Investment Quiz 5 Flashcards
Ethel is 68 years old and has recently retired. She receives a pension of $1,200 per month and her current investments are expected to provide an additional $300 per month for the remainder of her life. Ethel will inherit $100,000 in a few weeks from her late brother's estate. She would like to invest the funds in U.S. government guaranteed funds and in such a way that her monthly income will increase to $2,000. Which security should Ethel purchase? A) 20-year TIPS with a 5% coupon. B) Treasury bonds with a 6.5% coupon. C) 30-year STRIPS based on 7% coupon Treasury bonds. D) FNMA securities yielding 8%.
B
Ethel needs an additional $500 per month which equals $6,000 per year or a 6% annual coupon/current yield. TIPS, STRIPS, and Treasury bonds are all guaranteed by the U.S. government, but only the Treasury bond supplies the necessary income. STRIPS are zero-coupon bonds.
Bob, age 58, is an extremely wealthy, sophisticated investor in great health for his age. He has a very large portfolio of stocks, bonds, and mutual funds and has a high risk tolerance. Bob would like to supplement his large portfolio with a bond having the least volatility in the event of rising interest rates. Which of the following bonds listed below would have the least volatility?
A)
B rated, 20-year callable bond with a yield of 7.3%.
B)
A rated, 5-year high coupon bond with a yield of 6.8%.
C)
AA rated, 30-year zero coupon bond with a yield of 8%.
D)
AA rated, 20-year municipal bond with a yield of 5.9%.
B
Patricia and Mark are meeting with their CFP® professional, Johnny, to discuss a plan for investing. They are a young couple and they understand the importance of starting to plan early. However, they do not have all of the resources available to start planning for each goal. They have provided Johnny with all of the necessary documentation during the initial interview to prepare a comprehensive investment strategy. In what order should Johnny proceed with the investment planning process?
- Prioritize the couple’s financial goals.
- Identify the time horizon and dollar requirements for each goal.
- Present the couple with investment alternatives.
- Review the couple’s investment planning needs, goals, and objectives.
4, 2, 1, 3
Ryan, a CFP® professional, is meeting with Burt to review his current financial plan. Burt has indicated to Ryan that he wishes to save for his daughter’s college education. His daughter is two years old. Burt currently has $10,000 in a brokerage account in his name earmarked for this goal. However, he believes his asset allocation may be too conservative given his financial goals and risk tolerance. What should Ryan do next?
A)
Review Burt’s current brokerage statement and offer allocation recommendations.
B)
Recommend a Section 529 plan with a balanced asset allocation.
C)
Clarify Burt’s goals and expectations for the college savings plan.
D)
Ask Burt what he thinks is a reasonable rate of inflation for college tuition costs to be used in any planning recommendations.
C
Wendy, age 73 and a recent widower, was referred to Frank, a CFP® professional, by her long-time friend, Janice. Wendy’s late husband handled most of the finances and Wendy has been confused dealing with all the paperwork in settling her late husband’s estate. She has been skeptical in asking for assistance, but she is willing to meet with Frank. After contacting his office, Frank instructed her to mail or fax her personal and financial information in order to expedite the process. However, she indicated her uneasiness in providing this information via mail or fax. How should Frank proceed with the engagement?
A)
He should demand that she send in the paperwork before the meeting.
B)
He should set up a face-to-face meeting with Wendy to gather her personal financial information.
C)
He should have his assistant contact her to answer any questions or concerns.
D)
He should disengage from the relationship.
B
Jillian recently purchased a 30-year, investment-grade, state of Louisiana municipal bond, from her broker. She paid $972 plus commission for the bond, which has an annual coupon rate of 3.5% (paid semiannually). Which of the following statements is(are) CORRECT?
- The bond will be subject to high purchasing power risk.
- Interest paid by the bond will not be subject to federal income taxation.
- If the bond is sold in three years for $1,000, the gain will be considered income tax-free.
- The bond will be subject to a high level of default risk.
1 and 2
Carmen and Doug are meeting with their CFP® professional, Geoff, to discuss the purchase of a stock for their long-term investment portfolio. Based on the information gathered from their previous interviews, Geoff has narrowed down the choices to two stocks with significant growth prospects.
ABC XYZ Current market price $46 $18 Annual dividend growth rate 4% 5% Current dividend $1.25 $.45 P/E ratio 20 13 Beta 1.45 1.27 Assuming the client has a required rate of return of 7%, which stock should they choose for the portfolio?
A)
ABC because the current dividend is higher.
B)
ABC because the stock is trading at a price higher than the intrinsic value.
C)
XYZ because the stock is trading at a price less than the intrinsic value.
D)
XYZ because this stock has a lower beta and a lower market price.
C
Troy needs a 15% return to meet his financial goals. He is interested in a mutual fund with a beta of 1.3. If the market return has averaged 11% over the past 10 years and the U.S. Treasury bill rate is currently 4%, should Troy invest in this fund?
A)
Yes, the fund’s expected rate of return is more than Troy’s required rate or return.
B)
Yes, Troy’s required rate of return is more than the fund’s expected rate of return.
C)
No, the fund’s expected rate of return is less than Troy’s required rate of return.
D)
No, Troy’s required rate of return is less than the fund’s expected rate of return.
C
Jeff purchased a 30-year bond for $977.36 with a stated coupon rate of 8.5%. What is the yield to maturity for this investment if Jeff receives semiannual coupon payments and expects to hold the bond to maturity? A) 8.93%. B) 8.71%. C) 4.36%. D) 5.68%.
B
Michael, a Georgia resident, is considering one of the following four bonds for his fixed-income portfolio. He wants an investment grade bond that will provide him with the most income over the next ten years. He is in the 25% marginal federal income bracket. In addition, he is subject to a 5% state income tax. Which of these bonds would be most appropriate for Michael?
A)
15-year BB+ rated 8% ABC corporate bond callable in 10 years at 105.
B)
20-year AAA rated 3.25% State of Georgia municipal bond.
C)
30-year A rated 6% corporate bond callable in 15 years at 103.
D)
10-year AA rated 5% XYZ corporate bond callable in 7 years at 102.
C
Based on the information provided, the 30-year corporate bond is the best choice for his portfolio. The 20-year municipal bond has a taxable equivalent yield of 4.64% [3.25% ÷ (1 - 0.25 + 0.05)], which is well below the corporate bond coupon rate. The 15-year bond does not meet Michael’s criteria for an investment grade bond. The 10-year bond may be called during his investment time horizon.
Jack buys 100 shares of XYZ stock for $60 per share with an initial margin of 50% and a 30% maintenance margin. At what price would Jack receive a margin call? A) $44.00 B) $42.85 C) $42.00 D) $43.50
B
Margin Call = Debit Balance ÷ (1 − Maintenance Margin)
= ($60 × 50%) ÷ (1 − 0.30)
= $30 ÷ 0.70
= $42.85
Phillip compiled the following correlation coefficient matrix relating to Funds A, B, C, and D.
Fund A Fund B Fund C Fund D Fund A 1.00 .56 -.34 .22 Fund B .56 1.00 -.12 -.78 Fund C -.34 -.12 1.00 .00 Fund D .22 -.78 .00 1.00 On the basis of his findings, combining which funds would provide the highest level of diversification?
A) Funds A and C. B) Funds B and C. C) Funds A and B. D) Funds B and D.
D
Michael, a CFP® professional, is meeting with his client of 5 years, Caroline. She has a portfolio consisting of a variety of stocks and bonds. He is reviewing her holdings and the economic climate to ensure that her financial plan is still on track. What is the best investment strategy for Caroline if interest rates are currently low and expected to rise in the near future? A) Sell T-bills. B) Buy intermediate bonds. C) Buy convertible bonds. D) Sell long-term bonds.
D
Kevin and Catherine, ages 35 and 33 respectively, are ready to implement the investment recommendations proposed by their CFP® professional. All of the following are possible to occur during this phase EXCEPT?
A)
Transfer Kevin’s Section 401(k) plan from a former employer to a traditional IRA.
B)
Provide the couple with the firm’s engagement letter for review.
C)
Open a new Roth IRA for Catherine.
D)
Reallocate money from a money market mutual fund to an S&P 500 Index Fund.
B
Bill owns U.S. Treasury bonds worth $34,000, stocks worth $22,500, and mutual funds worth $15,000. If their expected returns are 4%, 8%, and 10%, respectively, what is the overall weighted average expected return on Bill’s investments?
A) 8.05%. B) 6.52%. C) 13.09%. D) 4.38%.
B
