Investment Analysis
Question Bank
Course Introduction
Investment Analysis is a comprehensive course designed to equip students with the foundational concepts and analytical tools necessary to evaluate various investment opportunities. The course covers essential topics such as financial markets and instruments, risk and return analysis, portfolio theory, asset pricing models, and security valuation techniques. Students will learn how to analyze stocks, bonds, and alternative investments, assess market trends, and apply quantitative methods to make informed investment decisions. Through case studies and practical assignments, the course emphasizes the development of critical thinking and decision-making skills required for effective investment management in a dynamic financial environment.
Recommended Textbook
Financial Markets and Institutions 11th Edition by Jeff Madura
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25 Chapters
1900 Verified Questions
1900 Flashcards
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Page 2
Chapter 1: Role of Financial Markets and Institutions
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Sample Questions
Q1) When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by investors.
A)undervalued
B)overvalued
C)fairly priced
D)efficient
E)none of the above
Answer: B
Q2) Common types of capital market securities include Treasury bills and commercial paper.
A)True
B)False
Answer: False
Q3) Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.
A)True
B)False
Answer: True
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Chapter 2: Determination of Interest Rates
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Sample Questions
Q1) Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. securities. This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S. interest rates.
A)decrease; upward
B)decrease; downward
C)increase; downward
D)increase; upward
Answer: C
Q2) The real interest rate can be forecasted by subtracting the ____ from the ____ for that period.
A)nominal interest rate; expected inflation rate
B)prime rate; nominal interest rate
C)expected inflation rate; nominal interest rate
D)prime rate; expected inflation rate
Answer: C
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4
Chapter 3: Structure of Interest Rates
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Sample Questions
Q1) You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after-tax yield, you would consider taxable securities that pay
A)31.1 percent.
B)19 percent.
C)12.5 percent.
D)14 percent.
Answer: D
Q2) If interest rates are expected to decrease, the yield on new short-term securities may be expected to ____, and the yield curve should be ____ sloping.
A)increase; upward
B)increase; downward
C)decrease; upward
D)decrease; downward
Answer: B
Q3) The yields of securities commonly move in the same direction over time. A)True
B)False
Answer: True
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Page 5
Chapter 4: Functions of the Fed
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Sample Questions
Q1) The advisory committee offering views on issues related to credit unions is the
A)Consumer Advisory Council.
B)Thrift Institutions Advisory Council.
C)Federal Advisory Council.
D)none of the above
Q2) Members of the Board of Governors serve 14-year nonrenewable terms.
A)True
B)False
Q3) As a result of the Financial Reform Act of 2010, the ____ was assigned the role of regulating financial products and services.
A)Federal Advisory Committee
B)Federal Open Market Committee
C)Consumer Financial Protection Bureau
D)Board of Governors
Q4) All commercial banks are required to be members of the Fed. A)True B)False
Q5) The Policy Directive is provided by Board of Governors to the FOMC.
A)True
B)False
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Chapter 5: Monetary Policy
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Sample Questions
Q1) The intent of the Fed's operation twist strategy in 2011 and 2012 was to:.
A)increase long-term interest rates.
B)require corporations to issue more commercial paper.
C)require bond rating agencies to impose higher standards on their ratings.
D)reduce long-term interest rates.
Q2) To correct excessive inflation, the Fed could use open market operations by buying Treasury securities in the secondary market.
A)True
B)False
Q3) The relationship between the interest rate on loanable funds and the level of business investment is positive.
A)True
B)False
Q4) The Fed's monetary policy is commonly intended to alter the supply of funds in the banking system in order to achieve a specific targeted:
A)discount rate.
B)required reserve requirement.
C)federal funds rate.
D)prime rate.
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Chapter 6: Money Markets
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Sample Questions
Q1) Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of $3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman's annualized cost of borrowing is estimated to be ____ percent.
A)14.39
B)14.13
C)14.59
D)14.33
E)none of the above
Q2) The yield on NCDs is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period.
A)greater than; recessionary
B)greater than; boom economy
C)less than; boom economy
D)less than; recessionary
Q3) A major drawback to investing in Treasury bills is that they cannot easily be liquidated.
A)True
B)False
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8
Chapter 7: Bond Markets
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Sample Questions
Q1) Many bonds are listed on the New York Stock Exchange (NYSE).
A)True
B)False
Q2) ____ require the owner to clip coupons attached to the bonds and send them to the issuer to receive coupon payments.
A)Bearer
B)Registered
C)Treasury
D)Corporate
Q3) The bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers.
A)True
B)False
Q4) The Treasury has relied heavily on ____-year bonds to finance the U.S. budget deficit.
A)50
B)70
C)10
D)5
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Chapter 8: Bond Valuation and Risk
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Sample Questions
Q1) Although the European debt crisis has had substantial effects on European financial markets, the crisis has been contained and has not affected markets and financial institutions outside Europe.
A)True
B)False
Q2) A(n) ____ in the expected level of inflation results in ____ pressure on bond prices.
A)increase; upward B)increase; downward
C)decrease; downward
D)none of the above
Q3) Sioux Financial Corp. has forecasted its bond portfolio value for one year ahead to be $105 million. In one year, it expects to receive $10,000,000 in coupon payments. The bond portfolio today is worth $101 million. What is the forecasted return of this bond portfolio?
A)10 percent
B)8.82 percent
C)4.32 percent
D)13.86 percent
E)none of the above
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Page 10
Chapter 9: Mortgage Markets
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Sample Questions
Q1) Collateralized mortgage obligations (CMOs) are generally perceived to have
A)no prepayment risk but some default risk.
B)no prepayment risk and no default risk.
C)the same interest rate risk as money market securities.
D)a high degree of prepayment risk.
Q2) ____ are backed by conventional mortgages.
A)Ginnie Mae mortgage-backed securities
B)Federal Reserve mortgage-backed securities
C)Private-label pass-through securities
D)Shared appreciation pass-through securities
Q3) ____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages.
A)Strong; increase; decrease
B)Strong; increase; increase
C)Weak; decrease; increase
D)Weak; increase; increase
E)Weak; decrease; decrease
Q4) A financial institution may service a mortgage even after selling it.
A)True
B)False
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Chapter 10: Stock Offerings and Investor Monitoring
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Sample Questions
Q1) Firms listed as "pink sheets" on the OTC market
A)are typically very large.
B)satisfy Nasdaq's listing requirements.
C)are typically owned by various institutional and individual investors.
D)none of the above
Q2) After an IPO, firms commonly list their shares on a private stock exchange.
A)True
B)False
Q3) Venture capital funds typically take over businesses and manage them.
A)True
B)False
Q4) Listing stock on a foreign stock exchange
A)enhances the stock's liquidity.
B)may increase the firm's perceived financial standing.
C)may protect a firm against hostile takeovers.
D)all of the above
Q5) Analysts periodically communicate with high-level managers of the firms whose stock they rate.
A)True
B)False
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Chapter 11: Stock Valuation and Risk
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Sample Questions
Q1) Zilo stock has an average return of 15 percent, a beta of 2.5, and a standard deviation of returns of 20 percent. The Sharpe index of Zilo stock is
A)0.36.
B)0.35.
C)0.28.
D)0.45.
E)none of the above
Q2) ____ is (are) not a firm-specific factor(s) that affect(s) stock prices.
A)Exchange rates
B)Dividend policy changes
C)Stock offerings and repurchases
D)Earnings surprises
E)All of the above are firm-specific factors that affect stock prices.
Q3) A stock portfolio has more volatility when its individual stock returns are uncorrelated.
A)True
B)False
Q4) A beta of 1.8 implies that the stock has a risk premium of 1.8%.
A)True
B)False
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Chapter 12: Market Microstructure and Strategies
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Sample Questions
Q1) Under the SEC's uptick rule, speculators are prohibited from taking a short position in stocks that have experienced a decline of at least 10 percent for the day, unless the most recent trade resulted in a decrease in the stock price
A)True
B)False
Q2) Mark would like to purchase a stock priced at $70. Mark thinks he can sell the stock for $100 after one year. If Mark does not borrow any money from his brokerage firm, what is the estimated return on the stock?
A)30.00 percent
B)-42.86 percent
C)-30.00 percent
D)42.86 percent
E)none of the above
Q3) ____ offer advice to customers on stocks to buy or sell.
A)Full-service brokers
B)Discount brokers
C)Floor brokers
D)Specialists
E)Market-makers
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Page 14
Chapter 13: Financial Futures Markets
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Sample Questions
Q1) _________ take positions in financial futures to reduce their exposure to future movements in interest rates or stock prices; ________ commonly take the opposite position and thus serve as counterparties on many transactions.
A)Speculators; hedgers
B)Hedgers; speculators
C)Arbitrageurs; speculators
D)Hedgers; arbitrageurs
Q2) According to the text, when a financial institution sells futures contracts on securities in order to hedge against a change in interest rates, this is referred to as
A)a long hedge.
B)a short hedge.
C)a closed out position.
D)basis trading.
Q3) Systemic risk reflects the risk that a particular event could
A)cause losses at a firm due to inadequate management control.
B)spread adverse effects among several firms or among financial markets.
C)cause a loss in value due to market conditions.
D)have a larger effect on the futures position than on the position being hedged.
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Chapter 14: Options Markets
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Sample Questions
Q1) Assume an insurance company purchases a call option on an S&P 500 Index futures contract for a premium of 14, with an exercise price of 1800. The value of an S&P 500 futures contract is 250 times the index. If the index on the futures contract increases to 1830, what is the gain on the sale of the futures contract?
A)$15,000
B)$7,500
C)$3,300
D)$4,000
E)$1,500
Q2) Speculators sell call options on currencies that they expect to strengthen against the dollar.
A)True
B)False
Q3) Several call options are available for a given stock, and the risk-return potential will vary among them.
A)True
B)False
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Page 16
Chapter 15: Swap Markets
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Sample Questions
Q1) When a bank participates in a swap of fixed interest rate payments for floating-rate payments, or a swap of currencies, it
A)can match up two parties but cannot take a position in the swap.
B)can match up two parties or can take a position in the swap.
C)cannot match up two parties and cannot take a position in the swap.
D)cannot match up two parties but can take a position in the swap.
Q2) Lizard National Bank purchases a three-year interest rate cap for a fee of 2 percent of notional principal valued at $50 million, with an interest rate ceiling of 11 percent and LIBOR as the index representing the market interest rate. Assume that LIBOR is expected to be 9 percent, 12 percent, and 13 percent at the end of each of the next three years, respectively. The total payments received (or paid) by Lizard, including the initial fee, are $____.
A)500,000
B)-500,000
C)-1,500,000
D)1,500,000
E)none of the above
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Page 17
Chapter 16: Foreign Exchange Derivative Markets
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Sample Questions
Q1) ____ are not foreign exchange derivatives.
A)Forward contracts
B)Currency futures contracts
C)Currency swaps
D)Currency options
E)All of the above are foreign exchange derivatives.
Q2) ____ forecasting involves the use of historical exchange rate data to predict future values.
A)Technical
B)Fundamental
C)Market-based
D)Mixed
Q3) The ____ allowed for the devaluation of the dollar in 1971.
A)Bretton Woods Agreement
B)Louvre Accord
C)Smithsonian Agreement
D)none of the above
Q4) Direct intervention is always extremely effective.
A)True
B)False
Page 18
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Chapter 17: Commercial Bank Operations
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Sample Questions
Q1) A bank's uses of funds represent liabilities of a bank.
A)True
B)False
Q2) The operations, management, and regulation of a financial conglomerate are the same irrespective of the types of services offered.
A)True
B)False
Q3) Like other market interest rates, the primary credit lending rate moves in reaction to changes in demand or supply of funds or both.
A)True
B)False
Q4) A bank's sources of funds represent liabilities or equity of the bank.
A)True
B)False
Q5) Transaction deposits do not include A)demand deposits.
B)NCDs.
C)NOW accounts.
D)all of the above are transactions deposits
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Chapter 18: Bank Regulation
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Q1) ____ is not a rating criterion used by the Federal Deposit Insurance Corporation (FDIC).
A)Capital adequacy
B)Off-balance sheet financing
C)Asset quality
D)Management
E)Liquidity
Q2) The Garn-St. Germain Act of 1982
A)permitted depository institutions to offer money market deposit accounts.
B)prevented depository institutions from acquiring problem institutions across geographical boundaries.
C)required the Fed to explicitly charge depository institutions for its services.
D)allowed the Fed to provide check clearing to depository institutions at no charge.
Q3) The Sarbanes-Oxley Act was enacted to make corporate managers, board members, and auditors more accountable for the accuracy of the financial statements that their respective firms provide.
A)True
B)False
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Chapter 19: Bank Management
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Sample Questions
Q1) ____ is (are) least likely to be used as a method of reducing interest rate risk.
A)Maturity matching
B)Floating-rate loans
C)Stock options
D)Interest rate swaps
E)Interest rate caps
Q2) Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri's $800 million in assets are rate-sensitive, while $600 million of its liabilities are rate-sensitive. Petri Bank's gap is $____.
A)-300 million
B)300 million
C)-500 million
D)500 million
Q3) A bank can usually simultaneously maximize its return on assets and minimize credit risk.
A)True
B)False
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Chapter 20: Bank Performance
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Sample Questions
Q1) Which of the following is not a factor that affects cash flows of a commercial bank?
A)changes in economic growth
B)changes in the risk-free interest rate
C)changes in industry conditions
D)changes in management abilities
E)all of the above are factors that affect cash flows of a commercial bank
Q2) When interest rates fall, the rates that a bank pays on deposits typically decline less than the interest rates that the bank earns on its loans and investments.
A)True
B)False
Q3) Which of the following banks would likely have the highest return on equity?
A)high return on assets, high capital ratio
B)high return on assets, low capital ratio
C)low return on assets, low capital ratio
D)low return on assets, high capital ratio
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Chapter 21: Thrift Operations
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Sample Questions
Q1) The primary source of funds for credit unions is
A)share certificates.
B)share deposits.
C)share drafts.
D)borrowed funds from the Central Liquidity Facility (CLF).
E)none of the above
Q2) A savings institution's cash flows are ____ related to interest rate movements.
A)positively related to B)negatively related to C)unrelated to D)none of the above
Q3) Comparing credit unions with commercial banks and savings institutions
A)credit unions are less able to quickly generate additional deposits.
B)savings institutions and commercial banks can borrow from the Central Liquidity Facility, but credit unions cannot.
C)savings institutions and commercial banks are less able to quickly generate additional deposits.
D)credit unions have less exposure to liquidity risk.
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Chapter 22: Finance Company Operations
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Sample Questions
Q1) The main competition for finance companies in the consumer loan market comes from pension funds and insurance companies.
A)True
B)False
Q2) Changes in economic growth are ____ related to a finance company's cash flows, and changes in the risk-free rate are ____ related to a finance company's cash flows.
A)positively; negatively
B)negatively; positively
C)negatively; negatively
D)positively; positively
Q3) Finance companies are subject to
A)a maximum limit on loan size.
B)ceiling interest rates on loans provided.
C)a maximum length on loan maturity.
D)regulations on intra-state banking.
E)all of the above
Q4) Business finance companies focus on loans to very large businesses.
A)True
B)False
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Chapter 23: Mutual Fund Operations
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Q1) If interest rates are expected to ________, mortgage real investment trusts (REITs)
A)decline; become less attractive
B)rise; become less attractive
C)rise; are not affected
D)decline; are not affected
Q2) If a mutual fund distributes at least ____ percent of its taxable income to shareholders, the fund is exempt from taxes on dividends, interest, and capital gains distributed to shareholders.
A)25
B)50
C)75
D)90
Q3) Equity REITs essentially represent fixed-income portfolios. Thus, their market values will be influenced by interest rate movements.
A)True
B)False
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Chapter 24: Securities Operations
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Q1) Which of the following is not a major function of the securities industry?
A)brokerage
B)raising new capital
C)underwriting
D)decisions regarding open market operations
Q2) The one-day return to investors who purchase IPO shares at the IPO offer price are ____, and the returns to investors who purchase the shares a day after the IPO are generally ____.
A)high; high
B)high; low
C)low; high
D)low; low
Q3) When the stock market is depressed, stock transactions tend to decline, causing a reduction in business for securities firms. This is an example of ____ risk.
A)interest rate
B)credit
C)market
D)exchange rate
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Chapter 25: Insurance and Pension Fund Operations
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Q1) ____ insurance protects the policyholders until death or as long as premiums are promptly paid.
A)Whole life
B)Variable life
C)Term life
D)Annuity life
E)None of the above
Q2) In periods when the risk-free interest rate ____ substantially, the required rate of return by bondholders ____, and most bond portfolios managed by pension funds perform ____.
A)declines; declines; poorly
B)declines; increases; well
C)declines; declines; well
D)declines, increases; poorly
E)none of the above
Q3) The moral hazard problem as related to the insurance industry means that some people take more risks once they are insured.
A)True
B)False
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