Deck 2: The Domestic and International Financial Marketplace

Question 1

____ markets deal in long-term securities having maturities greater than one year.

A) Credit
B) Money
C) Commodity futures
D) Capital

Answer 1

D

Question 2

Securities not listed on exchanges are said to be traded

A) on the AMEX
B) as composite transactions
C) over the counter
D) on the regional exchanges

Answer 2

C

Question 3

The following are listed security exchanges in the United Sates:

A) New York Stock Exchange
B) Pacific Exchange
C) Cincinnati Exchange
D) All the above are listed exchanges

Answer 3

D

Question 4

If the spot rate for Swiss francs is $0.6658/franc and the 180-day forward rate is $0.6637, the market is indicating that the Swiss franc is expected to

A) strengthen relative to the dollar
B) weaken relative to the ECU
C) lose value relative to the dollar over the next 6 months
D) gain value relative to the dollar over the next 6 months

Question 5

An exchange rate quoted as $1.47 per British pound is known as a ____ quote.

A) hedge
B) direct
C) futures
D) indirect

Question 6

The difference between merchandise exports and imports is known as the ____.

A) transaction exposure
B) difference in purchasing power
C) merchandise trade balance
D) import/export reserve

Question 7

If the exchange rate from U.S. dollars to Canadian dollars is $0.80/Canadian dollar, then the exchange rate from Canadian dollars to U.S. dollars is

A) 0.80 Canadian $/US dollar
B) $1.25 Canadian $/US dollar
C) $1.20 Canadian $/US dollar
D) $8.00 Canadian $/US dollar

Question 8

If the exchange rate from U.S. dollars to Swiss francs is $0.20/franc, then the exchange rate from francs to dollars is

A) 0.20 francs/dollar
B) 0.80 francs/dollar
C) 5.0 francs/dollar
D) 2.0 francs/dollar

Question 9

The Standard and Poor's 500 Stock Price Index is a ____ index.

A) price weighted
B) market value weighted
C) price average
D) none of these answers is correct

Question 10

If the spot rate (in U.S. dollars) for Japanese Yen is 0.00703 and the 180 day forward rate is 0.00717, then the Yen is trading at a(n) ____.

A) expected gain
B) premium
C) reciprocal
D) discount

Question 11

Eurodollars are U.S. dollars that have been deposited in

A) foreign banks
B) foreign branches of U.S. banks
C) foreign subsidiaries
D) foreign banks and foreign branches of U.S. banks

Question 12

The most important foreign currency futures market in the United States is the ____.

A) Chicago Board of Trade
B) New York Mercantile Exchange
C) Commodity Exchange
D) Chicago Mercantile Exchange

Question 13

Financial middlemen include

A) securities brokers
B) securities dealers
C) investment bankers
D) all of the above

Question 14

If Japanese yen are deposited in a bank in Paris, the deposits would be called ____

A) Eurofrancs
B) European Currency Unit
C) Eurobond
D) Euroyen

Question 15

The interest rate at which banks in the Eurocurrency market lend to each other is known as the ____.

A) Eurocurrency currency rate (ECR)
B) London interbank offer rate
C) exchange rate
D) interest rate parity

Question 16

Financial intermediaries include

A) securities brokers
B) commercial banks
C) securities dealers
D) all of the above

Question 17

Which of the following is not a correct statement about foreign currency futures?

A) futures contracts have a standardized maturity date
B) futures contracts are an exchange-traded agreement
C) futures contracts are not liquid
D) futures contracts are "marked to market" daily

Question 18

If the forward (direct quote) exchange rate is lower than the spot rate, then the currency is said to be trading at a ____.

A) forward premium
B) forward gain
C) forward discount
D) forward loss

Question 19

The buyer of a foreign currency call option has the ____ a fixed amount of a foreign currency.

A) right to sell
B) right but not the obligation to buy
C) obligation to buy, only at expiration,
D) obligation to buy

Question 20

A multinational firm ____.

A) has direct investments in manufacturing facilities in more than one country
B) exports finished goods for sale in another country
C) imports raw materials from another country
D) has a manufacturing representative in another country

Question 21

Ex post returns differ from ____ returns in that they represent ____ values rather than ____ values.

A) ex ante; estimated; actual
B) ex post; accounting; economic
C) ex ante; actual; estimated
D) ex ante; economic; accounting

Question 22

When an investor purchases shares in a no-load common stock mutual fund, she is using a(n)

A) primary intermediary
B) financial intermediary
C) over-the-counter market
D) broker

Question 23

Which of the following (if any) are not financial intermediaries?

A) commercial bank
B) thrift institution
C) securities broker
D) all are financial intermediaries

Question 24

Insider trading is defined as

A) an individual using proper trading rules
B) an individual buying or selling using non-SEC disclosure rules
C) an individual buying or selling on the basis of material nonpublic information
D) a zero-plus game

Question 25

A savings and loan association is an example of which type of financial intermediary?

A) commercial bank
B) investment company
C) finance company
D) thrift institution

Question 26

The Dow Jones Industrial Average is calculated using the

A) total market value of 30 stocks
B) price of 30 stocks
C) a weighted index of 30 stocks
D) industrial, railroad, financial, and utility stocks

Question 27

Money markets deal in securities having maturities of ____; capital market securities have maturities ____.

A) less than 18 months, greater than 18 months
B) one year or less, greater than one year
C) less than 9 months, greater than 9 months
D) less than 6 months, greater than 6 months

Question 28

The U.S. financial markets are said to be highly informationally efficient. This means

A) they process stock trades accurately and quickly
B) the market provides quick access to a firm's financial statements
C) they quickly reflect information relevant to determining stock value
D) accurate stock quotes are quickly available to all investors

Question 29

With semistrong-form market efficiency, no investor can expect to earn excess returns based on an investment strategy using any ____ information.

A) past market price
B) market value
C) publicly available
D) private

Question 30

The main purpose of an economy's financial system is to facilitate the transfer of funds from

A) financial middlemen to financial intermediaries
B) surplus spending units to deficit spending units
C) primary claimholders to secondary claimholders
D) lenders to financial intermediaries

Question 31

Finance companies obtain a significant amount of their funds by

A) issuing their own equity securities
B) accepting both demand and time deposits
C) issuing their own debt securities
D) pooling funds

Question 32

____ markets deal in short-term securities having maturities of one year or less.

A) Credit
B) Money
C) Capital
D) Capital and credit

Question 33

Commercial banks are an important source of

A) mortgage loans
B) equity loans
C) real estate loans
D) short-term loans and term loans

Question 34

Commercial banks are a major source of term loans. These loans are best used for:

A) financing the expansion of the business.
B) financing the establishment of overseas operations.
C) financing current assets like inventory and accounts receivable.
D) financing the payment of dividends.

Question 35

Financial intermediaries

A) issue secondary claims to the lender
B) are compensated for their services by fixed fees
C) include both brokers and dealers
D) issue primary claims to the lender

Question 36

Capital markets in financially sophisticated economies are not perfectly efficient because of

A) anomalous events
B) the Sun Spot theory
C) irrational investor behavior
D) anomalous events and irrational investor behavior

Question 37

In any economy as a whole, the actual savings for a given period of time must ____ the actual investments.

A) be greater than
B) be unrelated to
C) equal
D) be less than

Question 38

The fact that no investor can expect to earn excess returns based on an investment strategy using only historical stock price or return information is an example of ____ market efficiency.

A) strong-form
B) weak-form
C) semiweak-form
D) semistrong-form

Question 39

In the ____ market, the firm receives the proceeds from the sale of its securities.

A) over-the-counter
B) secondary
C) fully integrated
D) primary

Question 40

The interest rate in the Eurodollar market is related to

A) the DOW
B) the stock market
C) the LIBOR
D) interest rates in the United States

Question 41

What is the holding period return to an investor who bought 100 shares of Oil Slick stock nine months ago for $36 per share, received two $50 dividend checks, and sold the stock today at $38 a share.

A) 5.56%
B) 8.33%
C) 11.11%
D) 6.94%

Question 42

If the spot rate (in U.S. dollars) for Japanese Yen is 0.00703 and the 180 day forward rate is 0.00717, then the Yen is trading at an annualized

A) premium of 4.04%
B) premium of 3.98%
C) premium of 3.91%
D) discount of 3.89%

Question 43

The barriers to the free flow of capital among the major world capital markets include all of the following except:

A) low transaction costs
B) taxation policies
C) foreign exchange risks
D) legal restrictions

Question 44

Maher purchased 100 shares of Chill Pill Pharmaceuticals at $30 per share last spring and sold them in six months for $36 per share. The stock paid no dividend. What was Maher's holding period return?

A) 40%
B) 20%
C) 10%
D) 5%

Question 45

For the financial manager, taxes have important implications for

A) dividend policy
B) financial restructurings
C) capital structure policy
D) all of the above

Question 46

In an efficient capital market

A) required returns equal expected returns
B) investors will have holding period returns equal to zero
C) purchase of any security yields zero profit
D) purchasing stocks is no better than gambling

Question 47

Lear purchased 100 shares of Quitcha Twitchin Anti-inch Cream stock at $30 per share last year and sold them eleven months later for $24 per share. The shares split 2 for 1 shortly after Lear purchased the stock. If the stock paid $0.25 per share in dividends last year, what is Lear's holding period return?

A) 61.67%
B) -19.17%
C) 21.67%
D) 6.17%

Question 48

If an investor purchased 100 shares of Biggee stock for $30 per share, 6 months ago, and then sold the stock today for $33 per share, what was the investor's holding period return if a total of $1 per share in dividends was received over the 6 month period?

A) 10%
B) 27.1%
C) 17.1%
D) 13.3%

Question 49

Which of the following is correct regarding the forms of market efficiency?
I) In an efficient capital market stock prices provide an unbiased estimate of the true value of an enterprise.
II) In an efficient capital market, stock prices reflect the present value of the firm's expected cash flows.

A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question 50

Christy purchased 100 shares of Good Idea stock for $48 last year. Yesterday she sold the stock for $45. If she received $4 in dividends during the time she held the security, what is her holding period return?

A) 2.08%
B) 8.30%
C) -6.30%
D) 14.60%

Question 51

If a treasury bond can be purchased for $9,450 today and the bond holder will receive $850 in interest and the $10,000 face value at maturity, what is the percentage holding period return?

A) 14.8%
B) 5.8%
C) 6.7%
D) 12.6%

Question 52

Changes in the tax code that slow down depreciation, ____ the present value of investment cash flows and, therefore, make the investment ____ desirable.

A) decrease, more
B) decrease, less
C) increase, more
D) increase, less

Question 53

If the spot rate for the British pound is $1.5077 and the 180-day forward rate is $1.4934, what is the annualized premium (discount)?

A) premium of 1.90%
B) premium of 0.97%
C) discount of (-)1.90%
D) discount of (-)0.97%

Question 54

Two years ago you bought 100 shares of Big Bubba convertible preferred stock at $25 per share. The preferred stock had an annual dividend of $2.125 per share, and a total of $3.19 in dividends per share have been paid so far. Today the company announced that the stock is redeemable for $26.70 plus accrued and unpaid dividends, for a total of $27.76. Alternatively, holders may convert their shares of preferred stock at a conversion rate of 1.6393 shares of Big Bubba common stock for each share of preferred stock. If the closing price of Big Bubba common stock is $27.50, what is your holding period return?

A) 93.08%
B) 23.80%
C) 80.32%
D) 64.60%

Question 55

All of the following are financial intermediaries EXCEPT:

A) commercial banks
B) investment companies
C) thrift institutions
D) loan sharks

Question 56

You bought 100 shares of Risky Venture stock six months ago for $14 per share and sold it yesterday for $12. The company paid a total of $0.24 per share in dividends to you during the time you held the stock. What was your holding period return?

A) -25.14%
B) -16.67%
C) -12.57%
D) 16.00%

Question 57

In an efficient capital market, corporate diversification is ____.

A) unnecessary
B) inexpensive
C) of benefit to corporate managers
D) of great benefit

Question 58

If the spot rate for the Japanese yen is $0.009204 and the 90-day forward rate is $0.009227, what is the annualized premium (discount)?

A) premium of 1.00%
B) premium of 0.50%
C) discount of -0.99%
D) premium of 0.25%

Question 59

In an efficient capital market, all security investments will have:

A) a required rate of return that exceeds the cost of capital
B) a positive NPV
C) a required rate of return that is zero
D) a NPV of zero

Question 60

All of the following reflect the implications of income taxes for financial managers EXCEPT:

A) Interest payments on debt made by the firm are not tax deductible.
B) Preferred stock and common stock dividends are not tax deductible.
C) Dividends are taxed on the corporate level as profits and are taxed on the stockholders' tax return as income.
D) Depreciation provides a tax deduction for the corporation.

Question 61

Explain the degrees of market efficiency and their applicability to the stock market.

Question 62

What are the differences between the primary and secondary markets?

Question 63

List changes that have occurred within financial markets regulation as a result of the passage of the Sarbanes-Oxley Act of 2002.

Question 64

There are highly publicized hedge fund problems, for example Julian Robertson's Tiger fund or Long Term Capital Management. The impact that this has had on hedge funds is:

A) minimal. They have continued to grow in size and number.
B) huge. Hedge funds are being discontinued.
C) being felt in the overall reallocation of hedge funds into bonds.
D) inconsequential and irrelevant. Investors may rely on the due diligence of the fund managers.

Question 65

How did the mortgage market provide the impetus for the financial crisis of 2007-2010?

Question 66

There are many reasons why there was a financial crisis in 2007. The most significant event closely associated with this crisis is:

A) the stock market crash
B) the real estate bubble
C) government overspending
D) the use of financial hedging

Question 67

List the types of disclosure forms required by the SEC and explain what information is contained in each form.

Question 68

The difference between the bid price and the ask price on a security is the:

A) spread
B) value
C) asset factor
D) commission

Question 69

There are three forms of market efficiency. All of the following statements are correct EXCEPT:

A) The weak form efficiency states that no investor can earn excess returns based on historical price information.
B) The strong form of efficiency states that no investor can consistently earn excess returns since all public and private information is reflected in stock prices.
C) The semi-strong form of efficiency states that no investor can earn excess returns based on an investment strategy using public information.
D) Market efficiency is a hard and fast rule that has been verified in real-world situations.

Question 70

In the financial crisis of 2007 there was cheap money coming from emerging markets. Examples of emerging markets are all of the following EXCEPT:

A) South Korea
B) Australia
C) India
D) China

Question 71

An example of a listed security exchange within the secondary market is:

A) OTC
B) NYSE
C) NASDAQ
D) Automated quotations

Question 72

Define the differences between the capital market and the money market. Give examples of the kinds of securities found in each category.

Question 73

Although there was a financial crisis in 2007-2010, some firms were able to weather the crisis. These firms had all of the following characteristics which were directly responsible for their ability to survive the crisis EXCEPT:

A) Tight control over fixed and variable costs
B) Low business risk
C) A business model which encouraged risk taking by management that paid off
D) Low product pricing

Question 74

Trading on the NYSE is conducted by members of the exchange. The members that execute orders and act as agents on behalf of their clients are::

A) Floor Brokers
B) Exchange Runners
C) Designated Market Makers
D) SEC Agents

Question 75

An example of a financial middleman is a:

A) commercial bank
B) stock broker
C) insurance company
D) thrift institution

Question 76

What is the purpose and importance of the stock market indexes?

Question 77

Which of the following statements is/are correct about financial intermediaries?
I) Financial intermediaries primarily operate within the secondary market.
II) Examples of financial intermediaries are: commercial banks, thrift companies and the internal revenue service.

A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question 78

As a group, net savers are:

A) businesses
B) households
C) government
D) partnerships