1) Bonds with comparable ratings but different terms to maturity tend to have different
yields.
2) If an investor expects the stock market to rise, that individual enters into a short
position in stock index futures.
3) An index fund seeks to duplicate an aggregate measure of the market or a segment of
the market.
4) Default means the failure to meet any of the terms of
a bond’s indenture.
5) “Resistance” for a stock suggests that supply will blunt further price increases.
6) In most cases, interest accrues daily on longterm bonds but distributed only twice a
year.
7) Dividend increases usually occur prior to an increase
in earnings.
8) The term “investment” in economics generally refers to the purchase of stock and
bonds.
9) If interest rates increase, a bond may be called.
10) Risk is the uncertainty that the anticipated return will not be realized.
11) The proportion of a firm’s assets that are financed by debt is measured by the debt
ratio.
12) One reason for writing and selling a covered call
option is
a. potential leverage
b. safety of principal
c. income received
d. liquidity
13) If the price of a stock rises substantially,
the investor who wrote a covered call
1>earns a modest profit
2>sustains a modest loss
3>lost an opportunity for a large profit
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. only 3
14) Dividend reinvestment plans offer which advantage(s)?
1> deferment of federal income taxes
2> a convenient means to accumulate shares
3> dollar cost averaging
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. only 2
15) The future value of an annuity is
1> larger the higher the rate of interest
2> smaller the higher the rate of interest
3> larger the greater the number of years
4> smaller the greater the number of years
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
16) A strategy of averaging down will be profitable if
a. the price of the stock continues to fall
b. the firm pays more dividends
c. the firm retains earnings
d. the price of the stock subsequently rises
17) A convertible bond’s payback period
1>increases as the bond’s coupon increases
2>decreases as the bond’s coupon increases
3>increases as the stock’s dividend increases
4>decreases as the stock’s dividend increases
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
18) The use of price to book ratios to select stocks suggests that
a. high price to book stocks should be purchased
b. low price to book stocks are overvalued
c. a stock should be purchased if it is selling near its historic high price to book ratio
d. a stock should be purchased if it is selling near its historic low price to book ratio
19) If the quote on stock is reduced, that implies
1> supply exceeded demand
2> demand exceeded supply
3> the price was too high
4> the price was too low
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
20) An individual with a large stock portfolio can
hedge the position by
a. buying a stock index futures
b. selling a stock index futures
c. selling the stocks
d. maintaining the position
21) The price of a convertible bond is often
1> greater than its value as stock
2> less than its value as stock
3> greater than its value as debt
4> less than its value as debt
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
22) An exit fee has the same impact of
a. a load fee of the same percentage
b. a 12b1 fee with the same percentage
c. commissions paid by a mutual fund to buy securities
d. management fees
23) Convertible bonds have a call feature to
a. protect stockholders from early conversions
b. protect bondholders from conversions by stockholders
c. force stockholders to convert
d. force bondholders to convert
24) Many exchange-traded funds limit their portfolios to
a. high quality securities
b. stocks that respond to changes in consumer
prices (the Consumer Price Index or CPI)
c. stocks included in an aggregate measure of
stock prices
d. stocks and bonds of companies in a particular
industry
25) The present value of a dollar
1> increases as the interest rate increases
2> decreases as the interest rate increases
3> increases as the time period increases
4> decreases as the time period increases
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
26) Using the income statement and balance sheet constructed in (1) and (2), compute
the following ratios. Compare the results with the industry averages. What strengths and
weaknesses are apparent?
RATIO INDUSTRY AVERAGE
Current ratio 2:1
Acid test (quick ratio) 1:1
Inventory turnover
a. annual sales 2.5
b. cost of goods sold 1.2
Receivables turnover
a. annual credit sales 5.0x
b. annual sales 6.0x
Days sales outstanding 75 days
Operating profit margin 26%
Net profit margin 19%
Return on assets 10%
Return on equity 15%
Debt/equity 33%
Debt ratio (debt/total assets) 25%
Timesinterestearned 7.1x
ADDITIONAL INFORMATION:
last year’s inventory $40,000
credit sales $90,000
27) If an individual is in the 35 percent income tax bracket and corporate debt yields 7.5
percent, then to be competitive municipal debt must yield at least
a. 11.54%
b. 7.59%
c. 4.88%
d. 2.63%
28) The efficient frontier in portfolio theory
a. indicates the highest return for a given risk
b. illustrates the optimal tradeoff between long and
short-term capital gains
c. quantifies systematic and unsystematic risk
d. identifies the optimal portfolio for the investor
29) Investors may use P/E ratios and price/sales ratios to value stocks. If this analysis is
used, which of the
following is desirable?
a. a high P/E and a low price/sales ratio
b. a high P/E and a high price/sales ratio
c. a low P/E and a low price/sales ratio
d. a low P/E and a high price/sales ratio
30) An efficient portfolio
1> maximizes risk for a given return
2> minimizes risk for a given return
3> maximizes return for a given level of risk
4> minimizes return for a given level of risk
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
31) The accrued interest on a bond
a. avoids personal income taxation
b. is paid by the buyer of the bond to the seller of the bond
c. is the result of the possibility of the bond defaulting
d. applies only to zero coupon bonds
32) A put and a call have the following terms:
Call: strike price $30
term three months
price $3
Put: strike price $30
term three months
price $4
The price of the stock is currently $29. You sell the stock short and purchase the call.
Complete the following table and answer the questions.
Price of Profit on Profit on Net profit
the stock stock put
$20
25
30
35
40
a. What is the maximum possible profit on the position?
b. What is the maximum possible loss on the position?
c. What is the range of stock prices that generates a profit?
d. What advantage does this position offer?
33) Monetary policy affects securities prices by
1> affecting investors’ required return
2> increasing the federal deficit
3> affecting firms’ capacity to generate earnings
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
34) Given the following information,
price of a stock $39
strike price of a six-month call $35
market price of the call $8
strike price of a six-month put $40
market price of the put $3
finish the following sentences.
a. The intrinsic value of the call is _________.
b. The intrinsic value of the put is _________.
c. The time premium paid for the call is _________.
d. The time premium paid for the put is _________.
At the expiration of the options (i.e., after six months have lapsed), the price of the
stock is $45.
e. The profit (loss) from buying the call is _______.
f. The profit (loss) from writing the call covered (i.e.,
buying the stock and selling the call) is ________.
g. The profit (loss) from buying the put is _______.
h. The profit (loss) from selling the stock short is ______.
i. The maximum possible loss from buying the put is ______.
j. At expiration, the time premium paid for a put or a
call is _______.
35) A P/E ratio depends on
1> the firm’s dividends
2> the price of the stock
3> the firm’s per share earnings
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
36) As timesinterestearned increases,
a. bondholders’ position deteriorates
b. net income decreases
c. interest payments become more assured
d. taxes decrease
37) A state’s lottery winner is promised $200,000 a year for twenty years (starting at the
end of the first year). How much must the state invest now to guarantee the prize if the
state can earn annually 7 percent on its funds? How much must the state invest if the
annual payments are to be made at the beginning of the year?
38) The price of a stock is $46 and the prices of call options to buy the stock at $45 and
$50 are $6 and $3, respectively. What are the potential profits and losses when the price
of the stock is $40, $45, $50, and $55 if the investor buys the call at $45 and sells the
call at $50?
39) A portfolio manager is considering buying $100,000 worth of treasury bills for
$96,211 versus $100,000 worth of commercial paper for $95,897. Both securities will
mature in nine months. How much additional return will the commercial paper generate
over the Treasury bills?
40) You purchase a high-yield, junk bond for $1,000 that pays $140 annually. After
buying the bond, yields decline and you are able to reinvest the interest at only 9
percent. You reinvest all the interest payments. How much will you have when the bond
is retired after twelve years? What was the annual return you earned on this investment?
41) Your broker recommends that you purchase XYZ Inc. at $60. The stock pays a
$2.40 dividend which (like its per share earnings) is expected to grow annually at 8
percent. If you want to earn 12 percent on your funds, is this a good buy?
42) You bought a stock for $20 and sold it for $59.72 after six years. What was the
annual rate of return?
43) The inventory turnover for an industry is 6 (every two months) but Slow Corp. turns
over its inventory 4 times a year (every three months). If annual sales are $1,000,000
and the interest cost to carry inventory is 12 percent, what is the potential savings in
interest expense if the firm achieves the industry for the turnover of its inventory?
44) If the industry average days sales outstanding is 65 days and a firm with sales of
$1,034,550 has receivables of $268,700, how much in interest expense could the firm
save if the receivables turn over as quickly as the industry average and the cost of
carrying the receivables is 9%?
45) An investor sells 100 shares short at $43. The sale requires a margin deposit equal
to 60 percent of the proceeds of the sale. The company paid a cash dividend of $2 per
share. If the investor closed the position at $36, what was the percentage earned or lost
on the investment?
46) AIR National’s capacity is 120 passengers per flight. It currently carries 74
passengers per flight. Growth in passengers is expected to be 6 percent annually. New
plans will have to be ordered when the company is carrying 90 percent of capacity.
How long will it be before the firm must order new planes?