Deck 14: Investing Fundamentals

Question 1

It would be very difficult and expensive for an individual investor to benefit from holding all 500 stocks of the Standard and Poor's 500 Index.

Answer 1

False

Question 2

Before you start to invest,you should ensure liquidity by owning

A)individual stocks.
B)money market mutual funds.
C)options and puts.
D)corporate bonds.

Answer 2

money market mutual funds.

Question 3

One of the attractive features of mutual funds is that they offer small investors a diversified portfolio and professional management.

Answer 3

True

Question 4

An advantage of investing in corporate bonds is that they hold their value and pay predictable interest (coupon)payments periodically.

Question 5

The primary market is used by firms to raise funds and is a market where newly issued securities are traded.

Question 6

In addition to the interest earned on a bond,it is also possible that the actual bond will increase in value over time.

Question 7

The stocks of well-known companies are referred to as "preferred stock."

Question 8

Real estate is a good investment option for individuals and it offers the same liquidity as stocks or bonds.

Question 9

The higher the dividend paid by a firm,the lower its potential stock price appreciation.

Question 10

A company has a choice of whether to distribute dividends to common shareholders or to keep their profits in the company as retained earnings.

Question 11

Mutual fund gains can be in the form of dividends or capital gains,which are passed on to the individual investors.

Question 12

Institutional investors are professionals employed by a financial institution,who invest their own money earned from their jobs.

Question 13

Most individual investors who buy and sell stock do so on the secondary market through brokers or investment companies.

Question 14

Before you start an investment program,you should ensure liquidity by having money in financial institutions or in money market securities.

Question 15

Common stockholders have the right to vote on key corporate issues,but also have the last right to the assets or profits of a company.

Question 16

Growth stocks are likely to pay high dividends.

Question 17

Common stockholders usually have more dividend rights than preferred stockholders.

Question 18

Bonds are certificates representing partial ownership of a firm.

Question 19

Because dividends are fixed,the prices of preferred stock are not as volatile as those of common stock.

Question 20

Many more shares of stock are traded daily on the primary market than on the secondary market.

Question 21

Common stock is not

A)issued by every firm that issues stock.
B)riskier than preferred stock.
C)given voting rights.
D)guaranteed a dividend.

Question 22

All of the following are true statements about dividends except

A)dividends are based upon earnings.
B)no dividends may be paid.
C)dividends are based upon the number of shares.
D)dividends are contractually guaranteed to common stockholders.

Question 23

Which of the following statements is not true regarding individual investors?

A)They commonly invest a portion of the money earned from their jobs.
B)They invest in stocks to earn a reasonable return on their investments.
C)They expect their money to grow by the time they wish to use it to make purchases.
D)The number of individual investors has decreased in the last 20 years.

Question 24

Stock prices are characterized by all of the following except they

A)can plummet with poor economic conditions.
B)have a set lower limit.
C)can be affected by negative earnings.
D)can be increased through the company repurchasing the shares.

Question 25

All of the following are true regarding stock prices except they

A)are influenced by supply and demand.
B)are regulated by the Federal Reserve Board.
C)have no set limit.
D)generally increase with good financial news.

Question 26

Growth stocks tend to

A)be those of more established companies.
B)offer great opportunities for capital appreciation.
C)pay high dividends.
D)be favored by more conservative investors.

Question 27

________ investors are professionals employed by a financial institution and are responsible for managing money.

A)Institutional
B)Professional
C)Managing
D)Security

Question 28

Growth stocks tend to pay ________ dividends and have ________ appreciation of stock prices.

A)lower; higher
B)higher; lower
C)lower; lower
D)higher; higher

Question 29

Of the following statements about a day trader,which is not correct?

A)They have a short-term focus.
B)They may buy and sell on the same day.
C)They are more risk averse than most investors.
D)Day trading may be their career.

Question 30

In the secondary market,stock prices are

A)determined by supply and demand.
B)stable.
C)easy to predict.
D)less expensive than on the primary market.

Question 31

Income stocks tend to pay ________ dividends and have ________ appreciation of stock prices.

A)lower; higher
B)higher; lower
C)lower; lower
D)higher; higher

Question 32

The largest market where existing securities are sold is called the ________ market.

A)primary
B)secondary
C)third
D)fourth

Question 33

The security that represents equity or ownership of a corporation is

A)common stock.
B)corporate bonds.
C)long-term loans.
D)commercial paper.

Question 34

If you believe that a firm will grow rapidly in the future,you should buy its

A)bonds.
B)notes.
C)common stock.
D)preferred stock.

Question 35

Regarding dividends paid on common stock,

A)older,established firms tend to pay lower dividends.
B)newer firms in growth industries tend to pay higher dividends.
C)some firms don't pay any dividends at all.
D)a firm with high dividends is likely to have high stock price appreciation.

Question 36

Dividends are a portion of

A)earnings returned to the investor.
B)the equity returned to the investor.
C)liabilities returned to the company.
D)assets returned to the company.

Question 37

Investors who buy and sell stock,sometimes in the same day,are called

A)individual investors.
B)growth investors.
C)institutional investors.
D)day traders.

Question 38

An initial public offering (IPO)

A)is less risky than purchasing stocks in the secondary market.
B)can be sold later in the primary market.
C)can be a bargain as the stock prices may rise rapidly the next few days.
D)is a good investment for the beginning investor.

Question 39

Which one thing do you always have with common stock?

A)Dividends
B)Voting rights
C)Capital appreciation
D)A guarantee of at least par value

Question 40

The market for newly issued securities and initial public offerings (IPOs)is the ________ market.

A)initial
B)original
C)primary
D)secondary

Question 41

Which of the following is not true regarding mutual funds?

A)There are thousands of funds with many different investing objectives.
B)They offer small investors diversification and professional management.
C)Dividends received from their investments are used to pay operational expenses,and capital gains are passed on to the mutual fund shareowners.
D)Both dividends and gains are distributed to mutual fund shareowners.

Question 42

One advantage of investing in commercial real estate compared to stock,bonds,and mutual funds is that real estate

A)is more likely to go up in value.
B)is more marketable.
C)may yield income and tax advantages not available with the other investments.
D)is less risky than the other investments.

Question 43

Publicly traded indexes are not

A)purchased through a broker.
B)investments offering only capital appreciation but no dividends.
C)an option for small investors to have diversification of their investments.
D)securities whose values move in tandem with a particular stock index.

Question 44

You have been given an overview of stocks,bonds,and mutual funds.Give one advantage and one disadvantage of investing in each of these.

Question 45

The best way to ensure that you will receive dividends is to

A)day trade.
B)purchase bonds.
C)purchase common stock.
D)purchase preferred stock.

Question 46

If you wish to have the power to vote on who will serve on the board of directors of a corporation you will need to purchase shares of ________ in the corporation.

Question 47

If you wish to have a direct voice in the running of a company,you should purchase

A)bonds.
B)notes.
C)common stock.
D)preferred stock.

Question 48

If economic conditions deteriorate,stock prices will

A)increase.
B)decrease.
C)stay the same.
D)not be directly affected by changes in economic conditions.

Question 49

Corporate bonds

A)offer a predictable return to investors in the form of interest or coupon payments.
B)maintain their value even in periods of changing interest rates.
C)appreciate in value as the maturity date nears.
D)lose value at the maturity date nears.

Question 50

Since the gain received from the sale of stock is always taxed as ordinary income,you might want to time your sale to shift your profit from one year to another.

Question 51

The timing on the sale of a stock could make a big difference in the amount of taxes that are due on the profits.

Question 52

Stocks that provide investors with steady income in the form of large dividends are classified as ________.

Question 53

Present and future value concepts are used to determine the wealth provided by an investment.

Question 54

Individuals who buy and sell stock on a very short-term basis as a career are called ________.

Question 55

Describe common stock.

Question 56

Newly issued securities are traded in the ________.

Question 57

Which of the following is not true regarding preferred stock?

A)It gets rights to the assets of a corporation before common stock
B)It has a stated dividend rate
C)It has the potential for greater capital appreciation than common stock
D)It is a safer and more conservative investment than common stock

Question 58

The standard deviation of a stock's monthly returns measures the degree of volatility of a stock's returns over time and can be a method of evaluating a stock's future risk.

Question 59

The difference between common and preferred stock is that preferred stock

A)may or may not receive dividends.
B)has predictable income and more safety.
C)has greater potential for capital appreciation.
D)is issued more frequently than common.

Question 60

When a corporation goes from being a private to a public firm it will sell stock in what is called a(n)________.

Question 61

Smart investors can find investments that generate high rates of returns with small amounts of risk.

Question 62

You can estimate the amount by which your wealth will increase from an investment using

A)standard deviation.
B)discounted range of returns.
C)time value of money.
D)analysis of past returns.

Question 63

If you invest $1,000 in stock that pays no dividends and sell the stock one year later for $1,100,what will be your return? (Ignore commissions and trading fees.)

A)1%
B)5%
C)10%
D)100%

Question 64

If you purchase 100 shares of Ajax Corporation for $15 a share and one year later sell it for $20 a share,what was your return if the stock paid $2 per share dividends? (Ignore commissions and trading fees.Round to the nearest whole percent.)

A)10%
B)33%
C)47%
D)40%

Question 65

An investment that has the potential to rise substantially in value also has the potential to decline substantially in value.If you cannot afford the possible loss,you should not make that investment.

Question 66

Name three applications of present and future value concepts to stocks.

Question 67

All of the following gains from investments are taxed as ordinary income except

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

Question 68

It is December 30th and you have stock in Zero Corporation,which you bought on March 1st that has lost $2,000 in value.You have already sold other stock that you bought this year for a gain.From a tax standpoint,what should you do with the Zero stock?

A)Sell it today
B)Sell it on January 2nd next year
C)Wait until after next March 1st and sell it then
D)Keep the stock and hope that it goes up in value

Question 69

The time value of money concepts do not include

A)interest or the cost of money.
B)payments of principal and interest.
C)present and future values.
D)the risks associated with various investments.

Question 70

What would be the return on 200 shares of stock purchased on January 1,2005 for $60 per share and sold on December 31,2005 at $80 per share? Also assume that the company paid dividends of $2 per share over the year.The prices include all brokerage fees.Round to the nearest whole percent.
(a)37%
(b)25%
(c)33%
(d)40%

Question 71

Individual risk is

A)objective.
B)a fixed percentage.
C)an individual's comfort with the risk-return relationship.
D)pretty much the same for everyone.

Question 72

What would you pay for a stock whose price you estimate will be $50 in 10 years and you wish to earn a return on the investment of 9%? Ignore brokerage commissions and tax implications and assume the stock paid no dividends during the holding period.
(a)$45
(b)$41
(c)$21.10
(d)$15

Question 73

A stock's ________ is a measure of the degree of volatility in a stock's returns over time.

A)range of returns
B)standard deviation
C)beta
D)value

Question 74

It is December 10th and you have a stock you purchased last January 5th,which has increased in value by more than $3,000.You think the stock will not significantly increase or decrease in value over the next month or so,and you would like to take your gain.What should you do?

A)Sell the stock today and take the gain
B)Wait until December 30th and sell the stock then
C)Sell the stock on January 6th or later
D)Do not sell the stock until it starts to go down in value

Question 75

For minimal tax consequences,when your stock increases in value it should be held for

A)four months or longer.
B)over a year.
C)under a year.
D)five years or longer.

Question 76

To measure an investment's risk,you may use all of the following except

A)time value of money.
B)range of returns.
C)standard deviation of returns.
D)subjective measures of risk.

Question 77

Of the following,which is not used in measuring a stock's return?

A)Price of the stock at time of purchase
B)Average price of stock during period owned
C)Price of stock at time of sale
D)Dividends earned during period owned

Question 78

If a stock is purchased for $30 a share and pays $5 per share in dividends a year,what selling price at the end of the year would result in a return of 50%?
(a)$60
(b)$40
(c)$35
(d)$15

Question 79

What would be the return on a stock purchased at $20 per share,held for 5 years,and sold for $32.22? Ignore brokerage commissions and tax implications and assume the stock paid no dividends during the holding period.Round to the nearest whole percent if necessary.
(a)3%
(b)10%
(c)15%
(d)16%

Question 80

Assuming a tax rate on ordinary income of 25% and a long-term capital gain rate of 10%,how much would you pay in taxes if you sold stock "A" for a $200 capital gain after holding it for 5 months,stock "B" for a $300 capital gain after holding it for 8 months,and stock "C" for a $500 capital gain after holding it for 14 months?
(a)$250
(b)$100
(c)$130
(d)$175