Module 3 FP513 - Equity Investments & Managed Assets

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) $120 B) $90 C) $100 D) $240

A) $120 The company's new stock price will be $120, calculated as follows: $180 ÷ 3 × 2 = $120.

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: Year | Investment | Share Price 1 | $2,400 | $65 2 | $2,400 | $70 3 | $2,400 | $75 4 | $2,400 | $66 5 | $2,400 | $77 What is Alice's average cost per share? A) $70.28 B) $70.60 C) $96.58 D) $36.92

A) $70.28 Year | Investment | Share Price | Shares 1 | $2,400 $65 = 36.92 2 | 2,400 ÷ $70 = 34.29 3 | 2,400 ÷ $75 = 32.00 4 | 2,400 ÷ $66 = 36.36 5 | 2,400 ÷ $77 = 31.17 $12,000 170.74 $12,000 ÷ 170.74 = $70.28

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 not receive the dividend, because he did not purchase 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 purchased the shares after the announcement date. D) Bob will receive the dividend, because he purchased the shares before the ex-dividend date.

A) 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.

Advantages of unit investment trusts include which of these? I. Stable periodic income II. Diversification III. Active management of the portfolio A) I and II B) I and III C) I, II, and III D) II and III

A) 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.

Which of these statements correctly explains dollar cost averaging as a portfolio management technique? I. This technique involves investing a specific amount into an investment vehicle, regardless of whether the recent trend in the investment has been up or down. II. If prices decline, the fixed investment amount will purchase a greater quantity of the security. III. For the long-term investor, the presumption is that prices will eventually rise, so a lower average price translates into greater profits. IV. If prices rise, the fixed investment amount will purchase a greater amount of the security. A) I, II, and III B) I, III, and IV C) I and II D) II and III

A) I, II, and III If prices rise, the fixed investment amount will purchase a lower amount of the security. The effect of dollar cost averaging is to increase the number of shares gradually over a long period. Because more shares are acquired when the price of the stock or mutual fund declines, the average cost per share is reduced.

Holly and Jeff are a married couple who have recently retired and are no longer earning an income. They would like to change their asset allocation to provide more income in their retirement years. Which of the following investments should be recommended to help the couple in achieving their financial objectives? I. Aggressive growth mutual fund II. AA rated corporate bonds III. Zero-coupon bonds IV. Equity income mutual fund A) II and IV B) I, II, and IV C) II, III, and IV D) I and III

A) II and IV Investments II and IV are the only two that will provide current income for the couple.

Identify which of these methods may be used to trade exchange-traded funds (ETFs). I. Investors can buy or redeem shares from the fund family in lots of 1,000. II. Investors can trade ETFs in the secondary market by using a broker. III. ETFs can be purchased on margin. IV. ETFs may be sold short. A) II, III, and IV B) I and II C) I and III D) II only

A) II, III, and IV Some ETFs may be redeemed through the fund family but usually in lots of 50,000 shares or more.

Which of the following are characteristics of exchange-traded funds (ETFs)? I. They may not be sold short. II. They are generally tax-efficient. III. Large investors known as authorized participants buy or sell shares on an "in-kind" basis. IV. They usually trade at or near their net asset value. A) II, III, and IV B) I, II, and III C) II and IV D) I and III

A) II, III, and IV They are tax-efficient, generally low cost, and large investors conduct trades by making in-kind exchanges, whereby they give or receive shares of stock that are in the fund. Generally ETFs trade near net asset value (NAV), if not at NAV.

Which of these investments is advisable during periods of rising interest rates? A) Money market mutual funds B) Long-term bonds C) Public utility stocks D) Bank stocks

A) Money market mutual funds Short-term money market instruments are attractive during periods of rising interest rates. U.S. Treasury bills and negotiable CDs are also advisable. These investments do not experience significant erosion in value in response to increasing interest rates.

Select the CORRECT statement regarding hedge funds. A) Purchasers of hedge funds are required to be accredited investors. B) Short sales by the fund are not allowed. C) Hedge fund managers are paid on a commission basis. D) The fund is required to register with FINRA prior to soliciting potential clients.

A) Purchasers of hedge funds are required to be accredited investors. A hedge fund is an unregistered, privately offered, managed pool of capital for wealthy investors. In addition to short selling, a hedge fund will implement a wide array of risky trading strategies in order to exploit market inefficiencies. Hedge fund managers are paid based on fund performance.

An investor has a portfolio diversified among many different asset classes. If there was an immediate need for cash, which of the following would probably be the most liquid? A) QRS Money Market Mutual Fund B) XYZ International Stock Mutual Fund C) CDL Common Stock Mutual Fund D) Cash value from a universal life insurance policy

A) QRS Money Market Mutual Fund Money market funds generally come with a check-writing privilege offering investors the opportunity to convert the asset to cash at once. Although all mutual funds are readily redeemable, under the investment company Act of 1940, the fund has seven days to redeem. One must request the cash value from the insurance company.

RNO Mutual Fund invests in domestic debt and equity securities. The fund's current bond holdings are valued at $63 million, and its equity holdings are valued at $85 million. RNO currently has 3 million outstanding shares; although it is not limited in the number of shares it may sell. Which of these statements is CORRECT? A) RNO shares are priced at $49.33 per share. B) RNO is a closed-end investment company. C) RNO shares are traded on the major exchanges. D) RNO is a money market mutual fund.

A) RNO shares are priced at $49.33 per share. Because RNO invests in both bonds and equities, it is not a money market mutual fund. RNO's shares are valued at NAV, calculated as follows: ($63 million + $85 million) ÷ 3 million shares = $49.33 per share. Mutual fund shares are sold and redeemed directly by the mutual fund company and do not trade on the major exchanges. RNO is an example of an open-end investment company.

Select the type of mutual fund that generally focuses its investment objective in a narrow area such as natural resources, technology, or health care. A) Sector funds B) Growth funds C) Income funds D) Balanced funds

A) Sector funds Sector funds tend to limit their investments to one sector of the economy, such as natural resources, technology, or health care.

If a company has a stock split, which of these occurs? A) Shareholders own more shares after the split than before the split. B) Fewer investors will be interested in the stock. C) Shareholders are taxed on the number of shares received. D) The per-share market value of the stock stays the same after the split.

A) Shareholders own more shares after the split than before the split. Shareholders are not taxed on the shares they receive. The number of shares is increased and the per-share market value of the stock is decreased. Shareholders own more shares, but the market value of their holdings does not change. One of the reasons for having a stock split is to encourage more investors to be interested in purchasing the stock.

Which of the following occurs when a 10% stock dividend is paid? A) The firm's retained earnings decrease. B) The stock's price is increased. C) The stock's par value is decreased. D) The firm's equity is increased.

A) The firm's retained earnings decrease. The firm's equity and par value are unchanged. The stock price will drop by the amount of the dividend.

Which of the following best represents a characteristic of balanced mutual funds? A) They combine debt and equity securities. B) They combine income and growth stock. C) They combine domestic and international securities. D) They combine high- and low-risk stock.

A) They combine debt and equity securities. Income securities can be high-dividend paying stocks or bonds. Capital gains securities generally are stocks. Most balanced funds contain some combination of both stocks and bonds (often 60% stocks and 40% bonds).

All of these statements correctly identifies a separately managed account except A) a separately managed account is a privately offered pool of capital for wealthy, sophisticated investors. B) in a separately managed account, the investor owns 100% of the securities in the account. C) one advantage of a separately managed account is the ability to maintain an individual cost basis in the securities held in the account. D) a separately managed account holds a diversified portfolio of securities managed by a professional money manager.

A) a separately managed account is a privately offered pool of capital for wealthy, sophisticated investors. In a separately managed account, the money manager purchases securities on behalf of the individual investor, not as a pool of capital for numerous investors.

A review of the prospectus of an open-end investment company reveals that its portfolio consists entirely of CDs, Treasury bills, and repurchase agreements. This is probably a(n) A) money market fund. B) index fund. C) balanced fund. D) exchange-traded fund (ETF).

A) money market fund. Money market funds hold money market instruments like negotiable CDs, Treasury bills, banker's acceptances, commercial paper, and repurchase agreements.

An investor using a dollar cost averaging approach to buying a mutual fund will buy A) more shares when the NAV of the fund falls since the last purchase. B) the same number of shares regardless of which direction the NAV takes. C) fewer shares when the NAV of the fund falls since the last purchase. D) more shares when the NAV of the fund rises since the last purchase.

A) more shares when the NAV of the fund falls since the last purchase. The investor will purchase more shares when the NAV falls because the dollar amount invested remains the same.

The difference between a convertible bond and a bond with warrants is that A) when warrants are exercised, the issuer receives equity capital from the warrants in addition to the original debt from the bond with warrants; when convertible bonds are converted, the bond is replaced with stock. B) when warrants are exercised, a portion of the issuer's debt is replaced with equity; when convertible bonds are exercised, a portion of the issuer's debt is replaced with equity. C) a convertible bond has an embedded call option, and a bond with warrants does not. D) a bond with warrants has an embedded put option, and a convertible bond has an embedded call option.

A) when warrants are exercised, the issuer receives equity capital from the warrants in addition to the original debt from the bond with warrants; when convertible bonds are converted, the bond is replaced with stock. The issuer receives new equity upon exercise of the warrants, which is in addition to the initial debt received from the bonds; upon conversion of the convertible bond, the bond is retired and stock is issued in its place.

A pooled investment with a share price significantly different from its net asset value (NAV) per share is most likely A. a closed-end fund. B. an open-end fund. C. an exchange-traded fund (ETF). D. a unit investment trust (UIT).

A. a closed-end fund. Closed-end funds' share prices can differ significantly from their NAVs. Open-end fund shares can be purchased and redeemed at their NAVs. Market forces keep exchange-traded fund (ETF) share prices close to their NAVs because arbitrageurs can profit by trading when there are differences. UIT investors purchase units, which are sold at the NAV plus a broker's commission.

The risk level of a typical guaranteed investment contract (GIC) with an insurance company is best described as A. conservative. B. aggressive. C. extremely risky. D. default-risk free.

A. conservative. A guaranteed investment contract (GIC) is regarded as a conservative investment; however, it is not free of default risk.

An investor in a separately managed account versus a mutual fund has the advantage of A. maintaining an individual cost basis in the securities within the portfolio, thereby making it easier to income tax plan. B. the investment manager purchasing securities for the benefit of the fund. C. owning a set proportion of the securities in the account. D. owning a percentage of the total pooled assets of the fund.

A. maintaining an individual cost basis in the securities within the portfolio, thereby making it easier to income tax plan. The investment manager purchases securities for the benefit of the investor, not the fund. The investor owns 100% of the securities in the account, while a mutual fund owner only owns a percentage of the total pooled assets of the fund.

Your client began purchasing shares of GRO mutual fund two years ago. She has followed a dollar-cost averaging approach by investing $2,000 every six months for the last two years. The following data depict her purchases. Date | Net Asset Value of Fund | Number of Shares Purchased October 1, 20X6 | $44.44 | 45 April 1, 20X7 | $38.46 | 52 October 1, 20X8 | $33.90 | 59 April 1, 20X9 | $48.78 | 41 What is your client's average cost per share of GRO? A) $48.32 B) $40.61 C) $41.40 D) $42.78

B) $40.61 Period | Investment | Shares Purchased 1 | $2,000 | 45 2 | 2,000 | 52 3 | 2,000 | 59 4 | 2,000 | 41 = $8,000 ÷ 197 = 40.6091

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) Both I and II C) I only D) II only

B) 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.

Which of the following is a potential pitfall of mutual fund investing? A) Purchasing a fund immediately after a distribution of income and capital gains B) Buying a fund ranked number one if the fund is misclassified C) Buying a fund with a good long-term record with the same manager during the entire period D) Investing in a fund with low annual operating expenses

B) Buying a fund ranked number one if the fund is misclassified A number-one ranking can be obtained if a fund is misclassified with lower-risk funds.

Which of the following may be a negative consequence of a high portfolio turnover rate? A) Consistency of investing style B) Higher tax liabilities for the shareholder C) Lower transaction costs D) Lower annual operating expenses

B) Higher tax liabilities for the shareholder High turnover generally leads to realization of capital gains and higher taxation to shareholders.

Under which of these circumstances will dollar cost averaging result in an average cost per share lower than the average price per share? I. The price of the stock fluctuates over time. II. A fixed number of shares is purchased regularly. III. A fixed dollar amount is invested regularly. IV. A constant dollar plan is maintained. A) II and III B) I and III C) I, III, and IV D) I and II

B) I and III Dollar cost averaging benefits the investor if the same amount is invested on a regular basis over a substantial period, during which the price of the stock fluctuates. A constant dollar plan is one in which the investor maintains a constant dollar value of securities in the investment portfolio.

Identify the CORRECT statements regarding warrants. I. Warrants give the owner the right to purchase a specified number of shares for a specified period at a specified price. II. Warrants are typically written with a maturity date of nine months. III. Warrants must include standardized terms required by the Options Clearing Corporation. IV. Warrants are issued by a corporation rather than written by an individual. A) I and II B) I and IV C) III and IV D) I, II, III, and IV

B) 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.

Which of the following statements concerning dollar cost averaging as a portfolio management technique are CORRECT? I. This technique involves investing a specific amount into an investment vehicle, regardless of whether the recent trend in the investment has been up or down. II. If prices decline, the fixed investment amount will purchase a greater quantity of the security. III. For the long-term investor, the presumption is that prices will eventually rise, so a lower average price translates into greater profits. IV. If prices rise, the fixed investment amount will purchase a greater amount of the security. A) II and III B) I, II, and III C) I and II D) I, III, and IV

B) I, II, and III If prices rise, the fixed investment amount will purchase a lower amount of the security.

Dave and Pam Larson, ages 65 and 63, respectively, recently retired. They successfully saved for their retirement throughout their careers using a low-risk approach. They would like to restructure their investments to have current income now to travel in their leisure time. Which of the following investment alternatives would be appropriate for the Larsons' goal? I. Equity income mutual fund shares II. Aggressive growth mutual fund shares III. Newly issued U.S. government bonds IV. GNMA fund shares A) II, III, and IV B) I, III, and IV C) I, II, and III D) I, II, and IV

B) I, III, and IV Aggressive growth mutual funds have a primary objective of capital appreciation and pay out little to no dividends. This investment would not provide the Larsons with their desired current income. The remaining investment alternatives all fit within the Larsons' risk tolerance.

Which of the following are characteristics of closed-end funds? I. A closed-end fund stands ready to redeem shares from investors. II. Closed-end funds trade like common stocks. III. Closed-end fund shares can be bought on margin or sold short. IV. Closed-end funds will always trade at net asset value. A) I and III B) II and III C) II, III, and IV D) I and II

B) II and III Similar to common stocks, closed-end funds trade on the exchanges. Also, closed-end funds can be bought on margin and sold short.

Which of these statements regarding unit investment trusts (UITs) are CORRECT? I. A bond UIT has a yield to maturity. II. UIT sponsors must make a secondary market in the UITs they create. III. UITs have management fees lower than mutual funds. IV. A bond UIT does not replace bonds that are called. A) I and IV B) III and IV C) II and III D) I and II

B) 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.

Select the entity that issues guaranteed investment contracts (GICs). A) Commercial banks B) Insurance companies C) Credit unions D) Open-end investment companies

B) 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. They are not guaranteed by the FDIC.

Which of the following statements is CORRECT regarding hedge funds? A) They are available for any investor with $500,000 of net worth. B) They often make extensive use of derivatives. C) The fund manager's fee is usually 10% of the hedge fund's profits. D) A fund of hedge funds will have a higher minimum investment requirement than a hedge fund.

B) They often make extensive use of derivatives. Hedge funds may employ a variety of investment strategies in an attempt to achieve a superior return for investors and, as such, can be conservative investments or very aggressive investments.

Which of these statements regarding warrants is CORRECT? A) Warrants are safer than corporate bonds. B) Warrants are issued with other securities to make the offering more attractive. C) The term of a warrant is generally shorter than the term of a right. D) Warrants give the holder a perpetual interest in the issuer's stock.

B) Warrants are issued with other securities to make the offering more attractive. Warrants are generally issued with bond offerings as sweetener. Warrants are long-term options to buy stock and, because, they are equity securities, warrants are junior in safety to bonds.

A fund that invests in both U.S. stocks and international stocks is called A) a balanced fund. B) a global fund. C) an international fund. D) an asset allocation fund.

B) a global fund. A global fund invests in U.S. stocks and in international stocks.

To have the right to the next dividend payment of a stock, an investor must purchase the stock A) after the record date but before the distribution date. B) at least two days before the record date. C) on the corporation's record date. D) within two business days after the ex-dividend date.

B) at least two days before the record date. In order to receive the next dividend, an investor must purchase the stock at least two days before the record date.

A mutual fund investor who does NOT specify a method to calculate basis must use the A) average basis, double category method. B) first in, first out (FIFO) method. C) average basis method. D) specific identification method.

B) first in, first out (FIFO) method. The IRS requires the FIFO method of determining basis for a mutual fund in the absence of another method being designated by the shareholder. The average basis, double category method is no longer in use.

All of these statements correctly explain warrants except A) a warrant typically has a maturity date of several years. B) issuing a bond with an attached warrant may permit the corporation to increase the coupon rate to entice investors to make the investment. C) a warrant differs from a traditional option security in terms of maturity. D) a warrant is a long-term call option issued as a sweetener with a new bond issue.

B) 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.

If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors in the higher tax brackets, ABC is a(n) A) corporate bond fund. B) municipal bond fund. C) aggressive growth fund. D) money market fund.

B) municipal bond fund. Municipal bonds are considered second only to U.S. government securities in terms of safety. Furthermore, whenever you see a question about an investor in a high tax bracket, always look for the answer choice with municipal bonds; the tax-free income is the key. LO 3.3.1

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) between the ex-dividend date and the record date. B) two business days before the record date. C) three days before the payment date. D) before the declaration date.

B) two business days before the record date. Under the T+2 rules in effect, ex-dividend date is one day business prior to the record date. A trade made on the ex-dividend date will clear in two business days, one day after the record date. The investor will not be on the corporation's record book as a shareholder unless the purchase is made at least two days before the record date.

Joseph Brown follows a dollar cost averaging approach to purchase shares of XYZ Corporation. What is his average cost per share of XYZ? Year Investment Stock Price 1 800 $75 2 800 $78 3 800 $80 4 800 $70 5 800 $68 A. $70.50 B. $73.80 C. $75.00 D. $78.50

B. $73.80 To solve for the average cost per share, calculate the number of shares purchased each year. Then divide the total amount invested over the five years by the total number of shares purchased. $800 ÷ 75 = 10.7 $800 ÷ 78 = 10.3 $800 ÷ 80 = 10.0 $800 ÷ 70 = 11.4 $800 ÷ 68 = 11.8 $4,000 ÷ 54.2 = $73.80 average cost per share

Patricia owns 100 shares of Blue stock, which has a current market price of $150. She also owns 300 shares of Red stock, which has a current market price of $5. If Blue Corporation undergoes a 2-for-1 stock split and Red Corporation undergoes a 1-for-3 reverse split, which row would correctly identify Patricia's holdings? A. 100, $7,500, 300, $3,000 B. 200, $15,000, 100, $1,500 C. 200, $15,000, 900, $1,500 D. 50, $7,500, 900, $4,500

B. 200, $15,000, 100, $1,500 Stock splits and reverse splits do not change the total value of shares. Thus, Patricia will own 100 × $150 = $15,000 of Blue stock and 300 × $5 = $1,500 of Red stock. In a 2-for-1 stock split, the number of shares doubles, so Patricia will own 200 shares of Blue stock. In a 1-for-3 reverse split, the number of shares is divided by 3, so Patricia will own 100 shares of Red stock.

Which of following are reasons why an investor would choose stocks over bonds? I. A stockholder is not entitled to share in the earnings of the company. II. Bondholders do not have an ownership interest in the company. III. A stockholder has the right above a bondholder to assets of the corporation in case of liquidation. IV. A stockholder is entitled to a proportionate share of the assets of the company. A. I and III B. II and IV C. I, II, and IV D. II, III, and IV

B. II and IV A stockholder is entitled to share in the earnings of the company. A bondholder has the right above a stockholder to assets of the corporation in case of liquidation.

All of the following are reasons for a corporation to issue a warrant except A. as an incentive for investors to purchase preferred stock. B. to allow for standardization of terms among all potential investors. C. to lower the cost of capital necessary to float an issue. D. as an incentive for investors to purchase corporate debentures

B. to allow for standardization of terms among all potential investors. Warrants are essentially customized (not standardized) call options issued to meet the needs of both the issuing corporation and the investor.

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) $22.56 B) $19.53 C) $23.44 D) $24.39

C) $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.

An investor has purchased $500 of additional shares in a mutual fund each month for the past five months at the following prices: Month | Price Per Share | Investment Jan. | $35 | $500 Feb. | $37 | $500 Mar. | $ 38 | $500 Apr. | $ 32 | $500 May | $33 | $500 What is the average cost per share? A) $33.00 B) $31.25 C) $34.85 D) $35.00

C) $34.85 Month | Investment | Price Per Share | Shares Purchased Jan. | $500 | $35 = 14.2857 Feb. | $500 | $37 = 13.5135 Mar. | $ 500 | $38 = 13.1579 Apr. | $ 500 | $32 = 15.6250 May | $500 | $33 = 15.1515 = $2,500 / 71.7336 = $34.85

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) $60.32 C) $53.12 D) $63.88

C) $53.12 $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

Which of the following is a type of growth mutual fund? A) U.S. government fund B) Money market fund C) Asset allocation fund D) GNMA fund

C) Asset allocation fund The other options are all considered income funds.

A client has $40,000 in cash in a money market that she would like to invest in the stock market, but she is concerned that the market might not have hit bottom. You have convinced her of the merits of investing for the long term and she has decided to use a systematic approach to investing in mutual funds. She has decided that after her initial investment of $5,000, she will invest $4,000 at the end of each quarter provided that the NAV of the fund is less than her cumulative average cost basis. This is an example of which of the following strategies? A) Dollar cost averaging B) Share averaging C) Averaging down D) Averaging up

C) Averaging down Dollar cost averaging utilizes a fixed dollar amount at regular intervals regardless of price. Share averaging purchases the same number of shares and requires different dollar amounts. Averaging up is not a viable strategy; the idea is to buy low and sell high.

Which of the following is a general characteristic of hedge funds? A) High marketability B) Full transparency and disclosure C) Charge both a management fee and a carried interest fee D) Little or no use of leverage

C) Charge both a management fee and a carried interest fee Hedge funds have few public disclosure requirements, may lack marketability, and use leverage.

What kind of investment company has no provision for redemption of outstanding shares? A) Mutual fund B) Unit investment trust C) Closed-end company D) Open-end company

C) Closed-end company The closed-end company has a fixed capitalization and, like regular corporations, outstanding shares trade on the open market.

Daniel has several investment company products within his retirement portfolio. One of these investments trades on an exchange, may trade at a premium or discount to its net asset value, and has a fixed capital structure. These features illustrate which of these investments? A) Hedge fund B) Unit investment trust C) Closed-end investment company D) Open-end investment company

C) Closed-end investment company A closed-end investment company (closed-end fund) is a type of company whose shares trade in the secondary market.

A financial reporter notices that the quoted price of one investment company's shares is at a 22% discount from the NAV. From this information, it can be deduced that the company is likely which of the following? A) Open-end investment company B) Unit investment trust C) Closed-end investment company D) Contractual plan of a mutual fund

C) Closed-end investment company If the selling price of an investment company is less than the NAV, the fund is likely a closed-end investment company.

Which combination of the following statements is true regarding the investment strategy known as dollar cost averaging? I. Invests the same dollar amount each month over a period of time II. Purchases the same number of shares each month over a period of time III. Lowers average cost per share over a period of time (assuming share price fluctuations) IV. Invests the same dollar amount each month to protect the investment from loss of capital A) I, II, III, and IV B) II and III C) I and III D) I and II

C) I and III The purpose of using dollar cost averaging is to lower the average price paid for a stock as a consequence of taking advantage of price fluctuations, especially when the stock price moves downward in a temporary correction. The strategy may lower the average cost, but does not protect against losses, especially if the stock is on a strong downward trend instead of the more normal upward trend.

Grace's portfolio is comprised of 40% U.S. corporate bond fund, 50% U.S. growth and income equity fund, and 10% municipal bond fund. Grace would like to reduce her portfolio's level of risk and maintain or improve return. Which of these could be recommended to Grace to achieve her goal? I. Global equity fund II. Biotechnology sector equity fund III. Louisiana municipal bond fund IV. Emerging market fund A) I only B) II, III, and IV C) I and IV D) III only

C) I and IV Adding foreign investments could reduce her portfolio's level of risk and possibly improve return. Foreign investments have a low correlation with U.S. securities and thus provide diversification benefits. Additional investment in U.S. equities or bonds will not provide as much diversification as international investing.

Max bought 100 shares of PET Corporation stock 10 years ago. He paid $10 per share for the stock. The stock currently has a fair market value of $50 per share. Choose the CORRECT statement regarding Max's stock. A) If Max sells the stock now, he must pay taxes on only half the amount he receives from the sale. B) If Max does not sell the stock now, he must pay taxes on the difference between the amount he paid for the stock and the current market price, which will increase his basis in the stock. C) If Max does not sell the stock this year, he will not have to pay taxes on the difference between the amount he paid for the stock and the current market price this year. D) If Max sells the stock now, he must pay taxes on the full $5,000 he receives from the sale.

C) If Max does not sell the stock this year, he will not have to pay taxes on the difference between the amount he paid for the stock and the current market price this year. If Max sells the stock today, he realizes the gain in the value of the stock and must pay taxes on the gain. The gain would equal the price at which Max sells the stock minus the original purchase price, or $40 per share. If the gain is not realized, Max has no tax liability for the increase in the value of the stock. Capital gains are only taxable when they are realized at the time of the sale.

Which one of the following options is true? Closed-End Funds | Open-End Funds A. Bought and sold in secondary market | Often sell at discount to NAV B. Often sell at premium to NAV | NAV computed daily C. Sector funds not permitted | Also known as unit trusts D. Fixed number of shares sold | Shares purchased directly from fund company A) Option B B) Option A C) Option D D) Option C

C) Option D Investors purchase shares of open-end funds directly from investment companies.

All of the following are risks associated with hedge funds except A) leverage. B) lack of transparency. C) long selling. D) higher risk investments.

C) long selling. Short selling is a risk associated with hedge funds because losses can be incurred in unlimited amounts.

Long-term bond funds have A) no reinvestment rate risk. B) minimal purchasing power risk. C) more interest rate risk than short-term bonds. D) no interest rate risk.

C) more interest rate risk than short-term bonds. Long-term bonds have greater purchasing power risk than short-term bonds.

Janine's investment portfolio is 50% growth stocks, 10% foreign stocks, and 40% blue-chip stocks. Janine is interested in further diversification. Which mutual fund would best meet her goal? A. Emerging market fund B. Global equity fund C. Bond fund D. Aggressive growth fund

C. Bond fund Janine's portfolio contains foreign equities and growth stocks. She does not own fixed-income securities.

A couple in a high tax bracket wants to invest in a mutual fund to provide current income without large principal fluctuations. They have a moderate risk tolerance, and they are considering the following funds: Fund A: High-yield single-state municipal bond fund (long term) Fund B: Long-term municipal bond fund Fund C: Intermediate-term municipal bond fund Fund D: Aggressive growth fund Which of these funds would be the best choice for this couple? A. Fund A B. Fund B C. Fund C D. Fund D

C. Fund C All three of the municipal bond funds will provide current, tax-free income, but large principal fluctuations are more likely in Fund A and Fund B because they invest in long-term bonds, which have higher durations than intermediate-term bonds. An aggressive growth fund is not appropriate in this situation because the couple desires current income

Stewart, age 29, is seeking an investment that offers the potential for long-term growth based on a broad market index representative of the largest domestic and international nonfinancial companies. He considers himself a moderate to aggressive risk taker and is interested in a low-cost, tax-efficient portfolio. Which of the following would be the best investment for Stewart? A. Long-Term Corporate Bond ETF B. Green Energy Mutual Fund C. Nasdaq 100 ETF D. Pacific Rim Growth ETF

C. Nasdaq 100 ETF Based on his investment objectives and risk tolerance, the Nasdaq 100 ETF is the best choice for Stewart. The Long-Term Corporate Bond ETF does not meet his need for a long-term growth investment. The Pacific Rim Growth ETF and the Green Energy Mutual Fund would be too concentrated in one market segment.

Karl and Wendy, ages 35 and 34, have provided their financial planner with the following information: Salary (Wendy) $100,000 Salary (Karl)$55,000 Investment portfolio $150,000 Personal debt $5,000 Personal residence $250,000 Mortgage$188,000 Checking account $12,000 1. 100% of the assets are invested in common stocks. They have communicated that they are aggressive risk takers and wish to reposition $8,000 from their checking account to their investments. They prefer a risky investment to add

C. Pharmaceutical stock The best choice for the couple is the pharmaceutical stock. This type of stock is generally riskier and may provide a higher rate of return than the other choices. Grocery stock is considered a defensive stock. Utility stock is an example of an income stock. An international airline stock is a cyclical stock.

In a rising stock market, which of the following methods of establishing basis in mutual fund shares is the most favorable to the taxpayer-owner? A. Average cost method B. FIFO C. Specific identification D. Amortized cost method

C. Specific identification In a stock market where prices are rising, specific identification of mutual fund shares sold will generally prove most favorable to the taxpayer. (FIFO is least favorable.) However, most taxpayers do not keep good financial records; therefore, the average cost method of determining basis in mutual fund shares is the most common.

Investors will typically choose a fund of funds (FOF) to A. avoid the double layer of management fees. B. focus solely on coinvestment opportunities. C. benefit from diversification across many private equity funds. D. exercise more control over individual portfolio companies.

C. benefit from diversification across many private equity funds. The diversification benefit of investing through FOFs (into multiple private equity funds) is one of the primary advantages of this investment program. The double layer of management fees and the loss of control over the individual portfolio companies are considered disadvantages. Coinvestments are just one of the activities managed by FOFs (along with primary and secondary investments).

Chelsea purchases a warrant for $2 per share that gives her the right to buy 80 shares of XYZ stock at $20 per share for a period of five years from date of purchase. Assume XYZ stock goes up to $25 per share after three years and Chelsea exercises the warrant. What profit does she make on the 80 shares? A) $210 B) $180 C) $150 D) $240

D) $240 profit = (gain on stock - cost of warrant) × number of shares; ($5/share - $2/share) × 80 shares = $240

Dividend reinvestment plans offer which of these advantages? A) A means for the company to retain more earnings B) An increase in the stock's par value C) A means for the company to repurchase some of its shares D) A convenient means to accumulate shares

D) 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.

Identify which of these statements regarding rights and warrants is CORRECT. I. Rights provide current common stockholders with the ability to retain their ownership percentage when new shares of stock are issued. II. 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

D) 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.

Harry invests in a money market mutual fund to provide funds for investment opportunities and emergencies. However, he is concerned about the potential disadvantages of placing too much money into this type of fund. Which of these is NOT an advantage of money market mutual funds? A) Ease of redemption B) Diversification C) Safety of principal D) High rates of return

D) High rates of return Money market mutual funds invest in highly liquid short-term instruments. They have significantly lower risk and lower returns when compared to investing in stocks.

Which of the following are positive characteristics of a dividend reinvestment program? I. Such a program has the benefit of dollar cost averaging. II. Dividend income is not taxed when reinvested. III. Dividend shares are purchased at no commission cost. IV. Dividend shares have no tax basis. A) II and IV B) I and II C) I, II, and III D) I and III

D) I and III Because the dividends are reinvested directly into additional company shares without having to make a purchase through a stockbroker, these purchases are made with no commission cost.

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. II. Like stocks, UITs are traded on the major exchanges. III. During the term of the trust, unit holders are taxed in the same manner as owners of variable annuities. IV. Upon maturity, the securities are generally liquidated and the proceeds distributed to the investor or trust beneficiaries. A) I, III, and IV B) I and II C) III and IV D) I and IV

D) I and IV 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.

Which of these are correctly defined bond classifications? I. Short-term - maturities up to five years II. Intermediate-term - maturities of five to seven years III. Long-term - maturities longer than seven years A) None of these B) I, II, and III C) III only D) I only

D) I only Intermediate-term bonds have maturities five to 10 years. Long-term bonds have maturities of longer than 10 years.

Which of the following are considered bond classifications for multisector bond funds? I. Foreign bonds II. High-dividend-paying common stocks III. Commodities A) II and III B) I, II, and III C) I and II D) I only

D) I only Multisector bond funds typically purchase three types of bonds: U.S. government bonds, high-yield corporate bonds, and foreign bonds.

Which of these is a correct justification for use of an investment in a client's portfolio? I. Blue chip common stocks because they provide a hedge against inflation II. FNMA (Federal National Mortgage Association) securities because they are backed by the full faith and credit of the U.S. government III. Aggressive growth stocks because they perform better during economic contractions A) I and II B) II and III C) I and III D) I only

D) 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).

Identify those risks that pertain to hedge funds. I. Overuse of leverage II. Excessive short selling III. Lack of transparency IV. Lack of regulation A) I and IV B) II, III, and IV C) II and III D) I, II, III, and IV

D) I, II, III, and IV A hedge fund is subject to all these risks. In addition, hedge funds are usually subject to higher investment risk than other types of funds.

Which of these factors should an investor consider when investing in mutual funds? I. Fund performance II. Consistency of performance III. Management continuity IV. Fund age A) I and II B) I, II, and III C) III and IV D) I, II, III, and IV

D) I, II, III, and IV All four factors, among others, are important to consider when selecting funds.

Which of the following methods can be used in determining the basis in a mutual fund when the shares were acquired at different times? I. Specific identification II. First in, first out (FIFO) III. Average cost method A) II and III B) I and III C) II only D) I, II, and III

D) I, II, and III All of these can be used to make this determination.

Equity income funds may hold which of these types of securities? I. Income-producing common stocks II. Convertible bonds III. Convertible preferred stocks A) I and II B) II and III C) I and III D) I, II, and III

D) I, II, and III All three types of securities may be in an equity income fund.

Exchange-traded funds (ETFs) generally offer which of these? I. Tax efficiency II. Low expense ratios III. Active professional management IV. Marketability A) I and II B) I, II, III, and IV C) I, II, and III D) I, II, and IV

D) 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.

Identify the CORRECT statements regarding a 2-for-1 stock split. I. The total market value of the outstanding stock decreases. II. The total number of shares outstanding doubles. III. The share price is reduced by one-half. IV. The shareholder will own a higher proportion of the company. A) II, III, and IV B) I and II C) I and III D) II and III

D) II and III In a 2-for-1 stock split, the number of outstanding shares is doubles and the share price is reduced by one-half. The total market value of the company's stock and the shareholder's interest remains the same.

Select the CORRECT statements regarding stock splits. I. Following a stock split, an investor owns an increased percentage of the company. II. Because of the increased number of shares an investor owns following a stock split, the stock split is a taxable event to the investor. III. A stock split results in a downward adjustment in a shareholder's per share basis. IV. A reverse stock split reduces the total shares outstanding and increases the price per share. A) II and IV B) I, II, III, and IV C) I and III D) III and IV

D) III and IV A stock split is not a taxable event to the investor. Following a stock split, the investor owns the same percentage of the company as before, but each share now represents a correspondingly smaller percentage.

Your client is invested in a well-diversified portfolio of mutual funds. Recently he read about closed-end funds, and he wonders if he should consider adding them to his portfolio. As his advisor, you would explain to him which of the following regarding closed-end funds? I. Closed-end managers periodically close the fund to new investors, whereas open-end managers continuously offer shares to new investors. II. Closed-end shares are purchased at NAV plus a commission, whereas some open-end shares can be purchased with no commission. III. Closed-end shares generally trade at a discount or premium to NAV, whereas open-end shares trade at NAV plus commission, if applicable. IV. The number of available shares in a closed-end fund is fixed, whereas the number of available shares in an open-end fund varies. A) I and II B) II and III C) I and III D) III and IV

D) III and IV Closed-end funds are closed to new investors after all shares are initially sold; thereafter, they can only be purchased on the open market from another investor. Closed-end shares trade at their market price plus commission, not at NAV plus commission.

Identify the entity that issues guaranteed investment contracts (GICs). A) Credit unions B) Open-end investment companies C) Commercial banks D) Insurance companies

D) 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.

Which of these statements about closed-end funds is CORRECT? A) Closed-end shares are purchased from and sold by the fund company. B) Closed-end funds continuously offer new shares to the public. C) Closed-end funds have 12b-1 fees. D) Investors in closed-end shares can profit from changes in the discount to NAV.

D) Investors in closed-end shares can profit from changes in the discount to NAV. When the discount shrinks, an investor can profit even if the NAV of the underlying portfolio does not change.

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) Wednesday, May 16 C) Friday, May 11 D) Monday, May 14

D) 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.

Select the investment that gives the shareholder a short-term opportunity to buy new shares of the new stock issue, thereby maintaining the shareholder's respective overall percentage ownership in the corporation. A) Warrants B) Call options C) Preferred stock D) Rights

D) Rights Rights are a purchase option for stock that allows a shareholder the opportunity to buy shares of the new stock issue, thereby maintaining the overall percentage ownership in the corporation.

Which of the following is true of warrants? A) They increase the cost of capital necessary to float an issue B) There are incentives for investors to purchase the corporation's preferred stock C) They are incentives for investors to purchase futures contracts D) They allow for customization of terms among all potential investors

D) They allow for customization of terms among all potential investors Warrants are essentially customized (not standardized) call options issued to meet the needs of both the issuing corporation and the investor.

Which of the following statements is CORRECT regarding exchange-traded funds (ETFs)? A) They can be exchanged for other ETFs in the same family. B) They trade right at net asset value due to arbitrage transactions. C) They are usually tax-inefficient. D) They are permitted to sample an index.

D) They are permitted to sample an index. Rather than buy every security in an index, some ETFs only sample the index, called representative sampling, especially when the index contains a very large number of issues.

Louis owns an investment that is an unmanaged portfolio in which the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the investment portfolio terminates. This statement best describes which type of investment? A) Open-end investment company B) Hedge fund C) Closed-end investment company D) Unit investment trust

D) Unit investment trust A unit investment trust (UIT) is an investment company whose units are sold in the secondary market and is generally unmanaged, or passively managed as the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the UIT terminates.

An investor who is looking for the opportunity to buy an investment that generates consistent income with no portfolio turnover, no management fee, and low operating expenses would choose which of these? A) Guaranteed investment contract (GIC) B) Closed-end fund C) Open-end fund D) Unit investment trust

D) Unit investment trust Unit investment trusts are fixed portfolios of securities, most frequently in fixed income that an investor pays a load upfront to own, but have no turnover because it is a fixed portfolio of self-liquidating securities that have no management fee.

An investor should choose index funds if he or she believes in A) technical analysis. B) fundamental analysis. C) specialized investing. D) a passive investment strategy.

D) a passive investment strategy. Index funds are used in a passive investment strategy. The purpose of an indexed portfolio is not to beat the targeted index (e.g., S&P 500 Index) but merely to match its long-term performance, less any management fees and administrative costs.

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) on the declaration date. B) on or after the ex-dividend date. C) before the payment date. D) before the ex-dividend date.

D) 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.

All of these are examples of investment strategies for mutual funds, except A) short selling. B) lack of diversification. C) leverage through borrowing. D) manager bias.

D) 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.

All of the following are considered risks inherent with equity investments except A) interest rate risk. B) financial risk. C) market risk. D) reinvestment rate risk.

D) reinvestment rate risk. Interest rate risk, market risk, business risk, and financial risk are all risks that impact equity investments. Reinvestment rate risk is a primary consideration for fixed-income investments.

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) rights offering. B) short put option. C) long call option. D) warrant.

D) 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.

Which of the following clients would be the best candidate for a hedge fund? A. Marcy, age 23, recent college graduate, student debt, low net worth, entry-level position at a local law firm B. Bob and Carol, mid 30s, two young kids, homeowners, $50,000 net worth, long-term investment perspective C. Howard, age 78, widowed, conservative risk taker, $250,000 net worth, lives on a fixed income D. Drew and Fran, late 50s, no dependents, semiretired, $5 million net worth, moderate risk takers, divers

D. Drew and Fran, late 50s, no dependents, semiretired, $5 million net worth, moderate risk takers, diversified holdings The best choice for a hedge fund is Drew and Fran. They have no dependents, have a high net worth (diversified), and exhibit a moderate risk tolerance. The other clients would generally not be considered candidates for a hedge fund based on net worth and investment objectives.

Mary and Ed, ages 62 and 68, would like to add a new mutual fund investment to their portfolio. They are seeking income along with a preservation of capital. Which of the following would be the best alternative based on their investment objectives? A. High-yield bond fund B. Asset allocation fund C. Russell 2000® Index fund D. U.S. government bond fund

D. U.S. government bond fund With investment objectives of income and capital preservation, they should choose the U.S. government bond fund. This type of fund is designed to offer an investor income. Also, the securities within this type of portfolio should provide the investor with principal stability.

Which of the following statements regarding unit investment trusts (UITs) is NOT correct? A. They do not have a board of directors. B. They do not employ an investment advisor. C. They do not actively manage their own portfolios. D. Unit holders are not taxed on capital gains, interest, or dividends until they dispose of their units or the trust terminates.

D. Unit holders are not taxed on capital gains, interest, or dividends until they dispose of their units or the trust terminates. During the term of the trust, capital gains, interest, and dividends earned by the trust and passed through to the unit holders are subject to taxation.