Deck 11: The Fundamentals of Investing

Question 1

Before beginning to invest and build your financial capital, you should make sure you have adequate

A) insurance coverage only.
B) emergency funds in cash or savings accounts only.
C) insurance coverage and emergency funds in cash or savings accounts.
D) insurance coverage, real estate, and emergency funds in cash or savings accounts.

Answer 1

insurance coverage and emergency funds in cash or savings accounts.

Question 2

Which of the following personal financial plan components should be completed before you begin an investing plan?

A) Identifying and prioritizing financial goals
B) Developing a budget
C) Establishing a liquid emergency fund
D) All of the above.

Answer 2

All of the above.

Question 3

If you are investing to meet long-term goals, you can afford to take ______ if you are investing to meet short-term goals.

A) less risk than
B) greater risk than
C) the same risk as
D) no risk, like

Answer 3

greater risk than

Question 4

Investment goals should be all of the following except

A) realistic.
B) specific.
C) measurable.
D) broad.

Question 5

The first step in the investment planning process is to

A) evaluate your risk tolerance.
B) learn about your investment choices.
C) identify your investment goals.
D) select investments consistent with risk tolerance, time horizon, and investment objectives.

Question 6

Which of the following is not one of the steps in the investment planning process?

A) Learning about your employer's flexible spending account (FSA)
B) Monitoring your investment plan
C) Selecting appropriate investments
D) Evaluating your investment choices

Question 7

You want to have $1,000 accumulated in 3 years and you already have $250 in a savings account earning 6%. If you don't contribute any additional funds, how much will you be short of your goal in 3 years?

A) $702
B) $750
C) $407
D) $634

Question 8

You want to invest equal annual amounts over the next 15 years. If your goal is to have $15,000 at the end of that time and if you can earn 8% on your invested funds, how much do you need to invest annually at the end of each year to reach your goal?

A) $315
B) $552
C) $920
D) $1,000

Question 9

Which is a recommended source to find funds to invest?

A) Paying your bills first
B) Saving half your raise
C) Paying the minimum credit card bills and investing the difference
D) Avoiding down payments and investing the difference

Question 10

Replacing a car with a more fuel efficient one and investing the annual cash savings is an example of finding money to invest?

A) Paying yourself first
B) Paying your bills first
C) Stopping up a cash leak
D) Continuing a payment plan

Question 11

Which investment strategy involves buying the same dollar amount of securities at regular intervals?

A) Dollar compounding
B) Dollar cost averaging
C) Marginal cost investing
D) Compound interval investing

Question 12

In the long run, dollar cost averaging will weight your portfolio with more

A) low-cost shares than high-cost shares.
B) high-cost shares than low-cost shares.
C) low-priced stock than high-priced stock.
D) high-priced shares than low-priced stock.

Question 13

Long-term capital gains are taxed at ______, and most dividends are taxed at ________ than earned income.

A) the same rate; a lower rate
B) a lower rate; the same rate.
C) a lower rate; a lower rate.
D) the same rate; the same rate.

Question 14

Interest earned on municipal bonds is generally

A) tax-deferred until the bonds are sold.
B) federal income tax-free
C) tax-deferred until the bonds mature.
D) federal income tax-free if held longer than one year.

Question 15

_____________ are required to report their financial performance to the owners of the company in an annual report.

A) All U.S. companies
B) Publicly held companies
C) Privately held companies
D) All companies doing business in the United States

Question 16

An example of a tax-deferred investment is a

A) traditional IRA.
B) Roth IRA.
C) mutual fund.
D) municipal bond.

Question 17

Which of the following statements concerning federal and municipal debt is true?

A) Interest on municipal debt is tax exempt from federal income taxes and state income taxes if the investor is a resident of the state that issued the bond. Federal debt interest is exempt from state and local income taxes.
B) Municipal debt interest is exempt only from federal income taxes. Interest on federal debt is tax exempt from all federal, state, and local income taxes.
C) Interest on federal and municipal debt is tax exempt from all federal, state, and local income taxes.
D) Interest on municipal debt is tax exempt from both federal and state income taxes regardless of the state in which the investor lives. Federal debt is tax exempt only from federal income taxes.

Question 18

Which of the following is not one of the strategies for successful investing?

A) Understanding and taking advantage of tax rules
B) Keeping accurate records
C) Hiring a full-service broker to get access to information
D) Starting early and be consistent

Question 19

If you purchase $100 of stock every 15th of the month, you are practicing

A) dollar cost averaging.
B) diversification.
C) market timing.
D) asset allocation.

Question 20

Dollar cost averaging will result in

A) the highest average return of any investment strategy.
B) a greater return than a buy-and-hold strategy if prices are rising.
C) a higher average purchase price than the average price over the long term.
D) a lower average purchase price than the average price over the long term.

Question 21

Municipal bonds bought by residents of the state that issues them are a ___________ investment.

A) tax-deferred equity
B) tax-exempt equity
C) tax-deferred debt
D) tax-exempt debt

Question 22

Mandy is subject to a marginal tax rate of 24%. She earned $400 in dividends from a taxable brokerage account last year. How much of the dividend income will Mandy pay in taxes?

A) $96
B) $80
C) $60
D) $0, because dividend income is tax exempt

Question 23

The following amounts were earned on Ernesto's portfolio last year: $250 interest income, $100 dividend income, $500 short-term capital gain, and $1,000 long-term capital gain. If Ernesto is in the 24% tax bracket, what is the total amount he will pay in taxes on his investment earnings?

A) $323
B) $345
C) $354
D) $444

Question 24

When making investment decisions within a portfolio, which of the following is not a factor to be considered?

A) Obtaining money to invest
B) Risk tolerance
C) Time horizon
D) Tax laws and tax rates

Question 25

Which of the following is the best strategy for building sufficient wealth for retirement?

A) Starting to save early and taking advantage of compound interest
B) Investing at the highest rate possible
C) Taking very high risks
D) Working with a full-service stockbroker

Question 26

Justin is comparing two investments, A and B. A pays its return in interest, whereas B is a growth investment whose return is in the form of price appreciation. Assume Justin sells Investment B after one year. What is the difference between Investments A and B on an after-tax return basis after one year if Justin's marginal tax rate is 32% and both investments are expected to earn 10% on an initial investment of $50,000?

A) The after-tax return on Investment B is $850 more than A
B) The after-tax return on Investment A is $850 more than B
C) There is no difference between the two.
D) The after-tax return on Investment B is $600 more than A

Question 27

A person can invest by being

A) either an owner or a lender.
B) an owner but not a lender.
C) a lender but not an owner.
D) neither an owner nor a lender.

Question 28

Which of the following would be an example of a fixed-income investment?

A) Commodities
B) Bonds
C) Stocks
D) Land

Question 29

Your accountant has just told you that one of your investments had a capital gain over the year. This would mean that

A) the value of the investment appreciated.
B) the investment paid a large dividend.
C) the investment made a large interest payment.
D) you received a tax refund related to the investment.

Question 30

Debt investments generally earn lower returns compared to equity investments such as stocks. This is because debt investments ________ equities.

A) have less risk than
B) have more risk than
C) have as much risk as
D) are a subgroup of

Question 31

Which of the following is a disadvantage of debt investments?

A) They tend to be less risky than many other types of investments.
B) They tend to have lower liquidity than many other types of investments.
C) They tend to have lower rates of return than many other types of investments.
D) All of the above are disadvantages of debt investments.

Question 32

An investor that has an ownership interest in a business is a(n)

A) debt investor.
B) equity investor.
C) commodity investor.
D) money market investor.

Question 33

Goodroad Transportation Company has earned a profit of $25 million for the year. In order to reward its shareholders, it intends to pay a total dividend of $8 million. Goodroad will pay the dividend from

A) its profits.
B) the original capital investment of its shareholders.
C) tax refunds it gets from the taxing authority.
D) the new sale of equity shares to the public.

Question 34

If you buy a stock at $50, and, a year later, sell the stock for $60, you have a

A) $10 capital gain.
B) $60 capital gain.
C) $10 dividend.
D) $10 yield.

Question 35

Companies are obligated to make payments to their _____ investors.

A) common stock
B) preferred stock
C) bond
D) bond and preferred stock

Question 36

Which of the following are entitled to vote in the election of the board of directors of the company?

A) Common shareholders
B) Preferred shareholders
C) Common and preferred shareholders
D) Bondholders

Question 37

Dividends represent current income for _______; interest represents current income for ___________.

A) bondholders; shareholders
B) shareholders; bondholders
C) shareholders; shareholders
D) bondholders; bondholders

Question 38

Most bonds pay current income in the form of fixed

A) semi-annual periodic payment of interest.
B) quarterly periodic payment of interest.
C) quarterly periodic payment of dividends.
D) semi-annual periodic payment of dividends.

Question 39

A bond's ________ is fixed for the life of the bond.

A) payment of interest
B) price
C) yield
D) current value

Question 40

Unlike common stock, preferred stock has

A) priority in dividend payment.
B) a periodic dividend.
C) a maturity.
D) both a periodic dividend and fixed maturity date.

Question 41

Which of the following is a major difference between stock and bond investments?

A) Bonds can be issued by governments but stock cannot.
B) Stocks have a fixed maturity but bonds do not.
C) It is possible to earn current income on bonds but not on stock.
D) All of these choices are correct.

Question 42

Melvin owns 10 20-year corporate bonds, each with a face value of $1,000. If the bonds pay an interest rate of 7.5%, how much total interest will Melvin earn before taxes in one year on this investment?

A) $75
B) $100
C) $375
D) $750

Question 43

Kramer Manufacturing wants to issue $50 million in bonds and pay interest at the rate of 5% semiannually on a face value of $1,000. Kramer will need to issue ________ bonds and pay ________ per bond in interest every six months.

A) 100,000; $25
B) 500,000; $50
C) 50,000; $50
D) 50,000; $25

Question 44

Skyjet Airlines has $200 million in existing bond debt, $50 million in preferred stock, and total common stockholders' equity of $400 million. If Skyjet were to file for bankruptcy and liquidate its total assets for $500 million, Skyjet would have to pay

A) $200 million to its debt holders, followed by $50 million to its preferred stockholders, and lastly, $250 million to its common stockholders.
B) $400 million to its common stockholders, followed by $100 million to its debt holders.
C) $50 million to its preferred stockholders, $400 million to its common stockholders, and $50 million to its debt holders.
D) $200 million to its debt holders, followed by $300 million to its common stockholders.

Question 45

Derivative securities derive their value from the

A) time value of money.
B) statistical value of the underlying asset class.
C) price fluctuations of the underlying asset.
D) net present value of the underlying asset.

Question 46

The buyer of a call option has the right to ____ the underlying asset at a set price on _______.

A) sell; or before the call's expiration date
B) buy; or before the call's expiration date
C) buy; the call's expiration date
D) sell; the call's expiration date

Question 47

Which is a difference between options and futures?

A) Futures contracts derive their value from the price movements, where options contracts are based on time value of money.
B) Options contracts derive their value from the price movements, where futures contracts are based on time value of money.
C) The buyer of an options contract is not obligated to go through with the contract.
D) The buyer of a futures contract is not obligated to go through with the contract.

Question 48

Which of the following statements is true regarding speculative investments, such as derivatives?

A) The main return on these investments is typically based on price movement.
B) These investments typically require a long-term hold.
C) These investments typically have large tangible asset values.
D) The size of potential return on these investments is usually limited.

Question 49

Which of the following would be considered a commodity?

A) Gold
B) stock option contract
C) Mortgage-backed bond
D) Real estate

Question 50

Which of the following is the most appropriate investment for emergency funds?

A) Money market securities
B) Stocks
C) Corporate bonds
D) A diversified mix of stocks and long-term bonds

Question 51

Which of the following is the riskiest asset class?

A) Treasury bonds
B) Derivative securities
C) Large company stocks
D) Corporate bonds

Question 52

Which of the following is the least risky asset class?

A) Money market securities
B) Derivative securities
C) Large company stocks
D) Corporate bonds

Question 53

Mutual fund investors are considered

A) lenders to the fund and expect to share in the income of the fund but not the growth.
B) lenders to the fund and expect to share in the income and growth of the investment pool.
C) owners of the fund and entitled to share in the growth of the investment pool but not the income.
D) owners of the fund and entitled to share in the income and growth of the investment pool.

Question 54

Which of the following would be considered a pooled investment?

A) Mutual funds
B) Preferred stock
C) Bonds
D) Common stock

Question 55

In general, _____ investments provide you with _____ average rates of return over time .

A) riskier; higher
B) less risky; higher
C) riskier; lower
D) less risky; about

Question 56

The sacrifice of today's consumption for consumption at a later date is captured in the

A) real risk-free rate.
B) inflation rate.
C) liquidity premium.
D) maturity risk premium.

Question 57

The rate of return on any investment includes

A) current income earned only.
B) capital gains earned only.
C) both current income and any capital gains earned.
D) capital gains less current income earned.

Question 58

You invest $250 into ABC Corp. stock for a price of $62.50 per share. At the end of one year, you sell your shares for $70.50 per share and you received a $1.10 per share dividend during the year. What is your return on investment for this period?

A) 11.04%
B) 12.36%
C) 13.24%
D) 14.56%

Question 59

An investment of $1 each in two different securities led to a value of $10 (Security A) and $20 (Security B), respectively, after 15 years. When comparing the rate of return earned by the two securities, it can be said that

A) Security B earned a higher average annual rate of return.
B) Security A earned a higher average annual rate of return.
C) both securities earned the same average annual rate of return.
D) it is impossible to calculate the securities rates of return based on this information.

Question 60

Mindy purchased 100 shares of Fly By Wire Training Academy at $75.50 per share one year ago. She has just received a dividend of $2.50 per share and the share is selling at a price of $89.25. If Mindy sold it at this price, what was her rate of return on Fly By Wire stock over the one-year holding period?

A) 21.52%
B) 18.21%
C) 15.41%
D) 3.31%

Question 61

Based on historical performance of various investments, which of the following is considered the riskiest on the list and therefore will have the highest expected rate of return over the long-term?

A) Long-term U.S. government bonds
B) U.S. corporate bonds
C) Small U.S. company stocks
D) Large U.S. company stocks

Question 62

A risk-averse investor will

A) not invest in any high-risk securities.
B) prefer to invest in low-risk securities.
C) prefer to invest in an asset that would produce an expected return commensurate to the risk involved.
D) not invest in low-return investments.

Question 63

You are more likely to take on riskier investments during the _________ stage than during the ____________ phase.

A) early life-cycle; wealth accumulation
B) wealth accumulation; early life-cycle
C) retirement; wealth accumulation
D) early life-cycle; retirement

Question 64

In general, families with children tend to be ______ to take financial risk.

A) less willing
B) more willing
C) agnostic
D) encouraged

Question 65

Studies have shown that investors with a college education have ________ than those without a college education.

A) higher risk tolerance
B) lower risk tolerance
C) no significant difference in risk tolerance
D) a significant difference in risk tolerance

Question 66

Which of the following statements concerning risk tolerance is true?

A) There is some evidence that women are less inclined to take risk than men.
B) Investors in the early life-cycle stages tend to be the biggest risk-takers.
C) College-educated investors are lower risk-takers than investors without a college education.
D) As investors approach retirement years, they take on more risk.

Question 67

Which type of investor usually demands a risk premium to be willing to invest in risky assets?

A) Equity investors only
B) Bond investors only
C) Mutual fund investors only
D) All investors

Question 68

If the inflation rate ______, your purchasing power _________.

A) increases; decreases
B) decreases; decreases
C) increases; increases
D) decreases; remains the same

Question 69

The minimum rate of return required by investors is usually called the

A) nominal risk-free rate.
B) nominal inflation rate.
C) expected rate of return.
D) expected required return.

Question 70

The risk of a company becoming bankrupt is also called its

A) market risk.
B) default risk.
C) liquidity risk
D) inflation risk.

Question 71

Which of the following statements regarding default risk is true?

A) In a bankruptcy proceeding, the value of an equity investment is likely to be zero.
B) Default risk is greater for short-term securities than for long-term securities.
C) In a bankruptcy proceeding, the value of a debt investment is likely to be zero.
D) Default risk is greater for illiquid investments.

Question 72

A bear market occurs when the market is

A) generally rising.
B) generally declining.
C) very volatile.
D) fairly stagnant.

Question 73

When investors are worried about a possible "bear market," this is an example of

A) default risk.
B) interest-rate risk.
C) liquidity risk.
D) market risk.

Question 74

Which of the following is not one of the risks equity investors normally face?

A) Inflation risk
B) Reinvestment risk
C) Maturity risk
D) Market risk

Question 75

Reinvestment risk is greatest for

A) short-term debt securities.
B) long-term debt securities.
C) bonds.
D) common stock.

Question 76

The risk of not being able to convert an asset to cash without losing value is

A) liquidity risk.
B) reinvestment risk.
C) default risk.
D) market risk.

Question 77

All of the following characteristics tend to increase a person's risk-taking tendencies except

A) old age.
B) income.
C) wealth.
D) education.

Question 78

Which of the following is not one of the factors affecting risk tolerance?

A) Consumer confidence
B) The state the person lives in
C) Life-cycle effects
D) Education

Question 79

A risk-averse investor will

A) not accept any risk.
B) accept any risk.
C) only accept the risk of inflation.
D) only accept higher risk to gain higher returns.

Question 80

A person is said to be risk-averse if he or she

A) prefers to receive an amount of money for certain instead of taking a gamble that would, on average, produce the same amount of money.
B) prefers to take a gamble that would produce, on average, a certain amount of money, instead of receiving that same amount of money for certain.
C) is very comfortable with taking investment risk.
D) does not require an extra risk premium for taking more risk.