172A CH.2 Review

A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend received by stock investors must have been ______ per share.

$0.45 (60*0.30)/4=0.45

The price quotations of Treasury bonds in the Wall Street Journal show a bid price of 102:12 and an ask price of 102:14. If you sell a Treasury bond, you expect to receive _________.

$1,023.75 P=(102+13/32)*(1000/100)

June call and put options on King Books Inc. are available with exercise prices of $30, $35, and $40. Among the different exercise prices, the call option with the _____ exercise price and the put option with the _____ exercise price will have the greatest value.

$30; $40

A T-bill quote sheet has 90-day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has a $10,000 face value, an investor could buy this bill for _____.

$9,878.50 $10,000*(1-(0.0486*90)/360)

Treasury notes have initial maturities between ________ years.

1 and 10

The minimum tick size, or spread between prices in the Treasury bond market, is

1/64 of a point.

The maximum maturity on commercial paper is _____.

270 days

A tax free municipal bond provides a yield of 2.34%. What is the equivalent taxable yield on the bond given a 28% tax bracket?

3.25% Yield: 0.0234/1-0.28=0.0325

When computing the bank discount yield, you would use ____ days in the year.

360

Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350 million, and $150 million, respectively. If you were to construct a price-weighted index of the three stocks, what would be the index value?

39 Index = (12 + 75 + 30)/3 = 39

The Hydro Index is a price weighted stock index based on the 5 largest boat manufacturers in the nation. The stock prices for the five stocks are $10, $20, $80, $50 and $40. The price of the last stock was just split 2 for 1 and the stock price was halved from $40 to $20. What is the new divisor for a price weighted index?

4.50 Index0: (10+20+80+50+40)/5= 40 Index 1: (10+20+80+50+20)/x=40, x=4.50

A tax free municipal bond provides a yield of 3.2%. What is the equivalent taxable yield on the bond given a 35% tax bracket?

4.92% Yield: 0.032/1-0.35=0.0492

An investor buys a T-bill at a bank discount quote of 4.80 with 150 days to maturity. The investor's actual annual rate of return on this investment is _____.

4.97% Step 1: 10,000*(1-(0.0480*150)/360)=9800 Step 2:(10,000/9800-1 )*(365/150)= 4.97%

81. The Chompers Index is a price weighted stock index based on the 3 largest fast food chains. The stock prices for the three stocks are $54, $23, and $44. What is the price weighted index value of the Chompers Index?

40.33 Index:(54+23+44)/3=40.33

An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and 6.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____.

5% and 5.44% After-tax return on municipal bond = .05 After-tax return on corporate bond = .064(1 - .15) = .0544 = 5.44%

A corporation in a 34% tax bracket invests in the preferred stock of another company and earns a 6% pretax rate of return. An individual investor in a 15% tax bracket invests in the same preferred stock and earns the same pretax return. The after-tax return to the corporation is _______, and the after-tax return to the individual investor is _______.

5.39%; 5.1% After-tax return to corporate investor after 70% exclusion = .06 - (.06 × .30) × .34 = 5.39% After-tax return to individual investor = .06(1 - .15) = 5.1%

A benchmark market value index is comprised of three stocks. Yesterday the three stocks were priced at $12, $20, and $60. The number of outstanding shares for each is 600,000 shares, 500,000 shares, and 200,000 shares, respectively. If the stock prices changed to $16, $18, and $62 today respectively, what is the 1-day rate of return on the index?

6.16%

What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%?

6.48% After-tax yield =.09(1 - .28) = .0648

A bond issued by the state of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket, this bond would provide you with an equivalent taxable yield of _________.

8.68% 8.68% = 6.25%/(1 - .28)

A benchmark index has three stocks priced at $23, $43, and $56. The number of outstanding shares for each is 350,000 shares, 405,000 shares, and 553,000 shares, respectively. If the market value weighted index was 970 yesterday and the prices changed to $23, $41, and $58, what is the new index value?

975 Index:(23*350,000+41*405,000+58*553,000)/(23*350,000+43*405,000+56*553,000)* 970 =975

If a Treasury note has a bid price of $996.25, the quoted bid price in the Wall Street Journal would be _________.

99:20

__________ is not a money market instrument. -A certificate of deposit -A Treasury bill -A Treasury bond -Commercial paper

A Treasury bond

Which one of the following is a true statement regarding corporate bonds? -A corporate callable bond gives its holder the right to exchange it for a specified number of the company's common shares. -A corporate debenture is a secured bond. -A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares. -Holders of corporate bonds have voting rights in the company.

A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares.

Which of the following is not a true statement regarding municipal bonds?

A municipal bond is a debt obligation issued by the federal government.

Suppose the market prices of the 30 stocks in the Dow Jones Industrial Average all change by the same dollar amount on a given day. Assuming there are no stock splits, which stock will have the greatest impact on the average?

All 30 stocks will have the same impact.

45. Which of the following does not approximate the performance of a buy-and-hold portfolio strategy? -An equally weighted index -A price-weighted index -A value-weighted index -All of these options (Weights are not a factor in this situation.)

An equally weighted index

Which of the following is used to back international sales of goods and services?

Bankers' acceptance

_____ is considered to be an emerging market country.

Brazil

______ would not be included in the EAFE index.

Canada

Which one of the following is a true statement?

Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock.

The German stock market is measured by which market index?

DAX

All but which one of the following indices is value weighted? -NASDAQ Composite -S&P 500 -Wilshire 5000 -DJIA

DJIA

A typical bond price quote includes all but which one of the following? -Daily high price for the bond -Closing bond price -Yield to maturity -Dividend yield

Dividend yield

The U.K. stock index is the _________.

FTSE

The Federal Reserve Board of Governors directly controls which of the following interest rates?

Federal funds

85. Which of the following mortgage scenarios will benefit the homeowner the most? -Adjustable rate mortgage when interest rate increases. -Fixed rate mortgage when interest rates falls. -Fixed rate mortgage when interest rate rises. -None of these options, as the banker's interest will always be protected.

Fixed rate mortgage when interest rate rises.

What are business firms most likely to use derivative securities for? -Hedging -Speculating -Doing calculus problems -Market making

Hedging

56. The Hang Seng index reflects market performance on which of the following major stock markets?

Hong Kong

T-bills are issued with initial maturities of: I. 4 weeks II. 16 weeks III. 26 weeks IV. 32 weeks

I and III only

Which of the following are true statements about T-bills? I. T-bills typically sell in denominations of $10,000. II. Income earned on T-bills is exempt from all federal taxes. III. Income earned on T-bills is exempt from state and local taxes.

I and III only -I. T-bills typically sell in denominations of $10,000. -III. Income earned on T-bills is exempt from state and local taxes.

What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11, 2001?

Increase, as the spread usually increases in response to a crisis

Which one of the following is a true statement regarding the Dow Jones Industrial Average? -It is a value-weighted average of 30 large industrial stocks. -It is a price-weighted average of 30 large industrial stocks. -It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange. -It is a value-weighted average of all stocks traded on the New York Stock Exchange.

It is a price-weighted average of 30 large industrial stocks.

Which of the following types of bonds are excluded from most bond indexes?

Junk bonds

The interest rate charged by large banks in London to lend money among themselves is called _________.

LIBOR

Which of the following is not a characteristic of a money market instrument? -Liquidity -Marketability -Low risk -Maturity greater than 1 year

Maturity greater than 1 year

Which one of the following provides the best example of securitization?

Mortgage pass-through security

Which of the following is not a money market instrument? -Treasury bill -Commercial paper -Preferred stock -Bankers' acceptance

Preferred stock

A firm that has large securities holdings and wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following?

Repurchase agreement

Which of the following is most like a short-term collateralized loan?

Repurchase agreement

Which of the following is not a nickname for an agency associated with the mortgage markets? -Fannie Mae -Freddie Mac -Sallie Mae -Ginnie Mae

Sallie Mae

The most marketable money market security is _____.

Treasury bills

40. TIPS are ______.

Treasury bonds that protect investors from inflation

Which of the following is not considered a money market investment? -Bankers' acceptance -Eurodollar -Repurchase agreement -Treasury note

Treasury note

Which of the following is not a characteristic of common stock ownership? -Residual claimant -Unlimited liability -Voting rights -Limited life of the security

Unlimited liability

The Dow Jones Industrial Average is _________. -a price-weighted average -a value weight and average -an equally weighted average -an unweighted average

a price-weighted average

You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wanted to construct an index to track your portfolio performance, your best match for your portfolio would be to construct ______.

a price-weighted index

57. The Standard & Poor's 500 is __________ weighted index.

a value-

Currently, the Dow Jones Industrial Average is computed by _________.

adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends

Which of the following indexes are market value-weighted? I. The NYSE Composite II. The S&P 500 III. The Wilshire 5000

all 3 of them

An index computed from a simple average of returns is a

an _____. /equal weighted index

An investor in a T-bill earns interest by _________.

buying the bill at a discount from the face value to be received at maturity

In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs _________.

by adjusting the divisor

A __________ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date.

call option

Large well-known companies often issue their own short-term unsecured debt notes directly to the public, rather than borrowing from banks; their notes are called _________.

commercial paper

An individual who goes short in a futures position _____.

commits to delivering the underlying commodity at contract maturity

A bond that has no collateral is called a _________.

debenture

Eurodollars are _________.

dollar-denominated deposits at any foreign bank or foreign branch of an American bank

A dollar-denominated deposit at a London bank is called _____.

eurodollars

Deposits of commercial banks at the Federal Reserve are called _____.

federal funds

54. The ________ the ratio of municipal bond yields to corporate bond yields, the _________ the cutoff tax bracket at which more individuals will prefer to hold municipal debt.

higher; lower

58.A firm that fails to pay dividends on its preferred stock is said to be _________.

in arrears

Investors will earn higher rates of returns on TIPS than on equivalent default-risk standard bonds if _______________. -inflation is lower than anticipated over the investment period -inflation is higher than anticipated over the investment period -the U.S. dollar increases in value against the euro -the spread between commercial paper and Treasury securities remains low

inflation is higher than anticipated over the investment period

Preferred stock is like long-term debt in that ___________.

it promises to pay to its holder a fixed stream of income each year

Commercial paper is a short-term security issued by __________ to raise funds.

large well-known companies

The yield on tax-exempt bonds is ______. -usually less than 50% of the yield on taxable bonds -normally about 90% of the yield on taxable bonds -greater than the yield on taxable bonds -less than the yield on taxable bonds

less than the yield on taxable bonds

If you thought prices of stock would be rising over the next few months, you might want to __________________ on the stock.

purchase a call option

A __________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date.

put option

An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond or a corporate bond. She looks up municipal bond yields (rm) but wishes to calculate the taxable equivalent yield r. The formula she should use is given by ______.

r = rm/(1 - 28%)

Ownership of a call option entitles the owner to the __________ to __________ a specific stock, on or before a specific date, at a specific price.

right; buy

Ownership of a put option entitles the owner to the __________ to ___________ a specific stock, on or before a specific date, at a specific price.

right; sell

86. The TED spread refers to -the difference between the Treasury bond rate and the Treasury bill rate. -the difference between the Treasury note rate and the Treasury bill rate. -the difference between the LIBOR rate and the Treasury bill rate. -the difference between the LIBOR rate and the Treasury bond rate.

the difference between the LIBOR rate and the Treasury bill rate.

Treasury bills are financial instruments issued by __________ to raise funds.

the federal government

The purchase of a futures contract gives the buyer _________.

the obligation to buy an item at a specified price

The bid price of a Treasury bill is _________.

the price at which the dealer in Treasury bills is willing to buy the bill

Money market securities are sometimes referred to as cash equivalents because _____.

they are safe and marketable

In a ___________ index, changes in the value of the stock with the greatest market value will move the index value the most, everything else equal.

value-weighted index