Investment - Test 1

1. __________ are real assets. 
A. Bonds
B. Production equipment
C. Stocks
D. Commercial paper

B. Production equipment

2. __________ assets generate net income to the economy and __________ assets define allocation of income among investors. 
A. Financial, financial
B. Financial, real
C. Real, financial
D. Real, real

C. Real, financial

3. After considering current market conditions an investor decides to place 60% of their funds in equities and the rest in bonds. This is an example of 
A. asset allocation
B. security analysis
C. top down portfolio management
D. passive management

A. asset allocation

4. 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

5. __________ 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

6. ____ 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

7. 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

8. Money market securities are sometimes referred to as "cash equivalent" because _____. 
A. they are safe and marketable
B. they are not liquid
C. they are high risk
D. they are low denomination

A. they are safe and marketable

9. 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.

10. __________ is not a money market instrument. 
A. A certificate of deposit
B. A treasury bill
C. A treasury bond
D. Commercial paper

C. A treasury bond

11. The _________ price is the price at which a dealer is willing to purchase a security. 
A. bid
B. ask
C. clearing
D. settlement

A. bid

12. The yield on tax-exempt bonds is ______. 
A. usually less than 50% of the yield on taxable bonds
B. normally about 90% of the yield on taxable bonds
C. greater than the yield on taxable bonds
D. less than the yield on taxable bonds

D. less than the yield on taxable bonds

13. An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond or a corporate bond. She looks up municipal bond yields (r_m) but wishes to calculate the taxable equivalent yield r. The formula she should use is given by ______. 
A. r = r_m (1 - 28%)
B. r = r_m/(1 - 72%)
C. r = r_m (1 - 72%)
D. r = r_m/(1 - 28%)

D. r = r_m/(1 - 28%)

14. A tax free municipal bond provides a yield of 3.2%. What is the equivalent taxable yield on the bond given a 35% tax bracket? 
A. 3.20%
B. 3.68%
C. 4.92%
D. 5.00%

C. 4.92%

15. You purchased a share of stock for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was _________. 
A. -3.57%
B. - 3.45%
C. 4.31%
D. 8.03%

C. 4.31%

16. 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

17. 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

18. The Chompers Index is a price weighted stock index based on the 3 largest fast food chains. The stock prices for the three stocks are $54, $23, and $44. What is the price weighted index value of the Chompers Index? 
A. 23.43
B. 35.36
C. 40.33
D. 49.58

C. 40.33

19. Ownership of a put option entitles the owner to the __________ to ___________ a specific stock, on or before a specific date, at a specific price. 
A. right, buy
B. right, sell
C. obligation, buy
D. obligation, sell

B. right, sell

20. 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

21. Which one of the following is not an example of a brokered market? 
A. Residential real estate market
B. Market for large block security transactions
C. Primary market for securities
D. NASDAQ

D. NASDAQ

22. 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

23. Which one of the following statements about IPOs is not true? 
A. IPOs generally outperform in the short run.
B. IPOs often provide very good initial returns to investors.
C. IPOs generally provide superior long-term performance as compared to other stocks.
D. Shares in IPOs are often primarily allocated to institutional investors.

C. IPOs generally provide superior long-term performance as compared to other stocks.

24. The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________. 
A. interest building
B. book building
C. market analysis
D. customer identification

B. book building

 

25. Which one of the following is a false statement regarding NYSE specialists? 
A. On a stock exchange all buy or sell orders are executed at a specialist's post on the exchange
B. Specialists cannot trade for their own accounts
C. Specialists earn income from commissions and spreads in stock prices
D. Specialists stand ready to trade at quoted bid and ask prices

B. Specialists cannot trade for their own accounts

26. 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

27. If an investor places a _________ order the stock will be sold if its price falls to the stipulated level. If an investor places a __________ order the stock will be bought if its price rises above the stipulated level. 
A. stop-buy; stop-loss
B. market; limit
C. stop-loss; stop-buy
D. limit; market

C. stop-loss; stop-buy

28. __________ often accompany short sales, and are used to limit potential losses from the short position. 
A. Limit orders
B. Restricted orders
C. Limit-loss orders
D. Stop-buy orders

D. Stop-buy orders

29. Assume you purchased 500 shares of XYZ common stock on margin at $40 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is _________. 
A. $20,000
B. $12,000
C. $8,000
D. $15,000

C. $8,000

30. You purchased 100 shares of ABC common stock on margin at $60 per share. Assume the initial margin is 60% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends and ignore interest on the margin loan.) 
A. $26.55
B. $34.29
C. $28.95
D. $30.77

B. $34.29

31. You purchased 250 shares of common stock on margin for $25 per share. The initial margin is 65% and the stock pays no dividend. Your rate of return would be __________ if you sell the stock at $32 per share. Ignore interest on margin. 
A. 35%
B. 39%
C. 43%
D. 28%

C. 43%

32. You sell short 100 shares of ABC company which are currently selling at $50 per share. You post the 60% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account and the firm does not pay any dividends) 
A. $61.54
B. $70.72
C. $62.98
D. $64.50

A. $61.54

33. The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________. 
A. book value
B. market value
C. liquidation value
D. Tobin's q

A. book value

34. You wish to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant growth DDM, the intrinsic value of stock A _________. 
A. will be higher than the intrinsic value of stock B
B. will be the same as the intrinsic value of stock B
C. will be less than the intrinsic value of stock B
D. more information is necessary to answer this question

A. will be higher than the intrinsic value of stock B

35. Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be _____. 
A. 4.5%
B. 10.5%
C. 15.0%
D. 30.0%

B. 10.5%

36. You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for one year. You expect to receive both $1.25 in dividends and $35 from the sale of the share at the end of the year. The maximum price you would pay for a share today is __________ if you wanted to earn a 12% return. 
A. $31.25
B. $32.37
C. $38.47
D. $41.32

B. $32.37