Deck 11: Investment Basics

Question 1

A lending type investment, such as a corporate bond, represents a legal obligation for the issuer to pay its creditors back.

Answer 1

True

Question 2

On the TV show "The Big Bang Theory" the main characters are frequently seen purchasing comic books. Purchasing rare comic books is an example of investing.

Answer 2

False

Question 3

A typical bond will pay annual coupon payments until it matures, at which time it will surrender its par value to the owner of the bond.

Answer 3

True

Question 4

As the owner of a corporate bond this means I hold an ownership position within that corporation.

Question 5

Purchasing derivatives is a form of speculating.

Question 6

The ________ date is the date at which the bond issuer must repay the loan or borrowed funds.

A) premium
B) ending
C) completion
D) maturity
E) none of the above

Question 7

The rate of return on an investment is calculated by dividing the capital gain or loss plus the cash flows by the initial investment amount.

Question 8

Real estate investments are more liquid than stocks most of the time.

Question 9

An option gives you the right to buy or sell the underlying asset at a set price on or before the option's maturity date.

Question 10

To begin your savings plan it is a good idea to set aside your savings first and only spend what is left over.

Question 11

Long-term capital gains have favorable tax treatment over earned income.

Question 12

Investing in assets such as collectable Barbie Dolls or Beanie Babies are both example of speculating.

Question 13

Investing in bonds tends to be riskier financial strategy than investing in common stocks.

Question 14

Which of the following investors will potentially receive dividends on their investments?

A) Bondholders
B) Stockholders
C) Debt holders
D) Derivative holders
E) Both B and D are correct.

Question 15

An investor owns stock from seven different companies, two rental houses, and three government bonds. Together these assets are considered to be the investor's ________ .

A) collection
B) derivative holding
C) asset class
D) portfolio
E) none of the above

Question 16

Investing in bonds is generally less risky than investing in stocks.

Question 17

Bonds are always a safe investment if held to maturity.

Question 18

A company that doesn't make a dividend payment is insolvent and may be forced into bankruptcy by the stockholders.

Question 19

If the corporation that issued a bond goes bankrupt, the bondholders are paid before stock holders are paid from any remaining assets of the corporation.

Question 20

Stocks represent a legal obligation for the issuing company to pay dividends, whether the company has made a profit or not.

Question 21

What is an advantage to being a "preferred" stock holder?

A) Preferred stock holders always get to vote for the board of directors of the company.
B) Preferred stock holders receive a better coupon interest rate.
C) Preferred stock holders receive dividend payouts before common stock holders do.
D) Preferred stock holders never pay commissions on their stock trades.
E) There are no advantages to being a preferred stock holder.

Question 22

An option gives its owner the right to buy or sell an asset. This asset is generally ________.

A) preferred stock
B) mutual funds
C) corporate bonds
D) common stock
E) none of the above are correct

Question 23

You can make investments on a ________ basis, which means that not only does your investment grow free of taxes, but the money you invest isn't taxed until you liquidate your investment

A) tax-eliminated
B) progressive tax
C) tax-deferred
D) asset management

Question 24

Just as valuable as the tax break on capital gains income is the fact that you don't have to claim it--and, therefore, you don't pay taxes on the asset until you ________.

A) have an equal match in personal income
B) sell it
C) retire
D) file your next years' taxes

Question 25

The difference between an investment and speculation is that an investment ________ while speculation depends solely on ________ to produce results.

A) costs less; the economic conditions
B) generates a return; supply and demand
C) costs less; generating a return
D) depends on supply and demand; economic conditions
E) depends on supply and demand; generating a return

Question 26

As a young college graduate, your biggest investment ally is ________.

A) leverage
B) a windfall
C) tax-free investments
D) time
E) derivatives

Question 27

A security whose value is based solely on the value of other assets is called a ________ security.

A) capital option
B) hedging
C) derivative
D) alternative asset
E) none of the above

Question 28

Petrina was told by a successful friend to invest in stocks and income-producing real estate. Both of these are examples of ________ investments.

A) ownership
B) lending
C) risk-free
D) short-term
E) liquid

Question 29

Suppose that you purchased a machine several years ago for your company. You recently sold the machine for more than you paid. This is an example of a ________.

A) capital carry-forward
B) non-taxable gain
C) capital gain
D) windfall
E) none of the above

Question 30

If you purchase some shares of stock

A) you may earn dividends.
B) you will definitely earn dividends.
C) you may earn coupon interest.
D) you will definitely earn coupon interest.

Question 31

When you purchase an asset that generates a return, it is generally considered to be ________.

A) an investment
B) speculation
C) a windfall
D) an expected returner
E) none of the above

Question 32

Which of the following questions is relevant to setting investment goals?

A) If I don't accomplish this goal, what are the consequences?
B) Am I willing to make the financial sacrifices necessary to meet this goal?
C) When do I need this money?
D) How much money do I need to accomplish this goal?
E) All of the above are relevant.

Question 33

The ________ rate is the interest to be paid annually on a bond as a percentage of its par value.

A) base
B) coupon interest
C) face interest
D) compound interest
E) none of the above

Question 34

Long term capital gains are taxed at ________ percent.

A) 8
B) 10
C) 15
D) 25
E) 40

Question 35

Hern MacTavish only invests in lending investments. If his financial advisor gave him the list below, which might Hern invest in?

A) saving accounts
B) stocks
C) income-producing real estate
D) bonds
E) both A and D

Question 36

Jennifer has money invested in stocks. She earns a return on her investment, which is a portion of the company's profits, called ________.

A) interest
B) a return
C) dividends
D) growth
E) retained earnings

Question 37

You are considered to be engaging in ________ when you purchase an asset whose value depends solely on supply and demand.

A) investing
B) speculation
C) hedging
D) optioning
E) none of the above

Question 38

Real estate investments can be income-producing investments. Which of these would be included as an income-producing real estate investment?

A) An apartment complex
B) A shopping mall
C) Your personal home
D) All of the above
E) Only A and B above

Question 39

The ________ is the stated amount on the face of a bond, which the firm is to repay at the maturity date.

A) historical value
B) debt price
C) par value
D) relevant value
E) none of the above

Question 40

If you bought a 20-year bond issued by the government, with a par value of $1,000 and an interest rate of 8%. At maturity you will be returned the principal of ________.

A) $80
B) $500
C) $800
D) $1,000
E) $1,600

Question 41

Latisha invested $1,000 in XYZ stock. Two years later she sold the stock for $1,200. During the time she owned the stock, she received a total of $80 in dividends. What was her total return on this investment?

A) 8%
B) 20%
C) 23.33%
D) 28%

Question 42

A prerequisite to investing is to perform a financial reality check. Explain its 3 parts.

Question 43

The nominal rate of interest that investors demand will increase with an increase in the expected rate of inflation.

Question 44

You recently purchased a stock for $25. It is now worth $35, and it paid a $5 dividend during the time you held it. Your rate of return on this stock is closest to which of the following?

A) 60%
B) -20%
C) 43%
D) 40%

Question 45

You recently purchased a stock for $50. It is now worth $75, and it paid a $15 dividend during the two years you held it. What is your annualized rate of return on this stock?

A) 80%
B) 40%
C) 27%
D) 25%

Question 46

Why is speculating in derivatives, futures contracts and options not appropriate for the typical, long-term investor?

Question 47

What is the purpose of return on investment?

Question 48

Juan purchased shares in ABC company for $5,000 three years ago. During these three years he received $600 in dividends. He just sold the stock for $4,300. What was his total return on this investment?

A) -14%
B) -2%
C) 12%
D) 14%

Question 49

Compare and contrast lending and ownership investments.

Question 50

The real rate of return is the nominal rate of return adjusted for inflation.

Question 51

If the total rate of return is multiplied by 1/N, where N is the number of years for which the investment was held, the result is the ________.

A) serialized rate of return
B) annualized rate of return
C) tax-free rate of return
D) capitalized rate of return

Question 52

You recently purchased 100 shares of stock at $15 per share. The stock is now worth $20 per share, and it paid a $2 dividend during the time you held it. Your rate of return on this stock is closest to which of the following?

A) -20%
B) 33%
C) 35%
D) 47%

Question 53

What are the four financial questions that help focus on investing goals?

Question 54

You recently purchased a stock for $30. It is now worth $40, and it paid a $5 dividend during the time you held it. Your rate of return on this stock is closest to which of the following?

A) 67%
B) 50%
C) 38%
D) 33%
E) 17%

Question 55

Lavon has his money invested into an asset that has averaged the following returns the last three years: +22%, -8%, +13%. Most likely what type of asset is he invested in?

A) Corporate bonds
B) Income producing real estate
C) Gold coins
D) Common stock

Question 56

Louis purchased $5,000 worth of stock three years ago and sold it today for $7,000. He received no dividends from this investment. Inflation averaged 4% during the three years he owned the stock. What was his annualized real rate of return on this investment?

A) 4%
B) 9.33%
C) 13.33%
D) 36%
E) 40%

Question 57

If you are too conservative with your investments, they may not keep up with inflation.

Question 58

You purchased an investment for $1,000 on which you earned $120 investment last year. The inflation rate during that time was 3%. What was your real rate of return?

A) 3%
B) 9%
C) 12%
D) 15%
E) none of the above

Question 59

Paula bought a stock for $200 last year and sold it today for $150. If she earned a dividend of $100 while she held the stock her rate of return was

A) -50%
B) -25%
C) 25%
D) 33.33%
E) 50%

Question 60

Tran purchased a house for a rental property for $100,000 five years ago. During the time he owned this rental, his net rental income was a total of $4,000. He just sold the property for $120,000. What was his average annual return on this investment?

A) 4.0%
B) 4.8%
C) 20%
D) 24%

Question 61

Alice learned that the difference between the real rate of return and the nominal or quoted rate of return is that

A) the real rate is adjusted for inflation.
B) the real rate is not adjusted for inflation.
C) the nominal rate is adjusted for inflation
D) none of the above

Question 62

The real rate of return can never be a negative number.

Question 63

Suppose that you are beginning an investment plan. You have decided that you want to retire in 30 years with $1,000,000 in your bank account at that time. How much would you need to invest at the end each of the next 30 years if you could earn 8%?

A) $11,924,613.33
B) $83,860.16
C) $46,030.93
D) $22,045.16
E) $8,827.43

Question 64

When it comes to tax advantages, capital gains and dividend income are taxed at a lower rate than ordinary income.

Question 65

The nominal rate of return minus the inflation rate is called the ________.

A) stated rate of return
B) standard rate of return
C) real rate of return
D) Fisher effect
E) none of the above

Question 66

Lawrence Wright is slow in math. He has before him the equation of (ending value minus beginning value) and income return totalled, then divided by beginning value. This is used to find the

A) rate of inflation.
B) capital gain.
C) capital loss
D) rate of return.
E) serialized rate of return.

Question 67

Interest rates are closely tied to the rate of inflation.

Question 68

While studying the chapter on investments in Personal Finance, Becky Hargrith found out that the ________ is equal to the real rate of return plus the rate of inflation.

A) adjusted rate
B) long-term rate of return
C) nominal interest rate
D) real interest rate

Question 69

The real rate of return is the rate of return earned on an investment without any adjustment for inflation.

Question 70

The ________ rate of return earned on an investment is unadjusted for lost purchasing power.

A) effective
B) annual
C) real
D) nominal
E) none of the above

Question 71

The higher your marginal tax bracket, the less attractive tax-free investments become.

Question 72

Principle #2: the time value of money tells us that time is our greatest ally. This being so, the most important and most difficult step is making the commitment to get started. Tell how to find the money and get started with Principle #15: just do it.

Question 73

When market interest rates go up investors demand ________ returns on other types of investments and when market interest rates go down, the return investors demand on other types of investments ________.

A) lower; goes down
B) higher; goes down
C) lower; goes up
D) higher return; goes up

Question 74

If the nominal rate is 10% and inflation is 3%, the real rate of return is 7%.

Question 75

The nominal rate of return is simply the real rate of return minus the inflation rate.

Question 76

Provide an explanation of the four points of making a comparison of investing returns on an after-tax basis.

Question 77

One should keep in mind that when it comes to tax advantages, ________ is/are better than ________.

A) ordinary income; capital gains
B) tax-free investments; tax deferred
C) capital gains; ordinary income
D) tax shelters; capital gains
E) marginal rates; ordinary income

Question 78

Principle #4, taxes affect personal finance decisions, tells us that several points hold true regardless of what we invest in. Jason found a point that was included on the list in error. Which of the following is it?

A) The marginal tax rate is the rate you pay on the next dollar of earnings.
B) Tax-free investments should be compared on a before-tax basis.
C) You should consider tax-deferred investments.
D) Capital gains are better than ordinary income when it comes to taxes.
E) The higher your marginal tax bracket, the more attractive tax-free investments become.

Question 79

Historical rates of return for the last 82 years place ________ at the highest end of the spectrum for risk and ________ at the lowest end for risk.

A) common stocks; T-Bills
B) common stocks; long-term government bonds
C) common stocks; long-term corporate bonds
D) long-term corporate bonds; long-term government bonds

Question 80

During times of rising inflation, investments with fixed returns like a bond or bank CD are attractive investments to own.