Deck 2: Asset Classes and Financial Instruments

Question 1

T-bills are issued with initial maturities of:
I) 4 weeks
II) 16 weeks
III) 26 weeks
IV) 32 weeks

A) I and II only
B) I and III only
C) I, II, and III only
D) I, II, III, and IV

Answer 1

B

Question 2

The most marketable money market security is ________.

A) Treasury bills
B) bankers' acceptances
C) certificates of deposit
D) common stock

Answer 2

A

Question 3

An investor in a T-bill earns interest by ________.

A) receiving interest payments every 90 days
B) receiving dividend payments every 30 days
C) converting the T-bill at maturity into a higher-valued T-note
D) buying the bill at a discount from the face value to be received at maturity

Answer 3

D

Question 4

The German stock market is measured by which market index?

A) FTSE
B) Dow Jones 30
C) DAX
D) Nikkei

Question 5

Deposits of commercial banks at the Federal Reserve are called ________.

A) bankers' acceptances
B) federal funds
C) repurchase agreements
D) time deposits

Question 6

The minimum tick size, or spread between prices in the Treasury bond market, is

A) 1/8 of a point.
B) 1/16 of a point.
C) 1/32 of a point.
D) 1/128 of a point.

Question 7

The maximum maturity on commercial paper is ________.

A) 270 days
B) 180 days
C) 90 days
D) 30 days

Question 8

An individual who goes short in a futures position ________.

A) commits to delivering the underlying commodity at contract maturity
B) commits to purchasing the underlying commodity at contract maturity
C) has the right to deliver the underlying commodity at contract maturity
D) has the right to purchase the underlying commodity at contract maturity

Question 9

Which one of the following is a true statement?

A) Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors.
B) Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock.
C) Preferred stockholders have voting power.
D) Investors can sue managers for nonpayment of preferred dividends.

Question 10

________ would not be included in the EAFE index.

A) Australia
B) Canada
C) France
D) Japan

Question 11

A dollar-denominated deposit at a London bank is called ________.

A) eurodollars
B) LIBOR
C) fed funds
D) bankers' acceptance

Question 12

Which of the following is not a true statement regarding municipal bonds?

A) A municipal bond is a debt obligation issued by state or local governments.
B) A municipal bond is a debt obligation issued by the federal government.
C) The interest income from a municipal bond is exempt from federal income taxation.
D) The interest income from a municipal bond is exempt from state and local taxation in the issuing state.

Question 13

Money market securities are sometimes referred to as cash equivalents because ________.

A) they are safe and marketable
B) they are not liquid
C) they are high-risk
D) they are low-denomination

Question 14

The bid price of a Treasury bill is ________.

A) the price at which the dealer in Treasury bills is willing to sell the bill
B) the price at which the dealer in Treasury bills is willing to buy the bill
C) greater than the ask price of the Treasury bill expressed in dollar terms
D) the price at which the investor can buy the Treasury bill

Question 15

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

A) liquidity
B) marketability
C) low risk
D) maturity greater than 1 year

Question 16

________ is considered to be an emerging market country.

A) France
B) Norway
C) Brazil
D) Canada

Question 17

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

A) the Federal Reserve
B) the New York Stock Exchange
C) large well-known companies
D) all of these options

Question 18

Which of the following is not a nickname for an agency associated with the mortgage markets?

A) Fannie Mae
B) Freddie Mac
C) Sallie Mae
D) Ginnie Mae

Question 19

Which of the following is not a money market instrument?

A) Treasury bill
B) commercial paper
C) preferred stock
D) bankers' acceptance

Question 20

When computing the bank discount yield, you would use ________ days in the year.

A) 260
B) 360
C) 365
D) 366

Question 21

Which one of the following provides the best example of securitization?

A) convertible bond
B) call option
C) mortgage pass-through security
D) preferred stock

Question 22

Which of the following indexes are market value-weighted?
I) The NYSE Composite
II) The S&P 500
III)The Wilshire 5000

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 23

Currently, the Dow Jones Industrial Average is computed by ________.

A) adding the prices of 30 large "blue-chip" stocks and dividing by 30
B) calculating the total market value of the 30 firms in the index and dividing by 30
C) measuring the current total market value of the 30 stocks in the index relative to the total value on the previous day
D) adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends

Question 24

A firm that has large securities holdings and wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following?

A) reverse repurchase agreement
B) bankers' acceptance
C) commercial paper
D) repurchase agreement

Question 25

Which of the following are true statements about T-bills?
I) T-bills typically sell in denominations of $10,000.
II) Income earned on T-bills is exempt from all federal taxes.
III) Income earned on T-bills is exempt from state and local taxes.

A) I only
B) I and II only
C) I and III only
D) I, II, and III

Question 26

A ________ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date.

A) call option
B) futures contract
C) put option
D) interest rate swap

Question 27

An investor buys a T-bill at a bank discount quote of 4.80 with 150 days to maturity for $9800. The bill has a face value of $10,000. The investor's bond equivalent yield on this investment is ________.

A) 4.8%
B) 4.97%
C) 5.47%
D) 5.74%

Question 28

An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and 6.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, ________.

A) 5% and 6.4%
B) 5% and 5.44%
C) 4.25% and 6.4%
D) 5.75% and 5.44%

Question 29

A bond that has no collateral is called a ________.

A) callable bond
B) debenture
C) junk bond
D) mortgage

Question 30

The interest rate charged by large banks in London to lend money among themselves is called ________.

A) the prime rate
B) the discount rate
C) the federal funds rate
D) LIBOR

Question 31

If a Treasury note has a bid price of $996.25, the quoted bid price in the Wall Street Journal would be ________.

A) 99:5/8
B) 99:6/10
C) 99.6250
D) none of the options

Question 32

Which one of the following is a true statement regarding the Dow Jones Industrial Average?

A) It is a value-weighted average of 30 large industrial stocks.
B) It is a price-weighted average of 30 large industrial stocks.
C) It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange.
D) It is a value-weighted average of all stocks traded on the New York Stock Exchange.

Question 33

________ is not a money market instrument.

A) A certificate of deposit
B) A Treasury bill
C) A Treasury bond
D) Commercial paper

Question 34

Which one of the following is a true statement regarding corporate bonds?

A) A corporate callable bond gives its 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 convertible bond gives its holder the right to exchange it for a specified number of the company's common shares.
D) Holders of corporate bonds have voting rights in the company.

Question 35

A T-bill quote sheet has 90-day T-bill quotes with a 4.92 ask and a 4.86 bid. If the bill has a $10,000 face value, an investor could sell this bill for ________.

A) $10,000
B) $9,878.50
C) $9,877
D) $9,880.16

Question 36

Treasury bills are financial instruments issued by ________ to raise funds.

A) commercial banks
B) the federal government
C) large corporations
D) state and city governments

Question 37

TIPS are ________.

A) Treasury bonds that pay no interest and are sold at a discount
B) U.K. bonds that protect investors from default risk
C) securities that trade on the Toronto stock index
D) Treasury bonds that protect investors from inflation

Question 38

The U.K. stock index is the ________.

A) DAX
B) FTSE
C) GSE
D) TSE

Question 39

A ________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date.

A) call option
B) futures contract
C) put option
D) interest rate swap

Question 40

The yield on tax-exempt bonds is ________.

A) usually less than 50% of the yield on taxable bonds
B) normally about 90% of the yield on taxable bonds
C) greater than the yield on taxable bonds
D) less than the yield on taxable bonds

Question 41

June call and put options on King Books Inc. are available with exercise prices of $30, $35, and $40. Among the different exercise prices, the call option with the ________ exercise price and the put option with the ________ exercise price will have the greatest value.

A) $40; $30
B) $30; $40
C) $35; $35
D) $40; $40

Question 42

In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs ________.

A) automatically
B) by adjusting the divisor
C) by adjusting the numerator
D) by adjusting the market value weights

Question 43

Ownership of a put option entitles the owner to the ________ to ________ a specific stock, on or before a specific date, at a specific price.

A) right; buy
B) right; sell
C) obligation; buy
D) obligation; sell

Question 44

The Dow Jones Industrial Average is ________.

A) a price-weighted average
B) a value weight and average
C) an equally weighted average
D) an unweighted average

Question 45

Which of the following is used to back international sales of goods and services?

A) certificate of deposit
B) bankers' acceptance
C) eurodollar deposits
D) commercial paper

Question 46

A bond issued by the state of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket, this bond would provide you with an equivalent taxable yield of ________.

A) 4.5%
B) 7.25%
C) 8.68%
D) none of these options

Question 47

Which of the following does not approximate the performance of a buy-and-hold portfolio strategy?

A) an equally weighted index
B) a price-weighted index
C) a value-weighted index
D) all of these options (Weights are not a factor in this situation.)

Question 48

Investors will earn higher rates of returns on TIPS than on equivalent default-risk standard bonds if ________.

A) inflation is lower than anticipated over the investment period
B) inflation is higher than anticipated over the investment period
C) the U.S. dollar increases in value against the euro
D) the spread between commercial paper and Treasury securities remains low

Question 49

The Standard & Poor's 500 is ________ weighted index.

A) an equally
B) a price-
C) a value-
D) a share-

Question 50

Treasury notes have initial maturities between ________ years.

A) 2 and 4
B) 5 and 10
C) 10 and 30
D) 1 and 10

Question 51

Large well-known companies often issue their own short-term unsecured debt notes directly to the public, rather than borrowing from banks; their notes are called ________.

A) certificates of deposit
B) repurchase agreements
C) bankers' acceptances
D) commercial paper

Question 52

Which of the following is most like a short-term collateralized loan?

A) certificate of deposit
B) repurchase agreement
C) bankers' acceptance
D) commercial paper

Question 53

An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond or a corporate bond. She looks up municipal bond yields (rm) but wishes to calculate the taxable equivalent yield r. The formula she should use is given by ________.

A) r = rm × (1 - 28%)
B) r = rm / (1 - 72%)
C) r = rm × (1 - 72%)
D) r = rm / (1 - 28%)

Question 54

The price quotations of Treasury bonds in the Wall Street Journal show a bid price of 104.5313 and an ask price of 104.5489. If you sell a Treasury bond, you expect to receive ________.

A) $ 1,000.00
B) $ 1,045.00
C) $ 1,045.31
D) $ 1,045.48

Question 55

Ownership of a call option entitles the owner to the ________ to ________ a specific stock, on or before a specific date, at a specific price.

A) right; buy
B) right; sell
C) obligation; buy
D) obligation; sell

Question 56

Preferred stock is like long-term debt in that ________.

A) it gives the holder voting power regarding the firm's management
B) it promises to pay to its holder a fixed stream of income each year
C) the preferred dividend is a tax-deductible expense for the firm
D) in the event of bankruptcy preferred stock has equal status with debt

Question 57

The Hang Seng index reflects market performance on which of the following major stock markets?

A) Japan
B) Singapore
C) Taiwan
D) Hong Kong

Question 58

The purchase of a futures contract gives the buyer ________.

A) the right to buy an item at a specified price
B) the right to sell an item at a specified price
C) the obligation to buy an item at a specified price
D) the obligation to sell an item at a specified price

Question 59

The ________ the ratio of municipal bond yields to corporate bond yields, the ________ the cutoff tax bracket at which more individuals will prefer to hold municipal debt.

A) higher; lower
B) lower; lower
C) higher; higher
D) The answer cannot be determined without more information.

Question 60

Eurodollars are ________.

A) dollar-denominated deposits at any foreign bank or foreign branch of an American bank
B) dollar-denominated bonds issued by firms outside their home market
C) currency issued by Euro Disney and traded in France
D) dollars that wind up in banks as a result of money-laundering activities

Question 61

In a ________ index, changes in the value of the stock with the greatest market value will move the index value the most, everything else equal.

A) value-weighted index
B) equally weighted index
C) price-weighted index
D) bond price index

Question 62

If you thought prices of stock would be rising over the next few months, you might want to ________ on the stock.

A) purchase a call option
B) purchase a put option
C) sell a futures contract
D) place a short-sale order

Question 63

The rate of interest on short-term loans among financial institutions is ________.

A) bankers' acceptances
B) brokers' calls
C) federal funds rate
D) LIBOR

Question 64

Which of the following is not a characteristic of common stock ownership?

A) residual claimant
B) unlimited liability
C) voting rights
D) right to any dividend paid by the corporation.

Question 65

A benchmark market value index is comprised of three stocks. Yesterday the three stocks were priced at $12, $20, and $60. The number of outstanding shares for each is 600,000 shares, 500,000 shares, and 200,000 shares, respectively. If the stock prices changed to $16, $18, and $62 today respectively, what is the 1-day rate of return on the index?

A) 5.78%
B) 4.35%
C) 6.16%
D) 7.42%

Question 66

An index computed from a simple average of returns is a/an ________.

A) equal weighted index
B) value weighted index
C) price weighted index
D) share weighted index

Question 67

Which of the following mortgage scenarios will benefit the homeowner the most?

A) adjustable rate mortgage when interest rate increases.
B) fixed rate mortgage when interest rates falls.
C) fixed rate mortgage when interest rate rises.
D) None of these options, as the banker's interest will always be protected.

Question 68

A tax free municipal bond provides a yield of 2.34%. What is the equivalent taxable yield on the bond given a 28% tax bracket?

A) 2.34%
B) 2.68%
C) 3.25%
D) 4.92%

Question 69

Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350 million, and $150 million, respectively. If you were to construct a price-weighted index of the three stocks, what would be the index value?

A) 300
B) 39
C) 43
D) 30

Question 70

A typical bond price quote includes all but which one of the following?

A) coupon
B) closing bond price
C) yield to maturity
D) dividend yield

Question 71

What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%?

A) 6.48%
B) 7.25%
C) 8.02%
D) 9%

Question 72

You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wanted to construct an index to track your portfolio performance, your best match for your portfolio would be to construct ________.

A) a value-weighted index
B) an equally weighted index
C) a price-weighted index
D) a bond price index

Question 73

A corporation in a 34% tax bracket invests in the preferred stock of another company and earns a 6% pretax rate of return. An individual investor in a 15% tax bracket invests in the same preferred stock and earns the same pretax return. The after-tax return to the corporation is ________, and the after-tax return to the individual investor is ________.

A) 3.96%; 5.1%
B) 5.39%; 5.1%
C) 6%; 6%
D) 3.96%; 6%

Question 74

A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend received by stock investors must have been ________ per share.

A) $0.55
B) $1.80
C) $0.45
D) $1.25

Question 75

All but which one of the following indices is value weighted?

A) NASDAQ Composite
B) S&P 500
C) Wilshire 5000
D) DJIA

Question 76

A tax free municipal bond provides a yield of 3.2%. What is the equivalent taxable yield on the bond given a 35% tax bracket?

A) 3.2%
B) 3.68%
C) 4.92%
D) 5%

Question 77

A benchmark index has three stocks priced at $23, $43, and $56. The number of outstanding shares for each is 350,000 shares, 405,000 shares, and 553,000 shares, respectively. If the market value weighted index was 970 yesterday and the prices changed to $23, $41, and $58 today, what is the new index value?

A) 960
B) 970
C) 975
D) 985

Question 78

What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11, 2001?

A) no change, as both yields will remain the same
B) increase, as the spread usually increases in response to a crisis
C) decrease, as the spread usually decreases in response to a crisis
D) no change, as both yields will move in the same direction

Question 79

The Hydro Index is a price weighted stock index based on the 5 largest boat manufacturers in the nation. The stock prices for the five stocks are $10, $20, $80, $50 and $40. The price of the last stock was just split 2 for 1 and the stock price was halved from $40 to $20. What is the new divisor for a price weighted index?

A) 5.00
B) 4.85
C) 4.50
D) 4.75

Question 80

Which of the following is not considered a money market investment?

A) bankers' acceptance
B) eurodollar
C) repurchase agreement
D) Treasury note