Quiz on Lecture 2 4) Which one of the following is a true

MULTIPLE CHOICE - Choose the one statement?

alternative that best completes the A) Dividends on preferred stocks are
statement or answers the question. tax-deductible to individual
investors but not to corporate
1) Money market securities are sometimes investors.
referred to as cash equivalents because B) Common dividends cannot be
_______. paid if preferred dividends are in
A) they are safe, marketable, and arrears on cumulative preferred
offer low returns stock.
B) they are not liquid C) Preferred stockholders have
C) they are high-risk voting power.
D) they are low-denomination D) Investors can sue managers for
nonpayment of preferred
2) The most marketable money market dividends.
securities are _______.
A) Treasury bills 5) The bid price of a Treasury bill is
B) Bankers' acceptances _______.
C) Certificates of deposit A) the price at which the dealer in
D) Common stock Treasury bills is willing to sell
the bill
3) An investor in a T-bill earns interest by B) the price at which the dealer in
_______. Treasury bills is willing to buy
A) receiving interest payments every the bill
90 days C) greater than the ask price of the
B) receiving dividend payments Treasury bill expressed in dollar
every 30 days terms
C) converting the T-bill at maturity D) the price at which the investor
into a higher-valued T-note can buy the Treasury bill
D) buying the bill at a discount from
the face value to be received at 6) Which of the following is not a
maturity characteristic of a money market
instrument?
A) Liquidity
B) Marketability
C) Low risk
D) Maturity greater than 1 year

Chapter 2 1
7) An individual who goes short in a 10) A bond that has no collateral is called a
futures position _______. _______.
A) has the obligation to deliver the A) callable bond
underlying commodity at B) debenture
contract maturity C) junk bond
B) has the obligation to purchase the D) mortgage
underlying commodity at
contract maturity 11) A _______ gives its holder the right to
C) has the right to deliver the sell an asset for a specified exercise
underlying commodity at price on or before a specified expiration
contract maturity date.
D) has the right to purchase the A) call option
underlying commodity at B) futures contract
contract maturity C) put option
D) interest rate swap
8) Commercial paper is a short-term
security issued by ______ to raise funds. 12) Which one of the following is a true
A) the Federal Reserve statement regarding corporate bonds?
B) the New York Stock Exchange A) A corporate callable bond gives
C) large well-known companies its holder the right to exchange it
D) All of the choices are correct. for a specified number of the
company's common shares.
9) Which one of the following is a true B) A corporate debenture is a
statement regarding the Dow Jones secured bond.
Industrial Average? C) A corporate convertible bond
A) It is a value-weighted average of gives its holder the right to
30 large industrial stocks. exchange it for a specified
B) It is a price-weighted average of number of the company's
30 large industrial stocks. common shares.
C) It is a price-weighted average of D) Holders of corporate bonds have
100 large stocks traded on the voting rights in the company.
New York Stock Exchange.
D) It is a value-weighted average of 13) The U.K. stock index is the _________.
all industrial stocks traded on the A) DAX
New York Stock Exchange. B) FTSE
C) GSE
E) D) TSE

Chapter 2 2
14) A _______ gives its holder the right to 17) Currently, the Dow Jones Industrial
buy an asset for a specified exercise Average is computed by _______.
price on or before a specified expiration A) adding the prices of 30 large
date. "blue-chip" stocks and dividing
A) call option by 30
B) futures contract B) calculating the total market value
C) put option of the 30 firms in the index and
D) interest rate swap dividing by 30
C) measuring the current total
15) Which one of the following provides the market value of the 30 stocks in
best example of relatively recent the index relative to the total
securitization? value on the previous day
A) Convertible bond D) adding the prices of 30 large
B) Call option "blue-chip" stocks and dividing
C) Mortgage pass-through security by a divisor adjusted for stock
D) Preferred stock splits and large stock dividends

16) Which of the following indexes are 18) TIPS are _______.
market value-weighted? A) Treasury bonds that pay no
1. The NYSE Composite interest and are sold at a discount
2. The S&P 500 B) U.K. bonds that protect investors
3.The Wilshire 5000 from default risk
A) 1 and 2 only C) securities that trade on the
B) 2 and 3 only Toronto stock index
C) 1 and 3 only D) Treasury bonds that protect
D) 1, 2, and 3 investors from inflation

19) Which of the following mortgage

scenarios will benefit the homeowner the
most?
A) Adjustable rate mortgage when
interest rate increases.
B) Fixed rate mortgage when
interest rates falls.
C) Fixed rate mortgage when
interest rate rises.
D) None of these options, as the
banker's interest will always be
protected.

Chapter 2 3
20) Investors will earn higher rates of returns 23) June call and put options on King Books
on TIPS than on equivalent default-risk Incorporated are available with exercise
standard bonds if _______. prices of $30, $35, and $40. Among the
A) inflation is lower than anticipated different exercise prices, the call option
over the investment period with the _______ exercise price and the
B) inflation is higher than put option with the _______ exercise
anticipated over the investment price will have the greatest value.
period A) $40; $30
C) the U.S. dollar increases in value B) $30; $40
against the euro C) $35; $35
D) the spread between commercial D) $40; $40
paper and Treasury securities
remains low 24) The Hang Seng index reflects market
performance on which of the following
21) Preferred stock is like long-term debt in major stock markets?
that _______. A) Japan
A) it gives the holder voting power B) Singapore
regarding the firm's management C) Taiwan
B) it promises to pay to its holder a D) Hong Kong
fixed stream of income each year
C) the preferred dividend is a tax- 25) The Standard & Poor's 500 is _______
deductible expense for the firm weighted index.
D) in the event of bankruptcy A) an equally
preferred stock has equal status B) a price-
with debt C) a value-
D) a share-
22) Ownership of a put option entitles the
owner to the _______ to _______ a 26) Large well-known companies often issue
specific stock, on or before a specific their own short-term unsecured debt
date, at a specific price. notes directly to the public, rather than
A) right; buy borrowing from banks; their notes are
B) right; sell called _______.
C) obligation; buy A) certificates of deposit
D) obligation; sell B) repurchase agreements
C) bankers' acceptances
D) commercial paper

Chapter 2 4
27) Which of the following is used to back
international sales of goods and
services?
A) Certificate of deposit
B) Bankers' acceptance
C) Eurodollar deposits
D) Commercial paper

28) If you thought prices of stock would be

rising over the next few months, you
might want to _______ on the stock.
A) purchase a call option
B) purchase a put option
C) sell a futures contract
D) place a short-sale order

29) A stock quote indicates a stock price of

$60 and a dividend yield of 3%. The
latest quarterly dividend received by
stock investors must have been ______
per share.
A) $0.55
B) $1.80
C) $0.45
D) $1.25

30) What would be the profit or loss per

share of stock to an investor who bought
an October expiration Apple call option
with an exercise price of $130 if Apple
closed on the expiration date at $120?
Assume the option premium was $3.00.
A) $0
B) $3.00 gain
C) $3.00 loss
D) $7.00 gain

Chapter 2 5