Investment Analysis Chapter 2 Study Questions

Which of the following defines a "bankers' acceptance"? a. An order by a customer to pay a sum of money at a future date b. Secured loan provided by a bank for unsecured debt c. The establishment of a new bank account d. A monthly bank statement

A

The bond market is composed of longer-term borrowing or debt instruments than those that trade in the money market. Which of the following does this market NOT include? a. Corporate bonds b. Treasury bills c. Mortgage securities d. Treasury Notes

B

Which of the following statements BEST describes Federal Funds? a. Loans provided by the federal government to commercial banks b. Funds that are in the accounts of commercial banks at the Federal Reserve Bank c. Deposit obligations of the federal government d. Long-Term debts of the federal government

B

Which of the following statements is NOT true about preferred stocks? a. It promises to pay to its holder a fixed stream of income each year b. Preferred stock dividends are tax deductible expenses c. Resembles a bond in that it does not give the holder voting power regarding the firm's management d. Preferred stock is an equity investment

B

Which of the following statements is not a fact about Eurodollars? a. Eurodollars are dollar-denominated deposits at foreign branches of American banks b. Eurodollar CDs are not considered less liquid and riskier than domestic CDs c. A Eurodollar CD resembles a domestic bank CD except it is the liability of a non-US branch of a bank, typically a London branch d. Most Eurodollar deposits are for large sums, and most are time deposits of less than six months' maturity

B

Commercial Papers are short-term unsecured unsecured debt issued by large corporations. Which of the following statements is not true when discussing commercial papers? a. Commercial papers are considered to be a fairly safe asset, given that a firm's condition presumably can be monitored and predicted. b. Commercial Papers are referred to as "CP" c. Commercial papers can never be backed by a bank line of credit d. Commercial papers trade in secondary markets

C

Which of the following is NOT a government (mortgage-related) agency, created because Congress believed that adequate credit was not being received through normal private sources? a. Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) b. Federal Home Loan Bank (FHLB) c. Federal Government Association (FGA) d. Federal National Mortgage Association (FNMA or Fannie Mae) e. Government National Mortgage Association (GNMA or Ginnie Mae)

C

Which of the following is NOT true about Municipal Bonds? a. Capital gains taxes must be paid if the bonds mature or are sold for more than the investor's purchase price b. They are issued by state and local governments c. They are insured by the Federal Deposit Insurance Corporation. d. Their interest income is exempt from federal income taxation

C

Which of the following statements is NOT true above inflation-protected treasury bonds? a. Inflation-protected treasury bonds are called "TIPS" b. The real interest rates you earn are least risky if you hold them to maturity c. The principal amount of these bonds decreases in proportion to the increases in the Consumer Price Index. d. They provide a constant stream of income in real (inflation-adjusted) dollars.

C. Principal amount is adjusted in proportion

A certificate of deposit is a time deposit with a bank. Which of the following is NOT a fact about certificate of deposits? a. The time deposits may not be withdrawn on demand without penalty b. The bank pays interest and principal to the depositor only at the end of the fixed term of the deposit. c. A certificate of deposit is also known as a "CD" d. Certificate of deposits are not treated as bank deposits by the Federal Deposit Insurance Corporation.

D

Which of the following statements is NOT true about Treasury bills? a. Treasury bills are the most marketable of all money market instrument b. The government raises money by selling Treasury bills to the public c. Treasury bills represent the simplest form of borrowing d. Treasury bills are long-term government securities issued at a discount

D

The U.S. government borrows funds in large part by selling Treasury notes and Treasury bonds. Which of the following is NOT a true statement about Treasury notes and bonds? a. Both bonds and notes make semiannual interest payments b. Bonds and notes commonly trade in denominations of $1,000 c. Both bonds and notes may be issued in increments of $100 d. Both bonds and notes are short term instruments

D. Bonds and notes are considered long term

A _______________ is a bond denominated in a currency other than that of the country in which it is issued.

Eurobond

True or False Corporate Bonds are short-term debt issued by private corporations typically paying semiannual coupons and returning the face value of the bond at maturity.

False

____________ _____________ means that the most shareholders can lose in event of the failure of the corporation is their original investment.

Limited Liability

The __________ ___________ ____________ ___________ ___________ (LIBOR) is the rate at which large banks in London are willing to lend money among themselves

London Interbank Offered Rate

_________________ claim means stockholders are the last in line of all those who have a claim on the assets and income of the corporation.

Residual

True or False Individuals who buy stocks on margin borrow part of the funds to pay for the stocks from their broker.

True

True or false Although most money market securities are of low risk, they are not risk-free.

True

The U.S. government borrows funds in large part by selling treasury ______________ , treasury ______________ and _________________.

bills, notes, bonds