Chapter 14 Finance Review Questions Final

Stocks are certificates representing partial ownership in a:

Corporation

Why do investors measure risk?

Degree of uncertainty surrounding their future returns

Your first investing priority should be:

Ensure adequate liquidity

20. Which of the following is not a common investment mistake made by​ individuals

Filing for bankruptcy in order to salvage certain investments.

Stocks with potential for substantial growth are:

Growth stocks

Stocks are a common investment for those who believe that they will get a:

Higher return from stocks than from other investments

The types of stock investments are particularly tempting for stock investors are:

IPOs

27. How does your personal tolerance for risk impact your investment decisions?

If you take on too much risk, you might panic and sell at the wrong time. (Me)

Some firms do not pay dividends but instead reinvest all the earnings:

In the firms operation

Stocks that deliver large dividends are:

Income stocks

Dividends are usually paid by older, more established firms that have:

Less potential for substantial growth

Common stock is __________ and ___________ than preferred stock

More violent, more risky

The market value of a stock is determined by:

Multiplying the number of shares outstanding by the market price of the stock

Dividends are normally ___________ distribution of the firm's earnings to the stockholders

Quarterly

What is the formula for estimating returns on dividend paying stocks? Describe each element of the formula. How do you calculate the dollar amount of your returns?

R= (Pt-Pt-1)+D/Pt-1 Upper Pt is the (sale price) of stock Pt-1 is the (stock price) at purchase D is the (dividends earned) over the investment horizon Dollar Amount of Dividends + Dollar Amount from Selling the Stock - Dollar Amount Paid for the Stock

Corporations sell stocks in order to:

Raise funds for expansion of their business operations

Two common measures of risk are:

Range of return and standard deviation of the returns

What components make up the return from investing in real estate?

Rent payments

22. What are liquity investments?

SA, MMDA, CD's

The types of firms that are particularly risky are:

Smaller firms

Before making an IPO type of investment, individual investors must consider:

That the long term return on IPOs is weak compared to aggregate stock indexes

The return risk trade off is:

A higher return equates to a higher degree of uncertainty

Bonds are:

A long term debt securities issued by government agencies or corporations

The disadvantage of investments that satisfy that priority is

A relatively low return

18. Describe the return-risk trade-offs among bonds, mutual funds, and real estate investments.

Bonds: Firms may be unable to pay its coupon payment Real Estate: Tenants may miss several monthly payments.

Day traders are investors who:

Buy and sell the stock within one day

Your personal financial goals will all​ have:

a time horizon attached to them and some amount of money needed to achieve the goal. These two factors will determine where you need to invest in order to generate sufficient return to achieve your goals.

What is the difference in tax rates on long-term versus short-term capital gains?

long-term capital gains are taxed at a lower rate than ordinary income short-term capital gains are taxed at ordinary income rates

How can you limit your risk through diversification

not equally sensitive to economic conditions

Mutual funds are managed by _____________ for the individual investor

portfolio manager

Exchange-traded funds, or​ ETFs: How does it differ from a mutual​ fund? ​

put a pool of securities into a trust account designed to mimic a specific stock index and then sell shares of that trust. The ETF shares are traded like stocks and can be bought and sold throughout the time the market is open. In contrast a mutual funds pools​ investors' funds and then buys stocks or bonds with those funds

Mutual funds ___________ and invest portfolio of investments such as bonds or stocks

sell shares to individuals corporations

Growth stocks​ are: Income stocks are: Why would investors prefer one type over the​ other

stocks of firms with substantial growth opportunities. Growth firms tend to reinvest profits back into the firm and pay low or no dividends. stocks of firms that are more mature. These firms will elect to pay much higher dividends and therefore generate more current income for their shareholders. An​ investor's need for current income​ and/or desire to defer taxes will determine which category of stocks they hold in their portfolio.

The market price of a stock depends on:

The number of investors willing to buy the stock versus the number of investors willing to sell

The primary and secondary stock markets in what aspect:

The primary stock market offers newly issued securities and the secondary stock market offers existing securities

The price of the stock changes each day in response to changes in the:

Supply and demand for the product in the secondary market

The price of the land is based on:

Supply and demand in the land market

Define the risk of an investment.

Surrounding both the coupon payment and how the price of the investment will change

Bonds can offer a return to investors in the form of:

A coupon payment and bond price appreciation

28. What are some of the risks associated with investing in real estate?

Liquidity risk, market risk, and interest rate risk.

Coupon or dividend payments generated by a mutual funds portfolio are:

Passed on the individual investor

If mutual funds share decline over time, individual investors would have a:

Capital loss

What is an IPO? What are the risks associated with buying​ IPOs?

Initial Public​ Offering, which occur when a firm sells equity for the first time in the primary market. Most IPOs are offered to large institutional investors or investors with high net worth. Therefore most individual investors rarely get to buy an IPO but instead must purchase it in the secondary market when it begins trading on an organized stock exchange. Research has shown that this strategy generates poor returns compared with other investing strategies.

Two types of investors are:

Institutional investors and individual investors

How can investments in stock increase your wealth? How would you calculate the value of a stock investment of a single sum over time? How would you calculate the value of a stock investment of a specific amount over several periods?

Your wealth will increase when your investment increases​ if your liabilities do not increase investment amount x FVIF periodic investment amount x FVIFA

Economic conditions​ affect

investor cash flows​ and, in the case of a​ recession, may result in lower demand for assets and push prices lower.

Shareholders can earn a return through ______________ or selling _____________ at a price higher than the price they paid

dividends, selling their stock