Investing Practice Questions

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1 Investing Practice Questions 1) When interest is calculated only on the principal amount of the investment, it is known as: a) straight interest b) simple interest c) compound interest d) calculated interest e) all the above 2) A publicly traded corporation: a) is traded on the stock market. b) offers shares to the public. c) is required to provide periodic financial statements. d) is run by a board of directors. e) all of the above. 3) Which of the following is the best example of a debt investment? a) shares in a company. b) government bonds. c) real estate holdings. d) antiques and collectibles. e) lines of credit. Explanation: A debt investment is where an investor loans money to a company or the government for a fixed period of time at a fixed interest rate. 4) A debenture is a type of: a) stock b) bond c) preferred stock d) dividend payment e) mutual fund Explanation: Debenture is the name of an unseured debt investment. 5) It is a good idea to borrow money in order to invest when: a) interest rates are rising and the S&P is falling. b) interest rates are falling and CPI is rising. c) interest rates are rising and the CPI is falling. d) interest rates are falling and the S&P is rising. e) interest rates are steady and the S&P is steady. Explanation: It is best to borrow money when interest rates are falling, so you won t be paying a high interest and invest when the S&P is rising so you can make a profit on your investment.

2 6) Which of the following is a benefit of an RRSP? a) Opportunity to save for your child s education. b) It can be cashed in at anytime without a financial penalty. c) you can receiving tax deduction d) you can receive annual dividends e) None of the above Explanation: By contributing money into an RRSP, you can receive a tax deduction on the amount of money you contributed into your RRSP. However, there is a limit to how much you can contribute into your RRSP. You will be required to pay additional tax on any excess contribution above your contribution limit. 7) When investing in a corporation, bondholders get their money back when a) the market demand decreases for the corporation s products b) there is a change of upper management in the corporation c) the bond matures or they sell it to another investor d) the bond expires e) the corporation s profits increase by 20 % 8) When interest is expressed as a percentage of the original investment, it is called a) rate of return b) yield c) the loss rate d) Both (a) and (b) e) Both (b) and (c) 9) A pool of money from many investors that is set up and managed by an investment company to buy and sell securities of other corporations is called a(n) a) investment fund b) mutual fund c) equity fund d) balanced fund e) combination fund 10) The simple interest amount, where the principal is $500.00, the rate is 5.5 percent, and the time is one year, would be a) $25.00 b) $27.50 c) $7.50 d) $72.50 e) $20.50 Explanation: Interest amount=$ 500*0.055 =$27.50

3 11) A portion of a corporation's profit that is paid to shareholders is called a. a) capital gain b) net profit c) stock d) bond e) dividend 12) Which of the following statements is correct? a) It is always better to invest in stocks than in bonds. b) The greater the risk, the greater the return. c) If you invest in corporate bonds, your money is guaranteed by the government. d) The greater the risk, the greater the potential for large returns or losses. e) Investing in common shares is safer than investing in preferred shares. 13) Adam deposited $2 500 into a 30 day term deposit that has an annual interest rate of 6%. At the end of the 30 days, Adam will earn approximately in interest. a) $13.22 b) $30.00 c) $33.12 d) $12.33 e) $ Explanation: Interest= $2,500*0.06*(30/365) = ) Nadia's parents invest $5,000 in her name when she is 15 years old. The investment earns an annual rate of return of 9%. How old will Nadia be when her investment is worth $20,000? a) 20 years old b) 23 years old c) 28 years old d) 31 years old e) 35 years old Explanation: The Rule of 72 is a rule that you use to find the number of years required to double your money at a given interest rate. Divide 72 by the interest rate. Amount Years 5, ,000 8 (72/9) 20,000 8 (72/9) Total 16 Nadia s Age= 15+16=31

4 15) Compound interest means: a) your money is managed by a fund manager b) you can only collect your interest when the time period is over c) you have put your money into a 90-day renewable term deposit d) you earn interest on interest and principal e) you earn, and are paid, interest every year 16) Which of the following is an advantage of preferred stock over common stock? a) preferred shareholders get a vote for the Board of Directors b) preferred shareholders are paid first if a company makes a profit c) preferred stock always has a greater yield d) preferred stock is more liquid e) preferred stock dividends are never fixed 17) If a corporation earns a profit of $200,000, and $50,000 is to be distributed to the holders of 500 shares, the owner of one share will receive a dividend of a) $10 b) $15 c) $40 d) $100 e) $400 Explanation: Dividend=$50,000/500 = $100 18) Which of the following is a potential benefit of investing in stocks and not mutual funds? a) Diversification b) Economies of scale c) Access to professional management d) Liquidity e) Higher returns Explanation: Stocks normally provides higher returns than mutual funds. However, there are mutual funds that have been beating the market (provide higher returns than stocks) 19) Consider The Business Cycle. Pick the true statement. a) A Depression always follows a Recession. b) The Trough phase is typically followed by a Recession. c) The Recovery phase sees existing stock levels depleted, forcing businesses to increase production. d) A smart business person would begin increasing production during the beginning of a Recession. e) A business cycle is always between 8 and 10 years.

5 Explanation: 20) Tyler invested $500 at 4% interest. Tyler has approached you to figure out how long it would take to double his money. The answer would be. a) 18 years b) 288 years c) 28.8 years d) 20 years e) 8 years Explanation: Use the rule of 72: 72/4= 18 years 21) Which of the following statements about savings plans for wage earners is true? a) You pay income tax on RRSP contributions until you withdraw the funds b) Term deposits offer a higher rate of interest than GICs. c) With term deposits, usually, the shorter the term, the higher the rate of interest d) A savings account is not suitable for those who want to avoid risk e) People without a pension plan can make larger RRSP contributions than those with a pension 22) he savings plan in which you deposit a fixed sum of money for a specific length of time, at a fixed rate of interest is called a: a) guaranteed investment certificate (GIC) b) registered retirement savings plan (RRSP) c) common stock d) mutual fund e) collectible

6 23) If $8, is compounded annually for 6 years at 5% interest, approximately how much would you have at the end of year 6? a) $10, b) $50, c) $32, d) $10, e) $10, Explanation: Let x be the amount you will receive at the end of year 6 x=8,000*(1+0.05)^6 x=10, ) When investing, some investors spread their money over several investments in order to reduce risk. This is known as. a) Buying on margin b) diversifying c) riding the yield curve d) generating a rate of return e) paying capital gains 25) Which of the following has the most potential for capital gains? a) real estate b) Canada Savings Bonds c) a savings account d) a one year term deposit e) a five year term deposit Explanation: Real estate is the only one that has the most potential for capital gains because the other options have no possibility of earning capital gains. 26) Why would you choose to put your money in a GIC versus a savings account? a) The GIC is more liquid than a savings account b) The GIC has a greater return than a savings account c) The GIC is more risky than owning stock d) all of the above e) none of the above Explanation: GIC is an investment that offers a guaranteed rate of return over a fixed period of time. Typically GIC interest rates are higher than a savings account, so you will receive a higher return from a GIC.

7 27) The simple interest amount, where the principal is $1,500.00, the rate is 5.5 percent, and the time is one year, would be a) $75.00 b) $82.50 c) $21.50 d) $ e) $61.50 Explanation: Interest amount= $1,500*0.055 =$ ) Given an economic forecast of low worldwide growth leading to declining demand for commodities, which of the following investment strategies would you recommend for a typical Canadian investor? a) Purchase a Canadian Equity mutual fund b) Invest all of your assets in an Oil and Gas stock c) Purchase a Canadian Fixed Income mutual fund d) Convert all of assets into a commodity based currency e) Take a trip to Las Vegas and play the slot machines Explanation: The question mentioned declining demands for commodities therefore it is not wise to invest into commodities. Therefore it is best to purchase a Canadian Fixed Income mutual fund because of its stability. 29) Historically, the best performing asset class in North America over long periods of time has been? a) Bonds b) T-bills c) Stocks d) Real Estate e) Gold 30) A term deposit is similar to a guaranteed investment certificate in that a) Both are savings plans b) Both accept money for a fixed period of time c) Both pay a fixed rate of interest d) All of the above e) None of the above Explanation: A term deposit is similar to a GIC in terms of both being held at a financial institution for a fixed term. In addition, they both are short-term investments and have a fixed rate of interest rate.

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