Deck 13: Investing Fundamentals

Question 1

Preferred stock represents the most basic form of corporate ownership.

Answer 1

False

Question 2

The most important priority for an investor in preferred stock is receiving cash dividends before common stockholders are paid any cash dividends.

Answer 2

True

Question 3

The rate of return on an investment has no effect on a long-term investment program.

Answer 3

False

Question 4

A credit ceiling on a credit card is determined by the borrower and is the dollar amount that they want to borrow using the cash advance provision on their credit card.

Question 5

An emergency fund is an amount of money that can be obtained quickly in case of immediate need.

Question 6

An investment that an investor expects will increase in value is known as a growth investment.

Question 7

Asset allocation is the process of spreading your assets among several different types of investments to lessen risk.

Question 8

A line of credit is a short-term loan that is approved before the money is actually needed.

Question 9

Because of the age factor, most young investors tend to invest a large percentage of their nest egg in growth-oriented investments.

Question 10

There is no relationship between risk and safety.

Question 11

One risk associated with a global investment is the difficulty of obtaining reliable accounting information needed to evaluate stocks issued by international companies.

Question 12

Liquidity is the ease with which an asset can be converted to cash without a substantial loss in dollar value.

Question 13

Bondholders generally receive interest payments every six months.

Question 14

Over the past 50 years, stocks and U.S. government bonds have returned about the same rate of return.

Question 15

The potential return of any investment should be directly related to the risk that the investor assumes.

Question 16

Potential investors should not wait until they put their financial affairs in order before starting to invest.

Question 17

The decision to establish an investment plan is an important first step to accomplishing your financial goals.

Question 18

During inflationary times, there is a risk that the financial return on an investment will not keep pace with the rate of inflation.

Question 19

The amount of time that your investments have to work for you is an important factor when managing your investment portfolio.

Question 20

When investing in global investments, changes in the currency exchange rate may affect the return on your investment.

Question 21

Today, federal, state, and local governments and most corporations have a home page where you can obtain valuable information.

Question 22

Once you have made a decision to buy an investment, there is no need for continued evaluation.

Question 23

Generally, options are conservative, long-term investment techniques.

Question 24

A short-term investment objective is one that will be accomplished within a period of:

A) one year or less.
B) two to five years.
C) more than five years.
D) three years or less.
E) two years or less.

Question 25

Eric Peltz earns $80,000 a year. His monthly expenses total $4,300. What is the minimum amount of money that Mr. Peltz should set aside in an emergency fund?

A) $2,150
B) $4,300
C) $8,600
D) $12,900
E) $43,000

Question 26

A corporation must give each potential investor an annual report.

Question 27

The fees for investor services and newsletters usually range between $30 and $1,000 per year.

Question 28

Jack Masters earns $40,000 a year. His monthly expenses total $2,100. What is the minimum amount of money that Mr. Masters should set aside in an emergency fund?

A) $2,100
B) $4,200
C) $6,300
D) $8,400
E) $10,000

Question 29

An intermediate-term investment objective is defined as one that will be accomplished within a period of:

A) five to ten years.
B) two to five years.
C) more than five years.
D) one to five years.
E) less than one year.

Question 30

Once you have painstakingly developed a financial plan, it is unwise to change it.

Question 31

The average investor cannot afford to purchase much of the investment information available from the U.S. government.

Question 32

All of the following statements are considered to be good advice for a potential investor starting an investment program except:

A) Work to balance your budget.
B) Increase credit purchases to conserve cash.
C) Establish specific and measurable investment goals.
D) Start an emergency fund.
E) Establish a line of credit.

Question 33

A good rule of thumb is to limit consumer credit payments to ____________ percent of your net monthly income.

A) 20
B) 30
C) 40
D) 50
E) 60

Question 34

Although useful for many things, the Internet cannot be used to monitor the value of stock, bond, and mutual fund investments.

Question 35

Which of the following is a true statement?

A) The first order of business for an investor is acquiring the money needed to begin investing.
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.

Question 36

Accurate recordkeeping can help you spot opportunities to maximize profits or reduce dollar losses when you sell your investments.

Question 37

A speculative investment is an investment that is made in the hope of earning a relatively large profit over a long period of time.

Question 38

Mutual funds range from very conservative to extremely speculative investments.

Question 39

Which of the following features does not accurately describe a line of credit?

A) Credit line approved before the money is actually needed
B) Funds available immediately when needed
C) Obtainable from a credit union, savings and loan association, or bank
D) Alternative source of emergency funds
E) Long-term loan

Question 40

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.

Question 41

James Gripka has a mutual fund that automatically takes $50 out of his checking account each month. Which suggestion for obtaining the money he needs for investing is he following?

A) Taking advantage of gifts, inheritance and other windfalls
B) Taking advantage of employer-sponsored retirement programs
C) Participating in an elective savings program
D) Making a special effort once or twice a year to save
E) Using financial leverage to increase investment returns

Question 42

Sam Waters just received $10,000 from his grandmother's estate. He has thought about buying himself a new Harley with the money but has decided instead to add the money to his mutual fund account. Which suggestion for obtaining the money he needs for investing is he following?

A) Paying himself first
B) Taking advantage of employer-sponsored retirement programs
C) Participating in an elective savings program
D) Making a special effort once or twice a year to save
E) Taking advantage of gifts, inheritance and other windfalls

Question 43

Allen Arnold earns $3,000 per month. He pays his mortgage, utilities, grocery and other bills and then he makes sure to set aside $150 for his savings and investment accounts before he spends money to go to movies and other personal expenses. Which suggestion for obtaining the money he needs for investing is he following?

A) Paying himself first
B) Taking advantage of employer-sponsored retirement programs
C) Participating in an elective savings program
D) Making a special effort once or twice a year to save
E) Taking advantage of gifts, inheritance and other windfalls

Question 44

If interest rates in the overall economy increase to 8 percent, which one of the following is most likely to be the market value of a $1,000 corporate bond with a fixed interest rate of 7 percent?

A) $0
B) $1,100
C) $900
D) $1,000
E) $1,300
Since the market rate is greater than the coupon rate, the market price should be less than $1,000.

Question 45

When a bondholder loses money because interest rates in the economy increase, it is an example of ____________ risk.

A) market
B) interest rate
C) inflation
D) business failure
E) current

Question 46

An example of ____________ risk occurs when an investment does not keep up with prices that are increasing in the overall economy.

A) market
B) interest
C) inflation
D) business failure
E) current

Question 47

All except which one of the following are good ways to acquire money for starting an investment program?

A) Pay bills first, and then save a reasonable amount of money for investment
B) Participate in an elective savings program offered by your employer
C) Make a special savings effort one month per year
D) Borrow money specifically for investment purposes
E) Take advantage of gifts, inheritances, and windfalls

Question 48

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

Question 49

Gina Davidson has received $50,000 in a divorce settlement and is trying to decide how to invest it. She has looked at stocks but knows that some stocks have lost a lot of value for their owners recently. What aspect of investing is she most concerned about?

A) Risk
B) Return
C) Diversification
D) Liquidity
E) Investment growth

Question 50

After the death of her husband, Gina Baker, 35, received a check for $350,000 from a life insurance company. Gina has two small children and wants to make sure that both she and the children are taken care of in the future. Based on this information, which of the investment factors listed below would be the most important to Gina in her investment program?

A) Beta
B) Safety
C) Business failure
D) Market risk
E) Liquidity

Question 51

After Christmas is over, Ted Riley works hard to control his expenses in February so that he can make an extra payment into a mutual fund. Which suggestion for obtaining the money needs for investing is he following?

A) Paying himself first
B) Taking advantage of employer-sponsored retirement programs
C) Participating in an elective savings program
D) Making a special effort once or twice a year to save
E) Taking advantage of gifts, inheritance and other windfalls

Question 52

A $1,000 corporate bond pays 6.5 percent a year. What is the annual interest you will receive?

A) $0.65
B) $6.50
C) $65.00
D) $1,060.50
E) $1,065.00

Question 53

Which one of the following individuals should have a higher tolerance for risk?

A) Joan Cummings, who is a single mother with two small children
B) Darren Carter, who works for American Airlines and is worried that he is going to be laid off soon
C) Barry Parks, who is an investment banker and earns over $200,000 per year
D) Michael Clark, who is 74 years old and has been retired for 6 years
E) Fred Funderbunk, who is a pizza delivery person and makes about $15,000 per year

Question 54

If interest rates in the overall economy decrease to 6 percent, which one of the following is most likely to be the market value of a $1,000 corporate bond with a fixed interest rate of 7 percent?

A) $400
B) $1,100
C) $900
D) $1,000
E) $700
Since the market rate is less than the coupon rate, the market price should exceed $1,000.

Question 55

Which one of the following is a true statement?

A) When choosing an investment, it is not necessary to consider the risk factor.
B) During inflationary times, there is a risk that the financial return on an investment will not keep pace with the rate of inflation.
C) The interest rate risk associated with investments in bonds is the result of changes in business conditions faced by companies.
D) The risk of business failure deals with changes in the value of stocks and bonds due to changes in interest rates in the market.
E) The prices of stocks, bonds, and other investments never fluctuate in the market.

Question 56

Twenty years ago, you began investing $250 a month. Because your investments earned an average of 8 percent a year, your investment portfolio has a current dollar value of $145,000. How much did you earn on your investments over the 20-year period of time?

A) $142,000
B) $80,000
C) $85,000
D) $140,000
E) $132,000

Question 57

Alice Cooper contributes ten percent of her monthly earnings to her 401(k) plan at work. The plan allows her to invest in several different types of mutual funds and her employer matches up to 5% of her salary. Which suggestion for obtaining the money she needs for investing is she following?

A) Paying herself first
B) Taking advantage of employer-sponsored retirement programs
C) Participating in an elective savings program
D) Making a special effort once or twice a year to save
E) Taking advantage of gifts, inheritance and other windfalls

Question 58

Bad products or poor corporate management may result in investors experiencing ______________ risk.

A) inflation
B) interest rate
C) business failure
D) systematic
E) income

Question 59

Brenda Lee has received a $10,000 gift from her mother and is trying to decide how to invest it. She thinks she would like to invest it in stocks because she knows that stocks have been earning about a 10% rate of return over the last several years. What aspect of investing interests Brenda?

A) Risk
B) Return
C) Diversification
D) Liquidity
E) Income

Question 60

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 will lose all its value.
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, decrease, or remain constant.

Question 61

What is the primary goal of asset allocation?

A) Investment income
B) Growth
C) Liquidity
D) Return
E) Risk reduction

Question 62

Bill Teague has just gotten a gift of $20,000 from his parents and is trying to decide how to invest it. He is thinking about investing in a money market mutual fund because he knows he can withdraw the money from the money market mutual fund whenever he needs it with little chance of loss in value. What aspect of investing is Bill most concerned about?

A) Risk
B) Return
C) Diversification
D) Liquidity
E) Investment growth

Question 63

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) growth potential.
D) fixed cost factor.
E) variable cost factor.

Question 64

Lester McCann wants to invest but is worried about risk. In particular, he is worried that the money he invests today will not buy as much ten years from now. What type of risk concerns Lester?

A) Inflation
B) Interest rate risk
C) Business failure
D) Market
E) Global investment

Question 65

A decrease in the value of stocks, bonds, or other investments may cause investors to experience ____________ risk.

A) inflation
B) interest rate
C) business failure
D) market
E) income

Question 66

Which one of the following investments offers the greatest growth potential?

A) Bank accounts
B) Common stock
C) Corporate bonds
D) Government bonds
E) Options

Question 67

Which one of the following investments would rank the highest with regard to safety?

A) Government bond
B) Common stock
C) Preferred stock
D) Corporate bond
E) Real estate

Question 68

Which one of the following investments offers the greatest liquidity?

A) Savings account
B) Common stock
C) Corporate bond
D) Real estate
E) Collectibles

Question 69

Based on historical performance, which one of the following investments is most apt to provide an average return of 10 percent a year between now and the year 2025?

A) U.S. Treasury bills
B) Corporate bonds
C) Stocks
D) Options
E) Zero-coupon bonds

Question 70

Which one of the following investments offers the least amount of growth potential?

A) Real estate
B) Common stock
C) Mutual funds
D) Options
E) Preferred stock

Question 71

An investor concerned with a predictable source of income provided by an investment would choose:

A) government bonds.
B) commodities.
C) options.
D) common stocks.
E) speculative investments.

Question 72

Which one of the following investments offers the least liquidity?

A) Checking account
B) Government bond
C) Real estate
D) Savings account
E) Preferred stock

Question 73

Which one of the following statements is true?

A) Global investments must be evaluated just like other investment alternatives.
B) Since global investments can only be bought in the U.S., there is no need to worry about currency exchange rates.
C) Today, very few investors are investing in stocks and bonds issued by foreign firms or in global mutual funds.
D) For most small investors, it makes more sense to invest in stocks and bonds issued by individual foreign firms, rather than in global mutual funds.
E) Evaluating global investments is easy because there is plenty of good information available.

Question 74

Carl Reimer has just received an inheritance of $40,000 from his mother and is trying to decide how to invest it. Carl is young and earns a good salary. Carl wants to invest in a small cap mutual fund. While he won't receive much in the way of cash dividends, the companies are reinvesting significant amounts so the sales revenue and earnings in the future will be much larger. What aspect of investing is Carl most concerned about?

A) Risk
B) Return
C) Diversification
D) Liquidity
E) Investment growth

Question 75

Matt Jackson is single and 24. He has just graduated from college and obtained a job making $26,400 a year. Which one of the following investments would you recommend for his long-term investment program?

A) Corporate bonds
B) Government bonds
C) Growth stocks
D) Commodities
E) Money-market fund

Question 76

Which one of the following statements is true?

A) Investors should put all of their "eggs in one basket."
B) Individuals can ignore their tolerance for risk when selecting specific investments.
C) Diversification is one way to lessen systematic risk.
D) The amount of time a specific investment has to work is an important consideration when developing an investment portfolio.
E) Younger investors should invest a large percentage of their portfolio in income-producing securities.

Question 77

Allison Peavy wants to invest but is worried about risk: In particular, she is worried that bad management and increased competition in the wireless phone market will make these companies less profitable than expected. What type of risk is Allison most concerned with?

A) Inflation
B) Interest rate
C) Business failure
D) Systematic
E) None of these

Question 78

Equity capital is money:

A) obtained from the owners of a business.
B) borrowed through banks.
C) obtained by employee benefit programs.
D) that has to be repaid.
E) that has been allocated to a retirement program.

Question 79

Terry Hamilton has just received $30,000 from an uncle who died and is trying to decide how to invest it. She has done some research has decided that about 30% of the money should go into large cap stocks, 20% into medium cap stocks, 15% into small cap stocks, 10% into bonds, 10% into foreign stock, and 15% into cash. She thinks that even if one area does not do that well, the rest will so that her overall return will be pretty good. What aspect of investing is Terry most concerned about?

A) Income
B) Return
C) Diversification
D) Liquidity
E) Investment growth

Question 80

John Hernandez is 24 and has saved enough money to fund an adequate emergency fund. In addition, he has saved $5,600 that can be used to fund an investment program. He is single, has no dependents, and would like to retire when he is 60. Which one of the investment factors listed below would be most important for an investor like Mr. Hernandez?

A) Beta
B) Income
C) Growth
D) Risk
E) Liquidity