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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federal funds C. bankers acceptances B. D. ______ would not be included in the EAFE index. Dow Jones 30 C. C. Nikkei 14. Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors B. Canada C. _____ is considered to be an emerging market country. time deposits 15. 2-2 . the price at which the dealer in treasury bills is willing to sell the bill B. Japan 10. France D. A. repurchase agreements D. greater than the ask price of the treasury bill expressed in dollar terms D. The interest income from a municipal bond is exempt from federal income taxation. Australia B. Which of the following is not a true statement regarding municipal bonds? A. The bid price of a treasury bill is _________. Investors can sue managers for nonpayment of preferred dividend 12. Preferred stockholders have voting power D. A municipal bond is a debt obligation issued by the Federal Government. A. Which one of the following is a true statement? A.Chapter 02 . the price at which the investor can buy the treasury bill 13. The German stock market is measured by which market index? A. A. the price at which the dealer in treasury bills is willing to buy the bill C. The interest income from a municipal bond is exempt from state and local taxation in the issuing state. B. FTSE B. Brazil D. A municipal bond is a debt obligation issued by state or local governments. Deposits of commercial banks at the Federal Reserve are called _____. Canada 11. Norway C. A. DAX D. France B. Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock C.Asset Classes and Financial Instruments 9.

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

a mortgage 25.97% C. If the bill has a $10. 4.877. a junk bond D. put option D. Commercial paper 30. A corporate debenture is a secured bond C. greater than the yield on taxable bonds D. $9.16 27.Chapter 02 . $10. The investor's actual annual rate of return on this investment was _____. 5. a debenture C. normally about 90% of the yield on taxable bonds C. A.000 face value an investor could buy this bill for A. An investor buys a T-bill at a bank discount quote of 4.92 bid and a 4.880.74% 2-4 . A __________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date. less than the yield on taxable bonds 29. $9. A treasury bill C.47% D. $9. 5. A. A. A T-bill quote sheet has 90 day T-bill quotes with a 4.Asset Classes and Financial Instruments 24.00 B. a callable bond B. A bond that has no collateral is called _________. interest rate swap 26.80 with 150 days to maturity. A. A. call option B. A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares D.00 D. 4. __________ is not a money market instrument.878. A corporate callable bond gives its holder the right to exchange it for a specified number of the company's common shares B. A certificate of deposit B.86 ask.80% B.000. A treasury bond D.50 C. usually less than 50% of the yield on taxable bonds B. The yield on tax-exempt bonds is ______. Holders of corporate bonds have voting rights in the company 28. Which one of the following is a true statement regarding corporate bonds? A. futures contract C.

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

99:08 40. 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. 5. 99:25 B.Chapter 02 . $1.022.023. $1.44% C. an unweighted average 2-6 . U. A. a price weighted average B.064(1 . bonds that protect investors from default risk C.40% respectively.50 42.75 B. an equally weighted average D. 5.K. Treasury bonds that protect investors from inflation 41. the quoted bid price in the Wall Street Journal would be _________. $1.15) = 0. If a treasury note has a bid price of $996.05 After-tax return on corporate bond = .40% D.40% B.0544 = 5. TIPS are ______.. 99:20 D.25.024. If the investor is in the 15% tax bracket.Asset Classes and Financial Instruments 38. The Dow Jones Industrial Average is _________. Treasury bonds that pay a variable rate of interest B. securities that trade on the Toronto stock index D. A.00% and 6. $1.00% and 5. An investor purchases one municipal and one corporate bond that pay rates of return of 5. 4. his after tax rates of return on the municipal and corporate bonds would be respectively A. a value weight and average C.38 C.75% and 5. 99:63 C.25% and 6. 5.44% After-tax return on municipal bond = .024. If you sold the bond you expect to receive _________.75 D. A.44% 39. A.00% and 6.

A value weighted index D. A bond issued by the State of Alabama is priced to yield 6. automatically B. All 30 stocks will have the same impact D. by adjusting the numerator D. In calculating the Dow Jones Industrial Average. it gives the holder voting power regarding the firm's management B. 4. Investors will earn higher rates of returns on TIPS than equivalent default risk standard bonds if _______________. The one with the lowest price C. the spread between commercial paper and Treasury securities remains low 44. 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. A.25%. the obligation to sell an item at a specified price 2-7 . Weights are not a factor in this situation 46. A price weighted index C. the right to sell an item at a specified price C. the preferred dividend is a tax-deductible expense for the firm D.0. Preferred stock is like long-term debt in that ___________. by adjusting the market value weig 47. A.68% = 6. If you are in the 28% tax bracket this bond would provide you with an equivalent taxable yield of _________. the obligation to buy an item at a specified price D. dollar increases in value against the euro D. it promises to pay to its holder a fixed stream of income each year C. the right to buy an item at a specified price B. An equally weighted index B. assuming there are no stock splits which stock will have the greatest impact on the average? A.28) 49. The one with the highest price B.50% B. A. 7. none of the above Feedback: 8. The answer cannot be determined by the information given 48. inflation is higher than anticipated over the investment period C. 8.25% C. A.Chapter 02 .S. A. Which of the following does not approximate the performance of a buy and hold portfolio strategy? A. in the event of bankruptcy preferred stock has equal status with debt 45. the U. the adjustment for a stock split occurs _________. by adjusting the divisor C.Asset Classes and Financial Instruments 43. inflation is lower than anticipated over the investment period B.68% D. The purchase of a futures contract gives the buyer _________.25%/(1 .

Which of the following types of bonds are excluded from most bond indices? A. higher. $30.72%) C. right. buy B. Municipal bonds D. The formula she should use is given by ______. The Hang Seng index reflects market performance on which of the following major stock markets? A. lower. She looks up municipal bond yields (rm) but wishes to calculate the taxable equivalent yield r. obligation. Hong Kong 2-8 . on or before a specific date. right. 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. r = rm * (1 . buy B. A.72%) D. sell 51. obligation. the call option with the _____ exercise price and the put option with the _____ exercise price will have the greatest value. Ownership of a put option entitles the owner to the __________ to ___________ a specific stock. higher D. Among the different exercise prices. A. lower C.Chapter 02 . at a specific price. Taiwan D. None of the above 56. Corporate bonds B. A. $30 B. sell C. $40 53.Asset Classes and Financial Instruments 50. $40. A. r = rm/(1 . Japan B. June call and put options on King Books Inc are available with exercise prices of $30. A. right. higher. lower B. sell C. Singapore C. $40 C. $35. sell 54. r = rm/(1 . obligation. Ownership of a call option entitles the owner to the __________ to __________ a specific stock. Junk bonds C. at a specific price. r = rm * (1 .28%) B. $40. lower. buy D. $35 D. obligation. higher 55. An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond or a corporate bond. right. $35 and $40.28%) 52. buy D. on or before a specific date.

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

Asset Classes and Financial Instruments 65. and $30 with total market values of $400 million. the spread usually decreases in response to a crisis. purchase a put option C. No change. Bankers acceptances B. What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11. If you thought prices of stock would be rising over the next few months you may wish to __________________ on the stock. place a short sale order 66. B. 69. No change. 43 D. Market making 68. Yield to maturity D. Repurchase agreement D. Daily high price for the bond B. $1. The latest quarterly dividend received by stock investors must have been ______ per share. Speculating C. Increase. Hedging B. Dividend yield 67. 30 Index = (12 + 75 + 30)/3 = 39 71.25 70. Which of the following is not considered a money market investment? A.80 C. 300 B. $75.45 D. $0. A typical bond price quote includes all but which one of the following? A. Eurodollar C. $350 million and $150 million respectively. Treasury note 2-10 . 39 C. A. A. Closing bond price C. sell a futures contract D.55 B.Chapter 02 . Decrease. the spread usually increases in response to a crisis. C. $0. $1. A stock quote indicates a stock price of $60 and a dividend yield of 3%. What are business firms most likely to use derivative securities for? A. as both yields will move in the same direction. 2001? A. Doing calculus problems D. as both yields will remain the same. purchase a call option B. Three stocks have share prices of $12. D. If you were to construct a price-weighted index of the three stocks what would be the index value? A.

3.06 * (1 .06 * 0.00% D. equal weighted index C.1% B.Chapter 02 .92% D.00% 78. 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. Brokers call C. What is the equivalent taxable yield on the bond given a 35% tax bracket? A. 3. value weighted index B. bond price index 75.(0.00% After-tax return to corporate investor after 70% exclusion = 0.96%.00%.30)*0.96%.68% C.15) = 5.20% B. 6. 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%. Wilshire 5000 D. 7.1% 76. Federal funds D. LIBOR 73. The Federal Reserve Board of Governors directly controls which of the following interest rates? A. A.39% After-tax return to individual investor = 0. 6. Bankers acceptances B. 5. 8. The after tax return to the corporation is _______ and the after tax return to the individual investor is _______.02% D. 4. price weighted index D.48% B. Nasdaq Composite B. 9. A tax free municipal bond provides a yield of 3. 6. equal weighted index C. 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. 5. If you wished to construct an index to track your portfolio performance your best match for your portfolio would be to construct a/an ______. value weighted index B. 3.00% 2-11 .0. An individual investor in a 15% tax bracket invests in the same preferred stock and earns the same pre-tax return. 5.2%.06 .Asset Classes and Financial Instruments 72. 5. 6.25% C.34 = 5. 3. DJIA 77.1% C. All but which one of the following indices is value weighted? A. A. S&P 500 C. A. price weighted index D.

49.85 C. The price of the last stock was just split 2 for 1 and the stock price was halved from $40 to $20. 2. 4. 5.58 82.33 D. What is the equivalent taxable yield on the bond given a 28% tax bracket? A. What is the price weighted index value of the Chompers Index? A. 35.34% B. 3. $20. A.68% C.75 2-12 . 40.50 D. 2. equal weighted index B. The stock prices for the three stocks are $54. 4.Asset Classes and Financial Instruments 79. The stock prices for the five stocks are $10.25% D. $50 and $40. The Hydro Index is a price weighted stock index based on the 5 largest boat manufacturers in the nation. 4. value weighted index C. and $44. share weighted index 80. An index computed from a simple average of returns is a/an _____. $23.43 B.34%. $80. 23. What is the new divisor for a price weighted index? A. The Chompers Index is a price weighted stock index based on the 3 largest fast food chains. price weighted index D. A tax free municipal bond provides a yield of 2.Chapter 02 .36 C. 4.92% 81.00 B.

970 C. respectively. $20. 5.Chapter 02 . If the stock prices changed to $16. 405. respectively. The number of outstanding shares for each is 350. Yesterday the three stocks were priced at $12. 985 84. A benchmark index has three stocks priced at $23.78% B. $41. and $56. None of the above. 2-13 .000 shares.000 shares. 960 B. what is the new index value? A. $43.Asset Classes and Financial Instruments 83. and $58. Fixed rate mortgage when interest rates falls. what is the one day rate of return on the index? A.35% C.000 shares.000 shares.42% 85. 6. and 200. 975 D. D. Fixed rare mortgage when interest rate rises. C.000 shares. as banker's interest will always be protected. 7. 500.16% D. and 553. 4.000 shares. Adjustable rate mortgage when interest rate increases. If the market value weighted index was 970 yesterday and the prices changed to $23. $18. B. The number of outstanding shares for each is 600. A benchmark market value index is comprised of three stocks. Which of the following mortgage scenarios will benefit the homeowner the most? A. and $62 today respectively. and $60.

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