ACC 590 Exam 3

A

A diversified portfolio of securities is characterized by: A. dissimilar risk-return characteristics of the financial instruments. B. concentration on a single industry that has the highest growth rate. C. erratic loss potential due to investment in the latest financial vehicles. D. unstable earnings for the entire investment horizon. E. investing in a single security that has the lowest risk and the highest returns.

C

Which of the following characteristics of an investor should be evaluated in order to formulate an effective portfolio strategy? A. Level of educational attainment B. Interest in specific activities C. Level and stability of income D. Level of Internet skills E. Judgment skills to buy and sell securities

C

Which of the following combines some of the operating characteristics of an open-end fund with some of the trading characteristics of a closed-end fund? A. Preferred fund B. Common fund C. Exchange-traded fund (ETF) D. Net asset fund E. Unit investment fund

27.58%

You bought 150 shares of XYZ Corporation 1 year ago at $187.50 per share. The stock is currently selling at $236.72. Over the year, XYZ paid dividends of $2.50 per share. What rate of return did you earn? (Show all work.)

A

You will receive the largest monthly payment under an annuity contract when the annuity disbursement option is the: A. life annuity with no refund. B. life annuity, period certain. C. refund annuity. D. annuity certain. E. temporary life annuity.

D

_____ are highly speculative investments that seek large profits from capital gains. A. Balanced funds B. Growth funds C. Equity-income funds D. Aggressive growth funds E. Exchange-traded funds (ETFs)

A

_____ have no maturity date. A. Common stocks B. Bonds C. Exchange-traded notes (ETNs) D. Insurance policies E. Certificates of deposit (CDs)

C

_____ is a risky short-term investment activity. A. Purchasing life insurance B. Buying real estate C. Speculating in securities D. Investing in mutual funds E. Systematically saving for retirement

D

Lillian has a defined benefit plan that promises an annual retirement benefit based on 2% of her final 3-year average annual salary for each year of service. At retirement, Lillian has 15 years of service and had an average salary of $80,000 over the last 3 years. What is the amount of her annual benefit? A. $65,000 B. $50,500 C. $35,400 D. $24,000 E. $0

True

Many people tend to be too conservative when investing their retirement funds. True or False

C

Marie, a 67-year-old, is receiving Social Security benefits. She received $25,000 in interest and dividends this year. Her Social Security benefits are: A. subject to an earnings test. B. reduced to half because of these earnings. C. not reduced because of these earnings. D. reduced by the federal tax paid on her interest income. E. reduced by a penalty.

B

Mathew purchased 100 shares of Blue Corporation for $100 per share. Currently, the stocks of Blue Corporation are trading at $150. Which of the following is the rate of return on Mathew's investment in one share? A. 65% B. 50% C. 75% D. 80% E. 40%

D

Megan invested in 10 bonds with a total face value of $5,000, issued by Zen Corporation. The bonds paid a contractual 10% interest rate on a semiannual basis until the maturity date. Which of the following is the amount of interest earned on the first payment on a single bond? A. $50 B. $100 C. $500 D. $250 E. $75

D

The Social Security tax rate for an employee remains in effect: A. until the employee's expenses change. B. until the cost of living increases. C. permanently. D. until the employee reaches a maximum wage base. E. until the employee changes jobs.

D

The _____ reflects the total market value of 98 to 99% of all publicly traded stock in the United States. A. Dow Jones Industrial Average (DJIA) B. Standard & Poor (S&P) 500 composite index C. National Association of Securities Dealers Automated Quotation System (Nasdaq) Composite index D. Dow Jones Wilshire 5000 index E. New York Stock Exchange (NYSE) index

D

The average level of Social Security benefits for retirees aged 67 and above is adjusted upward each year with subsequent increases in the: A. retirees' income. B. number of dependents. C. quality of life. D. cost of living. E. preretirement cost of living.

True

The best way to handle individual retirement account (IRA) rollovers is to arrange for the transfer of funds from one firm to another. True or False

B

The cash benefits provided by Social Security come from: A. voluntary contributions made by employees and employers. B. payroll taxes paid by covered employees and their employers. C. state and federal income taxes paid by employees and employers. D. charitable contributions made by the federal government. E. the U.S. Treasury.

C

The current market value of all the securities a mutual fund owns, less any liabilities, on a per-share basis is known as the fund's: A. compounded value. B. par value. C. net asset value (NAV). D. book value. E. liquidation value.

C

The current net profit of Sigma Inc. is $8 million, the market price of the stock is $65, and sales is $50 million. The net profit margin percentage of Sigma Inc. is: A. 10%. B. 28%. C. 16%. D. 8%. E. 22%.

B

The most comprehensive measure of money management costs is the _____, which includes the management fee. A. price/earnings (P/E) ratio B. expense ratio C. rate of return D. portfolio turnover rate E. ratio of net investment income to average net assets

A

The most important reason why people invest is to: A. accumulate funds for retirement. B. save for a major purchase. C. seek shelter from taxes. D. enhance current income. E. save for college education.

C

The new securities sold in primary markets are handled by a(n): A. security exchange council. B. securities dealer. C. investment banker. D. credit bureau. E. insurance agent.

True

The value of a stock depends on its expected stream of future earnings. True or False

False

Traditional defined benefit plans are better suited than cash-balance plans for a mobile workforce. True or False

C

Two investment prerequisites that are essential to developing a successful investment program are: A. ample income and debt. B. ample income and confidential information. C. ample insurance and liquidity. D. an investment plan and a nonmonetary goal. E. inconsistency and risk awareness.

A

When a bond is sold between coupon payment dates, the buyer pays the seller for the _____, which is the prorated share of the upcoming coupon payment. A. accrued interest B. prepaid interest C. bond premium D. bond discount E. discount

True

When completed, an investment plan is a way of translating an abstract investment target into a specific investment program. True or False

D

Changes in the general level of prices within an economy produce: A. business risk. B. financial risk. C. market risk. D. purchasing power risk. E. liquidity risk.

True

Tech stocks often fall into either the growth stock category or the speculative stock class. True or False

B

The Dow Jones Industrial Average (DJIA) is based on: A. 50 stocks. B. 30 stocks. C. 500 stocks. D. 200 stocks. E. 100 stocks.

C

Clara's portfolio is worth $200,000, and her portfolio consists of common stocks worth $56,000. Therefore, equity constitutes _____ of Clara's portfolio. A. 10% B. 33% C. 28% D. 56% E. 61%

C

Compared to mutual funds, exchange-traded funds (ETFs): A. are more cost-effective for investors with a short-term horizon. B. generate higher taxable gains. C. accommodate investors pursuing narrow market segments. D. are more diversified. E. have higher overhead expenses.

False

Contributions to employer-sponsored profit-sharing retirement plans are invested only in securities issued by the employing firm itself. True or False

C

The Smith family owns 200 shares of Elta stock. The company declared a 5% stock dividend. The Smiths now own: A. 200 shares. B. 205 shares. C. 210 shares. D. 420 shares. E. 410 shares.

B

A _____ is a type of municipal bond that is backed by the full faith and credit of the municipality. A. debenture B. general obligation bond C. revenue bond D. zero coupon bond E. equipment trust certificate

B

A bear market condition is associated with: A. investor optimism. B. declining securities prices. C. economic recovery. D. an increased tax rate. E. high returns.

A

A bond selling below par value is selling at: A. a discount. B. its coupon value. C. a premium. D. its maturity value. E. the highest effective yield.

B

A bond was issued at a par value of $1,000 when the interest rate for similar bonds was 8%. Presently, new bonds issued with a similar creditworthiness have a 10% interest rate. Which of the following statements about the bond is most likely to be true? A. It is currently selling for a premium. B. It is currently selling at a discount. C. It is currently selling at par. D. It is likely to be retired. E. The bond's coupon rate will increase.

A

A bull market is characterized by: A. investor optimism. B. low returns. C. economic slowdown. D. falling stock prices. E. lack of growth.

D

A fund that is structured to match the performance of a certain market segment is known as a(n): A. balanced fund. B. money market mutual fund. C. exchange-traded fund (ETF). D. index fund. E. capital fund.

True

A fund's objective is stated in its prospectus. True or False

A

A general-purpose money fund: A. invests in virtually any type of money market investment vehicle. B. limits its investments to short-term, tax-exempt municipal securities. C. limits its investments to short-term securities of the U.S. government and its agencies. D. invests in stock considered to be undervalued in the market. E. limits its investments to real estate properties.

B

A market order is transacted at the: A. lowest price of the day. B. best price when the order is entered. C. limit price. D. price quoted by the broker. E. average price of the stock on the transaction day.

D

A person who is not gainfully employed must start withdrawing funds from his or her Keogh retirement account by age: A. 50. B. 59½. C. 65. D. 70½. E. 75.

A

A stock generally issued by companies expected to provide an uninterrupted stream of dividends and good long-term growth prospects is called a(n): A. blue-chip stock. B. growth stock. C. income stock. D. defensive stock. E. cyclical stock.

C

A stock's dividend yield is calculated as the: A. annual dividend received per share divided by the book value per share of stock. B. book value per share of stock divided by the annual dividend received per share. C. annual dividend received per share divided by the market price per share of stock. D. market price per share of stock divided by the annual dividend received per share. E. earnings remaining after paying preferred dividends divided by the number of common shares outstanding.

D

A stop-loss order: A. is the quickest way to have an order filled. B. allows buy orders to be filled at the lowest price. C. allows stocks to be purchased at the current market price. D. sells a stock when the market price drops below a specified price. E. is used to buy stocks at a 10% margin.

C

A(n) _____ is a service offered by mutual funds that enables an investor to earn a fully compounded rate of return on their investments. A. retirement plan B. deferred withdrawal plan C. automatic reinvestment plan D. automatic investment plan E. systemic withdrawal plan

False

All income from mutual funds that are not held in tax-deferred accounts is taxed at identical tax rates. True or False

C

All mutual funds always charge a: A. transaction fee. B. 12b-1 fee. C. management fee. D. fee on the sale of the shares. E. redemption fee.

A

An _____ provides financial and descriptive information about a firm's operations in the recent past to stockholders and other interested parties. A. annual stockholders' report B. annual tax report C. annual portfolio report D. annual research report E. annual education report

D

An annual contribution of $3,000 to a retirement account that earns 6% will be worth approximately _____ in 20 years. (Round the answer to the nearest whole dollar.) A. $60,120 B. $96,788 C. $100,000 D. $110,357 E. $192,624

D

An annual fee charged by a number of open-end mutual funds that's supposed to be used to offset promotion and selling expenses is called the: A. management fee. B. back-end load fee. C. transaction fee. D. 12b-1 fee. E. low-load fee.

B

An investment that earns interest on interest is said to be earning a: A. discounted rate of return. B. fully compounded rate of return. C. consolidated rate of return. D. risk-free rate of return. E. tax-free rate of return.

D

Bill has worked for Excellent Corp. for 4 years. During this period, Excellent Corp. has contributed $25,000 to his retirement plan. Assuming the company uses graded vesting, how much will Bill be able to roll into an individual retirement account (IRA) if he leaves Excellent Corp. at the end of 4 years? A. $0 B. $5,000 C. $10,000 D. $15,000 E. $20,000

B

Bonds issued by political subdivisions of the U.S. government that are not obligations of the U.S. Treasury are called: A. federal bonds. B. agency bonds. C. Treasury bonds. D. municipal bonds. E. trust bonds.

False

Bonds typically have higher long-term returns when compared to stocks. True or False

D

Companies with a great deal of long-term debt are considered to have high _____ risk. A. market B. event C. business D. financial E. liquidity

A

Damien plans to buy a share at $120 and hold it for 5 years. During this period, he would receive average annual dividends of $4 a share. He expects to receive $145 at the end of the 5-year period when he sells the share. What are the keystrokes used to calculate the rate of return on the investment? A. N = 5, PV = -120, PMT = 4, FV = 145 B. N = 5, PV = 120, PMT = 4, FV = -145 C. N = 5, PV = -145, PMT = -4, FV = 120 D. N = 4, PV = -120, PMT = 5, FV = 145 E. N = 4, PV = 145, PMT = 5, FV = -120

False

Diversification of investment securities increases risk. True or False

True

Dividend income, capital gains distribution, and change in the fund's share price are all potential sources of returns for a mutual fund investor. True or False

False

Earnings per share (EPS) indicates to the stockholders the amount of dividends earned. True or False

A

Exchange-traded funds (ETFs): A. have become more popular as a form of investment in recent years. B. are closed-end funds with a fixed number of shares outstanding. C. always distribute their capital gains to fund holders, resulting in low taxes. D. are actively managed by investors, resulting in high costs and high taxes. E. fill their buy and sell orders at the closing prices at the end of the trading day.

A

Gordon and Lisa estimate that they will need $1,875,000 in 40 years for their retirement fund. If they can earn 8% annually on their funds, how much do they need to save annually? (Round the answer to the nearest whole dollar.) A. $7,238 B. $7,987 C. $8,103 D. $9,234 E. $9,875

A

Having money taken at regular intervals from your paycheck and put into a mutual fund is an example of: A. an automatic investment plan. B. an authorized deduction plan. C. a systematic withdrawal plan. D. conversion privileges. E. an index plan.

C

High-grade corporate bond funds invest chiefly in investment-grade securities rated _____ or better. Group of answer choices A. AA B. D C. BBB D. CCC E. AAA

E

Jamie has worked for ABC Printing for 5 years. During this period, ABC Printing has contributed $25,000 to her noncontributory retirement plan. Assuming ABC uses cliff vesting, the longest period allowed, how much will Jamie be able to roll into an individual retirement account (IRA) if she leaves ABC Printing? A. $0 B. $5,000 C. $10,000 D. $20,000 E. $25,000

C

John Smith is in the 28% tax bracket. If he were to purchase a $1,000 municipal bond that has a stated interest rate of 6.9%, what would the fully taxable equivalent yield be? (Round the answer to two decimal places.) A. 6.90% B. 8.26% C. 9.58% D. 12.11% E. 14.63%

B

If you withdraw funds from a Keogh plan before age 59½, you will have to pay a _____ federal income tax penalty. A. 5% B. 10% C. 15% D. 20% E. 25%

False

In order to maximize returns, an investor should stick to investing in load funds instead of no-load funds. True or False

Apple

In terms of market capitalization, [Apple | IBM] is the largest company in the world.

A

In the stock market, the market cap of a large-cap stock is: A. more than $10 billion. B. more than $20 billion. C. between $2 to $10 billion. D. less than $2 billion. E. between $5 to $10 million.

A

Instructing your broker to buy or sell a stock at a particular price is a: A. limit order B. market order C. margin order D. regular order E. stop order

False

It really makes little difference whether you start retirement savings at age 25 or at age 45. True or False

A

Jacque Solis, a 38-year-old, is leaving her current job and would like to take a long vacation before a new job. She has $62,000 in an individual retirement account (IRA) that she would like to live on during this period. If she is in a 25% marginal tax bracket, how much will she have left after paying taxes and penalties? A. $40,300 B. $43,500 C. $37,700 D. $29,000 E. $14,500

B

Melissa's retirement plan is described in her employee handbook as follows: ​ Noncontributory Cliff vesting (100%) after 3 years of full-time employment Monthly retirement benefits based on average salary over the last 3 years of employment and the total number of years worked for the company ​ Which of the following statements about this retirement plan is true? A. Melissa will have to pay money into the plan. B. If Melissa leaves this company before working full time for 3 years, she will not receive any benefits. C. Melissa will have to make investment decisions regarding her retirement plan. D. Melissa's retirement plan is a defined contribution plan. E. For Melissa, vesting takes place gradually over the first 3 years of employment.

True

Mutual funds and exchange-traded funds (ETFs) provide professional money management. True or False

True

Mutual funds provide professional management and diversification that individual investors—especially those with limited resources—can rarely obtain on their own. True or False

B

One of the biggest financial benefits of starting early to save for your retirement fund is related to: A. the increased cost of living. B. compound interest. C. lower tax deductions. D. inflation. E. reduced expenses.

A

Planning for retirement over a series of short-run time frames requires: A. stating your retirement income objectives as a percentage of your present earnings. B. the retiree to wait until age 50 to start planning. C. annual savings of at least $100,000. D. investment of retirement funds in more risky investments. E. estimating the inflation factor by reducing inflation projections.

True

Profit-sharing plans enable employees to participate in the earnings of their employer. True or False

E

Retirement planning starts with: A. determining the size of the required nest egg. B. considering the longevity of the retiree. C. defining the investment program. D. determining the interest on income-earning assets. E. setting retirement goals.

False

Sector funds are often attractive to individuals wishing to avoid high exposure to risk. True or False

A

Selling your back-end load mutual fund shares might result in a charge called the: A. redemption fee. B. usage fee. C. management fee. D. recordkeeping fee. E. 12b-1 fee.

False

Sheltering income from taxes is an illegitimate goal. True or False

A

Stocks whose prices tend to increase when the economy is in an expansionary stage and decline during a contractionary stage are called: A. cyclical stocks. B. defensive stocks. C. speculative stocks. D. income stocks. E. tech stocks.

C

Suppose the earnings per share (EPS) of a stock is $2, and the current price/earnings (P/E) ratio is 10. What is the current price of the stock? A. $5 B. $8 C. $20 D. $40 E. $35

B

The decision on how to divide your portfolio among different types of securities is known as: A. arbitration B. asset allocation C. portfolio tracking D. estate planning E. investment planning

C

The employer retirement plan that is intended to promote employee productivity and allows the employer to vary the amount of annual contributions is a: A. qualified defined contribution plan. B. thrift and savings plan. C. profit-sharing plan. D. 401(k) plan. E. 403(b) plan.

True

The idea of a mutual fund is based on the idea of pooled diversification. True or False

False

The individual manager of a mutual fund or an exchange-traded fund (ETF) has little to do with the fund's success. True or False

A

The main advantages of common stock ownership are: A. potential substantial returns and high liquidity. B. potential substantial returns and voting rights. C. a high interest payment and availability of market information. D. no direct management and guaranteed dividends. E. low risk and guaranteed dividends.

B

The market price per share of Zinc Corporation is $145, and earnings per share (EPS) is $20. What is the price/earnings (P/E) ratio of Zinc Corporation? A. 10.25 B. 7.25 C. 2.25 D. 12.36 E. 15.00

D

Which of the following individuals would a portfolio containing 80 to 90% in common stocks be appropriate for? A. John and Vanessa, a retired couple in their mid-60s B. Michelle, a divorced middle-aged mother who has custody of her children, ages 2 and 6, and earns $60,000 a year in salary C. Meredith and Joe, a blue-collar, two-income family with 2 children, both of whom will be starting college within the next 3 years D. Ryan and Ramona, newlyweds who are in their mid-20s, have steady jobs, and are putting money aside for retirement E. Antonio and Lora, a couple in their mid-50s who earn a combined $150,000 in salary and are planning to retire in 10 years

D

Which of the following investments has the highest liquidity risk? A. Common stock B. Corporate bond C. Treasury bond D. Land E. Mutual fund share

C

Which of the following is a difference between an exchange-traded fund (ETF) and a mutual fund? A. An ETF is a fixed-income instrument, whereas a mutual fund is a variable-income instrument. B. An ETF can only be traded at the end of the day, whereas a mutual fund can be bought or sold throughout the trading day. C. Investors can buy and sell ETF's much like individual shares of stock. D. An ETF is a convertible security, whereas a mutual fund is a nonconvertible security. E. An ETF is a hybrid security, whereas a mutual fund is not a hybrid security.

D

Which of the following is a reason to invest in mutual funds? A. Mutual funds are free of any hidden costs. B. Mutual funds earn tax-free returns. C. Mutual funds provide a guaranteed return in spite of market risks. D. Mutual funds provide diversification of invested funds. E. Mutual funds do not charge any fees.

D

Which of the following is a requirement for nearly all workers today to qualify for full retirement benefits under the Social Security system? A. The individual must be employed in a job covered by Social Security for at least 60 quarters, or 15 years, which need not be consecutive. B. The individual must be employed in a job covered by Social Security for at least 50 quarters, or 12.5 years, which need not be consecutive. C. The individual must be employed in a job covered by Social Security for at least 50 consecutive quarters, or 12.5 years. D. The individual must be employed in a job covered by Social Security for at least 40 quarters, or 10 years, which need not be consecutive. E. The individual must be employed in a job covered by Social Security for at least 40 consecutive quarters, or 10 years.

D

Which of the following is the principal source of income for the average retiree? A. Earnings from income-producing assets (such as stocks and bonds) B. Earnings from full- or part-time jobs C. Pension plans D. Social Security E. Annuities

D

Which of the following statements about a stock's beta is true? A. Stocks with betas of less than 2.0 have low price volatility. B. High-beta stocks are relatively conservative investments. C. The higher the beta, the more confidences that investors are presumed to have in a given security. D. Most stock betas are positive. E. Stocks with positive betas are considered to be highly volatile.

D

Which of the following statements about balanced funds is true? A. Balanced funds are most suitable for investors who can tolerate risk and price volatility. B. Balanced funds put most of their money into equities. C. Balanced funds are viewed by many high-income investors as a type of tax-sheltered investment. D. Balanced funds generally keep 30% to 40% of their portfolios in bonds. E. Balanced funds look for stocks with relatively low price/earnings (P/E) ratios, high dividend yields, and moderate amounts of financial leverage.

B

Which of the following statements about exchange-traded notes (ETNs) is true? A. ETNs are more similar to mutual funds than to exchange-traded funds (ETFs) B. ETNs are backed only by the issuer of the securities, such as a bank. C. ETNs have no maturity dates D. ETNs cannot be sold short E. ETNs can be bough or sold only at the end of the day

A

Which of the following statements about risk is true? A. The higher the risk, the higher the expected return. B. The higher the risk, the lower the expected return. C. The lower the risk, the greater the maturity value of the investment. D. The higher the risk, the lower the maturity value of the investment. E. The higher the risk, the lower the risk-free rate.

B

Which of the following statements regarding Social Security benefits is true? A. Social Security benefits are retirement benefits extended only to self-employed people. B. In two-income families, both husband and wife may be eligible for full benefits. C. Social Security benefits are available to military personnel only. D. Social Security benefits may be reduced if the recipient is under age 55 and still gainfully employed. E. To obtain Social Security benefits, you must participate in enough quarters.

C

Which of the following statements regarding individual retirement accounts (IRAs) is true? A. Traditional IRAs can be opened by anyone with a modified adjusted gross income (MAGI) of more than $50,000. B. A 10% tax penalty applies to any funds withdrawn from a traditional IRA before 70½. C. Withdrawals from Roth IRAs are tax free, so long as the account has been open for 5 years and the individual is past the age of 59½. D. It is not possible to convert a traditional IRA to a Roth IRA. E. Contributions made to traditional IRAs are made with after-tax dollars.

A

Which of the following terms best describes a day trader? A. Speculative B. Long-term perspective C. Money market maker D. Buy-and-hold mentality E. Illegal gambler

C

Which of the following types of bonds is unsecured? A. Mortgage bonds B. Equipment trust certificates C. Debentures D. Agency bonds E. Treasury bonds