Preview Extract
1. Which of the following is not a money market instrument?
A. Treasury bill
B. Commercial paper
C. Preferred stock
D. Bankers' acceptance
Answer: C. Preferred stock
2. T-bills are issued with initial maturities of:
I. 4 weeks
II. 16 weeks
III. 26 weeks
IV. 32 weeks
A. I and II only
B. I and III only
C. I, II, and III only
D. I, II, III, and IV
Answer: B. I and III only
3. When computing the bank discount yield, you would use ____ days in the year.
A. 260
B. 360
C. 365
D. 366
Answer: B. 360
4. A dollar-denominated deposit at a London bank is called _____.
A. eurodollars
B. LIBOR
C. fed funds
D. bankers' acceptance
Answer: A. eurodollars
5. Money market securities are sometimes referred to as cash equivalents because _____.
A. they are safe and marketable
B. they are not liquid
C. they are high-risk
D. they are low-denomination
Answer: A. they are safe and marketable
6. The most marketable money market security is _____.
A. Treasury bills
B. bankers' acceptances
C. certificates of deposit
D. common stock
Answer: A. Treasury bills
7. The minimum tick size, or spread between prices in the Treasury bond market, is
A. 1/8 of a point.
B. 1/16 of a point.
C. 1/32 of a point.
D. 1/64 of a point.
Answer: D. 1/64 of a point.
8. An investor in a T-bill earns interest by _________.
A. receiving interest payments every 90 days
B. receiving dividend payments every 30 days
C. converting the T-bill at maturity into a higher-valued T-note
D. buying the bill at a discount from the face value to be received at maturity
Answer: D. buying the bill at a discount from the face value to be received at maturity
9. ______ would not be included in the EAFE index.
A. Australia
B. Canada
C. France
D. Japan
Answer: B. Canada
10. _____ is considered to be an emerging market country.
A. France
B. Norway
C. Brazil
D. Canada
Answer: C. Brazil
11. Which one of the following is a true statement?
A. Dividends on preferred stocks are tax-deductible to individual investors but not to
corporate investors.
B. Common dividends cannot be paid if preferred dividends are in arrears on cumulative
preferred stock.
C. Preferred stockholders have voting power.
D. Investors can sue managers for nonpayment of preferred dividends.
Answer: B. Common dividends cannot be paid if preferred dividends are in arrears on
cumulative preferred stock.
12. The bid price of a Treasury bill is _________.
A. the price at which the dealer in Treasury bills is willing to sell the bill
B. the price at which the dealer in Treasury bills is willing to buy the bill
C. greater than the ask price of the Treasury bill expressed in dollar terms
D. the price at which the investor can buy the Treasury bill
Answer: B. the price at which the dealer in Treasury bills is willing to buy the bill
13. The German stock market is measured by which market index?
A. FTSE
B. Dow Jones 30
C. DAX
D. Nikkei
Answer: C. DAX
14. Deposits of commercial banks at the Federal Reserve are called _____.
A. bankers' acceptances
B. federal funds
C. repurchase agreements
D. time deposits
Answer: B. federal funds
15. Which of the following is not a true statement regarding municipal bonds?
A. A municipal bond is a debt obligation issued by state or local governments.
B. A municipal bond is a debt obligation issued by the federal government.
C. The interest income from a municipal bond is exempt from federal income taxation.
D. The interest income from a municipal bond is exempt from state and local taxation in the
issuing state.
Answer: B. A municipal bond is a debt obligation issued by the federal government.
16. Which of the following is not a characteristic of a money market instrument?
A. Liquidity
B. Marketability
C. Low risk
D. Maturity greater than 1 year
Answer: D. Maturity greater than 1 year
17. An individual who goes short in a futures position _____.
A. commits to delivering the underlying commodity at contract maturity
B. commits to purchasing the underlying commodity at contract maturity
C. has the right to deliver the underlying commodity at contract maturity
D. has the right to purchase the underlying commodity at contract maturity
Answer: A. commits to delivering the underlying commodity at contract maturity
18. Which of the following is not a nickname for an agency associated with the mortgage
markets?
A. Fannie Mae
B. Freddie Mac
C. Sallie Mae
D. Ginnie Mae
Answer: C. Sallie Mae
19. Commercial paper is a short-term security issued by __________ to raise funds.
A. the Federal Reserve
B. the New York Stock Exchange
C. large well-known companies
D. all of these options
Answer: C. large well-known companies
20. The maximum maturity on commercial paper is _____.
A. 270 days
B. 180 days
C. 90 days
D. 30 days
Answer: A. 270 days
21. Which one of the following is a true statement regarding the Dow Jones Industrial
Average?
A. It is a value-weighted average of 30 large industrial stocks.
B. It is a price-weighted average of 30 large industrial stocks.
C. It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange.
D. It is a value-weighted average of all stocks traded on the New York Stock Exchange.
Answer: B. It is a price-weighted average of 30 large industrial stocks.
22. Treasury bills are financial instruments issued by __________ to raise funds.
A. commercial banks
B. the federal government
C. large corporations
D. state and city governments
Answer: B. the federal government
23. Which of the following are true statements about T-bills?
I. T-bills typically sell in denominations of $10,000.
II. Income earned on T-bills is exempt from all federal taxes.
III. Income earned on T-bills is exempt from state and local taxes.
A. I only
B. I and II only
C. I and III only
D. I, II, and III
Answer: C. I and III only
24. A bond that has no collateral is called a _________.
A. callable bond
B. debenture
C. junk bond
D. mortgage
Answer: B. debenture
25. A __________ gives its holder the right to sell an asset for a specified exercise price on or
before a specified expiration date.
A. call option
B. futures contract
C. put option
D. interest rate swap
Answer: C. put option
26. A T-bill quote sheet has 90-day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has
a $10,000 face value, an investor could buy this bill for _____.
A. $10,000
B. $9,878.50
C. $9,877
D. $9,880.16
Answer: B. $9,878.50
$9,878.50 =
27. Which one of the following is a true statement regarding corporate bonds?
A. A corporate callable bond gives its holder the right to exchange it for a specified number of
the company's common shares.
B. A corporate debenture is a secured bond.
C. A corporate convertible bond gives its holder the right to exchange it for a specified
number of the company's common shares.
D. Holders of corporate bonds have voting rights in the company.
Answer: C. A corporate convertible bond gives its holder the right to exchange it for a
specified number of the company's common shares.
28. The yield on tax-exempt bonds is ______.
A. usually less than 50% of the yield on taxable bonds
B. normally about 90% of the yield on taxable bonds
C. greater than the yield on taxable bonds
D. less than the yield on taxable bonds
Answer: D. less than the yield on taxable bonds
29. __________ is not a money market instrument.
A. A certificate of deposit
B. A Treasury bill
C. A Treasury bond
D. Commercial paper
Answer: C. A Treasury bond
30. An investor buys a T-bill at a bank discount quote of 4.80 with 150 days to maturity. The
investor's actual annual rate of return on this investment is _____.
A. 4.8%
B. 4.97%
C. 5.47%
D. 5.74%
Answer: B. 4.97%
31. The U.K. stock index is the _________.
A. DAX
B. FTSE
C. GSE
D. TSE
Answer: B. FTSE
32. A __________ gives its holder the right to buy an asset for a specified exercise price on or
before a specified expiration date.
A. call option
B. futures contract
C. put option
D. interest rate swap
Answer: A. call option
33. Which one of the following provides the best example of securitization?
A. Convertible bond
B. Call option
C. Mortgage pass-through security
D. Preferred stock
Answer: C. Mortgage pass-through security
34. Which of the following indexes are market value-weighted?
I. The NYSE Composite
II. The S&P 500
III. The Wilshire 5000
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
Answer: D. I, II, and III
35. The interest rate charged by large banks in London to lend money among themselves is
called _________.
A. the prime rate
B. the discount rate
C. the federal funds rate
D. LIBOR
Answer: D. LIBOR
36. A firm that has large securities holdings and wishes to raise money for a short length of
time may be able to find the cheapest financing from which of the following?
A. Reverse repurchase agreement
B. Bankers' acceptance
C. Commercial paper
D. Repurchase agreement
Answer: D. Repurchase agreement
37. Currently, the Dow Jones Industrial Average is computed by _________.
A. adding the prices of 30 large "blue-chip" stocks and dividing by 30
B. calculating the total market value of the 30 firms in the index and dividing by 30
C. measuring the current total market value of the 30 stocks in the index relative to the total
value on the previous day
D. adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for
stock splits and large stock dividends
Answer: D. adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted
for stock splits and large stock dividends
38. An investor purchases one municipal bond and one corporate bond that pay rates of return
of 5% and 6.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of
return on the municipal and corporate bonds would be, respectively, _____.
A. 5% and 6.4%
B. 5% and 5.44%
C. 4.25% and 6.4%
D. 5.75% and 5.44%
Answer: B. 5% and 5.44%
After-tax return on municipal bond = .05
After-tax return on corporate bond = .064(1 - .15) = .0544 = 5.44%
39. If a Treasury note has a bid price of $996.25, the quoted bid price in the Wall Street
Journal would be _________.
A. 99:25
B. 99:63
C. 99:20
D. 99:08
Answer: C. 99:20
Quoted price =
40. TIPS are ______.
A. Treasury bonds that pay no interest and are sold at a discount
B. U.K. bonds that protect investors from default risk
C. securities that trade on the Toronto stock index
D. Treasury bonds that protect investors from inflation
Answer: D. Treasury bonds that protect investors from inflation
41. The price quotations of Treasury bonds in the Wall Street Journal show a bid price of
102:12 and an ask price of 102:14. If you sell a Treasury bond, you expect to receive
_________.
A. $1,024.75
B. $1,024.38
C. $1,023.75
D. $1,022.50
Answer: C. $1,023.75
42. The Dow Jones Industrial Average is _________.
A. a price-weighted average
B. a value weight and average
C. an equally weighted average
D. an unweighted average
Answer: A. a price-weighted average
43. Investors will earn higher rates of returns on TIPS than on equivalent default-risk standard
bonds if _______________.
A. inflation is lower than anticipated over the investment period
B. inflation is higher than anticipated over the investment period
C. the U.S. dollar increases in value against the euro
D. the spread between commercial paper and Treasury securities remains low
Answer: B. inflation is higher than anticipated over the investment period
44. Preferred stock is like long-term debt in that ___________.
A. it gives the holder voting power regarding the firm's management
B. it promises to pay to its holder a fixed stream of income each year
C. the preferred dividend is a tax-deductible expense for the firm
D. in the event of bankruptcy preferred stock has equal status with debt
Answer: B. it promises to pay to its holder a fixed stream of income each year
45. Which of the following does not approximate the performance of a buy-and-hold portfolio
strategy?
A. An equally weighted index
B. A price-weighted index
C. A value-weighted index
D. All of these options (Weights are not a factor in this situation.)
Answer: A. An equally weighted index
46. In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs
_________.
A. automatically
B. by adjusting the divisor
C. by adjusting the numerator
D. by adjusting the market value weights
Answer: B. by adjusting the divisor
47. Suppose the market prices of the 30 stocks in the Dow Jones Industrial Average all change
by the same dollar amount on a given day. Assuming there are no stock splits, which stock
will have the greatest impact on the average?
A. The one with the highest price
B. The one with the lowest price
C. All 30 stocks will have the same impact.
D. The answer cannot be determined from the information given.
Answer: C. All 30 stocks will have the same impact.
48. A bond issued by the state of Alabama is priced to yield 6.25%. If you are in the 28% tax
bracket, this bond would provide you with an equivalent taxable yield of _________.
A. 4.5%
B. 7.25%
C. 8.68%
D. none of these options
Answer: C. 8.68%
8.68% = 6.25%/(1 - .28)
49. The purchase of a futures contract gives the buyer _________.
A. the right to buy an item at a specified price
B. the right to sell an item at a specified price
C. the obligation to buy an item at a specified price
D. the obligation to sell an item at a specified price
Answer: C. the obligation to buy an item at a specified price
50. Ownership of a put option entitles the owner to the __________ to ___________ a
specific stock, on or before a specific date, at a specific price.
A. right; buy
B. right; sell
C. obligation; buy
D. obligation; sell
Answer: B. right; sell
51. An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond
or a corporate bond. She looks up municipal bond yields (r m) but wishes to calculate the
taxable equivalent yield r. The formula she should use is given by ______.
A. r = rm × (1 - 28%)
B. r = rm/(1 - 72%)
C. r = rm × (1 - 72%)
D. r = rm/(1 - 28%)
Answer: D. r = rm/(1 - 28%)
52. June call and put options on King Books Inc. are available with exercise prices of $30,
$35, and $40. Among the different exercise prices, the call option with the _____ exercise
price and the put option with the _____ exercise price will have the greatest value.
A. $40; $30
B. $30; $40
C. $35; $35
D. $40; $40
Answer: B. $30; $40
53. Ownership of a call option entitles the owner to the __________ to __________ a specific
stock, on or before a specific date, at a specific price.
A. right; buy
B. right; sell
C. obligation; buy
D. obligation; sell
Answer: A. right; buy
54. The ________ the ratio of municipal bond yields to corporate bond yields, the _________
the cutoff tax bracket at which more individuals will prefer to hold municipal debt.
A. higher; lower
B. lower; lower
C. higher; higher
D. The answer cannot be determined without more information.
Answer: A. higher; lower
55. Which of the following types of bonds are excluded from most bond indexes?
A. Corporate bonds
B. Junk bonds
C. Municipal bonds
D. None of these options
Answer: B. Junk bonds
56. The Hang Seng index reflects market performance on which of the following major stock
markets?
A. Japan
B. Singapore
C. Taiwan
D. Hong Kong
Answer: D. Hong Kong
57. The Standard & Poor's 500 is __________ weighted index.
A. an equally
B. a priceC. a valueD. a shareAnswer: C. a value58. A firm that fails to pay dividends on its preferred stock is said to be _________.
A. insolvent
B. in arrears
C. insufferable
D. delinquent
Answer: B. in arrears
59. Large well-known companies often issue their own short-term unsecured debt notes
directly to the public, rather than borrowing from banks; their notes are called _________.
A. certificates of deposit
B. repurchase agreements
C. bankers' acceptances
D. commercial paper
Answer: D. commercial paper
60. Which of the following is most like a short-term collateralized loan?
A. Certificate of deposit
B. Repurchase agreement
C. Bankers' acceptance
D. Commercial paper
Answer: B. Repurchase agreement
61. Eurodollars are _________.
A. dollar-denominated deposits at any foreign bank or foreign branch of an American bank
B. dollar-denominated bonds issued by firms outside their home market
C. currency issued by Euro Disney and traded in France
D. dollars that wind up in banks as a result of money-laundering activities
Answer: A. dollar-denominated deposits at any foreign bank or foreign branch of an
American bank
62. Which of the following is used to back international sales of goods and services?
A. Certificate of deposit
B. Bankers' acceptance
C. Eurodollar deposits
D. Commercial paper
Answer: B. Bankers' acceptance
63. Treasury notes have initial maturities between ________ years.
A. 2 and 4
B. 5 and 10
C. 10 and 30
D. 1 and 10
Answer: D. 1 and 10
64. Which of the following is not a characteristic of common stock ownership?
A. Residual claimant
B. Unlimited liability
C. Voting rights
D. Limited life of the security
Answer: B. Unlimited liability
65. If you thought prices of stock would be rising over the next few months, you might want
to __________________ on the stock.
A. purchase a call option
B. purchase a put option
C. sell a futures contract
D. place a short-sale order
Answer: A. purchase a call option
66. A typical bond price quote includes all but which one of the following?
A. Daily high price for the bond
B. Closing bond price
C. Yield to maturity
D. Dividend yield
Answer: D. Dividend yield
67. What are business firms most likely to use derivative securities for?
A. Hedging
B. Speculating
C. Doing calculus problems
D. Market making
Answer: A. Hedging
68. What would you expect to have happened to the spread between yields on commercial
paper and Treasury bills immediately after September 11, 2001?
A. No change, as both yields will remain the same
B. Increase, as the spread usually increases in response to a crisis
C. Decrease, as the spread usually decreases in response to a crisis
D. No change, as both yields will move in the same direction
Answer: B. Increase, as the spread usually increases in response to a crisis
69. A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest
quarterly dividend received by stock investors must have been ______ per share.
A. $0.55
B. $1.80
C. $0.45
D. $1.25
Answer: C. $0.45
$60 × 0.30/4 = $0.45
70. Three stocks have share prices of $12, $75, and $30 with total market values of $400
million, $350 million, and $150 million, respectively. If you were to construct a priceweighted index of the three stocks, what would be the index value?
A. 300
B. 39
C. 43
D. 30
Answer: B. 39
Index = (12 + 75 + 30)/3 = 39
71. Which of the following is not considered a money market investment?
A. Bankers' acceptance
B. Eurodollar
C. Repurchase agreement
D. Treasury note
Answer: D. Treasury note
72. The Federal Reserve Board of Governors directly controls which of the following interest
rates?
A. Bankers' acceptances
B. Brokers' calls
C. Federal funds
D. LIBOR
Answer: C. Federal funds
73. You decide to purchase an equal number of shares of stocks of firms to create a portfolio.
If you wanted to construct an index to track your portfolio performance, your best match for
your portfolio would be to construct ______.
A. a value-weighted index
B. an equally weighted index
C. a price-weighted index
D. a bond price index
Answer: C. a price-weighted index
74. In a ___________ index, changes in the value of the stock with the greatest market value
will move the index value the most, everything else equal.
A. value-weighted index
B. equally weighted index
C. price-weighted index
D. bond price index
Answer: A. value-weighted index
75. A corporation in a 34% tax bracket invests in the preferred stock of another company and
earns a 6% pretax rate of return. An individual investor in a 15% tax bracket invests in the
same preferred stock and earns the same pretax return. The after-tax return to the corporation
is _______, and the after-tax return to the individual investor is _______.
A. 3.96%; 5.1%
B. 5.39%; 5.1%
C. 6%; 6%
D. 3.96%; 6%
Answer: B. 5.39%; 5.1%
After-tax return to corporate investor after 70% exclusion = .06 - (.06 × .30) × .34 = 5.39%
After-tax return to individual investor = .06(1 - .15) = 5.1%
76. All but which one of the following indices is value weighted?
A. NASDAQ Composite
B. S&P 500
C. Wilshire 5000
D. DJIA
Answer: D. DJIA
77. What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of
28%?
A. 6.48%
B. 7.25%
C. 8.02%
D. 9%
Answer: A. 6.48%
After-tax yield =.09(1 - .28) = .0648
78. A tax free municipal bond provides a yield of 3.2%. What is the equivalent taxable yield
on the bond given a 35% tax bracket?
A. 3.2%
B. 3.68%
C. 4.92%
D. 5%
Answer: C. 4.92%
Yield = .032/1 - .35 = 0.0492
79. An index computed from a simple average of returns is a/an _____.
A. equal weighted index
B. value weighted index
C. price weighted index
D. share weighted index
Answer: A. equal weighted index
80. A tax free municipal bond provides a yield of 2.34%. What is the equivalent taxable yield
on the bond given a 28% tax bracket?
A. 2.34%
B. 2.68%
C. 3.25%
D. 4.92%
Answer: C. 3.25%
Yield = .0234/1 – .28 = 0.0325
81. The Chompers Index is a price weighted stock index based on the 3 largest fast food
chains. The stock prices for the three stocks are $54, $23, and $44. What is the price weighted
index value of the Chompers Index?
A. 23.43
B. 35.36
C. 40.33
D. 49.58
Answer: C. 40.33
Index = 54 + 23 + 44/3 = 40.33
82. The Hydro Index is a price weighted stock index based on the 5 largest boat
manufacturers in the nation. The stock prices for the five stocks are $10, $20, $80, $50 and
$40. The price of the last stock was just split 2 for 1 and the stock price was halved from $40
to $20. What is the new divisor for a price weighted index?
A. 5.00
B. 4.85
C. 4.50
D. 4.75
Answer: C. 4.50
83. A benchmark index has three stocks priced at $23, $43, and $56. The number of
outstanding shares for each is 350,000 shares, 405,000 shares, and 553,000 shares,
respectively. If the market value weighted index was 970 yesterday and the prices changed to
$23, $41, and $58, what is the new index value?
A. 960
B. 970
C. 975
D. 985
Answer: C. 975
84. A benchmark market value index is comprised of three stocks. Yesterday the three stocks
were priced at $12, $20, and $60. The number of outstanding shares for each is 600,000
shares, 500,000 shares, and 200,000 shares, respectively. If the stock prices changed to $16,
$18, and $62 today respectively, what is the 1-day rate of return on the index?
A. 5.78%
B. 4.35%
C. 6.16%
D. 7.42%
Answer: C. 6.16%
85. Which of the following mortgage scenarios will benefit the homeowner the most?
A. Adjustable rate mortgage when interest rate increases.
B. Fixed rate mortgage when interest rates falls.
C. Fixed rate mortgage when interest rate rises.
D. None of these options, as the banker's interest will always be protected.
Answer: C. Fixed rate mortgage when interest rate rises.
86. The TED spread refers to
A. the difference between the Treasury bond rate and the Treasury bill rate.
B. the difference between the Treasury note rate and the Treasury bill rate.
C. the difference between the LIBOR rate and the Treasury bill rate.
D. the difference between the LIBOR rate and the Treasury bond rate.
Answer: C. the difference between the LIBOR rate and the Treasury bill rate.
Test Bank for Essentials of Investments
Zvi Bodie, Alex Kane, Alan Marcus
9780078034695, 9789389957877, 9781264140251, 9781260316148, 9780073382401, 9780078034695, 9781260013924, 9780077835422
