Capital Markets
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Course Introduction
This course provides a comprehensive overview of capital markets, exploring their structure, functions, and significance within the global financial system. Key topics include the roles of primary and secondary markets, the issuance and trading of financial securities such as stocks and bonds, and the regulatory frameworks governing these activities. Students will examine the mechanisms of market operations, the determination of security prices, and the impact of macroeconomic factors on capital market performance. Additionally, the course covers the roles of various market participants, the process of capital raising for corporations and governments, and the management of investment risks. Through real-world examples and analytical tools, students will develop an in-depth understanding of how capital markets facilitate economic growth and resource allocation.
Recommended Textbook
Investment Analysis and Portfolio Management 1st Canadian Edition by Frank K. Reilly
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Chapter 1: The Investment Setting
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Sample Questions
Q1) The basic trade-off in the investment process is
A) between the anticipated rate of return for a given investment instrument and its degree of risk.
B) between understanding the nature of a particular investment and having the opportunity to purchase it.
C) between high returns available on single instruments and the diversification of instruments into a portfolio.
D) between the desired level of investment and possessing the resources necessary to carry it out.
Answer: A
Q2) The variability of operating earnings is associated with A) Business risk.
B) Liquidity risk.
C) Exchange rate risk.
D) Financial risk.
E) Market risk.
Answer: A
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Chapter 2: The Asset Allocation Decision
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Sample Questions
Q1) One of the first steps in developing a financial plan is to purchase adequate life insurance.
A)True
B)False
Answer: True
Q2) Someone in the 15% tax bracket can earn 8% annually on his investments in a tax-exempt RRSP account. What will be the value of a $10,000 investment after 5 years (assuming annual compounding)?
A) $6,805
B) $14,693
C) $15,528
D) $20,114
E) $50,000
Answer: B
Q3) Asset allocation is the process of dividing funds into different classes of assets.
A)True
B)False
Answer: True
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4
Chapter 3: Selecting Investments in a Global Market
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Sample Questions
Q1) Refer to Exhibit 3-1. What is the real return on small capitalization stocks?
A) 1.02%
B) 3.68%
C) 4.71%
D) 11.27%
E) 13.33%
Answer: E
Q2) You are trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%. Assuming all other factors are the same and you are in the 28% tax bracket, which bond should you choose and why?
A) Corporate bond because the after tax yield is 6.25%.
B) Corporate bond because the after tax yield is 4.5%.
C) Municipal bond because the equivalent taxable yield is 6.3%.
D) Municipal bond because the equivalent taxable yield is 6.6%.
E) You will be indifferent between the two because the after tax yields are the same. Answer: D
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Chapter 4: Securities Markets and the Economy
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Sample Questions
Q1) Refer to Exhibit 4-1. What is Jackie's profit/loss if Turtle's price after one year is $40?
A) $50,000
B) -$50,000
C) $100,000
D) -$100,000
E) None of the above
Q2) Refer to Exhibit 4-4. What is your rate of return on the investment?
A) 10.48%
B) 12.87%
C) 13.98%
D) 15.49%
E) 18.87%
Q3) A corporation wishing to raise funds will normally want the investment banker to use a "best efforts" arrangement rather than a negotiated basis.
A)True
B)False
Q4) It is required by law that a stock market must have a physical location.
A)True
B)False
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Chapter 5: Efficient Capital Markets
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Sample Questions
Q1) Superior analysts are encouraged to concentrate their efforts in "middle tier" stocks. This is recommended because
A) it works to minimize taxes for the client.
B) only individuals deal in the middle tier stocks.
C) prices may not adjust quite as rapidly for middle tier stocks as they do in the top tier; therefore, the chances of temporarily undervalued securities are greater.
D) it includes companies too small to be considered by institutions.
E) Technical analysts never look at "middle tier" stocks.
Q2) Evidence supporting the strong form efficient market hypothesis (EMH) resulted from examining
A) Value Line rankings.
B) Corporate insiders.
C) Stock exchange specialists.
D) Choices b and c
E) All of the above.
Q3) An efficient market requires a large number of profit-maximizing investors.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) In a given a portfolio of stocks, what is the envelope curve containing the set of best possible combinations known as?
A) Efficient portfolio.
B) Utility curve.
C) Efficient frontier.
D) Last frontier.
E) Capital asset pricing model.
Q2) Refer to Exhibit 6-7. What is the standard deviation of this portfolio?
A) 4.87%
B) 3.62%
C) 4.13%
D) 5.76%
E) 6.02%
Q3) An investor is risk neutral if she chooses the asset with lower risk given a choice of several assets with equal returns.
A)True
B)False
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Chapter 7: Asset Pricing Models: Capm and Apt
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Sample Questions
Q1) In the APT model, the identity of all the factors is known.
A)True
B)False
Q2) The only way to estimate a beta for a security is to calculate the covariance of the security with the market.
A)True
B)False
Q3) The introduction of lending and borrowing severely limits the available risk/return opportunities.
A)True
B)False
Q4) Refer to Exhibit 7-1. Compute the correlation coefficient between RA Computer and the Market Index.
A) -0.32
B) 0.78
C) 0.66
D) 0.58
E) 0.32
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Chapter 8: Economic and Industry Analysis
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Sample Questions
Q1) Which of the following is not characteristic of the "growth" phase in the industry life cycle?
A) Consumer will accept uneven quality
B) Products have technical and performance differentiation
C) High advertising costs
D) Low profits
E) Many competitors
Q2) During a recession,
A) financial stock rise on expectations of increases in loan demand, housing constructions and security offerings.
B) consumer durable stocks rise on expectations of rising consumer confidence and personal income.
C) capital goods stocks rise on expectation of increases in business capital spending.
D) basic materials stocks rise on expectation of rising profit margins.
E) consumer staple stocks rise on expectations that consumers will continue to spend on necessities.
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Chapter 9: Company Analysis and Stock Valuation
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Sample Questions
Q1) A growth company is one whose stock is undervalued by the market.
A)True
B)False
Q2) Peter Lynch identified a number of attributes of firms that may result in favourable stock market performances, including
A) Products that are faddish, people like change.
B) Firms that have competitive advantages over their rivals.
C) Firms that can benefit from cost reductions.
D) Choices b and c
E) All of the above.
Q3) In Berkshire Hathoway annual reports Warren Buffet highlights business tenants that he believes are important. Which of the following is not a business tenant of Warren Buffet?
A) Is the business unique and technologically advanced?
B) Does the business have a consistent operating history?
C) Does the business have favourable long-term prospects?
D) a and b above.
E) All of the above are business tenants of Warren Buffet.
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Chapter 10: Technical Analysis
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Sample Questions
Q1) Candlestick charts indicate the price change from open to close by shading whether the market went down or up for the day.
A)True
B)False
Q2) According to contrary opinion technicians, the ratio of mutual funds cash to total assets ____ near troughs in the market cycle and ____ near peaks.
A) Level out, spikes
B) Remains low, remains high
C) Is published near, is not published
D) Increases, decreases
E) Decreases, increases
Q3) What might a technical analyst consider as a bearish signal(s)?
A) Investment advisory opinion is bearish
B) Investment advisory opinion is bullish
C) CBOE put-call ratio above 0.60
D) CBOE put-call ratio below 0.40
E) Choices b and d
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Chapter 11: Bond Fundamentals
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Sample Questions
Q1) Which of the following statements is not true regarding bond ratings?
A) The ratings assigned are meant to indicate the probability of default for the bond issuer.
B) The bonds assigned one of the top four rating classes are considered investment grade bonds.
C) Once a rating is assigned to an issue it cannot be changed for the first two years after which it is reviewed on a regular basis.
D) Bonds rated BB and below are referred to as high yield or "junk" bonds.
E) The rating agencies modify the ratings with + and - signs or numbers after the letters.
Q2) A major source of risk faced by CMO issues is
A) Default risk.
B) Prepayment risk.
C) Counterparty risk.
D) Choices a and b.
E) Choices a, b and c.
Q3) In the Eurozone, the government sector is the largest bond market segment.
A)True
B)False
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Chapter 12: The Analysis and Valuation of Bonds
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Sample Questions
Q1) If an investor buys a high coupon bond, and rates then fall, the investor has "locked up" that high yield as a realized yield.
A)True
B)False
Q2) Refer to Exhibit 12-2. If interest rates increase 50 basis points, what will be the approximate price change for the Talmart bond?
A) -17.0%
B) -1.7%
C) 1.7%
D) 1.8%
E) 17.0%
Q3) According to the expectations hypothesis a rising yield curve indicates that investors expect
A) future short term rates to fall
B) future short term rates to rise
C) future long term rates to rise
D) future long term rates to fall
E) None of the above.
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Chapter 13: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) Refer to Exhibit 13-9. Calculate the net value of a covered call position at a stock price at expiration of $20, and a stock price at expiration of $45.
A) $6.35, $18.85
B) $29.65, $42.15
C) $21.65, $34.15
D) $8, $8
E) -$8, -$8
Q2) Holding a put option and the underlying security at the same time is an example of A) Collar
B) Straddle
C) Income generation
D) Portfolio insurance
E) None of the above
Q3) In the forward market both parties are required to post collateral or margin.
A)True
B)False
Q4) A long strip position indicates that an investor is bullish but conservative.
A)True
B)False
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Chapter 14: Derivatives: Analysis and Valuation
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Q1) The investment value of a convertible bond is the price which it would be expected to sell as a straight debt instrument.
A)True B)False
Q2) The underlying stock price and the value of the put option are factors that impact the value of an American call option.
A)True B)False
Q3) Risk management strategies involving interest rate agreements can be classified as forward-based or option-based.
A)True B)False
Q4) Investors should purchase market index put options if they anticipate an increase in the index value.
A)True B)False
Q5) Credit risk in the options market is only a concern to the option seller. A)True B)False
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Chapter 15: Equity Portfolio Management Strategies
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Sample Questions
Q1) Which of the following is not considered an active management strategy?
A) Sector rotation
B) Use of factor models
C) Quantitative screens
D) Full replication
E) Linear programming
Q2) Refer to Exhibit 15-1. The recommended portfolio for Tom Luck is
A) Portfolio A because it has expected utility of 9.95
B) Portfolio A because it has expected utility of 4.5
C) Portfolio B because it has expected utility of 5.33
D) Portfolio B because it has expected utility of 7.27
E) Portfolio C because it has expected utility of 6.75
Q3) If the annual geometric mean for the equity risk premium is 8.4%, what percentage of the equity risk premium is consumed by trading costs of 1.2%?
A) 7.20%
B) 9.60%
C) 9.70%
D) 10.08%
E) 14.29%
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Chapter 16: Bond Portfolio Management Strategies
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Sample Questions
Q1) Refer to Exhibit 16-7. Calculate the percentage gain per invested dollar for Bond A assuming a one year horizon, and a reinvestment rate of 9% per year.
A) 9.73%
B) 9.93%
C) 9.20%
D) 8.20%
E) 9.50%
Q2) Refer to Exhibit 16-4. The dollar investment in the candidate bond is
A) $780.34
B) $1483.25
C) $1361.54
D) $1413.95
E) $1000.00
Q3) Refer to Exhibit 16-10. Calculate the Modified Duration for Bond A.
A) 0.98
B) 1.79
C) 1.90
D) 1.93
E) 2.31
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Chapter 17: Professional Money Management, Alternative Assets, and Industry Ethics
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Sample Questions
Q1) Hedge funds have no limitations on when and how often capital can be contributed or removed from the partnership.
A)True
B)False
Q2) On January 2, 2007, you invest $10,000 in the Tiger Fund, a load fund that charges a fee of 6%. The fund's returns were 25% in 2007, 35% in 2008, -5% in 2009. On December 31, 2009, you redeem all your shares of Tiger. The dollar value is
A) $5,200.89
B) $13,345.89
C) $7,931.25
D) $15,896.34
E) $8,646.91
Q3) The market price of a closed-end investment company has generally been
A) 5 to 20% below the NAV.
B) 25 to 35% below the NAV.
C) Equal to the NAV (within a 2% range).
D) 5 to 20% above the NAV.
E) 25 to 35% above the NAV.
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Chapter 18: Evaluation of Portfolio Performance
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Q1) Refer to Exhibit 18-11. Based on the Sharpe Measure, which portfolio preformed best?
A) A
B) B
C) C
D) D
E) Market
Q2) Refer to Exhibit 18-10. Calculate the percentage return that can be attributed to the asset allocation decision.
A) 0.105%
B) 0.925%
C) 0.20%
D) 0.96%
E) 0.94%
Q3) In evaluating bond performance, the Russell 3000 Index is an appropriate risk measure.
A)True
B)False
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Chapter 19: Analysis of Financial Statements
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Q1) Refer to Exhibit 19-8. Calculate the sustainable growth rate for Zeco Company.
A) 0.4%
B) 0.7%
C) 1.3%
D) 2.1%
E) 4.1%
Q2) Which of the following statements regarding financial risk and business risk is true?
A) The acceptable level of financial risk for a firm depends on its business risk.
B) A firm with a greater degree of business risk has the ability to take on more debt.
C) A firm with a greater degree of financial risk typically takes on less business risk.
D) Financial risk and business risk are both important but they are not related in anyway.
E) Financial risk is more important for small firms and business risk is more important for large firms.
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Chapter 20: An Introduction to Security Valuation
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Q1) Refer to Exhibit 20-4. How much should you be willing to pay for the stock if you require a 17% return?
A) $16.97
B) $22.16
C) $21.32
D) $32.63
E) $23.63
Q2) The dividend growth models are only meaningful for companies that have a required rate of return that exceeds their dividend growth rate.
A)True
B)False
Q3) The most difficult part of valuing a bond is determining the required rate of return on this investment.
A)True
B)False
Q4) Growth companies are those firms that consistently earn higher rates of return by assuming greater amounts of risk.
A)True B)False
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Chapter 21: Web Appendix: A Review of Statistics and the
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Q1) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q2) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q3) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
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Chapter
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Sample Questions
Q1) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q2) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q3) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
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Chapter
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Sample Questions
Q1) _________ are investment specialists that are responsible for managing the investments of others. There are often legal standards against which they must abide in the performance of their duties.
A) Underwriters
B) Investments bankers
C) Fiduciaries
D) Account executives
E) Trust officers
Q2) Banks must compete for funds (savings deposits, CDs, etc.) in order to make loans and other types of investments.
A)True
B)False
Q3) Banks have high liquidity needs and therefore, have a short time horizon.
A)True
B)False
Q4) Non-life insurance companies have somewhat unpredictable cash outflows and are therefore faced with different investment constraints than life insurance companies.
A)True
B)False
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