fin3244 final practice questions

by definition, key activities of INVESTMENT BANKS include:

underwriting of initial public offerings of corporate bonds

by definition, key attributes of OVER THE COUNTER markets include:

a geographic dispersement of dealers who make the market by posting bid/ask prices

which of the following is not a financial asset?
a) a bond issued by Google
b) wells fargo bank
c) a home mortgage loan
d) a certificate of deposit

b) wells fargo bank

if you buy a bond issued by intel, the bond is a(n):
a) libaility to intel and an asset for you
b) liability to you and an asset to intel
c) liability to both you and Intel
d) asset to both you and intel

a) liability to intel and an asset to you

which of the following forms the largest share of household holdings of financial assets?
a) corporate equities
b) bank deposits
c) pension funds reserves
d) life insurance

c) pension funds reserves

which of the following is not a key financial service provided by the financial system?
a) risk sharing
b) profitability
c) liquidity
d) information

b) profitability

by providing the communicating information, the financial system
a) reduces the difference between the return on three-month US treasury bills and the return on thirty-year US treaty bonds
b) relives individual savers from necessity of searching out individual borrowers
c) eliminates the risk in investing in the stock market
d) guarantees investors a reasonable return on their money

b) relieves individual savers from the necessity of searching out individual borrowers

if a bank grants you a mortgage, the mortgage is
a) an asset to you as well as an asset to the bank
b)an asset to you, but a liability to the bank
c) a liability to you, but an asset to the bank
d) a liability to you as well as a liability to the bank

c) a liability to you, but an asset to the bank

financial markets
a) channel funds indirectly between borrowers and lenders
b) channel funds directly from lenders to borrowers
c) act as go-betweens by holding a portfolio of assets and issuing claims based on that portfolio to savers
d) generally provides lenders with lower returns than do financial intermediaries

b) channel funds directly from lenders to borrowers

which of the following is not a financial intermediary?
a) NASDAQ
b) allstate insurance company
c) bank of america
d) vanguard total stock market index fund

a) NASDAQ

the main role of financial intermediaries is to
a) provide funds to the federal government to cover the budget deficit
b) borrow funds from savers and lend them to borrowers
c) provide advice to consumers on how they should handle their finances
d) help ensure that there is enough money in circulation

b) borrow funds from savers and lend them to borrowers

financial intermediaries
a) include banks and other depository institutions
b) include the ny and american stock exchange
c) directly issue claims on individual borrowers to savers
d) are owned and operated by the federal government

a) include banks and other depository institutions

a "primary market" is a market
a) for government securities
b) in which newly issued claims are sold to buyers or borrowers
c) in which newly issued claims are sold by savers to borrowers
d) for debt by large or "primary" corporations

b) in which newly issued claims are sold to buyers by borrowers

a bank lending depositors’ money to a local business and a pension fun investing contributions in shares of a company are similar financial activities in that
a) both involve the use of financial markets
b) both involve funds being channeled from savers to borrowers through financial intermediaries
c) both involve a reduction in the overall level of liquidity in the financial system
d) both involve in an increase in the overall level of risk in the financial system

b) both involve funds being channeled from savers to borrowers through financial intermediaries

the leading federal regulatory body for financial markets in the US is the
a) federal bureau of investigation
b) securities and exchange commission
c) federal financial market bureau
d) investors protection agency

b) securities and exchange commission

the federal reserve system
a) is in charge of managing the ny stock exchange
b) is headed by the secretary of treasury
c) is the central bank of the united states
d) is responsible for conduction fiscal policy for the united states

c) is the central bank of the united states

monetary policy refers to the government’s
a) decisions on how much money to spend
b) decisions on how much money to collect in taxes
c) plans for retiring the national debt
d) management of the money supply and interest rates to achieve macroeconomic objectives

d) management of the money supply and interest rates to achieve macroeconomic objectives

in the united states, monetary policy is carried out by
a) the federal reserve system
b) congress
c) the president
d) congress and the president acting together

a) the federal reserve system

in the united states, the lender of last resort is
a) fannie mae
b) the federal reserve
c) the federal deposit insurance corporation
d) securities and exchange commission

b) the federal reserve

a decline in bank lending has the most significant effect on
a) small business
b) large business
c) state governments
d) federal goverment

a) small businesses

financial intermediaries include the following except:
a) a savings and loan association
b) a mutual savings bank
c) the bond market
d) a credit union

c) the bond market

when an investment bank___, it guarantees a price for the securities that the issuing firm is selling. the bank then attempts to sell the issue at a higher price and capture the difference as profit
a) engages in price discrimination
b) underwrites
c) grant securitized real estate loans
d) collateralizes an investment

b) underwrites

which of the following is traded in a money market?
a) US treasury bonds
b) mortgages
c) common stocks
d) federal funds
e) none of the above

d) federal funds

which of the following is a depository institution?
a) life insurance company
b) credit union
c) pension fund
d) finance company

b) credit union

contractual savings institutions include:
a) commerical banks and thrifts
b) life insurance companies and pension funds
c) finance companies and mutual funds
d) all of the above

b) life insurance companies and pension funds

federal funds are loans made by the
a) federal reserve system to commercial banks
b) one commercial bank to another
c) the us treasury to the federal reserve
d) the federal reserve to the us treasury

b) one commercial bank to another

general motors acceptance corporation (GMAC) is an example of a
a) sales finance company
b) consumer finance company
c) business finance company
d) public finance company

a) sales finance company

lisa want to add a new room to her house. what type of finance company will she deal with in getting the loan to finance the room addition?
a) sales finance company
b) consumer finance company
c) business finance company
d) public finance company

b) consumer finance company

when an investment bank purchases a new issue of securities in the hopes of making a profit, it is said to __ the issue.
a) pawn
b) backstock
c) syndicate
d) underwrite

d) underwrite

brokers are distinguished from the dealers in that brokers do not
a) hold inventories of securities
b) make profits
c) incur losses
d) deal directly with the public

a) hold inventories of securities

financial intermediaries
a) solve some of the problems associated with asymmetric information
b) decrease transaction costs for borrowers and lenders
c) allow borrowers and lenders to engage in risk sharing
d) all of the above

d) all of the above

investment banks facilitate the sale of securities in the
a) primary market
b) secondary market
c) retail market
d) wholesale market

a) primary market

which of the following is a source of commercial bank funds
a) deposits
b) capital
c) non deposit borrowing
d) all of the above

d) all of the above

which of the following is a use for commercial bank funds?
a) loans
b) securities
c) reserves
d) all of the above

d) all of the above

credit unions characterized by all the following except:
a) they offer checkable deposits in the form of the share draft accounts
b) they are non-profit financial cooperatives who are owned by their members
c) their deposits are insured by the federal deposit insurance corporation
d) they have generally maintained capital levels higher than the average commercial bank

c) their deposits are insured by the federal deposit insurance corporation

commercial banks obtain funds by:
a) issuing demand deposits
b) borrowing from other banks
c) issuing ownership claims (equity
d) all of the above

d) all of the above

national banks are chartered by:
a) the federal deposit insurance corporation
b) the federal reserve
c) the securities and exchange commission
d) the comptroller of the currency

d) the comptroller of the currency

depositors sometimes make "runs" on banks because they
a) face stiff competition from other financial intermediaries
b) are over regulated by the government, thus lessening their ability to make loans
c) specialize in making mortgage loans to high income households
d) offer deposits that are highly liquid, permitting panic to easily occur

d) offer deposits that are highly liquid, permitting panic to easily occur

technically, the federal reserve system is owned by:
a) the US treasury
b) the department of commerce
c) the world bank
d) the commercial banks that are federal reserve member

d) the commercial banks that are federal reserve members

the type of discount loan extended by the fed to banks that experience financial difficulties and do not qualify as fulfilling "generally sound financial condition" is called
a) primary credit
b) seasonal credit
c) secondary credit
d) installment credit

c) secondary credit

the fed extends___ to financially sound banks that experience unexpected withdrawals of funds by depositors
a) primary credit loans
b) seasonal credit loans
c) secondary credit loans
d) emergency loans

a) primary credit loans

temporary, short-term discount loans to banks in areas in which agriculture and tourism are important are known as
a) primary credit
b) secondary credit
c) seasonal credit
d) extended credit

c) seasonal credit

Mutual funds provide a simplified means of diversifying a portfolio.
True / False

true

When an investor buys shares in a mutual fund, he or she becomes a part owner of a portfolio of securities.
True/False

true

Mutual funds rank second only to banks as being the largest financial intermediary in the United States.
true/false

false

The transfer agent for a mutual fund physically safeguards the securities being bought and sold by that firm.
True/False

false

Mutual funds tend to outperform the market.
True/False

false

For a mutual fund to avoid taxation it must distribute at least 90% of its realized capital gains and investment income.
True/ False

false

Which one of the following statements concerning mutual funds is correct?
A) The selection of individual securities remains with the mutual fund investor.
B) Mutual funds were first created in the 1980s.
C) The mutual fund industry is the largest financial intermediary in the United States.
D) Mutual funds are generally highly concentrated portfolios.

C) The mutual fund industry is the largest financial intermediary in the United States.

Which of the following are advantages offered by mutual funds?
I. professional portfolio management
II. dividend reinvestment
III. consistent returns in excess of the overall market rate of return
IV. modest capital outlay for investors
A) I and II only
B) I and IV only
C) II, III and IV only
D) I, II and IV only

D) I, II and IV only

One drawback of investing in mutual funds is the
A) annual management fee.
B) lack of liquidity of fund shares.
C) amount required for the initial investment.
D) lack of information on the performance of the fund.

A) annual management fee.

Which one of the following statements is correct concerning players in the mutual fund industry?
A) Security analysts and traders work for the management company.
B) Normally a bank serves as the custodian.
C) The management company maintains the shareholder records.
D) The mutual fund shareholders are the owners of the management company.

B) Normally a bank serves as the custodian.

The Securities Act of 1933
A) set forth the antifraud provisions to which mutual funds are subject.
B) regulates investment advisers.
C) requires mutual funds to provide a prospectus to each prospective investor.
D) sets forth the qualification requirements for classification as an investment company.

C) requires mutual funds to provide a prospectus to each prospective investor.

The Investment Company Act of 1940 established the
A) maximum number of shares that can be issued by an open-end fund.
B) standards for the income distributions and fee structures of mutual funds.
C) guidelines under which a prospectus must be prepared and delivered.
D) investment objectives under which an individual mutual fund must operate.

B) standards for the income distributions and fee structures of mutual funds.

To operate as a regulated investment company and enjoy the related tax benefits, a mutual fund must annually distribute to its shareholders
A) half of its realized capital gains, and interest and dividend income.
B) none of its realized capital gains, but all of its interest and dividend income.
C) all of its realized capital gains, and at least 90 percent of its interest and dividend income.
D) all of its realized capital gains and interest and dividend income.

C) all of its realized capital gains, and at least 90 percent of its interest and dividend income.

Nearly all mutual funds operate as regulated investment companies. This means that
A) they are no-load funds.
B) portfolio decisions are mandated by government authorities.
C) they do not pay taxes on their income.
D) their investments are guaranteed by the FDIC.

C) they do not pay taxes on their income.

With a closed-end mutual fund, investors purchase shares directly from the fund.
true/false

false

The purchase price of a closed-end mutual fund is equivalent to the net asset value of the fund.
true/false

false

The discount or premium on a closed-end mutual fund can be as much as 25 percent.
true/false

true

An exchange-traded fund is a closed-end fund that trades like a listed security on a stock exchange.
true/false

false

Like ordinary stocks, exchange traded funds (ETFs) can be sold short.
true/false

true

An investor who buys shares in an exchange-traded fund (ETF) in the morning will pay the net asset value at the close of trading for the day.
true/false

false

Most exchange-traded funds are index funds.
true/false

true

Mutual fund fees are disclosed in the fund prospectus.
true/false

true

The net asset value is the price per share an investor will pay to acquire shares in a no-load, open-end fund.
true/false

true

The longer you intend to hold a fund, the more willing you should be to accept a front-end load charge in exchange for lower annual management and 12(b)-1 fees.
true/false

true

An open-end investment company
A) is involved in all trades of its shares.
B) sells shares at a discounted NAV price.
C) trades like a stock on the exchanges.
D) has a set number of shares.

A) is involved in all trades of its shares.

The net asset value of a mutual fund increased from $12.03 to $13.53, but its price per share increased by only $1.26. This information indicates that the fund
A) paid out $1 in capital gains.
B) paid out $1 in dividends.
C) is a closed-end fund.
D) is an open-end fund.

C) is a closed-end fund.

Which of the following characteristics apply to closed-end mutual funds?
I. unlimited number of outstanding shares
II. transactions between shareholders
III. market prices in excess of NAV
IV. fund repurchase of shares at any time
A) I and IV only
B) II and III only
C) I, II and III only
D) II, III and IV only

B) II and III only

Closed-end funds are
A) less liquid than open-end funds.
B) best purchased when they are selling at a premium.
C) purchased directly from the funds’ manager.
D) traded at NAV.

A) less liquid than open-end funds.

Which one of the following statements concerning ETFs is correct?
A) ETFs are based solely on US indexes.
B) The ETF based on the Standard & Poors 500 Index is priced at 1/10 the value of that index.
C) Spiders are based on the DJIA.
D) The ETF based on the Dow is priced at 1/10 of the value of the DJIA.

B) The ETF based on the Standard & Poors 500 Index is priced at 1/10 the value of that index.

Which of the following statements is(are) correct concerning exchange-traded funds (ETFs)?
I. You can buy and sell ETFs any time during trading hours.
II. ETFs are actively managed.
III. ETFs have high portfolio turnover rates.
IV. ETFs rarely distribute any capital gains.
A) I, II and IV only
B) I and IV only
C) II and III only
D) I only

B) I and IV only

The commission charged when shares of an open-end mutual fund are purchased is called a
A) management fee.
B) back-end load.
C) front-end load.
D) 12(b)-1 fee.

C) front-end load.

Back-end loads
A) are charged when an investor buys their mutual fund shares.
B) are charged if an investor sells his or her shares within the first few years.
C) were designed to help no-load funds cover their marketing expenses.
D) encourage short-term trading.

B) are charged if an investor sells his or her shares within the first few years.

One characteristic of 12(b)-1 charges is that they are payable
A) only in years that the mutual fund shows an increase in net asset value.
B) each year regardless of the performance of the mutual fund.
C) only during the first year the fund is owned.
D) only when shares in the fund are sold.

B) each year regardless of the performance of the mutual fund.

A type of fund that invests in real estate and/or mortgages is known as a
A) REIT.
B) ETF.
C) sector fund.
D) hedge fund.

A) REIT.

A "t" in the newspaper behind a fund’s name indicates that the fund charges a
A) front-end load.
B) back-end load.
C) front-end load and also a 12(b)-1 fee.
D) back-end load and also a 12(b)-1 fee.

D) back-end load and also a 12(b)-1 fee.

A long-term mutual fund investor should normally purchase
A) A shares.
B) B shares.
C) C shares.
D) any type of share as the costs are the same over the long term.

A) A shares.

The primary objective of growth mutual funds is capital appreciation with a high level of current income
true/false

false

A GNMA bond fund distributes both interest and principal on a monthly basis
true/ false

true

The maximum average maturity of the holdings within a money market account must be 6 months or less.
true/false

false

Socially responsible funds tend to underperform the market.
true/false

true

A unit investment trust
A)engages in short-term trading within a particular sector.
B) offers a low-cost, diversified portfolio.
C) is an unmanaged portfolio of securities.
D) is used only for fixed-income securities.

C) is an unmanaged portfolio of securities.

Which of the following statements are correct concerning hedge funds?
I. Hedge funds are highly-regulated, professionally-managed portfolios.
II. Hedge funds are actually limited partnerships.
III. Hedge funds cater to high net worth individuals and institutional investors.
IV. Hedge funds primarily adhere to a buy-and-hold conservative strategy.
A) I and II only
B) III and IV only
C) II and III only
D) I, II, and III only

C) II and III only

Risk-seeking investors seeking maximum capital appreciation with little, if any current income, should invest in
A) value funds.
B) growth funds.
C) aggressive growth funds.
D) equity-income funds.

C) aggressive growth funds.

An aggressive growth mutual fund is least likely to purchase a stock
A) with a high P/E ratio.
B) with a high anticipated rate of growth.
C) of an unseasoned firm.
D) with a high current yield.

D) with a high current yield.

Aggressive mutual funds often employ investing strategies such as
I. short selling.
II. margin trading.
III. option trading.
IV. hedging.
A) I and III only
B) II and III only
C) I, II, and IV only
D) I, II, III and IV

D) I, II, III and IV

Value funds seek stocks
I. with low dividend yields.
II. with potential for growth.
III. with low P/E ratios.
IV. of newly discovered firms.
A) I and III only
B) II and III only
C) II, III and IV only
D) I, II, III and IV

B) II and III only

The primary objective of an equity-income fund is
A) capital gains.
B) current income with capital preservation.
C) potentially high capital gains with limited income.
D) high risk-return trade-offs.

B) current income with capital preservation.

Which type of mutual fund consists of both stocks and bonds with a combined objective of current income and long-term capital gains?
A) equity-income
B) balanced
C) value
D) bond

B) balanced

One characteristic of bond funds is the
A) requirement of a minimum initial investment of $5,000 or more.
B) high anticipated short-term growth potential.
C) fluctuation in value in response to changing interest rates.
D) extremely aggressive trading approach.

C) fluctuation in value in response to changing interest rates.

One advantage gained by investing in a bond fund rather than in individual bonds is the
A) ability to earn fully compounded rates of return.
B) government guarantee protecting the bond principal.
C) ability to earn a capital gain.
D) guarantee that the bonds will be held to maturity to avoid market fluctuations.

A) ability to earn fully compounded rates of return.

Investors who seek triple (federal, state, and local) tax-free income should invest in __________ bond funds.
A) convertible
B) indexed
C) mortgage-backed
D) single-state municipal

D) single-state municipal

Compared to yields on general purpose money funds, the yields on tax-exempt money funds are
A) about the same.
B) 5 to 10 percent higher.
C) 5 to 10 percent lower.
D) 20 to 30 percent lower

D) 20 to 30 percent lower

Government securities money funds are structured to eliminate
A) interest rate risk.
B) inflation risk.
C)default risk.
D) market risk.

C)default risk.

A fund that is designed to match the performance of a measure such as the S & P 500 or the Russell 2000 is called a(n)
A) index fund.
B) targeted fund.
C) sector fund.
D) block fund.

A) index fund.

One characteristic of most index funds is that such funds typically
A) produce a large dollar amount of realized capital gains every year.
B) have a very low-cost structure with respect to management fees and transaction fees.
C) charge high front-end loads.
D) are designed to "beat the market."

B) have a very low-cost structure with respect to management fees and transaction fees.

Socially responsible funds are distinguished from other mutual funds because they
A) invest only in over-the-counter stocks.
B) do not charge any sales commission or management fees.
C) invest only in companies that meet specified moral, ethical, or environmental standards.
D) will sell their shares only to investors who sign a statement saying they do not smoke tobacco or use alcohol.

C) invest only in companies that meet specified moral, ethical, or environmental standards.

Sector funds generally
I. seek capital gains.
II. seek current income.
III. are speculative in nature.
IV. concentrate in one industry.
A) I and IV only
B) II and IV only
C) I, III and IV only
D) II, III and IV only

C) I, III and IV only

One type of mutual fund spreads investors’ money across equity markets, bond markets, and money markets. Moreover, as market conditions change, the amount of money invested in each market sector will change. This type of mutual fund is known as a(n)
A) socially responsible fund.
B) fiscally responsible fund.
C) growth-and-income fund.
D) asset allocation fund.

D) asset allocation fund.

Which one of the following statements is correct concerning international funds?
A) A devaluation of the dollar causes returns on foreign investments to improve from a U.S. perspective.
B) International funds are considered low-risk investments.
C) Balance-of-trade positions do NOT affect the rate of return from a U.S. perspective.
D) Technically, global funds can only invest in foreign securities.

A) A devaluation of the dollar causes returns on foreign investments to improve from a U.S. perspective.

Automatic investment plans makes it easier for investors to save money
true/false

true

Even though a mutual fund investor reinvests 100% of his or her dividend and capital gains distributions, the IRS will treat the distributions as cash receipts and tax them in the year in which they are received.
true/false

true

The conversion privilege offered by many mutual funds enables investors, within three days, to convert their shares back to cash in an amount equal to the original cost of the investment.
true/false

false

Systematic withdrawal plans from mutual funds usually require a minimum investment of at least $100,000.
true/false

false

The ability to automatically buy additional fund shares using the dividend income generated by the fund is called a(n)
A) automatic investment plan.
B) automatic reinvestment plan.
C) systematic withdrawal plan.
D) conversion plan.

B) automatic reinvestment plan.

Typical services offered by mutual funds include:
I. automatic investing from a payroll withholding plan.
II. automatic reinvestment of dividends and capital gains.
III. systematic withdrawal plans.
IV. automatic transfers from one fund type to another when market conditions change .
A) I and III only
B) II and IV only
C) I, II, and III only
D) I, II, III, and IV

C) I, II, and III only

Automatic reinvestment plans
A) are a good way to avoid taxes on dividends and capital gains.
B) may involve exceptionally high transaction fees.
C) do not allow for the purchase of fractional shares.
D) are an excellent way to accumulate wealth through disciplined investing.

D) are an excellent way to accumulate wealth through disciplined investing.

The conversion privilege provided by mutual fund families allows investors to
A) move from one fund to another without incurring any capital gains tax liability.
B) be more aggressive since they can re-allocate their funds when market conditions change.
C) re-allocate their funds at any time as long as they pay an additional sales load on the transferred funds.
D) move from one fund family to another once every six months.

B) be more aggressive since they can re-allocate their funds when market conditions change.

Mutual funds are used extensively as retirement investments.
true/false

true

Investors should select mutual funds that match their personal investment goals and provide the services they desire.
true/false

true

To maximize returns, investors should generally invest in no-load or low-load funds.
true/false

true

Much of the success of a mutual fund depends on the investment skills of the fund manager.
true/false

true

An investor who wants to use mutual funds as a storehouse of value should invest in
A) high-yield corporate bond funds and growth funds.
B) growth funds and equity-income funds.
C) equity-income funds and long-term bond funds.
D) money funds and short-term bond funds.

D) money funds and short-term bond funds.

Investors use mutual funds for which of the following reasons?
I. to accumulate wealth
II. to minimize risk
III. as a speculative vehicle
IV. as a storehouse of value
A) I and II only
B) II, III and IV only
C) I, II and IV only
D) I, II, III and IV

D) I, II, III and IV

Leverage funds, option funds and emerging-market funds are all
A) international funds.
B) no-load funds.
C) aggressive funds.
D) tax-advantaged funds

C) aggressive funds.

Which of the following accurately describe reasons for investing in mutual funds?
I. to effectively control the timing of capital gains for tax purposes
II. to achieve portfolio diversification at a reasonable cost
III. to invest in unfamiliar sectors or geographic regions
IV. to outperform the market
A) I and IV only
B) II and III only
C) I, II and III only
D) I, II, III and IV

B) II and III only

A mutual fund is generally more tax efficient when it has a __________ turnover rate and a __________ dividend yield.
A) low; low
B) low; high
C) high; low
D) high; high

A) low; low

As a general rule, the time to buy a closed-end mutual fund is when the fund’s premium is approximately 5 percent higher than its past average.
true/false

false

A closed end fund is selling at a premium when the NAV exceeds the market price.
true/false

false

A closed-end fund with an NAV of $9.60 and a market price of $10.25 is selling at a premium of 6.8%.
true/false

true

Closed-end funds are required to provide a prospectus to all new shareholders as long as the fund is trading at a premium.
true/false

false

IPOs for closed-end funds are priced at NAV.
true/false

false

Both realized and unrealized capital gains from mutual fund investments are currently taxable for individual income tax purposes.
true/false

false

Both the performance of the overall stock market as well as the skills of the mutual fund manager affect the performance of a mutual fund.
true/false

true

Holding period returns are normally used only for investment periods of one year or less.
true/false

true

Last year, Sue purchased a closed-end mutual fund that was trading at $42 and had an NAV of $38. Sue sold the fund today when the NAV is $44 and the market price is $43. The fund paid $1 in dividends over the past year. What is the Sue’s holding period return?
A) 4.8%
B) 7.1%
C) 11.6%
D) 18.4%

A) 4.8%

Investors are generally well advised to avoid mutual funds with
A) highly rated fund managers.
B) low fees and high tax efficiency.
C) consistently poor historical performance.
D) good performance in both up and down markets.

C) consistently poor historical performance.

Which of the following are sources of income for an open-end mutual fund?
I. dividend and interest income
II. change in the discount or premium
III. capital gains
IV. change in NAV
A) I and III only
B) I, II and III only
C) I, III and IV only
D) II, III and IV only

C) I, III and IV only

Income distributed by a mutual fund from which one of the following sources receives a preferential tax rate of 15%?
A) dividends on common stock
B) interest on bonds
C) dividends from most preferred stocks
D) dividends from REITs

A) dividends on common stock

Last year at this time, a mutual fund had an NAV of $13.20 per share. Over the past year the fund paid dividends of $0.70 per share and had a capital gains distribution of $1.20 per share. What is the holding period return assuming that the current NAV is $14.42?
A) 13.2%
B) 14.4%
C) 21.6%
D) 23.6%

D) 23.6%

Mutual fund investors are primarily exposed to __________ and __________ risks.
A) market; financial
B) market; inflation
C) business; financial
D) business; inflation

B) market; inflation

Because puts and calls derive their value from the behavior of some other real or financial asset, they are known as derivative securities.
true/false

true

Investors who purchase options acquire nothing more than the right to buy or sell the shares of the underlying security.
true/ false

true

Options are created by investors.
true/false

true

Puts and calls are issued by the same corporation that issued the underlying stock.
true/false

false

Warrants are short-term options usually expiring within a year or less.
true/false

false

Warrants are options that are attached to bond issues to make the bonds more attractive to investors.
true/false

true

Purchasers of stock options
A) own a financial asset with benefits of firm ownership.
B) have a claim on the profits of the firm issuing the underlying securities.
C) have the obligation to buy or sell a predetermined amount of shares at the strike price.
D) have the right to buy or sell a certain number of underlying shares.

D) have the right to buy or sell a certain number of underlying shares.

Which one of the following statements concerning options is correct?
A) One option covers 1,000 shares of stock.
B) A put gives the option holder the right to buy a stated amount of securities.
C) The owner of a call is entitled to the dividends paid on the underlying shares of stock.
D) Option holders can profit on movements of the price of the underlying security.

D) Option holders can profit on movements of the price of the underlying security.

Which of the following statements concerning options are correct?
I. Options are derivative securities.
II. The value of an option is dependent upon the value of the underlying security.
III. The seller of the option retains the option premium whether or not the option is exercised.
IV. Options can provide leverage benefits.
A) II and III only
B) I, II and III only
C) I, II and IV only
D) I, II, III and IV

D) I, II, III and IV

The maker of a put or call is the
A) company which issued the underlying security.
B) person who facilitates the trade on the floor of the exchange.
C) party who writes the option.
D) party who decides whether or not the option is exercised.

C) party who writes the option.

One reason that writing options can be a viable and profitable investment strategy is that
A) the option writer collects the quarterly dividends.
B) most options expire unexercised.
C) an option writer determines when the option is exercised.
D) an option writer can exercise the option to avoid a potential loss.

B) most options expire unexercised.

The ability to obtain a given equity position at a reduced capital investment, and therefore magnify returns, is known as
A) leverage.
B) straddling.
C) hedging.
D) triple witching.

A) leverage.

Warrants are generally created when
A) a firm decides to execute a stock split.
B) the issuing corporation decides to sweeten a bond issue.
C) a LEAP expires and automatically converts.
D) a financial institution decides to create them based on market conditions.

B) the issuing corporation decides to sweeten a bond issue.

Warrants
A) provide substantially less capital appreciation potential than the underlying stock.
B) tend to be quite costly.
C) have a stipulated price and an expiration date.
D) are not traded in the secondary markets because of their low unit costs.

C) have a stipulated price and an expiration date.

Many options expire without being exercised.
true/false

true

The party that accepts the legal obligation to stand behind the option is the buyer of the contract.
true/false

false

Listed options trade over-the-counter.
true/false

false

Over-the-counter options are less structured than listed options and are primarily purchased by individual investors.
true/false

false

The majority of today’s options are stock options traded primarily on the CBOE and on AMEX.
true/false

true

Technically, listed options expire on the Saturday following the third Friday of the expiration month.
true/false

true

European options can only be sold on the expiration date.
true/ false

false

Standardized options expire on the last business day of the expiration month.
true/false

false

The buyer of a listed American option has which of the following rights?
I. the right to change the expiration date
II. the right to change the strike price
III. the right to resell the option
IV. the right to let the option expire unexercised
A) I and III only
B) III and IV only
C) I, III and IV only
D) II, III and IV only

B) III and IV only

The writer of a put
A) accepts the obligation to sell a predetermined number of shares at a predetermined price.
B) is betting the price of the underlying security will increase in value.
C) is hoping that the put will be in-the-money prior to expiration.
D) will pay the premium whether or not the option is exercised.

B) is betting the price of the underlying security will increase in value.

Under the current two-plus-two system, the standardized options available in January are
A) February, March, May and August.
B) January, February, April and July.
C) January, April, May and July.
D) January, February, June and July

B) January, February, April and July.

Which one of the following was the first listed exchange for stock options in the United States?
A) Stock Index Board
B) Philadelphia Board of Trade
C) New York Stock Exchange
D) Chicago Board Options Exchange

D) Chicago Board Options Exchange

Listed options
A) are traded directly between the buyer and the seller.
B) are rarely traded in the secondary markets.
C) have readily available price information.
D) are sold over the counter.

C) have readily available price information.

The two provisions which investors should carefully consider when evaluating stock options are the
A) strike price and the exchange ratio.
B) time until expiration and the strike price.
C) leverage ratio and the time to maturity.
D) premium and the discount.

B) time until expiration and the strike price.

For a call purchased on an organized security exchange, the strike price specifies the
A) contractual price at which each of the shares of the underlying stock can be bought.
B) prevailing market price of one share of the underlying stock.
C) cost of buying one option contact based on the value of the underlying stock.
D) intrinsic value of the offsetting put.

A) contractual price at which each of the shares of the underlying stock can be bought.

For all practical purposes, listed stock options always expire
A) on the last business day of the expiration month.
B) on the first Monday of every calendar quarter.
C) on the third Friday of the expiration month.
D) three months from the date of the option purchase.

C) on the third Friday of the expiration month.

The buyer of a put expects the price of the underlying stock to rise.
true/ false

false

The value of a call increases as the price of the underlying security rises.
true/false

true

The value of a put increases as the price of the underlying security rises.
true/false

false

The option premium is the price of the option.
true/false

true

The price behavior of the underlying security is the primary determinant of the price of an option.
true/false

true

The writer of a put is bearish on the underlying security.
true/false

false

Grant purchased one call on XYZ stock at an exercise price of $25. The market price of XYZ stock when Grant purchased the call was $24 a share. XYZ is currently priced at $30 a share. Grant paid $120 to buy the call. How much profit will Grant make if he exercises the option today and then sells the shares? Ignore all transaction-related costs.
A) $380
B) $480
C) $500
D) $600

A) $380

Rex bought a put on Alpha stock with a strike price of $35 when the market price of Alpha stock was $33 a share. Alpha is currently selling at $34 a share. Which of the following statements are true given this information?
I. Rex’s option is worth at least $100 today.
II. Rex’s option is worthless today.
III. Rex’s option has more value today than when he bought it.
IV. Rex’s option has less value today than when he bought it.
A) I and III only
B) I and IV only
C) II and III only
D) II and IV only

B) I and IV only

One of the major disadvantages of options is
A) their lifespan.
B) their cost.
C) their lack of liquidity.
D) the risk to option buyers.

A) their lifespan.

The most important factor affecting the market price of a put or call is the
A) market interest rate.
B) expiration date.
C) price behavior of the underlying common stock.
D) price behavior of the corresponding warrant.

C) price behavior of the underlying common stock.

Which of the following affect the value of puts and calls written on shares of common stock?
I. price volatility of the underlying stock
II. current market price of the underlying stock
III. length of time until the option expiration date
IV. current market interest rate
A) I and II only
B) I, II and III only
C) II, III and IV only
D) I, II, III and IV

D) I, II, III and IV

Lew paid $300 to purchase a call on Delta stock with a strike price of $25. What does the market price of Delta have to be for Lew to break-even on his option investment? Ignore transaction costs and taxes.
A) $22
B) $25
C) $28
D) Cannot be determined from the information provided.

C) $28

Andrea wrote a three-month call on Echo stock. The option cost $200 and the strike price was $10. What does the market price of Echo have to be for Andrea to break-even on this investment if the option is exercised? Ignore transaction construed taxes.
A) $10
B) $12
C) $8
D) Cannot be determined from the information provided.

B) $12

Jason purchased a six-month put on ABC stock at a cost of $100. The strike price was $15. At what market price does Jason just break-even on this investment? Ignore transaction costs and taxes.
A) $15
B) $16
C) $14
D) Cannot be determined from the information provided

C) $14

Jaime wrote a nine-month put on Beta stock. The strike price was $25 and the market price at the time the option was written was $24. The total price of the option was $150. At what market price will Jamie just break-even on this investment? Ignore transaction costs and taxes.
A) $23.50
B) $24.00
C) $25.00
D) $26.50

A) $23.50

A put has fundamental value as long as
A) the market price of the underlying financial asset has a positive value.
B) the market price of the underlying financial asset is less than the strike price.
C) the strike price of the put is greater than the time premium of the put.
D) the strike price of the put is less than the market value of the underlying asset.

B) the market price of the underlying financial asset is less than the strike price.

What is the fundamental value of a call with a strike price of $30 and a market price of $33?
A) -$300
B) -$3
C) $3
D) $300

D) $300

Which of the following represent in-the-money options?
I. a call when the market price exceeds the strike price
II. a call when the strike price exceeds the market price
III. a put when the market price exceeds the strike price
IV. a put when the strike price exceeds the market price
A) I and III only
B) I and IV only
C) II and III only
D) II and IV only

B) I and IV only

What is the time premium of a put with a strike price of $25 when the option price is $2 and the underlying common stock sells for $24?
A) $100
B) $200
C) $300
D) $400

A) $100

Which of the following increase(s) the time premium of a call option?
I. a market price that exceeds the strike price
II. increasing volatility in the market price of the underlying security
III. decreasing market interest rates
IV. decreasing the time to option expiration
A) II only
B) I and II only
C) III and IV only
D) II and III only

A) II only

Options can provide a lot of price action for a limited dollar investment.
true/false

true

One of the primary advantages of options is the leverage they provide.
true/false

true

The maximum amount the buyer of a put can lose is the cost of the option.
true/false

true

If you expect the price of a security to decline, you could buy a call to protect your financial position.
true/false

false

Once the call premium is recouped, the profit from a call is only limited by the price increases of the underlying stock prior to the contract expiration.
true/false

true

Options that are not exercised become worthless at the close of the expiration date.
true/false

true

The longer the time to expiration, the lower the option time premium tends to be.
true/false

false

The maximum loss that can be incurred as the buyer of an option is the amount of the option premium.
true/false

true

Option writing can be very profitable because the majority of options are never exercised.
true/false

true

A naked option is a conservative investment with limited risk.
true/false

false

An option straddle is the simultaneous purchase (or sale) of both a put and a call option on the same underlying security.
true/false

true

Margaret believes the price of Ajax stock is about to decrease. If she wants to capture the price appreciation, she could __________ on Ajax stock.
A) buy a call
B) write a put
C) buy a put
D) sell a put

C) buy a put

Roselle paid $250 to buy one put option with a strike price of $35. What is the maximum profit Roselle can earn on her option contract?
A) $100
B) $350
C) $3,250
D) Her profit potential is unlimited.

C) $3,250

The price of ABC stock is currently $42 per share, but in six months you expect it to rise to $50. ABC does not pay a dividend. You buy a six-month call on ABC, with a strike price of $45. The option cost $200. What holding period return do you expect on this call? Ignore transaction costs and taxes.
A) 150%
B) 200%
C) 250%
D) 300%

A) 150%

Tiffany would like to own shares of Blackwood, Inc. but only if she can acquire them at a total cost of $30 a share or less. Blackwood is currently trading at $31.76. Cynthia should __________ with a strike price of $30. Ignore transaction costs.
A) buy a call
B) buy a put
C) write a call
D) write a put

A) buy a call

Fred bought 600 shares of Edgewood stock at a price of $19. The stock is currently selling for $53 a share. To protect his profits, Fred should buy
A) 600 call options with a strike price of $55.
B) 600 put options with a strike price of $50.
C) 6 call options with a strike price of $55.
D) 6 put options with a strike price of $50.

D) 6 put options with a strike price of $50.

Shares of Lakewood, Inc. are currently selling for $52.63. You believe the stock will decline in price ranging from $30 to $32 in the next few months. Which of the following strategies will allow you to profit if your prediction is correct?
I. short the stock
II. buy a call at 50
III. write a call at 55
IV. buy a put at 45
A) II and IV only
B) I and III only
C) III and IV only
D) I, III and IV only

D) I, III and IV only

In nearly all cases, the purpose of a hedge is to
A) reduce or eliminate risk.
B) make a very high profit in an extremely short time frame.
C) speculate on a downward drop in a general market index.
D) speculate on an upward movement in a given currency.

A) reduce or eliminate risk.

Which one of the following actions would be the most appropriate hedge to a short sale of common stock?
A) sale of a call
B) purchase of a call
C) sale of a put
D) purchase of a put

B) purchase of a call

Steve bought 300 shares of stock at a price of $20 per share. The price of the stock then went up to $33 per share so Steve decided to hedge his position by purchasing 3 puts at a cost of $120 each. The puts have an exercise price of 30. One week prior to the expiration of the puts, the price of the stock was at $22 per share. If Steve closed out all of his positions at that time, he would have earned a net profit of
A) $200.
B) $240.
C) $2,640.
D) $3,000.

C) $2,640.

Allison bought 100 shares of MIKO, Inc. stock at a price of $35 a share. In addition, she bought a 35 put on MIKO at a cost of $125. Which of the following are true about Allison’s position from now until the option expiration date?
I. Her maximum loss is $3,625.
II. Her maximum loss is $125.
III. Her minimum gain is $125.
IV. Her maximum profit is unlimited.
A) I and IV only
B) II and III only
C) II and IV only
D) II, III and IV only

C) II and IV only

The purchase of a June 25 call on XXO stock and the sale of a June 30 call on XXO stock is known as a
A) long straddle.
B) short straddle.
C) vertical spread.
D) horizontal spread.

C) vertical spread.

A long straddle
A) consists of selling and writing an equal number of puts and calls with different strike prices but the same expiration date and the same underlying security.
B) is a strategy based on the expectation that the price of the underlying security will be relatively constant.
C) consists of buying a call at one strike price and then writing a call at a higher strike price.
D) is a strategy that produces profits when the price of the underlying security moves significantly in either direction.

D) is a strategy that produces profits when the price of the underlying security moves significantly in either direction.

Writing covered calls may result in a profit to the writer even if the stock price does not change.
true/false

true

Writing covered calls protects the writer from losses if the price of the underlying stock declines.
true/false

false

Covered call writers have unlimited loss exposure as well as unlimited profit potential.
true/false

false

Matt owns 500 shares of IKM stock. The market price of IKM is $51.74. Matt just sold five calls on IKM with a strike price of $50. This is known as
A) writing a naked call.
B) writing a covered call.
C) creating a naked cover.
D) covering a short position.

B) writing a covered call.

Mary wrote a 40 call on ABC stock at a price of $275. She does not own any shares of ABC. Mary has
I. limited her losses to $275.
II. unlimited loss potential.
III. limited her gains to $275.
IV. unlimited profit potential.
A) I and IV only
B) II and III only
C) I and III only
D) II and IV only

B) II and III only

The writer of a covered call has taken a(n)
A) conservative investment position with unlimited potential profits.
B) conservative investment position with limited profits.
C) aggressive position with limited losses and unlimited potential profits.
D) aggressive position with potentially unlimited profits or losses.

B) conservative investment position with limited profits.

While stock index options can be used to play the market as a whole, they are also effective in protecting equity portfolios against falling markets.
true/false

true

Long-term Equity AnticiPation Securities (LEAPS) are a form of option that gives the holder the right to buy newly-issued shares of stock directly from the issuing corporation.
true/false

false

If the S&P 500 index is at 1,061, then the cash value of an S&P 500 index option is
A) $10.61.
B) $1,061.
C) $10,610.
D) $106,100.

D) $106,100.

If you owned a diversified portfolio of two dozen stocks and you thought the market was heading down, you could appropriately protect your capital by
A) purchasing stock-index calls.
B) selling stock-index puts.
C) purchasing stock-index puts.
D) simultaneously buying an interest rate call and a currency put.

C) purchasing stock-index puts.

The premium on a stock index call would be expected to increase as the
A) market becomes more volatile.
B) option life nears expiration.
C) index price falls further below the strike price.
D) underlying securities stabilize in value.

A) market becomes more volatile.

I. protect a portfolio from market declines
II. speculate on the price appreciation of a particular common stock
III. take advantage of a leverage opportunity
IV. create a portfolio hedge
A) I and IV only
B) II and IV only
C) I and III only
D) I, III and IV only

D) I, III and IV only

The value of an interest rate call option
A) varies directly with the price of the underlying corporate bond.
B) increases when the yield on the underlying Treasury security rises.
C) is based on the market price of U. S. Treasury securities.
D) decreases when the price of U.S. Treasuries decreases.

B) increases when the yield on the underlying Treasury security rises

If the Canadian dollar became stronger relative to the U.S. dollar, the price of
A) a call option on the Canadian dollar will increase.
B) a put option on the Canadian dollar will increase.
C) a call option on the Canadian dollar will decrease.
D) both the call and the put options on the Canadian dollar will decrease.

A) a call option on the Canadian dollar will increase.

The currency option strike price of 163 means that
A) $1 is worth 1.63 units of the foreign currency.
B) $1 is worth 163 units of the foreign currency.
C) one unit of the foreign currency is worth $1.63.
D) one unit of the foreign currency is worth $163.

C) one unit of the foreign currency is worth $1.63.

Which of the following statements concerning Long-term Equity AnticiPation Securities (LEAPS) is correct?
A) LEAPS are traded solely in the over-the-counter market.
B) LEAPS are options that are available only on individual common stocks.
C) LEAPS typically have a higher quoted price than that of a regular option.
D) LEAPS generally have a longer life than a warrant.

C) LEAPS typically have a higher quoted price than that of a regular option.

Which of the following characteristics apply to warrants?
I. Warrants are similar to call LEAPS.
II. Warrants pay quarterly dividends.
III. Warrants can generate capital gains.
IV. Warrants normally cover two or less shares of the underlying security.
A) I, II and III only
B) II and IV only
C) I, III and IV only
D) III and IV only

C) I, III and IV only