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Quiz II

Time: 10 mins

1. Although derivatives can be used as speculative instruments, businesses most often use them to:

a. hedge.

b. offset debt

c. appease stockholders.

d. attract customers

e. enhance their balance sheets.

2. Financial intermediaries exist because small investors cannot efficiently

a. gather information

b. advertise for needed investments.

c. monitor their portfolios.

d. diversify their portfolios

e. all of the above

3. Which one of the following is not a money market instrument?

a. a Treasury bond

b. a negotiable certificate of deposit

c. a Eurodollar account

d. a Treasury bill

e. commercial paper

4. A T-bill has a face value of $10,000 and is selling for $9,800. If the T-bill matures in 90 days, what is its

affective annual yield?

a. 6.85%

b. 2.98%

c. 6.12%

d. 8.54%

e. 6.42%

5. Which of the following securities is a money market instrument?

a. Treasury Bond

b. Treasury Note

c. Commercial Paper

d. Municipal Bond

e. Mortgage Backed Security

6. A sale by Microsoft of new stock to the public would be a(n)

a. short sale.

b. initial public offering

c. secondary market transaction.

d. seasoned new issue offering.

e. none of the above.

7. A year ago, you invested $2,000 in a savings account that pays an annual interest rate of 6%. What is your

approximate annual real rate of return if the rate of inflation was 3% over the year?

a. 4%

b. 10%

c. 7%

d. 3%

8. You purchased a share of stock for $20. One year later you received $1 as dividend and sold the share for

$29. What was your holding period return?

a. 45%

b. 5%

c. 50%

d. 40%

e. None of the above

9. Which of the following statements is true:

a. Inflation has no effect on the nominal rate of interest.

b. The realized nominal rate of interest is always positive.

c. The realized nominal rate of interest is always greater than the real rate of interest.

d. Certificates of deposit offer a guaranteed real rate of interest.

e. None of the above must be true

10. The holding period return (HPR) on a share of stock is equal to

a. the capital gain yield over the period, plus the dividend yield.

b. the capital gain yield over the period, plus the inflation rate

c. the current yield plus the dividend yield

d. the dividend yield plus the risk premium.

e. the change in stock price.

11. In words, the real rate of interest is approximately equal to

a. the nominal rate times the inflation rate

b. the inflation rate minus the nominal rate.

c. the nominal rate minus the inflation rate.

d. the inflation rate divided by the nominal rate.

e. the nominal rate plus the inflation rate.

12. An investor purchased a bond 45 days ago for $895. He received $12 in interest and sold the bond for $893.

What is the holding period return on his investment?

a. 1.52%

b. 0.50%

c. 1.12%

d. 0.08%

e. 0.01%

13. LJP, Inc. has the following probability distribution of holding period returns on its stock.

State of Economy Probability HPR

Boom .25 25%

Normal Growth .45 15%

Recession .30 9%

The expected return on LJP's stock is

a. 15.7%.

b. 12.4%.

c. 16.5%.

d. 17.8%.

e. 11.6%.

14. LJP, Inc. has the following probability distribution of holding period returns on its stock.

Boom .25 25%

Normal Growth .45 15%

Recession .30 9%

The expected variance of these returns is

a. 66.6.

b. 35.3.

c. 29.4.

d. 40.5

e. none of the above

15. If a T-bill pays 5 percent, which of the following investments would not be chosen by a risk-averse investor?

a. An asset that pays 10 percent with a probability of 0.60 or 2 percent with a probability of 0.40

b. An asset that pays 10 percent with a probability of 0.40 or 2 percent with a probability of 0.60.

c. An asset that pays 10 percent with a probability of 0.30 or 3.75 percent with a probability of 0.70.

d. An asset that pays 10 percent with a probability of 0.20 or 3.75 percent with a probability

of 0.80

e. Neither A nor B would be chosen.

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