Chapter 2 Review Questions

A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend received by stock investors must have been ________ per share. A) $0.55 B) $1.80 C) $0.45 D) $1.2

(60%*3) = 1.80

Which of the following is not considered a money market investment? A)bankers' acceptance B) eurodollar C) repurchase agreement D) Treasury note

..

The price quotations of Treasury bonds in the Wall Street Journal show a bid price of 104.5313 and an asking price of 104.5489. If you sell a Treasury bond, you expect to receive ________. A) $ 1,000.00 B) $ 1,045.00 C) $ 1,045.31 D) $ 1,045.4

...

1) Which of the following is not a money market instrument? A) Treasury bill B) commercial paper C) preferred stock D) bankers' acceptance

.preferred stock

3) When computing the bank discount yield, you would use ________ days in the year. A) 260 B) 360 C) 365 D) 366

360

An investor buys a T-bill at a bank discount quote of 4.80 with 150 days to maturity for $9800. The bill has a face value of $10,000. The investor's bond equivalent yield on this investment is ________. A) 4.8% B) 4.97% C) 5.47% D) 5.74%

4.97%

38) 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

5 and 5.44

What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%? A) 6.48% B) 7.25% C) 8.02% D) 9%

9 * (1-28%) = 6.48

A T-bill quote sheet has 90-day T-bill quotes with a 4.92 ask and a 4.86 bid. If the bill has a $10,000 face value, an investor could sell this bill for ________. A) $10,000 B) $9,878.50 C) $9,877 D) $9,880.1

9878.50

If a Treasury note has a bid price of $996.25, the quoted bid price in the Wall Street Journal would be ________. A) 99:5/8 B) 99:6/10 C) 99.6250 D) none of the option

99:20

T- bills are issued with initial maturities of: I. 4 weeks II. 16 weeks III. 26 weeks IV. 32 weeks A) I and II only B) I and III only C) I, II, and III only D) I, II, III, and IV

I and II only

Which of the following are true statements about T-bills? I. T-bills typically sell in denominations of $10,000. II. Income earned on T-bills is exempt from all federal taxes. III. Income earned on T-bills is exempt from state and local taxes. A) I only B) I and II only C) I and III only D) I, II, and II

I and II only

The interest rate charged by large banks in London to lend money among themselves is called ________. A) the prime rate B) the discount rate C) the federal funds rate D) LIBOR

LIBOR

Which of the following is not a nickname for an agency associated with the mortgage markets? A) Fannie Mae B) Freddie Mac C) Sallie Mae D) Ginnie Mae

Sallie Mae

TIPS are ________. A) Treasury bonds that pay no interest and are sold at a discount B) U.K. bonds that protect investors from default risk C) securities that trade on the Toronto stock index D) Treasury bonds that protect investors from inflation

Treasury bonds that protect investors from inflation

Which of the following is not a true statement regarding municipal bonds? A) A municipal bond is a debt obligation issued by state or local governments. B) A municipal bond is a debt obligation issued by the federal government. C) The interest income from a municipal bond is exempt from federal income taxation. D) The interest income from a municipal bond is exempt from state and local taxation in the issuing state

a municipal bond is a debt obligation issued by the federal government

________ is not a money market instrument. A) A certificate of deposit B) A Treasury bill C) A Treasury bond D) Commercial paper

a treasury bond

An investor in a T- bill earns interest by ________. A) receiving interest payments every 90 days B) receiving dividend payments every 30 days C) converting the T- bill at maturity into a higher- valued T-note D) buying the bill at a discount from the face value to be received at maturity

buying the bill at a discount from the face value to be received at maturity

A ________ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date. A) call option B) futures contract C) put option D) interest rate swap

call option

A dollar-denominated deposit at a London bank is called ________. A) eurodollars B) LIBOR C) fed funds D) bankers' acceptance

eurodollars

4) Deposits of commercial banks at the Federal Reserve are called ________. A) bankers' acceptances B) federal funds C) repurchase agreements D) time deposits

federal funds

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

it is a price-weighted average of 30 large industrial stocks

Preferred stock is like long- term debt in that ________. A) it gives the holder voting power regarding the firm's management B) it promises to pay to its holder a fixed stream of income each year C) the preferred dividend is a tax-deductible expense for the firm D) in the event of bankruptcy preferred stock has equal status with debt

it promises to pay its holder a fixed stream of income each year

9) Commercial paper is a short- term security issued by _______ to raise funds. A) the Federal Reserve B) the New York Stock Exchange C) large well-known companies D) all of these options

large well-known companies

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

less than the yield on taxable bonds

Which of the following is not a characteristic of a money market instrument? A) liquidity B) marketability C) low risk D) maturity greater than 1 year

maturity greater than 1 year

Which one of the following provides the best example of securitization? A) convertible bond B) call option C) mortgage pass-through security D) preferred stock

mortgage pass-through security

A ________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date. A) call option B) futures contract C) put option D) interest rate swap

put option

A firm that has large securities holdings and wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following? A) reverse repurchase agreement B) bankers' acceptance C) commercial paper D) repurchase agreement

repurchase agreement

22) Treasury bills are financial instruments issued by ________ to raise funds. A) commercial banks B) the federal government C) large corporations D) state and city government

the federal government

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

the price at which the dealer in Treasury bills are willing to sell the bill

Money market securities are sometimes referred to as cash equivalents because A) they are safe and marketable B) they are not liquid C) they are high-risk D) they are low-denomination

they are safe and marketable

6) The most marketable money market security is ________. Treasury bills B) bankers' acceptances C) certificates of deposit D) common stock

treasury bills