Deck 1: The Investment Environment

Question 1

Land and buildings are examples of real property investments.

Answer 1

True

Question 2

The percentage of common stock owned directly by U.S. households has dramatically increased since 1945.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

Institutional investors are individuals who invest indirectly through financial institutions.

Question 8

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 9

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

Question 10

Which of the following are traded in the securities market?

A) stocks
B) bonds
C) derivatives
D) all of the above

Question 11

Typical hedge funds are characterized by

A) limited risk investment strategies.
B) low minimum investment requirements.
C) high minimum invested requirements.
D) their appeal to a large number of small investors.

Question 12

Banks and insurance companies are examples of institutional investors.

Question 13

Mutual funds are traded on exchanges and priced continuously throughout the trading day.

Question 14

A forum in which suppliers and demanders of funds make financial transactions is called a financial

A) institution.
B) bank.
C) instrument.
D) market.

Question 15

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 16

Stocks are a(n) ________ investment representing ________ of a business.

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

Question 17

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 18

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 19

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 20

Describe the major differences between individual and institutional investors.

Question 21

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

Question 22

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

Question 23

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

Question 24

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 25

Short-term capital gains are taxed at the taxpayer's marginal tax rate.

Question 26

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

Question 27

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

Question 28

Mutual funds invest in diversified portfolios of securities.

Question 29

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

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

Question 30

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

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

Question 31

Bond prices rise as interest rates decline.

Question 32

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

Question 33

Advantages of investing in real estate potentially include
I) rental income.
II) liquidity.
III) tax write offs.
IV) capital gains.

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

Question 34

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

A) stock
B) Series EE bond
C) money market mutual fund
D) real estate

Question 35

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

Question 36

If the value of a common stock increases the value of an option to buy that stock should also increase.

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

What are some of the important prerequisites to investing?

Question 42

Table 1.4
Use the following tax rates and income brackets for 2012 to answer the following question(s).
Josh 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 2012? Round to the nearest dollar.

A) $13,750
B) $16,665
C) $18,425
D) $20,625

Question 43

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

Question 44

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 45

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 46

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

Question 47

Table 1.4
Use the following tax rates and income brackets for 2012 to answer the following question(s).
Andrew and Jennifer are in the 25% marginal tax bracket. Three years ago they purchased 100 shares of stock at $20 a share. In 2012, 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 48

You should spend money on housing, clothing and basic insurance before investing.

Question 49

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

A) are subject to political pressure and change frequently.
B) are very stable and have not changed in many years.
C) are phased out on incomes over $388,351.
D) are adjusted for inflation every year.

Question 50

Sarah purchased a stock one year ago at a price of $32 a share. In the past year, she has received four quarterly dividends of $0.75 each. Today she sold the stock for $38 a share. Her capital gain per share is

A) $3.00.
B) $6.00.
C) $(6.00).
D) $9.00.

Question 51

Speculative and growth oriented investments are least appropriate for

A) young investors.
B) middle-aged investors.
C) retired investors.
D) high income investors.

Question 52

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 53

Wages, tips, pension income and alimony are examples of

A) portfolio income.
B) active income.
C) non-taxable income.
D) passive income.

Question 54

Table 1.4
Use the following tax rates and income brackets for 2012 to answer the following question(s).
Danielle and Jonathan are in the 28% marginal tax bracket. They bought 200 shares of DJN stock at $35 per share and sold them 4 years later in 2012 at $12 per share? How much did their loss reduce their taxes in the year when they sold the stock?

A) $0
B) $450
C) $840
D) $1,288

Question 55

Table 1.4
Use the following tax rates and income brackets for 2012 to answer the following question(s).
For a taxpayer in the 25% marginal tax bracket, a long-term capital gain realized in 2012 will be taxed at

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

Question 56

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 57

Monitoring and restructuring your investments is called

A) diversification.
B) valuation.
C) portfolio management.
D) financial planning.

Question 58

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 59

Under current tax law, dividend income is taxed at the same rate as

A) ordinary income.
B) short-term capital gains.
C) long-term capital gains.
D) interest income.

Question 60

Table 1.4
Use the following tax rates and income brackets for 2012 to answer the following question(s).
In 2012, John and Nicole 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) $41,664
B) $29,723
C) $29,593
D) $22,320

Question 61

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

Question 62

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

Question 63

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

Question 64

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

Question 65

Jobs in which of the following fields require an understanding of the investment environment?
I) commercial banking
II) corporate finance
III) financial planning
IV) insurance

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

Question 66

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

Question 67

Which of the following typically offers the highest rate of return?

A) certificates of deposit
B) passbook savings accounts
C) Now accounts
D) money market deposit accounts

Question 68

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 69

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 70

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 71

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 72

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

Question 73

Which of the following has set an outstanding example of ethical behavior in the financial professions?

A) Bernard Madoff of Madoff Securities
B) former U.S. senator and governor of New Jersey John Corzine of MF Global
C) Ramalinga Rau of Satyam Computers
D) none of the above

Question 74

Commercial bankers work with corporate and institutional clients, but not with individuals.

Question 75

Beginning in 2010, 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.

Question 76

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

Question 77

A major function of investment banking firms is

A) providing loans to investors.
B) providing financial planning services to wealthy individuals.
C) assisting businesses when they issue stocks and bonds.
D) developing investment strategies to neutralize risk.

Question 78

Chartered Financial Analyst (CFA) is a degree offered by several prestigious business schools.

Question 79

Typical responsibilities of financial professionals in a corporate setting include
I) managing cash and short-term investments.
II) evaluating investment opportunities.
III) working one on one with individuals to formulate plans for reaching their financial goals.
IV) interacting with financial markets to find sources of external financing such as debt and equity.

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

Question 80

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