Deck 14: Investing Fundamentals

Question 1

Bonds are financial instruments representing partial ownership of a firm.

Answer 1

False

Question 2

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

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

Answer 2

money market securities.

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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 10

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

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

Question 11

It is better to pay off low interest loans and then invest, versus paying off loans with higher interest rates.

Question 12

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.

Question 13

Common stockholders usually have more dividend rights than preferred stockholders.

Question 14

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

Question 15

If you have a 6% student loan and a 10% student loan, and can invest at 5% without risk, in what order should you allocate funds?

A) Start investing; the sooner the better
B) Split your excess cash flow between paying off the 10% loan and investing
C) Pay off the 10% loan, then pay off the 6% loan, then invest
D) Not enough information

Question 16

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

Question 17

Which of the following investments would you not consider if you have adequate liquidity and additional funds to invest?

A) Real estate
B) Preferred stock
C) Mutual funds
D) Money market securities

Question 18

Before investing you should consider paying off loans before making investments.

Question 19

Which of the following is true of an initial public offering (IPO)?

A) Buying an IPO stock is less risky than purchasing established companies in the secondary market.
B) An IPO stock can be sold later in the primary market.
C) An IPO's stock price may rise or fall rapidly on the first day.
D) An IPO represents a company that was just created within the last month.

Question 20

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

Question 21

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 22

Which of the following is not true regarding preferred stock?

A) Preferred stockholders have rights to the assets of the corporation before common stockholders.
B) Preferred stockholders have priority over common stockholders in receiving dividends.
C) Preferred stock has greater potential for capital appreciation than common stock.
D) The price of preferred stock is less volatile than the price of common stock.

Question 23

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

Question 24

When a firm performs well, investors holding its shares are ________ willing to sell them and therefore, the demand for the stock ________.

A) more; increases
B) less; decreases
C) less; increases
D) more; decreases

Question 25

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 26

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 27

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 28

Preferred stock dividends are paid before a firm can pay dividends on its common stock.

Question 29

Which of the following is not true of common stock?

A) Common stock represents partial ownership in the firm.
B) Common stock is riskier than preferred stock.
C) Investors in common stock are given voting rights.
D) Investors in common stock are guaranteed a dividend.

Question 30

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 31

One difference between common and preferred stock is that preferred stock

A) does not pay dividends.
B) offers more predictable income.
C) has greater potential for capital appreciation.
D) is issued more frequently than common stock.

Question 32

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

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

Question 33

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 34

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

Question 35

If economic conditions deteriorate, stock prices are likely to

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

Question 36

Publicly traded indexes are typically purchased by investors who expect an increase in

A) an inflation index.
B) an unemployment index.
C) an index representing the political approval rating of the president of the United States.
D) a particular stock index.

Question 37

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 percentage of individual Americans who own stocks increased immediately following the financial crisis of 2008-2009.

Question 38

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 39

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 affected by the quality of the company's management.

Question 40

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

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

Question 41

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 42

Describe common stock.

Question 43

Growth stocks are likely to pay high dividends.

Question 44

Use the following two columns of items to answer the matching questions below:
preferred stock

A)first offering of a firm's stock to the public
B)facilities that allow investors to purchase or sell existing stocks
C)investors owning this type of stock have priority over common stockholders in receiving dividends
D)market where existing securities are sold
E)individual investors who buy and sell stocks within a day
F)financial instruments that represent partial ownership of a firm
G)debt instruments issued by the government or corporations to borrow money from investors
H)professionals responsible for clients' funds

Question 45

Newly issued securities are traded in the ________.

Question 46

Which of the following are true about IPOs?

A) An IPO is the first time a firm's shares are listed on a stock exchange and publicly traded.
B) An IPO is the first time a firm sells shares to any investor.
C) After the IPO, shares begin trading on the secondary market.
D) A and C are correct.

Question 47

Which of the following is an accurate statement?

A) Owning common stock is less risky than owning real estate.
B) In times of rising inflation, it is safer to own bonds than common stock.
C) Owning common stock provides the investor with a share of the firm's earnings and potential dividends.
D) Owning preferred stock is more risky than owning common stock since the investor has voting rights with common stock and it stands before preferred stock in the event of bankruptcy.

Question 48

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 49

Use the following two columns of items to answer the matching questions below:
secondary market

A)first offering of a firm's stock to the public
B)facilities that allow investors to purchase or sell existing stocks
C)investors owning this type of stock have priority over common stockholders in receiving dividends
D)market where existing securities are sold
E)individual investors who buy and sell stocks within a day
F)financial instruments that represent partial ownership of a firm
G)debt instruments issued by the government or corporations to borrow money from investors
H)professionals responsible for clients' funds

Question 50

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 51

Use the following two columns of items to answer the matching questions below:
IPO

A)first offering of a firm's stock to the public
B)facilities that allow investors to purchase or sell existing stocks
C)investors owning this type of stock have priority over common stockholders in receiving dividends
D)market where existing securities are sold
E)individual investors who buy and sell stocks within a day
F)financial instruments that represent partial ownership of a firm
G)debt instruments issued by the government or corporations to borrow money from investors
H)professionals responsible for clients' funds

Question 52

Use the following two columns of items to answer the matching questions below:
stock exchanges

A)first offering of a firm's stock to the public
B)facilities that allow investors to purchase or sell existing stocks
C)investors owning this type of stock have priority over common stockholders in receiving dividends
D)market where existing securities are sold
E)individual investors who buy and sell stocks within a day
F)financial instruments that represent partial ownership of a firm
G)debt instruments issued by the government or corporations to borrow money from investors
H)professionals responsible for clients' funds

Question 53

Use the following two columns of items to answer the matching questions below:
institutional investors

A)first offering of a firm's stock to the public
B)facilities that allow investors to purchase or sell existing stocks
C)investors owning this type of stock have priority over common stockholders in receiving dividends
D)market where existing securities are sold
E)individual investors who buy and sell stocks within a day
F)financial instruments that represent partial ownership of a firm
G)debt instruments issued by the government or corporations to borrow money from investors
H)professionals responsible for clients' funds

Question 54

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 55

Use the following two columns of items to answer the matching questions below:
common stock

A)first offering of a firm's stock to the public
B)facilities that allow investors to purchase or sell existing stocks
C)investors owning this type of stock have priority over common stockholders in receiving dividends
D)market where existing securities are sold
E)individual investors who buy and sell stocks within a day
F)financial instruments that represent partial ownership of a firm
G)debt instruments issued by the government or corporations to borrow money from investors
H)professionals responsible for clients' funds

Question 56

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

Question 57

Use the following two columns of items to answer the matching questions below:
day trader

A)first offering of a firm's stock to the public
B)facilities that allow investors to purchase or sell existing stocks
C)investors owning this type of stock have priority over common stockholders in receiving dividends
D)market where existing securities are sold
E)individual investors who buy and sell stocks within a day
F)financial instruments that represent partial ownership of a firm
G)debt instruments issued by the government or corporations to borrow money from investors
H)professionals responsible for clients' funds

Question 58

Use the following two columns of items to answer the matching questions below:
bonds

A)first offering of a firm's stock to the public
B)facilities that allow investors to purchase or sell existing stocks
C)investors owning this type of stock have priority over common stockholders in receiving dividends
D)market where existing securities are sold
E)individual investors who buy and sell stocks within a day
F)financial instruments that represent partial ownership of a firm
G)debt instruments issued by the government or corporations to borrow money from investors
H)professionals responsible for clients' funds

Question 59

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

Question 60

Day traders always trade

A) in the primary market.
B) in either the primary or secondary markets.
C) with an objective of buying and selling within two hours.
D) using margin funding.

Question 61

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 62

Jane has $3,200 she wants to invest in stocks. She has found an investment that she believes will earn a 9% annual return. What will be the value of Jane's investment in 20 years if she is correct?

A) $17,933
B) $16,512
C) $14,915
D) $21,526

Question 63

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 64

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 65

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 66

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 67

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

Question 68

If you purchase 100 shares of XYZ Corporation for $50 per share, receive a dividend check for $200, and then sell the stock for $62 per share, what will your return on the stock be?

A) 4%
B) 424%
C) 24%
D) 28%

Question 69

If you bought stock for $3,000 a year ago, received no dividends, and sold it for $1,000, what is the return on your investment?

A) -67%
B) 0%
C) 67%
D) -33%

Question 70

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 71

John decides to take his annual Christmas bonus of $2,000 and invest it each year for the next five years in stock he believes can earn an 8% annual return. How much will John's investment be worth at the end of the five years?

A) $11,972
B) $19,098
C) $11,734
D) $15,600

Question 72

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

Question 73

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 74

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

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

Question 75

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

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

Question 76

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 77

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

Question 78

All of the following are true statements about common stock dividends, except

A) dividends are not generally paid by tech growth companies.
B) no dividends may be paid.
C) dividends are usually between 1% and 3% of the stock's price.
D) dividends are contractually guaranteed to common stockholders.

Question 79

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

Question 80

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.