Deck 20: A: Understanding Personal Finances and Investments

Question 1

Describe how portfolio management, asset allocation, the time your investments have to work for you, and your age affect your choice of investments.

Answer 1

Answer not provided.

Question 2

What is buying stock on margin? Why is it considered a high-risk investment?

Answer 2

Answer not provided.

Question 3

Give at least three sources of information that investors could use to evaluate an investment. Why might investors want this information about an investment?

Answer 3

Answer not provided.

Question 4

What can you learn about your finances from constructing a personal balance sheet? What can you learn from a personal income statement?

Question 5

What financial risks are associated with selling stock short? What financial risks are associated with a margin transaction?

Question 6

What are two ways to make money on stock investments? Is one more favorable that the other?

Question 7

Briefly describe the differences between closed-end funds, open-end funds, and exchange-traded funds.

Question 8

Explain the steps involved in purchasing common stock that is listed on a national securities exchange. What role does an account executive play in completing the transaction?

Question 9

How do you calculate rate of return? Why is this calculation important?

Question 10

Why might one investor choose to invest in no-load funds while another may choose load funds? What are the advantages and disadvantages of each? Is there a significant difference between investment returns?

Question 11

Describe investing in corporate bonds--what is the process of purchasing/selling, how safe or risky are they, and is this type of investing favorable to you (why or why not)?

Question 12

Suggest several factors to consider when setting personal investment goals. Why are these important?

Question 13

Traditional investments include bank accounts, corporate bonds, and government bonds. If you had $15,000 to invest, which would you choose? Explain your answer.

Question 14

How can computers and the Internet help you invest?

Question 15

Experts recommend that in order to survive an economic crisis, you must put your financial affairs in order before the crisis. What steps should you take to survive an economic crisis?

Question 16

Investments can provide income, growth, and liquidity. Which factor is more important to you? Why?

Question 17

What steps are required to construct a personal budget? How can the information in a personal budget help you manage your personal finances and prepare for an investment program?

Question 18

What is your personal role in the investment process? How will taking a responsible role in investing serve your best interest?

Question 19

What does safety in an investment mean? What does risk in an investment mean? How are the two related?

Question 20

What features make convertible bonds different than other bonds? Do convertible bonds appear to be a solid, attractive investment to you? Why or why not?

Question 21

To determine his net worth, Joe Gillian subtracts ____ from ____.

A) liabilities; assets
B) assets; liabilities
C) expenses; income
D) income; expenses
E) assets; budgeted amounts

Question 22

Personal Accents, Inc. (PAI)
Personal Accents, Inc., (PAI) is a publicly-held company that specializes in selling a variety of skin- and hair-care products. The company owns specialty stores that appeal to both men and women. Recently PAI has obtained financing through the sale of bonds which have been rated as AAA by Standard & Poor's.
Charlotte is an investor who pays very close attention to high-risk investments because she she's interested in the huge profits that can be obtained from this type of investment. Charlotte usually prefers moderately risky investments so that she can obtain a profit; but in case something goes sour, she will not lose everything. Fearing the potential loss of money in high-risk investments, she has invested in PAI. She feels that the company is established and has maintained stable profits over the years. She is well aware of the different types of high-risk investments, but she chooses to invest more conservatively.
Refer to Personal Accents, Inc. Which of these would be considered a high-risk investment for Charlotte as a PAI investor?

A) Buying PAI stocks
B) Buying PAI bonds
C) Selling PAI stock short
D) Buying mutual funds that hold PAI stock
E) Selling mutual funds that hold PAI stock

Question 23

Which of the following statements is false?

A) The sooner you start an investment program, the more time your investments have to work for you.
B) A personal income statement lists your assets and liabilities.
C) A budget is a specific plan for spending your income for a specific period of time.
D) It is important to balance your budget so that your income is equal to the money you spend or invest each month.
E) Unfortunately, many individuals spend more than they make.

Question 24

Debby Martin has assets valued at $120,000 and liabilities that total $50,000. Based on this information, what is Debby's net worth?

A) $120,000
B) $50,000
C) $170,000
D) $70,000
E) $0

Question 25

Pro-future, Inc.
Sandy is a personal financial planner at Pro-future, Inc. Pro-future is a financial company that focuses on personal and business financing. When potential customers come to Sandy for financial advice, she first determines their investment goals in order to create a financial plan that fits their needs. Once she has created a suitable financial plan for a customer, Sandy gives her clients a pamphlet with suggestions for helping to accumulate the amount of money that they need.
Advice about risk is given to all of Sandy's clients. Sandy also makes strategic financial plans for each of her customers, which helps them to track and achieve their financial goals.
Refer to Pro-future, Inc. Which of the following would Sandy explain in order to match her clients' possible investment plans with their investment goals?

A) Secondary market
B) Primary country debts
C) Personality and temper
D) Risk and safety
E) Investment ratings

Question 26

Which of the following statements regarding investment objectives is incorrect?

A) The goals must be realistic in terms of economic conditions.
B) The goals must be tailored to the individual.
C) The goals must be specific and measurable.
D) The goals must be oriented toward the future.
E) All of these answers are correct.

Question 27

Personal Accents, Inc. (PAI)
Personal Accents, Inc., (PAI) is a publicly-held company that specializes in selling a variety of skin- and hair-care products. The company owns specialty stores that appeal to both men and women. Recently PAI has obtained financing through the sale of bonds which have been rated as AAA by Standard & Poor's.
Charlotte is an investor who pays very close attention to high-risk investments because she she's interested in the huge profits that can be obtained from this type of investment. Charlotte usually prefers moderately risky investments so that she can obtain a profit; but in case something goes sour, she will not lose everything. Fearing the potential loss of money in high-risk investments, she has invested in PAI. She feels that the company is established and has maintained stable profits over the years. She is well aware of the different types of high-risk investments, but she chooses to invest more conservatively.
Refer to Personal Accents, Inc. If Charlotte purchases PAI bonds, how often will she receive interest payments?

A) When the bonds mature
B) Every month
C) Every quarter
D) Every six months
E) Once a year

Question 28

Pro-future, Inc.
Sandy is a personal financial planner at Pro-future, Inc. Pro-future is a financial company that focuses on personal and business financing. When potential customers come to Sandy for financial advice, she first determines their investment goals in order to create a financial plan that fits their needs. Once she has created a suitable financial plan for a customer, Sandy gives her clients a pamphlet with suggestions for helping to accumulate the amount of money that they need.
Advice about risk is given to all of Sandy's clients. Sandy also makes strategic financial plans for each of her customers, which helps them to track and achieve their financial goals.
Refer to Pro-future, Inc. If Sandy were to create a personal budget for her clients, what would be her first step?

A) Estimate their expected amount of money to be allocated to their investments
B) Determine the amount of income needed to cover their expenses
C) Calculate their long-term debt
D) Estimate their income for a specific period
E) Estimate their expenses for a specific period

Question 29

Pro-future, Inc.
Sandy is a personal financial planner at Pro-future, Inc. Pro-future is a financial company that focuses on personal and business financing. When potential customers come to Sandy for financial advice, she first determines their investment goals in order to create a financial plan that fits their needs. Once she has created a suitable financial plan for a customer, Sandy gives her clients a pamphlet with suggestions for helping to accumulate the amount of money that they need.
Advice about risk is given to all of Sandy's clients. Sandy also makes strategic financial plans for each of her customers, which helps them to track and achieve their financial goals.
Refer to Pro-future, Inc. Why would Sandy consider risk to be a good thing?

A) The higher the risk, the larger the possible return.
B) The higher the risk, the lower the possible investment.
C) The lower the risk, the larger the possible return.
D) The higher the risk, the higher the rate of investment.
E) The lower the risk, the lower the rate of investment.

Question 30

Personal Accents, Inc. (PAI)
Personal Accents, Inc., (PAI) is a publicly-held company that specializes in selling a variety of skin- and hair-care products. The company owns specialty stores that appeal to both men and women. Recently PAI has obtained financing through the sale of bonds which have been rated as AAA by Standard & Poor's.
Charlotte is an investor who pays very close attention to high-risk investments because she she's interested in the huge profits that can be obtained from this type of investment. Charlotte usually prefers moderately risky investments so that she can obtain a profit; but in case something goes sour, she will not lose everything. Fearing the potential loss of money in high-risk investments, she has invested in PAI. She feels that the company is established and has maintained stable profits over the years. She is well aware of the different types of high-risk investments, but she chooses to invest more conservatively.
Refer to Personal Accents, Inc. Charlotte recently chose an account executive for her investment and financial needs. Which of the following best describes an account executive?

A) A financial ad executive
B) An individual who gets free money for clients
C) A discount agent
D) An individual who sells manufactured products for clients
E) An individual who buys and sells securities for clients

Question 31

The purpose of a budget is to

A) determine the amount of your total liabilities.
B) develop a plan for spending your future income over a specific time period.
C) reduce total assets.
D) increase monthly expenses.
E) develop a plan for increasing credit purchases.

Question 32

Personal Accents, Inc. (PAI)
Personal Accents, Inc., (PAI) is a publicly-held company that specializes in selling a variety of skin- and hair-care products. The company owns specialty stores that appeal to both men and women. Recently PAI has obtained financing through the sale of bonds which have been rated as AAA by Standard & Poor's.
Charlotte is an investor who pays very close attention to high-risk investments because she she's interested in the huge profits that can be obtained from this type of investment. Charlotte usually prefers moderately risky investments so that she can obtain a profit; but in case something goes sour, she will not lose everything. Fearing the potential loss of money in high-risk investments, she has invested in PAI. She feels that the company is established and has maintained stable profits over the years. She is well aware of the different types of high-risk investments, but she chooses to invest more conservatively.
Refer to Personal Accents, Inc. Which of the following was required of PAI when it first issued publicly-traded stock for the company?

A) It had to offer the account executive's name to potential investors.
B) It had to provide the company budget to potential investors.
C) It had to offer dividends.
D) It had to provide a prospectus.
E) It had to offer a security index to the public.

Question 33

A personal income statement lists your ____ and ____ for a specific period of time.

A) assets; budgeted amounts
B) liabilities; assets
C) assets; liabilities
D) expenses; net worth
E) income; expenses

Question 34

Sira Barker has a monthly income of $2,800. Her monthly expenses total $2,200. Based on this information, she has

A) a cash deficit of $2,800.
B) a cash surplus of $2,200.
C) assets that total $600.
D) liabilities that total $2,200.
E) a cash surplus of $600.

Question 35

Each year, Miguel Guerra constructs a personal balance sheet to determine his

A) cash surplus.
B) cash deficit.
C) net worth.
D) cash balance.
E) expenses.

Question 36

Personal Accents, Inc. (PAI)
Personal Accents, Inc., (PAI) is a publicly-held company that specializes in selling a variety of skin- and hair-care products. The company owns specialty stores that appeal to both men and women. Recently PAI has obtained financing through the sale of bonds which have been rated as AAA by Standard & Poor's.
Charlotte is an investor who pays very close attention to high-risk investments because she she's interested in the huge profits that can be obtained from this type of investment. Charlotte usually prefers moderately risky investments so that she can obtain a profit; but in case something goes sour, she will not lose everything. Fearing the potential loss of money in high-risk investments, she has invested in PAI. She feels that the company is established and has maintained stable profits over the years. She is well aware of the different types of high-risk investments, but she chooses to invest more conservatively.
Refer to Personal Accents, Inc. If Charlotte wants to buy more PAI stock and puts in a request to purchase it at the current market price, this would be called a ____ order.

A) matched
B) market
C) limit
D) money
E) specific

Question 37

Pro-future, Inc.
Sandy is a personal financial planner at Pro-future, Inc. Pro-future is a financial company that focuses on personal and business financing. When potential customers come to Sandy for financial advice, she first determines their investment goals in order to create a financial plan that fits their needs. Once she has created a suitable financial plan for a customer, Sandy gives her clients a pamphlet with suggestions for helping to accumulate the amount of money that they need.
Advice about risk is given to all of Sandy's clients. Sandy also makes strategic financial plans for each of her customers, which helps them to track and achieve their financial goals.
Refer to Pro-future, Inc. What is a possible suggestion Sandy might give her clients in order to meet their retirement goals?

A) Finance your credit cards first.
B) Do not participate in 401(k) or 403(b) programs.
C) Take advantage of any employer-sponsored retirement plans.
D) Allocate enough money to meet all of your needs.
E) Invest 30 percent of your monthly earnings for retirement.

Question 38

Lillian decides to use the money she has saved to earn a financial return. This is called a(n)

A) investment goal.
B) investment plan.
C) financial plan.
D) bank account.
E) personal investment.

Question 39

Pro-future, Inc.
Sandy is a personal financial planner at Pro-future, Inc. Pro-future is a financial company that focuses on personal and business financing. When potential customers come to Sandy for financial advice, she first determines their investment goals in order to create a financial plan that fits their needs. Once she has created a suitable financial plan for a customer, Sandy gives her clients a pamphlet with suggestions for helping to accumulate the amount of money that they need.
Advice about risk is given to all of Sandy's clients. Sandy also makes strategic financial plans for each of her customers, which helps them to track and achieve their financial goals.
Refer to Pro-future, Inc. Which of the following best describes a financial planner like Sandy?

A) A person who has had at least two years of training in investments, insurance, taxation, retirement planning, and estate planning and has passed a rigorous examination
B) A person who has passed a national but not state examination
C) A person who has had at least six months of training in investments, insurance, taxation, retirement planning, and estate planning
D) A person who has had at least five years of training in investments, insurance, taxation, retirement planning, and estate planning, and has graduated from high school
E) A person who has a college degree in planning

Question 40

What is the role of the Securities and Exchange Commission (SEC) in protecting investors in the stock market?

Question 41

Which of the following statements is most in keeping with investment counselors' suggestions for investment goals?

A) By January 2015, I will have total assets of $180,000.
B) I want to invest to earn money with money.
C) In twenty years or so, I want to have $10,000 in a bank account.
D) I want to invest in stock that is growing.
E) By December 2014 or 2015, I want to hold stocks in a Fortune 500 company.

Question 42

To get the proper financial counseling, Marquis and Marta Jacobs made an appointment with Harry Hanstein. Harry has had two years of training in securities, insurance, taxation, retirement planning, and estate planning and has passed a rigorous qualifying examination given by the Certified Financial Planner Board of Standards in Denver. Harry is a

A) real estate broker.
B) stockbroker.
C) certified public accountant.
D) tax consultant.
E) certified financial planner.

Question 43

The total return you receive on an investment over a specific period of time divided by the amount invested is referred to as the

A) rate of investment.
B) rate of return.
C) current yield.
D) yield to maturity.
E) income return.

Question 44

All of the following would satisfy the safety factor of investing except

A) savings accounts.
B) blue-chip stocks.
C) a certificate of deposit.
D) highly rated municipal bonds.
E) antiques and collectibles.

Question 45

Most investment counselors recommend that an individual establish an emergency fund equal to at least

A) one month's living expenses.
B) one month's gross salary.
C) two times the take-home salary.
D) three months' living expenses.
E) nine months' living expenses.

Question 46

Christine wants to start purchasing stock from individual companies, but she wants to maintain a conservative investment strategy with only safe stocks. What type of stocks should Christine invest in?

A) High-tech stocks
B) Old stocks
C) Blue-chip stocks
D) Mutual funds
E) IPOs

Question 47

Instead of paying dividends to their stockholders, growing corporations typically

A) pay bonuses to their stockholders.
B) sell more stock to the public.
C) pay back their bank loans more quickly.
D) reinvest profits in the business.
E) provide steady income to their investors.

Question 48

The stock market reached an all-time high at ___ in the fall of 2007.

A) 6,600
B) 10,900
C) 13,000
D) 14,000
E) 16,500

Question 49

Jan Murphy would like some help choosing an investment that will grow over the next ten years. Which of the following investments would you recommend for growth?

A) Savings accounts
B) Corporate bonds
C) Municipal bonds
D) Common stock
E) Commodities

Question 50

Martie Brown is now retired and asks for your help choosing an investment that will provide a steady source of income. In this situation, you recommend

A) growth stocks.
B) certificates of deposit.
C) commodities.
D) margin investments.
E) high-risk corporate bonds.

Question 51

On January 1, 2012, Brad came up with an investment goal of having $50,000 in assets by March 31, 2012. What fault would financial planners find with Brad's goal?

A) This goal is not specific enough.
B) This goal cannot be easily measured to determine if it has been achieved.
C) This goal is overly specific.
D) This goal is not future-oriented enough.
E) This goal is unreasonable because of uncertain economic conditions.

Question 52

The ease with which an investment can be converted into cash is called

A) profitability.
B) convertibility.
C) cashibility.
D) redemption value.
E) liquidity.

Question 53

Since Mike and Carol are nearing retirement age, they are concerned with the need for their investments to provide income. If you were a financial planner, which of the following would you not recommend to Mike and Carol as an investment?

A) Blue-chip stocks known for paying dividends
B) Stocks of high-growth companies
C) Corporate bonds
D) Government bonds
E) Certificates of deposit

Question 54

In order to reach goals of high dollar returns on your investments, what must you generally give up?

A) Risk
B) Safety
C) Stocks
D) Money
E) Return

Question 55

Barry Ferrell has monthly income of $2,500. His monthly expenses are $2,000. Based on this information, Barry should establish an emergency fund of at least

A) $2,000.
B) $2,500.
C) $7,500.
D) $6,000.
E) $1,500.

Question 56

At the beginning of the year, John Stewart invested $10,000. Twelve months later, John sold his investment for $11,000. Assuming he received no dividends or interest during this time, what is his rate of return?

A) $11,000
B) $10,000
C) 10 percent
D) 9 percent
E) It is impossible to calculate rate of return with this information.

Question 57

Which of the following would most likely be considered the safest investment?

A) Corporate bond
B) Certificate of deposit
C) Common stock
D) Cumulative preferred stock
E) Preferred stock

Question 58

Haverting, Inc., is a fast-growing biotech company. What is Haverting likely to do with any profits it generates?

A) Pay them out to stockholders as dividends
B) Invest them in the stock of other companies
C) Reinvest them in Haverting to finance growth
D) Keep half and pay the rest to stockholders
E) Use the money to reduce corporate debt

Question 59

What is the general relationship between risk and return?

A) These two factors are not related.
B) As risk increases, returns will decrease.
C) They are directly related to one another.
D) Risk is the chance for loss, whereas return is the chance for speculation.
E) As returns increase, the risk involved decreases.

Question 60

Which of the following statements is true about retirement plans?

A) Only employers are able to contribute to 401(k) plans.
B) You must pay taxes on Roth IRA contributions.
C) All employers match some or all of an employee's contributions to a 401(k) plan.
D) Contributions to traditional IRAs are not tax-deductible.
E) Some nonprofit and government agencies offer 401(k) plans.

Question 61

A government security that is sold in minimum units of $100 and has maturities that may be as long as one year is a

A) Series EE savings bond.
B) U.S. savings bond.
C) Treasury bond.
D) Treasury note.
E) Treasury bill.

Question 62

Which of the following investments is most liquid?

A) Stocks
B) Real estate
C) Antique collectibles
D) Corporate bonds
E) Savings accounts

Question 63

Interest payments on corporate bonds are usually paid

A) every month.
B) every quarter.
C) every six months.
D) every year.
E) when the bond matures.

Question 64

Corporate bonds are a form of

A) short-term debt financing.
B) bank account.
C) long-term equity financing.
D) long-term debt financing.
E) short-term equity financing.

Question 65

For a corporate bond with a face value of $1,000 and a stated interest rate of 6 percent, the owner would receive

A) $60 every six months.
B) $60 every month.
C) $30 every six months.
D) $30 every month.
E) $60 between the date of purchase and the maturity date.

Question 66

Dillon owns a $1,000 corporate bond. He receives semiannual payments of $35 for his bond. What is the bond's stated interest rate?

A) 3.5 percent
B) 5 percent
C) 7 percent
D) 8 percent
E) 10 percent

Question 67

Axon Corporation decides to issue convertible bonds. Why might Axon prefer to issue convertible bonds?

A) It will receive more money from selling convertible bonds.
B) It will not have to make interest payments on convertible bonds.
C) Convertible bonds generally carry a lower interest rate than regular bonds.
D) Issuing convertible bonds generally increases a corporation's sales.
E) Convertible bonds do not have to be paid back if they are not converted.

Question 68

What would cause a corporate bond with a $1,000 face value and a fixed interest rate of 7 percent to increase in value?

A) The bond receives a lower rating by Moody's or Standard & Poor's.
B) Overall interest rates in the economy increase.
C) The government places an interest ceiling on corporate bonds.
D) Overall interest rates in the economy decrease.
E) The corporation files for protection under the bankruptcy laws.

Question 69

Which of the following is not a suggested tip for making investment decisions?

A) Do your homework about potential investments.
B) Keep copies of materials used to make investment decisions.
C) Monitor the value of your investments.
D) Keep accurate records.
E) Choose the least expensive online broker for stock purchases.

Question 70

Robert has been saving his money and decides he wants to invest it. Which of the following is considered the most speculative?

A) A bank account
B) Corporate bonds
C) Real estate
D) Derivatives
E) Preferred stock

Question 71

What are the most conservative of all investments?

A) Mattresses
B) Bank accounts
C) Common stocks
D) Corporate bonds
E) Mutual funds

Question 72

Anne Martinez owns a convertible bond that allows her to convert her $1,000 bond to 50 shares of the corporation's common stock. What is the lowest stock price that would allow her to convert her bond to shares of common stock?

A) $10
B) $15
C) $20
D) $25
E) $30

Question 73

The purpose of asset allocation is to

A) reduce commission charges.
B) increase investment risk.
C) reduce government fees associated with investing.
D) reduce taxes paid to the IRS.
E) reduce investment risk.

Question 74

Which of the following investments has the highest returns since 1926?

A) Certificates of deposit
B) Stocks
C) Corporate bonds
D) Government bonds
E) Commodities

Question 75

Since 1926, U.S. government bonds have returned an average of about ___ percent a year.

A) 14
B) 12
C) 9
D) 6
E) 3

Question 76

A government security that is sold in $100 units with a maturity of more than one year but not more than ten years is a

A) Series EE savings bond.
B) U.S. savings bond.
C) Treasury bond.
D) Treasury note.
E) Treasury bill.

Question 77

Kaitlyn purchases a $1,000 corporate bond with a fixed interest rate of 5 percent for $900. What is the most likely explanation for this apparent bargain?

A) Overall interest rates in the economy increase.
B) Someone just wanted to get rid of the bond quickly.
C) The bond receives a better rating by Standard & Poor's or Moody's.
D) Overall interest rates in the economy decrease.
E) The company just introduced a new product.

Question 78

Which of the following is not one of the types of bonds issued by the U.S. federal government?

A) Treasury notes
B) Savings bonds
C) Treasury municipals
D) Treasury bonds
E) Treasury bills

Question 79

According to Suze Orman, how much of Jackie Martin's portfolio should be invested in growth investments if she is 40 years old?

A) 33 percent
B) 40 percent
C) 50 percent
D) 70 percent
E) 90 percent

Question 80

Which of the following would most likely be classified as a traditional investment?

A) Common stock issued by new corporations
B) Mutual funds
C) Corporate bonds
D) Market order
E) Savings account