Deck 11: Investing Basics and Evaluating Bonds

Question 1

Long-term goals should be completed in one to five years.

Answer 1

False

Question 2

For many people,the easiest way to begin an investment program is to participate in an employer-sponsored 401(k)or 403(b)retirement account.

Answer 2

True

Question 3

An example of an investment with high risk is a federal government bond.

Answer 3

False

Question 4

If you are unable to make your credit card payments,you should not contact your credit card company.

Question 5

The risk associated with some investments may fluctuate because of periods of economic expansion followed by periods of recession.

Question 6

Investments that earn a lower rate of interest will have a higher total dollar return than those that earn a high rate of interest.

Question 7

To survive a financial crisis,you should track the value of your stock,mutual fund,and retirement accounts.

Question 8

Investors choose safe investments because they know there is a moderate chance that these investments will become worthless.

Question 9

It isn't important to know how much you owe in order to survive a financial crisis.

Question 10

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

Question 11

To help survive a financial crisis,it is important to establish a larger than usual emergency fund.

Question 12

Intermediate goals should be accomplished in two to five years.

Question 13

Since 1926,stocks have earned an average annual return of near 10%.

Question 14

Continuing to evaluate your investment after its purchase can reduce your inflation risk.

Question 15

Fluctuations in market prices of stocks or bonds relate only to fundamental changes in the financial health of corporations.

Question 16

To investors,liquidity means their investments will increase in value.

Question 17

Investment goals are always oriented to the future.

Question 18

Short-term goals should be completed in 30 or fewer days.

Question 19

To investors,liquidity is the ability to buy or sell an investment quickly without substantially affecting the investment's value.

Question 20

Patrick Guitman wants to protect himself against losses in his investments.To do this,he should evaluate the companies whose stock or bonds he wants to purchase and continue to evaluate his investments after his purchase.

Question 21

The value of a bond is not tied to the corporation's ability to repay its bond.

Question 22

At the least,you should keep purchase records of the actual dollar cost of your investments plus any commissions or fees paid.

Question 23

The taxable equivalent yield for a municipal bond will be lower than the tax-exempt yield for that bond.

Question 24

Younger investors tend to invest in more growth-oriented investments because they are more concerned about safety than older investors.

Question 25

An easy way to determine what percentage of your assets should be invested in growth investments is to take your age and subtract it from 80.

Question 26

As investors age,their investments typically become more aggressive.

Question 27

Whether you are making your own decisions or have professional help,you must consider the tax consequences of selling your investments.

Question 28

The purpose of diversification is to spread your assets among several different types of investments to decrease risk.

Question 29

An unemployed single parent who just received a $300,000 divorce settlement would likely prefer conservative investments over speculative investments.

Question 30

At the most,you should keep only purchase records of the actual dollar cost of your investments.

Question 31

The usual face value of a corporate bond is $100.

Question 32

Younger investors tend to invest in more growth-oriented investments than older investors.

Question 33

A 25-year-old single investor with a secure,full-time job that pays $60,000 would likely prefer conservative investments over speculative investments.

Question 34

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

Question 35

In the event of bankruptcy,stockholders have a claim to assets of the corporation before bondholders.

Question 36

The potential return on any investment should be indirectly related to the risk the investor assumes.

Question 37

After you invest,it is important to let the investments manage themselves.

Question 38

Government bonds have a higher potential investment income than stocks.

Question 39

A corporate bond is a written pledge of a government or municipality to repay a specified sum of money,along with interest.

Question 40

Municipal bonds generally are only tax-exempt at the state level.

Question 41

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

A) Work to balance your budget.
B) Increase credit purchases and make installment payments in order to increase cash available for investing.
C) Manage your credit card debt.
D) Start an emergency fund.
E) Establish a line of credit for emergency needs.

Question 42

As people approach retirement,which of the following holds true for most?

A) They choose more speculative investments.
B) Their choices of investments do not change.
C) They choose more conservative investments.
D) They choose more risky investments.
E) They move all of their money into certificates of deposit.

Question 43

Which of the following is not one of the four components of risk to be considered when evaluating investments?

A) Business failure
B) Inflation
C) Interest rate
D) Market
E) Stock

Question 44

Which of the following would be considered speculative investments?

A) Government bonds
B) Savings accounts
C) Certificates of deposit
D) Certain corporate bonds
E) Commodities

Question 45

A valid short-term investment goal is

A) Saving $4,000 per year for 40 years for retirement.
B) Spending less than $500 per month for housing.
C) Accumulating $3,000 in a savings account over the next 12 months.
D) Using credit cards less in the next six months.
E) Purchasing a $250,000 life insurance policy within the next four years.

Question 46

Which of the following steps is NOT a factor to be considered before making your first investment?

A) Work to balance your budget.
B) Manage your credit card debt.
C) Have access to other sources of cash for emergency needs.
D) Save at least $10,000 to invest.
E) Start an emergency fund.

Question 47

Which of the following steps should be completed before starting an investment program?

A) Pick out at least two stocks or bonds to invest in.
B) Work to balance your budget.
C) Save at least $10,000 to invest.
D) Invest in certificates of deposit.
E) These all are completed at the same time.

Question 48

When choosing an investment,you should consider risk.The four primary risk components are

A) Business failure, inflation, buying power, stock.
B) Buying power, inflation, interest rate, market.
C) Inflation, interest rate, business failure, market.
D) Market, bond, stock, inflation.
E) Stock, interest rate, market, buying power.

Question 49

A good rule of thumb is to limit installment payments to ____________ of your net (after-tax)income.

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

Question 50

Investors can typically find more information about stocks and mutual funds online than they can find for bonds.

Question 51

Gwendolyn and Jack Francis are typical investors.As they approach retirement,which approach will they likely take?

A) They will choose more speculative investments.
B) Their choices of investments will not change.
C) They will choose more conservative investments.
D) They will choose more risky investments.
E) They will move all of their money into certificates of deposit.

Question 52

Which of the following is not 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 specific and measurable.
C) Investment goals must be tailored to the particular financial needs of the individual.
D) Because investment objectives deal with the future, it is useless to make long-term goals.
E) A long-term investment goal involves a period of five or more years.

Question 53

The potential return on any investment should

A) Be directly related to the risk the investor assumes.
B) Be inversely related to the risk of the investment.
C) Not have any relationship to the risk of any investment.
D) Be inversely related to the risk the investor assumes.
E) Be guaranteed.

Question 54

Safe investments include all of the following except

A) Government bonds.
B) Savings accounts.
C) Certificates of deposit.
D) Certain corporate bonds.
E) Commodities.

Question 55

Which of the following would be considered a safe investment?

A) Options
B) Collectibles
C) Precious metals
D) Savings accounts
E) Commodities

Question 56

Speculative investments include all of the following except

A) Options.
B) Commodities.
C) Precious stones.
D) Savings accounts.
E) Precious metals.

Question 57

A _____________ is an employer-sponsored retirement account.

A) TRA account
B) 301(a) account
C) 509(re) account
D) 401(k) account
E) 321(a) account

Question 58

If you invest $4,000 per year over the next 40 years for retirement,which of the following is correct?

A) A low rate of return will give you the highest total dollar return.
B) A high rate of return will give you the highest total dollar return.
C) The rate of return doesn't matter; your total dollar return will be the same with any investment.
D) We cannot compare the total dollar return for a low rate of return or a high rate of return.
E) Your investment will be worth $160,000 at retirement.

Question 59

In general,bond rating categories are similar to school grading scales with A being better than
C.

Question 60

A valid long-term investment goal is

A) Saving $4,000 per year for 40 years for retirement.
B) Spending less than $500 per month for housing.
C) Accumulating $3,000 in a savings account over the next 18 months.
D) Using credit cards less in the next six months.
E) Purchasing a $250,000 life insurance policy within the next four years.

Question 61

All of the following can be factors that influence business failure risk except

A) Bad management.
B) Unsuccessful products.
C) Competition.
D) All of these can affect business failure risk.
E) None of these can affect business failure risk.

Question 62

Which of the following investments is the most liquid?

A) Certificate of deposit
B) Corporate bond
C) Interest-bearing checking account
D) Municipal bond
E) Preferred stock

Question 63

A common way of saying you need to diversify your investments is

A) A bird in the hand is worth two in the bush.
B) A stitch in time saves nine.
C) Birds of a feather flock together.
D) Don't judge a book by its cover.
E) Don't put all of your eggs in one basket.

Question 64

Business failure risk can be due to

A) A reduction in buying power.
B) Changes in interest rates.
C) Bad management and/or unsuccessful products.
D) Political or social conditions.
E) Predictable sources of income.

Question 65

Which of the following risks associated with preferred stocks or government or corporate bonds is a result of changes in rates in the economy?

A) Inflation
B) Interest rate
C) Business failure
D) Market
E) Stock

Question 66

Inflation risk deals with

A) A reduction in buying power.
B) Changes in interest rates.
C) Bad management and/or unsuccessful products.
D) Political or social conditions.
E) Predictable sources of income.

Question 67

Which of the following risks deals with fluctuations due to economic conditions?

A) Inflation
B) Interest rate
C) Business failure
D) Market
E) Stock

Question 68

If your primary investment objective is to receive investment income,which of the following would NOT be appropriate for your portfolio?

A) Passbook savings account
B) Certificate of deposit
C) Municipal bond
D) Preferred stock
E) "Growth" common stock

Question 69

Which of the following investors would mostly prefer conservative investments to speculative investments?

A) A 25-year-old single investor with a job that pays $60,000 per year
B) An unemployed single parent who just received a $300,000 divorce settlement
C) A 30-year-old who has a separate trust fund for day-to-day expenses
D) A dual-career couple in their 30s whose combined income is $95,000
E) A healthy 45-year-old who plans to work in his secure job for at least 25 more years

Question 70

If your main focus is to have your investments increase in value,you are most concerned with

A) Income.
B) Growth.
C) Liquidity.
D) Business failure risk.
E) Market risk.

Question 71

The process of spreading your assets among several different types of investments to lessen risk is called

A) Asset allocation.
B) Asset combination.
C) Asset investments.
D) Asset riskiness.
E) Asset returns.

Question 72

Business failure risk

A) Cannot be diversified.
B) Causes the business to increase its dividends.
C) In the worst case, leads to improved earnings.
D) Is associated with government bonds.
E) Leads to lower profitability than anticipated.

Question 73

Timothy Calibe owns common stock in XYZWidgets.com.To reduce his business failure risk,he should

A) Buy more common stock in XYZWidgets.com.
B) Buy preferred stock in XYZWidgets.com.
C) Buy bonds in XYZWidgets.com.
D) Continue to evaluate his investment in XYZWidgets.com after the purchase.
E) Any of these would reduce his business failure risk.

Question 74

Which of the following risks reduces your buying power?

A) Inflation
B) Interest rate
C) Business failure
D) Market
E) Stock

Question 75

If your main focus is to be able to buy or sell an investment quickly without substantially affecting the investment's value,you are most concerned with

A) Income.
B) Growth.
C) Liquidity.
D) Business failure risk.
E) Market risk.

Question 76

Which of the following describes a growth company?

A) The company pays a large dividend.
B) Earnings are reinvested in the company for future growth.
C) Sales revenues are not growing.
D) The company invests most of its money in safe securities like government bonds.
E) The company provides a predictable source of income for investors.

Question 77

Which of the following investors would mostly prefer speculative investments over conservative investments?

A) A 25-year-old single investor who does not have an emergency fund
B) An unemployed single parent who just received a $300,000 divorce settlement
C) A 70-year-old who uses his dividends and interest to pay his monthly bills
D) A dual-career couple in their 30s whose combined income is $95,000
E) A retired couple with $850,000 in retirement savings

Question 78

Which of the following risks deals with the possibility that bad management,unsuccessful products,or other factors will cause the firm to be less profitable than originally anticipated?

A) Inflation
B) Interest rate
C) Business failure
D) Market
E) Stock

Question 79

Which of the following does not describe a growth company?

A) The company pays a large dividend.
B) Earnings are reinvested in the company for future growth.
C) Earnings potential is high.
D) Managers can solve problems associated with rapid expansion.
E) Sales revenue is increasing.

Question 80

Market risk is associated with fluctuations in the market due to

A) A reduction in buying power.
B) Changes in interest rates.
C) Bad management and/or unsuccessful products.
D) Economic conditions.
E) Predictable sources of income.