Question 1

A mutual fund company uses the funds of its investors to

Accepted Answer

Mutual fund companies pool investors' money to buy a diversified portfolio of stocks, bonds, or other securities, not to produce goods, build infrastructure, or buy resources for firms.

Question 2

A stock investor may expect returns in the form of

Accepted Answer

A stock investor can expect returns in the form of dividends and capital gains. Dividends are a portion of the company's profits that are distributed to shareholders and capital gains are the increase in the stock's price over time. Interest is typically associated with bonds and other fixed-income securities. Present and future values are concepts used in financial analysis, but not necessarily returns in themselves.

Question 3

Shawna bought an antique table for $200 last year and is now selling it for $250.Her rate of return on the table is

Accepted Answer

To find the rate of return, we use the formula: ((selling price - buying price)/buying price) x 100. 
Using the numbers given, we get: ((250-200)/200) x 100 = 25%. Therefore, the rate of return on the table is 25 percent, which is option C.

Question 4

Terri buys a house for $200,000 and expects to sell it in three years for $300,000.Her expected percentage rate of return over that three-year period is

Accepted Answer

Terri's expected rate of return can be calculated using the formula:
[(selling price - buying price) / buying price] x 100%
= [(300,000 - 200,000) / 200,000] x 100%
= 50%
Therefore, the answer is (C) 50 percent.

Question 5

What do bonds represent?

Accepted Answer

Bonds represent debt contracts with corporations or governments, where the bondholder lends money in exchange for regular interest payments and the return of the principal at maturity.

Question 6

The primary risk that bondholders face is that

Accepted Answer

Bondholders primarily face the risk of default, where the bond issuer fails to make the required interest payments or repay the principal amount.

Question 7

Equal shares of a firm's profit are paid out to stockholders as

Accepted Answer

Dividends are payments made to stockholders from a firm's profits.

Question 8

Which of the following is a popular type of investment?

Accepted Answer

Mutual funds are a popular type of investment as they allow investors to pool their money together to invest in a diversified portfolio of stocks, bonds or other securities. This diversification helps to spread the risk of investing and potentially increase returns. Dividends, portfolios, and capital gains are all associated with investing, but they are not necessarily types of investment in themselves.

Question 9

The limited liability rule means that if a corporation goes bankrupt,

Accepted Answer

The limited liability rule means that shareholders can only lose the amount they invested in the corporation and are not personally responsible for the corporation's debts.

Question 10

Bankruptcy of a firm means that it

Accepted Answer

Bankruptcy occurs when a firm is unable to make timely payments on its debt, indicating it cannot meet its financial obligations.

Question 11

If stockholders sell their shares for more than they paid for those shares, the stockholders

Accepted Answer

When stockholders sell their shares for more than they paid, they realize a capital gain, which is the profit from the sale of an asset.

Question 12

The U.S.federal government is unlikely to default on its bonds because

Accepted Answer

The federal government has the ability to collect taxes and to sell securities to the Fed. This means that the government can always generate revenue and has access to borrowing options, making a default on its bonds unlikely. The other options presented in the question are not accurate, as bonds are not insured, borrowing from states and businesses is not a reliable solution, and foreign investors' willingness to lend is subject to economic conditions and political factors.

Question 13

Which one of the following is a feature of all investments?

Accepted Answer

All investments give owners a chance to receive future payments, whether through dividends, capital gains, or interest payments. This is the defining feature of an investment, as opposed to simply saving money. Options A, B, and C are not necessarily true of all investments - some investments may not provide regular interest payments, may be short term, or may have a significant amount of risk.

Question 14

Which of the following statements about stocks and bonds is true?

Accepted Answer

The U.S. Federal government issues bonds to raise funds but does not issue stocks. Stocks represent ownership in a company, while bonds are a form of debt.

Question 15

Joe and Linda have the opportunity to purchase a new home.The house in Glen Oaks is currently worth $250,000 but is predicted to be worth $270,000 in a year.What is the rate of appreciation for the house from one year to the next?

Accepted Answer

The answer of Joe and Linda have the opportunity to...

Question 16

What do stocks represent?

Accepted Answer

Stocks represent shares of ownership in a corporation, giving shareholders an entitlement to a portion of the corporation's future profits, but not a guaranteed stream of profits.

Question 17

Which one of the following would best describe a mutual fund?

Accepted Answer

A mutual fund is a company that pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities, managed by professional fund managers.

Question 18

Which of the following statements is true?

Accepted Answer

Actively managed funds involve constant buying and selling of assets by portfolio managers to generate better returns, while passively managed funds simply track a specific index and do not involve the same level of active management. Therefore, statement C is the only true statement. Statements A and B are false, as passively managed funds do pay dividends and can hold a variety of assets in their portfolio. Statement D is also false, as adjusting assets to match the performance of an index is a characteristic of passively managed funds.

Question 19

Which of the following statements is true about investing in stocks and bonds?

Accepted Answer

In the event of bankruptcy, bondholders have a higher claim on assets than stockholders, meaning they are paid first. Stocks represent ownership and are riskier, as they are paid after all debts are settled.

Question 20

One fundamental concept in financial economics is that an investment's rate of return is

Accepted Answer

The rate of return is inversely related to the price paid for an investment because as the price increases, the potential return decreases, assuming the future cash flows remain constant.

Quiz 37: Financial Economics