Deck 4: Investment Planning

Question 1

A client has $100,000 to invest. They are considering a short-term investment that is unsecured but think it may be a good idea to have the issuer to be a large corporation. What investment vehicle should a financial planner suggest?

A)U)S. Series EE and HH Bonds
B)High-grade Common Stock
C)Commercial Paper
D)Money Market Accounts

Answer 1

Commercial Paper

Question 2

What type of financial investment is guaranteed by a commercial bank?

A)U)S. Series EE and HH Bonds
B)Banker's Acceptances
C)Commercial Paper
D)Money Market Accounts

Answer 2

Banker's Acceptances

Question 3

In 1985, the Treasury introduced a zero coupon bond called STRIPS; they are direct obligations of the federal government. Your client is interested in investing a sum of funds that can grow tax-free and is concerned about bond volatility, what should you inform your client about STRIPS?

A)STRIPS are can be volatile, but grow tax-free
B)STRIPS are non-volatile, but grow tax-free
C)STRIPS are can be volatile, but do not grow tax-free
D)STRIPS are non-volatile, but do not grow tax-free

Answer 3

STRIPS are can be volatile, but do not grow tax-free

Question 4

Assume you have a client that is willing to take a moderate level of risk when investing. They are interested in government coupons and want to take advantage the highs and lows of inflation, what should be recommended?

A)U)S. Series EE and HH Bonds
B)Banker's Acceptances
C)Treasury Inflation Protected Securities
D)Money Market Accounts

Question 5

The U.S. Government's Series E bond was replaced by what bond?

A)EE Bond
B)HH Bond
C)H Bond
D)Was not replaced

Question 6

What type of investment vehicle is issued by federal agencies, are not debt of the federal government, provide higher yields than the U.S. Treasury debt, and are extremely safe for investors?

A)Series EE Bonds
B)Mortgaged-backed Securities
C)Asset-backed Securities
D)Mortgage pass-through Securities

Question 7

Some bonds are issued to purchase specific fixed assets, some are promissory notes, still others are sold with no coupon at a discount; what type of bonds are debt obligations issued by state and local government?

A)Series EE Bonds
B)Municipal Bonds
C)Asset-backed Securities
D)Mortgage pass-through Securities

Question 8

Some bonds are debt obligations issued by state and local governments, others are sold with no coupon at a discount, still others are promissory notes; what type of bond are issued to purchase specific fixed assets that are pledged to secure debt?

A)Corporate Bonds
B)Municipal Bonds
C)Asset-backed Securities
D)Mortgage pass-through Securities

Question 9

A shareholder owns 100 shares and there are three positions on the board of directors. How many votes does this shareholder have and what is the proper term for this voting right?

A)99 shares, cumulative
B)99 shares, noncumulative
C)300 shares, cumulative
D)300 shares, noncumulative

Question 10

By what means can current stockholders use to maintain their proportionate ownership in a firm?

A)Cumulative Rights
B)Respective Rights
C)Pre-emptive Rights
D)Rights of Warrants

Question 11

Your client has an investment bond paying a coupon rate of 5 percent, but inflation increased to 5.5 percent. What type of risk does the scenario represent?

A)Reinvestment Risk
B)Interest Rate Risk
C)Purchasing Power Risk
D)Market Risk

Question 12

Interest rates have an inverse relationship with what type of investments?

A)Bonds
B)Stocks
C)Neither bonds nor stocks
D)Both bonds and stocks

Question 13

You have invested $10,000 of your client's money in the exchange market of Spain. You have introduced your client's money to what?

A)Interest Rate Risk
B)Reinvestment Risk
C)Exchange Rate Risk
D)Unsystematic Risk

Question 14

Systematic risk includes risks that affect the entire market; the risk cannot be eliminated through diversification because it affects the entire market. For an investor to determine total financial risk, what must also be determined?

A)Business Risk
B)Financial Risk
C)Exchange Rate Risk
D)Nonmarket Risk

Question 15

What concept states that the larger a sample population the more accurate the prediction acquired by the testing of the sample?

A)Law of Adverse Numbers
B)Law of Large Numbers
C)Law of Action
D)Adverse Reaction

Question 16

What would have to be completed to compare the benefits of a project to the cost of a project?

A)Cost-benefit Analysis
B)Project-benefit Analysis
C)Cost-price Analysis
D)Benefit-price Analysis

Question 17

What term is defined as the variability or uncertainly in a firm's operating income or earnings before interest and taxes?

A)Business Risk
B)Financial Risk
C)Exchange Rate Risk
D)Nonmarket Risk

Question 18

A firm takes out a loan for investments; this introduces the firm to what type of risk?

A)Business Risk
B)Financial Risk
C)Exchange Rate Risk
D)Nonmarket Risk

Question 19

What improves when more participants are engaged in trading a security?

A)Liquidity Risk
B)Financial Risk
C)Tax Risk
D)Nonmarket Risk

Question 20

What do normal distribution and "skewness" have in common?

A)Covariance
B)Coefficient of Variation
C)Bell Curve
D)Beta

Question 21

Your client wants to know the systematic risk of his diversified portfolio. What would you first determine before answering the client's question?

A)Covariance
B)Coefficient of Variation
C)Bell Curve
D)Beta

Question 22

What concept is used to evaluate, rank, and select among various investment projects?

A)Annuity Due
B)Future Annuities
C)Net Present Value
D)Stream Annuities

Question 23

Volatility is the amount by which the price of a security swings up and down. If the price of a security moves up and down frequently, it has_____ volatility. Fill in the blank with the most suitable word.

A)high.
B)low.
C)medium.
D)no.

Question 24

If you are looking to add a new mutual fund for the purpose of diversification, the fund you would select would have what?

A)Largest negative correlation
B)Smallest negative correlation
C)Zero variance
D)Largest positive correlation

Question 25

What measure for investment returns computes the return for each period and takes the average of the results?

A)Time-weighted Return
B)Dollar-weighted Return
C)Geometric Return
D)Simple Return

Question 26

Beta used to determine risk is only accurate when calculated for what?

A)Investment Risk
B)Reinvestment Risk
C)Diversified Portfolios
D)Streamed Portfolios

Question 27

Higher rates of return do not alone indicate superior performance. For a complete picture of a fund's performance risk and return must be calculated; what are the composite measures?

A)Treynor Index
B)Sharpe Index
C)Jensen Index
D)All of the above

Question 28

What concept has the shortcoming of assuming all cash flows are discounted at the same rate and are reinvested at the yield to maturity rate?

A)Current Yield
B)After-tax Return
C)Yield to Call
D)Yield to Maturity

Question 29

What measurement does not include any reinvestment income or price appreciation or depreciation?

A)Current Yield
B)After-tax Return
C)Yield to Call
D)Yield to Maturity

Question 30

Which of the following is considered a distribution of a corporation's net income?

A)Common stock
B)Preferred stock
C)Dividends
D)Stockholder's equity
E)Treasury stock

Question 31

What is a bond? Select all that apply:

A)It is a contract by which an investor lends money in return for a promise of future cash flows.
B)It is an instrument for large institutions such as governments and large companies to borrow on the world capital markets.
C)A token of trust between lenders and borrowers.
D)A piece of paper that represents an amount of money that is lent or borrowed.

Question 32

A callable bond__________

A)Has specific names.
B)Allows the issuer to retire the bond before it matures.
C)Is designed for specific investors.
D)Has zero interest rates.

Question 33

Coupons are fixed periodic interest payments. They are paid from the bond's issue date to the bond's maturity date. What is the relationship between a bond's yield and its coupons?

A)A bond's yield is the sum of total coupons.
B)A bond's yield is the sum of total coupons divided by the bond's face value.
C)A bond's yield is the final coupon paid on the maturity date of the bond.
D)A bond's yield is another name for a coupon.

Question 34

What is used to show yields for bond maturities to determine the best value in bonds as an economic indicator?

A)Yield Curve
B)Deflation Curve
C)Inflation Marker
D)National Indicator

Question 35

Which of the following term(s) refer to the principal amount of the bond that the issuing corporation will pay the bondholders on the bond's maturity date?

A)Stated value
B)Par value
C)Maturity value
D)Face value
E)All of these terms could be used.

Question 36

Your client wants to know which of his bonds are more volatile to changes in interest rates; what is the best technique to determine volatility of bonds?

A)Current Yield
B)Bond Duration
C)Convexity
D)Yield to Maturity

Question 37

The tangent line is strongly related to duration; both estimate the rate of change in price. After the first percentage change in price, what is used to approximate the second and added to the duration?

A)Current Yield
B)Bond Duration
C)Convexity
D)Yield to Maturity

Question 38

Not all investments are capitalized for earnings, what one/s is/are?

A)Stocks
B)Bonds
C)Both stocks and bonds
D)Neither stocks nor bonds

Question 39

Your client's investment stocks are not paying cash dividends but he wants to know how much the value of her stocks is. You inform her that there is a way to determine the value without cash dividends; what would you use to determine the stock value?

A)Current Yield
B)Bond Duration
C)Convexity
D)P/E Ratio

Question 40

What ratio focuses on growth in cash flows versus earnings and used in conjunction with P/E ratio?

A)Intrinsic Value
B)Price/sales
C)Convexity
D)Price/free Cash Flows

Question 41

Your client wants to purchase stock that appears to have a higher price than it should. What information should you seek to determine if indeed the price is too high?

A)Intrinsic Value
B)Price/sales
C)Convexity
D)Price/free Cash Flows

Question 42

Your client wants to invest in bonds and they don't mind high levels of risk if the payoff is worth it in the end. He has been watching a company that is looking to complete a major project in the city and is offering debentures, but there are rumors that the company may go bankrupt trying to complete the project. What should the client be told about debentures as it pertains to the current scenario?

A)That debentures are only backed only by the company's creditworthiness.
B)The debentures are unsecure promissory notes.
C)That due to the added risk of unsecure debt the yield can be higher than secure debt.
D)All of the above.

Question 43

What are the top four bond rating categories in Moody's and Standard and Poor's industrial bond ratings classifications referred to?

A)Debentures
B)Investment Grade
C)Graded Investment
D)Investment Level

Question 44

What type of bonds are often issued to finance a takeover and merger or to help a start-up firm raise capital?

A)Debentures
B)Zero Coupon Bonds
C)High-Yield Bonds
D)Convertible

Question 45

What allows a corporation to have a debt instrument in its capital structure and are subordinate to other debt issued by the corporation?

A)Debentures
B)Zero Coupon Bonds
C)High-Yield Bonds
D)Convertible

Question 46

When are convertibles in double jeopardy?

A)When interest rates are high
B)When stock prices are low
C)Both A and B
D)Neither A or B

Question 47

What type of bonds helps provide for diversification?

A)Dividend Bonds
B)Local Bonds
C)Foreign Bonds
D)Control Bonds

Question 48

The market has been suffering from extremely high interest rates; a company wants to avoid the maturity of their bonds, what provision would allow the company to do that?

A)Potential risk
B)Risk Avoidance Procedures
C)Callable
D)Control Rights

Question 49

If a corporation issues a 10-year $100,000 8% bond. What is the total that the issuing corporation pays to the bondholder over the next 10 years?

A)$80,000
B)$140,000
C)$180,000
D)$100,000
E)$200,000

Question 50

What are the two methods for computing the basis of mutual funds?

A)Cost Basis and First-in, first-out
B)Specific Identification and First-in, first-out
C)First-in, first-out and Average Basis
D)Average Basis and Cost Basis

Question 51

What investments types rely on demand for pricing?

A)Natural Resources
B)Tangible Assets
C)Neither A or B
D)Both A and B

Question 52

Your client wants to know the risk involved with their small portfolio. What type of performance measure should you use?

A)Treynor Index
B)Sharpe Index
C)Jensen Index
D)None of the above

Question 53

You have a new client, it is time to make investment decisions and you want to reduce professional liability exposure; what should be created for each client?

A)Probability Analysis
B)Performance Benchmarks
C)Technical Analysis
D)Investment Policy Statement.

Question 54

A diversified portfolio, market risk, and use of beta coefficient are associated with what type of performance measure?

A)Treynor Index
B)Sharpe Index
C)Jensen Index
D)None of the above

Question 55

Which statement is not true of Markowitz portfolio theory?

A)Investors maximize their one-period expected utility
B)Investors base all decisions on expected return and risk.
C)Investors estimate risk of a portfolio on the basis of variability of expected returns.
D)The above statements are Capital market theory.

Question 56

Which statement is not an assumption to capital market theory?

A)There are not taxes or transaction costs.
B)Capital markets are in equilibrium.
C)All investors have the same one-period time horizon.
D)Investors behavior impacts investment decisions.

Question 57

Your client wants to invest in some stocks. She wants to invest in companies with highly regarded companies but want to avoid issues involved with up or down economy cycles. What product should be recommended and what should be avoided?

A)Recommend blue chip stocks and avoid cyclical stocks
B)Recommend cyclical stocks and avoid blue chip stocks
C)Recommend noncumulative stocks and avoid cumulative stocks
D)None of the above

Question 58

What type of stocks keep up with inflation or the general economy?

A)Income Stocks
B)Growth Stocks
C)A and B
D)None of the above

Question 59

Mary has $100,000 that she would like to invest in jumbo certificates of deposit (CD). She doesn't want her money tied-up to long, but she doesn't want to pay any penalties. How long must she wait for the CD to mature and to withdrawal without penalty?

A)1 year
B)6 months
C)18 months
D)24 months

Question 60

What type of investment vehicle has low-default-risk and specializes in short-term securities?

A)U)S. Series EE and HH Bonds
B)High-grade Common Stock
C)High-grade Corporate Bonds
D)Money Market Accounts

Question 61

Your 68 year old client wishes to make an investment, but doesn't want any risk or have their money tied-up for too long; what investment vehicle would be best for the given situation?

A)U)S. Series EE and HH Bonds
B)High-grade Common Stock
C)Treasury Bills
D)Money Market Accounts

Question 62

Your client want to invest 80 percent of their funds in stocks that are steady and not effected by the economy and to invest another 20 percent of their funds in stock that would take advantage of economical shifts. Where type of stocks would you suggest 80 percent of the funds purchase?

A)Interest-sensitive Stocks
B)Foreign Stocks
C)Defensive Stocks
D)None of the above

Question 63

Prices are determined by supply and demand. Supply and demand are driven by rational and irrational behavior. Security prices move in trends that persist for long periods of time. The actual shift in supply and demand can be observed in market price behavior. Each of the above statements is assumptions of what type of analysis?

A)Efficient Frontier Hypothesis
B)Market Indicators Analysis
C)Technical Analysis
D)Anomalies

Question 64

What theory recognizes three movements in security markets: major trends, intermediate trends, and short-term trends?

A)Efficient Frontier Hypothesis
B)Market Indicators Analysis
C)Technical Analysis
D)Dow Theory

Question 65

Your client as 20 years old and has several thousand dollars' worth of EE bonds that he was gifted on his first birthday. The client's EE bonds are hitting maturity and taxes will be due. The client is also starting college and funds to pay for school. What would you suggest the client do to address their financial dilemma?

A)Suggest the client exchange the current bonds for HH bonds
B)Suggest they use the bonds for college tuition
C)Both A and B
D)Neither A or B

Question 66

Your client wants a hands-on approach to portfolio management since they have the tendency to anticipate the direction of economic conditions. What type of investment strategy does this client want to practice?

A)Passive Investing
B)Indexing
C)Market Timing
D)Buy and hold

Question 67

The setting of specific percentages for each asset class demonstrates what type of investment strategy?

A)Passive Investing
B)Active Investing
C)Market Timing
D)Buy and hold

Question 68

Investors that do not believe that active management adds any additional returns to their portfolios practice what type of investment strategy?

A)Passive Investing
B)Active Investing
C)Market Timing
D)Buy and hold

Question 69

How many asset classes are there in financial planning?

A)1
B)2
C)3
D)4

Question 70

What is not a phase of life cycle associated with a client's risk tolerance?

A)Accumulation
B)Control
C)Consolidation
D)Spending

Question 71

What statement is about tax-efficient investing is false?

A)Funds with a greater portfolio turnover ratio generate more tax consequences for their investors.
B)The return of a mutual fund is stated before tax
C)Both A and B are true
D)Both A and B are false

Question 72

Behind the random walk model, the current price is the best prediction of future prices.

Question 73

Naomi owns closely held stock and is considering selling a few shares. What makes this a difficult transaction?

A)Annuities affect stock prices.
B)Bonds affect stock prices.
C)The lack of an organized market makes it difficult to determine the value of stock
D)All of the above.

Question 74

Futures contracts are settled daily and traders are required to realize losses in cash on a daily basis, but to purchase futures contract requires what type of account?

A)Tangible Account
B)Margin Account
C)Natural Resource Account
D)Separately Managed Account

Question 75

Tom is looking at the morning's currency reports and notices that 1 Nigindia rupee equals 1.5 Vietbodian pounds. It also reads that 1 Vietbodian pound equals 2 Mexicali pesos, but 1 Nigindia rupee equals 4 Mexicali pesos. Tom wants to gain profits by employing an arbitrage strategy. Which of the following defines arbitrage strategy?

A)An arbitrage strategy is a risky strategy to buy something at a low price and sell it at a high price.
B)An arbitrage strategy is a pattern of trade that allows the exchange in currencies.
C)An arbitrage strategy is a pattern of trade that exploits the discrepancies between the prices of different assets in order to earn profit without bearing any risk.
D)An arbitrage strategy is a strategy that requires risky behaviors and a high setup cost.

Question 76

A client is an owner of a semi-large firm in Kansas, but they want to retain their dollars for use later to pay for goods purchased from other U.S. firms. The client has decided to take some funds and invest in Barclays Bank in London. What would the client's funds be known as once the investment is made?

A)International Euros
B)Foreign Banker's Acceptances Funds
C)Intra-continental Foreign Commercial Paper
D)Eurodollars

Question 77

What is the process of selecting broad investment categories for a client's portfolio?

A)Asset allocation
B)Diversification
C)Financial planning
D)Brokerage

Question 78

What model should you have a working knowledge of in order to best measure the risk and return of a portfolio allocation?

A)Tangent portfolio
B)Priced source of risk
C)Markowitz
D)Array

Question 79

Which of the following is true regarding asset allocation and portfolio diversification?

A)Through diversification, you should maximize risk in a portfolio by spreading investments across various types.
B)You should periodically rebalance the asset allocation.
C)Clients will never understand the techniques you employ, so it is not important to explain them.
D)You should educate the client at the beginning of portfolio management, but should not need to do it again.