Ch 9

Question 1

How is investment income taxed?

Answer 1

As normal income

Question 2

Uncertainty caused by changes in the overall price level of goods and services.

Answer 2

Inflation risk

Question 3

Which assets are less susceptible to inflation risk?

Answer 3

Assets that emphasize capital appreciation. Ex. Stocks and real estate because their rate of return usually beats inflation.

Question 4

Risk of loss caused by changes in the level of interest rates.

Answer 4

Interest rate risk.

Question 5

What happened to bonds when the market interest rate increases?

Answer 5

Value of bonds decreases.

Question 6

A stock that tends to pay high dividends which means mostly investment income.

Answer 6

Value stock

Question 7

Which bonds are more susceptible to interest rate risk?

Answer 7

Older bonds

Question 8

Uncertainty about an investment’s future value because of potential changes in the market

Answer 8

Market risk

Question 9

What kind of risk can be diversified away?

Answer 9

Unsystematic

Question 10

Risk that a company has taken on too much debt.

Answer 10

Financial risk

Question 11

Dollar cost averaging for bonds where dates are staggered and maturing investments are reinvested.

Answer 11

Laddering.

Question 12

Mutual fund dividend reinvestment option.

Answer 12

DRIP

Question 13

What is the tax treatment of reinvestment of dividends?

Answer 13

Dividends have to be reported. It’s like getting the cash and manually investing it.

Question 14

Bonds where interest isn’t pad the tip redeemed.

Answer 14

EE or I

Question 15

Treasury security with maturity of less than a year

Answer 15

T-bill

Question 16

Bond secured by the full faith and taxing authority of the issuer.

Answer 16

GOB

Question 17

Bond that only pays after the collateralized debt has been satisfied.

Answer 17

Debentures

Question 18

Bond where owners only receive interest if the corporation has earnings from which the interest can be paid.

Answer 18

Income bond

Question 19

Stock where the company’s earnings are growing at a faster rate than the general economy.

Answer 19

Growth stock

Question 20

Stock considered undervalued since current price is less than the intrinsic value.

Answer 20

Value stock

Question 21

Stock with earnings that are closely correlated with the economic cycle.

Answer 21

Cyclical stock (ex. Automobile companies l)

Question 22

Stocks that are less affected by the economic cycle (ex grocery stores, tobacco, medical companies)

Answer 22

Defensive stock

Question 23

Stocks with a record of steady dividend payments.

Answer 23

Income stock

Question 24

Stock with a price of less than $1/share.

Answer 24

Penny stock

Question 25

Four systematic risks

Answer 25

Purchasing power risk
Interest rate risk
Market risk
Exchange rate risk

Question 26

What does it mean if a stock has a beta of 1? How about -1; +1

Answer 26

-1 = less risky than market
1= same as market
2=more risky

Question 27

Mutual fund constantly issuing new shares. Outstanding shares are redeemed based on the current net asset value.

Answer 27

Open-end fund

Question 28

How do you calculate the by asset value of an open-end fund?

Answer 28

Assets - liabilities / number of shares

Question 29

Mutual fund that sells a fixed number of shares.

Answer 29

Closed-end fund

Question 30

Key advantage of mutual funds.

Answer 30

Diversification.

Question 31

What do cds derive their return from?

Answer 31

Investment income

Question 32

Risk that a business may take on too much debt

Answer 32

Financial risk

Question 33

What is the tax treatment of treasury notes?

Answer 33

Not taxed Federally or by the State.

Question 34

Are sector funds diversified?

Answer 34

No; so they should only be a small portion of the portfolio

Question 35

What does a beta less than 1 mean?

Answer 35

Returns are less than the market rate of return.

Question 36

What happens with an asset-allocation or life-cycle fund?

Answer 36

The mix becomes less risky over time.

Question 37

Are tbills actively traded on securities markets?

Answer 37

Yes