Capital Markets
Chapter Exam Questions
Course Introduction
This course provides an in-depth exploration of capital markets, focusing on their structure, functions, and role in the global financial system. Students will learn about the various instruments traded, such as stocks, bonds, and derivatives, and the institutions and participants involved in capital market activities. The course also examines key concepts including market efficiency, pricing mechanisms, regulatory frameworks, and risk management. Through case studies and real-world examples, students gain practical insights into how capital markets facilitate the allocation of resources, support corporate finance, and influence economic growth.
Recommended Textbook Fundamentals of Investment Management 9th Edition by Geoffrey
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Page 2
A. Hirt
Chapter 1: The Investment Setting
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Q1) What factors must be considered in choosing between investment alternatives?
A)Risk and liquidity
B)Interest or dividends vs.capital gains
C)Time frame for managing funds and evaluating performance and tax effects
D)Safety of principle
E)All of the above
Answer: D
Q2) Which of the following is not one of the considerations in setting investment objectives?
A)Risk versus safety of principal
B)Maximize wealth versus minimize expenses
C)Current income versus capital appreciation
D)Short versus long-term orientation
E)Taxes
Answer: B
Q3) The riskiness of an investment is measured by the dispersion of possible outcomes. A)True
B)False
Answer: True
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Page 3
Chapter 2: Security Markets: Present and Future
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Q1) Specialists and over-the-counter dealers,sometimes called market makers,buy and sell for their own account.
A)True
B)False
Answer: True
Q2) At the end of 2006,Citigroup (Smith Barney),J.P.Morgan and Deutsche Bank were three of the top ranked investment bankers in the underwriting of both global and domestic equity issues.
A)True
B)False
Answer: True
Q3) A commission broker is one who
A)Is registered to trade on the exchange but are not employees of a member firm
B)Is not associated with a member firm
C)Represents a retail brokerage firm and transacts business on the floor for customers of that firm
D)Transacts orders for individuals buying or selling less than 100 shares.
Answer: C
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4
Chapter 3: Participating in the Market
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Q1) Which of the following is NOT a characteristic of the Dow Jones Industrial Average?
A)It includes only very high quality common stock
B)It generally follows the trend of the market
C)The companies included,comprise over 25 percent of the companies listed on the New York Stock Exchange
D)It is a value weighted average
E)Dividends require adjustments to the divisor
Answer: D
Q2) The following are all value-weighted indexes,except:
A)The S&P 500
B)The Dow Jones Industrial Average
C)Midcap 400
D)The S&P Industrials (400 stocks)
E)Wilshire 5000
Answer: B
Q3) Long-term capital gains are taxed as ordinary income.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Sources of Investment Information
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Q1) Year-end Corporate Reports for NYSE stocks are selected and bound in an annual publication called Standard & Poor's Stock Guide.
A)True
B)False
Q2) While the SEC requires the l0-K report to be filed annually the 8-K,which covers important events of which stockholders should be aware,is filed quarterly.
A)True
B)False
Q3) Standard Industrial Codes (SIC)can be used to
A)Find all companies in the same industry or subset of an industry
B)Identify the security number of each company's common stock
C)Divide a large company's sales into its various industry sectors
D)A and c
Q4) The World Wide Web has become very important to investors mostly because they can now access EDGAR-online.
A)True
B)False
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Chapter 5: Economic and Industry Analysis
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Q1) Industries that are not closely related to business cycles include:
A)Industries that have products with low price elasticities
B)Industries that have products with high price elasticities
C)All industries are closely related to business cycles
D)The entertainment and amusement industries,for example
Q2) The National Bureau of Economic Research publishes information about economic indicators in its monthly Survey of Current Business.The most important indicators to investors are the
A)Leading indicators
B)Coincident indicators
C)Lagging indicators
D)Market indicators
E)None of the above
Q3) A federal deficit will always expand the money supply.
A)True
B)False
Q4) The housing industry has historically done poorly during recessionary periods.
A)True
B)False
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Chapter 6: Industry Analysis
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Q1) When studying an industry,it is difficult to determine the best and worst performing companies in that industry.
A)True
B)False
Q2) Investors should buy consumer non-cyclical stocks in the early stages of recovery.
A)True
B)False
Q3) Why would an investor want to use the rotational investing method?
A)It allows the investor to rotate out of losing stocks
B)The investor is attempting to profit from movements in the economic cycle
C)It is an easy method of employing dollar cost averaging
D)It assures the investor of owning the proper mix of stocks and bonds
E)It is easy to time the market for higher returns
Q4) The more saturated an industry gets with competitors,the further along the life cycle it will probably be.
A)True
B)False
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Chapter 7: Valuation of the Individual Firm
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Q1) The key to firms having assets as sources of value is their current return on these assets.
A)True
B)False
Q2) If the company's profit margin is constant over time,the number of common shares remain the same,and the dividend payout ratio stays the same,the price to sales ratio,the price to earnings ratio and the price to book value ratio should
A)Provide similar valuations for the company's stock value
B)Provide very different valuations for the company's stock value
C)Not be related in any way
D)None of the above are true
Q3) Under most dividend valuation models,a stock with an expected level dividend (zero dividend growth)would have no value.
A)True
B)False
Q4) The current price of a stock should equal the future value of the expected dividend stream.
A)True
B)False
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Chapter 8: Financial Statement Analysis
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Q1) Industry trend analysis provides a method of comparing industry performance throughout the economy and of identifying the potential winning and losing companies within an industry.
A)True
B)False
Q2) Price Printing Co.had sales of $10 million,Operating Income of $3 million; After-tax income of $1 million; assets of $8 million; Stockholders' equity of $5 million; and a total debt of $3 million.What is Price Printing Company's return on equity?
A)37.5%
B)10.0%
C)20.0%
D)60.0%
E)12.5%
Q3) The primary emphasis of the profitability ratios is a determination of the firm's ability to pay off short-term obligations as they come due.
A)True B)False
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Chapter 9: A Basic View of Technical Analysis and Market
Efficiency
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Q1) The ideas that stock prices tend to move in trends that persist for long periods and that these trends can be detected in charts are basic assumptions of fundamental analysis.
A)True
B)False
Q2) Smart money rules or approaches to the market include
A)Short sales by specialists
B)The put-call ratio
C)Investment Advisory recommendations
D)The odd-lot theory
Q3) A high short interest ratio is considered bullish.
A)True
B)False
Q4) ______________ analysis focuses on charts and graphs based on internal market data,while _____________ analysis emphasizes earnings reports,management capabilities and new product development.
A)Technical; fundamental
B)Fundamental; technical
C)Technical; external
D)Technical; semi-strong
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Chapter 10: Investment in Special Situations and Anomalies
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Q1) To be guilty of insider trading,one must be an officer of the company involved.
A)True
B)False
Q2) Once management announces that it will buy back one million shares over a given time period as circumstances become appropriate
A)It is legally obligated to buy all one million shares back
B)It is not legally obligated to buy all one million shares back
C)It must buy back the number of shares that are equal to income in a given year (up to one million shares)
D)It must buy back the number of shares that are equal to income minus common stock dividends in a given year (up to one million shares)
Q3) A good reason for a stock repurchase is:
A)That management believes that the stock is overvalued in the market
B)So the company can escape the threat of a future merger or acquisition
C)To fulfill obligations under an employee stock ownership plan
D)B and C
Q4) Institutional investors often take advantage of the small firm effect.
A)True
B)False
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Chapter 11: Bond and Fixed Income Fundamentals
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Q1) Inflation-indexed Treasury securities provide returns through
A)Interest payments plus a conversion privilege
B)Interest payments plus an increase in value due to inflation
C)Tax exempt interest payments
D)Cumulative interest payments
Q2) A strong incentive to a corporation to meet preferred stock dividend payments is provided by the ___________ feature of some preferred stocks.
A)Cumulative
B)Convertible
C)Callable
D)All of the above
Q3) An investor in a municipal bond will receive 8 percent interest.He is in a 33 percent tax bracket.The comparable before tax yield on a taxable investment is 14 percent. \[\frac { 8 \% } { ( 1 - .33 ) } = \frac { 8 \% } { .67 } = 11.94 \%\]
A)True
B)False
Q4) A sinking fund may be used to pay off a perpetual bond.
A)True
B)False
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Chapter 12: Principles of Bond Valuation and Investment
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Q1) The market segmentation theory focuses on
A)The impact of institutional investors on the yield curve
B)The maturity preferences of banks and those of life insurance companies
C)Phases of the business cycle
D)All of the above
Q2) The value of a bond at any given time is the sum of
A)The future interest payments and the par value
B)The present value of future interest payments and the present value of the par value
C)The future value of the interest payments and the future value of the par value
D)The present value of future interest payments and the market value
E)The present value of future interest payments and the future value of the par value
Q3) What is the approximate yield to maturity of an 8 percent coupon bond,with a par value of $1000.The bond is currently selling for $920 and has five years to maturity.
Q4) The anticipated realized yield represents the return over the holding period.
A)True
B)False
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Chapter 13: Duration and Reinvestment Concepts
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Q1) Terminal wealth analysis is one way of analyzing the effect of the reinvestment rate risk.
A)True
B)False
Q2) Assume you buy a 20 year,$1000 par value zero-coupon bond that provides a 12 percent yield to maturity.Almost immediately after you buy the bond,yields decrease to 9 percent.What will be the percentage gain on the investment?
Q3) You have invested $1,000 in a 12% coupon bond that matures in three years.You are investing the interest income in a fund earning 8%.At the end of three years,what will be your portfolio sum?
A)$1,120.00
B)$1,249.60
C)$1,360.00
D)$1,389.57
E)$1,540.73
Q4) Compute the duration for a bond with a 8 percent coupon rate maturing in five years.A discount rate of 10 percent should be applied.
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Page 15
Chapter 14: Convertible Securities and Warrants
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Q1) Floor values are sensitive to interest rates.
A)True
B)False
Q2) A warrant with an intrinsic value of zero cannot sell at a premium.
A)True
B)False
Q3) The value of a warrant is the market value of the stock minus the option price of the warrant divided by the number of shares it will buy.
A)True
B)False
Q4) Generally,the best time to buy convertible bonds is when interest rates are _________ and when stock prices are ________:
A)Low; low
B)High; low
C)Low; high
D)High; high
Q5) Premiums paid for warrants often are related to time. A)True
B)False
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Chapter 15: Put and Call Options
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Q1) Generally,the longer the exercise period,the lower the speculative premium.
A)True
B)False
Q2) 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
Q3) _______ was the first organized exchange to trade options,in 1973.
A)The New York Stock Exchange
B)The American Exchange
C)The Chicago Board Option Exchange
D)The International Securities Exchange
E)None of the above
Q4) The longer the time to expiration the higher the speculative premium per day.
A)True
B)False
Q5) Option trading thrives under volatile pricing conditions and uncertainty.
A)True
B)False
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Chapter 16: Commodities and Financial Futures
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Q1) Because of price movement limitations,the commodities market is not always in equilibrium.
A)True
B)False
Q2) The difference between speculators and hedgers is that speculators are _______ while hedgers are ______
A)Risk-takers; risk averters
B)Individual investors; financial managers
C)Short term; long-term
D)None of the above
Q3) The primary difference between options and futures is that
A)The option premium is the full liability of the purchaser,while a futures contract may call for additional margin to hold the position
B)Options are more speculative than futures
C)Futures require the physical transfer of goods,while options do not
D)More than one of the above
Q4) Given a 5,000 bushel futures contract on grain at a price of $2.75 per bushel,margin requirement is 5 percent,maintenance margin is 80 percent.What would the return on investment be if the price increases by $.08 per bushel?
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Chapter 17: Stock Index Futures and Options
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Q1) Stock index futures represent an efficient approach to:
A)Only taking on unsystematic risk
B)Only taking on systematic risk
C)Taking on zero risk because the index is fully diversified
D)Taking on lots of risk due to the fact that the indexes are usually composed of lots of stocks,not just a few
Q2) The loss on option purchase is always
A)Limited to the premium paid
B)Limited to the margin maintenance requirement
C)The difference between the strike price and the premium paid
D)None of the above
Q3) Which of the following statements about hedging a stock portfolio with stock index futures is NOT ?
A)Futures contracts magnify gains (or losses)on the stock portfolio
B)In a declining market,futures contracts help offset losses on the portfolio
C)A risk-taker would probably not hedge the entire portfolio with stock index futures
D)All of the are true
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Chapter 18: Mutual Funds
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Q1) An important consideration with an open-end fund is whether it is a load fund or a no-load fund.
A)True
B)False
Q2) A characteristic of a closed-end fund:
A)Stands ready at all times to sell the investor new shares or buy back the old ones
B)Is that the method of purchase is the stock exchange or over-counter-market
C)Is that the closed-end fund does not deal with shareholders
D)It trades shares at the Net Asset Value
Q3) By using dollar cost averaging
A)The investor is attempting to beat the market
B)The investor buys when prices are favorable only
C)The investor invests a fixed amount at regular intervals,at current market prices
D)None of the above
Q4) Bond mutual funds can be divided into corporate,government and municipal funds.
A)True
B)False
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20
Chapter 19: International Securities Markets
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Q1) Between year end 2002 and 2005,the value of the United States equity markets as a percentage of the total World equity markets has
A)Increased 100 percent
B)Increased from 35 percent to 42 percent of the total developed market
C)Decreased from 53 percent to 33 percent of the total developed market
D)Decreased slightly from about 53 percent to 47 percent of total developed market
Q2) At the peak of the stock market bubble in 1999,the value of the developed world's stock market was $33 trillion.By 2002 the value had declined to less than $21 trillion.By year-end 2005 after several years of world-wide economic growth,the developed markets reached $36.5 trillion.
A)True
B)False
Q3) Emerging markets seem to have fairly consistent valuation standards and ratios. A)True
B)False
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21
Chapter 20: Investment in Real Assets
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Q1) Twin factors that make real estate an attractive investment are tax write offs and appreciation from inflation.
A)True
B)False
Q2) Real assets in comparison to financial assets are more likely to produce
A)Superior returns
B)High liquidity
C)Psychic pleasure
D)Deflationary benefits
Q3) Real assets may offer an opportunity as an inflation hedge because inflation means higher replacement costs for real estate,precious metals,and other physical items.
A)True
B)False
Q4) Gold ownership is considered a hedge against inflation.
A)True
B)False
Q5) REITs are very similar to mutual funds or investment companies.
A)True
B)False
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Chapter 21: A Basic Look at Portfolio Management and Capital Market Theory
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Q1) Unsystematic risk cannot be diversified away.
A)True
B)False
Q2) If the market rate of return is 10 percent and the beta on a particular stock is .78,the return on the stock will be
A)Greater than 10 percent
B)Greater or less than 10 percent,depending on the risk free rate of return
C)Less than 10 percent
D)Dependent on some other factor
Q3) In using the Capital Market Line,the higher the portfolio standard deviation (p),the lower the anticipated return (Kp).
A)True
B)False
Q4) Because of portfolio effect,the most significant factor related to the risk of any investment is
A)Its standard deviation,or degree of uncertainty
B)Its effect on the risk of the portfolio
C)Systematic risk associated with the investment
D)None of the above
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Chapter 22: Measuring Risks and Returns of Portfolio Managers
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Q1) A firm that evaluates portfolios uses the Sharpe approach to measuring performance.How would it rank these three portfolios?
Q2) A firm with an alpha of .5
A)Has performed half as well as the market
B)Has performed above the market line
C)Has performed below the market line
D)Is likely to have a high beta
Q3) Adherence to objectives as measured by risk exposure is important in evaluating a fund manager because risk is one of the variables a money manager can directly control.
A)True
B)False
Q4) Studies by Ippolito as well as Goodwin indicate that Mutual fund managers are superior performers.
A)True B)False
Q5) Sharpe uses beta as a measure of risk.
A)True B)False
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Chapter 23: Sustainable Growth Model
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Q1) A firm had earnings per share of $3.25 for the year.The book value per share at the beginning of the year was $13.The firm paid out $.975 in dividends per share at the end of the year.If the rate of return on book value remains constant from year to year,and the firm maintains the same earnings retention ratio,what will the sustainable growth rate be for the foreseeable future?
A)35.7%
B)7.5%
C)8.3%
D)17.5%
E)25%
Q2) Based on the sustainable growth model,a decrease in the dividend payout ratio (1the retention ratio)will increase the growth in earnings per share in the future.
A)True
B)False
Q3) The sustainable growth model is appropriate for firms that exhibit a constant pattern of growth and reinvestment.
A)True
B)False
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Chapter 24: a Black Scholes Option Pricing Model
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Q1) The Black and Scholes option pricing model makes an assumption that stock prices are normally distributed with a constant mean returns over the period of the option.
A)True
B)False
Q2) For call options the price is positively related to
A)The stock's price changes and the volatility of the stock price changes
B)To the time to maturity and the riskless rate of interest
C)The strike price
D)A)and B)
Q3) The Black and Scholes option pricing model makes an assumption that the option could be exercised before maturity.
A)True
B)False
Q4) The Black and Scholes option pricing model makes an assumption that markets have taxes and transactions costs.
A)True
B)False
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Chapter 26: A Comprehensive Analysis for Real Estate
Investment Decisions
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Q1) A duplex was purchases 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 is $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 percent.
(a)What is taxable income or loss?
(b)what is the tax shield benefit or tax owed?
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Chapter 25: Unit Investment Trusts Uits
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Q1) Unit investment trusts have all of the following features except
A)They usually invest in tax-exempt municipals
B)Stipulated end to the life of the fund
C)Little interest rate risk
D)Actively trading the bonds in the portfolio
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Chapter 27: The Makeup of Institutional Investors
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Q1) ___________ represent permanent capital funds that are donated to universities,churches or civic organizations.
A)Trusts
B)Endowments
C)Commingled funds
D)Annuities
Q2) Organizations responsible for bringing together large pools of capital for purposes of reinvestment are called:
A)Individual investors
B)Institutional investors
C)Social security clubs
D)B and C
Q3) Foundations represent profitable organizations set up to accomplish social,educational,or charitable purposes.
A)True
B)False
Q4) Pension funds represent a declining segment of the institutional market.
A)True
B)False
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