Financial Literacy: Investing: Stocks, Bonds, and Mutual Funds Worksheet

Question 1

A share of stock represents ownership in a company. Explain one way an investor can make money from owning a stock and one risk of owning a stock.

Accepted Answer

An investor can make money if the stock price increases and they sell it for more than they paid, or if the company pays dividends. A risk is that the stock price can decrease, causing the investor to lose money.

Question 2

You buy 20 shares of a stock at $15 per share. One year later, you sell all the shares for $18 per share. What is your total capital gain, not including fees or taxes?

Accepted Answer

The total cost was 20 × $15 = $300. The selling value was 20 × $18 = $360. The total capital gain was $360 - $300 = $60.

Question 3

A company pays a dividend of $0.75 per share. You own 40 shares. How much dividend income do you receive?

Accepted Answer

You receive 40 × $0.75 = $30 in dividend income.

Question 4

A bond has a face value of $1,000 and pays a 5% annual coupon rate. How much interest does the bond pay in one year?

Accepted Answer

The bond pays 5% of $1,000 each year. The annual interest payment is 0.05 × $1,000 = $50.

Question 5

Compare stocks and bonds. Which one usually has higher potential return, and which one is usually considered more stable? Explain why.

Accepted Answer

Stocks usually have higher potential return because shareholders can benefit from company growth and rising stock prices. Bonds are usually more stable because they are loans with scheduled interest payments, although they still have risk.

Question 6

A mutual fund owns shares of 100 different companies. Explain how this can reduce risk compared with buying stock in only one company.

Accepted Answer

A mutual fund can reduce risk through diversification. If one company performs poorly, the other companies in the fund may help balance the loss, so the investor is not depending on only one company.

Question 7

A mutual fund earns a 7% return in a year before fees. The fund charges an expense ratio of 1%. What is the approximate return after fees?

Accepted Answer

The approximate return after fees is 7% - 1% = 6%. Fees reduce the investor's return.

Question 8

You invest $2,000 in a mutual fund. At the end of the year, the investment is worth $2,140. What is the percentage return for the year?

Accepted Answer

The gain was $2,140 - $2,000 = $140. The percentage return was $140 ÷ $2,000 = 0.07, or 7%.

Question 9

Look at this portfolio: 70% stocks, 25% bonds, and 5% cash. Describe whether this portfolio is likely to be more aggressive or more conservative, and explain your reasoning.

Accepted Answer

This portfolio is likely more aggressive because it has a large percentage in stocks. Stocks usually have more risk and higher potential return than bonds or cash.

Question 10

A bond pays fixed interest, but inflation rises sharply. Explain why inflation can reduce the real value of the bond's interest payments.

Accepted Answer

Inflation reduces purchasing power. If the bond pays a fixed amount of interest while prices rise, the interest payments buy less than they did before.

Question 11

An investor buys a bond for $950 and later receives $1,000 when the bond matures. The investor also receives $40 in interest while holding the bond. What is the total dollar return?

Accepted Answer

The investor gained $50 from the bond price because $1,000 - $950 = $50. Adding $40 in interest gives a total dollar return of $90.

Question 12

A student says, "Mutual funds have no risk because they own many investments." Explain why this statement is incorrect.

Accepted Answer

This statement is incorrect because diversification can reduce risk, but it does not remove all risk. A mutual fund can still lose value if the investments it owns decrease in price.

Question 13

A stock price changes from $50 to $45 in one week, then from $45 to $54 the next week. What does this example show about stock price volatility?

Accepted Answer

This example shows that stock prices can be volatile because they may rise and fall over short periods. The price first decreased by $5 and then increased by $9.

Question 14

Choose the better investment for a person who needs the money in 3 months: a stock mutual fund or a savings account. Explain your choice.

Accepted Answer

A savings account is usually the better choice for money needed in 3 months because it is more stable and liquid. A stock mutual fund could lose value in the short term.

Question 15

The chart shows three investments: Investment A has high risk and high potential return, Investment B has medium risk and medium potential return, and Investment C has low risk and low potential return. Match each one to the most likely category: stock, bond, or savings account.

Accepted Answer

Investment A is most likely a stock because stocks often have higher risk and higher potential return. Investment B is most likely a bond because bonds often have moderate risk and return. Investment C is most likely a savings account because savings accounts usually have low risk and low return.

Financial Literacy: Investing: Stocks, Bonds, and Mutual Funds

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