Investments and Security Analysis Exam 1 MC Qs

Which of the following are financial assets?

I. Debt securities

II. Equity securities

III. Derivative securities

A. I only

B. I and II only

C. II and III only

D. I, II and III

D. I, II and III

_________ are examples of financial intermediaries.

A. Commercial banks

B. Insurance companies

C. Investment companies

D. All of the above are financial intermediaries

D. All of the above are financial intermediaries

________ is an example of an agency problem.

A. Managers engage in empire building

B. Managers protect their jobs by avoiding risky projects

C. Managers over consume luxuries such as corporate jets

D. All of the answers provide examples of agency problems

D. All of the answers provide examples of agency problems

The value of a derivative security ________.

A. depends on the value of other related security

B. affects the value of a related security

C. is unrelated to the value of a related security

D. can only be integrated by calculus professors

A. depends on the value of other related security

Firms that specialize in helping companies raise capital by selling securities to the public are called ___________.

A. Pension Funds

B. Investment Banks

C. Savings Banks

D. REITs

B. Investment Banks

The Bid Price of a treasury bill is __________.

A. the price at which the dealer in treasury bills is willing to sell the bill

B. the price at which the dealer in treasury bills is willing to buy the bill

C. greater than the ask price of the treasury bill expressed in dollar terms

D. the price at which the investor can buy the treasury bill

B. the price at which the dealer in treasury bills is willing to buy the bill

Deposits of commercial banks at the Federal Reserve are called __________.

A. bankers acceptances

B. federal funds

C. repurchase agreements

D. time deposits

B. federal funds

Commercial Paper is a short-term security issued by _______ to raise funds.

A. the Federal Reserve

B. commercial banks

C. large well-known companies

D. the New York Stock Exchange

C. large well-known companies

Which one of the following is a true statement regarding the Dow Jones Industrial Average?

A. It is a value-weighted average of 30 large industrial stocks

B. It is a price-weighted average of 30 large industrial stocks

C. It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange

D. It is a value-weighted average of all stocks traded on the New York Stock Exchange

B. It is a price-weighted average of 30 large industrial stocks

Currently the Dow Jones Industrial Average is computed by _________.

A. adding the prices of 30 large "blue-chip" stocks and dividing by 30

B. calculating the total market value of the 30 firms in the index and dividing by 30

C. measuring the current total market value of the 30 stocks in the index relative to the total value on the previous day

D. adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends

D. adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends

A red herring becomes a prospectus when _______.

A. the preliminary registration statement is approved by the SEC

B. the IPO is complete

C. the offering is seasoned

D. the lockup period expires

A. the preliminary registration statement is approved by the SEC

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?

A. $50

B. $150

C. $10,000

D. unlimited

D. unlimited

In general, IPOs are _________ in the short run and ________ in the long run.

(a) underpriced; fairly priced

(b) overpriced; fairly priced

(c) overpriced; overpriced

(d) underpriced; overpriced

(e) overprices; underpriced

(d) underpriced; overpriced

What is the definition of an efficient market (what is true of market prices)?

Market prices immediately reflect all relevant information.

What is the difference between asset allocation and security selection?

Asset allocation deals with selecting weights on various asset classes (stocks, bonds, real estate, etc.), while security selection deals with choosing specific assets within each asset class (specific stocks like IBM and Amazon).

What is the difference between a primary and a secondary market transaction?

In a primary market transaction, money goes to the firm who is issuing the shares (as in an IPO or SEO), while in a secondary market transaction, the exchange of money for shares is between two parties, neither of which is the firm.

What do we mean by "money left on the table" in an IPO?

Money left on the table is defined as the closing price on the first day minus the offer price, multiplied by the number of shares sold. It represents the implicit cost of the IPO to the firm going public.

Preferred stock is like long-term debt in that ___________.

A. it gives the holder voting power regarding the firm's management

B. it promises to pay to its holder a fixed stream of income each year

C. the preferred dividend is a tax-deductible expense for the firm

D. in the event of bankruptcy preferred stock has equal status with debt

B. it promises to pay to its holder a fixed stream of income each year

Large well-known companies often issue their own short term unsecured debt notes directly to the public, rather than borrowing from banks. Their notes are called _________.

A. certificates of deposit

B. repurchase agreements

C. banker's acceptances

D. commercial paper

D. commercial paper

What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11, 2001?

A. No change, as both yields will remain the same.

B. Increase, the spread usually increases in response to a crisis.

C. Decrease, the spread usually decreases in response to a crisis.

D. No change, as both yields will move in the same direction.

B. Increase, the spread usually increases in response to a crisis.

Individuals may find it more advantageous to purchase claims from a financial intermediary rather than directly purchasing claims in capital markets because...

I. intermediaries are better diversified than most individuals

II. intermediaries can exploit economies of scale in investing that individual investors cannot

III. intermediated investments usually offer higher rates of return than direct capital market claims

A. I only

B. I and II only

C. II and III only

D. I, II and III

B. I and II only

Real assets in the economy include all but which one of the following?

A. Land

B. Buildings

C. Consumer durables

D. Common stock

D. Common stock

According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households is _______.

A. mutual fund shares

B. real estate

C. pension reserves

D. corporate equity

B. real estate

According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is _________.

A. mortgages

B. consumer credit

C. bank loans

D. gambling debts

A. mortgages

_________ is not a derivative security.

A. A share of common stock

B. A call option

C. A futures contract

D. All of the above are derivative securities.

A. A share of common stock

Active trading in markets and competition among securities analysts helps ensure that ________.

I. security prices approach informational efficiency

II. riskier securities are priced to offer higher potential returns

III. investors are unlikely to be able to consistently find under- or overvalued securities

A. I only

B. I and II only

C. II and III only

D. I, II and III

D. I, II and III

Asset allocation refers to the _________.

A. allocation of the investment portfolio across broad asset classes

B. analysis of the value of securities

C. choice of specific assets within each asset class

D. none of the answers define asset allocation

A. allocation of the investment portfolio across broad asset classes

Security selection refers to the ___________.

A. allocation of the investment portfolio across broad asset classes

B. analysis of the value of securities

C. choice of specific securities within each asset class

D. top down method of investing

C. choice of specific securities within each asset class

________ portfolio construction starts with selecting attractively priced securities.

A. Bottom-up

B. Top-down

C. Upside-down

D. Side-to-side

A. Bottom-up

_______ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis.

A. Active

B. Momentum

C. Passive

D. Market timing

C. Passive

Financial markets allow for all but which one of the following?

A. Shift consumption through time from higher income periods to lower

B. Price securities according to their riskiness

C. Channel funds from lenders of funds to borrowers of funds

D. Allow most participants to routinely earn high returns with low risk

D. Allow most participants to routinely earn high returns with low risk

_______ are an indirect way U.S. investors can invest in foreign companies.

A. ADRs

B. IRAs

C. SDRs

D. CPCs

A. ADRs

Which of the following is not an example of a financial intermediary?

A. Goldman Sachs

B. Allstate Insurance

C. First Interstate Bank

D. IBM

D. IBM

Money Market securities are characterized by ________.

I. maturity less than one year

II. safety of the principal investment

III. low rates of return

A. I only

B. I and II only

C. I and III only

D. I, II and III

D. I, II and III

Accounting scandals can often be attributed to a particular concept in the study of finance known as the...

A. agency problem

B. risk - return trade - off

C. allocation of risk

D. securitization

A. agency problem

An intermediary that pools and manages funds for many investors is called a/an ________.

A. investment company

B. savings and loan

C. investment banker

D. ADR

A. investment company

An investor in a T-bill earns interest by _______.

A. receiving interest payments every 90 days

B. receiving dividend payments every 30 days

C. converting the T-bill at maturity into a higher valued T-note

D. buying the bill at a discount from the face value received at maturity

D. buying the bill at a discount from the face value received at maturity

Which one of the following is a true statement?

A. Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors

B. Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock

C. Preferred stockholders have voting power

D. Investors can sue managers for nonpayment of preferred dividends

B. Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock

Which of the following is not a true statement regarding municipal bonds?

A. A municipal bond is a debt obligation issued by state or local governments.

B. A municipal bond is a debt obligation issued by the Federal Government.

C. The interest income from a municipal bond is exempt from federal income taxation.

D. The interest income from a municipal bond is exempt from state and local taxation in the issuing state.

B. A municipal bond is a debt obligation issued by the Federal Government.

Which of the following indices are market value-weighted?

I. The NYSE Composite

II. The S&P 500

III. The Wilshire 5000

A. I and II only

B. II and III only

C. I and III only

D. I, II and III

D. I, II and III

A firm that has large securities holdings that wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following?

A. Reverse repurchase agreement

B. Banker's acceptance

C. Commercial paper

D. Repurchase agreement

D. Repurchase agreement

TIPs are _______.

A. Treasury bonds that pay a variable rate of interest

B. U.K. bonds that protect investors from default risk

C. securities that trade on the Toronto stock index

D. Treasury bonds that protect investors from inflation

D. Treasury bonds that protect investors from inflation

Purchases of new issues of stock take place ______.

A. at the desk of the Fed

B. in the primary market

C. in the secondary market

D. in the money markets

B. in the primary market

An order to buy or sell a security at the current price is a _____.

A. limit order

B. market order

C. stop loss order

D. stop buy order

B. market order

The primary market where new security issues are offered to the public is a good example of _____.

A. an auction market

B. a brokered market

C. a dealer market

D. a direct search market

B. a brokered market