FINC 409 Exam 3 (Ch. 10, 11, 12, 6 multiple choice questions)

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A bond's market value is the same as its par value when the coupon rate is: a. the same as the required rate of return b. higher than the required rate of return c. lower than the required rate of return d. lower than the inflation rate

A contract that gives the owner the choice of buying a particular good at a specified price on or before a specified date is called a (n): a. call option b. put option c. futures contract d. derivative option

A document which is administered by a trustee, and includes in great detail the various provisions of the loan agreement is called the: a. trust indenture b. debenture c. bond covenant d. bearer bond

A lower the coefficient of variation indicates ____________ risk per unit of return. a. lower b. higher c. close to 100% d. zero

A market has ________ if it can absorb large orders without disrupting prices; it has ___________ if it has many trades. a. depth, breadth b. breadth, depth c. liquidity, quick execution d. quick execution, liquidity

A trade in the multiple of 100 shares is called a (n): a. round lot b. odd lot c. block trade d. none of the above

A(n) ________________ is an extra dividend declared by the firm over and above its regular dividend payout. a. special dividend b. speculative dividend c. extra-large dividend d. treasury dividend e. none of the above

An example of asset securitization is: a. a first mortgage bond b. a debenture unsecured c. a subordinated debenture d. all the above

An increase in the supply of euros (€) accompanied by a decrease in the demand for euros will cause the dollar to relative to the euro. a. appreciate b. depreciate c. remain stable d. cannot be determined without additional information

An order for immediate purchase or sale at the best possible price is called a: a. market order b. limit order c. stop loss order d. margin order

Bond ratings are paid for by: a. the issuing firm b. the trustee c. the investment banker d. none of the above

CHAPTER 11 Newly created securities are sold in the: a. primary market b. secondary market c. third market d. fourth market

Commercial banks were for many years prohibited from full-fledged investment banking by the: a. Glass-Steagall Act b. Garn-St. Germain Depository Institutions Act c. Dodd-Frank Wall Street Reform and Consumer Protection Act d. National Association of Securities Dealers

Consolidated Edison has just paid an annual dividend of $3 per share. If the expected growth rate for Con Ed is 10%, and your required rate of return is 16%, what is the maximum you should be willing to pay for this stock? (Pick the closest answer.) a. $55 b. $50 c. $46.50 d. $51.50 𝐏𝟎=$𝟑.𝟑𝟎𝟎.𝟏𝟔−𝟎.𝟏𝟎=$_

Foreign exchange hedging by a multinational corporation is: a. a normal responsibility of foreign exchange specialists b. not ordinarily considered to be prudent business c. usually described in speculative terms d. permitted only for defensive purposes

Holding the demand for euros (€) constant, a decrease in the supply of euros will cause the euro to relative to the dollar. a. appreciate b. depreciate c. remain stable d. cannot be determined without additional information

Holding the demand for euros (€) constant, an increase in the supply of euros will cause the dollar to relative to the euro. a. appreciate b. depreciate c. remain stable d. cannot be determined without additional information

Holding the supply of euros (€) constant, a decrease in the demand for euros will cause the dollar to relative to the euro. a. appreciate b. depreciate c. remain stable d. cannot be determined without additional information

Holding the supply of euros (€) constant, an increase in the demand for euros will cause the euro to relative to the dollar. a. appreciate b. depreciate c. remain stable d. cannot be determined without additional information

If Stock A is considered to be of lower risk than Stock B, then Stock A should have returns that are a. lower than Stock B b. higher than Stock B c. they would have equal returns d. cannot determine from the information given

If U.S. interest rates are expected to be 2 percent next year, European interest rates are expected to be 5 percent next year, the U.S. is the home country, and the spot rate between the euro and dollar is $0.92/€, then according to interest rate parity, we would expect the dollar to _________ against the euro from $0.92/€ to __________: (Pick the closest answer.) a. appreciate, $0.894/€ b. appreciate, $0.947/€ c. depreciate, $0.894/€ d. depreciate, $0.947/€ $𝟎.𝟗𝟐×(𝟏+𝟐%)/(𝟏+𝟓%) = $𝟎.𝟗𝟐×𝟏.𝟎𝟐/𝟏.𝟎𝟓 = $𝟎.𝟗𝟐(𝟎.𝟗𝟕𝟏𝟒)=$_/€

If U.S. interest rates are expected to be 4 percent next year, European interest rates are expected to be 6 percent next year, the U.S. is the home country, and the spot rate between the euro and dollar is $1.30/€, then according to interest rate parity, we would expect the dollar to _________ against the euro from $1.30/€ to __________: (Pick the closest answer.) a. appreciate, $1.275/€ b. appreciate, $1.325/€ c. depreciate, $1.275/€ d. depreciate, $1.325/€ $𝟏.𝟑𝟎×(𝟏+𝟒%)/(𝟏+𝟔%) = $𝟏.𝟑𝟎×𝟏.𝟎𝟒/𝟏.𝟎𝟔 = $𝟏.𝟑𝟎(𝟎.𝟗𝟖𝟏𝟏)=$_/€

If a Microsoft January call option with a strike price of $20 had a premium of $2.00 and the market price of the underlying Microsoft stock was $25.62, the call option would be _______________. a. in-the-money b. out-of-the-money c. fairly priced d. not enough information to tell

If a Microsoft January put option with a strike price of $20 had a premium of $5.00 and the market price of the underlying Microsoft stock was $10.00, the put option would be _______________. a. in-the-money b. out-of-the-money c. fairly priced d. not enough information to tell

If the U.S. inflation rate is expected to be 3% next year, the European inflation rate is expected to be 4% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $1.30/€, then according to purchasing power parity, we would expect the dollar to _________ against the euro from $1.30/€ to __________: (Pick the closest answer.) a. appreciate, $1.2875/€ b. appreciate, $1.3126/€ c. depreciate, $1.2875/€ d. depreciate, $1.3126/€ $𝟏.𝟑𝟎×(𝟏+𝟑%)/(𝟏+𝟒%) = $𝟏.𝟑𝟎×𝟏.𝟎𝟑/𝟏.𝟎𝟒 = 𝟏.𝟑𝟎(𝟎.𝟗𝟗𝟎𝟒)=$_/€

If the U.S. inflation rate is expected to be 7%next year, the European inflation rate is expected to be 5% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $0.93/€, then according to purchasing power parity, we would expect the euro to _________ against the dollar from $0.93/€ to __________: (Pick the closest answer.) a. appreciate, $0.9477/€ b. appreciate, $0.9126/€ c. depreciate, $0.9477/€ d. depreciate, $0.9126/€ $𝟎.𝟗𝟑×(𝟏+𝟕%)/(𝟏+𝟓%) = $𝟎.𝟗𝟑×𝟏.𝟎𝟕/𝟏.𝟎𝟓=𝟎.𝟗𝟑(𝟏.𝟎𝟏𝟗𝟎)=$_/€

If the variance for Stock A is greater than the variance for Stock B, then the standard deviation for Stock A: a. is greater than the standard deviation for Stock B b. is less than the standard deviation for Stock B c. is the same as the standard deviation for stock b d. cannot be determined by this information

If the variance in returns for Stock A is 400% and the expected return is 5%, then the coefficient of variation is: a. 4 b. 80 c. .25 d. cannot be determined by this information variance = σ2 → standard deviation = √𝒗𝒂𝒓𝒊𝒂𝒏𝒄𝒆 = √𝝈𝟐 = σ 𝐂𝐕=𝛔𝐑̅ , since 𝛔𝐀=√𝟒𝟎𝟎=𝟐𝟎% and 𝐑̅=𝟓% → 𝐂𝐕=𝟐𝟎%/𝟓%=_

If you buy stock certificates and keep them at the brokerage firm rather than taking personal possession of them, your stock is in: a. street name b. a short sale c. a limit order d. none of the above

Maximum diversification benefit can be achieved if one were to form a portfolio of two stocks whose returns had a correlation coefficient of: a. -1.0 perfectly negatively correlated, change in opposite directions by same percentage b. +1.0 perfectly positively correlated c. 0.0 no correlation d. none of the above

Putable bonds are sometimes referred to as: a. retractable bonds b. callable bonds c. convertible bonds d. none of the above

Suppose a firm's $1,000 par value convertible bond is currently worth $1,000. Its conversion ratio is 30 and the stock currently sells for $25 per share. Would it make better financial sense to hold onto the bond or convert it? a. hold onto the bond b. convert the bond c. can't tell from this information d. none of the above PVbond = $1,000 PVstock = $25(30) =$750

Systematic risk is rewarded with higher returns in the market because: a. it is associated with market movements which cannot be eliminated through diversification b. it is a microeconomic risk c. that risk is unique to a firm or an industry d. none of the above

The Capital Asset Pricing Model (CAPM) states that the expected return on an asset depends upon its level of: a. systematic risk b. unsystematic risk c. all of the above d. none of the above

The Security Market Line describes the relationship between the: a. expected return on securities and their systematic risk b. expected return on securities and their unsystematic risk c. expected return on a security and the expected return on the market portfolio d. risk-free rate and the expected return on the market portfolio

The advantage of buying on margin is: a. larger potential profit b. using more of your own money c. deductible loss d. non-taxable capital gain

The benefits of diversification are greatest when asset returns have: a. negative correlations b. positive correlations c. zero correlations d. low positive covariances

The currency quotation method that indicates the amount of a home country's currency needed to purchase one unit of a foreign currency is called the a. direct quotation method b. indirect quotation method c. floating exchange rate method d. none of the above

The current U.S. one month forward rate is $1.25/€. You are an American speculator with $40,000. You are sure the spot rate will be $1.32/€ one month from today. What steps should you take today and one month from today to make a profit buying and selling euros using your $40,000 and a forward contract? Today you should enter into a one month forward contract to € at today's forward rate of $1.25/€. One month from today your dollar profit is . (Pick the closest answer.) a. buy, €32,000, $2,240 b. buy, €30,303, $2,121 c. sell, €30,303, $2,121 d. sell, €32,000, $2,240 Today: Enter into a forward contract to buy €32,000 one month from today at $1.25. $40,000/€$1.25/€ = €_ One Month from Today: Step 1: With the forward contract buy €32,000 for $40,000 Step 2: Sell the €32,000 in the spot market for $1.32 and receive (€32,000)($1.32) = $42,240 Dollar Profit: $42,240 - $40,000 = $_

The current U.S. one month interest rate is 4% compared to 6% in Europe. Today's spot rate between the euro and dollar is $1.15/€ and today's one month forward rate is $1.12/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. Your covered investment in Europe was because the rate of return on the covered investment is a. unsuccessful, less than the U.S. interest rate b. unsuccessful, less than the European interest rate even though it is more than the U.S. interest rate c. successful, more than the U.S. interest rate even though it is less than the European interest rate. d. successful, more than both the U.S. and European interest rate. e. successful, greater than zero. $1,000$1.15/€= €869.57 → €869.57(1.06) = €921.74 €921.74($1.12/€) = $1,032.35 $𝟑𝟐.𝟑𝟓$𝟏,𝟎𝟎𝟎=𝟑.𝟐𝟒%

The effect of ______________ and _______________ on the value of a firm's stock and the wealth of shareholders is zero. a. stock dividends, stock splits b. cash dividends, stock dividends c. cash dividends, stock splits d. none of the above

The portfolio that contains all risky assets is known as the: a. market portfolio b. efficient portfolio c. efficient frontier d. value-weighted portfolio

The process whereby an underwriting syndicate steps in to buy back securities to prevent a larger price drop than that which has already occurred is called. a. market stabilization b. price normalization c. dollar cost averaging d. none of the above

The purpose of pre-emptive rights is to allow shareholders to: a. buy enough of a new securities offering to maintain their present proportional share of ownership b. buy an unlimited amount of the new issue at a discount c. pre-empt other stockholders from selling securities in a company d. none of the above

The risk caused by variations in interest expense unrelated to sales or operating income arising from changes in the level of interest rates in the economy is called: a. interest rate risk b. business risk c. tax risk d. financial risk e. none of the above

The risk of having a bond issuer request the bond back from the bondholder thus forcing the bondholder to reinvest the proceeds at a lower interest rate is called: a. call risk b. reinvestment rate risk c. interest rate risk d. none of the above

The three types of risk faced by investors in domestic bonds include all of the following EXCEPT: a. exchange rate risk b. credit risk c. interest rate risk d. reinvestment rate risk

The value of a share of stock, currently selling for $100, after it has a 2 for 1 split is: (Pick the closest answer.) a. $50 b. $150 c. $200 d. $250 $𝟏𝟎𝟎/𝟐=$_

The value of a share of stock, currently selling for $100, after it has a 5 for 1 split is: (Pick the closest answer.) a. $20 b. $50 c. $200 d. $500 $𝟏𝟎𝟎/𝟓 = $𝟐𝟎

A speculative (junk) bond issue as rated under Standard & Poor's would be rated ______ or below: a. AA- b. BB+ c. CCC d. CC

Under conditions of purchasing power parity (PPP), a country with a relatively _______ expected inflation rate will have its currency _______ relative to a country with a relatively _______ inflation rate. a. higher, depreciate, lower b. lower, depreciate, higher c. higher, appreciate, lower d. both b and c are correct

Variations in operating income over time because of variations in unit sales, price, cost margins, and/or fixed expenses are called: a. business risk b. exchange rate risk c. purchasing power risk d. financial risk e. none of the above

When the market interest rate is above the coupon rate for a particular quality of bond, the bond will be priced: a. below its par value b. at its par value c. above its par value d. The bond price cannot be determined

Which of the following bonds can be redeemed prior to maturity by the firm? a. callable bonds b. convertible bonds c. putable bonds d. retractable bonds

Which of the following is not a characteristic of a good market? a. central location b. quick and accurate trade execution c. low cost of trading d. all of the above are characteristics of a good market

Which of the following statements is most correct? a. The U.S. stock market appears to be a fairly good example of a semi-strong form efficient market. p 326 b. A market in which prices reflect all past and current publicly known information is a strong form efficient market. p 325 public and private c. A weak-form efficient market implies that technical analysis can be used to predict future price movements. p 326 d. All of the above statements are correct.

Which of the following statements is most correct? a. The security market line graphically shows the expected return and systematic risk relationship. b. Unsystematic risk is the major determinant of returns for a well-diversified portfolio of stocks. c. Assets that have greater systematic risk than the market have betas greater than 0.0. d. All of the above statements are correct

Which of the following types of bonds have the lowest bondholder security risk? a. closed-end mortgage bond b. subordinated debenture c. open-end mortgage bond d. all the above would have the same risk

Which type of bond is currently prohibited from being issued in the United States? a. bearer bonds b. unregulated debentures c. tax avoidance bonds d. income bonds

___________________ is a highly regulated document which details the issuers operations and finances and must be provided to each buyer of a newly issued security. a. A prospectus b. An underwriting agreement c. A best efforts agreement d. none of the above

_________________________ was created to help economic growth in developing countries. a. The World Bank b. The International Monetary Fund c. The Export-Import Bank d. The Agency for International Development.

A (n) _____________ gives the bondholder a claim to specific assets (identified through serial numbers) such as railroad cars or airplanes. a. first mortgage bond b. equipment trust certificate c. inventory bond d. collateralized bond

A U.S. based multinational corporation (MNC) bought some equipment from a British firm today and must pay them £1,000,000 one month from today. The MNC is certain the spot rate will be $1.10/£ one month from today. The current forward rate is $1.05/£. Which of the following is the best course of action for the MNC to deal with the foreign exchange exposure of this situation? a. Enter into a forward contract to buy £1,000,000 one month from today at $1.10/£. b. Enter into a forward contract to buy £1,000,000 one month from today at $1.05/£. c. Enter into a forward contract to sell £1,000,000 one month from today at $1.10/£. d. Enter into a forward contract to sell £1,000,000 one month from today at $1.05/£. e. Wait one month and buy the £1,000,000 in the spot market at the forecasted rate of $1.10/£ rather than use a forward contract.

A U.S. based multinational corporation (MNC) bought some equipment from a British firm today and must pay them £1,000,000 one month from today. The MNC is certain the spot rate will be £1.10/$ one month from today. The current forward rate is £1.15/$. Which of the following is the best course of action for the MNC to deal with the foreign exchange exposure of this situation? a. Enter into a forward contract to buy £1,000,000 one month from today at £1.10/$. b. Enter into a forward contract to buy £1,000,000 one month from today at £1.15/$. c. Enter into a forward contract to sell £1,000,000 one month from today at £1.10/$. d. Enter into a forward contract to sell £1,000,000 one month from today at £1.15/$. e. Wait one month and buy the pounds in the spot market at the forecasted rate of £1.10/$ rather than use a forward contract. (MNC must pay £1,000,000 → wants to pay the fewest $, rates are indirect → £1.15/$ is a better rate because U.S. MNC will get more pounds for each dollar)

A bond that can be changed into a specified number of shares of the issuer's common stock is called a: a. retractable bond b. convertible bond c. callable bond d. collateralized bond

A contract that gives the owner the choice of selling a particular good at a specified price on or before a specified date is called a (n): a. call option b. put option c. futures contract d. derivative option

A decrease in the supply of euros (€) accompanied by an increase in the demand for euros will cause the dollar to relative to the euro. a. appreciate b. depreciate c. remain stable d. cannot be determined without additional information

A firm's stock is expected to pay a $2 annual dividend next year, and the current $50 stock price is expected to rise to $53 over the next year. What is the expected return during this one year time period? (Pick the closest answer.) a. 8% b. 10% c. 12% d. 15% $53 - $50 = $3 → ($𝟑+$𝟐)/$𝟓𝟎=_%

A fruit company has 20% returns in periods of normal rainfall and negative 3% returns in droughts. The probability of normal rainfall is 60% and droughts 40%. What would the fruit company's expected returns be? a. 24% b. 10.8% c. 0 d. cannot determine from the information given E(R) = (60%)(20%) +(40%)(-3%) = 12% - 1.2% = _%

A receipt that represents foreign shares owned and traded by U.S. investors is called a (n): a. global depository receipt b. American depository receipt c. representative depository receipt d. none of the above

A syndicate is: a. a firm that assists in specialist transactions b. a group of several investment banking firms that participate in the underwriting and distributing of a security issue c. the largest group of members on the NYSE d. composed of direct costs, the spread, and underpricing

According to the Gordon dividend model, which of the following variables would not affect a stock's price? a. the firm's expected growth rate in dividends b. the number of shares outstanding c. the shareholder's required return d. all the above affect stock price

According to the definitions given in the text, if Stock A has a standard deviation of 4% and expected returns of 9%, and Stock B has a standard deviation of 3% and expected returns of 1%, which stock is riskier? a. Stock A b. Stock B c. they are equally risky d. cannot determine from the information given (compare the coefficient of variation of each stock to determine which stock is riskier: 𝐂𝐕𝐀=𝟒%/𝟗%=𝟎.𝟒𝟒 compared to 𝐂𝐕𝐁=𝟑%/𝟏%=𝟑)

After controlling for risk, if someone were able to earn greater than the average returns for the market on a consistent basis using publicly available information, which form of market efficiency is violated? a. none of the forms would be violated b. semi-strong all public information, past and current, is reflected in asset prices c. strong reflects ALL knowledge, including past and current publicly known and private information d. all of the forms of market efficiency would be violated,

Ameritech has just issued a $1,000 par value bond that will mature in 10 years. This bond pays interest of $45 every six months. If the annual yield to maturity of this bond is 8%, what is the price of the Ameritech bond if the market is in equilibrium? (Pick the closest answer.) a. $991.50 b. $1,067.96 c. $1,112.82 d. $1,046.58 END MODE FV 1,000 N 20 PMT 45 I/Y 4 → PV = $_

An agreement whereby an investment banker tries to sell securities of an issuing corporation, but assumes no risk if the flotation is unsuccessful is called a: a. due diligence agreement b. best-effort agreement c. firm commitment price agreement d. shelf registration agreement

An individual or organization that represents the bondholders to ensure the indenture's provisions are respected by the bond issuer is called a (n): a. trust indenture b. trustee c. investment banker d. trust organization

Assume the probability of a pessimistic, most likely and optimistic state of nature is .25, .45 and .30, and the returns associated with those states of nature are 10%, 12%, and 16% for asset X. Based on this information, the expected return and standard deviation of return are: (Pick the closest answer.) a. 12.0% and 4.0% b. 12.7% and 2.3% c. 12.7% and 4.0% d. 12.0% and 2.3% e. 12.9% and 5.30% E(R) = (.25)(10%)+(.45)(12%)+(.30)(16%) = 2.5% + 5.4% + 4.8% = _% σ2 = (.25)(10%-12.7%)2 + (.45)(12%-12.7%)2 + (.30)(16%-12.7%)2 = 1.8225 + 0.2205 + 3.267 = 5.2945 → 𝝈 = √𝟓.𝟐𝟗𝟒𝟓 = _%

Brokerage firms that not only assist in trades but also have research staffs that analyze firms and make recommendations about which stocks to buy or sell are called: a. discount brokerage firms b. full service brokerage firms c. investment saving firms d. stock advisory brokers

Foreign exchange markets may be described as: a. specific locations in major industrial cities b. major financial centers connected by good communications systems c. money markets outside of the United States d. facilities of central banks for foreign exchange

Holding the demand for euros (€) constant, a decrease in the supply of euros will cause the dollar to relative to the euro. a. appreciate b. depreciate c. remain stable d. cannot be determined without additional information

Holding the demand for euros (€) constant, an increase in the supply of euros will cause the euro to relative to the dollar. a. appreciate b. depreciate c. remain stable d. cannot be determined without additional information

Holding the supply of euros (€) constant, a decrease in the demand for euros will cause the euro to relative to the dollar. a. appreciate b. depreciate c. remain stable d. cannot be determined without additional information

Holding the supply of euros (€) constant, an increase in the demand for euros will cause the dollar to relative to the euro. a. appreciate b. depreciate c. remain stable d. cannot be determined without additional information

If IBM has a beta of 1.2 when the risk-free rate is 6% and the expected return on the market portfolio is 18%, the expected return on IBM is: a. 17.2% b. 20.4% c. 22.1% d. 23.6% CAPM security market line E(Ri) = RFR + [E(RMKT )- RFR]βi E(RIBM) = 6% + (18% - 6%)1.2 = 6% + 12%(1.2) = 20.4%

If Stock A had a price of $120 at the beginning of the year, $150 at the end of the year and paid a $6 dividend during the year, what would be the annualized holding period return? Pick the closest answer. a. 36% b. 30% c. 25% d. 28% dollar return = ($150 - $120) + $6 = $36 → % 𝐫𝐞𝐭𝐮𝐫𝐧 = $𝟑𝟔/$𝟏𝟐𝟎 = _%

If U.S. interest rates are expected to be 5 percent next year, European interest rates are expected to be 2 percent next year, the U.S. is the home country, and the spot rate between the euro and dollar is $0.92/€, then according to interest rate parity, we would expect the euro to _________ against the dollar from $0.92/€ to __________: (Pick the closest answer.) a. appreciate, $0.894/€ b. appreciate, $0.947/€ c. depreciate, $0.894/€ d. depreciate, $0.947/€ $𝟎.𝟗𝟐×(𝟏+𝟓%)/(𝟏+𝟐%) = $𝟎.𝟗𝟐×𝟏.𝟎𝟓/𝟏.𝟎𝟐 = $𝟎.𝟗𝟐(𝟏.𝟎𝟐𝟗𝟒)=$_/€

If U.S. interest rates are expected to be 6 percent next year, European interest rates are expected to be 4 percent next year, the U.S. is the home country, and the spot rate between the euro and dollar is $1.30/€, then according to interest rate parity, we would expect the euro to _________ against the dollar from $1.30/€ to __________: (Pick the closest answer.) a. appreciate, $1.275/€ b. appreciate, $1.325/€ c. depreciate, $1.275/€ d. depreciate, $1.325/€ $𝟏.𝟑𝟎×(𝟏+𝟔%)/(𝟏+𝟒%) = $𝟏.𝟑𝟎×𝟏.𝟎𝟔/𝟏.𝟎𝟒 = $𝟏.𝟑𝟎(𝟏.𝟎𝟏𝟗𝟐)=$_/€

If a Microsoft January call option with a strike price of $20 were about to expire and the market price of the underlying Microsoft stock was $25.62, the premium of the call option would have to be __________ or higher to eliminate arbitrage opportunities. a. $31.24 b. $5.62 c. $15.62 d. $25.62 e. $14.38

If a Microsoft January put option with a strike price of $20 had a premium $5.00 and the market price of the underlying Microsoft stock was $23.00, the put option would be _______________. a. in-the-money b. out-of-the-money c. fairly priced d. not enough information to tell

If a bond with a par value of $500 and a call premium of 6% is called in before its maturity date, the firm would pay the following to the bondholders: (Pick the closest answer.) a. $500 b. $530 c. $0 d. $560 $500(1.06) = $_

If a market has "price pressure" this is a sign of a. good liquidity in the market. b. low liquidity in the market. c. high listing fees. d. high brokerage commissions

If a person requires greater return when risk increases, that person is said to be: a. risk seeking b. risk averse c. risk aware d. risk indifferent e. none of the above

If the U.S. inflation rate is expected to be 4% next year, the European inflation rate is expected to be 3% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $1.30/€, then according to purchasing power parity, we would expect the euro to _________ against the dollar from $1.30/€ to __________: (Pick the closest answer.) a. appreciate, $1.2875/€ b. appreciate, $1.3126/€ c. depreciate, $1.2875/€ d. depreciate, $1.3126/€ $𝟏.𝟑𝟎×(𝟏+𝟒%)/(𝟏+𝟑%) = $𝟏.𝟑𝟎×𝟏.𝟎𝟒/𝟏.𝟎𝟑 = 𝟏.𝟑𝟎(𝟏.𝟎𝟎𝟗𝟕)=$_/€

If the U.S. inflation rate is expected to be 5% next year, the European inflation rate is expected to be 7% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $0.93/€, then according to purchasing power parity, we would expect the dollar to _________ against the euro from $0.93/€ to __________: (Pick the closest answer.) a. appreciate, $0.9477/€ b. appreciate, $0.9126/€ c. depreciate, $0.9477/€ d. depreciate, $0.9126/€ $𝟎.𝟗𝟑×(𝟏+𝟓%)/(𝟏+𝟕%) = $𝟎.𝟗𝟑×𝟏.𝟎𝟓/𝟏.𝟎𝟕=𝟎.𝟗𝟑(𝟎.𝟗𝟖𝟏𝟑)=$_/€

If the expected return on the market portfolio is 12%, and the beta on Consolidated Edison is 0.8, then using the Security Market Line, the expected return on Con Ed is: a. greater than 12% b. less than 12% c. greater or less than 12%, depending on the risk-free rate of return d. dependent on some other factors

If the risk-free rate, the expected return on the market portfolio, and the _____________ of a stock is known, an investor can use the security market line to determine the expected return on that stock. a. standard deviation b. beta c. coefficient of variation d. unsystematic risk

If the value of the securities that you borrowed money from your broker to purchase falls, you may receive a: a. call option b. margin call c. limit order call d. specialist call

Key factors that influence currency exchange rates include all of the following EXCEPT: a. supply and demand relationships b. U.N. proclamations c. interest rates d. inflation rates

Lance Inc. is a U.S. corporation operating in France. When the euro depreciates against the dollar, the dollar value of the firm's euro earnings from its French operations a. increase b. decrease c. stay the same d. cannot be determined without additional information

Large multinational corporations enjoy special opportunities for risk reduction or speculative gains from currency activities: a. because of their influence on currency developments in the various countries b. since they can move balances from one country to another as monetary conditions seem to warrant c. because of their generally stronger credit ratings d. because they always deal in currencies denominated in U.S. dollars

Market stabilization is: a. disallowed under the Securities Act of 1934 b. permitted for underwriters if the market price falls below the offering price c. prohibited by the Securities Exchange Commission d. none of the above

Most firms that issue dividends try to maintain a consistent _________________. a. dividend per share b. dividend payout ratio c. both policies are frequently employed d. neither policy is frequently employed

Rico bought 100 shares of Banana Republic stock for $24.00 per share on January 1, 2010. He received a dividend of $2.00 per share at the end of 2010 and $3.00 per share at the end of 2011. At the end of 2012, Rico collected a dividend of $4.00 per share and sold his stock for $18.00 per share. What was Rico's realized holding period return? a. -12.5% b. 12.5% c. -16.7% d. 16.7% e. none of the above Dollar Return = ($18 - $24) + $2 + $3 + $4 = $3 𝐇𝐨𝐥𝐝𝐢𝐧𝐠 𝐏𝐞𝐫𝐢𝐨𝐝 𝐑𝐞𝐭𝐮𝐫𝐧= $𝟑/$𝟐𝟒=_%

Sales of securities that the seller does not own is called a: a. stop-loss order b. short sale c. limit order d. maintenance margin

The _______ includes ALL international transactions. a. balance sheet b. balance of payments c. current account balance d. capital account balance

The _____________ policy states that dividends will vary based upon how much excess funds the firm has from year-to-year, whereas under a ________________ policy the firm pays a constant percentage of earnings as dividends, so as earnings rise and fall so does the dollar amount of dividends. a. constant payout ratio, residual dividend b. residual dividend, constant payout ratio c. constant dividend, variable payout ratio d. variable payout ratio, constant dividend e. none of the above

The ________________________, the greater the chance of the option becoming _____________________. a. shorter the time to expiration, in-the-money b. longer the time to expiration, in-the-money c. less the volatility, in-the-money d. two of the above are correct. e. none of the above.

The correlation between the return on the risk-free asset with a constant return over time and the return on a risky asset is always: a. -1 b. 0 c. 1 d. 0.5

The current U.S. one month interest rate is 4% compared to 6% in Europe. Today's spot rate between the euro and dollar is $1.15/€ and today's one month forward rate is $1.13/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. Today you should convert your $1,000 to euros, deposit the euros in a European bank for one month, and enter into a forward contract to € one month forward at today's forward rate of $1.13/€. One month from today you will take your euros out of the European bank and use the forward contract to convert them to $ giving you a % rate of return. (Pick the closest answer.) a. sell, €869.57, $982.61, -1.74% b. sell, €921.74, $1,041.55, 4.16% c. buy, €869.57, $982.61, -1.74% d. buy, €921.74, $1,041.55, 4.16% $1,000/$1.15/€ = €869.57 → €869.57(1.06) = €921.74 €921.74($1.13/€) = $1,041.57 $41.57/$1,000 = 4.16%

The current U.S. one month interest rate is 7% compared to 5% in Europe. Today's spot rate between the euro and dollar is $1.25/€ and today's one month forward rate is $1.18/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. Today you should convert your $1,000 to euros, deposit the euros in a European bank for one month, and enter into a forward contract to € one month forward at today's forward rate of $1.18/€. One month from today you will take your euros out of the European bank and use the forward contract to convert them to $ giving you a % rate of return. (Pick the closest answer.) a. sell, €847.46, $1,059.33, 5.93% b. sell, €840.00, $991.20, - 0.88% c. sell, €800.00, $944.00, - 5.60% d. sell, €856, $1,010.08, 1.01% $1,000$1.25/€= €800.00 → €800(1.05) = €_ €840($1.18/€) = $991.20 - $8.80$1,000 = _%

The current U.S. one month interest rate is 7% compared to 5% in Europe. Today's spot rate between the euro and dollar is $1.25/€ and today's one month forward rate is $1.28/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. Today you should convert your $1,000 to euros, deposit the euros in a European bank for one month, and enter into a forward contract to € one month forward at today's forward rate of $1.28/€. One month from today you will take your euros out of the European bank and use the forward contract to convert them to $ giving you a % rate of return. (Pick the closest answer.) a. sell, €856.00, $1,095.68, 9.57% b. sell, €840.00, $1,075.20, 7.52% c. buy, €856.00, $1,095.68, 9.57 $1,000% d. buy, €840.00, $1,075.20, 7.52% $1,000/$1.25/€= €800.00 → €800(1.05) = €_ €840($1.28/€) = _ → $75.20/$1,000 = _%

The direct exchange rate is the rate at which one unit of foreign currency is quoted in terms of: a. commodity prices b. the domestic currency c. the foreign currency d. gold

The document which details the issuer's finances and must be provided to each buyer of the security is called the: a. indenture b. prospectus c. tombstone d. all the above

The effect of arbitrage activities in foreign exchange markets is to: a. create disparity among the rates of various currencies b. eliminate or reduce exchange rate quotation differentials c. hinder the otherwise smooth functioning of the exchange markets d. create wide swings in quotations from period to period

The effect on revenues and expenses from variations in the value of the U.S. dollar in terms of other currencies is called: a. interest rate risk b. exchange rate risk c. purchasing power risk d. financial risk e. none of the above

The market portfolio would have a beta of: a. 0 b. 1 c. -1 d. 0.8

The slope of the linear relation between the returns on a stock and the returns on the market portfolio is called the: a. alpha b. beta c. covariance d. coefficient of variance

The terms or covenants of a bond contract are set out in which of the following documents? a. debenture b. trust indenture c. mortgage d. negative pledge clause

The total risk of a well-diversified international portfolio of stocks appears to be about what proportion of the risk of an average one-stock portfolio? a. one-quarter b. one-third c. one-half d. two-thirds e. three-fourths

The total risk of a well-diversified portfolio of U.S. stocks appears to be about what proportion of the risk of an average one-stock portfolio? a. one-third b. one-half c. two-thirds d. three-fourths

Under a ______________, if any additional shares of common stock, or any security that may be converted into common stock, are to be issued, the securities must be offered for sale first to the existing common stockholders. a. red herring b. pre-emptive rights offering c. seasoned offering d. shelf registration

When the market interest rate is the same as the coupon rate for a particular quality of bond, the bond will be priced: a. below its par value b. at its par value c. above its par value d. The bond price cannot be determined

Which factor does not impact international trade balances? a. The exchange value of the U.S. dollar relative to other currencies b. How often the government sells treasury bills c. Relative inflation rates d. Economic growth e. The prices of goods in the U.S.

Which of the following is not an advantage of owning debt securities? a. high claim on cash flows of a firm b. highest return of corporate securities equity c. high claim on assets of in liquidation d. none of the above

Which of the following is not required to compute the expected return of a three-asset portfolio? a. the amount invested in each stock b. the correlation between the returns on each stock c. the expected return on each stock d. all of the above are required

Which of the following statements is correct? a. A closed-end mortgage bond is one that allows the same assets to be used as security in future bond issues. b. Covenants in a trust indenture restrict or limit the actions the firm can take. c. Retractable bonds can be redeemed prior to maturity by the firm. d. All of the above are correct.

Which of the following is not a component of the Gordon (or constant dividend growth rate) model for valuing stocks? a. next year's expected dividend b. a constant dividend growth rate c. next year's expected earnings d. a discount rate that reflects the riskiness of the stock

Which of the following statements is most correct? a. Because global depository receipts are listed on the London Stock Exchange, U.S. investors cannot buy GDRs through a broker in the United States. b. Foreign stocks can be traded in the United States if they are registered with the Securities and Exchange Commission. c. The fourth market is a market for large blocks of listed stocks that operates outside the confines of the organized exchanges. d. All the above statements are correct.

Which of the following statements is most correct? a. Combining positively correlated assets having the same expected return results in a portfolio with the same level of expected return and a lower level of risk. Positively correlated assets → perhaps slightly less risk b. Combining negatively correlated assets having the same expected return results in a portfolio with the same level of expected return and a lower level of risk. Negatively correlated assets → greatest reduction in risk c. Combining positively correlated assets having the same expected return results in a portfolio with a lower level of expected return and a lower level of risk. Portfolio will have the same expected return, not lower d. Combining negatively correlated assets having the same expected return results in a portfolio with a lower level of expected return and a lower level of risk. Portfolio will have the same expected return, not lower e. all of the above

Which of the following types of stocks have the lowest risk to shareholders? a. common stock b. cumulative preferred stock c. non-cumulative preferred stock d. callable preferred stock

You are considering buying a 10-year, $1,000 par value bond issued by IBM. The coupon rate is 8% annually, with interest being paid semiannually. The first interest payment will be received six months from today. If you expect to earn a 10% rate of return on this bond, what is the maximum price you should be willing to pay for this IBM bond? (Pick the closest answer.) a. $189.93 b. $875.38 c. $898.54 d. $911.46 earn 10% annual rate of return → 5% semiannually, PMT = (1/2)(8%)($1,000) = $40 semiannually N = 2(10) = 20 semiannual periods END MODE FV 1,000 N 20 PMT 40 I/Y 5 → PV = $875.38

__________________ allows stock to be held in the name of a brokerage house. a. The Federal Reserve b. Street name c. The Securities Exchange Act of 1944 d. none of the above

___________________ are comprised of direct costs, the spread, and underpricing. a. Commission costs b. Flotation costs c. Brokerage commissions d. none of the above

___________________ is an order to sell stock at the market price when the price of the stock falls to a specified level. a. A short sale b. A stop-loss order c. A limit order d. Buying on margin

_________________________ was created to promote world trade through monitoring and maintaining fixed exchange rates and by making loans to countries with payments problems. a. The World Bank b. The International Monetary Fund c. The International Bank for Reconstruction and Development d. none of the above

A bond that does not permit future bond issues to be secured by any of the assets pledged as security to it is called a (n): a. first mortgage bond b. equipment trust certificate c. closed-end mortgage bond d. open-end mortgage bond

A potential investment pays $10 per year indefinitely. The appropriate discount rate for the potential investor is 10%. The present value of this cash flow is: (Pick the closest answer.) a. $1 b. $10 c. $100 d. $1,000 this is a perpetuity $𝟏𝟎/𝟎.𝟏𝟎=$_

A sinking fund: a. is a special fund set up to pay of the creditors of bankrupt firms b. requires specific approval by the firm's board of directors c. requires the issuer to retire a bond issue incrementally over time d. none of the above

A stop-loss order: a. sets a price a broker may not violate b. stops losses for one trading day c. is executed at the market price when the price of the stock falls to a specified level d. stops losses for 30 days

All of the following represent bonds secured by real assets except a (n): a. closed-end mortgage bond b. equipment trust certificate c. debenture d. open-end mortgage bond

All other things being equal, a bond's value will be below its maturity value of $1,000 if it pays interest of $100 per year and investors require a rate of return that is,: a. less than 10% b. exactly 10% c. higher than 10% d. either less than or greater than 10% $100 interest per year: If price = $1,000 → 10% return, if price > $1,000 → less than 10% return if price < $1,000 → investors can get more than 10% which would give investors a return equal to alternative equal risk investments which is what they would require

An over-the-counter market trade occurs in the: a. primary market b. NYSE c. third market d. SEC

Bonds that have coupons that are literally clipped and presented, like a check, to the bank for payment, and where the bond issuer does not know who is receiving the coupon payments are called: a. registered bonds b. first mortgage bonds c. bearer bonds d. none of the above

CHAPTER 12 A stock that went from $40 per share at the beginning of the year to $45 at the end of the year and paid a $2 dividend provided an investor with a ____ return. a. 8.75% b. 14% c. 17.5% d. 7% e. none of the above dollar return = $45 - $40 + $2 = $7 →% 𝐫𝐞𝐭𝐮𝐫𝐧 = $𝟕/$𝟒𝟎 = _%

Chrysler has a bond outstanding with eight years remaining to maturity, a coupon rate of 5%, and semiannual payments. If the market price of the Chrysler bond is $729.05, what is the annual yield to maturity? (Pick the closest answer.) a. 7% b. 9% c. 10% d. 11% coupon rate 5% paid semiannually → $1,000(0.05) = $50 → $25 semiannual PMT, number of periods 2(8) = 16 END MODE FV 1,000 N 16 PMT 25 PV -$729.05 → I/Y = 5% semiannual → _% YTM

Dollar-denominated bonds that are issued in the United States by a foreign issuer are called: a. Eurodollar bonds b. foreign bonds c. Yankee bonds d. global bonds

Federal regulation of investment banking is administered primarily under the provisions of the ___________________. a. Investment Banking Act of 1977 b. The Garn-St. Germain Act of 1997 c. The Securities Act of 1933 d. none of the above

If U.S. interest rates are expected to be 2 percent next year, European interest rates are expected to be 5 percent next year, the U.S. is the home country, and the spot rate between the euro and dollar is $0.92/€, then according to interest rate parity, we would expect the euro to _________ against the dollar from $0.92/€ to __________: (Pick the closest answer.) a. appreciate, $0.894/€ b. appreciate, $0.947/€ c. depreciate, $0.894/€ d. depreciate, $0.947/€ $𝟎.𝟗𝟐×(𝟏+𝟐%)/(𝟏+𝟓%)=$𝟎.𝟗𝟐×(𝟏.𝟎𝟐/𝟏.𝟎𝟓)=$𝟎.𝟗𝟐(𝟎.𝟗𝟕𝟏𝟒)=$_/€

If U.S. interest rates are expected to be 4 percent next year, European interest rates are expected to be 6 percent next year, the U.S. is the home country, and the spot rate between the euro and dollar is $1.30/€, then according to interest rate parity, we would expect the euro to _________ against the dollar from $1.30/€ to __________: (Pick the closest answer.) a. appreciate, $1.275/€ b. appreciate, $1.325/€ c. depreciate, $1.275/€ d. depreciate, $1.325/€ $𝟏.𝟑𝟎×(𝟏+𝟒%)/(𝟏+𝟔%) = $𝟏.𝟑𝟎×𝟏.𝟎𝟒/𝟏.𝟎𝟔 = $𝟏.𝟑𝟎(𝟎.𝟗𝟖𝟏𝟏)=$_/€

If prices in a particular market fully reflect all public and private knowledge, the market is efficient in the: a. weak form b. semi-strong form c. strong form d. both a and b

If the U.S. inflation rate is expected to be 3% next year, the European inflation rate is expected to be 4% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $1.30/€, then according to purchasing power parity, we would expect the euro to _________ against the dollar from $1.30/€ to __________: (Pick the closest answer.) a. appreciate, $1.2875/€ b. appreciate, $1.3126/€ c. depreciate, $1.2875/€ d. depreciate, $1.3126/€ $𝟏.𝟑𝟎×(𝟏+𝟑%)/(𝟏+𝟒% = $𝟏.𝟑𝟎×(𝟏.𝟎𝟑)/(𝟏.𝟎𝟒) = 𝟏.𝟑𝟎(𝟎.𝟗𝟗𝟎𝟒)=$_/€

If the U.S. inflation rate is expected to be 7% next year, the European inflation rate is expected to be 5% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $0.93/€, then according to purchasing power parity, we would expect the dollar to _________ against the euro from $0.93/€ to __________: (Pick the closest answer.) a. appreciate, $0.9477/€ b. appreciate, $0.9126/€ c. depreciate, $0.9477/€ d. depreciate, $0.9126/€ $𝟎.𝟗𝟑×(𝟏+𝟕%)/(𝟏+𝟓%) = $𝟎.𝟗𝟑×𝟏.𝟎𝟕/𝟏.𝟎𝟓=𝟎.𝟗𝟑(𝟏.𝟎𝟏𝟗𝟎)=$_/€

If the expected return on Stock 1 is 6%, and the expected return on Stock 2 is 20%, the expected return on a two-asset portfolio that holds 10% of its funds in Stock 1 and 90% in Stock 2 is: a. 11.52% b. 13% c. 18.6% d. 19.14% (10%) (6%) + (90%)(20%) = 0.6% + 18% = 18.6%

If the expected returns for Stock A are 3% and this year's returns are 3%, next year's returns would be a. 3% b. 6% c. cannot say for certain d. 4.5%

If the initial margin requirement is 50% and you have $5,000 in your brokerage account, you may purchase a total of __________ worth of securities on margin. (Pick the closest answer.) a. $2,000 b. $2,500 c. $10,000 d. $12,500

If we assume that asset X has an expected return of 10 and a variance of 10, then its coefficient of variation is: (Pick the closest answer.) a. 3.162 b. 1.000 c. 0.316 d. 0.032 variance = σ2 → standard deviation = √𝒗𝒂𝒓𝒊𝒂𝒏𝒄𝒆 = √𝝈𝟐 = σ 𝛔=√𝟏𝟎=𝟑.𝟏𝟔 → 𝐂𝐕=𝝈𝑹̅=𝟑.𝟏𝟔𝟏𝟎=_

If you invest 40% of your investment in GE with an expected rate of return of 10% and the remainder in IBM with an expected rate of return of 16%, the expected return on your portfolio is: a. 12.4% b. 13% c. 13.6% d. 14.5% E(Rp) = (40%)(10%) + (60%)(16%) = 4% + 9.6% = _%

In an efficient market: a. it is fairly easy to find stocks whose prices do not fairly reflect the present value of future expected cash flows b. expected news will cause a rapid change in prices c. information flows are random, both in timing and in content d. all the above Efficient market: a market which adjusts quickly after the arrival of important news surprises

Insider trading laws regulate the behavior of a. corporate officers only b. investment bankers only c. anyone with nonpublic information about a firm d. none of the above.

Investing in _____ is a way for small investors to enjoy the benefits of professional management and diversification. a. stocks b. bonds c. mutual funds d. put options

Most American bonds pay coupon interest a. monthly b. quarterly c. semi-annually d. annually e. none of the above

Portfolio risk is comprised of: a. systematic and market risk b. unsystematic and microeconomic risk c. systematic and unsystematic risk d. systematic and macroeconomic risk

Purchasing commodities, securities, or currencies in one market and immediately selling them in another to make a profit from price differences in the two markets is called: a. profiteering b. skimming c. arbitrage d. all of the above

The _____________ is the difference in return earned by investing in a longer term bond that has the same credit risk as a shorter-term bond. a. purchasing power spread b. credit risk premium c. horizon risk premium d. two of the above e. none of the above

The ___________________ shows the flow of income into and out of the United States during a specified period. a. Balance of payments b. Capital Account balance c. Current Account balance d. Merchandise Trade balance e. Balance of trade

The aftermarket is: a. the over-the-counter market b. the foreign exchange market c. the period after a new issue is initially sold to the public d. none of the above

The brokers who handle the house broker's overflow are called: a. specialists b. registered traders c. independent brokers d. all the above

The constant dividend growth model assumes: a. a constant annual dividend b. a constant dividend growth rate for no more than the first 10 years c. that the discount rate must be greater than the dividend growth rate d. two of above are true assumptions

The current U.S. one month interest rate is 4% compared to 6% in Europe. Today's spot rate between the euro and dollar is $1.15/€ and today's one month forward rate is $1.13/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. Your covered investment in Europe was because the rate of return on the covered investment is a. unsuccessful, less than the U.S. interest rate b. unsuccessful, less than the European interest rate even though it is more than the U.S. interest rate c. successful, more than the U.S. interest rate even though it is less than the European interest rate. d. successful, more than both the U.S. and European interest rate. e. successful, greater than zero $1,000$1.15/€= €869.57 → €869.57(1.06) = €921.74 €921.74($1.13/€) = $1,041.56 $41.56$1,000 = 4.16%

The current U.S. one month interest rate is 5% compared to 7% in Europe. Today's spot rate between the euro and dollar is $1.18/€ and today's one month forward rate is $1.25/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. Today you should convert your $1,000 to euros, deposit the euros in a European bank for one month, and enter into a forward contract to € one month forward at today's forward rate of $1.25/€. One month from today you will take your euros out of the European bank and use the forward contract to convert them to $ giving you a % rate of return. (Pick the closest answer.) a. sell, €800, $944.00, - 5.6% b. sell, €847.46, $906.78, -9.32% c. sell, €906.78, $1,133.48, 13.35% d. sell, €889.83, $1,112.29, 11.23% e. none of the above is correct because you want to buy €'s with the forward contract $1,000$1.18/€= €847.46 → €847.46(1.07) = €_ €906.78($1.25/€) = $1,133.48 $133.48$1,000 = _%

The last dividend on GTE stock was $4, and the expected growth rate is 10%. If you require a rate of return of 20%, what is the highest price you should be willing to pay for GTE stock? (Pick the closest answer.) a. $40 b. $42.50 c. $44 d. none of the above D1 = $4(1.10) = $_ 𝐏𝟎 = $𝟒.𝟒𝟎/(𝟐𝟎%−𝟏𝟎%) = $𝟒𝟒

The lead investment banker: a. is elected by members of the syndicate b. is appointed by the SEC c. originates and handles a flotation d. none of the above

The manager of the foreign exchange office of a multinational corporation could, in anticipation of a decline in the value of currency of one of its foreign accounts receivable (i.e. it will receive the foreign currency in the future): a. borrow in that country and add to its account with that branch b. accelerate the timing of remitting on the payables of that foreign branch c. enter into a futures contract for delivery of that currency at today's rate d. shift funds from branches in other countries to that foreign branch

The market for large blocks of listed stocks that operates outside the confines of the organized exchanges is called the: a. primary market b. secondary market c. third market d. fourth market

The price for which the owner is willing to sell the security is called the: a. bid price b. spread c. ask price d. limit price

The risk caused by changes in inflation that affect revenues, expenses and profitability is called: a. interest rate risk b. business risk c. purchasing power risk d. financial risk e. none of the above

The risk caused by variations in income before taxes over time because fixed interest expenses do not change when operating income rises or falls is called: a. interest rate risk b. business risk c. financial risk d. purchasing power risk e. none of the above

The seller of an option contract is called a (n) ____________ and the price paid for the option itself is the called the ___________. a. option broker, option price b. sales agent, option premium c. option writer, option premium d. option writer, option price e. none of the above.

The syndicate dissolves: a. when members elect to do so b. 30 days after securities issue c. when the lead investment banker decides d. the syndicate never dissolves

The value of a share of stock currently selling for $100 after a 1 for 5 split is: (Pick the closest answer.) a. $20 b. $40 c. $500 d. $1000

The value of a share of stock currently selling for $50 after a 1 for 5 split is: (Pick the closest answer.) a. $10 b. $200 c. $250 d. $500

To accurately compare the rate of return on one investment with another, they should be: a. equal in size or dollar amount b. measured over different time periods c. measured over equal time periods d. held for more than one year

Unsystematic risk is also known as: a. market risk b. nondiversifiable risk c. firm-specific risk d. macroeconomic risk

When the market interest rate is below the coupon rate for a particular quality of bond, the bond will be priced: a. below its par value b. at its par value c. above its par value d. The bond price cannot be determined

When the market interest rate rises for a particular quality of bond, the price of the bond falls, which gives investors a new: a. coupon rate b. interest payment amount c. yield to maturity d. maturity

Which of the following (a, b, c) is not an advantage of shelf registration? a. saving time on issuing securities b. allows issuer to determine which investment bank offers the best service c. eliminates filing fees d. all the above (a, b, c) e. none of the above (neither a, b, or c)

Which of the following activities is not the responsibility of registered traders? a. buy and sell stocks for their own accounts b. pay no commissions because they do their own trading c. match up buy and sell orders d. all the above

Which of the following is considered to be the most risky? a. U.S. government bonds b. mortgage bonds c. corporate bonds d. common stocks

Which of the following statements is false? a. Preferred stock that is both cumulative and convertible is a popular financing choice for investors purchasing shares of stock in small firms with high growth potential. b. Bond issues of a single firm can have different bond ratings if their security provisions differ. c. Yankee bonds are dollar-denominated bonds that are sold outside the United States. d. All of the above statements are correct.

Which of the following statements is most correct? a. The variance of a portfolio is a weighted average of asset variances. b. The benefits of diversification are greatest when asset returns have zero correlations. c. The market portfolio truly eliminates all unsystematic risk. d. Beta is the measure of an asset's unsystematic risk.

Which of the following statements is most correct? a. A weaker dollar results in more imports of foreign merchandise since it requires fewer dollars for purchase. b. A stronger dollar results in fewer imports of foreign merchandise since it requires fewer dollars for purchase. c. A stronger dollar results in more imports of foreign merchandise since it requires fewer dollars for purchase. d. A weaker dollar results in more imports of foreign merchandise since it requires more dollars for purchase. e. none of the above

Which of the following statements is most correct? a. Perfectly negatively correlated series move exactly together and have a correlation coefficient of -1.0 while perfectly positively correlated series move exactly in opposite directions and have a correlation coefficient of +1.0. b. Perfectly negatively correlated series move exactly together and have a correlation coefficient of +1.0 while perfectly positively correlated series move exactly in opposite directions and have a correlation coefficient of -1.0. c. Perfectly positively correlated series move exactly together and have a correlation coefficient of +1.0 while perfectly negatively correlated series move exactly in opposite directions and have a correlation coefficient of -1.0. d. Perfectly positively correlated series move exactly together and have a correlation coefficient of -1.0 while perfectly negatively correlated series move exactly in opposite directions and have a correlation coefficient of +1.0. e. none of the above

Which one of the following is not a cost to the issuing firm of going public with an initial stock offering? a. direct costs (legal fees, accounting fees, etc.) b. underwriter's spread c. overpricing d. underpricing

__________________ assess both the collateral and the ability of the issuer to make timely interest and principal payments. a. Bond covenants b. Bond indentures c. Bond ratings d. none of the above

___________________ is an agreement by the investment banker to sell securities of the issuing corporation whereby the investment banker assumes no risk for the possible failure of the flotation. a. A prospectus b. An underwriting agreement c. A best-effort agreement d. none of the above

___________________ is the maximum purchase price or minimum selling price specified by an investor. a. A short sale b. A stop-loss order c. A limit order d. Buying on margin

_________________________ was an international monetary system in which the U.S. dollar was valued in gold and other exchange rates were pegged to the dollar. a. The silver standard b. The flexible exchange rate system c. The Bretton Woods System d. none of the above

Which of the following is not a component of the security market line equation? a. risk-free rate b. expected return on the market c. an asset's systematic risk d. an asset's unsystematic risk

A U.S. based multinational corporation (MNC) sold some equipment to a British firm today and will receive £1,000,000 from the British firm one month from today. The MNC is certain the spot rate will be $1.10/£ one month from today. The current forward rate is $1.15/£. Which of the following is the best course of action for the MNC to deal with the foreign exchange exposure of this situation? a. Enter into a forward contract to buy £1,000,000 one month from today at $1.10/£. b. Enter into a forward contract to buy £1,000,000 one month from today at $1.15/£. c. Enter into a forward contract to sell £1,000,000 one month from today at $1.10/£. d. Enter into a forward contract to sell £1,000,000 one month from today at $1.15/£. e. Wait one month and sell £1,000,000 in the spot market at the forecasted rate of $1.10/£ rather than use a forward contract.

A bond that allows investors to force the issuer to redeem the bond prior to maturity is called a: a. convertible bond b. callable bond c. debenture bond d. putable bond

A bond that allows the same assets to be used as security in future issues is called a (n): a. first mortgage bond b. equipment trust certificate c. closed-end mortgage bond d. open-end mortgage bond

A decrease in the supply of euros (€) accompanied by a decrease in the demand for euros will cause the dollar to relative to the euro. a. appreciate b. depreciate c. remain stable d. cannot be determined without additional information

A firm may decide to list its shares on another exchange besides the NYSE because a. costs are lower. b. listing requirements are easier to satisfy. c. investors can get faster trade execution in another exchange. d. all of the above.

A firm's stock is expected to pay a $3 annual dividend next year, the current stock price is $60, and the expected growth rate in dividends is 8%. Using the Gordon approach, what is the expected return? (Pick the closest answer.) a. 5% b. 8% c. 13.4% d. 13% 𝐫𝐬 = 𝐃𝟏/𝐏𝟎+𝐠 = ($𝟑/$𝟔𝟎)+𝟖% = 𝟓%+𝟖%=_%

A limit order, if not executed, will expire at the end of a. the day. b. the week. c. the month. d. all of the above are possibilities as the trader will decide the expiration date

A market in which large institutional investors arrange purchases and sales of securities among themselves without the benefit of a broker or dealer is referred to as the: a. primary market b. secondary market c. third market d. fourth market

A potential investment pays $10 per year indefinitely. The appropriate discount rate for the potential investor is 10%. The present value of this cash flow is calculated by: a. multiplying $10 by the appropriate present value factor b. dividing $10 by 10 c. multiplying $10 by the present value factor of an annuity d. dividing $10 by .10

A statistical concept that relates movements in one set of returns to movements in another set over time is called: a. variance b. standard deviation c. coefficient of variation d. correlation

A stronger U.S. dollar generally a. results in more imports of foreign merchandise foreign goods are less expensive to US consumers b. leads to concern about worsening trade deficits ↑ imports and ↓ exports → larger deficits c. results in lower domestic inflation buying more foreign → less demand for US goods → lower US prices d. all of the above

A weaker U.S. dollar generally a. helps U.S. exporting firms U.S. goods are less expensive to foreign consumers b. reduces an existing U.S. trade deficit ↓ imports and ↑ exports → smaller deficits c. leads to higher inflation in the U.S. American and foreign consumers buy more American products d. all of the above e. none of the above

According to the definitions given in the text, if Stock A has a standard deviation of 4% and Stock B has a standard deviation of 3% which stock is riskier? a. Stock A b. Stock B c. they are equally risky d. cannot determine from the information given

An increase in the supply of euros (€) accompanied by an increase in the demand for euros will cause the dollar to relative to the euro. a. appreciate b. depreciate c. remain stable d. cannot be determined without additional information

An order to sell stock at the market price when the price of the stock falls to a specified level is called a: a. limit order b. market order c. short sale d. stop-loss order

An unrated bond: a. is perceived as having lower than average risk b. are termed as "debentures" c. generally has a lower yield than rated bonds d. none of the above

Assume the probability of a pessimistic, most likely and optimistic state of nature is .25, .55 and .20, and the returns associated with those states of nature are 5%, 10%, and 13% for asset Y. Based on this information, the expected return, standard deviation, and coefficient of variation for asset Y are: (Pick the closest answer.) a. 10.50%, 2.96% and 0.395 respectively b. 10.35%, 2.86% and 0.345 respectively c. 9.35%, 7.63% and 0.816 respectively d. 9.35%, 2.76% and 0.295 respectively E(R) = (0.25)(5%) + (0.55)(10%) + (0.20)( 13%) = 1.25% + 5.5% + 2.6% = 9.35% σ2 = (.25)(5%-9.35%)2+(.55)(10%-9.35%)2+(.20)(13%-9.35%)2 = 4.7306 + 0.2324 + 2.6645 = 7.6275 → 𝝈 = √𝟕.𝟔𝟐𝟕𝟓 = 2.7618% 𝐂𝐕 = 𝟐.𝟕𝟔𝟏𝟖%𝟗.𝟑𝟓% =

CHAPTER 6 If the exchange rate in New York for British pounds sterling (£) is quoted at $1.60/£, and in London the rate is quoted at $1.62/£, financial arbitragers should: a. buy pounds in New York b. sell dollars in London c. simultaneously sell pounds in New York and buy pounds in London d. simultaneously buy pounds in New York and sell pounds in London

Eurodollar bonds are: a. denominated in Eurodollars b. extremely long-term obligations c. scrutinized by the SEC d. none of the above

If U.S. interest rates are expected to be 5 percent next year, European interest rates are expected to be 2 percent next year, the U.S. is the home country, and the spot rate between the euro and dollar is $0.92/€, then according to interest rate parity, we would expect the dollar to _________ against the euro from $0.92/€ to __________: (Pick the closest answer.) a. appreciate, $0.894/€ b. appreciate, $0.947/€ c. depreciate, $0.894/€ d. depreciate, $0.947/€ $𝟎.𝟗𝟐×(𝟏+𝟓%)/(𝟏+𝟐%) = $𝟎.𝟗𝟐×𝟏.𝟎𝟓/𝟏.𝟎𝟐 = $𝟎.𝟗𝟐(𝟏.𝟎𝟐𝟗𝟒)=$_/€

If U.S. interest rates are expected to be 6% next year, European interest rates are expected to be 4% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $1.30/€, then according to interest rate parity, we would expect the dollar to _________ against the euro from $1.30/€ to __________: (Pick the closest answer.) a. appreciate, $1.275/€ b. appreciate, $1.325/€ c. depreciate, $1.275/€ d. depreciate, $1.325/€ $𝟏.𝟑𝟎×(𝟏+𝟔%)/(𝟏+𝟒%) = $𝟏.𝟑𝟎×𝟏.𝟎𝟔/𝟏.𝟎𝟒 = $𝟏.𝟑𝟎(𝟏.𝟎𝟏𝟗𝟐) = $𝟏.𝟑𝟐𝟓/€

If a Microsoft January call option had a strike price of $20 and the market price of the underlying Microsoft stock was $25.62, the call option would be _______________. a. in-the-money b. out-of-the-money c. fairly priced d. not enough information to tell

If a Microsoft January put option had a strike price of $20 and the market price of the underlying Microsoft stock was $15.00, the put option would be _______________. a. in-the-money b. out-of-the-money c. fairly priced d. not enough information to tell

If an investor feels the price of a stock will decline in the future, which trade should the investor undertake? a. market order b. buy on margin c. limit order d. short sale

If the U.S. inflation rate is expected to be 4% next year, the European inflation rate is expected to be 3% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $1.30/€, then according to purchasing power parity, we would expect the dollar to _________ against the euro from $1.30/€ to __________: (Pick the closest answer.) a. appreciate, $1.2875/€ b. appreciate, $1.3126/€ c. depreciate, $1.2875/€ d. depreciate, $1.3126/€ $𝟏.𝟑𝟎×(𝟏+𝟒%)?(𝟏+𝟑%) = $𝟏.𝟑𝟎×𝟏.𝟎𝟒/𝟏.𝟎𝟑 = 𝟏.𝟑𝟎(𝟏.𝟎𝟎𝟗𝟕)= $_/€

If the U.S. inflation rate is expected to be 5% next year, the European inflation rate is expected to be 7% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $0.93/€, then according to purchasing power parity, we would expect the euro to _________ against the dollar from $0.93/€ to __________: (Pick the closest answer.) a. appreciate, $0.9477/€ b. appreciate, $0.9126/€ c. depreciate, $0.9477/€ d. depreciate, $0.9126/€ $𝟎.𝟗𝟑×(𝟏+𝟓%)/(𝟏+𝟕%) = $𝟎.𝟗𝟑×𝟏.𝟎𝟓/𝟏.𝟎𝟕=𝟎.𝟗𝟑(𝟎.𝟗𝟖𝟏𝟑)=$_/€

If the variance for Stock A is greater than the variance for Stock B, then the coefficient of variation for Stock A: a. is greater than the coefficient of variation for Stock B b. is less than the coefficient of variation for Stock B c. is the same as the coefficient of variation for stock b d. cannot be determined by this information

In an efficient market which of the following would not be expected to cause a quick price change in the stock of a company? a. an unexpected announcement by a major competitor b. higher than predicted earnings announcement c. unexpected death of CEO d. all the above would be expected to cause a quick price change

In reality, an option's value will equal its intrinsic value only at expiration. At all other times, the option's premium or price will exceed its intrinsic value. A major reason for this is _____________. a. marketability b. price c. trade restrictions d. time e. none of the above

Investment banks engage in the following activities: a. underwrite corporate securities p 277 b. buy and sell commercial paper p 286 c. mergers and acquisitions p 287 d. all of the above (a, b, and c) e. none of the above (neither a, b, or c)

Key factors that influence currency exchange rates include all of the following EXCEPT: a. supply and demand relationships b. inflation rates c. interest rates d. all of the above influence exchange rates

Mary wants to purchase a 20-year bond that has a par value of $1,000 and makes semiannual interest payments of $40. If her required yield to maturity is 10%, which of the following is closest to how much should Mary be willing to pay for the bond? (Pick the closest answer.) a. $902 b. $925 c. $1000 d. $828 END MODE FV 1,000 N 40 PMT 40 I/Y 5 → PV = $_

Over-the-counter (OTC) trades must take place: a. on the floor of the New York Stock Exchange b. on the floor of the American Stock Exchange c. on the floor of the NASDAQ Stock Exchange d. none of the above

Preferred stock can have which of the following characteristics? It can be: a. cumulative b. non-cumulative c. convertible d. all of the above

Private placements: a. are sold to the general public b. have expedited SEC scrutiny c. require public disclosure of the firm's financial information d. none of the above

Quotations of foreign exchange rates in the many cities of the world are identical or nearly so because of: a. central bank control b. price fixing c. clearinghouse activities d. arbitrage activities

RJR Nabisco recently experienced a market reevaluation due to a number of tobacco lawsuits. The firm has a bond outstanding with 15 years to maturity, and a coupon rate of 8%, with interest being paid semiannually. The required yield to maturity has risen to 16%. What is the price of the RJR Nabisco bond? a. $1,000 b. $804 c. $767 d. $550 coupon rate 8% paid semiannually → $1,000(0.08) = $80 → $40 semiannual PMT 16% required yield → ½(16%) = 8% semiannually END MODE FV 1,000 N 30 PMT 40 I/Y 8 → PV =$_

Several factors will be considered by the board of directors and management as they consider the level of dividend payout. Some of these factors include: a. the ability of the firm to generate cash to sustain the level of dividends. b. legal and contractual considerations c. growth opportunities d. all of the above e. none of the above

The Federal Reserve System and the New York Stock Exchange regulations currently require the short seller to have an initial margin of at least _______ of the price of the stock: a. 10% b. 25% c. 30% d. 50%

Which of the following risks would not be faced by investors in domestic bonds? a. credit (or default) risk b. interest rate risk c. reinvestment rate (or rollover) risk d. exchange rate risk

The current U.S. one month forward rate is $1.34/€. You are an American speculator with $40,000. You are sure the spot rate will be $1.28/€ one month from today. What steps should you take today and one month from today to make a profit buying and selling euros using your $40,000 and a forward contract? Today you should enter into a one month forward contract to € at today's forward rate of $1.34/€. One month from today your dollar profit is . (Pick the closest answer.) a. buy, €31,250, $1,875 b. buy, €29,851, $1,791 c. sell, €29,851, $1,791 d. sell, €31,250, $1,875 Since you expect the spot rate one month from today to be lower that today's forward rate, you want to buy euros one month from today at $1.28/€ and set up a forward contract today to sell the euros one month from today at $1.34/€. So you have to calculate today how many euros you can buy one month from today at the forecasted spot rate of $1.28/€. Today: Enter into a forward contract to sell €31,250 one month from today at $1.34. $40,000/€$1.28/€ = €_ One Month from Today: Survey of Finance Practice Problems Key Chapter 6Page 16 Step 1: Buy €31,250 in the spot market at the spot rate of $1.28 for a cost of $40,000 Step 2: With the forward contract, sell the €31,250 for $1.34 and receive (€31,250)($1.34) = $41,875 Dollar Profit: $41,875 - $40,000 = $_

The current U.S. one month interest rate is 4% compared to 6% in Europe. Today's spot rate between the euro and dollar is $1.15/€ and today's one month forward rate is $1.16/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. Your covered investment in Europe was because the rate of return on the covered investment is a. unsuccessful, less than the U.S. interest rate b. unsuccessful, less than the European interest rate even though it is more than the U.S. interest rate c. successful, more than the U.S. interest rate even though it is less than the European interest rate. d. successful, more than both the U.S. and European interest rate. e. successful, greater than zero. $1,000$1.15/€= €869.57 → €869.57(1.06) = €921.74 €921.74($1.16/€) = $1,069.22 $𝟔𝟗.𝟐𝟐$𝟏,𝟎𝟎𝟎=𝟔.𝟗𝟐%

The current U.S. one month interest rate is 6% compared to 4% in Europe. Today's spot rate between the euro and dollar is $1.15/€ and today's one month forward rate is $1.13/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. The rate of return on your covered investment in Europe is % . (Pick the closest answer.) a. 4% b. 3.57% c. 4.83% d. 2.19% $1,000$1.15/€= €869.57 → €869.57(1.04) = €_ €904.35($1.13/€) = $1,021.92 $21.92$1,000 = _%

The current U.S. one month interest rate is 6% compared to 4% in Europe. Today's spot rate between the euro and dollar is $1.15/€ and today's one month forward rate is $1.19/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. Today you should convert your $1,000 to euros, deposit the euros in a European bank for one month, and enter into a forward contract to € one month forward at today's forward rate of $1.19/€. One month from today you will take your euros out of the European bank and use the forward contract to convert them to $ giving you a % rate of return. (Pick the closest answer.) a. buy, €869.57, $1,034.78, 3.48% b. buy, €904.35, $1,076.18, 7.62% c. sell, €869.57, $1,034.78, 3.48% d. sell, €904.35, $1,076.18, 7.62% $1,000$1.15/€ = €869.57 → €869.57(1.04) = €_ €904.35($1.19/€) = $1,076.18 $76.18$1,000 = _%

The flotation costs of an IPO depend on a. the size of the offering b. the issuing firm's earnings c. the condition of the stock market d. all of the above (a, b, c) e. none of the above (neither a, b, or c)

The following factors may affect a bond rating: a. security provisions b. indenture provisions c. expected trends of industry operations d. all the above e. none of the above

The maximum buying price or the minimum selling price specified by the investor is called a: a. stop-loss order b. market order c. short sale d. limit order

The regulation of new security sales by individual states is referred to as: a. the registration process b. a truth-in-securities requirement c. the rating of security quality d. Blue-sky laws

The security market line can be used to determine the expected return on a security if we know the: a. risk-free rate b. systematic risk of that security this is the β for that security c. expected return on the market portfolio d. all of the above

The square root of the standard deviation is called the: a. variance b. coefficient of variation c. beta d. none of the above

The strong-form efficient market implies that: a. no investor can consistently beat the market after adjusting for risk differences b. stock prices reflect all public and private knowledge c. even corporate officers and insiders cannot earn above-average, risk-adjusted profits d. all of the above

To protect against loss as a result of adverse currency fluctuations, an export firm may: a. demand immediate cash settlement convert foreign currency to home currency immediately b. use a futures contract as a hedge p 135 and 305 c. require the customer to make payment in the exporter's currency eliminates converting foreign currency d. all of the above are possible protections.

Trades between large institutional investors that take place without the benefits of brokers or dealers occur in the: a. primary market b. secondary market c. third market d. fourth market

Under conditions of interest rate parity (IRP), a country with a relatively _______ hnominal interest rate will have its currency _______ relative to a country with a relatively _______ nominal interest rate. a. higher, depreciate, lower b. lower, appreciate, higher c. higher, appreciate, lower d. both a and b are correct

Which of the following bond types would describe unsecured obligations that depend on the general credit strength of the corporation? a. closed-end mortgage bonds b. mortgage bonds c. equipment trust certificates d. debenture bonds

Which of the following bonds has the greatest interest rate risk? a. a 5 year, 10% coupon bond (shorter maturity) b. a 10 year, 10% coupon bond (higher coupon rate) c. a 5 year, 5% coupon bond (shorter maturity and higher coupon rate) d. a 10 year, 5% coupon bond

Which of the following constitute default on a bond? a. nonpayment of par value b. nonpayment of coupon c. violation of the indenture d. all the above e. none of the above

Which of the following securities issues do not usually require competitive bidding? a. state government bond issues b. local government bond issues c. Federal government bond issues d. corporate bond issues

Which of the following statements is false? a. Diversification cannot eliminate risk that is inherent in the macroeconomy or market risk. p 332 b. The expected rate of return on a portfolio does not depend on the correlation between the return on each stock. p 327 and Equation 12-7 c. Although gold is a risky investment by itself, including gold in a stock portfolio may reduce total risk of the portfolio. p 333 d. All of the above statements are correct

Which one of the following is not a primary market function of investment bankers? a. originating b. underwriting c. selling d. making loans

Which one of the following is not considered to be a generally recognized type of market efficiency? a. strong-form b. semi-strong form c. weak-form d. insider-information form

_____________ is when a broker constantly buys and sells securities from a client's portfolio in an effort to generate commissions. Rather than making decisions that are in the client's best interest, frequent commission-generating trades may be made by brokers with selfish motives. a. Blending b. Flipping c. Swapping d. Churning

__________________ is a technique for trading stocks as a group rather than individually, defined as a minimum of at least 15 different stocks with a maximum value of $1 million. a. A short sale b. A stop-loss order c. Margin trading d. Program trading

___________________ has the lowest claim on the assets and cash flow of the firm. a. A bond b. A subordinated debenture c. Preferred stock d. Common stock

___________________ is when an investor borrows money and invests the borrowed funds along with his or her own funds in securities. a. A short sale b. A stop-loss order c. A limit order d. Buying on margin

A U.S. based multinational corporation (MNC) bought some equipment from a British firm today and must pay them £1,000,000 one month from today. The MNC is certain the spot rate will be $1.10/£ one month from today. The current forward rate is $1.15/£. Which of the following is the best course of action for the MNC to deal with the foreign exchange exposure of this situation? a. Enter into a forward contract to buy £1,000,000 one month from today at $1.10/£. b. Enter into a forward contract to buy £1,000,000 one month from today at $1.15/£. c. Enter into a forward contract to sell £1,000,000 one month from today at $1.10/£. d. Enter into a forward contract to sell £1,000,000 one month from today at $1.15/£. e. Wait one month and buy the £1,000,000 in the spot market at the forecasted rate of $1.10/£ rather than use a forward contract.

A U.S. based multinational corporation (MNC) sold some equipment to a British firm today and will receive £1,000,000 from the British firm one month from today. The MNC is certain the spot rate will be $1.10/£ one month from today. The current forward rate is $1.05/£. Which of the following is the best course of action for the MNC to deal with the foreign exchange exposure of this situation? a. Enter into a forward contract to buy £1,000,000 one month from today at $1.10/£. b. Enter into a forward contract to buy £1,000,000 one month from today at $1.05/£. c. Enter into a forward contract to sell £1,000,000 one month from today at $1.10/£. d. Enter into a forward contract to sell £1,000,000 one month from today at $1.05/£. e. Wait one month and sell £1,000,000 in the spot market at the forecasted rate of $1.10/£ rather than use a forward contract.

A(n) ________________ is an extra dividend declared by the firm over and above its regular dividend payout. a. strong dividend b. speculative dividend c. extra-large dividend d. treasury dividend e. none of the above

As defined in accordance with efficient markets notions, a strong-form efficient market would be a market in which asset prices reflect all of the following EXCEPT: a. past public information b. current public information c. past private information d. current private information e. all four of the above are reflected in asset prices

As defined in accordance with efficient markets notions, a weak-form efficient market would be a market in which asset prices reflect all: a. current public information b. current inside information c. current private information d. all three a, b, and c e. none of the three, a, b, and c

Exchange-traded options are liquid because they are standardized in terms of: a. diversity in the location of the underlying assets b. diversity of the underlying assets c. diversity of the timing of the underlying assets d. all three (a, b, and c) e. none of the three (a, b, and c)

Exchange-traded options are liquid because they are standardized in terms of: a. expiration dates b. exercise prices c. quantity of the underlying asset d. quality of the underlying asset e. all of the above.

Floor brokers include: a. house brokers b. independent brokers c. designated market makers d. all the above (a, b, and c) e. both a and b

Futures contracts are traded on all of the following EXCEPT a. agricultural goods b. currencies c. oil d. interest rates e. the winner of the Super Bowl

If a Microsoft January put option with a strike price of $20 were about to expire and the market price of the underlying Microsoft stock was $15.00, the premium of the put option would have to be __________ or higher to eliminate arbitrage opportunities. a. $1.00 b. $2.00 c. $4.00 d. $6.00 e. $5.00

Several factors will be considered by the board of directors and management as they consider the level of dividend payout. These factors include: a. the ability of the firm to generate cash to sustain the level of dividends. b. legal and contractual considerations c. growth opportunities d. cost of other financing sources e. all of the above

Assets that are more volatile than the market have a beta of: a. 1 b. 0 c. less than 1 but greater than 0 d. more than 1

The _____________ policy states that dividends will vary based upon how much excess funds the firm has from year-to-year, whereas under a ________________ policy the firm pays a constant percentage of earnings as dividends, so as earnings rise and fall so does the dollar amount of dividends. a. constant payout ratio, regular dividend b. regular dividend, constant payout ratio c. constant dividend, variable payout ratio d. variable payout ratio, constant dividend e. none of the above

The ________________________, the greater the chance of the option becoming _____________________. a. shorter the time to expiration, in-the-money b. longer the time to expiration, out-of-the-money c. less the volatility, in-the-money d. two of the above are correct. e. none of the above.

The current U.S. one month interest rate is 5% compared to 7% in Europe. Today's spot rate between the euro and dollar is $1.18/€ and today's one month forward rate is $1.25/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. Today you should convert your $1,000 to euros, deposit the euros in a European bank for one month, and enter into a forward contract to € one month forward at today's forward rate of $1.25/€. One month from today you will take your euros out of the European bank and use the forward contract to convert them to $ giving you a % rate of return. (Pick the closest answer.) a. buy, €800, $944.00, - 5.6%% b. buy, €847.46, $906.78, -9.32% c. buy, €906.78, $1,133.48, 13.35% $ d. buy, €889.83, $1,112.29, 11.23% e. none of the above is correct because you want to sell €'s with the forward contract $1,000$1.18/€= €847.46 → €847.46(1.07) = €_ €906.78($1.25/€) = $1,133.48 $133.48$1,000 = _%

The effect of ______________ and _______________ on the value of a firm's stock and the wealth of shareholders is positive. a. share repurchases, stock splits stock splits have zero effect b. cash dividends, stock dividends stock dividends have zero effect c. cash dividends, stock splits stock splits have zero effect d. stock dividends, share repurchases stock dividends have zero effect e. none of the above

The effect on revenues and expenses from variations in the value of the U.S. dollar in terms of other currencies is called: a. interest rate risk b. business risk c. purchasing power risk d. financial risk e. none of the above

The risk caused by changes in inflation that affect revenues, expenses and profitability is called: a. interest rate risk b. business risk c. tax risk d. financial risk e. none of the above

The risk caused by variations in income before taxes over time because fixed interest expenses do not change when operating income rises or falls is called: a. interest rate risk involves variations in interest expenses b. business risk c. tax risk d. purchasing power risk e. none of the above

The risk caused by variations in interest expense unrelated to sales or operating income arising from changes in the level of interest rates in the economy is called: a. financial risk b. business risk c. tax risk d. purchasing power risk e. none of the above

The seller of an option contract is called a (n) ____________ and the price paid for the option itself is the called the ___________. a. option broker, option price b. sales agent, call option c. sales agent, option premium d. option writer, option price e. none of the above.

U.S. based multinational corporation (MNC) sold some equipment to a British firm today and will receive £1,000,000 from the British firm one month from today. The MNC is certain the spot rate will be £1.10/$ one month from today. The current forward rate £1.15/$. Which of the following is the best course of action for the MNC to deal with the foreign exchange exposure of this situation? a. Enter into a forward contract to buy £1,000,000 one month from today at £1.10/$. b. Enter into a forward contract to buy £1,000,000 one month from today at £1.15/$. c. Enter into a forward contract to sell £1,000,000 one month from today at £1.10/$. d. Enter into a forward contract to sell £1,000,000 one month from today at £1.15/$. e. Wait one month and sell the pounds in the spot market at the forecasted rate of £1.10/$ rather than use a forward contract. (MNC will receive £1,000,000 → wants to convert them to the most $, rates are indirect → £1.10/$ is a better rate because U.S. MNC will pay fewer pounds for each dollar)

Variations in a firm's tax rate and tax-related charges over time due to changing tax laws and regulations is called: a. interest rate risk b. business risk c. exchange rate risk d. purchasing power risk e. none of the above

Variations in operating income over time because of variations in unit sales, price, cost margins, and/or fixed expenses are called: a. interest rate risk b. exchange rate risk c. purchasing power risk d. financial risk e. none of the above

Which of the following is not a basic type of member of the New York Stock Exchange? a. independent brokers b. floor brokers c. registered traders d. specialists e. security regulators

Which of the following statements is most correct? a. A weaker dollar results in more imports of foreign merchandise since it requires fewer dollars for purchase. b. A stronger dollar results in fewer imports of foreign merchandise since it requires fewer dollars for purchase. c. A stronger dollar results in more imports of foreign merchandise since it requires more dollars for purchase. d. A weaker dollar results in more imports of foreign merchandise since it requires more dollars for purchase. e. none of the above

While the Chicago Board Options Exchange remains the main market for exchange traded options, the ______________ exchange also deals in option contracts. a. Miami b. Indianapolis c. San Francisco d. all three (a, b, and c) e. none of the three (a, b, and c)

While the Chicago Board Options Exchange remains the main market for exchange traded options, the ______________ exchange also deals in option contracts. a. New York b. American c. Pacific d. Philadelphia e. all of the above.

Hedging is similar to the concept of ________________. a. gambling b. juggling c. hiding d. insurance

A good market has the following characteristics: a. trades are executed quickly at a price close to fair market value b. market prices fluctuate sharply on successive trades c. listing requirements are unreasonable d. fees are high

CHAPTER 10 Which of the following statements is true about long-term external financing: a. Borrowing is cheaper than raising equity financing. b. Most of the funds raised annually from security issues come from corporate stock sales. c. Stocks have a maturity date. d. Firms cannot repurchase their outstanding stock.

Secondary markets are where a. existing securities are traded among investors b. securities are initially sold c. debt securities with maturities of one year or less are issued and traded d. debt securities with maturities longer than one year and equity securities are issued and traded

Select ALL of the following statements that are true: a. $1.05/€ is a direct quote from the American point of view b. $1.05/€ is a direct quote from the European point of view c. $1.05/€ is an indirect quote from the American point of view d. $1.05/€ is an indirect quote from the European point of view.

a, d

Select ALL of the following statements that are true about zero-coupon bonds: a. they pay no interest over the life of the bond $ interest = par value - discounted price b. they pay interest semiannually over the life of the bond Practice Problems key Chapter 10 Page 19 c. they pay interest annually over the life of the bond d. they can be converted, at the investor's option, into a specific number of shares of the issuer's common stock e. because of their tax-implications these bonds are best suited for tax-exempted accounts f. they are bonds with ratings that are below investment grade

a, e

A market in which existing securities are traded among investors is called a: a. primary market b. secondary market c. third market d. fourth market

A security whose value is determined by the value of another investment vehicle is referred to as a (n) a. underlying security b. derivative security c. debenture security d. at-the-money security.

Arbitrage refers to: a. selling securities you don't own short sale b. buying and selling stocks with offsetting trades to lock in profits from price differences between different markets bottom of p 288 c. buying IPO's d. selling IPO's

The current U.S. one month interest rate is 7% compared to 9% in Europe. Today's spot rate between the euro and dollar is $1.18/€ and today's one month forward rate is $1.16/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. The rate of return on your covered investment in Europe is %. (Pick the closest answer.) a. 9.00% b. 7.15% c. 10.88% d. 8.37%

You are trying to determine the fair price to pay for a share of Ford. If you buy this stock, you plan to hold it for a year. At the end of the year, you expect to receive a dividend of $5.50 and to sell the stock for $154. The discount rate for Ford stock is 16%. What should be the price of this stock? (Pick the closest answer.) a. $99.80 b. $137.50 c. $144.22 d. $151.66 END MODE FV 154 PMT 5.50 N 1 I/Y 16 → PV = $137.50 or FV = $154 + $5.50 = $159.50 FV 159.50 N 1 I/Y 16 → PV = $_

Select ALL of the following statements that are true if the exchange rate changes from $1.15/€ to $1.18/€: a. the dollar appreciated against the euro b. the dollar depreciated against the euro c. the euro appreciated against the dollar d. the euro depreciated against the dollar e. both the dollar and the euro appreciated against each other f. both the dollar and the euro depreciated against each other

b, c

A contract that obligates the owner to purchase or sell the underlying asset at a specified price on a specified day is called a a. put option contract b. call option contract c. futures contract d. money market contract.

A private placement is: a. a bidding process which allows smaller firms and individual investors to purchase securities b. a group of several investment banking firms that participate in underwriting and distributing a security issue c. the sale of securities to a small group of private investors d. an initial sale of equity to the public

If the exchange rate in New York for dollars in terms of British pounds sterling (£) is quoted at £1.60/$ and in London the rate is quoted at £1.62/$, financial arbitragers who have dollars should: a. buy pounds in New York b. sell dollars in London c. simultaneously sell pounds in New York and buy pounds in London d. simultaneously buy pounds in New York and sell pounds in London

Reasons why U.S. firms are continuing to raise funds overseas include all of the following EXCEPT: a. it makes sense to raise funds in the county where a firm has a facility b. financing costs are sometimes lower overseas c. foreign underwriters often have more experience than U.S. underwriters d. issuers avoid the costly SEC approval process

If the exchange rate in New York for dollars in terms of British pounds sterling (£) is quoted at £1.60/$ and in London the rate is quoted at £1.62/$, financial arbitragers who have pounds should: a. buy pounds in New York b. sell dollars in London c. simultaneously sell dollars in New York and buy dollars in London d. simultaneously buy dollars in New York and sell dollars in London

What is the value of HM stock which currently has a dividend of $2 and is growing at 7%? The investor's required rate of return is 11%. (Pick the closest answer.) a. $46 b. $50 c. $52 d. 53.50 D1 = $2(1.07) = $2.14 𝐏𝟎 = $𝟐.𝟏𝟒 / (𝟏𝟏%−𝟕%) = $𝟐.𝟏𝟒 / 𝟎.𝟎𝟒 = $𝟓𝟑. 𝟓𝟎

Select ALL of the following that are not bond rating agencies. a. Standard and Poor's b. Fitch's c. Moody's d. Treasury e. Federal Reserve Board of Governors

FINC 409 Exam 3 (Ch. 10, 11, 12, 6 multiple choice questions)

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