Course Introduction
Personal Finance Exam Practice Tests
Personal Finance introduces students to the fundamental principles and strategies for managing individual and household finances effectively. Topics covered include budgeting, saving, investing, credit and debt management, insurance, taxes, retirement planning, and financial decision-making. Through real-world examples and practical exercises, students learn how to set financial goals, make informed financial choices, and develop lifelong habits that promote financial well-being and security. The course empowers learners to navigate the complexities of personal finance and prepares them to achieve financial independence and stability in a rapidly changing economic landscape.
Recommended Textbook
Investments An Introduction 9th Edition by Herbert
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Page 2
B. Mayo
Chapter 1: An Introduction to Investments
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29 Verified Questions
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Sample Questions
Q1) Risk is the uncertainty that the anticipated return will not be realized.
A)True
B)False
Answer: True
Q2) Sources of risk to the investor include
1)loss of income when funds are reinvested
2)fluctuations in security markets
3)the financing decisions of the firm
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Answer: D
Q3) Unsystematic risk
A) is increased through diversification
B) is reduced when markets fluctuate less
C) is affected by the nature of how a firm finances its operations
D) increases during periods of volatile interest rates
Answer: C
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Page 3
Chapter 2: The Creation of Financial Assets
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Sample Questions
Q1) Financial intermediaries
1)transfer funds from borrowers to savers
2)create claims on themselves
3)transfer funds from savers to borrowers
4)create claims on lenders
A)1 and 2
B)1 and 4
C)2 and 3
D)only 3
Answer: C
Q2) The shares of money market mutual funds are insured by the federal government up to $100,000.
A)True
B)False
Answer: False
Q3) Treasury bills have no risk of default but risk of loss of interest payments.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Securities Markets
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) Inside information
A) is obtained from inside brokerage firms
B) is reported in a firm's financial statements
C) must be disclosed to the SEC
D) may not be legally used to obtain security profits
Answer: D
Q2) The margin requirement sets the maximum cash investment the individual investor must make.
A)True
B)False
Answer: False
Q3) The cost of investing includes
1)commissions
2)the spread
3)dividends
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Answer: A
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Chapter 4: The Time Value of Money
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Sample Questions
Q1) The future value of an annuity is
1)larger the higher the rate of interest
2)smaller the higher the rate of interest
3)larger the greater the number of years
4)smaller the greater the number of years
A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4
Q2) The present value of a dollar
1)increases as the interest rate increases
2)decreases as the interest rate increases
3)increases as the time period increases
4)decreases as the time period increases
A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4
Q3) A homeowner has a ten-year home-improvement loan for $36,875.What are the annual payments required by the loan if the annual rate of interest is 10 percent?
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Chapter 5: The Tax Environment
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Sample Questions
Q1) With a Roth IRA,the individual
A) may deduct the annual contributions
B) earns tax-free income
C) defers taxes
D) avoids estate taxes
Q2) The traditional IRA is
A) a tax-deferred retirement account for individuals not covered by a corporate pension plan
B) a taxable retirement account for individuals not covered by a corporate pension plan
C) a means to generate tax-free income
D) a means to increase current income
Q3) Net short-term capital losses are used to offset
A) dividend income
B) long-term capital gains
C) 401(k) contributions
D) tax credits
Q4) Capital losses may not be used to offset capital gains.
A)True
B)False
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Chapter 6: Risk and Portfolio Management
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Sample Questions
Q1) The numerical value of beta for the market equals 1.
A)True
B)False
Q2) Diversification reduces reinvestment rate risk.
A)True
B)False
Q3) In a world of certainty,there would be no risk.
A)True
B)False
Q4) The "efficient frontier" relates all the combinations of risk and return that represent the same level of satisfaction.
A)True
B)False
Q5) A portfolio's beta coefficient tends to be stable over time.
A)True
B)False
Q6) A diversified portfolio requires the securities of at least fifty firms.
A)True
B)False
Page 8
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Chapter 7: Investment Companies: Mutual Funds
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Sample Questions
Q1) Mutual fund A earned 10 percent while B earned 8 percent.The standard deviations of the returns were 10 percent and 7 percent,respectively.According to the Sharpe ratio,which fund performed better?
Q2) Empirical studies of returns earned by mutual funds suggest they consistently outperform the market.
A)True
B)False
Q3) A high beta coefficient for a mutual fund is desirable if the investor is seeking a conservative investment.
A)True
B)False
Q4) Index funds tend to track
A) the stock market as a whole
B) the bond market
C) a specific measure of the market
D) the return on other index funds
Q5) The net asset value of a mutual fund rises when it distributes capital gains.
A)True
B)False
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Chapter 8: Closed-End Investment Companies
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Sample Questions
Q1) Distributions from an investment company may include earnings and capital gains.
A)True
B)False
Q2) Exchange-traded funds
A) redeem their shares
B) only buy exchangeable securities
C) are bought and sold in secondary markets
D) cannot be sold short
Q3) If a closed-end investment company is selling for a discount
A) its price exceeds the net asset value
B) its price is less than the net asset value
C) dividend income exceeds capital gains
D) capital gains exceed dividend income
Q4) The net asset value of shares in a closed-end investment company is $36.An investor buys the shares for $34 in the secondary market.The company distributes $1,and after one year,the net asset rises to $42.The investor sells the shares for $44 in the secondary market.
a.What is the discount?
b.What is the percentage return on the investment?
Page 10
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Chapter 9: The Valuation of Common Stock
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Sample Questions
Q1) An increase in the risk-free rate will tend to decrease stock prices.
A)True
B)False
Q2) According to the dividend-growth model,the valuation of common stock depends on
1)the firm's dividends
2)investors' required rate of return
3)the prior year's dividends
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q3) Most stockholders of publicly held stock have pre-emptive rights.
A)True
B)False
Q4) Since many start-up firms operate at a loss,a financial analyst may use cash flow as an alternative to earnings.
A)True
B)False
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Chapter 10: Investment Returns and Aggregate Measures
of Stock Markets
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Sample Questions
Q1) The Standard & Poor's 500 stock index illustrates
A) a value-weighted index
B) a simple average
C) a geometric index
D) an exponential index
Q2) Dollar-cost averaging is achieved by periodic,equal dollar investments.
A)True
B)False
Q3) Averaging down will prove to be profitable only if the price of the stock subsequently rises.
A)True
B)False
Q4) The Russell 1000 index
A) combines 1000 stocks and bonds
B) uses the 1000 largest Nasdaq stocks
C) is a broad measure of listed and Nasdaq stocks
D) is a broad-based measure of bonds
Q5) The realized return includes both dividends and price changes. A)True
B)False
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Chapter 11: Dividends: Past, present, and Future
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Sample Questions
Q1) Dividend reinvestment plans are a means to postpone federal income tax on dividends.
A)True
B)False
Q2) Regression analysis estimates the rate of growth in dividends by considering the starting and ending dividend paid by the firm.
A)True B)False
Q3) If a firm's dividend has grown from $1 to $2 in ten years,the annual rate of growth is 10 percent.
A)True
B)False
Q4) Historical growth rates are useful for stock valuation only to the extent they help forecast the future growth in dividends.
A)True B)False
Q5) Stock splits and stock dividends increase the earning capacity of the firm. A)True B)False
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Chapter 12: The Macroeconomic Environment for Investment Decisions
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Sample Questions
Q1) Deflation is a period of rising unemployment.
A)True
B)False
Q2) An increase in stock prices is a lagging indicator of economic activity.
A)True
B)False
Q3) The anticipation of inflation suggests that the investor should
A) buy bonds
B) anticipate higher interest rates
C) avoid real estate investments
D) sell stocks of gold companies
Q4) When the Federal Reserve seeks to contract the money supply,it may
A) sell securities and raise the target federal funds rate
B) sell securities and lower the target federal funds rate
C) buy securities and raise the target federal funds rate
D) buy securities and lower the target federal funds rate
Q5) Monetary and fiscal policy may affect security prices through their impact on earnings.
A)True
B)False
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Chapter 13: Analysis of Financial Statements
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Sample Questions
Q1) Owners of bonds would prefer
1)a debt ratio of 60 percent to a debt ratio of 40 percent
2)a debt ratio of 40 percent to a debt ratio of 60 percent
3)a times-interest-earned of 5.1 to a times-interest-earned of 3.9
4)a times-interest-earned of 3.9 to a times-interest-earned of 5.1
A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4
Q2) The statement of cash flow places emphasis on management's ability to retire debt.
A)True
B)False
Q3) Operating income is not affected by
A) depreciation
B) cost of goods sold
C) rent payments
D) interest earned
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Chapter 14: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) If a 200-day moving average equals the current market price of a stock,that suggests the stock's price will stagnate.
A)True
B)False
Q2) Technical analysts use financial statements as the basis for making investment decisions.
A)True
B)False
Q3) If technical analysis cannot be demonstrated to produce higher returns,that is evidence supporting efficient markets.
A)True
B)False
Q4) The Dow Theory considers price movements in the Dow Jones industrial and transportation averages.
A)True B)False
Q5) Behavioral finance asserts that emotional investing produces higher returns.
A)True
B)False
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Chapter 15: The Bond Market
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Sample Questions
Q1) Euro-bonds are denominated in dollars.
A)True
B)False
Q2) If a firm repurchases debt at a discount,its net income is increased.
A)True
B)False
Q3) The current yield and the yield to maturity are equal if the bond sells for par value.
A)True
B)False
Q4) A split coupon bond combines a zero coupon bond with a regular coupon bond.
A)True
B)False
Q5) As the length of time to maturity (i.e.,the term)of a bond increases,generally
A) the coupon rate rises
B) the coupon rate falls
C) the riskiness of the bond falls
D) the price of the bond rises
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Chapter 16: The Valuation of Fixed-Income Securities
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Sample Questions
Q1) Bonds that are callable often have a call penalty.
A)True
B)False
Q2) If a preferred stock pays an annual $4.50 dividend,what should be the price of the stock if comparable yields are 10 percent? What would be the loss if yields rose to 12 percent?
Q3) Fluctuations in yields is one means by which the economy allocates scarce credit.
A)True
B)False
Q4) Preferred stock generally pays
A) a variable dividend
B) a fixed dividend
C) a stock dividend
D) no dividend
Q5) If you purchase a $5 preferred stock for $40 a share,what is the current yield? If you anticipate that yields will decline to 10 percent,what will be the anticipated capital gain on this investment?
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Chapter 17: Government Securities
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Sample Questions
Q1) Sources of risk to investors who purchase federal government bonds include
1)reinvestment rate risk
2)risk of default
3)interest rate risk
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q2) Interest earned on series EE bonds is exempt from federal income taxation.
A)True
B)False
Q3) If an investor is in the 30 percent income tax bracket and can earn 6 percent on a corporate bond,then 4.1 percent on a municipal bond is attractive.
A)True
B)False
Q4) Municipal bonds are not registered with the SEC.
A)True
B)False
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Page 19
Chapter 18: Convertible Bonds and Convertible Preferred Stock
46
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Sample Questions
Q1) Convertible bonds tend to sell for a premium over their value as stock.
A)True
B)False
Q2) If interest rates rise,the value of a convertible bond as debt increases.
A)True
B)False
Q3) Convertible bonds are often subordinated to the firm's other debt.
A)True
B)False
Q4) Convertible bonds tend to pay more interest than comparable non-convertible bonds.
A)True
B)False
Q5) The premium paid over a convertible bond's value as debt tends to decline as the price of the stock rises.
A)True
B)False
B)False Page 20
Q6) A convertible bond may be converted at the firm's option into common stock. A)True
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Page 21
Chapter 19: An Introduction to Options
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Sample Questions
Q1) There is no secondary market for rights.
A)True
B)False
Q2) Call options offer buyers
A) potential leverage
B) liquidity
C) income
D) safety of principal
Q3) Warrants and calls do not have
A) an expiration date
B) a specified exercise price
C) the right to receive dividends
D) a strike price
Q4) While individuals can write call options,they can only buy put options.
A)True
B)False
Q5) If the price of an option to buy stock were to sell for less than its strike price,an opportunity for arbitrage exists.
A)True
B)False
Page 22
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Chapter 20: Option Valuation and Strategies
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Sample Questions
Q1) According to the Black/Scholes option valuation model,a call option's value increases if
A) stock prices increase and interest rates decrease
B) the time to expiration decreases and interest rates increase
C) the variability of the stock's return increases and stock prices increase
D) interest rates decrease and the variability of the stock's return increases
Q2) An investor buys a straddle in anticipation of stable stock prices.
A)True
B)False
Q3) According to put-call parity,if a stock is overvalued,the investor should sell the stock short,sell the put,buy the call,and buy the bond.
A)True
B)False
Q4) The investor owns 1,000 shares of stock but anticipates its price may decline.To reduce the risk of loss,how many call options must be sold if the hedge ratio is 0.7?
Q5) The protective call strategy is an illustration of a short position.
A)True
B)False
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Chapter 21: Commodity and Financial Futures
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Sample Questions
Q1) Investors can only buy futures,since these contracts cannot be sold.
A)True
B)False
Q2) Investing in futures is
A) investing in physical goods
B) entering into contracts for future delivery
C) executing contracts for prior delivery
D) selling a contract in anticipation of price increases
Q3) The amount of margin required to enter into a futures contract is at least 50 percent of the value of the contract.
A)True
B)False
Q4) When an investor sells a contract and subsequently offsets (closes)the position,the individual experiences neither losses nor profits.
A)True
B)False
Q5) Selling a commodity contract is a long position.
A)True
B)False
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Chapter 22: Investing in Foreign Securities
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Sample Questions
Q1) If a nation exports more goods than it imports,it has a surplus in the current account.
A)True
B)False
Q2) Foreign travel is recorded in the current account of the balance of payments.
A)True
B)False
Q3) The European Economic Monetary Union created the euro which is 1)iShares
2)international mutual funds
3)country closed-end investment companies
A) a European equities market
B) a common European currency
C) a European bond traded outside of Europe
D) a currency for clearing security trades
Q4) American investors may acquire shares in mutual funds that specialize in foreign investments.
A)True
B)False
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Page 25
Chapter 23: Investing in Nonfinancial Assets:
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Sample Questions
Q1) Hedge fund strategies may include buying one stock while shorting another.
A)True
B)False
Q2) Investors should specialize in a type of collectible in order to know what may appreciate in value.
A)True
B)False
Q3) The shares of hedge funds are registered with the SEC.
A)True
B)False
Q4) Who previously owned a painting may affect its value.
A)True
B)False
Q5) The value of a gold coin depends on its 1.rarity
2)gold content
3)tax advantages
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
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Chapter 24: Portfolio Planning and Management in an Efficient Market Context
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Sample Questions
Q1) One passive investment strategy suggests that the individual construct a portfolio consisting of index funds.
A)True
B)False
Q2) In an efficient securities market,the investor should earn,over a period of years,a return comparable to the amount of risk the individual bears.
A)True
B)False
Q3) An investor who wants to make passive investments would prefer
A) long-term federal corporate bonds
B) exchange traded funds
C) stocks in the Dow Jones industrial average
D) closed-end investment companies
Q4) An active portfolio strategy is premised on
A) the stock market being efficient
B) the stock market being inefficient
C) the investor's being able to obtain public information
D) the portfolio manager's access to corporate management
Page 27
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