Deck 11: Investing Fundamentals and Bonds

Question 1

The risk of fluctuations in the market prices of stocks or bonds relates only to fundamental changes in the financial health of corporations that issue these investments.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Investment goals are always oriented to the future.

Answer 3

True

Question 4

With business failure risk, you face the possibility that good management and successful products will cause the business to be less profitable than originally anticipated.

Question 5

Patrick Guitman wants to protect himself against losses in his investments after the purchase. To do this, he should monitor the value of his investments to determine if he should hold, sell, or increase his stake in a specific investment.

Question 6

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

Question 7

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

Question 8

Market risk is associated with some investments and indicates that periods of economic expansion are followed by periods of recession.

Question 9

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

Question 10

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

Question 11

From both a legal and ethical standpoint, you have an obligation to pay for credit purchases.

Question 12

A good rule of thumb is to limit consumer credit payments to 30% of your net (after-tax) income.

Question 13

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

Question 14

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

Question 15

Investors pick investments that have less risk, because they know there is a moderate chance that these investments will become worthless.

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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 21

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

Question 22

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

Question 23

Bond ratings range from AAA (the highest) to D (the lowest) for Standard & Poor's Corporation.

Question 24

Younger investors tend to invest in more growth-oriented investments, because they do not have time to recover if their investments take a nosedive.

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

As investors age, they tend to invest more in growth-oriented investments.

Question 30

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

Question 31

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

Question 32

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

Question 33

Considering your role in the investment process, it is important to let the investments manage themselves after you invest.

Question 34

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

Question 35

An unemployed single parent who just received a $300,000 divorce settlement would likely prefer investments with less risk.

Question 36

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

Question 37

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

Question 38

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 39

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

Question 40

An emergency fund is an amount of money you can obtain quickly in case of immediate need.

Question 41

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 42

Gwendolyn and Jack Francis are investors with no financial training or investment background. Which approach will they likely take?

A) They will choose investments with higher risks.
B) Their choices of investments will not be affected by risk.
C) They will choose investments with less risk.
D) They will choose investments with no risk.
E) They will move all of their money into a savings account.

Question 43

While all cardholders have reasons for using their credit cards, it is very difficult to get in trouble by using your credit cards.

Question 44

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 45

Speculative investments include all of the following except

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

Question 46

Regarding older investors, which of the following holds true for most?

A) They choose investments with higher risks.
B) Their choices of investments do not change.
C) They choose investments with less risk.
D) They choose investments with no risk.
E) They move all of their money into a savings account.

Question 47

A corporation issuing bonds appoints a trustee to represent bondholders, because corporate bond indentures are very difficult for the average person to read and understand.

Question 48

Which of the following is not a true statement?

A) The decision to start an investment plan is one you must make for yourself.
B) To be useful, investment goals must be specific and measurable.
C) The sooner you start an investment program, the more time your investments have to work for you.
D) Because investment goals deal with the future, it is useless to make long-term goals.
E) A short-term investment goal involves a period of 12 months.

Question 49

A $1,000 bond issued by ABC corporation pays a 6% rate of interest, which resulted in an annual amount of interest of $600.

Question 50

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) The length of time your money is invested does not make a difference.
E) Your investment will be worth $160,000 at retirement.

Question 51

Which of the following would be considered speculative investments?

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

Question 52

All of the following statements are considered to be good advice for a potential investor in performing a financial checkup 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 53

A valid short-term investment goal is

A) Saving $4,000 per year 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 54

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 55

A _____________ is an employer-sponsored retirement account, and participating in one is one of the easiest ways to begin an investment program.

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

Question 56

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 57

Which of the following would be considered a safe investment?

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

Question 58

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

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

Question 59

Which of the following steps should be completed before making your first investment?

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 60

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 61

Which of the following investors would mostly prefer conservative investments with less risk to speculative investments with higher risks?

A) A 25-year-old single investor with no children 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 in independently wealthy and has a separate trust fund for day-to-day expenses
D) A dual-career couple in their 30s with secure jobs 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 62

Which of the following risks reduces your purchasing power?

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

Question 63

Inflation risk deals with

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

Question 64

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

A) Utility stock
B) Corporate bond
C) Municipal bond
D) Preferred stock
E) Aggressive "Growth" funds

Question 65

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 66

Timothy Calibe purchased common stock in XYZWidgets.com. To be a successful investor, 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 67

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 68

Which of the following describes a growth company?

A) The company pays a large dividend.
B) Profits are reinvested in the company for future growth.
C) Sales revenues are not increasing.
D) The company has managers who cannot solve the problems associated with rapid expansion.
E) The company is considered a conservative company for investors.

Question 69

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 risk
B) Interest rate risk
C) Business failure risk
D) Market risk
E) Stock risk

Question 70

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

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

Question 71

A fancy 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 72

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

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

Question 73

Business failure risk can be due to

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

Question 74

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 75

Which of the following investors would mostly prefer speculative investments with higher risks over conservative investments with less risk?

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 (with no children) in their 30s whose combined income is $95,000
E) A retired couple with $850,000 in retirement savings

Question 76

Which of the following does not describe a growth company?

A) The company pays a large dividend.
B) Profits 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 77

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 78

Market risk is associated with fluctuations in the market due to

A) A reduction in purchasing power.
B) Changes in interest rates.
C) Bad management and/or unsuccessful products.
D) Economic conditions such as rapid expansion and recession.
E) Predictable sources of income.

Question 79

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) Causes the business to be less profitable than originally anticipated.

Question 80

Which of the following risks deals with fluctuations in the economy from a period of rapid expansion followed by a period of recession?

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