A True Statement Regarding Municipal Bonds
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A __________ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date.
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call option
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A firm that has large securities holdings that wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following?
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Repurchase agreement
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Money market securities are sometimes referred to as \"cash equivalent\" because _____.
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they are safe and marketable
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An investor in a T-bill earns interest by _________.
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buying the bill at a discount from the face value received at maturity
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Investors will earn higher rates of returns on TIPS than equivalent default risk standard bonds if _______________.
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inflation is higher than anticipated over the investment period
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Treasury notes have initial maturities between ________ years.
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1 and 10
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An individual who goes short in a futures position
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commits to delivering the underlying commodity at contract maturity
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Which one of the following is a true statement regarding the Dow Jones Industrial Average?
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It is a price-weighted average of 30 large industrial stocks
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Commercial paper is a short-term security issued by __________ to raise funds.
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large well-known companies
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An investor purchases one municipal and one corporate bond that pay rates of return of 5.00% and 6.40% 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
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5.00% and 5.44% Response Feedback: After-tax return on municipal bond = .05 After-tax return on corporate bond = .064(1 - .15) = 0.0544 = 5.44%
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Which one of the following is a true statement regarding corporate bonds?
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A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares
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Which of the following mortgage scenarios will benefit the homeowner the most?
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Fixed rare mortgage when interest rate rises.
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The Standard and Poors 500 is a(n) __________ weighted index.
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value
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Which of the following is not a true statement regarding municipal bonds?
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A municipal bond is a debt obligation issued by the Federal Government.
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Which of the following are not characteristic of common stock ownership?
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Unlimited liability
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Currently the Dow Jones Industrial Average is computed by _________.
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adding the prices of 30 large \"blue-chip\" stocks and dividing by a divisor adjusted for stock splits and large stock dividends
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A dollar denominated deposit at a London bank is called _____.
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eurodollars
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The interest rate charged by large banks in London to lend money among themselves is called _________.
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LIBOR
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The ________ the ratio of municipal bond yields to corporate bond yields the _________ the cutoff tax bracket where more individuals will prefer to hold municipal debt.
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higher; lower
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Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350 million and $150 million respectively. If you were to construct a price-weighted index of the three stocks what would be the index value?
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39 Response Feedback: Index = (12 + 75 + 30)/3 = 39
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Which of the following is not a money market instrument?
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Preferred stock
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Which one of the following is a true statement?
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Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock
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Which one of the following provides the best example of securitization?
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mortgage pass-through security
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Which of the following are true statements about T-bills? I. T-bills typically sell in denominations of $10,000 II. Income earned on T-bills is exempt from all Federal taxes III. Income earned on T-bills is exempt from state and local taxes
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I and III only
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A __________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date.
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put option
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A bond issued by the State of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket this bond would provide you with an equivalent taxable yield of _________.
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8.68% Response Feedback: 8.68% = 6.25%/(1 - 0.28)
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June call and put options on King Books Inc are available with exercise prices of $30, $35 and $40. Among the different exercise prices, the call option with the _____ exercise price and the put option with the _____ exercise price will have the greatest value.
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$30; $40
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What are business firms most likely to use derivative securities for?
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Hedging
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If you thought prices of stock would be rising over the next few months you may wish to __________________ on the stock.
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purchase a call option
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Deposits of commercial banks at the Federal Reserve are called _____.
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federal funds
