Multiple Choice
Identify the choice that best completes the
statement or answers the question.
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1.
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All of the following are examples of financial intermediaries EXCEPT
a. | a credit union. | c. | a finance company. | b. | a stock certificate. | d. | a life insurance
company. |
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2.
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The main advantage of diversification as an investment policy is that it
a. | reduces risk to investors. | b. | increases investors’ access to their
money. | c. | offsets the effects of inflation on investments. | d. | guarantees a fixed
rate of return on an investment. |
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3.
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An accurate statement about bonds would be that
a. | they are insured by the FDIC. | b. | they are generally held for 3 or 6
months. | c. | they are usually a low-risk investment. | d. | they entitle the
holder to a share of ownership in a corporation. |
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4.
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The interest rate the bond issuer pays to the bondholder is called the
a. | coupon rate. | c. | discount rate. | b. | maturity rate. | d. | value rate. |
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5.
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Savings bonds differ from most other bonds in that
a. | they provide a higher rate of return. | b. | they are held for a shorter
time. | c. | the buyer does not receive periodic interest payments in exchange for a lower
purchase price. | d. | they are issued in fairly large denominations in exchange for a lower purchase
price. |
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6.
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To finance the building of a new police station, a local government is most
likely to issue a
a. | junk bond. | c. | municipal bond. | b. | treasury bond. | d. | money market
bond. |
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7.
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Investing in a money market mutual fund is a higher risk than investing in a
certificate of deposit because unlike CDs, money market funds
a. | are not insured by the FDIC. | b. | are not protected by the Securities and
Exchange Commission. | c. | do not earn a fixed interest
rate. | d. | must be held for a preset amount of time. |
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8.
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An example of blue chip stock might be
a. | a new start-up firm. | b. | a foreign-owned company that operates in
another country. | c. | an established company that is traded over the Internet. | d. | a large, well-known
company traded on the NYSE. |
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9.
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The Dow Jones Industrial Average consists of
a. | 500 different stocks that change annually. | b. | 30 stocks that are
considered representative of the market as a whole. | c. | the top-selling 250 stocks over a 10-year
period. | d. | 60 stocks selected from the NYSE, the NASDAQ-AMEX, and the OTC
market. |
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10.
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When you invest in a mutual fund,
a. | your money is invested in a variety of insurance policies. | b. | you have easier
access to your money than in a savings account. | c. | your money is invested in a variety of stocks
and bonds. | d. | you are guaranteed a fixed return on your investment. |
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11.
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All of the following are low-risk investments EXCEPT
a. | junk bonds. | c. | municipal bonds. | b. | treasury bonds. | d. | savings bonds. |
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12.
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All of the following are basic components of bonds EXCEPT
a. | maturity. | c. | par value. | b. | liquidity. | d. | coupon rate. |
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13.
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A stock that reinvests its earnings in the business instead of paying regular
dividends is called
a. | an income stock. | c. | preferred stock. | b. | common stock. | d. | a growth stock. |
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14.
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You realize that many students who come to early morning hockey practice do not
get up early enough to eat breakfast. You borrow $500 from your parents to start a bagel delivery
service to the hockey rink in the early mornings. You are acting as
a. | a supplier in the capital market. | c. | a financial capital
investor | b. | an entrepreneur. | d. | an intermediary. |
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15.
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In June, Leslie wins a cash prize of $2,000. She plans to use this money to pay
her tuition bill in September. Leslie puts this money in a savings account because her main priority
is
a. | receiving the maximum amount of interest possible. | b. | taking a risk in
hopes that she’ll get a high return. | c. | liquidity, since she’ll need to use the
money in a short time. | d. | making a safe long term
investment. |
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16.
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Against your better judgment, you lend $100 to your cousin Manny, who has a
reputation for failing to pay back loans. You are taking a
a. | liquidity risk | c. | inflation rate risk. | b. | time risk. | d. | credit risk. |
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17.
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Since bonds are considered among the safest investments, you would expect that
they would
a. | mature quickly. | c. | take a long time to mature. | b. | have high interest
rates. | d. | have low interest
rates. |
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18.
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Why would a person invest in junk bonds?
a. | He does not know anything about investment. | b. | Junk bonds can pay
very high interest rates. | c. | Most junk bonds have low interest
rates. | d. | Junk bonds have high bond ratings. |
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19.
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Your friend Jorge has just inherited $1000 and would like to invest the money in
the stock market. You suggest that he
a. | contact a brokerage firm, who will put him in touch with a
stockbroker. | b. | reserve a seat at the New York Stock exchange. | c. | contact Nasdaq, who
will assign a stockbroker to him. | d. | call the New York Stock Exchange, who can
direct him to the OTC market. |
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20.
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Karen wants to buy stock, but is worried about the current “bear
market.” This means that
a. | profits from stocks are rising, making it a good time to buy. | b. | many investors are
selling their stocks in anticipation of lower profits. | c. | profits from stocks are falling, making it a
good time to buy. | d. | many investors are buying stocks in
anticipation of higher profits. |
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21.
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The Great Crash can be attributed to all of the following reasons EXCEPT
a. | many people had gone into debt buying consumer items on credit. | b. | the practice of
making high-risk investments with borrowed money. | c. | the small number of people buying stock on
margin. | d. | a relatively few companies and families held much of the nation’s
wealth. |
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22.
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You hear on the news that The Dow has fallen to just below 8000 points. This
means that
a. | the Dow is at the lowest level it has been since the Great
Depression. | b. | the Dow has fallen after an all-time high of 8000 points. | c. | the Dow is at
relatively high levels compared to the early 1980s, but short of its all-time
high. | d. | the Dow has plunged to its lowest level in 100 years. |
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Matching
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Identifying Key Terms
Match each term with the correct
statement below. a. | bear market | f. | investment | b. | bull
market | g. | par
value | c. | capital gain | h. | portfolio | d. | equities | i. | prospectus | e. | financial
asset | j. | yield |
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23.
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an investment report to potential investors
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24.
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the use of assets to earn income or profits
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25.
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amount paid to purchase a bond that will be repaid at maturity
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26.
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the annual rate of return on a bond if the bond were held to maturity
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27.
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claim on the property or income of a borrower
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28.
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claims of ownership in a corporation
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29.
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the difference between a higher selling price and a lower purchase price,
resulting in a financial gain for the seller
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30.
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a steady drop in the price of stocks over a period of time
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Identifying Key Terms
Match each term with the correct
statement below. a. | bear market | f. | portfolio | b. | bull
market | g. | primary
market | c. | equities | h. | prospectus | d. | investment | i. | return | e. | money
market | j. | speculation |
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31.
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the act of redirecting resources from being consumed today so that they may
create benefits in the future
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32.
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a collection of financial assets
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33.
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the money an investor receives above and beyond the sum of money initially
invested
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34.
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market for selling financial assets that can only be redeemed by the original
holder
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35.
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claims of ownership in a corporation
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36.
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market in which money is lent for periods less than a year
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37.
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a steady rise in the stock market over a period of time
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38.
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the practice of making high-risk investments with borrowed money in hopes of
getting a big return
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