Test Bank For Investments, 12th Edition

Student name:__________ MULTIPLE CHOICE – Choose the one alternative that best completes the statement or answers the question. 1) Which of the following are not characteristics of money market instruments? A) Liquidity B) Marketability C) Long maturity D) Liquidity premium E) Long maturity and liquidity premium Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Money market securities 2) The money market is a subsector of the A) commodity market. B) capital market. C) derivatives market. D) equity market. E) None of the options are correct. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Money market securities 3) Treasury Inflation-Protected Securities (TIPS) Version 1 1 A) pay a fixed interest rate for life. B) pay a variable interest rate that is indexed to inflation but maintain a constant principal. C) provide a variable stream of income in real (inflation-adjusted) dollars. D) have their principal adjusted in proportion to the Consumer Price Index. E) provide a constant stream of income in real (inflation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : U.S. Treasury and agency securities 4) Which one of the following is not a money market instrument? A) Treasury bill B) Negotiable certificate of deposit C) Commercial paper D) Treasury bond E) Eurodollar account Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Money market securities 5) T-bills are financial instruments initially sold by ________ to raise funds. Version 1 2 A) commercial banks B) the U.S. government C) state and local governments D) agencies of the federal government E) the U.S. government and agencies of the federal government Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : U.S. Treasury and agency securities 6) The bid price of a T-bill in the secondary market is A) the price at which the dealer in T-bills is willing to sell the bill. B) the price at which the dealer in T-bills is willing to buy the bill. C) greater than the asked price of the T-bill. D) the price at which the investor can buy the T-bill. E) never quoted in the financial press. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Bond price and quotes 7) The smallest component of the money market is A) repurchase agreements. B) small-denomination time deposits. C) savings deposits. D) money market mutual funds. E) commercial paper. Version 1 3 Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Money market securities 8) The smallest component of the fixed-income market is _______ debt. A) Treasury B) other asset-backed C) corporate D) tax-exempt E) mortgage-backed Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Bond markets and trading 9) The largest component of the fixed-income market is _______ debt. A) Treasury B) asset-backed C) corporate D) tax-exempt E) mortgage-backed Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Bond markets and trading Version 1 4 10) Which of the following is not a component of the money market? A) Repurchase agreements B) Eurodollars C) Real estate investment trusts D) Money market mutual funds E) Commercial paper Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Money market securities 11) Commercial paper is a short-term security issued by ________ to raise funds. A) the Federal Reserve Bank B) commercial banks C) large, well-known companies D) the New York Stock Exchange E) state and local governments Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Money market securities 12) Which one of the following terms best describes Eurodollars? Version 1 5 A) Dollar-denominated deposits only in European banks. B) Dollar-denominated deposits at branches of foreign banks in the U.S. C) Dollar-denominated deposits at foreign banks and branches of American banks outside the U.S. D) Dollar-denominated deposits at American banks in the U.S. E) Dollars that have been exchanged for European currency. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Understand Difficulty : 2 Intermediate Topic : Money market securities 13) Deposits of commercial banks at the Federal Reserve Bank are called A) bankers’ acceptances. B) repurchase agreements. C) time deposits. D) federal funds. E) reserve requirements. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Money market securities 14) The interest rate charged by banks with excess reserves at a Federal Reserve Bank to banks needing overnight loans to meet reserve requirements is called the Version 1 6 A) prime rate. B) discount rate. C) federal funds rate. D) call money rate. E) money market rate. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Interest rates 15) Which of the following statement(s) is (are) true regarding municipal bonds? 1.I) A municipal bond is a debt obligation issued by state or local governments. 2.II) A municipal bond is a debt obligation issued by the federal government. 3.III) The interest income from a municipal bond is exempt from federal income taxation. 4.IV) The interest income from a municipal bond is exempt from state and local taxation in the issuing state. A) I and II only B) I and III only C) I, II, and III only D) I, III, and IV only E) I and IV only Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Understand Difficulty : 2 Intermediate Topic : State and local securities 16) Which of the following statements is true regarding a corporate bond? Version 1 7 A) A corporate callable bond gives the holder the right to exchange it for a specified number of the company’s common shares. B) A corporate debenture is a secured bond. C) A corporate indenture is a secured bond. D) A corporate convertible bond gives the holder the right to exchange the bond for a specified number of the company’s common shares. E) Holders of corporate bonds have voting rights in the company. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Understand Topic : Bond types and features 17) In the event of the firm’s bankruptcy, A) the most shareholders can lose is their original investment in the firm’s stock. B) common shareholders are the first in line to receive their claims on the firm’s assets. C) bondholders have claim to what is left from the liquidation of the firm’s assets after paying the shareholders. D) the claims of preferred shareholders are honored before those of the common shareholders. E) the most shareholders can lose is their original investment in the firm’s stock and the claims of preferred shareholders are honored before those of the common shareholders. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Understand Difficulty : 2 Intermediate Topic : Shareholder rights and voting 18) Which of the following is true regarding a firm’s securities? Version 1 8 A) Common dividends are paid before preferred dividends. B) Preferred stockholders have voting rights. C) Preferred dividends are usually cumulative. D) Preferred dividends are contractual obligations. E) Common dividends can usually be paid if preferred dividends have been skipped. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Preferred stock 19) Which of the following is true of the Dow Jones Industrial Average? A) It is a value-weighted average of 30 large industrial stocks. B) It is a price-weighted average of 30 large industrial stocks. C) The divisor must be adjusted for stock splits. D) It is a value-weighted average of 30 large industrial stocks, and the divisor must be adjusted for stock splits. E) It is a price-weighted average of 30 large industrial stocks, and the divisor must be adjusted for stock splits. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Stock market indexes and averages 20) Which of the following indices is (are) market-value weighted? 1.I) The New York Stock Exchange Composite Index 2.II) The Standard and Poor’s 500 Stock Index 3.III) The Dow Jones Industrial Average Version 1 9 A) I only B) I and II only C) I and III only D) I, II, and III E) II and III only Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 2 Intermediate Topic : Stock market indexes and averages 21) The Dow Jones Industrial Average (DJIA) is computed by A) adding the prices of 30 large “blue-chip” stocks and dividing by 30. B) calculating the total market value of the 30 firms in the index and dividing by 30. C) adding the prices of the 30 stocks in the index and dividing by a divisor. D) adding the prices of the 500 stocks in the index and dividing by a divisor. E) adding the prices of the 30 stocks in the index and dividing by the value of these stocks as of some base date period. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Stock market indexes and averages 22) Consider the following three stocks: Stock Stock A Price Number of shares outstanding $ 40 200 Stock B $ 70 Version 1 500 10 Stock C $ 10 600 The price-weighted index constructed with the three stocks is A) 30. B) 40. C) 50. D) 60. E) 70. Question Details Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Apply Topic : Stock market indexes and averages AACSB : Knowledge Application 23) Consider the following three stocks: Stock Stock A Price Number of shares outstanding $ 40 200 Stock B $ 70 500 Stock C $ 10 600 The value-weighted index constructed with the three stocks using a divisor of 100 is A) 1.2. B) 1200. C) 490. D) 4900. E) 49. Version 1 11 Question Details Accessibility : Keyboard Navigation Difficulty : 2 Intermediate Bloom’s : Apply Topic : Stock market indexes and averages AACSB : Knowledge Application 24) Consider the following three stocks: Stock Stock A Price Number of shares outstanding $ 40 200 Stock B $ 70 500 Stock C $ 10 600 Assume at these prices that the value-weighted index constructed with the three stocks is 490. What would the index be if stock B is split 2 for 1 and stock C 4 for 1? A) 265 B) 430 C) 355 D) 490 E) 1000 Question Details Accessibility : Keyboard Navigation Difficulty : 2 Intermediate Bloom’s : Apply Topic : Stock market indexes and averages AACSB : Knowledge Application 25) The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104.25 and a bid price of 104.125. As a buyer of the bond, what is the dollar price you expect to pay? Version 1 12 A) $1,048.00 B) $1,042.50 C) $1,044.00 D) $1,041.25 E) $1,040.40 Question Details Accessibility : Keyboard Navigation Difficulty : 2 Intermediate Bloom’s : Apply Topic : Bond price and quotes AACSB : Knowledge Application 26) The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104.25 and a bid price of 104.125. As a seller of the bond, what is the dollar price you expect to receive? A) $1,048.00 B) $1,042.50 C) $1,041.25 D) $1,041.75 E) $1,040.40 Question Details Accessibility : Keyboard Navigation Difficulty : 2 Intermediate Bloom’s : Apply Topic : Bond price and quotes AACSB : Knowledge Application 27) An investor purchases one municipal and one corporate bond that pay rates of return of 8% and 10%, respectively. If the investor is in the 22% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. Version 1 13 A) 8%; 10% B) 8%; 7.8% C) 6.4%; 8% D) 6.4%; 10% E) 10%; 10% Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Difficulty : 2 Intermediate Bloom’s : Apply Topic : Bond yields and returns AACSB : Knowledge Application 28) An investor purchases one municipal and one corporate bond that pay rates of return of 7.5% and 10.3%, respectively. If the investor is in the 24% marginal tax bracket, his or her aftertax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. A) 7.5%; 10.3% B) 7.5%; 7.83% C) 5.63%; 7.73% D) 5.63%; 10.3% E) 10%; 10% Question Details Accessibility : Keyboard Navigation Difficulty : 2 Intermediate Bloom’s : Apply Topic : Bond yields and returns AACSB : Knowledge Application 29) If a Treasury note has a bid price of $975, the quoted bid price in the Wall Street Journal would be Version 1 14 A) 97:50. B) 97:16. C) 97:80. D) 94:24. E) 97:75. Question Details Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Apply Topic : Bond price and quotes AACSB : Knowledge Application 30) If a Treasury note has a bid price of $995, the quoted bid price in the Wall Street Journal would be A) 99:50. B) 99:16. C) 99:80. D) 99:24. E) 99:32. Question Details Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Apply Topic : Bond price and quotes AACSB : Knowledge Application 31) In calculating the Standard and Poor’s stock price indices, the adjustment for stock split occurs A) by adjusting the divisor. B) automatically. C) by adjusting the numerator. D) quarterly on the last trading day of each quarter. Version 1 15 Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Stock market indexes and averages 32) Which of the following statements regarding the Dow Jones Industrial Average (DJIA) is false? A) The DJIA is a measure of the performance of the stock market. B) The DJIA consists of 30 blue chip stocks. C) The DJIA is affected equally by changes in low- and high-priced stocks. D) The DJIA divisor needs to be adjusted for stock splits. E) The value of the DJIA is much higher than individual stock prices. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Understand Topic : Stock market indexes and averages 33) The index that includes the largest number of actively-traded stocks is A) the NASDAQ Composite Index. B) the NYSE Composite Index. C) the Wilshire 5000 Index. D) the Value Line Composite Index. E) the Russell Index. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Stock market indexes and averages Version 1 16 34) A 5.5%, 20-year municipal bond is currently priced to yield 7.2%. For a taxpayer in the 33% marginal tax bracket, this bond would offer an equivalent taxable yield of A) 8.46%. B) 10.75%. C) 12.40%. D) 3.58%. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Difficulty : 2 Intermediate Bloom’s : Apply Topic : Bond yields and returns 35) If the market prices of each of the 30 stocks in the Dow Jones Industrial Average (DJIA) all change by the same percentage amount during a given day, which stock will have the greatest impact on the DJIA? A) The stock trading at the highest dollar price per share B) The stock having the greatest amount of debt in its capital structure C) The stock having the greatest amount of equity in its capital structure D) The stock having the lowest volatility Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Understand Difficulty : 2 Intermediate Topic : Stock market indexes and averages 36) The stocks on the Dow Jones Industrial Average Version 1 17 A) have remained unchanged since the creation of the index. B) include most of the stocks traded on the NYSE. C) are changed occasionally as circumstances dictate. D) consist of stocks on which the investor cannot lose money. E) include most of the stocks traded on the NYSE and are changed occasionally as circumstances dictate. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Stock market indexes and averages 37) Federally-sponsored agency debt A) is legally insured by the U.S. Treasury. B) would probably be backed by the U.S. Treasury in the event of a near-default. C) has a small positive yield spread relative to U.S. Treasuries. D) would probably be backed by the U.S. Treasury in the event of a near-default and has a small positive yield spread relative to U.S. Treasuries. E) is legally insured by the U.S. Treasury and has a small positive yield spread relative to U.S. Treasuries. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Understand Topic : U.S. Treasury and agency securities 38) Brokers’ calls Version 1 18 A) are funds used by individuals who wish to buy stocks on margin. B) are funds borrowed by the broker from the bank, with the agreement to repay the bank immediately if requested to do so. C) carry a rate that is usually about one percentage point lower than the rate on U.S. Tbills. D) are funds used by individuals who wish to buy stocks on margin and are funds borrowed by the broker from the bank, with the agreement to repay the bank immediately if requested to do so. E) are funds used by individuals who wish to buy stocks on margin and carry a rate that is usually about one percentage point lower than the rate on U.S. T-bills. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Understand Topic : Margin 39) A form of short-term borrowing by dealers in government securities is (are) A) reserve requirements. B) repurchase agreements. C) bankers’ acceptances. D) commercial paper. E) brokers’ calls. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Money market securities 40) Which of the following securities is a money market instrument? Version 1 19 A) Treasury note B) Treasury bond C) Municipal bond D) Commercial paper E) Mortgage security Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Money market securities 41) The yield to maturity reported in the financial pages for Treasury securities A) is calculated by compounding the semiannual yield. B) is calculated by doubling the semiannual yield. C) is also called the bond equivalent yield. D) is calculated as the yield-to-call for premium bonds. E) is calculated by doubling the semiannual yield and is also called the bond equivalent yield. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Bond yields and returns 42) Which of the following is not a mortgage-related government or government-sponsored agency? Version 1 20 A) The Federal Home Loan Bank B) The Federal National Mortgage Association C) The U.S. Treasury D) Freddie Mac E) Ginnie Mae Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Mortgage markets and regulations 43) In order for you to be indifferent between the after-tax returns on a corporate bond paying 8.5% and a tax-exempt municipal bond paying 6.12%, what would your tax bracket need to be? A) 33% B) 72% C) 15% D) 28% E) Cannot be determined from the information given. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Difficulty : 2 Intermediate Bloom’s : Analyze Topic : Bond yields and returns 44) What does the term negotiable mean, with regard to negotiable certificates of deposit? Version 1 21 A) The CD can be sold to another investor if the owner needs to cash it in before its maturity date. B) The rate of interest on the CD is subject to negotiation. C) The CD is automatically reinvested at its maturity date. D) The CD has staggered maturity dates built in. E) The interest rate paid on the CD will vary with a designated market rate. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Money market securities 45) Freddie Mac and Ginnie Mae were organized to provide A) a primary market for mortgage transactions. B) liquidity for the mortgage market. C) a primary market for farm loan transactions. D) liquidity for the farm loan market. E) a source of funds for government agencies. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Understand Topic : Mortgage markets and regulations 46) The type of municipal bond that is used to finance commercial enterprises, such as the construction of a new building for a corporation, is called Version 1 22 A) a corporate courtesy bond. B) a revenue bond. C) a general-obligation bond. D) a tax-anticipation note. E) an industrial-development bond. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Understand Topic : State and local securities 47) Suppose an investor is considering a corporate bond with a 7.17% before-tax yield and a municipal bond with a 5.93% before-tax yield. At what marginal tax rate would the investor be indifferent between investing in the corporate and investing in the muni? A) 15.4% B) 23.7% C) 39.5% D) 17.3% E) 12.4% Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Difficulty : 2 Intermediate Bloom’s : Apply Topic : Bond yields and returns 48) Which of the following are characteristics of preferred stock? 1.I) It pays its holder a fixed amount of income each year at the discretion of its managers. 2.II) It gives its holder voting power in the firm. 3.III) Its dividends are usually cumulative. 4.IV) Failure to pay dividends may result in bankruptcy proceedings. Version 1 23 A) I, III, and IV B) I, II, and III C) I and III D) I, II, and IV E) I, II, III, and IV Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 2 Intermediate Topic : Preferred stock 49) Bond market indexes can be difficult to construct because A) they cannot be based on firms’ market values. B) bonds tend to trade infrequently, making price information difficult to obtain. C) there are so many different kinds of bonds. D) prices cannot be obtained for companies that operate in emerging markets. E) corporations are not required to disclose the details of their bond issues. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Understand Difficulty : 2 Intermediate Topic : Bond market indexes and indicators 50) With regard to a futures contract, the long position is held by A) the trader who bought the contract at the largest discount. B) the trader who has to travel the farthest distance to deliver the commodity. C) the trader who plans to hold the contract open for the lengthiest time period. D) the trader who commits to purchasing the commodity on the delivery date. E) the trader who commits to delivering the commodity on the delivery date. Version 1 24 Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Futures contracts 51) In order for you to be indifferent between the after-tax returns on a corporate bond paying 9% and a tax-exempt municipal bond paying 7%, what would your tax bracket need to be? A) 17.6% B) 27% C) 22.2% D) 19.8% E) Cannot be determined from the information given. Question Details Accessibility : Keyboard Navigation Difficulty : 2 Intermediate Bloom’s : Apply Topic : Stock market indexes and averages AACSB : Knowledge Application 52) In order for you to be indifferent between the after-tax returns on a corporate bond paying 7% and a tax-exempt municipal bond paying 5.5%, what would your tax bracket need to be? A) 22.6% B) 21.4% C) 26.2% D) 19.8% E) Cannot be determined from the information given. Question Details Accessibility : Keyboard Navigation Difficulty : 2 Intermediate Bloom’s : Apply Topic : Stock market indexes and averages AACSB : Knowledge Application Version 1 25 53) An investor purchases one municipal and one corporate bond that pay rates of return of 6% and 8%, respectively. If the investor is in the 24% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. A) 6%; 8% B) 4.5%; 6% C) 4.5%; 8% D) 6%; 6.08% Question Details Accessibility : Keyboard Navigation Difficulty : 2 Intermediate Bloom’s : Apply Topic : Bond yields and returns AACSB : Knowledge Application 54) An investor purchases one municipal and one corporate bond that pay rates of return of 7.2% and 9.1%, respectively. If the investor is in the 12% marginal tax bracket, his or her aftertax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. A) 7.2%; 9.1% B) 7.2%; 8.008% C) 6.12%; 7.735% D) 8.471%; 9.1% Question Details Accessibility : Keyboard Navigation Difficulty : 2 Intermediate Bloom’s : Apply Topic : Bond yields and returns AACSB : Knowledge Application Version 1 26 55) For a taxpayer in the 24% marginal tax bracket, a 20-year municipal bond currently yielding 5.5% would offer an equivalent taxable yield of A) 7.24%. B) 10.75%. C) 5.5%. D) 4.125%. Question Details Accessibility : Keyboard Navigation Difficulty : 2 Intermediate Bloom’s : Apply Topic : Bond yields and returns AACSB : Knowledge Application 56) For a taxpayer in the 12% marginal tax bracket, a 15-year municipal bond currently yielding 6.2% would offer an equivalent taxable yield of A) 6.2%. B) 5.27%. C) 8.32%. D) 7.05%. Question Details Accessibility : Keyboard Navigation Difficulty : 2 Intermediate Bloom’s : Apply Topic : Bond yields and returns AACSB : Knowledge Application 57) With regard to a futures contract, the short position is held by A) the trader who bought the contract at the largest discount. B) the trader who has to travel the farthest distance to deliver the commodity. C) the trader who plans to hold the contract open for the lengthiest time period. D) the trader who commits to purchasing the commodity on the delivery date. E) the trader who commits to delivering the commodity on the delivery date. Version 1 27 Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Understand Topic : Bond yields and returns 58) A call option allows the buyer to A) sell the underlying asset at the exercise price on or before the expiration date. B) buy the underlying asset at the exercise price on or before the expiration date. C) sell the option in the open market prior to expiration. D) sell the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration. E) buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Bond yields and returns 59) A put option allows the holder to A) buy the underlying asset at the strike price on or before the expiration date. B) sell the underlying asset at the strike price on or before the expiration date. C) sell the option in the open market prior to expiration. D) sell the underlying asset at the strike price on or before the expiration date and sell the option in the open market prior to expiration. E) buy the underlying asset at the strike price on or before the expiration date and sell the option in the open market prior to expiration. Version 1 28 Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Futures contracts 60) The ____ index represents the performance of the German stock market. A) DAX B) FTSE C) Nikkei D) Hang Seng Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Options 61) The ____ index represents the performance of the Japanese stock market. A) DAX B) FTSE C) Nikkei D) Hang Seng Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Options 62) The ____ index represents the performance of the U.K. stock market. Version 1 29 A) DAX B) FTSE C) Nikkei D) Hang Seng Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Stock market indexes and averages 63) The ____ index represents the performance of the Hong Kong stock market. A) DAX B) FTSE C) Nikkei D) Hang Seng Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Stock market indexes and averages 64) The ____ index represents the performance of the Canadian stock market. A) DAX B) FTSE C) TSX D) Hang Seng Version 1 30 Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Stock market indexes and averages 65) The ultimate stock index in the U.S. is the A) Wilshire 5000. B) DJIA. C) S&P 500. D) Russell 2000. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Stock market indexes and averages 66) The ____ is an example of a U.S. index of large firms. A) Wilshire 5000 B) DJIA C) DAX D) Russell 2000 E) All of the options. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Stock market indexes and averages 67) The ____ is an example of a U.S. index of small firms. Version 1 31 A) S&P 500 B) DJIA C) DAX D) Russell 2000 E) All of the options are correct. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Stock market indexes and averages 68) The largest component of the money market is/are A) repurchase agreements. B) money market mutual funds. C) T-bills. D) Eurodollars. E) savings deposits. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Stock market indexes and averages 69) Certificates of deposit are insured by the A) SPIC. B) CFTC. C) Lloyds of London. D) FDIC. E) All of the options are correct. Version 1 32 Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Stock market indexes and averages 70) Certificates of deposit are insured for up to ____________ in the event of bank insolvency. A) $10,000 B) $100,000 C) $250,000 D) $500,000 Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Money market securities 71) is The maximum maturity of commercial paper that can be issued without SEC registration A) 270 days. B) 180 days. C) 90 days. D) 30 days. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Financial market regulation and protections Version 1 33 72) Which of the following is used extensively in foreign trade when the creditworthiness of one trader is unknown to the trading partner? A) Repos B) Bankers’ acceptances C) Eurodollars D) Federal funds Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Financial market regulation and protections 73) A U.S. dollar-denominated bond that is sold in Singapore is a(n) A) Eurobond. B) Yankee bond. C) Samurai bond. D) Bulldog bond. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Money market securities 74) A municipal bond issued to finance an airport, hospital, turnpike, or port authority is typically a A) revenue bond. B) general-obligation bond. C) industrial-development bond. D) revenue bond or general-obligation bond. Version 1 34 Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Understand Topic : Money market securities 75) Unsecured bonds are called A) junk bonds. B) debentures. C) indentures. D) subordinated debentures. E) either debentures or subordinated debentures. Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Money market securities 76) A bond that can be retired prior to maturity by the issuer is a(n) ____________ bond. A) convertible B) secured C) unsecured D) callable E) Yankee Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : State and local securities Version 1 35 77) Corporations can exclude ____________% of the dividends received from preferred stock from taxes. A) 50 B) 70 C) 20 D) 15 E) 62 Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Bond types and features 78) You purchased a futures contract on corn at a futures price of 350, and at the time of expiration, the price was 352. What was your profit or loss? A) $2.00 B) −$2.00 C) $100 D) −$100 Question Details Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Apply Topic : Bond types and features AACSB : Knowledge Application 79) You purchased a futures contract on corn at a futures price of 331, and at the time of expiration, the price was 343. What was your profit or loss? Version 1 36 A) −$12.00 B) $12.00 C) −$600 D) $600 Question Details Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Apply Topic : Preferred stock AACSB : Knowledge Application 80) You sold a futures contract on corn at a futures price of 350, and at the time of expiration, the price was 352. What was your profit or loss? A) $2.00 B) −$2.00 C) $100 D) −$100 Question Details Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Apply Topic : Futures prices and profits AACSB : Knowledge Application 81) You sold a futures contract on corn at a futures price of 331, and at the time of expiration, the price was 343. What was your profit or loss? A) −$12.00 B) $12.00 C) −$600 D) $600 Version 1 37 Question Details Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Apply Topic : Futures prices and profits AACSB : Knowledge Application 82) You purchased a futures contract on oats at a futures price of 233.75, and at the time of expiration, the price was 261.25. What was your profit or loss? A) $1375.00 B) −$1375.00 C) −$27.50 D) $27.50 Question Details Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Apply Topic : Futures prices and profits AACSB : Knowledge Application 83) You sold a futures contract on oats at a futures price of 233.75, and at the time of expiration, the price was 261.25. What was your profit or loss? A) $1375.00 B) −$1375.00 C) −$27.50 D) $27.50 Question Details Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Apply Topic : Futures prices and profits AACSB : Knowledge Application Version 1 38 84) What short term interest rate was proposed to be phased out by 2021? A) SONIA B) LIBOR C) Tokyo Interbank rate D) Euribor E) US Treasury Repo Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Stock market indexes and averages 85) rate? What interest rate have British regulators proposed be the new short term benchmark A) SONIA B) LIBOR C) Tokyo Interbank rate D) Euribor E) US Treasury Repo Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Stock market indexes and averages 86) What interest rate have US regulators proposed be the new short term benchmark rate? Version 1 39 A) SONIA B) LIBOR C) Tokyo Interbank rate D) Euribor E) US Treasury Repo Question Details AACSB : Reflective Thinking Accessibility : Keyboard Navigation Bloom’s : Remember Difficulty : 1 Basic Topic : Stock market indexes and averages 87) A corporate bond is listed in the Wall Street Journal and shows an ask price of 98.62. If the corporate bonds have a par value of $1,000, what dollar amount should a buyer expect to pay? A) $98.62 B) $986.20 C) $1,000.00 D) $1,081.25 E) $1,140.40 Question Details Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Apply Topic : Bond price and quotes AACSB : Knowledge Application 88) An investor pays $104,280 for a treasury bond. The price mostly listed in the Wall Street Journal show as the ask price will be _________. Version 1 40 A) 98.20 B) 100.00 C) 104.28 D) 106.33 E) 108.00 Question Details Accessibility : Keyboard Navigation Difficulty : 1 Basic Bloom’s : Apply Topic : Bond price and quotes AACSB : Knowledge Application Version 1 41 Answer Key Test name: Chapter 02 1) E Money market instruments are short-term instruments with high liquidity and marketability; they do not have long maturities nor pay liquidity premiums. 2) E Money market instruments are short-term instruments with high liquidity and marketability; they do not have long maturities nor pay liquidity premiums. 3) E TIPS provide a constant stream of income in real (inflation-adjusted) dollars because their principal is adjusted in proportion to the Consumer Price Index. 4) D Money market instruments are instruments with maturities of one year or less, which applies to all of the options except Treasury bonds. 5) B Only the U.S. government sells T-bills in the primary market. 6) B T-bills are sold in the secondary market via dealers; the bid price quoted in the financial press is the price at which the dealer is willing to buy the bill. 7) E 8) B According to Figure 2.9, other asset-backed debt is the smallest component of the fixed-income market. 9) A Version 1 42 According to Figure 2.9 Treasury debt is the largest component of the fixed-income market. 10) C Real estate investment trusts are not short-term investments. 11) C Commercial paper is short-term unsecured financing issued directly by large, presumably safe corporations. 12) C Although originally Eurodollars were used to describe dollardenominated deposits in European banks, today the term has been extended to apply to any dollar-denominated deposit outside the U.S. 13) D The federal funds are required for the bank to meet reserve requirements, which is a way of influencing the money supply. No substitutes for fed funds are permitted. 14) C The federal funds are required for the bank to meet reserve requirements, which is a way of influencing the money supply. 15) D State and local governments and agencies thereof issue municipal bonds on which the interest income is free from all federal taxes and is exempt from state and local taxation in the issuing state. 16) D “A corporate convertible bond gives the holder the right to exchange the bond for a specified number of the company’s common shares” is the only true statement; all other statements describe something other than the term specified. 17) E Version 1 43 Shareholders have limited liability and have residual claims on assets. Bondholders have a priority claim on assets, and preferred shareholders have priority over common shareholders. 18) C Preferred dividends must be paid first and any skipped preferred dividends must be paid before common dividends may be paid. 19) E The Dow Jones Industrial Average is a price-weighted index of 30 large industrial firms, and the divisor must be adjusted when any of the stocks on the index split. 20) B The Dow Jones Industrial Average is a price-weighted index. 21) C When the DJIA became a 30-stock index, it was computed by adding the prices of 30 large “blue-chip” stocks and dividing by 30; however, as stocks on the index have split and been replaced, the divisor has been adjusted. 22) B ($40 + $70 + $10)/3 = $40. 23) C The sum of the value of the three stocks divided by 100 is 490: [($40 × 200) + ($70 × 500) + ($10 × 600)]/100 = 490. 24) D Value-weighted indexes are not affected by stock splits. 25) B You pay the asking price of the dealer, 104 8/32, or 104.25% of $1,000, or $1,042.50. 26) C You receive the bid price of the dealer, 104 4/32, or 104.125% of $1,000, or $1,041.25. Version 1 44 27) B rc = 0.10(1− 0.22) = 0.078, or 8%; rm = 0.08(1 − 0) = 8%. 28) B rc = 0.103(1 − 0.24) = 0.0783, or 7.83%; rm = 0.075(1 − 0) = 7.5%. 29) B Treasuries are quoted as a percent of $1,000 and in 1/32s. 30) B Treasuries are quoted as a percent of $1,000 and in 1/32s. 31) B The calculation of the value-weighted S&P indices includes both price and number of shares of each of the stocks in the index. Thus, the effects of stock splits are automatically incorporated into the calculation. 32) C The high-priced stocks have much more impact on the DJIA than do the lower-priced stocks. 33) C The Wilshire 5000 is the largest readily available stock index, consisting of the stocks traded on the organized exchanges and the OTC stocks. 34) B 0.072 = r(1− t); 0.072 = r(0.67); r = 0.072/0.67; r = 0.1075 = 10.75%. 35) A Higher-priced stocks affect the DJIA more than lower-priced stocks; other choices are not relevant. 36) C The stocks on the DJIA are only a small sample of the entire market and have been changed occasionally since the creation of the index; one can lose money on any stock. 37) D Version 1 45 Federally sponsored agencies are not government owned. These agencies’ debt is not insured by the U.S. Treasury, but probably would be backed by the Treasury in the event of an agency near-default. As a result, the issues are very safe and carry a yield only slightly higher than that of U.S. Treasuries. 38) D Brokers’ calls are funds borrowed from banks by brokers and loaned to investors in margin accounts. 39) B Repurchase agreements are a form of short-term borrowing, where a dealer sells government securities to an investor with an agreement to buy back those same securities at a slightly higher price. 40) D Only commercial paper is a money market security. The others are capital market instruments. 41) E The yield to maturity shown in the financial pages is an APR calculated by doubling the semiannual yield. 42) C Only the U.S. Treasury issues securities that are not mortgage-backed. 43) D 0.0612 = 0.085(1 − t); (1 − t) = 0.72; t = 0.28. 44) A Negotiable means that it can be sold or traded to another investor. 45) B Liquidity for the mortgage market. 46) E Industrial development bonds allow private enterprises to raise capital at lower rates. 47) D Version 1 46 tm = 1− (5.93%/7.17%) = 17.29%. 48) C Only I and III are true. 49) B Bond trading is often “thin,” making prices stale (or not current). 50) D The trader agreeing to buy the underlying asset is said to be long the contract, whereas the trader agreeing to deliver the underlying asset is said to be short the contract. 51) C 0.07 = 0.09(1− t); (1 − t) = 0.777; t = 0.222. 52) B 0.055 = 0.07(1 – t); (1 – t) = 0.786; t = 0.214. 53) D rc = 0.08(1 − 0.24) = 0.0608, or 6%; rm = 0.06(1 − 0) = 6%. 54) B rc = 0.091(1− 0.12) = 0.08008, or 8.008%; rm = 0.072(1 − 0) = 7.2%. 55) A 0.055 = r(1 − t); r = 0.055/0.76; r = 0.0724. 56) D 0.062 = r(1 – t); r = 0.062/(0.88); r = 0.0705 = 7.05%. 57) E The trader agreeing to buy the underlying asset is said to be long the contract, whereas the trader agreeing to deliver the underlying asset is said to be short the contract. 58) B A call option may be exercised (allowing the holder to buy the underlying asset) on or before expiration. 59) B Version 1 47 A put option allows the buyer to sell the underlying asset at the strike price on or before the expiration date. 60) A Many major foreign stock markets exist, including the DAX (Germany), FTSE (UK), Nikkei (Japan), Hang Seng (Hong Kong), and TSX (Canada). 61) C Many major foreign stock markets exist, including the DAX (Germany), FTSE (UK), Nikkei (Japan), Hang Seng (Hong Kong), and TSX (Canada). 62) B Many major foreign stock markets exist, including the DAX (Germany), FTSE (UK), Nikkei (Japan), Hang Seng (Hong Kong), and TSX (Canada). 63) D Many major foreign stock markets exist, including the DAX (Germany), FTSE (UK), Nikkei (Japan), Hang Seng (Hong Kong), and TSX (Canada). 64) C Many major foreign stock markets exist, including the DAX (Germany), FTSE (UK), Nikkei (Japan), Hang Seng (Hong Kong), and TSX (Canada). 65) A The Wilshire 5000 is the broadest U.S. index and contains more than 7000 stocks. 66) B The DJIA contains 30 of some of the largest firms in the U.S. 67) D The Russell 2000 is a small firm index. The DJIA and S&P 500 are large firm U.S. indexes and the DAX is a large German firm index. Version 1 48 68) E 69) D The Federal Deposit Insurance Corporation (FDIC) insures saving deposits for up to $250,000. 70) C The Federal Deposit Insurance Corporation (FDIC) insures saving deposits for up to $250,000. 71) A The SEC permits issuing commercial paper for a maximum of 270 days without registration. 72) B A bankers’ acceptance facilitates foreign trade by substituting a bank’s credit for that of the trading partner. 73) A Eurobonds are bonds denominated in a currency other than the currency of the country in which they are issued. 74) A Revenue bonds depend on revenues from the project to pay the coupon payment and are normally issued for airports, hospitals, turnpikes, or port authorities. General obligation bonds are backed by the taxing power of the municipality. Industrial development bonds are used to support private enterprises. 75) E Debentures are unsecured bonds. 76) D Only callable bonds can be retired prior to maturity. 77) A Corporations can exclude 50% of dividends received. 78) C Version 1 49 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was (3.52 − 3.50) = $0.02 per bushel, or $0.02 × 5,000 = $100. 79) D There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was (3.43 − 3.31) = $0.12 per bushel, or $0.12 × 5,000 = $600. 80) D There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your loss was ($3.50 − $3.52) = −$0.02 per bushel, or −$0.02 × 5,000 = −$100. 81) C There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was ($3.31 − $3.43) = −$0.12 per bushel, or −$0.12 × 5,000 = −$600. 82) A There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was ($2.6125 − $2.3375) = $0.275 per bushel, or $0.275 × 5,000 = $1,375. 83) B There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your loss was ($2.3375 − $2.6125) = −$0.275 per bushel, or − $0.275 × 5,000 = −$1,375. 84) B 85) A 86) E 87) B You pay $1,000 × 0.9862 = $986.20 88) C The price listed will be $104,280/$100,000 = 104.28 Version 1 50 Version 1 51