ch.17-21
Expense Ratio. Mark owns a mutual fund with a NAV of $80.00 per share and expenses of $1.90 per share. What is the expense ratio for Mark's mutual fund?
(1.90 / 80) x 100 = 2.38
Amount of Shares Purchased. Hope invested $14,000 in a mutual fund at a time when the price per share was $20. The fund has a load fee of $400. How many shares did she purchase?
(14,000 - 400) / 20 = 680shares investment - load fee divided price per share
Tax Consequences. Rena purchased 100 shares of a no-load stock mutual fund. During the year she received $6.60 per share in dividend distributions, $277 in long-term capital gain distributions, and capital gains of $1,444 when she sold the stock after owning it eight months. What are the tax consequences of Rena's ownership of this stock fund? Rena is in a 24% marginal tax bracket.
(6.60 x 100) x 15% = 99 277 x 15% = 41.55 1,444 x .24 = 346.56 99 + 41.55 + 346.56 = 487.11
Tax Consequences. Ronnie owns 600 shares of a stock mutual fund. This year he received dividend distributions of 81 stock mutual fund shares ($75 per share) and long-term capital gain distributions of 54 stock mutual fund shares (also $75 per share). What are the tax consequences of Ronnie's stock mutual fund ownership if he is in a 32% marginal tax bracket?
(75 x 81) x .15 = 911.25 (75 x 54) x .15 = 607.50 911.25 + 607.50 = 1,518.75
A put option provides the right to sell:
100 shares of a specified stock at a specified price by a specified expiration date
Individuals must earn:
40 credits to qualify for Social Security.
b. To calculate Tilly's savings at retirement from the stock investments outside the retirement account, first calculate her after-tax income available for investment using the following formula:
5,000 - (5000 x 32%) = 3400 use cals 3400 is PMT
Return on Stock Options. Maryanne paid $510 for a call option on a stock. The option gives her the right to buy the stock for $60.00 per share until March 1st. On February 15th, the stock price rises to $70.35 per share, and Maryanne exercises her option. What is Maryanne's return from this transaction? (Hint: Ignore transaction costs.)
70.35 x 100 = 7035 60 x 100 = 6000 510 7035 - 6000 - 510 = 525 ( 525 / 510) x 100 = 103
A will is
A written document outlining the distribution of property previously owned by a person who dies. a legal request, and also identifies a guardian for surviving children.
Investing in mutual funds is a good choice because:
A. a small amount of money is needed to obtain a broadly diversified portfolio. B. mutual funds are designed to meet specific investment goals. C. portfolio managers have expertise in investing and have access to the best research available. D. All of the above.
A mutual fund can generate returns for investors:
A. as the difference between the share purchase price and the share sale price. B. as capital gains distributions. C. through a dividend distribution. D. All of the above.
The relevant characteristic(s) of a mutual fund that should be considered before purchasing is:
A. the investment objective of the fund. B. the investment company. C. the minimum investment. D. All of the above.
Benefits can be received when:
A. you retire. B. you survive the breadwinner of the household. C. you become disabled. D. All of the above.
The expense ratio for a fund is:
Annual Expenses per Share / Asset Value per Share
Which of the following is true?
EITs trade their shares on stock exchanges.
Social Security is a ▼ federal state and federal state program that taxes individuals while they are working and provides them income during retirement.
Federal
Estimating Returns. Hunter invested $10,500 in shares of a load mutual fund. The load of the fund is 11%. When Hunter purchased the shares, the NAV per share was $93. A year later, Hunter sold the shares at a NAV of $89 per share. What is Hunter's return from selling his shares in the mutual fund?
Load fee = 10,500 x .11 = 1,55 10,500 - 1,155 / 93 = 100 100 x 89 - 10,500 / 10500 x 100 = -15.24
The NAV is commonly reported as:
NAV/Number of Shares Outstanding
c. To calculate the after-tax value of the stock investments outside the retirement account, first calculate the capital gains using the following formula:
Purchase price of stock 3400 x 15 = 51000 capital gains 73,367 - 51,000 = 22365 22365 x 15% = 3,355 value of investment 73,367 - 3,355
Which of the following is a characteristic unique to a Roth IRA?
The contributions are not tax deductible
Which of the following is not true of profit-sharing and employee stock ownership (ESOP) plans?
The employer can contribute a portfolio of diversified stock to the employee's retirement account.
Which of the following is not true of Simplified Employee Plans?
They are government-sponsored retirement plans.
c. He owns a small firm with employees. Which is the best selection?
Thomas should consider the Simplified Employee Pension Plan (SEP) or the Savings Incentive Match Plan for Employees plan (SIMPLE).
a. He works for a large private firm. Which is the best selection?
Thomas should consider the 401(k) plan.
b. He works at a university. Which is the best selection?
Thomas should consider the 403(b) plan.
A prospectus is
a document that provides financial information about the fund.
A portfolio is a:
a set of multiple investments in different assets
Three components of a will include:
a specified distribution of the estate, the specification of a guardian for minor children, and a letter of last instruction
An annuity is a:
a stream of equal payments that are received or paid at a determined time interval. financial contract that provides annual payments for a specified period or for the annuitant's life.
Which of the following is a correct consideration when planning for retirement?
adjusting the risk of your investments according to the years to your retirement
If an employee is fully vested,
all money reserved for the employee each year will be maintained in the retirement account.
A mutual fund supermarket:
allows investors to diversify among various mutual funds and receive a summary statement for these funds on a consolidated basis.
Retirement Funding. Barry has just become eligible for his employer-sponsored retirement plan. Barry is 41 and plans to retire at 65. Barry calculates that he can contribute $5,000 per year to his plan. Barry's employer will match this amount. If Barry can earn a return of 3% on his investment, how much will he have at retirement?
amount from bary + amount from employer = PMT years until retirement = 65-41 use calc
If someone dies without a will (intestate), then the court will appoint:
an administrator, who will be paid with the assets from the estate.
Stock options:
are options to purchase or sell stocks under specified conditions
An estate represents a person's:
assets after any existing liabilities are paid off
The way to properly use stock options for asset allocation is to:
buy put options on stocks you own, or to sell call options on stocks you own.
A prospectus:
can be ordered over the phone, by e-mail, and via the Internet.
Social Security benefits:
can be taxed for retirees with high income.
If an employee is vested, he:
can claim a portion of the retirement money that has been reserved for him.
Your risk tolerance when investing should:
decline by the time you retire, because you should invest conservatively by the time you retire. Most retirees cannot afford to take much risk when investing because they will need the money that they have accumulated over time.
A prospectus does not:
describe the background and family history of the managers
Before an investor makes a decision about purchasing a mutual fund, she should:
determine her investment objectives, evaluate her risk tolerance, and decide on the characteristics of a fund that are important.
An effective diversification strategy is to:
diversify across stock funds and bond funds
A simplified employee plan (SEP)
does not allow the employee to make contributions
Those investing in U.S. bond funds do not face the ▼ exchange rate transaction cost asset devaluation broker trading risk as those investing in international or global bond funds.
exchange rate
The most important statistic mentioned in the prospectus is the ratio.
expense
A call option:
gives the holder the right to buy 100 shares of a specified stock at a specified price by a specified date.
It is important for an investor to understand how stock options function because:
hey are a popular type of investment, they are very risky, and many employers offer them to their employees.
A variable annuity:
high fees associated with them charged by the financial institution that sells and manages them.
Expenses associated with international and global bond funds tend to be ▼ lower higher than those of domestic bond funds because of the ▼ transaction legal accounting costs involved.
higher transaction
An investor can find price quotations for closed-end and open-end funds:
in financial papers and at financial websites.
All bonds are subject to risk.
interest rate
The types of companies that usually manage open-end funds are:
investment companies.
An equity real estate investment trust (REIT):
invests directly in properties.
A portfolio's risk:
is higher if the stock returns exhibit a high positive correlation
Social Security is a source of income during retirement. Usually it ▼ is is not enough to live on comfortably.
is not
Which of the following characteristics is unique to a 401(k) plan?
it is a defined contribution plan established by companies for their employee
When REITs are added to a portfolio along with stocks and bonds, the portfolio becomes ▼ more less risky because it is ▼ likely unlikely that all three types of investments will perform poorly at the same time.
less unlikely
Closed-end funds are:
listed on the exchanges where they are traded
Diversification:
lowers the level of risk in a portfolio.
A mutual fund's net asset value is the:
market value of all the securities it has purchased minus any liabilities owed.
A simple will:
may cause a high level of taxes if the estate is large
The main goal of estate planning is to:
minimize taxes on assets an individual wants transferred to the beneficiaries
Investors should pay attention to expense ratios because:
mutual funds are only worthwhile if they offer a high enough return to offset the extra expenses.
Some U.S. investors are attracted to international or global bond funds because they:
offer a higher yield than U.S. bonds.
Some employers are switching to this type of plan because they:
place more responsibility on the employee to contribute the money and decide how it is invested.
Estate planning is the act of:
planning how an individual's wealth will be allocated upon or before death.
On a given day,
redemptions may exceed the value of the new shares purchased and fund managers may need to find the necessary funds to cover the redemptions through sale of stocks in the portfolio.
A diverse portfolio:
reduces your exposure to the adverse effects of any one investment.
When an employee leaves his employer, he cannot choose to:
retain his retirement account with his former employer if he has less than $5,000 in the account.
An open-end mutual fund:
sells shares directly to investors and purchases those shares back whenever investors wish to sell their shares.
If the price of the stock rises above the specified call price, the investor:
sells the stock at the higher current stock price, and earns a return
An investor for whom a higher degree of risk is acceptable:
should consider individual stocks
A defined-contribution plan:
specifies the guidelines under which you and/or your employer can contribute to your retirement account.
The two popular retirement plans for self-employed individuals are:
the Simplified Employee Plan (SEP) and a 401(k) plan.
For open-end funds, if a company offers several different funds,
the company name is listed in bold and the funds are listed below.
A defined-benefit plan guarantees:
the employee a specific amount of income when he retires.
A will is critical to ensure that:
the estate is distributed to the heirs according to the individual's wishes.
The difference between no-load and load mutual funds is:
the fee charged when you purchase them.
The higher the expected return,
the higher the risk.
The requirements for a valid will are:
the individual must be of legal age, the will be signed and dated, and the will be signed by at least two witnesses.
A benefit of a defined-contribution plan is that:
the money contributed by the employer is like extra compensation to the employee.
One factor that will not affect the amount of funds available to you at retirement is:
the number of jobs you have worked.
The amount of income that you receive from Social Security when you retire is dependent on:
the number of years in which you earned income and your average level of income.
One concern about the future of Social Security is:
there will be more retires in the future with fewer workers supporting them
Investors purchase load funds because:
they believe that the load fund will generate higher returns and outperform a no-load fund even after the load fee.
An effective diversification strategy is:
to choose stocks in different industries.
Retirement Planning. Tilly would like to invest $5,000 in before-tax income each year in a retirement account or in stock investments outside the retirement account. Tilly likes the stock investments outside the retirement account because they provide her with more flexibility and a potentially higher return. Tilly would like to retire in 15 years. If she invests money in the retirement account, she can earn 3% annually. If she invests in stock outside the account, she can earn 5% annually. Tilly is in the 32% marginal tax bracket. a. If Tilly invests all her money in the retirement account and withdraws all her income when she retires, what is her income after taxes?
use calc 92,995 x .03 = 29759 92,995 - 29759 = income after taxes
Asset allocation enables investors to diversify among various financial assets:
where some have lower risk and some have higher risk.
Which of the following is not a key retirement planning decision an individual must make?
whether you should change jobs
If you expect interest rates to fall,
you might shift your holdings from short term to long term bonds
early in your career
you should invest in relatively safe and liquid securities
Since it is difficult to predict economic conditions and determine how different types of investments will perform in a given period, it may be better to base your asset allocation decisions on:
your stage in life and degree of risk tolerance.
In an employer-sponsored retirement plan,
you and/or your employer contribute money to a retirement account each pay period.
Estimating Returns. Hope invested $14,000 in a mutual fund at a time when the price per share was $20. The fund has a load fee of $400. As a result, she purchased 680 shares in the mutual fund. Hope later sold her shares in the mutual fund for $28 per share. What would her return be? If it had been a no-load fund and she purchased 700 shares, what would her return be?
{(680 x28) - 14,000 / 14,000 x 100 = 36%
Mutual funds incur expenses such as:
administrative, legal, and clerical expenses and portfolio management fees.
Studies on mutual funds have found that:
no-load funds outperform load funds when considering the fees paid on load funds on average.
