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.
Answer: True Difficulty: Easy LO: 1 Page: 408
TF2.A short-term investment objective is defined as one that will be accomplished within a period of two to five years.
Answer: False Difficulty: Med LO: 1 Page: 409
TF3.An emergency fund is a certain amount of money that can be obtained quickly in case of immediate need.
Answer: True Difficulty: Easy LO: 1 Page: 409
TF4.A line of credit is a short-term loan that is approved before the money is actually needed.
Answer: True Difficulty: Easy LO: 1 Page: 410
TF5.Generally, it is not a good idea to participate in an employer-sponsored retirement program.
Answer: False Difficulty: Easy LO: 1 Page: 410
TF6.The rate of return on an investment has no affect on a long-term investment program.
Answer: False Difficulty: Med LO: 2 Page: 414
TF7.There is no relationship between risk and safety.
Answer: False Difficulty: Med LO: 2 Page: 412
TF8.The potential return of any investment should be directly related to the risk that the investor assumes.
Answer: True Difficulty: Med LO: 2 Page: 413
TF 9.During inflationary times, there is a risk that the financial return on an investment will not keep pace with the rate of inflation.
Answer: True Difficulty: Easy LO: 2 Page: 416
TF10.The dollar value of a fixed-return investment (like a bond) increases when overall interest rates in the economy increase.
Answer: False Difficulty: Hard LO: 2 Page: 416
TF11.Liquidity is the ease with which an asset can be converted to cash without a substantial loss in dollar value.
Answer: True Difficulty: Easy LO: 3 Page: 419
TF12.There are two types of stock-common stock and preferred stock.
Answer: True Difficulty: Easy LO: 3 Page: 422
TF13.Preferred stock represents the most basic form of corporate ownership.
Answer: False Difficulty: Med LO: 3 Page: 422
TF14.The most important priority an investor in preferred stock enjoys is receiving cash dividends before common stockholders are paid any cash dividends.
Answer: True Difficulty: Med LO: 3 Page: 422
TF15.Bondholders generally receive interest payments every six months.
Answer: True Difficulty: Med LO: 3 Page: 423
TF16.Mutual funds range from very conservative to extremely speculative investments.
Answer: True Difficulty: Med LO: 3 Page: 423
TF17.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.
Answer: False Difficulty: Med LO: 3 Page: 421
TF18.Asset allocation is the process of spreading your assets among several different types of investments to lessen risk.
Answer: True Difficulty: Easy LO: 3 Page: 419
TF19.The amount of time that your investments have to work for you is an important factor when managing your investment portfolio.
Answer: True Difficulty: Easy LO: 3 Page: 421
TF20.Because 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 LO: 3 Page: 421
TF21.Once you have painstakingly developed a financial plan, it is not wise to change it.
Answer: False Difficulty: Med LO: 4 Page: 426
TF22.Although useful for many things, the Internet cannot be used to monitor the value of stock, bond, and mutual fund investments.
Answer: False Difficulty: Med LO: 4 Page: 428
Multiple Choice Questions
23.Which of the following is a true statement?
A)No one is going to make you save the money you need to start an investment program.
B)To be useful, investment objectives must be very general.
C)Investment goals are the same for each individual.
D)Because investment objectives deal with the future, it is useless to plan more than five years in the future.
E)A long-term investment objective involves a time period of five years or less.
Answer: A Difficulty: Med LO: 1 Page: 408
24.An emergency fund should be deposited in a:
A)savings account at the highest available interest rate.
B)six month certificate of deposit.
C)checking account.
D)safe place at home.
E)safe deposit box in a bank vault.
Answer: A Difficulty: Easy LO: 1 Page: 409
25.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
Answer: C Difficulty: Hard LO: 2 Page: 414
26.Which of the following investments would rank the highest with regard to safety?
A)government bonds
B)common stock
C)preferred stock
D)corporate bonds
E)real estate
Answer: A Difficulty: Med LO: 2 Page: 413
27.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.
Answer: B Difficulty: Hard LO: 2 Page: 416
28.The ease with which an investment can be converted to cash without a substantial loss in dollar value is called the:
A)asset value.
B)liquidity factor.
C)immediate quotient.
D)fixed cost factor.
E)variable cost factor.
Answer: B Difficulty: Easy LO: 3 Page: 419
29.A corporation selling stock is obligated to:
A)guarantee your investment.
B)repay money obtained from the sale of stock.
C)repurchase shares of stock at a later date.
D)pay dividends.
E)pay dividends to preferred stockholders before dividends are paid to common stockholders.
Answer: E Difficulty: Med LO: 3 Page: 422
30.Normally, corporate bondholders receive interest:
A)monthly.
B)every three months.
C)every six months.
D)yearly.
E)when the bond matures.
Answer: C Difficulty: Med LO: 3 Page: 423
31.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.
Answer: D Difficulty: Easy LO: 3 Page: 423
Chapter 14 Investing in Stocks
True/False Questions
TF32.At maturity, corporations must repay stockholders the money they invested in the company.
Answer: False Difficulty: Easy LO: 1 Page: 443
TF33.Dividend payments on common stock are guaranteed, but the amount is determined by the board of directors.
Answer: False Difficulty: Med LO: 1 Page: 443
TF34.A proxy is a legal form that lists the issues to be decided at a stockholders' meeting and requests that stockholders transfer their voting rights to some individual or individuals.
Answer: True Difficulty: Easy LO: 1 Page: 443
TF35.The record date is the date that the actual dividend payment is made to stockholders.
Answer: False Difficulty: Med LO: 1 Page: 444
TF36.A stock split is a procedure in which a stockholder's common stock is exchanged for preferred stock.
Answer: False Difficulty: Med LO: 1 Page: 445
TF37.A blue-chip stock is too speculative for most investors.
Answer: False Difficulty: Easy LO: 2 Page: 448
TF38.The beta is an index that compares the risk associated with a specific stock issue with the risk of the stock market in general.
Answer: True Difficulty: Med LO: 3 Page: 458
TF39.Dollar-cost averaging enables investors to avoid the problem of buying high and selling low.
Answer: True Difficulty: Med LO: 5 Page: 467
Multiple Choice Questions
40.Apple Computer Corporation holds its annual meeting in April. Maxine Star, who owns stock in the company, cannot attend the meeting. She can vote by:
A)voluntary certificate.
B)preemptive right.
C)proxy.
D)cumulative certificate.
E)participatory certificate.
Answer: C Difficulty: Med LO: 1 Page: 443
41.Dividends remain with the stock until:
A)two business days before the date of record.
B)two business days after the date of record.
C)five days before the date of record.
D)five days after the date of record.
E)five days before the actual payment date.
Answer: A Difficulty: Hard LO: 1 Page: 444
42.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.
Answer: D Difficulty: Med LO: 1 Page: 444
43.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
Answer: B Difficulty: Hard LO: 1 Page: 444
44.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
Answer: D Difficulty: Med LO: 1 Page: 445
45.When the board of directors approves a two for one stock split, the price for each share of stock:
A)decreases in value.
B)increases in value.
C)remains unchanged.
D)is guaranteed to go up within a short period of time.
E)increase to twice of its former value.
Answer: A Difficulty: Hard LO: 1 Page: 445
46.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.
Answer: B Difficulty: Med LO: 1 Page: 447
47.James Turbyfil purchased 100 shares of IBM for $72. James also paid $55 commission. What was the total purchase price for this transaction?
A)$55
B)$72
C)$7,237.50
D)$7,255.00
E)$7,347.50
Answer: D Difficulty: Hard LO: 2 Page: 449
48.Assume that you purchased 100 shares of Exxon stock for $55 a share, that you received an annual dividend of $2.00 a share, and that you sold your Exxon stock for $65 a share at the end of one year. What is the total return for your investment? (Ignore commission amounts for this question.)
A)$200
B)$1,000
C)$1,200
D)$1,500
E)$2,200
Answer: C Difficulty: Hard LO: 3 Page: 457
49.Assume the beta for the stock market in general is 1.0 and that the beta for World-Wide Television Productions is 2.4. If the stock market increases by 10 percent, how much will the stock for World-Wide Productions increase?
A)12 percent
B)20 percent
C)24 percent
D)48 percent
E)It is impossible to calculate the amount of increase with this information.
Answer: C Difficulty: Hard LO: 3 Page: 458
50. A request that a stock be bought or sold at the current market price is called a ______order.
A)market
B)limit
C)stop
D)round
E)discretionary
Answer: A Difficulty: Easy LO: 4 Page: 466
- James Garner just bought the stock of a company. He knows that he will receive a cash payment from the company once a quarter, although the company is not obligated to make this payment. What will he receive?
A)Equity
B)Proxy
C)Voting Rights
D)Dividends
E)None of the above
Answer: D Difficulty: Med LO: 1 Page: 443
- Val Kilmer has purchased the stock of the Williams Widget Company. After he buys the stock he is told that the number of shares he owns will be divided into a larger number. In fact, he will get two shares for every share that he owns today. What has happened to this company?
A)Dividend split
B)Proxy split
C)Stock split
D)Banana split
E)None of the above
Answer: C Difficulty: Med LO: 1 Page: 445
- Sean Connery has purchased the stock of the Stowaway Transportation Company. The company is getting ready to pay a dividend. He knows he must be registered on the corporation’s books on the in order to receive the dividend.
A)Record date
B)Ex dividend date
C)Payment date
D)Purchased date
E)None of the above
Answer: A Difficulty: Med LO: 1 Page: 444
- Orlando Bloom is buying the stock of the Getaway Caribbean Cruise Company. However, if he buys the stock today, he knows it is the first day it is selling without the dividend this quarter. What date is Orlando buying the stock on?
A)Record Date
B)Ex dividend date
C)Payment date
D)Sale date
E)None of the above
Answer: B Difficulty: Med LO: 1 Page: 444
- Beverly Frickel purchased 100 shares of Gleason Systems stock for $42.50 per share. Her commission for this purchase was $35. She sold the stock two years later for $55 per share and a commission of $50. While she held the stock it paid a dividend of $1.50 per share. What was Beverly’s total dollar return on this stock?
A)$1250
B)$1165
C)$150
D)$1315
E)$1400
Answer: D Difficulty: Hard LO: 1 Page: 444-445
- Trevor Conklin is thinking about buying the preferred stock of Galloway Gems Company. He knows that the dividend is a fixed amount and is determined by taking a percentage of what value?
A)Par value
B)Market value
C)Present value
D)Future value
E)None of the above
Answer: A Difficulty: Med LO: 1 Page: 447
Chapter 15 Investing in Bonds
True/False Questions
TF57.A corporate bond is a corporation's written pledge that it will repay a specified amount of money with interest.
Answer: True Difficulty: Easy LO: 1 Page: 482
TF58.The bond debenture is a legal document that details all of the conditions relating to a bond issue.
Answer: False Difficulty: Med LO: 1,2 Page: 483
TF59.The trustee is an independent firm that acts as the bondholders' representative.
Answer: True Difficulty: Easy LO: 1,2 Page: 483
TF60.Corporate bonds are a form of equity financing that does not have to be repaid.
Answer: False Difficulty: Easy LO: 1,2 Page: 483
TF61.If overall interest rates in the economy fall, then a corporate bond with a fixed interest rate will decrease in value.
Answer: False Difficulty: Hard LO: 3 Page: 488
TF62.The only way an investor can make money on a bond investment is to hold the bond until maturity.
Answer: False Difficulty: Med LO: 3 Page: 489-490
TF63.Because 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: Med LO: 3 Page: 490
TF64.A bond with a price quotation of 73 sells for $73.
Answer: False Difficulty: Med LO: 5 Page: 500-501
Multiple Choice Questions
65.Assume that you purchased a $1,000 Exxon bond that pays 9 1/2 percent interest. What is the amount of interest you would receive each six months?
A)$4.75
B)$9.50
C)$95
D)$47.50
E)$1,000
Answer: D Difficulty: Hard LO: 1 Page: 482
66.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
Answer: A Difficulty: Easy LO: 2 Page: 484
67.A bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's stock is called a(n) ______bond.
A)debenture
B)mortgage
C)indenture
D)convertible
E)subordinated
Answer: D Difficulty: Med LO: 2 Page: 484
68.A $l,000 corporate bond is convertible to 25 shares of the corporation's common stock. What is the minimum price that the stock must obtain before bondholders would consider converting a bond to the company's common stock?
A)$10
B)$20
C)$30
D)$40
E)$50
Answer: D Difficulty: Hard LO: 2 Page: 484
69.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.
Answer: C Difficulty: Med LO: 2 Page: 485
70.A bond that is registered in the owner's name by the issuing company is called a ______bond.
A)certified
B)coupon
C)registered
D)zero-coupon
E)general obligation
Answer: C Difficulty: Easy LO: 3 Page: 488
71.John Peterson purchased a bond at a price far below its face value, that makes no interest payments, and will be redeemed at its face value at maturity. In all likelihood, he purchased a(n) ______bond.
A)debenture
B)convertible
C)indenture
D)registered
E)zero-coupon
Answer: E Difficulty: Med LO: 3 Page: 488
72.The type of bond that is not registered in the investor's name is a ______bond.
A)revenue
B)general obligation
C)bearer
D)zero-coupon
E)tax-exempt
Answer: C Difficulty: Easy LO: 3 Page: 488
73.If overall interest rates in the economy rise, a corporate bond with a fixed interest rate will generally:
A)increase in value.
B)decrease in value.
C)remain unchanged.
D)become worthless.
E)be returned to the corporation.
Answer: B Difficulty: Hard LO: 3 Page: 488-489
74.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
Answer: C Difficulty: Hard LO: 3 Page: 488-489
75.What is the approximate market value for a $1,000 corporate bond that pays 9 percent interest when comparable bonds are paying 8 percent?
A)$800
B)$900
C)$1,000
D)$1,125
E)$1,600
Answer: D Difficulty: Hard LO: 3 Page: 488-489
76.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.
Answer: B Difficulty: Easy LO: 3 Page: 488
77.If a bond was quoted in the newspaper at 88 3/4, the price in dollars was
A)$75
B)$88
C)$88.75
D)$887.50
E)$1,000
Answer: D Difficulty: Med LO: 5 Page: 499
Chapter 16 Investing in Mutual Funds
True/False Questions
TF78.The major reasons why investors purchase mutual funds are professional management and diversification.
Answer: True Difficulty: Easy LO: 1 Page: 515
TF79.Because of professional management, there is no need for the individual investor to evaluate a mutual fund investment.
Answer: False Difficulty: Med LO: 1 Page: 515
TF80.A closed-end fund is a mutual fund in which shares are issued only when the fund is organized.
Answer: True Difficulty: Easy LO: 1 Page: 516
TF81.Today, there are more closed-end funds than there are open-end funds.
Answer: False Difficulty: Med LO: 1 Page: 516
TF82.An exchange-traded fund, commonly referred to as an EFT, is a fund that invests in the stocks contained in a specific stock index.
Answer: True Difficulty: Easy LO: 1 Page: 516
TF83.Because an exchange-traded fund mirrors the same stocks that are contained in a specific stock index, there is more need for a professional manager.
Answer: False Difficulty: Med LO: 1 Page: 516
TF84.In a newspaper quotation, NAV stands for "not accessible value."
Answer: False Difficulty: Med LO: 3 Page: 528
Multiple Choice Questions
85.Which of the following statements is false?