Deck 14: The Stock Market

Question 1

A(n) _______________________ is an irrational increase in prices accompanied by euphoric expectations.

A)irrational exuberance
B)financial crisis
C)speculative bubble
D)circuit breaker

Answer 1

C

Question 2

A volatile stock price is important because

A)it affects employment.
B)it affects inflation.
C)it affects the stability of the financial system.
D)All of the above are correct.

Answer 2

D

Question 3

Preferred stockholders

A)are paid a fixed dividend before common stock holders have been paid a dividend.
B)have voting rights in the corporation.
C)must be paid a dividend even if the corporation does not earn a profit.
D)rely on capital appreciation for their return to owning stock.

Answer 3

A

Question 4

Who regulates the marketing of newly issued shares of stock?

A)the investment banker who is responsible for underwriting the new issue
B)the Fed, as primary regulator of the financial system
C)the Securities and Exchange Commission (SEC)
D)the Initial Public Offering (IPO)

Question 5

When a corporation issues stock publicly for the first time, this is called

A)a declared public offering (DPO)
B)an initial public offering (IPO)
C)an initial prime loan (IPL)
D)a declared prime loan (DPL)

Question 6

An offering of newly issued shares of stock by a firm that already has outstanding publicly held shares is

A)an initial public offering (IPO).
B)the result of a shelf registration..
C)a secondary stock offering.
D)always more profitable than the previous offering.

Question 7

Which of the following is false?

A)Program trading is the pre-programming of computers to buy or sell a large number (basket) of stocks.
B)Program trading is used extensively by all market participants in the stock market.
C)Program trading is used primarily by institutional investors.
D)The expanded use of computers has facilitated the increase in program trading.

Question 8

What makes stocks liquid?

A)the reputation and financial strength of the corporations that issue them
B)the fact that a secondary market exists for publicly traded stocks
C)the fact that they are generally short term financial assets
D)the Securities and Exchange Commission's provision that they must be liquid

Question 9

What makes stocks liquid?

A)the fact that the Fed is willing to buy and sell stocks
B)the stock market is not regulated
C)the fact that a secondary market exists for publicly traded stocks
D)All of the above are correct.

Question 10

The margin requirement is

A)currently 50 percent and is set by the Securities and Exchange Commission (SEC).
B)currently 50 percent and is set by the Fed.
C)set by either the exchange or the broker.
D)applies to secondary market offerings only.

Question 11

The ______________________________ is the minimum amount of equity the investor needs in her account relative to the market value of her stock.

A)initial margin requirement
B)circuit breaker
C)maintenance margin requirement
D)market risk premium

Question 12

Buying on the margin presents problems under which of the following market circumstances?

A)a bull market
B)a bear market
C)a stable market
D)a regulated market

Question 13

When one sells stock to recoup losses, this action puts

A)upward pressure on the stock price.
B)downward pressure on the stock price.
C)has no effect on the stock price.
D)the company out of business.

Question 14

The New York Stock Exchange (NYSE) is

A)self-regulated.
B)unregulated.
C)regulated by the Federal Reserve.
D)regulated by the U.S. Treasury.

Question 15

The __________ is a computer system that sends buy and sell orders to a market specialist's post where the transaction is automatically executed.

A)American Stock Exchange (AMEX)
B)Designated Order Turnaround (DOT) System
C)Over-the-Counter Market
D)New York Stock Exchange (NYSE)

Question 16

Circuit breakers

A)were in place, but failed to work effectively when the Dow fell 508 points on October 19, 1987.
B)temporarily halt market trading if prices fall by some specified percentage.
C)do not place a limit on program trading.
D)have not been "tripped" since they were instituted.

Question 17

When the price of a basket of stocks and the price of a futures agreement in those stocks diverge enough to enable someone to make a riskless profit, this is

A)an equilibrium price.
B)trading opportunity enhancement.
C)index-arbitrage trading.
D)Both b and c are correct.

Question 18

Circuit breakers for index-arbitrage trading are triggered more frequently because of the _________ change needed to trigger the circuit breaker than for price changes that halt all market activity.

A)smaller
B)larger
C)equal
D)unregulated

Question 19

The __________ is an electronic stock market for trading the securities of approximately 3,200 firms.

A)American Stock Exchange (AMEX)
B)Designated Order Turnaround (DOT) System
C)National Association of Securities Dealers Automated Quotation System (NASDAQ)
D)New York Stock Exchange (NYSE)

Question 20

Who directly regulates the participants in the over-the-counter market?

A)The Securities and Exchange Commission (SEC)
B)The Fed
C)The National Association of Securities Dealers Automated Quotation System (NASDAQ)
D)The members of the New York Stock Exchange

Question 21

The National Association of Securities Dealers Automated Quotation System (NASDAQ) is

A)an electronic stock market.
B)a rival to the NYSE.
C)larger than any other domestic or foreign exchange.
D)Both a and b are correct.

Question 22

Trading in the pre- and after-hour markets usually offers

A)more liquidity.
B)inferior prices.
C)potentially less price volatility.
D)more liquidity and less price volatility.

Question 23

Which company reports an unweighted average of the sum of the daily closing prices of 30 blue chip stocks?

A)Instinet
B)Dow Jones Industrial Average (DJIA or the Dow)
C)NASDAQ
D)ArcaEx

Question 24

Which of the following stock market indices is the broadest measure of stock market activity that includes virtually all U.S. headquartered companies?

A)the New York Composite Index
B)the Wilshire Equity Index Value
C)the NASDAQ Composite Index
D)the Standard and Poor's 500

Question 25

One disadvantage of program trading is that

A)during a market crash, computers tend to automatically execute huge numbers of buy orders as prices fall. This accelerates and strengthens the market decline.
B)investors program their computers to buy or sell particular stocks when the stock hits a particular price.
C)during a market crash, computers tend to automatically execute huge numbers of sell orders as prices rise. This accelerates and strengthens the market decline.
D)during a market crash, computers tend to automatically execute huge numbers of sell orders as prices fall. This accelerates and deepens the market decline.

Question 26

Which of the following statements about mutual funds is false?

A)Mutual funds provide diversification at a minimum cost.
B)Mutual funds have experienced tremendous growth in recent years.
C)Mutual funds offer greater safety and less diversification than investment in one or more stocks.
D)Mutual funds pool the funds of many investors and then invest in several hundred or even thousands of stocks.

Question 27

Which of the following statements about an indexed mutual fund is true?

A)high cost and little trading
B)low cost and little trading
C)high cost and frequent trading
D)low cost and frequent trading

Question 28

The Exchange Traded Funds (EFTs)

A)mirror the holdings of a stock in an index.
B)are traded on several exchanges.
C)charge a brokerage commission to trade.
D)All of the above are correct

Question 29

If a share of stock pays a dividend of $3 and closes today at $42, what is its current yield (or return)?

A)14 percent
B)9.3 percent
C)7.7 percent
D)7.1 percent

Question 30

If the current yield on a share of stock is 8 percent when its price is $50, what is the dividend?

A)$4
B)$8
C)$5
D)It is impossible to tell with the information given.

Question 31

The _________________________ develops a model of the return needed to own a share of stock based on the risk free return, and the market and firm specific risks.

A)Capital Asset Pricing Model
B)Stock Valuation Model
C)Beta Model
D)Market and Firm Specific Risk Model

Question 32

The Capital Asset Pricing Model develops a model of the return needed to own a share of stock based on the _______ return, and the market and firm specific risks.

A)risk free
B)equilibrium
C)high risk
D)firm specific risk

Question 33

A measure of the overall sensitivity or variability of the stock's return relative to changes in the entire stock market is which of the following?

A)beta
B)the market risk premium
C)the firm specific risk premium
D)the risk free return

Question 34

Assuming a constant cash flow of $100 and a discount factor of 10 percent, the current value of a share of stock will be

A)$10
B)$100
C)$1,000
D)$10,000

Question 35

If the current price of a stock is $200 and the discount factor is 10 percent, what is the constant cash flow?

A)$100
B)$200
C)$20
D)$10

Question 36

Which of the following is false?

A)If we expect the firm to earn a constant cash flow, C, then the stock's price (P) will be equal to C/d where d is the discount factor.
B)There are often divergent opinions about the future expected cash flows of a stock.
C)Assuming we can estimate the expected cash flow (C) and the discount factor (d), we can solve for the current value of a share of the stock.
D)The stock's price will always converge to a value based on a universally held expected value.

Question 37

Which of the following is true?

A)The equilibrium return on a stock is based solely on a risk premium associated with owning the stock.
B)The equilibrium return on a stock is based on the firm specific risk, as measured by beta, only.
C)The equilibrium return on a stock should be based on the risk free return, and a market and firm specific risk.
D)At any time, more people are usually trying to buy stock rather than to sell stock.

Question 38

The market risk premium is

A)based on historical data that shows how much on average the ownership of stocks pays over the risk free return.
B)based on the risk free and firm specific risk premium.
C)measured by beta.
D)All of the above.

Question 39

Which of the following is the formula for finding the price, P, of a stock with an original cash flow of C, a discount factor of d, and a constant growth rate of cash flows equal to g?

A) P = C x d x g
B) P = C/(d -
C) P = C/(d +
D) P = C + d + g

Question 40

Assume that d is the discount factor, Rf is the risk free return, b is beta for a particular stock, and Rm is the market risk premium. According to the capital asset pricing model, the formula for finding the discount factor is

A)d = Rf + b(Rm)
B)d = Rf/b(Rm)
C)d = Rf x Rm
D)not enough information is given to find the discount factor.

Question 41

Assume that the discount factor of a stock is 12 percent and that cash flows are expected to grow 2 percent. What is the price of the stock if the original cash flow is $100?

A)$1,400
B)$1,200
C)$800
D)$1,000

Question 42

Which of the following is true?

A)The prices of stocks and bonds adjust until the average investor is indifferent between stocks or bonds--in other words, until the risk adjusted returns to owning stocks or bonds are equalized.
B)The equilibrium return to owning stocks consists of a risk free return, a risk premium for owning stock, and a firm specific premium.
C)If the Fed takes action that causes interest rates to change, this changes the risk free return of government bonds, and financial prices of stocks and bonds adjust until the investor is again indifferent between stocks and bonds.
D)All of the above are true.

Question 43

Which of the following is false?

A)Future cash flows are unknown.
B)It is the discounted value of expected cash flows that is used in stock valuation.
C)If earnings reports are what were expected, sharp price movements can occur immediately as investors take advantage of buying and selling opportunities.
D)According to the capital asset pricing model, the return needed to purchase stock is equal to the risk free return plus beta multiplied by the market risk premium.

Question 44

Which of the following best summarizes how changes in interest rates influence stock prices?

A)A fall in interest rates increases the quantity demanded of bonds and decreases stock prices.
B)A fall in interest rates will be expected to increase the demand for goods and services, to increase the earnings of firms, and in turn to increase their stock prices.
C)A fall in interest rates makes the expected return on stocks greater than the expected return on bonds.
D)Both b and c

Question 45

____________________________ is the spending of money balances on hand or the liquidation of financial or real assets owned by firm to finance spending that exceeds current receipts.

A)Retained earnings
B)External financing
C)Internal financing
D)Borrowing

Question 46

The leverage ratio is

A)the ratio of the firm's equity to debt.
B)the ratio of the stock's price to dividends.
C)the ratio of a stock's price to the interest rate.
D)the ratio of a firm's debt to equity.

Question 47

If stocks pay a higher risk-adjusted return than bonds, then

A)investors will sell stocks.
B)investors will buy bonds.
C)there will be a tendency for stock prices to rise and bond prices to fall.
D)stock prices will fall and bond prices will rise.

Question 48

Any particular financial decision reached by a firm is influenced by

A)the type of expenditures being financed.
B)the current financial environment and expectations about the future environment.
C)the firm's financial structure and tax laws.
D)All of the above are correct

Question 49

Why might a firm opt for long-term debt instead of equity?

A)the impact of U.S. tax laws
B)debt is always cheaper
C)equity is always cheaper
D)Both a and b are correct.

Question 50

Because of a rise in debt in the aggregate, leverage ratios of firms

A)will increase and credit-worthiness will decline.
B)will increase and credit-worthiness will rise.
C)will decrease and credit-worthiness will decline.
D)will decrease and credit-worthiness will rise.

Question 51

Stratospheric stock prices are justified if

A)expected cash flows increases sufficiently to justify high prices.
B)if the rate at which expected cash flows are discounted decreases enough to justify high prices.
C)the Federal Reserve keeps interest rates high.
D)All of the above are correct.
E)Both a and b are correct.

Question 52

Possible theories that account for high stock prices include

A)a decrease in productivity.
B)an increase in the value of existing firms because of technological innovation.
C)financial liberalization.
D)All of the above are correct

Question 53

In the late 1990s, why were investors willing to pay high prices for start-up companies that had never made a profit, never produced a product, and had no real or financial assets?

A)because interest rates were expected to rise
B)because of very high expected future cash flows
C)because of government guarantees
D)because firms need tax write-offs

Question 54

Volatile asset prices affect the real sector through which of the following channels?

A)when asset prices increase, nominal wealth increases leading to spending increases
B)when wealth increases, spending increases and the willingness to take on more debt
C)when the health of financial institutions is jeopardized by decreases in the prices of assets they hold
D)All of the above are correct.

Question 55

Which of the following is true?

A)The stock market experienced a bull market between 2003 and 2007.
B)The speculative bubble in the stock market of the late 1990s burst in early 2000 and stock prices have not increased in any single year since.
C)The bursting of the stock market bubble in 2008 was the primary cause of the financial crisis of 2008.
D)Stock prices are far less volatile than in the past.

Question 56

Which of the following is false?

A)The Fed is concerned about minimizing inflation in output markets.
B)The Fed is concerned about the destabilizing effects of extremely volatile stock prices.
C)Volatile stock prices can affect the health and safety of the financial system.
D)Although drops in stock prices can be devastating to individual investors, they generally do not affect employment and output prices.

Question 57

Common stockholders

A)are paid a variable dividend after preferred stock holders have been paid a fixed dividend.
B)do not have voting rights in the corporation.
C)must be paid a dividend before retained earnings can be set aside.
D)rely on capital appreciation for their return to owning stock.

Question 58

Common stockholders

A)are paid a variable dividend after preferred stock holders have been paid a fixed dividend.
B)have voting rights in the corporation.
C)may or may not be paid a dividend even if the firm has retained earnings.
D)All of the above are correct.

Question 59

Preferred stockholders

A)are paid a fixed dividend before common stock holders have been paid a dividend.
B)do not have voting rights in the corporation.
C)must be paid a dividend only if the corporation earns a profit.
D)All of the above are correct.

Question 60

The ____________________________ designs and markets a new securities offering.

A)investment banker
B)securities and Exchange Commission (SEC)
C)preferred stock holder
D)institutional investor

Question 61

The investment banker designs and markets

A)new securities offerings
B)mutual funds
C)certificates of deposit
D)All of the above are correct.

Question 62

Which of the following is false?

A)A secondary stock offering is an offering of newly issued shares by a firm that already has outstanding publicly held shares.
B)To bring new shares to the market, a corporation must register the new issue with the Securities and Exchange Commission (SEC).
C)Since 1982, the SEC has allowed corporations to register securities without immediately issuing them through a procedure called shelf registration.
D)Shelf registration permits a company to register a quantity of securities and sell them over a twenty-year period rather than at the time the shares are registered.

Question 63

____________________________________ permits a company to register a quantity of securities and sell them over a two-year period rather than at the time the shares are registered.

A)A secondary offering
B)A primary offering
C)Shelf registration
D)The Fed

Question 64

Which of the following is not an advantage of shelf registration?

A)Shelf registration avoids the costs of several registration processes
B)Shelf registration allows the firm to respond quickly to advantageous market conditions.
C)Shelf registration raises the most funds for a firm at the least costly way despite the cumbersome approval process with the Securities and Exchange Commission (SEC).
D)Shelf registration avoids the costs in time of several registration processes.

Question 65

______________________ is the pre-programming of computers to buy or sell a large basket of stocks.

A)The circuit breaker
B)Program trading
C)The NASDAQ
D)The over-the-counter market

Question 66

The__________ is the world's largest secondary market for trading stocks.

A)American Stock Exchange (AMEX)
B)Designated Order Turnaround (DOT) System
C)Over-the-Counter Market
D)New York Stock Exchange (NYSE)

Question 67

The __________ is an association whose members trade stocks over an advanced computer system that provides immediate information about prices and the number of shares being traded.

A)American Stock Exchange (AMEX)
B)National Association of Securities Dealers Automated Quotation System (NASDAQ)
C)Over-the-Counter Market
D) d. New York Stock Exchange (NYSE)

Question 68

An investment-type financial intermediary that pools the funds of many investors to invest in several hundred or even thousands of stocks and/or bonds is called a/an

A)mutual fund.
B)no-load fund.
C)load fund.
D)closed-end fund.

Question 69

The primary advantage gained by purchasing a mutual fund rather than an individual stock is

A)deposit insurance.
B)increased risk and return.
C)diversification.
D)uniformly lower brokerage fees.

Question 70

Equity claims representing ownership of the net income and assets of a corporation that receive a variable dividend after preferred stockholders have been paid and retained earning have been put aside are called

A)mutual funds.
B)preferred stock.
C)common stock.
D)corporate bonds.

Question 71

Equity claims representing ownership of the net income and assets of a corporation that receive a fixed dividend before common stockholders are entitled to anything are called

A)mutual funds.
B)preferred stock.
C)common stock.
D)corporate bonds.

Question 72

Equity claims representing ownership of the net income and assets of a corporation that receive a ______dividend before common stockholders are entitled to anything are called preferred stock.

A)fixed
B)variable
C)random

Question 73

The __________ is an index that measures stock price movements of 30 of the largest companies traded on the NYSE.

A)S&P 500
B)Dow Jones Industrial Average (DJIA or the Dow)
C)Russell 2000
D)GNMA 30

Question 74

. Which of the following is true?

A)The New York Stock Exchange is owned by the U.S. government to facilitate the trading of stocks in the secondary market.
B)The New York Stock Exchange is a publicly traded company owned by those who have purchase stock it.
C)The New York Stock Exchange has merged with numerous other exchanges in recent years.
D)Both b and c are true.

Question 75

Falling capital asset prices can have which of the following effects on a country's economy?

A)Decreased capital asset prices decrease wealth and with it consumption, borrowing, output, and employment.
B)Decreased capital asset prices can adversely affect financial institutions by decreasing the value of their assets while leaving their liabilities largely unchanged.
C)Decreased stock, bond, and real estate prices can cause bankruptcies of financial and non-financial firms on such a large scale that the financial system and real sectors of an affected economy collapse.
D)All of the above are correct.

Question 76

Which of the following statements is false regarding The Wall Street Journal's stock listings?

A)Stock prices are currently reported using fractions.
B)Beginning in January 2001, decimals were used to report stock prices rather than fractions.
C)The "High" and "Lo" columns give the high and low prices of the stock in the last 52 weeks.
D)The higher the earnings per share of the company (given the price of the stock), the lower the Price-to-Earnings ratio.

Question 77

Which of the following is false?

A)The margin requirement is the percentage of a stock purchase that can be borrowed as opposed to being paid in readily available funds.
B)The margin requirement is always equal to the maintenance margin requirement.
C)The maintenance margin requirement is the minimum amount of equity the investor needs in his account relative to the market value of his stocks.
D)In a declining market, margin buying magnifies losses.

Question 78

Which of the following is false?

A)In a rising stock market, buying on the margin makes investment more profitable than it otherwise would be.
B)When an investor uses borrowed funds to purchase stock, the lender may put in a margin call that requires the investor to put up more funds at any time.
C)If the investor fails to meet a margin call, the stock is sold for the lender to recoup part or all of its losses.
D)The selling of the stock to recoup losses when a borrower fails to meet a margin call puts additional downward pressure on the flagging stock price.

Question 79

Which of the following is true?

A)In late 1999 and early 2000, margin credit grew much faster than the overall appreciation of the stock market.
B)By early 2000, margin credit relative to the total value of stocks traded in the market was extremely high.
C)Raising margin requirements has been proposed as a monetary policy tool to reduce speculative behavior that could fuel a stock market bubble.
D)All of the above are true.

Question 80

Which of the following is false?

A)Buying stocks on the margin refers to putting up only a fraction of the stock's selling price and borrowing the rest.
B)Currently, the margin requirement to purchase stock is set by the Fed and is equal to 50 percent.
C)Stocks may be traded in organized markets such as the NYSE, the American Stock Exchange, or other regional stock exchanges.
D)Stock exchanges are the only secondary markets for stocks.