Chap 002

Chapter 02 - Asset Classes and Financial Instruments
Chapter 02
Asset Classes and Financial Instruments

Multiple Choice Questions

1. Which of the following is not a money market instrument
A. !reasury "ill
#. Commercial paper
C. $referred stock
%. #anker&s acceptance

2. !hirteen week !-"ill auctions are conducted ''''.
A. daily
#. weekly
C. monthly
%. (uarterly

). When computing the "ank discount yield you would use '''' days in the year.
A. 2*0
#. )*0
C. )*+
%. )**

,. A dollar denominated deposit at a -ondon "ank is called '''''.
A. eurodollars
#. -I#./
C. fed funds
%. "anker&s acceptance

+. 0oney market securities are sometimes referred to as 1cash e(ui2alent1 "ecause '''''.
A. they are safe and marketa"le
#. they are not li(uid
C. they are high risk
%. they are low denomination

2-1
*. !he most acti2ely traded money market security is
A. !reasury "ills
#. #ankers& Acceptances
C. Certificates of %eposit
%. Common stock

3. '''''' 2oting of common stock gi2es minority shareholders the most representation on the
"oard of directors.
A. 0a4ority
#. Cumulati2e
C. /ights
%. $ro5y

6. An in2estor in a !-"ill earns interest "y '''''''''.
A. recei2ing interest payments e2ery 70 days
#. recei2ing di2idend payments e2ery )0 days
C. con2erting the !-"ill at maturity into a higher 2alued !-note
%. "uying the "ill at a discount from the face 2alue recei2ed at maturity

7. '''''' would not "e included in the 8AF8 inde5.
A. Australia
#. Canada
C. France
%. 9apan

10. ''''' is considered to "e an emerging market country.
A. France
#. :orway
C. #ra;il
%. Canada

2-2
11. Which one of the following is a true statement
A. %i2idends on preferred stocks are ta5-deducti"le to indi2idual in2estors "ut not to
corporate in2estors
#. Common di2idends cannot "e paid if preferred di2idends are in arrears on cumulati2e
preferred stock
C. $referred stockholders ha2e 2oting power
%. In2estors can sue managers for nonpayment of preferred di2idends

12. !he "id price of a treasury "ill is '''''''''.
A. the price at which the dealer in treasury "ills is willing to sell the "ill
#. the price at which the dealer in treasury "ills is willing to "uy the "ill
C. greater than the ask price of the treasury "ill e5pressed in dollar terms
%. the price at which the in2estor can "uy the treasury "ill

1). !he <erman stock market is measured "y which market inde5
A. F!=8
#. %ow 9ones )0
C. %A>
%. :ikkei

1,. %eposits of commercial "anks at the Federal /eser2e are called '''''.
A. "ankers acceptances
#. federal funds
C. repurchase agreements
%. time deposits

1+. Which of the following is not a true statement regarding municipal "onds
A. A municipal "ond is a de"t o"ligation issued "y state or local go2ernments.
#. A municipal "ond is a de"t o"ligation issued "y the Federal <o2ernment.
C. !he interest income from a municipal "ond is e5empt from federal income ta5ation.
%. !he interest income from a municipal "ond is e5empt from state and local ta5ation in the
issuing state.

2-)
1*. Which of the following is not a characteristic of a money market instrument
A. -i(uidity
#. 0arketa"ility
C. -ow risk
%. 0aturity greater than one year

13. An indi2idual who goes short in a futures position
A. commits to deli2ering the underlying commodity at contract maturity
#. commits to purchasing the underlying commodity at contract maturity
C. has the right to deli2er the underlying commodity at contract maturity
%. has the right to purchase the underlying commodity at contract maturity

16. Which of the following is not a nickname for an agency associated with the mortgage
markets
A. Fannie 0ae
#. Freddie 0ac
C. =allie 0ae
%. <innie 0ae

17. Commercial paper is a short-term security issued "y '''''''''' to raise funds.
A. the Federal /eser2e
#. commercial "anks
C. large well-known companies
%. the :ew ?ork =tock 85change

20. !he ma5imum maturity on commercial paper is
A. 230 days
#. 160 days
C. 70 days
%. )0 days

2-,
21. Which one of the following is a true statement regarding the %ow 9ones Industrial
A2erage
A. It is a 2alue-weighted a2erage of )0 large industrial stocks
#. It is a price-weighted a2erage of )0 large industrial stocks
C. It is a price-weighted a2erage of 100 large stocks traded on the :ew ?ork =tock 85change
%. It is a 2alue-weighted a2erage of all stocks traded on the :ew ?ork =tock 85change

22. !reasury "ills are financial instruments issued "y '''''''''' to raise funds.
A. commercial "anks
#. the Federal <o2ernment
C. large corporations
%. state and city go2ernments

2). Which of the following are true statements a"out !-"ills
I. !-"ills typically sell in denominations of @10A000
II. Income earned on !-"ills is e5empt from all Federal ta5es
III. Income earned on !-"ills is e5empt from state and local ta5es
A. I only
#. I and II only
C. I and III only
%. IA II and III

2,. A "ond that has no collateral is called '''''''''.
A. a calla"le "ond
#. a de"enture
C. a 4unk "ond
%. a mortgage

2+. A '''''''''' gi2es its holder the right to sell an asset for a specified e5ercise price on or
"efore a specified e5piration date.
A. call option
#. futures contract
C. put option
%. interest rate swap

2-+
2*. A !-"ill (uote sheet has 70 day !-"ill (uotes with a ,.72 "id and a ,.6* ask. If the "ill has
a @10A000 face 2alue an in2estor could "uy this "ill for
A. @10A000.00
#. @7A636.+0
C. @7A633.00
%. @7A660.1*

23. Which one of the following is a true statement regarding corporate "onds
A. A corporate calla"le "ond gi2es its holder the right to e5change it for a specified num"er of
the company&s common shares
#. A corporate de"enture is a secured "ond
C. A corporate con2erti"le "ond gi2es its holder the right to e5change it for a specified
num"er of the company&s common shares
%. Bolders of corporate "onds ha2e 2oting rights in the company

26. !he yield on ta5-e5empt "onds is ''''''.
A. usually less than +0C of the yield on ta5a"le "onds
#. normally a"out 70C of the yield on ta5a"le "onds
C. greater than the yield on ta5a"le "onds
%. less than the yield on ta5a"le "onds

27. '''''''''' is not a money market instrument.
A. A certificate of deposit
#. A treasury "ill
C. A treasury "ond
%. Commercial paper

)0. An in2estor "uys a !-"ill at a "ank discount (uote of ,.60 with 1+0 days to maturity. !he
in2estor&s actual annual rate of return on this in2estment was '''''.
A. ,.60C
#. ,.73C
C. +.,3C
%. +.3,C

2-*
)1. !he D.E. stock inde5 is the '''''''''.
A. %A>
#. F!=8
C. <=8
%. !=8

)2. A '''''''''' gi2es its holder the right to "uy an asset for a specified e5ercise price on or
A. call option
#. futures contract
C. put option

)). Which one of the following pro2ides the "est e5ample of securiti;ation
A. con2erti"le "ond
#. call option
C. mortgage pass-through security
%. preferred stock

),. Which of the following indices are market-2alue weighted
I. !he :?=8 Composite
II. !he =F$ +00
III. !he Wilshire +000
A. I and II only
#. II and III only
C. I and III only
%. IA II and III

)+. !he interest rate charged "y large "anks in -ondon to lend money among themsel2es is
called '''''''''.
A. the prime rate
#. the discount rate
C. the federal funds rate
%. -I#./

2-3
)*. A firm that has large securities holdings that wishes to raise money for a short length of
time may "e a"le to find the cheapest financing from which of the following
A. /e2erse repurchase agreement
#. #anker&s acceptance
C. Commercial paper
%. /epurchase agreement

)3. Currently the %ow 9ones Industrial A2erage is computed "y '''''''''.
A. adding the prices of )0 large 1"lue-chip1 stocks and di2iding "y )0
#. calculating the total market 2alue of the )0 firms in the inde5 and di2iding "y )0
C. measuring the current total market 2alue of the )0 stocks in the inde5 relati2e to the total
2alue on the pre2ious day
%. adding the prices of )0 large 1"lue-chip1 stocks and di2iding "y a di2isor ad4usted for
stock splits and large stock di2idends

)6. An in2estor purchases one municipal and one corporate "ond that pay rates of return of
+.00C and *.,0C respecti2ely. If the in2estor is in the 1+C ta5 "racketA his after ta5 rates of
return on the municipal and corporate "onds would "e respecti2ely
A. +.00C and *.,0C
#. +.00C and +.,,C
C. ,.2+C and *.,0C
%. +.3+C and +.,,C

)7. If a treasury note has a "id price of @77*.2+A the (uoted "id price in the Wall =treet
9ournal would "e '''''''''.
A. 77G2+
#. 77G*)
C. 77G20
%. 77G06

2-6
,0. !I$= are ''''''.
A. !reasury "onds that pay a 2aria"le rate of interest
#. D.E. "onds that protect in2estors from default risk
C. securities that trade on the !oronto stock inde5
%. !reasury "onds that protect in2estors from inflation

,1. !he price (uotations of treasury "onds in the Wall =treet 9ournal show a "id price of
102G12 and an ask price of 102G1,. If you sold the "ond you e5pect to recei2e '''''''''.
A. @1A02,.3+
#. @1A02,.)6
C. @1A02).3+
%. @1A022.+0

,2. !he %ow 9ones Industrial A2erage is '''''''''.
A. a price weighted a2erage
#. a 2alue weight and a2erage
C. an e(ually weighted a2erage
%. an unweighted a2erage

,). In2estors will earn higher rates of returns on !I$= than e(ui2alent default risk standard
"onds if '''''''''''''''.
A. inflation is lower than anticipated o2er the in2estment period
#. inflation is higher than anticipated o2er the in2estment period
C. the D.=. dollar increases in 2alue against the euro
%. the spread "etween commercial paper and !reasury securities remains low

,,. $referred stock is like long-term de"t in that '''''''''''.
A. it gi2es the holder 2oting power regarding the firm&s management
#. it promises to pay to its holder a fi5ed stream of income each year
C. the preferred di2idend is a ta5-deducti"le e5pense for the firm
%. in the e2ent of "ankruptcy preferred stock has e(ual status with de"t

2-7
,+. Which of the following does not appro5imate the performance of a "uy and hold portfolio
strategy
A. An e(ually weighted inde5
#. A price weighted inde5
C. A 2alue weighted inde5
%. Weights are not a factor in this situation

,*. In calculating the %ow 9ones Industrial A2erageA the ad4ustment for a stock split occurs
'''''''''.
A. automatically
#. "y ad4usting the di2isor
C. "y ad4usting the numerator
%. "y ad4usting the market 2alue weights

,3. If the market prices of the )0 stocks in the %ow 9ones Industrial A2erage all change "y the
same dollar amount on a gi2en dayA assuming there are no stock splits which stock will ha2e
the greatest impact on the a2erage
A. !he one with the highest price
#. !he one with the lowest price
C. All )0 stocks will ha2e the same impact
%. !he answer cannot "e determined "y the information gi2en

,6. A "ond issued "y the =tate of Ala"ama is priced to yield *.2+C. If you are in the 26C ta5
"racket this "ond would pro2ide you with an e(ui2alent ta5a"le yield of '''''''''.
A. ,.+0C
#. 3.2+C
C. 6.*6C
%. none of the a"o2e

,7. !he purchase of a futures contract gi2es the "uyer '''''''''.
A. the right to "uy an item at a specified price
#. the right to sell an item at a specified price
C. the o"ligation to "uy an item at a specified price
%. the o"ligation to sell an item at a specified price

2-10
+0. .wnership of a put option entitles the owner to the '''''''''' to ''''''''''' a
specific stockA on or "efore a specific dateA at a specific price.
A. rightA "uy
#. rightA sell
C. o"ligationA "uy
%. o"ligationA sell

+1. An in2estor in a 26C ta5 "racket is trying to decide whether to in2est in a municipal "ond
or a corporate "ond. =he looks up municipal "ond yields Hr
m
I "ut wishes to calculate the
ta5a"le e(ui2alent yield r. !he formula she should use is gi2en "y ''''''.
A. r J r
m
K H1 - 26CI
#. r J r
m
LH1 - 32CI
C. r J r
m
K H1 - 32CI
%. r J r
m
LH1 - 26CI

+2. 9une call and put options on Eing #ooks Inc are a2aila"le with e5ercise prices of @)0A @)+
and @,0. Among the different e5ercise pricesA the call option with the ''''' e5ercise price
and the put option with the ''''' e5ercise price will ha2e the greatest 2alue.
A. @,0M @)0
#. @)0M @,0
C. @)+M @)+
%. @,0M @,0

+). .wnership of a call option entitles the owner to the '''''''''' to '''''''''' a specific
stockA on or "efore a specific dateA at a specific price.
A. rightA "uy
#. rightA sell
C. o"ligationA "uy
%. o"ligationA sell

2-11
+,. !he '''''''' the ratio of municipal "ond yields to corporate "ond yields the '''''''''
the cutoff ta5 "racket where more indi2iduals will prefer to hold municipal de"t.
A. higherM lower
#. lowerM lower
C. lowerM higher
%. higherM higher

++. Which of the following types of "onds are e5cluded from most "ond indices
A. Corporate "onds
#. 9unk "onds
C. 0unicipal "onds
%. :one of the a"o2e

+*. !he Bang =eng inde5 reflects market performance on which of the following ma4or stock
markets
A. 9apan
#. =ingapore
C. !aiwan
%. Bong Eong

+3. !he =tandard and $oors +00 is aHnI '''''''''' weighted inde5.
A. e(ually
#. price
C. 2alue
%. share

+6. A firm that fails to pay di2idends on its preferred stock is said to "e '''''''''.
A. insol2ent
#. in arrears
C. insuffera"le
%. delin(uent

2-12
+7. -arge well-known companies often issue their own short term unsecured de"t notes
directly to the pu"licA rather than "orrowing from "anksA their notes are called '''''''''.
A. certificates of deposit
#. repurchase agreements
C. "anker&s acceptances
%. commercial paper

*0. Which of the following is most like a short-term collaterali;ed loan
A. Certificate of deposit
#. /epurchase agreement
C. #anker&s acceptance
%. Commercial paper

*1. 8urodollars are '''''''''.
A. dollar denominated deposits at any foreign "ank or foreign "ranch of an American "ank
#. dollar denominated "onds issued "y firms outside their home market
C. currency issued "y 8uro %isney and traded in France
%. dollars that wind up in "anks as a result of money laundering acti2ities

*2. Which of the following is used to "ack international sales of goods and ser2ices
C. 8urodollar deposits
%. Commercial paper

*). !reasury notes ha2e initial maturities "etween '''''''' years.
A. 2 and ,
#. + and 10
C. 10 and )0
%. 1 and 10

2-1)
*,. Which of the following are not characteristic of common stock ownership
A. /esidual claimant
#. Dnlimited lia"ility
C. Noting rights
%. -imited life of the security

*+. If you thought prices of stock would "e rising o2er the ne5t few months you may wish to
'''''''''''''''''' on the stock.
A. purchase a call option
#. purchase a put option
C. sell a futures contract
%. place a short sale order

**. A typical "ond price (uote includes all "ut which one of the following
A. %aily high price for the "ond
#. Closing "ond price
C. ?ield to maturity
%. %i2idend yield

*3. What are "usiness firms most likely to use deri2ati2e securities for
A. Bedging
#. =peculating
C. %oing calculus pro"lems
%. 0arket making

*6. What would you e5pect to ha2e happened to the spread "etween yields on commercial
paper and !reasury "ills immediately after =eptem"er 11A 2001
A. :o changeA as "oth yields will remain the same.
#. IncreaseA the spread usually increases in response to a crisis.
C. %ecreaseA the spread usually decreases in response to a crisis.
%. :o changeA as "oth yields will mo2e in the same direction.

2-1,
*7. A stock (uote indicates a stock price of @*0 and a di2idend yield of )C. !he latest
(uarterly di2idend recei2ed "y stock in2estors must ha2e "een '''''' per share.
A. @0.++
#. @1.60
C. @0.,+
%. @1.2+

30. !hree stocks ha2e share prices of @12A @3+A and @)0 with total market 2alues of @,00
millionA @)+0 million and @1+0 million respecti2ely. If you were to construct a price-weighted
inde5 of the three stocks what would "e the inde5 2alue
A. )00
#. )7
C. ,)
%. )0

31. Which of the following is not considered a money market in2estment
A. #ankers acceptances
#. 8urodollar
C. /epurchase agreement
%. !reasury note

32. !he Federal /eser2e #oard of <o2ernors directly controls which of the following interest
rates
#. #rokers call
C. Federal funds
%. -I#./

2-1+
3). ?ou decide to purchase an e(ual num"er of shares of stocks of firms to create a portfolio.
If you wished to construct an inde5 to track your portfolio performance your "est match for
your portfolio would "e to construct aLan ''''''.
A. 2alue weighted inde5
#. e(ual weighted inde5
C. price weighted inde5
%. "ond price inde5

3,. In a ''''''''''' inde5 changes in the 2alue of the stock with the greatest market 2alue
will mo2e the inde5 2alue the most e2erything else e(ual.
%. "ond price inde5

3+. A corporation in a ),C ta5 "racket in2ests in the preferred stock of another company and
earns a *C pre-ta5 rate of return. An indi2idual in2estor in a 1+C ta5 "racket in2ests in the
same preferred stock and earns the same pre-ta5 return. !he after ta5 return to the corporation
is ''''''' and the after ta5 return to the indi2idual in2estor is '''''''.
A. ).7*CM +.1C
#. +.)7CM +.1C
C. *.00CM *.00C
%. ).7*CM *.00C

3*. All "ut which one of the following indices is 2alue weighted
A. :asda( Composite
#. =F$ +00
C. Wilshire +000
%. %9IA

2-1*
33. What is the ta5 e5empt e(ui2alent yield on a 7C "ond yield gi2en a marginal ta5 rate of
26C
A. *.,6C
#. 3.2+C
C. 6.02C
%. 7.00C

36. A ta5 free municipal "ond pro2ides a yield of ).2C. What is the e(ui2alent ta5a"le yield
on the "ond gi2en a )+C ta5 "racket
A. ).20C
#. ).*6C
C. ,.72C
%. +.00C

37. An inde5 computed from a simple a2erage of returns is aLan '''''.
A. e(ual weighted inde5
#. 2alue weighted inde5
%. share weighted inde5

60. A ta5 free municipal "ond pro2ides a yield of 2.),C. What is the e(ui2alent ta5a"le yield
on the "ond gi2en a 26C ta5 "racket
A. 2.),C
#. 2.*6C
C. ).2+C
%. ,.72C

61. !he Chompers Inde5 is a price weighted stock inde5 "ased on the ) largest fast food
chains. !he stock prices for the three stocks are @+,A @2)A and @,,. What is the price weighted
inde5 2alue of the Chompers Inde5
A. 2).,)
#. )+.)*
C. ,0.))
%. ,7.+6

2-13
62. !he Bydro Inde5 is a price weighted stock inde5 "ased on the + largest "oat
manufacturers in the nation. !he stock prices for the fi2e stocks are @10A @20A @60A @+0 and
@,0. !he price of the last stock was 4ust split 2 for 1 and the stock price was hal2ed from @,0
to @20. What is the new di2isor for a price weighted inde5
A. +.00
#. ,.6+
C. ,.+0
%. ,.3+

6). A "enchmark inde5 has three stocks priced at @2)A @,)A and @+*. !he num"er of
outstanding shares for each is )+0A000 sharesA ,0+A000 sharesA and ++)A000 sharesA
respecti2ely. If the market 2alue weighted inde5 was 730 yesterday and the prices changed to
@2)A @,1A and @+6A what is the new inde5 2alue
A. 7*0
#. 730
C. 73+
%. 76+

6,. A "enchmark market 2alue inde5 is comprised of three stocks. ?esterday the three stocks
were priced at @12A @20A and @*0. !he num"er of outstanding shares for each is *00A000
sharesA +00A000 sharesA and 200A000 sharesA respecti2ely. If the stock prices changed to @1*A
@16A and @*2 today respecti2elyA what is the one day rate of return on the inde5
A. +.36C
#. ,.)+C
C. *.1*C
%. 3.,2C

6+. Which of the following mortgage scenarios will "enefit the homeowner the most
A. Ad4usta"le rate mortgage when interest rate increases.
#. Fi5ed rate mortgage when interest rates falls.
C. Fi5ed rare mortgage when interest rate rises.
%. :one of the a"o2eA as "anker&s interest will always "e protected.

2-16
Chapter 02 Asset Classes and Financial Instruments Answer Eey

Multiple Choice Questions

1. Which of the following is not a money market instrument
A. !reasury "ill
#. Commercial paper
C. $referred stock
%. #anker&s acceptance

Difficulty: Easy

2. !hirteen week !-"ill auctions are conducted ''''.
A. daily
B. weekly
C. monthly
%. (uarterly

Difficulty: Easy

). When computing the "ank discount yield you would use '''' days in the year.
A. 2*0
B. )*0
C. )*+
%. )**

Difficulty: Medium

2-17
,. A dollar denominated deposit at a -ondon "ank is called '''''.
A. eurodollars
#. -I#./
C. fed funds
%. "anker&s acceptance

Difficulty: Easy

+. 0oney market securities are sometimes referred to as 1cash e(ui2alent1 "ecause '''''.
A. they are safe and marketa"le
#. they are not li(uid
C. they are high risk
%. they are low denomination

Difficulty: Easy

*. !he most acti2ely traded money market security is
A. !reasury "ills
#. #ankers& Acceptances
C. Certificates of %eposit
%. Common stock

Difficulty: Medium

3. '''''' 2oting of common stock gi2es minority shareholders the most representation on the
"oard of directors.
A. 0a4ority
B. Cumulati2e
C. /ights
%. $ro5y

Difficulty: Medium

2-20
6. An in2estor in a !-"ill earns interest "y '''''''''.
A. recei2ing interest payments e2ery 70 days
#. recei2ing di2idend payments e2ery )0 days
C. con2erting the !-"ill at maturity into a higher 2alued !-note
D. "uying the "ill at a discount from the face 2alue recei2ed at maturity

Difficulty: Easy

7. '''''' would not "e included in the 8AF8 inde5.
A. Australia
B. Canada
C. France
%. 9apan

Difficulty: Hard

10. ''''' is considered to "e an emerging market country.
A. France
#. :orway
C. #ra;il
%. Canada

Difficulty: Medium

11. Which one of the following is a true statement
A. %i2idends on preferred stocks are ta5-deducti"le to indi2idual in2estors "ut not to
corporate in2estors
B. Common di2idends cannot "e paid if preferred di2idends are in arrears on cumulati2e
preferred stock
C. $referred stockholders ha2e 2oting power
%. In2estors can sue managers for nonpayment of preferred di2idends

Difficulty: Medium

2-21
12. !he "id price of a treasury "ill is '''''''''.
A. the price at which the dealer in treasury "ills is willing to sell the "ill
B. the price at which the dealer in treasury "ills is willing to "uy the "ill
C. greater than the ask price of the treasury "ill e5pressed in dollar terms
%. the price at which the in2estor can "uy the treasury "ill

Difficulty: Easy

1). !he <erman stock market is measured "y which market inde5
A. F!=8
#. %ow 9ones )0
C. %A>
%. :ikkei

Difficulty: Easy

1,. %eposits of commercial "anks at the Federal /eser2e are called '''''.
A. "ankers acceptances
B. federal funds
C. repurchase agreements
%. time deposits

Difficulty: Easy

1+. Which of the following is not a true statement regarding municipal "onds
A. A municipal "ond is a de"t o"ligation issued "y state or local go2ernments.
B. A municipal "ond is a de"t o"ligation issued "y the Federal <o2ernment.
C. !he interest income from a municipal "ond is e5empt from federal income ta5ation.
%. !he interest income from a municipal "ond is e5empt from state and local ta5ation in the
issuing state.

Difficulty: Easy

2-22
1*. Which of the following is not a characteristic of a money market instrument
A. -i(uidity
#. 0arketa"ility
C. -ow risk
D. 0aturity greater than one year

Difficulty: Easy

13. An indi2idual who goes short in a futures position
A. commits to deli2ering the underlying commodity at contract maturity
#. commits to purchasing the underlying commodity at contract maturity
C. has the right to deli2er the underlying commodity at contract maturity
%. has the right to purchase the underlying commodity at contract maturity

Difficulty: Easy

16. Which of the following is not a nickname for an agency associated with the mortgage
markets
A. Fannie 0ae
#. Freddie 0ac
C. =allie 0ae
%. <innie 0ae

Difficulty: Easy

17. Commercial paper is a short-term security issued "y '''''''''' to raise funds.
A. the Federal /eser2e
#. commercial "anks
C. large well-known companies
%. the :ew ?ork =tock 85change

Difficulty: Easy

2-2)
20. !he ma5imum maturity on commercial paper is
A. 230 days
#. 160 days
C. 70 days
%. )0 days

Difficulty: Medium

21. Which one of the following is a true statement regarding the %ow 9ones Industrial
A2erage
A. It is a 2alue-weighted a2erage of )0 large industrial stocks
B. It is a price-weighted a2erage of )0 large industrial stocks
C. It is a price-weighted a2erage of 100 large stocks traded on the :ew ?ork =tock 85change
%. It is a 2alue-weighted a2erage of all stocks traded on the :ew ?ork =tock 85change

Difficulty: Easy

22. !reasury "ills are financial instruments issued "y '''''''''' to raise funds.
A. commercial "anks
B. the Federal <o2ernment
C. large corporations
%. state and city go2ernments

Difficulty: Easy

2). Which of the following are true statements a"out !-"ills
I. !-"ills typically sell in denominations of @10A000
II. Income earned on !-"ills is e5empt from all Federal ta5es
III. Income earned on !-"ills is e5empt from state and local ta5es
A. I only
#. I and II only
C. I and III only
%. IA II and III

Difficulty: Medium

2-2,
2,. A "ond that has no collateral is called '''''''''.
A. a calla"le "ond
B. a de"enture
C. a 4unk "ond
%. a mortgage

Difficulty: Easy

2+. A '''''''''' gi2es its holder the right to sell an asset for a specified e5ercise price on or
A. call option
#. futures contract
C. put option

Difficulty: Easy

2*. A !-"ill (uote sheet has 70 day !-"ill (uotes with a ,.72 "id and a ,.6* ask. If the "ill has
a @10A000 face 2alue an in2estor could "uy this "ill for
A. @10A000.00
B. @7A636.+0
C. @7A633.00
%. @7A660.1*

Difficulty: Hard

2-2+
23. Which one of the following is a true statement regarding corporate "onds
A. A corporate calla"le "ond gi2es its holder the right to e5change it for a specified num"er of
the company&s common shares
#. A corporate de"enture is a secured "ond
C. A corporate con2erti"le "ond gi2es its holder the right to e5change it for a specified
num"er of the company&s common shares
%. Bolders of corporate "onds ha2e 2oting rights in the company

Difficulty: Medium

26. !he yield on ta5-e5empt "onds is ''''''.
A. usually less than +0C of the yield on ta5a"le "onds
#. normally a"out 70C of the yield on ta5a"le "onds
C. greater than the yield on ta5a"le "onds
D. less than the yield on ta5a"le "onds

Difficulty: Easy

27. '''''''''' is not a money market instrument.
A. A certificate of deposit
#. A treasury "ill
C. A treasury "ond
%. Commercial paper

Difficulty: Easy

2-2*
)0. An in2estor "uys a !-"ill at a "ank discount (uote of ,.60 with 1+0 days to maturity. !he
in2estor&s actual annual rate of return on this in2estment was '''''.
A. ,.60C
B. ,.73C
C. +.,3C
%. +.3,C

Difficulty: Hard

)1. !he D.E. stock inde5 is the '''''''''.
A. %A>
#. F!=8
C. <=8
%. !=8

Difficulty: Easy

)2. A '''''''''' gi2es its holder the right to "uy an asset for a specified e5ercise price on or
A. call option
#. futures contract
C. put option

Difficulty: Easy

2-23
)). Which one of the following pro2ides the "est e5ample of securiti;ation
A. con2erti"le "ond
#. call option
C. mortgage pass-through security
%. preferred stock

Difficulty: Easy

),. Which of the following indices are market-2alue weighted
I. !he :?=8 Composite
II. !he =F$ +00
III. !he Wilshire +000
A. I and II only
#. II and III only
C. I and III only
D. IA II and III

Difficulty: Easy

)+. !he interest rate charged "y large "anks in -ondon to lend money among themsel2es is
called '''''''''.
A. the prime rate
#. the discount rate
C. the federal funds rate
D. -I#./

Difficulty: Easy

)*. A firm that has large securities holdings that wishes to raise money for a short length of
time may "e a"le to find the cheapest financing from which of the following
A. /e2erse repurchase agreement
C. Commercial paper
D. /epurchase agreement

Difficulty: Hard

2-26
)3. Currently the %ow 9ones Industrial A2erage is computed "y '''''''''.
A. adding the prices of )0 large 1"lue-chip1 stocks and di2iding "y )0
#. calculating the total market 2alue of the )0 firms in the inde5 and di2iding "y )0
C. measuring the current total market 2alue of the )0 stocks in the inde5 relati2e to the total
2alue on the pre2ious day
D. adding the prices of )0 large 1"lue-chip1 stocks and di2iding "y a di2isor ad4usted for
stock splits and large stock di2idends

Difficulty: Hard

)6. An in2estor purchases one municipal and one corporate "ond that pay rates of return of
+.00C and *.,0C respecti2ely. If the in2estor is in the 1+C ta5 "racketA his after ta5 rates of
return on the municipal and corporate "onds would "e respecti2ely
A. +.00C and *.,0C
B. +.00C and +.,,C
C. ,.2+C and *.,0C
%. +.3+C and +.,,C
After-ta5 return on municipal "ond J .0+
After-ta5 return on corporate "ond J .0*,H1 - .1+I J 0.0+,, J +.,,C

Difficulty: Medium

)7. If a treasury note has a "id price of @77*.2+A the (uoted "id price in the Wall =treet
9ournal would "e '''''''''.
A. 77G2+
#. 77G*)
C. 77G20
%. 77G06

Difficulty: Medium

2-27
,0. !I$= are ''''''.
A. !reasury "onds that pay a 2aria"le rate of interest
#. D.E. "onds that protect in2estors from default risk
C. securities that trade on the !oronto stock inde5
D. !reasury "onds that protect in2estors from inflation

Difficulty: Medium

,1. !he price (uotations of treasury "onds in the Wall =treet 9ournal show a "id price of
102G12 and an ask price of 102G1,. If you sold the "ond you e5pect to recei2e '''''''''.
A. @1A02,.3+
#. @1A02,.)6
C. @1A02).3+
%. @1A022.+0

Difficulty: Medium

,2. !he %ow 9ones Industrial A2erage is '''''''''.
A. a price weighted a2erage
#. a 2alue weight and a2erage
C. an e(ually weighted a2erage
%. an unweighted a2erage

Difficulty: Easy

2-)0
,). In2estors will earn higher rates of returns on !I$= than e(ui2alent default risk standard
"onds if '''''''''''''''.
A. inflation is lower than anticipated o2er the in2estment period
B. inflation is higher than anticipated o2er the in2estment period
C. the D.=. dollar increases in 2alue against the euro
%. the spread "etween commercial paper and !reasury securities remains low

Difficulty: Medium

,,. $referred stock is like long-term de"t in that '''''''''''.
A. it gi2es the holder 2oting power regarding the firm&s management
B. it promises to pay to its holder a fi5ed stream of income each year
C. the preferred di2idend is a ta5-deducti"le e5pense for the firm
%. in the e2ent of "ankruptcy preferred stock has e(ual status with de"t

Difficulty: Medium

,+. Which of the following does not appro5imate the performance of a "uy and hold portfolio
strategy
A. An e(ually weighted inde5
#. A price weighted inde5
C. A 2alue weighted inde5
%. Weights are not a factor in this situation

Difficulty: Medium

,*. In calculating the %ow 9ones Industrial A2erageA the ad4ustment for a stock split occurs
'''''''''.
A. automatically
B. "y ad4usting the di2isor
C. "y ad4usting the numerator
%. "y ad4usting the market 2alue weights

Difficulty: Medium

2-)1
,3. If the market prices of the )0 stocks in the %ow 9ones Industrial A2erage all change "y the
same dollar amount on a gi2en dayA assuming there are no stock splits which stock will ha2e
the greatest impact on the a2erage
A. !he one with the highest price
#. !he one with the lowest price
C. All )0 stocks will ha2e the same impact
%. !he answer cannot "e determined "y the information gi2en

Difficulty: Medium

,6. A "ond issued "y the =tate of Ala"ama is priced to yield *.2+C. If you are in the 26C ta5
"racket this "ond would pro2ide you with an e(ui2alent ta5a"le yield of '''''''''.
A. ,.+0C
#. 3.2+C
C. 6.*6C
%. none of the a"o2e

Difficulty: Medium Feedback: 8.68% = 6.25%/( ! ".28#

,7. !he purchase of a futures contract gi2es the "uyer '''''''''.
A. the right to "uy an item at a specified price
#. the right to sell an item at a specified price
C. the o"ligation to "uy an item at a specified price
%. the o"ligation to sell an item at a specified price

Difficulty: Easy

+0. .wnership of a put option entitles the owner to the '''''''''' to ''''''''''' a
specific stockA on or "efore a specific dateA at a specific price.
A. rightA "uy
B. rightA sell
C. o"ligationA "uy
%. o"ligationA sell

Difficulty: Easy

2-)2
+1. An in2estor in a 26C ta5 "racket is trying to decide whether to in2est in a municipal "ond
or a corporate "ond. =he looks up municipal "ond yields Hr
m
I "ut wishes to calculate the
ta5a"le e(ui2alent yield r. !he formula she should use is gi2en "y ''''''.
A. r J r
m
K H1 - 26CI
#. r J r
m
LH1 - 32CI
C. r J r
m
K H1 - 32CI
D. r J r
m
LH1 - 26CI

Difficulty: Hard

+2. 9une call and put options on Eing #ooks Inc are a2aila"le with e5ercise prices of @)0A @)+
and @,0. Among the different e5ercise pricesA the call option with the ''''' e5ercise price
and the put option with the ''''' e5ercise price will ha2e the greatest 2alue.
A. @,0M @)0
B. @)0M @,0
C. @)+M @)+
%. @,0M @,0

Difficulty: Medium

+). .wnership of a call option entitles the owner to the '''''''''' to '''''''''' a specific
stockA on or "efore a specific dateA at a specific price.
A. rightA "uy
#. rightA sell
C. o"ligationA "uy
%. o"ligationA sell

Difficulty: Easy

2-))
+,. !he '''''''' the ratio of municipal "ond yields to corporate "ond yields the '''''''''
the cutoff ta5 "racket where more indi2iduals will prefer to hold municipal de"t.
A. higherM lower
#. lowerM lower
C. lowerM higher
%. higherM higher

Difficulty: Hard

++. Which of the following types of "onds are e5cluded from most "ond indices
A. Corporate "onds
B. 9unk "onds
C. 0unicipal "onds
%. :one of the a"o2e

Difficulty: Medium

+*. !he Bang =eng inde5 reflects market performance on which of the following ma4or stock
markets
A. 9apan
#. =ingapore
C. !aiwan
D. Bong Eong

Difficulty: Medium

+3. !he =tandard and $oors +00 is aHnI '''''''''' weighted inde5.
A. e(ually
#. price
C. 2alue
%. share

Difficulty: Easy

2-),
+6. A firm that fails to pay di2idends on its preferred stock is said to "e '''''''''.
A. insol2ent
B. in arrears
C. insuffera"le
%. delin(uent

Difficulty: Medium

+7. -arge well-known companies often issue their own short term unsecured de"t notes
directly to the pu"licA rather than "orrowing from "anksA their notes are called '''''''''.
A. certificates of deposit
#. repurchase agreements
C. "anker&s acceptances
D. commercial paper

Difficulty: Easy

*0. Which of the following is most like a short-term collaterali;ed loan
B. /epurchase agreement
C. #anker&s acceptance
%. Commercial paper

Difficulty: Medium

*1. 8urodollars are '''''''''.
A. dollar denominated deposits at any foreign "ank or foreign "ranch of an American "ank
#. dollar denominated "onds issued "y firms outside their home market
C. currency issued "y 8uro %isney and traded in France
%. dollars that wind up in "anks as a result of money laundering acti2ities

Difficulty: Easy

2-)+
*2. Which of the following is used to "ack international sales of goods and ser2ices
B. #anker&s acceptance
C. 8urodollar deposits
%. Commercial paper

Difficulty: Medium

*). !reasury notes ha2e initial maturities "etween '''''''' years.
A. 2 and ,
#. + and 10
C. 10 and )0
D. 1 and 10

Difficulty: Easy

*,. Which of the following are not characteristic of common stock ownership
A. /esidual claimant
B. Dnlimited lia"ility
C. Noting rights
%. -imited life of the security

Difficulty: Easy

*+. If you thought prices of stock would "e rising o2er the ne5t few months you may wish to
'''''''''''''''''' on the stock.
A. purchase a call option
#. purchase a put option
C. sell a futures contract
%. place a short sale order

Difficulty: Medium

2-)*
**. A typical "ond price (uote includes all "ut which one of the following
A. %aily high price for the "ond
#. Closing "ond price
C. ?ield to maturity
D. %i2idend yield

Difficulty: Easy

*3. What are "usiness firms most likely to use deri2ati2e securities for
A. Bedging
#. =peculating
C. %oing calculus pro"lems
%. 0arket making

Difficulty: Medium

*6. What would you e5pect to ha2e happened to the spread "etween yields on commercial
paper and !reasury "ills immediately after =eptem"er 11A 2001
A. :o changeA as "oth yields will remain the same.
B. IncreaseA the spread usually increases in response to a crisis.
C. %ecreaseA the spread usually decreases in response to a crisis.
%. :o changeA as "oth yields will mo2e in the same direction.

Difficulty: Hard

2-)3
*7. A stock (uote indicates a stock price of @*0 and a di2idend yield of )C. !he latest
(uarterly di2idend recei2ed "y stock in2estors must ha2e "een '''''' per share.
A. @0.++
#. @1.60
C. @0.,+
%. @1.2+

Difficulty: Medium

30. !hree stocks ha2e share prices of @12A @3+A and @)0 with total market 2alues of @,00
millionA @)+0 million and @1+0 million respecti2ely. If you were to construct a price-weighted
inde5 of the three stocks what would "e the inde5 2alue
A. )00
B. )7
C. ,)
%. )0
$%de& J H12 O 3+ O )0IL) J )7

Difficulty: Medium

31. Which of the following is not considered a money market in2estment
#. 8urodollar
C. /epurchase agreement
D. !reasury note

Difficulty: Easy

2-)6
32. !he Federal /eser2e #oard of <o2ernors directly controls which of the following interest
rates
#. #rokers call
C. Federal funds
%. -I#./

Difficulty: Easy

3). ?ou decide to purchase an e(ual num"er of shares of stocks of firms to create a portfolio.
If you wished to construct an inde5 to track your portfolio performance your "est match for
your portfolio would "e to construct aLan ''''''.
%. "ond price inde5

Difficulty: Hard

3,. In a ''''''''''' inde5 changes in the 2alue of the stock with the greatest market 2alue
will mo2e the inde5 2alue the most e2erything else e(ual.
%. "ond price inde5

Difficulty: Medium

2-)7
3+. A corporation in a ),C ta5 "racket in2ests in the preferred stock of another company and
earns a *C pre-ta5 rate of return. An indi2idual in2estor in a 1+C ta5 "racket in2ests in the
same preferred stock and earns the same pre-ta5 return. !he after ta5 return to the corporation
is ''''''' and the after ta5 return to the indi2idual in2estor is '''''''.
A. ).7*CM +.1C
B. +.)7CM +.1C
C. *.00CM *.00C
%. ).7*CM *.00C
After-ta5 return to corporate in2estor after 30C e5clusion J 0.0* - H0.0* K 0.)0IK0.), J +.)7C
After-ta5 return to indi2idual in2estor J 0.0* K H1 - 0.1+I J +.1C

Difficulty: Hard

3*. All "ut which one of the following indices is 2alue weighted
A. :asda( Composite
#. =F$ +00
C. Wilshire +000
D. %9IA

Difficulty: Easy

33. What is the ta5 e5empt e(ui2alent yield on a 7C "ond yield gi2en a marginal ta5 rate of
26C
A. *.,6C
#. 3.2+C
C. 6.02C
%. 7.00C

Difficulty: Medium

2-,0
36. A ta5 free municipal "ond pro2ides a yield of ).2C. What is the e(ui2alent ta5a"le yield
on the "ond gi2en a )+C ta5 "racket
A. ).20C
#. ).*6C
C. ,.72C
%. +.00C

Difficulty: Medium

37. An inde5 computed from a simple a2erage of returns is aLan '''''.
A. e(ual weighted inde5
#. 2alue weighted inde5
%. share weighted inde5

Difficulty: Medium

60. A ta5 free municipal "ond pro2ides a yield of 2.),C. What is the e(ui2alent ta5a"le yield
on the "ond gi2en a 26C ta5 "racket
A. 2.),C
#. 2.*6C
C. ).2+C
%. ,.72C

Difficulty: Medium

2-,1
61. !he Chompers Inde5 is a price weighted stock inde5 "ased on the ) largest fast food
chains. !he stock prices for the three stocks are @+,A @2)A and @,,. What is the price weighted
inde5 2alue of the Chompers Inde5
A. 2).,)
#. )+.)*
C. ,0.))
%. ,7.+6

Difficulty: Medium

62. !he Bydro Inde5 is a price weighted stock inde5 "ased on the + largest "oat
manufacturers in the nation. !he stock prices for the fi2e stocks are @10A @20A @60A @+0 and
@,0. !he price of the last stock was 4ust split 2 for 1 and the stock price was hal2ed from @,0
to @20. What is the new di2isor for a price weighted inde5
A. +.00
#. ,.6+
C. ,.+0
%. ,.3+

Difficulty: Hard

2-,2
6). A "enchmark inde5 has three stocks priced at @2)A @,)A and @+*. !he num"er of
outstanding shares for each is )+0A000 sharesA ,0+A000 sharesA and ++)A000 sharesA
respecti2ely. If the market 2alue weighted inde5 was 730 yesterday and the prices changed to
@2)A @,1A and @+6A what is the new inde5 2alue
A. 7*0
#. 730
C. 73+
%. 76+

Difficulty: Hard

6,. A "enchmark market 2alue inde5 is comprised of three stocks. ?esterday the three stocks
were priced at @12A @20A and @*0. !he num"er of outstanding shares for each is *00A000
sharesA +00A000 sharesA and 200A000 sharesA respecti2ely. If the stock prices changed to @1*A
@16A and @*2 today respecti2elyA what is the one day rate of return on the inde5
A. +.36C
#. ,.)+C
C. *.1*C
%. 3.,2C

Difficulty: Hard

6+. Which of the following mortgage scenarios will "enefit the homeowner the most
A. Ad4usta"le rate mortgage when interest rate increases.
#. Fi5ed rate mortgage when interest rates falls.
C. Fi5ed rare mortgage when interest rate rises.
%. :one of the a"o2eA as "anker&s interest will always "e protected.

Difficulty: Medium

2-,)

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Chapter 02 - Asset Classes and Financial Instruments

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