Financial Markets and Institutions
Final Test Solutions
Course Introduction
This course provides a comprehensive overview of financial markets and institutions, exploring their roles, structures, and functions within the global economy. Students will learn about the various types of financial markets, including money, capital, and derivative markets, as well as the institutions that facilitate financial transactions, such as banks, insurance companies, and investment firms. The course examines how these organizations manage risk, allocate resources, and comply with regulatory frameworks. Key topics include the determination of interest rates, financial intermediation, the impact of monetary policy, and current trends in financial innovation and globalization.
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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Sample Questions
Q1) When comparing returns by decade,the Ibbotson study shows that small stocks outperformed large stocks in every decade since the 1920's.
A)True
B)False
Answer: False
Q2) Mutual funds are a form of direct equity claims.
A)True
B)False
Answer: False
Q3) Those who attempt to engage in short-term market tactics are termed traders.
A)True
B)False
Answer: True
Q4) The Ibbotson study showed that high risk investments generate high returns.
A)True
B)False
Answer: True
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3
Chapter 2: Security Markets: Present and Future
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Sample Questions
Q1) Specialists are now able to keep their limit orders in the Electronic Book rather than the old manual "specialist's book."
A)True
B)False
Answer: True
Q2) Every security traded over-the-counter has its own set of dealers and its own distribution system.
A)True
B)False
Answer: True
Q3) The Cincinnati Stock Exchange is the largest of the regional stock exchanges. A)True
B)False
Answer: False
Q4) All markets must have a physical central trading location. A)True
B)False
Answer: False
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Page 4
Chapter 3: Participating in the Market
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Sample Questions
Q1) When an investor establishes a position in a security:
A)They are said to be long if they purchase the security for their account
B)They are said to be long if they sell the security for their account
C)They are said to be short if they sell the security for their account
D)They are said to be short if they purchase the security for their account
E)Both a and c
Answer: E
Q2) You are said to be long in a security if you purchase the security.
A)True
B)False Answer: True
Q3) The Dow Jones Industrial Average is not adjusted for stock splits.
A)True
B)False Answer: False
Q4) The Securities and Exchange Commission publishes a list of approved securities that may be borrowed against.
A)True
B)False Answer: True
Page 5
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Chapter 4: Sources of Investment Information
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Sample Questions
Q1) Information on U.S.,Canadian,and international companies covering fujll balance sheets and income statements,corporate profiles,subsidiary and division information,SEC reports,and new and press releases may be found in Standard & Poor's
A)Corporation Records
B)Analysts Handbook
C)Investment Advisory Survey
D)None of the above
Q2) The SEC currently sells its data to the public on the Internet.
A)True
B)False
Q3) You can access each of the 12 Federal Reserve Banks either through the Federal Reserve Board or each bank's individual Internet Site.
A)True
B)False
Q4) Morningstar is one of the largest mutual funds in the U.S. A)True
B)False
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Chapter 5: Economic and Industry Analysis
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Sample Questions
Q1) In 2001 the World Trade Organization admitted
A)China
B)Poland
C)The Czech Republic
D)Turkey
Q2) For the investor's purposes,a normal business cycle (peak to peak or trough to trough)lasts approximately _________ as reported by the National Bureau of Economic Research based on the last 8 peace time business cycles.
A)Ten months
B)Eleven months
C)Forty-six months
D)Thirty four months
E)Sixty-three months
Q3) The U.S.government has had only ten years between 1977 and 2007 where a surplus occurred because government revenues were greater than expenditures.
A)True
B)False
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Chapter 6: Industry Analysis
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Sample Questions
Q1) Pure competition in manufacturing is common in the United States.
A)True
B)False
Q2) Firms in the development stage finance their growth from internal cash flows.
A)True
B)False
Q3) An industry reaches the maturity stage when its sales growth matches the rate of growth of the economy.
A)True
B)False
Q4) Investors should buy consumer non-cyclical stocks in the early stages of recovery.
A)True
B)False
Q5) Which of the following four industry sectors would benefit the most from rising inflation?
A)Consumer cyclical
B)Basic materials
C)Household durable goods
D)Consumer non-cyclical
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Chapter 7: Valuation of the Individual Firm
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Sample Questions
Q1) A good example of an industry that has a lot of growth companies in it is the:
A)Automobile industry
B)Biotechnology industry
C)Food and beverage industry
D)Consumer products industry
Q2) Under a non-constant growth model,Ke(required rate of return)is varied from time period to time period.
A)True
B)False
Q3) Which of the following statements about stock valuation based on asset value is NOT ?
A)Natural resources often give a company value even if an income stream is not produced
B)The value of the assets may not even appear on the balance sheet
C)Current assets are usually excluded from the valuation process since they will be used up in the next business cycle
D)Hidden assets can add substantial value to the firm
Q4) In the formula Po= D1/(Ke-g),if D1= $2.00,Ke= .10 and g = .06,Pois equal to $55.
A)True
B)False
Page 9
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Chapter 8: Financial Statement Analysis
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Sample Questions
Q1) Balance sheet items are carried at original cost or market value at the discretion of the individual firm.
A)True
B)False
Q2) A stock is a good buy when the value of these ratios except one is low compared to a market index or company history.Which one doesn't belong?
A)Price to book value
B)Price to earnings
C)Dividend yield
D)All of the above belong
Q3) Industry comparisons allow an analyst to separate quality companies from losers.
A)True
B)False
Q4) Cash flows from investing activities would involve the purchase or sale of plant and equipment.
A)True
B)False
Q5) If a firm has a return on assets of 10% and a 40% debt to total assets ratio what will the return on equity be?
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Chapter 9: A Basic View of Technical Analysis and Market Efficiency
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Q1) Barron's Confidence Index has only a mixed record of success. A)True
B)False
Q2) The essence of the contrary opinion rule is that it is easier to figure out who is right than who is wrong.
A)True
B)False
Q3) When short sellers are bearish,it is thought to be a bullish signal.
A)True
B)False
Q4) Divergence between advances and declines in a breadth of the market indicator and the Dow Jones Industrial Average may signal a reversing trend in the market.
A)True
B)False
Q5) The Barron's Confidence Index is used to observe the trading pattern of investors in the stock market.
A)True B)False
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Chapter 10: Investment in Special Situations and Anomalies
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Sample Questions
Q1) The strong form of the efficient market hypothesis suggests that only insiders are able to show superior risk-adjusted returns.
A)True
B)False
Q2) In the bull market of the 1990s,many firms repurchasing their own shares were among the strongest and most respected companies on Wall Street.
A)True
B)False
Q3) The weak form of the efficient market hypothesis can be tested by utilizing A)Tests of independence
B)Regression analysis
C)Trading rule tests
D)A and C
Q4) Research on the strong form shows that _______ are able to achieve superior returns.
A)Members of the SEC
B)Corporate insiders and public officials
C)Market specialists and corporate insiders
D)The majority of professional mutual fund managers
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Chapter 11: Bond and Fixed Income Fundamentals
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Q1) 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
Q2) Corporate bonds generally trade in units of
A)$100
B)$1,000
C)$5,000
D)$10,000
Q3) A sinking fund may be used to pay off a perpetual bond.
A)True
B)False
Q4) If inflation is higher than that expected at time of issue,inflation-indexed Treasury securities
A)Provide a lower return than fixed income securities
B)Provide a higher return than fixed income securities
C)Do not adequately compensate the investor for loss of purchasing power
D)May be called in by the government
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Chapter 12: Principles of Bond Valuation and Investment
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Sample Questions
Q1) The expectations hypothesis is that any long-term rate is an average of the expectations of future short-term rate over the applicable time horizon.
A)True
B)False
Q2) Yield to maturity considers annual interest,difference between current price and maturity value,and years to maturity.
A)True
B)False
Q3) Short-term interest rates have _________ volatility in comparison to long-term interest rates
A)Much less
B)More
C)Equal
D)Slightly less
Q4) Interest rate changes affect low quality issues to a greater degree than high quality issues.
A)True
B)False
Q5) What would be the current yield of a 6 percent coupon bond priced at $950?
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Chapter 13: Duration and Reinvestment Concepts
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Sample Questions
Q1) A 10 percent coupon rate,five-year bond is currently selling to yield 12 percent and is priced at $927.50.
a)Recalculate the price of the bond based on a 7 percent yield to maturity and calculate the percentage price change. (use annual compounding)
b)If this bond has a duration of 3.40,how would you approximate the change in price of the bond for a 5 percent change in the yield to maturity?
Q2) 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.
Q3) Terminal wealth analysis for a zero coupon bond is irrelevant.
A)True
B)False
Q4) When duration of a coupon paying bond is plotted against years to maturity on the X axis,the line
A)Is linear
B)Is concave
C)Is convex
D)Is linear at a 45 degree angle
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Chapter 14: Convertible Securities and Warrants
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Sample Questions
Q1) Companies usually force conversion when conversion values are low.
A)True
B)False
Q2) Assume that a firm has warrants outstanding that allow the holder to buy one share of stock at $22 per share.Also assume the stock is selling at $28 per share and warrants are now selling at $10 per warrant.You can invest $1000 in the stock or the warrants.Assume the stock goes to $44 and the warrants trade at their intrinsic value when the stock is at $44.Would you have a larger total dollar profit by initially investing in the stock or the warrants? Compute the leverage.
Q3) Which of the following statements explains the premium paid over the intrinsic value of a warrant?
A)The higher the price volatility of the common stock,the greater the premium
B)The market value may fall below the intrinsic value because of the downside risk
C)The greater the time period over which the option may be exercised,the higher the premium
D)More than one of the above are true
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Chapter 15: Put and Call Options
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Sample Questions
Q1) The maximum possible loss on a strategy of buying put options is limited to the options premium under all circumstances.
A)True
B)False
Q2) At the time of expiration,the premium (price)on a call option
A)Reflects risk in addition to intrinsic value
B)Will be equal to the intrinsic value
C)May be above or below the intrinsic value
D)None of the above
Q3) A stock is selling for $35.You buy an April 30 call option for 3.75 and short (write)an April 35 call option for 1.25.You have entered into a vertical spread.If the stock is $43 at expiration,what will your profit or loss be on the spread?
Q4) A naked option write is a conservative strategy.
A)True
B)False
Q5) Generally,the higher the beta,the greater the speculative premium.
A)True
B)False
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Chapter 16: Commodities and Financial Futures
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Sample Questions
Q1) You,a farmer,anticipate taking 80,000 bushels of soybeans to the market in three months.The current cash price for soybeans is $5.85.The size of the futures contract is 5,000 bushels per contract and the current three-month futures price is $5.88.You decide to hedge one-half of your exposure to a drop in the value of soybeans.Assume that in three months,when you take the soybeans to market,you close out the futures contracts and the price has fallen to $5.80.How much did this hedge in the futures market generate in gains?
A)$2,400
B)$2,000
C)$6,400
D)$4,000
E)$3,200
Q2) Speculators are not significant participants in the commodities markets.
A)True
B)False
Q3) Given a 5,000 bushel futures contract on grain at a price of $3.25 per bushel,a margin requirement of 5 percent and a maintenance margin of 80 percent,your customer wants to know on a single contract,how much would the price per bushel have to fall before additional margin would be required.
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Page 18
Chapter 17: Stock Index Futures and Options
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Sample Questions
Q1) Stock index futures and options are sometimes referred to as derivative products because they:
A)Are often used as part of program trading
B)Make the market less volatile
C)Have intrinsic characteristics
D)Derive their existence from actual market indexes
Q2) The multiplier for the S & P 500 future contract is:
A)5
B)10
C)100
D)250
E)500
Q3) In order to effectively hedge a stock portfolio,the portfolio manager must know the total dollar value of the portfolio,the current index futures price and
A)The number of contracts available in the market
B)The portfolio P/E ratio
C)The relative volatility of the portfolio to the market
D)More than one of the above
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Chapter 18: Mutual Funds
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Q1) The acceptable range for a mutual fund's total yearly expenses is from 2% to 3% of assets.
A)True
B)False
Q2) Money market fund rates do not closely track short-term market interest rates because the maturities of assets held in money market portfolios generally range from one to six months.
A)True
B)False
Q3) Mutual funds which provide tax-free income are ________ and certain types of
A)Stock funds; bond funds
B)Money market funds; balanced funds
C)Municipal bond funds; money market funds
D)None of the above
Q4) An end load fund has
A)No charge upon purchase,but a fixed charge upon sale
B)A smaller charge on purchase,and another small charge again on sale
C)No charge upon purchase,and a declining charge based on time owned,on sale
D)Two of the above
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Chapter 19: International Securities Markets
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Sample Questions
Q1) Indirect international investment effectively eliminates problems with A)Taxation by foreign governments
B)Administration of foreign securities problems
C)Different cultures and reporting standards
D)All of the above
Q2) The European,Australian and Far East Index published by Morgan Stanley Capital Market International has returns over time that have been about 80 percent correlated with the Standard and Poor's 500.
A)True
B)False
Q3) U.S.multinational corporations are highly correlated with United States financial markets and therefore do not reduce portfolio risk to the same extent as investing in foreign corporations
A)True
B)False
Q4) In the developing world,Germany has the second largest equity market after the United States.
A)True
B)False
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Chapter 20: Investment in Real Assets
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Sample Questions
Q1) The value of real assets moves closely with the value of financial assets and therefore they provide effective portfolio diversification.
A)True
B)False
Q2) Under an equity participation arrangement,the lender not only provides the borrowed capital,but part of the equity ownership funds as well.
A)True
B)False
Q3) In a(n)____ arrangement,the borrower may end up making payment to cover not only the loan amortization,but also interest on deferred interest from an earlier period.
A)Graduated payment mortgage
B)Shared appreciation mortgage
C)Adjustable rate mortgage
D)More than one of the above
Q4) Under some mortgage arrangement,the lender may loan the funds at a rate well below the current market rate.
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) An assumption of the capital asset pricing model is that investors can borrow or lend an unlimited amount of funds at a given risk-free rate.
A)True
B)False
Q2) If the _____ of any individual stock is known,an investor can use the _____ to determine the expected rate of return on that stock
A)Beta; capital market line
B)Beta; security market line
C)Standard deviation; capital market line
D)None of the above
Q3) A good way to minimize risk and receive an optimum return on your portfolio is:
A)Through diversification
B)Buy only risk-free securities
C)Through blue-chip stock purchases only
D)Through junk-bonds
Q4) Points below the efficient frontier have less desirable risk-return characteristics than those along the efficient frontier.
A)True
B)False
23
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Chapter 22: Measuring Risks and Returns of Portfolio Managers
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Sample Questions
Q1) Sharpe uses beta as a measure of risk.
A)True
B)False
Q2) Due to either superior market timing or excellence in security analysis and selection,a few portfolio managers may outperform the market over the long-term.
A)True
B)False
Q3) The degree of association between the independent and dependant variables is measured by:
A)The beta
B)The standard deviation
C)The coefficient of determination
D)A and B
Q4) Treynor uses beta as a measure of risk.
A)True
B)False
Q5) The wise money manager will generally adhere strictly to stated objectives.
A)True
B)False
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Chapter 23: Sustainable Growth Model
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Q1) 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
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) The sustainable growth model is appropriate for highly cyclical firms. 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 markets have taxes and transactions costs.
A)True
B)False
Q2) Which of the following is NOT an assumption of the Black and Scholes Option Pricing Model?
A)Markets are frictionless and have no taxes or transaction cost
B)The stock pays dividends during its option period
C)Stock prices have a distribution that is skewed to the right
D)The option may be exercised before maturity
Q3) 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
Q4) The Black and Scholes option pricing model makes an assumption that markets have normal friction.
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) Which of the following are NOT examples of institutional investors?
A)Mutual funds and pension funds
B)Insurance companies
C)Commercial Banks
D)All of the above are institutional investors
Q2) Pension funds represent a declining segment of the institutional market.
A)True
B)False
Q3) 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
Q4) The largest category of institutional investor's are:
A)Foundations
B)Personal trusts
C)Mutual savings banks
D)Pension funds
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