Chapter 2—THE BUSINESS ENVIRONMENT
MULTIPLE CHOICE
1. Financial intermediaries include
a.
securities brokers
b.
securities dealers
c.
investment bankers
d.
none of the above
2. The following are listed security exchanges in the United Sates:
a.
New York Stock Exchange
b.
Pacific Exchange
c.
Cincinnati Exchange
d.
All the above are listed exchanges
3. The Standard and Poor’s 500 Stock Price Index is a ____ index.
a.
price weighted
b.
market value weighted
c.
price average
d.
none of the above
4. Securities not listed on exchanges are said to be traded
a.
on the AMEX
b.
as composite transactions
c.
over the counter
d.
on the regional exchanges
5. Financial intermediaries include
a.
securities brokers
b.
commercial banks
c.
securities dealers
d.
all of the above
6. ____ markets deal in long-term securities having maturities greater than one year.
a.
Credit
b.
Money
c.
Commodity futures
d.
Capital
7. ____ markets deal in short-term securities having maturities of one year or less.
a.
Credit
b.
Money
c.
Capital
d.
a and b only
8. Which of the following, if any, are not financial intermediaries?
a.
commercial bank
b.
thrift institution
c.
securities broker
d.
all are financial intermediaries
9. In the ____ market, the firm receives the proceeds from the sale of its securities.
a.
over-the-counter
b.
secondary
c.
fully integrated
d.
none of the above
10. A savings and loan association is an example of which type of financial intermediary?
a.
commercial bank
b.
investment company
c.
finance company
d.
thrift institution
11. Financial intermediaries
a.
issue secondary claims to the lender
b.
are compensated for their services by fixed fees
c.
include both brokers and dealers
d.
issue primary claims to the lender
12. Money markets deal in securities having maturities of ____; capital market securities have maturities
____.
a.
less than 18 months, greater than 18 months
b.
one year or less, greater than one year
c.
less than 9 months, greater than 9 months
d.
less than 6 months, greater than 6 months
13. Finance companies obtain a significant amount of their funds by
a.
issuing their own equity securities
b.
accepting both demand and time deposits
c.
issuing their own debt securities
d.
none of the above
14. When an investor purchases shares in a no-load common stock mutual fund, she is using a(n)
a.
primary intermediary
b.
financial intermediary
c.
over-the-counter market
d.
broker
15. The Dow Jones Industrial Average is calculated using the
a.
total market value of 30 stocks
b.
price of 30 stocks
c.
a weighted index of 30 stocks
d.
industrial, railroad, financial, and utility stocks
16. Insider trading is defined as
a.
an individual using proper trading rules
b.
an individual buying or selling using non-SEC disclosure rules
c.
an individual buying or selling on the basis of material nonpublic information
d.
a zero-plus game
17. The U.S. financial markets are said to be highly informationally efficient. This means
a.
they process stock trades accurately and quickly
b.
the market provides quick access to a firm’s financial statements
c.
they quickly reflect information relevant to determining stock value
d.
accurate stock quotes are quickly available to all investors
18. Ex post returns differ from ____ returns in that they represent ____ values rather than ____ values.
a.
ex ante; estimated; actual
b.
ex post; accounting; economic
c.
ex ante; actual; estimated
d.
ex ante; economic; accounting
19. The fact that no investor can expect to earn excess returns based on an investment strategy using only
historical stock price or return information is an example of ____ market efficiency.
a.
strong-form
b.
weak-form
c.
semiweak-form
d.
semistrong-form
20. With semistrong-form market efficiency, no investor can expect to earn excess returns based on an
investment strategy using any ____ information.
a.
past market price
b.
market value
c.
publicly available
d.
private
21. The following is from a bond quotation from The Wall Street Journal:
General Motors 8.375 coupon; Last price 117.260; Yield 6.986
If the bond has a face (par) value of $1000, what was the market price?
a.
$8,375
b.
$1,172.60
c.
$1,000
d.
$6,986
22. The following bond quotation indicates that the holder expects to receive ____ in interest annually:
PAC 11s09
a.
$90
b.
$116
c.
$1,000
d.
$110
23. From the following stock quotation, what is AT&T’s dividend yield?
ATT 0.95 4.4 8 65529 21.49 0.62
a.
0.95%
b.
12%
c.
4.4%
d.
21.49%
24. The P/E ratio indicates
a.
how much investors are willing to pay for $1 of current earnings
b.
the current yield
c.
the current price
d.
how risky the stock is
25. In stock quotations, the last column – showing the net change – indicates the net change in
a.
a share’s price during the day
b.
the dividend yield
c.
the closing price from the previous day’s close
d.
a share’s high price during the day
26. What is the current value of the common stock of The Limited if you know the current dividend yield
is 6.14%, the P/E is 16, and the annual dividend is $1.35?
a.
$21.60
b.
$21.99
c.
$8.29
d.
$98.24
27. Bell South pays a quarterly dividend of $0.70, has a P/E ratio of 14 and closed yesterday at $48.25.
What is the dividend yield?
a.
5.45%
b.
1.45%
c.
5.8%
d.
7.25%
28. Christy purchased 100 shares of General Data for $48 last year. Yesterday she sold the stock for $45.
If she received $4 in dividends during the time she held the security, what is her holding period return?
a.
2.08%
b.
8.30%
c.
-6.30%
d.
14.60%
29. If an investor purchased 100 shares of BGE for $30 per share, 6 months ago, and then sold the stock
today for $33 per share, what was the investor’s holding period return if a total of $1 per share in
dividends was received over the 6 month period?
a.
10%
b.
27.1%
c.
17.1%
d.
None of the above
30. What is the holding period return to an investor who bought 100 shares of Charter Oil nine months ago
for $36 per share, received two $50 dividend checks, and sold the stock today at $38 a share.
a.
5.56%
b.
8.33%
c.
11.11%
d.
6.94%
31. If a treasury bond can be purchased for $9,450 today and the bond holder will receive $850 in interest
and the $10,000 face value at maturity, what is the percentage holding period return?
a.
14.8%
b.
5.8%
c.
6.7%
d.
none of the above
32. You bought 100 shares of KeyMid six months ago for $14 per share and sold it yesterday for $12. The
company paid a total of $0.24 per share in dividends to you during the time you held the stock. What
was your holding period return?
a.
-25.14%
b.
-16.67%
c.
-12.57%
d.
16.00%
33. Maher purchased 100 shares of Boston Chicken at $30 per share last spring and sold them in six
months for $36 per share. The stock paid no dividend. What was Maher’s holding period return?
a.
40%
b.
20%
c.
10%
d.
5%
34. Two years ago you bought 100 shares of Biogen convertible preferred stock at $25 per share. The
preferred stock had an annual dividend of $2.125 per share, and a total of $3.19 in dividends per share
have been paid so far. Today the company announced that the stock is redeemable for $26.70 plus
accrued and unpaid dividends, for a total of $27.76. Alternatively, holders may convert their shares of
preferred stock at a conversion rate of 1.6393 shares of Biogen common stock for each share of
preferred stock. If the closing price of Biogen common stock is $27.50, what is your holding period
return?
a.
93.08%
b.
23.80%
c.
80.32%
d.
none of the above
35. Lear purchased 100 shares of Biotech at $30 per share last year and sold them eleven months later for
$24 per share. The shares split 2 for 1 shortly after Lear purchased the stock. If the stock paid $0.25
per share in dividends last year, what is Lear’s holding period return?
a.
61.67%
b.
-19.17%
c.
21.67%
d.
6.17%
36. Which of the following statements about this stock quotation is/are correct?
-2.5 42.17 16.52 WashCent WC 1.18 4.3 23 32995 27.16 +.85
I. Washington Central sold 32,995 shares during yesterday’s trading.
II. The highest price paid for Washington Central stock for this calendar year is $42.17.
a.
I only
b.
II only
c.
Both I and II
d.
Neither I nor II
37. Stock quotations are designed to give the investor specific information. The P/E ratio indicates all of
the following EXCEPT:
a.
It indicates how many dollars an investor will spend to receive one dollar of earnings.
b.
It indicates the rate of return that the investor should expect to receive.
c.
It is an indication of the risk inherent in the firm.
d.
It is based on many factors including growth potential and size of the firm.
38. What is the difference between a realized returns and an expected returns
a.
Realized returns are easier to determine.
b.
Expected returns are more realistic.
c.
Prices and cash distributions for expected returns are estimated values.
d.
There is no difference between realized returns and expected returns.
39. What term is used to identify the difference between the yield to maturity on a corporate bond as
compared to the yield to maturity on a Treasury bond?
a.
current yield spread
b.
buying spread
c.
return spread
d.
default risk spread
40. There are three main types of derivative securities. Which of the following is NOT one of them?
a.
Options
b.
Futures contracts
c.
Bond contracts
d.
Forward contracts
41. Which of the following statements regarding options is/are correct?
I. An option gives the holder an obligation to buy or sell an asset at a set price.
II. An option has a specified time period during which it can be exercised.
a.
I only
b.
II only
c.
Both I and II
d.
Neither I nor II
42. Options can be used for limiting loss exposure. This is called:
a.
hedging
b.
speculating
c.
efficient marketing
d.
accommodation
43. What is the form filed with the SEC prior to the annual shareholder meetings which details the matters
to be discussed and voted upon?
a.
filing statement
b.
proxy statement
c.
agenda statement
d.
10-K form
44. Which of the following is a way that electronic communications networks (ECN) differ from
organized stock exchanges or OTC dealers?
a.
Brokerage commissions are higher for the ECN due to SEC oversight.
b.
ECN participants can find out who the buyers and sellers are before the sale is made.
c.
It is an unreliable trading exchange since matches can only be made by the exchange.
d.
ECN’s are designed to bring buyers and sellers together directly with complete anonymity.
45. Which of the following statements is/are correct about spreads?
I. A spread is the difference between the brokerage commission and the capital gains that are earned.
II. A spread is the amount of profit a dealer makes.
a.
I only
b.
II only
c.
Both I and II
d.
Neither I nor II
46. Which of the following is correct about bond quotations?
a.
The current yield is a cumulative return which considers both the interest and capital gains
earned.
b.
The yield to maturity is determined by multiplying the coupon rate by par.
c.
The coupon rate is listed as a dollar amount.
d.
The quoted price of a bond is listed as a percent of par.
47. All of the following are advantages to using financial intermediaries EXCEPT:
a.
The investor can select individual stocks.
b.
Financial intermediaries have a certain level of expertise.
c.
Financial intermediaries pool investors’ money to provide diversification.
d.
Financial managers provide a risk management function.
ESSAY
1. What are the significant changes in the regulation of financial markets that were accomplished by the
passage of the Sarbanes-Oxley Act of 2002?
2. Explain how primary claims are sold.
3. List some of the potential benefits that financial intermediaries offer to investors.