Part 1

Question 1: Which of the following statements is CORRECT?

• The New York Stock Exchange is an auction market with a physical location.
• Capital market transactions involve only the purchase and sale of equity securities, i.e., common stocks.
• If an investor sells shares of stock through a broker, then this would be a primary market transaction.
• Consumer automobile loans are evidenced by legal documents called "promissory notes," and these individual notes are traded in the money market.
• While the distinctions are blurring as investment banks are today buying commercial banks, and vice versa, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

Question 2: Which of the following statements is CORRECT?

• Capital market instruments include both long-term debt and common stocks.
• An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift.
• The NYSE does not exist as a physical location; rather, it represents a loose collection of dealers who trade stocks electronically.
• If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.
• While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.

Question 3: You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following statements best describes this transaction?

• This is an example of an exchange of physical assets.
• This is an example of a primary market transaction.
• This is an example of a direct transfer of capital.
• This is an example of a money market transaction.
• This is an example of a derivatives market transaction

Question 4: Which of the following statements is CORRECT?

• While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
• A security whose value is derived from the price of some other "underlying" asset is called a liquid security.
• Money market mutual funds usually invest most of their money in a well-diversified portfolio of liquid common stocks.
• Money markets are markets for common stocks and long-term debt.
• The NYSE operates as an auction market, whereas the Nasdaq is a dealer market.

Question 5: Money markets are markets for

• Foreign stocks.
• Consumer automobile loans.
• U.S. stocks.
• Short-term debt securities.
• Long-term bonds.

Question 6: Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?

• Corporations generally find it relatively difficult to raise large amounts of capital.
• Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership.
• Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.
• Corporate investors are exposed to unlimited liability.
• Corporations generally face relatively few regulations.

Question 7: You recently sold 200 shares of Apple stock to your brother. The transfer was made through a broker, and the trade occurred on the NYSE. This is an example of:

• An over-the-counter market transaction
• A futures market transaction.
• A primary market transaction.
• A secondary market transaction.
• A money market transaction.

Question 8: Which of the following statements is CORRECT?

• If expected inflation increases, interest rates are likely to increase.
• If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.
• If companies have fewer good investment opportunities, interest rates are likely to increase.
• Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.
• Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.

Question 9: Which of the following statements is CORRECT?

• The maximum federal tax rate on personal income in 2010 was 50%.
• Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible.
• Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate, which in 2010 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.
• The maximum federal tax rate on corporate income in 2010 was 50%.
• Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes.

Question 10: Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

• The company purchases a new piece of equipment.
• The company repurchases common stock.
• The company pays a dividend.
• The company issues new common stock.
• The company gives customers more time to pay their bills.

PART 2

Question 1: JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

• $1,781.53
• $1,870.61
• $1,964.14
• $2,062.34
• $2,165.46

Question 2: Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

• The periodic rate of interest is 8% and the effective rate of interest is also 8%.
• The periodic rate of interest is 2% and the effective rate of interest is 4%.
• The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
• The periodic rate of interest is 4% and the effective rate of interest is less than 8%.
• The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.

Question 3: You are considering two equally risky annuities, each of which pays $15,000 per year for 20 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

• If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.
• The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.
• The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.
• The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
• The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.

Question 4: Which of the following statements is CORRECT?

• If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.
• The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
• If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
• The cash flows for an annuity due must all occur at the ends of the periods.
• The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

Question 5: A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

• The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity.
• The periodic interest rate is greater than 3%.
• The periodic rate is less than 3%.
• The present value would be greater if the lump sum were discounted back for more periods.
• The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.

Question 6: At the end of 10 years, which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.

• Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).
• Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).
• Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).
• Investment D pays $2,500 at the end of 10 years (just one payment).
• Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments).

Question 7: Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

• Market interest rates rise sharply.
• Market interest rates decline sharply.
• The company's financial situation deteriorates significantly.
• Inflation increases significantly.
• The company's bonds are downgraded.

Question 8: Which of the following statements is CORRECT?

• All else equal, long-term bonds have less interest rate price risk than short-term bonds.
• All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.
• All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.
• All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.
• All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.

Question 9: A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is NOT CORRECT?

• The bond's yield to maturity is 9%.
• The bond's current yield is 9%.
• If the bond's yield to maturity remains constant, the bond will continue to sell at par.
• The bond's current yield exceeds its capital gains yield.
• The bond's expected capital gains yield is positive.

Question 10: Which of the following statements is CORRECT?

• The total yield on a bond is derived from dividends plus changes in the price of the bond.
• Bonds are riskier than common stocks and therefore have higher required returns.
• Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.
• The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.
• If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.