Deck 1: The Investment Environment

Question 1

Which of the following investments represents partial ownership of a corporation?

A) Bonds.
B) Ordinary share.
C) Commercial paper.
D) Managed funds.

Answer 1

B

Question 2

Debt represents funds loaned in exchange for

A) interest income and a partial ownership interest in the firm.
B) dividend income and the repayment of the loan principal.
C) dividend income and an ownership interest in the firm.
D) interest income and the repayment of the loan principal.

Answer 2

D

Question 3

Which of the following economic conditions is most difficult to identify?

A) Change in direction.
B) Expansion.
C) Recovery.
D) Recession.

Answer 3

A

Question 4

The primary risk associated with a short- term investment is

A) interest rate risk.
B) default risk.
C) purchasing power risk.
D) economic risk.

Question 5

Which one of the following would be the most liquid investment?

A) Real estate.
B) Money market managed fund.
C) Government bonds.
D) Shares.

Question 6

Investment in a professionally managed pool of assets such as a managed fund is an example of

A) direct investment.
B) indirect investment.
C) speculative investment.
D) derivative investment.

Question 7

Investors seeking a diversified, professionally managed portfolio of securities can purchase shares in

A) insurance policies.
B) convertible securities.
C) managed funds.
D) preference shares.

Question 8

Shares are a(n) investment representing of a business.

A) direct; debt
B) indirect; debt
C) direct; ownership
D) indirect; ownership

Question 9

Which of the following is an indirect investment?

A) Managed funds.
B) Real estate.
C) Shares in foreign companies.
D) Australian government bonds.

Question 10

A forum in which suppliers and demanders of funds make financial transactions is called a financial

A) market.
B) institution.
C) bank.
D) instrument.

Question 11

In selecting investments consistent with your goals, you should consider

A) risks, returns, and taxes.
B) rates of return and taxes only.
C) annual dividends and taxes only.
D) the pre- tax rate of return only.

Question 12

Which one of the following statements about the economy is correct?

A) A strong economy is associated with a declining business cycle.
B) It is difficult to accurately predict movements in the stock market when the economy is at a peak.
C) Shares tend to perform well in a weak economy.
D) The economic cycle has little effect on shares.

Question 13

Which of the following is an investment as defined in the text?

A) A new automobile.
B) Australian government bond.
C) Automobile insurance.
D) All of the above.

Question 14

Sarah purchased a share one year ago at a price of $32. In the past year, she has received four quarterly dividends of $0.75 each. Today she sold the stock for $38 a share. Her capital gain per share is

A) $9.00.
B) $6.00.
C) $3.00.
D) $8.00.

Question 15

Investors seeking to increase their wealth as quickly as possible would invest in

A) smaller companies pursuing rapid growth.
B) corporate bonds.
C) large company shares with high dividends.
D) government bonds and low- risk income shares.

Question 16

Which of the following typically offers the highest rate of return?

A) Passbook savings accounts.
B) Money market deposit accounts.
C) Certificates of deposit.
D) Cheque accounts.

Question 17

A major function of investment banking firms is

A) assisting businesses when they issue shares and bonds.
B) providing financial planning services to wealthy individuals.
C) developing investment strategies to neutralise risk.
D) providing loans to investors.

Question 18

Monitoring and restructuring your investments is called

A) portfolio management.
B) diversification.
C) valuation.
D) financial planning.

Question 19

Which of the following is an example of a tangible asset?

A) Real estate.
B) Bonds.
C) Stocks.
D) Managed funds.

Question 20

On a net basis, funds in the financial markets are generally supplied by

A) business firms.
B) the government.
C) individuals.
D) both individuals and business firms.

Question 21

Earning a high rate of return with little or no risk is a realistic investment goal.

Question 22

Liquidity is the ability to convert an investment into cash quickly with little or no loss of value.

Question 23

An option to purchase ordinary shares is a type of equity security.

Question 24

Short- term capital gains are taxed at the taxpayer's marginal tax rate.

Question 25

Commercial bankers work with corporate and institutional clients, but not with individuals.

Question 26

Chartered Financial Analyst (CFA) is a degree offered by several prestigious business schools.

Question 27

A major goal of corporate financial management is to increase the value of the firm to investors.

Question 28

Traditionally, which one of the following has the lowest level of risk?

A) Commercial paper.
B) Money market managed fund account.
C) Australian Treasury bill.
D) Banker's acceptance.

Question 29

You should spend money on housing, clothing and basic insurance before investing.

Question 30

Managed funds invest in diversified portfolios of securities.

Question 31

The value of a derivative security is based on the value of an underlying security.

Question 32

An ordinary share is a type of debt instrument.

Question 33

The government is generally

A) a demander of funds in the financial market.
B) the owner of the financial market.
C) a supplier of funds to the financial market.
D) not involved in the financial markets.

Question 34

Speculative and growth oriented investments are least appropriate for

A) retired investors.
B) middle- aged investors.
C) high income investors.
D) young investors.

Question 35

Short- term investments generally provide liquidity, safety, and a high rate of return.

Question 36

Tax planning

A) guides investment activities to maximise after- tax returns over the long term for an acceptable level of risk.
B) is primarily done by individuals with incomes below $200,000.
C) ignores the source of income and concentrates solely on the amount of income.
D) is limited to reviewing income for the current year and determining how to minimise current taxes.

Question 37

Land and buildings are examples of real property investments.

Question 38

Bond prices rise as interest rates decline.

Question 39

Since 1900, the average annual return on savings accounts has been higher than the return on stocks.

Question 40

Institutional investors manage money for businesses and nonprofit organisations, but not for individuals.

Question 41

Discuss the general investment philosophy and the types of investments preferred by investors in each phase of the life cycle.

Question 42

An example of a direct investment is the purchase of managed fund shares.

Question 43

Money market accounts, certificates of deposit, bonds and commercial paper are all forms of short- term investment vehicles.

Question 44

Institutional investors are individuals who invest indirectly through financial institutions.

Question 45

Banks and insurance companies are examples of institutional investors.

Question 46

The periodic payments that a corporation pays to its shareholders from net earnings are called dividends.

Question 47

Bonds represent a lower level of risk than shares in the same company.

Question 48

In the financial markets, individuals are net suppliers of funds.

Question 49

Insurance companies invest the premiums and fees collected from customers in order to neutralise the risks assumed from their clients.

Question 50

Briefly describe three different career paths that require a strong background in investments.

Question 51

Discuss the relationship between share prices and investors' beliefs about the business cycle.

Question 52

Explain the differences between shares, bonds, and options.