1) If the firm’s current ratio exceeds 1:1 and the firm retires an account payable, the
quick ratio increases.
2) The dividend-growth valuation model depends on dividends and the required rate of
return.
3) Compounding refers to the earning of interest on interest earned previously.
4) If an investor has a short position in corn, the position is closed by buying corn.
5) If a $1,000 bond has a coupon of 8 percent and matures after eight years, the price of
the bond will exceed $1,000 if the current interest rate is 9 percent.
6) The direct sale of new securities to a pension plan is
a private placement, and the securities do not have to be registered with the SEC.
7) Fluctuations in yields is one means by which the economy allocates scarce credit.
8) Since Ginnie Mae bonds are debt instruments, the timing and amount of each
payment is known.
9) Most stockholders of publicly held stock have preemptive rights.
10) The rate of return on a stock considers the price change but not dividend income.
11) If accounts receivable are collected, the quick ratio is unaffected.
12) Operating income is not affected by
a. depreciation
b. cost of goods sold
c. rent payments
d. interest earned
13) Which of the following is not an investment in the
layperson’s general use of the term?
a. equipment
b. land
c. stock
d. savings account
14) The net asset value of a closed-end investment company
fund increases with
a. higher stock prices
b. lower stock prices
c. larger number of shares
d. increased liabilities
15) The Treynor index standardizes performance by the portfolio’s beta.
16) The sum of cash, currency, and demand deposits is
a. M1
b. M2
c. M3
d. M4
17) The Dogs of the Dow strategy
a. forecasts the direction of Dow Jones averages
b. suggests buying the Dow stocks with the highest
dividend yields
c. outperforms the S&P 500
d. suggests buying the lowest priced Dow stocks
18) The price of a call depends on
1>the strike price
2>the price of the underlying stock
3>the term (i.e., life) of the call
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
19) Securities regulations protect investors by
a. requiring disclosures of information by firms
b. stopping investors from buying overpriced stock
c. reducing competition among brokers
d. establishing commission schedules
20) Treasury bills
a. sell at a discount
b. sell for a premium
c. pay an established 4.5% annual interest
d. mature after one year
21) Earnings are
a. retained
b. distributed
c. invested
d. retained and/or distributed
22) An American investor may take a position in foreign equities by acquiring
1> iShares specializing in foreign country indexes
2> international mutual funds
3> country closed-end investment companies
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
23) Sources of unsystematic risk include
1> the firm’s financing decisions
2> the firm’s operations
3> fluctuating market prices
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
24) A mutual funds net asset value is $50, but the fund charges an exit fee of 1 percent
of net asset value and a load fee of 4 percent of net asset value. An individual purchases
the shares. During the year the fund distributes $2.34. The net asset value rises to
$58.38 and the investor redeems the shares.
a. What is the percentage return the fund can report that was achieved by its portfolio
managers.
b. What is the percentage return the individual earned on the investment?
c. Why are the two percentages different?
25) If an investor’s excess return is negative,
a. the realized return was less than the return earned
by the market
b. the required return exceeded the realized return
c. the investor constructed a poorly diversified
portfolio
d. the investor’s portfolio had excessive
diversification
26) The strong form of the efficient market hypothesis suggests
1> inside information will not lead to superior
investment results
2> inside information will lead to superior
investment results
3> studying financial statements will not lead
to superior investment results
4> studying financial statements will lead to
superior investment results
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
27) A market maker
1> sells stock at the ask price
2> buys stock at the ask price
3> sells stock at the bid price
4> buys stock at the bid price
a. 1 and 2
b. 1 and 4
c. 2 and 3
d. 3 and 4
28) The time premium paid for an option to buy stock
is affected by
a. the length of time to expiration
b. the firm’s credit rating
c. the existence of a rights offering
d. the firm’s financial statements
29) Which of the following is not a leading indicator?
a. initial claims for unemployment insurance
b. building permits for new home construction
c. changes in manufacturers’ unfilled orders for
durable good
d. the level of unemployment
30) If a call is overvalued, put-call parity suggests that
the investor should
a. sell the call and the stock and buy the put and the bond
b. sell the call and the bond and buy the put and the stock
c. sell the bond and the put and buy the stock and the call
d. sell the stock and the put and buy the call and the bond
31) Equipment trust certificates are
a. riskier than convertible bonds
b. secured debt obligations
c. a type of debenture
d. bonds with low credit ratings
32) An implication of the efficient market hypothesis is
a. securities prices are random determined
b. stock prices reflect historical information
c. few investors can expect to outperform the market
over a period of time
d. after adjusting for risk, money market securities
offer superior returns
33) Zero coupon and split coupon bonds
a. experience stable prices
b. conserve the firm’s cash
c. reduce the firm’s use of financial leverage
d. pay interest only at maturity
34) If the investor anticipates that the price of stock will
be stable, he or she may
a. sell a straddle
b. buy a straddle
c. buy a call
d. buy a put
35) Preferred stock generally pays
a. a variable dividend
b. a fixed dividend
c. a stock dividend
d. no dividend
36) Index funds tend to track
a. the stock market as a whole
b. the bond market
c. a specific measure of the market
d. the return on other index funds
37) The price to sales ratio may be a preferred analytical tool if
a. the firm is not generating cash
b. the firm is not generating earnings
c. the P/E ratio is too high
d. the dividend-growth model suggests the stock is
undervalued
38) Price bubbles may be evidence that
1> financial markets are inefficient
2> financial markets are rational
3> the investors have a herd instinct
4> investors do not have a herd instinct
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
39) Concerning a new issue of stock, a lock-up refers to
a. a guaranteed profit on the initial purchase
b. a guaranteed profit to the underwriter
c. the requirement that shares purchased by insiders prior to an initial public offering
must retain those shares for a specified period
d. initial buyers of the stock in the IPO must hold the shares for a specified period of
time
40) A $1,000 zero coupon bond matures in five years and sells for $784 to yield 5
percent. The accrued interest for the first year is $39. You are in the 30 percent federal
income tax bracket. What is tax owed in the interest if the bond is (a) in your regular
personal account or (b) in your Roth retirement account (IRA)?
41) The final prospectus does not include
a. the firm’s balance sheet
b. the price of the securities sold to the public
c. the underwriter’s profit on the sale
d. the underwriting discount
42) If a 7 percent, $1,000 bond matures after ten years and current interest rates are 9
percent, the current price of the bond should not be
1> $1,000
2> $872
3> $1,140
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. only 2
43) Purchasers of gold futures contracts
a. do not have to meet margin requirements
b. may anticipated an increase in inflation
c. are considered to have unleveraged positions
d. have less speculative positions
44) Which of the following is not a shortterm,
liquid asset?
a. negotiable certificate of deposit
b. U.S. Treasury bills
c. corporate stock
d. commercial paper
45) The Russell 3000 is a broad-based measure of bond prices.
46) You know the following concerning a common stock:
EPS $3.00
Payout ratio 25%
P/E 10
Annual rate of growth of 6%
earnings and dividends
If you want to earn 10 percent, should you buy this stock? What is the maximum price
you should be willing to pay for the stock?
47) If the price of a stock is $100 while the price of a call option at $100 is $3, the price
of the put option is $2, and the rate of interest is 10 percent so the investor can purchase
a $100 discounted note for $90.90 (i.e., $91). what should you do and verify the
potential losses and profits from the position.
48) Given the following information concerning three stocks, answer the following
questions:
Stock Price Shares Outstanding
A $10 1,000,000
B $14 3,000,000
C $21 10,000,000
b. What are averages if each price rises to $11, $17, and $35, respectively?
c. What is the percentage increase in each average?
49) Your brother, who is prone to bearing substantial risk, suggests that you buy a
security for $10,000 that promises to pay you $100,000 at the end of 15 years. What is
the implied annual return or yield on this investment?
50) Presently, Stock A pays a dividend of $2.00 a share, and you expect the dividend to
grow rapidly for the next four years at 20 percent. Thus the dividend payments will be
Year Dividend
1 $1.20
2 1.44
3 1.73
4 2.07
After this initial period of super growth, the rate of increase in the dividend should
decline to 8 percent. If you want to earn 12 percent on investments in common stock,
what is the maximum you should pay for this stock?
51) Given the following information,
price of a stock $50
strike price of a six-month call $45
market price of the call $9
finish the following sentences:
b. The time premium paid for the call is ________.
c. If an investor established a covered call position, the amount invested is _________.
d. The most the buyer of the call can lose is ________.
e. The maximum amount the seller of the call naked can lose is ________.
f. which call is “in” or “out” of the money?
After six months (i.e., at the expiration date of the call),
the price of the stock is $52.
g. The profit (loss) from buying the call is ________.
h. The price (loss) from selling the call naked is _______.
i. The profit (loss) from selling the call covered is __________.
j. The profit (loss) from selling the stock short six months earlier is _________.
52) The investor owns 1,000 shares of stock but anticipates its price may decline. To
reduce the risk of loss, how many call options must be sold if the hedge ratio is 0.7?
53) A firm currently earns $1.00 per share. A financial analyst believes that earnings
will grow annually at the rate of 10 percent for five years and then decline to 5 percent.
What are the expected earnings after ten years?
54) What is the expected return on a stock that pays a 4 percent annual dividend and
whose price is expected to appreciate annually at 6 percent?