Chapter 02 - Asset Classes and Financial Instruments

Chapter 02 Asset Classes and Financial Instruments Answer Key Multiple Choice Questions

1. Which of the following is not a money market instrument? A. Treasury bill B. Commercial paper C. Preferred stock D. Banker's acceptance 2. Thirteen week T-bill auctions are conducted ____. A. daily B. weekly C. monthly D. quarterly 3. When computing the bank discount yield you would use ____ days in the year. A. 260 B. 360 C. 365 D. 366 4. A dollar denominated deposit at a London bank is called _____. A. eurodollars B. LIBOR C. fed funds D. banker's acceptance 5. Money market securities are sometimes referred to as "cash equivalent" because _____. A. they are safe and marketable B. they are not liquid C. they are high risk D. they are low denomination 6. The most actively traded money market security is A. Treasury bills B. Bankers' Acceptances C. Certificates of Deposit D. Common stock 7. ______ voting of common stock gives minority shareholders the most representation on the board of directors. A. Majority B. Cumulative C. Rights D. Proxy 8. An investor in a T-bill earns interest by _________. A. receiving interest payments every 90 days B. receiving dividend payments every 30 days C. converting the T-bill at maturity into a higher valued T-note D. buying the bill at a discount from the face value received at maturity
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_____ is considered to be an emerging market country. Which one of the following is a true statement? A. Preferred stockholders have voting power D. Norway C. A. A municipal bond is a debt obligation issued by state or local governments. Australia B. repurchase agreements D. Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock C. the price at which the dealer in treasury bills is willing to buy the bill C. the price at which the dealer in treasury bills is willing to sell the bill B. Canada C. Deposits of commercial banks at the Federal Reserve are called _____. Japan 10. Canada 11. C. Investors can sue managers for nonpayment of preferred dividend 12. the price at which the investor can buy the treasury bill 13. D. 2-2 . The bid price of a treasury bill is _________. The interest income from a municipal bond is exempt from federal income taxation. A. B. A municipal bond is a debt obligation issued by the Federal Government. DAX D. time deposits 15. greater than the ask price of the treasury bill expressed in dollar terms D. bankers acceptances B. The interest income from a municipal bond is exempt from state and local taxation in the issuing state. The German stock market is measured by which market index? A. A. Which of the following is not a true statement regarding municipal bonds? A. Nikkei 14. A. FTSE B. federal funds C.Chapter 02 . Dow Jones 30 C. Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors B. ______ would not be included in the EAFE index. Brazil D.Asset Classes and Financial Instruments 9. France D. France B.

the New York Stock Exchange 20. It is a price-weighted average of 30 large industrial stocks C. commercial banks B. Which of the following is not a characteristic of a money market instrument? A. It is a value-weighted average of 30 large industrial stocks B. large corporations D. state and city governments 23. 180 days C. large well-known companies D. the Federal Reserve B. Low risk D. An individual who goes short in a futures position A. Liquidity B.Chapter 02 . Sallie Mae D. Treasury bills are financial instruments issued by __________ to raise funds. It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange D. It is a value-weighted average of all stocks traded on the New York Stock Exchange 22. II and II 2-3 . A. The maximum maturity on commercial paper is A. Which one of the following is a true statement regarding the Dow Jones Industrial Average? A. Income earned on T-bills is exempt from state and local taxes A. I. Which of the following are true statements about T-bills? I.Asset Classes and Financial Instruments 16. Ginnie Mae 19. A. Which of the following is not a nickname for an agency associated with the mortgage markets? A. 30 days 21. Marketability C. Income earned on T-bills is exempt from all Federal taxes III. has the right to purchase the underlying commodity at contract maturity 18. Freddie Mac C. I and II only C. the Federal Government C. T-bills typically sell in denominations of $10. has the right to deliver the underlying commodity at contract maturity D. Maturity greater than one year 17. I and III only D. commercial banks C. Commercial paper is a short-term security issued by __________ to raise funds. commits to delivering the underlying commodity at contract maturity B. 270 days B. Fannie Mae B. 90 days D. I only B.000 II. commits to purchasing the underlying commodity at contract maturity C.

The investor's actual annual rate of return on this investment was _____. A treasury bond D.877.000 face value an investor could buy this bill for A. Which one of the following is a true statement regarding corporate bonds? A. If the bill has a $10.86 ask. A. A. A treasury bill C.880. A T-bill quote sheet has 90 day T-bill quotes with a 4. The yield on tax-exempt bonds is ______.80% B. A. a junk bond D. A corporate debenture is a secured bond C.000.00 D.878. 4.74% 2-4 . A certificate of deposit B. A bond that has no collateral is called _________. 4. 5. normally about 90% of the yield on taxable bonds C.80 with 150 days to maturity. futures contract C. a mortgage 25. A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares D. usually less than 50% of the yield on taxable bonds B.97% C. put option D. A __________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date. $9.00 B.16 27.92 bid and a 4. __________ is not a money market instrument.47% D. Holders of corporate bonds have voting rights in the company 28. a debenture C. $10. interest rate swap 26. A. An investor buys a T-bill at a bank discount quote of 4. $9. A corporate callable bond gives its holder the right to exchange it for a specified number of the company's common shares B.Asset Classes and Financial Instruments 24. greater than the yield on taxable bonds D.Chapter 02 . A. less than the yield on taxable bonds 29. Commercial paper 30. a callable bond B.50 C. call option B. $9. 5.

adding the prices of 30 large "blue-chip" stocks and dividing by 30 B. put option D. The interest rate charged by large banks in London to lend money among themselves is called _________. mortgage pass-through security D.K. Which one of the following provides the best example of securitization? A. futures contract C. Reverse repurchase agreement B. interest rate swap 33. A. A. The S&P 500 III. call option C. TSE 32.Chapter 02 . stock index is the _________. The Wilshire 5000 A. GSE D.Asset Classes and Financial Instruments 31. Currently the Dow Jones Industrial Average is computed by _________. convertible bond B. the prime rate B. preferred stock 34. Which of the following indices are market-value weighted? I. the discount rate C. call option B. calculating the total market value of the 30 firms in the index and dividing by 30 C. The NYSE Composite II. A __________ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date. FTSE C. A. I and III only D. the federal funds rate D. adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends 2-5 . I. DAX B. II and III 35. Repurchase agreement 37. Banker's acceptance C. A. Commercial paper D. LIBOR 36. The U. II and III only C. I and II only B. measuring the current total market value of the 30 stocks in the index relative to the total value on the previous day D. 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? A.

$1. If a treasury note has a bid price of $996. 4.75 B.00% and 5.0544 = 5. $1. securities that trade on the Toronto stock index D.05 After-tax return on corporate bond = .44% After-tax return on municipal bond = . U. a value weight and average C.. If the investor is in the 15% tax bracket.00% and 6.024. An investor purchases one municipal and one corporate bond that pay rates of return of 5. 5. 99:20 D. 5. TIPS are ______.40% respectively.75 D.00% and 6. 99:63 C.44% C. 99:25 B. A.50 42.K. A.75% and 5. an unweighted average 2-6 . the quoted bid price in the Wall Street Journal would be _________. an equally weighted average D. $1. 99:08 40.023.022. The price quotations of treasury bonds in the Wall Street Journal show a bid price of 102:12 and an ask price of 102:14. $1. The Dow Jones Industrial Average is _________.25. Treasury bonds that pay a variable rate of interest B.Chapter 02 . 5. a price weighted average B. his after tax rates of return on the municipal and corporate bonds would be respectively A. Treasury bonds that protect investors from inflation 41. A.40% B.Asset Classes and Financial Instruments 38. A. bonds that protect investors from default risk C.064(1 .024. If you sold the bond you expect to receive _________.44% 39.38 C.40% D.15) = 0.25% and 6.

A. 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. Weights are not a factor in this situation 46. All 30 stocks will have the same impact D. A bond issued by the State of Alabama is priced to yield 6. the adjustment for a stock split occurs _________. A. the spread between commercial paper and Treasury securities remains low 44. the right to buy an item at a specified price B. by adjusting the numerator D. 8. A. The purchase of a futures contract gives the buyer _________. The one with the highest price B.68% D. the obligation to sell an item at a specified price 2-7 .25%/(1 .0.28) 49. the right to sell an item at a specified price C. it gives the holder voting power regarding the firm's management B. none of the above Feedback: 8. 4. inflation is lower than anticipated over the investment period B. A price weighted index C. by adjusting the market value weig 47.S. The one with the lowest price C. A. in the event of bankruptcy preferred stock has equal status with debt 45. Preferred stock is like long-term debt in that ___________. A. 7. by adjusting the divisor C. Which of the following does not approximate the performance of a buy and hold portfolio strategy? A.Asset Classes and Financial Instruments 43. If you are in the 28% tax bracket this bond would provide you with an equivalent taxable yield of _________. The answer cannot be determined by the information given 48. In calculating the Dow Jones Industrial Average.25%. dollar increases in value against the euro D. inflation is higher than anticipated over the investment period C.68% = 6. the U. assuming there are no stock splits which stock will have the greatest impact on the average? A. the preferred dividend is a tax-deductible expense for the firm D. Investors will earn higher rates of returns on TIPS than equivalent default risk standard bonds if _______________. it promises to pay to its holder a fixed stream of income each year C. automatically B.25% C. the obligation to buy an item at a specified price D. A value weighted index D. An equally weighted index B.50% B.Chapter 02 .

Which of the following types of bonds are excluded from most bond indices? A. Singapore C. Taiwan D. Ownership of a call option entitles the owner to the __________ to __________ a specific stock. buy B. 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. $30. buy D.28%) 52. A. sell 51. Corporate bonds B. r = rm/(1 . None of the above 56. higher. A. Among the different exercise prices.Chapter 02 .72%) C. An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond or a corporate bond. $40 C. $35 and $40. A. higher 55. Junk bonds C. r = rm/(1 . The Hang Seng index reflects market performance on which of the following major stock markets? A. $40. right. buy D. sell 54. higher. Municipal bonds D. $35 D. obligation. r = rm * (1 . right. at a specific price. lower.72%) D. The formula she should use is given by ______. the call option with the _____ exercise price and the put option with the _____ exercise price will have the greatest value.Asset Classes and Financial Instruments 50. June call and put options on King Books Inc are available with exercise prices of $30. $40. at a specific price. obligation. on or before a specific date. higher D. A. $30 B. obligation.28%) B. sell C. sell C. She looks up municipal bond yields (rm) but wishes to calculate the taxable equivalent yield r. on or before a specific date. Hong Kong 2-8 . lower. buy B. lower B. Ownership of a put option entitles the owner to the __________ to ___________ a specific stock. Japan B. $35. A. right. r = rm * (1 . right. lower C. $40 53. obligation.

Banker's acceptance D. Commercial paper 61. dollar denominated deposits at any foreign bank or foreign branch of an American bank B. price C. Banker's acceptance C. A. Which of the following is used to back international sales of goods and services? A. insufferable D. Eurodollar deposits D. 1 and 10 64.Chapter 02 . The Standard and Poors 500 is a(n) __________ weighted index. Unlimited liability C. Residual claimant B. their notes are called _________. Certificate of deposit B. share 58. A firm that fails to pay dividends on its preferred stock is said to be _________. A. value D. Limited life of the security 2-9 . delinquent 59. in arrears C. Eurodollars are _________. equally B. Which of the following is most like a short-term collateralized loan? A. Repurchase agreement C. A. dollar denominated bonds issued by firms outside their home market C. Treasury notes have initial maturities between ________ years. insolvent B. Commercial paper 63. 2 and 4 B. Which of the following are not characteristic of common stock ownership? A. 5 and 10 C. rather than borrowing from banks. repurchase agreements C. dollars that wind up in banks as a result of money laundering activities 62. A. banker's acceptances D. certificates of deposit B. Large well-known companies often issue their own short term unsecured debt notes directly to the public.Asset Classes and Financial Instruments 57. Certificate of deposit B. 10 and 30 D. commercial paper 60. A. Voting rights D. currency issued by Euro Disney and traded in France D.

as both yields will move in the same direction.45 D. A.Asset Classes and Financial Instruments 65. Yield to maturity D. The latest quarterly dividend received by stock investors must have been ______ per share. $350 million and $150 million respectively. Which of the following is not considered a money market investment? A.25 70. No change. D. Daily high price for the bond B. Dividend yield 67. 300 B. place a short sale order 66. A typical bond price quote includes all but which one of the following? A. Closing bond price C. 39 C.80 C. C. What are business firms most likely to use derivative securities for? A. 30 Index = (12 + 75 + 30)/3 = 39 71. Hedging B. $0. What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11. the spread usually decreases in response to a crisis. Increase. $1. 69. A. 43 D. If you thought prices of stock would be rising over the next few months you may wish to __________________ on the stock. Eurodollar C. B. If you were to construct a price-weighted index of the three stocks what would be the index value? A. A stock quote indicates a stock price of $60 and a dividend yield of 3%. $0. $75. as both yields will remain the same. the spread usually increases in response to a crisis.Chapter 02 . Bankers acceptances B. Three stocks have share prices of $12. 2001? A. purchase a put option C. $1. sell a futures contract D. Repurchase agreement D. Doing calculus problems D. Speculating C. purchase a call option B. and $30 with total market values of $400 million. Market making 68. Decrease. No change.55 B. Treasury note 2-10 .

A.06 * (1 . 3. value weighted index B.0. 5. What is the equivalent taxable yield on the bond given a 35% tax bracket? A. If you wished to construct an index to track your portfolio performance your best match for your portfolio would be to construct a/an ______. A. A tax free municipal bond provides a yield of 3. 6.68% C. 5. 5.00% 2-11 . 6. In a ___________ index changes in the value of the stock with the greatest market value will move the index value the most everything else equal.34 = 5.(0. equal weighted index C.02% D. The Federal Reserve Board of Governors directly controls which of the following interest rates? A.00% After-tax return to corporate investor after 70% exclusion = 0.Chapter 02 . Federal funds D. 6.25% C. DJIA 77.39%. 9. A. All but which one of the following indices is value weighted? A.1% B. An individual investor in a 15% tax bracket invests in the same preferred stock and earns the same pre-tax return. 8. bond price index 74. A corporation in a 34% tax bracket invests in the preferred stock of another company and earns a 6% pre-tax rate of return.39% After-tax return to individual investor = 0.06 * 0.Asset Classes and Financial Instruments 72. 3.1% 76.20% B.96%. Wilshire 5000 D. bond price index 75. Brokers call C.00% D.00% 78. 7.2%.06 . price weighted index D.00%.1% C.15) = 5. 4. S&P 500 C.92% D.96%. Nasdaq Composite B. 3. 5. 6. 3. LIBOR 73.48% B. You decide to purchase an equal number of shares of stocks of firms to create a portfolio. What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%? A.30)*0. Bankers acceptances B. price weighted index D. equal weighted index C. value weighted index B. The after tax return to the corporation is _______ and the after tax return to the individual investor is _______.

What is the equivalent taxable yield on the bond given a 28% tax bracket? A. An index computed from a simple average of returns is a/an _____. 23.75 2-12 .36 C. The Chompers Index is a price weighted stock index based on the 3 largest fast food chains.58 82. 35.25% D.50 D. A tax free municipal bond provides a yield of 2.Chapter 02 . $20.34% B. The price of the last stock was just split 2 for 1 and the stock price was halved from $40 to $20. 4.33 D. $23.43 B. equal weighted index B. value weighted index C. 2.68% C. A. What is the new divisor for a price weighted index? A.34%. The Hydro Index is a price weighted stock index based on the 5 largest boat manufacturers in the nation. What is the price weighted index value of the Chompers Index? A.00 B. The stock prices for the five stocks are $10. 5. 2. 3. $50 and $40. 4. share weighted index 80. price weighted index D. 4. 4.85 C. 40. The stock prices for the three stocks are $54. 49. and $44.Asset Classes and Financial Instruments 79. $80.92% 81.

D. and $56. 405. C. $20. and $62 today respectively.42% 85. Fixed rate mortgage when interest rates falls. 5. and $60. respectively. B.16% D. 970 C. 500. The number of outstanding shares for each is 350. 4. 7. and 553. Fixed rare mortgage when interest rate rises.Chapter 02 . 960 B. and $58.35% C. $18. 2-13 .78% B.000 shares. None of the above.000 shares.000 shares. what is the one day rate of return on the index? A. The number of outstanding shares for each is 600. and 200. what is the new index value? A. A benchmark index has three stocks priced at $23.000 shares.000 shares. A benchmark market value index is comprised of three stocks. 6.Asset Classes and Financial Instruments 83. as banker's interest will always be protected. $41. 985 84. If the market value weighted index was 970 yesterday and the prices changed to $23. respectively. If the stock prices changed to $16. Which of the following mortgage scenarios will benefit the homeowner the most? A. 975 D.000 shares. $43. Adjustable rate mortgage when interest rate increases. Yesterday the three stocks were priced at $12.

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