1) High portfolio turnover is associated with high tax efficiency.
2) The return on assets employs operating income instead of net income.
3) A loading fee charged by a mutual fund does not apply to a closed-end investment
company.
4) The prices of low coupon bonds tend to fluctuate more than the prices of high
coupon bonds.
5) Investors can only buy futures, since these contracts cannot be sold.
6) Municipal bonds are more marketable than corporate and federal government bonds.
7) A bond is more likely to be called after interest rates have fallen.
8) Preferred stock pays a fixed amount of interest.
9) The prices of twentyyear bonds tend to fluctuate less than bonds with five years to
maturity.
10) Bonds that are callable often have a call penalty.
11) A closedend investment company is not a “mutual fund.”
12) Income taxation on the interest earned from an investment in a zero coupon bond
occurs when the bond matures.
13) A closedend investment companys shares cannot sell for a discount from net asset
value.
14) A prospectus is required when a corporation issues new
securities that are sold to the general public.
15) An IRA is a taxdeferred pension plan for the selfemployed.
16) According to behavioral finance, investors often select investment data that
confirms a preconceived position.
17) After purchasing stock, an investor may place a stop loss order to sell if the stock’s
price declines.
18) If interest rates rise, the value of a convertible bond as debt increases.
19) If interest rates rise, the price of preferred stock
a. rises
b. falls
c. is not affected
d. rises or falls
20) The net asset value of shares in a closed-end investment company is $36. An
investor buys the shares for $34 in the secondary market. The company distributes $1
and after one year, the net asset rises to $4 The investor sells the shares for $44 in the
secondary market.
a. What is the discount?
b. What is the percentage return on the investment?
c. In both problems 1 and 2, the investment companys net asset value rose from $36 to
$42 and the company distributed $1. Why are the percentage returns different?
21) The technical approach suggests that future stock prices
are forecasted by
a. past stock prices
b. financial ratios
c. accounting statements
d. monetary policy
22) Which of the following currently reduces taxes?
1> contributions to an IRA
2> contributions to a Roth account
3> purchases of life insurance
4> contributions to a 401(k) plan
a. 1 and 2
b. 1 and 3
c. 1 and 4
d. 2 and 4
23) A new issue of corporate securities sold to the general
public must be
a. registered with the SEC
b. initially sold through brokers
c. offered initially to existing stockholders
d. bought by specialists in corporate securities
24) An investor bought on margin 100 shares of Copier Corp. for $85 a share. The firm
paid an annual dividend of $4 a share; the margin requirement was 60 percent with an
interest rate of 8 percent on borrowed funds, and commissions on the purchase and sale
were $75. The price of the stock rose to $120 in one year.
a. What is the percentage earned on the investment if the stock is bought for cash (i.e.,
the investor did not use margin)?
b. What is the percentage earned on the investment if the stock is bought on margin?
25) Which of the following is not a consideration for
investing in real estate investment trusts (REITs)?
a. fluctuations in dividend payments
b. excessive use of debt financing by some REITs
c. fluctuating interest rates affecting securities
valuations
d. the federal tax rate paid by the trust
26) American Depository Receipts represent
a. American stocks traded abroad
b. European stock traded in Europe
c. foreign stocks traded in the U.S
d. American and foreign stocks traded OTC
27) According to the dividendgrowth model, the valuation of common stock depends on
1> the firm’s dividends
2> investors’ required rate of return
3> the prior year’s dividends
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
28) Daily securities transactions that are reported in
the financial media generally include
1> the volume of transactions
2> the high and low prices for the day
3> the net change in price from the previous day
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
29) The value of a convertible bond as debt does not depend on
a. the bond’s coupon
b. the conversion price of the bond
c. current interest rates
d. the term of the bond
30) Exchange rate risk refers to fluctuations in
a. the prices of stocks on the New York Stock Exchange
b. the values of bonds and other debt instruments
c. the price of one currency relative to other
currencies
d. the value of the investor’s portfolio
31) Examples of capital gains include sales of
1> IRA accounts
2> stocks sold for a profit
3> real estate sold for a profit
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
32) The intrinsic value of a put depends on
1>the strike price
2>the price of the stock
3>the term on the put
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
33) Openend investment companies
a. have a fixed number of shares
b. issue new stock whenever investors buy shares
c. may sell for a discount from net asset value
d. redeem shares at the investor’s cost
34) Historical studies of rates of return on large stocks suggest
a. the average return is about 6.4 percent annually
b. over a period of years, the rate is approximately
10 percent
c. equity investors rarely sustain losses
d. dividends account for over half the return
35) If an investor is in the 28 percent federal income tax bracket, which bond is to be
preferred?
a. Single A, tenyear corporate bond yielding 9.5%
b. Single A, tenyear municipal bond yielding 7.1%
36) Since closed-end investment companies acquire securities
in efficient financial markets, they
a. cannot outperform the market consistently
b. should not outperform the market consistently
c. will underperform the market when security
prices decline
d. primarily bear unsystematic risk
37) 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
38) As the price of common stock rises,
a. the value of convertible bonds and convertible preferred stock declines
b. the value of convertible bonds falls but convertible stock rises
c. the value of convertible bonds rises but convertible preferred stock falls
d. the value of convertible bonds and convertible preferred stock rises
39) If an individual expected securities prices to
fall, that investor could
1> buy put options
2> sell a stock index futures contract
3> sell stock short
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
40) Dividend policy depends on
1> the firm’s earnings
2> investment opportunities available to the firm
3> corporate income taxes
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
41) Risk
a. depends solely on price fluctuations
b. should be maximized to increase returns
c. is reduced through specialization
d. refers to the uncertainty of returns
42) Sources of risk to investors who purchase federal
government bonds include
1> reinvestment rate risk
2> risk of inflation
3> interest rate risk
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
43) The expected return on an investment in stock is
a. the expected dividend payments
b. the anticipated capital gains
c. the sum of expected dividends and capital gains
d. less than the realized return
44) Which of the following human emotions tend to affect
investments decisions?
1> the pain of regret
2> following the crowd or herding
3> selective memory
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
45) Short selling is
a. selling borrowed securities
b. selling stock owned for less than a year
c. selling an odd lot
d. selling against the investor’s broker’s advice
46) As an investor you have a required rate of return of 14 percent for investments in
risky stocks. You have analyzed three risky firms and must decide which (if any) to
purchase. Your information is
Firm A B C
Current dividends $1.00 $3.00 $7.50
Expected annual growth 7% 2% (1%)
rate in dividends
Current market price $23 $47 $60
a. What is the maximum price? Which (if any) should you buy?
b. If you bought Stock A, what is your implied rate of return?
c. If your required rate of return were 10 percent, what should be the price necessary to
induce you to buy Stock A?
47) If a speculator is short and the price of the
commodity rises, the individual
1> can expect a margin call
2> may take profits out of the position
3> may close the position at a loss
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
48) Time value concepts may be used to determine
1> the annual growth rate in dividends
2> the amount in an IRA account after ten years
3> the tax owed on a capital gain
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. only 2
49) A bond’s call feature may be exercised if
1> the yield to maturity exceeds the current yield
2> the yield to maturity is less than the current yield
3> interest rates have risen
4> interest rates have fallen
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
50) If the investor buys a bull spread, the individual
anticipates
a. higher call price
b. higher stock prices
c. lower stock prices
d. lower call prices
51) An annuity is a series of
a. rising annual payments
b. random payments
c. equal payments
d. unequal payments
52) 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
53) When an investor purchases a bond, he or she
a. pays accrued interest
b. receives accrued interest
c. pays accrued dividends
d. receives accrued dividends
54) Movements in individual stock prices tend to be
a. positively correlated
b. positively correlated with inflation
c. negatively correlated
d. positively correlated with changes in interest rates
55) A portfolio consists of the following stocks:
Stock Expected Return
A 15%
B 10
C 22
D 14
a. What is the expected return on a portfolio consisting of an equal amount invested in
each stock?
b. What is the expected return on the portfolio if 50 percent of the funds are invested in
stock C, 30 percent in stock A, and 20 percent in Stock D?
56) If a $100 par value preferred stock pays an annual dividend of $5 and comparable
yields are 10 percent, the price of this preferred stock will be
a. $100
b. $75
c. $50
d. $25
57) Which of the following is not illustrative of a
taxsheltered retirement plan?
a. Keogh account
b. IRAs
c. 401(k) plans
d. life insurance
58) You bought a stock for $28.29 that paid the following dividends
Year 1 2 3
Dividend $1.00 $1.50 $1.80
After the third year, you sold the stock for $35. What was the annual rate of return?
59) A put and a call have the following terms:
Call: strike price $50
expiration date six months
Put: strike price $50
expiration date six months
The price of the stock is currently $55. The price of the call and put are, respectively, $9
and $1. What will be the profit from buying the call or buying the put if, after six
months, the price of the stock is $40, $50, or $60?
60) A homeowner has a tenyear home-improvement loan for $36,875. What are the
annual payments required by the loan if the annual rate of interest is 4 percent?
61) A state lotto awarded a prize of $560,000 a year for the next 20 years starting today.
If the state sold $21,900,000 in lotto tickets, what proportion of the sales will the state
distribute if it earns 8% annually on invested funds?
62) Compute the durations of the following bonds and rank them on the basis of their
price volatility. Assume that the current rate of interest is 8 percent.
Bond Coupon Term
A 8 percent 10 years
B 12 percent 10 years
C 8 percent 5 years
Confirm your ranking by calculating the percentage change in the price of each bond
when interest rates rise from 8 to 12 percent.
63) If an investor purchases shares in a no load mutual fund for $36, receives cash
distributions of $1 and redeems the shares after one year for $42, what is the percentage
return on the investment?
64) A $50 par value convertible preferred stock is convertible into 5 shares (exercise
price of $10). The preferred is selling for $75, and the price of the common stock is $1If
the price of the common stock rises to $20, what is the minimum percentage price
increase the holder of the preferred stock should experience?