Security Analysis
Test Bank
Course Introduction
Security Analysis is a comprehensive course that explores the principles and practices of evaluating investment securities, including stocks, bonds, and other financial instruments. The course covers the fundamental and technical analysis techniques used to assess the intrinsic value and potential risk of various securities. Students will learn how to interpret financial statements, analyze industry trends, and utilize valuation models to make informed investment decisions. Emphasis is placed on understanding market behavior, portfolio management strategies, and the ethical considerations involved in security analysis. Through case studies and practical exercises, students will develop critical skills for analyzing financial assets in real-world contexts.
Recommended Textbook Fundamentals of Investments 6th Edition by Bradford
D. Jordan
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Chapter 1: A Brief History of Risk and Return
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Q1) The average compound return earned per year over a multiyear period when inflows and outflows are considered is called the:
A) total return.
B) average capital gains yield.
C) dollar-weighted average return.
D) arithmetic average return.
E) geometric average return.
Answer: C
Q2) For the period 1926-2009, long-term government bonds had an average return that ______ the average return on long-term corporate bonds while having a standard deviation that _______ the standard deviation of the long-term corporate bonds.
A) exceeded; was less than
B) exceeded; equaled
C) exceeded; exceeded
D) was less than; exceeded
E) was less than; was less than
Answer: D
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Chapter 2: The Investment Process
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Q1) You are having a discussion with Kate when she mentions that she just initiated a short position on ABC stock. Given that statement, what do you know about Kate's future outlook for ABC stock?
Answer: A short position provides a positive return to an investor when a security's price declines. Thus, Kate is bearish on the stock as she is expecting the value of that stock to decline.
Bloom's taxonomy: comprehension
Q2) Jesse is researching chemical companies in an effort to determine which company's stock he should purchase. This process is known as:
A) market timing.
B) purchase shorting.
C) marketing research.
D) asset allocation.
E) security selection.
Answer: E
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Chapter 3: Overview of Security Types
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Q1) You purchased four August 09 futures contracts on soybeans at a price quote of 1156'6. Each contract is for 5,000 bushels with the price quoted in cents and 1/8 ths of a cent per bushel. Assume the contract price is 116'4 when you close out your contract six weeks from now. What will be your total profit or loss on this investment?
A) $950
B) -$238
C) $6,480
D) $16,200
E) $24,000
Answer: A
Q2) The annual interest payment divided by the current price of a bond is called the: A) coupon rate.
B) current yield.
C) yield-to-maturity.
D) yield-to-market.
E) market yield.
Answer: B
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Chapter 4: Mutual Funds
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Q1) Matt owns 724.08 shares of a fund which has a current NAV of $44.17. He has owned all of these shares for 3.3 years. The fund charges a contingent deferred sales charge which starts at 6 percent for the first year and declines by 1 percent each year. How much cash will he receive if he redeems all of his shares today?
A) $29,396.63
B) $29,709.36
C) $30,334.82
D) $30,647.55
E) $31,023.14
Q2) Which type of investor is most apt to purchase municipal bond funds and why?
Q3) A closed-end fund has total assets of $379 million and liabilities of $640,000. There are 36 million shares outstanding. What is the premium or discount if the shares are currently selling for $9.80 each?
A) 7.46 percent discount
B) 6.76 percent discount
C) 6.94 percent discount
D) 6.80 percent premium
E) 7.46 percent premium
Q4) What are the primary differences between an ETF and an ETN?
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Chapter 5: The Stock Market
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Q1) Which one of the following is the federal agency which regulates the financial markets in the U.S.?
A) Treasury Department
B) National Association of Securities Dealers
C) Over the Counter Commission
D) Federal Reserve
E) Securities and Exchange Commission
Q2) A trading floor broker:
A) is a NYSE member who trades on the floor for his or her personal account.
B) executes orders on behalf of commission brokers in exchange for a fee.
C) executes customers' orders in exchange for a commission.
D) trades a limited number of securities and is obligated to maintain an orderly market for those securities.
E) is any party who owns a NYSE trading license.
Q3) In 2007, NYSE Holdings merged with which one of the following?
A) NASDAQ
B) AMEX
C) Chicago Stock Exchange
D) London Stock Exchange
E) Euronext, N.V.
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Chapter 6: Common Stock Valuation
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Q1) The Shoe Box will not pay a dividend for the next two years. The following two years, it will pay annual dividends of $1 per share. Starting in year 5, the dividends will increase by 4 percent annually. The discount rate is 8 percent. What is the value of this stock today?
A) $18.18
B) $20.64
C) $22.63
D) $24.08
E) $27.09
Q2) Wilkinson and Daughters has net income of $318,5000, total assets of $2.2 million, and total liabilities of $1.08 million. The company paid $160,000 in dividends. What is the firm's sustainable rate of growth?
A) 9.69 percent
B) 11.06 percent
C) 12.49 percent
D) 13.93 percent
E) 14.15 percent
Q3) Identify three causes for a decrease in a firm's sustainable rate of growth.
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Chapter 7: Stock Price Behavior and Market Efficiency
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Q1) How should cumulative abnormal returns react in an efficient market?
A) relatively constant, sharp break, relatively constant
B) relatively constant with no breaks
C) steadily increasing
D) steadily decreasing
E) remain constant at zero
Q2) Which one of the following involves the study of a firm's stock price for the few days surrounding a news announcement?
A) web survey
B) market analysis
C) event study
D) auditing review
E) trend study
Q3) Efficient markets tend to exist:
A) only when all investors are rational.
B) anytime market volume exceeds the average trading volume.
C) only when market volatility is low.
D) when rational arbitrage traders dominate irrational traders.
E) when arbitrage trading is prohibited.
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Chapter 8: Behavioral Finance and the Psychology of Investing
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Q1) Which one of the following risks is related to irrational beliefs?
A) systematic
B) firm-specific
C) industry-specific
D) sentiment-based
E) market
Q2) The price of a stock increased from $21 to $26. Using phi, what are the primary and secondary support areas for the stock?
A) $25.33; $23.67
B) $23.67; $25.33
C) $24.09; $22.91
D) $28.14; $26.99
E) $26.99; $28.14
Q3) A "block trade" is a trade in excess of how many shares?
A) 1,000
B) 5,000
C) 10,000
D) 50,000
E) 100,000
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Chapter 9: Interest Rates
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Q1) Modern term structure theory supports the contention that the term structure of interest rates will:
A) be upward sloping.
B) be downward sloping.
C) be upward sloping in the short-term and relatively flat in the long-term.
D) be constant over time.
E) change over time.
Q2) Pure discount bonds which are created by separating the interest and principal payments from U.S. Treasury bonds are called U.S. Treasury:
A) notes.
B) bills.
C) STRIPS.
D) SWAPS.
E) tax-exempts.
Q3) Banks are most apt to quote short-term loan rates as:
A) prime plus a spread.
B) prime plus inflation.
C) prime minus inflation.
D) Federal funds plus prime.
E) prime minus the discount.
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Chapter 10: Bond Prices and Yields
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Q1) Alaskan Motors has outstanding bonds that mature in 14 years and pay $32.50 every 6 months in interest. The par value is $1,000 per bond and the market value is $981. The coupon rate is _____ percent, the current yield is _____ percent, and the yield to maturity is _____ percent.
A) 6.50; 6.37; 6.67
B) 6.50; 6.63; 6.71
C) 6.50; 6.67; 6.71
D) 7.00; 6.37; 6.67
E) 7.00; 6.67; 6.71
Q2) An 8.5 percent coupon bond pays interest semiannually and has 10.5 years to maturity. The bond has a face value of $1,000 and a market value of $878.50. What is the yield to maturity?
A) 5.16 percent
B) 8.37 percent
C) 8.78 percent
D) 10.43 percent
E) 11.21 percent
Q3) Explain the conditions under which an investor should place more reliance on the yield-to-call than on the yield-to-maturity.
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Chapter 11: Diversification and Risky Asset Allocation
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Q1) You are graphing the portfolio expected return against the portfolio standard deviation for a portfolio consisting of two securities. Which one of the following statements is correct regarding this graph?
A) Risk-taking investors should select the minimum variance portfolio.
B) Risk-averse investors should select the portfolio with the lowest rate of return.
C) Some portfolios will be efficient while others will not.
D) The minimum variance portfolio will have the lowest portfolio expected return of any of the possible portfolios.
E) All possible portfolios will graph as efficient portfolios.
Q2) Which one of the following distinguishes a minimum variance portfolio?
A) lowest risk portfolio of any possible portfolio given the same securities but in differing proportions
B) lowest risk portfolio possible given any specified expected rate of return
C) the zero risk portfolio created by maximizing the asset allocation mix
D) any portfolio with an expected standard deviation of 9 percent or less
E) any portfolio created with securities that are evenly weighted in respect to the asset allocation mix
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Chapter 12: Return, Risk, and the Security Market Line
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Q1) Explain the relationship between the security market line and market efficiency.
Q2) Which one of the following is the best example of a risk associated with stock ownership?
A) The stock paid a regular quarterly dividend.
B) The firm's net income decreased by 4 percent for the quarter, as had been expected.
C) One of the firm's patent applications was unexpectedly rejected.
D) The firm's cost of debt increased as the result of an expected tax cut.
E) The firm's production costs increased in line with previous years.
Q3) Wilson Farms' stock has a beta of .84 and an expected return of 7.8 percent. The risk-free rate is 2.6 percent and the market risk premium is 6 percent. This stock is _____ because the CAPM return for the stock is _____ percent.
A) undervalued; 7.34
B) undervalued; 7.49
C) undervalued; 7.64
D) overvalued; 7.34
E) overvalued; 7.49
Q4) Identify and describe each of the three components of a security's expected return according to the capital asset pricing model.
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Chapter 13: Performance Evaluation and Risk Management
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Q1) You want to create the best portfolio that can be derived from two assets. Which one of the following will help you identify that portfolio?
A) highest portfolio beta
B) market equivalent level of risk
C) highest possible rate of return
D) Treynor-minimal portfolio
E) Sharpe-optimal portfolio
Q2) A portfolio has a beta of 1.16, a standard deviation of 12.2 percent, and an expected return of 11.55 percent. The market return is 10.4 percent and the risk-free rate is 3.2 percent. What is the portfolio's Sharpe ratio?
A) .57
B) .68
C) .73
D) .77
E) .85
Q3) Explain a key advantage and a key disadvantage of Jensen's alpha.
Q4) Explain the similarities and differences between the Sharpe and Treynor ratios. Also, explain the most appropriate application for each.
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Chapter 14: Futures Contracts
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Q1) Julie purchased five (5) S&P 500 index futures at a price of 1392. The contract size is $250 times the index value. The futures are maturing today at a price of 1387.50. What is the amount of her profit or loss?
A) -$3,125
B) -$4,650
C) -$5,625
D) -$13,575
E) -$15,625
Q2) Which one of the following terms is defined as the process of recognizing gains and losses on outstanding futures positions on a daily basis?
A) profit taking
B) margin adjusting
C) daily distributing
D) market adjusting
E) marking-to-market
Q3) You are the chief financial officer (CFO) of a major textile importer. Identify one of the key risks your company faces and explain how you can hedge this risk using futures.
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Chapter 15: Stock Options
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Q1) A call option has a premium of $0.60, a strike price of $40, and 3 months to expiration. The current stock price is $39.60. The stock will pay a $0.80 dividend two months from now. The risk-free rate is 3 percent. What is the premium on a 3-month put with a strike price of $40? Assume the options are European style.
A) $0.25
B) $0.51
C) $0.78
D) $1.23
E) $1.50
Q2) Selling a call option on stock which you own is referred to as which one of the following strategies?
A) covered call
B) naked call
C) protective put
D) underlying put
E) straddle
Q3) Explain how options can be used to manage risk. Provide an example using a call option and another example using a put option.
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Chapter 16: Option Valuation
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Q1) Which two of the following are the key reasons why most major corporations issue employee stock options?
I. provide an employee benefit in place of a retirement plan
II. no immediate cost to the corporation
III. align management and shareholder interests
IV. replace employer-provided insurance benefits
A) I and II only
B) I and III only
C) II and III only
D) II and IV only
E) III and IV only
Q2) Which one of the following statements is correct?
A) Both call and put option deltas are always positive.
B) Put option deltas are always positive.
C) Call option deltas are always positive.
D) Both call and put option deltas are always negative.
E) All deltas can be positive, negative, or equal to zero.
Q3) Identify the five factors of the Black-Scholes option pricing model and identify whether each factor must increase or decrease to cause the price of a put option to increase.
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Chapter 17: Projecting Cash Flow and Earnings
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Q1) A firm has earnings per share of $3.50 and cash flow per share of $3.84. The price-earnings ratio is 24.1. What is the price-cash flow ratio?
A) 19.8
B) 20.1
C) 22.0
D) 26.0
E) 27.1
Q2) A firm has net income of $20,000 on sales of $208,000. Sales are expected to increase by 10 percent next year and the dividend payout ratio is 35 percent. The firm uses the percentage of sales approach when compiling pro forma statements. What amount is expected to be added to retained earnings next year?
A) $14,300
B) $15,400
C) $15,686
D) $22,000
E) $26,600
Q3) Why is the expected rate of sales growth so critical to pro forma statements?
Q4) What value does the Statement of Cash Flows add to the financial statements of a firm?
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Chapter 18: Corporate Bonds
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Q1) Which one of the following defines an in-the-money bond?
A) secured bond with collateral value that exceeds the bond's price
B) callable bond with a call price that exceeds the current market price
C) put bond with a put price that exceeds the current market price
D) convertible bond with a call price that exceeds its conversion value
E) convertible bond with a conversion value that exceeds its call price
Q2) Which one of these statements regarding corporate bond credit ratings is correct?
A) Bonds rated Ba<sub>3</sub> or above by Moody's are considered investment-grade bonds.
B) All bonds issued by the same issuer will have the same credit rating.
C) A bond's credit spread may be a better indicator of a bond's risk than its rating.
D) Bond ratings are based solely on the seniority of the bond issue and the protective covenants by which it is covered.
E) Credit ratings are assigned to the bond issuer, not the bond issue.
Q3) How is the minimal value for a convertible bond determined?
Q4) Why do corporations, rather than individuals, tend to be the largest holders of preferred stock?
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Chapter 19: Government Bonds
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Q1) Which one of the following descriptors is used to identify a bond that pays one single payment at maturity?
A) zero coupon
B) imputed value
C) solo
D) STRIP
E) term
Q2) You have a marginal tax rate of 31 percent and an average tax rate of 28 percent. Municipal bonds in your area are yielding 3.6 percent. What is your equivalent taxable yield?
A) 4.16 percent
B) 4.93 percent
C) 5.13 percent
D) 5.22 percent
E) 5.27 percent
Q3) Why would an investor prefer a TIPS which offers a lower coupon rate over a comparable T-note with a higher coupon rate?
Q4) What is the advantage of purchasing a STRIPS over a Treasury note?
Q5) Explain how the imputed interest is computed on a U. S. Treasury bill.
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Chapter 20: Mortgage-Backed Securities
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Q1) Which one of the following is NOT a reason why mortgage prepayments occur?
A) house securing the mortgage is sold
B) increase in interest rates
C) homeowner's spouse dies
D) homeowner faces job transfer
E) home is refinanced
Q2) You have a 20-year mortgage at 7 percent interest. The initial loan amount was $200,000. By how much did the principal decrease over the first 10 years of the loan? Payments are made monthly.
A) $61,345
B) $64,580
C) $65,355
D) $66,453
E) $68,618
Q3) Mortgage prepayments are best defined by which one of the following?
A) reducing the mortgage according to a schedule over the life of the mortgage
B) paying a monthly mortgage payment before the regular due date
C) paying off the principal faster than required by the amortization schedule
D) paying a cash deposit when purchasing a property
E) paying each mortgage payment as scheduled
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