Financial Markets and Institutions
Exam Questions
Course Introduction
This course provides an in-depth exploration of the structure, functions, and operations of financial markets and institutions. Students will examine the roles that commercial banks, investment banks, insurance companies, pension funds, and other financial intermediaries play in the global economy. The course covers fundamental concepts such as interest rates, risk management, asset valuation, and regulatory frameworks. It also analyzes the impact of central banks, monetary policy, and international financial systems on market dynamics. Through real-world case studies and financial data analysis, students gain a comprehensive understanding of how financial markets and institutions facilitate economic growth, allocate resources, and manage financial risk.
Recommended Textbook Fundamentals of Investing 11th Edition by Lawrence J. Gitman
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Chapter 1: The Investment Environment
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Sample Questions
Q1) Explain the differences between stocks, bonds, and options.
Answer: Stocks are equity securities and represent ownership of a business.Bonds are debt securities and represent a liability of a business.Options are derivative securities and represent neither ownership nor debt of a business.While stocks are issued by corporations, and bonds are issued by corporations and governmental units, options are issued by individual investors.
Q2) Sarah purchased a stock one year ago at a price of $32 a share.In the past year, she has received four quarterly dividends of $0.75 each.Today she sold the stock for $38 a share.Her capital gain per share is
A) $3.00.
B) $6.00.
C) $(6.00).
D) $9.00.
Answer: B
Q3) An example of a direct investment is the purchase of mutual fund shares.
A)True
B)False
Answer: False
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Chapter 2: Securities Markets and Transactions
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Sample Questions
Q1) Stocks purchased in the secondary market are purchased
A) directly from the issuing corporation.
B) from other investors.
C) from small, little-known brokerages.
D) indirectly through financial institutions.
Answer: B
Q2) Which one of the following statements concerning the primary market is correct?
A) A transaction in the primary market is between two private stockholders.
B) The first public sale of a company's stock in the primary market is called a seasoned new issue.
C) The first public sale of a company's stock is called an IPO.
D) A rights offering is a direct sale of stock to an institution that participates in the primary market.
Answer: C
Q3) A market maker brings together buyers and sellers in an auction market.
A)True
B)False
Answer: False
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Chapter 3: Investment Information and Securities Transactions
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Sample Questions
Q1) The Standard & Poor's indexes are all based on market values which consider the number of shares outstanding.
A)True
B)False
Answer: True
Q2) Investing online is usually less expensive than traditional methods.
A)True
B)False Answer: True
Q3) Charting is the technique of
A) plotting the performance of a security over time.
B) sorting through databases of securities to select one based on certain parameters.
C) monitoring a stock based on the underlying economic conditions.
D) determining the amount of money that must be saved based on a given financial goal.
Answer: A
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Page 5
Chapter 4: Return and Risk
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Sample Questions
Q1) Investors can be confidently predict future returns on an investment by studying its past performance.
A)True
B)False
Q2) Which one of the following is an internal characteristic that can affect the value of an investment?
A) Federal Reserve actions
B) inflation
C) war
D) use of debt financing
Q3) Brittany purchased a stock for $14 a share and sold it six months later for $15.50.While she owned the stock, Britanny received two quarterly dividends of $0.16 per share.Brittany's holding period return on this stock is
A) 13.0%.
B) 15.0%.
C) 17.4%.
D) 19.3%.
Q4) Which types of risk can not be avoided by carefully researching a company's business prospects and financial statements.
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Chapter 5: Modern Portfolio Concepts
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Sample Questions
Q1) Combining uncorrelated assets should
A) increase the overall risk level of a portfolio.
B) decrease the overall risk level of a portfolio.
C) not change the overall risk level of a portfolio.
D) cause the other assets in the portfolio to become positively related.
Q2) Maximum international diversification can be achieved by investing solely in U.S.multinational corporations.
A)True
B)False
Q3) Market return is the average return on a large sample of stocks such as those in the Standard & Poor's 500 Stock Composite Index.
A)True
B)False
Q4) What is the expected return on a stock with a beta of 1.09, a market risk premium of 8%, and a risk-free rate of 4%?
A) 4.36%
B) 8.36%
C) 8.72%
D) 12.72%
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Chapter 6: Common Stocks
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Sample Questions
Q1) The common shares of the Owl Company have a book value of $10.80 and a market value of $14.30.The company pays $0.14 in dividends each quarter.What is the dividend yield?
A) 1.0%
B) 1.3%
C) 3.9%
D) 5.2%
Q2) Investors should never pay more than par value for a stock.
A)True
B)False
Q3) Over the 50-year period of 1953-2002, the stock market provided an average annual rate of return of approximately 11%.
A)True
B)False
Q4) Which of the following periods provided particularly high returns to stock investors?
A) February 1972-October 1974
B) August 1998-March 2000
C) September 2000-September 2002
D) October 2007-March 2009
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Chapter 7: Analyzing Common Stocks
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Sample Questions
Q1) Which one of the following statements concerning accounting reports is correct?
A) The income statement reflects the position of a firm as of a single point in time.
B) The total equity of a firm is equal to the total assets plus the total liabilities.
C) The statement of cash flows identifies both the sources and the uses of cash.
D) The income statement reflects the amount of cash available for investment and financing activities.
Q2) Which of the following are considered in the company analysis phase of a fundamental analysis of a firm?
I.the composition and growth in sales
II.the capital structure of the firm
III.the outlook of the national economy
IV.the composition and liquidity of the company's assets
A) I and II only
B) I, II and IV only
C) II and IV only
D) I, II, III and IV
Q3) Briefly describe and discuss both industry analysis and fundamental analysis.
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Chapter 8: Stock Valuation
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Sample Questions
Q1) The major forces behind earnings per share are
A) return on assets and book value.
B) return on assets and total asset turnover.
C) return on equity and the equity multiplier.
D) return on equity and book value.
Q2) One method of estimating the dividend growth rate is to calculate the discount rate that equates today's dividend with the dividend paid ten years ago.
A)True
B)False
Q3) The rate of dividend growth can be estimated by multiplying the return on equity rate by the dividend payout ratio.
A)True
B)False
Q4) High price/sales multiples go with high profit margins.
A)True
B)False
Q5) List the key variables that affect the P/E ratio and explain the relationship between each variable and the P/E ratio.
Q6) Explain how the time value of money concept is used in stock valuation.
Page 10
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Chapter 9: Market Efficiency, Behavioral Finance, and Technical Analysis
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Sample Questions
Q1) The market reaction to quarterly earnings announcements tends to support the strong form of the efficient market hypothesis.
A)True
B)False
Q2) Which one of the following best describes the term "efficient market"?
A) The commissions on large transactions are smaller than the commissions on small transactions.
B) New information is quickly reflected in security prices.
C) Little time and effort are spent on marketing securities to the public.
D) The cost of receiving, processing, executing, and reporting securities orders is small.
Q3) Historically higher returns on the stocks of small companies can be completely explained by their higher risk.
A)True
B)False
Q4) Available evidence does not support the strong form of the efficient market hypothesis.
A)True
B)False
Page 11
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Chapter 10: Fixed-Income Securities
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Sample Questions
Q1) Lee is considering buying one of two newly-issued bonds.Bond A is a twenty-year, 7.5% coupon bond that is non-callable.Bond B is a twenty-year, 8.25% bond that is callable after two years.Both bonds are comparable in all other aspects.Lee plans on holding his bond to maturity.What should Lee do if he feels that interest rates are going to decline by 2% in the near future and then remain relatively stable thereafter?
A) purchase Bond A
B) purchase Bond B
C) purchase neither A nor B at this time
D) negotiate a higher rate on Bond A
Q2) The conversion ratio denotes the number of shares for which a convertible bond can be exchanged.
A)True
B)False
Q3) The primary reasons for owning bonds are the income they provide and also the stability they bring to an investment portfolio.
A)True
B)False
Q4) What are the major factors that affect the price of convertible bonds?
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Page 12
Chapter 11: Bond Valuation
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Sample Questions
Q1) Which one of the following statements concerning interest rates is correct?
A) A decrease in the money supply will cause interest rates to decline.
B) A federal budget surplus will cause interest rates to decline.
C) Economic expansions will cause interest rates to decline.
D) Rising interest rates in foreign countries will cause U.S. interest rates to decline.
Q2) Based on the concept of bond duration, which one of the following statements is correct?
A) Lower coupons result in shorter durations.
B) Longer maturities mean shorter durations.
C) Higher yields (YTMs) lead to longer durations.
D) Longer durations mean greater volatility.
Q3) What is the current price of a $1,000, 6% coupon bond that pays interest semi-annually if the bond matures in ten years and has a yield-to-maturity of 7.1325%?
A) $567
B) $920
C) $1,030
D) $1,080
Q4) Explain the technique and the purpose of building bond ladders.
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Page 13
Chapter 12: Mutual Funds: Professionally Managed Portfolios
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Sample Questions
Q1) Which one of the following statements is correct concerning players in the mutual fund industry?
A) Security analysts and traders work for the management company.
B) Normally a bank serves as the custodian.
C) The management company maintains the shareholder records.
D) The mutual fund shareholders are the owners of the management company.
Q2) Holding period returns are normally used only for investment periods of one year or less.
A)True
B)False
Q3) Mutual fund investors are primarily exposed to ________ and ________ risks.
A) market; financial
B) market; inflation
C) business; financial
D) business; inflation
Q4) Government securities money funds are structured to eliminate
A) interest rate risk.
B) inflation risk.
C) default risk.
D) market risk.
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Chapter 13: Managing Your Own Portfolios
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Sample Questions
Q1) Allison's portfolio has an expected return of 14% and a standard deviation of of 20%.Brianna's portfolio has an expected rate of return of 11% and a standard deviation of 12%.The risk-free rate is 3%.According to the Sharpe measure,
A) Allison has the better portfolio.
B) Brianna has the better portfolio.
C) The portfolio's are equally desirable.
D) The answer depends on Allison and Brianna's risk tolerance.
Q2) On January 1, Tim's portfolio was valued at $432,098.During the year Tim received $10,563 in interest and $15,060 in dividends.He also sold stock at a net loss of $12,870 and used the proceeds to purchase another stock.Tim did not contribute any more funds nor withdraw any funds during the year.On December 31 of the same year, Tim's portfolio was valued at $398,189.What is the holding period return for the year?
A) -5.3%
B) -4.9%
C) -2.1%
D) -1.9%
Q3) Dollar-cost averaging plans and constant-dollar plans are both formula approaches to portfolio management.Briefly explain the two plans.
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Chapter 14: Options: Puts and Calls
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Sample Questions
Q1) What is the time premium of a put with a strike price of $25 when the option price is $2 and the underlying common stock sells for $24?
A) $100
B) $200
C) $300
D) $400
Q2) Mary wrote a 40 call on ABC stock at a price of $275.She does not own any shares of ABC.Mary has
I.limited her losses to $275.
II.unlimited loss potential.
III.limited her gains to $275.
IV.unlimited profit potential.
A) I and IV only
B) II and III only
C) I and III only
D) II and IV only
Q3) Options are created by investors.
A)True
B)False
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Page 16
Chapter 15: Commodities and Financial Futures
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Sample Questions
Q1) The value of an interest-rate futures contract will go up when A) interest rates go up.
B) interest rates go down.
C) gold prices rise.
D) gold prices fall.
Q2) The return on a futures contract
A) is highly related to the low margin requirement.
B) is always equal to or greater than zero.
C) tends to be fairly stable from one trading day to the next.
D) is solely related to the current price of the underlying item.
Q3) For a commodities contract, the maximum daily price range is usually equal to twice the daily price limit.
A)True
B)False
Q4) The seller of a stock-index future is obligated to deliver a specified number of shares of the underlying security.
A)True
B)False
Q5) Briefly discuss futures options.What are they, and what advantage do they offer an investor?
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