FIN-421 Exam 1

13. Ceteris paribus, a decrease in the demand for loans A.drives the interest rate down. B. drives the interest rate up. C. might not have any effect on interest rates. D. results from an increase in business prospects and a decrease in the level of savings.

A.drives the interest rate down. A decrease in demand, ceteris paribus, always drives interest rates down. An increase in business prospects would increase the demand for funds. The savings level affects the supply of, not the demand for, funds.

51. Of the following types of mutual funds, an investor who wishes to invest in a diversified portfolio of stocks worldwide (including the U.S.) should choose A.international funds. B. global funds. C. regional funds. D. emerging-market funds.

B. global funds.

65. The ultimate stock index in the U.S. is the A. Wilshire 5000. B. DJIA. C. S&P 500. D. Russell 2000.

A. Wilshire 5000

4. Multiple Mutual Funds had year-end assets of $457,000,000 and liabilities of $17,000,000. There were 24,300,000 shares in the fund at year end. What was Multiple Mutual's net asset value? A. $18.11 B. $18.81 C. $69.96 D. $7.00 E. $181.07

A. $18.11 ($457,000,000 - 17,000,000)/24,300,000 = $18.11.

46. A mutual fund had NAV per share of $26.25 on January 1, 2016. On December 31 of the same year, the fund's rate of return for the year was 16.4%. Income distributions were $1.27, and the fund had capital gain distributions of $1.85. Without considering taxes and transactions costs, what ending NAV would you calculate? A. $27.44 B. $33.88 C. $24.69 D. $42.03 E. $16.62

A. $27.44 0.164 = (P- $26.25 + 1.27 + 1.85)/$26.25; P= $27.435.

23. Investors' Choice Fund had NAV per share of $37.25 on January 1, 2016. On December 31 of the same year, the fund s rate of return for the year was 17.3%. Income distributions were $1.14, and the fund had capital gain distributions of $1.35. Without considering taxes and transactions costs, what ending NAV would you calculate for Investors' Choice? A. $41.20 B. $33.88 C. $43.69 D. $42.03 E. $46.62

A. $41.20 0.173 = (P- $37.25 + 1.14 + 1.35)/$37.25; P= $41.20.

48. You purchased 100 shares of XON common stock on margin at $60 per share. Assume the initial margin is 50%, and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin. A. $42.86 B. $50.75 C. $49.67 D. $80.34

A. $42.86 100 shares × $60 × 0.5 = $6,000 × 0.5 = $3,000 (loan amount); 0.30 = (100P$3,000)/100P; 30 - P= 100P- $3,000; -70P= -$3,000; P= $42.86.

36. You want to purchase XON stock at $60 from your broker using as little of your own money as possible. If initial margin is 50% and you have $3,000 to invest, how many shares can you buy? A. 100 shares B. 200 shares C. 50 shares D. 500 shares E. 25 shares

A. 100 shares 0.5 = [(Q× $60) - $3,000]/(Q× $60); $30Q= $60Q- $3,000; $30Q

41. A mutual fund had year-end assets of $521,000,000 and liabilities of $63,000,000. If the fund NAV was $26.12, how many shares must have been held in the fund? A. 17,534,456 B. 16,488,372 C. 18,601,742 D. 17,542,515

A. 17,534,456 ($521,000,000 - 63,000,000)/$26.12 = 17,534,456.

17. In 2016, the proportion of mutual funds (based on total assets) specializing in bonds was A. 21.8%. B. 28.0%. C. 54.1%. D. 73.4%. E. 63.5%.

A. 21.8%.

71. The maximum maturity of commercial paper that can be issued without SEC registration is A. 270 days. B. 180 days. C. 90 days. D. 30 days.

A. 270 days.

55. ________ are, in essence, an insurance contract against the default of one or more borrowers. A. Credit default swaps B. CMOs C. ETFs D. Collateralized debt obligations E. All of the options

A. Credit default swaps

27. As of 2016, which class of mutual funds had the largest amount of assets invested? A. Equity funds B. Bond funds C. Mixed asset classes, such as asset allocation funds D. Money market funds E. Global funds

A. Equity funds

44. In a typical underwriting arrangement, the investment-banking firm I) sells shares to the public via an underwriting syndicate.II) purchases the securities from the issuing company.III) assumes the full risk that the shares may not be sold at the offering price.IV) agrees to help the firm sell the issue to the public but does not actually purchase the securities. A. I, II, and III B. I, III, and IV C. I and IV D. II and III E. I and II

A. I, II, and III

35.If the market prices of each of the 30 stocks in the Dow Jones Industrial Average (DJIA) all change by the same percentage amount during a given day, which stock will have the greatest impact on the DJIA? A. The stock trading at the highest dollar price per share B. The stock having the greatest amount of debt in its capital structure C. The stock having the greatest amount of equity in its capital structure D. The stock having the lowest volatility

A. The stock trading at the highest dollar price per share

12. In 2016, which of the following financial assets make up the greatest proportion of the financial assets held by U.S. households? A. Pension reserves B. Life insurance reserves C. Mutual fund shares D. Debt securities E. Personal trusts

A. Pension reserves

53. Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks the S&P 500 should choose A. SPY. B. DIA. C. QQQ. D. IWM. E. VTI.

A. SPY. SPY tracks the S&P 500.

44. What does the term negotiablemean, with regard to negotiable certificates of deposit? A. The CD can be sold to another investor if the owner needs to cash it in before its maturity date. B. The rate of interest on the CD is subject to negotiation. C. The CD is automatically reinvested at its maturity date. D. The CD has staggered maturity dates built in. E. The interest rate paid on the CD will vary with a designated market rate.

A. The CD can be sold to another investor if the owner needs to cash it in before its maturity date. Negotiable means that it can be sold or traded to another investor.

34. Which of the following portfolio construction methods starts with asset allocation? A. Top-down B. Bottom-up C. Middle-out D. Buy and hold E. Asset allocation

A. Top-down

9. The largest component of the fixed-income market is _______ debt. A. Treasury B. asset-backed C. corporate D. tax-exempt E. mortgage-backed

A. Treasury

24. The ____________ refers to the potential conflict between management and shareholders. A. agency problem B. diversification problem C. liquidity problem D. solvency problem E. regulatory problem

A. agency problem

6. In a "firm commitment," the investment banker A. buys the stock from the company and resells the issue to the public. B. agrees to help the firm sell the stock at a favorable price. C. finds the best marketing arrangement for the investment-banking firm. D. agrees to help the firm sell the stock at a favorable price and finds the best marketing arrangement for the investment-banking firm.

A. buys the stock from the company and resells the issue to the public. In a "firm commitment," the investment banker buys the stock from the company and resells the issue to the public.

32. Security selection refers to A. choosing which securities to hold based on their valuation. B. investing only in "safe" securities. C. the allocation of assets into broad asset classes. D. top-down analysis.

A. choosing which securities to hold based on their valuation.

21. The value of a derivative security A. depends on the value of the related security. B. is unable to be calculated. C. is unrelated to the value of the related security. D. has been enhanced due to the recent misuse and negative publicity regarding these instruments. E. is worthless today.

A. depends on the value of the related security.

1. The trading of stock that was previously issued takes place A. in the secondary market. B. in the primary market. C. usually with the assistance of an investment banker. D. in the secondary and primary markets.

A. in the secondary market.

52. Of the following types of mutual funds, an investor who wishes to invest in a diversified portfolio of foreign stocks (excluding the U.S.) should choose A. international funds. B. global funds. C. regional funds. D. emerging-market funds.

A. international funds.

39. In 2016, ____________ was(were) the most significant financial asset(s) of U.S. commercial banks in terms of total value. A. loans and leases B. cash C. real estate D. deposits E. investment securities

A. loans and leases

46. New issues of securities are sold in the ________ market(s). A. primary B. secondary C. over-the-counter D. primary and secondary

A. primary

62. The preliminary prospectus is referred to as a(n) A. red herring. B. indenture. C. greenmail. D. tombstone. E. headstone.

A. red herring.

10. Investors in closed-end funds who wish to liquidate their positions must A. sell their shares through a broker. B. sell their shares to the issuer at a discount to net asset value. C. sell their shares to the issuer at a premium to net asset value. D. sell their shares to the issuer for net asset value. E. hold their shares to maturity.

A. sell their shares through a broker. Closed-end fund shares are sold on organized exchanges through a broker.

35. Over the past year, you earned a nominal rate of interest of 14% on your money. The inflation rate was 2% over the same period. The exact actual growth rate of your purchasing power was A.11.76%. B. 16.00%. C. 15.02%. D. 14.32%.

A.11.76%. r = (1 + R)/(1 +I) - 1; 1.14/1.02 - 1 = 11.76%.

22. If a portfolio had a return of 18%, the risk-free asset return was 5%, and the standard deviation of the portfolio's excess returns was 34%, the risk premium would be A.13%. B. 18%. C. 49%. D. 12%. E. 29%.

A.13%. 18 - 5 = 13%.

39. A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 5.7%. What is your approximate annual real rate of return if the rate of inflation was 1.6% over the year? A.4.1% B. 2.5% C. 2.9% D. 1.6%

A.4.1% 5.7% - 1.6% = 4.1%.

3. A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 9%. What is your approximate annual real rate of return if the rate of inflation was 4% over the year? A.5% B. 10% C. 7% D. 3%

A.5% 9% - 4% = 5%.

1. Which one of the following statements regarding open-end mutual funds is false? A.The funds redeem shares at net asset value. B. The funds offer investors professional management. C. The funds offer investors a guaranteed rate of return. D. The funds redeem shares at net asset value and offer investors professional management.

A.The funds redeem shares at net asset value. Mutual funds do not offer a guaranteed rate of return.

12. At issue, offering prices of open-end funds will often be A.less than NAV due to loads. B. greater than NAV due to loads. C. less than NAV due to limited demand. D. greater than NAV due to excess demand. E. less than or greater than NAV with no apparent pattern

B . greater than NAV due to loads Open-end funds are redeemable on demand at NAV so they should never sell for less than NAV. However, loads can increase the price above NAV.

25.The price quotations of Treasury bonds in the Wall Street Journalshow an ask price of 104.25 and a bid price of 104.125. As a buyer of the bond, what is the dollar price you expect to pay? A. $1,048.00 B. $1,042.50 C. $1,044.00 D. $1,041.25 E. $1,040.40

B. $1,042.50 You pay the asking price of the dealer, 104 8/32, or 104.25% of $1,000, or $1,042.50.

51. You purchased 1,000 shares of common stock on margin at $30 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $24? Ignore interest on margin. A.0.33 B. 0.375 C. 0.20 D. 0.23 E. 0.25

B. 0.375 1,000 shares × $30/share × 0.5 = $30,000 × 0.5 = $15,000 (loan amount); X= [1,000($24) - $15,000]/1,000($24); X= 0.375.

36. A mutual fund had year-end assets of $560,000,000 and liabilities of $26,000,000. There were 23,850,000 shares in the fund at year end. What was the mutual fund's net asset value? A.$22.87 B. $22.39 C. $22.24 D. $17.61 E. $19.25

B. $22.39 ($560,000,000 - 26,000,000)/23,850,000 = $22.389.

16. You purchased 100 shares of IBM common stock on margin at $70 per share. Assume the initial margin is 50%, and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin. A.$21 B. $50 C. $49 D. $80

B. $50 100 shares × $70 × 0.5 = $7,000 × 0.5 = $3,500 (loan amount); 0.30 = (100P$3,500)/100P; 30 -P= 100P- $3,500; -70P= -$3,500; P= $50.

20. You sold short 300 shares of common stock at $55 per share. The initial margin is 60%. At what stock price would you receive a margin call if the maintenance margin is 35%? A.$51.00 B. $65.19 C. $35.22 D. $40.36

B. $65.19

22. Consider the following three stocks: The price-weighted index constructed with the three stocks is A. 30. B. 40. C. 50. D. 60. E. 70.

B. 40.

31. Patty O Furniture purchased 100 shares of Green Isle mutual fund at a net asset value of $42 per share. During the year, Patty received dividend income distributions of $2.00 per share and capital gains distributions of $4.30 per share. At the end of the year, the shares had a net asset value of $40 per share. What was Patty's rate of return on this investment? A.5.43% B. 10.24% C. 7.19% D. 12.44% E. 9.18%

B. 10.24% R= ($40 - 42 + 2 + 4.3)/$42 = 10.238%.

34. A 5.5%, 20-year municipal bond is currently priced to yield 7.2%. For a taxpayer in the 33% marginal tax bracket, this bond would offer an equivalent taxable yield of A. 8.20%. B. 10.75%. C. 11.40%. D. 4.82%.

B. 10.75%. 0.072 = r(1 - t); 0.072 = r(0.67);r= 0.072/0.67; r= 0.1075 = 10.75%

52. In order for you to be indifferent between the after-tax returns on a corporate bond paying 7% and a tax-exempt municipal bond paying 5.5%, what would your tax bracket need to be? A. 22.6% B. 21.4% C. 26.2% D. 19.8% E. Cannot be determined from the information given.

B. 21.4% 0.055 = 0.07(1 - t); (1 - t) = 0.786; t= 0.214.

64. You purchased shares of a mutual fund at a price of $20 per share at the beginning of the year and paid a front-end load of 5.75%. If the securities in which the fund invested increased in value by 11% during the year, and the fund's expense ratio was 1.25%, your return if you sold the fund at the end of the year would be A.4.33%. B. 3.44%. C. 2.45%. D. 6.87%.

B. 3.44%. {[$20 × 0.9425 × (1.11 - 0.0125)] -$20}/$20 = 3.44%.

33. Assume that you purchased shares of High Flying mutual fund at a net asset value of $12.50 per share. During the year, you received dividend income distributions of $0.78 per share and capital gains distributions of $1.67 per share. At the end of the year, the shares had a net asset value of $13.87 per share. What was your rate of return on this investment? A.29.43% B. 30.56% C. 31.19% D. 32.44% E. 29.18%

B. 30.56% R= ($13.87 - 12.50 + 0.78 + 1.67)/$12.50 = 30.56%.

54. Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks the Dow Jones Industrials should choose A.SPY. B. DIA. C. QQQQ. D. IWM. E. VTI.

B. DIA. DIA tracks the DJIA.

58. Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks the MSCI Japan Index should choose A.SPY. B. EWJ. C. QQQQ. D. IWM. E. VTI.

B. EWJ. EWJ tracks the MSCI Japan Index.

49. Until 1999, the ________ Act(s) prohibited banks in the United States from both accepting deposits and underwriting securities. A.Sarbanes-Oxley B. Glass-Steagall C. SEC D. Sarbanes-Oxley and SEC E. None of the options

B. Glass-Steagall

20. Which of the following indices is(are) market-value weighted? I) The New York Stock Exchange Composite Index II) The Standard and Poor's 500 Stock Index III) The Dow Jones Industrial Average A. I only B.I and II only C. I and III only D. I, II, and III E. II and III only

B. I and II only The Dow Jones Industrial Average is a price-weighted index.

53. Which of the following is true about mortgage-backed securities? I) They aggregate individual home mortgages into homogeneous pools.II) The purchaser receives monthly interest and principal payments received from payments made on the pool.III) The banks that originated the mortgages maintain ownership of them.IV) The banks that originated the mortgages may continue to service them. A.II, III, and IV B. I, II, and IV C. II and IV D. I, III, and IV E. I, II, III, and IV

B. I, II, and IV

37. ________ specialize in helping companies raise capital by selling securities. A.Commercial bankers B. Investment bankers C. Investment issuers D. Credit raters

B. Investment bankers

27. Which of the following orders instructs the broker to sell at or below a specified price? A.Limit-sell order B. Stop-loss C. Limit-buy order D. Stop-buy order E. Market order

B. Stop-loss Stop-loss orders are to be executed if the market price decreases to the specified limit price.

23. Shares for short transactions A.are usually borrowed from other brokers. B. are typically shares held by the short seller's broker in street name. C. are borrowed from commercial banks. D. are typically shares held by the short seller's broker in street name and are borrowed from commercial banks.

B. are typically shares held by the short seller's broker in street name.

31. In calculating the Standard and Poor's stock price indices, the adjustment for stock split occurs A. by adjusting the divisor. B. automatically. C. by adjusting the numerator. D. quarterly on the last trading day of each quarter

B. automatically. The calculation of the value-weighted S&P indices includes both price and number of shares of each of the stocks in the index. Thus, the effects of stock splits are automatically incorporated into the calculation.

44. In terms of total value, the most significant liability(ies) of U.S. nonfinancial businesses in 2016 was(were) A.bank loans. B. bonds and mortgages. C. trade debt. D. other loans. E. marketable securities.

B. bonds and mortgages.

49. Bond market indexes can be difficult to construct because A. they cannot be based on firms'market values. B. bonds tend to trade infrequently, making price information difficult to obtain. C. there are so many different kinds of bonds. D. prices cannot be obtained for companies that operate in emerging markets. E. corporations are not required to disclose the details of their bond issues. Bond trading is often "thin," making prices stale (or not current).

B. bonds tend to trade infrequently, making price information difficult to obtain.

52. The sale of a mortgage portfolio by setting up mortgage pass-through securities is an example of A.credit enhancement. B. credit swap. C. unbundling. D. derivatives.

B. credit swap.

38. Commercial banks differ from other businesses in that both their assets and their liabilities are mostly A.illiquid. B. financial. C. real. D. owned by the government. E. regulated.

B. financial.

45. Freddie Mac and Ginnie Mae were organized to provide A. a primary market for mortgage transactions. B. liquidity for the mortgage market. C. a primary market for farm loan transactions. D. liquidity for the farm loan market. E. a source of funds for government agencies. Liquidity for the mortgage market.

B. liquidity for the mortgage market.

11. In 2016, ____________ were the most significant liability of U.S. households in terms of total value. A.credit cards B. mortgages C. bank loans D. student loans E. other forms of debt

B. mortgages

8. The smallest component of the fixed-income market is _______ debt. A. Treasury B. other asset-backed C. corporate D. tax-exempt E. mortgage-backed

B. other asset-backed

39. A form of short-term borrowing by dealers in government securities is (are) A. reserve requirements. B. repurchase agreements. C. bankers' acceptances. D. commercial paper. E. brokers'calls.

B. repurchase agreements. Repurchase agreements are a form of short-term borrowing, where a dealer sells government securities to an investor with an agreement to buy back those same securities at a slightly higher price.

14. The largest component of domestic net worth in 2016 was A.nonresidential real estate. B. residential real estate. C. inventories. D. consumer durables. E. equipment and software.

B. residential real estate.

37. A sale by IBM of new stock to the public would be a(n) A.short sale. B. seasoned equity offering. C. private placement. D. secondary-market transaction. E. initial public offering.

B. seasoned equity offering. When a firm whose stock already trades in the secondary market issues new shares to the public, this is referred to as a seasoned equity offering.

47. Investors trade previously issued securities in the ________ market(s). A.primary B. secondary C. primary and secondary D. derivatives

B. secondary

59. A put option allows the holder to A. buy the underlying asset at the strike price on or before the expiration date. B. sell the underlying asset at the strike price on or before the expiration date. C. sell the option in the open market prior to expiration. D. sell the underlying asset at the strike price on or before the expiration date and sell the option in the open market prior to expiration. E. buy the underlying asset at the strike price on or before the expiration date and sell the option in the open market prior to expiration.

B. sell the underlying asset at the strike price on or before the expiration date. A put option allows the buyer to sell the underlying asset at the strike price on or before the expiration date

8. Initial margin requirements are determined by A.the Securities and Exchange Commission. B. the Federal Reserve System. C. the New York Stock Exchange. D. the Federal Reserve System and the New York Stock Exchange.

B. the Federal Reserve System.

5. T-bills are financial instruments initially sold by ________ to raise funds. A. commercial banks B. the U.S. government C. state and local governments D. agencies of the federal government E. the U.S. government and agencies of the federal government

B. the U.S. government

41. You sell short 100 shares of Loser Co. at a market price of $45 per share. Your maximum possible loss is A.$4,500. B. unlimited. C. zero. D. $9,000. E. Cannot be determined from the information given.

B. unlimited.

26. The price quotations of Treasury bonds in the Wall Street Journalshow an ask price of 104.25 and a bid price of 104.125. As a seller of the bond, what is the dollar price you expect to receive? A. $1,048.00 B. $1,042.50 C. $1,041.25 D. $1,041.75 E. $1,040.40

C. $1,041.25 You receive the bid price of the dealer, 104 4/32, or 104.125% of $1,000, or $1,041.25

78. You purchased a futures contract on corn at a futures price of 350, and at the time of expiration, the price was 352. What was your profit or loss? A. $2.00 B. -$2.00 C. $100 D. -$100

C. $100 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was (3.52 - 3.50) = $0.02 per bushel, or $0.02 × 5,000 = $100

46. You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. Your initial investment was A.$4,800. B. $12,000. C. $2,250. D. $7,200.

C. $2,250.

50. You purchased 100 shares of common stock on margin at $40 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $25? Ignore interest on margin. A.0.33 B. 0.55 C. 0.20 D. 0.23 E. 0.25

C. 0.20 100 shares × $40/share × 0.5 = $4,000 × 0.5 = $2,000 (loan amount); X= [100($25) - $2,000]/100($25); X= 0.20.

73. If a portfolio had a return of 12%, the risk-free asset return was 4%, and the standard deviation of the portfolio's excess returns was 25%, the Sharpe measure would be A. 0.12. B. 0.04. C. 0.32. D. 0.16. E. 0.25.

C. 0.32. (12 - 4)/25 = 0.32.

34. Assume that you purchased shares of a mutual fund at a net asset value of $14.50 per share. During the year, you received dividend income distributions of $0.27 per share and capital gains distributions of $0.65 per share. At the end of the year, the shares had a net asset value of $13.74 per share. What was your rate of return on this investment? A.2.91% B. 3.07% C. 1.10% D. 1.78% E. -1.18%

C. 1.10% R= ($13.74 - 14.50 + 0.27 + 0.65)/$14.50 = 1.103%.

13. In 2016, _______ of the assets of U.S. households were financial assets as opposed to tangible assets. A.20.4% B. 34.2% C. 69.4% D. 71.7% E. 82.5%

C. 69.4%

51. In order for you to be indifferent between the after-tax returns on a corporate bond paying 9% and a tax-exempt municipal bond paying 7%, what would your tax bracket need to be? A. 17.6% B. 27% C. 22.2% D. 19.8% E. Cannot be determined from the information given.

C. 22.2% 0.07 = 0.09(1 - t); (1 - t) = 0.777;t= 0.222

19. Assume you sell short 100 shares of common stock at $45 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $40 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction. A.20.03% B. 25.67% C. 22.22% D. 77.46%

C. 22.22% Profit on stock = ($45 - $40) × 100 = $500, $500/$2,250 (initial investment) = 22.22%.

7. Pinnacle Fund had year-end assets of $825,000,000 and liabilities of $25,000,000. If Pinnacle's NAV was $32.18, how many shares must have been held in the fund? A.21,619,346.92 B. 22,930,546.28 C. 24,860,161.59 D. 25,693,645.25

C. 24,860,161.59 ($825,000,000 - 25,000,000)/$32.18 = 24,860,161.59.

6. Diversified Portfolios had year-end assets of $279,000,000 and liabilities of $43,000,000. If Diversified's NAV was $42.13, how many shares must have been held in the fund? A.43,000,000 B. 6,488,372 C. 5,601,709 D. 1,182,203

C. 5,601,709 ($279,000,000 - 43,000,000)/$42.13 = 5,601,708.996.

16. In 2016, the proportion of mutual funds (based on total assets) specializing in common stocks was A.21.7%. B. 28.0%. C. 52.1%. D. 73.4%. E. 63.5%.

C. 52.1%

48. Which of the following are characteristics of preferred stock? I) It pays its holder a fixed amount of income each year at the discretion of its managers. II) It gives its holder voting power in the firm. III) Its dividends are usually cumulative. IV) Failure to pay dividends may result in bankruptcy proceedings. A. I, III, and IV B. I, II, and III C. I and III D. I, II, and IV E. I, II, III, and IV Only I and III are true.

C. I and III

55. Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks the Nasdaq 100 should choose A.SPY. B. DIA. C. QQQ. D. IWM. E. VTI.

C. QQQ. QQQ tracks the Nasdaq 100.

26. Which of the following are mechanisms that have evolved to mitigate potential agency problems? I) Using the firm's stock options for compensation II) Hiring bickering family members as corporate spies III) Boards of directors forcing out underperforming management IV) Security analysts monitoring the firm closely V) Takeover threats A.II and V B. I, III, and IV C. I, III, IV, and V D. III, IV, and V E. I, III, and V

C. I, III, IV, and V

26. Which of the following orders instructs the broker to buy at or below a specified price? A.Limit-loss order B. Discretionary order C. Limit-buy order D. Stop-buy order E. Market order

C. Limit-buy order Limit-buy orders are to be executed if the market price decreases to the specified limit price.

28. Which of the following orders instructs the broker to sell at or above a specified price? A.Limit-buy order B. Discretionary order C. Limit-sell order D. Stop-buy order E. Market order

C. Limit-sell order Limit-sell orders are to be executed if the market price increases to the specified limit price.

18. Which of the following is trueregarding a firm's securities? A. Common dividends are paid before preferred dividends. B. Preferred stockholders have voting rights. C. Preferred dividends are usually cumulative. D. Preferred dividends are contractual obligations. E. Common dividends can usually be paid if preferred dividends have been skipped.

C. Preferred dividends are usually cumulative. Preferred dividends must be paid first and any skipped preferred dividends must be paid before common dividends may be paid.

10. Which of the following is not a component of the money market? A. Repurchase agreements B. Eurodollars C. Real estate investment trusts D. Money market mutual funds E. Commercial paper

C. Real estate investment trusts

32. Which of the following statements regarding the Dow Jones Industrial Average (DJIA) isfalse? A. The DJIA is not very representative of the market as a whole. B. The DJIA consists of 30 blue chip stocks. C. The DJIA is affected equally by changes in low- and high-priced stocks. D. The DJIA divisor needs to be adjusted for stock splits. E. The value of the DJIA is much higher than individual stock prices.

C. The DJIA is affected equally by changes in low- and high-priced stocks. The high-priced stocks have much more impact on the DJIA than do the lower-priced stocks

42. Which of the following is not a mortgage-related government or government-sponsored agency? A. The Federal Home Loan Bank B. The Federal National Mortgage Association C. The U.S. Treasury D. Freddie Mac E. Ginnie Mae

C. The U.S. Treasury

24. Which of the following is notan advantage of owning mutual funds? A.They offer a variety of investment styles. B. They offer small investors the benefits of diversification. C. They treat income as "passed through" to the investor for tax purposes. D. All of the options are advantages of mutual funds. E. None of the options are an advantage of mutual funds.

C. They treat income as "passed through" to the investor for tax purposes.

21. The Dow Jones Industrial Average (DJIA) is computed by A. adding the prices of 30 large "blue-chip" stocks and dividing by 30. B. calculating the total market value of the 30 firms in the index and dividing by 30. C. adding the prices of the 30 stocks in the index and dividing by a divisor. D. adding the prices of the 500 stocks in the index and dividing by a divisor. E. adding the prices of the 30 stocks in the index and dividing by the value of these stocks as of some base date period.

C. adding the prices of the 30 stocks in the index and dividing by a divisor. When the DJIA became a 30-stock index, it was computed by adding the prices of 30 large "blue-chip" stocks and dividing by 30; however, as stocks on the index have split and been replaced, the divisor has been adjusted

36. The stocks on the Dow Jones Industrial Average A. have remained unchanged since the creation of the index. B. include most of the stocks traded on the NYSE. C. are changed occasionally as circumstances dictate. D. consist of stocks on which the investor cannot lose money. E. include most of the stocks traded on the NYSE and are changed occasionally as circumstances dictate. The stocks on the DJIA are only a small sample of the entire market and have been changed occasionally since the creation of the index; one can lose money on any stock.

C. are changed occasionally as circumstances dictate.

14. The interest rate charged by banks with excess reserves at a Federal Reserve Bank to banks needing overnight loans to meet reserve requirements is called the A. prime rate. B. discount rate. C. federal funds rate. D. call money rate. E. money market rate.

C. federal funds rate. The federal funds are required for the bank to meet reserve requirements, which is a way of influencing the money supply.

15. The smallest component of domestic net worth in 2016 was A.nonresidential real estate. B. residential real estate. C. inventories. D. consumer durables. E. equipment and software.

C. inventories.

35. You want to buy 100 shares of Hotstock Inc. at the best possible price as quickly as possible. You would most likely place a A.stop-loss order. B. stop-buy order. C. market order. D. limit-sell order. E. limit-buy order.

C. market order.

7. In 2016, ____________ was the most significant real asset of U.S. households in terms of total value. A.consumer durables B. automobiles C. real estate D. mutual fund shares E. bank loans

C. real estate

52. Over the past year, you earned a nominal rate of interest of 3.6% on your money. The inflation rate was 3.1% over the same period. The exact actual growth rate of your purchasing power was A. 3.6%. B. 3.1%. C.0.48%. D. 6.7%.

C.0.48% r = (1 + R)/(1 +I) - 1; 1.036/1.031% - 1 = 0.484%.

2. Over the past year, you earned a nominal rate of interest of 8% on your money. The inflation rate was 4% over the same period. The exact actual growth rate of your purchasing power was A. 15.5%. B. 10.0%. C.3.8%. D. 4.8%. E. 15.0%.

C.3.8%. r = (1 + R)/(1 +I) - 1; 1.08%/1.04% - 1 = 3.8%.

25. Which of the following factors would not be expected to affect the nominal interest rate? A. The supply of loans B. The demand for loans C.The coupon rate on previously issued government bonds D. The expected rate of inflation E. Government spending and borrowing

C.The coupon rate on previously issued government bonds

47. You sold short 150 shares of common stock at $27 per share. The initial margin is 45%. Your initial investment was A.$4,800.60. B. $12,000.25. C. $2,250.75. D. $1,822.50.

D. $1,822.50. 150 shares × $27/share × 0.45 = $4,050 × 0.45 = $1,822.50.

5. Growth Fund had year-end assets of $862,000,000 and liabilities of $12,000,000. There were 32,675,254 shares in the fund at year end. What was Growth Fund's net asset value? A.$28.17 B. $25.24 C. $19.62 D. $26.01 E. $21.56

D. $26.01 ($862,000,000 - 12,000,000)/32,675,254 = $26.01.

16. The domestic net worth of the U.S. in 2016 was A.$15.411 trillion. B. $26.431 trillion. C. $42.669 trillion. D. $64.747 trillion. E. $70.983 trillion.

D. $64.747 trillion.

15. You sold short 200 shares of common stock at $60 per share. The initial margin is 60%. Your initial investment was A.$4,800. B. $12,000. C. $5,600. D. $7,200.

D. $7,200. 200 shares × $60/share × 0.60 = $12,000 × 0.60 = $7,200.

80. You sold a futures contract on corn at a futures price of 350, and at the time of expiration, the price was 352. What was your profit or loss? A. $2.00 B. -$2.00 C. $100 D. -$100

D. -$100 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your loss was ($3.50 - 3.52) = $0.02 per bushel, or -$0.02 × 5,000 = -$100.

35. Assume that you purchased shares of a mutual fund at a net asset value of $10.00 per share. During the year, you received dividend income distributions of $0.05 per share and capital gains distributions of $0.06 per share. At the end of the year, the shares had a net asset value of $8.16 per share. What was your rate of return on this investment? A.-18.24% B. -16.1% C. 16.10% D. -17.3% E. 17.3%

D. -17.3% R= ($8.16 - 10.00 + 0.05 + 0.06)/$10.00 = 17.3%.

18. You purchased 300 shares of common stock on margin for $60 per share. The initial margin is 60%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $45 per share? Ignore interest on margin. A.25.00% B. -33.33% C. 44.31% D. -41.67% E. -54.22%

D. -41.67% 300($60)(0.60) = $10,800 investment; 300($60) = $18,000 × (0.40) = $7,200 loan; proceeds after selling stock and repaying loan: $13,500 - $7,200 = $6,300; Return = ($6,300 - $10,800)/$10,800 = -41.67%.

31. Block transactions are transactions for more than _______ shares, and they account for about _____ percent of all trading on the NYSE. A.1,000; 5 B. 500; 10 C. 100,000; 50 D. 10,000; 30 E. 5,000; 23

D. 10,000; 30 Block transactions are defined as trades of 10,000 or more shares.

30. The fee that mutual funds use to help pay for advertising and promotional literature is called a A.front-end load fee. B. back-end load fee. C. operating expense fee. D. 12b-1 fee. E. structured fee.

D. 12b-1 fee. A front-end load fee and back-end load fee are used to compensate the sales force, and an operating expense fee is used to cover operating expenses. Rule 12b-1 allows a small fee to cover advertising and promotion.

47. Suppose an investor is considering a corporate bond with a 7.17% before-tax yield and a municipal bond with a 5.93% before-tax yield. At what marginal tax rate would the investor be indifferent between investing in the corporate and investing in the muni? A. 15.4% B. 23.7% C. 39.5% D. 17.3% E. 12.4%

D. 17.3% t m = 1 - (5.93%/7.17%) = 17.29%.

21. The Profitability Fund had NAV per share of $17.50 on January 1, 2016. On December 31 of the same year, the fund's NAV was $19.47. Income distributions were $0.75, and the fund had capital gain distributions of $1.00. Without considering taxes and transactions costs, what rate of return did an investor receive on the Profitability Fund last year? A.11.26% B. 15.54% C. 16.97% D. 21.26% E. 9.83%

D. 21.26% R= ($19.47 - 17.50 + 0.75 + 1.00)/$17.50 = 21.26%.

59. Assume you sold short 100 shares of common stock at $70 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $85? A.40.5% B. 20.5% C. 35.5% D. 23.5%

D. 23.5% $7,000 × 1.5 = $10,500; [$10,500 - 100($85)]/100($85) = 23.5%.

61. A mutual fund had average daily assets of $2.0 billion in 2016. The fund sold $500 million worth of stock and purchased $600 million worth of stock during the year. The fund's turnover ratio is A.27.5%. B. 12%. C. 15%. D. 25%. E. 20%.

D. 25%. 500,000,000/2,000,000,000 = 25%.

43. In order for you to be indifferent between the after-tax returns on a corporate bond paying 8.5% and a tax-exempt municipal bond paying 6.12%, what would your tax bracket need to be? A. 33% B. 72% C. 15% D. 28% E. Cannot be determined from the information given.

D. 28% 0.0612 = 0.085(1 - t); (1 - t) = 0.72;t= 0.28.

53. You purchased 100 shares of common stock on margin for $35 per share. The initial margin is 50%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $42 per share? Ignore interest on margin. A.28% B. 33% C. 14% D. 40% E. 24%

D. 40% 100($35)(0.50) = $1,750 investment; gain on stock sale = (42 - 35)(100) = $700; Return = ($700/$1,750) = 40%.

53. An investor purchases one municipal and one corporate bond that pay rates of return of 6% and 8%, respectively. If the investor is in the 25% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. A. 6%; 8% B. 4.5%; 6% C. 4.5%; 8% D. 6%; 6%

D. 6%; 6% r c = 0.08(1 - 0.25) = 0.06, or 6%; rm= 0.06(1 - 0) = 6%.

40. A mutual fund had year-end assets of $465,000,000 and liabilities of $37,000,000. If the fund NAV was $56.12, how many shares must have been held in the fund? A.4,300,000 B. 6,488,372 C. 8,601,709 D. 7,626,515 E. None of these options are correct.

D. 7,626,515 ($465,000,000 - 37,000,000)/$56.12 = 7,626,515.

19. In 2016, the proportion of hybrid (bond and stock) mutual funds (based on total assets) was A.21.7%. B. 28.0%. C. 54.1%. D. 8.5%. E. 22.6%.

D. 8.5%

16. Which of the following statements is trueregarding a corporate bond? A. A corporate callable bond gives the holder the right to exchange it for a specified number of the company's common shares. B. A corporate debenture is a secured bond. C. A corporate indenture is a secured bond. D. A corporate convertible bond gives the holder the right to exchange the bond for a specified number of the company's common shares. E. Holders of corporate bonds have voting rights in the company.

D. A corporate convertible bond gives the holder the right to exchange the bond for a specified number of the company's common shares.

11. Which one of the following statements regarding orders is false? A.A market order is simply an order to buy or sell a stock immediately at the prevailing market price. B. A limit-sell order is where investors specify prices at which they are willing to sell a security. C. If stock ABC is selling at $50, a limit-buy order may instruct the broker to buy the stock if and when the share price falls below $45. D. A market order is an order to buy or sell a stock on a specific exchange (market).

D. A market order is an order to buy or sell a stock on a specific exchange (market).

48. Investment bankers perform which of the following role(s)? A.Market new stock and bond issues for firms B. Provide advice to the firms as to market conditions, price, etc. C. Design securities with desirable properties D. All of the options E. None of the options

D. All of the options

25. Which of the following would increase the net asset value of a mutual fund share, assuming all other things remain unchanged? A.An increase in the number of fund shares outstanding B. An increase in the fund's accounts payable C. A change in the fund's management D. An increase in the value of one of the fund's stocks

D. An increase in the value of one of the fund's stocks

_______ are financial assets. A.Bonds B. Machines C. Stocks D. Bonds and stocks E. Bonds, machines, and stocks

D. Bonds and stocks

54. ________ were designed to concentrate the credit risk of a bundle of loans on one class of investor, leaving the other investors in the pool relatively protected from that risk. A.Stocks B. Bonds C. Derivatives D. Collateralized debt obligations E. All of the options

D. Collateralized debt obligations Collateralized debt obligations were designed to concentrate the credit risk of a bundle of loans on one class of investor, leaving the other investors in the pool relatively protected from that risk

69. Certificates of deposit are insured by the A. SPIC. B. CFTC. C. Lloyds of London. D. FDIC. E. All of the options are correct.

D. FDIC.

51. Mortgage-backed securities were created when ________ began buying mortgage loans from originators and bundling them into large pools that could be traded like any other financial asset. A.GNMA B. FNMA C. FHLMC D. FNMA and FHLMC E. GNMA and FNMA

D. FNMA and FHLMC

56. Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks the Russell 2000 should choose A.SPY. B. DIA. C. QQQQ. D. IWM. E. VTI.

D. IWM. IWM tracks the Russell 2000

13. Which of the following statements about real estate investment trusts is true? A.REITs invest in real estate or loans secured by real estate. B. REITs raise capital by borrowing from banks and issuing mortgages. C. REITs are similar to open-end funds, with shares redeemable at NAV. D. REITs invest in real estate or loans secured by real estate and raise capital by borrowing from banks and issuing mortgages. E. All of the options are true.

D. REITs invest in real estate or loans secured by real estate and raise capital by borrowing from banks and issuing mortgages. Real estate investment trusts invest in real estate or real-estate-secured loans. They may raise capital from banks and by issuing mortgages. They are similar to closed-end funds, and shares are typically exchange traded

67. The ____ is an example of a U.S. index of small firms. A. S&P 500 B. DJIA C. DAX D. Russell 2000 E. All of the options are correct.

D. Russell 2000

24. Which of the following orders is most useful to short sellers who want to limit their potential losses? A.Limit order B. Discretionary order C. Limit-loss order D. Stop-buy order

D. Stop-buy order

29. Which of the following orders instructs the broker to buy at or above a specified price? A.Limit-buy order B. Discretionary order C. Limit-sell order D. Stop-buy order E. Market order

D. Stop-buy order Stop-buy orders are to be executed if the market price increases to the specified limit price.

50. The spread between the LIBOR and the Treasury-bill rate is called the A.term spread. B. T-bill spread. C. LIBOR spread. D. TED spread.

D. TED spread.

2. Which one of the following statements regarding closed-end mutual funds is false? A.The funds always trade at a discount from NAV. B. The funds redeem shares at their net asset value. C. The funds offer investors professional management. D. The funds always trade at a discount from NAV and redeem shares at their net asset value. E. None of the options are correct.

D. The funds always trade at a discount from NAV and redeem shares at their net asset value. Closed-end funds are sold at the prevailing market price.

45. Which of the following is trueregarding private placements of primary security offerings? A.Extensive and costly registration statements are required by the SEC. B. For very large issues, they are better suited than public offerings. C. They trade in secondary markets. D. The shares are sold directly to a small group of institutional or wealthy investors. E. They have greater liquidity than public offerings.

D. The shares are sold directly to a small group of institutional or wealthy investors. Firms can save on registration costs, but the result is that the securities cannot trade in the secondary markets and therefore are less liquid. Public offerings are better suited for very large issues.

15. Which of the following statements about money market mutual funds is true? A.They invest in commercial paper, CDs, and repurchase agreements. B. They usually offer check-writing privileges. C. They are highly leveraged and risky. D. They invest in commercial paper, CDs, and repurchase agreements, and they usually offer check-writing privileges. E. All of the options are true.

D. They invest in commercial paper, CDs, and repurchase agreements, and they usually offer check-writing privileges.

4. Which one of the following is nota money market instrument? A. Treasury bill B. Negotiable certificate of deposit C. Commercial paper D. Treasury bond E. Eurodollar account

D. Treasury bond Money market instruments are instruments with maturities of one year or less, which applies to all of the options except Treasury bonds.

76. ________ is a risk measure that indicates vulnerability to extreme negative returns. A. Value at risk B. Lower partial standard deviation C. Standard deviation D.Value at risk and lower partial standard deviation E. None of the options are correct.

D. Value at risk and lower partial standard deviation

20. An example of a derivative security is A.a common share of Microsoft. B. a call option on Intel stock. C. a commodity futures contract. D. a call option on Intel stock and a commodity futures contract. E. a common share of Microsoft and a call option on Intel stock.

D. a call option on Intel stock and a commodity futures contract.

32. A program trade is A.a trade of 10,000 (or more) shares of a stock. B. a trade of many shares of one stock for one other stock. C. a trade of analytic programs between financial analysts. D. a coordinated purchase or sale of an entire portfolio of stocks. E. not feasible with current technology but is expected to be popular in the near future.

D. a coordinated purchase or sale of an entire portfolio of stocks. Program trading is a coordinated purchase or sale of an entire portfolio of stocks.

18. A debt security pays A.a fixed level of income for the life of the owner. B. a variable level of income for owners on a fixed income. C. a fixed or variable income stream at the option of the owner. D. a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.

D. a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.

5. Investment bankers A.act as intermediaries between issuers of stocks and investors. B. act as advisors to companies in helping them analyze their financial needs and find buyers for newly-issued securities. C. accept deposits from savers and lend them out to companies. D. act as intermediaries between issuers of stocks and investors and act as advisors to companies in helping them analyze theirfinancial needs and find buyers for newly-issued securities.

D. act as intermediaries between issuers of stocks and investors and act as advisors to companies in helping them analyze their financial needs and find buyers for newly-issued securities.

38. Brokers' calls A. are funds used by individuals who wish to buy stocks on margin. B. are funds borrowed by the broker from the bank, with the agreement to repay the bank immediately if requested to do so. C. carry a rate that is usually about one percentage point lower than the rate on U.S. T-bills. D. are funds used by individuals who wish to buy stocks on margin and are funds borrowed by the broker from. the bank, with the agreement to repay the bank immediately if requested to do so. E. are funds used by individuals who wish to buy stocks on margin and carry a rate that is usually about one percentage point lower than the rate on U.S. T-bills.

D. are funds used by individuals who wish to buy stocks on margin and are funds borrowed by the broker from. the bank, with the agreement to repay the bank immediately if requested to do so. Brokers'calls are funds borrowed from banks by brokers and loaned to investors in margin accounts.

76. A bond that can be retired prior to maturity by the issuer is a(n) ____________ bond. A. convertible B. secured C. unsecured D. callable E. Yankee

D. callable

8. Most actively-managed mutual funds, when compared to a market index such as the Wilshire 5000, A.beat the market return in all years. B. beat the market return in most years. C. exceed the return on index funds. D. do not outperform the market.

D. do not outperform the market. Most actively managed mutual funds fail to equal the return earned by index funds, possibly due to higher transactions costs.

23. Financial assets permit all of the following except A.consumption timing. B. allocation of risk. C. separation of ownership and control. D. elimination of risk.

D. elimination of risk.

13. Deposits of commercial banks at the Federal Reserve Bank are called A. bankers'acceptances. B. repurchase agreements. C. time deposits. D. federal funds. E. reserve requirements.

D. federal funds.

The means by which individuals hold their claims on real assets in a well-developed economy are A.investment assets. B. depository assets. C. derivative assets. D. financial assets. E. exchange-driven assets.

D. financial assets. Financial assets allocate the wealth of the economy. Example: it is easier for an individual to own shares of an auto company than to own an auto company directly.

22. Although derivatives can be used as speculative instruments, businesses most often use them to A.attract customers. B. appease stockholders. C. offset debt. D. hedge risks. E. enhance their balance sheets.

D. hedge risks.

28. Theoretically, takeovers should result in A.improved management. B. increased stock price. C. increased benefits to existing management of the taken-over firm. D. improved management and increased stock price. E. All of the options.

D. improved management and increased stock price.

71. If a distribution has "fat tails," it exhibits A. positive skewness. B. negative skewness. C. a kurtosis of zero. D. kurtosis. E. positive skewness and kurtosis.

D. kurtosis. Kurtosis is a measure of the tails of a distribution, or "fat tails."

8. In 2016, ____________ was the least significant financial asset of U.S. households in terms of total value. A.real estate B. mutual fund shares C. debt securities D. life insurance reserves E. pension reserves

D. life insurance reserves

9. You purchased JNJ stock at $50 per share. The stock is currently selling at $65. Your gains may be protected by placing a A.stop-buy order. B. limit-buy order. C. market order. D. limit-sell order. E. None of these options are correct.

D. limit-sell order. With a limit-sell order, your stock will be sold only at a specified price, or better. Thus, such an order would protect your gains. None of the other orders are applicable to this situation.

80. When assessing tail risk by looking at the 5% worst-case scenario, the VaR is the A. most realistic, as it is the most complete measure of risk. B. most pessimistic, as it is the most complete measure of risk. C. most optimistic, as it is the most complete measure of risk. D. most optimistic, as it takes the highest return (smallest loss) of all the cases.

D. most optimistic, as it takes the highest return (smallest loss) of all the cases.

11. Closed-end funds are frequently issued at a ______ to NAV and subsequently trade at a __________ to NAV. A.discount; discount B. discount; premium C. premium; premium D. premium; discount E. No consistent relationship has been observed.

D. premium; discount

40. All of the following are considered new trading strategies, except A.high frequency trading. B. algorithmic trading. C. dark pools. D. short selling.

D. short selling.

27. Corporate shareholders are best protected from incompetent management decisions by A.the ability to engage in proxy fights. B. management's control of pecuniary rewards. C. the ability to call shareholder meetings. D. the threat of takeover by other firms. E. one-share/one-vote election rules.

D. the threat of takeover by other firms.

50. With regard to a futures contract, the long position is held by A. the trader who bought the contract at the largest discount. B. the trader who has to travel the farthest distance to deliver the commodity. C. the trader who plans to hold the contract open for the lengthiest time period. D. the trader who commits to purchasing the commodity on the delivery date. E. the trader who commits to delivering the commodity on the delivery date.

D. the trader who commits to purchasing the commodity on the delivery date. The trader agreeing to buy the underlying asset is said to be long the contract, whereas the trader agreeing to deliver the underlying asset is said to be short the contract.

7. The secondary market consists of A.transactions on the AMEX. B. transactions in the OTC market. C. transactions through the investment banker. D. transactions on the AMEX and in the OTC market. E. transactions on the AMEX, through the investment banker, and in the OTC market.

D. transactions on the AMEX and in the OTC market. The secondary market consists of transactions on the organized exchanges and in the OTC market. The investment banker is involved in the placement of new issues in the primary market.

14. Assume you purchased 200 shares of GE common stock on margin at $70 per share from your broker. If the initial margin is 55%, how much did you borrow from the broker? A.$6,000 B. $4,000 C. $7,700 D. $7,000 E. $6,300

E. $6,300 200 shares × $70/share × (1 - 0.55) = $14,000 × (0.45) = $6,300

72. If a portfolio had a return of 8%, the risk-free asset return was 3%, and the standard deviation of the portfolio's excess returns was 20%, the Sharpe measure would be A. 0.08. B. 0.03. C. 0.20. D. 0.11. E. 0.25.

E. 0.25. (8 - 3)/20 = 0.25.

22. The Yachtsman Fund had NAV per share of $36.12 on January 1, 2016. On December 31 of the same year, the fund's NAV was $39.71. Income distributions were $0.64, and the fund had capital gain distributions of $1.13. Without considering taxes and transactions costs, what rate of return did an investor receive on the Yachtsman Fund last year? A.22.92% B. 17.68% C. 14.39% D. 18.52% E. 14.84%

E. 14.84% R= ($39.71 - 36.12 + 0.64 + 1.13)/$36.12 = 14.84%.

18. In 2016, the proportion of mutual funds (based on total assets) specializing in money market securities was A.21.7%. B. 28.0%. C. 54.1%. D. 73.4%. E. 17.6%.

E. 17.6%.

60. A mutual fund had average daily assets of $3.0 billion in 2016. The fund sold $600 million worth of stock and purchased $700 million worth of stock during the year. The fund's turnover ratio is A.27.5%. B. 12%. C. 15%. D. 25%. E. 20%.

E. 20%. 600,000,000/3,000,000,000 = 20%.

52. You purchased 100 shares of common stock on margin for $50 per share. The initial margin is 50%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $56 per share? Ignore interest on margin. A.28% B. 33% C. 14% D. 42% E. 24%

E. 24% 100($50)(0.50) = $2,500 investment; gain on stock sale = (56 - 50)(100) = $600; Return = ($600/$2,500) = 24%.

44. A mutual fund had NAV per share of $19.00 on January 1, 2016. On December 31 of the same year, the fund's NAV was $19.14. Income distributions were $0.57, and the fund had capital gain distributions of $1.12. Without considering taxes and transactions costs, what rate of return did an investor receive on the fund last year? A.11.26% B. 10.54% C. 7.97% D. 8.26% E. 9.63%

E. 9.63% R= ($19.14 - 19.00 + 0.57 + 1.12)/$19.00 = 9.63%.

22. Specialists on stock exchanges perform which of the following functions? A.Act as dealers in their own accounts B. Analyze the securities in which they specialize C. Provide liquidity to the market D. Act as dealers in their own accounts and analyze the securities in which they specialize E. Act as dealers in their own accounts and provide liquidity to the market

E. Act as dealers in their own accounts and provide liquidity to the market

30. The Sarbanes-Oxley Act A.requires corporations to have more independent directors. B. requires the firm's CFO to personally vouch for the firm's accounting statements. C. prohibits auditing firms from providing other services to clients. D. requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements. E. All of the above.

E. All of the above.

35. _______ are examples of financial intermediaries. A.Commercial banks B. Insurance companies C. Investment companies D. Credit unions E. All of the options

E. All of the options

14. Which of the following statements about real estate investment trusts is true? A.REITs may be equity trusts or mortgage trusts. B. REITs are usually highly leveraged. C. REITs are similar to closed-end funds. D. REITs may be equity trusts or mortgage trusts and are usually highly leveraged. E. All of the options are true.

E. All of the options are true

19. Money market securities A.are short term. B. are highly marketable. C. are generally very low risk. D. are highly marketable and are generally very low risk. E. All of the options.

E. All of the options.

36. Financial intermediaries exist because small investors cannot efficiently A.diversify their portfolios. B. assess credit risk of borrowers. C. advertise for needed investments. D. diversify their portfolios and assess credit risk of borrowers. E. All of the options.

E. All of the options.

50. Differences between hedge funds and mutual funds are that A.hedge funds are only subject to minimal SEC regulation. B. hedge funds are typically open only to wealthy or institutional investors. C. hedge fund managers can pursue strategies not available to mutual funds, such as short selling, heavy use of derivatives, and leverage. D. hedge funds are commonly structured as private partnerships. E. All of the options.

E. All of the options. Hedge funds are typically open only to wealthy or institutional investors, are commonly structured as private partnerships, are only subject to minimal SEC regulation, and can pursue strategies not available to mutual funds, such as short selling, heavy use of derivatives, and leverage.

3. Which of the following functions do investment companies perform for their investors? A.Record keeping and administration B. Diversification and divisibility C. Professional management D. Lower transaction costs E. All of the options.

E. All of the options. Investment companies are attractive to investors because they offer all of the listed services.

_________ financial asset(s). A.Buildings are B. Land is a C. Derivatives are D. U.S. agency bonds are E. Derivatives and U.S. agency bonds are

E. Derivatives and U.S. agency bonds are

29. Which of the following is trueregarding equity mutual funds? I) They invest primarily in stock. II) They may hold fixed-income securities, as well as stock. III) Most hold money market securities, as well as stock. IV) Two types of equity funds are income funds and growth funds. A.I and IV B. I, III, and IV C. I, II, and IV D. I, II, and III E. I, II, III, and IV

E. I, II, III, and IV

29. During the period between 2000 and 2002, a large number of scandals were uncovered. Most of these scandals were related to I) manipulation of financial data to misrepresent the actual condition of the firm.II) misleading and overly optimistic research reports produced by analysts.III) allocating IPOs to executives as a quid pro quo for personal favors. IV) greenmail. A.II, III, and IV B. I, II, and IV C. II and IV D. I, III, and IV E. I, II, and III

E. I, II, and III

19. Which of the following is trueof 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. The divisor must be adjusted for stock splits. D. It is a value-weighted average of 30 large industrial stocks, and the divisor must be adjusted for stock splits. E. It is a price-weighted average of 30 large industrial stocks, and the divisor must be adjusted for stock splits. The Dow Jones Industrial Average is a price-weighted index of 30 large industrial firms, and the divisor must be adjusted when any of the stocks on the index split.

E. It is a price-weighted average of 30 large industrial stocks, and the divisor must be adjusted for stock splits. The Dow Jones Industrial Average is a price-weighted index of 30 large industrial firms, and the divisor must be adjusted when any of the stocks on the index split.

_______ are real assets. A.Land B. Machines C. Stocks and bonds D. Knowledge E. Land, machines, and knowledge

E. Land, machines, and knowledge

25. Which of the following orders instructs the broker to buy at the current market price? A.Limit order B. Discretionary order C. Limit-loss order D. Stop-buy order E. Market order

E. Market order Market orders are to be executed immediately at the best prevailing price.

2. The money market is a subsector of the A. commodity market. B. capital market. C. derivatives market. D. equity market. E. None of the options are correct.

E. None of the options are correct.

4. Which of the following statements regarding the specialist are true? A.Specialists maintain a book listing outstanding, unexecuted limit orders. B. Specialists earn income from commissions and spreads in stock prices. C. Specialists stand ready to trade at quoted bid and ask prices. D. Specialists cannot trade in their own accounts. E. Specialists maintain a book listing outstanding, unexecuted limit orders, earn income from commissions and spreads in stock

E. Specialists maintain a book listing outstanding, unexecuted limit orders, earn income from commissions and spreads in stock

7. The smallest component of the money market is A. repurchase agreements. B. small-denomination time deposits. C. savings deposits. D. money market mutual funds. E. commercial paper.

E. commercial paper.

57. Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks the Wilshire 5000 should choose A.SPY. B. DIA. C. QQQ. D. IWM. E. VTI.

E. VTI. VTI tracks the Wilshire 5000.

46. The type of municipal bond that is used to finance commercial enterprises, such as the construction of a new building for a corporation, is called A. a corporate courtesy bond. B. a revenue bond. C. a general-obligation bond. D. a tax-anticipation note. E. an industrial-development bond.

E. an industrial-development bond. ndustrial development bonds allow private enterprises to raise capital at lower rates.

13. The cost of buying and selling a stock consists of A.broker's commissions. B. dealer's bid-asked spread. C. a price concession an investor may be forced to make. D. broker's commissions and dealer's bid-asked spread. E. broker's commissions, dealer's bid-asked spread, and a price concession an investor may be forced to make.

E. broker's commissions, dealer's bid-asked spread, and a price concession an investor may be forced to make.

75. Unsecured bonds are called A. junk bonds. B. debentures. C. indentures. D. subordinated debentures. E. either debentures or subordinated debentures. Debentures are unsecured bonds

E. either debentures or subordinated debentures. Debentures are unsecured bonds

20. Management fees and other expenses of mutual funds may include A.front-end loads. B. back-end loads. C. 12b-1 charges. D. front-end and back-end loads. E. front-end loads, back-end loads, and 12b-1 charges.

E. front-end loads, back-end loads, and 12b-1 charges.

2. A purchase of a new issue of stock takes place A.in the secondary market. B. in the primary market. C. usually with the assistance of an investment banker. D. in the secondary and primary markets. E. in the primary market and usually with the assistance of an investment banker.

E. in the primary market and usually with the assistance of an investment banker. Funds from the sale of new issues flow to the issuing corporation, making this a primary market transaction. Investment bankers usually assist by pricing the issue and finding buyers.

41. The yield to maturity reported in the financial pages for Treasury securities A. is calculated by compounding the semiannual yield. B. is calculated by doubling the semiannual yield. C. is also called the bond equivalent yield. D. is calculated as the yield-to-call for premium bonds. E. is calculated by doubling the semiannual yield and is also called the bond equivalent yield.

E. is calculated by doubling the semiannual yield and is also called the bond equivalent yield.

28. Commingled funds are A.amounts invested in equity and fixed-income mutual funds. B. funds that may be purchased at intervals of 3, 6, or 12 months at the discretion of management. C. amounts invested in domestic and global equities. D. closed-end funds that may be repurchased only once every two years at the discretion of mutual fund management. E. partnerships of investors that pool their funds, which are then managed for a fee.

E. partnerships of investors that pool their funds, which are then managed for a fee. Commingled funds are partnerships of investors that pool their funds, which are then managed for a fee.

9. In 2016, ____________ was the most significant financial asset of U.S. households in terms of total value. A.real estate B. mutual fund shares C. debt securities D. life insurance reserves E. pension reserves

E. pension reserves

34. NASDAQ subscriber levels A.permit those with the highest level, 3, to "make a market" in the security. B. permit those with a level 2 subscription to receive all bid and ask quotes but not to enter their own quotes. C. permit level 1 subscribers to receive general information about prices. D. include all OTC stocks. E. permit those with the highest level, 3, to "make a market" in the security; permit those with a level 2 subscription to receive all bid and ask quotes but not to enter their own quotes; and permit level 1 subscribers to receive general information about prices.

E. permit those with the highest level, 3, to "make a market" in the security; permit those with a level 2 subscription to receive all bid and ask quotes but not to enter their own quotes; and permit level 1 subscribers to receive general information about prices. NASDAQ links dealers in a loosely organized network with different levels of access to meet different needs.

3. Treasury Inflation-Protected Securities (TIPS) A. pay a fixed interest rate for life. B. pay a variable interest rate that is indexed to inflation but maintain a constant principal. C. provide a constant stream of income in real (inflation-adjusted) dollars. D. have their principal adjusted in proportion to the Consumer Price Index. E. provide a constant stream of income in real (inflation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index.

E. provide a constant stream of income in real (inflation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index.

68. The largest component of the money market is/are A. repurchase agreements. B. money market mutual funds. C. T-bills. D. Eurodollars. E. savings deposits.

E. savings deposits.

33. When stocks are held in street name, A.the investor receives a stock certificate with the owner's street address. B. the investor receives a stock certificate without the owner's street address. C. the investor does not receive a stock certificate. D. the broker holds the stock in the brokerage firm's name on behalf of the client. E. the investor does not receive a stock certificate, and the broker holds the stock in the brokerage firm's name on behalf of the client.

E. the investor does not receive a stock certificate, and the broker holds the stock in the brokerage firm's name on behalf of the client.

57. With regard to a futures contract, the short position is held by A. the trader who bought the contract at the largest discount. B. the trader who has to travel the farthest distance to deliver the commodity. C. the trader who plans to hold the contract open for the lengthiest time period. D. the trader who commits to purchasing the commodity on the delivery date. E. the trader who commits to delivering the commodity on the delivery date.

E. the trader who commits to delivering the commodity on the delivery date.

1. Which of the following is nota characteristic of a money market instrument? A. Liquidity B. Marketability C. Long maturity D. Liquidity premium E.Long maturity and liquidity premium

E.Long maturity and liquidity premium Money market instruments are short-term instruments with high liquidity and marketability; they do not have long maturities nor pay liquidity premiums

43. If the annual real rate of interest is 2.5%, and the expected inflation rate is 3.4%, the nominal rate of interest would be approximately A. 4.9%. B. 0.9%. C. -0.9%. D. 7%. E.None of the options are correct.

E.None of the options are correct. 2.5% + 3.4% = 5.9%.

20. If the nominal return is constant, the after-tax real rate of return A. declines as the inflation rate increases. B. increases as the inflation rate increases. C. declines as the inflation rate declines. D. increases as the inflation rate decreases. E.declines as the inflation rate increases and increases as the inflation rate decreases.

E.declines as the inflation rate increases and increases as the inflation rate decreases.

30. The holding-period return (HPR) for a stock is equal to A. the real yield minus the inflation rate. B. the nominal yield minus the real yield. C. the capital gains yield minus the tax rate. D. the capital gains yield minus the dividend yield. E.the dividend yield plus the capital gains yield.

E.the dividend yield plus the capital gains yield.

17. In the event of the firm's bankruptcy, A. the most shareholders can lose is their original investment in the firm's stock. B. common shareholders are the first in line to receive their claims on the firm's assets. C. bondholders have claim to what is left from the liquidation of the firm's assets after paying the shareholders. D. the claims of preferred shareholders are honored before those of the common shareholders. E.the most shareholders can lose is their original investment in the firm's stock and the claims of preferredshareholders are honored before those of the common shareholders.

E.the most shareholders can lose is their original investment in the firm's stock and the claims of preferredshareholders are honored before those of the common shareholders.

32. Assume that you purchased 200 shares of Super Performing mutual fund at a net asset value of $21 per share. During the year, you received dividend income distributions of $1.50 per share and capital gains distributions of $2.85 per share. At the end of the year, the shares had a net asset value of $23 per share. What was your rate of return on this investment? A. 30.24% B. 25.37% C. 27.19% D. 22.44% E. 29.18%

A. 30.24% R= ($23 - 21 + 1.5 + 2.85)/$21 = 30.238%.

68. Kurtosis is a measure of A.how fat the tails of a distribution are. B. the downside risk of a distribution. C. the normality of a distribution. D. the dividend yield of the distribution. E.how fat the tails of a distribution are.

A.how fat the tails of a distribution are. E.how fat the tails of a distribution are.

61. Annual percentage rates (APRs) are computed using A. simple interest. B. compound interest. C. either simple interest or compound interest. D. best estimates of expected real costs. E. None of the options are correct.

A.simple interest.

69. When a distribution is positively skewed, A. standard deviation overestimates risk. B. standard deviation correctly estimates risk. C. standard deviation underestimates risk. D. the tails are fatter than in a normal distribution

A.standard deviation overestimates risk.

15. Historical records regarding return on stocks, Treasury bonds, and Treasury bills between 1926 and 2015 show That A.stocks offered investors greater rates of return than bonds and bills. B. stock returns were less volatile than those of bonds and bills. C. bonds offered investors greater rates of return than stocks and bills. D. bills outperformed stocks and bonds. E. Treasury bills always offered a rate of return greater than inflation.

A.stocks offered investors greater rates of return than bonds and bills.

27. In words, the real rate of interest is approximately equal to A.the nominal rate minus the inflation rate. B. the inflation rate minus the nominal rate. C. the nominal rate times the inflation rate. D. the inflation rate divided by the nominal rate. E. the nominal rate plus the inflation rate.

A.the nominal rate minus the inflation rate.

42. You buy 300 shares of Qualitycorp for $30 per share and deposit initial margin of 50%. The next day, Qualitycorp's price drops to $25 per share. What is your actual margin? A.50% B. 40% C. 33% D. 60% E. 25%

B. 40% AM= [300 ($25) - 0.5(300) ($30)]/[300 ($25)] = 0.40.

28. An investor purchases one municipal and one corporate bond that pay rates of return of 7.5% and 10.3%, respectively. If the investor is in the 25% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. A. 7.5%; 10.3% B. 7.5%; 7.73% C. 5.63%; 7.73% D. 5.63%; 10.3% E. 10%; 10%

B. 7.5%; 7.73% r c = 0.103(1 - 0.25) = 0.07725, or 7.73%; rm= 0.075(1 - 0) = 7.5%.

77. Corporations can exclude ____________% of the dividends received from preferred stock from taxes. A. 50 B. 70 C. 20 D. 15 E. 62

B. 70

27. An investor purchases one municipal and one corporate bond that pay rates of return of 8% and 10%, respectively. If the investor is in the 20% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. A. 8%; 10% B. 8%; 8% C. 6.4%; 8% D. 6.4%; 10% E. 10%; 10%

B. 8%; 8% r c = 0.10(1 - 0.20) = 0.08, or 8%; rm= 0.08(1 - 0) = 8%.

29. If a Treasury note has a bid price of $975, the quoted bid price in the Wall Street Journalwould be A. 97:50. B. 97:16. C. 97:80. D. 94:24. E. 97:75.

B. 97:16. Treasuries are quoted as a percent of $1,000 and in 1/32s.

30. If a Treasury note has a bid price of $995, the quoted bid price in the Wall Street Journalwould be A. 99:50. B. 99:16. C. 99:80. D. 99:24. E. 99:32.

B. 99:16 Treasuries are quoted as a percent of $1,000 and in 1/32s.

33. Which of the following portfolio construction methods starts with security analysis? A.Top-down B. Bottom-up C. Middle-out D. Buy and hold E. Asset allocation

B. Bottom-up Bottom-up refers to using security analysis to find securities that are attractively priced. Top-down refers to using asset allocation as a starting point.

17. A fixed-income security pays A.a fixed level of income for the life of the owner. B. a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security. C. a variable level of income for owners on a fixed income. D. a fixed or variable income stream at the option of the owner.

B. a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.

1. The material wealth of a society is a function of A.all financial assets. B. all real assets. C. all financial and real assets. D. all physical assets.

B. all real assets

58. A call option allows the buyer to A. sell the underlying asset at the exercise price on or before the expiration date. B. buy the underlying asset at the exercise price on or before the expiration date. C. sell the option in the open market prior to expiration. D. sell the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration. E. buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.

B. buy the underlying asset at the exercise price on or before the expiration date. A call option may be exercised (allowing the holder to buy the underlying asset) on or before expiration

3. Firms raise capital by issuing stock A.in the secondary market. B. in the primary market. C. to unwary investors. D. only on days when the market is up.

B. in the primary market.

6. Financial assets A.directly contribute to the country's productive capacity. B. indirectly contribute to the country's productive capacity. C. contribute to the country's productive capacity, both directly and indirectly. D. do not contribute to the country's productive capacity, either directly or indirectly. E. are of no value to anyone.

B. indirectly contribute to the country's productive capacity. Financial assets indirectly contribute to the country's productive capacity because these assets permit individuals to invest in firms and governments. This in turn allows firms and governments to increase productive capacity.

6. The bid price of a T-bill in the secondary market is A. the price at which the dealer in T-bills is willing to sell the bill. B. the price at which the dealer in T-bills is willing to buy the bill. C. greater than the asked price of the T-bill. D. the price at which the investor can buy the T-bill. E. never quoted in the financial press.

B. the price at which the dealer in T-bills is willing to buy the bill.

78. The most common measure of loss associated with extremely negative returns is A. lower partial standard deviation. B.value at risk. C. expected shortfall. D. standard deviation.

B. value at risk.

38. A year ago, you invested $10,000 in a savings account that pays an annual interest rate of 3%. What is your approximate annual real rate of return if the rate of inflation was 4% over the year? A. 1% B.-1% C. 7% D. 3%

B.-1% 3% - 4% = -1%.

34. Over the past year, you earned a nominal rate of interest of 8% on your money. The inflation rate was 3.5% over the same period. The exact actual growth rate of your purchasing power was A. 15.55%. B.4.35%. C. 5.02%. D. 4.81%. E. 15.04%.

B.4.35%. r = (1 + R)/(1 +I) - 1; 1.08/1.035 - 1 = 4.35%.

63. If an investment provides a 1.25% return quarterly, its effective annual rate is A. 5.23%. B.5.09%. C. 4.02%. D. 4.04%.

B.5.09%. 1.0125)4 - 1 = 5.09%.

7. You purchased a share of stock for $20. One year later, you received $1 as a dividend and sold the share for $29. What was your holding-period return? A. 45% B.50% C. 5% D. 40% E. None of the options are correct

B.50% ($1 + $29 - $20)/$20 = 0.5000, or 50%.

5. If the annual real rate of interest is 5%, and the expected inflation rate is 4%, the nominal rate of interest would be approximately A. 1%. B.9%. C. 20%. D. 15%.

B.9% 5% + 4% = 9%.

12. Other things equal, an increase in the government budget deficit A. drives the interest rate down. B. drives the interest rate up. C. might not have any effect on interest rates. D. increases business prospects.

B.drives the interest rate up. An increase in the government budget deficit, other things equal, causes the government to increase its borrowing, which increases the demand for funds and drives interest rates up

60. When comparing investments with different horizons, the ____________ provides the more accurate comparison. A. arithmetic average B.effective annual rate C. average annual return D. historical annual average

B.effective annual rate The effective annual rate provides the more accurate comparison of investments with different horizons because it expresses the returns in a common period.

28. If the Federal Reserve lowers the Fed Funds rate, ceteris paribus, the equilibrium levels of funds lent will __________, and the equilibrium level of real interest rates will ___________. A. increase; increase B.increase; decrease C. decrease; increase D. decrease; decrease E. reverse direction from their previous trends; reverse direction from their previous trends

B.increase; decrease A lower Fed Funds rate would encourage banks to make more loans, which would increase the money supply. The supply curve would shift to the right and the equilibrium level of funds would increase while the equilibrium interest rate would fall.

14. The holding-period return (HPR) on a share of stock is equal to A. the capital gain yield during the period plus the inflation rate. B.the capital gain yield during the period plus the dividend yield. C. the current yield plus the dividend yield. D. the dividend yield plus the risk premium. E. the change in stock price.

B.the capital gain yield during the period plus the dividend yield.

49. A mutual fund had NAV per share of $37.12 on January 1, 2016. On December 31 of the same year, the fund's rate of return for the year was 11.0%. Income distributions were $2.26, and the fund had capital gain distributions of $1.64. Without considering taxes and transactions costs, what ending NAV would you calculate? A.$37.93 B. $34.52 C. $37.30 D. $47.25 E. $36.28

C. $37.30 0.11 = (P- $37.12 + 2.26 + 1.64)/$37.12; P= $37.303.

61. You sold short 100 shares of common stock at $75 per share. The initial margin is 50%. At what stock price would you receive a margin call if the maintenance margin is 30%? A.$90.23 B. $88.52 C. $86.54 D. $87.12

C. $86.54

12. Which one of the following terms bestdescribes Eurodollars? A. Dollar-denominated deposits only in European banks. B. Dollar-denominated deposits at branches of foreign banks in the U.S. C. Dollar-denominated deposits at foreign banks and branches of American banks outside the U.S. D. Dollar-denominated deposits at American banks in the U.S. E. Dollars that have been exchanged for European currency.

C. Dollar-denominated deposits at foreign banks and branches of American banks outside the U.S.

26. Which of the following characteristics apply to unit investment trusts? I) Most are invested in fixed-income portfolios.II) They are actively-managed portfolios.III) The sponsor pools securities, then sells public shares in the trust.IV) The portfolio is fixed for the life of the fund. A.I and IV B. I and II C. I, III, and IV D. I, II, and III E. I, II, III, and IV

C. I, III, and IV

25. A disadvantage of using stock options to compensate managers is that A.it encourages managers to undertake projects that will increase stock price. B. it encourages managers to engage in empire building. C. it can create an incentive for managers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects. D. All of the above.

C. it can create an incentive for managers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects.

11. Commercial paper is a short-term security issued by ________ to raise funds. A. the Federal Reserve Bank B. commercial banks C. large, well-known companies D. the New York Stock Exchange E. state and local governments

C. large, well-known companies

10. You sold JCP stock short at $80 per share. Your losses could be minimized by placing a A.limit-sell order. B. limit-buy order. C. stop-buy order. D. day-order. E. None of the options are correct.

C. stop-buy order. With a stop-buy order, the stock would be purchased if the price increased to a specified level, thus limiting your loss.

33. The index that includes the largest number of actively-traded stocks is A. the NASDAQ Composite Index. B. the NYSE Composite Index. C. the Wilshire 5000 Index. D. the Value Line Composite Index. E. the Russell Index.

C. the Wilshire 5000 Index. The Wilshire 5000 is the largest readily available stock index, consisting of the stocks traded on the organized exchanges and the OTC stocks.

31. Asset allocation refers to A.choosing which securities to hold based on their valuation. B. investing only in "safe" securities. C. the allocation of assets into broad asset classes. D. bottom-up analysis.

C. the allocation of assets into broad asset classes

38. The finalized registration statement for new securities approved by the SEC is called A.a red herring. B. the preliminary statement. C. the prospectus. D. a best-efforts agreement. E. a firm commitment.

C. the prospectus.

9. Pools of money invested in a portfolio that is fixed for the life of the fund are called A.closed-end funds. B. open-end funds. C. unit investment trusts. D. REITS. E. redeemable trust certificates.

C. unit investment trusts. Unit investment trusts are funds that invest in a portfolio, often fixed-income securities, and hold it to maturity.

70. When a distribution is negatively skewed, A. standard deviation overestimates risk. B. standard deviation correctly estimates risk. C.standard deviation underestimates risk. D. the tails are fatter than in a normal distribution.

C.standard deviation underestimates risk.

67. Skewness is a measure of A. how fat the tails of a distribution are. B. the downside risk of a distribution. C.the symmetry of a distribution. D. the dividend yield of the distribution. E. None of the options are correct.

C.the symmetry of a distribution.

40. Which of the following securities is a money market instrument? A. Treasury note B. Treasury bond C. Municipal bond D. Commercial paper E. Mortgage security

D. Commercial paper

37. Federally-sponsored agency debt A. is legally insured by the U.S. Treasury. B. would probably be backed by the U.S. Treasury in the event of a near-default. C. has a small positive yield spread relative to U.S. Treasuries. D. would probably be backed by the U.S. Treasury in the event of a near-default and has a small positive yield spread relative to U.S. Treasuries. E. is legally insured by the U.S. Treasury and has a small positive yield spread relative to U.S. Treasuries. Federally sponsored agencies are not government owned. These agencies'debt is not insured by the U.S. Treasury, but probably would be backed by the Treasury in the event of an agency near-default. As a result, the issues are very safe and carry a yield only slightly higher than that of U.S. Treasuries.

D. would probably be backed by the U.S. Treasury in the event of a near-default and has a small positive yield spread relative to U.S. Treasuries.

62. If an investment provides a 2% return semi-annually, its effective annual rate is A. 2%. B. 4%. C. 4.02%. D.4.04%. E. None of the options are correct.

D.4.04%. (1.02)2 - 1 = 4.04%.

1. Over the past year, you earned a nominal rate of interest of 10% on your money. The inflation rate was 5% over the same period. The exact actual growth rate of your purchasing power was A. 15.5%. B. 10.0%. C. 5.0%. D.4.8%. E. 15.0%.

D.4.8% r = (1 + R)/(1 +I) -1; 1.10%/1.05% - 1 = 4.8%.

9. Which of the following determine(s) the level of real interest rates? I) The supply of savings by households and business firms II) The demand for investment funds III) The government's net supply and/or demand for funds A. I only B. II only C. I and II only D.I, II, and III

D.I, II, and III

15. Which of the following statement(s) is (are) true regarding municipal bonds? I) A municipal bond is a debt obligation issued by state or local governments. II) A municipal bond is a debt obligation issued by the federal government. III) The interest income from a municipal bond is exempt from federal income taxation. IV) The interest income from a municipal bond is exempt from state and local taxation in the issuing state. A. I and II only B. I and III only C. I, II, and III only D.I, III, and IV only E. I and IV only

D.I, III, and IV only

11. Which of the following statement(s) is(are) true? A. Inflation has no effect on the nominal rate of interest. B. The realized nominal rate of interest is always greater than the real rate of interest. C. Certificates of deposit offer a guaranteed real rate of interest. D.None of the options are true.

D.None of the options are true.

51. Which of the following measures of risk best highlights the potential loss from extreme negative returns? A. Standard deviation B. Variance C. Upper partial standard deviation D.Value at risk (VaR) E. None of the options are correct.

D.Value at risk (VaR) Only VaR measures potential loss from extreme negative returns.

21. The risk premium for common stocks A. cannot be zero, for investors would be unwilling to invest in common stocks. B. must always be positive, in theory. C. is negative, as common stocks are risky. D. cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory. E. cannot be zero, for investors would be unwilling to invest in common stocks and is negative, as common stocks are risky.

D.cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory. If the risk premium for common stocks were zero or negative, investors would be unwilling to accept the lower returns for the increased risk.

16. If the interest rate paid by borrowers and the interest rate received by savers accurately reflect the realized rate of inflation, A. borrowers gain and savers lose. B. savers gain and borrowers lose. C. both borrowers and savers lose. D. neither borrowers nor savers gain nor lose. E. both borrowers and savers gain.

D.neither borrowers nor savers gain nor lose