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Investing Fundamentals.docx

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Category: Economics
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Investing Fundamentals True/False Questions T F 1. The decision to establish an investment plan is an important first step to accomplishing your financial goals. Answer: True T F 2. A short-term investment objective is defined as one that will be accomplished within a period of two to five years. Answer: False T F 3. An emergency fund is a certain amount of money that can be obtained quickly in case of immediate need. Answer: True T F 4. A line of credit is a short-term loan that is approved before the money is actually needed. Answer: True T F 5. Generally, it is not a good idea to participate in an employer-sponsored retirement program. Answer: False T F 6. The rate of return on an investment has no affect on a long-term investment program. Answer: False T F 7. There is no relationship between risk and safety. Answer: False Page: 412 T F 8. The potential return of any investment should be directly related to the risk that the investor assumes. Answer: True T F 9. During inflationary times, there is a risk that the financial return on an investment will not keep pace with the rate of inflation. Answer: True T F 10. The dollar value of a fixed-return investment (like a bond) increases when overall interest rates in the economy increase. Answer: False T F 11. Liquidity is the ease with which an asset can be converted to cash without a substantial loss in dollar value. Answer: True Page: 419 T F 12. There are two types of stock-common stock and preferred stock. Answer: True T F 13. Preferred stock represents the most basic form of corporate ownership. Answer: False T F 14. The most important priority an investor in preferred stock enjoys is receiving cash dividends before common stockholders are paid any cash dividends. Answer: True T F 15. Bondholders generally receive interest payments every six months. Answer: True T F 16. Mutual funds range from very conservative to extremely speculative investments. Answer: True T F 17. Because of the growth potential, stocks or mutual funds that invest in stocks should be the only type of securities included in the investment portfolio for most people. Answer: False Page: 421 T F 18. Asset allocation is the process of spreading your assets among several different types of investments to lessen risk. Answer: True Page: 419 T F 19. The amount of time that your investments have to work for you is an important factor when managing your investment portfolio. Answer: True Page: 421 T F 20. Because of the age factor, most young investors tend to invest a large percentage of their nest egg in growth-oriented investments. Answer: True Page: 421 T F 21. Once you have painstakingly developed a financial plan, it is not wise to change it. Answer: False T F 22. Although useful for many things, the Internet cannot be used to monitor the value of stock, bond, and mutual fund investments. Answer: False Multiple Choice Questions 23. Which of the following is a true statement? A) No one is going to make you save the money you need to start an investment program. B) To be useful, investment objectives must be very general. C) Investment goals are the same for each individual. D) Because investment objectives deal with the future, it is useless to plan more than five years in the future. E) A long-term investment objective involves a time period of five years or less. Answer: A 24. An emergency fund should be deposited in a: A) savings account at the highest available interest rate. B) six month certificate of deposit. C) checking account. D) safe place at home. E) safe deposit box in a bank vault. Answer: A 25. Twenty years ago, you began investing $2,000 a year. Because your investments earned an average of 8 percent a year, your investment portfolio has a current dollar value of $92,000. How much did you earn on your investments over the 20-year period of time? A) $2,000 B) $40,000 C) $52,000 D) $92,000 E) $132,000 Answer: C 26. Which of the following investments would rank the highest with regard to safety? A) government bonds B) common stock C) preferred stock D) corporate bonds E) real estate Answer: A 27. If interest rates in the overall economy decrease, what will happen to the market value of a corporate bond with a fixed interest rate? A) The bond is worthless. B) The value of the bond will increase. C) The value of the bond will decrease. D) The value of the bond will not change. E) It is impossible to determine if the bond's value will increase or decrease. Answer: B 28. The ease with which an investment can be converted to cash without a substantial loss in dollar value is called the: A) asset value. B) liquidity factor. C) immediate quotient. D) fixed cost factor. E) variable cost factor. Answer: B Page: 419 29. A corporation selling stock is obligated to: A) guarantee your investment. B) repay money obtained from the sale of stock. C) repurchase shares of stock at a later date. D) pay dividends. E) pay dividends to preferred stockholders before dividends are paid to common stockholders. Answer: E 30. Normally, corporate bondholders receive interest: A) monthly. B) every three months. C) every six months. D) yearly. E) when the bond matures. Answer: C 31. A type of investment that combines and invests the funds of many investors and manages it with a professional manager is called a(n): A) NOW account. B) securities exchange. C) certificate of deposit. D) mutual fund. Answer: D Page: 423 Chapter 14 Investing in Stocks True/False Questions T F 32. At maturity, corporations must repay stockholders the money they invested in the company. Answer: False Page: 443 T F 33. Dividend payments on common stock are guaranteed, but the amount is determined by the board of directors. Answer: False Page: 443 T F 34. A proxy is a legal form that lists the issues to be decided at a stockholders' meeting and requests that stockholders transfer their voting rights to some individual or individuals. Answer: True Page: 443 T F 35. The record date is the date that the actual dividend payment is made to stockholders. Answer: False Page: 444 T F 36. A stock split is a procedure in which a stockholder's common stock is exchanged for preferred stock. Answer: False Page: 445 T F 37. A blue-chip stock is too speculative for most investors. Answer: False Page: 448 T F 38. The beta is an index that compares the risk associated with a specific stock issue with the risk of the stock market in general. Answer: True Page: 458 T F 39. Dollar-cost averaging enables investors to avoid the problem of buying high and selling low. Answer: True LO: 5 Page: 467 Multiple Choice Questions 40. Apple Computer Corporation holds its annual meeting in April. Maxine Star, who owns stock in the company, cannot attend the meeting. She can vote by: A) voluntary certificate. B) preemptive right. C) proxy. D) cumulative certificate. E) participatory certificate. Answer: C Page: 443 41. Dividends remain with the stock until: A) two business days before the date of record. B) two business days after the date of record. C) five days before the date of record. D) five days after the date of record. E) five days before the actual payment date. Answer: A Page: 444 42. Patsy Banz owns 220 shares of General Mills Corporation. For the last calendar quarter, General Mills Corporation paid a dividend of $0.47 a share. What is the total amount she received in her dividend check for this quarter? A) $0.47 B) $47 C) $94 D) $103.40 E) It is impossible to calculate the total dividend amount with this information. Answer: D Page: 444 43. Jo Bower owns 150 shares of Data General stock. She purchased the stock for $24 a share. She sold her stock for $30 a share. The commissions required to buy and sell her stock totaled $120. Assuming that she received no dividends during the time she owned the stock, what is her total return for this transaction? A) $600 B) $780 C) $900 D) $2,400 E) $3,000 Answer: B Page: 444 44. If the board of directors approves a two for one stock split, an investor who owns 150 shares before the split owns ____________ shares after the split. A) 75 B) 150 C) 225 D) 300 E) 450 Answer: D Page: 445 45. When the board of directors approves a two for one stock split, the price for each share of stock: A) decreases in value. B) increases in value. C) remains unchanged. D) is guaranteed to go up within a short period of time. E) increase to twice of its former value. Answer: A Page: 445 46. The type of preferred stock that may be exchanged at the stockholder's option for common stock is: A) corporate bond. B) convertible preferred stock. C) participating preferred stock. D) cumulative preferred stock. E) callable preferred stock. Answer: B Page: 447 47. James Turbyfil purchased 100 shares of IBM for $72. James also paid $55 commission. What was the total purchase price for this transaction? A) $55 B) $72 C) $7,237.50 D) $7,255.00 E) $7,347.50 Answer: D Page: 449 48. Assume that you purchased 100 shares of Exxon stock for $55 a share, that you received an annual dividend of $2.00 a share, and that you sold your Exxon stock for $65 a share at the end of one year. What is the total return for your investment? (Ignore commission amounts for this question.) A) $200 B) $1,000 C) $1,200 D) $1,500 E) $2,200 Answer: C Page: 457 49. Assume the beta for the stock market in general is 1.0 and that the beta for World-Wide Television Productions is 2.4. If the stock market increases by 10 percent, how much will the stock for World-Wide Productions increase? A) 12 percent B) 20 percent C) 24 percent D) 48 percent E) It is impossible to calculate the amount of increase with this information. Answer: C Page: 458 50. A request that a stock be bought or sold at the current market price is called a ____________ order. A) market B) limit C) stop D) round E) discretionary Answer: A Page: 466 James Garner just bought the stock of a company. He knows that he will receive a cash payment from the company once a quarter, although the company is not obligated to make this payment. What will he receive? Equity Proxy Voting Rights Dividends None of the above Answer: D Difficulty: Med Page: 443 Val Kilmer has purchased the stock of the Williams Widget Company. After he buys the stock he is told that the number of shares he owns will be divided into a larger number. In fact, he will get two shares for every share that he owns today. What has happened to this company? Dividend split Proxy split Stock split Banana split None of the above Answer: C Difficulty: Med Page: 445 Sean Connery has purchased the stock of the Stowaway Transportation Company. The company is getting ready to pay a dividend. He knows he must be registered on the corporation’s books on the in order to receive the dividend. Record date Ex dividend date Payment date Purchased date None of the above Answer: A Difficulty: Med Page: 444 Orlando Bloom is buying the stock of the Getaway Caribbean Cruise Company. However, if he buys the stock today, he knows it is the first day it is selling without the dividend this quarter. What date is Orlando buying the stock on? Record Date Ex dividend date Payment date Sale date None of the above Answer: B Difficulty: Med Page: 444 Beverly Frickel purchased 100 shares of Gleason Systems stock for $42.50 per share. Her commission for this purchase was $35. She sold the stock two years later for $55 per share and a commission of $50. While she held the stock it paid a dividend of $1.50 per share. What was Beverly’s total dollar return on this stock? $1250 $1165 $150 $1315 $1400 Answer: D Difficulty: Hard Page: 444-445 Trevor Conklin is thinking about buying the preferred stock of Galloway Gems Company. He knows that the dividend is a fixed amount and is determined by taking a percentage of what value? Par value Market value Present value Future value None of the above Answer: A Difficulty: Med Page: 447 Chapter 15 Investing in Bonds True/False Questions T F 57. A corporate bond is a corporation's written pledge that it will repay a specified amount of money with interest. Answer: True Page: 482 T F 58. The bond debenture is a legal document that details all of the conditions relating to a bond issue. Answer: False LO: 1,2 Page: 483 T F 59. The trustee is an independent firm that acts as the bondholders' representative. Answer: True LO: 1,2 Page: 483 T F 60. Corporate bonds are a form of equity financing that does not have to be repaid. Answer: False LO: 1,2 Page: 483 T F 61. If overall interest rates in the economy fall, then a corporate bond with a fixed interest rate will decrease in value. Answer: False Page: 488 T F 62. The only way an investor can make money on a bond investment is to hold the bond until maturity. Answer: False Page: 489-490 T F 63. Because bonds are considered debt financing that must be repaid at maturity, the corporation's financial stability has little effect on the bond's value between the issue date and the maturity date. Answer: False Page: 490 T F 64. A bond with a price quotation of 73 sells for $73. Answer: False LO: 5 Page: 500-501 Multiple Choice Questions 65. Assume that you purchased a $1,000 Exxon bond that pays 9 1/2 percent interest. What is the amount of interest you would receive each six months? A) $4.75 B) $9.50 C) $95 D) $47.50 E) $1,000 Answer: D Page: 482 66. A bond that is backed only by the reputation of the issuing corporation is called a(n) ____________ bond. A) debenture B) mortgage C) indenture D) preemptive E) treasury Answer: A Page: 484 67. A bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's stock is called a(n) ____________ bond. A) debenture B) mortgage C) indenture D) convertible E) subordinated Answer: D Page: 484 68. A $l,000 corporate bond is convertible to 25 shares of the corporation's common stock. What is the minimum price that the stock must obtain before bondholders would consider converting a bond to the company's common stock? A) $10 B) $20 C) $30 D) $40 E) $50 Answer: D Page: 484 69. A call feature: A) allows bondholders to convert their bond to a specified number of shares of common stock. B) is not available on corporate bonds. C) allows the corporation to buy outstanding bonds from current bondholders before the maturity date. D) is only available with government securities. E) is guaranteed by the corporation. Answer: C Page: 485 70. A bond that is registered in the owner's name by the issuing company is called a ____________ bond. A) certified B) coupon C) registered D) zero-coupon E) general obligation Answer: C Page: 488 71. John Peterson purchased a bond at a price far below its face value, that makes no interest payments, and will be redeemed at its face value at maturity. In all likelihood, he purchased a(n) ____________ bond. A) debenture B) convertible C) indenture D) registered E) zero-coupon Answer: E Page: 488 72. The type of bond that is not registered in the investor's name is a ___________ bond. A) revenue B) general obligation C) bearer D) zero-coupon E) tax-exempt Answer: C Page: 488 73. If overall interest rates in the economy rise, a corporate bond with a fixed interest rate will generally: A) increase in value. B) decrease in value. C) remain unchanged. D) become worthless. E) be returned to the corporation. Answer: B Page: 488-489 74. What is the approximate market value for a $1,000 corporate bond that pays 8 percent interest when comparable bonds are paying 9 percent interest? A) $80 B) $90 C) $889 D) $1,000 E) $1,125 Answer: C Page: 488-489 75. What is the approximate market value for a $1,000 corporate bond that pays 9 percent interest when comparable bonds are paying 8 percent? A) $800 B) $900 C) $1,000 D) $1,125 E) $1,600 Answer: D Page: 488-489 76. When a bond is selling for more than its face value, it is said to be selling at a: A) discount. B) premium. C) commission. D) conservative value. E) prospectus value. Answer: B Page: 488 77. If a bond was quoted in the newspaper at 88 3/4, the price in dollars was A) $75 B) $88 C) $88.75 D) $887.50 E) $1,000 Answer: D LO: 5 Page: 499 Chapter 16 Investing in Mutual Funds True/False Questions T F 78. The major reasons why investors purchase mutual funds are professional management and diversification. Answer: True T F 79. Because of professional management, there is no need for the individual investor to evaluate a mutual fund investment. Answer: False T F 80. A closed-end fund is a mutual fund in which shares are issued only when the fund is organized. Answer: True T F 81. Today, there are more closed-end funds than there are open-end funds. Answer: False T F 82. An exchange-traded fund, commonly referred to as an EFT, is a fund that invests in the stocks contained in a specific stock index. Answer: True T F 83. Because an exchange-traded fund mirrors the same stocks that are contained in a specific stock index, there is more need for a professional manager. Answer: False T F 84. In a newspaper quotation, NAV stands for "not accessible value." Answer: False Multiple Choice Questions 85. Which of the following statements is false? A) Investors purchase mutual funds for diversification. B) Investors purchase mutual funds because of professional management. C) Investors who purchase mutual funds are guaranteed a higher rate of return than a comparable investment in stocks or bonds. D) Professional mutual fund managers work for an investment company. E) Even the best portfolio managers sometimes make mistakes. Answer: C 86. A mutual fund in which no sales charge is paid by the individual investor is called a(n) ____________ fund. A) closed-end B) open-end C) load D) no-load E) convertible fund. Answer: D 87. A fee that some investment companies charge for marketing and distributing a mutual fund is called a: A) 14A-1 fee. B) 12b-1 fee. C) 18-2 fee. D) 21-AB fee. E) None of the above answers are correct. Answer: B 88. A mutual fund that invests in companies outside the United States is called a(n) ____________ fund. A) growth-income B) income C) international D) industry E) global market Answer: C 89. A municipal bond fund: A) is too risky for most investors. B) provides investors with tax-free income. C) invests in bonds that are backed by the federal government. D) is a risk-free investment. E) are not rated because they are short-term investments. Answer: B 90. When one investment company manages a group of mutual funds, it is called a(n): A) family of funds. B) exchange fund. C) diversification fund. D) versatility fund. E) group of funds. Answer: A For most open ended mutual funds, when is net asset value calculated? The beginning of each trading day At noon of each trading day At the end of each trading day At the end of each trading week At the end of each trading month Answer: C Peter Conrad is buying a mutual fund that is investing in stocks all over the world including the United States. What type of mutual fund has he purchased? An aggressive growth fund An equity income fund A global fund An international fund A regional fund Answer: C

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