PFI Exam 3 Material

Benito placed $11,500 in a mutual fund with a 3.5% front-end load. How much money did he actually invest in the fund after accounting for the load?

$11,097.50 Benito placed $11,500 in a mutual fund with a 3.5% front-end load. He actually invested $11,097.50 in the fund after accounting for the load. The 3.5% front-end load is a sales commission that will be deducted from the amount of his investment and the remainder placed in the fund. So, ($11,500 - (.035 x $11,500)) = $11,097.50.

If Motorola sells a bond with a face value of $5,000 and an interest rate of 5 percent, what is the annual payment on the bond?

$250 If Motorola sells a bond with a face value of $5,000 and an interest rate of 5 percent, the annual payment on the bond is $250. You compute the annual payment by multiplying the coupon interest rate of 5% by the bond's par value of $5,000. So, the payment = $5,000 x .05 = $250.

The Federal Deposit Insurance Corporation (FDIC) insures deposits at commercial banks for up to __________ per depositor.

$250,000

Jessica inherited $282,000 from her grandfather which she used to buy a certificate of deposit at a local bank. However, the bank was just declared insolvent and taken over by federal regulators. How much money will Jessica potentially lose?

$32,000 **Jessica inherited $282,000 from her grandfather which she used to buy a certificate of deposit at a local bank. However, the bank was just declared insolvent and taken over by federal regulators. Jessica could potentially lose $32,000 since the CD is only guaranteed up to $250,000.

For 2017, IRA contributions are limited to __________ if you are under the age of 50.

$5,500

Haven has invested in a mutual fund. The net asset value at the time of purchase was $254.50 and he sells the fund two years later for $275.00. Additionally, during the time that he owns the mutual fund, he receives dividends of $12.50 and capital gain distributions of $15.75. What is Haven's return on this investment?

19.16% Haven's total return can be calculated using the following formula: total return = dividends distrib. + capital gains distrib. + ending NAV - beginning NAV beginning NAV Substituting the values provided, total return = ($12.50 + $15.75 + $275.00 - $254.50)/$254.50 = 19.16%

What is the after-tax return on a money market mutual fund if it is currently paying 3% and you are in a 28% marginal tax bracket?

2.16% **The after-tax return on a money market mutual fund if it is currently paying 3% and you are in a 28% marginal tax bracket is 2.16%. You compute the after-tax return by multiplying the pre-tax return by the factor (1 - marginal tax rate). So, the after-tax return is = 3%(1 - .28) = 2.16%.

What is the holding period return of a stock that was purchased for $45 and sold one year later for $55 if the stock also paid $3 in dividends over that time period?

28.9% The holding period return of a stock that was purchased for $45 and sold one year later for $55 if the stock also paid $3 in dividends over that time period is 28.9%. The following formula computes percentage returns: rate of return = (ending value - beginning value) + income return beginning value So, for this stock: rate of return = ($45 - $55) + $3 = 28.9% $45

A certificate of deposit, or CD, pays a fixed rate of interest on deposits ranging in term from:

30 days to several years. **A certificate of deposit, or CD, pays a fixed rate of interest on deposits ranging in term from 30 days to several years. Since you guarantee that you will leave the money on deposit for the specified length of time, or face stiff financial penalties, CDs pay a slightly higher interest rate than other liquid forms of savings. CDs are insured by the FDIC and require a minimum deposit amount.

Jessica purchased 100 shares in a mutual fund at an NAV of $23.45. She held the fund for one year and received a dividend of $2 during that time and a capital gains distribution of $4.22. What is her total percentage return if she sold her shares for an NAV of $27.10?

42%

For Americans born after 1960 the Social Security retirement age to receive full benefits is:

67 **For Americans born after 1960 the Social Security retirement age to receive full benefits is 67. While you can retire at age 62 you will receive a reduced benefit. Those born prior to 1960 can retire with full benefits at a younger age depending on the exact date of their birth.

You are legally required to take minimum distributions from your retirement accounts by April 1 of the year after you turn:

70½.

You purchased Hobo Hats stock last year for $60 a share. Today, you received $2 a share dividend and immediately sold the stock for $63. Your realized return, or holding period return, was _________.

8.33%

Mutual fund loads, or sales fees, can be as high as:

8.5%

At this point in time there are approximately __________ mutual funds that specialize in all different types of financial assets.

8000

Approximately __________ of all Americans are covered by Social Security.

95%

The __________ converts interest rates with different compounding frequencies into a comparable annual interest rate so investors can make accurate comparisons.

APY **The APY converts interest rates with different compounding frequencies into a comparable annual interest rate so investors can make accurate comparisons. APY, or annual percentage yield, is a mandatory interest rate computation required by the Truth in Savings Act of 1993. Financial institutions have to report APY on interest rate options so savers and borrowers can make better decisions.

Which of the following is the best description of systematic risk?

Any risk that will impact the value of all assets simultaneously.

Investing in yourself is also known as:

Human capital investment

Which of these accounts is not federally insured?

Money market mutual funds **Deposits at money market mutual funds are not federally insured. However, given that these funds invest in very short maturity high-grade government and corporate bonds they are very low risk funds.

Which of these is a decision factor you should use when evaluating different mutual fund investments?

Personal goals

Which of these is an advantage of mutual funds?

Professional management

Which of these is a derivative security?

Stock option **A stock option is a derivative security. Derivative securities are financial assets that derive their value from the value of the underlying asset. Stock options give the owner the option to buy (call option) or the option to sell (put option) 100 shares of stock in some firm. Their value is therefore dependent on the value of the stock on which the option is written. Versus A rental house or 100 shares of stock represent ownership claims and their value is not derived from the value of another underlying asset.

__________ risk is the only risk that matters to investors with broadly diversified portfolios.

Systematic

Which of the following would be the best example of systematic risk?

The Federal Reserve tightens the money supply to fight inflation which causes the interest rates to rise.

Which of these investments is an appropriate asset for a money market mutual fund to hold in its portfolio?

U.S. Treasury bills

The return on investment for education tends to be higher for younger people because:

Younger people have lower opportunity costs. Older people have higher opportunity cost. Younger people have more time to recoup their initial investment.

A time deposit that pays a fixed rate of interest is known as:

a savings account.

Most career experts advise that you should begin looking for a job:

about one year before you graduate.

Any cash transfer that takes place automatically is known as:

an electronic funds transfer. **Any cash transfer that takes place automatically is known as an electronic funds transfer, or EFT. EFTs include debit card transactions, direct deposit of your paycheck, direct drafts for bills, electronic checks, etc. Any transaction that involves remitting or receiving your money electronically is an EFT. Automatic payments and Internet banking are both forms of EFT.

The decision regarding what career path to select is __________ financial planning.

an important step in

A form of diversification in which the investor decides on the proportions of an investment portfolio that will be devoted to various categories of assets:

asset allocation

If a market is efficient it means that:

asset prices respond very rapidly to new information.

A(n) __________ fund will hold stocks, bonds and also preferred stock.

balanced

Which of these is considered a deposit-type financial institution?

bank

A __________ fund invests primarily in long-term debt.

bond

Investing in stocks is higher risk:

but also generates higher returns.

An investment strategy in which investors hold on to investments for long periods of time:

buy-and-hold strategy

Determining how much money to keep in liquid assets and where to keep it is the subject of:

cash management. **Determining how much money to keep in liquid assets and where to keep it is the subject of cash management. Most financial managers will tell you that you need between 3 and 6 months of living expenses in your emergency fund. However that amount can vary significantly depending on how secure your job is and your access to credit, among other things. The matter is compounded by the fact that cash amounts do not earn high returns. Cash management involves deciding how much cash to keep on hand and where to keep the cash to earn the highest return and still have the necessary liquidity. versus Portfolio management involves managing all you your investments regardless of asset class or category. Fund management typically refers to mutual fund managers.

A __________ is a check drawn on a financial institution's account.

cashiers check

A(n) __________ cannot issue new shares in response to investor demand.

closed-end fund **A closed-end fund cannot issue new shares in response to investor demand. New investors must purchase mutual fund shares from current investors who want to sell. A type of mutual fund that can issue an unlimited number of mutual fund shares is known as an open-end fund. Investors can buy and redeem mutual fund shares at their discretion. These types of funds can therefore expand in size indefinitely. Open-end funds sell or redeem mutual fund shares at net asset value, or NAV. The net asset value is computed by taking the market value of all mutual fund holdings at the end of the day and dividing it by the number of mutual fund shares.

Diversification is the process of:

combining assets to reduce risk and/or increase returns.

Most retirement plans are tax-deferred which means:

contributions and earnings are not taxed until you withdraw them at retirement. **Most retirement plans are tax-deferred which means contributions and earnings are not taxed until you withdraw them at retirement. This fact is important since it enables your retirement funds to grow more rapidly. And, typically most people are in a lower tax bracket when they retire so their withdrawals will be taxed at a rate that should be lower than the marginal tax rate of their peak earning years.

The actual rate of interest to be paid annually on a bond, calculated as a percentage of the par value, is known as the:

coupon interest rate

A person with a very short-term time horizon may buy and sell stocks based purely on price trends with the expectation of reversing the position within hours or days. This practice is known as:

day trading

A card that allows you to access your bank account electronically is known as a:

debit card. **A card that allows you to access your bank account electronically is known as a debit card. A debit card functions like an automatic check that instantly reduces the amount in your checking account by the amount of the transaction. In contrast, a credit card gives you access to a line of credit and you are borrowing money. Versus a Smart cards are electronically loaded with a certain amount of money and then function like cash until the preloaded amount is spent.

A traditional pension plan that pays a specific amount at retirement based on a formula payout is known as a:

defined-benefit plan.

The first step in retirement planning is to:

determine what you want to do in retirement.

Payments made by a corporation to the shareholders are known as:

dividends

ETFs can be bought and sold:

during normal trading hours just like a stock. **ETFs can be bought and sold during normal trading hours just like a stock. ETFs trade like stocks but yet most of them represent a specific equity index so provide instant diversification. Mutual funds are purchased or redeemed at net asset value (NAV) after the market closes. And many mutual funds, and not ETFs, can be purchased directly without the use of a broker.

The key factor that typically determines your eventual salary is:

educational attainment

Jill recently bounced a check and is upset about the fees that she was charged. Which of the following strategies will be most helpful in avoiding this situation in the future?

establish overdraft protection

A high risk, largely unregulated investment fund for wealthy investors is called a:

hedge fund

Investors have a tendency to notice overall market trends and take a position designed to follow the market trend. This type of behavior is known as:

herd behavior. Investors have a tendency to notice overall market trends and take a position designed to follow the market trend. This type of behavior is known as herd behavior. For example, if a particular stock or market segment is moving higher some investors will take a position simply based on that trend and not on the underlying fundamentals.

Investment vehicles at the very bottom of the investment pyramid are most likely to have a:

high level of liquidity

A diversified stock mutual fund will help you eliminate the risk associated with:

holding individual assets.

Additional skills, training, or education is often referred to as:

human capital.

Purchasing an asset with the expectation that it will generate a return is known as:

investing

A type of mutual fund that attempts to tailor its holdings to an investor's age and tolerance for risk is known as a(n):

life cycle fund.

A sales commission charge on a mutual fund is referred to as a(n):

load.

Liquid assets are __________ risk and generate __________ returns.

low low

If you elect to receive all your retirement benefits in a single payment it is known as a:

lump-sum option.

When an organization has a funded pension plan the organization:

makes regular contributions to a trustee that will administer the retirement fund.

Mutual fund advisors are compensated by:

management fees

A type of brokerage account that allows you to borrow money from the broker to invest in stocks is called a:

margin account

An order to purchase 100 shares of IBM stock at the prevailing price is called a:

market order

Which of these is considered to be a liquid asset? corporate stock car money market mutual funds

money market mutual funds **Money market mutual funds are considered to be a liquid asset. Cash deposited in this type of account can be accessed within a few days if not sooner. Corporate stock and a Jeep Wrangler could be converted to cash fairly rapidly but you might have to take a loss to do so. Part of liquidity is convertibility to cash without a significant loss in value.

The top issue that leads to divorce is:

money problems

A type of defined contribution plan where the employer makes annual retirement contributions that are a fixed percentage of the employee's salary is known as a:

money purchase plan **A type of defined contribution plan where the employer makes annual retirement contributions that are a fixed percentage of the employee's salary is known as a money purchase plan. These plans will receive a guaranteed annual contribution since they are not based on the organization's profitability but instead based on salary. A thrift and savings plan is a plan where employers match employee contributions to their retirement accounts up to a certain amount. For example, a firm might match contributions up to 5% of the employee's salary. Profit-sharing plans are based on the firm's profitability so contributions can vary substantially from year to year. Contributions are based on an employee's salary but the percentage can vary from year to year. These plans often have a contribution range established where the firm must make a minimum contribution every year but also caps the maximum contribution in high-profit years.

An investment vehicle that pools money from a number of investors and then invests those funds in stocks, bonds, or some financial asset is known as a(n):

mutual fund

A description of a specific mutual fund that lists the fund's objectives, risks and other information is known as a(n):

mutual fund prospectus.

A mutual fund that does not charge any sales commission is called a:

no-load fund

Market risk can also be called:

non-diversifiable risk Market risk can also be called non-diversifiable risk. Market risk is also known as systematic risk and is the risk that an investor must assume that impacts the overall market or system. Unsystematic risk, asset-specific risk, or unique risk are all terms for the type of risk that can be eliminated through diversification. For this reason it is also called diversifiable risk.

Which of the following markets has no listing requirements?

over-the-counter

Financial planners recommend __________ to make it easier to save.

paying yourself first

In what stage do you determine your career goals?

pre-production

When Mark Zuckerburg, the owner and founder of Facebook, decided to allow public ownership of his company the stock offering occurred in the __________.

primary market

Issuers sell new financial claims to investors in the __________.

primary markets

Jorge wrote a check to a local vendor prior to inspecting the vendor's work on his house. However, after inspection he is dissatisfied with the quality of the work. Assuming the vendor has not cashed the check Jorge can:

put a stop payment on the check.

T-bills are short-term debt issued by the U.S. Treasury that are considered to be:

risk-free.

A physical storage location at a financial institution that you can rent and use to store important documents and other small items is known as a:

safety-deposit box.

Investors resell existing stocks to each other in what type of market?

secondary market

Mutual funds that typically invest at least 2/3rds of their assets in a specific industry are known as:

sector funds

When an investor wants to sell shares in an open-end mutual fund they:

sell them back to the mutual fund at net asset value.

If your employer offers to match the first 5% of your retirement contributions you should:

sign up immediately

The single most important factor that determines your value to an employer is your:

skill set

A ______ is similar to a debit card, but differs because the card itself magnetically stores its own accounts.

smart card **A smart card is similar to a debit card, but this card actually magnetically stores its own accounts. Funds are transferred onto the card, which is then used the same way you'd use a debit card. When the funds run out, the card is useless until more funds are magnetically transferred in.

Retirees in the lowest income brackets receive the majority of their retirement income from:

social security

In order to free up funds for savings and investment you must:

spend less than you earn.

Social Security is designed to:

supplement your retirement income.

Financial planners suggest making retirement investments on a __________ basis.

tax-deferred

Some people may postpone saving for retirement since there is so much uncertainty surrounding the future. In behavioral finance this tendency to discount the future is known as:

temporal myopia

The risk-return tradeoff principle in finance is:

the expectation of receiving higher returns for higher risk investments.

A stock's holding period rate of return represents:

the total return earned over a specific period through buying and selling an asset.

A __________ plan is a plan where employers match employee contributions to their retirement accounts up to a certain amount.

thrift and savings **A thrift and savings plan is a plan where employers match employee contributions to their retirement accounts up to a certain amount. For example, a firm might match contributions up to 5% of the employee's salary. A type of defined contribution plan where the employer makes annual retirement contributions that are a fixed percentage of the employee's salary is known as a money purchase plan. These plans will receive a guaranteed contribution since they are not based on the organization's profitability but instead based on salary. Profit-sharing plans are based on the firm's profitability so contributions can vary substantially from year to year. Contributions are based on an employee's salary but the percentage can vary from year to year. These plans often have a contribution range established where the firm must make a minimum contribution every year but also caps the maximum contribution in high-profit years.

One measure of a mutual fund's trading activity is the:

turnover rate

Market risk refers to:

undiversifiable risk

If you have worked at a firm long enough to be eligible for a pension you are considered to be:

vested.

Women need to save more money for retirement since they:

will live on average 7 years longer than men.