FI 301 Exam 2

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.

b. more than the price paid for a six-month Treasury bill.

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

b. poison pills

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

b. poorly

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

b. proxy contests

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

b. secondary

The ____ market accommodates originators of mortgages that desires to sell their mortgages prior to maturity. a. primary b. secondary c. money d. none of the above

b. secondary

Investors in Treasury notes and bonds receive ____ interest payments from the Treasury. a. quarterly b. semiannual c. annual d. monthly

b. semiannual

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

b. slightly higher than

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. stripped securities d. leveraged notes

b. structured notes

The effective yield of a foreign money market security is ___ when the foreign currency weakens against the dollar. a. unaffected b. always negative c. reduced d. increased

c. reduced

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

c. rise

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

c. supported by the municipal government's ability to tax; supported by revenue generated from the project

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

c. the Federal Deposit Insurance Corporation (FDIC)

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

c. undervalued; overvalued

The minimum denomination of commercial paper is a. $25,000. b. $200,000. c. $150,000 d. $100,000.

d. $100,000.

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. 11.11% b. 13.00% c. 15.25% d. 12.12% e. 14.08%

d. 12.12%

A financial institution has a higher degree of interest rate risk on a ____ than a ____. a. 30-year variable-rate mortgage; 15-year fixed-rate mortgage b. 15-year variable-rate mortgage; 15-year fixed-rate mortgage c. 15-year fixed-rate mortgage; 30-year fixed-rate mortgage d. 30-year fixed-rate mortgage; 15-year fixed-rate mortgage

d. 30-year fixed-rate mortgage; 15-year fixed-rate mortgage

____ are portfolios of international stocks created and managed by various financial institutions. a. American Depository Receipts b. Exchange rate options c. IPOs d. International mutual funds

d. International mutual funds

In a short sale of a home: a. the lender allows the homeowner to sell the home for less than what is owed on the mortgage b. the lender forecloses and then sells the home for less than what is owed on the mortgage c. the lender does not recover the full amount of the mortgage d. A and C e. B and C

e. B and C

An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and the investor holds to maturity. What is the annualized yield? a. 8.90% b. 8.62% c. 8.78% d. 9.14% e. 9.00%

a. 9.14%

____ are not primary purchasers of bonds. a. Finance companies b. Pension funds c. Insurance companies d. Mutual funds

a. Finance companies

____ are backed by conventional mortgages. a. Private-label pass-through securities b. Shared appreciation pass-through securities c. Federal Reserve mortgage-backed securities d. Ginnie Mae mortgage-backed securities

a. Private-label pass-through securities

Bonds issued by ____ are backed by the federal government. a. the Treasury b. state governments c. AAA-rated corporations d. city governments

a. The Treasury

____ bonds have the most active secondary market. a. Treasury b. Junk c. Municipal d. Zero-coupon corporate

a. Treasury

When would a firm most likely call bonds? a. after interest rates have declined b. just before the time at which the interest rates are expected to decline c. if interest rates do not change d. after interest rates increase

a. after interest rates have declined

A mortgage that requires interest payments for a three- to five-year period, then full payment of principal, is a(n) a. balloon payment mortgage. b. open-ended mortgage bond. c. variable-rate mortgage. d. chattel mortgage.

a. balloon payment mortgage.

Which of the following will typically require homeowners to ultimately request a new mortgage? a. balloon-payment mortgage b. graduated-payment mortgage (GPM) c. share-appreciation mortgage d. growing-equity mortgage

a. balloon-payment mortgage

Which of the following instruments has a highly active secondary market? a. banker's acceptances b. commercial paper c. federal funds d. repurchase agreements

a. banker's acceptances

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

a. competitive

For bonds issued under a ____ arrangement, the underwriter guarantees the issuer that the bonds will be sold at a specified price. a. firm commitment b. best efforts c. specific value d. fixed proceeds

a. firm commitment

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. increasing; decreasing b. increasing; stable c. decreasing; increasing d. stable; decreasing

a. increasing; decreasing

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. none of the above.

a. loan repayment to the lending financial institution.

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

a. more than

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

a. more; long

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

a. placed either directly or with the help of commercial paper dealers.

When a corporation makes a secondary offering, it may direct sales of the stock to its existing shareholders by giving them: a. preemptive rights b. subscription rights c. limit orders d. presumptive rights

a. preemptive rights.

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 Treasury. e. B and D

a. short-term funds from each other.

The rate on Eurodollar floating rate CDs is based on a. the London Interbank Offer Rate. b. a weighted average of European prime rates. c. a weighted average of European discount rates. d. the U.S. prime rate.

a. the London Interbank Offer Rate.

IPOs perform ____ on the day of the IPO and ____ for periods of a year or longer after the IPO. a. well; poorly b. well; well c. poorly; well d. poorly; poorly

a. well; poorly

The Treasury has relied heavily on ____-year bonds to finance the U.S. budget deficit. a. 70 b. 10 c. 50 d. 5

b. 10

Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs) are typically a. 3% per year and 8% for the mortgage lifetime. b. 2% per year and 5% for the mortgage lifetime. c. 5% per year and 15% for the mortgage lifetime. d. 0% per year and 10% for the mortgage lifetime.

b. 2% per year and 5% for the mortgage lifetime.

Commercial paper has a maximum maturity of ____ days. a. 45 b. 270 c. 360 d. none of the above

b. 270

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 yields is ____ percent. a. 18.63 b. 5.37 c. 8.81 d. none of the above

b. 5.37%

Paul can purchase bonds with 15 years remaining until maturity, a par value of $1,000, and a 9% 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

b. 7.84%

The ____ is a value-weighted average of stock prices of 30 large U.S. firms. a. Nasdaq b. Dow Jones Industrial Average c. NYSE Index d. S&P 500

b. Dow Jones Industrial Average

Which of the following eurozone countries has not recently experienced debt repayment problems? a. Portugal b. Finland c. Spain d. Greece

b. Finland

____ 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

b. Ginnie Mae

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.

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.

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 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.

b. Investors are taxed on the total amount of interest earned at maturity.

The coupon rate of most variable-rate bonds it tied to a. the discount rate. b. LIBOR. c. the prime rate. d. the federal funds rate.

b. LIBOR

____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages. a. Weak; increase; increase b. Weak; decrease; increase c. Weak; decrease; decrease d. Strong; increase; increase e. Strong; decrease; decrease

b. Weak; decrease; increase

At a given point in time, the interest rates 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

b. above

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

b. anitakeover amendments

Bonds that are not secured by specific property are called a. open-end mortgage bonds b. debentures c. blanket mortgage bonds d. a chattel mortgage

b. debentures

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

b. demand exceeds supply

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

b. downward pressure

A ____ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase over the first 5-10 years and then level off. a. second mortgage b. graduated payment mortgage c. growing-equity mortgage d. shared-appreciation mortgage

b. graduated payment mortgage

Note maturities are usually ____, while bond maturities are ____. a. 5 years or more; less than 5 years b. less than 10 years; 10 years or more c. 10 years or more; less than 10 years d. less than 5 years; 5 years or more

b. less than 10 years; 10 years or more

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

b. money market instruments.

Which of the following is not a money market security? a. banker's acceptance b. commercial paper c. negotiable CDs d. repurchase agreements e. all of the above are money market instruments

e. all of the above are money market securities

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

e. Answers C and D are correct

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. 5.10% b. 2.04% c. 2.0% d. 5.00%

a. 5.10%

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

a. 14.39%

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

a. 3.10%

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.

b. the Treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds

A credit rating agency is paid by: a. the NYSE or the over-the-counter market where the bonds are listed. b. the issuers of the bonds that the agency rates. c. the taxpayers, because the rating agencies are government agencies. d. the purchasers of the bonds that the agency rates.

b. the issuers of the bonds that the agency rates

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%. 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% b. 35.42% c. 14.59% d. none of the above

c. 14.59%

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

c. 7

____ require the owner to clip coupons attached to the bonds and send them to the issuer to receive coupon payments. a. Treasury b. Corporate c. Bearer d. Registered

c. Bearer

The Financial Reform Act of 2010 established the ____ to provide oversight for credit rating agencies. a. Ratings Oversight Commission b. Office of Agency Supervision c. Office of Credit Ratings d. Federal Ratings Bureau

c. Office of Credit Ratings

____ are sold at auction at a discount from par value. a. Repurchase agreements b. Commercial paper c. Treasury bills d. Banker's acceptances

c. Treasury bills

Which of the following would not be a likely example of a protective provision? a. a limit on the corporate officers' salaries a firm can pay b. the amount of additional debt a firm can issue c. a call feature d. a limit on the amount of dividends a firm can pay

c. a call feature

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

c. balloon-payment mortgage certificates

Which money market transaction is most likely to represent a loan from one commercial bank to another? a. commercial paper b. negotiable CD c. federal funds d. banker's acceptance

c. federal funds

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

c. higher than; behind

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 heavily in subprime mortgages. d. invested only in prime mortgages that offered very low returns.

c. invested heavily in subprime mortgages.

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

c. investors to benefit from rising market interest rates over time.

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

c. laddering.

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

c. less; can

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

c. originating mortgages and selling those mortgages.

The purpose of a lockup provision is to a. increase the number of outstanding shares. b. keeping individual investors from buying a selling stock. c. prevent downward pressure on the stock's price. d. allocate a larger proportion of stock to institutional investors.

c. prevent downward pressure on the stock's price.

The prevailing price per share divided by the firm's earnings per share is known as the a. dividend yield b. annual dividend c. price-earnings ratio d. fully diluted earnings per share

c. price-earnings ratio.

Mortgage-backed securities are assigned ratings by: a. the Treasury. b. the mortgage originator. c. rating agencies. d. the Fed.

c. rating agencies.

Which of the following statements is incorrect with respect to the federal funds rate? a. The Federal Reserve adjusts the amounts of funds in depository institutions in order to influence the federal funds rate. b. It is not influenced by the supply and demand for funds in the federal funds market. c. It is the rate charged by financial institutions on loans they extend to each other. 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 funds rate is closely monitored by all types of firms.

d. It is not influenced by the supply and demand for funds in the federal funds market.

____ mortgages enabled more people with relatively lower income, or high existing debt, or a small down payment to purchase homes. a. Prime b. Amortized c. Balloon d. Subprime

d. Subprime

When a bank guarantees a future payment to a firm, the financial instrument used is called a. a repurchase agreement. b. commercial paper. c. a negotiable CD. d. a banker's acceptance.

d. a banker's acceptance.

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

d. all of the above

A firm will typically attempt to sell shares from a secondary offering a. far below the prevailing market price b. at the offer price of the IPO c. far above the prevailing market price d. at the prevailing market price.

d. at the prevailing market price.

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

d. euros and making payments from its German subsidiary

A mortgage with low initial payments that increase over time without ever leveling off is a a. second mortgage b. shared-appreciated mortgage c. graduated payment mortgage d. growing-equity mortgage

d. growing-equity mortgage.

The effective yield of a foreign money market security is ____ when the foreign currency strengthens against the dollar. a. always negative b. unaffected c. reduced d. increased

d. increased

Which of the following institutions is most likely to purchase a private bond placement? a. commercial bank b. mutual fund c. savings institution d. insurance company

d. insurance company

When purchasing bonds, individual investors can use a ____ to specify the maximum price they are willing to pay for the bond. a. stop order b. price order c. market order d. limit order

d. limit order

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

d. none of the above

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

d. none of the above

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

d. offer; bookbuilding

A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n) a. initial public offering (IPO) b. initial rights issue c. stock repurchase d. secondary stock offering

d. secondary stock offering

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

d. share-appreciation mortgage

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

d. the appointment of a trustee in all bond indentures

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

e. Answers B and C are correct