Deck 2: Financial Markets and Financial Instruments

Question 1

The bid price is the price a broker will give you for the stock you want to sell.

Answer 1

False

Question 2

A market maker is someone who works for someone wanting to sell her stock.

Answer 2

False

Question 3

More shares are traded on the Nasdaq on a daily basis than the NYSE.

Answer 3

True

Question 4

Bond prices are indexed relative to 100.

Question 5

Financial markets only involve buyers and sellers of financial instruments.

Question 6

When calculating a holding period of return, dividends are excluded.

Question 7

Forward contracts are easier to sell than a futures contract.

Question 8

The annual returns of the Dow Jones Industrial Average and the S&P 500 index are highly positively correlated.

Question 9

Insurance companies have decreased their loans to hospitality firms in recent years.

Question 10

A bond with a rating of AA is better than a bond rated AAA.

Question 11

As interest rates decline, the prices of outstanding bonds rise.

Question 12

Most stock trading occurs on the secondary market.

Question 13

The return on commercial paper is guaranteed by the federal government.

Question 14

Interest expense is tax deductible but dividends are not.

Question 15

Stock prices are based upon the future value of cash flows.

Question 16

A college education can be considered an investment.

Question 17

American hospitality companies really don't have to worry about foreign currency.

Question 18

We measure the uncertainty of an investment by its mean average)return.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Question 19

The current yield of a bond is the rate of return on a bond if you hold it until maturity.

Question 20

Futures contracts only are used with physical commodities.

Question 21

The first stock issue available to the public is called

A)a first sale.
B)secondary trading.
C)an IPO.
D)stock hedging.

Question 22

Assume you buy a share of stock for $20 and hold it for one year. During the year you receive $1.20 in dividends. At the end of the year you sell the stock for $19. What is your holding period return pre-tax)?

A)6.32%
B)1%
C)6.0%
D)5.0%

Question 23

Which of the following is considered to have the lowest risk?

A)an Aa bond from Hilton Hotels
B)a Ba bond from Cendant Corporation
C)commercial paper from McDonald's
D)a treasury bill from the U.S. government

Question 24

You manage a McDonald's in Germany. At the beginning of the year, the exchange rate was $1 = 1Euro. At the end of the year, the exchange rate is $1 = .90Euro. You report profits of 450,000 Euros. How much have your profits increased in terms of dollars from the exchange rate change during the year?

A)10%
B)90%
C)11.11%
D)unkown from information given

Question 25

How can we get out of a futures contract?

A)Take an equal and opposite position in another contract.
B)Just let the contract expire.
C)Sell the contract.
D)Both a and c.

Question 26

If a $1,000 bond is selling for 97, what is the selling price in dollars?

A)$970
B)$97
C)$1,030
D)$1,070

Question 27

A measure of uncertainty in stock returns is

A)weighted average.
B)mean.
C)correlation coefficient.
D)standard deviation.

Question 28

The best way for a large hospitality firm to hedge a price increase in a commodity would be to

A)do nothing and hope the price will decrease.
B)dramatically increase the price on your menu.
C)buy a futures contract.
D)buy a lot of the product now from a local purveyor with a lot of cash.

Question 29

You own the following portfolio of stocks that have achieved the following returns. Stock Percentage of Portfolio Return Percentage
A 25% 8%
B 65% 4%
C 10% -5%
The weighted average return is

A)approximately 4.33 percent.
B)approximately 4.10 percent.
C)approximately 2.33 percent.
D)approximately 33 percent.

Question 30

Given a two-year loan of $50,000 and an annual interest rate of 8 percent, how much interest will accrue during the life of the loan? Assume no principal payments during the term.)

A)$4,000
B)$8,000
C)$400
D)None of the above

Question 31

People invest

A)to make a lot of money.
B)so they can buy things now.
C)to increase future consumption.
D)to keep up with the times.

Question 32

An 81/2 09 bond is currently selling for 102.50. The principal amount is $1,000. The current yield on the bond is

A)8.5 percent.
B)9 percent.
C)8.29 percent.
D)none of the above.

Question 33

A government agency involved in the secondary mortgage market is

A)FDIC.
B)Fannie Mae.
C)GAO.
D)IRS.

Question 34

You run a hotel in Belgium that is owned by an American company. If the Euro strengthens against the dollar, your converted dollar profits will be

A)higher.
B)lower.
C)the same because we report our profits in Euros.
D)can't tell from information given.

Question 35

What are the three factors that affect the present value of future cash flows?

A)timing, magnitude, and size
B)timing, magnitude, and risk
C)date cash flows are received, date stock was purchased, and taxes
D)type of cash flows, size of firm, and amount

Question 36

You currently hold a bond from Marriott International that pays you 8 percent. If interest rates rise the price of your bond will:

A)increase.
B)decrease.
C)only decrease if interest rates go above 8 percent.
D)be unchanged because the price depends on the risk of the company.