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PRACTICE QUESTIONS CoversBackground from Chapters 1-5

  1. A Chartered Financial Analyst designation is
  1. A professional designation awarded by AIMR to candidates passing three levels of examinations involving important investments topics
  2. certification of a successful investing record used by professionals to advertise
  3. a professional designation awarded by employers to employees meeting recognized standards of competency and conduct
  4. a professional designation awarded by colleges upon successful completion of the proper exams
  1. The best definition of debt securities, based on the text, is that the term includes
  1. All bonds and preferred stocks
  2. Treasuries, agencies, municipals, and corporates
  3. Treasuries, agencies and corporates
  4. Corporate bonds and Treasury bonds only

3. An investor buys 100 shares of a stock at $200 per share on 40% margin. The stock goes to $230. Ignoring all costs of transacting, the percentage return on investment is

a. 16.66%

b. 25%

c. 10%

d. none of the above

4. With regard to markets, choose the INCORRECT statement:

  1. Secondary markets exist for the trading of existing securities
  2. Investment bankers often underwrite new issues by purchasing the securities
  3. If the issuer is selling securities for the first time, these are referred to as IPOs
  4. All secondary equity markets are auction markets
  1. With regard to securitization, choose the INCORRECT statement.
  1. It refers to the transformation of illiquid loans into less risky securities.
  2. The less risky securities resulting from securitization are referred to as asset-backed securities.
  3. Securitization works best when packaged loans are heterogeneous, so that returns are more variable.
  4. Ginnie Mae issues are one example of securitization
  1. The common stockholder
  1. is guaranteed a specified dividend return
  2. is senior to (that is, ranks above) debt holders in terms of payment
  3. takes relatively small risk in any given year
  4. can best be described as the residual claimant
  1. Which of the following is CORRECT regarding specialists?
  1. They are critical on an auction market such as Nasdaq.
  2. They act as brokers but not as dealers.
  3. They are not expected to maintain a fair and orderly market if they have to risk their own capital.
  4. They often “go against the market” to maintain an orderly market.
  1. Which of the following statements about short selling is CORRECT
  1. Short sales have a specified time limit.
  2. Dividends on stock sold short must be paid by the short seller.
  3. Short sales on the NYSE are permitted on upticks or downticks.
  4. Buying calls is a substitute for selling short.

9. A TEY for an investor in the 39.6% marginal tax bracket holding a 5.5% municipal bond is

a. 10.76%

b. 15.15%

c. 9.11%

d. none of the above

10. You are trying to put together a list of 4 different corporate bonds, all with the same maturity, with their current rates. One bond is rated AAA, one is rated AA, one is rated A, and one is rated BBB. Which of the following rates would be associated with the A-rated bonds?

  1. 6%
  2. 6.5%
  3. 7.9%
  4. 7.1%
  1. With regard to the Janus Twenty mutual fund , we can conclude
  1. its expense ratio is about average, given the expense ratio for all equity mutual funds
  2. subsequent performance is not always predictable on the basis of recent performance
  3. it can be classified as a diversified equity fund
  4. over a period of years, its returns should show less variability than those of Fidelity's Equity-Income fund

12. Money market funds

a. Have a sales (load) charge but not a redemption charge.

  1. Are closed-end investment companies.

c. By law can hold only taxable securities.

d. Charge their investors a management fee

13. You sell short 100 shares of stock at $150 per share. If the stock moves to $170, you have

a. a loss of $2000

b. a gain of $3000

c. a loss of $3000

d. none of the above

14. The DJIA

  1. has a divisor of 30
  2. is a price-weighted index

c. has a base number set to 10

d. is biased toward low-priced stocks

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15. With regard to the S&P 500 Index, choose the CORRECT statement.

a. It is less frequently used than the DJIA by institutional investors

b. A current value of 10000 for this index would indicate that the average price of the 500 stocks in the index is 100 times the base number

c. It is a market capitalization-weighted index of 500 large stocks

d. Stock splits and dividends are not automatically accounted for in its calculation

  1. ECNs
  1. have extended evening trading hours for many investors so that they can now trade after hours
  2. have links to all discount brokers now doing business
  3. pose no real threat to either the NYSE or to Nasdaq
  4. are not likely to have much of an impact on financial markets because the NYSE and Nasdaq have entrenched positions

17. In describing the tradeoff that investors face, which of the following statements is INCORRECT?

  1. on an expected basis for the next year, the tradeoff can be only upward sloping
  2. over long periods of financial market history, such as 50 or more years, the tradeoff is upward sloping
  3. over recent historical periods of one or two years, the tradeoff can be upward sloping or downward sloping
  4. on an expected basis for the next 10 or 15 years, the tradeoff could be either upward sloping or downward sloping

18. Intelligent investment decisions for any future period are based on

  1. the relation between realized return and risk
  2. the relation between expected return and risk
  3. expected return only
  4. a tradeoff between return and risk that is downward sloping

19. Which statement concerning the current status of the markets is INCORRECT?

  1. The Dow Jones Industrial Index has reached new highs but has not reached a level of 10,000
  2. The S&P 500 Index is currently more than 1000
  3. The American Stock Exchange accounts for roughly 4% of total volume traded among all markets
  4. Dow Jones points are not equal to dollars

20. Which of the following statement is CORRECT about closed-end investment companies?

a. they can be referred to as mutual funds

b. the NAV is typically less than or greater than the market price

c. investors buy and redeem shares through the company

d. there are more closed-end companies than open-end companies

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21. Given the expected return--risk tradeoff that exists for investment decisions, which of the following financial assets would be expected to be highest on the tradeoff?

a. AAA corporate bonds

b. small Nasdaq stocks

c. blue-chip common stocks

d. preferred stock

22. Which of the following is not a money-market security?

a. a Treasury bill

b. money market deposit account

c. a banker's acceptance

d. commercial paper

23. Which of the following is not a corporate-created equity-derivative security?

a. puts and calls

b. rights

c. convertible bonds

d. warrants

24. Which of the following statements about short sales is CORRECT?

a. short sales have a specified time limit

b. short sales on the NYSE are permitted only on an uptick

c. short sellers need only a cash account to sell short

d. the short seller incurs no costs other than brokerage costs on the typical dividend-paying NYSE stock

25. All open-end investment companies

a. charge a load fee + an expense ratio

b. charge an expense ratio, a load fee, and a redemption fee

  1. have shares that are valued at the NAV but are priced on the basis of whatever investors are willing to pay for them

d. Charge an expense ratio, and may or may not charge a load fee, a maintenance fee, and a redemption fee

26. Fidelity’s Equity-Income Fund is

a. an example of a mutual fund classified as an aggressive growth fund.

  1. a closed-end fund.
  2. an open-end investment company.
  3. an index fund.

27. The Russell 2000 is a

a. price-weighted market index used to measure small cap stocks

b. value-weighted market index used to measure large and small cap stocks

c. value-weighted index used to measure small cap stocks

d. price-weighted index used to measure mid-cap stocks

28. With regard to types of orders, select the CORRECT statement

a. a market order ensures that a transaction will be carried out

b. stop orders specify a certain price that the investor is assured of receiving

c. limit orders are the most common type of order on the NYSE

d. a market order removes all doubt about the price to be received in a transaction

  1. The state of New York issues a 30-year bond with a tax-exempt yield of 3.8% while 30year Treasury bonds are yielding 5.8%. For an investor in the 36% tax bracket, the TEY (defined in Chapter 2) for this bond is

a. is less than the comparable Treasury bond yield.

b. is greater than the comparable Treasury bond yield.

c. would be less attractive if the tax rate were higher.

d. such that an investor would be indifferent between these two alternatives.

30. If the initial margin requirement is 40 percent, and a stock sells for $40, an investor with $2000 of his own who wants to use the full $2000 in a margin transaction

a. can purchase 125 shares.

b. can purchase a maximum of 100 shares by borrowing $2000 from the broker.

c. can purchase 80 shares.

d. can purchase 200 shares by borrowing $3000 from the broker.

31. With regard to the size of equity markets, which statement is INCORRECT?

a. Nasdaq has more companies listed on it than does the NYSE

b. The Amex has only approximately 800 stocks listed

c. The NYSE has more than 5000 stocks listed

d. The total market value of all NYSE stocks exceeds the total market value of all Nasdaq stocks

32. The average expense ratio for equity mutual funds has been about:

  1. 1.79%
  2. 1.41%
  3. 0.69%
  4. 1.19%

33. Which of the following statements is CORRECT concerning direct and indirect investing?

  1. over the last 5 years, individual investors have been net sellers of stocks
  2. over the last 5 years, individual investors have decreased their indirect investing in equity funds
  3. mutual fund assets have not increased in the last few years as investors have turned more to direct investing in equities
  4. most investors should choose to do either direct investing or indirect investing, but not both

34. With regard to direct and indirect investing, choose the INCORRECT statement.

  1. Direct investing refers to the purchase of securities directly in one’s brokerage account
  2. Indirect investing refers to the purchase of investment companies, thereby letting the intermediary do the investing on behalf of the investment company owners
  3. Direct investing must be done by every investor since it is not possible to invest only indirectly
  4. Many investors do both direct and indirect investing

35. NASDAQ National Market System is

a. a self-regulating body of brokers and dealers that oversees OTC practices.

b. a combination of specialists in the auction markets and market makers in OTC stocks, combined with the up-to-the-minute reporting of trades.

c. a combination of specialists in OTC stocks and the up-to-minute reporting of trades.

d. a combination of the competing market makers in OTC stocks and a reporting of trades similar to that which occurs on the NYSE.

  1. Which statement is CORRECT with regard to closed-end investment companies?
  1. they are generally unmanaged, passive investments
  2. they are the most popular form of investment company for the typical investor
  3. if their NAV is greater than the current market price, they are said to be selling for a premium
  4. their capitalizations are fixed unless a new public offering of stock is made

37. Ex ante, the return-risk tradeoff available to investors

a. can only be a flat line in return-risk space.

b. can only be upward sloping in return-risk space.

c. can only be downward sloping in return-risk space.

d. could be downward sloping in return-risk space.

38. With regard to market indexes, choose the INCORRECT statement

a. The Dow Jones World Stock Index is a price-weighted index

b. The Dow Jones Equity Market Index is capitalization-weighted

c. The Russell indexes are capitalization-weighted

d. The S&P indexes are capitalization-weighted

39. If the initial margin requirement is 55% and the maintenance margin requirement is 30%, what is the most that could be borrowed in order to buy the stock by an investor who wishes to purchase 100 shares of the stock which has a current price of $15.75?

a. $708.75

b. $837.50

c. $866.25

d. $753.75

40. With regard to mutual funds, choose the INCORRECT statement

a. money market funds are a form of mutual funds

b. all mutual funds typically charge a management fee

c. the NAV of a mutual fund is calculated at least once daily

d. some mutual funds trade on exchanges

41. On August 20, 1999, the Dow Jones Industrial Average declined about 150 points. The divisor for this index was .205 at this time. GM declined $15.375 to $115.75. Based on this information, choose the CORRECT statement.

a. Investors holding a diversified portfolio of stocks lost about $150 that day.

b. GM accounted for about 15.375/150 of the decline.

c. Percentage wise, the loss on the Dow was larger than the loss on GM that day

d. GM alone accounted for about one-half of the decline in the Dow for that day

42. A futures contract

a. is always exercised by the buyer.

b. is mainly used for hedging purposes.

c. is mainly used for speculative purposes.

d. requires an initial margin of 20% or more to be paid.

43. A call is

a. a short-term option to buy at a specified price within a specified time

b. a short-term option to sell at a specified price within a specified time

c. a long-term option to buy issued by a corporation

d. a long-term option to buy stock issued by other investors

Assume that Intel is trading around $92. The bid price is 91 7/8, and the asked price is $92. You own some Intel shares and are considering various trades of Intel at this time.

Use this information to answer the next two questions:

44. Assume you are unwilling to pay more than 91 1/2 for Intel but would like to buy some more at that price. In order to attempt to purchase at this price you should place

a. a market order because it assures you of buying at this price

b. a market order when the stock trades at 91 1/2 because that will assure you of getting Intel at that price when your order goes in and is executed

c. a stop order at 91 1/2

d. a limit order to buy at 91 1/2

  1. You instruct your broker to sell your existing shares at a price that will assure you of at least 93. This is

a. a market order

b. a limit order to sell

c. a stop order to buy

d. a stop order to sell

46. With regard to margin:

  1. The NYSE establishes the initial margin
  2. The maintenance margin is set by the Board of Governors of the Federal Reserve System
  3. The initial margin is set by the Federal Reserve and the maintenance margin is set by brokers and the exchanges
  4. The maintenance margin requirement has been 50% for many years
  1. Which of the following statements is INCORRECT concerning the S&P 500 Index?
  1. It accounts for approximately 70% of the total value of the U. S. equity market
  2. The base is 1941-43 = 10
  3. More than half of the total market value of the index is accounted for by only 10 stocks
  4. All stock dividends and splits are automatically accounted for
  1. The DJIA includes how many stocks?
  1. 10
  2. 30
  3. 50
  4. 70

49. With regard to markets, choose the CORRECT statement:

  1. Secondary markets exist for the trading of new and existing securities
  2. Investment bankers are prohibited from joining together to sell an issue of securities
  3. If the issuer is selling securities for the first time, these are referred to as seasoned offers
  4. All secondary equity markets are either auction markets or negotiated markets

50. Which security is typically riskiest to investors?

  1. corporate bond
  2. common stock
  3. long-term warrant

d. call option

PRACTICE QUESTIONS Covers>Background Chapters 1-5 SET 2

1. Given the expected return--risk tradeoff that exists for investment decisions, which of the following financial assets would be expected to be lowest on the tradeoff?

a. AAA corporate bonds

b. Treasury bonds

c. blue-chip common stocks

d. preferred stock

2. Risk is best thought of as

a. the chance that the actual return will be zero or negative

b. the chance that the actual return will differ from the expected return

c. the chance that the expected return will be lower than what investors demand

d. the chance that the expected return will be incorrectly estimated

3. An example of a nonmarketable security is

a. a Treasury bill

b. a government savings bond

c. a banker's acceptance

d. commercial paper

4. Which of the following is a corporate-created equity-derivative security?

a. puts and calls

b. futures contracts

c. commercial paper

d. warrants

5. Which of the following statements about common stock is CORRECT?

a. it has a specified return in the form of dividends that must be paid annually

b. stockholders have specific promises to receive cash from the corporation because of the dividends

c. common stock has no specified return that must be paid

d. common stockholders are paid ahead of the preferred stockholders.

6. If the initial margin requirement is 40%, and the maintenance margin is 30%, an investor purchasing 200 shares of a stock selling at $100 must put up, to buy the stock

a. $12,000

b. $ 8,000

c. $10,000

  1. none of the above

7. Which of the following statements is INCORRECT?

a. The New York Stock Exchange is an auction market

b. Nasdaq is an example of an agency auction market

c. Specialists act as both brokers and dealers

d. Nasdaq is a negotiated market while the NYSE is an auction market.

  1. With regard to Vanguard’s Tax Exempt Bond Funds discussed in class, choose the INCORRECT statement.

a. The long-term bond fund over a period of years should return more than the short-term bond fund

  1. The money market fund’s Total Return is comprised of the capital return and the income return
  2. The long-term portfolio should show capital returns that have a wider variance than the capital returns for the short-term portfolio
  3. The short-term portfolio over a period of years shows both positive and negative capital returns

9. You sell short 150 shares of stock at $150 per share. If the stock price moves to $130, you have

a. a loss of $2000

b. a gain of $3000

c. a loss of $3000

d. none of the above

10. Which of the following statements about short sales is CORRECT?

a. short sales have a specified time limit

b. short sales on the NYSE are permitted only on an uptick