LOS o: Evaluate how economic and competitive factors affect investment markets, sectors, and specific securities.

Q1. In the early expansion phase of the business cycle stock prices are:

A)   rising at a faster rate than they are in the later stages of an expansion.

B)   stagnant as they are in the later stages of an expansion.

C)   rising at a slower rate than they are in the later stages of an expansion.

Q2. Which of the following statements regarding TIPS is most accurate? TIPS have:

A)   inflation risk but no credit risk.

B)   credit risk but no inflation risk.

C)   no credit risk and no inflation risk.

Q3. If inflation rises, the yields for TIPS will:

A)   fall and their price will rise.

B)   rise and their price will fall.

C)   rise and their price will rise.

LOS o: Evaluate how economic and competitive factors affect investment markets, sectors, and specific securities. fficeffice" />

Q1. In the early expansion phase of the business cycle stock prices are:

A)   rising at a faster rate than they are in the later stages of an expansion.

B)   stagnant as they are in the later stages of an expansion.

C)   rising at a slower rate than they are in the later stages of an expansion.

Correct answer is A)

In the early expansion phase of the business cycle, stock prices are increasing. This is due to the fact that sales are increasing but inputs costs will be fairly stable. Labor will not ask for wage increases because unemployment is still high. Idle plant and equipment will be pushed into service at little cost. Furthermore, firms usually emerge from recession leaner because they have shed their wasteful projects and excessive spending. Later on in the expansion, the growth in earnings and stock returns slows because input costs start to increase. Interest rates will also increase during late expansion, which is a further negative for stock valuation.

Q2. Which of the following statements regarding TIPS is most accurate? TIPS have:

A)   inflation risk but no credit risk.

B)   credit risk but no inflation risk.

C)   no credit risk and no inflation risk.

Correct answer is C)

U.S. Treasury Inflation Protected Securities (TIPS) are both credit risk and inflation risk free.

Q3. If inflation rises, the yields for TIPS will:

A)   fall and their price will rise.

B)   rise and their price will fall.

C)   rise and their price will rise.

Correct answer is A)

If inflation starts rising, the yields for U.S. Treasury Inflation Protected Securities (TIPS) will actually fall and their prices will rise because the demand for them increases as investors seek out their inflation protection.

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