Fina Exam 3

The phrase ________ is sadly appropriate for the actions of some people, as they perceive that investment success rests in making frequent transactions. A) "playing the market" B) "timing the market" C) "go big or lose your home" D) "buy low, sell high"

A) "playing the market"

Suppose that the current value of all of a mutual fund's holdings is determined to be $700 million. The fund's liabilities are $100 million and it grew at 20% from last year. It currently has 50 million shares outstanding. What is the fund's NAV? A) $12.00 per shar B) $14.00 per share C) $14.40 per share D) $16.80 per share

A) $12.00 per share (700m-100m)/50m sh

You have a corporate bond that pays interest every six months. Its par value is $1,000 and it carries a coupon rate of 10%. What is your accrued interest on the bond if it has been four months since interest was last paid? A) $33.33 B) $50.00 C) $66.66 D) $100.00

A) $33.33

You purchased 1000 shares of fund ABC for $35.00 NAV per share. While you owned these shares you received $150 in dividend distributions and $350 in capital gains distributions. You just sold all of your shares for a total of $$2500. What was your total return on this investment? A) -14.3% B) 14.3% C) 32.8% D) 42.8%

A) -14.3%

You purchased 100 shares of a fund for $24.50 per share. Its current NAV is 30.75 per share. There were no other distributions. What is your total return? A) 25.51% B) 20.33% C) 79.67% D) 125.51%

A) 25.51% ((100*30.75-100*24.5))/100*24.5

Zippo Mutual Fund is one of your best performers. It just announced a year-end distribution of $3.50 per share in capital gains and $1.50 in dividends. Assuming the NAV increased from $29.50 to $33.50, calculate your total annual return? A) 30.51% B) 26.87% C) 16.95% D) 14.93%

A) 30.51% ((3.5+1.5+33.5)-29.5)/29.5

You purchased 100 shares of a fund for $15.50 per share. Its current NAV is 20.75 per share. There were no distributions. What is your total return? A) 33.87% B) 22.33% C) 79.67% D) 25.51%

A) 33.87% (20.75-15.50)/15.50

Zippo Mutual Fund is one of your best performers. It just announced a year-end distribution of $2.50 per share in capital gains and $4.25 in dividends. Assuming the NAV increased from $31.50 to $43.75, calculate your total annual return. A) 60.32% B) 46.87% C) 26.95% D) 24.53%

A) 60.32%

What would you expect to be associated with a company whose stock has a high beta? A) A high potential return B) A high dividend yield C) A large market capitalization D) All of the above are correct. E) All but C are correct

A) A high potential return

According to your text, is it recommended that couples have a joint credit card or not? A) No, it is best for couples to have their own credit cards. B) Yes, it is important for couples to have joint credit cards.

A) No, it is best for couples to have their own credit cards.

This approach is used regularly by security analysts to measure a stock's relative value, or how much investors are willing to pay for a dollar of the company's earnings. It is found by dividing the price per share by the earnings per share and is called the A) P/E ratio. B) technical industry analysis. C) fundamental analysis. D) discounted dividends valuation. E) market-to-price ratio

A) P/E ratio.

Frances McClurg favors the Roth IRA over the traditional IRA. What advantage does the Roth provide over the traditional IRA? A) She can avoid income taxes when she withdraws. B) The earnings are tax deferred, unlike a traditional IRA. C) Contributions are tax deductible. D) It saves tax money for education

A) She can avoid income taxes when she withdraws.

Most of the bonds that are bought and sold are not transacted on the organized exchanges. They are bought and sold through bond dealers who do not sell many ________ bonds but do trade many ________ bonds in the secondary market. A) corporate; government B) government; corporate C) high par value; corporate D) government; low par value E) corporate; firm-specific bonds

A) corporate; government

Because every company is almost certain to experience a bad year or two, holding on to stock for only one year A) is not a very sound investment decision. B) is a very sound investment decision. C) is a good idea for those who may need to liquidate their investment quickly. D) diversifies one's portfolio risk

A) is not a very sound investment decision.

Alice just inherited an antique wood burning stove. While she appreciates the sentimental value of the stove she is concerned that an investment such as this might not be able to be converted into cash quickly at a fair market price. Alice is worried about ________ on this as an investment. A) liquidity risk B) cash conversion C) maturity risk D) default risk E) none of the above

A) liquidity risk

Petrina was told by a successful friend to invest in stocks and income-producing real estate. Both of these are examples of ________ investments. A) ownership B) lending C) risk-free D) short-term E) liquid

A) ownership

ABC Corporation is selling additional shares of common stock. These are new shares of stock, and have never been sold or traded previously. The selling of these shares would take place in the ________ market. A) primary B) secondary C) tertiary D) quaternary E) none of the above

A) primary

Principle 8 tells us that diversification reduces A) risk. B) costs. C) profitability. D) earnings

A) risk.

If you purchase some shares of stock A) you may earn dividends. B) you will definitely earn dividends. C) you may earn coupon interest. D) you will definitely earn coupon interest

A) you may earn dividends.

Suppose that the current value of all of a mutual fund's holdings is determined to be $750 million. The fund's liabilities are $125 million and it grew at 20% from last year. It currently has 45 million shares outstanding. What is the fund's NAV? A) $12.00 per share B) $13.89 per share C) $14.40 per share D) $16.80 per share

B) $13.89 per share

The net income of the firm is $4 million dollars. The firm will pay $500,000 in dividends to the preferred shareholders. There are currently 1 million shares of common stock outstanding. What are the earnings per share for this firm? A) $4.00 B) $3.50 C) $4.50 D) $3.00

B) $3.50

Lori Watts favors the traditional IRA over the Roth IRA. What advantage does the traditional IRA have over the Roth? A) The earnings are tax-exempt, unlike a Roth IRA. B) Contributions are likely to be fully or partially tax deductible. C) It saves tax money for education. D) There are no penalties for early withdrawals

B) Contributions are likely to be fully or partially tax deductible

What is a reason that your textbook suggests as to why a newly married couple would want to establish separate checking accounts? A) It makes record keeping much easier. B) It is preferable if the couple has incompatible money management styles. C) One always gets a better deal from the bank on two accounts versus one account. D) All of the above

B) It is preferable if the couple has incompatible money management styles.

What is a reason that your textbook suggests as to why a newly married couple would want to establish separate checking accounts? A) It makes record keeping much easier. B) It is preferable if the couple has incompatible money management styles. C) One always gets a better deal from the bank on two accounts versus one account. D) All of the above E) None of the above

B) It is preferable if the couple has incompatible money management styles.

You are considering the purchase of one of two different bonds, a muni, which currently yields 6%, and a corporate, which currently yields 10%. If you are trying to maximize your return and you are in a 38% tax bracket, which of the following is true ? A) The muni bond has a better yield for you. B) The corporate bond has a better yield for you. C) The bonds have identical yields for you. D) There is not enough information to determine which is a better yield for you

B) The corporate bond has a better yield for you.

What is a disadvantage of the "Prepaid College Tuition Plan" version of the 529 plan? A) Distributions before age 59 1/2 incur a 10% tax penalty. B) They generally guarantee that your child will be covered only if he or she attends a public in-state university or college. C) They allow greater flexibility than the College Savings Plans. D) All of the above. E) None of the above.

B) They generally guarantee that your child will be covered only if he or she attends a public in-state university or college.

________ risk is simply the variability in the returns of an investment that is due to events that are unrelated to the overall market. A) Systematic B) Unsystematic C) Non-diversifiable D) Portfolio

B) Unsystematic

You and a group of your friends have been discussing your portfolios at the company water cooler. Your discussion has centered on how your stocks are moving up or down in price relative to the market as a whole. Each stock's ________ is likely the best measure of the relationship. A) relative index B) beta C) alpha D) delta

B) beta

The following equation, (net income - preferred stock dividends)/number of shares of common stock outstanding, allows us to calculate the ________ and this information is necessary to calculate the ________ ratio. A) dividend yield; dividend B) earnings per share; P/E C) market-to-book ratio; book-to-market D) stock growth: P/E E) price-to-book ratio; market-to-book

B) earnings per share; P/E

Total returns on mutual funds can be calculated by adding dividends distributed, capital gains distributed, and ________ and dividing this sum by the beginning NAV. A) beginning NAV - ending NAV B) ending NAV - beginning NAV C) dividends undistributed + capital gains undistributed D) beginning NAV + ending NAV E) ending NAV + beginning NAV

B) ending NAV - beginning NAV

You are considering the purchase of a corporation's stock. You have noted that this particular corporation has a high use of debt, which is associated with ________ risk. A) business B) financial C) corporate D) market

B) financial

Compared to other investment options, we can safely say that investing in stocks A) has equal risk. B) has greater risk C) has less risk. D) is not worth the risk

B) has greater risk

The ________ the firm's earnings growth rate, the ________ the firm's P/E ratio and the ________ the investor's required rate of return, the ________ the P/E ratio. A) higher; higher; higher; higher B) higher; higher; higher; lower C) higher; higher; lower; lower D) higher; lower; lower; lower E) lower; lower; lower; lower

B) higher; higher; higher; lower

Peter must read the ________, or legal agreement between the firm issuing the bond and the bond trustee who represents the bondholders. A) contract B) indenture C) provisions D) debenture E) prospectus

B) indenture

If you were considering the purchase of a bond issued by a state, county, or city you would be considering the purchase of a ________ bond. A) state B) municipal C) government hedge D) corporate

B) municipal

Changes in the capital gains tax rate, or in the tax deductibility on municipal bonds are examples of ________ risk. A) inflation B) political and regulatory C) interest rate D) exchange rate risk E) none of the above

B) political and regulatory

ABC Corporation is selling additional shares of common stock. Although ABC Corporation has already sold shares of stock in the public equity markets, these are new shares of stock, and have never been sold or traded previously. This is called a(n) A) initial public offering. B) seasoned new issue. C) secondary issue. D) blue chip issue. E) none of the above.

B) seasoned new issue.

A ________ increases the number of stock shares outstanding by replacing each existing share of stock with a stated number of new shares. A) dividend reinvestment B) stock split C) stock repurchase D) stock reissue

B) stock split

A ________ increases the number of stock shares outstanding by replacing each existing share of stock with a stated number of new shares. A) dividend reinvestment B) stock split C) stock repurchase D) stock reissue E) none of the above

B) stock split

Sherman has three bonds with a $1,000 par value that pay a 9% coupon interest rate. How much will he earn every six months? A) $27 B) $90 C) $135 D) $202.50 E) $270

C) $135

You want to start an Coverdell Education Savings Account for your child. Suppose that you contribute $500 each year to this account for 18 years, starting when he or she is born. If you can earn 8% on the deposits, how much will be on deposit at the end of the 18th year? A) $4,306.38 B) $17,581.05 C) $18,725.12 D) $3,682.89

C) $18,725.12

Suppose that you just purchased a $1,000 Treasury Inflation-Indexed Bond which carried an original interest rate of 3.375%. The consumer price index just increased by 5% increasing the par value of the bond to $1,050. What is your interest payment considering this change? A) $31.75 B) $33.75 C) $35.44 D) $50.00 E) $52.50

C) $35.44

Suppose that you have a bond that has a par value of $1,000 and a coupon interest rate of 9%. Its current price is $950 and it will mature in 7 years. What is the yield to maturity? A) 8.45% B) 9.00% C) 10.03% D) 10.23%

C) 10.03%

Long term capital gains are taxed at ________ percent. A) 8 B) 10 C) 15 D) 25 E) 40

C) 15

Reggie has two children. He is wanting to put money away for their college education. What type of plan can only be used for college and graduate school, and allows contributions of up to $250,000? A) 403(b) B) ESOP C) 529 D) 12b-4

C) 529

Suppose you just purchased a corporate bond with a par value of $1,000 for $951.25. It carries a 7% coupon rate and will mature in 5 years. What is the yield to maturity? A) 6.14% B) 7% C) 8.23% D) 12%

C) 8.23%

Each individual mutual fund hires an investment advisor, generally from the management company, who oversee the particular fund. How is this advisor paid? A) Hourly B) Based on a percentage of the commissions charged on an annual basis C) Based on a percentage of the total value of the fund on an annual basis D) Annually based on the capital gains realized by the fund E) None of the above

C) Based on a percentage of the total value of the fund on an annual basis

The system of Social Security is based on young working people paying taxes to support older retired people. The dependency ratio is the number of workers to retirees. Forty years ago it was 16 workers for every one retiree. What will happen to this ratio by the year 2048? A) It will reverse so that there will be more retirees than workers. B) It will increase, because there will be more young workers than retirees. C) It will decline to 2 workers for every 1 retiree. D) Nothing, since the ratio of young people to old people does not change.

C) It will decline to 2 workers for every 1 retiree.

What is an advantage to being a "preferred" stock holder? A) Preferred stock holders always get to vote for the board of directors of the company. B) Preferred stock holders receive a better coupon interest rate. C) Preferred stock holders receive dividend payouts before common stock holders do. D) Preferred stock holders never pay commissions on their stock trades. E) There are no advantages to being a preferred stock holder

C) Preferred stock holders receive dividend payouts before common stock holders do.

According to your text, which of the following is true regarding employment in today's world? A) Your history with the company is all that matters. B) Working at a company for many years ensures that you will keep your job. C) Reinventing and upgrading your skills is a necessity in today's business world. D) None of the above

C) Reinventing and upgrading your skills is a necessity in today's business world.

Which type of risk can an investor effectively manage by investing in broadly diversified mutual funds? A) Serial risk B) Systematic risk C) Unsystematic risk D) None of the above is correct

C) Unsystematic risk

The long-term bond you own was issued by IBM Corporation and used no collateral. This is an example of a(n) A) unsecured mortgage. B) credit. C) debenture. D) nomenclature

C) debenture.

The largest single player and payer in the bond market A) is corporate America. B) are municipal bond issuers. C) is the U.S. government. D) are foreign firms. E) are schools and county governments

C) is the U.S. government.

The risk that you will not be able to find a buyer at a fair market price, and will wind up having to sell for less than an asset's worth is called ________ risk. A) inflation B) interest C) liquidity D) call

C) liquidity

A(n) ________ is a legal document that describes a securities issue and is made available to potential investors. A) disclosure statement B) offering contract C) prospectus D) tombstone

C) prospectus

The city of Houston passed a bond issue to build a bridge over the bay. The bond was to have the interest paid by the income generated by charging drivers a toll to cross the bridge. This is an example of a ________ bond. A) collateralized B) cash C) revenue D) general obligation

C) revenue

In October 2008, most of the major stock indices around the world plummeted in value. The most likely cause for these dramatic events were A) non-systematic risk. B) variable betas. C) systematic risk

C) systematic risk

You can make investments on a ________ basis, which means that not only does your investment grow free of taxes, but the money you invest isn't taxed until you liquidate your investment. A) tax-eliminated B) progressive tax C) tax-deferred D) asset management

C) tax-deferred

IBM is considering hiring an investment banker who will purchase and subsequently resell an issue of stock for them. This service is called A) stock brokerage. B) full-service brokerage. C) underwriting. D) churning. E) none of the above

C) underwriting.

he discounted dividends valuation model of common stock assumes that dividends will grow at a constant rate forever. This method tells us that the (dividend next year) divided by the (required rate of return - growth rate) yields the A) discounted dividend. B) dividend growth rate. C) value of the common stock. D) value of the earnings. E) value of the P/E ratio.

C) value of the common stock.

This equation, dividends next year/required rate of return minus growth rate tells us the stock's A) dividend yield. B) earnings per share. C) value. D) growth potential. E) book-to-price ratio.

C) value.

According to U.S. News and World Reports , the required investment for a medium income family to raise and support a child for 22 years is approximately A) $52,000 B) $197,704 C) $1,000,000 D) $1,450,000 E) $3,000,000

D) $1,450,000

You purchased 100 shares of Gibraltar Strength Fund for $20.50 per share. As a result of distribution reinvestment you currently own 120 shares with a NAV of $22.75 per share. What is your total return? A) 16.67% B) 20.00% C) 24.91% D) 33.17%

D) 33.17% ((120*22.75)-(100*20.5))/(100*20.5)

What is the total return for a mutual fund with the following characteristics? beginning NAV = $55.82 ending NAV = $70.52 dividends distributed = $2.25 capital gains distributed = $3.50 A) 29.71% B) 30.82% C) 32.26% D) 36.64%

D) 36.64%

To be eligible for Social Security benefits, you receive one credit for every $1,200 in wages that you earn, up to 4 credits per year. How many total credits do you need to qualify for benefits? A) 4 B) 20 C) 30 D) 40

D) 40

A bond has a par value of $1,000, a market price of $300, and a 9% coupon rate. It will mature in 5 years. What is the current yield of the bond? A) 18.89% B) 19.00% C) 21.75% D) 48.27% E) 44.96%

D) 48.27%

You purchased 500 shares in a mutual fund for $20 NAV. You elected the DividendReinvestment Plan and had all dividend and capital gains distributions reinvested in additional shares. You just closed your account and sold 550 shares for $28 NAV. What was your total return on this investment? A) 24% B) 34% C) 44% D) 54%

D) 54% (550*28-500*20)/500*20

You purchased 100 shares of Gibraltar Strength Fund for $12.75 per share. Its current NAV is 18.75 per share. There was a total of $0.25 in dividends and $0.75 in capital gains distributed. What is your total return? A) 32.00% B) 37.33% C) 47.06% D) 54.90%

D) 54.90% ((0.25+0.75+18.75)-12.75)/12.75

Real estate investments can be income-producing investments. Which of these would be included as an income-producing real estate investment? A) An apartment complex B) A shopping mall C) Your personal home D) All of the above E) Only A and B above

D) All of the above

How is the size of a person's Social Security retirement benefits determined? A) It depends on the number of credits earned in a person's lifetime. B) It depends on the average level of earning over a person's lifetime. C) It depends on the number of years a person has paid Social Security taxes. D) All of the above are correct. E) Only B and C are correct.

D) All of the above are correct.

The investor services that most mutual funds offer include A) bookkeeping services. B) checking accounts. C) automatic systems to add to or withdraw from your account. D) All of the above are correct. E) All but B are correct

D) All of the above are correct.

Which of the following is a benefit to investing in a mutual fund? A) Most small investors don't have the time, knowledge or desire to do the research necessary to purchase individual stocks. B) Mutual fund transaction fees are considerably lower than the brokerage fees most small investors incur buying and selling individual stocks. C) Most small investors want to be able to invest relatively small amounts of money on a regular basis. D) All of the above are correct. E) Only A and B are correct.

D) All of the above are correct.

Randall has $25,000 and is considering investing in bonds. With this amount of start up money he should look into which of the following bonds? A) Agency bonds B) Corporate bonds C) Pass-through certificates D) All of the above would be good choices.

D) All of the above would be good choices.

Securities that are less frequently traded, along with many new and high-tech stocks, are relegated to the A) NYSE. B) AMEX. C) ADR market. D) OTC market

D) OTC market

Which of the following are passed on to fund share holders through 12b-1 fees? A) Commissions B) Advertising expenses C) Promotional fees D) Only B and C E) All of the above

D) Only B and C

Your investment goal is to receive a stream of income from your investment. Which of the following would be important information to determine whether a particular stock purchase would suit your plan? A) The earnings per share B) The market-to-book ratio C) The book value D) The dividend yield

D) The dividend yield

Which of the following statements about saving for college is not true? A) The Coverdell Education Savings Account works just like the Roth IRA, except with respect to contributions. B) If the money in a Coverdell Education Savings Account isn't used for college, taxes and penalties may apply. C) Some 529 plans are prepaid college tuition plans. D) You must open a 529 plan sponsored by the state in which you reside. E) 529 college savings plans offer more flexibility than prepaid college tuition plans

D) You must open a 529 plan sponsored by the state in which you reside.

Barney Hopkins is the financial manager for Amax Corporation. He knows that ________ risk deals with good or bad management decisions and ________ is associated with his company's use of debt. A) market; business B) market; financial C) business; interest rate D) business; financial E) financial; business

D) business; financial

Bruce Lee owns stocks, bonds, real estate, gold coins, T-Bills, and gemstones. He has a(n) A) equity portfolio. B) default-proof portfolio. C) inflation-proof portfolio. D) diverse portfolio. E) risk adverse portfolio

D) diverse portfolio.

The ________ is the value of the mutual fund's holdings, minus any debt, divided by the number of shares outstanding. A) net worth B) market value C) tangible value D) net asset value E) none of the above

D) net asset value

You own a(n) ________ certificate, which is a certificate that represents a portion of ownership in a pool of federally insured mortgages. A) interest B) mortgage bond C) collateral D) pass-through

D) pass-through

Marian read in a financial magazine that the discounted dividends valuation model of common stock defines the value of a share of common stock as the ________ value of the infinite stream of future ________. A) future; growth B) future; earnings C) dividend; earnings D) present; dividends E) present; earnings

D) present; dividends

A(n) ________ is a legal agreement signed by a stockholder allowing someone else to vote on his or her behalf at the corporation's annual meeting. A) voting contract B) agency contact C) contingency contract D) proxy

D) proxy

A(n) ________ is a legal agreement signed by a stockholder allowing someone else to vote on his or her behalf at the corporation's annual meeting. A) voting contract B) agency contact C) contingency contract D) proxy E) none of the above

D) proxy

A(n) ________ advertisement provides a listing of the underwriting syndicate involved in a new offering. A) prospectus B) underwriting notification C) brokerage notification D) tombstone E) none of the above

D) tombstone

Pedro is trying to take advantage of the bond valuation relationships. He has figured out that when you expect interest rates to go up, buy ________ bonds and when you expect interest rates to go down, buy ________. A) government bonds; short-term bonds B) interest-indexed bonds; long-term bonds C) very long-term; bonds with very short-term maturities that are not callable D) very short-term; bonds with very long-term maturities that are not callable E) interest-proof; long-term bonds

D) very short-term; bonds with very long-term maturities that are not callable

The bond that you own does not pay any interest. Instead, it is sold at a "discount" from its maturity value. This is a ________ bond. A) no interest B) face discount C) growth D) zero coupon

D) zero coupon

For your investment program, you have occasionally been holding a few stocks that you purchased from various brokers. Based on this, which advantages of mutual funds would be appealing to you? A) Diversification B) Professional management C) Avoidance of bad brokers D) only A and C E) A, B, and C

E) A, B, and C

According to your textbook, which is a typical financial event that recent graduates may face during their first decade out of college? A) Buying a car B) Establishing credit C) Paying taxes D) Repaying student loans E) All of the above

E) All of the above

Fundamental analysis looks at which of the following? A) Future earnings B) Dividends C) Expected levels of interest rates D) The firm's risk E) All of the above

E) All of the above

Many people never consider or think of the sources of risk that affect their investments. Which of the following is a risk associated with investing? A) Interest rate risk B) Inflation risk C) Business risk D) Financial risk E) All of the above

E) All of the above

Which of the following statements is true regarding Social Security retirement benefits? A) It attempts to replace 42% of your average earnings. B) Not all occupations are covered. C) Some people's benefits may be taxed. D) You may retire beginning at age 62 with reduced benefits. E) All of the above

E) All of the above

Which of the following is not true regarding investing in stocks? A) They are risky, but not as risky as not investing in them. B) Mutual funds are an easy way to invest in stocks and diversify. C) You should let asset allocation decisions be guided by your time horizon. D) You should review the time dimension of investing. E) All of the above are true statements.

E) All of the above are true statements.

Hern MacTavish only invests in lending investments. If his financial advisor gave him the list below, which might Hern invest in? A) Saving accounts B) Stocks C) Income-producing real estate D) Bonds E) Both A and D

E) Both A and D

Social Security is a mandatory insurance program that provides a base level of protection for all of the following occurrences except one. Choose that one. A) Death B) Disability C) Health problems D) Retirement E) Job loss

E) Job loss

Which of the following will affect your capital gains liability? A) Turnover ratio B) Changes in net asset value C) Expense ratio D) All of the above are correct. E) Only A and B are correct.

E) Only A and B are correct.

Social Security is a system where current workers' pay taxes that are used to pay current retirees' benefits. How is Social Security funded? A) Income taxes by all Americans B) Payroll taxes on employees up to a salary cap C) Payroll taxes on employers up to a salary cap D) All of the above are correct. E) Only B and C are correct

E) Only B and C are correct

The invoice price of a bond A) is the price you pay if you buy the bond in the secondary market. B) is the quoted price of the bond. C) is the stated price of the bond plus the bond's accrued interest. D) all of the above. E) only A and C

E) only A and C

Jose does not have a retirement plan at work. He currently earns $30,000 in salary and is in the 15% marginal tax bracket. If he contributes the maximum contribution of $5,500 to his traditional IRA, how much money will he save on his income tax liability?

Tax savings = $5500*.15=$825

The following equation, (net income - preferred stock dividends)/number of shares of common stock outstanding, allows us to calculate the ________ and this information is necessary to calculate the ________ ratio.

earnings per share; P/E