Personal Finance Chapter 11 & 12

t/f Interest rate risk is greater for long-term bonds than for short-term bonds. True
t/f The returns you expect from securities are income and growth True
t/f Bondholders will receive interest payments after the stockholders receive dividends False
t/f You receive stock dividend this year instead of cash. This is taxable income. False
t/f You receive a cash dividend from your stock investment this year. This is taxable income True
Which of the following type of investment is the most liquidity risk? A. Mutual fund sharesB. LandC. Corporate bondsD. Common stockE. Treasury bonds B. Land
The Smith Family owns 200 shares of Elta stock. The company declared a 5% stock dividend. The smiths now own __________ shares 210 (5% of 200… add that to original shares)
Cash dividends on common stock are most often paid:A. weeklyB. semi-anuallyC. monthlyD. quarterlyE. annually D. quarterly
U-Need-This has $12 million in liabilities, $12 million preferred stock, $10 million shares of common stock outstanding, and $39 million in total assets. The book value is:A. $4.10 per shareB. $1.50 per shareC. $4.30 per shareD. $2.00 per shareE. none of the above B. $1.50 per share
The amount of stockholders’ equity in a firm; determined by subtracting the company’s liabilities and preferred stock from its assets Book Value
The ______ of a stock reflects stockholder confidence.A. par valueB. face valueC. dividend yieldD. price/earnings ratioE. book value D. Price/earnings ratio
purchasing power risk a type of risk resulting from possible changes in price levels, which can significantly affect investment returns
fixed-income securities securities such as bonds, notes, and preferred stocks that offer purchasers fixed periodic income.
liquidity risk a type of risk associated with the inability to liquidate an investment conveniently and at a reasonable price
event risk the risk that some major, unexpected event will occur that leads to a sudden and substantial change in the value of an investment
Dividends Payments from corporations to common stockholders in the form of cash and/or additional stock. Cash dividends are most common.
Dividend Yield formula Dividend Yield = Annual dividend per share/market price per share of stock
stock dividends new shares of stock distributed to existing stock-holders as a supplement to or substitute for cash dividends
Earnings Per Share (EPS) The dollar return earned by each share of common stock; calculated by dividing all earnings remaining after paying preferred dividends by the number of common shares outstanding
Net profit margin relates a firms net profits to its sales; shows the rate of return a company is earning on sales
Common stock a piece of ownership in a company.
Bonds bonds are liabilities. An individual who invests in a bond receives a stipulated interest income, typically paid every six months, plus the return of the principal value of the bond at maturity
mutual fund an organization that invests in and professionally manages a diversified portfolio of securities
Bull Market prices go UP (associated with investor optimism, economic recovery and expansions, rising securities prices)
Bear Market prices go DOWN (associated with pessimism & economic slowdown, falling securities prices)
Stop loss (Stop order) when the market price reaches or drops below a specified level. used to protect the investor against rapid declines in stock prices.. activated when stop price is reached.
t/f Two prerequisites to investing are above average risk and clear understanding of market direction false
preferred stock combines the fixed income features of bonds with the same price appreciation potential as common stock false
Mutual funds often sell directly to investors true
_________ is a short-term investment activityA. Buying life insuranceB. SavingC. Investing in common stockD. Buying bondsE. Speculating in common stock E. Speculating in common stock
The most common reason for investing is:A. sheltering earnings from taxesB. enhancing current incomeC. paying for an expensive vacationD. saving for college educationE. saving for retirement E. Saving for retirement
You have been offered an opportunity to buy shares of a diversified collection of securities. You will be investing in: A. BondsB. Mutual fundsC. Real EstateD. Stock opt ionsE. Common stock B. Mutual funds
Which of the following is an order to sell a stock when the market price drops to or below a specified level?A. Stop-loss orderB. day orderC. Market orderD. limit orderE. fill or kill order A. Stop-loss order
The SIPC provides protection to the investor fromA. low or missing dividend paymentsB. declining security pricesC. brokerage firm failureD. using margin requirementsE. none of these C. brokerage firm failure
Which of the following would offer the best return on investment? Assume that you buy $6,000 in stock in all three cases, and ignore interest and transaction costs in all your calculations.A. Buy a stock at $85 without margin and sell it 1 year later at $95.B. Buy a stock at $30 with 50% margin and sell it 1 year later at $45.C. Buy a stock at $70 with 75% margin and sell it 1 year later at $85. B. Buy a stock at $30 with 50% margin and sell it 1 year later at $45.

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