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Chapter 11 Personal Finance

d
43. Which of the following is not a true statement?
A. No one is going to make you save the money you need to start an investment program.
B. To be useful, investment objectives must be specific and measurable.
C. Investment goals must be tailored to the particular financial needs of the individual.
D. Because investment objectives deal with the future, it is useless to make long-term goals.
E. A long-term investment goal involves a period of five or more years.
c
44. A valid short-term investment goal is
A. Saving $4,000 per year for 40 years for retirement.
B. Spending less than $500 per month for housing.
C. Accumulating $3,000 in a savings account over the next 12 months.
D. Using credit cards less in the next six months.
E. Purchasing a $250,000 life insurance policy within the next four years.
a
45. A valid long-term investment goal is
A. Saving $4,000 per year for 40 years for retirement.
B. Spending less than $500 per month for housing.
C. Accumulating $3,000 in a savings account over the next 18 months.
D. Using credit cards less in the next six months.
E. Purchasing a $250,000 life insurance policy within the next four years
b
46. Which of the following steps should be completed before starting an investment program?
A. Pick out at least two stocks or bonds to invest in.
B. Work to balance your budget.
C. Save at least $10,000 to invest.
D. Invest in certificates of deposit.
E. These all are completed at the same
d
47. Which of the following steps is NOT a factor to be considered before making your first investment?
A. Work to balance your budget.
B. Manage your credit card debt.
C. Have access to other sources of cash for emergency needs.
D. Save at least $10,000 to invest.
E. Start an emergency fund.
b
48. All of the following statements are considered to be good advice for a potential investor before starting an
personal investment program except
A. Work to balance your budget.
B.
Increase credit purchases and make installment payments in order to increase cash available for
investing.
C. Manage your credit card debt.
D. Start an emergency fund.
E. Establish a line of credit for emergency needs.
a
49. A good rule of thumb is to limit installment payments to ____________ of your net (after-tax)
income.
A. 20%
B. 30%
C. 40%
D. 50%
E. 60%
d
50. A _____________ is an employer-sponsored retirement account.
A. TRA account
B. 301(a) account
C. 509(re) account
D. 401(k) account
E. 321(a) account
b
51. If you invest $4,000 per year over the next 40 years for retirement, which of the following is correct?
A. A low rate of return will give you the highest total dollar return.
B. A high rate of return will give you the highest total dollar return.
C. The rate of return doesn’t matter; your total dollar return will be the same with any investment.
D. We cannot compare the total dollar return for a low rate of return or a high rate of return.
E. Your investment will be worth $160,000 at retirement.
e
51. If you invest $4,000 per year over the next 40 years for retirement, which of the following is correct?
A. A low rate of return will give you the highest total dollar return.
B. A high rate of return will give you the highest total dollar return.
C. The rate of return doesn’t matter; your total dollar return will be the same with any investment.
D. We cannot compare the total dollar return for a low rate of return or a high rate of return.
E. Your investment will be worth $160,000 at retirement.
e
53. Which of the following would be considered speculative investments?
A. Government bonds
B. Savings accounts
C. Certificates of deposit
D. Certain corporate bonds
E. Commodities
d
54. Speculative investments include all of the following except
A. Options.
B. Commodities.
C. Precious stones.
D. Savings accounts.
E. Precious metals.
d
55. Which of the following would be considered a safe investment?
A. Options
B. Collectibles
C. Precious metals
D. Savings accounts
E. Commodities
c
56. As people approach retirement, which of the following holds true for most?
A. They choose more speculative investments.
B. Their choices of investments do not change.
C. They choose more conservative investments.
D. They choose more risky investments.
E. They move all of their money into certificates of deposit.
c
57. Gwendolyn and Jack Francis are typical investors. As they approach retirement, which approach will they
likely take?
A. They will choose more speculative investments.
B. Their choices of investments will not change.
C. They will choose more conservative investments.
D. They will choose more risky investments.
E. They will move all of their money into certificates of deposit.
a
58. The potential return on any investment should
A. Be directly related to the risk the investor assumes.
B. Be inversely related to the risk of the investment.
C. Not have any relationship to the risk of any investment.
D. Be inversely related to the risk the investor assumes.
E. Be guaranteed.
e
59. Which of the following is not one of the four components of risk to be considered when evaluating
investments?
A. Business failure
B. Inflation
C. Interest rate
D. Market
E. Stock
c
60. When choosing an investment, you should consider risk. The four primary risk components are
A. Business failure, inflation, buying power, stock.
B. Buying power, inflation, interest rate, market.
C. Inflation, interest rate, business failure, market.
D. Market, bond, stock, inflation.
E. Stock, interest rate, market, buying power.
a
61. Which of the following risks reduces your buying power?
A. Inflation
B. Interest rate
C. Business failure
D. Market
E. Stock
b
62. Which of the following risks associated with preferred stocks or government or corporate bonds is a
result of changes in rates in the economy?
A. Inflation
B. Interest rate
C. Business failure
D. Market
E. Stock
c
63. Which of the following risks deals with the possibility that bad management, unsuccessful products, or
other factors will cause the firm to be less profitable than originally anticipated?
A. Inflation
B. Interest rate
C. Business failure
D. Market
E. Stock
d
64. Which of the following risks deals with fluctuations due to economic conditions?
A. Inflation
B. Interest rate
C. Business failure
D. Market
E. Stock
a
65. Inflation risk deals with
A. A reduction in buying power.
B. Changes in interest rates.
C. Bad management and/or unsuccessful products.
D. Political or social conditions.
E. Predictable sources of income.
c
66. Business failure risk can be due to
A. A reduction in buying power.
B. Changes in interest rates.
C. Bad management and/or unsuccessful products.
D. Political or social conditions.
E. Predictable sources of income
d
67. Market risk is associated with fluctuations in the market due to
A. A reduction in buying power.
B. Changes in interest rates.
C. Bad management and/or unsuccessful products.
D. Economic conditions.
E. Predictable sources of income.
d
67. Market risk is associated with fluctuations in the market due to
A. A reduction in buying power.
B. Changes in interest rates.
C. Bad management and/or unsuccessful products.
D. Economic conditions.
E. Predictable sources of income.
e
69. Business failure risk
A. Cannot be diversified.
B. Causes the business to increase its dividends.
C. In the worst case, leads to improved earnings.
D. Is associated with government bonds.
E. Leads to lower profitability than anticipated.
d
70. Timothy Calibe owns common stock in XYZWidgets.com. To reduce his business failure risk, he
should
A. Buy more common stock in XYZWidgets.com.
B. Buy preferred stock in XYZWidgets.com.
C. Buy bonds in XYZWidgets.com.
D. Continue to evaluate his investment in XYZWidgets.com after the purchase.
E. Any of these would reduce his business failure risk.
e
71. If your primary investment objective is to receive investment income, which of the following would NOT
be appropriate for your portfolio?
A. Passbook savings account
B. Certificate of deposit
C. Municipal bond
D. Preferred stock
E. “Growth” common stock
b
72. Which of the following describes a growth company?
A. The company pays a large dividend.
B. Earnings are reinvested in the company for future growth.
C. Sales revenues are not growing.
D. The company invests most of its money in safe securities like government bonds.
E. The company provides a predictable source of income for investors.
a
73. Which of the following does not describe a growth company?
A. The company pays a large dividend.
B. Earnings are reinvested in the company for future growth.
C. Earnings potential is high.
D. Managers can solve problems associated with rapid expansion.
E. Sales revenue is increasing.
a
73. Which of the following does not describe a growth company?
A. The company pays a large dividend.
B. Earnings are reinvested in the company for future growth.
C. Earnings potential is high.
D. Managers can solve problems associated with rapid expansion.
E. Sales revenue is increasing.
c
75. If your main focus is to be able to buy or sell an investment quickly without substantially affecting the
investment’s value, you are most concerned with
A. Income.
B. Growth.
C. Liquidity.
D. Business failure risk.
E. Market risk.
c
76. Which of the following investments is the most liquid?
A. Certificate of deposit
B. Corporate bond
C. Interest-bearing checking account
D. Municipal bond
E. Preferred stock
a
77. The process of spreading your assets among several different types of investments to lessen risk is
called
A. Asset allocation.
B. Asset combination.
C. Asset investments.
D. Asset riskiness.
E. Asset returns.
e
78. A common way of saying you need to diversify your investments is
A. A bird in the hand is worth two in the bush.
B. A stitch in time saves nine.
C. Birds of a feather flock together.
D. Don’t judge a book by its cover.
E. Don’t put all of your eggs in one basket.
b
79. Which of the following investors would mostly prefer conservative investments to speculative
investments?
A. A 25-year-old single investor with a job that pays $60,000 per year
B. An unemployed single parent who just received a $300,000 divorce settlement
C. A 30-year-old who has a separate trust fund for day-to-day expenses
D. A dual-career couple in their 30s whose combined income is $95,000
E. A healthy 45-year-old who plans to work in his secure job for at least 25 more years
d
80. Which of the following investors would mostly prefer speculative investments over conservative
investments?
A. A 25-year-old single investor who does not have an emergency fund
B. An unemployed single parent who just received a $300,000 divorce settlement
C. A 70-year-old who uses his dividends and interest to pay his monthly bills
D. A dual-career couple in their 30s whose combined income is $95,000
E. A retired couple with $850,000 in retirement savings
e
81. Which of the following investments typically has the largest potential investment return?
A. Government bonds
B. Cash
C. Cash equivalents
D. Certificates of deposit
E. Stocks
e
82. Which of the following investments typically has the most risk?
A. Government bonds
B. Cash
C. Cash equivalents
D. Certificates of deposit
E. Stocks
e
83. Which of the following would you expect to earn near 10% per year over the long term?
A. Bonds
B. Certificates of deposit
C. Conservative portfolio
D. Savings account
E. Stocks
e
84. If you need access to your funds in two years or less, which of the following investments would be least
appropriate?
A. Cash
B. Certificates of deposit
C. Short-term government bonds
D. Highly rated corporate bonds
E. Stocks and mutual funds
e
85. If you can leave your funds alone for 5-10 years or more, which of the following investments would be
most appropriate?
A. Cash
B. Certificates of deposit
C. Short-term government bonds
D. Highly rated corporate bonds
E. Stocks and mutual funds
d
86. As investors approach retirement age, they are often more interested in ______ portfolios.
A. aggressive
B. international
C. cash
D. conservative
E. growth-oriented
a
87. Young investors are often more interested in ______ portfolios than older investors.
A. growth-oriented
B. government bond
C. cash
D. conservative
E. safe mutual fund
d
88. Some financial experts, such as Suze Orman, suggest that investors include a percentage of growth
investments as part of their portfolio. This can be calculated by subtracting your age from
A. 50.
B. 95.
C. 100.
D. 110.
E. 200.
b
89. When investing, an investor should not
A. Evaluate potential investments.
B. Let the investments manage themselves.
C. Monitor the value of investments.
D. Keep accurate records.
E. Consider tax consequences of selling investments.
b
90. After you purchase an investment, you should
A. Assume that your investment is tax-free.
B. Monitor the value of your investment.
C. Ignore other potential investments.
D. Leave recordkeeping to the financial adviser.
E. Let the investment manage itself.
d
91. When monitoring the value of your stock investments, it is important to
A. Wait until you sell them to determine their value.
B. Track the prices in the December copy of a financial magazine.
C. Estimate their values based on similar stocks.
D. Determine their values using the Internet or newspapers.
E. Assume that the values remain the same as long as you hold them.
e
92. To maximize profit or reduce dollar losses when you sell your investments, it is important to do all of the
following except
A. Keep purchase records.
B. Monitor current values to spot opportunities for when to sell.
C. Identify commissions or fees paid.
D. Keep a list of sources of information (such as Internet addresses) for reference.
E. Identify original dollar costs after you sell investments.
d
93. When should you consider the tax consequences of selling your investments?
A. When you make your own decisions
B. When you have professional help
C. When the taxes due are less than $300 per transaction
D. When you make your own decisions or when you have professional help
E. When you are working with professionals and taxes due are less than $300 per transaction
d
94. Which of the following is not a U.S. Treasury security?
A. Treasury note
B. Treasury bond
C. Treasury Inflation-Protected Securities (TIPS)
D. Treasury stock
E. Treasury bill
b
95. A discounted security means that the actual purchase price is trading at
A. The face value.
B. Less than the maturity value.
C. Greater than the face value.
D. The value at maturity.
E. The expected interest rate.
d
96. Which of the following statements is false?
A. The federal government sells bonds and securities to obtain financing.
B. U.S. government Treasury securities carry a reduced risk of default when compared to stocks.
C. U.S. Treasury securities offer lower income potential than stocks.
D.
Individual investors who purchase U.S. government securities must hold the investments until
maturity.
E. Treasury securities may be purchased through banks or brokers.
b
97. A U.S. government security issued in minimum units of $100 with 4, 13, 26, or 52-week maturities is
called a
A. Subordinated bond.
B. Treasury bill.
C. Treasury note.
D. Treasury bond.
E. Savings bond.
b
98. When comparing the interest rates for U.S. government securities, which of the following is correct?
A. Treasury bonds < Treasury bills < Treasury notes B. Treasury bills < Treasury notes < Treasury bonds C. Treasury notes < Treasury bills < Treasury bonds D. Treasury bills < Treasury bonds < Treasury notes E. Treasury bonds < Treasury notes < Treasury bills
c
99. A U.S. government security issued in $100 units with maturities of more than 1 year but not more than 10
years is called a
A. Subordinated bond.
B. Treasury bill.
C. Treasury note.
D. Treasury bond.
E. Savings bond.
d
100.A U.S. government security issued in minimum units of $100 with a 30-year maturity is called a
A. Subordinated bond.
B. Treasury bill.
C. Treasury note.
D. Treasury bond.
E. Savings bond.
b
101.A security issued by the U.S. government that protects the investor from inflation is called a
A. Treasury note.
B. TIPS.
C. SAFE.
D. Treasury bond.
E. Treasury bill.
d
102.A bond backed by the full faith, credit, and unlimited taxing power of the government that issued it is
called a ____________ bond.
A. debenture
B. mortgage
C. secured
D. general obligation
E. revenue
c
103.A bond that is repaid from the income generated by the project it is designed to finance is called a(n)
A. Treasury bill.
B. Savings bond.
C. Revenue bond.
D. General obligation bond.
E. Agency bond.
b
104.A debt security issued by a state or local government is known as a
A. Treasury bond.
B. Municipal bond.
C. Corporate bond.
D. Subordinated bond.
E. Federal agency bond.
a
105.Which of the following features is a benefit for investors of municipal bonds?
A. Interest may be tax-exempt at the federal level.
B. Interest may be tax-deductible at the federal level.
C. The face value may be tax-deductible at the state level.
D. The face value may be a tax credit at the federal level.
E. All payments are tax-deductible at all governmental levels.
c
106.The taxable equivalent yield for a municipal bond is calculated using the
A. Investor’s tax rate and Treasury bill yield.
B. Tax-exempt yield and current inflation rate.
C. Tax-exempt yield and the investor’s tax rate.
D. Current inflation rate and number of years until maturity.
E. Tax-exempt yield and number of years until maturity.
e
107.Which of the following is not correct?
A. The taxable equivalent yield is greater than the tax-exempt yield.
B. The taxable equivalent yield can be compared to the return on a taxable investment.
C. An investor can have a capital gain if she sells a municipal bond before maturity.
D. The taxable equivalent yield is calculated for municipal securities.
E. The tax-exempt yield is associated primarily with federal government securities.
c
108.Generally, interest on corporate bonds is normally paid every
A. Month.
B. Three months.
C. Six months.
D. Nine months.
E. Year.
d
109.Corporations use bonds
A. For financing ongoing business activities.
B. When it is difficult to sell stock.
C. To improve financial leverage.
D. All of these are correct.
E. None of these is correct.
b
110.Interest paid to corporate bondholders is
A. Tax-deductible for the investor.
B. Tax-deductible for the corporation.
C. Tax-exempt for the investor.
D. Tax-exempt for the corporation.
E. Tax-deductible for both the investor and the corporation.
e
111.The financially independent firm or individual that acts as the bondholders’ representative is the
A. Chairman of the board.
B. President of the corporation.
C. Debenture holder.
D. Indenture holder.
E. Trustee.
c
112.Which of the following statements is correct?
A. For the corporation, interest paid on corporate bonds is not tax-deductible.
B. Bond financing is seldom used to pay for a corporation’s ongoing business activities.
C. Bonds are a form of debt financing.
D. Bonds do not have to be repaid at maturity.
E. Interest payments to bondholders are at the discretion of the corporation.
a
113.A bond that is backed only by the reputation of the issuing corporation is called a(n) ____________
bond.
A. debenture
B. mortgage
C. indenture
D. preemptive
E. treasury
b
114.A corporate bond that is secured by various assets of the issuing firm is called a(n) ____________
bond.
A. debenture
B. mortgage
C. indenture
D. preemptive
E. treasury
d
115.A bond that can be exchanged, at the owner’s option, for a specified number of shares of the corporation’s
stock is called a(n) ____________ bond.
A. debenture
B. mortgage
C. indenture
D. convertible
E. subordinated
d
116.Which of the following statements is true?
A. Convertible corporate bonds are more secure than government bonds.
B. Convertible bonds often pay 1-2% more interest than nonconvertible bonds.
C. Because of the conversion feature, it is not necessary to evaluate convertible corporate bonds.
D. Not all convertible bonds are quality investments.
E.
Even after convertible bondholders convert their investments to common stock, the bondholders still
receive interest payments.
c
117.A call feature
A. Allows bondholders to convert their bonds to a specified number of shares of common stock.
B. Is not available for corporate bonds.
C. Allows the corporation to buy outstanding bonds from current bondholders before the maturity date.
D. Is available only with government securities.
E. Is guaranteed by the corporation.
b
118.A fund to which annual or semiannual deposits are made for the purpose of redeeming a bond issue is
called a(n) ____________ fund.
A. serial
B. sinking
C. debenture
D. indenture
E. money
e
119.Bonds of a single issue that mature on different dates are called ____________ bonds.
A. debenture
B. mortgage
C. sinking fund
D. subordinate
E. serial
b
120.Which of the following is not a rating agency for bonds?
A. Moody’s Investors Service
B. Bond Rating Corporation
C. Standard & Poor’s Corporation
D. Fitch Ratings Service
E. Mergent, Inc
e
121.Why do investors purchase corporate bonds?
A. Dividend income
B. Repayment at maturity
C. Possible increase in value
D. Dividend income and repayment at maturity
E. Repayment at maturity and a possible increase in value
b
122.The type of bond that is tracked electronically by the issuing company is a
A. General obligation bond.
B. Registered bond.
C. Revenue bond.
D. Tax-exempt bond.
E. Zero-coupon bond.
b
123.If overall interest rates in the economy rise, a corporate bond with a fixed interest rate will generally
A. Increase in value.
B. Decrease in value.
C. Remain unchanged.
D. Become worthless.
E. Be returned to the corporation.
c
124.Which of the following securities are rated at various agencies?
A. Treasury bills
B. Treasury notes
C. Corporate bonds
D. Treasury bonds
E. TIPS
d
125.If your monthly expenses total $2,000, you should save at least _______ in an emergency fund before
focusing on your investment portfolio.
A. $1,000
B. $2,000
C. $4,000
D. $6,000
E. $8,000
F. $10,000
d
126.If your monthly expenses total $2,500, you should save at least _______ in an emergency fund before
focusing on your investment portfolio.
A. $1,000
B. $2,500
C. $5,000
D. $7,500
E. $10,000
F. $12,500
d
127.According to some financial experts like Suze Orman, how much of an investment portfolio should a 30-
year-old have in growth investments?
A. 30%
B. 65%
C. 70%
D. 80%
E. 100%
a
128.According to some financial experts like Suze Orman, how much of an investment portfolio should a 30-
year-old have in safe (nongrowth) investments?
A. 20%
B. 30%
C. 70%
D. 80%
E. 100%
d
129.According to some financial experts like Suze Orman, how much of an investment portfolio should a 50-
year-old have in growth investments?
A. 30%
B. 40%
C. 50%
D. 60%
E. 70%
b
130.According to some financial experts like Suze Orman, how much of an investment portfolio should a 50-
year-old invest in safe (nongrowth) investments?
A. 30%
B. 40%
C. 50%
D. 60%
E. 70%
e
131.You are considering an investment in a municipal bond that has a yield of 4%. Your tax rate is 25%.
What is your taxable equivalent yield?
A. 0.75%
B. 3.75%
C. 4%
D. 4.25%
E. 5.33%
e
132.You are considering an investment in a municipal bond that has a yield of 5%. Your tax rate is 25%.
What is your taxable equivalent yield?
A. 0.75%
B. 4.75%
C. 5%
D. 5.25%
E. 6.67%
d
133.Assume that you purchase a $1,000 bond issued by GE that pays 5% interest each year. What is the
annual interest amount?
A. $5.00
B. $25.00
C. $40.00
D. $50.00
E. $1,000
c
134.Assume that you purchase a $1,000 bond issued by Harley-Davidson that pays 6% interest each year,
paid semiannually. What is the amount of each interest payment?
A. $3.00
B. $6.00
C. $30.00
D. $60.00
E. $1,000
c
135.Assume that you purchase a $1,000 bond issued by Kohls that pays 8% interest each year, paid
semiannually. What is the amount of each interest payment?
A. $4.00
B. $8.00
C. $40.00
D. $80.00
E. $1,000
d
136.What is the approximate market value of a bond that pays $60 interest each year if comparable interest
rates have dropped to 5%?
A. $100
B. $300
C. $500
D. $1,200
E. $2,400
c
137.If a bond is quoted in the newspaper at 90, what is its price?
A. $9.00
B. $90
C. $900
D. $1,000
E. $1,090
e
138.If a bond is quoted in the newspaper at 105, what is its price?
A. $1.05
B. $10.50
C. $105.00
D. $1,000
E. $1,050
e
139.Gwendolyn Francis is interested in buying a bond that pays $70 annually. The current price of the bond is
$800. What is her current yield?
A. 3.5%
B. 4%
C. 7%
D. 8%
E. 8.75%

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