1) The anticipated return and the realized return often differ.
2) A timesinterestearned of 0.9 means that interest will not be paid.
3) If investors expect interest rates to decline, they should buy bonds.
4) The portfolio manager of a value fund uses analytical techniques such as a price to
earnings ratio.
5) Indices of Nasdaq stocks tend to be less volatile than the S&P 500 index.
6) Averaging down may result in the investor sending good money after bad.
7) Investing in stocks purchased by insiders may generate superior investment results
and that is inconsistent with the strong form of the efficient market hypothesis.
8) Since preferred stock represents equity, it generally
has the right to vote.
9) An option’s intrinsic value exceeds the option’s price.
10) If interest rates fall, the value of a Ginnie Mae bond should increase.
11) 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
12) The future value of an annuity will be larger if
1> the annuity is an ordinary annuity
2> the annuity is an annuity due
3> the payments are made at the beginning of the year
4> the payments are made at the end of the year
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
13) The futures price of a commodity such as wheat is $2.50 a bushel. Futures contracts
are for 10,000 bushels, and the margin requirement is $2,500 a contract. The
maintenance market requirement is $1,000. A speculator expects the price of the
commodity to rise and enters into a contract to buy wheat.
a. How much must the speculator initially remit?
b. If the futures price rises to $2.60, what is the profit and return on the position?
c. If the futures price declines to $2.47, what is the loss on the position?
d. If the futures price rises to $2.70, what must the speculator do?
e. If the futures price continues to decline to $2.32, how much does the speculator have
in the account?
14) The interest on series EE bonds
a. is exempt from federal income taxation
b. is distributed semi-annually
c. is exempt from state income taxation
d. is taxed even though it is not received
until the bond is redeemed
15) To determine the realized return on an investment, the investor needs to know
1> income received
2> the cost of an investment
3> the sale price of the investment
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
16) The margin requirement is set by the
a. Federal Reserve
b. SEC
c. FDIC
d. SIPC
17) Owners of bonds would prefer
1> a debt ratio of 60 percent to a debt ratio of
40 percent
2> a debt ratio of 40 percent to a debt ratio of
60 percent
3> a timesinterestearned of 5.1 to a
times-interest-earned of 3.9
4> a timesinterestearned of 3.9 to a
times-interest-earned of 5.1
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
18) You own a $10,000 bond that pays interest of 5.6 percent annually. If you are in the
30 percent federal income tax bracket, what is the annual tax owed if the bond is (a) in
your regular personal account or (b) in your traditional retirement account (IRA)?
19) Warrants are issued by
a. individuals
b. firms
c. governments
d. investors
20) If a stock is bought on margin,
a. part of the cost of investment is borrowed
b. the commissions on the investment are increased
c. the cost of the investment is reduced
d. the interest on the borrowed funds is set by the SEC
21) The weak form of the efficient market hypothesis implies
a. securities prices are randomly determined
b. studying past price behavior will lead to
inferior investment decisions
c. past securities prices predict future prices
d. studying past price behavior does not lead
to superior investment decisions
22) Convertible preferred stock
1>pays a fixed dividend
2>pays a variable dividend
3>may be converted into the firm’s bonds
4>may be converted into the firm’s stock
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
23) If a bond pays $90 interest annually, matures after ten years, and costs $1,100, the
current yield is
a. 8.2 percent
b. 10.1 percent
c. 9.0 percent
d. 9.6 percent
24) A low price to sales ratio suggests
a. the firm is generating cash
b. the firm has no earnings
c. the stock valuation is too high
d. the stock may be undervalued
25) Which of the following is a cash inflow?
a. distributing a stock dividend
b. retiring an account payable
c. collecting an account receivable
d. paying property taxes
26) According to the Black/Scholes option valuation model, a call option’s value
decreases if
a. interest rates increase as the option approaches expiration
b. the variability of the stock’s return declines and the interest rate decreases
c. an increase in the price of the stock results in a two for one stock split
d the option is exercised
27) Investors are insured from brokerage firm losses by
a. the SEC
b. the Federal Reserve
c. the SIPC
d. the FDIC
28) Which of the following has no impact on cash flow?
a. the firm’s equity
b. depreciation expense
c. taxes paid
d. net income
29) The Standard & Poor’s 500 stock index illustrates
a. a value-weighted index
b. a simple average
c. a geometric index
d. an exponential index
30) A retirement account for the selfemployed is called a
a. 401(k) plan
b. Keogh account (HR10 account)
c. 10K report
d. tax-deferred annuity
31) A broker
a. stresses one type of investment
b. makes a market in securities
c. buys securities for customers’ accounts
d. underwrites stock but not corporate bonds
32) A negatively sloped yield curve suggests
1> shortterm rates exceed longterm rates
2> longterm rates exceed shortterm rates
3> the Federal Reserve is following a tight
monetary policy
4> the Federal Reserve is following an easy
monetary policy
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
33) Collateralized mortgage obligations (CMOs)
a. are free of interest rate risk
b. have certain repayment schedules
c. are not exempt from federal income taxation
d. increase in value when interest rates rise
34) If the financial markets were not efficient,
a. all investors would profit
b. prices indicate the proper valuation of securities
c. prices would adjust rapidly
d. an investor may consistently outperform the market
35) The return on equity
a. is the ratio of sales to equity
b. measures what the firm earns on assets
c. is the ratio of net income to total equity
d. measures what the firm earns on sales
36) Buying a bond with a duration equal to when the funds are needed
a. reduces reinvestment rate risk
b. increases impact of higher interest rates
c. reduces the impact of default
d. increases the bond’s yield
37) Beta coefficients of 1.3 indicate
a. the stock has more unsystematic risk
b. the stock has less unsystematic risk
c. the stock is more volatile than the market
d. the stock is less volatile than the market