1) If a beta coefficient is 1.7, that implies the return on the stock tends to be less volatile
than the return on the market.
2) The profits (gains) on option trading are exempt from federal income taxation.
3) The prices of treasury bonds are insensitive to changes in interest rates.
4) If bond prices were to decline, the current yield would increase.
5) Municipal bonds are exempt from federal income but not necessarily from state
income taxation.
6) If bond prices rise, the yield to maturity declines.
7) Generally, convertible bonds lack a call provision.
8) A convertible bond may be converted at the firm’s option into common stock.
9) The protective call strategy is an illustration of a
short position.
10) A new issue of corporate securities sold to the general public must be registered
with the SEC.
11) If the investor buys a stock index put, the individual will profit if the market rises.
12) The current ratio and the quick ratio are measures of asset usage.
13) If an investor buys stock on margin and the price of the stock rises, the investor will
not receive a margin call from the broker.
14) Municipal bonds are not registered with the SEC.
15) If preferred stock is subject to mandatory retirement, its price is more volatile than
preferred stock without the retirement feature.
16) Unsystematic risk considers how firms finance their assets and the nature of their
operations.
17) The strike price of an option is fixed.
18) A high beta coefficient for a mutual fund is desirable if the investor is seeking a
conservative investment.
19) If interest rates are expected to rise, a prudent strategy would be to sell treasury bills
and buy treasury bonds.
20) The cost of investing includes
1> commissions
2> the spread
3> dividends
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
21) Inventory turnover may increase if
a. the firm increases its accounts payable
b. the firm uses less debt financing
c. the firm increases its inventory
d. the firm lowers the prices of its goods
22) Which of the following occurs when a 10 percent
stock dividend is paid?
a. the firm’s retained earnings decrease
b. the firm’s equity is increased
c. the stock’s par value is decreased
d. the stock’s price is increased
23) A real estate investment trust
a. pays federal income taxes
b. retains all of its earnings
c. invests in mortgages or rental properties
d. cannot use debt financing
24) Which of the following is a consideration when
selecting a mutual fund?
1> portfolio turnover
2> 12b-1 fees
3> unrealized losses in the fund’s portfolio
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
25) Commodity contracts are
1> bought and sold through commodity exchanges
2> considered to be speculative investments
3> permit investors to take either long or
short positions
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
26) According to the Black/Scholes option valuation model, the value of a call option
increases if
a. the option approaches expiration
b. the return on the stock is more certain
c. interest rates on a discounted bond decline
d. the standard deviation of the stock’s return increases
27) Coverage ratios measure a firm’s
a. ability to use debt financing
b. use of plant and equipment
c. ability to cover (i.e., sell) its inventory
d. ability to meet fixed payments such as interest
28) Stock index options
1>permit the investor to short the market instead of individual stocks
2>require delivery of an index of stocks
3>limit the buyers potential loss to the cost of the option
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
29) Inflation is a period of
a. rising stock prices
b. rising prices of consumer goods
c. declining interest rates
d. rising confidence in the dollar
30) Empirical studies of returns earned by investment
companies indicate that
a. no funds outperform the market consistently
b. most funds are less risky than the market
c. most funds outperform the market consistently
d. few funds outperform the market consistently
31) Diversification reduces
a. systematic risk
b. unsystematic risk
c. market risk
d. purchasing power risk
32) According to the arbitrage pricing theory, the return
on a stock
a. is not related to the expected return on the stock
b. depends on the stock’s responsiveness to unexpected
changes
c. is reduced through the construction of diversified
portfolios
d. equals the market return if the expected rate of
inflation is realized
33) Which of the following is not traded in the secondary
markets?
a. U.S. Treasury bills
b. U.S. Treasury bonds
c. series EE bonds
d. municipal bonds
34) The current ratio is unaffected by
a. using cash to retire an account payable
b. the collection of an account receivable
c. selling inventory for a profit
d. selling bonds and using the funds to
finance inventory
35) Which of the following is premised on lower stock prices?
a. buying a stock index call
b. buying a stock index put
c. buying a stock and selling a call
d. buying a stock and selling a put
36) A call is an option to
a. sell stock at a specified price
b. buy stock at a specified price
c. deliver stock at a specified price
d. deliver bonds at a specified price
37) Stock dividends increase
a. the number of shares outstanding
b. the firm’s assets
c. the firm’s equity
d. the stock’s price
38) Behavioral finance suggests that
a. investors are not informed
b. individuals make rational investment decisions
c. investors may be subject to bias which leads to
excessive buying or selling of stocks
d. emotion plays only a minor role in security selection
39) Closed-end investment companies with beta coefficients
less 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
40) Which of the following is included in an individuals
cash budget?
a. common stock
b. social security payments
c. home mortgage owed
d. credit card balances
41) Creditors would prefer
1> a quick ratio of 1.2 to a quick ratio of 0.8
2> a quick ratio of 0.8 to a quick ratio of 1.2
3> days sales outstanding of 46 to a
days sales outstanding of 35
4> days sales outstanding of 35 to a
days sales outstanding of 46
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
42) Money market mutual funds invest in
1> commercial paper
2> repurchase agreements
3> corporate bonds
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
43) The process of financial planning requires the
individual to
1> establish financial goals
2> identify and quantify the value of his or her assets
3> hire professional financial advisors
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
44) Exchange-traded funds
a. consistently outperform other funds
b. mimic an index of securities
c. require investors to select individual stocks
d. are illustrations of load funds
45) If the Federal Reserve lowers the target federal funds rate,
a. the discount rate rises
b. liquidity in the banking system is increased
c. securities prices fall
d. required reserves are decreased
46) If a firm has substantial excess cash, it may
1> repurchase some of its shares
2> increase its cash dividends
3> increase its liabilities
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. only 2
47) Profits will result from a short sale if
a. stock prices rise
b. stock prices fall
c. stock prices remain stable
d. answer is indeterminate
48) A stock’s price will tend to fall if
1> the firm’s beta declines
2> the firm’s beta increases
3> the riskfree rate declines
4> the riskfree rate increases
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
49) A bond has the following terms:
Annual interest $100
Term 15 years
Principal $1,000
a. What is the current price of the bond if comparable yields are 7 percent?
b. What are the current yield and yield to maturity given the price of the bond in the
previous question?
c. If you expect the bond to be called at the end of the year, what would be the
maximum price you should pay for the bond?
d. Is there a reason to expect that the bond will be called?
50) Your uncle plans to leave you an inheritance of $200,000. If his life expectancy is
twenty years, what is your inheritance currently worth if the anticipated return on
investments is 9 percent?
51) EEM, INC has a $1,000,000 debt outstanding that is due after 15 years. The
contract required that after five years, the firm must set aside annually an amount so the
debt is retired in full at maturity. If EEM can earn 8 percent on invested funds, how
much must the company set aside each year?
52) What is the repayment schedule for the first three years of a $60,000 mortgage loan
at 8 percent for twentyfive years? (Assume that payments are made annually.)
53) The riskfree rate of return is 8 percent; the expected rate of return on the market is
12 percent. Stock X has a beta coefficient of 1.3, an earnings and dividendgrowth rate
of 7 percent, and a current dividend of $2.40. If the stock is selling for $35, what should
you do?
54) Given the following information, construct the statement of changes in financial
position. What happened to the firm’s liquidity position during the year?
Net income $16.7
Decrease in accounts receivable 6.1
Increase in accounts payable 13.6
Sale of bonds 55.1
Dividends 14.8
Retirement of bonds 10.8
Increase in inventory 15.2
Depreciation expense 56.0
Cost of goods sold 72.1
Reduction in income taxes payable 5.0
Sale of stock 0.4
Purchase of plant and equipment 91.0
Beginning cash 1.1
Repurchase of stock 5.6
