Financial Markets and Institutions
Test Questions
Course Introduction
This course provides a comprehensive overview of the structure, functions, and operations of financial markets and institutions. It examines the roles of key players such as commercial banks, investment banks, insurance companies, mutual funds, and central banks, as well as the various financial instruments traded in money and capital markets. The course also explores how interest rates are determined, the regulatory frameworks governing financial systems, the impact of technological innovation, and the effects of global integration. Students will develop an understanding of risk management, the sources and uses of funds in financial institutions, and the crucial link between financial markets, institutions, and the broader economy.
Recommended Textbook
Essentials of Investments 8th Edition by Zvi Bodie
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22 Chapters
1830 Verified Questions
1830 Flashcards
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Chapter 1: Investments: Background and Issues
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Sample Questions
Q1) In securities markets,there should be a risk-return trade-off with higher-risk assets having _________ expected returns than lower-risk assets.
A) higher
B) lower
C) the same
D) Can't tell from the information given
Answer: A
Q2) The process of securitizing poor quality bank loans made to developing nations resulted in the creation of __________.
A) Pass-throughs
B) Brady bonds
C) WEBS
D) FHLMC participation certificates
Answer: B
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Page 3
Chapter 2: Asset Classes and Financial Instruments
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85 Flashcards
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Sample Questions
Q1) Treasury notes have initial maturities between ________ years.
A) 2 and 4
B) 5 and 10
C) 10 and 30
D) 1 and 10
Answer: D
Q2) The Hydro Index is a price weighted stock index based on the 5 largest boat manufacturers in the nation.The stock prices for the five stocks are $10,$20,$80,$50 and $40.The price of the last stock was just split 2 for 1 and the stock price was halved from $40 to $20.What is the new divisor for a price weighted index?
A) 5.00
B) 4.85
C) 4.50
D) 4.75
Answer: C
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Page 4
Chapter 3: Securities Markets
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90 Flashcards
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Sample Questions
Q1) The __________ system enables exchange members to send orders directly to a specialist over computer lines.
A) FAX
B) Direct Plus
C) NASDAQ
D) SUPERDOT
Answer: D
Q2) You purchased 200 shares of ABC common stock on margin at $50 per share.Assume the initial margin is 50% and the maintenance margin is 30%.You will get a margin call if the stock drops below ________.(Assume the stock pays no dividends and ignore interest on the margin loan.)
A) $26.55
B) $35.71
C) $28.95
D) $30.77
Answer: B
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Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) In 2000,the SEC instituted new rules that require funds to disclose _____.
A) 12b-1 fees
B) the tax impact of portfolio turnover
C) front-end loads
D) back-end loads
Q2) Which type of investment fund is commonly known to invest in options and futures in large scale?
A) Commingled funds
B) Hedge funds
C) ETFs
D) REITS
Q3) An official description of a particular mutual fund's planned investment policy can be found in the fund's _____________.
A) prospectus
B) indenture
C) investment statement
D) 12b-1 forms
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Chapter 5: Risk and Return: Past and Prologue
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Sample Questions
Q1) If you want to measure the performance of your investment in a fund,including the timing of your purchases and redemptions you should calculate the __________.
A) geometric average return
B) arithmetic average return
C) dollar weighted return
D) index return
Q2) Rank the following from highest average historical return to lowest average historical return from 1926-2008.
I.Small stocks
II.Long term bonds
III.Large stocks
IV.T-bills
A) I, II, III, IV
B) III, IV, II, I
C) I, III, II, IV
D) III, I, II, IV
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Chapter 6: Efficient Diversification
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Sample Questions
Q1) The optimal risky portfolio can be identified by finding ____________.
I.the minimum variance point on the efficient frontier
II.the maximum return point on the efficient frontier the minimum variance point on the efficient frontier
III.the tangency point of the capital market line and the efficient frontier
IV.the line with the steepest slope that connects the risk free rate to the efficient frontier
A) I and II only
B) II and III only
C) III and IV only
D) I and IV only
Q2) A stock has a correlation with the market of 0.45.The standard deviation of the market is 21% and the standard deviation of the stock is 35%.What is the stock's beta?
A) 1.00
B) 0.75
C) 0.60
D) 0.55
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Chapter 7: Capital Asset Pricing and Arbitrage Pricing
Theory
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Sample Questions
Q1) Consider the multi-factor APT with two factors.Portfolio A has a beta of 0.5 on factor 1 and a beta of 1.25 on factor 2.The risk premiums on the factors 1 and 2 portfolios are 1% and 7% respectively.The risk-free rate of return is 7%.The expected return on portfolio A is __________ if no arbitrage opportunities exist.
A) 13.5%
B) 15.0%
C) 16.25%
D) 23.0%
Q2) Consider the capital asset pricing model.The market degree of risk aversion,A,is 3.The variance of return on the market portfolio is .0225.If the risk-free rate of return is 4%,the expected return on the market portfolio is _________.
A) 6.75%
B) 9.0%
C) 10.75%
D) 12.0%
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Chapter 8: The Efficient Market Hypothesis
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Sample Questions
Q1) Value stocks usually exhibit ___ price-to-book ratios and ___ price-to-earnings ratios.
A) low, low
B) low, high
C) high, low
D) high, high
Q2) Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news.This is a violation of which form of efficiency?
A) Weak form efficiency
B) Semi-strong form efficiency
C) Strong form efficiency
D) Technical analysis
Q3) A day trade with an average stock holding period of under 8 minutes might be most closely associated with which trading philosophy?
A) EMH
B) Fundamental analysis
C) Strong form market efficiency
D) Technical analysis
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10
Chapter 9: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) The Cumulative Breadth for the first two days is ___.
A) -240
B) -50
C) 110
D) 250
Q2) Testing many different trading rules until you find one that would have worked in the past is called _______.
A) data mining
B) perceived patterning
C) pattern searching
D) behavioral analysis
Q3) A high amount of short interest is typically considered as a __________ signal and contrarians may consider it as a _________ signal.
A) bearish; bullish
B) bullish; bearish
C) bearish; false
D) bullish; false
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11
Chapter 10: Bond Prices and Yields
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Sample Questions
Q1) A 1% decline in yield will have the least effect on the price of the bond with a
A) 10-year maturity, selling at 80
B) 10-year maturity, selling at 100
C) 20-year maturity, selling at 80
D) 20-year maturity, selling at 100
Q2) TIPS are an example of _______________.
A) Eurobonds
B) convertible bonds
C) indexed bonds
D) catastrophe bonds
Q3) A debenture is _________.
A) secured by other securities held by the firm
B) secured by equipment owned by the firm
C) secured by property owned by the firm
D) unsecured
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Chapter 11: Managing Bond Portfolios
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Sample Questions
Q1) All other things equal,a bond's duration is _________.
A) higher when the coupon rate is higher
B) lower when the coupon rate is higher
C) the same when the coupon rate is higher
D) indeterminate when the coupon rate is high
Q2) You have an investment horizon of 6 years.You choose to hold a bond with a duration of 10 years.Your realized rate of return will be larger than the promised yield on the bond if ___________________.
A) interest rates increase
B) interest rates stay the same
C) interest rates fall
D) one can't tell with the information given
Q3) The duration of a 5-year zero coupon bond is ____ years.
A) 4.5
B) 5.0
C) 5.5
D) 3.5
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Chapter 12: Macroeconomic and Industry Analysis
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89 Flashcards
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Sample Questions
Q1) Which of the following are examples of cyclical industries?
I.Maytag
II.Computer chip manufacturers
III.Kellogg's Frosted Flakes
IV.Pfizer
A) I and II only
B) I, II and III only
C) II, III and IV only
D) I, II, III and IV
Q2) The ratio of the purchasing power of two economies is termed the _______.
A) balance of trade
B) real exchange rate
C) real interest rate
D) nominal exchange rate
Q3) The discount rate is the ________.
A) interest rate banks charge each other for overnight loans of deposits on reserve at the Fed
B) interest rate the Fed charges commercial banks on short term loans
C) interest rate that the U.S. Treasury pays on its bills
D) interest rate that banks charge their best corporate customers
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Chapter 13: Equity Valuation
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Sample Questions
Q1) A firm has a stock price of $55 per share and a P/E ratio of 75.If you buy the stock at this P/E and earnings fail to grow at all,how long should you expect it to take to just recover the cost of your investment?
A) 27 years
B) 37 years
C) 55 years
D) 75 years
Q2) A firm's earnings per share increased from $10 to $12,its dividends increased from $4.00 to $4.40,and its share price increased from $80 to $100.Given this information,it follows that _________.
A) the stock experienced a drop in its P/E ratio
B) the company had a decrease in its dividend payout ratio
C) both earnings and share price increased by 20%
D) the required rate of return increased
Q3) What price do you expect ART shares to sell for in 4 years?
A) $53.96
B) $44.95
C) $41.68
D) $39.76
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Page 15
Chapter 14: Financial Statement Analysis
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Sample Questions
Q1) A firm purchases goods on credit worth $100.The same firm pays off $80 in old credit purchases.An investment is made via the purchase of a new facility and equity is issued in the amount of $200 to pay for the purchase.What is the change in net cash provided by financing?
A) $20 increase
B) $80 increase
C) $100 increase
D) $200 increase
Q2) Refer to the financial statements of Flathead Lake Manufacturing Company.The firm's inventory turnover ratio is _________.Please keep in mind that when a ratio involves both income statement and balance sheet numbers,the balance sheet numbers for the beginning and end of the year must be averaged.
A) 11.6
B) 10.2
C) 9.5
D) 7.7
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Chapter 15: Options Markets
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Sample Questions
Q1) Longer term American style options with maturities of up to three years are called __________.
A) warrants
B) LEAPS
C) GICs
D) CATs
Q2) Which strategy benefits from upside price movement and has some protection should the price of the security fall?
A) Bull spread
B) Long put
C) Short call
D) Straddle
Q3) At contract maturity the value of a call option is ___________ where X equals the option's strike price and S<sub>T</sub> is the stock price at contract expiration.
A) Max(0, S<sub>T</sub> - X)
B) Min(0, S<sub>T</sub> - X)
C) Max(0, X - S<sub>T</sub>)
D) Min(0, X - S<sub>T</sub>)
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17
Chapter 16: Option Valuation
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Sample Questions
Q1) A 45 put option on a stock priced at $50 is priced at $3.50.This call has an intrinsic value of ______ and a time value of _____.
A) $3.50; $0
B) $5.00; $3.50
C) $3.50; $5.00
D) $0; $3.50
Q2) Suppose you purchase a call and write a put on the same stock with the same exercise price and expiration.If prices are at equilibrium the value of this portfolio is
A) S<sub>0</sub> - Xe<sup>-rt</sup>
B) S<sub>0</sub> - X
C) S<sub>0</sub> + Xe<sup>-rt</sup>
D) S<sub>0</sub> + X
Q3) Using the Black-Scholes OPM,the call option should be worth __________ today.
A) $0.01
B) $0.08
C) $9.26
D) $9.62
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Page 18
Chapter 17: Futures Markets and Risk Management
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Sample Questions
Q1) The S&P500 index futures contract is an example of a(n)______ delivery contract.The pork bellies contract is an example of a(n)______ delivery contract.
A) cash; cash
B) cash; actual
C) actual; cash
D) actual; actual
Q2) On January 1,you sold one April S&P 500 index futures contract at a futures price of 1300.If the April futures price is 1250 on February 1,your profit would be __________ if you close your position.(The contract multiplier is 250.)
A) -$12,500
B) -$15,000
C) $15,000
D) $12,500
Q3) On which of the given days do you get a margin call?
A) Monday
B) Tuesday
C) Wednesday
D) None
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19
Chapter 18: Portfolio Performance Evaluation
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Sample Questions
Q1) What was the manager's return in the month?
A) 2.07%
B) 2.21%
C) 2.24%
D) 4.80%
Q2) Which one of the following performance measures is the Sharpe measure?
A) Average excess return to beta ratio
B) Average excess return to standard deviation ratio
C) Alpha to standard deviation of residuals ratio
D) Average return minus required return
Q3) Consider the theory of active portfolio management.Stocks A and B have the same beta and non-systematic risk.Stock A has higher positive alpha than stock B. You should want __________ in your active portfolio.
A) equal proportions of stocks A and B
B) more of stock A than stock B
C) more of stock B than stock A
D) more information is needed to answer this question
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Chapter 19: Globalization and International Investing
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Sample Questions
Q1) Four largest economies in the world in 2007 were ____________.
A) U.S., India, China, and Japan
B) U.S., China, Canada, and Japan
C) U.S., Japan, Germany, and China
D) China, UK, Canada, and U.S.
Q2) 25 countries with largest equity capitalization made up about _____ of the word GDP in 2007.
A) 22%
B) 44%
C) 75%
D) 85%
Q3) One year U.S.interest rates are 5% and European interest rates are 7%.The spot euro direct exchange rate quote is 1.32 and the one year forward rate direct quote is 1.35.If you have $1 million dollars or 1 million to start with what would be your dollar profits from an interest arbitrage based on this data?
A) $94,322
B) $55,345
C) $44,318
D) $33,595
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Page 21
Chapter 20: Hedge Funds
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Sample Questions
Q1) What is expected quarterly return on the hedged portfolio?
A) 0%
B) 2%
C) 3%
D) 4%
Q2) Hedge fund managers receive incentive bonuses when they increase portfolio assets beyond a stipulated benchmark but lose nothing when they fail to perform.This equivalent to __________.
A) writing a call option
B) receiving a free call option
C) writing a put option
D) receiving a free put option
Q3) You believe that the spread between the September S&P 500 future and S&P 500 index is too large and will soon correct.To take advantage of this mispricing a hedge fund should ______________.
A) buy all the stocks in the S&P 500 and write put options on the S&P 500 index
B) sell all the stocks in the S&P 500 and buy call options on S&P 500 index
C) sell S&P 500 index futures and buy all the stocks in the S&P 500
D) sell short all the stocks in the S&P 500 and buy S&P 500 index futures
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Page 22
Chapter 21: Taxes,inflation,and Investment Strategy
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Sample Questions
Q1) Today most employees receive retirement benefits in the form of ________.
A) SEPs
B) defined benefit plans
C) defined annuity plans
D) defined contribution plans
Q2) The fact that the U.S.government provides deposit insurance to banks creates a form of ___________ which is at least partially offset by requiring banks to hold more capital if they are riskier.
A) moral hazard
B) adverse selection
C) risk aversion
D) interest rate risk
Q3) The Average Indexed Monthly Income is used to compute ___________.
A) the consumer price index
B) your Social Security retirement benefits
C) your maximum 401k contribution
D) your maximum IRA contribution
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Chapter 22: Investors and the Investment Process
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Sample Questions
Q1) Earnings on variable life and universal life insurance policies are ___________.
A) never taxed
B) taxed only at the capital gains tax rate
C) not taxed until the money is withdrawn
D) not taxed at the federal level but are taxed at the state level
Q2) The term "investment horizon" refers to __________.
A) the proportion of short-term to long-term investments held in an investor's portfolio
B) the planned liquidation date of an investment
C) the average maturity date of investments held in a portfolio
D) the maturity date of the longest investment in the portfolio
Q3) Under a "passive core" portfolio management strategy,a manager would
A) index the entire portfolio
B) index part of the portfolio and actively manage the rest
C) delegate the management of core segments of the portfolio to other managers
D) actively manage the entire portfolio
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