1) If a cumulative preferred stock pays a dividend, it is said to be in arrears.
2) A call penalty protects the firm from early retirement of the bond.
3) Municipal bonds are considered to be safe investments because they may be readily
sold with little chance of loss.
4) Preferred stock dividends are usually cumulative.
5) A “head and shoulder” pattern suggests that a stock’s price will fall.
6) A firm may not repurchase bonds at a discount.
7) A writer of a naked call option will lose money if the price of the stock declines.
8) A put bond permits the investor to sell the bond back to the issuer at par prior to
maturity.
9) Portfolios that offer the highest return for a given
level of risk are “efficient.”
10) A currency swap is an agreement to convert payments in a foreign currency to
payments in the domestic currency.
11) Arbitrage is the act of buying a high priced asset in
one market and simultaneously selling it in another market at a lower price.
12) Securities prices tend to adjust slowly as new information is disseminated in an
inefficient market.
13) The Sharpe index assumes that portfolios are not well diversified.
14) Variable interest rate bonds
a. do not mature
b. are an example of a discount bond
c. have fluctuating coupons
d. are nonmarketable securities
15) Speculators who are short
a. expect prices to rise
b. are not seeking capital gains
c. are hedging their long positions
d. anticipate lower prices
16) The anticipation of inflation suggests that the investor should
a. buy bonds
b. anticipate higher interest rates
c. avoid real estate investments
d. sell stocks of gold companies
17) A firm’s stock sells for $100 a share. What will be the price after a
a. twoforone split
b. fourforone split
c. onefortwo reverse split?
18) Which of the following is true?
a. Mutual funds report returns before adjusting for
taxes
b. 12b-1 fees exceed a fund’s NAV
c. Small cap funds cannot have load fees
d. Exchange-traded funds exchange their portfolios
19) A style portfolio manager offers two things:
a. investment skill and market timing
b. the specific style combined with a low beta
c. a high beta and investment timing
d. investment skill combined with the style
20) A call penalty (i.e., call premium) protects the
a. investor against premature retirement of the bond
b. investor from default
c. issuer from rising interest rates
d. issuer from the bondholder requesting payment
21) Risk to bondholders comes from
1> possibility of default
2> higher interest rates
3> higher inflation
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
22) As the length of time to maturity (i.e., the term)
of a bond increases, generally
a. the coupon rate rises
b. the coupon rate falls
c. the riskiness of the bond falls
d. the price of the bond rises
23) If the required rate of return is 10 percent and the stock pays a fixed $5 dividend, its
value is
a. $100
b. $75
c. $50
d. $25
24) Preferred stock generally pays
a. a variable dividend
b. a fixed dividend
c. a stock dividend
d. no dividend
25) Many investments such as stock have common
characteristics including
1> existence of secondary markets
2> risk
3> potential for capital gains
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
26) A futures contract to take delivery is canceled by
a. entering into a contract to make delivery
b. refusing to take delivery
c. refusing to make delivery
d. letting the contract expire
27) Which of the following is not used in technical
analysis?
a. moving averages
b. bar graphs
c. pointandfigure charts
d. P/E ratios
28) A registered representative
a. makes a market
b. buys and sells for customers’ accounts
c. represents brokerage firms with the NYSE
d. sets the spread
29) The intrinsic value of an option sets
a. the minimum price of an option
b. the maximum price of an option
c. neither an option’s minimum nor its maximum price
d. both the maximum and the minimum price of an option
30) Which of the following is a cash outflow?
a. splitting the stock two for one
b. acquiring inventory
c. retaining earnings
d. switching from straight-line depreciation
to accelerated depreciation
31) A firm’s balance sheet has the following entries:
Cash $30,000,000
Total assets 100,000,000
Common stock (10,000,000 20,000,000
shares outstanding, $2 par)
Additional paidin capital 5,000,000
Retained earnings 35,000,000
What will be each of these balance sheet entries after a
a. $2 a share cash dividend
b. fourforone split
c. 5 percent stock dividend (current price of the
stock is $20)?
32) The intrinsic value of an option to buy stock rises as
a. the strike price increases and the price of the stock declines
b. the strike price increases and the price of the stock rises
c. the strike price decreases and the price of the stock declines
d. the strike price decreases and the price of the stock rises
33) An investment offers $10,000 at the end of each year for ten years. (a) If you can
earn 5 percent annually, what is this investment worth today? (b) If you do not spend
the annual payment but invest it at 5 percent, how much will you have after the ten
years have lapsed?
34) Virtually all bonds have each of the following except
a. interest payments
b. maturity date
c. voting rights
d. an indenture
35) A put is the option to sell stock at $35. The price of the stock is $34, and the price of
the put is $2.
a. What is the intrinsic value of the put?
b. What is the time premium paid for the put?
c. What is the percentage return from purchasing the put if at the expiration of the put
the price of the stock is $31?
36) An index fund limits its portfolio to
a. high quality securities
b. stocks that respond to changes in the consumer
prices (i.e., Consumer Price Index)
c. stocks included in an aggregate measure
of stock prices
d. stocks of firms in a particular industry
37) Advantages of the corporate form of business include
a. limited liability for stockholders
b. avoidance of state taxation
c. limited life
d. deductibility of dividends
38) If a moving average of the Dow Jones industrial average
crosses the Dow Jones industrial average,
a. the direction of security prices has changed
b. stock prices will stabilize
c. stock prices will go through a period of fluctuation
d. the investor should take profits
39) Commercial paper is
a. a short-term unsecured debt of a corporation
b. a short-term secured debt of a corporation
c. a long-term unsecured debt of a corporation
d. a long-term secured debt of a corporation
40) Warrants and calls do not have
a. an expiration date
b. a specified exercise price
c. the right to receive dividends
d. a strike price
41) A three-month call option with a strike price of $30 is
currently selling for $4 when the price of the underlying stock is selling for $32.
a. What is the call’s intrinsic value?
b. What is the time premium?
c. What is the maximum possible loss to the buyer of the call?
d. What is the maximum possible profit to the seller of the option?
e. Would you buy the call if you expected the price of the stock to fall?
Three months later the stock is selling for $39.
f. What is your profit or loss from buying the stock?
g. What is the option’s intrinsic value?
h. What is your profit or loss from selling the call?
i. If you let the option expire, what do you receive?
j. What are the percentage returns you earned on investments in the call and in the
stock?
k. If the price of the stock had been $30 at the option’s expiration, what would have
been the percentage returns on investments in the call and in the stock?
l. What is the primary reason for purchasing a call instead of the underlying stock?
42) A high-yield bond has the following terms:
Principal amount $1,000
Annual interest paid $100
Maturity 10 years
a. What is the bond’s price if comparable debt yields 12 percent?
b. What would be the price if comparable debt yields 12 percent and the bond matures
after five years?
c. What are the current yields and yields to maturity in a and b?
d. What would be the bond’s price in a and b if interest rates declined to 9 percent?
e. What are the current yield and yield to maturity in d?
f. What two generalizations may be drawn from the above price
changes?
43) The cost of investing in a mutual fund includes
1> the loading charges
2> commissions when the fund buys and sells securities
3> management fees
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
44) The use of P/E ratios to select stocks suggests that
a. high P/E stocks should be purchased
b. low P/E ratio stocks are overvalued
c. a stock should be purchased if it is selling near its historic low P/E
d. a stock should be purchased if it is selling near its historic high P/E
45) An investor purchased on margin Orange Computer for $30 a share. The stock’s
price subsequently increased to $50 a share at which time the investor sold the stock. If
the margin requirement is 60 percent and the interest rate on borrowed funds was 7
percent, what would be the percentage earned on the investor’s funds (excluding
commissions)? What would have been the return if the investor had not bought the
stock on margin?
46) Put-call parity asserts that a combination of a long position in the stock and the put
produces the same return as a comparable position in a call and a risk-free bond. If not,
at least one market is in disequilibrium. The resulting arbitrage alters the securities’
prices until the value of the stock plus the put equals the prices of the call and the bond.
The successful use of arbitrage assumes the investor of a profit no matter what happens
to the price of the stock.
Put-call parity also asserts that if an arbitrage opportunity does not exist, then a
combination of the stock and the put produces the same return as the comparable
position in the call and the risk-free bond. Currently, the price of a stock is $70 while
the price of a call option at $70 is $6; the price of the put option at $70 is $2, and the
price of a discounted bond is $66. Verify that a long position in the stock and the put
produces the same performance as a long position in the call and the bond for the
following prices of the stock: $60, 65, 70, 75, and 80.
47) An investor bought 100 shares of a REIT for $54 a share and two years later sold
the shares for $62. The REIT annually distributed $4.00 per share ($400) consisting of
$2.00 return of capital $200), $1.20 ($120) in income and $0.80 ($80) in long-term
capital gains. The investors income tax bracket is 30%. The long-term capital gains tax
rate is 15 percent. What is the investors second years tax obligation?
48) If an investor buys shares in a closed-end investment company for $46 and the net
asset value is $53, what is
the discount? If the company distributes $1, the net asset
value rises to $58, and the investor sells the shares for a premium of 5 percent over the
net asset value, what is the
percentage earned on the investment?
49) You sold 200 shares of WOOF short for $24. After three years you closed your
position at $17. WOOF paid an annual dividend of $1, what was the annualized
(compound) return on the trade?
50) An investor buys a $1,000, 20 year 7 percent (interest paid semiannually) bond at
par. After five years have passed, interest rates are 10 percent. How much did the
investor lose on the purchase of the bond?
51) If you open an IRA and invest $3,000 a year (at the end of the year), how much will
be in the account after twentyfive years if the funds earn 5 percent annually? How much
would be in the account if payments were made at the beginning of the year?
52) If a preferred stock pays an annual $4.50 dividend, what should be the price of the
stock if comparable yields are 10 percent? What would be the loss if yields rose to 12
percent?
53) A bond matures in 2020 and has an annual coupon of 3.65 percent, payable on
January 1 and July The current price of the $1,000 bond is $978. On February 1, you
purchase $10,000 face amount, and your broker charges a $25 commission. How much
must you remit for the purchase?
54) An analysis of last year’s financial statements produced the following results.
Current ratio 3.6
Quick ratio 2.2
Days sales outstanding 78.0 days
Inventory turnover 4.4
Fixed asset turnover 6.4
Operating profit margin 11.9%
Net profit margin 6.1%
Return on assets 8.8%
Return on equity 13.7%
Debt ratio 35.5%
Times-interest-earned 9.3X
Payout ratio 41.4%
Use the following data to compute the comparable financial ratios for next fiscal year.
Has the firm’s financial position changed?
Current assets
Cash and shortterm investments $ 14,657,000
Accounts receivable 71,873,000
Inventory 56,372,0001
Plant and equipment 26,881,000
Long-term investments and other assets 20,606,000
Total assets $190,389,000
Current liabilities $ 37,481,000
Long-term debt 17,895,000
Equity 135,013,000
Total liabilities and equity $190,389,000
Sales $254,553,000
Cost of goods sold 149,903,000
Selling, administrative, and other expenses 69,609,000
Earnings before interest and taxes 35,041,000
Interest 2,529,000
Taxes 13,972,540
Net income $ 18,540,000
Earnings per share $4.13
Dividends per share $1.80
1 Average inventory = $56,530,000