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FIN352
Review questions for midterm exam 1
1. The nominal risk-free rate of interest is a function of
a)
The real risk-free rate plus the investment's variance.
b)
The prime rate and the rate of inflation.
c) The T-bill rate plus the inflation rate.
d) The real risk-free rate and the expected rate of inflation.*
2. At the beginning of the year an investor purchased 100 shares of common stock from ABC Corporation
at $10 per share. During the year, the firm paid dividends of $1 per share. At the end of the year, the
investor sold the 100 shares at $11 per share. What is the period return?
a)
b)
c)
d)
1.20%
5.50%
12.00%
20.00% *
7. The member of the New York Stock Exchange who acts
as a dealer on assigned stocks is known as a
a)
b)
c)
d)
Registered trader.
Commission broker.
Registered dealer.
Specialist. *
9. An order placed specifying the buy or sell price
a)
b)
c)
d)
is a
Limit order. *
Short sale.
Market order.
Priced order.
10. A pure auction market is one in which
a)
b)
c)
d)
Dealers provide liquidity by buying and selling shares of stock for
themselves.
Dealers compete against each other to provide the highest bid and lowest
asking prices.
Buyers submit bid prices to sellers.
Buyers and sellers submit bid and ask prices to a central location to be
matched. *
USE THE FOLLOWING INFORMATION FOR THE NEXT THREE PROBLEMS
Jack has a margin account and deposits $25,000. If the margin requirement is 40 percent, commissions are
ignored, and Irish Industries is currently selling at $45 per share:
11. What is the value of stock that Jack can acquire?
a)
b)
c)
d)
$41,667
$62,500 *
$75,000
$87,500
12. What is Jack's profit if the price of Irish Industries rises to $55?
a)
b)
c)
d)
$ 5,555
$ 9,259
$13,895 *
$23,598
13. If the maintenance margin is 20 percent, to what price can Irish Industries fall before Jack receives a
margin call?
a)
b)
c)
d)
14.
>
$21.75
$23.75
$33.75 *
$35.75
Portfolio theory tells us that diversification has the potential to:
a.
b.
c.
d.
increase anticipated risk for a given expected return.
reduce expected return for a given anticipated risk.
reduce anticipated risk for a given expected return.
reduce transaction costs.
15. A stock broker may improperly buy and sell the securities in a customer’s account to generate
commissions. This is known as ____________ .
>
17.
>
18
a.
a.
b.
c.
d.
enhancement
insider trading
indexing
churning
Annual accounting information is filed with the SEC on the:
a. 10K report.
b. 10Q report.
c. 13D report.
d. Form 144.
The largest single institutional owner of common stocks is:\
mutual funds.
b.
c.
d.
insurance companies.
pension funds *
commercial banks
19.
Finance professionals who work with individual investors and institutions in executing orders for
individual common stocks or bonds are called:
>
a.
b.
c.
d.
22.
brokers.
portfolio managers.
analysts.
certified financial planners.
Treasury bills are traded in the --------------------- .
a.
b.
c.
d.
money market. *
capital market.
government market.
regulated market.
23. Bonds trade on an accrual interest basis. This means an investor:
a.
b.
can sell a bond at any time without losing the interest that has accrued. *
can buy a bond at any time and gain the interest accrued from the time of the last
payment.
can sell a bond at any time and retain the interest portion of the bond.
buy a bond at any time and receive an immediate interest check.
c.
d.
24. A corporate bond with a rating of BBB- is considered to be which of the following?
a.
b.
c.
d.
non-investment grade
investment grade *
speculative grade
junk, or high-yield
26. The New York Stock Exchange is the:
>
a)
b)
c)
d)
sole trading forum for all companies listed on the NYSE.
home of securities with a total market capitalization of roughly $50 trillion.
second largest equities marketplace in the world.
largest U.S. securities market in terms of the value of companies listed and the dollar value of
trading activity.
27.
The National Association of Securities Dealers (NASD) is a:
>
a)
b)
self-regulatory organization with particular responsibility for the regulation of options markets.
self-regulatory organization with particular responsibility for the regulation of OTC markets.
c)
d)
regulatory arm of the SEC.
self-regulatory organization with particular responsibility for the regulation of futures markets.
28.
Nasdaq is a negotiated market in which investors deal directly with:
>
a)
b)
c)
d)
29.
The S&P 500:
>
a)
b)
c)
d)
market maker dealers.
exchange specialists.
floor brokers.
other investors in a trading pit.
dates from 1896.
is comprised mainly of Nasdaq stocks..
accounts for roughly 30% of the market capitalization of the overall stock market.
a market cap weighted index.
30. Which stock index is a good benchmark for determining the performance of small companies?
>
a.
b.
c.
a.
Whilshire 4500
Nikkei 225 Index
Russell 2000
NASDAQ 100
31. Investment
a.
b.
c.
d.
companies must register with the SEC under the provisions of the:
Securities Act of 1933
Securities Exchange Act of 1934
Maloney Act of 1938
Investment Company Act of 1940 *
32. Short sales with 50% initial margin trigger a 30% maintenance margin call following a:
>
a.
b.
c.
d.
50% rise in price.
15.4% rise in price.
20% rise in price.
22.9% fall in price.
Solution: consider that the investor shorts one share of a $100 with $50 of borrowed money. To trigger
a 30% margin call, the price would have to change to 0.3 = (100+50-P) / P, solving for P =
$115.38, which represents a 15.4% increase in price.
33. If the initial margin requirement is 40%, an investor buying 100 shares at $100 per share must furnish
equity of:
>
a)
b)
c)
d)
$4,000.
$6,000.
$10,000.
$100.
Solution: equity = 40% × 100 × $100 = $4,000
34.Limit orders:
>
35.
a.
b.
c.
d.
specify a certain price at which a market order takes effect.
specify a particular price to be met or bettered.
are executed at the best price available.
are orders entered for a particular day.
Primary markets:
a.
b.
c.
involve the organized trading of outstanding securities on exchanges.
involve the organized trading of outstanding securities in the over-the-counter market.
involve the organized trading of outstanding securities on exchanges and over-the-counter
markets.
are where new issues (IPOs) are sold by corporations to raise new capital.
>
d.
36.
The role of investment banker does not include:
>
a.
b.
c.
d.
giving companies advice on the price, amount and timing of an IPO.
a commitment to maintain a continuous primary market for listed issues.
managing a syndicate for distribution on a firm-price (dealer) or best-efforts (broker) basis.
helping maintain an after market for OTC issues.
37. An investor buys $10,000 worth of stock using 50% margin. If the stock price increases by 20%, what
return does the investor earn? (ignore transaction costs and interest fees)
>
a.
b.
c.
d.
10%
20%
30%
40%
Solution: return = 20%×$10,000 / (50% × $10,000) = 0.4 or 40%
38. If an investor would like to sell short shares originally valued at $20,000 in which his/her cash
contribution is $10,000, what is the stock value when the investor receives a margin call if the maintenance
margin 30%?
>
a) The current stock value decreases to $24,615
b) The current stock value decreases to $14,000
c) The current stock value increases to $24,615
d) The current stock value increases to $26,000
0.30 
Solution:
$20, 000  $18, 000  Current Stock Value
Current Stock Value
Current stock value = $24,615
39. Net
asset value takes into account:
a.
b.
c.
d.
both realized and unrealized capital gains. *
only realized capital gains.
only unrealized capital gains.
neither realized or unrealized capital gains.
40. Index
a.
b.
c.
d.
funds provide low-cost, passive investment exposure in a similar fashion to:
hybrid mutual funds
money market mutual funds
exchange-traded funds *
equity income funds
41. A loading fee is a:
a.
b.
c.
d.
type of income tax.
management fee.
origination fee.
sales charge. *
42. The ___________ summarizes information about a new security issue.
a.
b.
c.
d.
syndicate offer
IPO
prospectus *
shelf rule
43. Merrill Lynch and UBS are examples of:
a.
b.
c.
d.
discount brokers
wholesale brokers
full-service brokers *
blue-chip brokers
44. Ms. Brown sold short 100 shares of common stock at $78 per share. The
price has declined to $69. The outlook for the stock is mixed, so she
would cover her short position if the stock moves up as much as $1 but
hold if it continues down. Ms. Brown should place a
a.
b.
c.
d.
sell stop order at $70.
buy stop order at $70. *
sell limit order at $70.
buy limit order at $70.