Deck 1: The Investment Environment

Question 1

Stocks of large publicly traded companies are

A) rarely traded.
B) illiquid.
C) rarely decline in value.
D) highly liquid.

Answer 1

D

Question 2

Since 1900, the average return on stocks has exceeded the average return on savings accounts by more than 6 percentage points.

Answer 2

True

Question 3

Which of the following are true concerning institutional investors?
I) Institutional investors are professionals who manage money for other people.
II) Banks, insurance companies and mutual funds are all institutional investors.
III) Institutional investors are individuals who invest indirectly through financial institutions.
IV) Institutional investors invest large sums of money.

A) I and II only
B) I, II and IV only
C) II, III and IV only
D) I, II, III and IV

Answer 3

B

Question 4

Which of the following is NOT traded in the securities markets?

A) stocks
B) bonds
C) derivatives
D) real estate

Question 5

A United States Savings Bond is an example of an investment as defined in the text.

Question 6

Stocks are a(n)_______ investment representing_____ of a business.

A) direct; ownership
B) direct; debt
C) indirect; ownership
D) indirect; debt

Question 7

The government is generally

A) not involved in the financial markets.
B) the owner of the financial market.
C) a supplier of funds to the financial market.
D) a demander of funds in the financial market.

Question 8

An exchange traded fund that invests in the stocks of large corporations is an example of

A) direct investment.
B) indirect investment.
C) derivative investment.
D) tangible investment.

Question 9

Banks and insurance companies are examples of institutional investors.

Question 10

Most sources of investment information are in print format, expensive, and difficult to access.

Question 11

In the financial markets, individuals are net suppliers of funds.

Question 12

Institutional investors are individuals who invest indirectly through financial institutions.

Question 13

Which of the following is NOT an investment as defined in the text?

A) a certificate of deposit issued by a bank
B) a new automobile
C) a United States Saving Bond
D) a mutual fund held in a retirement account

Question 14

Land and buildings are examples of real property investments.

Question 15

On a net basis, funds in the financial markets are generally supplied by

A) individuals.
B) both individuals and business firms.
C) business firms.
D) the government.

Question 16

Which of the following has declined in recent years?

A) direct ownership of stock by individual investors
B) the percentage of foreign stocks held in typical portfolios
C) institutional ownership of common stocks
D) the timeliness of information available to investors

Question 17

A non-interest bearing checking account is still considered an investment.

Question 18

Which of the following has increased in recent years?

A) direct ownership of stock by individual investors
B) the percentage of domestic stocks held in typical portfolios
C) institutional ownership of common stocks
D) indirect ownership of stocks through mutual funds and ETFs.

Question 19

Institutional investors manage money for businesses and nonprofit organizations, but not for individuals.

Question 20

Debt represents funds loaned in exchange for

A) dividend income and the repayment of the loan principal.
B) dividend income and an ownership interest in the firm.
C) interest income and a partial ownership interest in the firm.
D) interest income and the repayment of the loan principal.

Question 21

Bond prices rise as interest rates decline.

Question 22

Bonds represent a lower level of risk than do stocks in the same company.

Question 23

Earning a high rate of return with little or no risk is a realistic investment goal.

Question 24

One reason that passively managed mutual funds have grown in popularity relative to actively managed mutual funds is that

A) passive fund expense ratios are lower.
B) passive fund returns are always higher.
C) active funds are too diverse.
D) none of these

Question 25

Briefly describe three advantages of investing in mutual funds or exchange traded funds.

Question 26

Describe the major differences between individual and institutional investors.

Question 27

The major difference between mutual funds and exchange traded funds (ETFs) is

A) ETFs can be bought or sold at their current price at any time during normal trading hours.
B) mutual fund portfolios are always based on one of the major market indexes.
C) ETFs invest in broadly diversified portfolios of securities.
D) ETFs are actively managed.

Question 28

Bond investors lend their money for a fixed period of time and receive interest.

Question 29

Over the past decade, passively managed index funds have

A) grown quite a lot.
B) declined in popularity.
C) attracted almost 100% of investment dollars.
D) almost disappeared as a fund type.

Question 30

Investors seeking a diversified, professionally managed portfolio of securities can purchase shares of

A) preferred stock.
B) convertible securities.
C) insurance policies.
D) mutual funds.

Question 31

Which one of the following would be the least liquid investment?

A) stock
B) put options
C) money market mutual fund
D) real estate

Question 32

Bond interest and stock dividends are different ways of distributing a corporation's earnings to its owners.

Question 33

Call options on common stock are a form of equity.

Question 34

Which of the following is an example of a tangible asset?

A) bonds
B) mutual funds
C) real estate
D) stocks

Question 35

Exchange traded funds are similar to mutual funds, but are traded like stocks.

Question 36

An option to purchase common stock is a type of derivative security.

Question 37

Which of the following investments represents partial ownership of a corporation?

A) bonds
B) mutual funds
C) commercial paper
D) common stock

Question 38

Mutual funds invest in diversified portfolios of securities.

Question 39

Under current tax laws, most taxpayers will pay a lower tax rate on capital gains than on dividends.

Question 40

A collection of securities designed to meet an investment goal is called a portfolio.

Question 41

Under current laws, a couple filing jointly with a total income of $75,000 would pay a 15% tax on capital gains.

Question 42

Because Doug lost his job in 2018, his income was only $27,000. To make ends meet, he sold stock and realized capital gains of $5,000. Doug is single and files as an individual. The tax on his capital gains will be

A) $0.
B) $600.
C) $750.
D) $1,000.

Question 43

-In 2018, Jordan and Kailey earned a combined taxable income of $148,800 from employment plus $1,000 in long term capital gains and they file a joint tax return. What is their total federal income tax? Round to the nearest dollar.

A) $33,780
B) $29,063
C) $24,765
D) $24,659

Question 44

Investors can postpone or avoid income taxes by investing through Individual Retirement Accounts.

Question 45

Michelle and Patrick are in the 24% marginal tax bracket. They bought 100 shares of DJN stock at $45 per share and sold them 4 years later in 2018 at $22 per share? By how much did their loss reduce their taxes in the year when they sold the stock?

A) $0
B) $345
C) $552
D) $1,260

Question 46

-For a taxpayer in the 22% marginal tax bracket, a long-term capital gain realized in 2018 will be taxed at

A) 5%.
B) 10%.
C) 15%.
D) 25%.

Question 47

Investors seeking to increase their wealth as quickly as possible would invest in

A) corporate bonds and preferred stock.
B) large company stocks with high dividends.
C) smaller companies pursuing rapid growth.
D) government bonds and low-risk income stocks.

Question 48

Andrew and Jennifer are in the 22% marginal tax bracket. Three years ago they purchased 100 shares of stock at $20 a share. In 2018, they sold the 100 shares for $29 a share. What is the amount of federal income tax they owe as a result of this sale?

A) $135
B) $165
C) $225
D) $435

Question 49

Contributions to a Roth IRA are taxed up front, but subsequent earnings and withdrawals are tax free.

Question 50

In selecting investments consistent with your goals, you should consider

A) rates of return and taxes only.
B) the pre-tax rate of return only.
C) annual dividends and taxes only.
D) risks, returns, and taxes.

Question 51

-Jon earned $82,500 in taxable income, all from wages and interest, and files an individual tax return. What is the amount of Josh's taxes for the year 2018? Round to the nearest dollar.

A) $13,750
B) $14,090
C) $18,150
D) $12,285

Question 52

Retirement plans, such as a 401(k), allow employees to defer taxes on the plan contributions until such time as the funds are withdrawn from the retirement plan.

Question 53

Alexandra purchased a stock one year ago at a price of $64 a share. In the past year, she has received four quarterly dividends of $1.50 each. Today she sold the stock for $76 a share. Her capital gain per share is

A) $6.00.
B) $12.00.
C) $(6.00).
D) $18.00.

Question 54

To qualify for long-term capital gains rates, a stock must be held for at least 12 months.

Question 55

Tax planning

A) guides investment activities to maximize after-tax returns over the long term for an acceptable level of risk.
B) ignores the source of income and concentrates solely on the amount of income.
C) is primarily done by individuals with incomes below $200,000.
D) is limited to reviewing income for the current year and determining how to minimize current taxes.

Question 56

Which of the following represent investment goals?
I) saving for major expenditures such as a house or education
II) sheltering income from taxes
III) increasing current income
IV) saving funds for retirement

A) I and IV only
B) III and IV only
C) I, III and IV only
D) I,,II, III and IV

Question 57

Beginning investors with small amounts to invest should

A) avoid stock investments completely.
B) invest all of their money in one high quality stock.
C) buy mutual funds or exchange traded funds (ETFs).
D) buy a portfolio of very low priced stocks (penny stocks).

Question 58

Both the holding period to qualify and the tax rate on long-term capital gains

A) are subject to political pressure and occasionally change.
B) are very stable and have not changed since the 1960s.
C) are phased out on incomes over $388,351.
D) are adjusted for inflation every year.

Question 59

Research indicates that investors who monitor their portfolios less frequently

A) outperform those who hold investments for the long-term and trade infrequently.
B) tend to invest in riskier assets.
C) earn rates of return similar to those who hold investments for the long-term and trade infrequently.
D) are more highly educated and in higher income brackets than those who hold investments for the long term and trade infrequently.

Question 60

A well-conceived investment policy statement will take into account

A) the investor's current age and economic situation.
B) the investor's preference for frequent or infrequent trading.
C) the types of investments the investor is willing to consider.
D) all of the above.

Question 61

Short-term investments generally provide liquidity, safety, and a high rate of return.

Question 62

Discuss the relationship between stock prices and investors' beliefs about the business cycle.

Question 63

Short-term investments
I) provide liquidity.
II) fill an important part of most investment programs.
III) provide a high rate of return with low risk.
IV) provide resources for emergencies.

A) I and IV only
B) II and IV only
C) I, II and IV only
D) I, II, III and IV

Question 64

Stringent regulations and vigorous enforcement have all but eliminated unethical behavior by financial professionals in recent years.

Question 65

What are some of the important prerequisites to investing?

Question 66

Federal insurance protects passbook savings accounts and money market deposit accounts (MMDAs) up to

A) $100,000.
B) $150,000.
C) $250,000.
D) $1,000,000.

Question 67

A major goal of corporate financial management is to increase the value of the firm to investors.

Question 68

Liquidity is the ability to convert an investment into cash quickly with little or no loss of value.

Question 69

The average tax rate is the rate a person pays on their next dollar of income.

Question 70

U.S. Treasury Bills mature in 1 year or less.

Question 71

A person's marginal tax rate is the rate they pay

A) on the next dollar of income.
B) on all income.
C) only on investment income.
D) only on earned income.

Question 72

Insurance companies invest the premiums and fees collected from customers in order to neutralize the risks assumed from their clients.

Question 73

Money market accounts, certificates of deposit, bonds and commercial paper are all forms of short-term investment vehicles.

Question 74

Discuss the general investment philosophy and the types of investments preferred by investors in each phase of the life cycle.

Question 75

The primary risk associated with a short-term investment is

A) purchasing power risk.
B) default risk.
C) interest rate risk.
D) economic risk.

Question 76

During which period are stock returns typically the lowest?

A) 6 months before a recession
B) during a recession
C) 12 months after a recession
D) there is no discernable pattern

Question 77

Certified Financial Planners typically manage institutional portfolios.

Question 78

Which one of the following has the lowest level of risk?

A) commercial paper
B) money market mutual fund account
C) banker's acceptance
D) U.S. Treasury bill

Question 79

Since 2010, the interest rate on passbook accounts and certificates of deposit has

A) been less than the average rate of inflation.
B) closely tracked the average rate of inflation.
C) exceeded the average rate of inflation by 1.5%.
D) fluctuated widely.

Question 80

The amount protected by the Federal Deposit Insurance Corporation in non-interest bearing checking accounts is

A) zero.
B) $100,000.
C) unlimited.
D) $250,000.