Deck 2: Asset Classes and Financial Instruments

Question 1

Which one of the following terms best describes Eurodollars?

A) Dollar-denominated deposits only in European banks.
B) Dollar-denominated deposits at branches of foreign banks in the U.S.
C) Dollar-denominated deposits at foreign banks and branches of American banks outside the U.S.
D) Dollar-denominated deposits at American banks in the U.S.
E) Dollars that have been exchanged for European currency.

Answer 1

C

Question 2

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

A) Repurchase agreements
B) Eurodollars
C) Real estate investment trusts
D) Money market mutual funds
E) Commercial paper

Answer 2

C

Question 3

The interest rate charged by banks with excess reserves at a Federal Reserve Bank to banks needing overnight loans to meet reserve requirements is called the

A) prime rate.
B) discount rate.
C) federal funds rate.
D) call money rate.
E) money market rate.

Answer 3

C

Question 4

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.

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

Question 5

Treasury Inflation-Protected Securities (TIPS)

A) pay a fixed interest rate for life.
B) pay a variable interest rate that is indexed to inflation but maintain a constant principal.
C) provide a variable stream of income in real (inflation-adjusted) dollars.
D) have their principal adjusted in proportion to the Consumer Price Index.
E) provide a constant stream of income in real (inflation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index.

Question 6

The money market is a subsector of the

A) commodity market.
B) capital market.
C) derivatives market.
D) equity market.
E) None of the options are correct.

Question 7

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.

Question 8

T-bills are financial instruments initially sold by ________ to raise funds.

A) commercial banks
B) the U.S. government
C) state and local governments
D) agencies of the federal government
E) the U.S. government and agencies of the federal government

Question 9

Which of the following indices is (are) market-value weighted?I) The New York Stock Exchange Composite IndexII) The Standard and Poor's 500 Stock IndexIII) The Dow Jones Industrial Average

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

Question 10

The largest component of the fixed-income market is _______ debt.

A) Treasury
B) asset-backed
C) corporate
D) tax-exempt
E) mortgage-backed

Question 11

The smallest component of the money market is

A) repurchase agreements.
B) small-denomination time deposits.
C) savings deposits.
D) money market mutual funds.
E) commercial paper.

Question 12

Which of the following is true regarding a firm's securities?

A) Common dividends are paid before preferred dividends.
B) Preferred stockholders have voting rights.
C) Preferred dividends are usually cumulative.
D) Preferred dividends are contractual obligations.
E) Common dividends can usually be paid if preferred dividends have been skipped.

Question 13

The Dow Jones Industrial Average (DJIA) 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) adding the prices of the 30 stocks in the index and dividing by a divisor.
D) adding the prices of the 500 stocks in the index and dividing by a divisor.
E) adding the prices of the 30 stocks in the index and dividing by the value of these stocks as of some base date period.

Question 14

In the event of the firm's bankruptcy,

A) the most shareholders can lose is their original investment in the firm's stock.
B) common shareholders are the first in line to receive their claims on the firm's assets.
C) bondholders have claim to what is left from the liquidation of the firm's assets after paying the shareholders.
D) the claims of preferred shareholders are honored before those of the common shareholders.
E) the most shareholders can lose is their original investment in the firm's stock and the claims of preferred shareholders are honored before those of the common shareholders.

Question 15

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.

Question 16

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.

Question 17

Which of the following is true of 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) The divisor must be adjusted for stock splits.
D) It is a value-weighted average of 30 large industrial stocks, and the divisor must be adjusted for stock splits.
E) It is a price-weighted average of 30 large industrial stocks, and the divisor must be adjusted for stock splits.

Question 18

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

A) Treasury bill
B) Negotiable certificate of deposit
C) Commercial paper
D) Treasury bond
E) Eurodollar account

Question 19

The smallest component of the fixed-income market is _______ debt.

A) Treasury
B) other asset-backed
C) corporate
D) tax-exempt
E) mortgage-backed

Question 20

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

A) the Federal Reserve Bank
B) commercial banks
C) large, well-known companies
D) the New York Stock Exchange
E) state and local governments

Question 21

Federally-sponsored agency debt

A) is legally insured by the U.S. Treasury.
B) would probably be backed by the U.S. Treasury in the event of a near-default.
C) has a small positive yield spread relative to U.S. Treasuries.
D) would probably be backed by the U.S. Treasury in the event of a near-default and has a small positive yield spread relative to U.S. Treasuries.
E) is legally insured by the U.S. Treasury and has a small positive yield spread relative to U.S. Treasuries.

Question 22

Brokers' calls

A) are funds used by individuals who wish to buy stocks on margin.
B) are funds borrowed by the broker from the bank, with the agreement to repay the bank immediately if requested to do so.
C) carry a rate that is usually about one percentage point lower than the rate on U.S. T-bills.
D) are funds used by individuals who wish to buy stocks on margin and are funds borrowed by the broker from the bank, with the agreement to repay the bank immediately if requested to do so.
E) are funds used by individuals who wish to buy stocks on margin and carry a rate that is usually about one percentage point lower than the rate on U.S. T-bills.

Question 23

In calculating the Standard and Poor's stock price indices, the adjustment for stock split occurs

A) by adjusting the divisor.
B) automatically.
C) by adjusting the numerator.
D) quarterly on the last trading day of each quarter.

Question 24

The stocks on the Dow Jones Industrial Average

A) have remained unchanged since the creation of the index.
B) include most of the stocks traded on the NYSE.
C) are changed occasionally as circumstances dictate.
D) consist of stocks on which the investor cannot lose money.
E) include most of the stocks traded on the NYSE and are changed occasionally as circumstances dictate.

Question 25

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

Question 26

If the market prices of each of the 30 stocks in the Dow Jones Industrial Average (DJIA) all change by the same percentage amount during a given day, which stock will have the greatest impact on the DJIA?

A) The stock trading at the highest dollar price per share
B) The stock having the greatest amount of debt in its capital structure
C) The stock having the greatest amount of equity in its capital structure
D) The stock having the lowest volatility

Question 27

The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104.25 and a bid price of 104.125. As a seller of the bond, what is the dollar price you expect to receive?

A) $1,048.00
B) $1,042.50
C) $1,041.25
D) $1,041.75
E) $1,040.40

Question 28

If a Treasury note has a bid price of $975, the quoted bid price in the Wall Street Journal would be

A) 97:50.
B) 97:16.
C) 97:80.
D) 94:24.
E) 97:75.

Question 29

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

A) 8.46%.
B) 10.75%.
C) 12.40%.
D) 3.58%.

Question 30

The yield to maturity reported in the financial pages for Treasury securities

A) is calculated by compounding the semiannual yield.
B) is calculated by doubling the semiannual yield.
C) is also called the bond equivalent yield.
D) is calculated as the yield-to-call for premium bonds.
E) is calculated by doubling the semiannual yield and is also called the bond equivalent yield.

Question 31

If a Treasury note has a bid price of $995, the quoted bid price in the Wall Street Journal would be

A) 99:50.
B) 99:16.
C) 99:80.
D) 99:24.
E) 99:32.

Question 32

Consider the following three stocks: $\begin{array}{lll}\text { Stock } & \text { Price Number of shares}& \text { outstanding } \\\text { Stock A } & \$ 40 & 200 \\\text { Stock B } & \$ 70 & 500 \\\text { Stock C } & \$ 10 & 600\end{array}$
The value-weighted index constructed with the three stocks using a divisor of 100 is

A) 1.2.
B) 1200.
C) 490.
D) 4900.
E) 49.

Question 33

A form of short-term borrowing by dealers in government securities is (are)

A) reserve requirements.
B) repurchase agreements.
C) bankers' acceptances.
D) commercial paper.
E) brokers' calls.

Question 34

Consider the following three stocks: $\begin{array}{lll}\text { Stock } & \text { Price Number of shares}& \text { outstanding } \\\text { Stock A } & \$ 40 & 200 \\\text { Stock B } & \$ 70 & 500 \\\text { Stock C } & \$ 10 & 600\end{array}$
Assume at these prices that the value-weighted index constructed with the three stocks is 490. What would the index be if stock B is split 2 for 1 and stock C 4 for 1?

A) 265
B) 430
C) 355
D) 490
E) 1000

Question 35

Consider the following three stocks: $\begin{array}{lll}\text { Stock } & \text { Price Number of shares}& \text { outstanding } \\\text { Stock A } & \$ 40 & 200 \\\text { Stock B } & \$ 70 & 500 \\\text { Stock C } & \$ 10 & 600\end{array}$ The price-weighted index constructed with the three stocks is

A) 30.
B) 40.
C) 50.
D) 60.
E) 70.

Question 36

The index that includes the largest number of actively-traded stocks is

A) the NASDAQ Composite Index.
B) the NYSE Composite Index.
C) the Wilshire 5000 Index.
D) the Value Line Composite Index.
E) the Russell Index.

Question 37

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 24% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.

A) 7.5%; 10.3%
B) 7.5%; 7.83%
C) 5.63%; 7.73%
D) 5.63%; 10.3%
E) 10%; 10%

Question 38

The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104.25 and a bid price of 104.125. As a buyer of the bond, what is the dollar price you expect to pay?

A) $1,048.00
B) $1,042.50
C) $1,044.00
D) $1,041.25
E) $1,040.40

Question 39

Which of the following statements regarding the Dow Jones Industrial Average (DJIA) is false?

A) The DJIA is a measure of the performance of the stock market.
B) The DJIA consists of 30 blue chip stocks.
C) The DJIA is affected equally by changes in low- and high-priced stocks.
D) The DJIA divisor needs to be adjusted for stock splits.
E) The value of the DJIA is much higher than individual stock prices.

Question 40

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 22% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.

A) 8%; 10%
B) 8%; 7.8%
C) 6.4%; 8%
D) 6.4%; 10%
E) 10%; 10%

Question 41

With regard to a futures contract, the long 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.

Question 42

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.

Question 43

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.

Question 44

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 be determined from the information given.

Question 45

Which of the following is not a mortgage-related government or government-sponsored agency?

A) The Federal Home Loan Bank
B) The Federal National Mortgage Association
C) The U.S. Treasury
D) Freddie Mac
E) Ginnie Mae

Question 46

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.

Question 47

Freddie Mac and Ginnie Mae were organized to provide

A) a primary market for mortgage transactions.
B) liquidity for the mortgage market.
C) a primary market for farm loan transactions.
D) liquidity for the farm loan market.
E) a source of funds for government agencies.

Question 48

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 12% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.

A) 7.2%; 9.1%
B) 7.2%; 8.008%
C) 6.12%; 7.735%
D) 8.471%; 9.1%

Question 49

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%

Question 50

For a taxpayer in the 12% 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) 7.05%.

Question 51

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.

Question 52

What does the term negotiable mean, with regard to negotiable certificates of deposit?

A) The CD can be sold to another investor if the owner needs to cash it in before its maturity date.
B) The rate of interest on the CD is subject to negotiation.
C) The CD is automatically reinvested at its maturity date.
D) The CD has staggered maturity dates built in.
E) The interest rate paid on the CD will vary with a designated market rate.

Question 53

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?

A) 33%
B) 72%
C) 15%
D) 28%
E) Cannot be determined from the information given.

Question 54

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 be determined from the information given.

Question 55

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

Question 56

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 24% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.

A) 6%; 8%
B) 4.5%; 6%
C) 4.5%; 8%
D) 6%; 6.08%

Question 57

The ____ index represents the performance of the Japanese stock market.

A) DAX
B) FTSE
C) Nikkei
D) Hang Seng

Question 58

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.

Question 59

For a taxpayer in the 24% marginal tax bracket, a 20-year municipal bond currently yielding 5.5% would offer an equivalent taxable yield of

A) 7.24%.
B) 10.75%.
C) 5.5%.
D) 4.125%.

Question 60

The ____ index represents the performance of the German stock market.

A) DAX
B) FTSE
C) Nikkei
D) Hang Seng

Question 61

The ultimate stock index in the U.S. is the

A) Wilshire 5000.
B) DJIA.
C) S&P 500.
D) Russell 2000.

Question 62

Certificates of deposit are insured for up to ____________ in the event of bank insolvency.

A) $10,000
B) $100,000
C) $250,000
D) $500,000

Question 63

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

A) 50
B) 70
C) 20
D) 15
E) 62

Question 64

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

A) Eurobond.
B) Yankee bond.
C) Samurai bond.
D) Bulldog bond.

Question 65

Unsecured bonds are called

A) junk bonds.
B) debentures.
C) indentures.
D) subordinated debentures.
E) either debentures or subordinated debentures.

Question 66

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.

Question 67

The ____ is an example of a U.S. index of small firms.

A) S&P 500
B) DJIA
C) DAX
D) Russell 2000
E) All of the options are correct.

Question 68

Certificates of deposit are insured by the

A) SPIC.
B) CFTC.
C) Lloyds of London.
D) FDIC.
E) All of the options are correct.

Question 69

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

Question 70

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

Question 71

The ____ is an example of a U.S. index of large firms.

A) Wilshire 5000
B) DJIA
C) DAX
D) Russell 2000
E) All of the options.

Question 72

Which of the following is used extensively in foreign trade when the creditworthiness of one trader is unknown to the trading partner?

A) Repos
B) Bankers' acceptances
C) Eurodollars
D) Federal funds

Question 73

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

Question 74

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.

Question 75

The ____ index represents the performance of the Canadian stock market.

A) DAX
B) FTSE
C) TSX
D) Hang Seng

Question 76

A bond that can be retired prior to maturity by the issuer is a(n) ____________ bond.

A) convertible
B) secured
C) unsecured
D) callable
E) Yankee

Question 77

The ____ index represents the performance of the U.K. stock market.

A) DAX
B) FTSE
C) Nikkei
D) Hang Seng

Question 78

The largest component of the money market is/are

A) repurchase agreements.
B) money market mutual funds.
C) T-bills.
D) Eurodollars.
E) savings deposits.

Question 79

The ____ index represents the performance of the Hong Kong stock market.

A) DAX
B) FTSE
C) Nikkei
D) Hang Seng

Question 80

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