Essentials of Investments, 11e (Bodie)
Chapter 2 Asset Classes and Financial Instruments
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 weeks
II. 16 weeks
III. 26 weeks
IV. 32 weeks
A) I and II only
B) I and III only
C) I, II, and III only
D) I, II, III, and IV
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) 1/128 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 ask and a 4.86 bid. If the bill has a
$10,000 face value, an investor could sell this bill for ________.
A) $10,000
B) $9,878.50
C) $9,877
D) $9,880.16
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 for
$9800. The bill has a face value of $10,000. The investor’s bond equivalent yield on this
investment is ________.
A) 4.8%
B) 4.97%
C) 5.47%
D) 5.74%
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 Composite
II. The S&P 500
III.The Wilshire 5000
A) I and II only
B) II and III only
C) I and III only
D) I, II, and III
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) 99:5/8
B) 99:6/10
C) 99.6250
D) none of the options
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
104.5313 and an ask price of 104.5489. If you sell a Treasury bond, you expect to receive
________.
A) $ 1,000.00
B) $ 1,045.00
C) $ 1,045.31
D) $ 1,045.48
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