Money and Capital Markets
Review Questions
Course Introduction
This course provides an in-depth examination of money and capital markets, exploring their structures, functions, and the critical roles they play in the financial system. Key topics include the characteristics and operations of various financial instruments such as bonds, equities, and derivatives; the behavior and management of financial intermediaries; and the influence of central banks and monetary policy on money supply and interest rates. The course also analyzes the interaction between financial markets and the broader economy, risk management strategies, and current trends impacting the evolution of global capital markets. Through case studies and real-world examples, students gain practical insight into how funds are channeled from savers to borrowers and how financial assets are priced and traded.
Recommended Textbook
Investments An Introduction 9th Edition by Herbert B. Mayo
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Chapter 1: An Introduction to Investments
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Sample Questions
Q1) The term "investment" in economics generally does not refer to the purchase of securities.
A)True
B)False
Answer: True
Q2) Investors may reduce risk by constructing diversified portfolios but not eliminate risk.
A)True
B)False
Answer: True
Q3) Exchange rate risk refers to fluctuations in
A) the prices of stocks on the New York Stock Exchange
B) the values of bonds and other debt instruments
C) the price of one currency relative to other currencies
D) the value of the investor's portfolio
Answer: C
Q4) Reinvestment rate risk results from higher stock prices in the future.
A)True
B)False
Answer: False
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Chapter 2: The Creation of Financial Assets
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Sample Questions
Q1) The SEC establishes the price of a new stock issue.
A)True
B)False
Answer: False
Q2) Commercial paper is
A) a short-term unsecured debt of a corporation
B) a short-term secured debt of a corporation
C) a long-term unsecured debt of a corporation
D) a long-term secured debt of a corporation
Answer: A
Q3) The primary role of organized security exchanges is to raise capital (money)for firms.
A)True
B)False
Answer: False
Q4) The shares of money market mutual funds are insured by the federal government up to $100,000.
A)True
B)False
Answer: False
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Chapter 3: Securities Markets
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Sample Questions
Q1) A round lot is the general unit for trading in a security.
A)True
B)False
Answer: True
Q2) A market maker
1)sells stock at the ask price
2)buys stock at the ask price
3)sells stock at the bid price
4)buys stock at the bid price
A) 1 and 2
B) 1 and 4
C) 2 and 3
D) 3 and 4
Answer: B
Q3) A short position is premised on security prices rising.
A)True
B)False
Answer: False
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Chapter 4: The Time Value of Money
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Sample
Questions
Q1) An investment offers $10,000 at the end of each year for ten years.(a)If you can earn 10 percent annually,what is this investment worth today? (b)If you do not spend the annual payment but invest it at 10 percent,how much will you have after the ten years have lapsed?
Q2) The future value of an annuity is
1)larger the higher the rate of interest
2)smaller the higher the rate of interest
3)larger the greater the number of years
4)smaller the greater the number of years
A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4
Q3) You are hurt in a car accident and your lawyer wins a $100,000 settlement to be distributed as follows:
$20,000 immediate payment
$5,000 a year for ten years starting now
$30,000 after ten years.
If the lawyer's fee is $10,000,what is the value of this settlement if the interest rate is 10 percent?
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Chapter 5: The Tax Environment
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Sample Questions
Q1) Which of the following currently reduces taxes?
1)contributions to an IRA
2)contributions to a Roth account
3)purchases of life insurance
4)contributions to a 401(k)plan
A) 1 and 2
B) 1 and 3
C) 1 and 4
D) 2 and 4
Q2) Only the earnings,and not the amount invested,are taxed when distributed from a 401(k).
A)True
B)False
Q3) Taxes are levied against a base such as property.
A)True
B)False
Q4) Roberta owns a savings account that paid annual interest of $1,000 stock that paid a dividend of $1,000
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Chapter 6: Risk and Portfolio Management
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Sample Questions
Q1) For diversification to reduce risk,
A) the returns on the individual securities should be highly correlated
B) the prices of the stocks should be stable
C) the returns on the individual securities should be negatively correlated
D) one firm should offer dividends and the other should offer capital gains
Q2) Diversification reduces reinvestment rate risk.
A)True
B)False
Q3) The security market line does not
A) indicate the relationship between risk and return
B) relate the market return and beta to a stock's return
C) identify the optimal portfolio for the investor
D) use beta coefficients as a measure of risk
Q4) Unsystematic risk is
A) the risk associated with movements in securities prices
B) reduced through diversification
C) higher when interest rates rise
D) the risk of loss of purchasing power
Q5) What is the expected return on a stock that pays a 4 percent annual dividend and whose price is expected to appreciate annually at 6 percent?
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Chapter 7: Investment Companies: Mutual Funds
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Sample Questions
Q1) A high beta coefficient for a mutual fund is desirable if the investor is seeking a conservative investment.
A)True
B)False
Q2) The shares of a mutual often sell for discount from net asset value.
A)True
B)False
Q3) The S&P 500 stock index may be an inappropriate benchmark for a small-cap fund.
A)True
B)False
Q4) Since mutual funds make investments in efficient financial markets,they
A) cannot outperform the market consistently
B) should not outperform the market consistently
C) will underperform the market when securities prices decline
D) primarily bear unsystematic risk
Q5) A style portfolio manager offers two things:
A) investment skill and market timing
B) the specific style combined with a low beta
C) a high beta and investment timing
D) investment skill combined with the specific style
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Chapter 8: Closed-End Investment Companies
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Sample Questions
Q1) Asset allocation determines
1)the proportion of a portfolio that should be held in money market securities
2)the distribution of a portfolio between stocks and bonds
3)the allocation of a portfolio among classes of stock
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all three
Q2) If a closed-end investment company were liquidated,the investor should receive the net asset value minus the cost of the liquidation.
A)True
B)False
Q3) If a closed-end investment company specializes in the securities of one sector of the economy,systematic risk is reduced.
A)True
B)False
Q4) The shares of a closed-end investment company often sell for discount.
A)True
B)False
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Chapter 9: The Valuation of Common Stock
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Sample Questions
Q1) The risk-adjusted required rate of return includes
1)the firm's earnings
2)the firm's beta coefficient
3)the treasury bill rate (i.e.,the risk-free rate)
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q2) Stockholders generally have which of the following rights?
1)right to vote
2)right to share in the firm's earnings
3)right to sell the stock
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q3) If you purchase TrisCorp stock at $71 a share and the firm pays a $5.20 dividend which is expected to grow at 7.5 percent,what is the implied annual rate of return on the investment?
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Chapter 10: Investment Returns and Aggregate Measures
of Stock Markets
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Sample Questions
Q1) Studies of rates of return on large stocks suggest
A) the average return is about 7.4 percent annually
B) over a period of years, the rate is approximately 10 percent
C) equity investors rarely sustain losses
D) dividends account for over half the return
Q2) Indices of Nasdaq stocks tend to be less volatile than the S&P 500 index.
A)True
B)False
Q3) If inflation occurs and the Dow Jones industrial average is unchanged,that implies A) security prices rose
B) security prices fell
C) investors' purchasing power diminished
D) investors' purchasing power increased
Q4) Movements in stock prices are often illustrated using relative (percentage)price changes.
A)True B)False
Q5) You bought a stock for $20 and sold it for $59.72 after six years.What was the annual rate of return?
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Chapter 11: Dividends: Past, present, and Future
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Sample Questions
Q1) Stock dividends cause
A) the price of a share of stock to rise
B) the price of a share of stock to fall
C) the value of the firm to rise
D) the value of the firm to fall
Q2) A higher payout ratio implies a lower growth rate.
A)True
B)False
Q3) If a firm repurchases its stock,
A) selling stockholders avoid capital gains taxes
B) the firm's holdings of cash are increased
C) earnings per share are increased
D) debt financing decreases
Q4) If an investor buys stock on the ex-dividend date,that individual will not receive the dividend.
A)True B)False
Q5) The payout ratio is dividends divided by earnings.
A)True
B)False
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Chapter 12: The Macroeconomic Environment for Investment Decisions
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Sample Questions
Q1) Investments in cyclical firms are less risky than investments in firms in non-cyclical industries.
A)True
B)False
Q2) Economies go through regular,identifiable cycles that can be forecasted with accuracy.
A)True
B)False
Q3) The anticipation of inflation suggests that the investor should
A) buy bonds
B) anticipate higher interest rates
C) avoid real estate investments
D) sell stocks of gold companies
Q4) If the country's exports increase,GDP declines.
A)True
B)False
Q5) A tight monetary policy should generate a higher required return for common stock.
A)True
B)False
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Chapter 13: Analysis of Financial Statements
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Sample Questions
Q1) Activity ratios measure
A) how rapidly assets flow through the firm
B) how frequently the firm's stock is traded
C) how rapidly employees turn over
D) the profitableness of accounts receivable
Q2) The statement of cash flow places emphasis on management's ability to retire debt.
A)True
B)False
Q3) Efficient financial markets suggest that
A) fundamental analysis leads to superior returns
B) fundamental analysis does not lead to superior returns
C) ratio analysis predicts changes in stock prices
D) ratio analysis reduces market efficiency
Q4) When a firm makes a profitable sale,its total assets increase.
A)True
B)False
Q5) The greater the numerical value of the debt ratio,the riskier the firm.
A)True
B)False
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Chapter 14: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) Technical analysts use financial statements as the basis for making investment decisions.
A)True
B)False
Q2) Which of the following human emotions tend to affect investment decisions?
1)the pain of regret
2)following the crowd or "herding"
3)selective memory
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q3) The Dogs of the Dow strategy suggests buying the lowest dividend yields of the Dow stocks.
A)True
B)False
Q4) Acknowledging traits that affect investment behavior should lead to better investment decisions.
A)True
B)False
Page 16
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Chapter 15: The Bond Market
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Sample Questions
Q1) Today few bonds are issued in "book entry" form.
A)True
B)False
Q2) Federal government bonds are the least risky bonds because the federal government has the power to tax and print money.
A)True
B)False
Q3) A diversified portfolio of high-yield securities may be achieved with ten or fewer bonds.
A)True B)False
Q4) The coupon on the variable interest rate bond varies with changes in interest rates. A)True B)False
Q5) Since bonds are legal obligations,there is little risk associated with purchasing these securities.
A)True B)False
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Chapter 16: The Valuation of Fixed-Income Securities
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Sample Questions
Q1) The concept of duration considers the
A) timing of interest payments
B) timing of principal repayment
C) current rate of interest
D) timing of both interest and principal repayment
Q2) If interest rates decline after a bond is issued and the investor reinvests the interest payment,the realized yield exceeds the yield to maturity.
A)True
B)False
Q3) Since preferred stock represents equity,it generally has the right to vote.
A)True
B)False
Q4) While bond prices fluctuate, A) yields are constant
B) coupons are constant
C) the spread between yields is constant
D) short-term bond prices fluctuate more
Q5) If interest rates increase,a bond may be called. A)True
B)False
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Chapter 17: Government Securities
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Sample Questions
Q1) Federal government debt does not have default risk because the government has the power to tax and to create money.
A)True
B)False
Q2) Treasury bills are sold for a premium.
A)True
B)False
Q3) Treasury bills
A) sell at a discount
B) sell for a premium
C) pay an established 4.5% annual interest
D) mature after one year
Q4) What is the value of a $1,000 zero coupon government bond that matures after eight years,if comparable yields are 7%?
Q5) Collateralized mortgage obligations (CMOs)are sold in classes ("tranches")that increase the certainty of the timing of payments.
A)True
B)False
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Chapter 18: Convertible Bonds and Convertible Preferred Stock
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Sample Questions
Q1) If a $1,000 convertible bond may be converted into 25 shares,the exercise price is $40 a share.
A)True
B)False
Q2) Generally,convertible bonds lack a call provision.
A)True
B)False
Q3) As interest rates increase,the probability that a convertible bond will be called declines.
A)True
B)False
Q4) If interest rates rise,the value of a convertible bond as debt increases.
A)True
B)False
Q5) Buying a bond with an option to sell the bond back to the firm at par is more speculative than buying a bond that lacks this feature.
A)True
B)False
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Chapter 19: An Introduction to Options
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Sample Questions
Q1) Buying a stock index option reduces systematic risk.
A)True
B)False
Q2) The writer of a naked call option wants
A) the prices of the stock and the call to rise
B) the prices of the stock and the call to fall
C) the prices of the stock to fall and the call to rise
D) the prices of the stock to rise and the call to remain stable
Q3) An investor may reduce risk by simultaneously purchasing a stock and a put option.
A)True
B)False
Q4) When a call option is exercised,new stock is issued.
A)True
B)False
Q5) The value of a right is independent of the price of the stock that the right is an option to buy.
A)True B)False
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Chapter 20: Option Valuation and Strategies
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Sample Questions
Q1) The hedge ratio determines the number of
A) call options to offset movements in the price of the stock
B) call options to offset a straddle
C) put options to offset movements in the price of a call option
D) call options to offset the impact of changes in interest rates
Q2) If an investor sells a stock short,that individual reduces the risk of loss by
A) buying a put
B) buying a call
C) entering a limit order to sell the stock if its price declines
D) increasing the collateral with the broker
Q3) If the price of a stock is $100 while the price of a call option at $100 is $3,the price of the put option is $2,and the rate of interest is 10 percent so the investor can purchase a $100 discounted note for $90.90 ,what should you do? Verify the potential losses and profits from the position.
Q4) According to the Black/Scholes option valuation model,a call option's value increases if
A) stock prices increase and interest rates decrease
B) the time to expiration decreases and interest rates increase
C) the variability of the stock's return increases and stock prices increase
D) interest rates decrease and the variability of the stock's return increases
Page 22
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Chapter 21: Commodity and Financial Futures
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Sample Questions
Q1) Selling a commodity contract is a long position.
A)True
B)False
Q2) If speculators anticipate interest rates will rise,they enter into contracts to sell bonds.
A)True
B)False
Q3) If the commodity's futures price declines 1.the long position profits
2)the short position profits
3)the buyer of the contract profits
4)the seller of the contract profits
A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4
Q4) If an individual has a long position in bond futures,that investor is anticipating lower interest rates.
A)True
B)False
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Chapter 22: Investing in Foreign Securities
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Sample Questions
Q1) Which of the following is recorded in the current account of the balance of payments?
A) a purchase of a foreign money market security
B) a foreign company's buying equipment in the U.S.
C) a foreign government spending in the U.S.
D) the statistical adjustment for differences in imports and exports
Q2) If you own British pounds and the American dollar is devalued,that implies American goods will be cheaper.
A)True
B)False
Q3) The shares of closed-end investment companies that invest in foreign securities may sell for a premium over their net asset values.
A)True
B)False
Q4) American investors may acquire shares in mutual funds that specialize in foreign investments.
A)True
B)False
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Chapter 23: Investing in Nonfinancial Assets:
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Sample Questions
Q1) The Canadian Maple Leaf is a pure silver coin.
A)True
B)False
Q2) The cash flow generated by REITs is taxed as income by the federal government.
A)True
B)False
Q3) Risks associated with home ownership may include 1.excessive use of financial leverage
2)fluctuations in home values
3)possible theft and fire
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q4) A hedge fund is a conservative type of mutual fund.
A)True
B)False
Q5) FHA mortgages are insured by state governments. A)True
B)False
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Chapter 24: Portfolio Planning and Management in an Efficient Market Context
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Sample
Questions
Q1) An enumeration of an individual's receipts and disbursements is called an income statement.
A)True
B)False
Q2) Investors seeking to avoid actively managing their portfolios will prefer which of the following assets?
A) common stock
B) index funds
C) financial futures
D) real estate
Q3) Which of the following short-term securities is inappropriate for an individual desiring funds for financial emergencies?
A) Treasury bills
B) certificates of deposit
C) financial futures
D) savings accounts
Q4) Interest earned and received appears on the individual's balance sheet.
A)True
B)False
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