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1.
In return for getting a relatively low rate of return on their bond investments, bondholders enjoy _______ shareholders.
Less risk than. Besides less risk, they also get an earlier claim on a company's assets should it go bankrupt.
2.
Which of the following best defines a stock?
A stock is an ownership interest in a company. Although companies receive money from stock offerings, it is more important to remember that a stock represents a stake in a company. Stocks should not be considered vehicles for speculative trading.
3.
A company's return on capital is calculated by _______.
Dividing profit by invested capital.
4.
According to Benjamin Graham, the father of value investing, in the long run the market is like a _______.
Weighing machine. In the long run, the market sees the substance of a company rather than its popularity. A weighing machine assesses the substance of a company.
5.
Which of the following is a benefit of a bondholder over a stockholder?
If a company goes bankrupt, bondholders gets paid before stockholders. Stockholders are the "residual" claimants of a company's profits, which means they get paid after everybody else. If a company goes bankrupt, they get what's left over after all the creditors are paid. Bonds typically do not yield higher returns than stocks when a company does well. The government doesn't pay a company's interest on a corporate bond if the company can't pay for it--the company is responsible for the interest payment.
