Self Test: Multiple Choice
You can find the answers on the last page of this book.
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16-1 Mason recently bought a $10,000 government bond with a 3.5 percent interest rate. For the first two years, his semiannual interest payments were $175, $175, $200, and $200. What kind of government bond would Mason most likely have purchased?
Treasury bill
Treasury note
TIPS
Treasury bond
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16-2 Which of the following could cause a stock price to change for Sunny Orange Growers, Inc.?
More investors dislike the stock and sell it than those who like the stock and buy it.
An unexpected freeze ruins the Florida orange crop for the year.
The government establishes a tax incentive for all U.S. agricultural companies that will help boost net income.
All of the above.
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16-3 What document must companies prepare and make available to investors when issuing stocks for the first time?
A prospectus
An initial public offering
Proprietary underwriting
Investor guideline sheets
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16-4 Tracy Quinn feels she has a great investment portfolio. She has investments in technology stocks, banking stocks, and consumer goods stocks. Which type of investment should she use if she is striving for greater asset allocation?
Foreign stock mutual fund
S&P Index fund
Municipal bond fund
Any of the above
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16-5 Jose Fernandez is saving toward retirement and has an investment portfolio that reflects his risk tolerance. It was carefully put together by a trusted investment adviser. Unfortunately, the returns on the portfolio are not projected to generate the type of savings Jose desires. What should Jose do?
Invest in riskier stocks that have a higher return.
Lower his retirement expectations.
Increase his risk tolerance.
Change investment advisers.
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16-6 Jeremy wants to invest in companies that have a long history of consistent growth and stability. He should invest in which of the following?
Blue-chip stocks
Growth stocks
Value stocks
Cyclical stocks
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16-7 Which of the following describes a security issued by a local government agency?
Acme, Inc. debenture bond
Souderton County Water Authority bond
10-year Treasury bond
Fidelity bond fund
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16-8 If you own a $5,000 bond that has a coupon of 4 percent and pays interest semiannually, how much interest would you receive?
$200 every six months
$200 once a year
$200 every two years
$100 twice a year
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16-9 Which is not an advantage of investing in mutual funds?
Mutual funds have less price variability than stocks or bonds.
Mutual funds provide diversification.
Mutual fund investments are managed by a professional.
None of the above.
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16-10 An ETF is
a contract that gives a buyer the right to buy or sell a security at a specified price on or before a certain date.
an agreement between a buyer and seller to buy an asset at a later date at a specified time.
an investment fund that is valued by its net asset value at the end of a trading day.
an investment that holds a collection of investments and trades like a stock.
True/False
You can find the answers on the last page of this book.
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16-11 A person’s risk tolerance might change with more investment knowledge or greater wealth.
□ True or □ False
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16-12 Five years ago, Jerome bought 100 shares of Kodak at $60 per share. Last month, he sold the 100 shares at $55 per share. Jerome has a capital gain from the sale.
□ True or □ False
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16-13 Treasury notes are bonds that mature in 2, 3, 5, 7, and 10 years.
□ True or □ False
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16-14 Common stockholders get paid before preferred stockholders if a firm goes out of business.
□ True or □ False
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16-15 Asset allocation is an investment strategy that suggests you structure your portfolio with stocks from different sectors.
□ True or □ False
Critical Thinking Questions
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16-16 Before investing, you should determine your risk tolerance. How would you define your level of risk tolerance? What, if anything, might change your risk tolerance? -
16-17 List three short- to medium-term financial goals you want to achieve in the next one to five years and an approximate value for each. List three long-term financial goals that you want to achieve in the next 6 to 20 years and an approximate value for each. Discuss how you might be able to achieve some or all of these financial goals.
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16-18 The term blue chip applies to stocks issued by a company in excellent financial standing with a record of producing earnings and paying dividends. Stocks in companies such as GE and Chrysler were initially considered blue chip stocks. Today, stocks in companies that were not in existence when the term was coined, such as Intel and Walmart, are considered blue chip stocks. Name three other companies you might consider blue chip stocks and why you would do so.