Economics Chapter 2 Alternatively Holders May Convert Their Shares Preferred

CHAPTER 2: THE DOMESTIC AND INTERNATIONAL FINANCIAL

MARKETPLACE

1. A multinational firm .

a. has direct investments in manufacturing facilities in more than one country

b. exports finished goods for sale in another country

c. imports raw materials from another country

d. has a manufacturing representative in another country

2. The difference between merchandise exports and imports is known as the .

a. transaction exposure

b. difference in purchasing power

c. goods and services trade balance

d. import/export reserve

3. The interest rate at which banks in the Eurocurrency market lend to each other is known as the .

a. Eurocurrency currency rate (ECR)

b. London interbank offer rate

c. exchange rate

d. interest rate parity

4. An exchange rate quoted as $1.47 per British pound is known as a quote.

a. hedge

b. direct

c. futures

d. indirect

5. If Japanese yen are deposited in a bank in Paris, the deposits would be called

a. Eurofrancs

b. European Currency Unit

c. Eurobond

d. Euroyen

Chapter 2: The Domestic and International Financial Marketplace

6. If the spot rate for Swiss francs is $0.6658/franc and the 180-day forward rate is $0.6637, the market is

indicating that the Swiss franc is expected to

a. strengthen relative to the dollar

b. weaken relative to the ECU

c. lose value relative to the dollar over the next 6 months

d. gain value relative to the dollar over the next 6 months

7. Which of the following is not a correct statement about foreign currency futures?

a. futures contracts have a standardized maturity date

b. futures contracts are an exchange–traded agreement

c. futures contracts are not liquid

d. futures contracts are “marked to market” daily

8. The most important foreign currency futures market in the United States is the .

a. Chicago Board of Trade

b. New York Mercantile Exchange

c. Commodity Exchange

d. Chicago Mercantile Exchange

9. The buyer of a foreign currency call option has the a fixed amount of a foreign currency.

a. right to sell

b. right but not the obligation to buy

c. obligation to buy, only at expiration,

d. obligation to buy

10. Eurodollars are U.S. dollars that have been deposited in

a. foreign banks

b. foreign branches of U.S. banks

c. foreign subsidiaries

d. foreign banks and foreign branches of U.S. banks

Chapter 2: The Domestic and International Financial Marketplace

11. If the exchange rate from U.S. dollars to Canadian dollars is $0.80/Canadian dollar, then the exchange rate

from Canadian dollars to U.S. dollars is

a. 0.80 Canadian $/US dollar

b. $1.25 Canadian $/US dollar

c. $1.20 Canadian $/US dollar

d. $8.00 Canadian $/US dollar

12. If the exchange rate from U.S. dollars to Swiss francs is $0.20/franc, then the exchange rate from francs to

dollars is

a. 0.20 francs/dollar

b. 0.80 francs/dollar

c. 5.0 francs/dollar

d. 2.0 francs/dollar

13. If the spot rate (in U.S. dollars) for Japanese Yen is 0.00703 and the 180 day forward rate is 0.00717, then

the Yen is trading at a(n) .

a. expected gain

b. premium

c. reciprocal

d. discount

14. If the forward (direct quote) exchange rate is lower than the spot rate, then the currency is said to be

trading at a _____.

a. forward premium

b. forward gain

c. forward discount

d. forward loss

15. Financial middlemen include

a. securities brokers

b. securities dealers

c. investment bankers

d. all of these

Chapter 2: The Domestic and International Financial Marketplace

16. The following are listed security exchanges in the United Sates:

a. New York Stock Exchange

b. Pacific Exchange

c. Cincinnati Exchange

d. All of these are listed exchanges

17. 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 these answers is correct

18. 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

19. Financial intermediaries include

a. securities brokers

b. commercial banks

c. securities dealers

d. all of these

20. markets deal in long-term securities having maturities greater than one year.

a. Credit

b. Money

c. Commodity futures

d. Capital

21. markets deal in short-term securities having maturities of one year or less.

a. Credit

b. Money

c. Capital

d. Capital and credit

Chapter 2: The Domestic and International Financial Marketplace

22. Which of the following (if any) are not financial intermediaries?

a. commercial bank

b. thrift institution

c. securities broker

d. all are financial intermediaries

23. In the market, the firm receives the proceeds from the sale of its securities.

a. over-the-counter

b. secondary

c. fully integrated

d. primary

24. 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

25. In any economy as a whole, the actual savings for a given period of time must the actual

investments.

a. be greater than

b. be unrelated to

c. equal

d. be less than

26. 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

27. The main purpose of an economy‘s financial system is to facilitate the transfer of funds from

a. financial middlemen to financial intermediaries

b. surplus spending units to deficit spending units

c. primary claimholders to secondary claimholders

d. lenders to financial intermediaries

Chapter 2: The Domestic and International Financial Marketplace

28. 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

29. Commercial banks are an important source of

a. mortgage loans

b. equity loans

c. real estate loans

d. short-term loans and term loans

30. 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. pooling funds

31. 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

32. The interest rate in the Eurodollar market is related to

a. the DOW

b. the stock market

c. the LIBOR

d. interest rates in the United States

33. Capital markets in financially sophisticated economies are not perfectly efficient because of

a. anomalous events

b. the Sun Spot theory

c. irrational investor behavior

d. anomalous events and irrational investor behavior

Chapter 2: The Domestic and International Financial Marketplace

34. Commercial banks are a major source of term loans. These loans are best used for:

a. financing the expansion of the business.

b. financing the establishment of overseas operations.

c. financing current assets like inventory and accounts receivable.

d. financing the payment of dividends.

35. 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

36. 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

37. 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

38. 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

39. 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

Chapter 2: The Domestic and International Financial Marketplace

40. 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

41. In an efficient capital market, all security investments will have:

a. a required rate of return that exceeds the cost of capital

b. a positive NPV

c. a required rate of return that is zero

d. a NPV of zero

42. In an efficient capital market, corporate diversification is .

a. unnecessary

b. inexpensive

c. of benefit to corporate managers

d. of great benefit

43. The barriers to the free flow of capital among the major world capital markets include all of the following

except:

a. low transaction costs

b. taxation policies

c. foreign exchange risks

d. legal restrictions

44. For the financial manager, taxes have important implications for

a. dividend policy

b. financial restructurings

c. capital structure policy

d. all of these

Chapter 2: The Domestic and International Financial Marketplace

45. Changes in the tax code that slow down depreciation, the present value of investment cash flows

and, therefore, make the investment desirable.

a. decrease, more

b. decrease, less

c. increase, more

d. increase, less

46. In an efficient capital market

a. required returns equal expected returns

b. investors will have holding period returns equal to zero

c. purchase of any security yields zero profit

d. purchasing stocks is no better than gambling

47. If the spot rate for the British pound is $1.5077 and the 180-day forward rate is $1.4934, what is the

annualized premium (discount)?

a. premium of 1.90%

b. premium of 0.97%

c. discount of (-)1.90%

d. discount of (-)0.97%

48. If the spot rate for the Japanese yen is $0.009204 and the 90-day forward rate is $0.009227, what is the

annualized premium (discount)?

a. premium of 1.00%

b. premium of 0.50%

c. discount of –0.99%

d. premium of 0.25%

49. Christy purchased 100 shares of Good Idea stock 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%

Chapter 2: The Domestic and International Financial Marketplace

50. If an investor purchased 100 shares of Biggee stock 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. 13.3%

51. What is the holding period return to an investor who bought 100 shares of Oil Slick stock 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%

52. 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. 12.6%

53. You bought 100 shares of Risky Venture stock 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%

Chapter 2: The Domestic and International Financial Marketplace

54. Maher purchased 100 shares of Chill Pill Pharmaceuticals 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%

55. Two years ago you bought 100 shares of Big Bubba 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 Big Bubba common stock for each share of preferred stock. If the closing

price of Big Bubba common stock is $27.50, what is your holding period return?

a. 93.08%

b. 23.80%

c. 80.32%

d. 64.60%

56. If the spot rate (in U.S. dollars) for Japanese Yen is 0.00703 and the 180 day forward rate is 0.00717, then

the Yen is trading at an annualized

a. premium of 4.04%

b. premium of 3.98%

c. premium of 3.91%

d. discount of 3.89%

57. Lear purchased 100 shares of Quitcha Twitchin Anti-inch Cream stock 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%

Chapter 2: The Domestic and International Financial Marketplace

58. Which of the following reflect (reflects) the implications of income taxes for financial managers:

I. Interest payments on debt incurred by the firm are not tax deductible for the firm.

II. Preferred stock and common stock dividends are tax deductible for the firm and are used as often

as possible to raise capital.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements I and II are correct.

d. Neither statement I nor II is correct.

59. Savings and loan associations are considered:

a. commercial banks

b. investment companies

c. thrift institutions

d. loan sharks

60. Which of the following is correct regarding the forms of market efficiency?

I. In an efficient capital market stock prices provide an unbiased estimate of the true value of an

enterprise.

II. In an efficient capital market, stock prices reflect the present value of the firm’s expected cash

flows.

a. Only statement I is correct

b. Only statement II is correct

c. Both statements I and II are correct

d. Neither statement I nor II is correct

61. Which of the following statements is/are correct about financial intermediaries?

I. Financial intermediaries primarily operate within the secondary market.

II. Examples of financial intermediaries are: commercial banks, thrift companies and the internal

revenue service.

a. Only statement I is correct.

b. Only statement II is correct.

c. Both statements I and II are correct.

d. Neither statement I nor II is correct.

Chapter 2: The Domestic and International Financial Marketplace

62. There are three forms of market efficiency. All of the following statements are correct EXCEPT:

a. The weak form efficiency states that no investor can earn excess returns based on historical price

information.

b. The strong form of efficiency states that no investor can consistently earn excess returns since all public

and private information is reflected in stock prices.

c. The semi-strong form of efficiency states that no investor can earn excess returns based on an

investment strategy using public information.

d. Market efficiency is a hard and fast rule that has been verified in real-world situations.

63. There are highly publicized hedge fund problems, for example Julian Robertson’s Tiger fund or Long Term

Capital Management. The impact that this has had on hedge funds is:

a. minimal. They have continued to grow in size and number.

b. huge. Hedge funds are being discontinued.

c. being felt in the overall reallocation of hedge funds into bonds.

d. inconsequential and irrelevant. Investors may rely on the due diligence of the fund managers for safe

investing.

64. An example of a financial middleman is a:

a. commercial bank

b. stock broker

c. insurance company

d. thrift institution

65. An example of a listed security exchange within the secondary market is:

a. OTC

b. NYSE

c. NASDAQ

d. Automated quotations

66. As a group, net savers are:

a. businesses

b. households

c. government

d. partnerships

Chapter 2: The Domestic and International Financial Marketplace

67. Trading on the NYSE is conducted by members of the exchange. The members that execute orders and

act as agents on behalf of their clients are:

a. Floor Brokers

b. Exchange Runners

c. Designated Market Makers

d. SEC Agents

68. The difference between the bid price and the ask price on a security is the:

a. spread

b. value

c. asset factor

d. commission

69. There are many reasons why there was a financial crisis in 2007. The most significant event closely

associated with this crisis is:

a. the stock market crash

b. the real estate bubble

c. government overspending

d. the use of financial hedging

70. In the financial crisis of 2007 there was cheap money coming from emerging markets. Examples of

emerging markets are all of the following EXCEPT:

a. South Korea

b. Australia

c. India

d. China

71. Although there was a financial crisis in 2007-2010, some firms were able to weather the crisis. These firms

had all of the following characteristics which were directly responsible for their ability to survive the crisis

EXCEPT:

a. Tight control over fixed and variable costs

b. Low business risk

c. A business model which encouraged risk taking by management that paid off

d. Low product pricing

Chapter 2: The Domestic and International Financial Marketplace

72. What are the differences between the primary and secondary markets?

73. What is the purpose and importance of the stock market indexes?

74. Explain the degrees of market efficiency and their applicability to the stock market.

75. Define the differences between the capital market and the money market. Give examples of the kinds of

securities found in each category.

Chapter 2: The Domestic and International Financial Marketplace

76. List the types of disclosure forms required by the SEC and explain what information is contained in each

form.

77. List changes that have occurred within financial markets regulation as a result of the passage of the

Sarbanes-Oxley Act of 2002.

78. How did the mortgage market provide the impetus for the financial crisis of 2007–2010?

Chapter 2: The Domestic and International Financial Marketplace

79. The difference between puts and calls is:

a. a call is an option to buy

b. a put allows the purchase of extra stock

c. a call cannot be resold

d. a put requires that the owner of the put must sell on a specific date

80. Foreign currency forward and future options are contracts that reflect :

a. an obligation

b. a choice

c. a delivery date of the product

d. a specific requirement

81. Foreign currency forward and future options provide a means for firms to control

a. foreign government intervention

b. foreign political problems

c. foreign exchange risk

d. the foreign transport of the goods

82. An investor decides to sell his stock based on information he received about some internal audit revealing

that the company has severe financial problems. Trading on this information is called:

a. private trading

b. insider trading

c. options trading

d. information trading

83. finance seeks to identify why some investors react irrationally when confronted with unexpected ups

and downs in the market

a. Systematic

b. Weak-form

c. Asset Evaluation

d. Behavioral

Chapter 2: The Domestic and International Financial Marketplace

84. All of the following are anomalies that have impacted the financial market in the past EXCEPT:

a. the real estate market

b. the purchase and subsequent sale of internet stock

c. the run up of gold prices

d. investing in blue chip stock

85. All of the following contributed to the financial crisis of 2007–2010 EXCEPT:

a. the Gulf War

b. the securitization of mortgage loans

c. very low interest rates

d. foreign investment in the bond market

86. All of the following have tax implications as it concerns financial management decisions EXCEPT:

a. Capital structure

b. Dividend policy

c. Inventory control

d. Leasing

87. Financial intermediaries are compensated for their services by

a. the interest rate spread.

b. salary.

c. stock options

d. preferred stock certificates

88. Financial assets are all of the following EXCEPT:

a. money

b. debt securities

c. equity securities

d. inventory