Exam 2 Review

An order to buy shares of stock at a stated price or less is called a _____ order. A) limit B) stop C) market D) short E) bid

A

Closed-end funds and exchange-traded funds (ETFs) have which of the following characteristics in common? A) Shares of both closed-end funds and ETFs trade in the secondary market. B) Both closed-end funds and ETFs stand ready to redeem shares. C) The structures of closed-end funds and ETFs prevent shares from trading at a significant premium or discount to NAV. D) Neither ETF nor closed-end fund managers receive a management fee.

A

Growth, value, large-cap, and small-cap investing are all examples of: A) Style investment strategies B) Sector investment strategies C) Index investment strategies D) Lifestyle investment strategies

A

If the pricebook ratio is greater than 1.0, then the: A) firm has created value for its shareholders. B) priceearnings ratio must equal 1.0. C) firm has positive earnings per share. D) cash flow per share must equal the earnings per share. E) cash flow per share must be greater than the earnings per share.

A

One of the main advantages to investing in a fund of funds (FOF) is that FOFs provide: A) Improved diversification of assets B) Higher expected returns C) Lower management fees D) Higher volatility of returns

A

Residual income is: A) The actual earnings less expected earnings. B) Any increase in the value of the firm. C) The value of profitable investment projects. D) The value added by economical use of assets.

A

Small stocks tend to earn higher returns during the: A) first few days of a new year. B) last week of January. C) week including April 15th. D) last week of September. E) first few days of December.

A

The market segmentation theory states that interest rates on debt vary dependent upon market segments which are segmented based upon which one of the following? A) time to maturity B) type of borrower C) use of funds D) principal amount E) type of lender

A

The residual income model separates the value of the firm into two basic components. What are these two components? A) The current book value and the present value of future earnings. B) The value of earnings per share and the value of cash flow per share. C) The current value of the firm's shares and the future value of its shares. D) The time value of money and the value of bearing risk.

A

Which of the following are three key advantages of mutual funds? A) low initial investments, professional management, diversification B) costs, diversification, liquidity C) professional management, high initial investments, taxes D) liquidity, high initial investments, diversification E) diversification, taxes, high initial investments

A

Which of the following mutual fund fees will most likely be the biggest expense for a long-term fund investor? A) 12b-1 fees B) Front-end load C) Back-end load D) Contingent deferred sales charge (CDSC)

A

Which one of the following correctly identifies the phenomenon that states that one month as the greatest tendency for small stocks to earn large returns? A) January effect B) September effect C) October effect D) December effect E) March effect

A

HiTek Electronics is a relatively young firm which plans on paying its first dividend next year in the amount of $.25 a share. HiTek plans to steadily increase its dividend to $1 per share within the next three years and then maintain a constant dividend growth rate of 5 percent forever. Which valuation method should you use to determine the value of HiTek's stock today? A) dividend discount model B) twostage dividend growth model C) constant growth rate model D) sustainable growth rate model E) constant perpetual growth model

B

In applying the constant growth dividend discount model, a stock's intrinsic value will do which of the following when the required rate of return is lowered? A) Decrease. B) Increase C) Remain unchanged. D) Decrease or increase, depending on other factors.

B

The Value Line Investment Survey includes: A) historical information only. B) numerical values only. C) both historical and projected information. D) information on assets and liabilities but nothing on a firm's capital structure. E) earnings and price information but nothing related to a firm's cash flows.

B

The clean surplus relation says that: A) Assets minus liabilities minus shareholder's equity equals the change in current assets plus debt payments. B) The difference between earnings and dividends equals the change in book value C) Dividends minus earnings equals one minus the payout ratio. D) The difference between earnings and dividends equals the change in surplus inventory

B

The constant growth dividend discount model will not produce a finite value if the dividend growth rate is which of the following? A) Above its historical average. B) Above the required rate of return. C) Below its historical average. D) Below the required rate of return.

B

The price of a bond quote as seen in a newspaper is the ______ price and the price you pay to purchase a bond is the _____ price. A) clean; clean B) clean; dirty C) dirty; clean D) dirty; dirty E) Answer depends on whether the bond pays interest annually or semiannually.

B

Which mutual fund type will most likely incur the smallest tax liability for its investors? A) Index fund B) Municipal bond fund C) Income fund D) Growth fund

B

Which of the following is not part of the expense statement? A) Shareholder transactions expenses B) Shareholder demographic profile C) Annual operating expenses

B

Which of the following statements regarding exchange-traded funds (ETFs) is false? A) ETFs are funds that can be traded on a stock market. B) ETF investors own shares of the underlying fund sponsor. C) ETF shares can be sold short. D) ETF shares can be bought on margin.

B

Which one of the following terms is used to describe a stock price that moves over time creating now discernible pattern? A) efficient movement B) random walk C) deviated pattern D) dispersed flow E) overreaction and correction

B

A company's return on equity is greater than its required return on equity. The earnings multiplier (P/E) for that company's stock is most likely to be positively related to the: A) Risk-free rate. B) Market risk premium. C) Earnings retention ratio. D) Stock's capital asset pricing model beta

C

An order to sell that involves a preset trigger point is called a _____ order. A) limit B) day C) stop D) short E) market

C

Assume that a large corporation, such as General Electric, needs money in the short-term. Which one of the following securities is that corporation most likely to issue to meet this need? A) corporate bond B) banker's acceptance C) commercial paper D) prime rate loan E) secured bill

C

If you want to find a fund which invests only in companies which are environmentally friendly, you should refer to the category of funds which are classified as _____ funds. A) income B) index C) social conscience D) sector E) emerging markets

C

The constant growth dividend discount model would typically be most appropriate for valuing the stock of which of the following? A) New venture expected to retain all earnings for several years. B) Rapidly growing company. C) Moderate growth, mature company. D) Company with valuable assets not yet generating profits.

C

The inability to determine what information was underlying the market behavior on a particular date is known as the ______ problem. A) market data B) "inside" information C) relevant information D) data snooping E) dumb luck

C

The overnight repurchase rate is the rate charged on overnight loans which are collateralized by which one of the following securities? A) commercial paper B) banker's acceptances C) Treasury securities D) Municipal bonds E) Eurodollar deposits

C

Two similar companies acquire substantial new production facilities, which they both will depreciate over a 10-year period. However, Company A uses accelerated depreciation while Company B uses straight-line depreciation. In the first year that the assets are depreciated, which of the following is most likely to occur? A) A's P/CF ratio will be higher than B's. B) A's P/CF ratio will be lower than B's. C) A's P/E ratio will be higher than B's. D) A's P/E ratio will be lower than B's.

C

When market prices are higher than what can be supported by rational analysis, a market _______ occurs. A) crash B) recession C) bubble D) explosion E) implosion

C

Which of the following is an advantage of the enterprise value ratio as compared to price ratios? A) The EV ratio excludes interest expense. B) The EV ratio adds the value of the firm's cash holding. C) The EV ratio captures the value of both firm debt and equity. D) The EV ratio controls for the market risk premium while price ratios do not

C

Which of the following relates to the possibility that a bond issuer might not repay the bond's principal as stated in the bond indenture agreement? A) interest rate risk premium B) liquidity premium C) default premium D) real interest rate E) inflation premium

C

Which of the following statements typically does not characterize the structure of an investment company? A) An investment company adopts a corporate form of organization. B) An investment company invests a pool of funds belonging to many investors in a portfolio of individual investments. C) An investment company receives an annual management fee ranging from 3 to 5 percent of the total value of the fund. D) The board of directors of an investment company hires a separate investment management company to manage the portfolio of securities and handle other administrative duties.

C

Which one of the following has the longest duration? A) 5year, 10 percent coupon bond B) 5year, 15 percent coupon bond C) 10year, zero coupon bond D) 10year, 10 percent coupon bond E) 10year, 15 percent coupon bond

C

Which one of the following is required for a trader to earn excess profits? A) relatively stable market state B) excessive trading C) market inefficiency D) excessive research E) highly volatile market state

C

Which one of the following relates to the possibility that a bond issuer might not repay the bond's principal as stated in the bond indenture agreement? A) interest rate risk premium B) liquidity premium C) default premium D) real interest rate E) inflation premium

C

Which one of the following transactions occurs in the primary market? A) sale of stock by Shareholder A to Shareholder B B) gift of shares from a grandmother to her granddaughter C) sale of newly issued shares by the issuer to a shareholder D) sale of shares in the third market E) purchase of shares by a dealer from a shareholder

C

A closed-end fund is owned by which of the following? A) An investment company B) An investment advisory firm C) A "family of funds" mutual fund company D) Its shareholders

D

An open-end mutual fund is owned by which of the following? A) An investment company B) An investment advisory firm C) A "family of funds" mutual fund company D) Its shareholders

D

Efficient markets tend to exist: A) only when market volatility is low. B) when arbitrage trading is prohibited. C) anytime market volume exceeds the average trading volume. D) when rational arbitrage traders dominate irrational traders. E) only when all investors are rational.

D

In an efficient market, stocks with similar risks will: A) pay similar dividends. B) have the same market price. C) produce abnormal returns. D) have similar rates of return. E) yield the market rate of return.

D

When an open-end fund closes, the: A) fund is converting into a closedend fund B) final prices for the trading day are being calculated C) fund ceases operations. D) fund refuses to accept any new investors. E) fund is finished trading for the day.

D

When you redeem shares in an ETF, you: A) receive the closing price for the trading day B) must sell your shares to another shareholder. C) do not incur any costs. D) receive shares of stock. E) receive a commission on the sale.

D

Which mutual fund type will most likely incur the greatest overall risk levels for its investors? A) Large-cap index fund B) Insured municipal bond fund C) Money market mutual fund D) Small-cap growth fund

D

Which of the following is most true of a closed-end investment company? A) The fund's share price is usually greater than net asset value. B) The fund's share price is set equal to net asset value. C) Fund shares outstanding vary with purchases and redemptions by shareholders. D) Fund shares outstanding are fixed at the issue date.

D

Which of the following is the least likely advantage of mutual fund investing? A) Diversification B) Professional management C) Convenience D) Mutual fund returns are normally higher than market average returns

D

Which of the following mutual fund fees and expenses is the most difficult for investors to assess? A) Sales charges or "loads" B) 12b-1 fees C) Management fees D) Trading costs

D

Which one of the following statements is correct concerning mutual funds? A) Mutual funds are risk-free. B) All mutual funds are diversified. C) Profits on the sale of mutual fund shares are tax-free. D) Mutual funds generally pay no taxes. E) Investments in mutual funds are guaranteed from loss by a private agency of the federal government.

D

Which one of the following statements is correct concerning premium bonds? A) The par value exceeds the face value. B) As the time to maturity decreases, the premium increases. C) The premium increases when interest rates increase. D) The yield to maturity is less than the coupon rate. E) The coupon rate is less than the current yield.

D

Which one of these rates is considered the bellwether rate for short term bank commercial loans? A) discount B) call C) Federal funds D) prime E) commercial paper

D

Which one of these rates is considered the bellwether rate for short-term bank commercial loans? A) discount B) call C) Federal funds D) prime E) commercial paper

D

As a result of the "dot.com" crash, the Amex Internet Index lost about _____ percent of its value. A) 50 B) 60 C) 70 D) 80 E) 90

E

Each prospective investor in a mutual fund must be supplied with a(n): A) trust certificate. B) stock certificate. C) tax report. D) investment advisory report. E) prospectus.

E

If every investor in the market was irrational, the market: A) would have some highly overvalued and some highly undervalued securities. B) would tend to be overvalued as a whole. C) would tend to be undervalued as a whole. D) fluctuations would tend to be severe. E) could still be efficient.

E

The day-of-the-week effect is defined as the tendency for which day of the week to have a negative average rate of return? A) Tuesday B) Thursday C) Friday D) Wednesday E) Monday

E

The net asset value (NAV) of a mutual fund is equal to the: A) market value of the assets divided by the number of shares outstanding. B) cost of the assets minus the liabilities. C) market value of the assets minus the liabilities. D) (cost of the assets minus the liabilities) divided by the number of shares outstanding. E) (market value of the assets minus the liabilities) divided by the number of shares outstanding.

E

Which one of the following risks is associated with investing a coupon payment at a rate that is lower than the bond's yield-to-maturity? A) current rate risk B) current yield risk C) payment risk D) maturity risk E) reinvestment rate risk

E

Which one of the following statements is correct? A) The YTM is less than the coupon rate for a discount bond. B) A discount bond has a face value that is less than its market price. C) A par value bond has a current yield that is greater than the coupon rate. D) A premium bond sells for less than par. E) The coupon rate is greater than the YTM for a premium bond.

E

Which one of these statements is true? A) A 5-year bond is less sensitive to interest rate changes than a 1-year bond. B) A 30-year bond is 50 percent more sensitive to interest rate changes than a 20-year bond. C) A par value bond has no interest rate sensitivity. D) A premium bond with 5 years to maturity will always sell for more than par value until the bond matures E) The realized return rarely equals the YTM, especially if the bond is considered long-term.

E

T/F: A Yankee bond is issued by a U.S. corporation, denominated in U.S. dollars, and is sold outside of the U.S.

False

T/F: A mutual fund is owned by the investment advisory firm which manages the fund.

False

T/F: Higher coupon bonds are more volatile than lower coupon bonds.

False

T/F: If the yield to maturity is greater than the coupon rate, a bond will sell at a premium.

False

T/F: Investors buy at the bid price and sell at the ask price.

False

T/F: Mutual funds are only permitted to invest in U.S. securities.

False

T/F: The random walk theory supports the hypothesis that stock prices have a discernible pattern over time.

False

Which of the following assumptions does the constant growth dividend discount model require? I. Dividends grow at a constant rate. II. The dividend growth rate continues indefinitely. III. The required rate of return is less than the dividend growth rate.

I and II only

Which of the following have been offered as possible causes or contributors to the market crash known as "Black Monday"? I. unsupportable high prices II. program trading III. antitakeover legislation discussions IV. economic information

I, II, III, and IV

The Treasury yield curve: I. is generally expected to be flat II. plots yields against maturities III. is the same as the term structure of interest rates IV. reveals the cost of riskfree borrowing

II and IV only

The Treasury yield curve: I. is generally expected to be flat. II. plots yields against maturities. III. is the same as the term structure of interest rates. IV. reveals the cost of risk-free borrowing.

II and IV only

Which of the following will increase the price of a money market instrument computed using a discount yield? I. increase in discount yield II. decrease in discount yield III. increase in days to maturity IV. decrease in days to maturity

II and IV only

Which of the following will increase if the coupon rate increases? I. face value II. market value III. yield-to-maturity IV. current yield

II, III, and IV only

T/F: A contingent deferred sales charge is a backend load which is imposed when shares of some mutual funds are sold.

True

T/F: Hanover Inc., stock returned 14 percent while other stocks with the same level of risk returned 12 percent. This means that Hanover stock has a 2 percent excess return.

True

T/F: If you decide to purchase shares of a stock based on your analysis of information you have read both on the internet and in the newspaper, then you are an informed trader.

True

T/F: In relation to the price-cash flow ratio, cash flow is commonly defined as net income plus depreciation.

True

T/F: It is common for various price ratio methods to produce differing valuations for a stock

True

T/F: The Swift Water Co. is expected to increase its dividends at 18 percent for the next three years and then taper off to a constant 4 percent rate of increase. The value of Swift Water's stock should be computed using the two-stage dividend growth model.

True

T/F: The discount rate is the rate changed by the Federal Reserve to commercial banks for overnight reserve loans.

True

T/F: The discount rate is the rate charged by the Federal Reserve to commercial banks for overnight reserve loans.

True