3.00 Test - Finance

An employer-sponsored, tax-deferred retirement plan is known as a(n)

401(k). An employer-sponsored, tax-deferred retirement plan is known as a 401(k). A DRIP (Dividend Reinvestment Plan) is a way for investors to accumulate more and more shares of a company's stock, without having to pay the standard brokerage fees for purchasing them. A DSP (Direct Stock Purchase) is a plan in which investors make an initial stock purchase directly from the company, bypassing the brokerage house and its associated fees. An IRA (Individual Retirement Account) is a tax-deferred retirement plan you set up for yourself.

Which of the following is not found in a company's annual report:

A listing of all the things that went wrong. A company's annual report is usually a glossy, four-color print piece in which the key management tries to shine the best possible light on what the company did that year and what the important achievements were. Management also may provide some ideas on where the company will go next. The annual report is not a place where management wants to highlight all the things that went wrong.

Robyn bought $100 worth of stock in a company, and now it's worth $150. This is an illustration of

Capital appreciation. Robyn's story is an illustration of capital appreciation. Capital appreciation is an increase in the price of the stock you own. Robyn's stock is now worth more than what she paid for it. A stock exchange is a place (physical or virtual) where stocks are traded by brokers who represent buyers and sellers. A stock split is the division of a corporation's existing stock into multiple shares. Dividends are sums of money paid to investors as earnings on their investments.

Which of the following represents one way assessing a mutual fund is different from assessing a stock:

Combined value is important, not individual value. One way assessing a mutual fund is different from assessing a stock is the importance of the combined value of the fund's investments over the individual value of each investment. Minimum investment requirements may or may not be low for a mutual fund compared to a stock. A PEG ratio shows whether the market reflects a company's growth potential. With mutual funds (as with stocks), investors' goals and abilities are important.

Before you invest, you should

Conduct thorough research. Before you invest, you should conduct thorough research. The stock market can seem like a big, bad place, and investing is a tricky business. But that doesn't mean you shouldn't do it—it just means you need to do your homework before jumping in and investing. Every successful investor realizes the importance of thorough research. You shouldn't put your money into any investment without getting all the facts. Some of the facts you'll need to learn come from researching the investment, and some of the facts come from taking a close look at yourself. You don't need to graduate from college, be 25, or own a car before investing—the sooner you get started, the better.

Since John wants to know the bond's interest rate, he needs to look at the bond's

Coupon. The bond's interest rate is its coupon rate. The issuer is the corporation or governing body "issuing" the bond, or borrowing the money. The maturity date is the day when the bond will be repaid. The par value is the original amount of money borrowed.

Because stocks in pharmaceutical companies hold their value regardless of the state of the economy, they are known as __________ stocks.

Defensive. Because stocks in pharmaceutical companies hold their value regardless of the state of the economy, they are known as defensive stocks. Defensive stocks belong to companies whose products are necessities no matter what. Cyclical stocks are stocks whose performance is tied to the overall economy; when the economy expands, these stocks rise quickly, and when the economy contracts, they fall quickly. Speculative stocks are issued by companies that have not yet established themselves. Penny stocks are speculative stocks that sell at very low prices, usually less than $1 per share.

Too much diversification in a financial portfolio can

Dilute the value of big gains on an individual stock. Too much diversification in a financial portfolio can offset big gains from one particular stock. In fact, too much diversification can lead to average performance, instead of the above-average performance investors desire. Having an over-diversified portfolio does not affect what other investors or fund managers do, nor does it prevent any stock from growing in value.

Teri decided to invest in a few different mutual funds rather than put all her investment dollars into one or two individual stocks. A stock in one of her mutual funds went bust, but since her money was spread out, Teri wasn't significantly affected. What advantage of mutual funds does Teri's situation illustrate?

Diversification. Teri's situation illustrates diversification. Diversification means spreading out your investment dollars among a number of different securities. If Teri had $10,000 to invest, and she invested all $10,000 in one stock, she'd lose everything if the stock went bust. It's smart to invest in several different stocks and other types of securities, but doing so on your own requires a lot more time, effort and money than you would probably be able to give. Investing in mutual funds takes care of the problem, since mutual funds contain many different securities, often 100 or more. Convenience refers to the relative ease with which you can trade mutual funds, and liquidity refers to the ease with which you can convert your investments into cash. Professional money man-agement refers to the full-time fund managers who make investment decisions for a mutual fund.

A company that Marcus invested in has earned a profit, and now Marcus is receiving a cash payment. This is an illustration of

Dividends. Marcus' cash payment is an illustration of dividends. When the company you invest in makes a profit, you may be paid a dividend, or a portion of the company's earnings. The company's board of directors decides whether or not to pay dividends; it is not a legal requirement, even if the company has made a profit. When a company does decide to pay out a dividend, it can do so in a variety of different ways, but the most common is cash. A stock exchange is a place (physical or virtual) where stocks are traded by brokers who represent buyers and sellers. A stock split is the division of a corporation's existing stock into multiple shares. Capital appreciation is an increase in the price of the stock you own.

Sammy received one share of stock in Nike, Inc. as a gift. He wondered how much of the company's profit went to his single share, so he divided net income by the number of outstanding shares of common stock. This common ratio is called

Earnings per share. Dividing net income by the number of outstanding shares of common stock results in a financial ratio called earnings per share. It is not gross profit margin, which is calculated by dividing gross profit by sales; return on equity, which is calculated by dividing net income by book value; nor price-earnings, which is calculated by dividing stock price by earnings per share.

Publicly-traded companies are required by law to provide

Financial statements. Publicly-traded companies are required by law to provide financial statements to their shareholders every 90 days. Company report cards and yearly newsletters are not typical items that they are required to provide. Stock research is usually something that external sources provide to stockholders.

Return on equity (ROE) measures management's ability to make a profit

From the money that shareholders have invested. Return on equity (ROE) looks at management's ability to make a profit with the money that shareholders have invested. It does not consider management's ability to make a profit from the money generated by sales, by more efficient operations, or by owning shares of other firms.

What might a dividend payout tell you about a company?

It's a well-established company. Typically, well-established companies are the ones that pay dividends. Companies that are still growing tend to put their profits back into their companies; and, therefore do not pay dividends. Whether or not a company is trying to rid itself of cash, or is paying back a loan, cannot be determined by the numbers in the dividend column of a stock table.

Sales figures are most helpful to investors when they are used to measure

Long-term sales growth. When considering sales figures, sales growth over the long term is most helpful to investors. Consumer response to promotions may be reflected in sales growth, but it is not particularly helpful to investors. One-year increases and decreases are within too short of a time frame to be very useful to investors. A company's share of the market, in terms of sales, is useful in establishing a firm's presence, but is not necessarily useful to investors who want to value the stock.

The Cutting Edge Company is very popular with investors, who keep buying shares even though stock price is increasing. In this case, the company's __________ value is increasing.

Market. Valuing a stock based on how much investors are willing to pay for it is called market value. It is an economic value, not an accounting value. It also does not take into consideration intrinsic or underlying value.

Which of the following is an ideal investment if you have a need for liquidity:

Money market account. A money market account is an ideal investment if you have a need for liquidity because it is easy to withdraw money from without penalty. 401(k)s, bonds, and CDs all have penalties for early withdrawal.

Which of the following is the least likely to be a valid reason for making a significant change in your personal asset allocation:

New car purchase. Buying a new car is not usually sufficient reason for changing one's asset allocation. Major personal changes, such as marriage or the birth of a child, and major economic events, such as a significant change in inflation, are valid reasons for making changes in personal asset allocation.

When should an investor sell his/her investments?

Not very often. An investor should not sell his/her investments very often. Frequent selling is common in market timing. Investments that lose money in the short term are not necessarily bad performers over time. In general, investors should avoid selling for emotional reasons, such as "feeling like" making a change.

For assessing a stock's value, which of the following is not a qualitative factor to consider:

Offering more healthful food. When assessing a stock's value, consider qualitative factors such as staying on top of trends, paying the CEO a reasonable amount, and employing experienced managers. A restaurant might offer more healthful food when it strives to stay on top of trends.

It's a good idea for an investor to watch the numbers on a stock table

Over a period of time. Watching numbers over a period of time is a good idea because investors can get a sense of what is normal for a stock price. Looking at the numbers once a year, on a given day, or when dividends are paid does not give you enough time to obtain this kind of information.

Which of the following is an appropriate investment objective for a mutual fund with a buy-and-hold approach:

Seeking long-term capital appreciation. An appropriate investment objective for a mutual fund with a buy-and-hold approach is to seek long-term capital appreciation. The other three options—selecting stocks with superior growth potential, investing primarily in a diversified portfolio, and covering a broad range of industries—are not so much related to buy-and-hold as they are to growth and diversification.

If you are investing for a goal that you hope to reach within three years, you are investing for a

Short-term time horizon. A short-term time horizon means you are investing for a goal you want to reach in less than five years; if you are investing for a three-year goal, you are on a short-term time horizon. An intermediate-term time horizon is 5 to 15 years, and a long-term time horizon is longer than 15 years. Risk-tolerant time horizon is not a term that is used in investing.

Form 10-K is most like

The annual report. Form 10-K is the annual report that a company must file with the SEC. It is less attractive than the annual report that companies send to their shareholders. Form 10-Q is a quarterly report. The bottom line and cash flow statements appear in 10-Ks.

The numbers listed in a stock table's 52-week high and low column tell you

The range of prices for the year. The numbers in a stock table's 52-week high and low column tell you the range of the prices for the year. But, the numbers simply give the range for the year. Alone they do not tell an investor if the stock is overvalued, what the best price for the stock is, or where the range should be.

Which investments, in particular, should an investor sell?

Those with the least potential for the future. An investor should sell the investments with the least potential for the future. Those with the most potential for the future should remain because they support the investor's goals. Investment performance in the most recent quarter—whether good or bad—should not be a major consideration in identifying which investments to sell. The potential for positive performance in the long term is more important than short-term ups and downs.

Which of the following is not a reason that companies issue stock:

To gain respect. Companies do not issue stock to gain respect, but rather because they need the money. Companies need to raise money for a variety of different reasons—to fuel growth and expansion, to develop new products, to acquire other companies, and more.

The stock table column that tells you how many shares were traded that day is labeled

VOL. VOL is short for Volume (sometimes called Sales). It records how many shares were traded that day. NET CHG stands for Net Change, or the difference between the closing price and the previous day's price. DIV is short for dividend, which is a portion of a company's profits, paid to shareholders each year. YLD% stands for Yield Percentage, which is determined by dividing the dividend into the current stock price.

Which type of stock is considered a "bargain"?

Value. A value stock is considered a "bargain" because it has been overlooked by investors and is, therefore, trading at a lower-than-average price. An income stock is a stock that pays higher-than-average dividends. A domestic stock is a stock issued by a company in the country where you live. A growth stock is a stock that achieves capital appreciation rather than paying dividends.

Which of the following can you not learn about a company by reading a stock table:

What breaking news affected the company that day. While breaking news about a company can be easily found in a newspaper, financial publication, or web site, stock tables deal with the actual numbers. Therefore, investors would learn if the stock is up or down, what the stock's yearly price range is, and what the day's volume was.

What a bond brings you over a period of time at a particular price is called the bond's

Yield. The yield is what the bond may bring you over the time period at a certain price. The bid price is what others are willing to pay for the bond. Liquid investments are ones in which the investor has immediate access to the invested funds. The maturity date is the day when the bond will be repaid.

Which of the following factors does not influence your investment choices:

Your parents' investment choices. Your parents' investment choices do not influence your investment choices because what's right for them may not be right for you. They are at a different age and life phase than you and have a different time horizon. Your age, your current amount of income, and your marriage status are all personal factors that influence your investment choices.