Deck 2: Asset Classes and Financial Instruments

Question 1

Treasury Inflation-Protected Securities (TIPS)

A) pay a fixed interest rate for life.
B) pay a variable interest rate that is indexed to inflation.
C) provide a constant stream of income in real (inflation-adjusted)dollars.
D) have their principal adjusted in proportion to the Consumer Price Index.
E) provide a constant stream of income in real (inflation-adjusted)dollars and have their principal adjusted in proportion to the Consumer Price Index.

Answer 1

E

Question 2

Eurodollars have the following characteristics:

A) They are dollar-denominated deposits in foreign banks
B) They are not subject to Regulation Q.
C) They are in banks exempt from U.S.reserve requirements.
D) They earn tax-free income.
E) a,b,and c

Answer 2

E

Question 3

T-bills are financial instruments initially sold by ________ to raise funds.

A) chartered banks
B) the federal government
C) state and local governments
D) agencies of the federal government
E) b and d

Answer 3

B

Question 4

Which of the following is true regarding a firm's securities?

A) Common dividends are paid before preferred dividends.
B) Preferred stockholders have voting rights.
C) Preferred dividends are usually cumulative.
D) Preferred dividends are contractual obligations.
E) Common dividends usually can be paid if preferred dividends have been skipped.

Question 5

Which one of the following is not a money market instrument?

A) a Treasury bill
B) a negotiable certificate of deposit
C) commercial paper
D) a Treasury bond
E) a Eurodollar account

Question 6

Which one of the following statements is true?

A) at issuance,Treasury note maturities range up to 10 years
B) at issuance,Treasury bond maturities range up to 10 years
C) at issuance,Treasury note maturities range from 10 to 30 years
D) Treasury notes may be callable
E) at issuance,Treasury bill maturities range up to 10 years.

Question 7

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

Question 8

Consider the following three stocks: $$\begin{array} { l c c } \text { Stock } & \text { Price } & \text { Number of shares outstanding } \\\hline \text { Stock A } & \$ 40 & 200 \\\text { Stock B } & \$ 70 & 500 \\\text { Stock C } & \$ 10 & 600\end{array}$$
The price-weighted index constructed with the three stocks is

A) 30
B) 40
C) 50
D) 60
E) 70

Question 9

Which one of the following terms best describes Eurodollars:

A) dollar-denominated deposits in European banks.
B) dollar-denominated deposits at branches of foreign banks in the U.S.
C) dollar-denominated deposits at foreign banks and branches of American banks outside the U.S.
D) dollar-denominated deposits at American banks in the U.S.
E) dollars that have been exchanged for European currency.

Question 10

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

Question 11

Which of the following is true of 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) The divisor must be adjusted for stock splits.
D) a and c.
E) b and c.

Question 12

Which of the following statements is true regarding a corporate bond?

A) A corporate callable bond gives the 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 indenture is a secured bond.
D) A corporate convertible bond gives the holder the right to exchange the bond for a specified number of the company's common shares.
E) Holders of corporate bonds have voting rights in the company.

Question 13

Commercial paper is a short-term security issued by ________ to raise funds.

A) the Bank of Canada
B) commercial banks
C) large,well-known companies
D) the Toronto Stock Exchange
E) provincial and local governments

Question 14

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.

Question 15

In the event of the firm's bankruptcy

A) the most shareholders can lose is their original investment in the firm's stock.
B) common shareholders are the first in line to receive their claims on the firm's assets.
C) bondholders have claim to what is left from the liquidation of the firm's assets after paying the shareholders.
D) the claims of preferred shareholders are honored before those of the common shareholders.
E) a and d.

Question 16

Which of the following statements is(are)true regarding municipal bonds?
I)A municipal bond is a debt obligation issued by state or local governments.
II)A municipal bond is a debt obligation issued by the federal government.
III)The interest income from a municipal bond is exempt from federal income taxation.
IV)The interest income from a municipal bond is exempt from state and local taxation in the issuing state.

A) I and II only
B) I and III only
C) I,II,and III only
D) I,III,and IV only
E) I and IV only

Question 17

Which of the following indices is(are)market-value weighted?
I)The S&P/TSX Composite Index.
II)The Standard and Poor's Composite 500-Stock Index Response
III)The Dow Jones Industrial Average.

A) I only
B) I and II only
C) I and III only
D) I,II,and III
E) II and III only

Question 18

You sold a futures contract on oats at a futures price of 233.75 and at the time of expiration the price was 261.25.What was your profit or loss?

A) $1375.00
B) -$1375.00
C) -$27.50
D) $27.50
E) $1325.00

Question 19

Which of the following is not a characteristic of a money market instrument?

A) liquidity
B) marketability
C) long maturity
D) liquidity premium
E) c and d

Question 20

The bid price of a T-bill in the secondary market is

A) the price at which the dealer in T-bills is willing to sell the bill.
B) the price at which the dealer in T-bills is willing to buy the bill.
C) greater than the asked price of the T-bill.
D) the price at which the investor can buy the T-bill
E) never quoted in the financial press.

Question 21

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%

Question 22

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.

Question 23

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.

Question 24

If a Treasury note has a bid price of $995,the quoted bid price would be

A) 9:50.
B) 99:16.
C) 9:80.
D) 9:24.
E) 9:32.

Question 25

The yield to maturity reported in the financial pages for Treasury securities

A) is calculated by compounding the semiannual yield.
B) is calculated by doubling the semiannual yield.
C) is also called the bond equivalent yield.
D) is calculated as the yield-to-call for premium bonds.
E) Both b and c are true.

Question 26

The Value Line Index is an equally weighted geometric average of the return of about 1,700 firms.What is the value of an index based on the geometric average returns of three stocks,where the returns on the three stocks during a given period were 20%,-10%,and 5%?

A) 4.3%
B) 5.0%
C) 11.7%
D) 13.4%
E) 12.2%

Question 27

As a taxpayer,in order for you to be indifferent between the after tax returns on a corporate bond paying 8.5% and a tax-exempt municipal bond paying 6.12%,what would your tax bracket need to be?

A) 33%
B) 72%
C) 15%
D) 28%
E) Cannot tell from the information given

Question 28

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.

Question 29

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 with total equity has the higher market value.
C) The stock having the greatest amount of equity in its capital structure.
D) The stock having the lowest volatility.
E) All will have an equal impact.

Question 30

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 these.

Question 31

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 these.

Question 32

The price quotations of Canada bonds 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) $10,480.00
B) $10,425.00
C) $10,440.00
D) $10,412.50
E) $10,404.00

Question 33

The asked bank discount yield on a T-bill is 5 percent.What is the asked price of the bill if it matures in 60 days and has a face value of $10,000?

A) $9,500.00
B) $9,916.67
C) $9,523.81
D) $8,753.14
E) $9,876.52

Question 34

If a U.S.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

Question 35

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.

Question 36

A T-bill has a face value of $10,000 and is selling for $9,800.If the T-bill matures in 90 days,what is its effective annual yield?

A) 8.16%.
B) 2.04%.
C) 8.54%.
D) 6.12%.
E) 8.42%

Question 37

The call provision in Canada securities
I)is used with Canada Bills.
II)is used with Canada Bonds.
III)gives the issuer the right to repurchase the security at par.
IV gives the issuer the right to repurchase the security at a premium over par.

A) II and III are correct.
B) II and IV are correct.
C) I,II and III are correct.
D) I,II and IV are correct.
E) Only II is correct.

Question 38

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.

Question 39

For a taxpayer in the 25% marginal tax bracket,a 20-year municipal bond currently yielding 5.5% would offer an equivalent taxable yield of:

A) 7.33%.
B) 10.75%.
C) 5.5%.
D) 4.125%.
E) 6.45%.

Question 40

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.

Question 41

Discuss the advantages and disadvantages of common stock ownership,relative to other investment alternatives.

Question 42

With regard to a futures contract,the long position is held by

A) the trader who bought the contract at the largest discount.
B) the trader who has to travel the farthest distance to deliver the commodity.
C) the trader who plans to hold the contract open for the lengthiest time period.
D) the trader who commits to purchasing the commodity on the delivery date.
E) the trader who commits to delivering the commodity on the delivery date.

Question 43

With regard to a futures contract,the short position is held by

A) the trader who bought the contract at the largest discount.
B) the trader who has to travel the farthest distance to deliver the commodity.
C) the trader who plans to hold the contract open for the lengthiest time period.
D) the trader who commits to purchasing the commodity on the delivery date.
E) the trader who commits to delivering the commodity on the delivery date.

Question 44

The Dow Jones Industrial Average,the New York Stock Exchange Index,and the Value Line Index have unique characteristics.Discuss how these indices are calculated and any problems/advantages associated with the specific indices.

Question 45

At what price could an investor purchase the following T-Bill? $$\begin{array}{l}\text { }&\\\begin{array} { l l l l l l } \text {Days to Maturity }&\text {Bid }&\text { Asked}&\text {Chg. }&\text { Ask Yield}\\585&6.01&5.97&+0.01&6.11\end{array}\end{array}$$

A) $9,897.16
B) $9,903.17
C) $9,903.82
D) $9,901.56
E) $9,905.43

Question 46

The Canada Mortgage and Housing Corporation provides

A) a primary market for mortgage transactions.
B) liquidity for the mortgage market.
C) a primary market for farm loan transactions.
D) liquidity for the farm loan market.
E) a source of funds for government agencies.

Question 47

Which of the following are characteristics of preferred stock?
I)It pays its holder a fixed amount of income each year,at the discretion of its managers.
II)It gives its holder voting power in the firm.
III)Its dividends are usually cumulative.
IV)Failure to pay dividends may result in bankruptcy proceedings.

A) I,III,and IV
B) I,II,and III
C) I and III
D) I,II,and IV
E) I,II,III,and IV

Question 48

What does the term "negotiable" mean with regard to negotiable certificates of deposit?

A) The CD can be sold to another investor if the owner needs to cash it in before its maturity date.
B) The rate of interest on the CD is subject to negotiation.
C) The CD is automatically reinvested at its maturity date.
D) The CD has staggered maturity dates built in.
E) The interest rate paid on the CD will vary with a designated market rate.

Question 49

What is the bond equivalent yield of a T-Bill that is selling for $9,453 and has 173 days remaining until maturity?

A) 11.54%
B) 12.21%
C) 12.04%
D) 11.38%
E) 12.15%

Question 50

Based on the information given,for a price-weighted index of the three stocks calculate:
a.the rate of return for the first period (t = 0 to t = 1).
b.the value of the divisor in the second period (t = 2).Assume that Stock A had a 2-1 split during this period.
c.the rate of return for the second period (t = 1 to t = 2).

Question 51

Based on the information given for the three stocks,calculate the first-period rates of return (from t = 0 to t = 1)on
a.a market-value-weighted index.
b.an equally-weighted index
c.a geometric index

Question 52

Suppose an investor is considering a corporate bond with a 7.17% before-tax yield and a municipal bond with a 5.93% before-tax yield.At what marginal tax rate would the investor be indifferent between investing in the corporate and investing in the municipal?

A) 15.4%
B) 23.7%
C) 39.5%
D) 17.3%
E) 12.4%

Question 53

Bond market indexes can be difficult to construct because

A) they cannot be based on firms' market values.
B) bonds tend to trade infrequently,making price information difficult to obtain.
C) there are so many different kinds of bonds.
D) prices cannot be obtained for companies that operate in emerging markets.
E) corporations are not required to disclose the details of their bond issues.

Question 54

Distinguish between Federal Government debt and Federal Crown Corporation debt.

Question 55

Which of the following are true about Treasury Bills?
I)T-Bills are capital market instruments.
II)T-Bills sell through both competitive and noncompetitive bids.
III)T-Bill yields are quoted in the financial pages as effective annual rates of return.
IV)At the T-Bill's maturity,the holder receives the face value of the Bill.

A) I and II
B) II,III,and IV
C) I,II,and IV
D) II and III
E) II and IV