Investments Exam #1: Chapters 1-3

A stock quote indicates a stock price of $72 and a dividend yield of 3%. The latest quarterly dividend received by stock investors must have been ______ per share.

$0.54 ($72 × .030) / 4 (quarterly) = 0.54

The price quotations of Treasury bonds in the Wall Street Journal show a bid price of 102:12 and an ask price of 102:14. If you sell a Treasury bond, you expect to receive _________.

$1,032.75 P= (102 + (12 / 32) x (1000 / 100) = 1032.75

A municipal bond carries a coupon rate of 6.75% and is trading at par. What would be the equivalent taxable yield of this bond to a taxpayer in a 35% tax bracket? (Round 2 decimal spaces)

10.38% equivalent taxable yield on municipal bond = (coupon rate) / (1 - tax bracket %) = 0.0675 / 1 - 0.35 = 10.38

An investor buys a T-bill at a bank discount quote of 4.80 with 150 days to maturity. The investor's actual annual rate of return on this investment is _____.

4.97% ( 1- (0.0480 x 150) / (360)) x 10,000 = $9800 (1- (10,000)/9800) x (365 / 150) = 4.97

A benchmark market value index is comprised of three stocks. Yesterday the three stocks were priced at $14, $22, and $50. The number of outstanding shares for each is 630,000 shares, 530,000 shares, and 230,000 shares, respectively. If the stock prices changed to $18, $20, and $52 today respectively. what is the 1-day rate of return on the index?

6.00% (18 x 620,000 + 20 x 530,000 + 52 x 230,000) / (14 x 620,000 + 22 x 520, 000 + 50 x 230,000) - 1 = 6.00

An investor is in a 30% combined federal plus state tax bracket. If corporate bonds offer 9% yields, what must municipals offer for the investor to prefer them to corporate bonds?

6.3% municipal offer = yield % x (1- tax bracket %) = 0.09 x (1-0.30) = 6.3

A bond issued by the state of Alabama is priced to yield 6.50%. If you are in the 28% tax bracket, this bond would provide you with an equivalent taxable yield of _________.

9.03% 6.50%/(1 - 0.28) = 9.03%

The maximum maturity on commercial paper is _____. 270 days 180 days 90 days 30 days

A

Asset allocation refers to _________. the allocation of the investment portfolio across broad asset classes the analysis of the value of securities the choice of specific assets within each asset class none of these options

A: The allocation of the investment portfolio across broad asset classes

Accounting scandals can often be attributed to a particular concept in the study of finance known as the _____. agency problem risk-return trade-off allocation of risk securitization

A: agency problem

After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _____. asset allocation security analysis top-down portfolio management passive management

A: asset allocation

__________ portfolio construction starts with selecting attractively priced securities. Bottom-up Top-down Upside-down Side-to-side

A: bottom up

Venture capital is _________. a)frequently used to expand the businesses of well-established companies b)supplied by venture capital funds and individuals to start-up companies c)illegal under current U.S. laws d)most frequently issued with the help of investment bankers

B

The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following? a) Required that corporations have more independent directors b) Required that the CFO personally vouch for the corporation's financial statements c) Required that firms could no longer employ investment bankers to sell securities to the public d) Required the creation of a new board to oversee the auditing of public companies

C: Required that firms could no longer employ investment bankers to sell securities to the public

Money market securities are characterized by: I. Maturity less than 1 year II. Safety of the principal investment III. Low rates of return I only I and II only I and III only I, II, and III

D: I, II, and III

Which security should sell at a greater price? a) put option on a stock selling at $50 b) a put option on another stock selling at $60. (All other relevant features of the stocks and options are assumed to be identical.)

a

What was the result of high-frequency traders' leaving the market during the flash crash of 2010? a. Market liquidity decreased. b. Market liquidity increased. c. Market volatility decreased. d. Trading frequency increased.

a) Market liquidity decreased

Consider the following limit order book for a share of stock. The last trade in the stock occurred at a price of $95. Limit buy orders Limit sell orders price shares price shares $94.75 800 $95.25 120 94.50 1,100 96.50 120 94.25 800 99.75 200 94.00 200 103.25 120 93.50 900 a) If a market buy order for 120 shares comes in, at what price will it be filled? b) At what price would the next market buy order be filled? c) If you were a security dealer, would you want to increase or decrease your inventory of this stock? Increase Decrease

a) $95.25 b) $96.50 c) increase

You've borrowed $20,000 on margin to buy shares in Disney, which is now selling at $40 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $35 per share. a) What is the percentage margin on the above transaction? (Round your answer to 2 decimal places.) b) Will you receive a margin call? c) How low can the price of Disney shares fall before you receive a margin call? (Round your answer to 2 decimal places.)

a) 42.86% percentage margin steps: $20,000 borrowed + $20,000 of own = $40,000 $40,000 / $40 per share = 1,000 shares price falls to $35 / share $35 x 1,000 shares = 35,000 $35,000 - $20,000 = $15,000 15,000 / 35,000 = 42.86% b) No - you will not receive a margin call since the maintenance margin is 35% and the percentage margin is 42.86% which is bigger than 35%. c) $30.77 Lowest price for margin call steps: 1,000 shares = 1,000 P (1000 P - 20,000) / 1000 P = 0.35 Solve for P: P = 30.77

Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at $40 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $40 to $50, and the stock has paid a dividend of $2 per share. a) What is the remaining margin in the account? b) What is the margin on the short position? c) If the maintenance margin requirement is 30%, will Old Economy receive a margin call? Yes No d) What is the rate of return on the investment?

a) 8,000 remaining margin steps: $40 x 1,000 shares = 40,000 50% (initial marg req) of 40,000 = 20,000 firm rises from $40 to $50 = $10 loss $10 + $2 dividend = $12 loss $12 x 1,000 shares = $12,000 loss $20,000 - 12,000 = $8,000 b) 16% short margin % steps: (remaining margin / new stock price) / # of shares ($8,000 / 50) / 1,000 160 / 1,000 = .16= 16% c) Yes, -you will receive a margin call because the maintenance margin requirement is 30% and the short margin is 16% which is less that the margin requirement of 30%. d) -60 ROR steps: ( ending equity - initial equity) / initial equity ending equity: margin short = 8,000 initial equity: initial margin = 20,000 (8,000 - 20,000) / 20,000 -12,000 / 20,000 = -.60 = -60%

Financial institutions that specialize in assisting corporations in primary market transactions are called _______. mutual funds investment bankers pension funds globalization specialists

b: investment bankers

A new financial asset is ......... if Microsoft issues new shares.

created

You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a _________. limit buy order limit sell order market order stop-loss order

d) stop-loss order

Consider the following limit order book of a specialist. The last trade in the stock occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled? Limit Buy Orders Limit Sell Orders price shares price shares $39.75 100 $40.25 100 $39.50 100 $40.50 100 a. $39.75 b. $40.25 c. $40.375 d. $40.25 or less

d. $40.25 or less stock occurred at $40. The investor wants to buy at the lowest possible. Investor wants to buy----> sell orders Lowest price to buy is $40.25 or less.

The cash that the company receives....

financial asset

Lanni sells the software product to Microsoft, which will market it to the public under the Microsoft name. Lanni accepts payment in the form of 5,000 shares of Microsoft stock. Lanni sells the software, which is a ....... to Microsoft

real asset

ratio of real asset and total asset

real asset / total asset

A T-bill quote sheet has 120-day T-bill quotes with a 5.82 bid and a 5.76 ask. If the bill has a $10,000 face value, an investor could buy this bill for _____.

$9,808.00 rBD= 10,000-P / $10,000 X 360/ n rBD= 10,000-P / $10,000 X 360 / 120 360 / 120= 3 rBD= 10,000-P / $10,000 X .0576 / 3 .0576 / 3 = .0192 rBD= (10,000-P) / (.0192 X 10,000) = 192 rBD= (10,000-192)= P P= 9808

Which of the following correctly describes a repurchase agreement? a. The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price. b. The sale of a security with a commitment to repurchase the same security at a future date left unspecified, at a designated price. c. The purchase of a security with a commitment to purchase more of the same security at a specified future date.

A: The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price. ** A repurchase agreement is the sale of a security with a commitment to repurchase the same security at a specified future date and a designated price.

The value of a derivative security _________. depends on the value of another related security affects the value of a related security is unrelated to the value of a related security can be integrated only by calculus professors

A: depends on the value of another related security

In securities markets, there should be a risk-return trade-off with higher-risk assets having _________ expected returns than lower-risk assets. higher lower the same The answer cannot be determined from the information given.

A: higher

An intermediary that pools and manages funds for many investors is called ______. an investment company a savings and loan an investment banker a commercial bank

A: investment company

According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is ________. mortgages consumer credit bank loans gambling debts

A: mortgages

When the market is more optimistic about a firm, its share price will ______; as a result, it will need to issue _______ shares to raise funds that are needed. rise; fewer fall; fewer rise; more fall; more

A: rise; fewer

Which of the following is (are) true about hedge funds? I. They are open to institutional investors. II. They are open to wealthy individuals. III. They are more likely than mutual funds to pursue simple strategies. I and II only I and III only II and III only I, II, and III

A: I and II only

You are bullish on a stock that is currently traded at $70. You are buying the stock with margins for 1,000 shares. The initial margin is 50% with maintenance margin at 40%. What is the percentage gains and losses when the stock goes up to $75 and drops to $65 in 90 days, with a APR of 7%. (assume under a 365 days of a year)

Answers: at $75: the percentage gain is: 50.94% at $65: the percentage loss is: -64.94% steps: @ $70 $70 x 1000shares = $70,000 (market value) 0.50% x 70,000 = 35,000 (Liability) 70,000 - 35,000 = 35,000 @ $75 $75 x 1000 = 75,000 (liability)=35,000 x (1+ (0.07 x 90/365) = $35,604 75,000 - 35,604 = $39,396 ROR % gain: (39,396 -35,000) / (35,000) x (365/90) = 50.94% @ 65 65 x 1000 = 65,000 (liability)= 35,000 x (1+(0.07 x 90/365) = $35,604 $65,000 - 35,604 = $29,396 ROR % loss: (29,396 - 35,000) / (35,000) x (356/90) = -64.94%

Suppose an investor is considering one of two investments that are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to _____. a)earn no more than the Treasury-bill rate on either security. b)pay less for the security that has higher risk. c)pay less for the security that has lower risk. d)earn more if interest rates are lower.

B

Firms that specialize in helping companies raise capital by selling securities to the public are called _________. pension funds investment banks savings banks REITs

B: Investment banks

After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of ______. asset allocation security analysis top-down portfolio management passive management

B: Security analysis

__________ portfolio construction starts with asset allocation. Bottom-up Top-down Upside-down Side-to-side

B: top-down

Which of the following is not a money market security? U.S. Treasury bill 6-month maturity certificate of deposit Common stock Bankers' acceptance

C: common stock

__________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis. Active Momentum Passive Market-timing

C: passive

According to the Flow of Funds Accounts of the United States, the largest financial asset of U.S. households is ____. mutual fund shares corporate equity pension reserves personal trusts

C: pension reserves

Financial markets allow for all but which one of the following? Shift consumption through time from higher-income periods to lower Price securities according to their riskiness Channel funds from lenders of funds to borrowers of funds Allow most participants to routinely earn high returns with low risk

D: Allow most participants to routinely earn high returns with low risk

Financial intermediaries exist because small investors cannot efficiently _________. diversify their portfolios gather information monitor their portfolios all of these options

D: all of these options

Active trading in markets and competition among securities analysts helps ensure that: I. Security prices approach informational efficiency II. Riskier securities are priced to offer higher potential returns III. Investors are unlikely to be able to consistently find under- or overvalued securities I only I and II only II and III only I, II, and III

D: I, II, and III

Methods of encouraging managers to act in shareholders' best interest include: I. Threat of takeover II. Proxy fights for control of the board of directors III. Tying managers' compensation to stock price performance only I and II only II and III only I, II, and III

D: I, II, and III

A dollar-denominated deposit at a London bank is called _____. a. eurodollars b. LIBOR c. fed funds d. bankers' acceptance

a) eurodollar

The most marketable money market security is _____. Treasury bills bankers' acceptances certificates of deposit common stock

a) treasury bills

You are bearish on Telecom and decide to sell short 100 shares at the current market price of $43 per share a) How much in cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50% of the value of the short position? b) How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position?

a) $2,150 Initial margin: $43 x 100 shares = 4,300 50% of 4,300 = 2,150 b) $49.62 Total assets= 2,150 + 4,300 = 6,450 liabilities = 100P Stock price reaches= (6,450 - 100P) / 100P = 0.30 (maintenance margin) 100P x 0.30 = 30 P 100P + 30P = 130P 6,450 / 130P= 49.62= P

Here is some price information on Fincorp stock. Suppose first that Fincorp trades in a dealer market. Bid Asked 55.25 55.50 a) Suppose you have submitted an order to your broker to buy at market. At what price will your trade be executed? b) Suppose you have submitted an order to sell at market. At what price will your trade be executed? c) What will happen suppose you have submitted a limit order to sell at $55.62. d) What will happen suppose you have submitted a limit order to buy at $55.37.

a) $55.50 b) $55.25 c) Trade will not be executed d) Trade will not be executed

Dée Trader opens a brokerage account and purchases 200 shares of Internet Dreams at $48 per share. She borrows $3,100 from her broker to help pay for the purchase. The interest rate on the loan is 5%. a) What is the margin in Dée's account when she first purchases the stock? b) 1: If the share price falls to $38 per share by the end of the year, what is the remaining margin in her account? b) 2: If the maintenance margin requirement is 30%, will she receive a margin call? c) What is the rate of return on her investment?

a) $6,500 $200 x 48 = 9600 9,600-3,100 = 6500 b) 1: 57.12% steps: $200 x 38 = 7,600 principal x (1+ interest rate) $3,100 x (1+0.05) = 3,255 Margin on long position = "Equity in account " /"Value of stock" Margin on long position = 7,600 - 3,255 / 7,600 = .5712 = 57.12% b) 2: no, since Margin on long position = 7,600 - 3,255 / 7,600 = .5712 = 57.12% c) -33.15 Steps: Rate of return = "Ending equity in account － Initial equity in account" /"Initial equity in account" $7,600- $3,255= 4,345 Rate of return = (4,325 - 6,500) = -2155 (-2155) / (6,500) = -33.15

General Dynamics: close: 75.60 change: 0.97 52 week high: 78.27 52 week low: 55.46 dividend: 1.88 price to earnings: 10.92 yield: 2.49 year to date % change: 6.54 a. What was the firm's closing price yesterday? b. How many shares could you buy for $5,000? c. What would be your annual dividend income from those shares? d. What must be General Dynamics' earnings per share?

a) $74.63 close price yesterday= close price today - change (75.60 - 0.97) = 74.63 b) 66 shares # shares = $ you have / close price (5,000 / 75.60) = 66 c) $124.08 annual divid income = dividend price x # of shares (1.88 x 66) =124.08 d) $6.92 (close price / earnings per share) = price to earnings 75.60 / earnings per share = 10.92 (close price / price per earnings) = earnings per share 75.60 / 10.92 = 6.92

A T-bill with face value $10,000 and 84 days to maturity is selling at a bank discount ask yield of 3.1%. a) What is the price of the bill? (Use 360 days a year. Do not round intermediate calculations. Round your answer to 2 decimal places.) b) What is its bond equivalent yield? (Use 365 days a year. Do not round intermediate calculations. Round your answer to 2 decimal places.)

a) $9,927.66 rBN= (10,000-P) / ($10,000) x (360/ n) rBN= (10,000 - P) / (10,000) x (360 / 84) (360/84)= 4.285714286 rBN= (10,000 - P) / (10,000) x (.031 / 4.285714286) (.031 / 4.285714286) = .0072333333 rBN= (10,000 - P) / (10,000 x .0072333333) (10,000 x .0072333333) = 72.333333 rBN= (10,000 - 72.333333) = P P= 9,927.66 b) 3.16% rBEY= (10,000 -P) / (P) x (365 / n) rBEY= (10,000 -P) / (P) x (365 / 84) (365 / 84) = 4.345238095 rBEY= ( 10,000-9,927.66) / (9,927.66) x 4.345238095 rBEY = 3.16

Look at the Treasury bond maturing in November 2040: Treasury Bond November 15 2040 Coupon: 4.250% Bid: $97.9531 Asked: $98.0000 Change: -0.313 Yield to Maturity: 4.371% a) How much would you have to pay to purchase one of these bonds? b) What is its coupon rate? c) What is the current yield on the bond?

a) $980 Bond purchase price = FV x ask$ / 100 = (1,000 x $98.0000) / (100) = $980 b) 4.25% c) 4.37%

You are bullish on Telecom stock. The current market price is $50 per share, and you have $5,000 of your own to invest. You borrow an additional $5,000 from your broker at an interest rate of 8% per year and invest $10,000 in the stock. a) What will be your rate of return if the price of Telecom stock goes up by 10% during the next year? (Ignore the expected dividend.) b) How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.

a) 12% ROR steps: $10,000 / 50 shares = 200 stocks bought if stock increases by 10% $10,000 x 0.10 = $1,000 Pay interest since borrowed $5,000 = $5,000 x 0.08 (interest rate) = $400 ROR = (1,000 - 400) / (5,000) = .12 = 12% b) $35.71 Stock price falls steps: 200 stocks bought = 200 P Equity = (200 P - 5,000) required margin: 30% = 200P - 5,000 / 200 P = 0.30 Solve for P: 200 P x 0.30 = 60P 200 P - 60P = -140P -5,000 / -140P = P = 35.71

Suppose you short-sell 100 shares of IBM, now selling at $132 per share. a) What is your maximum possible loss? 1. 132 2. unlimited 3. 0 b) What happens to the maximum loss if you simultaneously place a stop-buy order at $141.20?

a) 2 - unlimited b) 920 $141.20 - $132 = loss = $9.2 $ 9.2 x 100 shares =920

On January 1, you sold short one round lot (that is, 100 shares) of Lowe's stock at $25.50 per share. On March 1, a dividend of $2.30 per share was paid. On April 1, you covered the short sale by buying the stock at a price of $21.50 per share. You paid 25 cents per share in commissions for each transaction. a) What is the proceeds from the short sale (net of commission)? b) What is the dividend payment? c) What is the total cost, including commission, if you have to cover the short sale by buying the stock at a price of $21.50 per share? d) What is the value of your account on April 1?

a) 2,525 commission: (25.50 x 100) - 25 = 2,525 * the 25 is from 0.25 cents x 100 b) $230 dividend payment: $2.30 x 100 = 230 c) $2,175 total cost with comm: $21.50 x 100 = 2,150 2,150 +25 = 2,175 d) $120 value of account: 2,525 - 230 - 2,175 = 120

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2 A 90 100 95 100 95 100 B 50 200 45 200 45 200 C 100 200 110 200 55 400 Calculate the first-period rates of return on the following indexes of the three stocks: a. A market value-weighted index. Rate of return: b. An equally weighted index. Rate of return:

a) 3.85% market value period index: period 0 index: (90 x 100) + (50 x 200) + (100 x 200) / 3 (3900) / 3 = 13000 period 1 index: (95 x 100) + (45 x 200) + (110 x 200) / 3 (40500) / 3 = 13500 rate of return market value index: (13500 / 13000) - 1 = 3.85 b) 1.85% equally weighted index: (p1/ p0) -1 (for stocks a b c) (95/ 90) - 1 = .055 (45 / 50) -1 = -0.1 (110 / 100) -1 = .1 Rate of return equally index: (.055 + -0.1 + 0.1) / 3 =1.85

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2 A 90 100 95 100 95 100 B 50 200 45 200 45 200 C 100 200 110 200 55 400 a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1) b. What will be the divisor for the price-weighted index in year 2?

a) 4.16% period 0 index: (90 + 50 + 100) / 3 240 / 3 = 80 period 1 index: (95 + 45 + 110) / 3 250 / 3 = 83.33 Rate of Return first period 0 to 1: (83.33 - 80) / 80 = 4.16 b) 2.34% period 2 price index : stock A & B numbers from period 1 + stock C number in period 2 period 2 price index : (95+45+55) / X = 195 / X Divisor= 195 / X = period 1 index Divisor = 195 / X = 83.33 195 / 83.33 = X X = 2.34 = Divisor

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2 A 81 100 86 100 86 100 B 41 200 36 200 36 200 C 82 200 92 200 46 400 a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1). b. What will be the divisor for the price-weighted index in year 2?

a) 4.90% b) 2.36

Suppose that Intel currently is selling at $40 per share. You buy 500 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%. a) What is the percentage increase in the net worth of your brokerage account if the price of Intel immediately changes to (1) $44; (2) $40; (3) $36? b) If the maintenance margin is 25%, how low can Intel's price fall before you get a margin call? c) How would your answer to requirement 2 would change if you had financed the initial purchase with only $10,000 of your own money? d) What is the rate of return on your margined position (assuming again that you invest $15,000 of your own money) if Intel is selling after one year at (1) $44; (2) $40; (3) $36? e) Continue to assume that a year has passed. How low can Intel's price fall before you get a margin call?

a) percentage gain 1: 13.33% percentage gain 2: 0 percentage gain 3: -13.33% STEPS: 500 shares x $40 = $20,000 $20,000 - $ 15,000 (own $) = $5,000 ( money borrowed to buy stock) 1: ($44 x 500 shares) - $5,000 = $17,000 17,000 - 15,000 = 2,000 2,000 / 15,000 = 13.33% 2: $40 is the same from the $40 per share. The price has not changed. So percent gain = 0% 3: (36 x 500) - 5,000 = 13,000 13,000 - 15,000 = -2,000 -2,000 / 15,000 = -13.33% b) $13.33 STEPS: 500 shares = 500 P 500 P - $5,000 / 500 P = 0.25 Solve for P: P = 13.33 c) $26.67 STEPS: 10,000 of own money: 20,000 - 10,000 = 10,000 borrowed 500 P - $10,000 / 500 P Solve for P: P = 26.67 d) ROR 1: 10.67% ROR 2: -2.67% ROR 3: -16,00% STEPS: 15,000 own money borrowed $5,000 interest rate for loan is 8% $5,000 x 0.08 = 400 5,000 + 400 = 5,400 1: (500 shares x 44) - 5,400 - 15,000 / 15,000 = 10.67 2: (500 x 40 ) - 5,400 - 15,000 / 15,000 = -2.67 3: (500 x 36) - 5,400 - 15,000 / 15,000 = -16 e) $14.40 STEPS: 500 shares = 500 P Margin call= 500 P - 5,400 / 500 P Solve for P P = 14.40

An investment adviser has decided to purchase gold, real estate, stocks, and bonds in equal amounts. This decision reflects which part of the investment process? Asset allocation Investment analysis Portfolio analysis Security selection

a: asset allocation

In recent years the greatest dollar amount of securitization occurred for which type of loan? Home mortgages Credit card debt Automobile loans Equipment leasing

a: home mortgages

Money market securities are sometimes referred to as cash equivalents because _____. they are safe and marketable they are not liquid they are high-risk they are low-denomination

a: they are safe and marketable

The _________ price is the price at which a dealer is willing to sell a security. bid ask clearing settlement

ask

The bid price of a Treasury bill is _________. a. the price at which the dealer in Treasury bills is willing to sell the bill b. the price at which the dealer in Treasury bills is willing to buy the bill c. greater than the ask price of the Treasury bill expressed in dollar terms d. the price at which the investor can buy the Treasury bill

b

Which one of the following is a true statement regarding the Dow Jones Industrial Average? a. It is a value-weighted average of 30 large industrial stocks. b. It is a price-weighted average of 30 large industrial stocks. c. It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange. d. It is a value-weighted average of all stocks traded on the New York Stock Exchange.

b

Which security should sell at a greater price? a) three-month expiration call option with an exercise price of $40 b) a three-month call on the same stock with an exercise price of $35.

b

Which security should sell at a greater price? a) a 10-year Treasury bond with a 9% coupon rate b) a 10-year T-bond with a 10% coupon.

b

An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and 6.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____. a. 5% and 6.4% b. 5% and 5.44% c. 4.25% and 6.4% d. 5.75% and 5.44%

b) 5% & 5.44% After-tax return on municipal bond = .05 After-tax return on corporate bond = .064(1 - .15) = .0544 = 5.44%

You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends, and ignore interest on the margin loan.) a. $26.55 b. $35.71 c. $28.95 d. $30.77

b) $35.71 Steps: Equity = 200P - 5,000 Margin = (200P - 5,000)/200P = .30 200P x .30 =60 200 P - 60P = 140P 140P = 5,000 5,000 / 140 P P = 35.71429

An investor purchases one municipal bond and one corporate bond that pay rates of return of 10% and 11.5%, respectively. If the investor is in the 20% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____. 10% and 11.5% 10% and 9.20% 8.00% and 11.5% 12.00% and 9.20%

b: 10% and 9.20% After-tax return on municipal bond = .10---> 10% After-tax return on corporate bond = .115(1 - .20) = .0920 = 9.20%

A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________. private equity investments securitization negative analyst recommendations online trading

b: securitization

The _________ price is the price at which a dealer is willing to purchase a security. bid ask clearing settlement

bid

You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wanted to construct an index to track your portfolio performance, your best match for your portfolio would be to construct ______. a. a value-weighted index b. an equally weighted index c. a price-weighted index d. a bond price index

c price-weighted index

You purchased 250 shares of common stock on margin for $25 per share. The initial margin is 65%, and the stock pays no dividend. Your rate of return would be __________ if you sell the stock at $32 per share. Ignore interest on margin. a. 38% b. 35% c. 43% d. 22%

c) 43% steps: ($32 - $25) / (25(0.65) (7) / (0.25(0.65) = 43.076...= 43%

Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market a. overpriced b. correctly priced c. underpriced d. mispriced, but without any particular bias

c. underpriced

Which of the following is not a money market instrument? Treasury bill Commercial paper Preferred stock Bankers' acceptance

c: preferred stock

A new financial asset is............which is the company's promissory note held by the bank.

created

The yield on tax-exempt bonds is ______. a. usually less than 50% of the yield on taxable bonds b. normally about 90% of the yield on taxable bonds c. greater than the yield on taxable bonds d. less than the yield on taxable bonds

d

Which of the following is not a characteristic of a money market instrument? Liquidity Marketability Low risk Maturity greater than 1 year

d

Advantages of ECNs over traditional markets include all but which one of the following? a. Lower transactions costs b. Anonymity of the participants c. Small amount of time needed to execute and orderd d. Ability to handle very large orders

d) ability to handle very large orders

When matching orders from the public, a specialist is required to use the _______. a. lowest outstanding bid price and highest outstanding ask price b. highest outstanding bid price and highest outstanding ask price c. lowest outstanding bid price and lowest outstanding ask price d. highest outstanding bid price and lowest outstanding ask price

d) highest outstanding bid price and lowest outstanding ask price

The systemic risk that led to the financial crisis of 2008 was increased by _____. collateralized debt obligations subprime mortgages credit default swaps all of the options

d: all of the options

The loan is ........ in the transaction, since it is retired when paid.

destroyed

Find the equivalent taxable yield of the municipal bond for tax brackets of zero, 10%, 20%, and 30%, if it offers a yield of 4%. a. Zero= ? b. 10% = ? c. 20% = ? d. 30% = ?

equivalent taxable yield on municipal bond = (coupon rate) / (1 - tax bracket %) a) Zero = 0.04 / 1 - 0 = 4.00% b) 10% = 0.04 / 1 - 0.10 = 4.44% c) 20% = 0.04 / 1 - 0.20 = 5.00% d) 30% = 0.04 / 1 - 0.30 = 5.71%

In exchange Lanni receives a ......... 5,000 shares of Microsoft stock.

financial asset

Lanni sells the shares of stock for $25 per share and uses part of the proceeds to payoff the bank loan. In selling 5,000 shares of stock for $125,000, Lanni is exchanging one ........... for another

financial asset

Lanni uses the cash from the bank plus $20,000 of its own funds to finance the development of new financial planning software. The cash paid by Lanni is the transfer of a .......... to the software developer.

financial asset

an IOU that a company does is a......

financial asset

In paying off the IOU with $50,000, Lanni is exchanging ..........

financial assets

Lanni takes out a bank loan. It receives $50,000 in cash and signs a note promising to pay back the loan over three years. The bank loan is a....

financial liability

A benchmark index has three stocks priced at $37, $60, and $70. The number of outstanding shares for each is 420,000 shares, 545,000 shares, and 693,000 shares, respectively. If the market value weighted index was 880 yesterday and the prices changed to $37, $56, and $74. what is the new index value?

new index: 885 Index = (today prices) / (yesterday prices) x yesterday index ($37 × 420,000 + $56 × 545,000 + $74 × 693,000) / ($37 × 420,000 + $60 × 545,000 + $70 × 693,000) x 880 = 885

volcker rule

prohibits banks from making risky wagers with their own money, and bans them from owning big stakes in hedge funds or private equity firms.

Effective annual yield for treasury yield

rEAY= (10,000 - P) / (P)= ? # ?# ^(365/n) - 1 = answer

In return, Lanni gets a .......... the completed software. No financial assets are created or destroyed. Cash is simply transferred from one firm to another.

real asset

__________ often accompany short sales and are used to limit potential losses from the short position. Limit orders Restricted orders Limit loss orders Stop-buy orders

stop-buy orders

If an investor places a _________ order, the stock will be sold if its price falls to the stipulated level. If an investor places a __________ order, the stock will be bought if its price rises above the stipulated level. stop-buy; stop-loss market; limit stop-loss; stop-buy limit; market

stop-loss; stop-buy

efficient market hypothesis

suggests that passive portfolio management strategies are the most appropriate invest strategies