Question 1

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.
A) 8% and 10%
B) 8% and 8%
C) 6.4% and 8%
D) 6.4% and 10%
E) 10% and 10%

Accepted Answer

r_c = 0.10(1 - 0.20) = 0.08, or 8%; r_m = 0.08(1 - 0) = 8%.

Question 2

Which of the following securities is a money market instrument?
A) Treasury note
B) Treasury bond.
C) municipal bond.
D) commercial paper.
E) mortgage security.

Accepted Answer

Commercial paper is a short-term debt instrument issued by corporations and governments to finance their short-term cash needs. Being a short-term debt instrument, commercial paper is classified as a money market instrument. The other options, treasury note, treasury bond, municipal bond, and mortgage security, are all types of long-term securities and therefore not money market instruments.

Question 3

Brokers' calls
A) are funds used by individuals who wish to buy stocks on margin.
B) are funds borrowed by the broker from the bank,with the agreement to repay the bank immediately if requested to do so.
C) carry a rate that is usually about one percentage point lower than the rate on U.S.T-bills.
D) a and b.
E) a and c.

Accepted Answer

Brokers' calls are funds used by individuals who wish to buy stocks on margin, but they are also borrowed by the broker from the bank with the agreement to repay immediately if requested to do so. Therefore, options A and B are correct. The interest rate on brokers' calls is typically tied to the rate on U.S. Treasury bills, with a spread of about one percentage point. Therefore, option C is not correct.

Question 4

If a Treasury note has a bid price of $995,the quoted bid price would be
A) 9:50.
B) 99:16.
C) 9:80.
D) 9:24.
E) 9:32.

Accepted Answer

Treasury note prices are quoted in 32nds of a dollar. Therefore, a bid price of $995 translates to 99 and 16/32 or 99:16.

Question 5

The yield to maturity reported in the financial pages for Treasury securities
A) is calculated by compounding the semiannual yield.
B) is calculated by doubling the semiannual yield.
C) is also called the bond equivalent yield.
D) is calculated as the yield-to-call for premium bonds.
E) Both b and c are true.

Accepted Answer

The yield to maturity for Treasury securities is often calculated by doubling the semiannual yield, which is a method to annualize the yield. This is also referred to as the bond equivalent yield.

Question 6

The Value Line Index is an equally weighted geometric average of the return of about 1,700 firms.What is the value of an index based on the geometric average returns of three stocks,where the returns on the three stocks during a given period were 20%,-10%,and 5%?
A) 4.3%
B) 5.0%
C) 11.7%
D) 13.4%
E) 12.2%

Accepted Answer

The geometric average return is calculated as [(1+0.20) * (1-0.10) * (1+0.05)]^(1/3) - 1 = 4.3%.

Question 7

As a taxpayer,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?
A) 33%
B) 72%
C) 15%
D) 28%
E) Cannot tell from the information given

Accepted Answer

To be indifferent, the after-tax return on the corporate bond should equal the tax-exempt return on the municipal bond. The formula is: Corporate Bond Rate * (1 - Tax Rate) = Municipal Bond Rate. Solving for the tax rate: 8.5% * (1 - Tax Rate) = 6.12%, which gives a tax rate of approximately 28%.

Question 8

Which of the following statements regarding the Dow Jones Industrial Average (DJIA)is false?
A) The DJIA is not very representative of the market as a whole.
B) The DJIA consists of 30 blue chip stocks.
C) The DJIA is affected equally by changes in low and high priced stocks.
D) The DJIA divisor needs to be adjusted for stock splits.
E) The value of the DJIA is much higher than individual stock prices.

Accepted Answer

The DJIA is not affected equally by changes in low and high priced stocks. It is a price-weighted index, which means that stocks with higher prices have a greater impact on the index's value. Therefore, a large price increase in a high-priced stock in the DJIA would have a greater impact on the index's value than the same percentage increase in a low-priced stock.

Question 9

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?
A) The stock trading at the highest dollar price per share.
B) The stock with total equity has the higher market value.
C) The stock having the greatest amount of equity in its capital structure.
D) The stock having the lowest volatility.
E) All will have an equal impact.

Accepted Answer

The stock trading at the highest dollar price per share will have the greatest impact on the DJIA because the index is price-weighted, meaning that stocks with higher prices have a greater impact on the overall value of the index.

Question 10

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:
A) 8.20%.
B) 10.75%.
C) 11.40%.
D) 4.82%.
E) none of these.

Accepted Answer

The answer of A 5.5% 20-year municipal bond is currently...

Question 11

In calculating the Standard and Poor's stock price indices,the adjustment for stock split occurs:
A) by adjusting the divisor.
B) automatically.
C) by adjusting the numerator.
D) quarterly,on the last trading day of each quarter.
E) none of these.

Accepted Answer

The answer of In calculating the Standard and Poor's stock...

Question 12

The price quotations of Canada bonds 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?
A) $10,480.00
B) $10,425.00
C) $10,440.00
D) $10,412.50
E) $10,404.00

Accepted Answer

The answer of The price quotations of Canada bonds show...

Question 13

The asked bank discount yield on a T-bill is 5 percent.What is the asked price of the bill if it matures in 60 days and has a face value of $10,000?
A) $9,500.00
B) $9,916.67
C) $9,523.81
D) $8,753.14
E) $9,876.52

Accepted Answer

Bank discount yield (BDY) = (Discount / Face Value) x (360 / days until maturity)
5% = (Discount / $10,000) x (360 / 60)
Discount = $250

The asked price of the bill can be calculated as:
Asked price = Face value - Discount = $10,000 - $250 = $9,750

However, this asked price is not an option in the given choices. We need to calculate the actual price using the following formula:
Actual price = Asked price / (1 + (BDY x days until maturity / 360))
= $9,750 / (1 + (0.05 x 60 / 360))
= $9,916.67

Therefore, the best choice is B.

Question 14

If a U.S.Treasury note has a bid price of $975,the quoted bid price in the Wall Street Journal would be
A) 97:50
B) 97:16
C) 97:80
D) 94:24
E) 97:75

Accepted Answer

The bid price for a U.S. Treasury note is quoted as a percentage of its par value, which is $100. If the bid price is $975, that means the percentage bid price is 97.5. However, the Wall Street Journal only reports bid prices in increments of 1/32 of a point, so we need to round the percentage bid price to the nearest 1/32. In this case, the nearest 1/32 below 97.5 is 97:16. Therefore, the quoted bid price in the Wall Street Journal would be B) 97:16.

Question 15

The index that includes the largest number of actively traded stock is:
A) the NASDAQ Composite Index.
B) the NYSE Composite Index.
C) the Wilshire 5000 Index.
D) the Value Line Composite Index.
E) the Russell Index.

Accepted Answer

The Wilshire 5000 Index includes all actively traded stocks in the US market, making it the index with the largest number of stocks included. The NASDAQ Composite Index includes a large number of technology and growth-oriented stocks, but not all actively traded stocks. The NYSE Composite Index includes all the stocks listed on the NYSE, but excludes those listed on other exchanges. The Value Line Composite Index includes 1,700 stocks selected by the Value Line Investment Survey based on their fundamental financial strength. The Russell Index includes only a portion of the total US market, based on size and style characteristics.

Question 16

A T-bill has a face value of $10,000 and is selling for $9,800.If the T-bill matures in 90 days,what is its effective annual yield?
A) 8.16%.
B) 2.04%.
C) 8.54%.
D) 6.12%.
E) 8.42%

Accepted Answer

First, we have to calculate the discount rate that $9,800 represents relative to the face value of $10,000:

Discount rate = (Face value - Price) / Face value = (10,000 - 9,800) / 10,000 = 0.02

Next, we have to convert this discount rate into an effective annual yield, using the formula for the yield on a discount basis:

Effective annual yield = (1 - Discount rate)^(365 / days to maturity) - 1

Plugging in the numbers, we get:

Effective annual yield = (1 - 0.02)^(365 / 90) - 1 = 0.0854 or 8.54%

Therefore, the answer is (C) 8.54%.

Question 17

The call provision in Canada securities
I.is used with Canada Bills.
II.is used with Canada Bonds.
III.gives the issuer the right to repurchase the security at par.
IV gives the issuer the right to repurchase the security at a premium over par.
A) II and III are correct.
B) II and IV are correct.
C) I,II and III are correct.
D) I,II and IV are correct.
E) Only II is correct.

Accepted Answer

The call provision in Canada securities is used with Canada Bonds and gives the issuer the right to repurchase the security at par.

Question 18

The stocks on the Dow Jones Industrial Average
A) have remained unchanged since the creation of the index.
B) include most of the stocks traded on the NYSE.
C) are changed occasionally as circumstances dictate.
D) consist of stocks on which the investor cannot lose money.
E) b and c.

Accepted Answer

The stocks on the Dow Jones Industrial Average are changed occasionally as circumstances dictate. The index currently includes 30 large publicly traded companies, selected by the editors of The Wall Street Journal based on various criteria including market capitalization, industry representation, and overall reputation.

Question 19

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:
A) 7.33%.
B) 10.75%.
C) 5.5%.
D) 4.125%.
E) 6.45%.

Accepted Answer

To calculate the equivalent taxable yield, we need to use the formula:
Equivalent Taxable Yield = Tax-Free Yield / (1 - Marginal Tax Rate)
In this case, the tax-free yield is 5.5% and the marginal tax rate is 25%. Plugging these values into the formula, we get:
Equivalent Taxable Yield = 5.5% / (1 - 0.25) = 7.33%
Therefore, choice A is the correct answer.

Question 20

A form of short-term borrowing by dealers in government securities is
A) reserve requirements.
B) repurchase agreements
C) banker's acceptances.
D) commercial paper.
E) brokers' calls.

Accepted Answer

Repurchase agreements, also known as repos, are a form of short-term borrowing commonly used by dealers in government securities. In a repo transaction, the dealer sells the securities to an investor for cash and agrees to buy them back at a slightly higher price on a future date. This allows the dealer to access immediate cash while still retaining ownership of the securities.

Quiz 2: Asset Classes and Financial Instruments

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.

Which of the following securities is a money market instrument?

Brokers' calls

If a Treasury note has a bid price of $995,the quoted bid price would be

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

The Value Line Index is an equally weighted geometric average of the return of about 1,700 firms.What is the value of an index based on the geometric average returns of three stocks,where the returns on the three stocks during a given period were 20%,-10%,and 5%?

As a taxpayer,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?

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

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?

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:

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

The price quotations of Canada bonds 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?

The asked bank discount yield on a T-bill is 5 percent.What is the asked price of the bill if it matures in 60 days and has a face value of $10,000?

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

The index that includes the largest number of actively traded stock is:

A T-bill has a face value of $10,000 and is selling for $9,800.If the T-bill matures in 90 days,what is its effective annual yield?

The call provision in Canada securities I.is used with Canada Bills. II.is used with Canada Bonds. III.gives the issuer the right to repurchase the security at par. IV gives the issuer the right to repurchase the security at a premium over par.

The stocks on the Dow Jones Industrial Average

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:

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