BUSI 321 test 2 Liberty University complete answers

BUSI 321 test 2 Liberty University complete answers

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Question 1 Some bonds are "stripped," which means that

Question 2 Which of the following is not an example of a municipal bond?

Question 3 For bonds issued under a _______ arrangement, the underwriter guarantees the issuer that the bonds will be sold at a specified price.

Question 4 (Financial calculator required.) Erin is, a private investor, who can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Erin's yield to maturity is ____ percent.

Question 5 Bonds issued by ____ are backed by the federal government.

Question 6 A call provision on bonds normally

Question 7 Which of the following statements is true regarding STRIPS?

Question 8 Which of the following is not mentioned in your text as a protective covenant?

Question 9 A ten­year, inflation­indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based on this information, the coupon payment after six months will be $____.

Question 10 The ____________ was recently established to identify risks in the U.S. financial system and make regulatory recommendations that could reduce such risks.

Question 11 Assume bond portfolio managers actively manage their portfolios. If they expect interest rates to ____, they would shift toward ____.

Question 12 The bonds that are most sensitive to interest rate movements have

Question 13 Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is ____ years.

Question 14 If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds.

Question 15 As interest rates consistently rise over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's default risk.)

Question 16 When the European Central Bank provides credit to a country that is experiencing debt repayment problems, the ECB commonly:

Question 17 Consider a coupon bond that sold at par value two years ago. If interest rates are much lower now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bonds will be ____ its par value.

Question 18 Which of the following is not true with respect to a growing­equity mortgage?

Question 19 A(n) _________ problem occurs when a person or institution does not have to bear the full consequence of its behavior and therefore assumes more risk than it otherwise would.

Question 20 Collateralized mortgage obligations (CMOs) are generally perceived to have

Question 21 Use an amortization schedule. A 15­year $100,000 mortgage has a fixed mortgage rate of 9 percent. In the first month, the total mortgage payment is $____, and $____ of this amount represents payment of interest.

Question 22 A mortgage with low initial payments that increase over time without ever leveling off is a

Question 23 Financial institutions that hold fixed­rate mortgages in their asset portfolios are exposed to ____ risk, because they commonly use funds obtained from short­term customer deposits to make long­term mortgage loans.

Question 24 In an amortization schedule of monthly mortgage payments

Question 25 A ____ mortgage allows borrowers to initially make small payments on the mortgage, which are then increased on a graduated basis over the first five to ten years; payments then level off from there on.

Question 26 A firm whose stock price has risen:

Question 27 Firms are more willing to issue new stock in a secondary stock offering when the market price of their outstanding shares is relatively

Question 28 Which of the following is not a form of shareholder activism?

Question 29 Which of the following is not true regarding the Sarbanes­Oxley Act?

Question 30 Assume a firm that is valued at $800 million with 6 million shares of stock outstanding. This firm's stock should have a price of $____ per share.

Question 31 When brokers encourage investors to place bids for IPO shares on the first day that are above the offer price this is referred to as

Question 32 Which of the following is not a provision specified in the Sarbanes­Oxley Act?

Question 33 Which of the following is not a barrier to corporate control?

Question 34 Which of the following statements is incorrect?

Question 35 The general mood of investors represents:

Question 36 ____ is (are) not a firm­specific factor(s) that affect(s) stock prices.

Question 37 Steam Corp. has a beta of 1.5. The prevailing risk­free rate is 5 percent and the annual market return in recent years has been 11 percent. Based on this information, the required rate of return on Steam Corp. stock is ____ percent.

Question 38 If the standard deviation of a stock's returns over the last 12 quarters is 4 percent, and if there is no perceived change in volatility, there is a ____ percent probability that the stock's returns will be within ____ percentage points of the expected outcome.

Question 39 The formula for a stock portfolio's volatility does not contain the

Question 40 Stock X has a lower beta than Stock Y. The market return for next month is expected to be either −1 percent, +1 percent, or +2 percent with an equal probability of each scenario. The probability distribution of Stock X returns for next month is

Question 41 The January effect refers to the ____ pressure on ____ stocks in January of every year.

Question 42 Sorvino Co. is expected to offer a dividend of $3.2 per share per year forever. The required rate of return on Sorvino stock is 13 percent. Thus, the price of a share of Sorvino stock, according to the dividend discount model, is $____.

Question 43 Short­selling a stock refers to

Question 44 Lisa would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. She can either put up the entire amount and purchase the stock, or borrow $35 from her brokerage firm at an annual interest rate of 12 percent and put up the remainder. She thinks she can sell the stock for $100 after one year. If she borrows from her brokerage firm, her estimated return on the stock would be ____ percent.

Question 45 Which of the following statements is incorrect with respect to the structure of the SEC?

Question 46 Karen just purchased a stock costing $33 on margin, paying $23 and borrowing the remainder from a brokerage firm at 15 percent annual interest. The stock pays an annual dividend of $2. If Karen sells the stock after one year at a price of $50, what is the return on the stock?

Question 47 The Division of ____ of the SEC regulates the fair and orderly disclosure trading by ensuring honest practices by various organizations that facilitate the trading of securities.

Question 48 When investors buy stock with borrowed funds, this is sometimes referred to as

Question 49 Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to pay $25 a share and borrows the remaining funds at a 12 percent annual interest. What is the return if the investor sells the stock for $55 at the end of one year?

Question 50 The risk of a short sale is that the stock price

 

Question 1 A ____ has first claim on specified assets, while a ____ is a debenture that has claims against a firm's assets that are junior to the claims of mortgage bonds and regular debentures.

Question 2 When firms issue ____, the amount of interest and principal to be paid is based on specified market conditions. The amount of the repayment may be tied to a Treasury bond price index or even to a stock index.

Question 3 Bonds issued by ____ are backed by the federal government.

Question 4 ____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased.

Question 5 Devin, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____ percent.

Question 6 Which of the following institutions is most likely to purchase a private bond placement?

Question 7 If interest rates suddenly ____, those existing bonds that have a call feature are ____ likely to be called.

Question 8 Which of the following is not an advantage of online bond brokerage services?

Question 9 ____ are not primary purchasers of bonds.

Question 10 If the Treasury issues an unusually large amount of bonds in the primary market, it places ____ on bond prices and ____ on yields to be earned by investors that purchase bonds and plan to hold them to maturity.

Question 11 When financial institutions expect interest rates to ____, they may ____.

Question 12 A bank buys bonds with a par value of $25 million for $24,040,000. The coupon rate is 10 percent, and the bonds make annual payments. The bonds mature in four years. The bank wants to sell them in two years and estimates the required rate of return in two years will be 8 percent. What will the market value of the bonds be in two years?

Question 13 Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The modified duration of this bond is

Question 14 If the U.S. government announces that it will borrow an additional $400 billion, this announcement will normally cause bond traders to expect

Question 15 Assume bond portfolio managers actively manage their portfolios. If they expect interest rates to ____, they would shift toward ____.

Question 16 The actual relationship reflecting the response of a bond's price to a change in bond yields is

Question 17 Assume a bond with a $1,000 par value and a 7 percent coupon rate, three years remaining to maturity, and a 9 percent yield to maturity. The duration of this bond is ____ years.

Question 18 The difference between the 30-year mortgage rate and the 30-year Treasury bond rate is primarily attributable to

Question 19 The ____ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity.

Question 20 A ____ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase over the first 5 to 10 years and then level off.

Question 21 A __________ is a privately negotiated contract that protects investors against the risk of default on particular debt securities such as mortgage-backed securities.

Question 22 Which of the following is not a guarantor of federally insured mortgages?

Question 23 ____ mortgages enabled more people with relatively lower income, or high existing debt, or a small down payment to purchase homes.

Question 24 An adjustable-rate mortgage increases interest rate risk for the ____, but reduces interest rate risk for the ____.

Question 25 Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ____ risk, because they commonly use funds obtained from short-term customer deposits to make long-term mortgage loans.

Question 26 ____ are not barriers to corporate control to eliminate agency problems.

Question 27 Whenever _____, the stock price will be driven up.

Question 28 ____ are employed by brokerage firms and execute orders for clients on the NYSE.

Question 29 In preparing for an IPO, a prospectus must be filed with the

Question 30 If many investors quickly sell an IPO stock in the secondary market, there will be ____ on the stock's price.

Question 31 The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called

Question 32 Which of the following statements is incorrect?

Question 33 A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n)

Question 34 Venture capital funds commonly exit their investment in a business by

Question 35 The January effect refers to the ____ pressure on ____ stocks in January of every year.

Question 36 The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's beta.

Question 37 According to the capital asset pricing model, the required return by investors on a security is

Question 38 The demand by foreign investors for the stock of a U.S. firm sold on a U.S. exchange may be higher when the dollar is expected to ____, other things being equal. (Assume the firm's operations are unaffected by the value of the dollar.)

Question 39 A beta of 1.1 means that for a given 1 percent change in the value of the market, the _______ is expected to change by 1.1 percent in the same direction.

Question 40 The ____ is commonly used as a proxy for the risk-free rate in the capital asset pricing model.

Question 41 If the standard deviation of a stock's returns over the last 12 quarters is 4 percent, and if there is no perceived change in volatility, there is a ____ percent probability that the stock's returns will be within ____ percentage points of the expected outcome.

Question 42 Holding other factors constant, an increase in the capital gains tax rate will:

Question 43 A short seller

Question 44 Expert networks consisting of managers or executives of a publicly traded company who are hired as consultants (“experts”) by a hedge fund to provide insight about the company:

Question 45 Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to pay $25 a share and borrows the remaining funds at a 12 percent annual interest. What is the return if the investor sells the stock for $55 at the end of one year?

Question 46 The NYSE defines ____as the simultaneous buying and selling of a portfolio of at least 15 different stocks that are valued at more than $1 million.

Question 47 While an investor’s ability to simultaneously consider multiple markets to accommodate its orders was perceived to allow for more competitive pricing (lower transactions costs), it also led to a form of “_______________” whereby traders with relatively faster access to specific markets can use another trader’s planned orders and move ahead of that order.

Question 48 Until recently, international trading of stocks was limited by

Question 49 ____ offer advice to customers on stocks to buy or sell.

Question 50 The risk of a short sale is that the stock price

 

1. Securities with maturities of one year or less are classified as

a.
capital market instruments.
b.
money market instruments.
c.
preferred stock.
d.
none of the above
 

       2.    Which of the following is not a money market security?

a.
Treasury bill
b.
negotiable certificate of deposit
c.
common stock
d.
federal funds
 

       3.    ____ are sold at an auction at a discount from par value.

a.
Treasury bills
b.
Repurchase agreements
c.
Banker's acceptances
d.
Commercial paper
 

       4.    Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod's expected annualized yield from this transaction?

a.
13.43 percent
b.
2.78 percent
c.
10.55 percent
d.
2.80 percent
e.
none of the above
 

       5.    If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?

a.
about 13.4 percent
b.
about 12.5 percent
c.
about 11.3 percent
d.
about 11.6 percent
e.
about 10.7 percent
 

       6.    An investor buys a T-bill with 180 days to maturity and $250,000 par value for $242,000. He plans to sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield based on this expectation?

a.
about 10.1 percent
b.
about 12.6 percent
c.
about 11.4 percent
d.
about 13.5 percent
e.
about 14.3 percent
 

       7.    Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of $10,000. The price investors would be willing to pay is $____.

a.
10,000
b.
9,524
c.
9,756
d.
none of the above
       8.    A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What is the discount?

a.
10.26 percent
b.
0.26 percent
c.
$2,500
d.
10.00 percent
e.
11.00 percent
 

       9.    Large corporations typically make ____ bids for T-bills so they can purchase larger amounts.

a.
competitive
b.
noncompetitive
c.
very small
d.
none of the above
 

    10.    At any given time, the yield on commercial paper is ____ the yield on a T-bill with the same maturity.

a.
slightly less than
b.
slightly higher than
c.
equal to
d.
A and B both occur with about equal frequency
 

    11.    T-bills and commercial paper are sold

a.
with a stated coupon rate.
b.
at a discount from par value.
c.
at a premium about par value.
d.
A and C
e.
none of the above
 

    12.    ____ is a short-term debt instrument issued only be well-known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable.

a.
A banker's acceptance
b.
A repurchase agreement
c.
Commercial paper
d.
A Treasury bill
 

    13.    Commercial paper has a maximum maturity of ____ days.

a.
45
b.
270
c.
360
d.
none of the above
 

    14.    An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and the investor holds it to maturity. What is the annualized yield?

a.
8.62 percent
b.
8.78 percent
c.
8.90 percent
d.
9.14 percent
e.
9.00 percent
 

    15.    A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What is the firm's cost of borrowing?

a.
12.12 percent
b.
11.11 percent
c.
13.00 percent
d.
14.08 percent
e.
15.25 percent
 

    16.    When firms sell commercial paper at a ____ price than they projected, their cost of raising funds is ____ than projected.

a.
higher; higher
b.
lower; lower
c.
A and B
d.
none of the above
 

    17.    Which of the following is not a money market instrument?

a.
banker's acceptance
b.
commercial paper
c.
negotiable CDs
d.
repurchase agreements
e.
all of the above are money market instruments
 

    18.    A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in 60 days for $5,000,000. What is the yield?

a.
9.43 percent
b.
9.28 percent
c.
9.14 percent
d.
9.00 percent
 

    19.    The federal funds market allows depository institutions to borrow

a.
short-term funds from each other.
b.
short-term funds from the Treasury.
c.
long-term funds from each other.
d.
long-term funds from the Federal Reserve.
e.
B and D
 

    20.    When a bank guarantees a future payment to a firm, the financial instrument used is called

a.
a repurchase agreement.
b.
a negotiable CD.
c.
a banker's acceptance.
d.
commercial paper.
 

    21.    Which of the following instruments has a highly active secondary market?

a.
banker's acceptances
b.
commercial paper
c.
federal funds
d.
repurchase agreements
 

    22.    Which of the following is true of money market instruments?

a.
Their yields are highly correlated over time.
b.
They typically sell for par value when they are initially issued (especially T-bills and commercial paper).
c.
Treasury bills have the highest yield.
d.
They all make periodic coupon (interest) payments.
e.
A and B
 

    23.    An investor purchased an NCD a year ago in the secondary market for $980,000. He redeems it today and receives $1,000,000. He also receives interest of $30,000. The investor's annualized yield on this investment is

a.
2.0 percent.
b.
5.10 percent.
c.
5.00 percent.
d.
2.04 percent.
 

    24.    An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is ____ percent.

a.
3.10
b.
0.77
c.
1.00
d.
none of the above
 

    25.    The rate at which depository institutions effectively lend or borrow funds from each other is the ____.

a.
federal funds rate
b.
discount rate
c.
prime rate
d.
repo rate
 

    26.    ____ are the most active participants in the federal funds market.

a.
Savings and loan associations
b.
Securities firms
c.
Credit unions
d.
Commercial banks
 

    27.    Eurodollar deposits

a.
are U.S. dollars deposited in the U.S. by European investors.
b.
are subject to interest rate ceilings.
c.
have a relatively large spread between deposit and loan rates (compared to the spread between deposits and loans in the United States).
d.
are not subject to reserve requirements.
 

    28.    Which money market transaction is most likely to represent a loan from one commercial bank to another?

a.
banker's acceptance
b.
negotiable CD
c.
federal funds
d.
commercial paper
 

    29.    The rate on Eurodollar floating rate CDs is based on

a.
a weighted average of European prime rates.
b.
the London Interbank Offer Rate.
c.
the U.S. prime rate.
d.
a weighted average of European discount rates.
 

    30.    Treasury bills

a.
have a maturity of up to five years.
b.
have an active secondary market.
c.
are commonly sold at par value.
d.
commonly offer coupon payments.
 

    31.    The yield on commercial paper is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period.

a.
greater than; recessionary
b.
greater than; boom economy
c.
less than; boom economy
d.
less than; recessionary
 

    32.    The yield on NCDs is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period.

a.
greater than; recessionary
b.
greater than; boom economy
c.
less than; boom economy
d.
less than; recessionary
 

    33.    Which of the following is sometimes issued in the primary market by nonfinancial firms to borrow funds?

a.
NCDs
b.
retail CDs
c.
commercial paper
d.
federal funds
 

    34.    The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be

a.
eliminated.
b.
reduced.
c.
increased.
d.
unchanged (there is no effect).
 

    35.    The effective yield of a foreign money market security is ____ when the foreign currency strengthens against the dollar.

a.
increased
b.
reduced
c.
always negative
d.
unaffected
 

    36.    The effective yield of a foreign money market security is ____ when the foreign currency weakens against the dollar.

a.
increased
b.
reduced
c.
always negative
d.
unaffected
 

    37.    Treasury bills are sold through ____ when initially issued.

a.
insurance companies
b.
commercial paper dealers
c.
auction
d.
finance companies
 

    38.    At a given point in time, the actual price paid for a three-month Treasury bill is

a.
usually equal to the par value.
b.
more than the price paid for a six-month Treasury bill.
c.
equal to the price paid for a six-month Treasury bill.
d.
none of the above
 

    39.    The minimum denomination of commercial paper is

a.
$25,000.
b.
$100,000.
c.
$150,000.
d.
$200,000.
 

    40.    Commercial paper is

a.
always directly placed with investors.
b.
always placed with the help of commercial paper dealers.
c.
placed either directly or with the help of commercial paper dealers.
d.
always placed by bank holding companies.
 

    41.    An investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If the Treasury bill is held to maturity, the annualized yield is ____ percent.

a.
6.02
b.
1.54
c.
1.50
d.
6.20
e.
none of the above
 

    42.    When an investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700, the Treasury bill discount is ____ percent.

a.
5.93
b.
6.12
c.
6.20
d.
6.02
e.
none of the above
 

    43.    Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one-year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins?

a.
25.00 percent
b.
35.41 percent
c.
14.59 percent
d.
none of the above
 

    44.    An aggregate purchase by investors of low-yield instruments in favor of high-yield instruments places ____ pressure on the yields of low-yield securities and ____ on the yields of high-yield securities.

a.
upward; upward
b.
downward; downward
c.
upward; downward
d.
downward; upward
 

    45.    Which of the following statements is incorrect with respect to the federal funds rate?

a.
It is the rate charged by financial institutions on loans they extend to each other.
b.
It is not influenced by the supply and demand for funds in the federal funds market.
c.
The federal funds rate is closely monitored by all types of firms.
d.
Many market participants view changes in the federal funds rate to be an indicator of potential changes in other money market rates.
e.
The Federal Reserve adjusts the amount of funds in depository institutions in order to influence the federal funds rate.
 

    46.    Buser Corp. purchases certain securities for $4,921,349, with an agreement to sell them back at a price of $4,950,000 at the end of a 30-day period. The repo rate is ____ percent.

a.
7.08
b.
6.95
c.
6.99
d.
7.04
e.
none of the above
 

    47.    Commercial paper is subject to:

a.
interest rate risk.
b.
default risk.
c.
A and B.
d.
none of the above.
 

    48.    If economic conditions cause investors to sell stocks because they want to invest in safer securities with much liquidity, this should cause a ____ demand for money market securities, which placed ____ pressure on the yields of money market securities.

a.
weak; downward
b.
weak; upward
c.
strong; upward
d.
none of the above
 

    49.    In general the money markets are widely perceived to be efficient in the sense that the prices reflect all available public information.

a. True

b. False

    50.    Money market securities are must have a maturity of three months or less.

a. True

b. False

    51.    Money market securities are issued in the primary market through a telecommunications network by the Treasury, corporations, and financial intermediaries that wish to obtain short-term financing.

a. True

b. False

    52.    An international interbank market facilitates the transfer of funds from banks with excess funds to those with deficient funds.

a. True

b. False

    53.    The interest rate charged for a short-term loan from a bank to a corporation is referred to as the London interbank offer rate (LIBOR).

a. True

b. False

    54.    Money markets are used to facilitate the transfer of short-term funds from individuals, corporations, or governments with excess funds to those with deficient funds.

a. True

b. False

    55.    Because money market securities have a short-term maturity and typically cannot be sold easily, they provide investors with a low degree of liquidity.

a. True

b. False

    56.    There is no limit to the amount of T-bills that can be purchased by noncompetitive bidders in a T-bill auction.

a. True

b. False

    57.    T-bills do not offer coupon payments but are sold at a discount from par value.

a. True

b. False

    58.    Junk commercial paper is commercial paper that is not rated or rated low.

a. True

b. False

    59.    A line of credit provided by a commercial bank allows a company the right (but not the obligation) to borrow a specified maximum amount of funds over a specified period of time.

a. True

b. False

    60.    T-bills must offer a premium above the negotiable certificate of deposit (NCD) to compensate for less liquidity and safety.

a. True

b. False

    61.    Most repo transactions use government securities.

a. True

b. False

    62.    Exporters can hold a banker's acceptance until the date at which payment is to be made, yet they frequently sell the acceptance before then at a discount to obtain cash immediately.

a. True

b. False

    63.    Money market security values are less sensitive to interest rate movements than bonds.

a. True

b. False

    64.    During periods of uncertainty about the economy, there is a shift from risky money market securities to Treasury securities.

a. True

b. False

    65.    The price noncompetitive bidders will pay at a Treasury bill auction is the

a.
highest price entered by a competitive bidder.
b.
highest price entered by a noncompetitive bidder.
c.
weighted average price paid by all competitive bidders whose bids were accepted.
d.
equally weighted average price paid by all competitive bidders whose bids were accepted.
e.
none of the above
 

    66.    Bill Yates, a private investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If Bill holds the Treasury bill to maturity, his annualized yield is ____ percent.

a.
6.02
b.
1.54
c.
1.50
d.
6.20
e.
none of the above
    67.    You purchase a six-month (182-day) T-bill with a $10,000 par value for $9,700. The Treasury bill discount is ____ percent.

a.
5.93
b.
6.12
c.
6.20
d.
6.02
e.
none of the above
 

    68.    A ____ is not a money market security.

a.
Treasury bill
b.
negotiable certificate of deposit
c.
bond
d.
banker's acceptance
e.
All of the above are money market securities.
 

    69.    Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of $3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman's annualized cost of borrowing is estimated to be ____ percent.

a.
14.39
b.
14.13
c.
14.59
d.
14.33
e.
none of the above
 

    70.    When a firm sells its commercial paper at a ____ price than projected, their cost of raising funds will be ____ than what they initially anticipated.

a.
higher; higher
b.
lower; lower
c.
higher; lower
d.
lower; higher
e.
Answers C and D are correct.
 

    71.    Which of the following securities is most likely to be used in a repo transaction?

a.
commercial paper
b.
certificate of deposit
c.
Treasury bill
d.
common stock
e.
All of the above are equally likely to be used in a repo transaction.
 

 

         

 

       1.    The appropriate discount rate for valuing any bond is the

a.
bond's coupon rate.
b.
bond's coupon rate adjusted for the expected inflation rate over the life of the bond.
c.
Treasury bill rate with an adjustment to include a risk premium if one exists.
d.
yield that could be earned on alternative investments with similar risk and maturity.
 

       2.    The valuation of bonds is generally perceived to be ____ the valuation of equity securities.

a.
more difficult than
b.
easier than
c.
just as difficult as
d.
none of the above
 

       3.    A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6 percent. What should be the current price?

a.
$1,069.31
b.
$1,000.00
c.
$9712
d.
$927.66
e.
none of the above
 

       4.    A bond with a ten percent coupon rate bond pays interest semi-annually. Par value is $1,000. The bond has three years to maturity. The investors' required rate of return is 12 percent. What is the present value of the bond?

a.
$1,021
b.
$1,000
c.
$981
d.
$951
e.
none of the above
 

       5.    A bond with a 12 percent quarterly coupon rate has a yield to maturity of 16 percent. The bond has a par value of $1,000 and matures in 20 years. Based on this information, a fair price of this bond is $____.

a.
1,302
b.
763
c.
761
d.
1,299
 

       6.    From the perspective of investing institutions, the most attractive foreign bonds offer a ____ and are denominated in a currency that ____ over the investment horizon.

a.
high yield; appreciates
b.
high yield; remains stable
c.
low yield; appreciates
d.
low yield; depreciates
 

       7.    The value of ____-risk securities will be relatively ____.

a.
high; high
b.
high; low
c.
low; low
d.
none of the above
 

       8.    The larger the investor's ____ relative to the ____, the larger the ____ of a bond with a particular par value.

a.
discount rate; required rate of return; discount
b.
required rate of return; discount rate; discount
c.
required rate of return; discount rate; premium
d.
none of the above
 

       9.    If the coupon rate equals the required rate of return, the price of the bond

a.
should be above its par value.
b.
should be below its par value.
c.
should be equal to its par value.
d.
is negligible.
 

    10.    When financial institutions expect interest rates to ____, they may ____.

a.
increase; sell bonds and buy short-term securities
b.
increase; sell short-term securities and buy bonds
c.
decrease; sell bonds and buy short-term securities
d.
B and C
 

    11.    For a given par value of a bond, the higher the investor's required rate of return is above the coupon rate, the

a.
greater is the premium on the price.
b.
greater is the discount on the price.
c.
smaller is the premium on the price.
d.
smaller is the discount on the price.
 

    12.    Zero coupon bonds with a par value of $1,000,000 have a maturity of 10 years, and a required rate of return of 9 percent. What is the current price?

a.
$363,212
b.
$385,500
c.
$422,400
d.
$424,100
e.
none of the above
 

    13.    If the coupon rate ____ the required rate of return, the price of a bond ____ par value.

a.
equals; equals
b.
exceeds; is less than
c.
is less than; is greater than
d.
B and C
e.
none of the above
 

    14.    As interest rates increase, long-term bond prices

a.
increase by a greater degree than short-term bond prices.
b.
increase by an equal degree as short-term bond prices.
c.
decrease by a greater degree than short-term bond prices.
d.
decrease by an equal degree as short-term bond prices.
e.
decrease by a smaller degree than short-term bond prices.
 

    15.    The prices of bonds with ____ are most sensitive to interest rate movements.

a.
high coupon payments
b.
zero coupon payments
c.
small coupon payments
d.
none of the above (The size of the coupon payment does not affect sensitivity of bond prices to interest rate movements.)
 

    16.    A(n) ____ in the expected level of inflation results in ____ pressure on bond prices.

a.
increase; upward
b.
increase; downward
c.
decrease; downward
d.
none of the above
 

    17.    Other things held constant, bond prices should increase when inflationary expectations rise.

a. True

b. False

    18.    An expected ____ in economic growth places ____ pressure on bond prices.

a.
increase; downward
b.
increase; upward
c.
decrease; downward
d.
none of the above
 

    19.    Assume that the price of a $1,000 zero coupon bond with five years to maturity is $567 when the required rate of return is 12 percent. If the required rate of return suddenly changes to 15 percent, what is the price elasticity of the bond?

a.
-.980
b.
+.980
c.
-.494
d.
+.494
e.
none of the above
 

    20.    If a financial institution's bond portfolio contains a relatively large portion of ____, it will be ____.

a.
high coupon bonds; more favorably affected by declining interest rates
b.
zero or low coupon bonds; more favorably affected by declining interest rates
c.
zero or low coupon bonds; more favorably affected by rising interest rates
d.
high coupon bonds; completely insulated from rising interest rates
 

    21.    The prices of ____-coupon and ____ maturities are most sensitive to changes in the required rate of return.

a.
low; short
b.
low; long
c.
high; short
d.
high; long
 

    22.    An insurance company purchases corporate bonds in the secondary market with six years to maturity. Total par value is $55 million. The coupon rate is 11 percent, with annual interest payments. If the expected required rate of return in 4 years is 9 percent, what will the market value of the bonds be then?

a.
$52,115,093
b.
$55,341,216
c.
$55,000,000
d.
$56,935,022
 

    23.    A $1,000 par bond with five years to maturity is currently priced at $892. Annual interest payments are $90. What is the yield to maturity?

a.
13 percent
b.
12 percent
c.
11 percent
d.
10 percent
 

    24.    A bank buys bonds with a par value of $25 million for $24,040,000. The coupon rate is 10 percent, and the bonds pay annual payments. The bonds mature in four years. The bank wants to sell them in two years, and estimates the required rate of return in two years will be 8 percent. What will the market value of the bonds be in two years?

a.
$24,113,418
b.
$24,667,230
c.
$25,000,000
d.
$25,891,632
 

    25.    The price of short-term bonds are commonly ____ those of long-term bonds.

a.
more volatile than
b.
equally volatile as
c.
less volatile than
d.
A and C occur with about equal frequency
 

    26.    Assume that the value of liabilities equals that of earning assets. If asset portfolio durations are ____ than liability portfolio durations, then the market value of assets are ____ interest-rate sensitive than the market value of liabilities.

a.
greater; more
b.
greater; equally
c.
greater; less
d.
less; equally
e.
B and D
 

    27.    As interest rates consistently rise over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's default risk.)

a.
consistently increase
b.
consistently decrease
c.
remain unchanged
d.
change in a direction that cannot be determined with the above information
    28.    As interest rates consistently decline over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's default risk.)

a.
consistently increase
b.
consistently decrease
c.
remain unchanged
d.
change in a direction that cannot be determined with the above information
 

    29.    If analysts expect that the demand for loanable funds will increase, and the supply of loanable funds will decrease, they would most likely expect interest rates to ____ and prices of existing bonds to ____.

a.
increase; increase
b.
increase; decrease
c.
decrease; decrease
d.
decrease; increase
 

    30.    If analysts expect that the demand for loanable funds will decrease, and the supply of loanable funds will increase, they would most likely expect interest rates to ____ and prices of existing bonds to ____.

a.
increase; increase
b.
increase; decrease
c.
decrease; decrease
d.
decrease; increase
 

    31.    Consider a coupon bond that sold at par value two years ago. If interest rates are much lower now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bonds will be ____ its par value.

a.
above; above
b.
above; below
c.
below; below
d.
below; above
 

    32.    Consider a coupon bond that sold at par value two years ago. If interest rates are much higher now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bonds will be ____ its par value.

a.
above; above
b.
above; below
c.
below; below
d.
below; above
 

    33.    If bond portfolio managers expect interest rates to increase in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions.

a.
increase; increase
b.
increase; decrease
c.
decrease; decrease
d.
decrease; increase
 

    34.    If bond portfolio managers expect interest rates to decrease in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions.

a.
increase; increase
b.
increase; decrease
c.
decrease; decrease
d.
decrease; increase
 

    35.    Which of the following will most likely cause bond prices to increase? (Assume no possibility of higher inflation in the future.)

a.
reduced Treasury borrowing along with anticipation that money supply growth will decrease
b.
reduced Treasury borrowing along with anticipation that money supply growth will increase
c.
an anticipated drop in money supply growth along with increasing Treasury borrowing
d.
higher levels of Treasury borrowing and corporate borrowing
 

    36.    If the United States announces that it will borrow an additional $10 billion, this announcement will normally cause the bond traders to expect

a.
higher interest rates in the future, and will buy bonds now.
b.
higher interest rates in the future, and will sell bonds now.
c.
stable interest rates in the future, and will buy bonds now.
d.
lower interest rates in the future, and will buy bonds now.
e.
lower interest rates in the future, and will sell bonds now.
 

    37.    The market value of long-term bonds is ____ sensitive to interest rate movements; as interest rates fall, the market value of long-term bonds ____.

a.
slightly; rises
b.
very; rises
c.
very; declines
d.
slightly; declines
    38.    The bonds that are most sensitive to interest rate movements have

a.
no coupon and a short-term maturity.
b.
high coupons and a short-term maturity.
c.
high coupons and a long-term maturity.
d.
no coupon and a long-term maturity.
 

    39.    When two securities have the same expected cash flows, the value of the ____ security will be higher than the value of the ____ security.

a.
high-risk; low-risk
b.
low-risk; high-risk
c.
high-risk; high-risk
d.
low-risk; low-risk
e.
none of the above
 

    40.    Morgan would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has 10 years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 6 percent, how much will Morgan pay for the bond?

a.
$1,000.00
b.
$1,147.20
c.
$856.80
d.
none of the above
 

    41.    Sioux Financial Corp. has forecasted its bond portfolio value for one year ahead to be $105 million. In one year, it expects to receive $10,000,000 in coupon payments. The bond portfolio today is worth $101 million. What is the forecasted return of this bond portfolio?

a.
10 percent
b.
8.82 percent
c.
4.32 percent
d.
13.86 percent
e.
none of the above
 

    42.    Hurricane Corp. recently purchased corporate bonds in the secondary market with a par value of $11 million, a coupon rate of 12 percent (with annual coupon payments), and four years until maturity. If Bullock intends to sell the bonds in two years and expects investors' required rate of return at that time on similar investments to be 14 percent at that time, what is the expected market value of the bonds in two years?

a.
$9.33 million
b.
$11.00 million
c.
$10.64 million
d.
$9.82 million
e.
none of the above
 

    43.    Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is

a.
1.90 years.
b.
1.50 years.
c.
1.92 years.
d.
none of the above
 

    44.    Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The modified duration of this bond is

a.
1.73 years.
b.
1.71 years.
c.
1.90 years.
d.
none of the above
 

    45.    The relationship reflecting the actual response of a bond's price to a change in bond yields is

a.
concave.
b.
convex.
c.
linear.
d.
quadratic.
 

    46.    If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds.

a.
increase; upward; downward
b.
decrease; upward; downward
c.
decrease; upward; upward
d.
increase; downward; upward
e.
increase; upward; upward
    47.    Using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes.

a.
matching
b.
laddered
c.
barbell
d.
interest rate
e.
none of the above
    48.    With a(n) ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity. Thus, this strategy allocates some funds to achieving a relatively high return and other funds to covering liquidity needs.

a.
matching
b.
laddered
c.
barbell
d.
interest rate
e.
none of the above
 

    49.    Which of the following bonds is most susceptible to interest rate risk from an investor's perspective?

a.
short-term, high-coupon
b.
short-term, low-coupon
c.
long-term, high-coupon
d.
long-term, zero-coupon
 

    50.    Which of the following is most likely to cause a decrease in bond prices?

a.
a decrease in money supply growth and an increase in the demand for loanable funds
b.
a forecast of decreasing oil prices
c.
a forecast of a stronger dollar
d.
an increase in money supply growth and no change in the demand for loanable funds
 

    51.    If the Treasury issues an unusually large amount of bonds in the primary market, it places ____ on bond prices, and ____ on yields to be earned by investors that purchase bonds and plan to hold them to maturity.

a.
downward pressure; downward pressure
b.
downward pressure; upward pressure
c.
upward pressure; upward pressure
d.
upward pressure; downward pressure
 

    52.    Assume bond portfolio managers actively manage their portfolios. If they expect interest rates to ____, they would shift toward ____.

a.
increase; long-maturity bonds with zero-coupon rates
b.
decrease; short-maturity bonds with high-coupon rates
c.
increase; high-coupon bonds with long maturities
d.
decrease; long-maturity bonds with zero-coupon rates
 

    53.    The market price of a bond is partly determined by the timing of the payments made to bondholders.

a. True

b. False

    54.    The appropriate price of a bond is simply the sum of the cash flows to be received.

a. True

b. False

    55.    The valuation of bonds is generally perceived to be more difficult than the valuation of equity securities.

a. True

b. False

    56.    Bonds that sell below their par value are called premium bonds.

a. True

b. False

    57.    A zero-coupon bond makes no coupon payments.

a. True

b. False

    58.    If the coupon rate of a bond is above the investor's required rate of return, the price of the bond should be below its par value.

a. True

b. False

    59.    An increase in either the risk-free rate or the general level of the risk premium on bonds results in a higher required rate of return and therefore causes bond prices to increase.

a. True

b. False

    60.    The long-term, risk-free interest rate is driven by inflationary expectations, economic growth, the money supply, and the budget deficit.

a. True

b. False

    61.    If the level of inflation is expected to decrease, there will be upward pressure on interest rates and on the required rate of return on bonds.

a. True

b. False

    62.    Foreign investors anticipating dollar depreciation are less willing to hold U.S. bonds because the coupon payments will convert to less of their home currency.

a. True

b. False

    63.    Any announcement that signals stronger than expected economic growth tends to increase bond prices.

a. True

b. False

    64.    Bond price elasticity is the percentage change in bond prices divided by the percentage change in the required rate of return.

a. True

b. False

    65.    As interest rates increase, prices of short-term bonds will decline by a greater degree than prices on long-term bonds.

a. True

b. False

    66.    Duration is a measure of bond price sensitivity.

a. True

b. False

    67.    A bond portfolio containing a large portion of zero-coupon bonds will be more favorably affected by declining interest rates than a bond portfolio containing no zero-coupon bonds.

a. True

b. False

    68.    International diversification of bonds reduces the sensitivity of a bond portfolio to any single country's interest rate movements.

a. True

b. False

    69.    In a laddered strategy, investors create a bond portfolio that will generate periodic income that can match their expected periodic expenses.

a. True

b. False

    70.    Which of the following formulas best describes the value of a bond?

a.

b.

c.

d.

e.
none of the above
 

    71.    Stephanie would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has ten years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 6 percent, how much will Stephanie pay for the bond?

a.
$1,000.00
b.
$1,147.20
c.
$856.80
d.
none of the above
 

    72.    Julia just purchased a $1,000 par value bond with a 10 percent annual coupon rate and a life of twenty years. The bond has four years remaining until maturity, and the yield to maturity is 12 percent. How much did Julia pay for the bond?

a.
$1,063.40
b.
$1,000
c.
$939.25
d.
none of the above
 

    73.    To determine the present value of a bond that pays semiannual interest, which of the following adjustments should not be made to compute the price of the bond?

a.
The annualized coupon should be split in half.
b.
The annual discount rate should be divided by 2.
c.
The number of annual periods should be doubled.
d.
The par value should be split in half.
e.
All of the above adjustments have to be made.
 

    74.    A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to maturity and five years remaining to maturity should sell for

a.
$1,000.00.
b.
$1,081.11.
c.
$798.70.
d.
$880.22.
e.
none of the above.
 

    75.    If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds.

a.
increase; upward; downward
b.
decrease; upward; downward
c.
decrease; upward; upward
d.
increase; upward; upward
e.
increase; downward; upward
 

    76.    An economic announcement signaling ____ economic growth in the future will probably cause bond prices to ____.

a.
weak; decrease
b.
strong; increase
c.
weak; increase
d.
strong; decrease
e.
Answers C and D are correct.
 

    77.    Because of a change in the required rate of return from 11 percent to 13 percent, the bond price of a zero-coupon bond will fall from $1,000 to $860. Thus, the bond price elasticity for this bond is

a.
0.77.
b.
-0.77.
c.
-0.90.
d.
-1.06.
e.
none of the above.
 

    78.    The required rate of return on a certain bond changes from 12 percent to 8 percent, causing the price of the bond to change from $900 to $1,100. The bond price elasticity of this bond is

a.
-0.36.
b.
-0.44.
c.
-0.55.
d.
-0.67.
e.
0.67.
 

    79.    Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is ____ years.

a.
1.92
b.
1.50
c.
1.90
d.
none of the above
    80.    A bond has a $1,000 par value and an 8 percent coupon rate. The bond has four years remaining to maturity and a 10 percent yield to maturity. This bond's modified duration is ____ years.

a.
1.33
b.
1.27
c.
3.24
d.
1.31
e.
none of the above
 

    81.    If investors rely strictly on modified duration to estimate the percentage change in the price of a bond, they will tend to ____ the price decline associated with an increase in rates and ____ the price increase associated with a decrease in rates.

a.
underestimate; underestimate
b.
overestimate; overestimate
c.
underestimate; overestimate
d.
overestimate; underestimate
 

    82.    In the ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity.

a.
matching
b.
laddered
c.
barbell
d.
interest rate
e.
none of the above
 

    83.    Using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes.

a.
matching
b.
laddered
c.
barbell
d.
interest rate
e.
none of the above
 

    84.    Which of the following is not a factor affecting the market price of a foreign bond held by a U.S. investor?

a.
foreign interest rate movements
b.
credit risk
c.
exchange rate fluctuations
d.
All of the above are factors affecting the market price of a foreign bond.
 

 

       1.    A ____ order to buy or sell a stock means to execute the transaction at the best possible price.

a.
market
b.
limit
c.
stop-loss
d.
stop-buy
 

       2.    With a ____ order, the investor specifies a purchase price that is above the current market price.

a.
market
b.
limit
c.
stop-loss
d.
stop-buy
 

       3.    When investors buy stock with borrowed funds, this is sometimes referred to as

a.
use of proxy.
b.
purchasing stock on margin.
c.
a margin call.
d.
a margin residual claim.
 

       4.    The maintenance margin is the minimum amount of the margin that investors must maintain as a percentage of the stock's initial purchase price.

a. True

b. False

       5.    Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to pay $25 a share and borrows the remaining funds at a 12 percent annual interest. What is the return if the investor sells the stock for $55 at the end of one year?

a.
50 percent
b.
30 percent
c.
10 percent
d.
16 percent
e.
8 percent
 

       6.    When a brokerage firm demands more collateral from investors who have borrowed from the brokerage firm to buy stocks, it is making a

a.
margin call.
b.
short sale.
c.
proxy fight.
d.
hedge.
 

       7.    Which of the following statements is incorrect?

a.
In a short sale, investors place an order to sell a stock that they do not own.
b.
Investors sell a stock short when they anticipate that its price will rise.
c.
When investors sell short, they will ultimately have to provide the stock back to the investor from whom they borrowed it.
d.
Short-sellers must make payments to the investor from whom the stock was borrowed to cover the dividend payments that the investor would have received of the stock had not been borrowed.
 

       8.    Program trading

a.
is commonly used to reduce the susceptibility of a stock portfolio to stock market movements.
b.
may involve the purchase of stocks that become "underpriced."
c.
may involve the sale of stocks that become "overpriced."
d.
can be combined with the trading of individual bonds to create portfolio insurance.
e.
none of the above
 

       9.    You purchase a stock with cash, and you earn a negative return on the stock. If you had purchased the stock with 60 percent cash and 40 percent borrowed funds, your return on your investment would have been

a.
positive.
b.
more negative than if you had covered the entire investment with cash.
c.
negative, but more favorable than if you had covered the entire investment with cash.
d.
zero.
 

    10.    Mark would like to purchase a stock priced at $70. Mark thinks he can sell the stock for $100 after one year. If Mark does not borrow any money from his brokerage firm, what is the estimated return on the stock?

a.
30.00 percent
b.
-42.86 percent
c.
-30.00 percent
d.
42.86 percent
e.
none of the above
 

    11.    Mark would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. Mark can either put up the entire amount and purchase the stock, or borrow half of the investment amount from his brokerage firm at an annual interest rate of 12 percent and put up the remainder. Mark thinks he can sell the stock for $100 after one year. If Mark borrows from his brokerage firm, his estimated return on the stock would be ____ percent.

a.
42.86
b.
85.71
c.
73.71
d.
30.00
 

    12.    Karen just purchased a stock costing $33 on margin, paying $23 and borrowing the remainder from a brokerage firm at 15 percent annual interest. The stock pays an annual dividend of $2. If Karen sells the stock after one year at a price of $50, what is the return on the stock?

a.
27.60 percent
b.
82.61 percent
c.
76.09 percent
d.
58.70 percent
e.
none of the above
 

    13.    The present margin requirement is that at least ____ percent of an investor's invested funds must be paid in cash.

a.
20
b.
30
c.
40
d.
50
e.
none of the above
 

    14.    An investor sold a stock short a year ago for $50 per share. The stock's price is currently $52 per share. If the investor is unwilling to accept a loss on the short sale of more than $5 per share on the transaction, she could place a

a.
stop-loss order with a specified selling price of $55 per share.
b.
stop-buy order with a specified purchase price of $55 per share.
c.
stop-loss order with a specified selling price of $45 per share.
d.
stop-buy order with a specified purchase price of $45 per share.
 

    15.    The short interest ratio is commonly measured as the number of shares shorted divided by the number of shares that the firm has repurchased in the last quarter.

a. True

b. False

    16.    Investors can reduce their risk by purchasing a stock on margin instead of using all cash to buy the stock.

a. True

b. False

    17.    A short seller

a.
anticipates that the price of the stock sold short will increase.
b.
earns the difference between what they initially paid for the stock versus what they later sell the stock for.
c.
makes a profit equal to the difference between the original sell price and the price paid for the stock, after subtracting any dividend payments made.
d.
is essentially lending the stock to another investor and will ultimately receive that stock back from that investor.
e.
none of the above
 

    18.    ____ are enforced to restrict the amount of credit extended to customers by stockbrokers.

a.
Limit orders
b.
Margin requirements
c.
Maintenance margins
d.
Initial margins
 

    19.    Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock on margin, paying $25 per share and borrowing the remainder from the brokerage firm at 9 percent annual interest. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is

a.
60 percent.
b.
44 percent.
c.
30 percent.
d.
69 percent.
 

    20.    Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock, using only personal funds and not borrowing from the brokerage firm. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is

a.
26.5 percent.
b.
28.5 percent.
c.
30.5 percent.
d.
34.5 percent.
 

    21.    The risk of a short sale is that the stock price

a.
may decrease over time.
b.
will remain the same.
c.
may increase over time.
d.
none of the above
 

    22.    ____ facilitate stock transactions by taking positions in specific stocks.

a.
Board members
b.
Capstone members
c.
Market makers
d.
None of the above
 

    23.    ____ facilitate transactions on a stock exchange by executing stock transactions for their clients.

a.
Board members
b.
Capstone members
c.
Floor brokers
d.
None of the above
 

    24.    The short interest represents the amount of interest that borrowers owe on loans used to purchase stock.

a. True

b. False

    25.    Which of the following statements is incorrect?

a.
Market-makers take positions to capitalize on the discrepancy between the prevailing stock price and their own valuation of a stock.
b.
Market-makers may take the opposite position of uninformed investors and therefore stand to benefit if their expectations are correct.
c.
Market makers are required to purchase the stocks they are assigned for a price existing when the market opened on any given day.
d.
The spread quoted for a given stock may vary among market-makers.
 

    26.    A short-interest ratio of 20 or more indicates that many investors

a.
believe that the stock price is currently overvalued.
b.
believe that the stock price is currently undervalued.
c.
are selling the stock short.
d.
both A and C
 

    27.    Lisa would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. She can either put up the entire amount and purchase the stock, or borrow $35 from her brokerage firm at an annual interest rate of 12 percent and put up the remainder. She thinks she can sell the stock for $100 after one year. If she borrows from her brokerage firm, her estimated return on the stock would be ____ percent.

a.
42.86
b.
85.71
c.
73.71
d.
30.00
 

    28.    Short-selling a stock refers to

a.
poor performance from purchasing an overvalued stock.
b.
the new issuance of low-priced stocks by firms.
c.
the new issuance of stocks by financially weak firms.
d.
the borrowing of stock owned by someone else and selling it in the market.
 

    29.    Trading halts are imposed by

a.
the SEC.
b.
brokers.
c.
stock exchanges.
d.
the Treasury.
 

    30.    The size of the spread on stocks that have relatively little trading is

a.
smaller to reflect the lower degree of uncertainty.
b.
the same as that of stocks with higher volumes of trading.
c.
wider to reflect the higher degree of uncertainty.
d.
not affected by trading volume.
 

    31.    The ____ the trading volume of a stock, the ____ the spread.

a.
higher; wider
b.
higher; narrower
c.
lower; narrower
d.
none of the above
 

    32.    Electronic communications networks are primarily intended to prevent executives from using inside information when trading stocks.

a. True

b. False

    33.    A ____ is a trading platform on a computer web site that allows investors to trade stocks without the use of a broker.

a.
direct access broker
b.
program trader
c.
market maker
d.
communication network
 

    34.    The NYSE defines ____as the simultaneous buying and selling of a portfolio of at least 15 different stocks that are valued at more than $1 million.

a.
direct access brokering
b.
electronic communication networking
c.
program trading
d.
regulation of stock trading
 

    35.    Trading halts are intended to ensure that the market has complete information before trading on news.

a. True

b. False

    36.    The Division of ____ of the SEC regulates the fair and orderly disclosure trading by ensuring honest practices by various organizations that facilitate the trading of securities.

a.
Corporate Finance
b.
Enforcement
c.
Administration
d.
Market Regulation
 

    37.    The Division of ____ of the SEC assesses possible violations of regulations imposed by the SEC, and can take action against individuals or firms.

a.
Corporate Finance
b.
Enforcement
c.
Administration
d.
Market Regulation
 

    38.    Until recently, international trading of stocks was limited by

a.
transaction costs.
b.
information costs.
c.
exchange rate risk.
d.
all of the above
 

    39.    The transaction costs associated with international trading of stocks have been reduced by

a.
the consolidation of stock exchanges.
b.
extensive computerization.
c.
the Eurolist system.
d.
all of the above
 

    40.    The exchange rate risk associated with international trading of stock has been reduced by

a.
information available on the Internet.
b.
extensive computerization of stock exchanges.
c.
the conversion of many European countries to a single currency.
d.
the Eurolist system.
 

    41.    A market order is an order to buy or sell a stock at the best possible price.

a. True

b. False

    42.    A stop-loss order is a particular type of limit order whereby the investor specifies a selling price that is below the current market price of the stock.

a. True

b. False

    43.    When investors place a limit order, they can place it for the day only.

a. True

b. False

    44.    The initial margin is the minimum amount of margin that investors must maintain as a percentage of the stock's value without receiving a margin call.

a. True

b. False

    45.    A margin call from a broker means that the investor is required to provide more collateral (cash or stocks) or sell the stock.

a. True

b. False

    46.    When investors sell short, they are essentially lending the stock to another investor and will ultimately receive that stock back from the investor to whom they lent it.

a. True

b. False

    47.    A relatively high percentage (such as 3 percent) of the ratio of the number of shares sold short divided by the total number of shares outstanding suggests a large amount of short positions in the market, which implies that a relatively large number of investors expect the stock's price to decline.

a. True

b. False

    48.    Trading halts are intended to prevent insider trading.

a. True

b. False

    49.    A trading halt prevents a stock from experiencing a loss in response to news.

a. True

b. False

    50.    The SEC's Division of Market Regulation assesses possible violations of the SEC's regulations and can take action against individuals or firms.

a. True

b. False

    51.    Regulation Fair Disclosure (FD) requires firms to disclose relevant information first to their most important clients.

a. True

b. False

    52.    ____ offer advice to customers on stocks to buy or sell.

a.
Full-service brokers
b.
Discount brokers
c.
Floor brokers
d.
Specialists
e.
Market-makers
 

    53.    Which of the following statements is incorrect with respect to Regulation Fair Disclosure (FD)?

a.
It required firms to disclose relevant information broadly to investors at the same time.
b.
It restricts firms from providing analysts with information that they could use before the market is aware of the information.
c.
It requires firms to announce a change in expected earnings to all investors and other interested parties at the same time.
d.
It prohibits firms from communicating with analysts after a news announcement is made to all investors.
e.
All of the above are correct with respect to Regulation FD.
 

    54.    A(n) ____ from a broker requires the investor to put up additional collateral.

a.
maintenance margin
b.
initial margin
c.
margin call
d.
trading halt
 

    55.    The short-interest ratio is the shares sold short divided by the

a.
average shares purchased over a recent period.
b.
average daily trading volume over a recent period.
c.
interest rate paid on the short sale.
d.
average daily trading volume on other stocks from the same industry.
 

    56.    A short seller

a.
anticipates that the price of the stock sold short will increase.
b.
earns the difference between what he initially paid for the stock versus what he later sell the stock for.
c.
makes a profit equal to the difference between the original selling price and the price paid for the stock, after subtracting any dividend payments made.
d.
is essentially lending the stock to another investor and will ultimately receive that stock back from that investor.
e.
none of the above
 

    57.    The bid-ask spread is negatively related to

a.
order costs.
b.
inventory costs.
c.
risk
d.
trading volume.
 

    58.    Marziano Co. stock is quoted by a broker as bid $21.20, ask $21.40. The bid-ask spread is ____ percent.

a.
0.94
b.
0.93
c.
0.20
d.
none of the above
 

    59.    Which of the following statements is incorrect with respect to the structure of the SEC?

a.
It is composed of seven commissioners appointed by the president of the United States.
b.
The president selects one commissioner to chair the commission.
c.
Each commissioner serves a five-year term.
d.
Commissioners' terms are staggered.
e.
Commissioners meet to assess whether existing regulations are successfully preventing abuses and to revise the regulations as needed.
 

    60.    The SEC's ____ requires the orderly disclosure of securities trades by various organizations that facilitate the trading of securities.

a.
Division of Corporate Finance
b.
Division of Market Regulation
c.
Division of Enforcement
d.
none of the above
 

    61.    The SEC's ____ reviews the registration statement files when a firm goes public, corporate filings for annual and quarterly reports, and proxy statements that involve voting for board members or other corporate issues.

a.
Division of Corporate Finance
b.
Division of Market Regulation
c.
Division of Enforcement
d.
none of the above
 

 

1. ____ require the owner to clip coupons attached to the bonds and send them to the issuer to receive coupon payments.

a.
Bearer
b.
Registered
c.
Treasury
d.
Corporate
 

       2.    The yield to maturity is the annualized discount rate that equates the future coupon and principal payments to the initial proceeds received from the bond offering.

a. True

b. False

       3.    Note maturities are usually ____, while bond maturities are ____.

a.
less than 10 years; 10 years or more
b.
10 years or more; less than 10 years
c.
less than 5 years; 5 years or more
d.
5 years or more; less than 5 years
 

       4.    Investors in Treasury notes and bonds receive ____ interest payments from the Treasury.

a.
annual
b.
semiannual
c.
quarterly
d.
monthly
 

       5.    The Treasury has relied heavily on ____-year bonds to finance the U.S. budget deficit.

a.
50
b.
70
c.
10
d.
5
 

       6.    Interest earned from Treasury bonds is

a.
exempt from all income tax.
b.
exempt from federal income tax.
c.
exempt from state and local taxes.
d.
subject to all income taxes.
 

       7.    Treasury bond auctions are normally conducted only at the beginning of each year.

a. True

b. False

       8.    ____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased.

a.
Competitive
b.
Noncompetitive
c.
Negotiable
d.
Non-negotiable
 

       9.    Treasury bond dealers

a.
quote an ask price for customers who want to sell existing Treasury bonds to the dealers.
b.
profit from a very wide spread between bid and ask prices in the Treasury securities market.
c.
may trade Treasury bonds among themselves.
d.
make a primary market for Treasury bonds.
 

    10.    Under the STRIP program created by the Treasury, stripped securities are created and sold by the Treasury.

a. True

b. False

    11.    A ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based on this information, the coupon payment after six months will be $____.

a.
250
b.
255
c.
500
d.
510
 

    12.    Bonds issued by ____ are backed by the federal government.

a.
the Treasury
b.
AAA-rated corporations
c.
state governments
d.
city governments
 

    13.    Municipal general obligation bonds are ____. Municipal revenue bonds are ____.

a.
supported by the municipal government's ability to tax; supported by the municipal government's ability to tax
b.
supported by the municipal government's ability to tax; supported by revenue generated from the project
c.
always subject to federal taxes; always exempt from state and local taxes
d.
typically zero-coupon bonds; typically zero-coupon bonds
 

    14.    In general, variable-rate municipal bonds are desirable to investors who expect that interest rates will ____.

a.
remain unchanged
b.
fall
c.
rise
d.
none of the above
 

    15.    Which of the following statements is not true regarding zero-coupon bonds?

a.
They are issued at a deep discount from par value.
b.
Investors are taxed on the total amount of interest earned at maturity.
c.
The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest until maturity.
d.
Zero-coupon bonds are purchased mainly for tax-exempt investment accounts, such as pension funds and individual retirement accounts.
e.
All of the above are true.
 

    16.    A variable rate bond allows

a.
investors to benefit from declining rates over time.
b.
issuers to benefit from rising market interest rates over time.
c.
investors to benefit from rising market interest rates over time.
d.
none of the above.
 

    17.    Corporate bonds that receive a ____ rating from credit rating agencies are normally placed at ____ yields.

a.
higher; lower
b.
lower; lower
c.
higher; higher
d.
none of the above
 

    18.    A private bond placement has to be registered with the SEC.

a. True

b. False

    19.    Which of the following institutions is most likely to purchase a private bond placement?

a.
commercial bank
b.
mutual fund
c.
insurance company
d.
savings institution
 

    20.    A protective covenant may

a.
specify all the rights and obligations of the issuing firm and the bondholders.
b.
require the firm to retire a certain amount of the bond issue each year.
c.
restrict the amount of additional debt the firm can issue.
d.
none of the above
 

    21.    A call provision on bonds normally

a.
allows the firm to sell new bonds at par value.
b.
gives the firm to sell new bonds above market value.
c.
allows the firm to sell bonds to the Treasury.
d.
allows the firm to buy back bonds that it previously issued.
 

    22.    When would a firm most likely call bonds?

a.
after interest rates have declined
b.
if interest rates do not change
c.
after interest rates increase
d.
just before the time at which interest rates are expected to decline
 

    23.    Assume U.S. interest rates are significantly higher than German rates. A U.S. firm with a German subsidiary could achieve a lower financing rate, without exchange rate risk by denominating the bonds in

a.
dollars.
b.
euros and making payments from U.S. headquarters.
c.
euros and making payments from its German subsidiary.
d.
dollars and making payments from its German subsidiary.
 

    24.    Many bonds have different call prices: a higher price for calling the bonds to meet sinking-fund requirements and a lower price if the bonds are called for any other reason.

a. True

b. False

    25.    Bonds that are not secured by specific property are called

a.
a chattel mortgage.
b.
open-end mortgage bonds.
c.
debentures.
d.
blanket mortgage bonds.
 

    26.    Bonds that are secured by personal property are called

a.
chattel mortgage bonds.
b.
first mortgage bonds.
c.
second mortgage bonds.
d.
debentures.
 

    27.    The coupon rate of most variable-rate bonds is tied to

a.
the prime rate.
b.
the discount rate.
c.
LIBOR.
d.
the federal funds rate.
 

    28.    Assume that you purchased corporate bonds one year ago that have no protective covenants. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The market value of your bonds will likely ____ as a result.

a.
rise
b.
decline
c.
be zero
d.
be unaffected
 

    29.    During weak economic periods, newly issued junk bonds require lower risk premiums than in strong economic periods.

a. True

b. False

    30.    ____ bonds have the most active secondary market.

a.
Treasury
b.
Zero-coupon corporate
c.
Junk
d.
Municipal
 

    31.    Some bonds are "stripped," which means that

a.
they have defaulted.
b.
the call provision has been eliminated.
c.
they are transferred into principal-only and interest-only securities.
d.
their maturities have been reduced.
 

    32.    ____ are not primary purchasers of bonds.

a.
Insurance companies
b.
Finance companies
c.
Mutual funds
d.
Pension funds
 

    33.    Leveraged buyouts are commonly financed by the issuance of:

a.
money market securities.
b.
Treasury bonds.
c.
corporate bonds.
d.
municipal bonds.
 

    34.    When firms issue ____, the amount of interest and principal to be paid is based on specified market conditions. The amount of the repayment may be tied to a Treasury bond price index or even to a stock index.

a.
auction-rate securities
b.
structured notes
c.
leveraged notes
d.
stripped securities
 

    35.    Which of the following statements is true regarding STRIPS?

a.
they are issued by the Treasury
b.
they are created and sold by various financial institutions
c.
they are not backed by the U.S. government
d.
they have to be held until maturity
e.
all of the above are true regarding STRIPS
 

    36.    (Financial calculator required.) Lisa can purchase bonds with 15 years until maturity, a par value of $1,000, and a 9 percent annualized coupon rate for $1,100. Lisa's yield to maturity is ____ percent.

a.
9.33
b.
7.84
c.
9.00
d.
none of the above
 

    37.    (Financial calculator required.) Erin is, a private investor, who can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Erin's yield to maturity is ____ percent.

a.
9.96
b.
10.00
c.
10.33
d.
10.24
e.
none of the above
 

    38.    Devin is, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____ percent.

a.
12
b.
9
c.
10.5
d.
more information is needed to answer this question
 

    39.    Which of the following is not true regarding zero-coupon bonds?

a.
They are issued at a deep discount from par value.
b.
Investors are taxed annually on the amount of interest earned, even though the interest will not be received until maturity.
c.
The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest.
d.
Zero-coupon bonds are purchased mainly for tax-exempt investment account, such as pension funds and individual retirement accounts.
e.
all of the above are true
 

    40.    Which of the following is not true regarding the call provision?

a.
It typically requires a firm to pay a price above par value when it calls its bonds.
b.
The difference between the market value of the bond and the par value is called the call premium.
c.
A principal use of the call provision is to lower future interest payments.
d.
A principal use of the call provision is to retire bonds as required by a sinking-fund provision.
e.
A call provision is normally viewed as a disadvantage to bondholders.
 

    41.    If interest rates suddenly ____, those existing bonds that have a call feature are ____ likely to be called.

a.
decline; more
b.
decline; less
c.
increase; more
d.
none of the above
 

    42.    Which of the following would not be a likely example of a protective covenant provision?

a.
a limit on the amount of dividends a firm can pay
b.
a limit on the corporate officers' salaries a firm can pay
c.
the amount of additional debt a firm can issue
d.
a call feature
 

    43.    Bonds are issued in the primary market through a telecommunications network.

a. True

b. False

    44.    Corporate bonds can be placed with investors through a public offering or a private placement.

a. True

b. False

    45.    When a corporation issues bonds, it normally hires a securities firm that targets large institutional investors such as pension funds, bond mutual funds, and insurance companies.

a. True

b. False

    46.    Rule 144A, which allows small individual investors to trade privately-placed bonds (and some other securities) with each other without requiring that the firms that issued the securities to register them with the SEC.

a. True

b. False

    47.    Rule 144A creates liquidity for securities that are privately placed.

a. True

b. False

    48.    Corporate bonds are more standardized than stocks.

a. True

b. False

    49.    Structured notes are issued by firms to borrow funds, and the repayment of interest and principal is based on specified market conditions.

a. True

b. False

    50.    Bonds issued by large well-known corporations in large volume are illiquid because most buyers hold these bonds until maturity.

a. True

b. False

    51.    The bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers.

a. True

b. False

    52.    Bond dealers do not have an inventory of bonds.

a. True

b. False

    53.    Bond dealers specialize in small transactions (less than $100,000) in order to enable small investors to trade bonds.

a. True

b. False

    54.    Many bonds are listed on the New York Stock Exchange (NYSE).

a. True

b. False

    55.    The primary investors in bond markets are institutional investors such as commercial banks, bond mutual funds, pension funds, and insurance companies.

a. True

b. False

    56.    The key difference between a note and a bond is that note maturities are usually less than one year, while bond maturities are one year or more.

a. True

b. False

    57.    Treasury bonds are issued by state and local governments.

a. True

b. False

    58.    Stripped bonds are bonds whose cash flows have been transformed into a security representing the principal payment only and a security representing interest payments only.

a. True

b. False

    59.    Inflation-indexed Treasury bonds are intended for investors who wish to ensure that the returns on their investments keep up with the increase in prices over time.

a. True

b. False

    60.    Savings bonds are bonds issued by the Federal Reserve.

a. True

b. False

    61.    Corporate bonds usually pay interest on an annual basis.

a. True

b. False

    62.    The bond debenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders.

a. True

b. False

    63.    A sinking-fund provision is a requirement that the issuing firm retire a certain amount of the bond issue each year.

a. True

b. False

    64.    Subordinated indentures are debentures that have claims against the firm's assets that are junior to the claims of both mortgage bonds and regular debentures.

a. True

b. False

    65.    High-risk bonds are called trash bonds.

a. True

b. False

    66.    Zero-coupon bonds do not pay interest. Instead, they are issued at a discount from par value.

a. True

b. False

    67.    If interest rates suddenly decline, those existing bonds that have a call feature are less likely to be called.

a. True

b. False

    68.    Which of the following statements is not true regarding STRIPS?

a.
They are not issued by the Treasury.
b.
They are created and sold by various financial institutions.
c.
They are backed by the U.S. government.
d.
They have to be held until maturity.
e.
All of the above are true regarding STRIPS.
 

    69.    (Financial calculator required.) Paul can purchase bonds with 15 years remaining until maturity, a par value of $1,000, and a 9 percent annual coupon rate for $1,100. Paul's yield to maturity is ____ percent.

a.
9.33
b.
7.84
c.
9.00
d.
none of the above
 

    70.    (Financial calculator required.) Steven, a private investor, can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Steven's yield to maturity is ____ percent.

a.
9.96
b.
10.00
c.
10.33
d.
10.24
e.
none of the above
 

    71.    Jim purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Jim will hold the bonds until maturity. Thus, he will earn a return of ____ percent.

a.
12.00
b.
9.00
c.
10.50
d.
More information is needed to answer this question.
 

    72.    Which of the following is not an example of a municipal bond?

a.
general obligation bond
b.
revenue bond
c.
Treasury bond
d.
All of the above are examples of municipal bonds.
 

    73.    Which of the following statements is incorrect?

a.
The municipal bond must pay a risk premium to compensate for the possibility of default risk.
b.
The Treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds.
c.
The income earned from municipal bonds is exempt from federal taxes.
d.
All of the above are true.
 

    74.    Which of the following is not mentioned in your text as a protective covenant?

a.
a limit on the amount of dividends a firm can pay
b.
a limit on the corporate officers' salaries a firm can pay
c.
the amount of additional debt a firm can issue
d.
the appointment of a trustee in all bond indentures
e.
All of the above are mentioned in the text as protective covenants.
 

    75.    Everything else being equal, which of the following bond ratings is associated with the highest yield?

a.
Baa
b.
A
c.
Aa
d.
Aaa
 

    76.    A ____ has first claim on specified assets, while a ____ is a debenture that has claims against a firm's assets that are junior to the claims of mortgage bonds and regular debentures.

a.
first mortgage bond; second mortgage bond
b.
first mortgage bond; debenture
c.
first mortgage bond; subordinated debenture
d.
chattel mortgage bond; subordinated debenture
e.
none of the above
 

    77.    If a firm believes that it will have sufficient cash flows to cover interest payments, it may consider using ____ debt and ____ equity, which implies a ____ degree of financial leverage.

a.
more; less; lower
b.
more; less; higher
c.
less; more; higher
d.
none of the above
 

       1.    Mortgage-backed securities are commonly contained within collateralized debt obligations.

a. True

b. False

       2.    Federally insured mortgages guarantee

a.
loan repayment to the lending financial institution.
b.
that the interest rate will not increase during the life of the mortgage.
c.
the lending financial institution a selling price for the mortgage in the secondary market.
d.
all of the above
 

       3.    At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically ____ the initial interest rate offered on a new adjustable-rate mortgage.

a.
below
b.
above
c.
equal to
d.
all of the above are very common
 

       4.    An institution that originates and holds a fixed-rate mortgage is adversely affected by ____ interest rates; the borrower who was provided the mortgage is adversely affected by ____ interest rates.

a.
stable; decreasing
b.
increasing; stable
c.
increasing; decreasing
d.
decreasing; increasing
       5.    Rates for adjustable-rate mortgages are commonly tied to the

a.
average prime rate over the previous year.
b.
Fed's discount rate over the previous year.
c.
average Treasury bill rate over the previous year.
d.
average Treasury bond rate over the previous year.
 

       6.    Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs) are typically

a.
2 percent per year and 5 percent for the mortgage lifetime.
b.
5 percent per year and 15 percent for the mortgage lifetime.
c.
0 percent per year and 10 percent for the mortgage lifetime.
d.
3 percent per year and 8 percent for the mortgage lifetime.
 

       7.    From the perspective of the lending financial institution, interest rate risk is

a.
lower on a 30-year fixed-rate mortgage than on a 15-year fixed-rate mortgage.
b.
lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
c.
higher on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
d.
higher on a 15-year adjustable-rate mortgage than on a 30-year adjustable-rate mortgage.
 

       8.    Mortgage companies specialize in

a.
purchasing mortgages originated by other financial institutions.
b.
investing and maintaining mortgages that they create.
c.
originating mortgages and selling those mortgages.
d.
borrowing money through the creation of mortgages that is used to invest in real estate.
 

       9.    For any given interest rate, the shorter the life of the mortgage, the ____ the monthly payment and the ____ the total payments over the life of the mortgage.

a.
greater; greater
b.
greater; lower
c.
lower; greater
d.
lower; lower
 

    10.    A financial institution has a higher degree of interest rate risk on a ____ than a ____.

a.
30-year fixed-rate mortgage; 15-year fixed-rate mortgage
b.
30-year variable-rate mortgage; 30-year fixed-rate mortgage
c.
15-year fixed-rate mortgage; 30-year fixed-rate mortgage
d.
15-year variable-rate mortgage; 15-year fixed-rate mortgage
 

    11.    A balloon-payment mortgage requires interest payments for a 10- to 20-year period, at the end of which the borrower must pay the full amount of the principal.

a. True

b. False

    12.    Use an amortization schedule. A 15-year $100,000 mortgage has a fixed mortgage rate of 9 percent. In the first month, the total mortgage payment is $____, and $____ of this amount represents payment of interest.

a.
1,014; 264
b.
1,241; 750
c.
1,014; 750
d.
none of the above
 

    13.    A mortgage that requires interest payments for a three- to five-year period, then full payment of principal, is a(n)

a.
chattel mortgage.
b.
balloon payment mortgage.
c.
variable-rate mortgage.
d.
open-ended mortgage bond.
 

    14.    In an amortization schedule of monthly mortgage payments

a.
the amount of interest in each payment is equal to the principal paid.
b.
interest payments exceed principal payments early on.
c.
principal payments exceed interest payments early on.
d.
B and C both occur with about equal frequency
 

    15.    A mortgage with low initial payments that increase over time without ever leveling off is a

a.
graduated payment mortgage.
b.
growing-equity mortgage.
c.
second mortgage.
d.
shared-appreciation mortgage.
 

    16.    The interest rate on a second mortgage is ____ on a first mortgage created at the same time, because the second mortgage is ____ the existing first mortgage in priority claim against the property in the event of default.

a.
higher than; behind
b.
equal to that; equal to
c.
lower than; ahead of
d.
higher than; ahead of
e.
lower than; behind
 

    17.    Which of the following mortgages allows the home purchaser to obtain a mortgage at a below-market interest rate throughout the life of the mortgage?

a.
second mortgage
b.
growing-equity mortgage
c.
graduated payment mortgage
d.
shared-appreciation mortgage
 

    18.    A ____ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase over the first 5 to 10 years and then level off.

a.
graduated payment mortgage
b.
growing-equity mortgage
c.
second mortgage
d.
shared-appreciation mortgage
 

    19.    Mortgage companies, commercial banks and savings institutions are the primary originators of mortgages.

a. True

b. False

    20.    ____ was created in 1968 as a corporation that is wholly owned by the federal government. It guarantees payment on mortgages that meet specific criteria.

a.
Freddie Mac
b.
Ginnie Mae
c.
Fannie Mae
d.
None of the above
 

    21.    "Securitization" refers to the private insurance of conventional mortgages.

a. True

b. False

    22.    A financial institution may service a mortgage even after selling it.

a. True

b. False

    23.    The difference between the 30-year mortgages rate and the 30-year Treasury bond rate is primarily attributable to

a.
interest rate risk.
b.
reinvestment rate risk.
c.
credit risk.
d.
insurance risk.
 

    24.    Mortgage prices would normally be expected to ____ when the interest rates ____, holding other factors constant.

a.
increase; increase
b.
decrease; decrease
c.
increase; decrease
d.
none of the above
 

    25.    Collateralized mortgage obligations (CMOs) are generally perceived to have

a.
no prepayment risk but some default risk.
b.
no prepayment risk and no default risk.
c.
the same interest rate risk as money market securities.
d.
a high degree of prepayment risk.
    26.    Mortgage prices are subject to

a.
interest rate risk.
b.
credit risk.
c.
prepayment risk.
d.
all of the above.
 

    27.    During a weak economy, the credit risk to a financial institution from investing in mortgage-backed securities representing subprime mortgages is ____ than that of mortgage-backed securities representing prime mortgages.

a.
equal to
b.
slightly less than
c.
more than
d.
substantially less than
 

    28.    ____ are backed by conventional mortgages.

a.
Ginnie Mae mortgage-backed securities
b.
Federal Reserve mortgage-backed securities
c.
Private-label pass-through securities
d.
Shared appreciation pass-through securities
 

    29.    Which of the following is not a guarantor of federally insured mortgages?

a.
the Federal Housing Administration (FHA)
b.
the Veteran's Administration (VA)
c.
the Federal Deposit Insurance Corporation (FDIC)
d.
all of the above are guarantors of federally insured mortgages
 

    30.    ____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages.

a.
Strong; increase; decrease
b.
Strong; increase; increase
c.
Weak; decrease; increase
d.
Weak; increase; increase
e.
Weak; decrease; decrease
 

    31.    A ____ mortgage allows borrowers to initially make small payments on the mortgage, which are then increased on a graduated basis over the first five to ten years; payments then level off from there on.

a.
balloon-payment
b.
graduated-payment
c.
shared-appreciation
d.
growing-equity
e.
none of the above
 

    32.    The adjustable-rate mortgage creates uncertainty for the ____ profit margin, but reduces the uncertainty for the ____.

a.
originator's; borrower
b.
borrower's; originator
c.
government's; originator
d.
none of the above
 

    33.    When financial institutions originate residential mortgages, the mortgage contract should not specify

a.
whether the mortgage is federally insured.
b.
the amount of the loan.
c.
whether the interest rate is fixed or adjustable.
d.
the maturity.
e.
the mortgage contract should specify all of the above
 

    34.    Which of the following is not a common type of mortgage-backed security according to your text?

a.
participation certificates (PCs)
b.
collateralized mortgage obligations (CMOs)
c.
balloon-payment mortgage certificates
d.
private-label pass-through securities
e.
all of the above are common types of mortgage pass-through securities
 

    35.    ____ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates.

a.
Interest rate
b.
Credit
c.
Prepayment
d.
Reinvestment rate
 

    36.    Mortgage-backed securities are assigned ratings by:

a.
rating agencies.
b.
the Treasury.
c.
the Fed.
d.
the mortgage originator.
 

    37.    In a collateralized mortgage obligation (CMO), mortgages are  segmented into ____ (or classes).

a.
balloon payments
b.
caps
c.
tranches
d.
strips
 

    38.    The credit crisis is mostly attributed to the use of:

a.
strict criteria applied by mortgage originators.
b.
liberal criteria applied by mortgage originators.
c.
very tough credit ratings applied to mortgages.
d.
fixed-rate mortgages with long terms to maturity.
 

    39.    Fannie Mae and Freddie Mac experienced financial problems during the credit crisis because they:

a.
were unwilling to finance new mortgages.
b.
invested heavily in balloon mortgages.
c.
invested only in prime mortgages that offered very low returns.
d.
invested heavily in subprime mortgages.
 

    40.    ____ mortgages enabled more people with relatively lower income, or high existing debt, or a small down payment to purchase homes.

a.
Prime
b.
Balloon
c.
Amortized
d.
Subprime
 

    41.    The secondary mortgage market that accommodates originators of mortgages who desire to sell their mortgages before maturity.

a. True

b. False

    42.    Regardless of what happens to market interest rates, most adjustable-rate mortgages (ARMs) specify a maximum allowable fluctuation in the mortgage rate per year and over the mortgage life.

a. True

b. False

    43.    Some adjustable-rate mortgages (ARMs) contain an option clause that allows mortgage holders to switch to a fixed-rate mortgage within a specified period.

a. True

b. False

    44.    Mortgage lenders normally charge a higher initial interest rate on adjustable-rate mortgages than on fixed-rate mortgages.

a. True

b. False

    45.    A balloon-payment mortgage requires interest payments for a three- to five-year period. At the end of this period, full payment of the principal (the balloon payment) is required.

a. True

b. False

    46.    During the early years of a mortgage, most of the monthly payment reflects principal.

a. True

b. False

    47.    Mortgages are rarely sold in the secondary market.

a. True

b. False

    48.    An increase in either the risk-free rate or the risk premium on a fixed-rate mortgage results in a higher required rate of return when investing in the mortgage and therefore causes mortgage prices to decrease.

a. True

b. False

    49.    Strong economic growth tends to reduce the probability that the issuer of a mortgage will default on its debt payments and therefore tends to decrease mortgage prices.

a. True

b. False

    50.    The higher the level of equity invested by the borrower, the higher the probability that the loan will default.

a. True

b. False

    51.    Borrowers who have a lower level of income relative to the periodic loan payments are more likely to default on their mortgages.

a. True

b. False

    52.    Non-U.S. financial institutions never hold mortgages on U.S. property.

a. True

b. False

    53.    The ____ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity.

a.
primary
b.
secondary
c.
money
d.
none of the above
 

    54.    Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ____ risk, because they commonly use funds obtained from short-term customer deposits to make long-term mortgage loans.

a.
exchange rate
b.
prepayment
c.
reinvestment rate
d.
interest rate
e.
exchange rate
 

    55.    From the perspective of the lending financial institution, there is a ____ degree of interest rate risk for ____-maturity mortgages.

a.
higher; shorter
b.
higher; longer
c.
lower; shorter
d.
lower; higher
e.
Answers B and C are correct.
 

    56.    During the early years of a mortgage,

a.
most of the monthly payment reflects principal reduction.
b.
most of the monthly payment reflects interest.
c.
about half of the monthly payment reflects interest.
d.
Cannot answer without more information.
 

    57.    Which of the following will typically require homeowners to ultimately request a new mortgage?

a.
graduated-payment mortgage (GPM)
b.
growing-equity mortgage
c.
balloon-payment mortgage
d.
shared-appreciation mortgage
 

    58.    Which of the following is not true with respect to a growing-equity mortgage?

a.
It is similar to a graduated-payment mortgage.
b.
It allows borrowers to initially make small payments on the mortgage.
c.
It involves increased payments, on a graduated basis, over the first five to ten years of the mortgage.
d.
It involves payments that level off after the first five to ten years of the mortgage.
 

    59.    ____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages.

a.
Strong; decrease; decrease
b.
Strong; increase; increase
c.
Weak; increase; increase
d.
Weak; decrease; increase
e.
Weak; decrease; decrease
 

    60.    The probability that a borrower will default (credit risk) is influenced by all of the following, except

a.
economic conditions.
b.
the level of equity invested by the borrower.
c.
the borrower's income level.
d.
the borrower's credit history.
e.
Credit risk is affected by all of the above.
 

 

         

 

       1.    The price-earnings valuation method applies the ____ price-earnings ratio to ____ earnings per share in order to value the firm's stock.

a.
firm's; industry
b.
firm's; firm's
c.
average industry; industry
d.
average industry; firm's
 

       2.    A firm is expected to generate earnings of $2.22 per share next year. The mean ratio of share price to expected earnings of competitors in the same industry is 15. Based on this information, the valuation of the firm's shares based on the price-earnings (PE) method is

a.
$2.22.
b.
$6.76.
c.
$33.30.
d.
none of the above
 

       3.    The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the firm's future earnings or in choosing the industry composite used to derive the PE ratio.

a. True

b. False

       4.    Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork's dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $____ per share.

a.
33.33
b.
166.67
c.
41.67
d.
60.00
 

       5.    Protsky Inc. just paid a dividend of $2.20 per share. The dividend growth rate for Protsky's dividends is 3 percent per year. If the required rate of return on Protsky stock is 12 percent, the stock should be valued at $____ per share according to the dividend discount model.

a.
24.44
b.
25.18
c.
18.88
d.
75.53
 

       6.    The limitations of the dividend discount model are more pronounced when valuing stocks

a.
that pay most of their earnings as dividends.
b.
that retain most of their earnings.
c.
that have a long history of dividends.
d.
that have constant earnings growth.
 

       7.    Vansel Inc. retains most of its earnings. The company currently has earnings per share of $11. Vansel expects its earnings to grow at a constant rate of 2 percent per year. Furthermore, the average PE ratio of all other firms in Vansel's industry is 12. Vansel is expected to pay dividends per share of $3.50 during each of the next three years. If investors require a 10 percent rate of return on Vansel stock, a fair price for Vansel stock today is $____.

a.
113.95
b.
111.32
c.
105.25
d.
none of the above
 

       8.    When evaluating stock performance, ____ measures variability that is systematically related to market returns; ____ measures total variability of a stock's returns.

a.
beta; standard deviation
b.
standard deviation; beta
c.
intercept; beta
d.
beta; error term
 

       9.    The ____ is commonly used as a proxy for the risk-free rate in the Capital Asset Pricing Model.

a.
Treasury bond rate
b.
prime rate
c.
discount rate
d.
federal funds rate
 

    10.    A beta of 1.8 implies that the stock has a risk premium of 1.8%.

a. True

b. False

    11.    Stock prices of U.S. firms primarily involved in exporting are likely to be ____ affected by a weak dollar and ____ affected by a strong dollar.

a.
favorably; adversely
b.
adversely; adversely
c.
favorably; favorably
d.
adversely; favorably
 

    12.    A weak dollar may enhance the value of a U.S. firm whose sales are dependent on the U.S. economy.

a. True

b. False

    13.    The January effect refers to the ____ pressure on ____ stocks in January of every year.

a.
downward; large
b.
upward; large
c.
downward; small
d.
upward; small
 

    14.    The expected acquisition of a firm typically results in ____ in the target's stock price.

a.
an increase
b.
a decrease
c.
no change
d.
none of the above
 

    15.    The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's volatility.

a.
Sharpe
b.
Treynor
c.
arbitrage
d.
margin
 

    16.    The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's beta.

a.
Sharpe
b.
Treynor
c.
arbitrage
d.
margin
 

    17.    Stock price volatility increased during the credit crisis.

a. True

b. False

    18.    The Sharpe Index measures the

a.
average return on a stock.
b.
variability of stock returns per unit of return
c.
stock's beta adjusted for risk.
d.
excess return above the risk-free rate per unit of risk.
 

    19.    A stock's average return is 11 percent. The average risk-free rate is 9 percent. The stock's beta is 1 and its standard deviation of returns is 10 percent. What is the Sharpe Index?

a.
.05
b.
.5
c.
.1
d.
.02
e.
.2
 

    20.    A stock's average return is 10 percent. The average risk-free rate is 7 percent. The standard deviation of the stock's return is 4 percent, and the stock's beta is 1.5. What is the Treynor Index for the stock?

a.
.03
b.
.75
c.
1.33
d.
.02
e.
50
 

    21.    If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other public information, security markets are

a.
weak-form efficient.
b.
semi-strong form efficient.
c.
strong form efficient.
d.
B and C
e.
none of the above
 

    22.    If security markets are semi-strong form efficient, investors cannot solely use ____ to earn excess returns.

a.
previous price movements
b.
insider information
c.
publicly available information
d.
A and C
 

    23.    The ____ is commonly used to determine what a stock's price should have been.

a.
Capital Asset Pricing Model
b.
Treynor Index
c.
Sharpe Index
d.
B and C
 

    24.    A stock's beta is estimated to be 1.3. The risk-free rate is 5 percent, and the market return is expected to be 9 percent. What is the expected return on the stock based on the CAPM?

a.
5.2 percent
b.
11.7 percent
c.
16.7 percent
d.
4 percent
e.
10.2 percent
 

    25.    According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be ____ affected by a weak dollar. Stock prices of U.S. importing firms could be ____ affected by a weak dollar.

a.
adversely; favorably
b.
favorably; adversely
c.
favorably; favorably
d.
adversely; adversely
 

    26.    The demand by foreign investors for the stock of a U.S. firm sold on a U.S. exchange may be higher when the dollar is expected to ____, other things being equal. (Assume the firm's operations are unaffected by the value of the dollar.)

a.
strengthen
b.
weaken
c.
stabilize
d.
B and C
 

    27.    A higher beta of an asset reflects

a.
lower risk.
b.
lower covariance between the asset's returns and market returns.
c.
higher covariance between the asset's returns and the market returns.
d.
none of the above
 

    28.    The "January effect" refers to a large

a.
rise in the price of small stocks in January.
b.
decline in the price of small stocks in January.
c.
decline in the price of large stocks in January.
d.
rise in the price of large stocks in January.
 

    29.    Technical analysis relies on the use of ____ to make investment decisions.

a.
interest rates
b.
inflationary expectations
c.
industry conditions
d.
recent stock price trends
 

    30.    The capital asset pricing model (CAPM) suggests that the required rate of return on a stock is directly influenced by the stock's :

a.
prevailing level of the industry competition.
b.
beta.
c.
liquidity.
d.
size (market capitalization).
 

    31.    According to the capital asset pricing model, the required return by investors on a security is

a.
inversely related to the risk-free rate.
b.
inversely related to the firm's beta.
c.
inversely related to the market return.
d.
none of the above
 

    32.    Boris stock has an average return of 15 percent. Its beta is 1.5. Its standard deviation of returns is 25 percent. The average risk-free rate is 6 percent. The Sharpe index for Boris stock is

a.
0.35.
b.
0.36.
c.
0.45.
d.
0.28.
e.
none of the above
 

    33.    Morgan stock has an average return of 15 percent, a beta of 2.5, and a standard deviation of returns of 20 percent. The Treynor index of Morgan stock is

a.
0.04.
b.
0.05.
c.
0.35.
d.
0.03.
e.
none of the above
 

    34.    Zilo stock has an average return of 15 percent, a beta of 2.5, and a standard deviation of returns of 20 percent. The Sharpe index of Zilo stock is

a.
0.36.
b.
0.35.
c.
0.28.
d.
0.45.
e.
none of the above
 

    35.    Sorvino Co. is expected to offer a dividend of $3.2 per share per year forever. The required rate of return on Sorvino stock is 13 percent. Thus, the price of a share of Sorvino stock, according to the dividend discount model, is $____.

a.
4.06
b.
4.16
c.
40.63
d.
24.62
e.
none of the above
 

    36.    Kandle stock just paid a dividend of $4.76 per share and plans to pay a dividend of $5 per share next year, which is expected to increase by 3 percent per year subsequently. The required rate of return is 15 percent. The value of Kandle stock, according to the dividend discount model, is $____.

a.
39.67
b.
41.67
c.
33.33
d.
31.73
e.
none of the above
 

    37.    LeBlanc Inc. currently has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as LeBlanc Inc. is 15. LeBlanc is expected to pay a dividend of $3 per share over the next four years, and an investor in LeBlanc requires a return of 12 percent. What is the forecasted stock price of LeBlanc in four years, using the adjusted dividend discount model?

a.
$150.00
b.
$163.91
c.
$45.00
d.
$168.83
e.
none of the above
 

    38.    Tarzak Inc. has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as Tarzak is 15. Tarzak is expected to pay a dividend of $3 per share over the next four years, and an investor in Tarzak requires a return of 12 percent. The estimated stock price of Tarzak today should be ____ using the adjusted dividend discount model.

a.
$116.41
b.
$104.91
c.
$161.15
d.
none of the above
 

    39.    The standard deviation of a stock's returns is used to measure a stock's

a.
volatility.
b.
beta.
c.
Treynor Index.
d.
risk-free rate.
 

    40.    The formula for a stock portfolio's volatility does not contain the

a.
weight (proportional investment) assigned to each stock.
b.
variance (standard deviation squared) of returns of each stock.
c.
correlation coefficients between returns of each stock.
d.
risk-free rate.
 

    41.    If the returns of two stocks are perfectly correlated, then

a.
their betas should each equal 1.0.
b.
the sum of their betas should equal 1.0.
c.
their correlation coefficient should equal 1.0.
d.
their portfolio standard deviation should equal 1.0.
 

    42.    A stock's beta can be measured from the estimate of the using regression analysis.

a.
intercept
b.
market return
c.
risk-free rate
d.
slope coefficient
 

    43.    A beta of 1.1 means that for a given 1 percent change in the value of the market, the is expected to change by 1.1 percent in the same direction.

a.
risk-free rate
b.
stock's value
c.
stock's standard deviation
d.
correlation coefficient
 

    44.    Stock X has a lower beta than Stock Y. The market return for next month is expected to be either -1 percent, +1 percent, or +2 percent with an equal probability of each scenario. The probability distribution of Stock X returns for next month is

a.
the same as that of Stock Y.
b.
more dispersed than that of Stock Y.
c.
less dispersed than that of Stock Y.
d.
zero.
 

    45.    The beta of a stock portfolio is equal to a weighted average of the

a.
betas of stocks in the portfolio.
b.
betas of stocks in the portfolio, plus their correlation coefficients.
c.
standard deviations of stocks in the portfolio.
d.
correlation coefficients between stocks in the portfolio.
 

    46.    Value at risk estimates the ____ a particular investment for a specified confidence level.

a.
beta of
b.
risk-free rate of
c.
largest expected loss to
d.
standard deviation of
 

    47.    A stock has a standard deviation of daily returns of 1 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stock's expected daily return is .2 percent. The lower boundary is

a.
-1.45 percent.
b.
-1.85 percent.
c.
0 percent.
d.
-1.65 percent.
 

    48.    A stock has a standard deviation of daily returns of 3 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stock's expected daily return is .1 percent. The lower boundary is

a.
-1.65 percent.
b.
-3.00 percent.
c.
-4.85 percent.
d.
-5.05 percent.
 

    49.    Which of the following is not commonly used as the estimate of a stock's volatility?

a.
the estimate of its standard deviation of returns over a recent period
b.
the trend of historical standard deviations of returns over recent periods
c.
the implied volatility derived from an option pricing model
d.
the estimate of its option premium derived from an option pricing model
 

    50.    The credit crisis caused major problems in the mortgage market but had no impact on the stock market.

a. True

b. False

    51.    When new information suggests that a firm will experience lower cash flows than previously anticipated or lower risk, investors will revalue the corresponding stock downward.

a. True

b. False

    52.    A relatively simple method of valuing a stock is to apply the mean price-earnings (PE) ratio of all publicly traded competitors in the respective industry to the firm's expected earnings for the year.

a. True

b. False

    53.    While the previous year's earnings are often used as a base for forecasting future earnings, the recent year's earnings do not always provide an accurate forecast of the future.

a. True

b. False

    54.    If investors agree on a firm's forecasted earnings, they will derive the same value for that firm using the PE method to value the firm's stock.

a. True

b. False

    55.    The dividend discount model states that the price of a stock should reflect the present value of the stock's future dividends.

a. True

b. False

    56.    The dividend discount model can be adapted to assess the value of any firm, even those that retain most or all of their earnings.

a. True

b. False

    57.    For firms that do not pay dividends, the free cash flow model may be more suitable than the dividend discount model.

a. True

b. False

    58.    The capital asset pricing model (CAPM) is based on the premise that the only important risk of a firm is unsystematic risk.

a. True

b. False

    59.    The prime rate is commonly used as a proxy for the risk-free rate in the capital asset pricing model (CAPM).

a. True

b. False

    60.    A stock with a beta of 2.3 means that for every 1 percent change in the market overall, the stock tends to change by 2.3 percent in the same direction.

a. True

b. False

    61.    Stocks that have relatively little trading are normally subject to less price volatility.

a. True

b. False

    62.    A firm's stock price is affected not only by macroeconomic and market conditions but also by firm specific conditions.

a. True

b. False

    63.    Stock repurchases are commonly viewed as an unfavorable signal about the firm.

a. True

b. False

    64.    The main source of uncertainty in computing the return of a stock is the dividend to be received next year.

a. True

b. False

    65.    A stock portfolio has more volatility when its individual stock returns are uncorrelated.

a. True

b. False

    66.    Beta serves as a measure of risk because it can be used to derive a probability distribution of returns based on a set of market returns.

a. True

b. False

    67.    The value-at-risk method is intended to warn investors about the potential maximum loss that could occur.

a. True

b. False

    68.    Regarding the value-at-risk method, the same methods used to derive the maximum expected loss of one stock can be applied to derive the maximum expected loss of a stock portfolio for a given confidence level.

a. True

b. False

    69.    Portfolio managers who monitor systematic risk rather than total risk are more concerned about stock volatility than about beta.

a. True

b. False

    70.    Regarding the implied standard deviation, by plugging in the actual option premium paid by investors for a specific stock in the option-pricing model, it is possible to derive the anticipated volatility level.

a. True

b. False

    71.    A portfolio's beta is the sum of the individual forecasted betas, weighted by the market value of each stock.

a. True

b. False

    72.    If beta is thought to be the appropriate measure of risk, a stock's risk-adjusted returns should be determined by the Sharpe index.

a. True

b. False

    73.    The Treynor index is similar to the Sharpe index, except that is uses beta rather than standard deviation to measure the stock's risk.

a. True

b. False

    74.    Fabrizio, Inc. is expected to generate earnings of $1.50 per share this year. If the mean ratio of share price to expected earnings of competitors in the same industry is 20, then the stock price per share is $____.

a.
13.33
b.
3.00
c.
20.00
d.
30.00
e.
none of the above
 

    75.    Which of the following is not a reason the PE ratio method may result in an inaccurate valuation for a firm?

a.
potential errors in the forecast of the firm's beta
b.
potential errors in the forecast of the firm's future earnings
c.
potential errors in the choice of the industry composite used to derive the PE ratio
d.
All of the above are reasons the PE ratio method may result in an inaccurate valuation for a firm.
 

    76.    The ____ is not a measure of a stock's risk.

a.
stock's price volatility
b.
stock's return
c.
stock's beta
d.
value-at-risk method
e.
All of the above are measures of a stock's risk.
    77.    If the standard deviation of a stock's returns over the last 12 quarters is 4 percent, and if there is no perceived change in volatility, there is a ____ percent probability that the stock's returns will be within ____ percentage points of the expected outcome.

a.
68; 4
b.
68; 8
c.
95; 8
d.
95; 6
e.
none of the above
 

    78.    The limitations of the dividend discount model are most pronounced for a firm that

a.
has a high beta.
b.
has high expected future earnings.
c.
distributes most of its earnings as dividends.
d.
retains all of its earnings.
e.
none of the above
 

    79.    Which of the following is incorrect regarding the capital asset pricing model (CAPM)?

a.
It is sometimes used to estimate the required rate of return for any firm with publicly traded stock.
b.
It is based on the premise that the only important risk of a firm is systematic risk.
c.
It is concerned with unsystematic risk.
d.
All of the above are true.
 

    80.    The ____ is not a factor used in the capital asset pricing model (CAPM) to derive the return of an asset.

a.
prevailing risk-free rate
b.
dividend growth rate
c.
market return
d.
covariance between the asset's returns and market returns
e.
All of the above are factors used in the CAPM.
 

    81.    Steam Corp. has a beta of 1.5. The prevailing risk-free rate is 5 percent and the annual market return in recent years has been 11 percent. Based on this information, the required rate of return on Steam Corp. stock is ____ percent.

a.
21.5
b.
6.5
c.
16.5
d.
14.0
e.
none of the above
 

    82.    Which of the following is not a type of factor that drives stock prices, according to your text?

a.
economic factors
b.
market-related factors
c.
firm-specific factors
d.
All of the above are factors that affect stock prices.
 

    83.    The general mood of investors represents:

a.
investor sentiment.
b.
beta.
c.
systematic risk.
d.
unsystematic risk.
 

    84.    ____ is (are) not a firm-specific factor(s) that affect(s) stock prices.

a.
Exchange rates
b.
Dividend policy changes
c.
Stock offerings and repurchases
d.
Earnings surprises
e.
All of the above are firm-specific factors that affect stock prices.
 

 

1. Which of the following statements is incorrect?

a.
A stock is a certificate representing partial ownership in a corporation.
b.
Like debt securities, common stock is issued by firms to obtain funds.
c.
Stocks are issued by corporations to raise short-term funds.
d.
The secondary stock market enables investors to sell stocks that they had previously purchased.
 

       2.    Preferred shareholders

a.
typically have the same voting rights as common shareholders.
b.
do not share the ownership of the firm with common shareholders.
c.
typically participate in the profits of the firm beyond the stated fixed annual dividend.
d.
may not receive a dividend every year.
 

       3.    From a cost perspective, preferred stock is a less desirable source of capital for a firm than bonds.

a. True

b. False

       4.    A ____ requires that dividends cannot be paid on common stock until all current and previously omitted dividends are paid on preferred stock.

a.
residual claim
b.
preferred margin
c.
cumulative provision
d.
liquidation claim
 

       5.    Firms assume ____ risk when they issue preferred stock than when they issue bonds. The payment of dividends on preferred stock ____ be omitted without the firm being forced into bankruptcy.

a.
more; can
b.
less; can
c.
more; cannot
d.
less; cannot
 

       6.    When a corporation first decides to issue stock to the public, it engages in a(n)

a.
secondary offering.
b.
initial public offering.
c.
seasoned equity offering.
d.
none of the above
 

       7.    A firm can best avoid the time lag between registering new securities with the SEC and actually selling them by

a.
use of proxy.
b.
shelf-registration.
c.
use of a margin call.
d.
use of preemptive rights.
 

       8.    The process by which the lead underwriter solicits indications of interest by institutional investors in an IPO at various possible ____ prices is referred to as ____.

a.
IPO; margin selling
b.
offer; secondary market building
c.
offer; bookbuilding
d.
IPO; bookbuilding
 

       9.    To the extent that shares sold during an IPO are discounted from their appropriate price, the proceeds that the issuing firm receives from the IPO are less than it deserves.

a. True

b. False

    10.    The transaction costs to the issuing firm in an IPO is usually ____ percent of the funds raised.

a.
1
b.
3
c.
7
d.
25
 

    11.    If many investors quickly sell an IPO stock in the secondary market, there will be ____ on the stock's price.

a.
upward pressure
b.
downward pressure
c.
no additional pressure
d.
none of the above
 

    12.    The purpose of a lockup provision is to

a.
keep individual investors from buying and selling stock.
b.
prevent downward pressure on the stock's price.
c.
increase the number of outstanding shares.
d.
allocate a larger proportion of stock to institutional investors.
 

    13.    When the lockup period expires, the share price commonly

a.
remains unchanged.
b.
increases significantly.
c.
decreases significantly.
d.
none of the above
 

    14.    IPOs tend to occur more primarily during recessions.

a. True

b. False

    15.    The initial (one-day) return of IPOs in the United States has averaged about ____ percent over the last 30 years.

a.
10
b.
20
c.
30
d.
50
 

    16.    The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called

a.
flipping.
b.
skiing.
c.
flopping.
d.
none of the above
 

    17.    ____ occurs when a securities firm allocates share from an IPO to corporate executives who may be considering an IPO or other business that will require the help of an investment bank.

a.
Flipping
b.
Spinning
c.
Laddering
d.
None of the above
 

    18.    When brokers encourage investors to place bids for IPO shares on the first day that are above the offer price this is referred to as

a.
flipping.
b.
spinning.
c.
laddering.
d.
none of the above
 

    19.    On average, IPOs of firms tend to perform ____ over a period of a year or longer.

a.
well
b.
poorly
c.
about the same as the S&P 500 index
d.
none of the above
 

    20.    A firm that wants to engage in a secondary stock offering does not need to file the offering with the SEC.

a. True

b. False

    21.    A firm will typically attempt to sell shares from a secondary offering

a.
far below the prevailing market price.
b.
far above the prevailing market price.
c.
at the prevailing market price.
d.
at the offer price of the IPO.
 

    22.    Buy and sell orders on the OTC market are completed by

a.
auction on the trading floor.
b.
sealed competitive bids.
c.
noncompetitive bids.
d.
a telecommunications network.
 

    23.    A(n) ____ is a certificate which represents ownership of a foreign stock.

a.
ADR
b.
SEAQ
c.
Nasdaq
d.
AMEX
 

    24.    The first-time issuance of shares by a specific firm to the public is referred to as a(n)

a.
stock repurchase.
b.
secondary stock offering.
c.
initial rights issue.
d.
initial public offering (IPO).
 

    25.    A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n)

a.
stock repurchase.
b.
secondary stock offering.
c.
initial rights issue.
d.
initial public offering (IPO).
 

    26.    Managers of firms may consider a stock repurchase or even a leveraged buyout when they believe their stock is ____ by the market, or a secondary stock offering when they believe their stock is ____ by the market.

a.
undervalued; undervalued
b.
overvalued; overvalued
c.
undervalued; overvalued
d.
overvalued; undervalued
e.
none of the above
 

    27.    The largest organized exchange, listing the largest firms, is the

a.
New York Stock Exchange.
b.
American Stock Exchange.
c.
Midwest Stock Exchange.
d.
Pacific Stock Exchange.
 

    28.    ____ are employed by brokerage firms and execute orders for clients on the floor of the NYSE.

a.
Specialists
b.
Commission brokers
c.
Independent brokers
d.
Dealers
 

    29.    The OTC market does not have a trading floor.

a. True

b. False

    30.    Firms listed as "pink sheets" on the OTC market

a.
are typically very large.
b.
satisfy Nasdaq's listing requirements.
c.
are typically owned by various institutional and individual investors.
d.
none of the above
 

    31.    The prevailing price per share divided by the firm's earnings per share is known as the

a.
dividend yield.
b.
price-earnings ratio.
c.
fully diluted earnings per share.
d.
annual dividend.
 

    32.    The ____ is a value-weighted average of stock prices of 30 large U.S. firms.

a.
Dow Jones Industrial Average
b.
Standard and Poor's 500
c.
New York Stock Exchange Index
d.
Nasdaq
 

    33.    The ____ is a value-weighted index of stock prices of 500 large U.S. firms.

a.
Dow Jones Industrial Average
b.
Standard and Poor's 500
c.
New York Stock Exchange Index
d.
Nasdaq
 

    34.    Sudden favorable news about the performance of a firm will make investors believe that the firm's stock is ____ at its prevailing price.

a.
overvalued
b.
fixed
c.
appropriate
d.
undervalued
 

    35.    Analysts periodically communicate with high-level managers of the firms whose stock they rate.

a. True

b. False

    36.    Shareholders can most easily measure a firm's performance by monitoring changes in its ____ over time.

a.
share price
b.
employee job descriptions
c.
board of directors
d.
asset size
 

    37.    Which of the following is not true regarding the Sarbanes-Oxley Act?

a.
It attempts to force accountants to conform to regular accounting standards in preparing a firm's financial statements.
b.
It requires that only outside board members of a firm be on the firm's audit committee.
c.
It allows public accounting firms to offer nonaudit consulting services to an audit client whether the client's audit committee pre-approves the nonaudit services or not.
d.
It prevents members of a firm's audit committee from receiving consulting of advising fees or other compensation from the firm beyond that earned from serving on the board.
 

    38.    An example of shareholder activism is

a.
communication with the firm.
b.
engaging in a proxy contest.
c.
filing a lawsuit against the board.
d.
all of the above
 

    39.    ____ are acquisitions that require substantial amounts of borrowed funds.

a.
Stock repurchases
b.
Corporate controls
c.
Leveraged buyouts
d.
Stock splits
 

    40.    ____ are not barriers to corporate control to eliminate agency problems.

a.
Leveraged buyouts
b.
Antitakeover amendments
c.
Poison pills
d.
Golden parachutes
 

    41.    Listing stock on a foreign stock exchange

a.
enhances the stock's liquidity.
b.
may increase the firm's perceived financial standing.
c.
may protect a firm against hostile takeovers.
d.
all of the above
 

    42.    American Depository Receipts (ADRs) are similar to

a.
stock options.
b.
bank deposits.
c.
stocks.
d.
bonds.
 

    43.    ____ are portfolios of international stocks created and managed by various financial institutions.

a.
International mutual funds
b.
American Depository Receipts
c.
Exchange rate options
d.
Initial Public Offerings
 

    44.    ____ sell shares to investors and use the proceeds to invest in portfolios of international stocks created and managed by portfolio managers.

a.
International mutual funds
b.
American Depository Receipts
c.
World Equity Depository Receipts
d.
Initial Public Depository Receipts
 

    45.    When a firm buys some of its shares that it had previously issued, this is referred to as a:

a.
reverse IPO.
b.
leveraged buyout.
c.
ladder spin.
d.
stock repurchase.
 

    46.    Whenever _____, the stock price will be driven up.

a.
supply exceeds demand
b.
demand exceeds supply
c.
demand is reduced
d.
none of the above
 

    47.    Which of the following is not a form of shareholder activism?

a.
investors communicating their concerns to other investors in an effort to place more pressure on the firm's managers or its board members
b.
poison pills
c.
shareholder lawsuits
d.
all of the above
 

    48.    Initial public offerings (IPOs) tend to occur more frequently during bearish (weak) stock markets.

a. True

b. False

    49.    Initial public offerings (IPOs) perform ____ on the day following the IPO and ____ for periods of a year or longer after the IPO.

a.
well; poorly
b.
poorly; well
c.
well; well
d.
poorly; poorly
 

    50.    Which of the following is not a part of the over-the-counter market?

a.
the Nasdaq National Market
b.
the Nasdaq Small Cap Market
c.
the OTC Bulletin Board
d.
the New York Stock Exchange
 

    51.    A firm has a current stock price of $15.32. The firm's annual dividend is $1.14 per share. The firm's dividend yield is

a.
.74 percent.
b.
1.34 percent.
c.
7.44 percent.
d.
1.14 percent.
 

    52.    If the secondary market is inactive, then the shares would be illiquid.

a. True

b. False

    53.    Private firms that need a large equity investment but are not yet in a position to go public may attempt to obtain funding from a venture capital (VC) fund.

a. True

b. False

    54.    Venture capital (VC) funds receive money from wealth investors and from pension funds that need to receive their money back in one year or less.

a. True

b. False

    55.    Venture capital (VC) funds commonly serve as advisors to the businesses in which they invest.

a. True

b. False

    56.    Venture capital (VC) funds usually invest in publicly-traded businesses.

a. True

b. False

    57.    Venture capital (VC) funds typically plan to exit from their original investment within a period of about one year.

a. True

b. False

    58.    The phrase "leaving money on the table" refers to investors who pay more for a stock in the secondary market than was paid by those investors who were able to buy shares at the initial (offer) price on the IPO date.

a. True

b. False

    59.    Underwriters sell most or all of the shares of an IPO to institutional investors.

a. True

b. False

    60.    The total cost of engaging in an IPO is usually about 1 percent of the total proceeds.

a. True

b. False

    61.    Since the Sarbanes-Oxley Act of 2002, the initial returns resulting from an IPO have generally been smaller.

a. True

b. False

    62.    In general, secondary offerings cause an immediate increase in the market price of the stock.

a. True

b. False

    63.    Electronic stock exchanges that execute stock transactions electronically are referred to as electronic communications networks (ECNs).

a. True

b. False

    64.    As a result of the Sarbanes-Oxley Act, firms were able to reduce their costs of compiling and reporting financial information.

a. True

b. False

    65.    As a result of the Sarbanes-Oxley Act, there was a reduced likelihood of fraudulent financial reporting by firms.

a. True

b. False

    66.    The legal protection of shareholders varies substantially among countries.

a. True

b. False

    67.    Common law countries such as the U.S., Canada, and the United Kingdom allow for more legal protection than civil law countries such as France or Italy.

a. True

b. False

    68.    The government enforcement of securities laws varies among countries.

a. True

b. False

    69.    The laws of the financial information that must be provided by public companies is similar among all developed countries.

a. True

b. False

    70.    Electronic communications networks (ECNs) are passive funds that track a specific index.

a. True

b. False

    71.    A venture capital fund typically plans to exit from its original investment within about four to seven years.

a. True

b. False

    72.    Venture capital funds typically take over businesses and manage them.

a. True

b. False

    73.    Normally, only the owners of preferred stock are permitted to vote on certain key matters concerning the firm, such as the election of the board of directors.

a. True

b. False

    74.    If investors become dissatisfied with a firm's performance, they can compete with management in soliciting proxy votes in what is known as a proxy fight.

a. True

b. False

    75.    Initial public offerings (IPOs) tend to occur more frequently during bullish stock markets.

a. True

b. False

    76.    According to financial research, there is evidence that the stock price associated with an IPO typically rises on the first day but then declines over time.

a. True

b. False

    77.    Shelf-registration allows firms quick access to funds without repeatedly being slowed by the registration process.

a. True

b. False

    78.    In addition to the Nasdaq market, the OTC market has another segment known as "pink sheets," where smaller stocks are traded.

a. True

b. False

    79.    The Dow Jones Industrial Average (DJIA) is a value-weighted average of stock prices of 30 large U.S. firms.

a. True

b. False

    80.    Research studies have found that the share prices of target firms and of acquiring firms react very positively to announcements of an acquisition.

a. True

b. False

    81.    If managers believe that their firm's stock price is weak because it is undervalued by the market, they may consider repurchasing a portion of the shares that are outstanding.

a. True

b. False

    82.    International exchange-traded funds (ETFs) represent international indexes that reflect composites of stocks for particular countries; shares of the index can be purchased or sold, thereby allowing investors to invest directly in a stock index representing any one of several countries.

a. True

b. False

    83.    Which of the following is not true with respect to venture capital (VC) funds?

a.
When a VC fund decides to invest in a business, it will negotiate the terms of its investment, including the amount of funds it is willing to invest.
b.
One common exit strategy for VC funds is to sell its equity stake to the public before the business engages in a public stock offering.
c.
VC funds receive money from wealthy investors and from pension funds that are willing to maintain the investment for a long-term period.
d.
All of the above are true with respect to VC funds.
 

    84.    Assume a firm that is valued at $800 million with 6 million shares of stock outstanding. This firm's stock should have a price of $____ per share.

a.
6.00
b.
80.00
c.
133.33
d.
none of the above
 

    85.    The owners of common stock are permitted to vote on the

a.
election of the board of directors.
b.
authorization to issue new shares of common stock.
c.
approval of amendments to the corporate charter.
d.
adoption of bylaws.
e.
all of the above
 

    86.    Which of the following is not true with respect to preferred stock?

a.
Preferred stock usually does not allow for significant voting rights.
b.
If the firm does not have sufficient earnings from which to pay the preferred stock dividends, the preferred shareholders may force the firm into bankruptcy.
c.
Normally, the owners of preferred stock do not participate in the profits of the firm beyond the stated fixed annual dividend.
d.
Payment of preferred dividends is not a tax-deductible expense.
e.
All of the above are true.
 

    87.    Which of the following is false with respect to initial public offerings (IPOs)?

a.
IPOs are first-time offerings of shares by a specific firm to the public.
b.
Normally, a firm planning an IPO will hire a securities firm to recommend the amount of stock to issue and the asking price for the stock.
c.
Owners of firms that engage in IPOs are normally required to retain their shares for at least 3 years before selling them in the secondary market.
d.
IPOs are typically intended to raise funds so the corporation can expand.
 

    88.    To discourage flipping, some securities firms make ____ shares of future IPOs available to institutional investors that retain shares for a ____ period of time.

a.
fewer; long
b.
more; short
c.
more; long
d.
Answers A and B are correct.
 

 

ANS:    C                           PTS:     1

 

    89.    There is strong evidence that IPOs of firms perform ____ on average over a period of a year or longer.

a.
well
b.
poorly
c.
very well relative to other firms in their industry
d.
none of the above
 

    90.    Firms are more willing to issue new stock in a secondary stock offering when the market price of their outstanding shares is relatively

a.
high.
b.
low.
c.
either high or low, depending on the overall market.
d.
none of the above
 

    91.    "Pink sheets" are traded on the

a.
New York Stock Exchange.
b.
American Stock Exchange.
c.
over-the-counter market.
d.
Nasdaq market.
 

    92.    The annual dividend on Grozky, Inc. stock is $5 per share and the stock's prevailing price is $93.13 per share. Thus, the stock's dividend yield is ____ percent.

a.
18.63
b.
5.37
c.
8.81
d.
none of the above
 

    93.    Which of the following is not a provision specified in the Sarbanes-Oxley Act?

a.
It requires that only inside board members of a firm be on the firm's audit committee.
b.
It prevents the members of a firm's audit committee from receiving consulting or advising fees or other compensation from the firm beyond that earned from serving on the board.
c.
It requires that the CEO and CFO of firms that are of at least a specified size certify the audited financial statements are accurate.
d.
It allows public accounting firms to offer nonaudit consulting services to an audit client only if the client's audit committee pre-approves the nonaudit services to be rendered before the audit begins.
 

    94.    Which of the following is not a form of shareholder activism?

a.
proxy contests
b.
antitakeover amendments
c.
shareholder lawsuits
d.
all of the above are forms of shareholder activism
 

    95.    Which of the following is not a barrier to corporate control?

a.
antitakeover amendments
b.
proxy contests
c.
poison pills
d.
golden parachutes
e.
all of the above are barriers to corporate control
 

 

 
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