Which of the following are impediments to the correction of a security’s mispricing?
I. sentiment-based risk
II. implementation costs
III. firm-specific risk
IV. noise trader risk
A. II only
B. II and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
A mortgage pool is divided into A, B, C, and Z-tranches based on the textbook example.
Which tranche will have the longest life?
A. A-tranche
B. B-tranche
C. C-tranche
D. Z-tranche
E. All tranches will have equal lives.
Which one of the following defines frame dependence?
A. Investors react differently to prospective gains and losses.
B. Investors tend to make more cognitive errors when they view investing as gambling.
C. Investors tend to be more irrational in bear markets than in bull markets.
D. Investors react differently depending on how an opportunity is presented.
E. Investors suffer from money illusion in bull markets but not in bear markets.
A tax exempt money market fund has an annual return of 3.76 percent. What is your
equivalent taxable rate if you are in a 28 percent marginal tax bracket?
A. 3.15 percent
B. 3.38 percent
C. 5.22 percent
D. 6.11 percent
E. 6.81 percent
Use the following stock quotes to answer this question:
What is the latest earnings per share for Baker Co. stock if the PE is 22?
A. $1.06
B. $1.10
C. $2.19
D. $3.55
E. $4.10
Mortgage-backed securities are defined as securities whose investment returns are
based on which one of the following?
A. lease payments from the tenants of financed property
B. interest only on mortgage loans
C. loan refinancings
D. condominium fees
E. pool of mortgages
Amy just purchased $12,000 of stock. She paid $9,000 in cash and borrowed the
remaining $3,000 needed to pay for this purchase. If you constructed a balance sheet
reflecting this transaction, the total assets would be:
A. $3,000.
B. $9,000.
C. $12,000.
D. $15,000.
E. $21,000.
Which of the following will increase the price of a money market instrument computed
using a discount yield?
I. increase in discount yield
II. decrease in discount yield
III. increase in days to maturity
IV. decrease in days to maturity
A. I only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only
Which one of the following is another term for implied volatility?
A. implied delta
B. implied standard deviation
C. implied alpha
D. implied beta
E. implied gamma
You want to buy 1,400 shares of a mutual fund that has an NAV of $26.50. The fund
charges a 3.5 percent front-end load. How much will you have to spend to make this
purchase?
A. $34,878.87
B. $35,913.00
C. $36,953.37
D. $37,333.33
E. $38,445.60
The arithmetic average return is the:
A. summation of the returns for a number of years, t, divided by (t – 1).
B. compound total return for a period of years, t, divided by t.
C. average compound return earned per year over a multi-year period.
D. average squared return earned in a single year.
E. return earned in an average year over a multi-year period.
For the past year, a particular stock has a relative strength value of 1.03 as compared to
the market. This means that the stock:
A. increased in value 3 percent more than the market for the day.
B. has 3 percent more risk than the average security.
C. outperformed the market for the period.
D. had 3 percent higher trading volume on a growth basis as compared to the market.
E. is selling for 103 percent of the market value per share.
The maximum option payoff from:
A. writing a put is $0.
B. buying a put is $0.
C. writing a call is an unlimited profit.
D. buying a call is the strike price.
E. writing a call is the stock price.
Your broker requires an initial margin of $4,500 per futures contract on soybeans and a
maintenance margin of $3,000 per contract. Soybean futures contracts are based on
5,000 bushels and quoted in cents per bushel. Yesterday, you bought 5 soybean futures
contracts at the closing settlement price of 1372. Today, the settlement quote is 1340.
All margin calls restore margin levels to their initial margin level. Will you receive a
margin call and if so, for what amount?
A. no margin call
B. call for $1,425
C. call for $2,487
D. call for $4,650
E. call for $8,000
What is the method of selling Treasury bills at less than face value called?
A. imputed basis
B. par value method
C. discount basis
D. STRIP basis
E. face value method
A firm has sales of $685,000 and cost of goods sold of $435,000. The firm expects sales
to increase by 6 percent next year. What is the gross profit amount expected to be next
year if the firm uses the percentage of sales approach when compiling pro forma
statements?
A. $235,100
B. $265,000
C. $335,000
D. $355,100
E. $536,100
Assume a stock’s price remains relatively stable while the money flow becomes highly
positive. Which one of the following is most expected given this scenario?
A. price decrease
B. stable price
C. price increase
D. increasing trading volume
E. decreasing trading volume
Tall Stand Timber stock has an expected return of 16.8 percent. What is the risk-free
rate if the risk premium on the stock is 12.1 percent?
A. 4.70 percent
B. 5.30 percent
C. 5.67 percent
D. 6.55 percent
E. 7.17 percent
Which one of the following is equal to the option premium minus the intrinsic value?
A. parity value
B. payoff value
C. time value
D. strike value
E. profit
Your broker requires an initial margin of $6,075 per futures contract on wheat and a
maintenance margin of $4,500 per contract. Wheat futures contracts are based on 5,000
bushels and quoted in cents per bushel. You sold one wheat futures contract yesterday at
the closing settlement price quote of 786. Today, the settlement quote is 808. Will you
receive a margin call and if so, for what amount? All margin calls restore the margin
level to its initial level.
A. no margin call
B. call for $475
C. call for $1,100
D. call for $4,750
E. call for $11,000
A bond has 8 years to maturity, a 7 percent coupon, a $1,000 face value, and pays
interest semiannually. What is the bond’s current price if the yield to maturity is 6.91
percent?
A. $799.32
B. $848.16
C. $917.92
D. $1,005.46
E. $1,009.73
Which one of the following statements must be true?
A. All securities are projected to have higher rates of return when the economy booms
versus when it is normal.
B. Considering the possible states of the economy emphasizes the fact that multiple
outcomes can be realized from an investment.
C. The highest probability of occurrence must be placed on a normal economy versus
either a boom or a recession.
D. The total of the probabilities of the economic states can vary between zero and 100
percent.
E. Various economic states affect a portfolio’s expected return but not the expected level
of risk.
VIX represents the volatility index on which one of the following?
A. Wilshire 3000 index
B. DJIA
C. S&P 500 index
D. Dow Jones Transportation average
E. NASDAQ 100
Which one of the following statements related to convertible bonds is correct?
A. Convertible bonds have a maximum value equal to the bond’s intrinsic value.
B. Convertible bonds have limited downside risk with unlimited upside potential.
C. A convertible bond is in-the-money when its call price is greater than its conversion
value.
D. Convertible bonds must be converted prior to or on the maturity date.
E. Convertible bonds must be converted once they are called.
A firm has the following account balances for this year. Sales for the year are $420,000.
Projected sales for next year are $441,000. The percentage of sales approach is used for
pro forma purposes. All balance sheet accounts, except long-term debt and common
stock, change according to that approach. The firm plans to decrease the long-term debt
balance by $23,500 next year. Retained earnings is expected to increase by $5,400 next
year. What is the projected external financing need?
A. -$14,150
B. -$6,850
C. $32,850
D. $36,000
E. $56,350
Which one of the following distinguishes a minimum variance portfolio?
A. lowest risk portfolio of any possible portfolio given the same securities but in
differing proportions
B. lowest risk portfolio possible given any specified expected rate of return
C. the zero risk portfolio created by maximizing the asset allocation mix
D. any portfolio with an expected standard deviation of 9 percent or less
E. any portfolio created with securities that are evenly weighted in respect to the asset
allocation mix
Pro forma financial statements are statements based on which one of the following?
A. projected future income, cash flows, and other non-cash items
B. historical revenue and expenses
C. historical asset and liability values
D. current period cash flows
E. current period revenues and expenses
The duration of a 3-month Treasury futures contract is 3.46 years. What is the duration
of the underlying Treasury note?
A. 2.98 years
B. 3.11 years
C. 3.21 years
D. 3.36 years
E. 3.48 years
The slope of the security market line is equal to the:
A. market risk premium.
B. risk-free rate of return.
C. market rate of return.
D. market rate of return multiplied by any security’s beta, given an inefficient market.
E. market rate of return multiplied by the risk-free rate.
According to Dow theory, which one of the following is the primary means of
eliminating secondary market trends?
A. corrections
B. confirmations
C. continuations
D. conversions
E. coordinated trades
The unadjusted total percentage return on a security that has not been compared to any
benchmark is referred to as which one of the following?
A. raw return
B. indexed return
C. real return
D. marginal return
E. absolute return
The entire formal contract between a bond issuer and the bondholders is found in which
one of the following documents?
A. prospectus
B. prospectus summary
C. indenture agreement
D. indenture summary
E. trust certificate
Which one of the following statements correctly relates to reverse mortgages?
A. The loans allow homeowners to build equity in their property.
B. The total costs associated with the loans are relatively low.
C. Borrowers only qualify if they are 65 years of age or older.
D. Homeowner’s make monthly payments of principal and interest.
E. No payments are required from the borrower as long as the borrower lives in the
mortgaged property.
You analyze a firm’s financial statements and invest based upon the results of this
analysis. Which form of market efficiency must exist if you are able to earn excess
profits on these investments?
A. weak-form
B. historical-form
C. semi-strong form
D. full-form
E. mild-form