BUSI 321 test 2 solutions complete answers

BUSI 321 test 2 solutions complete answers

 

The SEC's ____ reviews the registration statement filed when a firm goes public, corporate filings for annual and quarterly reports, and proxy statements that involve voting for board members or other corporate issues.

 

Which of the following would not be a likely example of a protective covenant provision?

 

Which of the following statements is true regarding STRIPS?

 

Bonds that are not secured by specific property are called

 

Municipal general obligation bonds are ____. Municipal revenue bonds are ____.

 

Which of the following statements is incorrect?

 

(Financial calculator required.) Erin is, a private investor, who can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Erin's yield to maturity is ____ percent.

 

The issuance of municipal securities is regulated by:

 

The Financial Reform Act of 2010 established the __________ to provide oversight for credit rating agencies.

 

____ bonds have the most active secondary market.

 

Stephanie would like to purchase a bond that has a par value of $1,000, pays $100 at the end of each year in coupon payments, and has three years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 12 percent, how much will Stephanie pay for the bond?

 

The prices of short-term bonds are commonly ____ those of long-term bonds.

 

Assume bond portfolio managers actively manage their portfolios. If they expect interest rates to ____, they would shift toward ____.

 

Which of the following bonds is most susceptible to interest rate risk from an investor's perspective?

 

Assume a bond with a $1,000 par value and a 7 percent coupon rate, three years remaining to maturity, and a 9 percent yield to maturity. The duration of this bond is ____ years.

 

The required rate of return on a certain bond changes from 12 percent to 8 percent, causing the price of the bond to change from $900 to $1,100. The bond price elasticity of this bond is

 

The bonds that are most sensitive to interest rate movements have

 

If analysts expect that the demand for loanable funds will increase and the supply of loanable funds will decrease, they would most likely expect interest rates to ____ and prices of existing bonds to ____.

 

____ mortgages enabled more people with relatively lower income, or high existing debt, or a small down payment to purchase homes.

 

The difference between the 30-year mortgage rate and the 30-year Treasury bond rate is primarily attributable to

 

At a given point in time, the price of a credit default swap contract should be ________ related to the default risk of the securities covered by the contract. For a given set of securities that are covered by a credit default swap, the price of the contract should be _______ related to the default risk as it changes over time.

 

Which of the following is not a common type of mortgage-backed security according to your text?

 

The ____ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity.

 

An adjustable-rate mortgage increases interest rate risk for the ____, but reduces interest rate risk for the ____.

 

____ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates.

 

Use an amortization schedule. A 15-year $100,000 mortgage has a fixed mortgage rate of 9 percent. In the first month, the total mortgage payment is $____, and $____ of this amount represents payment of interest.

 

On average, IPOs of firms tend to perform ____ over a period of a year or longer.

 

Sudden favorable news about the performance of a firm will make investors believe that the firm's stock is ____ at its prevailing price.

 

When a firm goes public and issues stock in the primary market,

 

The prevailing price per share divided by the firm's earnings per share is known as the

 

A firm can avoid the time lag between registering new securities with the SEC and actually selling them by using

 

When a corporation first decides to issue stock to the public, it engages in a(n)

 

Preferred shareholders

 

When brokers encourage investors to place first-day bids for IPO shares that are above the offer price, this is referred to as

 

Which of the following is false with respect to initial public offerings (IPOs)?

 

Steam Corp. has a beta of 1.5. The prevailing risk-free rate is 5 percent, and the annual market return in recent years has been 11 percent. Based on this information, the required rate of return on Steam Corp. stock is ____ percent.

 

Boris stock has an average return of 15 percent. Its beta is 1.5. Its standard deviation of returns is 25 percent. The average risk-free rate is 6 percent. The Sharpe index for Boris stock is

 

The ____ is commonly used as a proxy for the risk-free rate in the capital asset pricing model.

 

A stock has a standard deviation of daily returns of 1 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stock's expected daily return is .2 percent. The lower boundary is

 

Kandle Company paid a dividend of $4.76 per share this year and plans to pay a dividend of $5 per share next year, which is expected to increase by 3 percent per year subsequently. The required rate of return is 15 percent. The value of Kandle stock, according to the dividend discount model, is $____.

 

The general mood of investors represents:

 

Fabrizio, Inc. is expected to generate earnings of $1.50 per share this year. If the mean ratio of share price to expected earnings of competitors in the same industry is 20, then the stock price per share is $____.

 

If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other public information, security markets are

 

Under the present margin requirements, at least ____ percent of an investor's invested funds must be paid in cash.

 

Which of the following is incorrect in regard to short selling?

 

The transaction costs associated with international trading of stocks have been reduced by

 

The risk of a short sale is that the stock price

 

______________ represents the use of electronic platforms to execute orders based on an algorithm with programmed instructions.

 

Short selling a stock refers to

 

Karen just purchased a stock costing $33 on margin, paying $23 and borrowing the remainder from a brokerage firm at 15 percent annual interest. The stock pays an annual dividend of $2. If Karen sells the stock after one year at a price of $50, what is the return on the stock?

 

The size of the spread on stocks that have relatively little trading is

 

 

____ are not primary purchasers of bonds.

a. Insurance companies
b. Finance companies
c. Mutual funds
d. Pension funds
 
 
Assume that you purchased corporate bonds one year ago that have no protective covenants. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The market value of your bonds will likely ____ as a result.

a. rise
b. decline
c. be zero
d. be unaffected
 
 
Assume U.S. interest rates are significantly higher than German rates. A U.S. firm with a German subsidiary could achieve a lower financing rate, without exchange rate risk by denominating the bonds in

a. dollars.
b. euros and making payments from U.S. headquarters.
c. euros and making payments from its German subsidiary.
d. dollars and making payments from its German subsidiary.
 
 
____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased.

a. Competitive
b. Noncompetitive
c. Negotiable
d. Non-negotiable
 
 
____ bonds have the most active secondary market.

a. Treasury
b. Zero-coupon corporate
c. Junk
d. Municipal
 
 
Bonds issued by ____ are backed by the federal government.

a. the Treasury
b. AAA-rated corporations
c. state governments
d. city governments
 
 
Bonds that are not secured by specific property are called

a. a chattel mortgage.
b. open-end mortgage bonds.
c. debentures.
d. blanket mortgage bonds.
 
 
Bonds that are secured by personal property are called

a. chattel mortgage bonds.
b. first mortgage bonds.
c. second mortgage bonds.
d. debentures.
 
 
A call provision on bonds normally

a. allows the firm to sell new bonds at par value.
b. gives the firm to sell new bonds above market value.
c. allows the firm to sell bonds to the Treasury.
d. allows the firm to buy back bonds that it previously issued.
 
 
Corporate bonds that receive a ____ rating from credit rating agencies are normally placed at ____ yields.

a. higher; lower
b. lower; lower
c. higher; higher
d. none of the above
 
 
The coupon rate of most variable-rate bonds is tied to

a. the prime rate.
b. the discount rate.
c. LIBOR.
d. the federal funds rate.
 
 
A credit rating agency is paid by:

a. the purchasers of the bonds that the agency rates.
b. the issuers of the bonds that the agency rates.
c. the taxpayers, because the rating agencies are government agencies.
d. the New York Stock Exchange or the over-the-counter market where the bonds are listed.
 
 
Devin is, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____ percent.

a. 12
b. 9
c. 10.5
d. more information is needed to answer this question
 
 
Everything else being equal, which of the following bond ratings is associated with the highest yield?

a. Baa
b. A
c. Aa
d. Aaa
 
 
(Financial calculator required.) Erin is, a private investor, who can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Erin's yield to maturity is ____ percent.

a. 9.96
b. 10.00
c. 10.33
d. 10.24
e. none of the above
 
 
(Financial calculator required.) Lisa can purchase bonds with 15 years until maturity, a par value of $1,000, and a 9 percent annualized coupon rate for $1,100. Lisa's yield to maturity is ____ percent.

a. 9.33
b. 7.84
c. 9.00
d. none of the above
 
 
(Financial calculator required.) Paul can purchase bonds with 15 years remaining until maturity, a par value of $1,000, and a 9 percent annual coupon rate for $1,100. Paul's yield to maturity is ____ percent.

a. 9.33
b. 7.84
c. 9.00
d none of the above
 
 
 
 
 
 
 
 
 
 

(Financial calculator required.) Steven, a private investor, can purchase $1,000 par value bonds for$980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Steven's yield to maturity is ____ percent.

a. 9.96
b. 10.00
c. 10.33
d. 10.24
e. none of the above
 
 
The Financial Reform Act of 2010 established the __________ to provide oversight for credit rating agencies.

a. Federal Ratings Bureau
b. Office of Credit Ratings
c. Office of Agency Supervision
d. Ratings Oversight Commission
 
 
For bonds issued under a _______ arrangement, the underwriter attempts to sell the bonds at a specified price but makes no guarantee to the issuer.

a. floating value
b. variable proceeds
c. best efforts
d. firm commitment
 
 
For bonds issued under a _______ arrangement, the underwriter guarantees the issuer that the bonds will be sold at a specified price.

a. specific value
b. fixed proceeds
c. best efforts
d. firm commitment
 
 
A ____ has first claim on specified assets, while a ____ is a debenture that has claims against a firm's assets that are junior to the claims of mortgage bonds and regular debentures.

a. first mortgage bond; second mortgage bond
b. first mortgage bond; debenture
c. first mortgage bond; subordinated debenture
d. chattel mortgage bond; subordinated debenture
e. none of the above
 
 
If a firm believes that it will have sufficient cash flows to cover interest payments, it may consider using ____ debt and ____ equity, which implies a ____ degree of financial leverage.

a. more; less; lower
b. more; less; higher
c. less; more; higher
d. none of the above
 
 
If interest rates suddenly ____, those existing bonds that have a call feature are ____ likely to be called.

a. decline; more
b. decline; less
c. increase; more
d. none of the above
 
 
In general, variable-rate municipal bonds are desirable to investors who expect that interest rates will ____.

a. remain unchanged
b. fall
c. rise
d. none of the above
 
 
Interest earned from Treasury bonds is

a. exempt from all income tax.
b. exempt from federal income tax.
c. exempt from state and local taxes.
d. subject to all income taxes.
 
 
Investors in Treasury notes and bonds receive ____ interest payments from the Treasury.

a. annual
b. semiannual
c. quarterly
d. monthly
 
 
The issuance of municipal securities is regulated by:

a. the Securities and Exchange Commission.
b. the Consumer Financial Protection Bureau.
c. their respective state governments.
d. the Federal Reserve.
 
 
 
 
 
 
 
 

Jim purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Jim will hold the bonds until maturity. Thus, he will earn a return of ____ percent.

a. 12.00
b. 9.00
c. 10.50
d. More information is needed to answer this question.
 
 
Leveraged buyouts are commonly financed by the issuance of:

a. money market securities.
b. Treasury bonds.
c. corporate bonds.
d. municipal bonds.
 
 
Municipal general obligation bonds are ____. Municipal revenue bonds are ____.

a. supported by the municipal government's ability to tax; supported by the municipal government's ability to tax
b. supported by the municipal government's ability to tax; supported by revenue generated from the project
c. always subject to federal taxes; always exempt from state and local taxes
d. typically zero-coupon bonds; typically zero-coupon bonds
 
 
Note maturities are usually ____, while bond maturities are ____.

a. less than 10 years; 10 years or more
b. 10 years or more; less than 10 years
c. less than 5 years; 5 years or more
d. 5 years or more; less than 5 years
 
 
Online bond brokerage services offer several advantages including:

a. pricing is more transparent because investors can easily compare bid and ask spreads.
b. some services charge commissions, which may be more easily understood than bid and ask spreads.
c. some brokers have narrowed their spreads so that they do not lose business to competitors.
d. all of the above
 
 
A protective covenant may

a. specify all the rights and obligations of the issuing firm and the bondholders.
b. require the firm to retire a certain
amount of the bond issue each year.
c. restrict the amount of additional debt the firm can issue.
d. none of the above
 
 
____ require the owner to clip coupons attached to the bonds and send them to the issuer to receive coupon payments.

a. Bearer
b. Registered
c. Treasury
d. Corporate
 
 
Some bonds are "stripped," which means that

a. they have defaulted.
b. the call provision has been eliminated.
c. they are transferred into principal-only and interest-only securities.
d. their maturities have been reduced.
 
 
A ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based on this information, the coupon payment after six months will be $____.

a. 250
b. 255
c. 500
d. 510
 
 
 
 
 
 
 
 

Treasury bond dealers

a. quote an ask price for customers who want to sell existing Treasury bonds to the dealers.
b. profit from a very wide spread between bid and ask prices in the Treasury securities market.
c. may trade Treasury bonds among themselves.
d. make a primary market for Treasury bonds.
 
 
The Treasury has relied heavily on ____-year bonds to finance the U.S. budget deficit.

a. 50
b. 70
c. 10
d. 5
 
 
A variable rate bond allows

a. investors to benefit from declining rates over time.
b. issuers to benefit from rising market interest rates over time.
c. investors to benefit from rising market interest rates over time.
d. none of the above.
 
 
When firms issue ____, the amount of interest and principal to be paid is based on specified market conditions. The amount of the repayment may be tied to a Treasury bond price index or even to a stock index.

a. auction-rate securities
b. structured notes
c. leveraged notes
d. stripped securities
 
 
When purchasing bonds, individual investors can use a ________ to specify the maximum price they are willing to pay for a bond.

a. limit order
b. market order
c. stop order
d. price order
 
 
When would a firm most likely call bonds?

a. after interest rates have declined
b. if interest rates do not change
c. after interest rates increase
d. just before the time at which interest rates are expected to decline
 
 
Which of the following eurozone countries has not recently experienced debt repayment problems?

a. Finland
b. Greece
c. Portugal
d. Spain
 
 
Which of the following institutions is most likely to purchase a private bond placement?

a. commercial bank
b. mutual fund
c. insurance company
d. savings institution
 
 
Which of the following is not an example of a municipal bond?

a. general obligation bond
b. revenue bond
c. Treasury bond
d. All of the above are examples of municipal bonds.
 
 
Which of the following is not mentioned in your text as a protective covenant?

a. a limit on the amount of dividends a firm can pay
b. a limit on the corporate officers' salaries a firm can pay
c. the amount of additional debt a firm can issue
d. the appointment of a trustee in all bond indentures
e. All of the above are mentioned in the text as protective covenants.
 
 
 
 
 
 
 
 

Which of the following is not true regarding the call provision?

a. It typically requires a firm to pay a price above par value when it calls its bonds.
b. The difference between the market value of the bond and the par value is called the call premium.
c. A principal use of the call provision is to lower future interest payments.
d. A principal use of the call provision is to retire bonds as required by a sinking-fund provision.
e. A call provision is normally viewed as a disadvantage to bondholders.
 
 
Which of the following is not true regarding zero-coupon bonds?

a. They are issued at a deep discount from par value.
b. Investors are taxed annually on the amount of interest earned, even though the interest will not be received until maturity.
c. The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest.
d. Zero-coupon bonds are purchased mainly for tax-exempt investment account, such as pension funds and individual retirement accounts.
e. all of the above are true
 
 
Which of the following statements is incorrect?

a. The municipal bond must pay a risk premium to compensate for the possibility of default risk.
b. The Treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds.
c. The income earned from municipal bonds is exempt from federal taxes.
d. All of the above are true.
 
 
Which of the following statements is not true regarding STRIPS?

a. They are not issued by the Treasury.
b. They are created and sold by various financial institutions.
c. They are backed by the U.S. government.
d. They have to be held until maturity.
e. All of the above are true regarding STRIPS.
 
 
Which of the following statements is not true regarding zero-coupon bonds?

a. They are issued at a deep discount from par value.
b. Investors are taxed on the total amount of interest earned at maturity.
c. The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest until maturity.
d. Zero-coupon bonds are purchased mainly for tax-exempt investment accounts, such as pension funds and individual retirement accounts.
e. All of the above are true.
 
 
Which of the following statements is true regarding STRIPS?

a. they are issued by the Treasury
b. they are created and sold by various financial institutions
c. they are not backed by the U.S. government
d. they have to be held until maturity
e. all of the above are true regarding STRIPS
 
 
Which of the following would not be a likely example of a protective covenant provision?

a. a limit on the amount of dividends a firm can pay
b. a limit on the corporate officers' salaries a firm can pay
c. the amount of additional debt a firm can issue
d. a call feature
 
 
 
 
 
 
 
 

 

A $1,000 par bond with five years to maturity is currently priced at $892. Annual interest payments are $90. What is the yield to maturity?
a. 13 percent
b. 12 percent
c. 11 percent
d. 10 percent
 
 
A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to maturity and five years remaining to maturity should sell for
a. $1,000.00.

b. $1,081.11.

c. $798.70.

d. $880.22.

e. none of the above.
 
 
A bank buys bonds with a par value of $25 million for $24,040,000. The coupon rate is 10 percent, and the bonds make annual payments. The bonds mature in four years. The bank wants to sell them in two years and estimates the required rate of return in two years will be 8 percent. What will the market value of the bonds be in two years?
a. $24,113,418
b. $24,667,230
c. $25,000,000
d. $25,891,632
 
 
A bond has a $1,000 par value and an 8 percent coupon rate. The bond has four years remaining to maturity and a 10 percent yield to maturity. This bond's modified duration is ____ years.
a. 1.33

b. 1.27

c. 3.24

d. 1.31

e. none of the above
 
 
A bond portfolio containing a large portion of zero-coupon bonds will be more favorably affected by declining interest rates than a bond portfolio containing no zero-coupon bonds.
a. True
b. False
 
 
A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6 percent. What should be the current price?
a. $1,069.31

b. $1,000.00

c. $9712

d. $927.66

e. none of the above
 
 
A bond with a 12 percent quarterly coupon rate has a yield to maturity of 16 percent. The bond has a par value of $1,000 and matures in 20 years. Based on this information, a fair price of this bond is $____.
a. 1,302
b. 763
c. 761
d. 1,299
 
 
Although the European debt crisis had substantial effects on European financial markets, the crisis was contained and did not affect markets and financial institutions outside Europe.
a. True
b. False
 
 
An economic announcement signaling ____ economic growth in the future will probably cause bond prices to ____.
a. weak; decrease

b. strong; increase

c. weak; increase

d. strong; decrease

e. Answers C and D are correct.
 
 
An increase in either the risk-free rate or the general level of the risk premium on bonds results in a higher required rate of return and therefore causes bond prices to increase.
a. True
b. False
 
 
A(n) ____ in the expected level of inflation results in ____ pressure on bond prices.
a. increase; upward
b. increase; downward
c. decrease; downward
d. none of the above
 
 
Any announcement that signals stronger than expected economic growth tends to increase bond prices.
a. True
b. False
 
 
As interest rates increase, prices of short-term bonds will decline by a greater degree than prices of long-term bonds.
a. True
b. False
 
 
Assume a bond with a $1,000 par value and a 7 percent coupon rate, three years remaining to maturity, and a 9 percent yield to maturity. The duration of this bond is ____ years.
a. 1.92

b. 2.5

c. 2.8

d. none of the above
 
 
Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is
a. 1.90 years.

b. 1.50 years.

c. 1.92 years.

d. none of the above
 
 
Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The modified duration of this bond is
a. 1.73 years.

b. 1.71 years.

c. 1.90 years.

d. none of the above
 
 
 
 
 
 
 
 
 
 
 

Assume bond portfolio managers actively manage their portfolios. If they expect interest rates to ____, they would shift toward ____.
a. increase; long-maturity bonds with zero-coupon rates
b. decrease; short-maturity bonds with high-coupon rates
c. increase; high-coupon bonds with long maturities
d. decrease; long-maturity bonds with zero-coupon rates
 
 
Assume that the price of a $1,000 zero-coupon bond with five years to maturity is $567 when the required rate of return is 12 percent. If the required rate of return suddenly changes to 15 percent, what is the price elasticity of the bond?
a. -.980

b. +.980

c. -.494

d. +.494

e. none of the above
 
 
A zero-coupon bond makes no coupon payments.
a. True
b. False
 
 
Because of a change in the required rate of return from 11 percent to 13 percent, the bond price of a zero-coupon bond will fall from $1,000 to $860. Thus, the bond price elasticity for this bond is
a. 0.77.

b. -0.77.

c. -0.90.

d. -1.06.

e. none of the above.
 
 
Bond price elasticity is the percentage change in bond prices divided by the percentage change in the required rate of return.
a. True
b. False
 
 
Bonds that sell below their par value are called premium bonds.
a. True
b. False
 
 
Consider a coupon bond that sold at par value two years ago. If interest rates are much lower now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bond will be ____ its par value.
a. above; above
b. above; below
c. below; below
d. below; above
 
 
Duration is a measure of the life of a bond on a present value basis.
a. True
b. False
 
 
For a bond of a given par value, the higher the investor's required rate of return is above the coupon rate, the
a. greater is the premium on the price.
b. greater is the discount on the price.
c. smaller is the premium on the price.
d. smaller is the discount on the price.
 
 
Foreign investors anticipating dollar depreciation are less willing to hold U.S. bonds because the coupon payments will convert to less of their home currency.
a. True
b. False
 
 
From the perspective of investing institutions, the most attractive foreign bonds offer a ____ and are denominated in a currency that ____ over the investment horizon.
a. high yield; appreciates
b. high yield; remains stable
c. low yield; appreciates
d. low yield; depreciates
 
 
Holding other factors constant, a higher budget deficit leads to ______ interest rates, and higher inflationary expectations lead to _______ interest rates.
a. higher; lower
b. higher; higher
c. lower; higher
d. lower; lower
 
 
 
 
 
 
 
 

Hurricane Corp. recently purchased corporate bonds in the secondary market with a par value of $11 million, a coupon rate of 12 percent (with annual coupon payments), and four years until maturity. If Hurricane intends to sell the bonds in two years and expects investors' required rate of return on similar investments to be 14 percent at that time, what is the expected market value of the bonds in two years?
a. $9.33 million

b. $11.00 million

c. $10.64 million

d. $9.82 million

e. none of the above
 
 
If a financial institution's bond portfolio contains a relatively large portion of ____, it will be ____.
a. high-coupon bonds; more favorably affected by declining interest rates
b. zero- or low-coupon bonds; more favorably affected by declining interest rates
c. zero- or low-coupon bonds; more favorably affected by rising interest rates
d. high-coupon bonds; completely insulated from rising interest rates
 
 
If analysts expect that the demand for loanable funds will increase and the supply of loanable funds will decrease, they would most likely expect interest rates to ____ and prices of existing bonds to ____.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
 
 
If bond portfolio managers expect interest rates to increase in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
 
 
If interest rates consistently decline over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's default risk.)
a. consistently increase

b. consistently decrease

c. remain unchanged

d. change in a direction that cannot be determined with the above information
 
 
If interest rates consistently rise over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's default risk.)
a. consistently increase

b. consistently decrease

c. remain unchanged

d. change in a direction that cannot be determined with the above information
 
 
If investors rely strictly on modified duration to estimate the percentage change in the price of a bond, they will tend to ____ the price decline associated with an increase in rates and ____ the price increase associated with a decrease in rates.
a. underestimate; underestimate
b. overestimate; overestimate
c. underestimate; overestimate
d. overestimate; underestimate
 
 
If the coupon rate equals the required rate of return, the price of the bond
a. should be above its par value.
b. should be below its par value.
c. should be equal to its par value.
d. is negligible.
 
 
If the coupon rate of a bond is above the investor's required rate of return, the price of the bond should be below its par value.
a. True
b. False
 
 
 
 
 
 
 
 

If the coupon rate ____ the required rate of return, the price of a bond ____ par value.
a. equals; equals
b. exceeds; is less than
c. is less than; is greater than
d. B and C
e. none of the above
 
 
If the level of inflation is expected to decrease, there will be upward pressure on interest rates and on the required rate of return on bonds.
a. True
b. False
 
 
If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds.
a. increase; upward; downward
b. decrease; upward; downward
c. decrease; upward; upward
d. increase; downward; upward
e. increase; upward; upward
 
 
If the Treasury issues an unusually large amount of bonds in the primary market, it places ____ on bond prices and ____ on yields to be earned by investors that purchase bonds and plan to hold them to maturity.
a. downward pressure; downward pressure
b. downward pressure; upward pressure
c. upward pressure; upward pressure
d. upward pressure; downward pressure
 
 
If the U.S. government announces that it will borrow an additional $400 billion, this announcement will normally cause bond traders to expect
a. higher interest rates in the future, and they will buy bonds now.
b. higher interest rates in the future, and they will sell bonds now.
c. stable interest rates in the future, and they will buy bonds now.
d. lower interest rates in the future, and they will buy bonds now.
e. lower interest rates in the future, and they will sell bonds now.
 
 
In a laddered strategy, investors create a bond portfolio that will generate periodic income that can match their expected periodic expenses.
a. True
b. False
 
 
International diversification of bonds reduces the sensitivity of a bond portfolio to any single country's interest rate movements.
a. True
b. False
 
 
Julia just purchased a $1,000 par value bond with a 10 percent annual coupon rate and a life of 20 years. The bond has four years remaining until maturity, and the yield to maturity is 12 percent. How much did Julia pay for the bond?
a. $1,063.40

b. $1,000

c. $939.25

d. none of the above
 
 
Morgan would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has 10 years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 6 percent, how much will Morgan pay for the bond?
a. $1,000.00

b. $1,147.20

c. $856.80

d. none of the above
 
 
Other things held constant, bond prices should increase when inflationary expectations rise.
a. True
b. False
 
 
Sioux Financial Corp. has forecasted its bond portfolio value for one year ahead to be $105 million. In one year, it expects to receive $10,000,000 in coupon payments. The bond portfolio today is worth $101 million. What is the forecasted return of this bond portfolio?
a. 10 percent

b. 8.82 percent

c. 4.32 percent

d. 13.86 percent

e. none of the above
 
 
 
 
 
 
 
 

Stephanie would like to purchase a bond that has a par value of $1,000, pays $100 at the end of each year in coupon payments, and has three years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 12 percent, how much will Stephanie pay for the bond?
a. $1,000.00

b. $951.97

c. $856.80

d. none of the above
 
 
Systemic risk could be avoided if all financial institutions would use derivative securities as a means of insuring against the default of the debt securities that they hold.
a. True
b. False
 
 
The actual relationship reflecting the response of a bond's price to a change in bond yields is
a. concave.

b. convex.

c. linear.

d. quadratic.
 
 
The appropriate discount rate for valuing any bond is the
a. bond's coupon rate.
b. bond's coupon rate adjusted for the expected inflation rate over the life of the bond.
c. Treasury bill rate with an adjustment to include a risk premium if one exists.
d. yield that could be earned on alternative investments with similar risk and maturity.
 
 
The appropriate price of a bond is simply the sum of the cash flows to be received.
a. True
b. False
 
 
The bonds that are most sensitive to interest rate movements have
a. no coupon and a short-term maturity.
b. high coupons and a short-term maturity.
c. high coupons and a long-term maturity.
d. no coupon and a long-term maturity.
 
 
The credit risk premium tends to be larger for bonds that have longer terms to maturity.
a. True
b. False
 
 
The long-term, risk-free interest rate is driven by inflationary expectations, economic growth, the money supply, and the budget deficit.
a. True
b. False
 
 
The market price of a bond is partly determined by the timing of the payments made to bondholders.
a. True
b. False
 
 
The market value of long-term bonds is ____ sensitive to interest rate movements; as interest rates fall, the market value of long-term bonds ____.
a. slightly; rises

b. very; rises

c. very; declines

d. slightly; declines
 
 
The prices of bonds with ____ are most sensitive to interest rate movements.
a. high coupon payments

b. zero coupon payments

c. small coupon payments

d. none of the above (The size of the coupon payment does not affect the sensitivity of bond prices to interest rate movements.)
 
 
The prices of ____-coupon bonds and bonds with ____ maturities are most sensitive to changes in the required rate of return.
a. low; short
b. low; long
c. high; short
d. high; long
 
 
 
 
 
 
 
 

The prices of short-term bonds are commonly ____ those of long-term bonds.
a. more volatile than

b. equally volatile as

c. less volatile than

d. A and C occur with about equal frequency
 
 
The process by which higher credit risk in one country is transmitted to another country is known as 
a. credit epidemic.
b. credit expansion.
c. credit contagion.
d. none of the above
 
 
The required rate of return on a certain bond changes from 12 percent to 8 percent, causing the price of the bond to change from $900 to $1,100. The bond price elasticity of this bond is
a. -0.36.
b. -0.44.
c. -0.55.
d. -0.67.
e. 0.67.
 
 
The valuation of bonds is generally perceived to be more difficult than the valuation of equity securities.
a. True
b. False
 
 
The valuation of bonds is generally perceived to be ____ the valuation of equity securities.
a. more difficult than
b. easier than
c. just as difficult as
d. none of the above
 
 
The value of ____-risk securities will be relatively ____.
a. high; high

b. high; low

c. low; low

d. none of the above
 
 
The ____________ was recently established to identify risks in the U.S. financial system and make regulatory recommendations that could reduce such risks.
a. Financial Risk Assessment Commission
b. Financial Markets Protection Agency
c. Financial Stability Oversight Council
d. Federal Bureau of Financial Markets
 
 
To determine the present value of a bond that pays semiannual interest, which of the following adjustments should not be made to compute the price of the bond?
a. The annualized coupon should be split in half.
b. The annual discount rate should be divided by 2.
c. The number of annual periods should be doubled.
d. The par value should be split in half.
e. All of the above adjustments have to be made.
 
 
Using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes.
a. matching

b. laddered

c. barbell

d. interest rate

e. none of the above
 
 
When financial institutions expect interest rates to ____, they may ____.
a. increase; sell bonds and buy short-term securities
b. increase; sell short-term securities and buy bonds
c. decrease; sell bonds and buy short-term securities
d. B and C
 
 
When holding other factors constant, increased borrowing by the Treasury can result in a _______ required return and therefore _______ prices on existing bonds.
a. higher; lower
b. higher; higher
c. lower; higher
d. lower; lower
 
 
 
 
 
 
 
 
 
 
 

When the European Central Bank provides credit to a country that is experiencing debt repayment problems, the ECB commonly:
a. allows the country's government to conduct its own monetary policy.
b. recommends that the country withdraw from the eurozone.
c. urges the country's government to increase spending and lower taxes to stimulate the economy.
d. imposes austerity conditions to enable the government to reduce its budget deficit.
 
 
When two securities have the same expected cash flows, the value of the ____ security will be higher than the value of the ____ security.
a. high-risk; low-risk
b. low-risk; high-risk
c. high-risk; high-risk
d. low-risk; low-risk
e. none of the above
 
 
Which of the following bonds is most susceptible to interest rate risk from an investor's perspective?
a. short-term, high-coupon
b. short-term, low-coupon
c. long-term, high-coupon
d. long-term, zero-coupon
 
 
Which of the following is most likely to cause a decrease in bond prices?
a. a decrease in money supply growth and an increase in the demand for loanable funds
b. a forecast of decreasing oil prices
c. a forecast of a stronger dollar
d. an increase in money supply growth and no change in the demand for loanable funds
 
 
Which of the following is not a factor affecting the market price of a foreign bond held by a U.S. investor?
a. foreign interest rate movements
b. credit risk
c. exchange rate fluctuations
d. All of the above are factors affecting the market price of a foreign bond.
 
 
Which of the following will most likely cause bond prices to increase? (Assume no possibility of higher inflation in the future.)
a. reduced Treasury borrowing along with anticipation that money supply growth will decrease
b. reduced Treasury borrowing along with anticipation that money supply growth will increase
c. an anticipated drop in money supply growth along with increasing Treasury borrowing
d. higher levels of Treasury borrowing and corporate borrowing
 
 
With a(n) ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity. Thus, this strategy allocates some funds to achieving a relatively high return and other funds to covering liquidity needs.
a. matching

b. laddered

c. barbell

d. interest rate
 
 
Zero-coupon bonds with a par value of $1,000,000 have a maturity of 10 years and a required rate of return of 9 percent. What is the current price?
a. $363,212

b. $385,500

c. $422,400

d. $424,100

e. none of the above
 
 
 
 
 
 
 
 

 

​A(n) _________ problem occurs when a person or institution does not have to bear the full consequences of its behavior and therefore assumes more risk than it otherwise would.


 
 
At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically ____ the initial interest rate offered on a new adjustable-rate mortgage.
below
above
equal to
All of these are very common.
 
 
At a given point in time, the price of a credit default swap contract should be ________ related to the default risk of the securities covered by the contract. For a given set of securities that are covered by a credit default swap, the price of the contract should be _______ related to the default risk as it changes over time. 
​positively; positively 
​positively; inversely
​Inversely; positively 
​inversely; inversely
 
 
​Bear Stearns commonly used __________ as collateral when borrowing short-term funds, but its funding was cut off because prospective creditors questioned the quality of the collateral.
​commercial paper
​Treasury securities
​its stock 
​mortgages
 
 
Borrowers who have a lower level of income relative to the periodic loan payments are more likely to default on their mortgages.
 
 
The credit crisis is mostly attributed to the use of
strict criteria applied by mortgage originators.
liberal criteria applied by mortgage originators.
very tough credit ratings applied to mortgages.
fixed-rate mortgages with long terms to maturity.
 
 
During the early years of a mortgage, most of the monthly payment reflects principal.
 
 
Fannie Mae and Freddie Mac experienced financial problems during the credit crisis because they
were unwilling to finance new mortgages.
invested heavily in balloon mortgages.
invested only in prime mortgages that offered very low returns.
invested heavily in subprime mortgages.
 
 
Federally insured mortgages guarantee
loan repayment to the lending financial institution.
that the interest rate will not increase during the life of the mortgage.
the lending financial institution a selling price for the mortgage in the secondary market.
All of these are correct.
 
 
A financial institution has a higher degree of interest rate risk on a ____ than a ____.
​30-year fixed-rate mortgage; 15-year fixed-rate mortgage
​30-year variable-rate mortgage; 30-year fixed-rate mortgage
​15-year fixed-rate mortgage; 30-year fixed-rate mortgage
​15-year variable-rate mortgage; 15-year fixed-rate mortgage
 
 
A financial institution may service a mortgage even after selling it.
 
 
Financial institutions may purchase credit default swaps on mortgages if they expect defaults on many mortgages.
 
 
Financial institutions may sell credit default swaps on mortgages if they expect defaults on many mortgages.
 
 
Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ____ risk, because they commonly use funds obtained from short-term customer deposits to make long-term mortgage loans.
exchange rate
​prepayment
​reinvestment rate
​interest rate
​exchange rate
 
 
For any given interest rate, the shorter the life of the mortgage, the ____ the monthly payment and the ____ the total payments over the life of the mortgage.
​greater; greater
​greater; lower
​lower; greater
​lower; lower
 
 
From the perspective of the lending financial institution, interest rate risk is
​lower on a 30-year fixed-rate mortgage than on a 15-year fixed-rate mortgage.
​lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
​higher on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
​higher on a 15-year adjustable-rate mortgage than on a 30-year adjustable-rate mortgage.
 
 
From the perspective of the lending financial institution, there is a ____ degree of interest rate risk for ____-maturity mortgages.
higher; shorter
higher; longer
lower; shorter
lower; higher
higher; longer AND lower; shorter
 
 
​In a collateralized mortgage obligation (CMO), mortgages are segmented into ____ (or classes).
​balloon payments
​caps
​tranches
​strips
 
 
In a short sale of a home
the lender forecloses and then sells the home for less than what is owed on the mortgage.
the lender allows the homeowner to sell the home for less than what is owed on the mortgage.
the lender does not recover the full amount of the mortgage.
the lender allows the homeowner to sell the home for less than what is owed on the mortgage AND the lender does not recover the full amount of the mortgage.
the lender forecloses and then sells the home for less than what is owed on the mortgage AND the lender does not recover the full amount of the mortgage.
 
 
An increase in either the risk-free rate or the risk premium on a fixed-rate mortgage results in a higher required rate of return when investing in the mortgage and therefore causes the mortgage price to decrease.
 
 
An institution that originates and holds a fixed-rate mortgage is adversely affected by ____ interest rates; the borrower who was provided the mortgage is adversely affected by ____ interest rates.
​stable; decreasing
​increasing; stable
​increasing; decreasing
​decreasing; increasing
 
 
 
 
 
 
 
 
 
 
 

The interest rate on a second mortgage is ____ on a first mortgage created at the same time, because the second mortgage is ____ the existing first mortgage in priority claim against the property in the event of default.
​higher than; behind
​equal to that; equal to
​lower than; ahead of
​higher than; ahead of
​lower than; behind
 
 
In the earlier years of a mortgage,
​most of the monthly payment reflects principal reduction.
​most of the monthly payment reflects interest.
​about half of the monthly payment reflects interest.
​all of the monthly payment reflects principal reduction.
 
 
An investor in interest-only collateralized mortgage obligations (CMOs) would not be concerned that homeowners will prepay the underlying mortgages.
 
 
A __________ is a privately negotiated contract that protects investors against the risk of default on particular debt securities such as mortgage-backed securities.
​default insurance contract
​default risk swap
​credit default swap
​collateralized debt obligation
 
 
​Lehman Brothers commonly used _________ as collateral when borrowing short-term funds, but its funding was cut off because prospective creditors questioned the quality of the collateral.
​commercial paper
​Treasury securities
​its stock 
​mortgages
 
 
A ____ mortgage allows borrowers to initially make small payments on the mortgage, which are then increased on a graduated basis over the first five to ten years; payments then level off from there on.
balloon-payment
graduated-payment
shared-appreciation
growing-equity
None of these are correct.
 
 
A ____ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase over the first 5 to 10 years and then level off.
​graduated-payment mortgage
​growing-equity mortgage
​second mortgage
​shared-appreciation mortgage
 
 
Mortgage-backed securities are assigned ratings by:
rating agencies
the Treasury
the Fed
the mortgage originator
 
 
Mortgage-backed securities are commonly contained within collateralized debt obligations
 
 
Mortgage companies, commercial banks, and savings institutions are the primary originators of mortgages.
 
 
​Mortgage companies specialize in
​purchasing mortgages originated by other financial institutions.
​investing and maintaining mortgages that they create.
​originating mortgages and selling those mortgages.
​borrowing money through the creation of mortgages that is used to invest in real estate.
 
 
​Mortgage lenders normally charge a higher initial interest rate on adjustable-rate mortgages than on fixed-rate mortgages.
 
 
Mortgages are rarely sold in the secondary market.
 
 
____ mortgages enabled more people with relatively lower income, or high existing debt, or a small down payment to purchase homes.
Prime
​Balloon
​Amortized
​Subprime
 
 
A mortgage that requires interest payments for a three- to five-year period, then full payment of principal, is a(n)
​chattel mortgage.
​balloon-payment mortgage.
​variable-rate mortgage.
​open-ended mortgage bond.
 
 
A mortgage with low initial payments that increase over time without ever leveling off is a
​graduated payment mortgage.
​growing-equity mortgage.
​second mortgage.
​shared-appreciation mortgage.
 
 
Non-U.S. financial institutions never hold mortgages on U.S. property.
 
 
 

The probability that a borrower will default (credit risk) is influenced by all of the following, EXCEPT
economic conditions.
the level of equity invested by the borrower.
the borrower's income level.
the borrower's credit history.
Credit risk is affected by all of these.
 
 
Regardless of what happens to market interest rates, most adjustable-rate mortgages (ARMs) specify a maximum allowable fluctuation in the mortgage rate per year and over the mortgage life.
 
 
The secondary mortgage market accommodates originators of mortgages who desire to sell their mortgages before maturity.
 
 
"Securitization" refers to the private insurance of conventional mortgages.
 
 
​Some adjustable-rate mortgages (ARMs) contain an option clause that allows mortgage holders to switch to a fixed-rate mortgage within a specified period.
 
 
Speculators sell credit default swaps to benefit from the default of specific subprime mortgages.
 
 
​Strong economic growth tends to reduce the probability that the issuer of a mortgage will default on its debt payments and therefore tends to decrease mortgage prices.
 
 
​The higher the level of equity invested by the borrower, the higher the probability that the loan will default.
 
 
The valuation of mortgage-backed securities is difficult because of limited

transparency.
 
 
____ was created in 1968 as a corporation that is wholly owned by the federal government. It guarantees payment on mortgages that meet specific criteria.
Freddie Mac
Ginnie Mae
Fannie Mae
None of these are correct
 
 
When financial institutions originate residential mortgages, the mortgage contract should not specify
whether the mortgage is federally insured.
the amount of the loan.
whether the interest rate is fixed or adjustable.
the maturity.
You Answered
The mortgage contract should specify all of these.
 
 
Which of the following is NOT a guarantor of federally insured mortgages?
Federal Housing Administration (FHA)
Veterans Administration (VA)
Federal Deposit Insurance Corporation (FDIC)
All of these are guarantors of federally insured mortgages.
 
 
Which of the following is NOT true with respect to a growing-equity mortgage?
It is similar to a graduated-payment mortgage.
It allows borrowers to initially make small payments on the mortgage.
It involves increased payments, on a graduated basis, over the first five to ten years of the mortgage.
It involves payments that level off after the first five to ten years of the mortgage.
 
 
Which of the following mortgages allows the home purchaser to obtain a mortgage at a below-market interest rate throughout the life of the mortgage?
​second mortgage
​growing-equity mortgage
​graduated-payment mortgage
​shared-appreciation mortgage
 
 
Which of the following will typically require homeowners to ultimately request a new mortgage?
​graduated-payment mortgage (GPM)
​growing-equity mortgage
​balloon-payment mortgage
​shared-appreciation mortgage
 
 
 
 
 
 
 
 

 

According to financial research, there is evidence that the stock price associated with an IPO typically rises on the first day but then declines over time.
 
 
After an IPO, firms commonly list their shares on a private stock exchange.
 
 
All countries that have stock markets have similar laws regarding the financial information that must be provided by public companies.
 
 
American depository receipts (ADRs) are similar to
 
 
Analysts periodically communicate with high-level managers of the firms whose stock they rate.
 
 
____ are acquisitions that require substantial amounts of borrowed funds.
 
 
____ are employed by brokerage firms and execute orders for clients on the NYSE.
 
 
____ are not barriers to corporate control to eliminate agency problems.
 
 
____ are portfolios of international stocks created and managed by various financial institutions.
 
 
As a result of the Sarbanes-Oxley Act, firms were able to reduce their costs of compiling and reporting financial information.
 
 
Assume that a firm is valued at $800 million and has 6 million shares of stock outstanding. This firm's stock should have a price of $____ per share
 
 
Common law countries such as the United States, Canada, and the United Kingdom allow for more legal protections for shareholders than civil law countries such as France or Italy.
 
 
Crowdfunding is a way that small businesses can raise funds from a number of investors over the Internet.
 
 
The Dow Jones Industrial Average (DJIA) is a value-weighted average of stock prices of 30 large U.S. firms.
 
 
e legal protection of shareholders varies substantially among countries.
 
 
An example of shareholder activism is
 
 
A firm can avoid the time lag between registering new securities with the SEC and actually selling them by using
 
 
A firm has a current stock price of $15.32. The firm's annual dividend is $1.14 per share. The firm's dividend yield is
 
 
Firms are more willing to issue new stock in a secondary stock offering when the market price of their outstanding shares is relatively
 
 
Firms assume ____ risk when they issue preferred stock than when they issue bonds. The payment of dividends on preferred stock ____ be omitted without the firm being forced into bankruptcy
 
 
Firms listed on the "pink sheets" of the OTC market
 
 
A firm that wants to engage in a secondary stock offering does not need to file the offering with the SEC.
 
 
A firm whose stock price has risen:
 
 
A firm will typically attempt to sell shares from a secondary offering
 
 
The first-time issuance of shares by a specific firm to the public is referred to as a(n)
 
 
For many IPOs, the lead underwriter has a(an) _______ option, which allows it to allocate an additional 15 percent of the firm's shares for a period of up to 30 days after the IPO.
 
 
From a cost perspective, preferred stock is a less desirable source of capital for a firm than bonds.
 
 
Google's IPO used a _________ auction process, which enabled it to attract a diversified investor base including many individual investors
 
 
The government enforcement of securities laws varies among countries.
 
 
If managers believe that their firm's stock price is weak because it is undervalued by the market, they may consider repurchasing a portion of the shares that are outstanding.
 
 
If many investors quickly sell an IPO stock in the secondary market, there will be ____ on the stock's price.
 
 
If shareholders become dissatisfied with a firm's performance, they may engage in a proxy contest in an attempt to change the composition of the board of directors
 
 
If the secondary market for a stock is inactive, then the shares are illiquid.
 
 
In addition to extended sessions offered by the stock exchanges, some electronic communications networks (ECNs) allow for trading at any time.
 
 
In addition to the Nasdaq market, the OTC market has another segment known as "pink sheets," where smaller stocks are traded
 
 
Index-traded funds are passive funds that track a specific index.
 
 
In general, secondary offerings cause an immediate increase in the market price of the stock.
 
 
The initial (one-day) return of IPOs in the United States has averaged about ____ percent over the last 30 years
 
 
Initial public offerings (IPOs) tend to occur more frequently during bearish (weak) stock markets.
 
 
Initial public offerings (IPOs) tend to occur more frequently during bullish stock markets.
 
 
Initial public offerings (IPOs) typically perform ____ on the day of the IPO and ____ for periods of a year or longer after the IPO
 
 
In preparing for an IPO, a prospectus must be filed with the
 
 
International exchange-traded funds (ETFs) represent international indexes that reflect the stock markets of particular countries; shares of an index can be purchased or sold, thereby allowing investors to invest directly in a stock index representing any one of several countries
 
 
 
 
 
 
 
 
 
 

The investment by a private equity fund in a business is normally much larger than the typical investment by a venture capital fund
 
 
IPOs tend to occur more frequently during recessions.
 
 
The ____ is a value-weighted average of stock prices of 30 large U.S. firms.
 
 
The ____ is a value-weighted index of stock prices of 500 large U.S. firms.
 
 
The largest organized exchange in the United States, listing the largest firms, is the
 
 
Listing stock on a foreign stock exchange
 
 
Managers protected by golden parachutes may be more willing to make decisions that increase the company's earnings in the long run, even though the decisions adversely affect the stock price in the short run
 
 
Most individual investors attend road shows of firms that are about to go public before they purchase shares at the time of an IPO.
 
 
A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n)
 
 
Normally, only the owners of preferred stock are permitted to vote on certain key matters concerning the firm, such as the election of the board of directors.
 
 
(n) ____ represents ownership of a foreign stock.
 
 
On average, IPOs of firms tend to perform ____ over a period of a year or longer
 
 
The OTC market does not have a trading floor.
 
 
The owners of common stock are permitted to vote on the
 
 
The phrase "__________" implies that the company engaged in an IPO could have received a larger amount of funds had the offer price been set at a higher level.
 
 
The phrase "leaving money on the table" refers to investors paying more for a stock in the secondary market than was paid by those investors who were able to buy shares at the initial (offer) price on the IPO date
 
 
Pink sheets" are traded on the
 
 
Possible disadvantages of private stock exchanges to investors include:
 
 
The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called
 
 
Preferred shareholders
 
 
The prevailing price per share divided by the firm's earnings per share is known as the
 
 
A ____ prevents dividends from being paid on common stock until all current and previously omitted dividends are paid on preferred stock
 
 
Private equity funds commonly exit their investment in a business by
 
 
Private equity funds tend to use mostly _________ when acquiring stakes in businesses.
 
 
Private firms that need a large equity investment but are not yet in a position to go public may attempt to obtain funding from a venture capital (VC) fund
 
 
The purpose of a lockup provision is to
 
 
Research studies have found that the share prices of target firms and of acquiring firms react very positively to announcements of an acquisition.
 
 
The Sarbanes-Oxley Act has improved transparency, but investors may still have limited information about publicly traded firms.
 
 
____ sell shares to investors and use the proceeds to invest in portfolios of international stocks created and managed by portfolio managers
 
 
Shareholders can most easily measure a firm's performance by monitoring changes in its ____ over time.
 
 
Shelf-registration allows firms quick access to funds without repeatedly being slowed by the registration process.
 
 
 
 
 
 
 
 

Sudden favorable news about the performance of a firm will make investors believe that the firm's stock is ____ at its prevailing price.
 
 
To discourage flipping, some securities firms make ____ shares of future IPOs available to institutional investors that retain shares for a ____ period of time.
 
 
The total cost of engaging in an IPO is usually about 1 percent of the total proceeds.
 
 
To the extent that shares sold during an IPO are discounted from their appropriate price, the proceeds that the issuing firm receives from the IPO are less than it deserves.
 
 
The transaction costs to the issuing firm in an IPO are usually ____ percent of the funds raised.
 
 
Underwriters sell most or all of the shares of an IPO to institutional investors.
 
 
Venture capital funds commonly exit their investment in a business by
 
 
Venture capital funds typically take over businesses and manage them
 
 
A venture capital fund typically plans to exit from its original investment within about four to seven years
 
 
Venture capital (VC) funds commonly serve as advisers to the businesses in which they invest.
 
 
Venture capital (VC) funds receive money from wealth investors and from pension funds that need to receive their money back in one year or less.
 
 
Venture capital (VC) funds typically plan to exit from their original investment within about one year.
 
 
Venture capital (VC) funds usually invest in publicly traded businesses.
 
 
When a corporation first decides to issue stock to the public, it engages in a(n)
 
 
When a corporation makes a secondary offering, it may direct sales of the stock to its existing shareholders by giving them:
 
 
When a firm buys some of its shares that it had previously issued, this is referred to as a:
 
 
When a firm goes public and issues stock in the primary market,
 
 
When brokers encourage investors to place first-day bids for IPO shares that are above the offer price, this is referred to as
 
 
Whenever _____, the stock price will be driven up.
 
 
Which of the following is false with respect to initial public offerings (IPOs)?
 
 
Which of the following is not a barrier to corporate control?
 
 
Which of the following is not a form of shareholder activism?
 
 
Which of the following is not a part of the over-the-counter market?
 
 
Which of the following is not true regarding overallotment options?
 
 
Which of the following is not true regarding the Sarbanes-Oxley Act?
 
 
Which of the following is not true with respect to preferred stock?
 
 
 
 
 
 
 
 
 

Which of the following is not true with respect to venture capital (VC) funds?
 
 
Which of the following statements is incorrect?
 
 
 

 

​A beta of 1.1 means that for a given 1 percent change in the value of the market, the _______ is expected to change by 1.1 percent in the same direction.
​risk-free rate
​stock's value
​stock's standard deviation
​correlation coefficient
 
 
According to the capital asset pricing model, the required return by investors on a security is
inversely related to the risk-free rate.
inversely related to the firm's beta.
inversely related to the market return.
None of these are correct.
 
 
According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be ____ affected by a weak dollar. Stock prices of U.S. importing firms could be ____ affected by a weak dollar.
​adversely; favorably
​favorably; adversely
​favorably; favorably
​adversely; adversely
 
 
​A stock portfolio has more volatility when its individual stock returns are uncorrelated.
 
 
​A stock's average return is 11 percent. The average risk-free rate is 9 percent. The stock's beta is 1, and the standard deviation of its returns is 10 percent. What is the Sharpe index?
 
 
​A weak dollar may enhance the value of a U.S. firm whose sales are dependent on the U.S. economy.
 
 
A beta of 1.8 implies that the stock has a risk premium of 1.8 percent.
 
 
The beta of a stock portfolio is equal to a weighted average of the
​betas of stocks in the portfolio.
​betas of stocks in the portfolio, plus their correlation coefficients.
​standard deviations of stocks in the portfolio.
​correlation coefficients between stocks in the portfolio.
 
 
Beta serves as a measure of risk because it can be used to derive a probability distribution of returns based on a set of market returns
 
 
​Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork's dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $____ per share.
 
 
Boris stock has an average return of 15 percent. Its beta is 1.5. Its standard deviation of returns is 25 percent. The average risk-free rate is 6 percent. The Sharpe index for Boris stock is:
 
 
The capital asset pricing model (CAPM) is based on the premise that the only important risk of a firm is unsystematic risk.
 
 
The capital asset pricing model (CAPM) suggests that the required rate of return on a stock is directly influenced by the stock's :
​prevailing level of the industry competition.
​beta.
​liquidity.
​size (market capitalization).
 
 
The credit crisis caused major problems in the mortgage market but had no impact on the stock market.
 
 
The demand by foreign investors for the stock of a U.S. firm sold on a U.S. exchange may be higher when the dollar is expected to ____, other things being equal. (Assume the firm's operations are unaffected by the value of the dollar.)
strengthen
weaken
stabilize
weaken AND stabilize
 
 
The dividend discount model can be adapted to assess the value of any firm, even those that retain most or all of their earnings.
 
 
The dividend discount model states that the price of a stock should reflect the present value of the stock's future dividends.
 
 
The expected acquisition of a firm typically results in ____ in the target's stock price.
an increase
a decrease
no change
None of these are correct.
 
 
Fabrizio, Inc. is expected to generate earnings of $1.50 per share this year. If the mean ratio of share price to expected earnings of competitors in the same industry is 20, then the stock price per share is $____.
 
 
A firm's stock price is affected not only by macroeconomic and market conditions but also by firm-specific conditions.
 
 
For firms that do not pay dividends, the free cash flow model may be more suitable than the dividend discount model
 
 
The general mood of investors represents:
investor sentiment
beta
systematic risk
unsystematic risk
 
 
A higher beta for an asset reflects
lower risk.
lower covariance between the asset's returns and market returns.
higher covariance between the asset's returns and the market returns.
None of these are correct.
 
 
Holding other factors constant, an increase in the capital gains tax rate will
have more effect on the valuation of dividend-paying stocks than on stocks with high growth prospects.
have less effect on the valuation of dividend-paying stocks than on stocks with high growth prospects.
have no effect on the valuations of stocks.
have the same effect on the valuation of dividend-paying stocks and stocks with high growth prospects.
 
 
Holding other factors constant, a stock portfolio has more volatility when its individual stock volatilities are ________ and its individual stock returns have _______ correlations.
 
 
​If beta is thought to be the appropriate measure of risk, a stock's risk-adjusted returns should be determined by the Sharpe index.
 
 
​If investors agree on a firm's forecasted earnings, they will derive the same value for that firm using the PE method to value the firm's stock.
 
 
If security markets are semistrong-form efficient, investors cannot solely use ____ to earn excess returns.
previous price movements
insider information
publicly available information
previous price movements AND publicly available information
 
 
If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other public information, security markets are:
weak-form efficient
semistrong-form efficient.
strong-form efficient.
semistrong-form efficient AND strong-form efficient
None of these are correct.
 
 
 
 
 
 
 
 
 
 
 

If the returns of two stocks are perfectly correlated, then
​their betas should each equal 1.0.
​the sum of their betas should equal 1.0.
​their correlation coefficient should equal 1.0.
​their portfolio standard deviation should equal 1.0.
 
 
If the standard deviation of a stock's returns over the last 12 quarters is 4 percent, and if there is no perceived change in volatility, there is a ____ percent probability that the stock's returns will be within ____ percentage points of the expected outcome.
 
 
The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's beta.
​Sharpe
​Treynor
​arbitrage
​margin
 
 
Investors can avoid unsystematic risk by
using the capital asset pricing model.
investing in stocks with low PE ratios.
holding diversified portfolios.
using the free cash flow model.
 
 
The ____ is not a factor used in the capital asset pricing model (CAPM) to derive the return of an asset.
prevailing risk-free rate
dividend growth rate
market return
covariance between the asset's returns and market returns
All of these are factors used in the CAPM.
 
 
The ____ is not a measure of a stock's risk.
stock's price volatility
stock's return
stock's beta
value-at-risk method
All of these are correct.
 
 
The ____ is often used to estimate the required rate of return for any firm with public traded stock.
capital asset pricing model
Treynor index
Sharpe index
Treynor index AND Sharpe index
 
 
The "January effect" refers to a large
rise in the price of small stocks in January.
decline in the price of small stocks in January.
decline in the price of large stocks in January.
rise in the price of large stocks in January.
 
 
Kandle Company paid a dividend of $4.76 per share this year and plans to pay a dividend of $5 per share next year, which is expected to increase by 3 percent per year subsequently. The required rate of return is 15 percent. The value of Kandle stock, according to the dividend discount model, is $____.
 
 
LeBlanc Inc. currently has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as LeBlanc Inc. is 15. LeBlanc is expected to pay a dividend of $3 per share over the next four years, and an investor in LeBlanc requires a return of 12 percent. What is the forecasted stock price of LeBlanc in four years, using the adjusted dividend discount model?
 
 
The limitations of the dividend discount model are most pronounced for a firm that
has a high beta.
has high expected future earnings.
distributes most of its earnings as dividends.
retains all of its earnings.
None of these are correct.
 
 
The market risk premium is
the yield on newly issued Treasury bonds.
the return of the market in excess of the risk-free rate.
the covariance between the risk-free rate and the return of the market.
the return of the market in excess of expected cash flows.
 
 
Morgan stock has an average return minus the average risk-free rate of 12.5 percent, a beta of 2.5, and a standard deviation of returns of 20 percent. The Treynor index of Morgan stock is:
 
 
The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the firm's future earnings or in choosing the industry composite used to derive the PE ratio.
 
 
Portfolio managers who monitor systematic risk rather than total risk are more concerned about stock volatility than about beta.
 
 
A portfolio's beta is the sum of the individual forecasted betas, weighted by the market value of each stock.
 
 
Regarding the implied standard deviation, by plugging in the actual option premium paid by investors for a specific stock in the option-pricing model, it is possible to derive the anticipated volatility level.
 
 
 
 
 
 
 
 

Regarding the value-at-risk method, the same methods used to derive the maximum expected loss of one stock can be applied to derive the maximum expected loss of a stock portfolio for a given confidence level.
 
 
A relatively simple method of valuing a stock is to apply the mean price-earnings (PE) ratio of all publicly traded competitors in the respective industry to the firm's expected earnings for the year.
 
 
The Sharpe index measures the
average return on a stock.
variability of stock returns per unit of return.
stock's beta adjusted for risk.
excess return above the risk-free rate per unit of risk.
 
 
Sorvino Co. is expected to offer a dividend of $3.20 per share per year forever. The required rate of return on Sorvino stock is 13 percent. Thus, the price of a share of Sorvino stock, according to the dividend discount model, is $____.
 
 
Steam Corp. has a beta of 1.5. The prevailing risk-free rate is 5 percent, and the annual market return in recent years has been 11 percent. Based on this information, the required rate of return on Steam Corp. stock is ____ percent.
 
 
A stock has a standard deviation of daily returns of 1 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stock's expected daily return is .2 percent. The lower boundary is
 
 
A stock has a standard deviation of daily returns of 3 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stock's expected daily return is .1 percent. The lower boundary is
 
 
Stock prices of U.S. firms primarily involved in exporting are likely to be ____ affected by a weak dollar and ____ affected by a strong dollar.
​favorably; adversely
​adversely; adversely
​favorably; favorably
​adversely; favorably
 
 
​Stock price volatility increased during the credit crisis.
 
 
A stock's average return is 10 percent. The average risk-free rate is 7 percent. The standard deviation of the stock's return is 4 percent, and the stock's beta is 1.5. What is the Treynor index for the stock?
 
 
A stock's beta can be measured from the estimate of the ________ using regression analysis.
​intercept
​market return
​risk-free rate
​slope coefficient
 
 
Stocks that have relatively little trading are normally subject to less price volatility.
 
 
A stock with a beta of 2.3 means that for every 1 percent change in the market overall, the stock tends to change by 2.3 percent in the same direction.
 
 
Tarzak Inc. has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as Tarzak is 15. Tarzak is expected to pay a dividend of $3 per share over the next four years, and an investor in Tarzak requires a return of 12 percent. The estimated stock price of Tarzak today should be ____ using the adjusted dividend discount model.
 
 
​Technical analysis relies on the use of ____ to make investment decisions.
​interest rates
​inflationary expectations
​industry conditions
​recent stock price trends
 
 
​The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's volatility.
​Sharpe
​Treynor
​arbitrage
​margin
 
 
​The ____ is commonly used as a proxy for the risk-free rate in the capital asset pricing model.
​Treasury bond rate
​prime rate
​discount rate
​federal funds rate
 
 
​The January effect refers to the ____ pressure on ____ stocks in January of every year.
​downward; large
​upward; large
​downward; small
​upward; small
 
 
​The limitations of the dividend discount model are more pronounced when valuing stocks
​that pay most of their earnings as dividends.
​that retain most of their earnings.
​that have a long history of dividends.
​that have constant earnings growth
 
 
 
 
 
 
 
 

​The market risk premium is stable over time and is not affected by stock market conditions.
 
 
​The price-earnings valuation method applies the ____ price-earnings ratio to the ____ earnings per share in order to value the firm's stock.
​firm's; industry
​firm's; firm's
​average industry; industry
​average industry; firm's
 
 
​The standard deviation of a stock's returns is used to measure the stock's
​volatility.
​beta.
​Treynor index.
​risk-free rate.
 
 
​The Treynor index is similar to the Sharpe index, except that is uses beta rather than standard deviation to measure the stock's risk.
 
 
​The U.S. government's budget deficit has a significant impact on the bond market but does not affect the stock market.
 
 
Value at risk estimates the ____ a particular investment for a specified confidence level.
​beta of
​risk-free rate of
​largest expected loss to
​standard deviation of
 
 
The value-at-risk method is intended to warn investors about the potential maximum loss that could occur
 
 
Vansel Inc. retains most of its earnings. The company currently has earnings per share of $11. Vansel expects its earnings to grow at a constant rate of 2 percent per year. Furthermore, the average PE ratio of all other firms in Vansel's industry is 12. Vansel is expected to pay dividends per share of $3.50 during each of the next three years. If investors require a 10 percent rate of return on Vansel stock, a fair price for Vansel stock today is $____.
 
 
VIX (CBOE Volatility Index) indicates the volatility of the bond market in general.
 
 
When a firm's announced earnings are lower than expected, investors will increase their valuation of the firm's future cash flows and its stock.
 
 
When evaluating stock performance, ____ measures variability that is systematically related to market returns; ____ measures total variability of a stock's returns.
​beta; standard deviation
​standard deviation; beta
​intercept; beta
​beta; error term
 
 
Which of the following is incorrect regarding the capital asset pricing model (CAPM)?
It is sometimes used to estimate the required rate of return for any firm with publicly traded stock.
It is based on the premise that the only important risk of a firm is systematic risk.
It is concerned with unsystematic risk.
All of these are correct.
 
 
Which of the following is not a type of factor that drives stock prices, according to your text?
​economic factors
​market-related factors
​firm-specific factors
​All of the above are factors that affect stock prices
 
 
Which of the following is NOT commonly used as an estimate of a stock's volatility?
the estimate of its standard deviation of returns over a recent period
the trend of historical standard deviations of returns over recent periods
the implied volatility derived from an option pricing model
the estimate of its option premium derived from an option pricing model
 
 
While the previous year's earnings are often used as a base for forecasting future earnings, the recent year's earnings do not always provide an accurate forecast of the future
 
 
Zilo stock has an average return minus the average risk-free rate of 5 percent, a beta of 1, and a standard deviation of returns of 20 percent. The Sharpe index of Zilo stock is:
 
 
 
 
 
 
 
 

 

A short seller
a. ​anticipates that the price of the stock sold short will increase.
b. ​earns the difference between what was initially paid for the stock versus what the stock is later sold for.
c. ​makes a profit equal to the difference between the original selling price and the price paid for the stock, after subtracting any dividend payments made.
d. ​is essentially lending the stock to another investor and will ultimately receive that stock back from that investor.
e. ​none of the above
 
 
​A market order is an order to buy or sell a stock at the best possible price.
a. ​True
b. ​False
 
 
A(n) ____ from a broker requires the investor to put up additional collateral.
a. ​maintenance margin
b. ​initial margin
c. ​margin call
d. ​trading halt
 
 
​A ____ order to buy or sell a stock means to execute the transaction at the best possible price.
a. ​market
b. ​limit
c. ​stop-loss
d. ​stop-buy
 
 
​____ are enforced to restrict the amount of credit extended to customers by stockbrokers.
a. Limit orders​
b. ​Margin requirements
c. ​Maintenance margins
d. ​Initial margins
 
 
Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to pay $25 a share and borrows the remaining funds at a 12 percent annual interest. What is the return if the investor sells the stock for $55 at the
end of one year?
a. ​50 percent
b. ​30 percent
c. ​10 percent
d. ​16 percent
e. ​8 percent
 
 
Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock on margin, paying $25 per share and borrowing the remainder from the brokerage firm at 9 percent annual interest. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is
a. ​60 percent
b. ​44 percent.
c. ​30 percent.
d. ​69 percent.
 
 
Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock, using only personal funds and not borrowing from the brokerage firm. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is
a. ​26.5 percent.
b. ​28.5 percent.
c. ​30.5 percent.
d. ​34.5 percent.
 
 
The bid-ask spread is negatively related to
a. ​order costs
b. ​inventory costs.
c. ​Risk
d. ​trading volume
 
 
A criticism of dark pools is that they:
a. ​reduce transparency.
b. ​are more expensive than the public stock exchanges.
c. ​are not accessible to institutional investors.
d. ​cannot be used to trade large blocks of stock.
 
 
Dark pools:
a. ​are private stock markets used by institutional investors.
b. ​are stocks issued by firms that have disclosed very limited financial information.
c. ​are stock option contracts that cover positions in stocks.
d. ​are contracts used to bet against the default of a debt instrument.
 
 
The Division of ____ of the SEC assesses possible violations of SEC regulations and can take action against individuals or firms.
a. ​Corporate Finance
b. ​Enforcement
c. ​Administration
d. ​Market Regulation
 
 
The Division of ____ of the SEC requires the orderly disclosure of securities trades by various organizations that facilitate the trading of securities.
a. ​Corporate Finance
b. ​Enforcement
c. ​Administration
d. ​Market Regulation
 
 
Electronic communications networks are primarily intended to prevent executives from using inside information when trading stocks.
a. ​True
b. ​False
 
 
The exchange rate risk associated with international trading of stock has been reduced by
a. ​information available on the Internet.
b. ​extensive computerization of stock exchanges.
c. ​the conversion of many European countries to a single currency.
d. ​the Eurolist system.
 
 
Expert networks consisting of managers or executives of a publicly traded company who are hired as consultants ("experts") by a hedge fund to provide insight about the company:
a. ​are illegal under Regulation FD.
b. ​are legitimate if the consultants divulge only information that is already public.
c. ​have raised concerns that the consultants provide inside information
d. ​B and C
 
 
 
 
 
 
 
 
 
 
 

High frequency traders set up their own _________ that specify the conditions under which a specific stock should be purchased or sold, the size of the transaction, and the price that should be paid.
a. ​algorithms
b. ​inverse programs
c. ​circuit breakers
d. ​nextron networks
 
 
The initial margin is the minimum amount of margin that investors must maintain as a percentage of the stock's value without receiving a margin call.​
a. ​True
b. ​False
 
 
In naked short selling, short-sellers sell a stock short that they currently own.
a. ​True
b. ​False
 
 
Investors can reduce their risk by purchasing a stock on margin instead of using all cash to buy the stock.
a. ​True
b. ​False
 
 
A ____ is a trading platform on a computer website that allows investors to trade stocks without the use of a broker.
a. ​direct access broker
b. ​program trader
c. ​market maker
d. ​communication network
 
 
It is not illegal for investors to take positions in a stock based on inside information that they received from an insider at the company, although it would be illegal for the insider to take a position based on that information.
a. ​True
b. ​False
 
 
Karen just purchased a stock costing $33 on margin, paying $23 and borrowing the remainder from a brokerage firm at 15 percent annual interest. The stock pays an annual dividend of $2. If Karen sells the stock after one year at a price of $50, what is the return on the stock?
a. ​27.60 percent
b. ​82.61 percent
c. ​76.09 percent
d. ​58.70 percent
e. ​none of the above
 
 
The maintenance margin is the minimum amount of the margin that investors must maintain as a percentage of the stock's initial purchase price.
a. ​True
b. ​False
 
 
Many high frequency traders are willing to serve as intermediaries (similar to market makers) by accommodating orders that they believe will ultimately result in profits.
a. ​True
b. ​False
 
 
A margin call from a broker means that the investor is required to provide more collateral (cash or stocks) or sell the stock.
a. ​True
b. ​False
 
 
Mark would like to purchase a stock priced at $70. Mark thinks he can sell the stock for $100 after one year. If Mark does not borrow any money from his brokerage firm, what is the estimated return on the stock?
a. ​30.00 percent
b. ​-42.86 percent
c. ​-30.00 percent
d. ​42.86 percent
e. ​none of the above
 
 
​Mark would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. Mark can either put up the entire amount and purchase the stock, or borrow half of the investment amount from his brokerage firm at an annual interest rate of 12 percent and put up the remainder. Mark thinks he can sell the stock for $100 after one year. If Mark borrows from his brokerage firm, his estimated return on the stock would be ____ percent.
a. ​42.86
b. ​85.71
c. ​73.71
d. ​30.00
 
 
​____ may facilitate stock transactions by taking positions in specific stocks.
a. ​Board members
b. ​Capstone members
c. ​Market makers
d. ​None of the above
 
 
​____ may facilitate transactions on a stock exchange by executing stock transactions for their clients.
a. ​Board members
b. ​Capstone members
c. ​Floor brokers
d. ​None of the above
 
 
 
 
 
 
 
 
 
 
 

The NYSE defines ____as the simultaneous buying and selling of a portfolio of at least 15 different stocks that are valued at more than $1 million.
a. ​direct access brokering
b. ​electronic communication networking
c. ​program trading
d. ​regulation of stock trading
 
 
____ offer advice to customers on stocks to buy or sell.
a. ​Full-service brokers
b. ​Discount brokers
c. ​Floor brokers
d. ​Specialists
e. ​Market makers
 
 
​On May 6, 2010, the "__________" occurred, when stocks on the New York Stock Exchange (NYSE) declined by more than 9 percent on average before reversing and recovering most of those losses on that same day. Much of the trading occurred within a half hour, which is thought to be the most volatile half hour in the history of the NYSE. 
a. ​credit cefault crisis
b. ​swap crisis
c. ​specialist crash
d. ​flash crash
 
 
Regulation Fair Disclosure (FD) requires firms to disclose relevant information first to their most important clients.
a. ​True
b. ​False
 
 
​______________ represents the use of electronic platforms to execute orders based on an algorithm with programmed instructions.
a. ​High frequency trading
b. ​Mechanical analysis 
c. ​Liquidity trading
d. ​Technical analysis
 
 
The SEC's Division of Market Regulation assesses possible violations of the SEC's regulations and can take action against individuals or firms.
a. ​True
b. ​False
 
 
A short interest ratio of 20 or higher indicates that many investors
a. ​believe that the stock price is currently overvalued.
b. ​believe that the stock price is currently undervalued.
c. ​are selling the stock short.
d. ​both A and C
 
 
The short interest represents the amount of interest that borrowers owe on loans used to purchase stock.
a. ​True
b. ​False
 
 
Short selling a stock refers to
a. ​poor performance from purchasing an overvalued stock.
b. ​the new issuance of low-priced stocks by firms.
c. ​the new issuance of stocks by financially weak firms.
d. ​the borrowing of stock owned by someone else and selling it in the market.
 
 
The size of the spread on stocks that have relatively little trading is
a. ​smaller to reflect the lower degree of uncertainty.
b. ​the same as that of stocks with higher volumes of trading.
c. ​wider to reflect the higher degree of uncertainty.
d. ​not affected by trading volume.
 
 
A stop-loss order is a particular type of limit order whereby the investor specifies a selling price that is below the current market price of the stock.
a. ​True
b. ​False
 
 
 
​The risk of a short sale is that the stock price
a. ​may decrease over time.
b. ​will remain the same.
c. ​may increase over time.
d. ​none of the above
 
 
 
 
 
 
 
 
 
 
 
 

​The SEC's ____ reviews the registration statement filedwhen a firm goes public, corporate filings for annual and quarterly reports, and proxy statements that involve voting for board members or other corporate issues.
a. ​Division of Corporate Finance
b. ​Division of Market Regulation
c. ​Division of Enforcement
d. ​none of the above
 
 
​The short interest ratio is commonly measured as the number of shares sold short divided by the number of shares that the firm has repurchased in the last quarter.
a. ​True
b. ​False
 
 
​The ____ the trading volume of a stock, the ____ the spread.
a. ​higher; wider
b. ​higher; narrower
c. ​lower; narrower
d. ​none of the above
 
 
To prosecute defendants connected with the Galleon Fund for __________, the government effectively used wiretap evidence.
a. ​dark pool trading
b. ​naked short selling
c. ​insider trading
d. ​accounting fraud
 
 
Traders that engage in high frequency trading commonly close out their positions in:
a. ​one day.
b. ​one month
c. ​three months
d. ​one year
 
 
A trading halt prevents a stock from experiencing a loss in response to news.
a. ​True
b. ​False
 
 
Trading halts are imposed by
a. ​the SEC.
b. ​brokers.
c. ​stock exchanges.
d. ​the Treasury.
 
 
Trading halts are intended to ensure that the market has complete information before trading on news.
a. ​True
b. ​False
 
 
Trading halts are intended to prevent insider trading.
a. ​True
b. ​False
 
 
The transaction costs associated with international trading of stocks have been reduced by
a. ​the consolidation of stock exchanges.
b. ​extensive computerization.
c. ​the Eurolist system
d. ​all of the above
 
 
Under the present margin requirements, at least ____ percent of an investor's invested funds must be paid in cash.
a. ​20
b. ​30
c. ​40
d. ​50
e. ​none of the above
 
 
Under the SEC's uptick rule, speculators are prohibited from taking a short position in stocks that have experienced a decline of at least 10 percent for the day, unless the most recent trade resulted in a decrease in the stock price
a. ​True
b. ​False
 
 
​Until recently, international trading of stocks was limited by
a. ​transaction costs
b. ​information costs.
c. ​exchange rate risk.
d. ​all of the above
 
 
When a brokerage firm demands more collateral from investors who have borrowed from the brokerage firm to buy stocks, it is making a
a. ​margin call.
b. ​short sale.
c. ​proxy fight.
d. ​hedge.
 
 
When investors buy stock with borrowed funds, this is sometimes referred to as
a. ​use of proxy.
b. ​purchasing stock on margin.
c. ​a margin call.
d. ​a margin residual claim.
 
 
​When investors place a limit order, they can place it for the day only.
a. ​True
b. ​False
 
 
 
 
 
 
 
 

When investors sell short, they are essentially lending the stock to another investor and will ultimately receive that stock back from the investor to whom they lent it.
a. ​True
b. ​False
 
 
When the price of a company's stock increases or decreases significantly in advance of a public announcement of an event affecting the company, there are suspicions that __________ may have occurred.
a. ​bid rigging
b. ​default inversion
c. ​insider trading
d. ​an increase in margin requirements
 
 
​When the ratio of the number of shares of a stock sold short divided by the total number of shares outstanding is 3 percent or higher, this suggests a large amount of short positions in the market, which implies that a relatively large number of investors expect the stock's price to decline.
a. ​True
b. ​False
 
 
Which of the following is incorrect in regard to short selling?
a. ​Naked short selling involves selling a stock short without first borrowing the stock.
b. ​During the credit crisis, the SEC temporarily protected more than 800 firms from short selling.
c. ​The SEC's uptick rule prevents speculators from taking a short position in stocks that have declined at least 15 percent for the day, except when the most trade resulted in an increase in the stock price.
d. ​During the credit crisis, some short sellers focused particularly on the stocks of financial institutions.
e. ​none of the above
 
 
Which of the following is incorrect with regard to taxes imposed on stock transactions? 
a. ​Stock transactions are subject to dividend and capital gains tax at the federal level and may be subject to state income tax as well.
b. ​Stocks have to be held for at least one year to qualify for the long-term capital gains tax.
c. ​The maximum federal tax on dividends and long-term capital gains is 14 percent.
d. ​Higher tax rates are imposed on the dividends and capital gains of individuals in high tax brackets.
 
 
Which of the following statements about program trading is incorrect?
a. ​It represents a computerized response by institutional investors to either buy or sell a large basket of stocks in response to movements in a particular stock index.
b. ​It may involve the purchase of stocks that have become "underpriced"
c. It may involve the sale of stocks that have become "overpriced"
d. ​It is designed to capitalize on Federal Reserve monetary policy announcements.
e. ​None of the above
 
 
​Which of the following statements is incorrect?
a. ​In a short sale, investors place an order to sell a stock that they do not own.
b. ​Investors sell a stock short when they anticipate that its price will rise.
c. ​When investors sell short, they will ultimately have to provide the stock back to the investor from whom they borrowed it.
d. ​Short-sellers must make payments to the investor from whom the stock was borrowed to cover the dividend payments that the investor would have received of the stock had not been borrowed.
 
 
 
 
 
 
 
 

Which of the following statements is incorrect with respect to Regulation Fair Disclosure (FD)?
a. ​It requires firms to disclose relevant information broadly to investors at the same time.
b. ​It restricts firms from providing analysts with information that they could use before the market is aware of the
information.
c. ​It requires firms to announce a change in expected earnings to all investors and other interested parties at the
same time.
d. ​It prohibits firms from communicating with analysts after a news announcement is made to all investors.
e. ​All of the above are correct with respect to Regulation FD.
 
 
Which of the following statements is incorrect with respect to the structure of the SEC?
a. ​It is composed of seven commissioners appointed by the president of the United States.
b. ​The president selects one commissioner to chair the commission.
c. ​Each commissioner serves a five-year term.
d. ​Commissioners terms are staggered.
e. ​Commissioners meet to assess whether existing regulations are successfully preventing abuses and to revise the regulations as needed.
 
 
While an investor's ability to simultaneously consider multiple markets to accommodate its orders was perceived to allow for more competitive pricing (lower transactions costs), it also led to a form of "_______________" whereby traders with relatively faster access to specific markets can use another trader's planned orders and move ahead of that order.
a. ​randomized algo
b. ​front running
c. ​circuit breaking
d. ​specialist surfing
 
 
With a ____ order, the investor specifies a purchase price that is above the current market price.
a. ​market
b. ​limit
c. ​stop-loss
d. ​stop-buy
 
 
You purchase a stock with cash, and you earn a negative return on the stock. If you had purchased the stock with 60 percent cash and 40 percent borrowed funds, your return on your investment would have been
a. ​positive
b. ​more negative than if you had covered the entire investment with cash.
c. ​negative, but more favorable than if you had covered the entire investment with cash.
d. ​zero