Investment (Investor Knowledge)


Which kind of bond is the most secure?

Correct! Wrong!

The federal government issues "treasuries." Unlike corporate or municipal bonds, they are backed by the US government's "full faith and credit," which ensures that interest payments are always made and bonds are redeemed at maturity.

In general, higher-risk investments produce higher returns over time than lower-risk investments.

Correct! Wrong!

Over time, the stock and bond markets tend to reward risk-taking. The risk-reward tradeoff is what it's called. However, high-risk investments like small-company stocks can be exceedingly volatile in the near run. The less inclined you are to take that risk, the more you should focus on investments like short-term bonds, which provide a consistent return with less volatility.

Which of the following institutions protects you against stock market losses?

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When you buy stocks, you accept the risk that the value of your investment may fall as well as gain. Securities regulators like FINRA and the SEC are in charge of enforcing securities laws and regulations and punishing those who break them. When an FDIC-regulated bank fails, the FDIC covers checking, savings, and other deposit accounts. The Securities Investor Protection Corporation (SIPC) is tasked with returning monies and securities to investors in the event that the brokerage firm holding these assets goes bankrupt.

Which of the following best explains why municipal bonds have lower yields than other government securities?

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Municipal bond dividend payments are normally tax-free, even if they have lower yields than other government bonds, so their after-tax rates of return are appealing to investors in higher tax bands.

Which definition of "selling short" is the most accurate?

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Short selling entails borrowing stock from a broker via a margin account and selling it with the knowledge that it will be purchased and returned to the broker later. If the stock drops in value, as the short seller hopes, the investor would profit because the stock borrowed and sold was worth more than the stock later acquired and returned to the broker. If the stock's value rises, the investor must pay the difference to the broker to make good on the shares owing to him.

A Section 529 Plan is a tax-advantaged approach to save for the:

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Portion 529 plans, named after the section of the federal tax code that controls them, are tax-advantaged programs that assist families in saving for college.

If you invest in a company's stock...

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Stocks are called "equities" because each stock share represents a small fraction of a company's ownership, entitles the shareholder to vote in the election of directors and other items discussed at shareholder meetings or via proxy.

Bond prices generally _________ as interest rates fall.

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The cardinal law of bonds is that bond prices rise when interest rates decrease, and bond prices fall when interest rates rise. This is because as interest rates rise, newer bonds come to market that offer higher interest yields than older bonds already in investors' hands, reducing the value of older bonds.

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