Investments Midterm

The minimum holding period to qualify for the long-term capital gains treatment is:

12 months.

What is the risk-free rate in an environment where the real rate is 3% and inflation is running at 3%? Use either method found in chapter one.

6.09% or just 6%

Which of the following is not a goal of the federal government economic policy as established by the Employment Act of 1946?

Balanced federal budgets

In the comparative international arena of real GDP growth rates, which country has had the highest growth in real GDP over the years 1993 to 2005?

China

According to insider trading rules of the SEC, securities analysts and financial writers may not trade on insider information, but these rules do not extend to relatives and friends.

False

An increase in reserve requirements by the Federal Reserve would decrease the money supply.

False

Diamonds represent a form of real assets, but cattle do not.

False

Good till canceled (GTC) orders expire automatically after a set period of time.

False

Money market funds are usually load funds.

False

A(n) _____ is a legally documented claim on an asset, while a(n) _____ is an actual, tangible asset which may be seen, felt, held, or collected.

Financial asset; real asset

Which of the following is NOT a characteristic of an organized exchange?

It functions as a primary market

An important consideration with an open-end fund is whether it is a load fund or a no-load fund.

True

Beta measures a security's return relative to the market.

True

In general, young, rapidly expanding firms are more likely to carry higher P/E ratios than mature firms.

True

In the last few years (since 2006), the trade deficit has increased dramatically.

True

Load funds, which charge a commission, generally perform no better than no-load funds.

True

Margin percentages are set by the Board of Governors of the Federal Reserve System.

True

Morningstar Mutual Fund Survey is considered one of the leading authorities on mutual fund performance.

True

Shares of a closed-end fund trade on an exchange, just like stocks.

True

The Federal Reserve Board of Governors controls money supply and interest rates through its monetary policy.

True

The age and economic circumstances of an investor are important variables in determining an appropriate level of risk.

True

The first step in using the income-statement method of estimating earnings per share (EPS) is to develop an accurate sales forecast.

True

The intent of dollar-cost averaging is to avoid buying high and selling low.

True

The method that starts the stock valuation process with an economic analysis is called the top-down approach.

True

There is concern by the SEC and Congress that dark pools create a two-tier market.

True

When investment bankers underwrite a security, they usually guarantee purchase of the securities at a fixed price for the selling firm.

True

An example of an equal-weighted index or average is the:

Value Line Average.

The first step in any stock valuation is: a. Economic analysis. b. An accurate stock market prediction. c. Financial analysis. d. Industry analysis.

a. Economic analysis.

The Gramm-Leach-Bliley Act was passed in 1999 by the U.S. Congress to allow: a. Financial institutions to offer full financial services, such as insurance and investment banking, as well as traditional commercial banking. b. Financial institutions to be sued by stockholders for off-balance sheet accounting errors. c. Savings and loans to compete with commercial banks in both the commercial banking arena and mortgage loans. d. European banks to acquire U.S. financial institutions.

a. Financial institutions to offer full financial services, such as insurance and investment banking, as well as traditional commercial banking.

Net asset value a. Is the value of the securities minus the liabilities, divided by the number of shares outstanding. b. Is the price at which the shares of a closed-end fund trade. c. Is the value of the fund's year's earnings, divided by the total amount invested in the fund. d. A and B

a. Is the value of the securities minus the liabilities, divided by the number of shares outstanding.

A __________ order sets the price at which an investor is willing to buy or sell and assures the investor that he/she will pay no more or receive no less than the agreed-upon price. a. Limit b. Stop c. Good 'til canceled d. Market

a. Limit

Some of the major leading indicators would be: a. Money supply (M2), consumer expectations, and stock prices (S&P 500). b. Personal income, employees on nonagricultural payrolls, and industrial production. c. Average prime rate charged by banks, labor cost per unit of output, and commercial and industrial loans outstanding. d. All of the above are leading indicators

a. Money supply (M2), consumer expectations, and stock prices (S&P 500).

Which of the following best describes the function of an investment banker selling an issue on a "best efforts" basis? a. Return unsold securities to the firm b. Guarantee a continuous liquid market c. Private placements to financial institutions d. More than one of the above

a. Return unsold securities to the firm

The exchange with the largest dollar volume in major companies and which has the most restrictive listing requirements is: a. The New York Stock Exchange. b. The American Exchange. c. The NASDAQ Stock Market. d. The Securities Exchange.

a. The New York Stock Exchange.

A closed-end fund might trade at a premium due to: a. The quality of fund management. b. An upcoming dividend payable to the portfolio. c. An impending stock split in the portfolio. d. A closed-end fund would never trade at a premium.

a. The quality of fund management.

A limit order can ensure that you will not pay above a given price in purchasing a stock or sell below a given price in selling a stock. a. True b. False

a. True

A shelf registration enables an investment banker to sell a small portion of an issue without forming a syndicate. a. True b. False

a. True

All dividend valuation models are based on the present value of a future income stream. a. True b. False

a. True

All things being equal, the more rapid growth a firm enjoys, the higher the P/E ratio. a. True b. False

a. True

An investor in a mutual fund can incur capital gains even if no shares are sold. a. True b. False

a. True

Bond mutual funds can be divided into corporate, government, and municipal funds. a. True b. False

a. True

Dividend valuation models are best suited for firms in the expansion or maturity phase of their life cycle. a. True b. False

a. True

Every investment requires a total return comprised of a real rate of return, compensation for inflationary expectations, and a risk premium. a. True b. False

a. True

Industry life cycles measure the growth path of an industry through five stages. a. True b. False

a. True

Mathematically, the price-earnings ratio (P/E) is simply the price per share divided by earnings per share. a. True b. False

a. True

One characteristic of efficient markets is that prices adjust rapidly to new information. a. True b. False

a. True

Specialists buy and sell for their own account. a. True b. False

a. True

Tax rates that apply to income within a given tax bracket are referred to as marginal tax rates. a. True b. False

a. True

The Gramm-Leach-Bliley Act essentially repealed many of the prohibitions of the Glass-Steagall Act, which restricted commercial banks from also being in the investment banking business. a. True b. False

a. True

The Ibbotson study showed that high-risk investments generate high returns. a. True b. False

a. True

The Value Line Average contains stocks from several exchanges or markets. a. True b. False

a. True

The combined earnings and dividend model considers the present value of dividends, plus the present value of a future P/E ratio times future projected earnings. a. True b. False

a. True

The riskiness of an investment is measured by the dispersion of possible outcomes. a. True b. False

a. True

Trading through an online broker is generally cheaper than trading through a discount broker. a. True b. False

a. True

Under a non-constant growth model, the growth rate (g) is varied from time period to time period. a. True b. False

a. True

The reason price-earnings ratios and inflation are related is because:

as inflation increases, the required return in the market rises, pushing down the prices of securities.

Some of the major lagging indicators would be:

average prime rate charged by banks, labor cost per unit of output, and commercial and industrial loans outstanding.

What is the value of a stock which has a current dividend (D0) of $1.50, and is growing at the rate of 7%? The investor's required rate of return is 12%. a. $26.75 b. $30.00 c. $32.10 d. $21.42

b. $32.10

The value of common stock can be viewed as: a. A dividend stream, plus a market price at the end of the dividend stream. b. A present value of a dividend stream, plus a market price at the end of the dividend stream. c. The terminal value of the dividend stream. d. The sum of the dividend stream, taken to infinity.

b. A present value of a dividend stream, plus a market price at the end of the dividend stream.

___________ has two major functions: to handle special orders, such as purchases with a price contingency, and to maintain continuous, liquid, orderly markets. a. A registered trader b. A specialist c. An odd-lot dealer d. A commission broker

b. A specialist

Investment company shares that trade on stock exchanges just like common stock and are essentially funds that mimic some index are: a. Open-end mutual funds. b. Exchange-traded funds. c. Money market funds. d. Load funds traded on stock exchanges.

b. Exchange-traded funds.

As inflation increases, the required rate of return on common stocks falls, as well as the prices. a. True b. False

b. False

Assets must be currently producing income in order to give a company value. a. True b. False

b. False

Good performance by a mutual fund in the past is highly indicative of good performance in the future. a. True b. False

b. False

Long-term capital gains are taxed as ordinary income. a. True b. False

b. False

Mutual funds are a form of direct equity claims. a. True b. False

b. False

Purchasing securities in open-market operations by the Federal Reserve has the same effect as increasing reserve requirements. a. True b. False

b. False

The composite index of leading indicators has shown little variation in its ability to predict. a. True b. False

b. False

The prospectus is designed to provide a broad overview of the mutual fund, but is not required to disclose its investment focus or the investment style that it represents. a. True b. False

b. False

When an investment bank sells securities on a best efforts basis, it assumes all risk of the offering. a. True b. False

b. False

Growth rates are highest in which of the industry life cycle stages? a. Expansion b. Growth c. Development d. Maturity

b. Growth

The Nikkei average relates to stock movements in what market? a. Korea b. Japan c. Austria d. Australia

b. Japan

According to the traditional definitions, a recession is two or more quarters of: a. Negative nominal Gross Domestic Product (GDP) growth. b. Negative real GDP growth. c. A rate of inflation which exceeds real GDP growth. d. Declining growth in real past GDP.

b. Negative real GDP growth.

The following are all value-weighted indexes, except: a. The S&P 500. b. The Dow Jones Industrial Average. c. Midcap 400. d. The S&P Industrials (400 stocks).

b. The Dow Jones Industrial Average.

Characteristics of mutual funds with a goal of investing in growth companies include everything except: a. Different investors can pool their money. b. The money is invested in stable companies, with an objective of strong dividend income. c. Funds not included in the mutual fund are placed in short-term T-bills to earn interest. d. The money is invested in stable companies' common stock.

b. The money is invested in stable companies, with an objective of strong dividend income.

Online brokers have become popular because: a. They offer discounts on stock research reports. b. Their commissions are lower than full-service or discount brokers. c. They specialize in the stock of low priced securities. d. Only online brokers can service self-directed individual retirement accounts.

b. Their commissions are lower than full-service or discount brokers.

Wealthy investors may prefer the favorable tax treatment of investments such as: a. corporate bonds. b. municipal bonds. c. common stock. d. preferred stock.

b. municipal bonds.

The most widely used tool of the Federal Reserve is:

buying and selling securities for its own portfolio.

What would be the rate of return for a stock that increased in value from $60 per share to $63 per share and paid a $3 dividend? a. 12% b. 11% c. 10% d. 1.5%

c. 10%

A back-end load fund has: a. No charge upon purchase, but a fixed charge upon sale. b. A smaller charge on purchase, and another small charge again on sale. c. No charge upon purchase, and a declining charge, based on time owned, on sale. d. Two of the above

c. No charge upon purchase, and a declining charge, based on time owned, on sale.

The crossover point on the life cycle curve is the point where: a. The company issues stock in an initial public offering (IPO). b. The company gets listed on an organized exchange. c. The company's industry moves from the growth stage to the expansion stage. d. The industry's products begin to be accepted by the marketplace.

c. The company's industry moves from the growth stage to the expansion stage.

An investor will purchase shares of companies in the development stage for:

capital gains only.

A ____________ requires full payment for the purchase of securities, while a _____________ allows the investor to borrow a portion of the purchase price from the brokerage firm.

cash account; margin account

Reliable sources of information about mutual funds include all of the following, except:

correct answer: All are good sources Forbes.Lipper.Morningstar.

The basis of stock valuation includes an analysis of: a. Economic variables. b. Industry variables. c. Financial statements. d. All of the other answers

d. All of the other answers

Which of the following is true of OTC markets? a. Trading takes place by telephone or electronic network b. It is regulated by the SEC and the National Association of Securities Dealers c. Government securities of the US Treasury provide the largest dollar volume. d. All of the other answers are true

d. All of the other answers are true

In general, markets are efficient when: a. Prices respond quickly to new information. b. Each successive trade is made at a price close to the preceding price. c. They can absorb large amounts of securities or assets without changing the price significantly. d. All other answers are correct

d. All other answers are correct

The first exchange to become a publicly traded company was the: a. New York Stock Exchange. b. NASDAQ Stock Market. c. American Stock Exchange. d. Chicago Mercantile Exchange.

d. Chicago Mercantile Exchange.

A rotational investor will rotate through stocks that perform well in different stages of the economy in which order (from trough to peak)? a. Basic materials; consumer cyclical; consumer non-cyclical; household durable goods b. Consumer cyclical; basic materials; consumer non-cyclical; household durable goods c. Basic materials; household durable goods; consumer cyclical; consumer non-cyclical d. Household durable goods; consumer cyclical; consumer non-cyclical; basic materials

d. Household durable goods; consumer cyclical; consumer non-cyclical; basic materials

A stop order is similar to a limit order, except that once the set price is reached, the stop order: a. Is executed after all limit orders at the same price. b. Becomes a limit order. c. Goes to the end of the execution cue. d. Immediately becomes a market order.

d. Immediately becomes a market order.

The _______________ has/have the most restrictive listing requirements. a. Regional exchanges b. ECNs c. NASDAQ Stock market d. New York Stock Exchange

d. New York Stock Exchange

The growth fund category of funds would include: Answers: equity growth funds and aggressive growth. dividend paying equities with growing dividends. convertible securities that are convertible into growth stocks. funds that specialize in a high growth industry, such as technology.

equity growth funds and aggressive growth.

The general dividend valuation model assumes the investor knows the _______ and the discount rate.

exact dividend to be paid in each and every year

Federal income tax on investment income and capital gains of a mutual fund:

is not required of the fund if it distributes at least 90% of its net investment income and capital gains.

Dual trading creates the following benefit:

it improves liquidity of a security.

The ability of the investor to convert an investment into cash in a short period of time is called:

liquidity.

A fund investing in T-bills, Eurodollar deposits, commercial paper, and repurchase agreements is probably a:

money market fund.

From the investment banker's point of view, the major reason syndicates are formed in the distribution of large issues is for the purpose of:

reducing the underwriter's risk.

Creating prices for securities and allowing for liquidity are functions of:

the secondary market.

Because most investors are risk averse,

they will require a higher rate of return for a riskier investment.