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Questions in this quiz (74)
1Which one of these characteristics applies to money market securities?
- AHigh level of risk
- BIssued solely by the U. S. Treasury
- CPotentially large fluctuations in value
- DShort maturities
2Which three of the following are key factors that limit direct investment in financial claims? Select three.
- AInflation risk
- BLiquidity costs
- CPrice risk
- DMonitoring costs
3Which one of these terms best describes the relationship between the rate of inflation and the rate of interest?
- AIndirect relationship
- BExponential relationship
- CNo relationship
- DDirect relationship
4Which one of these is the definition of a nominal interest rate?
- AA nominal interest rate is the rate of interest which excludes any special provisions.
- BA nominal interest rate is the rate of interest that excludes the inflation premium.
- CA nominal interest rate is the rate of interest that includes all risk premiums.
- DA nominal interest rate is the rate of interest that excludes all risk premiums.
5Which of the following are specific factors that affect nominal interest rates? Select all that apply.
- AExchange rate risk
- BLiquidity risk
- CDefault risk
- DTerm to maturity
6What can you determine with certainty about an upward-sloping yield curve according to the liquidity premium theory?
- AFuture 1-year rates will be lower than today's 1-year rate
- BFuture 1-year rates will be higher than today's 1-year rate
- CFuture 1-year rates will be the same as today's 1-year rate
- DLonger-term rates are higher than shorter-term rates today
7Which one of these sets of characteristics applies to money market securities?
- AShort-term, low price volatility, high risk
- BShort-term, low risk, high price volatility
- CLow risk, low price volatility, short-term
- DHigh risk, high price volatility, long-term
8Which one of the following is a key factor that makes direct investments unpopular with investors?
- AMonitoring costs
- BBanker's fees
- CFinancial intermediary costs
- DCosts of holding cash
9What is the best definition of default risk?
- ADefault risk is the possibility that an issuer may pay late or miss an interest or principal payment.
- BDefault risk is defined as paying off a loan prior to maturity to avoid incurring future interest.
- CDefault risk is defined as non-repayment of the principal value of a loan.
- DDefault risk is the potential for an issuer to never pay the interest or principal payments on a debt security.
10Which three of the following are key factors that limit direct investment in financial claims?
- ALiquidity costs
- BMonitoring costs
- CInflation risk
- DPrice risk
11Which one of the following best explains the concept of the unbiased expectations theory?
- ACurrent long-term interest rates are arithmetic averages of current and future expected short-term rates.
- BThe current yield curve is the market's expectations of current and future long-term rates.
- CThe long term N-year rate is simply the current 1-year rate raised to the Nth power.
- DCurrent long-term interest rates are geometric averages of current and future expected short-term rates.
12What can you determine with certainty about an upward-sloping yield curve according to the liquidity premium theory?
- ALonger-term rates are higher than shorter-term rates today
- BFuture 1-year rates will be lower than today's 1-year rate
- CFuture 1-year rates will be the same as today's 1-year rate
- DFuture 1-year rates will be higher than today's 1-year rate
13True or false: The issuer of the new securities will receive the proceeds of a security's sale if that sale occurs in the primary market.
- ATrue
- BFalse
14Which of these defines a secondary market? Select all that apply.
- AThe secondary market involves the resale of a stock by a shareholder.
- BA secondary market is a market in which the seller is also the issuer.
- CThe secondary market refers to all security transactions that involve individual investors.
- DA secondary market is a market where previously issued securities are traded.
15What is the basic premise of the liquidity theory?
- AInvestors must be paid a premium to hold more liquid securities.
- BInvestors must be paid a premium to offset increased future uncertainty.
- CInvestors are indifferent to liquidity.
- DInvestors demand a premium that is inversely related to the term to maturity.
16How is a primary market defined?
- AA primary market is the market in which a handful of institutions purchase an entire issue of securities.
- BA primary market is the sale of any security that has been registered with the SEC.
- CA primary market is a market in which corporations and other fund demanders obtain funds by issuing new securities.
- DThe primary market is defined as the market where only IPOs can occur.
17Which of these fits the definition of a secondary market transaction? Select all that apply.
- AThe Excel Co. sold 1,000 shares of its stock to Fred Stone.
- BThe Bolt Co. purchased 300 shares of Metals, Inc. stock in an IPO.
- CMartha sold 100 shares of stock to her son.
- DThe Feel Good Co. sold 500 shares of ABC, Inc. to The Better Health Co.
18Which money market security involves a sale, generally at a discounted price, that includes a promise to reverse the sale at a specified price on a specified date?
- ABanker's acceptance (BA)
- BNegotiable certificate of deposit
- CRepurchase agreement (repo)
- DTreasury bill
19According to the definition of a foreign exchange market, what good or commodity is exchanged in these markets?
- AForeign currency only
- BForeign-produced goods
- CForeign services
- DDomestic-produced
20Which one of these is a characteristic of a derivative security?
- AValue dependent on underlying security
- BPrice of asset exchanged determined when exchange occurs
- CInformal agreement
- DRisk-free security
21True or false: The issuer of the new securities will receive the proceeds of a security's sale if that sale occurs in the primary market.
- ATrue
- BFalse
22You are a U. S. cereal maker who buys corn in the U. S. and sells cereal in Mexico. Which of these options would be of interest to you? Select all that apply.
- AHedging a position to lock in a dollar/peso exchange rate
- BHedging a position to lock in the price of cotton
- CHedging a position to lock in the price of corn
- DHedging a position to lock in an interest rate
23The risk that an asset's value may be less than its purchase price is referred to as which type of risk?
- ALiquidity risk
- BPrice risk
- CInflation risk
- DDefault risk
24Which set of characteristics best applies to a derivative security agreement?
- AStandardized quantity, predetermined price of exchanged asset, specified exchange date, high degree of leverage
- BStandardized quantity, unspecified price of exchanged asset, and unspecified exchange date, low degree of leverage.
- CVariable quantity, predetermined price of exchanged asset, variable exchange date, low degree of leverage
- DVariable quantity, specified price of exchanged asset,and specified exchange date, high degree of leverage
25Which one of these statements is correct?
- ASecondary securities are primarily owned by financial institutions.
- BSecondary securities represent direct transfers of funds.
- CSecondary securities tend to be more liquid than primary securities.
- DSecondary securities are additional offerings of stock issued by corporations.
26Which one of these defines an asset transformer?
- AA financial institution which issues secondary securities to investors
- BA corporation that repurchases outstanding shares of stock
- CAn economic agent appointed to act on behalf of investors
- DA financial institution that issues primary equity securities
27Which one of these price changes meets the definition of price risk?
- AJamie purchased a store for $389,000. That store is now worth $415,000.
- BWillis purchased a lot for $120,000. That lot is now worth $89,000.
- CAudry purchased a building for $267,000. That building is still worth $267,000.
- DTheo purchased land for $539,000 and later sold it for $541,000.
28Which one of these is a characteristic of a derivative security?
- AValue dependent on underlying security
- BPrice of asset exchanged determined when exchange occurs
- CRisk-free security
- DInformal agreement
29The Corner Bank packaged a pool of home mortgages and sold mortgage-backed securities to the Uptown Insurance Co. to fund the monies loaned to the home owners. Which party(ies) meet the definition of asset transformer?
- AHomeowners with Corner Bank mortgages
- BUptown Insurance Co.
- CCorner Bank and Uptown Insurance Co.
- DCorner Bank only
30Which one of these defines an asset transformer?
- AAn economic agent appointed to act on behalf of investors
- BA financial institution which issues secondary securities to investors
- CA corporation that repurchases outstanding shares of stock
- DA financial institution that issues primary equity securities
31The largest supplier of loanable funds in the United States is
- AU.S. banks
- BThe household sector
- CCorporate investments
32What is the definition of a real interest rate?
- AA real interest rate is the rate an investor actually earns on an investment.
- BA real interest rate is the rate designated as (i) in the Fisher effect formula.
- CA real interest rate is the guaranteed rate that a bank pays on a certificate of deposit
- DA real interest rate is the rate that would exist on a default-free security if no inflation were expected.
33The term structure of interest rates compares similar bonds based on which variable?
- ATaxability provision
- BTime to maturity
- CLevel of default risk
- DDegree of liquidity
34True or false: In general, the quantity of loanable funds demanded drops as interest rates fall.
- ATrue
- BFalse
35The term structure of interest rates is derived from which one of these?
- AFisher effect
- BTime value of money
- CDefault risk concept
- DConsumer price index
36Which one of these statements correctly applies to the market segmentation theory?
- AEach individual investor has a preferred maturity based on his or her own financial situation.
- BFinancial intermediaries (FIs) are neutral in respect to security maturities.
- CIndividual investors prefer longer-term securities and must be compensated to switch to shorter-term securities.
- DThe maturity preferences of individual investors are directly offset by the maturity preferences of financial intermediaries (FIs).
37What is a forward rate?
- AA forward rate is an implied rate on a short-term security that will originate sometime in the future.
- BA forward rate is a rate on a security that will mature sometime in the future.
- CA forward rate is a real rate of interest that has been adjusted for inflation.
- DA forward rate is a real rate that has been adjusted for all the risks associated with an individual security j.
38Which one of these descriptions defines a Treasury inflation-protection security (TIPS)?
- AU.S. government bond with a variable coupon rate and a fixed par value
- BU. S. government bond with an inflation-adjusted par value and varying interest payments
- CU. S. government bond with inflation-adjusted interest payments and a fixed par value
- DU.S. government bond with a fixed coupon rate and par value
39True or false: The financial status of the issuer will affect the coupon rate that issuer pays on its bonds.
- ATrue
- BFalse
40The market rate of interest that is used to compute the present value of a bond is affected by which of the following? Select all that apply.
- ABond's face value
- BTax status of the bond
- CBond's coupon rate
- DCredit quality of the bond
41Assume a $1,000 Treasury inflation-protected bond has a 2 percent coupon and a face value at issuance of $1,000. The reference CPI is 202.34 and the current CPI is 203.18. What do you know for certain about this bond?
- AThe current par value is $1,000 but the coupon rate is currently greater than 2 percent.
- BThe coupon rate is still 2 percent but the interest payments have increased.
- CThe current semiannual interest payment is $10.
- DThe current par value is $1,000.
42A municipal bond quote displays a price quote of 98.67. How is this quote interpreted? Assume a typical face value for a municipal bond.
- AThe municipal bond is selling at a premium price of $4,933.50.
- BThe municipal bond is selling at a discounted price of $986.70.
- CThe municipal bond is selling at a discounted price of $4,933.50.
- DThe municipal bond is selling at a premium price of $986.70.
43Which of these best explains the current value of a bond?
- AThe current value is the future value of the bond's cash flows compounded at the market rate of interest.
- BThe current value is the present value of the bond's expected future interest payments discounted at the coupon rate.
- CThe current value is the present value of the bond's expected future cash flows discounted at the market rate of interest.
- DThe current value equals the par value plus the present value of the bond's expected future interest payments.
44Which one of these descriptions defines a Treasury inflation-protection security (TIPS)?
- AU.S. government bond with a variable coupon rate and a fixed par value
- BU. S. government bond with inflation-adjusted interest payments and a fixed par value
- CU. S. government bond with an inflation-adjusted par value and varying interest payments
- DU.S. government bond with a fixed coupon rate and par value
45True or false: The financial status of the issuer will affect the coupon rate that issuer pays on its bonds.
- ATrue
- BFalse
46The market rate of interest that is used to compute the present value of a bond is affected by which of the following? Select all that apply.
- ATax status of the bond
- BBond's face value
- CBond's coupon rate
- DCredit quality of the bond
47Why are U. S. Treasury bonds considered to be safe?
- AThey are secured by the full-faith-and-credit of the U. S. government.
- BThey provide income exempt from all forms of income taxes.
- CThey are repaid from user fees.
- DThey mature in one year or less.
48Which of these are basic assumptions that should be used when valuing a corporate coupon bond unless the problem states otherwise?
- AFace value = $1,000
- BAnnual interest payments
- CSemiannual interest payments
- DFace value = $10,000
49Which of the following affect the coupon rate a firm must set on its bonds if the bonds are to be sold at par? Select all that apply.
- ABond term
- BFace amount
- CDefault risk
- DMarket rates of interest
50How does the yield to call differ from the yield to maturity for the same bond? Select all that apply.
- AThe call price used in the yield to call usually exceeds the face value used in the yield to maturity.
- BThe interest payments are annual in the yield to call and semiannual in the yield to maturity.
- CThere are fewer time periods in the yield to call.
- DThe interest payments will vary as the coupon rate is applied to the call price rather than the par value in the yield to call.
51Which one of these is correct if a bond is selling at a premium?
- ACurrent yield > Coupon rate >Yield to maturity
- BCoupon rate > Current yield > Yield to maturity
- CYield to maturity > Current yield > Coupon rate
- DYield to maturity > Coupon rate >Current yield
52You need to select one of two premium bonds to purchase. You plan to hold whichever bond you select until it matures in 10 years. Which bond should you select and why?
- AThe bond with the highest premium as it will provide the highest payment at maturity.
- BThe bond with the highest yield to maturity as you prefer to earn the highest rate of return over the 10 years.
- CThe bond with the highest coupon rate because you plan to hold the bond to maturity.
- DThe bond with the highest coupon rate because the bond is selling at a premium.
53Mary placed an order to purchase 100 shares of ABC stock at the going price. The order was filled as soon as it reached the floor of the exchange. What type of order did Mary place?
- AMarket sell order
- BMarket buy order
- CLimit buy order
- DLimit sell order
54How is the dividend yield on a constant-dividend preferred stock defined?
- ALast semi-annual dividend payment/Current stock price
- BNext expected quarterly dividend/Current stock price
- CLast quarterly dividend/Current stock price
- DLast four quarters of dividend income/Current stock price
55How can a preferred stock be valued? Select all that apply.
- APreferred stock should be valued by dividing the annual dividend by the current market price.
- BPreferred stock can be valued the same as a bond.
- CPreferred stock can be valued as a perpetuity, PV = PMT/i
- DPreferred stock can be valued using the constant-growth model.
56Which of these are basic assumptions of a variable growth rate valuation? Select all that apply.
- Ag1 can be negative, positive, or equal to zero
- Bg2 < i
- Cg1 applies to a designated number of years
- Dg1 must be a sustainable rate of growth
57If you purchase shares of stock on NASDAQ, who is the most likely seller of those shares?
- AIndividual investor
- BSpecialist
- CBroker
- DDealer
58Assume a preferred stock pays a constant annual dividend. Which of these is a correct computation of the dividend yield? Select all that apply.
- ADividend yield = D1/P1
- BDividend yield = D1/P0
- CDividend yield = D/P0
- DDividend yield = D0/P0
59Which of these applies to the valuation of a preferred stock? Select all that apply.
- APreferred dividends are assumed to be a constant dollar amount.
- BPreferred dividends are assumed to have a constant, non-zero rate of growth.
- CPreferred dividend payments are assumed to be infinite.
- DPreferred dividend payments are assumed to have a finite life.
60What is the best definition of the variable-growth rate stock valuation method?
- AStock valuation method used when a firm is expected to pay totally irregular dividends into infinity
- BStock valuation method used when a firm's current growth rate is expected to change in the future
- CStock valuation method used when a firm is expected to go out of business
- DStock valuation method used when a firm has variable earnings but a constant dividend rate of growth
61A stock quote shows a P/E of 18. How is the ratio defined?
- ACurrent stock price/Last four quarters of earnings
- BAverage price for the last 52-week period/Last four quarters of earnings
- CAverage price for the last 52-week period/Estimated annual earnings for the next 12 months
- DCurrent stock price/Estimated annual earnings for the next 12 months
62Which of these terms best describes the trading process used by NASDAQ?
- AFace-to-face trading
- BMultiple market maker system
- CBroker system
- DSpecialist system
63What does it mean when a P/E is designated as a trailing P/E?
- AThe earnings used in the P/E calculation were for the past four quarters.
- BBoth the price and the earnings used in the P/E calculation were last year's values.
- CThe earnings used in the P/E calculation were for a period greater than 12 months.
- DThe price used in the P/E calculation was last year's price.
64Which of these are basic assumptions of a variable growth rate valuation? Select all that apply.
- Ag2 < i
- Bg1 applies to a designated number of years
- Cg1 can be negative, positive, or equal to zero
- Dg1 must be a sustainable rate of growth
65Which of these is correct?
- ADealers are willing to sell stocks at the ask price.
- BInvestors earn the spread.
- CInvestors buy stocks at the bid price.
- DDealers are willing to purchase stocks at the ask price.
66Which one of these statements is correct?
- AInvestors generally use the trailing P/E.
- BA forward P/E is less accurate than a trailing P/E.
- CThe trailing P/E includes investor's expectations of future profits.
- DMedia outlets generally report the forward P/E.
67Which of these accurately recaps dividend growth estimations and limitations as they apply to the dividend growth model? Select all that apply.
- ADividend growth must be based on actual historical data.
- BDividend growth must not exceed the economic growth rate in either the short-run or the long-run.
- CDividends can grow quickly in the short-run but cannot exceed the overall economic growth rate over the long-run.
- DDividend growth can be estimated based on historical data, dividend trends, or analyst's forecasts.
68The overall rate of growth for a firm and its industry is 3.5 percent. Which of these combinations of dividend growth rates are acceptable when computing the current value of the firm's stock?
- AShort-run growth = 5 percent; Long-run growth = 4 percent
- BShort-run growth = 20 percent; Long-run growth = 5 percent
- CShort-run growth = 15 percent; Long-run growth = 3 percent
- DShort-run growth = 2 percent; Long-run growth = 4 percent
69What is the definition of market capitalization?
- ABook value per share times number of shares outstanding
- BCurrent stock price times number of shares outstanding
- CBook value of equity
- DCurrent stock prices times number of shares traded
70What is the basic assumption of the constant-growth model?
- ADividends increase by a constant dollar amount each year.
- BThe model assumes that dividends become a constant dollar amount after a set number of years.
- CIf the dividend amount changes each year, it does so by a constant percentage.
- DDividends must increase by a constant percentage each year.
71What is the best definition of the variable-growth rate stock valuation method?
- AStock valuation method used when a firm has variable earnings but a constant dividend rate of growth
- BStock valuation method used when a firm is expected to go out of business
- CStock valuation method used when a firm is expected to pay totally irregular dividends into infinity
- DStock valuation method used when a firm's current growth rate is expected to change in the future
72Which of these is a limitation that applies to the constant-growth dividend model?
- Ag > i or g = i
- Bg < 3 percent
- Cg > 0
- Dg < i
73How is the discount rate used to value a stock related to the expected return on the stock? Assume the stock price fairly reflects the stock's value.
- AThe discount rate should exceed the expected rate of return.
- BThe discount rate should equal the expected rate of return.
- CThe discount should be equal to or less than the expected rate of return.
- DThe discount rate should be less than the expected rate of return.
74True or false: A growth stock is considered to be a bargain stock.
- ATrue
- BFalse
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- Quiz on test fen, created by Israel Cruz on 31/03/2023.
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- Israel Cruz
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- Created on 31 Mar 2023 · updated on 1 Apr 2023
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