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1. Which of the following is a fundamental principle of behavior finance?

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a. the use of P/E ratios

   

 

 

   b. the tendency to avoid acknowledging investment errors

    

 

     

c. selling stocks at a loss for tax purposes

    

  d. constructing a diversified portfolio

5 points  

Question 2

2.  

3. Which of the following human emotions tend to affect

     

investments decisions?

      1. the pain of regret

      2. following the crowd or “herding”

      3. selective memory

      

  

a. 1 and 2

       

 

 b. 1 and 3

  

      

c. 2 and 3

        

d. all of the above

5 points  

Question 3

1.  

   The technical approach suggests that future stock prices are forecasted by

      

a. past stock prices
b. financial ratios
c. accounting statements
d. monetary policy

5 points  

Question 4

1.  

   5. Which of the following is not used in technical

         analysis?

       

a. moving averages

b. bar graphs

c. point‑and‑figure charts

d. P/E ratios

5 points  

Question 5

1.  

    If a moving average of the Dow Jones industrial average crosses the Dow Jones industrial average,

        

a. the direction of security prices has changed
b. stock prices will stabilize
c. stock prices will go through a period of fluctuation
d. the investor should take profits

5 points  

Question 6

1.  

    Empirical evidence

        

     

   

a. does not support efficient markets

d. only supports head-and-figure charts

5 points  

Question 7

1.  

   According to chapter 13  risk to bondholders comes from

         1. possibility of default

         2. higher interest rates

         3. higher inflation    

            

a.. all of the above

b. 1 and 2

c. 1 and 3

d. 2 and 3

5 points  

Question 8

1.  

    When an investor purchases a bond, he or she

        

a. pays accrued interest

b. receives accrued interest

c. pays accrued dividends

d. receives accrued dividends

5 points  

Question 9

1.  

   Equipment trust certificates are

      

a. riskier than convertible bonds

b. secured debt obligations

c. a type of debenture

d. bonds with low credit ratings

5 points  

Question 10

1.  

    9. Variable interest rate bonds

        

a. do not mature

b. are an example of a discount bond

c. have fluctuating coupons

d. are nonmarketable securities

5 points  

Question 11

1.  

   A high yield bond

         

a. pays no interest

b. pays interest only at maturity

c. is a high‑risk debt instrument

d. is a bond in default

5 points  

Question 12

1.  

   Zero coupon and split coupon bonds

         

a. experience stable prices

b. conserve the firm’s cash

c. reduce the firm’s use of financial leverage

d. pay interest only at maturity.

5 points  

Question 13

1.  

   The value of a bond depends on

          1. the coupon rate

          2. the terms of the indenture

          3. the maturity date

            

a. 1 and 2

b. 1 and 3

c. 2 and 3

d. all of the above

5 points  

Question 14

1.  

   If an investor were to anticipate that interest rates  were going to fall, that individual should

     

a. take no action

b. buy bonds

c. sell bonds

d. acquire money market securities

5 points  

Question 15

1.  

   The yield to call

         

      

b. equals the current yield

c. equals the yield to maturity

5 points  

Question 16

1.  

   The concept of duration considers

         

a. the timing of interest payments

b. the timing of principal repayment

c. the current rate of interest

d. the timing of both interest and principal repayment

5 points  

Question 17

1.  

   Preferred stock and long‑term bonds are similar because

         

a. they both have voting power

b. interest and dividend payments are fixed

c. interest and dividend payments are legal obligations

d. interest and dividend payments are tax‑deductible expenses

5 points  

Question 18

1.  

   c  23. An individual may purchase preferred stock

          1. in anticipation of lower interest rates

          2. in anticipation of higher interest rates

          3. to receive a flow of tax‑free income

          4. to receive a flow of income

          

a. 1 and 3

b. 2 and 3

c. 1 and 4

d. 2 and 4

5 points  

Question 19

1.  

   The interest on series EE bonds

        

a. is exempt from federal income taxation

b. is distributed semi-annually

c. is exempt from state income taxation

d. is taxed even though it is not receiveduntil the bond is redeemed

5 points  

Question 20

1.  

   If interest rates increase,

          1. the price of a Ginnie Mae falls

          2. the price of a Ginnie Mae rises

          3. the speed with which Ginnie Maes are retired increases

          4. the speed with which Ginnie Maes are retired declines

    

           

a. 1 and 3

b. 1 and 4

c. 2 and 3

d. 2 and 4

5 points  

Question 21

1.  

   c   8. Collateralized mortgage obligations (CMOs)

          1. are free of interest rate risk

          2. have more certain repayment schedules than Ginnie Maes

          3. are not exempt from federal income taxation

            

a. 1 and 2

b. 1 and 3

c. 2 and 3

d. only 3

5 points  

Question 22

1.  

   Municipal bonds

      

a. pay more interest than corporate debt

b. are exempt from federal income taxation

c. are exempt from federal estate taxation

d. reduce interest rate risk

5 points  

Question 23

1.  

   Which of the following is not traded in the secondary markets?

        

a. U.S. Treasury bills

b. U.S. Treasury bonds

c. series EE bonds

d. municipal bonds

5 points  

Question 24

1.  

   If an individual is in the 35 percent income tax bracket and corporate debt yields 7.5 percent, then to be competitive municipal debt must yield at least

        
    

a. 11.54%

b. 7.59%

c. 2.63%

d. 4.88%

5 points  

Question 25

1.  

   The interest income on a government savings bond issued by the Federal Government

     

a. is taxed even though it is not received until the bond is redeemed

b. is exempt from federal income taxation

c. is distributed semi-annually

d. is exempt from state income taxation

5 points  

Question 26

1.  

   Treasury bonds may be 

    

a. Bought and sold in the secondary markets like corporate bonds.

c. Bought and sold at a timeline dictated by the Federal Govennment or the     Federal Reserve Bank

5 points  

Question 27

1.  

   If a call is overvalued, put-call parity suggests that the investor should

         

a. sell the call and the stock and buy the put and the bond

b. sell the call and the bond and buy the put and the stock

c. sell the bond and the put and buy the stock and the call

d. sell the stock and the put and buy the call and the bond

5 points  

Question 28

1.  

   The hedge ratio determines

         

a. the number of call options to offset movements in the price of the stock

b. the number of call options to offset a straddle

c. the number of put options to offset movements in the price of a call option

d. the number of call options to offset the impact of changes in interest rates

5 points  

Question 29

1.  

   To acquire a straddle, the investor

        

a. buys stock and a call

b. buys two calls with different strike prices

c. buys a put and sells a call

d. buys a put and buys a call

5 points  

Question 30

1.  

   If the investor anticipates that the price of stock will fluctuate, this individual may

       

a. sell a call and sell a put

b. buy a call and buy a put

c. buy a call and sell a put

d. sell a call and buy a put

5 points  

Question 31

 

Dow Jones Indudtrial Monthly Index January – August 2012

<><><><><><><><><><><><><><><><><><><><><><><><><><><><><><><><><><><><><><><><><><> Date Open High Low Close Avg Vol Adj Close* Aug 1, 2012 13,007.47 13,330.76 12,778.90 13,090.84 1,037,800 13,090.84 Jul 2, 2012 12,879.71 13,128.64 12,492.25 13,008.68 1,287,600 13,008.68 Jun 1, 2012 12,391.56 12,898.94 12,035.09 12,880.09 1,483,400 12,880.09 May 1, 2012 13,214.16 13,338.66 12,311.56 12,393.45 1,479,600 12,393.45 Apr 2, 2012 13,211.36 13,297.11 12,710.56 13,213.63 1,351,300 13,213.63 Mar 1, 2012 12,952.29 13,289.08 12,734.86 13,212.04 1,533,900 13,212.04 Feb 1, 2012 12,632.76 13,055.75 12,632.76 12,952.07 1,447,300 12,952.07 Jan 3, 2012 12,221.19 12,841.95 12,221.19 12,632.91 1,574,500 12,632.91 * Close price adjusted for dividends and splits.

Source: Calculated using data from Yahoo Finance.com. retrieved on Saturday 8th September, 2012
 Questions:  The third 6-month moving average using the Adjusted Close and starting from January would be closest to

a.      $  12,880

b.    $    13,213

c.        $12,966

d.       $ 13,009

20 points  

Question 32

1.  

   A corporate bond which is due to expire in 10 years and pays 10% sells for $1,100. If a bond investor is seeking a 9.00% return on her investment the price she would be willing to pay as much as:

a.       $1,100

b.      $1,000

c.       $   900

d.      None of the above

20 points  

Question 33

1.  

   If a preferred stock pays an annual

   $4

   .50 dividend, what should be the price of the stock with comparable yields being approximately 10 percent? What would be the gain or (loss) if yields rose to 12 percent?

a.          $45

b.        $7.50

c.       ($7.50)

d.      (37,50)

20 points  

Question 34

1.  

   A portfolio manager is considering buying $100,000 worth of treasury bills for $96,211 versus $100,000 worth of commercial paper for $95,897. Both securities will mature in nine months. How much additional return will the commercial paper generate over the Treasury bills?

   The difference in basis between the commercial paper and treasury bills is:

a.        52.5 basis points

b.       57.1 basis points

c.        40.3 basis points

d.       45.3 basis points

20 points  

Question 35

1.  

   A put and a call have the following terms:

$30

three months

Call:    strike price		$3 0
term		three months
price	$3
Put :   strike price
term
price	$4

The price of the stock is currently $29. You sell the stock short and purchase the call. Complete the following table and answer the questions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Price of the Stock	Profit on Stock	Profit on Put	Net Profit
$20
25
30
35
40

 
After completing the blankd above as done in class, the maximum possible profit and maximum loss on the positions are:

a.        $34 and $4

b        $9  and $6

c       $26 and $4

d.       $4  and $1