123 Review Questions

Chapter 13 Review Questions

1. Define the competitive and noncompetitive bid process for US Treasury bills.

2. How does a negotiable certificate of deposit (NCD) differ from the typical certificate of deposit you may see advertised by your local bank?

3. If you are an investor concerned about unexpected inflation in the coming years which of the following investments offers the greatest protection against inflation, and why: T-notes, T-bonds, or TIPS?

4. Debentures are more common than mortgage bonds issued by corporations. Why do you think debentures are more popular with investors? Be sure to define each bond contract in your discussion.

5. Market capitalization is a common way to rank firm size. Search the internet to identify and define at least two other ways to rank firms based on size. Identify at least one reason you prefer market capitalization as the method of choice to rank firm size.

6. Compare and contrast an SEO, IPO, and SPAC. If Ford Motor Company wished to raise new equity capital, which of these vehicles would they use?

7. Compared to a “best efforts” form of underwriting, how does “firm commitment” underwriting transfer risk from the issuing firm to the underwriter?

8. How would a decrease in inflation affect the interest rate on an adjustable-rate debenture?

9. If inflation unexpectedly rises by 3%, would a corporation that had recently borrowed money by issuing fixed-rate bonds to pay for a new investment benefit or lose?

10. If wages on average rise at least as fast as inflation, why do people worry about how inflation affects incomes?

11. Identify at least one item that you use regularly whose price has changed significantly.

12. What has been the average annual rate of inflation between 1985 and 2020? What is the long-run average annual rate of inflation over the last century?

13. Between 1985 and 2020, what year had the lowest realized annual rate of inflation in the United States? Why do you think inflation was so low in this particular year?

14. Go to https://www.usinflationcalculator.com/. How much money would it take today to purchase what one dollar would have bought in 1950, in 1975, and in your birth year?

15. Are US Treasury bonds truly risk free?

16. At the end of 2020 and the beginning of 2021, coupon rates on long-term T-notes and T-bonds were near historic lows. Further, the federal government was running a historically large budget deficit in an effort to stimulate an economy battered by COVID-19 and to support millions of unemployed workers. Some investment advisers warned that this could be a particularly bad time to invest in government bonds or bonds in general. Why?

17. Which group of securities earned a higher average annual return from 2000 to 2020, T-bonds or Baa bonds? Why do think this was so?

18. Which earned a higher average annual return, a portfolio of T-bonds from 1980 to 2000 or from 2000 to 2020? Why do think this was so?

19. Why is standard deviation of returns a reasonable measure of risk for a portfolio of equity securities?

20. Many popular-press articles claim that growth investing is “clearly better” than value investing or that value investing is “dead.” How would you respond to proponents of growth investing after observing Figure 12.15?

21. Over the last 120 years, few countries have achieved the realized rate of returns enjoyed by US equity markets. Does this mean investors should ignore international investments and focus only on domestic markets in an effort to maximize returns?