Capital Markets and Investments
Final Exam Questions
Course Introduction
Capital Markets and Investments explores the fundamental concepts and mechanisms underlying the operation of capital markets, including the issuance, trading, and valuation of financial securities such as stocks, bonds, and derivatives. The course examines the roles of key market participants, regulatory frameworks, and the process of capital allocation in both domestic and global contexts. Students will analyze investment strategies, portfolio theory, risk-return trade-offs, and asset pricing models. Emphasis is placed on understanding market efficiency, behavioral finance, and the impact of economic indicators and monetary policy on investment decisions. Through case studies and real-world applications, students develop analytical skills essential for careers in finance and investment management.
Recommended Textbook
Fundamentals of Investment Management, 10e by Geoffrey A. Hirt
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Page 2
Chapter 1: The Investment Setting
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Sample Questions
Q1) The age and economic circumstances of an investor are important variables in determining an appropriate level of risk.
A)True
B)False
Answer: True
Q2) Retirement questions should be asked 5-10 years before retirement.
A)True
B)False
Answer: False
Q3) Historically, the real rate of return in the U.S. economy has been:
A)1-2%.
B)2-3%.
C)3-4%.
D)4-5%.
E)5-6%.
Answer: B
Q4) Real estate may be favored by investors in high tax brackets.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Security Markets
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Sample Questions
Q1) Bringing private companies public for the first time is called:
A)a private placement.
B)an initial public offering (IPO).
C)a secondary offering.
D)a founders sale.
E)a shelf registration.
Answer: B
Q2) The least popular form of distributing corporate securities is:
A)underwriting.
B)best efforts.
C)firm commitment.
D)syndicated offering.
E)direct by issuer.
Answer: E
Q3) Why was the Sarbanes-Oxley Act enacted?
Answer: The Sarbanes-Oxley Act was enacted after the accounting frauds and scandals of the 1990s.
Explanation: The Sarbanes-Oxley Act was enacted after the accounting frauds and scandals of the 1990s.
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Page 4
Chapter 3: Participating in the Market
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Sample Questions
Q1) Securities must be kept in the street name of the brokerage if a margin account is used.
A)True
B)False
Answer: True
Q2) You can write off up to $5,000 in investment losses in any one year.
A)True
B)False
Answer: False
Q3) The indexes of The New York Stock Exchange, American Exchange, and NASDAQ are all price-weighted.
A)True
B)False Answer: False
Q4) If a stock is held for less than 12 months, any gain in value is taxed as ordinary income.
A)True
B)False Answer: True
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Chapter
Exchange-Traded Funds, Closed-End Funds, and Unit
Investment Trusts
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Sample Questions
Q1) A characteristic of a closed-end fund is that:
A)it stands ready at all times to sell the investor new shares or buy back the old ones.
B)the method of purchase is the stock exchange or over-the-counter market.
C)the closed-end fund does not deal with shareholders.
D)it trades shares at the Net Asset Value.
Q2) Which of the following is not a disadvantage of investing in mutual funds?
A)They do not outperform the market as a group
B)Some mutual funds may be expensive to purchase
C)Sector funds are riskier than diversified funds
D)With 5,000 funds to choose from, the selection of a fund is just as difficult as selecting an individual stock
Q3) A fund is set up to charge a load. Its net asset value is $17.70 and its offer price is $18.60. What percentage of the net asset value does the load represent?
A)4.84%
B)5.08%
C)16.74%
D)15.93%
E)20.67%
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Chapter 5: Economic Activity
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Sample Questions
Q1) In the last few years (since 2001), the trade deficit has increased dramatically.
A)True
B)False
Q2) When the dollar increases relative to foreign currencies, foreign goods become more expensive, and consumers spend less money on imports.
A)True
B)False
Q3) According to the traditional definitions, a recession is two or more quarters of:
A)negative nominal Gross Domestic Product (GDP) growth.
B)negative real GDP growth.
C)a rate of inflation which exceeds real GDP growth.
D)declining growth in real past GDP.
Q4) Coincident indicators are of major importance to investors because they accurately predict the timing of business cycle changes.
A)True
B)False
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Page 7
Chapter 6: Industry Analysis
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Sample Questions
Q1) In which stage in the industry life cycle are companies likely to be privately owned?
A)Development
B)Maturity
C)Decline
D)Expansion
Q2) The use of stock dividends by industries in the growth stage is for what purpose?
A)To dilute the ownership of current holders of equity
B)To maintain cash to pay off creditors
C)To signal to investors that the company is profitable
D)Because cash dividends would signal to investors that the company has reached the crossover point
Q3) A Stage II industry is one that is growing, and thus provides opportunities without much risk.
A)True
B)False
Q4) Firms in the development stage are typically publicly owned.
A)True
B)False
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Chapter 7: Valuation of the Individual Firm
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Sample Questions
Q1) The pure, short-term earnings model:
A)ignores present value analysis and its long-term forecasts of dividends and earnings per share.
B)uses the past three months to estimate earnings per share.
C)disregards the long-term growth forecasts for earnings per share.
D)uses the payout ratio and return on equity to derive the P/E ratio.
Q2) The basis of stock valuation includes an analysis of
A)economic variables.
B)industry variables.
C)financial statements.
D)All of the following
Q3) A high P/E ratio for any individual stock may be misleading
A)in an inflationary economy.
B)if the firm is in a cyclical industry, like automobiles.
C)if the firm has a strong future growth rate.
D)More than one of the above
Q4) Under a non-constant growth model, K<sub>e</sub> (required rate of return) is varied from time period to time period.
A)True
B)False
Page 9
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Chapter 8: Financial Statement Analysis
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Sample Questions
Q1) The Financial Accounting Standards Board (FASB) 85 requires that the Statement of Cash Flows be divided into three sections: cash flows from operations, investments, and financing.
A)True
B)False
Q2) The ________ ratios help determine the degree of financial risk and earnings volatility present in a firm.
A)profitability
B)asset-utilization
C)liquidity
D)debt-utilization
E)price
Q3) You would find the payment of dividends in the statement of cash flow under:
A)cash flows from operating activities.
B)cash flows from investing activities.
C)cash flows from financing activities.
D)cash flows from purchasing activities.
E)cash flows from selling activities.
Q4) If a firm has a return on assets of 10% and a 40% debt-to-total-assets ratio, what will the return on equity be?
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Chapter 9: Efficient Markets and Anomalies
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Sample Questions
Q1) The semi-strong form of the efficient market hypothesis says that investors are not able to use _____________ information for their gain.
A)public
B)insider
C)charting
D)leading indicators
Q2) New stock issues are considered a special investment situation, because
A)they exhibit a very good long-term investment potential.
B)the spread is greater than that in the secondary market.
C)there is some evidence that new issues are under-priced.
D)More than one of the above
Q3) Positive abnormal returns on stocks may represent a measurement error.
A)True
B)False
Q4) Anomalies related to the semi-strong form of the efficient market hypothesis indicate that:
A)the market is truly efficient.
B)high returns are very difficult to achieve.
C)the market is less than perfectly efficient.
D)public information is almost useless.
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Chapter 10: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) The short interest ratio is the total short sales position, divided by average daily exchange volume for the month.
A)True B)False
Q2) Divergence between advances and declines in a breadth of the market indicator and the Dow Jones Industrial Average may signal a reversing trend in the market.
A)True B)False
Q3) A low Barron's Confidence Index means that:
A)investors prefer stocks to bonds.
B)the yield on bonds is greater than that on stock.
C)low-quality bonds have returns much higher than high-quality bonds.
D)low-quality bonds have returns slightly higher than high-quality bonds.
Q4) A support level signals new demand.
A)True B)False
Q5) Chartists do not consider volume significant in reading market indicators. A)True B)False
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Chapter 11: Bond and Fixed-Income Fundamentals
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Sample Questions
Q1) Commercial paper represents a short-term credit instrument.
A)True
B)False
Q2) Yankee bonds are issued by foreign governments, corporations, or are traded in the U.S. and denominated (payable) in U.S. dollars.
A)True
B)False
Q3) Corporate bonds carry a higher yield than government issues, and are fully taxable for federal, state, and local purposes.
A)True
B)False
Q4) Assume a $1,000 Treasury bill is quoted to pay 6% interest over a three-month period. How much interest would the investor receive?
A)$10
B)$15
C)$20
D)$30
E)$60
Q5) What is the dollar value of a U.S. government bond quoted at 98 8/32?
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Chapter 12: Principles of Bond Valuation and Investment
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Sample Questions
Q1) Interest rate changes affect low-quality issues to a greater degree than high-quality issues.
A)True
B)False
Q2) The term structure of interest rates refers to:
A)the relationships between interest rates and term to maturity.
B)the idea that any long-term rate is the average of expected future short-term rates.
C)a general expectation of higher future interest rates.
D)the idea that the terms of the bond may change as time to maturity changes.
E)More than one of the above are true
Q3) Yield to maturity can be thought of as the internal rate of return of the bond.
A)True
B)False
Q4) The approximate yield to maturity method tends to understate the true yield for bonds trading at a discount.
A)True
B)False
Q5) What would be the current yield of a 6% coupon bond priced at $950?
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Chapter 13: Convertible Securities and Warrants
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Sample Questions
Q1) From the corporate financial officer's viewpoint, which of the following is a reason for not calling a bond for redemption when the conversion value is above the par value?
A)Calling the bond may encourage everyone to take the stock rather than the par value in cash
B)The after-tax cost of the dividends on the new shares might be higher than the after-tax cost of the interest expense on the existing convertible bond
C)The chief financial officer might want to wait until interest rates decline before calling the bond
D)The number of new shares on the market will cause the diluted earnings per share to decline
Q2) Which of the following is NOT a characteristic of a warrant?
A)It is an option to buy a specified number of shares of stock at a given price over a given period of time
B)It represents a cash inflow to the issuing company when exercised
C)When exercised, it replaces debt on the balance sheet
D)It allows the bond to carry a lower coupon rate
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Chapter 14: Put and Call Options
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Sample Questions
Q1) The Options Clearing Corporation functions as a middleman or broker, bringing together writers and buyers of options.
A)True
B)False
Q2) A put is said to be "in-the-money" when the strike price is __________ the market price.
A)equal to B)greater than C)less than
D)may be more than one of the above, depending on the option premium
Q3) LEAPS have a maximum time to expiration of 5 years.
A)True
B)False
Q4) If an option is traded on more than one exchange, it may be bought, sold, or closed out on any exchange.
A)True
B)False
Q5) Calls used to cover a short sale guarantee that no loss can occur.
A)True
B)False
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Chapter 15: Commodities and Financial Futures
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Sample Questions
Q1) Initial margin requirements usually run 70-80% of the contract price.
A)True
B)False
Q2) The commodities exchanges are regulated primarily by the SEC.
A)True
B)False
Q3) There is no real difference in loss potential in the options and the commodities markets.
A)True
B)False
Q4) The interest rate futures market includes all of the following except:
A)Treasury bonds, notes and bills.
B)Eurodollars.
C)GNMA certificates and bank CDs.
D)All of the above are traded in the interest rate futures market
Q5) A hedger reduces risk of loss and enhances additional profit opportunities.
A)True
B)False
Q6) If a $100,000 Treasury bond futures contract changes by 15/32, what is the dollar change?
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Chapter 16: Stock Index Futures and Options
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Sample Questions
Q1) The primary use of stock index futures by the portfolio manager is:
A)to offset the loss on the portfolio in a declining market.
B)to profit from major market movements.
C)to increase the profit potential on the portfolio.
D)All of the above
Q2) In a declining market, stock index futures can be used to hedge a stock portfolio to help offset losses in the portfolio.
A)True
B)False
Q3) Stock specialists and OTC dealers hedge their positions with stock index futures:
A)to profit from major market movements.
B)to reduce market risk on his or her inventory.
C)to reduce the unsystematic risk on the stocks in his or her inventory.
D)More than one of the above
Q4) Each of the major stock index futures markets has a corresponding stock index options market.
A)True
B)False
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Chapter 17: A Basic Look at Portfolio Management and Capital Market Theory
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Q1) The capital asset pricing model (CAPM) takes off where the efficient frontier concludes, with the introduction of a new investment outlet, the risk-free asset (R<sub>F</sub>).
A)True
B)False
Q2) There is debate in regard to the capital asset pricing model about the appropriate R<sub>F</sub>, K<sub>M</sub>, and stability of beta.
A)True
B)False
Q3) According to the capital asset pricing model, it is possible to compose a portfolio with a return greater than any one on the efficient frontier, given equal risk, without borrowing funds for investment.
A)True
B)False
Q4) In an efficient market context, the ability to achieve high returns may be more directly related to absorption of additional risk than superior ability in selecting stocks.
A)True
B)False
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Chapter 18: Duration and Bond Portfolio Management
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Sample Questions
Q1) A zero-coupon bond has a duration equal to its maturity.
A)True
B)False
Q2) Duration is:
A)always longer than maturity.
B)always the same as maturity.
C)normally shorter than maturity.
D)always shorter than maturity.
Q3) The value of a bond may be expressed as the sum of:
A)the interest payments and the maturity value.
B)the present value of the par value and the present value of the sum of the interest payments.
C)the present value of the maturity value and the sum of the present values of the interest payments.
D)None of the above
Q4) The duration of a ten-year, 10%, $1,000 bond at a market rate of 6% is exactly equal to the duration of the same bond at a 14% market rate.
A)True
B)False
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Chapter 19: International Securities Markets
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Sample Questions
Q1) Countries are divided into developed and emerging markets based on the market capitalization of their stock market.
A)True
B)False
Q2) An investor who wishes to achieve high returns and low risk exposure through international diversification would probably look for:
A)a compound rate of return higher than that in the United States and a negative or low positive correlation of returns with the United States market.
B)stable currencies relative to the dollar, total market value potential higher than the United States, and high correlation of returns.
C)a compound rate of return equal to that of the United States and a correlation coefficient close to that of the United States.
D)None of the above
Q3) In the developing world, Germany has the second largest equity market after the United States.
A)True
B)False
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Chapter 20: Investments in Real Assets
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Sample Questions
Q1) Common date gold coins may trade at ________ their pure bullion value.
A)50-75% of
B)100% of
C)2 to 3 times
D)50 to 100 times
Q2) In recent times, suppliers of second mortgages have often been:
A)buyers of real estate.
B)Real Estate Investment Trusts (REITs).
C)sellers of real estate.
D)real estate brokers.
Q3) Under a graduated payment mortgage, annual payments are adjusted based on the new existing interest rate.
A)True
B)False
Q4) Real estate investment trusts are similar to mutual funds or investment companies because:
A)they do not trade on organized exchanges, but do trade over-the-counter.
B)they pool investors' funds.
C)they are both limited partnerships.
D)All of the above
Page 22
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Chapter 21: Alternative Investments: Private Equity and Hedge Funds
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Sample Questions
Q1) A fund which invests in companies that are in or close to bankruptcy is called:
A)a short/long bias fund.
B)a market neutral fund.
C)a distressed fund.
D)a sloan funD.
Q2) The risk/return trade-off with hedge funds over time has been:
A)negative.
B)positive.
C)neutral.
D)undetermineD.
Q3) The No-Bias hedge fund strategy is to:
A)use multiple stocks to sell short or long.
B)pair two stocks in the same industry, sell one short and keep one long.
C)use no stocks, only CDs.
D)None of the above
Q4) Relative to other asset classes, hedge funds are:
A)not highly correlated.
B)negatively correlated.
C)not correlated at all.
D)related only to the currencies.
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Chapter 22: Measuring Risks and Returns of Portfolio Managers
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Q1) The effectiveness of portfolio diversification can be measured by the coefficient of determination, which is the correlation between excess returns on the market and those on the fund.
A)True
B)False
Q2) Asset allocation represents an attempt by individuals or portfolio managers to determine what?
A)percentage of assets should be distributed to beneficiaries.
B)mutual funds are appropriate for investment based on risk and return.
C)percent of funds under management should be invested in stocks, bonds, and the like.
D)brokerage houses best meet their needs.
Q3) Michael Jensen uses the security market line to evaluate excess returns on investments.
A)True B)False
Q4) The Jensen study indicates that mutual fund managers tend to have very superior performances.
A)True
B)False
24
Chapter 23: A Comprehensive Analysis for Real Estate
Investment Decisions
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Q1) A duplex was purchased for $120,000, and depreciation of $3,300 has been taken for the last seven years. The net proceeds from the sale of the property were $135,000.
A) Assuming the property qualifies for capital gains treatment at a 15% rate, what is the tax owed?
B) What are the net funds from the sale?
Q2) An apartment complex has net operating income of $15,000, depreciation of $8,000, and interest expense of $13,000. The tax rate is 30%. a) What is taxable income or loss?
B) What is the tax shield benefit or tax owed?
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25
Chapter 24: The Makeup of Institutional Investors
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Q1) Foundations represent profitable organizations set up to accomplish social, educational, or charitable purposes.
A)True
B)False
Q2) ___________ represent permanent capital funds that are donated to universities, churches, or civic organizations.
A)Trusts
B)Endowments
C)Commingled funds
D)Annuities
Q3) The largest category of institutional investors is: A)foundations.
B)personal trusts.
C)mutual savings banks.
D)pension funds.
Q4) Pension funds represent a declining segment of the institutional market.
A)True
B)False
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