ch.17-21

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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.


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