Chapter 13 Investing Fundamentals

True/False Questions
T F 1. The decision to establish an investment plan is an important first step to
accomplishing your financial goals.
Answer: True Difficulty: Easy L: 1 !age: "#$
T F %. A short&term investment ob'ective is defined as one that will be accomplished
within a period of two to five years.
Answer: False Difficulty: (ed L: 1 !age: "#)
T F *. An emergency fund is a certain amount of money that can be obtained +uic,ly in
case of immediate need.
Answer: True Difficulty: Easy L: 1 !age: "#)
T F ". A line of credit is a short&term loan that is approved before the money is actually
needed.
Answer: True Difficulty: Easy L: 1 !age: "1#
T F -. .enerally/ it is not a good idea to participate in an employer&sponsored retirement
program.
Answer: False Difficulty: Easy L: 1 !age: "1#
T F 0. The rate of return on an investment has no affect on a long&term investment
program.
Answer: False Difficulty: (ed L: % !age: "1"
T F 1. There is no relationship between ris, and safety.
Answer: False Difficulty: (ed L: % !age: "1%
1
T F $. The potential return of any investment should be directly related to the ris, that
the investor assumes.
Answer: True Difficulty: (ed L: % !age: "1*
T F ). During inflationary times/ there is a ris, that the financial return on an investment
will not ,eep pace with the rate of inflation.
Answer: True Difficulty: Easy L: % !age: "10
T F 1#. The dollar value of a fi2ed&return investment 3li,e a bond4 increases when overall
interest rates in the economy increase.
Answer: False Difficulty: 5ard L: % !age: "10
T F 11. Li+uidity is the ease with which an asset can be converted to cash without a
substantial loss in dollar value.
Answer: True Difficulty: Easy L: * !age: "1)
T F 1%. There are two types of stoc,&common stoc, and preferred stoc,.
Answer: True Difficulty: Easy L: * !age: "%%
T F 1*. !referred stoc, represents the most basic form of corporate ownership.
Answer: False Difficulty: (ed L: * !age: "%%
T F 1". The most important priority an investor in preferred stoc, en'oys is receiving cash
dividends before common stoc,holders are paid any cash dividends.
Answer: True Difficulty: (ed L: * !age: "%%
%
T F 1-. 6ondholders generally receive interest payments every si2 months.
Answer: True Difficulty: (ed L: * !age: "%*
T F 10. (utual funds range from very conservative to e2tremely speculative investments.
Answer: True Difficulty: (ed L: * !age: "%*
T F 11. 6ecause of the growth potential/ stoc,s or mutual funds that invest in stoc,s
should be the only type of securities included in the investment portfolio for most
people.
Answer: False Difficulty: (ed L: * !age: "%1
T F 1$. Asset allocation is the process of spreading your assets among several different
types of investments to lessen ris,.
Answer: True Difficulty: Easy L: * !age: "1)
T F 1). The amount of time that your investments have to wor, for you is an important
factor when managing your investment portfolio.
Answer: True Difficulty: Easy L: * !age: "%1
T F %#. 6ecause of the age factor/ most young investors tend to invest a large percentage
of their nest egg in growth&oriented investments.
Answer: True Difficulty: Easy L: * !age: "%1
T F %1. nce you have painsta,ingly developed a financial plan/ it is not wise to change
it.
Answer: False Difficulty: (ed L: " !age: "%0
T F %%. Although useful for many things/ the 7nternet cannot be used to monitor the value
of stoc,/ bond/ and mutual fund investments.
Answer: False Difficulty: (ed L: " !age: "%$
*
Multiple Choice Questions
%*. 8hich of the following is a true statement9
A4 :o one is going to ma,e you save the money you need to start an investment
program.
64 To be useful/ investment ob'ectives must be very general.
;4 7nvestment goals are the same for each individual.
D4 6ecause investment ob'ectives deal with the future/ it is useless to plan more than
five years in the future.
E4 A long&term investment ob'ective involves a time period of five years or less.
Answer: A Difficulty: (ed L: 1 !age: "#$
%". An emergency fund should be deposited in a:
A4 savings account at the highest available interest rate.
64 si2 month certificate of deposit.
;4 chec,ing account.
D4 safe place at home.
E4 safe deposit bo2 in a ban, vault.
Answer: A Difficulty: Easy L: 1 !age: "#)
%-. Twenty years ago/ you began investing <%/### a year. 6ecause your investments earned
an average of $ percent a year/ your investment portfolio has a current dollar value of
<)%/###. 5ow much did you earn on your investments over the %#&year period of time9
A4 <%/###
64 <"#/###
;4 <-%/###
D4 <)%/###
E4 <1*%/###
Answer: ; Difficulty: 5ard L: % !age: "1"
%0. 8hich of the following investments would ran, the highest with regard to safety9
A4 government bonds
64 common stoc,
;4 preferred stoc,
D4 corporate bonds
E4 real estate
Answer: A Difficulty: (ed L: % !age: "1*
"
%1. 7f interest rates in the overall economy decrease/ what will happen to the mar,et value of
a corporate bond with a fi2ed interest rate9
A4 The bond is worthless.
64 The value of the bond will increase.
;4 The value of the bond will decrease.
D4 The value of the bond will not change.
E4 7t is impossible to determine if the bond=s value will increase or decrease.
Answer: 6 Difficulty: 5ard L: % !age: "10
%$. The ease with which an investment can be converted to cash without a substantial loss in
dollar value is called the:
A4 asset value.
64 li+uidity factor.
;4 immediate +uotient.
D4 fi2ed cost factor.
E4 variable cost factor.
Answer: 6 Difficulty: Easy L: * !age: "1)
%). A corporation selling stoc, is obligated to:
A4 guarantee your investment.
64 repay money obtained from the sale of stoc,.
;4 repurchase shares of stoc, at a later date.
D4 pay dividends.
E4 pay dividends to preferred stoc,holders before dividends are paid to common
stoc,holders.
Answer: E Difficulty: (ed L: * !age: "%%
*#. :ormally/ corporate bondholders receive interest:
A4 monthly.
64 every three months.
;4 every si2 months.
D4 yearly.
E4 when the bond matures.
Answer: ; Difficulty: (ed L: * !age: "%*
*1. A type of investment that combines and invests the funds of many investors and manages
it with a professional manager is called a3n4:
A4 :8 account.
64 securities e2change.
;4 certificate of deposit.
D4 mutual fund.
Answer: D Difficulty: Easy L: * !age: "%*
-
Chapter 14 Investing in Stocks
True/False Questions
T F *%. At maturity/ corporations must repay stoc,holders the money they invested in the
company.
Answer: False Difficulty: Easy L: 1 !age: ""*
T F **. Dividend payments on common stoc, are guaranteed/ but the amount is
determined by the board of directors.
Answer: False Difficulty: (ed L: 1 !age: ""*
T F *". A pro2y is a legal form that lists the issues to be decided at a stoc,holders=
meeting and re+uests that stoc,holders transfer their voting rights to some
individual or individuals.
Answer: True Difficulty: Easy L: 1 !age: ""*
T F *-. The record date is the date that the actual dividend payment is made to
stoc,holders.
Answer: False Difficulty: (ed L: 1 !age: """
T F *0. A stoc, split is a procedure in which a stoc,holder=s common stoc, is e2changed
for preferred stoc,.
Answer: False Difficulty: (ed L: 1 !age: ""-
T F *1. A blue&chip stoc, is too speculative for most investors.
Answer: False Difficulty: Easy L: % !age: ""$
T F *$. The beta is an inde2 that compares the ris, associated with a specific stoc, issue
with the ris, of the stoc, mar,et in general.
Answer: True Difficulty: (ed L: * !age: "-$
0
T F *). Dollar&cost averaging enables investors to avoid the problem of buying high and
selling low.
Answer: True Difficulty: (ed L: - !age: "01
Multiple Choice Questions
"#. Apple ;omputer ;orporation holds its annual meeting in April. (a2ine >tar/ who owns
stoc, in the company/ cannot attend the meeting. >he can vote by:
A4 voluntary certificate.
64 preemptive right.
;4 pro2y.
D4 cumulative certificate.
E4 participatory certificate.
Answer: ; Difficulty: (ed L: 1 !age: ""*
"1. Dividends remain with the stoc, until:
A4 two business days before the date of record.
64 two business days after the date of record.
;4 five days before the date of record.
D4 five days after the date of record.
E4 five days before the actual payment date.
Answer: A Difficulty: 5ard L: 1 !age: """
"%. !atsy 6an? owns %%# shares of .eneral (ills ;orporation. For the last calendar +uarter/
.eneral (ills ;orporation paid a dividend of <#."1 a share. 8hat is the total amount she
received in her dividend chec, for this +uarter9
A4 <#."1
64 <"1
;4 <)"
D4 <1#*."#
E4 7t is impossible to calculate the total dividend amount with this information.
Answer: D Difficulty: (ed L: 1 !age: """
1
"*. @o 6ower owns 1-# shares of Data .eneral stoc,. >he purchased the stoc, for <%" a
share. >he sold her stoc, for <*# a share. The commissions re+uired to buy and sell her
stoc, totaled <1%#. Assuming that she received no dividends during the time she owned
the stoc,/ what is her total return for this transaction9
A4 <0##
64 <1$#
;4 <)##
D4 <%/"##
E4 <*/###
Answer: 6 Difficulty: 5ard L: 1 !age: """
"". 7f the board of directors approves a two for one stoc, split/ an investor who owns 1-#
shares before the split owns AAAAAAAAAAAA shares after the split.
A4 1-
64 1-#
;4 %%-
D4 *##
E4 "-#
Answer: D Difficulty: (ed L: 1 !age: ""-
"-. 8hen the board of directors approves a two for one stoc, split/ the price for each share of
stoc,:
A4 decreases in value.
64 increases in value.
;4 remains unchanged.
D4 is guaranteed to go up within a short period of time.
E4 increase to twice of its former value.
Answer: A Difficulty: 5ard L: 1 !age: ""-
"0. The type of preferred stoc, that may be e2changed at the stoc,holder=s option for
common stoc, is:
A4 corporate bond.
64 convertible preferred stoc,.
;4 participating preferred stoc,.
D4 cumulative preferred stoc,.
E4 callable preferred stoc,.
Answer: 6 Difficulty: (ed L: 1 !age: ""1
$
"1. @ames Turbyfil purchased 1## shares of 76( for <1%. @ames also paid <-- commission.
8hat was the total purchase price for this transaction9
A4 <--
64 <1%
;4 <1/%*1.-#
D4 <1/%--.##
E4 <1/*"1.-#
Answer: D Difficulty: 5ard L: % !age: "")
"$. Assume that you purchased 1## shares of E22on stoc, for <-- a share/ that you received
an annual dividend of <%.## a share/ and that you sold your E22on stoc, for <0- a share
at the end of one year. 8hat is the total return for your investment9 37gnore commission
amounts for this +uestion.4
A4 <%##
64 <1/###
;4 <1/%##
D4 <1/-##
E4 <%/%##
Answer: ; Difficulty: 5ard L: * !age: "-1
"). Assume the beta for the stoc, mar,et in general is 1.# and that the beta for 8orld&8ide
Television !roductions is %.". 7f the stoc, mar,et increases by 1# percent/ how much will
the stoc, for 8orld&8ide !roductions increase9
A4 1% percent
64 %# percent
;4 %" percent
D4 "$ percent
E4 7t is impossible to calculate the amount of increase with this information.
Answer: ; Difficulty: 5ard L: * !age: "-$
-#. A re+uest that a stoc, be bought or sold at the current mar,et price is called a
AAAAAAAAAAAA order.
A4 mar,et
64 limit
;4 stop
D4 round
E4 discretionary
Answer: A Difficulty: Easy L: " !age: "00
)
-1. @ames .arner 'ust bought the stoc, of a company. 5e ,nows that he will receive a cash
payment from the company once a +uarter/ although the company is not obligated to ma,e
this payment. 8hat will he receive9
A4 E+uity
64 !ro2y
;4 Boting Cights
D4 Dividends
E4 :one of the above
Answer: D Difficulty: (ed L: 1 !age: ""*
-%. Bal Dilmer has purchased the stoc, of the 8illiams 8idget ;ompany. After he buys the
stoc, he is told that the number of shares he owns will be divided into a larger number. 7n
fact/ he will get two shares for every share that he owns today. 8hat has happened to this
company9
A4 Dividend split
64 !ro2y split
;4 >toc, split
D4 6anana split
E4 :one of the above
Answer: ; Difficulty: (ed L: 1 !age: ""-
-*. >ean ;onnery has purchased the stoc, of the >towaway Transportation ;ompany. The
company is getting ready to pay a dividend. 5e ,nows he must be registered on the
corporationEs boo,s on the in order to receive the dividend.
A4 Cecord date
64 E2 dividend date
;4 !ayment date
D4 !urchased date
E4 :one of the above
Answer: A Difficulty: (ed L: 1 !age: """
1#
-". rlando 6loom is buying the stoc, of the .etaway ;aribbean ;ruise ;ompany. 5owever/
if he buys the stoc, today/ he ,nows it is the first day it is selling without the dividend this
+uarter. 8hat date is rlando buying the stoc, on9
A4 Cecord Date
64 E2 dividend date
;4 !ayment date
D4 >ale date
E4 :one of the above
Answer: 6 Difficulty: (ed L: 1 !age: """
--. 6everly Fric,el purchased 1## shares of .leason >ystems stoc, for <"%.-# per share. 5er
commission for this purchase was <*-. >he sold the stoc, two years later for <-- per share
and a commission of <-#. 8hile she held the stoc, it paid a dividend of <1.-# per share.
8hat was 6everlyEs total dollar return on this stoc,9
A4 <1%-#
64 <110-
;4 <1-#
D4 <1*1-
E4 <1"##
Answer: D Difficulty: 5ard L: 1 !age: """&""-
-0. Trevor ;on,lin is thin,ing about buying the preferred stoc, of .alloway .ems ;ompany.
5e ,nows that the dividend is a fi2ed amount and is determined by ta,ing a percentage of
what value9
A4 !ar value
64 (ar,et value
;4 !resent value
D4 Future value
E4 :one of the above
Answer: A Difficulty: (ed L: 1 !age: ""1
Chapter 15 Investing in onds
True/False Questions
T F -1. A corporate bond is a corporation=s written pledge that it will repay a specified
amount of money with interest.
Answer: True Difficulty: Easy L: 1 !age: "$%
11
T F -$. The bond debenture is a legal document that details all of the conditions relating
to a bond issue.
Answer: False Difficulty: (ed L: 1/% !age: "$*
T F -). The trustee is an independent firm that acts as the bondholders= representative.
Answer: True Difficulty: Easy L: 1/% !age: "$*
T F 0#. ;orporate bonds are a form of e+uity financing that does not have to be repaid.
Answer: False Difficulty: Easy L: 1/% !age: "$*
T F 01. 7f overall interest rates in the economy fall/ then a corporate bond with a fi2ed
interest rate will decrease in value.
Answer: False Difficulty: 5ard L: * !age: "$$
T F 0%. The only way an investor can ma,e money on a bond investment is to hold the
bond until maturity.
Answer: False Difficulty: (ed L: * !age: "$)&")#
T F 0*. 6ecause bonds are considered debt financing that must be repaid at maturity/ the
corporation=s financial stability has little effect on the bond=s value between the
issue date and the maturity date.
Answer: False Difficulty: (ed L: * !age: ")#
T F 0". A bond with a price +uotation of 1* sells for <1*.
Answer: False Difficulty: (ed L: - !age: -##&-#1
1%
Multiple Choice Questions
0-. Assume that you purchased a <1/### E22on bond that pays ) 1F% percent interest. 8hat is
the amount of interest you would receive each si2 months9
A4 <".1-
64 <).-#
;4 <)-
D4 <"1.-#
E4 <1/###
Answer: D Difficulty: 5ard L: 1 !age: "$%
00. A bond that is bac,ed only by the reputation of the issuing corporation is called a3n4
AAAAAAAAAAAA bond.
A4 debenture
64 mortgage
;4 indenture
D4 preemptive
E4 treasury
Answer: A Difficulty: Easy L: % !age: "$"
01. A bond that can be e2changed/ at the owner=s option/ for a specified number of shares of
the corporation=s stoc, is called a3n4 AAAAAAAAAAAA bond.
A4 debenture
64 mortgage
;4 indenture
D4 convertible
E4 subordinated
Answer: D Difficulty: (ed L: % !age: "$"
0$. A <l/### corporate bond is convertible to %- shares of the corporation=s common stoc,.
8hat is the minimum price that the stoc, must obtain before bondholders would consider
converting a bond to the company=s common stoc,9
A4 <1#
64 <%#
;4 <*#
D4 <"#
E4 <-#
Answer: D Difficulty: 5ard L: % !age: "$"
1*
0). A call feature:
A4 allows bondholders to convert their bond to a specified number of shares of common
stoc,.
64 is not available on corporate bonds.
;4 allows the corporation to buy outstanding bonds from current bondholders before the
maturity date.
D4 is only available with government securities.
E4 is guaranteed by the corporation.
Answer: ; Difficulty: (ed L: % !age: "$-
1#. A bond that is registered in the owner=s name by the issuing company is called a
AAAAAAAAAAAA bond.
A4 certified
64 coupon
;4 registered
D4 ?ero&coupon
E4 general obligation
Answer: ; Difficulty: Easy L: * !age: "$$
11. @ohn !eterson purchased a bond at a price far below its face value/ that ma,es no interest
payments/ and will be redeemed at its face value at maturity. 7n all li,elihood/ he
purchased a3n4 AAAAAAAAAAAA bond.
A4 debenture
64 convertible
;4 indenture
D4 registered
E4 ?ero&coupon
Answer: E Difficulty: (ed L: * !age: "$$
1%. The type of bond that is not registered in the investor=s name is a AAAAAAAAAAA bond.
A4 revenue
64 general obligation
;4 bearer
D4 ?ero&coupon
E4 ta2&e2empt
Answer: ; Difficulty: Easy L: * !age: "$$
1"
1*. 7f overall interest rates in the economy rise/ a corporate bond with a fi2ed interest rate
will generally:
A4 increase in value.
64 decrease in value.
;4 remain unchanged.
D4 become worthless.
E4 be returned to the corporation.
Answer: 6 Difficulty: 5ard L: * !age: "$$&"$)
1". 8hat is the appro2imate mar,et value for a <1/### corporate bond that pays $ percent
interest when comparable bonds are paying ) percent interest9
A4 <$#
64 <)#
;4 <$$)
D4 <1/###
E4 <1/1%-
Answer: ; Difficulty: 5ard L: * !age: "$$&"$)
1-. 8hat is the appro2imate mar,et value for a <1/### corporate bond that pays ) percent
interest when comparable bonds are paying $ percent9
A4 <$##
64 <)##
;4 <1/###
D4 <1/1%-
E4 <1/0##
Answer: D Difficulty: 5ard L: * !age: "$$&"$)
10. 8hen a bond is selling for more than its face value/ it is said to be selling at a:
A4 discount.
64 premium.
;4 commission.
D4 conservative value.
E4 prospectus value.
Answer: 6 Difficulty: Easy L: * !age: "$$
11. 7f a bond was +uoted in the newspaper at $$ *F"/ the price in dollars was
A4 <1-
64 <$$
;4 <$$.1-
D4 <$$1.-#
E4 <1/###
Answer: D Difficulty: (ed L: - !age: "))
1-
Chapter 1! Investing in Mutual Funds
True/False Questions
T F 1$. The ma'or reasons why investors purchase mutual funds are professional
management and diversification.
Answer: True Difficulty: Easy L: 1 !age: -1-
T F 1). 6ecause of professional management/ there is no need for the individual investor
to evaluate a mutual fund investment.
Answer: False Difficulty: (ed L: 1 !age: -1-
T F $#. A closed&end fund is a mutual fund in which shares are issued only when the fund
is organi?ed.
Answer: True Difficulty: Easy L: 1 !age: -10
T F $1. Today/ there are more closed&end funds than there are open&end funds.
Answer: False Difficulty: (ed L: 1 !age: -10
T F $%. An e2change&traded fund/ commonly referred to as an EFT/ is a fund that invests
in the stoc,s contained in a specific stoc, inde2.
Answer: True Difficulty: Easy L: 1 !age: -10
T F $*. 6ecause an e2change&traded fund mirrors the same stoc,s that are contained in a
specific stoc, inde2/ there is more need for a professional manager.
Answer: False Difficulty: (ed L: 1 !age: -10
T F $". 7n a newspaper +uotation/ :AB stands for Gnot accessible value.G
Answer: False Difficulty: (ed L: * !age: -%$
10
Multiple Choice Questions
$-. 8hich of the following statements is false9
A4 7nvestors purchase mutual funds for diversification.
64 7nvestors purchase mutual funds because of professional management.
;4 7nvestors who purchase mutual funds are guaranteed a higher rate of return than a
comparable investment in stoc,s or bonds.
D4 !rofessional mutual fund managers wor, for an investment company.
E4 Even the best portfolio managers sometimes ma,e mista,es.
Answer: ; Difficulty: (ed L: 1 !age: -1"
$0. A mutual fund in which no sales charge is paid by the individual investor is called a3n4
AAAAAAAAAAAA fund.
A4 closed&end
64 open&end
;4 load
D4 no&load
E4 convertible fund.
Answer: D Difficulty: Easy L: 1 !age: -1$
$1. A fee that some investment companies charge for mar,eting and distributing a mutual
fund is called a:
A4 1"A&1 fee.
64 1%b&1 fee.
;4 1$&% fee.
D4 %1&A6 fee.
E4 :one of the above answers are correct.
Answer: 6 Difficulty: (ed L: 1 !age: -1$
$$. A mutual fund that invests in companies outside the Hnited >tates is called a3n4
AAAAAAAAAAAA fund.
A4 growth&income
64 income
;4 international
D4 industry
E4 global mar,et
Answer: ; Difficulty: (ed L: % !age: -%1
11
$). A municipal bond fund:
A4 is too ris,y for most investors.
64 provides investors with ta2&free income.
;4 invests in bonds that are bac,ed by the federal government.
D4 is a ris,&free investment.
E4 are not rated because they are short&term investments.
Answer: 6 Difficulty: (ed L: % !age: -%%
)#. 8hen one investment company manages a group of mutual funds/ it is called a3n4:
A4 family of funds.
64 e2change fund.
;4 diversification fund.
D4 versatility fund.
E4 group of funds.
Answer: A Difficulty: (ed L: % !age: -%*
91. For most open ended mutual funds, when is net asset value
calculated?
A) The beginning of each trading day
) At noon of each trading day
!) At the end of each trading day
") At the end of each trading wee#
$) At the end of each trading month
Answer% ! "i&culty% 'ed ()% 1 *age% +1,
9-. *eter !onrad is buying a mutual fund that is investing in stoc#s all over
the world including the .nited /tates. 0hat type of mutual fund has he
purchased?
A) An aggressive growth fund
) An e1uity income fund
!) A global fund
") An international fund
$) A regional fund
Answer% ! "i&culty% 'ed ()% - *age% +-1
1$