1) The New York Stock Exchange is an example of a secondary market.
2) The cost of an underwriting (to the firm issuing the
securities) is the difference between the price of the public and the proceeds received by
the firm.
3) One of the major advantages associated with liquid money market securities is safety
of principal.
4) Exchange rate risk refers to fluctuations in the prices of foreign currencies (i.e.,
foreign exchange).
5) If a convertible bond is called, the bondholder must convert the bond or lose the
appreciation achieved by the stock.
6) A swap agreement converts a futures contract into a spot contract.
7) Stock indices do not consider taxes on capital gains.
8) As the price of the stock rises, the probability that a convertible bond will be called
increases.
9) The investor must maintain a minimum amount of equity (i.e., maintenance margin)
to maintain a futures position.
10) Asset allocation is important to help diversify a portfolio but has little impact on the
portfolio’s return.
11) The dividendgrowth model includes both the current and past years’ dividends.
12) The SEC cannot suspend trading in a firm’s stock.
13) Systematic risk is reduced through diversification.
14) A firm will exercise its option to call a bond if interest rates rise.
15) The cash flow generated by REITs is taxed as income by the federal government.
16) An investor cannot buy and sell two different call options with the same expiration
dates.
17) Cash dividends
1> are paid from earnings
2> increase the capacity of the firm to grow
3> reduce the firm’s assets
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
18) Reinvestment rate risk refers to fluctuations in
a. a stock’s price
b. a stock’s dividend
c. rates earned when funds are reinvested
d. the cost of an investment
19) Which is the smallest if interest rates are 8 percent?
a. $100 to be received after five years
b. the present value of an annuity of $100 for 5 years
c. $100 received in the present
d. $100 received for two years
20) If the ratio of price to book exceeds 1.0,
a. the stock is overvalued
b. the firm’s assets are understated
c. the price of the stock is greater than the
accounting value of the firm
d. the accounting value of the firm is greater
than the market value of the firm
21) One means to invest in anticipation of inflation
is to
a. sell stocks short
b. buy fixed income securities
c. acquire ETFs specializing in commodities
d. hoard money
22) With a Roth IRA, the individual
a. deducts the annual contributions
b. earns tax-free income
c. defers taxes
d. avoids estate taxes
23) Corporation HBM has a convertible bond with the following terms:
coupon 5%
principal $1,000
maturity 10 years
conversion price $50 (20 shares)
call price $1,000 + one year’s interest
The bond’s credit rating is BBB, and comparable BBB rated bonds yield 9 percent.
The firm’s stock is selling for $45 and pays a dividend of $1.50 a share. The convertible
bond is selling for $1,000.
a. What is the premium paid over the bond’s value as stock?
b. Given the bond’s income advantage, how long must the investor hold the bond to
overcome the premium over the bond’s value as stock?
c. If the price of the bond stock to $65, is there any reason to expect the firm to call the
bond?
d. If the convertible bond is held to maturity, what is the annualized return on an
investment in the bond?
e. If the price of the stock declines to $25 a share while interest rates on BBB rated
bonds rise to 12 percent, what impact does the increase in interest rates have on this
convertible bond?
24) Examples of tax shelters for individuals include
1> interest on municipal bonds
2> realized short-term capital gains
3> Keogh accounts
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
25) Given the information below, answer the following questions.
A convertible bond has the following features:
Principal $1,000
Maturity date 20 years
Interest $80 (8% coupon)
Call price $1,050
Exercise price $65 a share
a. The bond may be converted into how many shares?
b. If comparable non-convertible debt offered an annual yield of 12 percent, what
would be the value of this bond as debt?
c. If the stock were selling for $52, what is the value of the bond in terms of stock?
d. Would you expect the bond to sell for its value as debt (i.e., the value determined in
b) if the price of the stock were $52?
e. If the price of the bond were $960, what are the premiums paid over the bond’s value
as stock and its value as debt?
f. If the price of the stock were $35, what would be the minimum price of the bond?
g. What is the probability that the bond will be called when the price of the stock is
$52?
h. If the price of the stock rose to $73, what would happen to the price of the bond?
i. If the price of the stock were $73, what would the investor receive if the bond were
called?
j. What will the investor receive when the bond matures?
26) Discounting
a. expresses the present in the future
b. brings the future back to the present
c. is synonymous with compounding
d. depends on the rate of interest
27) The advantages offered by investment companies include
1> professional management
2> avoidance of income taxes by the investor
3> portfolio diversification
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
28) Which of the following is not part of the underwriting
process?
a. the prospectus
b. the originating house
c. the SIPC
d. the SEC
29) Municipal bonds
a. pay more interest than corporate debt
b. are exempt from federal income taxation
c. are exempt from federal estate taxation
d. reduce interest rate risk
30) Which of the following is not an investment company?
a. a money market mutual fund
b. an index fund
c. a commercial bank
d. a growth mutual fund
31) Rates of return reported by mutual funds
a. are reported after taxes
b. consider the impact of loading fees
c. are based on change in net asset value and
the fund’s distributions
d. are adjusted for the funds systematic risk
32) An investment’s internal rate of return equates
a. dividend payments and capital gains
b. cash outflows and subsequent cash inflows
c. initial cash outflow and the sale price
d. dividend payments and the investment’s cost
33) Analysis of preferred stock uses
a. operating income (EBIT)
b. earnings after dividends to common stock
c. earnings after taxes
d. earnings after interest but before taxes
34) If mutual funds make investments in efficient financial
markets, they
a. cannot outperform the market consistently
b. should not outperform the market consistently
c. will underperform the market when securities
prices decline
d. primarily bear unsystematic risk
35) If an investor constructs a covered call,
a. there is no limit to the potential profit
b. risk is increased
c. risk is reduced
d. the term of the position is increased
36) The value of convertible preferred stock depends on
1>the exercise (i.e., conversion) price
2>the number of shares into which the stock may be converted
3>the price of the common stock
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
37) Empirical evidence
a. does not support efficient markets
b. does not support the use of technical analysis
c. cannot be applied to technical analysis
d. only supports head-and-figure charts
38) Inside information
a. is obtained from inside brokerage firms
b. is reported in a firm’s financial statements
c. must be disclosed to the SEC
d. may not be legally used to obtain security profits
39) Use of P/E ratios will not produce superior investment results according to the
a. weak form of the efficient market hypothesis
b. semistrong form of the efficient market hypothesis
c. strong form of the efficient market hypothesis
d. all forms of the efficient market hypothesis
40) To acquire a straddle, the investor
a. buys stock and a call
b. buys two calls with different strike prices
c. buys a put and sells a call with the same strike price
d. buys a put and buys a call with the same strike price
41) 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 obtain public
information
d. the portfolio manager’s access to corporate
management
42) Two stocks each pay a $1 dividend that is growing annually at 8 percent. Stock A
has a beta of 1.3; stock B’s beta is 0.8.
a. Which stock is more volatile?
b. If treasury bills yield 6 percent and you expect the market to rise by 12 percent, what
is your riskadjusted required rate of return?
c. Using the dividendgrowth model, what is the maximum amount you would be willing
to pay for each stock?
d. Why are your valuations different?
43) The traditional IRA is
a. a taxdeferred retirement account for individuals
not covered by a corporate pension plan
b. a taxable retirement account for individuals not
covered by a corporate pension plan
c. a means to generate taxfree income
d. a means to increase current income
44) If interest rates in general were to fall,
1> the prices of existing bonds would rise
2> the prices of existing bonds would fall
3> yields to maturity would rise
4> yields to maturity would fall
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
45) Portfolio risk encompasses
1> a firm’s financing decisions
2> interest rate risk
3> loss of purchasing power
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
46) If a stock rose from $10 to $30 over ten years, the annual rate of return
a. was 20 percent
b. was greater than 20 percent
c. was less than 20 percent
d. cannot be determined
47) Stock dividends cause
a. the price of a share of stock to rise
b. the price of a share of stock to fall
c. the value of the firm to rise
d. the value of the firm to fall
48) The value of a convertible bond as stock depends on the
1> current rate of interest
2> number of shares into which it is convertible
3> price of the stock
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
49) Earnings per preferred share are
a. earnings before interest and taxes
b. the ratio of earnings to number of preferred shares
c. the ratio of EBIT to number of preferred shares
d. the ratio of preferred shares to common shares
50) Which is the largest if interest rates are 7 percent?
a. $100 compounded for three years
b. the future value of a $100 annuity for three years
c. the present value of $100 after three years
d. the present value of a $100 annuity
51) Serial bonds
a. have a sinking fund
b. are issued and retired in a series
c. are a type of income bond
d. are primarily issued by the federal government
52) A hedge fund
a. is a public financial institution
b. has its shares registered with the Federal Reserve
c. is open to a select number of individual investors
d. has actively traded shares
53) Possible investment objectives may include
1> capacity to meet financial emergencies
2> preservation of capital
3> desire to finance retirement
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
54) Activity ratios measure
a. how rapidly assets flow through the firm
b. how frequently the firm’s stock is traded
c. how rapidly employees turn over
d. the profitableness of accounts receivable
55) Generally a convertible bond lacks
a. an indenture
b. a call feature
c. a strong sinking fund
d. a maturity date
56) Construct a balance sheet from the following information.
Accrued interest payable $4,000
Accumulated depreciation 30,000
Trade accounts payable 10,000
Retained earnings 86,000
Accrued wages 11,000
Work in process 5,000
Finished goods 30,000
Plant and equipment 100,000
Cash and marketable securities 10,000
Land 10,000
Accounts receivable 32,000
Allowance for doubtful accounts 2,000
Bank note (due in six months) 15,000
Longterm debt 15,000
Raw materials 7,000
Investments 10,000
Taxes due 1,000
Additional paidin capital 20,000
$1 par value common stock
20,000 shares authorized
10,000 shares outstanding
57) You buy a REIT for $50 a share. The REIT distributes $3.00 consisting of return of
capital. You are in the 30% income tax bracket (which also applies to short-term capital
gains) and the 15 percent long-term capital gains bracket. What is the tax
implication of this distribution?
58) (This problem illustrates the computation of beta coefficients may be solved using
the Investment Analysis Calculator or Excel.) The returns on the market and stock A
and stock B are as follows:
Period Market Stock A Stock B
1 10% 9% 12%
2 15 25 25
3 3 6 5
4 7 12 6
5 4 1 9
6 5 10 1
7 8 7 5
8 13 15 1
9 15 23 12
10 3 9 10
Compute the beta coefficient for each stock and interpret the results of the
computations.
59) A firm has a $1,000,000 debt (e.g., a bond) outstanding that matures after 10 years.
The sinking fund requires the firm to set aside annually an amount so the debt may be
retired at maturity. If the firm can earn 10% annually on these funds, how much must it
invest annually to meet the sinking fund?
60) If an investor enters into a contract to sell corn, that position is closed by delivering
the contract.
61) What is the debt/net worth ratio and the debt to total assets ratio for a firm with total
debt of $600,000 and equity of $400,000?