Financial Markets and Institutions
Exam Review
Course Introduction
This course provides a comprehensive overview of the structure, function, and operation of financial markets and institutions. It examines the roles that various financial intermediaries play in the economy, including commercial banks, investment banks, insurance companies, and mutual funds. Students will explore the mechanisms of money and capital markets, the pricing of financial assets, and the impact of regulatory frameworks. The course also covers topics such as interest rates, risk management, and the globalization of financial markets, equipping students with the knowledge necessary to understand current developments and trends in the financial sector.
Recommended Textbook Fundamentals of Investment Management 9th Edition by Geoffrey A. Hirt
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Chapter 1: The Investment Setting
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Q1) Dividends and long-term capital gains are now taxed at the same maximum rate.
A)True
B)False
Answer: True
Q2) What would the rate of return for a stock that increased in value from $60 per share to $63 per share and paid a $3.00 dividend?
A)12%
B)11%
C)10%
D)1.5%
E)5%
Answer: C
Q3) Assume the real rate of return in the economy is 4.25 percent,the expected rate of inflation is 3.5 percent and the risk premium is 6.75 percent.Compute the risk free rate and required rate of return.
Answer: Risk free rate Rf= (1 + .0425) (1 + .035)- 1 = 1.079 - 1 = .079 or 7.9% or Rf= 4.25% + 3.5% = 7.75% Required Rate of Return = (1.0425) (1.035) (1.0675)- 1 = 1.1518 - 1 = .1518 or 15.18% or Required Rate of Return = 4.25% + 3.5% + 6.75% = 14.50%
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Chapter 2: Security Markets: Present and Future
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Sample Questions
Q1) The Gramm-Leach-Bliley Act was passed in 1999 by the U.S.Congress to allow
A)Financial institutions to offer full financial services such as insurance and investment banking as well as traditional commercial banking
B)Financial institutions to be sued by stockholders for off-balance sheet accounting errors
C)Savings and loans to compete with commercial banks in both the commercial banking arena and mortgage loans
D)European banks to acquire U.S.financial institutions.
Answer: A
Q2) The first exchange to become a publicly traded company was the
A)New York Stock Exchange
B)Chicago Board of Trade
C)Nasdaq Stock Market
D)American Stock Exchange
E)Chicago Mercantile Exchange.
Answer: E
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Chapter 3: Participating in the Market
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Sample Questions
Q1) Trading through an online broker is generally cheaper than trading through a discount broker.
A)True
B)False
Answer: True
Q2) The Standard and Poor's 500 stock index is widely followed by professional money managers as a measure of broad stock market activity.
A)True
B)False Answer: True
Q3) The NYSE sets margin requirements.
A)True
B)False Answer: False
Q4) Different mutual funds are judged by different measures,depending on their investment objectives.
A)True
B)False Answer: True
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Chapter 4: Sources of Investment Information
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Sample Questions
Q1) Comprehensive investment advice can be found in such periodicals as Barron's,Forbes and Fortune Magazine.
A)True
B)False
Q2) Standard and Poor's Stock Reports provide a 10 year summary of abbreviated financial data from the income statement and the balance sheet.
A)True
B)False
Q3) The World Wide Web has become very important to investors mostly because they can now access EDGAR-online.
A)True
B)False
Q4) National Economic Trends,published monthly by the St.Louis Federal Reserve Bank,is a good source of raw data on economic time series.
A)True
B)False
Q5) The World Federation of Exchanges HYPERLINK "http://www.world-exchanges.org/" www.world-exchanges.org offers links to stock exchanges around the world.
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Chapter 5: Economic and Industry Analysis
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Sample Questions
Q1) Fiscal policy which results in a deficit will cause more inflation when it finances the deficit through
A)International currency exchange
B)The sale of treasury securities to the Federal Reserve
C)The sale of treasury securities to individuals in the private sector
D)None of the above
Q2) The valuation process begins with an industry analysis.
A)True
B)False
Q3) Since late 2002 the Bush administration has followed a weak dollar policy and
A)The euro has fallen against the dollar
B)The euro has risen against the dollar
C)The Chinese renmimbi has declined against the dollar
D)None of the above have happen
Q4) The primary purpose of fundamental stock valuation is
A)To eliminate stock of those companies that are potential losers from the portfolio
B)To identify for purchase those companies that are fundamentally undervalued
C)To learn to identify peaks and troughs of the business cycle
D)Two of the above.
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Chapter 6: Industry Analysis
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Sample Questions
Q1) 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
Q2) Oligopolistic industries are characterized by many competitors and few barriers to entry.
A)True
B)False
Q3) Ascertaining the competitive structure of an industry can help the analyst to determine the long-term profitability and outlook for that industry.
A)True
B)False
Q4) Rotational investors study the business cycle and invest in companies that are likely to benefit from the predicted movements of the economy.
A)True
B)False
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Chapter 7: Valuation of the Individual Firm
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Sample Questions
Q1) In the non-constant growth model where the first phase of growth is 5 years followed by a second phase of constant growth
A)P5= D6/(Ke-g)
B)P0= the present value of dividends from years 1 - 5 plus the present value of P5
C)The company's growth rate is probably higher than Keduring the first 5 years
D)All of the above are correct
Q2) It is thought that historical growth rates have more impact on an individual company's P/E ratio than expected future growth rate.
A)True
B)False
Q3) The strong inverse relationship between P/E ratios and changes in the Consumer Price Index can be directly traced to investors' required rate of return.
A)True B)False
Q4) Least squares trend analysis is used to take a simple average of past data.
A)True
B)False
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Chapter 8: Financial Statement Analysis
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Sample Questions
Q1) 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 $4 million.What is Price Printing Company's return on assets?
A)37.5%
B)12.5%
C)30.0%
D)25.0%
E)20.0%
Q2) You would expect to find depreciation and amortized expenses in the statement of cash flows 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
Q3) To examine the long-term performance over a number of years,one would use fundamental analysis.
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 ____________ suggests watching the small investor,who is right most of the time but misses key market turns,and then doing the opposite.
A)Contrary opinion rule
B)Odd-lot theory
C)Greed index
D)None of the above
Q2) Under the Dow theory,all of the following represent trends in the market except
A)Daily fluctuations
B)Secondary movement
C)Primary trends
D)Linear trends
Q3) A high ratio of specialist short sales compared to exchange short sales is interpreted as bearish.
A)True
B)False
Q4) The short interest ratio is the total short sales position divided by average daily exchange volume.
A)True
B)False
11
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Chapter 10: Investment in Special Situations and Anomalies
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Sample Questions
Q1) The _________ of the efficient market hypothesis suggests that there is little or nothing to be gained from studying past stock price trends.
A)Weak form
B)Semi-strong form
C)Strong form
D)Semi-weak form
Q2) The semi-strong form of the efficient market hypothesis maintains all of the following except
A)There is no learning lag in the distribution of public information
B)All public information is immediately impounded into the value of a security
C)Technical analysis is helpful in determining whether a stock is overvalued or undervalued
D)Fundamental analysts cannot outperform the market
Q3) Underpricing of new stock issues helps ensure the investment banker that the issue will be fully subscribed to at the initial market price.
A)True
B)False
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Chapter 11: Bond and Fixed Income Fundamentals
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Sample Questions
Q1) A "split rating" means that bond rating agencies assigned different ratings.
A)True
B)False
Q2) The primary difference between jumbo and small Certificates of Deposit,besides dollar amount,is
A)That jumbo certificates have a variable interest rate
B)That small certificates are considered to be risk-free
C)There is no secondary market for small certificates of deposit
D)None of the above
Q3) A Treasury bill is a long-term obligation of the federal government.
A)True
B)False
Q4) As the yield spread between high and low rating categories increases,this indicates a gain of confidence in the economy.
A)True
B)False
Q5) Private placements refer exclusively to stock issues sold to insurance companies or individuals.
A)True
B)False
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Chapter 12: Principles of Bond Valuation and Investment
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Q1) The investor in deep-discount bonds generally accepts a lower yield because of
A)The unique conversion feature associated with deep-discount bonds
B)The extremely low risk of a call
C)The fact that the return represents pure interest income
D)More than one of the above
Q2) When one invests in a private placement bond offering,they can generally expect to receive a slightly higher yield than on public bond offerings,because:
A)Of a very large secondary market for the private placement bonds
B)Of a very small secondary market for the private placement bonds
C)Of the large size of the borrowing firm in the private placement
D)There is less risk in a private placement than in a public one
Q3) The price of a lower coupon rate bond is more sensitive to interest rate changes than higher coupon rate bonds.
A)True
B)False
Q4) The reinvestment assumption would have no effect on yield if the bond is held to maturity.
A)True
B)False
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Chapter 13: Duration and Reinvestment Concepts
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Q1) The duration of a 20-year,$1,000 bond at a COUPON rate of 8 percent is _________ the duration of an identical bond at a coupon rate of 6 percent.
A)Greater than
B)Less than
C)Equal to
D)There is not enough information to tell
Q2) Volatile high interest rates have directly caused more emphasis on duration analysis because
A)Investors have responded to the new environment by switching from short-term to longer-term securities
B)Prices of longer-term bonds are more sensitive to shifts in interest rates than shorter-term bonds
C)Duration analysis measures the degree of bond price sensitivity
D)All of the above
Q3) Weighted average life is the most representative value for effective bond life.
A)True
B)False
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Chapter 14: Convertible Securities and Warrants
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Sample Questions
Q1) A warrant carries an option to purchase two shares at $35.The warrant's minimum value is determined to be $25.At what price is this company's common stock currently trading?
A)$25.5
B)$50.0
C)$47.5
D)$70.0
E)$95.0
Q2) From the corporate financial officer's viewpoint,which of the following is a reason for not calling 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 aftertax cost of the dividends on the new shares might be higher than the aftertax 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
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Chapter 15: Put and Call Options
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Q1) The difference between selling short and buying a put is that the short seller can lose more that the initial investment.
A)True
B)False
Q2) Calls used to cover a short sale guarantee that no loss can occur.
A)True
B)False
Q3) 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
Q4) If a stock price increased by 76.5 percent and the leverage for the option was calculated to be 1.5,the option price increased by 25.5 percent.
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) There is no real difference in loss potential in the options and the commodities markets.
A)True
B)False
Q2) A banker who is paying a fixed 6 percent rate on CDs for the next two years and is afraid interest rates may go down on new loans,may hedge this exposure with interest rate swaps by
A)Swapping a fixed rate for a variable rate
B)Swapping a variable rate for a fixed rate
C)Swapping short-term exposure for long-term exposure
D)Swapping long-term exposure for short-term exposure
Q3) Treasury bond futures trade on the New York Stock Exchange.
A)True
B)False
Q4) Which of the following is not a major category of financial futures?
A)Commodity futures
B)Currency futures
C)Interest rate futures
D)Stock index futures
E)None of the above are major categories
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Chapter 17: Stock Index Futures and Options
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Q1) Options on stock index futures may settle on a cash basis or exercise the option to obtain the futures contract.
A)True
B)False
Q2) The profit on a stock index option is determined by the change in the underlying value of the futures contract.
A)True
B)False
Q3) Which of the following statements about the "basis" of stock index futures is ?
A)It is the difference between the futures price and the value of the actual underlying index
B)Negative basis is generally considered to foretell a declining market
C)The basis reflects market changes instantaneously while the actual underlying index moves more slowly
D)All of the above are true
Q4) A perfect hedge using stock index futures eliminates both losses and gains on a stock portfolio.
A)True B)False
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Chapter 18: Mutual Funds
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Q1) An investor should expect a mutual fund to maintain its historical track record of returns.
A)True
B)False
Q2) Reliable sources of information about mutual funds include all of the following except
A)Forbes
B)Lipper
C)Morningstar
D)All of the above are good sources
Q3) Federal income tax on investment income and capital gains of a mutual fund
A)Must always be paid by both the fund and the shareholder
B)Must be paid only by the shareholder
C)Is not required of the fund if it distributes at least 90% of its net investment income and capital gains
D)Is not required either of the fund or of its shareholders
Q4) Morningstar Mutual Fund Survey is considered one of the leading authorities on mutual fund performance.
A)True
B)False
Page 20
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Chapter 19: International Securities Markets
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Q1) Correlations between U.S.returns and foreign stock returns appear to remain fairly stable from period to period.
A)True
B)False
Q2) Less developed countries may provide even greater risk reduction in a portfolio than developed countries.
A)True
B)False
Q3) The correlation coefficient measures the movement of one series of data to another series of data over the same time period.
A)True
B)False
Q4) ADR's (American Depository Receipts)represent an ownership interest in a foreign company's common stock.
A)True B)False
Q5) Emerging markets seem to have fairly consistent valuation standards and ratios. A)True
B)False
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Chapter 20: Investment in Real Assets
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Q1) Which of the following allow the individual to invest in gold without actually owning gold?
A)Gold stock
B)Gold futures
C)Options on gold futures
D)All of the above
Q2) No one in a limited partnership arrangement has unlimited liability.
A)True
B)False
Q3) In evaluating a general partner of a limited partnership an investor should be sensitive to his or her
A)Experience
B)Possible lawsuits
C)Law degree
D)A and B
Q4) A limited partnership can be either private or public in nature.
A)True
B)False
Q5) A shopping center has annual net operating income of $1,050,000 and a capitalization rate of 8%.What is its value?
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Chapter 21: A Basic Look at Portfolio Management and Capital Market Theory
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Q1) Under Markowitz' theory,the ideal portfolio for an investor is represented by
A)The point of tangency between the efficient frontier and the investor's indifference curve
B)The highest possible indifference curve
C)The highest possible point on the efficient frontier
D)None of the above
Q2) The investor wants to achieve the __________ risk-return indifference curve.
A)Lowest
B)Highest
C)Median
D)Mean
Q3) The point of tangency between the efficient frontier and the Security Market Line is considered to represent an optimum portfolio.
A)True
B)False
Q4) The efficient frontier
A)Represents all possible portfolios for a given level of risk
B)Separates unattainable portfolios from less than optimal portfolios
C)Is different for every investor
D)More than one of the above
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Chapter 22: Measuring Risks and Returns of Portfolio Managers
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Q1) Alpha must always be a positive number.
A)True
B)False
Q2) If the portfolio return is 10 percent and the U.S.T-bill rate is 5.75 percent what is the Treynor measure of excess returns?
A).4250
B).0425
C).7391
D)There is not enough information to tell
Q3) To achieve effective diversification,a fund must have 80 to 100 different securities.
A)True
B)False
Q4) Treynor uses beta as a measure of risk.
A)True
B)False
Q5) A fund manager has almost total control over the beta of his portfolio. A)True
B)False
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Chapter 23: Sustainable Growth Model
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Q1) The sustainable growth model is appropriate for firms that exhibit a constant pattern of growth and reinvestment.
A)True
B)False
Q2) 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.If the firm paid out $.975 in dividends per share at the end of the year,how much will the book value per share be at the end of the year?
A)$16.25
B)$13.975
C)$15.275
D)$4.225
E)$12.025
Q3) 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
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Chapter 24: a Black Scholes Option Pricing Model
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Q1) In the Black and Scholes Option Pricing Model the put and call prices are a function of which of the following:
A)The underlying stock's market price and the strike price
B)The length of the option's life and the riskless rate of interest
C)The volatility of the stock price changes expressed as the statistical measure "variance"
D)All of the above
Q2) What does the Black and Scholes Option Pricing model mean by "markets are frictionless"?
A)There are no taxes
B)There are no transactions costs
C)All securities are infinitely divisible
D)All market participants may borrow or lend at the known constant riskless rate of interest
E)All of the above are correct
Q3) The Black and Scholes option pricing model makes an assumption that the option could be exercised before maturity.
A)True
B)False
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Chapter 26: A Comprehensive Analysis for Real Estate
Investment Decisions
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Q1) 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?
Q2) 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?
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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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