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Test Bank For Fundamentals of Investing, 14th Edition

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    1 Fundamentals of Investing, 14e (Smart/Zutter) Chapter 1 The Investment Environment 1.1 Learning Goal 1 1) A non - interest bearing checking account is still considered an investment. Answer: FALSE Learning Outcome: F - 12 Discuss the implications of s ystematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 2) Land and buildings are examples of real prope rty investments. Answer: TRUE L earning Outcome: F - 12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 3) Since 1900, the average r eturn on stocks has exceeded the average return on savings accounts by more than 6 percentage points. Answer: TRUE Learning Outcome: F - 12 Discuss the implications of systematic risk in financial markets and its role in sha ping investment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 4) A United States Savings Bond is an example of an investment as defined in the text. Answer: TRUE Learning Outcome: F - 12 Discuss the implications of systematic ris k in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 5) Most sources of investment information are in print format, expensive, and difficult to ac cess. Answer: FALSE Learning Outcome: F - 12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: Previous Edi tion Learning Goal: Learning Goal 1

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    2 6) Whi ch of the following is NOT an investment as defined in the text? A) a certificate of deposit issued by a bank B) a new automobile C) a United States Saving Bond D) a mutual fund held in a retirement account Answ er: B Learning Outcome: F - 12 Discuss the im plications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 7) Stocks are a(n) _ _______ investment representing ________ of a business. A) direct; ownership B) direct; debt C) indirect; ownership D) indirect; debt Answer: A Learning Outcome: F - 12 Discuss the i mplications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical think ing Question Status: Previous Edition Learning Goal: Learning Goal 1 8) An exchange traded fund that invests in the stocks of large c orporations is an example of A) direct investment. B) indirect investment. C) derivative investment. D) tangible inv estment. Answer: B Learning Outcome: F - 12 Discuss the implications of systematic risk in financial markets and its role in shaping inve stment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 9) Whic h of the following has declined in recent years? A) direct ownership of stock by individual investors B) the percentage of foreign stocks held in typical portfolios C) institutional ownership of common stocks D) the timeliness of information available to i nvestors Answer: A Learning Outcome: F - 12 Discuss the implications of systematic risk in financial markets and its role in shaping inve stment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1

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    3 10) Whi ch of the following has increased in recent years? A) direct ownership of stock by individual investors B) the percentage of domestic stocks held in typical portfolios C) institutional ownership of common stocks D) indirect ownership of stocks through mutu al funds and ETFs. Answer: D Learning Outcome: F - 12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: New Question Learning Goal: Learning Goal 1 1 1) Debt represents funds loaned in exchange for A) div idend 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 th e repayment of the loan principal. Answer: D Learning Outcome: F - 12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 1.2 Learning Goal 2 1) Instituti onal investors manage money for businesses and nonprofit organizations, but not for individuals. Answer: FALSE Learning Outcome: F - 01 Describe the different financial markets and the role of the finan cial managers AACSB: Appl ication of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 2) Institutional investors are individuals who invest indirectly through financial institutions. Answer: FALSE Learning Outcome: F - 01 Desc ribe the different financi al markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2

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    4 3) Banks and insurance companies are examples of institutional investors. Ans wer: TRUE Learning Outcome : F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 4) In the financial markets, individual s are net suppliers of fund s. Answer: TRUE Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Revised Learning Goal: Learning Goal 2 5) The governme nt is generally A) not invo lved 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: D Learning Outcome: F - 01 Describe the different financ ial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 6) On a net basis, funds in the financial markets are generally supplie d by A) individuals. B) both ind ividuals and business firms. C) business firms. D) the government. Answer: A Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learn ing Goal: Learning Goal 2

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    5 7) Stocks of large publicly traded companies are A) rarely traded. B) illiquid. C) rarely decline in value. D) highly liquid. Answer: D Learning Outcome: F - 01 Describe the different financial m arkets and the role of the fina ncial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 2 8) 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 investo rs are individuals who invest indirectly through financial institutions. IV. Institutional investors invest large sums of money. A) I and I I only B) I, II and IV only C) II, III and IV only D) I, II, III and IV Answer: B Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 9) Which of the following is NOT traded in the securities markets? A) stocks B) bon ds C) derivatives D) real estate Answer: D Learning Outcome: F - 01 Describe the different financial markets and the role of the financial m anagers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2

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    6 10) Describe the major differences between individual and institutional investors. Answer: Individual investors manage their own funds to achiev e individual goals such as increasing financial security or financing a comfortable retirement . Institutional investors such as mutual funds and insurance companies manage funds for individuals who lack the time or expertise to invest individually and for other institutions such as universities or charities. Learning Outcome: F - 01 Describe the dif ferent financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 1.3 Learning Goal 3 1) Bond investors lend their money for a fixed period of time and r eceive interest. Answer: TRUE Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of know ledge Question Status: Previous Edition Learning Goal: Learning Goal 3 2) A collection of securities designed to meet an investment goal is called a portfolio. Answer: TRUE Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Editio n Learning Goal: Learning Goal 3 3) Call options on common stock are a form of equity. Answer: FALSE Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 3 4) An option to purchase common stock is a type of derivative security. An swer: TRUE Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3

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    7 5) Bonds represent a lower level of r isk than do stocks in the same comp any. Answer: TRUE Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 6) Exchange traded funds are s imilar to mutual funds, but are traded like stocks. Answer: TRUE Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: L earning Goal 3 7) Mutual funds invest in diversified portfolios of securities. Answer: TRUE Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previ ous Edition Learning Goal: Learning Goal 3 8) Bond prices rise as interest rates decline. Answer: TRUE Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question St atus: Previous Edition Learning Goal: Learning Goal 3 9) Bond interest and stock dividends are different ways of distributing a corporation's earnings to its owners. Answer: FALSE Learning Outcome: F - 01 Describe the different financial markets and th e role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3

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    8 10) Which of the following is an example of a tangible asset? A) bonds B) mutual funds C) real estate D) stocks Answer: C Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: A pplication of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 11) Which one of the following would be the l east liquid investment? A) stock B) put options C) money market mutual fund D) real estate Answer: D Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Revised Learning Goal: Learning Goal 3 12) Which of the following investments represents partial ownership of a corporation? A) bonds B) mutual funds C) commercial paper D) common stock Answer: D Learning Outcome: F - 01 Describe the different financ ial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3

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    9 13) Investors seeking a diversified, professionally managed portfolio of securities can purchase shar es of A) preferred stock. B) convertible securities. C) insurance policies. D) mutual funds. Answer: D Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Statu s: Previous Edition Learning Goal: Learning Goal 3 14) The major difference between mutual funds and exchange traded funds (ETFs) is A) ETFs can be bought or sold at their current price at any time during normal trading hours. B) mutual fund portfolio s are always based on one of the major market indexes. C) ETFs invest in broadl y diversified portfolios of securities. D) ETFs are actively managed. Answer: A Learning Outcome: F - 01 Describe the different financial markets and the role of the financial m anagers AACSB: Application of knowledge Question Status: New Question Learni ng Goal: Learning Goal 3 15) Briefly describe three advantages of investing in mutual funds or exchange traded funds. Answer: The investor does not need to spend a great dea l of time researching individual securities. Small investors easily achieve di versification by investing indirectly in a broad portfolio of securities. The funds are managed by professionals who presumably have expertise in making investment decisions. L earning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3

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    10 16) One reason that passively managed mutual fund s have grown in popularity relative to actively managed mutual funds is that A) passive fund expense ratios are lower. B) passive fund returns are always higher. C) active funds are too diverse. D) none of these Answer: A Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 3 17) Over the past decade, passively managed index funds have A) grown qui te a lot. B) declined in popularity. C) attracted almost 100% of investment dollars. D) almost disappeared as a fund type. Answer: A Learning Outcome: F - 01 Describe the different financia l markets and the role of the financial managers AACSB: Application of knowled ge Question Status: New Question Learning Goal: Learning Goal 3 1.4 Learning Goal 4 1) Earning a high rate of return with little or no risk is a realistic investment goa l. Answer: FALSE Learning Outcome: F - 01 Describe the different financial mark ets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 2) Under current tax laws, most taxpayers will pay a lower tax rate on capital gains than on dividends. Answer: FALSE Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Qu estion Status: Previous Edition Learning Goal: Learning Goal 4

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    11 3) Investors can postpone or avoid income taxes by investing through Individual Retirement Accounts. Answer: TRUE Learning Outcome: F - 01 Describe the different financial markets and the r ole of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 4) Under current laws, a couple filing jointly with a total income of $75,000 would pay a 15% tax on capital gains. Answer: FALSE Learning Outcome: F - 01 Describe the different financial markets and the role of the financial manag ers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 4 5) To qualify for long - term capital gains rates , a stock must be held for at least 12 months. Answer: TRUE Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learni ng Goal 4 6) Retirement plans, such as a 401(k), allow employees to defer taxes on the plan contributions until such time as the funds are withdrawn from the retirement plan. Answer: TRUE Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 7) Contributions to a Roth IRA are taxed up front, but subsequent earnings and withdrawals are tax free. Answer: TRUE Learning Ou tcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 4

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    12 8) Which of the following represent investment goals? I. saving for major expenditures such as a house or education II. sheltering income from taxes III. in creasing current income IV. saving funds for retirement A) I and IV only B) III and IV only C) I, III and IV only D) I,,II, III and IV Answer: D Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB : Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 9) In selecting investments consistent with your goals, you should consider A) rates of return and taxes only. B) the pre - tax rate of return only. C) annual di vidends and taxes only. D) risks, returns, and taxes. Answer: D Learning Outcome: F - 01 Describe th e different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Le arning Goal 4 10) Alexandra purchased a stock one year ago at a price of $64 a share. In the past y ear, she has received four quarterly dividends of $1.50 each. Today she sold the stock for $76 a share. Her capital gain per share is A) $6.00. B) $12.00. C ) $(6.00). D) $18.00. Answer: B Learning Outcome: F - 01 Describe the different financial markets an d the role of the financial managers AACSB: Application of knowledge Question Status: Revised Learning Goal: Learning Goal 4

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    13 11) A well - conceived inve stment policy statement will take into account A) 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. Answ er: D Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Revised Learning Goal: Learning Goal 4 12) Beginning investors with small amounts to invest should A) avoid stock investments completely. B) invest all of their money in one high quality stoc k. C) buy mutual funds or exchange traded funds (ETFs). D) buy a portfolio of very low priced stocks (penny stocks). Answer: C Learning Outcome: F - 01 Des cribe the different financial markets and the role of the financial managers AACSB: Application of k nowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 13) Research indicates that investors who monitor their portfolios less frequ ently A) outperform those who hold investments for the long - term and trade infrequently. B) tend to i nvest in riskier assets. C) earn rates of return similar to those who hold investments for the long - term and trade infrequently. D) are more highly educate d and in higher income brackets than those who hold investments for the long term and trade infrequen tly. Answer: B Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Q uestion Status: Previous Edition Learning Goal: Learning Goal 4

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    14 Table 1.2 2018 (due April 15, 2019) Tax rates Individual Returns Joint Returns 10% $0 to $9,525 $0 to $19,050 12% $9,526 to $38,700 $19,051 to $77,400 22% $38,701 to $82,500 $77 ,401 to $165,000 24% $82,501 to $157,500 $165,001 to $315,000 32% $157,501 to $200,000 $315,001 to $400,000 35% $200,001 to $500,000 $400,001 to $600,000 37% Over $500,000 Over $600,000 14) In 2018, Jordan and Kailey earned a combined taxable in come of $148,800 from employment plus $1,000 in long term capital gains and they file a joint tax return. What is their total federal income tax? Round to the nearest dollar. A) $33,780 B) $29,063 C) $24,765 D) $24,659 Answer: C Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Revised Learning Goal: Learning Goal 4 15) Jon earned $82,500 in taxable income, all from wages and interest, and files an individual tax return. What is the amount of Josh's taxes for the year 2018? Round to the nearest dollar. A) $13,750 B) $14,090 C) $18,150 D) $12,285 Answer: B Learning Outco me: F - 01 Describe the different financial markets and the role of the financia l managers AACSB: Application of knowledge Question Status: Revised Learning Goal: Learning Goal 4

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    15 16) For a taxpayer in the 22% marginal tax bracket, a long - term capital g ain realized in 2018 will be taxed at A) 5%. B) 10%. C) 15%. D) 25%. Answer: C Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Revised Learning Goa l: Learning Goal 4 17) Andrew and Jennifer are in the 22% marginal tax brack et. Three years ago they purchased 100 shares of stock at $20 a share. In 2018, they sold the 100 shares for $29 a share. What is the amount of federal income tax they owe as a r esult of this sale? A) $135 B) $165 C) $225 D) $435 Answer: A Learning Outcom e: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 18) Michelle and Patrick are in the 24% marginal tax bracket. Th ey bought 100 shares of DJN stock at $45 per share and sold them 4 years later in 2018 at $22 per share? By how much did their loss reduce their taxes in the year when they sold the stock? A) $0 B) $345 C) $552 D) $1,260 Answer: C Learning Outcome: F - 01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4

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