Chap 002

Chapter 02 - Asset Classes and Financial Instruments

Chapter 02 Asset Classes and Financial Instruments Multiple Choice Questions

1. Which of the following is not a money market instrument A. !reasury "ill #. Commercial paper C. $referred stock %. #anker&s acceptance

2. !hirteen week !-"ill auctions are conducted ''''. A. daily #. weekly C. monthly %. (uarterly

). When computing the "ank discount yield you would use '''' days in the year. A. 2*0 #. )*0 C. )*+ %. )**

,. A dollar denominated deposit at a ondon "ank is called '''''. A. eurodollars #. I#/ C. fed funds %. "anker&s acceptance

+. oney market securities are sometimes referred to as cash e(uialent "ecause '''''. A. they are safe and marketa"le #. they are not li(uid C. they are high risk %. they are low denomination

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*. !he most actiely traded money market security is A. !reasury "ills #. #ankers& Acceptances C. Certificates of %eposit %. Common stock

3. '''''' oting of common stock gies minority shareholders the most representation on the "oard of directors. A. a4ority #. Cumulatie C. /ights %. $ro5y

6. An inestor in a !-"ill earns interest "y '''''''''. A. receiing interest payments eery 70 days #. receiing diidend payments eery )0 days C. conerting the !-"ill at maturity into a higher alued !-note %. "uying the "ill at a discount from the face alue receied at maturity

7. '''''' would not "e included in the 8AF8 inde5. A. Australia #. Canada C. France %. 9apan

10. ''''' is considered to "e an emerging market country. A. France #. :orway C. #ra;il %. Canada

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11. Which one of the following is a true statement A. %iidends on preferred stocks are ta5-deducti"le to indiidual inestors "ut not to corporate inestors #. Common diidends cannot "e paid if preferred diidends are in arrears on cumulatie preferred stock C. $referred stockholders hae oting power %. Inestors can sue managers for nonpayment of preferred diidends

12. !he "id price of a treasury "ill is '''''''''. A. the price at which the dealer in treasury "ills is willing to sell the "ill #. the price at which the dealer in treasury "ills is willing to "uy the "ill C. greater than the ask price of the treasury "ill e5pressed in dollar terms %. the price at which the inestor can "uy the treasury "ill

1). !he %. :ikkei

1,. %eposits of commercial "anks at the Federal /esere are called '''''. A. "ankers acceptances #. federal funds C. repurchase agreements %. time deposits

1+. Which of the following is not a true statement regarding municipal "onds A. A municipal "ond is a de"t o"ligation issued "y state or local goernments. g oernments. #. A municipal "ond is a de"t o"ligation issued "y the Federal
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1*. Which of the following is not a characteristic of a money market instrument A. i(uidity #. arketa"ility C. ow risk %. aturity greater than one year

13. An indiidual who goes short in a futures position A. commits to deliering the underlying commodity at contract maturity #. commits to purchasing the underlying commodity at contract maturity C. has the right to delier the underlying commodity at contract maturity %. has the right to purchase the underlying commodity at contract maturity

16. Which of the following is not a nickname for an agency associated with the mortgage markets A. Fannie ae #. Freddie ac C. =allie ae %.
17. Commercial paper is a short-term security issued "y '''''''''' ''''' ''''' to raise funds. A. the Federal /esere #. commercial "anks C. large well-known companies %. the :ew ?ork =tock 85change

20. !he ma5imum maturity on commercial paper is A. 230 days #. 160 days C. 70 days %. )0 days

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21. Which one of the following is a true statement regarding the %ow 9ones Industrial Aerage A. It is a alue-weighted aerage of )0 large industrial stocks #. It is a price-weighted aerage of )0 large industrial stocks C. It is a price-weighted aerage of 100 large stocks traded on the :ew ?ork =tock 85change %. It is a alue-weighted aerage of all stocks traded on the :ew ?ork =tock 85change

22. !reasury "ills are financial instruments issued "y '''''''''' to raise funds. A. commercial "anks #. the Federal
2). Which of the following are true statements a"out a"ou t !-"ills I. !-"ills typically sell in denominations of @10000 II. Income earned on !-"ills is e5empt from all Federal Fed eral ta5es III. Income earned on !-"ills is e5empt from state and local ta5es A. I only #. I and II only C. I and III only %. I II and III

2,. A "ond that has no collateral is called '''''''''. A. a calla"le "ond #. a de"enture C. a 4unk "ond %. a mortgage

2+. A '''''''''' gies its holder the right to sell an asset for a specified e5ercise price on or "efore a specified e5piration date. A. call option #. futures contract C. put option %. interest rate swap

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2*. A !-"ill (uote sheet has 70 day !-"ill (uotes with a ,.72 "id and a ,.6* ask. If the "ill has a @10000 face alue an inestor could "uy this "ill for A. @10000.00 #. @7636.+0 C. @7633.00 %. @7660.1*

23. Which one of the following is a true statement regarding corporate "onds A. A corporate calla"le "ond gies its holder the right to e5change it for a specified num"er of the company&s common shares #. A corporate de"enture is a secured "ond C. A corporate conerti"le "ond gies its holder the right to e5change it for a specified num"er of the company&s common shares %. Bolders of corporate "onds hae oting rights in the company

26. !he yield on ta5-e5empt "onds is ''''''. A. usually less than +0 of the yield on ta5a"le "onds #. normally a"out 70 of the yield on ta5a"le "onds C. greater than the yield on ta5a"le "onds %. less than the yield on ta5a"le "onds

27. '''''''''' is not a money market instrument. A. A certificate of deposit #. A treasury "ill C. A treasury "ond %. Commercial paper

)0. An inestor "uys a !-"ill at a "ank discount (uote of ,.60 with 1+0 days to maturity. !he inestor&s actual annual rate of return on this inestment was '''''. A. ,.60 #. ,.73 C. +.,3 %. +.3,

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)1. !he D.E. stock inde5 is the '''''''''. A. %A> #. F!=8 C. <=8 %. !=8

)2. A '''''''''' gies its holder the right to "uy an asset for a specified e5ercise price on or "efore a specified e5piration date. A. call option #. futures contract C. put option %. interest rate swap

)). Which one of the following proides the "est e5ample of securiti;ation A. conerti"le "ond #. call option C. mortgage pass-through security %. preferred stock

),. Which of the following indices are market-alue weighted I. !he :?=8 Composite II. !he =$ +00 III. !he Wilshire +000 A. I and II only #. II and III only C. I and III only %. I II and III

)+. !he interest rate charged "y large "anks in ondon to lend money among themseles is called '''''''''. A. the prime rate #. the discount rate C. the federal funds rate %. I#/

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)*. A firm that has large securities holdings that wishes to raise money for a short length of time may "e a"le to find the cheapest financing from which of the following A. /eerse repurchase agreement #. #anker&s acceptance C. Commercial paper %. /epurchase agreement

)3. Currently the %ow 9ones Industrial Aerage is computed "y '''''''''. A. adding the prices of )0 large "lue-chip stocks and diiding "y )0 #. calculating the total market alue of o f the )0 firms in the inde5 and an d diiding "y )0 C. measuring the current total market alue of o f the )0 stocks in the inde5 relatie to the total alue on the preious day %. adding the prices of )0 large "lue-chip stocks and diiding "y a diisor ad4usted for stock splits and large stock diidends

)6. An inestor purchases one municipal and one corporate "ond that pay rates of return of +.00 and *.,0 respectiely. If the inestor is in the 1+ ta5 "racket his after ta5 rates of return on the municipal and corporate "onds would "e respectiely A. +.00 and *.,0 #. +.00 and +.,, C. ,.2+ and *.,0 %. +.3+ and +.,,

)7. If a treasury note has a "id price of @77*.2+ the (uoted "id price in the Wall =treet 9ournal would "e '''''''''. A. 77G2+ #. 77G*) C. 77G20 %. 77G06

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,0. !I$= are ''''''. A. !reasury "onds that pay a aria"le rate of interest #. D.E. "onds that protect inestors from default risk C. securities that trade on the !oronto stock inde5 %. !reasury "onds that protect inestors from inflation

,1. !he price (uotations of treasury "onds in the Wall =treet 9ournal show a "id price of 102G12 and an ask price of 102G1,. If you sold the "ond you e5pect to receie '''''''''. A. @102,.3+ #. @102,.)6 C. @102).3+ %. @1022.+0

,2. !he %ow 9ones Industrial Aerage is '''''''''. A. a price weighted aerage #. a alue weight and aerage C. an e(ually weighted aerage %. an unweighted aerage

,). Inestors will earn higher rates of returns on !I$= than e(uialent default risk standard "onds if '''''''''''''''. A. inflation is lower than anticipated oer the inestment period #. inflation is higher than anticipated oer the inestment period C. the D.=. dollar increases in alue against the euro %. the spread "etween commercial paper pa per and !reasury securities remains low

,,. $referred stock is like long-term de"t in that '''''''''''. A. it gies the holder oting power regarding the firm&s management #. it promises to pay to its holder a fi5ed stream of income each year C. the preferred diidend is a ta5-deducti"le e5pense for the firm %. in the eent of "ankruptcy preferred stock has e(ual status with de"t

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,+. Which of the following does not no t appro5imate the performance of a "uy "u y and hold portfolio strategy A. An e(ually weighted inde5 #. A price weighted inde5 C. A alue weighted inde5 %. Weights are not a factor in this situation

,*. In calculating the %ow 9ones Industrial Aerage the ad4ustment for a stock split occurs '''''''''. A. automatically #. "y ad4usting the diisor C. "y ad4usting the numerator %. "y ad4usting the market alue weights

,3. If the market prices of the )0 ) 0 stocks in the %ow 9ones Industrial Aerage all change chan ge "y the same dollar amount on a gien day assuming there are no stock splits which stock will hae the greatest impact on the aerage A. !he one with the highest price #. !he one with the lowest price C. All )0 stocks will hae the same impact %. !he answer cannot "e determined "y the information gien

,6. A "ond issued "y the =tate of Ala"ama is priced to yield *.2+. If you are in the 26 ta5 "racket this "ond would proide you with an e(uialent ta5a"le yield of '''''''''. A. ,.+0 #. 3.2+ C. 6.*6 %. none of the a"oe

,7. !he purchase of a futures contract gies the "uyer '''''''''. A. the right to "uy an item at a specified price #. the right to sell an item at a specified price C. the o"ligation to "uy an item at a specified price %. the o"ligation to sell an item at a specified price

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+0. wnership of a put option entitles the owner to the '''''''''' to ''''''''''' a specific stock on or "efore a specific date at a specific price. A. right "uy #. right sell C. o"ligation "uy %. o"ligation sell

+1. An inestor in a 26 ta5 "racket is trying to decide whether wh ether to inest in a municipal "ond or a corporate "ond. =he looks up municipal "ond yields Hr m "ut wishes to calculate the ta5a"le e(uialent yield r. !he formula she should use is gien "y ''''''. A. r J r m K H1 - 26 #. r J r mLH1 - 32 C. r J r m K H1 - 32 %. r J r mLH1 - 26

+2. 9une call and put options on Eing #ooks Inc are aaila"le with e5ercise prices of @)0 @)+ and @,0. Among the different e5ercise prices the call option with the ''''' e5ercise price and the put option with the ''''' e5ercise price will hae the greatest alue. A. @,0M @)0 #. @)0M @,0 C. @)+M @)+ %. @,0M @,0

+). wnership of a call option entitles the owner to the '''''''''' to '''''''''' a specific stock on or "efore a specific date at a specific price. A. right "uy #. right sell C. o"ligation "uy %. o"ligation sell

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+,. !he '''''''' the ratio of municipal "ond yields to corporate "ond yields the ''''''''' the cutoff ta5 "racket where more indiiduals will prefer to hold municipal de"t. A. higherM lower #. lowerM lower C. lowerM higher %. higherM higher

++. Which of the following types of "onds are e5cluded from most "ond indices A. Corporate "onds #. 9unk "onds C. unicipal "onds %. :one of the a"oe

+*. !he Bang =eng =en g inde5 reflects market performance on which of o f the following ma4or stock markets A. 9apan #. =ingapore C. !aiwan %. Bong Eong

+3. !he =tandard and $oors +00 is aHn '''''''''' weighted inde5. A. e(ually #. price C. alue %. share

+6. A firm that fails to pay diidends on its preferred stock is said to "e '''''''''. A. insolent #. in arrears C. insuffera"le %. delin(uent

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+7. arge well-known companies often issue their own ow n short term unsecured de"t notes directly to the pu"lic rather than "orrowing from "anks "ank s their notes are called '''''''''. A. certificates of deposit #. repurchase agreements C. "anker&s acceptances %. commercial paper

*0. Which of the following is most like a short-term collaterali;ed loan A. Certificate of deposit #. /epurchase agreement C. #anker&s acceptance %. Commercial paper

*1. 8urodollars are '''''''''. A. dollar denominated deposits at any foreign "ank or foreign "ranch of an American "ank #. dollar denominated "onds issued "y firms outside their home market C. currency issued "y 8uro %isney and traded in France %. dollars that wind up in "anks "ank s as a result of money laundering actiities

*2. Which of the following is used to "ack international sales of goods and serices A. Certificate of deposit #. #anker&s acceptance C. 8urodollar deposits %. Commercial paper

*). !reasury notes hae initial maturities "etween '''''''' ''''''' ' years. A. 2 and , #. + and 10 C. 10 and )0 %. 1 and 10

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*,. Which of the following are not n ot characteristic of common stock ownership A. /esidual claimant #. Dnlimited lia"ility C. Noting rights %. imited life of the security

*+. If you thought prices of stock would "e rising oer the ne5t few months you may wish to '''''''''''''''''' on the stock. A. purchase a call option #. purchase a put option C. sell a futures contract %. place a short sale order

**. A typical "ond price (uote includes all "ut which one of the following A. %aily high price for the "ond #. Closing "ond price C. ?ield to maturity %. %iidend yield

*3. What are "usiness firms most likely to use deriatie securities for A. Bedging #. =peculating C. %oing calculus pro"lems %. arket making

*6. What would you e5pect to hae happened to the spread "etween yields on commercial paper and !reasury "ills immediately after =eptem"er 11 2001 A. :o change as "oth yields will remain the same. #. Increase the spread usually increases in response to a crisis. C. %ecrease the spread usually decreases in response to a crisis. %. :o change as "oth yields will moe in the same direction.

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*7. A stock (uote indicates a stock price of @*0 and a diidend yield of ). !he latest (uarterly diidend receied "y stock inestors must hae "een '''''' per share. A. @0.++ #. @1.60 C. @0.,+ %. @1.2+

30. !hree stocks hae share prices of @12 @3+ and @)0 with total market alues of @,00 million @)+0 million and @1+0 million respectiely. If you were to construct a price-weighted inde5 of the three stocks what would "e the inde5 alue A. )00 #. )7 C. ,) %. )0

31. Which of the following is not considered c onsidered a money market inestment A. #ankers acceptances #. 8urodollar C. /epurchase agreement %. !reasury note

32. !he Federal /esere #oard of
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3). ?ou decide to purchase an e(ual num"er of shares of stocks of firms to create a portfolio. If you wished to construct an inde5 to track your portfolio performance your "est match for your portfolio would "e to construct aLan ''''''. A. alue weighted inde5 #. e(ual weighted inde5 C. price weighted inde5 %. "ond price inde5

3,. In a ''''''''''' inde5 changes in the alue of the stock with the greatest market alue will moe the inde5 alue the most eerything else e(ual. A. alue weighted inde5 #. e(ual weighted inde5 C. price weighted inde5 %. "ond price inde5

3+. A corporation in a ), ta5 "racket inests in the preferred stock of another company and earns a * pre-ta5 rate of return. An indiidual inestor in a 1+ ta5 "racket inests in the same preferred stock and earns the same pre-ta5 p re-ta5 return. !he after ta5 return to the corporation co rporation is ''''''' and the after ta5 return to the indiidual inestor is '''''''. A. ).7*M +.1 #. +.)7M +.1 C. *.00M *.00 %. ).7*M *.00

3*. All "ut which one of o f the following indices is alue weighted A. :asda( Composite #. =$ +00 C. Wilshire +000 %. %9IA

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33. What is the ta5 e5empt e(uialent yield on a 7 "ond yield gien a marginal ta5 rate of 26 A. *.,6 #. 3.2+ C. 6.02 %. 7.00

36. A ta5 free municipal "ond proides a yield of ).2. What is the e(uialent ta5a"le yield on the "ond gien a )+ ta5 "racket A. ).20 #. ).*6 C. ,.72 %. +.00

37. An inde5 computed from a simple aerage of returns is aLan '''''. A. e(ual weighted inde5 #. alue weighted inde5 C. price weighted inde5 %. share weighted inde5

60. A ta5 free municipal "ond proides a yield of 2.),. What is the e(uialent ta5a"le yield on the "ond gien a 26 ta5 "racket A. 2.), #. 2.*6 C. ).2+ %. ,.72

61. !he Chompers Inde5 is a price weighted stock inde5 "ased on the ) largest fast food chains. !he stock prices for the three stocks are @+, @2) and @,,. What is the price weighted inde5 alue of the Chompers Inde5 A. 2).,) #. )+.)* C. ,0.)) %. ,7.+6

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62. !he Bydro Inde5 is a price weighted stock inde5 "ased on the + largest "oat manufacturers in the nation. !he stock prices for the fie stocks are @10 @20 @60 @+0 and @,0. !he price of the last stock was 4ust split 2 for 1 and the stock price was haled from @,0 to @20. What is the new diisor for a price weighted inde5 A. +.00 #. ,.6+ C. ,.+0 %. ,.3+

6). A "enchmark inde5 has three stocks priced at @2) @,) and @+*. !he num"er of outstanding shares for each is )+0000 shares ,0+000 shares and ++)000 shares respectiely. If the market alue weighted inde5 was 730 yesterday and the prices changed to @2) @,1 and @+6 what is the new inde5 alue A. 7*0 #. 730 C. 73+ %. 76+

6,. A "enchmark market alue inde5 is comprised of three stocks. ?esterday the three stocks were priced at @12 @20 and @*0. !he num"er of outstanding shares for each is *00000 shares +00000 shares and 200000 shares respectiely. If the stock prices changed to @1* @16 and @*2 today respectiely what is the one day rate of return on the inde5 A. +.36 #. ,.)+ C. *.1* %. 3.,2

6+. Which of the following mortgage scenarios will "enefit the homeowner the most A. Ad4usta"le rate mortgage when interest rate increases. #. Fi5ed rate mortgage when interest rates falls. C. Fi5ed rare mortgage when interest rate rises. %. :one of the a"oe as "anker&s interest will always "e protected.

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Chapter 02 Asset Classes and Financial Instruments Answer Eey

Multiple Choice Questions

1. Which of the following is not a money market instrument A. !reasury A. !reasury "ill #. Commercial #. Commercial paper C. $referred stock %. #anker&s %. #anker&s acceptance

Difficulty: Easy

2. !hirteen week !-"ill auctions are conducted ''''. A. daily A. daily B. weekly C. monthly C. monthly %. (uarterly %. (uarterly

Difficulty: Easy

). When computing the "ank discount yield you would use '''' days in the year. A. 2*0 A. 2*0 B. )*0 C. )*+ C. )*+ %. )** %. )**

Difficulty: Medium

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,. A dollar denominated deposit at a ondon "ank is called '''''. A. eurodollars #. I#/ #. I#/ C. fed C. fed funds %. "anker&s %. "anker&s acceptance

Difficulty: Easy

+. oney market securities are sometimes referred to as cash e(uialent "ecause '''''. A. they are safe and marketa"le #. they #. they are not li(uid C. they C. they are high risk %. they %. they are low denomination

Difficulty: Easy

*. !he most actiely traded money market security is A. !reasury "ills #. #ankers& #. #ankers& Acceptances C. Certificates C. Certificates of %eposit %. Common %. Common stock

Difficulty: Medium

3. '''''' oting of common stock gies minority shareholders the most representation on the "oard of directors. A. a4ority A. a4ority B. Cumulatie C. /ights C. /ights %. $ro5y %. $ro5y

Difficulty: Medium

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6. An inestor in a !-"ill earns interest "y '''''''''. A. receiing A. receiing interest payments eery 70 days #. receiing #. receiing diidend payments eery )0 days C. conerting C. conerting the !-"ill at maturity into a higher alued !-note D. "uying the "ill at a discount from the face alue receied at maturity

Difficulty: Easy

7. '''''' would not "e included in the 8AF8 inde5. A. Australia A. Australia B. Canada C. France C. France %. 9apan %. 9apan

Difficulty: Hard

10. ''''' is considered to "e an emerging market country. A. France A. France #. :orway #. :orway C. #ra;il %. Canada %. Canada

Difficulty: Medium

11. Which one of the following is a true statement A. %iidends A. %iidends on preferred stocks are ta5-deducti"le to indiidual inestors "ut not to corporate inestors B. Common diidends cannot "e paid if preferred diidends are in arrears on cumulatie preferred stock C. $referred C. $referred stockholders hae oting power %. Inestors %. Inestors can sue managers for nonpayment of preferred diidends

Difficulty: Medium

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12. !he "id price of a treasury "ill is '''''''''. A. the A. the price at which the dealer in treasury "ills is willing to sell the "ill B. the price at which the dealer in treasury "ills is willing to "uy the "ill C. greater C. greater than the ask price of the treasury "ill e5pressed in dollar terms %. the %. the price at which the inestor can "uy the treasury "ill

Difficulty: Easy

1). !he %. :ikkei %. :ikkei

Difficulty: Easy

1,. %eposits of commercial "anks at the Federal /esere are called '''''. A. "ankers A. "ankers acceptances B. federal funds C. repurchase C. repurchase agreements %. time %. time deposits

Difficulty: Easy

1+. Which of the following is not a true statement regarding municipal "onds A. A A. A municipal "ond is a de"t o"ligation issued "y state or local goernments. g oernments. B. A municipal "ond is a de"t o"ligation issued "y the Federal
Difficulty: Easy

2-22


1*. Which of the following is not a characteristic of a money market instrument A. i(uidity A. i(uidity #. arketa"ility #. arketa"ility C. ow C. ow risk D. aturity greater than one year

Difficulty: Easy

13. An indiidual who goes short in a futures position A. commits to deliering the underlying commodity at contract maturity #. commits #. commits to purchasing the underlying commodity at contract maturity C. has C. has the right to delier the underlying commodity at contract maturity %. has %. has the right to purchase the underlying commodity at contract maturity

Difficulty: Easy

16. Which of the following is not a nickname for an agency associated with the mortgage markets A. Fannie A. Fannie ae #. Freddie #. Freddie ac C. =allie ae %.
Difficulty: Easy

17. Commercial paper is a short-term security issued "y '''''''''' ''''' ''''' to raise funds. A. the A. the Federal /esere #. commercial #. commercial "anks C. large well-known companies %. the %. the :ew ?ork =tock 85change

Difficulty: Easy

2-2)


20. !he ma5imum maturity on commercial paper is A. 230 days #. 160 #. 160 days C. 70 C. 70 days %. )0 %. )0 days

Difficulty: Medium

21. Which one of the following is a true statement regarding the %ow 9ones Industrial Aerage A. It A. It is a alue-weighted aerage of )0 large industrial stocks B. It is a price-weighted aerage of )0 large industrial stocks C. It C. It is a price-weighted aerage of 100 large stocks traded on the :ew ?ork =tock 85change %. It %. It is a alue-weighted aerage of all stocks traded on the :ew ?ork =tock 85change

Difficulty: Easy

22. !reasury "ills are financial instruments issued "y '''''''''' to raise funds. A. commercial A. commercial "anks B. the Federal
Difficulty: Easy

2). Which of the following are true statements a"out a"ou t !-"ills I. !-"ills typically sell in denominations of @10000 II. Income earned on !-"ills is e5empt from all Federal Fed eral ta5es III. Income earned on !-"ills is e5empt from state and local ta5es A. I A. I only #. I #. I and II only C. I and III only %. I %. I II and III

Difficulty: Medium

2-2,


2,. A "ond that has no collateral is called '''''''''. A. a A. a calla"le "ond B. a de"enture C. a C. a 4unk "ond %. a %. a mortgage

Difficulty: Easy

2+. A '''''''''' gies its holder the right to sell an asset for a specified e5ercise price on or "efore a specified e5piration date. A. call A. call option #. futures #. futures contract C. put option %. interest %. interest rate swap

Difficulty: Easy

2*. A !-"ill (uote sheet has 70 day !-"ill (uotes with a ,.72 "id and a ,.6* ask. If the "ill has a @10000 face alue an inestor could "uy this "ill for A. @10000.00 A. @10000.00 B. @7636.+0 C. @7633.00 C. @7633.00 %. @7660.1* %. @7660.1*

Difficulty: Hard

2-2+


23. Which one of the following is a true statement regarding corporate "onds A. A A. A corporate calla"le "ond gies its holder the right to e5change it for a specified num"er of the company&s common shares #. A #. A corporate de"enture is a secured "ond C. A corporate conerti"le "ond gies its holder the right to e5change it for a specified num"er of the company&s common shares %. Bolders %. Bolders of corporate "onds hae oting rights in the company

Difficulty: Medium

26. !he yield on ta5-e5empt "onds is ''''''. A. usually A. usually less than +0 of the yield on ta5a"le "onds #. normally #. normally a"out 70 of the yield on ta5a"le "onds C. greater C. greater than the yield on ta5a"le "onds D. less than the yield on ta5a"le "onds

Difficulty: Easy

27. '''''''''' is not a money market instrument. A. A A. A certificate of deposit #. A #. A treasury "ill C. A treasury "ond %. Commercial %. Commercial paper

Difficulty: Easy

2-2*


)0. An inestor "uys a !-"ill at a "ank discount (uote of ,.60 with 1+0 days to maturity. !he inestor&s actual annual rate of return on this inestment was '''''. A. ,.60 A. ,.60 B. ,.73 C. +.,3 C. +.,3 %. +.3, %. +.3,

Difficulty: Hard

)1. !he D.E. stock inde5 is the '''''''''. A. %A> #. F!=8 #. F!=8 C. <=8 C. <=8 %. !=8 %. !=8

Difficulty: Easy

)2. A '''''''''' gies its holder the right to "uy an asset for a specified e5ercise price on or "efore a specified e5piration date. A. call option #. futures #. futures contract C. put C. put option %. interest %. interest rate swap

Difficulty: Easy

2-23


)). Which one of the following proides the "est e5ample of securiti;ation A. conerti"le A. conerti"le "ond #. call #. call option C. mortgage pass-through security %. preferred %. preferred stock

Difficulty: Easy

),. Which of the following indices are market-alue weighted I. !he :?=8 Composite II. !he =$ +00 III. !he Wilshire +000 A. I A. I and II only #. II #. II and III only C. I C. I and III only D. I II and III

Difficulty: Easy

)+. !he interest rate charged "y large "anks in ondon to lend money among themseles is called '''''''''. A. the A. the prime rate #. the #. the discount rate C. the C. the federal funds rate D. I#/

Difficulty: Easy

)*. A firm that has large securities holdings that wishes to raise money for a short length of time may "e a"le to find the cheapest financing from which of the following A. /eerse A. /eerse repurchase agreement #. #anker&s #. #anker&s acceptance C. Commercial C. Commercial paper D. /epurchase agreement

Difficulty: Hard

2-26


)3. Currently the %ow 9ones Industrial Aerage is computed "y '''''''''. A. adding A. adding the prices of )0 large "lue-chip stocks and diiding "y )0 #. calculating #. calculating the total market alue of o f the )0 firms in the inde5 and an d diiding "y )0 C. measuring C. measuring the current total market alue of o f the )0 stocks in the inde5 relatie to the total alue on the preious day D. adding the prices of )0 large "lue-chip stocks and diiding "y a diisor ad4usted for stock splits and large stock diidends

Difficulty: Hard

)6. An inestor purchases one municipal and one corporate "ond that pay rates of return of +.00 and *.,0 respectiely. If the inestor is in the 1+ ta5 "racket his after ta5 rates of return on the municipal and corporate "onds would "e respectiely A. +.00 A. +.00 and *.,0 B. +.00 and +.,, C. ,.2+ C. ,.2+ and *.,0 %. +.3+ %. +.3+ and +.,, After-ta5 return on municipal "ond J .0+ After-ta5 return on corporate "ond J .0*,H1 - .1+ J 0.0+,, J +.,,

Difficulty: Medium

)7. If a treasury note has a "id price of @77*.2+ the (uoted "id price in the Wall =treet 9ournal would "e '''''''''. A. 77G2+ A. 77G2+ #. 77G*) #. 77G*) C. 77G20 %. 77G06 %. 77G06

Difficulty: Medium

2-27


,0. !I$= are ''''''. A. !reasury A. !reasury "onds that pay a aria"le rate of interest #. D.E. #. D.E. "onds that protect inestors from default risk C. securities C. securities that trade on the !oronto stock inde5 D. !reasury "onds that protect inestors from inflation

Difficulty: Medium

,1. !he price (uotations of treasury "onds in the Wall =treet 9ournal show a "id price of 102G12 and an ask price of 102G1,. If you sold the "ond you e5pect to receie '''''''''. A. @102,.3+ A. @102,.3+ #. @102,.)6 #. @102,.)6 C. @102).3+ %. @1022.+0 %. @1022.+0

Difficulty: Medium

,2. !he %ow 9ones Industrial Aerage is '''''''''. A. a price weighted aerage #. a #. a alue weight and aerage C. an C. an e(ually weighted aerage %. an %. an unweighted aerage

Difficulty: Easy

2-)0


,). Inestors will earn higher rates of returns on !I$= than e(uialent default risk standard "onds if '''''''''''''''. A. inflation A. inflation is lower than anticipated oer the inestment period B. inflation is higher than anticipated oer the inestment period C. the C. the D.=. dollar increases in alue against the euro %. the %. the spread "etween commercial paper pa per and !reasury securities remains low

Difficulty: Medium

,,. $referred stock is like long-term de"t in that '''''''''''. A. it A. it gies the holder oting power regarding the firm&s management B. it promises to pay to its holder a fi5ed stream of income each year C. the C. the preferred diidend is a ta5-deducti"le e5pense for the firm %. in %. in the eent of "ankruptcy preferred stock has e(ual status with de"t

Difficulty: Medium

,+. Which of the following does not no t appro5imate the performance of a "uy "u y and hold portfolio strategy A. An A. An e(ually weighted inde5 #. A #. A price weighted inde5 C. A alue weighted inde5 %. Weights %. Weights are not a factor in this situation

Difficulty: Medium

,*. In calculating the %ow 9ones Industrial Aerage the ad4ustment for a stock split occurs '''''''''. A. automatically A. automatically B. "y ad4usting the diisor C. "y C. "y ad4usting the numerator %. "y %. "y ad4usting the market alue weights

Difficulty: Medium

2-)1


,3. If the market prices of the )0 ) 0 stocks in the %ow 9ones Industrial Aerage all change chan ge "y the same dollar amount on a gien day assuming there are no stock splits which stock will hae the greatest impact on the aerage A. !he A. !he one with the highest price #. !he #. !he one with the lowest price C. All )0 stocks will hae the same impact %. !he %. !he answer cannot "e determined "y the information gien

Difficulty: Medium

,6. A "ond issued "y the =tate of Ala"ama is priced to yield *.2+. If you are in the 26 ta5 "racket this "ond would proide you with an e(uialent ta5a"le yield of '''''''''. A. ,.+0 A. ,.+0 #. 3.2+ #. 3.2+ C. 6.*6 %. none %. none of the a"oe

Difficulty: Medium Feedback: 8.68% = 6.25%/( 6.25%/( ! ".28#

,7. !he purchase of a futures contract gies the "uyer '''''''''. A. the A. the right to "uy an item at a specified price #. the #. the right to sell an item at a specified price C. the o"ligation to "uy an item at a specified price %. the %. the o"ligation to sell an item at a specified price

Difficulty: Easy

+0. wnership of a put option entitles the owner to the '''''''''' to ''''''''''' a specific stock on or "efore a specific date at a specific price. A. right A. right "uy B. right sell C. o"ligation C. o"ligation "uy %. o"ligation %. o"ligation sell

Difficulty: Easy

2-)2


+1. An inestor in a 26 ta5 "racket is trying to decide whether wh ether to inest in a municipal "ond or a corporate "ond. =he looks up municipal "ond yields Hr m "ut wishes to calculate the ta5a"le e(uialent yield r. !he formula she should use is gien "y ''''''. A. r A. r J r m K H1 - 26 #. r #. r J r mLH1 - 32 C. r C. r J r m K H1 - 32 D. r J r mLH1 - 26

Difficulty: Hard

+2. 9une call and put options on Eing #ooks Inc are aaila"le with e5ercise prices of @)0 @)+ and @,0. Among the different e5ercise prices the call option with the ''''' e5ercise price and the put option with the ''''' e5ercise price will hae the greatest alue. A. @,0M A. @,0M @)0 B. @)0M @,0 C. @)+M C. @)+M @)+ %. @,0M %. @,0M @,0

Difficulty: Medium

+). wnership of a call option entitles the owner to the '''''''''' to '''''''''' a specific stock on or "efore a specific date at a specific price. A. right "uy #. right #. right sell C. o"ligation C. o"ligation "uy %. o"ligation %. o"ligation sell

Difficulty: Easy

2-))


+,. !he '''''''' the ratio of municipal "ond yields to corporate "ond yields the ''''''''' the cutoff ta5 "racket where more indiiduals will prefer to hold municipal de"t. A. higherM lower #. lowerM #. lowerM lower C. lowerM C. lowerM higher %. higherM %. higherM higher

Difficulty: Hard

++. Which of the following types of "onds are e5cluded from most "ond indices A. Corporate A. Corporate "onds B. 9unk "onds C. unicipal C. unicipal "onds %. :one %. :one of the a"oe

Difficulty: Medium

+*. !he Bang =eng =en g inde5 reflects market performance on which of o f the following ma4or stock markets A. 9apan A. 9apan #. =ingapore #. =ingapore C. !aiwan C. !aiwan D. Bong Eong

Difficulty: Medium

+3. !he =tandard and $oors +00 is aHn '''''''''' weighted inde5. A. e(ually A. e(ually #. price #. price C. alue %. share %. share

Difficulty: Easy

2-),


+6. A firm that fails to pay diidends on its preferred stock is said to "e '''''''''. A. insolent A. insolent B. in arrears C. insuffera"le C. insuffera"le %. delin(uent %. delin(uent

Difficulty: Medium

+7. arge well-known companies often issue their own ow n short term unsecured de"t notes directly to the pu"lic rather than "orrowing from "anks "ank s their notes are called '''''''''. A. certificates A. certificates of deposit #. repurchase #. repurchase agreements C. "anker&s C. "anker&s acceptances D. commercial paper

Difficulty: Easy

*0. Which of the following is most like a short-term collaterali;ed loan A. Certificate A. Certificate of deposit B. /epurchase agreement C. #anker&s C. #anker&s acceptance %. Commercial %. Commercial paper

Difficulty: Medium

*1. 8urodollars are '''''''''. A. dollar denominated deposits at any foreign "ank or foreign "ranch of an American "ank #. dollar #. dollar denominated "onds issued "y firms outside their home market C. currency C. currency issued "y 8uro %isney and traded in France %. dollars %. dollars that wind up in "anks "ank s as a result of money laundering actiities

Difficulty: Easy

2-)+


*2. Which of the following is used to "ack international sales of goods and serices A. Certificate A. Certificate of deposit B. #anker&s acceptance C. 8urodollar C. 8urodollar deposits %. Commercial %. Commercial paper

Difficulty: Medium

*). !reasury notes hae initial maturities "etween '''''''' ''''''' ' years. A. 2 A. 2 and , #. + #. + and 10 C. 10 C. 10 and )0 D. 1 and 10

Difficulty: Easy

*,. Which of the following are not n ot characteristic of common stock ownership A. /esidual A. /esidual claimant B. Dnlimited lia"ility C. Noting C. Noting rights %. imited %. imited life of the security

Difficulty: Easy

*+. If you thought prices of stock would "e rising oer the ne5t few months you may wish to '''''''''''''''''' on the stock. A. purchase a call option #. purchase #. purchase a put option C. sell C. sell a futures contract %. place %. place a short sale order

Difficulty: Medium

2-)*


**. A typical "ond price (uote includes all "ut which one of the following A. %aily A. %aily high price for the "ond #. Closing #. Closing "ond price C. ?ield C. ?ield to maturity D. %iidend yield

Difficulty: Easy

*3. What are "usiness firms most likely to use deriatie securities for A. Bedging #. =peculating #. =peculating C. %oing C. %oing calculus pro"lems %. arket %. arket making

Difficulty: Medium

*6. What would you e5pect to hae happened to the spread "etween yields on commercial paper and !reasury "ills immediately after =eptem"er 11 2001 A. :o A. :o change as "oth yields will remain the same. B. Increase the spread usually increases in response to a crisis. C. %ecrease C. %ecrease the spread usually decreases in response to a crisis. %. :o %. :o change as "oth yields will moe in the same direction.

Difficulty: Hard

2-)3


*7. A stock (uote indicates a stock price of @*0 and a diidend yield of ). !he latest (uarterly diidend receied "y stock inestors must hae "een '''''' per share. A. @0.++ A. @0.++ #. @1.60 #. @1.60 C. @0.,+ %. @1.2+ %. @1.2+

Difficulty: Medium

30. !hree stocks hae share prices of @12 @3+ and @)0 with total market alues of @,00 million @)+0 million and @1+0 million respectiely. If you were to construct a price-weighted inde5 of the three stocks what would "e the inde5 alue A. )00 A. )00 B. )7 C. ,) C. ,) %. )0 %. )0 $de& J H12 O 3+ O )0L) J )7

Difficulty: Medium

31. Which of the following is not considered c onsidered a money market inestment A. #ankers A. #ankers acceptances #. 8urodollar #. 8urodollar C. /epurchase C. /epurchase agreement D. !reasury note

Difficulty: Easy

2-)6


32. !he Federal /esere #oard of
Difficulty: Easy

3). ?ou decide to purchase an e(ual num"er of shares of stocks of firms to create a portfolio. If you wished to construct an inde5 to track your portfolio performance your "est match for your portfolio would "e to construct aLan ''''''. A. alue A. alue weighted inde5 #. e(ual #. e(ual weighted inde5 C. price weighted inde5 %. "ond %. "ond price inde5

Difficulty: Hard

3,. In a ''''''''''' inde5 changes in the alue of the stock with the greatest market alue will moe the inde5 alue the most eerything else e(ual. A. alue weighted inde5 #. e(ual #. e(ual weighted inde5 C. price C. price weighted inde5 %. "ond %. "ond price inde5

Difficulty: Medium

2-)7


3+. A corporation in a ), ta5 "racket inests in the preferred stock of another company and earns a * pre-ta5 rate of return. An indiidual inestor in a 1+ ta5 "racket inests in the same preferred stock and earns the same pre-ta5 p re-ta5 return. !he after ta5 return to the corporation co rporation is ''''''' and the after ta5 return to the indiidual inestor is '''''''. A. ).7*M A. ).7*M +.1 B. +.)7M +.1 C. *.00M C. *.00M *.00 %. ).7*M %. ).7*M *.00 After-ta5 return to corporate inestor after 30 e5clusion J 0.0* - H0.0* K 0.)0K0.), J +.)7 After-ta5 return to indiidual inestor J 0.0* K H1 - 0.1+ J +.1

Difficulty: Hard

3*. All "ut which one of o f the following indices is alue weighted A. :asda( A. :asda( Composite #. =$ #. =$ +00 C. Wilshire C. Wilshire +000 D. %9IA

Difficulty: Easy

33. What is the ta5 e5empt e(uialent yield on a 7 "ond yield gien a marginal ta5 rate of 26 A. *.,6 #. 3.2+ #. 3.2+ C. 6.02 C. 6.02 %. 7.00 %. 7.00

Difficulty: Medium

2-,0


36. A ta5 free municipal "ond proides a yield of ).2. What is the e(uialent ta5a"le yield on the "ond gien a )+ ta5 "racket A. ).20 A. ).20 #. ).*6 #. ).*6 C. ,.72 %. +.00 %. +.00

Difficulty: Medium

37. An inde5 computed from a simple aerage of returns is aLan '''''. A. e(ual weighted inde5 #. alue #. alue weighted inde5 C. price C. price weighted inde5 %. share %. share weighted inde5

Difficulty: Medium

60. A ta5 free municipal "ond proides a yield of 2.),. What is the e(uialent ta5a"le yield on the "ond gien a 26 ta5 "racket A. 2.), A. 2.), #. 2.*6 #. 2.*6 C. ).2+ %. ,.72 %. ,.72

Difficulty: Medium

2-,1


61. !he Chompers Inde5 is a price weighted stock inde5 "ased on the ) largest fast food chains. !he stock prices for the three stocks are @+, @2) and @,,. What is the price weighted inde5 alue of the Chompers Inde5 A. 2).,) A. 2).,) #. )+.)* #. )+.)* C. ,0.)) %. ,7.+6 %. ,7.+6

Difficulty: Medium

62. !he Bydro Inde5 is a price weighted stock inde5 "ased on the + largest "oat manufacturers in the nation. !he stock prices for the fie stocks are @10 @20 @60 @+0 and @,0. !he price of the last stock was 4ust split 2 for 1 and the stock price was haled from @,0 to @20. What is the new diisor for a price weighted inde5 A. +.00 A. +.00 #. ,.6+ #. ,.6+ C. ,.+0 %. ,.3+ %. ,.3+

Difficulty: Hard

2-,2


6). A "enchmark inde5 has three stocks priced at @2) @,) and @+*. !he num"er of outstanding shares for each is )+0000 shares ,0+000 shares and ++)000 shares respectiely. If the market alue weighted inde5 was 730 yesterday and the prices changed to @2) @,1 and @+6 what is the new inde5 alue A. 7*0 A. 7*0 #. 730 #. 730 C. 73+ %. 76+ %. 76+

Difficulty: Hard

6,. A "enchmark market alue inde5 is comprised of three stocks. ?esterday the three stocks were priced at @12 @20 and @*0. !he num"er of outstanding shares for each is *00000 shares +00000 shares and 200000 shares respectiely. If the stock prices changed to @1* @16 and @*2 today respectiely what is the one day rate of return on the inde5 A. +.36 A. +.36 #. ,.)+ #. ,.)+ C. *.1* %. 3.,2 %. 3.,2

Difficulty: Hard

6+. Which of the following mortgage scenarios will "enefit the homeowner the most A. Ad4usta"le A. Ad4usta"le rate mortgage when interest rate increases. #. Fi5ed #. Fi5ed rate mortgage when interest rates falls. C. Fi5ed rare mortgage when interest rate rises. %. :one %. :one of the a"oe as "anker&s interest will always "e protected.

Difficulty: Medium

2-,)

Chap 002

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