Test Bank For Fundamentals of Investing, 14th Edition

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1Fundamentals of Investing, 14e(Smart/Zutter)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: 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: Analytical thinkingQuestion Status: Previous EditionLearning Goal: Learning Goal13) 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: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: Analytical thinkingQuestion Status: Previous EditionLearning Goal: Learning Goal 15) Most sources of investment information are inprint 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: Analytical thinkingQuestion Status: Previous EditionLearning 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: Analytical thinkingQuestion Status: Previous EditionLearning Goal: Learning Goal 17) Stocks are a(n) ________ investment representing ________ of abusiness.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: 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: 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 stocksheld 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: Analytical thinkingQuestion Status: Previous EditionLearning Goal: Learning Goal 1

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310) Which of the following has increased in recent years?A)direct ownership of stock by individual investorsB) the percentage of domestic stocks held in typical portfoliosC) institutional ownership of common stocksD) indirect ownership of stocks through mutual funds and ETFs.Answer: DLearning Outcome: F-12Discuss the implications of systematic risk in financial markets and itsrole in shaping investment choicesAACSB: Analytical thinkingQuestion Status: New QuestionLearning Goal: Learning Goal 111) 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: DLearningOutcome: F-12 Discuss the implications of systematic risk in financial markets and itsrole in shaping investment choicesAACSB: 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: Application of knowledgeQuestion 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: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 2

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43) 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: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 24) In the financial markets, individuals are net suppliers of funds.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: RevisedLearning 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: Application of knowledgeQuestion 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: Application of knowledgeQuestionStatus: Previous EditionLearning Goal: Learning Goal 2

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57) Stocks of large publicly traded companies areA) rarely traded.B) illiquid.C) rarely decline in value.D) highly liquid.Answer: DLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: New QuestionLearning Goal: Learning Goal 28)Which of the following are true concerning institutional investors?I.Institutional investors are professionals who manage money for otherpeople.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 Describethe different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 29) Which of the following isNOTtraded 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: Application of knowledgeQuestion Status: Previous EditionLearning 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 forother institutions such as universities or charities.Learning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal21.3Learning 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: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 32) A collection ofsecurities designed to meet an investment goal is called a portfolio.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the roleof the financialmanagersAACSB: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 33) Call options on common stock are a form of equity.Answer: FALSELearning Outcome: F-01 Describe the different financialmarkets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: New QuestionLearning Goal: Learning Goal 34) An option to purchase common stock is a type of derivative security.Answer: TRUELearning Outcome: F-01Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 3

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75) 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: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal36) 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: Application of knowledgeQuestion 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: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 38) Bond prices rise as interest rates decline.Answer: TRUELearningOutcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 39) Bond interest and stock dividends are different ways ofdistributing a corporation's earningsto its owners.Answer: FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: Previous EditionLearning Goal:Learning Goal 3

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810) 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: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 311) Which one of the following would be the least liquid investment?A) stockB) put optionsC) money market mutual fundD) real estateAnswer: DLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status:RevisedLearning Goal: Learning Goal 312) Which of the following investments represents partialownership 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: Application of knowledgeQuestion Status:Previous EditionLearning Goal: Learning Goal 3

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913) 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: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 314) The major differencebetween mutual funds and exchange traded funds (ETFs) isA) ETFs can be bought or sold at their current price at any time during normal trading hours.B) mutual fund portfolios are always based on one of the major market indexes.C) ETFs invest in broadly diversified portfolios of securities.D) ETFs are actively managed.Answer: ALearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: New QuestionLearning Goal: Learning Goal 315) 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 ofthe financialmanagersAACSB: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 3

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1016) One reason that passively managed mutual funds have grown in popularity relative toactively managed mutual funds is thatA)passive fund expense ratios are lower.B) passive fund returns are always higher.C) active funds are too diverse.D) none of theseAnswer: ALearning Outcome: F-01 Describethe different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: New QuestionLearning Goal: Learning Goal 317) Over the past decade, passively managed index funds haveA) grown quite a lot.B)declined in popularity.C) attracted almost 100% of investment dollars.D) almost disappeared as a fund type.Answer: ALearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion 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: Application of knowledgeQuestion 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: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 4

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113) Investors can postpone or avoid incometaxes by investing through Individual RetirementAccounts.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: Previous EditionLearningGoal: Learning Goal 44) Under current laws, a couple filing jointly with a total income of $75,000 would pay a 15%tax on capital gains.Answer:FALSELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: New QuestionLearning Goal: Learning Goal 45) 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 differentfinancial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 46)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 ofthe financialmanagersAACSB: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 47) Contributions to a Roth IRA are taxed up front, but subsequent earnings and withdrawals aretax free.Answer: TRUELearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: New QuestionLearning Goal: Learning Goal 4

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128) Which of the following represent investment goals?I.savingfor 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: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 49)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: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 410) Alexandra purchased a stock one year ago at a price of $64 a share. In the past year, she hasreceived four quarterly dividends of $1.50 each. Today she sold the stock for $76 a share. Hercapital gain per share isA) $6.00.B) $12.00.C) $(6.00).D) $18.00.Answer: BLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: RevisedLearning Goal: Learning Goal 4

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1311) A well-conceived investment policy statement will take into accountA) 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: Application of knowledgeQuestion Status: RevisedLearning Goal: Learning Goal 412) Beginning investors with small amounts to investshouldA) 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: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 413) Research indicates that investors who monitor their portfolios less frequentlyA) outperform those who hold investments for the long-term and trade infrequently.B) tend to invest in riskier assets.C) earn rates of return similar to those who hold investments for the long-term and tradeinfrequently.D) are more highly educated and in higher income brackets than those who hold investmentsfor the long term and trade infrequently.Answer: BLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 4

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14Table 1.22018 (due April 15, 2019)Tax ratesIndividualReturnsJoint Returns10%$0 to $9,525$0 to $19,05012%$9,526 to $38,700$19,051 to $77,40022%$38,701 to $82,500$77,401 to $165,00024%$82,501 to $157,500$165,001 to $315,00032%$157,501 to $200,000$315,001 to $400,00035%$200,001 to $500,000$400,001 to $600,00037%Over $500,000Over $600,00014)In 2018, Jordan and Kailey earned a combined taxable income of $148,800 fromemployment plus $1,000 in long term capital gains and they file a joint tax return. What is theirtotal federal income tax? Round to the nearest dollar.A) $33,780B) $29,063C)$24,765D) $24,659Answer: CLearning Outcome: F-01Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: RevisedLearning Goal: Learning Goal 415)Jon earned $82,500 in taxable income, all from wages and interest, and files anindividualtax return. What is the amount of Josh's taxes for the year 2018? Round to the nearest dollar.A) $13,750B) $14,090C) $18,150D) $12,285Answer: BLearning Outcome: F-01 Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: RevisedLearning Goal: Learning Goal 4

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1516) For a taxpayer in the 22% marginal tax bracket, a long-term capital gain realized in 2018will 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: Application of knowledgeQuestion Status: RevisedLearning Goal: Learning Goal 417) Andrew and Jennifer are in the 22% marginal tax bracket. Three years ago they purchased100 shares of stock at $20 a share. In 2018, 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: Application of knowledgeQuestion Status: Previous EditionLearning Goal: Learning Goal 418) Michelle and Patrick are in the 24% marginal tax bracket. They bought 100 shares of DJNstock at $45 per share and sold them 4 years later in 2018 at $22 per share? By how much didtheir loss reduce their taxes in theyear when they sold the stock?A) $0B) $345C) $552D) $1,260Answer: CLearning Outcome: F-01Describe the different financial markets and the role of the financialmanagersAACSB: Application of knowledgeQuestion Status: Previous EditionLearningGoal: Learning Goal 4

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