Answer The Following Questions

Instructions: Answer all of the following multiple-choice questions. Only one possible answer is correct.

  1. 1. __________ is NOT a characteristic of a money market instrument.
  2. illiquidity
  3. short maturity
  4. low risk
  5. none of above

 

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  1. Which of the following is a characteristic of preferred stock?
  2. Give voting rights to its owner.
  3. It is like annuity.
  4. Investors cannot force the payment of the dividend.
  5. Dividends are tax-deductible for the firm as opposed to interest payment.

 

  1. Which of the following is NOT money market security?
  2. Bankers acceptance
  3. Treasury notes
  4. Federal funds
  5. 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

(days)

Bid

%

Asked

%

60 1.64 1.55
88 1.63 1.54
116 1.62 1.53
144 1.61 1.52

 

  1. The bid price of a T-bill in the secondary market is
  2. the price at which the dealer in T-bills is willing to sell the bill.
  3. the price at which the investor in T-bills is willing to sell the bill.
  4. larger than the ask price of the T-bill.
  5. The price at which the investor can buy the T-bill.

 

  1. What is the purchase price of the 144-day bill that you face?
  2. $993.29
  3. $993.56
  4. $993.92
  5. $994.05

 

  1. What would be the effective annual rate of return on your investment if you held the bill until maturity?
  2. 1.53%
  3. 1.56%
  4. 1.65%
  5. 1.72%

 

  1. 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?
  1. 1.31%
  2. 1.61%
  3. 1.53%
  4. 1.13%

 

  1. 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?
    1. 18%
    2. 22%
    3. 20%

D.     25%

 

  1. Related to the previous question, what was your effective annual rate?
A.    12.5%
  1. 5%
  2. 0%

D.     9.5%

 

  1. 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

 

  1. 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.
  2. above; below; above; below
  3. below; above; above; below
  4. below; above; below; above
  5. above; below; below; above

 

 

  1. Which of the following statements is INCORRECT about trading on margin
  2. It is a leveraged equity investment.
  3. Stocks purchased on margin are registered in street name.
  4. It increases payoff both on the upside and downside.
  5. In general, a limit-buy order may be placed to limit potential losses.

 

  1. 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

 

  1. 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.

 

  1. 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?
  2. Simple interest
  3. 360-day year
  4. Initial investment amount in the denominator
  5. Par value in the denominator

 

  1. Suppose we borrow from a credit card company at an APR of 24%, compounded monthly. What is the EAR on this loan?
  2. 26.0%
  3. 27.1%
  4. 26.8%
  5. 27.8%

 

  1. Related to the previous question, what is the EAR on this loan if compounded daily.
  2. 26.8%
  3. 28.6%
  4. 27.1%
  5. 27.9%

 

 

  1. 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?
  2. 56.79
  3. 57.69
  4. 59.69
  5. 58.79

 

  1. 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?
  2. limit sell order at $60/share
  3. limit buy order at $60/share
  4. stop loss order at $60/share
  5. stop buy order at $60/share

 

  1. 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
  2. 16.7%
  3. 33.3%
  4. 15%
  5. 27.3%

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