1) Bond averages that are expressed in percentages are not comparable to the S&P 500.
2) The price of a call option is often more volatile than the price of the underlying
stock.
3) Yields on municipal bonds exceed yields on corporate bonds with the same term to
maturity and credit rating.
4) In order to sell securities to the general public, a mutual fund must register its
securities and prepare a prospectus detailing its objectives and costs to investors.
5) Publicly owned firms must provide investors with information that may affect the
value of the firm’s securities.
6) A small cap fund has total assets of less than $100 million.
7) Most stockholders have cumulative voting rights.
8) Treasury bills have no risk of default but risk of loss of interest payments.
9) If an investment company were liquidated, the investor should receive the net asset
value.
10) Real estate investment trusts (REITs) are illustrative
of a closedend investment company.
11) In addition to put and call options on individual stocks, there are also options on the
market as a whole (i.e., an index).
12) A zero coupon only pays interest when it is sold.
13) The concept of duration stresses when a bond will make its payments to
bondholders.
14) The spread (the basis points) between the yields on AAA-rated bonds and B-rated
bonds tends to rise when yields increase.
15) Yields on all federal government securities are fixed and do not change with
changes in interest rates.
16) Individuals who do the opposite of what investment analysts are suggesting are
“contrarians.”
17) High P/E stocks should be preferred because they pay larger dividends.
18) One anomaly to the efficient market hypothesis is that investments in debt of large
firms will earn higher returns than investments in their stock.
19) A 401(k) plan is a
a. taxdeferred retirement plan
b. savings plan for the retired
c. plan to increase current tax-exempt income
d. dividend or interest enhancement plan
20) The riskadjusted required rate of return includes
1> the firm’s earnings
2> the firm’s beta coefficient
3> the treasury bill rate (i.e., the riskfree rate)
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
21) If a bond is selling for a premium,
a. the yield to maturity exceeds the current yield
b. the current yield exceeds the yield to maturity
c. the current yield has risen
d. the bond cannot be called
22) A fallen angel is
a. a quality bond whose credit rating has declined
b. a firm in financial difficulty
c. a junk bond in default
d. a firm being liquidated
23) When a convertible bond is called,
1> interest ceases to accrue
2> the bondholder receives the principal
3> the bondholder generally converts the bond
4> dividends are paid to the bondholder
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
24) The current yield on a longterm bond is the
a. coupon interest divided by the price of the bond
b. coupon
c. interest paid, adjusted for price changes
d. going rate of interest
25) Mutual funds with beta coefficients greater than 1.0
a. have outperformed the market
b. have underperformed the market
c. have more systematic risk than the market
d. have less systematic risk than the market
26) The economic goals of the Federal Reserve include
1> prosperity
2> full employment
3> stable prices
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
27) Stockholders generally have which of the following
rights?
1> right to vote
2> right to share in the firm’s earnings
3> right to sell the stock
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
28) Short selling requires
1> no collateral
2> a margin payment
3> delivering securities owned
4> borrowing securities to deliver
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
29) The present value of an annuity is
1> larger the greater the rate of interest
2> smaller the greater the rate of interest
3> larger as the number of years increases
4> smaller as the number of years increases
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
30) The security market line does not
a. indicate the relationship between risk and return
b. relate the market return and beta to a stock’s return
c. identify the optimal portfolio for the investor
d. use beta coefficients as a measure of risk
31) The net asset value of a stock mutual fund rises with
a. higher stock prices
b. lower stock prices
c. larger number of shares
d. increased liabilities
32) Investing in futures is
a. investing in physical goods
b. entering into contracts for future delivery
c. executing contracts for prior delivery
d. selling a contract in anticipation of
price increases
33) What is the federal income tax owed by an investor in the 35 percent income tax
bracket? The tax rate on long-term capital gains is 15 percent.
a. Bob
owns a savings account that paid $350 in interest and
sold Stock B for a long-term capital gain of $1,200.
b. Bill
sold Stock A for a short-term capital gain of $3,500;
sold Stock B for a short-term capital loss of $3,100.
c. Brian
sold Stock A for a long-term capital gain of $3,700;
sold Stock B for a long-term capital loss of $5,100.
d. Barbara
sold Stock A for a $6,000 short-term loss and
sold Stock B for a $2,000 long-term gain.
e. Robertas IRA account collected interest of $1,000
and a bond paid her interest of $1,000.
34) Hedging with commodity futures
a. reduces the risk of loss
b. results when an investor buys a contract
c. occurs when the individual takes delivery
d. is the opposite of selling short
35) Convertible bonds sell for a premium over their
1> market price
2> value as stock
3> value as debt
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
36) Because of arbitrage, the price of an option
a. exceeds its intrinsic value
b. is less than its intrinsic value
c. cannot be less than its intrinsic value
d. cannot be greater than its intrinsic value
37) A swap agreement may be used to convert
a. variable payments into fixed payments
b. short-term gains into long-term gains
c. bonds into stock
d. futures prices into spot prices
38) What is the federal income tax owed by an investor in the 35 percent income tax
bracket? The tax rate on long-term capital gains is 15 percent.
a. Megan
sold Stock A for a short-term capital gain of $5,500;
sold Stock B for a short-term capital loss of $2,100.
b. Margaret
sold Stock A for a short-term capital loss of $2,000;
sold Stock B for a short-term capital gain of $4,000.
c. Melissa is 70 years old and withdraws $1,000 from her
Roth IRA account. Would the answer be different if
she were 65 years old?
d. Morgan
bought 100 shares of IBM in March for $100 a share and
sold the shares in April for $110.
e. Murphy
contributed $4,000 to an IRA and used the proceeds to
purchase stock A for $4,000. The stock was subsequently
sold for $4,500 after a year had passed.
39) A call option is similar to a warrant except
a. the strike price is fixed
b. it may be issued by individual investors
c. it is not marketable (saleable)
d. it receives dividend payments
40) In general, income bonds are less risky than
a. mortgage bonds
b. secured debt
c. preferred stock
d. shortterm debt obligations
41) If financial markets are efficient, that suggests that
a. investors cannot earn superior returns
b. investors cannot expect to outperform the market consistently
c. security prices are random
d. bearing additional risk will not increase return
42) No load mutual funds may increase fees through
1> sales charges
2> commissions
3> 12b1 plans
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. only 3
43) Sources of risk to investors in municipal bonds include
1> fluctuations in interest rates
2> reinvestment rate risk
3> default risk
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
44) A high yield bond
a. pays no interest
b. pays interest only at maturity
c. is a highrisk debt instrument
d. is a bond in default
45) Put-call parity basically says that combination of a put, a call, and a risk-free bond
must be the same value as the underlying stock. If not, at least one market is in
disequilibrium. The resulting arbitrage alters the securities’ prices until the value of the
call plus the bond is equal to the prices of the put plus the stock. Currently, the price of
a stock is $100 while the price of a call option at $100 is $10; the price of the put option
is $4.59, and the rate of interest is 8 percent, so that the investor may purchase a $100
discounted note for $92.59.
a. Do these prices indicate that the financial markets are in equilibrium? Show me how
you derived your answer.
b. An arbitrage opportunity should exist, but if you set up the position incorrectly, you
will always sustain losses. Verify to me that if you do set up an incorrect arbitrage, you
will always sustain a loss. Please use prices of the stock at $80, $100, and $120 as of
the expiration date of the options.
46) Sources of risk include
1> fluctuating exchange rates
2> a firm’s financing decisions
3> higher interest rates
4> loss of purchasing power
a. 1 and 2
b. 2 and 3
c. 2 and 4
d. all four
47) Reasons for saving and investing include
1> need for funds to meet emergencies
2> retirement income
3> desire to leave an estate for children
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
48) As the debt ratio increases,
1> fewer assets are debt financed
2> more assets are debt financed
3> the ratio of debt to equity increases
4> the ratio of debt to equity decreases
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
49) If an investor expected the firm to grow slowly, which
of the following strategies would be best?
a. sell the stock short
b. buy a convertible bond and short the stock
c. buy the stock
d. buy the firm’s convertible securities
50) Preferred stock and longterm bonds are similar because
a. they both have voting power
b. interest and dividend payments are fixed
c. interest and dividend payments are legal obligations
d. interest and dividend payments are taxdeductible
expenses
51) An active portfolio strategy is premised on
a. the stock market being efficient
b. the stock market being inefficient
c. the investor’s being able to obtainpublic information
d. the portfolio manager’s access to corporate management
52) You purchase a three-month discount security (e.g., a Treasury bill or commercial
paper) for $0.9878 on $1 (i.e., $98,780 for $100,000 face amount). What are the
discount yield, the simple annual yield, and the annual compound yield earned by the
investment?
53) An investor sells 100 shares short at $4 The sale requires a margin deposit equal to
60 percent of the proceeds of the sale. If the investor closes the position at $49, what
was the percentage earned or lost on the investment? If the position had been closed
when the price of the stock was $27, what would have been the percent earned or lost
on the position?
54) A piece of rental property will generate $10,000 a year for five years, $12,000 for
the next five years, and then be sold at the end of the tenth year for $100,000. If you can
earn 10 percent on your funds, what is the maximum you should pay for the property?
55) What is the value of a $1,000 zero coupon government bond that matures after eight
years, if comparable yields are 7%?
56) You are hurt in a car accident and your lawyer wins a $100,000 settlement to be
distributed as follows:
$20,000 immediate payment
$5,000 a year for ten years
$30,000 after ten years.
If the lawyer’s fee is $10,000, what is the value of this settlement if the interest rate is 6
percent?
57) If you purchase a $5 preferred stock for $40 a share, what is the current yield? If
you anticipate that yields will decline to 10 percent, what will be the anticipated capital
gain on this investment?
58) A bond with a 5 percent coupon ($50 a year) that matures after eight years is selling
for $779. What is the yield to maturity?
59) A homeowner has been offered three alternative mortgage loans to finance the
purchase of a $300,000 house. The interest rate on the first alternative is 8 percent for
twentyfive years, and the loan requires a 20 percent down payment. The second
mortgage loan is also for twentyfive years with an interest rate of 7 percent but requires
a down payment of a third of the cost of the house. The third loan also requires a third
down but is for 20 years at 6 percent. What are the annual mortgage payments required
by each loan?
60) Mutual fund A earned 10 percent while B earned 8 percent. The standard deviations
of the returns were 10 percent and 7 percent, respectively. According to the Sharpe
ratio, which fund performed better?
61) What are the intrinsic values and time premiums of the following call options if the
price of the underlying stock is $35? What are the profits and losses to the buyers and
the writers if the stock sells for $31 at the options’ expiration?
Strike Price Price of the Option
$30 $7.50
$35 $3.00