Deck 16: Capital Markets

Question 1

A firm decides to hire more equipments if:

A)the average revenue it earns by selling its output is equal to its average cost.
B)its total revenue is greater than the total cost of hiring the equipments.
C)the marginal revenue product of the additional unit of capital is greater than the marginal factor cost.
D)its average revenue is greater than the average cost of hiring equipments.
E)the price of its product is greater than the average cost of production.

Answer 1

C

Question 2

When a new generation of computers that are faster and more powerful than the previous generation are introduced into the resource market:

A)many firms do not change their demand for capital.
B)many firms increase their demand for capital.
C)many firms decrease their demand for capital.
D)the quantity demanded of capital declines.
E)the quantity demanded of capital increases.

Answer 2

B

Question 3

A stock index measures the:

A)change in dividend payments of a group of stocks.
B)fluctuation in the price earning ratio of each share.
C)change in the trading volume in the stock exchange.
D)price movements of a group of stocks.
E)change in the number of enlisted companies.

Answer 3

D

Question 4

Stocks that offer a guaranteed fixed periodic payment or dividend are known as:

A)common stock.
B)restricted stock.
C)close-ended stock.
D)preferred stock.
E)open-ended stock.

Question 5

The largest stock exchange in the world is:

A)the Munich Stock Exchange.
B)the London Stock Exchange.
C)the New York Stock Exchange.
D)the Tokyo Stock Exchange.
E)the Shanghai Stock Exchange.

Question 6

The figure given below shows the demand curves [D₁ and D₂] and the supply curve [S₁] of capital. Figure 16.1 In Figure 16.1,if the demand curve for capital shifts to D₂,the equilibrium price and quantity of capital are:

A)P₁ and Q₁.
B)P₂ and Q₂.
C)P₅ and Q₁.
D)P₃ and Q₃.
E)P₄ and Q₄.

Question 7

The figure given below shows the demand curves [D₁ and D₂] and the supply curve [S₁] of capital. Figure 16.1 In Figure 16.1,if the initial demand curve is D₁,the capital market is in equilibrium at:

A)point a.
B)point b.
C)point c.
D)point d.
E)point f.

Question 8

The figure given below shows the demand curves [D₁ and D₂] and the supply curve [S₁] of capital. Figure 16.1 In Figure 16.1,if the price set in the market is P₃ when the demand curve is D₁,then:

A)the market will be in equilibrium.
B)there will be an excess demand for capital of the amount Q₄ - Q₁.
C)there will be a shortage of capital in the market by the amount Q₄ - Q₂.
D)there will be a surplus of capital in the market by the amount Q₃ - Q₁.
E)there will be a surplus of capital in the market by the amount Q₃ - Q₂.

Question 9

The product of the stock price and the total outstanding shares of that stock are referred to as:

A)market capitalization.
B)floating capital.
C)book value.
D)financial value.
E)face value.

Question 10

The figure given below shows the demand curves [D₁ and D₂] and the supply curve [S₁] of capital. Figure 16.1 In Figure 16.1,if the initial demand curve is D₁,the equilibrium quantity of capital demanded is:

A)Q₁.
B)Q₃.
C)0.
D)Q₄.
E)Q₂.

Question 11

What is the main difference between common and preferred stocks?

A)Common stocks pay interest whereas preferred stocks pay dividends.
B)Preferred stocks carry voting rights whereas common stocks do not carry voting rights.
C)Preferred stocks pay a guaranteed dividend,while common stocks may or may not pay dividends.
D)In case of bankruptcy,preferred stockholders have a right to the company's asset,whereas common stockholders do not have such rights.
E)Common stocks can be converted into preferred stocks while preferred stocks cannot be converted into common stocks.

Question 12

The unique alphabetic name that identifies a listed stock is known as the:

A)stock's nickname.
B)stock's alpha sign.
C)ticker symbol.
D)alternative name.
E)fixed call number.

Question 13

Dividend yield is:

A)the annual dividend payment per share.
B)the annual dividend per share divided by the price of each share.
C)the current stock price divided by the dividend per share.
D)the year-on-year change in the annual dividend payment.
E)the dollar value change in the stock price from the previous day's closing price.

Question 14

If the price of capital falls:

A)the supply of capital increases.
B)the quantity supplied of capital decreases.
C)the quantity supplied of capital increases.
D)the quantity supplied of capital remains unchanged.
E)the supply of capital decreases.

Question 15

All of the following will shift the demand curve for capital,except:

A)future expectations about the demand for the good produced by a firm.
B)technological changes.
C)the price of capital.
D)the entry of new firms into the market.
E)the change in the interest rate.

Question 16

When the rate of interest rises,the resulting change in the demand for capital is shown graphically by:

A)a movement down along the demand curve.
B)a rightward shift of the demand curve.
C)a leftward shift of the demand curve.
D)a movement up along the demand curve.
E)an outward rotation of the demand curve.

Question 17

The demand curve for capital:

A)shows the positive relation between capital usage and the quantity of capital demanded.
B)shows the positive relation between aggregate output and the quantity of capital demanded.
C)shows the negative relation between rate of inflation and the quantity of capital demanded.
D)shows the positive relation between technological change and the quantity of capital demanded.
E)shows the negative relation between price of capital and the quantity of capital demanded.

Question 18

Most stock indexes use which of the following measures to weight the companies that participate in the index?

A)The company's sales volume
B)The company's book value
C)The current profits
D)The available cash
E)The market capitalization

Question 19

If the P/E ratio is equal to 50,it implies that investors in the stock are willing to pay:

A)$25 for every $2 of the earnings that the company generates during a period.
B)$100 for every $1 of the earnings that the company generates during a period.
C)$500 for every $1 of the earnings that the company generates during a period.
D)$50 for every $1 of the earnings that the company generates during a period.
E)$5 for every $1 of the earnings that the company generates during a period.

Question 20

The figure given below shows the demand curves [D₁ and D₂] and the supply curve [S₁] of capital. Figure 16.1 In Figure 16.1,if the initial demand curve is D₁,the equilibrium price of capital is:

A)P₂.
B)P₄.
C)P₁.
D)P₅.
E)P₃.

Question 21

NAVPS in the mutual fund table denotes:

A)the percentage change in the asset value of the mutual fund from the close of the previous day's trading.
B)the highest and lowest values that the mutual fund has experienced over the last one year.
C)the highest asset value at which the fund was sold during the past week.
D)percentage change in the asset value of the mutual fund from the previous week.
E)the value of the mutual fund divided by the number of shares of the fund.

Question 22

An investment that has the same features,such as risk and ease of selling,as the investment being considered is referred to as a(n):

A)equivalent investment.
B)comparable investment.
C)twin investment.
D)dual investment.
E)duplication investment.

Question 23

If people expect the price of a stock to rise in future,the demand curve for the stock:

A)becomes positively sloped.
B)shifts to the right.
C)becomes horizontal.
D)becomes vertical.
E)shifts to the left.

Question 24

Consider a mutual fund with a 6 percent back-end load that decreases to 0 percent in the seventh year.How much of the load will an investor have to bear if she sells it off in the seventh year?

A)1 percent of the load
B)0 percent of the load
C)2 percent of the load
D)6 percent of the load
E)4 percent of the load

Question 25

Mutual funds that attempt to mimic the performance of a broad market index,such as the Dow Jones Industrial Average,are known as:

A)socially responsible funds.
B)index funds.
C)equity funds.
D)fixed-income funds.
E)money market funds.

Question 26

Mutual funds that are composed of corporate and government bonds are known as:

A)risk-adjusted funds.
B)global funds.
C)equity funds.
D)fixed-income funds.
E)money market funds.

Question 27

A pervasive tradeoff in financial markets relates risk to expected returns.Which of the following statements reflects this relationship?

A)The higher the risk of an asset,the lower the expected return on the asset.
B)There is usually no relationship between risk and return.
C)The higher the risk of an asset,the higher the expected return on the asset.
D)The return on an asset is normally positively related to the risk of comparable assets.
E)The return on a risky asset cannot be compared with the return on a risk free asset.

Question 28

Mutual funds that invest only in companies that meet certain criteria and usually exclude companies that produce tobacco,weapons,or alcoholic beverages are known as:

A)socially responsible funds.
B)global funds.
C)equity funds.
D)fixed-income funds.
E)money market funds.

Question 29

Which of the following measures the performance of smaller stocks in the United States?

A)S&P 500
B)NASDAQ Composite
C)Wilshire 5000
D)Russell 2000
E)Goldman Sachs Indices

Question 30

A mutual fund for which a fee is paid at the time of purchase is a:

A)no-load fund.
B)face-end load fund.
C)back-end load fund.
D)fixed-end fund.
E)front-end load fund.

Question 31

Which of the following indexes includes the stocks of 500 companies that are widely owned and that represent all sectors of the U.S.economy?

A)Standard & Poor's 500
B)Dow Jones Industrial Average
C)BSE Sensex
D)Mid-Cap-50
E)NSE 20 Share Index

Question 32

Which of the following factors affects the quantity demanded of a company's stock?

A)The prices of other companies' stocks
B)The price of the company's stock
C)The returns on other possible investments
D)Expectations regarding stock price movements
E)Income of the investors

Question 33

Which of the following is true of the NASDAQ Composite Index?

A)It includes stocks of 500 companies that are widely owned by U.S.citizens.
B)It represent all major areas of the U.S.economy.
C)It includes mostly the stocks technology and Internet related companies.
D)It contains more than 6,500 stocks that trade in the United States.
E)It includes all of the stocks on the New York Stock Exchange.

Question 34

The possible returns to a share holder are:

A)rent and capital gain.
B)fixed interest and dividend.
C)fixed interest and capital gain.
D)rent and fixed interest.
E)dividend and capital gain.

Question 35

Compute the actual investment in a mutual fund carrying a front-end load of 10 percent on a sum of $10,000 invested by an individual.

A)$1,000
B)$10,000
C)$11,000
D)$9,000
E)$12,000

Question 36

The amount that a risk averse person requires to take on risk is called:

A)risk arbitrage.
B)risk bonus.
C)risk premium.
D)risk capital.
E)risk rate.

Question 37

Consider a mutual fund with a 6 percent back-end load that decreases to 0 percent in the seventh year.How much of the load will an investor have to bear if she sells it off in the second year?

A)4 percent of the load
B)3 percent of the load
C)6 percent of the load
D)5 percent of the load
E)2 percent of the load

Question 38

If the current shareholders begin to believe that the prices of the stocks are likely to rise in future,the supply curve of shares will:

A)shift to the right.
B)become perfectly elastic.
C)slope downward.
D)shift to the left.
E)become perfectly inelastic.

Question 39

Fees paid to the mutual fund manager are called:

A)fund fees.
B)service fees.
C)load.
D)dividends.
E)agency fees.

Question 40

A group of stocks of individual firms that are placed into one investment pool by an investment company is commonly known as a:

A)pooled stock venue.
B)stock clump.
C)stock agreement.
D)mutual fund.
E)maximal diversified investment (MDI).

Question 41

A bubble or panic generally occurs in the stock market because of:

A)upswings in the business cycle.
B)expansionary monetary policies undertaken by the government.
C)irrational,or abnormal forecasts,or market valuations.
D)an increase in the profitability of the firms.
E)deliberate government actions to control inflation.

Question 42

Which of the following is sometimes used as a synonym to describe a bond?

A)Stock
B)Fixed-income security
C)Capital asset
D)Retained earning
E)Depreciation

Question 43

Why are bonds less risky than stocks?

A)Dividend given on shares are usually less than the coupon-rate on bonds.
B)Bonds can be issued only by the government whereas shares are issued by private firms.
C)Bondholders have a claim on the assets of the firm whereas the shareholders do not.
D)Shareholders are entitled to a share of company's earnings.
E)The higher the profit of the firm,the greater the share of the bondholders.

Question 44

The fixed amount that the issuer of a bond agrees to pay the bondholder each year until the bond matures is called:

A)rent.
B)coupon.
C)interest.
D)load.
E)dividend.

Question 45

Which of the following describes the relationship between bond prices and bond yields?

A)There is a positive relationship between the yield and the price.
B)Every 1% increase in the bond price results in a 2% increase in the yield.
C)When the bond price is greater than the annual interest,yield is greater than one.
D)Bond price divided by the bid price is equal to the yield.
E)There is an inverse relationship between the yield and the price.

Question 46

The price of Amazon.com stock was very high in the 1990s although the company never earned an economic profit.This demonstrates that:

A)investors' expectations of future profits alone influence the stock prices.
B)the performance of a firm has no bearing on stock prices.
C)stock markets are highly inefficient because investors vary in their risk appetites.
D)speculation based on wishful thinking by investors have a bearing on the stock prices.
E)investor expectations are generally rational.

Question 47

The face value of a bond is:

A)the amount of the coupon that is paid at equal intervals.
B)the amount repaid to the lender on maturity.
C)the percentage of company profits that is paid to the borrower.
D)equivalent to the capital gain.
E)equivalent to economic profit.

Question 48

A bond with a par value of $1,000 is traded at $1,500.The coupon rate offered on the bond is 10 percent.The bond matures after a period of 5 years .The coupon paid to the bond holder after the end of the first year is:

A)$150.
B)$100.
C)$200.
D)$50.
E)$250

Question 49

If the earnings report of a firm indicates higher earnings than was expected by the investors:

A)the stock prices of the firm will decline.
B)the price of the product produced by this firm will decline.
C)the price of the product produced by this firm will rise.
D)the firm will spend more on advertising.
E)the stock prices of this firm will increase.

Question 50

The maturity date of a bond is:

A)the date on which the lender receives the coupon from the borrower.
B)the date on which the borrower takes the loan.
C)the date on which the bond is bought by an individual from the firm.
D)the specified time when the borrower repays the loan.
E)the specified time when the borrower sells the bond held by him to someone else.

Question 51

Which of the following names is given to the corporate bonds that carry the maximum risk?

A)Risky-time bonds
B)Failure bonds
C)Revelation bonds
D)Blue-chip bonds
E)Junk bonds

Question 52

The U.S.government bonds are likely to be less risky because:

A)the government always runs a balanced budget.
B)the government bonds are backed by gold.
C)the government can raise taxes to redeem the bonds at maturity.
D)the government has limited liability to repay.
E)the government always has an excess reserve of foreign exchange.

Question 53

Why is it unlikely for even a very successful investor to continuously outperform the market?

A)Different investors have different risk appetites.
B)Individual investors have independent strategies.
C)The stock market is not subject to sufficient government regulations.
D)Investors often mimic the strategies of the successful investor.
E)The market is always inefficient.

Question 54

Buying a newly issued bond implies:

A)borrowing money from a private bank.
B)taking over the ownership of a firm.
C)lending money to a firm.
D)paying the price for a service rendered by a firm.
E)borrowing funds from international organizations.

Question 55

The figure given below shows the demand [D and D'] and supply [S and S'] curves of shares of stock. Figure 16.2 According to Figure 16.2,what sort of change in the market environment would increase the supply of stocks from S to S' and decrease the demand from D to D'?

A)A perceived increase in the firms' expected future profits
B)A new perception that the economy is about to enter a period of expansion
C)News revealing that stocks prices will increase in the future
D)News that the economy is likely go into a recession soon
E)A perceived improvement in the firms' performance compared to the last year

Question 56

Shane holds wealth worth $10,000.He considers investing it equally in two gambles one of which has a probability of 0.6 to yield a return of 10% and the other has a probability of 0.4 to yield a return of 20%.What will be Shane's total expected return from the two gambles?

A)$1,000
B)$700
C)$500
D)$900
E)$1,100

Question 57

The figure given below shows the demand [D and D'] and supply [S and S'] curves of shares of stock. Figure 16.2 According to Figure 16.2,what will be a necessary result of a simultaneous increase in the supply of stocks from S to S' and decrease in the demand from D to D'?

A)A decrease in the price of the shares
B)An increase in the price of the shares
C)An increase in the amount of shares offered for sale
D)An increase in the volatility of the share
E)A decrease in the profits earned by the firms

Question 58

According to the ratings given by Moody's and Standard and Poor's,_____ bonds are corporate bonds that carry the lowest risk and offer a lower yield.

A)A+
B)white collar
C)AA
D)blue chip
E)AA+

Question 59

Risk is typically measured:

A)by comparing the size of a firm to other firms operating in the market.
B)by looking at the economic profit that a firm has earned in the past few years.
C)by determining whether the bonds issued by a firm are of high or low value.
D)by comparing how much the stock price fluctuates compared with an average firm.
E)by comparing how much the price of the bond falls whenever the price of a firm's product rises.

Question 60

The price of stock is determined by:

A)the demand for the good produced by the firm.
B)the number of shares of a firm's stock that is available.
C)the performance of the stock market.
D)the performance of the Federal Reserve.
E)the demand for and supply of a company's shares.

Question 61

A bond that provides no interest payments but instead is issued at a value that is lower than its face value is called:

A)a no-interest bond.
B)a load-free bond.
C)a no-load bond.
D)a zero-coupon bond.
E)a coupon bond.

Question 62

If both demand for and supply of capital increases by equal amounts,then the equilibrium price of capital goes up,and the equilibrium quantity of capital increases.

Question 63

If the coupon-rate of a particular bond increases:

A)the supply of the bond increases.
B)the price of the bond declines.
C)the demand for the bond declines.
D)the supply of the bond decreases.
E)the demand for the bond increases.

Question 64

Although technically owning a share means the shareholder holds a share of everything that the firm owns but in actuality he is only entitled to a share of the company's earnings.

Question 65

Notes are debt securities which have a maturity period of:

A)0-5 years.
B)10-15 years.
C)0-1 year.
D)10-20 years.
E)1-10 years.

Question 66

If bonds and stocks are considered to be substitute goods,and the investors expect stock prices to drop in recent future:

A)the price of bonds will also decline.
B)the supply of bond will increase.
C)the interest rate on bonds will decline.
D)the demand for stocks will increase.
E)the demand for bonds will decline.

Question 67

The quantity of capital demanded changes when one of the nonprice determinants of demand change.

Question 68

Which of the following factors lead to a drastic rise in the price of assets?

A)Increased supply of assets
B)Increase in the market rate of interest
C)Reduced demand for money.
D)Increased liquidity in the economy.
E)Contractionary monetary and fiscal policies being undertaken by the government

Question 69

A low P/E ratio of a stock means that the company issuing the stock is headed to trouble in near future.

Question 70

The S&P 500 index includes the stocks of 500 largest companies in the U.S.

Question 71

As the price of capital falls,the quantity of capital that producers are willing and able to offer falls.

Question 72

The capital market is a market in which financial capital is acquired.

Question 73

During the stock market bubbles,the price/earnings [P/E] ratio:

A)hits high levels.
B)falls to zero.
C)becomes negative.
D)remains constant.
E)declines to a very low level.

Question 74

When the price of a stock rises significantly higher than that can be justified by the dividends the firm can be expected to pay in future,a(n) _____ is said to have occurred.

A)stock market crash
B)arbitrage
C)stock market bubble
D)bull run
E)short sale

Question 75

Yield on a bond refers to:

A)the coupon-rate of the bond.
B)the money earned by selling a bond.
C)the return from a bond after its maturity.
D)the difference between the face value of a bond and the bond price.
E)the annual return until the bond matures.

Question 76

A decline in the interest rate will lead to an increase in the price of capital,supply of capital remaining constant.

Question 77

A bond with a par value of $1,000 is traded at $2,000.The interest rate offered on the bond is 10 percent per annum.The bond matures after a period of 5 years.The yield from the bond is:

A)5 percent.
B)10 percent.
C)20 percent.
D)15 percent.
E)2.5 percent.

Question 78

If $30 is paid for a share of stock and the earning per share is $3,how long will it take for the firm's earnings to add up to the purchase price?

A)30 years
B)3 years
C)27 years
D)10 years
E)90 years

Question 79

If the par value of a bond is $200,and the bid price of the bond is $90,it implies:

A)the bond is sold at $110.
B)the bond was bought at $110.
C)the bond is trading at a discount of 10 percent of its par value.
D)the bond is trading at 45 percent of its par value.
E)the bond is trading at a premium of 15 percent.

Question 80

Which of the following factors led to the housing bubble in the U.S.in 2006?

A)Increased amount of lending to subprime borrowers
B)Decreased money supply by Federal Reserve
C)Future expectation about downward movement of prices of the houses
D)Federal Reserve raised the market rate of interest
E)Increase in the supply of houses