Deck 1: The Investment Environment

Question 1

An exchange traded fund that invests in the stocks of large corporations is an example of

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

Answer 1

B

Question 2

Since 1900, the average return on stocks has exceeded the average return on savings accounts by more than 6 percentage points.

Answer 2

True

Question 3

Institutional investors are individuals who invest indirectly through financial institutions.

Answer 3

False

Question 4

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

Question 5

Land and buildings are examples of real property investments.

Question 6

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

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

Question 7

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

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

Question 8

Stocks are a(n)________ investment representing ________ of a business.

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

Question 9

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

Question 10

Which of the following is NOT an investment as defined in the text?

A)a certificate of deposit issued by a bank
B)a new automobile
C)a United States Saving Bond
D)a mutual fund held in a retirement account

Question 11

A United States Savings Bond is an example of an investment as defined in the text.

Question 12

Banks and insurance companies are examples of institutional investors.

Question 13

Which of the following is not traded in the securities markets?

A)stocks
B)bonds
C)derivatives
D)real estate

Question 14

Debt represents funds loaned in exchange for

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

Question 15

Most sources of investment information are in print format, expensive, and difficult to access.

Question 16

Which of the following has declined in recent years?

A)direct ownership of stock by individual investors
B)the percentage of foreign stocks held in typical portfolios
C)institutional ownership of common stocks
D)the timeliness of information available to investors

Question 17

Describe the major differences between individual and institutional investors.

Question 18

Which of the following are true concerning institutional investors?
I.Institutional investors are professionals who manage money for other people.
II.Banks, insurance companies and mutual funds are all institutional investors.
III.Institutional investors are individuals who invest indirectly through financial institutions.
IV.Institutional investors invest large sums of money.

A)I and II only
B)I, II and IV only
C)II, III and IV only
D)I, II, III and IV

Question 19

A non-interest bearing checking account is still considered an investment.

Question 20

The government is generally

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

Question 21

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

A)bonds
B)mutual funds
C)commercial paper
D)common stock

Question 22

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

A)bonds
B)mutual funds
C)real estate
D)stocks

Question 23

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

A)stock
B)Series EE bond
C)money market mutual fund
D)real estate

Question 24

Under current tax laws, most taxpayers will pay a lower tax rate on capital gains than on dividends.

Question 25

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

Question 26

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

A)preferred stock.
B)convertible securities.
C)insurance policies.
D)mutual funds.

Question 27

Under current tax laws, most taxpayers will pay a lower tax rate on capital gains than on income from wages.

Question 28

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

Question 29

Exchange traded funds are similar to mutual funds, but are traded like stocks.

Question 30

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

Question 31

One feature that mutual funds and exchange traded funds have in common is

A)they trade continuously throughout the trading day.
B)their portfolios are always based on one of the major market indexes.
C)they invest in broadly diversified portfolios of securities.
D)investors purchase share from the funds managers rather than from other investors.

Question 32

Bond investors lend their money for a fixed period of time and receive interest.

Question 33

An option to purchase common stock is a type of derivative security.

Question 34

A collection of securities designed to meet an investment goal is called a portfolio.

Question 35

Bond interest and stock dividends are different ways of distributing a corporation's earnings to its owners.

Question 36

Mutual funds invest in diversified portfolios of securities.

Question 37

Investors can postpone or avoid income taxes by investing through Individual Retirement Accounts.

Question 38

Briefly describe three advantages of investing in mutual funds or exchange traded funds.

Question 39

If the value of a common stock increases the value of an option to buy that stock should also increase.

Question 40

Bond prices rise as interest rates decline.

Question 41

Table 1.2
Use the following tax rates and income brackets for 2015 to answer the following question(s).
Andrew and Jennifer are in the 25% marginal tax bracket.Three years ago they purchased 100 shares of stock at $20 a share.In 2015, they sold the 100 shares for $29 a share.What is the amount of federal income tax they owe as a result of this sale?

A)$135
B)$165
C)$225
D)$435

Question 42

Beginning investors with small amounts to invest should

A)avoid stock investments completely.
B)invest all of their money in one high quality stock.
C)buy mutual funds or exchange traded funds (ETFs).
D)buy a portfolio of very low priced stocks (penny stocks).

Question 43

Table 1.2
Use the following tax rates and income brackets for 2015 to answer the following question(s).
Josh earned $82,500 in taxable income, all from wages and interest, and files an individual tax return.What is the amount of Josh's taxes for the year 2015? Round to the nearest dollar.

A)$13,750
B)$16,481
C)$18,425
D)$12,285

Question 44

Table 1.2
Use the following tax rates and income brackets for 2015 to answer the following question(s).
For a taxpayer in the 25% marginal tax bracket, a long-term capital gain realized in 2015 will be taxed at

A)5%.
B)10%.
C)15%.
D)25%.

Question 45

Tax planning

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

Question 46

A well-conceived investment policy statement will specify

A)the investor's current age and economic situation.
B)the investor's preference for frequent or infrequent trading.
C)the types of investments the investor is willing to consider.
D)all of the above.

Question 47

Sarah purchased a stock one year ago at a price of $32 a share.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)$3.00.
B)$6.00.
C)$(6.00).
D)$9.00.

Question 48

Retirement plans, such as a 401(k), allow employees to defer taxes on the plan contributions until such time as the funds are withdrawn from the retirement plan.

Question 49

In selecting investments consistent with your goals, you should consider

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

Question 50

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

Question 51

Table 1.2
Use the following tax rates and income brackets for 2015 to answer the following question(s).
In 2015, John and Nicole earned a combined taxable income of $148,800 from employment plus $1,000 in long term capital gains and they file a joint tax return.What is their total federal income tax? Round to the nearest dollar.

A)$37,150
B)$29,063
C)$29,593
D)$28,963

Question 52

Which of the following represent investment goals?
I.saving for major expenditures such as a house or education
II.sheltering income from taxes
III.increasing current income
IV.saving funds for retirement

A)I and IV only
B)III and IV only
C)I, III and IV only
D)I,,II, III and IV

Question 53

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

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

Question 54

Table 1.2
Use the following tax rates and income brackets for 2015 to answer the following question(s).
Michelle and Patrick are in the 28% marginal tax bracket.They bought 100 shares of DJN stock at $45 per share and sold them 4 years later in 2015 at $22 per share? By how much did their loss reduce their taxes in the year when they sold the stock?

A)$0
B)$644
C)$345
D)$1,260

Question 55

Both the holding period to qualify and the tax rate on long-term capital gains

A)are subject to political pressure and occasionally change.
B)are very stable and have not changed since the 1960s.
C)are phased out on incomes over $388,351.
D)are adjusted for inflation every year.

Question 56

Speculative and growth oriented investments are least appropriate for

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

Question 57

Research indicates that investors who closely monitor their portfolios and trade quickly in response to minor fluctuations in price

A)outperform those who hold investments for the long-term and trade infrequently.
B)underperform those who hold investments for the long-term and trade infrequently.
C)earn rates of return similar to those who hold investments for the long-term and trade infrequently.
D)be more highly educated and in higher income brackets than those who hold investments for the long term and trade infrequently.

Question 58

To qualify for long-term capital gains rates, a stock must be held for at least 12 months.

Question 59

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

Question 60

Under current tax law, dividend income is taxed at the same rate as

A)ordinary income.
B)short-term capital gains.
C)long-term capital gains.
D)interest income.

Question 61

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

Question 62

Federal insurance protects passbook savings accounts and money market deposit accounts (MMDAs)up to

A)$100,000.
B)$150,000.
C)$250,000.
D)$1,000,000.

Question 63

U.S.Treasury Bills mature in 1 year or less.

Question 64

Which one of the following has the lowest level of risk?

A)commercial paper
B)money market mutual fund account
C)banker's acceptance
D)U.S.Treasury bill

Question 65

The primary risk associated with a short-term investment is

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

Question 66

Typical responsibilities of financial professionals in a corporate setting include
I.managing cash and short-term investments.
II.evaluating investment opportunities.
III.working one on one with individuals to formulate plans for reaching their financial goals.
IV.interacting with financial markets to find sources of external financing such as debt and equity.

A)I and IV only
B)I, II and IV only
C)II, III and IV only
D)I, II, III and IV

Question 67

What are some of the important prerequisites to investing?

Question 68

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

Question 69

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

Question 70

Certified Financial Planners typically manage institutional portfolios.

Question 71

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

Question 72

Stringent regulations and vigorous enforcement have all but eliminated unethical behavior by financial professionals in recent years.

Question 73

Since 2010, the interest rate on passbook accounts and certificates of deposit has

A)been less than the rate of inflation.
B)has closely tracked the rate of inflation.
C)exceeded the rate of inflation by 1.5% on average.
D)fluctuated widely.

Question 74

Beginning in 2010, the amount protected by the Federal Deposit Insurance Corporation in non-interest bearing checking accounts is

A)zero.
B)$100,000.
C)unlimited.
D)$250,000.

Question 75

A major function of investment banking firms is

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

Question 76

Jobs in which of the following fields require an understanding of the investment environment?
I.commercial banking
II.corporate finance
III.financial planning
IV.insurance

A)I and IV only
B)I, II and IV only
C)II, III and IV only
D)I, II, III and IV

Question 77

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

Question 78

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

Question 79

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

Question 80

Short-term investments
I.provide liquidity.
II.fill an important part of most investment programs.
III.provide a high rate of return with low risk.
IV.provide resources for emergencies.

A)I and IV only
B)II and IV only
C)I, II and IV only
D)I, II, III and IV