Test Bank For Essentials of Investments, 8th Edition

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ch01Student: ___________________________________________________________________________1.Financial assets represent _____ of total assets of U.S. households.A. over 60%B. over 90%C. under 10%D. about 30%2.Real assets in the economy include all but which one of the following?A. LandB. BuildingsC. Consumer durablesD. Common stock3.Net worth represents _____ of the liabilities and net worth of commercial banks.A. about 51%B. about 91%C. about 11%D. about 31%4.According to theFlow of Funds Accounts of the United States,the largest single asset of U.S. householdsis ___.A. mutual fund sharesB. real estateC. pension reservesD. corporate equity5.According to theFlow of Funds Accounts of the United States,the largest liability of U.S. households is________.A. mortgagesB. consumer creditC. bank loansD. gambling debts6.____ isnota derivative security.A. A share of common stockB. A call optionC. A futures contractD. None of these options (All of the answers are derivative securities.)7.According to theFlow of Funds Accounts of the United States,the largest financial asset of U.S.households is ____.A. mutual fund sharesB. corporate equityC. pension reservesD. personal trusts

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8.Active trading in markets and competition among securities analysts helps ensure that:I. Security prices approach informational efficiencyII. Riskier securities are priced to offer higher potential returnsIII. Investors are unlikely to be able to consistently find under- or overvalued securitiesA. I onlyB. I and II onlyC. II and III onlyD. I, II, and III9.The material wealth of society is determined by the economy's _________, which is a function of theeconomy's _________.A. investment bankers; financial assetsB. investment bankers; real assetsC. productive capacity; financial assetsD. productive capacity; real assets10. Which of the following isnota money market security?A. U.S. Treasury billB. 6-month maturity certificate of depositC. Common stockD. Bankers' acceptance11. __________ assets generate net income to the economy, and __________ assets define allocation ofincome among investors.A. Financial, financialB. Financial, realC. Real, financialD. Real, real12. Which of the following are financial assets?I. Debt securitiesII. Equity securitiesIII. Derivative securitiesA. I onlyB. I and II onlyC. II and III onlyD. I, II, and III13. __________ are examples of financial intermediaries.A. Commercial banksB. Insurance companiesC. Investment companiesD. All of these options14.Asset allocationrefers to _________.A. the allocation of the investment portfolio across broad asset classesB. the analysis of the value of securitiesC. the choice of specific assets within each asset classD. none of these options15. Which one of the following best describes the purpose of derivatives markets?A. Transferring risk from one party to anotherB. Investing for a short time period to earn a small rate of returnC. Investing for retirementD. Earning interest income

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16. More than _____________ of currency is traded each day in the market for foreign exchange.A. $300 millionB. $1 billionC. $30 billionD. $1 trillion17.Security selectionrefers to the ________.A. allocation of the investment portfolio across broad asset classesB. analysis of the value of securitiesC. choice of specific securities within each asset classD. top-down method of investing18. Which of the following is an example of an agency problem?A. Managers engage in empire building.B. Managers protect their jobs by avoiding risky projects.C. Managers over consume luxuries such as corporate jets.D. All of these options are examples of agency problems.19. _____ is a mechanism for mitigating potential agency problems.A. Tying income of managers to success of the firmB. Directors defending top managementC. Antitakeover strategiesD. The straight voting method of electing the board of directors20. __________ is (are) real assets.A. BondsB. Production equipmentC. StocksD. Commercial paper21. __________ portfolio construction starts with selecting attractively priced securities.A. Bottom-upB. Top-downC. Upside-downD. Side-to-side22. In a market economy, capital resources are primarily allocated by ____________.A. governmentsB. the SECC. financial marketsD. investment bankers23. __________ represents an ownership share in a corporation.A. A call optionB. Common stockC. A fixed-income securityD. Preferred stock24. The value of a derivative security _________.A. depends on the value of another related securityB. affects the value of a related securityC. is unrelated to the value of a related securityD. can be integrated only by calculus professors25. Commodity and derivative markets allow firms to adjust their _________.A. management stylesB. focus from their main line of business to their investment portfoliosC. ways of doing business so that they'll always have positive returnsD. exposure to various business risks

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26. __________ portfolio management calls for holding diversified portfolios without spending effort orresources attempting to improve investment performance through security analysis.A. ActiveB. MomentumC. PassiveD. Market-timing27. Financial markets allow for all but which one of the following?A. Shift consumption through time from higher-income periods to lowerB. Price securities according to their riskinessC. Channel funds from lenders of funds to borrowers of fundsD. Allow most participants to routinely earn high returns with low risk28. Financial intermediaries exist because small investors cannot efficiently _________.A. diversify their portfoliosB. gather informationC. monitor their portfoliosD. all of these options29. Methods of encouraging managers to act in shareholders' best interest include:I. Threat of takeoverII. Proxy fights for control of the board of directorsIII. Tying managers' compensation to stock price performanceA. I onlyB. I and II onlyC. II and III onlyD. I, II, and III30. Firms that specialize in helping companies raise capital by selling securities to the public are called_________.A. pension fundsB. investment banksC. savings banksD. REITs31. In securities markets, there should be a risk-return trade-off with higher-risk assets having _________expected returns than lower-risk assets.A. higherB. lowerC. the sameD. The answer cannot be determined from the information given.32. When the market is more optimistic about a firm, its share price will ______; as a result, it will need toissue _______ shares to raise funds that are needed.A. rise; fewerB. fall; fewerC. rise; moreD. fall; more33.Security selectionrefers to _________.A. choosing specific securities within each asset classB. deciding how much to invest in each asset classC. deciding how much to invest in the market portfolio versus the riskless assetD. deciding how much to hedge

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34. An example of a derivative security is _________.A. a common share of General MotorsB. a call option on Intel stockC. a Ford bondD. a U.S. Treasury bond35. __________ portfolio construction starts with asset allocation.A. Bottom-upB. Top-downC. Upside-downD. Side-to-side36. Which one of the following firms falsely claimed to have a $4.8 billion bank account at Bank of Americaand vastly understated its debts, eventually resulting in the firm's bankruptcy?A. WorldComB. EnronC. ParmalatD. Global Crossing37. Debt securities promise:I. A fixed stream of incomeII. A stream of income that is determined according to a specific formulaIII. A share in the profits of the issuing entityA. I onlyB. I or II onlyC. I and III onlyD. II or III only38. The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of thefollowing?A. Required that corporations have more independent directorsB. Required that the CFO personally vouch for the corporation's financial statementsC. Required that firms could no longer employ investment bankers to sell securities to the publicD. Required the creation of a new board to oversee the auditing of public companies39. The success of common stock investments depends on the success of _________.A. derivative securitiesB. fixed-income securitiesC. the firm and its real assetsD. government methods of allocating capital40. The historical average rate of return on large company stocks since 1926 has been _____.A. 5%B. 8%C. 12%D. 20%41. The average rate of return on U.S. Treasury bills since 1926 was _________.A. less than 1%B. less than 3%C. less than 4%D. less than 7%

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42. An example of a real asset is:I. A college educationII. Customer goodwillIII. A patentA. I onlyB. II onlyC. I and III onlyD. I, II, and III43. The 2002 law designed to improve corporate governance is titled the _____.A. Pension Reform ActB. ERISAC. Financial Services Modernization ActD. Sarbanes-Oxley Act44. Which of the following isnota financial intermediary?A. a mutual fundB. an insurance companyC. a real estate brokerage firmD. a savings and loan company45. The combined liabilities of American households represent approximately __________ of combinedassets.A. 11%B. 19%C. 25%D. 33%46. In 2011 real assets represented approximately __________ of the total asset holdings of Americanhouseholds.A. 32%B. 42%C. 48%D. 55%47. In 2011 mortgages represented approximately __________ of total liabilities and net worth of Americanhouseholds.A. 12%B. 14%C. 28%D. 42%48. Liabilities equal approximately _____ of total assets for nonfinancial U.S. businesses.A. 10%B. 25%C. 48%D. 75%49. Which of the following isnotan example of a financial intermediary?A. Goldman SachsB. Allstate InsuranceC. First Interstate BankD. IBM

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50. Real assets represent about ____ of total assets for commercial banks.A. 1%B. 15%C. 25%D. 40%51. Money market securities are characterized by:I. Maturity less than 1 yearII. Safety of the principal investmentIII. Low rates of returnA. I onlyB. I and II onlyC. I and III onlyD. I, II, and III52. After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of______.A. asset allocationB. security analysisC. top-down portfolio managementD. passive management53. After considering current market conditions, an investor decides to place 60% of her funds in equities andthe rest in bonds. This is an example of _____.A. asset allocationB. security analysisC. top-down portfolio managementD. passive management54. Suppose an investor is considering one of two investments that are identical in all respects except forrisk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to_____.A. earn no more than the Treasury-bill rate on either security.B. pay less for the security that has higher risk.C. pay less for the security that has lower risk.D. earn more if interest rates are lower.55. The efficient market hypothesis suggests that _______.A. active portfolio management strategies are the most appropriate investment strategiesB. passive portfolio management strategies are the most appropriate investment strategiesC. either active or passive strategies may be appropriate, depending on the expected direction of themarketD. a bottom-up approach is the most appropriate investment strategy56. In a perfectly efficient market the best investment strategy is probably _____.A. an active strategy.B. a passive strategy.C. asset allocation.D. market timing.57. Market signals will help to allocate capital efficiently only if investors are acting _____.A. on the basis of their individual hunches.B. as directed by financial experts.C. as dominant forces in the economy.D. on accurate information.

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58. Which of the following is (are) true about hedge funds?I. They are open to institutional investors.II. They are open to wealthy individuals.III. They are more likely than mutual funds to pursue simple strategies.A. I and II onlyB. I and III onlyC. II and III onlyD. I, II, and III59. Venture capital is _________.A. frequently used to expand the businesses of well-established companiesB. supplied by venture capital funds and individuals to start-up companiesC. illegal under current U.S. lawsD. most frequently issued with the help of investment bankers60. Individuals may find it more advantageous to purchase claims from a financial intermediary rather thandirectly purchasing claims in capital markets because:I. Intermediaries are better diversified than most individualsII. Intermediaries can exploit economies of scale in investing that individual investors cannotIII. Intermediated investments usually offer higher rates of return than direct capital market claimsA. I onlyB. I and II onlyC. II and III onlyD. I, II, and III61. Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft inexchange for 1,000 shares of Microsoft common stock. Surf City Software has exchanged a _____ assetfor a _____ asset in this transaction.A. real; realB. financial; financialC. real; financialD. financial; real62. Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to payback the loan over 5 years. In this transaction, _____.A. a new financial asset was createdB. a financial asset was traded for a real assetC. a financial asset was destroyedD. a real asset was created63. Which of the following firms wasnotengaged in a major accounting scandal between 2000 and 2005?A. General ElectricB. ParmalatC. EnronD. WorldCom64. Accounting scandals can often be attributed to a particular concept in the study of finance known as the_____.A. agency problemB. risk-return trade-offC. allocation of riskD. securitization

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65. An intermediary that pools and manages funds for many investors is called ______.A. an investment companyB. a savings and loanC. an investment bankerD. a commercial bank66. Financial institutions that specialize in assisting corporations in primary market transactions are called_______.A. mutual fundsB. investment bankersC. pension fundsD. globalization specialists67. When a pass-through mortgage security is issued, what does the issuing agency expect to receive?A. The amount of the original loan plus a servicing feeB. The principal and interest that are paid by the homeownerC. The principal and interest that are paid by the homeowner, minus a servicing feeD. The interest paid by the homeowner, plus a servicing fee68. In 2008 the largest corporate bankruptcy in U.S. history involved the investment banking firm of______.A. Goldman SachsB. Lehman BrothersC. Morgan StanleyD. Merrill Lynch69. The inability of shareholders to influence the decisions of managers, despite overwhelming shareholdersupport, is a breakdown in what process or mechanism?A. AuditingB. Public financeC. Corporate governanceD. Public reporting70. Real assets are ______.A. assets used to produce goods and servicesB. always the same as financial assetsC. always equal to liabilitiesD. claims on a company's income71. A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________.A. private equity investmentsB. securitizationC. negative analyst recommendationsD. online trading72. In recent years the greatest dollar amount of securitization occurred for which type of loan?A. Home mortgagesB. Credit card debtC. Automobile loansD. Equipment leasing73. Which of the following is (are) true about nonconforming mortgage loans?A. They are also known assubprime loans.B. They have higher default risk than conforming loans.C. They were able to be offered without due diligence.D. All of these options are true.

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74. The systemic risk that led to the financial crisis of 2008 was increased by _____.A. collateralized debt obligationsB. subprime mortgagesC. credit default swapsD. all of the options75. An investment adviser has decided to purchase gold, real estate, stocks, and bonds in equal amounts. Thisdecision reflects which part of the investment process?A. Asset allocationB. Investment analysisC. Portfolio analysisD. Security selection

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ch01 Key1. A2. D3. C4. B5. A6. A7. C8. D9. D10. C11. C12. D13. D14. A15. A16. D17. C18. D19. A20. B21. A22. C23. B24. A25. D26. C27. D28. D29. D30. B31. A32. A33. A34. B35. B36. C

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37. B38. C39. C40. C41. C42. D43. D44. C45. B46. A47. B48. C49. D50. A51. D52. B53. A54. B55. B56. B57. D58. A59. B60. B61. C62. A63. A64. A65. A66. B67. C68. B69. C70. A71. B72. A73. D74. D

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75. A

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ch01 SummaryCategory# of QuestionsAACSB: Analytic75Blooms: Remember75Bodie - Chapter 0175Difficulty: 1 Easy33Difficulty: 2 Medium37Difficulty: 3 Hard5Learning Objective: 01-02 Distinguish between real assets and financial assets.32Learning Objective: 01-03 Explain the economic functions of financial markets and how various securities are related to the governance of the corporation.19Learning Objective: 01-04 Describe the major steps in the construction of an investment portfolio.15Learning Objective: 01-05 Identify different types of financial markets and the major participants in each of those markets.3Learning Objective: 01-06 Explain the causes and consequences of the financial crisis of 2008.6Topic: Efficient Markets1Topic: Financial Assets8Topic: Financial Intermediaries10Topic: Financial Markets and the Economy19Topic: Real Assets versus Financial Assets17Topic: The Financial Crisis of 20086Topic: The Investment Process14

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ch02Student: ___________________________________________________________________________1.Which of the following isnota money market instrument?A. Treasury billB. Commercial paperC. Preferred stockD. Bankers' acceptance2.T-bills are issued with initial maturities of:I. 4 weeksII. 16 weeksIII. 26 weeksIV. 32 weeksA. I and II onlyB. I and III onlyC. I, II, and III onlyD. I, II, III, and IV3.When computing the bank discount yield, you would use ____ days in the year.A. 260B. 360C. 365D. 3664.A dollar-denominated deposit at a London bank is called _____.A. eurodollarsB. LIBORC. fed fundsD. bankers' acceptance5.Money market securities are sometimes referred to ascash equivalentsbecause _____.A. they are safe and marketableB. they are not liquidC. they are high-riskD. they are low-denomination6.The most marketable money market security is _____.A. Treasury billsB. bankers' acceptancesC. certificates of depositD. common stock7.The minimumtick size, or spread between prices in the Treasury bond market, isA. 1/8 of a point.B. 1/16 of a point.C. 1/32 of a point.D. 1/64 of a point.8.An investor in a T-bill earns interest by _________.A. receiving interest payments every 90 daysB. receiving dividend payments every 30 daysC. converting the T-bill at maturity into a higher-valued T-noteD. buying the bill at a discount from the face value to be received at maturity

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9.______ wouldnotbe included in the EAFE index.A. AustraliaB. CanadaC. FranceD. Japan10. _____ is considered to be an emerging market country.A. FranceB. NorwayC. BrazilD. Canada11. Which one of the following is a true statement?A. Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors.B. Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock.C. Preferred stockholders have voting power.D. Investors can sue managers for nonpayment of preferred dividends.12. The bid price of a Treasury bill is _________.A. the price at which the dealer in Treasury bills is willing to sell the billB. the price at which the dealer in Treasury bills is willing to buy the billC. greater than the ask price of the Treasury bill expressed in dollar termsD. the price at which the investor can buy the Treasury bill13. The German stock market is measured by which market index?A. FTSEB. Dow Jones 30C. DAXD. Nikkei14. Deposits of commercial banks at the Federal Reserve are called _____.A. bankers' acceptancesB. federal fundsC. repurchase agreementsD. time deposits15. Which of the following isnota true statement regarding municipal bonds?A. A municipal bond is a debt obligation issued by state or local governments.B. A municipal bond is a debt obligation issued by the federal government.C. The interest income from a municipal bond is exempt from federal income taxation.D. The interest income from a municipal bond is exempt from state and local taxation in the issuing state.16. Which of the following isnota characteristic of a money market instrument?A. LiquidityB. MarketabilityC. Low riskD. Maturity greater than 1 year17. An individual who goes short in a futures position _____.A. commits to delivering the underlying commodity at contract maturityB. commits to purchasing the underlying commodity at contract maturityC. has the right to deliver the underlying commodity at contract maturityD. has the right to purchase the underlying commodity at contract maturity18. Which of the following isnota nickname for an agency associated with the mortgage markets?A. Fannie MaeB. Freddie MacC. Sallie MaeD. Ginnie Mae

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19. Commercial paper is a short-term security issued by __________ to raise funds.A. the Federal ReserveB. the New York Stock ExchangeC. large well-known companiesD. all of these options20. The maximum maturity on commercial paper is _____.A. 270 daysB. 180 daysC. 90 daysD. 30 days21. Which one of the following is a true statement regarding 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. It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange.D. It is a value-weighted average of all stocks traded on the New York Stock Exchange.22. Treasury bills are financial instruments issued by __________ to raise funds.A. commercial banksB. the federal governmentC. large corporationsD. state and city governments23. Which of the following are true statements about T-bills?I. T-bills typically sell in denominations of $10,000.II. Income earned on T-bills is exempt from all federal taxes.III. Income earned on T-bills is exempt from state and local taxes.A. I onlyB. I and II onlyC. I and III onlyD. I, II, and III24. A bond that has no collateral is called a _________.A. callable bondB. debentureC. junk bondD. mortgage25. A __________ gives its holder the right to sell an asset for a specified exercise price on or before aspecified expiration date.A. call optionB. futures contractC. put optionD. interest rate swap26. A T-bill quote sheet has 90-day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has a $10,000 facevalue, an investor could buy this bill for _____.A. $10,000B. $9,878.50C. $9,877D. $9,880.16

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27. Which one of the following is a true statement regarding corporate bonds?A.A corporate callable bond gives its holder the right to exchange it for a specified number of thecompany's common shares.B. A corporate debenture is a secured bond.C.A corporate convertible bond gives its holder the right to exchange it for a specified number of thecompany's common shares.D. Holders of corporate bonds have voting rights in the company.28. The yield on tax-exempt bonds is ______.A. usually less than 50% of the yield on taxable bondsB. normally about 90% of the yield on taxable bondsC. greater than the yield on taxable bondsD. less than the yield on taxable bonds29. __________ isnota money market instrument.A. A certificate of depositB. A Treasury billC. A Treasury bondD. Commercial paper30. An investor buys a T-bill at a bank discount quote of 4.80 with 150 days to maturity. The investor's actualannual rate of return on this investment is _____.A. 4.8%B. 4.97%C. 5.47%D. 5.74%31. The U.K. stock index is the _________.A. DAXB. FTSEC. GSED. TSE32. A __________ gives its holder the right to buy an asset for a specified exercise price on or before aspecified expiration date.A. call optionB. futures contractC. put optionD. interest rate swap33. Which one of the following provides the best example of securitization?A. Convertible bondB. Call optionC. Mortgage pass-through securityD. Preferred stock34. Which of the following indexes are market value-weighted?I. The NYSE CompositeII. The S&P 500III. The Wilshire 5000A. I and II onlyB. II and III onlyC. I and III onlyD. I, II, and III

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35. The interest rate charged by large banks in London to lend money among themselves is called_________.A. the prime rateB. the discount rateC. the federal funds rateD. LIBOR36. A firm that has large securities holdings and wishes to raise money for a short length of time may be ableto find the cheapest financing from which of the following?A. Reverse repurchase agreementB. Bankers' acceptanceC. Commercial paperD. Repurchase agreement37. Currently, the Dow Jones Industrial Average is computed by _________.A. adding the prices of 30 large "blue-chip" stocks and dividing by 30B. calculating the total market value of the 30 firms in the index and dividing by 30C. measuring the current total market value of the 30 stocks in the index relative to the total value on theprevious dayD.adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits andlarge stock dividends38. An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and6.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipaland corporate bonds would be, respectively, _____.A. 5% and 6.4%B. 5% and 5.44%C. 4.25% and 6.4%D. 5.75% and 5.44%39. If a Treasury note has a bid price of $996.25, the quoted bid price in theWall Street Journalwould be_________.A. 99:25B. 99:63C. 99:20D. 99:0840. TIPS are ______.A. Treasury bonds that pay no interest and are sold at a discountB. U.K. bonds that protect investors from default riskC. securities that trade on the Toronto stock indexD. Treasury bonds that protect investors from inflation41. The price quotations of Treasury bonds in theWall Street Journalshow a bid price of 102:12 and an askprice of 102:14. If you sell a Treasury bond, you expect to receive _________.A. $1,024.75B. $1,024.38C. $1,023.75D. $1,022.5042. The Dow Jones Industrial Average is _________.A. a price-weighted averageB. a value weight and averageC. an equally weighted averageD. an unweighted average

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43. Investors will earn higher rates of returns on TIPS than on equivalent default-risk standard bonds if_______________.A. inflation is lower than anticipated over the investment periodB. inflation is higher than anticipated over the investment periodC. the U.S. dollar increases in value against the euroD. the spread between commercial paper and Treasury securities remains low44. Preferred stock is like long-term debt in that ___________.A. it gives the holder voting power regarding the firm's managementB. it promises to pay to its holder a fixed stream of income each yearC. the preferred dividend is a tax-deductible expense for the firmD. in the event of bankruptcy preferred stock has equal status with debt45. Which of the following doesnotapproximate the performance of a buy-and-hold portfolio strategy?A. An equally weighted indexB. A price-weighted indexC. A value-weighted indexD. All of these options (Weights are not a factor in this situation.)46. In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs _________.A. automaticallyB. by adjusting the divisorC. by adjusting the numeratorD. by adjusting the market value weights47. Suppose the market prices of the 30 stocks in the Dow Jones Industrial Average all change by the samedollar amount on a given day. Assuming there are no stock splits, which stock will have the greatestimpact on the average?A. The one with the highest priceB. The one with the lowest priceC. All 30 stocks will have the same impact.D. The answer cannot be determined from the information given.48. A bond issued by the state of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket, thisbond would provide you with an equivalent taxable yield of _________.A. 4.5%B. 7.25%C. 8.68%D. none of these options49. The purchase of a futures contract gives the buyer _________.A. the right to buy an item at a specified priceB. the right to sell an item at a specified priceC. the obligation to buy an item at a specified priceD. the obligation to sell an item at a specified price50. Ownership of a put option entitles the owner to the __________ to ___________ a specific stock, on orbefore a specific date, at a specific price.A. right; buyB. right; sellC. obligation; buyD. obligation; sell

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51. An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond or a corporatebond. She looks up municipal bond yields (rm) but wishes to calculate the taxable equivalent yieldr.Theformula she should use is given by ______.A.r=rm× (1 - 28%)B.r=rm/(1 - 72%)C.r=rm× (1 - 72%)D.r=rm/(1 - 28%)52. June call and put options on King Books Inc. are available with exercise prices of $30, $35, and $40.Among the different exercise prices, the call option with the _____ exercise price and the put option withthe _____ exercise price will have the greatest value.A. $40; $30B. $30; $40C. $35; $35D. $40; $4053. Ownership of a call option entitles the owner to the __________ to __________ a specific stock, on orbefore a specific date, at a specific price.A. right; buyB. right; sellC. obligation; buyD. obligation; sell54. The ________ the ratio of municipal bond yields to corporate bond yields, the _________ the cutoff taxbracket at which more individuals will prefer to hold municipal debt.A. higher; lowerB. lower; lowerC. higher; higherD. The answer cannot be determined without more information.55. Which of the following types of bonds are excluded from most bond indexes?A. Corporate bondsB. Junk bondsC. Municipal bondsD. None of these options56. The Hang Seng index reflects market performance on which of the following major stock markets?A. JapanB. SingaporeC. TaiwanD. Hong Kong57. The Standard & Poor's 500 is __________ weighted index.A. an equallyB. a price-C. a value-D. a share-58. A firm that fails to pay dividends on its preferred stock is said to be _________.A. insolventB. in arrearsC. insufferableD. delinquent

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59. Large well-known companies often issue their own short-term unsecured debt notes directly to the public,rather than borrowing from banks; their notes are called _________.A. certificates of depositB. repurchase agreementsC. bankers' acceptancesD. commercial paper60. Which of the following is most like a short-term collateralized loan?A. Certificate of depositB. Repurchase agreementC. Bankers' acceptanceD. Commercial paper61. Eurodollars are _________.A. dollar-denominated deposits at any foreign bank or foreign branch of an American bankB. dollar-denominated bonds issued by firms outside their home marketC. currency issued by Euro Disney and traded in FranceD. dollars that wind up in banks as a result of money-laundering activities62. Which of the following is used to back international sales of goods and services?A. Certificate of depositB. Bankers' acceptanceC. Eurodollar depositsD. Commercial paper63. Treasury notes have initial maturities between ________ years.A. 2 and 4B. 5 and 10C. 10 and 30D. 1 and 1064. Which of the following isnota characteristic of common stock ownership?A. Residual claimantB. Unlimited liabilityC. Voting rightsD. Limited life of the security65. If you thought prices of stock would be rising over the next few months, you might want to__________________ on the stock.A. purchase a call optionB. purchase a put optionC. sell a futures contractD. place a short-sale order66. A typical bond price quote includes all but which one of the following?A. Daily high price for the bondB. Closing bond priceC. Yield to maturityD. Dividend yield67. What are business firms most likely to use derivative securities for?A. HedgingB. SpeculatingC. Doing calculus problemsD. Market making

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68. What would you expect to have happened to the spread between yields on commercial paper andTreasury bills immediately after September 11, 2001?A. No change, as both yields will remain the sameB. Increase, as the spread usually increases in response to a crisisC. Decrease, as the spread usually decreases in response to a crisisD. No change, as both yields will move in the same direction69. A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividendreceived by stock investors must have been ______ per share.A. $0.55B. $1.80C. $0.45D. $1.2570. Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350million, and $150 million, respectively. If you were to construct a price-weighted index of the threestocks, what would be the index value?A. 300B. 39C. 43D. 3071. Which of the following isnotconsidered a money market investment?A. Bankers' acceptanceB. EurodollarC. Repurchase agreementD. Treasury note72. The Federal Reserve Board of Governors directly controls which of the following interest rates?A. Bankers' acceptancesB. Brokers' callsC. Federal fundsD. LIBOR73. You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wantedto construct an index to track your portfolio performance, your best match for your portfolio would be toconstruct ______.A. a value-weighted indexB. an equally weighted indexC. a price-weighted indexD. a bond price index74. In a ___________ index, changes in the value of the stock with the greatest market value will move theindex value the most, everything else equal.A. value-weighted indexB. equally weighted indexC. price-weighted indexD. bond price index75. A corporation in a 34% tax bracket invests in the preferred stock of another company and earns a 6%pretax rate of return. An individual investor in a 15% tax bracket invests in the same preferred stock andearns the same pretax return. The after-tax return to the corporation is _______, and the after-tax return tothe individual investor is _______.A. 3.96%; 5.1%B. 5.39%; 5.1%C. 6%; 6%D. 3.96%; 6%

Test Bank For Essentials of Investments, 8th Edition - Page 25 preview image

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76. All but which one of the following indices is value weighted?A. NASDAQ CompositeB. S&P 500C. Wilshire 5000D. DJIA77. What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%?A. 6.48%B. 7.25%C. 8.02%D. 9%78. A tax free municipal bond provides a yield of 3.2%. What is the equivalent taxable yield on the bondgiven a 35% tax bracket?A. 3.2%B. 3.68%C. 4.92%D. 5%79. An index computed from a simple average of returns is a/an _____.A. equal weighted indexB. value weighted indexC. price weighted indexD. share weighted index80. A tax free municipal bond provides a yield of 2.34%. What is the equivalent taxable yield on the bondgiven a 28% tax bracket?A. 2.34%B. 2.68%C. 3.25%D. 4.92%81. The Chompers Index is a price weighted stock index based on the 3 largest fast food chains. The stockprices for the three stocks are $54, $23, and $44. What is the price weighted index value of the ChompersIndex?A. 23.43B. 35.36C. 40.33D. 49.5882. The Hydro Index is a price weighted stock index based on the 5 largest boat manufacturers in the nation.The stock prices for the five stocks are $10, $20, $80, $50 and $40. The price of the last stock was justsplit 2 for 1 and the stock price was halved from $40 to $20. What is the new divisor for a price weightedindex?A. 5.00B. 4.85C. 4.50D. 4.7583. A benchmark index has three stocks priced at $23, $43, and $56. The number of outstanding shares foreach is 350,000 shares, 405,000 shares, and 553,000 shares, respectively. If the market value weightedindex was 970 yesterday and the prices changed to $23, $41, and $58, what is the new index value?A. 960B. 970C. 975D. 985

Test Bank For Essentials of Investments, 8th Edition - Page 26 preview image

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84. A benchmark market value index is comprised of three stocks. Yesterday the three stocks were pricedat $12, $20, and $60. The number of outstanding shares for each is 600,000 shares, 500,000 shares, and200,000 shares, respectively. If the stock prices changed to $16, $18, and $62 today respectively, what isthe 1-day rate of return on the index?A. 5.78%B. 4.35%C. 6.16%D. 7.42%85. Which of the following mortgage scenarios will benefit the homeowner the most?A. Adjustable rate mortgage when interest rate increases.B. Fixed rate mortgage when interest rates falls.C. Fixed rate mortgage when interest rate rises.D. None of these options, as the banker's interest will always be protected.86. The TED spread refers toA. the difference between the Treasury bond rate and the Treasury bill rate.B. the difference between the Treasury note rate and the Treasury bill rate.C. the difference between the LIBOR rate and the Treasury bill rate.D. the difference between the LIBOR rate and the Treasury bond rate.

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ch02 Key1. C2. B3. B4. A5. A6. A7. D8. D9. B10. C11. B12. B13. C14. B15. B16. D17. A18. C19. C20. A21. B22. B23. C24. B25. C26. B27. C28. D29. C30. B31. B32. A33. C34. D35. D36. D

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37. D38. B39. C40. D41. C42. A43. B44. B45. A46. B47. C48. C49. C50. B51. D52. B53. A54. A55. B56. D57. C58. B59. D60. B61. A62. B63. D64. B65. A66. D67. A68. B69. C70. B71. D72. C73. C74. A

Test Bank For Essentials of Investments, 8th Edition - Page 29 preview image

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75. B76. D77. A78. C79. A80. C81. C82. C83. C84. C85. C86. C

Test Bank For Essentials of Investments, 8th Edition - Page 30 preview image

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ch02 SummaryCategory# of QuestionsAACSB: Analytic78AACSB: Reflective Thinking8Blooms: Apply16Blooms: Remember60Blooms: Understand10Bodie - Chapter 0286Difficulty: 1 Easy39Difficulty: 2 Medium36Difficulty: 3 Hard11Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.52Learning Objective: 02-02 Describe the construction of stock market indexes.25Learning Objective: 02-03 Calculate the profit or loss on investments in options and futures contracts.9Topic: Derivative Markets9Topic: Equity Securities5Topic: Stock and Bond Market Indexes24Topic: The Bond Market21Topic: The Money Market27

Test Bank For Essentials of Investments, 8th Edition - Page 31 preview image

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ch03Student: ___________________________________________________________________________1.Underwriting is one of the services provided by _____.A. the SECB. investment bankersC. publicly traded companiesD. FDIC2.Under firm-commitment underwriting, the ______ assumes the full risk that the shares cannot be sold tothe public at the stipulated offering price.A. red herringB. issuing companyC. initial stockholderD. underwriter3.Explicit costs of an IPO tend to be around ______ of the funds raised.A. 1%B. 7%C. 15%D. 25%4.Barnegat Light sold 200,000 shares in an initial public offering. The underwriter's explicit fees were$90,000. The offering price for the shares was $35, but immediately upon issue, the share price jumped to$43. What is the best estimate of the total cost to Barnegat Light of the equity issue?A. $90,000B. $1,290,000C. $2,390,000D. $1,690,0005.A red herring becomes a prospectus when ____.A. the preliminary registration statement is approved by the SECB. the IPO is completeC. the offering is seasonedD. the lockup period expires6.Private placements can be advantageous, compared to public issue, because:I. Private placements are cheaper to market than public issues.II. Private placements may still be sold to the general public under SEC Rule 144A.III. Privately placed securities trade on secondary markets.A. I onlyB. I and III onlyC. II and III onlyD. I, II, and III7.A level _____ subscriber to the NASDAQ system may enter bid and ask prices.A. 1B. 2C. 3D. 4

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