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Personal Investing - Final Exam

Terms in this set (102)

Which of the following is a strategy that you can used purchase a property if you do not have plus 20 percent on a property's mortgage?
Take out a private mortgage,
Take out a private mortgage, Dip into retirement savings, Postpone your purchase
What are some of the traits of a good real estate agent?
A good real estate agent should be honest and have good interpersonal skills with people and be able to keep up with the market
What are the qualities of a good negotiator?
Finding the value of the property and the owner before making the offer, Researching the facts and getting comparable sales data to support your price, Try to leave emotions out of purchase decisions
What is the major problem with selling real estate on your own?
You may not get as high a price as with an agent, You cannot list it in the MLS which only real estate agents can access, You could get sued for failing to disclose known defects on the property
What are the qualities of a successful small business owner?
A self-starter and someone that likes challenges, Someone that values independence and self-control, Someone that is willing to make financial sacrifices and live a reduced lifestyle before and during your early entrepreneurship years
What are one of the alternative routes to investing in a small business?
Investing in your career
What are the possible decisions you will have to make when purchasing an existing business?
Firing people who do not fit with your plans
When you write a plan for your business, what is one of the possible objectives to consider mentioned in the text?
Improving an industry or setting the industry standard
Which of the following is the advantage of real estate investing?
Limited supply
Which of the following statement is correct?
Real estate investors are rewarded by capital appreciation of their property value or by income generated by their properties, Homeowners usually use up the house as a place to live, Typically the appreciation of houses is about local inflation
Which of the following statement is incorrect?
Sometimes the owner of the vacant land will sublet to a farmer to get a high reward
Which of the following of the statement about rental property is correct?
The biggest problem for rental properties is dealing with renters
What should you do before you leave your job before you start your own business?
Secure a long-term disability policy
What is the term that describes making do with a small amount of capital and spending only what you can afford?
Bootstrapping
What are the reasons to consider incorporation of your business?
Liability protection, Variety of insurance and related benefits, Incorporation can potentially save a business money in taxes
How would a starting business find customers and retain them?
Through putting together, a mailing list of people you know and draft an overview of what the business offers, Provide solid customer service
How can you pay lower taxes (legally)?
Take all the deduction at once or spread it around, Take advantage of auto deductions, Deduct travel, meal, and entertainment expenses
Which of the following are the pros of purchasing a small business?
You avoid the hassles of startups, You reduce the risk that you would take on
Which of the following is a prerequisite to buying a business?
Business Experience, Financial Recourses
What are some recourses that you can use to buy a business?
Specialty published magazines and newsletters, Speak with business advisors, Business brokers
What are the disadvantages of purchasing a franchise?
The franchisee may be not like following the established rules, The franchise may be unproven
What is the due diligence that you should do when determining a business's value?
Calculate how many times the companies' earnings that the business sold for when looking at comparable businesses, Look at the book value of the company's assets
Today, you purchased a BMW for $40,000. You didn't have all the cash up front so you decided to finance the purchase. The bank offered you a 3% annual interest rate payable over 7 years. How much is your annual payment?
First, decide if you are looking for a single sum or an annuity (equal payment over time). In this case, we are making an equal payment over time or an annuity. Therefore, we will use either table A-2 (PV-annuity) or table A-4 (FV-annuity).

Now, we must identify if are looking for an amount in the future or today. In this case, we are borrowing money to buy a car today. Therefore, table A-2 (PV annuity) is the correct table to use.

n = 7 i = 3 table factor is 6.2303
amount borrowed/table factor = annual payment
40,000/6.2303 = 6,420.24
One of your parents died and left you a life insurance policy of $25,000. This policy is not taxable. You would like to put the money aside to help your child with college expenses. Today, your child is 8 years old and will start college 10 years from today. If you can earn 4% annually on your investment then how much will be in the account after the 10 years?
First, decide if you are looking for a single sum or an annuity (equal payment over time). In this case, we are making a one time deposit into the account. Therefore, we will use either table A-1 (PV-single) or table A-3 (FV-single).

Now, we must identify if are looking for an amount in the future or today. In this case, we are saving for a future expense (college). Therefore, table A-3 (FV single) is the correct table to use.

n =10 i = 4% table factor 1.4802
investment amount x table factor = how much we will have in the future
25,000 x 1.4802 = 37,005
You are looking to save $50,000 for a down payment on a house in 5 years. How much should you deposit into your account each year assuming you can earn 6% annually on your investment?
8,869.81
Today, you are 25 years old and you would like to retire in 40 years at age 65. You plan to contribute $5,500 per year into an IRA and believe that you can earn 10% annually. How much will you have in your IRA when you retire?
First, decide if you are looking for a single sum or an annuity (equal payment over time). In this case, we are making an equal payment over time or an annuity. Therefore, we will use either table A-2 (PV-annuity) or table A-4 (FV-annuity).

Now, we must identify if are looking for an amount in the future or today. In this case, we are saving each year which will be used in the future when we decide to retire. Therefore, table A-4 (FV annuity) is the correct table to use.

n = 40 i = 10 table factor is 442.59
payment x table factor = amount we will have in the future
5,500 x 442.59 = 2,434,245
In four years, you would like to take a two week vacation across Europe with your family. You estimate that the trip will cost $15,000 four years from now. If you can earn 2% annually on your investment then how much should you deposit into your account today? (assumes that you have enough cash to save for the entire vacation up front)
First, decide if you are looking for a single sum or an annuity (equal payment over time). In this case, we are a one time deposit. Therefore, we will use either table A-1 (PV-single) or table A-3 (FV-single).

Now, we must identify if are looking for an amount in the future or today. In this case, we know what we need in the future. You are deciding how much to save today. Therefore, table A-1 (PV single) is the correct table to use.

n = 4 i = 2 table factor is .9238
amount needed in the future x table factor = amount we must save today
15,000 x .9238 = 13,857
What is the reason that investing has become a hot topic with media outlets?
Communications options are expanding, The 2000s were a rough decade combine with the panic brought by performance of stocks, Economic change breeds uncertainty
What are some of the problems that advertising can cause within media outlets?
Advertisers wield influence over content
How can you know what information is good that comes from the "experts"?
Through investigating their qualifications and philosophy, Investigating the individual's connections to the picks they are advertising
When watching an up to the minute update on the financial markets, what does the author say that many of the programs bring to viewers with their news?
Noise rather than constructive information
What are the problems with published investment articles?
Highlighting hype and horror, Quoting experts who do not know their stuff
What are some of the problems with radio and television programs?
The media has an inability to distinguish between and good and bad experts, Much of the reporting revolves around hype and information overload
What should you do when dealing with investment newsletters and individuals that claim to predict market events?
Be highly suspicious of investment performance claims and do not believe the claim unless a reputable accounting firm has audited it
According to the Hulbert Financial Digest, how have some of the worst investment newsletters performed during the 1980s and 1990s when financial markets performed extremely well?
Underperformed the market average by dozens of percentage points and have caused readers to lose money
What is the relationship between risk and return?
The greater the potential return, the greater the risk
Which of the following statement is correct?
The purpose of regulating the securities markets is to provide for adequate and accurate disclosure of financial information
You bought a stock for $42 and you received dividends of $2. The stock is now selling for $50. What is your dollar return?
$10
You bought a stock for $42 and you received dividends of $2. The stock is now selling for $50.What is your percentage return?
Dividend yield = 4.76%
Which of the following statement is correct?
Stock prices are fairly priced, In the efficient markets investors can earn a positive return, Market efficiency cannot protect you from wrong choices if you do not diversify
Which of the following statement is correct?
Biggest advantage to a broker is that they follow the market everyday and do more research than the average person, There are 3 types of brokers: Full-service; discount and online, Stockbrokers want you to do well because if you are losing money you may go somewhere else
According to the text, what do the worst books steer readers towards?
Purchasing an investment product that the author has a vested interest in selling to readers
What should a reader do if claims of high returns made by an author are unaudited?
Do not believe it
What is the book recommended by the text when it comes to investment advice?
Stocks for the Long Run: The definitive guide to Financial Market Returns and Long-Term Investment Strategies, A Random Walk Down Wall Street
What book is recommended by the author that discusses the best mutual funds available and provides sample portfolios?
Mutual funds for dummies
What are the benefits of investment tracking software?
Software can help organize your holdings, Gives users briefly access, Gives overall return data
What is the best software for researching individuals' securities?
Value line investment survey
What is one thing you should research before you trust the information provided by a website?
Discover the identity of who is running the website and what their agenda is
What website mentioned is run by an investment company that offers useful education materials as well as details about the company's family of funds?
Vanguard.com
Assume you have a 5-year mortgage. You borrow $10,000 for a car and plan to make monthly payments over 5 years. We have been quoted an interest rate of 4.5% annually. Using excel to calculate and answer the following questions.

Answers should be an exact match. Please round final answers to 2 decimal places for calculations. What's your monthly payment, in dollars?
186.43
How much of the payment goes to pay the principle and interest for the second year? Principle $ [A], Interest $ [B]
A = 149.49, B = 36.94
How much we pay to the bank in interest, in dollars?
186.43 x 60 = $11,185.80 total amount paid to the bank, subtract the original $10,000, difference is $1,185.81
If the interest rate is 5.2%, how the monthly payment changes, in dollars?
189.63
If you pay the loan out over 3 years with 4% interest rate, what is your monthly payment, in dollars?
295.24
Will you save money to pay interest?
Determine how much money you will pay in interest for each loan
4%, 3 years, 10000 borrowed is a payment of $295.24 per month
295.24 x 36 payments = 10,628.64 subtract 10000 borrowed therefore paid the difference in interest 628.64
other loan 5.2%, 5 years, 10000 borrowed payment is $189.63 per month
189.63 x 60 months of payments = 11,377.80 subtract 10000 borrowed therefore paid the difference in interest 1,377.80
now subtract the interest 1,377.80 - 628.64 = 749.16

Yes, 749.16
Is there any age limit for ROTH IRA?
Yes, 72
Which of the following statement is correct?
If you use traditional IRA, the amount when you make withdrawal is taxable
Assume you plan for your investment to earn 10% annually and you deposit $5,000 each year for the next 40 years. How much will you have if you invest in a traditional IRA?
2,212,950
Assume you plan for your investment to earn 15% annually and you deposit $5,000 each year for the next 40 years. You are in a federal tax bracket at 22% and 4% for Ohio. What is the equivalent amount you will invest if in a ROTH IRA?
22% fed + 4% state = 26% tax savings if invested into a traditional IRA

If you invest into a ROTH then you pay the taxes up front. $5,000 x 26% = 1,300 in taxes therefore 5,000 - 1,300 = 3,700 what you acutally invest
At retirement, how much money will be in your ROTH IRA account assuming you invest 3,700 each year earning 10% for 40 years?
1,637,583
Which of the following statement is not correct about the concept of mutual funds?
Mutual funds cannot use the pooled funds to invest in other mutual funds
What is the advantage of investing in mutual funds?
The diversification greatly reduces random risk
Which fund doesn't have income objectives?
Value funds
Which of the following statements is not correct?
Funds cannot also focus solely on large-, medium-, small-, and very small-sized firms
How to select the funds you should invest?
Obtain investment information and advice, Create a portfolio of funds in which to invest, Choose no-load funds with low management fees
Why mutual fund is primarily the best way for us to invest?
Most of us cannot afford to own large stock positions in one company, We need to protect our money through diversification, Mutual funds are offered by all employers that offer a 401k
what is the criteria for picking a good mutual fund?
level of the expenses the fund charges to the investors
Which of the following statement about efficient market is not correct?
everyone comes to the same conclusion about those facts
Definition-actively managed funds is the use of a human manager or a group of managers
True
If only 10% of all mutual fund managers beat the market index, then that would suggest that the market has some inefficiency
True
One great benefit to an index fund is they have very low expenses
True
If you want to invest in small companies then it is very possible that an actively managed fund can help you earn a greater return, because there are many individuals looking at the financial performance of the little companies
False
Which of the following statements about mutual fund expense is correct?
Operating expenses cover expenses to pay for employees, mailings, maintain a website, etc.
which of the following fund is common fund in 401k?
bonds, Equity-fund, Target-Date funds
Which of the following is not advantage of bonds?
Legal obligation to pay interest
Which of the following statement is correct?
The maturity date is when the loan ends and the bind issuer repays the principal to the bondholder
Which of the following is true for bond issue characteristics?
If sold before maturity, bonds can also generate capital gains/losses
US treasury obligation with maturity of more than 10 years that pays interest annually
False
Municipal bonds issued by government institutions
True
Corporate bonds is taxable
True
US treasury bonds exempt from all taxes
False
Zero coupon bonds pay no annual interest and it sold at a premium to the par value
False
Convertible bond can be converted into a certain number of shares of issuing company's common stock
True
The higher the rating, the lower the risk of default and the lower the coupon rate which will be offered
True
What is one thing that inexperienced or nervous investors may be tempted to do during times of uncertainty?
Sell their stock and bail
What is a mistake made by investors if they believe they can receive high returns just through following a simple stock picking system?
Overconfidence in their abilities
When it comes to making your money grow what does the author suggest you invest in to beat the rate of inflation?
Stocks, Real estate, Small businesses
What does the author suggest you do to avoid impulse trading decisions?
Restrict your diet of financial information and advice
Which of the following statements about stock investment is correct?
Each share represents equity or part ownership in the company, Stock ownership is a residual
What's the advantage of investing in common stock?
Uncertainty of dividends
Which of the following statements about stock concepts is correct?
Usually one share equals to one voting right
There are 200 share of XYZ stock selling at $60, if 3 for 2 stock split was declared, the stock price will be $24 per share.
False
What's the key measure of performance?
Net profit margin, Return on Equity, Earning Per Share, Beta
Every stock option is not designed by?
Spot price
Options and futures are derived from and dependent upon another type of investment
True
Options and futures are not very risky: big price changes in the underlying asset lead to small changes in the derivative asset
False
The volatile nature of derivative in investments is due to leverage which will assuredly magnify your gains or losses
True
Stock option is connected to something, such as a listed stock, an exchange index, futures contracts, or real estate
True
A European option can be exercised before expiration date
False
Owning a call option gives the right (but not the obligation) to sell a stock at the strike price any time before the option expires
False
Which of the following statement about options is correct?
People can sell options without owned them before which is called naked call writing
Which of the following statement about futures is incorrect?
There are four types of futures: commodity futures, foreign currency futures, stock price futures, interest rate futures
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