Financial Markets and Institutions
Test Preparation
Course Introduction
Financial Markets and Institutions provides an in-depth exploration of the structure and functioning of financial systems, including the roles and operations of major financial markets and intermediary institutions. The course examines how financial markets such as stock, bond, money, and derivative markets facilitate the flow of funds in the economy and contribute to economic growth and stability. Students will analyze the functions of institutions like commercial banks, investment banks, insurance companies, and regulatory bodies, along with the impact of government policies on financial systems. The course also covers contemporary issues such as financial innovation, risk management, and globalization, equipping students with a strong foundation to understand the dynamic environment of modern finance.
Recommended Textbook
Fundamentals of Investments 8th Edition by Bradford Jordan
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20 Chapters
1925 Verified Questions
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Page 2
Chapter 1: A Brief History of Risk and Return
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Sample Questions
Q1) Which one of the following should be used as the mean return when you are defining the normal distribution of an investment's annual rates of return?
A) arithmetic average return for the period
B) geometric average return for the period
C) total return for the period divided by N - 1
D) arithmetic average return for the period divided by N - 1
E) geometric average return for the period divided by N - 1
Answer: A
Q2) Downtown Industries common stock had returns of 5.2,10.3,9.3,and 9.5 percent,respectively,over the past four years.What is the standard deviation of these returns?
A) 2.29 percent
B) 2.38 percent
C) 2.41 percent
D) 2.59 percent
E) 2.82 percent
Answer: A
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Chapter 2: The Investment Process
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Sample Questions
Q1) Brooke has decided to invest 55 percent of her money in large company stocks,40 percent in small company stocks,and 5 percent in cash.This is a(n)_____ decision.
A) market timing
B) security selection
C) tax-advantaged
D) active strategy
E) asset allocation
Answer: E
Q2) Sam is purchasing 800 shares of RPT,Inc.,stock at a price per share of $15.50.What is the minimum amount the Federal Reserve will require Sam to pay in cash for this purchase?
A) $4,488
B) $6,200
C) $9,800
D) $10,968
E) $11,960
Answer: B
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Page 4
Chapter 3: Overview of Security Types
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Sample Questions
Q1) Alicia owns 500 shares of Danube stock.She thinks the market price will continue to rise but would like to ensure that she can get at least $47.50 a share should she decide to sell her shares. The 47.50 call option is quoted at $1.05 bid,$1.15 ask.The 47.50 put is quoted at $0.80 bid,$0.85 ask.How much will it cost her to ensure that she can sell all of her shares for at least $47.50 each?
A) $805
B) $740
C) $670
D) $530
E) $425
Answer: E
Q2) What was the previous day's closing price for Baker Co.stock?
A) $44.70
B) $54.10
C) $68.20
D) $78.10
E) $80.40
Answer: E
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5
Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) A mutual fund has a current offering price of $56.70.What is the net asset value if the fund charges a 4.5 percent front-end load?
A) $50.74
B) $51.66
C) $54.15
D) $54.86
E) $54.91
Q2) You are investing $8,000 in a mutual fund that charges a 4.50 percent front-end load.The offering price is $24.70 a share.What will your investment be worth immediately after your shares are purchased?
A) $7,520
B) $7,640
C) $8,000
D) $8,360
E) $8,420
Q3) What are the primary differences between an ETF and an ETN?
Q4) Which type of investor is most apt to purchase municipal bond funds and why?
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6
Chapter 5: The Stock Market
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Sample Questions
Q1) When stocks are held in an index in proportion to their total company market value,the index is:
A) dollar-weighted.
B) front-weighted.
C) back-weighted.
D) price-weighted.
E) value-weighted.
Q2) The SuperDOT system has lessened the role of which one of the following?
A) personal financial advisers
B) floor traders
C) specialists
D) floor brokers
E) underwriters
Q3) The stocks listed on the Pink Sheets:
A) are those stocks trading on the NASDAQ CAPITAL MARKET.
B) do not have to file financial statements with the SEC.
C) have all been delisted by the NYSE.
D) are the highest priced stocks listed on NASDAQ.
E) must file financial statements with the SEC but do not have to meet any listing requirements.
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Chapter 6: Common Stock Valuation
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Sample Questions
Q1) Blue Water Tours just paid an annual dividend of $0.80 a share.The firm has a policy of increasing the dividend by 3.5 percent annually.What is the current value of this stock at a discount rate of 11.5 percent?
A) $9.52
B) $9.78
C) $9.91
D) $10.02
E) $10.35
Q2) The Shoe Box will not pay a dividend for the next two years.The following two years,it will pay annual dividends of $1 per share.Starting in year 5,the dividends will increase by 4 percent annually.The discount rate is 8 percent.What is the value of this stock today?
A) $18.18
B) $20.64
C) $22.63
D) $24.08
E) $27.09
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Chapter 7: Stock Price Behavior and Market Efficiency
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Sample Questions
Q1) Which of the following will lead to excess profits in a semistrong-form efficient market?
I.private financial information
II.historical price trends
III.financial analysts reports
IV.unreleased merger plans
A) I only
B) I and IV only
C) II and III only
D) I, II, and III only
E) I, III, and IV only
Q2) Independent deviations from rationality:
A) only exist when the overall market is overvalued.
B) prevent the markets from ever being efficient.
C) can create an efficient market.
D) are the actions taken by rational arbitrage traders.
E) do not exist in an efficient market.
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Chapter 8: Behavioral Finance and the Psychology of Investing
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Sample Questions
Q1) Which one of the following is seen as a bearish indicator?
A) decreased short selling
B) increased buying by odd-lot traders
C) shorter skirt lengths
D) a Super Bowl win by a National Football League team
E) tight Bollinger bands
Q2) Ted constantly ignores the effects of inflation on money.Ted is suffering from which one of the following?
A) endowment effect
B) money illusion
C) regret aversion
D) myopic loss aversion
E) sunk cost fallacy
Q3) The measure of performance of one investment compared to another investment is called the:
A) wave height.
B) relative arm.
C) relative strength.
D) bar height.
E) support factor.
Page 10
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Chapter 9: Interest Rates
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Sample Questions
Q1) A two-year STRIPS sells at an interest rate of 3.84 percent and a three-year STRIPS sells at a rate of 3.97 percent.What is the implied one year interest rate two years from now? Assume the rates are effective annual rates.
A) 4.23 percent
B) 4.36 percent
C) 4.41 percent
D) 4.45 percent
E) 4.50 percent
Q2) Which of the following statements are true?
I.Lenders have a preference for shorter maturities.
II.Lenders have a preference for longer maturities.
III.Borrowers have a preference for shorter maturities.
IV.Borrowers have a preference for longer maturities.
A) I only
B) I and III only
C) I and IV only
D) II and III only
E) II and IV only
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Chapter 10: Bond Prices and Yields
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Sample Questions
Q1) A basic bond that has a face value of $1,000 and pays regular semiannual coupon payments is referred to as which one of the following?
A) pure discount bond
B) premium bond
C) inflation bond
D) straight bond
E) conversion bond
Q2) You want to buy a bond that has a quoted price of $923.The bond pays interest semiannually on April 1 and October 1.The coupon rate is 6 percent.What is the clean price of this bond if today's date is June 1? Assume a 360-day year.
A) $927.62
B) $923.00
C) $923.23
D) $936.85
E) $1,076.83
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Page 12
Chapter 11: Diversification and Risky Asset Allocation
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Sample Questions
Q1) What is the correlation coefficient of two assets that are uncorrelated?
A) -100
B) -1
C) 0
D) 1
E) 100
Q2) There is a 35 percent probability that a particular stock will earn a 16 percent return and a 65 percent probability that it will earn 10 percent.What is the risk-free rate if the risk premium on the stock is 7.5 percent?
A) 4.20 percent
B) 4.60 percent
C) 5.20 percent
D) 5.40 percent
E) 5.80 percent
Q3) Correlation is the:
A) squared measure of a security's total risk.
B) extent to which the returns on two assets move together.
C) measurement of the systematic risk contained in an asset.
D) daily return on an asset compared to its previous daily return.
E) spreading of an investment across a number of assets.
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Chapter 12: Return,Risk,and the Security Market Line
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Sample Questions
Q1) Home Interior's stock has an expected return of 13.25 percent and a beta of 1.4.The market return is 10.75 percent and the risk-free rate is 4.5 percent.This stock is ________ because the CAPM return for the stock is ________ percent.
A) greatly overvalued; 16.50
B) slightly overvalued; 14.91
C) priced correctly; 13.25
D) slightly undervalued; 12.91
E) greatly undervalued; 16.50
Q2) Which one of the following terms is another name for systematic risk?
A) unique risk
B) firm risk
C) market risk
D) asset-specific risk
E) diversifiable risk
Q3) What is the beta of a risk-free security?
A) 0.00
B) 0.50
C) 1.00
D) 1.50
E) 2.00
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Chapter 13: Performance Evaluation and Risk Management
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Sample Questions
Q1) What is the Treynor ratio of a portfolio comprised of 45 percent portfolio A and 55 percent portfolio B?
P1P1_5.08AP1P1_EP1P1_12.70BP1P1_E
WeightP1P1_5.0845%P1P1_EP1P1_12.7055%P1P1_E
Avg ReturnP1P1_5.0813.60%P1P1_EP1P1_12.708.40%P1P1_E
Std DevP1P1_5.0817.20%P1P1_EP1P1_12.706.40%P1P1_E
BetaP1P1_5.081.38P1P1_EP1P1_12.700.87P1P1_E
The risk-free rate is 3.12 percent and the market risk premium is 8.5 percent.
A) 0.041
B) 0.058
C) 0.069
D) 0.114
E) 0.136
Q2) A fund has an alpha of 0.73 percent and a tracking error of 4.9 percent.What is the fund's information ratio?
A) 0.112
B) 0.135
C) 0.149
D) 0.208
E) 0.229
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Page 15
Chapter 14: Futures Contracts
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Sample Questions
Q1) Which one of the following statements is true regarding futures contracts?
A) Futures prices are generally set equal to the spot price on the delivery date.
B) Futures contracts generally grant the buyer the option to accept only a portion of the contract.
C) Cost and convenience are the two key considerations when establishing the settlement procedures.
D) The seller of a futures contract has the option to deliver cash in an amount equal to the contract value in lieu of the underlying asset.
E) The buyer and seller of the contract negotiate the price on the maturity date.
Q2) A stock is currently selling for $28 a share and has a dividend yield of 3.2 percent.The risk-free rate is 2.5 percent.What is the 6-month futures price on this stock?
A) $27.66
B) $27.90
C) $28.02
D) $28.10
E) $28.35
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Chapter 15: Stock Options
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Sample Questions
Q1) You own 200 shares of Allen Bros.stock.Which one of the following would allow you to receive an option premium in exchange for selling your shares in Allen Bros.at the strike price?
A) straddle
B) long spread
C) selling a put
D) buying a call
E) writing a covered call
Q2) You purchased 5 put option contracts on Mountain Builders stock at an option premium of $0.70.The strike price is $30.What is your break-even stock price?
A) $19.90
B) $24.35
C) $25.00
D) $29.30
E) $30.70
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Chapter 16: Option Valuation
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Sample Questions
Q1) Which one of the following statements is correct concerning the Black-Scholes option pricing model?
A) The model assumes a stock pays a constant annual dividend.
B) The model expresses time in terms of years.
C) The model is based on American-style options.
D) The model assumes that the current stock price is equal to the strike price.
E) The model assumes the put is in-the-money.
Q2) Which one of the following is defined as an estimate of stock price volatility obtained from an option price?
A) calculated alpha
B) estimated variance
C) implied theta
D) VIX
E) implied standard deviation
Q3) VIX represents the volatility index on which one of the following?
A) Wilshire 3000 index
B) DJIA
C) S&P 500 index
D) Dow Jones Transportation average
E) NASDAQ 100
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Chapter 17: Projecting Cash Flow and Earnings
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Sample Questions
Q1) Return on equity is equal to which one of the following?
A) dividend yield divided by total equity
B) retained earnings divided by total equity
C) revenue divided by total equity
D) net income divided by total equity
E) operating cash flow divided by total equity
Q2) How frequently do corporations file 10K reports with the SEC?
A) monthly
B) quarterly
C) semi-annually
D) annually
E) only when the firm engages in a merger or an acquisition
Q3) Which one of the following is defined as anything a firm owns that has value?
A) equity
B) asset
C) liability
D) cash inflow
E) cash outflow
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19
Chapter 18: Corporate and Government Bonds
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Sample Questions
Q1) A $1,000 par value bond has a market price of $991 and a conversion ratio of 17.The stock is selling for $55.20.What is the conversion value?
A) $903.17
B) $911.10
C) $925.60
D) $938.40
E) $946.49
Q2) Term bonds are defined as all bonds in a bond issue having which one of the following characteristics?
A) sequential maturity dates
B) serial maturity dates
C) multiple maturity dates
D) an identical maturity date
E) renewable maturity dates
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20
Chapter 19: Global Economic Activity and Industry Analysis
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Sample Questions
Q1) Suppose you are a U.S.investor who is planning to invest $100,000 in China.Your Chinese investment gains 6 percent.If the exchange rate moves from 7.10 Yuan per dollar to 7.15 per dollar over the period,what is your total return on this investment?
A) 4.52%
B) 4.76%
C) 4.91%
D) 5.26%
E) 5.49%
Q2) Which of the following combinations describes a "goldilocks" scenario?
A) slow income growth, low unemployment and low inflation
B) rapid income growth, high unemployment and low inflation
C) rapid income growth, low unemployment and low inflation
D) rapid income growth, low unemployment and high inflation
E) rapid income growth, high unemployment and high inflation
Q3) Which of the following is NOT considered a lagging economic indicator?
A) prime rate
B) change in CPI for services
C) industrial production
D) commercial and industrial loans
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Page 21
Chapter 20: Mortgage-Backed Securities
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Sample Questions
Q1) Which one of the following is a security that only pays the principal cash flows to investors?
A) split strip
B) interest-only strip
C) amortized strip
D) principal-only strip
E) final strip
Q2) When a borrower pays a fixed monthly amount on his or her home mortgage based on a fixed rate of interest,he or she has which type of mortgage?
A) prepayment-based
B) open-end
C) fixed-rate
D) variable-rate
E) floating-rate
Q3) Mortgage prepayments are best defined by which one of the following?
A) reducing the mortgage according to a schedule over the life of the mortgage
B) paying a monthly mortgage payment before the regular due date
C) paying off the principal faster than required by the amortization schedule
D) paying a cash deposit when purchasing a property
E) paying each mortgage payment as scheduled
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