Question 1

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.)

Accepted Answer

The return is calculated as (Final Value - Initial Value) / Initial Value * 100 = ($1,100 - $1,000) / $1,000 * 100 = 10%.

Question 2

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?

Accepted Answer

The value of Jane's investment can be calculated using the formula for compound interest: A = P(1 + r)^n, where A is the amount of money accumulated after n years, including interest, P is the principal amount ($3,200), r is the annual interest rate (9% or 0.09), and n is the time the money is invested for (20 years). Plugging in the values: A = $3,200(1 + 0.09)^20 = $17,933 (rounded to the nearest dollar).

Question 3

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.)

Accepted Answer

The total return is the sum of the capital gain and the dividends received. The capital gain is the difference between the selling price and the purchase price, which is $20 - $15 = $5 per share. The dividends received are $2 per share. Therefore, the total return is $5 + $2 = $7 per share. The percentage return is $7 / $15 * 100% = 46.67%, which rounds to 47%.

Question 4

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

Accepted Answer

Income stocks typically pay higher dividends to investors but often have lower appreciation of stock prices compared to growth stocks, as they are usually well-established companies with stable earnings.

Question 5

Growth stocks tend to

Accepted Answer

Growth stocks are typically associated with companies that offer significant opportunities for capital appreciation, often because they reinvest earnings into further growth rather than paying out high dividends. These companies are usually in the process of expanding their product lines, markets, or operations.

Question 6

Dividends are a portion of

Accepted Answer

Dividends are a portion of a company's earnings that are distributed to shareholders as a return on their investment.

Question 7

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

Accepted Answer

The answer of An advantage of investing in corporate bonds...

Question 8

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?

Accepted Answer

To calculate the return, first find the total initial investment: 100 shares * $50 = $5000. Then, calculate the total amount received from selling the shares: 100 shares * $62 = $6200. Add the dividend received: $6200 + $200 = $6400. The profit is $6400 - $5000 = $1400. The return percentage is ($1400 / $5000) * 100% = 28%.

Question 9

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?

Accepted Answer

The return on investment (ROI) is calculated as (final value - initial value) / initial value * 100. Here, it is ($1,000 - $3,000) / $3,000 * 100 = -66.67%, which rounds to -67%.

Question 10

All of the following are true regarding stock prices, except they

Accepted Answer

Stock prices are influenced by supply and demand, have no set limit, and generally increase with good financial news. However, they are not regulated by the Federal Reserve Board; instead, the Federal Reserve Board oversees the U.S. monetary system and influences interest rates, which can indirectly affect stock prices.

Question 11

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?

Accepted Answer

John is making a series of equal investments at the end of each year, which is an example of an ordinary annuity. The future value of an ordinary annuity can be calculated using the formula: FV = P * [(1 + r)^n - 1] / r, where P is the payment (annual investment), r is the annual interest rate, and n is the number of periods. Plugging in the values: P = $2,000, r = 0.08 (8%), and n = 5, we get FV = $2,000 * [(1 + 0.08)^5 - 1] / 0.08 = $11,734.

Question 12

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

Accepted Answer

Mutual funds generate returns for investors through dividends on stocks and interest on bonds held in the fund's portfolio, which are distributed to investors. Additionally, if the fund sells securities that have increased in value, it realizes capital gains, which are also passed on to investors.

Question 13

Regarding dividends paid on common stock,

Accepted Answer

Some firms choose not to pay dividends, especially if they are reinvesting profits into growth or development projects. This strategy is common among newer companies or those in rapidly evolving industries.

Question 14

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

Accepted Answer

The average price of the stock during the period owned is not typically used in measuring a stock's return. Instead, the return is calculated based on the price at purchase, the price at sale, and any dividends earned during the period the stock was held.

Question 15

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

Accepted Answer

Long-term capital gains are taxed at a lower rate than ordinary income, which includes coupon payments, interest, and short-term capital gains.

Question 16

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

Accepted Answer

Growth stocks typically reinvest their earnings to fuel growth, leading to lower dividends but higher potential for stock price appreciation.

Question 17

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

Accepted Answer

Preferred stock dividends are typically fixed, making their prices less volatile compared to common stock, whose dividends can vary based on the company's performance and decisions by the board of directors.

Question 18

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

Accepted Answer

Dividends are not contractually guaranteed to common stockholders. They are typically declared at the discretion of the company's board of directors and can vary in amount or not be paid at all, depending on the company's performance and financial health.

Question 19

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

Accepted Answer

The market value of a bond can increase over time due to changes in interest rates, credit ratings of the issuer, or market demand, allowing the bondholder to potentially sell the bond for more than its purchase price.

Question 20

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

Accepted Answer

Holding a stock for over a year typically qualifies the gains for long-term capital gains tax rates, which are generally lower than short-term capital gains tax rates applied to assets held for less than a year.

Quiz 14: Investing Fundamentals