Xiao Exam 1

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characteristics of a money market instrument

A. liquidity B. marketability

The attempt to improve performance either by identifying mis-priced securities or by timing the performance of broad asset classes is referred to as _______ management

active

Shares for short transactions

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

If an investor's ______ in an account falls below the ______ level, the broker will issue a ______, which requires the investor to add new cash or securities to the margin account.

margin maintenance margin margin call

An equity offering (or new issue) is said to be ______ when it is the sale of additional shares by a company that is already publicly traded.

offering

Dealers quote prices at which they are willing to buy or sell securities in an _____ _____ _____ dealer

over the counter

Mortgage-backed securities that are passed along from the homeowner to the lender to Fannie or Freddie to the investor are also called _________ _________

pass throughs

NASDAQ subscriber levels

permit those with the highest level, 3, to "make a market" in the security; permit those with a level 2 subscription to receive all bid and ask quotes but not to enter their own quotes; and permit level 1 subscribers to receive general information about prices.

When the proportion of the index a stock represents is proportional to the stock's share price, the index is said to be

price weighted

New issues of securities are offered in the ______ market

primary

Investment bankers are generally hired to manage the sale of these securities in what is called a

primary market for newly issued securities

The agency problem refers to the possible conflicts of interest between self-interested managers as ______ and shareholders of the firm who are the ______.

principals; agents

A primary offering in which shares are sold directly to a small group of institutional or wealthy investors by a private firm is a

private placement

services offered by full-service brokers?

providing bull and sell recommendations holding securities for safekeeping extending margin loans trading for client accounts

Companies whose shares are available for purchase to investors are referred to as

publicly traded publicly listed public companies

Bond Equivalent Yield (BEY)

r BEY ((Face Value - Purchase Price) / Purchase Price)) * (365/n)

Bank Discount Rate (T-Bill quotes) P = $9,875 90-day T-bill

rBD = (Face Value - Purchase Price) / Face Value * (360/n) rBD = ($10,000 - $9,875)/$10,000 * (360 / 90) = 5%

Bond Equivalent Yield (BEY) P = $9,875 90-day T-bill

rBEY ((Face Value - Purchase Price) / Purchase Price)) * (365/n) (($10,000-$9,875)/$9,875) * (365/90) = 5.13%

Consider these long-term investment data: The price of a 10-year $100 par value zero coupon inflation-indexed bond is $84.36. A real-estate property is expected to yield 2% per quarter (nominal) with a SD of the (effective) quarterly rate of 10%. Compute the annual rate on the real

real bond annual rate = (100/84.36)^(1/10)-1 =1.72%

An equity offered (or new issue) is said to be _______ when it is the sale of additional shares by a company that is already publicly traded

seasoned

Once securities are issued, investors might well wish to trade them among themselves. Trades in existing securities are place in he so-called

secondary market

Old Economy Traders opened an account to short-sell 1,600 shares of Internet Dreams at $52 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $52 to $60, and the stock has paid a dividend of $2.00 per share.

skip

A trader who makes a market in the shares of one or more firms and who maintains a "fair and orderly market" by dealing personally in the stock is referred to as a(n)

specialist

Which of the following orders is most useful to short sellers who want to limit their potential losses?

stop-buy order

Prices for call options decrease when

strike price goes up

Prices for put options increase when

strike price goes up

A $10 million 10-day VAR figure with 95% confidence means:

the loss over the next 10 days is expected to be at most $10 million in 95% of the cases.

Shelf registration

is a way of placing issues in the primary market and allows firms to register securities for sale over a two-year period.

A futures contract

is an agreement to buy or sell a specified amount of an asset at a PREDETERMINED price on the expiration date of the contract

The time it takes to accept, process, and deliver a trading order is the trade's

latency

Which of the following orders instructs the broker to buy at or below a specified price?

limit buy order

Assume you sold short 100 shares of common stock at $40 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $50?

$4,000 × 1.5 = $6,000 [$6,000 - 100($50)]/100($50) = 20%. =20%

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.20 and a T-bill with a rate of return of 0.03. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to

(0.11 - 0.03)/0.20 = 0.40.

You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P, constructed with two risky securities, X and Y. The weights of X and Y in P are 0.60 and 0.40, respectively. X has an expected rate of return of 0.14 and variance of 0.01, and Y has an expected rate of return of 0.10 and a variance of 0.0081. What would be the dollar values of your positions in X and Y, respectively, if you decide to hold 40% of your money in the risky portfolio and 60% in T-bills?

$400(0.6) = $240 in X $400(0.4) = $160 in Y.

Assume you sold short 100 shares of common stock at $50 per share. The initial margin is 60%. What would be the maintenance margin if a margin call is made at a stock price of $60?

$5,000 × (1 + .6) = $8,000 [$8,000 - 100($60)]/100($60) = 33%.

Assume you sold short 100 shares of common stock at $70 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $85?

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

You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P, constructed with two risky securities, X and Y. The weights of X and Y in P are 0.60 and 0.40, respectively. X has an expected rate of return of 0.14 and variance of 0.01, and Y has an expected rate of return of 0.10 and a variance of 0.0081. What would be the dollar value of your positions in X, Y, and the T-bills, respectively, if you decide to hold a portfolio that has an expected outcome of $1,120?

($1,120 - $1,000)/$1,000 = 12% (0.6)14% + (0.4)10% = 12.4% 12% = w5% + 12.4%(1 - w) w = 0.054 1-w = 0.946w = 0.054($1,000) = $54 (T-bills) 1 - w = 1 - 0.054 = 0.946($1,000) = $946 $946 × 0.6 = $568 in X $946 × 0.4 = $378 in Y.

Calculate the Bank Discount Rate (T-bill quotes)

((Face value-purchase price)/purchase price) * 360/n

Calculate the bond equivalent yield

((Face value-purchase price)/purchase price) * 365/n

You purchased a share of stock for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was _____.

((sold share price + dividend)-purchase price) / purchase price ((28+2.25)-29)/29 =4.31%

You purchased a share of stock for $25. One year later, you received $1 as a dividend and sold the share for $29. What was your holding-period return?

((sold share price + dividend)-purchase price) / purchase price ((29+1)-25)/25 = 20%

You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard deviation of 0.15 and a T-bill with a rate of return of 0.05. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to

(0.12 - 0.05)/0.15 = 0.4667.

You invest $1,000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to

(0.17 - 0.04)/0.40 = 0.325.

If an investment provides a 0.78% return monthly, its effective annual rate is 9.36%. 9.63%. 10.02%. 9.77%.

(1.0078)12-1 = 9.77%

Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at $45 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $45 to $49.50, and the stock has paid a dividend of $5.40 per share. • c. What is the rate of return on the investment?

(12,600-22,500)/22,500=-.4400=-44%

You sold a futures contract on corn at a futures price of 331, and at the time of expiration, the price was 343. What was your profit or loss? Note : (futures price of the commodity - the time of expiration price) = answer * bushel of 5000 please note, you have the move the decimal two spots to the right

(3.31-3.43) = -.12 * 5000 = -600

You manage an equity fund with an expected monthly return of 1% (per month) and the standard deviation of the monthly return is 7%. The annual rate of return on Treasury bills is 3%. B. What is the Sharpe ratio of the fund ?

.09/(.07*sqrt(12))=.37

A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 3.5%. What is your approximate annual real rate of return if the rate of inflation was 5.5% over the year? a. 0.9% b. −2.0% c. 5.9% d. 3.4%

0.035 − 0.055 = −2.0%

A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The risk-free rate is 6%. An investor has the following utility function: U = E(r) - (A/2)s^2. Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset?

0.06 = 0.15 - A/2(0.15)^2 0.06 - 0.15 = -A/2(0.0225) -0.09 = -0.01125A A = 8; U = 0.15 - 8/2(0.15)^2 = 6% U(Rf) = 6%.

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and a T-bill with a rate of return of 0.045. What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.08?

0.08 = x(0.21); x = 38.1% in risky asset.

You invest $1,000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04.What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.20?

0.20 = x(0.40); x = 50% in risky asset. 50% and 50%

You want to purchase XON stock at $60 from your broker using as little of your own money as possible. If initial margin is 50% and you have $3,000 to invest, how many shares can you buy?

0.5 = [(Q * $60) - $3,000]/(Q * $60) $30Q = $60Q - $3,000 $30Q = $3,000 Q = $100

You purchased 1000 shares of CSCO common stock on margin at $19 per share. Assume the initial margin is 50%, and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.

1,000 shares × $19 × 0.5 = $19,000 × 0.5 = $9,500 (loan amount) 0.30 = (1,000P - $9,500)/1,000P 300P = 1,000P - $9,500 -700P = -$9,500P = $13.57.

You purchased 1,000 shares of common stock on margin at $30 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $24? Ignore interest on margin.

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

Block transactions are transactions for more than _______ shares and they account for about _____ percent of all trading on the NYSE.

10,000; 30

You purchased 100 shares of common stock on margin at $40 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $25? Ignore interest on margin.

100 shares × $40/share × 0.5 = $4,000 4000 × 0.5 = $2,000 (loan amount) X = [100($25) - $2,000]/100($25)X = 0.20.

You purchased 100 shares of common stock on margin at $45 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $30? Ignore interest on margin.

100 shares × $45/share × 0.5 = $4,500 4500 × 0.5 = $2,250 (loan amount) X = [100($30) - $2,250]/100($30)X = 0.25.

You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. Your initial investment was

100 shares × $45/share × 0.50 = $4,500 × 0.50 = $2,250.

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

100 shares × $60 × 0.5 = $6,000 × 0.5 = $3,000 (loan amount) 0.30 = (100P $3,000)/100 P30 - P = 100P - $3,000 -70P = -$3,000 P = $42.86.

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

100 shares × $70 × 0.5 = $7,000 7000 × 0.5 = $3,500 (loan amount) 0.30 = (100P $3,500)/100P30 - P = 100P - $3,500-70P = -$3,500P = $50.

You purchased 100 shares of common stock on margin for $35 per share. The initial margin is 50%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $42 per share? Ignore interest on margin.

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

You purchased 100 shares of common stock on margin for $50 per share. The initial margin is 50%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $56 per share? Ignore interest on margin.

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

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

5% 9% - 4% = 5%.

You invest $1,000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04. What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.11?

11% = w1(17%) + (1 - w1)(4%) 11% = 17%w1 + 4% - 4%w1 7% = 13%w1 w1 = 0.538 1 - w1 = 0.462 0.538(17%) + 0.462(4%) = 11.0%.

• Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at $45 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $45 to $49.50, and the stock has paid a dividend of $5.40 per share. • b. What is the margin percentage on the short position a year later?

12,600/49,500=.2545=25.45%

You sold short 150 shares of common stock at $27 per share. The initial margin is 45%. Your initial investment was

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

What would be the profit or loss per share to an investor who bought the July 2012 expiration IBM call option with exercise price $180 if the stock price at the expiration date is $187 ? (slide 4 lecture 2 full)

187-180=7 cost=5.5 (taken from July row, "Last" Column) 7-5.5=1.5

If the annual real rate of interest is 2.5%, and the expected inflation rate is 3.4%, the nominal rate of interest would be approximately a. 5.9%. b. 0.9% c. -0.9% d. 7% e. none of the options are correct

2.5% + 3.4% = 5.9%.

A portfolio has an average return of 7% and standard deviation of 14%, what's the 5% VaR of this portfolio for one-year holding period

5% VaR = 7% + −1.65 ×14% = 16%

You sold short 200 shares of common stock at $60 per share. The initial margin is 60%. Your initial investment was

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

Assume you purchased 200 shares of GE common stock on margin at $70 per share from your broker. If the initial margin is 55%, how much did you borrow from the broker?

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

The NASDAQ Stock Market lsits around

3,000 firms

A year ago, you invested $10,000 in a savings account that pays an annual interest rate of 5%. What is your approximate annual real rate of return if the rate of inflation was 1.5% over the year?

3.5% 5% - 1.5% = 3.5%

You purchased 300 shares of common stock on margin for $60 per share. The initial margin is 60%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $45 per share? Ignore interest on margin.

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

A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 6%. What is your approximate annual real rate of return if the rate of inflation was 2% over the year?

4% 6% - 2% = 4%.

A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 4.3%. What is your approximate annual real rate of return if the rate of inflation was 3% over the year?

4.3% - 3% = 1.3%.

You buy 300 shares of Qualitycorp for $30 per share and deposit initial margin of 50%. The next day, Qualitycorp's price drops to $25 per share. What is your actual margin?

40%

You have been given this probability distribution for the holding-period return for Cheese, Inc. stock: Stock of the Economy: Probability HPR Boom 0.20 24% Normal growth 0.45 15% Recession 0.35 8% Assuming that the expected return on Cheese's stock is 14.35%, what is the standard deviation of these returns

5.7382%

You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard deviation of 0.15 and a T-bill with a rate of return of 0.05. What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.06?

60% and 40% 0.06 = x(0.15); x = 40% in risky asset.

If the annual real rate of interest is 3.0%, and the expected inflation rate is 4.0%, the nominal rate of interest would be approximately

7% 3% + 4% = 7%

Corporations can exclude ____________ percent of the dividends received from preferred stock from taxes.

If the annual real rate of interest is 6%, and the expected inflation rate is 2%, the nominal rate of interest would be approximately

8% 6% + 2% = 8%

If the annual real rate of interest is 5% and the expected inflation rate is 4%, the nominal rate of interest would be approximately

9% 5% + 4% = 9%.

A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 9%. What is your approximate annual real rate of return if the rate of inflation was 2% over the year?

9% − 2% = 7%.

CDO

A security representing a portfolio of fixed-income assets divided into tranches.

You purchased a futures contract on oats at a futures price of 233.75 and at the time of expiration, the price was 261.25. What was your profit or loss? A. $1375.00 B. −$1375.00 C. −$27.50 D. $27.50 E. -$67.50

A. $1375 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was (2.6125 − 2.3375) = $0.275 per bushel, or $0.275 * 5,000 = $1,375.

The maximum maturity of commercial paper that can be issued without SEC registration is ____________. A. 270 days B. 180 days C. 90 days D. 30 days E. 15 days

A. 270 days

For a taxpayer in the 25% marginal tax bracket, a 20-year municipal bond currently yielding 5.5% would offer an equivalent taxable yield of: A. 7.33%. B. 10.75%. C. 5.5%. D. 4.125%. E. 6.45%.

A. 7.33% 0.055 = r(1 − t); r = 0.055/0.75; r = 0.0733

The ____ index represents the performance of the German stock market. A. DAX B. FTSE C. Nikkei D. Hang Seng E. CAC

A. DAX

You buy 300 shares of Quality corp for $30 per share and deposit initial margin of 50%. The next day, Quality corp's price drops to $25 per share. What is your actual margin?

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

Specialists on stock exchanges perform which of the following functions?

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

Over the past year, you earned a nominal rate of interest of 9% on your money. The inflation rate was 3% over the same period. The exact actual growth rate of your purchasing power was a. 15.5% b. 10.0% c. 5.8% d. 4.8% e. 15.0%

Actual growth rate = [(1 + nominal) / (1 + Inflation rate)] - 1 Actual growth rate = [(1 + 0.09) / (1 + 0.03)] - 1 Actual growth rate = [1.09 / 1.03] - 1 Actual growth rate = 1.058 - 1 Actual growth rate = 0.058 or 5.8%

Over the past year, you earned a nominal rate of interest of 12.5% on your money. The inflation rate was 2.6% over the same period. The exact actual growth rate of your purchasing power was

Actual growth rate = [(1 + nominal) / (1 + Inflation rate)] -1 Actual growth rate = [(1 + 0.125) / (1 + 0.026)] - 1 Actual growth rate = [1.125 / 1.026] - 1 Actual growth rate = 1.09649-1 Actual growth rate = 9.65%

Over the past year, you earned a nominal rate of interest of 14% on your money. The inflation rate was 2% over the same period. The exact actual growth rate of your purchasing power was

Actual growth rate = [(1 + nominal) / (1 + Inflation rate)] -1 Actual growth rate = [(1 + 0.14) / (1 + 0.02)] - 1 Actual growth rate = [1.14 / 1.02] - 1 Actual growth rate = 1.11764-1 Actual growth rate = 11.76%

Suppose your combined federal plus state tax bracket is 30% .Would you prefer to earn a 6% taxable return or a 4% tax-free return? What is the equivalent taxable yield of the 4% tax-free yield?

After Tax return= taxable return * (1-tax rate) .06*(1-.3)=.042 Equivalent taxable yield= tax free return/(1-tax rate) .04/(1-.3)=.0572 if taxable return> equivalent taxable yield, prefer taxable return .06>.0572

Suppose your combined federal plus state tax bracket is 30% .Would you prefer to earn a 6% taxable return or a 4% tax-free return? What is the equivalent taxable yield of the 4% tax-free yield?

After tax return 6%*(1-30%) = 4.2% • 4.2% > 4% •Equivalent taxable yield = 4%/(1-30%) = 5.72% • 6% > 5.72% •Prefer 6% taxable return

• You manage an equity fund with an expected monthly return of 1% (per month) and the standard deviation of the monthly return is 7%. The annual rate of return on Treasury bills is 3%. A. What is the annual risk premium of the fund ?

Annual risk premium (excess return over T-bill) = 1%×12 − 3% = 9%

Stock and Bond Market Indexes: Stock Splits, Equally weighted (see slide 19 lecture 2 full notes)

Assumption: invest $300 in each stocks at t = 0 • No. of shares for A: $300/10 = 30 • No. of shares for B: $300/50 = 6 • No. of shares for C: $300/140 = 2.143 • Total market value at t = 0 is: ($10 × 30) + ($50 × 6) + ($140 × 2.143) = $900 • Total market value at t = 1 is: ($15 × 30) + ($25 × 12) + ($150 × 2.143) = $1,071.45 (After stock splits, No. of shares for stock B will become 6 × 2 = 12 shares) • Index rate of return for this period = $1,071.45/$900 -1 = 19.05%

The New York Stock Exchange is an example of what type of market?

Auction market

Certificates of deposit are insured for up to ____________ in the event of bank insolvency. A. $10,000 B. $100,000 C. $50,000 D. $500,000 E. 10,000,000

B. $100,000

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

B. 21.4%. 055 = .07(1 − t); (1 − t) = 0.786; t = .214

An investor purchases one municipal and one corporate bond that pay rates of return of 7.2% and 9.1%, respectively. If the investor is in the 15% marginal tax bracket, his or her after tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. A. 7.2% and 9.1% B. 7.2% and 7.735% C. 6.12% and 7.735% D. 8.471% and 9.1% E. None of the above

B. 7.2% and 7.735% rc = 0.091(1 − 0.15) = 0.07735, or 7.735%; rm = 0.072(1 − 0) = 7.2%.

The ____ is an example of a U.S. index of large firms. A. Wilshire 5000 B. DJIA C. DAX D. Russell 2000 E. FTSE

B. DJIA

The ____ index represents the performance of the U.K. stock market. A. DAX B. FTSE C. Nikkei D. Hang Seng E. CAC

B. FTSE

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

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

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

B. effective annual rate

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

B. in the primary market.

You've borrowed $24,000 on margin to buy shares in Ixnay, which is now selling at $32 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $29 per share. a. Will you receive a margin call? b. How low can the price of Ixnay shares fall before you receive a margin call?

Borrowing: $24,000 Equity: $24,000 share price = $32 Number of shares purchased: ($24,000+$24,000) / $32.00 = 1,500 shares purchased Loss due to fall in price = (29-32) * 1500 = -4500 a. Margin balance as a % = ($24,000-$4,500)/(1500 * 29) = 44.83 a. No, you will not receive a margin call. b. Margin call level price = $24,000 / (1500-1500 * 35%) = 24.62

You purchased a futures contract on corn at a futures price of 350 and at the time of expiration the price was 352. What was your profit or loss? A. $2.00 B. -$2.00 C. $100 D. -$100 E. $75.00

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

You sold a futures contract on corn at a futures price of 331 and at the time of expiration the price was 343. What was your profit or loss? A. -$12.00 B. $12.00 C. -$600 D. $600 E. $67.50

C. -$600 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was (3.31 − 3.43) = −$0.12 per bushel, or −$0.12 * 5,000 = −$600.

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

C. 22.2% .07 = .09(1 − t); (1 − t) = 0.777; t = .222

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

C. I and III

The ____ index represents the performance of the Japanese stock market. A. DAX B. FTSE C. Nikkei D. Hang Seng E. CAC

C. Nikkei

The ____ index represents the performance of the Canadian stock market. A. DAX B. FTSE C. TSX D. Hang Seng E. CAC

C. TSX

What is the HPR for a share of stock that was purchase for $25, sold for $27 and distributed $1.25 in dividends?

Cap gains yield=(27-25)/25=8% Dividend Yield= 1.25/25=5%

For a taxpayer in the 15% marginal tax bracket, a 15-year municipal bond currently yielding 6.2% would offer an equivalent taxable yield of: A. 6.2%. B. 5.27%. C. 8.32%. D. 7.29%. E. 7.62%.

D. 7.29% 0.062 = r(1 − t); r = 0.062/(0.85); r = 0.0729 = 7.29%.

You purchased a futures contract on corn at a futures price of 331 and at the time of expiration the price was 343. What was your profit or loss? A. -$12.00 B. $12.00 C. -$600 D. $600 E. $75.00

D. $600 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was (3.43 − 3.31) = $0.12 per bushel, or $0.12 * 5,000 = $600.

You sold short 200 shares of common stock at $60 per share. The initial margin is 60%. Your initial investment was A. $4,800. B. $12,000. C. $5,600. D. $7,200. E. none of the above.

D. $7,200.

You sold a futures contract on corn at a futures price of 350 and at the time of expiration the price was 352. What was your profit or loss? A. $2.00 B. -$2.00 C. $100 D. -$100 E. $67.50

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

Assume you sell short 100 shares of common stock at $45 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $40 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction. A. 25.00% B. -33.33% C. 44.31% D. -41.67% E. -54.22%

D. -41.67%

For a taxpayer in the 25% marginal tax bracket, a 15-year municipal bond currently yielding 10.2% would offer an equivalent taxable yield of: A. 6.2%. B. 5.27%. C. 8.32%. D. 12%. E. 7.62%.

D. 12%. 0.102 = r (1-t); r = 0.102/(0.75); r=0.12 = 12%

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

D. 17.3% tm = 1 − (5.93%/7.17%) = 17.29%

An investor purchases one municipal and one corporate bond that pay rates of return of 6% and 8%, respectively. If the investor is in the 25% marginal tax bracket, his or her after tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. A. 6% and 8% B. 4.5% and 6% C. 4.5% and 8% D. 6% and 6% E. None of the above

D. 6% and 6% rc = 0.08(1 − 0.25) = 0.06, or 6%; rm = 0.06(1 − 0) = 6%.

The ____ is an example of a U.S. index of small firms. A. S&P 500 B. DJIA C. DAX D. Russell 2000 E. FTSE

D. Russell 2000

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

D. callable

The ____ index represents the performance of the Hong Kong stock market. A. DAX B. FTSE C. Nikkei D. Hang Seng E. TSX

D. hang seng

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

D. sell the underlying asset at the strike price on or before the expiration date and sell the option in the open market prior to expiration.

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

D. the broker holds the stock in the brokerage firms' name on behalf of the client.

For the highlighted area, what is the Discount Yield (Asked) ? For the highlighted area, what is the Asked Price ?

Discount Yield (Asked) = 0.04% *(177/360) = 0.0197% Asked price = $10,000 * (1-0.0197%) = $9,998.033

Calculate the discount yield and asked price for a treasury bill (slide 11 lecture 1 full)

Discount Yield (Asked)= Asked * (Days to Maturity/360) .04*(177/360)=.0197 Asked Price=$10,000 * (1-discount yield) 10,000 * (1-.0197)=9,998.033

Consider a risky portfolio, A, with an expected rate of return of 0.15 and a standard deviation of 0.15, that lies on a given indifference curve. Which one of the following portfolios might lie on the same indifference curve?

E(r) = 0.10; Standard deviation = 0.10 Portfolio A has a reward to risk ratio of 1.0; portfolio C is the only choice with the same risk-return trade-off.

what is the mean what is the standard deviation

E(r)=[0.20 × 47.5%] + [0.29 × 13.0%] + [0.51 × (-20.0%)] = 0.0307 or 3.07% σ2=[0.20 × (47.5 − 3.07)2] + [0.29 × (13.0 − 3.07)2] + [0.51 × (−20.0 − 3.07)2] = 694.835 σ=0.2636 or 26.36%

Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky assets (P) and T-Bills. The information below refers to these assets.E(Rp) 12.00 %Standard Deviation of P 7.20 %T-Bill rate 3.60 % Proportion of Complete Portfolio in P 80%Proportion of Complete Portfolio in T-Bills 20 % Composition of P: Stock A 40.00 % Stock B 25.00 % Stock C 35.00 % Total 100.00 % What is the expected return on Bo's complete portfolio?

E(rC) = 0.8 × 12.00% + 0.2 × 3.6% = 10.32%.

An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.11 and a variance of 0.12 and 70% in a T-bill that pays 3%. His portfolio's expected return and standard deviation are __________ and __________, respectively.

E(rP) = 0.3(11%) + 0.7(3%) = 5.4% sP = 0.3(0.12)1/2 = 10.4%.

An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.13 and a variance of 0.03 and 70% in a T-bill that pays 6%. His portfolio's expected return and standard deviation are __________ and __________, respectively.

E(rP) = 0.3(13%) + 0.7(6%) = 8.1% sP = 0.3(0.03)^1/2 = 5.19%.

An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 70% in a T-bill that pays 6%. His portfolio's expected return and standard deviation are __________ and __________, respectively.

E(rP) = 0.3(15%) + 0.7(6%) = 8.7% sP = 0.3(0.04)^1/2 = 6%.

An investor invests 35% of his wealth in a risky asset with an expected rate of return of 0.18 and a variance of 0.10 and 65% in a T-bill that pays 4%. His portfolio's expected return and standard deviation are __________ and __________, respectively.

E(rP) = 0.35(18%) + 0.65(4%) = 8.9% sP = 0.35(0.10)1/2 = 11.07%.

An investor invests 40% of his wealth in a risky asset with an expected rate of return of 0.17 and a variance of 0.08 and 60% in a T-bill that pays 4.5%. His portfolio's expected return and standard deviation are __________ and __________, respectively.

E(rP) = 0.4(17%) + 0.6(4.5%) = 9.5% sP = 0.4(0.08)^1/2 = 11.31%.

An investor invests 70% of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 30% in a T-bill that pays 5%. His portfolio's expected return and standard deviation are __________ and __________, respectively.

E(rP) = 0.7(15%) + 0.3(5%) = 12.0% sP = 0.7(0.04)^1/2 = 14%.

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

E. an industrial development bond

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

E. buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration

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

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

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

E. either debentures or subordinated debentures

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

E. savings deposits

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

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

• You purchased ABC stocks three months ago, for $1,366. You received $5 in dividends and you just sold the stocks for $1,525. • c. What is the effective annual rate (EAR)?

EAR: 1+EAR=(1+APR/n)^n=(1+.4802/4)^4=1.5738 EAR=57.38%

computer-operated trading network offering an alternative to formal stock exchanges or dealer markets for trading securities is often referred to as an

ECN

You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. At what stock price would you receive a margin call if the maintenance margin is 35%?

Equity = 100($45) × 1.5 = $6,750 0.35 = ($6,750 - 100P)/100P 35P = $6,750 - 100P 135P = $6,750 P = $50.00

You sold short 100 shares of common stock at $75 per share. The initial margin is 50%. At what stock price would you receive a margin call if the maintenance margin is 30%?

Equity = 100($75) × 1.5 = $11,250 0.30 = ($11,250 - 100P)/100P 30P = $11,250 - 100P1 30P = $11,250P = $86.54.

You sold short 300 shares of common stock at $55 per share. The initial margin is 60%. At what stock price would you receive a margin call if the maintenance margin is 35%?

Equity = 300($55) × 1.6 = $26,400 0.35 = ($26,400 - 300P)/300P 105P = $26,400 - 300P 405P = $26,400 P = $65.18.

A U.S. dollar-denominated bond that is sold in Singapore is a

Eurobond

The smallest component of the money market is

Eurodollars

please see picture a. 17.72% b. 18.89% c. 17.91% d. 18.18%

Expected Price in one year = 50*25% + 60*40% + 70*35% = $61 Holding period return = (Price after one year + Dividend - Price paid)/Price paid = (61+4-55)/55 = 18.18%

Practitioners often use a ________% VaR, meaning that ________% of returns will exceed theVaR, and ________% will be worse. A. 25, 75, 25 B. 75, 25, 75 C. 5, 95, 5 D. 95, 5, 95 E. 80, 80, 20 F. 1; 99; 1

F. 1; 99; 1

If a portfolio had a return of 11%, the risk-free asset return was 6%, and the standard deviation of the portfolio's excess returns was 25%, the risk premium would be

Given, Portfolio return = 11% Risk free rate = 6% Solution :- Risk premium = Portfolio return - Risk free rate = 11% - 6% = 5% So, the risk premium would be 5%

An investor purchased a bond 63 days ago for $980. He received $17 in interest and sold the bond for $987. What is the holding-period return on his investment? 1.52% 2.45% 1.92% 2.68%

HPR = ($17 + 987 - 980)/$980 = .0244898 = approximately 2.45%.

You purchase a share of CAT stock for $90. One year later, after receiving a dividend of $4, you sell the stock for $97. What was your holding-period return?

HPR = ([97 - 90] + 4)/90 = 12.22%.

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

I , II, III

Which of the following statement(s) is(are) true? I) The real rate of interest is determined by the supply and demand for funds. II) The real rate of interest is determined by the expected rate of inflation. III) The real rate of interest can be affected by actions of the Fed. IV) The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation.

I) The real rate of interest is determined by the supply and demand for funds. III) The real rate of interest can be affected by actions of the Fed.

The securities act of 1933 I) requires full disclosure of relevant information relating to the issue of new securities. II) requires registration of new securities. III) requires issuance of a prospectus detailing financial prospects of the firm. IV) established the SEC.V) requires periodic disclosure of relevant financial information.VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers.

I, II, and III

Which of the following statements is(are) FALSE? I) Risk-averse investors reject investments that are fair games. II) Risk-neutral investors judge risky investments only by the expected returns. III) Risk-averse investors judge investments only by their riskiness. IV) Risk-loving investors will not engage in fair games.

III and IV only

The Securities Act of 1934 I) requires full disclosure of relevant information relating to the issue of new securities. II) requires registration of new securities. III) requires issuance of a prospectus detailing financial prospects of the firm. IV) established the SEC. V) requires periodic disclosure of relevant financial information. VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers.

IV, V, and VI

What would be the profit or loss per share to an investor who bought the July 2012 expiration IBM put option with exercise price $180 if the stock price at the expiration date is $187 ?

If the put option has an exercise price of $180, option holder would not exercise the option at a stock price of $187. The loss on the call would be the initial cost: 2.11

You purchased 100 shares of common stock on margin for $60 per share. The initial margin is 50%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $72 per share? Ignore interest on margin.

Initial margin = 100 shares * $60 * .50% =$3,000 Profit = Number of shares * (selling price initial price) = 100 shares * ($72 - $60) = $1,200 Return = (profit / investment) * 100 answer = 40%

According to the mean-variance criterion, which of the statements below is correct? Investment E(r) Standard Deviation A 10 % 5 % B 21 % 11 % C 18 % 23 % D 24 % 16 %

Investment B dominates investment C because investment B has a higher return and a lower standard deviation (risk) than investment C.

The number of shareholders a company may have before being required to register its common stock with the SEC and file public reports was increased from 500 to 2,000 by the 2012 ______ Business Act.

Jumpstart Our

Which of the following orders instructs the broker to buy at or below a specified price?

Limit-buy order

During a period of severe inflation, a bond offered a nominal HPR of 80% per year. The inflation rate was 70% per year. a. What was the real HPR on the bond over the year? b. Compare this real HPR to the approximation rr=rn-i

a. rr=(1+rn)/(1+i) -1= (rn-i)/(1+i)=(.8-.7)/(1.7)=.0588 b. rr=rn-i=80%-70%=10%

Buying on Margin

Margin Trading: Initial Conditions • X Corp: Stock price = $70 • 50%: Initial margin • 40%: Maintenance margin • 1000 shares purchased Stock price falls to $60 per share • New Margin %: $25,000/$60,000 = 41.67% Market Value <= $35,000/(1 - .40) = $58,333 With 1,000 shares, stock price per share for margin call is $58,333/1,000 = $58.33 Equity = $58,333 - $35,000 = $23,333 • Margin % = Equity/Market value of stocks = $23,333/$58,333 = 40%

Which of the following orders instructs the broker to buy at the current market price?

Market order

(Slide 38 lecture 3 full notes) Compute mean and standard deviation of the HPR on stocks

Mean: (.2*.37)+(.6*.22)+(.2*-.2)=.166 or 16.60% Variance= [.2*(.37-.166)^2]+[.6*(.22-.166)^2]+[.2*(-.2-.166)^2=.0369 Standard Deviation= square root(.0369)=.1920 or 19.2%

ABC fund has a daily mean return of 0% and the standard deviation of daily return is 2%. Assume there are 20 trading days in month, what is the 5% monthly VaR for ABC fund ? (z-score is -1.65)

Monthly VaR at 5% = (−1.65)×σ×√T = −1.65 ×0.02× 20 = −14.76%

The NYSE Euronext acquired the American Stock Exchange in 2008 to focus on small firms and was rename

NYSE AMEX

If the annual real rate of interest is 2.5%, and the expected inflation rate is 3.4%, the nominal rate of interest would be approximately a. 4.9% b. 0.9% c. -0.9% d. 7% e. None

Nominal return=1.025*1.034-1= 5.985% e.

Tens of thousands securtities are traded on the

OTC market.

Stock and Bond Market Indexes: Stock Splits, price weighted (see slide 18 lecture 2 full notes)

Price Weighted Index - divisor adjustment • Time 0 index value: (10 + 50 + 140)/3 = 200/3 = 66.7 • After stock splits: (10 + 25 + 140)/New divisor = 66.7 • New divisor = 2.625 • Time 1 index value: (15 + 25 + 150)/2.62 = 72.38 • Index rate of return = 72.38/66.7 -1 = 8.5%

Assume you sell short 100 shares of common stock at $30 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $35 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.

Profit on stock = ($30 - $35)(100) = -500initial investment = ($30)(100)(0.5) = $1,500return = $500/$1,500 = -33.33%.

Assume you sell short 1,000 shares of common stock at $35 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $25 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.

Profit on stock = ($35 - $25)(1,000) = $10,000 initial investment = ($35)(1,000)(0.5) = $17,500; return = $10,000/$17,500 = 57.14%.

Profit on stock = ($45 - $40) × 100 = $500 $500/$2,250 (initial investment) = 22.22%. **Initial Investment: $45 x 100 x .50 = 2250

Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky assets (P) and T-Bills. The information below refers to these assets. E(Rp) 12.00 %Standard Deviation of P 7.20 %T-Bill rate 3.60% Proportion of Complete Portfolio in P 80 %Proportion of Complete Portfolio in T-Bills 20 % Composition of P: Stock A 40.00 % Stock B 25.00 % Stock C 35.00 % Total 100.00 % What are the proportions of stocks A, B, and C, respectively, in Bo's complete portfolio?

Proportion in A = 0.8 × 40% = 32% proportion in B = 0.8 × 25% = 20% proportion in C = 0.8 × 35% = 28%.

Which of the following is not a component of the money market?

Real estate investment trusts

Level 2 Nasdaq

Receive all bid and ask quotes but cannot enter their own quotes

Level 1 Nasdaq

Receive only inside quotes (i.e., the best bid and ask prices)

Level 3 Nasdaq

Registered market makers that can enter and change bid-ask quotes continually and have the fastest execution of trades

If a portfolio had a return of 8%, the risk-free asset return was 3%, and the standard deviation of the portfolio's excess returns was 20%, the Sharpe measure would be

Sharpe ratio: = (Mean portfolio return − Risk-free rate)/Standard deviation of portfolio return = (8%-3%)/20% = 0.25 Hence, correct option is 0.25

Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky assets (P) and T-Bills. The information below refers to these assets. E(Rp) 12.00 % Standard Deviation of P 7.20 % T-Bill rate 3.60 % Proportion of Complete Portfolio in P 80 % Proportion of Complete Portfolio in T-Bills 20 % Composition of P: Stock A 40.00 % Stock B 25.00 % Stock C 35.00 % Total 100.00 % What is the standard deviation of Bo's complete portfolio?

Std. Dev. of C = 0.8 × 7.20% = 5.76%.

Equivalent Taxable Yield Formula

Tax-Exempt Yield / (1 - Marginal Tax Rate) rmuni/1-tax rate

Suppose that an investment portfolio has a 4% chance of a loss of 10 million, a 2% chance of a loss of 1 million, and a 94% chance of a profit of 1 million. They are independent of each other. What are the 5% VaR and ES of this portfolio?

The 95% VaR is 1 million and the expected shortfall is 8.2 million.

• You purchased ABC stocks three months ago, for $1,366. You received $5 in dividends and you just sold the stocks for $1,525. . What is the holding period return (HPR) on your investment?

The HPR equals (1,525 + 5 - 1,366) / 1,366 = 12.01%.

The initial margin (Initial Equity) was: $45 × 1,000 × 0.50 = $22,500. • Assets = Short sale proceeds + Initial margin = $45,000 + $22,500 = $67,500 • Liability = Current market value of stocks owed + dividends owed during the short sale period = $49.5 × 1,000 + $5.4 × 1,000 = $54,900 • Ending Equity = $67,500 - $54,900 = $12,600 OR A quicker solution: loss from higher stock price = ($45- 49.5) × 1,000 = -$4,500 • Ending Equity = $22,500 (initial equity) - $4,500 (losses) - $5.4 × 1,000 (repay dividend) = $12,600

statements about bond trading are true?

The majority of bond trading occurs in the OTC market among bond dealers, even for bonds that are actually listed on the NYSE. The NYSE has expanded its electronic bond-trading platforms, which is now called NYSE Bonds and is the largest centralized bond market. Merrill Lynch, Salomon Smith Barney and Goldman Sachs are currently bond dealers.

Consider a T-bill with a rate of return of 5% and the following risky securities: Security A: E(r) = 0.15; Variance = 0.04 Security B: E(r) = 0.10; Variance = 0.0225 Security C: E(r) = 0.12; Variance = 0.01 Security D: E(r) = 0.13; Variance = 0.0625 From which set of portfolios, formed with the T-bill and any one of the four risky securities, would a risk-averse investor always choose his portfolio?

The set of portfolios formed with the T-bill and security C. Security C has the highest reward-to-volatility ratio.

Why do investors buy securities on margin?

They can achieve greater upside potential, but they also expose themselves to greater downside risk

(See slide 12 lecture 2 full notes for chart/numbers) Price weighted index

Time 0 index value: (10 + 50 + 140)/3 = 200/3 = 66.7 •Time 1 index value: (15 + 50 + 150)/3 = 215/3 = 71.7 • Rate of return for this period = 71.7/66.7-1 = 7.5% • If at t = 0 , the starting index value is 100, the index value at t = 1 would be 100× (71.7/66.7) = 107.5

Suppose that you sell short 1,000 shares of Intel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account. Assume that Intel also has paid a year-end dividend of $1 per share. • b. If the maintenance margin is 25%, how high can Intel's price rise before you get a margin call ?

Total assets are $35,000 (short sale proceeds ($20,000) + margin ($15,000), and liabilities are (1,000P + 1,000). A margin call will be issued when: • (35,000-1,000P-1,000)/1000P= 0.25, solve for P = $27.2

(See slide 14 lecture 2 full notes for chart/numbers) Market Value weighted index

Total market value at t = 0 is: ($10 × 40) + ($50× 80) + ($140 × 50) =$11,400 • Total market value at t = 1 is: ($15 × 40) + ($50× 80) + ($150 × 50) =$12,100 • Index rate of return for this period =$12,100/$11,400 -1=6.14% • If at t = 0 , the starting index value is 100, the index value at t = 1 would be 100× (12,100/11,400) = 106.14

Which of the following statements are true about high-frequency trading? a. Trade execution times for high-frequency traders are measured in milliseconds or less. b. High-frequency traders co-locate at exchanges because the speed of light is too slow for them to be further away. c. High-frequency traders compete for trades each of which offers very large profits. d. High-frequency strategies often attempt to profit from bid-ask spreads.

Trade execution times for high-frequency traders are measured in milliseconds or less. High-frequency traders co-locate at exchanges because the speed of light is too slow for them to be further away. High-frequency strategies often attempt to profit from bid-ask spreads.

The largest component of the bond market is

Treasury

True or false: A short sale allows investors to profit from a decline in a security's price.

True

________ is a risk measure that indicates vulnerability to extreme negative returns.

Value at risk and lower partial standard deviation

Dealer Markets

When trading activity in a particular type of asses increases.

• Suppose that you sell short 1,000 shares of Intel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account. Assume that Intel also has paid a year-end dividend of $1 per share. • a. If you earn no interest on the funds in your margin account, what will be your rate of return after 1 year if Intel stock is selling at $18 (this price should be interpreted as ex-dividend, that is, price after the dividend has been paid)

With a $1 dividend, the short position must now pay on the borrowed shares: ($1/share ´ 1000 shares) = $1000. • Rate of return is now: [(-1,000 ´ ΔP) - 1,000]/15,000 • If Intel stock is selling at $18, ΔP = $18 - $20 = - $2 • Rate of return = [(-1,000) ´ (-$2) - $1,000]/$15,000 = +0.067, or +6.67%

You want to purchase IBM stock at $80 from your broker using as little of your own money as possible. If initial margin is 50% and you have $2,000 to invest, how many shares can you buy?

You can buy ($2,000/$80) = 25 shares outright and you can borrow $2,000 to buy another 25 shares.

You are bullish on Telecom stock. The current market price is $90 per share, and you have $13,500 of your own to invest. You borrow an additional $13,500 from your broker at an interest rate of 7.8% per year and invest $27,000 in the stock. • How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.

Your initial investment is the sum of $13,500 in equity and $13,500 from borrowing, which enables you to buy 300 shares of Telecom stock: Initial investment/Stock Price = $27,000/$90 = 300 shares The value of the 300 shares is 300P. Equity is (300P-$13,500), and the required margin is 30% Solving (300P-13,500)/300P=.3, we get P=$64.29 You will receive a margin call when the stock price falls below $64.29

According to the mean-variance criterion, which one of the following investments dominates all others?

[ E(r) = 0.15; Variance = 0.20 ] E(r) = 0.10; Variance = 0.20 E(r) = 0.10; Variance = 0.25 E(r) = 0.15; Variance = 0.25

•A T-bill with face value $10,000 and 87 days to maturity is selling at a bank discount ask yield of 3.4%. • a. What is the price of the bill? • b. What is its bond equivalent yield?

a. Bank discount of 87 days:0.034 × 87 days/360 days = 0.008217 Price: $10,000 × (1 - 0.008217) = $9,917.83 b. Bond Eqivalent Yield= ((10,000 − 9,917.83)/9,917.83) × (365/87)

a. If a market buy order for 100 shares comes in, at what price will it be filled? b. At what price would the next market buy order be filled? c. If you were a security dealer, would you want to increase or decrease your inventory of this stock?

a. The market-buy order will be filled at $52.25, the best price of the limit-sell orders in the book. b. The next market-buy order will be filled at $52.50, the next best limit-sell order price. c. Increase. As a security dealer, you would want to increase your inventory. There is considerably buying demand at price just below $52, indicating that downside risk is limited. In contrast, limit-sell orders are sparse, indicating that a moderate buy order could result in a substantial price increase.

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

a. drives the interest rate down

Kurtosis is a measure of a. how fat the tails of a distribution are. b. the downside risk of a distribution. c. the normality of a distribution. d. the dividend yield of the distribution.

a. how fat the tails of a distribution are.

You are bullish on Telecom stock. The current market price is $100 per share, and you have $14,000 of your own to invest. You borrow an additional $14,000 from your broker at an interest rate of 9% per year and invest $28,000 in the stock. a. What will be your rate of return if the price of Telecom stock goes up by 10% during the next year? The stock currently pays no dividends. b. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.

a. increase in sale price = $28,000 * .10% increase = $2,800 minus interest = $14,000 * .09% = $1,260 Net Profit = $1,540.00 / self equity of $14,000 rate of return = 11% b. margin call = $14,000 / (280-(280*.30)) = $71.43

You want to purchase GM stock at $40 from your broker using as little of your own money as possible. If initial margin is 50% and you have $4000 to invest, how many shares can you buy? a. 100 shares b. 200 shares c. 50 shares d. 500 shares e. 25 shares

b. 200 shares You can buy ($4,000/$40) = 100 shares outright and you can borrow $4,000 to buy another 100 shares.

Assume you sold short 100 shares of common stock at $50 per share. The initial margin is 60%. What would be the maintenance margin if a margin call is made at a stock price of $60? a. 40% b. 33% c. 35% d. 25%

b. 33% [$8000 - 100 ($60)]/100($60) = 33%

b. I and III only

You purchased ABC stocks three months ago, for $1,366. You received $5 in dividends and you just sold the stocks for $1,525. • b. What is the annual percentage rate (APR)?

b. The APR is the 3-month rate times the number of three-month periods in one year. • APR = 12.01% × (12/3) = 48.02%

A sale by IBM of new stock to the public would be a(n) a. short-sale b. seasoned equity offering c. private placement d. secondary-market transaction e. initial public offering

b. seasoned equity offering

A transaction of more than 10,000 shares of stock is referred to as a(n) ________ trade

block

You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard deviation of 0.15 and a T-bill with a rate of return of 0.05.A portfolio that has an expected outcome of $115 is formed by

borrowing $43 at the risk-free rate and investing the total amount ($143) in the risky asset. For $100: (115 - 100)/100 = 15% .15 = w1(0.12) + (1 - w1)(0.05) .15 = 0.12w1 + 0.05 - 0.05w1 0.10 = 0.07w1 w1 = 1.43($100) = $143 (1 - w1)$100 = -$43.

The cost of buying and selling a stock consists of

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

If a portfolio had a return of 12%, the risk-free asset return was 4%, and the standard deviation of the portfolio's excess returns was 25%, the Sharpe measure would be a. 0.12. b. 0.04. c. 0.32. d. 0.16. e. 0.25.

c. (12-4)/25 = 0.32

_______ bonds give the firm the option to repurchase the bond from the holder at a stipulated call price.

callable

To build an indifference curve, we can first find the utility of a portfolio with 100% in the risk-free asset, then

change the standard deviation of the portfolio and find the expected return the investor would require to maintain the same utility level.

New electronic trading platforms such as MarketAxess, now exist directly to _______ buyers and sellers

connect

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

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

d. None of the options are true. The expected inflation rate are determinant of nominal interest rate The realized nominal rate of interest would be less than the real rate if the unexpected inflation were greater than the real rate of interest Certificates of deposit contain a real rate that is based on inflation rate which is not guaranteed

You purchased JNJ stock at $130 per share. The stock is currently selling at $145. Your gains may be protected by placing a a. stop-buy order b. limit-buy order c. market order d. limit-sell order e. none

d. limit-sell order

Electronic trading networks where participants can anonymously buy or sell large blocks of securities are called

dark pools

a. 2.07% b. 9.96% c. 7.04% d. 1.44% e. None of the options are correct

e. None of the options are correct s = [0.40 (22 − 10.4)2 + 0.35 (11 − 10.4)2 + 0.25 (−9 − 10.4)2]1/2 = 12.167%.

When assessing tail risk by looking at the 5% worst-case scenario, the most realistic view of downside exposure would be a. expected shortfall. b. value at risk c. conditional tail expectation d. expected shortfall and value at risk e. expected shortfall and conditional tail expectation.

e. expected shortfall and conditional tail expectation.

Prices for both call and put options increase with time until

expiration

t/f An example of an average latency time for CBOE Global Markets utilizing the BATS platform advertises times of.01 second.

false. Reason: .001 second

A subset of algorithmic trading that relies on computer programs to make extremely rapid decisions is

high frequency trading

The finalized registration statement for new securities approved by the SEC is called

the prospectus

True or false: Shelf registration refers to ready to be issued securities.

true

t/f An investor who places a market order buys at the ask price and sells at the bid price.

true

A reward-to-volatility ratio is useful in

understanding how returns increase relative to risk increases.

A fair game

will not be undertaken by a risk-averse investor and is a risky investment with a zero risk premium.

You are bullish on Telecom stock. The current market price is $90 per share, and you have $13,500 of your own to invest. You borrow an additional $13,500 from your broker at an interest rate of 7.8% per year and invest $27,000 in the stock. • b) what will be your rate of return if the price of Telecom stock goes down by 10% during the next year? (Ignore the expected dividend.)

• After stock goes down by 10% , market value of stocks will be $27,000 × 1 − 10% = $24,300 • Margin interest and principal needs to be repaid: $13,500 × 1 + 7.8% = $14,553 • After paying off the margin loan, you have $24,300 − $14,553 = $9,747 • Rate of return = (9,747-13,500)/13,500=-27.8

You are bullish on Telecom stock. The current market price is $90 per share, and you have $13,500 of your own to invest. You borrow an additional $13,500 from your broker at an interest rate of 7.8% per year and invest $27,000 in the stock. • a) what will be your rate of return if the price of Telecom stock goes up by 10% during the next year? (Ignore the expected dividend.)

• After stock goes up by 10% , market value of stocks will be $27,000 × 1 + 10% = $29,700 • Margin interest and principal needs to be repaid: $13,500 × 1 + 7.8% = $14,553 • After paying off the margin loan, you have $29,700 − $14,553 = $15,147 • Rate of return = (15,147-13,500)/13,500= 12.2%

(See slide 16 lecture 2 full notes for chart/numbers) Equally weighted index

• Assumption: invest $300 in each stocks at t = 0 • No. of shares for A: $300/10 = 30 • No. of shares for B: $300/50 = 6 • No. of shares for C: $300/140 = 2.143 • Total market value at t = 0 is: ($10 × 30) + ($50 × 6) + ($140 × 2.143) = $900 • Total market value at t = 1 is: ($15 × 30) + ($50 × 6) + ($150 × 2.143) = $1,071.45 • Index rate of return for this period = $1,071.45/ $900 -1 = 19.05%

Stock and Bond Market Indexes: Stock Splits, market weighted (see slide 19 lecture 2 full notes)

• Market Value Weighted Index • Total market value at t = 0 is: ($10 × 40) + ($50 × 80) + ($140 × 50) = $11,400 • Total market value at t = 1 is: ($15 × 40) + ($25 × 160) + ($150 × 50) = $12,100 • Index rate of return for this period = $12,100/ $11,400 -1 = 6.14%

(See slide 16 lecture 2 full notes for chart/numbers) Equally weighted index, Alternative Method: Index rate of return for this period =Simple average return for individual stocks

• Stock A return = $15/$10 -1=50% • Stock B return = $50/$50 -1 = 0% • Stock C return = $150/140 -1 = 7.14% • Index rate of return = (50% + 0% + 7.14%)/3 = 19.05% • If at t = 0 , the starting index value is 100, the index value at t = 1 would be 100× 1 + 19.05% = 119.05

Barnegat Light sold 200,000 shares in an initial public offering. The underwriter's explicit fees were $90,000. The offering price for the shares was $35, but immediately upon issue, the share price jumped to $43. What is the best estimate of the total cost to Barnegat Light of the equity issue?

• Total costs = 90,000 + (43 - 35)200,000 = $1,690,000 43-35=cost of underpricing

You sold a futures contract on oats at a futures price of 233.75 and at the time of expiration the price was 261.25. What was your profit or loss? Note : (futures price of the commodity - the time of expiration price) = answer * bushel of 5000 please note, you have the move the decimal two spots to the right

(2.3375-2.6125)= -0.275 *5000 = -1,375

A 5.5%, 20-year municipal bond is currently priced to yield 10.4%. For a taxpayer in the 27% marginal tax bracket, this bond would offer an equivalent taxable yield of Note: Use Equivalent taxable yield : Yield / (1-tax%)

10.4% / (1-27%) = 14.25%

A 5.5%, 20-year municipal bond is currently priced to yield 6.54%. For a taxpayer in the 23% marginal tax bracket, this bond would offer an equivalent taxable yield of Note: Use Equivalent taxable yield : Yield / (1-tax%)

6.54% / (1-23%) = 8.49%

A 5.5%, 20-year municipal bond is currently priced to yield 7.2%. For a taxpayer in the 33% marginal tax bracket, this bond would offer an equivalent taxable yield of Note: Use Equivalent taxable yield : Yield / (1-tax%)

7.2% / (1- 33%) = 10.75%

An investor purchases one municipal and one corporate bond that pay rates of return of 7.5% and 10.3%, respectively. If the investor is in the 25% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ________, respectively.

7.5% and 7.73%

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

8% and 8%

In order for you to be indifferent between the after-tax returns on a corporate bond paying 8.5% and a tax-exempt municipal bond paying 6.12%, what would your tax bracket need to be? Note: corporate bond yield(1-tax rate)=municipal bond yield

8.5%(1-tax rate) = 6.12% 1-tax rate = (6.12%/8.5%) tax rate = 1-(6.12%/8.5%) answer = 28%

Which security should sell at a greater price? A 3-month expiration call option with an exercise price of $80 versus A 3-month call on the same stock with an exercise price of $65.

A 3-month expiration call option with an exercise price of $65.

CDs

A contract that provides insurance against the risk of default

Which of the following statements is true regarding a corporate bond?

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

A put option on a stock selling at $65 or a put option on another stock selling at $80 (all other relevant features of the stocks and options may be assumed to be identical). A put option on another stock selling at $80. A put option on a stock selling at $65.

A put option on a stock selling at $65.

T/F: Time deposits may be withdrawn on demand

False: Time deposits may not be withdrawn on demand. The bank pays interest and principal to the depositor only at maturity.

An investor is in a 21% combined federal plus state tax bracket. If corporate bonds offer 4% yields, what yield must municipals offer for the investor to prefer them to corporate bonds? We have to calculate this using the formula After-Tax Yield:

Federal plus state tax bracket = 21% Corporate Bond yield = 4% Yield = .04 * (1-.21) After-tax yield = .0316% Answer: 3.16%

An investor is in a 30% combined federal plus state tax bracket. If corporate bonds offer 9% yields, what yield must municipals offer for the investor to prefer them to corporate bonds? We have to calculate this using the formula After-Tax Yield:

Federal plus state tax bracket = 30% Corporate bond yield = 9% Yield = .09 * (1-.30) After-tax yield = .0630% Answer: 6.30%

An investor is in a 35% combined federal plus state tax bracket. If corporate bonds offer 12% yields, what yield must municipals offer for the investor to prefer them to corporate bonds? We have to calculate this using the formula After-Tax Yield:

Federal plus state tax bracket = 35% Corporate Bond yield = 12% Yield = .12 * (1-.35) After-tax yield = .0780% Answer: 7.80%

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

I, III, and IV only

mortgage-backed security

Large pools of mortgages that could be traded like any other financial asset

Commercial paper is a short-term security issued by ________ to raise funds.

Large, well-known companies

ARMs

Loans with low initial or "teaser" interest rates that eventually would reset to current market interest yields

Which of the following are not characteristics of money market instruments? a. Liquidity b. Marketability c. Long maturity d. Liquidity premium e. Long maturity and liquidity premium

Long maturity and liquidity premium

Which of the following is not a characteristic of a money market instrument?

Long maturity and liquidity premium

Shares of publicly listed firms trade continually in markets such as the

NYSE and NASDAQ

the NYSE is the largest U.S.

Stock exchange as measured by market value of listed stocks.

True or false: British regulators have proposed phasing out LIBOR by 2021 to be replaced with a rate called SONIA (Sterling Overnight Interbank Average Rate).

True

T/F Due to the risk-return trade-off in the securities markets, the higher-risk assets are priced to offer higher expected returns than lower-risk assets.

True: Due to the risk-return trade-off in the securities markets, the higher-risk assets are priced to offer higher expected returns than lower-risk assets

The prohibition of trading for their own accounts by deposit-taking banks is the ______ Rule, named for the former Federal Reserve Chair.

Volcker Rule

Brokered Markets

Where investors use brokers to locate a counterparty to a trade; Useful with unique or illiquid securities; Dealers do not carry inventory; Too few trades to trade in an order-driven market

When the issuing firms sells the securities to the underwriting syndicate for the public offering price less a spread that serves as compensation to the underwriters is called

a firm commitment because underwriters bear the risk that they will not be able to sell the stock at the planned offering price

Which statements about preferred stock are true? a. Corporations may exclude 70% of dividends received from domestic corporations from taxable income. b. It conveys voting power regarding the management of the firm. c. It pays a fixed stream of income without a contractual obligation to make the payments. d. Their dividends are tax-deductible expenses to the issuing firms.

a. Corporations may exclude 70% of dividends received from domestic corporations from taxable income. c. It pays a fixed stream of income without a contractual obligation to make the payments.

Which of the following is true regarding private placements of primary security offerings?

a. Extensive and costly registration statements are required by the SEC. b. For very large issues, they are better suited than public offerings. c. They trade in secondary markets. d. The shares are sold directly to a small group of institutional or wealthy investors. e. They have greater liquidity than public offerings.

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

a. Government National Mortgage Association (GNMA or Ginnie Mae) b. Federal Home Loan Bank (FHLB) c. Federal National Mortgage Association (FNMA or Fannie Mae) e. Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac).

Which statements are true of the S&P 500? a. It is based on the free float. b. It is based on 500 firms c. It is a price-weighted index d. It must be adjusted for stock splits

a. It is based on the free float. b. It is based on 500 firms c. It is a price-weighted index

Which of the following US firms manipulated and misstated their accounts to the tune of billions of dollars? (Select all that apply.) a. Qwest Communications b. Parmalat c. HealthSouth d. Global Communications

a. Qwest Communications c. HealthSouth

Which of the following are correct about inflation-indexed treasury bonds? a. The principal amount on them is adjusted in proportion to increases in the Consumer Price Index. b. Their yields are interpreted as real interest rates. c. They provide a constant stream of income in real dollars. d. They offer a "free lunch" because of their inflation protection.

a. The principal amount on them is adjusted in proportion to increases in the Consumer Price Index. b. Their yields are interpreted as real interest rates. c. They provide a constant stream of income in real dollars.

Which statements are true of money market instruments? a. They have relatively low credit risk. b. They include the entire fixed income market. c. They are directly accessible to individual investors. d. They can be purchased indirectly through mutual funds.

a. They have relatively low credit risk. d. They can be purchased indirectly through mutual funds.

Lanni Products is a start-up computer software development firm. It currently owns computer equipment worth $31,000 and has cash on hand of $18,000 contributed by Lanni's owners.For each of the following transactions, identify the real and/or financial assets that trade hands. Are any financial assets created or destroyed in the transaction? a. Lanni takes out a bank loan. It receives $48,000 in cash and signs a note promising to pay back the loan over 3 years. The bank loan is a _________ For Lanni, and a ______ for the bank. The cash Lanni receives is a ______. The new financial assset _______ is Lanni's promissory note to repay the loan. b. Lanni uses the cash from the bank plus $18,000 of its own funds to finance the development of new financial planning software. Lanni transfers ______ (cash) to the software developers. In return, Lani receives the completed software package, which is a _____ c. Lanni sells the software product to Microsoft, which will market it to the public under the Microsoft name. Lanni accepts payment in the form of 1,400 shares of Microsoft stock. Lani exchanges the ______ (the software) for a ______, which is 1,400 shares of Microsoft stock. If the Microsoft issues new shares in order to pay Lanni, then this would represent the creation of new _________. d. Lanni sells the shares of stock for $40 per share and uses part of the proceeds to pay off the bank loan. By selling its shares in Microsoft, Lanni exchanges one _______ (1,400 shares of stock) for another ($56,000 in cash.) Lanni uses the ______ of $48,000 in cash to repay the bank and retire it's promissory note. The bank much return its _____ to Lanni. The loan is _______ in the transaction, since it is retired when paid off and no long exists.

a. financial liability a. financial asset a. financial asset a. created b. Financial assets b. real asset c. Real asset c. financial asset c. financial assets d. financial asset d. financial asset d. financial asset d. destroyed

The trading of stock that was previously issued takes place a. in the secondary market b. in the primary market c. usually with the assistance of an investment banker d. in the secondary and primary markets

a. in the secondary market

A municipal bond issued to finance an airport, hospital, turnpike, or port authority is typically a a. revenue bond b. general-obligation bond c. industrial-development bond d. revenue bond or general-obligation bond

a. revenue bond

That managers of a public corporation often pursue their own interests rather than the interests of the shareholders is referred to as the ______ problem.

agency

Sources of venture capital are dedicated venture capital funds, wealthy individuals known as _____________, ____________, and institutions such as pension funds.

angel investors

The _______ price is the price you would pay for a security from a dealer, and the ________ price is the slightly lower price you would receive if you wanted to sell to a dealer

ask price bid price

The smallest component of the bond market is

asset-backed

The material wealth of a society, determined by the productive capacity of the economy is a function of real __________ of the economy.

assets

Which security should sell at a greater price? A 10-year Treasury bond with a 7.0% coupon rate versus a 10-year T-bond with a 7.5% coupon. a. A 10-year Treasury bond with a 7% coupon rate. b. A 10-year T-bond with a 7.5% coupon.

b. A 10-year T-bond with a 7.5% coupon.

Which statements are true about Rule 415 and its consequences? a. Securities can be sold in small amounts, but will have substantial flotation costs. b. Registered securities are said to be "on the shelf." c. It allows securities to be sold on short notice, with little additional paperwork. d. It was introduced in 1982.

b. Registered securities are said to be "on the shelf." c. It allows securities to be sold on short notice, with little additional paperwork. d. It was introduced in 1982.

Why might the rating agencies have so dramatically underestimated credit risk in subprime securities? a. Default probabilities had been estimated using historical data that did not include periods of rising rates. b. Since they were paid to provide ratings by the issuers of the securities, they faced pressure to provide generous ratings. c. They extrapolated historical default experience to a new sort of borrower pool. d. Default probabilities had been estimated using historical data from an unrepresentative period characterized by a housing boom.

b. Since they were paid to provide ratings by the issuers of the securities, they faced pressure to provide generous ratings. c. They extrapolated historical default experience to a new sort of borrower pool. d. Default probabilities had been estimated using historical data from an unrepresentative period characterized by a housing boom.

Which of the following companies went bankrupt between the years of 2000 and 2008? a. procter and gamble b. lehman brothers c. enron d. worldcom

b. lehman brothers c. enron d. worldcom

The bid price of a T-bill in the secondary market is a. the price at which the dealer in T-bills is willing to sell the bill. b. the price at which the dealer in T-bills is willing to buy the bill. c. greater than the asked price of the T-bill. d. the price at which the investor can buy the T-bill. e. never quoted in the financial press.

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

You sell short 100 shares of Loser Co. at a market price of $45 per share. Your maximum possible loss is a. $4,500 b. unlimited c. zero d. $9,000 e. cannot be determined from the information given

b. unlimited

Market orders are

buy or sell orders that are to be executed immediatley at current market prices.

Price-contingent order

buy/sell at specified price or better

What are the types of financial assets? a. Fixed income b. Real assets c. Equity d. Derivatives

c. Equity d. Derivatives a. Fixed income

What contributed to systemic risk? a. Banks had a lot of capital so took on more risk. b. New financial products were hard to value and could therefore be illiquid. c. Financial firms relied on short-term funding of long-term assets. d. Financial firms were highly leveraged.

c. Financial firms relied on short-term funding of long-term assets. d. Financial firms were highly leveraged. b. New financial products were hard to value and could therefore be illiquid.

Which are mechanisms to mitigate potential agency problems? a. Shareholders can launch proxy contests b. Boards of directors can defend top management c. Top executives are provided with shares or stock options

c. Top executives are provided with shares or stock options

You want to buy 100 shares of Hotstock Inc. at the best possible price as quickly as possible. You would most likely place a a. stop-loss order b. stop-buy order c. market order d. limit-sell order e. limit-buy order

c. market order

You sold AAPL stock short at $190 per share. Your losses could be minimized by placing a a. limit-sell order b. limit-buy order c. stop-buy order d. day-order e. none of the options are correct

c. stop-buy order

Lanni Products is a start-up computer software development firm. It currently owns computer equipment worth $32,500 and has cash on hand of $15,000 contributed by Lanni's owners. Lanni takes out a bank loan. It receives $45,000 in cash and signs a note promising to pay back the loan over 3 years. a-1. Prepare the balance sheet just after it gets the bank loan.

cash on hand = $15,000 + Bank loan $45,000 cash computer equipement = $32,500 bank loan = $45,000 Share holders = $47,500

Electronic communication networks

computer networks that allow direct trading without the need for market makers

Which of the following statements is true regarding a corporate bond? a. A corporate callable bond gives the holder the right to exchange it for a specified number of the company's common shares. b. A corporate debenture is a secured bond. c. A corporate indenture is a secured bond. d. A corporate convertible bond gives the holder the right to exchange the bond for a specified number of the company's common shares. e. Holders of corporate bonds have voting rights in the company.

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

Which of the following securities is a money market instrument? a. Treasury Note b. Treasury Bond c. Municipal Bond d. Commercial Paper e. Mortgage Security

d. Commercial Paper

Deposits of commercial banks at the Federal Reserve Bank are called a. bankers' acceptances. b. repurchase agreements. c. time deposits. d. federal funds e. reserve requirements

d. federal funds

The types of financial asses includes fixed income, equity, and

derivatives

When a private firm decided that it wishes to raise capital from a wide range of investors it may decide to

go public.

The apparent success of monetary policy over the three decades prior to the financial crisis of 2008 was referred to as the

great moderation

Money market instruments are short-term instruments with

high liquidity and marketability; they do not have long maturities nor pay liquidity premiums.

The first issuance of shares to the general public is called the firm's

initial public offering, or IPO

Firms specializing in the sale of new securities to the public, typically by underwriting the issue, are called ______.

investment banks

Capital markets allow the risk inherent to all investments to be borne by the _______ most willing to bear it

investors

Direct search markets

is the least organized market. Example: Transaction in such a market is the sale of an old TB where the seller advertises for buyers in the local newspaper.

You are bullish on Telecom stock. The current market price is $52 per share, and you have $13,000 of your own to invest. You borrow an additional $13,000 from your broker at an interest rate of 5% per year and invest $26,000 in the stock. a. What will be your rate of return if the price of Telecom stock goes up by 10% during the next year? The stock currently pays no dividends. b. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.

look up how to do

A potential breakdown of the financial system when problems in one market spill over and disrupt others is

systemic risk

The bid-ask spread

the difference between the bid price and the asked price

With regard to a futures contract, the short position is held by

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

With regard to a futures contract, the long position is held by

the trader who commits to purchasing the commodity on the delivery date.

Portfolio construction techniques that start with the asset allocation decision and then progress to more specific security-selection decisions are referred to as ______.

top-down

Public offerings of both stocks and bonds typically are marketed by investment bankers who in this role are called

underwriters

Primary Market

where new issues of securities are offered to the public, is another example of a brokered market.

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