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Fundamentals of Investments 8th Edition by Bradford Jordan -Test Bank
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Chapter 2 The Investment Process
1) Market timing is the:
- A) placing of an order within the last half-hour of trading for a day.
- B) period of time between the placement of a short sale and the covering of that sale.
- C) buying and selling of securities in anticipation of the overall direction of the market.
- D) staggering of either buy or sell orders to mask the total size of a large transaction.
- E) placing of trades within the last half-hour prior to the commencement of daily trading.
Answer: C
Explanation: See Section 2.1
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Market timing
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 3 Apply
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2) Asset allocation is the:
- A) selection of specific securities within a particular class or industry.
- B) division of a purchase price between a cash payment and a margin loan.
- C) division of a portfolio into short and long positions.
- D) distribution of investment funds among various broad asset classes.
- E) dividing of assets into those that are hypothecated and those that are not.
Answer: D
Explanation: See Section 2.1
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Asset allocation and security selection
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 3 Apply
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3) Jack is researching chemical companies in an effort to determine which company’s stock he should purchase. This process is known as:
- A) market timing.
- B) purchase shorting.
- C) marketing research.
- D) asset allocation.
- E) security selection.
Answer: E
Explanation: See Section 2.1
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Asset allocation and security selection
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 3 Apply
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4) A Roth IRA:
- A) is a form of “tax-deferred” account.
- B) funds are taxed at the time you begin withdrawals.
- C) are well-suited to investors nearing retirement.
- D) invests after-tax dollars.
- E) is the type of account offered by most employers.
Answer: D
Explanation: See Section 2.1
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Tax shelters
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 3 Apply
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5) A brokerage account in which purchases can be made using credit is referred to as which type of account?
- A) clearing
- B) funds available
- C) cash
- D) call
- E) margin
Answer: E
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 3 Apply
Accessibility: Keyboard Navigation
6) Kay just purchased $5,000 worth of stock. She paid $3,000 in cash and borrowed $2,000. In this example, the term margin refers to:
- A) the total amount of the purchase.
- B) the percentage of the purchase that was paid in cash.
- C) the percentage of the purchase paid with borrowed funds.
- D) any future increase in the value of the stock.
- E) any future decrease in the value of the stock.
Answer: B
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 1 Remember
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7) Which one of the following best describes the term “initial margin”?
- A) Amount of money that must be deposited to open a margin account with a broker
- B) Amount of cash that must be paid to purchase a security on margin
- C) Amount of cash that must be paid when a broker issues a margin call
- D) Amount of money borrowed when a security is purchased
- E) Total loan amount offered to a customer by a brokerage firm to cover future purchases
Answer: B
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
8) The minimum equity that must be maintained at all times in a margin account is called the:
- A) initial margin.
- B) initial equity position.
- C) maintenance margin.
- D) call requirement.
- E) margin call.
Answer: C
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 1 Remember
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9) When your equity position in a security is less than the required amount, your brokerage firm will issue a:
- A) margin call.
- B) margin certificate.
- C) cash certificate.
- D) limit order.
- E) leverage call.
Answer: A
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 1 Remember
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10) Sam purchased 500 shares of Microsoft stock which he has pledged to his broker as collateral for the loan in his margin account. This process of pledging securities is called:
- A) margin calling.
- B) hypothecation.
- C) leveraging.
- D) maintaining the margin.
- E) street securitization.
Answer: B
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 1 Remember
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11) Staci owns 1,000 shares of stock in a margin account. Those shares are most likely held in:
- A) transit.
- B) her registered name.
- C) street name.
- D) a wrap account.
- E) a discretionary account.
Answer: C
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 1 Remember
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12) This morning, Josh sold 800 shares of stock that he did not own. This sale is referred to as a:
- A) margin sale.
- B) long position.
- C) wrap trade.
- D) hypothecated sale.
- E) short sale.
Answer: E
Explanation: See Section 2.4
Difficulty: 1 Easy
Section: 2.4 Types of Positions
Topic: Short sales
Learning Objective: 02-04 The workings of short sales.
Bloom’s: Level 1 Remember
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13) The amount of common stock held in short positions is referred to as the short:
- A) margin.
- B) shares.
- C) proceeds.
- D) sale.
- E) interest.
Answer: E
Explanation: See Section 2.4
Difficulty: 1 Easy
Section: 2.4 Types of Positions
Topic: Short sales
Learning Objective: 02-04 The workings of short sales.
Bloom’s: Level 1 Remember
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14) A company that owns income-producing real estate such as an apartment complex or a retail shopping center is called a(n):
- A) REIT.
- B) SIPC.
- C) REEF.
- D) EAR.
- E) SPIC.
Answer: A
Explanation: See Section 2.5
Difficulty: 1 Easy
Section: 2.5 Forming an Investment Portfolio
Topic: Real estate investment trusts
Learning Objective: 02-04 The workings of short sales.
Bloom’s: Level 1 Remember
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15) An investor who has a resource constraint:
- A) pays no income taxes.
- B) has insufficient funds to purchase a security.
- C) has a relatively high marginal tax rate.
- D) has only one source of income.
- E) will only invest in socially acceptable securities.
Answer: B
Explanation: See Section 2.1
Difficulty: 1 Easy
Section: 2.1 The Investment Policy Statement
Topic: Investor constraints
Learning Objective: 02-01 The importance of an investment policy statement.
Bloom’s: Level 1 Remember
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16) To be considered liquid, a security must:
- A) be held in a cash account.
- B) pay dividends.
- C) be able to be sold on short notice.
- D) be held for less than one year.
- E) be able to be sold quickly with little, if any, price concession.
Answer: E
Explanation: See Section 2.1
Difficulty: 1 Easy
Section: 2.1 The Investment Policy Statement
Topic: Stock trading and strategies
Learning Objective: 02-01 The importance of an investment policy statement.
Bloom’s: Level 2 Understand
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17) Walter is trying to decide whether he wants to purchase shares in General Motors, Ford, or Honda, all of which are auto manufacturers. Walter is making a(n) _______ decision.
- A) security selection
- B) tax-advantaged
- C) risk aversion
- D) active strategy
- E) asset allocation
Answer: A
Explanation: See Section 2.1
Difficulty: 1 Easy
Section: 2.1 The Investment Policy Statement
Topic: Asset allocation and security selection
Learning Objective: 02-01 The importance of an investment policy statement.
Bloom’s: Level 1 Remember
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18) Brooke has decided to invest 55 percent of her money in large company stocks, 40 percent in small company stocks, and 5 percent in cash. This is a(n) _____ decision.
- A) market timing
- B) security selection
- C) tax-advantaged
- D) active strategy
- E) asset allocation
Answer: E
Explanation: See Section 2.1
Difficulty: 1 Easy
Section: 2.1 The Investment Policy Statement
Topic: Asset allocation and security selection
Learning Objective: 02-01 The importance of an investment policy statement.
Bloom’s: Level 1 Remember
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19) Kay plans to retire in two years and wishes to liquidate her account at that time. Kay has a ________ constraint.
- A) resource
- B) horizon
- C) liquidity
- D) tax
- E) special circumstances
Answer: B
Explanation: See Section 2.1
Difficulty: 1 Easy
Section: 2.1 The Investment Policy Statement
Topic: Investor constraints
Learning Objective: 02-01 The importance of an investment policy statement.
Bloom’s: Level 1 Remember
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20) The SIPC:
- A) guarantees investors against any loss related to an investment account held at a brokerage firm.
- B) guarantees cash balances held in brokerage accounts up to $500,000.
- C) is an agency of the federal government.
- D) protects private brokerage firms from bankruptcy.
- E) protects investors from missing assets when a brokerage firm closes.
Answer: E
Explanation: See Section 2.2
Difficulty: 1 Easy
Section: 2.2 Investment Professionals
Topic: Financial market regulation and protections
Learning Objective: 02-02 The various types of securities brokers and brokerage accounts.
Bloom’s: Level 1 Remember
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21) The determination of which individual stocks to purchase within a particular asset class is referred to as:
- A) security selection.
- B) asset allocation.
- C) security analysis.
- D) market timing.
- E) market selection.
Answer: A
Explanation: See Section 2.1
Difficulty: 1 Easy
Section: 2.1 The Investment Policy Statement
Topic: Asset allocation and security selection
Learning Objective: 02-01 The importance of an investment policy statement.
Bloom’s: Level 1 Remember
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22) An investor who follows a fully active strategy will:
- A) move money between asset classes as well as try to select the best performers in each class.
- B) move money between asset classes but will not be concerned about which individual securities are owned.
- C) focus on picking individual stocks only.
- D) maintain a relatively constant mix of asset classes while continually buying and selling individual securities.
- E) concentrate solely on asset allocation to maximize potential returns.
Answer: A
Explanation: See Section 2.1
Difficulty: 1 Easy
Section: 2.1 The Investment Policy Statement
Topic: Active portfolio management
Learning Objective: 02-01 The importance of an investment policy statement.
Bloom’s: Level 2 Understand
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23) Which one of the following decisions falls under the category of asset allocation?
- A) Purchasing Ford stock rather than General Motors stock
- B) Determining that thirty percent of a portfolio should be invested in bonds
- C) Adopting a passive investment strategy
- D) Deciding to actively analyse individual securities
- E) Deciding to use an online broker
Answer: B
Explanation: See Section 2.1
Difficulty: 1 Easy
Section: 2.1 The Investment Policy Statement
Topic: Asset allocation and security selection
Learning Objective: 02-01 The importance of an investment policy statement.
Bloom’s: Level 2 Understand
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24) Tom recently inherited a large sum of money that he wants to invest in the stock market. Since he has no investment experience, he has decided that he would like to work with a professional who can explain the market to him and also manage his funds for him. Ted most likely needs the services offered by a(n):
- A) deep-discount broker.
- B) discount broker.
- C) full-service broker.
- D) online broker.
- E) cyber broker.
Answer: C
Explanation: See Section 2.2
Difficulty: 1 Easy
Section: 2.2 Investment Professionals
Topic: Investment professionals
Learning Objective: 02-02 The various types of securities brokers and brokerage accounts.
Bloom’s: Level 2 Understand
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25) Which one of the following statements is correct?
- A) Most brokerage agreements require disputes be settled in a court of law.
- B) Arbitration is a formal legal process for settling disputes related to brokerage accounts.
- C) Churning is the preferred method of providing deep-discount brokerage services.
- D) Discount brokers only provide order execution services.
- E) Full service brokers frequently provide financial planning services to clients.
Answer: E
Explanation: See Section 2.2
Difficulty: 1 Easy
Section: 2.2 Investment Professionals
Topic: Investment professionals
Learning Objective: 02-02 The various types of securities brokers and brokerage accounts.
Bloom’s: Level 2 Understand
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26) Martin has an investment account with William, who is a broker with City Brokerage. Martin believes that William has mishandled his account by churning it. If he files a complaint against William seeking compensation, the case will most likely be decided by:
- A) the office manager of City Brokerage.
- B) a civil suit judge.
- C) a jury.
- D) an arbitration panel.
- E) the SEC Hearing Board.
Answer: D
Explanation: See Section 2.2
Difficulty: 1 Easy
Section: 2.2 Investment Professionals
Topic: Financial market regulation and protections
Learning Objective: 02-02 The various types of securities brokers and brokerage accounts.
Bloom’s: Level 2 Understand
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27) You currently have $5,000 in cash in your brokerage account. You decide to spend $8,000 to purchase shares of stock and borrow $3,000 from your broker to do so. Which type of brokerage account do you have?
- A) Cash
- B) Wrap
- C) Margin
- D) Short
- E) Asset allocation
Answer: C
Explanation: See Section 2.2
Difficulty: 1 Easy
Section: 2.2 Investment Professionals
Topic: Margin
Learning Objective: 02-02 The various types of securities brokers and brokerage accounts.
Bloom’s: Level 1 Remember
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28) Which one of the following statements is correct?
- A) The call money rate is the rate of interest brokerage firms charge on margin loans.
- B) The spread is the fee a deep-discount broker charges to execute a trade.
- C) The percentage of a purchase paid for with borrowed funds is referred to as the margin.
- D) A margin loan is treated as an asset on an account balance sheet.
- E) Margin is equal to account equity divided by the value of the securities owned.
Answer: E
Explanation: See Section 2.2
Difficulty: 1 Easy
Section: 2.2 Investment Professionals
Topic: Margin
Learning Objective: 02-02 The various types of securities brokers and brokerage accounts.
Bloom’s: Level 2 Understand
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29) Staci just used $5,000 of cash plus a $2,500 margin loan to purchase $7,500 worth of stock. This is the only transaction in her brokerage account. According to her account balance sheet, she now has account equity of:
- A) $2,500.
- B) $5,000.
- C) $7,500.
- D) $12,500.
- E) $15,000.
Answer: B
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 2 Understand
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30) Ann just purchased $10,000 of stock. She paid $8,000 in cash and borrowed the remaining $2,000 needed to pay for this purchase. If you constructed a balance sheet reflecting this transaction, the total assets would be:
- A) $3,000.
- B) $9,000.
- C) $10,000.
- D) $15,000.
- E) $21,000.
Answer: C
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 2 Understand
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31) Anita wants to buy $10,000 of securities in her margin account. Her advisor has informed her that she must pay a minimum of $7,000 in cash and maintain a minimum equity position of 30 percent. The initial margin requirement is ________ percent and the maintenance margin is ________ percent.
- A) 30; 30
- B) 30; 70
- C) 70; 30
- D) 70; 50
- E) 70; 70
Answer: C
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 2 Understand
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32) The absolute minimum initial margin requirement is set by the:
- A) individual investor.
- B) brokerage firm.
- C) Federal Reserve.
- D) Security Investors Protection Corporation.
- E) Securities and Exchange Commission.
Answer: C
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 1 Remember
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33) You open a margin account with a local broker and purchase shares of stock. The house maintenance margin requirement for your account is set by:
- A) your broker.
- B) the stock exchange.
- C) the SEC.
- D) the SIPC.
- E) the Federal Reserve.
Answer: A
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
34) If you opt to purchase shares of stock on margin rather than with cash, you will:
- A) decrease your maximum potential rate of return.
- B) increase your maximum potential rate of return.
- C) guarantee yourself a profit.
- D) eliminate any potential profit.
- E) have equal rates of return regardless of how the purchase is made.
Answer: B
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 2 Understand
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35) What is the purpose of a margin call?
- A) to inform you that your margin loan is due and payable
- B) to demand funds to increase your margin position
- C) to let you know the amount of funds that are now available for you to borrow
- D) to advise you that the interest rate on your loan has changed
- E) to remind you of the upcoming monthly payment due on your margin loan
Answer: B
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 2 Understand
Accessibility: Keyboard Navigation
36) If you ignore a margin call, your broker:
- A) will seize all the assets in your account.
- B) will close your account.
- C) may place a short sale on your behalf to cover the amount of the call.
- D) may sell some of your securities to repay the margin loan.
- E) will increase both your margin loan and the rate of interest on that loan.
Answer: D
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 2 Understand
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37) Lauren Mitchell has a margin account with a local brokerage firm, RL Brokers. She recently purchased 200 shares of Abbot Industries common stock that trades on the New York Stock Exchange (NYSE). These shares are held in street name and are registered under the name of:
- A) Lauren Mitchell.
- B) RL Brokers.
- C) Abbot Industries.
- D) the New York Stock Exchange.
- E) the Securities and Exchange Commission.
Answer: B
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 1 Remember
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38) Which one of the following is generally true concerning securities held in street name?
- A) The securities are registered under your mailing address rather than your name.
- B) There is a greater likelihood the security may be stolen.
- C) All dividend checks are mailed to your street address.
- D) The annual stock report is mailed directly to your street address.
- E) The brokerage firm is the owner of record.
Answer: E
Explanation: See Section 2.3
Difficulty: 1 Easy
Section: 2.3 Types of Accounts
Topic: Margin
Learning Objective: 02-03 How to trade on margin, including calculating the initial and maintenance margins.
Bloom’s: Level 1 Remember
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Fundamentals of Investments, 8e (Jordan)
Chapter 4 Mutual Funds and Other Investment Companies
1) An investment company:
- A) specializes in investing funds on behalf of a financial institution.
- B) is a closed-end fund that invests in real estate.
- C) pools funds from individual investors.
- D) is a specific type of a bank.
- E) is a specialized form of a joint stock company.
Answer: C
Explanation: See Section 4.2.
Difficulty: 1 Easy
Section: 4.2 Investment Companies and Fund Types
Topic: Open-end funds
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
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2) An investment company that will repurchase shares at any time is called a(n) ________ fund.
- A) hedge
- B) closed-end
- C) open-end
- D) public
- E) exchange traded
Answer: C
Explanation: See Section 4.2.
Difficulty: 1 Easy
Section: 4.2 Investment Companies and Fund Types
Topic: Open-end funds
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
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3) An investment company that issues a fixed number of shares which can only be resold in the open stock market is called a(n) ________ fund.
- A) hedge
- B) closed-end
- C) open-end
- D) public
- E) market
Answer: B
Explanation: See Section 4.2.
Difficulty: 1 Easy
Section: 4.2 Investment Companies and Fund Types
Topic: Closed-end funds
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
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4) The value of a load mutual fund’s assets less its liabilities, divided by the number of shares outstanding is referred to as the fund’s:
- A) net asset value.
- B) offering price.
- C) open-end value.
- D) closed-end value.
- E) prime value.
Answer: A
Explanation: See Section 4.2.
Difficulty: 1 Easy
Section: 4.2 Investment Companies and Fund Types
Topic: Fund pricing
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
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5) A fee that is charged at the time mutual fund shares are purchased by an investor is called a:
- A) contingent deferred sales charge.
- B) 12b-1 fee.
- C) back-end load.
- D) front-end load.
- E) issuance charge.
Answer: D
Explanation: See Section 4.4.
Difficulty: 1 Easy
Section: 4.4 Mutual Fund Costs and Fees
Topic: Fund management fees, loads, and other charges
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
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6) A 12b-1 fee is a fee charged by a mutual fund:
- A) at the time shares are issued.
- B) if shares are sold within a stated period of time.
- C) to cover trading costs.
- D) to pay the fund’s managers.
- E) to cover marketing costs.
Answer: E
Explanation: See Section 4.4.
Difficulty: 1 Easy
Section: 4.4 Mutual Fund Costs and Fees
Topic: Fund management fees, loads, and other charges
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
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7) The turnover for a mutual fund refers to:
- A) the length of time an average investor holds fund shares.
- B) a measure of trading activity.
- C) replacing the fund’s investment manager.
- D) the annual change in the number of shares outstanding.
- E) the percentage change in the ownership of fund shares.
Answer: B
Explanation: See Section 4.4.
Difficulty: 1 Easy
Section: 4.4 Mutual Fund Costs and Fees
Topic: Fund characteristics and considerations
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
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8) An open-end fund which invests solely in short-term debt obligations is called a(n) ________ mutual fund.
- A) growth
- B) stock
- C) money market
- D) asset allocation
- E) balanced
Answer: C
Explanation: See Section 4.5.
Difficulty: 1 Easy
Section: 4.5 Short-Term Funds
Topic: Fund classifications
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
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9) A fund that is basically an index fund that trades like a closed-end fund is called a(n):
- A) open-end fund.
- B) money market fund.
- C) exchange-traded fund.
- D) mutual fund.
- E) depository receipt.
Answer: C
Explanation: See Section 4.8.
Difficulty: 1 Easy
Section: 4.8 Closed-End Funds, Exchange-Traded Funds, and Hedge Funds
Topic: Exchange traded funds
Learning Objective: 04-04 The workings of exchange-traded funds (ETFs) and hedge funds.
Bloom’s: Level 1 Remember
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10) Which one of the following describes an investment company that generally has an unrestricted investment strategy and is not accessible to the general public?
- A) mutual fund
- B) open-end fund
- C) closed-end fund
- D) exchange-traded fund
- E) hedge fund
Answer: E
Explanation: See Section 4.8.
Difficulty: 1 Easy
Section: 4.8 Closed-End Funds, Exchange-Traded Funds, and Hedge Funds
Topic: Hedge funds versus mutual funds
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
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11) Which of the following are three key advantages of mutual funds?
- A) diversification, taxes, high initial investments
- B) low initial investments, professional management, diversification
- C) liquidity, high initial investments, diversification
- D) professional management, high initial investments, taxes
- E) costs, diversification, liquidity
Answer: B
Explanation: See Section 4.1.
Difficulty: 1 Easy
Section: 4.1 Advantages and Drawbacks of Mutual Fund Investing
Topic: Fund characteristics and considerations
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
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12) Which one of the following statements is correct concerning mutual funds?
- A) Mutual funds generally pay no taxes.
- B) Mutual funds are risk-free.
- C) Profits on the sale of mutual fund shares are tax-free.
- D) All mutual funds are diversified.
- E) Investments in mutual funds are guaranteed from loss by a private agency of the federal government.
Answer: A
Explanation: See Section 4.1.
Difficulty: 1 Easy
Section: 4.1 Advantages and Drawbacks of Mutual Fund Investing
Topic: Fund characteristics and considerations
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
13) Which one of the following statements is correct concerning an open-end mutual fund which charges a front-end load?
- A) The number of shares outstanding was fixed at the time the fund was created.
- B) If an investor wishes to sell her shares, she must do so by selling to another investor.
- C) The NAV exceeds the offering price.
- D) The load is expressed as a percentage of the NAV.
- E) Investors receive the NAV when shares are sold.
Answer: E
Explanation: See Section 4.2.
Difficulty: 1 Easy
Section: 4.2 Investment Companies and Fund Types
Topic: Fund investments, exchanges, and redemptions
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
14) Which one of the following statements correctly relates to closed-end funds?
- A) Closed-end funds must sell at the NAV or above.
- B) The number of shares outstanding changes on a daily basis as shares are sold and repurchased.
- C) Shares in closed-end funds must be held until the funds mature.
- D) Once a fund closes, a new investor is unable to purchase shares in that fund.
- E) Shares of closed-end funds trade just like stocks.
Answer: E
Explanation: See Section 4.2.
Difficulty: 1 Easy
Section: 4.2 Investment Companies and Fund Types
Topic: Closed-end funds
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
15) Shares in closed-end funds:
- A) can be resold to the fund at any time.
- B) are more popular than shares in open-end funds.
- C) may sell for more or less than the NAV.
- D) are referred to as mutual fund shares.
- E) cannot be resold.
Answer: C
Explanation: See Section 4.2.
Difficulty: 1 Easy
Section: 4.2 Investment Companies and Fund Types
Topic: Closed-end funds
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
16) A mutual fund is owned by:
- A) its shareholders.
- B) a management company.
- C) a financial institution.
- D) the fund’s board of directors.
- E) a mutual fund family.
Answer: A
Explanation: See Section 4.3.
Difficulty: 1 Easy
Section: 4.3 Mutual Fund Operations
Topic: Open-end funds
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
17) A mutual fund is created by which one of the following parties?
- A) fund shareholders
- B) fund’s board of directors
- C) SEC
- D) investment advisory firm
- E) discount broker
Answer: D
Explanation: See Section 4.3.
Difficulty: 1 Easy
Section: 4.3 Mutual Fund Operations
Topic: Open-end funds
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
18) Mutual funds are generally created to:
- A) provide tax shelters for investors.
- B) generate fees for an advisory firm.
- C) eliminate investment risk.
- D) avoid taxes.
- E) avoid regulation.
Answer: B
Explanation: See Section 4.3.
Difficulty: 1 Easy
Section: 4.3 Mutual Fund Operations
Topic: Fund management fees, loads, and other charges
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
19) Investment advisory firms generally provide which of the following services to a mutual fund?
- marketing
- record keeping
III. investment research
- tax payment
- A) I only
- B) II and III only
- C) I, II, and III only
- D) II, III, and IV only
- E) I, II, III, and IV
Answer: C
Explanation: See Section 4.3.
Difficulty: 1 Easy
Section: 4.3 Mutual Fund Operations
Topic: Fund management fees, loads, and other charges
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
20) An investment company will be treated as a “regulated investment company” by the Internal Revenue Service provided that it:
- invests almost all of its assets in bonds, stocks, and other securities.
- invests solely in U.S. securities.
III. does not invest more than two percent of its assets in any one security.
- passes all its realized investment income through to its shareholders.
- A) I and III only
- B) I and IV only
- C) II and III only
- D) I, II, and IV only
- E) I, III, and IV only
Answer: B
Explanation: See Section 4.3.
Difficulty: 1 Easy
Section: 4.3 Mutual Fund Operations
Topic: Fund returns, yields, and taxation
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
21) The income earned by a regulated investment company is:
- A) exempt from all taxation.
- B) taxed only at the state and local level.
- C) taxed only at the federal level.
- D) taxable income for the fund.
- E) taxable income for the fund’s shareholders.
Answer: E
Explanation: See Section 4.3.
Difficulty: 1 Easy
Section: 4.3 Mutual Fund Operations
Topic: Fund returns, yields, and taxation
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
22) Today, you are selling shares of an open-end mutual fund and will be charged a CDSC of 3 percent. The price you will receive per share is equal to:
- A) 103 percent of the opening NAV.
- B) 97 percent of the opening offering price.
- C) 97 percent of the closing NAV.
- D) 103 percent of the closing offering price.
- E) the closing offering price.
Answer: C
Explanation: See Section 4.4.
Difficulty: 1 Easy
Section: 4.4 Mutual Fund Costs and Fees
Topic: Fund investments, exchanges, and redemptions
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
23) Which one of the following costs can a mutual fund shareholder avoid by holding shares for an extended period of time?
- A) 12b-1 fee
- B) front-end load
- C) management fee
- D) contingent deferred sales charge
- E) trading costs
Answer: D
Explanation: See Section 4.4.
Difficulty: 1 Easy
Section: 4.4 Mutual Fund Costs and Fees
Topic: Fund management fees, loads, and other charges
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
24) When the offering price and the NAV are the same, you know that a mutual fund is not charging which one of the following fees?
- A) 12b-1 fee
- B) front-end load
- C) management fee
- D) contingent deferred sales charge
- E) trading costs
Answer: B
Explanation: See Section 4.4.
Difficulty: 1 Easy
Section: 4.4 Mutual Fund Costs and Fees
Topic: Fund management fees, loads, and other charges
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
25) Assume a mutual fund is a pure no-load fund. Which of the following costs should an investor still expect to incur?
- contingent deferred sales charge
- management fee
III. trading costs
- redemption fee
- A) I, II, and III only
- B) II and III only
- C) II, III, and IV only
- D) I, II, III, and IV
- E) none of the costs listed
Answer: B
Explanation: See Section 4.4.
Difficulty: 1 Easy
Section: 4.4 Mutual Fund Costs and Fees
Topic: Fund management fees, loads, and other charges
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
26) Contingent deferred sales charges:
- A) are applied at the time fund shares are purchased.
- B) are applied only to front-end load funds.
- C) are charged on an annual basis to cover distribution and marketing costs.
- D) are no longer permissible.
- E) can be avoided.
Answer: E
Explanation: See Section 4.4.
Difficulty: 1 Easy
Section: 4.4 Mutual Fund Costs and Fees
Topic: Fund management fees, loads, and other charges
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
27) Mutual fund trading costs:
- A) are computed as a percentage of a fund’s assets.
- B) are generally set at a flat amount per year.
- C) generally include a bonus fee for outperforming an index.
- D) increase in direct relation to the turnover rate.
- E) are the costs paid to brokers in the form of sales commissions.
Answer: D
Explanation: See Section 4.4.
Difficulty: 1 Easy
Section: 4.4 Mutual Fund Costs and Fees
Topic: Fund management fees, loads, and other charges
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
28) Which one of the following is not included in the fee table found in a mutual fund prospectus?
- A) 12b-1 fee
- B) turnover rate
- C) redemption fee percentage
- D) management fee
- E) front-end load
Answer: B
Explanation: See Section 4.4.
Difficulty: 1 Easy
Section: 4.4 Mutual Fund Costs and Fees
Topic: Fund management fees, loads, and other charges
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
29) What are the two best reasons for considering a load fund?
- A) lack of good no-load funds and superior market performance
- B) preference for a particular fund manager or a specialized type of fund
- C) superior market performance and preferential tax treatment
- D) tax-free income and superior fund managers
- E) no management fees and a particular fund manager
Answer: B
Explanation: See Section 4.4.
Difficulty: 1 Easy
Section: 4.4 Mutual Fund Costs and Fees
Topic: Fund evaluation and performance
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
30) Money market mutual funds do which one of the following?
- A) offer a guaranteed rate of return
- B) invest in securities that mature in 90 days or less
- C) provide a risk-free means of investing
- D) invest only in government bonds
- E) trade for $10 a share
Answer: B
Explanation: See Section 4.5.
Difficulty: 1 Easy
Section: 4.5 Short-Term Funds
Topic: Fund characteristics and considerations
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
31) The net asset value of a money market mutual fund:
- A) is dependent upon the value of the fund’s assets.
- B) is guaranteed to be $1 a share.
- C) fluctuates as new shares are issued and old shares are redeemed.
- D) varies inversely with market interest rates.
- E) is insured by the sponsoring investment advisory firm.
Answer: A
Explanation: See Section 4.5.
Difficulty: 1 Easy
Section: 4.5 Short-Term Funds
Topic: Fund pricing
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
32) Money market mutual funds:
- A) must be valued at $1 a share or more.
- B) invest only in certificates of deposit.
- C) produce income that is always tax-exempt.
- D) can provide “triple-tax-free” income.
- E) are insured by the FDIC.
Answer: D
Explanation: See Section 4.5.
Difficulty: 1 Easy
Section: 4.5 Short-Term Funds
Topic: Fund characteristics and considerations
Learning Objective: 04-02 How mutual funds operate.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
33) To determine the actual objective of a fund, you should primarily refer to the:
- A) fund’s objective statement.
- B) fund’s prospectus.
- C) portfolio holdings.
- D) sales literature.
- E) portfolio manager’s comments in the annual report.
Answer: C
Explanation: See Section 4.6 “As a result, it is a mistake to look only at a fund’s stated objective: Actual portfolio holdings speak louder than prospectus promises.”
Difficulty: 1 Easy
Section: 4.6 Long-Term Funds
Topic: Fund characteristics and considerations
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
34) Which type of stock fund focuses on maximizing share price appreciation?
- A) growth and income
- B) large-company
- C) equity income
- D) capital appreciation
- E) growth
Answer: D
Explanation: See Section 4.6.
Difficulty: 1 Easy
Section: 4.6 Long-Term Funds
Topic: Fund classifications
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
35) Which type of stock fund focuses primarily on current income?
- A) growth and income
- B) small-company
- C) equity income
- D) capital appreciation
- E) growth
Answer: C
Explanation: See Section 4.6.
Difficulty: 1 Easy
Section: 4.6 Long-Term Funds
Topic: Fund classifications
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
36) Small-cap funds:
- A) generally focus on dividend-paying stocks.
- B) focus more on capital appreciation than on current income.
- C) are defined as the smallest 20 percent of all funds based on total asset value.
- D) are defined as the 20 percent of funds with the smallest NAVs.
- E) are generally also classified as equity income funds.
Answer: B
Explanation: See Section 4.6.
Difficulty: 1 Easy
Section: 4.6 Long-Term Funds
Topic: Fund classifications
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
37) The primary difference between an international fund and a global fund is the fact that:
- A) a global fund invests in U.S. stocks while an international fund does not.
- B) an international fund invests in U.S. stocks while a global fund does not.
- C) all international funds are country specific while global funds are not.
- D) global funds may opt to be country or region specific while international funds may not.
- E) international funds tend to be more geographically diversified than global funds.
Answer: A
Explanation: See Section 4.6.
Difficulty: 1 Easy
Section: 4.6 Long-Term Funds
Topic: Fund classifications
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
38) Which type of fund should you purchase if you are interested in investing primarily in countries that have relatively new stock markets?
- A) international fund
- B) emerging markets fund
- C) social conscience fund
- D) global fund
- E) sector fund
Answer: B
Explanation: See Section 4.6.
Difficulty: 1 Easy
Section: 4.6 Long-Term Funds
Topic: Fund classifications
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
39) A sector fund:
- A) tends to perform consistently from one year to the next.
- B) is usually highly diversified.
- C) rarely outperforms other types of funds.
- D) concentrates on investing in one industry or one commodity.
- E) is best evaluated by its past performance.
Answer: D
Explanation: See Section 4.6.
Difficulty: 1 Easy
Section: 4.6 Long-Term Funds
Topic: Fund classifications
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
40) A fund which tracks the S&P 500 would best be classified as which type of fund?
- A) sector
- B) global
- C) equity income
- D) index
- E) growth
Answer: D
Explanation: See Section 4.6.
Difficulty: 1 Easy
Section: 4.6 Long-Term Funds
Topic: Fund classifications
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
41) Which one of the following characteristics best fits an index fund?
- A) market outperformer
- B) high expenses
- C) passively managed
- D) dividend oriented
- E) high turnover rate
Answer: C
Explanation: See Section 4.6.
Difficulty: 1 Easy
Section: 4.6 Long-Term Funds
Topic: Fund characteristics and considerations
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
42) You want to purchase shares in a fund and also ensure that your money does not support firms that harm the environment. Which type of fund should you purchase?
- A) international fund
- B) income fund
- C) tax-managed fund
- D) index fund
- E) social conscience fund
Answer: E
Explanation: See Section 4.6.
Difficulty: 1 Easy
Section: 4.6 Long-Term Funds
Topic: Fund classifications
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
43) Which one of the following is a general characteristic of a tax-managed fund?
- A) low turnover rate
- B) concentration on income-producing securities
- C) high level of realized capital gains
- D) higher trading costs than average funds
- E) matching of dividend income to capital gains
Answer: A
Explanation: See Section 4.6.
Difficulty: 1 Easy
Section: 4.6 Long-Term Funds
Topic: Fund characteristics and considerations
Learning Objective: 04-01 The different types of mutual funds.
Bloom’s: Level 1 Remember
Accessibility: Keyboard Navigation
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