Final Revision

|Page 1
1) Financial market participants who provide funds are called
a) deficit units.
b) surplus units.
c) primary units.
d) secondary units

2) The main provider(s) of funds to the U.S. Treasury is (are)

A. households and businesses.
B. foreign financial institutions.
C. the Federal Reserve System.
D. foreign nonfinancial sectors.

3) The largest deficit unit is (are)

A. households and businesses.
B. foreign financial institutions.
C. the U.S. Treasury.
D. foreign nonfinancial sectors

4) Those financial markets that facilitate the flow of short-term funds are known as
A. money markets.
B. capital markets.
C. primary markets.
D. secondary markets.

5) Funds are provided to the initial issuer of securities in the……

A. secondary market.
B. primary market.
C. deficit market.
D. surplus market.

6) which of the following is a capital market instrument?

A. a six-month CD
B. a three-month Treasury bill
C. a ten-year bond
D. an agreement for a bank to loan funds directly to a company for nine months

7) Which of the following is a money market security?

A. Treasury note
B. municipal bond
C. mortgage
D. commercial
1.B 2.A 3.C 4.A 5.B 6.C 7.D

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8) The creditors in the federal funds market are
A. households.
B. depository institutions.
C. firms.
D. government agencies

9) Equity securities have a expected return than most long-term debt securities, and they
exhibit a degree of risk.
A. higher; higher
B. lower; lower
C. lower; higher
D. higher; lower

10) Money market securities generally have Capital market securities are typically expected
to have a .
A. less liquidity; higher annualized return
B. more liquidity; lower annualized return
C. less liquidity; lower annualized return
D. more liquidity; higher annualized return

11) If security prices fully reflect all available information, the markets for these securities
are
A. efficient.
B. primary.
C. overvalued.
D. undervalued.

12) If markets are , investors could use available information ignored by the market to earn
abnormally high returns.
A. perfect
B. active
C. inefficient
D. in equilibrium

13) If financial markets are efficient, this implies that all securities should earn the same
return.
A. True
B. False

8.B 9.A 10.D 11.A 12.C 13.B

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14) Common stock is an example of a(n)
A. debt security.
B. money market security.
C. equity security.
D. A and B

15) financial markets were , all information about any securities for sale in primary and
secondary markets would be continuously and freely available to investors.
A. efficient
B. inefficient
C. perfect
D. imperfect

16) The typical role of a securities firm in a public offering of securities is to

A. purchase the entire issue for its own investment.
B. place the entire issue with a single large investor.
C. spread the issue across several investors until the entire issue is sold.
D. provide all large investors with loans so that they can invest in the offering

17) Without the participation of financial intermediaries in financial market

transactions…………….
A. information and transaction costs would be lower.
B. transaction costs would be higher but information costs would be unchanged.
C. information costs would be higher but transaction costs would be unchanged.
D. information and transaction costs would be higher

18) Which of the following is most likely to be described as a depository institution?

A. finance companies
B. securities firms
C. credit unions
D. pension funds
E. insurance companies

19) In aggregate, are the most dominant depository institution, with more total assets than
other depository institutions.
A. commercial banks
B. savings banks
C. credit unions
D. S&L

14.C 15.C 16.C 17.D 18.C 19.A

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20) Which of the following is a non- depository financial institution?
A. savings banks
B. commercial banks
C. savings and loan associations
D. mutual funds

21) which of the following concentrate on mortgage loans.

A. Finance companies
B. Commercial banks
C. Savings institutions
D. Credit unions

22) securities have a maturity of one year or less; securities are generally more liquid.
A. Money market; capital market
B. Money market; money market
C. Capital market; money market
D. Capital market; capital market

23) Which of the following is not a major investor in stocks?

A. commercial banks
B. insurance companies
C. mutual funds
D. pension funds

24) Which of the following financial intermediaries commonly invests in stocks and bonds?
A. pension funds
B. insurance companies
C. mutual funds
D. all of the above

25) Securities are certificates that represent a claim on the issuer.

A. True
B. False

26) Debt securities are certificates that represent debt (borrowed funds) by the issuer.
A. True
B. False

20.D 21.C 22.B 23.A 24.D 25.A 26.A

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27) A five-year security was purchased two years ago by an investor who plans to resell it.
The security will be sold by the investor in the so-called
A. secondary market.
B. primary market.
C. deficit market.
D. surplus market

28) Financial markets facilitating the flow of short-term funds with maturities of less than
one year are known as…
A. secondary markets.
B. capital markets.
C. primary markets.
D. money markets.
E. none of the above

29) Those participants who receive more money than they spend are referred to
as……………
A. deficit units.
B. surplus units.
C. borrowing units.
D. government units

30) The main reason that depository institutions experienced financial problems during the
credit crisis was their investment in:
A. mortgages.
B. money market securities.
C. stock.
D. Treasury bonds.

31) If investors speculate in derivative contracts rather than the underlying asset, they will
probably achieve returns, and they are exposed to relatively risk.
A. lower; lower
B. lower; higher
C. higher; lower
D. higher; higher

32) Debt securities issued by a small firm may be, meaning that investors want to invest in
those securities.
A. liquid; many
B. liquid; not many
C. illiquid; not many
D. illiquid; many
27.A 28.A 29.B 30.A 31.D 32.C

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33) The price of bond when calculated below its par value is classified as
A. classified bond
B. discount bond
C. c)compound bond
D. consideration earning

34) The interest rate which is used in calculation of cash flows of bonds is called
A. required rate of redemption
B. required rate of earning
C. required rate of return
D. required option

35) A coupon bond pays the owner of the bond

A. the same amount every month until maturity date.
B. b)a fixed interest payment every period and repays the face value at the maturity date.
C. the face value of the bond plus an interest payment once the maturity date has been reached.
D. the face value at the maturity date.
E. none of the above.

36) If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every
year is
A. $650.
B. $1,300.
C. $130.
D. $13.
E. None of the above.

37) The value of any bond should be:

A. the sum total of all the coupon receipts as well as the principal repayment at the bond's
maturity.
B. b)the present value of all the coupon receipts as well as the principal repayment at the bond's
maturity.
C. the future value of all the coupon receipts as well as the principal repayment at the bond's
maturity.
D. none of the above.

38) Mary just purchased a bond which pays $60 a year in interest. What is this $60 called?
A. coupon
B. face value
C. discount
D. call premium
E. yield
33.B 34.C 35.B 36.A 37.B 38.A

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39) Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal
payment at maturity. What is the $1,000 called?
A. coupon
B. face value
C. discount
D. yield
E. dirty price

40) A bond that has only one payment, which occurs at maturity, defines which one of the
following?
A. debenture
B. callable
C. floating-rate
D. junk
E. zero coupon

41) A bond has a market price that exceeds its face value. Which of the following features
currently apply to this bond?
I. discounted price
II. premium price
III. yield-to-maturity that exceeds the coupon rate
IV. yield-to-maturity that is less than the coupon rate
A. III only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only

42) All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to
maturity.
A. a premium; less than
B. a premium; equal to
C. a discount; less than
D. a discount; higher than
E. par; less than

39.B 40.E 41.E 42.C

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43) The Walthers Company has a semi-annual coupon bond outstanding. An increase in the
market rate of interest will have which one of the following effects on this bond?
A. increase the coupon rate
B. decrease the coupon rate
C. increase the market price
D. decrease the market price
E. increase the time period

44) Which of the following relationships apply to a par value bond?

I. coupon rate < yield-to-maturity
II. current yield = yield-to-maturity
III. market price = call price
IV. market price = face value
A. I and II only
B. I and III only
C. II and IV only
D. I, II, and III only
E. II, III, and IV only

45) Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a
face value of $1,000. The bonds will be repaid in 10 years and will be sold at par. Given this,
which one of the following statements is correct?
A. The bonds will become discount bonds if the market rate of interest declines.
B. The bonds will pay 10 interest payments of $60 each.
C. The bonds will sell at a premium if the market rate is 5.5 percent.
D. The bonds will initially sell for $1,030 each.
E. The final payment will be in the amount of $1,060.

46) Which of the following increase the price sensitivity of a bond to changes in interest
rates?
I. increase in time to maturity
II. decrease in time to maturity
III. increase in coupon rate
IV. decrease in coupon rate
A. II only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only

43.D 44.C 45.C 46.C

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47) Longer-term bond prices are more sensitive to changes in interest rates than are short-
term bond prices.
A) True B) False

48) A stock is expected to pay a dividend of $3.00 in one year. To purchase the stock,
investors seek a15% annual return. If the stock is currently trading at $60, what is the
implied constant growth rate individends for the future?
A. 5%
B. 10%
C. 15%
D. 20%

49) Risk on a stock portfolio which cannot be eliminated or reduced by placing it in

diversified portfolio is classified as
A. diversifiable risk
B. market risk
C. stock risk
D. portfolio risk

50) No matter how large the number of stocks in the portfolio is, the risk that cannot be
diversified away is the:
A. company-specific risk
B. unsystematic risk
C. systematic risk
D. unique risk
E. both a and b

51) The market portfolio has a beta of:

A. a)1.0
B. b) 0.0
C. c) 2.0
D. -1.0
E. 0.5

52) According to the capital asset pricing model, beta is a measure of:
A. A)systematic risk
B. b) inflation risk
C. C)standard deviation of returns
D. D)unsystematic risk
E. variance of returns

47.A 48.B 49.B 50.C 51.A 52.A

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53) Within the framework of the Capital Asset Pricing Model, consider stocks A and B. Asset
A’s β is strictly bigger than asset B’s β. Moreover, the expected market return exceeds the
risk-free rate. Which of the two assets has a higher expected return?
A. The expected return for both assets is the same.
B. Asset A.
C. Asset B.
D. More information is needed to answer this question

54) Suppose two portfolios have the same average return, the same standard deviation of
returns, but portfolio X has a higher beta than portfolio Y. According to the Sharpe
measure, the performance of portfolio X
A. is the same as the performance of portfolio Y
B. is better than the performance of portfolio Y
C. is poorer than the performance of portfolio Y
D. cannot be measured as there is no data on the alpha of the portfolio
E. none of the above is true.

55) Suppose two portfolios have the same average return, the same standard deviation of
returns, but portfolio A has a higher beta than portfolio B. According to the Treynor
measure, the performance of portfolio A __________.
A. is better than the performance of portfolio B
B. is the same as the performance of portfolio B
C. is poorer than the performance of portfolio B
D. cannot be measured as there is no data on the alpha of the portfolio
E. None of these is correct.

56) Suppose two portfolios have the same average return, the same standard deviation of
returns, but portfolio A has a lower beta than portfolio B. According to the Treynor
measure, the performance of portfolio A __________.
A. is better than the performance of portfolio B
B. is the same as the performance of portfolio B
C. is poorer than the performance of portfolio B
D. cannot be measured as there is no data on the alpha of the portfolio
E. None of these is correct.

53.B 54.A 55.C 56.A

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57) You want to evaluate three mutual funds using the Sharpe measure for performance
evaluation. The risk-free return during the sample period is 6%. The average returns,
standard deviations and betas for the three funds are given below, as is the data for the S&P
500 index.

The fund with the highest Sharpe measure is __________.

A. Fund A
B. Fund B
C. Fund C
D. Funds A and B are tied for highest
E. Funds A and C are tied for highest

58) The following data are available relating to the performance of Sooner Stock Fund and
the market portfolio:

The risk-free return during the sample period was 3%.What is the Sharpe measure of
performance evaluation for Sooner Stock Fund?
A. 1.33%
B. 4.00%
C. 8.67%
D. 38.6%
E. 37.14%

59) What is the Treynor measure of performance evaluation for Sooner Stock Fund?
A. 1.33%
B. 4.00%
C. 8.67%
D. 9.44%
E. 37.14%

57.C 58.D 59.D

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60) The __________ measures the reward to volatility trade-off by dividing the average
portfolio excess return by the standard deviation of returns.
A. Sharpe measure
B. Treynor measure
C. Jensen measure
D. information ratio
E. None of these is correct

61) The difference between the return on the market portfolio and the risk-free rate is
known as the:
A. total return.
B. systematic premium.
C. unsystematic return.
D. market risk premium.

62) The intercept of the security market line is:

A. E(Rm) - Rf
B. 1/(E(Rm) - Rf)
C. Rf - E(Rm)
D. Rf

63) The slope of the security market line is:

A. the return on the market.
B. beta.
C. the market risk premium.
D. the risk-free rate.

64) The formula for the Capital Asset Pricing Model is:
A. E(Ri) = Rf + i(E(Rm) - Rf)
B. E(Ri) = Rf + iE(Rm)
C. E(Ri) = i(E(Rm) - Rf)
D. E(Ri) + Rf = i(E(Rm) - Rf)

65) Security I has a beta of 1.3, the risk-free rate is 4%, and the expected return on the
market is 11%. What is the expected return for Security I?
A. 15.0%
B. 18.3%
C. 14.6%
D. 13.1%

60.A 61.D 62.D 63.C 64.A 65.D

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66) Security I has a beta of 1.3, the risk-free rate is 4%, and the expected market risk
premium is 11%. What is the expected return for Security I?
A. 15.0%
B. 18.3%
C. 14.6%
D. 13.1%

67. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is
A. unique risk.
B. beta.
C. standard deviation of returns.
D. variance of returns.
E. none of the above

68. In the context of the Capital Asset Pricing Model (CAPM) the relevant risk is
A. unique risk.
B. market risk
C. standard deviation of returns.
D. variance of returns.
E. none of the above

69. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate
of return is a function of
A. market risk
B. unsystematic risk
C. unique risk.
D. reinvestment risk.
E. none of the above.

70. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate
of return is a function of
A. beta risk
B. unsystematic risk
C. unique risk.
D. reinvestment risk.
E. none of the above

66.B 67.B 68.B 69.A 70.A

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71. The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively.
According to the capital asset pricing model (CAPM), the expected rate of return on security
X with a beta of 1.2 is equal to
A. 0.06.
B. 0.144.
C. 0.12.
D. 0.132
E. 0.18

72. Which statement is not true regarding the Capital Market Line (CML)?
A. The CML is the line from the risk-free rate through the market portfolio.
B. The CML is the best attainable capital allocation line.
C. The CML is also called the security market line.
D. The CML always has a positive slope.
E. The risk measure for the CML is standard deviation

73. The market risk, beta, of a security is equal to

A. the covariance between the security's return and the market return divided by the variance of
the market's returns.
B. the covariance between the security and market returns divided by the standard deviation of the
market's returns.
C. the variance of the security's returns divided by the covariance between the security and market
returns.
D. the variance of the security's returns divided by the variance of the market's returns.
E. none of the above.

74. The Security Market Line (SML) is

A. the line that describes the expected return-beta relationship for well-diversified portfolios only.
B. also called the Capital Allocation Line.
C. the line that is tangent to the efficient frontier of all risky assets.
D. the line that represents the expected return-beta relationship.
E. the line that represents the relationship between an individual security's return and the market's
return

75. According to the Capital Asset Pricing Model (CAPM), which one of the following
statements is false?
A. The expected rate of return on a security decreases in direct proportion to a decrease in the
risk-free rate.
B. The expected rate of return on a security increases as its beta increases.
C. A fairly priced security has an alpha of zero.
D. In equilibrium, all securities lie on the security market line.
E. All of the above statements are true
71.D 72.C 73.A 74.D 75.A

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76. Given the following two stocks A and B

If the expected market rate of return is 0.09 and the risk-free rate is 0.05, which security
would be considered the better buy and why?
A. A because it offers an expected excess return of 1.2%.
B. B because it offers an expected excess return of 1.8%.
C. A because it offers an expected excess return of 2.2%.
D. B because it offers an expected return of 14%.
E. B because it has a higher beta

77. According to the CAPM, the risk premium an investor expects to receive on any stock or
portfolio increases:
A. directly with alpha.
B. inversely with alpha.
C. directly with beta.
D. inversely with beta.
E. in proportion to its standard deviation

78. Standard deviation and beta both measure risk, but they are different in that :
A. beta measures both systematic and unsystematic risk.
B. beta measures only systematic risk while standard deviation is a measure of total risk.
C. beta measures only unsystematic risk while standard deviation is a measure of total risk.
D. beta measures both systematic and unsystematic risk while standard deviation measures only
systematic risk.
E. beta measures total risk while standard deviation measures only nonsystematic risk.

79. The expected return-beta relationship

A. is the most familiar expression of the CAPM to practitioners.
B. refers to the way in which the covariance between the returns on a stock and returns on the
market measures the contribution of the stock to the variance of the market portfolio, which is
beta.
C. assumes that investors hold well-diversified portfolios.
D. all of the above are true.
E. none of the above are true

76.C 77.C 78.B 79.D

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80. The risk premium on the market portfolio will be proportional to
A. the average degree of risk aversion of the investor population.
B. the risk of the market portfolio as measured by its variance.
C. the risk of the market portfolio as measured by its beta.
D. both A and B are true.
E. both A and C are true.

81. A recession is an economic event that is best characterized as:

a. Unsystematic risk that can be diversified away.
b. Systematic risk.
c. Market risk that can be diversified away.
d. Unsystematic risk that cannot be diversified away
e. Both b and c

82. Stock A has a beta of 1.2 and Stock B has a beta of 0.6. Which of the following statements
is true?
a. Stock A has more unsystematic risk than Stock B.
b. Stock B has more systematic risk than Stock A.
c. If the risk- free rate and the market risk premium are both positive, Stock A has a higher
expected return than Stock B according to the CAPM.
d. Both a and b are true
e. Both b and c are true

83. Which of the following statements is true about the market risk premium?
a. The market risk premium is defined as the expected return on the market portfolio minus the
risk-free rate of return
b. The market risk premium is defined as the risk free-rate of return minus the expected return on
the market portfolio.
c. The market risk premium is defined as beta multiplied by the expected return on the market
minus the risk-free rate a of return
d. None of the above

84. The market portfolio has a beta of

A. 0.
B. 1.
C. -1.
D. 0.5.
E. none of the above

80.D 81.B 82.C 83.A 84.B

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85. According to the Capital Asset Pricing Model (CAPM), the expected rate of return on
any security is equal to
A. Rf +  [E(RM)].
B. Rf +  [E(RM) - Rf].
C.  [E(RM) - Rf].
D. E(RM) + Rf.
E. none of the above.

86. What is the expected return of a zero-beta security?

A. The market rate of return.
B. Zero rate of return.
C. A negative rate of return.
D. The risk-free rate.
E. None of the above.

87. Standard deviation and beta both measure risk, but they are different in that
A. beta measures both systematic and unsystematic risk.
B. beta measures only systematic risk while standard deviation is a measure of total risk.
C. beta measures only unsystematic risk while standard deviation is a measure of total risk.
D. beta measures both systematic and unsystematic risk while standard deviation measures only
systematic risk.
E. beta measures total risk while standard deviation measures only nonsystematic risk.

85.B 86.D 87.B

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1) Financial market participants who provide funds are called
e) deficit units. B) surplus units.
f) primary units. D) secondary units

2) Those financial markets that facilitate the flow of short-term funds are known as
E. money markets.
F. capital markets.
G. primary markets.
H. secondary markets.

3) Funds are provided to the initial issuer of securities in the……

E. secondary market.
F. primary market.
G. deficit market.
H. surplus market.

4) Equity securities have a ------ expected return than most longterm debt securities, and
they exhibit a ---------- degree of risk.
E. higher; higher
F. lower; lower
G. lower; higher
H. higher; lower

5) Money market securities generally have------- Capital market securities are typically
expected to have a .
E. less liquidity; higher annualized return
F. more liquidity; lower annualized return
G. less liquidity; lower annualized return
H. more liquidity; higher annualized return

6) If security prices fully reflect all available information, the markets for these securities are
E. efficient.
F. primary.
G. overvalued.
H. undervalued.

7) Financial markets were ------ , all information about any securities for sale in primary and
secondary markets would be continuously and freely available to investors.
E. efficient
F. inefficient
G. perfect
H. imperfect
1.B 2.E 3.F 4.E 5.H 6.E 7.G

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8) Which of the following is a non- depository financial institution?
E. savings banks
F. commercial banks
G. savings and loan associations
H. mutual funds

9) The main reason that depository institutions experienced financial problems during the
credit crisis was their investment in:
E. mortgages.
F. money market securities.
G. stock.
H. Treasury bonds.

10) A coupon bond pays the owner of the bond

F. the same amount every month until maturity date.
G. a fixed interest payment every period and repays the face value at the maturity date.
H. the face value of the bond plus an interest payment once the maturity date has been reached.
I. the face value at the maturity date.

11) The value of any bond should be:

E. the sum total of all the coupon receipts as well as the principal repayment at the bond's
maturity.
F. the present value of all the coupon receipts as well as the principal repayment at the bond's
maturity.
G. the future value of all the coupon receipts as well as the principal repayment at the bond's
maturity.
H. none of the above.

12) Which of the following relationships apply to a par value bond?

I. coupon rate < yield-to-maturity
II. current yield = yield-to-maturity
III. market price = call price
IV. market price = face value
F. I and II only
G. I and III only
H. II and IV only
I. I, II, and III only
J. II, III, and IV only

8.H 9.E 10.G 11.F 12.H

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13) A stock is expected to pay a dividend of $3.00 in one year. To purchase the stock,
investors seek a15% annual return. If the stock is currently trading at $60, what is the
implied constant growth rate individends for the future?
E. 5%
F. 10%
G. 15%
H. 20%

14) No matter how large the number of stocks in the portfolio is, the risk that cannot be
diversified away is the:
F. company-specific risk
G. unsystematic risk
H. systematic risk
I. unique risk
J. both a and b

15) The market portfolio has a beta of:

a)1.0
b) 0.0
c) 2.0
d)-1.0

16) Suppose two portfolios have the same average return, the same standard deviation of
returns, but portfolio X has a higher beta than portfolio Y. According to the Sharpe
measure, the performance of portfolio X
F. is the same as the performance of portfolio Y
G. is better than the performance of portfolio Y
H. is poorer than the performance of portfolio Y
I. cannot be measured as there is no data on the alpha of the portfolio
J. none of the above is true.

17) Suppose two portfolios have the same average return, the same standard deviation of
returns, but portfolio A has a higher beta than portfolio B. According to the Treynor
measure, the performance of portfolio A __________.
F. is better than the performance of portfolio B
G. is the same as the performance of portfolio B
H. is poorer than the performance of portfolio B
I. cannot be measured as there is no data on the alpha of the Portfolio

13.F 14.H 15.A 16.F 17.H

| P a g e 21
18) The difference between the return on the market portfolio and the risk-free rate is
known as the:
E. total return.
F. systematic premium.
G. unsystematic return.
H. market risk premium.

19) The formula for the Capital Asset Pricing Model is:
E. E(Ri) = Rf + i(E(Rm) - Rf)
F. E(Ri) = Rf + iE(Rm)
G. E(Ri) = i(E(Rm) - Rf)
H. E(Ri) + Rf = i(E(Rm) - Rf)

20) Security I has a beta of 1.3, the risk-free rate is 4%, and the expected return on the
market is 11%. What is the expected return for Security I?
E. 15.0%
F. 18.3%
G. 14.6%
H. 13.1%

21) Standard deviation and beta both measure risk, but they are different in that :
A. beta measures both systematic and unsystematic risk.
B. beta measures only systematic risk while standard deviation is a measure of total risk.
C. beta measures only unsystematic risk while standard deviation is a measure of total risk.
D. beta measures both systematic and unsystematic risk while standard deviation measures only
systematic risk.

22) What is the expected return of a zero-beta security?

A. The market rate of return.
B. Zero rate of return.
C. A negative rate of return.
D. The risk-free rate.

23) Find the current dividend for a stock given that the stock price is $128.53 the growth rate
in dividends is 5.8% per year, and the required return is 8.5%.
a. $1.58 b. $2.04 c. $2.71 d. $3.28

24) Find the price of a semiannual coupon bond given that the coupon rate = 10%, the face
value = $1000, the required return = 16%, and there are 5 years remaining until maturity.
a. $789.87 b. $794.52 c. $798.7 d. $804.16

18.H 19.E 20.H 21.B 22.D 23.D 24.C

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25) Find the Standard Deviation for a portfolio formed with Stocks 1 and 2. The Expected
Return for Stock 1 is 6%, the Standard Deviation for Stock 1 is 8%, the Expected Return for
Stock 2 is 9%, the Standard Deviation for Stock 2 is 8%, the Weight of Stock 1 in the
portfolio is 70%, and the Correllation Coefficient between the returns on Stocks 1 and 2 is
0.14.
a) 0.14 b) 6.39 c) 6.9 d) 4.09

26) Financial managers are primarily concerned with

a) costs decisions b) profits decisions c) risky decisions d) investment decisions

27) Investors who completely ignore an asset’s variance and only consider the asset’s
expected return are called:
a) risk seekers. b) risk averters. c) risk-neutral investors. d) value seeking investors.

28) _________ are financial contracts whose values are obtained from the values of
underlying assets.
a. Bonds b. Mortgages c. Stocks d. Derivatives

29) ________ are depository financial institutions.

a. Savings banks b. Finance companies
c. Mutual funds d. Securities firms

30) In aggregate, ____________ are the most dominant depository institution.

a. credit unions b. savings banks
c. savings and loan associations d. commercial banks

31) Financial markets have the basic function of

a. bringing together people with funds to lend and people who want to borrow funds.
b. assuring that the swings in the business cycle are less pronounced.
c. assuring that governments need never resort to printing money.
d. both A and B of the above.

32) A bond that has only one payment, which occurs at maturity, defines which one of the
following?
a. debenture b. callable c. floating-rate d. zero coupon

33) Broker
a. a visible marketplace for secondary market transactions
b. a person or institution executing securities transactions between two parties
c. a person making a market in specific securities by adjusting his inventory of securities
d. the degree to which securities can easily be sold without a loss of value

25.B 26.D 27.C 28.D 29.A 30.D 31.A 32.D 33.B

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34) Stanford Corporation arranged a repurchase agreement in which it purchased securities
for $4,900,000 and will sell the securities back for $5,000,000 in 40 days. What is the yield (or
repo rate) to Stanford Corporation?
a. 18.37% b. 2.04% c.22.67% d. 3.92%

35) Assume the following information for an existing bond that provides annual coupon
payments: Par value = $1,000, Coupon rate = 11%, Maturity = 4 years, and Required rate of
return by investors = 11%. What is the present value of the bond?
a. 11000 b. 44000 c. 275 d.1000

36) Which is TRUE concerning preferred stock?

a. Preferred stock is considered debt on the company balance sheet.
b. Preferred stock holders have voting rights for the company board of directors.
c. Preferred stock payments are variable like common stock.
d. Preferred stock is viewed as less risky than a firm’s common stock.

37) Which is NOT a feature of common stock?

a. Voting rights
b. Priority over debt holders for liquidation rights
c. Rights to dividends and other distributions
d. Majority voting system

38) Which of the following relationships apply to a par value bond?

I. coupon rate < yield-to-maturity
II. current yield = yield-to-maturity
III. market price = call price
IV. market price = face value
A. I and II only
B. I and III only
C. II and IV only
D. I, II, and III only
E. II, III, and IV only

34.A 35.D 36.D 37.B 38.C

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39) You paid $98,000 for a $100,000 T-bill maturing in 120 days. If you hold it until
maturity, what is the T-bill yield? What is the T-bill discount?
A) 5%
B) 6%
c) 3%
d) 9.8%

40) In general, money market securities have a higher degree of _____________ than capital
market securities.
a. Liquidity
b. risk
c. return
d. dealers

39.B 40.A

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