Personal Finance, 6e (Madura) Chapter 14 Investing Fundamentals 14.1 Types of Investments 1) Before you start an investment program, you should ensure liquidity by having money in financial institutions or in money market securities. Answer: TRUE Diff: 1 Question Status: Previous edition 2) Bonds are financial instruments representing partial ownership of a firm. Answer: FALSE Diff: 1 Question Status: Revised 3) The primary market is used by firms to raise funds and is a market where newly issued securities are traded. Answer: TRUE Diff: 1 Question Status: Previous edition 4) Many more shares of stock are traded daily on the primary market than on the secondary market. Answer: FALSE Diff: 2 Question Status: Previous edition 5) Most individual investors who buy and sell stock do so on the secondary market through brokers or investment companies. Answer: TRUE Diff: 1 Question Status: Previous edition 6) Institutional investors are professionals employed by a financial institution, who invest their own money earned from their jobs. Answer: FALSE Diff: 2 Question Status: Previous edition 7) A company has a choice of whether to distribute dividends to common shareholders or to keep its profits in the company as retained earnings. Answer: TRUE Diff: 2 Question Status: Revised 1 Copyright © 2017 Pearson Education, Inc. 8) The stocks of well-known companies are referred to as "preferred stock." Answer: FALSE Diff: 1 Question Status: Previous edition 9) Common stockholders usually have more dividend rights than preferred stockholders. Answer: FALSE Diff: 1 Question Status: Previous edition 10) One of the attractive features of mutual funds is that they offer small investors a diversified portfolio and professional management. Answer: TRUE Diff: 1 Question Status: Previous edition 11) It would be very difficult and expensive for an individual investor to benefit from holding all 500 stocks of the Standard and Poor's 500 Index. Answer: FALSE Diff: 2 Question Status: Previous edition 12) Real estate is a good investment option for individuals and it offers the same liquidity as stocks or bonds. Answer: FALSE Diff: 1 Question Status: Previous edition 13) Before you start to invest, you should ensure liquidity by owning A) individual stocks. B) money market securities. C) options and puts. D) corporate bonds. Answer: B Diff: 1 Question Status: Revised 14) Which of the following investments would you not consider if you have adequate liquidity and additional funds to invest? A) Real estate B) Preferred stock C) Mutual funds D) Money market securities Answer: D Diff: 1 Question Status: Previous edition 2 Copyright © 2017 Pearson Education, Inc. 15) The security that represents equity or ownership of a corporation is A) common stock. B) corporate bonds. C) long-term loans. D) commercial paper. Answer: A Diff: 1 Question Status: Previous edition 16) The market for newly issued securities and initial public offerings (IPOs) is the ________ market. A) initial B) original C) primary D) secondary Answer: C Diff: 1 Question Status: Previous edition 17) Which of the following is true of an initial public offering (IPO)? A) Buying an IPO stock is less risky than purchasing established companies in the secondary market. B) An IPO stock can be sold later in the primary market. C) An IPO's stock price may rise or fall rapidly on the first day. D) An IPO represents a company that was just created within the last month. Answer: C Diff: 1 Question Status: Revised 18) Investors who buy and sell stock, sometimes in the same day, are called A) individual investors. B) growth investors. C) institutional investors. D) day traders. Answer: D Diff: 2 Question Status: Previous edition 19) In the secondary market, stock prices are A) determined by supply and demand. B) stable. C) easy to predict. D) less expensive than on the primary market. Answer: A Diff: 1 Question Status: Previous edition 3 Copyright © 2017 Pearson Education, Inc. 20) The largest market where existing securities are sold is called the ________ market. A) primary B) secondary C) third D) fourth Answer: B Diff: 1 Question Status: Previous edition 21) ________ investors are professionals employed by a financial institution and are responsible for managing money. A) Institutional B) Professional C) Managing D) Security Answer: A Diff: 1 Question Status: Previous edition 22) Which of the following statements is not true regarding individual investors? A) They commonly invest a portion of the money earned from their jobs. B) They invest in stocks to earn a reasonable return on their investments. C) They expect their money to grow by the time they wish to use it to make purchases. D) The percentage of individual Americans who own stocks has increased since the financial crisis of 2008-2009. Answer: D Diff: 2 Question Status: Revised 23) Of the following statements about a day trader, which is not correct? A) They have a short-term focus. B) They may buy and sell on the same day. C) They are more risk averse than most investors. D) Day trading may be their career. Answer: C Diff: 2 Question Status: Previous edition 24) Stock prices are characterized by all of the following except they A) can plummet with poor economic conditions. B) have a set lower limit. C) can be affected by negative earnings. D) can be affected by the quality of the company's management. Answer: B Diff: 1 Question Status: Revised 4 Copyright © 2017 Pearson Education, Inc. 25) Which of the following is not true of common stock? A) Common stock represents partial ownership in the firm. B) Common stock is riskier than preferred stock. C) Investors in common stock are given voting rights. D) Investors in common stock are guaranteed a dividend. Answer: D Diff: 1 Question Status: Revised 26) Which one thing do you always have with common stock? A) Dividends B) Voting rights C) Capital appreciation D) A guarantee of at least par value Answer: B Diff: 1 Question Status: Previous edition 27) If you believe that a firm will grow rapidly in the future, you should buy its A) bonds. B) notes. C) common stock. D) preferred stock. Answer: C Diff: 1 Question Status: Previous edition 28) If economic conditions deteriorate, stock prices are likely to A) increase. B) decrease. C) stay the same. D) not be directly affected by changes in economic conditions. Answer: B Diff: 2 Question Status: Revised 29) When a firm performs well, investors holding its shares are ________ willing to sell them and therefore, the demand for the stock ________. A) more; increases B) less; decreases C) less; increases D) more; decreases Answer: C Diff: 2 Question Status: Revised 5 Copyright © 2017 Pearson Education, Inc. 30) Which of the following is not true regarding preferred stock? A) Preferred stockholders have rights to the assets of the corporation before common stockholders. B) Preferred stockholders have priority over common stockholders in receiving dividends. C) Preferred stock has greater potential for capital appreciation than common stock. D) The price of preferred stock is less volatile than the price of common stock. Answer: C Diff: 2 Question Status: Revised 31) One difference between common and preferred stock is that preferred stock A) does not pay dividends. B) offers more predictable income and more safety. C) has greater potential for capital appreciation. D) is issued more frequently than common stock. Answer: B Diff: 2 Question Status: Revised 32) The best way to ensure that you will receive dividends is to A) day trade. B) purchase bonds. C) purchase common stock. D) purchase preferred stock. Answer: D Diff: 1 Question Status: Previous edition 33) If you wish to have a direct voice in the running of a company, you should purchase A) bonds. B) notes. C) common stock. D) preferred stock. Answer: C Diff: 1 Question Status: Previous edition 34) Publicly traded indexes are typically purchased by investors who expect an increase in A) an inflation index. B) an unemployment index. C) an index representing the political approval rating of the president of the United States. D) a particular stock index. Answer: D Diff: 2 Question Status: Revised 6 Copyright © 2017 Pearson Education, Inc. 35) Individuals who buy and sell stock on a very short-term basis as a career are called ________. Answer: day traders Diff: 1 Question Status: Previous edition 36) If you wish to have the power to vote on who will serve on the board of directors of a corporation you will need to purchase shares of ________ in the corporation. Answer: common stock Diff: 1 Question Status: Previous edition 37) When a corporation goes from being a private to a public firm it will sell stock in what is called a(n) ________. Answer: initial public offering Diff: 1 Question Status: Previous edition 38) Newly issued securities are traded in the ________. Answer: primary market Diff: 1 Question Status: Previous edition 7 Copyright © 2017 Pearson Education, Inc. Use the following two columns of items to answer the matching questions below: A) first offering of a firm's stock to the public B) financial instruments that represent partial ownership of a firm C) investors owning this type of stock have priority over common stockholders in receiving dividends D) individual investors who buy and sell stocks within a day E) market where existing securities are sold F) professionals responsible for clients' funds G) facilities that allow investors to purchase or sell existing stocks H) debt instruments issued by the government or corporations to borrow money from investors 39) common stock Diff: 1 Question Status: New 40) IPO Diff: 1 Question Status: New 41) secondary market Diff: 1 Question Status: New 42) day trader Diff: 1 Question Status: New 43) bonds Diff: 1 Question Status: New 44) institutional investors Diff: 1 Question Status: New 45) stock exchanges Diff: 1 Question Status: New 46) preferred stock Diff: 1 Question Status: New Answers: 39) B 40) A 41) E 42) D 43) H 44) F 45) G 46) C 8 Copyright © 2017 Pearson Education, Inc.