Question 1

The current yield on a $5,000, 8 percent coupon bond selling for $4,000 is

1. 5%.
2. 8%.
3. 10%.
4. 20%.
5. none of the above.Question 2

Question 2

An advantage of providing multiple financial services within one financial institution is that it

1. lowers information costs.
2. develops broader long-term relationships with customers
3. both A and B of the above.
4. none of the above.Question 3

Question 3

The primary function of investment banks is to

1. extend credit to stock brokers and dealers.
2. extend credit to investors.
3. extend credit to corporations.
4. help corporations issue new securities.

Question 4

(I) Securities that have an original maturity greater than one year are traded in capital markets.
(II) The best known capital market securities are stocks and bonds.

1. (I) is true, (II) false.
2. (I) is false, (II) true.
3. Both are false.
4. Both are true.

Question 5

A weakness of the PE approach to valuing stock is that it is

1. difficult to estimate the constant growth rate of a firm's dividends.
2. difficult to estimate the required return on equity.
3. based on industry averages rather than firm-specific factors.
4. difficult to predict how much a firm will pay in dividends.

Question 6

Which of the following is not an objective of the Securities and Exchange Commission?

1. require firms to provide specific information to investors
2. regulate major participants in securities markets
3. maintain integrity of the securities markets
4. advise investors about which particular stocks are good buys

Question 7

If a firm is due to be paid in euros in two months, to hedge against exchange rate risk the firm should

1. sell foreign exchange futures short.
2. buy foreign exchange futures long.
3. stay out of the exchange futures market.
4. do none of the above.

Question 8

A put option gives the seller the ________ to ________ the underlying security.

1. right; buy
2. obligation; buy
3. right; sell
4. obligation; sell

 
Question 9

A stock's value falls if the ________ rises.

1. expected future price
2. required return on equity
3. current price
4. dividend

Question 10

A call option gives the owner the ________ to ________ the underlying security.

1. right; buy
2. obligation; buy
3. right; sell
4. obligation; sell

Question 11

A change in the current yield ________ signals a change in the same direction of the yield to maturity.

1. always
2. never
3. rarely
4. often

Question 12

Which combination of activities within a single financial institution is least likely to lead to conflicts of interest?

1. consumer lending and business lending
2. commercial banking and investment banking
3. auditing and management advisory services
4. assessment of credit quality and consulting

Question 13

(I) Firms and individuals use the capital markets for long-term investments.
(II) Capital markets provide an alternative to investment in assets such as real estate and gold.

1. Both are false.
2. Both are true.
3. (I) is true, (II) false.
4. (I) is false, (II) true.

Question 14

The prices of Treasury notes, bonds, and bills are quoted

1. as a multiple of the annual interest paid.
2. as a percentage of $100 face value.
3. as a percentage of the coupon rate.
4. as a percentage of the previous day's closing value.

Question 15

Bad firms

1. do not have an incentive to make themselves look good.
2. will slant the information they are required to transmit to the public.
3. both A and B of the above.
4. neither A nor B of the above.

Question 16

The PE ratio approach to valuing stock is especially useful for valuing

1. both A and B of the above.
2. privately held firms.
3. firms that don't pay dividends.
4. neither A nor B of the above.

Question 17

Governments never issue stock because

1. they cannot sell ownership claims.
2. the Constitution expressly forbids it.
3. both A and B of the above.
4. neither A nor B of the above.

Question 18

When an old bond's market value is above its par value, the bond is selling at a ________. This occurs because the old bond's coupon rate is ________ the coupon rates of new bonds with similar risk.

1. premium; above
2. premium; below
3. discount; above
4. discount; below

Question 19

(I) Capital market securities fall into two categories: bonds and stocks.
(II) Long-term bonds include government bonds and long-term notes, municipal bonds, and corporate bonds.

1. (I) is true, (II) false.
2. (I) is false, (II) true.
3. Both are false.
4. Both are true.

Question 20

By selling short a futures contract of $100,000 at a price of 96, you are agreeing to deliver ________ face value securities for ________.

1. $100,000; $100,000
2. $100,000; $96,000
3. $96,000; $100,000
4. $100,000; $104,167

Question 21

If you buy an option to sell Treasury futures at 115, and at expiration the market price is 110,

1. the call will not be exercised.
2. the call will be exercised.
3. the put will not be exercised.
4. the put will be exercised.

Question 22

The current yield on a $6,000, 10 percent coupon bond selling for $5,000 is

1. 15%.
2. 10%.
3. 5%.
4. 12%.

Question 23

By buying a long $100,000 futures contract for 115, you agree to pay ________ for ________ face value securities.

1. $115,000; $100,000
2. $100,000; $115,000
3. $86,956; $100,000
4. $86,956; $115,000

Question 24

________ perform their main function in the primary market for securities and ________ perform
their main function in the secondary market.

1. Securities brokers; securities dealers
2. Securities dealers; securities brokers
3. Investment banks; securities brokers and dealers
4. Securities brokers and dealers; investment banks

Question 25

(I) There are two types of exchanges in the secondary market for capital securities: organized exchanges and over-the-counter exchanges.
(II) When firms sell securities for the very first time, the issue is an initial public offering.

1. Both are true.
2. (I) is true, (II) false.
3. Both are false.
4. (I) is false, (II) true.