Personal Finance 1200-Fall 2007
Test #5- Chapters 13-16
Chapter 13 Investing Fundamentals
True/False Questions
TF1.The decision to establish an investment plan is an important first step to accomplishing your financial goals.
TF2.Potential investors should not wait until they put their financial affairs in order before starting to invest.
TF3.A line of credit is a short-term loan that is approved before the money is actually needed.
TF4.Generally, it is not a good idea to participate in an employer-sponsored retirement program.
TF5.There is no relationship between risk and safety.
TF6.The potential return of any investment should be directly related to the risk that the investor assumes.
TF7.Liquidity is the ease with which an asset can be converted to cash without a substantial loss in dollar value.
TF8.Preferred stock represents the most basic form of corporate ownership.
TF9.One of the most important priority an investor in preferred stock enjoys is receiving cash dividends before common stockholders are paid any cash dividends.
TF10.Bondholders generally receive interest payments every six months.
TF11.Over the past 50 years, stocks and U.S. government bonds have returned about the same rate of return.
TF12.Because of the growth potential, stocks or mutual funds that invest in stocks should be the only type of securities included in the investment portfolio for most people.
TF13.Because of the age factor, most young investors tend to invest a large percentage of their nest egg in growth-oriented investments.
Multiple Choice Questions
14.A good rule of thumb is to limit installment payments to ______percent of your net monthly income.
A)20
B)30
C)40
D)50
E)60
15.Jack Masters earns $40,000 a year. His monthly expenses total $2,100. What is the minimum amount of money that Mr. Masters should set aside in an emergency fund?
A)$2,100
B)$4,200
C)$6,300
D)$8,400
E)$10,000
16.Twenty years ago, you began investing $2,000 a year. Because your investments earned an average of 8 percent a year, your investment portfolio has a current dollar value of $92,000. How much did you earn on your investments over the 20-year period of time?
A)$2,000
B)$40,000
C)$52,000
D)$92,000
E)$132,000
17.If interest rates in the overall economy decrease, what will happen to the market value of a corporate bond with a fixed interest rate?
A)The bond is worthless.
B)The value of the bond will increase.
C)The value of the bond will decrease.
D)The value of the bond will not change.
E)It is impossible to determine if the bond's value will increase or decrease.
18.Earnings that are reinvested in a corporation are called:
A)retained earnings.
B)surplus earnings.
C)retention capital.
D)additional capital.
E)collected capital.
19.Which of the following investments offers the greatest liquidity?
A)checking accounts
B)common stock
C)corporate bonds
D)real estate
E)collectibles
20.An investor can make money on a common stock investment by:
A)waiting for the corporation to repurchase the stock.
B)waiting for the stock's value to increase and then selling it.
C)waiting for the stock's value to decrease and then selling it.
D)waiting for the stock to reach the maturity date.
E)converting the common stock to preferred stock.
21.Normally, corporate bondholders receive interest:
A)monthly.
B)every three months.
C)every six months.
D)yearly.
E)when the bond matures.
22.A type of investment that combines and invests the funds of many investors and manages it with a professional manager is called a(n):
A)NOW account.
B)securities exchange.
C)certificate of deposit.
D)mutual fund.
E)option fund.
23.An individual can reduce the amount of risk associated with an investment program by using:
A)an investment timer.
B)asset allocation.
C)a portfolio picker.
D)speculative investments.
E)a personal investment notebook.
- Garrett Jennings is thinking about buying an investment. The investment option that he is thinking about buying represents the most basic form of ownership and pays a dividend. The dividend on this investment is paid after all other payments and dividends have been made. What investment is Garrett thinking about purchasing?
A)Common Stock
B)Preferred Stock
C)Corporate Bond
D)Real Estate
E)Mutual fund
- Mike Lively is thinking about buying an investment. The investment option that he is thinking about buying is an ownership claim on the company. The most important priority he has with this investment is receiving dividends before dividends are paid to other types of investments. What investment is Mike thinking about purchasing?
A)Common Stock
B)Preferred Stock
C)Corporate Bond
D)Real Estate
E)Mutual Fund
- Kevin Bacon is thinking about buying an investment. The investment option that he is thinking about buying is a written pledge by a corporation to repay a specified amount of money. It also pays interest payments every 6 months until it matures. What investment is Kevin thinking about purchasing?
A)Common Stock
B)Preferred Stock
C)Corporate Bond
D)Real Estate
E)Mutual Fund
- Hugh Jackman is thinking about buying an investment. The investment option that he is thinking about buying is an investment where investors pool their money and buy a variety of other investments. One of the key features is that it is managed by professional managers. What investment is Hugh thinking about purchasing?
A)Common Stock
B)Preferred Stock
C)Corporate Bond
D)Real Estate
E)Mutual Fund
Chapter 14 Investing in Stocks
True/False Questions
- Corporations sell common stock to finance their expansion.
- A corporation must pay dividends to stockholders.
- The record date is the date when a stockholder must be registered on the corporation’s books in order to receive dividends.
- The cumulative feature of preferred stock allows the investor to exchange their preferred stock into a specified number of shares of common stock.
- The book value for a share of stock is determined by deducting all liabilities from the corporation’s assets and dividing the remainder by the number of outstanding shares of common stock.
- Over the past 100 years, stocks have returned on average about 10 percent a year.
- At maturity, corporations must repay stockholders the money they invested in the company.
- Dividend payments on common stock are guaranteed, but the amount is determined by the board of directors.
- The record date is the date that the actual dividend payment is made to stockholders.
- A blue-chip stock is too speculative for most investors.
- Earnings per share are a corporation's after-tax earnings divided by the number of stockholders.
- The beta is an index that compares the risk associated with a specific stock issue with the risk of the stock market in general.
- Dollar-cost averaging enables investors to avoid the problem of buying high and selling low.
Multiple Choice Questions
- Because General Electric is a ______corporation, Todd Barrow can purchase stock with the help of an account executive through the secondary market.
A)private
B)public
C)general
D)institutional
E) securities
42. Dividends are paid out of profits, and:
A)dividend payments must be approved by the firm's board of directors.
B)dividends are guaranteed.
C)dividends are paid before a firm's taxes are paid.
D)dividends are usually paid twice a year.
43. Patsy Banz owns 220 shares of General Mills Corporation. For the last calendar quarter, General Mills Corporation paid a dividend of $0.47 a share. What is the total amount she received in her dividend check for this quarter?
A)$0.47
B)$47
C)$94
D)$103.40
E) It is impossible to calculate the total dividend amount with this information.
44. Jo Bower owns 150 shares of Data General stock. She purchased the stock for $24 a share. She sold her stock for $30 a share. The commissions required to buy and sell her stock totaled $120. Assuming that she received no dividends during the time she owned the stock, what is her total return for this transaction?
A)$600
B)$780
C)$900
D)$2,400
E)$3,000
45. If the board of directors approves a two for one stock split, an investor who owns 150 shares before the split owns ______shares after the split.
A)75
B)150
C)225
D)300
E)450
46. The type of stock in which stockholders are assured that omitted dividends will be paid to them before other dividends are paid is ______stock.
A)common
B)convertible preferred
C)participating preferred
D)cumulative preferred
E) callable preferred
47. The type of preferred stock that may be exchanged at the stockholder's option for common stock is:
A)corporate bond.
B)convertible preferred stock.
C)participating preferred stock.
D)cumulative preferred stock.
E)callable preferred stock.
48. Barker Creek Clothing has after-tax income of $12.8 million. It also has 32 million shares of stock outstanding. What is the firm's earnings per share?
A)$4.48 a share
B)$3.20 a share
C)$1.28 a share
D)$0.40 a share
E)$0.80 a share
49. Last year, High-Tech Electronics earned $1.50 per share. If the current market value for a share of stock is $45, what is the firm's PE ratio?
A)0.033
B)3.3
C)30
D)33
E)It is impossible to calculate a PE ratio with this information.
50. A long-term technique used by investors who purchase an equal dollar amount of the same stock at equal intervals in time is called:
A)dollar cost averaging.
B)dividend reinvestment plan.
C)buy and hold technique.
D)regulated transaction.
E)secured transaction.
Chapter 15 Investing in Bonds
True/False Questions
TF51.A corporate bond is a corporation's written pledge that it will repay a specified amount of money with interest.
T F52.Maturity dates for corporate bonds generally range from 5 to 10 years.
T F53.The bond debenture is a legal document that details all of the conditions relating to a bond issue.
T F54.All bonds in a serial bond issue mature on the same date.
T F55.The purchase price for Series EE bonds is one half of their maturity value.
T F56.Tax-exempt bonds offer slightly higher interest rates than corporate bonds.
Multiple Choice Questions
57. Assume that you purchase a $1,000 corporate bond that pays 9 1/4 percent interest. What is the amount of interest that you receive each year?
A)$1,000
B)$92.50
C)$92
D)$90
E) $9.
- Generally, interest on corporate bonds is paid every:
A)month.
B)three months.
C)six months.
D)nine months.
E)year
59. Nancy Groom owns one $1,000 corporate bond issued by Chevron. The bond pays 8.5 percent. If interest is paid semiannually, what is the amount of the check that Ms. Groom will receive at the end of each six-month period.
A)$4.25
B)$42.50
C)$85
D)$850
E)$1,000
60. Which of the following statements is true?
A)Corporate bonds do not have a maturity date.
B)The maturity dates for corporate bonds are less than a year.
C)Corporate bonds do not have any default risk..
D)Corporate bonds are a form of equity.
E)Long-term corporate bonds have maturities over 15 years.
61. The legal conditions for a corporate bond are described in the:
A)trustee contract.
B)bondholder's covenant.
C)corporate charter.
D)bond indenture.
E)bond debenture.
62. A bond that is backed only by the reputation of the issuing corporation is called a(n) ______bond.
A)debenture
B)mortgage
C)indenture
D)preemptive
E)treasury
63. A corporate bond that is secured by various assets of the issuing firm is called a(n) ______bond.
A)debenture
B)mortgage
C)indenture
D)preemptive
E)treasury
64. A call feature:
A)allows bondholders to convert their bond to a specified number of shares of common stock.
B)is not available on corporate bonds.
C)allows the corporation to buy outstanding bonds from current bondholders before the maturity date.
D)is only available with government securities.
E)is guaranteed by the corporation.
65. Bonds of a single issue that mature on different dates are called ______bonds.
A)debenture
B)mortgage
C)sinking fund
D)subordinate
E)serial
66. What is the approximate market value for a $1,000 corporate bond that pays 8 percent interest when comparable bonds are paying 9 percent interest?
A)$80
B)$90
C)$889
D)$1,000
E)$1,125
67. When a bond is selling for less than its face value, it is said to be selling at a:
A)discount.
B)premium.
C)commission.
D)conservative value.
E)prospectus value.
68. When a bond is selling for more than its face value, it is said to be selling at a:
A)discount.
B)premium.
C)commission.
D)conservative value.
E)prospectus value.
69.The highest bond rating issued by Standard & Poor's is:
A)AAA.
B)Aaa.
C)A +.
D)BB.
E)Excellent.
Chapter 16 Investing in Mutual Funds
True/False Questions
TF70. In late 2004, there were over 8,000 mutual funds, and the number continues to increase each year.
TF71.The major reasons why investors purchase mutual funds are professional management and diversification.
TF72. Because of professional management, there is no need for the individual investor to evaluate a mutual fund investment.
TF73. Mutual funds that apportion their investments among common stocks and bonds are referred to as small cap funds.
TF74. In a newspaper quotation, NAV stands for "not accessible value."
TF75. In a newspaper quotation, the letter "P" means a 12b-1 distribution fee is charged.
TF76. Typically, you must invest at least $15,000, to open a mutual fund account.
Multiple Choice Questions
77. Which of the following statements is false?
A)Investors purchase mutual funds for diversification.
B)Investors purchase mutual funds because of professional management.
C)Investors who purchase mutual funds are guaranteed a higher rate of return than a comparable investment in stocks or bonds.
D)Professional mutual fund managers work for an investment company.
E)Even the best portfolio managers sometimes make mistakes.
78. Approximately ______percent of all mutual funds are open-end funds.
A)5
B)6
C)30
D)72
E)91
79. The value of the mutual fund's portfolio minus the mutual fund's liabilities divided by the number of shares outstanding is called the:
A)book value.
B)outstanding balance.
C)per share value.
D)net asset value.
E)accounting value.
80. For most mutual funds, the net asset value is calculated:
A)yearly.
B)quarterly.
C)weekly.
D)daily.
E)whenever an investor calls and requests a price quote.
81. A mutual fund that invests in the common stocks of companies in the same industry is called a(n) ______fund.
A)growth-income
B)income
C)sector
D)small-cap
E)money market
82. A mutual fund that invests in companies outside the United States is called a(n) ______fund.
A)growth-income
B)income
C)international
D)industry
E)global market
83. A municipal bond fund:
A)is too risky for most investors.
B)provides investors with tax-free income.
C)invests in bonds that are backed by the federal government.
D)is a risk-free investment.
E)are not rated because they are short-term investments.
84. When one investment company manages a group of mutual funds, it is called a(n):
A)family of funds.
B)exchange fund.
C)diversification fund.
D)versatility fund.
E)group of funds.
True/False
85.Corporations sell common stock to finance their expansion.
86.A corporation must pay dividends to stockholders.
87.The record date is the date when a stockholder must be registered on the corporation’s books in order to receive dividends.
88.The cumulative feature of preferred stock allows the investor to exchange their preferred stock into a specified number of shares of common stock.
89.The book value for a share of stock is determined by deducting all liabilities from the corporation’s assets and dividing the remainder by the number of outstanding shares of common stock.
90.A bond debenture is a legal document that details all of the conditions relating to a bond issue.
91.Corporations sell corporate bonds to help finance their ongoing business activities.
92.A mortgage bond is sometimes referred to as a secured bond.
93.A sinking fund is a fund to which deposits are made each year for the purpose of redeeming a bond issue.
94.A revenue bond is a bond backed by the full faith, credit, and unlimited taxing power of the government that issued it.
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