Analysis - Basic Tax Rules: Market Analysis

If the United States balance of payments goes from a deficit to a surplus position, the value of the U.S. dollar should: A. appreciate B. depreciate C. fluctuate D. stagnate

A. Appreciate (If the United States exports more to foreign countries than is imported, then there is a balance of payments surplus. To pay for their purchases, foreigners must sell their currency and buy the U.S. dollar (since payment for purchases in the U.S. is made in dollars). Thus, the value of the U.S. dollar will rise.)

Transactions in the interbank market cause direct movements in the prices of: A. currencies B. currency options C. equities D. equity options

A. Currencies

A customer viewing virtual trading floor information on the NYSE Website notices that he can see most, but not all, of the stocks included in the Dow Jones Industrial Average, trading on the floor. The customer asks his registered representative why this is the case. The customer should be told that: A. Of the 30 stocks included in a Dow Jones Industrial Average, a handful do not trade on the NYSE B. The NYSE only includes the most actively traded Dow Jones Industrial Average stocks in the display C. These are the companies that have not paid the NYSE to be included in the display D. The companies that are not displayed have just announced significant news and trading has been halted in those issues until the news is disseminated

A. Of the 30 stocks included in a Dow Jones Industrial Average, a handful do not trade on the NYSE (Of the Dow 30 stocks, most of the issues are NYSE listed, but a handful, such as Microsoft Apple and Intel, are only traded on NASDAQ.)

If a foreign government wishes to stabilize its currency because it has been falling against the U.S. Dollar, the government would: A. buy its own currency B. sell its own currency C. sell short its own currency D. buy U.S. dollars

A. buy its own currency (To stabilize a currency that is falling against the dollar, the foreign government would buy its currency (driving its price up against the U.S. Dollar); and sell the U.S. Dollar (driving the U.S. dollar down against the foreign currency).

Trading in the Interbank market will affect all of the following directly EXCEPT: A. foreign currency prices in terms of U.S. dollars B. American Depositary Receipt prices in terms of U.S. dollars C. future economic growth D. future trade deficit or surplus figures

B. American Depositary Receipt prices in terms of U.S. dollars

The figures presented for GDP, Currency Value and Trade Balance show the change from 1 year ago. U.S. GDP: -.4%, Long Bond Yield: 8.5%, Change in Currency Value: -10%, Trade Balance: -$100B Japan GDP: +3%, Long Bond Yield: 6%, Change in Currency Value: +8%, Trade Balance: +$130B During the past year, foreign investment in the United States has been increasing. The likely cause for this is: A. the United States has been running a trade surplus, demonstrating the strength of the economy B. interest rates in the United States are higher than those available overseas C. the U.S. economy has been undergoing a broad expansion during the past year D. the dollar has been strengthening, producing gains for investors in dollars over the past year

B. Interest rates in the United States are higher than those available overseas (Long term interest rates in the U.S. are at 8.5%, while those in Japan are at 6%, reading from the chart. Since U.S. interest rates are higher, this attracts investment from overseas. During this past year, the U.S. ran a trade deficit of $100 billion, which is not a good sign for the economy; GDP declined, another bad sign; and the dollar weakened by 10%, another bad sign.)

The largest component of the Standard and Poor's 500 Average is the: A. utilities B. technology C. consumer staples D. industrials

B. Technology (The S&P 500 Index was "recategorized" about 15 years ago into different sectors to allow the creation of "Sector SPDRs" - index funds based on these sectors. The new breakdown, by approximate size, is: Technology 24% Financials 15% Healthcare 14% Consumer Discretionary 12% Industrials 10% Consumer Staples 9% Energy 6% Utilities 3% Materials 3% Real Estate 3% Telecoms 2% By far the largest weighting in the revised sector breakdown is technology stocks.)

If the real Gross Domestic Product of the G-20 countries is growing at a faster rate than real Gross Domestic Product growth in the United States, then the value of the U.S. dollar can be expected to: A. appreciate B. depreciate C. fluctuate D. stagnate

B. depreciate (The G-20 countries are the major industrialized nations of the world. If the Gross Domestic Product of the other G-20 countries is growing at a faster rate than the GDP growth in the United States, then these countries are doing "better" than the United States, and the U.S. dollar will depreciate in value relative to those currencies.)

If the dollar falls against foreign currencies, all of the following statements are true EXCEPT: A. U.S. goods are cheaper to foreign countries B. U.S. exports are likely to rise C. foreign currencies buy fewer dollars D. foreign imports are likely to fall

C. Foreign currencies buy fewer dollars (If the dollar falls, U.S. goods become cheaper to foreigners and foreign goods become more expensive in the U.S. Thus, exports are likely to rise and imports are likely to fall. Since the dollar is cheaper, foreign currencies buy more dollars and/or goods.)

A U.S. balance of payments deficit would be narrowed by which of the following? A. Increased levels of U.S. imports B. Decreased sales of U.S. securities to foreign holders C. Increased levels of foreign tourists visiting the United States D. Increased dividends paid to foreign holders of U.S. securities

C. Increased levels of foreign tourists visiting the United States (If the balance of payments is running a deficit, then more U.S. Dollars are being spent abroad for foreign goods and services than are being spent in the United States by foreigners for domestic goods and services. Increased levels of U.S. imports will cause more dollars to leave the U.S., widening the deficit. Increased levels of foreign tourists visiting the U.S. will narrow the deficit, since dollars are being spent in the U.S. by more foreigners. Increased dividends paid to foreign holders of U.S. securities will cause dollars to leave the U.S., widening the deficit. Finally, decreased sales of U.S. securities to foreign holders will reduce the inflow of dollars resulting from these purchases, widening the balance of payments deficit.)

Speculators in foreign currencies would be subject to all of the following risks EXCEPT: A. political risk B. market risk C. interest rate risk D. exchange rate risk

C. Interest rate risk (Interest rate risk only affects fixed income securities. As interest rates rise, the stream of future fixed interest payments and final principal repayment are devalued, reducing the current value of the bond. This risk would not affect foreign currencies, which do not give investors an income stream. Speculators in foreign currencies are simply placing bets on the future value of that currency. They assume political risk, exchange rate risk, and market risk. Market risk in this case is simply the risk of being on the wrong "side" of the market - e.g., being long the currency only to have its value fall; or short the currency only to have its value rise.)

Which of the following indexes is the broadest measure of the market? A. Value Line Index B. New York Stock Exchange Composite Index C. Wilshire Index D. Standard and Poor's Composite Index

C. Wilshire Index (The Wilshire Index is the broadest measure since it includes about 3,500 issues of companies headquartered in the United States that are listed on the NYSE, NYSE American (AMEX), or NASDAQ. The Wilshire started at 5,000 stocks in 1974 but the number of listed companies in the U.S. has been declining over the years, mainly because of the high regulatory cost of a company "going public." The Value Line Index only includes 1,700 issues. The Standard and Poor's Composite Index has 500 stocks, while the NYSE Composite includes all common issues listed on the NYSE - currently about 2,500 issues.)

NYSE MARKET DIARY Yesterday Prev. Day Advanced 577 827 Declined 1963 1757 Unchanged 455 388 Total Issues 2995 2972 New Highs 10 13 New Lows 91 78 Based on the information presented for both days, a technical analyst would conclude that the market: A. is in a consolidation phase B. breadth indicates a strong bullish trend C. breadth indicates a strong bearish trend D. is peaking and will soon enter a downturn

C. breadth indicates a strong bearish trend (Declines sharply outnumbered advances on both days, with many new low prices being set. Thus, the breadth of the market indicates a strong bearish (downward) trend.)

Which index is the narrowest measure of the market? A. Wilshire Index B. Value Line Index C. NYSE Composite Index D. Dow Jones Industrial Average

D. Dow Jones Industrial Average (The Dow Jones Industrial Average consists of 30 stocks (principally NYSE listed issues). This is the narrowest measure of the market. The Value Line Index is broader, including 1,700 issues. The NYSE Composite Index consists of the approximately 2,500 issues listed on the NYSE. The Wilshire Index is the broadest measure since it includes about 3,500 issues of companies headquartered in the United States that are listed on the NYSE, NYSE American (AMEX), or NASDAQ. The Wilshire started at 5,000 stocks in 1974 but the number of listed companies in the U.S. has been declining over the years, mainly because of the high regulatory cost of a company "going public.")

A foreign currency trade that settles either one or two business days after trade date is a: A. cash settlement B. seller's option settlement C. forward settlement D. spot settlement

D. spot settlement (Settlement of "spot" trades in the Interbank market takes place either one or two business days after trade date (the more actively traded currencies settle next day; less actively traded currencies settle in 2 business days).

An investor holds an international bond fund. Regarding the performance of the fund, which of the following statements are TRUE? I If the foreign currency value rises against the dollar, the fund's Net Asset Value will increase II If the foreign currency value rises against the dollar, the fund's Net Asset Value will decrease III If the dollar falls against the foreign currency, the fund will have an inferior performance relative to dollar denominated funds IV If the dollar falls against the foreign currency, the fund will have a superior performance relative to dollar denominated funds

I and IV (An international bond fund will have securities that are denominated in foreign currencies. If the foreign currency value rises against the dollar, then when the fund's NAV is converted into dollars, proportionately more dollars will be created, since each unit of foreign currency buys more dollars. Similarly, if the U.S. Dollar drops against the foreign currency, when the fund's NAV is converted into dollars, proportionately more dollars will be created, since each unit of foreign currency buys more dollars.)

Which of the following statements are TRUE about the interbank market? I Foreign currency values are determined in this market II The market is centralized III Trading is regulated IV Foreign policy actions affect values in the market

I and IV (The Interbank market is a free wheeling, unregulated, worldwide currency trading market open 24 hours a day. It is completely unregulated, but is influenced by central bank trading. Central bank trading actions are directed by each country's government.)

Which of the following economic events would have a positive long term impact on common stock prices? I Falling interest rates II Falling capital gains tax rates III Rising employment rates IV Rising inflation rates

I, II, III (Falling interest rates are good for stock prices. More investors will switch from low yielding bonds to stock investments. A falling capital gains tax rate also makes stocks attractive to investors. Rising employment indicates that the economy is expanding. This is bullish for corporate profits and hence, stock prices. Rising inflation means that interest rates are likely to rise. This makes long term debt unattractive due to their greater price volatility in response to market interest rate changes and also makes stocks unattractive since corporations are not able to increase prices in line with rising costs, hurting profits. In inflationary times, investors switch from stocks and long term bonds to money market instruments which are paying current high rates of interest; and "hard" assets such as gold and real estate that tend to keep up with inflation.)

Trading in the Interbank market will DIRECTLY affect: I American Depositary Receipt prices in terms of U.S. dollars II Foreign Currency prices in terms of U.S. dollars III Future trade deficit or surplus figures IV Future economic growth

II, III, and IV (Foreign currencies trade in the "Interbank" market. If the dollar declines against foreign currencies, U.S. goods become cheaper to foreigners. This will stimulate exports and domestic economic growth. If the dollar rises against foreign currencies, foreign goods become cheaper in the U.S. This will stimulate imports, and shift production out of the U.S. to other countries. American Depositary Receipts are vehicles for foreign securities to be traded in the United States. ADRs are only traded in the United States, and are denominated in U.S. dollars, so there is no direct effect of foreign currency price movements on ADR prices (though an argument can be made that the foreign stock held in trust pays dividends in the foreign currency; and that these dividends are converted to U.S. dollars to be paid to ADR holders; that currency price movements have some impact on ADR values).