chapter 14 personal finance
professionals responsible for clients' funds
institutional investors
The market for newly issued securities and initial public offerings (IPOs) is the ________ market.
primary
t/f One of the factors involving risks of investments is the time period you have to keep your money invested.
true
t/f A company has a choice of whether to distribute dividends to common shareholders or to keep their profits in the company as retained earnings.
true
t/f Present and future value concepts are used to determine the wealth provided by an investment.
true
Which one thing do you always have with common stock?
voting rights
It would be very difficult and expensive for an individual investor to benefit from holding all 500 stocks of the Standard and Poor's 500 Index.
false
t/f An advantage of investing in corporate bonds is that they hold their value and pay predictable interest (coupon) payments periodically.
false
t/f Bonds are certificates representing partial ownership of a firm.
false
t/f Common stockholders usually have more dividend rights than preferred stockholders.
false
t/f Institutional investors are professionals employed by a financial institution, who invest their own money earned from their jobs.
false
t/f It is easy to predict the level of demand for certain investments since future economic conditions are fairly measurable.
false
t/f Many more shares of stock are traded daily on the primary market than on the secondary market.
false
t/f Most investors are fully aware of the risk involved when pursuing investments that have the potential for very large returns.
false
t/f Real estate is a good investment option for individuals and it offers the same liquidity as stocks or bonds.
false
t/f Smart investors can find investments that generate high rates of returns with small amounts of risk.
false
t/f The stocks of well-known companies are referred to as "preferred stock."
false
t/f When economic conditions are strong, the demand for most types of investments is low.
false
t/f Since the gain received from the sale of stock is always taxed as ordinary income, you might want to time your sale to shift your profit from one year to another.
false
Examples of common investment mistakes covered in the text include all of the following except
following the advice of a stockbroker
Common stock is not
guaranteed a dividend
The difference between common and preferred stock is that preferred stock
has predictable income and more safety.
Stock prices are characterized by all of the following except they
have a set lower limit.
Income stocks tend to pay ________ dividends and have ________ appreciation of stock prices.
higher; lower
Which of the following is true with regards to the trade-off between a risk-free investment and a risky investment?
if you prefer less risk, purchase a bond issued by a successful and established firm
Stocks that provide investors with steady income in the form of large dividends are classified as ________.
income stocks
When a corporation goes from being a private to a public firm it will sell stock in what is called a(n) ________.
initial public offering
________ investors are professionals employed by a financial institution and are responsible for managing money.
institutional
You have $10,000 to invest and would like to set these funds aside for retirement in 20 years. You should
invest in a diversified stock mutual fund.
Publicly traded indexes are not
investments offering only capital appreciation but no dividends.
An initial public offering (IPO) is characterized by all of the following except
is available to individual investors before institutional investors
When a firm performs well, investors holding shares are ________ willing to sell it and therefore, the demand for the stock ________.
less; increaases
All of the following gains from investments are taxed as ordinary income except
long-term capital gains
Growth stocks tend to pay ________ dividends and have ________ appreciation of stock prices.
lower; higher
One advantage of investing in commercial real estate compared to stock, bonds, and mutual funds is that real estate
may yield income and tax advantages not available with the other investments
Before you start to invest, you should ensure liquidity by owning
money market mutual funds`
Which of the following investments would you not consider if you have adequate liquidity and additional funds to invest?
money market securities
growth stocks tend to
offer great opportunities of capital appreciation
For minimal tax consequences, when your stock increases in value it should be held for
over a year
first priority over common stockholders to receive dividends
preferred stock
Newly issued securities are traded in the ________.
primary market
The best way to ensure that you will receive dividends is to
purchase preferred stock
If you have $1,000 to invest, but will need the money in one month to pay bills, you should
put the money in a money market savings account
The largest market where existing securities are sold is called the ________ market.
secondary
existing securities are sold in this market
secondary market
It is December 30th and you have stock in Zero Corporation, which you bought on March 1st that has lost $2,000 in value. You have already sold other stock that you bought this year for a gain. From a tax standpoint, what should you do with the Zero stock?
sell it today
t/f A key reason for uncertainty surrounding the return on investment is the uncertainty surrounding the current economic conditions.
true
t/f An investment that has the potential to rise substantially in value also has the potential to decline substantially in value. If you cannot afford the possible loss, you should not make that investment.
true
t/f Because dividends are fixed, the prices of preferred stock are not as volatile as those of common stock.
true
t/f Common stockholders have the right to vote on key corporate issues, but also have the last right to the assets or profits of a company. Answer: TRUE
true
t/f In addition to the interest earned on a bond, it is also possible that the actual bond will increase in value over time.
true
t/f Most individual investors who buy and sell stock do so on the secondary market through brokers or investment companies.
true
t/f Mutual fund gains can be in the form of dividends or capital gains, which are passed on to the individual investors.
true
t/f One of the attractive features of mutual funds is that they offer small investors a diversified portfolio and professional management.
true
t/f The higher the dividend paid by a firm, the lower its potential stock price appreciation.
true
t/f The primary market is used by firms to raise funds and is a market where newly issued securities are traded.
true
t/f The return you will earn on certain stocks and bonds is uncertain because certain prices are not guaranteed.
true
t/f The standard deviation of a stock's monthly returns measures the degree of volatility of a stock's returns over time and can be a method of evaluating a stock's future risk.
true
t/f The timing on the sale of a stock could make a big difference in the amount of taxes that are due on the profits.
true
t/f before you start an investment program, you should ensure liquidity by having money in financial institutions or in money market securities
true
If you purchase 100 shares of Ajax Corporation for $15 a share and one year later sell it for $20 a share, what was your return if the stock paid $2 per share dividends? (Ignore commissions and trading fees. Round to the nearest whole percent.)
47%
If you purchase 100 shares of XYZ Corporation for $50 per share, receive a dividend check for $200, and then sell the stock for $62 per share, what will your return on the stock be?
28%
What would be the return on 200 shares of stock purchased on January 1, 2005 for $60 per share and sold on December 31, 2005 at $80 per share? Also assume that the company paid dividends of $2 per share over the year. The prices include all brokerage fees. Round to the nearest whole percent.
37%
first offering of a firm's stock to the public
IPO
Dividends are a portion of
earnings returned to the investor
John decides to take his annual Christmas bonus of $2,000 and invest it each year for the next five years, in stock he believes can earn an 8% annual return. How much will John's investment be worth at the end of the five years?
$11,734
Jane has $3,200 she wants to invest in stocks. She has found an investment that she believes will earn 9% annual return. What will be the value of Jane's investment in 20 years?
$17,933
Assuming a tax rate on ordinary income of 25% and a long-term capital gain rate of 10%, how much would you pay in taxes if you sold stock "A" for a $200 capital gain after holding it for 5 months, stock "B" for a $300 capital gain after holding it for 8 months, and stock "C" for a $500 capital gain after holding it for 14 months?
$175
What would you pay for a stock whose price you estimate will be $50 in 10 years and you wish to earn a return on the investment of 9%? Ignore brokerage commissions and tax implications and assume the stock paid no dividends during the holding period.
$21.10
If a stock is purchased for $30 a share and pays $5 per share in dividends a year, what selling price at the end of the year would result in a return of 50%?
$40
If you bought $3,000 in stock a year ago, received no dividends, and sold it for $1,000, what is the return on your investment?
-67%
Which of the following ranges of returns would indicate a less risky, more stable investment?
.4% to 1.4%
If you invest $1,000 in stock that pays no dividends and sell the stock one year later for $1,100, what will be your return? (Ignore commissions and trading fees.)
10%
What would be the return on a stock purchased at $20 per share, held for 5 years, and sold for $32.22? Ignore brokerage commissions and tax implications and assume the stock paid no dividends during the holding period. Round to the nearest whole percent if necessary.
10%
Which of the following is not true regarding mutual funds?
Dividends received from their investments are used to pay operational expenses, and capital gains are passed on to the mutual fund shareowners.
Which of the following is not true regarding preferred stock?
It has the potential for greater capital appreciation than common stock
Which of the following statements regarding an investment's risk is not true?
Risky stock will have a smaller range of returns and a smaller standard deviation of returns.
Which of the following statements is not true regarding individual investors?
The number of individual investors has decreased in the last 20 years.
Of the following statements about a day trader, which is not correct?
They are more risk averse than most investors.
To earn the highest possible return in the stock market, you will need to
accept a high level of risk
Individual risk is
an individual's comfort with the risk-return relationship
All of the following are true regarding stock prices except they
are regulated by the Federal Reserve Board
Of the following, which is not used in measuring a stock's return?
average price of stock during period owned
debt instruments issued by the government or corporations to borrow money from investors
bonds
You have $3,000 to invest, but will need the funds in a year to make a tuition payment. You should
buy a one-year CD
If you have $5,000 to invest but will need to use the funds in three years to buy a home, you should
buy a stock of relatively stable firms that have low risk
An initial public offering (IPO)
can be a bargain as the stock prices may rise rapidly the next few days
If you believe that a firm will grow rapidly in the future, you should buy its
common stock
If you wish to have a direct voice in the running of a company, you should purchase A) bonds.
common stock
If you wish to have the power to vote on who will serve on the board of directors of a corporation you will need to purchase shares of ________ in the corporation.
common stock
The security that represents equity or ownership of a corporation is
common stock
certificates that represent partial ownership of a firm
common stock
_________ offer a predictable return to investors in the form of interest or coupon payments.
corporate bonds
Growth stocks are likely to pay high dividends.
false
individual investors who buy and sell stocks within a day
day trader
Individuals who buy and sell stock on a very short-term basis as a career are called ________.
day traders
Investors who buy and sell stock, sometimes in the same day, are called
day traders
If economic conditions deteriorate, stock prices will
decrease
In the secondary market, stock prices are
determined by supply and demand
You can reduce your risk by
diversifying your investments
All of the following are true statements about dividends except
dividends are contractually guaranteed to common stockholders.
It is December 10th and you have a stock you purchased last January 5th, which has increased in value by more than $3,000. You think the stock will not significantly increase or decrease in value over the next month or so, and you would like to take your gain. What should you do?
sell the stock on January 6th or later
Regarding dividends paid on common stock,
some firms don't pay any dividends at all
The Internet should be used for all of the following except
specific recommendation on which stocks to buy
A stock's ________ is a measure of the degree of volatility in a stock's returns over time.
standard deviation
facilities that allow investors to purchase or sell existing stocks
stock exchanges
The risk-return relationship means
the higher the risk, the higher the return
The time value of money concepts do not include
the risks associated with various investments
To measure an investment's risk, you may use all of the following except
time value of money
you can estimate the amount by which your wealth will increase from an investment using
time value of money
