Series 65

What is the current yield of a $1,000 par bond, with a 6% coupon rate that is now selling for $1,090? (a) 5.5 percent (b) 5.75 percent (c) 5 percent (d) 6 percent

(a) 5.5 percent

A bond with five years left until maturity now sells for $963 and makes annual coupon payments of $60. What is its current yield? (a) 6.23% (b) 31.15% (c) 6.00% (d) 3.12%

(a) 6.23%

Standard deviation is a measure of:

(a) An investment's volatility (b) Risk-free return (c) Currency rates (d) Inflationary conditions

If a bond with a face value of $1,000 is bought at par, then the yield to maturity will be: (a) Equal to the coupon rate (b) Unrelated to the coupon rate (c) Lower than the coupon rate (d) Higher than the coupon rate

(a) Equal to the coupon rate

Which of the following pertaining to beta are correct? I. A stock with a beta of 1 are expected to move exactly with the market II. Stocks with high positive betas greater than 1 have volatile earnings III. Stocks with betas less than 1 have greater risk than the market IV. A negative beta indicates the stock moves in the same direction as the market (a) I and II only (b) I and III only (c) I, II, and III (d) II and IV only

(a) I and II only

Which of the following can be found on the corporate Balance Sheet? I. Working Capital II. Accounts Payable III. Inventory IV. Current Ratio (a) I, II, III, and IV (b) I and II only (c) II and III only (d) II, III, and IV

(a) I, II, III, and IV

Which of the following risks are considered to be unsystematic risks? I. Business Risk II. Regulation Risk III. Market Risk IV. Default Risk (a) I, II, and IV (b) I, II, III, IV (c) II and IV only (d) I and II only

(a) I, II, and IV

If the price of your bond ($1,000 par) dropped from $1,000 to $800, this could most likely be attributable to which of the following? (a) Increase in interest rates (b) Bond is approaching maturity date (c) Decrease in interest rates (d) Inflation rates

(a) Increase in interest rates

An investor that is trying to "Immunize" their bond portfolio is primarily concerned with: (a) Interest rate risk (b) Business risk (c) Market risk (d) Inflation

(a) Interest rate risk

You're explaining the relationship of bond yields and maturities to one of your clients on a yield curve graph. You've plotted that bonds maturing in one year are yielding 6%, those maturing in five years yield 5.5%, and those maturing in ten years yield 5%. From the information given, you would be plotting a: (a) Inverted Yield Curve (b) Positive Yield Curve (c) Flat Yield Curve (d) Normal Yield Curve

(a) Inverted Yield Curve

f a city decides to build a sports complex on a vacant land lot, the term that best describes the cost of a forgone alternative project that could have been pursued with the land instead is known as: (a) Opportunity Cost (b) Purchasing Power (c) Retained Earnings (d) Cash Value

(a) Opportunity Cost

11) If the market for a particular security becomes more active, the spread between the bid and the ask prices on that security: (a) Shortens (b) Widens (c) No longer exists (d) Remains the same

(a) Shortens

The internal rate of return represents: (a) The interest rate at which the net present value of all cash flows equals zero. (b) The interest rate at which the net present value of all cash flows is positive. (c) The interest rate at which the net present value of all cash flows is negative. (d) None of the above.

(a) The interest rate at which the net present value of all cash flows equals zero.

Each of the following statements is true about duration except: (a) The longer the duration of a bond, the less its price will fluctuate in response to interest rate changes. (b) The longer the duration of a bond, the more its price will fluctuate in response to interest rate changes. (c) The shorter a bond's duration, the less it will fluctuate in response to interest rate changes. (d) Duration is always equal to less than the years to maturity of the bond.

(a) The longer the duration of a bond, the less its price will fluctuate in response to interest rate changes.

From the Balance Sheet information provided below, calculate the working capital and current ratio: Current Assets $200,000, Equipment $50,000, Total Assets $500,000, Current Liabilities $80,000, Total Liabilities $100,000 (a) $570,000 working capital, 5.0 current ratio (b) $120,000 working capital, 2.5 current ratio (c) $170,000 working capital, 2.5 current ratio (d) $400,000 working capital, 5.0 current ratio

(b) $120,000 working capital, 2.5 current ratio

Dennis, a resident of Pennsylvania, bought a U.S. Treasury Bond which pays 7% interest annually (coupon rate). His federal income tax rate is 30% and State of Pennsylvania tax rate is 6%. What would be his after-tax yield? (a) 5.5 percent (b) 4.9 percent (c) 6.2 percent (d) 5.2 percent

(b) 4.9 percent

10) On December 1, 2003, Mike bought 50 shares of XYZ common stock for $80 per share. One year later, mike sold the stock for $85 per share. While he owned the shares, XYZ paid $1.40 in cash dividends to all common stockholders. Mike inquires about his total return for the period, the registered rep should state his total return was: (a) 12 percent (b) 8 percent (c) 10 percent (d) 6 percent

(b) 8 percent

) A measure of the price of a basket of goods and services including food, clothing, medical care and utilities is known as the: (a) Balance of payments (b) Consumer Price Index (c) Gross Domestic Product (d) Producer Price Index

(b) Consumer Price Index

Net income is used to calculate which of the following financial measures of a company's performance? (a) Shareholder equity (b) Earnings per share (c) Operating margin (d) Book value

(b) Earnings per share

If the value of the U.S. dollar declines relative to foreign currencies, which of the following would be true? I. U.S. exports would increase II. Foreign imports would decrease III. Foreign products become cheaper in the U.S. IV. U.S. exports would decrease (a) II, III and IV (b) I and II only (c) II and IV only (d) III and IV only

(b) I and II only

What two components are used to calculate risk-adjusted return? I. Risk-free rate of return II. Correlation coefficient III. Conversion ratio IV. Standard deviation (a) I and III (b) I and IV (c) III and IV (d) II and III

(b) I and IV

Which of the following are true statements concerning Gross Domestic Product (GDP)? I. The foreign efforts of domestic companies are included in GDP II. GDP is always quoted in constant terms III. Personal consumption expenditures are not a part of GDP IV. Government expenditures are included in GDP (a) II and III only (b) II and IV only (c) I and IV only (d) I and II only

(b) II and IV only

16) When interest rates rise, the value of existing bonds decline. This is an example of: (a) Reinvestment risk (b) Interest rate risk (c) Credit risk (d) Call risk

(b) Interest rate risk

13) ABC Company decides to purchase a new printing press. Which of the following costs best describes the cost of income foregone from making an economic decision to use funds for this purchase? (a) Variable cost (b) Opportunity cost (c) Fixed cost (d) Marginal cost

(b) Opportunity cost Foregone income costs are known as opportunity costs. Variable costs are costs that fluctuate depending on units produced. Fixed costs are costs that do not change. Marginal costs are the costs to product one more unit of product.

Beta measures what type of risk? (a) Inflation risk (b) Systematic risk (c) Unsystematic risk (d) Regulatory risk

(b) Systematic risk

15) The Inflation-Adjusted Return (Real Rate of Return) is best described as which of the following: (a) The difference between the inflation rate and the current T-bill rate (b) The current interest rate less the inflation rate (c) The monthly CPI figure adjusted to reflect an annual return (d) Inflation rate plus the annual return of the underlying investment

(b) The current interest rate less the inflation rate The inflation-adjusted return is simply the current interest rate less the inflation rate. If the expected return of an investment is less than the inflation rate is would not be a favorable investment.

Holding period return measures: (a) The period before a short seller must return a borrowed stock to its to the brokerage firm (b) The total return between the time an investor buys a stock and then sells it (c) Return over a one-year period (d) The annualized return over a particular holding period

(b) The total return between the time an investor buys a stock and then sells it

In a portfolio analysis that was prepared by you for a client, you used the term "risk-free" return as a benchmark for measuring performance. Your client wants to known what mechanism is used to measure a "risk-free" return. You should tell him which of the following? (a) S&P 500 (b) Lehman Aggregate Bond Index (c) Current Treasury Bill Rate (d) Discount Rate

(c) Current Treasury Bill Rate

A bond with a par value of $1,000 has eight years left until maturity but is callable in five years, and now it sells for $1,045. Its yield to call is: (a) Equal to its yield to maturity (b) Equal to its coupon rate (c) Different from its yield to maturity (d) Higher than its coupon rate

(c) Different from its yield to maturity

Operating income does not include which of the following elements: I. Taxes II. Interest on debt III. Lease payments IV. Workers compensation insurance (a) I, II and IV (b) I and III (c) I and II (d) I, II and III

(c) I and II

Which of the following are non-diversifiable risks? I. Exchange Rate Risk II. Market Risk III. Unsystematic Risk IV. Interest Rate Risk (a) I, II, and III (b) I and II only (c) I, II, and IV (d) II and III only

(c) I, II, and IV Systematic risk is also known as non-diversifiable risk. No matter how well an investor diversifies, systematic risk cannot be avoided. Systematic risk includes purchasing power, reinvestment rate, interest rate, market, and exchange rate risks.

If a bond with a par value of $1,000 and a 6% coupon rate currently sells for $1,080 on the open market, then the yield to maturity will be: (a) More than 6% (b) Insufficient information given (c) Less than 6% (d) Equal to 6%

(c) Less than 6%

The risk found in trading "thinly held issues" or those that lack marketability is best known as: (a) Exchange Rate Risk (b) Business Risk (c) Liquidity Risk (d) Default Risk

(c) Liquidity Risk

A client of XYZ broker/dealer owns a bond that matures in 20 years with a 7% nominal yield. The client asks the registered rep to help him understand what will happen to the price of his bond if interest rates should rise. The best response would be: (a) Sell your bond now, and look at purchasing another bond with a longer maturity (b) Since this is a long-term investment, you have nothing to worry about (c) Long-term bonds have high interest rate risk, so this bond will most likely drop in price (d) Bond prices will go up in response to the positive outlook on the economy

(c) Long-term bonds have high interest rate risk, so this bond will most likely drop in price

All of the following can be found on a company's Income Statement EXCEPT: (a) Retained Earnings (b) Common Stockholder Dividend (c) Working Capital (d) Cash Flow

(c) Working Capital

Investing in mutual funds is a common way for investors to obtain diversification in an effort to reduce what type of risk? (a) Purchasing power risk (b) Reinvestment rate risk (c) Interest rate risk (d) Business risk

(d) Business risk

A bond with a par value of $1,000 has eight years left until maturity but is callable in five years, and now it sells for $1,045. Its yield to call is: (a) Higher than its coupon rate (b) Equal to its coupon rate (c) Equal to its yield to maturity (d) Different from its yield to maturity

(d) Different from its yield to maturity

Which of the following statements about investment risk are correct? I. Standard deviation is a measure of total risk II. Market risk is also known as unsystematic risk III. Unsystematic risk can be greatly reduced through diversification IV. Beta is a measure of systematic, non-diversifiable risk (a) I and II only (b) II, III, and IV (c) I, II, and IV (d) I, III and IV

(d) I, III and IV

All of the following are considered to be "leading economic indicators" in the business cycle EXCEPT: (a) Money supply (b) New manufacturing orders (c) Initial claims for unemployment insurance (d) Industrial production

(d) Industrial production

All of the following would create Deflation in the U.S. economy EXCEPT: (a) A decline in the general level of prices (b) Increasing taxes (c) Reduction in the supply of money (d) More government spending

(d) More government spending

The latest closing price of a stock divided by the company's net asset value is the formula for calculating what ratio? (a) Dividend yield (b) Price-earnings ratio (c) Profit margin (d) Price-to-book ratio

(d) Price-to-book ratio

An inverted yield curve shows: (a) Rates for short-term bonds are lower than rates for long-term bonds (b) Rates for long-term bonds are higher than short-term bonds (c) Rates for long-term bonds are the same as short-term bonds (d) Rates for short-term bonds are higher than long-term bonds

(d) Rates for short-term bonds are higher than long-term bonds

All of the following are components of an investor's expected return when utilizing the equation used for the security market line EXCEPT: (a) Beta (b) Risk-free rate (c) Risk premium (d) Standard deviation

(d) Standard deviation

8) All of the following are true statements about risk EXCEPT: (a) Unsystematic risk includes financial risk (b) Standard deviation is a measure of total risk (c) Beta is a measure of systematic risk (d) Systematic risk includes business risk

(d) Systematic risk includes business risk

Which of the following statements about inflation is correct? (a) The Consumer Price Index (CPI) is the leading indicator of inflation trends. (b) The Federal Reserve Board tries to control inflation by lowering interest rates. (c) Inflation is often caused by a reduction in the supply of money. (d) The Producer Price Index (PPI) is the leading indicator of inflation trends.

(d) The Producer Price Index (PPI) is the leading indicator of inflation trends. The Consumer Price Index (CPI) is a measure of the change in consumer prices of goods and services. The Producer Price Index (PPI) is a measure of the change in wholesale prices. The leading indicator of inflation trends is the PPI; as these costs to producers increase, they are "passed on" to consumers and reflected in the CPI. If the Federal Reserve Board wants to control inflation, they raise interest rates. Deflation is caused by a reduction in the supply of money.

Which of the following business activities is not included in gross domestic product? (a) The production of Microsoft software in Redmond, Washington (b) The manufacturing of Toyota cars at U.S. plants (c) The sale of life insurance policies in the United States (d) The manufacturing of Ford cars at Canadian plants

(d) The manufacturing of Ford cars at Canadian plants Cars produced in another country - even by a U.S. company - are not part of the gross domestic product. Each of the other choices are examples of goods and services produced in the United States.

All of the following are true concerning the Yield-to-Maturity (YTM) of a bond EXCEPT: (a) YTM is the promised rate of return an investor will receive from a bond at the current market price if held to maturity (b) YTM assumes that the investor reinvests all coupons received from a bond at a rate equal to the computed YTM (c) It is sometimes known as the dollar-weighted return (d) The premium or discount on the bond is not an important factor in the calculation of YTM

(d) The premium or discount on the bond is not an important factor in the calculation of YTM

Suppose ABC stock is selling for $50 and it pays no dividend. A recent analyst report shows that ABC will earn $3.00 and the P/E ratio is 20. Which of the following is correct? (a) Not enough information provided to evaluate the stock (b) The stock is selling proportionally with its current market price (c) The stock is overvalued (d) The stock is undervalued

(d) The stock is undervalued

12) If a $1,000 par bond (7% coupon) is selling at a discount of $900, which of the following is true? (a) The nominal yield will equal the current yield (b) The bond cannot be called (c) Current yield is less than the nominal yield (d) Yield-to-call exceeds the current yield

(d) Yield-to-call exceeds the current yield

4) John purchased 100 shares of XYZ stock for $50 per share. He held the stock for one year then sold the 100 shares for $60 per share. During the time he owned the stock it paid a $1.50 dividend per share. What was John's Holding Period Return?

23%

Which of the following statements concerning Inflation are Correct? I. A higher rate of inflation usually leads to increasing interest rates II. A higher rate of inflation usually leads to lower interest rates III. Inflation deteriorates purchasing power IV. Inflation has no relationship to the rise in prices of good and services

I. A higher rate of inflation usually leads to increasing interest rates III. Inflation deteriorates purchasing power

The broadest measure of the activity and movement of the overall stock market can be measured by using which of the following indexes? (a) S&P 500 (b) Dow Jones Industrial Average (DJIA) (c) Lehman Aggregate Bond Index (d) Wilshire 5000

The Wilshire 5000 is a value weighted index that consists of more than 7,000 issues that trade on the NYSE, AMEX and in the OTC market. It is considered to be the broadest measure of the activity and movement of the overall stock market. The DJIA consists of 30 industrial stocks and is the most widely used index, but it is the narrowest measure of the market. The S&P 500 measures the largest issues that trade on the NYSE. The Lehman Aggregate Bond Index tracks the performance of more than 5,000 different types of bonds.

If a bond with a par value of $1,000 and a 6% coupon rate currently sells for $1,080 on the open market, then the yield to maturity will be:

Yield to maturity falls below coupon rate when a bond sells at a premium. It rises when the bond sells at a discount.

Jensen measure

a risk-adjusted performance measure that represents the average return on a portfolio or investment, above or below that predicted by the capital asset pricing model (CAPM), given the portfolio's or investment's beta and the average market return. Assuming the CAPM is correct, Jensen's alpha is calculated using the following four variables: = (Return of Portfolio) - (Risk-free rate) + (Beta * (Return of Market) - (Risk-free rate))

Modern Portfolio Theory (MPT)

a theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward. According to the theory, it's possible to construct an "efficient frontier" of optimal portfolios offering the maximum possible expected return for a given level of risk. The expected return of the portfolio is calculated as a weighted sum of the individual assets' returns. If a portfolio contained four equally-weighted assets with expected returns of 4, 6, 10 and 14%, the portfolio's expected return would be: (4% x 25%) + (6% x 25%) + (10% x 25%) + (14% x 25%) = 8.5%

Sharpe index

developed by Nobel laureate William F. Sharpe, and is used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. Subtracting the risk-free rate from the mean return allows an investor to better isolate the profits associated with risk-taking activities. = (Return of Portfolio- Risk-free rate) / Standard Deviation of portfolio's excess return

Treynor index

measures the risk-adjusted performance of an investment portfolio by analyzing a portfolio's excess return per unit of risk. The measure of market risk used is beta, which is a measure of overall market risk or systematic risk. The higher the Treynor Index, the greater "excess return" being generated by the portfolio per each unit of overall market risk. The index was developed by economist Jack Treynor. It is essentially an expression that represents how many units of reward an investor is given for each unit of volatility, or pain, they experience along the ride. For example, assume Portfolio Manager A achieves a portfolio return of 8% in a given year, when the risk-free rate of return is 5%; the portfolio had a beta of 1.5. In the same year, Portfolio Manager B achieved a portfolio return of 7%, with a portfolio beta of 0.8. The Treynor Index is therefore 2.0 for A, and 2.5 for B. While Portfolio Manager A exceeded B's performance by a percentage point, Portfolio Manager B actually had the better performance on a risk-adjusted basis.

security market line

serves as a graphical representation of the capital asset pricing model (CAPM), which shows different levels of systematic, or market, risk of various marketable securities plotted against the expected return of the entire market at a given point in time.

Immunization

strategy that matches the duration of assets and liabilities, minimizing the impact of interest rates on the net worth. For example, large banks must protect their current net worth, whereas pension funds have the obligation of payments after a number of years. These institutions are both concerned about protecting the future value of their portfolios and must deal with uncertain future interest rates.

nominal yield

the interest rate (to par value) that the bond issuer promises to pay bond purchasers. This rate is fixed, applies to the life of the bond, and is sometimes referred to as coupon yield or coupon rate

Leading economic indicators

used by economists to forecast the business cycle because they usually "anticipate" or move before changes in the economy. They include stock prices (S&P), money supply, interest rate spread, new manufacturing orders, initial claims for unemployment insurance, new building permits and orders for durable goods, to name a few. Annual personal income, industrial production and manufacturing sales are all considered to be coincidental indicators.