FIN3340 - Investments
Stringent regulations and vigorous enforcement have all but eliminated unethical behavior by financial professionals in recent years.
False
Andrew and Jennifer are in the 22% marginal tax bracket. Three years ago they purchased 100 shares of stock at $20 a share. In 2018, they sold the 100 shares for $29 a share. What is the amount of federal income tax they owe as a result of this sale? A) $135 B) $165 C) $225 D) $435
A) $135 Realized Capital Gain = 29-20 = 9 * 100 = 900 Long-term capital gain tax rate = 15% Tax on realized capital gain = 900*15% = 135
57) Because Doug lost his job in 2018, his income was only $27,000. To make ends meet, he sold stock and realized capital gains of $5,000. Doug is single and files as an individual. The tax on his capital gains will be A) $0. B) $600. C) $750. D) $1,000.
A) 0%
During which period are stock returns typically the lowest? A) 6 months before a recession B) during a recession C) 12 months after a recession D) there is no discernable pattern
A) 6 months before a recession The returns on common stock and other equity-related securities respond sharply to macroeconomic conditions. Stock values often fall several months before periods when economic activity is declining. The reason that stocks move ahead of the business cycle is that stock prices reflect investors' beliefs about companies' future prospects. The same thing happens in reverse when investors believe the economy will perform better. Stock prices rise in anticipation of strong future economic performance. The average monthly return on the stock market was lower in the six months leading up to a recession than it was during the recession. On average the stock market performs very well in the first 12 months after a recession ends.
In the U.S., the most prestigious designation for financial planners is A) CFP. B) CPA. C) ING. D) SIPC.
A) CFP. CFP-Certified Financial Planner
The major difference between mutual funds and exchange-traded funds (ETFs) is A) ETFs can be bought or sold at their current price at any time during normal trading hours. B) mutual fund portfolios are always based on one of the major market indexes. C) ETFs invest in broadly diversified portfolios of securities. D) ETFs are actively managed.
A) ETFs can be bought or sold at their current price at any time during normal trading hours. ETFs trade on exchanges so that investors can buy and sell an ETF at its current market price any time during regular trading hours. Mutual funds are not traded on exchanges, and the transactions occur at the end of the day using fund's closing price.
On a net basis, funds in the financial markets are generally supplied by A) individuals. B) both individuals and business firms. C) business firms. D) the government
A) Individuals Individuals who spend less than their income have savings, and they want to invest surplus funds to earn a return. Thus, Individuals are generally net suppliers of funds.
Both the holding period to qualify and the tax rate on long-term capital gains A) are subject to political pressure and occasionally change. B) are very stable and have not changed since the 1960s. C) are phased out on incomes over $388,351. D) are adjusted for inflation every year.
A) are subject to political pressure and occasionally change.
Since 2010, the interest rate on passbook accounts and certificates of deposit has A) been less than the average rate of inflation. B) closely tracked the average rate of inflation. C) exceeded the average rate of inflation by 1.5%. D) fluctuated widely.
A) been less than the average rate of inflation. The average interest rate on bank money market savings accounts has been below 0.5% while the average inflation rate has been about 1.7%
Relative to a traditional IPO process, a direct listing A) can save the issuer millions of dollars in investment banking fees. B) is illegal in the United States. C) is much more costly so rarely used. D) has a much longer road show.
A) can save the issuer millions of dollars in investment banking fees. A direct listing saves the issuer millions of dollars in investment banking fees, while allowing pre-IPO investors to liquidate some of their holdings and making it easier for the firm to add equity to employee compensation packages. In a direct listing, there are no underwriters. The process of using underwriters and selling at a discount increases the time and cost for a company that is issuing new shares. The cost of the process is much lower than the cost of an IPO. Direct listing helps companies avoid hefty fees paid to investment banks. It also helps them avoid the indirect cost of selling the stocks at a discount.
Which of the following has declined in recent years? A) direct ownership of stock by individual investors B) the percentage of foreign stocks held in typical portfolios C) institutional ownership of common stocks D) the timeliness of information available to investors
A) direct ownership of stock by individual investors The direct ownership of stock by individuals has declined over the years while indirect ownership has been rising. The factors that caused this change include the 1981 Internal Revenue Service rules allowing 401(k) contributions to be deducted from paychecks, the 1993 development of exchange-traded funds, and the creation of Roth IRA accounts in 1997.
Stocks are a(n) ________ investment representing ________ of a business. A) direct; ownership B) direct; debt C) indirect; ownership D) indirect; debt
A) direct; ownership A direct investment is one in which an investor directly acquires a claim on security or property. By buying stock in a company, an investor has made a direct investment and becomes a part owner of that firm. Stocks are equity investments that represent ownership in a corporation. Each share of stock represents a fractional ownership interest in the firm. Page 37 - Direct or Indirect investments
Over the past decade, passively managed index funds have A) grown quite a lot. B) declined in popularity. C) attracted almost 100% of investment dollars. D) almost disappeared as a fund type.
A) grown quite a lot. One reason for this trend is that passively managed funds tend to have lower expense ratios than actively managed funds.
Tax planning A) guides investment activities to maximize after-tax returns over the long term for an acceptable level of risk. B) ignores the source of income and concentrates solely on the amount of income. C) is primarily done by individuals with incomes below $200,000. D) is limited to reviewing income for the current year and determining how to minimize current taxes.
A) guides investment activities to maximize after-tax returns over the long term for an acceptable level of risk. Tax planning involves looking at earnings, both current and projected, and developing strategies that will defer and minimize taxes. The tax plan should guide investment activities to achieve maximum after-tax returns (for an acceptable risk level) over the long run.
A person's marginal tax rate is the rate they pay A) on the next dollar of income. B) on all income. C) only on investment income. D) only on earned income.
A) on the next dollar of income. The marginal tax rate is the tax rate paid on the next dollar of income. Under the progressive income tax method used for federal income tax in the United States, the marginal tax rate increases as income increases. Marginal tax rates are separated by income levels into seven tax brackets.
One reason that passively managed mutual funds have grown in popularity relative to actively managed mutual funds is that A) passive fund expense ratios are lower. B) passive fund returns are always higher. C) active funds are too diverse. D) none of these
A) passive fund expense ratios are lower. Expense ratio is a fee charged to investors based on a percentage of the assets invested in a fund. It accrues daily and represents one of the primary costs that investors pay when they purchase mutual funds shares. Expense ratios are generally higher for funds that invest in riskier securities. Since actively managed funds are more expensive to operate, expense ratios tend to be higher for actively managed funds.
The primary risk associated with a short-term investment is A) purchasing power risk. B) default risk. C) interest rate risk. D) economic risk.
A) purchasing power risk. Short-term investments are generally not very risky. Their primary risk results from inflation risk—the potential loss of purchasing power that may occur if the rate of return on these investments is less than the inflation rate.
Direct listings are more common among A) small firms. B) large firms. C) publicly traded firms. D) established firms with long track records.
A) small firms. DPO is attractive to small companies and companies with an established and loyal client base.
The over the counter market describes transactions A) that involve the purchase and sale of smaller, unlisted securities. B) that take place in a broker's office. C) that are not reported. D) that are not regulated by the SEC.
A) that involve the purchase and sale of smaller, unlisted securities. The over-the-counter (OTC) market, which involves trading in smaller, unlisted securities, represents the other major segment of the secondary market
Alexandra purchased a stock one year ago at a price of $64 a share. In the past year, she has received four quarterly dividends of $1.50 each. Today she sold the stock for $76 a share. Her capital gain per share is A) $6.00. B) $12.00. C) $(6.00). D) $18.00.
B) $12.00 76 - 64 = 12 The return on common stock comes from two sources: dividends and capital gains. Dividends are payments the corporation makes to its shareholders. A capital gain represents the amount by which the proceeds from the sale of a capital asset exceed its original purchase price. Thus, Alexandra's capital gain per share is $12.
Jon earned $82,500 in taxable income, all from wages and interest, and files an individual tax return. What is the amount of Josh's taxes for the year 2018? Round to the nearest dollar. A) $13,750 B) $14,090 C) $18,150 D) $12,285
B) $14,090 Ordinary income: 9,525 x 10% = 952.50 (38,700 - 9,526) x 12% = 3,500.88 (82,500 - 38,701) x 22% = 9,635.78 Tax liability: 952.50 + 3,500.88 + 9,635.78 = 14,089.16
Which of the following are true concerning institutional investors? I. Institutional investors are professionals who manage money for other people. II. Banks, insurance companies, and mutual funds are all institutional investors. III. Institutional investors are individuals who invest indirectly through financial institutions. IV. Institutional investors invest large sums of money. A) I and II only B) I, II and IV only C) II, III and IV only D) I, II, III and IV
B) I, II and IV only
Which of the following is NOT an investment as defined in the text? A) a certificate of deposit issued by a bank B) a new automobile C) a United States Saving Bond D) a mutual fund held in a retirement account
B) a new automobile According to the textbook, an investment is any asset into which you place funds with the expectation that it will generate positive income and/or increase its value. Thus, a new automobile is not an investment, because it fails both tests of the definition: It does not provide added income, and its value does not increase.
Stocks purchased in the secondary market are purchased A) directly from the issuing corporation. B) from other investors. C) from small, little-known brokerages. D) indirectly through financial institutions
B) from other investors Capital markets can be further classified as either primary or secondary, depending on whether issuers sell securities directly to investors (as in the primary market) or investors trade securities with each other (as in the secondary market).
IPO activity tends to peak when stock prices A) have fallen sharply. B) have risen sharply. C) are volatile and unstable. D) Stock prices have relatively little influence on IPO activity.
B) have risen sharply. IPO volume moves dramatically as economic conditions change and as the stock market moves up and down. Generally speaking, more companies go public when the economy is strong and stock prices are rising.
An exchange traded fund that invests in the stocks of large corporations is an example of A) direct investment. B) indirect investment. C) derivative investment. D) tangible investment
B) indirect investment An indirect investment is an investment in a collection of securities or properties managed by a professional investor. An exchange-traded funds (ETF) hold portfolios of securities, and investors buy shares in the ETF. Investors in an ETF own an interest in the fund's collection as opposed to shares in the companies in which the fund invests. Pages 37, 44, and 45
A rights offering is the A) initial offering of securities to the public. B) offering of new securities to current shareholders on a pro-rata basis. C) sale of newly issued shares of stock to the general public. D) sale of securities directly to a select group of investors.
B) offering of new securities to current shareholders on a pro-rata basis. A rights offering is effectively an invitation to existing shareholders to purchase additional new shares in the company. More specifically, this type of issue gives existing shareholders securities called "rights," which, well, give the shareholders the right to purchase new shares at a discount to the market price on a stated future date. The company is giving shareholders a chance to increase their exposure to the stock at a discount price.
Funds that merely track a broad index and make no attempt to identify undervalued or exceptional growth stocks are known as A) hedge funds. B) passively managed funds. C) actively managed funds. D) equity funds.
B) passively managed funds. In a passively managed fund, managers make no attempt to identify under- or overvalued securities. Instead, they buy a diversified portfolio of stocks and try to mimic or match the return on a market index. Because these funds provide returns that are close to the returns on a market index, they are called index funds.
Research indicates that investors who monitor their portfolios less frequently A) outperform those who hold investments for the long-term and trade infrequently. B) tend to invest in riskier assets. C) earn rates of return similar to those who hold investments for the long-term and trade infrequently. D) are more highly educated and in higher income brackets than those who hold investments for the long term and trade infrequently.
B) tend to invest in riskier assets. Almost by definition, risky investments will frequently experience periods of low or even negative returns, even though over long periods of time risky assets tend to earn higher returns than safe assets do. When investors check their portfolios frequently, they apparently find it uncomfortable to observe the periods when risky investments perform badly, so they simply take less risk. One study found that when a new law in Israel prevented retirement funds from displaying returns for any period shorter than 12 months, investors put more of their money in riskier assets. In the long run, taking very little risk leads to very low returns, so it is not clear that watching investments too closely is a good thing.
The primary market tends to be more active when A) the economy is slowing and stock prices are falling. B) the economy is expanding and stock prices are rising. C) interest rates are rising. D) early in the calendar year.
B) the economy is expanding and stock prices are rising. The primary market is the market in which firms and governments sell new issues of securities to investors. One way that a company sells its securities in the primary market is the initial public offering (IPO), which marks the first public sale of a company's stock, thus converting the firm from private to public ownership. IPO volume moves dramatically as economic conditions change and as the stock market moves up and down. Generally speaking, more companies go public when the economy is strong, and stock prices are rising.
50) In 2018, Jordan and Kailey earned a combined taxable income of $148,800 from employment plus $1,000 in long-term capital gains and they file a joint tax return. What is their total federal income tax? Round to the nearest dollar. A) $33,780 B) $29,063 C) $24,765 D) $24,659
C) $24,765 Ordinary income 19,050 x 10% = 1,905 (77,400 - 19,051) x 12% = 7,001.88 (148,800 - 77,401) x 22% = 15,707.78 1,905 + 7,001.88 + 15,707.78 = 24,614.66 Long-term capital gains 1,000 x 15% = 150.00 Total tax liability: 24,614.66 + 150 = 24,764.66
Federal insurance protects passbook savings accounts and money market deposit accounts (MMDAs) up to A) $100,000. B) $150,000. C) $250,000. D) $1,000,000.
C) $250,000 Government agencies insure deposits in commercial banks, savings and loans, savings banks, and credit unions for up to $250,000 per account.
Michelle and Patrick are in the 24% marginal tax bracket. They bought 100 shares of DJN stock at $45 per share and sold them 4 years later in 2018 at $22 per share? By how much did their loss reduce their taxes in the year when they sold the stock? A) $0 B) $345 C) $552 D) $1,260
C) $552 Capital loss = 22 - 45 = -23 x 100shares = -2,300 2,300 capital loss x 24% marginal tax bracket = 552
For a taxpayer in the 22% marginal tax bracket, a long-term capital gain realized in 2018 will be taxed at A) 5%. B) 10%. C) 15%. D) 25%.
C) 15% The 22% marginal tax bracket income is $38,701 to $82,500 for individual returns and $77,401 to $165,000 for joint returns. The tax rates for long-term capital gains for incomes correspondent to 22% bracket is 15% for income $38,601 to $425,800 individual returns and $77,201 to $479,000 for joint returns
Short-term investments I. provide liquidity. II. fill an important part of most investment programs. III. provide a high rate of return with low risk. IV. provide resources for emergencies. A) I and IV only B) II and IV only C) I, II and IV only D) I, II, III and IV
C) I, II and IV only Short-term investments represent an important part of most savings and investment programs. They generate income, although with the prevailing near-zero interest rates in recent years. Their primary function is to provide a pool of reserves for emergencies or simply to accumulate funds for some specific purpose.
The governmental agency that oversees the capital markets is the A) Federal Trade Commission. B) Federal Reserve. C) Securities and Exchange Commission. D) Fair Trade and Banking Agency.
C) Securities and Exchange Commission. The Securities and Exchange Commission (SEC) is a federal regulatory agency that regulates the securities markets.
Which one of the following statements concerning the primary market is correct? A) A transaction in the primary market is between two private stockholders. B) The first public sale of a company's stock in the primary market is called a seasoned new issue. C) The first public sale of a company's stock is called an IPO. D) A rights offering is a direct sale of stock to an institution that participates in the primary market.
C) The first public sale of a company's stock is called an IPO.
Beginning investors with small amounts to invest should A) avoid stock investments completely. B) invest all of their money in one high-quality stock. C) buy mutual funds or exchange-traded funds (ETFs). D) buy a portfolio of very low-priced stocks (penny stocks).
C) buy mutual funds or exchange-traded funds (ETFs). Mutual funds and ETFs allow investors to construct a well-diversified portfolio without having to invest a large sum of money
Short-term securities are bought and sold in the A) capital market. B) primary market. C) money market. D) stock market
C) money market. The money market is the market where short-term debt securities (with maturities of less than one year) trade. Investors use the money market for short-term borrowing and lending.
99) The document that describes the issuer of a security's management and financial position is known as a A) balance sheet. B) 10-K report. C) prospectus. D) red herring.
C) prospectus. A prospectus is a disclosure document that describes the key aspects of the securities to be issued, the issuer's management, and the issuer's financial position. Among other pertinent information, the prospectus provides potential investors with a list of associated risk factors, such as those related to the issuer's business and industry (e.g., opportunities for growth or competition for market share).
Which of the following is an example of a tangible asset? A) bonds B) mutual funds C) real estate D) stocks
C) real estate
Investors seeking to increase their wealth as quickly as possible would invest in A) corporate bonds and preferred stock. B) large company stocks with high dividends. C) smaller companies pursuing rapid growth. D) government bonds and low-risk income stocks.
C) smaller companies pursuing rapid growth.
Investment bankers who join together to share the financial risk associated with buying an entire issue of new securities and reselling them to the public is called a(n) A) selling group. B) tombstone group. C) underwriting syndicate. D) primary market group.
C) underwriting syndicate. In the case of large security issues, the lead or originating investment bank brings in other banks as partners to form an underwriting syndicate. The syndicate shares the financial risk associated with buying the entire issue from the issuer and reselling the new securities to the public.
The amount protected by the Federal Deposit Insurance Corporation in non-interest-bearing checking accounts is A) zero. B) $100,000. C) unlimited. D) $250,000.
D) $250,000.
A well-conceived investment policy statement will take into account A) the investor's current age and economic situation. B) the investor's preference for frequent or infrequent trading. C) the types of investments the investor is willing to consider. D) all of the above
D) All of the above
Stocks of large publicly traded companies are A) rarely traded. B) illiquid. C) rarely decline in value. D) highly liquid.
D) Highly liquid In general investments traded in thin markets, where transaction volume is low, tend to be less liquid than those traded in broad markets. Assets such as stocks issued by large companies and bonds issued by the U.S. Treasury are generally highly liquid
Which of the following represents investment goals? I. saving for major expenditures such as a house or education II. sheltering income from taxes III. increasing current income IV. saving funds for retirement A) I and IV only B) III and IV only C) I, III and IV only D) I, II, III and IV
D) I, II, III and IV Investment goals are the financial objectives that one wishes to achieve by investing.
Jobs in which of the following fields require an understanding of the investment environment? I. commercial banking II. corporate finance III. financial planning IV. insurance A) I and IV only B) I, II and IV only C) II, III and IV only D) I, II, III and IV
D) I, II, III and IV Regardless of the job title, a career in finance requires an understanding of the investment environment.
Which one of the following has the lowest level of risk? A) commercial paper B) money market mutual fund account C) banker's acceptance D) U.S. Treasury bill
D) U.S. Treasury bill Commercial paper: is an unsecured, short-term debt instrument issued by corporations. Money market mutual fund account: professionally managed portfolios of high quality, short-term debt securities that pay dividends that generally reflect short-term interest rates. Many investors use money market funds to store cash or as an alternative to investing in the stock market. Banker's acceptance: Banker's acceptance (BA) is a negotiable piece of paper that functions like a post-dated check. A bank, rather than an account holder, guarantees the payment. Banker's acceptances (also known as bills of exchange) are used by companies as a relatively safe form of payment for large transactions. U.S. Treasury Bills: A Treasury Bill (T-Bill) is a short-term U.S. government debt obligation backed by the Treasury Department with a maturity of one year or less. Thus, the T-Bill has the lowest level of risk because it is backed by the U.S. Treasury Department
The government is generally A) not involved in the financial markets. B) the owner of the financial market. C) a supplier of funds to the financial market. D) a demander of funds in the financial market
D) a demander of funds in the financial market Governments often spend more than their taxes revenues; they usually need to raise more funds and they do so by issuing bonds and other debt securities. Thus, typically governments are net demanders of funds.
A major function of investment banking firms is A) assisting businesses when they issue stocks and bonds. B) providing financial planning services to wealthy individuals. C) developing investment strategies to neutralize risk. D) all of these are major functions of investment banking firms.
D) all of these are major functions of investment banking firms. Investment banks help firms and governments raise money by issuing stocks and bonds, and they facilitate trading activities of both institutional and retail investors by making markets. Their in-house security analysts provide research on both equity and fixed-income securities, and they provide financial advice to and manage financial assets for high net worth individuals, firms, institutions, and governments. Investment banks even provide their clients with quantitative analysis or program trading and consultation on mergers and acquisitions.
Stocks and bonds are traded in A) securities and exchange commissions. B) money markets. C) federal trade commissions. D) capital markets.
D) capital markets. Investors turn to the capital market to buy and sell long-term securities (with maturities of more than one year), such as stocks and bonds. In the capital market, investors can make transactions in a wide variety of financial securities, including stocks, bonds, mutual funds, exchange-traded funds, options, and futures
Which of the following investments represents partial ownership of a corporation? A) bonds B) mutual funds C) commercial paper D) common stock
D) common stock Common stock is an equity investment that represents ownership in a corporation.
Which of the following has increased in recent years? A) direct ownership of stock by individual investors B) the percentage of domestic stocks held in typical portfolios C) institutional ownership of common stocks D) indirect ownership of stocks through mutual funds and ETFs.
D) indirect ownership of stocks through mutual funds and ETFs.
Debt represents funds loaned in exchange for A) dividend income and the repayment of the loan principal. B) dividend income and an ownership interest in the firm. C) interest income and a partial ownership interest in the firm. D) interest income and the repayment of the loan principal.
D) interest income and the repayment of the loan principal. Debt is simply a loan that obligates the borrower to make periodic interest payments and to repay the full amount of the loan by some future date. When companies or governments need to borrow money, they issue securities called bonds. page 38
Investors seeking a diversified, professionally managed portfolio of securities can purchase shares of A) preferred stock. B) convertible securities. C) insurance policies. D) mutual funds
D) mutual funds A mutual fund is a portfolio of stocks, bonds, or other assets purchased with a pool of funds contributed by many different investors and managed by an investment company on behalf of its clients. Investors in a mutual fund or an ETF own an interest in the fund's collection of securities. Most individual investors who own stocks do so indirectly by purchasing mutual funds that hold stocks. When they send money to a mutual fund, investors buy shares in the fund (as opposed to shares in the companies in which the fund invests), and the price of the mutual fund's shares reflects the value of the assets that the fund holds. Mutual funds allow investors to construct well-diversified portfolios without having to invest a large sum of money.
Which of the following has set an outstanding example of ethical behavior in the financial professions? A) Bernard Madoff of Madoff Securities B) Hank Greenberg of AIG C) Ramalinga Raju of Satyam Computers D) none of the above
D) none of the above Bernie Madoff, Ramalinga Raju of Satyam Computer Services, Hank Greenberg of American International Group (AIG), and David Glenn of Freddie Mac, are key executives charged or convicted of financial fraud. Source: Ethical Failure - Massaging the Numbers - page 55
Which of these alternatives is NOT an option available to companies offering their stock to the public for the first time? A) a public offering B) private placement C) rights offering D) prospectors
D) prospectors To sell its securities in the primary market, a firm has three choices. It may make (1) a public offering, in which the firm offers its securities for sale to public investors; (2) a rights offering, in which the firm offers shares to existing stockholders on a pro rata basis (each outstanding share gets an equal proportion of new shares); or (3) a private placement, in which the firm sells securities directly without SEC registration to select groups of private investors such as insurance companies, investment management funds, and pension funds.
Which one of the following would be the least liquid investment? A) stock B) put options C) money market mutual fund D) real estate
D) real estate Investopedia defines illiquidity as "the state of a security or other asset that cannot easily be sold or exchanged for cash without a substantial loss in value."1 Opposite to securities that are traded at high volumes, such as stocks and treasury bonds, illiquid assets include private securities and hard assets that are not traded as frequently. Illiquidity stems from the depth of supply and demand within an asset's market, as well as the nature of the asset, such as ease of valuation and ability to transact.
Which of the following is NOT traded in the securities markets? A) stocks B) bonds C) derivatives D) real estate
D) real estate Securities are investments issued by firms, governments, or other organizations that represent a financial claim on the issuer's resources. The Securities markets are organized exchanges plus over-the-counter markets in which securities are traded. Since real estate consists of assets such as residential homes, raw land, and a variety of forms of income property, it is not traded in the securities markets
In selecting investments consistent with your goals, you should consider A) rates of return and taxes only. B) the pre-tax rate of return only. C) annual dividends and taxes only. D) risks, returns, and taxes.
D) risks, returns, and taxes.
When the offer price is lower than the market price on the first day of trading, the difference is known as A) the spread. B) overpricing. C) the underwriter's fee. D) underpricing.
D) underpricing. Because IPO shares typically go up as soon as they start trading, we say that IPOs are underpriced on average. IPO shares are underpriced if they are sold to investors at a price that is lower than what the market will bear.
Most sources of investment information are in print format, expensive, and difficult to access.
FALSE Financial news is plentiful and finding financial information has become easier than ever. Traditional media outlets, including TV networks such as CNBC, Bloomberg Television, and Fox Business Network, and print-based powerhouses such as The Wall Street Journal and The Financial Times, provide financial advice for individual investors. In addition, more people obtain investment information from the Internet than from all other sources combined. The Internet makes enormous amounts of information readily available, enables investors to trade securities with the click of a mouse, and provides free and low-cost access to tools that were once restricted to professional investors.
Bond interest and stock dividends are different ways of distributing a corporation's earnings
False A bond is a debt obligation. Investors who buy corporate bonds are lending money to the company issuing the bond. Bond interest represents the interest to be paid on the money borrowed via the bond issue. Source: https://www.sec.gov/files/ib_corporatebonds.pdf
Chartered Financial Analyst (CFA) is a degree offered by several prestigious business schools.
False A chartered financial analyst (CFA) is a globally-recognized professional designation given by the CFA Institute, (formerly the AIMR (Association for Investment Management and Research)), that measures and certifies the competence and integrity of financial analysts. Candidates are required to pass three levels of exams covering areas, such as accounting, economics, ethics, money management, and security analysis.
A red herring is a term referring to false or misleading statements in the prospectus.
False A red herring refers to a preliminary prospectus. The disclaimer statement across the top of the page is normally printed in red, which explains why a preliminary prospectus is often called a red herring.
Money market accounts, certificates of deposit, bonds, and commercial paper are all forms of short-term investment vehicles.
False Bonds are long-term debt instruments.
Call options on common stock are a form of equity
False Call options are an example of derivative security. Call options are financial contracts that give the option buyer the right but not the obligation to buy a stock, bond, commodity, or other asset or instrument at a specified price within a specific time period. The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset increases in price.
Under current tax laws, most taxpayers will pay a lower tax rate on capital gains than on dividends
False Capital gain represents the amount by which the proceeds from the sale of a capital asset exceed its original purchase price. Dividends are payments the corporation makes to its shareholders. Short-term capital gains and dividends are classified as ordinary income, and it is taxed at the federal level at the current income tax bracket level. Long-term capital gains have favorable tax treatment and are taxed at rates of 0%, 15%, or 20% depending on the investor's income level.
Capital markets deal exclusively in stock. Money markets deal exclusively in debt instruments.
False Capital market is the market where long-term securities trade. The money market is the market where short-term debt securities (with maturities of less than one year) trade
Institutional investors are individuals who invest indirectly through financial institutions
False Institutional Investors are large institutions that trade securities in the market in large quantities on behalf of their investors. Institutional investors include pension funds, mutual funds, money managers, insurance companies, investment banks, commercial trusts, endowment funds, hedge funds, and also some private equity investors. Institutional investors account for more than 85% of the volume of trade on the New York Stock Exchange. Institutional Investors move large blocks of shares and can have a tremendous influence on the stock market's movements. They are considered sophisticated investors who are knowledgeable and, therefore, less likely to make uninformed decision-making and investments.
Institutional investors manage money for businesses and nonprofit organizations, but not for individuals.
False Institutional investors are investment professionals who earn their living by managing other people's money. These professionals trade large volumes of securities for individuals, as well as for businesses and governments.
A non-interest-bearing checking account is still considered an investment.
False It fails both tests of the investment definition: It does not provide added income, and its value does not increase. In fact, over time, inflation erodes the purchasing power of money left in a non-interest-bearing checking account
Primary markets deal in the stocks of larger, well-known companies; secondary markets deal in the stocks of smaller, less well-known companies
False Most companies that go public are small, fast-growing companies that require additional capital to continue expanding, and they go public on the primary market
IPOs are relatively safe investments
False Most companies that go public are small, fast-growing companies that require additional capital to continue expanding, and they go public on the primary market. Thus, investing in IPOs is risky business, particularly for individual investors who can't acquire shares at the offer price. Most of those shares go to institutional investors and brokerage firms' best clients. Although news stories often chronicle the huge first-day gains, IPO stocks are not necessarily good long-term investments. IPO firms tend to underperform for at least the first three years following the IPO.
Certified Financial Planners typically manage institutional portfolios.
False The CFP® program is primarily designed for people who want to work directly with clients, helping them develop and execute investment plans. People with the CFP® credential typically work as financial advisors.
Short-term investments generally provide liquidity, safety, and a high rate of return.
False The major advantages of short-term investments are their high liquidity and low risk. Perhaps their biggest disadvantage is their relatively low return. Because these securities are generally so low in risk, the returns on short-term investments average less than the returns on long-term investments.
The price of stock sold in an IPO is set by bids submitted in the month before trading begins.
False The price of a traditional initial public offering (IPO) is determined by the lead investment bank underwriting it. Investment bankers use a combination of financial information, comparable company valuations, experience, and sales skills to arrive at the final offer price before the first day of trading.
Earning a high rate of return with little or no risk is a realistic investment goal
False There is a tradeoff between an investment's risk and its return. In general, to obtain higher returns, investors usually have to accept greater risks.
Under current laws, a couple filing jointly with a total income of $75,000 would pay a 15% tax on capital gains.
False The tax rate would be 0%
A collection of securities designed to meet an investment goal is called a portfolio
True
Contributions to a Roth IRA are taxed up front, but subsequent earnings and withdrawals are tax-free.
True
Liquidity is the ability to convert an investment into cash quickly with little or no loss of value.
True
A major goal of corporate financial management is to increase the value of the firm to investors
True A CFO's job (and most other corporate finance jobs) is typically focused on increasing a firm's value through successful business decisions.
U.S. Treasury Bills mature in 1 year or less
True A Treasury Bill (T-Bill) is a short-term U.S. government debt obligation backed by the Treasury Department with a maturity of one year or less. Treasury bills are usually sold in denominations of $1,000. However, some can reach a maximum denomination of $5 million in non-competitive bids. These securities are widely regarded as low-risk and secure investments.
Since 1900, the average return on stocks has exceeded the average return on savings accounts by more than 6 percentage points
True A share of common stock can provide both income and the chance of increased value. In the United States the average return on a savings account has been a little more than 4%, while the average return on common stock has been about 11.5%
Exchange-traded funds are similar to mutual funds but are traded like stocks
True An exchange-traded fund (ETF) is a basket of securities that trades on an exchange just like a stock does, and is called an exchange-traded fund because it's traded on an exchange just like stocks are. The price of an ETF's shares will change throughout the trading day as the shares are bought and sold on the market ETFs can contain all types of investments, including stocks, commodities, or bonds; some offer U.S.-only holdings, while others are international. An ETF is a type of fund that holds multiple underlying assets, rather than only one like a stock does. Because there are multiple assets within an ETF, they can be a popular choice for diversification.
IPOs are typically underpriced so that the price rises during the first few days of trading.
True Because IPO shares typically go up as soon as they start trading, we say that IPOs are underpriced on average. IPO shares are underpriced if they are sold to investors at a price that is lower than what the market will bear.
Bond investors lend their money for a fixed period of time and receive interest.
True Bonds are long-term debt instruments issued by corporations and governments to raise funds. When an investor buys a bond, he lends money to the issuer. The issuer agrees to make periodic interest payments and to repay the full amount of the loan at a specified time.
Investors can postpone or avoid income taxes by investing through Individual Retirement Accounts.
True In a traditional IRA, investors do not pay taxes on contributions to the plan or on investment earnings generated on those contributions until they withdraw funds during retirement. In a Roth IRA, contributions are taxed upfront, but subsequent investments earnings and withdraws are tax-free
Stocks, bonds, and exchange-traded funds (ETFs) are bought and sold in the capital market.
True In general securities markets are broadly classified as money markets or capital markets. The money market is the market where short-term debt securities (with maturities of less than one year) trade. Investors use the money market for short-term borrowing and lending. Investors turn to the capital market to buy and sell long-term securities (with maturities of more than one year), such as stocks and bonds. In the capital market, investors can make transactions in a wide variety of financial securities, including stocks, bonds, mutual funds, exchange-traded funds, options, and futures. Capital markets can be further classified as either primary or secondary, depending on whether issuers sell securities directly to investors (as in the primary market) or investors trade securities with each other (as in the secondary market).
Banks and insurance companies are examples of institutional investors
True Institutional investors include banks, life insurance companies, mutual funds, and hedge funds.
Insurance companies invest the premiums and fees collected from customers in order to neutralize the risks assumed from their clients
True Insurers collect premiums and fees for the services they provide and they invest those funds in assets so that when customers submit claims, the insurance company will have the cash to fulfill the financial promises they made to their customers.
The NYSE is part of the world's largest international trading network known as NYSE Euronext.
True Known as "the Big Board," the NYSE is, in fact, the largest stock exchange in the world, accounting for a little more than 25% of the total dollar volume of all trades in the U.S. stock market. Now part of the NYSE Euronext group of exchanges, the NYSE sells one-year trading licenses to trade directly on the exchange.
Firms that list their stock on an exchange can be delisted for failing to meet the requirements of the exchange
True Listing requirements are a set of conditions which a firm must meet before listing a security on one of the organized stock exchanges. Exchanges establish these standards as a means of maintaining their own integrity, reputation, and visibility. Once a security is listed, the issuing firm usually must maintain a set of related but less stringent trading requirements. Otherwise, the company faces delisting. If companies fail to pay annual fees or they can no longer meet the financial and liquidity requirements of an exchange, they can be delisted. Also, if share prices drop below a certain minimum, a company can be delisted. Once delisted from a particular exchange, investors won't be able to trade a company's stock on that exchange.
The purpose of the "quiet period" a company must observe from the time it files a registration statement with the SEC until after an IPO is complete is to assure that all investors receive the same information.
True Once a firm files a prospectus with the SEC, a quiet period begins, during which the firm faces a variety of restrictions on what it can communicate to investors. The purpose of the quiet period is to make sure that all potential investors have access to the same information about the company—that which is presented in the preliminary prospectus—but not to any unpublished data that might provide an unfair advantage. The quiet period ends when the SEC declares the firm's prospectus to be effective
An option to purchase common stock is a type of derivative security
True Options are securities that give the investor an opportunity to buy or sell an underlying asset at a specified price for a limited time. The underlying asset is usually another security such as share of common stock.
Land and buildings are examples of real property investments
True Real property refers to land, buildings, and things permanently affixed to the land.
A United States Savings Bond is an example of an investment as defined in the text
True Savings bonds are short-term investments issued by the U.S. Treasury in denominations as low as $25; earn an interest rate that varies with the inflation rate; interest is exempt from state and local taxes.
Bonds represent a lower level of risk than do stocks in the same company
True Stocks are generally considered riskier than bonds because stock returns vary over a much wider range and are harder to predict than are bond returns
Underwriters are responsible for promoting and facilitating the sale of securities
True The company that decides to go public must find an investment bank willing to underwrite the offering. This bank is the lead underwriter and is responsible for promoting the company's stock and facilitating the sale of the company's IPO shares. The lead underwriter often brings in other investment banks to help underwrite and market the company's stock
In the financial markets, individuals are net suppliers of funds.
True individuals are typically net suppliers. Households that spend less than their income have savings and they want to invest that surplus to earn a return.
To qualify for long-term capital gains rates, a stock must be held for at least 12 months
True A capital gain represents the amount by which the proceeds from the sale of a capital asset exceed its original purchase price. For assets held more than 12 months, the tax law classifies capital gains as long-term.
Mutual funds invest in diversified portfolios of securities
True A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor's part of ownership in the fund and the income it generates.
Bond prices rise as interest rates decline
True Returns on bonds and other forms of fixed-income securities respond to the business cycle because they are highly sensitive to interest-rate movement. Interest rates and bond prices move in opposite directions.
Retirement plans, such as a 401(k), allow employees to defer taxes on the plan contributions until such time as the funds are withdrawn from the retirement plan.
True The federal government has established a number of plans that offer special tax incentives designed to encourage people to save for retirement. Those that are employer sponsored include profit-sharing plans, thrift and savings plans, and 401(k) plans. These plans allow employees to defer paying taxes on funds that they save and invest during their working years until they withdraw those funds during retirement.
The NYSE and AMEX are examples of broker-dealer markets
True. Broker-dealer market means that when executing orders its market makers must act first as brokers and attempt to cross public orders at the midpoint of the bid/ask spread, saving both sides of the order one-half of the bid/ask spread, and act second as dealers when they must use their own inventory of securities to provide liquidity for the trading public. The New York Stock Exchange (NYSE), which is a national securities exchange. Today, the AMEX is known as the NYSE American. The American Stock Exchange (AMEX) was once the third-largest stock exchange in the U.S. NYSE Euronext acquired the AMEX in 2008.
