Unit 6 Quiz Deck Flashcards
Prepayment risk is associated with which type of securities?
A) Corporate bonds
B) Treasury bonds
C) Municipal bonds
D) GNMA
D) GNMA
GNMAs are mortgage back securities; if homeowners pay off their mortgages early, mortgage backed securities are subject to prepayment risk.
Sovereign risk is the risk
A) that a country will default on its commercial debt obligations.
B) of losing all one’s investment due to a change in tax laws.
C) that interest rates decline in several countries simultaneously.
D) that a dollar earned today will not be able to purchase the same goods or services it can now in the future.
A) that a country will default on its commercial debt obligations.
Sovereign risk is when a country is at risk of defaulting on its commercial debt obligations. When this occurs, the impact is felt on financial markets worldwide.
All investors and investments are different. Recognizing this, it is true that
A) all investments can be deemed suitable for every investor.
B) no investment should be deemed suitable for every investor.
C) some investments can be suitable for all investors.
D) most investments are not deemed suitable for any investor.
B) no investment should be deemed suitable for every investor.
Because all investments are different, carrying different levels of risk and reward, no investment can ever be assumed as being suitable for all investors. Each investment type and/or strategy will be suitable for some investors but not all.
Risks that are unique to a specific industry, business type, or investment type are known as
A) systematic risks.
B) stock market risk.
C) security risks.
D) nonsystematic risks.
D) nonsystematic risks.
Nonsystematic risks are those that are unique to a specific industry, business enterprise, or investment type.
For investors, instability within an emerging economy is generally recognized as
A) political risk.
B) regulatory risk.
C) currency risk.
D) business risk.
A) political risk.
While political risk can be interrelated with legislative risk, most attribute this risk specifically to the potential instability in the political underpinnings of a country or economy. This risk is often associated with emerging economies, though it can potentially exist anywhere.
The ratings on the debt instruments of a foreign country with outstanding loans from a number of other countries worldwide have been downgraded. The impact felt due to the risk of possible default is known as
A) sovereign risk.
B) interest-rate risk.
C) legislative risk.
D) political risk.
A) sovereign risk.
While it can be noted that sovereign risk is a type of political risk, the risk of default by a country on its debt instruments is specifically recognized as sovereign risk
A luxury tax that consumers must pay that is levied on nonessential items of a certain value or more is an example of
A) legislative risk.
B) regulatory risk.
C) political risk.
D) consumer risk
A) legislative risk.
Legislative risk is the risk that laws are introduced or amended. Always associate changes in tax laws or code with legislative risk.
Which types of investments are most susceptible to interest rate risks?
A) Common stocks
B) Money market instruments
C) Bonds
D) Options
C) Bonds
Bond prices move down when interest rates move up. Money market instruments can also be affected, but bonds are more impacted due to longer duration.
Inflation risk is most closely associated with
A) interest-rate risk.
B) call risk.
C) nonsystematic risk.
D) purchasing power risk.
D) purchasing power risk.
When prices are rising (inflation), purchasing power is reduced. During inflationary periods, a dollar today often doesn’t purchase the quantity of goods and services it purchased yesterday.
A change to tax rates on dividends would be an example of
A) purchasing power risk.
B) legislative risk.
C) liquidity risk.
D) currency risk
B) legislative risk.
When legislation is passed that affects the income received on an investment, the investor is exposed to legislative risk. Only a legislature can change tax rates.
If the stock market were to fall substantially in a single day, a portfolio consisting primarily of common and preferred stock would be most subject to
A) inflation risk.
B) regulatory risk.
C) market risk.
D) reinvestment risk.
C) market risk.
Market risk is the risk that when the overall market declines, so too will any portfolio made of securities the market is composed of.
The ability to take the proceeds from the redemption of one security or investment and allocate those proceeds in such a way so as to maintain the same level of return is expressed in which of the following concepts?
A) Purchasing power risk
B) Market risk
C) Interest-rate risk
D) Reinvestment risk
D) Reinvestment risk
The concept of reinvestment risk has to do with the ability to reinvest proceeds from one sale or redemption while still maintaining the same yield or return. This is difficult to do in times when interest rates are falling.
Which of the following has the most liquidity risk?
A) Limited partnerships
B) Treasury bonds
C) Stocks listed on NASDAQ
D) Listed REITs
A) Limited partnerships
Limited partnerships are generally illiquid; the other options are actively traded securities.
Financial risk is most attributed to which of the following investments?
A) Value stock
B) Municipal general obligation bonds
C) Corporate bonds
D) U.S. government bonds
C) Corporate bonds
Financial risk is the risk that an issuer would not be able to make principal and interest payments. This rules out government bonds and municipal general obligation bonds because they are backed by taxing power, and stocks don’t pay principal and interest.
Systematic risk would include all of the following except
A) inflation risk.
B) market risk.
C) business risk.
D) interest rate risk
C) business risk.
Nonsystematic risks are those associated with the issuer (like a bad business strategy). Systematic risks impact large portions of the market and are difficult to reduce by diversification.
