Chapter5MoneyMarketsTrue/FalseQuestions

1.

Everything else equal, an effective annual rate will be greater than

the bond equivalent yield on the same security. Answer:

2.

Money markets exist to help reduce the opportunity cost of holding

cash balances.

3.

The majority of money market securities are low denomination,

low risk investments designed to appeal to individual investors
with excess cash.

4.

Most money market securities are initially sold to individual

investors.

5.

Commercial paper, negotiable certificates of deposit and banker's

acceptance rates are all quoted as discount yields.

6.

Euro commercial paper is a short term obligation of the European

Central Bank.

7.

The U.S. Treasury recently switched from a discriminating price

auction to a single price auction because the latter lowered the
average price paid by investors.

8.

In the T-Bill secondary market the ask yield will normally be less
than the bid yield.

9.

The largest secondary money market in the U.S. is the secondary

market for T-Bills.

10.

Fed funds are generally short term unsecured loans while repos
are short term secured loans.
MultipleChoiceQuestions

11. For the purposes for which they are used, money market
securities should have which of the following characteristics?
I.

Low trading costs

II.

Little price risk

III.

High rate of return

IV.

Life greater than one year

A) I and III

B) II and IV

C) III and IV

D) I and II

E) I, II and III
Money market securities exhibit which of the following?
I. II. III. IV.
A) B) C) D) E)
Large denominationMaturity greater than one yearLow default risk
Contractually determined cash flows
I, II and IIII, III and IVII, III and IV II and IVI, II, III and IV
Answer: B Page: 123 Level: Medium

13.

A repo is in essence a collateralized

A) Banker'sacceptance

B) Certificate of deposit

C) Fed funds loan

D) Commercial paper loan

E) Eurodollar deposit
14.

A short term unsecured promissory note issued by a company is

A) Commercial paper

B) T-Bills

C) Repurchaseagreement

D) Negotiable CD

E) Banker's acceptance
15.

A time draft payable to a seller of goods, with payment guaranteed

by a bank is a

A) Commercial paper security

B) T-Bill

C) Repurchaseagreement

D) Negotiable CD

E) Banker's acceptance
16.

In the T-Bill auction process the competitive bidder is guaranteed a

_____ and a noncompetitive bidder is guaranteed a _____.

A) Minimum price; maximum price

B) Maximumprice;minimumprice

C) Maximumprice;givenquantity

D) Minimum price; maximum quantity

E) None of the above

59

17.

A dealer is quoting a $10,000 face 60 day T-Bill quoted at 3.22 bid,

3.14 ask. You could buy this bill at _____ or sell it at _____.

A) $9,947.67 , $9,946.33

B) $9,678.00 , $9,686.00

C) $9,686.00 , $9,678.00

D) $9,946.33 , $9,947.67

E) None of the above

18.

Rates on federal funds and repurchase agreements are stated

A) On a bond equivalent basis with a 360 day year

B) On a bond equivalent basis with a 365 day year

C) As a discount yield with a 360 day year

D) As an EAR

E) As a discount yield with a 365 day year

19.

The discount yield on a T-Bill differs from the T-bill's bond

equivalent yield (BEY) because
A) The discount yield is a percentage of face value instead of

price
.

B) A 360 day year is used on the discount yield instead of 365

days

C) The discount yield is without compounding, the BEY is with

compounding

D) BothAandB

E) A, B and C are all reasons for the difference

20.

The typical spread on prime quality commercial paper and medium

grade commercial paper has been about ______ basis points.
A) 200
B) 22
C) 33
D) 86
E) 12

21.

The rate of return on a repo is

A) Determined by the rate of return on the underlying collateral

B) Strongly affected by the current Fed funds rate at the time of

the repo

C) Determined at the time of the repo

D) A and C

E) B and C
22.

Which one of the following statements about commercial paper is

NOT true? Commercial paper issued in the U.S.:

A) Is an unsecured short term promissory note

B) Has a maximum maturity of 270 days

C) Is virtually always rated by at least one ratings agency

D) Has no secondary market

E) Carries an interest rate above the prime rate

23.

A negotiable CD

A) Is a bank issued transactions deposit

B) Isaregisteredinstrument

C) Is a bank issued time deposit

D) Has denominations ranging from $50,000 to $10 million

E) Pays discount interest

24.

A 90 day $1 million CD has a 4% annual rate quote. If you buy the

CD, how much will you collect in 90 days?
A) $1,040,000
B) $1,009,863
C) $1,000,000
D) $1,015,012

E) $1,010,000
25. A banker's acceptance is
.

A) A time draft drawn on the exporter's bank

B) A method to help importers evaluate the creditworthiness of

exporters

C) A liability of the importer and the importer's bank

D) An add on instrument

E) For greater than 1 year maturity

26. The most liquid of the money market securities are

A) Commercial paper

B) Banker'sacceptances

C) T-Bills

D) Fed funds

E) Repurchase agreements
25.

In dollars outstanding in 2004 the largest money market security

was

A) Commercial paper

B) Banker'sacceptances

C) T-Bills

D) Fed funds & repos

26.

The international version of the fed funds rate is called

A) LIBOR

B) The repo rate

C) The Euro rate

D) International dollar rate

E) The exchange rate

27.

LIBOR is generally _____ the Fed funds rate because foreign bank
deposits are generally _____ than domestic bank deposits
A) Greater than; less risky
B) Lessthan;morerisky
C) Thesameas;equallyrisk

D) Greater than; more risky

E) Less than; less risky

30.

A U.S. exporter sells $50,000 of furniture to a Latin American

importer. The exporter requires the importer to obtain a letter of
credit. When the bank accepts the draft the exporter discounts the
90 day note at a 6% discount. What is the exporter's true effective
annual financing cost?
A) 6.00%
B) 6.18%
C) 6.32%

D) 6.24%
E) 6.45%
31. A Chinese exporter sells $75,000 of toys to a French importer.
The Chinese exporter requires the French importer to obtain a
letter of credit. When the bank accepts the draft the exporter
discounts the 60 day note at a 3.5% discount. What is the exporter's
true effective annual financing cost?
A) 3.62%
B) 3.57%
C) 3.35%
D) 3.78%
E) 3.97%
32. If a $10,000 par T-Bill has a 4.5% discount quote and a 180
day maturity, what is the price of the T-Bill?
.

A) $9,550

B) $9,525

C) $9,775

D) $9,675

E) None of the above

31.

A 90 day T-Bill is selling for $9,915. The par is $10,000. The

effective annual return on the T- Bill is (watch your rounding)
A) 4.09%

B) 3.48%
C) 3.47%
D) 3.52%
E) 3.55%
32. Suppose that $10 million face value commercial paper
with a 270 day maturity is selling for $9.65 million. What is
the BEY on the paper?
A) 3.627%
B) 4.903%
C) 4.836%
D) 4.934%
E) None of the above
35.

A $5 million jumbo CD is paying a quoted 4.25% interest rate on

120 day maturity CDs. How much money could you withdraw at
maturity if you invest in the CD?
A) $5,000,000
B) $5,069,863
C) $4,929,167
D) $5,212,500
E) $5,070,833
36. From 1990 to 2004 which one of the following money

market securities actually declined in terms of dollar amount

outstanding?
.

A) Commercial paper

B) Treasurybills

C) Federal funds and repos

D) Negotiable CDs

E) Banker's Acceptances
36.

A 120 day maturity money market security has a bond equivalent

yield of 4.25%. The security's EAR is

A) 4.44%

B) 4.28%

C) 4.93%

D) 4.31%

E) None of the above

37.

In a Treasury auction, preferential bidding status is granted to

A) Competitive bidders

B) Noncompetitivebidders

C) Shortsalecommittedbidders

D) Commercial bank bidders

E) No group of bidders

38.

If your firm enters into an overnight reverse repurchase agreement

your firm is

A) Borrowing fed funds temporarily

B) Selling a security now while agreeing to buy it back tomorrow

C) Giving an unsecured loan to the counterparty

D) Procuringabanker'sacceptance

E) None of the above

39.

Eurodollar CDs would include

A) CDs denominated in Euros

B) Dollar investments by European entities in the U.S.

C) Dollars deposited in Caribbean banks

D) Dollars deposited in Europe
E) Both C & D

Chapter6BondMarketsTrue/FalseQuestions
11.

A Treasury STRIP is sometimes referred to as a TIPS.

12.

A callable bond is one where the issuer is required to retire a

certain amount of the outstanding bonds each year to ensure that
all the bond principle is paid by final maturity.

13.

Of the three major sectors of bond issuers, corporations have the

greatest dollar value of bonds outstanding.

14.

On the run Treasury notes and bonds are newly issued securities
and off the run Treasuries are securities that have been
previously issued.

15.

Bonds that give the bondholder the opportunity to purchase

common stock at a prespecified price up to a specified date are
called convertible bonds.

16.

The dirty price plus accrued interest is called the clean price of the
security.

17.

Accrued interest owed to the bond seller increases as the next

coupon payment date approaches

18.

Revenue bonds are backed by the full revenue of the municipality.

V.

An institutional investor that pays no taxes and is looking for a

bond investment will probably not invest in municipal bonds.

VI. An unsecured bond that has no specific collateral other than the
general creditworthiness of the issuing firm is called a debenture.
VII. With TIPS, the security's coupon rate is changed every six months
by the inflation rate as measured by the CPI.
VIII. Bond ratings use a classification system to give investors an idea
of the amount of interest rate risk associated with the bond issue.
IX. Bonds rated below Baa by Moody's or BBB by S&P are junk
bonds.
X.

Euro bonds are bonds denominated in the issuer's home currency,

but are issued outside their home country.

XI.

Callable bonds have lower required yields than similar convertible

bonds, ceteris paribus.
MultipleChoiceQuestions

The largest component of bond market instruments outstanding in

2004 was comprised of
1 A) T-Bills
2 B) T-Bonds
3 C) Municipalbonds
4 D) Corporate bonds
5 E) None of the above

A T-Bond with a $1000 par is quoted at 98:20 Bid, 98:24 Ask. The
clean price for you to buy this bond is
1 A) $986.25
2 B) $987.50
3 C) $982.00
4 D) $982.40
5 E) None of the above

The quoted ask yield on a 15 year $1000 par T-Bond with a 6%

semiannual payment coupon and a price quote of 104:12 is

A) 6.00%

B) 5.60%

C) 5.57%

D) 2.81%

E) 2.78%

A Treasury security in which periodic coupon interest payments

can be separated from each other and from the principal payment is
called a
1 A) STRIP
2 B) T-Note
3 C) T-Bond
4 D) G.O. Bond
5 E) Revenue Bond
20. An 18 year T-Bond can be stripped into how many separate
securities?
A) 18
B) 19
C) 36
D) 37
E) 38

17.

A life insurer owes $75,000 in 6 years. To fund this outflow the

insurer wishes to buy strips that mature in 6 years. The strips have
a $3,000 face value per strip and pay a 7% EAR. How much must
the insurer spend now to fully fund the outflow (to the nearest
dollar)?

A) $10,000
B) $25,000
C) $49,634
D) $45,649
E) $41,877
The January 1, 2005 ask yield on a Treasury STRIP maturing in 8
years is 5.488%. If the face value is $1000, what should be the
QUOTED cost of the strip today (use semiannual compounding)?
A) 60:00
B) 64:03
C) 64:63
D) 64:27
E) 64:12
Which one of the following bonds is likely to have the highest
required rate of return, ceteris paribus?
.

A) AAA rated noncallable corporate bond with a sinking fund.

B) AA rated callable corporate bond with a sinking fund

C) AAA rated callable corporate bond with a sinking fund

D) High quality municipal bond

E) AA rated callable corporate bond without a sinking fund

24. On June 1, 2000 you purchase a $10,000 par T-Note that

matures in 5 years. The coupon rate is 6% and the price quote is
98:6. The last coupon payment was May 1, 2000 and the next is
November 1, 2000 (184 days total). The accrued interest is
A) $75.35
B) $101.00
C) $50.54
D) $40.65
E) $35.67
21.

On September 1, 2000 an investor purchases a $10,000 par T-Bond

that matures in 15.67 years. The coupon rate is 6% and the investor
buys the bond 60 days after the last coupon payment (120 days
before the next). The ask yield is 7%. The dirty price of the bond
is:
A) $9,045.63
B) $9,157.47
C) $9,145.63
D) $9,200.02
E) $9,000.10
Interest income from Treasury securities is _____, and
interest income from municipal bonds is always _____.

A) Exempt from federal taxes; exempt from all taxes

B) Taxableatthestatelevelonly;exemptfromstatetaxesonly

C) Taxableatfederallevelonly;exemptfromfederaltaxes

D) Taxable at the state level; taxed at the federal level

E) Totally tax exempt; exempt from state taxes

23.

An investor is in the 28% federal tax bracket, pays an 8% state tax

rate and 2% in local income taxes. For this investor a municipal
bond paying 6% interest is equivalent to a corporate bond paying
_____ interest
A) 15.79%
B) 8.33%
C) 9.38%
D) 9.68%
E) 8.47%
An investor is trying to decide between a muni paying 6% or
an equivalent taxable corporate paying 7.5%. What is the
minimum marginal tax rate the investor must have to
consider buying the municipal bond?
A) 80.00%
B) 20.00%
C) 25.00%
D) 66.67%
E) 33.33%

28.

Standard revenue bonds are

A) Backed by the full taxing authority of the municipality

B) Collateralized by the earnings from a specific project

C) Bonds backed by mortgages

D) Backed by the U.S. Treasury

E) Always offered with a best efforts offering

29.

When an investment banker purchases an offering from a bond

issuer and then resells it to the public this is known as a

A) Rights offering

B) Privateplacement

C) Firmcommitment

D) Best efforts

E) Standby offering
.

The entire contract between the bondholders and bond issuer is

called the _____.

A) Covenant

B) Debenture

C) Indenture

D) Denture

E) Monitor

Which of the following is/are true about callable bonds?

I. II. III. IV.

A) B) C) D) E)
Must always be called at parWill normally be called after
interest rates dropCan be called by either the bondholder or
the bond issuer Have higher required returns than non-callable
bonds
I and II onlyII and IV onlyII and IV onlyI, II and III onlyI, II,
III and IV are true
Answer: B Page: 178-179 Level: Medium
32.

SEC Rule 144 A does which of the following?

A) Allows privately placed investments to be traded on a limited

basis

B) Allows bond issuers to call their bonds when desired

C) Determines the limits of responsibility of bond covenants

D) Requires that bonds traded on the NYSE bond market utilize

the ABS system

E) None of the above

33.

Convertible bonds are

A) Bonds that give the bondholder the right to purchase stock at a

preset price without giving up the bond

B) Bonds in which the issue matures (converts) a little each year

C) Bonds collateralized with certain types of automobiles

D) Bonds that allow the issuing company to require bondholders

to purchase stock in exchange for the bond

.

E) None of the above

35. A holder of Rainbow Funds convertible bonds with a $1,000
price can convert the bond to 20 shares of common stock. The
stock is currently priced at $44/share. By what percent does the
stock price have to rise to make conversion potentially attractive?
A) 10.00%
B) 14.73%
C) 11.11%
D) 13.64%
E) 10.69%
With respect to private placements of bonds, which of the
following is correct?
Answer: DRationale: [(1000 / 20) / 44] - 1
I.
II.
III. IV.
A) B) C) D) E)
Issuers of privately placed bonds tend to be less well known
than public bond issues
Interest rates on privately placed debt tend to be higher than
for similar public issues
Purchasers of privately placed debt have assets of at least $100
million

Once bonds have been privately placed, the original buyers

must hold the bonds until maturity
I onlyI and III onlyI, II and III only I, III and IV only I, II, III
and IV
Level: Difficult
Answer: C Page: 173 Level: Medium37. Which of the following
statements about Euro bonds is/are true?
I. II.
III. IV.
A) B) C) D) E)
The issuer chooses the currency of denomination
Spreads on firm commitment offers are lower for Euro bonds
than for U.S. bonds
Euro bonds typically have denomination of $5,000 and $10,000
Euro bonds are bearer bonds
I and II onlyI, III and IV onlyII, III and IV onlyII and III only
I, II, III and IV are true
Answer: B Page: 187-188 Level: Medium
78

40.

Brady bonds are sometimes converted to _____ when the issuer's

credit rating improves.

A) Samurai bonds

B) Zombiebonds

C) Bulldogbonds

D) Sovereign bonds

E) Phoenix bonds
41.

Bearer bonds are bonds

A) With coupons attached that are redeemable by whoever has the

bond

B) Where the registered owner automatically receives bond

payments when scheduled.

C) In which the issue matures on a series of dates

D) Issued in another currency other than the bond issuer's home

currency

E) Issued in a different country other than the bond issuer's home

country
42.

A T-Bond with a $1000 par is quoted at a bid of 110:12 and an ask

of 110:15. If you
sell the bond you will receive

41.

A) $1,103.75

42.

B) $1,104.69

43.

C) $1,101.20

44.

D) $1,101.50

45.

E) None of the above

41. A T-Bond with a $10,000 par is quoted at a bid of 96:10 and an
ask of 96:14. If you bought the bond and then immediately sold it
at the same quotes, how much money would you gain or lose

(ignore commissions)?
A) $12.50
B) -$12.50
C) -$4.00
D) $4.00
E) $0.00
47.

The quoted ask yield on a 12 year $1000 par T-Bond with a 5%

coupon and a price quote of 106:22 is (use semiannual
compounding)
A) 5.00%
B) 4.32%
C) 4.36%
D) 2.16%
E) 2.18%

An investor buys a $10,000 par, 3% coupon TIPS security with 2

years to maturity. If inflation every six months over the investor's
holding period is 2%, what is the final payment the TIPS investor
will receive?
A) $10,150.00
B) $10,344.15
C) $10,745.68

D) $10,824.32
E) $10,986.69
A bond investor has a 99% chance of receiving all of her promised
payments on a particular bond issue in the first year of holding the
bond, but only a 97% chance in the second year and beyond. What
is the cumulative default probability over the first three years she
holds the bond?
A) 6.85%
B) 7.00%
C) 9.00%
D) 7.32%
E) 7.55%
You purchase a $1000 par convertible bond that can be converted
into 142 shares of stock. The stock is currently priced at $5.42.
What percentage price increase in the stock is needed to make
conversion worthwhile?
A) 15.5%
B) 29.9%
C) 18.2%
D) 23.7%
E) 19.8%
An investor buys a corporate callable bond at par that has a 6

year maturity. The bond is called after three years at a call

price of $1045.12. You reinvested your money for the
remaining three years in the same risk level of investment.
Which one of the following is true?
I. II. III. IV.
A) B) C) D) E)
Over the full six years you earned less than the yield rate you
were promised when you originally purchased the bond.
At the end of the first three years, interest rates were probably
higher than when you bought the bond.
Over the full six years you earned more than the yield rate you
were promised when you originally purchased the bond.
You were able to reinvest the coupons at a higher rate of
interest in the last three years than the reinvestment rate you
earned in the first three years.
I onlyIII onlyI and II only III and IV only II and IV only
Page: 177
Level: Medium
Answer: A Page: 178-179 Level: Medium
81

Chapter18PensionFundsTrue/FalseQuestions
19.

Of the different types of defined benefit plans, plans using the final
pay method will usually produce the biggest retirement benefit to
employees.

20.

A Keogh plan is designed for self-employed individuals.

21.

Pension plans administered by the federal government are called

insured pension plans.

22.

Insured pension plans are backed by a percentage of the sponsor's

assets but do not have separate asset backing.

23.

The largest amount of private pension fund assets are held by

uninsured private pension funds.

24.

Noninsured pension plans generally invest in riskier assets than

insured pension plans.

25.

If you believe that taxes and are going to go up and you will likely
have to pay a high tax rate when you retire, you will probably be
better off with a Roth IRA than with a traditional IRA.

26.

If you are terminated before you are fully vested in an employer

sponsored plan you may not get to keep previous contributions to
your pension made by your employer.

27.

In a defined benefit plan the retirement benefit will vary according

to rates of return on pension fund reserves.

28.

In terms of assets managed and numbers of plans, defined

contribution plans are becoming more predominant and defined
benefit plans are declining.
MultipleChoiceQuestions
11. A pension plan has promised to payout $15 million per year
over the next 10 years to its employees. Actuaries estimate the rate
of return on the fund's assets will be 5%. What amount of pension
fund reserves (to the nearest dollar) are needed for the plan to be
fully funded?

A) $115,826,024

B) $150,000,000

C) $125,657,890

D) $111,458,231

E) None of the above

12. Private pension funds are funds administered by

18.

A) The Federal government

19.

B) State and local governments

20.

C) Insurancecompanies

21.

D) Banks and mutual funds

22.

E) Both C and D

22.

In general terms, which one of the following plan types is the

riskiest for an employee?

A) Defined contribution plan invested in fixed income securities

B) Defined contribution plan invested in equities

C) Final pay defined benefit plan

D) Career average defined benefit plan

E) Overfunded defined benefit plan

23.

Over the last 10 years defined contribution plans have grown

faster than defined benefit plans in which of the following
areas?
I. II. III.
A) B) C) D) E)
Fund assetsNumber of fundsNumber of plan participants

I onlyI and II only II and III only I, II and IIIII only

Answer: D Page: 515-516 Level: Medium
15. Congratulations, you have just been employed! You now have
a choice between a flat benefit at retirement equal to $3,000 times
your years of service, or a career average formula of 3% of your
average salary times your years of service. You expect to work 35
years. At what average salary would you be indifferent between the
two alternatives?
A) $103,000
B) $102,500
C) $101,850
D) $105,000
E) $100,000
16. At your new job you estimate that your average salary over
your working years will be $75,000 per year. How many more
years would you have to work to receive as much benefit from a
flat benefit of $2,250 times years of service as you would receive
from 4% of your average salary times years of service?
24.

A) 1.33 times as many years

25.

B) 0.75 times as many years

26.

C) 1.04 times as many years

27.

D) 2.40 times as many years

28.

E) 1.50 times as many years

30.

An employee who has worked for his firm for 30 years can retire
right now and receive a constant annual benefit of $45,000. He has
a final pay plan that pays his average salary over his final 5 years

times 3% times years of service. He has decided he will keep

working five more years only if by doing so, his retirement
benefits will grow at 6% per year. How much would his expected
average salary (to the nearest dollar) have to be over the next 5
years to keep him working?
A) $60,220
B) $57,353
C) $50,010
D) $66,911
E) $53,147
The main advantage of a profit sharing Keogh plan over a
money sharing Keogh plan is that profit sharing plans
.

A) Are eligible for PBGC insurance and money sharing plans are
not

B) Have higher maximum contributions than money sharing plans

C) Can have contributions that vary from year to year with profits,
while money sharing plan contributions are fixed

D) Both A and B are advantages

E) None of the above

.
.

A defined benefit pension plan has expected payouts of $15 million

per year over the next 25 years. The fund can be expected to earn
an average of 6% on its assets. It currently has reserves of $160

million. The fund is __________ by about ___________ million.

.

A) Underfunded; $31.75

B) Underfunded;$215

C) Overfunded;$31.75

D) Overfunded; $215

Under ERISA, pension fund managers are required to invest fund

assets as if wisely as if they were investing their own money. This
requirement is called the
1 A) Owlrule
2 B) V esting requirement
3 C) 403(b) requirement
4 D) Prudent person rule
5 E) Funding rule

A ___________ plan does not require the employer to guarantee

retirement benefits nor to maintain a minimum level of pension
reserves

34.

A) Defined benefit

35.

B) Insured pension

36.

C) Corporatepension

37.

D) Uninsured pension

38.

E) Defined contribution

43.

Which of the following statements about 401(k) plans are true?

They are defined benefit plans

They allow employer and employee contributions

Earnings accrue tax free during the employee's working years

They allow employee discretion in asset allocation

They always have minimum guaranteed rates of return

A) I, IV and V only

B) II, II and V only

C) II and III only

D) II, III and IV only

E) All are true

44.

An employee contributes 8% of his salary to their 401(k) plan and

the employer matches with 3%. The employee earns $60,000 and
is in a 28% tax bracket. If the employee also invests the tax savings
generated by his contribution and earns 10% on all funds invested,
what is his one year rate of return relative to the amount of money
he invested?
A) 10.00%
B) 51.25%
C) 90.07%
D) 42.22%

E) 29.52%
Employee plus employer contributions to a 401(k) are
$15,000 per year. Equity funds are earning 15%, bond funds
8% and money market funds 6%. The employee wants to
retire as soon as possible with $1 million in retirement assets.
How much more quickly can he retire if he puts all his
money in equity than if he puts 1/3 in each?
.

A) 3.3 years

B) 9.7 years

C) 4.6 years

D) 2.4 years

E) 12.2 years
25. Which of the following statements are true about a
traditional IRA?
I.
II. III. IV. V.
per
Subject to an income limit, in 2005 a single person may
contribute up to $4000 year of pretax income to an IRAAll
withdrawals are tax freeEarnings on the IRA account are not
taxed until withdrawn
You must begin withdrawals at age 59 12 Withdrawal(s) can
be a lump sum or installments
46.

A) I, II, IV

47.

B) I, II, IV and V

48.

C) I, III and V

49.

D) II, IV and V

50.

E) III, IV and V
Answer: C Page: 521 Level: Medium

48.

Which of the following are true about a Roth IRA?

1 Contributions are tax deductible
2 Withdrawals after retirement are not taxed
3 You must begin withdrawals at age 70 12
4 Employers match contributions
5 They are only available to individuals earning less than
$50,000, or households earning less than $90,000
6 A) I, II and IV
7 B) II, IV and V
8 C) I, III and IV
9 D) II only
10 E) V only

49.

A retirement account specifically designed for self-employed

persons is a
1 A) Roth IRA

2 B) TraditionalIRA
3 C) Keogh
4 D) Penny Benny
5 E) Public Pension plan
45.

Most public pension funds are

1 A) Overfunded
2 B) Underfunded
3 C) Fullyfunded
4 D) Defined contribution
5 E) Keogh plans

46.

Under ERISA the maximum time period allowed for vesting is

____ years.
A) 3
B) 5
C) 8
D) 10
E) 15

47.

ERISA established all but which one of the following?

1.

A) Prudent man rule

2.

B) Maximumvestingtimes

3.

C) Minimumfundingrequirements

4.

D) Insurance for pension plan participants

5.

E) Minimum payouts for defined contribution plans

48.

The PBGC

1.

A) Insures participants of defined benefit plans if plan funds are

insufficient to meet contractual pension obligations

2.

B) Insures participants of defined contribution plans if investment

returns are insufficient to meet expected pension obligations

3.

C) Regulates day to day pension fund operations

4.

D) Both A and C are correct

5.

E) A, B and C are correct

258

51.

A defined benefit pension plan has expected payouts of $20 million

per year for 10 years and then $35 million over the following 20
years. The fund can be expected to earn an average of 4.75% on its
assets. It currently has reserves of $320 million. The plan is
underfunded by about ___________ million.
A) $900
B) $116
C) $580
D) $224
An employee contributes 5% of her salary to her 401(k) plan

and her employer contributes another $1,900. The employee

earns $75,000 and is in a 28% tax bracket. If the employee
does not invest the tax savings generated by her contribution
and earns 9% on all funds invested, what is her one year rate
of return relative to the amount of money she invested?
A) 9.00%
B) 41.25%
C) 64.23%
D) 32.74%
E) 19.67%
34. Employee plus employer contributions to a 401(k) are $14,000
per year. Equity funds are earning 11%, bond funds 6% and money
market funds 4%. The employee will retire in 30 years. How much
money will he have if puts 60% of his money in equities, 30% in
bond funds and the rest in money market funds?
A) $1,456,960
B) $1,838,526
C) $1,654,320
D) $1,978,565
E) $1,248,550
259

54.

You want to have $2,000,000 when you retire and you are in a
defined contribution plan. You can earn 8% per year on the money
invested and you will retire in 30 years. Your employer also
contributes to your plan. The employer will contribute 6% of what

you put into the plan each year. How much do you have to
contribute per year to meet your goal? A) $18,435.43
B) $17,654.87
C) $16,879.32
D) $16,655.53
E) $15,999.44
Vesting refers to
1 A) How long until an employee owns any employer
contributions to the employee's pension plan
2 B) How long until an employee can transfer any of
their own contributions to a new plan if they switch
jobs
3 C) Eligibilityrequirementstoretireearly
4 D) Restrictions on asset allocations with in a defined
contribution plan
5 E) The extent to which an employee materially
participated in a given business in a given year
55.

IRAs are
1 A) Self directed investment vehicles designed to
provide supplemental retirement income
2 B) Corporate retirement plans for self employed
individuals and small businesses

3 C) Specific classes of investments such as equities or

bonds issued by certain corporations
4 D) Investment vehicles created by ERISA
1.

Countries where the link between public pension benefits and

amounts paid in are weak include
A) Sweden
B) Italy
C) GreatBritain
D) Chile
E) France

2.

In 2004, PBGC had a

1 A) Small deficit of $1.5 billion
2 B) Record surplus of $9.5 billion
3 C) Record deficit of $23.5 billion
4 D) Small surplus of $2.25 billion

3.

Social Security is projected to begin running deficits in the year

A) 2010
B) 2018
C) 2028
D) 2042

E) 2052

Chapter17True/FalseQuestions
29.

Over the last ten years the number of banks has been declining, but
the number of mutual funds has been growing.

30.

Net new cash flows to money market mutual funds vary inversely
with interest rate spreads on money market funds and savings
deposits.

31.

Most of the recent growth of long term mutual funds has occurred
because of the bull market of the 1990s.

32.

As of 2001 total U.S. mutual fund assets exceeded U.S. insurer's

assets but were less than commercial bank total assets.

33.

The shares of a closed end fund with market value of assets of

$200 million and 2 million shares outstanding will always trade at
a market value of $100 per share.

34.

If invest $10,000 in a mutual fund with a NAV of $50 per share

and a 5.5% load you will receive less than 200 shares in the fund.

XII. The typical household that owns mutual funds owns no more than
3 mutual funds.
XIII. Each fund's prospectus is required to disclose the fund's beta risk
and total risk.
XIV. The market value of a fund's net assets divided by the number of
mutual fund shares outstanding is called the NAV of the fund.
XV. Open end fund shares often trade at a discount or premium relative
to NAV.
XVI. Load funds typically provide investors with higher rates of return
and offer more services such as check writing, transfers between
funds, etc.
XVII. A 12 b-1 fee is an implicit load charge.
XVIII. Of long term equity funds, municipal funds and growth and
income funds are the largest categories.
XIX. A drop in interest rates will usually result in an increase in the
number of money market mutual fund shares.
15. The Federal Mutual Fund Commission (FMFC) is the primary
regulator of the mutual fund industry.
MultipleChoiceQuestions
.

Open end mutual funds guarantee

1 A) Investors a minimum rate of return
2 B) Investors a minimum NA V

3 C) To redeem investor's shares upon demand at current

NAV
4 D) To earn the rate promised in the prospectus
5 E) None of the above
.

As compared to purchasing a stock, a no load mutual fund investor

will usually get
1 A) Commissionless reinvestment opportunities
2 B) Better diversification
3 C) Free switching between funds within the same
family
4 D) Lower commissions costs
5 E) All of the above

Money market mutual funds invest primarily in

1 A) Foreign currencies
2 B) Realestate
3 C) Longtermbonds
4 D) IPOs
5 E) None of the above

In terms of asset size, rank the top three U.S. financial

intermediaries from largest to smallest.
I. II. III. IV. A) B) C) D) E)

Commercial banksState and local government pension funds

Private pension fundsMutual funds
I, IV, III I, III, II IV, I, II I, II, IV II, III, I
Answer: A Page: 488 Level: Medium
23.

As the economy weakens, one would expect investment in

_________ funds to increase and investment in __________ funds
to decrease, ceteris paribus.

A) Money market mutual; equity

B) Equity;bond

C) Municipal bond; money market mutual

D) Corporate bond; Municipal bond

E) Long term; short term

24.

Hybrid mutual funds normally invest significant amounts in

A) Common stock

B) Commercialpaper

C) Longtermbonds

D) Treasury bills

E) Both A) and C)
25.

During 2001 investment in money market mutual funds _____ and

the investment in long term mutual funds ____.
A) Decreased; decreased

B) Increased;increased

C) Increased;decreased

D) Decreased; increased

E) Stayed the same; increased

26.

Money market mutual funds (MMMFs) have caused

disintermediation at banks. This is because MMMFs

A) Allow investors access to higher interest rate money market

securities with a relatively small capital investment

B) Are less risky than bank deposits

C) Arenowfederallyinsured,likebankdeposits

D) Offer guaranteed rates of return

E) None of the above

24. The 'profile' of the typical mutual fund owners implies that
he or she is a:
24.

Long term investor

25.

Generation Xer
III. Employed
IV. College graduate

29.

A) III only

30.

B) I and III only

31.

C) II, III and IV only

32.

D) I, III and IV only

33.

E) I, II, III and IV

Answer: D Page: 490-491 Level: Easy

31.

By type of fund, there are more _____ funds than any other.

A) Equity

B) Bond

C) Taxable money market

D) Tax exempt money market

E) Hybrid
32.

The largest proportion of long term mutual fund assets are held by
_____ and the largest proportion of money market mutual fund
assets are held by _____.

A) Bank trusts and estates, the household sector

B) The household sector, private pension funds

C) The household sector, the household sector

D) Private pension funds, nonfinancial corporate business

E) Life insurance firms, funding corporations

33.

The market value of a mutual fund's assets divided by the number

of fund shares outstanding is equal to the
A) Load charge

B) NAV

C) Expenseratio

D) 12b-1 fee

E) Management fee
28. Rank the following types of funds from most risky to least
risky (variations exist but rank them generally)
I. II. III. IV. A) B) C) D) E)
GrowthGrowth and income Money market mutual fund Bond
fund
II, I, III, IV I, II, IV, III I, IV, II, III II, III, I, IV III, IV, II, I
Answer: B Page: 493 Level: Easy
.

You have $5,000 to invest and you are considering investing in

Fund A. The fund charges a 5.5% load and an annual expense fee
of 1.25% of the average asset value over the year. You believe the
fund's rate of return will be 10% per year. If you make the
investment what should your investment be worth in one year?

A) $5,135.48

B) $5,197.50

C) $5,500.00

D) $5,431.25

E) $5,162.50

A fund has a NAV of $30 per share but the shares are currently
selling for $32. This fund must be

1 A) An open ended fund

2 B) A closed end fund
3 C) Abalancedfund
4 D) An aggressive growth fund
5 E) A money market mutual fund
39.

An open end mutual fund owns 1000 share of Krispy Kreme priced
at $40. The fund also owns 2000 shares of Ben & Jerry's priced at
$55, and 1000 shares of Pepsi priced at $45. The fund itself has
3000 of its own shares outstanding. What is the NAV of a fund's
share?
A) $65
B) $55
C) $45
D) $35
E) $25

40.

You have $8,000 to invest in a mutual fund with a NAV = $45. You
choose a fund with a 5.5% load, a 1% management fee and a
0.25% 12b-1 fee. Assume that the management and 12b-1 fees are
charged on year end assets. The gross annual return on the fund's
shares was 12%. What was your net annual rate of return to the
nearest basis point?
A) 3.26%
B) 6.50%

C) 6.25%
D) 4.52%
E) 4.02%
41.

Investors pay load changes to receive

A) Higher returns on their investments

B) Additionalservicesfromfunds

C) Voting shares of stock

D) Advice on which fund to buy

E) 12B-1 remunerations
42.

A money market mutual fund's total assets increase from $100 to

$105 when the fund has 100 shares outstanding. Which of the
following will happen?

A) The fund's NAV will rise from $100 to $105

B) The fund's NAV per share will rise from $1 to $1.05

C) The fund will issue a total of 5 new shares

D) The fund's NAV will fall 5%

E) The fund will close to new investors

35. The primary regulator of mutual funds is the
A) NASD
B) CFTC

C) NYSE
D) SEC
E) NSMIA