Fundamentals of Investing 13th Edition Test Bank

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1Fundamentals of Investing, 13e(Smart)Chapter 1The Investment Environment1.1Learning Goal 11) A non-interest bearing checking account is still considered an investment.Answer: FALSELearning Outcome: F-12 Discuss the implications of systematic risk in financial markets and itsrole in shaping investment choicesAACSB: 3 Analytical thinkingQuestion Status: Previous EditionLearning Goal: Learning Goal 12) Land and buildings are examples of real property investments.Answer: TRUELearning Outcome: F-12 Discuss the implications of systematic risk in financial markets and itsrole in shaping investment choicesAACSB: 3 Analytical thinkingQuestion Status: Previous EditionLearning Goal: Learning Goal 13) Since 1900, the average return on stocks has exceeded the average return on savingsaccounts by more than 6 percentage points.Answer: TRUELearning Outcome: F-12 Discuss the implications of systematic risk in financial markets and itsrole in shaping investment choicesAACSB: 3 Analytical thinkingQuestion Status: Previous EditionLearning Goal: Learning Goal 14) A United States Savings Bond is an example of an investment as defined in the text.Answer: TRUELearning Outcome: F-12 Discuss the implications of systematic risk in financial markets and itsrole in shaping investment choicesAACSB: 3 Analytical thinkingQuestion Status: Previous EditionLearning Goal: Learning Goal 15) Most sources of investment information are in print format, expensive, and difficult toaccess.Answer: FALSELearning Outcome: F-12 Discuss the implications of systematic risk in financial markets and itsrole in shaping investment choicesAACSB: 3 Analytical thinkingQuestion Status: New QuestionLearning Goal: Learning Goal 1

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26) Which of the following is NOT an investment as defined in the text?A) a certificate of deposit issued by a bankB) a new automobileC) a United States Saving BondD) a mutual fund held in a retirement accountAnswer: BLearning Outcome: F-12 Discuss the implications of systematic risk in financial markets and itsrole in shaping investment choicesAACSB: 3 Analytical thinkingQuestion Status: Previous EditionLearning Goal: Learning Goal 17) Stocks are a(n) ________ investment representing ________ of a business.A) direct; ownershipB) direct; debtC) indirect; ownershipD) indirect; debtAnswer: ALearning Outcome: F-12 Discuss the implications of systematic risk in financial markets and itsrole in shaping investment choicesAACSB: 3 Analytical thinkingQuestion Status: Previous EditionLearning Goal: Learning Goal 18) An exchange traded fund that invests in the stocks of large corporations is an example ofA) direct investment.B) indirect investment.C) derivative investment.D) tangible investment.Answer: BLearning Outcome: F-12 Discuss the implications of systematic risk in financial markets and itsrole in shaping investment choicesAACSB: 3 Analytical thinkingQuestion Status: Previous EditionLearning Goal: Learning Goal 19) Which of the following has declined in recent years?A) direct ownership of stock by individual investorsB) the percentage of foreign stocks held in typical portfoliosC) institutional ownership of common stocksD) the timeliness of information available to investorsAnswer: ALearning Outcome: F-12 Discuss the implications of systematic risk in financial markets and itsrole in shaping investment choicesAACSB: 3 Analytical thinkingQuestion Status: Previous EditionLearning Goal: Learning Goal 1

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310) Debt represents funds loaned in exchange forA) 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.Answer: DLearning Outcome: F-12 Discuss the implications of systematic risk in financial markets and itsrole in shaping investment choicesAACSB: 3 Analytical thinkingQuestion Status: Previous EditionLearning Goal: Learning Goal 11.2Learning Goal 21) Institutional investors manage money for businesses and nonprofit organizations, but not forindividuals.Answer: FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 22) Institutional investors are individuals who invest indirectly through financial institutions.Answer: FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 23) Banks and insurance companies are examples of institutional investors.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 2

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44) In the financial markets, individuals are net demanders of funds.Answer: FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 25) The government is generallyA) 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.Answer: DLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 26) On a net basis, funds in the financial markets are generally supplied byA) individuals.B) both individuals and business firms.C) business firms.D) the government.Answer: ALearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 2

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57) A forum in which suppliers and demanders of funds make financial transactions is called afinancialA) institution.B) bank.C) instrument.D) market.Answer: DLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 28) 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 onlyB) I, II and IV onlyC) II, III and IV onlyD) I, II, III and IVAnswer: BLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 29) Which of the following is NOT traded in the securities markets?A) stocksB) bondsC) derivativesD) real estateAnswer: DLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: New QuestionLearning Goal: Learning Goal 2

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610) Describe the major differences between individual and institutional investors.Answer: Individual investors manage their own funds to achieve individual goals such asincreasing financial security or financing a comfortable retirement. Institutional investors suchas mutual funds and insurance companies manage funds for individuals who lack the time orexpertise to invest individually and for other institutions such as universities or charities.Learning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 21.3Learning Goal 31) Bond investors lend their money for a fixed period of time and receive interest.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 32) A collection of securities designed to meet an investment goal is called a portfolio.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 33) If the value of a common stock increases the value of an option to buy that stock should alsoincrease.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 3

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74) An option to purchase common stock is a type of derivative security.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: New QuestionLearning Goal: Learning Goal 35) Bonds represent a lower level of risk than do stocks in the same company.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 36) Exchange traded funds are similar to mutual funds, but are traded like stocks.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 37) Mutual funds invest in diversified portfolios of securities.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 38) Bond prices rise as interest rates decline.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 3

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89) Bond interest and stock dividends are different ways of distributing a corporation's earningsto its owners.Answer: FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 310) Which of the following is an example of a tangible asset?A) bondsB) mutual fundsC) real estateD) stocksAnswer: CLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 311) Which one of the following would be the most liquid investment?A) stockB) Series EE bondC) money market mutual fundD) real estateAnswer: CLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 3

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912) Which of the following investments represents partial ownership of a corporation?A) bondsB) mutual fundsC) commercial paperD) common stockAnswer: DLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 313) Investors seeking a diversified, professionally managed portfolio of securities can purchaseshares ofA) preferred stock.B) convertible securities.C) insurance policies.D) mutual funds.Answer: DLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 314) One feature that mutual funds and exchange traded funds have in common isA) 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.Answer: CLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: New QuestionLearning Goal: Learning Goal 3

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1015) Briefly describe three advantages of investing in mutual funds or exchange traded funds.Answer: The investor does not need to spend a great deal of time researching individualsecurities. Small investors easily achieve diversification by investing indirectly in a broadportfolio of securities. The funds are managed by professionals who presumably have expertisein making investment decisions.Learning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: New QuestionLearning Goal: Learning Goal 31.4Learning Goal 41) Earning a high rate of return with little or no risk is a realistic investment goal.Answer: FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 42) Under current tax laws, most taxpayers will pay a lower tax rate on capital gains than ondividends.Answer: FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 43) Under current tax laws, most taxpayers will pay a lower tax rate on capital gains than onincome from wages.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 4

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114) Investors can postpone or avoid income taxes by investing through Individual RetirementAccounts.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 45) Short-term capital gains are taxed at the taxpayer's marginal tax rate.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 46) To qualify for long-term capital gains rates, a stock must be held for at least 12 months.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 47) Retirement plans, such as a 401(k), allow employees to defer taxes on the plan contributionsuntil such time as the funds are withdrawn from the retirement plan.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 48) You should spend money on housing, clothing and basic insurance before investing.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 4

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129) Which of the following represent investment goals?I.saving for major expenditures such as a house or educationII. sheltering income from taxesIII. increasing current incomeIV. saving funds for retirementA) I and IV onlyB) III and IV onlyC) I, III and IV onlyD) I,,II, III and IVAnswer: DLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 410) In selecting investments consistent with your goals, you should considerA) 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.Answer: DLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 411) Sarah purchased a stock one year ago at a price of $32 a share. In the past year, she hasreceived four quarterly dividends of $0.75 each. Today she sold the stock for $38 a share. Hercapital gain per share isA) $3.00.B) $6.00.C) $(6.00).D) $9.00.Answer: BLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 3

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1312) A well-conceived investment policy statement will specifyA) 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.Answer: DLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: New QuestionLearning Goal: Learning Goal 413) Beginning investors with small amounts to invest shouldA) 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).Answer: CLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 414) Research indicates that investors who closely monitor their portfolios and trade quickly inresponse to minor fluctuations in priceA) 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 tradeinfrequently.D) be more highly educated and in higher income brackets than those who hold investments forthe long term and trade infrequently.Answer: BLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: New QuestionLearning Goal: Learning Goal 4

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14Table 1.2Use the following tax rates and income brackets for 2015 to answer the following question(s).15) In 2015, John and Nicole earned a combined taxable income of $148,800 from employmentplus $1,000 in long term capital gains and they file a joint tax return. What is their total federalincome tax? Round to the nearest dollar.A) $37,150B) $29,063C) $29,593D) $28,963Answer: BLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: New QuestionLearning Goal: Learning Goal 416) Josh earned $82,500 in taxable income, all from wages and interest, and files an individualtax return. What is the amount of Josh's taxes for the year 2015? Round to the nearest dollar.A) $13,750B) $16,481C) $18,425D) $12,285Answer: BLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: New QuestionLearning Goal: Learning Goal 4

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1517) For a taxpayer in the 25% marginal tax bracket, a long-term capital gain realized in 2015will be taxed atA) 5%.B) 10%.C) 15%.D) 25%.Answer: CLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: RevisedLearning Goal: Learning Goal 418) Andrew and Jennifer are in the 25% marginal tax bracket. Three years ago they purchased100 shares of stock at $20 a share. In 2015, they sold the 100 shares for $29 a share. What isthe amount of federal income tax they owe as a result of this sale?A) $135B) $165C) $225D) $435Answer: ALearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: RevisedLearning Goal: Learning Goal 419) Michelle and Patrick are in the 28% marginal tax bracket. They bought 100 shares of DJNstock at $45 per share and sold them 4 years later in 2015 at $22 per share? By how much didtheir loss reduce their taxes in the year when they sold the stock?A) $0B) $644C) $345D) $1,260Answer: BLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: New QuestionLearning Goal: Learning Goal 4

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1620) Under current tax law, dividend income is taxed at the same rate asA) ordinary income.B) short-term capital gains.C) long-term capital gains.D) interest income.Answer: CLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 421) Both the holding period to qualify and the tax rate on long-term capital gainsA) 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.Answer: ALearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 422) Tax planningA) guides investment activities to maximize after-tax returns over the long term for anacceptable 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 currenttaxes.Answer: ALearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 4

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1723) Speculative and growth oriented investments are least appropriate forA) young investors.B) middle-aged investors.C) retired investors.D) high income investors.Answer: CLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 424) Investors seeking to increase their wealth as quickly as possible would invest inA) 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.Answer: CLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 425) Discuss the relationship between stock prices and investors' beliefs about the businesscycle.Answer: Stock prices tend to anticipate the economic conditions that investors expect in thefuture. 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, stockprices rise.Learning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 4

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1826) What are some of the important prerequisites to investing?Answer: Before entering into risky investments, individuals need to provide for the necessitiesof life such as housing, transportation, and taxes. They should have liquid assets available tomeet unforeseen emergencies such as job loss, auto repairs or dental treatments. They shouldalso have insurance for catastrophic events involving health or property.Learning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 427) Discuss the general investment philosophy and the types of investments preferred byinvestors in each phase of the life cycle.Answer:Learning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 4

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191.5Learning Goal 51) U.S. Treasury Bills mature in 1 year or less.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 52) Liquidity is the ability to convert an investment into cash quickly with little or no loss ofvalue.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 53) Short-term investments generally provide liquidity, safety, and a high rate of return.Answer: FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 54) Money market accounts, certificates of deposit, bonds and commercial paper are all forms ofshort-term investment vehicles.Answer: FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 5

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205) The primary risk associated with a short-term investment isA) purchasing power risk.B) default risk.C) interest rate risk.D) economic risk.Answer: ALearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 56) Short-term investmentsI.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 onlyB) II and IV onlyC) I, II and IV onlyD) I, II, III and IVAnswer: CLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 57) Federal insurance protects passbook savings accounts and money market deposit accounts(MMDAs) up toA) $100,000.B) $150,000.C) $250,000.D) $1,000,000.Answer: CLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 5

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218) Beginning in 2010, the amount protected by the Federal Deposit Insurance Corporation innon-interest bearing checking accounts isA) zero.B) $100,000.C) unlimited.D) $250,000.Answer: CLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 59) Since 2010, the interest rate on passbook accounts and certificates of deposit hasA) 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.Answer: ALearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: New QuestionLearning Goal: Learning Goal 510) Which one of the following has the lowest level of risk?A) commercial paperB) money market mutual fund accountC) banker's acceptanceD) U.S. Treasury billAnswer: DLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 5

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221.6Learning Goal 61) Certified Financial Planners typically manage institutional portfolios.Answer: FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: New QuestionLearning Goal: Learning Goal 62) A major goal of corporate financial management is to increase the value of the firm toinvestors.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 63) Stringent regulations and vigorous enforcement have all but eliminated unethical behaviorby financial professionals in recent years.Answer: FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 64) Insurance companies invest the premiums and fees collected from customers in order toneutralize the risks assumed from their clients.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 6

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235) Chartered Financial Analyst (CFA) is a degree offered by several prestigious businessschools.Answer: FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 66) Typical responsibilities of financial professionals in a corporate setting includeI.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 andequity.A) I and IV onlyB) I, II and IV onlyC) II, III and IV onlyD) I, II, III and IVAnswer: BLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 6

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247) Jobs in which of the following fields require an understanding of the investmentenvironment?I.commercial bankingII. corporate financeIII. financial planningIV. insuranceA) I and IV onlyB) I, II and IV onlyC) II, III and IV onlyD) I, II, III and IVAnswer: DLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 68) A major function of investment banking firms isA) 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.Answer: CLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 69) Which of the following has set an outstanding example of ethical behavior in the financialprofessions?A) Bernard Madoff of Madoff SecuritiesB) Hank Greenberg of AIGC) Ramalinga Raju of Satyam ComputersD) none of the aboveAnswer: DLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 6

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2510) In the U.S., the most prestigious designation for financial planners isA) CFP.B) CPA.C) ING.D) SIPC.Answer: ALearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 611) Briefly describe three different career paths that require a strong background ininvestments.Answer: 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 theirshort and long term goals.The insurance industry employs professionals to invest and manage the large sums collectedfrom premiums.Within the investment management industry, professionals may work as securities analysts,fund managers, or retail brokers.Learning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 6

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1Fundamentals of Investing, 13e(Smart)Chapter 2Securities Markets and Transactions2.1Learning Goal 11) Stocks, bonds and mutual fund shares are bought and sold in the capital market.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 12) Capital markets deal exclusively in stock. Money markets deal exclusively in debtinstruments.Answer: FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 13) Primary markets deal in the stocks of larger, well-known companies; secondary markets dealin the stocks of smaller, less well-known companies.Answer: FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 14) Short-term securities are bought and sold in theA) capital market.B) primary market.C) money market.D) stock market.Answer: CLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 1

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25) The governmental agency that oversees the capital markets is theA) Federal Trade Commission.B) Federal Reserve.C) Securities and Exchange Commission.D) Fair Trade and Banking Agency.Answer: CLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 16) Stocks purchased in the secondary market are purchasedA) directly from the issuing corporation.B) from other investors.C) from small, little-known brokerages.D) indirectly through financial institutions.Answer: BLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 17) Stocks and bonds are traded inA) securities and exchange commissions.B) money markets.C) federal trade commissions.D) capital markets.Answer: DLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 1

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38) The primary market tends to be more active whenA) 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.Answer: BLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: New QuestionLearning Goal: Learning Goal 12.2Learning Goal 21) Underwriters are responsible for promoting and facilitating the sale of securities.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 22) The preliminary version of a prospectus is called a red herring.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 23) The purpose of the "quiet period" a company must observe from the time it files aregistration statement with the SEC until after an IPO is complete is to assure that all investorsreceive the same information.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: New QuestionLearning Goal: Learning Goal 2

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44) IPOs are typically underpriced so that the price rises during the first few days of trading.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 25) IPOs are relatively safe investments.Answer: FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 26) The price of stock sold in an IPO is set by bids submitted in the month before trading begins.Answer: FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: New QuestionLearning Goal: Learning Goal 27) 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 newissue.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 primarymarket.Answer: CLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 2

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58) A rights offering is theA) 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.Answer: BLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 29) IPO activity tends to peak when stock pricesA) have fallen sharply.B) have risen sharply.C) are volatile and unstable.D) Stock prices have relatively little influence on IPO activity.Answer: BLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: New QuestionLearning Goal: Learning Goal 210) The document that describes the issuer of a security's management and financial position isknown as aA) balance sheet.B) 10-K report.C) prospectus.D) red herring.Answer: CLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: 8 Application of knowledge (Able to translate knowledge of business and managementinto practice)Question Status: Previous EditionLearning Goal: Learning Goal 2

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