Chapter 02 Flashcards by Matt Mitchell

Which of the following is not a characteristic of a money market instrument?

Long maturity and liquidity premium

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The money market is a subsection of the

None of the options. (other options are commodity market, capital market, derivatives market and equity market)

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Treasury Inflation-Protected Securities (TIPS)

provide a constant stream of income in real (inflation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index

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Which one of the following is not a money market instrument?

Treasury bond

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T-bills are financial instruments initially sold by … to raise funds.

the U.S. government

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The bid price of a T-bill in the secondary market is

the price at which the dealer in T-bills is willing to buy the bill

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The smallest component of the money market is

small-denomination time deposits

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The smallest component of the bond market is … debt

other asset-backed

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The largest component of the bond market is … debt

Treasury

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Which of the following is not a component of the money market?

Real estate investment trusts

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Commercial paper is a short-term security issued by … to raise funds.

large, well-known companies

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Which one of the following terms best describes Eurodollars?

Dollar-denominated deposits at foreign banks and branches of American banks outside the U.S.

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Deposits of commercial banks at the Federal Reserve Bank are called

federal funds.

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The interest rate charged by banks with excess reserves at a Federal Reserve Bank to banks needing overnight loans to meet reserve requirements is called the

federal funds rate.

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Which of the following statement(s) is (are) true regarding municipal bonds?

I) A municipal bond is a debt obligation issued by state or local governments.
II) A municipal bond is a debt obligation issued by the federal government.
III) The interest income from a municipal bond is exempt from federal income taxation.
IV) The interest income from a municipal bond is exempt from state and local taxation in the issuing state.

I, III, and IV only

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Which of the following statements is true regarding a corporate bond?

A corporate convertible bond gives the holder the right to exchange the bond for a specified number of the company’s common shares.

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In the event of the firm’s bankruptcy

the most shareholders can lose is their original investment in the firm’s stock and the claims of preferred shareholders are honored before those of the common shareholders.

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Which of the following is true regarding a firm’s securities?

Preferred dividends are usually cumulative

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Which of the following is true of the Dow Jones Industrial Average?

it is a price-weighted average of 30 large industrial stocks and the divisor must be adjusted for stock splits.

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Which of the following indices is(are) market-value weighted?

I) The New York Stock Exchange Composite Index
II) The Standard and Poor’s 500 Stock Index
III) The Dow Jones Industrial Average

I and II only

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The Dow Jones Industrial Average (DJIA) is computed by

adding the prices of the 30 stocks in the index and dividing by a divisor

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Consider the following three stocks:

Stock - Price - Number of Shares Outstanding
Stock A - $40 - 200
Stock B - $70 - 500
Stock C - $10 - 600

The price-weighted index constructed with the three stocks is

40 = (40+70+10)/3

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Consider the following three stocks:

Stock - Price - Number of Shares Outstanding
Stock A - $40 - 200
Stock B - $70 - 500
Stock C - $10 - 600

The value-weighted index constructed with the three stocks using a divisor of 100 is

490 = [(40x200)+(70x500)+(10x600)]/100

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Consider the following three stocks:

Stock - Price - Number of Shares Outstanding
Stock A - $40 - 200
Stock B - $70 - 500
Stock C - $10 - 600

Assume at these prices that the value-weighted index constructed with the three stocks is 490. What would the index be if stock B is split 2 for 1 and stock C 4 for 1?

490 - value-weighted indexes are not affected by stock splits

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The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104:08 and a bid price of 104:04. As a buyer of the bond, what is the dollar price you expect to pay?

$1042.50 - you pay the asking price of the dealer, 104 8/32 or 104.25% of $1000

The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104:08 and a bid price of 104:04. As a seller of the bond what is the dollar price you expect to pay?

$1041.25 - you receive the bid price of the dealer, 104 4/32 or 104.125% of $1000

An investor purchases one municipal and one corporate bond that pay rates of return of 8% and 10% respectively. If the investor is in the 20% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ... and ... respectively.

8% and 8% r.c = 0.10(1-0.20) = 0.08 r.m = 0.08(1-0)=8%

An investor purchases one municipal and one corporate bond that pay rates of return of 7.5% and 10.3% respectively. If the investor is in the 25% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ... and ... respectively

7.5% and 7.73% r.c = 0.103(1-0.25) = 7.73% r.m = 0.075(1-0) = 7.5% (municipal bonds aren't taxed)

If a Treasury note has a bid price of $975, the quoted bid price in the Wall Street Journal would be

97:16 Treasuries are quoted as a percent of $1000 and in 1/32s

If a Treasury note has a bid price of $995, the quoted bid price in the Wall Street Journal would be

99:16

In calculating the Standard and Poor's stock price indices, the adjustment for stock split occurs

automatically.

Which of the following statements regarding the Dow Jones Industrial Average (DJIA) is false?

The DJIA is affected equally by changes in low-and high-priced stocks

The index that includes the largest number of actively traded stocks is

the Wilshire 5000 Index

A 5.5% 20-year municipal bond is currently priced to yield 7.2%. For a taxpayer in the 33% marginal tax bracket, this bond would offer an equivalent taxable yield of

10.75% 0.072 = r(1-t) = r(1-0.33) r = 0.072/0.67 = 10.75%

If the market prices of each of the 30 stocks in the Dow Jones Industrial Average (DJIA) all change by the same percentage amount during a given day, which stock will have the greatest impact on the DJIA?

The stock trading at the highest dollar price per share

The stocks on the Dow Jones Industrial Average

are changed occasionally as circumstances dictate.

Federally sponsored agency debt

would probably be backed by the U.S. Treasury in the event of a near-default and has a small positive yield spread relative to U.S. Treasuries.

Broker's calls

are funds used by individuals who wish to buy stocks on margin and are funds borrowed by the broker from the bank, with the agreement to repay the bank immediately if requested to do so.

A form of short-term borrowing by dealers in government securities is

repurchase agreements.

Which of the following securities is a money market instrument?

Commercial paper

The yield to maturity reported in the financial pages for Treasury securities

is calculated by doubling the semiannual yield and is also called the bond equivalent yield

Which of the following is not a mortgage-related government or government-sponsored agency?

The US Treasury

In order for you to be indifferent between the after-tax returns on a corporate bond paying 8.5% and a tax-exempt municipal bond paying 6.12%, what would your tax bracket need to be?

28% 0.0612 = 0.085 (1-t) t = 0.28

What does the term negotiable mean with regard to negotiable certificates of deposit?

The CD can be sold to another investor if the owner needs to cash it in before its maturity date

Freddie Mac and Ginnie Mae were organised to provide

liquidity for the mortgage market

The type of municipal bond that is used to finance commercial enterprises such as the construction of a new building for a corporation is called

an industrial development bond.

Suppose an investor is considering a corporate bond with a 7.17% before-tax yield and a municipal bond with a 5.93% before-tax yield. At what marginal tax rate would the investor be indifferent between investing in the corporate and investing in the muni?

17.3% t.m = 1 - (5.93/7.17)

Which of the following are characteristics of preferred stock? I) It pays its holder a fixed amount of income each year at the discretion of its managers II) It gives its holder voting power in the firm III) Its dividend are usually cumulative IV) Failure to pay dividends may result in bankruptcy proceedings

I and III

Bond market indexes can be difficult to construct because

bonds tend to trade infrequently, making price information difficult to obtain

With regard to a futures contract, the long position is held by

the trader who commits to purchasing the commodity on the delivery date

In order for you to be indifferent between the after-tax returns on a corporate bond paying 9% and a tax-exempt municipal bond paying 7%, what would your tax bracket need to be?

22.2% 0.07 = 0.09 (1-t); t = 0.222

In order for you to be indifferent between the after-tax returns on a corporate bond paying 7% and a tax-exempt municipal bond paying 5.5%, what would your tax bracket need to be?

21.4% 0.055 = 0.07(1-t); t = 0.214

An investor purchases one municipal and one corporate bond that pay rates of return of 6% and 8% respectively. If the investor is in the 25% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ... and ..., respectively.

6% and 6% r.c = 0.08(1-0.25) r.m = 0.06 (1-0)

An investor purchases one municipal and one corporate bond that pay rates of return of 7.2% and 9.1% respectively. If the investor is in the 15% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ... and ..., respectively.

7.2% and 7.735% r.c = 0.091(1-0.15) r.m = 0.072(1-0)

For a taxpayer in the 25% marginal tax bracket, a 20-year municipal bond currently yielding 5.5% would offer an equivalent taxable yield of

7.33% 0.055 = r(1-0.25)

For a taxpayer in the 15% marginal tax bracket, a 15-year municipal bond currently yielding 6.2% would offer an equivalent taxable yield of

7.29% 0.062 = r(1-0.15)

With regards to a futures contract, the short position is held by

the trader who commits to delivering the commodity on the delivery table

A call option allows the buyer to

buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration

A put option allows the holder to

sell the underlying asset at the strike price on or before the expiration date and sell the option in the open market prior to expiration

The ... index represents the performance of the German stock market.

DAX

The ... index represents the performance of the Japanese stock market.

Nikkei

The ... index represents the performance of the UK stock market.

FTSE

The ... index represents the performance of the Hong Kong stock market.

Hang Seng

The ... index represents the performance of the Canadian stock market.

TSX

The ultimate stock index in the US is the

Wilshire 5000

The ... is an example of a US index of large firms.

DJIA

The ... is an example of a US index of small firms.

Russell 2000

The largest component of the money market is

savings deposits

Certificates of deposits are insured by the

FDIC

Certification of deposit are insured for up to ... in the event of bank insolvency

$250,000

The maximum maturity of commercial paper that can be issued without SEC registration is

270 days

Which of the following is used extensively in foreign trade when the creditworthiness of one trader is unknown to the trading partner?

Bankers' acceptances

A US dollar-denominated bond that is sold in Singapore is a

Eurobond

A municipal bond issued to finance an airport, hospital, turnpike, or port authority is typically a

revenue bond

Unsecured bonds are called

either debentures or subordinated debentures

A bond that can be retired prior to maturity by the issuer is a(an) ... bond

callable

Corporations can exclude ...% of the dividends received from preferred stock from taxes

You purchased a futures contract on corn at a futures price of 331, and at the time of expiration the price was 343. What was your profit or loss?

$600 5,000 bushels per contract and prices are quoted in cents per bushel. Your profit was 3.43-3.31 = $0.12 per bushel and so profit was $0.12 x 5000

You sold a futures contract on corn at a futures price of 350 and at the time of expiration the price was 352. What was your profit or loss?

-$100 (3.50-3.52) x 5000 = -$100