Investments Ch2
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T-bills are financial instruments initially sold by ________ to raise funds.
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the U.S. government
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The bid price of a T-bill in the secondary market is
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the price at which the dealer in T-bills is willing to buy the bill.
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The smallest component of the money market is
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Eurodollars
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The smallest component of the bond market is
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asset-backed
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The largest component of the bond market is
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Treasury
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component of the money market is
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A. repurchase agreements B. Eurodollars D. money market mutual funds E. commercial paper
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Commercial paper is a short-term security issued by ________ to raise funds.
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C. large, well-known companies
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best describes Eurodollars
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C. dollar-denominated deposits at foreign banks and branches of American banks outside the U.S.
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Deposits of commercial banks at the Federal Reserve Bank are called __________.
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D. federal funds
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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 _________.
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C. federal funds rate
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true regarding municipal bonds?
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I) A municipal bond is a debt obligation issued by state or local governments. III) The interest income from a municipal bond is exempt from federal income taxation. IV) The interest income from a municipal bond is exempt from state and local taxation in the issuing state.
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is true regarding a corporate bond?
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A corporate convertible bond gives the holder the right to exchange the bond for a specified number of the company's common shares.
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17. In the event of the firm's bankruptcy
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A. the most shareholders can lose is their original investment in the firm's stock. D. the claims of preferred shareholders are honored before those of the common shareholders.
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true regarding a firm's securities
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C. Preferred dividends are usually cumulative.
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true of the Dow Jones Industrial Average
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B. It is a price-weighted average of 30 large industrial stocks. C. The divisor must be adjusted for stock splits.
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indices is (are) market-value weighted?
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I) The New York Stock Exchange Composite Index II) The Standard and Poor's 500 Stock Index
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The Dow Jones Industrial Average (DJIA) is computed by:
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C. adding the prices of the 30 stocks in the index and dividing by a divisor.
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The price-weighted index constructed with the three stocks ($40, $70, $10) The value-weighted index constructed with the three stocks ($40, $70, $10) using a divisor of 100 is... (# of shares outstanding 200, 500, 600) Assume at these prices the value-weighted index constructed with the three stocks is 490. What would the index be if stock B is split 2 for 1 and stock C 4 for 1?
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($40 + $70 + $10)/3 = $40. The sum of the value of the three stocks divided by 100 is 490: [($40 x 200) + ($70 x 500) + ($10 x 600) ] /100 = 490. D. 490 (Value-weighted indexes are not affected by stock splits.)
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The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104:08 and a bid price of 104:04. As a buyer of the bond what is the dollar price you expect to pay?
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You pay the asking price of the dealer, 104 8/32, or 104.25% of $1,000, or $1042.50.
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The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104:08 and a bid price of 104:04. As a seller of the bond what is the dollar price you expect to pay?
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You receive the bid price of the dealer, 104 4/32, or 104.125% of $1,000, or $1,041.25.
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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 20% marginal tax bracket, his or her after tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.
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rc = 0.10(1 - 0.20) = 0.08, or 8%; rm = 0.08(1 - 0) = 8%.
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An investor purchases one municipal and one corporate bond that pay rates of return of 7.5% and 10.3%, respectively. If the investor is in the 25% marginal tax bracket, his or her after tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.
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rc = 0.10.3(1 - 0.25) = 0.07725, or 7.73%; rm = 0.075(1 - 0) = 7.5%.
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29. If a Treasury note has a bid price of $975, the quoted bid price in the Wall Street Journal would be
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B. 97:16 (Treasuries are quoted as a percent of $1,000 and in 1/32s.)
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30. If a Treasury note has a bid price of $995, the quoted bid price in the Wall Street Journal would be
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B. 99:16. (Treasuries are quoted as a percent of $1,000 and in 1/32s.)
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31. In calculating the Standard and Poor's stock price indices, the adjustment for stock split occurs:
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B. automatically. (The calculation of the value-weighted S&P indices includes both price and number of shares of each of the stocks in the index. Thus, the effects of stock splits are automatically incorporated into the calculation.)
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Which of the following statements regarding the Dow Jones Industrial Average (DJIA) is true
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A. The DJIA is not very representative of the market as a whole. B. The DJIA consists of 30 blue chip stocks. D. The DJIA divisor needs to be adjusted for stock splits. E. The value of the DJIA is much higher than individual stock prices.
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33. The index that includes the largest number of actively traded stock is:
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C. the Wilshire 5000 Index.
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A 5.5% 20-year municipal bond is currently priced to yield 7.2%. For a taxpayer in the 33% marginal tax bracket, this bond would offer an equivalent taxable yield of:
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0.072 = rm (1-t); 0.072 = rm / (0.67); rm = 0.1075 = 10.75%.
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If the market prices of each of the 30 stocks in the Dow Jones Industrial Average (DJIA) all change by the same percentage amount during a given day, which stock will have the greatest impact on the DJIA?
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A. The stock trading at the highest dollar price per share.
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36. The stocks on the Dow Jones Industrial Average
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C. are changed occasionally as circumstances dictate.
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. Federally sponsored agency debt
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B. would probably be backed by the U.S. Treasury in the event of a near-default. C. has a small positive yield spread relative to U.S. Treasuries.
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Brokers' calls
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A. are funds used by individuals who wish to buy stocks on margin. B.are funds borrowed by the broker from the bank, with the agreement to repay the bank immediately if requested to do so.
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A form of short-term borrowing by dealers in government securities is
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B. repurchase agreements.
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Which of the following securities is a money market instrument?
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D. commercial paper.
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The yield to maturity reported in the financial pages for Treasury securities
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B. is calculated by doubling the semiannual yield. C. is also called the bond equivalent yield.
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a mortgage-related government or government sponsored agency?
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A. The Federal Home Loan Bank B. The Federal National Mortgage Association D. Freddie Mac E. Ginnie Mae
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In order for you to be indifferent between the after tax returns on a corporate bond paying 8.5% and a tax-exempt municipal bond paying 6.12%, what would your tax bracket need to be?
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.0612 = .085(1-t); (1-t) = 0.72; t = .28
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What does the term \"negotiable\" mean with regard to negotiable certificates of deposit?
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The CD can be sold to another investor if the owner needs to cash it in before its maturity date.
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Freddie Mac and Ginnie Mae were organized to provide
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B. liquidity for the mortgage market.
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The type of municipal bond that is used to finance commercial enterprises such as the construction of a new building for a corporation is called
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E. an industrial development bond.
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Suppose an investor is considering a corporate bond with a 7.17% before-tax yield and a municipal bond with a 5.93% before-tax yield. At what marginal tax rate would the investor be indifferent between investing in the corporate and investing in the muni?
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tm = 1 - (5.93%/7.17%) = 17.29%
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characteristics of preferred stock?
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It pays its holder a fixed amount of income each year, at the discretion of its managers Its dividends are usually cumulative
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Bond market indexes can be difficult to construct because
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bonds tend to trade infrequently, making price information difficult to obtain.
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With regard to a futures contract, the long position is held by
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the trader who commits to purchasing the commodity on the delivery date
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In order for you to be indifferent between the after tax returns on a corporate bond paying 9% and a taxexempt municipal bond paying 7%, what would your tax bracket need to be?
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.055 = .07(1-t); (1-t) = 0.786; t = .214
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In order for you to be indifferent between the after tax returns on a corporate bond paying 7% and a taxexempt municipal bond paying 5.5%, what would your tax bracket need to be?
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.055 = .07(1-t); (1-t) = 0.786; t = .214
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An investor purchases one municipal and one corporate bond that pay rates of return of 6% and 8%, respectively. If the investor is in the 25% marginal tax bracket, his or her after tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.
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rc = 0.08(1 - 0.25) = 0.06, or 6%; rm = 0.06(1 - 0) = 6%.
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An investor purchases one municipal and one corporate bond that pay rates of return of 7.2% and 9.1%, respectively. If the investor is in the 15% marginal tax bracket, his or her after tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.
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rc = 0.091(1 - 0.15) = 0.07735, or 7.735%; rm = 0.072(1 - 0) = 7.2%.
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For a taxpayer in the 25% marginal tax bracket, a 20-year municipal bond currently yielding 5.5% would offer an equivalent taxable yield of:
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0.055 = rm(1-t); 0.0733 = rm / 0.75).
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For a taxpayer in the 15% marginal tax bracket, a 15-year municipal bond currently yielding 6.2% would offer an equivalent taxable yield of:
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0.062 = rm(1-t); 0.062 = rm / (0.85); rm = 0.0729 = 7.29%.
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59. With regard to a futures contract, the short position is held by
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E. the trader who commits to delivering the commodity on the delivery date.
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60. A call option allows the buyer to
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B. buy the underlying asset at the exercise price on or before the expiration date. C. sell the option in the open market prior to expiration.
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61. A put option allows the holder to
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B. sell the underlying asset at the strike price on or before the expiration date. C. sell the option in the open market prior to expiration.
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62. The ____ index represents the performance of the German stock market.
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A. DAX
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63. The ____ index represents the performance of the Japanese stock market.
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C. Nikkei
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64. The ____ index represents the performance of the U.K. stock market.
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B. FTSE
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65. The ____ index represents the performance of the Hong Kong stock market.
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D. Hang Seng
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66. The ____ index represents the performance of the Canadian stock market.
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C. TSX
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67. The ultimate stock index in the U.S. is the
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A. Wilshire 5000.
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68. The ____ is an example of a U.S. index of large firms.
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B. DJIA
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69. The ____ is an example of a U.S. index of small firms.
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D. Russell 2000
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70. The largest component of the money market is ____________.
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E. savings deposits
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71. Certificates of deposit are insured by the ____________.
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D. FDIC
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72. Certificates of deposit are insured for up to ____________ in the event of bank insolvency.
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the Federal Deposit Insurance Corporation (FDIC) insures saving deposits for up to $100,000.
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73. The maximum maturity of commercial paper that can be issued without SEC registration is
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A. 270 days
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Which of the following is used extensively in foreign trade when the creditworthiness of one trader is unknown to the trading partner?
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B. bankers acceptances
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75. A US dollar denominated bond that is sold in Singapore is a ____________.
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Eurobond
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76. A municipal bond issued to finance an airport, hospital, turnpike, or port authority is typically a
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A. revenue bond
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77. Unsecured bonds are called ____________.
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A. junk bonds or D. subordinated debentures
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78. A bond that can be retired prior to maturity by the issuer is a ____________ bond.
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callable
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79. Corporations can exclude ____________ percent of the dividends received from preferred stock.
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B. 70
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You purchased a futures contract on corn at a futures price of 350 and at the time of expiration the price was 352. What was your profit or loss?
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There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was (3.52 - 3.50) = $0.02 per bushel, or $0.02 * 5,000 = $100.
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You purchased a futures contract on corn at a futures price of 331 and at the time of expiration the price was 343. What was your profit or loss?
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There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was (3.43 - 3.31) = $0.12 per bushel, or $0.12 * 5,000 = $600.
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You sold a futures contract on corn at a futures price of 350 and at the time of expiration the price was 352. What was your profit or loss?
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There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your loss was ($3.50 - 3.52) = $0.02 per bushel, or -$0.02 * 5,000 = -$100.
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You sold a futures contract on corn at a futures price of 331 and at the time of expiration the price was 343. What was your profit or loss?
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There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was (3.31 - 3.43) = -$0.12 per bushel, or -$0.12 * 5,000 = -$600.
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You purchased a futures contract on oats at a futures price of 233.75 and at the time of expiration the price was 261.25. What was your profit or loss?
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There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was (2.6125 - 2.3375) = $0.275 per bushel, or $0.275 * 5,000 = $1,375.
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You sold a futures contract on oats at a futures price of 233.75 and at the time of expiration the price was 261.25. What was your profit or loss?
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There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your loss was ($2.3375 - 2.6125) = -$0.275 per bushel, or -$0.275 * 5,000 = -$1,375.
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