FIN 320 Week 5 Mid-Term Exam Strayer

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Chapters 1 Through 8

Chapter 1: ___________________________________________________________________________1.Financial assets represent _____ of total assets of U.S. households.

A.over 60%

B.over 90%

C.under 10%

D.about 30%

2.Real assets in the economy include all but which one of the following?

A.Land

B.Buildings

C.Consumer durables

D.Common stock

3.Net worth represents _____ of the liabilities and net worth of commercial banks.

A.about 51%

B.about 91%

C.about 11%

D.about 31%

4.According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households is ___.

A.mutual fund shares

B.real estate

C.pension reserves

D.corporate equity

5.According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is ________.

A.mortgages

B.consumer credit

C.bank loans

D.gambling debts

6.____ is not a derivative security.

A.A share of common stock

B.A call option

C.A futures contract

D.None of these options (All of the answers are derivative securities.)

7.According to the Flow of Funds Accounts of the United States, the largest financial asset of U.S. households is ____.

A.mutual fund shares

B.corporate equity

C.pension reserves

D.personal trusts

8.Active trading in markets and competition among securities analysts helps ensure that:

I. Security prices approach informational efficiencyII. Riskier securities are priced to offer higher potential returnsIII. Investors are unlikely to be able to consistently find under- or overvalued securities

A.I only

B.I and II only

C.II and III only

D.I, II, and III

9.The material wealth of society is determined by the economy's _________, which is a function of the economy's _________.

A.investment bankers; financial assets

B.investment bankers; real assets

C.productive capacity; financial assets

D.productive capacity; real assets

10.Which of the following is not a money market security?

A.U.S. Treasury bill

B.6-month maturity certificate of deposit

C.Common stock

D.Bankers' acceptance

11.__________ assets generate net income to the economy, and __________ assets define allocation of income among investors.

A.Financial, financial

B.Financial, real

C.Real, financial

D.Real, real

12.Which of the following are financial assets?

I. Debt securitiesII. Equity securitiesIII. Derivative securities

A.I only

B.I and II only

C.II and III only

D.I, II, and III

13.__________ are examples of financial intermediaries.

A.Commercial banks

B.Insurance companies

C.Investment companies

D.All of these options

14.Asset allocation refers to _________.

A.the allocation of the investment portfolio across broad asset classes

B.the analysis of the value of securities

C.the choice of specific assets within each asset class

D.none of these options

15.Which one of the following best describes the purpose of derivatives markets?

A.Transferring risk from one party to another

B.Investing for a short time period to earn a small rate of return

C.Investing for retirement

D.Earning interest income

16.More than _____________ of currency is traded each day in the market for foreign exchange.

A.$300 million

B.$1 billion

C.$30 billion

D.$1 trillion

17.Security selection refers to the ________.

A.allocation of the investment portfolio across broad asset classes

B.analysis of the value of securities

C.choice of specific securities within each asset class

D.top-down method of investing

18.Which of the following is an example of an agency problem?

A.Managers engage in empire building.

B.Managers protect their jobs by avoiding risky projects.

C.Managers over consume luxuries such as corporate jets.

D.All of these options are examples of agency problems.

19._____ is a mechanism for mitigating potential agency problems.

A.Tying income of managers to success of the firm

B.Directors defending top management

C.Antitakeover strategies

D.The straight voting method of electing the board of directors

20.__________ is (are) real assets.

A.Bonds

B.Production equipment

C.Stocks

D.Commercial paper

21.__________ portfolio construction starts with selecting attractively priced securities.

A.Bottom-up

B.Top-down

C.Upside-down

D.Side-to-side

22.In a market economy, capital resources are primarily allocated by ____________.

A.governments

B.the SEC

C.financial markets

D.investment bankers

23.__________ represents an ownership share in a corporation.

A.A call option

B.Common stock

C.A fixed-income security

D.Preferred stock

24.The value of a derivative security _________.

A.depends on the value of another related security

B.affects the value of a related security

C.is unrelated to the value of a related security

D.can be integrated only by calculus professors

25.Commodity and derivative markets allow firms to adjust their _________.

A.management styles

B.focus from their main line of business to their investment portfolios

C.ways of doing business so that they'll always have positive returns

D.exposure to various business risks

26.__________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis.

A.Active

B.Momentum

C.Passive

D.Market-timing

27.Financial markets allow for all but which one of the following?

A.Shift consumption through time from higher-income periods to lower

B.Price securities according to their riskiness

C.Channel funds from lenders of funds to borrowers of funds

D.Allow most participants to routinely earn high returns with low risk

28.Financial intermediaries exist because small investors cannot efficiently _________.

A.diversify their portfolios

B.gather information

C.monitor their portfolios

D.all of these options

29.Methods of encouraging managers to act in shareholders' best interest include:

I. Threat of takeoverII. Proxy fights for control of the board of directorsIII. Tying managers' compensation to stock price performance

A.I only

B.I and II only

C.II and III only

D.I, II, and III

30.Firms that specialize in helping companies raise capital by selling securities to the public are called _________.

A.pension funds

B.investment banks

C.savings banks

D.REITs

31.In securities markets, there should be a risk-return trade-off with higher-risk assets having _________ expected returns than lower-risk assets.

A.higher

B.lower

C.the same

D.The answer cannot be determined from the information given.

32.When the market is more optimistic about a firm, its share price will ______; as a result, it will need to issue _______ shares to raise funds that are needed.

A.rise; fewer

B.fall; fewer

C.rise; more

D.fall; more

33.Security selection refers to _________.

A.choosing specific securities within each asset class

B.deciding how much to invest in each asset class

C.deciding how much to invest in the market portfolio versus the riskless asset

D.deciding how much to hedge

34.An example of a derivative security is _________.

A.a common share of General Motors

B.a call option on Intel stock

C.a Ford bond

D.a U.S. Treasury bond

35.__________ portfolio construction starts with asset allocation.

A.Bottom-up

B.Top-down

C.Upside-down

D.Side-to-side

36.Which one of the following firms falsely claimed to have a $4.8 billion bank account at Bank of America and vastly understated its debts, eventually resulting in the firm's bankruptcy?

A.WorldCom

B.Enron

C.Parmalat

D.Global Crossing

37.Debt securities promise:

I. A fixed stream of incomeII. A stream of income that is determined according to a specific formulaIII. A share in the profits of the issuing entity

A.I only

B.I or II only

C.I and III only

D.II or III only

38.The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following?

A.Required that corporations have more independent directors

B.Required that the CFO personally vouch for the corporation's financial statements

C.Required that firms could no longer employ investment bankers to sell securities to the public

D.Required the creation of a new board to oversee the auditing of public companies

39.The success of common stock investments depends on the success of _________.

A.derivative securities

B.fixed-income securities

C.the firm and its real assets

D.government methods of allocating capital

40.The historical average rate of return on large company stocks since 1926 has been _____.

A.5%

B.8%

C.12%

D.20%

41.The average rate of return on U.S. Treasury bills since 1926 was _________.

A.less than 1%

B.less than 3%

C.less than 4%

D.less than 7%

42.An example of a real asset is:

I. A college educationII. Customer goodwillIII. A patent

A.I only

B.II only

C.I and III only

D.I, II, and III

43.The 2002 law designed to improve corporate governance is titled the _____.

A.Pension Reform Act

B.ERISA

C.Financial Services Modernization Act

D.Sarbanes-Oxley Act

44.Which of the following is not a financial intermediary?

A.a mutual fund

B.an insurance company

C.a real estate brokerage firm

D.a savings and loan company

45.The combined liabilities of American households represent approximately __________ of combined assets.

A.11%

B.19%

C.25%

D.33%

46.In 2011 real assets represented approximately __________ of the total asset holdings of American households.

A.32%

B.42%

C.48%

D.55%

47.In 2011 mortgages represented approximately __________ of total liabilities and net worth of American households.

A.12%

B.14%

C.28%

D.42%

48.Liabilities equal approximately _____ of total assets for nonfinancial U.S. businesses.

A.10%

B.25%

C.48%

D.75%

49.Which of the following is not an example of a financial intermediary?

A.Goldman Sachs

B.Allstate Insurance

C.First Interstate Bank

D.IBM

50.Real assets represent about ____ of total assets for commercial banks.

A.1%

B.15%

C.25%

D.40%

51.Money market securities are characterized by:

I. Maturity less than 1 yearII. Safety of the principal investmentIII. Low rates of return

A.I only

B.I and II only

C.I and III only

D.I, II, and III

52.After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of ______.

A.asset allocation

B.security analysis

C.top-down portfolio management

D.passive management

53.After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _____.

A.asset allocation

B.security analysis

C.top-down portfolio management

D.passive management

54.Suppose an investor is considering one of two investments that are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to _____.

A.earn no more than the Treasury-bill rate on either security.

B.pay less for the security that has higher risk.

C.pay less for the security that has lower risk.

D.earn more if interest rates are lower.

55.The efficient market hypothesis suggests that _______.

A.active portfolio management strategies are the most appropriate investment strategies

B.passive portfolio management strategies are the most appropriate investment strategies

C.either active or passive strategies may be appropriate, depending on the expected direction of the market

D.a bottom-up approach is the most appropriate investment strategy

56.In a perfectly efficient market the best investment strategy is probably _____.

A.an active strategy.

B.a passive strategy.

C.asset allocation.

D.market timing.

57.Market signals will help to allocate capital efficiently only if investors are acting _____.

A.on the basis of their individual hunches.

B.as directed by financial experts.

C.as dominant forces in the economy.

D.on accurate information.

58.Which of the following is (are) true about hedge funds?

I. They are open to institutional investors.II. They are open to wealthy individuals.III. They are more likely than mutual funds to pursue simple strategies.

A.I and II only

B.I and III only

C.II and III only

D.I, II, and III

59.Venture capital is _________.

A.frequently used to expand the businesses of well-established companies

B.supplied by venture capital funds and individuals to start-up companies

C.illegal under current U.S. laws

D.most frequently issued with the help of investment bankers

60.Individuals may find it more advantageous to purchase claims from a financial intermediary rather than directly purchasing claims in capital markets because:

I. Intermediaries are better diversified than most individualsII. Intermediaries can exploit economies of scale in investing that individual investors cannotIII. Intermediated investments usually offer higher rates of return than direct capital market claims

A.I only

B.I and II only

C.II and III only

D.I, II, and III

61.Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1,000 shares of Microsoft common stock. Surf City Software has exchanged a _____ asset for a _____ asset in this transaction.

A.real; real

B.financial; financial

C.real; financial

D.financial; real

62.Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay back the loan over 5 years. In this transaction, _____.

A.a new financial asset was created

B.a financial asset was traded for a real asset

C.a financial asset was destroyed

D.a real asset was created

63.Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005?

A.General Electric

B.Parmalat

C.Enron

D.WorldCom

64.Accounting scandals can often be attributed to a particular concept in the study of finance known as the _____.

A.agency problem

B.risk-return trade-off

C.allocation of risk

D.securitization

65.An intermediary that pools and manages funds for many investors is called ______.

A.an investment company

B.a savings and loan

C.an investment banker

D.a commercial bank

66.Financial institutions that specialize in assisting corporations in primary market transactions are called _______.

A.mutual funds

B.investment bankers

C.pension funds

D.globalization specialists

67.When a pass-through mortgage security is issued, what does the issuing agency expect to receive?

A.The amount of the original loan plus a servicing fee

B.The principal and interest that are paid by the homeowner

C.The principal and interest that are paid by the homeowner, minus a servicing fee

D.The interest paid by the homeowner, plus a servicing fee

68.In 2008 the largest corporate bankruptcy in U.S. history involved the investment banking firm of ______.

A.Goldman Sachs

B.Lehman Brothers

C.Morgan Stanley

D.Merrill Lynch

69.The inability of shareholders to influence the decisions of managers, despite overwhelming shareholder support, is a breakdown in what process or mechanism?

A.Auditing

B.Public finance

C.Corporate governance

D.Public reporting

70.Real assets are ______.

A.assets used to produce goods and services

B.always the same as financial assets

C.always equal to liabilities

D.claims on a company's income

71.A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________.

A.private equity investments

B.securitization

C.negative analyst recommendations

D.online trading

72.In recent years the greatest dollar amount of securitization occurred for which type of loan?

A.Home mortgages

B.Credit card debt

C.Automobile loans

D.Equipment leasing

73.Which of the following is (are) true about nonconforming mortgage loans?

A.They are also known as subprime loans.

B.They have higher default risk than conforming loans.

C.They were able to be offered without due diligence.

D.All of these options are true.

74.The systemic risk that led to the financial crisis of 2008 was increased by _____.

A.collateralized debt obligations

B.subprime mortgages

C.credit default swaps

D.all of the options

75.An investment adviser has decided to purchase gold, real estate, stocks, and bonds in equal amounts. This decision reflects which part of the investment process?

A.Asset allocation

B.Investment analysis

C.Portfolio analysis

D.Security selection

Chapter 2: ___________________________________________________________________________1.Which of the following is not a money market instrument?

A.Treasury bill

B.Commercial paper

C.Preferred stock

D.Bankers' acceptance

2.T-bills are issued with initial maturities of:

I. 4 weeksII. 16 weeksIII. 26 weeksIV. 32 weeks

A.I and II only

B.I and III only

C.I, II, and III only

D.I, II, III, and IV

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

A.260

B.360

C.365

D.366

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

A.eurodollars

B.LIBOR

C.fed funds

D.bankers' acceptance

5.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

6.The most marketable money market security is _____.

A.Treasury bills

B.bankers' acceptances

C.certificates of deposit

D.common stock

7.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.1/64 of a point.

8.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

9.______ would not be included in the EAFE index.

A.Australia

B.Canada

C.France

D.Japan

10._____ is considered to be an emerging market country.

A.France

B.Norway

C.Brazil

D.Canada

11.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.

12.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

13.The German stock market is measured by which market index?

A.FTSE

B.Dow Jones 30

C.DAX

D.Nikkei

14.Deposits of commercial banks at the Federal Reserve are called _____.

A.bankers' acceptances

B.federal funds

C.repurchase agreements

D.time deposits

15.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.

16.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

17.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

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

19.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

20.The maximum maturity on commercial paper is _____.

A.270 days

B.180 days

C.90 days

D.30 days

21.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.

22.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

23.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

24.A bond that has no collateral is called a _________.

A.callable bond

B.debenture

C.junk bond

D.mortgage

25.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

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

A.$10,000

B.$9,878.50

C.$9,877

D.$9,880.16

27.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.

28.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

29.__________ is not a money market instrument.

A.A certificate of deposit

B.A Treasury bill

C.A Treasury bond

D.Commercial paper

30.An investor buys a T-bill at a bank discount quote of 4.80 with 150 days to maturity. The investor's actual annual rate of return on this investment is _____.

A.4.8%

B.4.97%

C.5.47%

D.5.74%

31.The U.K. stock index is the _________.

A.DAX

B.FTSE

C.GSE

D.TSE

32.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

33.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

34.Which of the following indexes are market value-weighted?

I. The NYSE CompositeII. The S&P 500III. The Wilshire 5000

A.I and II only

B.II and III only

C.I and III only

D.I, II, and III

35.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

36.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

37.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

38.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%

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

A.99:25

B.99:63

C.99:20

D.99:08

40.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

41.The price quotations of Treasury bonds in the Wall Street Journal show a bid price of 102:12 and an ask price of 102:14. If you sell a Treasury bond, you expect to receive _________.

A.$1,024.75

B.$1,024.38

C.$1,023.75

D.$1,022.50

42.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

43.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

44.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

45.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.)

46.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

47.Suppose the market prices of the 30 stocks in the Dow Jones Industrial Average all change by the same dollar amount on a given day. Assuming there are no stock splits, which stock will have the greatest impact on the average?

A.The one with the highest price

B.The one with the lowest price

C.All 30 stocks will have the same impact.

D.The answer cannot be determined from the information given.

48.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

49.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

50.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

51.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%)

52.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

53.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

54.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.

55.Which of the following types of bonds are excluded from most bond indexes?

A.Corporate bonds

B.Junk bonds

C.Municipal bonds

D.None of these options

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

A.Japan

B.Singapore

C.Taiwan

D.Hong Kong

57.The Standard & Poor's 500 is __________ weighted index.

A.an equally

B.a price-

C.a value-

D.a share-

58.A firm that fails to pay dividends on its preferred stock is said to be _________.

A.insolvent

B.in arrears

C.insufferable

D.delinquent

59.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

60.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

61.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

62.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

63.Treasury notes have initial maturities between ________ years.

A.2 and 4

B.5 and 10

C.10 and 30

D.1 and 10

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

A.Residual claimant

B.Unlimited liability

C.Voting rights

D.Limited life of the security

65.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

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

A.Daily high price for the bond

B.Closing bond price

C.Yield to maturity

D.Dividend yield

67.What are business firms most likely to use derivative securities for?

A.Hedging

B.Speculating

C.Doing calculus problems

D.Market making

68.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

69.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

70.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

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

A.Bankers' acceptance

B.Eurodollar

C.Repurchase agreement

D.Treasury note

72.The Federal Reserve Board of Governors directly controls which of the following interest rates?

A.Bankers' acceptances

B.Brokers' calls

C.Federal funds

D.LIBOR

73.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

74.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

75.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%

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

A.NASDAQ Composite

B.S&P 500

C.Wilshire 5000

D.DJIA

77.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%

78.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%

79.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

80.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%

81.The Chompers Index is a price weighted stock index based on the 3 largest fast food chains. The stock prices for the three stocks are $54, $23, and $44. What is the price weighted index value of the Chompers Index?

A.23.43

B.35.36

C.40.33

D.49.58

82.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

83.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, what is the new index value?

A.960

B.970

C.975

D.985

84.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%

85.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.

86.The TED spread refers to

A.the difference between the Treasury bond rate and the Treasury bill rate.

B.the difference between the Treasury note rate and the Treasury bill rate.

C.the difference between the LIBOR rate and the Treasury bill rate.

D.the difference between the LIBOR rate and the Treasury bond rate.

Chapter 3: ___________________________________________________________________________1.Underwriting is one of the services provided by _____.

A.the SEC

B.investment bankers

C.publicly traded companies

D.FDIC

2.Under firm-commitment underwriting, the ______ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price.

A.red herring

B.issuing company

C.initial stockholder

D.underwriter

3.Explicit costs of an IPO tend to be around ______ of the funds raised.

A.1%

B.7%

C.15%

D.25%

4.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?

A.$90,000

B.$1,290,000

C.$2,390,000

D.$1,690,000

5.A red herring becomes a prospectus when ____.

A.the preliminary registration statement is approved by the SEC

B.the IPO is complete

C.the offering is seasoned

D.the lockup period expires

6.Private placements can be advantageous, compared to public issue, because:

I. Private placements are cheaper to market than public issues.II. Private placements may still be sold to the general public under SEC Rule 144A.III. Privately placed securities trade on secondary markets.

A.I only

B.I and III only

C.II and III only

D.I, II, and III

7.A level _____ subscriber to the NASDAQ system may enter bid and ask prices.

A.1

B.2

C.3

D.4

8.Which one of the following statements about IPOs is not true?

A.IPOs generally underperform in the short run.

B.IPOs often provide very good initial returns to investors.

C.IPOs generally provide superior long-term performance as compared to other stocks.

D.Shares in IPOs are often primarily allocated to institutional investors.

9.The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss?

A.9%

B.15%

C.48%

D.57%

10.The NYSE acquired the ECN _______, and NASDAQ recently acquired the ECN ________.

A.Archipelago; Instinet

B.Instinet; Archipelago

C.Island; Instinet

D.LSE; Euronext

11.Rank the following types of markets from least integrated and organized to most integrated and organized:

I. Brokered marketsII. Continuous auction marketsIII. Dealer marketsIV. Direct search markets

A.IV, II, I, III

B.I, III, IV, II

C.II, III, IV, I

D.IV, I, III, II

12.As a result of flash crashes, the SEC is trying circuit breakers that will halt trading for 5 minutes if large stocks' prices change by more than _____ in a 5-minute period.

A.10%

B.20%

C.30%

D.40%

13.Which one of the following is not an example of a brokered market?

A.Residential real estate market

B.Market for large block security transactions

C.Primary market for securities

D.NASDAQ

14.More than ______ of all trading is believed to be initiated by computer algorithms.

A.25%

B.40%

C.50%

D.75%

15.Purchases of new issues of stock take place _________.

A.at the desk of the Fed

B.in the primary market

C.in the secondary market

D.in the money markets

16.Initial margin requirements on stocks are set by _________.

A.the Federal Deposit Insurance Corporation

B.the Federal Reserve

C.the New York Stock Exchange

D.the Securities and Exchange Commission

17.Which one of the following types of markets requires the greatest level of trading activity to be cost-effective?

A.Broker market

B.Dealer market

C.Continuous auction market

D.Direct search market

18.Which one of the following is a false statement regarding NYSE specialists?

A.On a stock exchange most buy or sell orders are executed via an electronic system rather than through specialists.

B.Specialists cannot trade for their own accounts.

C.Specialists maintain limit order books, which contain the outstanding unexecuted limit orders.

D.Specialists stand ready to trade at narrower bid-ask spreads in cases where the spread has become too wide.

19.Restrictions on trading involving insider information apply to:

I. Corporate officers and directorsII. Major stockholdersIII. Relatives of corporate directors and officers

A.I only

B.I and II only

C.II and III only

D.I, II, and III

20.An order to buy or sell a security at the current price is a ______________.

A.limit order

B.market order

C.stop-loss order

D.stop-buy order

21.The term inside quotes refers to _____.

A.the difference between the lowest bid price and the highest ask price in the limit order book.

B.the difference between the highest bid price and the lowest ask price in the limit order book.

C.the difference between the lowest bid price and the lowest ask price in the limit order book.

D.the difference between the highest bid price and the highest ask price in the limit order book.

22.The term latency refers to _____.

A.the lag between when an order is placed on the NYSE and when it is executed.

B.the amount of time it takes to accept, process, and deliver a trading order.

C.the time it takes to implement new rules and procedures for stock exchanges and computer trading systems.

D.the lag between when an order is executed and when the investor takes possession of the securities.

23.If an investor places a _________ order, the stock will be sold if its price falls to the stipulated level. If an investor places a __________ order, the stock will be bought if its price rises above the stipulated level.

A.stop-buy; stop-loss

B.market; limit

C.stop-loss; stop-buy

D.limit; market

24.On a given day a stock dealer maintains a bid price of $1,000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades that totaled 500 bonds traded that day. What was the dealer's gross trading profit for this security?

A.$1,375

B.$500

C.$275

D.$1,450

25.Advantages of ECNs over traditional markets include all but which one of the following?

A.Lower transactions costs

B.Anonymity of the participants

C.Small amount of time needed to execute and order

D.Ability to handle very large orders

26.The __________ was established to protect investors from losses if their brokerage firms fail.

A.CFTC

B.SEC

C.SIPC

D.AIMR

27.When matching orders from the public, a specialist is required to use the _______.

A.lowest outstanding bid price and highest outstanding ask price

B.highest outstanding bid price and highest outstanding ask price

C.lowest outstanding bid price and lowest outstanding ask price

D.highest outstanding bid price and lowest outstanding ask price

28.The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________.

A.interest building

B.book building

C.market analysis

D.customer identification

29.The bulk of most initial public offerings (IPOs) of equity securities goes to ___________.

A.institutional investors

B.individual investors

C.the firm's current shareholders

D.day traders

30.Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.

A.overpriced

B.correctly priced

C.underpriced

D.mispriced, but without any particular bias

31.According to multiple studies by Ritter, initial public offerings tend to exhibit __________ performance initially and __________ performance over the long term.

A.bad; good

B.bad; bad

C.good; good

D.good; bad

32.Specialists try to maintain a narrow bid-ask spread because:

I. If the spread is too large, they will not participate in as many trades, losing commission income.II. The exchange requires specialists to maintain price continuity.III. Specialists are nonprofit entities designed to facilitate market transactions rather than make a profit.

A.I only

B.I and II only

C.II and III only

D.I, II, and III

33.In a __________ underwriting arrangement, the underwriter assumes the full risk that shares may not be sold to the public at the stipulated offering price.

A.best-efforts

B.firm-commitment

C.private placement

D.none of these options

34.The ______________ is the most important dealer market in the United States, and the ______________ is the most important auction market.

A.NYSE; NASDAQ

B.NASDAQ; NYSE

C.CME; OTC

D.AMEX; NYSE

35.The inside quotes on a limit order book can be found ______.

A.at the top of the list

B.at the bottom of the list

C.by taking the averages of the bid and ask prices on the list

D.only by direct contact with the specialist who maintains the book

36.The __________ system enables exchange members to send orders directly to a specialist over computer lines.

A.FAX

B.Direct Plus

C.NASDAQ

D.SUPERDOT

37.The fully automated trade-execution system installed on the NYSE is called _____.

A.FAX

B.Direct +

C.NASDAQ

D.SUPERDOT

38.The NYSE Hybrid Market allows _____.

A.individuals to send orders directly to a specialist

B.individuals to send orders directly to an electronic system

C.brokers to send orders directly to a specialist

D.brokers to send orders either to an electronic system or to a specialist

39.Approximately __________ of trades involving shares issued by firms listed on the New York Stock Exchange actually take place on the New York Stock Exchange.

A.50%

B.25%

C.60%

D.75%

40.The _________ price is the price at which a dealer is willing to purchase a security.

A.bid

B.ask

C.clearing

D.settlement

41.The _________ price is the price at which a dealer is willing to sell a security.

A.bid

B.ask

C.clearing

D.settlement

42.The difference between the price at which a dealer is willing to buy and the price at which a dealer is willing to sell is called the _________.

A.market spread

B.bid-ask spread

C.bid-ask gap

D.market variation

43.The bid-ask spread exists because of _______________.

A.market inefficiencies

B.discontinuities in the markets

C.the need for dealers to cover expenses and make a profit

D.lack of trading in thin markets

44.The NYSE has lost market share to ECNs in recent years. Part of the NYSE's response to the growth of ECNs has been to:

I. Purchase Archipelago, a major ECN, and rename it NYSE ArcaII. Enable automatic trade execution through its new Market CenterIII. Impose a tighter limit on bid-ask spreads

A.I only

B.II and III only

C.I and II only

D.I, II, and III

45.The cost of buying and selling a stock includes:

I. Broker's commissionsII. Dealer's bid-asked spreadIII. Price concessions that investors may be forced to make

A.I and II only

B.II and III only

C.I and III only

D.I, II, and III

46.Which of the following is (are) true about dark pools?

I. They allow anonymity in trading.II. They often involve large blocks of stocks.III. Trades made through them might not be reported.

A.I and II only

B.II and III only

C.I and III only

D.I, II, and III

47.You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a _________.

A.limit buy order

B.limit sell order

C.market order

D.stop-loss order

48.Consider the following limit order book of a specialist. The last trade in the stock occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled?

A.$39.75

B.$40.25

C.$40.375

D.$40.25 or less

49.You find that the bid and ask prices for a stock are $10.25 and $10.30, respectively. If you purchase or sell the stock, you must pay a flat commission of $25. If you buy 100 shares of the stock and immediately sell them, what is your total implied and actual transaction cost in dollars?

A.$50

B.$25

C.$30

D.$55

50.According to SEC Rule 415 regarding shelf registration, firms can gradually sell securities to the public for __________ following initial registration.

A.1 year

B.2 years

C.3 years

D.4 years

51.What happened to the effective spread on trades when the SEC allowed the minimum tick size to move from one-eighth of a dollar to one-sixteenth of a dollar in 1997 and from one-sixteenth of a dollar to one cent in 2001?

A.The tick size increased in 1997 but decreased in 2001.

B.The tick size increased in both cases.

C.The tick size decreased in 1997 but increased in 2001.

D.The tick size decreased in both cases.

52.Assume you purchased 500 shares of XYZ common stock on margin at $40 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is _________.

A.$20,000

B.$12,000

C.$8,000

D.$15,000

53.You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________.

A.$4,500

B.$6,000

C.$9,000

D.$10,000

54.You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?

A.$50

B.$150

C.$10,000

D.Unlimited

55.You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible gain, ignoring transactions cost?

A.$50

B.$150

C.$10,000

D.Unlimited

56.You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you want to limit your loss to $2,500, you should place a stop-buy order at ____.

A.$37.50

B.$62.50

C.$56.25

D.$59.75

57.You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends, and ignore interest on the margin loan.)

A.$26.55

B.$35.71

C.$28.95

D.$30.77

58.You purchased 250 shares of common stock on margin for $25 per share. The initial margin is 65%, and the stock pays no dividend. Your rate of return would be __________ if you sell the stock at $32 per share. Ignore interest on margin.

A.35%

B.39%

C.43%

D.28%

59.You sell short 200 shares of Doggie Treats Inc. that are currently selling at $25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account, and the firm does not pay any dividends.)

A.$28.85

B.$35.71

C.$31.50

D.$32.25

60.Transactions that do not involve the original issue of securities take place in _________.

A.primary markets

B.secondary markets

C.over-the-counter markets

D.institutional markets

61.What was the result of high-frequency traders' leaving the market during the flash crash of 2010?

A.Market liquidity decreased.

B.Market liquidity increased.

C.Market volatility decreased.

D.Trading frequency increased.

62.__________ often accompany short sales and are used to limit potential losses from the short position.

A.Limit orders

B.Restricted orders

C.Limit loss orders

D.Stop-buy orders

63.The market share held by the NYSE Arca system in February 2011 was approximately ____.

A.65%

B.45%

C.25%

D.10%

64.Regulation NMS:

I. Supports the goal of integrating financial marketsII. Requires the use of specialists to execute tradesIII. Requires that exchanges honor quotes of other exchanges when they can be executed automatically

A.I only

B.I and II only

C.I and III only

D.I, II, and III

65.The commission structure on a stock purchase is $50 plus $.03 per share. If you purchase 600 shares of a stock selling for $65, what is your commission?

A.$35

B.$45

C.$53

D.$68

66.All major stock markets today are effectively _______________.

A.specialist trading systems

B.electronic trading systems

C.continuous auction markets

D.direct search markets

67.In 2008, the NASDAQ stock market merged with _____.

A.Euronext

B.OMX, which operates seven Nordic and Baltic stock exchanges

C.the International Securities Exchange (ISE)

D.BATS

68.You hold 5,000 shares of the 1 million outstanding shares of Wealthy Wranglers common stock. You've just learned that the company plans to issue more shares, so that 2 million shares will be outstanding. This is called _____.

A.an advanced equity offering

B.a weathered equity offering

C.a seasoned equity offering

D.a veteran equity offering

69.If an investor uses the full amount of margin available, the equity in a margin account used for a stock purchase can be found as ________.

A.market value of the stock - amount owed on the margin loan

B.market value of the stock + amount owed on the margin loan

C.market value of the stock margin loan

D.margin loan market value of the stock

70.The average depth of the limit order book is _____.

A.lower for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index

B.higher for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index

C.about the same for both the large stocks in the S&P 500 Index and the smaller stocks in the Russell 2000 Index

D.unrelated to the sizes of the stocks in the indexes

71.The CFA Institute Standards of Professional Conduct require that members _____.

A.place their clients' interests before their own

B.disclose conflicts of interest to clients

C.inform their employers that they are obligated to comply with the Standards of Professional Conduct

D.all of these options

72.Trading on inside information is:

I. Prohibited by federal lawII. Prohibited by the CFA Institute Standards of Professional ConductIII. Monitored by the SEC

A.I and II only

B.II and III only

C.I and III only

D.I, II, and III

73.The ____ requires full disclosure of relevant information relating to the issue of new securities.

A.Insider Trading Act of 1931

B.Securities Act of 1933

C.Securities Exchange Act of 1934

D.Investment Company Act of 1940

74.The SIPC was established by the ____.

A.Insider Trading Act of 1931

B.Securities Act of 1933

C.Securities Exchange Act of 1934

D.none of these options

75.Maintenance requirements for margin accounts are set by ____.

A.brokerage firms

B.the SEC

C.the Federal Reserve System's Board of Governors

D.the Supreme Court

76.Which of the following are true concerning short sales of exchange-listed stocks?

I. Proceeds from the short sale must be kept on deposit with the broker.II. Short-sellers must post margin with their broker to cover potential losses on the position.III. The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement.

A.I only

B.I and III only

C.I and II only

D.I, II, and III

77.The largest nongovernmental regulator of securities firms in the United States is ________.

A.the CFA Institute

B.the Public Company Accounting Oversight Board

C.the Financial Industry Regulatory Authority

D.the Board of Directors of NYSE Euronext

78.In ________ markets, participants post bid and ask prices at which they are willing to trade, but orders are not automatically executed by computer. ____________ execute trades for people other than themselves, and in _______________ markets a computer matches orders with an existing limit order book and executes the trades automatically.

A.electronic; Dealers; brokers

B.dealer; Brokers; electronic

C.direct search; Brokers; electronic

D.brokered; Dealers; direct search

79.An investor puts up $5,000 but borrows an equal amount of money from his broker to double the amount invested to $10,000. The broker charges 7% on the loan. The stock was originally purchased at $25 per share, and in 1 year the investor sells the stock for $28. The investor's rate of return was ____.

A.17%

B.12%

C.14%

D.19%

80.An investor buys $8,000 worth of a stock priced at $40 per share using 50% initial margin. The broker charges 6% on the margin loan and requires a 30% maintenance margin. In 1 year the investor has interest payable and gets a margin call. At the time of the margin call the stock's price must have been ____.

A.$20

B.$29.77

C.$30.29

D.$32.45

81.The New York Stock Exchange is a good example of _________.

A.an auction market

B.a brokered market

C.a dealer market

D.a direct search market

82.The primary market where new security issues are offered to the public is a good example of _________.

A.an auction market

B.a brokered market

C.a dealer market

D.a direct search market

83.The over-the-counter securities market is a good example of _________.

A.an auction market

B.a brokered market

C.a dealer market

D.a direct search market

84.An investor buys $16,000 worth of a stock priced at $20 per share using 60% initial margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. The stock pays a $.50-per-share dividend in 1 year, and then the stock is sold at $23 per share. What was the investor's rate of return?

A.17.5%

B.19.67%

C.23.83%

D.25.75%

85.Level 3 NASDAQ subscribers _____.

A.are registered market makers.

B.can post bid and ask prices.

C.have the fastest execution of trades.

D.all of these options.

86.You sell short 300 shares of Microsoft that are currently selling at $30 per share. You post the 50% margin required on the short sale. If you earn no interest on the funds in your margin account, what will be your rate of return after 1 year if Microsoft is selling at $27? (Ignore any dividends.)

A.10%

B.20%

C.6.67%

D.15%

87.The commission structure on a stock purchase is $20 plus $.02 per share. If you purchase four round lots of a stock selling for $56, what is your commission?

A.$20

B.$22

C.$26

D.$28

Chapter 4: ___________________________________________________________________________1.Which one of the following invests in a portfolio that is fixed for the life of the fund?

A.Mutual fund

B.Money market fund

C.Managed investment company

D.Unit investment trust

2.______ are partnerships of investors with portfolios that are larger than most individual investors but are still too small to warrant managing on a separate basis.

A.Commingled funds

B.Closed-end funds

C.REITs

D.Mutual funds

3.A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.

A.commingled pool

B.unit trust

C.hedge fund

D.money market fund

4.Advantages of investment companies to investors include all but which one of the following?

A.Record keeping and administration

B.Low-cost diversification

C.Professional management

D.Guaranteed rates of return

5.Which of the following typically employ significant amounts of leverage?

I. Hedge fundsII. REITsIII. Money market fundsIV. Equity mutual funds

A.I and II only

B.II and III only

C.III and IV only

D.I, II, and III only

6.The NAV of which funds is fixed at $1 per share?

A.Equity funds

B.Money market funds

C.Fixed-income funds

D.Commingled funds

7.The two principal types of REITs are equity trusts, which _______________, and mortgage trusts, which _______________.

A.invest directly in real estate; invest in mortgage and construction loans

B.invest in mortgage and construction loans; invest directly in real estate

C.use extensive leverage; distribute less than 95% of income to shareholders

D.distribute less than 95% of income to shareholders; use extensive leverage

8.A contingent deferred sales charge is commonly called a ____.

A.front-end load

B.back-end load

C.12b-1 charge

D.top-end sales commission

9.In the United States in 2011, there were approximately _______ mutual funds offered by fewer than _______ fund families.

A.12,000; 600

B.7,000; 100

C.8,000; 700

D.9,000; 300

10.Part B of a mutual fund prospectus contains information about:

I. Fund holdings by directors and officersII. Front-end and back-end loadsIII. Securities held by the fund at the end of the fiscal year

A.I only

B.I and II only

C.I and III only

D.I, II, and III

11.Mutual funds provide the following for their shareholders:

A.Diversification

B.Professional management

C.Record keeping and administration

D.All of these options

12.The average maturity of fund investments in a money market mutual fund is _______.

A.slightly more than 1 month

B.slightly more than 1 year

C.about 9 months

D.between 2 and 3 years

13.Rank the following fund categories from most risky to least risky:

I. Equity growth fundII. Balanced fundIII. Sector fundIV. Money market fund

A.IV, I, III, II

B.III, II, IV, I

C.I, II, III, IV

D.III, I, II, IV

14.Which of the following result in a taxable event for investors?

I. Short-term capital gain distributions from the fundII. Dividend distributions from the fundIII. Long-term capital gain distributions from the fund

A.I only

B.II only

C.I and II only

D.I, II, and III

15.The type of mutual fund that primarily engages in market timing is called _______.

A.a sector fund

B.an index fund

C.an ETF

D.an asset allocation fund

16.As of 2011, approximately _____ of mutual fund assets were invested in equity funds.

A.5%

B.54%

C.30%

D.12%

17.As of 2011, approximately _____ of mutual fund assets were invested in bond funds.

A.14%

B.19%

C.37%

D.47%

18.As of 2011, approximately _____ of mutual fund assets were invested in money market funds.

A.5%

B.26%

C.44%

D.66%

19.Management fees for open-end and closed-end funds typically range between _____ and _____.

A..2%; 1.5%

B..5%; 5%

C.2%; 5%

D.3%; 8%

20.The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________.

A.net asset value

B.average asset value

C.gross asset value

D.total asset value

21.Net asset value is defined as ________________________.

A.book value of assets divided by shares outstanding

B.book value of assets minus liabilities divided by shares outstanding

C.market value of assets divided by shares outstanding

D.market value of assets minus liabilities divided by shares outstanding

22.Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares?

A.$12

B.$9

C.$10

D.$1

23.Assume that you have recently purchased 100 shares in an investment company. Upon examining the balance sheet, you note that the firm is reporting $225 million in assets, $30 million in liabilities, and 10 million shares outstanding. What is the net asset value (NAV) of these shares?

A.$25.50

B.$22.50

C.$19.50

D.$1.95

24.The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so, the fund buys shares in each S&P 500 company __________.

A.in proportion to the market value weight of the firm's equity in the S&P 500

B.in proportion to the price weight of the stock in the S&P 500

C.by purchasing an equal number of shares of each stock in the S&P 500

D.by purchasing an equal dollar amount of shares of each stock in the S&P 500

25.Which of the following is not a type of managed investment company?

A.Unit investment trusts

B.Closed-end funds

C.Open-end funds

D.Hedge funds

26.Which of the following funds invest specifically in stocks of fast-growing companies?

A.Balanced funds

B.Growth equity funds

C.REITs

D.Equity income funds

27.A fund that invests in securities worldwide, including the United States, is called ______.

A.an international fund

B.an emerging market fund

C.a global fund

D.a regional fund

28.The greatest percentage of mutual fund assets are invested in ________.

A.bond funds

B.equity funds

C.hybrid funds

D.money market funds

29.Sponsors of unit investment trusts earn a profit by ___________________.

A.deducting management fees from fund assets

B.deducting a percentage of any gains in asset value

C.selling shares in the trust at a premium to the cost of acquiring the underlying assets

D.charging portfolio turnover fees

30.Investors who want to liquidate their holdings in a unit investment trust may ___________________.

A.sell their shares back to the trustee at a discount

B.sell their shares back to the trustee at net asset value

C.sell their shares on the open market

D.sell their shares at a premium to net asset value

31.Investors who want to liquidate their holdings in a closed-end fund may ___________________.

A.sell their shares back to the fund at a discount if they wish

B.sell their shares back to the fund at net asset value

C.sell their shares on the open market

D.sell their shares at a premium to net asset value if they wish

32.__________ fund is defined as one in which the fund charges a sales commission to either buy into or exit from the fund.

A.A load

B.A no-load

C.An index

D.A specialized-sector

33.Which of the following is a false statement regarding open-end mutual funds?

A.They offer investors a guaranteed rate of return.

B.They offer investors a well-diversified portfolio.

C.They redeem shares at their net asset value.

D.They offer low-cost diversification.

34.__________ funds stand ready to redeem or issue shares at their net asset value.

A.Closed-end

B.Index

C.Open-end

D.Hedge

35.Revenue sharing with respect to mutual funds refers to _________.

A.fund companies paying brokers if the broker recommends the fund to investors

B.allowing certain classes of investors to engage in market timing

C.charging loads to new investors in a mutual fund

D.directly marketing funds over the Internet

36.Higher portfolio turnover:

I. Results in greater tax liability for investorsII. Results in greater trading costs for the fund, which investors have to pay forIII. Is a characteristic of asset allocation funds

A.I only

B.II only

C.I and II only

D.I, II, and III

37.Low-load mutual funds have front-end loads of no more than _____.

A.2%

B.3%

C.4%

D.5%

38.Most real estate investment trusts (REITs) have a debt ratio of around _________.

A.10%

B.30%

C.50%

D.70%

39.Measured by assets, about _____ of funds are money market funds.

A.15%

B.25%

C.40%

D.60%

40.Which of the following is not a type of real estate investment trust?

I. Equity trust II. Debt trustIII. Mortgage trust IV. Unit trust

A.I and II only

B.II only

C.II and IV only

D.I, II, and III

41.______________________ are often called mutual funds.

A.Unit investment trusts

B.Open-end investment companies

C.Closed-end investment companies

D.REITs

42.Mutual funds account for roughly ______ of investment company assets.

A.30%

B.50%

C.70%

D.90%

43.An official description of a particular mutual fund's planned investment policy can be found in the fund's _____________.

A.prospectus

B.indenture

C.investment statement

D.12b-1 forms

44.Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ____________________.

A.income funds

B.balanced funds

C.asset allocation funds

D.index funds

45.______ are mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager's forecast of the performance of that market sector.

A.asset allocation funds

B.balanced funds

C.index funds

D.income funds

46.Specialized-sector funds concentrate their investments in _________________.

A.bonds of a particular maturity

B.geographic segments of the real estate market

C.government securities

D.securities issued by firms in a particular industry

47.If a mutual fund has multiple-class shares, which class typically has a front-end load?

A.Class A

B.Class B

C.Class C

D.Class D

48.The commission, or front-end load, paid when you purchase shares in mutual funds may not exceed __________.

A.3.5%

B.6%

C.8.5%

D.10%

49.You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a __________ rather than a __________, everything else equal.

A.12b-1 fee; front-end load

B.front-end load; 12b-1 fee

C.back-end load; front-end load

D.12b-1 fee; back-end load

50.Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses directly from the fund assets rather than billing investors. These fees are known as ____________.

A.direct operating expenses

B.back-end loads

C.12b-1 charges

D.front-end loads

51.The SEC requires funds to disclose:

I. After-tax returns for the past yearII. After-tax returns for the last 5-year periodIII. The tax impact of portfolio turnover

A.I only

B.I and II only

C.I and III only

D.I, II, and III

52.SEC Rule 12b-1 allows managers of certain funds to deduct __________ expenses from fund assets; however, these expenses may not exceed __________ of the fund's average net assets per year.

A.marketing; 1%

B.marketing; 5%

C.administrative; .5%

D.administrative; 2%

53.Consider a mutual fund with $300 million in assets at the start of the year and 12 million shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the year-end value, what is the rate of return on the fund?

A.15.64%

B.16%

C.17.25%

D.17.5%

54.Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start of the year and with $250 million in assets and 11 million shares at the end of the year. During the year investors have received income distributions of $2 per share and capital gain distributions of $.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund?

A.11.19%

B.23.75%

C.24.64%

D.The answer cannot be determined from the information given.

55.Consider a no-load mutual fund with $400 million in assets, 50 million in debt, and 15 million shares at the start of the year and with $500 million in assets, 40 million in debt, and 18 million shares at the end of the year. During the year investors have received income distributions of $.50 per share and capital gain distributions of $.30 per share. If the total expense ratio is .75%, what is the rate of return on the fund?

A.12.09%

B.12.99%

C.8.25%

D.The answer cannot be determined from the information given.

56.Mutual fund returns may be granted pass-through status if _________________.

A.virtually all income is distributed to shareholders

B.the fund qualifies for pass-through status according to the U.S. tax code

C.the fund is sufficiently diversified

D.All of these options (All of the answers must be true for pass-through status to be granted.)

57._____ is an example of an exchange-traded fund.

A.An SPDR or spider

B.A samurai

C.A Vanguard

D.An open-end fund

58.If you place an order to buy or sell a share of a mutual fund during the trading day, the order will be executed at _____.

A.the NAV calculated at the market close at 4 pm New York time

B.the real time NAV

C.the NAV delayed 15 minutes

D.the NAV calculated at the opening of the next day's trading

59.According to the 2011 Mutual Fund Fact Book, _______ of total assets were in taxable money market funds and _______ were tax-exempt money market funds.

A.35%; 14%

B.12.3%; 75%

C.22%; 3.9%

D.5%; 47%

60.In his 1970 study, Malkiel found that mutual funds that do well in one period have an approximately ________ chance of doing well in the subsequent-year period.

A.33%

B.52%

C.65%

D.85%

61.In a recent study, Malkiel found that evidence of persistence in the performance of mutual funds ________________ in the 1980s.

A.grew stronger

B.remained about the same

C.became slightly weaker

D.virtually disappeared

62.The ratio of trading activity of a portfolio to the assets of the portfolio is called the ____________.

A.reinvestment ratio

B.trading rate

C.portfolio turnover

D.tax yield

63.Which of the following ETFs tracks the S&P 500 Index?

A.Qubes

B.Diamonds

C.Vipers

D.Spiders

64.The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV?

A.9.26% premium

B.8.47% premium

C.9.26% discount

D.8.47% discount

65.The difference between balanced funds and asset allocation funds is that _____.

A.balanced funds invest in bonds while asset allocation funds do not

B.asset allocation funds invest in bonds while balanced funds do not

C.balanced funds have relatively stable proportions of stocks and bonds while the proportions may vary dramatically for asset allocation funds

D.balanced funds make no capital gain distributions and asset allocation funds make both dividend and capital gain distributions

66.The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B shares with a 12b-1 fee of 1% annually. If you plan to sell the fund after 4 years, are Class A or Class B shares the better choice? Assume a 10% annual return net of expenses before the 12b-1 fee is applied.

A.Class A.

B.Class B.

C.There is no difference.

D.The answer cannot be determined from the information given.

67.A mutual fund has total assets outstanding of $69 million. During the year the fund bought and sold assets equal to $17.25 million. This fund's turnover rate was _____.

A.25%

B.28.5%

C.18.63%

D.33.4%

68.Which type of investment fund is commonly known to invest in options and futures in large scale?

A.Commingled funds

B.Hedge funds

C.ETFs

D.REITs

69.Advantages of ETFs over mutual funds include all but which one of the following?

A.ETFs trade continuously, so investors can trade throughout the day.

B.ETFs can be sold short or purchased on margin, unlike fund shares.

C.ETF providers do not have to sell holdings to fund redemptions.

D.ETF values can diverge from NAV.

70.Harold has just taken his company public and owns a large quantity of restricted stock. For purposes of diversification, what fund might he help create in order to diversify his holdings?

A.Commingled funds

B.Hedge funds

C.ETF

D.REITs

71.Which of the following funds is most likely to have a debt ratio of 70% or higher?

A.Bond fund

B.Commingled fund

C.Mortgage-backed securities

D.REIT

72._______ have become the main way for investors to speculate in precious metals.

A.Strategic income funds

B.Balanced funds

C.Specialized-sector funds

D.Exchange-traded funds

73.From 1971 to 2010 the average return on the Wilshire 5000 Index was _________ the return of the average mutual fund.

A.identical to

B..8% higher than

C..8% lower than

D.1.3% higher than

74.An open-end fund has a NAV of $16.50 per share. The fund charges a 6% load. What is the offering price?

A.$14.57

B.$15.95

C.$17.55

D.$16.49

75.The offer price of an open-end fund is $18 and the fund is sold with a front-end load of 5%. What is the fund's NAV?

A.$18.74

B.$17.10

C.$15.40

D.$16.57

76.A mutual fund has $50 million in assets at the beginning of the year and 1 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund imposes a 12b-1 fee on all shares equal to 1%. The fee is imposed on year-end asset values. If there are no distributions, what is the end-of-year NAV for the fund?

A.$50

B.$55.44

C.$56.12

D.$54.55

77.The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has 700,000 shares outstanding and pays a $3 dividend, what is the dividend yield?

A.5%

B.10%

C.15%

D.20%

78.Which of the following funds are usually most tax-efficient?

A.Equity funds

B.Bond Funds

C.ETFs

D.Specialized-sector funds

79.You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 2% back-end load, which decreases .5% per year. How much will you pay in fees on a $10,000 investment that does not grow if you cash out after 3 years of no gain?

A.$103

B.$219

C.$553

D.$635

80.You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class A investment of $20,000 with no growth in value?

A.$658

B.$794

C.$885

D.$902

81.You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class B investment of $20,000 if you redeem shares with no growth in value?

A.$596

B.$794

C.$885

D.$902

82.You pay $21,600 to the Laramie Fund, which has a NAV of $18 per share at the beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund increased in value by 10% during the year. The fund's expense ratio is 1.3% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year?

A.4.35%

B.4.23%

C.6.45%

D.5.63%

83.Which one of the following statements about returns reported by mutual funds is not correct?

A.Reported returns are net of management expenses.

B.Reported returns are net of 12b-1 fees.

C.Reported returns are net of brokerage fees paid on the fund's trading activity.

D.None of these options. (All of the items are included in reported returns.)

84.The top Morningstar mutual fund performance rating is ________.

A.five stars

B.four stars

C.three stars

D.two stars

85.You are considering investing in a no-load mutual fund with an annual expense ratio of .6% and an annual 12b-1 fee of .75%. You could also invest in a bank CD paying 6.5% per year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD?

A.7.1%

B.7.45%

C.7.25%

D.7.85%

Chapter 5: ___________________________________________________________________________1.You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was ____.

A.4%

B.3.5%

C.7%

D.11%

2.The ______ measure of returns ignores compounding.

A.geometric average

B.arithmetic average

C.IRR

D.dollar-weighted

3.If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________.

A.geometric average return

B.arithmetic average return

C.dollar-weighted return

D.index return

4.Which one of the following measures time-weighted returns and allows for compounding?

A.Geometric average return

B.Arithmetic average return

C.Dollar-weighted return

D.Historical average return

5.Rank the following from highest average historical return to lowest average historical return from 1926 to 2010.

I. Small stocksII. Long-term bondsIII. Large stocksIV. T-bills

A.I, II, III, IV

B.III, IV, II, I

C.I, III, II, IV

D.III, I, II, IV

6.Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2010.

I. Small stocksII. Long-term bondsIII. Large stocksIV. T-bills

A.I, II, III, IV

B.III, IV, II, I

C.I, III, II, IV

D.III, I, II, IV

7.You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ________.

A.dollar-weighted return

B.geometric average return

C.arithmetic average return

D.index return

8.The complete portfolio refers to the investment in _________.

A.the risk-free asset

B.the risky portfolio

C.the risk-free asset and the risky portfolio combined

D.the risky portfolio and the index

9.You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen?

A.Dollar-weighted return

B.Geometric average return

C.Arithmetic average return

D.Index return

10.The holding period return on a stock is equal to _________.

A.the capital gain yield over the period plus the inflation rate

B.the capital gain yield over the period plus the dividend yield

C.the current yield plus the dividend yield

D.the dividend yield plus the risk premium

11.Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest?

A.Dollar-weighted return

B.Geometric average r