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

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.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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 5

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.

Question 6

Bonds are always a safe investment if held to maturity.

Question 7

Purchasing derivatives is a form of speculating.

Question 8

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 9

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.

Question 10

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

Question 11

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 12

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

Question 13

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 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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 19

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

Question 20

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

Question 21

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 22

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 23

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 24

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 25

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 26

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 27

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 28

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 29

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 30

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 31

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 32

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 33

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 34

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 35

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 36

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 37

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 38

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 39

Long term capital gains are taxed at ________ percent.

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

Question 40

As a young college graduate,your biggest investment ally is

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

Question 41

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 42

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 43

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 44

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 45

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

Question 46

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

Question 47

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 48

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 49

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 50

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 51

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 52

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 53

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 54

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 55

What is the purpose of return on investment?

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

Compare and contrast lending and ownership investments.

Question 61

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

Question 62

Diversification works in one's portfolio because stock returns in one's portfolio do not always move in the same direction;as a result,the upswings and downturns in one's portfolio eliminate one another.

Question 63

Systematic risk can be effectively managed through diversification.

Question 64

The risk associated with the use of debt by the firm is business risk.

Question 65

For the international investor,exchange rate risk is simply another layer of risk.

Question 66

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

Question 67

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

Question 68

Historically,U.S.government securities have been considered the safest,lowest-risk investment available.

Question 69

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

Question 70

Market risk deals with the inability to sell a security quickly at fair market value.

Question 71

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

Question 72

Diversification lowers risk,but it also lowers the expected return.

Question 73

Market risk is the risk of fluctuations in security prices due to changes in the market interest rate.

Question 74

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

Question 75

Some types of investments expose you to multiple sources of risk.

Question 76

One of the most important types of risk associated with real estate is the liquidity risk.

Question 77

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

Question 78

Interest rates are closely tied to the rate of inflation.

Question 79

Particularly,during election years,investors should make themselves aware of the risk resulting from unanticipated changes in the tax or legal environment.This is classified as political and regulatory risk.

Question 80

Diversification eliminates all the risk from your portfolio.