Chapter 14 Methods of Investing

Personal Financial Literacy, 2e (Madura/Casey/Roberts)

Chapter 14 Methods of Investing

14.1

1)  Experts suggest that you should build a cash reserve large enough to pay for ________ worth of your regular bills.

A)  one week's

B)  one month's

C)  three to six months'

D)  six months' to one year's

2)  Earnings from which of the following are LEAST likely to outpace inflation over time?

A)  stocks

B)  bonds

C)  CDs

D)  mutual funds

3)  With the promise of higher returns on an investment comes ________.

A)  lower taxes

B)  lower risk

C)  higher risk

D)  higher costs

4)  If you will likely need the money which you have set aside for an investment in the near future, you should avoid ________.

A)  CDs

B)  savings accounts

C)  stocks

D)  money market accounts

14.2

5)  A stock is a certificate that represents a ________ a company.

A)  loan made to

B)  piece of ownership in

C)  liquid investment in

D)  promissory note for

6)  IPO stands for ________.

A)  initial price offer

B)  initial principal order

C)  initial public offering

D)  initial private ordering

7)  A company receives money for the sale of its stock ________.

A)  during its IPO

B)  whenever its stock is traded

C)  when shares are purchased in a secondary market

D)  when shares are privately traded

8)  An IPO occurs in the ________.

A)  primary market

B)  secondary market

C)  New York Stock Exchange

D)  NASDAQ

9)  A company is said to be publicly traded when its stocks are ________.

A)  sold on the primary market

B)  bought and sold in the secondary market

C)  sold in an IPO

D)  bought and sold by a full-service brokerage

10)  Most investors in the stock market are trying to buy a stock at a ________ and sell it later at a ________.

A)  high price; higher price

B)  low price; lower price

C)  high price; lower price

D)  low price; higher price

11)  Companies pay their stockholders ________ in cash or, sometimes, in additional stock.

A)  commissions

B)  bonds

C)  dividends

D)  promissory notes

12)  The role of the Securities Exchange Commission is to ________.

A)  provide a basic level of insurance for transactions in the primary market

B)  provide a basic level of insurance for transactions in the secondary market

C)  regulate and monitor the stock market

D)  regulate and monitor the voting rights of stock holders

13)  Which of the following is a widely used term for investments issued by corporations or governments in which the investor receives proof of ownership?

A)  commissions

B)  dividends

C)  promissory notes

D)  securities

14)  Brokerage firms typically earn money by charging customers ________.

A)  commissions

B)  interest

C)  dividends

D)  securities

15)  Sara has just submitted an order to sell several stocks through her online broker. Which of the following is most likely to happen next?

A)  Sara receives confirmation of the sale.

B)  A stock exchange matches Sara's "sell" order with someone else's "buy" order for the same stock.

C)  Sara's online broker contacts a representative at a stock exchange.

D)  The online broker contacts a full-service brokerage.

14.3

16)  In financial terms, a bond is a ________.

A)  security

B)  promissory note

C)  commission

D)  dividend

17)  Bonds typically have ________ ranging from five to thirty years.

A)  coupon rates

B)  interest rates

C)  maturity dates

D)  value dates

18)  On a bond's maturity date, the investor is paid ________.

A)  a dividend

B)  his or her initial investment

C)  compound interest

D)  a commission

19)  A bond's coupon rate is its ________.

A)  face value

B)  interest rate

C)  maturity rate

D)  dividend

20)  In general, the ________ the bond rating, the ________ the interest rate the bond pays.

A)  lower; lower

B)  higher; higher

C)  lower; higher

D)  higher; the more frequent

21)  Bonds issued the Federal Housing Administration (FHA) and the Government National Mortgage Association (Ginnie Mae) are called ________.

A)  Treasury bonds

B)  federal agency bonds

C)  municipal bonds

D)  corporate bonds

22)  A city that wants to finance a new water treatment plant would most likely issue which of the following?

A)  Treasury bonds

B)  federal agency bonds

C)  municipal bonds

D)  corporate bonds

23)  Using Standard & Poor's bond rating classes, a medium quality bond would have which of the following ratings?

A)  AA

B)  BBB

C)  B

D)  CCC

24)  Treasury bonds are used to ________.

A)  finance state and local public projects

B)  stimulate growth in the economy

C)  finance the debt of the United States government

D)  reduce owners' federal taxes

25)  Anything rated below the top four categories of bonds is considered a ________.

A)  junk bond

B)  investment-grade bond

C)  corporate bond

D)  municipal bond

26)  Investors do not pay federal taxes on the interest earned from ________ bonds.

A)  Treasury

B)  municipal

C)  corporate

D)  federal agency

14.4

27)  One advantage of mutual funds is their ________, or their ownership of a wide range of investments.

A)  commission

B)  diversification

C)  face value

D)  liquidity

28)  Which of the following is a tax-sheltered retirement account?

A)  a mutual fund

B)  a promissory note

C)  a municipal bond

D)  a 401(k)

14.5

29)  The value of homes in a given area is MOST dependent on which of the following?

A)  performance of the stock market

B)  the national employment rate

C)  supply and demand for homes in the area

D)  rules in the tax code

30)  When the supply of houses for sale in an area is greater than the demand for houses in that area, the prices of houses in that area will most likely ________.

A)  go up

B)  go down

C)  stabilize

D)  all of the above