1) Firms with too much debt are undercapitalized.
2) If a mutual fund specializes in the securities of one sector of the economy,
unsystematic risk may not be reduced.
3) The potential savings from a 401(k) plan increases as the individuals tax rate
decreases.
4) The owner of a Ginnie Mae bond receives monthly both interest and principal
repayments.
5) The anticipation of a lower tax rate in the future is an argument for a Roth IRA
instead of a Keogh account.
6) An income statement enumerates of an individual’s receipts and disbursements.
7) The S&P 500 stock index is more sensitive to changes in the prices of small stocks
than the stocks of large companies.
8) When an investor purchases a bond, that individual receives accrued interest from the
seller.
9) The net profit margin increases as the firms interest expense declines.
10) The most the individual who buys a put option can lose is the cost of the option.
11) The intrinsic value of a put establishes the put’s maximum price.
12) If an investor is in the 25 percent income tax bracket and can earn 5 percent on a
corporate bond, then 3 percent on a municipal bond is attractive.
13) Technical analysts use financial statements as the basis for making investment
decisions.
14) Dollar cost averaging is
a. periodically buying a round lot of stock
b. periodically investing a specified dollar amount
in a stock
c. a means to increase the average cost basis
d. a means to insure a positive return
15) 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
16) Answer the questions given the following information:
price of a stock $52
strike price of a threemonth call $50
market price of the call $4.
a. Is the call “out” of the money?
b. What is the time premium paid for the call?
c. What is the maximum possible loss from buying the call?
d. What is the maximum profit the buyer of the call can earn?
e. What is the maximum profit the seller of the call can earn?
f. What price of the stock will assure that the buyer of the call will not sustain a loss?
g. If an investor sells the call covered, what is the cash
inflow or cash outflow?
After three months (i.e., at the expiration of the options), the price of the stock is $53.
h. What is the profit or loss from buying the call?
i. What is the profit or loss from selling the call naked?
j. At expiration, what is the time premium paid for the call?
17) Junk Corp.’s highyield bond has the following features:
Principal $1,000
Coupon 10%
Maturity 5 years
Special features: Company may extend the life
of the bond to 10 years
a. If interest rates are currently 12 percent on comparable high-yield securities and are
not expected to change, what is the price of this bond?
b. If interest rates are currently 9 percent on comparable highyield securities and are not
expected to change, what is the price of this bond?
c. If interest rates are currently 9 percent on comparable highyield securities but the
investor has no forecast as to future rates, what is the possible range of prices for this
bond?
18) Which of the following is an investment as defined
by an economist?
a. equipment
b. land
c. stock
d. savings account
19) Hedge funds follow investment strategies such as
a. acquiring shares in mutual funds
b. shorting overvalued stocks while buying
undervalued stocks
c. limiting their portfolios to money market instruments
d. underwriting new issues (IPOs)
20) The CBOE is
1>a secondary market in put and call options
2>a division of the SEC that regulated option trading
3>the first organized options exchange
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
21) The S&P 500 uses
a. a simple average
b. a compound average
c. a geometric average
d. a value-weighted average
22) The value of a put rises as the price of
a. stock rises
b. a call falls
c. stock falls
d. a call rises
23) Futures contracts offer the advantage of
a. potential leverage
b. liquidity
c. safety
d. tax savings
24) When the Federal Reserve seeks to contract the money supply, it may
a. sell securities and raise the targeted federal funds rate
b. sell securities and lower the targeted federal funds rate
c. buy securities and raise the targeted federal funds rate
d. buy securities and lower the targeted federal funds rate
25) A call option is the right to buy stock at $25 a share. According to the Black/Scholes
option valuation model, what is the value of the call
a. if the price of the stock is $25, the interest rate is 8 percent, the option expires in
three months, and the standard deviation of the stock’s return is 0.20 (20 percent)?
b. if the price of the stock is $25, the interest rate is 6 percent, the option expires in
three months, and the standard deviation of the stock’s return is 0.20 (20 percent)?
c. if the price of the stock is $27, the interest rate is 8 percent, the option expires in
three months, and the standard deviation of the stock’s return is 0.20 (20 percent)?
26) Days sales outstanding (receivables turnover) measures
a. the speed with which accounts payable are paid
b. the speed with which accounts receivable
are collected
c. the safety of accounts receivable
d. the safety of accounts payable
27) The moving average convergence divergence indicator uses
a. the difference in yields on stocks and bonds
b. the difference in yields between high and low
quality stocks
c. the difference in a short-term moving average and
a longer term moving average
d. the difference in the number of shares sold short
and the number purchased
28) If the commodity’s futures price declines
1> the long position profits
2> the short position profits
3> the buyer of the contract profits
4> the seller of the contract profits
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
29) Beta coefficients
1> are a measure of systematic risk
2> relate the return on an individual security to
the return on the market
3> measure the variability of as asset’s return
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
30) In a typical bond classification
a. “A” are investment grade bonds
b. “B” stands for a “bearer” bond
c. “C” stands for a convertible bond
d. “D” represents a debenture
31) 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
32) The maximum daily price increase that is permitted
in the futures markets is
a. the daily limit
b. the daily range
c. $1 per contract
d. 5% per contract
33) The Russell 1000 index
a. combines 1000 stocks and bonds
b. uses the 1000 largest Nasdaq stocks
c. is a broad measure of listed and Nasdaq stocks
d. is a broad-based measure of bonds
34) An implication of the efficient market hypothesis is
a. securities prices are random determined
b. stock prices reflect historical information
c. few investors can expect to outperform the market over a period of time
d. after adjusting for risk, money market securities offer superior returns
35) If an investor sells a stock short, that individual
reduces the risk of loss by
a. buying a put
b. buying a call
c. entering a limit order to sell the stock if its price declines
d. increasing the collateral with the broker
36) The futures price of gold is $1,000. Futures contracts are for 100 ounces of gold,
and the margin requirement is $3,000 a contract. The maintenance market requirement
is $1,500. A speculator expects the price of gold to rise and enters into a contract to buy
gold.
a. How much must the speculator initially remit?
b. If the futures price of gold rises to $1,005, what is the profit and return on the
position?
c. If the futures price of gold declines to $998, what is the loss on the position?
d. If the futures price declines to $984, what must the speculator do?
e. If the futures price continues to decline to $982, how much does the speculator have
in the account?
37) Financial investments are made in efficient markets.
The existence of these markets 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
38) One means to adjust for risk is
a. standardize funds’ return by their beta coefficients
b. compute their rates of return including both income
and capital gain distributions
c. standardize funds’ costs by an aggregate index of
mutual fund expenses
d. to divide each funds’ return by the return on the
market
39) The fiscal policy of the federal government excludes
a. expenditures
b. taxation
c. the money supply
d. debt management
40) 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
41) The quick ratio
a. excludes accounts payable
b. excludes accounts receivable
c. includes inventory
d. includes cash and cash equivalents
42) You obtain the following information concerning a stock, a call option, and a put
option
Price of the stock $42
Strike price (both options) $40
Price of the call $6
Price of the put $3
Expiration date three months
You want to purchase the stock but also want to use an option to reduce your risk of
loss.
a. Do you purchase the put or the call or do you sell the put or the call?
b. What is the cash inflow or outflow from your position?
c. What is profit or loss if the price of the stock stagnates and trades for $42 after three
months?
d. What is profit or loss if the price of the stock trades for $50 or $100 after three
months?
e. What is profit or loss if the price of the stock trades for $30 after three months?
f. What is the worst case scenario?
g. If you want to retain the position, what must be done after three months have passed?
43) 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
44) The debt ratio is a measure
1> of financial leverage
2> of the use of debt financing
3> of asset utilization
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
45) Which of the following occurs when a stock is split
twoforone?
a. the price of the stock decreases
b. the firm’s assets decrease
c. the firm’s liabilities decrease
d. the firms equity decreases
46) Which of the following assumes higher stock prices?
1>buying a stock index call
2>buying a stock index put
3>selling a stock index call
4>selling a stock index put
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
47) Mutual funds realized capital gains and
income (e.g., dividends received)
a. retain
b. reinvest
c. distribute
d. distribute or reinvest
48) The price of a convertible bond increases when
1> interest rates rise
2> interest rates fall
3> the price of the stock rises
4> the price of the stock falls
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4