FIN 414

An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the 3 years was ______.

(1.10)(1.15)(1 - .12) - 1 = 11.32%

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? A. 5.78% B. 4.35% C. 6.16% D. 7.42%

(16x600000+18x500000+62X200000)/12x600000+20x500000+60X200000)-1=6.164%

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? A. 960 B. 970 C. 975 D. 985

(23x350000+41x405000+58*53000)/(23x350000+43x405000+56*53000) x970=975

On a given day a stock dealer maintains a bid price of $1,000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades that totaled 500 bonds traded that day. What was the dealer's gross trading profit for this security?

1,003.25 - 1,000.50)500 = $1,375

If you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn?

1.12/1.03 -1 = 8.74

You find that the bid and ask prices for a stock are $10.25 and $10.30, respectively. If you purchase or sell the stock, you must pay a flat commission of $25. If you buy 100 shares of the stock and immediately sell them, what is your total implied and actual transaction cost in dollars? A. $50 B. $25 C. $30 D. $55

100(10.30 - 10.25) + 2(25) = $55

Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in 2 months. What is the annual percentage rate of return for this investment

12.14 10000-9800/ 98000 x 12/2

39. Approximately __________ of trades involving shares issued by firms listed on the New York Stock Exchange actually take place on the New York Stock Exchange. A. 50% B. 25% C. 60% D. 75%

25%

Suppose you pay $9,700 for a $10,000 par Treasury bill maturing in 3 months. What is the holding-period return for this investment?

3.09 10000-9700 /////// 9700

T-bills are issued with initial maturities of:

4 and 26

Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment?

5.14 E(rp)=.4(15%)+(.5)(10%)+(.10)(-.03)=10.7% sd=.4(15%x.107)^2+(.5)(10%-.107)^2)+(.10)(-.03-.107)^2

The arithmetic average of -11%, 15%, and 20% is ________.

8% ADD them then divide by 3

You have an EAR of 9%. The equivalent APR with continuous compounding is _____.

8.62 LN[1=.09] 8.62

If a Treasury note has a bid price of $996.25, the quoted bid price in the Wall Street Journal would be _________. A. 99:25 B. 99:63 C. 99:20 D. 99:08

996.25*(100/1000) =99.625+(.625x32/32)=99 -20/32=99:20

19. Management fees for open-end and closed-end funds typically range between _____ and _____. A. .2%; 1.5% B. .5%; 5% C. 2%; 5% D. 3%; 8%

A

32. A __________ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date. A. call option B. futures contract C. put option D. interest rate swap

A

33. Security selection refers to _________. A. choosing specific securities within each asset class B. deciding how much to invest in each asset class C. deciding how much to invest in the market portfolio versus the riskless asset D. deciding how much to hedge

A

40. The _________ price is the price at which a dealer is willing to purchase a security. A. bid B. ask C. clearing D. settlement

A

42. The Dow Jones Industrial Average is _________. A. a price-weighted average B. a value weight and average C. an equally weighted average D. an unweighted average

A

75. An investment adviser has decided to purchase gold, real estate, stocks, and bonds in equal amounts. This decision reflects which part of the investment process? A. Asset allocation B. Investment analysis C. Portfolio analysis D. Security selection

A

Accounting scandals can often be attributed to a particular concept in the study of finance known as the _____. A. agency problem B. risk-return trade-off C. allocation of risk D. securitization

A

An index computed from a simple average of returns is a/an _____. A. equal weighted index B. value weighted index C. price weighted index D. share weighted index

A

If you thought prices of stock would be rising over the next few months, you might want to __________________ on the stock. A. purchase a call option B. purchase a put option C. sell a futures contract D. place a short-sale order

A

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. A. value-weighted index B. equally weighted index C. price-weighted index D. bond price index

A

Ownership of a call option entitles the owner to the __________ to __________ a specific stock, on or before a specific date, at a specific price. A. right; buy B. right; sell C. obligation; buy D. obligation; sell

A

Real assets are ______. A. assets used to produce goods and services B. always the same as financial assets C. always equal to liabilities D. claims on a company's income

A

The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________. A. net asset value B. average asset value C. gross asset value D. total asset value

A

What are business firms most likely to use derivative securities for? A. Hedging B. Speculating C. Doing calculus problems D. Market making

A

When the market is more optimistic about a firm, its share price will ______; as a result, it will need to issue _______ shares to raise funds that are needed. A. rise; fewer B. fall; fewer C. rise; more D. fall; more

A

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

A

Which of the following is a false statement regarding open-end mutual funds? A. They offer investors a guaranteed rate of return. B. They offer investors a well-diversified portfolio. C. They redeem shares at their net asset value. D. They offer low-cost diversification.

A

Which of the following is not a type of managed investment company? A. Unit investment trusts B. Closed-end funds C. Open-end funds D. Hedge funds

A

_____ is a mechanism for mitigating potential agency problems. A. Tying income of managers to success of the firm B. Directors defending top management C. Antitakeover strategies D. The straight voting method of electing the board of directors

A

An individual who goes short in a futures position _____.

A. commits to delivering the underlying commodity at contract maturity

The market risk premium is defined as __________.

A. the difference between the return on an index fund and the return on Treasury bills

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

A. eurodollars

Money market securities are sometimes referred to as cash equivalents because _____. A. they are safe and marketable B. they are not liquid C. they are high-risk D. they are low-denomination

A. they are safe and marketable

6. The most marketable money market security is _____. A. Treasury bills B. bankers' acceptances C. certificates of deposit D. common stock

A. treasury bills

What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%? A. 6.48% B. 7.25% C. 8.02%

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

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, _____. A. 5% and 6.4% B. 5% and 5.44% C. 4.25% and 6.4% D. 5.75% and 5.44%

After-tax return on municipal bond = .05After-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 _______. A. 3.96%; 5.1% B. 5.39%; 5.1% C. 6%; 6% D. 3.96%; 6%

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%

An example of a derivative security is _________. A. a common share of General Motors B. a call option on Intel stock C. a Ford bond D. a U.S. Treasury bond

B

50. Ownership of a put option entitles the owner to the __________ to ___________ a specific stock, on or before a specific date, at a specific price. A. right; buy B. right; sell C. obligation; buy D. obligation; sell

B

66. Financial institutions that specialize in assisting corporations in primary market transactions are called _______. A. mutual funds B. investment bankers C. pension funds D. globalization specialists

B

77. The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has 700,000 shares outstanding and pays a $3 dividend, what is the dividend yield? A. 5% B. 10% C. 15% D. 20% Price per share = (25 million - 4 million)/700,000 = 30 per shareDividend yield = 3/30 = 10%

B

The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B shares with a 12b-1 fee of 1% annually. If you plan to sell the fund after 4 years, are Class A or Class B shares the better choice? Assume a 10% annual return net of expenses before the 12b-1 fee is applied. A. Class A. B. Class B. C. There is no difference. D. The answer cannot be determined from the information given.

Assume $100 is invested.Class A: Investment after load = $100 - .05($100) = $95After four years = $95(1.104) = $95 × 1.4641 = $139.09Class B: Rate of return after 12b-1 fee = 10% - 1% = 9%After four years = $100(1.094) = $100 × 1.4116 = $141.16Class B is the better choice.

30. Firms that specialize in helping companies raise capital by selling securities to the public are called _________. A. pension funds B. investment banks C. savings banks D. REITs

B

42. The difference between the price at which a dealer is willing to buy and the price at which a dealer is willing to sell is called the _________. A. market spread B. bid-ask spread C. bid-ask gap D. market variation

B

46. In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs _________. A. automatically B. by adjusting the divisor C. by adjusting the numerator D. by adjusting the market value weights

B

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. A. $40; $30 B. $30; $40 C. $35; $35 D. $40; $40

B

The offer price of an open-end fund is $18 and the fund is sold with a front-end load of 5%. What is the fund's NAV? A. $18.74 B. $17.10 C. $15.40 D. $16.57 ($18)(1 - .05) = $17.10

B

__________ portfolio construction starts with asset allocation. A. Bottom-up B. Top-down C. Upside-down D. Side-to-side

B

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 _____. A. $10,000 B. $9,878.50 C. $9,877 D. $9,880.16 $9,878.50 =

B$9,878.50 =10000 x [1- [.0486x90)/360]

Specialists try to maintain a narrow bid-ask spread because:I. If the spread is too large, they will not participate in as many trades, losing commission income.II. The exchange requires specialists to maintain price continuity.III. Specialists are nonprofit entities designed to facilitate market transactions rather than make a profit.

B. I and II only

The ______________ is the most important dealer market in the United States, and the ______________ is the most important auction market.

B. NASDAQ; NYSE

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

B. federal funds

The holding period return on a stock is equal to _________.

B. the capital gain yield over the period plus the dividend yield

48. 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 _________. A. 4.5% B. 7.25% C. 8.68% D. none of these options 8.68% = 6.25%/(1 - .28)

C

57. The Standard & Poor's 500 is __________ weighted index. A. an equally B. a price- C. a value- D. a share-

C

76. Which of the following are true concerning short sales of exchange-listed stocks?I. Proceeds from the short sale must be kept on deposit with the broker.II. Short-sellers must post margin with their broker to cover potential losses on the position.III. The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement. A. I only B. I and III only C. I and II only D. I, II, and III

C

An open-end fund has a NAV of $16.50 per share. The fund charges a 6% load. What is the offering price? A. $14.57 B. $15.95 C. $17.55 D. $16.49

C

The bid-ask spread exists because of _______________. A. market inefficiencies B. discontinuities in the markets C. the need for dealers to cover expenses and make a profit D. lack of trading in thin markets

C

Which one of the following statements about IPOs is not true?

C. IPOs generally provide superior long-term performance as compared to other stocks.

40. One method of forecasting the risk premium is to use the _______.

C. average historical excess returns for the asset under consideration

The commission structure on a stock purchase is $50 plus $.03 per share. If you purchase 600 shares of a stock selling for $65, what is your commission? A. $35 B. $45 C. $53 D. $68

Commission = 50 + (600 × .03) = $68

Money market securities are characterized by:I. Maturity less than 1 yearII. Safety of the principal investmentIII. Low rates of return

D

21. Net asset value is defined as ________________________. A. book value of assets divided by shares outstanding B. book value of assets minus liabilities divided by shares outstanding C. market value of assets divided by shares outstanding D. market value of assets minus liabilities divided by shares outstanding

D

34. Which of the following indexes are market value-weighted?I. The NYSE CompositeII. The S&P 500III. The Wilshire 5000 A. I and II only B. II and III only C. I and III only D. I, II, and III

D

35. The interest rate charged by large banks in London to lend money among themselves is called _________. A. the prime rate B. the discount rate C. the federal funds rate D. LIBOR

D

37. Currently, the Dow Jones Industrial Average 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. measuring the current total market value of the 30 stocks in the index relative to the total value on the previous day D. adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends

D

4. Advantages of investment companies to investors include all but which one of the following? A. Record keeping and administration B. Low-cost diversification C. Professional management D. Guaranteed rates of return

D

76. All but which one of the following indices is value weighted? A. NASDAQ Composite B. S&P 500 C. Wilshire 5000 D. DJIA

D

85. Level 3 NASDAQ subscribers _____. A. are registered market makers. B. can post bid and ask prices. C. have the fastest execution of trades. D. all of these options.

D

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? A. Reverse repurchase agreement B. Bankers' acceptance C. Commercial paper D. Repurchase agreement

D

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 ______. A. r = rm × (1 - 28%) B. r = rm/(1 - 72%) C. r = rm × (1 - 72%) D. r = rm/(1 - 28%)

D

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 _________. A. certificates of deposit B. repurchase agreements C. bankers' acceptances D. commercial paper

D

The 2002 law designed to improve corporate governance is titled the _____. A. Pension Reform Act B. ERISA C. Financial Services Modernization Act D. Sarbanes-Oxley Act

D

Which of the following are financial assets?I. Debt securitiesII. Equity securitiesIII. Derivative securities A. I only B. I and II only C. II and III only D. I, II, and III

D

Which one of the following invests in a portfolio that is fixed for the life of the fund? A. Mutual fund B. Money market fund C. Managed investment company D. Unit investment trust

D

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss? A. $50 B. $150 C. $10,000 D. Unlimited There is no upper limit to the price of a share of stock and, therefore, no upper limit to the price you will have to pay to replace the 200 shares of Tuckerton.

D

You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 2% back-end load, which decreases .5% per year. How much will you pay in fees on a $10,000 investment that does not grow if you cash out after 3 years of no gain? A. $103 B. $219 C. $553 D. $635 Total fees = 10,000 - (10,000 × .97) × (.99) × (.99) × (.99) × (.995) = 635

D Total fees = 10,000 - (10,000 × .97) × (.99) × (.99) × (.99) × (.995) = 635

85. You are considering investing in a no-load mutual fund with an annual expense ratio of .6% and an annual 12b-1 fee of .75%. You could also invest in a bank CD paying 6.5% per year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD? A. 7.1% B. 7.45% C. 7.25% D. 7.85% r > .065 + .006 + .0075 = .0785 = 7.85%

D r > .065 + .006 + .0075 = .0785 = 7.85%

You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was ____.

D. 11% 4+ 3.50/$50

Advantages of ECNs over traditional markets include all but which one of the following?

D. Ability to handle very large orders

Which of the following is not a characteristic of a money market instrument?

D. Maturity greater than 1 year

Which one of the following is not an example of a brokered market?

D. NASDAQ

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? A. 300 B. 39 C. 43 D. 30

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

53. You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________. A. $4,500 B. $6,000 C. $9,000 D. $10,000

Investment = 300(30)(.50) = 4,500

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 _________. A. $1,024.75 B. $1,024.38 C. $1,023.75 D. $1,022.50

P=(102 + 12/32) x(1000/100)= 1023.75

Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start of the year and with $250 million in assets and 11 million shares at the end of the year. During the year investors have received income distributions of $2 per share and capital gain distributions of $.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund? A. 11.19% B. 23.75% C. 24.64% D. The answer cannot be determined from the information given.

NAV0 = $200/10 = $20.00NAV1 = [$250 - ($250 × .01)]/11 = $22.50Gross return = ($22.50 - $20 + $2 + $.25)/$20 = 23.75%

26. __________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis. A. Active B. Momentum C. Passive D. Market-timing

c

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? A. 3.2% B. 3.68% C. 4.92% D. 5%

c. yield = .032/1-.35 =.0492

The geometric average of -12%, 20%, and 25% is _________.

[(1 + -.12)(1 + .20)(1 + .25)]1/3 - 1 = 9.70

20. The maximum maturity on commercial paper is _____. A. 270 days B. 180 days C. 90 days D. 30 days

a

50. Real assets represent about ____ of total assets for commercial banks. A. 1% B. 15% C. 25% D. 40%

a

53. After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _____. A. asset allocation B. security analysis C. top-down portfolio management D. passive management

a

6. ____ is not a derivative security. A. A share of common stock B. A call option C. A futures contract D. None of these options (All of the answers are derivative securities.)

a

Asset allocation refers to _________. A. the allocation of the investment portfolio across broad asset classes B. the analysis of the value of securities C. the choice of specific assets within each asset class D. none of these options

a

Eurodollars are _________. A. dollar-denominated deposits at any foreign bank or foreign branch of an American bank B. dollar-denominated bonds issued by firms outside their home market C. currency issued by Euro Disney and traded in France D. dollars that wind up in banks as a result of money-laundering activities

a

Financial assets represent _____ of total assets of U.S. households. A. over 60% B. over 90% C. under 10% D. about 30%

a

Which one of the following best describes the purpose of derivatives markets? A. Transferring risk from one party to another B. Investing for a short time period to earn a small rate of return C. Investing for retirement D. Earning interest income

a

You sell short 200 shares of Doggie Treats Inc. that are currently selling at $25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account, and the firm does not pay any dividends.) A. $28.85 B. $35.71 C. $31.50 D. $32.25

a cash from ss: 5000 liability 5000 cash for equity 2500 equity 25000 TA 7500----- price changes Cash ss 5000 liabilyt 200p cash for equity 2500 equity 7500-200p TA 7500 MArgin fcall if equity/market value=.3 .3=(7500-200p)/200p 260p=7500

Consider a mutual fund with $300 million in assets at the start of the year and 12 million shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the year-end value, what is the rate of return on the fund? A. 15.64% B. 16% C. 17.25% D. 17.5%

a. 300000x(1.18)=354000000 .02x354000000=7080000 354000000-7080000-300000000 /300000000 =15.64

The ______ measure of returns ignores compounding

arithmetic

20. __________ is (are) real assets. A. Bonds B. Production equipment C. Stocks D. Commercial paper

b

30. Investors who want to liquidate their holdings in a unit investment trust may ___________________. A. sell their shares back to the trustee at a discount B. sell their shares back to the trustee at net asset value C. sell their shares on the open market D. sell their shares at a premium to net asset value

b

60. Transactions that do not involve the original issue of securities take place in _________. A. primary markets B. secondary markets C. over-the-counter markets D. institutional markets

b

64. Which of the following is not a characteristic of common stock ownership? A. Residual claimant B. Unlimited liability C. Voting rights D. Limited life of the security

b

66. All major stock markets today are effectively _______________. A. specialist trading systems B. electronic trading systems C. continuous auction markets D. direct search markets

b

Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares? A. $12 B. $9 C. $10 D. $1 NAV = ($500 - $50)/50 = $9

b

In 2008, the NASDAQ stock market merged with _____. A. Euronext B. OMX, which operates seven Nordic and Baltic stock exchanges C. the International Securities Exchange (ISE) D. BATS

b

In a perfectly efficient market the best investment strategy is probably _____. A. an active strategy. B. a passive strategy. C. asset allocation. D. market timing.

b

The _________ price is the price at which a dealer is willing to sell a security. A. bid B. ask C. clearing D. settlement

b

The offer price of an open-end fund is $18 and the fund is sold with a front-end load of 5%. What is the fund's NAV? A. $18.74 B. $17.10 C. $15.40 D. $16.57 ($18)(1 - .05) = $17.10

b

Treasury bills are financial instruments issued by __________ to raise funds. A. commercial banks B. the federal government C. large corporations D. state and city governments

b

Which of the following is most like a short-term collateralized loan? A. Certificate of deposit B. Repurchase agreement C. Bankers' acceptance D. Commercial paper

b

Which one of the following is a true statement regarding 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. It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange. D. It is a value-weighted average of all stocks traded on the New York Stock Exchange.

b

You sell short 300 shares of Microsoft that are currently selling at $30 per share. You post the 50% margin required on the short sale. If you earn no interest on the funds in your margin account, what will be your rate of return after 1 year if Microsoft is selling at $27? (Ignore any dividends.) A. 10% B. 20% C. 6.67% D. 15%

b (320-27)/.5*30 = 20%

You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends, and ignore interest on the margin loan.) A. $26.55 B. $35.71 C. $28.95 D. $30.77 Equity = 200P - 5,000Margin = (200P - 5,000)/200P = .30200P - 5,000 = 60P140P = 5,000P = 35.71429

b Equity = 200P - 5,000Margin = (200P - 5,000)/200P = .30200P - 5,000 = 60P140P = 5,000P = 35.71429

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 _____. A. 4.8% B. 4.97% C. 5.47% D. 5.74%

b 10,000x[.0480x150/360] ..... [(10,000/9800)-1)x(365/150)]=4.97

The bid price of a Treasury bill is _________.

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

10. Which of the following is not a money market security? A. U.S. Treasury bill B. 6-month maturity certificate of deposit C. Common stock D. Bankers' acceptance

c

11. __________ assets generate net income to the economy, and __________ assets define allocation of income among investors. A. Financial, financial B. Financial, real C. Real, financial D. Real, real

c

19. Commercial paper is a short-term security issued by __________ to raise funds. A. the Federal Reserve B. the New York Stock Exchange C. large well-known companies D. all of these options

c

29. Sponsors of unit investment trusts earn a profit by ___________________. A. deducting management fees from fund assets B. deducting a percentage of any gains in asset value C. selling shares in the trust at a premium to the cost of acquiring the underlying assets D. charging portfolio turnover fees

c

29. __________ is not a money market instrument. A. A certificate of deposit B. A Treasury bill C. A Treasury bond D. Commercial paper

c

34. __________ funds stand ready to redeem or issue shares at their net asset value. A. Closed-end B. Index C. Open-end D. Hedge

c

47. 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? A. The one with the highest price B. The one with the lowest price C. All 30 stocks will have the same impact. D. The answer cannot be determined from the information given.

c

72. The Federal Reserve Board of Governors directly controls which of the following interest rates? A. Bankers' acceptances B. Brokers' calls C. Federal funds D. LIBOR

c

A __________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date. A. call option B. futures contract C. put option D. interest rate swap

c

According to the Flow of Funds Accounts of the United States, the largest financial asset of U.S. households is ____. A. mutual fund shares B. corporate equity C. pension reserves D. personal trusts

c

An investor buys $16,000 worth of a stock priced at $20 per share using 60% initial margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. The stock pays a $.50-per-share dividend in 1 year, and then the stock is sold at $23 per share. What was the investor's rate of return? A. 17.5% B. 19.67% C. 23.83% D. 25.75%

c

Investors who want to liquidate their holdings in a closed-end fund may ___________________. A. sell their shares back to the fund at a discount if they wish B. sell their shares back to the fund at net asset value C. sell their shares on the open market D. sell their shares at a premium to net asset value if they wish

c

Security selection refers to the ________. A. allocation of the investment portfolio across broad asset classes B. analysis of the value of securities C. choice of specific securities within each asset class D. top-down method of investing

c

Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1,000 shares of Microsoft common stock. Surf City Software has exchanged a _____ asset for a _____ asset in this transaction. A. real; real B. financial; financial C. real; financial D. financial; real

c

The success of common stock investments depends on the success of _________. A. derivative securities B. fixed-income securities C. the firm and its real assets

c

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. A. I only B. I and II only C. I and III only D. I, II, and III

c

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. a value-weighted index B. an equally weighted index C. a price-weighted index D. a bond price index

c

You hold 5,000 shares of the 1 million outstanding shares of Wealthy Wranglers common stock. You've just learned that the company plans to issue more shares, so that 2 million shares will be outstanding. This is called _____. A. an advanced equity offering B. a weathered equity offering C. a seasoned equity offering D. a veteran equity offering

c

You purchased 250 shares of common stock on margin for $25 per share. The initial margin is 65%, and the stock pays no dividend. Your rate of return would be __________ if you sell the stock at $32 per share. Ignore interest on margin. A. 35% B. 39% C. 43% D. 28%

c 32-25/254*.65 ..... =.43

The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss?

c 48% Loss =(22-25)100 Amount invested=.25x25x100 retrun =-300/625

Assume you purchased 500 shares of XYZ common stock on margin at $40 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is _________. A. $20,000 B. $12,000 C. $8,000 D. $15,000

c 500($40)(.40) = $8,000

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. A. $0.55 B. $1.80 C. $0.45 D. $1.25

c 60x30.../4 =.45

86. The TED spread refers to A. the difference between the Treasury bond rate and the Treasury bill rate. B. the difference between the Treasury note rate and the Treasury bill rate. C. the difference between the LIBOR rate and the Treasury bill rate. D. the difference between the LIBOR rate and the Treasury bond rate.

c.

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible gain, ignoring transactions cost? A. $50 B. $150 C. $10,000 D. Unlimited Tuckerton could go bankrupt, with a share price of $0. You could keep the entire proceeds from the short sale

c. proceeds-minimum possible replacement cost 200(50) - 200(0) 10,000

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? A. 23.43 B. 35.36 C. 40.33 D. 49.58

c. 54+23+44 .... /3 =40.33

Which of the following is not a money market instrument?

c. Preferred stock

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? A. 2.34% B. 2.68% C. 3.25% D. 4.92%

c. tiled = .0234/1-.28 =.0325

13. __________ are examples of financial intermediaries. A. Commercial banks B. Insurance companies C. Investment companies D. All of these options

d

18. Which of the following is an example of an agency problem? A. Managers engage in empire building. B. Managers protect their jobs by avoiding risky projects. C. Managers over consume luxuries such as corporate jets. D. All of these options are examples of agency problems.

d

42. An example of a real asset is:I. A college educationII. Customer goodwillIII. A patent A. I only B. II only C. I and III only D. I, II, and III

d

Financial intermediaries exist because small investors cannot efficiently _________. A. diversify their portfolios B. gather information C. monitor their portfolios D. all of these options

d

Methods of encouraging managers to act in shareholders' best interest include:I. Threat of takeoverII. Proxy fights for control of the board of directorsIII. Tying managers' compensation to stock price performance A. I only B. I and II only C. II and III only D. I, II, and III

d

Real assets in the economy include all but which one of the following? A. Land B. Buildings C. Consumer durables D. Common stock

d

The material wealth of society is determined by the economy's _________, which is a function of the economy's _________. A. investment bankers; financial assets B. investment bankers; real assets C. productive capacity; financial assets D. productive capacity; real assets

d

Which of the following is not considered a money market investment? A. Bankers' acceptance B. Eurodollar C. Repurchase agreement D. Treasury note

d

The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV? A. 9.26% premium B. 8.47% premium C. 9.26% discount D. 8.47% discount

d NAV = ($300,000,000 - $5,000,000)/9,000,000 = $32.78Discount = $32.78 - $30 = $2.78Discount as % of NAV = $2.78/$32.78 = .0847 = 8.47%

If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________.

dollar weighted

You have an APR of 7.5% with continuous compounding. The EAR is _____.

e075 -1=7.79

Which one of the following measures time-weighted returns and allows for compounding

geometric

According to multiple studies by Ritter, initial public offerings tend to exhibit __________ performance initially and __________ performance over the long term.

good;bad

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? A. 5.00 B. 4.85 C. 4.50 D. 4.75

index = 10 + 20 + 80+50 +40 ..../5 =40 Index 1 = 10 + 20 + 80+50 20 / x = 40 x = 4.5

The bulk of most initial public offerings (IPOs) of equity securities goes to ___________.

institutional investors

An order to buy or sell a security at the current price is a ______________.

market order

Purchases of new issues of stock take place _________.

primary market

The complete portfolio refers to the investment in _________.

the risk-free asset and the risky portfolio combined

Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.

underpriced