Q&A Hero

Q: Which of the following is not a derivative security? a. a call option on a stock index b. a futures contract c. an interest rate swap d. a repurchase agreement e. All of the above are derivative securities.

Q: Which one of the following statements is true? a. Derivative securities are used to minimize or eliminate an investor's or a firm's exposure to various types of risk that they may be exposed to. b. Derivatives are financial securities which are based upon or derived from existing securities. c. Risk to an investor or a firm can be caused by interest rate changes or foreign exchange rate changes, commodity prices or stock prices. d. all of the above

Q: If the exercise price is greater than the current stock price, the call option is out-of-the- money but the put option is in-the-money.

Q: The writer of a call option on stock benefits if the underlying stock price decrease or if the volatility of the stock's price decreases.

Q: If you forecast that interest rates are likely to decrease over the next several years, you might sell a T-bond futures contract or buy an interest rate cap to take advantage of your expectations.

Q: A non-standardized agreement that is negotiated between a buyer and seller to exchange an asset for cash at some future date, with the price set today is called a future agreement.

Q: At least one of two counterparties in a forward contract must be a speculator.

Q: Speculators intentionally assume price risk.

Q: A hedger always owns the financial contract or is producing the commodity.

Q: Cross-hedgers have to accept some basis risk.

Q: The Chicago Board Options Exchange is the primary regulator of options contracts.

Q: A pension fund manager can protect his/her recent price gains by buying stock index futures contracts.

Q: Margin requirements relate to the amount of cash down payment or equity one must have deposited before participating in any trade.

Q: Interest rate swap dealers bring together counterparties willing to trade but never take positions in swap contracts themselves.

Q: Futures markets involve more standardized contracts compared to forward markets.

Q: Options premiums vary directly with the maturity of the option.

Q: A futures contract involves a hedger (risk averter) and a speculator (risk taker).

Q: A savings and loan with interest rate-sensitive liabilities and interest rate insensitive assets (i.e., negative GAP) might swap future fixed rate interest payments for variable rate interest payments.

Q: A swap entails buying and selling a futures contract at the same time.

Q: Margin risk involves the chance that initial margin requirements will be raised.

Q: Basis risk involves the risk that the price of futures contracts will not vary in exactly the same way as the price of the item being hedged.

Q: A depository institution can guarantee its costs of funds by selling Eurodollar futures.

Q: The financial futures hedger loses when futures contracts are marked to market.

Q: The open interest is the number of outstanding contracts.

Q: Most forward market contracts are settled before delivery.

Q: The price sensitivity rule assists the hedger by estimating the number of futures contracts to trade.

Q: Writing calls can generate potentially unlimited losses.

Q: Hedgers always buy futures contracts.

Q: Why have international stock prices fallen as a result of Standard and Poor's announcement regarding the down grade in the U.S. long-term credit rating in August 2011?

Q: Explain why unsystematic risk is ignored when appropriate levels of return are computed.

Q: What are the advantages of investing in American Depository Receipts (ADRs) compared to direct investment into foreign equities?

Q: Describe how limit orders whose prices are not close to current market prices are handled at NYSE.

Q: List and briefly describe the four types of secondary equity markets.

Q: Explain what shelf registration is and how it can help companies to reduce their costs.

Q: Suppose Zina & Co. has an expected dividend next year of $5.6 per share, a growth rate of dividends of 10 percent, and a required return of 20%. The value of a share of common stock is. a. $22.40 b. $28.00 c. $18.67 d. $56.00

Q: All of the following features may be characteristics of preferred stock EXCEPT a. convertible b. callable c. tax-deductible dividends d. no maturity date

Q: Since your grandmother supports your tuition at college, she wants to make sure it is worthy to invest in your education. She is wondering if you can tell her the key differences between common stock and bonds. Which of the following is NOT accurate? a. interest paid to bondholder is tax-deductible but dividends paid to stockholders are not. b. bonds have a stated maturity but stock does not. c. bonds are long-term debt instruments, while stock is long-term equity capital. d. common stockholders have a senior claim on assets and income relative to bondholders.

Q: Paul is examining a common stock of Cino Oil Co. that currently has a beta of 1.3. The risk-free rate, which is 90-day Treasury Bill yield, is an annual rate of 6%, and the market return, which is S&P 500 index change, is an annual rate of 12%. This stock is expected to generate a constant dividend of $5.20. However, a toxic spill of Cino Oil Co. results in an international lawsuit and potential finds, and the beta of the stock jumps to 1.6. What will the new equilibrium price of the stock be? a. $33.33 b. $37.68 c. $43.33 d. $53.68

Q: The current price of Fukushima Power Co. stock is $32.50 per share. Earnings next year should be $2.5 per share and it should pay a $ 1 dividend. The P/E multiple is 15 times on average in this industry. What price would you expect for the firm's stock in the future if you believe the P/E multiple approach is correct? a. $13.5 b. $22.50 c. $26.50 d. $37.50

Q: Suppose MBI Co.recently paid $2 annual dividend. The company is projecting that its dividends will grow by 20 percent next year, 12 percent annually for the two years after that, and then at 6 percent annually. Based on this information, how much should the company's common stock sell for today if the required return is 10.5%? a. $50.90 b. $59.22 c. $66.60 d. $77.50

Q: The current dividend yield, which is the recent dividend divided by the current stock price, on common stock of Formosan Freedom Co. is 4.8 %. The company just paid a $2.10 dividend. The dividend will be $2.205 in next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on stock of Formosan Freedom Co.? a. 10.04 percent b. 16.07 percent c. 21.88 percent d. 43.75 percent

Q: Which of the followings statements is correct? a. The stock market does a poor job of predicting economic recessions. b. The stock market does a good job of predicting economic recessions. c. Economic recessions always precede poor stock market performance. d. Positive stock market returns are not possible during economic recessions.

Q: Stocks XX, YY, and ZZ, initially priced at $35, $65, and $72, respectively, comprise a price-weighted index with a base value of 100. One year later the stocks above were valued at $40, $69, and $87, respectively. What was the value of the index at the end of year one? a. 88 b. 100 c. 114 d. 124 e. 196

Q: At the beginning of year one, the stock market index had a value of 225.4. Two years later the value was 298. What was the average annual rate of return on the index portfolio? a. 28.6% b. 30.0% c. 36.3% d. 15.0% e. 14.3%

Q: When constructing a stock market index, which two items are needed to start the index? a. the starting date and an estimate of future prices. b. the starting date and the base index value. c. the starting and ending dates of the index. d. 1,000 is the base value, combined with the starting date.

Q: The slope of the security market line is a. the market risk premium. b. beta c. the risk-free rate d. the return on the market portfolio. e. none of the above

Q: The security market line shows a. the amount of risk demanded for each unit of return. b. the return for each level of risk. c. the sum of the systematic and unsystematic risks. d. the risk/return tradeoff over time.

Q: Stocks with beta values of one a. will have very predictable rates of return. b. will have little risk compared to the market portfolio. c. has had return variability similar to the market. d. has had a constant rate of return. e. both a and b

Q: Investors in well diversified stock portfolios are concerned about ________ risk. a. specific stock b. unsystematic c. systematic d. diversifiable

Q: A stock currently trading at $50 expects to pay a $4.50 dividend this year. The dividends and stock price has been growing at 8% per year for 10 years. What is the expected total return on the stock this year? a. 17% b. 18% c. 20% d. 9% e. 15%

Q: If the risk-free rate is 7%, the return on the market portfolio is 15%, and the beta is 1.5, what is the value of the stock if the current dividend (D0) is $1.20 and it is expected to grow at a constant rate of 6% per year? a. $6.30 b. $6.70 c. $9.20 d. $9.80 e. $20.00

Q: What is the required rate of return on a stock if the risk-free rate is 7%, the return on the market portfolio is 15%, and the beta is 1.5? a. 12 % b. 19% c. 22.5% d. 29.5% e. 33%

Q: What is the estimated value of a stock, which paid a $5 dividend this year, expects dividends to grow at 6 per cent, and requires a 20 per cent return? a. $35.71 b. $37.86 c. $25.00 d. $20.38 e. $26.50

Q: Ace Corporation preferred stock pays an 8% dividend on a par value of $50 and is currently selling at $47.50. What is required rate of return on the stock? a. 7.5% b. 8% c. 8.4% d. 12.5% e. 16%

Q: A stock just paid an annual dividend of $2. The dividends are expected to grow at 20% per year over each of the next three years and 5% per year thereafter. What is the value of the stock if the required rate of return is 12%? a. $34.29 b. $36.49 c. $39.84 d. $43.80 e. $58.74

Q: What is the value of a stock expected to pay a constant $5 dividend each year forever, if the market required rate of return is 18%? a. $90 b. $28 c. $36 d. $23

Q: The federal legislation that made the Securities and Exchange Commission responsible for the broad oversight of securities markets was a. The Securities Act of 1933. b. The Securities Exchange Act of 1934. c. The Investment Company Act of 1940. d. The National Securities Company Act of 1932. e. none of the above.

Q: The primary federal regulator of stock markets is a. the Federal Reserve. b. the Federal National Securities Corporation. c. the National Association of Securities Dealers (NASD). d. the Securities Investor Protection Corporation. e. the Securities and Exchange Commission.

Q: In response to competition from foreign stock exchanges, U.S. stock exchanges have a. shortened their trading hours to decrease the volatility of stock prices. b. implemented after-hours discussion session between floor brokers and customers. c. expanded electronic after-hour trading for stocks. d. listed more stocks to compete with foreign stock exchanges.

Q: Which of the following statements is true about secondary markets? a. A buyer may incur search costs and find a seller on their own through a direct search. b. A broker may bring buyers and sellers together, charging a commission. c. A dealer may sell and buy securities using his inventory, therefore reducing search costs. The dealer's return is the bid/ask spread. d. An auction market allocates the selling shares to the highest bidder. e. All of the above statements are true.

Q: Which of the following is not a result of advances in technology and competition in equity markets? a. higher transaction costs b. the development of a national market system c. 24-hour trading of some stocks d. globalization of equity markets

Q: An order to the New York Stock Exchange to buy or sell at the best price available is called a. a limit order. b. a stop order. c. a market order. d. none of the above.

Q: Which of the following is not one of three major sources of active bids and offerings in a stock issue at a stock trading post on an exchange? a. floor brokers handling customer orders. b. limit price orders held by floor brokers. c. the specialists making trades for his/her own account. d. the specialist executing limit price orders.

Q: The daily pink sheets of the OTC market were replaced a. by the emerging dealer market. b. by the brokers relaying information to their customers. c. by the NASDAQ system. d. when the NASD required that dealers be registered.

Q: The NASDAQ system provides price input capability for a. brokers. b. dealers. c. stock-trading customers of dealers. d. the Securities and Exchange Commission.

Q: Which of the following is not associated with the over-the-counter market for stocks? a. NASDAQ b. unlisted c. auction market d. dealer market

Q: Which of the following is not a reason for not listing a stock on an exchange? a. limited trading in the stock b. small issue size c. having excellent support by NASD dealers d. having a large number of public shareholders

Q: The over-the-counter market trades ______ stocks than exchanges, and exchanges tend to list ________ companies. a. less; smaller b. less; larger c. more; larger d. more; smaller

Q: The bid-ask spread for equity securities tends to be _______ for more frequently traded stocks and _______ for stocks which have more traders with inside information. a. less; more b. less; less c. more; more d. more; less

Q: The percentage bid-ask spread for equity securities a. is higher with higher priced stocks. b. is large for very small and very large transactions. c. is less for less than round lot trades. d. all of the above.

Q: Which of the four types of secondary markets listed below has low search costs, price risk, and the expense of a bid/ask spread? a. direct search b. brokered c. dealer d. auction

Q: Which of the four types of secondary markets listed below minimizes price risk, but search costs are often high? a. direct search b. brokered c. dealer d. auction

Q: Which of the four types of secondary markets listed below achieves economies of scale in search costs but does not guarantee that orders will be executed promptly? a. direct search b. brokered c. dealer d. auction

Q: Which of the four types of secondary markets listed below involves considerable costs and no third party? a. direct search b. brokered c. dealer d. auction

Q: The New York Stock Exchange is a(n) ________ market. a. auction b. exchange c. secondary d. all of the above

Q: The underwriter's spread (%) is a. directly related to the size of the primary offering. b. directly related to the riskiness of the issue. c. greater when the shelf registration process is used. d. smaller for stocks than for bonds.

Q: Sampson Corporation, through its investment banker, First Ohio Securities, recently sold 200,000 shares of common stock to the public, grossing $7.4 million. Issuing expenses paid by Sampson totaled $200,000, and the underwriter's spread was $3 per share. How much net financing did Sampson Corporation raise in the deal? a. $6.6 million b. $7.2 million c. $6.4 million d. $7.0 million e. $6.8 million

Q: Which of the following market participants functions in the primary equity markets? a. broker b. specialist c. underwriter d. dealer e. none of the above

Q: Which of the following terms is associated with secondary equity markets? a. seasoned equity offering b. initial public offering c. underwriter's spread d. bid-ask spread e. shelf registration

Q: The sale of securities to the public via an investment banker by a new corporation raising funds is called a. a seasoned offering. b. a secondary offering. c. an initial public offering. d. a best efforts offering.