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1) An investment bank is a financial institution that A) bundles small deposits into larger loans. B) helps corporations raise funds. C) holds most of its assets in commercial paper. D) does all of the above. E) does only A and B of the above. Answer: B Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 2) In a ________, new issues of a security are sold to buyers by the corporation or government agency ultimately using the funds. A) primary market B) secondary market C) capital market D) money market Answer: A Topic: Chapter 22.1 Investment Banks Question Status: New Question 3) In a ________, a security is sold between investors, and does not (necessarily) involve the corporation or government agency ultimately using the funds. A) primary market B) secondary market C) capital market D) money market Answer: B Topic: Chapter 22.1 Investment Banks Question Status: New Question 4) The Glass-Steagall Act A) separated commercial and investment banking. B) made it illegal for a commercial bank to buy or sell securities on behalf of its customers. C) made it illegal for investment banks to engage in the underwriting of corporate securities. D) did all of the above. E) did only A and B of the above. Answer: E Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 5) During the Depression, about ________ banks failed (about 40% of all commercial banks). A) 500 B) 1,000 C) 5,000 D) 10,000 Answer: D Topic: Chapter 22.1 Investment Banks Question Status: New Question 6) Investment banks sell ________ securities to the public, and brokerage firms sell ________ securities to the public. A) new; existing B) new and existing; existing C) existing; new D) existing; new and existing Answer: A Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 7) The primary function of investment banks is A) the bundling of deposits into loans. B) extending long-term credit to other financial institutions. C) helping corporations raise funds. D) providing credit to firms engaged in international trade. Answer: C Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 8) The primary function of investment banks is to A) extend credit to stock brokers and dealers. B) extend credit to investors. C) extend credit to corporations. D) help corporations issue new securities. Answer: D Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 9) Which is not an activity of investment banks? A) Underwriting new issues of corporate stocks and bonds B) Acting as deal makers in mergers C) Acting as intermediaries in the buying and selling of businesses or parts of businesses D) Underwriting new issues of federal government bonds Answer: D Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 10) Tasks that investment bankers perform when acting as underwriters to sell securities to the public include A) pricing the security. B) preparing the filings required by the Securities and Exchange Commission. C) arranging for the security to be rated. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 11) Investment banks find it less difficult to price securities if the firm has prior issues currently selling in the market, called ________. A) secondary issues B) seasoned issues C) outstanding issues D) experienced issues Answer: B Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 12) The process of underwriting a stock or bond issue requires that the investment bank A) assure investors that the issue will provide them a high return. B) purchase the entire issue at a predetermined price if the quantity demanded by consumers is insufficient at the predetermined price. C) purchase the entire issue at a predetermined price and then resell it in the market. D) do both A and B of the above. Answer: C Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 13) The registration statement the securities underwriter files with the SEC contains information about A) the firm's financial condition, management, competition, industry, and experience. B) how the funds will be used. C) management's assessment of the risk of the securities. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 14) SEC registration is A) required for all securities. B) required if less than $1.5 million in securities are issued per year. C) not required for securities that are sold through a private placement. D) required if the securities mature in less than one year. E) not required if securities are underwritten by a reputable investment bank. Answer: C Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 15) By law, investors must be given a portion of the registration statement before they can invest in a new security. This document is called a ________. A) prospectus B) proxy statement C) fiduciary warrant D) debenture Answer: A Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 16) Investment banks advertise upcoming securities offerings with block ads in the Wall Street Journal. Such an ad is called a ________. A) tombstone B) marker C) prospectus D) registration statement Answer: A Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 17) Most investment banks are attached to A) large commercial banks. B) large brokerage houses. C) finance companies. D) large nonfinancial corporations. Answer: B Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 18) From an investment banker's perspective, the best outcome occurs when a new issue is ________. A) undersubscribed B) fully subscribed C) oversubscribed D) syndicated Answer: B Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 19) Investment banks may lose ________ if new securities issues are ________. A) large amounts of money; oversubscribed B) large amounts of money; fully subscribed C) future business; oversubscribed D) future business; undersubscribed Answer: C Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 20) The largest U.S. underwriter of global debt and equity issues, as of 2009, was ________. A) Merrill Lynch B) J.P. Morgan C) Morgan Stanley D) Goldman Sachs Answer: B Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 21) Often investment bankers will form a group, each one buying only a portion of the new securities to be issued. Such a group is called an underwriting ________. A) alliance B) syndicate C) association D) guild Answer: B Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 22) In a ________ agreement, the investment banker makes no guarantee regarding the price the issuing firm will receive, but agrees to sell the securities on a commission basis. A) best efforts B) brokered C) private-placement D) jump-start Answer: A Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 23) Under best efforts underwriting, the underwriter A) pays for the entire security issue. B) sells the security on a commission basis. C) spreads the risk among different brokerage houses. D) makes a special appeal to the Securities and Exchange Commission to delay the issue. Answer: B Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 24) Private placements A) do not require the services of investment bankers. B) need not be registered with the SEC. C) are more common in the sale of stocks than for bonds. D) all of the above. E) are only A and B of the above. Answer: E Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 25) The most active investment banking firm in the private placement market is ________. A) Merrill Lynch B) Lehman Brothers C) Goldman Sachs D) Morgan Stanley Answer: C Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 26) The buyers of private placement issues are most likely to be ________. A) insurance companies B) pension funds C) investment banks D) all of the above E) only A and B of the above Answer: E Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 27) The buyers of private placement securities are most likely to be ________. A) insurance companies B) pension funds and mutual funds C) commercial banks D) all of the above E) only A and B of the above Answer: D Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 28) Which of the following statements about private placements are true? A) Private placements are more common for the sale of bonds than for stocks. B) Investment bankers, though not required for a private placement, often facilitate the transaction. C) Investment bankers help the issuing firm file the paperwork required by the SEC. D) All of the above are true. E) Only A and B of the above are true. Answer: E Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 29) Investment bankers have been active in the mergers and acquisitions market since the 1960s. Their contributions have included A) helping firms that want to acquire another firm locate a firm to pursue. B) helping would-be acquirers solicit shareholders through a tender offer. C) helping target firms ward off undesired takeover attempts. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 30) Which of the following is not a step in the process by which an investment bank assists in the sale of a company or corporate division? A) Preparation of a confidential memorandum B) Negotiation of a letter of intent C) Preparation of a definitive agreement D) Forming a syndicate of purchasers Answer: D Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 31) The best known investment banker involved in mergers and acquisitions, credited with inventing the junk bond market, is ________. A) Ivan Boesky B) Michael Milken C) James Garner D) Michael Douglas Answer: B Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 32) ________ perform their main function in the primary market for securities and ________ perform their main function in the secondary market. A) Investment banks; securities brokers and dealers B) Securities brokers and dealers; investment banks C) Securities brokers; securities dealers D) Securities dealers; securities brokers Answer: A Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 33) The securities sales, the ________ price is the price that the broker pays for securities they buy for their inventory. A) bid B) ask C) midpoint D) transaction Answer: A Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: New Question 34) The securities sales, the ________ price is the price that the broker receive when they sell the securities. A) bid B) ask C) midpoint D) transaction Answer: B Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: New Question 35) In a primary market, ________ sell new issues of securities; in a secondary market, ________ assist in trading previously issued securities. A) securities dealers; securities brokers B) securities brokers; securities dealers C) investment banks; securities brokers and dealers D) securities brokers and dealers; investment banks Answer: C Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 36) Which of the following best explains the difference between brokers and dealers? A) Brokers are pure middlemen; dealers make markets by standing ready to buy and sell at given prices. B) Dealers are pure middlemen; brokers make markets by standing ready to buy and sell at given prices. C) Dealers link up buyers and sellers, but do not stand ready to buy and sell from their inventories of securities; brokers stand ready to buy and sell from their inventories of securities. D) There is no difference between brokers and dealers. Answer: A Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 37) Securities dealers A) hold inventories of securities, which they sell to customers who want to buy. B) hold securities that they have purchased from customers who wanted to sell. C) are called market takers, as they have significantly cut into the market that brokers used to dominate. D) do all of the above. E) do only A and B of the above. Answer: E Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 38) Securities dealers A) sell securities out of their inventories to customers who want to buy. B) buy securities, which they add to their inventories, from customers who want to sell. C) are largely responsible for the health and growth of small businesses in the United States. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 39) By making a market in thinly traded stocks, securities dealers solve the ________ trading problem, which is of particular benefit to ________ businesses. A) synchronous; large B) synchronous; small C) nonsynchronous; large D) nonsynchronous; small Answer: D Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 40) Which of the following is not a service securities brokers offer their clients? A) Holding customers' stock for safekeeping B) Providing insurance against loss of the securities C) Providing insurance against loss of value of the securities D) Extending margin credit Answer: C Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 41) An instruction to a securities agent to buy or sell the security at the current market price is called a ________. A) limit order B) market order C) stop loss order D) margin order Answer: B Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 42) An instruction to a securities agent to sell a stock when it reaches a specific price is a ________. A) short sell B) market order C) limit order D) stop loss order Answer: D Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 43) An instruction to a securities agent to purchase a stock as long as its price does not exceed a specified level is a ________. A) short sell B) market order C) limit order D) stop loss order Answer: C Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 44) To take advantage of anticipated stock price decreases, an investor would use ________. A) a market order B) a limit order C) a short sell D) margin credit Answer: C Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 45) Which of the following statements about cash management accounts (CMAs) are true? A) The cash management account was developed in 1977 by Merrill Lynch. B) The advantage of brokerage-based cash management accounts is that they make it easier to buy and sell securities. C) As a result of CMAs, the distinction between banking activities and the activities of nonbank financial institutions has become more clearly defined. D) All of the above are true. E) Only A and B of the above are true. Answer: E Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 46) The largest full-service broker is ________ with about 17,000 financial advisors and $2.2 trillion in client assets. A) Bank of America Merrill Lynch B) Charles Schwab Corp. C) Ameritrade D) Smith Barney Answer: A Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 47) A full-service broker offers its clients all of the following except A) execution of trades on request. B) low transaction fees. C) research and investment advice. D) development of long-term customer relationships. Answer: B Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 48) An investment pool is formed to A) manipulate the market by spreading false rumors. B) lower brokerage fees by combining security purchases. C) share investment advice among member investors. D) take advantage of tax breaks introduced by the 1933 and 1934 securities acts. Answer: A Topic: Chapter 22.3 Regulation of Securities Firms Question Status: Previous Edition 49) A securities dealer stands ready to make a market in the security at any time. For this reason, dealers are also called ________. A) market makers B) "brokers and dealers" C) liquidity traders D) demand dealers Answer: A Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: New Question 50) If an investment is liquid, it can be sold ________. A) quickly B) anonymously C) only on "rainy" days D) through a full-service broker Answer: A Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: New Question 51) A ________ is a specialized firm that finances young, start-up companies. A) venture capital firm B) finance company C) small-business finance company D) capital-creation company Answer: A Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 52) Which of the following provides funds to companies not yet ready to sell securities to the public? A) Investment banks B) Securities brokers and dealers C) Venture capital firms D) None of the above Answer: C Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 53) The first true venture capital firm was ________, established in 1946 by MIT president Karl Compton and local business leaders. A) American Research & Development (ARD) B) Charles River Development C) Redsocks Capital D) the MIT Fund Answer: A Topic: Chapter 22.5 Private Equity Investment Question Status: New Question 54) Which of the following is the first phase in the life cycle of a venture capital deal? A) A limited partnership is formed and funds are raised. B) Funds are invested in start-up companies. C) The venture firm exits the investment. D) The venture firm seeks approval from the S.E.C. Answer: A Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 55) Which of the following is the second phase in the life cycle of a venture capital deal? A) A limited partnership is formed and funds are raised. B) Funds are invested in start-up companies. C) The venture firm exits the investment. D) The venture firm seeks approval from the S.E.C. Answer: B Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 56) Which of the following is the third and final phase in the life cycle of a venture capital deal? A) A limited partnership is formed and funds are raised. B) Funds are invested in start-up companies. C) The venture firm exits the investment. D) The venture firm seeks approval from the S.E.C. Answer: C Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 57) Venture capital firms are usually organized as ________. A) closed-end mutual funds B) limited partnerships C) corporations D) nonprofit businesses Answer: B Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 58) Which of the following is not a characteristic feature of venture capital firms? A) Funding just one or a small number of firms B) Holding equity in the firms that are funded C) Having a long-term investment horizon D) Providing advice and assistance to the firms that are funded Answer: A Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 59) Which of the following is a characteristic feature of venture capital firms? A) Developing a portfolio of companies B) Holding debt in the firms that are funded C) Allowing firms to use the funds as they see fit D) Having a short-term investment horizon Answer: A Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 60) The sources of venture capital funding have A) shifted from wealthy individuals to pension funds and corporations. B) shifted from pension funds and corporations to wealthy individuals. C) decreased since 1990. D) done none of the above. Answer: A Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 61) A typical venture capital firm has a ________ number of investors who each contribute a ________ amount of money to the fund. A) large; small B) small; large C) large; large D) small; small Answer: B Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 62) Which of the following statements about venture capital funding is not correct? A) Exiting an investment can occur through an initial public offering or by merger or acquisition. B) Venture capital investing is highly risky. C) Venture capital firms may focus on a limited geographic area or on specific industries to facilitate monitoring their investments. D) Firms hope to exit a start-up firm in 3-5 years. Answer: D Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 63) The 20-year average return of venture capital firms has been about ________. A) 56% B) 8% C) 24% D) 102% Answer: C Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 64) Since the stock market decline in 2000, the number of companies funded and the total funds invested by venture capital firms have ________. A) held steady B) declined C) increased slightly D) increased sharply Answer: B Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 65) The ________ of the volume handled by brokers and dealers is in the publicly held securities. A) vast majority B) low percentage C) total amount D) none of the above Answer: A Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 66) With private investing, A) capital is raised by selling securities to the public. B) capital is raised by issuing new shares of stock. C) a limited partnership is formed that raises money from a small number of high-wealth investors. D) all of the above occur Answer: C Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 67) Which of the following is an advantage to a private equity buyout? A) They are subject to the controversial regulations included in the 2002 Sarbanes-Oxley Act. B) The CEOs frequently have more time and flexibility to enact changes need to turn around subpar companies. C) Both A and B. D) Neither A nor B. Answer: B Topic: Chapter 22.6 Private Equity Buyouts Question Status: Previous Edition 68) When taking a particular course of action for a private equity firm, the CEO of a privately held company needs to convince ________ that it is a good decision. A) the shareholders B) the managing partners C) no one D) both A and B Answer: B Topic: Chapter 22.6 Private Equity Buyouts Question Status: Previous Edition 69) There are ________ risk and ________ returns to investors in private equity buyouts. A) high; low B) low; high C) high; high D) low; low Answer: C Topic: Chapter 22.6 Private Equity Buyouts Question Status: Previous Edition 70) Which of the following is a description of a public firm acquired by a private equity investment? A) Public shares are retired. B) A public company goes private. C) The firm is no longer subject to controls and oversight required of publicly held companies. D) All of the above are correct. Answer: D Topic: Chapter 22.6 Private Equity Buyouts Question Status: Previous Edition 22.2 True/False 1) The Glass-Steagall Act made it illegal for an investment bank to buy or sell securities on behalf of its customers. Answer: FALSE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 2) When a firm issues stock for the first time in an initial public offering, it is difficult for an investment bank to determine what the correct price should be. Answer: TRUE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 3) To help raise the money to finance railroad expansions, J. P. Morgan's father resided in London and sold Morgan railroad securities to European investors. Answer: TRUE Topic: Chapter 22.1 Investment Banks Question Status: New Question 4) An undersubscribed issue occurs when sales agents have been unable to generate sufficient interest among their customers to sell all the securities by the issue date. Answer: TRUE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 5) Investment banks form syndicates to reduce the risk involved in selling new securities. Answer: TRUE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 6) Resisted takeovers are called hostile. Answer: TRUE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 7) Private placements are more common for the sale of stocks than for bonds. Answer: FALSE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 8) Investment bankers perform a number of tasks required to sell securities to the public, among them pricing the security, preparing the filings required by the SEC, arranging for the security to be rated, and marketing the security through their contacts with brokerage houses. Answer: TRUE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 9) One disadvantage of the private placement of securities issues is the high cost of registering the issue. Answer: FALSE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 10) Junk bonds are high-risk, high-return equity securities that were used primarily to finance takeover attempts. Answer: FALSE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 11) The Securities Acts Amendment of 1975 abolished fixed commissions. Answer: TRUE Topic: Chapter 22.3 Regulation of Securities Firms Question Status: Previous Edition 12) An investment pool is formed to manipulate the market for a stock by spreading false rumors about the health of the firm. Answer: TRUE Topic: Chapter 22.3 Regulation of Securities Firms Question Status: Previous Edition 13) Venture capital firms reduce risk by investing in only a few companies which can be carefully monitored and nurtured. Answer: FALSE Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 14) Investors in venture capital firms expect to profit quickly from their investment. Answer: FALSE Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 15) An additional perk of a private equity firm is that the profits for both CEOs and the partners are taxed at the 15% capital gains rate rather than the 35% rate they would suffer if the income was received as income. Answer: TRUE Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 16) In a typical private equity buyout, a partnership is formed and private equity investors are contacted to pledge participation. Answer: TRUE Topic: Chapter 22.6 Private Equity Buyouts Question Status: Previous Edition 17) Within the broad universe of private equity sectors, the two most common are venture funds and capital buyouts. Answer: TRUE Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition
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1) At the beginning of 2013, mutual funds held about ________ of the U.S. stock market was held by mutual funds. A) 30% B) 50% C) 10% D) 70% Answer: A Topic: Chapter 20.1 The Growth of Mutual Funds Question Status: Updated from Previous Edition 2) The origins of mutual funds can be traced back to the mid to late 1800s in ________. A) England and Scotland B) New York City C) Boston D) Germany Answer: A Topic: Chapter 20.1 The Growth of Mutual Funds Question Status: New Question 3) ________ intermediation means that small investors can pool their funds with other investors to purchase high face value securities. A) Liquidity B) Financial C) Denomination D) Share Answer: C Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 4) Mutual funds offer investors all of the following except A) greater-than-average returns. B) diversified portfolios. C) lower transaction costs. D) professional investment management. Answer: A Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 5) Mutual funds A) pool the resources of many small investors by selling these investors shares and using the proceeds to buy securities. B) allow small investors to obtain the benefits of lower transaction costs in purchasing securities. C) provide small investors a diversified portfolio that reduces risk. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 6) ________ enables mutual funds to consistently outperform a randomly selected group of stocks. A) Managerial expertise B) Diversification C) Denomination intermediation D) None of the above Answer: D Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 7) At the end of 2012 there were over ________ separate mutual funds with total assets over ________. A) 800; $10 trillion B) 7,500; $13 trillion C) 10,000; $10 trillion D) 1,000; $7 trillion Answer: B Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Updated from Previous Edition 8) Most mutual funds are structured in two ways. The most common structure is a(n) ________ fund, from which shares can be redeemed at any time at a price that is tied to the asset value of the fund. A(n) ________ fund has a fixed number of nonredeemable shares that are traded in the over-the-counter market. A) closed-end; open-end B) open-end; closed-end C) no-load; closed-end D) no-load; load E) load; no-load Answer: B Topic: Chapter 20.3 Mutual Fund Structure Question Status: Previous Edition 9) Which of the following is an advantage to investors of an open-end mutual fund? A) Once all the shares have been sold, the investor does not have to put in more money. B) The investors can sell their shares in the over-the-counter market with low transaction fees. C) The fund agrees to redeem shares at any time. D) The market value of the fund's shares may be higher than the value of the assets held by the fund. Answer: C Topic: Chapter 20.3 Mutual Fund Structure Question Status: Previous Edition 10) The net asset value of a mutual fund is A) determined by subtracting the fund's liabilities from its assets and dividing by the number of shares outstanding. B) determined by calculating the net price of the assets owned by the fund. C) calculated every 15 minutes and used for transactions occurring during the next 15-minute interval. D) calculated as the difference between the fund's assets and its liabilities. Answer: A Topic: Chapter 20.3 Mutual Fund Structure Question Status: Previous Edition 11) ________ funds are the simplest type of investment funds to manage. A) Balanced B) Global equity C) Growth D) Index Answer: D Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 12) The majority of mutual fund assets are now owned by A) individual investors. B) institutional investors. C) fiduciaries. D) business organizations. E) retirees. Answer: A Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 13) Capital appreciation funds select stocks of ________ and tend to be ________ risky than total return funds. A) large, established companies that pay dividends regularly; more B) large, established companies that pay dividends regularly; less C) companies expected to grow rapidly; more D) companies expected to grow rapidly; less Answer: C Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 14) From largest to smallest in terms of total assets, the four classes of mutual funds are A) equity funds, bond funds, hybrid funds, money market funds. B) equity funds, money market funds, bond funds, hybrid funds. C) money market funds, equity funds, hybrid funds, bond funds. D) bond funds, money market funds, equity funds, hybrid funds. Answer: B Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 15) Measured by assets, the most popular type of bond fund is the ________ bond fund. A) state municipal B) strategic income C) government D) high-yield Answer: B Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 16) People who take their money out of insured bank deposits to invest in uninsured money market mutual funds have ________ risk because money market funds invest in ________ assets. A) high; long-term B) low; short-term C) high; short-term D) low; long-term Answer: B Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 17) The largest share of assets held by money market mutual funds is A) Treasury bills. B) certificates of deposit. C) commercial paper. D) repurchase agreements. Answer: C Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 18) Which of the following is a feature of index funds? A) They have lower fees. B) They select and hold stocks to match the performance of a stock index. C) They do not require managers to select stocks and decide when to buy and sell. D) All of the above. Answer: D Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 19) A deferred-load mutual fund charges a commission A) when shares are purchased. B) when shares are sold. C) both when shares are purchased and when they are sold. D) when shares are redeemed. Answer: D Topic: Chapter 20.5 Fee Structure of Investment Funds Question Status: Previous Edition 20) Over the past twenty years, mutual fund fees have ________, largely because ________. A) fallen; SEC fee disclosure rules have led to greater competition B) risen; investors have learned that funds with high fees provide better performance C) risen; there has been collusion between large mutual fund companies D) fallen; advances in information technology have lowered transaction costs Answer: A Topic: Chapter 20.5 Fee Structure of Investment Funds Question Status: Previous Edition 21) Which of the following is most likely to be a no-load fund? A) Value funds B) Hedge funds C) Growth funds D) Index funds Answer: D Topic: Chapter 20.5 Fee Structure of Investment Funds Question Status: Previous Edition 22) When investors switch between funds within the same fund family, mutual funds may charge A) a contingent deferred sales charge. B) a redemption fee. C) an exchange fee. D) 12b-1 fees. E) an account maintenance fee. Answer: C Topic: Chapter 20.5 Fee Structure of Investment Funds Question Status: Previous Edition 23) The Securities Acts of 1933 and 1934 did not A) regulate the activities of investment funds. B) require funds to register with the SEC. C) include antifraud rules covering the purchase and sale of fund shares. D) apply to investment funds. Answer: B Topic: Chapter 20.6 Regulation of Mutual Funds Question Status: Previous Edition 24) The largest share of total investment in mutual funds is in A) stock funds. B) hybrid funds. C) bond funds. D) money market funds. Answer: A Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 25) Over ________ of the total daily volume in stocks is due to institutions initiating trades. A) 70% B) 50% C) 25% D) 90% Answer: A Topic: Chapter 20.6 Regulation of Mutual Funds Question Status: New Question 26) Hedge funds are A) low risk because they are market-neutral. B) low risk if they buy Treasury bonds. C) low risk because they hedge their investments. D) high risk because they are market-neutral. E) high risk, even though they may be market-neutral. Answer: E Topic: Chapter 20.7 Hedge Funds Question Status: Previous Edition 27) The near collapse of Long Term Capital Management was caused by A) the high management fees charged by the fund's two Nobel Prize winners. B) the fund's high leverage ratio of 20 to 1. C) a sharp decrease in the spread between corporate bonds and Treasury bonds. D) a sharp increase in the spread between corporate bonds and Treasury bonds. E) the fund's shift away from a market-neutral investment strategy. Answer: D Topic: Chapter 20.7 Hedge Funds Question Status: Previous Edition 28) Conflicts arise in the mutual funds industry because ________ cannot effectively monitor ________. A) investment advisers; directors B) directors; shareholders C) shareholders; investment advisers D) investment advisers; stocks that will outperform the overall market Answer: C Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry Question Status: Previous Edition 29) Late trading is the practice of allowing orders received ________ to trade at the ________ net asset value. A) before 4:00 pm; 4:00 pm B) after 4:00 pm; 4:00 pm C) after 4:00 pm; next day's D) before 4:00 pm; previous day's Answer: B Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry Question Status: Previous Edition 30) Market timing A) takes advantage of time differences between the east and west coasts of the United States. B) takes advantage of arbitrage opportunities in foreign stocks. C) takes advantage of the time lag between the receipt and execution of orders. D) is discouraged by the stiff fees mutual funds charge every investor for buying and then selling shares on the same day. Answer: B Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry Question Status: Previous Edition 31) Late trading and market timing A) allow large, favored investors in a mutual fund to profit at the expense of other investors in the fund. B) hurt ordinary investors by increasing the number of fund shares and diluting the fund's net asset value. C) are both A and B of the above. D) are none of the above. Answer: C Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry Question Status: Previous Edition 32) Which of the following is not a proposal to deal with abuses in the mutual fund industry? A) Strictly enforce the 4:00 pm net asset value rule. B) Make redemption fees mandatory. C) Disclose compensation arrangements for investment advisers. D) Increase the number of dependent directors. Answer: D Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry Question Status: Previous Edition 33) ________ means the investors can convert their investment into cash quickly at a low cost. A) Liquidity intermediation B) Denomination intermediation C) Diversification D) Managerial expertise Answer: A Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 34) At the start of 2014, one share of Berkshire Hathaway's A-shares was trading at over $150,000. ________ in an mutual fund gives a small investor access to these shares. A) Liquidity intermediation B) Denomination intermediation C) Diversification D) Managerial expertise Answer: B Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 35) Mutual fund companies frequently offer a number of separate mutual funds called ________. A) indexes B) complexes C) components D) actuaries Answer: B Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 36) Equity funds can be placed in which class according to the Investment Company Institute? A) Capital appreciation funds B) World funds C) Total return funds D) All of the above Answer: D Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 37) Government bonds are essentially default risk-free, ________ returns. A) and will yield high B) and will yield the highest C) but will have relatively low D) none of the above Answer: C Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 38) ________ bonds combine stocks into one fund. A) Hybrid B) Money market C) Municipal D) Equity Answer: A Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 39) All ________ are open-end investment funds that invest only in money market securities. A) Stock funds B) Bond funds C) Money market mutual funds D) all of the above Answer: C Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 20.2 True/False 1) The larger the number of shares traded in a stock transaction, the lower the transaction costs per share. Answer: TRUE Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 2) The increase in the number of defined contribution pension funds has slowed the growth of mutual funds. Answer: FALSE Topic: Chapter 20.1 The Growth of Mutual Funds Question Status: Previous Edition 3) Mutual funds accounted for $5.3 trillion, or 27%, of the $19.5 trillion U.S. retirement market at the beginning of 2013. Answer: TRUE Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Updated from Previous Edition 4) Among the investors in mutual funds, only about 25% cite preparing for retirement as one of their main reasons for holding shares. Answer: FALSE Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Updated from Previous Edition 5) Open-end mutual funds are more common than closed-end funds. Answer: TRUE Topic: Chapter 20.3 Mutual Fund Structure Question Status: Previous Edition 6) The net asset value of a mutual fund is the average market price of the stocks, bonds, and other assets the fund owns. Answer: FALSE Topic: Chapter 20.3 Mutual Fund Structure Question Status: Previous Edition 7) A mutual fund's board of directors picks the securities that will be held and makes buy and sell decisions. Answer: FALSE Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 8) Money market mutual funds originated when the brokerage firm Merrill Lynch offered its customers an account from which funds could be taken to purchase securities and into which funds could be deposited when securities were sold. Answer: TRUE Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 9) A deferred load is a fee charged when shares in a mutual fund are redeemed. Answer: TRUE Topic: Chapter 20.5 Fee Structure of Investment Funds Question Status: Previous Edition 10) Several academic research studies show that investors earn higher returns by investing in mutual funds that charge higher fees. Answer: FALSE Topic: Chapter 20.5 Fee Structure of Investment Funds Question Status: Previous Edition 11) Hedge funds have a minimum investment requirement of between $100,000 and $20 million, with the typical minimum investment being $1 million. Answer: TRUE Topic: Chapter 20.7 Hedge Funds Question Status: New Question 12) SEC research suggests that about three-fourths of mutual funds let privileged shareholders engage in market timing. Answer: TRUE Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry Question Status: Previous Edition 13) One factor explaining the rapid growth in mutual funds is that they are financial intermediaries that are not regulated by the federal government. Answer: FALSE Topic: Chapter 20.1 The Growth of Mutual Funds Question Status: Previous Edition 14) Whether a fund is organized as a closed- or an open-end fund, is will have the same basic organizational structure. Answer: TRUE Topic: Chapter 20.3 Mutual Fund Structure Question Status: Previous Edition 15) The primary purpose of loads is to provide compensation for sales brokers. Answer: TRUE Topic: Chapter 20.5 Fee Structure of Investment Funds Question Status: Previous Edition 16) Mutual funds are regulated under four federal laws designed to protect investors. Answer: TRUE Topic: Chapter 20.6 Regulation of Mutual Funds
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1) Every financial market performs the following function: A) It determines the level of interest rates. B) It allows common stock to be traded. C) It allows loans to be made. D) It channels funds from lenders-savers to borrowers-spenders. Answer: D 11) The money market is the market in which ________ are traded. A) new issues of securities B) previously issued securities C) short-term debt instruments D) long-term debt and equity instruments Answer: C 18) An important financial institution that assists in the initial sale of securities in the primary market is the A) investment bank. B) commercial bank. C) stock exchange. D) brokerage house. Answer: A NUMBER 4 NOT THERE 5 49) In which of the following situations would you prefer to be making a loan? A) The interest rate is 9 percent and the expected inflation rate is 7 percent. B) The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 25 percent and the expected inflation rate is 50 percent. Answer: B 28) Which of the following $1,000 face value securities has the highest yield to maturity? A) A 5 percent coupon bond selling for $1,000 B) A 10 percent coupon bond selling for $1,000 C) A 15 percent coupon bond selling for $1,000 D) A 15 percent coupon bond selling for $900 Answer: D 63) Reinvestment risk is the risk that A) a bond's value may fall in the future. B) a bond's future coupon payments may have to be invested at a rate lower than the bond's yield to maturity. C) an investor's holding period will be short and equal in length to the maturity of the bonds he or she holds. D) a bond's issuer may fail to make the future coupon payments and the investor will have no cash to reinvest. Answer: B 65) The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is 6.76 years. What happens to the price of the bond if the interest rate falls to 8 percent? A) It rises 20 percent. B) It rises 12.3 percent. C) It falls 20 percent. D) It falls 12.3 percent. Answer: B 7) When the interest rate on a bond is above the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________. A) demand; rise B) demand; fall C) supply; fall D) supply; rise Answer: B 20) During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________. A) falls; right B) falls; left C) rises; right D) rises; left Answer: C 12 not there 1) The term structure of interest rates is A) the relationship among interest rates of different bonds with the same risk and maturity. B) the structure of how interest rates move over time. C) the relationship among the terms to maturity of different bonds from different issuers. D) the relationship among interest rates on bonds with different maturities but similar risk. Answer: D 6) Bonds with relatively low risk of default are called A) zero coupon bonds. B) junk bonds. C) investment-grade bonds. D) none of the above. Answer: C 13) If a corporation's earnings rise, then the default risk on its bonds will ________ and the equilibrium interest rate on these bonds will ________. A) increase; decrease B) decrease; decrease C) increase; increase D) decrease; increase Answer: B 17) The spread between interest rates on low-quality corporate bonds and U.S. government bonds ________ during the Great Depression. A) was reversed B) narrowed significantly C) widened significantly D) did not change Answer: C NO 17 18 19 Quant NO 20, 21 4) The risk premium on corporate bonds becomes smaller as the liquidity of the bonds falls. Answer: FALSE 8) According to the expectations theory, the interest rate on a long-term bond is the average of the short-term interest rates expected over the life of the long-term bond. Answer: TRUE 12) The current yield goes up as the price of a bond falls. Answer: TRUE 7) A long-term bond's price is less affected by interest rate movements than a short-term bond's price. Answer: FALSE ) A mutual fund is not a depository institution. Answer: TRUE 27 not there 28 not there 13) An increase in the marginal tax rate would likely increase the demand for municipal bonds, and decrease the demand for U.S. government bonds. Answer: TRUE
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1. Another way to state the efficient market hypothesis is that in an efficient market, A) unexploited profit opportunities will never exist as market participants, such as arbitrageurs, ensure that they are instantaneously dissipated. B) unexploited profit opportunities will not exist for long, as market participants will act quickly to eliminate them. C) every financial market participant must be well informed about securities. D) only A and C of the above. Answer: B 2) Evidence in favor of market efficiency includes A) performance of investment analysts and mutual funds. B) whether stock prices reflect publicly available information. C) the random-walk behavior of stock prices. D) all of the above. Answer: D 3) Banks subject to reserve requirements set by the Federal Reserve System include A) only state-chartered banks. B) only nationally chartered banks. C) only banks with less than $100 million in assets. D) only banks with less than $500 million in assets. E) all banks whether or not they are members of the Federal Reserve System. Answer: E 4) Factors that provide the Federal Reserve with a high degree of independence include A) 14-year terms for members of the Board of Governors. B) a four-year term for the chairman of the Board of Governors that is not coincident with the president's term of office. C) constitutional independence from Congress and the president. D) all of the above. E) only A and B of the above. Answer: E 5) If the intersection initially intersects the demand curve in its downward-sloped section, an open market purchase Answer: shifts the supply curve for reserves to the right and causes the federal funds rate to fall 6) When a bank repays a discount loan to the Fed, there is a(n) ________ in reserves in the banking system and a(n) ________ in the monetary base. A) increase; decrease B) decrease; decrease C) decrease; increase D) increase; increase Answer: B 7) If the Fed increases reserve requirements, the demand for reserves ________ and the equilibrium federal funds rate ________. A) increases; drops B) decreases; rises C) decreases; drops D) increases; rises Answer: D Need 8 9 & 10 Quantitative 11) Repos are A) usually low-risk loans. B) usually collateralized with Treasury securities. C) low interest rate loans. D) all of the above. E) only A and B of the above. Answer: D 12. What are the differences between LIBOR and Fed Funds Rate? Answer: All the above 13. Holding everything else constant (e.g., credit risk, maturity, coupon), which one of the following bonds is most likely to protect investors against increase in interest rates? A. Option-free B. Callable C. Puttable D. Convertible Answer: C Which bond has the highest price? Option-free Puttable Death puttable Callable Answer: Puttable (I) Because interest rates on Treasury bills are more volatile than rates on long-term securities, the return on short-term Treasury securities is usually above that on longer-term Treasury securities. (II) A Treasury STRIP separates the periodic interest payments from the final principal repayment. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: B Quantitative 17. Securities not listed on one of the exchanges trade in the over-the-counter market. In this exchange, dealers "make a market" by A) buying stocks for inventory when investors want to sell. B) selling stocks from inventory when investors want to buy. C) doing both of the above. D) doing neither of the above. Answer: C 18. Which of the following statements about trading operations in an organized exchange is correct? A) Floor traders all deal in a wide variety of stocks. B) In most trades, specialists match buy and sell orders. C) In most trades, specialists buy for or sell from their own inventories. D) The SuperDOT system is used to expedite large trades of over 100,000 shares. Answer: B 19. Which of the following statements is the characteristics of ETFs? A) A basket of assets that tracks indices (such as the S&P 500) B) Investment vehicle that is made up or a pool of funds collected from many investors C) Can't be purchased on margin or sold short D) Have no annual expenses Answer: A 20. Quantitative 21. Announcing the FOMC's policy decision immediately after the FOMC meeting is an example of how Fed policymaking has become more transparent. Answer: TRUE 22. The FOMC issues directives to the trading desk at the New York Fed. Answer: TRUE 23. The term Libor-OIS spread is assumed to be a measure of the health of banks because it reflects what banks believe is the risk of default associated with lending to other banks Answer: True 24. A lower than average PE may mean that the market expects earnings to rise in the future. Answer: FALSE 25. All stocks pay dividends, as that is the only way an investor can profit from holding stock. Answer: FALSE 26. About 95% of orders to buy or sell on the NYSE are executed using SuperDOT Answer: ?????? 27. Evidence that a mutual fund has performed extraordinarily well in the past contradicts the efficient market hypothesis. Answer: FALSE 28. Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation. Answer: TRUE 29. Paying interest on reserves allows the Fed to place a floor on the federal funds rate, since depository institutions have little incentive to lend in the overnight interbank federal funds market at rates below the interest rate on excess reserves. Answer: True 30. Best efforts underwriting is an offering in which the underwriter agrees to distribute as much of the offering as possible. Any unsold portions of the offering are returned to the issuing firm. Answer: True
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