Financial Management Exam 3 Conceptual Problems Study Set

Which one of the following is the price at which a dealer will sell a bond? A) Asked price B) Bid price C) Call price D) Par value E) Bid-ask spread

A) Asked price

Which one of following is the rate at which a stock's price is expected to appreciate? A) Capital gains yield B) Current yield C) Coupon rate D) Total return E) Dividend yield

A) Capital gains yield

Which of the following yields on a stock can be negative? A) Capital gains yield and total return B) Dividend yield, capital gains yield, and total return C) Dividend yield and total return D) Capital gains yield E) Dividend yield

A) Capital gains yield and total return

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? A) Constant-growth model B) Realized-earnings model C) Maximal-growth model D) Realized-growth model E) Capital pricing model

A) Constant-growth model

A company has four open seats on its board of directors. There are seven candidates vying for these four positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400 of your votes for a single candidate. What is this type of voting called? A) Cumulative B) Proxy C) Deferred D) Straight E) Democratic

A) Cumulative

What are the distributions of either cash or stock to shareholders by a corporation called? A) Dividends B) Retained earnings C) Diluted profits D) Capital payments E) Coupon payments

A) Dividends

Which one of the following applies to the dividend growth model? A) Even if the dividend amount and growth rate remain constant, the value of a stock can vary. B) Zero-growth stocks have no market value. C) An individual stock has the same value to every investor. D) Stocks that pay the same annual dividend will have equal market values. E) The dividend growth rate is inversely related to a stock's market price.

A) Even if the dividend amount and growth rate remain constant, the value of a stock can vary.

You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent? A) Expected return B) Geometric return C) Required return D) Historical return E) Arithmetic return

A) Expected return

Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information? A) If cumulative voting applies, Jen is assured on seat on the board. B) If straight voting applies, Jen is assured a seat on the board. C) If straight voting applies, Jen can control all of the open seats. D) If cumulative voting applies, Jen can control all of the open seats. E) Regardless of the voting procedure, Jen does not own enough shares to gain a seat on the board.

A) If cumulative voting applies, Jen is assured one seat on the board.

Suzie owns five different bonds and twelve different stocks. Which one of the following terms most applies to her investments? A) Portfolio B) Collection C) Risk-free D) Grouping E) Index

A) Portfolio

The Fisher effect is defined as the relationship between which of the following variables? A) Real rates, inflation rates, and nominal rates B) Nominal rates, real rates, and interest rate risk premium C) Real rates, interest rate risk premium, and nominal rates D) Interest rate risk premium, real rates, and default risk premium E) Default risk premium, inflation risk premium, and real rates

A) Real rates, inflation rates, and nominal rates

Which one of the following categories of securities had the highest average annual return for the period 1926-2016? A) Small-company stocks B) Long-term government bonds C) U.S. Treasury bills D) Long-term corporate bonds E) Large-company stocks

A) Small-company stocks

Which one of the following statements is correct? A) Stocks can have negative growth rates. B) Preferred stocks generally have variable growth rates. C) Dividend growth rates must be either zero or positive. D) All stocks can be valued using the dividend discount models. E) Stocks can only be assigned one dividend growth rate.

A) Stocks can have negative growth rates.

Which one of the following best defines the variance of an investment's annual returns over a number of years? A) The average squared difference between the actual returns and the arithmetic average return B) The average squared difference between the arithmetic and the geometric average annual returns C) The average difference between the annual returns and the average return for the period D) The squared summation of the differences between the actual returns and the average geometric return E) The difference between the arithmetic average and the geometric average return for the period

A) The average squared difference between the actual return and the arithmetic average return

A $1,000 par value corporate bond that pays $60 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $996.20? A) The current yield exceeds the coupon rate. B) The bond is selling at par value. C) The coupon rate has increased to 7 percent. D) The current yield exceeds the yield to maturity. E) The bond is currently selling at a premium.

A) The current yield exceeds the coupon rate.

Which one of the following had the least volatile annual returns over the period of 1926-2016? A) U.S. Treasury bills B) Inflation C) Long-term corporate bonds D) Large-company stocks E) Intermediate-term government bonds

A) U.S. Treasury bills

All else constant, a bond will sell at ________ when the coupon rate is ________ the yield to maturity. A) a discount; less than B) a premium; equal to C) a premium; less than D) par; less than E) a discount; higher than

A) a discount; less than

Bonds issued by the U.S. government: A) are considered to be free of default risk. B) are called "munis." C) are considered to be free of interest rate risk. D) pay interest that is exempt from federal income taxes. E) generally have higher coupons than comparable bonds issued by a corporation.

A) are considered to be free of default risk.

Bayside Marina just announced it is decreasing its annual dividend from $1.48 per share to $1.45 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price: A) decreased proportionately with the dividend decrease. B) decreased by $.03 per share. C) increased by $.03 per share. D) increased proportionately with the dividend decrease. E) was unaffected by the announcement.

A) decreased proportionately with the dividend decrease

The question is in the image on the other side.

A) g1 can be greater than R

The current yield is defined as the annual interest on a bond divided by the: A) market price. B) face value. C) coupon rate. D) par value. E) call price.

A) market price.

Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock. The firm has 1,000 shares of stock outstanding. The company: A) must still declare each dividend before it becomes an actual company liability. B) is obligated to pay $2.40 per share each year in perpetuity. C) incurs a liability that must be paid at a later date should the company miss paying an annual dividend payment. D) will be declared in default if it does not pay at least $2.40 per share per year on a timely basis. E) must always show a current liability of $2,400 for dividends payable.

A) must still declare each dividend before it becomes an actual company liability.

The annual dividend yield is computed by dividing ________ annual dividend by the current stock price. A) next year's B) the past 5-year average C) last year's D) this year's E) the next 5-year average

A) next year's

Interest rates that include an inflation premium are referred to as: A) nominal rates. B) real rates. C) annual percentage rates. D) stripped rates. E) effective annual rates.

A) nominal rates.

The dividend growth model: A) requires the growth rate to be less than the required return. B) assumes dividends increase at a decreasing rate. C) cannot be used to value constant dividend stocks. D) can be used to value both dividend-paying and non-dividend-paying stocks. E) only values stocks at Time 0.

A) requires the growth rate to be less than the required return

The expected return on a stock given various states of the economy is equal to the: A) weighted average of the returns for each economic state. B) highest expected return given any economic state. C) summation of the individual expected rates of return. D) return for the economic state with the highest probability of occurrence E) arithmetic average of the returns for each economic state.

A) weighted average of the returns for each economic state.

The secondary market is best defined as the market: A) where outstanding shares of stock are resold. B) conducted solely by brokers. C) in which subordinated shares are issued and resold. D) where warrants are offered and sold. E) dominated by dealers

A) where outstanding shares of stock are resold.

The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting? A) 25 percent plus one vote B) 50 percent plus one vote C) 20 percent plus one vote D) 17 percent E) 51 percent

B) 50 percent plus one vote

A decrease in which of the following will increase the current value of a stock according to the dividend growth model? A) Number of future dividends, provided the total number of dividends is less than infinite B) Discount rate C) Dividend growth rate D) Dividend amount E) Both the discount rate and the dividend growth rate

B) Discount rate

Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued? A) Price at which a bondholder can resell a bond to another bondholder B) List of collateral used as bond security C) Written record of all the current bond holders D) Current yield E) Current market price

B) List of collateral used as bond security

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur? A) Long-term; high coupon B) Long-term; zero coupon C) Short-term; low coupon D) Short-term; high coupon E) Long-term; low coupon

B) Long-term; zero coupon

Which one of the following is an example of unsystematic risk? A) Adoption of a national sales tax B) National decrease in consumer spending on entertainment C) An across the board increase in income taxes D) Decrease in the national level of inflation E) An increased feeling of global prosperity

B) National decrease in consumer spending on entertainment

Which one of the following is defined by its mean and its standard deviation? A) Arithmetic nominal return B) Normal distribution C) Variance D) Geometric real return E) Risk premium

B) Normal distribution

Ernst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets? A) Secondary B) Primary C) Auction D) Private E) Tertiary

B) Primary

Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following is the most likely outcome of this situation given that some shareholders are happy with the existing management? A) Protracted legal battle over control of the board of directors B) Proxy fight for control of the board C) Negotiated settlement where each side is granted control over one of the open seats D) Arbitrated settlement where the arbitrator determines who will be elected to the board E) Control of the board decided without your influence

B) Proxy fight for control of the board

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond? A) Nominal rate B) Real rate C) Current rate D) Realized rate E) Risk-free rate

B) Real rate

Which one of the following is least apt to reduce the unsystematic risk of a portfolio? A) Adding international securities into a portfolio of U.S. stocks B) Reducing the number of stocks held in a portfolio C) Adding technology stocks to a portfolio of industrial stocks D) Adding bonds to a stock portfolio E) Adding U.S. Treasury bills to a risky portfolio

B) Reducing the number of stocks held in a portfolio

You want to be on the board of directors of Uptown Communications. Since you are the only shareholder who will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What is the type of voting called that requires this level of stock ownership to be successfully elected? A) Democratic B) Straight C) Proxy D) Cumulative E) Deferred

B) Straight

Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct? A) The bonds will become discount bonds if the market rate of interest declines. B) The bonds will sell at a premium if the market rate is 5.5 percent. C) The final payment will be in the amount of $1,060. D) The bonds will pay 10 interest payments of $60 each. E) The bonds will initially sell for $1,030 each.

B) The bonds will sell at a premium if the market rate is 5.5 percent.

Which one of the following statements is correct? A) Any return greater than the inflation rate represents the risk premium. B) The real rate must be less than the nominal rate given a positive rate of inflation. C) Nominal rates exceed real rates by the amount of the risk-free rate. D) The risk-free rate represents the change in purchasing power. E) Historical real rates of return must be positive.

B) The real rate must be less than the nominal rat given a positive rate of inflation.

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today? A) One months' interest B) Two months' interest C) Four months' interest D) Five months' interest E) No difference

B) Two months' interest

Standard deviation is a measure of which one of the following? A) Real returns B) Volatility C) Risk premium D) Probability E) Average rate of return

B) Volatility

You own a bond that pays an annual coupon of 6 percent that matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent? A) The current yield is 6 percent. B) You will realize a capital gain on the bond if you sell it today. C) The current yield to maturity is greater than 6 percent. D) The next interest payment will be $30. E) The bond is currently valued at one-half of its issue price.

B) You will realize a capital gain on the bond if you sell it today.

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds? A) Debenture B) Zero coupon C) Floating-rate D) Callable E) Junk

B) Zero coupon

NYSE designated market makers: A) are guaranteed a profit on every stock purchased and resold. B) act as dealers. C) provide a one-sided market. D) execute trades on behalf of their clients. E) are also referred to as "$2 brokers."

B) act as dealers.

A bond that is payable to whomever has physical possession of the bond is said to be in: A) new-issue condition B) bearer form C) collateral status D) registered form E) debenture status

B) bearer form

The interest rate risk premium is the: A) difference between the market interest rate and the coupon rate. B) compensation investors demand for accepting interest rate risk. C) additional compensation paid to investors to offset rising prices. D) difference between the yield to maturity and the current yield. E) difference between the coupon rate and the current yield.

B) compensation investors demand for accepting interest rate risk

An agent who maintains an inventory from which he or she buys and sells securities is called a: A) broker. B) dealer. C) principal. D) trader. E) capitalist

B) dealer.

The primary purpose of portfolio diversification is to: A) increase returns and risks. B) eliminate asset-specific risk. C) lower both returns and risks. D) eliminate all risks. E) eliminate systematic risk.

B) eliminate asset-specific risk.

A newly issued bond has a coupon rate of 7 percent and semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be: A) 3.5 percent. B) greater than 7 percent. C) 7 percent. D) greater than 3.5 percent but less than 7 percent. E) less than 3.5 percent

B) greater than 7 percent.

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will: A) pay an increasing dividend for a period of time and then cease paying dividends altogether. B) grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely. C) pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year. D) pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time. E) increase the dividend amount every other year

B) grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the: A) number of shares owned of each stock. B) market value of the investment in each stock. C) cost per share of each stock held. D) market price per share of each stock. E) original amount invested in each stock.

B) market value of the investment in each stock.

The excess return is computed as the: A) risk premium on a risky security minus the risk-free rate. B) return on a risky security minus the risk-free rate. C) return on a security minus the inflation rate. D) risk-free rate minus the inflation rate. E) risk-free rate plus the inflation rate.

B) return on a risky security minus the risk-free rate.

The expected risk premium on a stock is equal to the expected return on the stock minus the: A) inflation rate. B) risk-free rate. C) expected market rate of return D) variance. E) standard deviation

B) risk-free rate

Total risk is measured by -------- and systematic risk is measure by --------. A) beta; alpha B) standard deviation; beta C) alpha; beta D) beta; standard deviation E) standard deviation; variance

B) standard deviation; beta

If you sell a bond with a coupon of 6 percent to a dealer when the market rate is 7 percent, which one of the following prices will you receive? A) Bid-ask spread B) Par value C) Bid price D) Call price E) Asked price

C) Bid price

Which of the following statements are true based on the historical record for 1926-2016? A) Risk-free securities produce a positive real rate of return each year. B) Returns are more predictable over the short term than they are over the long term. C) Bonds are generally a safer, or less risky, investment than are stocks. D) The normal distribution curve for large-company stocks is narrower than the curve for small-company stocks. E) Risk and potential reward are inversely related.

C) Bonds are generally a safer, or less risky, investment than are stocks.

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? A) Electing the board of directors B) Voting either for or against a proposed merger or acquisition C) Determining the amount of the dividend to be paid per share D) Having first chance to purchase any new equity shares that may be offered E) Receiving a distribution of company profits

C) Determining the amount of the dividend to be paid per share

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today? A) Clean price B) Bid price C) Dirty price D) Quoted price E) Asked price

C) Dirty price

Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model? A) $1 per share annual dividend for two years, then $1.25 annual dividends forever B) Decreasing dividends for six years followed by one final liquidating dividend payment C) Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter D) Dividends payments that increase by 2, 3, and 4 percent respectively for three years followed by a constant dividend thereafter E) No dividends for five years, then increasing dividends forever

C) Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

Which on of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? A) Taxability risk B) Default risk C) Interest rate risk D) Liquidity risk E) Real rate risk

C) Interest rate risk

Which one of the following correctly describes the dividend yield? A) Next year's annual dividend divided by this year's annual dividend B) The increase in next year's dividend over this year's dividend divided by this year's dividend C) Next year's annual dividend divided by today's stock price D) This year's annual dividend divided by next year's expected stock price E) This year's annual dividend divided by today's stock price

C) Next year's annual dividend divided by today's stock price

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market? A) Auction B) Insider C) Over-the-counter D) Regional E) Private

C) Over-the-counter

Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. Which one of the following terms refers to the difference between these two rates of return? A) Geometric average return B) Arithmetic average return C) Risk premium D) Variance E) Standard deviation

C) Risk premium

Which one of the following categories of securities had the most volatile annual returns over the period 1926-2016? A) Large-company stocks B) Intermediate-term government bonds C) Small-company stocks D) U.S. Treasury bills E) Long-term corporate bonds

C) Small-company stocks

Which one of the following earned the highest risk premium over the period 1926-2016? A) Long-term government bonds B) U.S. Treasury bills C) Small-company stocks D) Long-term corporate bonds E) Large-company stocks

C) Small-company stocks

Which one of the following is a risk that applies to most securities? A) Unsystematic B) Diversifiable C) Systematic D) Industry E) Asset-specific

C) Systematic

A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today? A) The face value of the bond today is greater than it was when the bond was issued. B) The bond is worth less today than when it was issued. C) The yield to maturity is less than the coupon rate. D) The yield to maturity equals the current yield. E) The coupon rate is less than the current yield.

C) The yield to maturity is less than the coupon rate.

The rate of return on which type of security is normally used as the risk-free rate of return? A) Long-term Treasury bonds B) Intermediate-term corporate bonds C) Treasury bills D) Long-term corporate bonds E) Intermediate-term Treasury bonds

C) Treasury bills

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? A) Indenture voting B) Alternative voting C) Voting by proxy D) Cumulative voting E) Straight voting

C) Voting by proxy

An example of a negative covenant that might be found in a bond indenture is a statement that the company: A) must maintain the loan collateral in good working order B) shall provide audited financial statements in a timely manner. C) cannot lease any major assets without bondholder approval. D) shall maintain a current ratio of 1.1 or higher. E) shall maintain a cash surplus of $100,000 at all times

C) cannot lease any major assets without bondholder approval.

A bond is quoted at a price of $1,011. This price is referred to as the: A) maturity price. B) call price. C) clean price. D) face value. E) dirty price.

C) clean price.

Rosita paid a total of $1,189, including accrued interest, to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the: A) spread price B) clean price C) dirty price D) quoted price E) call price

C) dirty price

A discount bond's coupon rate is equal to the annual interest divided by the: A) clean price. B) call price. C) face value. D) dirty price. E) current price.

C) face value.

Supernormal growth is a growth rate that: A) applies to a single, abnormal year. B) is generally constant for an infinite period of time. C) is unsustainable over the long term. D) exceeds a firm's previous year's rate of growth. E) is both positive and follows a year or more of negative growth.

C) is unsustainable over the long term.

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the: A) coupon payment will increase. B) current yield will decrease. C) market price of the bond will decrease. D) yield to maturity will be less than the coupon rate. E) coupon rate will also increase.

C) market price of the bond will decrease.

The owner of a trading license for the NYSE is called a: A) agent. B) specialist. C) member. D) dealer. E) broker.

C) member.

For the period 1926-2016, U.S. Treasury bills always: A) provided an annual rate of return that exceeded the annual inflation rate. B) had an annual rate of return in excess of 1.2 percent. C) provided a positive annual rate of return. D) had a greater variation in returns year-over-year than did long term government bonds. E) earned a higher annual rate of return than long-term government bonds.

C) provided a positive annual rate of return.

The bond market requires a return of 9.8% percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the: A) current yield B) coupon rate C) yield to maturity D) call rate E) face rate

C) yield to maturity

You own one share of a cumulative preferred stock that pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ________ quarter(s) of dividends when the next dividend is paid. A) 0 B) 1 C) 2 D) 3 E) either 1, 2, or 3

D) 3

Which one of the following indicates a portfolio is being effectively diversified? A) A decrease in the portfolio beta B) An increase in the portfolio rate of return C) An increase in the portfolio beta D) A decrease in the portfolio standard deviation E) An increase in the portfolio standard deviation

D) A decrease in the portfolio standard deviation

Which one of the following statements is correct concerning a portfolio beta? A) The beta of a market portfolio is equal to zero. B) Portfolio betas range between −1.0 and +1.0. C) A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification. D) A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio. E) A portfolio of U.S. Treasury bills will have a beta of +1.0.

D) A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.

Which one of the following transactions occurs in the primary market? A) IBM's purchase of GE stock from a dealer B) Gift of 200 shares of stock by a mother to her daughter C) Gift of 100 outstanding shares to a charitable organization D) A purchase of newly issued stock from the issuer E) Purchase of 500 shares of GE stock from a current shareholder

D) A purchase of newly issued stock from the issuer

Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called? A) Discount B) Yield C) Dirty price D) Face value E) Coupon

D) Face Value

Generally speaking, which of the following best correspond to a wide frequency distribution? A) Low rate of return, large risk premium B) Small risk premium, high rate of return C) Small risk premium, low standard deviation D) High standard deviation, large risk premium E) High standard deviation, low rate of return

D) High standard deviation, large risk premium

Which of the following statements concerning risk are correct? I. Non-diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non-diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid. A) I, II, and III only B) II and IV only C) I and II only D) I and III only E) III and IV only

D) I and III only

At a minimum, which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset? I. Asset's standard deviation II. Asset's beta III. Risk-free rate of return IV. Market risk premium A) III and IV only B) I, III, and IV only C) I, II, III, and IV D) II and IV only E) I and III only

D) II and IV only

Real rates are defined as nominal rates that have been adjusted for which of the following? A) Interest rate risk B) Accrued interest C) Default risk D) Inflation E) Both inflation and interest rate risk

D) Inflation

Which one of the following is an example of systematic risk? A) A toymaker has to recall its top-selling toy B) A flood washes away a firm's warehouse C) A city imposes an additional one percent sales tax on all products D) Investors panic causing security prices around the globe to fall precipitously E) Corn prices increase due to increased demand for alternative fuels

D) Investors panic causing security around the globe to fall precipitously

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following? A) Index value B) Degree of risk C) Portfolio return D) Portfolio weight E) Price-earnings ratio

D) Portfolio weight

Hardy Lumber has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders? A) Right to elect the corporate directors B) Right to vote on proposed mergers C) Right to a permanent seat on the board of directors D) Right to share in company profits prior to other shareholders E) Right to all residual income after the common dividends have been paid

D) Right to share in company profits prior to other shareholders

Winston Co. has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true? A) The required rate of return for this stock increased over the year. B) The firm is experiencing supernormal growth. C) The dividend must be constant. D) The stock has a negative capital gains yield. E) The capital gains yield must be zero.

D) The stock has a negative capital gains yield.

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2016? A) Long-term corporate bonds B) Long-term government bonds C) Large-company stocks D) U.S. Treasury bills E) Small-company stocks

D) U.S. Treasury bills

A news flash just appeared that caused about a dozen stocks to suddenly increase in value by 12 percent. What type of risk does this news flash best represent? A) Market B) Expected C) Portfolio D) Unsystematic E) Non-diversifiable

D) Unsystematic

Which one of the following risks is irrelevant to a well-diversified investor? A) Systematic risk B) Systematic portion of a surprise C) Market risk D) Unsystematic risk E) Non-diversifiable risk

D) Unsystematic risk

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect: A) dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value. B) an increase in all stock values. C) all stock values to remain constant. D) a decrease in all stock values. E) dividend-paying stocks to increase in price while non-dividend paying stocks remain constant in value.

D) a decrease in all stock values

Systematic risk is measured by: A) the standard deviation. B) the mean. C) the geometric average. D) beta. E) the arithmetic average.

D) beta.

The price sensitivity of a bond increases in response to a change in the market rate of interest at the: A) coupon rate increases B) time to maturity and coupon rate both decrease C) time to maturity decreases D) coupon rate decreases and the time to maturity increases E) coupon rate and time to maturity both increase

D) coupon rate decreases and the time to maturity increases

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n): A) designated market maker. B) dealer. C) supplemental liquidity provider. D) floor broker. E) specialist.

D) floor broker.

To convince investors to accept greater volatility, you must: A) decrease the risk-free rate B) decrease the risk premium C) decrease the real return D) increase the risk premium E) increase the risk-free rate

D) increase the risk premium

The Fisher effect primarily emphasizes the effects of ________ on an investor's rate of return. A) default B) market movements C) interest rate changes D) inflation E) the time to maturity

D) inflation

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings? A) Dual class B) Preferred C) Non-cumulative D) Cumulative E) Common

E) Common

Which one of the following best describes NASDAQ? A) Market where dealers buy at the asked price B) Largest U.S. stock market in terms of dollar trading volume C) Market where the designated market makers are located at posts D) Market with three physical trading floors E) Computer network of securities dealers

E) Computer network of securities dealers

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment? A) Call premium B) Discount C) Face value D) Yield E) Coupon

E) Coupon

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected? A) Taxability B) Interest rate risk C) Liquidity D) Inflation E) Default risk

E) Default risk

A floor broker on the NYSE does which one of the following? A) Trades for his or her own personal inventory B) Maintains an inventory and assumes the role of a market maker C) Supervises the commission brokers of a specific financial firm D) Is charged with maintaining a liquid, orderly market E) Executes orders on behalf of customers

E) Executes orders on behalf of customers

Which one of the following is most directly affected by the level of systematic risk in a security? A) Variance of the returns B) Market risk premium C) Standard deviation of the returns D) Risk-free rate E) Expected rate of return

E) Expected rate of return

Which of the following are examples of diversifiable risk? I. An earthquake damages an entire town II. The federal government imposes $100 fee on all business entities III. Employment taxes increase nationally IV. All toymakers are required to improve their safety standards A) I, III, and IV only B) II and III only C) I and III only D) II and IV only E) I and IV only

E) I and IV only

The expected return on a portfolio considers which of the following factors? I. Percentage of the portfolio invested in each individual security II. Projected states of the economy III. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy A) I and III only B) II, III, and IV only C) I, III, and IV only D) II and IV only E) I, II, III, and IV

E) I, II, III, and IV

The historical record for the period 1926- 2016 supports which one of the following statements? A) The return on U.S. Treasury bills exceeds the inflation rate by at least .5 percent each year. B) The inflation rate was positive each year throughout the period. C) When large-company stocks have a negative return, they will have a negative return for at least two consecutive years. D) There was only one year during the period when double-digit inflation occurred. E) Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year.

E) Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year.

Stacy purchased a stock last year and sold it today for $4 a share more than her purchase price. She received a total of $1.15 per share in dividends. Which one of the following statements is correct in relation to this investment? A) The total dollar return per share is $2.85. B) The dividend yield is greater than the capital gains yield. C) The capital gain would have been less had Stacy not received the dividends. D) The dividend yield is expressed as a percentage of the par value. E) The capital gains yield is positive.

E) The capital gains yield is positive.

Which one of these equations applies to a bond that currently has a market price that exceeds par value? A) Current yield > Coupon rate B) Yield to maturity = Current yield C) Market value = Face value D) Market value < Face value E) Yield to maturity < Coupon rate

E) Yield to maturity < Coupon rate

The systematic risk of the market is measured by a: A) beta of 0. B) standard deviation of 1. C) standard deviation of 0. D) variance of 1. E) beta of 1.

E) beta of 1.

An agent who arranges a transaction between a buyer and a seller of equity securities is called a: A) floor trader. B) dealer. C) principal. D) capitalist. E) broker

E) broker

Unsystematic risk: A) is related to the overall economy. B) is compensated for by the risk premium. C) is measured by standard deviation D) is measured by beta E) can be effectively eliminated by portfolio diversification

E) can be effectively eliminated by portfolio diversification

A member who acts as a dealer in a limited number of securities on the floor of the NYSE is called a: A) floor broker. B) floor trader. C) commission broker. D) floor post. E) designated market maker.

E) designated market maker.

The question is on the image on the other side.

E) g

A bond's principal is repaid on the ________ date. A) yield B) coupon C) dirty D) clean E) maturity

E) maturity

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is: A) basically worthless as it offers no growth potential. B) equal in value to the present value of $1 paid one year from today C) valued at an assumed growth rate of 1 percent D) worth $1 a share in the current market E) priced the same as a $1 perpetuity

E) priced the same as a $1 perpetuity

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the: A) call price. B) equilibrium. C) discount. D) premium. E) spread.

E) spread.

The principle of diversification tells us that: A) concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk. B) spreading an investment across five diverse companies will not lower the total risk. C) spreading an investment across many diverse assets will eliminate all of the systematic risk. D) concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. E) spreading an investment across many diverse assets will eliminate some of the total risk.

E) spreading an investment across many diverse assets will eliminate some of the total risk.