Deck 10: Fundamentals of Investing

Question 1

A short-term investment objective is defined as one that will be accomplished within a period of less than two years.

Answer 1

True

Question 2

During inflationary times, there is a risk that the financial return on an investment will not keep pace with the rate of inflation.

Answer 2

True

Question 3

A long-term objective may take up to three years to accomplish.

Answer 3

False

Question 4

Liquidity is the ease with which an asset can be converted to cash without a substantial loss in dollar value.

Question 5

An elective savings program is when an individual cuts back on spending for one to two months to obtain additional money for investment purposes.

Question 6

When investing in global investments, changes in the currency exchange rate may affect the return on your investment.

Question 7

Bondholders generally receive interest payments every five months.

Question 8

The amount put aside as an emergency fund should be equal to 1 to 3 months of living expenses.

Question 9

When starting an investment program, you should participate in an elective savings program.

Question 10

Mutual funds range from very conservative to extremely speculative investments.

Question 11

Diversification of assets among several types of investments can increase risk.

Question 12

An intermediate-term objective is defined as one that will be accomplished within eighteen months.

Question 13

A line of credit is a short-term loan that is approved before the money is actually needed.

Question 14

The potential return of any investment should be directly related to the risk that the investor assumes.

Question 15

Leveraged investing in common shares is expected to increase your net worth.

Question 16

The dollar value of a fixed-return investment decreases when overall interest rates in the economy decreases.

Question 17

Potential investors should wait until they put their financial affairs in order before starting to invest.

Question 18

An emergency fund is a certain amount of money that can be obtained quickly in case of immediate need.

Question 19

Preferred stock represents the most basic form of corporate ownership.

Question 20

The most important priority an investor in preferred stock enjoys is receiving cash dividends before common stockholders are paid any cash dividends.

Question 21

Statistical averages show trends and direction, but they do not pinpoint the actual value of a specific investment.

Question 22

A long-term objective may take more than five years to accomplish.

Question 23

Today, federal, provincial, and local governments and most corporations have a home page where you can obtain valuable information.

Question 24

An intermediate-term objective is defined as one that will be accomplished within two to five years.

Question 25

A speculative investment is an investment that is made in the hope of earning a relatively large profit over a long period of time.

Question 26

Desktop information services provide instantaneous access to real-time historical financial data, news and many other services.

Question 27

Dividends and interest income are taxed as long-term capital gains under the current tax laws.

Question 28

The basic idea behind a hedge fund is to take two simultaneous positions in two different investments in order to reduce risk.

Question 29

Generally, options are not long-term investment techniques.

Question 30

Common stock represents the most basic form of corporate ownership.

Question 31

Studies show that investors are willing to run a greater risk to avoid a loss than to make a gain.In behavioural finance this is called loss aversion.

Question 32

The belief that something must be of superior value because we own it, is known as the endowment effect.

Question 33

Although useful for many things, the Internet cannot be used to monitor the value of stock, bond, and mutual fund investments.

Question 34

The amount put aside as an emergency fund should be equal to 3 to 9 months of living expenses.

Question 35

Derivatives are securities such as options, and forward and futures contracts, whose value depends on the performance of an underlying security.

Question 36

The nationwide average increase is just over 7 percent for real estate investments.

Question 37

Once you have painstakingly developed a financial plan, it is not wise to change it.

Question 38

The average investor cannot afford to purchase much of the investment information available from the government.

Question 39

A designated financial planner has had at least two years of training in securities, insurance, taxes, real estate, and estate planning and has passed a rigorous examination.

Question 40

The fees for investor services and newsletters may range between $30 and $750 a year.

Question 41

When a bondholder loses money because interest rates in the economy increase, it is an example of ____________ risk.

A)market
B)interest rate
C)inflation
D)business failure
E)current

Question 42

Jamie Lynn earns $40,000 a year.Her monthly expenses total $1,700.What is the minimum amount of money that Ms.Lynn should set aside in an emergency fund?

A)$1,700
B)$3,400
C)$5,100
D)$8,400
E)$10,000

Question 43

A good rule of thumb is to limit installment payments to ____________ percent of your net monthly income.

A)8
B)20
C)25
D)10
E)30

Question 44

One dollar placed in a safety deposit box in 1980 is worth

A)less than 50 cents.
B)about 10 cents.
C)zero.
D)between 50 cents and one dollar.
E)more than one dollar.

Question 45

After the death of her husband, Gina Balmer, 35, received a check for $350,000 from a life insurance company.Ms.Balmer has two small children and wants to make sure that both she and the children are taken care of in the future.Based on this information, which of the investment factors listed below would be the most important to Ms.Balmer in her investment program?

A)beta
B)safety
C)business failure
D)market risk
E)liquidity

Question 46

Which of the following investments would rank the highest with regard to safety?

A)real estate
B)common stock
C)preferred stock
D)corporate bonds
E)bank accounts

Question 47

Bad products or poor financial management may result in investors experiencing ____________ risk.

A)business failure
B)interest rate
C)inflation.
D)market
E)income

Question 48

An example of ____________ risk occurs when an investment does not keep up with prices that are increasing in the overall economy.

A)market
B)interest
C)inflation
D)business failure
E)current

Question 49

Diversification of assets among several types of investments can decrease risk.

Question 50

Which of the following statements does not accurately describe a line of credit?

A)A line of credit is already approved before the money is actually needed.
B)A line of credit is a long-term loan.
C)A line of credit can be obtained at a credit union, trust company, or bank.
D)A line of credit provides an alternative source of funds if an emergency does develop.
E)A line of credit is available immediately when needed.

Question 51

Which of the following investments has the best rate of return when adjusted for inflation?

A)savings accounts
B)corporate bonds
C)Canadian treasury bills
D)common stocks
E)preferred stocks

Question 52

All of the following statements are considered to be good advice for the potential investor before starting his or her personal investment program except:

A)Learn to live within your means.
B)Increase credit purchases and make installment payments in order to increase cash available for investing.
C)Provide adequate insurance protection.
D)Start an emergency fund.
E)Establish a line of credit.

Question 53

All except which one of the following are good ways to acquire money for starting an investment program?

A)Pay bills first, and then save a reasonable amount of money for investment.
B)Participate in an elective savings program offered by your employer.
C)Make a special savings effort one month per year.
D)Borrow money specifically for investment purposes.
E)Take advantage of gifts, inheritances, and windfalls.

Question 54

A decrease in the value of stocks, bonds, or other investments may cause investors to experience ____________ risk.

A)market
B)interest rate
C)business failure
D)inflation
E)income

Question 55

Which of the following is not a true statement?

A)No one is going to make you save the money you need to start an investment program.
B)To be useful, investment objectives must be specific and measurable.
C)Investment goals must be tailored to the particular financial needs of the individual.
D)Because investment objectives deal with the future, it is useless to plan more than five years in the future.
E)A long-term investment objective involves a time period of five years or more.

Question 56

Which of the following is not a true statement?

A)When choosing an investment, it is not necessary to consider the risk factor.
B)During inflationary times, there is a risk that the financial return on an investment will not keep pace with the rate of inflation.
C)The interest rate risk associated with investments in bonds is the result of changes in the interest rates in the economy.
D)The risk of business failure is associated with investments in common stock, preferred stock, and corporate bonds.
E)The price of stocks, bonds, and other investments may fluctuate because of the behavior of investors in the marketplace.

Question 57

An emergency fund should be deposited in a

A)savings account at the highest available interest rate.
B)six-month certificate of deposit.
C)checking account.
D)safe place at home.
E)safe deposit box in a bank vault.

Question 58

Which of the following is not a determinant of investor risk tolerance?

A)goals and time frames
B)economy
C)income and asset base
D)personality
E)income

Question 59

If interest rates in the overall economy decrease, what will happen to the market value of a corporate bond with a fixed interest rate?

A)The value of the bond will increase.
B)The bond is worthless.
C)The value of the bond will decrease.
D)The value of the bond will not change.
E)It is impossible to determine if the bond's value will increase or decrease.

Question 60

Chi Min-Ho is 24 and has saved enough money to fund an adequate emergency fund.In addition, he has saved $5,600 that can be used to fund an investment program.He is single, has no dependents, and would like to retire when he is 60.Which of the investment factors listed below would be most important for an investor like Mr.Min-Ho?

A)beta
B)income
C)growth
D)risk
E)liquidity

Question 61

Which of the following statements is not true?

A)An investor seeking global diversification with less than $200,000 to invest should invest in global mutual funds.
B)Changes in currency exchange rate may affect the return on your investment.
C)Today, more and more investors are investing in stocks and bonds issued by foreign firms and global mutual funds.
D)An investor in Canada cannot purchase shares in a foreign company.
E)Because of international accounting rules, evaluating foreign investments is more difficult than evaluating investments in Canada.

Question 62

A type of investment that combines and invests the funds of many investors and manages it with a professional manager is called a(n)

A)chequing account.
B)securities exchange.
C)guaranteed investment certificate.
D)mutual fund.
E)option fund.

Question 63

A corporation selling stock is obligated to

A)guarantee your investment.
B)repay money obtained from the sale of stock.
C)repurchase shares of stock at a later date.
D)pay dividends to preferred stockholders before dividends are paid to common stockholders.
E)pay dividends.

Question 64

Which of the following is not a true statement?

A)Professional management is an especially important factor for investors purchasing a mutual fund.
B)One of the many reasons why investors purchase mutual funds is diversification.
C)With mutual funds, an occasional loss in one security is often offset by gains in other securities.
D)Mutual funds are designed to appeal to conservative investors with long-term investment goals.
E)The individual investor is responsible for choosing the right mutual fund.

Question 65

Which of the following is not a true statement?

A)A corporation generally obtains equity capital from stockholders.
B)A corporation can issue both preferred stock and common stock.
C)When a corporation is experiencing financial problems, an investor should purchase common rather than preferred stock.
D)Most corporations sell common stock to satisfy a large part of their financing needs.
E)The most important priority a preferred stockholder enjoys is receiving cash dividends before common stockholders receive cash dividends.

Question 66

An investor concerned with a predictable source of income provided by an investment would choose

A)options.
B)commodities.
C)government bonds.
D)common stocks.
E)speculative investments.

Question 67

Which of the following investments offers the greatest liquidity?

A)collectibles
B)common stock
C)corporate bonds
D)real estate
E)bank accounts

Question 68

The ease with which an investment can be converted to cash without a substantial loss in dollar value is called the

A)asset value.
B)liquidity factor.
C)immediate quotient.
D)fixed cost factor.
E)variable cost factor.

Question 69

Which of the following investments offers the least liquidity?

A)bank accounts
B)government bonds
C)real estate
D)common stock
E)preferred stock

Question 70

The money obtained from selling corporate bonds

A)is obtained from lenders.
B)is obtained from the owners of the business.
C)is obtained from employee stock option programs.
D)does not have to be repaid.
E)has been allocated to retirement programs.

Question 71

Which of the following is not a true statement?

A)Real estate ownership represents one of the best hedges against inflation.
B)Poor location can cause a piece of real estate property to go down in value.
C)There are many factors to consider before investing in real estate.
D)There is no reason to evaluate a real estate investment because real estate always increases in value sooner or later.
E)Finding a buyer for a piece of real estate can be difficult if loan money is scarce.

Question 72

Nationwide real estate values have historically increased by ____________ percent a year.

A)1
B)3
C)7
D)10
E)15

Question 73

The maturity dates for most bonds range between ____________ years.

A)0 to 5
B)5 to 15
C)10 to 15
D)1 to 30
E)1 to 40

Question 74

Normally, corporate bondholders receive interest

A)monthly.
B)every three months.
C)every six months.
D)yearly.
E)when the bond matures.

Question 75

Earnings that are reinvested in a corporation are called

A)retained earnings.
B)surplus earnings.
C)retention capital.
D)additional capital.
E)collected capital.

Question 76

Equity capital is money

A)obtained from the owners of the business.
B)borrowed through banks.
C)obtained by employee benefit programs.
D)that has to be repaid.
E)that has been allocated to a retirement program.

Question 77

Matt Jacobs is single and 24.He has just graduated from college and obtained a job making $26,400 a year.He would like to establish a long-term investment program.Which of the following investments would you recommend for his investment program?

A)growth stocks
B)government bonds
C)corporate bonds
D)commodities
E)a money-market fund

Question 78

Which of the following investments offers the greatest growth potential?

A)bank accounts
B)common stock
C)corporate bonds
D)government bonds
E)option bonds

Question 79

Which one of the following is not a true statement?

A)Most mutual funds invest in stocks, bonds, and other securities.
B)Diversification provided by a mutual fund reduces risk.
C)The goals of one mutual fund investor may differ from those of another.
D)Since mutual fund managers are professionals, there is no need to evaluate a mutual fund.
E)Mutual fund investments range from very conservative to very speculative investments.

Question 80

An investor can make money on a common stock investment by

A)waiting for the corporation to repurchase the stock.
B)waiting for the stock's value to increase and then selling it.
C)waiting for the stock's value to decrease and then selling it.
D)waiting for the stock to reach the maturity date.
E)converting the common stock to preferred stock.