Question 1

The first stock issue available to the public is called

Accepted Answer

The first stock issue available to the public is called an IPO, or initial public offering.

Question 2

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)?

Accepted Answer

The answer of Assume you buy a share of stock...

Question 3

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

Accepted Answer

Treasury bills from the U.S. government are considered to be the safest investment because they are backed by the full faith and credit of the government. They are considered to have the lowest risk of default.

Question 4

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?

Accepted Answer

At the beginning of the year, 1 Euro = $1, so 450,000 Euros = $450,000. At the end of the year, 1 Euro = $1/0.90 = $1.1111, so 450,000 Euros = $450,000 * 1.1111 = $500,000. The profits in terms of dollars have increased from $450,000 to $500,000, which is an increase of $50,000 on $450,000, or 11.11%.

Question 5

How can we get out of a futures contract?

Accepted Answer

To exit a futures contract, one can either take an equal and opposite position in another contract, effectively neutralizing the original position, or sell the contract to another party.

Question 6

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

Accepted Answer

If the bond is selling for 97, then it is being sold at 97% of its face value. So, the selling price in dollars would be 97% of $1,000, which is $970.

Question 7

A measure of uncertainty in stock returns is

Accepted Answer

Standard deviation is the best choice for measuring uncertainty in stock returns as it measures the amount of variation or dispersion of the returns from their average or expected value. It provides an indication of the level of risk associated with the investment, with higher standard deviation indicating higher risk.

Question 8

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

Accepted Answer

Buying a futures contract allows the firm to lock in a price for the commodity, effectively hedging against price increases. This is a common strategy used by many large companies in the hospitality industry to manage price risk.

Question 9

You own the following portfolio of stocks that have achieved the following returns.

The weighted average return is

Accepted Answer

To calculate the weighted average return, we need to multiply each stock's return by its weight (percentage of the total portfolio value) and then sum up the results.

Weighted average return = (0.40 x 0.06) + (0.30 x 0.02) + (0.20 x 0.03) + (0.10 x 0.10)
= 0.024 + 0.006 + 0.006 + 0.010
= 0.046 or 4.6%

Therefore, the best answer is B, approximately 4.10 percent.

Question 10

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.)

Accepted Answer

The total interest accrued during the life of the loan can be calculated using the simple interest formula:

I = P x r x t

Where: 
I = interest 
P = principal (amount of the loan) 
r = annual interest rate 
t = time (in years)

Plugging in the values given: 
P = $50,000 
r = 8% or 0.08 (decimal form) 
t = 2 years

I = $50,000 x 0.08 x 2 
I = $8,000

Therefore, the correct answer is B. $8,000.

Question 11

People invest

Accepted Answer

The main reason people invest is to increase their future consumption. By investing their money now, they hope to earn a return on their investment and grow their wealth over time. This allows them to have more money to spend in the future on things like retirement, education, or other major expenses. While making money is certainly a goal of investing, it is not the only reason and may not always be the primary motivation. Buying things now or keeping up with the times are not typically reasons people choose to invest.

Question 12

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

Accepted Answer

The answer of An 81/2 09 bond is currently selling...

Question 13

A government agency involved in the secondary mortgage market is

Accepted Answer

The answer of A government agency involved in the secondary...

Question 14

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

Accepted Answer

When the Euro strengthens against the dollar, the value of profits in Euros, when converted to dollars, increases. This is because each Euro will convert to more dollars than before the strengthening.

Question 15

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

Accepted Answer

The present value of future cash flows is affected by the timing of the cash flows, the magnitude or size of the cash flows, and the risk associated with the investment. Options A, C, and D do not accurately reflect the factors that affect the present value of future cash flows.

Question 16

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

Accepted Answer

When interest rates rise, newer bonds paying higher interest become available in the market, making the current bonds less attractive to investors. Therefore, the demand for the current bond decreases, leading to a decrease in its price.

Quiz 2: Financial Markets and Financial Instruments