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FIN 322 Chapter 2 Quiz

Terms in this set (20)

Treasury Inflation-Protected Securities (TIPS)
a. pay a fixed interest rate for life.
b. provide a constant stream of income in real (inflation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index.
c. provide a constant stream of income in real (inflation-adjusted) dollars.
d. pay a variable interest rate that is indexed to inflation but maintain a constant principal.
Answer:
b. provide a constant stream of income in real (inflation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index.
The bid price of a T-bill in the secondary market is
a. never quoted in the financial press.
b. the price at which the dealer in T-bills is willing to buy the bill.
c. greater than the asked price of the T-bill.
d. the price at which the investor can buy the T-bill.
e. the price at which the dealer in T-bills is willing to sell the bill.
Answer:
b. the price at which the dealer in T-bills is willing to buy the bill.
The interest rate charged by banks with excess reserves at a Federal Reserve Bank to banks needing overnight loans to meet reserve requirements is called the
Answer :
Federal Funds Rate
Which of the following statement(s) is (are) true regarding municipal bonds?

I) A municipal bond is a debt obligation issued by state or local governments.
II) A municipal bond is a debt obligation issued by the federal government.
III) The interest income from a municipal bond is exempt from federal income taxation.
IV) The interest income from a municipal bond is exempt from state and local taxation in the issuing state.

a. I, II, and III only
b. I and IV only
c. I and III only
d. I and II only
e. I, III, and IV only
Answer:
E. I, III, and IV only
Which of the following is true of the Dow Jones Industrial Average?
It is a value-weighted average of 30 large industrial stocks, and the divisor must be adjusted for stock splits.
A. The divisor must be adjusted for stock splits.
B. It is a price-weighted average of 30 large industrial stocks, and the divisor must be adjusted for stock splits.
C. It is a price-weighted average of 30 large industrial stocks.
D. It is a value-weighted average of 30 large industrial stock
Answer:
C. It is a price-weighted average of 30 large industrial stocks, and the divisor must be adjusted for stock splits.

The Dow Jones Industrial Average is a price-weighted index of 30 large industrial firms, and the divisor must be adjusted when any of the stocks on the index split.
Which of the following indices is(are) market-value weighted?

I) The New York Stock Exchange Composite Index
II) The Standard and Poor's 500 Stock Index
III) The Dow Jones Industrial Average
A. II and III only
B. I and II only
C. I only
D. I and III only
E. I, II, and III
Answer:
B. I and II only
The Dow Jones Industrial Average is a price-weighted index.
The Dow Jones Industrial Average (DJIA) is computed by
Answer:
adding the prices of the 30 stocks in the index and dividing by a divisor.


When the DJIA became a 30-stock index, it was computed by adding the prices of 30 large "blue-chip" stocks and dividing by 30; however, as stocks on the index have split and been replaced, the divisor has been adjusted.
Consider the following three stocks:


Stock Price Number of shares outstanding
Stock A $ 40 200
Stock B $ 70 500
Stock C $ 10 600
The price-weighted index constructed with the three stocks is
30.
70.
50.
60.
40.
Answer:
40

($40 + $70 + $10)/3 = $40.
Consider the following three stocks:


Stock Price Number of shares outstanding
Stock A $ 40 200
Stock B $ 70 500
Stock C $ 10 600
The value-weighted index constructed with the three stocks using a divisor of 100 is
1200.
4900.
49.
490.
1.2.
Answer:
490

The sum of the value of the three stocks divided by 100 is 490: [($40 × 200) + ($70 × 500) + ($10 × 600)]/100 = 490.
The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104.25 and a bid price of 104.125. As a buyer of the bond, what is the dollar price you expect to pay?
$1,040.40
$1,041.25
$1,044.00
$1,042.50
$1,048.00
Answer:
$1,042.50

You pay the asking price of the dealer, 104 8/32, or 104.25% of $1,000, or $1,042.50.
An investor purchases one municipal and one corporate bond that pay rates of return of 8% and 10%, respectively. If the investor is in the 20% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ________, respectively.
10%; 10%
8%; 8%
6.4%; 10%
8%; 10%
6.4%; 8%
Answer:
8%; 8%

rc = 0.10(1 - 0.20) = 0.08, or 8%; rm = 0.08(1 - 0) = 8%.
The index that includes the largest number of actively-traded stocks is
the Wilshire 5000 Index.


The Wilshire 5000 is the largest readily available stock index, consisting of the stocks traded on the organized exchanges and the OTC stocks.
A 5.5%, 20-year municipal bond is currently priced to yield 7.2%. For a taxpayer in the 33% marginal tax bracket, this bond would offer an equivalent taxable yield of
11.40%.
4.82%.
10.75%.
8.20%.
Answer:
10.75%

0.072 = r(1 - t); 0.072 = r(0.67); r = 0.072/0.67; r = 0.1075 = 10.75%.
In order for you to be indifferent between the after-tax returns on a corporate bond paying 8.5% and a tax-exempt municipal bond paying 6.12%, what would your tax bracket need to be?
28%
33%
15%
Cannot be determined from the information given.
72%
Answer:
28%

0.0612 = 0.085(1 - t); (1 - t) = 0.72; t = 0.28.
With regard to a futures contract, the long position is held by
Answer:

the trader who commits to purchasing the commodity on the delivery date.
With regard to a futures contract, the short position is held by
Answer:

the trader who commits to delivering the commodity on the delivery date.
A call option allows the buyer to
Answer:
buy the underlying asset at the exercise price on or before the expiration date.
A put option allows the holder to
Answer:

sell the underlying asset at the strike price on or before the expiration date.
Which of the following is used extensively in foreign trade when the creditworthiness of one trader is unknown to the trading partner?
Federal funds
Correct!
Bankers' acceptances
Eurodollars
Repos
Answer:

Bankers' acceptances

A bankers' acceptance facilitates foreign trade by substituting a bank's credit for that of the trading partner.
A bond that can be retired prior to maturity by the issuer is a(n) ________ bond.
Answer:

Callable
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