FIN 310 EXAM 3

7. A financial institution has a higher degree of interest rate risk on a ______ than a ______. A) 30-year fixed-rate mortgage; 15-year fixed-rate mortgage B) 30-year variable-rate mortgage; 30-year fixed-rate mortgage C) 15-year fixed-rate mortgage; 30-year fixed-rate mortgage D) 15-year variable-rate mortgage; 15-year fixed-rate mortgage

A) 30-year fixed-rate mortgage; 15-year fixed-rate mortgage

A(n) ______ is a certificate which represents ownership of a foreign stock. A) ADR B) SEAQ C) Nasdaq D) AMEX

A) ADR

The ____________________is a price-weighted average of stock prices of 30 large U.S. firms. A) Dow Jones Industrial Average B) Standard and Poor's 500 C) New York Stock Exchange Index D) NASDAQ

A) Dow Jones Industrial Average

_______________are not barriers to corporate control to eliminate agency problems. A) Leveraged buyouts B) Antitakeover amendments C) Poison pills D) Golden parachutes

A) Leveraged buyouts

When evaluating stock performance, ______ measures variability that is systematically related to market returns; ______ measures total variability of a stock's returns. A) beta; standard deviation B) standard deviation; beta C) intercept; beta D) beta; error term

A) beta; standard deviation

The issuance of pass-through securities by financial institutions that provide mortgages A) can reduce their interest rate risk. B) increases their interest rate risk. C) has no effect on their interest rate risk. D) requires financial institutions to sell mortgages outright in the secondary market.

A) can reduce their interest rate risk.

The ______ is commonly used to determine what a stock's price should have been. A) capital asset pricing model B) Treynor Index C) Sharpe Index D) B and C

A) capital asset pricing model

The interest rate on a second mortgage is ______ on a first mortgage created at the same time, because the second mortgage is ______ the existing first mortgage in priority claim against the property in the event of default. A) higher than; behind B) equal to that; equal to C) lower than; ahead of D) higher than; ahead of E) lower than; behind

A) higher than; behind

1. Federally insured mortgages guarantee A) loan repayment to the lending financial institution. B) that the interest rate will not increase during the life of the mortgage. C) the lending financial institution a selling price for the mortgage in the secondary market. D) all of the above

A) loan repayment to the lending financial institution.

The "January effect" refers to a large A) rise in the price of small stocks in January. B) decline in the price of small stocks in January. C) decline in the price of large stocks in January. D) rise in the price of large stocks in January.

A) rise in the price of small stocks in January.

Shareholders can most easily measure a firm's performance by monitoring changes in its __________ over time. A) share price B) employee job descriptions C) Board of Directors D) asset size

A) share price

11. The demand by foreign investors for the stock of a U.S. firm sold on a U.S. exchange may be higher when the dollar is expected to ______, other things being equal. (Assume the firm's operations are unaffected by the value of the dollar.) A) strengthen B) weaken C) stabilize D) B and C

A) strengthen

If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other public information, security markets are A) weak-form efficient. B) semi-strong form efficient. C) strong form efficient. D) B and C. E) None of the above.

A) weak-form efficient.

The ____________________is a value-weighted index of stock prices of 500 large U.S. firms. A) Dow Jones Industrial Average B) Standard and Poor's 500 C) New York Stock Exchange Index D) NASDAQ

B) Standard and Poor's 500

2. At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically __________ the initial interest rate offered on a new adjustable-rate mortgage. A) below B) above C) equal to D) All of the above are very common.

B) above

8. A mortgage which requires interest payments for a three- to five-year period, then full payment of principal, is a(n) A) chattel mortgage. B) balloon payment mortgage. C) variable-rate mortgage. D) open-ended mortgage bond.

B) balloon payment mortgage.

According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be ______ affected by a weak dollar. Stock prices of U.S. importing firms could be ______ affected by a weak dollar. A) adversely; favorably B) favorably; adversely C) favorably; favorably D) adversely; adversely

B) favorably; adversely

6. For any given interest rate, the shorter the life of the mortgage, the ______ the monthly payment and the ______ the total payments over the life of the mortgage. A) greater; greater B) greater; less C) less; greater D) less; less

B) greater; less

A mortgage with low initial payments that increase over time without ever leveling off is a A) graduated payment mortgage. B) growing-equity mortgage. C) second mortgage. D) shared-appreciation mortgage.

B) growing-equity mortgage.

In an amortization schedule of monthly mortgage payments, A) the amount of interest in each payment is equal to the principal paid. B) interest payments exceed principal payments early on. C) principal payments exceed interest payments early on. D) B and C both occur with about equal frequency.

B) interest payments exceed principal payments early on.

Firms assume ______ risk when they issue preferred stock than when they issue bonds. The payment of dividends on preferred stock ______ be omitted without the firm being forced into bankruptcy. A) more; can B) less; can C) more; cannot D) less; cannot

B) less; can

The prevailing price per share divided by the firm's earnings per share is known as the A) dividend yield. B) price-earnings ratio. C) fully diluted earnings per share. D) annual dividend.

B) price-earnings ratio.

A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n) A) stock repurchase. B) secondary stock offering. C) initial rights issue. D) initial public offering (IPO).

B) secondary stock offering.

A firm can best avoid the time lag between registering new securities with the SEC and actually selling them by A) use of proxy. B) shelf-registration. C) use of a margin call. D) use of preemptive rights.

B) shelf-registration.

The interest rate received by purchasers of the mortgage pass-through securities is ______ the interest rate on the mortgages serving as collateral. A) equal to B) slightly less than C) much more than D) substantially less than

B) slightly less than

_______________are acquisitions that require substantial amounts of borrowed funds. A) Stock repurchases B) Corporate controls C) Leveraged buyouts D) Stock splits

C) Leveraged buyouts

4. Rates for adjustable-rate mortgages are commonly tied to the A) average prime rate over the previous year. B) Fed's discount rate over the previous year. C) average Treasury bill rate over the previous year. D) average Treasury bond rate over the previous year.

C) average Treasury bill rate over the previous year.

A ______ requires that dividends cannot be paid on common stock until all current and previously omitted dividends are paid on preferred stock. A) residual claim B) preferred margin C) cumulative provision D) liquidation claim

C) cumulative provision

A higher beta of an asset reflects A) lower risk. B) lower covariance between the asset's returns and market returns. C) higher covariance between the asset's returns and the market returns. D) none of the above.

C) higher covariance between the asset's returns and the market returns.

3. An institution that originates and holds a fixed-rate mortgage is adversely affected by _______ interest rates; the borrower who was provided the mortgage is adversely affected by _______ interest rates. A) stable; decreasing B) increasing; stable C) increasing; decreasing D) decreasing; increasing

C) increasing; decreasing

5. Mortgage companies specialize in A) purchasing mortgages originated by other financial institutions. B) investing and maintaining mortgages that they create. C) originating mortgages and selling those mortgages. D) borrowing money through the creation of mortgages that is used to invest in real estate.

C) originating mortgages and selling those mortgages.

Managers of firms may consider a stock repurchase or even a leveraged buyout when they believe their stock is ____________ by the market, or a secondary stock offering when they believe their stock is ____________ by the market. A) undervalued; undervalued B) overvalued; overvalued C) undervalued; overvalued D) overvalued; undervalued E) none of the above

C) undervalued; overvalued

A stock's average return is 10 percent. The average risk-free rate is 7 percent. The standard deviation of the stock's return is 4 percent, and the stock's beta is 1.5. What is the Treynor Index for the stock? A) .03 B) .75 C) 1.33 D) .02 E) 50

D) .02

If security markets are semi-strong form efficient, investors cannot solely use ______ to earn excess returns. A) previous price movements B) insider information C) publicly available information D) A and C

D) A and C

Collateralized mortgage obligations (CMOs) are generally perceived to have A) no interest rate risk but some default risk. B) the same interest rate risk and no default risk. C) the same interest rate risk as money market securities. D) a high degree of interest rate risk.

D) a high degree of interest rate risk.

Buy and sell orders on the OTC market are completed by A) auction on the trading floor. B) sealed competitive bids. C) noncompetitive bids. D) a telecommunications network.

D) a telecommunications network.

An example of shareholder activism is A) communication with the firm. B) engaging in a proxy contest. C) filing a lawsuit against the board. D) all of the above.

D) all of the above.

The common price-earnings valuation method applied the ______ price-earnings ratio to ________ earnings per share in order to value the firm's stock. A) firm's; industry B) firm's; firm's C) average industry; industry D) average industry; firm's

D) average industry; firm's

The Sharpe Index measures the A) average return on a stock. B) variability of stock returns per unit of return C) stock's beta adjusted for risk. D) excess return above the risk-free rate per unit of risk.

D) excess return above the risk-free rate per unit of risk.

The first-time issuance of shares by a specific firm to the public is referred to as a(n) A) stock repurchase. B) secondary stock offering. C) initial rights issue. D) initial public offering (IPO).

D) initial public offering (IPO).

12. Which of the following mortgages allows the home purchaser to obtain a mortgage at a below-market interest rate throughout the life of the mortgage? A) second mortgage B) growing-equity mortgage C) graduated payment mortgage D) shared-appreciation mortgage

D) shared-appreciation mortgage

Technical analysis involves the ______ to make investment decisions. A) interest rates B) inflationary expectations C) industry conditions D) trend of recent stock prices

D) trend of recent stock prices

Sudden favorable news about the performance of a firm will make investors believe that the firm's stock is __________at its prevailing price. A) overvalued B) fixed C) appropriate D) undervalued

D) undervalued

A stock's average return is 11 percent. The average risk-free rate is 9 percent. The stock's beta is 1 and its standard deviation of returns is 10 percent. What is the Sharpe Index? A) .05 B) .5 C) .1 D) .02 E) .2

E) .2

A stock's beta is estimated to be 1.3. The risk-free rate is 5 percent, and the market return is expected to be 9 percent. What is the expected return on the stock based on the CAPM? A) 5.2 percent B) 11.7 percent C) 16.7 percent D) 4 percent E) 10.2 percent

E) 10.2 percent