Instructions: Answer all of the following multiple-choice questions. Only one possible answer is correct.
- 1. __________ is NOT a characteristic of a money market instrument.
- short maturity
- low risk
- none of above
- Which of the following is a characteristic of preferred stock?
- Give voting rights to its owner.
- It is like annuity.
- Investors cannot force the payment of the dividend.
- Dividends are tax-deductible for the firm as opposed to interest payment.
- Which of the following is NOT money market security?
- Bankers acceptance
- Treasury notes
- Federal funds
- Eurodollars and Eurodollar CD’s
Answer the next 4 questions using the information in the following table.
You are considering the purchase of a $1,000 par value Treasury Bill and observe the following quotes for T-Bills in the market: Ignore transaction costs.
|Time to Maturity
- The bid price of a T-bill in the secondary market is
- the price at which the dealer in T-bills is willing to sell the bill.
- the price at which the investor in T-bills is willing to sell the bill.
- larger than the ask price of the T-bill.
- The price at which the investor can buy the T-bill.
- What is the purchase price of the 144-day bill that you face?
- What would be the effective annual rate of return on your investment if you held the bill until maturity?
- What would be the effective annual rate of return on your investment if you bought this bill today and were able to sell it back to a dealer after 28 days, assuming that yields do not change over time?
- You purchased a share of stock for $50. Two years later you received $2 as dividend and sold the share for $59. What was your holding period return?
- Related to the previous question, what was your effective annual rate?
- You purchased XYZ stock at $50 per share. The stock is currently selling at $80. You expect the stock price to go up, but not 100% sure. Placing a ___________ may protect your current gains of $30 while at the same time keeping the opportunity open for future upward potential.
A. limit-buy order
B. limit-sell order
C. stop-buy order
D. stop-loss order
- A limit buy order is an order to buy if the stock price goes ___ a specified level; a stop buy is an order to buy if the stock price goes ___ a specified level; a limit sell is an order to sell if the stock price goes ___ a specified level; a stop loss is an order to sell if the stock price goes ___ a specified level.
- above; below; above; below
- below; above; above; below
- below; above; below; above
- above; below; below; above
- Which of the following statements is INCORRECT about trading on margin
- It is a leveraged equity investment.
- Stocks purchased on margin are registered in street name.
- It increases payoff both on the upside and downside.
- In general, a limit-buy order may be placed to limit potential losses.
- The NYSE is an example of ________ and NASDAQ is an example of ______
A. a dealer market ; an auction market
B. a specialist market; a dealer market
C. a brokered market; a dealer market
D. a direct search market; a brokered market
- The money market is the market where:
A. Only equity securities are traded.
B. Debt securities with maturities of longer than a year are traded.
C. Where treasury debt securities are traded.
D. Securities of maturities up to one year are traded.
- Which of the following is NOT a problem associated with the Bank Discount Yield that prevents it from being useful as an accurate measure of investment returns?
- Simple interest
- 360-day year
- Initial investment amount in the denominator
- Par value in the denominator
- Suppose we borrow from a credit card company at an APR of 24%, compounded monthly. What is the EAR on this loan?
- Related to the previous question, what is the EAR on this loan if compounded daily.
- Consider the following short sale example: an investor borrows 100 shares of a stock from the broker, put down 50% as the initial margin, and sells the stock at $50/share in the market. If the maintenance margin is 30%, how much can the stock price rise before the investor gets a margin call?
- Regarding the previous question, suppose the stock price later goes up from $50/share to $75/share, put a ____________may limit the potential loss for the investor?
- limit sell order at $60/share
- limit buy order at $60/share
- stop loss order at $60/share
- stop buy order at $60/share
- An investor buys 100 shares of a stock at $200 per share on 45% margin. The stock goes to $230. Ignoring all costs of transacting, the percentage return on the investor’s equity is