Unit 1 test
All of the following are money market instruments EXCEPT A)warrants expiring within three months B)Treasury bonds maturing within the next year C)banker's acceptances D)negotiable certificates of deposit
A> warrants expiring within three months Money market instruments are liquid debt securities maturing within a year. Warrants are equity securities.
Which of the following securities is commonly used to settle transactions involving imports and exports? A)American depositary receipts B)Banker's acceptances C)Foreign currencies D)Eurodollars
Banker's acceptances Corporations use banker's acceptances to settle transactions involving the import and export of goods
Which organization or governmental unit sets fiscal policy? A)Federal Reserve Board (FRB) B)Secretary of the Treasury C)Federal Open Market Committee (FOMC) D)Congress and the President
Congress and the President Congress and the President set fiscal policy, while the FRB sets monetary policy.
Which of the following is NOT true concerning convertible bonds? A) Coupon rates are usually lower than nonconvertible bond rates of the same issuer. B) Convertible bondholders are creditors of the corporation. C) Coupon rates are usually higher than nonconvertible bond rates of the same issuer. D) If the common stock is above parity, the convertible feature will affect the price.
Coupon rates are usually higher than nonconvertible bond rates of the same issuer. They are lower because of the conversion feature's value to the bondholder. The bondholders are creditors, and if the stock price rises above the conversion price, the conversion feature will greatly influence the bond's price.
If an investor purchases $50,000 face value of 5.10 bonds at par due in 2025 and holds them to maturity, which of the following statements is TRUE? A)The investor will receive $50,000 plus 5.10 at maturity. B)The investor will receive $50,000 less 5.10 market discount at maturity. C)The investor will receive $50,000, the final two interest payments, and 5.10 market gain at maturity. D)The investor will receive $50,000 and the final interest payment at maturity.
D. The investor will receive $50,000 and the final interest payment at maturity.
Which of the following terms do economists use to describe a downturn in the economy that lasts more than six consecutive quarters? A)Depression B)Recession C)Inflation D)Stagflation
Depression An economic downturn that lasts for more than six consecutive quarters is known as a depression. It is also generally associated with high unemployment.
An investor interested in monthly interest income should invest in A) GNMAs B) Treasury bonds C) utility company stock D) corporate bonds
GNMAs GNMAs pay monthly interest and principal, treasury bonds pay semiannual interest, utility stocks pay quarterly dividends, and corporate bonds pay semiannual interest.
Why might an investor choose to purchase an American depositary receipt for a foreign stock, rather than the foreign stock itself?
He need only deal in U.S. currency.
Which of the following option investors are bearish? 1 Buyer of a call 2 Writer of a call 3 Buyer of a put 4 Writer of a put
II and III If an investor anticipates a decline in a stock's price, he is considered to be bearish on the stock. To profit from the anticipated downward movement in the stock, he could either sell (write) calls or buy puts. Both are bearish option strategies.
Which of the following is TRUE of treasury stock? 1 It has voting rights and is entitled to a dividend when declared. 2 It has no voting rights and no dividend entitlement. 3 It has been issued and reacquired by the company. 4 It is authorized, but unissued, stock.
II and III Treasury stock is stock that has been issued by a corporation and subsequently reacquired in the secondary market. It does not carry the rights of other common shares, such as voting rights, rights to dividends, or preemptive rights.
If interest rates are changing, which of the following terms would best describe the relationship between prices and yields for corporate bonds? A)Reverse B)Inverse C)Coaxial D)Coterminous
Inverse As yields increase, the price of outstanding debt decreases and vice versa. The resulting relationship is termed an inverse relationship
The price of which of the following will fluctuate most with a change in interest rates? A)Long-term bonds B)Money-market instruments C)Common stock D)Short-term bonds
Long-term bonds Long-term debt prices fluctuate more than short-term debt prices as interest rates rise and fall.
To benefit the economy, business activity needs to increase. Which of the following monetary policy measures might an economist urge the FRB to do?
Lower the discount rate Lowering the discount rate makes borrowing money cheaper, which will stimulate the economy. Raising or lowering taxes is fiscal policy, not monetary policy.
Which of the following is the CORRECT order of the stages in a business cycle? A)Peak, expansion, contraction, trough B)Expansion, peak, contraction, trough C)Contraction, trough, peak, expansion D)Trough, contraction, expansion, peak
Peak, expansion, contraction, trough B) Expansion, peak, contraction, trough Contraction, trough, peak, expansion Trough, contraction, expansion, peak
An investor purchased a corporate bond at 98 5/8 and sold the bond at 101 3/4. How much money did he make or lose on this transaction (excluding commissions)? A)Loss of $31.25 B)Profit of $3.125 C)Profit of $31.25 D)Loss of $3.125
Profit of $31.25 The investor sold the bond for 3 1/8 points more than purchase price. One point for a bond is $10, therefore, we know that 3 points is $30 and 1/8 of a point is $1.25. When we add those numbers together, we have a profit of $31.25.
When a company liquidates assets, in which order are claims satisfied, earlier to later?
Secured bondholders, debentures, preferred stockholders, common stockholders
The interest from which of the following bonds is exempt from federal income tax? State of California revenue bonds City of Anchorage general obligation bonds Treasury bonds GNMA bonds
State of California revenue bonds City of Anchorage general obligation bonds Municipal bonds are exempt from federal income tax. Treasury bonds are exempt from state tax but not federal tax. GNMAs are subject to federal, state, and local income tax.
Which of the following statements regarding Treasury bonds are TRUE? They are sold at a discount. They pay a fixed rate of interest semiannually. They mature in one year or less. They mature in ten years or more.
They pay a fixed rate of interest semiannually. They mature in ten years or more. T-bonds are sold at par and pay interest semiannually; they are issued with maturities of ten years or more.
Which of the following securities trade flat? A)TIPS B)Treasury STRIPS C)Treasury bonds D)Treasury notes
Treasury STRIPS Treasury STRIPS are a type of zero coupon security. They trade flat, because they do not pay interest.
A municipal bond has a coupon of 6.25% and at the present time, its yield to maturity is 6.75%. From this information, it can be determined that the municipal bond is trading A)at a premium B)at par C)at a discount D)flat
at a discount The YTM is greater than the nominal yield, or coupon yield. Therefore, the bond is trading at a discount.
Market interest rates have been rising, which means that the price of bonds traded in the secondary market has A)increased B)not changed because bond prices are not affected by interest rates C)stayed the same D)decreased
decreased When interest rates rise, bond prices fall.
If a bond is purchased at a premium, the yield to maturity is A)the same as the current yield B)higher than the current yield C)higher than the nominal yield D)lower than the nominal yield
higher than the current yield A bond purchased at a premium is purchased for an amount greater than the face amount of the bond. The premium paid reduces both the current yield and the yield to maturity
A company that has issued cumulative preferred stock
pays past and current preferred dividends before paying dividends on common stock
The federal funds rate is the rate that the Federal Reserve charges a member bank that major commercial banks charge their best corporate customers that major commercial banks charge broker/dealers for margin account loans that banks charge each other for overnight loans and is subject to daily change
that banks charge each other for overnight loans and is subject to daily change The discount rate is the rate charged by the Federal Reserve to a member bank. The prime rate is the rate that commercial banks charge their best corporate customers. The broker call loan rate is what major banks charge broker/dealers for margin account loans.
If a corporation wanted to offer the opportunity to purchase common stock at a given price for the next five years, it would issue A)put options B)rights C)callable preferred stock D)warrants
warrants A warrant is a purchase option for stock for a long period (i.e., longer than one year). The warrant allows the holder to purchase common stock for a set price that is above what the market price was when the warrant was first issued.
