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Fin 333 Final Exam

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All other characteristics being equal, securities with ____ liquidity would have to offer a ____ yield to be preferred. a. lower; higher b. higher; higher c. lower; lower d. none of the above

In naked short selling, short-sellers sell a stock short that they presently own. a. True b. False

The short interest represents the amount of interest that borrowers owe on loans used to purchase stock. a. True b. False

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

Managers protected by golden parachutes may be more willing to make decisions that increase the company's earnings in the long run, even though the decisions adversely affect the stock price in the short run. a. True b. False

Many bonds are listed on the New York Stock Exchange (NYSE). a. True b. False

Market participants who expect the stock market to perform poorly before the settlement date may consider selling S&P 500 index futures. a. True b. False

Options on small stocks normally have higher premiums than options on large stocks because small stocks typically are more volatile. a. True b. False

Private firms that need a large equity investment but are not yet in a position to go public may attempt to obtain funding from a venture capital (VC) fund. a. True b. False

Put options are more typically used to hedge when portfolio managers are mainly concerned about a temporary decline in a stock's value. a. True b. False

Rule 144A creates liquidity for securities that are privately placed. a. True b. False

Securities are certificates that represent a claim on the issuer. a. True b. False

Securities are certificates that represent a claim on the provider of funds. a. True b. False

Several call options are available for a given stock, and the risk-return potential will vary among them. a. True b. False

Shelf-registration allows firms quick access to funds without repeatedly being slowed by the registration process. a. True b. False

Since stock index futures prices are primarily driven by movements in the corresponding stock indexes, participants in stock index futures monitor indicators that may signal changes in the stock indexes. a. True b. False

Since the Sarbanes-Oxley Act of 2002, the initial returns resulting from an IPO have generally been smaller. a. True b. False

Some specialized futures contracts are sold over the counter, whereas standardized financial futures contracts are traded on exchanges. a. True b. False

Speculating with derivative contracts on an underlying asset typically results in both higher risk and higher returns than speculating in the underlying asset itself. a. True b. False

Stock options can be used by speculators to benefit from their expectations and by financial institutions to reduce their risk. a. True b. False

Stripped bonds are bonds whose cash flows have been transformed into a security representing the principal payment only and a security representing interest payments only. a. True b. False

Structured notes are issued by firms to borrow funds, and the repayment of interest and principal is based on specified market conditions. a. True b. False

The Dow Jones Industrial Average (DJIA) is a value-weighted average of stock prices of 30 large U.S. firms. a. True b. False

The OTC market does not have a trading floor. a. True b. False

The Options Clearing Corporation (OCC) serves as a guarantor on option contracts traded in the United States. a. True b. False

The bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers. a. True b. False

The effectiveness of a cross-hedge depends on the degree of correlation between the market values of the two financial instruments. a. True b. False

The euro increased business between European countries and created a more competitive environment in Europe. a. True b. False

The futures price is mainly a function of the prevailing price of the underlying security plus an expected adjustment in that price by the settlement date. a. True b. False

The government enforcement of securities laws varies among countries. a. True b. False

The legal protection of shareholders varies substantially among countries. a. True b. False

The motive for a CEO to backdate options is that it allowed them to exercise the options at a lower exercise price. a. True b. False

The price of stock index futures may reflect investor expectations about the market more rapidly than stock prices. a. True b. False

The primary investors in bond markets are institutional investors such as commercial banks, bond mutual funds, pension funds, and insurance companies. a. True b. False

The yield to investors on Treasury bonds reflects the risk-free rate because these bonds are virtually free from credit (default) risk. a. True b. False

The yield to maturity is the annualized discount rate that equates the future coupon and principal payments to the initial proceeds received from the bond offering. a. True b. False

To the extent that shares sold during an IPO are discounted from their appropriate price, the proceeds that the issuing firm receives from the IPO are less than it deserves. a. True b. False

Trading halts are intended to ensure that the market has complete information before trading on news. a. True b. False

Underwriters sell most or all of the shares of an IPO to institutional investors. a. True b. False

Venture capital (VC) funds commonly serve as advisors to the businesses in which they invest. a. True b. False

When a corporation issues bonds, it normally hires a securities firm that targets large institutional investors such as pension funds, bond mutual funds, and insurance companies. a. True b. False

When a depository institution offers a loan, it is acting as a creditor. a. True b. False

A ____-money policy can reduce unemployment, and a ____-money policy can reduce inflation. a. tight; loose b. loose; tight c. tight; tight d. loose; loose

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

A criticism of the Fed's actions during the credit crisis is that it: a. did not attempt to increase the liquidity of the debt markets. b. focused too much on financial institutions. c. allowed Bear Stearns to fail and file for bankruptcy. d. periodically raised the primary credit rate.

A firm can best avoid the time lag between registering new securities with the SEC and actually selling them by a. use of proxy. b. shelf-registration. c. use of a margin call. d. use of preemptive rights.

A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent. To match this yield, taxable securities must offer a before-tax yield of a. 7.0 percent. b. 10.8 percent. c. 20.0 percent. d. none of the above

The level of installment debt as a percentage of disposable income is generally ____ during recessionary periods. a. higher b. lower c. zero d. negative

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

The money market interest rate paid by corporations that borrow short-term funds in a particular country is typically: a. equal to the rate paid by that country's government. b. slightly higher than the rate paid by that country's government. c. mostly influenced by the demand for and supply of long-term funds in that country. d. set by the country's central bank.

The premium on an existing call option should ____ when the underlying stock price decreases. a. be negative b. decline c. increase d. be unaffected e. A and B

The premium on an existing call option should ____ when there is a reduction in the expected short-term volatility of the stock price. a. be negative b. decline c. increase d. be unaffected e. A and B

The premium on an existing put option should ____ when the underlying stock price increases. a. be negative b. decline c. increase d. be unaffected e. A and B

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

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

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

The required return to implement a given business project will be ____ if interest rates are lower. This implies that businesses will demand a ____ quantity of loanable funds when interest rates are lower. a. greater; lower b. lower; greater c. lower; lower d. greater; greater

The short-interest ratio is the shares sold short divided by the a. average shares purchased over a recent period. b. average daily trading volume over a recent period. c. interest rate paid on the short sale. d. average daily trading volume on other stocks from the same industry.

The time between when an economic problem is realized and when the Fed tries to correct it with its policies is the a. recognition lag. b. implementation lag. c. impact lag. d. open-market lag.

The yield offered on a debt security is ____ related to the prevailing risk-free rate and ____ related to the security's risk premium. a. negatively; negatively b. positively; positively c. negatively; positively d. positively; negatively

There is strong evidence that IPOs of firms perform ____ on average over a period of a year or longer. a. well b. poorly c. very well relative to other firms in their industry d. none of the above

Those participants who receive more money than they spend are referred to as a. deficit units. b. surplus units. c. borrowing units. d. government units.

When investors place a limit order, they can place it for the day only. a. True b. False

When investors purchase an option that does not hedge their existing investments, the option can be referred to as "naked." a. True b. False

When security prices fully reflect all available information, the markets for these securities are said to be efficient. a. True b. False

Zero-coupon bonds do not pay interest. Instead, they are issued at a discount from par value. a. True b. False

Treasury bills a. have a maturity of up to five years. b. have an active secondary market. c. are commonly sold at par value. d. commonly offer coupon payments.

Vaughn Corporation is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper. The corporation believes that a 0.2 percent default risk premium, a 0.1 percent liquidity premium, and a 0.3 percent tax adjustment are necessary to sell its commercial paper to investors. Furthermore, annualized T-bill rates are 7 percent. Based on this information, Vaughn should offer ____ percent on its commercial paper. a. 8.0 b. 7.6 c. 7.5 d. 7.9 e. none of the above

When a corporation first decides to issue stock to the public, it engages in a(n) a. secondary offering. b. initial public offering. c. seasoned equity offering. d. none of the above

When a securities firm acts as a(n) ____, it maintains a position in securities. a. adviser b. dealer c. broker d. none of the above

When firms issue ____, the amount of interest and principal to be paid is based on specified market conditions. The amount of the repayment may be tied to a Treasury bond price index or even to a stock index. a. auction-rate securities b. structured notes c. leveraged notes d. stripped securities

When investors buy stock with borrowed funds, this is sometimes referred to as a. use of proxy. b. purchasing stock on margin. c. a margin call. d. a margin residual claim.

When open market operations are used to ____ bank funds, the yield on debt instruments ____. a. reduce; decreases b. reduce; increases c. increase; increases d. none of the above

When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by investors. a. undervalued b. overvalued c. fairly priced d. efficient e. none of the above

When the Fed purchases Treasury securities, the account balances of the investors who sell their securities to the Fed _________, and there are _________ in the account balances of other financial institutions. a. increase; offsetting decreases b. increase; no offsetting decreases c. decrease; offsetting increases d. decrease; no offsetting increases

When the Fed uses open market operations by selling some of its Treasury securities to investors in the U.S., there will be a. an outward shift in the supply schedule of loanable funds. b. an inward shift in the supply schedule of loanable funds. c. no shift in the supply schedule of loanable funds. d. an outward shift in the demand schedule for loanable funds.

When the exercise price exceeds the market price of the underlying security, the a. call option is in the money. b. put option is in the money. c. call option is at the money. d. put option is out of the money.

Whenever _____, the stock price will be driven up. a. supply exceeds demand b. demand exceeds supply c. demand is reduced d. none of the above

Which of the following can normally be found in quotations for stock options provided by the financial media? a. exercise price, expiration date, and implied volatility b. exercise price, expiration date, and most recently quoted premium c. expiration date, implied volatility, and trading volume d. expiration date, most recently quoted premium, and implied volatility

Which of the following is incorrect regarding organized exchanges trading financial futures contracts? a. Organized exchanges establish and enforce rules for the trading of financial futures contracts. b. Organized exchanges ensure that the seller of the futures contract always delivers the securities covered by the contract, whether the contract was settled prior to the settlement date or not. c. Organized exchanges clear, settle, and guarantee all transactions that occur on their exchanges. d. The operations of financial futures exchanges are regulated by the Commodity Futures Trading Commission (CFTC). e. All of the above are correct.

Which of the following is not a barrier to corporate control? a. antitakeover amendments b. proxy contests c. poison pills d. golden parachutes e. all of the above are barriers to corporate control

Which of the following is not a form of shareholder activism? a. investors communicating their concerns to other investors in an effort to place more pressure on the firm's managers or its board members b. poison pills c. shareholder lawsuits d. all of the above

Which of the following is not a form of shareholder activism? a. proxy contests b. antitakeover amendments c. shareholder lawsuits d. all of the above are forms of shareholder activism

Which of the following is not a typical money market security? a. Treasury bills b. Treasury bonds c. Commercial paper d. Negotiable certificates of deposit

Which of the following is not true regarding the call provision? a. It typically requires a firm to pay a price above par value when it calls its bonds. b. The difference between the market value of the bond and the par value is called the call premium. c. A principal use of the call provision is to lower future interest payments. d. A principal use of the call provision is to retire bonds as required by a sinking-fund provision. e. A call provision is normally viewed as a disadvantage to bondholders.

Which of the following is a capital market instrument? a. a six-month CD b. a three-month Treasury bill c. a ten-year bond d. an agreement for a bank to loan funds directly to a company for nine months

Which of the following is false with respect to initial public offerings (IPOs)? a. IPOs are first-time offerings of shares by a specific firm to the public. b. Normally, a firm planning an IPO will hire a securities firm to recommend the amount of stock to issue and the asking price for the stock. c. Owners of firms that engage in IPOs are normally required to retain their shares for at least 3 years before selling them in the secondary market. d. IPOs are typically intended to raise funds so the corporation can expand.

Which of the following is least likely to affect household demand for loanable funds? a. a decrease in tax rates b. an increase in interest rates c. a reduction in positive net present value (NPV) projects available d. All of the above are equally likely to affect household demand for loanable funds.

Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal? a. a decrease in savings by foreign savers b. an increase in inflation c. pessimistic economic projections that cause businesses to reduce expansion plans d. a decrease in savings by U.S. households

Which of the following is most likely to be described as a depository institution? a. finance companies b. securities firms c. credit unions d. pension funds e. insurance companies

Which of the following is not a difference between purchasing an option and purchasing a futures contract? a. The option requires that a premium be paid in addition to the price of the financial instrument. b. Owners of options can choose to let the option expire on the so-called expiration date without exercising it. c. The fulfillment of futures contracts is regulated by exchanges, while the fulfillment of options is not. d. All of the above are differences between purchasing an option and purchasing a futures contract.

Which of the following is not a disadvantage of inflation targeting? a. If the U.S. inflation rate deviates substantially from the Fed's target inflation rate, the Fed could lose credibility. b. The Fed's complete focus on inflation could result in a much higher unemployment level. c. The Fed's complete focus on inflation could result in much higher interest rates, which would discourage economic growth. d. All of the above are disadvantages of inflation targeting.

Which of the following is not a major component of the Federal Reserve System? a. member banks b. Federal Open Market Committee c. Securities and Exchange Commission d. Board of Governors

Which of the following is not a money market security? a. Treasury bill b. negotiable certificate of deposit c. common stock d. federal funds

Which of the following is not an assumption underlying the Black-Scholes option-pricing model? a. The risk-free rate is known and constant over the life of the option. b. The probability distribution of stock prices is lognormal. c. The world is risk-neutral. d. The variability of a stock's return is constant. e. There are no transaction costs involved in trading options.

Which of the following is not an example of a municipal bond? a. general obligation bond b. revenue bond c. Treasury bond d. All of the above are examples of municipal bonds.

Which of the following is not an example of the government's recent increased role in financial markets? a. a. the Federal Reserve's purchase of debt securities during the credit crisis b. a. regulations changing the way that the credit risk of bonds is assessed c. a. regulations setting maximum rates for Treasury securities d. a. increased monitoring of stock trading and prosecution of those who trade on inside information

Which of the following is not true regarding foreign interest rates? a. The large flow of funds between countries causes interest rates in any given country to become more susceptible to interest rate movements in other countries. b. The expectations of a strong dollar should cause a flow of funds to the U.S. c. An increase in a foreign country's interest rates will encourage investors in that country to invest their funds in other countries. d. All of the above are true regarding foreign interest rates.

Which of the following is not true regarding the Sarbanes-Oxley Act? a. It attempts to force accountants to conform to regular accounting standards in preparing a firm's financial statements. b. It requires that only outside board members of a firm be on the firm's audit committee. c. It allows public accounting firms to offer nonaudit consulting services to an audit client whether the client's audit committee pre-approves the nonaudit services or not. d. It prevents members of a firm's audit committee from receiving consulting of advising fees or other compensation from the firm beyond that earned from serving on the board.

Which of the following is not true with respect to market makers? a. They benefit from the spread. b. They may earn profits when they take positions in options. c. They are not subject to the risk of loss on their positions in options. d. All of the above are true with respect to market makers.

Which of the following is sometimes issued in the primary market by nonfinancial firms to borrow funds? a. NCDs b. retail CDs c. commercial paper d. federal funds

Which of the following securities is most likely to be used in a repo transaction? a. commercial paper b. certificate of deposit c. Treasury bill d. common stock e. All of the above are equally likely to be used in a repo transaction.

If markets are perfect, securities buyers and sellers to not have full access to information and cannot always break down securities to the precise size they desire. a. True b. False

In general, secondary offerings cause an immediate increase in the market price of the stock. a. True b. False

Initial public offerings (IPOs) tend to occur more frequently during bearish (weak) stock markets. a. True b. False

Institutional investors not only provide financial support to companies but exercise some degree of corporate control over them. a. True b. False

Investors can reduce their risk by purchasing a stock on margin instead of using all cash to buy the stock. a. True b. False

It is not illegal for investors to take positions in a stock based on inside information that they received from an insider at the company, although it would be illegal for the insider to take a position based on that information. a. True b. False

Many bonds have different call prices: a higher price for calling the bonds to meet sinking-fund requirements and a lower price if the bonds are called for any other reason. a. True b. False

Market makers can execute stock option transactions for customers and do not trade stock options for their own account. a. True b. False

Money market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery. a. True b. False

Most individual investors attend road shows of firms that are about to go public before they purchase shares at the time of an IPO. a. True b. False

Most mutual funds obtain funds by issuing securities, then lend the funds to individuals and small businesses. a. True b. False

Normally, only the owners of preferred stock are permitted to vote on certain key matters concerning the firm, such as the election of the board of directors. a. True b. False

Purchasers of currency futures contracts are required to hold the contract until the settlement date and accept delivery of the foreign currency at that time. a. True b. False

Purchasers of financial futures contracts usually know who the sellers are, and vice versa. a. True b. False

Regulation Fair Disclosure (FD) requires firms to disclose relevant information first to their most important clients. a. True b. False

Research studies have found that the share prices of target firms and of acquiring firms react very positively to announcements of an acquisition. a. True b. False

Rule 144A, which allows small individual investors to trade privately-placed bonds (and some other securities) with each other without requiring that the firms that issued the securities to register them with the SEC. a. True b. False

Savings bonds are bonds issued by the Federal Reserve. a. True b. False

Savings institutions represent a nondepository institution. a. True b. False

Securities that are not as safe and liquid as other securities are never considered for investment by anyone. a. True b. False

Settlement of stock index futures contracts occurs through delivery of the underlying securities. a. True b. False

Since markets are efficient, institutional and individual investors should ignore the various investment instruments available. a. True b. False

Speculators sell call options on currencies that they expect to strengthen against the dollar. a. True b. False

Speculators who anticipate a decline in interest rates may consider writing a call option on Treasury bond futures. a. True b. False

Speculators who anticipate a sharp increase in stock market prices overall may consider purchasing put options on one of the market indexes. a. True b. False

Stock index futures cannot be closed out before the settlement date. a. True b. False

Subordinated indentures are debentures that have claims against the firm's assets that are junior to the claims of both mortgage bonds and regular debentures. a. True b. False

The SEC's Division of Market Regulation assesses possible violations of the SEC's regulations and can take action against individuals or firms. a. True b. False

The bond debenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders. a. True b. False

The credit crisis in the 2008-2009 period was caused by weak economies in Asia. a. True b. False

The greater the existing market price of the underlying financial instrument relative to the exercise price, the higher the put option premium, other things being equal. a. True b. False

The initial margin is the minimum amount of margin that investors must maintain as a percentage of the stock's value without receiving a margin call. a. True b. False

The key difference between a note and a bond is that note maturities are usually less than one year, while bond maturities are one year or more. a. True b. False

The laws of the financial information that must be provided by public companies is similar among all developed countries. a. True b. False

The longer a call option's time to maturity, the lower the call option premium, other things being equal. a. True b. False

The maintenance margin is the minimum amount of the margin that investors must maintain as a percentage of the stock's initial purchase price. a. True b. False

The phrase "leaving money on the table" refers to investors who pay more for a stock in the secondary market than was paid by those investors who were able to buy shares at the initial (offer) price on the IPO date. a. True b. False

The purchaser of an American-style put option is always better off exercising the option at the expiration date than before that date. a. True b. False

The results with covered call writing are better than without covered call writing when the stock performs poorly and better when the stock performs well. a. True b. False

The short interest ratio is commonly measured as the number of shares shorted divided by the number of shares that the firm has repurchased in the last quarter. a. True b. False

The total asset value of savings institutions is larger than that of commercial banks. a. True b. False

The total cost of engaging in an IPO is usually about 1 percent of the total proceeds. a. True b. False

The value of a stock index futures contract has little correlation with the value of the underlying stock index. a. True b. False

The writer of a put option is obligated to provide the specified financial instrument at the price specified by the option contract if the owner exercises the option. a. True b. False

Those financial markets that facilitate the flow of short-term funds (with maturities of less than one year) are known as capital markets, while those that facilitate the flow of long-term funds are known as money markets. a. True b. False

Trading halts are intended to prevent insider trading. a. True b. False

Treasury bond auctions are normally conducted only at the beginning of each year. a. True b. False

Treasury bonds are issued by state and local governments. a. True b. False

Treasury bonds have a maturity of one to three years. a. True b. False

Under the SEC's uptick rule, speculators are prohibited from taking a short position in stocks that have experienced a decline of at least 10 percent for the day, unless the most recent trade resulted in a decrease in the stock price a. True b. False

Under the STRIP program created by the Treasury, stripped securities are created and sold by the Treasury. a. True b. False

Valuing stocks is easier than valuing debt securities because stocks promise to provide investors with specific payments at regular intervals. a. True b. False

Venture capital (VC) funds receive money from wealth investors and from pension funds that need to receive their money back in one year or less. a. True b. False

Venture capital (VC) funds typically plan to exit from their original investment within a period of about one year. a. True b. False

Venture capital (VC) funds usually invest in publicly-traded businesses. a. True b. False

Venture capital funds typically take over businesses and manage them. a. True b. False

When investors sell short, they are essentially lending the stock to another investor and will ultimately receive that stock back from the investor to whom they lent it. a. True b. False

When security prices fully reflect all available information, the markets for these securities are said to be perfect. a. True b. False

A stop-loss order is a particular type of limit order whereby the investor specifies a selling price that is below the current market price of the stock. a. True b. False

A venture capital fund typically plans to exit from its original investment within about four to seven years. a. True b. False

According to financial research, there is evidence that the stock price associated with an IPO typically rises on the first day but then declines over time. a. True b. False

An increase in uncertainty results in a higher implied standard deviation for the stock, which means that the writer of an option requires a higher premium to compensate for the anticipated increase in the stock's volatility. a. True b. False

Analysts periodically communicate with high-level managers of the firms whose stock they rate. a. True b. False

As a result of the Sarbanes-Oxley Act, there was a reduced likelihood of fraudulent financial reporting by firms. a. True b. False

Backdating implies that CEO (or other executives) reset the date that their options were granted to a different date when the stock price was lower. a. True b. False

Bonds are issued in the primary market through a telecommunications network. a. True b. False

Brokers commonly require margin deposits from their customers above those required by the exchanges. a. True b. False

Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery. a. True b. False

Commercial banks in aggregate have more assets than credit unions. a. True b. False

Common law countries such as the U.S., Canada, and the United Kingdom allow for more legal protection than civil law countries such as France or Italy. a. True b. False

Common types of money market securities include negotiable certificates of deposit and Treasury bills. a. True b. False

Corporate bonds can be placed with investors through a public offering or a private placement. a. True b. False

Debt securities are certificates that represent debt (borrowed funds) by the issuer. a. True b. False

Debt securities include commercial paper, Treasury bonds, and corporate bonds. a. True b. False

Dynamic asset allocation involves the switching between risky and low-risk investments by institutional investors over time in response to changing expectations. a. True b. False

Electronic stock exchanges that execute stock transactions electronically are referred to as electronic communications networks (ECNs). a. True b. False

Financial futures contracts on U.S. securities are commonly traded by non-U.S. financial institutions that maintain holdings of U.S. securities. a. True b. False

From a cost perspective, preferred stock is a less desirable source of capital for a firm than bonds. a. True b. False

If investors become dissatisfied with a firm's performance, they can compete with management in soliciting proxy votes in what is known as a proxy fight. a. True b. False

If managers believe that their firm's stock price is weak because it is undervalued by the market, they may consider repurchasing a portion of the shares that are outstanding. a. True b. False

If the secondary market is inactive, then the shares would be illiquid. a. True b. False

In addition to the Nasdaq market, the OTC market has another segment known as "pink sheets," where smaller stocks are traded. a. True b. False

In recent years, financial institutions have consolidated to capitalize on economies of scale and on economies of scope. a. True b. False

Inflation-indexed Treasury bonds are intended for investors who wish to ensure that the returns on their investments keep up with the increase in prices over time. a. True b. False

Initial public offerings (IPOs) tend to occur more frequently during bullish stock markets. a. True b. False

International exchange-traded funds (ETFs) represent international indexes that reflect composites of stocks for particular countries; shares of the index can be purchased or sold, thereby allowing investors to invest directly in a stock index representing any one of several countries. a. True b. False

IPOs tend to occur more primarily during recessions. a. True b. False

If financial markets are efficient, this implies that all securities should earn the same return. a. True b. False

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

Trading halts are imposed by a. the SEC. b. brokers. c. stock exchanges. d. the Treasury.

The ____ sector is the largest supplier of loanable funds. a. household b. government c. business d. none of the above

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29, and rises to $32 before the expiration date. What is the stock price at which the speculator would break even? a. $26 b. $34 c. $28 d. $29 e. $32

A(n) ____ is a certificate which represents ownership of a foreign stock. a. ADR b. SEAQ c. Nasdaq d. AMEX

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ____ pressure on the demand for short-term funds by borrowers and the yield curve will be ____ sloping. a. upward; downward b. downward; upward c. upward; upward d. downward; downward

LIBOR is: a. the interest rate charged on international interbank loans. b. the average rate charged on commercial loans in Europe. c. the rate charged by the Federal Reserve for loans to banks. d. the rate charged by the European Central Bank for loans to banks.

A ____ grants the owner the right to purchase a specified financial instrument for a specified price within a specified period of time. a. call option b. put option c. sale of a futures contract d. purchase of a futures contract

A ____ is a trading platform on a computer web site that allows investors to trade stocks without the use of a broker. a. direct access broker b. program trader c. market maker d. communication network

A ____ order to buy or sell a stock means to execute the transaction at the best possible price. a. market b. limit c. stop-loss d. stop-buy

A call option is "in the money" when the a. market price of the underlying security exceeds the exercise price. b. market price of the underlying security equals the exercise price. c. market price of the underlying security is less than the exercise price. d. premium on the option is less than the exercise price.

A criticism of dark pools is that they: a. reduce transparency. b. are more expensive than the public stock exchanges. c. are not accessible to institutional investors. d. cannot be used to trade large blocks of stock.

A financial institution that wishes to reduce its exposure to the possibility of declining interest rates might use: a. a long hedge. b. a short hedge. c. a day hedge. d. index arbitrage.

A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What is the firm's cost of borrowing? a. 12.12 percent b. 11.11 percent c. 13.00 percent d. 14.08 percent e. 15.25 percent

A five-year security was purchased two years ago by an investor who plans to resell it. The security will be sold by the investor in the so-called a. secondary market. b. primary market. c. deficit market. d. surplus market.

A high budget deficit tends to place ____ pressure on interest rates; the Fed's tightening of the money supply tends to place ____ pressure on interest rates. a. upward; upward b. upward; downward c. downward; downward d. downward; upward

A put option is "out of the money" when the a. market price of the security exceeds the exercise price. b. market price of the security equals the exercise price. c. market price of the security is less than the exercise price. d. premium on the option is less than the exercise price.

A savings institution has long-term fixed rate mortgages supported by short-term funds. A put option on Treasury bond futures could be used to (ignore the premium paid for the option when you answer this question) a. maintain its interest rate spread if interest rates rise, and increase its spread if interest rates fall. b. maintain its interest rate spread if interest rates fall, and increase its spread if interest rates rise. c. maintain its interest rate spread whether interest rates rise or fall. d. increase its interest rate spread whether interest rates rise or fall.

According to segmented markets theory, if investors have mostly short-term funds available and borrowers want long-term funds, there would be ____ pressure on the supply of short-term funds provided by investors and ____ pressure on the yield of long-term securities. a. upward; upward b. downward; downward c. upward; downward d. downward; upward

According to the Fisher effect, expectations of higher inflation cause savers to require a ____ on savings. a. higher nominal interest rate b. higher real interest rate c. lower nominal interest rate d. lower real interest rate

According to the text, a futures contract on one financial instrument to protect a position in a different financial instrument is known as a. cross-hedging. b. ratio hedging. c. basis hedging. d. liquid hedging.

An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is ____ percent. a. 3.10 b. 0.77 c. 1.00 d. none of the above

An unexpected ____ in the consumer price index tends to create expectations of ____ interest rates and places ____ pressure on Treasury bond futures prices. a. increase; higher; downward b. increase; lower; downward c. increase; higher; upward d. decrease; higher; downward e. none of the above

As the supply of funds in the banking system ____, the federal funds rate ____. a. increases; declines b. increases; increases c. declines, declines d. none of the above

Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure expectations theory? a. 15.08 percent b. 3.00 percent c. 12.00 percent d. 12.62 percent e. 11.41 percent

Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock on margin, paying $25 per share and borrowing the remainder from the brokerage firm at 9 percent annual interest. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is a. 60 percent. b. 44 percent. c. 30 percent. d. 69 percent.

Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume the yield curve is initially flat. If liquidity suddenly was no longer important, the yield curve would now have a ____ (assuming no other changes). a. slight downward slope b. slight upward slope c. steep upward slope d. steep downward slope

Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. securities and to instead increase their holdings of securities in their own countries. This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S. interest rates. a. decrease; upward b. decrease; downward c. increase; downward d. increase; upward

Assume that the Treasury bond yield today is 2% higher than it was one year ago. Also assume that the credit (default) risk premium of an A-rated bond declined by 0.4% since one year ago. A newly issued A-rated bond will likely offer a yield today that is ____ the yield that was offered on an A-rated bond issued one year ago. a. greater than b. equal to c. less than d. A or B are both common

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

Bonds that are secured by personal property are called a. chattel mortgage bonds. b. first mortgage bonds. c. second mortgage bonds. d. debentures.

Canada and the U.S. are major trading partners. If Canada experiences a major increase in economic growth, it could place ____ pressure on Canadian interest rates and ____ pressure on U.S. interest rates. a. upward; upward b. upward; downward c. downward; downward d. downward; upward

Corporate bonds that receive a ____ rating from credit rating agencies are normally placed at ____ yields. a. higher; lower b. lower; lower c. higher; higher d. none of the above

Dark pools: a. are private stock markets used by institutional investors. b. are stocks issued by firms that have disclosed very limited financial information. c. are stock option contracts that cover positions in stocks. d. are contracts used to bet against the default of a debt instrument.

Due to expectations of lower inflation in the future, we would typically expect the supply of loanable funds to ____ and the demand for loanable funds to ____. a. increase; decrease b. increase; increase c. decrease; increase d. decrease; decrease

Equity securities have a ____ expected return than most long-term debt securities, and they exhibit a ____ degree of risk. a. higher; higher b. lower; lower c. lower; higher d. higher; lower

Everything else being equal, which of the following bond ratings is associated with the highest yield? a. Baa b. A c. Aa d. Aaa

Financial markets facilitating the flow of short-term funds with maturities of less than one year are known as a. secondary markets. b. capital markets. c. primary markets. d. money markets. e. none of the above

Firms are more willing to issue new stock in a secondary stock offering when the market price of their outstanding shares is relatively a. high. b. low. c. either high or low, depending on the overall market. d. none of the above

Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of $3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman's annualized cost of borrowing is estimated to be ____ percent. a. 14.39 b. 14.13 c. 14.59 d. 14.33 e. none of the above

Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation tends to ____ shortly thereafter which in turn places ____ pressure on U.S. interest rates. a. increase; upward b. increase; downward c. decrease; downward d. decrease; upward

Holding other factors such as risk constant, the relationship between the maturity and annualized yield of securities is called the a. term structure of interest rates. b. default structure of interest rates. c. liquidity structure of interest rates. d. tax structure of interest rates. e. none of the above

Households with ____ are served by ____. a. deficient funds; depository institutions and finance companies b. deficient funds; finance companies only c. savings; finance companies only d. savings; pension funds and finance companies

If a futures contract is more volatile than the portfolio value, the amount of principal represented by the futures contracts to hedge the portfolio is ____ the market value of the securities to be hedged. a. smaller than b. greater than c. equal to d. B and C are both possible

If a security can easily be converted to cash without a loss in value, it a. is liquid. b. has a high after-tax yield. c. has high default risk. d. is illiquid.

If a yield curve is upward sloping, the investment strategy of buying long-term securities, then selling them after a short period (say, one year) is called a. riding the yield curve. b. liquidating the yield curve. c. segmenting the yield curve. d. a forward roll. e. none of the above

If economic expansion is expected to increase, then demand for loanable funds should ____ and interest rates should ____. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase

If inflation turns out to be lower than expected a. savers benefit. b. borrowers benefit while savers are not affected. c. savers and borrowers are equally affected. d. savers are adversely affected but borrowers benefit.

If interest rates suddenly ____, those existing bonds that have a call feature are ____ likely to be called. a. decline; more b. decline; less c. increase; more d. none of the above

If investors speculate in the underlying asset rather than derivative contracts on the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk. a. lower; lower b. lower; higher c. higher; lower d. higher; higher

If liquidity influences the yield curve, but is not considered when deriving the forward interest rate, the forward interest rate ____ the market's expectation of the future interest rate. a. overestimates b. accurately estimates c. underestimates d. is an unbiased forecast of (it has an equal chance of overestimating or underestimating)

If security prices fully reflect all available information, the markets for these securities are a. efficient. b. primary. c. overvalued. d. undervalued.

If speculators believe interest rates will ____, they would consider ____ a T-bill futures contract today. a. increase; selling b. increase; buying c. decrease, selling d. decrease; purchasing a call option on

If the Fed desires to ____ the money supply using open market operations, it would instruct the trading desk to ____ government securities. a. increase; purchase b. increase; sell c. decrease; purchase d. Answers B and C are correct.

If the Treasury uses a relatively large proportion of ____ debt to finance the deficit, this may place upward pressure on ____ interest rates, and corporations may reduce their investment in fixed assets. a. long-term; long-term b. long-term; short-term c. short-term; long-term d. B and C

If the federal government is willing to pay whatever is necessary to borrow loanable funds, but the private sector is not, this reflects a. the crowding-out effect. b. dynamic open market operations. c. defensive open market operations. d. monetizing the debt.

If the real interest rate was stable over time, this would suggest that there is ____ relationship between inflation and nominal interest rate movements. a. a positive b. an inverse c. no d. an uncertain (cannot be determined from information above)

In aggregate, ____ are the most dominant depository institution, with more total assets than other depository institutions. a. commercial banks b. savings banks c. credit unions d. S&Ls

Initial public offerings (IPOs) perform ____ on the day following the IPO and ____ for periods of a year or longer after the IPO. a. well; poorly b. poorly; well c. well; well d. poorly; poorly

Large corporations typically make ____ bids for T-bills so they can purchase larger amounts. a. competitive b. noncompetitive c. very small d. none of the above

Marcia buys an S&P 500 futures contract with a September settlement date when the index is 1,750. By the settlement date, the S&P 500 index falls to 1,400. The return on Marcia's position in the S&P 500 futures contract is ____ percent. a. −20 b. −10 c. 25 d. 20 e. 0

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

Options on stock indexes representing non-U.S. stocks are ____; options exchanges have been established ____. a. available; in numerous non-U.S. countries b. not available; in numerous non-U.S. countries c. available; only in the United States d. not available; only in the United States

Other things being equal, foreign governments and corporations would demand ____ U.S. funds if their local interest rates were lower than U.S. rates. Therefore, for a given set of foreign interest rates, foreign demand for U.S. funds is ____ related to U.S. interest rates. a. less; inversely b. more; positively c. less; positively d. more; inversely

Program trading a. is commonly used to reduce the susceptibility of a stock portfolio to stock market movements. b. may involve the purchase of stocks that become "underpriced." c. may involve the sale of stocks that become "overpriced." d. can be combined with the trading of individual bonds to create portfolio insurance. e. none of the above

Securities that offer ____ liquidity will need to offer a ____ yield. a. lower; higher b. lower; lower c. higher; higher d. B and C

Shareholders can most easily measure a firm's performance by monitoring changes in its ____ over time. a. share price b. employee job descriptions c. board of directors d. asset size

Speculators in futures contracts that normally close out their futures positions on the same day that the positions were initiated are referred to as a. day traders. b. hedgers. c. closed-end traders. d. position traders.

The Board of Governors is composed of a. seven members appointed by the President of the United States. b. the 12 presidents of Fed district banks. c. the Federal Open Market Committee, plus the Federal Advisory Council. d. the Federal Open Market Committee, plus the President of the United States.

The Fed's purchases of long-term Treasury securities in recent years were intended to: a. reduce long-term interest rates. b. reduce interest rates on credit cards and consumer loans. c. increase the federal funds rate. d. restore confidence in the market for these securities.

The Federal Reserve would be most inclined to use a stimulative monetary policy to cure a recession if oil prices are a. low and steady. b. low, but rising. c. very high, but declining slightly. d. very high and rising.

The Fisher effect states that the a. nominal interest rate equals the expected inflation rate plus the real rate of interest. b. nominal interest rate equals the real rate of interest minus the expected inflation rate. c. real rate of interest equals the nominal interest rate plus the expected inflation rate. d. expected inflation rate equals the nominal interest rate plus the real rate of interest.

The SEC's ____ reviews the registration statement files when a firm goes public, corporate filings for annual and quarterly reports, and proxy statements that involve voting for board members or other corporate issues. a. Division of Corporate Finance b. Division of Market Regulation c. Division of Enforcement d. none of the above

The Securities Act of 1933 a. required complete disclosure of relevant financial information for publicly offered secu-rities in the primary market. b. declared trading strategies to manipulate the prices of public secondary securities illegal. c. declared misleading financial statements for public primary securities illegal. d. required complete disclosure of relevant financial information for securities traded in the secondary market. e. all of the above

The ____ indicators tend to occur before a business cycle. a. leading b. lagging c. coincident d. none of the above

The ____ is a value-weighted average of stock prices of 30 large U.S. firms. a. Dow Jones Industrial Average b. Standard and Poor's 500 c. New York Stock Exchange Index d. Nasdaq

The ____ is made up of seven individual members, and each member is appointed by the president of the U.S. a. Board of Governors b. Federal Reserve district bank c. Federal Open Market Committee (FOMC) d. Securities and Exchange Commission

The ____ is not an indicator of economic growth. a. producer price index b. gross domestic product c. national income d. unemployment rate e. All of the above are indicators of economic growth.

The ____ lag represents the time from when an economic problem exists until it is recognized. a. recognition b. adjustment c. implementation d. none of the above

The ____, the lower the premium on a put option, other things being equal. a. higher the existing price of the security relative to the exercise price b. greater the variability of the security's market value c. longer the maturity of the option d. A and B

The basis is the a. difference between the price of a security and the price of a futures contract on the security. b. gain or loss from hedging with futures contracts. c. difference between a futures contract price and the initial deposit required. d. price paid for a futures contract after accounting for transactions costs. e. price paid for an option contract.

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

The equilibrium interest rate a. equates the aggregate demand for funds with the aggregate supply of loanable funds. b. equates the elasticity of the aggregate demand and supply for loanable funds. c. decreases as the aggregate supply of loanable funds decreases. d. increases as the aggregate demand for loanable funds decreases.

The equilibrium interest rate should a. fall when the aggregate supply funds exceeds aggregate demand for funds. b. rise when the aggregate supply of funds exceeds aggregate demand for funds. c. fall when the aggregate demand for funds exceeds aggregate supply of funds. d. rise when aggregate demand for funds equals aggregate supply of funds. e. B and C

The federal funds market allows depository institutions to borrow a. short-term funds from each other. b. short-term funds from the Treasury. c. long-term funds from each other. d. long-term funds from the Federal Reserve. e. B and D

The form of money consisting of currency held by the public and checkable deposits at depository institutions is called a. M1. b. M2. c. M3. d. MMDA.

The largest organized exchange, listing the largest firms, is the a. New York Stock Exchange. b. American Stock Exchange. c. Midwest Stock Exchange. d. Pacific Stock Exchange.

The main provider(s) of funds to the U.S. Treasury is (are) a. households and businesses. b. foreign financial institutions. c. the Federal Reserve System. d. foreign nonfinancial sectors.

The main reason that depository institutions experienced financial problems during the credit crisis was their investment in: a. mortgages. b. money market securities. c. stock. d. Treasury bonds.

The net gain or loss on a futures contract for a stock index that is not closed out is based on the difference between the futures price when the initial position was created and the futures price at a. the settlement date. b. the date at which the futures price reaches its maximum. c. the date at which the futures price reaches its minimum. d. the date three months beyond the date when the initial position was taken.

The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called a. flipping. b. skiing. c. flopping. d. none of the above

The rate at which depository institutions effectively lend or borrow funds from each other is the ____. a. federal funds rate b. discount rate c. prime rate d. repo rate

The risk that financial problems could spread among financial institutions and across financial markets, causing a collapse of the financial system, is known as: a. systemic risk. b. leverage risk. c. financial meltdown risk. d. credit risk.

The sale of a call option on a stock the seller already owns is referred to as a. a covered call. b. a naked call. c. call on futures. d. futures on options.

The term ____ involves decisions such as how much funding to obtain, and how to invest the proceeds to expand operations. a. corporate finance b. investment management c. financial markets and institutions d. none of the above

The time lag between when an economic problem arises and when it is reported in economic statistics is the a. recognition lag. b. implementation lag. c. impact lag. d. open-market lag.

The yield on NCDs is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period. a. greater than; recessionary b. greater than; boom economy c. less than; boom economy d. less than; recessionary

____ offer advice to customers on stocks to buy or sell. a. Full-service brokers b. Discount brokers c. Floor brokers d. Specialists e. Market-makers

The yield on commercial paper is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period. a. greater than; recessionary b. greater than; boom economy c. less than; boom economy d. less than; recessionary

There is a ____ relationship between the risk of a security and the expected return from investing in the security. a. positive b. negative c. indeterminable d. none of the above

Those financial markets that facilitate the flow of short-term funds are known as a. money markets. b. capital markets. c. primary markets. d. secondary markets.

To decrease money supply, the Fed could ____ the reserve requirement ratio. a. increase b. stabilize c. reduce d. eliminate

Total funds of commercial banks will initially ____ by the dollar amount of securities ____ by the Fed. a. increase; purchased b. increase; sold c. decrease; purchased d. A and B

Vince, a speculator, expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 95-32. The premium paid for the put option is 2-36. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 93-22. Vince exercises the option and closes out the position by purchasing an identical futures contract. Vince's net gain from this speculative strategy is $____. a. −406.25 b. 4,718.75 c. −4,718.75 d. −812.50 e. none of the above

What is the basis of the relationship between the Fisher effect and the loanable funds theory? a. the saver's desire to maintain the existing real rate of interest b. the borrower's desire to achieve a positive real rate of interest c. the saver's desire to achieve a negative real rate of interest d. B and C

When a brokerage firm demands more collateral from investors who have borrowed from the brokerage firm to buy stocks, it is making a a. margin call. b. short sale. c. proxy fight. d. hedge.

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

When an investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700, the Treasury bill discount is ____ percent. a. 5.93 b. 6.12 c. 6.20 d. 6.02 e. none of the above

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

When stock portfolio managers use dynamic asset allocation by writing call options on a stock index, they ____ their exposure to stock market conditions. a. reduce b. completely eliminate c. have no effect on d. increase

When the Fed purchases securities, the total funds of commercial banks ____ by the market value of securities purchased by the Fed. This activity initiated by the FOMC's policy directive is referred to as a(n) ____ of money supply growth. a. increase; loosening b. decrease; tightening c. decrease; loosening d. increase; tightening e. none of the above

When the Fed uses open market operations by purchasing Treasury securities from various financial institutions in the U.S., there will be a. an outward shift in the supply schedule of loanable funds. b. an inward shift in the supply schedule of loanable funds. c. no shift in the supply schedule of loanable funds. d. an inward shift in the demand schedule for loanable funds.

When the market price of the underlying security exceeds the exercise price, the a. call option is in the money. b. put option is in the money. c. call option is at the money. d. call option is out of the money.

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

Which of the following are not considered depository financial institutions? a. finance companies b. commercial banks c. savings institutions d. credit unions e. All of the above are depository financial institutions.

Which of the following distinguishes credit unions from commercial banks and savings institutions? a. Credit unions are non-profit b. Credit unions accept deposits but do not make loans c. Credit unions make loans but do not accept deposits d. Savings institutions restrict their business to members who share a common bond

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

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

Which of the following is a valid representation of the Fisher effect? a. i = E(INF) + iR b. iR = E(INF) + i c. E(INF) = i + iR d. none of the above

Which of the following is an action that the Fed uses to increase or decrease the money supply? a. buying or selling Treasury securities in the secondary market b. adjusting the tax rate imposed on income earned on Treasury securities c. adjusting the coupon rate on Treasury bonds d. selling Treasury securities in the primary market

Which of the following is not a major investor in stocks? a. commercial banks b. insurance companies c. mutual funds d. pension funds

Which of the following is not a provision specified in the Sarbanes-Oxley Act? a. It requires that only inside board members of a firm be on the firm's audit committee. b. It prevents the members of a firm's audit committee from receiving consulting or advising fees or other compensation from the firm beyond that earned from serving on the board. c. It requires that the CEO and CFO of firms that are of at least a specified size certify the audited financial statements are accurate. d. It allows public accounting firms to offer nonaudit consulting services to an audit client only if the client's audit committee pre-approves the nonaudit services to be rendered before the audit begins.

Which of the following is true of money market instruments? a. Their yields are highly correlated over time. b. They typically sell for par value when they are initially issued (especially T-bills and commercial paper). c. Treasury bills have the highest yield. d. They all make periodic coupon (interest) payments. e. A and B

Which of the following statements is incorrect with respect to the structure of the SEC? a. It is composed of seven commissioners appointed by the president of the United States. b. The president selects one commissioner to chair the commission. c. Each commissioner serves a five-year term. d. Commissioners' terms are staggered. e. Commissioners meet to assess whether existing regulations are successfully preventing abuses and to revise the regulations as needed.

With regard to monetary policy, which of the following is under direct control of the Federal Reserve's Board of Governors? a. revise reserve requirements for depository institutions b. authorize changes in the amount of borrowing by the Treasury c. monitor the stock market for insider trading d. monitor the derivatives market for illegal trading strategies

You purchase a six-month (182-day) T-bill with a $10,000 par value for $9,700. The Treasury bill discount is ____ percent. a. 5.93 b. 6.12 c. 6.20 d. 6.02 e. none of the above

____ are classified as a depository institution. a. Credit unions b. Pension funds c. Finance companies d. Securities firms

____ are not barriers to corporate control to eliminate agency problems. a. Leveraged buyouts b. Antitakeover amendments c. Poison pills d. Golden parachutes

____ are not considered capital market securities. a. Repurchase agreements b. Municipal bonds c. Corporate bonds d. Equity securities e. Mortgages

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

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

____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased. a. Competitive b. Noncompetitive c. Negotiable d. Non-negotiable

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

____ credit extended by the Fed to financial institutions may be used for any purpose and is available only to depository institutions that satisfy specific criteria reflecting financial soundness. a. Primary b. Secondary c. Tertiary d. None of the above

____ credit may be used for any purpose and is available only to depository institutions that meet specific requirements for financial soundness. a. Primary b. Secondary c. Tertiary d. None of the above

____ obtain funds by issuing securities, then lend the funds to individuals and small businesses. a. Finance companies b. Securities firms c. Mutual funds d. Insurance companies

____ of options can close out their positions at any time by ____ an identical option. a. Sellers; purchasing b. Sellers; selling c. Buyers; purchasing d. none of the above

____ sell shares to investors and use the proceeds to invest in portfolios of international stocks created and managed by portfolio managers. a. International mutual funds b. American Depository Receipts c. World Equity Depository Receipts d. Initial Public Depository Receipts

____ serves as the most direct indicator of economic growth in the United States. a. Gross domestic product (GDP) b. National income c. The unemployment rate d. The industrial production index

____ take positions in futures to reduce their exposure to future movements in interest rates or stock prices. a. Hedgers b. Day traders c. Position traders d. None of the above

The initial (one-day) return of IPOs in the United States has averaged about ____ percent over the last 30 years. a. 10 b. 20 c. 30 d. 50

(Financial calculator required.) Lisa can purchase bonds with 15 years until maturity, a par value of $1,000, and a 9 percent annualized coupon rate for $1,100. Lisa's yield to maturity is ____ percent. a. 9.33 b. 7.84 c. 9.00 d. none of the above

(Financial calculator required.) Paul can purchase bonds with 15 years remaining until maturity, a par value of $1,000, and a 9 percent annual coupon rate for $1,100. Paul's yield to maturity is ____ percent. a. 9.33 b. 7.84 c. 9.00 d. none of the above

A ____ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an ____ shift in the demand schedule. a. higher; inward b. higher; outward c. lower; outward d. none of the above

A firm whose stock price has risen: a. will not have to pay a premium if it acquires another firm. b. has an incentive to use its stock as currency to acquire the shares of a target firm. c. is likely to be a candidate for a leveraged buyout. d. is likely to repurchase some of its shares.

A loose money policy tends to ____ economic growth and ____ the inflation rate. a. stimulate; place downward pressure on b. stimulate; place upward pressure on c. dampen; place upward pressure on d. dampen; place downward pressure on

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

A speculator purchased a call option with an exercise price of $31 for a premium of $4. The option was exercised a few days later when the stock price was $34. What was the return to the speculator? a. 25 percent b. −25 percent c. −3.2 percent d. −2.9 percent

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29, and rises to $32 before the expiration date. What is the maximum profit per unit to the speculator who owned the put option assuming he or she exercises the option at the ideal time? a. −$4 b. −$3 c. −$2 d. $2 e. $3

A ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based on this information, the coupon payment after six months will be $____. a. 250 b. 255 c. 500 d. 510

A weak dollar would stimulate ____, discourage ____, and ____ the U.S. economy. a. U.S. exports; U.S. imports; weaken b. U.S. exports; U.S. imports; stimulate c. U.S. imports; U.S. exports; stimulate d. none of the above

According to the segmented markets theory, if most investors suddenly preferred to invest in short-term securities and most borrowers suddenly preferred to issue long-term securities there would be a. upward pressure on the price of long-term securities. b. upward pressure on the price of short-term securities. c. downward pressure on the yield of long-term securities. d. A and C

According to the text, when a financial institution sells futures contracts on securities in order to hedge against a change in interest rates, this is referred to as a. a long hedge. b. a short hedge. c. a closed out position. d. basis trading.

According to the theory of rational expectations, ____ inflationary expectations encourage businesses and households to ____ their demand for loanable funds in order to borrow and make planned expenditures increase. a. higher; reduce b. higher; increase c. lower; reduce d. lower; increase

According to your text, which of the following is not considered a money market security? a. Treasury bills b. Treasury notes c. retail CD d. banker's acceptance e. commercial paper

All ____ are required to be members of the Federal Reserve System. a. state banks b. national banks c. savings and loan associations d. finance companies e. A and B

An investor buys a T-bill with 180 days to maturity and $250,000 par value for $242,000. He plans to sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield based on this expectation? a. about 10.1 percent b. about 12.6 percent c. about 11.4 percent d. about 13.5 percent e. about 14.3 percent

An investor purchased an NCD a year ago in the secondary market for $980,000. He redeems it today and receives $1,000,000. He also receives interest of $30,000. The investor's annualized yield on this investment is a. 2.0 percent. b. 5.10 percent. c. 5.00 percent. d. 2.04 percent.

The initial margin of a futures contract is typically between ____ percent of a futures contract's full value. a. 0 and 2 b. 5 and 18 c. 25 and 40 d. 45 and 60

An investor sold a stock short a year ago for $50 per share. The stock's price is currently $52 per share. If the investor is unwilling to accept a loss on the short sale of more than $5 per share on the transaction, she could place a a. stop-loss order with a specified selling price of $55 per share. b. stop-buy order with a specified purchase price of $55 per share. c. stop-loss order with a specified selling price of $45 per share. d. stop-buy order with a specified purchase price of $45 per share.

An investor's tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 11 percent? a. 7.7 percent b. 15.71 percent c. 130 percent d. 11.00 percent e. none of the above

Assume a corporation is receiving a large amount of funds in the near future. The company plans to use the funds to purchase municipal bonds. Also assume that the company is concerned that interest rates decrease before the purchase date, which would make the municipal bonds more expensive. In order to hedge against this possibility, the company should ____ MBI futures contracts. If interest rates decrease, the futures contract will generate a ____. a. sell; loss b. purchase; gain c. purchase; loss d. sell; gain e. none of the above

Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of T-bills. This action will ____ the supply of T-bills in the market and places ____ pressure on the yield of T-bills. a. decrease; downward b. decrease; upward c. increase; upward d. increase; downward

Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, then the one-year forward rate is a. 8.0 percent. b. 7.6 percent. c. 3.0 percent. d. 7.0 percent.

Assume that the reserve requirement ratio is 12 percent and that the Fed uses open market operations by buying $200 million worth of Treasury securities. Assuming that banks use all funds except required reserves to make loans and that the public does not store any cash, the money supply should ____ by about ____. a. increase; $200 million b. increase; $1.67 billion c. decrease; $200 million d. decrease; $1.67 billion

Assume that the reserve requirements ratio is 15%. An initial injection of $150 million could result in a maximum change in the money supply of a. $150 million. b. $1 billion. c. $1 million. d. $22.5 million.

Assume that you purchased corporate bonds one year ago that have no protective covenants. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The market value of your bonds will likely ____ as a result. a. rise b. decline c. be zero d. be unaffected

Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve to a. remain flat. b. become upward sloping. c. become downward sloping. d. none of the above

At a given point in time, the actual price paid for a three-month Treasury bill is a. usually equal to the par value. b. more than the price paid for a six-month Treasury bill. c. equal to the price paid for a six-month Treasury bill. d. none of the above

At any given point in time, households would demand a ____ quantity of loanable funds at ____ rates of interest. a. greater; higher b. greater; lower c. smaller; lower d. none of the above

At any given point in time, households would demand a _____ quantity of loanable funds at ________. a. greater; higher b. greater; lower c. smaller; lower d. smaller; higher

At any given time, the yield on commercial paper is ____ the yield on a T-bill with the same maturity. a. slightly less than b. slightly higher than c. equal to d. A and B both occur with about equal frequency

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

Corporations involved in international business transactions can ____ to hedge future ____. a. sell currency call options; payables b. purchase currency put options; receivables c. purchase currency call options, receivables d. purchase currency put options, payables e. A and B

Devin is, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____ percent. a. 12 b. 9 c. 10.5 d. more information is needed to answer this question

Financial institutions such as commercial banks, bond mutual funds, insurance companies, and pension funds maintain large portfolios of bonds, so their portfolio is ____ affected when the Fed ____ interest rates. a. unfavorably; decreases b. unfavorably; increases c. favorably; increases d. Answer A and C are correct.

Financial market participants who provide funds are called a. deficit units. b. surplus units. c. primary units. d. secondary units.

Firms assume ____ risk when they issue preferred stock than when they issue bonds. The payment of dividends on preferred stock ____ be omitted without the firm being forced into bankruptcy. a. more; can b. less; can c. more; cannot d. less; cannot

For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign governments or firms will be ____ U.S. interest rates. a. positively related to b. inversely related to c. unrelated to d. none of the above

Funds are provided to the initial issuer of securities in the a. secondary market. b. primary market. c. deficit market. d. surplus market.

If a firm believes that it will have sufficient cash flows to cover interest payments, it may consider using ____ debt and ____ equity, which implies a ____ degree of financial leverage. a. more; less; lower b. more; less; higher c. less; more; higher d. none of the above

If all other characteristics are similar, ____ would have to offer ____. a. taxable securities; a higher after-tax yield than tax-exempt securities b. taxable securities; a higher before-tax yield than tax-exempt securities c. tax-exempt securities; a higher after-tax yield than taxable securities d. tax-exempt securities; a higher before-tax yield than taxable securities

If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield? a. about 13.4 percent b. about 12.5 percent c. about 11.3 percent d. about 11.6 percent e. about 10.7 percent

If inflation and nominal interest rates move more closely together over time than they did in earlier periods, this would ____ the volatility of the real interest rate movements over time. a. increase b. decrease c. have an effect, which cannot be determined with above information, on d. have no effect on

If interest rates are ____, ____ projects will have positive NPVs. a. higher; more b. lower; more c. lower; no d. none of the above

If interest rates are expected to decrease, the yield on new short-term securities may be expected to ____, and the yield curve should be ____ sloping. a. increase; upward b. increase; downward c. decrease; upward d. decrease; downward

If investors shift funds from stocks into bank deposits, this ____ the supply of loanable funds, and places ____ pressure on interest rates. a. increases; upward b. increases; downward c. decreases; downward d. decreases; upward

If many investors quickly sell an IPO stock in the secondary market, there will be ____ on the stock's price. a. upward pressure b. downward pressure c. no additional pressure d. none of the above

If research showed that anticipation about future interest rates was the only important factor for all investors in choosing short-term or long-term securities, this would support the argument made by the a. liquidity premium theory. b. expectations theory. c. segmented markets theory. d. A and B

If the aggregate demand for loanable funds increases without a corresponding ____ in aggregate supply, there will be a ____ of loanable funds. a. increase; surplus b. increase; shortage c. decrease; surplus d. decrease; shortage

If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates. a. no changes b. a slight decrease c. a slight increase d. a large increase

If the real interest rate is expected by a particular person to become negative, then the purchasing power of his or her savings would be ____, as the inflation rate is expected to be ____ the existing nominal interest rate. a. decreasing; less than b. decreasing; greater than c. increasing; greater than d. increasing; less than

If there are ____ traders with buy offers than sell offers for a particular contract, the futures price will ____ until this imbalance is removed. a. more; decrease b. more; rise c. fewer; rise d. none of the above

Ignoring transaction costs, the cost of borrowing with commercial paper is equal to: a. the yield on T-bills of the same maturity. b. the yield earned by investors holding the paper until maturity. c. the federal funds rate. d. the par value of the paper.

In cross-hedging, if the futures contract value is ____ volatile than the portfolio value, hedging will require a ____ amount of principal represented by the futures contracts. a. less; greater b. more; greater c. more; smaller d. none of the above

In general, securities with ____ characteristics will offer ____ yields. a. favorable; higher b. favorable; lower c. unfavorable; lower d. none of the above

In general, there is: a. a positive relationship between unemployment and inflation. b. an inverse relationship between unemployment and inflation. c. an inverse relationship between GNP and inflation. d. a positive relationship between GNP and unemployment.

In some time periods there is evidence that corporations initially financed long-term projects with short-term funds. They planned to borrow long-term funds once interest rates were lower. This specifically supports the ____ for explaining the term structure of interest rates. a. liquidity premium theory b. expectations theory c. segmented markets theory d. A and C

In the "operation twist" strategy used in 2011 and 2012, the Fed sold _______ Treasury securities and used the proceeds to purchase ________ Treasury securities. a. long-term; short-term b. short-term; long-term c. short-term; long-term d. long-term; short-term

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

Jim purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Jim will hold the bonds until maturity. Thus, he will earn a return of ____ percent. a. 12.00 b. 9.00 c. 10.50 d. More information is needed to answer this question.

Marcie purchases a call option on interest rate futures with an exercise price of 92-10. The premium on the call option is 2-24. Just before the expiration date, the price of Treasury bond futures is 97-14. At this time, Marcie decides to exercise the option and closes out the position by selling an identical futures contract. Marcie's net gain from this strategy is $____. a. −2,687.50 b. 2,687.50 c. 2,375.00 d. 7,437.50 e. none of the above

Marziano Co. stock is quoted by a broker as bid $21.20, ask $21.40. The bid-ask spread is ____ percent. a. 0.94 b. 0.93 c. 0.20 d. none of the above

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

On average, IPOs of firms tend to perform ____ over a period of a year or longer. a. well b. poorly c. about the same as the S&P 500 index d. none of the above

Other things being equal, a ____ quantity of U.S. funds would be demanded by foreign governments and corporations if their domestic interest rates were ____ relative to U.S. rates. a. smaller; high b. larger; high c. larger; low d. none of the above

Reese Insurance company sold a call option on interest rate futures with an exercise price of 92-10. The premium on the call option is 2-24. Just before the expiration date, the price of Treasury bond futures is 97-14. At this time, the option was exercised as the buyer closed out the position by selling an identical futures contract. Reese's net gain from selling the call option is $____. a. 2,687.50 b. −2,687.50 c. 2,375.00 d. 7,437.50 e. none of the above

Securities with maturities of one year or less are classified as a. capital market instruments. b. money market instruments. c. preferred stock. d. none of the above

Sellers (writers) of call options can offset their position at any point in time by a. selling a put option on the same stock. b. buying identical call options. c. selling additional call options on the same stock. d. all of the above e. A and B

Since 2003, the Fed's rate on short-term loans to depository institutions is referred to as the a. discount rate. b. primary credit lending rate. c. Federal funds rate. d. prime rate

The interest rate that the Fed targets for its monetary policy is the: a. commercial paper rate. b. federal funds rate. c. Treasury bond coupon rate. d. 1-year certificate of deposit rate.

Systemic risk exists because: a. there is no government regulation of financial markets. b. financial institutions invest in similar securities and therefore are similarly exposed to large declines in prices of those securities. c. financial institutions borrow using long-term debt securities but lend their funds for short-term periods. d. financial institutions invest heavily in Treasury securities and therefore are exposed to the possibility that the government will default on its debts.

Systemic risk reflects the risk that a particular event could a. cause losses at a firm due to inadequate management control. b. spread adverse effects among several firms or among financial markets. c. cause a loss in value due to market conditions. d. have a larger effect on the futures position than on the position being hedged.

T-bills and commercial paper are sold a. with a stated coupon rate. b. at a discount from par value. c. at a premium about par value. d. A and C e. none of the above

The CBOE volatility index (VIX): a. represents the implied volatility derived from options on the Wilshire 5000 index. b. represents the implied volatility derived from options on the S&P 500 index. c. is referred to as the "fear index" because low values are perceived to reflect a high degree of likelihood that stock prices will decline. d. B and C

The Division of ____ of the SEC assesses possible violations of regulations imposed by the SEC, and can take action against individuals or firms. a. Corporate Finance b. Enforcement c. Administration d. Market Regulation

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

The Financial Reform Act of 2010 established the __________ within the _________ to regulate credit rating agencies. a. a. Bureau of Thrift Agency Supervision; Treasury Department b. a. Office of Credit Ratings; Securities and Exchange Commission c. a. Federal Ratings Assurance Corporation; Treasury Department d. a. Ratings Oversight Commission; Federal Reserve

The SEC's ____ requires the orderly disclosure of securities trades by various organizations that facilitate the trading of securities. a. Division of Corporate Finance b. Division of Market Regulation c. Division of Enforcement d. none of the above

The ____ indicators tend to occur after a business cycle. a. leading b. lagging c. coincident d. none of the above

The ____ is a value-weighted index of stock prices of 500 large U.S. firms. a. Dow Jones Industrial Average b. Standard and Poor's 500 c. New York Stock Exchange Index d. Nasdaq

The ____ is directly responsible for conducting monetary policy. a. Federal Advisory Council b. FOMC c. Senate d. President of the United States

The ____ is directly responsible for controlling money supply growth. a. Federal Advisory Council b. FOMC c. Board of Governors d. President of the United States

The ____ is the most important exchange for trading options. a. New York Stock Exchange (NYSE) b. Chicago Board of Options Exchange (CBOE) c. Boston Options Exchange d. American Stock Exchange

The ____ suggests that the market interest rate is determined by factors that control the supply of and demand for loanable funds. a. Fisher effect b. loanable funds theory c. real interest rate d. none of the above

The ____ the trading volume of a stock, the ____ the spread. a. higher; wider b. higher; narrower c. lower; narrower d. none of the above

The actions of numerous institutional investors to sell stock index futures instead of selling stocks to prepare for a market decline would likely cause the index futures price to be a. equal to the prevailing stock prices. b. below the prevailing stock prices. c. above the prevailing stock prices. d. negative.

The advisory committee offering views on issues related to credit unions is the a. Consumer Advisory Council. b. Thrift Institutions Advisory Council. c. Federal Advisory Council. d. none of the above

The annual dividend on Grozky, Inc. stock is $5 per share and the stock's prevailing price is $93.13 per share. Thus, the stock's dividend yield is ____ percent. a. 18.63 b. 5.37 c. 8.81 d. none of the above

The creditors in the federal funds market are a. households. b. depository institutions. c. firms. d. government agencies.

The crowding-out effect occurs when: a. a. foreign investors crowd out U.S. investors in the market for loanable funds. b. a. the federal government's demand for loanable funds due to a higher budget deficit crowds out the private demand in the market for loanable funds. c. a. institutional investors crowd out individual investors in the market for loanable funds. d. a. firms and municipal governments crowd out households in the market for loanable funds.

The demand for funds resulting from business investment in short-term assets is ____ related to the number of projects implemented, and is therefore ____ related to the interest rate. a. inversely; positively b. positively; inversely c. inversely; inversely d. positively; positively

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

The federal government demand for funds is said to be interest inelastic, or ____ to interest rates. a. sensitive b. insensitive c. relatively sensitive as compared to other sectors d. none of the above

Which of the following is not true with respect to preferred stock? a. Preferred stock usually does not allow for significant voting rights. b. If the firm does not have sufficient earnings from which to pay the preferred stock dividends, the preferred shareholders may force the firm into bankruptcy. c. Normally, the owners of preferred stock do not participate in the profits of the firm beyond the stated fixed annual dividend. d. Payment of preferred dividends is not a tax-deductible expense. e. All of the above are true.

Which of the following is not true with respect to the Federal Reserve Act of 1913? a. It established reserve requirements for member commercial banks. b. It specified fourteen districts across the United States as well as a city in each district where a Federal Reserve district bank was to be established. c. Each district focused on its particular district, without much concern for other districts. d. All of the above are true.

Which of the following is not true with respect to venture capital (VC) funds? a. When a VC fund decides to invest in a business, it will negotiate the terms of its investment, including the amount of funds it is willing to invest. b. One common exit strategy for VC funds is to sell its equity stake to the public before the business engages in a public stock offering. c. VC funds receive money from wealthy investors and from pension funds that are willing to maintain the investment for a long-term period. d. All of the above are true with respect to VC funds.

Which of the following is probably not a goal the Fed is trying to achieve consistently? a. low inflation b. high interest rates c. steady GNP growth d. low unemployment

Which of the following statements is incorrect regarding organized futures exchanges? a. Organized exchanges establish and enforce rules for the trading of financial futures contracts. b. Organized exchanges serve as market makers for futures contracts by taking positions in futures. c. Organized exchanges clear, settle, and guarantee all transactions that occur on their exchanges. d. The operations of financial futures exchanges are regulated by the Commodity Futures Trading Commission (CFTC). e. All of the above are correct.

Which of the following statements is incorrect with respect to cross-hedging? a. Even when the futures contract is highly correlated with the portfolio being hedged, the value of the futures contract may change by a higher or lower percentage than the portfolio's market value. b. If the futures contract value is more volatile than the portfolio value, hedging will require a greater amount of principal represented by the futures contracts. c. The effectiveness of a cross-hedge depends on the degree of correlation between the market values of the two financial instruments. d. If the price of the underlying security of the futures contract moves closely in tandem with the security hedged, the futures contract can provide an effective hedge. e. All of the above are correct with respect to cross-hedging.

Which of the following statements is incorrect with respect to the federal funds rate? a. It is the rate charged by financial institutions on loans they extend to each other. b. It is not influenced by the supply and demand for funds in the federal funds market. c. The federal funds rate is closely monitored by all types of firms. d. Many market participants view changes in the federal funds rate to be an indicator of potential changes in other money market rates. e. The Federal Reserve adjusts the amount of funds in depository institutions in order to influence the federal funds rate.

Which of the following statements is incorrect? a. Circuit breakers are trading restrictions imposed on specific stocks or stock indexes. b. Circuit breakers guarantee that prices will turn upward. c. Circuit breakers may be able to prevent large declines in prices that would be attributed to panic selling rather than to fundamental forces. d. Circuit breakers may allow investors to determine whether circulating rumors are true.

Which of the following statements is incorrect? a. In a short sale, investors place an order to sell a stock that they do not own. b. Investors sell a stock short when they anticipate that its price will rise. c. When investors sell short, they will ultimately have to provide the stock back to the investor from whom they borrowed it. d. Short-sellers must make payments to the investor from whom the stock was borrowed to cover the dividend payments that the investor would have received of the stock had not been borrowed.

Which of the following statements is incorrect? a. The municipal bond must pay a risk premium to compensate for the possibility of default risk. b. The Treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds. c. The income earned from municipal bonds is exempt from federal taxes. d. All of the above are true.

Which of the following statements is not true regarding zero-coupon bonds? a. They are issued at a deep discount from par value. b. Investors are taxed on the total amount of interest earned at maturity. c. The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest until maturity. d. Zero-coupon bonds are purchased mainly for tax-exempt investment accounts, such as pension funds and individual retirement accounts. e. All of the above are true.

Which of the following statements is true regarding STRIPS? a. they are issued by the Treasury b. they are created and sold by various financial institutions c. they are not backed by the U.S. government d. they have to be held until maturity e. all of the above are true regarding STRIPS

Within the category of capital market securities, municipal bonds have the ____ before-tax yield, and their after-tax yield is typically ____ of Treasury bonds from the perspective of investors in high tax brackets. a. highest; below that b. lowest; above that c. highest; above that d. lowest; below that

You purchase a stock with cash, and you earn a negative return on the stock. If you had purchased the stock with 60 percent cash and 40 percent borrowed funds, your return on your investment would have been a. positive. b. more negative than if you had covered the entire investment with cash. c. negative, but more favorable than if you had covered the entire investment with cash. d. zero.

____ are enforced to restrict the amount of credit extended to customers by stockbrokers. a. Limit orders b. Margin requirements c. Maintenance margins d. Initial margins

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

____ includes only currency held by the public and checking deposits as well as savings accounts and small time deposits, money market deposit accounts, and some other items. a. M1 b. M2 c. M3 d. None of the above

____ maintain a larger amount of assets in aggregate than the other types of nondepository institutions. a. Finance companies b. Mutual funds c. Life insurance companies d. Securities firms

____ occurs when a securities firm allocates share from an IPO to corporate executives who may be considering an IPO or other business that will require the help of an investment bank. a. Flipping b. Spinning c. Laddering d. None of the above

____ securities have a maturity of one year or less; ____ securities are generally more liquid. a. Money market; capital market b. Money market; money market c. Capital market; money market d. Capital market; capital market

_________ take positions in financial futures to reduce their exposure to future movements in interest rates or stock prices; ________ commonly take the opposite position and thus serve as counterparties on many transactions. a. Speculators; hedgers b. Hedgers; speculators c. Arbitrageurs; speculators d. Hedgers; arbitrageurs

____________ applies psychology to financial decisions and offers an explanation for why markets are not always efficient. a. a. Psychological marketing b. a. Behavioral finance c. a. Inefficient markets theory d. a. Financial psychology

If interest rates suddenly decline, those existing bonds that have a call feature are less likely to be called. a. True b. False

Companies with international trade can hedge ____ by ____ currency futures. a. payables; selling b. receivables; buying c. payables; buying d. A and B e. B and C

"Pink sheets" are traded on the a. New York Stock Exchange. b. American Stock Exchange. c. over-the-counter market. d. Nasdaq market.

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

A ____ dollar tends to exert inflationary pressure in the U.S. a. stable b. strong c. weak d. both A and B

A ____ economic indicator tends to rise or fall a few months after business-cycle expansions and contractions. a. leading b. coincident c. lagging d. none of the above

A ____ has first claim on specified assets, while a ____ is a debenture that has claims against a firm's assets that are junior to the claims of mortgage bonds and regular debentures. a. first mortgage bond; second mortgage bond b. first mortgage bond; debenture c. first mortgage bond; subordinated debenture d. chattel mortgage bond; subordinated debenture e. none of the above

A ____ is not a money market security. a. Treasury bill b. negotiable certificate of deposit c. bond d. banker's acceptance e. All of the above are money market securities.

A ____ requires that dividends cannot be paid on common stock until all current and previously omitted dividends are paid on preferred stock. a. residual claim b. preferred margin c. cumulative provision d. liquidation claim

A common use of funds for ____ is investment in stocks and businesses, while their main use of funds is providing loans to households and businesses. a. savings institutions b. commercial banks c. mutual funds d. finance companies

A credit crunch occurs when: a. interest rates decline. b. interest rates rise. c. creditors restrict the amount of loans they are willing to provide. d. the economy is strong.

Commercial paper is subject to: a. interest rate risk. b. default risk. c. A and B. d. none of the above.

A financial institution that maintains some Treasury bond holdings sells Treasury bond futures contracts. If interest rates increase, the market value of the bond holdings will ____ and the position in futures contracts will result in a ____. a. increase; gain b. increase; loss c. decrease; gain d. decrease; loss

A firm has a current stock price of $15.32. The firm's annual dividend is $1.14 per share. The firm's dividend yield is a. .74 percent. b. 1.34 percent. c. 7.44 percent. d. 1.14 percent.

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

A protective covenant may a. specify all the rights and obligations of the issuing firm and the bondholders. b. require the firm to retire a certain amount of the bond issue each year. c. restrict the amount of additional debt the firm can issue. d. none of the above

A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in 60 days for $5,000,000. What is the yield? a. 9.43 percent b. 9.28 percent c. 9.14 percent d. 9.00 percent

A short seller a. anticipates that the price of the stock sold short will increase. b. earns the difference between what he initially paid for the stock versus what he later sell the stock for. c. makes a profit equal to the difference between the original selling price and the price paid for the stock, after subtracting any dividend payments made. d. is essentially lending the stock to another investor and will ultimately receive that stock back from that investor. e. none of the above

A short seller a. anticipates that the price of the stock sold short will increase. b. earns the difference between what they initially paid for the stock versus what they later sell the stock for. c. makes a profit equal to the difference between the original sell price and the price paid for the stock, after subtracting any dividend payments made. d. is essentially lending the stock to another investor and will ultimately receive that stock back from that investor. e. none of the above

A speculator buys a call option for $3, with an exercise price of $50. The stock is currently priced at $49, and rises to $55 on the expiration date. The speculator will exercise the option on the expiration date (if it is feasible to do so). What is the speculator's profit per unit? a. $1 b. $5 c. $2 d. −$1 e. −$2

A variable rate bond allows a. investors to benefit from declining rates over time. b. issuers to benefit from rising market interest rates over time. c. investors to benefit from rising market interest rates over time. d. none of the above.

A(n) ____ from a broker requires the investor to put up additional collateral. a. maintenance margin b. initial margin c. margin call d. trading halt

A(n) ____ is a standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specified price and date. a. option contract b. brokerage contract c. financial futures contract d. margin call

According to pure expectations theory, if interest rates are expected to decrease, there will be ____ pressure on the demand for short-term funds by borrowers and ____ pressure on the demand for long-term funds issued by borrowers. a. upward; upward b. downward; downward c. upward; downward d. downward; upward

According to the liquidity premium theory, the expected yield on a two-year security will ____ the expected yield from consecutive investments in one-year securities. a. equal b. be less than c. be greater than d. B and C are possible, depending on the size of the liquidity premium

Common stock is an example of a(n) a. debt security. b. money market security. c. equity security. d. A and B

American Depository Receipts (ADRs) are similar to a. stock options. b. bank deposits. c. stocks. d. bonds.

As a result of more favorable economic conditions, there is a(n) ____ demand for loanable funds, causing an ____ shift in the demand curve. a. decreased; inward b. decreased; outward c. increased; outward d. increased; inward

As a result of the Financial Reform Act of 2010, the ____ was assigned the role of regulating financial products and services. a. Federal Advisory Committee b. Federal Open Market Committee c. Consumer Financial Protection Bureau d. Board of Governors

Assume U.S. interest rates are significantly higher than German rates. A U.S. firm with a German subsidiary could achieve a lower financing rate, without exchange rate risk by denominating the bonds in a. dollars. b. euros and making payments from U.S. headquarters. c. euros and making payments from its German subsidiary. d. dollars and making payments from its German subsidiary.

Assume a firm that is valued at $800 million with 6 million shares of stock outstanding. This firm's stock should have a price of $____ per share. a. 6.00 b. 80.00 c. 133.33 d. none of the above

Assume an investor's tax rate is 25 percent. The before-tax yield on a security is 12 percent. What is the after-tax yield? a. 16.00 percent b. 9.25 percent c. 9.00 percent d. 3.00 percent e. none of the above

Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of $10,000. The price investors would be willing to pay is $____. a. 10,000 b. 9,524 c. 9,756 d. none of the above

Assume that a bank obtains most of its funds from large CDs with a one-year maturity. Its assets are in the form of loans with rates that adjust every six months. The bank would be ____ affected if interest rates increase. To partially hedge its position, it could ____ futures contracts. a. adversely; purchase b. favorably; sell c. favorably; purchase d. adversely; sell

Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to a. become inverted. b. become flat. c. become upward sloping. d. be unaffected.

Assume that corporate bond portfolio managers are concerned about the possibility of many bond defaults resulting from a future recession. A short position in Treasury bond futures ____ an effective hedge against the default risk. A short position in Treasury bill futures ____ an effective hedge against the default risk. a. would be; would be b. would be; would not be c. would not be; would not be d. would not be; would be

Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. securities. This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S. interest rates. a. decrease; upward b. decrease; downward c. increase; downward d. increase; upward

Assuming the same expiration date, an option with a ____ exercise price has a ____ call option premium and a ____ put option premium. a. higher; higher; higher b. higher; higher; lower c. higher; lower; higher d. lower; lower; higher e. none of the above

Bill Baher, a private investor, purchased a futures contract on Treasury bonds at a price of 102-12. Two months later, Baher sells the same futures contract in order to close out the position. At that time, the futures contract specifies 103-15. What is Baher's nominal profit? The par value of the futures contract is $100,000. a. $1,030.00; profit b. $1,030.00; loss c. $1,093.75; profit d. $1,093.75; loss e. none of the above

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

Buser Corp. purchases certain securities for $4,921,349, with an agreement to sell them back at a price of $4,950,000 at the end of a 30-day period. The repo rate is ____ percent. a. 7.08 b. 6.95 c. 6.99 d. 7.04 e. none of the above

Businesses demand loanable funds to a. finance installment debt. b. subsidize other companies. c. invest in fixed and short-term assets. d. none of the above

Costner National, a commercial bank, obtains short-term deposits and makes long-term fixed-rate loans. It should be adversely affected when the Fed: a. monetizes the debt. b. maintains a stable money supply. c. uses a tight-money policy. d. uses a loose-money policy.

Credit guarantees for commercial paper: a. ensures that the issuer of commercial paper will use the funds obtained to provide credit. b. are issued by the Federal Reserve Bank of New York. c. are only as good as the credit of the guarantor. d. A and C

Debt securities issued by a small firm may be ________, meaning that _______ investors want to invest in those securities. a. a. liquid; many b. a. liquid; not many c. a. illiquid; not many d. a. illiquid; many

Due to expectations of higher inflation in the future, we would typically expect the supply of loanable funds to ____ and the demand for loanable funds to ____. a. increase; decrease b. increase; increase c. decrease; increase d. decrease; decrease

Equity securities a. have a maturity. b. pay interest on a periodic basis. c. represent ownership in the issuer. d. repay the principal amount at maturity.

Financial futures contracts on U.S. securities are ____ by non-U.S. financial institutions. a. not allowed to be traded b. are rarely desired c. are commonly traded d. A and B

Financial leverage, when used in association with a futures contract, ____ the positive returns and ____ losses. a. magnifies; reduces b. reduces; magnifies c. magnifies; magnifies d. reduces; reduces

For bonds issued under a _______ arrangement, the underwriter attempts to sell the bonds at a specified price but makes no guarantee to the issuer. a. floating value b. variable proceeds c. best efforts d. firm commitment

Global crowding out is described in the text to mean the impact of a. excessive U.S. population growth on interest rates. b. excessive global population growth on interest rates. c. an excessive budget deficit in one country on interest rates of another country. d. an excessive budget deficit in one country on exchange rates.

If a firm has a credit risk premium of 3 percent and the Treasury security rate is 4 percent, the firm will be able to borrow at ________. If the Fed implements a monetary policy that raises the Treasury security rate to 6 percent, the cost of borrowing for the firm will be ________. a. 7 percent; 10 percent b. 4 percent; 6 percent c. 7 percent; 9 percent d. 1 percent; 3 percent

If a strong economy allows for a large ____ in households income, the supply curve will shift ____. a. decrease; outward b. increase; inward c. increase; outward d. none of the above

If economic expansion is expected to decrease, the demand for loanable funds should ____ and interest rates should ____. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase

If financial markets were ____, all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors. a. efficient b. inefficient c. perfect d. imperfect

If inflation is expected to decrease, then a. savers will provide less funds at the existing equilibrium interest rate. b. the equilibrium interest rate will increase. c. the equilibrium interest rate will decrease. d. borrowers will demand more funds at the existing equilibrium interest rate.

If markets are ____, investors could use available information ignored by the market to earn abnormally high returns. a. perfect b. active c. inefficient d. in equilibrium

If shorter term securities have higher annualized yields than longer term securities, the yield curve a. is horizontal. b. is upward sloping. c. is downward sloping. d. cannot be determined unless we know additional information (such as the level of market interest rates).

If the Fed uses a passive monetary policy during weak economic conditions, a. it increases money supply substantially. b. it reduces money supply substantially. c. it allows the economy to fix itself. d. it focuses on monetizing the debt.

If the federal government needs to borrow additional funds, this borrowing reflects a(n) ____ in the supply of loanable funds, and a(n) ____ in the demand for loanable funds. a. increase; no change b. decrease; no change c. no change; increase d. no change; decrease

If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be a. flat. b. downward sloping. c. upward sloping. d. none of the above.

In general, variable-rate municipal bonds are desirable to investors who expect that interest rates will ____. a. remain unchanged b. fall c. rise d. none of the above

Interest earned from Treasury bonds is a. exempt from all income tax. b. exempt from federal income tax. c. exempt from state and local taxes. d. subject to all income taxes.

Karen just purchased a stock costing $33 on margin, paying $23 and borrowing the remainder from a brokerage firm at 15 percent annual interest. The stock pays an annual dividend of $2. If Karen sells the stock after one year at a price of $50, what is the return on the stock? a. 27.60 percent b. 82.61 percent c. 76.09 percent d. 58.70 percent e. none of the above

Laura sells an S&P 500 futures contract with a September settlement date when the index is 1,750. By the settlement date, the S&P 500 index falls to 1,400. The return on Laura's position in the S&P 500 futures contract is ____ percent. a. −20 b. −10 c. 25 d. 20 e. 0

Leveraged buyouts are commonly financed by the issuance of: a. money market securities. b. Treasury bonds. c. corporate bonds. d. municipal bonds.

Lisa would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. She can either put up the entire amount and purchase the stock, or borrow $35 from her brokerage firm at an annual interest rate of 12 percent and put up the remainder. She thinks she can sell the stock for $100 after one year. If she borrows from her brokerage firm, her estimated return on the stock would be ____ percent. a. 42.86 b. 85.71 c. 73.71 d. 30.00

Long-term equity anticipations (LEAPS) represent a. stocks that have a maturity date. b. stocks that are converted to bonds once the price reaches a specified level. c. stock options with longer terms to expiration than the more traditional stock options. d. stock index futures that can have a more distant settlement date than the more typical stock options.

Managers of firms may consider a stock repurchase or even a leveraged buyout when they believe their stock is ____ by the market, or a secondary stock offering when they believe their stock is ____ by the market. a. undervalued; undervalued b. overvalued; overvalued c. undervalued; overvalued d. overvalued; undervalued e. none of the above

Mark would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. Mark can either put up the entire amount and purchase the stock, or borrow half of the investment amount from his brokerage firm at an annual interest rate of 12 percent and put up the remainder. Mark thinks he can sell the stock for $100 after one year. If Mark borrows from his brokerage firm, his estimated return on the stock would be ____ percent. a. 42.86 b. 85.71 c. 73.71 d. 30.00

Option trading is regulated by the a. Options Clearing Corporation. b. International Securities Exchange. c. Securities and Exchange Commission. d. Federal Reserve.

Other things equal, the yield required on A-rated bonds should be ____ the yield required on B-rated bonds whose other characteristics are exactly the same. a. greater than b. equal to c. less than d. All of the above are possible, depending on the size of the bond offering.

Put options are typically used to hedge a. when portfolio managers are mainly concerned with a permanent decline in a stock's value. b. when portfolio managers are mainly concerned with a permanent increase in a stock's value. c. when portfolio managers are mainly concerned with a temporary decline in a stock's value. d. when portfolio managers are mainly concerned with a temporary increase in a stock's value.

Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one-year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins? a. 25.00 percent b. 35.41 percent c. 14.59 percent d. none of the above

Some bonds are "stripped," which means that a. they have defaulted. b. the call provision has been eliminated. c. they are transferred into principal-only and interest-only securities. d. their maturities have been reduced.

Speculators who anticipate a decline in interest rates may consider ____ a ____ option on Treasury bond futures. a. purchasing; put b. selling; call c. purchasing; call d. none of the above

Stock index futures are priced ____ than the stock index itself. a. higher b. lower c. either higher or lower d. none of the above

The Fed's monetary policy is commonly intended to alter the supply of funds in the banking system in order to achieve a specific targeted: a. discount rate. b. required reserve requirement. c. federal funds rate. d. prime rate.

The LIBOR scandal in 2012 involved: a. banks reporting inflated earnings from their loans. b. hackers breaking into the loan documentation files. c. banks falsely reporting the interest rates they offered in the interbank market. d. collusion among the banks when setting the commercial paper.

The Monetary Control Act of 1980 subjected a. only member banks to the reserve requirements set by the Fed. b. only S&Ls to the reserve requirements set by the Fed. c. all depository institutions to the reserve requirements set by the Fed. d. only national banks to reserve requirements set by the Fed.

The NYSE defines ____as the simultaneous buying and selling of a portfolio of at least 15 different stocks that are valued at more than $1 million. a. direct access brokering b. electronic communication networking c. program trading d. regulation of stock trading

The Securities Exchange Commission (SEC) was established by the a. Federal Reserve Act. b. McFadden Act. c. Securities Exchange Act of 1934. d. Glass-Steagall Act. e. none of the above

The ____ consists of seven members, each of whom is appointed by the President of the United States. a. Federal Open Market Committee (FOMC) b. Federal Advisory Council c. Board of Governors d. none of the above

The ____ consists of seven members, each of whom is appointed by the president of the United States. a. Federal Open Market Committee (FOMC) b. Federal Advisory Council c. Board of Governors d. none of the above

The ____ indicators tend to occur before a business cycle. a. leading b. lagging c. coincident d. none of the above

The ____ is directly responsible for setting reserve requirements. a. Federal Advisory Council b. FOMC c. Board of Governors d. President of the United States

The ____ is not a factor affecting the call option premium. a. market price of the underlying instrument (relative to option's exercise price) b. volatility of the underlying instrument c. current price of futures contracts on the underlying instrument d. time to maturity of the call option

The ____ rate is the interest rate charged on Fed district bank loans to depository institutions. a. federal funds b. prime c. primary credit lending d. real

The ____, the higher the call option premium, other things being equal. a. lower the existing price of the security relative to the exercise price b. lower the variability of the security's market price c. longer the maturity of the option d. A and B

The advisory committee making recommendations to the Fed about economic and banking related issues is the a. Consumer Advisory Council. b. Thrift Institutions Advisory Council. c. Federal Advisory Council. d. none of the above

The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate two years ahead is ____ percent. a. 1.8 b. 9.0 c. 15.0 d. none of the above

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

The degree to which the Treasury's debt management policy could affect the term structure of interest rates is greatest if a. most debt is financed by foreign investors. b. the Treasury's debt level is small. c. maturity markets are segmented. d. A and B

The exchange rate risk associated with international trading of stock has been reduced by a. information available on the Internet. b. extensive computerization of stock exchanges. c. the conversion of many European countries to a single currency. d. the Eurolist system.

The federal government demand for loanable funds is ____. If the budget deficit was expected to increase, the federal government demand for loanable funds would ____. a. interest elastic; decrease b. interest elastic; increase c. interest inelastic; increase d. interest inelastic; decrease

The federal government's demand for funds is ________, and municipal governments' demand for funds is somewhat ____________. a. interest-inelastic; interest-inelastic b. interest-elastic; interest-elastic c. interest-inelastic; interest-elastic d. interest-elastic; interest-inelastic

The greater the volatility of the underlying stock, the ____ the call option premium and the ____ the put option premium. a. higher; lower b. lower; higher c. higher; higher d. lower; lower

The issuance of municipal securities is regulated by: a. the Securities and Exchange Commission. b. the Consumer Financial Protection Bureau. c. their respective state governments. d. the Federal Reserve.

The largest deficit unit is (are) a. households and businesses. b. foreign financial institutions. c. the U.S. Treasury. d. foreign nonfinancial sectors.

The longer the time to maturity, the ____ the call option premium and the ____ the put option premium. a. higher; lower b. lower; higher c. higher; higher d. lower; lower

The premium on an existing put option should ____ when there is an increase in the expected short-term volatility of the stock price. a. be negative b. decline c. increase d. be unaffected e. A and B

The price O bidders will pay at a Treasury bill auction is the a. highest price entered by a competitive bidder. b. highest price entered by a noncompetitive bidder. c. weighted average price paid by all competitive bidders whose bids were accepted. d. equally weighted average price paid by all competitive bidders whose bids were accepted. e. none of the above

The process by which the lead underwriter solicits indications of interest by institutional investors in an IPO at various possible ____ prices is referred to as ____. a. IPO; margin selling b. offer; secondary market building c. offer; bookbuilding d. IPO; bookbuilding

The profits of a financial institution with interest-rate sensitive liabilities and interest rate-insensitive assets are ____ with hedging than without hedging if interest rates decrease. a. higher b. the same c. lower d. higher or the same

The purchase of government securities by someone other than the Fed results in a. an overall increase in funds among commercial banks. b. an overall decrease in funds among commercial banks. c. offsetting changes in funds at commercial banks. d. an increase in securities maintained by the Fed.

The quantity of loanable funds supplied is normally a. highly interest elastic. b. more interest elastic than the demand for loanable funds. c. less interest elastic than the demand for loanable funds. d. equally interest elastic as the demand for loanable funds. e. A and B

The real interest rate can be forecasted by subtracting the ____ from the ____ for that period. a. nominal interest rate; expected inflation rate b. prime rate; nominal interest rate c. expected inflation rate; nominal interest rate d. prime rate; expected inflation rate

The risk of a short sale is that the stock price a. may decrease over time. b. will remain the same. c. may increase over time. d. none of the above

The size of the spread on stocks that have relatively little trading is a. smaller to reflect the lower degree of uncertainty. b. the same as that of stocks with higher volumes of trading. c. wider to reflect the higher degree of uncertainty. d. not affected by trading volume.

The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be a. eliminated. b. reduced. c. increased. d. unchanged (there is no effect).

The term structure of interest rates defines the relationship a. between risk and return. b. between risk and maturity. c. between maturity and yield. d. between default risk ratings and maturity.

The theory for the term structure of interest rates that says the shape of the yield curve is determined solely by expectations of future interest rates is called the a. segmented markets theory. b. liquidity premium theory. c. pure expectations theory. d. theory of rational expectations.

The theory of the term structure of interest rates, which states that investors and borrowers choose securities with maturities that satisfy their forecasted cash needs, is the a. pure expectations theory. b. liquidity premium theory. c. segmented markets theory. d. liquidity habitat theory.

The time between when the Fed adjusts the money supply and when interest rates change reflects the a. recognition lag. b. implementation lag. c. impact lag. d. open-market lag.

The transaction costs to the issuing firm in an IPO is usually ____ percent of the funds raised. a. 1 b. 3 c. 7 d. 25

The typical role of a securities firm in a public offering of securities is to a. purchase the entire issue for its own investment. b. place the entire issue with a single large investor. c. spread the issue across several investors until the entire issue is sold. d. provide all large investors with loans so that they can invest in the offering.

The use of financial leverage a. magnifies the positive returns of futures contracts. b. magnifies losses of futures contracts. c. both A and B d. none of the above

The voting members of the Federal Open Market Committee consist of the Board of Governors plus the a. President of the United States. b. Presidents of the 12 Fed district banks. c. Presidents of 5 Fed district banks. d. Federal Advisory Council.

The yield curve for corporate bonds. a. would typically lie below the Treasury yield curve. b. is identical to the Treasury yield curve. c. typically has the same slope as the Treasury yield curve. d. is irrelevant to investors.

To discourage flipping, some securities firms make ____ shares of future IPOs available to institutional investors that retain shares for a ____ period of time. a. fewer; long b. more; short c. more; long d. Answers A and B are correct.

To prosecute defendants connected with the Galleon Fund for __________, the government effectively used wiretap evidence. a. dark pool trading b. naked short selling c. insider trading d. accounting fraud

Trading restrictions imposed on specific stocks or stock indices are referred to as a. index busters. b. index options. c. circuit breakers. d. protective covenants.

Treasury bills are sold through ____ when initially issued. a. insurance companies b. commercial paper dealers c. auction d. finance companies

Treasury bond dealers a. quote an ask price for customers who want to sell existing Treasury bonds to the dealers. b. profit from a very wide spread between bid and ask prices in the Treasury securities market. c. may trade Treasury bonds among themselves. d. make a primary market for Treasury bonds.

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

When a firm goes public and issues stock in the primary market: a. the equity investment in the firm declines. b. the firm's debt level increases. c. the number of the firm's owners increases. d. A and C

When a securities firm acts as a broker, it a. guarantees the issuer a specific price for newly issued securities. b. makes a market in specific securities by adjusting its own inventory. c. executes transactions between two parties. d. purchases securities for its own account.

When a stock index option is exercised, the cash payment is equal to a specified dollar amount a. multiplied by the index level. b. multiplied by the exercise price. c. multiplied by the difference between the index level and the exercise price. d. multiplied by the sum of the index level and the exercise price.

When brokers encourage investors to place bids for IPO shares on the first day that are above the offer price this is referred to as a. flipping. b. spinning. c. laddering. d. none of the above

When the Fed buys Treasury bills as a means of increasing the money supply, it places ____ pressure on their prices and ____ pressure on their yields. a. upward; upward b. downward; downward c. upward; downward d. downward; upward

When the Fed purchases _______, it is attempting to directly stimulate the housing market. a. commercial paper b. short-term Treasury securities c. mortgage-backed securities d. consumer loans

When the lockup period expires, the share price commonly a. remains unchanged. b. increases significantly. c. decreases significantly. d. none of the above

When the price of a company's stock increases or decreases significantly in advance of a public announcement of an event affecting the company, there are suspicions that __________ may have occurred. a. bid rigging b. default inversion c. insider trading d. an increase in margin requirements

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

Which of the following does not directly affect a call option premium? a. volatility of the underlying instrument b. market price of the underlying instrument c. analyst rating of the underlying instrument d. time to maturity of the option

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

Which of the following statements is incorrect? a. A stock is a certificate representing partial ownership in a corporation. b. Like debt securities, common stock is issued by firms to obtain funds. c. Stocks are issued by corporations to raise short-term funds. d. The secondary stock market enables investors to sell stocks that they had previously purchased.

Which of the following statements is incorrect? a. Financial markets attract funds from investors and channel the funds to corporations. b. Money markets enable corporations to borrow funds on a short-term basis so that they can support their existing operations. c. Financial institutions serve solely as intermediaries with the financial markets and never serve as investors. d. Investors seek to invest their funds in the stock of firms that are presently undervalued and have much potential to improve.

Which of the following statements is incorrect? a. Market-makers take positions to capitalize on the discrepancy between the prevailing stock price and their own valuation of a stock. b. Market-makers may take the opposite position of uninformed investors and therefore stand to benefit if their expectations are correct. c. Market makers are required to purchase the stocks they are assigned for a price existing when the market opened on any given day. d. The spread quoted for a given stock may vary among market-makers.

Which of the following statements is incorrect? a. Some firms allowed their CEOs to backdate options that they were granted to an earlier period when the stock price was lower. b. Backdating is completely inconsistent with the idea of granting options to encourage managers to focus on maximizing the stock price. c. Firms readily promote their option compensation programs and are more than willing to acknowledge that the options are an expense. d. All of the above are correct.

Which of the following statements is least correct regarding corporations involved in international business transactions? a. They may purchase currency put options to hedge future receivables denominated in a foreign currency. b. They may purchase currency call options to hedge future payables denominated in a foreign currency. c. They may purchase currency call options to hedge future receivables denominated in a foreign currency. d. They benefit from currency put options if the currency's value declines before the expiration date of the option.

Which of the following statements is not true with respect to debt securities? a. Some types of debt securities always offer a higher yield than others. b. Debt securities offer different yields because they exhibit different characteristics that influence the offered yield. c. In general, securities with favorable characteristics will offer higher yields to entice investors. d. All of the above are true with respect to debt securities.

Which of the following theories suggests that investors and borrowers may normally concentrate on a particular natural maturity market? a. pure expectations b. liquidity premium c. segmented markets d. preferred habitat

Which of the following transactions would not be considered a secondary market transaction? a. An individual investor purchases some existing shares of stock in IBM through his bro-ker. b. An institutional investor sells some Disney stock through its broker. c. A firm that was privately held engages in an offering of stock to the public. d. All of the above are secondary market transactions.

Which of the following will probably not result in an increase in the business demand for loanable funds? a. an increase in positive net present value (NPV) projects b. a reduction in interest rates on business loans c. a recession d. All of the above will result in an increase in the business demand for loanable funds.

____ are acquisitions that require substantial amounts of borrowed funds. a. Stock repurchases b. Corporate controls c. Leveraged buyouts d. Stock splits

____ are employed by brokerage firms and execute orders for clients on the floor of the NYSE. a. Specialists b. Commission brokers c. Independent brokers d. Dealers

____ are long-term debt obligations issued by corporations and government agencies to support their operations. a. Common stock b. Derivative securities c. Bonds d. None of the above

____ concentrate on mortgage loans. a. Finance companies b. Commercial banks c. Savings institutions d. Credit unions

____ execute transactions desired by investors and trade stock options for their own account. a. Floor brokers b. Discount brokers c. Market-makers d. none of the above

____ facilitate stock transactions by taking positions in specific stocks. a. Board members b. Capstone members c. Market makers d. None of the above

____ facilitate transactions on a stock exchange by executing stock transactions for their clients. a. Board members b. Capstone members c. Floor brokers d. None of the above

____ is a short-term debt instrument issued only be well-known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable. a. A banker's acceptance b. A repurchase agreement c. Commercial paper d. A Treasury bill

____ risk is the risk of losses as a result of inadequate management or controls. a. Basis b. Systemic c. Operational d. Prepayment

__________ occurs when a firm does not have adequate controls to monitor the employees responsible for its futures positions and those employees take more speculative positions than the firm desires. a. Credit risk b. Control risk c. Operational risk d. Management risk

___________ involves the buying or selling of stock index futures with a simultaneous opposite position in the stocks that the index comprises. a. Dynamic asset allocation b. Cross-hedging c. Index arbitrage d. Net hedging

An investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If the Treasury bill is held to maturity, the annualized yield is ____ percent. a. 6.02 b. 1.54 c. 1.50 d. 6.20 e. none of the above

A call provision on bonds normally a. allows the firm to sell new bonds at par value. b. gives the firm to sell new bonds above market value. c. allows the firm to sell bonds to the Treasury. d. allows the firm to buy back bonds that it previously issued.

(Financial calculator required.) Erin is, a private investor, who can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Erin's yield to maturity is ____ percent. a. 9.96 b. 10.00 c. 10.33 d. 10.24 e. none of the above

(Financial calculator required.) Steven, a private investor, can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Steven's yield to maturity is ____ percent. a. 9.96 b. 10.00 c. 10.33 d. 10.24 e. none of the above

A ____ requires a premium above and beyond the price to be paid for the financial instrument. a. futures contract b. call option c. put option d. B and C

A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What is the discount? a. 10.26 percent b. 0.26 percent c. $2,500 d. 10.00 percent e. 11.00 percent

A purchase of Treasury securities by the Fed leads to a(n) ____ in interest rates and a(n) ____ in the level of business investment. a. increase; decrease b. decrease; decrease c. increase; increase d. decrease; increase

A savings and loan association has long-term fixed-rate mortgages financed by short-term funds. It hedges by selling Treasury bond futures. If interest rates decline, and many mortgages are prepaid a. the gain on the futures contracts offsets the loss on the mortgages. b. the gain on the mortgages offsets the loss on the futures contracts. c. the gain on the futures contracts more than offsets any unfavorable effects on mortgages. d. a loss on the futures contracts more than offsets the favorable effect on the mortgage portfolio.

A short-interest ratio of 20 or more indicates that many investors a. believe that the stock price is currently overvalued. b. believe that the stock price is currently undervalued. c. are selling the stock short. d. both A and C

A speculator buys a call option for $3, with an exercise price of $50. The stock is currently priced at $49, and rises to $55 on the expiration date. What is the stock price at which the speculator would break even? a. $50 b. $58 c. $52 d. $53 e. $49

A speculator purchased a put option with an exercise price of $56 for a premium of $10. The option was exercised a few days later when the stock price was $44. What was the return to the speculator? a. −20 percent b. 120 percent c. −100 percent d. 20 percent

A theory states that while investors and borrowers may normally concentrate on a particular natural maturity market, conditions may cause them to change maturity markets. This theory is called the a. liquidity premium theory. b. efficient markets theory. c. pure expectations theory. d. preferred habitat theory.

A(n) ____ in Federal Reserve float causes a(n) ____ in bank funds. a. increase; increase b. increase; decrease c. decrease; decrease d. A and C

According to expectations theory, the sudden expectation of lower interest rates in the future will cause a ____ supply of short-term funds provided by investors, and a ____ supply of long-term funds. a. large; large b. large; small c. small; small d. small; large

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ____ pressure on the demand for long-term funds issued by borrowers and the yield curve will be ____ sloping. a. upward; downward b. downward; upward c. upward; upward d. downward; downward

According to the theory of rational expectations, if the Fed uses open market operations in order to increase the supply of loanable funds, the ultimate effect on interest rates is definitely a. a reduction in interest rates. b. an increase in interest rates. c. no effect on the interest rates. d. the impact on interest rates cannot be determined.

An advantage of trading in dark pools is that: a. the bid or ask prices offered can be more favorable than those available in the public stock exchanges. b. an investor can accumulate a large number of shares of a particular stock without putting excessive upward pressure on the stock price. c. they are convenient for high-frequency traders using computer algorithms to catch price discrepancies. d. all of the above

An aggregate purchase by investors of low-yield instruments in favor of high-yield instruments places ____ pressure on the yields of low-yield securities and ____ on the yields of high-yield securities. a. upward; upward b. downward; downward c. upward; downward d. downward; upward

An example of shareholder activism is a. communication with the firm. b. engaging in a proxy contest. c. filing a lawsuit against the board. d. all of the above

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

Assume a pension fund purchased stock at $53. Call options at a $50 exercise price presently have a $4 premium per share. The pension fund sells a call option on the stock it owns. If the call option is exercised when the price of the stock is $56, what is the gain or loss per share to the pension fund (including its gain from holding the stock as well)? a. $4 gain b. $6 loss c. $2 loss d. $1 gain e. $0

Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to pay $25 a share and borrows the remaining funds at a 12 percent annual interest. What is the return if the investor sells the stock for $55 at the end of one year? a. 50 percent b. 30 percent c. 10 percent d. 16 percent e. 8 percent

Assume an insurance company purchases a call option on an S&P 500 Index futures contract for a premium of 14, with an exercise price of 1800. The value of an S&P 500 futures contract is 250 times the index. If the index on the futures contract increases to 1830, what is the gain on the sale of the futures contract? a. $15,000 b. $7,500 c. $3,300 d. $4,000 e. $1,500

Assume that a T-bill futures contract with a face value of $1 million is purchased at a price of $95.00 per $100 face value. At settlement, the price of T-bills is $95.50. What is the difference between the selling and purchase price of the futures contract? a. $.50 b. $50 c. $500 d. $5,000 e. none of the above

Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock, using only personal funds and not borrowing from the brokerage firm. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is a. 26.5 percent. b. 28.5 percent. c. 30.5 percent. d. 34.5 percent.

Assume that a stock mutual fund uses stock index futures as it conducts dynamic asset allocation. This means that the mutual fund a. liquidates its stocks whenever it expects a market downturn. b. maintains a constant buy position in stock index futures. c. maintains a constant sell position in stock index futures. d. none of the above

Assume that speculators had purchased a futures contract at the beginning of the year. If the price of a security represented by a futures contract ____ over the year, then these speculators would likely have purchased the futures contract for ____ than they can sell it for. a. increased; more b. decreased; less c. remains the same; more d. increased; less

Assume that the Treasury experiences a large increase in the budget deficit and issues a large number of T-bills. This action will ____ the supply of T-bills in the market and place ____ pressure on the yield of T-bills. a. decrease; downward b. decrease; upward c. increase; upward d. increase; downward

Based on a 2003 policy, the primary credit lending rate is set a. lower than the federal funds rate. b. lower than the prevailing Treasury bill rate. c. lower than the expected inflation rate. d. above the federal funds rate.

Bill Yates, a private investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If Bill holds the Treasury bill to maturity, his annualized yield is ____ percent. a. 6.02 b. 1.54 c. 1.50 d. 6.20 e. none of the above

Brad expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 95-32. The premium paid for the put option is 2-36. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 93-22. Brad exercises the option and closes out the position by purchasing an identical futures contract. Brad's net gain from this speculative strategy is $____. a. −812.50 b. 4,718.75 c. −4,718.75 d. −406.25 e. none of the above

Buy and sell orders on the OTC market are completed by a. auction on the trading floor. b. sealed competitive bids. c. noncompetitive bids. d. a telecommunications network.

Clarke plans to satisfy cash needs in nine months by selling its Treasury bond holdings for $4 million. However, Clarke is concerned that interest rates might increase over the next three months. To hedge against this possibility, Clarke plans to sell Treasury bond futures. Thus, Clarke sells ____ futures contract for a price of 99-12. Assuming that the actual price of the futures contract declined to 97-20, Clarke would make a ____ of $____ from closing out the futures position. a. 40; profit; $76,800 b. 40; loss; $76,800 c. 50; profit; $70,000 d. 40; profit; $70,000 e. none of the above

Covered call writing ____ the upside potential return and ____ the risk of an investment in stock. a. increases; increases b. increases; decreases c. limits; increases d. limits; decreases

Currency futures may be purchased to hedge ____ or to capitalize on the expected ____ of that currency against the dollar. a. receivables; appreciation b. receivables; depreciation c. payables; depreciation d. payables; appreciation

Default risk is likely to be highest for a. short-term Treasury securities. b. AAA corporate securities. c. long-term Treasury securities. d. BBB corporate securities.

Equity securities should normally have a ____ expected return and ____ risk than money market securities. a. lower; lower b. lower; higher c. higher; lower d. higher; higher

Which of the following is not an activity of Fed district banks? a. clearing checks b. replacing old currency c. providing loans to depository institutions d. acting as an intermediary to match up lenders and borrowers in the stock market

Eurodollar deposits a. are U.S. dollars deposited in the U.S. by European investors. b. are subject to interest rate ceilings. c. have a relatively large spread between deposit and loan rates (compared to the spread between deposits and loans in the United States). d. are not subject to reserve requirements.

European-style stock options a. are long-term options (at least one year until expiration at the time they are created). b. can be exercised after the expiration date. c. can be exercised any time until the expiration date. d. none of the above

Expert networks consisting of managers or executives of a publicly traded company who are hired as consultants ("experts") by a hedge fund to provide insight about the company: a. are illegal under Regulation FD. b. are legitimate if the consultants divulge only information that is already public. c. have raised concerns that the consultants provide inside information. d. B and C

Firms listed as "pink sheets" on the OTC market a. are typically very large. b. satisfy Nasdaq's listing requirements. c. are typically owned by various institutional and individual investors. d. none of the above

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

If a financial institution expects that the market value of its municipal bonds will decline because of economic conditions, it could hedge its position by ____ futures contracts on ____. a. purchasing; Treasury bonds b. purchasing; the S&P 500 Index c. purchasing; a Municipal Bond Index d. selling; a Municipal Bond Index

If a security is undervalued, some investors would capitalize from this by purchasing that security. As a result, the security's price will ____, resulting in a ____ return for those investors. a. rise; lower b. fall; higher c. fall; lower d. rise; higher

If economic conditions become less favorable, then: a. expected cash flows on various projects will increase. b. more proposed projects will have expected returns greater than the hurdle rate. c. there would be additional acceptable business projects. d. there would be a decreased demand by business for loanable funds.

If economic conditions cause investors to sell stocks because they want to invest in safer securities with much liquidity, this should cause a ____ demand for money market securities, which placed ____ pressure on the yields of money market securities. a. weak; downward b. weak; upward c. strong; upward d. none of the above

If investors speculate in derivative contracts rather than the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk. a. lower; lower b. lower; higher c. higher; lower d. higher; higher

If research showed that all investors attempt to purchase securities that perfectly match their time in which they will have available funds, this would specifically support the argument made by the a. liquidity premium theory. b. real interest rate theory. c. expectations theory. d. segmented markets theory.

If the Treasury uses a relatively large proportion of ____ debt to finance a budget deficit, this would place ____ pressure on long-term yields. a. short-term; downward b. long-term; downward c. short-term; upward d. long-term; upward

If the economy weakens, there is ____ pressure on interest rates. If the Federal Reserve increases the money supply there is ____ pressure on interest rates (assume that inflationary expectations are not affected). a. upward; upward b. upward; downward c. downward; upward d. downward; downward

If the prices of Treasury bonds ____, the value of an existing Treasury bond futures contract should ____. a. increase; be unaffected b. decrease; be unaffected c. A and B d. decrease; decrease e. decrease; increase

If the real interest rate was negative for a period of time, then a. inflation is expected to exceed the nominal interest rate in the future. b. inflation is expected to be less than the nominal interest rate in the future. c. actual inflation was less than the nominal interest rate. d. actual inflation was greater than the nominal interest rate.

In response to criticism of the ratings they assigned before the credit crisis, credit rating agencies now: a. a. are paid through fees assessed on the purchasers of bonds. b. a. are depending more on sensitivity analysis in which they assess how creditworthiness may change in response to abrupt changes in the economy. c. a. are not allowing the employees who promote an agency to influence the ratings that the agency assigns. d. a. B and C

Inflation is commonly the result of a a. large budget deficit. b. high level of interest rates. c. high level of unemployment. d. high level of aggregate demand.

Interest rate futures are not available on a. Treasury bonds. b. Treasury notes. c. Eurodollar CDs. d. the S&P 500 index.

International flows of funds can affect the Fed's monetary policy. For example, if there is downward pressure on U.S. interest rates that can be offset by foreign ____ of funds, the Fed may not feel compelled to use a ____ monetary policy. a. inflows; loose b. inflows; tight c. outflows; loose d. outflows; tight e. none of the above

International integration of securities markets allows: a. a. governments and corporations to have easier access to funding from creditors and investors in other countries. b. a. investors and creditors to benefit from investment opportunities in other countries. c. a. one's country's financial problems to adversely affect other countries. d. a. All of the above

Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod's expected annualized yield from this transaction? a. 13.43 percent b. 2.78 percent c. 10.55 percent d. 2.80 percent e. none of the above

Listing stock on a foreign stock exchange a. enhances the stock's liquidity. b. may increase the firm's perceived financial standing. c. may protect a firm against hostile takeovers. d. all of the above

Long-term debt securities tend to have a ____ expected return and ____ risk than money market securities. a. lower; lower b. lower; higher c. higher; lower d. higher; higher

Mark would like to purchase a stock priced at $70. Mark thinks he can sell the stock for $100 after one year. If Mark does not borrow any money from his brokerage firm, what is the estimated return on the stock? a. 30.00 percent b. −42.86 percent c. −30.00 percent d. 42.86 percent e. none of the above

Money market securities generally have ____. Capital market securities are typically expected to have a ____. a. less liquidity; higher annualized return b. more liquidity; lower annualized return c. less liquidity; lower annualized return d. more liquidity; higher annualized return

Municipal Bond Index (MBI) futures a. involve a physical exchange of bonds. b. are based on a Treasury bond index. c. are based on actively traded corporate bonds. d. are settled in cash.

On an exchange, option trades can be executed a. by a floor broker. b. electronically. c. by a market maker. d. all of the above e. A and B only

Online bond brokerage services offer several advantages including: a. pricing is more transparent because investors can easily compare bid and ask spreads. b. some services charge commissions, which may be more easily understood than bid and ask spreads. c. some brokers have narrowed their spreads so that they do not lose business to competitors. d. all of the above

Possible disadvantages of private stock exchanges to investors include: a. only large institutional investors may purchase shares in privately listed stocks b. required disclosures may be less than those required when a firm goes public. c. trading volume is limited. d. B and C

Preferred shareholders a. typically have the same voting rights as common shareholders. b. do not share the ownership of the firm with common shareholders. c. typically participate in the profits of the firm beyond the stated fixed annual dividend. d. may not receive a dividend every year.

Repurchase agreements are purchased by the Fed to a. temporarily decrease the aggregate level of bank funds. b. permanently increase the aggregate level of bank funds. c. permanently decrease the aggregate level of bank funds. d. temporarily increase the aggregate level of bank funds.

Short-selling a stock refers to a. poor performance from purchasing an overvalued stock. b. the new issuance of low-priced stocks by firms. c. the new issuance of stocks by financially weak firms. d. the borrowing of stock owned by someone else and selling it in the market.

Some financial institutions such as commercial banks are required by law to invest only in a. junk bonds. b. corporate stock. c. Treasury securities. d. investment-grade bonds.

Speculators in futures contracts that normally maintain the futures position that they initiate for extended periods of time (such as weeks or months) are referred to as a. day traders. b. hedgers. c. closed-end traders. d. position traders.

Speculators purchase currency ____ on currencies they expect to ____ against the dollar. a. call options; weaken b. put options; strengthen c. futures; weaken d. put options; weaken

Sudden favorable news about the performance of a firm will make investors believe that the firm's stock is ____ at its prevailing price. a. overvalued b. fixed c. appropriate d. undervalued

The Division of ____ of the SEC regulates the fair and orderly disclosure trading by ensuring honest practices by various organizations that facilitate the trading of securities. a. Corporate Finance b. Enforcement c. Administration d. Market Regulation

The Fed can ____ the level of spending as a means of stimulating the economy by ____ the money supply. a. increase; decreasing b. decrease; increasing c. decrease; decreasing d. increase; increasing

The ____ the reserve requirement ratio, the ____ the ultimate effect of any initial increase in money supply. a. lower; less b. lower; greater c. greater; less d. B and C

Which of the following is not an indicator of inflation? a. housing price indexes b. wage rates c. oil prices d. consumer confidence surveys

The ____ theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it. a. pure expectations b. liquidity premium c. segmented markets d. preferred habitat

The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate one-year ahead is ____ percent. a. 2.8 b. 115 c. 103 d. 15.1

The bid-ask spread is negatively related to a. order costs. b. inventory costs. c. risk d. trading volume.

The expected impact of an increased expansion by businesses is an ____ shift in the demand schedule and ____ in the supply schedule. a. inward; an inward shift b. inward; an outward shift c. outward; an inward shift d. outward; no obvious change

The first-time issuance of shares by a specific firm to the public is referred to as a(n) a. stock repurchase. b. secondary stock offering. c. initial rights issue. d. initial public offering (IPO).

The foreign exchange market facilitates the exchange of: a. a. information between investors in different countries. b. a. debt securities. c. a. equity securities. d. a. currencies.

The intent of the Fed's operation twist strategy in 2011 and 2012 was to:. a. increase long-term interest rates. b. require corporations to issue more commercial paper. c. require bond rating agencies to impose higher standards on their ratings. d. reduce long-term interest rates.

The main source of funds for ____ is proceeds from selling securities to households and businesses, while their main use of funds is providing loans to households and businesses. a. savings institutions b. commercial banks c. mutual funds d. finance companies e. pension funds

The present margin requirement is that at least ____ percent of an investor's invested funds must be paid in cash. a. 20 b. 30 c. 40 d. 50 e. none of the above

The prices of stock index futures a. are always the same as the prices of the stocks representing the index. b. are always a little above the prices of the stocks representing the index. c. are always a little below the prices of the stocks representing the index. d. none of the above

The risk that the position being hedged by a futures position is not affected in the same manner as the instrument underlying the financial futures contract, is referred to as a. market risk. b. liquidity risk. c. default risk. d. basis risk.

The substantial decline in interest rates during the credit crisis is attributed to which of the following changes in the market for loanable funds? a. a. an increase in both the supply of and the demand for loanable funds b. a. a decrease in both the supply of and the demand for loanable funds c. a. a decrease in the supply of loanable funds and an increase in the demand for loanable funds d. a. an increase in the supply of loanable funds and a decrease in the demand for loanable funds

The transaction costs associated with international trading of stocks have been reduced by a. the consolidation of stock exchanges. b. extensive computerization. c. the Eurolist system. d. all of the above

The yield curve in a foreign country is a. always downward sloping. b. non-existent. c. the same as the United States at any point in time. d. none of the above

Until recently, international trading of stocks was limited by a. transaction costs. b. information costs. c. exchange rate risk. d. all of the above

When Japanese interest rates rise, and if exchange rate expectations remain unchanged, the most likely effect is that the supply of loanable funds provided by Japanese investors to the United States will ____, and the U.S. interest rates will ____. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase

When a firm buys some of its shares that it had previously issued, this is referred to as a: a. reverse IPO. b. leveraged buyout. c. ladder spin. d. stock repurchase.

When firms sell commercial paper at a ____ price than they projected, their cost of raising funds is ____ than projected. a. higher; higher b. lower; lower c. A and B d. none of the above

When stock portfolio managers use dynamic asset allocation by purchasing call options on a stock index, they ____ their exposure to stock market conditions. a. reduce b. completely eliminate c. have no effect on d. increase

When the Fed sells securities, the total funds of commercial banks ____ by the market value of securities sold by the Fed. This activity initiated by the FOMC's policy directive is referred to as a ____ of money supply growth. a. increase; loosening b. decrease; loosening c. increase; tightening d. decrease; tightening e. none of the above

Which of the following did the Fed not do during the credit crisis? a. purchase mortgage-backed securities b. purchase commercial paper c. reduce the targeted federal funds rate d. prevent depository institutions from obtaining funding through the discount window

Which of the following financial intermediaries commonly invests in stocks and bonds? a. pension funds b. insurance companies c. mutual funds d. all of the above

Which of the following is a money market security? a. Treasury note b. municipal bond c. mortgage d. commercial paper

Which of the following is a nondepository financial institution? a. savings banks b. commercial banks c. savings and loan associations d. mutual funds

Which of the following is currently a main role of the Federal Reserve's Board of Governors? a. regulating commercial banks b. regulating foreign trade c. controlling monetary policy d. A and C

Which of the following is not a part of the over-the-counter market? a. the Nasdaq National Market b. the Nasdaq Small Cap Market c. the OTC Bulletin Board d. the New York Stock Exchange

Which of the following is not a reason that a stimulative monetary policy may be ineffective? a. The effects of a stimulative policy may be disrupted by expectations of inflation. b. Retirees who rely on interest income may restrict their spending c. Lending institutions may increase their standards for borrowers, so some potential borrowers may not qualify for loans. d. Higher interest rates encourage individuals to increase their savings.

Which of the following is not a reason why depository financial institutions are popular? a. They offer deposit accounts that can accommodate the amount and liquidity characteris-tics desired by most surplus units. b. They repackage funds received from deposits to provide loans of the size and maturity desired by deficit units. c. They accept the risk on loans provided. d. They use their information resources to act as a broker, executing securities transactions between two parties. e. They have more expertise than individual surplus units in evaluating the creditworthiness of deficit units.

Which of the following is not a type of risk associated with futures contracts? a. basis risk b. liquidity risk c. market risk d. postpayment risk

Which of the following is not mentioned in your text as a protective covenant? a. a limit on the amount of dividends a firm can pay b. a limit on the corporate officers' salaries a firm can pay c. the amount of additional debt a firm can issue d. the appointment of a trustee in all bond indentures e. All of the above are mentioned in the text as protective covenants.

Which of the following is not true with respect to inflation targeting? a. The Fed could lose credibility is the inflation rate deviates substantially from the Fed's target inflation rate. b. A complete focus on inflation could result in a much higher unemployment rate. c. Inflation targeting may not only satisfy the inflation goal, but could also achieve the employment stabilization goal in the long run. d. If unemployment is slightly higher than normal, while inflation is at the peak of the target range, and inflation targeting approach would like advocate a loose monetary policy.

Which of the following statements is incorrect with respect to Regulation Fair Disclosure (FD)? a. It required firms to disclose relevant information broadly to investors at the same time. b. It restricts firms from providing analysts with information that they could use before the market is aware of the information. c. It requires firms to announce a change in expected earnings to all investors and other interested parties at the same time. d. It prohibits firms from communicating with analysts after a news announcement is made to all investors. e. All of the above are correct with respect to Regulation FD.

Which of the following statements is incorrect? a. The Fed's monetary policy is intended to control the economic conditions in the U.S. b. The Fed's monetary policy affects the supply of loanable funds, which affects interest rates. c. By influencing interest rates, the Fed is able to influence the amount of money that corporations and households are willing to borrow and spend. d. All of the statements above are true.

Which of the following statements is not true regarding STRIPS? a. They are not issued by the Treasury. b. They are created and sold by various financial institutions. c. They are backed by the U.S. government. d. They have to be held until maturity. e. All of the above are true regarding STRIPS.

Which of the following was not true of the eurozone during the Greek crisis? a. Fear of a financial crisis throughout Europe discouraged investors and firms from moving funds into Europe. b. By using a more stimulative monetary policy than it desired, the European Central Bank aroused concerns about potential inflation in the eurozone. c. There was concern that the austerity conditions could weaken the country's economy further. d. Greece, Spain, and Portugal focused their efforts on reducing tax rates in order to stimulate their economies.

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

With a ____ order, the investor specifies a purchase price that is above the current market price. a. market b. limit c. stop-loss d. stop-buy

Without the participation of financial intermediaries in financial market transactions, a. information and transaction costs would be lower. b. transaction costs would be higher but information costs would be unchanged. c. information costs would be higher but transaction costs would be unchanged. d. information and transaction costs would be higher.

You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after-tax yield, you would consider taxable securities that pay a. 31.1 percent. b. 19 percent. c. 12.5 percent. d. 14 percent.

____ are the most active participants in the federal funds market. a. Savings and loan associations b. Securities firms c. Credit unions d. Commercial banks

____ is (are) not a component of the Fed as it exists today. a. The Federal Advisory Council b. The Board of Governors c. National banks d. The U.S. Department of Commerce e. All of the above are components of the Fed.

____ open market operations offset the impact of other conditions that affect the level of funds. a. Active b. Passive c. Dynamic d. Defensive

____ risk is the risk that the position being hedged by a futures contract is not affected in the same manner as the instrument underlying the futures contract. a. Market b. Liquidity c. Credit d. Basis e. None of the above

____ trade futures contracts for their own account. a. Commission brokers b. Floor brokers c. Commission traders d. Floor traders

If the federal government reduces its budget deficit, this causes a(n) ____ in the supply of loanable funds, and a(n) ____ in the demand for loanable funds. a. increase; no change b. decrease; no change c. no change; increase d. no change; decrease

D - on part 1

An upward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields. a. longer; lower b. longer; higher c. shorter; lower d. shorter; higher e. B and C

A downward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields. a. longer; lower b. longer; higher c. shorter; lower d. shorter; higher e. Answers A and D are correct.

A speculator purchases a put option on Treasury bond futures with a September delivery date with a strike price of 85-00. The option has a premium of 2-00. Assume that the price of the futures contract decreases to 82-00 on the expiration date and the option is exercised at that point (if it is feasible). What is the net gain? a. $1,968.75 b. $3,750.00 c. $3,000.00 d. −$2,000.00 e. $1,000.00

According to the pure expectations theory of the term structure of interest rates, the ____ the difference between the implied one-year forward rate and today's one-year interest rate, the ____ is the expected change in the one-year interest rate. a. greater; less b. less; greater c. greater; greater d. less; less e. C and D

Assume that a futures contract on Treasury bonds with a face value of $100,000 is purchased at 93-00. If the same contract is later sold at 94-18, what is the gain, ignoring transactions costs? a. $1,180,000 b. $118 c. $11,800 d. $15,625 e. $1,562.50

Assume that today, the annualized two-year interest rate is 12 percent, and the one-year interest rate is 9 percent. A three-year security has an annualized interest rate of 14 percent. What is the one-year forward rate two years from now? a. 12.67 percent b. 113 percent c. 195 percent d. 15.67 percent e. none of the above

If a corporation hedges payables with currency call options, it will ____ if the value of the foreign currency is ____ than the exercise price when the payables are due. a. exercise the option; greater b. exercise the option; less c. let the option expire; greater d. let the option expire; less e. A and D

If issuers of securities (borrowers) and investors suddenly expect interest rates to decrease, their actions to benefit from their expectations should cause a. long-term yields to rise. b. short-term yields to decrease. c. prices of long-term securities to decrease. d. A and B e. none of the above

Market makers a. can execute stock option transactions for their customers. b. can trade options for their own account. c. are subject to the risk of losses from their positions in options. d. benefit from the spread. e. all of the above

Speculators may be willing to write ____ options on foreign currencies they expect to ____ against the dollar. a. put; strengthen b. put; weaken c. call; strengthen d. call; weaken e. A and D

The Trading Desk is sometimes directed to ____ a sufficient amount of Treasury securities that will ____ the federal funds rate to a new targeted level set by the FOMC. a. buy; decrease b. sell; increase c. buy; increase d. sell; decrease e. A and B

The owners of common stock are permitted to vote on the a. election of the board of directors. b. authorization to issue new shares of common stock. c. approval of amendments to the corporate charter. d. adoption of bylaws. e. all of the above

The value of an S&P 500 futures contract is $500 times the index. Assume the futures price on the S&P 500 index is 1612 at the time of purchase. If the index price is $1619 when the position is closed out, the gain is a. $700. b. $7,000. c. $3,190. d. $3,120. e. $3,500.

To increase the money supply growth, the Fed could a. sell government securities in the secondary market. b. increase the primary credit lending rate. c. increase the reserve requirement ratio. d. all of the above e. none of the above

When a firm sells its commercial paper at a ____ price than projected, their cost of raising funds will be ____ than what they initially anticipated. a. higher; higher b. lower; lower c. higher; lower d. lower; higher e. Answers C and D are correct.

Which of the following best describes the relationship between the Fed and the Administration? a. The Fed must receive approval by the Administration before conducting monetary policy. b. The Fed must implement a monetary policy specifically to the support the Administration's policy. c. The Administration must receive approval from the Fed before implementing fiscal policy. d. A and C e. none of the above

Which of the following is not a characteristic affecting the yields on debt securities? a. default risk b. liquidity c. tax status d. term to maturity e. All of the above affect yields on debt securities.

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

Which of the following is not true regarding zero-coupon bonds? a. They are issued at a deep discount from par value. b. Investors are taxed annually on the amount of interest earned, even though the interest will not be received until maturity. c. The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest. d. Zero-coupon bonds are purchased mainly for tax-exempt investment account, such as pension funds and individual retirement accounts. e. all of the above are true

Which of the following is true? a. Federal deficits require that the Fed purchase government securities. b. Federal deficits will always result in an increase in money supply. c. The Federal Reserve monetizes debt by selling securities which ultimately increases money supply. d. An agreement between the Fed and the Treasury exists whereby the Fed is directly responsible for monetizing the debt whenever the deficit increases. e. None of the above.

Which of the following statements is incorrect with respect to a single European monetary policy? a. It allows for more consistent economic conditions across the countries. b. It prevents any participating European country from solving local economic problems with its own unique monetary policy. c. A policy used in a particular period may not affect the participating countries equally, since they all have the same currency. d. Each participating country will still be able to apply its own fiscal policy (tax and government expenditure decisions). e. All of the above are true with respect to a single European monetary policy.

Financial futures contracts on stock indexes are referred to as interest rate futures. a. True b. False

Futures exchanges take buy or sell positions on futures contracts. a. True b. False

High-risk bonds are called trash bonds. a. True b. False

A bond index futures contract allows for the buying, but not the selling, of a bond index for a specified price at a specified date. a. True b. False

A call option is said to be at the money when the market price of the underlying security exceeds the exercise price. a. True b. False

A firm that wants to engage in a secondary stock offering does not need to file the offering with the SEC. a. True b. False

A private bond placement has to be registered with the SEC. a. True b. False

A trading halt prevents a stock from experiencing a loss in response to news. a. True b. False

After an IPO, firms commonly list their shares on a private stock exchange. a. True b. False

All of the bonds issued by a particular company will have the same maturity, price, and credit rating. a. True b. False

American-style stock options can be exercised only just before expiration. a. True b. False

An option with a higher exercise price has a higher call option premium and a lower put option premium. a. True b. False

As a result of the Sarbanes-Oxley Act, firms were able to reduce their costs of compiling and reporting financial information. a. True b. False

Bond dealers do not have an inventory of bonds. a. True b. False

Bond dealers specialize in small transactions (less than $100,000) in order to enable small investors to trade bonds. a. True b. False

Bonds issued by large well-known corporations in large volume are illiquid because most buyers hold these bonds until maturity. a. True b. False

By requiring full disclosure of information, securities laws prevent investors from making poor investment decisions. a. True b. False

Commercial paper represents long-term debt obligations created to finance the purchase of commercial property. a. True b. False

Common types of capital market securities include Treasury bills and commercial paper. a. True b. False

Corporate bonds are more standardized than stocks. a. True b. False

Corporate bonds usually pay interest on an annual basis. a. True b. False

Credit risk exists for futures contracts traded on exchanges, but it is normally not a concern for over-the-counter futures transactions. a. True b. False

During weak economic periods, newly issued junk bonds require lower risk premiums than in strong economic periods. a. True b. False

Electronic communications networks (ECNs) are passive funds that track a specific index. a. True b. False

Electronic communications networks are primarily intended to prevent executives from using inside information when trading stocks. a. True b. False

Financial futures contracts are rarely sold over the counter. a. True b. False

A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread. a. True b. False

A financial institution that hedges with interest rate futures is less sensitive to economic events than an institution that does not hedge. a. True b. False

A margin call from a broker means that the investor is required to provide more collateral (cash or stocks) or sell the stock. a. True b. False

A market order is an order to buy or sell a stock at the best possible price. a. True b. False

A relatively high percentage (such as 3 percent) of the ratio of the number of shares sold short divided by the total number of shares outstanding suggests a large amount of short positions in the market, which implies that a relatively large number of investors expect the stock's price to decline. a. True b. False

A sinking-fund provision is a requirement that the issuing firm retire a certain amount of the bond issue each year. a. True b. False

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