FINA 3317 EXAM 2

A stock has a spot price of $55. Its May options are about to expire. One of its puts is worth $5 and one of its calls is worth $10. The exercise price of the put must be ______________ and the exercise price of the call must be ________________. $50; $45 $55; $55 $60; $45 $60; $50

$60; $45

he age group that held the least stock from 2009 through 2017 was the ____________ group. 18-29 30-49 50-64 65 and older

18-29

If interest rate parity holds and the annual German nominal interest rate is 3 percent and the U.S. annual nominal rate is 5 percent, and real interest rates are 2 percent in both countries, then inflation in Germany is about _______________ than in the United States. 1% higher 2% higher 1% lower 2% lower

2% lower

Hedge funds charge expense fees and performance fees. The average performance fee on hedge funds is ____________. 10% 15% 20% 25%

20%

The most commonly quoted index is the Dow Jones Industrial Average (DJIA), an index based on the performance of the stocks of ________ large companies. 25 30 35 40

30

Which of the following is not an objective of the Securities and Exchange Commission? Maintain integrity of the securities markets Advise investors about which particular stocks are good buys Require firms to provide specific information to investors Regulate major participants in securities markets

Advise investors about which particular stocks are good buys is an objective of investment companies.

Which of the following are likely to lead to an appreciation of the U.S. dollar (all else held constant)? Higher real U.S. interest rates Lower U.S. inflation Lower nominal U.S. interest rates All of the above

All of the above

In recent years defined contribution plans have grown faster than defined benefit plans in which of the following areas? Fund assets Number of funds Number of plan participants All of the above

All of the above defined benefit plans are gradually replaced by defined contribution plans in all areas. Some of the major reasons are changes in pension law and tax law, changes in accounting procedures, employers trying to curtails the escalating pension costs of defined benefit plans, the tax-deferred benefit of 401(k). In short, the risk of uncertainty in return has been transferred from all on the employer (defined benefit) to all on the employee (defined contribution).

Which of the following describes a seasoned offering? An IPO of common stock for a well-known firm. An IPO that is offered during the best buying season. An additional equity issue from a publicly traded firm. Any shares traded in the secondary market are seasoned offerings.

An additional equity issue from a publicly traded firm.

Which one of the following statements concerning annuities offered by insurers is not true? Annuity payments may be fixed or variable. Annuity contributions are not capped by the IRS. Annuities can be deferred or immediate. Annuity payments must cease upon the policyholder's death.

Annuity payments must cease upon the policyholder's death. annuity payments could continue for the designated beneficiaries. (a) is true because variable annuity works similar to a mutual fund (variable policy) where the return varies. (b) is true because there are limits on tax-deferred annuities but there are non-tax-advantaged annuities (the cap for 2022 was $20,500 for policyholders aged 50 or younger and $27,000 otherwise). (c) is true because annuities can be started immediately or deferred to be starting in the future.

Which of the following is correct? A share of common stock in a firm represents an ownership interest in that firm. A share of preferred stock is as much like a bond as it is like common stock. Both a and b. Neither a or b.

Both a and b.

In a bull market, which option position does not make money? Buying a call Buying a stock Buying a put Writing a put

Buying a put

Two competing fully electronic derivatives markets in the United States are: CME Globex and Eurex. Philadelphia Exchange and AMEX. NYSE and ABS. CME and Pacific Exchange.

CME Globex and Eurex.

The P&C loss ratio on an insurance line contains: I. payouts on claims. II. brokerage commissions incurred to market the claims. III. costs associated with settling claims. IV. dividend payouts to policyholders. I and II only I and III only II and IV only III and IV only

I and III only the property and casualty loss ratio include the payouts on claims and the costs associated with settling claims. (a) (c) and (d) are incorrect because marketing cost such as brokerage commission or dividend payout is not a part of loss calculation from claims (but expense ratio which includes costs associated with acquiring, underwriting, servicing premiums, and advertising, wages, brokerage commissions).

Rank the following in asset size from largest to smallest in 2019. I. Mutual funds II. Insurance companies III. Depository institutions I, II, III I, III, II II, III, I III, II, I

I, III, II its always mutual funds > depository institutions (banks) > insurance companies.

Which one of the following fund types is likely to have the lowest annual expense ratio? Index funds Equity funds Bond funds Hybrid funds

Index funds index funds mimics the broad market indices and considered passive investment. Passively managed funds or unmanaged funds have lower expense ratios than actively managed funds (actively managed funds find it difficult to consistently earn higher risk-adjusted returns than a broad stock market index). Note: Expense ratio does not include expenses related to trading activity - the buying and selling of portfolio securities, and they are called charges and fees such as loads, contingent deferred sales charges, redemption fees, brokerage commission, transaction fees. Expense ratio therefore include the operating costs associated with administration, portfolio management, marketing, etc., typically represented as a percentage annual cost.

What is the primary disadvantage of an ETF? ETFs tend to have lower management fees than comparable index mutual bonds. ETFs usually have no minimum investment amount. Investors have to pay a broker commission each time they buy or sell shares. They are listed and traded as individual stocks on a stock exchange.

Investors have to pay a broker commission each time they buy or sell shares. ETF has a lot of advantages such as low management fee, no investment requirement, actively traded to provide liquidity, but one disadvantage is the investment fee (calculated in-house and not shown on statement), however, there is an increasing number of new zero-fee ETFs.

Which of the following type(s) of life insurance policies do not have a savings feature? Term life Whole life Variable life Universal life

Term life term life insurance only protects against death within a window of time. (b) (c) and (d) are incorrect because they all have savings feature of whole life insurance which means the option to withdraw some cash value besides the death payoff. The differences are whole life policy is managed by the insurer, variable life policy is actively managed by the policyholder, and universal life policy has the flexibility of adjusting premiums (and coverage).

Common stocks typically have which of the following that bonds do not have? Voting rights Fixed cash flows Set maturity date Tax deductibility of cash flows to investors

Voting rights

You have agreed to deliver the underlying commodity on a futures contract in 90 days. Today the underlying commodity price rises and you get a margin call. You must have: a long position in a futures contract. a short position in a futures contract. sold a forward contract. purchased a forward contract.

a short position in a futures contract.

Investors pay load charges to receive: higher returns on their investments. additional services from funds. voting shares of stock. advice on which fund to buy.

advice on which fund to buy. load charges on actively managed (mutual) funds are for the professional consultancy and management services that are not available on passively managed funds (most index funds and even some smaller mutual funds do not charge loads, called no-load funds). (a) is incorrect because higher returns are never guaranteed. (b) is incorrect because load charges that compensate the intermediary that distributes shares, and the other fees for other services might be management fees, operating expenses, trading costs, performance fees, advisory fees. (c) is incorrect because voting power comes with ownership and not by fees.

The NYSE specialists are charged with: trading for their own account. ensuring public limit orders are executed. facilitating the processing of public market orders. all of the above

all of the above specialists also called floor broker and designated market maker (DMM).

NYSE listing has traditionally benefited a firm by: improving the stock's price. generating increased publicity for the firm. providing easier access to primary market capital. all of the above.

all of the above.

The preemptive right is designed to: allow management to diffuse stock ownership of any voting power. allow managers to preempt a stock offering if they do not like the terms of the deal. allow existing shareholders the right to sell their existing shares before the new offer. allow existing shareholders to buy shares of the new offering if they desire.

allow existing shareholders to buy shares of the new offering if they desire.

The largest asset category of life insurers is _______________ and the largest liability category is ___________. bonds; separate account items bonds; policy reserves policy reserves; mortgage loans common stock; dividend reserve

bonds; policy reserves on the assets side, insurance companies invest in financial securities but more bonds than stocks because they do not take too much risk, and on the liabilities side, their capital comes largely from policies. (a) is incorrect because separate account is not on the liabilities side, it is its own financial statement to report specific products. (c) is incorrect because insurance companies do not deal with mortgage loans. (d) is incorrect because dividend reserve is an item related to a company's equity.

The expected return on a common stock is composed of: dividend yield. capital appreciation. both dividend yield and capital appreciation. capital appreciation minus the dividend yield.

both dividend yield and capital appreciation.

At P&C insurers, if the combined ratio is less than 100%, the premiums charged were sufficient to cover: losses only. expenses only. both losses and expenses. losses, expenses, and investment returns on premiums.

both losses and expenses.

A U.S. firm has £50 million in assets in Britain that they need to repatriate in six months. They could hedge the exchange rate risk by: buying pounds forward. buying pounds spot. lending pounds. both selling pounds forward and borrowing pounds.

both selling pounds forward and borrowing pounds. they could either lock themselves into a pre-determined price of selling pound forward, or moving the timing of getting the pounds from six months later to today by borrowing pounds so that in six months, the principal plus interest will match their repatriation amount. (a) (b) are incorrect because they do not want or need more pounds. (c) is incorrect because they do not have pounds yet for lending

You have taken a stock option position and, if the stock's price increases, you could lose a fixed small amount of money, but if the stock's price decreases, your gain increases. You must have ________. bought a call option bought a put option written a call option written a put option

bought a put option

A U.S. investor has borrowed pounds, converted them to dollars, and invested the dollars in the United States to take advantage of interest rate differentials. To cover the currency risk, the investor should: sell pounds forward. buy dollars forward. buy pounds forward. buy pounds spot.

buy pounds forward. the US investor needs to pay back the loan plus the interest in pounds at the end of the investment period. They can either just buy pound at the future spot rate (whatever happens when they need the pound), or buy pound forward, buy pound futures, or buy pound call options. the US investor does not have pound to sell, it is the banker (their dealer) that sell pounds forward to them. technically buy dollars is almost the same as sell pounds, however, in standardized terms, US investors or banks do not buy or sell forward the domestic currency (pricing currency), they buy or sell forward the foreign currency. they do not need pounds now, they actually sell the borrowed pounds spot to get dollars for investment.

A U.S. firm has borrowed £50 million from a British firm. The borrower will need to convert dollars to pounds to repay the loan when it is due. The U.S. firm could hedge the exchange rate risk by: buying pounds forward. selling pounds forward. both selling pounds forward and borrowing pounds. both buying pounds forward and borrowing pounds.

buying pounds forward. if the US firm needs pounds in the future, they could lock the price by either buying pounds forward, buying pounds futures, or buying pound call options. (b) is incorrect because they do not have excess pounds to sell. (c) is incorrect because (b) is incorrect and also because they already bought pounds. (d) is incorrect because they do not borrow pounds anymore.

A fund that has a fixed number of shares outstanding and is traded on an exchange is called a(n): open-end mutual fund. hybrid fund. index fund. closed-end fund.

closed-end fund. closed-end funds do not issue more shares or buy back shares until retirement of the fund. (a) (b) and (c) are incorrect because they are all open-end fund with trading activities by the issuer (some are more active such as index fund, trading like stocks, vs. mutual funds trading once per day). Therefore, shares of open-end funds are typically traded at or near the fund's NAV but shares of closed-end funds could be traded far off the fund's NAV (NAV is the market value of a mutual fund's assets divided by the number of fund shares outstanding or the market value of each fund share).

The riskiest capital market security is preferred stock common stock corporate bonds Treasury bonds

common stock

Preferred stockholders hold a claim on assets that has priority over the claims of both common stockholders and bondholders. neither common stockholders nor bondholders. common stockholders, but after that of bondholders. bondholders, but after that of common stockholders.

common stockholders, but after that of bondholders.

The type of swap most closely linked to the subprime mortgage crisis is the ____________. interest rate swap currency swap equity linked swap credit default swap

credit default swap

Of the following, the most recent derivative security innovations are: foreign currency futures. interest rate futures. stock options. credit derivatives.

credit derivatives.

With ____________ voting, all directors up for election are voted on by the shareholders at the same time in one general election. straight participating non-participating cumulative

cumulative in cumulative voting, there are multiple wins and some weights. in straight voting, they vote for one director at a time. participating & non-participating refer to the dividend payments, not voting, where participating preferred stocks can get dividends that are actually larger than promised and non-participating preferred stocks get fixed dividends no matter what the profit is.

If all preferred dividend payments that have been missed must be paid before any common stock dividend can be paid, the preferred stock is called _____________ preferred stock. cumulative participating nonparticipating dual class

cumulative preferred stocks are non-participating and cumulative. cumulative preferred stocks means the missed dividends (due to financial difficulties) will accumulate over time and to be paid back Non-cumulative preferred stocks means they do not go into arrears and are never paid. Dual class refers to same common shares with different voting power

A professional futures trader who buys and sells futures for his own account throughout the day but typically closes out his positions at the end of the day is called a: floor broker day trader specialist hedger

day trader

A(n) ___________ plan does not require the employer to guarantee retirement benefits nor to maintain a minimum level of pension reserves. defined benefit insured pension uninsured pension defined contribution

defined contribution a defined contribution plan does not promise a specific income like defined benefit plan does ((a) is incorrect) and therefore does not have to maintain enough pension reserves (to meet the amount agreed). (b) and (c) are incorrect because insured and uninsured pension plans are both defined benefit plans (the difference is a fully insured plan provides guaranteed benefits, while an uninsured plan provides benefits that are not guaranteed).

The value of the euro changed from $1.15 to $1.25. We can say that the dollar has ________ and the euro has ________. appreciated; appreciated appreciated; depreciated depreciated; appreciated depreciated; depreciated

depreciated; appreciated

he value of the British pound changed from $1.40 to $1.15. We can say that the pound has ________ and the dollar has ________. appreciated; depreciated depreciated; appreciated appreciated; appreciated depreciated; depreciated

depreciated; appreciated

Securities not listed on one of the exchanges trade in the over-the-counter market. In this exchange, dealers "make a market" by buying stocks for inventory when investors want to sell. selling stocks from inventory when investors want to buy. doing both of the above. doing neither of the above.

doing both of the above. broker market where a transaction can happen only when the broker can match buyers with sellers.

In general, in a defined benefit pension plan, the risk of shortfall is borne by the __________; while in a defined contribution pension plan, the risk of the shortfall is borne by the __________. employee; employer employer; employee government; employer employer; government

employer; employee for defined benefit plan, the employer has to meet the amount needed and bear the risk of shortfall, while for defined contribution plan, the employer does not have to meet the amount needed and the employee has to bear the risk of not getting high enough return. This is one of the reason why private employers stopped providing defined benefit pension plans. (a) is incorrect because it is reversed. (c) and (d) are incorrect because the government could be the employer (in case of public employees and public pension funds) but not the employee.

My bank has a larger number of adjustable-rate mortgage loans outstanding. To protect our interest rate income on these loans, the bank could: enter into a swap to pay fixed and receive variable. enter into a swap to pay variable and receive fixed. buy an interest rate cap. do nothing

enter into a swap to pay variable and receive fixed.

By type of fund, there are more ______________ funds than any other. equity bond tax-exempt money market hybrid

equity equity funds > bond funds > hybrid funds > taxable money market funds > non-taxable money market funds

A contract wherein the buyer agrees to pay a specified interest rate on a loan that will be originated at some future time is called a(n): forward rate agreement. futures loan. interest rate swap contract. currency swap contract.

forward rate agreement.

Hurricane damage with _____________ in a given area is an example of a ______________ for which it is difficult to predict loss exposure. low-severity, low-frequency event high-severity, high-frequency event low-severity, high-frequency event high-severity, low-frequency event

high-severity, low-frequency event

The higher the exercise price, the ________________ the value of a put and the _______________ the value of a call. higher; higher lower; lower higher; lower lower; higher

higher; lower

On the NASDAQ system, the inside quotes are the: lowest ask and lowest bid. lowest bid and highest ask. highest bid and highest ask. highest bid and lowest ask.

highest bid and lowest ask. NASDAQ has Automated Quotations, meaning the orders are automatically matched with high speed by the computers in such a way that would make the best possible price for both side, meaning clients who sell could get the highest bid, and clients who buy could pay the lowest ask.

The largest single type of holder of common stock (by dollar holding) is: pension funds. households. mutual funds. life insurance firms.

households. smallest holder of common stock: life insurance companies mutual funds also hold a lot of common stocks through the individuals and households' brokerage accounts with them. pension funds can hold stocks because they could time their cash flows with higher probabilities compared to others and they used to balance between stocks and bonds. insurance companies prefer long-term, low-risk assets.

Hybrid mutual funds normally invest significant amounts in: common stock. long-term bonds. money market instruments. Correct! both common stock and long-term bonds.

hybrid mutual funds have investment strategies of both equity funds and bond funds ((a) and (b) are correct) but not money market instruments (not short-term)

The levels of foreign currency assets and liabilities at banks have ___________ in recent years, and the level of foreign currency trading has ____________. increased; increased decreased; decreased increased; decreased decreased; increased

increased; increased

Private pension funds are funds administered by: the federal government. state governments. local government insurance companies, banks and mutual funds .

insurance companies, banks and mutual funds. private pension funds are not administered by government at any level, most private companies do not offer pension funds (which is a defined benefit program) and they rather offer 401(k) (which is a defined contribution program), but some old-schooled companies do offer pension funds that were started from long time ago (either to all employees or frozen to new employees), and the pension funds are administered by insurance companies, banks, mutual funds.

As the economy weakens, one would expect investment in ____________ funds to increase and investment in _____________ funds to decrease, all else held constant. money market mutual; equity equity; bond corporate bond; municipal bond long-term; short-term

money market mutual; equity in economic downturns or recessions, investors seek for liquidity (short-term investments such as MMMFs), and during economic growths, investors seek for return (long-term riskier investments such as common stocks). (b) (c) and (d) are incorrect because in contractionary economy, long-term investments are not favored due to their risk, mainly maturity risk.

Property and casualty insurers hold _____________ short-term assets than life insurers because property and casualty loss rates are _____________ predictable than life insurance loss rates. more; more more; less less; less less; more

more; less P&C is much less predictable than life insurance (one relates to human behavior, the other relates to mortality), and therefore needs more liquidity (short-term) assets to deal with unexpected claims.

Banks' net foreign exposure is equal to: net foreign assets. net FX bought. net foreign assets + net FX bought. assets − liabilities.

net foreign assets + net FX bought.

In the calculation of rates of return on common stock, dividends are _____ and capital gains are ____. guaranteed; not guaranteed guaranteed; guaranteed not guaranteed; not guaranteed not guaranteed; guaranteed

not guaranteed; not guaranteed dividends are from "residual" income and capital gains are from fluctuations in market value of the stocks which is not predictable or determined by any single individual or entity.

A(n) ___________ fund must hold substantial cash reserves in order to meet fund redemptions from shareholders. closed-end REIT open-end mutual unit trusts

open-end mutual open-end funds or open-end mutual funds issue more shares based on demand or buy back shares based on supply on a regular basis, and to be able to do so, they must have enough liquidity (in case of buying back shares). (a) and (b) are incorrect because they are all closed-end funds, the issuers do not trade their shares prior to the retirement of the fund (but the shares are actively traded on secondary markets), they are however different because closed-end mutual funds are general while REITs focus on real estate. (d) is incorrect because UITs are similar to a hybrid of both open-end (transacted directly with issuer) and closed-end funds (issued via an IPO, not actively traded), but also differs from mutual funds (having an end date like a project). All of them are actively managed.

If The Wall Street Journal lists a stock's dividend as $1, then it is most likely the case that the stock: pays $1 quarterly, or an estimated $4 annually. pays $0.25 quarterly, or an estimated $1 annually. paid $1 during the past quarter, with no future dividends forecast. paid $1 during the past year, with no future dividends forecast.

pays $0.25 quarterly, or an estimated $1 annually.

By convention, a swap buyer on an interest rate swap agrees to: periodically pay a fixed rate of interest and receive a floating rate of interest. swap both principal and interest at contract maturity. back both sides of the swap agreement. act as the dealer in the swap agreement.

periodically pay a fixed rate of interest and receive a floating rate of interest.

If a firm has more foreign currency assets than liabilities, and no other foreign currency transactions, it has: positive net exposure. negative net exposure. a fully balanced position. zero net exposure.

positive net exposure.

According to the strong form of efficient market hypothesis: private information is of no help in earning abnormally high returns. using past price and volume information one can earn abnormally high returns from stocks. using insider information one can earn abnormally high returns from stocks. equity analysts are always correct in predicting the best stocks.

private information is of no help in earning abnormally high returns. in a strong form market, abnormal return does not exist. there is no way to use history to predict the future except for using technical analysis. insider information may work in weak form. no one can predict stocks.

A share of preferred stock in a firm represents an ownership interest in that firm and allows stockholders to vote. receive fixed dividends. receive residual dividends. receive interest payments.

receive fixed dividends.

The preliminary version of a security offer that is circulated to potential buyers before SEC approval (registration) is obtained is called a: final prospectus. shelf registration statement. waiting period offer. red herring prospectus.

red herring prospectus. red herring prospectus is the draft that describe the new issue final prospectus: the final version shelf registration statement: the statement to register for shelf offerings (can take securities off the shelf and sell multiple times within a certain number of years without registering again)

A U.S. bank borrowed dollars, converted them to euros, and invested in euro-denominated CDs to take advantage of interest rate differentials. To cover the currency risk the investor should: sell dollars forward. sell euros forward. buy euros forward. sell euros spot.

sell euros forward. the US bank will have principal plus interest rate from their EUR investment but they want to convert it all back to USD which is their domestic currency. (a) is incorrect because one, technically sell dollars is the same as buy euros and that is the currency they do not need to buy, two, we consider buying and selling the foreign currency, not the domestic currency. (c) is incorrect because they do not need euros, they receive euros. (d) is incorrect because they do not have the euros to sell yet, they buy euros spot paying with the borrowed dollars.

ETFs have several advantages over index funds, except for: trade throughout the day at continuously updated prices. purchase ETF shares on margin. sell ETF shares short. sell the shares back to the fund.

sell the shares back to the fund. ETFs can trade throughout the day like stocks but index funds (indexed mutual funds) are traded once per day ((a) is true), ETFs could be traded on margin or sold short with high risks while index funds could not ((b) and (c) are true), and both ETFs and index funds could be sold back to the fund ((d) is false).

In a ____________ the firm preregisters with the SEC any securities it wishes to sell over the next two years. voting rights fully underwritten shelf registration best efforts

shelf registration firms can use shelf registration to avoid repeating the registration and fee multiple times. fully underwritten refers to when the underwriting bank guarantee the full amount of issuance to the firm and then resell the stocks on the market. best efforts refers to when the underwriting bank does not guarantee the full amount but just acting as the broker for the best possible amount that they could help sell on the market.

Which of the following indexes is not value-weighted? NYSE Composite S&P 500 NASDAQ Composite Dow Jones Industrial Average

Dow Jones Industrial Average DJIA is price-weighted (based on the number of each stocks given the same starting amount of dollars on each stock and applying new pricing on them). The rest are all value-weighted when companies with more market value will have more weights/ impacts on the index.

Computerized markets that automatically match orders between buyers and sellers and are used primarily by institutional traders are called: OTC bulletin boards. SPDR. ECNs. specialists.

ECNs. ECN means Electronic Communication Network which is the computerized system that automatically match buy and sell orders for securities markets. the OTCBB is a trading platform for unlisted stocks. SPDR is the nickname (symbol) for an exchange-traded fund created by the investment company State Street Global Advisors to mimic the S&P 500 market index. specialists are designated market makers

In 2007 the NYSE merged with _________________. NASDAQ Euronext American Exchange Chicago Mercantile Exchange

Euronext NYSE and NASDAQ are two competing US stock exchanges NYSE Euronext acquired AMEX in 2008. CME is the market for futures and options (derivatives but not forward because forward is not traded on an exchange).

If the dollar appreciates relative to the euro then: European cars will become less expensive in the United States. American cars will become less expensive in Europe. European cars will become more expensive in the United States. American cars will become less expensive in the United States

European cars will become less expensive in the United States.

A contract that gives the holder the right to sell a security at a preset price only immediately before contract expiration is a(n): American call option. European call option. American put option. European put option.

European put option.

A decrease in which of the following would increase the price of a call option on common stock, all else held constant? Stock price Stock price volatility Interest rates Exercise price

Exercise price

Which of the following is true? Forward contracts have no default risk. Futures contracts require an initial margin requirement be paid. Forward contracts are marked to market daily. Futures contracts are only traded over the counter.

Futures contracts require an initial margin requirement be paid.

Which of the following conditions may lead to a decline in the value of a country's currency? High interest rates High inflation Large current account deficit All of the above

High interest rates

In terms of dollar costs, the worst U.S. catastrophe since 2000 was caused by: the terrorist attacks on the World Trade Center and the Pentagon. Hurricane Katrina of 2005. the California fires of 2007. the Florida hurricanes of 2004.

Hurricane Katrina of 2005. the top catastrophes with the most costly damages were all hurricanes, with Hurricane Katrina ranking top at $186 billion. The next costliest hurricanes in US were Hurricane Harvey of 2017 at $149 billion, Hurricane Maria of 2017 at $107 billion, Hurricane Sandy of 2012 at $82 billion, and Hurricane Ida of 2021 at $79 billion.

Suppose that over the last 10 to 15 years significantly large numbers of investors have been able to earn abnormal returns from using the firm's publicly-available financial information to forecast growth in earnings and dividends. This would be evidence that the markets are not: I. weak form efficient. II. semi-strong form efficient. III. strong form efficient. I only I and II only III only II and III only

I and II only If the market is strong-form efficient, there is no opportunity for abnormal return. When market is in semi-strong form, there might be opportunity for abnormal return from newly released information. When market is in weak form, there might be opportunity for abnormal return from both newly released information, or insider information.

Which of the following statements are true? Note: Pandemic bonds are also some sort of insurance under rare adverse event (controversial product). Catastrophe bonds may be used as a form of reinsurance. Catastrophe bonds are structured so that if an insured event results in large losses for an insurer, the bond's required payments increase. Buyers of catastrophe bonds benefit if the adverse event occurs. When issued, catastrophe bonds will have promised yields below the risk-free rate.

Catastrophe bonds may be used as a form of reinsurance. catastrophe bonds (CAT) are high-yield debt instruments with the purpose of raising money for issuers in the events of natural disasters (to provide them some financial cushion), and catastrophe bonds are issued not only by insurance companies or state catastrophe funds but also reinsurers. (b) is incorrect because the payments won't change ex-post (after the fact). (c) is incorrect because bond sellers or issuers benefit from the adverse event, not the bond buyers. (d) is incorrect because catastrophe bonds are high-risk and therefore high-yield to attract investors (buyers).

Which of the following ADRs is considered the most risky type of ADR? Level I ADR Level II ADR Level III ADR Level IV ADR

Level I ADR the lower the level, the less equivalent to a domestic stock the ADR is Level I is easiest for foreign firm, fewer compliance and regulation requirements, and can only be traded on OTC market. Level II requires more compliance, and can be traded on stock exchanges. Level III requires similar compliance and regulations as level II with one extra form that would allow the firms to raise capital through public offerings.

As of December 2005, trading licenses are required to conduct trades on the floor of the NYSE. Which of the following statements about these trading licenses is correct? Licenses are auctioned off in a special type of auction called a Dutch auction. A non-member organization of the NYSE is eligible to bid for a trading license. The SEC determines the maximum bid price. Trading licenses are good for 10 years.

Licenses are auctioned off in a special type of auction called a Dutch auction. Dutch auction is also called seat sales. The auction is called Stock Exchange Auction Trading System (SEATS) and happen when the number of seats actively being used on NYSE for trading is limited and lower than the total interest. There could be over 1000 bids ending with prices $50K-75K per seat (trading license) only NYSE member organizations are eligible to bid. the SEC is not involved and the max and min bid prices are set by NYSE the trading licenses are good for a year (annual license).

The largest center for trading in foreign exchange is: New York. London. Tokyo. Hong Kong.

London.

Which of the following is true about specialists? Investment banks generally can be specialists. Specialists are used by the NASDAQ system. Market and limit orders are transacted at specialist posts, but the specialist's own account orders are executed elsewhere. Specialists help maintain continuous trading.

Specialists help maintain continuous trading. specialists act as market makers and facilitate smooth and fast transactions. investment banks are usually on the buy side (helping their wealthy clients invest) NASDAQ is fully electronic (broker market) and does not use specialists like NYSE (auction market). specialists are floor brokers, they execute orders for clients.

A higher level of which of the following variables would make a call option on common stock more valuable, all else held constant? Stock price Stock price volatility Interest rates Exercise price

Stock price volatility

Which of the following information is not usually found in a Wall Street Journal stock quote? Dividend yield Closing price Stock rating Ticker symbol

Stock rating WSJ stock quote would include company name, ticker (symbol), bid price, ask price, last traded price, volume traded, high, change, % change, volume, P/E ratio, DY.

In terms of volume of trading and market value of firms traded, the _____________ is the largest U.S. stock market. In terms of number of firms traded, the ___________ is the largest in the United States. NYSE; NYSE NYSE; AMEX NYSE; NASDAQ NASDAQ; AMEX

NYSE; NASDAQ NYSE is considered a more prestigious one and therefore, historically attracting larger firms. For the same reason, being listed on NYSE is hard and small public companies would not meet the requirements and get listed on NASDAQ instead. AMEX was acquired by NYSE which is another reason why NYSE is larger.

Which of the following is not an advantage of a mutual fund? Cheaper transactions costs Diversification Monitoring activities at lower costs No default risk

No default risk mutual funds have cheaper cost ((a) is true), diversification ((b) is true), and efficient monitoring ((c) is true), when the mutual funds can pool smaller investment together to invest a larger amount and take advantage of the economies of scale, other than Treasuries, no investment vehicles have zero default risk ((d) is false).

The electronic-based market for less actively traded U.S. securities is the: ADR market. OTC bulletin board. Pink Sheet stocks. ECN Market.

OTC bulletin board. less actively traded stocks are traded on OTC market where OTC Bulletin Board or OTCBB is electronic and more like an extension of NASDAQ for smaller stocks, operated by NASDAQ. ADR or American Depositary Receipts are issued by US banks to represent equity ownership in foreign companies, they are equivalent to stocks and can be traded on either organized exchanges or on OTC markets. Pink Sheet is for unlisted stocks, including OTCBB but also stocks that do not qualify to be quoted on OTCBB. ECN or Electronic Communication Network is a computer system, not a market.

What stock price reaction would you expect from a firm that unexpectedly raises its dividend permanently and by a substantial amount? Price should rise, given dividend discount models. Price should decline, given discounted cash flow analysis. Price will remain constant, due to market efficiency. Price will remain constant, due to random-walk behavior.

Price should rise, given dividend discount models. Using Price = D1/(r-g).

The primary regulator of mutual funds is the: NASD CFTC NYSE SEC

SEC US Securities and Exchange Commission regulates securities exchanges and securities-related entities. (a) and (c) are incorrect because NASD (short version of NASDAQ) and NYSE are stock exchanges and not regulators. (b) is incorrect because Commodity Futures Trading Commission regulates the derivatives market, which include futures, swaps, some options.

Money market mutual funds (MMMFs) have caused disintermediation at banks at times. This is because MMMFs: sometimes pay higher interest rates than bank deposits. are less risky than bank deposits. are now federally insured, like bank deposits. offer guaranteed rates of return.

sometimes pay higher interest rates than bank deposits. MMMFs usually pay higher than banks (money market funds vs. money market accounts) (and typically the return ranking would be money market funds > certificates of deposit > savings account > money market account) and the main reason is MMMFs could invest in interest-bearing and sometimes tax-exempt short-term debt instruments (Treasuries, CDs, commercial papers, banker's acceptances, or repurchase agreements). (b) is incorrect because bank deposits are safer and should not have disintermediation for that reason. (c) is incorrect because MMMFs are not federally insured like deposits in banks (insured by FDIC) or in credit unions (insured by NCUA). (d) is incorrect because returns are never guaranteed unless on a single fixed-income product (and still, that is not considering default risk).

The primary regulator of insurance firms is the: McCarran-Ferguson Commission. FDIC state insurance regulator. SEC.

state insurance regulator. insurance industry is regulated at State level. (a) is incorrect because McCarran-Ferguson Act (no Commission) of 1869 was the law that stated that insurance is not interstate commerce (subject to the Commerce Clause in the US Constitution), therefore regulation of insurance was left to the states (there was an overturn of the law in 1944 was overwritten by a bill in 1945, leaving the Act as relevant today as it was before). Federal Depository Insurance Corporation (FDIC) is the independent agency that provides insurance and regulates the banking industry (National Credit Union Administration or NCUA is the agency that insures and regulates the non-bank depository institutions, naming thrifts and credit unions. Securities and Exchange Commission is the regulator of securities industry, including the stock exchanges and securities-related entities such as securities brokers and dealers, investment advisors, transfer agents, clearing agencies, and mutual funds (investment companies).

An agreement between two parties to exchange a series of specified periodic cash flows in the future based on some underlying instrument or price is a(n): forward agreement. futures contract. option contract. swap contract.

swap contract.

The value of common stock will likely decrease if: the investment horizon decreases. the growth rate of dividends increases. the discount rate increases. dividends are discounted back to the present.

the discount rate increases. Using Price = D1/(r-g).

The largest proportion of long-term mutual fund assets is held by ___________________. bank trusts and estates the household sector private pension funds life insurance firms

the household sector

A speculator may write a put option on stock with an exercise price of $15 and earn a $3 premium only if he thought: the stock price would stay above $12. the stock volatility would increase. the stock price would fall below $18. the stock price would stay above $15.

the stock price would stay above $12.

In property and casualty insurance, the combined ratio is equal to ___________________ divided by total premiums written. the sum of the loss ratio plus loss adjustment expenses the sum of the loss ratio plus the expense ratio the operating ratio minus dividends paid to policyholders the nominal ratio plus the real ratio

the sum of the loss ratio plus the expense ratio

Open-end mutual funds guarantee: investors a minimum rate of return. investors a minimum NAV. to redeem investor's shares upon demand at the current NAV. to earn the rate promised in the prospectus.

to redeem investor's shares upon demand at the current NAV. open-end mutual funds buy back issued shares or issue more shares on demand on a daily basis, and the prices of shares are calculated using the current net asset value at the end of the day (NAV = (Total assets - Total liabilities) / # outstanding shares). (a) (b) and (d) are incorrect because rate of return, market value (share price), earnings, are never guaranteed or promised except for fixed-income securities.

Premiums received before the coverage period are termed: unearned premiums. lagged premiums. loss reserves. policyholder's surplus.

unearned premiums. these premiums correspond to the time remaining on the policy and not yet "earned" by the insurance company (not policyholder) because the policy still has some time before it expires (and premiums become earned if there are no huge payoffs). (b) is incorrect because there is no such term. (c) is incorrect because loss reserves refer to the estimate of an insurer's liability from future claims and not premiums. (d) is incorrect because policyholder's surplus refers to the amount of money remaining after the insurer's liability are subtracted from assets, which is essentially a financial cushion that protects the policyholders in the event of unexpected catastrophic losses.

The term "variable" in a variable life policy refers to the policyholder's ability to vary the premiums. insurer's ability to vary the rate of return on the policy. variable growth rate of the cash value of the policy. the policyholder's ability to cancel the plan.

variable growth rate of the cash value of the policy. variable life policy is a type of life insurance that builds cash value through investment, and giving policyholders more flexibility in their active investment decisions, therefore having variable growth rate. (a) is incorrect because the premiums are fixed in variable life policy, and varying in universal life policy. (b) is incorrect because rate of return cannot be predetermined. (d) is incorrect because that is not the meaning of variable, and all life insurance policies are cancellable during the "free look" period (the first 10-30 days), term life policies can be stopped anytime with no payoff, and whole life policies could be terminated (with cash value if equity has been built up long enough), exchanged for another one, sold (very complicated).