FINA EXAM 2

Socially responsible funds are distinguished from other mutual funds because they

A. invest only in over − the − counter stocks.
B. invest only in companies that meet specified moral, ethical, or environmental standards.
C. do not charge any sales commission or management fees.
D. will sell their shares only to investors who sign a statement saying they do not smoke tobacco
or use alcohol

invest only in companies that meet specified moral, ethical, or environmental standards.

As bonds approach their maturity dates

A. the bonds prices will become more sensitive to changes in interest rates.
B. the risk of a call will increase.
C. premiums or discounts will increase.
D. prices will approach their par values.

prices will approach their par values

An inverted yield curve

A. sometimes results from actions by the Federal Reserve to control inflation.
B. rewards long − term investors for the additional risk they are assuming.
C. means that long − term bonds are yielding more than short − term bonds.
D. results when investor demand for longer maturities exceeds the demand for shorter maturities.

sometimes results from actions by the Federal Reserve to control inflation

Yield curves for corporate and government securities have similar shapes, but the corporate rates track below the
government rates.

True
False

False

A bond's sinking fund provisions specifies

A. which assets are available to secure the bond.
B. which bond issues have a higher claim on the firm's assets in case the firm goes under.
C. how the issuer will pay off the bond over time.
D. a diminishing series of interest payments as the bond approaches maturity.

how the issuer will pay off the bond over time.

Treasury STRIPS are securities created by stripping the coupon and principal payments made by an ordinary bond and
selling them as individual securities. A U.S. Treasury note with exactly four years to maturity most likely can be broken into
as many as:

A. 8 Treasury STRIPS.
B. 4 Treasury STRIPS.
C. 9 Treasury STRIPS.

9 Treasury STRIPS.

The most important factor affecting the market price of a put or call is the

A. expiration date.
B. price behavior of the corresponding warrant.
C. market interest rate.
D. price behavior of the underlying common stock.

price behavior of the underlying common stock.

Standardized options expire on the last business day of the expiration month.

False

The portfolio of a growth and income fund is likely to contain

A. an equal mix of stocks and fixed income securities.
B. stocks of recently listed companies with rapid growth in revenues.
C. a high percentage of stocks in established companies and a small amount of fixed income
securities.
D. a high percentage of preferred stocks and bonds selling at a discount.

a high percentage of stocks in established companies and a small amount of fixed income securities

Which of the following statements concerning mortgage backed securities are correct?
I. They are secured by a pool of residential mortgages.
II. A portion of the income stream is a non − taxable return of capital.
III. They are backed by the full faith and credit of the U.S. government.
IV. Their maturity depends on prepayments of the mortgages in the pool

I, II and IV only

Four "decision traps " identified by behavioral finance are

A. overconfidence, unfamiliarity bias, loss aversion. narrow framing.
B. lack of confidence, representativeness, overreaction, narrow framing.
C. overconfidence, representativeness, loss aversion, narrow framing.
D. overconfidence, representativeness, loss aversion, comprehensive framing.

overconfidence, representativeness, loss aversion, narrow framing.

You hear a market analyst on television say that the advance/decline ratio for the session was 2.6. What does that mean?

A. For every stock that advanced, issues declined. Or put another way, for every stocks
that declined, advanced.
2.6 10
26
B. For every stock that declined, issues advanced. Or put another way, for every stocks
that declined, advanced.
2.6 10
26
C. For every stock that declined, issues advanced. Or put another way, for every stocks
that advanced, declined.
2.6 10
26
D. For every stock that advanced, issues declined. Or put another way, for every 10 stocks
that advanced, declined.
2.6

For every stock that declined, 2.6 issues advanced. Or put another way, for every 10 stocks that declined, 26 advanced.

The writer of a put or call is the

A. can limit risk by letting the option expire unexercised.
B. party who agrees to buy or sell the underlying stock if the option holder chooses to exercise
the option.
C. party who guarantees that the terms of the option will be satisfied.
D. the institution that brings buyers and sellers of an option together in a transaction

party who agrees to buy or sell the underlying stock if the option holder chooses to exercise the option.

Which of the following characteristics apply to exchange − traded funds (ETFs)?
I. Unlimited number of outstanding shares.
II. Typically track the performance of some index.
III. Market prices reflect demand for the fund rather than NAV.
IV. Shares are purchased from and redeemed by the investment company managing the fund.

I and II only

Lakshmi is confident that the price of gold is going to rise because the rate of inflation is increasing. To profit from her
prediction, Lakshmi should

A. sell short a futures contract today.
B. buy a gold futures contract today.
C. buy gold bullion today and then sell an equivalent amount of gold futures.
D. sell short one futures contract and offset it by buying an equivalent long futures contract.

buy a gold futures contract today.

The odd lot trading indicator assumes that

A. odd lot purchases indicate that high priced stocks like Apple and Berkshire Hathaway are in
demand.
−
B. odd − lot traders are sophisticated and tend to buy at low points and sell when stocks are high.
C. odd − lot traders are unsophisticated and time their decisions poorly.
D. are good market indicators because the actions of small investors tend to confirm bearish or
bullish trends.

odd − lot traders are unsophisticated and time their decisions poorly.

Which of the following characteristics apply to futures contracts?
I. Futures contracts are an important tool to control risk.
II. Futures contracts are highly risky and involve speculation.
III. Futures contracts specify both the quantity and the quality of the item.
IV. The buyer must hold the contract until maturity.

I, II and III only

Which of the following statements are correct in respect to high − yield bonds?
I. They are junk bonds with highly unpredictable rates of return.
II. The issuing corporation usually has an excessive amount of debt.
III. They possess a high level of default and market risk.
IV. They are often subordinated debentures.

I, II, III and IV

Same state municipal bond funds are especially appropriate for

A. low income individuals.
B. residents of states with no state income tax.
C. residents of states a high state income tax.
D. all of the above

residents of states a high state income tax.

Which one of the following statements concerning options is correct?

A. The owner of a call is entitled to the dividends paid on the underlying shares of stock.
B. A put gives the option holder the right to buy a stated amount of securities.
C. Option holders can profit on movements of the price of the underlying security.
D. One option covers 1,000 shares of stock

Option holders can profit on movements of the price of the underlying security.

The odd lot trading indicator assumes that

A. odd lot purchases indicate that high priced stocks like Apple and Berkshire Hathaway are in
demand.
−
B. are good market indicators because the actions of small investors tend to confirm bearish or
bullish trends.
C. odd − lot traders are unsophisticated and time their decisions poorly.
D. odd − lot traders are sophisticated and tend to buy at low points and sell when stocks are high.

odd − lot traders are unsophisticated and time their decisions poorly

In the last year, Bradley purchased 3 stocks on recommendations from his broker, Emily. All of the stocks have increased
in value, so he decides to act on all of Emily's recommendations in the future. Over the same period, the S&P 500 was up
15%. Bradley exhibits the tendency known as

A. representativeness.
B. narrow framing.
C. overconfidence.
D. loss aversion.

representativeness

A debenture is secured only by the issuer's promise to repay the debt.

True
False

True

One characteristic of bond funds is the

A. extremely aggressive trading approach.
B. high anticipated short − term growth potential.
C. requirement of a minimum initial investment of $5,000 or more.
D. fluctuation in value in response to changing interest rates.

fluctuation in value in response to changing interest rates.

An aggressive growth mutual fund is least likely to purchase a stock

A. of an unseasoned firm.
B. with a high anticipated rate of growth.
C. with a high P/E ratio.
D. with a high dividend yield.

with a high dividend yield.

American style options can only be exercised on their expiration dates.

True
False

False

Which of the following is most likely to happen with a convertible bond when the market price of the stock exceeds the
conversion price? The stock does not pay a dividend.

A. Both the issuing company and the bondholders will wait for the bonds to reach their maturity
date.
B. The bondholders will immediately convert their bonds to stock.
C. The issuing company will call the bonds and bondholders will convert them to common
shares.
D. The issuing company will call the bonds and the bondholders will redeem them for the call
price.

The issuing company will call the bonds and bondholders will convert them to common shares

Sinking funds are most likely to:

A. always reduce the outstanding balance of the bond issue to 0 prior to maturity.
B. never allow issuers to retire more than the sinking fund requirement.
C. reduce credit risk (default risk).

reduce credit risk (default risk)

Which of the following tend to raise interest rates?
I. an increase in the money supply
II. an increase in the expected rate of inflation
III. Federal Reserve actions taken to lower expected rates of inflation
IV. an increase in investing activities by businesses

II, III, IV only

Hedge funds are subject to the same regulations and disclosure requirements as mutual funds.

False

Most bonds pay interest quarterly.

False

The Jefferson Company issued a 5% coupon bond four years ago at par value. The market interest rate on comparable
bonds today is 6%. The Jefferson Company bond currently pays ________ a year in interest and the bond sells at a
________.

A. $50; premium
B. $60; discount
C. $50; discount
D. $60; premium

$50; discount

Investors interested in predictable cash flow from their investments should consider funds that offer

A. conversion privileges.
B. systematic withdrawal plans.
C. automatic reinvestment plans.
D. automatic investment plans.

systematic withdrawal plans.

Donna B., a highly paid executive in her 40's, has invested 20% of her 401 K in an intermediate bond fund and 60% in an
S&P 500 index fund. She would like to invest the remaining 20% so as to maximize diversification while accepting some
risk in pursuit of large gains. A good choice might be

A. an emerging markets fund.
B. a DJIA index fund.
C. a global fund.
D. a technology sector fund.

an emerging markets fund.

Investors who seek double (federal and state) tax − free income should invest in ________ bond funds.

A. mortgage − backed
B. single − state municipal
C. indexed
D. convertible

single − state municipal

The open interest at the end of the trading day indicates the number of contracts that are open and have not been settled
by delivery or by an offsetting transaction.

True

The on balance volume (OBV) indicator

A. considers only the amount of daily trading volume.
B. is divergent when the OBV is falling and prices are also falling.
C. rises by 10,000 on a day when the trading volume is 5,000 shares and the price rises by $2.
D. indicates an up market when heavy volume accompanies price increases.

indicates an up market when heavy volume accompanies price increases.

The strong form of the efficient market hypothesis contends that

A. no one can consistently earn a profit.
B. no one can ever outperform the market.
C. no one can consistently earn abnormal profits.
D. a select few institutional investors can earn abnormal profits.

no one can consistently earn abnormal profits.

Speculators provide liquidity to the futures market.

True

Which one of the following statements concerning mutual funds is correct?

A. The mutual fund industry is the largest financial intermediary in the United States.
B. Mutual funds were first created in the 1980s.
C. Mutual funds are generally highly concentrated portfolios.
D. The selection of individual securities remains with the mutual fund investor.

The mutual fund industry is the largest financial intermediary in the United States.

In an efficient market, prices appear to move randomly because

A. only new information affects stock prices.
B. insider trading has an unpredictable effect on stock prices.
C. the number of investors who can forecast prices correctly is too small to have any effect.
D. investors do not process new information correctly.

only new information affects stock prices.

A U.S. investor who holds euro − denominated bonds will profit if the euro weakens against the dollar.

False

Which type of fund is always passively managed?

A. a growth fund
B. a value fund
C. an index fund
D. a closed − end fund

an index fund

Advantages of index funds include which of the following?
I. Low management fees.
II. They outperform most actively managed funds.
III. They have a balanced mix of stocks and bonds.
IV. Securities in the portfolio are selected by professional analysts.

I and II only

Which of the following statements about U.S. Agency bonds are true?
I. They are backed by the "full faith and credit" of the U.S. government.
II. Their risk is almost as low as government notes and bonds.
III. Their yields are slightly higher than those of government securities.
IV. They are exempt from state and federal taxes.

II and III only

Which one of the following statements is correct?

A. The market responds immediately to reflect insider information.
B. The weekend effect states that security prices tend to rise between Friday afternoon and
Monday morning.
C. The market fully anticipates the information contained in an earnings announcement prior to
the actual announcement.
D. Low P/E stocks tend to outperform high P/E stocks on a risk − adjusted basis.

Low P/E stocks tend to outperform high P/E stocks on a risk − adjusted basis

The value of a euro futures contract will go up when

A. interest rates go down.
B. the dollar weakens against the euro.
C. the dollar strengthens against the euro.
D. European interest rates go down.

the dollar weakens against the euro.

The behavioral tendency known as loss aversion causes some investors to:

A. avoid frequent trading.
B. overestimate risk.
C. hold losing stocks longer than winning stocks.
D. sell losing stocks too quickly and keep winning stocks too long.

hold losing stocks longer than winning stocks.

One characteristic of most index funds is that such funds typically

A. have a very low − cost structure with respect to management fees and transaction fees.
B. charge high front − end loads.
C. are designed to "beat the market."
D. produce a large dollar amount of realized capital gains every year.

have a very low − cost structure with respect to management fees and transaction fees.

An option straddle is the simultaneous purchase (or sale) of both a put and a call option on the same underlying security.

True