Test Bank For Essentials of Investments, 8th Edition
Test Bank For Essentials of Investments, 8th Edition ensures you’re prepared with expertly crafted questions and solutions.
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ch01
Student: ___________________________________________________________________________
1. Financial assets represent _____ of total assets of U.S. households.
A. over 60%
B. over 90%
C. under 10%
D. about 30%
2. Real assets in the economy include all but which one of the following?
A. Land
B. Buildings
C. Consumer durables
D. Common stock
3. Net worth represents _____ of the liabilities and net worth of commercial banks.
A. about 51%
B. about 91%
C. about 11%
D. about 31%
4. According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households
is ___.
A. mutual fund shares
B. real estate
C. pension reserves
D. corporate equity
5. According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is
________.
A. mortgages
B. consumer credit
C. bank loans
D. gambling debts
6. ____ is not a derivative security.
A. A share of common stock
B. A call option
C. A futures contract
D. None of these options (All of the answers are derivative securities.)
7. According to the Flow of Funds Accounts of the United States, the largest financial asset of U.S.
households is ____.
A. mutual fund shares
B. corporate equity
C. pension reserves
D. personal trusts
Student: ___________________________________________________________________________
1. Financial assets represent _____ of total assets of U.S. households.
A. over 60%
B. over 90%
C. under 10%
D. about 30%
2. Real assets in the economy include all but which one of the following?
A. Land
B. Buildings
C. Consumer durables
D. Common stock
3. Net worth represents _____ of the liabilities and net worth of commercial banks.
A. about 51%
B. about 91%
C. about 11%
D. about 31%
4. According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households
is ___.
A. mutual fund shares
B. real estate
C. pension reserves
D. corporate equity
5. According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is
________.
A. mortgages
B. consumer credit
C. bank loans
D. gambling debts
6. ____ is not a derivative security.
A. A share of common stock
B. A call option
C. A futures contract
D. None of these options (All of the answers are derivative securities.)
7. According to the Flow of Funds Accounts of the United States, the largest financial asset of U.S.
households is ____.
A. mutual fund shares
B. corporate equity
C. pension reserves
D. personal trusts
ch01
Student: ___________________________________________________________________________
1. Financial assets represent _____ of total assets of U.S. households.
A. over 60%
B. over 90%
C. under 10%
D. about 30%
2. Real assets in the economy include all but which one of the following?
A. Land
B. Buildings
C. Consumer durables
D. Common stock
3. Net worth represents _____ of the liabilities and net worth of commercial banks.
A. about 51%
B. about 91%
C. about 11%
D. about 31%
4. According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households
is ___.
A. mutual fund shares
B. real estate
C. pension reserves
D. corporate equity
5. According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is
________.
A. mortgages
B. consumer credit
C. bank loans
D. gambling debts
6. ____ is not a derivative security.
A. A share of common stock
B. A call option
C. A futures contract
D. None of these options (All of the answers are derivative securities.)
7. According to the Flow of Funds Accounts of the United States, the largest financial asset of U.S.
households is ____.
A. mutual fund shares
B. corporate equity
C. pension reserves
D. personal trusts
Student: ___________________________________________________________________________
1. Financial assets represent _____ of total assets of U.S. households.
A. over 60%
B. over 90%
C. under 10%
D. about 30%
2. Real assets in the economy include all but which one of the following?
A. Land
B. Buildings
C. Consumer durables
D. Common stock
3. Net worth represents _____ of the liabilities and net worth of commercial banks.
A. about 51%
B. about 91%
C. about 11%
D. about 31%
4. According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households
is ___.
A. mutual fund shares
B. real estate
C. pension reserves
D. corporate equity
5. According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is
________.
A. mortgages
B. consumer credit
C. bank loans
D. gambling debts
6. ____ is not a derivative security.
A. A share of common stock
B. A call option
C. A futures contract
D. None of these options (All of the answers are derivative securities.)
7. According to the Flow of Funds Accounts of the United States, the largest financial asset of U.S.
households is ____.
A. mutual fund shares
B. corporate equity
C. pension reserves
D. personal trusts
8. Active trading in markets and competition among securities analysts helps ensure that:
I. Security prices approach informational efficiency
II. Riskier securities are priced to offer higher potential returns
III. Investors are unlikely to be able to consistently find under- or overvalued securities
A. I only
B. I and II only
C. II and III only
D. I, II, and III
9. The material wealth of society is determined by the economy's _________, which is a function of the
economy's _________.
A. investment bankers; financial assets
B. investment bankers; real assets
C. productive capacity; financial assets
D. productive capacity; real assets
10. Which of the following is not a money market security?
A. U.S. Treasury bill
B. 6-month maturity certificate of deposit
C. Common stock
D. Bankers' acceptance
11. __________ assets generate net income to the economy, and __________ assets define allocation of
income among investors.
A. Financial, financial
B. Financial, real
C. Real, financial
D. Real, real
12. Which of the following are financial assets?
I. Debt securities
II. Equity securities
III. Derivative securities
A. I only
B. I and II only
C. II and III only
D. I, II, and III
13. __________ are examples of financial intermediaries.
A. Commercial banks
B. Insurance companies
C. Investment companies
D. All of these options
14. Asset allocation refers to _________.
A. the allocation of the investment portfolio across broad asset classes
B. the analysis of the value of securities
C. the choice of specific assets within each asset class
D. none of these options
15. Which one of the following best describes the purpose of derivatives markets?
A. Transferring risk from one party to another
B. Investing for a short time period to earn a small rate of return
C. Investing for retirement
D. Earning interest income
I. Security prices approach informational efficiency
II. Riskier securities are priced to offer higher potential returns
III. Investors are unlikely to be able to consistently find under- or overvalued securities
A. I only
B. I and II only
C. II and III only
D. I, II, and III
9. The material wealth of society is determined by the economy's _________, which is a function of the
economy's _________.
A. investment bankers; financial assets
B. investment bankers; real assets
C. productive capacity; financial assets
D. productive capacity; real assets
10. Which of the following is not a money market security?
A. U.S. Treasury bill
B. 6-month maturity certificate of deposit
C. Common stock
D. Bankers' acceptance
11. __________ assets generate net income to the economy, and __________ assets define allocation of
income among investors.
A. Financial, financial
B. Financial, real
C. Real, financial
D. Real, real
12. Which of the following are financial assets?
I. Debt securities
II. Equity securities
III. Derivative securities
A. I only
B. I and II only
C. II and III only
D. I, II, and III
13. __________ are examples of financial intermediaries.
A. Commercial banks
B. Insurance companies
C. Investment companies
D. All of these options
14. Asset allocation refers to _________.
A. the allocation of the investment portfolio across broad asset classes
B. the analysis of the value of securities
C. the choice of specific assets within each asset class
D. none of these options
15. Which one of the following best describes the purpose of derivatives markets?
A. Transferring risk from one party to another
B. Investing for a short time period to earn a small rate of return
C. Investing for retirement
D. Earning interest income
16. More than _____________ of currency is traded each day in the market for foreign exchange.
A. $300 million
B. $1 billion
C. $30 billion
D. $1 trillion
17. Security selection refers to the ________.
A. allocation of the investment portfolio across broad asset classes
B. analysis of the value of securities
C. choice of specific securities within each asset class
D. top-down method of investing
18. Which of the following is an example of an agency problem?
A. Managers engage in empire building.
B. Managers protect their jobs by avoiding risky projects.
C. Managers over consume luxuries such as corporate jets.
D. All of these options are examples of agency problems.
19. _____ is a mechanism for mitigating potential agency problems.
A. Tying income of managers to success of the firm
B. Directors defending top management
C. Antitakeover strategies
D. The straight voting method of electing the board of directors
20. __________ is (are) real assets.
A. Bonds
B. Production equipment
C. Stocks
D. Commercial paper
21. __________ portfolio construction starts with selecting attractively priced securities.
A. Bottom-up
B. Top-down
C. Upside-down
D. Side-to-side
22. In a market economy, capital resources are primarily allocated by ____________.
A. governments
B. the SEC
C. financial markets
D. investment bankers
23. __________ represents an ownership share in a corporation.
A. A call option
B. Common stock
C. A fixed-income security
D. Preferred stock
24. The value of a derivative security _________.
A. depends on the value of another related security
B. affects the value of a related security
C. is unrelated to the value of a related security
D. can be integrated only by calculus professors
25. Commodity and derivative markets allow firms to adjust their _________.
A. management styles
B. focus from their main line of business to their investment portfolios
C. ways of doing business so that they'll always have positive returns
D. exposure to various business risks
A. $300 million
B. $1 billion
C. $30 billion
D. $1 trillion
17. Security selection refers to the ________.
A. allocation of the investment portfolio across broad asset classes
B. analysis of the value of securities
C. choice of specific securities within each asset class
D. top-down method of investing
18. Which of the following is an example of an agency problem?
A. Managers engage in empire building.
B. Managers protect their jobs by avoiding risky projects.
C. Managers over consume luxuries such as corporate jets.
D. All of these options are examples of agency problems.
19. _____ is a mechanism for mitigating potential agency problems.
A. Tying income of managers to success of the firm
B. Directors defending top management
C. Antitakeover strategies
D. The straight voting method of electing the board of directors
20. __________ is (are) real assets.
A. Bonds
B. Production equipment
C. Stocks
D. Commercial paper
21. __________ portfolio construction starts with selecting attractively priced securities.
A. Bottom-up
B. Top-down
C. Upside-down
D. Side-to-side
22. In a market economy, capital resources are primarily allocated by ____________.
A. governments
B. the SEC
C. financial markets
D. investment bankers
23. __________ represents an ownership share in a corporation.
A. A call option
B. Common stock
C. A fixed-income security
D. Preferred stock
24. The value of a derivative security _________.
A. depends on the value of another related security
B. affects the value of a related security
C. is unrelated to the value of a related security
D. can be integrated only by calculus professors
25. Commodity and derivative markets allow firms to adjust their _________.
A. management styles
B. focus from their main line of business to their investment portfolios
C. ways of doing business so that they'll always have positive returns
D. exposure to various business risks
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26. __________ portfolio management calls for holding diversified portfolios without spending effort or
resources attempting to improve investment performance through security analysis.
A. Active
B. Momentum
C. Passive
D. Market-timing
27. Financial markets allow for all but which one of the following?
A. Shift consumption through time from higher-income periods to lower
B. Price securities according to their riskiness
C. Channel funds from lenders of funds to borrowers of funds
D. Allow most participants to routinely earn high returns with low risk
28. Financial intermediaries exist because small investors cannot efficiently _________.
A. diversify their portfolios
B. gather information
C. monitor their portfolios
D. all of these options
29. Methods of encouraging managers to act in shareholders' best interest include:
I. Threat of takeover
II. Proxy fights for control of the board of directors
III. Tying managers' compensation to stock price performance
A. I only
B. I and II only
C. II and III only
D. I, II, and III
30. Firms that specialize in helping companies raise capital by selling securities to the public are called
_________.
A. pension funds
B. investment banks
C. savings banks
D. REITs
31. In securities markets, there should be a risk-return trade-off with higher-risk assets having _________
expected returns than lower-risk assets.
A. higher
B. lower
C. the same
D. The answer cannot be determined from the information given.
32. When the market is more optimistic about a firm, its share price will ______; as a result, it will need to
issue _______ shares to raise funds that are needed.
A. rise; fewer
B. fall; fewer
C. rise; more
D. fall; more
33. Security selection refers to _________.
A. choosing specific securities within each asset class
B. deciding how much to invest in each asset class
C. deciding how much to invest in the market portfolio versus the riskless asset
D. deciding how much to hedge
resources attempting to improve investment performance through security analysis.
A. Active
B. Momentum
C. Passive
D. Market-timing
27. Financial markets allow for all but which one of the following?
A. Shift consumption through time from higher-income periods to lower
B. Price securities according to their riskiness
C. Channel funds from lenders of funds to borrowers of funds
D. Allow most participants to routinely earn high returns with low risk
28. Financial intermediaries exist because small investors cannot efficiently _________.
A. diversify their portfolios
B. gather information
C. monitor their portfolios
D. all of these options
29. Methods of encouraging managers to act in shareholders' best interest include:
I. Threat of takeover
II. Proxy fights for control of the board of directors
III. Tying managers' compensation to stock price performance
A. I only
B. I and II only
C. II and III only
D. I, II, and III
30. Firms that specialize in helping companies raise capital by selling securities to the public are called
_________.
A. pension funds
B. investment banks
C. savings banks
D. REITs
31. In securities markets, there should be a risk-return trade-off with higher-risk assets having _________
expected returns than lower-risk assets.
A. higher
B. lower
C. the same
D. The answer cannot be determined from the information given.
32. When the market is more optimistic about a firm, its share price will ______; as a result, it will need to
issue _______ shares to raise funds that are needed.
A. rise; fewer
B. fall; fewer
C. rise; more
D. fall; more
33. Security selection refers to _________.
A. choosing specific securities within each asset class
B. deciding how much to invest in each asset class
C. deciding how much to invest in the market portfolio versus the riskless asset
D. deciding how much to hedge
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34. An example of a derivative security is _________.
A. a common share of General Motors
B. a call option on Intel stock
C. a Ford bond
D. a U.S. Treasury bond
35. __________ portfolio construction starts with asset allocation.
A. Bottom-up
B. Top-down
C. Upside-down
D. Side-to-side
36. Which one of the following firms falsely claimed to have a $4.8 billion bank account at Bank of America
and vastly understated its debts, eventually resulting in the firm's bankruptcy?
A. WorldCom
B. Enron
C. Parmalat
D. Global Crossing
37. Debt securities promise:
I. A fixed stream of income
II. A stream of income that is determined according to a specific formula
III. A share in the profits of the issuing entity
A. I only
B. I or II only
C. I and III only
D. II or III only
38. The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the
following?
A. Required that corporations have more independent directors
B. Required that the CFO personally vouch for the corporation's financial statements
C. Required that firms could no longer employ investment bankers to sell securities to the public
D. Required the creation of a new board to oversee the auditing of public companies
39. The success of common stock investments depends on the success of _________.
A. derivative securities
B. fixed-income securities
C. the firm and its real assets
D. government methods of allocating capital
40. The historical average rate of return on large company stocks since 1926 has been _____.
A. 5%
B. 8%
C. 12%
D. 20%
41. The average rate of return on U.S. Treasury bills since 1926 was _________.
A. less than 1%
B. less than 3%
C. less than 4%
D. less than 7%
A. a common share of General Motors
B. a call option on Intel stock
C. a Ford bond
D. a U.S. Treasury bond
35. __________ portfolio construction starts with asset allocation.
A. Bottom-up
B. Top-down
C. Upside-down
D. Side-to-side
36. Which one of the following firms falsely claimed to have a $4.8 billion bank account at Bank of America
and vastly understated its debts, eventually resulting in the firm's bankruptcy?
A. WorldCom
B. Enron
C. Parmalat
D. Global Crossing
37. Debt securities promise:
I. A fixed stream of income
II. A stream of income that is determined according to a specific formula
III. A share in the profits of the issuing entity
A. I only
B. I or II only
C. I and III only
D. II or III only
38. The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the
following?
A. Required that corporations have more independent directors
B. Required that the CFO personally vouch for the corporation's financial statements
C. Required that firms could no longer employ investment bankers to sell securities to the public
D. Required the creation of a new board to oversee the auditing of public companies
39. The success of common stock investments depends on the success of _________.
A. derivative securities
B. fixed-income securities
C. the firm and its real assets
D. government methods of allocating capital
40. The historical average rate of return on large company stocks since 1926 has been _____.
A. 5%
B. 8%
C. 12%
D. 20%
41. The average rate of return on U.S. Treasury bills since 1926 was _________.
A. less than 1%
B. less than 3%
C. less than 4%
D. less than 7%
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42. An example of a real asset is:
I. A college education
II. Customer goodwill
III. A patent
A. I only
B. II only
C. I and III only
D. I, II, and III
43. The 2002 law designed to improve corporate governance is titled the _____.
A. Pension Reform Act
B. ERISA
C. Financial Services Modernization Act
D. Sarbanes-Oxley Act
44. Which of the following is not a financial intermediary?
A. a mutual fund
B. an insurance company
C. a real estate brokerage firm
D. a savings and loan company
45. The combined liabilities of American households represent approximately __________ of combined
assets.
A. 11%
B. 19%
C. 25%
D. 33%
46. In 2011 real assets represented approximately __________ of the total asset holdings of American
households.
A. 32%
B. 42%
C. 48%
D. 55%
47. In 2011 mortgages represented approximately __________ of total liabilities and net worth of American
households.
A. 12%
B. 14%
C. 28%
D. 42%
48. Liabilities equal approximately _____ of total assets for nonfinancial U.S. businesses.
A. 10%
B. 25%
C. 48%
D. 75%
49. Which of the following is not an example of a financial intermediary?
A. Goldman Sachs
B. Allstate Insurance
C. First Interstate Bank
D. IBM
I. A college education
II. Customer goodwill
III. A patent
A. I only
B. II only
C. I and III only
D. I, II, and III
43. The 2002 law designed to improve corporate governance is titled the _____.
A. Pension Reform Act
B. ERISA
C. Financial Services Modernization Act
D. Sarbanes-Oxley Act
44. Which of the following is not a financial intermediary?
A. a mutual fund
B. an insurance company
C. a real estate brokerage firm
D. a savings and loan company
45. The combined liabilities of American households represent approximately __________ of combined
assets.
A. 11%
B. 19%
C. 25%
D. 33%
46. In 2011 real assets represented approximately __________ of the total asset holdings of American
households.
A. 32%
B. 42%
C. 48%
D. 55%
47. In 2011 mortgages represented approximately __________ of total liabilities and net worth of American
households.
A. 12%
B. 14%
C. 28%
D. 42%
48. Liabilities equal approximately _____ of total assets for nonfinancial U.S. businesses.
A. 10%
B. 25%
C. 48%
D. 75%
49. Which of the following is not an example of a financial intermediary?
A. Goldman Sachs
B. Allstate Insurance
C. First Interstate Bank
D. IBM
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50. Real assets represent about ____ of total assets for commercial banks.
A. 1%
B. 15%
C. 25%
D. 40%
51. Money market securities are characterized by:
I. Maturity less than 1 year
II. Safety of the principal investment
III. Low rates of return
A. I only
B. I and II only
C. I and III only
D. I, II, and III
52. After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of
______.
A. asset allocation
B. security analysis
C. top-down portfolio management
D. passive management
53. After considering current market conditions, an investor decides to place 60% of her funds in equities and
the rest in bonds. This is an example of _____.
A. asset allocation
B. security analysis
C. top-down portfolio management
D. passive management
54. Suppose an investor is considering one of two investments that are identical in all respects except for
risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to
_____.
A. earn no more than the Treasury-bill rate on either security.
B. pay less for the security that has higher risk.
C. pay less for the security that has lower risk.
D. earn more if interest rates are lower.
55. The efficient market hypothesis suggests that _______.
A. active portfolio management strategies are the most appropriate investment strategies
B. passive portfolio management strategies are the most appropriate investment strategies
C. either active or passive strategies may be appropriate, depending on the expected direction of the
market
D. a bottom-up approach is the most appropriate investment strategy
56. In a perfectly efficient market the best investment strategy is probably _____.
A. an active strategy.
B. a passive strategy.
C. asset allocation.
D. market timing.
57. Market signals will help to allocate capital efficiently only if investors are acting _____.
A. on the basis of their individual hunches.
B. as directed by financial experts.
C. as dominant forces in the economy.
D. on accurate information.
A. 1%
B. 15%
C. 25%
D. 40%
51. Money market securities are characterized by:
I. Maturity less than 1 year
II. Safety of the principal investment
III. Low rates of return
A. I only
B. I and II only
C. I and III only
D. I, II, and III
52. After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of
______.
A. asset allocation
B. security analysis
C. top-down portfolio management
D. passive management
53. After considering current market conditions, an investor decides to place 60% of her funds in equities and
the rest in bonds. This is an example of _____.
A. asset allocation
B. security analysis
C. top-down portfolio management
D. passive management
54. Suppose an investor is considering one of two investments that are identical in all respects except for
risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to
_____.
A. earn no more than the Treasury-bill rate on either security.
B. pay less for the security that has higher risk.
C. pay less for the security that has lower risk.
D. earn more if interest rates are lower.
55. The efficient market hypothesis suggests that _______.
A. active portfolio management strategies are the most appropriate investment strategies
B. passive portfolio management strategies are the most appropriate investment strategies
C. either active or passive strategies may be appropriate, depending on the expected direction of the
market
D. a bottom-up approach is the most appropriate investment strategy
56. In a perfectly efficient market the best investment strategy is probably _____.
A. an active strategy.
B. a passive strategy.
C. asset allocation.
D. market timing.
57. Market signals will help to allocate capital efficiently only if investors are acting _____.
A. on the basis of their individual hunches.
B. as directed by financial experts.
C. as dominant forces in the economy.
D. on accurate information.
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58. Which of the following is (are) true about hedge funds?
I. They are open to institutional investors.
II. They are open to wealthy individuals.
III. They are more likely than mutual funds to pursue simple strategies.
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III
59. Venture capital is _________.
A. frequently used to expand the businesses of well-established companies
B. supplied by venture capital funds and individuals to start-up companies
C. illegal under current U.S. laws
D. most frequently issued with the help of investment bankers
60. Individuals may find it more advantageous to purchase claims from a financial intermediary rather than
directly purchasing claims in capital markets because:
I. Intermediaries are better diversified than most individuals
II. Intermediaries can exploit economies of scale in investing that individual investors cannot
III. Intermediated investments usually offer higher rates of return than direct capital market claims
A. I only
B. I and II only
C. II and III only
D. I, II, and III
61. Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in
exchange for 1,000 shares of Microsoft common stock. Surf City Software has exchanged a _____ asset
for a _____ asset in this transaction.
A. real; real
B. financial; financial
C. real; financial
D. financial; real
62. Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay
back the loan over 5 years. In this transaction, _____.
A. a new financial asset was created
B. a financial asset was traded for a real asset
C. a financial asset was destroyed
D. a real asset was created
63. Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005?
A. General Electric
B. Parmalat
C. Enron
D. WorldCom
64. Accounting scandals can often be attributed to a particular concept in the study of finance known as the
_____.
A. agency problem
B. risk-return trade-off
C. allocation of risk
D. securitization
I. They are open to institutional investors.
II. They are open to wealthy individuals.
III. They are more likely than mutual funds to pursue simple strategies.
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III
59. Venture capital is _________.
A. frequently used to expand the businesses of well-established companies
B. supplied by venture capital funds and individuals to start-up companies
C. illegal under current U.S. laws
D. most frequently issued with the help of investment bankers
60. Individuals may find it more advantageous to purchase claims from a financial intermediary rather than
directly purchasing claims in capital markets because:
I. Intermediaries are better diversified than most individuals
II. Intermediaries can exploit economies of scale in investing that individual investors cannot
III. Intermediated investments usually offer higher rates of return than direct capital market claims
A. I only
B. I and II only
C. II and III only
D. I, II, and III
61. Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in
exchange for 1,000 shares of Microsoft common stock. Surf City Software has exchanged a _____ asset
for a _____ asset in this transaction.
A. real; real
B. financial; financial
C. real; financial
D. financial; real
62. Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay
back the loan over 5 years. In this transaction, _____.
A. a new financial asset was created
B. a financial asset was traded for a real asset
C. a financial asset was destroyed
D. a real asset was created
63. Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005?
A. General Electric
B. Parmalat
C. Enron
D. WorldCom
64. Accounting scandals can often be attributed to a particular concept in the study of finance known as the
_____.
A. agency problem
B. risk-return trade-off
C. allocation of risk
D. securitization
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65. An intermediary that pools and manages funds for many investors is called ______.
A. an investment company
B. a savings and loan
C. an investment banker
D. a commercial bank
66. Financial institutions that specialize in assisting corporations in primary market transactions are called
_______.
A. mutual funds
B. investment bankers
C. pension funds
D. globalization specialists
67. When a pass-through mortgage security is issued, what does the issuing agency expect to receive?
A. The amount of the original loan plus a servicing fee
B. The principal and interest that are paid by the homeowner
C. The principal and interest that are paid by the homeowner, minus a servicing fee
D. The interest paid by the homeowner, plus a servicing fee
68. In 2008 the largest corporate bankruptcy in U.S. history involved the investment banking firm of
______.
A. Goldman Sachs
B. Lehman Brothers
C. Morgan Stanley
D. Merrill Lynch
69. The inability of shareholders to influence the decisions of managers, despite overwhelming shareholder
support, is a breakdown in what process or mechanism?
A. Auditing
B. Public finance
C. Corporate governance
D. Public reporting
70. Real assets are ______.
A. assets used to produce goods and services
B. always the same as financial assets
C. always equal to liabilities
D. claims on a company's income
71. A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________.
A. private equity investments
B. securitization
C. negative analyst recommendations
D. online trading
72. In recent years the greatest dollar amount of securitization occurred for which type of loan?
A. Home mortgages
B. Credit card debt
C. Automobile loans
D. Equipment leasing
73. Which of the following is (are) true about nonconforming mortgage loans?
A. They are also known as subprime loans.
B. They have higher default risk than conforming loans.
C. They were able to be offered without due diligence.
D. All of these options are true.
A. an investment company
B. a savings and loan
C. an investment banker
D. a commercial bank
66. Financial institutions that specialize in assisting corporations in primary market transactions are called
_______.
A. mutual funds
B. investment bankers
C. pension funds
D. globalization specialists
67. When a pass-through mortgage security is issued, what does the issuing agency expect to receive?
A. The amount of the original loan plus a servicing fee
B. The principal and interest that are paid by the homeowner
C. The principal and interest that are paid by the homeowner, minus a servicing fee
D. The interest paid by the homeowner, plus a servicing fee
68. In 2008 the largest corporate bankruptcy in U.S. history involved the investment banking firm of
______.
A. Goldman Sachs
B. Lehman Brothers
C. Morgan Stanley
D. Merrill Lynch
69. The inability of shareholders to influence the decisions of managers, despite overwhelming shareholder
support, is a breakdown in what process or mechanism?
A. Auditing
B. Public finance
C. Corporate governance
D. Public reporting
70. Real assets are ______.
A. assets used to produce goods and services
B. always the same as financial assets
C. always equal to liabilities
D. claims on a company's income
71. A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________.
A. private equity investments
B. securitization
C. negative analyst recommendations
D. online trading
72. In recent years the greatest dollar amount of securitization occurred for which type of loan?
A. Home mortgages
B. Credit card debt
C. Automobile loans
D. Equipment leasing
73. Which of the following is (are) true about nonconforming mortgage loans?
A. They are also known as subprime loans.
B. They have higher default risk than conforming loans.
C. They were able to be offered without due diligence.
D. All of these options are true.
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74. The systemic risk that led to the financial crisis of 2008 was increased by _____.
A. collateralized debt obligations
B. subprime mortgages
C. credit default swaps
D. all of the options
75. An investment adviser has decided to purchase gold, real estate, stocks, and bonds in equal amounts. This
decision reflects which part of the investment process?
A. Asset allocation
B. Investment analysis
C. Portfolio analysis
D. Security selection
A. collateralized debt obligations
B. subprime mortgages
C. credit default swaps
D. all of the options
75. An investment adviser has decided to purchase gold, real estate, stocks, and bonds in equal amounts. This
decision reflects which part of the investment process?
A. Asset allocation
B. Investment analysis
C. Portfolio analysis
D. Security selection
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ch01 Key
1. A
2. D
3. C
4. B
5. A
6. A
7. C
8. D
9. D
10. C
11. C
12. D
13. D
14. A
15. A
16. D
17. C
18. D
19. A
20. B
21. A
22. C
23. B
24. A
25. D
26. C
27. D
28. D
29. D
30. B
31. A
32. A
33. A
34. B
35. B
36. C
1. A
2. D
3. C
4. B
5. A
6. A
7. C
8. D
9. D
10. C
11. C
12. D
13. D
14. A
15. A
16. D
17. C
18. D
19. A
20. B
21. A
22. C
23. B
24. A
25. D
26. C
27. D
28. D
29. D
30. B
31. A
32. A
33. A
34. B
35. B
36. C
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37. B
38. C
39. C
40. C
41. C
42. D
43. D
44. C
45. B
46. A
47. B
48. C
49. D
50. A
51. D
52. B
53. A
54. B
55. B
56. B
57. D
58. A
59. B
60. B
61. C
62. A
63. A
64. A
65. A
66. B
67. C
68. B
69. C
70. A
71. B
72. A
73. D
74. D
38. C
39. C
40. C
41. C
42. D
43. D
44. C
45. B
46. A
47. B
48. C
49. D
50. A
51. D
52. B
53. A
54. B
55. B
56. B
57. D
58. A
59. B
60. B
61. C
62. A
63. A
64. A
65. A
66. B
67. C
68. B
69. C
70. A
71. B
72. A
73. D
74. D
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75. A
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ch01 Summary
Category # of Questions
AACSB: Analytic 75
Blooms: Remember 75
Bodie - Chapter 01 75
Difficulty: 1 Easy 33
Difficulty: 2 Medium 37
Difficulty: 3 Hard 5
Learning Objective: 01-02 Distinguish between real assets and financial assets. 32
Learning Objective: 01-
03 Explain the economic functions of financial markets and how various securities are related to the governance of the corporation.
19
Learning Objective: 01-04 Describe the major steps in the construction of an investment portfolio. 15
Learning Objective: 01-05 Identify different types of financial markets and the major participants in each of those markets. 3
Learning Objective: 01-06 Explain the causes and consequences of the financial crisis of 2008. 6
Topic: Efficient Markets 1
Topic: Financial Assets 8
Topic: Financial Intermediaries 10
Topic: Financial Markets and the Economy 19
Topic: Real Assets versus Financial Assets 17
Topic: The Financial Crisis of 2008 6
Topic: The Investment Process 14
Category # of Questions
AACSB: Analytic 75
Blooms: Remember 75
Bodie - Chapter 01 75
Difficulty: 1 Easy 33
Difficulty: 2 Medium 37
Difficulty: 3 Hard 5
Learning Objective: 01-02 Distinguish between real assets and financial assets. 32
Learning Objective: 01-
03 Explain the economic functions of financial markets and how various securities are related to the governance of the corporation.
19
Learning Objective: 01-04 Describe the major steps in the construction of an investment portfolio. 15
Learning Objective: 01-05 Identify different types of financial markets and the major participants in each of those markets. 3
Learning Objective: 01-06 Explain the causes and consequences of the financial crisis of 2008. 6
Topic: Efficient Markets 1
Topic: Financial Assets 8
Topic: Financial Intermediaries 10
Topic: Financial Markets and the Economy 19
Topic: Real Assets versus Financial Assets 17
Topic: The Financial Crisis of 2008 6
Topic: The Investment Process 14
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ch02
Student: ___________________________________________________________________________
1. Which of the following is not a money market instrument?
A. Treasury bill
B. Commercial paper
C. Preferred stock
D. Bankers' acceptance
2. T-bills are issued with initial maturities of:
I. 4 weeks
II. 16 weeks
III. 26 weeks
IV. 32 weeks
A. I and II only
B. I and III only
C. I, II, and III only
D. I, II, III, and IV
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. bankers' acceptance
5. Money market securities are sometimes referred to as cash equivalents 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 marketable money market security is _____.
A. Treasury bills
B. bankers' acceptances
C. certificates of deposit
D. common stock
7. The minimum tick size, or spread between prices in the Treasury bond market, is
A. 1/8 of a point.
B. 1/16 of a point.
C. 1/32 of a point.
D. 1/64 of a point.
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 to be received at maturity
Student: ___________________________________________________________________________
1. Which of the following is not a money market instrument?
A. Treasury bill
B. Commercial paper
C. Preferred stock
D. Bankers' acceptance
2. T-bills are issued with initial maturities of:
I. 4 weeks
II. 16 weeks
III. 26 weeks
IV. 32 weeks
A. I and II only
B. I and III only
C. I, II, and III only
D. I, II, III, and IV
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. bankers' acceptance
5. Money market securities are sometimes referred to as cash equivalents 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 marketable money market security is _____.
A. Treasury bills
B. bankers' acceptances
C. certificates of deposit
D. common stock
7. The minimum tick size, or spread between prices in the Treasury bond market, is
A. 1/8 of a point.
B. 1/16 of a point.
C. 1/32 of a point.
D. 1/64 of a point.
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 to be received at maturity
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9. ______ would not be included in the EAFE index.
A. Australia
B. Canada
C. France
D. Japan
10. _____ is considered to be an emerging market country.
A. France
B. Norway
C. Brazil
D. Canada
11. Which one of the following is a true statement?
A. Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors.
B. Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock.
C. Preferred stockholders have voting power.
D. Investors can sue managers for nonpayment of preferred dividends.
12. The bid price of a Treasury bill is _________.
A. the price at which the dealer in Treasury bills is willing to sell the bill
B. the price at which the dealer in Treasury bills is willing to buy the bill
C. greater than the ask price of the Treasury bill expressed in dollar terms
D. the price at which the investor can buy the Treasury bill
13. The German stock market is measured by which market index?
A. FTSE
B. Dow Jones 30
C. DAX
D. Nikkei
14. Deposits of commercial banks at the Federal Reserve are called _____.
A. bankers' acceptances
B. federal funds
C. repurchase agreements
D. time deposits
15. Which of the following is not a true statement regarding municipal bonds?
A. A municipal bond is a debt obligation issued by state or local governments.
B. A municipal bond is a debt obligation issued by the federal government.
C. The interest income from a municipal bond is exempt from federal income taxation.
D. The interest income from a municipal bond is exempt from state and local taxation in the issuing state.
16. Which of the following is not a characteristic of a money market instrument?
A. Liquidity
B. Marketability
C. Low risk
D. Maturity greater than 1 year
17. An individual who goes short in a futures position _____.
A. commits to delivering the underlying commodity at contract maturity
B. commits to purchasing the underlying commodity at contract maturity
C. has the right to deliver the underlying commodity at contract maturity
D. has the right to purchase the underlying commodity at contract maturity
18. Which of the following is not a nickname for an agency associated with the mortgage markets?
A. Fannie Mae
B. Freddie Mac
C. Sallie Mae
D. Ginnie Mae
A. Australia
B. Canada
C. France
D. Japan
10. _____ is considered to be an emerging market country.
A. France
B. Norway
C. Brazil
D. Canada
11. Which one of the following is a true statement?
A. Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors.
B. Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock.
C. Preferred stockholders have voting power.
D. Investors can sue managers for nonpayment of preferred dividends.
12. The bid price of a Treasury bill is _________.
A. the price at which the dealer in Treasury bills is willing to sell the bill
B. the price at which the dealer in Treasury bills is willing to buy the bill
C. greater than the ask price of the Treasury bill expressed in dollar terms
D. the price at which the investor can buy the Treasury bill
13. The German stock market is measured by which market index?
A. FTSE
B. Dow Jones 30
C. DAX
D. Nikkei
14. Deposits of commercial banks at the Federal Reserve are called _____.
A. bankers' acceptances
B. federal funds
C. repurchase agreements
D. time deposits
15. Which of the following is not a true statement regarding municipal bonds?
A. A municipal bond is a debt obligation issued by state or local governments.
B. A municipal bond is a debt obligation issued by the federal government.
C. The interest income from a municipal bond is exempt from federal income taxation.
D. The interest income from a municipal bond is exempt from state and local taxation in the issuing state.
16. Which of the following is not a characteristic of a money market instrument?
A. Liquidity
B. Marketability
C. Low risk
D. Maturity greater than 1 year
17. An individual who goes short in a futures position _____.
A. commits to delivering the underlying commodity at contract maturity
B. commits to purchasing the underlying commodity at contract maturity
C. has the right to deliver the underlying commodity at contract maturity
D. has the right to purchase the underlying commodity at contract maturity
18. Which of the following is not a nickname for an agency associated with the mortgage markets?
A. Fannie Mae
B. Freddie Mac
C. Sallie Mae
D. Ginnie Mae
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19. Commercial paper is a short-term security issued by __________ to raise funds.
A. the Federal Reserve
B. the New York Stock Exchange
C. large well-known companies
D. all of these options
20. The maximum maturity on commercial paper is _____.
A. 270 days
B. 180 days
C. 90 days
D. 30 days
21. Which one of the following is a true statement regarding the Dow Jones Industrial Average?
A. It is a value-weighted average of 30 large industrial stocks.
B. It is a price-weighted average of 30 large industrial stocks.
C. 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. Treasury bills are financial instruments issued by __________ to raise funds.
A. commercial banks
B. the federal government
C. large corporations
D. state and city governments
23. Which of the following are true statements about T-bills?
I. T-bills typically sell in denominations of $10,000.
II. Income earned on T-bills is exempt from all federal taxes.
III. Income earned on T-bills is exempt from state and local taxes.
A. I only
B. I and II only
C. I and III only
D. I, II, and III
24. A bond that has no collateral is called a _________.
A. callable bond
B. debenture
C. junk bond
D. mortgage
25. A __________ gives its holder the right to sell an asset for a specified exercise price on or before a
specified expiration date.
A. call option
B. futures contract
C. put option
D. interest rate swap
26. A T-bill quote sheet has 90-day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has a $10,000 face
value, an investor could buy this bill for _____.
A. $10,000
B. $9,878.50
C. $9,877
D. $9,880.16
A. the Federal Reserve
B. the New York Stock Exchange
C. large well-known companies
D. all of these options
20. The maximum maturity on commercial paper is _____.
A. 270 days
B. 180 days
C. 90 days
D. 30 days
21. Which one of the following is a true statement regarding the Dow Jones Industrial Average?
A. It is a value-weighted average of 30 large industrial stocks.
B. It is a price-weighted average of 30 large industrial stocks.
C. 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. Treasury bills are financial instruments issued by __________ to raise funds.
A. commercial banks
B. the federal government
C. large corporations
D. state and city governments
23. Which of the following are true statements about T-bills?
I. T-bills typically sell in denominations of $10,000.
II. Income earned on T-bills is exempt from all federal taxes.
III. Income earned on T-bills is exempt from state and local taxes.
A. I only
B. I and II only
C. I and III only
D. I, II, and III
24. A bond that has no collateral is called a _________.
A. callable bond
B. debenture
C. junk bond
D. mortgage
25. A __________ gives its holder the right to sell an asset for a specified exercise price on or before a
specified expiration date.
A. call option
B. futures contract
C. put option
D. interest rate swap
26. A T-bill quote sheet has 90-day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has a $10,000 face
value, an investor could buy this bill for _____.
A. $10,000
B. $9,878.50
C. $9,877
D. $9,880.16
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27. Which one of the following is a true statement regarding corporate bonds?
A. A corporate callable bond gives its holder the right to exchange it for a specified number of the
company's common shares.
B. A corporate debenture is a secured bond.
C. A corporate convertible bond gives its holder the right to exchange it for a specified number of the
company's common shares.
D. Holders of corporate bonds have voting rights in the company.
28. The yield on tax-exempt bonds is ______.
A. usually less than 50% of the yield on taxable bonds
B. normally about 90% of the yield on taxable bonds
C. greater than the yield on taxable bonds
D. less than the yield on taxable bonds
29. __________ is not a money market instrument.
A. A certificate of deposit
B. A Treasury bill
C. A Treasury bond
D. Commercial paper
30. An investor buys a T-bill at a bank discount quote of 4.80 with 150 days to maturity. The investor's actual
annual rate of return on this investment is _____.
A. 4.8%
B. 4.97%
C. 5.47%
D. 5.74%
31. The U.K. stock index is the _________.
A. DAX
B. FTSE
C. GSE
D. TSE
32. A __________ gives its holder the right to buy an asset for a specified exercise price on or before a
specified expiration date.
A. call option
B. futures contract
C. put option
D. interest rate swap
33. Which one of the following provides the best example of securitization?
A. Convertible bond
B. Call option
C. Mortgage pass-through security
D. Preferred stock
34. Which of the following indexes are market value-weighted?
I. The NYSE Composite
II. The S&P 500
III. The Wilshire 5000
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
A. A corporate callable bond gives its holder the right to exchange it for a specified number of the
company's common shares.
B. A corporate debenture is a secured bond.
C. A corporate convertible bond gives its holder the right to exchange it for a specified number of the
company's common shares.
D. Holders of corporate bonds have voting rights in the company.
28. The yield on tax-exempt bonds is ______.
A. usually less than 50% of the yield on taxable bonds
B. normally about 90% of the yield on taxable bonds
C. greater than the yield on taxable bonds
D. less than the yield on taxable bonds
29. __________ is not a money market instrument.
A. A certificate of deposit
B. A Treasury bill
C. A Treasury bond
D. Commercial paper
30. An investor buys a T-bill at a bank discount quote of 4.80 with 150 days to maturity. The investor's actual
annual rate of return on this investment is _____.
A. 4.8%
B. 4.97%
C. 5.47%
D. 5.74%
31. The U.K. stock index is the _________.
A. DAX
B. FTSE
C. GSE
D. TSE
32. A __________ gives its holder the right to buy an asset for a specified exercise price on or before a
specified expiration date.
A. call option
B. futures contract
C. put option
D. interest rate swap
33. Which one of the following provides the best example of securitization?
A. Convertible bond
B. Call option
C. Mortgage pass-through security
D. Preferred stock
34. Which of the following indexes are market value-weighted?
I. The NYSE Composite
II. The S&P 500
III. The Wilshire 5000
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
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35. The interest rate charged by large banks in London to lend money among themselves is called
_________.
A. the prime rate
B. the discount rate
C. the federal funds rate
D. LIBOR
36. A firm that has large securities holdings and wishes to raise money for a short length of time may be able
to find the cheapest financing from which of the following?
A. Reverse repurchase agreement
B. Bankers' acceptance
C. Commercial paper
D. Repurchase agreement
37. Currently, the Dow Jones Industrial Average is computed by _________.
A. adding the prices of 30 large "blue-chip" stocks and dividing by 30
B. calculating the total market value of the 30 firms in the index and dividing by 30
C. measuring the current total market value of the 30 stocks in the index relative to the total value on the
previous day
D. adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and
large stock dividends
38. An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and
6.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipal
and corporate bonds would be, respectively, _____.
A. 5% and 6.4%
B. 5% and 5.44%
C. 4.25% and 6.4%
D. 5.75% and 5.44%
39. If a Treasury note has a bid price of $996.25, the quoted bid price in the Wall Street Journal would be
_________.
A. 99:25
B. 99:63
C. 99:20
D. 99:08
40. TIPS are ______.
A. Treasury bonds that pay no interest and are sold at a discount
B. U.K. bonds that protect investors from default risk
C. securities that trade on the Toronto stock index
D. Treasury bonds that protect investors from inflation
41. 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. If you sell a Treasury bond, you expect to receive _________.
A. $1,024.75
B. $1,024.38
C. $1,023.75
D. $1,022.50
42. The Dow Jones Industrial Average is _________.
A. a price-weighted average
B. a value weight and average
C. an equally weighted average
D. an unweighted average
_________.
A. the prime rate
B. the discount rate
C. the federal funds rate
D. LIBOR
36. A firm that has large securities holdings and wishes to raise money for a short length of time may be able
to find the cheapest financing from which of the following?
A. Reverse repurchase agreement
B. Bankers' acceptance
C. Commercial paper
D. Repurchase agreement
37. Currently, the Dow Jones Industrial Average is computed by _________.
A. adding the prices of 30 large "blue-chip" stocks and dividing by 30
B. calculating the total market value of the 30 firms in the index and dividing by 30
C. measuring the current total market value of the 30 stocks in the index relative to the total value on the
previous day
D. adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and
large stock dividends
38. An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and
6.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipal
and corporate bonds would be, respectively, _____.
A. 5% and 6.4%
B. 5% and 5.44%
C. 4.25% and 6.4%
D. 5.75% and 5.44%
39. If a Treasury note has a bid price of $996.25, the quoted bid price in the Wall Street Journal would be
_________.
A. 99:25
B. 99:63
C. 99:20
D. 99:08
40. TIPS are ______.
A. Treasury bonds that pay no interest and are sold at a discount
B. U.K. bonds that protect investors from default risk
C. securities that trade on the Toronto stock index
D. Treasury bonds that protect investors from inflation
41. 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. If you sell a Treasury bond, you expect to receive _________.
A. $1,024.75
B. $1,024.38
C. $1,023.75
D. $1,022.50
42. The Dow Jones Industrial Average is _________.
A. a price-weighted average
B. a value weight and average
C. an equally weighted average
D. an unweighted average
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43. Investors will earn higher rates of returns on TIPS than on equivalent default-risk standard bonds if
_______________.
A. inflation is lower than anticipated over the investment period
B. inflation is higher than anticipated over the investment period
C. the U.S. dollar increases in value against the euro
D. the spread between commercial paper and Treasury securities remains low
44. Preferred stock is like long-term debt in that ___________.
A. it gives the holder voting power regarding the firm's management
B. it promises to pay to its holder a fixed stream of income each year
C. the preferred dividend is a tax-deductible expense for the firm
D. in the event of bankruptcy preferred stock has equal status with debt
45. Which of the following does not approximate the performance of a buy-and-hold portfolio strategy?
A. An equally weighted index
B. A price-weighted index
C. A value-weighted index
D. All of these options (Weights are not a factor in this situation.)
46. In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs _________.
A. automatically
B. by adjusting the divisor
C. by adjusting the numerator
D. by adjusting the market value weights
47. Suppose the market prices of the 30 stocks in the Dow Jones Industrial Average all change by the same
dollar amount on a given day. Assuming there are no stock splits, which stock will have the greatest
impact on the average?
A. The one with the highest price
B. The one with the lowest price
C. All 30 stocks will have the same impact.
D. The answer cannot be determined from the information given.
48. A bond issued by the state of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket, this
bond would provide you with an equivalent taxable yield of _________.
A. 4.5%
B. 7.25%
C. 8.68%
D. none of these options
49. The purchase of a futures contract gives the buyer _________.
A. the right to buy an item at a specified price
B. the right to sell an item at a specified price
C. the obligation to buy an item at a specified price
D. the obligation to sell an item at a specified price
50. Ownership of a put option entitles the owner to the __________ to ___________ a specific stock, on or
before a specific date, at a specific price.
A. right; buy
B. right; sell
C. obligation; buy
D. obligation; sell
_______________.
A. inflation is lower than anticipated over the investment period
B. inflation is higher than anticipated over the investment period
C. the U.S. dollar increases in value against the euro
D. the spread between commercial paper and Treasury securities remains low
44. Preferred stock is like long-term debt in that ___________.
A. it gives the holder voting power regarding the firm's management
B. it promises to pay to its holder a fixed stream of income each year
C. the preferred dividend is a tax-deductible expense for the firm
D. in the event of bankruptcy preferred stock has equal status with debt
45. Which of the following does not approximate the performance of a buy-and-hold portfolio strategy?
A. An equally weighted index
B. A price-weighted index
C. A value-weighted index
D. All of these options (Weights are not a factor in this situation.)
46. In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs _________.
A. automatically
B. by adjusting the divisor
C. by adjusting the numerator
D. by adjusting the market value weights
47. Suppose the market prices of the 30 stocks in the Dow Jones Industrial Average all change by the same
dollar amount on a given day. Assuming there are no stock splits, which stock will have the greatest
impact on the average?
A. The one with the highest price
B. The one with the lowest price
C. All 30 stocks will have the same impact.
D. The answer cannot be determined from the information given.
48. A bond issued by the state of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket, this
bond would provide you with an equivalent taxable yield of _________.
A. 4.5%
B. 7.25%
C. 8.68%
D. none of these options
49. The purchase of a futures contract gives the buyer _________.
A. the right to buy an item at a specified price
B. the right to sell an item at a specified price
C. the obligation to buy an item at a specified price
D. the obligation to sell an item at a specified price
50. Ownership of a put option entitles the owner to the __________ to ___________ a specific stock, on or
before a specific date, at a specific price.
A. right; buy
B. right; sell
C. obligation; buy
D. obligation; sell
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51. An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond or a corporate
bond. She looks up municipal bond yields (rm) but wishes to calculate the taxable equivalent yield r. The
formula she should use is given by ______.
A. r = rm × (1 - 28%)
B. r = rm/(1 - 72%)
C. r = rm × (1 - 72%)
D. r = rm/(1 - 28%)
52. June call and put options on King Books Inc. are available with exercise prices of $30, $35, and $40.
Among the different exercise prices, the call option with the _____ exercise price and the put option with
the _____ exercise price will have the greatest value.
A. $40; $30
B. $30; $40
C. $35; $35
D. $40; $40
53. Ownership of a call option entitles the owner to the __________ to __________ a specific stock, on or
before a specific date, at a specific price.
A. right; buy
B. right; sell
C. obligation; buy
D. obligation; sell
54. The ________ the ratio of municipal bond yields to corporate bond yields, the _________ the cutoff tax
bracket at which more individuals will prefer to hold municipal debt.
A. higher; lower
B. lower; lower
C. higher; higher
D. The answer cannot be determined without more information.
55. Which of the following types of bonds are excluded from most bond indexes?
A. Corporate bonds
B. Junk bonds
C. Municipal bonds
D. None of these options
56. The Hang Seng index reflects market performance on which of the following major stock markets?
A. Japan
B. Singapore
C. Taiwan
D. Hong Kong
57. The Standard & Poor's 500 is __________ weighted index.
A. an equally
B. a price-
C. a value-
D. a share-
58. A firm that fails to pay dividends on its preferred stock is said to be _________.
A. insolvent
B. in arrears
C. insufferable
D. delinquent
bond. She looks up municipal bond yields (rm) but wishes to calculate the taxable equivalent yield r. The
formula she should use is given by ______.
A. r = rm × (1 - 28%)
B. r = rm/(1 - 72%)
C. r = rm × (1 - 72%)
D. r = rm/(1 - 28%)
52. June call and put options on King Books Inc. are available with exercise prices of $30, $35, and $40.
Among the different exercise prices, the call option with the _____ exercise price and the put option with
the _____ exercise price will have the greatest value.
A. $40; $30
B. $30; $40
C. $35; $35
D. $40; $40
53. Ownership of a call option entitles the owner to the __________ to __________ a specific stock, on or
before a specific date, at a specific price.
A. right; buy
B. right; sell
C. obligation; buy
D. obligation; sell
54. The ________ the ratio of municipal bond yields to corporate bond yields, the _________ the cutoff tax
bracket at which more individuals will prefer to hold municipal debt.
A. higher; lower
B. lower; lower
C. higher; higher
D. The answer cannot be determined without more information.
55. Which of the following types of bonds are excluded from most bond indexes?
A. Corporate bonds
B. Junk bonds
C. Municipal bonds
D. None of these options
56. The Hang Seng index reflects market performance on which of the following major stock markets?
A. Japan
B. Singapore
C. Taiwan
D. Hong Kong
57. The Standard & Poor's 500 is __________ weighted index.
A. an equally
B. a price-
C. a value-
D. a share-
58. A firm that fails to pay dividends on its preferred stock is said to be _________.
A. insolvent
B. in arrears
C. insufferable
D. delinquent
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59. Large well-known companies often issue their own short-term unsecured debt notes directly to the public,
rather than borrowing from banks; their notes are called _________.
A. certificates of deposit
B. repurchase agreements
C. bankers' acceptances
D. commercial paper
60. Which of the following is most like a short-term collateralized loan?
A. Certificate of deposit
B. Repurchase agreement
C. Bankers' acceptance
D. Commercial paper
61. Eurodollars are _________.
A. dollar-denominated deposits at any foreign bank or foreign branch of an American bank
B. dollar-denominated bonds issued by firms outside their home market
C. currency issued by Euro Disney and traded in France
D. dollars that wind up in banks as a result of money-laundering activities
62. Which of the following is used to back international sales of goods and services?
A. Certificate of deposit
B. Bankers' acceptance
C. Eurodollar deposits
D. Commercial paper
63. Treasury notes have initial maturities between ________ years.
A. 2 and 4
B. 5 and 10
C. 10 and 30
D. 1 and 10
64. Which of the following is not a characteristic of common stock ownership?
A. Residual claimant
B. Unlimited liability
C. Voting rights
D. Limited life of the security
65. If you thought prices of stock would be rising over the next few months, you might want to
__________________ on the stock.
A. purchase a call option
B. purchase a put option
C. sell a futures contract
D. place a short-sale order
66. A typical bond price quote includes all but which one of the following?
A. Daily high price for the bond
B. Closing bond price
C. Yield to maturity
D. Dividend yield
67. What are business firms most likely to use derivative securities for?
A. Hedging
B. Speculating
C. Doing calculus problems
D. Market making
rather than borrowing from banks; their notes are called _________.
A. certificates of deposit
B. repurchase agreements
C. bankers' acceptances
D. commercial paper
60. Which of the following is most like a short-term collateralized loan?
A. Certificate of deposit
B. Repurchase agreement
C. Bankers' acceptance
D. Commercial paper
61. Eurodollars are _________.
A. dollar-denominated deposits at any foreign bank or foreign branch of an American bank
B. dollar-denominated bonds issued by firms outside their home market
C. currency issued by Euro Disney and traded in France
D. dollars that wind up in banks as a result of money-laundering activities
62. Which of the following is used to back international sales of goods and services?
A. Certificate of deposit
B. Bankers' acceptance
C. Eurodollar deposits
D. Commercial paper
63. Treasury notes have initial maturities between ________ years.
A. 2 and 4
B. 5 and 10
C. 10 and 30
D. 1 and 10
64. Which of the following is not a characteristic of common stock ownership?
A. Residual claimant
B. Unlimited liability
C. Voting rights
D. Limited life of the security
65. If you thought prices of stock would be rising over the next few months, you might want to
__________________ on the stock.
A. purchase a call option
B. purchase a put option
C. sell a futures contract
D. place a short-sale order
66. A typical bond price quote includes all but which one of the following?
A. Daily high price for the bond
B. Closing bond price
C. Yield to maturity
D. Dividend yield
67. What are business firms most likely to use derivative securities for?
A. Hedging
B. Speculating
C. Doing calculus problems
D. Market making
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68. What would you expect to have happened to the spread between yields on commercial paper and
Treasury bills immediately after September 11, 2001?
A. No change, as both yields will remain the same
B. Increase, as the spread usually increases in response to a crisis
C. Decrease, as the spread usually decreases in response to a crisis
D. No change, as both yields will move in the same direction
69. A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend
received by stock investors must have been ______ per share.
A. $0.55
B. $1.80
C. $0.45
D. $1.25
70. Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350
million, and $150 million, respectively. If you were to construct a price-weighted index of the three
stocks, what would be the index value?
A. 300
B. 39
C. 43
D. 30
71. Which of the following is not considered a money market investment?
A. Bankers' acceptance
B. Eurodollar
C. Repurchase agreement
D. Treasury note
72. The Federal Reserve Board of Governors directly controls which of the following interest rates?
A. Bankers' acceptances
B. Brokers' calls
C. Federal funds
D. LIBOR
73. You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wanted
to construct an index to track your portfolio performance, your best match for your portfolio would be to
construct ______.
A. a value-weighted index
B. an equally weighted index
C. a price-weighted index
D. a bond price index
74. 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.
A. value-weighted index
B. equally weighted index
C. price-weighted index
D. bond price index
75. A corporation in a 34% tax bracket invests in the preferred stock of another company and earns a 6%
pretax rate of return. An individual investor in a 15% tax bracket invests in the same preferred stock and
earns the same pretax return. The after-tax return to the corporation is _______, and the after-tax return to
the individual investor is _______.
A. 3.96%; 5.1%
B. 5.39%; 5.1%
C. 6%; 6%
D. 3.96%; 6%
Treasury bills immediately after September 11, 2001?
A. No change, as both yields will remain the same
B. Increase, as the spread usually increases in response to a crisis
C. Decrease, as the spread usually decreases in response to a crisis
D. No change, as both yields will move in the same direction
69. A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend
received by stock investors must have been ______ per share.
A. $0.55
B. $1.80
C. $0.45
D. $1.25
70. Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350
million, and $150 million, respectively. If you were to construct a price-weighted index of the three
stocks, what would be the index value?
A. 300
B. 39
C. 43
D. 30
71. Which of the following is not considered a money market investment?
A. Bankers' acceptance
B. Eurodollar
C. Repurchase agreement
D. Treasury note
72. The Federal Reserve Board of Governors directly controls which of the following interest rates?
A. Bankers' acceptances
B. Brokers' calls
C. Federal funds
D. LIBOR
73. You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wanted
to construct an index to track your portfolio performance, your best match for your portfolio would be to
construct ______.
A. a value-weighted index
B. an equally weighted index
C. a price-weighted index
D. a bond price index
74. 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.
A. value-weighted index
B. equally weighted index
C. price-weighted index
D. bond price index
75. A corporation in a 34% tax bracket invests in the preferred stock of another company and earns a 6%
pretax rate of return. An individual investor in a 15% tax bracket invests in the same preferred stock and
earns the same pretax return. The after-tax return to the corporation is _______, and the after-tax return to
the individual investor is _______.
A. 3.96%; 5.1%
B. 5.39%; 5.1%
C. 6%; 6%
D. 3.96%; 6%
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76. All but which one of the following indices is value weighted?
A. NASDAQ Composite
B. S&P 500
C. Wilshire 5000
D. DJIA
77. What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%?
A. 6.48%
B. 7.25%
C. 8.02%
D. 9%
78. A tax free municipal bond provides a yield of 3.2%. What is the equivalent taxable yield on the bond
given a 35% tax bracket?
A. 3.2%
B. 3.68%
C. 4.92%
D. 5%
79. An index computed from a simple average of returns is a/an _____.
A. equal weighted index
B. value weighted index
C. price weighted index
D. share weighted index
80. A tax free municipal bond provides a yield of 2.34%. What is the equivalent taxable yield on the bond
given a 28% tax bracket?
A. 2.34%
B. 2.68%
C. 3.25%
D. 4.92%
81. The Chompers Index is a price weighted stock index based on the 3 largest fast food chains. The stock
prices for the three stocks are $54, $23, and $44. What is the price weighted index value of the Chompers
Index?
A. 23.43
B. 35.36
C. 40.33
D. 49.58
82. The Hydro Index is a price weighted stock index based on the 5 largest boat manufacturers in the nation.
The stock prices for the five stocks are $10, $20, $80, $50 and $40. The price of the last stock was just
split 2 for 1 and the stock price was halved from $40 to $20. What is the new divisor for a price weighted
index?
A. 5.00
B. 4.85
C. 4.50
D. 4.75
83. A benchmark index has three stocks priced at $23, $43, and $56. The number of outstanding shares for
each is 350,000 shares, 405,000 shares, and 553,000 shares, respectively. If the market value weighted
index was 970 yesterday and the prices changed to $23, $41, and $58, what is the new index value?
A. 960
B. 970
C. 975
D. 985
A. NASDAQ Composite
B. S&P 500
C. Wilshire 5000
D. DJIA
77. What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%?
A. 6.48%
B. 7.25%
C. 8.02%
D. 9%
78. A tax free municipal bond provides a yield of 3.2%. What is the equivalent taxable yield on the bond
given a 35% tax bracket?
A. 3.2%
B. 3.68%
C. 4.92%
D. 5%
79. An index computed from a simple average of returns is a/an _____.
A. equal weighted index
B. value weighted index
C. price weighted index
D. share weighted index
80. A tax free municipal bond provides a yield of 2.34%. What is the equivalent taxable yield on the bond
given a 28% tax bracket?
A. 2.34%
B. 2.68%
C. 3.25%
D. 4.92%
81. The Chompers Index is a price weighted stock index based on the 3 largest fast food chains. The stock
prices for the three stocks are $54, $23, and $44. What is the price weighted index value of the Chompers
Index?
A. 23.43
B. 35.36
C. 40.33
D. 49.58
82. The Hydro Index is a price weighted stock index based on the 5 largest boat manufacturers in the nation.
The stock prices for the five stocks are $10, $20, $80, $50 and $40. The price of the last stock was just
split 2 for 1 and the stock price was halved from $40 to $20. What is the new divisor for a price weighted
index?
A. 5.00
B. 4.85
C. 4.50
D. 4.75
83. A benchmark index has three stocks priced at $23, $43, and $56. The number of outstanding shares for
each is 350,000 shares, 405,000 shares, and 553,000 shares, respectively. If the market value weighted
index was 970 yesterday and the prices changed to $23, $41, and $58, what is the new index value?
A. 960
B. 970
C. 975
D. 985
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84. A benchmark market value index is comprised of three stocks. Yesterday the three stocks were priced
at $12, $20, and $60. The number of outstanding shares for each is 600,000 shares, 500,000 shares, and
200,000 shares, respectively. If the stock prices changed to $16, $18, and $62 today respectively, what is
the 1-day rate of return on the index?
A. 5.78%
B. 4.35%
C. 6.16%
D. 7.42%
85. Which of the following mortgage scenarios will benefit the homeowner the most?
A. Adjustable rate mortgage when interest rate increases.
B. Fixed rate mortgage when interest rates falls.
C. Fixed rate mortgage when interest rate rises.
D. None of these options, as the banker's interest will always be protected.
86. The TED spread refers to
A. the difference between the Treasury bond rate and the Treasury bill rate.
B. the difference between the Treasury note rate and the Treasury bill rate.
C. the difference between the LIBOR rate and the Treasury bill rate.
D. the difference between the LIBOR rate and the Treasury bond rate.
at $12, $20, and $60. The number of outstanding shares for each is 600,000 shares, 500,000 shares, and
200,000 shares, respectively. If the stock prices changed to $16, $18, and $62 today respectively, what is
the 1-day rate of return on the index?
A. 5.78%
B. 4.35%
C. 6.16%
D. 7.42%
85. Which of the following mortgage scenarios will benefit the homeowner the most?
A. Adjustable rate mortgage when interest rate increases.
B. Fixed rate mortgage when interest rates falls.
C. Fixed rate mortgage when interest rate rises.
D. None of these options, as the banker's interest will always be protected.
86. The TED spread refers to
A. the difference between the Treasury bond rate and the Treasury bill rate.
B. the difference between the Treasury note rate and the Treasury bill rate.
C. the difference between the LIBOR rate and the Treasury bill rate.
D. the difference between the LIBOR rate and the Treasury bond rate.
Loading page 26...
ch02 Key
1. C
2. B
3. B
4. A
5. A
6. A
7. D
8. D
9. B
10. C
11. B
12. B
13. C
14. B
15. B
16. D
17. A
18. C
19. C
20. A
21. B
22. B
23. C
24. B
25. C
26. B
27. C
28. D
29. C
30. B
31. B
32. A
33. C
34. D
35. D
36. D
1. C
2. B
3. B
4. A
5. A
6. A
7. D
8. D
9. B
10. C
11. B
12. B
13. C
14. B
15. B
16. D
17. A
18. C
19. C
20. A
21. B
22. B
23. C
24. B
25. C
26. B
27. C
28. D
29. C
30. B
31. B
32. A
33. C
34. D
35. D
36. D
Loading page 27...
37. D
38. B
39. C
40. D
41. C
42. A
43. B
44. B
45. A
46. B
47. C
48. C
49. C
50. B
51. D
52. B
53. A
54. A
55. B
56. D
57. C
58. B
59. D
60. B
61. A
62. B
63. D
64. B
65. A
66. D
67. A
68. B
69. C
70. B
71. D
72. C
73. C
74. A
38. B
39. C
40. D
41. C
42. A
43. B
44. B
45. A
46. B
47. C
48. C
49. C
50. B
51. D
52. B
53. A
54. A
55. B
56. D
57. C
58. B
59. D
60. B
61. A
62. B
63. D
64. B
65. A
66. D
67. A
68. B
69. C
70. B
71. D
72. C
73. C
74. A
Loading page 28...
75. B
76. D
77. A
78. C
79. A
80. C
81. C
82. C
83. C
84. C
85. C
86. C
76. D
77. A
78. C
79. A
80. C
81. C
82. C
83. C
84. C
85. C
86. C
Loading page 29...
ch02 Summary
Category # of Questions
AACSB: Analytic 78
AACSB: Reflective Thinking 8
Blooms: Apply 16
Blooms: Remember 60
Blooms: Understand 10
Bodie - Chapter 02 86
Difficulty: 1 Easy 39
Difficulty: 2 Medium 36
Difficulty: 3 Hard 11
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets. 52
Learning Objective: 02-02 Describe the construction of stock market indexes. 25
Learning Objective: 02-03 Calculate the profit or loss on investments in options and futures contracts. 9
Topic: Derivative Markets 9
Topic: Equity Securities 5
Topic: Stock and Bond Market Indexes 24
Topic: The Bond Market 21
Topic: The Money Market 27
Category # of Questions
AACSB: Analytic 78
AACSB: Reflective Thinking 8
Blooms: Apply 16
Blooms: Remember 60
Blooms: Understand 10
Bodie - Chapter 02 86
Difficulty: 1 Easy 39
Difficulty: 2 Medium 36
Difficulty: 3 Hard 11
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets. 52
Learning Objective: 02-02 Describe the construction of stock market indexes. 25
Learning Objective: 02-03 Calculate the profit or loss on investments in options and futures contracts. 9
Topic: Derivative Markets 9
Topic: Equity Securities 5
Topic: Stock and Bond Market Indexes 24
Topic: The Bond Market 21
Topic: The Money Market 27
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ch03
Student: ___________________________________________________________________________
1. Underwriting is one of the services provided by _____.
A. the SEC
B. investment bankers
C. publicly traded companies
D. FDIC
2. Under firm-commitment underwriting, the ______ assumes the full risk that the shares cannot be sold to
the public at the stipulated offering price.
A. red herring
B. issuing company
C. initial stockholder
D. underwriter
3. Explicit costs of an IPO tend to be around ______ of the funds raised.
A. 1%
B. 7%
C. 15%
D. 25%
4. Barnegat Light sold 200,000 shares in an initial public offering. The underwriter's explicit fees were
$90,000. The offering price for the shares was $35, but immediately upon issue, the share price jumped to
$43. What is the best estimate of the total cost to Barnegat Light of the equity issue?
A. $90,000
B. $1,290,000
C. $2,390,000
D. $1,690,000
5. A red herring becomes a prospectus when ____.
A. the preliminary registration statement is approved by the SEC
B. the IPO is complete
C. the offering is seasoned
D. the lockup period expires
6. Private placements can be advantageous, compared to public issue, because:
I. Private placements are cheaper to market than public issues.
II. Private placements may still be sold to the general public under SEC Rule 144A.
III. Privately placed securities trade on secondary markets.
A. I only
B. I and III only
C. II and III only
D. I, II, and III
7. A level _____ subscriber to the NASDAQ system may enter bid and ask prices.
A. 1
B. 2
C. 3
D. 4
Student: ___________________________________________________________________________
1. Underwriting is one of the services provided by _____.
A. the SEC
B. investment bankers
C. publicly traded companies
D. FDIC
2. Under firm-commitment underwriting, the ______ assumes the full risk that the shares cannot be sold to
the public at the stipulated offering price.
A. red herring
B. issuing company
C. initial stockholder
D. underwriter
3. Explicit costs of an IPO tend to be around ______ of the funds raised.
A. 1%
B. 7%
C. 15%
D. 25%
4. Barnegat Light sold 200,000 shares in an initial public offering. The underwriter's explicit fees were
$90,000. The offering price for the shares was $35, but immediately upon issue, the share price jumped to
$43. What is the best estimate of the total cost to Barnegat Light of the equity issue?
A. $90,000
B. $1,290,000
C. $2,390,000
D. $1,690,000
5. A red herring becomes a prospectus when ____.
A. the preliminary registration statement is approved by the SEC
B. the IPO is complete
C. the offering is seasoned
D. the lockup period expires
6. Private placements can be advantageous, compared to public issue, because:
I. Private placements are cheaper to market than public issues.
II. Private placements may still be sold to the general public under SEC Rule 144A.
III. Privately placed securities trade on secondary markets.
A. I only
B. I and III only
C. II and III only
D. I, II, and III
7. A level _____ subscriber to the NASDAQ system may enter bid and ask prices.
A. 1
B. 2
C. 3
D. 4
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Finance