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Multiple Choice
1. A multinational corporation ____.
a.
has direct investments in manufacturing and/or distribution facilities in more than one country
b.
exports finished goods for sale in another country
c.
imports raw materials from another country
d.
has a manufacturing representative in another country
a
2. The difference between merchandise exports and imports is known as the ____.
a.
transaction exposure
b.
difference in purchasing power
c.
goods and services trade balance
d.
import/export reserve
c
3. The interest rate at which banks in the Eurocurrency market lend to each other is known as the ____.
a.
Eurocurrency currency rate (ECR)
b.
London interbank offered rate
c.
exchange rate
d.
interest rate parity
b
4. From the perspective of a U.S. firm, an exchange rate quoted as $1.47 per British pound is known as a(n) ____ quote.
a.
hedge
b.
direct
c.
futures
d.
indirect
b
5. If Japanese yen are deposited in a bank in Paris, the deposits would be called ____
a.
Eurofrancs
b.
European Currency Unit
c.
Eurobond
d.
Euroyen
d
6. If the spot rate for Swiss francs is $0.6658/franc and the 180-day forward rate is $0.6637, the market is indicating that
the Swiss franc is expected to _____.
a.
strengthen relative to the dollar
b.
weaken relative to the ECU
c.
lose value relative to the dollar over the next 6 months
d.
gain value relative to the dollar over the next 6 months
c
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7. Which of the following is not a correct statement about foreign currency futures?
a.
futures contracts have a standardized maturity date
b.
futures contracts are an exchange-traded agreement
c.
futures contracts are not liquid
d.
futures contracts are “marked to market” daily
8. The most important foreign currency futures market in the United States is the ____.
a.
Chicago Board of Trade
b.
New York Mercantile Exchange
c.
Commodity Exchange
d.
Chicago Mercantile Exchange
d
9. The buyer of a foreign currency call option has the ____ a fixed amount of a foreign currency.
a.
right to sell
b.
right but not the obligation to buy
c.
obligation to buy, only at expiration,
d.
obligation to buy
b
10. Eurodollars are U.S. dollars that have been deposited in _____.
a.
foreign banks
b.
foreign branches of U.S. banks
c.
foreign subsidiaries
d.
either foreign banks or foreign branches of U.S. banks
d
11. If the exchange rate from U.S. dollars to Canadian dollars is $0.80/Canadian dollar, then the exchange rate from
Canadian dollars to U.S. dollars is _____.
a.
$0.80 Canadian $/US dollar
b.
$1.25 Canadian $/US dollar
c.
$1.20 Canadian $/US dollar
d.
$8.00 Canadian $/US dollar
b
12. If the exchange rate from U.S. dollars to Swiss francs is $0.20/franc, then the exchange rate from francs to dollars is
_____.
a.
0.20 francs/dollar
b.
0.80 francs/dollar
c.
5.0 francs/dollar
d.
2.0 francs/dollar
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13. If the spot rate (in U.S. dollars) for Japanese yen is 0.00703 and the 180-day forward rate is 0.00717, then the yen is
trading at a(n) ____.
a.
expected gain
b.
forward premium
c.
reciprocal
d.
forward discount
b
14. If the forward (direct quote) exchange rate is lower than the spot rate, then the currency is said to be trading at a ____.
a.
forward premium
b.
forward gain
c.
forward discount
d.
forward loss
c
15. Financial middlemen include _____.
a.
securities brokers
b.
securities dealers
c.
investment bankers
d.
All of these are correct
d
16. The New York Stock Exchange is an example of a _____.
a.
money market
b.
capital market
c.
primary financial market
d.
secondary financial market
d
17. The Standard & Poor’s 500 Stock Price Index is a ____ index.
a.
price weighted
b.
market value-weighted
c.
price average
d.
None of these are correct
b
18. Securities not listed on exchanges are said to be traded
a.
on the AMEX
b.
as composite transactions
c.
over the counter
d.
on the regional exchanges
c
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19. Financial intermediaries include _____.
a.
securities brokers
b.
commercial banks
c.
securities dealers
d.
All of these are correct
b
20. ____ markets deal in long-term securities having maturities greater than one year.
a.
Credit
b.
Money
c.
Commodity futures
d.
Capital
d
21. ____ markets deal in short-term securities having maturities of one year or less.
a.
Credit
b.
Money
c.
Capital
d.
Capital and credit
b
22. Which of the following (if any) are not financial intermediaries?
a.
commercial bank
b.
thrift institution
c.
securities broker
d.
All of these are financial intermediaries
c
23. In the ____ market, the firm receives the proceeds from the sale of new securities.
a.
over-the-counter
b.
secondary financial
c.
fully integrated
d.
primary financial
d
24. A savings and loan association is an example of which type of financial intermediary?
a.
commercial bank
b.
investment company
c.
finance company
d.
thrift institution
d
25. In any economy as a whole, the actual savings for a given period of time must ____ the actual investments.
a.
be greater than
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b.
be unrelated to
c.
equal
d.
be less than
c
26. Financial intermediaries _____.
a.
issue secondary claims to the lender
b.
are compensated for their services by fixed fees
c.
include both brokers and dealers
d.
issue primary claims to the lender
a
27. The main purpose of the U.S. financial system is to facilitate the transfer of funds from _____.
a.
financial middlemen to financial intermediaries
b.
surplus spending units to deficit spending units
c.
primary claimholders to secondary claimholders
d.
lenders to financial intermediaries
b
28. Money markets deal in securities having maturities of ____; capital market securities have maturities ____.
a.
less than 18 months; greater than 18 months
b.
one year or less; greater than one year
c.
less than 9 months; greater than 9 months
d.
less than 6 months; greater than 6 months
b
29. Commercial banks are an important source of _____.
a.
mortgage loans
b.
equity loans
c.
real estate loans
d.
short-term loans and term loans
d
30. Finance companies obtain funds by _____.
a.
issuing their own equity securities
b.
accepting both demand and time deposits
c.
issuing their own debt securities
d.
pooling funds
c
31. Changes in the tax code that speed up depreciation _____ the present value of investment cash flows and therefore
make the investment _____ desirable.
a.
decrease; more
b.
decrease; less
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c.
increase; more
d.
increase; less
32. The interest rate in the Eurodollar market is related to _____.
a.
the DOW
b.
the stock market
c.
the LIBOR
d.
interest rates in the United States
33. Capital markets in financially sophisticated economies are not perfectly efficient due to _____.
a.
anomalous events
b.
excessive extrapolation by investors
c.
refusal to sell losing stocks
d.
All of these are correct
d
34. Commercial banks are a major source of term loans. These loans are best used for financing _____.
a.
the expansion of the business
b.
the establishment of overseas operations
c.
current assets such as inventory or accounts receivable
d.
the payment of dividends
35. The Dow Jones Industrial Average is calculated using the _____.
a.
total market value of 30 stocks
b.
stock price of 30 large, well-established industrial corporations
c.
a weighted index of 30 stocks
d.
industrial, railroad, financial, and utility stocks
b
36. Insider trading is defined as _____.
a.
an individual using proper trading rules
b.
an individual buying or selling using non-SEC disclosure rules
c.
an individual buying or selling on the basis of material nonpublic information
d.
a zero-plus game
37. Capital markets are said to be efficient. This means _____.
a.
they process stock trades accurately and quickly
b.
the market provides quick access to a firm’s financial statements
c.
security prices quickly reflect all economically relevant information
d.
accurate stock quotes are quickly available to all investors
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c
38. Ex post returns differ from ex ante returns in that they represent ____ values rather than ____ values.
a.
estimated; actual
b.
accounting; economic
c.
actual; estimated
d.
economic; accounting
c
39. The fact that no investor can expect to earn excess returns based on an investment strategy using only historical stock
price or return information is an example of ____ market efficiency.
a.
strong-form
b.
weak-form
c.
semiweak-form
d.
semistrong-form
b
40. With semistrong-form market efficiency, no investor can expect to earn excess returns based on an investment strategy
using any ____ information.
a.
past market price
b.
market value
c.
publicly available
d.
private
c
41. In an efficient capital market, all security investments will have a(n) ____.
a.
required rate of return that exceeds the cost of capital
b.
positive NPV
c.
required rate of return that is zero
d.
NPV of zero
d
42. In an efficient capital market, corporate diversification is ____.
a.
unnecessary
b.
inexpensive
c.
detrimental to corporate managers
d.
of great benefit
a
43. The barriers to the free flow of capital among the major world capital markets include all of the following EXCEPT
____.
a.
low transaction costs
b.
taxation policies
c.
foreign exchange risks
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d.
legal restrictions
a
44. For the financial manager, taxes have important implications for ____.
a.
capital expenditure decisions
b.
leasing decisions
c.
capital structure policy
d.
All of these are correct
d
45. Changes in the tax code that slow down depreciation ____ the present value of investment cash flows and therefore
make the investment ____ desirable.
a.
decrease; more
b.
decrease; less
c.
increase; more
d.
increase; less
b
46. In an efficient capital market ____.
a.
required returns equal expected returns
b.
investors will have holding period returns equal to zero
c.
purchase of any security yields zero profit
d.
purchasing stocks is no better than gambling
a
47. If the spot rate for the British pound is $1.5077 and the 180-day forward rate is $1.4934, what is the approximate
annualized forward premium (discount)?
a.
premium of 1.90%
b.
premium of 0.97%
c.
discount of (-)1.90%
d.
discount of (-)0.97%
c
48. If the spot rate for the Japanese yen is $0.009204 and the 90-day forward rate is $0.009227, what is the approximate
annualized forward premium (discount)?
a.
premium of 1.00%
b.
premium of 0.50%
c.
discount of -0.99%
d.
premium of 0.25%
a
49. Christy purchased 100 shares of Good Idea stock for $48 last year. Yesterday she sold the stock for $45. If she
received $4 in dividends during the time she held the security, what is her holding period return (round % to 2 decimals)?
a.
2.08%
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b.
8.30%
c.
-6.30%
d.
14.60%
a
50. If an investor purchased 100 shares of Biggee stock for $30 per share six months ago, and then sold the stock today for
$33 per share, what was the investor’s holding period return if a total of $1 per share in dividends was received over the
six-month period (round % to 1 decimal)?
a.
10.0%
b.
27.1%
c.
17.1%
d.
13.3%
d
51. What is the holding period return to an investor who bought 100 shares of Oil Slick stock nine months ago for $36 per
share, received two $50 dividend checks, and sold the stock today at $38 a share (round % to 2 decimals)?
a.
5.56%
b.
8.33%
c.
11.11%
d.
6.94%
b
52. If a treasury bond can be purchased for $9,450 today and the bond holder will receive $850 in interest and the face
value at maturity is $10,000, what is the holding period return (round % to 1 decimal)?
a.
14.8%
b.
5.8%
c.
6.7%
d.
12.6%
a
53. You bought 100 shares of Risky Venture stock six months ago for $14 per share and sold it yesterday for $12. The
company paid a total of $0.24 per share in dividends to you during the time you held the stock. What was your holding
period return (round % to 2 decimals)?
a.
-25.14%
b.
-16.67%
c.
-12.57%
d.
16.00%
c
54. Maher purchased 100 shares of Chill Pill Pharmaceuticals at $30 per share last spring and sold them in six months for
$36 per share. The stock paid no dividend. What was Maher’s holding period return?
a.
40%
b.
20%
c.
10%
d.
5%
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b
55. Two years ago you bought 100 shares of Big Bubba convertible preferred stock at $25 per share. The preferred stock
had an annual dividend of $2.125 per share, and a total of $3.19 in dividends per share have been paid so far. Today the
company announced that the stock is redeemable for $26.70 plus accrued and unpaid dividends, for a total of $27.76.
Alternatively, holders may convert their shares of preferred stock at a conversion rate of 1.6393 shares of Big Bubba
common stock for each share of preferred stock. If the closing price of Big Bubba common stock is $27.50, what is your
holding period return on the conversion option (round % to 2 decimals)?
a.
93.08%
b.
23.80%
c.
80.32%
d.
64.60%
a
56. If the spot rate (in U.S. dollars) for Japanese yen is 0.00703 and the 180-day forward rate is 0.00717, then the yen is
trading at an annualized forward ____ (round % to 2 decimals).
a.
premium of 4.04%
b.
premium of 3.98%
c.
premium of 3.91%
d.
discount of 3.89%
b
57. Lear purchased 100 shares of Quitcha Twitchin Anti-inch Cream stock at $30 per share last year and sold them eleven
months later for $24 per share. The shares split 2 for 1 shortly after Lear purchased the stock. If the stock paid $0.25 per
share in dividends last year, what is Lear’s holding period return (round to 2 decimals)?
a.
61.67%
b.
-19.17%
c.
21.67%
d.
6.17%
a
58. Which of the following reflect(s) the implications of income taxes for financial managers?
I. Interest payments on debt incurred by the firm are not tax deductible for the firm.
II. Preferred stock and common stock dividends are tax deductible for the firm and are used as often as possible to raise
capital.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements I and II are correct.
d.
Neither statement I nor II is correct.
d
59. For a company with positive pre-tax earnings and a 35 percent income tax rate, a new debt issue that increases interest
by $500,000 would cost the company ____.
a.
$175,000
b.
$325,000
c.
$500,000
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d.
$675,000
b
60. Which of the following is correct regarding the forms of market efficiency?
I. In an efficient capital market stock prices provide an unbiased estimate of the true value of an enterprise.
II. In an efficient capital market, stock prices reflect a present value of the firm’s expected cash flows.
a.
Only statement I is correct
b.
Only statement II is correct
c.
Both statements I and II are correct
d.
Neither statement I nor II is correct
c
61. Which of the following statements is (are) correct about financial intermediaries?
I. Financial intermediaries primarily operate within the secondary market.
II. Examples of financial intermediaries are: commercial banks, thrift Institutions and the Internal Revenue Service.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements I and II are correct.
d.
Neither statement I nor II is correct.
d
62. There are three degrees of market efficiency. All of the following statements are correct EXCEPT ____.
a.
The weak form efficiency states that no investor can earn excess returns based on historical price or return
information.
b.
The strong form of efficiency states that no investor can consistently earn excess returns since all public and
private information is reflected in stock prices.
c.
The semi-strong form of efficiency states that no investor can earn excess returns based on an investment
strategy using publicly available information.
d.
Market efficiency is a hard and fast rule that has been verified in real-world situations.
d
63. Most U.S. Treasury bonds are traded in ____.
a.
The Wall Street Journal
b.
stock market indexes
c.
listed security exchanges
d.
over-the-counter markets
d
64. An example of a financial middleman is a(n) ____.
a.
commercial bank
b.
stock-broker
c.
insurance company
d.
thrift institution
b
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65. An example of a listed security exchange within the secondary market is ____.
a.
OTC
b.
NYSE
c.
NASDAQ
d.
automated quotations
b
66. As a group, net savers are ____.
a.
businesses
b.
households
c.
government
d.
partnerships
b
67. Trading on the NYSE is conducted by members of the exchange. The members that execute orders and act as agents
on behalf of their clients are ____.
a.
floor brokers
b.
exchange runners
c.
designated market makers
d.
SEC agents
a
68. The difference between the bid price and the ask price on a security is the ____.
a.
spread
b.
value
c.
asset factor
d.
commission
a
69. There are many reasons for the financial crisis in 2007. The most significant event closely associated with this crisis is
____.
a.
the stock market crash
b.
the U.S. real estate bubble
c.
government overspending
d.
the use of financial hedging
b
70. In the financial crisis of 2007, there was cheap money coming from emerging markets. Examples of emerging markets
are all of the following EXCEPT ____.
a.
South Korea
b.
Australia
c.
India
d.
China
b
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71. Although there was a financial crisis in 2007-2010, some firms were able to weather the crisis. These firms had all of
the following characteristics that were directly responsible for their ability to survive the crisis EXCEPT ____.
a.
tight control over fixed and variable costs
b.
low business risk
c.
a business model that encouraged risk taking by management that paid off
d.
selling products that appealed to cost-conscious consumers
c
72. The difference between a put option and a call option is that ____.
a.
a call option is the option to buy
b.
a put option allows the purchase of extra stock
c.
a call option cannot be resold
d.
a put option requires the owner of the put option to sell on a specific date
a
73. Foreign currency options reflect ____ forward and future contracts.
a.
an obligation for
b.
an alternative to
c.
a delivery of
d.
a specific requirement of
b
74. Foreign currency forward and future options provide a means for firms to control ____.
a.
foreign government intervention
b.
foreign political problems
c.
foreign exchange risk
d.
the foreign transport of the goods
c
75. An investor decides to sell his stock based on information he received about some internal audit revealing that the
company has severe financial problems. Trading on this information is called ____.
a.
private trading
b.
insider trading
c.
options trading
d.
information trading
b
76. ____ finance seeks to identify why some investors react irrationally when confronted with unexpected ups and downs
in the market.
a.
Systematic
b.
Weak-form
c.
Asset evaluation
d.
Behavioral
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d
77. Each of the following markets, at some time in the past, has experienced a bubble that impacted the financial market
EXCEPT ____.
a.
real estate
b.
stock market
c.
gold
d.
blue chip
d
78. Each of the following contributed to the start of the financial crisis in 2007 EXCEPT ____.
a.
the Gulf War
b.
the creation of complex mortgage-backed securities
c.
very low interest rates
d.
use of high leverage by individuals and corporations
a
79. Each of the following has tax implications as it concerns financial management decisions EXCEPT ____.
a.
capital structure policy
b.
capital budgeting
c.
inventory control
d.
leasing
80. Financial intermediaries are compensated for their services by ____.
a.
the interest rate spread
b.
salary
c.
stock options
d.
preferred stock certificates
a
81. Financial assets include all of the following EXCEPT ____.
a.
money
b.
debt securities
c.
equity securities
d.
inventory
d
Essay
82. What are the differences between the primary and secondary markets?
The secondary market allows the investor to purchase securities that are already in circulation. These are
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83. What is the purpose and importance of the stock market indexes?
84. Explain the degrees of market efficiency and their applicability to the stock market.
85. Define the differences between the money market and the capital market.
86. List the types of disclosure forms required by the SEC, and explain what information is contained in each form.
87. List changes that have occurred within financial markets regulation as a result of the passage of the Sarbanes-Oxley
Act of 2002.
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88. How did the mortgage market provide the impetus for the financial crisis that began in 2007?