FIN4504 Chapter 2

Flashcard maker : Paula Corcoran
Which of the following is not a money market instrument?
preferred stock
Ninety-one-day T-bill auctions are conducted _____.
weekly
When computing the bank discount yield in a leap year you would use ____ days in the year.
360
A dollar denominated deposit at a London bank is called ______.
eurodollars
Risk premiums on money market instruments increased during the _____.
a.OPEC oil price shocks
b.Long Term Capital Management collapse
c.1987 market crash
d.all of the above
Money market securities are sometimes referred to as \”cash equivalent\” because
a.they are marketable
b.they are liquid
c.they are low-risk
d.all of the above
The most important feature of municipal bonds is their _______.
tax-exempt status
______ voting of common stock gives minority shareholders the most representation on the board of directors.
Cumulative
_____ computes over 50 country indexes.
MSCI
______ would not be included in the EAFE index.
Canada
_____ is considered to be an emerging market country.
Brazil
__________ is a true statement.
__________ is a true statement.
The bid price of a treasury bill is __________.
the price at which the dealer in treasury bills is willing to buy the bill
__________ measure bond market performance through creating their own bond market index.
a.Lehman Brothers
b.Merrill Lynch
c.Salomon Brothers
d.All of the above
Deposits of commercial banks at the Federal Reserve are called ______.
federal funds
__________ is not a true statement regarding municipal bonds.
A municipal bond is a debt obligation issued by the Federal Government.
__________ is not a characteristic of a money market instrument.
long maturity
In a futures contract, the short position is taken by the person who __________.
commits to delivering the commodity
__________ is not a nickname for an organization which issues federal agency debt.
Georgie Mac
Commercial paper is a short-term security issued by __________ to raise funds.
large well-known companies
A German company sells a bond denominated in euros to German residents. This bond is called a _____.
a.Yankee bond
b.Samurai bond
c.Eurobond
d.none of the above
__________ is a true statement regarding the Dow Jones Industrial Average.
It is a price-weighted average of 30 large industrial stocks
Treasury bills are financial instruments initially sold by __________ to raise funds.
the Federal Government
__________ is a true statement.
At issuance, treasury notes maturities range up to 10 years
A bond that has no collateral is called __________.
b.a debenture
A __________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date.
put option
The Tax Reform Act of 1986 restricted the use of _____.
private purpose tax-exempt bonds
__________ is a true statement regarding corporate bonds.
A corporate convertible bond gives its holder the right to exchange it for a specified number of the company’s common shares
The yield on tax-exempt bonds is
a.usually less than 50% of the yield on taxable bonds
b.normally about 90% of the yield on taxable bonds.
c.normally greater than the yield on taxable bonds.
d.none of the above
__________ is not a money market instrument.
A treasury bond
__________ would best describe Eurodollars.
Dollar-denominated deposits at foreign banks and branches of American banks outside the U.S.
The premier German stock index is the __________.
DAX
A __________ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date.
call option
A mortgage-backed security is __________.
a.an obligation that is secured by a pool of mortgages
b.an ownership claim in a pool of mortgages
c.either a or b
__________ market-value weighted.
a.The New York Stock Exchange Composite index is
b.The Standard & Poor’s Composite 500 Stock index is
c.The Wilshire 5000 index is
d.All of the above are
The interest rate charged by banks with excess reserves at a Federal Reserve Bank to banks needing overnight loans to meet reserve requirements is called the __________.
federal funds rate
In the event of the firm’s bankruptcy, __________.
the most shareholders can lose is their original investment in the firm’s stock
The Dow Jones Industrial Average is computed by __________.
adding the prices of the 30 stocks in the index and dividing by a divisor
39. An investor purchases one municipal and one corporate bond that pay rates of return of 8% and 10% respectively. If the investor is in the 15% tax bracket, his after tax rates of return on the municipal and corporate bonds would be respectively
8% and 8.5%
If a treasury note has a bid price of $982.50, the quoted bid price in the Wall Street Journal would be __________.
$98:08
A 10 year Treasury bond with an 8% coupon rate should sell for ____ a 10 year Treasury bond with a 12% coupon rate.
less than
The price quotations of treasury bonds in the Wall Street Journal show an ask price of 104:16 and a bid price of 104:08. As a buyer of the bond you expect to pay __________.
$1,045.00
The Dow Jones Industrial Average is __________
a price weighted average
Preferred stock is like equity in that _____.
a.it promises to pay a fixed stream of income each year
b.it has voting power regarding the firm’s management
c.the firm has a contractual obligation to pay the dividend
d.none of the above
Preferred stock is like long-term debt in that _____.
it promises to pay to its holder a fixed stream of income each year
Which of the following most closely approximates the performance of a buy and hold portfolio strategy?
a valve weighted index
In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs __________
by adjusting the divisor
If the market prices of the 30 stocks in the Dow Jones Industrial Average all change by the same dollar amount on a given day (ignoring the stock splits), which stock will have the greatest impact on the average?
all 30 stocks will have the same impact
A 5%, 15 year annual coupon bond issued by the State of Georgia is priced to yield 8%. If you are in the 28% tax bracket this bond would provide you with an equivalent taxable yield of __________
10.4%
Purchase of a futures contract involves __________
the obligation to buy an item at a specified price
Ownership of a put option entitles the owner to the __________ to ___________ a specific stock, on or before a specific date, at a specific price
right, sell
Futures and options are sometimes referred to as __________
a.derivative assets
b.integral assets
c.contingent claims
d.more than one of the above
The price which the owner of a call option must pay in order to purchase the stock named in the option contract is called the __________
a.purchase price
b.exercise price
c.strike price
d.More than one of the above
Ownership of a call option entitles the owner to the __________ to __________ a specific stock, on or before a specific date, at a specific price
right, buy
The Lehman Brothers bond index covers over __________issues.
6600
Which of the following types of bonds are excluded from most bond indices?
b.junk bonds
The Hang Seng index reflects market performance on which of the following major stock markets?
Hong Kong
The Standard and Poors 500 is a(n) __________ weighted index.
value
A firm that fails to pay dividends on its preferred stock is said to be __________.
in arrears
Large well-known companies often issue their own short term unsecured debt notes directly to the public, rather than borrowing from banks, their notes are called __________.
commercial paper
Which of the following is most like a short-term collateralized loan?
repurchase agreement
Euro dollars are __________
dollar denominated deposits at any foreign bank or foreign branch of an American bank
Which of the following is most like a postdated check?
banker’s acceptance
Treasury notes have initial maturities between ________years.
1 and 10
Which of the following are not characteristic of common stock ownership?
unlimited liability
Derivative securities can be based on _____.
a.currencies
b.common stocks
c.home mortgages
d.all of the above
Why are derivatives potentially dangerous?
They involve leverage.
What are business firms most likely to use derivative securities for?
hedging
What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11, 2001.
Increase, the spread usually increases in response to a crisis.
Why do put options with exercise prices lower than the price of the underlying stock sell for positive prices?
At some point in the future, the holder may be able to buy the stock, exercise the option, and make a profit.
Three stocks have share prices of $5, $7, and $3. What is the value of a price-weighted index of the three stocks?
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