Question 1

If a Treasury note has a bid price of $975,the quoted bid price in the Wall Street Journal would be
A)97:50.
B)97:16.
C)97:80.
D)94:24.
E)97:75.

Accepted Answer

The bid price in the Wall Street Journal is quoted as a percentage of par value, which for Treasury notes is $1000. So, a bid price of $975 means the bidder is willing to pay 97.50% of the face value. The bid price is then reported in 32nds of a point, so to find the quoted bid price, we multiply 97.50% by 32 and round to the nearest whole number. 
97.50% * 32 = 31.20 
Rounding to the nearest whole number gives 31, so the quoted bid price is 97-16.

Question 2

Consider the following three stocks: $\begin{array}{lll}
\underline{\text { Stock }} &\underline{ \text { Price } }&\underline{ \text { Number of shares outstandins} } \
\text { Stock A } & \$ 40 & 200 \
\text { Stock B } & \$ 70 & 500 \
\text { Stock C } & \$ 10 & 600
\end{array}$

-The value-weighted index constructed with the three stocks using a divisor of 100 is
A)1.2
B)1200
C)490
D)4900
E)49

Accepted Answer

To calculate the value-weighted index, we need to first calculate the market value of each stock. This is given by:

Market Value of Stock A = Price of Stock A × Number of Shares Outstanding = \$40 × 200 = \$8,000
Market Value of Stock B = Price of Stock B × Number of Shares Outstanding = \$70 × 500 = \$35,000
Market Value of Stock C = Price of Stock C × Number of Shares Outstanding = \$10 × 600 = \$6,000

The total market value of all stocks is:

Total Market Value = Market Value of Stock A + Market Value of Stock B + Market Value of Stock C
= \$8,000 + \$35,000 + \$6,000 = \$49,000

Using a divisor of 100, the value-weighted index is:

Value-Weighted Index = Total Market Value / Divisor
= \$49,000 / 100
= 490

Therefore, the correct answer is C.

Question 3

The Dow Jones Industrial Average (DJIA)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)adding the prices of the 30 stocks in the index and dividing by a divisor.
D)adding the prices of the 500 stocks in the index and dividing by a divisor.
E)adding the prices of the 30 stocks in the index and dividing by the value of these stocks as of some base date period.

Accepted Answer

The Dow Jones Industrial Average (DJIA) is computed by adding the prices of the 30 stocks in the index and dividing by a divisor. The divisor is adjusted to ensure continuity in the index when stock splits or other actions occur. The DJIA is a price-weighted index, which means that stocks with higher prices have a higher weighting in the calculation.

Question 4

The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104: 08 and a bid price of 104:
04)As a seller of the bond what is the dollar price you expect to pay?
A)$1,048.00
B)$1,042.50
C)$1,041.25
D)$1,041.75
E)$1,040.40

Accepted Answer

You receive the bid price of the dealer, 104 4/32, or 104.125% of $1,000, or $1,041.25.

Question 5

The index that includes the largest number of actively traded stock is:
A)the NASDAQ Composite Index.
B)the NYSE Composite Index.
C)the Wilshire 5000 Index.
D)the Value Line Composite Index.
E)the Russell Index.

Accepted Answer

The Wilshire 5000 Index includes all actively traded stocks in the US market, making it the index with the largest number of stocks included. The NASDAQ Composite Index includes a large number of technology and growth-oriented stocks, but not all actively traded stocks. The NYSE Composite Index includes all the stocks listed on the NYSE, but excludes those listed on other exchanges. The Value Line Composite Index includes 1,700 stocks selected by the Value Line Investment Survey based on their fundamental financial strength. The Russell Index includes only a portion of the total US market, based on size and style characteristics.

Question 6

Federally sponsored agency debt
A)is legally insured by the U.S.Treasury.
B)would probably be backed by the U.S.Treasury in the event of a near-default.
C)has a small positive yield spread relative to U.S.Treasuries.
D)B and C.
E)A and C.

Accepted Answer

Federally sponsored agency debt is not legally insured by the U.S. Treasury, but it is generally assumed that the government would step in to prevent a default, hence B is correct. Additionally, these debts typically offer a small yield spread over U.S. Treasuries, making C correct as well.

Question 7

Assume at these prices the value-weighted index constructed with the three stocks is 490.What would the index be if stock B is split 2 for 1 and stock C 4 for 1?
A)265
B)430
C)355
D)490
E)1000

Accepted Answer

Since the index is value-weighted, the total value of the index before the stock splits is:
A: 100 shares x $10/share = $1000
B: 50 shares x $20/share = $1000
C: 25 shares x $30/share = $750
Total value = $2750
Dividing by the divisor (which we don't know yet) gives us an index level of 490.
After the stock splits, the number of shares will change but the total value of each stock will remain the same. So we can calculate the new total value of the index as follows:
A: 100 shares x $10/share = $1000
B: 100 shares x $10/share = $1000
C: 100 shares x $7.50/share = $750
Total value = $2750
To calculate the new divisor, we divide the old total value by the new total value: 2750/2750 = 1
Therefore, the index level after the stock splits will be the same as before: 490.

Question 8

An investor purchases one municipal and one corporate bond that pay rates of return of 7.5% and 10.3%,respectively.If the investor is in the 25% marginal tax bracket,his or her after tax rates of return on the municipal and corporate bonds would be ________ and ______,respectively.
A)7.5% and 10.3%
B)7.5% and 7.73%
C)5.63% and 7.73%
D)5.63% and 10.3%
E)10% and 10%

Accepted Answer

For the municipal bond, the after-tax rate of return is simply (1 - marginal tax rate) x rate of return. Therefore, (1 - 0.25) x 7.5% = 5.63%. 
For the corporate bond, the after-tax rate of return is the pre-tax rate of return multiplied by (1 - marginal tax rate on interest income). Therefore, 10.3% x (1 - 0.25) = 7.73%. 
Thus, the best choice is B, where the after-tax rates of return on the municipal and corporate bonds are 5.63% and 7.73%, respectively.

Question 9

In calculating the Standard and Poor's stock price indices,the adjustment for stock split occurs:
A)by adjusting the divisor.
B)automatically.
C)by adjusting the numerator.
D)quarterly, on the last trading day of each quarter.
E)none of the above.

Accepted Answer

The answer of In calculating the Standard and Poor's stock...

Question 10

Which of the following securities is a money market instrument?
A)Treasury note.
B)Treasury bond.
C)Municipal bond.
D)Commercial paper.
E)Mortgage security.

Accepted Answer

Commercial paper is a short-term debt instrument issued by large corporations with good credit ratings. It is considered a money market instrument due to its short maturity date, typically less than 270 days. The other options listed are all longer-term securities and not classified as money market instruments.

Question 11

If a Treasury note has a bid price of $995,the quoted bid price in the Wall Street Journal would be
A)99:50.
B)99:16.
C)99:80.
D)99:24.
E)99:32.

Accepted Answer

The answer of If a Treasury note has a bid...

Question 12

Brokers' calls
A)are funds used by individuals who wish to buy stocks on margin.
B)are funds borrowed by the broker from the bank,with the agreement to repay the bank immediately if requested to do so.
C)carry a rate that is usually about one percentage point lower than the rate on U.S.T-bills.
D)A and B.
E)A and C.

Accepted Answer

Brokers' calls refer to funds borrowed by brokers from banks to lend to clients for margin trading, and individuals use these funds to buy stocks on margin.

Question 13

A 5.5% 20-year municipal bond is currently priced to yield 7.2%.For a taxpayer in the 33% marginal tax bracket,this bond would offer an equivalent taxable yield of:
A)8.20%.
B)10.75%.
C)11.40%.
D)4.82%.
E)none of the above.

Accepted Answer

The answer of A 5.5% 20-year municipal bond is currently...

Question 14

The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104: 08 and a bid price of 104:
04)As a buyer of the bond what is the dollar price you expect to pay?
A)$1,048.00
B)$1,042.50
C)$1,044.00
D)$1,041.25
E)$1,040.40

Accepted Answer

You pay the asking price of the dealer, 104 8/32, or 104.25% of $1,000, or $1,042.50.

Question 15

An investor purchases one municipal and one corporate bond that pay rates of return of 8% and 10%,respectively.If the investor is in the 20% marginal tax bracket,his or her after tax rates of return on the municipal and corporate bonds would be ________ and ______,respectively.
A)8% and 10%
B)8% and 8%
C)6.4% and 8%
D)6.4% and 10%
E)10% and 10%

Accepted Answer

r_c = 0.10(1 - 0.20) = 0.08, or 8%; r_m = 0.08(1 - 0) = 8%.

Question 16

Consider the following three stocks: $\begin{array}{lll}
\underline{\text { Stock }} &\underline{ \text { Price } }&\underline{ \text { Number of shares outstandins} } \
\text { Stock A } & \$ 40 & 200 \
\text { Stock B } & \$ 70 & 500 \
\text { Stock C } & \$ 10 & 600
\end{array}$

-The price-weighted index constructed with the three stocks is
A)30
B)40
C)50
D)60
E)70

Accepted Answer

To calculate a price-weighted index, we need to find the sum of the prices of all the stocks and divide it by the total number of stocks.

Total Price = (40 x 200) + (70 x 500) + (10 x 600) = 20,000 + 35,000 + 6,000 = 61,000

Total Number of Stocks = 200 + 500 + 600 = 1,300

Price-Weighted Index = Total Price / Total Number of Stocks = 61,000 / 1,300 = 47

Therefore, the closest answer choice is B) 40.

Question 17

A form of short-term borrowing by dealers in government securities is
A)reserve requirements.
B)repurchase agreements.
C)banker's acceptances.
D)commercial paper.
E)brokers' calls.

Accepted Answer

Repurchase agreements, or repo agreements, involve dealers in government securities borrowing funds overnight by selling securities to investors and agreeing to buy them back the next day at a slightly higher price. This allows dealers to finance their positions and maintain liquidity.

Question 18

The stocks on the Dow Jones Industrial Average
A)have remained unchanged since the creation of the index.
B)include most of the stocks traded on the NYSE.
C)are changed occasionally as circumstances dictate.
D)consist of stocks on which the investor cannot lose money.
E)B and C.

Accepted Answer

The stocks on the Dow Jones Industrial Average are changed occasionally as circumstances dictate. For example, in 2020, ExxonMobil, Pfizer, and Raytheon were removed from the index and were replaced by Salesforce, Amgen, and Honeywell.

Question 19

If the market prices of each of the 30 stocks in the Dow Jones Industrial Average (DJIA)all change by the same percentage amount during a given day,which stock will have the greatest impact on the DJIA?
A)The stock trading at the highest dollar price per share.
B)The stock having the greatest amount of debt in its capital structure.
C)The stock having the greatest amount of equity in its capital structure.
D)The stock having the lowest volatility.
E)None of the above.

Accepted Answer

The stock trading at the highest dollar price per share will have the greatest impact on the DJIA because the DJIA is a price-weighted index, meaning that stocks with higher prices have more influence on the index's movements.

Question 20

Which of the following statements regarding the Dow Jones Industrial Average (DJIA)is false?
A)The DJIA is not very representative of the market as a whole.
B)The DJIA consists of 30 blue chip stocks.
C)The DJIA is affected equally by changes in low and high priced stocks.
D)The DJIA divisor needs to be adjusted for stock splits.
E)The value of the DJIA is much higher than individual stock prices.

Accepted Answer

The DJIA is not affected equally by changes in low and high priced stocks. Higher-priced stocks have a greater impact on the index's movement than lower-priced stocks.

Quiz 2: Asset Classes and Financial Instruments

If a Treasury note has a bid price of $975,the quoted bid price in the Wall Street Journal would be

The Dow Jones Industrial Average (DJIA) is computed by:

The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104: 08 and a bid price of 104: 04) As a seller of the bond what is the dollar price you expect to pay?

The index that includes the largest number of actively traded stock is:

Federally sponsored agency debt

Assume at these prices the value-weighted index constructed with the three stocks is 490.What would the index be if stock B is split 2 for 1 and stock C 4 for 1?

An investor purchases one municipal and one corporate bond that pay rates of return of 7.5% and 10.3%,respectively.If the investor is in the 25% marginal tax bracket,his or her after tax rates of return on the municipal and corporate bonds would be __ and ,respectively.

In calculating the Standard and Poor's stock price indices,the adjustment for stock split occurs:

Which of the following securities is a money market instrument?

If a Treasury note has a bid price of $995,the quoted bid price in the Wall Street Journal would be

Brokers' calls

A 5.5% 20-year municipal bond is currently priced to yield 7.2%.For a taxpayer in the 33% marginal tax bracket,this bond would offer an equivalent taxable yield of:

The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104: 08 and a bid price of 104: 04) As a buyer of the bond what is the dollar price you expect to pay?

An investor purchases one municipal and one corporate bond that pay rates of return of 8% and 10%,respectively.If the investor is in the 20% marginal tax bracket,his or her after tax rates of return on the municipal and corporate bonds would be __ and ,respectively.

A form of short-term borrowing by dealers in government securities is

The stocks on the Dow Jones Industrial Average

If the market prices of each of the 30 stocks in the Dow Jones Industrial Average (DJIA) all change by the same percentage amount during a given day,which stock will have the greatest impact on the DJIA?

Which of the following statements regarding the Dow Jones Industrial Average (DJIA) is false?