Personal Finance: Chapter Fourteen

Smart investors can find investments that generate high rates of returns with small amounts of risk.

False

The stocks of well-known companies are referred to as "preferred stock."

False

When economic conditions are strong, the demand for most types of investments is low.

False

If you believe that a firm will grow rapidly in the future, you should buy its A) bonds. B) notes. C) common stock. D) preferred stock.

C

If you invest $1,000 in stock that pays no dividends and sell the stock one year later for $1,100, what will be your return? (Ignore commissions and trading fees.) A) 1% B) 5% C) 10% D) 100%

C

Bonds are certificates representing partial ownership of a firm

False

Common stockholders usually have more dividend rights than preferred stockholders

False

Growth stocks are likely to pay high dividends.

False

Many more shares of stock are traded daily on the primary market than on the secondary market.

False

Most investors are fully aware of the risk involved when pursuing investments that have the potential for very large returns.

False

The risk-return relationship means A) the lower the risk, the higher the return. B) the higher the risk, the lower the return. C) the higher the risk, the higher the return. D) risk and return have little or no correlation.

C

Which of the following statements is not true regarding individual investors? A) They commonly invest a portion of the money earned from their jobs. B) They invest in stocks to earn a reasonable return on their investments. C) They expect their money to grow by the time they wish to use it to make purchases. D) The number of individual investors has decreased in the last 20 years

D

You should A) put the money in a money market savings account. B) buy a one-year CD. C) buy stocks of relatively stable firms that have low risk. D) invest in a diversified stock mutual fund.

D

Common Stock

certificates that represent partial ownership of a firm

Individuals who buy and sell stock on a very short-term basis as a career are called ________.

day trader

Bonds

debt instruments issued by the government or corporations to borrow money from investors

If a stock is purchased for $30 a share and pays $5 per share in dividends a year, what selling price at the end of the year would result in a return of 50%? A) $60 B) $40 C) $35 D) $15

B

Income stocks tend to pay ________ dividends and have ________ appreciation of stock prices. A) lower; higher B) higher; lower C) lower; lower D) higher; higher

B

Of the following, which is not used in measuring a stock's return? A) Price of the stock at time of purchase B) Average price of stock during period owned C) Price of stock at time of sale D) Dividends earned during period owned

B

Publicly traded indexes are not A) purchased through a broker. B) investments offering only capital appreciation but no dividends. C) an option for small investors to have diversification of their investments. D) securities whose values move in tandem with a particular stock index.

B

Which of the following statements regarding an investment's risk is not true? A) Investors measure risk to determine the degree of uncertainty surrounding their future returns. B) Risky stock will have a smaller range of returns and a smaller standard deviation of returns. C) Investments with a wide range have more risk. D) Standard deviation measures the degree of volatility in the stock's return over time.

B

It would be very difficult and expensive for an individual investor to benefit from holding all 500 stocks of the Standard and Poor's 500 Index.

FAlse

Real estate is a good investment option for individuals and it offers the same liquidity as stocks or bonds.

FAlse

Since the gain received from the sale of stock is always taxed as ordinary income, you might want to time your sale to shift your profit from one year to another.

FAlse

) Institutional investors are professionals employed by a financial institution, who invest their own money earned from their jobs.

False

) It is easy to predict the level of demand for certain investments since future economic conditions are fairly measurable.

False

An advantage of investing in corporate bonds is that they hold their value and pay predictable interest (coupon) payments periodically

False

A company has a choice of whether to distribute dividends to common shareholders or to keep their profits in the company as retained earnings.

True

A key reason for uncertainty surrounding the return on investment is the uncertainty surrounding the current economic conditions.

True

An investment that has the potential to rise substantially in value also has the potential to decline substantially in value. If you cannot afford the possible loss, you should not make that investment.

True

Because dividends are fixed, the prices of preferred stock are not as volatile as those of common stock.

True

Before you start an investment program, you should ensure liquidity by having money in financial institutions or in money market securities

True

Common stockholders have the right to vote on key corporate issues, but also have the last right to the assets or profits of a company.

True

In addition to the interest earned on a bond, it is also possible that the actual bond will increase in value over time.

True

Most individual investors who buy and sell stock do so on the secondary market through brokers or investment companies.

True

Mutual fund gains can be in the form of dividends or capital gains, which are passed on to the individual investors.

True

One of the attractive features of mutual funds is that they offer small investors a diversified portfolio and professional management

True

One of the factors involving risks of investments is the time period you have to keep your money invested.

True

Present and future value concepts are used to determine the wealth provided by an investment.

True

The higher the dividend paid by a firm, the lower its potential stock price appreciation.

True

The primary market is used by firms to raise funds and is a market where newly issued securities are traded.

True

The return you will earn on certain stocks and bonds is uncertain because certain prices are not guaranteed.

True

The standard deviation of a stock's monthly returns measures the degree of volatility of a stock's returns over time and can be a method of evaluating a stock's future risk.

True

Newly issued securities are traded in the ________.

primary market

Institutional Investors

professionals responsible for clients' funds

Preferred Stock

) first priority over common stockholders to receive dividends

Day trader

) individual investors who buy and sell stocks within a day

Examples of common investment mistakes covered in the text include all of the following except A) following the advice of a stockbroker. B) making decisions based on unrealistic goals. C) borrowing to invest. D) taking risks to recover losses from previous investments.

A

If you have $1,000 to invest, but will need the money in one month to pay bills, you should A) put the money in a money market savings account. B) buy a one-year CD. C) buy stocks of relatively stable firms that have low risk. D) invest in a diversified stock mutual fund.

A

You can reduce your risk by A) diversifying your investments. B) having a shorter time horizon. C) putting all of your investment in one successful company. D) Both A and B are correct.

A

________ investors are professionals employed by a financial institution and are responsible for managing money. A) Institutional B) Professional C) Managing D) Security

A

) If economic conditions deteriorate, stock prices will A) increase. B) decrease. C) stay the same. D) not be directly affected by changes in economic conditions.

B

) Stock prices are characterized by all of the following except they A) can plummet with poor economic conditions. B) have a set lower limit. C) can be affected by negative earnings. D) can be increased through the company repurchasing the shares.

B

If you have $5,000 to invest but will need to use the funds in three years to buy a home, you should A) invest in a diversified stock mutual fund. B) buy a stock of relatively stable firms that have low risk. C) buy a one-year CD. D) put the money in a money market savings account.

B

The Internet should be used for all of the following except A) company financial statements. B) specific recommendation on which stocks to buy. C) stock prices. D) analysis of stocks and industries.

B

The difference between common and preferred stock is that preferred stock A) may or may not receive dividends. B) has predictable income and more safety. C) has greater potential for capital appreciation. D) is issued more frequently than common.

B

The largest market where existing securities are sold is called the ________ market. A) primary B) secondary C) third D) fourth

B

What would be the return on a stock purchased at $20 per share, held for 5 years, and sold for $32.22? Ignore brokerage commissions and tax implications and assume the stock paid no dividends during the holding period. Round to the nearest whole percent if necessary. A) 3% B) 10% C) 15% D) 16%

B

Which one thing do you always have with common stock? A) Dividends B) Voting rights C) Capital appreciation D) A guarantee of at least par value

B

You have $3,000 to invest, but will need the funds in a year to make a tuition payment. You should A) put the money in a money market savings account. B) buy a one-year CD. C) buy stocks of relatively stable firms that have low risk. D) invest in a diversified stock mutual fund.

B

) One advantage of investing in commercial real estate compared to stock, bonds, and mutual funds is that real estate A) is more likely to go up in value. B) is more marketable. C) may yield income and tax advantages not available with the other investments. D) is less risky than the other investments.

C

An initial public offering (IPO) A) is less risky than purchasing stocks in the secondary market. B) can be sold later in the primary market. C) can be a bargain as the stock prices may rise rapidly the next few days. D) is a good investment for the beginning investor.

C

To earn the highest possible return in the stock market, you will need to A) invest in the most well known stocks. B) diversify your portfolio. C) accept a high level of risk. D) buy only the stocks of large, international firms.

C

Which of the following is not true regarding preferred stock? A) It gets rights to the assets of a corporation before common stock B) It has a stated dividend rate C) It has the potential for greater capital appreciation than common stock D) It is a safer and more conservative investment than common stock

C

Which of the following is true with regards to the trade-off between a risk-free investment and a risky investment? A) There is very little risk in an IPO since returns often exceed 20% in the first day B) Mutual funds contain mostly large stocks are more risky than mutual funds containing smaller stocks C) If you prefer less risk, purchase a bond issued by a successful and established firm D) There is little risk in purchasing land as an investment since the value of land always appreciates over time

C

Which of the following ranges of returns would indicate a less risky, more stable investment? A) -3.0% to 4.0% B) 1.5% to 5.75% C) .4% to 1.4% D) -1.7% to 3.75%

C

You can estimate the amount by which your wealth will increase from an investment using A) standard deviation. B) discounted range of returns. C) time value of money. D) analysis of past returns.

C

) If you purchase 100 shares of XYZ Corporation for $50 per share, receive a dividend check for $200, and then sell the stock for $62 per share, what will your return on the stock be? A) 4% B) 424% C) 24% D) 28%

D

All of the following are true statements about dividends except A) dividends are based upon earnings. B) no dividends may be paid. C) dividends are based upon the number of shares. D) dividends are contractually guaranteed to common stockholders.

D

All of the following gains from investments are taxed as ordinary income except A) dividends. B) interest. C) short-term capital gains. D) long-term capital gains.

D

An initial public offering (IPO) is characterized by all of the following except A) the first time offering of stock by a corporation. B) can be sold later for a profit in the secondary market. C) can result in losing the investment. D) is available to individual investors before institutional investors.

D

Assuming a tax rate on ordinary income of 25% and a long-term capital gain rate of 10%, how much would you pay in taxes if you sold stock "A" for a $200 capital gain after holding it for 5 months, stock "B" for a $300 capital gain after holding it for 8 months, and stock "C" for a $500 capital gain after holding it for 14 months? A) $250 B) $100 C) $130 D) $175

D

Common stock is not A) issued by every firm that issues stock. B) riskier than preferred stock. C) given voting rights. D) guaranteed a dividend.

D

Investors who buy and sell stock, sometimes in the same day, are called A) individual investors. B) growth investors. C) institutional investors. D) day traders.

D

The timing on the sale of a stock could make a big difference in the amount of taxes that are due on the profits.

True

All of the following are true regarding stock prices except they A) are influenced by supply and demand. B) are regulated by the Federal Reserve Board. C) have no set limit. D) generally increase with good financial news.

B

Before you start to invest, you should ensure liquidity by owning A) individual stocks. B) money market mutual funds. C) options and puts. D) corporate bonds.

B

For minimal tax consequences, when your stock increases in value it should be held for A) four months or longer. B) over a year. C) under a year. D) five years or longer.

B

Growth stocks tend to A) be those of more established companies. B) offer great opportunities for capital appreciation. C) pay high dividends. D) be favored by more conservative investors.

B

) Corporate bonds A) offer a predictable return to investors in the form of interest or coupon payments. B) maintain their value even in periods of changing interest rates. C) appreciate in value as the maturity date nears. D) lose value at the maturity date nears.

A

) In the secondary market, stock prices are A) determined by supply and demand. B) stable. C) easy to predict. D) less expensive than on the primary market.

A

Dividends are a portion of A) earnings returned to the investor. B) the equity returned to the investor. C) liabilities returned to the company. D) assets returned to the company.

A

Growth stocks tend to pay ________ dividends and have ________ appreciation of stock prices. A) lower; higher B) higher; lower C) lower; lower D) higher; higher

A

If you bought $3,000 in stock a year ago, received no dividends, and sold it for $1,000, what is the return on your investment? A) -67% B) 0% C) 67% D) -33%

A

It is December 30th and you have stock in Zero Corporation, which you bought on March 1st that has lost $2,000 in value. You have already sold other stock that you bought this year for a gain. From a tax standpoint, what should you do with the Zero stock? A) Sell it today B) Sell it on January 2nd next year C) Wait until after next March 1st and sell it then D) Keep the stock and hope that it goes up in value

A

Jane has $3,200 she wants to invest in stocks. She has found an investment that she believes will earn 9% annual return. What will be the value of Jane's investment in 20 years? A) $17,933 B) $16,512 C) $14,915 D) $21,526

A

The security that represents equity or ownership of a corporation is A) common stock. B) corporate bonds. C) long-term loans. D) commercial paper.

A

To measure an investment's risk, you may use all of the following except A) time value of money. B) range of returns. C) standard deviation of returns. D) subjective measures of risk.

A

What would be the return on 200 shares of stock purchased on January 1, 2005 for $60 per share and sold on December 31, 2005 at $80 per share? Also assume that the company paid dividends of $2 per share over the year. The prices include all brokerage fees. Round to the nearest whole percent. A) 37% B) 25% C) 33% D) 40%

A

A stock's ________ is a measure of the degree of volatility in a stock's returns over time. A) range of returns B) standard deviation C) beta

B

If you purchase 100 shares of Ajax Corporation for $15 a share and one year later sell it for $20 a share, what was your return if the stock paid $2 per share dividends? (Ignore commissions and trading fees. Round to the nearest whole percent.) A) 10% B) 33% C) 47% D) 40%

C

If you wish to have a direct voice in the running of a company, you should purchase A) bonds. B) notes. C) common stock. D) preferred stock.

C

Individual risk is A) objective. B) a fixed percentage. C) an individual's comfort with the risk-return relationship. D) pretty much the same for everyone.

C

It is December 10th and you have a stock you purchased last January 5th, which has increased in value by more than $3,000. You think the stock will not significantly increase or decrease in value over the next month or so, and you would like to take your gain. What should you do? A) Sell the stock today and take the gain B) Wait until December 30th and sell the stock then C) Sell the stock on January 6th or later D) Do not sell the stock until it starts to go down in value

C

John decides to take his annual Christmas bonus of $2,000 and invest it each year for the next five years, in stock he believes can earn an 8% annual return. How much will John's investment be worth at the end of the five years? A) $11,972 B) $19,098 C) $11,734 D) $15,600

C

Of the following statements about a day trader, which is not correct? A) They have a short-term focus. B) They may buy and sell on the same day. C) They are more risk averse than most investors. D) Day trading may be their career.

C

Regarding dividends paid on common stock, A) older, established firms tend to pay lower dividends. B) newer firms in growth industries tend to pay higher dividends. C) some firms don't pay any dividends at all. D) a firm with high dividends is likely to have high stock price appreciation.

C

The market for newly issued securities and initial public offerings (IPOs) is the ________ market. A) initial B) original C) primary D) secondary

C

What would you pay for a stock whose price you estimate will be $50 in 10 years and you wish to earn a return on the investment of 9%? Ignore brokerage commissions and tax implications and assume the stock paid no dividends during the holding period. A) $45 B) $41 C) $21.10 D) $15

C

When a firm performs well, investors holding shares are ________ willing to sell it and therefore, the demand for the stock ________. A) more; increases B) less; decreases C) less; increases D) more; decreases

C

Which of the following is not true regarding mutual funds? A) There are thousands of funds with many different investing objectives. B) They offer small investors diversification and professional management. C) Dividends received from their investments are used to pay operational expenses, and capital gains are passed on to the mutual fund shareowners. D) Both dividends and gains are distributed to mutual fund shareowners.

C

The best way to ensure that you will receive dividends is to A) day trade. B) purchase bonds. C) purchase common stock. D) purchase preferred stock.

D

The time value of money concepts do not include A) interest or the cost of money. B) payments of principal and interest. C) present and future values. D) the risks associated with various investments.

D

Which of the following investments would you not consider if you have adequate liquidity and additional funds to invest? A) Real estate B) Preferred stock C) Mutual funds D) Money market securities

D

If you wish to have the power to vote on who will serve on the board of directors of a corporation you will need to purchase shares of ________ in the corporation

common stock

Secondary Market

existing securities are sold in this market

Stock Exchange

facilities that allow investors to purchase or sell existing stocks

IPO

first offering of a firm's stock to the public

Stocks that provide investors with steady income in the form of large dividends are classified as ________.

income stocks

When a corporation goes from being a private to a public firm it will sell stock in what is called a(n) ________.

initial public offering