Fundamentals of Investments, 8e (Jordan)
Chapter 3 Overview of Security Types
1) Which one of the following is the best definition of a money market instrument?
A) corporate debt that matures in 90 days or less
B) bank savings account
C) investment issued by a financial institution that matures in 30 days or less
D) investment issued by a financial institution that matures in one year or less
E) debt issued by the government or a corporation that matures in one year or less
2) A fixed-income security is defined as:
A) a debt obligation that pays a fixed rate of return for a one-year period of time.
B) common or preferred stock that pays a fixed annual dividend.
C) a long-term debt obligation that pays scheduled fixed payments.
D) long-term debt issued solely by a federal or state government.
E) any security originally issued as either debt or equity that pays a fixed, pre-set payment.
3) The annual interest payment divided by the current price of a bond is called the:
A) coupon rate.
B) current yield.
C) yield-to-maturity.
D) yield-to-market.
E) market yield.
4) A security originally sold by a business or government to raise money is called a(n):
A) derivative.
B) primary asset.
C) primary debt.
D) futures contract.
E) option contract.
5) A financial asset that represents a claim on another financial asset is classified as a ________
asset.
A) secondary
B) optioned
C) contracted
D) derivative
E) primary
6) A futures contract is an agreement:
A) that obligates a corporation to issue additional securities at a specified date in the future.
B) to exchange financial assets on a specified date in the future with the price determined on that
date.
C) to deliver goods today in exchange for an agreed upon payment to be paid on a specified date
in the future.
D) to exchange a specified quantity of goods on a specified date in the future at the current
market price.
E) to exchange goods on a specified date in the future at a price that is agreed upon today.
7) An agreement that grants the owner the right, but not the obligation, to buy or sell a specific
asset at a specified price during a specified time period is called a(n) ________ contract.
A) futures
B) obligatory
C) quoted
D) fixed
E) option
8) A call option is an agreement that:
A) obligates both the buyer and seller to a future transaction.
B) grants the seller the right to buy a security at a predetermined price.
C) gives the buyer the right to purchase an asset at some point in the future.
D) grants the seller the right, but not the obligation, to sell an asset.
E) presets a price but not a time period.
9) A contract that grants its buyer the right, but not the obligation, to sell an asset at a specified
price is called a:
A) futures contract.
B) call option.
C) preset contract.
D) put option.
E) primary contract.
10) The price paid to purchase an option contract is called the:
A) strike price.
B) option premium.
C) exercise price.
D) future premium.
E) current yield.
11) The amount of money per share that will be received when a put option on stock is exercised
is called the ________ price.
A) market
B) stock
C) strike
D) future
E) obligated
12) Riverview Chemical recently issued some debt that had an original maturity of nine months.
This debt is best classified as a(n):
A) option contract.
B) money market instrument.
C) fixed-income security.
D) derivative security.
E) futures contract.
13) Money market instruments:
A) tend to be illiquid.
B) are generally sold in small denominations.
C) cannot be resold.
D) may be sold on a discount basis.
E) are quoted in terms of a spread.
14) Money market instruments issued by a corporation:
A) are default-free.
B) are less liquid than those issued by the government.
C) must be held by the original purchaser until maturity.
D) can only be resold to the original issuer.
E) are risk-free.
15) Which one of the following is classified as a fixed-income security?
A) U.S. Treasury bill
B) 6-month municipal bond
C) common stock that pays regular quarterly dividends
D) 2-year U.S. Treasury security
E) 9-month bank certificate of deposit
16) Which one of the following sentences is correct concerning fixed-income securities?
A) The coupon rate on a fixed-income security is equal to the current yield.
B) The price of a fixed-income security is inversely related to the current yield.
C) Fixed-income securities are default free.
D) Fixed-income securities tend to be more liquid than money market securities.
E) Fixed-income securities include all debt instruments issued by the U.S. government.
17) Assume a semi-annual coupon bond matures in 3 years, has a face value of $1,000, a current
market price of $989, and a 5 percent coupon. Which one of the following statements is correct
concerning this bond?
A) The current coupon rate is greater than 5 percent.
B) The bond is a money market instrument.
C) The bond will pay less annual interest now than when it was originally issued.
D) The current yield exceeds the coupon rate.
E) The bond will pay semi-annual payments of $50 each.
18) Bond trades are reported:
A) on a weekly basis only.
B) only when originally sold.
C) on TRACE.
D) by the SEC.
E) only on government issues.
Use the following bond quotes to answer this question:
Issuer Name
Coupon
Maturity
High
Low
Last
Change
Alpha Industrial
5.875
Apr 2010
99.823
98.667
99.402
+0.008
Beta Movers
7.120
May 2036
103.407
100.013
103.354
+0.010
19) The Alpha Industrial bonds pay an annual interest payment equal to 5.875 percent of:
A) $999.90.
B) $1,000.00.
C) $1,000.13.
D) $1,033.54.
E) $1,034.07.
20) What was yesterday’s closing price on the Beta Movers bond?
A) $1,020.13
B) $1,033.44
C) $1,044.07
D) $1,053.54
E) $1,054.07
21) What is the current price of a $1,000 face value Alpha Industrial bond?
A) $986.67
B) $991.04
C) $994.02
D) $998.23
E) $1,000.00
22) Which one of the following represents a residual ownership interest in the issuer?
A) U.S. Treasury bond
B) corporate bond
C) municipal bond
D) preferred stock
E) common stock
23) Which one of the following statements related to common stock is correct?
A) Corporations are required to pay annual dividends to its common stockholders.
B) Corporations have the right to discontinue paying dividends.
C) Corporations pay dividends at the discretion of the firm’s president.
D) Common stock is a form of corporate debt.
E) Common stock has a pre-defined liquidation value.
24) Preferred stock:
A) represents the residual ownership of a corporation.
B) is generally issued only by new firms that are small in size.
C) has a fixed maturity date similar to a bond.
D) dividends can be skipped at the discretion of the company president.
E) may or may not be cumulative.
25) Preferred stock:
A) is a type of corporate debt.
B) is treated like debt for tax purposes.
C) is listed in the liabilities section of a balance sheet.
D) has a stated dividend but no stated liquidation value.
E) is treated like equity for both tax and accounting purposes.
Use the following stock quotes to answer this question:
52 WEEK
Company
Volume
Close
Chg
High
Low
Buy Rite
5,078,420
101.13
-0.05
104.90
82.13
Cloverdale
47,126,338
21.48
+0.01
30.15
16.80
Ditch Digger
11,298,006
48.19
-0.13
55.62
48.19
26) How many whole shares of Ditch Digger stock traded today?
A) 11,298
B) 112,980
C) 11,298,006
D) 112,980,060
E) 1,129,800,600
Use the following stock quotes to answer this question:
52 WEEK
Company
Volume
Div
Close
Chg
High
Low
Buy Rite
5,078,420
1.40
101.13
-0.05
104.90
82.13
Cloverdale
47,126,338
0.72
21.48
+0.01
30.15
16.80
Ditch Digger
11,298,006
0.48
48.1
-0.13
55.62
48.19
27) What is today’s closing price per share of Buy Rite stock?
A) $82.13
B) $101.13
C) $821.30
D) $1,011.30
E) $1,049.00
28) Which one of the following is a derivative asset?
A) common stock
B) option contract
C) government bond
D) preferred stock
E) corporate bond
29) Great Lakes Farm agreed this morning to sell General Mills 25,000 bushels of wheat six
months from now at a price per bushel of $9.75. This is an example of a:
A) call option.
B) put option.
C) futures contract.
D) money market security.
E) fixed-income security.
30) Cole’s Jewelers purchased a futures contract on 200 ounces of gold to be exchanged 3-
months from now. As the contract holder, Cole’s Jewelers:
A) has the right, but not the obligation, to purchase 200 ounces of gold 3 months from now.
B) has the obligation to purchase 200 ounces of gold at the market price three months from now.
C) has an obligation to buy 200 ounces of gold but only if the price of gold increases within the
next 3 months.
D) is expecting the price of gold to decrease and thus is locking in a selling price.
E) will profit if the price of gold is higher three months from now.
31) Futures contracts:
A) require payment in full at the time the contract is written.
B) can be resold.
C) establish the quantity to be exchanged but not the date of the exchange.
D) establish both the quantity to be exchanged and the exchange date but not the price.
E) are primary financial assets.
32) At the time a futures contract is written:
A) the underlying asset is specifically identified.
B) the buyer pays a good faith deposit to the seller.
C) the current market price of the underlying asset becomes the contract price.
D) the current market price of the underlying asset must be less than the agreed upon futures
price.
E) the buyer is granted the right, but not the obligation, to exercise the contract.
33) Which of the following are generally included in a standardized futures contract?
I. delivery date
II. quantity to be delivered
III. specific item to be delivered
IV. delivery location
A) I and II only
B) I, II, and III only
C) II, III, and IV only
D) I, III, and IV only
E) I, II, III, and IV
34) Harvest Fields sold ten September futures contracts on oats. Harvest Fields will:
A) pay for the oats in September.
B) take delivery of the oats in September.
C) pay for the oats now and take delivery in September.
D) receive payment now and deliver in September.
E) both receive payment and deliver in September.
35) Investing in a futures contract:
A) guarantees a sale but not a sale price.
B) can be profitable for both the buyer and the seller simultaneously.
C) guarantees the buyer a profit on the contract.
D) creates a gain for one party without causing a loss for the other party.
E) can be offset by taking an opposing position.
Use the following wheat futures quotes to answer this question.
Price = cents and 1/8ths per bushel
Prev
Exp
Last
Open
High
Low
Close
Settle
Settle
08 Mar
1093′2
1093′2
1093′4
1093′2
1093′2
1093′2
1063′0
08 May
1109′4
1109′6
1109′6
1109′2
1109′4
1109′4
1080′2
36) By how much did today’s settlement price per bushel for the Mar 08 wheat futures contract
increase over the prior day’s settlement price?
A) $0.3020
B) $0.3025
C) $30.20
D) $30.25
E) $30.50
37) What are the lowest and highest prices per bushel at which the March 08 wheat futures
contract sold today?
A) $10.9320; $10.9340
B) $10.9325; $10.9350
C) $10.6300; $10.9320
D) $10.6300; $10.9340
E) $10.6300; $10.9350
38) What price would you have paid today per bushel for the Mar 08 wheat futures contract if
you bought the contract at the final price of the day?
A) $10.8010
B) $10.8025
C) $10.9320
D) $10.9325
E) $11.0960
39) If you want the right, but not the obligation, to buy a stock at a specified price you should:
A) buy a call.
B) sell a call.
C) buy a put.
D) sell a put.
E) either sell a call or buy a put.
40) If you want the right, but not the obligation, to sell a stock at a specified price you should:
A) buy a call.
B) sell a call.
C) buy a put.
D) sell a put.
E) either sell a call or buy a put.
41) If you are willing to buy a stock and you wish to receive the option premium you should:
A) buy a call.
B) sell a call.
C) buy a put.
D) sell a put.
E) either sell a call or buy a put.
42) If you are willing to sell a stock and wish to receive the option premium you should:
A) buy a call.
B) sell a call.
C) buy a put.
D) sell a put.
E) either sell a call or buy a put.
43) A European put option grants the holder the right to:
A) buy the underlying security at a stated price at any time up to and including the expiration
date.
B) sell the underlying security at the strike price on or before the expiration date.
C) sell the underlying asset at the strike price only on the expiration date.
D) buy the underlying asset at or below the exercise price on or before the expiration date.
E) buy the underlying asset at the exercise price on the expiration date.
44) An American call option grants the holder the right to:
A) sell the underlying security at the strike price on or before the expiration date.
B) sell the underlying asset at the strike price only on the expiration date.
C) buy the underlying asset at or below the exercise price on or before the expiration date.
D) buy the underlying asset at the exercise price only on the expiration date.
E) buy the underlying security at a stated price on or before the expiration date.