1) The S&P 500 stock index may be an inappropriate benchmark for a small-cap fund.
2) Under current law, American corporations may not issue bearer bonds with coupons
attached.
3) Coverage ratios may be used to measure the safety of debt and other fixed
obligations.
4) If mutual fund shares are purchased just prior to the fund’s annual distribution, the
investor becomes responsible for taxes on the distribution.
5) Investments in mutual funds permit the investor to avoid market risk.
6) The first exchange-traded funds (ETFs) were a type of index fund.
7) An investor buys a straddle in anticipation of stable
stock prices.
8) An easy monetary policy increases the cost of credit.
9) The time period to expiration for call options is usually for less than a year.
10) A bond’s seller pays accrued interest to the buyer.
11) A warrant is the option to buy one share of stock at $40. It expires after one year
and currently sells for $10. The price of the stock is $32. a.) What is the maximum
possible profit if an investor buys one share of stock and shorts one warrant? b.) What
is the range of stock prices that yields a profit on this position?
12) Long dark candlesticks suggests
a. stock prices changed dramatically
b. stock prices rose
c. the daily price change was small
d. an investor should sell short
13) Options to buy stock offer
a. potential leverage
b. potential income
c. safety of principal
e. liquidity
14) If interest rates increase,
1> the price of a Ginnie Mae falls
2> the price of a Ginnie Mae rises
3> the speed with which Ginnie Maes are
retired increases
4> the speed with which Ginnie Maes are
retired declines
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
15) If a closed-end investment company sells for a discount,
a. its price exceeds the net asset value
b. its price is less than the net asset value
c. dividend income exceeds capital gains
d. capital gains exceed dividend income
16) The syndicate
1> facilitates the sale of new securities
2> is formed by the originating house
3> creates a secondary market in stocks
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
17) Recession is a period of
a. declining unemployment
b. rising unemployment
c. falling prices
d. rising prices
18) Exchange traded funds
a. redeem their shares
b. only buy exchangeable securities
c. are bought and sold in secondary markets
d. cannot be sold short
19) The writer of a naked call option wants
a. the prices of the stock and the call to rise
b. the prices of the stock and the call to fall
c. the prices of the stock to fall and the call to rise
d. the prices of the stock to rise and the call to remain stable
20) If the initial offer price of a new issue is too low,
1> demand will exceed supply
2> supply will exceed demand
3> the price of the securities will rise
4> the price of the securities will fall
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
21) The hedge ratio determines
a. the number of call options to offset movements in the price of the stock
b. the number of call options to offset a straddle
c. the number of put options to offset movements in the price of a call option
d. the number of call options to offset the impact of changes in interest rates
22) The market consists of the following stocks. Their prices and number of shares are
as follows:
Stock Price Number of Shares Outstanding
A $10 100,000
B 20 10,000
C 30 200,000
D 40 50,000
a. The price of Stock C doubles to $60. What is the percentage increase in the market if
a S&P 500 type of measure of the market is used?
b. Repeat question (a) but use a Value Line type of measure of the market (i.e., a
geometric average) to determine the percentage increase.
c. Suppose the price of stock B doubled instead of stock C. How would the market have
fared using the aggregate measures employed in (a) and (b)? Why are your answers
different?
23) If the investor anticipates that the price of a stock will
fluctuate, this individual may
a. sell a call and sell a put
b. buy a call and buy a put
c. buy a call and sell a put
d. sell a call and buy a put
24) 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
25) If the investor buys a bear spread, the individual
anticipates
a. higher interest rates
b. higher option prices
c. lower stock prices
d. lower put prices
26) For diversification to reduce risk,
a. the returns on the individual securities should be highly correlated
b. the prices of the stocks should be stable
c. the returns on the individual securities should be negatively correlated
d. one firm should offer dividends and the other should offer capital gains
27) Put-call parity suggests that
a. the sum of the prices of a stock and a call equal zero
b. the sum of the prices of a put and a call equal zero
c. the sum of the prices of a stock, a call, a put, and a bond equal zero
d. sum of the prices of a stock and a put must equal the sum of the prices of a call and a
discounted bond with the maturity date as the expiration date of the options
28) The Sarbanes-Oxley law
a. reduces potential conflicts of between securities analysts and investment bankers
b. legalizes the sale of securities by investment bankers
c. requires corporate boards of directors to own stock
d. mandates that securities analysts file their recommendations with the SEC
29) The value of a bond depends on
1> the coupon rate
2> the terms of the indenture
3> the maturity date
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
30) Given the following information:
Expected return on Stock A .12 (12%)
Standard deviation of return .1
Expected return on Stock B .20 (20%)
Standard deviation of return .6
Correlation coefficient of the
returns on Stock A and Stock B .2
a. What are the expected returns and standard deviations of the following portfolios:
1> 100 percent of funds invested in Stock A
2> 100 percent of funds invested in Stock B
3> 50 percent of funds invested in each stock?
b. What would be the impact if the correlation coefficient were 0.6 instead of 0.2?
31) According to the Black/Scholes option valuation model, a call option’s value
increases if
a. stock prices increase and interest rates decrease
b. the time to expiration decreases and interest rates increase
c. the variability of the stock’s return increases and stock prices increase
d. interest rates decrease and the variability of the stock’s return increases
32) Unsystematic risk
a. is increased through diversification
b. is reduced when markets fluctuate less
c. is affected by the nature of how a firm finances its
operations
d. increases during periods of volatile interest rates
33) The value of an ADR will tend to increase if
1> the value of the dollar rises
2> the value of the dollar falls
3> foreign stock markets rise
4> foreign stock markets fall
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
34) Preferred stock dividends are
1> a legal obligation
2> not a legal obligation
3> exempt from federal income taxation
4> not exempt from federal income taxation
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
35) Investors who want to bear less risk should acquire
stocks whose beta coefficients are
a. greater than 1.5
b. greater than 1.0
c. less than 1.0
d. less than 0.5
36) 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. Tristan
sold Stock A for a short-term capital loss of $5,250;
sold Stock B for a long-term capital gain of $4,250.
b. Isolda
sold Stock A for a $2,000 short-term gain;
sold Stock B for a $6,000 long-term loss.
c. Elsa is 65 years old and withdraws $1,000 from her
traditional IRA account, She deposits $1,000 in her
Roth IRA.
d. Gertrude
bought 100 shares of IBM in March 2006 for $100 a share
and sold 40 shares six months later for $120.
e. Siegmunds traditional IRA is currently worth $25,000.
He sold a stock in the account for $2,000. He had
purchased the stock for $1,000 in 2004.
f. Sieglinde purchased 100 shares of BABY at $15 on
September 10. She sold the shares for $12 on
September 15. She repurchased the shares on
September 20 for $10.
37) The concept of duration considers
a. the timing of interest payments
b. the timing of principal repayment
c. the current rate of interest
d. the timing of both interest and principal repayment
38) When the Federal Reserve seeks to expand the money supply, it
a. sells securities
b. buys securities
c. runs a deficit
d. runs a surplus
39) An individual may purchase preferred stock
1> in anticipation of lower interest rates
2> in anticipation of higher interest rates
3> to receive a flow of taxfree income
4> to receive a flow of income
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
40) A federal government deficit may be financed by
1> the general public buying government bonds
2> commercial banks buying treasury bills
3> the Federal Reserve selling securities
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
41) Which of the following should not have default risk?
a. money market mutual funds
b. commercial paper
c. negotiable certificates of deposit
d. treasury bills
42) Deflation is a period of
a. rising unemployment
b. declining unemployment
c. rising prices
d. falling prices
43) General obligation bonds
a. illustrative of a revenue bond
b. not illustrative of a tax-exempt bond
c. are supported by taxing authority
d. are secured by property
44) Convertible bonds may dilute current stockholders’
equity because
a. the bonds require interest payments
b. the bonds are callable
c. dividends to bondholders reduce earnings
d. new shares are issued when the bonds are converted
45) One use for futures markets is “price discovery,” that is, the futures price mirrors
the current consensus of the future price. If the current price of corn is $2.00 a bushel
and the cost of carry is 7 percent, explain what an investor would do if futures price of
wheat were $2.40. Is the investor at risk?
46) If a stock is selling for $33 and you expect the price not to fluctuate, what are the
potential profits and losses from writing a straddle if a call option at $35 sells for $3 and
the put option at $35 sells for $4?
47) Determine a firm’s earnings per share from the following information.
Corporate income tax rate 25%
Number of shares outstanding 10,000
Cost of goods sold $60,000
Interest earned 2,400
Selling and administrative expense 15,000
Interest expense 5,000
Sales 100,000
Annual credit sales 90,000
48) Worker A annually invests $1,000 in an IRA for nine years (ages 27 through 35) and
never makes another contribution. Worker B annually invests $1,000 in an IRA for
thirty years (ages 36 through 65). Which worker will have more in his or her account
when he or she retires if they both earn 8 percent on their investments?
49) A firm has both a convertible bond and a convertible preferred stock outstanding.
The convertible bond has the following features:
Coupon 6.5%
Maturity date 10 years
Exercise price $20
Principal $1,000
Call price $1,065.
The convertible preferred stock has the following features:
Annual dividend $2.25
Convertible into 2.5 shares of common stock
Callable at $25 a share.
Currently the common stock is selling for $13; the yield on nonconvertible bonds is
10%, and the yield on comparable preferred stocks is 14%. What is the value of the
above securities in terms of the common stock? What would be the value of each
security if it lacked the conversion feature?
50) If you purchase TrisCorp stock at $71 a share and the firm pays a $5.20 dividend
which is expected to grow at 7.5 percent, what is the implied annual rate of return on
the investment?
51) What are the following call options’ intrinsic values and time premiums if the price
of the underlying stock is $55?
Option strike price Price of the call
Call at $50 $7.00
Call at $55 3.00
Call at $60 0.50
52) An investor expects the price of a stock to double after eight years. What is the
expected annual rate of growth?
53) You wish to have $100,000 after ten years for a major purchase such as a boat. How
much must you invest at the end of each year if you earn 8 percent annually on your
funds?