Module 3 Quiz
LAC Corporation stock is currently trading for $180 per share. If the company institutes a 3-for-2 stock split, calculate the company's stock price following the stock split. A) $100 B) $240 C) $120 D) $90
The answer is $120. The company's new stock price will be $120, calculated as follows: $180 ÷ 3 × 2 = $120. LO 3.2.1
John Hawkins began purchasing VNB stock two years ago. He has followed a dollar cost averaging approach by investing $1,500 every six months for the last two years. The following data depicts John's purchases: Date Price of Stock Number of Shares Purchased 9/30/X7 $25.00 60 9/31/X8 $22.06 68 9/30/X8 $20.83 72 3/31/X9 $26.79 56 What is John's average cost per share of VNB? A) $24.39 B) $19.53 C) $22.56 D) $23.44
The answer is $23.44. John purchased 256 shares (60 + 68 + 72 + 56) and invested $6,000 over this period. Divide the total dollars invested by the number of shares purchased to obtain the correct answer. LO 3.5.1
John made these investments over a four month period into ABC Growth and Income fund. What is the average cost per share? Month Amount Invested Price Per Share No. of Shares January $600 $2030 February $600 $2425 March $600 $3020 April $600 $4015 Total $2,400 $11490 A) $28.50 B) $26.67 C) $32.50 D) $35.67
The answer is $26.67. The average cost per share equals $2,400 (the total investment) ÷ 90 (the total number of shares purchased), or $26.67 per share, whereas the average price per share is $28.50 ($114 ÷ 4). LO 3.5.1
Patrice Patterson began investing last year in the Apex Fund. She is investing $500 every quarter and wants to know what her average cost per share (basis) has been. These are the prices of the Apex fund at the end of each quarter when she made her purchases: $35.50, $38.90, $65.70, $72.50, and $89.00. What is her average cost per share? A) $41.44 B) $53.12 C) $60.32 D) $63.88
The answer is $53.12. It is calculated as follows: $ Amount Share Price # of Shares Purchased$500 $35.50 14.0845 $500 $38.90 12.8535 $500 $65.70 7.6104 $500 $72.50 6.8966 $500 $89.00 5.6180 TOTAL 47.063 shares $2,500 ÷ 47.063 shares = $53.12 LO 3.2.1
Alice Vinton began purchasing a mutual fund several years ago. She has followed a dollar-cost averaging approach by investing $2,400 each year for five years. The following data depict Alice's purchases: YearInvestmentShare Price1$2,400$652$2,400$703$2,400$754$2,400$665$2,400$77 What is Alice's average cost per share? A) $36.92 B) $70.60 C) $96.58 D) $70.28
The answer is $70.28. YearInvestmentShare PriceShares1$2,400$65=36.9222,400÷$70=34.2932,400÷$75=32.0042,400÷$66=36.3652,400÷$77=31.17$12,000170.74$12,000÷170.74=$70.28 LO 3.5.1
Acme Electric Company announces a cash dividend of $0.50 per share on August 5, to be paid on September 20, the payable date. The company also announces that the record date will be August 25. Bob Johnson purchases 100 shares of Acme on August 24. Based on this information, choose the CORRECT statement regarding the dividend payment. A) Bob will receive the dividend, because he purchased the shares before the ex-dividend date. B) Bob will receive the dividend, because he purchased the shares before the record date. C) Bob will not receive the dividend, because he did not purchase the shares before the ex-dividend date. D) Bob will not receive the dividend, because he purchased the shares after the announcement date.
The answer is Bob will not receive the dividend, because he did not purchase the shares before the ex-dividend date. In order to receive the dividend, Bob must purchase the shares before the ex-dividend date. The ex-dividend date is one business day before the record date. To receive the dividend, Bob must have purchased the shares by August 23. LO 3.2.1
Advantages of unit investment trusts include which of these? Stable periodic income Diversification Active management of the portfolio A) I and II B) I, II, and III C) II and III D) I and III
The answer is I and II. Because the portfolio is fixed, the income stream is predictable. The number of different bonds in the portfolio provides investors with a diversified portfolio. LO 3.3.1
Which of these statements are CORRECT of mutual fund dividend distributions? The fund pays dividends from net investment income. A single taxpayer may exclude $100 worth of dividend income from taxes annually. An investor is liable for taxes on distributions whether a dividend is a cash distribution or is reinvested in the fund. An investor is not liable for taxes if he or she automatically reinvests distributions. A) II and IV B) I and II C) I, II and III D) I and III
The answer is I and III. Mutual funds pay dividends from net investment income, and shareholders are liable for taxes on all distributions, whether reinvested or taken in cash. LO 3.3.1
Identify which of these statements regarding unit investment trusts (UITs) is CORRECT. Units are sold at net asset value plus a commission for the broker executing the transaction. Like stocks, UITs are traded on the major exchanges. During the term of the trust, unit holders are taxed in the same manner as owners of variable annuities. Upon maturity, the securities are generally liquidated and the proceeds distributed to the investor or trust beneficiaries. A) I and II B) I and IV C) III and IV D) I, III, and IV
The answer is I and IV. Statements II and III are incorrect. UITs are sold in the secondary market, but not on the major exchanges. During the term of the trust, unit holders are taxed in the same manner as shareholders of mutual funds with capital gains earned by the trust passed through and taxed to the unit holders. Dividends are taxed as ordinary income in the year earned. LO 3.3.1
Identify the CORRECT statements regarding warrants. Warrants give the owner the right to purchase a specified number of shares for a specified period at a specified price. Warrants are typically written with a maturity date of nine months. Warrants must include standardized terms required by the Options Clearing Corporation. Warrants are issued by a corporation rather than written by an individual. A) I and IV B) I, II, III, and IV C) III and IV D) I and II
The answer is I and IV. Warrants typically have a maturity date of several years, not months, and are customized to fit the needs of the issuing corporation. LO 3.1.1
Which of the following are considered bond classifications for multisector bond funds? Foreign bonds High-dividend-paying common stocks Commodities A) I only B) II and III C) I and II D) I, II, and III
The answer is I only. Multisector bond funds typically purchase three types of bonds: U.S. government bonds, high-yield corporate bonds, and foreign bonds. LO 3.3.1
Which of these is a correct justification for use of an investment in a client's portfolio? Blue chip common stocks because they provide a hedge against inflation FNMA (Federal National Mortgage Association) securities because they are backed by the full faith and credit of the U.S. government Aggressive growth stocks because they perform better during economic contractions A) I only B) II and III C) I and III D) I and II
The answer is I only. Stocks generally are considered an inflation hedge; in periods of hyper-inflation, this may not be true, but the question does not ask about periods of hyper-inflation. FNMA securities are not backed by the full faith of the government (the government did step in as a result of the credit crisis of 2008, but there has not been a commitment to permanently back FNMAs in the same way that GNMAs (Government National Mortgage Association) have historically been backed). LO 3.1.1
Which of the following methods can be used in determining the basis in a mutual fund when the shares were acquired at different times? Specific identification First in, first out (FIFO) Average cost method A) I and III B) II only C) II and III D) I, II, and III
The answer is I, II, and III. All of these can be used to make this determination. LO 3.3.1
Equity income funds may hold which of these types of securities? Income-producing common stocks Convertible bonds Convertible preferred stocks A) I and II B) I and III C) II and III D) I, II, and III
The answer is I, II, and III. All three types of securities may be in an equity income fund. LO 3.3.1
Exchange-traded funds (ETFs) generally offer which of these? Tax efficiency Low expense ratios Active professional management Marketability A) I, II, III, and IV B) I, II, and IV C) I, II, and III D) I and II
The answer is I, II, and IV. Tax efficiency, low expenses, and marketability are all characteristics of ETFs. Professional management is incorrect because virtually all ETFs are, in effect, index funds, which are passively managed. LO 3.4.1
Which of the following regarding mutual fund performance is CORRECT? Past performance is a reliable predictor of future performance. Past performance offers some indication as to the competency of fund managers. A) Both I and II B) II only C) I only D) Neither I nor II
The answer is II only. Numerous studies have confirmed that past performance is not a reliable predictor of future performance. Statement II is correct. LO 3.6.1
Identify which of these methods may be used to trade exchange-traded funds (ETFs). Investors can buy or redeem shares from the fund family in lots of 1,000. Investors can trade ETFs in the secondary market by using a broker. ETFs can be purchased on margin. ETFs may be sold short. A) II, III, and IV B) II only C) I and II D) I and III
The answer is II, III, and IV. Some ETFs may be redeemed through the fund family but usually in lots of 50,000 shares or more. LO 3.4.1
Which of these statements regarding unit investment trusts (UITs) are CORRECT? A bond UIT has a yield to maturity. UIT sponsors must make a secondary market in the UITs they create. UITs have management fees lower than mutual funds. A bond UIT does not replace bonds that are called. A) III and IV B) II and III C) I and IV D) I and II
The answer is III and IV. A bond UIT has an estimated return but cannot offer a yield to maturity because various bonds in the UIT have different maturities and some of the bond issues might be called before maturity. UIT sponsors are not required to make a secondary market in the UITs they create. UITs are not managed so their management fees are typically lower than those of mutual funds. If a bond issue is in a UIT and subsequently called, that issue is not replaced. LO 3.3.1
LFM Corporation declared a record date of Wednesday, May 16, for its next quarterly cash dividend. Determine the last day an investor can purchase LFM stock and receive the current dividend. A) Tuesday, May 15 B) Monday, May 14 C) Friday, May 11 D) Wednesday, May 16
The answer is Monday, May 14. To receive a cash dividend, an investor must be owner of record as of the close of business on the record date. The record date is the first business day after the ex-dividend date. To be listed as an owner, the investor must purchase the stock before the ex-dividend date, or May 15. Hence, the investor must purchase the stock no later than Monday, May 14, to be entitled to receive the dividend. LO 3.2.1
Dividend reinvestment plans offer which of these advantages? A) A convenient means to accumulate shares B) A means for the company to retain more earnings C) An increase in the stock's par value D) A means for the company to repurchase some of its shares
The answer is a convenient means to accumulate shares. The advantage to an investor is the saving of commissions by using a dividend reinvestment plan (DRIP). The advantage is to an investor, not to the company. The use of a DRIP has no effect on the stock's par value. A dividend reinvestment program has no effect on the company's ability to retain more earnings. LO 3.2.1
When a company issues an option to buy its stock at a specified price within a specified time period, it is known as a A) long call option. B) warrant. C) rights offering. D) short put option.
The answer is a warrant. A warrant can only be created by corporations and is an option to buy its stock at a specified price within a specified time period. LO 3.1.1
To be on a corporation's books as holder-of-record (and thus have a right to the next dividend payment), the investor must purchase stock A) before the payment date. B) before the ex-dividend date. C) on the declaration date. D) on or after the ex-dividend date.
The answer is before the ex-dividend date. Ex-dividend means "without dividend." Therefore, all purchases made on or after the ex-dividend date are not entitled to the next dividend to be paid. The ex-dividend date is one trading day before the record date. LO 3.2.1
Rhett recently purchased a bond with attached warrants that afford him the opportunity to participate in the appreciation of the underlying stock. Which of the following statements correctly describes warrants? Warrants are customized to fit the needs of the issuing corporation. Warrants typically have a maturity date of several years. A) Neither I nor II B) II only C) I only D) Both I and II
The answer is both I and II. If corporations issue warrants, they usually do so in conjunction with new bond issues or preferred stock issues. These warrants give the bond or stock purchaser a sweetener or equity kicker, making the issue more attractive to buyers. LO 3.1.1
Identify which of these statements regarding rights and warrants is CORRECT. Rights provide current common stockholders with the ability to retain their ownership percentage when new shares of stock are issued. Warrants are typically attached to new bond issues to attract investors. A) II only B) I only C) Neither I nor II D) Both I and II
The answer is both I and II. Rights provide current stockholders with the ability to maintain their percentage ownership interest in the corporation when new stock is issued. Warrants give the bond purchasers a sweetener, making the issue more attractive to buyers. LO 3.1.1
Identify the entity that issues guaranteed investment contracts (GICs). A) Insurance companies B) Open-end investment companies C) Credit unions D) Commercial banks
The answer is insurance companies. GICs are issued by insurance companies. They are called guaranteed investment contracts because their rate of return is guaranteed by the insurance company for a fixed period. LO 3.4.1
All of these statements correctly explain warrants except A) a warrant differs from a traditional option security in terms of maturity. B) a warrant typically has a maturity date of several years. C) issuing a bond with an attached warrant may permit the corporation to increase the coupon rate to entice investors to make the investment. D) a warrant is a long-term call option issued as a sweetener with a new bond issue.
The answer is issuing a bond with an attached warrant may permit the corporation to increase the coupon rate to entice investors to make the investment. Warrants give the bond purchaser a sweetener, which makes the issue more attractive. Issuing a bond with a warrant will typically allow the corporation to lower the coupon rate necessary to entice the investor to make the investment. LO 3.1.1
All of these are examples of investment strategies for mutual funds, except A) leverage through borrowing. B) short selling. C) lack of diversification. D) manager bias.
The answer is manager bias. This is not a strategy discussed in the module text. All others are examples in addition to manager flexibility, investment style, and lending securities. LO 3.6.1
Which one of these is NOT a typical key element that separates hedge funds from mutual funds? A) Illiquid securities are often used in hedge funds B) Derivatives are used extensively by hedge funds C) Leverage is often used in hedge funds D) Many hedge funds are broadly diversified
The answer is many hedge funds are broadly diversified. Hedge funds are private investment vehicles that tend to be more heavily concentrated than mutual funds. They often use leverage, derivatives, employ narrow investment strategies, and invest in nonpublic and illiquid securities. LO 3.4.1
Which one of these is a general characteristic of hedge funds? A) Full transparency and disclosure B) May sell short a variety of securities beyond the standard stocks and bonds. C) High marketability D) Little or no use of leverage
The answer is may sell short a variety of securities beyond the standard stocks and bonds. Hedge funds charge both a management fee and a carried interest fee. Hedge funds are characterized by a lack of marketability, significant use of leverage, and limited transparency. LO 3.4.1
Which one of these statements is CORRECT regarding exchange-traded funds (ETFs)? A) They also have lower turnover of assets than mutual funds and are, as a result, more tax efficient B) Because of their unique structure, ETFs cannot offer currency ETFs. C) An ETF that buys all the securities in an index uses representative sampling. D) In-kind exchanges typically are made in blocks of 10,000 shares.
The answer is they also have lower turnover of assets than mutual funds and are, as a result, more tax efficient. In-kind exchanges are done in blocks of 50,000 shares or more. An ETF that buys all the securities in an index is called a replicate index-based ETF. Futures contracts are taxed at year-end on appreciation at rates of 60% for long-term gains and 40% for short-term gains. ETFs can and do offer currency ETFs. LO 3.4.1
