FI 414 CH 1

Andrew and Jennifer are in the 25% marginal tax bracket. Three years ago they purchased 100 shares of stock at $20 a share. In 2015, 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

In the U.S., the most prestigious designation for financial planners is A) CFP. B) CPA. C) ING. D) SIPC.

A) CFP.

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 rate of inflation. B) has closely tracked the rate of inflation. C) exceeded the rate of inflation by 1.5% on average. D) fluctuated widely.

A) been less than the rate of inflation.

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

) Stocks are a(n) ________ investment representing ________ of a business. A) direct; ownership B) direct; debt C) indirect; ownership D) indirect; debt

A) direct; ownership

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.

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.

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.

Describe the major differences between individual and institutional investors.

Answer: Individual investors manage their own funds to achieve individual goals such as increasing financial security or financing a comfortable retirement. Institutional investors such as mutual funds and insurance companies manage funds for individuals who lack the time or expertise to invest individually and for other institutions such as universities or charities.

Sarah purchased a stock one year ago at a price of $32 a share. In the past year, she has received four quarterly dividends of $0.75 each. Today she sold the stock for $38 a share. Her capital gain per share is A) $3.00. B) $6.00. C) $(6.00). D) $9.00.

B) $6.00.

Michelle and Patrick are in the 28% marginal tax bracket. They bought 100 shares of DJN stock at $45 per share and sold them 4 years later in 2015 at $22 per share? By how much did their loss reduce their taxes in the year when they sold the stock? A) $0 B) $644 C) $345 D) $1,260

B) $644

Typical responsibilities of financial professionals in a corporate setting include I. managing cash and short-term investments. II. evaluating investment opportunities. III. working one on one with individuals to formulate plans for reaching their financial goals. IV. interacting with financial markets to find sources of external financing such as debt and equity. A) I and IV 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 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

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.

Research indicates that investors who closely monitor their portfolios and trade quickly in response to minor fluctuations in price A) outperform those who hold investments for the long-term and trade infrequently. B) underperform those who hold investments for the long-term and trade infrequently. C) earn rates of return similar to those who hold investments for the long-term and trade infrequently. D) be more highly educated and in higher income brackets than those who hold investments for the long term and trade infrequently.

B) underperform those who hold investments for the long-term and trade infrequently.

What are some of the important prerequisites to investing?

Before entering into risky investments, individuals need to provide for the necessities of life such as housing, transportation, and taxes. They should have liquid assets available to meet unforeseen emergencies such as job loss, auto repairs or dental treatments. They should also have insurance for catastrophic events involving health or property.

Briefly describe three advantages of investing in mutual funds or exchange traded funds.

Briefly describe three advantages of investing in mutual funds or exchange traded funds.

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.

For a taxpayer in the 25% marginal tax bracket, a long-term capital gain realized in 2015 will be taxed at A) 5%. B) 10%. C) 15%. D) 25%.

C) 15%.

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

A major function of investment banking firms is A) providing loans to investors. B) providing financial planning services to wealthy individuals. C) assisting businesses when they issue stocks and bonds. D) developing investment strategies to neutralize risk.

C) assisting businesses when they issue stocks and bonds.

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).

Under current tax law, dividend income is taxed at the same rate as A) ordinary income. B) short-term capital gains. C) long-term capital gains. D) interest income

C) long-term capital gains.

Which one of the following would be the most liquid investment? A) stock B) Series EE bond C) money market mutual fund D) real estate

C) money market mutual fund

Which of the following is an example of a tangible asset? A) bonds B) mutual funds C) real estate D) stocks

C) real estate

Speculative and growth oriented investments are least appropriate for A) young investors. B) middle-aged investors. C) retired investors. D) high income investors.

C) retired investors.

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.

One feature that mutual funds and exchange traded funds have in common is A) they trade continuously throughout the trading day. B) their portfolios are always based on one of the major market indexes. C) they invest in broadly diversified portfolios of securities. D) investors purchase share from the funds managers rather than from other investors.

C) they invest in broadly diversified portfolios of securities.

Beginning in 2010, 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.

C) unlimited.

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

Which of the following represent 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

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

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.

A well-conceived investment policy statement will specify 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.

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

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.

A forum in which suppliers and demanders of funds make financial transactions is called a financial A) institution. B) bank. C) instrument. D) market.

D) market.

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

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

Which of the following is not traded in the securities markets? A) stocks B) bonds C) derivatives D) real estate

D) real estate

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.

A non-interest bearing checking account is still considered an investment.

False

Bond interest and stock dividends are different ways of distributing a corporation's earnings to its owners

False

Certified Financial Planners typically manage institutional portfolios.

False

Chartered Financial Analyst (CFA) is a degree offered by several prestigious business schools.

False

Earning a high rate of return with little or no risk is a realistic investment goal.

False

In the financial markets, individuals are net demanders of funds.

False

Institutional investors are individuals who invest indirectly through financial institutions.

False

Institutional investors manage money for businesses and nonprofit organizations, but not for individuals.

False

Money market accounts, certificates of deposit, bonds and commercial paper are all forms of short-term investment vehicles.

False

Most sources of investment information are in print format, expensive, and difficult to access

False

Short-term investments generally provide liquidity, safety, and a high rate of return.

False

Stringent regulations and vigorous enforcement have all but eliminated unethical behavior by financial professionals in recent years.

False

Under current tax laws, most taxpayers will pay a lower tax rate on capital gains than on dividends.

False

Discuss the relationship between stock prices and investors' beliefs about the business cycle.

Stock prices tend to anticipate the economic conditions that investors expect in the future. When they believe that economic conditions will deteriorate and profits will decline, stock prices fall. When they expect an improving economy and higher corporate profits, stock prices rise.

Briefly describe three different career paths that require a strong background in investments.

Students may discuss any of the following career paths. Answers will vary. Responsibilities of commercial bankers may include portfolio management, managing short-term securities, and advising individuals as personal bankers. Corporate financial managers must raise external fuds through the debt and equity markets, manage short-term investments, and understand investor expectations for their business. Financial planners assist individuals in choosing the investments that will help them meet their short and long term goals. The insurance industry employs professionals to invest and manage the large sums collected from premiums. Within the investment management industry, professionals may work as securities analysts, fund managers, or retail brokers.

A United States Savings Bond is an example of an investment as defined in the text.

True

A collection of securities designed to meet an investment goal is called a portfolio.

True

A major goal of corporate financial management is to increase the value of the firm to investors.

True

An option to purchase common stock is a type of derivative security.

True

Banks and insurance companies are examples of institutional investors.

True

Bond investors lend their money for a fixed period of time and receive interest

True

Bond prices rise as interest rates decline.

True

Exchange traded funds are similar to mutual funds, but are traded like stocks.

True

If the value of a common stock increases the value of an option to buy that stock should also increase.

True

Insurance companies invest the premiums and fees collected from customers in order to neutralize the risks assumed from their clients.

True

Investors can postpone or avoid income taxes by investing through Individual Retirement Accounts.

True

Land and buildings are examples of real property investments

True

Liquidity is the ability to convert an investment into cash quickly with little or no loss of value.

True

Mutual funds invest in diversified portfolios of securities.

True

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

Short-term capital gains are taxed at the taxpayer's marginal tax rate.

True

Since 1900, the average return on stocks has exceeded the average return on savings accounts by more than 6 percentage points.

True

To qualify for long-term capital gains rates, a stock must be held for at least 12 months.

True

U.S. Treasury Bills mature in 1 year or less.

True

Under current tax laws, most taxpayers will pay a lower tax rate on capital gains than on dividends.

True

You should spend money on housing, clothing and basic insurance before investing.

True