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Q:
On the NASDAQ system, the inside quotes are the
A. lowest ask and lowest bid.
B. lowest bid and highest ask.
C. highest bid and highest ask.
D. highest bid and lowest ask.
E. none of the above
Q:
In terms of volume of trading and market value of firms traded, the _____________ is the largest U.S. stock market. In terms of number of firms traded, the ___________ is the largest in the United States.
A. NYSE; NYSE
B. NASDAQ; NYSE
C. NYSE; AMEX
D. NYSE; NASDAQ
E. NASDAQ; AMEX
Q:
Which of the following information is NOT usually found in a Wall Street Journal stock quote?
A. Dividend yield
B. Price-earnings ratio
C. Closing price of the stock
D. Stock rating
E. Ticker symbol
Q:
As of December 2005, trading licenses are required to conduct trades on the floor of the NYSE. Which of the following statements about these trading licenses is/are correct?
I. Licenses are auctioned off in a special type of auction called a Dutch auction.
II. The NYSE determines the minimum bid price.
III. The SEC determines the maximum bid price.
IV. Trading licenses are good for 10 years.
A. II and III only
B. I and II only
C. I and III only
D. II and IV only
E. I, II, III, and IV
Q:
Which of the following is/are true about specialists?
I. Investment banks generally cannot be specialists
II. Specialists are used by the NASDAQ system
III. Market and limit orders are transacted at specialist posts, but the specialist's own account orders are executed elsewhere
IV. Specialists help maintain continuous trading
A. I, II, and III only
B. I and IV only
C. II, III, and IV only
D. I only
E. III only
Q:
A shelf registration allows firms the opportunity to avoid the normal ______________ day waiting period by allowing preregistration of securities for up to ______________ years.
A. 20-; 2
B. 10-; 1
C. 15-; 3
D. 20-; 1
E. 30-; 2
Q:
The preliminary version of a security offer that is circulated to potential buyers before SEC approval (registration) is obtained is called a
A. final prospectus
B. shelf registration statement
C. due diligence draft
D. waiting period offer
E. red herring prospectus
Q:
The NASDAQ automatic order execution system for individual traders placing buy or sell orders of 1000 or fewer shares is called the
A. ECN Network
B. SOE System
C. NASDAQ/AMEX Joint Program
D. Instinet Network
E. ETrade Online Program
Q:
The preemptive right is designed to
A. allow management to diffuse stock ownership any voting power.
B. allow managers to preempt a stock offering if they do not like the terms of the deal.
C. allow existing shareholders the right to sell their existing shares before the new offer.
D. allow existing shareholders to buy shares of the new offering if they desire.
E. none of the above
Q:
If the net proceeds are greater than the gross proceeds in an underwritten offering, then
A. the investment banker made a profit on the spread.
B. the issuing company underpriced its securities.
C. the issue fails to occur.
D. the SEC rescinds the issue.
E. none of the above
Q:
In 2007 the NYSE merged with _________________.
A. Nasdaq
B. Euronext
C. American Exchange
D. Chicago Mercantile Exchange
E. London Stock Exchange
Q:
If all preferred dividend payments that have been missed must be paid before any common stock dividend can be paid the preferred stock is called _____________ preferred stock.
A. cumulative
B. participating
C. nonparticipating
D. voting
E. dual class
Q:
With ____________ voting, all directors up for election are voted on by the shareholders at the same time in one general election.
A. straight
B. participating
C. nonparticipating
D. proxy
E. cumulative
Q:
An investor has a 38% ordinary income tax rate and a 20% long-term capital gains tax rate. The investor holds stock in a firm that could pay its usual $1 per share dividend or reinvest the cash in the firm. The stock price is currently $30 per share. If the firm does not pay the dividend, the share price will rise. If it pays the dividend, the share price will stay the same. By how much must the share price rise if the dividend is not paid in order to make the investor indifferent between receiving the dividend or not?
A. $1.00
B. $0.59
C. $0.78
D. $0.97
E. $0.50
Q:
You buy a stock for $30 per share and sell it for $33 after holding it for slightly over a year and collecting a $0.75 per share dividend. Your ordinary income tax rate is 28% and your capital gains tax rate is 20%. Your after-tax rate of return is ___________________.
A. 8.00%
B. 10.25%
C. 12.50%
D. 9.80%
E. 8.75%
Q:
Common stocks typically have which of the following that bonds do not have?
I. Voting rights
II. Fixed cash flows
III. Set maturity date
IV. Tax deductibility of cash flows to investors
A. I only
B. I, II, and IV only
C. II, III, and IV only
D. IV only
E. I, II, III, and IV
Q:
A seasoned equity offering occurs when an issuer that already has equity publicly trading issues new shares to the public.
Q:
If the stock markets are semi-strong efficient, stock prices reflect all historic and current public information about a firm but prices do not reflect inside information.
Q:
Dual class stock refers to firms with both common and preferred stock outstanding.
Q:
The NYSE recently merged with the London Stock Exchange to form the merged company NYSE Euronext.
Q:
The market in which firms sell new securities to raise cash is called the secondary market.
Q:
Preferred stockholders have a claim senior to common stock but junior to bondholders.
Q:
The Dow Jones Industrial Average is a price-weighted index of 30 stocks chosen to represent the overall market.
Q:
In cumulative voting, a stockholder who owns 51% of the shares can be assured of the ability to elect the entire board of directors.
Q:
At year-end a firm has assets of $100 and debts due of $120. In this situation, the stockholders must pay an additional $20 out of their own pocket.
Q:
In the event of bankruptcy, a firm's janitor must be paid all of the salary owed to him before stockholders receive anything.
Q:
A long-term investor in a high marginal tax bracket will normally prefer a dollar of capital gain to a dollar of dividend yield.
Q:
Stock splits change the divisor in a price-weighted index but do not result in any net change in the divisor of a value-weighted index.
Q:
An order to buy shares of stock at a specified price or better is called a limit order.
Q:
A type of absentee ballot that allows a representative to vote on behalf of the stockholder is called a proxy.
Q:
Why were CMOs created?
Q:
You bought your house 5 years ago and you believe you will be in the house only about 5 more years before it gets too small for your family. Your original home value when you bought it was $250,000, you paid 20% down and you financed closing costs equal to 3% of the mortgage amount. The mortgage was a 30 year fixed-rate mortgage with a 6.5% annual interest rate. Rates on 30-year mortgages are now at 5% if you pay 2 points. Your refinancing costs will be 1.5% of the new mortgage amount (excluding points). You won't finance the points and closing costs this time. A new down payment is not required. Should you refinance? Ignore all taxes and show your work.
Q:
Explain each term of the following pass-through quote:
Q:
How does GNMA improve mortgage marketability?
Q:
Who are the major buyers of mortgages after they have been originated? What is the difference between selling with recourse or without recourse? Which is most common?
Q:
Why have FNMA and Freddie Mac, considered government sponsored enterprises (GSEs), been in the news lately? Explain.
Q:
What three major ways has the federal government assisted the mortgage markets? Explain.
Q:
If his parents give him $20,000 for a down payment, what is the most he can pay on a house with a 15-year mortgage if the interest rate is 5.50%?
Q:
If mortgage rates are 6.25% for a 30-year fixed-rate mortgage, how large can his mortgage be?
Q:
Why do mortgage lenders prefer ARMs while many borrowers prefer fixed-rate mortgages, ceteris paribus.
Q:
A homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0% with zero points or at a rate of 5.5% with 2.25 points.
Which one of the following entities is an actual government agency dealing with mortgages?
A. GNMA
B. FNMA
C. FHLMC
D. PIP
E. CMO
Q:
A homeowner could take out a 15-year mortgage at a 5.5% annual rate on a $195,000 mortgage amount, or she could finance the purchase with a 30-year mortgage at a 6.1% annual rate. How much total interest over the entire mortgage period could she save by financing her home with the 15-year mortgage (to the nearest dollar)?
A. $230,408
B. $190,105
C. $155,612
D. $144,325
E. $138,612
Q:
A homebuyer bought a house for $245,000. The buyer paid 20% down but decided to finance closing costs of 3% of the mortgage amount. If the borrower took out a 30-year fixed-rate mortgage at a 5% annual interest rate, how much interest will the borrower pay over the life of the mortgage?
A. $224,655
B. $180,622
C. $228,477
D. $188,265
E. $248,575
Q:
A borrower took out a 30-year fixed-rate mortgage of $2,250,000 at a 7.2% annual rate. After five years, he wishes to pay off the remaining balance. Interest rates have by then fallen to 7%. How much must he pay to retire the mortgage (to the nearest dollar)?
A. $2,122,426
B. $2,225,330
C. $2,015,678
D. $2,212,041
E. $1,999,998
Q:
You purchase a $325,000 town home and you pay 25% down. You obtain a 30-year fixed-rate mortgage with an annual interest rate of 5.75%. After 5 years you refinance the mortgage for 25 years at a 5.1% annual interest rate. After you refinance, what is the new monthly payment (to the nearest dollar)?
A. $1,422
B. $1,401
C. $1,366
D. $1,335
E. $1,296
Q:
You obtain a $265,000, 15-year fixed-rate mortgage. The annual interest rate is 6.25%. In addition to the principle and interest paid, you must pay $275 a month into an escrow account for insurance and taxes. What is the total monthly payment (to the nearest dollar)?
A. $2,272
B. $1,632
C. $2,547
D. $1,907
E. $2,311
Q:
You purchase a $255,000 house and you pay 20% down. You obtain a fixed-rate mortgage where the annual interest rate is 5.85% and there are 360 monthly payments. What is the monthly payment?
A. $1,215.27
B. $1,203.48
C. $1,194.45
D. $1,367.22
E. $1,504.35
Q:
The schedule showing how monthly mortgage payments are split into principle and interest is called a(n)
A. securitization schedule
B. balloon payment schedule
C. graduated payment schedule
D. amortization schedule
E. growing equity schedule
Q:
With a fixed-rate mortgage, the ____________ bears the interest rate risk and with an ARM the ______________ bears the interest rate risk.
A. borrower; lender
B. borrower; borrower
C. lender; lender
D. lender; borrower
E. federal government; pool organizer
Q:
Mortgage payments are ____________ on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage, and ____________ is paid on a 15-year mortgage than on a 30-year mortgage; ceteris paribus.
A. lower; less interest
B. lower; less principle
C. higher; less interest
D. higher; more principle
E. higher; more interest
Q:
If a borrower makes a 20% down payment on a conventional mortgage they will be required to obtain
A. FHA insurance
B. VA insurance
C. private mortgage insurance
D. GNMA payment guarantees
E. none of the above
Q:
A ___________ placed against mortgaged property ensures that the property cannot be sold (except by the lender) until the mortgage is paid off.
A. collateral
B. lien
C. writ of habeas corpus
D. down payment
E. writ of certiorari
Q:
The process of packaging and/or selling mortgages which are then used to back publicly traded debt securities is called
A. collateralization
B. securitization
C. market capitalization
D. stock diversification
E. mortgage globalization
Q:
Rank the following types of mortgages by amount outstanding from largest to smallest.
I. Home mortgages
II. Multifamily mortgages
III. Farm mortgages
IV. Commercial mortgages
A. I, II, III, IV
B. I, II, IV, III
C. II, I, IV, III
D. IV, II, III, I
E. I, IV, II, III
Q:
On a fixed-rate mortgage the dollars of interest the homeowner pays falls each year the mortgage is outstanding.
Q:
Discount points are paid to reduce the down payment required.
Q:
A borrower using a conventional mortgage will have to put up at least a 20% down payment or purchase private mortgage insurance.
Q:
Private mortgage insurance (and hence, that part of the homeowner's monthly payment) is automatically removed from a mortgage when the loan-to-value ratio on the mortgage falls below 80%.
Q:
Federally insured mortgages are called conventional mortgages.
Q:
A subprime mortgage is a mortgage made to a borrower who has a below normal credit rating.
Q:
The process of mortgage securitization results in a separation between mortgage origination and mortgage financing.
Q:
The largest category of mortgages by dollar volume is commercial mortgages.
Q:
You are an investment banker and one of your large U.S. corporate clients has come to you asking for help deciding on the best market in which to place a sizeable issue of bonds. You could try to issue dollar-denominated bonds, or Euro or yen-denominated bonds. You could also issue in the United States or overseas. What major factors should you consider in advising your client on where to market the issue?
Q:
An investor is holding a $1,000 par, 10-year 9% coupon convertible bond with a 9% required bond yield. The bond is convertible into 40 shares of stock. Each share is worth $30. The bond has a current market value of $1,200. If interest rates don't change what is the maximum gain and loss on the bond?
Q:
A bondholder purchased a 9% coupon, $1,000 par 3-year bond at a 9% yield. Interest rates then immediately fell to 7% and his bond was called at a price of $1,040. He reinvested his money and earned 7% on the $1,040 for 3 years. Did the call help or hurt the bondholder? What was his 3-year rate of return on his original investment?
Q:
You find the following quote for a corporate bond ($1,000 par, pays interest semiannually): a) What was the range of the price for the given day?b) How many dollars would you receive from each coupon payment?c) Approximately what risk level is implied by the bond rating?d) What would have been the Last Price on the day before?
Q:
You are considering purchasing 5-year corporate bonds as an investment. You have a choice of terms available. Which of the following terms would you find desirable, ceteris paribus? How does each feature affect the bond's required rate of return? Explain.
a) call feature
b) convertible feature
c) warrants
d) sinking fund
e) debenture
Q:
What is the difference between General Obligation and Revenue bonds?
Q:
A municipal bond holder buys a 5% coupon annual payment muni bond at a price of $4,900. The bond has a $5,000 face value. In one year she sells the bond for $4,975. The appropriate capital gains tax rate is 15% and her ordinary income tax rate is 28%. What is her after-tax rate of return?
Q:
What do bond rating agencies look at in setting a bond's rating?
Q:
The total sale proceeds from selling the stripped components of a Treasury security can sometimes be greater than the fair present value of the Treasury security. Why might this happen?
Q:
What ratings comprise investment-grade bonds and what ratings are used for junk bonds? What are the primary differences between the two? In particular, why are investment-grade bonds more marketable and why are junk bonds issued at all?
Q:
You purchased a five-year annual payment 6% coupon bond for $1,000 and you planned on holding it to maturity. However right after you bought the bond it was called at $1,043.29 when all interest rates fell to 5% and remained there for the full five years. You reinvested the money for the full five years. What was your annual compound rate of return off your original investment?
A. 6.00%
B. 5.89%
C. 5.75%
D. 5.23%
E. 5.00%
Q:
You purchase a $1000 face value convertible bond for $975. The bond can be converted into 150 shares of stock. The stock is currently priced at $5.25. At what minimum stock price would you be willing to convert?
A. $4.50
B. $5.26
C. $6.50
D. $7.10
E. $7.25
Q:
A bond investor has a 99% chance of receiving all of her promised payments on a particular bond issue in the first year of holding the bond, but only a 98% chance in the second year, and a 97% chance in the third year and beyond. What is the cumulative default probability over the first three years she holds the bond?
A. 3.75%
B. 4.24%
C. 5.89%
D. 6.85%
E. 7.33%
Q:
An investor buys a $10,000 par, 4.25% annual coupon TIPS security with 3 years to maturity. If inflation every six months over the investor's holding period is 2.50%, what is the final payment the TIPS investor will receive?
A. $10,213.00
B. $10,869.28
C. $11,822.25
D. $11,843.37
E. $12,201.11
Q:
The quoted ask yield on a 30-year $1000 par T-Bond with a 6.25% coupon and a price quote of 106:16 is ___________ (use semiannual compounding).
A. 2.94%
B. 2.90%
C. 5.79%
D. 5.87%
E. 4.95%
Q:
A T-Bond with a $10,000 par is quoted at a bid of 92:11 and an ask of 92:17. If you bought the bond and then immediately sold it at the same quotes, how much money would you gain or lose (ignore commissions)?
A. $12.50
B. -$12.50
C. -$18.75
D. $18.75
E. $0.00
Q:
Bearer bonds are bonds
A. with coupons attached that are redeemable by whoever has the bond.
B. where the registered owner automatically receives bond payments when scheduled.
C. in which the issue matures on a series of dates.
D. issued in another currency other than the bond issuer's home currency.
E. issued in a different country other than the bond issuer's home country.
Q:
Which of the following statements about Euro bonds is/are true?
I. The issuer chooses the currency of denomination.
II. Spreads on firm commitment offers are lower for Euro bonds than for U.S. bonds.
III. Euro bonds typically have denomination of $5,000 and $10,000.
IV. Euro bonds are bearer bonds.
A. I and II only
B. I, III, and IV only
C. II, III, and IV only
D. II and III only
E. I, II, III, and IV are true