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FIN 350 Week 11 Quiz – Strayer University New

FIN/350 Week 11 Quiz – Strayer

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Quiz 10 Chapter 22 and 23

Finance Company Operations

1. ____ finance companies concentrate on purchasing credit contracts from retailers and dealers.
a. Consumer
b. Sales
c. Commercial
d. None of the above

2. Which of the following is not a source of finance company funds to support operations?
a. loans from banks
b. commercial paper
c. federal funds
d. bonds

3. When a finance company’s assets are ____ interest rate sensitive than its liabilities and when interest rates are expected to ____, bonds can provide long-term financing at a rate that is completely insulated from rising market rates.
a. less; increase
b. less; decrease
c. more; increase
d. more; decrease

4. Finance companies differ from commercial banks, savings institutions, and credit unions in that they
a. normally do not obtain funds from deposits.
b. focus on financing acquisitions by companies.
c. focus on providing residential mortgages.
d. use most of their funds to purchase stocks.

5. Which of the following is not a main source of funds for finance companies?
a. bank loans
b. commercial paper issues
c. bonds
d. capital

6. Finance companies are more likely to issue bonds when their assets are presently ____ interest-rate sensitive than their liabilities, and when interest rates are expected to ____.
a. more; decrease
b. less; increase
c. more; increase
d. less; decrease

7. If finance companies were confident about projections of ____ interest rates, they may consider using the funds obtained from issuing bonds to offer loans with ____ rates.
a. declining; variable
b. rising; fixed
c. rising; variable
d. A and B

8. Finance companies would prefer to increase their long-term debt most once interest rates
a. have declined.
b. have increased.
c. were stable for several years.
d. were projected to decline.

9. The main competition for finance companies in the consumer loan market comes from
a. pension funds.
b. life insurance companies and property and casualty insurance companies.
c. commercial banks and savings and institutions.
d. mutual funds.

10. When finance companies purchase a firm’s receivables at a discount, and are responsible for processing and collecting the balances of these accounts, they act as a
a. leasing agent.
b. lessor.
c. lessee.
d. factor.

11. When a finance company purchases equipment for use by another business, the finance company provides financing in the form of
a. factoring.
b. leasing.
c. a banker’s acceptance.
d. a letter of credit.

12. Finance companies are exempt from state regulations.
a. True
b. False

13. Finance companies are not subject to state regulations on intrastate business.
a. True
b. False

14. Finance companies are subject to
a. a maximum limit on loan size.
b. ceiling interest rates on loans provided.
c. a maximum length on loan maturity.
d. regulations on intra-state banking.
e. all of the above

15. If finance companies with a greater rate-sensitivity of liabilities than assets wanted to reduce interest-rate risk, they could
a. shorten their average asset life.
b. lengthen their average asset life.
c. shorten the maturity of debt that they issue.
d. make greater use of fixed-rate loans.

16. Overall, the liquidity risk of finance companies is higher than that of other financial institutions.
a. True
b. False

17. Compared to other lending financial institutions, finance companies have a ____ loan delinquency rate, and the average rate charged on loans is ____ on average.
a. lower; lower
b. lower; higher
c. higher; higher
d. higher; lower

18. A wholly owned subsidiary whose primary purpose is to finance sales of the parent company’s products and services, provide wholesale financing to distributors of the parent company’s products, and purchase receivables of the parent company is a
a. captive finance subsidiary.
b. factor.
c. leasing agent.
d. captive factoring agent.

19. Which of the following statements is incorrect?
a. A captive finance subsidiary’s purpose is to finance sales of the parent company’s products and services.
b. An operating agreement between the parent and the captive specifies the type of receivables that qualify for same and specific services provided by the parent.
c. A captive can be used to finance distributor or dealer inventories until a sale occurs.
d. A captive is rarely used to finance products leased to others.

20. ____ provide loans to firms that cannot obtain financing from commercial banks.
a. Consumer finance companies
b. Sales finance companies
c. Commercial finance companies
d. None of the above

21. Which of the following is not a use of finance company funds?
a. consumer loans
b. business loans
c. commercial paper
d. real estate loans
e. All of the above are uses of finance company funds.

22. Finance companies commonly act as ____ for accounts receivable; that is, they purchase a firm’s receivables at a discount and are responsible for processing and collecting the balances of these accounts.
a. brokers
b. dealers
c. market makers
d. factors
e. none of the above

23. Most finance companies are commonly exposed to all forms of risk below except ____ risk.
a. exchange rate
b. interest rate
c. liquidity
d. credit

24. Changes in economic growth are ____ related to a finance company’s cash flows, and changes in the risk-free rate are ____ related to a finance company’s cash flows.
a. positively; negatively
b. negatively; positively
c. negatively; negatively
d. positively; positively

25. Finance companies participate in the ____ market to reduce interest rate risk.
a. money
b. bond
c. options
d. swap

26. Many consumer finance companies also provide personal loans, directly to individuals to finance purchases of large household items.
a. True
b. False

27. Business finance companies focus on loans to very large businesses.
a. True
b. False

28. Consumer finance companies sometimes provide Business finance companies to individuals.
a. True
b. False

29. Although commercial paper is available only for short-term financing, finance companies can continually roll over their issues to create a permanent source of funds.
a. True
b. False

30. After interest rates increase, finance companies tend to use more long-term debt to lock in the cost of funds over an extended period of time.
a. True
b. False

31. Some finance companies offer credit card loans through a particular retailer.
a. True
b. False

32. The main competition for finance companies in the consumer loan market comes from pension funds and insurance companies.
a. True
b. False

33. The value of a finance company can be modeled as the present value of its future cash flows.
a. True
b. False

34. The most important risk for finance companies is ____ risk.
a. settlement
b. accounting
c. credit
d. exchange rate

35. Finance companies can accumulate capital by doing all of the following except
a. retaining earnings.
b. issuing stock.
c. issuing commercial paper.
d. Finance companies can build their capital base by doing all of the above.

36. Consumer finance companies primarily focus on for
a. consumer loans.
b. consumer advising.
c. consumer regulation.
d. none of the above

37. Finance companies are regulated by the states but are not subject to regulation by an agency of the federal government.
a. True
b. False

38. Historically, captive finance subsidiaries were associated with:
a. the automobile industry.
b. the oil and gas industry.
c. the textile industry.
d. department stores.

Chapter 23—Mutual Fund Operations

1. Which of the following statements is incorrect?
a. Mutual funds serve as a key financial intermediary.
b. Managers of mutual funds do not analyze economic and industry trends.
c. Because of their diversification, management expertise, and liquidity, mutual funds have grown at a rapid pace.
d. Some mutual funds offer check-writing privileges.

2. No-load mutual funds are normally promoted by ____. Load funds are promoted by ____.
a. registered representatives of a brokerage firm; registered representatives of a brokerage firm
b. registered representatives of a brokerage firm; the mutual fund of concern
c. the mutual fund of concern; registered representatives of a brokerage firm
d. the mutual fund of concern; the mutual fund of concern

3. To cover managerial expenses, mutual funds typically charge
a. management fees of less than 2 percent of total assets per year.
b. commissions of typically 8 to 10 percent of transaction market value per year.
c. management fees of typically more than 10 percent of total assets per year.
d. commissions of typically 3 to 5 percent of the transaction market value per year.

4. Mutual funds that are willing to repurchase their shares from investors at any time are referred to as
a. closed-end funds.
b. load mutual funds.
c. no-load mutual funds.
d. open-end mutual funds.

5. ____ funds do not normally repurchase their shares from investors.
a. Closed-end
b. Load mutual
c. No-load mutual
d. Open-end mutual

6. Most closed-end funds invest in
a. stock and bonds.
b. money market securities.
c. gold.
d. derivatives.

7. Exchange-traded funds are like open-end funds in the sense that
a. their shares are traded on an exchange, and their share price changes throughout the day.
b. they have a fixed number of shares.
c. they are not actively managed.
d. none of the above

8. Hedge funds differ from open-end mutual funds in the sense that
a. they require a much smaller initial investment.
b. they are open to additional investments at any time.
c. their investors cannot sell shares back to the fund at any time they desire.
d. they invest in very limited set of securities.

9. Shares of open-end mutual funds are purchased and sold on exchanges.
a. True
b. False

10. Mutual funds
a. are unregulated.
b. are required to disclose the names of their portfolio managers in the prospectus.
c. are not required to disclose any information about their past performance.
d. are exempt from all taxes.

11. Which of the following is not disclosed in the prospectus?
a. the minimum amount of investment required
b. the investment objective of the funds
c. the fees incurred by the mutual fund
d. all of the above are disclosed

12. The net asset value of a mutual fund is estimated once every week.
a. True
b. False

13. Mutual funds with ____ expense ratios tend to ____ others that have a similar investment objective.
a. lower; underperform
b. higher; outperform
c. lower; outperform
d. A and B

14. A front-end load is a withdrawal fee assessed when you withdraw money from the mutual fund.
a. True
b. False

15. Money market funds invest mostly in
a. stocks.
b. long-term bonds.
c. real estate.
d. short-term securities.

16. If investors sell their mutual fund shares after the net asset value of the fund increases, the return is called
a. share price appreciation.
b. capital gains distribution.
c. dividends.
d. split net asset value.

17. Mutual funds composed of stocks that have potential for very high growth, but may also be unproven, are called
a. income funds.
b. capital appreciation funds.
c. specialty funds.
d. dividend funds.

18. Mutual funds composed of bonds that offer periodic coupon payments are
a. income funds.
b. specialty funds.
c. dividend funds.
d. growth funds.

19. Mutual funds whose bonds have a ____ average time to maturity are ____ sensitive to interest rate fluctuations.
a. longer; less
b. shorter; less
c. shorter; more
d. A and C

20. The net asset value of international stock mutual funds ____ as the dollar strengthens against foreign currencies. (Assume no change in the prices of foreign stocks.)
a. increases
b. decreases
c. is unaffected
d. can increase or decrease depending on the dollar’s degree of strength

21. Mutual funds that include some non-U.S. stocks and U.S. stocks are called ____ funds.
a. global
b. foreign
c. combined
d. mixed

22. A mutual fund consisting only of stocks of firms that are in a specific industry is an example of a ____ fund.
a. specialty
b. growth
c. capital appreciation
d. growth and income

23. The majority of mutual fund assets are in the form of
a. common stocks.
b. preferred stocks.
c. U.S. government bonds.
d. municipal bonds.

24. If a mutual fund distributes at least ____ percent of its taxable income to shareholders, the fund is exempt from taxes on dividends, interest, and capital gains distributed to shareholders.
a. 25
b. 50
c. 75
d. 90

25. When the redemptions of money market mutual fund shares exceeds sales of shares, the fund accommodates the amount of excessive redemptions by
a. selling some of the assets contained in the portfolio.
b. issuing stock.
c. issuing bonds.
d. borrowing from banks.

26. Money market fund assets include all of the following, except
a. stocks.
b. repurchase agreements.
c. Treasury bills.
d. CDs.

27. If money market funds definitely expect interest rates to increase, they will ____ their average asset maturity.
a. not adjust
b. shorten
c. lengthen
d. shorten (if the expected change is small) or lengthen (if the expected change is large)

28. Money market funds are normally perceived to have ____ interest rate risk, and ____ default risk.
a. low; high
b. high; high
c. high; low
d. low; low

29. Equity real estate investment trusts invest
a. in mortgage and construction loans.
b. directly in properties.
c. in common stocks issued by construction companies.
d. in common stocks issued by real estate brokerage firms.

30. Because ____ real estate investment trusts essentially represent a fixed income portfolio, their market value will ____ as interest rates increase.
a. equity; increase
b. equity; decrease
c. mortgage; increase
d. mortgage; decrease

31. When interest rates decline, investors who want to earn a high return may tend to ____ in stock mutual funds, and ____ deposits in depository institutions.
a. reduce; reduce
b. reduce; increase
c. increase; reduce
d. increase; increase

32. The composition of asset allocation funds
a. is focused completely on one type of security as specified by the particular mutual fund.
b. is fixed and not altered by the mutual fund managers.
c. A and B
d. none of the above

33. A mutual fund prospectus does not contain
a. minimum amount of investment required.
b. return on the fund since its inception.
c. investment objective of the mutual fund.
d. exposure of the mutual fund to various types of risk.
e. fees incurred by the mutual fund.

34. The ____ of a mutual fund indicates the value per share.
a. net asset value
b. gross asset value
c. net stock value
d. net bond value
e. none of the above

35. Mutual funds whose funds are promoted strictly by the mutual fund of concern are called
a. closed-end funds.
b. load mutual funds.
c. no-load mutual funds.
d. open-end mutual funds.

36. Mutual funds that are composed of bonds that offer periodic coupon payments are called ____ mutual funds.
a. tax-free
b. income
c. high-yield
d. growth
e. none of the above

37. ____ are most likely to invest in mortgages.
a. Stock mutual funds
b. Bond mutual funds
c. Load funds
d. Closed-end funds

38. Hedge funds that exceed a specified size must register with the
a. Securities and Exchange Commission (SEC).
b. Federal Reserve.
c. Office of Thrift Supervision.
d. Federal Mutual Fund Board.

39. According to SEC regulations, the majority of the members on a mutual fund’s board of directors must be
a. employed by the fund.
b. outsiders (not employed by the fund).
c. certified public accountants.
d. certified financial analysts.

40. An expense ratio represents ____ divided by the fund’s ____.
a. annual fees charged to investors; 12b-1 fees
b. annual fees charged to investors; net asset value
c. initial sales charge (load); 12b-1 fees
d. initial sales charge (load); net asset value

41. The most common investment by closed-end funds is in
a. derivatives.
b. bonds.
c. money market securities.
d. international equity securities.

42. ____ are beneficial for investors who want to invest in tax-exempt securities.
a. Municipal bond funds
b. Growth and income funds
c. International and global funds
d. Money market funds

43. When the demand for a particular closed-end fund is ____, the fund is likely priced at a ____.
a. high; discount
b. low; discount
c. high; premium
d. B and C are correct

44. Which of the following statements is incorrect?
a. Commercial paper is commonly purchased by money market funds.
b. From an investor’s perspective, money market funds usually have a low level of credit risk.
c. Money market funds tend to have low interest rate risk compared to bond funds.
d. If mutual fund managers expect interest rates to decrease in the future, they should use funds generated from maturing securities today to purchase new securities with shorter maturities.

45. The number of exchange-traded funds has declined over the last several years because the cost of managing them was excessive.
a. True
b. False

46. Exchange-traded funds can be purchased on margin.
a. True
b. False

47. Investors can sell exchange-traded funds short.
a. True
b. False

48. Mutual fund managers seek securities that have much liquidity so that they could easily sell them in the secondary market at any time.
a. True
b. False

49. Closed-end funds are closed to new investment but allow redemptions by shareholders.
a. True
b. False

50. Closed-end fund managers must hold more cash than mutual fund managers.
a. True
b. False

51. Index mutual funds are not traded throughout the day, while exchange-traded funds are.
a. True
b. False

52. Venture capital funds typically invest in stocks of publicly-traded companies.
a. True
b. False

53. Many businesses that go public are partially backed by venture capital before the IPO.
a. True
b. False

54. Private equity funds use most of their money to invest in stocks of publicly-traded companies.
a. True
b. False

55. Vulture funds are a type of private equity fund that purchase distressed assets of a firm that is in or near bankruptcy.
a. True
b. False

56. Hedge funds commonly engage in short selling.
a. True
b. False

57. ____ are not exchange-traded funds.
a. Spiders
b. Growth mutual funds
c. Diamonds
d. Sector Spiders

58. Which of the following statements is incorrect?
a. ETFs are like index mutual funds because the share price adjusts over time in response to the change in the index level.
b. Both ETFs and index mutual funds pay dividends in the form of additional shares to investors.
c. The portfolio management of both ETFs and index mutual funds is very complex.
d. ETFs can be traded throughout the day.

59. Funds that are designed to mimic particular stock indexes and are traded on a stock exchange are known as
a. index mutual funds.
b. exchange-traded funds.
c. money market funds.
d. none of the above

60. Exchange traded funds can be
a. traded throughout the day.
b. purchased on margin.
c. sold short.
d. all of the above

61. ____ trade at one-tenth of the S&P 500 value.
a. Spiders
b. Cubes
c. Diamonds
d. World Equity Benchmark Shares

62. Mutual funds must register with the U.S. Treasury and provide to interested investors a prospectus that discloses details about the components of the funds and risks involved.
a. True
b. False

63. The net asset value (NAV) is estimated each day by first determining the market value of all securities comprising the mutual fund.
a. True
b. False

64. Portfolio managers are hired by the mutual fund to invest in a portfolio of securities that satisfies the desires of investors.
a. True
b. False

65. The expenses incurred by a mutual fund are billed separately to investors, and are not included in the fund’s net asset value (NAV).
a. True
b. False

66. A front-end load is a withdrawal fee assessed when you withdraw money from the mutual fund.
a. True
b. False

67. Large mutual funds can exert some control over the management of firms because they commonly represent the largest shareholders.
a. True
b. False

68. Investors who feel capable of making their own investment decisions often prefer to invest in load funds.
a. True
b. False

69. The term “mutual funds” is normally used to represent closed-end funds, and does not include open-end funds.
a. True
b. False

70. Exchange-traded funds differ from open-end funds in that their share price is adjusted only at the end of every day.
a. True
b. False

71. Capital appreciation funds are suited for investors who are more willing to risk a possible loss in value.
a. True
b. False

72. The returns on international stock mutual funds are affected only by foreign companies’ stock prices, and are independent of currency movements.
a. True
b. False

73. Index funds are becoming increasingly unpopular because most mutual fund managers consistently outperform indexes.
a. True
b. False

74. A mutual fund’s performance is usually unrelated to market conditions.
a. True
b. False

75. The SEC requires that a majority of the directors of a mutual fund board be independent (not employed by the fund).
a. True
b. False

76. Diversification among types of mutual funds usually does little to reduce the volatility of returns on the overall investment.
a. True
b. False

77. Closed-end funds may sometimes engage in a stock repurchase, in which they purchase shares on the exchange where the shares are listed.
a. True
b. False

78. Because money market funds contain instruments with short-term maturities, their market values are not very sensitive to movements in market interest rates.
a. True
b. False

79. Equity REITs are sometimes purchased to hedge against inflation, as rents and property values tend to rise with inflation.
a. True
b. False

80. Equity REITs essentially represent fixed-income portfolios. Thus, their market values will be influenced by interest rate movements.
a. True
b. False

81. Hedge funds are more heavily regulated than mutual funds.
a. True
b. False

82. Which of the following is not true regarding mutual funds?
a. They are a key financial intermediary.
b. They provide an important service to individual investors seeking to invest funds.
c. Most mutual funds use experienced portfolio managers, so investors do not have to manage the portfolio themselves.
d. They provide a way for individual investors to diversify, but most individual investors are unable to afford the purchase of mutual fund shares.

83. Which of the following statements is incorrect?
a. Exchange-traded funds (ETFs) are designed to mimic particular stock indexes and are traded on a stock exchange.
b. Unlike a closed-end fund, an ETF has a fixed number of shares.
c. ETFs differ from most open-end and closed-end funds in that they are not actively managed.
d. One disadvantage of ETFs is that each purchase of additional shares must be done through the exchange where they are traded.

84. A mutual fund prospectus does not contain the
a. minimum amount of investment required.
b. investment objective of the mutual fund.
c. exposure of the mutual fund to various types of risk.
d. return on the fund since its inception.
e. fees incurred by the mutual fund.

85. The ____ of a mutual fund represents the price at which shares can be purchased from a mutual fund.
a. gross asset value
b. net asset value
c. net stock value
d. net bond value

86. Which of the following is incorrect about money market funds (MMFs)?
a. The credit risk of MMFs is normally perceived to be lower than that of corporate bonds.
b. MMFs have higher interest rate risk than bond funds.
c. MMFs normally generate positive returns over time
d. All of the above are correct.

87. ____ are most likely to invest in mortgages.
a. Stock mutual funds
b. Real estate investment trusts (REITs)
c. Load funds
d. Closed-end funds
e. None of the above

88. Mutual funds are not required to disclose which of the following in the prospectus?
a. the names of the portfolio managers
b. the length of time that the portfolio managers have been employed by the fund in that position
c. the performance record in recent years
d. the number of investors currently investing in the mutual fund
e. Mutual funds are required to disclose all of the above in a prospectus

89. Which of the following is not a way in which mutual funds generate returns for their shareholders?
a. They can pass on any earned income as dividend payments to shareholders.
b. They distribute the capital gains resulting from the sale of securities within the fund.
c. The mutual fund price appreciates.
d. All of the above are ways in which a mutual fund generates returns to its shareholders.

90. A(n) ____ fund contains a sales charge.
a. load
b. no-load
c. closed-end
d. open-end
e. none of the above

91. ____ funds are open to investment from investors at any time.
a. Load
b. No-load
c. Open-end
d. Closed-end
e. None of the above

92. Which of the following statements is incorrect?
a. Investors can purchase shares directly from an open-end fund at any time.
b. The number of shares of an open-end fund is always changing.
c. Open-end funds typically maintain some cash on hand in case investments exceed redemptions.
d. There are many different categories of open-end mutual funds.

93. ____ funds focus on a group of companies sharing a particular characteristic.
a. Specialty
b. Growth and income
c. Closed-end
d. Capital appreciation
e. None of the above

94. Bond portfolios with some bonds rated below Baa by Moody’s or BBB by Standard and Poor’s, available for investors desiring high return and willing to incur high risk, are called ____ funds.
a. growth
b. capital appreciation
c. junk bond
d. bond
e. none of the above

95. Which of the following statements is incorrect?
a. A mutual fund is usually run by an investment company.
b. Although many mutual funds have grown substantially over time, their expense ratios have generally increased over time.
c. For each mutual fund, all expenses charged and reflected in the expense ratio are always valid.
d. The SEC requires that a majority of the directors of a mutual fund board be independent.

96. Money market funds commonly invest in
a. stocks.
b. real estate.
c. commercial paper.
d. U.S. Treasury bonds.
e. none of the above

97. Which of the following is not true with respect to venture capital funds?
a. They typically invest in young, growing firms that need equity funding but are not ready or willing to go public.
b. More than half of all VC investing is in businesses that are being created.
c. Venture capital funds tend to focus on technology firms, which have the potential for high returns but also exhibit a high level of risk.
d. Because VC funds invest in fairly safe ventures, a low percentage of their ventures fail.
e. All of the above are correct with respect to venture capital funds.

98. ____ funds sell shares to wealthy individuals and financial institutions and use the proceeds to invest in securities.
a. Growth
b. Open-end
c. Capital appreciation
d. Hedge
e. Specialty

99. Exchange-traded funds distribute their capital gains to their shareholders, who must pay tax on the gains.
a. True
b. False

100. Shares of exchange-traded funds can be sold _________, and shares of open-end mutual funds can be sold _________.
a. at any time during trading hours; at any time via private trading networks
b. only at the end of the day; at any time during trading hours
c. at any time via private trading networks; at any time during trading hours
d. at any time during trading hours; only at the end of the day

101. The average annual fee on actively managed exchange-traded funds is ________, which is _________.
a. zero.
b. lower than the typical annual fee on open-end mutual funds.
c. higher than the typical annual fee on open-end mutual funds.
d. the same as the typical annual fee on open-end mutual funds.

102. An investor who believes that technology stocks will perform well but does not want to select individual technology stocks might invest in:
a. Spiders.
b. WEBs.
c. Cubes.
d. Diamonds.

103. If interest rates are expected to ________, mortgage real investment trusts (REITs) ___________.
a. decline; become less attractive
b. rise; become less attractive
c. rise; are not affected
d. decline; are not affected

104. Investors who invest in a hedge fund of funds essentially pay two layers of management fees.
a. True
b. False

105. Hedge funds commonly use financial leverage, which can:
a. magnify their returns and magnify their losses.
b. magnify their returns and limit their losses.
c. reduce their risk and limit their losses.
d. magnify their returns and not affect their risk.

FIN 320 Week 11 Final Exam – Strayer University New

FIN/320 Week 11 Final Exam – Strayer

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Chapters 9, 10, 12 Through 15 And 17 Through 22

9
Student: ___________________________________________________________________________
1. Testing many different trading rules until you find one that would have worked in the past is called _______.

A. data mining

B. perceived patterning

C. pattern searching

D. behavioral analysis

2. Models of financial markets that emphasize psychological factors affecting investor behavior are called _______.

A. data mining

B. fundamental analysis

C. charting

D. behavioral finance

3. The trin statistic is a ______ indicator.

A. sentiment

B. flow of funds

C. market structure

D. fundamental

4. The put/call ratio is a ______ indicator.

A. sentiment

B. flow of funds

C. market structure

D. fundamental

5. Relative strength is ______ indicator.

A. a fundamental

B. an economic

C. a technical

D. an international

6. Short interest is a ______ indicator.

A. sentiment

B. flow of funds

C. market structure

D. fundamental

7. Moving averages are ______ indicators.

A. sentiment

B. flow of funds

C. trend

D. fundamental

8. Market breadth is a ______ indicator.

A. sentiment

B. flow of funds

C. technical

D. fundamental

9. The cumulative tally of the number of advancing stocks minus declining stocks is called the ______________.

A. market breadth

B. market volume

C. trin ratio

D. relative strength ratio

10. A high amount of short interest is typically considered as a __________ signal, and contrarians may consider it as a _________ signal.

A. bearish; bullish

B. bullish; bearish

C. bearish; false

D. bullish; false

11. Technical analysis focuses on _____________________.

A. finding opportunities for risk-free investing

B. finding repeating trends and patterns in prices

C. changing prospects for earnings growth of particular firms or industries

D. forecasting technical regulatory changes

12. Behavioralists point out that even if market prices are ____________, there may be _______________.

A. distorted; limited arbitrage opportunities

B. distorted; fundamental efficiency

C. allocationally efficient; limitless arbitrage opportunities

D. distorted; allocational efficiency

13. According to market technicians, it is time to sell stock in a head-and-shoulders formation when ___________.

A. the price index pierces the left shoulder

B. the price index pierces the right shoulder

C. the price index pierces the head

D. none of these options takes place

14. When a stock price breaks through the moving average from below, this is considered to be ______.

A. the starting point for a new moving average

B. a bearish signal

C. a bullish signal

D. none of these options

15. When the stock price falls below a moving average, a possible conclusion is that _____.

A. market momentum has become positive

B. market momentum has become negative

C. there is no regular pattern for this stock’s market momentum

D. professional analysts’ opinions are invalid until the stock price rises again

16. Following a period of falling prices, the moving average will _____.

A. be below the current price

B. be above the current price

C. be equal to the current price

D. become more volatile than it had been before prices fell

17. A moving average of stock prices _________________.

A. always lies above the most recent price

B. always lies below the most recent price

C. is less volatile than the actual prices

D. is more volatile than the actual prices

18. When the housing bubble burst in 2007, it set off the worst financial crisis _____.

A. in 25 years.

B. in 40 years.

C. in 50 years.

D. in 75 years.

19. A support level is ___________________.

A. a level beyond which the market is unlikely to rise

B. a level below which the market is unlikely to fall

C. an equilibrium price level justified by characteristics such as earnings and cash flows

D. the peak of a market wave or cycle

20. According to Kondratieff, the macro economy moves in a series of waves that recur at intervals of approximately _________________.

A. 18 months

B. 4 years

C. 8 years

D. 50 years

21. According to Elliot’s wave theory, stock market behavior can be explained as _________________.

A. a series of medium-term wave cycles with no short-term trend

B. a series of long-term wave cycles with no short-term trend

C. a series of superimposed long-term and short-term wave cycles

D. sine and cosine functions

22. Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______.

A. rational; irrational

B. irrational; rational

C. greedy; philanthropic

D. philanthropic; greedy

23. The only way for behavioral patterns to persist in prices is if ______________.

A. markets are not weak-form efficient

B. there are limits to arbitrage activity

C. there are no significant trading costs

D. market psychology is inconsistent over time

24. In the context of a point and figure chart, a horizontal band of Xs and Os is a _____________.

A. buy signal

B. sell signal

C. congestion area

D. trend reversal

25. Even though indexing is growing in popularity, only about _____ of equity in the mutual fund industry is held in indexed funds. This may be a sign that investors and managers __________.

A. 5%; are excessively conservative

B. 15%; overestimate their ability

C. 20%; suffer from framing biases

D. 25%; engage in mental accounting

26. If investors are too slow to update their beliefs about a stock’s future performance when new evidence arises, they are exhibiting _______.

A. representativeness bias

B. framing error

C. conservatism

D. memory bias

27. If investors overweight recent performance in forecasting the future, they are exhibiting _______.

A. representativeness bias

B. framing error

C. memory bias

D. overconfidence

28. Trading activity and average returns in brokerage accounts tend to be _________.

A. uncorrelated

B. negatively correlated

C. positively correlated

D. positively correlated for women and negatively correlated for men

29. Your two best friends each tell you about a person they know who successfully started a small business. That’s it, you decide; if they can do it, so can you. This is an example of _____________.

A. mental accounting

B. framing bias

C. conservatism

D. representativeness bias

30. Which of the following is not a sentiment indicator?

A. Confidence index

B. Short interest

C. Odd-lot trading

D. Put/call ratio

31. Which of the following is considered a sentiment indicator?

A. A 200-day moving average

B. Short interest

C. Credit balances in brokerage accounts

D. Relative strength

32. An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in ___________.

A. overconfidence

B. representativeness

C. forecast errors

D. mental accounting

33. Which of the following analysts focus more on past price movements of a firm’s stock than on the underlying determinants of its future profitability?

A. Credit analysts

B. Fundamental analysts

C. Systems analysts

D. Technical analysts

34. A trin ratio of greater than 1 is considered a __________.

A. bearish signal

B. bullish signal

C. bearish signal by some technical analysts and a bullish signal by other technical analysts

D. trend reversal signal

35. Contrarian investors consider a high put/call ratio a __________.

A. bearish signal

B. bullish signal

C. trend confirmation signal

D. signal to enter the options market

36. The ratio of the average yield on 10 top-rated corporate bonds to the average yield on 10 intermediate-grade bonds is called the __________.

A. bond price index

B. confidence index

C. relative strength index

D. trin ratio

37. An investor needs cash to pay some hospital bills. He is willing to use his dividend income to pay the bills, but he will not sell any stock to do so. He is engaging in ___________.

A. overconfidence

B. representativeness

C. forecast errors

D. mental accounting

38. Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends are invested in. Shelly invests in a portfolio that is totally different from the portfolios of all her friends. Both Bill’s and Shelly’s stocks fall 15%. According to regret theory, _________________________________________.

A. Bill will have more regret over the loss than Shelly

B. Shelly will have more regret over the loss than Bill

C. Bill and Shelly will have equal regret over their losses

D. Bill’s and Shelly’s risk aversion will increase in the future

39. The most common measure of __________ is the spread between the number of stocks that advance in price and the number of stocks that decline in price.

A. market breadth

B. market volume

C. odd-lot trading

D. short interest

40. Jill is offered a choice between receiving $50 with certainty or possibly receiving the proceeds from a gamble. In the gamble a fair coin is tossed, and if it comes up heads, Jill will receive $100; if the coin comes up tails, she will receive nothing. Jill chooses the $50 instead of the gamble. Jill’s behavior indicates __________________.

A. regret avoidance

B. overconfidence

C. that she has a diminishing marginal utility of wealth

D. prospect theory loss aversion

41. When the market breaks through the moving average line from below, a technical analyst would probably suggest that it is a good time to ___________.

A. buy the stock

B. hold the stock

C. sell the stock

D. short the stock

42. If you believed in the reversal effect, you should __________.

A. buy bonds this period if you held stocks last period

B. buy stocks this period that performed poorly last period

C. buy stocks this period that performed well last period

D. do nothing if you held the stock last period

43. According to technical analysts, a shift in market fundamentals will __________.

A. be reflected in stock prices immediately

B. lead to a gradual price change that can be recognized as a trend

C. lead to high volatility in stock market prices

D. leave prices unchanged

44. According to market technicians, a trin statistic of less than 1 is considered a __________.

A. bearish signal

B. bullish signal

C. volume decline

D. signal reversal

45. It is difficult to test the Kondratieff wave theory because _________.

A. it applies to only Russian stocks

B. its main proponent found contrary research results

C. only two independent data points are generated each century

D. the stock market is too volatile to generate smooth waves

46. A _________ is a value above which it is difficult for the market to rise.

A. book value

B. resistance level

C. support level

D. confidence level

47. _____________ is a tool that can help identify the direction of a stock’s price.

A. Prospect theory

B. Framing

C. A moving average

D. Conservatism

48. If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting __________.

A. loss aversion

B. regret avoidance

C. mental accounting

D. framing bias

49. In technical analysis, __________ is a value below which the market is relatively unlikely to fall.

A. book value

B. resistance level

C. support level

D. the Dow line

50. A possible limit on arbitrage activity that may allow behavioral biases to persist is _______.

A. technical trends in prices

B. momentum effects

C. fundamental risk

D. trend reversals

51. If you are not a contrarian, you consider a high put/call ratio to be a __________.

A. bearish signal

B. bullish signal

C. trend confirmation signal

D. signal to enter the options market

52. On day 1, the stock price of Ford was $12 and the automotive stock index was 127. On day 2, the stock price of Ford was $15 and the automotive stock index was 139. Consider the ratio of Ford to the automotive stock index at day 1 and day 2. Ford is __________ the automotive industry, and technical analysts who follow relative strength would advise __________ the stock.

A. outperforming; buying

B. outperforming; selling

C. underperforming; buying

D. underperforming; selling

53. At the end of July, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 7.65% and 8.42%, respectively. At the end of August, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 6% and 6.71%, respectively. The confidence index _________ during August, and bond technical analysts are likely to be ________.

A. increased; bullish

B. increased; bearish

C. decreased; bullish

D. decreased; bearish

54. On a particular day, there were 890 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The common measure of market breadth is __________.

A. -10,449,000

B. -167

C. 167

D. 10,449,000

55. On a particular day, there were 920 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The trin ratio is __________, and technical analysts are likely to be __________.

A. .90; bullish

B. .90; bearish

C. 1.11; bullish

D. 1.11; bearish

56. An accumulation of cash by mutual funds may be viewed by technical traders as a __________ indicator.

A. bullish

B. neutral

C. bearish

D. trend reversal

57. A point and figure chart:

I. Gives a sell signal when the stock price penetrates previous lows
II. Tracks significant upward or downward movements
III. Has no time dimension
IV. Indicates congestion areas

A. I and II only

B. II and III only

C. I, III, and IV only

D. I, II, III, and IV

58. When technical analysts say a stock has good “relative strength,” they mean that in the recent past __________.

A. it has performed well compared to its closest competitors

B. it has exceeded its own historical high

C. trading volume in the stock has exceeded the normal trading volume

D. it has outperformed the market index

59. Technical traders view mutual fund investors as _________ market timers.

A. excellent

B. frequent

C. neutral

D. poor

60. An important assumption underlying the use of technical analysis techniques is that ___________________.

A. security prices adjust rapidly to new information

B. security prices adjust gradually to new information

C. security dealers will provide enough liquidity to keep price changes relatively small

D. all investors have immediate and costless access to information

61. If the put/call ratio increases, market contrarians may interpret this as what kind of signal?

A. Buy signal

B. Sell signal

C. Hold signal

D. This is not interpreted as a signal

62. The tendency of investors to hold on to losing investments is called the ________.

A. overweighting effect

B. head-in-the-sand effect

C. disposition effect

D. prospector effect

63. Which one of the following best describes fundamental risk?

A. A stock is overpriced, but your fund does not allow you to engage in short sales.

B. Your models indicate a stock is mispriced, but you are not sure if this is a real profit opportunity or a model input error.

C. You buy a stock that you believe is underpriced, and the underpricing persists for a long time, hurting your short-term results.

D. A stock is trading in two different markets at two different prices.

64.

The trin on day 2 is ___.

A. .72

B. 1.04

C. .92

D. .55

65.

The confidence index on day 1 is _____.

A. .82

B. .89

C. .92

D. 1.09

66.

The breadth on day 3 is _______.

A. -70

B. 10

C. 90

D. 170

67.

The cumulative breadth for the first 2 days is ___.

A. -240

B. -50

C. 110

D. 250

68.

Cumulative breadth for the 4 days is ___, which is ___.

A. -140; bullish

B. -140; bearish

C. -300; bullish

D. -300; bearish

69.

From day 1 to day 4, the trin has ___ and is ___.

A. increased; bullish

B. increased; bearish

C. decreased; bullish

D. decreased; bearish

70.

From day 1 to day 4, the confidence index has _____. This is _____.

A. increased; bullish

B. decreased; bullish

C. increased; bearish

D. decreased; bearish

71. Problems with behavioral finance include:

I. The behavioralists tell us nothing about how to exploit any irrationality.
II. The implications of behavioral patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes underreaction.
III. As with technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait.

A. I only

B. II only

C. I and III only

D. I, II, and III

72. A major problem with technical trading strategies is that ________.

A. it is very difficult to identify a true trend before the fact

B. it is very difficult to identify the correct trend after the fact

C. it is so easy to identify trends that all investors quickly do so

D. Kondratieff showed that you can’t identify trends without 48 to 60 years of data

73. The Elliott wave theory gives a buy signal when you can identify a primary bull trend by identifying _________.

A. when the long-term direction of the market is positive

B. when the long-term direction of the market is negative

C. when the long-term direction of the market is stable

D. good stocks without regard to the long-term direction of the market

74. In 1997 CSX successfully purchased a significant share of Conrail. Immediately after the first offer was announced and the acquisition eventually consummated, the price of CSX fell below preacquisition levels and took many years to recover. This may be an example of ________________.

A. loss aversion

B. mental accounting

C. overreaction

D. managerial overconfidence

75. An investor has her money segregated into checking, savings, and investments. The allocation among the categories is subjective, yet the investor spends freely from the checking account and not the others. This behavior can be explained as _______________.

A. loss aversion

B. mental accounting

C. overreaction

D. winner’s curse

76.

Identify the resistance-level stock price.

A. $40

B. $42

C. $44

D. $46

77.

Identify the support level stock price.

A. $40

B. $42

C. $44

D. $46

78. Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern?

A. Overconfidence

B. Loss aversion

C. Mental accounting

D. Calendar bias

79. During a period when prices have been rising, the _________ will be _______ the current price.

A. relative strength index; declining with

B. relative strength index; declining faster than

C. moving average; above

D. moving average; below

80. An investor purchases shares of an index fund. The investor could take on the same level of risk by taking out a loan and purchasing a higher-risk specialty fund. The Sharpe ratio on this complete portfolio is higher than her existing investment. What behavioral concept prevents the investor from taking out the loan and investing in the index fund?

A. Framing bias

B. Excessive volatility

C. Loss aversion

D. Mental accounting

81. The price of a stock fluctuates between $43 and $60. If the time frame referenced encompasses the primary trend, the $43 price may be considered the ___________.

A. intermediate trend level

B. minor trend level

C. resistance level

D. support level

82.

The moving average generates buy signal(s) _____.

A. on days 3, 11, and 15

B. on days 2 and 16

C. on days 5, 9, and 13

D. on no days

83.

The moving average generates sell signals _____.

A. on days 3, 11, and 15

B. on days 7, 15, and 18

C. on days 5, 9, and 13

D. on day 16

84. The price of a stock fluctuates over a period of 10 days. The movement of the stock price below the 10-day minimum price of $25 triggers a rash of selling. The $25 price might now be considered the _______________.

A. congestion area

B. penetration point

C. resistance level

D. support level

85. Trend analysts who follow bonds are most likely to monitor the ____________.

A. confidence index

B. odd-lot trading

C. short interest

D. trin statistic

86. You find that the confidence index is down, the market breadth is up, and the trin ratio is down. In total, how many bullish signs do you have?

A. 0

B. 1

C. 2

D. 3

87. You find that the trin ratio is up, the market breadth is down, and the market has closed below its 50-day moving average. In total, how many bearish signs do you have?

A. 0

B. 1

C. 2

D. 3

10
Student: ___________________________________________________________________________
1. The invoice price of a bond is the ______.

A. stated or flat price in a quote sheet plus accrued interest

B. stated or flat price in a quote sheet minus accrued interest

C. bid price

D. average of the bid and ask price

2. Sinking funds are commonly viewed as protecting the _______ of the bond.

A. issuer

B. underwriter

C. holder

D. dealer

3. A collateral trust bond is _______.

A. secured by other securities held by the firm

B. secured by equipment owned by the firm

C. secured by property owned by the firm

D. unsecured

4. A mortgage bond is _______.

A. secured by other securities held by the firm

B. secured by equipment owned by the firm

C. secured by property owned by the firm

D. unsecured

5. A debenture is _________.

A. secured by other securities held by the firm

B. secured by equipment owned by the firm

C. secured by property owned by the firm

D. unsecured

6. If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.)

A. capital gain; capital loss

B. capital gain; capital gain

C. capital loss; capital gain

D. capital loss; capital loss

7. Floating-rate bonds have a __________ that is adjusted with current market interest rates.

A. maturity date

B. coupon payment date

C. coupon rate

D. dividend yield

8. Inflation-indexed Treasury securities are commonly called ____.

A. PIKs

B. CARs

C. TIPS

D. STRIPS

9. In regard to bonds, convexity relates to the _______.

A. shape of the bond price curve with respect to interest rates

B. shape of the yield curve with respect to maturity

C. slope of the yield curve with respect to liquidity premiums

D. size of the bid-ask spread

10. A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct?

A. Both bonds are examples of Eurobonds.

B. The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond.

C. The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond.

D. Neither bond is a Eurobond.

11. The primary difference between Treasury notes and bonds is ________.

A. maturity at issue

B. default risk

C. coupon rate

D. tax status

12. TIPS offer investors inflation protection by ______________ by the inflation rate each year.

A. increasing only the coupon rate

B. increasing only the par value

C. increasing both the par value and the coupon payment

D. increasing the promised yield to maturity

13. You would typically find all but which one of the following in a bond contract?

A. A dividend restriction clause

B. A sinking fund clause

C. A requirement to subordinate any new debt issued

D. A price-earnings ratio

14. To earn a high rating from the bond rating agencies, a company would want to have:

I. A low times-interest-earned ratio
II. A low debt-to-equity ratio
III. A high quick ratio

A. I only

B. II and III only

C. I and III only

D. I, II, and III

15. According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to _______.

A. declining liquidity premiums

B. an expectation of an upcoming recession

C. a decline in future inflation expectations

D. an increase in expected interest rate volatility

16. __________ are examples of synthetically created zero-coupon bonds.

A. COLTS

B. OPOSSMS

C. STRIPS

D. ARMs

17. A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date.

A. callable

B. coupon

C. puttable

D. Treasury

18. TIPS are an example of _______________.

A. Eurobonds

B. convertible bonds

C. indexed bonds

D. catastrophe bonds

19. Bonds issued in the currency of the issuer’s country but sold in other national markets are called _____________.

A. Eurobonds

B. Yankee bonds

C. Samurai bonds

D. foreign bonds

20. You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive in year 3 is _________.

A. $30

B. $33

C. $32.78

D. $30.90

21. The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody’s. The C rating indicates that the bonds are _________.

A. high grade

B. intermediate grade

C. investment grade

D. junk bonds

22. Bonds rated _____ or better by Standard & Poor’s are considered investment grade.

A. AA

B. BBB

C. BB

D. CCC

23. Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________.

A. a higher yield on short-term bonds than on long-term bonds

B. a higher yield on long-term bonds than on short-term bonds

C. the same yield on both short-term bonds and long-term bonds

D. none of these options (The liquidity preference theory cannot be used to make any of the other statements.)

24. Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________.

A. both bonds will increase in value but bond A will increase more than bond B

B. both bonds will increase in value but bond B will increase more than bond A

C. both bonds will decrease in value but bond A will decrease more than bond B

D. both bonds will decrease in value but bond B will decrease more than bond A

25. You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following?

A. Mortgage bonds

B. Senior debentures

C. Preferred stock

D. Equipment obligation bonds

26. Bonds with coupon rates that fall when the general level of interest rates rise are called _____________.

A. asset-backed bonds

B. convertible bonds

C. inverse floaters

D. index bonds

27. _______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters.

A. Asset-backed bonds

B. TIPS

C. Catastrophe

D. Pay-in-kind

28. The issuer of ________ bond may choose to pay interest either in cash or in additional bonds.

A. an asset-backed

B. a TIPS

C. a catastrophe

D. a pay-in-kind

29. Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond’s price to interest rate changes.

A. longer; higher

B. longer; lower

C. shorter; higher

D. shorter; lower

30. Which one of the following statements is correct?

A. Invoice price = Flat price – Accrued interest

B. Invoice price = Flat price + Accrued interest

C. Flat price = Invoice price + Accrued interest

D. Invoice price = Settlement price – Accrued interest

31. A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.

A. callable

B. coupon

C. puttable

D. Treasury

32. Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years?

A. Callable feature

B. Convertible feature

C. Subordination clause

D. Sinking fund

33. Serial bonds are associated with _________.

A. staggered maturity dates

B. collateral

C. coupon payment dates

D. conversion features

34. In an era of particularly low interest rates, which of the following bonds is most likely to be called?

A. Zero-coupon bonds

B. Coupon bonds selling at a discount

C. Coupon bonds selling at a premium

D. Floating-rate bonds

35. Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future.

A. increase

B. decrease

C. not change

D. change in an unpredictable manner

36. A convertible bond has a par value of $1,000, but its current market price is $975. The current price of the issuing company’s stock is $26, and the conversion ratio is 34 shares. The bond’s market conversion value is _________.

A. $1,000

B. $884

C. $933

D. $980

37. A convertible bond has a par value of $1,000, but its current market price is $950. The current price of the issuing company’s stock is $19, and the conversion ratio is 40 shares. The bond’s conversion premium is _________.

A. $50

B. $190

C. $200

D. $240

38. A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________.

A. 7.2%

B. 8.8%

C. 9.1%

D. 9.6%

39. A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is _________.

A. 6%

B. 7.23%

C. 8.12%

D. 9.45%

40. A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is _________.

A. 6%

B. 6.49%

C. 6.73%

D. 7%

41. A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is _________.

A. 6%

B. 6.58%

C. 7.2%

D. 8%

42. A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________.

A. $1,000

B. $1,062.81

C. $1,081.82

D. $1,100.03

43. A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be _________.

A. $856.04

B. $891.86

C. $926.47

D. $1,000

44. A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be _________.

A. $1,140

B. $1,170

C. $1,180

D. $1,200

45. A Treasury bond due in 1 year has a yield of 6.3%, while a Treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corp. has a yield of 9.6%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield of 6.8%. The default risk premiums on the 1-year and 5-year bonds issued by High Country Marketing Corp. are, respectively, __________ and _________.

A. .4%; .3%

B. .4%; .5%

C. .5%; .5%

D. .5%; .8%

46. A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today.

A. $458.11

B. $641.11

C. $789.11

D. $1,100.11

47. Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity.

A. lower than

B. slightly higher than

C. identical to

D. twice as high as

48. You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond’s yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________.

A. 5%

B. 5.5%

C. 7.6%

D. 8.9%

49. Analysis of bond returns over a multiyear horizon based on forecasts of the bond’s yield to maturity and reinvestment rate of coupons is called ______.

A. multiyear analysis

B. horizon analysis

C. maturity analysis

D. reinvestment analysis

50. $1,000 par value zero-coupon bonds (ignore liquidity premiums)

The expected 1-year interest rate 1 year from now should be about _________.

A. 6%

B. 7.5 %

C. 9.02%

D. 10.08%

51. $1,000 par value zero-coupon bonds (ignore liquidity premiums)

One year from now bond C should sell for ________ (to the nearest dollar).

A. $857

B. $842

C. $835

D. $821

52. $1,000 par value zero-coupon bonds (ignore liquidity premiums)

The expected 2-year interest rate 3 years from now should be _________.

A. 9.55%

B. 11.74%

C. 14.89%

D. 13.73%

53. The __________ of a bond is computed as the ratio of the annual coupon payment to the market price.

A. nominal yield

B. current yield

C. yield to maturity

D. yield to call

54. A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the capital gain yield of this bond over the next year?

A. .72%

B. 1.85%

C. 2.58%

D. 3.42%

55. Consider the following $1,000 par value zero-coupon bonds:

The expected 1-year interest rate 2 years from now should be _________.

A. 7%

B. 8%

C. 9%

D. 10%

56. Which of the following bonds would most likely sell at the lowest yield?

A. A callable debenture

B. A puttable mortgage bond

C. A callable mortgage bond

D. A puttable debenture

57. A 1% decline in yield will have the least effect on the price of a bond with a _________.

A. 10-year maturity, selling at 80

B. 10-year maturity, selling at 100

C. 20-year maturity, selling at 80

D. 20-year maturity, selling at 100

58. Consider the following $1,000 par value zero-coupon bonds:

The expected 1-year interest rate 3 years from now should be _________.

A. 7%

B. 8%

C. 9%

D. 10%

59. Consider the following $1,000 par value zero-coupon bonds:

The expected 1-year interest rate 4 years from now should be _________.

A. 16%

B. 18%

C. 20%

D. 22%

60. You can be sure that a bond will sell at a premium to par when _________.

A. its coupon rate is greater than its yield to maturity

B. its coupon rate is less than its yield to maturity

C. its coupon rate is equal to its yield to maturity

D. its coupon rate is less than its conversion value

61. A corporate bond has a 10-year maturity and pays interest semiannually. The quoted coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond’s yield to call?

A. 6.72%

B. 9.17%

C. 4.49%

D. 8.98%

62. Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________.

A. higher

B. lower

C. the same

D. indeterminate

63. Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate __________________.

A. expected increases in inflation over time

B. expected decreases in inflation over time

C. the presence of a liquidity premium

D. that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market

64. The yield to maturity on a bond is:

I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium
II. The discount rate that will set the present value of the payments equal to the bond price
III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity

A. I only

B. II only

C. I and II only

D. I, II, and III

65. Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________.

A. marketability

B. risk

C. taxation

D. call protection

66. Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________.

A. $97.22

B. $104.49

C. $364.08

D. $732.14

67. A discount bond that pays interest semiannually will:

I. Have a lower price than an equivalent annual payment bond
II. Have a higher EAR than an equivalent annual payment bond
III. Sell for less than its conversion value

A. I and II only

B. I and III only

C. II and III only

D. I, II, and III

68. A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is _________.

A. $581.97

B. $1,163.93

C. $2,327.87

D. $3,000

69. The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is _____.

A. 4.8%

B. 6.1%

C. 7.7%

D. 10.4%

70. Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments.

What is the nominal rate of return on the TIPS bond in the first year?

A. 5%

B. 5.15%

C. 8.15%

D. 9%

71. Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments.

What is the real rate of return on the TIPS bond in the first year?

A. 5%

B. 8.15%

C. 7.15%

D. 4%

72. On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.

Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______.

A. The price of the Wildwood bond would decline by more than the price of the Asbury bond.

B. The price of the Wildwood bond would decline by less than the price of the Asbury bond.

C. The price of the Wildwood bond would increase by more than the price of the Asbury bond.

D. The price of the Wildwood bond would increase by less than the price of the Asbury bond.

73. On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.

If interest rates are expected to rise, then Joe Hill should ____.

A. prefer the Wildwood bond to the Asbury bond

B. prefer the Asbury bond to the Wildwood bond

C. be indifferent between the Wildwood bond and the Asbury bond

D. The answer cannot be determined from the information given.

74. On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.

If the volatility of interest rates is expected to increase, then Joe Hill should __.

A. prefer the Wildwood bond to the Asbury bond

B. prefer the Asbury bond to the Wildwood bond

C. be indifferent between the Wildwood bond and the Asbury bond

D. The answer cannot be determined from the information given.

75. One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of 7%, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year from today?

A. 2.07%

B. 8.03%

C. 9.01%

D. 11.12%

76. If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price at which you can purchase this bond given a $10,000 par value is _____________.

A. $9,828.12

B. $9,809.38

C. $9,840.62

D. $9,813.42

77. If the price of a $10,000 par Treasury bond is $10,237.50, the quote would be listed in the newspaper as ________.

A. 102:10

B. 102:11

C. 102:12

D. 102:13

78. A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.)

A. $13.21

B. $12.57

C. $15.44

D. $16.32

79. A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69?

A. $999.55

B. $1,002.01

C. $1,007.45

D. $1,012.13

80. If the quote for a Treasury bond is listed in the newspaper as 99:08 bid, 99:11 ask, the actual price at which you can sell this bond given a $10,000 par value is _____________.

A. $9,828.12

B. $9,925

C. $9,934.37

D. $9,955.43

81. A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest?

A. $4.81

B. $14.24

C. $25

D. $50

82. The price on a Treasury bond is 104:21, with a yield to maturity of 3.45%. The price on a comparable maturity corporate bond is 103:11, with a yield to maturity of 4.59%. What is the approximate percentage value of the credit risk of the corporate bond?

A. 1.14%

B. 3.45%

C. 4.59%

D. 8.04%

83. You buy a bond with a $1,000 par value today for a price of $875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity, but you do not reinvest any of your coupons. What was your effective EAR over the holding period?

A. 10.4%

B. 9.57%

C. 7.45%

D. 8.78%

84. You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ___.

A. .61%

B. -5.39%

C. 1.28%

D. -3.25%

85. You buy a 10-year $1,000 par value zero-coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket, you will owe taxes on this investment after the first year equal to _______.

A. $0

B. $4.27

C. $9.38

D. $33.51

86. You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield 6%. You do not sell the bond at year-end. If you are in a 15% tax bracket, at year-end you will owe taxes on this investment equal to _______.

A. $9.10

B. $4.25

C. $7.68

D. $5.20

87. An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond?

A. 4.8%

B. 4.85%

C. 9.6%

D. 9.7%

88. If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond?

A. 4.3%

B. 4.5%

C. 5.2%

D. 5.5%

89. The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%?

A. 4.08%

B. 4.5%

C. 5.1%

D. 5.6%

90. A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding-period return if an investor decides to sell now?

A. Increased

B. Decreased

C. Stayed the same

D. The answer cannot be determined from the information given.

91. The ___________ is the document that defines the contract between the bond issuer and the bondholder.

A. indenture

B. covenant agreement

C. trustee agreement

D. collateral statement

12
Student: ___________________________________________________________________________
1. A top-down analysis of a firm’s prospects starts with an analysis of the ____.

A. firm’s position in its industry

B. U.S. economy or even the global economy

C. industry

D. specific firm under consideration

2. In 1980 the dollar-yen exchange rate was about $.0045. In 2012 the yen-dollar exchange rate was about 80 yen per dollar. A Japanese producer would have had to increase the dollar price of a good sold in the United States by approximately _____ to maintain the same yen price in 2012.

A. 178%

B. 79.5%

C. 265.4%

D. 36%

3. An increase in the value of the yen against the U.S. dollar can cause the Japanese automaker Toyota to either _____________ on its U.S. sales.

A. lose market share or reduce its profit margin

B. gain market share or reduce its profit margin

C. lose market share or increase its profit margin

D. gain market share or increase its profit margin

4. You estimate that the present value of a firm’s cash flow is valued at $15 million. The break up value of the firm if you were to sell the major assets and divisions separately would be $20 million. This is an example of what Peter Lynch would call ___________.

A. a stalwart

B. slow growth

C. a star

D. an asset play

5. Between 1999 and 2010, the purchasing power of the U.S. dollar increased relative to the purchasing power of _______.

A. the United Kingdom

B. the Euro

C. Switzerland

D. Canada

6. If you believe the economy is about to go into a recession, you might change your asset allocation by selling _______ and buying ______.

A. growth stocks; long-term bonds

B. long-term bonds; growth stocks

C. defensive stocks; growth stocks

D. defensive stocks; long-term bonds

7. The yield curve spread between the 10-year T-bond yield and the federal funds rate is a _______ economic indicator.

A. leading

B. lagging

C. coincident

D. mixed

8. The Conference Board’s Consumer Confidence Index is released ______.

A. daily

B. weekly

C. monthly

D. quarterly

9. You can earn abnormal returns on your investments via macro forecasting ______.

A. if you can forecast the economy at all

B. if you can forecast the economy as well as the average forecaster

C. if you can forecast the economy better than the average forecaster

D. only if you can forecast the economy with perfect accuracy

10. Which of the following industries would most analysts classify as mature?

A. Internet service providers

B. Biotechnology

C. Wireless communication

D. Auto manufacturing

11. Which one of the following stocks represents industries with below-average sensitivity to the state of the economy?

A. Financials

B. Technology

C. Food and beverage

D. Cyclicals

12. The most widely used monetary policy tool is _________.

A. altering the discount rate

B. altering reserve requirements

C. open market operations

D. increasing the budget deficit

13. Which one of the following is the ratio of actual output from factories to potential output from factories?

A. Capacity utilizationrate

B. Participation rate

C. Durable goods orders rate

D. Industrial production rate

14. According to __________ economists, the growth of the U.S. economy in the 1980s can be attributed to lower marginal tax rates, which improved the incentives for people to work.

A. Keynesian

B. monetarist

C. supply-side

D. demand-side

15. The market value of all goods and services produced during a given time period is called ______.

A. GDP

B. industrial production

C. capacity utilization

D. factory orders

16. A big increase in government spending is an example of a _________.

A. positive demand shock

B. positive supply shock

C. negative demand shock

D. negative supply shock

17. GDP refers to _________.

A. the amount of personal disposable income in the economy

B. the difference between government spending and government revenues

C. the total manufacturing output in the economy

D. the total production of goods and services in the economy

18. Portfolio manager Peter Lynch would classify Coca-Cola as _________.

A. an asset play

B. a slow grower

C. a stalwart

D. a turnaround

19. Attempting to forecast future earnings and dividends is consistent with which of the following approaches to securities analysis?

A. Technical analysis

B. Fundamental analysis

C. Both technical analysis and fundamental analysis

D. Indexing

20. The analysis of the determinants of firm value is called _____________.

A. fundamental analysis

B. technical analysis

C. momentum analysis

D. indexing

21. Which of the following companies is the best example of a turnaround?

A. Coca-Cola

B. Microsoft

C. ExxonMobil

D. Kmart

22. Inflation is caused by ________________.

A. unions

B. rapid growth of the money supply

C. excess supply

D. low rates of capacity utilization

23. Everything else equal, if you expect a larger interest rate increase than other market participants, you should _________.

A. buy long-term bonds

B. buy short-term bonds

C. buy common stocks

D. buy preferred stocks

24. To obtain an approximate estimate of the real interest rate, one must _________ the __________ the nominal risk-free rate.

A. add; default premium to

B. subtract; default premium from

C. add; expected inflation to

D. subtract; expected inflation from

25. Which of the following would not be considered a supply shock?

A. A change in the price of imported oil

B. Frost damage to the orange crop

C. A change in the level of education of the average worker

D. An increase in the level of government spending

26. If economic conditions are such that very slow growth is expected in the foreseeable future, one would want to invest in industries with __________ sensitivity to economic conditions.

A. below-average

B. average

C. above-average

D. Since growth is expected to be slow, sensitivity to economic conditions is not an issue.

27. Which of the following is not an example of fiscal policy?

A. Social Security spending

B. Medicare spending

C. Fed purchases of Treasury securities

D. Changes in the tax rate

28. Supply-side economics tends to focus on _______________.

A. government spending

B. price controls

C. monetary policy

D. increasing productive capacity

29. Which one of the following describes the amount by which government spending exceeds government revenues?

A. Balance of trade

B. Budget deficit

C. Gross domestic product

D. Output gap

30. Which one of the following is probably the most direct and immediate way to stimulate or slow the economy, although it is not very useful for fine-tuning economic performance?

A. Fiscal policy

B. Monetary policy

C. Supply-side policy

D. Rising minimum wages

31. In macroeconomic terms, an increase in the price of imported oil or a decrease in the availability of oil is an example of a _________.

A. demand shock

B. supply shock

C. monetary shock

D. refinery shock

32. ______________ in interest rates are associated with stock market declines.

A. Anticipated increases

B. Unanticipated increases

C. Anticipated decreases

D. Unanticipated decreases

33. The average duration of unemployment is _________.

A. a leading economic indicator

B. a coincidental economic indicator

C. a lagging economic indicator

D. both a coincidental indicator and a lagging indicator

34. The ratio of the purchasing power of two economies is termed the _______.

A. balance of trade

B. real exchange rate

C. real interest rate

D. nominal exchange rate

35. Everything else equal, an increase in the government budget deficit would:

I. Increase the government’s demand for funds
II. Shift the demand curve for funds to the left
III. Increase the interest rate in the economy

A. II only

B. I and II only

C. I and III only

D. I, II, and III

36. Which of the following affects a firm’s sensitivity of its earnings to the business cycle?

I. Financial leverage
II. Operating leverage
III. Type of product

A. II only

B. I and II only

C. I and III only

D. I, II, and III

37. Which of the following describes the rate at which your ability to purchase grows while you hold an interest-earning investment?

A. The nominal exchange rate

B. The nominal interest rate

C. The real exchange rate

D. The real interest rate

38. An example of a highly cyclical industry is the _________.

A. automobile industry

B. tobacco industry

C. pharmaceutical industry

D. utility industry

39. The stock price index and contracts and orders for nondefense capital goods are _________.

A. leading economic indicators

B. coincidental economic indicators

C. lagging economic indicators

D. leading and coincidental indicators, respectively

40. Which one of the following is not a demand shock?

A. Increase in government spending

B. Increases in the money supply

C. Reductions in consumer spending

D. Improvements in education of U.S. workers

41. Which one of the following is not a U.S. supply shock?

A. Unions force an increase in national wage rates.

B. The oil supply from the Middle East drops 30%.

C. Extended droughts reduce U.S. food production 25%.

D. Chinese purchases of U.S. exports increase.

42. Pharmaceuticals, food, and other necessities would be good performers during the ____ stage of the business cycle.

A. peak

B. contraction

C. trough

D. expansion

43. Capital goods industries such as industrial equipment, transportation, and construction would be good investments during the _____ stage of the business cycle.

A. peak

B. contraction

C. trough

D. expansion

44. If you are going to earn abnormal returns based on your macroeconomic analysis, it will most likely have to be because __________.

A. you have more information than others

B. you are a better analyst than others

C. you have the same information as others

D. you are an equally good analyst as others

45. If the economy is going into a recession, a good industry to invest in would be the __________ industry.

A. automobile

B. banking

C. construction

D. medical services

46. Members of the Board of Governors of the Federal Reserve System are appointed by ____________ to serve _____________ terms.

A. the Senate; 10-year

B. the House of Representatives; 8-year

C. the President; 14-year

D. the Secretary of the Treasury; 6-year

47. A firm in the early stages of its industry life cycle will likely have _________.

A. low dividend payout rates

B. low rates of investment

C. low rates of return on investment

D. low R&D spending

48. Which of the following describes the percentage of the total labor force that has yet to find work?

A. The capacity utilization rate

B. The participation rate

C. The unemployment rate

D. The natural rate

49. Which of the following is the rate at which the general level of prices for goods and services is rising?

A. The exchange rate

B. The gross domestic product growth rate

C. The inflation rate

D. The real interest rate

50. An analyst starts by examining the broad economic environment and then considers the implications of the economy on the industry in which the firm operates. Finally, the firm’s position within the industry is examined. This is called __________ analysis.

A. bottom-up

B. outside-inside

C. top-down

D. upside-down

51. Assume that the Federal Reserve increases the money supply. This will cause:

I. Interest rates to decrease
II. Consumption and investment to decrease
III. Inflation to fall

A. I only

B. I and II only

C. II and III only

D. I, II, and III

52. The discount rate is the ________.

A. interest rate banks charge each other for overnight loans of deposits on reserve at the Fed

B. interest rate the Fed charges commercial banks on short-term loans

C. interest rate that the U.S. Treasury pays on its bills

D. interest rate that banks charge their best corporate customers

53. If the currency of your country is depreciating, this should __________ exports and __________ imports.

A. stimulate; stimulate

B. stimulate; discourage

C. discourage; stimulate

D. discourage; discourage

54. If interest rates increase, business investment expenditures are likely to __________ and consumer durable expenditures are likely to _________.

A. increase; increase

B. increase; decrease

C. decrease; increase

D. decrease; decrease

55. Increases in the money supply will cause demand for investment and consumption goods to __________ in the short run and may cause prices to __________ in the long run.

A. increase; increase

B. increase; decrease

C. decrease; increase

D. decrease; decrease

56. The nominal interest rate is 6%. The inflation rate is 3%. The exact real interest rate must be _________.

A. 2.91%

B. 3.85%

C. 1.45%

D. 2.12%

57. The nominal interest rate is 10%. The real interest rate is 4%. The inflation rate must be _________.

A. -6%

B. 4%

C. 5.77%

D. 14.4%

58. Order the following stages in the industry life cycle from the earliest to latest to occur after the start-up phase:

I. Maturity
II. Relative decline
III. Consolidation

A. III, I, II

B. I, III, II

C. III, II, I

D. I, II, III

59. An investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform others based on macroeconomic forecasts is termed ______________.

A. sector rotation

B. contraction/expansion analysis

C. life-cycle analysis

D. business-cycle shifting

60. Firm A produces gadgets. The price of gadgets is $2 each. Firm A has total fixed costs of $1,000,000 and variable costs of $1 per gadget. The corporate tax rate is 40%. If the economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell only half as many gadgets. If the economy enters a recession, the after-tax profit of firm A will be _________.

A. $0

B. $90,000

C. $180,000

D. $270,000

61. Firm B produce gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300,000 and variable costs of $1.40 per gadget. The corporate tax rate is 30%. If the economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell only half as many gadgets. If the economy is strong, the after-tax profit of firm B will be _________.

A. $90,000

B. $210,000

C. $300,000

D. $630,000

62. The fed funds rate is the __________.

A. interest rate that banks charge their best corporate customers

B. interest rate banks charge each other for overnight loans of deposits on reserve at the Fed

C. interest rate the Fed charges commercial banks on short-term loans

D. interest rate that the U.S. Treasury pays on its bills

63. Firm B produce gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300,000 and variable costs of $1.40 per gadget. The corporate tax rate is 40%. What is the breakeven number of gadgets B must sell to make a zero after-tax profit?

A. 300,000

B. 400,000

C. 500,000

D. 600,000

64. The goal of supply-side policies is to _______.

A. increase government involvement in the economy

B. create an environment where workers and owners of capital have the maximum incentive and ability to produce and develop goods

C. maximize tax revenues of the government

D. focus more on wealth redistribution policies

65. An industry analysis for manufacturers of a small personal care gadget observed the following characteristics:

1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate.
2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited.
3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year.
4. The current penetration rate in the United States is 60% of households and will be difficult to increase.
5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common.
6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service.
7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase.
8. New manufacturers continue to enter the market.

Characteristics 4 and 5 would indicate that the industry is in the _________ stage.

A. start-up

B. consolidation

C. maturity

D. relative decline

66. An industry analysis for manufacturers of a small personal care gadget observed the following characteristics:

1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate.
2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited.
3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year.
4. The current penetration rate in the United States is 60% of households and will be difficult to increase.
5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common.
6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service.
7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase.
8. New manufacturers continue to enter the market.

Characteristics _______ would be typical of an industry that is in the start-up stage.

A. 4 and 7

B. 1 and 4

C. 2 and 5

D. none of these options

67. An industry analysis for manufacturers of a small personal care gadget observed the following characteristics:

1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate.
2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited.
3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year.
4. The current penetration rate in the United States is 60% of households and will be difficult to increase.
5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common.
6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service.
7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase.
8. New manufacturers continue to enter the market.

Characteristics ____ would be typical of an industry that is in the consolidation stage.

A. 6 and 7

B. 1 and 4

C. 5 and 6

D. 2 and 8

68. An industry analysis for manufacturers of a small personal care gadget observed the following characteristics:

1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate.
2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited.
3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year.
4. The current penetration rate in the United States is 60% of households and will be difficult to increase.
5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common.
6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service.
7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase.
8. New manufacturers continue to enter the market.

Which of the characteristics would be typical of an industry that is in the maturity stage?

A. 1, 2, and 3

B. 4 and 5

C. 6, 7, and 8

D. all of these options

69. Countercyclical fiscal policy is best described by which of the following statements?

A. Government surpluses are planned during economic booms, and deficits are planned during economic recessions.

B. The annual budget should always be balanced.

C. Deficits should always equal surpluses.

D. Government deficits are planned during economic booms, and surpluses are planned during economic recessions.

70. A supply-side economist would likely agree with which of the following statements?

A. Real output and aggregate employment are primarily determined by aggregate demand.

B. Real income will rise when government expenditures and tax rates increase.

C. Real output and aggregate employment are primarily determined by tax rates.

D. Increasing the money supply will increase real output without causing higher inflation.

71. Which of the following actions should the central bank take if monetary authorities want to reduce the supply of money to slow the rate of inflation?

A. Sell government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand.

B. Buy government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand.

C. Decrease the discount rate, lowering interest rates and causing both costs and prices to fall.

D. Increase taxes, reducing costs and causing prices to fall.

72. The decline in the value of the dollar relative to the yen will have what impact on the purchase of U.S. goods in Japan?

A. U.S. goods will increase in cost, and Japan will import more.

B. U.S. goods will increase in cost, and Japan will import less.

C. U.S. goods will decrease in cost, and Japan will import more.

D. U.S. goods will increase in cost, and Japan will export less.

73. Which of the following are examples of cyclical industries?

I. Maytag
II. Computer chip manufacturers
III. Kellogg’s Frosted Flakes
IV. Pfizer

A. I and II only

B. I, II, and III only

C. II, III, and IV only

D. I, II, III, and IV

74. You would expect the beta of cyclical industries to be ______ and the beta of defensive industries to be ______.

A. greater than 1; less than 1

B. less than 1; less than 1

C. less than 1; greater than 1

D. greater than 1; greater than 1

75. What economic variable is most closely associated with increasing corporate profits?

A. Exchange rates

B. Inflation

C. Gross domestic product

D. Budget deficits

76. The federal government decides to pay for the transition to private social security accounts with a one-time $1 trillion bond issue. What will be the biggest concern to businesses relative to the “crowding out” effect?

A. Higher interest rates due to the new government borrowing

B. Inflation resulting from more government purchases

C. A negative supply shock

D. Shortage of investment due to new accounts

77. An expanding economy requires more workers. If the supply of workers becomes inadequate to meet the demand, what is the likely impact on the economy?

A. An economic slowdown is likely

B. Employment trends will reverse and unemployment will occur

C. Government deficits will result from capacity utilization

D. Inflation may result from upward wage pressures

78. An expanding economy puts stress on the manufacturing ability of a company. When a firm turns business down during periods of economic expansion, a problem exists in the area of ____________.

A. asset allocation

B. capacity utilization

C. employment management

D. strategic planning

79. The expansion of the money supply at a rate that exceeds the increase in goods and services will likely result in ___________.

A. expanding economy

B. increased inflation

C. interest rate declines

D. lower GDP

80. The supply of funds in the economy is controlled primarily by ____________.

A. the Federal Reserve System

B. Congress

C. money center banks

D. the Treasury department

81. The classification system used to classify firms into industries is now called the _____ code.

A. SIC

B. NAICS

C. ISO 57

D. ISM

82. During 2004 China increased its use of global oil by 40%. This followed a 100% increase during the previous 5 years. How do economists refer to this kind of economic event?

A. Demand shock

B. Equilibrium event

C. Expanding commodity event

D. Supply shock

83. Whenever OPEC attempts to influence the price of oil by significantly altering production, economists refer to this type of event as a ______________.

A. demand shock

B. equilibrium event

C. expanding commodity event

D. supply shock

84. Items that are ____________ and product purchases for which ________ is not important tend to be less cyclical in nature.

A. necessities; income

B. luxuries; leverage

C. discretionary goods; time of purchase

D. produced with high fixed costs; entertainment

85. Cash cows are typically found in the _________ stage of the industry life cycle.

A. start-up

B. consolidation

C. maturity

D. relative decline

86. At what point in the industry life cycle are inefficiencies in competitors most likely to be removed?

A. Start-up stage

B. Consolidation stage

C. Maturity stage

D. Relative decline stage

87. Stalwarts are typically found in the _________ stage of the industry life cycle.

A. start-up

B. consolidation

C. maturity

D. relative decline

88. Large-growth companies generally emerge in the __________ stage.

A. start-up

B. consolidation

C. maturity

D. relative decline

89. Which of the following are barriers to entry?

I. Large economies of scale required to be profitable
II. Established brand loyalty
III. Patent protection for the firm’s product
IV. Rapid industry growth

A. I and II only

B. I, II, and III only

C. II, III, and IV only

D. III and IV only

13
Student: ___________________________________________________________________________
1. The accounting measure of a firm’s equity value generated by applying accounting principles to asset and liability acquisitions is called ________.

A. book value

B. market value

C. liquidation value

D. Tobin’s q

2. The price-to-sales ratio is probably most useful for firms in which phase of the industry life cycle?

A. Start-up phase

B. Consolidation

C. Maturity

D. Relative decline

3. If a firm increases its plowback ratio, this will probably result in _______ P/E ratio.

A. a higher

B. a lower

C. an unchanged

D. The answer cannot be determined from the information given.

4. The value of Internet companies is based primarily on _____.

A. current profits

B. Tobin’s q

C. growth opportunities

D. replacement cost

5. New-economy companies generally have higher _______ than old-economy companies.

A. book value per share

B. P/E multiples

C. profits

D. asset values

6. P/E ratios tend to be _______ when inflation is ______.

A. higher; higher

B. lower; lower

C. higher; lower

D. They are unrelated.

7. Which one of the following statements about market and book value is correct?

A. All firms sell at a market-to-book ratio above 1.

B. All firms sell at a market-to-book ratio greater than or equal to 1.

C. All firms sell at a market-to-book ratio below 1.

D. Most firms have a market-to-book ratio above 1, but not all.

8. Earnings yields tend to _______ when Treasury yields fall.

A. fall

B. rise

C. remain unchanged

D. fluctuate wildly

9. Which one of the following is a common term for the market consensus value of the required return on a stock?

A. Dividend payout ratio

B. Intrinsic value

C. Market capitalization rate

D. Plowback ratio

10. Which one of the following is equal to the ratio of common shareholders’ equity to common shares outstanding?

A. Book value per share

B. Liquidation value per share

C. Market value per share

D. Tobin’s q

11. A firm has current assets that could be sold for their book value of $10 million. The book value of its fixed assets is $60 million, but they could be sold for $95 million today. The firm has total debt at a book value of $40 million, but interest rate changes have increased the value of the debt to a current market value of $50 million. This firm’s market-to-book ratio is ________.

A. 1.83

B. 1.5

C. 1.35

D. 1.46

12. If a stock is correctly priced, then you know that ____________.

A. the dividend payout ratio is optimal

B. the stock’s required return is equal to the growth rate in earnings and dividends

C. the sum of the stock’s expected capital gain and dividend yield is equal to the stock’s required rate of return

D. the present value of growth opportunities is equal to the value of assets in place

13. A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock ________.

A. has a Tobin’s q value < 1 B. will generate a positive alpha C. has an expected return less than its required return D. has a beta > 1

14. Bill, Jim, and Shelly are all interested in buying the same stock that pays dividends. Bill plans on holding the stock for 1 year. Jim plans on holding the stock for 3 years. Shelly plans on holding the stock until she retires in 10 years. Which one of the following statements is correct?

A. Bill will be willing to pay the most for the stock because he will get his money back in 1 year when he sells.

B. Jim should be willing to pay three times as much for the stock as Bill will pay because his expected holding period is three times as long as Bill’s.

C. Shelly should be willing to pay the most for the stock because she will hold it the longest and hence will get the most dividends.

D. All three should be willing to pay the same amount for the stock regardless of their holding period.

15. A firm that has an ROE of 12% is considering cutting its dividend payout. The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information, which of the following statements is (are) correct?

I. All else equal, the firm’s growth rate will accelerate after the payout change.
II. All else equal, the firm’s stock price will go up after the payout change.
III. All else equal, the firm’s P/E ratio will increase after the payout change.

A. I only

B. I and II only

C. II and III only

D. I, II, and III

16. A firm cuts its dividend payout ratio. As a result, you know that the firm’s _______.

A. return on assets will increase

B. earnings retention ratio will increase

C. earnings growth rate will fall

D. stock price will fall

17. __________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders.

A. Book value per share

B. Liquidation value per share

C. Market value per share

D. Tobin’s q

18. An underpriced stock provides an expected return that is ____________ the required return based on the capital asset pricing model (CAPM).

A. less than

B. equal to

C. greater than

D. greater than or equal to

19. Stockholders of Dogs R Us Pet Supply expect a 12% rate of return on their stock. Management has consistently been generating an ROE of 15% over the last 5 years but now believes that ROE will be 12% for the next 5 years. Given this, the firm’s optimal dividend payout ratio is now ______.

A. 0%

B. 100%

C. between 0% and 50%

D. between 50% and 100%

20. The constant-growth dividend discount model (DDM) can be used only when the ___________.

A. growth rate is less than or equal to the required return

B. growth rate is greater than or equal to the required return

C. growth rate is less than the required return

D. growth rate is greater than the required return

21. Suppose that in 2012 the expected dividends of the stocks in a broad market index equaled $240 million when the discount rate was 8% and the expected growth rate of the dividends equaled 6%. Using the constant-growth formula for valuation, if interest rates increase to 9%, the value of the market will change by _____.

A. -10%

B. -20%

C. -25%

D. -33%

22. You want to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant-growth DDM, the intrinsic value of stock A _________.

A. will be higher than the intrinsic value of stock B

B. will be the same as the intrinsic value of stock B

C. will be less than the intrinsic value of stock B

D. The answer cannot be determined from the information given.

23. Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both stocks. You require a return of 10% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the intrinsic value of stock A _________.

A. will be higher than the intrinsic value of stock B

B. will be the same as the intrinsic value of stock B

C. will be less than the intrinsic value of stock B

D. The answer cannot be determined from the information given.

24. You want to earn a return of 11% on each of two stocks, A and B. Stock A is expected to pay a dividend of $3 in the upcoming year, while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the constant-growth DDM, the intrinsic value of stock A _________.

A. will be higher than the intrinsic value of stock B

B. will be the same as the intrinsic value of stock B

C. will be less than the intrinsic value of stock B

D. The answer cannot be determined from the information given.

25. You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for 1 year. You expect to receive both $1.25 in dividends and $35 from the sale of the share at the end of the year. The maximum price you would pay for a share today is __________ if you wanted to earn a 12% return.

A. $31.25

B. $32.37

C. $38.47

D. $41.32

26. The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm’s plowback ratio is 50%, its P/E ratio will be _________.

A. 8.33

B. 12.5

C. 19.23

D. 24.15

27. The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm’s plowback ratio is 60%, its P/E ratio will be _________.

A. 7.14

B. 14.29

C. 16.67

D. 22.22

28. Weyerhaeuser Incorporated has a balance sheet that lists $70 million in assets, $45 million in liabilities, and $25 million in common shareholders’ equity. It has 1 million common shares outstanding. The replacement cost of its assets is $85 million. Its share price in the market is $49. Its book value per share is _________.

A. $16.67

B. $25

C. $37.50

D. $40.83

29. Eagle Brand Arrowheads has expected earnings of $1.25 per share and a market capitalization rate of 12%. Earnings are expected to grow at 5% per year indefinitely. The firm has a 40% plowback ratio. By how much does the firm’s ROE exceed the market capitalization rate?

A. .5%

B. 1%

C. 1.5%

D. 2%

30. Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be _____.

A. 4.5%

B. 10.5%

C. 15%

D. 30%

31. A preferred share of Coquihalla Corporation will pay a dividend of $8 in the upcoming year and every year thereafter; that is, dividends are not expected to grow. You require a return of 7% on this stock. Using the constant-growth DDM to calculate the intrinsic value, a preferred share of Coquihalla Corporation is worth _________.

A. $13.50

B. $45.50

C. $91

D. $114.29

32. Brevik Builders has an expected ROE of 25%. Its dividend growth rate will be __________ if it follows a policy of paying 30% of earnings in the form of dividends.

A. 5%

B. 15%

C. 17.5%

D. 45%

33. A firm is planning on paying its first dividend of $2 three years from today. After that, dividends are expected to grow at 6% per year indefinitely. The stock’s required return is 14%. What is the intrinsic value of a share today?

A. $25

B. $16.87

C. $19.24

D. $20.99

34. Rose Hill Trading Company is expected to have EPS in the upcoming year of $8. The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its dividend in the upcoming year should be _________.

A. $1.12

B. $1.44

C. $2.40

D. $5.60

35. Rose Hill Trading Company is expected to have EPS in the upcoming year of $6. The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its intrinsic value should be _________.

A. $20.93

B. $69.77

C. $128.57

D. $150

36. Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate and use the constant-growth DDM to determine the value of the stock. The stock’s current price is $84. Using the constant-growth DDM, the market capitalization rate is _________.

A. 9%

B. 12%

C. 14%

D. 18%

37. Grott and Perrin, Inc., has expected earnings of $3 per share for next year. The firm’s ROE is 20%, and its earnings retention ratio is 70%. If the firm’s market capitalization rate is 15%, what is the present value of its growth opportunities?

A. $20

B. $70

C. $90

D. $115

38. Ace Ventura, Inc., has expected earnings of $5 per share for next year. The firm’s ROE is 15%, and its earnings retention ratio is 40%. If the firm’s market capitalization rate is 10%, what is the present value of its growth opportunities?

A. $25

B. $50

C. $75

D. $100

39. Annie’s Donut Shops, Inc., has expected earnings of $3 per share for next year. The firm’s ROE is 18%, and its earnings retention ratio is 60%. If the firm’s market capitalization rate is 12%, what is the value of the firm excluding any growth opportunities?

A. $25

B. $50

C. $83.33

D. $208

40. Flanders, Inc., has expected earnings of $4 per share for next year. The firm’s ROE is 8%, and its earnings retention ratio is 40%. If the firm’s market capitalization rate is 15%, what is the present value of its growth opportunities?

A. -$6.33

B. $0

C. $20.34

D. $26.67

41. Firm A is high-risk, and Firm B is low-risk. Everything else equal, which firm would you expect to have a higher P/E ratio?

A. Firm A

B. Firm B

C. Both would have the same P/E if they were in the same industry.

D. There is not necessarily any linkage between risk and P/E ratios.

42. Firms with higher expected growth rates tend to have P/E ratios that are ___________ the P/E ratios of firms with lower expected growth rates.

A. higher than

B. equal to

C. lower than

D. There is not necessarily any linkage between risk and P/E ratios.

43. Value stocks are more likely to have a PEG ratio _____.

A. less than 1

B. equal to 1

C. greater than 1

D. less than zero

44. Generally speaking, as a firm progresses through the industry life cycle, you would expect the PVGO to ________ as a percentage of share price.

A. increase

B. decrease

C. stay the same

D. No typical pattern can be expected.

45. Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate on the stock and use the constant-growth DDM to determine the intrinsic value of the stock. The stock is trading in the market today at $84. Using the constant-growth DDM and the CAPM, the beta of the stock is _________.

A. 1.4

B. .9

C. .8

D. .5

46. Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company’s stock is 1.2. Using the CAPM, an appropriate required return on Westsyde Tool Company’s stock is _________.

A. 8%

B. 10.8%

C. 15.6%

D. 16.8%

47. Westsyde Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company’s stock is 1.2. Using a one-period valuation model, the intrinsic value of Westsyde Tool Company stock today is _________.

A. $24.29

B. $27.39

C. $31.13

D. $34.52

48. Todd Mountain Development Corporation is expected to pay a dividend of $2.50 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 12%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the CAPM, the return you should require on the stock is _________.

A. 7.25%

B. 10.25%

C. 14.75%

D. 21%

49. Todd Mountain Development Corporation is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 17%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the constant-growth DDM, the intrinsic value of the stock is _________.

A. 4

B. 17.65

C. 37.50

D. 50

50. Generally speaking, the higher a firm’s ROA, the _________ the dividend payout ratio and the _________ the firm’s growth rate of earnings.

A. higher; lower

B. higher; higher

C. lower; lower

D. lower; higher

51. Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 13%. The stock of Interior Airline has a beta of 4. Using the constant-growth DDM, the intrinsic value of the stock is _________.

A. $10

B. $22.73

C. $27.78

D. $41.67

52. Caribou Gold Mining Corporation is expected to pay a dividend of $4 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of .5. Using the CAPM, the return you should require on the stock is _________.

A. 2%

B. 5%

C. 8%

D. 9%

53. Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of .5. Using the constant-growth DDM, the intrinsic value of the stock is _________.

A. $50

B. $100

C. $150

D. $200

54. Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth __________ today.

A. $63.80

B. $65.13

C. $67.95

D. $85.60

55. Ace Frisbee Corporation produces a good that is very mature in the firm’s product life cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3, a dividend in year 2 of $2, and a dividend in year 3 of $1. After year 3, dividends are expected to decline at the rate of 2% per year. An appropriate required return for the stock is 8%. Using the multistage DDM, the stock should be worth __________ today.

A. $13.07

B. $13.58

C. $18.25

D. $18.78

56. A firm’s earnings per share increased from $10 to $12, its dividends increased from $4 to $4.40, and its share price increased from $80 to $100. Given this information, it follows that _________.

A. the stock experienced a drop in its P/E ratio

B. the company had a decrease in its dividend payout ratio

C. both earnings and share price increased by 20%

D. the required rate of return increased

57. Assuming all other factors remain unchanged, __________ would increase a firm’s price-earnings ratio.

A. an increase in the dividend payout ratio

B. a reduction in investor risk aversion

C. an expected increase in the level of inflation

D. an increase in the yield on Treasury bills

58. A company with an expected earnings growth rate which is greater than that of the typical company in the same industry most likely has _________________.

A. a dividend yield which is greater than that of the typical company

B. a dividend yield which is less than that of the typical company

C. less risk than the typical company

D. less sensitivity to market trends than the typical company

59. Everything else equal, which variable is negatively related to the intrinsic value of a company?

A. D1

B. D0

C. g

D. k

60. Sanders, Inc., paid a $4 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 13% return on equity in the future, and if you require a 15% return on the stock, the value of the stock is _________.

A. $26.67

B. $35.19

C. $42.94

D. $59.89

61. A firm has PVGO of 0 and a market capitalization rate of 12%. What is the firm’s P/E ratio?

A. 12

B. 8.33

C. 10.25

D. 18.55

62. A firm has an earnings retention ratio of 40%. The stock has a market capitalization rate of 15% and an ROE of 18%. What is the stock’s P/E ratio?

A. 12.82

B. 7.69

C. 8.33

D. 9.46

63. A common stock pays an annual dividend per share of $1.80. The risk-free rate is 5%, and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $1.80 per share, what is the value of the stock?

A. $17.78

B. $20

C. $40

D. None of these options

64. Transportation stocks currently provide an expected rate of return of 15%. TTT, a large transportation company, will pay a year-end dividend of $3 per share. If the stock is selling at $60 per share, what must be the market’s expectation of the constant-growth rate of TTT dividends?

A. 5%

B. 10%

C. 20%

D. None of these options

65. A stock is priced at $45 per share. The stock has earnings per share of $3 and a market capitalization rate of 14%. What is the stock’s PVGO?

A. $23.57

B. $15

C. $19.78

D. $21.34

66. A firm increases its dividend plowback ratio. All else equal, you know that _____________.

A. earnings growth will increase and the stock’s P/E will increase

B. earnings growth will decrease and the stock’s P/E will increase

C. earnings growth will increase and the stock’s P/E will decrease

D. earnings growth will increase and the stock’s P/E may or may not increase

67. A firm has a stock price of $54.75 per share. The firm’s earnings are $75 million, and the firm has 20 million shares outstanding. The firm has an ROE of 15% and a plowback of 65%. What is the firm’s PEG ratio?

A. 1.5

B. 1.25

C. 1.1

D. 1

68. ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of .20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock.

At what price would you expect ART to sell?

A. $25

B. $34.29

C. $42.86

D. $45.67

69. ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of .20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock.

At what P/E ratio would you expect ART to sell?

A. 8.33

B. 11.43

C. 14.29

D. 15.25

70. ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of .20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock.

What is the present value of growth opportunities for ART?

A. $8.57

B. $9.29

C. $14.29

D. $16.29

71. ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of .20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock.

What price do you expect ART shares to sell for in 4 years?

A. $53.96

B. $44.95

C. $41.68

D. $39.76

72. The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60, and the increase in net working capital is $30. What is the free cash flow to the firm?

A. $85

B. $125

C. $185

D. $305

73. A firm reports EBIT of $100 million. The income statement shows depreciation of $20 million. If the tax rate is 35% and total capital expenditures and increases in working capital total $10 million, what is the free cash flow to the firm?

A. $57

B. $65

C. $75

D. $95

74. The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14%, and the WACC is 10%. If the market value of the debt is $1 billion, what is the value of the equity using the free cash flow valuation approach?

A. $1 billion

B. $2 billion

C. $3 billion

D. $4 billion

75. If a firm has a free cash flow equal to $50 million and that cash flow is expected to grow at 3% forever, what is the total firm value given a WACC of 9.5%?

A. $679.81 million

B. $715.54 million

C. $769.23 million

D. $803.03 million

76. The free cash flow to the firm is reported as $405 million. The interest expense to the firm is $76 million. If the tax rate is 35% and the net debt of the firm increased by $50 million, what is the free cash flow to the equity holders of the firm?

A. $405.6 million

B. $454.2 million

C. $505.8 million

D. $553.5 million

77. The free cash flow to the firm is reported as $275 million. The interest expense to the firm is $60 million. If the tax rate is 35% and the net debt of the firm increased by $33 million, what is the free cash flow to the equity holders of the firm?

A. $269 million

B. $296 million

C. $305 million

D. $327 million

78. The free cash flow to the firm is reported as $205 million. The interest expense to the firm is $22 million. If the tax rate is 35% and the net debt of the firm increased by $25 million, what is the approximate market value of the firm if the FCFE grows at 2% and the cost of equity is 11%?

A. $2,168 billion

B. $2,445 billion

C. $2,565 billion

D. $2,998 billion

79. The free cash flow to the firm is reported as $198 million. The interest expense to the firm is $15 million. If the tax rate is 35% and the net debt of the firm increased by $20 million, what is the approximate market value of the firm if the FCFE grows at 3% and the cost of equity is 14%?

A. $1,950 billion

B. $2,497 billion

C. $2,585 billion

D. $3,098 billion

80. Firm A has a stock price of $35, and 60% of the value of the stock is in the form of PVGO. Firm B also has a stock price of $35, but only 20% of the value of stock B is in the form of PVGO. We know that:

I. Stock A will give us a higher return than Stock B.
II. An investment in stock A is probably riskier than an investment in stock B.
III. Stock A has higher forecast earnings growth than stock B.

A. I only

B. I and II only

C. II and III only

D. I, II, and III

81. A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock?

A. $27.27

B. $37.50

C. $66.67

D. $70

82. Next year’s earnings are estimated to be $5. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 9%, what is the present value of growth opportunities?

A. $9.09

B. $10.10

C. $11.11

D. $12.21

83. Next year’s earnings are estimated to be $6. The company plans to reinvest 33% of its earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities?

A. $6

B. $24.50

C. $44.44

D. $75

84. When Google’s share price reached $475 per share, Google had a P/E ratio of about 68 and an estimated market capitalization rate of 11.5%. Google pays no dividends. Approximately what percentage of Google’s stock price was represented by PVGO?

A. 92%

B. 87%

C. 77%

D. 64%

85. A firm has a stock price of $55 per share and a P/E ratio of 75. If you buy the stock at this P/E and earnings fail to grow at all, how long should you expect it to take to just recover the cost of your investment?

A. 27 years

B. 37 years

C. 55 years

D. 75 years

86. In what industry are investors likely to use the dividend discount model and arrive at a price close to the observed market price?

A. Import/export trade

B. Software

C. Telecommunications

D. Utility

87. Estimates of a stock’s intrinsic value calculated with the free cash flow methodology depend most critically on _______.

A. the terminal value used

B. whether one uses FCFF or FCFE

C. the time period used to estimate the cash flows

D. whether the firm is currently paying dividends

88. The greatest value to an analyst from calculating a stock’s intrinsic value is _______.

A. how easy it is to come up with accurate model inputs

B. the precision of the value estimate

C. how the process forces analysts to understand the critical variables that have the greatest impact on value

D. how all the different models typically yield identical value results

89. Which of the following valuation measures is often used to compare firms that have no earnings?

A. Price-to-book ratio

B. P/E ratio

C. Price-to-cash-flow ratio

D. Price-to-sales ratio

14
Student: ___________________________________________________________________________
1. Which of the following assets is most liquid?

A. Cash equivalents

B. Receivables

C. Inventories

D. Plant and equipment

2. Cost of goods sold refers to ___________.

A. direct costs attributable to producing the product sold by the firm

B. salaries, advertising, and selling expenses

C. payments to the firm’s creditors

D. payments to federal and local governments

3. Many observers believe that firms “manage” their income statements to _______.

A. minimize taxes over time

B. maximize expenditures

C. smooth their earnings over time

D. generate level sales

4. Depreciation expense is in what broad category of expenditures?

A. Operating expenses

B. General and administrative expenses

C. Debt interest expense

D. Tax expenditures

5. Firm A acquires firm B when firm B has a book value of assets of $155 million and a book value of liabilities of $35 million. Firm A actually pays $175 million for firm B. This purchase would result in goodwill for firm A equal to _____.

A. $175 million

B. $155 million

C. $120 million

D. $55 million

6. One of the biggest impediments to a global capital market has been _________.

A. volatile exchange rates

B. the lack of common accounting standards

C. lower disclosure standards in the United States than abroad

D. the lack of transparent reporting standards across the EU

7. Benjamin Graham thought that the benefits from detailed analysis of a firm’s financial statements had _________ over his long professional life.

A. increased greatly

B. increased slightly

C. remained constant

D. decreased

8. If the interest rate on debt is higher than the ROA, then a firm’s ROE will _________.

A. decrease

B. increase

C. not change

D. change but in an indeterminable manner

9. Which of the following is not one of the three key financial statements available to investors in publicly traded firms?

A. Income statement

B. Balance sheet

C. Statement of operating earnings

D. Statement of cash flows

10. In 2006 Hewlett-Packard repurchased shares of common stock worth $5,241 million and made dividend payments of $894 million. Other financing activities raised $196 million, and Hewlett-Packard’s total cash flow from financing was -$6,077 million. How much did the long-term debt accounts of Hewlett-Packard change?

A. Increased $138 million

B. Decreased $138 million

C. Increased $836 million

D. Decreased $836 million

11.

What must cash flow from financing have been in 2008 for Interceptors, Inc.?

A. $5

B. $28

C. $30

D. $33

12.
Based on the cash flow data in the table for Interceptors Inc., which of the following statements is (are) correct?

I. This firm appears to be a good investment because of its steady growth in cash.
II. This firm has been able to generate growing cash flows only by borrowing or selling equity to offset declining operating cash flows.
III. Financing activities have been increasingly important for this firm’s operations, at least in the short run.

A. I only

B. II and III only

C. II only

D. I and II only

13. Common-size balance sheets are prepared by dividing all quantities by ____________.

A. total assets

B. total liabilities

C. shareholders’ equity

D. fixed assets

14. Operating ROA is calculated as __________, while ROE is calculated as _________.

A. EBIT/Total assets; Net profit/Total assets

B. Net profit/Total assets; EBIT/Total assets

C. EBIT/Total assets; Net profit/Equity

D. Net profit/EBIT; Sales/Total assets

15. A firm increases its financial leverage when its ROA is greater than the cost of debt. Everything else equal, this change will probably increase the firm’s:

I. Beta
II. Earnings variability over the business cycle
III. ROE
IV. Stock price

A. I and II only

B. III and IV only

C. I, III, and IV only

D. I, II, and III only

16. The highest possible value for the interest-burden ratio is ______, and this occurs when the firm _________.

A. 0; uses as much debt as possible

B. 1; uses debt to the point where ROA = interest cost of debt

C. 1; uses no interest-bearing debt

D. -1; pays down its existing debts

17. Which one of the following ratios is used to calculate the times-interest-earned ratio?

A. Net profit/Interest expense

B. Pretax profit/EBIT

C. EBIT/Sales

D. EBIT/Interest expense

18. The process of decomposing ROE into a series of component ratios is called ______________.

A. DuPont analysis

B. technical analysis

C. comparative analysis

D. liquidity analysis

19. Which of the following is not a ratio used in the DuPont analysis?

A. Interest burden

B. Profit margin

C. Asset turnover

D. Earnings yield ratio

20. By 2008, over 100 countries had adopted financial reporting standards that are in conformance with ________.

A. GAAP

B. IFRS

C. FASB

D. GASB

21. Operating ROA can be found as the product of ______.

A. Return on sales × ATO

B. Tax burden × Interest burden

C. Interest burden × Leverage ratio

D. ROE × Dividend payout ratio

22. A firm has an ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is _________.

A. 8.4

B. 11.9

C. 17.62

D. 47.6

23. If a firm has a positive tax rate and a positive operating ROA, and the interest rate on debt is the same as the operating ROA, then operating ROA will be _________.

A. greater than zero, but it is impossible to determine how operating ROA will compare to ROE

B. equal to ROE

C. greater than ROE

D. less than ROE

24. You find that a firm that uses debt has a compound leverage factor less than 1. This tells you that ________.

A. the firm’s use of financial leverage is positively contributing to ROE

B. the firm’s use of financial leverage is negatively contributing to ROE

C. the firm’s use of operating leverage is positively contributing to ROE

D. the firm’s use of operating leverage is negatively contributing to ROE

25. A firm has a P/E ratio of 24 and an ROE of 12%. Its market-to-book-value ratio is _________.

A. 2.88

B. 2

C. 1.75

D. .69

26. A firm has an ROA of 8% and a debt/equity ratio of .5; its ROE is _________.

A. 4%

B. 6%

C. 8%

D. 12%

27. A firm has a tax burden of .7, a leverage ratio of 1.3, an interest burden of .8, and a return-on-sales ratio of 10%. The firm generates $2.28 in sales per dollar of assets. What is the firm’s ROE?

A. 12.4%

B. 14.5%

C. 16.6%

D. 17.8%

28. Economic value added (EVA) is:

A. the difference between the return on assets and the opportunity cost of capital times the capital base

B. ROA × ROE

C. a measure of the firm’s abnormal return

D. largest for high-growth firms

29. Which of the following statements is true concerning economic value added?

A. A growing number of firms tie managers’ compensation to EVA.

B. A profitable firm will always have a positive EVA.

C. EVA recognizes that the cost of capital is not a real cost.

D. If a firm has positive present value of growth opportunities, it will have positive EVA.

30. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s current ratio for 2012 indicates that Flathead’s liquidity has ________ since 2011.

A. risen

B. fallen

C. stayed the same

D. The answer cannot be determined from the information given.

31. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s inventory turnover ratio is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A. 11.6

B. 10.2

C. 9.5

D. 7.7

32. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s debt-to-equity ratio for 2012 is _________.

A. 2.13

B. 2.44

C. 2.56

D. 2.89

33. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s cash flow from operating activities for 2012 was _______.

A. $810,000

B. $775,000

C. $755,000

D. $735,000

34. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The industry average ACP is 32 days. How is Flathead doing in its collections relative to the industry? (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A. Flathead’s receivables are outstanding about 9 fewer days than the industry average.

B. Flathead’s receivables are outstanding about 15 fewer days than the industry average.

C. Flathead’s receivables are outstanding about 12 more days than the industry average.

D. Flathead’s receivables are outstanding about 6 more days than the industry average.

35. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s total asset turnover for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A. 3.56

B. 3.26

C. 3.14

D. 3.02

36. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. In 2012 Flathead generated ______ of EBIT for every dollar of sales.

A. $.075

B. $.086

C. $.092

D. $.099

37. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s return on equity ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A. 6.5%

B. 26.5%

C. 33.4%

D. 38%

38. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s P/E ratio for 2012 is _________.

A. 3.39

B. 3.6

C. 13.33

D. 10.67

39. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s compound leverage ratio is __________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A. 1.5

B. 2

C. 2.5

D. 3

40. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s current ratio for 2012 is _________.

A. 1.3

B. 1.5

C. 1.69

D. 2.83

41. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s quick ratio for 2012 is _________.

A. 1.3

B. 1.5

C. 1.69

D. 2.83

42. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s leverage ratio for 2012 is _________.

A. 1.3

B. 1.5

C. 1.69

D. 2.83

43. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s times-interest-earned ratio for 2012 is _________.

A. 2.8

B. 6

C. 9

D. 11.11

44. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s fixed-asset turnover ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A. 2.8

B. 6

C. 9

D. 11.11

45. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s asset turnover ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A. 1.3

B. 1.5

C. 1.69

D. 2.83

46. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s return-on-sales ratio for 2012 is _________.

A. .0409

B. .0429

C. .0475

D. .0753

47. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s return-on-equity ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A. .0409

B. .0429

C. .0462

D. .0923

48. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s P/E ratio for 2012 is _________.

A. 2.8

B. 3.6

C. 6

D. 11.11

49. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s market-to-book value for 2012 is _________.

A. .1708

B. .1529

C. .1462

D. .1636

50. A firm has a net profit/pretax profit ratio of .6, a leverage ratio of 1.5, a pretax profit/EBIT of .7, an asset turnover ratio of 4, a current ratio of 2, and a return-on-sales ratio of 6%. Its ROE is _________.

A. 7.56%

B. 15.12%

C. 20.16%

D. 30.24%

51. A firm has an ROA of 19%, a debt/equity ratio of 1.8, and a tax rate of 30%, and the interest rate on its debt is 7%. Its ROE is _________.

A. 15.12%

B. 28.42%

C. 37.24%

D. 40.6%

52. The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of low inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income.

A. understate; overstate

B. understate; understate

C. overstate; understate

D. overstate; overstate

53. If a firm’s ratio of stockholders’ equity/total assets is lower than the industry average and its ratio of long-term debt/stockholders’ equity is also lower than the industry average, this would suggest that the firm _________.

A. has more current liabilities than the industry average

B. has more leased assets than the industry average

C. will be less profitable than the industry average

D. has more current assets than the industry average

54. A firm has a lower inventory turnover, a longer ACP, and a lower fixed-asset turnover than the industry averages. You should not be surprised to find that this firm has:

I. Lower ATO than the industry average
II. Lower ROA than the industry average
III. Lower ROE than the industry average

A. I only

B. I and II only

C. II and III only

D. I, II, and III

55. A high price-to-book ratio may indicate which one of the following?

A. The firm expanded its plant and equipment in the past few years.

B. The firm is doing a poorer job controlling its inventory expense than other related firms.

C. Investors may believe that this firm has opportunities for earning a rate of return in excess of the market capitalization rate.

D. All of these options.

56. A firm has an ROE equal to the industry average, but its price-to-book ratio is below the industry average. You know that the firm’s _________.

A. earnings yield is above the industry average

B. P/E ratio is above the industry average

C. dividend payout ratio is too high

D. interest burden must be below the industry average

57. Use the following cash flow data of Haven Hardware for the year ended December 31, 2012.

What is the net cash provided by operating activities of Haven Hardware?

A. -$30,000

B. $220,000

C. $320,000

D. $780,000

58. Use the following cash flow data of Haven Hardware for the year ended December 31, 2012.

What is the net cash provided by or used in investing activities of Haven Hardware?

A. -$12,000

B. -$62,000

C. $12,000

D. $164,000

59. Use the following cash flow data of Haven Hardware for the year ended December 31, 2012.

What is the net cash provided by or used in financing activities of Haven Hardware?

A. -$10,000

B. -$120,000

C. $10,000

D. $120,000

60. Use the following cash flow data of Haven Hardware for the year ended December 31, 2012.

What is the net increase or decrease in cash for Haven Hardware for 2012?

A. -$94,000

B. -$88,000

C. $88,000

D. $188,000

61. Use the following cash flow data of Haven Hardware for the year ended December 31, 2012.

What is the cash at the end of 2012 for Haven Hardware?

A. $6,000

B. $94,000

C. $736,000

D. $188,000

62. All of the following ratios are related to efficiency except _______.

A. total asset turnover

B. fixed-asset turnover

C. average collection period

D. cash ratio

63. Which of the following would result in a cash inflow under the heading “Cash flow from investing” in the statement of cash flows?

A. Purchase of capital equipment

B. Payments to suppliers for inventory

C. Collections on receivables

D. Sale of production machinery

64. When assessing the sustainability of a firm’s cash flows, analysts will prefer to see cash growth generated from which of the following sources?

A. Cash flow from investment activities

B. Cash flow from operating activities

C. Cash flow from financing

D. Cash flow from extraordinary events

65. The ABS company has a capital base of $100 million, an opportunity cost of capital (k) of 15%, a return on assets (ROA) of 9%, and a return on equity (ROE) of 18%. What is the economic value added (EVA) for ABS?

A. $8 million

B. -$6 million

C. $3 million

D. -$4 million

66. Another term for EVA is ______.

A. net income

B. operating income

C. residual income

D. market-based income

67. Which of the following transactions will result in a decrease in cash flow from operations?

A. Increase in accounts receivable

B. Decrease in inventories

C. Decrease in taxes payable

D. Decrease in bonds outstanding

68. Which of the following transactions will result in a decrease in cash flow from investments?

A. Acquisition of another business

B. Capital gain from sale of a subsidiary

C. Decrease in net investments

D. Sale of equipment

69. Which of the following will result in an increase in cash to the firm?

A. Dividends paid

B. A delay in collecting on accounts receivable

C. Net new investments

D. An increase in accounts payable

70. The table below shows some data for Key Biscuit Company:

What must have caused the firm’s ROE to drop?

A. The firm began using more debt as a percentage of financing.

B. The firm began using less debt as a percentage of financing.

C. The compound leverage ratio was less than 1.

D. The operating ROA was declining.

71. A firm purchases goods on credit worth $150. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $300 to pay for the purchase. What is the change in net cash provided by operations?

A. $50 increase

B. $100 increase

C. $150 increase

D. $250 increase

72. A firm purchases goods on credit worth $100. The same firm pays off $80 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $200 to pay for the purchase. What is the change in net cash provided by financing?

A. $20 increase

B. $80 increase

C. $100 increase

D. $200 increase

73. A firm purchases goods on credit worth $90. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $180 to pay for the purchase. What is the change in net cash provided by investments?

A. $10 decrease

B. $90 decrease

C. $180 decrease

D. $190 decrease

74. The net income of the company is $120. Accounts payable increase by $20, depreciation is $15, and equipment is purchased for $40. If the firm issued $110 in new bonds, what is the total change in cash for the firm for all activities?

A. Increase of $225

B. Increase of $130

C. Decrease of $195

D. Decrease of $110

75. The term quality of earnings refers to ________.

A. how well reported earnings conform to GAAP

B. the realism and sustainability of reported earnings

C. whether actual earnings matched expected earnings

D. how well reported earnings fit a trend line of earnings growth

76. The practice of “selling” large quantities of goods to customers in order to get quarterly sales up while allowing these customers to return the goods next quarter is termed _____________.

A. channel stuffing

B. clogging the network

C. spamming the johns

D. artificial sales

77. What ratio will definitely increase when a firm increases its annual sales with no corresponding increase in assets?

A. Asset turnover

B. Current ratio

C. Liquidity ratio

D. Quick ratio

78. A firm’s leverage ratio is 1.2, interest-burden ratio is .81, and profit margin is .25, and its asset turnover is 1.1. What is the firm’s compound leverage factor?

A. .243

B. .267

C. .826

D. .972

79. The tax burden of the firm is .4, the interest burden is .65, the return on sales is .05, the asset turnover is .90, and the leverage ratio is 1.35. What is the ROE of the firm?

A. 1.58%

B. 5.68%

C. 12.2%

D. 13.33%

80. The tax burden of the firm is .5, the interest burden is .55, the profit margin is .25, the asset turnover is 1.5, and the leverage ratio is 1.65. What is the ROE of the firm?

A. 1.88%

B. 6.68%

C. 12.15%

D. 17.02%

81. The major difference between IFRS and GAAP is that U.S. standards are ___________ and IFRS standards are _________.

A. strictly enforced; weakly enforced

B. rules-based; principles-based

C. evolutionary; devolutionary

D. based on government standards; based on corporate practice

82. The quick ratio is a measure of a firm’s __________.

A. asset turnover

B. market valuation

C. liquidity

D. interest burden

83. The firm’s leverage ratio is 1.2, interest-burden ratio is .81, and profit margin is .24, and its asset turnover is 1.25. What is the firm’s ROA?

A. .25

B. .3

C. .335

D. .372

84. A firm has a compound leverage factor greater than 1; this indicates that ______.

A. the firm has no interest payments

B. the firm uses less debt as a percentage of financing

C. the firm’s interest payments are equal to the firm’s pretax profits

D. the firm’s debt has a positive contribution to the firm’s ROA

15
Student: ___________________________________________________________________________
1. You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

A. $200 profit

B. $200 loss

C. $300 profit

D. $300 loss

2. You purchase one IBM July 125 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

A. $200 profit

B. $200 loss

C. $500 profit

D. $500 loss

3. You purchase one IBM July 120 put contract for a premium of $3. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

A. $300 profit

B. $300 loss

C. $500 loss

D. $200 profit

4. You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration date, when IBM stock sells for $121 per share. You will realize a ______ on the investment.

A. $300 profit

B. $200 loss

C. $600 loss

D. $200 profit

5. ______ option can only be exercised on the expiration date.

A. A Mexican

B. An Asian

C. An American

D. A European

6. All else the same, an American style option will be ______ valuable than a ______ style option.

A. more; European-

B. less; European-

C. more; Canadian-

D. less; Canadian-

7. At contract maturity the value of a call option is ___________, where X equals the option’s strike price and ST is the stock price at contract expiration.

A. Max (0, ST – X)

B. Min (0, ST – X)

C. Max (0, X – ST)

D. Min (0, X – ST)

8. At contract maturity the value of a put option is ___________, where X equals the option’s strike price and ST is the stock price at contract expiration.

A. Max (0, ST – X)

B. Min (0, ST – X)

C. Max (0, X – ST)

D. Min (0, X – ST)

9. An American put option gives its holder the right to _________.

A. buy the underlying asset at the exercise price on or before the expiration date

B. buy the underlying asset at the exercise price only at the expiration date

C. sell the underlying asset at the exercise price on or before the expiration date

D. sell the underlying asset at the exercise price only at the expiration date

10. An Asian call option gives its holder the right to ____________.

A. buy the underlying asset at the exercise price on or before the expiration date

B. buy the underlying asset at a price determined by the average stock price during some specified portion of the option’s life

C. sell the underlying asset at the exercise price on or before the expiration date

D. sell the underlying asset at a price determined by the average stock price during some specified portion of the option’s life

11. An Asian put option gives its holder the right to ____________.

A. buy the underlying asset at the exercise price on or before the expiration date

B. buy the underlying asset at a price determined by the average stock price during some specified portion of the option’s life

C. sell the underlying asset at the exercise price on or before the expiration date

D. sell the underlying asset at a price determined by the average stock price during some specified portion of the option’s life

12. A time spread may be executed by _____.

A. selling an option with one exercise price and buying a similar one with a different exercise price

B. buying two options that have the same expiration dates but different strike prices

C. selling two options that have the same expiration dates but different strike prices

D. selling an option with one expiration date and buying a similar option with a different expiration date

13. Which of the following statements about convertible bonds are true?

I. The conversion price does not change over time.
II. The associated stocks may not pay dividends as long as the bonds are outstanding.
III. Most convertibles are also callable at the discretion of the firm.
IV. They may be thought of as straight bonds plus a call option.

A. I and III only

B. I and IV only

C. I, II, and IV only

D. III and IV only

14. A quanto provides its holder with the right to ______________.

A. participate in the payoffs from a portfolio of gambling casino stocks

B. exchange a fixed amount of a foreign currency for dollars at a specified exchange rate

C. participate in the investment performance of a foreign security

D. exchange the payoff from a foreign investment for dollars at a fixed exchange rate

15. You purchase a call option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option’s strike price, ST is the stock price at contract expiration, and C0 is the original purchase price of the option.

A. Max (-C0, ST – X – C0)

B. Min (-C0, ST – X – C0)

C. Max (C0, ST – X + C0)

D. Max (0, ST – X – C0)

16. Strips and straps are variations of __________.

A. straddles

B. collars

C. money spreads

D. time spreads

17. You write a put option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option’s strike price, ST is the stock price at contract expiration, and P0 is the original premium of the put option.

A. Max (P0, X – ST – P0)

B. Min (-P0, X – ST – P0)

C. Min (P0, ST – X + P0)

D. Max (0, ST – X – P0)

18. Longer-term American-style options with maturities of up to 3 years are called __________.

A. warrants

B. LEAPS

C. GICs

D. CATs

19. The initial maturities of most exchange-traded options are generally __________.

A. less than 1 year

B. less than 2 years

C. between 1 and 2 years

D. between 1 and 3 years

20. A futures call option provides its holder with the right to ___________.

A. purchase a particular stock at some time in the future at a specified price

B. purchase a futures contract for the delivery of options on a particular stock

C. purchase a futures contract at a specified price for a specified period of time

D. deliver a futures contract and receive a specified price at a specific date in the future

21. Exchange-traded stock options expire on the _______________ of the expiration month.

A. second Monday

B. third Wednesday

C. second Thursday

D. third Friday

22. The writer of a put option _______________.

A. agrees to sell shares at a set price if the option holder desires

B. agrees to buy shares at a set price if the option holder desires

C. has the right to buy shares at a set price

D. has the right to sell shares at a set price

23. Advantages of exchange-traded options over OTC options include all but which one of the following?

A. Ease and low cost of trading

B. Anonymity of participants

C. Contracts that are tailored to meet the needs of market participants

D. No concerns about counterparty credit risk

24. Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock.

A. 1

B. 10

C. 100

D. 1,000

25. Exercise prices for listed stock options usually occur in increments of ____ and bracket the current stock price.

A. $1

B. $5

C. $20

D. $25

26. You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a _________.

A. time spread

B. long straddle

C. short straddle

D. money spread

27. In 1973, trading of standardized options on a national exchange started on the _________.

A. AMEX

B. CBOE

C. NYSE

D. CFTC

28. An American call option gives the buyer the right to _________.

A. buy the underlying asset at the exercise price on or before the expiration date

B. buy the underlying asset at the exercise price only at the expiration date

C. sell the underlying asset at the exercise price on or before the expiration date

D. sell the underlying asset at the exercise price only at the expiration date

29. A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is _________.

A. at the money

B. in the money

C. out of the money

D. knocked out

30. You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July, and you write a call option on Merritt Corp. with an exercise price of $55 and an expiration date in July. This is called a ________.

A. time spread

B. long straddle

C. short straddle

D. money spread

31. A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________.

A. at the money

B. in the money

C. out of the money

D. knocked in

32. You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________.

A. covered call

B. long straddle

C. naked call

D. money spread

33. You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September, and you write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a _________.

A. time spread

B. long straddle

C. short straddle

D. money spread

34. A European call option gives the buyer the right to _________.

A. buy the underlying asset at the exercise price on or before the expiration date

B. buy the underlying asset at the exercise price only at the expiration date

C. sell the underlying asset at the exercise price on or before the expiration date

D. sell the underlying asset at the exercise price only at the expiration date

35. You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________.

A. long straddle

B. naked put

C. protective put

D. short stroll

36. The value of a listed call option on a stock is lower when:

I. The exercise price is higher.
II. The contract approaches maturity.
III. The stock decreases in value.
IV. A stock split occurs.

A. II, III, and IV only

B. I, III, and IV only

C. I, II, and III only

D. I, II, III, and IV

37. The Option Clearing Corporation is owned by _________.

A. the exchanges on which stock options are traded

B. the Federal Deposit Insurance Corporation

C. the Federal Reserve System

D. major U.S. banks

38. The value of a listed put option on a stock is lower when:

I. The exercise price is higher.
II. The contract approaches maturity.
III. The stock decreases in value.
IV. A stock split occurs.

A. II only

B. II and IV only

C. I, II, and III only

D. I, II, III, and IV

39. The maximum loss a buyer of a stock call option can suffer is the _________.

A. call premium

B. stock price

C. stock price minus the value of the call

D. strike price minus the stock price

40. Which one of the statements about margin requirements on option positions is not correct?

A. The margin required will be higher if the option is in the money.

B. If the required margin exceeds the posted margin, the option writer will receive a margin call.

C. A buyer of a put or call option does not have to post margin.

D. Even if the writer of a call option owns the stock, the writer will have to meet the margin requirement in cash.

41. A European put option gives its holder the right to _________.

A. buy the underlying asset at the exercise price on or before the expiration date

B. buy the underlying asset at the exercise price only at the expiration date

C. sell the underlying asset at the exercise price on or before the expiration date

D. sell the underlying asset at the exercise price only at the expiration date

42. The potential loss for a writer of a naked call option on a stock is _________.

A. equal to the call premium

B. larger the lower the stock price

C. limited

D. unlimited

43. A writer of a call option will want the value of the underlying asset to __________, and a buyer of a put option will want the value of the underlying asset to _________.

A. decrease; decrease

B. decrease; increase

C. increase; decrease

D. increase; increase

44. Buyers of listed options __________ required to post margins, and writers of naked listed options __________ required to post margins.

A. are; are not

B. are; are

C. are not; are

D. are not; are not

45. An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called ______ option.

A. an American

B. a European

C. an Asian

D. an Australian

46. Which of the following expressions represents the value of a call option to its holder on the expiration date?

A. ST – X if ST > X, 0 if ST ≤ X

B. – (ST – X) if ST > X, 0 if ST ≤ X

C. 0 if ST ≥ X, X – ST if ST < X

D. 0 if ST ≥ X, – (X – ST) if ST < X

47. A “bet” option is also called a ____ option.

A. barrier

B. lookback

C. digital

D. foreign exchange

48. Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index?

A. SPX

B. DJX

C. CME

D. OEX

49. The May 17, 2012, price quotation for a Boeing call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boeing is $69.80. The premium on one Boeing November 50 call contract is _________.

A. $1,980

B. $4,900

C. $5,000

D. $2,080

50. You purchase one IBM March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is _________.

A. $120

B. $1,000

C. $11,000

D. $12,000

51. You buy one Hewlett Packard August 50 call contract and one Hewlett Packard August 50 put contract. The call premium is $1.25, and the put premium is $4.50. Your highest potential loss from this position is _________.

A. $125

B. $450

C. $575

D. unlimited

52. You sell one Hewlett Packard August 50 call contract and sell one Hewlett Packard August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the stock price is __________ in August.

A. either lower than $44.25 or higher than $55.75

B. between $44.25 and $55.75

C. higher than $55.75

D. lower than $44.25

53. Suppose you purchase one Texas Instruments August 75 call contract quoted at $8.50 and write one Texas Instruments August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be _________.

A. $150

B. $400

C. $600

D. $1,850

54. __________ is the most risky transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is completed.

A. Writing an uncovered call option

B. Writing an uncovered put option

C. Buying a call option

D. Buying a put option

55. Which one of the following is a correct statement?

A. Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not.

B. A convertible bond consists of a straight bond plus a specified number of detachable warrants.

C. Call options always have an initial maturity greater than 1 year, while warrants have an initial maturity less than 1 year.

D. Call options may be convertible into the stock, while warrants are not convertible into the stock.

56. A put on Sanders stock with a strike price of $35 is priced at $2 per share, while a call with a strike price of $35 is priced at $3.50. The maximum per-share loss to the writer of an uncovered put is __________, and the maximum per-share gain to the writer of an uncovered call is _________.

A. $33; $3.50

B. $33; $31.50

C. $35; $3.50

D. $35; $35

57. You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes:

To establish a bull money spread with calls, you would _______________.

A. buy the 55 call and sell the 45 call

B. buy the 45 call and buy the 55 call

C. buy the 45 call and sell the 55 call

D. sell the 45 call and sell the 55 call

58. You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes:

Ignoring commissions, the cost to establish the bull money spread with calls would be _______.

A. $1,050

B. $650

C. $400

D. $400 income rather than cost

59. You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes:

If in June the stock price is $53, your net profit on the bull money spread (buy the 45 call and sell the 55 call) would be ________.

A. $300

B. -$400

C. $150

D. $50

60. You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes:

To establish a bull money spread with puts, you would _______________.

A. sell the 55 put and buy the 45 put

B. buy the 45 put and buy the 55 put

C. buy the 55 put and sell the 45 put

D. sell the 45 put and sell the 55 put

61. You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes:

Suppose you establish a bullish money spread with the puts. In June the stock’s price turns out to be $52. Ignoring commissions, the net profit on your position is _______________.

A. $500

B. $700

C. $200

D. $250

62. The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.

What would be a simple options strategy using a put and a call to exploit your conviction about the stock price’s future movement?

A. Sell a call.

B. Purchase a put.

C. Sell a straddle.

D. Buy a straddle.

63. The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.

Selling a straddle would generate total premium income of _____.

A. $300

B. $400

C. $500

D. $700

64. The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.

Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your net profit on the strap?

A. $200

B. $300

C. $700

D. $400

65. The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.

How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration?

A. Buy the call, sell the put; lend the present value of $40.

B. Sell the call, buy the put; lend the present value of $40.

C. Buy the call, sell the put; borrow the present value of $40.

D. Sell the call, buy the put; borrow the present value of $40.

66. A stock is trading at $50. You believe there is a 60% chance the price of the stock will increase by 10% over the next 3 months. You believe there is a 30% chance the stock will drop by 5%, and you think there is only a 10% chance of a major drop in price of 20%. At-the-money 3-month puts are available at a cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of 3 months?

A. $300

B. $200

C. $475

D. $0

67. A covered call strategy benefits from what environment?

A. Falling interest rates

B. Price stability

C. Price volatility

D. Unexpected events

68. You sell one IBM July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You hold the position until the expiration date, when IBM stock sells for $95 per share. You will realize a ______ on this strip.

A. $300 profit

B. $100 loss

C. $500 profit

D. $200 profit

69. Which strategy benefits from upside price movement and has some protection should the price of the security fall?

A. Bull spread

B. Long put

C. Short call

D. Straddle

70. What combination of puts and calls can simulate a long stock investment?

A. Long call and short put

B. Long call and long put

C. Short call and short put

D. Short call and long put

71. An investor purchases a long call at a price of $2.50. The expiration price is $35. If the current stock price is $35.10, what is the break-even point for the investor?

A. $32.50

B. $35

C. $37.50

D. $37.60

72. An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $.85, what is the break-even point for the investor?

A. $24.15

B. $25

C. $25.87

D. $27.86

73. Which of the following strategies makes a profit if the stock price stays stable?

A. Long call and short put

B. Long call and long put

C. Short call and short put

D. Short call and long put

74. Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases?

A. Long call and short put

B. Long call and long put

C. Short call and short put

D. Short call and long put

75. If you combine a long stock position with selling an at-the-money call option, the resulting net payoff profile will resemble the payoff profile of a _______.

A. long call

B. short call

C. short put

D. long put

76. What strategy could be considered insurance for an investment in a portfolio of stocks?

A. Covered call

B. Protective put

C. Short put

D. Straddle

77. What strategy is designed to ensure a value within the bounds of two different stock prices?

A. Collar

B. Covered Call

C. Protective put

D. Straddle

78. You are convinced that a stock’s price will move by at least 15% over the next 3 months. You are not sure which way the price will move, but you believe that the results of a patent hearing are definitely going to have a major effect on the stock price. You are somewhat more bullish than bearish however. Which one of the following options strategies best fits this scenario?

A. Buy a strip.

B. Buy a strap.

C. Buy a straddle.

D. Write a straddle.

79. When issued, most convertible bonds are issued _____________.

A. deep in the money

B. deep out of the money

C. slightly out of the money

D. slightly in the money

80. A convertible bond is deep in the money. This means the bond price will closely track the __________.

A. straight debt value of the bond

B. conversion value of the bond

C. straight debt value of the bond minus the conversion value

D. straight debt value of the bond plus the conversion value

81. Warrants differ from listed options in that:

I. Exercise of warrants results in dilution of a firm’s earnings per share.
II. When warrants are exercised, new shares of stock must be created.
III. Warrant exercise results in cash flows to the firm, whereas exercise of listed options does not.

A. I only

B. I and II only

C. II and III only

D. I, II, and III

82. Suppose you find two bonds identical in all respects except that bond A is convertible to common stock and bond B is not. Bond A is priced at $1,245, and bond B is priced at $1,120. Bond A has a promised yield to maturity of 5.6%, and bond B has a promised yield to maturity of 6.7%. The stock of bond A is trading at $49.80 per share. Which of the following statements is (are) correct?

I. The value of the conversion option for bond A is $125.
II. The lower promised yield to maturity of bond A indicates that the bond is priced according to its straight debt value rather than its conversion value.
III. If bond A can be converted into 25 shares of stock, the investor would break even at the current prices.

A. II only

B. I and III only

C. III only

D. I, II, and III

83. You find digital option quotes on jobless claims. You can buy a call option with a strike price of 300,000 jobless claims. This option pays $100 if actual claims exceed the strike price and pays zero otherwise. The option costs $68. A second digital call with a strike price of 305,000 jobless claims is available at a cost of $53. Suppose you buy the option with the 300,000 strike and sell the option with the 305,000 strike and jobless claims actually wind up at 303,000. Your net profit on the position is ______.

A. -$15

B. $200

C. $85

D. $185

84. Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell the stock this year due to tax reasons, but he is concerned that the stock will drop in value before year-end. Bill wants to use a collar to ensure that he minimizes his risk and doesn’t incur too much cost in deferring the gain. January call options with a strike of $50 are quoted at a cost of $2, and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill’s net position value including the option profit or loss and the stock is _________.

A. $195,000

B. $220,000

C. $175,000

D. $215,000

85. You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell, so you are considering purchasing either at-the-money or out-of-the-money puts. If you decide to purchase the out-of-the-money puts, your maximum loss is __________ than if you buy at-the-money puts and your maximum gain is __________.

A. greater; lower

B. greater; greater

C. lower; greater

D. lower; lower

86. You purchase one IBM July 90 call contract for a premium of $4. The stock has a 2-for-1 split prior to the expiration date. You hold the option until the expiration date, when IBM stock sells for $48 per share. You will realize a ______ on the investment.

A. $300 profit

B. $100 loss

C. $400 loss

D. $200 profit

87. You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6 months. You are considering using either puts or calls to hedge this position. Given this, which of the following statements is (are) correct?

I. One way to hedge your position would be to buy puts.
II. One way to hedge your position would be to write calls.
III. If major stock price declines are likely, hedging with puts is probably better than hedging with short calls.

A. I only

B. II only

C. I and III only

D. I, II, and III

17
Student: ___________________________________________________________________________
1. Today’s futures markets are dominated by trading in _______ contracts.

A. metals

B. agriculture

C. financial

D. commodity

2. A person with a long position in a commodity futures contract wants the price of the commodity to ______.

A. decrease substantially

B. increase substantially

C. remain unchanged

D. increase or decrease substantially

3. If an asset price declines, the investor with a _______ is exposed to the largest potential loss.

A. long call option

B. long put option

C. long futures contract

D. short futures contract

4. The clearing corporation has a net position equal to ______.

A. the open interest

B. the open interest times 2

C. the open interest divided by 2

D. zero

5. The S&P 500 Index futures contract is an example of a(n) ______ delivery contract. The pork bellies contract is an example of a(n) ______ delivery contract.

A. cash; cash

B. cash; actual

C. actual; cash

D. actual; actual

6. Which one of the following contracts requires no cash to change hands when initiated?

A. Listed put option

B. Short futures contract

C. Forward contract

D. Listed call option

7. Synthetic stock positions are commonly used by ______ because of their ______.

A. market timers; lower transaction cost

B. banks; lower risk

C. wealthy investors; tax treatment

D. money market funds; limited exposure

8. _____________ are likely to close their positions before the expiration date, while ____________ are likely to make or take delivery.

A. Investors; regulators

B. Hedgers; speculators

C. Speculators; hedgers

D. Regulators; investors

9. Futures contracts have many advantages over forward contracts except that _________.

A. futures positions are easier to trade

B. futures contracts are tailored to the specific needs of the investor

C. futures trading preserves the anonymity of the participants

D. counterparty credit risk is not a concern on futures

10. An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have _______.

A. an arbitrage

B. a cross-hedge

C. an over hedge

D. a spread hedge

11. The open interest on silver futures at a particular time is the number of __________.

A. all outstanding silver futures contracts

B. long and short silver futures positions counted separately on a particular trading day

C. silver futures contracts traded during the day

D. silver futures contracts traded the previous day

12. An investor who goes short in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset.

A. pay; pay

B. pay; receive

C. receive; pay

D. receive; receive

13. An investor who goes long in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset.

A. pay; pay

B. pay; receive

C. receive; pay

D. receive; receive

14. The advantage that standardization of futures contracts brings is that _____ is improved because ____________________.

A. liquidity; all traders must trade a small set of identical contracts

B. credit risk; all traders understand the risk of the contracts

C. pricing; convergence is more likely to take place with fewer contracts

D. trading cost; trading volume is reduced

15. The fact that the exchange is the counterparty to every futures contract issued is important because it eliminates _________ risk.

A. market

B. credit

C. interest rate

D. basis

16. In the futures market the short position’s loss is ___________ the long position’s gain.

A. greater than

B. less than

C. equal to

D. sometimes less than and sometimes greater than

17. A wheat farmer should __________ in order to reduce his exposure to risk associated with fluctuations in wheat prices.

A. sell wheat futures

B. buy wheat futures

C. buy a contract for delivery of wheat now and sell a contract for delivery of wheat at harvest time

D. sell wheat futures if the basis is currently positive and buy wheat futures if the basis is currently negative

18. Which of the following provides the profit to a long position at contract maturity?

A. Original futures price – Spot price at maturity

B. Spot price at maturity – Original futures price

C. Zero

D. Basis

19. You take a long position in a futures contract of one maturity and a short position in a contract of a different maturity, both on the same commodity. This is called a __________.

A. cross-hedge

B. reversing trade

C. spread position

D. straddle

20. Interest rate futures contracts exist for all of the following except __________.

A. federal funds

B. Eurodollars

C. banker’s acceptances

D. repurchase agreements

21. Initial margin is usually set in the region of ________ of the total value of a futures contract.

A. 5%-15%

B. 10%-20%

C. 15%-25%

D. 20%-30%

22. Margin must be posted by ________.

A. buyers of futures contracts only

B. sellers of futures contracts only

C. both buyers and sellers of futures contracts

D. speculators only

23. The daily settlement of obligations on futures positions is called _____________.

A. a margin call

B. marking to market

C. a variation margin check

D. the initial margin requirement

24. Which of the following provides the profit to a short position at contract maturity?

A. Original futures price – Spot price at maturity

B. Spot price at maturity – Original futures price

C. Zero

D. Basis

25. Margin requirements for futures contracts can be met by ______________.

A. cash only

B. cash or highly marketable securities such as Treasury bills

C. cash or any marketable securities

D. cash or warehouse receipts for an equivalent quantity of the underlying commodity

26. An established value below which a trader’s margin may not fall is called the ________.

A. daily limit

B. daily margin

C. maintenance margin

D. convergence limit

27. Which one of the following is a true statement?

A. A margin deposit can be met only by cash.

B. All futures contracts require the same margin deposit.

C. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract.

D. The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call.

28. At maturity of a futures contract, the spot price and futures price must be approximately the same because of __________.

A. marking to market

B. the convergence property

C. the open interest

D. the triple witching hour

29. A futures contract __________.

A. is a contract to be signed in the future by the buyer and the seller of a commodity

B. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract

C. is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract

D. gives the buyer the right, but not the obligation, to buy an asset some time in the future

30. Which one of the following exploits differences between actual future prices and their theoretically correct parity values?

A. Index arbitrage

B. Marking to market

C. Reversing trades

D. Settlement transactions

31. Which one of the following refers to the daily settlement of obligations on future positions?

A. Marking to market

B. The convergence property

C. The open interest

D. The triple witching hour

32. The most actively traded interest rate futures contract is for ___________.

A. LIBOR

B. Treasury bills

C. Eurodollars

D. Treasury bonds

33. The CME weather futures contract is an example of ______________.

A. a cash-settled contract

B. an agricultural contract

C. a financial future

D. a commodity future

34. Single stock futures, as opposed to stock index futures, are _______________.

A. not yet being offered by any exchanges

B. offered overseas but not in the United States

C. currently trading on One Chicago, a joint venture of several exchanges

D. scheduled to begin trading in 2015 on several exchanges

35. You are currently long in a futures contract. You instruct a broker to enter the short side of a futures contract to close your position. This is called __________.

A. a cross-hedge

B. a reversing trade

C. a speculation

D. marking to market

36. A company that mines bauxite, an aluminum ore, decides to short aluminum futures. This is an example of __________ to limit its risk.

A. cross-hedging

B. long hedging

C. spreading

D. speculating

37. Futures markets are regulated by the __________.

A. CFA Institute

B. CFTC

C. CIA

D. SEC

38. A hog farmer decides to sell hog futures. This is an example of __________ to limit risk.

A. cross-hedging

B. short hedging

C. spreading

D. speculating

39. On May 21, 2012, you could have purchased a futures contract from Intrade for a price of $5.70 that would pay you $10 if Barack Obama won the 2012 presidential election. This tells you _____.

A. that the market believed that Obama had a 57% chance of winning

B. that the market believed that Obama would not win the election

C. nothing about the market’s belief concerning the odds of Obama winning

D. that the market believed Obama’s chances of winning were about 43%

40. An investor would want to __________ to exploit an expected fall in interest rates.

A. sell S&P 500 Index futures

B. sell Treasury-bond futures

C. buy Treasury-bond futures

D. buy wheat futures

41. Forward contracts _________ traded on an organized exchange, and futures contracts __________ traded on an organized exchange.

A. are; are

B. are; are not

C. are not; are

D. are not; are not

42. If the S&P 500 Index futures contract is overpriced relative to the spot S&P 500 Index, you should __________.

A. buy all the stocks in the S&P 500 and write put options on the S&P 500 Index

B. sell all the stocks in the S&P 500 and buy call options on S&P 500 Index

C. sell S&P 500 Index futures and buy all the stocks in the S&P 500

D. sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

43. A long hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market.

A. long; long

B. long; short

C. short; long

D. short; short

44. Investors who take short positions in futures contract agree to ___________ delivery of the commodity on the delivery date, and those who take long positions agree to __________ delivery of the commodity.

A. make; make

B. make; take

C. take; make

D. take; take

45. An investor would want to __________ to hedge a long position in Treasury bonds.

A. buy interest rate futures

B. buy Treasury bonds in the spot market

C. sell interest rate futures

D. sell S&P 500 futures

46. Futures contracts are said to exhibit the property of convergence because _______________.

A. the profits from long positions and short positions must ultimately be equal

B. the profits from long positions and short positions must ultimately net to zero

C. price discrepancies would open arbitrage opportunities for investors who spot them

D. the futures price and spot price of any asset must ultimately net to zero

47. In the context of a futures contract, the basis is defined as ______________.

A. the futures price minus the spot price

B. the spot price minus the futures price

C. the futures price minus the initial margin

D. the profit on the futures contract

48. The __________ is among the world’s largest derivatives exchanges and operates a fully electronic trading and clearing platform.

A. CBOE

B. CBOT

C. CME

D. Eurex

49. Violation of the spot-futures parity relationship results in _______________.

A. fines and other penalties imposed by the SEC

B. arbitrage opportunities for investors who spot them

C. suspension of delivery privileges

D. suspension of trading

50. When dividend-paying assets are involved, the spot-futures parity relationship can be stated as _________________.

A. F1 = S0(1 + rf)

B. F0 = S0(1 + rf – d)T

C. F0 = S0(1 + rf + d)T

D. F0 = S0(1 + rf)T

51. An investor establishes a long position in a futures contract now (time 0) and holds the position until maturity (time T). The sum of all daily settlements will be __________.

A. F0 – FT

B. F0 – S0

C. FT – F0

D. FT – S0

52. A short hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market.

A. long; long

B. long; short

C. short; long

D. short; short

53. Approximately __________ of futures contracts result in actual delivery.

A. 0%

B. less than 1% to 3%

C. less than 5% to 15%

D. less than 60% to 80%

54. A long hedger will __________ from an increase in the basis; a short hedger will __________.

A. be hurt; be hurt

B. be hurt; profit

C. profit; be hurt

D. profit; profit

55. At year-end, taxes on a futures position _______________.

A. must be paid if the position has been closed out

B. must be paid if the position has not been closed out

C. must be paid regardless of whether the position has been closed out or not

D. need not be paid if the position supports a hedge

56. A speculator will often prefer to buy a futures contract rather than the underlying asset because:

I. Gains in futures contracts can be larger due to leverage.
II. Transaction costs in futures are typically lower than those in spot markets.
III. Futures markets are often more liquid than the markets of the underlying commodities.

A. I and II only

B. II and III only

C. I and III only

D. I, II, and III

57. On January 1, you sold one April S&P 500 Index futures contract at a futures price of 1,300. If the April futures price is 1,250 on February 1, your profit would be __________ if you close your position. (The contract multiplier is 250.)

A. -$12,500

B. -$15,000

C. $15,000

D. $12,500

58. The current level of the S&P 500 is 1,250. The dividend yield on the S&P 500 is 3%. The risk-free interest rate is 6%. The futures price quote for a contract on the S&P 500 due to expire 6 months from now should be __________.

A. 1,274.33

B. 1,286.95

C. 1,268.61

D. 1,291.29

59. The spot price for gold is $1,550 per ounce. The dividend yield on the S&P 500 is 2.5%. The risk-free interest rate is 3.5%. The futures price for gold for a 6-month contract on gold should be __________.

A. $1,504.99

B. $1,569.08

C. $1,554.04

D. $1,557.73

60. If you expect a stock market downturn, one potential defensive strategy would be to __________.

A. buy stock-index futures

B. sell stock-index futures

C. buy stock-index options

D. sell foreign exchange futures

61. At contract maturity the basis should equal ___________.

A. 1

B. 0

C. the risk-free interest rate

D. -1

62. You believe that the spread between the September T-bond contract and the June T-bond futures contract is too large and will soon correct. This market exhibits positive cost of carry for all contracts. To take advantage of this, you should ______________.

A. buy the September contract and sell the June contract

B. sell the September contract and buy the June contract

C. sell the September contract and sell the June contract

D. buy the September contract and buy the June contract

63. A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%.

The arbitrage profit implied by these prices is _____________.

A. $3.27

B. $4.39

C. $5.24

D. $6.72

64. A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%.

Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits?

A. Buy gold in the spot with borrowed money, and sell the futures contract.

B. Buy the futures contract, and sell the gold spot and invest the money earned.

C. Buy gold spot with borrowed money, and buy the futures contract.

D. Buy the futures contract, and buy the gold spot using borrowed money.

65. A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 1 year. If the T-bill rate is 5%, what should the futures price be?

A. $95.24

B. $100

C. $105

D. $107

66. A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 4 years. If the T-bill rate is 7%, what should the futures price be?

A. $76.29

B. $93.46

C. $107

D. $131.08

67. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract’s face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.

After Monday’s close the balance on your margin account will be ________.

A. $2,700

B. $2,000

C. $3,137.50

D. $2,262.50

68. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract’s face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.

At the close of day on Tuesday your cumulative rate of return on your investment is _____.

A. 16.2%

B. -5.8%

C. -.16%

D. -2.2%

69. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract’s face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.

On which of the given days do you get a margin call?

A. Monday

B. Tuesday

C. Wednesday

D. None of these options

70. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract’s face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.

The cumulative rate of return on your investment after Wednesday is a ____.

A. 79.9% loss

B. 2.6% loss

C. 33% gain

D. 53.9% loss

71. The volume of interest rate swaps increased from almost zero in 1980 to over __________ today.

A. $40 million

B. $400 million

C. $400 billion

D. $400 trillion

72. If the risk-free rate is greater than the dividend yield, then we know that _______________.

A. the futures price will be higher as contract maturity increases

B. F0 < S0 C. FT > ST

D. arbitrage profits are possible

73. Sahali Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 9%. Sahali Trading Company then enters into an interest rate swap where it will pay LIBOR and receive a fixed 8% on a notional principal of $100 million. After all these transactions are considered, Sahali’s cost of funds is __________.

A. 17%

B. LIBOR

C. LIBOR + 1%

D. LIBOR – 1%

74. Interest rate swaps involve the exchange of ________________.

A. actual fixed-rate bonds for actual floating-rate bonds

B. actual floating-rate bonds for actual fixed-rate bonds

C. net interest payments and an actual principal swap

D. net interest payments based on notional principal, but no exchange of principal

75. From the perspective of determining profit and loss, the long futures position most closely resembles a levered investment in a ____________.

A. long call

B. short call

C. short stock position

D. long stock position

76. The _________ contract dominates trading in stock-index futures.

A. S&P 500

B. DJIA

C. Nasdaq 100

D. Russell 2000

77. The ________ and the _______ have the lowest correlations with the large-cap indexes.

A. Nasdaq Composite; Russell 2000

B. NYSE; DJIA

C. S&P 500; DJIA

D. Russell 2000; S&P 500

78. The use of leverage is practiced in the futures markets due to the existence of _________.

A. banks

B. brokers

C. clearinghouses

D. margin

79. You purchase an interest rate futures contract that has an initial margin requirement of 15% and a futures price of $115,098. The contract has a $100,000 underlying par value bond. If the futures price falls to $108,000, you will experience a ______ loss on your money invested.

A. 31%

B. 41%

C. 52%

D. 64%

80. You own a $15 million bond portfolio with a modified duration of 11 years. Interest rates are expected to increase by 5 basis points, or .05%. What is the price value of a basis point?

A. $10,400

B. $14,300

C. $16,500

D. $21,300

81. The price of a corn futures contract is $2.65 per bushel when the contract is issued, and the commodity spot price is $2.55. When the contract expires, the two prices are identical. What principle is represented by this price behavior?

A. Convergence

B. Margin

C. Basis

D. Volatility

82. A corporation will be issuing bonds in 6 months, and the treasurer is concerned about unfavorable interest rate moves in the interim. The best way for her to hedge the risk is to _________________.

A. buy T-bond futures

B. sell T-bond futures

C. buy stock-index futures

D. sell stock-index futures

83. A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn.

What are the farmer’s proceeds from the sale of corn?

A. $27,500

B. $31,875

C. $33,875

D. $35,950

84. A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn.

Ignoring the transaction costs, how much did the farmer improve his cash flow by hedging sales with the futures contracts?

A. $0

B. $2,000

C. $31,875

D. $33,875

85. A bank has made long-term fixed-rate mortgages and has financed them with short-term deposits. To hedge out its interest rate risk, the bank could ________.

A. sell T-bond futures

B. buy T-bond futures

C. buy stock-index futures

D. sell stock-index futures

86. A market timer now believes that the economy will soften over the rest of the year as the housing market slump continues, and she also believes that foreign investors will stop buying U.S. fixed-income securities in the large quantities that they have in the past. One way the timer could take advantage of this forecast is to ________________.

A. buy T-bond futures and sell stock-index futures

B. sell T-bond futures and buy stock-index futures

C. buy stock-index futures and buy T-bond futures

D. sell stock-index futures and sell T-bond futures

87. The Student Loan Marketing Association (SLMA) has short-term student loans funded by long-term debt. To hedge out this interest rate risk, SLMA could:

I. Engage in a swap to pay fixed and receive variable interest payments
II. Engage in a swap to pay variable and receive fixed interest payments
III. Buy T-bond futures
IV. Sell T-bond futures

A. I and II only

B. I and IV only

C. II and III only

D. II and IV only

18
Student: ___________________________________________________________________________
1. A mutual fund with a beta of 1.1 has outperformed the S&P 500 over the last 20 years. We know that this mutual fund manager _____.

A. must have had superior stock selection ability.

B. must have had superior asset allocation ability.

C. must have had superior timing ability.

D. may or may not have outperformed the S&P 500 on a risk-adjusted basis.

2. The comparison universe is __________.

A. the bogey portfolio

B. a set of mutual funds with similar risk characteristics to your mutual fund

C. the set of all mutual funds in the United States

D. the set of all mutual funds in the world

3. Which one of the following performance measures is the Sharpe ratio?

A. Average excess return to beta ratio

B. Average excess return to standard deviation ratio

C. Alpha to standard deviation of residuals ratio

D. Average return minus required return

4. The M2 measure is a variant of ________________.

A. the Sharpe measure

B. the Treynor measure

C. Jensen’s alpha

D. the appraisal ratio

5. A managed portfolio has a standard deviation equal to 22% and a beta of .9 when the market portfolio’s standard deviation is 26%. The adjusted portfolio P* needed to calculate the M2 measure will have ________ invested in the managed portfolio and the rest in T-bills.

A. 84.6%

B. 118%

C. 18%

D. 15.4%

6. Your return will generally be higher using the __________ if you time your transactions poorly, and your return will generally be higher using the __________ if you time your transactions well.

A. dollar-weighted return method; dollar-weighted return method

B. dollar-weighted return method; time-weighted return method

C. time-weighted return method; dollar-weighted return method

D. time-weighted return method; time-weighted return method

7. Consider the Sharpe and Treynor performance measures. When a pension fund is large and well diversified in total and it has many managers, the __________ measure is better for evaluating individual managers while the __________ measure is better for evaluating the manager of a small fund with only one manager responsible for all investments, which may not be fully diversified.

A. Sharpe; Sharpe

B. Sharpe; Treynor

C. Treynor; Sharpe

D. Treynor; Treynor

8. Consider the theory of active portfolio management. Stocks A and B have the same beta and the same positive alpha. Stock A has higher nonsystematic risk than stock B. You should want __________ in your active portfolio.

A. equal proportions of stocks A and B

B. more of stock A than stock B

C. more of stock B than stock A

D. The answer cannot be determined from the information given.

9. Suppose that over the same time period two portfolios have the same average return and the same standard deviation of return, but portfolio A has a higher beta than portfolio B. According to the Sharpe ratio, the performance of portfolio A __________.

A. is better than the performance of portfolio B

B. is the same as the performance of portfolio B

C. is poorer than the performance of portfolio B

D. cannot be measured since there is no data on the alpha of the portfolio

10. Which model is preferred by academics, and is gaining in popularity with practitioners, when evaluating investment performance?

A. The Treynor-Black model

B. The single-index model

C. The Fama-French three-factor model

D. The Sharpe model

11. The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below.

What is the Treynor measure for portfolio A?

A. 12.38%

B. 2.38%

C. .91%

D. 3.64%

12. The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below.

What is the M2 measure for portfolio B?

A. .43%

B. 1.25%

C. 1.77%

D. 1.43%

13. The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below.

If these portfolios are subcomponents that make up part of a well-diversified portfolio, then portfolio ______ is preferred.

A. A

B. B

C. C

D. S&P 500

14. The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below.

Based on the M2 measure, portfolio C has a superior return of _____ as compared to the S&P 500.

A. -1.33%

B. 1.43%

C. 2%

D. 0%

15. Which one of the following is largely based on forecasts of macroeconomic factors?

A. Security selection

B. Passive investing

C. Market efficiency

D. Market timing

16. Based on the example used in the book, a perfect market timer would have made _______ by 2008 on a $1 investment made in 1926.

A. $100

B. $1,626

C. $1.5 million

D. $36.7 billion

17. The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%.

You want to evaluate the three mutual funds using the Sharpe ratio for performance evaluation. The fund with the highest Sharpe ratio of performance is __________.

A. fund A

B. fund B

C. fund C

D. The answer cannot be determined from the information given.

18. The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%.

You want to evaluate the three mutual funds using the Treynor measure for performance evaluation. The fund with the highest Treynor measure of performance is __________.

A. fund A

B. fund B

C. fund C

D. The answer cannot be determined from the information given.

19. The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%.

You want to evaluate the three mutual funds using the Jensen measure for performance evaluation. The fund with the highest Jensen measure of performance is __________.

A. fund A

B. fund B

C. fund C

D. S&P 500

20. In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The total excess return on the managed portfolio was __________.

A. 2%

B. 3%

C. 4%

D. 5%

21. In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The contribution of asset allocation across markets to the total excess return was __________.

A. 1.5%

B. 2%

C. 2.5%

D. 3.5%

22. In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The contribution of security selection within asset classes to the total excess return was __________.

A. 1.5%

B. 2%

C. 2.5%

D. 3.5%

23. In a particular year, Lost Hope Mutual Fund made the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The total extra return on the managed portfolio was __________.

A. 1%

B. 2%

C. 3%

D. 4%

24. In a particular year, Lost Hope Mutual Fund made the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The contribution of asset allocation across markets to the total extra return was __________.

A. -1%

B. 0%

C. 1%

D. 2%

25. In a particular year, Lost Hope Mutual Fund made the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The contribution of security selection within asset classes to the total extra return was __________.

A. -1%

B. 0%

C. 1%

D. 2%

26. Which one of the following averaging methods is the preferred method of constructing returns series for use in evaluating portfolio performance?

A. Geometric average

B. Arithmetic average

C. Dollar weighted

D. Internal

27. The __________ calculates the reward to risk trade-off by dividing the average portfolio excess return by the portfolio beta.

A. Sharpe ratio

B. Treynor measure

C. Jensen measure

D. appraisal ratio

28. 28. In creating the P* portfolio, one mixes the original portfolio P and T-bills to match the _________ of the market.

A. alpha

B. beta

C. excess return

D. standard deviation

29. The M2 measure of portfolio performance was developed by ______________.

A. Modigliani and Miller

B. Modigliani and Modigliani

C. Merton and Miller

D. Fama and French

30. Probably the biggest problem with evaluating the portfolio performance of actively managed funds is the assumption that __________________________.

A. the markets are efficient

B. portfolio risk is constant over time

C. diversification pays off

D. security selection is more valuable than asset allocation

31. Perfect-timing ability is equivalent to having __________ on the market portfolio.

A. a call option

B. a futures contract

C. a put option

D. a forward contract

32. One hundred fund managers enter a contest to see how many times in 13 years they can earn a higher return than their competitors. The probability distribution of the number of successful years out of 13 for the best-performing money managers is

Out of this sample, chance alone would indicate that there is a ______ probability that someone would beat the market at least 11 times out of 13 years.

A. 51.3%

B. 65.9%

C. 67.1%

D. 10.83%

33. The Treynor-Black model is a model that shows how an investment manager can use security analysis and statistics to construct __________.

A. a market portfolio

B. a passive portfolio

C. an active portfolio

D. an index portfolio

34. If an investor is a successful market timer, his distribution of monthly portfolio returns will __________.

A. be skewed to the left

B. be skewed to the right

C. exhibit kurtosis

D. exhibit neither skewness nor kurtosis

35. Recent analysis indicates that the style of investing is a critical component of fund performance. In fact, on average about _____ of fund performance is attributable to the asset allocation decision.

A. 68%

B. 74%

C. 88%

D. 97%

36. In the Treynor-Black model, the active portfolio will contain stocks with __________.

A. alphas equal to zero

B. negative alphas

C. positive alphas

D. some negative and some positive alphas

37. Portfolio performance is often decomposed into various subcomponents, such as the return due to:

I. Broad asset allocation across security classes
II. Sector weightings within equity markets
III. Security selection with a given sector

The one decision that contributes most to the fund performance is _____.

A. I

B. II

C. III

D. All contribute equally to fund performance.

38. The theory of efficient frontiers has __________.

A. no adherents among practitioners

B. a small number of adherents among practitioners

C. a significant number of adherents among practitioners

D. complete support by practitioners

39. In the Treynor-Black model, security analysts __________.

A. analyze a relatively small number of stocks

B. analyze all stocks that are publicly traded

C. are redundant

D. devote their attention to market timing rather than fundamental analysis

40. In the Treynor-Black model, security analysts __________.

A. analyze the entire universe of stocks

B. assume that markets are inefficient

C. treat market index as a baseline portfolio from which an active portfolio is constructed

D. focus on selecting the best-performing bogey

41. Active portfolio management consists of:

I. Market timing
II. Security selection
III. Sector selection within given markets
IV. Indexing

A. I and II only

B. II and III only

C. I, II, and III only

D. I, II, III, and IV

42. A market-timing strategy is one in which asset allocation in the stock market __________ when one forecasts that the stock market will outperform Treasury bills.

A. decreases

B. increases

C. remains the same

D. may increase or decrease

43. In the Treynor-Black model, the contribution of individual security to the active portfolio should be based primarily on the stock’s _________.

A. alpha

B. beta

C. residual variance

D. information ratio

44. If all ______ are ______ in the Treynor-Black model, there would be no reason to depart from the passive portfolio.

A. alphas; zero

B. alphas; positive

C. betas; positive

D. standard deviations; positive

45. In the Treynor-Black model, the weight of each analyzed security in the portfolio should be proportional to its __________.

A. alpha/beta

B. alpha/residual variance

C. beta/residual variance

D. none of these options

46. The critical variable in the determination of the success of the active portfolio is the stock’s __________.

A. alpha/nonsystematic risk ratio

B. alpha/systematic risk ratio

C. delta/nonsystematic risk ratio

D. delta/systematic risk ratio

47. Consider the theory of active portfolio management. Stocks A and B have the same positive alpha and the same nonsystematic risk. Stock A has a higher beta than stock B. You should want __________ in your active portfolio.

A. equal proportions of stocks A and B

B. more of stock A than stock B

C. more of stock B than stock A

D. The answer cannot be determined from the information given.

48. Consider the theory of active portfolio management. Stocks A and B have the same beta and nonsystematic risk. Stock A has a higher positive alpha than stock B. You should want __________ in your active portfolio.

A. equal proportions of stocks A and B

B. more of stock A than stock B

C. more of stock B than stock A

D. The answer cannot be determined from the information given.

49. The market-timing form of active portfolio management relies on __________ forecasting, and the security selection form of active portfolio management relies on __________ forecasting.

A. macroeconomic; macroeconomic

B. macroeconomic; microeconomic

C. microeconomic; macroeconomic

D. microeconomic; microeconomic

50. Active portfolio managers try to construct a risky portfolio with _______.

A. a higher Sharpe ratio than a passive strategy

B. a lower Sharpe ratio than a passive strategy

C. the same Sharpe ratio as a passive strategy

D. very few securities

51. In performance measurement, the bogey portfolio is designed to _________.

A. measure the returns to a completely passive strategy

B. measure the returns to a similar active strategy

C. measure the returns to a given investment style

D. equal the return on the S&P 500

52. __________ portfolio managers experience streaks of abnormal returns that are hard to label as lucky outcomes, and _________ anomalies in realized returns have been sufficiently persistent that portfolio managers could use them to beat a passive strategy over prolonged periods.

A. No; no

B. No; some

C. Some; no

D. Some; some

53. A passive benchmark portfolio is:

I. A portfolio in which the asset allocation across broad asset classes is neutral and not determined by forecasts of performance of the different asset classes
II. One in which an indexed portfolio is held within each asset class
III. Often called the bogey

A. I only

B. I and III only

C. II and III only

D. I, II, and III

54. The correct measure of timing ability is ____________ for a portfolio manager who correctly forecasts 55% of bull markets and 55% of bear markets.

A. -5%

B. 5%

C. 10%

D. 95%

55. It is very hard to statistically verify abnormal fund performance because of all of the following except which one?

A. Inevitably, some fund managers experience streaks of good performance that may just be due to luck.

B. The noise in realized rates of return is so large as to make it hard to identify abnormal performance in competitive markets.

C. Portfolio composition is rarely stable long enough to identify abnormal performance.

D. Even if successful, there is really not much value to be added by active strategies such as market timing.

56. The term alpha transport refers to _____.

A. establishing alpha and then using index products to hedge market exposure and reduce exposure to particular sectors.

B. establishing alpha and then using sector mutual funds to hedge market exposure and reduce exposure to the general market.

C. establishing alpha and then using sector mutual funds to hedge market exposure and gain exposure to the general market.

D. establishing alpha and then using index products to hedge market exposure and gain exposure to particular sectors.

57. Portfolio managers Martin and Krueger each manage $1 million funds. Martin has perfect foresight, and the call option value of his perfect foresight is $150,000. Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The correct measure of timing ability for Krueger is __________.

A. 20%

B. 60%

C. 75%

D. 120%

58. Portfolio managers Martin and Krueger each manage $1 million funds. Martin has perfect foresight, and the call option value of his perfect foresight is $150,000. Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The value of Krueger’s imperfect forecasting ability is __________.

A. $30,000

B. $67,500

C. $108,750

D. $217,500

59. Douglass, an imperfect forecaster, correctly predicts 57% of all bull markets and 68% of all bear markets. Simmonds is a perfect forecaster. If Douglass is able to charge a fee of $125,000, the fee that Roy Simmonds should charge is __________. Assume that both forecasters manage similar-size funds.

A. $31,250

B. $200,000

C. $500,000

D. $625,000

60. A mutual fund invests in large-capitalization stocks. Its performance should be measured against which one of the following?

A. Russell 2000 Index

B. S&P 500 Index

C. Wilshire 5000 Index

D. Dow Jones Industrial Average

61. Assume you purchased a rental property for $100,000 and sold it 1 year later for $115,000 (there was no mortgage on the property). At the time of the sale, you paid $3,000 in commissions and $1,000 in taxes. If you received $10,000 in rental income (all received at the end of the year), what annual rate of return did you earn?

A. 6%

B. 11%

C. 21%

D. 25%

62. The table presents the actual return of each sector of the manager’s portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4.

What was the manager’s return in the month?

A. 2.07%

B. 2.21%

C. 2.24%

D. 4.8%

63. The table presents the actual return of each sector of the manager’s portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4.

What was the bogey’s return in the month?

A. 2.07%

B. 2.21%

C. 2.24%

D. 4.8%

64. The table presents the actual return of each sector of the manager’s portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4.

What was the manager’s over- or underperformance for the month?

A. Underperformance = .03%

B. Overperformance = .03%

C. Overperformance = .14%

D. Underperformance = 3%

65. The table presents the actual return of each sector of the manager’s portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4.

What is the contribution of security selection to relative performance?

A. -.15%

B. .15%

C. -.3%

D. .3%

66. The table presents the actual return of each sector of the manager’s portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4.

What is the contribution of asset allocation to relative performance?

A. -.18%

B. .18%

C. -.15%

D. .15%

67. Morningstar’s RAR produce results that are similar but not identical to ________.

A. Jensen’s alpha

B. M2

C. the Treynor ratio

D. the Sharpe ratio

68. The Treynor-Black model assumes that security markets are _________.

A. completely efficient

B. nearly efficient

C. very inefficient

D. random walks

69. The information ratio is equal to the stock’s ____ divided by its ______.

A. diversifiable risk; beta

B. beta; alpha

C. alpha; beta

D. alpha; diversifiable risk

70. Empirical tests to date show ______________.

A. that many investors have earned large rewards by market timing

B. little evidence of market-timing ability

C. clear-cut evidence of substantial market-timing ability

D. evidence that absolutely no market-timing ability exists

71. A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the M2 measure of the portfolio if the risk-free rate is 5%?

A. .58%

B. .68%

C. .78%

D. .88%

72. A portfolio generates an annual return of 17%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the M2 measure of the portfolio if the risk-free rate is 4%?

A. 2.15%

B. 2.76%

C. 2.94%

D. 3.14%

73. A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the Treynor measure of the portfolio if the risk-free rate is 5%?

A. .1143

B. .1233

C. .1354

D. .1477

74. A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the Treynor measure of the portfolio if the risk-free rate is 6%?

A. .0833

B. .1083

C. .1114

D. .1163

75. A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the Sharpe measure of the portfolio if the risk-free rate is 5%?

A. .3978

B. .4158

C. .4563

D. .4706

76. A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the Sharpe ratio of the portfolio if the risk-free rate is 6%?

A. .4757

B. .5263

C. .6842

D. .7252

77. A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is Jensen’s alpha of the portfolio if the risk-free rate is 5%?

A. .017

B. .034

C. .067

D. .078

78. A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is Jensen’s alpha of the portfolio if the risk-free rate is 6%?

A. .017

B. .028

C. .036

D. .078

79. The portfolio that contains the benchmark asset allocation against which a manager will be measured is often called _____________.

A. the bogey portfolio

B. the Vanguard Index

C. Jensen’s alpha

D. the Treynor measure

80. An attribution analysis will not likely contain which of the following components?

A. Asset allocation

B. Index returns

C. Risk-free returns

D. Security selection

81. Which of the following investment strategies would have produced the highest returns in the time period since 1926?

A. T-bills portfolio

B. S&P 500 Index fund

C. Perfect market timing

D. Random stock selection

82. What phrase might be used as a substitute for the Treynor-Black model developed in 1973?

A. Solely active management

B. Enhanced index approach

C. Passive management

D. Random selection

83. What is the term for the process used to assess portfolio manager performance?

A. Active analysis

B. Attribution analysis

C. Passive analysis

D. Treynor-Black Analysis

84. A fund has excess performance of 1.5%. In looking at the fund’s investment breakdown, you see that the fund overweighted equities relative to the benchmark and that the average return on the fund’s equity portfolio was slightly lower than the equity benchmark return. The excess performance for this fund is probably due to _______________.

A. security selection ability

B. better sector weightings in the equity portfolio

C. the asset allocation decision

D. finding securities with positive alphas

85. For a market timer, the _____________ will be higher when RM is higher.

A. portfolio’s alpha and beta

B. portfolio’s unsystematic risk

C. portfolio’s beta and slope of the characteristic line

D. security selection component of the portfolio

86. The Treynor-Black model combines an actively managed portfolio with an efficiently diversified portfolio in order to:

I. Improve the diversification of the overall portfolio
II. Improve the overall portfolio’s Sharpe ratio
III. Reach a higher CAL than would otherwise be possible

A. I only

B. I and II only

C. II and III only

D. I, II, and III

19
Student: ___________________________________________________________________________
1. In 2011, U.S. securities represented ______ of the world market for equities.

A. less than 25%

B. more than two-thirds

C. between 30% and 40%

D. a consistent 50%

2. _____ has the highest market capitalization of listed corporations among developed markets.

A. The United States

B. Japan

C. The United Kingdom

D. Switzerland

3. Total capitalization of corporate equity in the United States in 2011 was about _______ trillion.

A. $13.9

B. $23.4

C. $30.2

D. $45.5

4. If you limit your investment opportunity set to only the largest six countries in the world in terms of equity capitalization as a percentage of total global equity capital, you will include about _______ of the world’s equity.

A. 34%

B. 44%

C. 54%

D. 64%

5. Limiting your investments to the top six countries in the world in terms of market capitalization may make sense for _________ investor but probably does not make sense for ________ investor.

A. an active; a passive

B. a passive; an active

C. a security selection expert; a market timer

D. a fundamental; a technical

6. WEBS are ____________________.

A. investments in country-specific portfolios

B. traded exactly like mutual funds

C. identical to ADRs

D. designed to give investors foreign currency exposure to multiple countries

7. Which one of the following allows you to purchase the stock of a specific foreign company?

A. WEBS

B. MSCI

C. ADR

D. EAFE

8. Generally speaking, countries with ______ capitalization of equities ________.

A. larger; have higher GDP

B. smaller; are wealthier

C. larger; have smaller GDP

D. larger; are higher-growth countries

9. The 32 “developed” countries with the largest equity capitalization made up about _____ of the world GDP in 2011.

A. 22%

B. 44%

C. 68%

D. 85%

10. According to a regression of GDP on market capitalization in 2010, virtually all developed countries had _______ per capita GDP than (as) predicted by the regression.

A. higher

B. lower

C. the same

D. sometimes lower and sometimes higher

11. If the direct quote for the exchange rate for the U.S. dollar versus the Canadian dollar is .98, what is the indirect quote?

A. 1.98

B. 1.02

C. .02

D. 1.05

12. EAFE stands for _______.

A. Equity And Foreign Exchange

B. European, Australian, Far East

C. European, Asian, Foreign Exchange

D. European, American, Far East

13. Which one of the following country risks includes the possibility of expropriation of assets, changes in tax policy, and restrictions on foreign exchange transactions?

A. Default risk

B. Foreign exchange risk

C. Market risk

D. Political risk

14. The __________ index is a widely used index of non-U.S. stocks.

A. CBOE

B. Dow Jones

C. EAFE

D. Lehman Index

15. Suppose that U.S. equity markets represent about 35% of total global equity markets and that the typical U.S. investor has about 95% of her portfolio invested only in U.S. equities. This is an example of _________.

A. home-country bias

B. excessive diversification

C. active management

D. passive management

16. The four largest economies in the world in 2010 were ____________.

A. United States, India, China, and Japan

B. United States, China, Canada, and Japan

C. United States, China, Japan, and Germany

D. China, United Kingdom, Canada, and United States

17. The proper formula for interest rate parity is ___________.

A. [1 + rf(foreign)]/[1 + rf(US)] = F1/E0

B. [1 + rf(US)]/[1 + rf(foreign)] = E0/F1

C. [1 + rf(US)]/[1 + rf(foreign)] = F0/E0

D. [1 + rf(foreign)]/[1 + rf(foreign)] = F0/E1

18. Research indicates that exchange risk of the major currencies has been _________ so far in this century.

A. relatively high

B. relatively low

C. declining slightly

D. declining rapidly

19. It appears from empirical work that exchange rate risk ____________.

A. has been declining for individual investments in recent years

B. is mostly diversifiable

C. is mostly systematic risk

D. is unimportant for an investment in a single foreign country

20. Passive investors with well-diversified international portfolios _________.

A. can safely ignore all political risk in emerging markets

B. can expect very large diversification gains from their international investing

C. do not need to be concerned with hedging exposure to foreign currencies

D. can expect returns to be better than the EAFE on a consistent basis

21. Which stock market has the largest weight in the EAFE index?

A. Japan

B. Germany

C. United Kingdom

D. Australia

22. The correlation coefficient between the U.S. stock market index and stock market indexes of major countries is __________.

A. between -1 and -.5

B. between -.50 and 0

C. between 0 and .5

D. between .5 and 1

23. In 2010, the ___ countries with the largest capitalization of equities made up approximately 60% of the world equity portfolio.

A. 2

B. 4

C. 5

D. 12

24. Investor portfolios are notoriously overweighted in home-country stocks. This is commonly called ________.

A. local fat

B. nativism

C. home-country bias

D. misleading representation

25. Corruption is _________ risk variable.

A. a firm-specific

B. a political

C. a financial

D. an economic

26. A U.S. hedge fund owns Swiss franc bonds. The fund manager believes that if Swiss interest rates rise relative to U.S. interest rates, the value of the franc will rise. To limit the risk to the fund’s dollar return, the fund manager should __________.

A. sell the Swiss franc bonds now

B. sell the Swiss franc forward

C. probably do nothing because the franc move will offset the lower bond price

D. enter into an interest rate swap to pay variable and receive fixed

27. The annual inflation rate is ______ risk variable.

A. a firm-specific

B. a political

C. a financial

D. an economic

28. A U.S. insurance firm must pay €75,000 in 6 months. The spot exchange rate is $1.32 per euro, and in 6 months the exchange rate is expected to be $1.35. The 6-month forward rate is currently $1.36 per euro. If the insurer’s goal is to limit its risk, should the insurer hedge this transaction? If so how?

A. The insurer need not hedge because the expected exchange rate move will be favorable.

B. The insurer should hedge by buying the euro forward even though this will cost more than the expected cost of not hedging.

C. The insurer should hedge by selling the euro forward because this will cost less than the expected cost of not hedging.

D. The insurer should hedge by buying the euro forward even though this will cost less than the expected cost of not hedging.

29. A fund has assets denominated in euros and liabilities in yen due in 6 months. The 6-month forward rate for the euro is $1.36 per euro, and the 6-month forward rate for the yen is 121 yen per dollar. The 6-month forward rate for the euro versus the yen should be ________ per euro.

A. ×88.97

B. ×145.34

C. ×154.67

D. ×164.56

30. You invest in various broadly diversified international mutual funds as well as your U.S. portfolio. The one risk you probably don’t have to worry about affecting your returns is __________.

A. business-cycle risk

B. beta risk

C. inflation risk

D. currency risk

31. According to the International Country Risk Guide in 2011, which of the following countries was the riskiest according to the current composite risk rating?

A. Japan

B. United States

C. China

D. India

32. Suppose the 6-month risk-free rate of return in the United States is 5%. The current exchange rate is 1 pound = US$2.05. The 6-month forward rate is 1 pound = US$2. The minimum yield on a 6-month risk-free security in Britain that would induce a U.S. investor to invest in the British security is ________.

A. 5.06%

B. 6.74%

C. 8.48%

D. 10.13%

33. The quoted interest rate on a 3-month Canadian security is 8%. The current exchange rate is C$1 = US$.68. The 3-month forward rate is C$1 = US$.70. The APR (denominated in US$) that a U.S. investor can earn by investing in the Canadian security is __________.

A. 5%

B. 7.25%

C. 20%

D. 22.43%

34. Suppose the 1-year risk-free rate of return in the United States is 5% and the 1-year risk-free rate of return in Britain is 8%. The current exchange rate is $1 = ₤.50. A 1-year future exchange rate of __________ would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security.

A. ₤.5150

B. ₤.5142

C. ₤.5123

D. ₤.4859

35. The risk-free interest rate in the United States is 4%, while the risk-free interest rate in the United Kingdom is 9%. If the British pound is worth $2 in the spot market, a 1-year futures rate on the British pound should be worth __________.

A. $1.83

B. $1.91

C. $2.08

D. $2.18

36. The risk-free interest rate in the United States is 8%, while the risk-free interest rate in the United Kingdom is 15%. If the 1-year futures price on the British pound is $2.40, the spot market value of the British pound today should be __________.

A. $1.93

B. $2.22

C. $2.56

D. $2.76

37. The present exchange rate is C$1 = US$.77. The 1-year futures rate is C$1 = US$.73. The yield on a 1-year U.S. bill is 4%. A yield of __________ on a 1-year Canadian bill will make investors indifferent between investing in the U.S. bill and the Canadian bill.

A. 9.7%

B. 2.9%

C. 2.8%

D. 2%

38. The yield on a 1-year bill in the United Kingdom is 6%, and the present exchange rate is 1 pound = US$2. If you expect the exchange rate to be 1 pound = US$1.95 a year from now, the return a U.S. investor can expect to earn by investing in U.K. bills is approximately __________.

A. -3%

B. 3%

C. 3.35%

D. 8.72%

39. Assume there is a fixed exchange rate between the Canadian and U.S. dollars. The expected return and standard deviation of return on the U.S. stock market are 13% and 15%, respectively. The expected return and standard deviation of return on the Canadian stock market are 12% and 16%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.2%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the expected return on your portfolio would be __________.

A. 12%

B. 12.5%

C. 14%

D. 15.5%

40. Assume there is a fixed exchange rate between the Canadian and U.S. dollars. The expected return and standard deviation of return on the U.S. stock market are 10% and 15%, respectively. The expected return and standard deviation of return on the Canadian stock market are 12% and 16%, respectively. The covariance of returns between the U.S. and Canadian stock markets is .012. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the standard deviation of return on your portfolio would be __________.

A. 10.96%

B. 12.25%

C. 13.42%

D. 15.5%

41. Inclusion of international equities in a U.S. investor’s portfolio has historically produced ___________________.

A. a substantially reduced portfolio variance

B. a slightly reduced portfolio variance

C. a substantially poorer portfolio variance

D. a slightly poorer portfolio variance

42. WEBS are _____________.

A. mutual funds marketed internationally on the Internet

B. synthetic domestic stock indexes

C. equity indexes that replicate the price and yield performance of foreign stock portfolios

D. single stock investments in a foreign security

43. You are a U.S. investor who purchased British securities for 3,500 pounds 1 year ago when the British pound cost $1.35. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of the securities is now 4,200 pounds and the pound is worth $1.15.

A. -3.8%

B. 2.2%

C. 5.6%

D. 15%

44. Real U.S. interest rates move above Japanese interest rates. If you believe that Japanese interest rates won’t move and that interest rate parity will hold, then ____________.

A. the yen-per-dollar exchange rate should rise

B. the dollar-per-yen exchange rate should rise

C. the exchange rate should stay the same if parity holds

D. The answer cannot be determined from the information given.

45. Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤.

How many shares can the investor purchase?

A. 140

B. 100

C. 71.43

D. None of these options

46. Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤.

After 1 year, the exchange rate is unchanged and the share price is ₤55. What is the dollar-denominated return?

A. 14%

B. 10%

C. 9.3%

D. 7.1%

47. Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤.

After 1 year, the exchange rate is unchanged and the share price is ₤55. What is the pound-denominated return?

A. 14%

B. 10%

C. 9.3%

D. 7.1%

48. Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤.

After 1 year, the exchange rate is $1.60/₤ and the share price is ₤55. What is the dollar-denominated return?

A. 25.7%

B. 16%

C. 14.3%

D. 9.3%

49. Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤.

After 1 year, the exchange rate is $1.50/₤ and the share price is ₤45. How much of your dollar-denominated return is due to the currency change?

A. 10%

B. 6.43%

C. 4.34%

D. 2.12%

50. You find that the exchange rate quote for the yen is 121 yen per dollar. This is an example of ________ quote. You also find that the euro is worth $1.33. This second quote is an example of _______ quote.

A. a direct; an indirect

B. an indirect; a direct

C. a foreign; a U.S.

D. a U.S.; a foreign

51. Among emerging countries the largest equity market in 2011 was located in _____________.

A. China

B. India

C. Brazil

D. Russia

52. In the PRS country composite risk ratings, a score of ______ represents the least risky and a score of _____ represents the most risky.

A. 0; 100

B. 0; 50

C. 50; 0

D. 100; 0

53. Which emerging country had the highest percentage growth in market capitalization during the 2000-2011 period?

A. Brazil

B. China

C. Columbia

D. Turkey

54. The dollar-per-euro spot rate is 1.2 when an importer of French wines places an order. Six months later, when she takes delivery, the spot rate is 1.3 dollars per euro. If her original invoice was for 30,000 euro, what is her gain or loss due to exchange rate risk?

A. $3,000 gain

B. $3,000 loss

C. $6,000 loss

D. No gain or loss

55. An importer of televisions from Japan has a contract to purchase a shipment of televisions for 2 million yen. The spot rate increases from 105 yen per dollar to 108 yen per dollar. What is the importer’s gain or loss?

A. $529 gain

B. $529 loss

C. $619 gain

D. $619 loss

56. A country has a PRS political risk rating of 75, a financial score of 40, and an economic score of 35. The country’s composite rating is _________.

A. 75

B. 50

C. 40

D. 35

57. The risk-free rate in the United States is 2.5%, and the risk-free rate in Europe is 3.2%. If the spot rate of dollars per euro is 1.32, what is the likely forward rate in terms of dollars per euro?

A. 1.30

B. 1.31

C. 1.32

D. 1.33

58. The risk-free rate in the United States is 4%, and the risk-free rate in Japan is 1.2%. If the spot rate of yen to dollars is 105, what is the likely yen-per-dollar forward rate?

A. 101

B. 102

C. 105

D. 108

59. The yen-per-dollar spot rate is 104. The yen-per-dollar forward rate is 107. If the U.S. risk-free rate is 2.4%, what is the likely yen risk-free rate?

A. 1.24%

B. 2.35%

C. 3.98%

D. 5.35%

60. In the PRS financial risk ratings, the United States rates poorly because of the U.S. ________.

I. Large budget deficit
II. Large trade deficit
III. Large amount of total debt

A. I only

B. I and II only

C. I and III only

D. I, II, and III

61. The major participants who directly purchase securities in the capital markets of other countries are predominantly ____________.

A. large institutional investors

B. individual investors

C. government agencies

D. central banks

62. Of the following, which is the most commonly used international index?

A. DJIA

B. EAFE

C. Russell 2000

D. S&P 500

63. WEBS differ from mutual funds in that:

I. WEBS can be shorted.
II. WEBS trade continuously on the AMEX.
III. WEBS are passively managed.

A. II only

B. II and III only

C. I and III only

D. I, II, and III

64. The variation in the betas of emerging markets suggests that ____________.

A. emerging markets are more uniform than developed markets

B. beta does not hold in international markets

C. international diversification may reduce portfolio risk

D. riskier emerging markets have uniformly lower betas

65. One year U.S. interest rates are 5%, and European interest rates are 7%. The spot euro direct exchange rate quote is 1.32, and the 1-year forward rate direct quote is 1.35. If you can borrow either $1 million or €1 million to start with, what would be your dollar profits from interest arbitrage based on these data?

A. $94,322

B. $55,345

C. $44,318

D. $33,595

66. One year U.S. interest rates are 7%, and European interest rates are 5%. The spot euro direct exchange rate quote is 1.30 and the 1-year forward rate direct quote is 1.25. If you can borrow either $1 million or €1 million to start with, what would be your dollar profits from interest arbitrage based on these data?

A. $60,384

B. $42,973

C. $68,422

D. $78,500

67.

All exchange rates are expressed as units of foreign currency that can be purchased with one U.S. dollar. Answer the following about decomposing the manager’s performance.

What is the difference in return of the manager’s portfolio due to currency selection?

A. -5%

B. -3%

C. 2%

D. 1%

68.

All exchange rates are expressed as units of foreign currency that can be purchased with one U.S. dollar. Answer the following about decomposing the manager’s performance.

What is the difference in return of the manager’s portfolio due to country selection?

A. -.60%

B. -.75%

C. .12%

D. .22%

69.

All exchange rates are expressed as units of foreign currency that can be purchased with one U.S. dollar. Answer the following about decomposing the manager’s performance.

What is the difference in return of the manager’s portfolio due to stock selection?

A. 1.15%

B. 3.25%

C. 5.45%

D. 6.13%

20
Student: ___________________________________________________________________________
1. Which of the following are characteristics of a hedge fund?

I. Pooling of assets
II. Strict regulatory oversight by the SEC
III. Investing in equities, debt instruments, and derivative instruments
IV. Professional management of assets

A. I and II only

B. II and III only

C. III and IV only

D. I, III, and IV only

2. A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.

A. commingled pool

B. unit trust

C. hedge fund

D. money market fund

3. Hedge funds are typically set up as _______________.

A. limited liability partnerships

B. corporations

C. REITs

D. mutual funds

4. A(n) _______________ hedge fund attempts to profit from situations such as mergers, acquisitions, restructuring, bankruptcy, or reorganization.

A. multistrategy

B. managed futures

C. dedicated short bias

D. event-driven

5. ______ are private partnerships of a small number of wealthy investors, are often subject to lock-up periods, and are allowed to pursue a wide range of investment activities.

A. Hedge funds

B. Closed-end funds

C. REITs

D. Mutual funds

6. Which of the following typically employ(s) significant amounts of leverage?

I. Hedge funds
II. Equity mutual funds
III. Money market funds
IV. Income mutual funds

A. I only

B. I and II only

C. III and IV only

D. I, II, and III only

7. As of 2012, hedge funds had approximately _____ under management.

A. $.5 trillion

B. $1.6 trillion

C. $2 trillion

D. $3.2 trillion

8. A restriction under which investors cannot withdraw their funds for as long as several months or years is called __________.

A. transparency

B. a lock-up period

C. a back-end load

D. convertible arbitrage

9. Hedge fund managers are compensated by ___________________.

A. deducting management fees from fund assets and receiving incentive bonuses for beating index benchmarks

B. deducting a percentage of any gains in asset value

C. selling shares in the trust at a premium to the cost of acquiring the underlying assets

D. charging portfolio turnover fees

10. Management fees for hedge funds typically range between _____ and _____.

A. .5%; 1.5%

B. 1%; 2%

C. 2%; 5%

D. 5%; 8%

11. Hedge funds can invest in various investment options that are not generally available to mutual funds. These include:

I. Futures and options
II. Merger arbitrage
III. Currency contracts
IV. Companies undergoing Chapter 11 restructuring and reorganization

A. I only

B. I and II only

C. I, II, and III only

D. I, II, III, and IV

12. A typical traditional initial investment in a hedge fund generally is in the range between _____ and _____.

A. $1,000; $5,000

B. $5,000; $25,000

C. $25,000; $250,000

D. $250,000; $1,000,000

13. The difference between market-neutral and long-short hedges is that market-neutral hedge funds _________.

A. establish long and short positions on both sides of the market to eliminate risk and to benefit from security asset mispricing whereas long-short hedges establish positions only on one side of the market

B. allocate money to several other funds while long-short funds do not

C. invest in relatively stable proportions of stocks and bonds while the proportions may vary dramatically for long-short funds

D. invest only in equities and bonds while long-short funds use only derivatives

14. Convertible arbitrage hedge funds _________.

A. attempt to profit from mispriced interest-sensitive securities

B. hold long positions in convertible bonds and offsetting short positions in stocks

C. establish long and short positions in global capital markets

D. use derivative products to hedge their short positions in convertible bonds

15. Assuming positive basis and negligible borrowing cost, which of the following transactions could yield positive arbitrage profits if pursued by a hedge fund?

A. Buy gold in the spot market, and sell the futures contract.

B. Buy the futures contract, and sell the gold spot and invest the money earned.

C. Buy gold spot with borrowed money, and buy the futures contract.

D. Buy the futures contract, and buy the gold spot using borrowed money.

16. An example of a neutral pure play is _______.

A. pairs trading

B. statistical arbitrage

C. convergence arbitrage

D. directional strategy

17. You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. To take advantage of this mispricing, a hedge fund should ______________.

A. buy all the stocks in the S&P 500 and write put options on the S&P 500 Index

B. sell all the stocks in the S&P 500 and buy call options on the S&P 500 Index

C. sell S&P 500 Index futures and buy all the stocks in the S&P 500

D. sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

18. You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. This is an example of ______________.

A. pairs trading

B. convergence play

C. statistical arbitrage

D. a long-short equity hedge

19. A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%.

The 1-year oil futures price should be equal to __________.

A. $68

B. $70.21

C. $71.25

D. $74.88

20. A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%.

The arbitrage profit implied by these prices is _____________.

A. $6.50

B. $5.44

C. $4.29

D. $3.25

21. A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%.

Based on the above data, which of the following sets of transactions will yield positive riskless arbitrage profits?

A. Buy oil in the spot market with borrowed money, and sell the futures contract.

B. Buy the futures contract, and sell the oil spot and invest the money earned.

C. Buy the oil spot with borrowed money, and buy the futures contract.

D. Buy the futures contract, and buy the oil spot using borrowed money.

22. Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years.

How many shares did you purchase?

A. 13,333

B. 25,000

C. 50,000

D. 66,000

23. Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years.

If the share price after 3 years increases to $15.28, what is the value of your investment?

A. $553,600

B. $625,000

C. $733,800

D. $764,000

24. Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years.

What is your annualized return over the 3-year holding period?

A. 14.45%

B. 15.18%

C. 16%

D. 17.73%

25. Which of the following are not managed investment companies?

A. Hedge funds

B. Unit investment trusts

C. Closed-end funds

D. Open-end funds

26. You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250.

How many S&P 500 contracts do you need to sell to hedge your portfolio?

A. 25

B. 35

C. 50

D. 60

27. You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250.

When you hedge your stock portfolio with futures contracts, the value of your portfolio beta is __________.

A. 0

B. 1

C. 1.2

D. The answer cannot be determined from the information given.

28. You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250.

What is the expected quarterly return on the hedged portfolio?

A. 0%

B. 2%

C. 3%

D. 4%

29. You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250.

How much is the portfolio expected to be worth 3 months from now?

A. $15,000,000

B. $15,450,000

C. $15,600,000

D. $16,000,000

30. You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250.

Hedging this portfolio by selling S&P 500 futures contracts is an example of ___________.

A. statistical arbitrage

B. pure play

C. a short equity hedge

D. fixed-income arbitrage

31. Hedge funds that change strategies and types of securities invested and also vary the proportions of assets invested in particular market sectors according to the fund manager’s outlook are called ____________________.

A. asset allocation funds

B. multistrategy funds

C. event-driven funds

D. market-neutral funds

32. When a short-selling hedge fund advertises in a prospectus that it is a 120/20 fund, this means that the fund may sell short up to ______ for every $100 in net assets and increase the long position to __________ of net assets.

A. $120; $20

B. $20; $120

C. $20; $20

D. $120; $120

33. The collapse of the Long Term Capital Management hedge fund in 1998 was a case of an extremely unlikely statistical event called ________.

A. statistical arbitrage

B. an unhedged play

C. a tail event

D. a liquidity trap

34. Which of the following investment styles could be the best description of the Long Term Capital Management market-neutral strategies?

A. Convergence arbitrage

B. Statistical arbitrage

C. Pairs trading

D. Convertible arbitrage

35. Consider a hedge fund with $250 million in assets at the start of the year. If the gross return on assets is 18% and the total expense ratio is 2.5% of the year-end value, what is the rate of return on the fund?

A. 15.05%

B. 15.5%

C. 17.25%

D. 18%

36. Consider a hedge fund with $200 million at the start of the year. The benchmark S&P 500 Index was up 16.5% during the same period. The gross return on assets is 21%, and the expense ratio is 2%. For each 1% above the benchmark return, the fund managers receive a .1% incentive bonus.

What was the management cost for the year?

A. $4,877,000

B. $4,900,000

C. $5,929,000

D. $6,446,000

37. Consider a hedge fund with $200 million at the start of the year. The benchmark S&P 500 Index was up 16.5% during the same period. The gross return on assets is 21%, and the expense ratio is 2%. For each 1% above the benchmark return, the fund managers receive a .1% incentive bonus.

What was the annual return on this fund?

A. 16.5%

B. 18.04%

C. 18.55%

D. 21%

38. Consider a hedge fund with $400 million in assets, $60 million in debt, and 16 million shares at the start of the year and with $500 million in assets, $40 million in debt, and 20 million shares at the end of the year. During the year, investors have received an income dividend of $.75 per share. Assuming that the total expense ratio is 2.75%, what is the rate of return on the fund?

A. 6.45%

B. 8.52%

C. 8.95%

D. 9.46%

39. Market-neutral hedge funds may experience considerable volatility. The source of volatile returns is the use of _________.

A. pure play

B. leverage

C. directional bests

D. net short positions

40. A hedge fund has $150 million in assets at the beginning of the year and 10 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund charges a 3% management fee on the assets. The fee is imposed on year-end asset values. What is the end-of-year NAV for the fund?

A. $15

B. $15.60

C. $16.30

D. $17.55

41. You pay $216,000 to the Capital Hedge Fund, which has a price of $18 per share at the beginning of the year. The fund deducted a front-end commission of 4%. The securities in the fund increased in value by 15% during the year. The fund’s expense ratio is 2% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year?

A. 5.35%

B. 7.23%

C. 8.19%

D. 10%

42. A hedge fund owns a $15 million bond portfolio with a modified duration of 11 years and needs to hedge risk, but T-bond futures are available only with a modified duration of the deliverable instrument of 10 years. The futures are priced at $105,000. The proper hedge ratio to use is ______.

A. 143

B. 157

C. 196

D. 218

43. Unlike market-neutral hedge funds, which have betas near ________, directional long funds exhibit highly _______ betas.

A. zero; positive

B. positive; negative

C. positive; zero

D. negative; positive

44. Portfolio A has a beta of .2 and an expected return of 14%. Portfolio B has a beta of .5 and an expected return of 16%. The risk-free rate of return is 10%. If you manage a long-short equity fund and want to take advantage of an arbitrage opportunity, you should take a short position in portfolio ______ and a long position in portfolio __________.

A. A; A

B. A; B

C. B; A

D. B; B

45. According to a model that was estimated using monthly excess returns from January 2005 through November 2011, average returns of equity hedge funds are __________ the S&P 500 Index.

A. equal to

B. considerably higher than

C. slightly lower than

D. slightly higher than

46. Research by Aragon (2007) indicates that lock-up restrictions tend to hold ____________ portfolios.

A. less liquid

B. more liquid

C. event-driven

D. shorter-maturity

47. Higher returns of equity hedge funds as compared to the S&P 500 Index reflect positive compensation for __________ risk.

A. market

B. liquidity

C. systematic

D. interest rate

48. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 9%. If a hedge fund manager wants to take advantage of an arbitrage opportunity, she should take a short position in portfolio __________ and a long position in portfolio __________.

A. A; A

B. A; B

C. B; A

D. B; B

49. In a 2011 study, Agarwal, Daniel, and Naik documented that hedge funds tend to report average returns in ____________ that are __________ than their average returns in other months.

A. September; lower

B. January; higher

C. January; lower

D. December; higher

50. To attract new clients, hedge funds often include past returns of funds only if they were successful. This is called __________.

A. long-short bias

B. survivorship bias

C. backfill bias

D. incentive bias

51. Some argue that abnormally high returns of hedge funds are tainted by __________, which arises when unsuccessful funds cease operations, leaving only successful ones.

A. reporting bias

B. survivorship bias

C. backfill bias

D. incentive bias

52. Malkiel and Saha (2005) estimate that the survivorship bias for hedge funds equals 4.4%, which is __________ the survivorship bias for mutual funds.

A. about the same as

B. much lower than

C. much higher than

D. only slightly lower than

53. Hedge fund managers receive incentive bonuses when they increase portfolio assets beyond a stipulated benchmark but lose nothing when they fail to perform. This is equivalent to __________.

A. writing a call option

B. receiving a free call option

C. writing a put option

D. receiving a free put option

54. A typical hedge fund incentive bonus is usually equal to ________ of investment profits beyond a predetermined benchmark index.

A. 5%

B. 10%

C. 20%

D. 25%

55. The fastest-growing category of hedge funds is feeder funds. These funds invest in ________.

A. other hedge funds

B. convertible securities and preferred stock

C. equities and bonds

D. managed futures and options

56. A high water mark is a limiting factor of hedge fund manager compensation. This means that managers can’t charge incentive fees ________.

A. when a fund stays flat

B. when a fund falls and does not recover to its previous high value

C. when a fund falls by 10% or more

D. none of these options. (Managers can always charge incentive fees.)

57. If the risk-free interest rate is rf and equals the fund’s benchmark, the portfolio’s net asset value is S0, and the hedge fund manager incentive fee is 20% of profit beyond that, the incentive fee is equivalent to receiving ______ call(s) with exercise price ________.

A. .2; S0

B. 1; S0(1 + rf)

C. 1.2; S0

D. .2; S0(1 + rf)

58. Assume the risk-free interest rate is 10% and is equal to the fund’s benchmark, the portfolio’s net asset value is $100, and the fund’s standard deviation is 20%. Also assume a time horizon of 1 year.

What is the exercise price on the incentive fee?

A. $100

B. $105

C. $110

D. $115

59. Assume the risk-free interest rate is 10% and is equal to the fund’s benchmark, the portfolio’s net asset value is $100, and the fund’s standard deviation is 20%. Also assume a time horizon of 1 year.

What is the Black-Scholes value of the call option on the management incentive fee?

A. $6.67

B. $8.18

C. $9.74

D. $10.22

60. Assume the risk-free interest rate is 10% and is equal to the fund’s benchmark, the portfolio’s net asset value is $100, and the fund’s standard deviation is 20%. Also assume a time horizon of 1 year.

Assuming a 2% management fee and a 20% incentive bonus, what is the expected management compensation per share if the fund’s net asset value exceeds the stated benchmark?

A. $4.24

B. $4

C. $3.84

D. $2.20

21
Student: ___________________________________________________________________________
1. Which one of the following is an example of “global” consumption smoothing?

A. Borrowing to buy a car

B. Borrowing to buy a home

C. Saving to send children to college

D. Saving during your working years for retirement

2. Inflation has an adverse effect on your savings because:

I. It erodes the purchasing power of the dollars you have saved.
II. It increases the real rate of return on the dollars you save.
III. Unless sheltered, it increases the taxes owed on investment income.

A. I only

B. II and III only

C. I and III only

D. I, II, and III

3. If you want to tilt your savings toward later years, you might be well advised to purchase which of the following types of readily available insurance?

A. Career failure insurance

B. Disability insurance

C. Unemployment insurance

D. Moral hazard insurance

4. Which one of the following represents local consumption smoothing?

I. Saving during your working years for retirement
II. Borrowing money to buy a car
III. Putting off a vacation for a year until you can afford it

A. I only

B. II and III only

C. I and II only

D. I, II, and III

5. In a private defined benefit pension plan the ___________ bears the investment risk, and in a private defined contribution plan the ____________ bears the investment risk.

A. plan sponsor; employee

B. employee; plan sponsor

C. U.S. government; plan sponsor

D. plan sponsor; U.S. government

6. A decrease of 1% in both your tax exemption and your income tax rate would, on net, _______________.

A. make you better off

B. make you worse off

C. make you neither better off nor worse off

D. make you either better or worse off depending on your age

7. Tax shelters __________________.

A. postpone payment of tax liabilities

B. decrease investment risk

C. increase the pretax rate of return earned

D. benefit the government more than the investor

8. The tax effect of a traditional retirement plan is to _____ taxes.

A. evade

B. postpone

C. erase

D. avoid

9. The U.S. income tax code is generally _____.

A. regressive

B. progressive

C. flat

D. peaked

10. Contributions to a _____________ are not tax deductible.

A. traditional retirement plan

B. Roth retirement plan

C. 401k plan

D. 403b plan

11. No taxes are paid on withdrawals made during retirement from a _________.

A. traditional retirement plan

B. Roth retirement plan

C. 401k

D. 403b plan

12. You earn 6% on your corporate bond portfolio this year, and you are in a 25% federal tax bracket and an 8% state tax bracket. Your after-tax return is _____. (Assume that federal taxes are not deductible against state taxes and vice versa).

A. 4.5%

B. 4.14%

C. 4.02%

D. 3.12%

13. You work for Fun-A-Rama Corporation and receive stock options as an incentive for your performance on the job. You are counting on the stock options to provide the funds you’ll need for your retirement. This is called _____________.

A. adverse selection

B. a 529 plan

C. a moral hazard

D. a Texas hedge

14. You can tax-shelter only one-half of your retirement savings. You want to invest one-half of your savings in bonds and one-half in stocks. How much of the bonds and how much of the stocks should you allocate to the tax-sheltered investment?

A. Stock and bond investments should be equally invested in both tax-sheltered and nonsheltered accounts.

B. You should place all the stocks in tax-sheltered accounts and all the bonds in nonsheltered accounts.

C. You should place all the bonds in tax-sheltered accounts and all the stocks in nonsheltered accounts.

D. It makes no difference how you allocate your stock and bond investments among tax sheltered and nonsheltered accounts.

15. Social Security is ____________.

A. a pension plan only

B. an insurance plan only

C. a combination of a pension and insurance plan

D. an involuntary intergenerational transfer

16. The Social Security system _______________.

A. is financed in a regressive way

B. is regressive in the way it allocates benefits

C. is progressive in the way it is financed

D. is fully funded for the foreseeable future

17. Total annuity income is positively correlated with:

I. Longevity
II. Durability of marriage
III. Expected length of your base (Social Security) annuity

A. I only

B. I and II only

C. II and III only

D. I, II, and III

18. The solvency of Social Security is threatened by ______________.

A. increasing population longevity

B. above-replacement growth of the U.S. population

C. alternative tax shelters

D. the growth of competing defined contribution plans

19. A person in poor health trying to buy supplemental health insurance is an example of ________.

A. moral hazard

B. adverse selection

C. a Texas hedge

D. actuarial error

20. A person in excellent health with a long life expectancy chooses a lifetime annuity. This is an example of _________.

A. moral hazard

B. adverse selection

C. a Texas hedge

D. actuarial error

21. It would be costly to provide wage insurance because of the ___________ problem.

A. moral hazard

B. adverse selection

C. Texas hedge

D. actuarial error

22. You earned 8% on your corporate bond portfolio this year, and you are in a 15% federal tax bracket. If over your holding period inflation was 3%, your real after-tax rate of return was _____.

A. 6.8%

B. 3.69%

C. 4.91%

D. 4.25%

23. As you get older, you decide to reduce the risk level of your retirement portfolio because your portfolio is nearing your minimum acceptable level. As the portfolio does better, you reallocate funds into higher-risk categories. You are practicing a form of ____________.

A. manipulating tax shelters

B. involuntary intergenerational transfers

C. excessive savings

D. dynamic hedging

24. Tilting your retirement savings plan toward your later years should only be done by investors _____________.

A. who are sufficiently risk averse

B. who are more tolerant of risk

C. who are unsure if their income growth will keep up with inflation

D. who want to retire early

25. Employers commonly match at least some portion of employee contributions to:

I. 401k plans
II.403b plans
III. Self-directed retirement plans

A. I only

B. I and II only

C. II only

D. I, II, and III

26. A saver who expects to have a higher tax rate after retirement would prefer a ______.

A. Roth retirement plan

B. traditional retirement plan

C. 401k plan

D. 403b plan

27. A retirement plan that offers a tax shelter will defer ______________ taxes on contributions and investment earnings.

A. income

B. sales

C. property

D. estate

28. A study by Spivack and Kotlikoff (1981) showed that a marriage contract increases the dollar value of lifetime savings by as much as _____.

A. 5%

B. 10%

C. 25%

D. 50%

29. Taxes are applied to the _______________________.

A. real value of sheltered investment income

B. nominal value of unsheltered investment income

C. nominal value of sheltered investment income

D. real value of unsheltered investment income

30. One feasible way to hedge labor income is to ____________________.

A. diversify your investment portfolio away from the industry in which you work

B. save for retirement only from investment income

C. change careers every 7 years

D. invest heavily in the stock options provided by your firm

31. Which one of the following is not likely to be subject to adverse selection?

A. Health insurance providers

B. Lifetime annuity providers

C. Life insurance providers

D. Social Security

32. Average Indexed Monthly Earnings are used to compute ___________.

A. the consumer price index

B. your Social Security retirement benefits

C. your maximum 401k contribution

D. your maximum retirement plan contribution

33. The Social Security Primary Insurance Amount formula favors ______.

A. older workers

B. high-income workers

C. younger workers

D. low-income workers

34. Contributions to a traditional retirement plan are __________, and contributions to a Roth retirement plan are ____________.

A. not tax deductible; not tax deducible

B. tax deductible; tax deductible

C. tax deductible; not tax deductible

D. not tax deductible; tax deductible

35. How many years of Social Security contributions count for determination of benefits?

A. 25

B. 35

C. 45

D. All yearly contributions count.

36. Under current rules most workers will have ________ of their salary deducted to pay for Social Security retirement benefits and _______ toward Medicare.

A. 1.45%; 6.2%

B. 6.2%; 1.45%

C. 7.65%; 1.45%%

D. 15.3%; 4.9%

37. In 2012, the income cap on Social Security taxes was set at _____ with an exemption of _____.

A. $200,000; $10,000

B. $153,600; $7,600

C. $110,100; $0

D. $96,000; $10,000

38. If your marginal tax rate is 15%, your capital gains tax rate on a stock you have held for 10 years would be ___.

A. 5%

B. 15%

C. 20%

D. 27.5%

39. A tax shelter that allows for tax-exempt saving for higher education is called a _____.

A. Roth savings plan

B. 403b

C. 401k

D. 529 plan

40. Withdrawals from a traditional retirement plan prior to age ___ are taxable and must pay a ___ tax penalty.

A. 59½; 10%

B. 62; 5%

C. 65; 7½ %

D. 63½; 5%

41. In planning for retirement, an investor decides she will save $2,000 every year for 25 years. At a 7% return on her investment, how much money will she have at the end of 25 years?

A. $119,015

B. $125,316

C. $126,498

D. $128,420

42. In planning for retirement, an investor decides she will save $11,000 every year for 40 years. At an 11% return on her investment, how much money will she have at the end of 40 years (to the nearest hundred thousand dollars)?

A. $1,400,000

B. $2,800,000

C. $4,900,000

D. $6,400,000

43. An investor plans to retire at age 60 with total savings of $1,000,000. If she is currently 35 years old, has no savings, and expects to earn 8% per year on her investments, how much money must she set aside every year?

A. $15,546

B. $13,679

C. $11,892

D. $10,324

44. An insurance company plans to sell annuities to investors. Based on actuarial calculations, an investor has a 15-year life span, and he wants a $30,000-per-year annuity, payable at the end of each year. If the insurance company uses a 4% assumed investment rate, how much should the annuity cost?

A. $296,928

B. $312,236

C. $333,552

D. $353.982

45. A safe driver who drives faster as a result of purchasing collision car insurance would be an example of the ___________ problem.

A. moral hazard

B. adverse selection

C. Texas hedge

D. actuarial error

46. A worker plans to retire in 20 years. He needs $20,000 per year in retirement income in today’s dollars. If inflation is forecast at 3.5% per year, what annual income should he plan to receive in the first year of retirement in order to maintain the purchasing power on $20,000?

A. $30,353

B. $34,159

C. $37,398

D. $39,796

47. An insurance company plans to sell annuities to investors. Based on actuarial calculations, an investor has a 20-year life span, and she wants a $50,000-per-year annuity, payable at the end of each year. If the insurance company uses a 3% assumed investment rate, how much should the annuity cost?

A. $696,928

B. $743,874

C. $833,552

D. $953.982

48. A worker plans to retire in 30 years. He hopes to receive $65,000 per year in retirement income. If inflation is forecast at 2.5% per year, what annual income should he plan to receive in the first year of retirement in order to maintain the purchasing power on $65,000?

A. $65,000

B. $76,159

C. $98,398

D. $136,342

49. An investor must decide between putting $2,000 into a regular retirement plan or putting $1,440 into a Roth retirement plan. If the investor’s tax rate is 28% now and in retirement, and she expects to earn 12% per year over the next 20 years, which will produce more cash in the end?

A. The investment in the regular retirement plan.

B. The investment in the Roth retirement plan.

C. Both investments will have the same future value after taxes.

D. The answer cannot be determined from the information given.

50. A regular retirement plan requires that taxes be paid at the time the money is removed from the plan. What is the after-tax value of a $5,000 deposit into a retirement plan today that generates an 8% return for 20 years if the investor is taxed at the 28% level?

A. $16,779

B. $20,135

C. $21,685

D. $23,305

51. What is the value of a $2,500 deposit into a retirement plan if the investment earns 12% per year for 15 years?

A. $12,174

B. $13,684

C. $14,652

D. $15,523

52. The employees of a firm complain that they cannot afford to contribute $8,000 per year to a 401k because of the loss of $8,000 of take-home pay. In fact, how much will the take-home pay be reduced if all taxes combined total 33%?

A. $5,360

B. $6,340

C. $7,637

D. $8,000

53. An employee uses her firm’s 401k plan. If she decides to contribute $11,000 per year and pays an effective tax rate for all items of 28%, what is the reduction in her take-home pay each year?

A. $3,080

B. $4,210

C. $7,920

D. $11,000

54. An investor has an effective tax rate on all items of 30%, and he decides to put $8,000 into a 401k. The future value of the investment that results from the deferral of taxes over 30 years at an 8% return equals _____________.

A. $2,400

B. $8,000

C. $10,400

D. $24,150

55. Withdrawals after retirement from a traditional retirement plan are __________, and withdrawals after retirement from a Roth retirement plan are ____________.

A. taxable; not taxable

B. not taxable; taxable

C. tax deductible; not tax deductible

D. not tax deductible; tax deductible

56. If you start saving for retirement only in your later years and your income growth from that point is rapid, then ________________________.

A. a traditional retirement plan is probably a better choice than a Roth retirement plan

B. a Roth retirement plan is probably a better choice than a traditional retirement plan

C. a SEP is probably a better choice than Medicare

D. a 401k is probably a better choice than a 403b

57. Which one of the following statements about 401k plans is not correct?

A. The employer will typically match some portion of an employee’s contributions to a 401k.

B. A 401k plan is a defined contribution plan.

C. Allowable contributions to 401k plans are limited.

D. Withdrawals from 401k plans are not taxed upon retirement.

58. Suppose you have maxed out your allowable contributions to your tax-sheltered retirement plans and you still want to shelter income. The best choice of investment for you to minimize the tax bill is to invest in _________.

A. a bond portfolio

B. stocks with high dividend yields

C. a blended stock and bond portfolio containing zero-coupon bonds

D. stocks with low or zero dividend yields

59. A bond portfolio and a stock portfolio both provided an unrealized pretax return of 8% to a taxable investor. If the stocks paid no dividends, we know that the ________.

A. after-tax return of the stock portfolio was higher than the after-tax return of the bond portfolio

B. after-tax return of the bond portfolio was higher than the after-tax return of the stock portfolio

C. after-tax income of the stock portfolio was equal to the after-tax income of the bond portfolio

D. after-tax income of the stock portfolio could have been higher or lower than the after-tax income of the bond portfolio, depending on the marginal tax rate of the investor

60. Statistics show that life expectancy at age 66 for males is about _____ additional years and for females is about _____ additional years.

A. 15; 20

B. 16; 19

C. 18; 22

D. 19; 24

61. Currently, the maximum combined taxable income of a retired household that avoids having to pay any taxes on a portion of their Social Security benefit is ______.

A. $15,000

B. $32,000

C. $45,000

D. $75,000

62. An investor can earn a 6% nominal rate of return, but inflation is expected to be 3%. If the individual invests $2,000 per year for 20 years, the real future value of this investment is ________. (All investments occur at year-end).

A. $73,571

B. $66,334

C. $53,251

D. $48,732

63. An individual wants to have $95,000 per year to live on when she retires in 30 years. The individual is planning on living for 20 years after retirement. If the investor can earn 6% during her retirement years and 10% during her working years, how much should she be saving during her working life? (Hint: Treat all calculations as annuities.)

A. $9,872

B. $8,234

C. $7,908

D. $6,624

64. If you plan for a bequest for your children, your grandchildren, their children, and so on, your planning horizon becomes _____.

A. equal to the life span of your children

B. 100 years, or your lifetime, whichever ends first

C. infinite

D. double what it would have been without the bequest

65. You want to minimize your current tax bill by maximizing your contributions to your _____________.

A. taxable bond portfolio

B. Roth retirement plan

C. 401k or 403b plan

D. taxable savings account

66. Sharon decides to put $5,000 into her retirement plan at the age of 25. She will continue to invest the same amount for a total of 6 years and then stop contributing. Assume 10% annual return.

How much money will Sharon have in her retirement plan after 6 years?

A. $30,000

B. $35,575

C. $38,578

D. $41,451

67. Sharon decides to put $5,000 into her retirement plan at the age of 25. She will continue to invest the same amount for a total of 6 years and then stop contributing. Assume 10% annual return.

How much money will Sharon have in her retirement plan when she is ready to retire at age 62?

A. $554,856

B. $623,245

C. $740,480

D. $1,311,805

68. A nonprofit organization offers a 5% salary contribution to John’s 403b plan regardless of his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes $56,000 a year.

What is the amount of the total contribution to his 403b if John contributes 5% of his own money?

A. $5,600

B. $8,400

C. $11,200

D. $12,500

69. A nonprofit organization offers a 5% salary contribution to John’s 403b plan regardless of his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes $56,000 a year.

What is John’s effective salary reduction if he is in the 25% tax bracket?

A. $2,100

B. $2,800

C. $5,600

D. $8,400

70. A nonprofit organization offers a 5% salary contribution to John’s 403b plan regardless of his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes $56,000 a year.

What is John’s total cost of his 5% contribution?

A. $2,100 cost

B. $2,800 cost

C. $700 benefit

D. $3.500 benefit

71. The fact that the U.S. government provides deposit insurance to banks creates a form of ___________, which is at least partially offset by requiring banks to hold more capital if they are riskier.

A. moral hazard

B. adverse selection

C. risk aversion

D. interest rate risk

72. An investor in the 34% tax bracket would be indifferent between a corporate bond with a before-tax yield of 8% and a municipal bond with a yield of _________.

A. 3.91%

B. 6.15%

C. 5.28%

D. 10.72%

73. An investor who is in the 35% federal tax bracket and the 5% state bracket buys a 6.5% yield corporate bond. What is his after-tax yield? (Assume that federal taxes are not deductible against state taxes and vice versa).

A. 3.9%

B. 4.75%

C. 6.5%

D. 9.9%

22
Student: ___________________________________________________________________________
1. To _____ means to mitigate a financial risk.

A. invest

B. speculate

C. hedge

D. renege

2. In a defined benefit pension plan, the _____ bears all of the fund’s investment performance risk.

A. employer

B. employee

C. fund manager

D. government

3. In a defined contribution pension plan, the _____ bears all of the fund’s investment performance risk.

A. employer

B. employee

C. fund manager

D. government

4. My pension plan will pay me a yearly retirement amount equal to 2% of my highest annual salary for each year of service. I must have ___________.

A. a defined benefit plan

B. a defined contribution plan

C. an endowment fund

D. a variable annuity

5. A ______ insurance policy provides death benefits, with no buildup of cash value.

A. whole-life

B. universal life

C. variable life

D. term life

6. If the maturity of a bank’s assets is much longer than the maturity of its liabilities and it wants to limit its interest rate risk, the bank may _________.

A. prefer to invest in long-term bonds in its asset portfolio

B. prefer to invest in equities in its asset portfolio

C. prefer to invest in variable-rate assets

D. decide to increase its fixed-rate mortgage holdings

7. You are thinking of investing in one of two assets. Asset A has higher systematic risk than asset B. You can be sure that asset A’s _______ return will be higher than asset B’s, but you can’t be sure if asset A’s _______ return will be higher than asset B’s.

A. realized; expected

B. real; nominal

C. expected; realized

D. nominal; expected

8. A mutual fund may not hold more than ______ of the shares of any publicly traded company.

A. 5%

B. 10%

C. 25%

D. 50%

9. Which one of the following would be considered a “cash equivalent” investment?

A. Treasury bills

B. Common stock

C. Corporate bonds

D. Real estate

10. For a bank, the difference between the interest rate charged to borrowers and the interest rate paid on liabilities is called the __________.

A. insurance premium

B. interest rate spread

C. risk premium

D. term premium

11. Price volatility is greatest on which one of the following investments?

A. Commercial paper

B. 20-year zero-coupon bonds

C. Treasury notes

D. Treasury bills

12. A portfolio manager indexes part of a portfolio and actively manages the rest of the portfolio. This is called a _________ strategy.

A. passive-aggressive

B. passive core

C. passively active

D. balanced fund

13. The major asset most people have during their early working years is their ________.

A. home

B. stock portfolio

C. earning power derived from their skills

D. bond portfolio

14. At the early stage of an individual’s working career, his or her retirement portfolio should probably consist mostly of _______.

A. annuities

B. stocks

C. bonds

D. commodities

15. If an investor wants to invest 100% of her portfolio in safe assets but does not want to manage her portfolio, she should invest in __________.

A. a money market fund

B. a growth stock fund

C. several different money market instruments

D. several different stocks

16. Just 2 months after you put money into an investment, its price falls 25%. Assuming that none of the investment fundamentals have changed, which of the following actions would evidence the greatest risk tolerance?

A. You sell to avoid further worry and buy something else.

B. You do nothing and wait for the investment to come back.

C. You buy more, thinking that if it was a good investment before, now it’s not only good but cheap too.

D. You sue your financial adviser.

17. To become a CFA, you must do all of the following except which one?

A. Pass three exams designed to ensure that you have sufficient knowledge of investments.

B. Obtain 3 years of work experience in money management.

C. Become a member of a local Society of the Financial Analysts Federation.

D. Divest all your own stock holdings to eliminate any potential conflicts of interest with client recommendations.

18. Which of the following is not one of the main areas covered in the examinations that must be taken in order to achieve the designation of Chartered Financial Analyst?

A. Investment management ethics

B. Securities analysis

C. Securities marketing techniques

D. Portfolio management

19. As the typical investor ages, the composition of his wealth usually switches from primarily _______ to primarily _______.

A. human capital; financial capital

B. financial capital; human capital

C. intellectual capital; physical capital

D. investable capital; noninvestable capital

20. The two most important factors in describing an individual’s or organization’s investment objectives are ________________.

A. income level and age

B. income level and risk tolerance

C. age and risk tolerance

D. return requirement and risk tolerance

21. The term hedge refers to an investment that is used ________________.

A. primarily for tax-loss selling purposes

B. to mitigate specific financial risks

C. to conceal one’s true investment strategy from other market participants

D. primarily to defer capital losses

22. The price of your investment increases 20% one month after you buy it. You do not believe that the stock’s prospects have changed. Which one of the following actions would indicate the lowest amount of risk aversion?

A. You hang on to the stock, anticipating that it will go higher.

B. You buy more stock, anticipating that it will go higher.

C. You sell all of your stock holdings immediately.

D. You sell half of your stock holdings and invest the proceeds in other areas of your portfolio.

23. An individual is on the game show Squeal or No Squeal, and she has a choice between receiving a certain gain of $100,000 and receiving a 50% chance of winning $200,000 or zero. If she takes the gamble instead of the certain $100,000, she is acting ____________________.

A. like a person who is risk-neutral

B. like a person who is risk averse

C. like a person who is a risk lover

D. irrationally

24. Which of the following typically strives to earn a return on their investments that exceeds the actuarially determined rate of return?

A. Banks

B. Thrifts

C. Mutual funds

D. Pension funds

25. If an individual confers legal title to property to another person or institution to manage the property on their behalf, the individual has created ___________.

A. a personal trust

B. a charitable trust

C. an endowment fund

D. a mutual fund

26. Personal trusts are typically allowed to engage in which of the following investment activities?

I. Buying and selling futures contracts.
II. Short-selling securities.
III. Purchasing and writing options.
IV. Buying stock on margin.

A. I only

B. II and III only

C. II and IV only

D. None of the given activities are allowed.

27. If a defined benefit pension fund’s actual rate of return is _____ than the actuarial assumed rate, then the ___________.

A. greater; employees will benefit

B. greater; firm’s shareholders will benefit

C. lower; employees will benefit

D. lower; firm’s shareholders will benefit

28. An employee has an average wage of $60,000 and has worked for the firm for 25 years. The defined benefit pension plan pays retirees 2.5% of the average wage times the years of service. The employee can expect to receive _______ per year upon retirement.

A. $18,000

B. $37,500

C. $45,325

D. $55,250

29. Life insurance companies try to hedge the risks inherent in whole-life insurance policies by investing in __________.

A. long-term bonds

B. money market mutual funds

C. savings accounts

D. short-term commercial paper

30. A pension fund will owe $10 million to retirees in 6 years. An actuary assumes an 8% rate of return on the funds invested in the pension plan. If the pension plan receives annual contributions from the company sponsor, how much must the company pay each year to fully fund the pension liability?

A. $1,212,587

B. $1,363,154

C. $1,533,333

D. $1,666,667

31. The risk that a downturn in the market may substantially reduce your investment principal is called _______.

A. purchasing power risk

B. interest rate risk

C. market risk

D. liquidity risk

32. The possibility that you are too conservative and your money doesn’t grow fast enough to keep pace with inflation is called ________.

A. purchasing power risk

B. liquidity risk

C. timing risk

D. market risk

33. A pension fund will owe $15 million to retirees in 20 years. An actuary assumes a 6% rate of return on the funds invested in the pension plan, but the fund actually earns 8%. The pension plan receives annual contributions from the company sponsor. If the 8% rate of return is expected to continue, by how much can the company reduce its pension payments per year?

A. $65,437

B. $79,985

C. $89,462

D. $95,320

34. Many defined benefit pension plans have a target rate of return on investment that is equal to the ____________.

A. firm’s return on equity

B. plan’s assumed actuarial rate of return

C. economic inflation rate because wages often increase with inflation

D. estimated stock market return

35. _______ is a life insurance policy that provides a death benefit and a fixed-rate tax-deferred savings plan.

A. Term life

B. Whole life

C. Variable life

D. Universal life

36. Empirical evidence confirms that investors become __________ as they approach retirement.

A. greedier

B. less interested in investments

C. more risk averse

D. more risk tolerant

37. _______ is a life insurance policy that will provide a death benefit only and has no savings plan.

A. Term life

B. Whole life

C. Variable life

D. Universal life

38. Of the following, the investment time horizon is typically the shortest for __________.

A. banks

B. endowment funds

C. life insurance companies

D. pension funds

39. A passive asset allocation strategy involves _________.

A. investing in the stock of companies that are price takers

B. maintaining approximately the same proportions of a portfolio in each asset class over time

C. varying the proportions of a portfolio in each asset class in response to changing market conditions

D. selecting individual securities in different sectors that are believed to be undervalued

40. An active asset allocation strategy involves _________.

A. investing in the stock of companies that are price takers

B. maintaining approximately the same proportions of a portfolio in each asset class over time

C. varying the proportions of a portfolio in each asset class in response to changing market conditions

D. selecting individual securities in different sectors that are believed to be undervalued

41. Endowment funds are held by __________.

A. financial intermediaries

B. individuals

C. profit-oriented firms

D. nonprofit institutions

42. Which one of the following is a life insurance policy that will provide a fixed death benefit and allows the policyholder to choose where to invest the policy’s cash value?

A. Term life

B. Whole life

C. Variable life

D. Industrial life

43. Under a “passive core” portfolio management strategy, a manager would ___________.

A. index the entire portfolio

B. index part of the portfolio and actively manage the rest

C. delegate the management of core segments of the portfolio to other managers

D. actively manage the entire portfolio

44. Of the following, the most flexible type of life insurance policy from the policyholder’s perspective is probably a ___________ policy.

A. term life

B. whole life

C. variable life

D. universal life

45. The amount of risk an individual should take depends on his or her:

I. Return requirements
II. Risk tolerance
III. Time horizon

A. I only

B. I and II only

C. II and III only

D. I, II, and III

46. Earnings on variable life and universal life insurance policies are ___________.

A. never taxed

B. taxed only at the capital gains tax rate

C. not taxed until the money is withdrawn

D. not taxed at the federal level but are taxed at the state level

47. When a company sets up a defined contribution pension plan, the __________ bears all the risk and the __________ receives all the return from the plan’s assets.

A. employee; employee

B. employee; employer

C. employer; employee

D. employer; employer

48. Suppose that the pretax holding-period returns on two stocks are the same. Stock A has a high dividend payout policy and stock B has a low dividend payout policy. If you are a high-tax rate individual and do not intend to sell the stocks during the holding period, __________.

A. stock A will have a higher after-tax holding-period return than stock B

B. the after-tax holding period returns on stocks A and B will be the same

C. stock B will have a higher after-tax holding-period return than stock A

D. The answer cannot be determined from the information given.

49. The objectives of personal trusts normally are __________ in scope than those of individual investors, and personal trust managers typically are __________ than individual investors.

A. broader; more risk averse

B. broader; less risk averse

C. more limited; more risk averse

D. more limited; less risk averse

50. The prudent investor rule requires __________.

A. executives of companies to avoid investing in options of companies they work for

B. executives of companies to disclose their transactions in stocks of companies they work for

C. professional investors who manage money for others to avoid all risky investments

D. professional investors who manage money for others to constrain their investments to those that would be approved by a prudent investor

51. The prudent investor rule is an example of a regulation designed to ensure appropriate _____________ by money managers.

A. fiduciary responsibility

B. fiscal responsibility

C. monetary responsibility

D. marketing procedures

52. An investor has a long time horizon and desires to earn the market rate of return. However, the investor will need to withdraw funds each year from her investment portfolio. The biggest constraint a planner would face with this client is a ___________ constraint.

A. tax

B. risk-tolerance

C. liquidity

D. social

53. When used in the context of investment decision making, the term liquidity refers to _____________.

A. the ease and speed with which an asset can be sold at any value possible

B. the ease and speed with which an asset can be sold without having to discount the value

C. an aspect of monetary policy

D. the proportion of short-term to long-term investments held in an investor’s portfolio

54. The term investment horizon refers to __________.

A. the proportion of short-term to long-term investments held in an investor’s portfolio

B. the planned liquidation date of an investment

C. the average maturity date of investments held in a portfolio

D. the maturity date of the longest investment in the portfolio

55. The choice of an active portfolio management strategy rather than a passive strategy assumes ___________.

A. the ability to continuously adjust the portfolio to provide superior returns

B. asset allocation involving only domestic securities

C. stable economic conditions over the short term

D. the ability to minimize trading costs

56. Conservative investors are likely to want to invest in __________ mutual funds, while risk-tolerant investors are likely to want to invest in __________.

A. income; high growth

B. income; moderate growth

C. moderate-growth; high growth

D. high-growth; moderate growth

57. The first step any investor should take before beginning to invest is to __________.

A. establish investment objectives

B. develop a list of investment managers with superior records to interview

C. establish asset allocation guidelines

D. decide between active management and passive management

58. Which of the following is the least likely to be included in the portfolio management process?

A. Monitoring market conditions and relative values

B. Monitoring investor circumstances

C. Identifying investor constraints and preferences

D. Organizing the investment management process itself

59. A clearly understood investment policy statement is not critical for which one of the following?

I. Mutual funds
II. Individuals
III. Defined benefit pension funds

A. II only

B. III only

C. I only

D. None of these options (A policy statement is necessary for all three.)

60. An investor refuses to invest in any firm that produces alcohol or tobacco. This is an example of a ___________ constraint.

A. return requirement

B. risk-tolerance

C. liquidity

D. social

61. Under the provisions of a typical defined benefit pension plan, the employer is responsible for _____________.

A. investing in conservative fixed-income assets

B. paying benefits to retired employees

C. counseling employees in the selection of asset classes

D. paying employees the market rate of return on employee contributions

62. A life insurance firm wants to minimize its interest rate risk, and it is planning on paying out $250,000 in 5 years. Which one of the following investments best matches its goal?

A. High-yield utility stocks

B. 5-year zero-coupon bonds

C. 10-year coupon bonds

D. Money market investments rolled over as needed

63. An institutional investor will have to pay off a maturing bond issue in 3 years. The institution has 10,000 bonds outstanding, each with a $1,000 par value. The institutional money manager is reevaluating the fund’s total portfolio of $100 million at this time. She is bullish on stocks and wants to put the most she can into the stock market, but she cannot risk being unable to pay off the bonds. Three-year zero-coupon bonds are available paying 6% interest. What percentage of the total $100 million portfolio can she put in stocks and still ensure meeting the bond payments?

A. 87.4%

B. 88.5%

C. 90%

D. 91.6%

64. An investor with high risk aversion will likely prefer which of the following risk and return combinations?

A. Expected return = 12%, historical standard deviation = 17%

B. Expected return = 14%, historical standard deviation = 19%

C. Expected return = 16%, historical standard deviation = 21%

D. Expected return = 18%, historical standard deviation = 23%

65. An investor with low risk aversion will likely prefer which of the following risk and return combinations?

A. Expected return = 11%, historical standard deviation = 12%

B. Expected return = 12%, historical standard deviation = 14%

C. Expected return = 14%, historical standard deviation = 18%

D. Expected return = 17%, historical standard deviation = 21%

66. Medfield College’s $10 million endowment fund is not allowed to spend any contributed capital or any capital gains. The fund may spend only investment earnings. The fund is expected to need between $500,000 and $1,000,000 to pay for new lab equipment for the science building. Which of the following is (are) true?

I. The fund should have a target rate of return of at least 10%.
II. The limitations on spending require that the fund limit its considerations to growth stocks.
III. The requirement to spend money out of the fund this year provides a liquidity constraint that may reduce the fund’s rate of return.

A. I only

B. II only

C. I and III only

D. I, II, and III

67. An investor is looking at different retirement investment choices, and he is willing to accept one with upside potential even if that means sacrificing certainty. Which of the following will he most likely select?

A. Fixed annuity

B. Defined benefit plan

C. Defined contribution plan

D. Bonds invested in a retirement plan

68. Both a wife and her husband work in the airline industry. They are in their 40s, and they have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals that they are primarily focused on long-term capital gains and will need at least a 9% to 11% average rate of return to meet their retirement goals. They desire a diversified portfolio, and liquidity is not currently a major concern. Which of the following asset allocations seems to best fit their situation?

A. 10% money market; 40% long-term bonds; 10% commodities; 40% high-dividend-paying stocks

B. 0% money market; 60% long-term bonds; 40% stocks

C. 10% money market; 30% long-term bonds; 10% commodities; 50% high-dividend-paying stocks

D. 5% money market; 30% long-term bonds; 5% commodities; 60% stocks, most with low dividends and high growth prospects

69. A family will retire in a few years. They have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals that they are primarily focused on safety of principal and will need a 6% to 8% average rate of return on their portfolio. They desire a diversified portfolio, and liquidity is likely to be a concern due to health reasons. Which of the following asset allocations seems to best fit this family’s situation?

A. 10% money market; 50% intermediate-term bonds; 40% blue chip stocks, many with high dividend yields

B. 0% money market; 60% intermediate-term bonds; 40% stocks

C. 10% money market; 30% intermediate-term bonds; 60% high-dividend-paying stocks

D. 5% money market; 35% intermediate-term bonds; 60% stocks, most with low dividends

70. Your sister, an avid outdoors person, works in the airline industry, and she has come to you (the financial guru) for investment advice. She is looking into purchasing stocks she knows something about. She is considering purchasing stock in Boeing, Lockheed Martin, United Technologies (maker of aircraft engines), and Cabela’s Sporting Goods. Based only on the information given, which stock should you recommend for her?

A. Boeing

B. Lockheed Martin

C. United Technologies

D. Cabela’s

71. In 1937 the Eli Lilly family donated millions of dollars in stock to fund a not-for-profit charitable organization. Such organizations are typically called _________________.

A. annuities

B. endowments

C. mutual funds

D. personal trusts

72. Which one of the following institutions typically has the longest investment horizon?

A. Mutual funds

B. Pension funds

C. Property and casualty insurers

D. Banks

73. For which one of the following institutions is liquidity usually the most important?

A. Mutual funds

B. Pension funds

C. Life insurers

D. Banks

74. One of the major functions of the investment committee is to ________________.

A. determine security selection of each portfolio operated by the investment company

B. translate the objectives and constraints of the investment company into an asset universe

C. determine the percentages of each security in the total investment company portfolio

D. calculate and report the overall rate of return to investment company constituents

75. For an investor concerned with maximizing liquidity, which of the following investments should be avoided?

A. Real estate

B. Bonds

C. Domestic stocks

D. International stocks

76. The asset universe is the _____________________.

A. set of investments in which an investment company can legally invest

B. existing set of assets the investment company currently owns in one or more of its portfolios

C. list of assets approved by the investment committee that may be placed into the investment company’s portfolio

D. market portfolio of all available risky assets

77. Go Global Investment Management has an asset allocation strategy of 60% U.S. investments and 40% global investments. Within the United States, Go Global has allocated 70% of its portfolio to equities and 30% to bonds. Go Global now holds 3% of its U.S. equity portfolio in the stock of Wally World. Internationally, Go Global has allocated 55% to equities and 45% to bonds. About what percentage of Go Global’s total portfolio is invested in Wally World?

A. 1%

B. 1.26%

C. 1.5%

D. 1.77%

78. Major functions of the investment committee include all but which one of the following?

A. Engage in security selection for each portfolio managed

B. Broadly determine the overall asset allocation of the investment company

C. Determine the asset-class weights for each portfolio

D. Determine the asset universe

79. A portfolio consists of three index funds: an equity index, a bond index, and an international index. The portfolio manager changes the weights periodically according to forecasts for each sector. This is an example of __________.

A. a passively managed core with an actively managed component

B. a totally passively managed fund

C. passive asset allocation with active security selection

D. active asset allocation with passive security selection

80. A portfolio consists of three index funds: an equity index accounting for 40% of the total portfolio, a bond index accounting for 30% of the total portfolio, and an international index accounting for 30% of the total portfolio. After each quarter the portfolio manager buys and sells some of each sector to preserve the original weights for each sector. This is an example of ____________.

A. a passively managed core with an actively managed component

B. a totally passively managed fund

C. passive asset allocation with active security selection

D. active asset allocation with passive security selection

81. One way that life insurance firms can hedge the risk created by offering whole-life insurance policies is by ________________.

A. holding long-term bonds

B. holding equities

C. holding short-term bonds

D. exercising its right to terminate the policy

ECO 450 Week 11 Final Exam – Strayer University New

ECO/450 Week 11 Final Exam – Strayer

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Chapters 8 Through 18

ECO 450 Week 6 Quiz

CHAPTER 8
Social Security and
Social Insurance
TRUE/FALSE QUESTIONS
1. The Social Security pension system is a fully funded retirement plan.
2. Social Security pension benefits are transfers from workers to retirees.
3. Social Security pensions are financed by voluntary contributions by workers.
4. The gross replacement rate measures the ratio of taxes paid per year by workers to their annual Social Security pension when they retire.
5. In the year prior to retirement, a worker earned $20,000 and paid $5,000 in taxes on those earnings. His annual Social Security pension is $10,000 per year. Then it follows that his net replacement rate is 50 percent.
6. The gross replacement rate for Social Security pensions is the same for all workers independent of their preretirement earnings.
7. The annual growth in wages subject to Social Security taxes is 3 percent. Given the payroll tax rate, the growth in funds available to pay pension benefits is also 3 percent.
8. The asset-substitution effect of Social Security pensions discourages saving.
9. The availability of Social Security pensions to workers over normal retirement age results in an income effect unfavorable to work but no substitution effect.
10. The bequest effect of Social Security encourages workers to save less.
11. The normal retirement age for Social Security old-age pensions is 67 for people born in the United States in 1960 or later.
12. Workers in the United States can retire under Social Security at age 62 with lower pensions than they would receive at their normal retirement age.
13. As of 2009, retired workers between the ages of 62 and their normal retirement age were subject to an “earnings test” that reduced their pension by $1 for each $2 of earnings after a certain minimum level of earnings.
14. Reducing the replacement rate will have no effect on the tax rate necessary to finance pensions under a pay-as-you-go, tax-financed pension system.
15. Workers who quit their jobs are eligible for unemployment insurance benefits in the United States.
16. By 2050, the expected percentage of the U.S. population that is considered elderly will be less than 20%.
17. Social Security was created in 1965.
18. On average, the elderly are less likely to be poor when compared to the rest of the U.S. population.
MULTIPLE CHOICE QUESTIONS
1. The Social Security retirement system:
a. is a fully funded pension system.
b. is a tax-financed system that pays benefits from taxes that are invested to return principal and interest to workers when they retire.
c. is a tax-financed retirement system that finances pensions by taxing workers each year and transferring the bulk of revenues obtained directly to retirees.
d. does not use taxes on workers to pay pensions to retirees.
2. The gross replacement rate:
a. measures a worker’s monthly retirement benefit divided by monthly earnings before taxes in the year prior to retirement.
b. measures a worker’s monthly retirement benefit divided by monthly earnings after taxes in the year prior to retirement.
c. is an increasing function of gross monthly earnings prior to retirement.
d. is independent of gross monthly earnings prior to retirement.
3. A worker earns $2,000 per month before taxes. He pays $140 per month payroll tax on those wages. In addition, the income taxes on those wages are $360 per month. On retirement, the worker receives a Social Security pension of $750 per month. Which of the following statements is true?
a. The worker’s gross replacement rate is 50 percent.
b. The worker’s net replacement rate is 50 percent.
c. The worker’s net replacement rate is 38 percent.
d. The worker’s net replacement rate is 75 percent.
4. The growth in hourly wages over the past 50 years has averaged about 2 percent per year. How¬ever, the growth in Social Security pensions has far exceeded this 2-percent rate. The growth in tax revenue to finance Social Security benefits in excess of 2 percent per year can be accounted for by:
a. increases in payroll tax rates.
b. use of other taxes beside the payroll tax to pay Social Security benefits.
c. an increase in the number of workers paying Social Security taxes.
d. either (a) or (b)
e. either (a) or (c)
5. Given the structure and level of gross replacement rates and the expected future growth of labor earnings subject to the payroll tax, the tax rates used to tax payrolls were increased in the 1980s because:
a. the number of retirees per worker will increase.
b. the number of retirees per worker will decrease.
c. wages are expected to decline.
d. the size of the work force is expected to increase.
6. Which of the following is likely to increase the net federal debt as a share of GDP?
a. a federal budget surplus.
b. a federal budget deficit.
c. a recession.
d. either b or c.
7. The asset-substitution effect of the Social Security retirement system leads all workers to:
a. save more for retirement.
b. save less for retirement.
c. save absolutely nothing for retirement.
d. work more
8. Which of the following is a consequence of a growing federal budget deficit in the United States?
a. A decrease in the federal debt outstanding.
b. An increase in the federal debt outstanding.
c. A decrease in the portion share of federal government expenditures that must be allocated to interest in the future.
d. An increase in national saving.
9. The induced-retirement effect of the Social Security pension system induces workers to:
a. save less for retirement.
b. save more for retirement.
c. reduce savings for retirement to zero.
d. work more after retirement.
10. Unemployment insurance benefits are:
a. financed by payroll taxes levied on workers.
b. financed by payroll taxes levied on employers.
c. both (a) and (b)
d. financed by sales taxes.
11. Which of the following is true about the Social Security pension system in the United States?
a. Pensions received by retired workers are based entirely on their contributions to the Social Security pension trust fund and the investment return on that fund.
b. Pensions received by married retirees with dependents are greater than that received by those without dependents.
c. Gross replacement rates are inversely related to preretirement earnings.
d. both (b) and (c)
12. Which of the following can decrease tax rates necessary to pay pensions for a pay-as-you-go pension system?
a. an increase in replacement rates
b. a decrease in the retirement age
c. an increase in the size of the work force
d. an increase in the number of retirees
13. Unless legislation is introduced to change the normal retirement age, people born in 1960 or later will be able to retire with full Social Security benefits at age:
a. 62.
b. 65.
c. 66.
d. 67.
14. The earnings test for retirees:
a. increases their incentive to work.
b. is applied to all retirees.
c. is applied only to retirees below normal retirement age.
d. reduces pension benefits by $1 for each $2 of earnings.
e. both (c) and (d)
15. A nation has 40 million current retirees and a work force of 100 million. Which of the following is true?
a. The replacement rate is 40 percent.
b. The replacement is 2.5.
c. The dependency ratio is 0.4.
d. The dependency ratio is 2.5.
16. Social Security tax rates can be reduced if:
a. taxable wages decline.
b. the retirement age is lowered.
c. the retirement age is raised.
d. the work force decreases in size.
17. A retiree subject to the earnings test under Social Security:
a. can earn as much as he or she chooses without losing Social Security pension benefits.
b. has his or her Social Security pension benefits reduced by one dollar for each dollar of labor earnings.
c. has his or her Social Security pension benefits reduced immediately by one dollar for each three dollars of labor earnings.
d. has his or her Social Security pension benefits reduced by one dollar for each two dollars of earnings after a certain minimum amount per year.
18. A pay-as-you-go social security retirement system is:
a. exemplified by the current U.S. social security system.
b. exemplified by the current Chilean social security system.
c. designed to have retirees set aside a contribution specifically for themselves during their earlier working life.
d. both (a) and (b).
19. Approximately, what percentage of beneficiaries of U.S. Social Security are retired workers?
a. 50%
b. 60%
c. 70%
d. 80%
20. The Social Security Act was implemented in the United States in:
a. 1927.
b. 1935.
c. 1947.
d. 1965.

CHAPTER 9
Government and Health Care

TRUE/FALSE QUESTIONS
1. In the United States the government pays the health bills of 90 percent of the population.
2. The American system of health care is financed by a mix of private and government insurance programs that pay over 80 percent of the health care bills for U.S. citizens.
3. Spending per person on health care in the United States is less than in the United Kingdom where national health insurance finances health expenditures.
4. Government spending on health care is declining as a percent of total government spending.
5. Medicare is a government program of health insurance for the elderly.
6. Exclusion of employer-provided health insurance to employees is an indirect subsidy to private provision of health insurance.
7. Third-party payments for health care services increase the quantity of health care demanded by reducing out-of-pocket costs to patients.
8. An increase in coinsurance and deductibles for health insurance can contribute to a reduction in expenditures on health care.
9. Half of Americans do not have health insurance coverage.
10. Under national health insurance in Great Britain, the price system is used to ration health care.
11. Approximately 16 percent of GDP was allocated to provision of health care in the United States as of 2006.
12. Individuals in the United States, on average, pay 50 percent of their health care costs out-of-pocket, and the remaining 50 percent is paid by insurance, governments, and charity.
13. Asymmetric information in the market for health care occurs when sellers of medical care are better informed about cost and quality of care than buyers.
14. Because of third-party payment for services in the market for health care, the price paid by buyers is less than the payment sellers receive, and the marginal social cost of health care exceeds its mar¬ginal social benefit.
15. Medicaid costs are paid entirely by the federal government.
16. Healthcare expenditures in the U.S. are projected to be 20% of GDP by 2017.
17. Asymmetric information can occur when the provider of a service is better informed than the consumer of the service.
18. A risk averse individual prefers to pay certain modest costs in exchange for possible unforeseen high costs.
MULTIPLE CHOICE QUESTIONS
1. Most of the medical bills of Americans in the United States are paid by:
a. the patients.
b. private and government health insurance.
c. charities.
d. Medicaid.
2. Since 1960, expenditures on health care as a percent of GDP has:
a. been cut in half.
b. nearly tripled.
c. remained the same.
d. doubled.
3. The government program that provides the health insurance to the poor in the United States is called:
a. national health insurance.
b. Medicare.
c. Medicaid.
d. employer-provided health insurance.
4. Which of the following programs accounts for the greatest amount of government expenditures on public health in the United States?
a. Medicare
b. worker’s compensation
c. the Public Health Service
d. medical research
5. Which of the following subsidizes private provision of health insurance?
a. Medicare
b. Medicaid
c. the Public Health Service
d. tax exclusion of the value of employer-provided health insurance to workers
6. Which of the following could help decrease the rate of increase of spending on health care in the United States?
a. a reduction in the deductibles on private health insurance policies
b. an increase in the coinsurance rate on health insurance and subjecting a larger volume of ser¬vices to coinsurance
c. extension of Medicaid insurance to all persons who are poor
d. a reduction in the coinsurance rate on health insurance and subjecting a smaller volume of ser¬vices to coinsurance
7. Which of the following is an example of the “moral hazard of health insurance”?
a. an increase in the number of surgeries prescribed for benign prostate disease beyond the point at which the marginal benefit equals the marginal cost
b. a decreased willingness of individuals to go to the doctor for minor ailments because of increases in coinsurance rates
c. an underallocation of resources to medical care because of monopoly power of hospitals
d. experience rating of health insurance groups by health insurers
8. A third-party payment system for health care:
a. results because of externalities in the production of health care services.
b. encourages more than the efficient amount of resources to be allocated to health care.
c. encourages patients and health care providers to economize on the use of health care resources.
d. means that patients pay the full price for health care services they consume.
9. Which of the following services is typically not covered under private health insurance and Medicare in the United States?
a. treatment for heart attack
b. surgery
c. office visits to physicians
d. long-term care services
10. Under national health insurance as operated in Great Britain,
a. the British system pays fees equal to half of the costs of services provided to them.
b. general practice physicians are paid on a per-patient rather than on a per-unit-of-service basis.
c. patients requiring surgery can pick their surgeons and can usually obtain the surgery in a matter of days, even if it is not an emergency.
d. there are no government limits on health care spending by hospitals.
11. Which of the following is true about the Medicaid program in the United States?
a. It is a program of health insurance for the elderly.
b. Its costs are paid entirely by the federal government.
c. It is a program of health insurance for the poor.
d. Its costs have been declining in recent years.
12. In the United States, individuals pay approximately what percent of the cost of their medical care directly to providers?
a. 100 percent
b. 50 percent
c. 15 percent
d. zero
13. The percent of total health care costs in the United States paid for by governments is approximately:
a. 90 percent.
b. 45 percent.
c. 25 percent.
d. 10 percent.
14. The system of third-party payment for medical care in the United States has which of the following effects in the market for health care?
a. It improves efficiency in the market.
b. It causes the marginal social benefit of health care to exceed its marginal social cost.
c. It causes the marginal social cost of health care to exceed its marginal social benefit.
d. It results in less than the efficient quantity of health care services.
15. Which of the following is true about the Medicare program in the United States?
a. It is only available to those who pass a means test.
b. It is available to all citizens over the age of 65.
c. The costs are completely financed by fees paid by insurees.
d. It places no limits on reimbursement to medical care providers.
16. What would be the effect of having no health insurance available?
a. The quantity of healthcare would be set at where the marginal benefit and marginal cost are equal.
b. Excess demand for healthcare would be the result because the quantity supplied would be at a level where the marginal benefit exceeds the marginal cost.
c. Excess supply for healthcare would be the result because the quantity supplied would be at a level where the marginal benefit would be below the marginal cost.
d. the quantity of healthcare would be at an inefficient level.
17. The elderly are what proportion of beneficiaries of Medicare?
a. 95%
b. 85%
c. 77%
d. 70%
18. What is the moral hazard associated with third party payment for health services?
a. The recipient of the service is not as informed as the provider of the service.
b. The recipient of services tends to decline more services than they should.
c. The recipient of services tends to have more services than what is needed relative to the efficient level of services.
d. There is no moral hazard.
19. Which is not reason for excalating healthcare costs in the U.S.?
a. Increase in malpractice insurance.
b. Cross-subsidization of patients who cannot pay for healthcare or insurance.
c. Overuse of new technology.
d. Both (b) and (c).
20. If the quantity of healthcare is more than the efficient quantity, what is the consequence?
a. Some will not have access to healthcare that would have access at the efficient level.
b. The healthcare will suffer in quality.
c. Capital could be more efficiently spent elsewhere leading to less overall productivity.
d. Lower marginal costs and marginal benefits.

ECO 450 Week 7 Quiz

CHAPTER 10
Introduction to
Government Finance
TRUE/FALSE QUESTIONS
1. Taxes simultaneously ration and finance government goods and services.
2. The federal government finances only half of its expenditures with taxes.
3. The benefit principle argues that the means of financing government goods and services should be linked to the benefits received from those goods and services.
4. Horizontal equity is achieved when individuals of the same economic capacity pay the same amount of taxes over a given period.
5. A flat-rate income tax is a proportional tax on an income base.
6. The marginal tax rate will eventually exceed the average tax rate if the tax rate structure is propor¬tional.
7. The marginal tax rate for a payroll tax is 7 percent on all wages up to $60,000 per year. The marginal tax rate for wages in excess of $60,000 per year is zero. The payroll tax is therefore a regressive tax.
8. Tax evasion would be less of a problem if tax rates were lowered.
9. The user charge for a congestible public good should be zero at all times.
10. Zero prices for price-excludable government services provide benefits only to the poor.
11. The gasoline tax is an example of a general tax on consumption.
12. For a proportional tax, the marginal tax rate is always equal to the average tax rate.
13. Tax avoidance is an illegal activity in the United States.
14. An increase in marginal tax rates is likely to increase tax evasion.
15. Most studies indicate that state-run lotteries are equivalent to a progressive tax on gambling.
16. Government activity requires the reallocation of resources from government to private use.
17. A flat income tax (i.e. a fixed amount paid by every taxpayer) is an example of a selective tax.
18. The average tax rate and marginal tax rate are the same under a progressive tax rate structure.
MULTIPLE CHOICE QUESTIONS
1. According to the benefit principle,
a. taxes should be distributed according to ability to pay.
b. user charges are an ideal source of finance for government goods and services.
c. the progressive income tax represents the ideal way of distributing taxes among citizens.
d. flat-rate taxes are always the best kind.
2. If horizontal equity is achieved in taxation,
a. vertical equity will also be achieved.
b. individuals of equal economic capacity will pay equal taxes.
c. a flat-rate tax will be used.
d. the tax system will not result in losses in efficiency in markets.
3. The tax base of a payroll tax is:
a. consumer expenditures.
b. interest income.
c. labor income.
d. both (b) and (c)
4. A 5-percent retail sales tax on all consumer purchases in a state is imposed. The sales tax is:
a. a flat-rate tax.
b. a tax with a regressive rate structure.
c. levied on an income base.
d. all of the above
5. A tax on the value of real estate holdings is a:
a. selective tax on wealth.
b. general tax on wealth.
c. general tax on income.
d. selective tax on income.
6. An excise tax is a:
a. general consumption tax.
b. selective consumption tax.
c. general wealth tax.
d. selective tax on wealth.

7. A proportional income tax has an average tax rate that:
a. always is less than the marginal tax rate.
b. always exceeds the marginal tax rate.
c. equals the marginal tax rate at first and then becomes less than the marginal tax rate.
d. always equals the marginal tax rate.
8. A payroll tax taxes a worker’s wages at 14 percent until the worker earns $60,000 per year. All labor earnings in excess of $60,000 are not subject to tax. The tax rate structure of the payroll tax is therefore:
a. proportional.
b. progressive.
c. regressive.
d. flat-rate.
9. A bridge becomes congested after 100 vehicles per hour use it on any day. To achieve efficiency, a toll:
a. that charges all users of the bridge, no matter how many vehicles use it per hour, should be imposed.
b. on additional users in excess of 100 per hour should be imposed.
c. on all users should be imposed, if more than 100 users per hour are expected.
d. is not required.
10. A government prints money to finance its expenditures. As a result,
a. the economy can operate at a point outside its production possibility curve.
b. inflation will occur.
c. consumers will give up private goods to finance the increased government expenditures.
d. both (b) and (c)
11. Taxes are likely to affect:
a. market equilibrium.
b. political equilibrium.
c. the distribution of income.
d. all of the above
12. Taxes:
a. are voluntary payments to governments.
b. are unlikely to affect market supply and demand.
c. never affect efficiency in the allocation of resources.
d. are compulsory payments associated with certain activities.
13. A tax on real estate is a:
a. general wealth tax.
b. general consumption tax.
c. selective wealth tax.
d. selective income tax.
14. The marginal tax rate will eventually exceed the average tax rate for a:
a. proportional tax.
b. regressive tax.
c. progressive tax.
d. flat-rate tax.
15. Marginal tax rates were reduced in 2001. Other things being equal, this is likely to:
a. increase tax evasion.
b. decrease tax evasion.
c. have no effect on tax evasion.
d. increase tax avoidance.

16. What is an example of a normative criterion that a government must trade-off in its method of
taxation?
a. Equity
b. Efficiency
c. Administrative ease
d. all of the above
17. Tax avoidance is:
a. a means of tax evasion.
b. a means of decreasing taxes paid by adjusting behavior.
c. a political process explicitly for the reduction of taxation.
d. a means to avoid tax owed.
18. If the marginal tax rate is 20% under a proportional tax rate structure, the average tax rate:
a. should be 20%.
b. should be above 20%.
c. should be below 20%.
d. cannot be determined.
19. If the average tax rate under a progressive tax rate structure is 35%, a possible marginal tax rate is:
a. 30%.
b. 25%.
c. 42%.
d. not able to be determined.
20. Which of the following countries has the highest average tax rate relative to GDP?
a. Japan
b. Sweden
c. Iceland
d. United Kingdom

ECO 450 Week 8 Quiz

CHAPTER 11
Taxation, Prices, Efficiency,
and the Distribution of Income
TRUE/FALSE QUESTIONS
1. A lump-sum tax results in both income and substitution effects.
2. A consumer currently pays $500 a year retail sales taxes. She would be better off if she paid the same amount annually as a lump-sum tax.
3. Clothing is sold in perfectly competitive markets where no externalities prevail. An excise tax on clothing will result in a market price for clothing that equals the marginal social benefit and mar¬ginal social cost of service.
4. Assuming that the income effects are negligible and that beer is sold in a competitive market, a 10 cent per can tax on beer that causes a 10,000 can per month decline in sales will result in an excess burden of $1,000 per month.
5. A tax on land results in an income effect on landlords but no substitution effect. Then it follows that the excess burden of a tax on land will be zero.
6. The excess burden of a tax on interest income is $5 billion per year. Total interest income per year is $50 billion. The tax currently collects $15 billion in revenue per year. The efficiency-loss ratio of the tax is therefore 0.33.
7. A payroll tax results in a difference between the gross wages paid by employers and the net wages received by workers.
8. If the market supply of labor services is perfectly inelastic, a tax on labor income will reduce the net wages received by workers by the full amount of the tax per labor hour.
9. If a $10 per unit tax is levied on the output of a monopolist, more of that tax will be shifted to con¬sumers than would be the case if the same good were produced by a competitive industry.
10. A study indicates that taxes in the United States reduce the Gini coefficient for the nation by 10 percent. This implies that taxes make the income distribution more equal.
11. A lump-sum tax only results in income effects.
12. An income tax is an example of a price-distorting tax.
13. The more price-elastic the demand of a taxed item, the lower the excess burden of a tax on the sale of that item.
14. If the tax on the sale of gasoline is doubled from 20 cents per gallon to 40 cents per gallon, the excess burden of the tax will quadruple.
15. If the compensated elasticity of supply of labor is zero, then a tax on labor earnings will have zero excess burden.
16. Lump-sum taxes do not prevent prices from equaling the marginal social cost and benefit of any goods and services.
17. Lump-sum taxes can vary in amount based on income level.
18. A lump-sum tax can distort prices and affect consumption behavior.
MULTIPLE CHOICE QUESTIONS
1. A lump-sum tax:
a. distorts market prices so that they do not simultaneously equal MSB and MSC.
b. can result in price changes but does not prevent prices from simultaneously being equal to MSB and MSC.
c. results in substitution effects that change prices.
d. results in both substitution effects and income effects that change prices.
2. The current price of compact discs, which are traded in perfectly competitive markets, is $10. A $1 per unit tax is levied on the discs. Annual record sales decline from five million to four million as a result of the tax. Assuming that the income effect of the tax-induced price change is negligible, the excess burden of the tax will be:
a. $500,000 per year.
b. $1 million per year.
c. $2 million per year.
d. $2.5 million per year.
3. The elasticity of supply of land is zero. A tax on land results only in an income effect to landlords. Then it follows that a 10-percent tax on land rents will:
a. have a positive excess burden.
b. be shifted forward to tenants.
c. be paid entirely by landlords.
d. have zero excess burden.
e. both (c) and (d)
4. Currently, a 10-cent per gallon tax is levied on gasoline consumption. The tax is increased to 20 cents per gallon. The excess burden of the tax will:
a. remain the same.
b. double.
c. increase four times.
d. decline.
5. The supply of new cars is perfectly elastic. A $400 per car tax is levied on buyers. As a result of the tax,
a. the price received by sellers will fall by $400.
b. the price paid by buyers, including the tax, will increase by $400.
c. the quantity of cars sold per year will be unchanged.
d. the excess burden of the tax will be zero.
e. both (c) and (d)
6. Other things being equal, the more inelastic the demand for a taxed good,
a. the greater the portion of the tax paid by sellers.
b. the greater the excess burden of the tax.
c. the greater the portion of the tax paid by buyers.
d. the less the portion of a tax on sellers that can be shifted to buyers.
7. The market supply of labor is perfectly inelastic. However, the income effect of tax-induced wage changes are believed to be substantial. Then it follows that a tax on labor income will:
a. have zero excess burden.
b. have positive excess burden.
c. be paid entirely by workers as a reduction in net wages.
d. both (a) and (c)
e. both (b) and (c)
8. Suppose an economy is comprised of only two markets: one for food and the other for housing. A tax on food used to finance transfer payments is likely to:
a. decrease the price of food.
b. increase the price of housing.
c. decrease the price of housing.
d. have no effect on either the price of food or housing.
9. Differential tax incidence measures the effect:
a. that a tax and the expenditures it finances have on the distribution of income.
b. that one tax alone has on the distribution of income.
c. on the distribution of income of substituting one tax for another while holding the size and composition of the budget fixed.
d. on the distribution of income of substituting one tax for another while changing the kinds of government services financed.
10. Most studies of tax incidence assume that taxes on labor income and other input services are borne entirely by the workers and other input owners that supply the services. This implies that the:
a. supply of those input services is very elastic.
b. supply of those input services is of unitary elasticity.
c. supply of those input services is perfectly inelastic.
d. demand for those input services is perfectly elastic.
11. Most studies show that the price elasticity of demand for gasoline is –0.2. If the price elasticity of supply is 2, then a tax on gasoline will:
a. have no effect on the market equilibrium price of gasoline.
b. cause the market equilibrium price of gasoline to fall.
c. cause the market equilibrium price paid by buyers to rise.
d. cause the net price received by sellers to fall.
e. both (c) and (d)
12. The demand for medical care is very inelastic. If a 10-percent tax is levied on the sale of medical services and is collected from medical-care providers, then:
a. the incidence of the tax is likely to be borne entirely by medical-care providers.
b. most of the tax is likely to be shifted to those who purchase medical care.
c. the market equilibrium price of medical care will fall.
d. the excess burden of the tax is likely to be very high.
13. Which of the following is true about a lump-sum tax?
a. It prevents efficiency from being attained in competitive markets.
b. It causes substitution effects.
c. It causes income effects.
d. It causes both income effects and substitution effects.
14. Housing construction is generally believed to be an industry of constant costs. In the long run, which of the following is true if a $10 per square foot tax on housing construction is collected directly from builders?
a. The incidence of the tax will be borne by builders.
b. The excess burden of the tax will be zero.
c. The quantity of new construction supplied will be unaffected.
d. The tax will be fully shifted to buyers of new construction.
15. If the price elasticity of supply of labor is equal to 0.5 and the price elasticity of demand for labor is –2, then which of the following is likely to result from a tax on labor earnings?
a. The tax will be fully borne by workers.
b. Some of the tax will be shifted to employers as market equilibrium wages increase.
c. Market equilibrium wages will decline.
d. There will be no effect on market equilibrium wages.
16. If a lump-sum tax is imposed, the slope of the new budget line relative to the budget line prior to the tax:
a. remains unchanged.
b. increases.
c. decrease.
d. can increase and decrease in different regions.
17. Viewed from origin a price distorting tax creates a new budget line with a ______ slope relative to the budget line without the tax.
a. less steep
b. more steep
c. similar
d. varying
18. A $0.30 per unit tax is imposed on a good that reduces the quantity supplied and demanded by 1000 units. What is the deadweight loss (ignore price elasticities)?
a. $300.00
b. $100.00
c. $150.00
d. Cannot be determined.
19. If a per unit tax is imposed, but the quantity supplied and demanded does not change then:
a. the demand is perfectly inelastic.
b. the supply is perfectly inelastic.
c. there is no deadweight loss.
d. All of the above.
20. The efficiency-loss ratio relative to tax is:
a. the deadweight loss less the tax revenue.
b. the deadweight loss divided by the tax revenue reduced by one.
c. the excess burden divided by the tax revenue.
d. None of the above.

CHAPTER 12
Budget Balance and
Government Debt
TRUE/FALSE QUESTIONS
1. From 1950 to 2009, the federal government budget has been in balance in most years.
2. The high employment budget deficit implies that increases in economic activity will not eliminate the actual deficit.
3. Other things being equal, an increase in government borrowing is likely to increase interest rates.
4. If taxpayers anticipate future tax increases when government borrows to finance deficits, increased government borrowing will increase interest rates.
5. As of 2008, the amount of federal debt outstanding was equal to twice the annual GDP.
6. From 1950 to 1980, the value of the federal debt as a percent of GDP declined.
7. More than 50 percent of the federal debt in recent years has been outside debt.
8. An increase in market rates of interest tends to decrease the market value of outstanding govern¬ment debt.
9. Deficit finance postpones taxation from the present to the future.
10. The burden of the debt is borne by those who purchase government bonds.
11. The federal government budget recorded surpluses between 1998 and 2001.
12. State and local governments are usually required by state law to keep the budgets in balance.
13. If business and personal saving are constant, then a federal budget deficit will have no impact on national saving.
14. Other things being equal, a government surplus increases the supply of loanable funds available for investment.
15. State revenue bonds are backed by the taxing power of state governments.
16. A federal budget surplus can lead to more credit being available for productive activity.
17. A federal budget deficit can strain credit markets forcing the real rate of interest to decrease.
18. The U.S. deficit in the 1980s was structural in the sense that federal spending would exceed federal revenue even at a level of full employment.
MULTIPLE CHOICE QUESTIONS
1. The outstanding federal debt will decline in value if:
a. budget deficits continue.
b. the government runs a budget surplus.
c. the market rate of interest increases.
d. either (b) or (c)
2. The federal budget has been in deficit:
a. for every year between 1970 and 1997.
b. for every year between 1950 and 1997.
c. only since 1980.
d. for every year between 1960 and 1997.
3. The high employment deficit is estimated at $100 billion. Assuming that the economy is operating below full employment and that it will not overheat during the year,
a. the actual budget is not in deficit.
b. increasing GDP will eliminate the deficit.
c. increasing GDP will not eliminate the deficit.
d. the actual budget is in surplus.
4. An increase in government borrowing has no effect on the willingness of citizens to save or on the demand for credit. Increased borrowing to cover deficits will therefore:
a. reduce interest rates.
b. increase interest rates.
c. have no effect on interest rates.
d. not require increased taxes in the future.
5. As a result of government borrowing to cover deficits, citizens increase the supply of savings to provide themselves with funds to pay anticipated increases in future taxes. Then it follows that increased government borrowing will:
a. reduce private investment.
b. increase private investment.
c. have no effect of private investment.
d. increase interest rates.
e. both (a) and (d)
6. The total dollar value of the federal debt outstanding is:
a. more than 50 percent of GDP.
b. more than 100 percent of GDP.
c. less than 50 percent of GDP.
d. less than 10 percent of GDP.
7. The federal government, its agencies, and the Federal Reserve System:
a. are not permitted to hold outstanding federal debt.
b. hold 50 percent of the outstanding federal debt.
c. hold between 15 and 25 percent of the outstanding federal debt.
d. hold 75 percent of the outstanding federal debt.
8. The largest portion of the net federal debt outstanding is owed to:
a. foreigners.
b. U.S. citizens and companies.
c. federal government agencies.
d. state and local governments.
9. The debt of state and local governments is mostly:
a. internal.
b. external.
c. owed to citizens of other nations.
d. worthless.
10. Government borrowing will:
a. postpone taxation to the future.
b. increase government interest cost.
c. both (a) and (b)
d. eliminate taxes.
11. Which of the following is true about the federal government budget balance in the United States?
a. The federal budget has never had a surplus.
b. The federal budget had a surplus every year from 1970 to 2008.
c. The federal budget had a surplus from 1998 until 2001.
d. The federal budget had a deficit from 1998 until 2001.
12. Which of the following can contribute to a decrease in national saving?
a. a federal budget deficit
b. an increase in the state and local government aggregate surplus
c. a federal budget surplus
d. an increase in personal saving
13. Other things being equal, a government budget surplus:
a. increases the demand for loanable funds.
b. increases the supply of loanable funds.
c. is likely to increase market equilibrium interest rates.
d. is unlikely to affect market equilibrium interest rates.
14. If the federal government runs a surplus consistently, then which of the following is likely to occur?
a. National saving will decline.
b. The gross federal debt will increase.
c. The gross federal debt will decrease.
d. Market equilibrium interest rates are likely to rise as a result of the surpluses.
15. General obligation bonds of state and local governments are:
a. backed by revenue from public facilities such as sports stadiums.
b. backed by the taxing power of state and local governments.
c. usually used to finance transfer payments.
d. usually used to finance capital expenditures.
e. both (b) and (d)
16. A bond that is backed by the tolls collected from a bridge to be constructed from the proceeds of the bond is an example of:
a. a general obligation bond.
b. a non-obligation bond.
c. a revenue bond.
d. none of the above.
17. Evidence of “crowding out” in the market for loanable funds at a rate of 8% could be:
a. private investors who will borrow only at a rate lower than 8%.
b. private investors who are willing to accept a rate higher than 8% for borrowing.
c. a government surplus.
d. a social security surplus.
18. High-employment deficit or surplus is:
a. an extreme economic situation requiring emergency measures.
b. the amount of deficit or surplus available assuming current employment levels.
c. the amount of deficit or surplus available when employment is at its approximately full capacity.
d. the amount of deficit or surplus available when unemployment is at a relatively high level.
19. A government’s internal debt is:
a. debt owed to other government agencies.
b. debt owed to other governments.
c. debt owed to its citizens.
d. both (a) and (c).
20. The National Income and Product Accounts budget balance reflects:
a. an inflation-adjusted budget balance less social security surplus.
b. new debt resulting from a federal budget deficit.
c. the real budget balance.
d. the nominal budget balance.

ECO 450 Week 9 Quiz

CHAPTER 13
The Theory of Income Taxation
TRUE/FALSE QUESTIONS
1. The actual federal income tax currently taxes all income irrespective of its source or use at the same tax rate.
2. Comprehensive income excludes unrealized capital gains.
3. Under a comprehensive income tax, transfer payments received by Social Security recipients would be fully taxable.
4. Homeowners earn rental income-in-kind from their home that would be taxable under a compre¬hensive income tax.
5. A comprehensive income tax is a lump-sum tax.
6. A comprehensive income tax will result in a divergence between gross wages paid by employers and net wages received by workers.
7. A comprehensive income tax will always reduce work effort by taxpayers.
8. The substitution effect of a tax-induced decline in wages always leads workers to work less.
9. The market wage elasticity of labor is zero. If this is the case, the excess burden of a tax on labor income will also be zero.
10. Points on a compensated labor supply curve are always more elastic than points for corresponding wage levels on a regular labor supply curve.
11. Comprehensive income is the sum of annual consumption and the change in net worth.
12. A tax on interest income does not prevent credit market from efficiently allocating resources.
13. If an individual is subject to a 30-percent income tax, then the net interest on a certificate of deposit yielding 5 percent would be 3.5 percent after taxes.
14. Because a tax on interest income results in income and substitution effects, it is not possible to pre¬dict the effect it will have on saving.
15. Most empirical studies indicate that the interest elasticity of supply of savings is close to zero.
16. Income tax became a permanent fixture in the United States starting in the early nineteenth century.
17. The Haig-Simons definition of income is different from comprehensive income.
18. Comprehensive income equals consumption plus the change in net worth.
MULTIPLE CHOICE QUESTIONS
1. Comprehensive income:
a. is the sum of annual consumption and realized capital gains.
b. is the sum of annual consumption and changes in net worth.
c. excludes corporation income.
d. is the sum of annual consumption and net worth.
2. A tax on labor income:
a. results only in an income effect that always decreases hours worked per year.
b. results in a substitution effect that always decreases hours worked per year.
c. results in an income effect that increases hours worked per year if leisure is a normal good.
d. both (a) and (b)
e. both (b) and (c)
3. The market supply of labor is perfectly inelastic. Then it follows that:
a. the substitution effect of wage changes is zero.
b. the income effect of wage changes is zero.
c. leisure is a normal good and the income effect of wage changes exactly offsets the substitution effect.
d. the excess burden of a tax on labor income will be zero.
4. The compensated labor supply curve:
a. will always be vertical.
b. will always be upward sloping.
c. will always be downward sloping.
d. reflects both the income and substitution effects of wage changes.
5. Using a regular labor supply curve instead of a compensated supply curve to calculate the excess burden of a tax on labor income will:
a. result in an accurate estimate of the excess burden.
b. overestimate the excess burden.
c. underestimate the excess burden.
d. accurately estimate the excess burden only if the market supply of labor is perfectly inelastic.
6. Most empirical research indicates that the market supply curve of labor hours by prime-age males is:
a. very elastic.
b. almost perfectly inelastic.
c. always upward sloping.
d. perfectly elastic.
7. A flat-rate tax on labor income will:
a. always reduce hours worked per year.
b. always increase hours worked per year.
c. either increase or decrease hours worked per year.
d. never have any effect on the amount of leisure hours per year.
8. A tax on interest income:
a. causes the gross interest rate paid by investors to exceed the net interest rate received by savers.
b. will always reduce saving.
c. will always increase saving.
d. is equivalent to a lump-sum tax.
9. If the market supply curve of savings is upward sloping, a tax on interest income will:
a. increase the amount of saving.
b. increase the market rate of interest.
c. decrease the market rate of interest.
d. have no effect on the market rate of interest.
10. If the supply of labor is perfectly inelastic, then the incidence of a payroll tax levied entirely on employers will be:
a. borne by employers as a reduction in profits.
b. split between workers and employers.
c. paid entirely by workers.
d. shifted forward to consumers.
11. Which of the following is true about comprehensive income?
a. Only labor income is included.
b. Only capital income is included.
c. Capital gains are not included.
d. Both realized and unrealized capital gains are included.
12. Which of the following will increase a person’s comprehensive income?
a. an increase in the market value of the person’s home
b. a decrease in the value of the person’s stock portfolio
c. a decrease in labor income
d. a decrease in consumption
13. A tax on labor income will:
a. increase the net wage received by workers.
b. decrease the net wage received by workers.
c. cause that net wage received by workers to decline below the gross wage paid by employers.
d. both (b) and (c)
14. If the return to savings, r, is subject to taxation at rate t, then in equilibrium a saver’s marginal rate of time preference will equal:
a. r
b. t
c. (1 + r)
d. [1 + r(1 – t)]
15. The higher the compensated elasticity of supply of savings,
a. the lower the excess burden of a tax on capital income.
b. the higher the excess burden of a tax on capital income.
c. the higher the excess burden of a tax on labor income.
d. both (b) and (c)
16. The Haig-Simons definition of income:
a. is the sum of annual consumption and realized capital gains.
b. is the sum of annual consumption and changes in net worth.
c. excludes corporation income.
d. is the sum of annual consumption and net worth.
17 Comprehensive income:
a. includes realized capital gains, but not unrealized capital gains
b. includes both realized and unrealized capital gains.
c. excludes cash from the sale of assets.
d. excludes increases in the value of assets.
18. Income-in-kind:
a. is exemplified by nonpecuniary returns.
b. is generally non-taxable because there is no monetary transaction.
c. is generally taxable.
d. both (a) and (b).
19. An example of a nonpecuniary return is:
a. job satisfaction.
b. unemployment benefits.
c. employer contributions to a retirement plan.
d. both (b) and (c).

20. Income from labor services (wages) account for what percentage of gross income in the U.S.?
a. 90%
b. 75%
c. 60%
d. 50%

CHAPTER 14
Taxation of Personal Income
in the United States
TRUE/FALSE QUESTIONS
1. Taxable income in the United States exceeds adjusted gross income.
2. Taxable income in the United States includes all capital gains earned, whether or not they are realized.
3. Taxable income in the United States amounts to less than 50 percent of personal income.
4. Tax preferences are really subsidies to certain activities.
5. A tax deduction allowed for an activity for which positive externalities are not likely to exist (such as home ownership) is likely to cause the marginal social cost of the activity to exceed its marginal social benefit.
6. The value of a personal exemption to a taxpayer varies with his or her marginal tax rate.
7. The U.S. personal income tax is not a progressive tax.
8. The highest statutory marginal tax rate under the federal personal income tax is 50 percent.
9. Under current rules, only real interest earned is subject to income tax.
10. Realized, long-term capital gains that reflect inflation are currently exempt from taxation.
11. The tax base under the personal income tax in the United States is the Haig-Simons definition of comprehensive income.
12. Tax credits vary with a person’s marginal tax rate.
13. The cuts in marginal tax rates initiated in 2001 are likely to reduce the excess burden of tax pref¬erences.
14. The earned income tax credit is a negative tax the subsidizes the earnings of low-income workers.
15. If a progressive income tax is replaced with an equal-yield, flat-rate tax, then work effort will unequivocally increase.
16. As of 2009, there is no marriage penalty for an adjusted gross income of $60,000.
17. Tax preferences are exclusions, exemptions, and deductions from the tax base.
18. Income-in-kind is not considered a tax preference.
MULTIPLE CHOICE QUESTIONS
1. Adjusted gross income, as defined by the United States Tax Code,
a. exceeds taxable income.
b. equals taxable income.
c. is less than taxable income.
d. is greater than comprehensive income.
2. Tax preferences:
a. are exclusions, exemptions, and deductions from the tax base.
b. are in the tax code by accident.
c. are extra taxes on certain taxpayers.
d. increase the amount of income that is taxable.
e. both (a) and (d)
3. Currently, the tax treatment of capital gains in the United States is such that:
a. all capital gains are taxed.
b. all realized capital gains are taxed.
c. most realized capital gains are taxed.
d. only capital gains adjusted for inflation are taxed.
4. The exclusion of interest of state and local bonds from taxation by the federal government:
a. decreases interest costs for state and local governments.
b. increases interest costs for state and local governments.
c. benefits lower-income taxpayers more than upper-income taxpayers.
d. discourages borrowing by local governments.
5. The value of personal exemptions in terms of taxes saved:
a. is the same for all taxpayers.
b. varies with family size.
c. varies with taxpayers’ marginal tax rates.
d. both (b) and (c)
6. A taxpayer is in a 33-percent tax bracket and itemizes deductions. He obtains a mortgage from a bank at 9-percent interest. The actual rate of interest he pays is:
a. 6 percent.
b. 9 percent.
c. 20 percent.
d. 25 percent.
7. Tax expenditures are:
a. expenditures made to collect taxes.
b. losses in revenue due to tax preferences.
c. less than 1 percent of tax revenue.
d. both (b) and (c)
8. Under the federal personal income tax rules prevailing as of 2009,
a. all interest expense is tax deductible.
b. the interest expense for mortgages on first and second homes is tax deductible.
c. the interest expense for mortgages only on first homes is tax deductible.
d. no interest is tax deductible.
9. The reduction in marginal tax rates will:
a. increase the excess burden of tax preferences.
b. increase tax expenditures.
c. decrease the excess burden of tax preferences.
d. have no effect of tax expenditures.
10. “Bracket creep” is no longer a problem in the United States because:
a. the tax brackets are indexed.
b. capital gains are now fully taxable.
c. only real interest is taxed.
d. capital gains are indexed.
11. Which of the following is true for the federal income tax in the United States?
a. All income irrespective of its source or use is taxed at the same rate.
b. Comprehensive income is the tax base.
c. The tax base is less than 50 percent of comprehensive income.
d. All realized and unrealized capital gains are included in the tax base.
12. Because of the Earned Income Tax Credit, the effective tax rate for the lowest-income taxpayers in the United States is:
a. only 15 percent.
b. higher than that paid by upper-income taxpayers.
c. zero.
d. negative.
13. The excess burden of tax preferences:
a. depends on average tax rates.
b. will be higher, the higher the marginal tax rate is.
c. will be lower, the higher the marginal tax rate is.
d. is independent of marginal tax rates.
14. A shift to an equal-yield, flat-rate personal income tax from the current progressive income tax rate structure will:
a. reduce the tax burden on upper-income groups.
b. increase the tax burden on upper-income groups.
c. increase the share of taxes paid by lower-income groups.
d. both (a) and (c)
15. Removing savings from the tax base of the personal income tax is likely to:
a. increase work effort.
b. decrease work effort.
c. lower market equilibrium interest rates by increasing the supply of loanable funds.
d. increase market equilibrium interest rates, thereby increasing the demand for loanable funds.
16. Which is a justification for tax preferences?
a. administrative difficulties
b. improving equity
c. encouraging private expenditures that create external benefits
d. all of the above
17. If the excess burden from tax is $10 million, lowering marginal tax rates should make the excess burden:
a. more than $10 million.
b. less than $10 million.
c. remain at $10 million.
d. none of the above is certain to occur
18. Which of the following is the result of The Economic Growth and Tax Relief Reconciliation Act enacted in 2001?
a. reduction of the highest marginal tax rate
b. increased the marriage penalty
c. created a new 40% tax bracket
d. both (a) and (c)
19. As of 2009, the highest marginal tax rate is:
a. 39.6%
b. 38%
c. 35%
d. 32.5%
20. Which is an example of an itemized deduction under the U.S. code as of 2009?
a. state and local income tax
b. state and local property tax
c. all medical expenses
d. both (a) and (b)

CHAPTER 17
Taxes on Wealth,
Property, and Estates
TRUE/FALSE QUESTIONS
1. Wealth is a flow.
2. A wealth tax is equivalent to a tax on the return to saving.
3. If the supply of savings is perfectly inelastic, a comprehensive wealth tax will increase the market rate of interest.
4. Assuming that the supply curve of savings is upward sloping, a comprehensive wealth tax will reduce annual investment.
5. As administered in the United States, the local property tax is mainly a tax on real estate.
6. The property tax in the United States is likely to reduce the equilibrium return to investment.
7. The town of Oz has raised its property tax rates considerably above the national average. Other things being equal, capital is likely to flow into Oz in the long run because of the tax.
8. If a real estate tax causes rents to rise, it cannot be fully capitalized.
9. A tax on the value of land is likely to be fully capitalized.
10. The local property tax is likely to result in less than the efficient amount of investment in real estate.
11. A general tax on wealth will cause efficiency loss in labor markets.
12. The local property tax, as administered in the United States, is a general tax on wealth.
13. The local property tax in the United States will reduce the return to real estate only in the long run.
14. Other things being equal, if the property tax rate is above the national average for a jurisdiction, capital can be expected to flow out of the region in that area.
15. If a local property tax increase is fully capitalized, property owners at the time of the increase can¬not shift any of the current or future tax increase to buyers if they sell the property.
16. A person who never saves any income and receives no gifts and inheritances will never accumulate wealth.
17. Wealth taxes are a relatively new form of taxation.
18. Total wealth definitions never include intangible personal property.
MULTIPLE CHOICE QUESTIONS
1. Wealth is:
a. a flow.
b. a stock.
c. the market value of accumulated assets.
d. both (b) and (c)
2. A comprehensive wealth tax base includes:
a. all real tangible, intangible, and human wealth, less any claims against those assets.
b. only real property.
c. only intangible assets.
d. only tangible assets.
3. If the interest elasticity of supply of savings is zero, a comprehensive wealth tax will:
a. increase the market rate of interest.
b. reduce the income of savers.
c. reduce the income of workers.
d. both (b) and (c)
4. If the supply curve of savings is upward sloping, a comprehensive wealth tax will:
a. increase the market rate of interest.
b. reduce the market rate of interest.
c. have zero excess burden.
d. have no effect on investment.
5. A comprehensive wealth tax will:
a. impair efficiency in labor markets.
b. impair efficiency in investment markets.
c. both (a) and (b)
d. have no excess burden.
6. Assuming that investors seek to maximize the return on their investment, the long-run effect of a national tax on real estate will be to:
a. reduce the return to investment in real estate only.
b. reduce the return to investment in all assets.
c. reduce wages only.
d. increase the return to all investors.
7. A local property tax, such as that used in the United States, is likely to:
a. increase investment in the economy.
b. cause a flow of investment among jurisdictions.
c. decrease the return to saving in all uses.
d. both (b) and (c)
8. If a property tax on real estate is capitalized,
a. the price of real estate will rise.
b. the price of real estate will fall.
c. the price of real estate will be unaffected.
d. the burden of the tax will be transferred to buyers of real estate.
e. both (b) and (d)
9. Suppose that the current market rate of interest is 10 percent. The market rent on a parcel of land is $6,000 per year. A 10-percent land tax is imposed. As a result of the tax, the price of the land parcel:
a. falls from $60,000 to $30,000.
b. increases from $30,000 to $60,000.
c. falls 10 percent.
d. falls 20 percent.
10. If a tax on real estate results in a decrease in the supply of housing, the tax will be:
a. fully capitalized.
b. only partially capitalized.
c. not capitalized at all.
d. borne entirely by renters.
11. If the supply of saving is not perfectly inelastic in the nation, then which of the following taxes will cause efficiency loss in capital markets?
a. a general wealth tax
b. a national tax on real estate
c. a consumption tax
d. both (a) and (b)
12. The local property tax in the United States is levied primarily on:
a. personal property.
b. intangible property.
c. business property.
d. real estate.
13. Which of the following would not be included in a comprehensive wealth tax base?
a. real estate
b. personal property
c. intangible assets
d. residential rents
14. If the supply of real estate is not perfectly inelastic, then the local real estate property tax differentials:
a. cannot be shifted to tenants.
b. can be shifted to tenants through increases in rents.
c. will be fully capitalized.
d. both (a) and (c)
15. If the supply of saving is not perfectly inelastic, then substituting a value-added tax for an equal-yield general wealth tax will:
a. decrease market equilibrium interest rates.
b. increase the efficiency loss in labor markets.
c. decrease the efficiency loss in labor markets.
d. decrease efficiency in capital markets.
e. both (a) and (b)
16. Intangible personal property includes:
a. stock in companies.
b. corporate bonds.
c. cash.
d. all of the above
17. If the annual amount of savings is $10 billion, what is the effect of a wealth tax assuming supply is perfectly inelastic?
a. annual savings remains $10 billion
b. annual savings increases above $10 billion
c. annual savings falls below $10 billion
d. no particular effect is guaranteed to happen
18. If the annual amount of savings is $10 billion, what is the effect of a wealth tax assuming supply is responsive?
a. annual savings remains $10 billion
b. annual savings increases above $10 billion
c. annual savings falls below $10 billion
d. no particular effect is guaranteed to happen
19. From the point of view of the locality, increasing property taxes:
a. increases the price of locally produced goods.
b. decreases income of owners of land in the associated community.
c. does not affect buyers of locally produced goods fro outside of the community.
d. both (a) and (b)
20. Tax capitalization is:
a. a decrease in the value of a taxed asset at a level related to the discounted value of the future tax liability.
b. partially recognized when the supply of taxed asset is perfectly inelastic.
c. only partially recognized on assets like land.
d. both (b) and (c)

CHAPTER 18
Fiscal Federalism and State and
Local Government Finance
TRUE/FALSE QUESTIONS
1. A federal system of government allows a wider diversity of preferences for government-provided services to be accommodated when compared to nonfederal, centralized government.
2. Income redistribution is a service likely to be most effectively administered by the federal govern¬ment.
3. Economic stabilization can be easily supplied to citizens by local governments.
4. When each local government supplies goods and services to its citizens, the political equilibrium in each jurisdiction corresponds to the median most-preferred outcome of all national voters.
5. A federal system of government allows both centralized and decentralized collective choices.
6. Local tax bases are less elastic than national tax bases.
7. Tax exporting occurs if the price of goods produced in the state and purchased by out-of-state residents rises as a result of in-state taxes.
8. Matching categorical grants can be used to internalize interjurisdictional positive externalities.
9. Matching grants only result in income effects.
10. A matching grant will increase local government expenditures by more than an equal-value, general purpose grant.
11. A federal system of government only has a central government that supplies all public goods and services.
12. According to the Tiebout model of fiscal federalism, a system of many local governments improves the efficiency of allocation of resources to and among public goods.
13. If a local jurisdiction’s tax base is elastic, an increase in tax rates will decrease tax revenue.
14. Taxing hotel rooms and restaurant meals in a city with lots of tourism is an example of tax exporting.
15. Financing local schooling with the local property tax can guarantee equality of opportunity in education.
16. According to Tiebout, individuals will self-select into communities where the government budget best satisfies their own personal preferences.
17. Mobility between communities is not critical to the Tiebout model.
18. Interjurisdictional externalities are costs or benefits of local government goods and services to residents in other political jurisdictions.
MULTIPLE CHOICE QUESTIONS
1. Under a federal system of government,
a. all government goods and services are supplied by a central government.
b. all government goods and services are supplied by local governments.
c. both central and noncentral governments supply goods and services.
d. all public choices are made nationally.
2. Economic stabilization is most effectively provided by:
a. a central government.
b. state governments.
c. local governments.
d. regional governments.
3. A decentralized system of government:
a. tends to result in uniformity in the quantity and quality of government services in all jurisdic¬tions.
b. allows diversity in the quantity and quality of government goods and services.
c. conducts national elections on all issues.
d. is undemocratic.
4. The political equilibrium in a local jurisdiction for a given public good corresponds to the median most-preferred outcome of:
a. all national voters.
b. the President.
c. local voters.
d. both (a) and (c)
5. In general, local tax bases tend to be:
a. less elastic than national tax bases.
b. more elastic than national tax bases.
c. equally elastic when compared with national tax bases.
d. very inelastic.
6. According to the Tiebout model of local government expenditure,
a. all local governments will supply the same kinds and amounts of services.
b. mobile citizens respond to differences in taxes and expenditures by moving to the jurisdiction that maximizes their well-being.
c. the average costs of government services is constant.
d. tax rates do not influence a citizen’s choice of residence.
7. A categorical grant:
a. does not restrict the use of transferred funds.
b. usually specifies the use to which the funds must be applied.
c. is used rarely in the United States.
d. is not used at all in the United States.
8. A federal highway grant will provide funds for roads supplied by state and local governments if these governments pay 50 percent of the cost of the roads. This grant is an example of:
a. revenue sharing.
b. a matching categorical grant.
c. a general purpose grant.
d. a nonmatching block grant.
9. A grant received by a local government will:
a. not affect the political equilibrium in that jurisdiction.
b. change the political equilibrium in that jurisdiction.
c. always increase government expenditures in the recipient jurisdiction by the amount of grant.
d. both (b) and (c)
10. Matching grants:
a. will not increase government spending in recipient jurisdictions.
b. increase government expenditures in recipient jurisdictions more than nonmatching grants of an equal amount.
c. increase government expenditures in recipient jurisdictions less than nonmatching grants of an equal amount.
d. increase tax rates in recipient jurisdictions.
11. Which of the following is true about a federal system of government?
a. There is only one level of government.
b. There are several levels of government.
c. A central government directs local governments to supply all public goods at levels determined nationally.
d. There are only local governments.
12. The central economic problem of fiscal federalism is:
a. the division of taxing and expenditure functions among different levels of government.
b. the choice of the collective choice rule for central governments only.
c. the level of public goods to be provided by a central government only.
d. how to achieve an equitable distribution of income.
13. Which of the following is best supplied by local governments?
a. national defense
b. income redistribution
c. money
d. fire protection
14. Local public goods:
a. are pure public goods for the entire nation.
b. are those whose benefits are nonrival only for the population of a particular geographical area.
c. have benefits that are subject to exclusion by pricing for local consumers.
d. are best provided by a central government.
15. An increase in the local retail sales tax rate will increase revenue collected by a local government:
a. if the tax base is elastic.
b. if the tax base is unit elastic.
c. if the tax base in inelastic.
d. no matter what the value of the elasticity of the tax base.
16. Which is an example of a interjurisdictional externality?
a. residential property tax
b. local sales tax
c. wage tax on all workers in a community
d. both (b) and (c)
17. Mobility:
a. is not essential to the Tiebout model.
b. can hamper a jurisdiction’s ability to raise revenues.
c. may be part of the reason for the reliance on local property taxes for the raising of local government revenue.
d. both (b) and (c)
18. A local wage tax can:
a. create tax competition if a neighboring jurisdiction does not have such a tax.
b. export tax onto workers in the local jurisdiction who live outside of the local jurisdiction.
c. prevent tax competition among other local jurisdictions.
d. both (a) and (b)
19. Fiscal capacity:
a. decreases with the ability of the jurisdiction to export tax.
b. is a measure of the ability of a jurisdiction to finance government-provided services.
c. is always enhanced by mobility.
d. is not dependent on the wealth of the community.
20. What is generally the best measure of fiscal capacity for local governments?
a. income per capita
b. per capita retail sales
c. assessed valuation per capita
d. per capita expenditure

ECO 410 Week 11 Quiz – Strayer University New

ECO/410 Week 11 Quiz – Strayer

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Quiz 10 Chapter 19 and 20

Working Capital Management

19.1 Trident Brazil’s Operating Cycle

Multiple Choice

1) Working capital management involves the management of:
A) current and long-term assets.
B) current assets and current liabilities.
C) current liabilities and long-term assets.
D) current liabilities and long-term debt and equity.

2) The cash conversion cycle:
A) is a subset of the operating cycle.
B) occurs in the latter stages of the operating cycle.
C) is a subset of the accounts receivable period.
D) all of the above.

3) The proper order of events for the operating cycle is:
A) input serving period, accounts receivable period, inventory period, quotation period.
B) quotation period, accounts receivable period, inventory period, input servicing period.
C) quotation period, input servicing period, inventory period, accounts receivable period.
D) accounts receivable period, input servicing period, quotation period, inventory period.

4) TrinityApps Corporation (US) has bid a price on a project for a Korean firm, but the Korean firm has not yet placed an order. This portion of the operating cycle is best described as the:
A) quotation period.
B) input sourcing period.
C) cash conversion cycle.
D) accounts payable cycle.

5) The period in the cash cycle where the customer places the order, and the firm determines what materials for manufacture are NOT in inventory is called the ________ period.
A) quotation
B) input sourcing
C) accounts payable
D) accounts receivable

6) The accounts payable period of the operating cycle:
A) is equal to the inventory period.
B) may run concurrently but shorter than the inventory period.
C) may run concurrently but longer than the inventory period.
D) Any one of the above may be true.

True/False

1) Typically, the inventory period and the accounts payable period at least partially overlap in the firms operating cycle.

2) Typically, the inventory period and the accounts receivable period at least partially overlap in the firms operating cycle.

3) The operating cycle begins with the quotation period and ends with the accounts payable period.

19.2 Trident’s Repositioning Decisions

Multiple Choice

1) Of the following, which would NOT be a significant decision-making factor in a multinational firm’s repositioning decision-making?
A) the subsidiary’s tax environment (high or low)
B) the stability of the local currency
C) the ability to move capital in and out of the subsidiary’s country
D) All of the above are significant factors.

True/False

1) In a country with a relatively high tax rate, it make sense the the MNE to reposition cash flows TO that country.

2) The MNE would prefer to leave capital with a firm in a country with high growth prospects over the alternative of leaving capital with a firm in a country with low growth prospects (other factors equal).

19.3 Constraints on Repositioning Funds

Multiple Choice

1) Each of the following is listed by your authors as a constraint on repositioning funds by an MNE EXCEPT:
A) political constraints.
B) tax constraints.
C) transaction costs.
D) All of the above are listed by your authors.

True/False

1) Local liquidity needs sometimes impact a firm’s worldwide optimal cash position.

2) The constraints on repositioning of funds that occur when exchanging one currency for another are considered to be primarily political constraints.

3) Political constraints can block the transfer of funds either overtly or covertly. OVERT blockage occurs when dividends or other forms of fund remittances are severely limited, heavily taxed, or excessively delayed by the need for bureaucratic approval.

19.4 Conduits for Moving Funds by Unbundling Them

Multiple Choice

1) ________ allows a multinational firm to recover funds from subsidiaries without piquing host country sensitivities over large dividend drains.
A) Unbundling funds
B) Bundling funds
C) Coordinating funds
D) none of the above

2) Unbundling of funds by an MNE may be a useful practice for which of the following reasons?
A) An increase in the funds flow (charges) in any of the before-tax categories reduces the taxable profits of the foreign subsidiary if the host-country tax authorities acknowledge the charge as a legitimate expense.
B) An item-by-item matching of remittance to input, such as royalties for intellectual property, and fees for patents and advice, is equitable to the host country and foreign investor alike.
C) Unbundling facilitates allocation of overhead from a parent”s international division, so-called shared services, to each operating subsidiary in accordance with a predetermined formula.
D) All of the reasons listed above

True/False

1) If all investment inputs are unbundled, part of what might have been classified as residual profits may turn out to be tax-deductible expenses related to a specific purchased benefit.

2) The before-tax/after-tax distinction is quite significant to a parent company attempting to repatriate funds in the most tax-efficient method if it is attempting to manage its own foreign tax credit/deficits between foreign units.

19.5 International Dividend Remittances

Multiple Choice

1) In anticipation of a foreign exchange loss, an MNE may speed up the transfer of funds out of the company via dividends. When undertaking such an activity the MNE must be concerned with all of the following EXCEPT:
A) interest rate differences between the two countries.
B) the negative impact on host country relations.
C) defection on the part of executives in the home headquarters.
D) MNEs must be concerned with all of the above.

True/False

1) Political risk may motivate parent firms to require foreign subsidiaries to remit all locally generated funds above that required to internally finance growth in sales and planned capital expansions.

19.6 Net Working Capital

Multiple Choice

1) One possible definition of net working capital (NWC) provided by your authors is:
A) NWC = A/R + inventory – A/P.
B) NWC = cash + A/P – inventory.
C) NWC = A/P + A/R – short-term loans.
D) NWC = A/R + inventory – long-term debt.

2) Which of the following actions will result in an increase in NWC?
A) an increase in A/P that exceeds an increase in A/R
B) a reduction in inventory
C) a reduction in A/P plus a smaller reduction in A/R
D) an increase in A/P and a smaller reduction in inventory

3) Which of the following statements is true?
A) A/R provide part of the funding for inventory.
B) A/P provide part of the funding for A/R and inventory.
C) Inventory pays for A/R and A/P.
D) None of the above is true.

TABLE 19.1
Use the information to answer following question(s).

TrinityApps Corporation Balance Sheet December 31, 20xx

4) Refer to Table 19.1. The NWC for TrinityApps is:
A) $80,000
B) $680,000
C) $35,000
D) $45,000

5) Refer to Table 19.1. If TrinityApps increases inventory by $10,000 and A/P also by $10,000, the net change in NWC is:
A) $20,000
B) $10,000
C) $0
D) none of the above

6) Refer to Table 19.1. NWC currently makes up what percentage of total firm value for TrinityApps?
A) 6.6%
B) 5.1%
C) 11.8%
D) 9.2%

Instruction 19.1:
Use the information to answer the following question(s).

Sunny Manufacturing Systems Inc. is supplied with plastic chips for their plastic injection molding manufacturing process. Their supplier, Sun Chemical, Inc. offers financing terms of a 2% discount if the accounts payable are paid in 10 days or less with the full balance due in 45 days. Short-term financing available to Sunny Manufacturing is available at an annual rate of 9.6%. Sunny Manufacturing has just purchased $400,000 of plastic chips from Sun Chemical.

7) Refer to Instruction 19.1. What is the amount of money Sunny Manufacturing will save on accounts payable if they accept the discount?
A) $400,000
B) $8,000
C) $33,333
D) $20,000

8) Refer to Instruction 19.1. What is the effective annual interest cost of supplier financing offered by Sun Chemical?
A) 7.3%
B) 9.5%
C) 10.4%
D) 22.9%

9) Refer to Instruction 19.1. Should Sunny Manufacturing take the discount offered by Sun Chemical?
A) Yes, Sunny Manufacturing will get to use their raw materials 35 days earlier than if they waited to pay at the end of the 45 days.
B) No, Sunny Manufacturing will not have to pay any interest if they just pay in 45 days.
C) Yes, Sunny Manufacturing’s short term borrowing rate of 9.6% is less than Sun’s offered cost of carry of 22.9%.
D) No, it costs Sunny Manufacturing 22.9% to accept the discount and they are better off paying the full amount in 45 days.

10) Days working capital is equal to:
A) days payables + days receivables – days inventory.
B) days inventory + days receivables – days payables.
C) days payables + days inventory + days receivables.
D) none of the above

11) Amundsen of Norway receives raw materials from their corporate parent in the U.S. with payment terms of net 60 days. Most of their sales are to firms in Norway where normal payment terms are net 30 days. This causes a problem for the subsidiary with working capital management because:
A) accounts receivable are so much longer than accounts payable.
B) accounts payable are so much longer than accounts receivable.
C) accounts receivable and accounts payable are equal.
D) This doesn’t really cause a problem; in fact it is to the benefit of the Norwegian subsidiary.

True/False

1) In principle, the firm tries to minimize its NWC balance.

2) Other things equal, managers prefer a lower “days working capital” to a higher one.

3) The authors present empirical evidence that shows the days sales basis for working capital to be 30 days GREATER in the U.S. compared to a similar industry in Europe.

Essay

1) What is a free-trade zone? Identify three techniques and provide examples of how firms and countries can benefit from having free trade zones.

19.7 International Cash Management

Multiple Choice

1) Other things equal, a firm would rather have ________ in a depreciating currency, and ________ in an appreciating currency.
A) accounts receivable; accounts payable
B) accounts receivable; accounts receivable
C) accounts payable; accounts receivable
D) none of the above

2) Which of the following is NOT a precautionary motive for holding cash?
A) Anticipated funds to be remitted from several Middle East countries are in question due to unrest in the region.
B) The firm has several short-term obligations in unhedged foreign currency-denominated contracts.
C) The firm must pay ordinary wages in two days.
D) All are precautionary motives.

3) Increases to cash flows can be anticipated if which of the following occurs?
A) A receivables contract is denominated in an appreciating foreign currency.
B) Sales are less than anticipated.
C) Days in accounts receivable increase by 15 days.
D) none of the above

4) A centralized depository benefits the firm primarily by:
A) reducing the cost of repatriating funds.
B) positioning profits where taxes are lowest.
C) reducing the total amount of capital employed within the total firm.
D) earning a higher rate of return than in domestic banking deposits.

5) The Clearing House Interbank Payment System (CHIPS) is:
A) the largest publicly operated payments system in the world.
B) owned and operated by the world’s seven largest central banks.
C) a computerized network that connects banks globally.
D) none of the above

6) An organizational structure employed by an MNE to reduce its use of bank lending for the support of operations is:
A) a centralized depository.
B) a reinvoicing center.
C) a cost center.
D) a syndicated bank.

7) ________ is the process that cancels via offset all, or part, of the debt owed by one entity to another related entity.
A) Syndicated banking
B) Centralized depositing
C) Multilateral netting
D) Debt cancellation

True/False

1) In an inflationary economy, demand for credit usually exceeds supply.

2) For disbursement purposes, it is to the benefit of the firm to minimize float.

3) Regarding wire transfers, CHIPS actually clears transactions whereas SWIFT does not.

4) A significant problem with centralized cash depositories is that they are isolated from the rest of the firm and tend to be at an information disadvantage.

5) A reason for holding all precautionary balances in a central pool is that the total pool, if centralized, can be reduced in size without any loss in the level of protection.

6) A disadvantage of a centralized cash management system is that managers will not be able to get the lowest average rate available for the firm. Instead, it misses out on the really low borrowing rates.

Essay

1) Central depositories are used for international cash management. What is a central depository? Identify and provide examples of at least three advantages to MNEs of having a central depository.

19.8 Financing Working Capital

Multiple Choice

1) A precautionary cash balance:
A) is used to replace spoiled or damaged inventory.
B) is held to facilitate cash disbursements when receipts slow down.
C) is used for normal day-to-day operations.
D) is held for the benefit of a sister affiliate.

2) An in-house bank:
A) is a separate bank chartered to operate within a business firm.
B) is in fact a set of functions performed by the firm’s existing treasury department.
C) assesses the credit standing of the bank’s customers.
D) provides banking services for employees.

3) A foreign banking office that is separately incorporated in the host country is:
A) a correspondent bank.
B) a representative office.
C) a bank subsidiary.
D) an Edge Act corporation.

True/False

1) An Edge Act corporation is a subsidiary of a U.S. bank located outside of the U.S. and incorporated to engage in international banking and financing operations.

2) Because they are direct payments, dividends are among the most efficient way for foreign subsidiaries to remit funds back to the parent.

3) Even though dividends are cash payments, firms typically must consider both cash flow and net income when making dividend distribution decisions.

Chapter 20 International Trade Finance

20.1 The Trade Relationship

Multiple Choice

1) The exporter-importer relationship to a corporation of a foreign importer that has not previously conducted business with the firm would be an:
A) unaffiliated known.
B) affiliated party.
C) unaffiliated unknown.
D) any of the above

2) Which of the following relationships between importing and exporting parties would require the least detailed contract to conduct business?
A) affiliated party
B) unaffiliated unknown party
C) known unaffiliated party
D) domestic supplier

3) Polaris Corporation has made an agreement to ship goods to a foreign firm with whom they have not entered into a contract for three years. However, the firms have communicated regularly since the last sale three years ago. This is an example of an:
A) unaffiliated known party transaction.
B) unaffiliated unknown party transaction.
C) affiliated party transaction.
D) none of the above

True/False

1) Today, international trade is dominated by transactions between unaffiliated parties (known or unknown).

2) Because most international transactions are between affiliated parties, international transaction contracts are less complex, but the management of the total value of the MNE is more complex.

3) An advantage of trading with an affiliated party for an MNE, compared to an unaffiliated party, could be reduced contracting costs and less to even no need to protect against nonpayment.

20.2 The Trade Dilemma

Multiple Choice

1) Which of the following is NOT a financial instrument that may be included in an international trade transaction?
A) Letter of Credit
B) Sight Draft
C) Order bill of lading
D) Federal funds transaction

True/False

1) The fundamental dilemma of foreign trade is being unwilling to trust a stranger in a foreign land.

20.3 Benefits of the System

Multiple Choice

1) The combination of a letter of credit, a sight draft, and an order bill of lading protect both parties in international transactions from which of the following?
A) the risk of noncompletion
B) the risk of foreign exchange risk (when combined with a various hedging techniques)
C) the risk that financing will not be available due to foreign exchange risk
D) All of these risks are reduced when using these trade implements.

True/False

1) If a foreign exchange transaction calls for payment in the importer’s currency, the exporter has the foreign exchange risk.

2) If a foreign exchange transaction calls for payment in the exporter’s currency, the importer has the foreign exchange risk.

3) In the case of international trade, the risk of nonpayment is essentially eliminated with the use of a letter of credit issued through a trustworthy bank.

20.4 Key Documents

Multiple Choice

1) Which of the following is NOT true regarding a letter of credit?
A) The importer and exporter agree on a transaction.
B) The importer applies to its local bank for the issuance of a letter of credit.
C) The exporter applies to its local bank for the issuance of a letter of credit.
D) The importer’s bank cuts a sales contract based on its assessment of the creditworthiness of the importer.

2) A/An ________ letter of credit is intended to serve as a means of arranging payment, but not as a guarantee of payment.
A) irrevocable
B) revocable
C) confirmed
D) unconfirmed

3) A/An ________ letter of credit is an obligation only of the issuing bank whereas other banks honor a/an ________ letter of credit.
A) irrevocable; unconfirmed
B) revocable; confirmed
C) confirmed; irrevocable
D) unconfirmed; confirmed

4) A letter of credit that is confirmed in the ________ country has the additional advantage of eliminating the problem of ________.
A) exporter’s; portfolio risk
B) importer’s; blocked foreign exchange
C) exporter’s; blocked foreign exchange
D) none of the above

5) The draft is the instrument normally used in international commerce to:
A) transfer product.
B) prove ownership.
C) transfer title.
D) initiate the sale.

6) The ________ is the instrument normally used to actually effect payment in international commerce.
A) banker’s acceptance
B) bill of exchange
C) bill of lading
D) letter of credit

7) The person or company initiating the draft or bill of exchange is known as the:
A) maker.
B) drawer.
C) originator.
D) any of the above

8) The person or company to whom the draft or bill of exchange is addressed is the:
A) drawee.
B) drawer.
C) maker.
D) originator.

9) Drafts that have been accepted by banks become:
A) clean drafts.
B) nonmarketable.
C) banker’s acceptances.
D) none of the above

10) Which of the following purposes is NOT served by the bill of lading?
A) It acts as a receipt.
B) It acts as a contract.
C) It acts as a document of title.
D) It acts as all of the above.

11) The ________ is issued to the exporter by a common carrier transporting the merchandise.
A) bill of lading
B) draft
C) banker’s acceptance
D) line of credit

12) A straight bill of lading is most likely to be used under which of the following circumstances?
A) when the merchandise has not been paid for in advance
B) when the transaction is being financed by a bank
C) when the shipment is to an affiliate
D) none of the above

13) To become a negotiable instrument, a draft must conform to the following requirements EXCEPT:
A) it must be in writing and signed by the maker or drawer.
B) it must be payable to order or to bearer.
C) it must be written in English.
D) it must be payable on demand or at a fixed or determinable future date.

True/False

1) A letter of credit is an agreement by the bank to pay against documents rather than the actual merchandise.

2) The primary advantage of a letter of credit is that it reduces risk.

3) The major advantage of a letter of credit to the exporter is that the exporter does not receive any funds until the documents have arrived at a local port or airfield.

4) To constitute a true letter of credit transaction, the issuing bank must receive a fee or other valid business consideration for issuing the L/C.

5) To constitute a true letter of credit transaction, the bank’s L/C must contain a specified expiration date or a definite maturity.

6) To constitute a true letter of credit transaction, the bank’s commitment must be open-ended and cannot have a stated maximum amount of money.

7) A revocable L/C is intended to serve as a means of arranging payment but not as a guarantee of payment.

8) A sight draft is payable on presentation to the drawee; a time draft allows a delay in payment.

9) A draft is sometimes called a revocable letter of credit.

10) A time draft is payable on presentation to the drawee; the drawee must pay at once or dishonor the draft. A sight draft, allows a delay in payment.

11) The bill of lading is issued to the exporter by a common carrier transporting the merchandise. It serves three purposes: a receipt, a contract, and a document of title.

Essay

1) Explain what a letter of credit (L/C) is, who the principle parties are, what the principle advantage is, and how the L/C facilitates international trade.

20.5 Example: Documentation in a Typical Trade Transaction

Multiple Choice

1) In a typical international trade transaction, the order of activity would be which of the following?
A) The foreign buyer places an order; The domestic manufacturer ships to the buyer; The manufacturer’s bank presents a draft and documents to the buyer’s bank for acceptance; The buyer’s bank submits payment to the manufacturer’s bank.
B) The domestic manufacturer ships to the buyer; The buyer’s bank submits payment to the manufacturer’s bank; The foreign buyer places an order; The domestic manufacturer ships to the buyer; The manufacturer’s bank presents a draft and documents to the buyer’s bank for acceptance.
C) The foreign buyer places an order; The manufacturer’s bank presents a draft and documents to the buyer’s bank for acceptance; The domestic manufacturer ships to the buyer; The buyer’s bank submits payment to the manufacturer’s bank.
D) The domestic manufacturer ships to the buyer; The manufacturer’s bank presents a draft and documents to the buyer’s bank for acceptance; The foreign buyer places an order; The buyer’s bank submits payment to the manufacturer’s bank.

True/False

1) Because of the risks involved in international trade, most transactions follow conventional methods and rarely require flexibility or creativity on the part of management.

Comment: Few international transactions are typical and often require flexibility or creativity on the part of management.

20.6 Government Programs to Help Finance Exports

Multiple Choice

1) The Export-Import Bank is an independent agency of the U.S. government established in 1934 to:
A) ship money abroad.
B) import agricultural products during the recession.
C) facilitate and stimulate foreign trade of the United States.
D) none of the above

2) In the United States, the Foreign Credit Insurance Corporation:
A) is a subsidiary of the Export-Import Bank.
B) provides letters of credit for U.S. importers.
C) provides letters of credit for U.S. exporters.
D) provides policies that protect U.S. exporters against default by foreign importers.

Instruction 20.1:
Use the information to answer the following question(s).

Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing equipment to Landcaster’s of Australia. Because the two companies have never done business with each other, Cypress requires a banker’s acceptance as payment for the $1,000,000 order. The banker’s acceptance carries a 1.4% commission per annum and payment is to be received in 6 months. If Cypress Inc. chooses to discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum.

3) Refer to Instruction 20.1. What is the size of the discount (not including the commission fee) Cypress must take for receiving the proceeds of the sale today rather than waiting for six months?
A) $7,000
B) $5,000
C) $12,000
D) $14.000

4) Refer to Instruction 20.1. What is the size of the commission Cypress will pay the bank for the banker’s acceptance?
A) $7,000
B) $5,000
C) $12,000
D) $14,000

5) Refer to Instruction 20.1. What is the total Cypress can expect to receive if the firm takes payment today?
A) $993,000
B) $995,000
C) $988,000
D) $996,000

6) Refer to Instruction 20.1. ________ is an unsecured promissory note.
A) A banker’s acceptance
B) An overdraft
C) A securitized loan
D) Commercial paper

7) Rogue Spices Inc. has a Canadian receivables contract for $200,000 due in 270 days. The firm has been approached by a factoring firm that offers to purchase the receivables at a 12% per annum discount plus a 1% charge for a nonrecourse clause. What is the annualized percentage all-in-cost of this factoring alternative?
A) 14.82%
B) 13.00%
C) 12.00%
D) 9.09%

True/False

1) The Foreign Credit Insurance Association is a branch of the U.S. federal government.

2) The Export-Import Bank (also called Eximbank) is an independent agency of the U.S. government, established in 1934 to stimulate and facilitate the foreign trade of the United States.

3) Essentially, the Eximbank lends dollars to borrowers inside the United States for the purchase of U.S. goods and services.

4) Banker’s acceptances can be used to finance only international trade receivables but not domestic trade receivables.

Essay

1) What is a banker’s acceptance? How are they initiated? Why are they desirable for the exporter?

20.7 Forfaiting: Medium- and Long-Term Financing

Multiple Choice

1) ________ is a specialized technique to eliminate the risk of nonpayment by importers in instances where the importing firm and/or its government is perceived by the exporter to be too risky for open account credit.
A) Forfeiting
B) Marketable Bank Shares
C) Forfaiting
D) Banker’s Acceptances

True/False

1) In effect, the forfaiter functions both as a money market firm and a specialist in packaging financial deals involving country risk.

ECO 305 Week 11 Quiz – Strayer University New

ECO/305 Week 11 Quiz – Strayer

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Quiz 10 Chapter 16 and 17

MACROECONOMIC POLICY IN AN OPEN ECONOMY

MULTIPLE CHOICE

1. A nation experiences internal balance if it achieves:
a. Full employment
b. Price stability
c. Full employment and price stability
d. Unemployment and price instability

2. A nation experiences external balance if it achieves:
a. No net changes in its international gold stocks
b. Productivity levels equal to those of its trading partners
c. An increase in its money supply equal to increases overseas
d. Equilibrium in its balance of payments

3. A nation experiences overall balance if it achieves:
a. Balance-of-payments equilibrium, full employment, and price stability
b. Balance-of-payments equilibrium, maximum productivity, and price stability
c. Full employment, price stability and no change in its money supply
d. Full employment, price stability, and maximum productivity

4. Most industrial countries generally considered ____ as the most important economic goal.
a. External balance
b. Internal balance
c. Maximum efficiency for business
d. Maximum efficiency for labor

5. Which policies are expenditure-changing policies?
a. Currency devaluation and revaluation
b. Import quotas and tariffs
c. Monetary and fiscal policy
d. Wage and price controls

6. Which policy is an expenditure-switching policy?
a. Increase in the money supply
b. Decrease in government expenditures
c. Increase in business and household taxes
d. Decrease in import tariffs

7. An expenditure-increasing policy would consist of an increase in:
a. Import tariffs
b. Import quotas
c. Governmental taxes
d. The money supply

8. An expenditure-reducing policy would consist of a decrease in:
a. The par value of a currency
b. Government expenditures
c. Import duties
d. Business or household taxes

9. Given fixed exchange rates, assume Mexico initiates expansionary monetary and fiscal policies to combat recession. These policies will also:
a. Increase both imports and exports
b. Increase exports and reduce imports
c. Reduce a balance-of-payments surplus
d. Reduce a balance-of-payments deficit

10. Given fixed exchange rates, assume Mexico initiates contractionary monetary and fiscal policies to combat inflation. These policies will also:
a. Reduce a balance-of-payments surplus
b. Reduce a balance-of-payments deficit
c. Increases both imports and exports
d. Decrease both imports and exports

11. The appropriate expenditure-switching policy to correct a current account surplus is:
a. Currency revaluation
b. Currency devaluation
c. Expansionary monetary policy
d. Contractionary fiscal policy

12. The appropriate expenditure-switching policy to correct a current account deficit is:
a. Contractionary monetary policy
b. Expansionary fiscal policy
c. Currency devaluation
d. Currency revaluation

13. Suppose the United States faces domestic recession and a current account deficit. Should the United States devalue the dollar, one would expect the:
a. Recession to become less severe–deficit to become less severe
b. Recession to become more severe–deficit to become less severe
c. Recession to become less severe–deficit to become more severe
d. Recession to become more severe–deficit to become more severe

14. Suppose the United States faces domestic inflation and a current account surplus. Should the United States revalue the dollar, one would expect the:
a. Inflation to become more severe–surplus to become less severe
b. Inflation to become less severe–surplus to become less severe
c. Inflation to become less severe–surplus to become more severe
d. Inflation to become more severe–surplus to become more severe

15. Suppose Brazil faces domestic recession and a current account surplus. Should Brazil revalue its currency, one would expect the:
a. Recession to become less severe–surplus to become less severe
b. Recession to become more severe–surplus to become more severe
c. Recession to become more severe–surplus to become less severe
d. Recession to become less severe–surplus to become more severe

16. Suppose that Brazil faces domestic inflation and a current account deficit. Should Brazil devalue its currency, one would expect the:
a. Inflation to become more severe–deficit to become less severe
b. Inflation to become more severe–deficit to become more severe
c. Inflation to become less severe–deficit to become less severe
d. Inflation to become less severe–deficit to become more severe

17. In a closed economy, which of the following will cause the economy’s aggregate demand curve to shift to the right?
a. decreases and wages and salaries paid to employees
b. increases in the prices of oil and natural gas
c. decreases in income taxes for households
d. decreases in the productivity of labor

18. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policy
a. cause aggregate demand to increase, thus strengthening the policy’s expansionary effect on real output
b. cause aggregate demand to decrease, thus eliminating the policy’s expansionary effect on real output
c. have conflicting effects on aggregate demand, thus weakening the policy’s expansionary effect on real output
d. have conflicting effects on aggregate demand, thus strengthening the policy’s expansionary effect on real output

19. A problem that economic policy makers confront when attempting to promote both internal and external balance for the nation is that monetary or fiscal policies aimed at the domestic sector also have impacts on:
a. Trade flows only
b. Capital flows only
c. both trade flows and capital flows
d. Neither trade flows nor capital flows

20. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. The initial and secondary effects of the policy
a. cause aggregate demand to increase, thus strengthening the policy’s expansionary effect on real output
b. cause aggregate demand to decrease, thus eliminating the policy’s expansionary effect on real output
c. have conflicting effects on aggregate demand, thus weakening the policy’s expansionary effect on real output
d. have conflicting effects on aggregate demand, thus strengthening the policy’s expansionary effect on real output

21. A system of fixed exchange rates and high capital mobility strengthens which policy in combating a recession:
a. Expansionary fiscal policy
b. Expansionary monetary policy
c. Contractionary fiscal policy
d. Contractionary monetary policy

22. A system of floating exchange rates and high capital mobility strengthens which policy in combating a recession:
a. Expansionary fiscal policy
b. Expansionary monetary policy
c. Contractionary fiscal policy
d. Contractionary monetary policy

23. Given an open economy with high capital mobility, all of the following statements are true except:
a. fiscal policy is strengthened under fixed exchange rates
b. monetary policy is weakened under fixed exchange rates
c. monetary policy is strengthened under floating exchange rates
d. fiscal policy is strengthened under floating exchange rates

24. Under a system of managed-floating exchange rates with heavy exchange rate intervention:
a. Fiscal policy is successful in promoting internal balance, while monetary policy is unsuccessful
b. Monetary policy is successful in promoting internal balance, while fiscal policy is unsuccessful
c. Both fiscal policy and monetary policy are successful in promoting internal balance
d. Neither fiscal policy nor monetary policy are successful in promoting internal balance

25. Given a system of floating exchange rates, an expansionary monetary policy by the Federal Reserve will cause
a. the dollar to appreciate and will decrease U.S. net exports
b. the dollar to appreciate and will increase U.S. net exports
c. the dollar to depreciate and will increase U.S. net exports
d. the dollar to depreciate and will decrease U.S. net exports

26. Given a system of floating exchange rates, a contractionary monetary policy by the Federal Reserve will cause
a. the dollar to appreciate and will decrease U.S. net exports
b. the dollar to appreciate and will increase U.S. net exports
c. the dollar to depreciate and will increase U.S. net exports
d. the dollar to depreciate and will decrease U.S. net exports

27. All of the following are obstacles to international economic policy coordination except:
a. Different national objectives and institutions
b. Different national political climates
c. Different phases in the business cycle
d. Different national currencies

28. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. This causes the
a. domestic money supply to decrease and a decline in aggregate demand
b. domestic money supply to increase and a decline in aggregate demand
c. domestic money supply to decrease and a rise in aggregate demand
d. domestic money supply to increase and a rise in aggregate demand

29. At the ____, the Group-of-Five nations agreed to intervene in the currency markets to promote a depreciation in the U.S. dollar’s exchange value.
a. Plaza Agreement of 1985
b. Louvre Accord of 1987
c. Bonn Summit of 1978
d. Tokyo Summit of 1962

30. The Plaza Agreement of 1985 and Louvre Accord of 1987 are examples of:
a. Tariff trade barrier formation
b. Nontariff trade barrier formation
c. International economic policy coordination
d. Beggar-thy-neighbor policies

Exhibit 16.1

At the Plaza Accord of 1985, the Group-of-Five nations agreed to drive the value of the dollar downward (i.e., depreciation) so as to help reduce the U.S. trade deficit. Answer the following question(s) on the basis of this information.

31. Refer to Exhibit 16.1. To help drive the dollar’s exchange value downward, the Federal Reserve would:
a. Reduce taxes
b. Increase taxes
c. Decrease the money supply
d. Increase the money supply

32. Refer to Exhibit 16.1. The Federal Reserve might refuse to support the accord on the grounds that when helping to drive the dollar’s exchange value downward, it promotes an increase in the U.S.:
a. Rate of inflation
b. Budget deficit
c. Unemployment level
d. Economic growth rate

33. Under a fixed exchange-rate system and high capital mobility, an expansion in the domestic money supply leads to:
a. Trade-account deficit and a capital-account surplus
b. Trade-account deficit and a capital-account deficit
c. Trade-account surplus and a capital-account surplus
d. Trade-account surplus and a capital-account deficit

34. Under a fixed exchange-rate system and high capital mobility, a contraction in the domestic money supply leads to a:
a. Trade-account deficit and a capital-account surplus
b. Trade-account deficit and a capital-account deficit
c. Trade-account surplus and a capital-account surplus
d. Trade-account surplus and a capital-account deficit

35. Under a fixed exchange-rate system and high capital mobility, an expansionary fiscal policy leads to a:
a. Trade-account deficit and a capital-account surplus
b. Trade-account deficit and a capital-account deficit
c. Trade-account surplus and a capital-account surplus
d. Trade-account surplus and a capital-account deficit

36. Under a fixed exchange-rate system and high capital mobility, a contractionary fiscal policy leads to a:
a. Trade-account deficit and a capital-account surplus
b. Trade-account deficit and a capital-account deficit
c. Trade-account surplus and a capital-account surplus
d. Trade-account surplus and a capital-account deficit

37. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. This causes the
a. domestic money supply to decrease and a decline in aggregate demand
b. domestic money supply to increase and a decline in aggregate demand
c. domestic money supply to decrease and a rise in aggregate demand
d. domestic money supply to increase and a fall in aggregate demand

38. Suppose a central bank prevents an appreciation of its currency by intervening in the foreign exchange market and selling its currency for foreign currency. This causes the
a. domestic money supply to decrease and a decline in aggregate demand
b. domestic money supply to increase and a decline in aggregate demand
c. domestic money supply to decrease and a rise in aggregate demand
d. domestic money supply to increase and a fall in aggregate demand

39. Assume a system of floating exchange rates. In response to relatively high interest rates abroad, suppose domestic investors place their funds in foreign capital markets. The result would be
a. a depreciation of the domestic currency and a rise in net exports
b. a depreciation of the domestic currency and a fall in net exports
c. an appreciation of the domestic currency and a rise in net exports
d. an appreciation of the domestic currency and a fall in net exports

40. Assume a system of floating exchange rates. In response to relatively high domestic interest rates, suppose that foreign investors place their funds in domestic capital markets. The result would be
a. a depreciation of the domestic currency and a rise in net exports
b. a depreciation of the domestic currency and a fall in net exports
c. an appreciation of the domestic currency and a rise in net exports
d. an appreciation of the domestic currency and a fall in net exports

41. When a nation realizes external balance
a. it can have a current account deficit
b. it can have a current account surplus
c. it has neither a current account deficit nor a current account surplus
d. Both a and b

42. Direct controls may take the form of
a. Tariffs
b. Export subsidies
c. Export quotas
d. All of the above

43. With a fixed exchange rate system, internal balance is most effectively achieved by using
a. Expansionary monetary policy to combat recession
b. Expansionary fiscal policy to combat inflation
c. Contractionary monetary policy to combat recession
d. Contractionary fiscal policy to combat recession

44. Policy coordination is complicated by
a. Different economic objectives
b. Different national institutions
c. Different phases in the business cycle
d. All of the above

TRUE/FALSE

1. A nation realizes internal balance if economy achieves full employment and price stability.

2. Nations have typically placed greater importance to the goal of internal balance than to the goal of external balance.

3. A nation realizes external balance when its current account is in equilibrium.

4. A nation realizes overall balance when it achieves full employment and current account equilibrium.

5. Expenditure-changing policies modify the direction of aggregate demand, shifting it between domestic output and imports.

6. Expenditure-switching policies include fiscal policy and monetary policy.

7. Economic policymakers have typically adopted expenditure-increasing policies to combat inflation and expenditure-reducing policies to combat recession.

8. Expenditure-switching policies alter the level of total spending (aggregate demand) for goods and services produced domestically and those imported.

9. Currency devaluation and revaluation are considered to be expenditure-changing policies since they alter a country’s aggregate demand for goods and services.

10. Expenditure-switching policies include currency revaluation, currency devaluation, and direct controls such as tariffs, quotas, and subsidies.

11. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policy have conflicting effects on aggregate demand, thus weakening the policy’s expansionary effect.

12. Given an open economy with high capital mobility and fixed exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. The initial and secondary effects of the policy cause aggregate demand to increase, thus strengthening the policy’s expansionary effect.

13. When the economy is in deep recession or depression, it is operating on that portion of its aggregate supply curve that is horizontal.

14. Changes in a country’s net exports, investment spending, or government spending will cause its aggregate demand curve to shift.

15. Given an open economy with high capital mobility, fiscal policy is strengthened under fixed exchange rates.

16. Given an open economy with high capital mobility, monetary policy is strengthened under fixed exchange rates.

17. Under floating exchange rates and high capital mobility, an expansionary monetary policy would help a country resolve a recession and a current account deficit.

18. Exchange rate management policies require international policy coordination because a depreciation of one nation’s currency implies an appreciation of its trading partner’s currency.

19. Currency devaluation and revaluation primarily affect the economy’s current account and have secondary effects on domestic employment and inflation.

20. Fiscal and monetary policies are generally used to combat domestic recession and inflation and have secondary effects on the balance of payments.

21. The Group of five (G-5) nations include Japan, Germany, China, and Australia.

22. The Bonn Summit of 1978 and Plaza Accord of 1985 are examples of international policy coordination.

23. International policy coordination is plagued by differing national economic objectives, institutions, political climates, and phases in the business cycle.

24. The goals of the Plaza Agreement of 1985 were to combat protectionism in the U.S. Congress, promote world economic expansion by stimulating demand in Germany and Japan, and to ease the burden of the U.S. debt service.

SHORT ANSWER

1. What policy instrument should be used when demand-pull inflation exists?

2. What happens to the balance of payments under a fixed exchange rate system, when expansionary or contractionary monetary policy is used?

ESSAY

1. Was the Plaza Agreement of 1985 a success?

2. What is international economic policy coordination?

CHAPTER 17—INTERNATIONAL BANKING: RESERVES, DEBT, AND RISK

MULTIPLE CHOICE

1. Which of the following assets makes use of the basket valuation technique?
a. Swap agreements
b. Oil facility
c. Buffer stock facility
d. Special drawing rights

2. Swap agreements are generally conducted by the:
a. Federal Reserve with foreign central banks
b. Federal Reserve with foreign commercial banks
c. U.S. Treasury with foreign central banks
d. U.S. Treasury with foreign commercial banks

3. Which of the following is a main central bank function of the International Monetary Fund?
a. The conduct of open market operations
b. The issuance of gold certificates
c. The provision of monetary policy for member nations
d. The granting of loans to member nations

4. The Federal Reserve’s swap network represents:
a. Efforts to stabilize only the value of the dollar
b. Efforts to stabilize only the value of foreign currencies
c. Long-term borrowing among countries
d. Short-term borrowing among countries

5. International trade and investment are most frequently financed by the U.S. dollar and the:
a. Japanese yen
b. British pound
c. Australian dollar
d. Swiss franc

6. The purpose of international reserves is to finance:
a. Short-term surpluses in the balance of payments
b. Long-term surpluses in the balance of payments
c. Short-term deficits in the balance of payments
d. Long-term deficits in the balance of payments

7. The currencies generally referred to as “reserve currencies” are the:
a. Japanese yen and U.S. dollar
b. Swiss franc and Japanese yen
c. British pound and U.S. dollar
d. Swiss franc and British pound

8. Which of the following does not represent a form of international liquidity?
a. IMF reserve positions
b. General arrangements to borrow
c. U.S. government securities
d. Reciprocal currency arrangements

9. Which of the following is not considered an “owned” reserve?
a. National currencies
b. Gold
c. Special drawing rights
d. Oil facility

10. Which of the following is not considered a “borrowed” reserve?
a. Special drawing rights
b. Oil facility
c. IMF drawings
d. Reciprocal currency arrangement

11. Eurodollars are:
a. Dollar-denominated deposits in overseas banks
b. European currencies used to finance transactions in the United States
c. Dollars that U.S. residents spend in Europe
d. European currencies used to finance imports from the United States

12. Which of the following is not a characteristic of the Eurodollar market? It:
a. Is mainly located in the United Kingdom and continental Europe
b. Operates as a financial intermediary, bringing together lenders and borrowers
c. Deals in interest-bearing time deposits and loans to governments
d. Grew in response to the deregulation of interest rate ceilings on U.S. savings accounts

13. Which of the following assets was (were) created in 1970 to provide additional international liquidity, in the belief that increasing world trade requires more liquidity for larger expected payments imbalances?
a. Eurodollar market
b. Special drawing rights
c. Reciprocal currency arrangements
d. General arrangements to borrow

14. Which of the following constitute(s) the largest component of the world’s international reserves?
a. Gold
b. Special drawing rights
c. IMF drawings
d. Foreign currencies

15. With an international gold standard, if a country ended up with a deficit from the balances on its current and capital accounts, it would:
a. Import gold to settle the balance
b. Export gold to settle the balance
c. Officially decrease the price of gold
d. Officially increase the price of gold

16. Which of the following is not a condition of the international gold standard? That a nation must:
a. Convert gold into paper currency, and vice versa, at a stipulated rate
b. Permit gold to be freely imported and exported
c. Tolerate wide fluctuations in its exchange rate
d. Define its monetary unit in terms of a stipulated amount of gold

17. All of the following exchange-rate systems require international reserves to finance balance-of-payments disequilibriums except:
a. Pegged or fixed exchange rates
b. Managed floating exchange rates
c. Adjustable pegged exchange rates
d. Freely floating exchange rates

18. A dollar shortage would indicate that the dollar is:
a. Undervalued in international markets
b. Overvalued in international markets
c. Overvalued in terms of gold
d. Overvalued in terms of special drawing rights

19. The U.S. gold outflow that began in the late 1940s and continued through the 1960s was due in part to:
a. Crawling pegged exchange rates
b. Freely floating exchange rates
c. An undervalued dollar
d. An overvalued dollar

20. The U.S. dollar glut of the 1960s was due in part to:
a. An undervalued dollar
b. An overvalued dollar
c. Freely floating exchange rates
d. Crawling pegged exchange rates

21. For developing countries such as Mexico and Brazil, severe economic problems in the 1980s were caused by:
a. A fall in the world demand for products produced by developing countries
b. High prices of basic raw materials and other commodities
c. Low real interest rates in the United States
d. High levels of income and imports for the United States

22. In response to the international debt problem, the United States set up a special fund in 1986 to help make up for lost oil revenues. Under the plan, the United States would make more money available as world oil prices fell. This plan was designed to help:
a. Argentina
b. Saudi Arabia
c. Mexico
d. Brazil

23. Which indicator of international debt burden schedules interest and principal payments on long-term debt as a percent of export earnings?
a. Debt service ratio
b. Debt-to-export ratio
c. Ratio of external debt to gross domestic product
d. Ratio of external debt to gross national product

24. Which term best describes the process in which the International Monetary Fund provides loans to countries facing balance-of-payments difficulties provided that they initiate programs holding promise of correcting these difficulties?
a. Conditionality
b. Debt service
c. Reciprocal currency arrangement
d. Swap agreement

25. All of the following are major goals of the International Monetary Fund except:
a. Promoting international cooperation among member countries
b. Fostering a multilateral system of international payments
c. Making long-term development and reconstruction loans
d. Promoting exchange-rate stability and the elimination of exchange restrictions

26. Which international reserve asset was officially phased out of the international monetary system by the United States in the early 1970s?
a. Special drawing rights
b. Swap agreements
c. General arrangements to borrow
d. Gold

27. Bilateral agreements between central banks, which provide for an exchange of currencies to help finance temporary balance-of-payments disequilibriums, are referred to as:
a. IMF drawings
b. Special drawing rights
c. Buffer stock facility
d. Swap agreements

28. Which organization is largely intended to make long-term reconstruction loans to developing nations?
a. Export-Import Bank
b. World Bank
c. International Monetary Fund
d. United Nations

29. “Owned” international reserves consist of:
a. Special drawing rights
b. Oil facility
c. IMF drawings
d. Reciprocal currency arrangements

30. “Borrowed” international reserves consist of:
a. IMF drawings
b. Foreign currencies
c. Gold
d. Special drawing rights

31. Concerning international lending risk of commercial banks, ____ refers to the probability that part/all of the interest/principal of a loan will not be repaid.
a. Country risk
b. Credit risk
c. Currency risk
d. Presidential risk

32. Concerning international lending risk of commercial banks, ____ is closely related to political developments in a borrowing country, especially the government’s views concerning international investments and loans.
a. Economic risk
b. Credit risk
c. Country risk
d. Currency risk

33. Concerning international lending risk of commercial banks, ____ is associated with possible changes in the exchange value of a nation’s currency.
a. Political risk
b. Country risk
c. Credit risk
d. Currency risk

34. To reduce their exposure to developing country debt, lending commercial banks have practiced all of the following except:
a. Making outright loan sales to other commercial banks
b. Reducing their capital base as a cushion against losses
c. Dealing in debt-for-debt swaps with foreign governments
d. Dealing in debt/equity swaps with foreign governments

35. To reduce losses on developing country loans, commercial banks sometimes sell their loans, at a discount, to a developing country government for local currency which is then used to finance purchases of ownership shares in developing country industries. This practice is known as:
a. Debt forgiveness
b. Debt buyback
c. Debt-for-debt swap
d. Debt/equity swap

36. Concerning international debt, ____ refers to a negotiated reduction in the contractual obligations of the debtor country and includes schemes such as markdowns and write-offs of debt.
a. Debt/equity swap
b. Debt-for-debt swap
c. Debt forgiveness
d. Debt sales

37. The exchange of borrowing country debt for an ownership position in the borrowing country is known as:
a. Debt forgiveness
b. Debt-for-debt swap
c. Debt reduction
d. Debt/equity swap

38. “Country risk” analysis is concerned with all of the following except:
a. Depreciation of the borrowing country’s currency
b. Political instability in the borrowing country
c. Economic growth in the borrowing country
d. External debt of the borrowing country

39. Debt reduction
a. Refers to any voluntary scheme that lessens the burden on the debtor nation
b. May be accomplished through debt rescheduling
c. May be achieved through debt/equity swaps
d. All of the above

40. Most analysts feel that the financial difficulties in East Asia were triggered by
a. Misallocation of investment
b. Unavailability of cheap foreign labor
c. Lack of alignment of the exchange rate with the dollar
d. Surpluses in the trade accounts of the Asian countries

41. A nation may experience debt-servicing problems because of
a. Pursuit of improper macroeconomic policies
b. Inadequate borrowing
c. Adverse economic events
d. Both a and c

42. Swap arrangements
a. Are agreements between governments
b. Require repayment within a stipulated period
c. Are usually multilateral agreements
d. Are never initiated by telephone

TRUE/FALSE

1. Under a system of fixed exchange rates, international reserves are needed to bridge the gap between monetary receipts and monetary payments.

2. International reserves allow a country to finance disequilibria in its balance-of-payments position.

3. An advantage of international reserves is that they allow countries to sustain temporary balance-of-payments deficits until acceptable adjustment measures can operate to correct the disequilibrium.

4. With floating exchange rates, countries require sizable amounts of international reserves for the stabilization of exchange rates.

5. When exchange rates are fixed by central bankers, the need for international reserves disappears.

6. When exchange rates are fixed by central bankers, international reserves are necessary for financing payments imbalances and the stabilization of exchange rates.

7. There exists a direct relationship between the degree of exchange rate flexibility and the need for international reserves.

8. With floating exchange rates, payments imbalances tend to be corrected by market-induced fluctuations in the exchange rate, and the need for exchange-rate stabilization and international reserves disappears.

The diagram below represents the exchange market position of the United States in trade with the United Kingdom. Starting at the equilibrium exchange rate of $3 per pound, suppose the demand for pounds rises from D0 to D1.

Figure 17.1 Foreign Exchange Market

9. Refer to Figure 17.1. Under a fixed exchange rate system, U.S. monetary authorities would have to supply 8 million pounds in exchange for dollars to keep the exchange rate at $3 per pound.

10. Refer to Figure 17.1. If the exchange rate was allowed to rise to $4 per pound, U.S. monetary authorities would have to supply 6 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.

11. Refer to Figure 17.1. Under a floating exchange rate system, the exchange rate would rise to $4 and U.S. monetary authorities would have to supply 4 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.

12. To the extent that adjustments in prices, interest rates, and income levels promote balance-of-payments equilibrium, the demand for international reserves decreases.

13. The greater a nation’s propensity to apply tariffs and quotas to key sectors, the greater will be the need for international reserves.

14. The demand for international reserves is negatively related to the level of world prices and income.

15. The demand for international reserves tend to increase with the level of world income and trade activity.

16. If a nation with a balance-of-payments deficit is willing and able to initiate quick actions to increase export receipts and decrease import payments, the amount of international reserves needed will be relatively large.

17. The supply of international reserves consists of owned reserves and borrowed reserves.

18. Foreign currencies constitute the smallest component of the world’s international reserves.

19. Gold constitutes the largest component of the world’s international reserves.

20. The U.S. dollar has been considered a reserve (key) currency because trading nations have been willing to hold it as an international reserve asset.

21. The U.S. dollar, Japanese yen, British pound, and Mexican peso are the major reserve currencies of the international monetary system.

22. By the 1990s, the British pound had replaced the U.S. dollar as the world’s key currency.

23. A goal of the International Monetary Fund is to make short-term loans to member nations so as to allow them to correct balance of payments disequilibriums without resorting to measures that would destroy national prosperity.

24. When granting loans to financially troubled nations, the International Monetary Fund requires some degree of conditionality, meaning that the borrowing nation must agree to implement economic policies as mandated by the IMF.

25. The International Monetary Fund has sometimes demanded that financially-troubled nations, that borrow from the IMF, undergo austerity programs including slashing of public spending and private consumption.

26. The main purpose of the International Monetary Fund is to grant long-term loans to developing nations to help them finance the development of infrastructure such as roads, dams, and bridges.

27. Gold is currently the most widely used asset in the international monetary system.

28. In 1974 the United States revoked a 41-year ban on U.S. citizen’s ownership of gold.

29. In 1975 the official price of gold was abolished as the unit of account for the international monetary system. As a result, gold was demonetized as an international reserve asset.

30. In the 1970s, the major industrial countries abandoned the managed-floating exchange rate system and adopted a system of fixed exchange rates tied to the price of gold.

31. Created by the International Monetary Fund, special drawing rights (SDRs) are unconditional rights to draw currencies of other nations, thus enabling countries to finance their current-account deficits.

32. The value of the SDR is tied to a currency basket consisting of the U.S. dollar, German mark, Japanese yen, French franc, and British pound.

33. The SDR has replaced the dollar, yen, and mark as the key asset of the international financial system.

34. Because the value of the SDR is tied directly to the value of the U.S. dollar, a 10 percent dollar depreciation would result in a 10 percent decrease in the SDR’s value.

35. A main purpose of the International Monetary Fund is to make loans of foreign currencies to member countries which are experiencing current-account surpluses.

36. When a deficit nation borrows from the International Monetary Fund, it purchases with its currency the foreign currency required to help finance the payments deficit.

37. The so-called General Arrangements to Borrow provide a permanent increase in the supply of international reserves.

38. Swap arrangements are bilateral agreements between central banks to allow countries to temporarily borrow funds to ease current-account deficits and discourage speculative capital flows.

39. IMF drawings, swap arrangements, buffer stock facility, and compensatory financing for exports are classified as owned reserves rather than borrowed reserves.

40. Concerning international lending risk, credit risk refers to the probability that part or all of the interest rate or principal of a loan will not be repaid.

41. Concerning international lending risk, country risk refers to the risk that part or all of the interest or principal of a loan will not be repaid.

42. Concerning international lending risk, currency risk is the risk of asset losses due to changing currency values.

43. A country with a high debt/export ratio and a high debt service/export ratio would likely be considered as an attractive place in which to invest by foreign residents.

44. A debt buyback is a debt-reduction technique in which a government of a debtor nation buys loans from commercial banks at a discount.

45. Under a debt-for-debt swap, a commercial bank sells its loans at a discount to a developing country government for local currency which it then uses to finance an equity investment in the debtor country.

46. A debt-equity swap results in a trade surplus nation forgiving the loans made to a trade-deficit nation.

47. Eurocurrencies are deposits, denominated and payable in dollars and other foreign currencies, in banks outside the United States, primarily in London, the market’s center.

SHORT ANSWER

1. Why do countries hold international reserves?

2. How can a bank reduce its exposure to the debt of developing nations?

ESSAY

1. Describe the eurocurrency market.

2. Are international reserve needs different for different exchange rate regimes?

ECO 302 Week 11 Quiz – Strayer University New

ECO/302 Week 11 Quiz – Strayer

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Chapter 17 and 18

TRUE/FALSE

1. With an international sector real GNP is consumption plus gross investment plus government purchases plus net real asset income from abroad.

2. The balance of trade is net exports or imports less exports.

3. A higher current account deficit is caused by a declining domestic economy.

4. The real current account balance is real national saving less net domestic investment.

5. Tariffs and quotas lead to a higher real GDP growth rate in the country imposing them.

6. The law of one price says that there must be a unique price for a good in each location where it is sold.

7. If the home country has a real GNP which is greater than real domestic expenditure, then the home country has a current-account deficit.

8. Foreign direct investment occurs when the home country acquires additional ownership of capital located in the rest of the world.

9. If the home country has negative trade balance, then its real GDP is less than real domestic expenditure.

10. The equilibrium business-cycle model predicts that the real current-account balance will be countercyclical.

MULTIPLE CHOICE

1. The law of one price:
a. prohibits price discrimination. c. is a tax on imports.
b. is that markets work to ensure that the same good has the same price in all locations. d. prohibits price increases unless firms can show their are unusual circumstances.

2. The difference between real GDP in a closed economy and real GNP in a open economy is:
a. net real asset income from abroad. c. net international investment position.
b. net imports. d. the trade balance.

3. Real GNP in an open economy is:
a. the closed economy real output less net real asset income from abroad. c. the closed economy real output less gross real asset income from abroad.
b. the closed economy real output plus gross real asset income from abroad. d. the closed economy real output plus net real asset income from abroad.

4. Net real asset income from abroad is:
a. rt-1•Bft-1/P. c. (Bft – Bft-1)/P.
b. Yt – (Ct +It +Gt ). d. ((Bft – Bft-1)/P) – (rt-1•Bft-1/P).

5. Net real foreign investment is:
a. rt-1•Bft-1/P. c. (Bft – Bft-1)/P.
b. Yt – (Ct +It +Gt ). d. ((Bft – Bft-1)/P) – (rt-1•Bft-1/P).

6. The trade balance is:
a. rt-1•Bft-1/P. c. (Bft – Bft-1)/P.
b. Yt – (Ct +It +Gt ). d. ((Bft – Bft-1)/P) – (rt-1•Bft-1/P).

7. The balance on the current account:
a. rt-1•Bft-1/P. c. (rt-1•Bft-1/P) + ((Bft – Bft-1)/P).
b. Yt + (rt-1•Bft-1/P) – (Ct +It +Gt ). d. ((Bft – Bft-1)/P) – (rt-1•Bft-1/P).

8. The balance on the current account is:
a. real GNP less net foreign investment income. c. real GNP less the net international investment position.
b. real GNP less net foreign investment. d. real GNP less real domestic expenditure.

9. The real current-account balance is:
a. net real asset income from abroad less trade balance c. trade balance times the net real asset income from abroad.
b. trade balance plus the net real asset income from abroad. d. trade balance less the net real income from abroad.

10. The real current account balance equals:
a. net foreign investments. c. the trade balance plus net real asset income from abroad.
b. real GNP less real domestic expenditure. d. all of the above.

11. The real current account balance equals:
a. net foreign investments. c. the trade balance.
b. the net international investment position. d. all of the above.

12. The real current account balance equals:
a. the trade balance. c. the net international investment position.
b. real GNP less real domestic expenditure. d. all of the above.

13. The real current account balance equals
a. the net international investment position. c. the trade balance plus net real asset income from abroad.
b. the trade balance. d. all of the above.

14. The trade balance is:
a. the difference between exports and imports. c. the real current-account balance less net real asset income from abroad.
b. real GDP less real domestic expenditure. d. all of the above.

15. The trade balance is:
a. the difference between exports and imports. c. net foreign investment.
b. real asset income from abroad. d. all of the above.

16. The trade balance is:
a. the balance on the current account. c. net foreign investment.
b. real GDP less real domestic expenditure. d. all of the above.

17. The trade balance is:
a. net foreign investment. c. the real current-account balance less net real asset income from abroad.
b. the net international investment position. d. all of the above.

18. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:
a. an increase in the MPK. c. an increase in borrowing from foreigners.
b. an increase in home country gross domestic investment. d. all of the above.

19. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:
a. an increase in the MPK. c. an increase in lending to foreigners.
b. an decrease in home country gross domestic investment. d. all of the above.

20. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:
a. an decrease in the MPK. c. an increase in lending to foreigners.
b. an increase in home country gross domestic investment. d. all of the above.

21. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:
a. a decrease in the MPK. c. an increase in borrowing from foreigners.
b. a decrease in gross domestic investment. d. all of the above.

22. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:
a. a larger current account deficit. c. a lower MPK.
b. a smaller current account deficit. d. lower domestic gross investment.

23. In the market clearing model with world markets for goods and credit, a decrease in technology, A, in the home country causes:
a. a larger current account deficit. c. a higher MPK.
b. a smaller current account deficit. d. higher domestic gross investment.

24. The open economy equilibrium business-cycle model predicts that the real current account balance will be:
a. acyclical. c. countercyclical.
b. procyclical. d. exogenous.

25. The open economy equilibrium business-cycle model predicts that the real current account balance will be:
a. the same in expansions and recession. c. high in expansions and low in recessions.
b. low in expansions and high in recessions. d. invariant with the business cycle.

26. In US data the real current account balance is:
a. procyclical when the model predicts it will be countercyclical. c. countercyclical when the model predicts it will be procyclical.
b. procyclical as the model predicts. d. countercyclical as the model predicts.

27. In US data the real current account balance is:
a. procyclical. c. countercyclical.
b. weakly procyclical. d. weakly countercyclical.

28. While according to the model the current account balance will be countercyclical, the balance can also decline due to:
a. a temporary negative shock like a harvest failure. c. a temporary increase in government purchases as in war time.
b. a less developed country having a low capital stock. d. all of the above.

29. While according to the model the current account balance will be countercyclical, the balance can also decline due to:
a. a temporary negative shock like a harvest failure. c. a permanent decrease in government purchases.
b. a less developed country having poor institutions for growth. d. all of the above.

30. While according to the model the current account balance will be countercyclical, the balance can also decline due to:
a. a temporary positive shock like a good harvest. c. a permanent decrease in government purchases.
b. a less developed country having a low capital stock. d. all of the above.

31. While according to the model the current account balance will be countercyclical, the balance can also decline due to:
a. a temporary positive shock like a positive harvest c. a temporary increase in government purchases as in war time.
b. a less developed country having a high capital stock. d. all of the above.

32. In the Ricardian case, if the government budget deficit is increased, then the trade balance:
a. moves toward a deficit too. c. is unaffected.
b. moves toward a surplus. d. is exogenous.

33. The terms of trade are:
a. ($ per home good)/($ per foreign good). c. foreign good per home good.
b. the number of units of foreign goods that can be imported for each unit of home goods exported. d. all of the above.

34. The terms of trade are:
a. ($ per home good)/($ per foreign good). c. home good per foreign good.
b. the number of units of home goods that can be exported for each unit of foreign goods imported. d. all of the above.

35. The terms of trade are:
a. ($ per foreign good)/($ per home good). c. home good per foreign good.
b. the number of units of foreign goods that can be imported for each unit of home goods exported. d. all of the above.

36. The terms of trade are:
a. ($ per home foreign/($ per home good). c. foreign good per home good.
b. the number of units of home goods that can be exported for each unit of foreign goods imported. d. all of the above.

37. An increase in the terms of trade:
a. raises real GDP. c. increases real national saving if the change in terms of trade is less than fully permanent.
b. increases consumption. d. all of the above.

38. An increase in the terms of trade:
a. raises real GDP. c. lowers real national saving.
b. decreases consumption. d. all of the above.

39. An increase in the terms of trade:
a. reduces real GDP. c. lowers real national saving.
b. increases consumption. d. all of the above.

40. An increase in the terms of trade:
a. reduces real GDP. c. increases real national saving if the change in terms of trade is less than fully permanent.
b. decreases consumption. d. all of the above.

41. A decrease in the terms of trade:
a. reduces real GDP. c. decreases real national saving if the change in terms of trade is less than fully permanent.
b. decreases consumption. d. all of the above.

42. A decrease in the terms of trade:
a. reduces real GDP. c. increases real national saving if the change in terms of trade is less than fully permanent.
b. increases consumption. d. all of the above.

43. If the government reduces tariffs or quotas on imports, then:
a. real GDP will increase. c. net domestic investment will rise.
b. the real current account balance falls. d. all of the above.

44. If the government reduces tariffs or quotas on imports, then:
a. real GDP will increase. c. net domestic investment will fall.
b. the real current account balance rises. d. all of the above.

45. If the government reduces tariffs or quotas on imports, then:
a. real GDP will decrease. c. net domestic investment will fall.
b. the real current account balance falls. d. all of the above.

46. If the government reduces tariffs or quotas on imports, then:
a. real GDP will decrease. c. net domestic investment will rise.
b. the real current account balance rises. d. all of the above.

47. If the government imposes or increases tariffs or quotas on imports, then:
a. real GDP will decrease. c. net domestic investment will fall.
b. the real current account balance rises. d. all of the above.

48. If the government imposes or increases tariffs or quotas on imports, then:
a. real GDP will decrease. c. net domestic investment will rise.
b. the real current account balance falls. d. all of the above.

49. If the government imposes or increases tariffs or quotas on imports, then:
a. real GDP will increase. c. net domestic investment will rise.
b. the real current account balance rises. d. all of the above.

50. If the government reduces tariffs or quotas on imports, then:
a. real GDP will increase. c. net domestic investment will fall.
b. the real current account balance falls. d. all of the above.

51. If we observe that the price of a good is higher in one location than in another location, this observation
a. violates the law of one price. c. violates the law of one GDP.
b. validates the law of one price. d. validates the law of one GDP.

52. Foreign direct investment is
a. the home country’s additional supply of labor to the rest of the world. c. the home country’s additional demand for labor from the rest of the world.
b. the home country’s additional ownership of capital in the rest of the world. d. the foreign country’s additional demand for labor in the home country.

53. When the home country acquires additional ownership of capital located in the rest of the world, it has is
a. reduced foreign indirect investment. c. acquired foreign direct investment.
b. acquired foreign divested investment. d. reduced foreign direct intervention.

54. Real gross national product in an open economy includes
a. real GDP. c. net real labor costs from abroad.
b. net real asset income from abroad. d. (a) and (b).

55. If the home country has a real GNP which is greater than real domestic expenditure, then the home country has
a. a current-account suplus. c. balance on the current account.
b. a current-account deficit. d. none of the above.

56. If the home country has a real GNP which is less than real domestic expenditure, then the home country has
a. a current-account suplus. c. balance on the current account.
b. a current-account deficit. d. none of the above.

57. If the home country has a real GNP which is equal to real domestic expenditure, then the home country has
a. a current-account suplus. c. balance on the current account.
b. a current-account deficit. d. none of the above.

58. If the home country has a real GNP which is greater than net foreign investment, then the home country has
a. a current-account suplus. c. balance on the current account.
b. a current-account deficit. d. none of the above.

59. If the home country has a real GDP which is greater than real domestic expenditure, then the home country has
a. a trade balance that is positive. c. a trade balance that is zero.
b. a trade balance that is negative. d. none of the above.

60. If the home country has a real GDP which is less than real domestic expenditure, then the home country has
a. a trade balance that is positive. c. a trade balance that is zero.
b. a trade balance that is negative. d. none of the above.

61. Historical data on the U.S. current account balance show
a. a deficit from the turn of the twentieth century through the mid-1970s. c. a surplus for the twentieth century through the mid-1970s.
b. a surplus in most of the past two decades. d. a zero current account balance for most of the twentieth century.

62. Historical data on the U.S. current account balance show that one of the largest ratios for the current-account balance relative to GDP occurred
a. as a surplus, in the early 1970s. c. as a surplus, in the early 2000s.
b. as a deficit, in the early 1990s. d. as a deficit, in the early 2000s.

63. Historical data on the ratio of U.S. nominal exports and imports to GDP show
a. a generally rising ratio since 1950. c. a generally positive but steady ratio since 1950.
b. a generally falling ratio since 1950. d. a ratio hovering around zero since 1950.

64. Historical data on the ratio of U.S. net international investment to GDP show
a. a steady increase in the ratio since 1980. c. a steady ratio since 1980.
b. a steady decline in the ratio since 1980. d. no discernable pattern in the ratio since 1980.

65. Historical data on the ratio of U.S. net factor income from abroad to GDP show
a. a steady increase in the ratio since 1980. c. a peak in the ratio around 1980, followed by a decline through 1987.
b. a steady decline in the ratio since 1960. d. no discernable pattern in the ratio since 1980.

66. A developing country with good prospects means that the country’s current-account balance would likely be
a. negative. c. zero.
b. positive. d. impossible to determine.

SHORT ANSWER

1. What is the real current account balance?

2. What are the effects of a permanent increase in technology in the open market clearing model?

3. What does the open market clearing model predict about the association of the real current account balance and real GDP growth and what do the data on the US show?

4. Does a government budget deficit lead to a real current-account deficit?

5. What are the effects of reducing tariffs and quotas in the open market clearing model?

Chapter 18

TRUE/FALSE

1. If the dollar per yen exchange rate rises, then so does the value of the dollar.

2. When absolute purchasing power parity holds, the real exchange rate is 1.

3. Relative purchasing power parity says that the country with the higher inflation rate will see its currency depreciate.

4. The interest rate differential between two countries is the real interest rate.

5. If a country fixes its exchange rate, it gives up control of its money supply.

6. The nominal exchange rate is measured by quantities of currencies exchanged, while the real exchange rate is measured by quantities of goods exchanged.

7. Fixed exchange rates are determined by market forces.

8. Flexible exchange rates are determined by market forces.

9. Poorer countries tend to have high real exchange rates because the prices for nontradable goods is low in these countries.

10. The combination of interest rate parity and relative purchasing power parity implies that expected real incomes are the same in the home country and the foreign country.

MULTIPLE CHOICE

1. The nominal exchange rate is:
a. foreign good per home good. c. the number of units of foreign currency per one unit of the home currency.
b. the number of units of foreign currency per one unit of home currency divided by the ratio of the foreign price level to the home price level. d. all of the above.

2. The real exchange rate is:
a. foreign good per home good. c. the number of units of foreign currency per one unit of the home currency.
b. nominal exchange rate divided by the ratio of the foreign price level to the home price level. d. all of the above.

3. Flexible exchange rates are determined by:
a. the market. c. the UN.
b. the home country government. d. the International Monetary Fund.

4. Fixed exchange rates are determined by:
a. the market. c. the UN.
b. the governments of the two countries. d. the International Monetary Fund.

5. Purchasing power parity is the idea that:
a. the nominal exchange equals the ratio of the foreign price to the home price. c. the nominal exchange equals the home price less the foreign price.
b. the nominal exchange rate equals the foreign price time the home price. d. the nominal exchange equals the home price less the foreign price.

6. Purchasing power parity may not hold due to:
a. inflation. c. market clearing.
b. nontraded goods such as services. d. all of the above.

7. Purchasing power parity may not hold due to:
a. inflation. c. shifts in the terms of trade.
b. market clearing. d. all of the above.

8. Absolutely purchasing power parity means:
a. the quantity of goods that can be bought in the home country equals the quantity of good that can be bought in the foreign country. c. the nominal exchange rate is the ratio of the foreign price to the home price.
b. buying and selling goods looks equally attractive in both countries. d. all of the above.

9. Absolute purchasing power parity means:
a. the quantity of goods that can be bought in the home country equals the quantity of good that can be bought in the foreign country. c. the nominal exchange rate is the ratio of the home price to the world price.
b. buying and selling goods looks more attractive in the home country. d. all of the above.

10. Absolute purchasing power parity means:
a. the quantity of goods that can be bought in the home country is greater than the quantity of goods that can be bought in the foreign country. c. the nominal exchange rate is the ratio of the foreign price to the world price.
b. buying and selling goods looks equally attractive in both countries. d. all of the above.

11. Absolutely purchasing power parity means:
a. the quantity of goods that can be bought in the home country is greater than the quantity of goods that can be bought in the foreign country. c. the nominal exchange rate is the ratio of the foreign price to the home price.
b. buying and selling goods looks more attractive in the home country. d. all of the above.

12. Non-traded goods include:
a. personal services like haircuts. c. consumer goods like shirts.
b. durable goods like tv sets. d. all of the above.

13. Non-traded goods include:
a. commodities like wheat. c. consumer goods like shirts.
b. real estate. d. all of the above.

14. Relative purchasing power parity says that:
a. the growth rate of the nominal exchange rate is the foreign inflation rate less the home inflation rate. c. the growth rate of the nominal exchange rate is the home inflation rate plus the foreign inflation rate.
b. the growth rate of the nominal exchange rate is the foreign inflation rate times the home inflation rate. d. the growth rate of the nominal exchange rate is the foreign inflation rate divided by the home inflation rate.

15. Relative purchasing power parity implies a country will see its currency fall in value, if
a. its inflation rate is lower than the foreign inflation rate. c. its inflation rate is higher than the foreign inflation rate.
b. its price level is higher than the foreign price level. d. its price level is lower than the foreign price level.

16. Relative purchasing power parity implies a country will see its currency rise in value, if
a. its inflation rate is lower than the foreign inflation rate. c. its inflation rate is higher than the foreign inflation rate.
b. its price level is higher than the foreign price level. d. its price level is lower than the foreign price level.

17. Relative purchasing power parity implies a country will see its currency keep the same value, if
a. its inflation rate is lower than the foreign inflation rate. c. its inflation rate is equal to the foreign inflation rate.
b. its price level is higher than the foreign price level. d. its price level is equal to the foreign price level.

18. If the home inflation rate is 5% and the foreign inflation rate is 9%, then by relative purchasing power parity the home country would expect is exchange rate to:
a. rise in value by 5%. c. rise value by 4%.
b. fall in value by 5%. d. fall in value by 4%.

19. If the home inflation rate is 9% and the foreign inflation rate is 5%, then by relative purchasing power parity the home country would expect is exchange rate to:
a. rise in value by 5%. c. rise value by 4%.
b. fall in value by 5%. d. fall in value by 4%.

20. If the home inflation rate is 5% and the foreign inflation rate is 5%, then by relative purchasing power parity the home country would expect is exchange rate to:
a. rise in value by 5%. c. have no change in its value.
b. fall in value by 5%. d. fall in value by 10%.

21. Interest rate parity says that:
a. the interest rate differential is the growth rate of the nominal exchange rate. c. the interest rate differential is the growth rate of the real exchange rate.
b. the interest rate differential is ratio of the foreign price level to the home price level. d. the interest rate differential is ratio of the home price level to the foreign price level.

22. If the home interest rate is 5% and the foreign interest rate is 7%, then the expected growth of the nominal exchange rate is:
a. 2%. c. -2%.
b. 5%. d. -12%.

23. If the home interest rate is 5% and the foreign interest rate is 7%, then the difference in the expected inflation rates is:
a. 2%. c. -2%.
b. 5%. d. -12%.

24. If the home interest rate is 7% and the foreign interest rate is 5%, then the expected growth of the nominal exchange rate is:
a. 2%. c. -2%.
b. 7%. d. -12%.

25. If the home interest rate is 7% and the foreign interest rate is 5%, then the difference in the expected inflation rates is:
a. 2%. c. -2%.
b. 7%. d. -12%.

26. If absolute purchasing power parity holds, under fixed exchange rates:
a. the home interest rate equals the foreign interest rate. c. the growth rate of the nominal exchange rate is zero.
b. the home inflation rate equals the foreign inflation rate. d. all of the above.

27. If absolute purchasing power parity holds, under fixed exchange rates:
a. the home interest rate equals the foreign interest rate. c. the growth rate of the nominal exchange rate is positive.
b. the home inflation is lower than the foreign inflation rate. d. all of the above.

28. If absolute purchasing power parity holds, under fixed exchange rates:
a. the home interest rate is higher than the foreign interest rate. c. the growth rate of the nominal exchange rate is negative.
b. the home inflation rate equals the foreign inflation rate. d. all of the above.

29. If absolute purchasing power parity holds, under fixed exchange rates:
a. the home interest rate is higher than the foreign interest rate. c. the growth rate of the nominal exchange rate is zero.
b. the home inflation rate is lower than the foreign inflation rate. d. all of the above.

30. If a country with a fixed exchange rate tries to raise its money stock it will:
a. see its central bank gain domestic government bonds. c. see its money stock fall back to its initial level.
b. see its central bank lose international reserves. d. all of the above.

31. If a country with a fixed exchange rate tries to raise its money stock it will:
a. see its central bank gain domestic government bonds. c. see its money stock continue to rise.
b. see its central bank gain international reserves. d. all of the above.

32. If a country with a fixed exchange rate tries to raise its money stock:
a. see its central bank lose domestic government bonds. c. see its money stock continue to rise.
b. see its central bank lose international reserves. d. all of the above.

33. If a country with a fixed exchange rate tries to raise its money stock:
a. see its central bank lose domestic government bonds. c. see its money stock fall back to its initial level.
b. see its central bank gain international reserves. d. all of the above.

34. A revaluation is when a country:
a. allows its currency’s value to float. c. lowers the fixed value of its currency.
b. raises the fixed value of its currency. d. allows its currency value to be set by the market.

35. A devaluation is when a country:
a. allows its currency’s value to float. c. lowers the fixed value of its currency.
b. raises the fixed value of its currency. d. allows its currency value to be set by the market.

36. A depreciation is when the value of a country’s currency:
a. is fixed by the government. c. falls in value in the exchange market.
b. rises in value in the exchange market. d. is fixed in relationship to gold.

37. An appreciation is when the value of a country’s currency:
a. is fixed by the government. c. falls in value in the exchange market.
b. rises in value in the exchange market. d. is fixed in relationship to gold.

38. Under a fixed exchange rate regime, losses of international reserves imply that:
a. the pressure on a country that needs to devalue it currency is greater. c. countries are not under much pressure to change the value of their currency.
b. the pressure on a country that needs to revalue its currency is greater. d. countries can not change the value of their currencies.

39. Fixed exchange rates:
a. facilitate transactions between countries compared to floating exchange rates. c. constrain monetary policy officials.
b. make monetary policy interdependent between the countries fixing their exchange rate. d. all of the above.

40. Fixed exchange rates:
a. facilitate transactions between countries compared to floating exchange rates. c. give domestic monetary policy officials more autonomy.
b. make monetary policy independent between the countries fixing their exchange rate. d. all of the above.

41. Fixed exchange rates:
a. make transactions between countries riskier compared to floating exchange rates. c. give domestic monetary policy officials more autonomy.
b. make monetary policy interdependent between the countries fixing their exchange rate. d. all of the above.

42. Fixed exchange rates:
a. make transactions between countries riskier compared to floating exchange rates. c. constrain monetary policy officials.
b. make monetary policy independent between the countries fixing their exchange rate. d. all of the above.

43. Floating exchange rates:
a. make transactions between countries more difficult. c. provide autonomy for monetary policy authorities.
b. make monetary policy independent. d. all of the above.

44. Floating exchange rates:
a. make transactions between countries more difficult. c. constrain monetary policy officials.
b. make monetary policy interdependent between the countries. d. all of the above.

45. Floating exchange rates:
a. make transactions between countries easier. c. constrain monetary policy officials.
b. make monetary policy independent. d. all of the above.

46. Floating exchange rates:
a. make transactions between countries easier. c. provide autonomy for monetary policy authorities.
b. make monetary policy interdependent between the countries. d. all of the above.

47. Under fixed exchange rates a country’s:
a. money supply is fixed. c. monetary policy makers are not independent.
b. inflation rate is fixed. d. all of the above.

48. Under fixed exchange rates a country’s:
a. money supply is fixed. c. monetary policy makers are independent.
b. inflation rate will rise. d. all of the above.

49. Under fixed exchange rates a country’s:
a. money supply is domestically controlled. c. monetary policy makers are independent.
b. inflation rate is fixed. d. all of the above.

50. Under fixed exchange rates a country’s:
a. money supply is domestically controlled. c. monetary policy makers are not independent.
b. inflation rate will rise. d. all of the above.

51. Suppose the exchange rate between the U.S. dollar and the Argentinian peso is 3 pesos per dollar today. It rises to 3.1 pesos per dollar the next day. This means the dollar has
a. appreciated and the peso has depreciated. c. appreciated, and the peso has appreciated.
b. depreciated and the peso has appreciated. d. depreciated, and the peso has depreciated.

52. In 1950, one U.S. dollar bought 361 Japanese yen, and in 2006, one U.S. dollar bought 117 yen. The U.S. dollar
a. gained over half of its value in terms of yen. c. appreciated relative to the yen.
b. lost over half of its value in terms of yen. d. appreciated relative to most of the world’s currencies.

53. If a country’s government intervenes often in the exchange rate market, then the country
a. is operating closer to a flexible exchange-rate model than a fixed exchange-rate model. c. is operating closer to a fixed exchange-rate model than a flexible exchange-rate model.
b. will experience repeated appreciations of its currency. d. is not a member of the International Monetary Fund (IMF).

54. At a simplified level, purchasing power parity makes sense because, if it did not, housefholds would
a. want to purchase all of their goods in one place, the more expensive country. c. not want to purchase any goods from either country.
b. want to purchase equal portions of their goods in each country. d. want to purchase all of their goods in one place, the cheaper country.

55. The real exchange rate is measured in units of
a. goods bought in the foreign country relative to goods bought in the home country. c. labor supply in the foreign country relative to labor supply in the home country.
b. prices in the foreign country relative to prices in the home country. d. none of the above.

56. If you can buy one pound of flour for $1.25 in the U.S. and one pound of flour for 0.75 £ (pounds) in the U.K., then purchasing power parity implies the
a. real exchange rate is 1.25 £ per $. c. nominal exchange rate is 1.67 £ per $.
b. nominal exchange rate is 0.6 £ per $. d. real exchange rate is 0.6 £ per $.

57. Purchasing power parity implies the
a. nominal exchange rate equals one. c. real exchange rate equals one.
b. nominal exchange is greater than one. d. real exchange rate is less than one.

58. The Balassa-Samuelson hypothesis identifies a pattern of poor countries having
a. low nominal exchange rates. c. low real exchange rates.
b. high nominal exchange rates. d. high real exchange rates.

59. The pattern of real exchange rates across countries that is identified by the Balassa-Samuelson hypothesis occurs because
a. low-income countries tend to have low prices for nontradable goods. c. low-income countries tend to have low prices for tradable goods.
b. low-income countries tend to have high prices for nontradable goods. d. low-income countries tend to have low real exchange rates.

60. The combination of interest-rate parity and relative purchasing power parity leads to the conclusion that the
a. foreign expected real interest rate is greater than the home expected real interest rate. c. foreign expected nominal interest rate equals the home expected real interest rate.
b. foreign expected real interest rate equals the home expected real interest rate. d. foreign expected nominal interest rate equals the home expected nominal interest rate.

61. The Bretton Woods System refers to
a. the flexible exchange-rate system that the International Monetary Fund (IMF) prefers. c. the fixed exchange-rate regime which linked other currencies to the dollar and the dollar to gold.
b. the flexible exchange-rate regime introduced just after World War II that gave France the major role in stabilizing currencies. d. the fixed exchange-rate regime which linked the U.S. and other currencies to silver.

62. Under the Bretton Woods System, the U.S. dollar
a. was allowed to vary around a wide band compared to other participating countries. c. was not fixed, but the U.S. nominal interest rate was fixed relative to other participating countries.
b. varied according to market conditions, but the other participating countries did not allow their currencies to vary. d. was the only participating currency linked directly to gold.

63. If the country of Colombia decides to fix its nominal exchange rate with the U.S. dollar, then in the long run, it will have
a. roughly the same inflation rate as the U.S. c. roughly the same real GDP as the U.S.
b. a higher inflation rate than the inflation rate for the U.S. d. a higher real GDP than the real GDP in the U.S.

64. One reason that a country with a record of high inflation might want to fix its nominal exchange rate with the U.S. dollar is that
a. the country will, in the long run, have about the same inflation rate as the U.S. c. the fixed exchange-rate will act as a monetary-policy rule which prevents the country from reneging on a pledge of low inflation.
b. the fixed exchange-rate will help the country gain credibility in fighting high inflation. d. all of the above.

65. In exchange rate policy, sterilization refers to
a. the market’s ability to clear excess quantities of currency supplied rapidly. c. anti-crime laws the U.S. passed to prevent “money laundering.”
b. the central bank’s attempt to offset an initial intervention in the exchange market. d. the process the International Monetary Fund (IMF) uses to lend to a country in need.

66. In a fixed exchange-rate regime, the money supply is
a. exogenous. c. endogenous.
b. interdependent. d. highly skewed.

SHORT ANSWER

1. What is a nominal exchange rate?

2. What is absolute purchasing power parity, what does it imply and why might it not hold?

3. What is relative purchasing power parity and when does it say the home country will see its currency lose value?

4. What is interest-rate parity and what does this imply about when the exchange rate will be stable?

5. What are the advantages of fixed and floating exchange rates?

LEG 320 Week 9 Quiz – Strayer University New

LEG 320 Week 9 Quiz – Strayer

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CHAPTER 16
DRUG ABUSE AND ALCOHOL-RELATED CRIMES

MULTIPLE CHOICE

1. Which of the following is NOT generally one of the elements of the crime of possession with intent to deliver?
a. the accused possessed a large amount of an illegal drug
b. the accused possessed scales
c. the accused possessed a cellular phone
d. the accused possessed a counterfeit credit card

432

2. In Gonzales v. Raich, the court reasoned that the private use of marijuana might have
a. an adverse impact on federal drug laws
b. a positive impact on federal drug laws
c. an adverse impact on state drug laws
d. a positive impact on state drug laws

443

3. In Gonzales v. Raich, the court reasoned Congress had the power under the Commerce Clause to regulate
a. even purely intra-sate use of marijuana
b. only purely intra-sate use of marijuana
c. even purely inter-sate use of marijuana
d. only purely inter-sate use of marijuana

443

4. All of the following are crimes under the Uniform Controlled Substances Act EXCEPT
a. manufacture or delivery of an illegal drug
b. possession with intent to deliver an illegal drug
c. delivery or possession with intent to deliver a counterfeit substance
d. possession of alcohol by a minor

428

5. Medical use of marijuana is permitted in some states. Although medical users can be prosecuted under federal laws,
a. in 2010 the Justice Department said it would not prosecute medical users
b. in 2010 the Justice Department said it would prosecute medical users
c. in 2010 the U.S. Supreme Court said it would not prosecute medical users
d. in 2010 the U.S. Supreme Court said it would prosecute medical users

433

6. What is the most widely abused and misused drug in America and in many other countries?
a. alcohol
b. meth
c. marijuana
d. cocaine

438

7. The 2002 National Institutes of Health study surveyed drinking among the 8 million college and university students in the United States. What percentage of students were shown to drink in binges?
a. 44%
b. 55%
c. 40%
d. 30%

438

8. How many alcohol-related student deaths are there each year?
a. 1,445
b. 2,545
c. 3,645
d. 4,745

438

9. The federal government and all states have enacted some form of the Uniform
a. Narcotics Act
b. Illegal Drug Act
c. Dangerous Drug Act
d. Controlled Substances Act

428

10. The most common illegal drug charge is some form of
a. selling
b. buying
c. possession
d. trafficking

428

11. How many states currently have a “Compassionate Use Medical Marijuana” statute?
a. 14
b. 19
c. 20
d. 16

433

12. The Uniform Controlled Substances Act divides drugs into how many schedules?
a. 3
b. 5
c. 7
d. 9

428

13. A minority of states require that the defendant have possessed what minimum amount of the illegal substance to sustain a conviction?
a. a trace amount
b. a usable amount
c. a gram
d. a bindle

430

14. What is the minimum amount of the illegal substance required to sustain a drug conviction by a majority of states?
a. usable amount
b. trace amount
c. any amount
d. a gram

430

15. In fourteen states, doctors may prescribe the personal use of what drug for pain management for people with serious illnesses?
a. cocaine
b. marijuana
c. heroin
d. methamphetamine

433

16. Challengers of the Federal Controlled Substances Act alleged Congress has no constitutional authority to prohibit the medical use of marijuana based on the
a. due process clause
b. equal protection clause
c. interstate commerce clause
d. none of these answers are correct

433

17. A defendant arrested in possession of a large amount of an illegal drug would most likely have been charged with the offense of
a. possession of a controlled substance
b. delivery of a controlled substance
c. possession with intent to deliver
d. possession of stolen property

432

18. In New Jersey an individual who provides an illegal drug to another, and that person dies as a result of ingesting the drug,
a. cannot be held liable for the death
b. may be held strictly liable for the death
c. will be found guilty of premeditated murder
d. will be charged with a misdemeanor drug offense

435

19. Approximately what number of people are killed every day in the United States because of driving under the influence?
a. 50
b. 100
c. 25
d. 150

438

20. The National Highway Traffic Safety Administration estimates the yearly costs of drunk driving to be
a. $45 billion
b. $35 billion
c. $25 billion
d. $15 billion

438

21. Which of the following is a violation of the Uniform Controlled Substances Act?
a. possession of a controlled substance
b. deliver a counterfeit substance
c. manufacture a controlled substance
d. all of these answers are correct

428

22. What are the two types of possession?
a. actual and constructive
b. real and actual
c. real and constructive
d. actual and contractual

430

23. The “usable quantity” rule holds that a useless trace amount is not
a. a usable amount
b. a sufficient amount
c. a chargeable amount
d. a sufficient quantity

430

24. Delivery of an illegal drug can be either an actual delivery, or it could be the crime of possession of a controlled substance with
a. intent to deliver
b. sufficient amount to deliver
c. quantity of delivery
d. delivery potential

432

25. What drug is particularly dangerous because it is an unpredictable killer that can cause life-threatening complications that are not related to the dose taken, the length of use, or the manner in which the drug is taken?
a. cocaine
b. heroin
c. marijuana
d. meth

435

26. Laws that make people who illegally manufacture, distribute, or dispense illegal drugs strictly liable for a death that results from the using such drugs are often called
a. Len Bias laws
b. Terrance Bianchi laws
c. Lawrence Brewer laws
d. Stephen Breyer laws

435

27. Which of the following may qualify as delivery of an illegal drug?
a. all of these may qualify as delivery of an illegal drug
b. possession of a controlled substance with intent to deliver
c. possession of a controlled substance with intent to sell
d. possession of a controlled substance with intent to transfer

432

28. British and U.S. studies of accidental deaths in the 1980s and a National Institutes of Health study in 2002 showed that alcohol has a high relationship to deaths caused by which of the following?
a. drowning
b. choking
c. burns
d. all of these answers are correct

438

29. What percent of state prisoners were convicted of a violent crime while under the influence of alcohol alone?
a. 21%
b. 31%
c. 41%
d. 51%

438

30. Which of the following is NOT a field sobriety test?
a. the walk-and-turn test
b. the HGB test
c. the one-leg-stand test
d. all of these are field sobriety tests

439

TRUE/FALSE

1. A suspect cannot be found to have been operating a motor vehicle by being behind the wheel of a car with the keys in the ignition.

2. The Uniform Controlled Substances Act lists marijuana as a Schedule I drug with the highest abuse potential.

3. In a majority of states, even a “trace” amount of an illegal drug will sustain a conviction for possession of that drug.

4. All states have a uniform charge of possession of a small amount of marijuana.

5. Possession of marijuana for personal use is illegal throughout the U.S.

6. A defendant arrested in possession of a large amount of an illegal drug may be charged with possession with intent to deliver.

7. A person who claims to be selling cocaine, but delivers baking soda, cannot be charged with a drug crime.

8. People who illegally dispense illegal drugs will be held strictly liable in many states for a death that results from the ingestion of such a drug.

9. Criminal liability for drug induced death requires that the state must show only that the defendant provided the drugs to the victim, and that the victim died as a proximate result of the defendant’s actions.

10. Victims of drunk driving may be able to sue bars or individuals who furnished the alcoholic drinks.

COMPLETION

1. Intent to deliver illegal drugs can be proved by showing a “ connection” between the facts of possession, such as the large quantity of the drug, and an intent to sell the drugs.

2. The most common criminal illegal drug charge is that of _____________ of a controlled substance.

3. Two types of drug possession are “actual” and “___________.”

4. An amount of an illegal drug that is so small that it is unusable is referred to as a “________” amount.

5. Depending upon the jurisdiction, possession of a small amount of marijuana may be charged as either a criminal or a _________ offense.

6. In Gonzales v. the court reasoned that private use of marijuana might have an adverse impact on federal drug laws.

7. In a number of states, a person who dispenses an illegal drug will be held ________ liable for a death that results from ingestion of such drug.

8. Most students drink or not at all, but 44 percent of students drink in binges.

9. The most widely abused and misused drug in America is _________.

10. Nystagmus is a persistent, rapid, , side-to-side eye movement.

CHAPTER 17
TERRORISM

MULTIPLE CHOICE

1. Terrorists are willing to take innocent lives to
a. make money
b. make a political statement
c. satisfy their bloodlust
d. stimulate reprisals

450

2. Congress was required to clearly define the acts that constituted terrorism and condemned under the conventions because of the
a. vagueness limitation on statutes
b. void limitation on statutes
c. definition limitation on statutes
d. discreet

451

3. People who believe that organized government is evil may be referred to as
a. anarchists
b. agnostics
c. advocates
d. agents

451

4. Generally, terrorists differ from other criminals on the basis of their
a. psychological characteristics
b. mental illness
c. motive
d. physical characteristics

451

5. Which of the following statements regarding terrorism is FALSE?
a. Acts of terrorism may be sponsored by a nation or a group.
b. Terrorism is not a form of warfare.
c. Terrorism is a global problem.
d. The U.S. is a stated target of the terrorist group Al Qaeda.

451
6. Who is authorized to identify groups or organizations as terrorist organizations?
a. the State Department
b. the President
c. the Congress
d. the House of Representatives

452

7. The Alabama Criminal Code, Section 13-A-10-151, defines the crime of terrorism as an act or acts intended to
a. Intimidate or coerce a civilian population.
b. Influence the policy of a unit of government by intimidation or coercion.
c. Affect the conduct of a unit of government by murder, assassination, or kidnapping.
d. all of these

454

8. Most state statutes also make it a crime for a person to support a terrorist act or organization. Actions that could constitute support include which of the following?
a. providing financial support
b. providing lodging
c. providing training
d. all of these

454

9. Which of the following is the definition of a terrorist threat under state laws?
a. threatened violence against another
b. terrorizing a person
c. threatened violence against another with the purpose of terrorizing
d. none of these

454

10. Most of the money used to finance the 9/11 terrorist attack came from which of the following?
a. charitable organizations
b. private donors
c. foreign governments
d. drug dealers

461
11. Which of the following crimes are favored by terrorists to finance their terrorist activities?
a. theft
b. fraud
c. drug trafficking
d. all of these

461

12. According to the text, terrorists sometimes use which of the following to move funds in and out of the United States?
a. electronic wire transfers
b. television commercials
c. radio advertisements
d. none of these

462

13. One way in which terrorists move funds in and out of the United States is through the use of IVTS. What does IVTS stand for?
a. informal value transfer systems
b. international value transfer systems
c. informal value terrorist systems
d. international value terrorist systems

462

14. One example of a kind of IVTS is
a. Hawala
b. Farouq
c. Mandamus
d. Baksheesh

462

15. What is one advantage of using an IVTS?
a. no paper trail
b. it is faster than wire transfers
c. more money is available through IVTS
d. none of these answers is correct

462

16. An extraordinary rendition occurs when a person is seized in one country and then transported to another country for
a. interrogation
b. extradition
c. repatriation
d. mediation

462

17. Customs and practices followed by most nations in wartime and now the subject of international conventions are known as
a. rules of war
b. degrees of war
c. peace negotiations
d. contracts

460

18. Advocating the forceful overthrow of the U.S. government is the crime of
a. sedition
b. sabotage
c. terrorism
d. treason

454

19. Which of the following is NOT one of the classes of crimes created by rules of war?
a. government crimes
b. crimes against peace
c. crimes against humanity
d. traditional war crimes

460

20. The use of unlawful force to coerce or intimidate persons or governments in the pursuit of political, social, or religious goals is known as
a. terrorism
b. genocide
c. humanism
d. feticide

450

21. Many states have adopted a definition of the crime of terrorism closely modeled after the
a. federal definition
b. international definition
c. Supreme Court definition
d. Hague definition

454

22. Damaging or injuring national defense material or national defense utilities with the intent to obstruct the national defense is the crime of
a. sedition
b. sabotage
c. treason
d. aiding a terrorist

457

23. Customs, practices, treaties, and agreements that most nations subscribe to for the conduct of wars openly declared against sovereign nations are called
a. international conventions
b. treaties
c. international agreements concerning waging war
d. rules of war

460

24. Funds for terrorist activities are often transferred through
a. informal value transfer systems
b. human couriers
c. high-tech electronic wire transfers
d. all of these

462

25. A program whereby suspected terrorists are seized by U.S. agents and transported to another country for interrogation is known as
a. secret abduction
b. extraordinary rendition
c. international detention
d. terrorist detention

462

26. Which of the following are possible charges against terrorists?
a. treason
b. sedition
c. sabotage
d. all of these

453-457

27. Which of the following statements regarding the rules of war is FALSE?
a. President Lincoln began the codification of these rules in 1864.
b. Most nations subscribe to the rules of war.
c. Combatants in a war are liable for the violation of ordinary criminal laws.
d. President Eisenhower began the codification of these rules in 1953.

460

28. Which of the following laws forbids the planning, commencement, and conduct of an aggressive war?
a. Crimes Against Peace
b. Crimes Against Humanity
c. Traditional War Crimes
d. Antiterrorism Act of 1996

460

29. Which of the following laws forbids deportation based on race, religion or ethnic origin?
a. Crimes Against Peace
b. Crimes Against Humanity
c. Traditional War Crimes
d. Antiterrorism Act of 1996

460

30. Which of the following laws addresses conduct of combatants towards prisoners of war?
a. Crimes Against Peace
b. Crimes Against Humanity
c. Traditional War Crimes
d. Antiterrorism Act of 1996

460

TRUE/FALSE

1. Not all terrorists are sponsored or protected by a nation or a group.

2. Acts of terrorism may be considered a form of warfare.

3. The term “terrorist” is reserved for those who believe organized government is evil.

4. The State Department is authorized to identify groups or organizations as terrorist organizations.

5. Congress enacted the Federal Antiterrorism Law following the 1995 bombing of the Oklahoma City federal building.

6. The intention to intimidate or coerce a civilian population is one of the elements of the crime of terrorism.

7. A terrorist threat is a threat to commit a violent felony that is a danger to human life, and is made to intimidate only a military group.

8. Rules of war are customs and practices followed by most nations in wartime and now the subject of international conventions.

9. No countries contribute directly to terrorists organizations.

10. An extraordinary rendition occurs when a person is seized in one country and then transported to another country for torture.

COMPLETION

1. Terrorists are criminals who use force and violence in the pursuit of _________, ideological, or religious goals.

2. People who believe organized government is evil are called _________.

3. The State Department is authorized to groups or organizations as terrorist organizations.

4. One of the elements of the crime of terrorism under most state laws is to
or coerce a civilian population.

5. The Antiterrorism and Effective ________ Penalty Act makes it a crime to aid a terrorist organization in the U.S.

6. A terrorist threat is a threat to commit a violent felony that is a danger to human life, and is made to intimidate or coerce a civilian group or a .

7. Rules of are customs and practices followed by most nations in wartime.

8. The shortage of financial support can affect the scope of a terrorist .

9. Individuals contribute indirectly to terrorist organizations by giving money and support to phony “ ” groups that support terrorists.

10. An “extraordinary “ occurs when a person is seized in one country and then transported to another country for interrogation.

FIN 350 Week 9 Quiz – Strayer University New

FIN 350 Week 9 Quiz – Strayer

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Quiz 8 Chapter 18 and 19

Bank Regulation

1. Deposit insurance has a limit of:
a. $10,000.
b. $25,000.
c. $100,000.
d. $250,000.

2. The opening of a commercial bank in the United States
a. does not require a charter.
b. always requires a charter from a state government.
c. always requires a charter from the federal government.
d. requires a charter from a state or the federal government.
e. requires a charter from both the state and federal government.

3. Commercial banks that are not members of the Federal Reserve System ____ borrow from the Fed, and ____ subject to the Fed’s reserve requirements.
a. may; are
b. may; are not
c. may not; are not
d. may not; are

4. National banks are regulated by ____, and state banks are regulated by ____.
a. the Comptroller of the Currency; their state agency
b. the Comptroller of the Currency; the Comptroller of the Currency
c. their state agency; their state agency
d. their state agency; the Comptroller of the Currency

5. All Fed member banks must hold
a. private insurance on deposits.
b. FDIC insurance on deposits.
c. both FDIC and private insurance on deposits.
d. none of the above

6. Commercial banks ____ restricted to a maximum percentage of their capital to loan to a single customer, and ____ allowed to use borrowed or deposited funds to purchase common stock.
a. are; are
b. are; are not
c. are not; are
d. are not; are not

7. Banks commonly use depositor funds to invest in stocks.
a. True
b. False

8. An “off-balance-sheet commitment” that provides the bank’s guarantee on the financial obligations of a borrower to a specific party is a
a. standby letter of credit.
b. federal funds agreement.
c. repurchase agreement.
d. discount window agreement.

9. The Depository Institutions Deregulation and Monetary Control Act of 1980 allowed banks to set their own
a. reserve requirements.
b. capital ratios.
c. interest rates on savings deposits.
d. corporate loan interest rates.

10. The Glass-Steagall Act of 1933 prevented
a. any firm that accepts deposits from underwriting stocks and bonds of corporations.
b. any firm that accepts deposits from underwriting general obligation bonds of states and municipalities.
c. any firm that accepts deposits from holding any corporate bonds in its asset portfolio.
d. state-chartered banks from offering commercial loans.

11. Which of the following is not a main deregulatory provision of Depository Institutions Deregulation and Monetary Control Act of 1980?
a. phase-out of deposit rate ceilings
b. allowance of checkable deposits for all depository institutions
c. new lending flexibility of depository institutions
d. allowance of interstate banking for depository institutions in most states

12. The Financial Reform Act was intended to:
a. prevent another credit crisis.
b. reduce capital ratios.
c. impose interest rate ceilings on deposits.
d. prevent banks from offering securities services.

13. The Garn-St. Germain Act of 1982
a. permitted depository institutions to offer money market deposit accounts.
b. prevented depository institutions from acquiring problem institutions across geographical boundaries.
c. required the Fed to explicitly charge depository institutions for its services.
d. allowed the Fed to provide check clearing to depository institutions at no charge.

14. Which of the following is not a specific criterion the FDIC uses to monitor banks?
a. capital adequacy
b. dollar value of fixed assets
c. asset quality
d. earnings
e. sensitivity to financial market conditions

15. The potential risk that financial problems can spread through financial institutions and the financial system is referred to as:
a. systemic
b. systematic
c. unsystematic
d. market

16. The Basel framework recommends capital requirements in proportion to:
a. mortgages
b. commercial paper
c. liabilities
d. risk-weighted assets

17. The Basel Accord
a. forces banks with greater risk to maintain more deposits.
b. forces banks with greater risk to maintain more capital.
c. forces banks with greater risk to maintain less capital.
d. none of the above

18. In general, a bank defines its value-at-risk as the estimated potential loss from its traditional businesses that could result from adverse movements in market prices.
a. True
b. False

19. Which of the following statements is incorrect?
a. The validity of a bank’s estimated VAR is assessed with backtests in which the actual daily trading gains or losses are compared to the estimated VAR over a particular period.
b. Some banks supplement the VAR estimate with stress tests.
c. In general, the VAR model does not lend itself to determine capital requirements.
d. All of the statements above are correct.

20. Which of the following is an “off-balance-sheet commitment?”
a. long-term debt
b. additional paid-in capital
c. notes payable
d. guarantees backing commercial paper issued by firms

21. The liquidity component of the CAMELS rating refers to
a. regulators’ concern about how a bank’s earnings would change if economic conditions change.
b. how well the bank’s management would detect its own financial problems.
c. a bank’s sensitivity to financial market conditions.
d. monitoring the type of loans that are given, the bank’s process for deciding whether to provide loans, and the credit rating of debt securities that it purchases.
e. excessive borrowing by banks from outside sources, such as the discount window.

22. Which of the following is not a corrective action taken by regulators when a bank is identified as a problem bank?
a. Regulators may examine such banks frequently and thoroughly.
b. Regulators may request that a bank boost its capital level or delay its plans to expand.
c. Regulators can require that additional financial information be periodically updated to allow continued monitoring.
d. Regulators have the authority to take legal action against a problem bank if the bank does not comply with their suggested remedies.
e. All of the above are possible corrective actions taken by bank regulators.

23. The fee banks pay to the FDIC for deposit insurance is now
a. a fixed dollar amount for all banks.
b. a fixed percentage of the bank’s deposit level for all banks.
c. a fixed percentage of the bank’s loan volume for all banks.
d. based on the risk of the bank.

24. Generally, the failure of small banks
a. causes more widespread concern about the safety of the banking system than the failure of large banks.
b. causes equal concern about the safety of the banking system as the failure of large banks.
c. causes less concern about the safety of the banking system than the failure of large banks.
d. Either A or B can be true, depending on the type of business cycle that exists while the failures occur.

25. The Sarbanes-Oxley Act was enacted to make corporate managers, board members, and auditors more accountable for the accuracy of the financial statements that their respective firms provide.
a. True
b. False

26. Bank A has a 10 percent capital ratio and uses a significant proportion of its assets to invest in very highly-rated bonds. Bank B has an 12 percent capital ratio and uses a significant proportion of its assets to invest in highly leveraged transactions. How would Bank A rate versus Bank B using the capital and asset quality criteria?
a. Bank A is perceived as safer by both criteria.
b. Bank B is perceived as safer by both criteria.
c. Bank A is perceived as safer according to capital, but more risky according to asset quality.
d. Bank B is perceived as safer according to capital, but more risky according to asset quality.

27. The key reason for regulatory examinations (such as CAMELS ratings) is to
a. rate past performance.
b. detect problems of a bank in time to correct them.
c. check for embezzlement.
d. monitor reserve requirements.

28. Deposit insurance now covers all bank deposits without imposing any limit.
a. True
b. False

29. Which banking act allowed banks to cross state lines in order to acquire a failing institution?
a. McFadden Act
b. Glass-Steagall Act
c. DIDMCA
d. Garn-St. Germain Act

30. Which banking act allowed for the creation of NOW accounts?
a. McFadden Act
b. Glass-Steagall Act
c. DIDMCA
d. Garn-St. Germain Act

31. Which banking act allowed interstate banking?
a. Reigle-Neal Interstate Banking and Branching Efficiency Act
b. Glass-Steagall Act
c. DIDMCA
d. Sarbanes-Oxley Act

32. Which banking act permanently increased FDIC insurance up to $250,000?
a. DIDMCA
b. Sarbanes-Oxley Act
c. Financial Reform Act
d. Garn-St. Germain Act

33. Which banking act removed deposit rate ceilings?
a. McFadden Act
b. Glass-Steagall Act
c. DIDMCA
d. Garn-St. Germain Act

34. The argument that interstate banking would allow banks to grow and more fully achieve a reduction in operating costs per unit of output as output increases is based on
a. economies of scale.
b. financial leverage.
c. diseconomies of scale.
d. capital adequacy theory.

35. Federal deposit insurance
a. existed since the 1800s.
b. was created in 1933.
c. was created after World War II.
d. was created in 1960.

36. ____ is not a characteristics used by the Federal Deposit Insurance Corporation (FDIC) to rate banks.
a. Capital adequacy
b. Current stock price
c. Asset quality
d. Management
e. All of the above are used by the FDIC to rate banks.

37. The moral hazard problem is minimized when deposit insurance premiums are
a. zero (not imposed by the FDIC).
b. the same percentage of assets for all banks.
c. set at a fixed percentage of assets for large banks, and is zero for small banks.
d. set at a percentage of assets that is based on the bank’s risk level.

38. Which of the following statements is incorrect with respect to the Financial Services Modernization Act of 1999?
a. It complemented the Glass-Steagall Act.
b. It enabled commercial banks to more easily pursue securities and insurance activities.
c. It gave securities firms and insurance companies the right to acquire banks.
d. The Act requires that commercial banks must have a strong rating in community lending in order to pursue additional expansion in securities and other nonbank activities.
e. All of the above are true.

39. The ____ is the fund used to cover insured depositors.
a. Bank Insurance Fund
b. Federal Deposit Insurance Corporation (FDIC)
c. money market mutual fund
d. growth fund
e. none of the above

40. ____ is not a rating criterion used by the FDIC.
a. Capital adequacy
b. Off-balance sheet financing
c. Asset quality
d. Management
e. Liquidity

41. The uniform global capital requirements mandated a minimum level of Tier 1 capital, which primarily consists of funds obtained from
a. issuing commercial paper and bonds.
b. retaining earnings and issuing commercial paper.
c. retaining earnings and issuing common stock.
d. issuing bonds and common stock.

42. During the 2008-2010 period, the ____ was implemented to alleviate the financial problems experienced by banks and other financial institutions with excessive exposure to mortgages or mortgage-backed securities.
a. Riegle Program
b. Sarbanes-Oxley Program
c. FDIC Program
d. Troubled Asset Relief Program (TARP)

43. The act of taking a risk because of protection from adverse consequences due to the risk is referred to as a moral hazard problem.
a. True
b. False

44. The Sarbanes-Oxley Act (SOX) was enacted in 2002 in order to ensure a more transparent process for reporting on productivity and the financial condition of the firm.
a. True
b. False

45. The Sarbanes-Oxley Act (2002) was enacted in response to some banks taking too much risk.
a. True
b. False

46. Publicly-traded banks have incurred larger reporting expenses to comply with the Sarbanes-Oxley Act.
a. True
b. False

47. The Financial Services Modernization Act of 1999
a. gave banks and other financial service firms less freedom to merge.
b. allowed financial institutions to offer a diversified set of financial services without being subjected to stringent constraints.
c. offers very few benefits to a financial institution’s clients.
d. increased the reliance of financial institutions on the demand for the single service they offer.

48. Which of the following is not true regarding the Financial Services Modernization Act of 1999?
a. It provided more momentum for the consolidation of financial services.
b. Financial institutions were finally able to offer a diversified set of financial services without being subjected to stringent constraints on the form or amount of financial services that they could offer.
c. Banks and other financial service firms were given more freedom to merge, but were forced to divest some of the financial services that they acquired.
d. Financial institutions no longer had to search for loopholes or monitor their business to ensure that the degree of financial services offered remained within the regulatory constraints that were previously imposed.
e. all of the above are true

49. All state banks are required to be members of the Federal Reserve System.
a. True
b. False

50. State banks are regulated by the Comptroller of the Currency.
a. True
b. False

51. Banks that are insured by the Federal Deposit Insurance Corporation (FDIC) are also regulated by the FDIC.
a. True
b. False

52. Commercial banks are allowed to invest in junk bonds.
a. True
b. False

53. In general, banks would prefer to maintain a high amount of capital to boost their return on equity ratio, yet regulators have argued that banks need only a sufficient amount of capital to absorb potential operating losses.
a. True
b. False

54. The provision of a letter of credit by a bank to issue commercial paper issued by a corporation is an example of an off-balance sheet commitment.
a. True
b. False

55. As a result of the Reigle-Neal Act, bank customers have benefited because of lower costs to banks and because of convenience.
a. True
b. False

56. There is much emphasis by regulators on the bank’s sensitivity to interest rate movements, since many banks have liabilities that are repriced more frequently than their assets and are adversely affected by rising interest rates.
a. True
b. False

57. If regulators reduce bank failures by imposing regulations that reduce competition, bank efficiency will be increased.
a. True
b. False

58. An ideal solution to react to a large failing bank would prevent a run on deposits of other large banks, yet not reward a poorly performing bank with a bailout.
a. True
b. False

59. ____ is not a rating criterion used by the Federal Deposit Insurance Corporation (FDIC).
a. Capital adequacy
b. Off-balance sheet financing
c. Asset quality
d. Management
e. Liquidity

60. A federal bank charter is issued by the
a. Comptroller of the Currency.
b. Securities and Exchange Commission.
c. U.S. Treasury.
d. Federal Reserve.
e. none of the above

61. Bank regulations typically:
a. involve a tradeoff between the safety of the banking system and the efficiency of bank operations.
b. impose restrictions on the types of assets in which banks can invest.
c. set requirements for the minimum amount of capital that banks must hold.
d. all of the above

62. When a bank holds a lower level of capital, a given dollar level of profits represents a lower return on equity.
a. True
b. False

63. Shareholders and managers of banks may prefer that banks be required to hold higher levels of capital because this would allow for higher share prices for the banks and larger bonuses for bank managers.
a. True
b. False

64. A bank can increase its capital ratio by:
a. buying back shares of its stock from shareholders.
b. selling assets.
c. increasing its dividend to encourage more investors to purchase its stock.
d. increasing its off-balance sheet activities.

65. The Basel III framework proposes:
a. lower capital requirements for banks to enable them to generate higher earnings to make up for their losses during the credit crisis.
b. relying on the rating agencies to assess the risk of bank assets.
c. increased capital requirements and liquidity requirements for banks.
d. using the gap ratio to set the capital ratio.

66. During the credit crisis, all of the following occurred except:
a. some securities firms were allowed to become bank holding companies.
b. the Federal Reserve rescued American International Group, an insurance company.
c. the Treasury injected funds into financial institutions.
d. the Supreme Court ruled that the Federal Reserve had exceeded its authority by assisting Bear Stearns because Bear was a securities firm and not a commercial bank.

67. The Volcker rule, named for a former Fed chair:
a. is intended to increase the powers of the Fed.
b. states that the U.S. government will rescue certain large banks if necessary to reduce systemic risk in the financial system.
c. sets limits on banks’ proprietary trading.
d. requires all banks to undergo annual stress tests.

68. The Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010:
a. ended the system of risk-based insurance premiums.
b. set requirements for the Deposit Insurance Fund’s reserves.
c. raised the limit for insured deposits to $750,000 per depositor.
d. allowed large insurance companies such as American International Group to compete with the FDIC to insure bank deposits.

Chapter 19—Bank Management

1. Which of the following statements is incorrect?
a. Managers may be tempted to make decisions that are in their own best interests rather than shareholder interests.
b. Directors are responsible for making most of the bank’s decisions regarding loans to customers, which encourages a loan department to extend loans with a very high concern for risk.
c. To prevent agency problems, some banks provide stock as compensation to managers.
d. The underlying goal behind the managerial policies of a bank is to maximize the wealth of the bank’s shareholders.

2. When cash outflows temporarily exceed cash inflows, banks are most likely to experience
a. higher dividend payments.
b. illiquidity.
c. a negative duration on its assets.
d. an excess of capital.

3. Banks can resolve cash deficiencies by
a. creating additional liabilities.
b. selling assets.
c. buying back common stock.
d. increasing dividend payouts.
e. A or B

4. As the secondary market for loans has become active, banks are more able to satisfy their liquidity needs with a ____ proportion of loans while achieving ____ profitability.
a. higher; higher
b. lower; lower
c. higher; lower
d. lower; higher

5. Banks are more liquid as a result of securitization because it allows them to request repayment of the loan principal from the borrower upon demand.
a. True
b. False

6. If a bank that relies heavily on short-term deposits expects interest rates to consistently decrease over time, it would allocate most of its loans with ____ rates if it desires to maximize its expected returns. It could reduce its exposure to interest rate risk by setting ____ rates on its loans.
a. fixed; fixed
b. variable; fixed
c. variable; variable
d. fixed; variable

7. During a period of rising interest rates, a bank’s net interest margin will likely ____ if its liabilities are ____ its assets.
a. increase; more rate-sensitive than
b. decrease; more rate-sensitive than
c. increase; equally rate-sensitive as
d. decrease; equally rate-sensitive as

8. If a bank expected interest rates to consistently ____ over time, it will consider allocating most funds to rate-____ assets.
a. decrease; sensitive
b. decrease; insensitive
c. increase; insensitive
d. none of the above

9. Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri’s $800 million in assets are rate-sensitive, while $600 million of its liabilities are rate-sensitive. Petri Bank’s net interest margin is ____ percent.
a. 4.0
b. 3.6
c. 6.7
d. 5.0

10. Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri’s $800 million in assets are rate-sensitive, while $600 million of its liabilities are rate-sensitive. Petri Bank’s gap is $____.
a. −300 million
b. 300 million
c. −500 million
d. 500 million

11. Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri’s $800 million in assets are rate-sensitive, while $600 million of its liabilities are rate-sensitive. Petri Bank’s gap ratio is ____ percent.
a. 37.5
b. 50.0
c. 100.0
d. 40.0

12. The measure of interest rate risk that uses the difference between rate-sensitive assets and rate-sensitive liabilities is called
a. gap measurement.
b. duration measurement.
c. duration ratio.
d. gap ratio.

13. A gap ratio of less than one suggests that
a. rate-sensitive assets exceed rate-sensitive liabilities.
b. an increase in interest rates would increase the bank’s net interest margin.
c. rate-sensitive liabilities exceed rate-sensitive assets.
d. a decrease in interest rates would decrease the bank’s net interest margin.
e. B and D

14. Each bank may have its own classification system of interest rate sensitivity, because there is no perfect measurement of the gap.
a. True
b. False

15. The duration of zero-coupon bonds will be ____ the duration of coupon bonds with the same maturity.
a. lower than
b. higher than
c. the same as
d. A or B, depending on the size of the coupon payment

16. In general, the duration of zero-coupon securities with short maturities is ____ than the duration of zero-coupon securities with long maturities.
a. higher than
b. lower than
c. equal to
d. A or B, depending on the issuer of the securities

17. Other things equal, assets with shorter maturities have ____ durations. Assets that generate more frequent coupon payments have ____ durations.
a. shorter; longer
b. shorter; shorter
c. longer; shorter
d. longer; longer

18. For most banks, the average duration of assets ____ the average duration of liabilities, so the duration gap is ____.
a. exceeds; zero
b. exceeds; negative
c. exceeds; positive
d. is less than; negative

19. Other things being equal assets with ____ maturities and ____ frequent coupon payments have shorter durations.
a. shorter; more
b. shorter; less
c. longer; more
d. longer; less

20. If a bank attempts to reduce exposure to interest rate risk by replacing long-term marketable securities with more floating-rate commercial loans, it is likely that the bank’s
a. default risk would decrease.
b. default risk would increase.
c. liquidity risk would increase.
d. liquidity risk would decrease.
e. B and C

21. Which of the following is not a likely method used by a bank to reduce interest rate risk?
a. maturity matching
b. using fixed-rate loans
c. using interest rate futures contracts
d. using interest rate caps

22. Floating-rate loans cannot completely eliminate interest rate risk; if the cost of funds is changing more frequently than the rate on assets, the bank’s net interest margin is still affected by interest rate fluctuations.
a. True
b. False

23. The ____ of interest rate futures ____ the potential adverse effect of rising interest rates on a bank’s interest expenses.
a. sale; increases
b. sale; reduces
c. purchase; reduces
d. both A and C are correct

24. Which of the following financial institutions would be most willing to swap variable-rate payments for fixed-rate payments in order to reduce exposure to interest rate risk?
a. one whose assets and liabilities are equally interest-rate sensitive
b. one whose assets are more interest-rate sensitive than its liabilities
c. one whose liabilities are more interest-rate sensitive than its assets
d. one whose gap ratio is equal to 1.0

25. Banks increase their risk by increasing their capital as a percentage of assets.
a. True
b. False

26. Banks generally ____ loans and ____ their purchases of low-risk securities when the economy is weak.
a. increase; increase
b. reduce; reduce
c. increase; reduce
d. reduce; increase

27. Banks tend to focus their loans in one industry so that they can specialize on one industry and reduce the credit risk of their loan portfolio.
a. True
b. False

28. Most loan sales enable the bank originating the loan to continue servicing the loan.
a. True
b. False

29. ROE is defined as
a. .
b. .
c. .
d. .

30. The greater the ____, the greater the amount of assets per dollar’s worth of equity.
a. leverage measure
b. ratio of equity to debt
c. capital ratio
d. proportion of loans to securities in the asset portfolio

31. A bank has a return on assets of 2 percent, $40 million in assets, and $4 million in equity. What is the return on equity?
a. 10 percent
b. .2 percent
c. 2 percent
d. 20 percent
e. none of the above

32. A bank has the following asset and liability portfolios. What is the gap?

Rate-sensitive Amount Rate-sensitive Amount
assets (in millions) liabilities (in millions)
Floating-rate
loans $4,000 NOW accounts $1,750

Floating-rate
mortgages 1,000 MMDAs 4,500

Short-term
Treasury securities 1,500 Short-term CDs 1,000

$6,500 $7,250

a. $750 million
b. −$750 million
c. 1.12
d. .896
e. none of the above

33. A bank has the following asset and liability portfolios. What is the gap ratio?

Rate-sensitive Amount Rate-sensitive Amount
assets (in millions) liabilities (in millions)
Floating-rate
loans $4,000 NOW accounts $1,750

Floating-rate
mortgages 1,000 MMDAs 4,500

Short-term
Treasury securities 1,500 Short-term CDs 1,000

$6,500 $7,250

a. $750 million
b. −$750 million
c. 1.12
d. .896
e. none of the above

34. If Bank A has a negative gap and Bank B has a positive gap. Which of the following is true?
a. Bank A is more favorably affected by rising interest rates.
b. Bank B is more favorably affected by falling interest rates.
c. Bank A is adversely affected by falling interest rates.
d. none of the above

35. Which of the following is a measure for banks to assess their exposure to interest rate risk?
a. capital ratio
b. leverage measure
c. duration measurement
d. gap ratio
e. C and D

36. If a bank sells interest rate futures, it ____ of rising interest rates and ____ of declining interest rates on its interest expenses.
a. reduces the potential adverse effect; reduces the potential favorable effect
b. increases the potential adverse effect; increases the potential favorable effect
c. decreases the potential adverse effect; increases the potential favorable effect
d. increases the potential adverse effect; decreases the potential favorable effect

37. Which of the following loan portfolios are best diversified against default risk?
a. consumer loans to farmers and commercial loans to farm equipment dealers in a local area
b. commercial loans to the same industry
c. commercial loans to various retail stores in the same city
d. consumer and commercial loans to different industries in different cities

38. Banks can increase their liquidity position by restructuring their asset portfolio to contain less ____ and more ____.
a. excess reserves; Treasury bills
b. Treasury bonds; corporate bonds
c. loans; Treasury bills
d. none of the above

39. Banks would reduce their liquidity position by restructuring their asset portfolio to contain less ____ and more ____.
a. Treasury securities; excess reserves
b. loans; Treasury securities
c. corporate bonds; Treasury securities
d. none of the above

40. Banks can reduce their default risk by restructuring their asset portfolio to contain less ____ and more ____.
a. Treasury bonds; corporate bonds
b. Treasury bonds; municipal bonds
c. Treasury bonds; commercial loans
d. none of the above

41. Banks can increase their potential interest revenues by restructuring their asset portfolio to contain less ____ and more ____.
a. Treasury bonds; commercial loans
b. Treasury bonds; excess reserves
c. consumer loans; Treasury bills
d. none of the above

42. If a bank desired to maximize its net interest margin, it would best achieve its goal by attempting to obtain most of its funds through ____ and use most of its funds for ____ (assuming that all loans will be repaid).
a. traditional demand deposits; commercial loans
b. traditional demand deposits; consumer loans
c. NOW accounts; consumer loans
d. NOW accounts; commercial loans

43. A bank that holds a greater percentage of traditional demand deposits and loans will likely incur ____ non-interest expenses and have a ____ net interest margin than other banks of the same size (assuming that its loan losses are no higher than those at other banks).
a. greater; higher
b. greater; lower
c. less; higher
d. less; lower

44. A bank’s net interest margin is commonly defined as
a. interest revenues minus interest expenses.
b. (interest revenues minus interest expenses)/total assets.
c. (interest revenues minus interest expenses)/total liabilities.
d. (interest revenues minus interest expenses)/capital.

45. A common method for banks to reduce their default risk is to
a. specialize in loans to just one or a few particular industries in which they have expertise in assessing creditworthiness.
b. specialize in loans of companies whose earnings patterns are quite similar over time.
c. A and B
d. none of the above

46. International diversification of loans can best reduce the bank’s overall default risk if
a. the countries where loans are given are clustered together in a single continent.
b. the countries where loans are given have economic cycles that do not move together over time.
c. A and B
d. none of the above

47. A bank’s net interest margin will likely decline if it has a large amount of
a. rate-sensitive assets and no rate-sensitive liabilities.
b. rate-sensitive liabilities and no rate-sensitive assets.
c. loans to technology firms.
d. real estate loans.

48. Banks can reduce their required capital levels by
a. increasing their loans.
b. reducing their loans.
c. increasing their dividends.
d. obtaining more deposits.

49. Terp Bank obtains a relatively large portion of its funds from conventional demand deposits as it creates many branches with many employees to attract demand deposits. Its interest expenses should be relatively ____, while its noninterest expenses should be relatively ____.
a. high; low
b. low; high
c. high; high
d. low; low
e. none of the above

50. Bank A has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Bank A’s net interest margin is
a. $1 million.
b. −$1 million.
c. −5 percent.
d. 5 percent.

51. ____ is not a method used to assess interest rate risk.
a. Efficiency analysis
b. Gap analysis
c. Duration analysis
d. Regression analysis

52. Durango Bank has $2 million in rate-sensitive liabilities and $3 million in rate sensitive assets. Durango’s gap is ____, and Durango is probably more concerned about a(n) ____ in interest rates.
a. −$1 million; increase
b. −$1 million; decrease
c. $1 million; increase
d. $1 million; decrease
e. none of the above

53. Leskar Bank has $2 million in rate-sensitive liabilities and $3 million in rate sensitive assets. Leskar’s gap ratio is ____.
a. 1.5
b. 0.67
c. $1 million
d. none of the above

54. ____ is (are) least likely to be used as a method of reducing interest rate risk.
a. Maturity matching
b. Using floating-rate loans
c. Stock options
d. Using interest rate swaps
e. Using interest rate caps

55. Ringo Bank has a profit after taxes of $3.0 million, total assets of $300 million, and shareholder’s equity of $30 million. Ringo’s return on equity (ROE) is ____ percent.
a. 1.0
b. 10.0
c. 3.0
d. none of the above

56. For a commercial bank, when the average duration of assets exceeds the average duration of liabilities, the duration gap is
a. zero.
b. positive.
c. negative.
d. B or C

57. Assume a bank accepts deposits on Australian dollars (A$) and makes some fixed-rate loans in British pounds. Which of the following would reduce the bank’s profit margin?
a. the A$ appreciates against the pound
b. the A$ is stable against the pound
c. the A$ depreciates against the pound
d. the British interest rates increase
e. C and D

58. The performance of a bank that continually concentrates in short-term deposits in euros and adjustable-rate dollar loans with equal rate-sensitivity is
a. unaffected if European interest rates increase and U.S. rates decrease.
b. unaffected if U.S. interest rates increase and European interest rates decrease.
c. adversely affected if European interest rates increase and U.S. rates decrease.
d. adversely affected if U.S. interest rates increase and European rates decrease.
e. A and B

59. If a bank has assets and liabilities in dollars and euros, its exposure to interest rate risk can best be minimized if the
a. currency mix of assets is similar to that of liabilities.
b. overall rate-sensitivity of assets and liabilities are similar.
c. rate sensitivity of assets and liabilities is matched for each currency.
d. A and B

60. The risk of a loss due to closing out a transaction is referred to as ____ risk.
a. credit
b. settlement
c. interest rate
d. exchange rate
e. none of the above

61. The Sarbanes-Oxley Act has had little impact on the monitoring conducted by the board members of commercial banks.
a. True
b. False

62. Whether a bank has a temporary or a permanent need for funds, the decision should be to borrow in the federal funds market.
a. True
b. False

63. A positive gap (or gap ratio of more than 1.00) suggests that rate-sensitive liabilities exceed rate-sensitive assets.
a. True
b. False

64. For most banks, the average duration of liabilities exceeds the average duration of assets, so the duration gap is positive.
a. True
b. False

65. Floating-rate loans completely eliminate interest rate risk.
a. True
b. False

66. A bank can usually simultaneously maximize its return on assets and minimize credit risk.
a. True
b. False

67. If the currency mix of a bank’s assets is similar to that of its liabilities and the overall rate sensitivity of its assets and liabilities is similar, interest rate risk is completely nonexistent.
a. True
b. False

68. Macon Bank has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Macon Bank’s net interest margin is
a. $1 million.
b. −1 million.
c. 5 percent.
d. −5 percent.

69. ____ is not a method used to assess interest rate risk.
a. Gap analysis
b. Ratio analysis
c. Duration analysis
d. Regression analysis
e. All of the above are methods to assess interest rate risk.

70. ____ is (are) least likely to be used as a method of reducing interest rate risk.
a. Maturity matching
b. Floating-rate loans
c. Stock options
d. Interest rate swaps
e. Interest rate caps

71. Crazer Bank has a profit after taxes of $2 million, total assets of $100 million, and shareholder’s equity of $10 million. Crazer’s return on equity (ROE) is ____ percent.
a. 18
b. 210
c. 15
d. 20
e. none of the above

72. Parsons Bank reported $3 million in interest revenues and $1 million in interest expenses. Parsons has $20 million in assets and $8 million in liabilities. Parsons net interest margin is ____ percent.
a. 10
b. −10
c. 35
d. 25
e. none of the above

73. If a bank expects interest rates to consistently ____ over time, it will consider allocating most of its funds to rate-____ assets.
a. decrease; sensitive
b. increase; insensitive
c. increase; sensitive
d. answers A and B are correct
e. none of the above

74. During a period of ____ interest rates, a bank’s net interest margin will likely ____ if its liabilities are more rate sensitive than its assets.
a. decreasing; decrease
b. increasing; increase
c. decreasing; increase
d. increasing; decrease
e. answers C and D are correct

75. If interest rates ____, banks with ____ duration gaps will be ____ affected.
a. rise; positive; positively
b. rise; positive; adversely
c. decrease; positive; adversely
d. decrease; negative; positively
e. none of the above

76. In a regression of a bank’s stock return on an interest rate proxy and market returns, a ____ coefficient for the interest rate variable suggests that bank performance is ____ affected by ____ interest rates.
a. positive; adversely; rising
b. positive; favorably; declining
c. negative; adversely; rising
d. negative; favorably; rising
e. none of the above

77. If a bank has a ____ duration gap, its average asset duration is probably ____ than its liability duration.
a. negative; smaller
b. positive; larger
c. negative; larger
d. none of the above

78. In an interest rate swap, a bank whose liabilities are ____ rate sensitive than its assets can swap payments with a ____ interest rate in exchange for payments with a ____ interest rate.
a. more; fixed; variable
b. more; variable; fixed
c. less; fixed; variable
d. less; fixed; fixed
e. none of the above

79. Because riskier assets offer ____ returns, a bank’s strategy to increase its return will typically entail a(n) ____ in the overall credit risk of its asset portfolio.
a. lower; increase
b. lower; decrease
c. higher; increase
d. higher; decrease
e. none of the above

80. The risk of a loss due to closing out a transaction is referred to as ____ risk.
a. settlement
b. credit
c. interest rate
d. exchange rate
e. none of the above

81. An effective way to align bank managers’ interests with shareholders’ goal of higher returns is to compensate the managers with fixed salaries without a bonus.
a. True
b. False

82. Which of the following is not a function of a bank’s board of directors?
a. overseeing acquisitions
b. determining a compensation system for the bank’s executives
c. overseeing policies for changing the bank’s capital structure
d. pursuing a proxy contest to change the bank’s dividend policy

83. As part of its liquidity management, a bank might:
a. purchase interest rate swaps.
b. issue commercial paper.
c. purchase long-term Treasury securities.
d. A and C

84. A(n) ____________ is an agreement for a fee to receive payments when the interest rate of a particular security rises above a specified level by a specified date.
a. interest rate cap
b. interest rate futures contract
c. interest rate swap
d. maximum rate contract

85. Which of the following is a method that a bank can use to reduce its credit risk?
a. diversifying its loans across industries
b. focusing on credit card loans
c. focusing on consumer loans
d. selling its holdings of Treasury securities

FIN 320 Week 9 Quiz – Strayer University New

FIN/320 Week 9 Quiz – Strayer

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Quiz 7 Chapter 17 and 18
Chapter 17: ___________________________________________________________________________
1. Today’s futures markets are dominated by trading in _______ contracts.

A. metals

B. agriculture

C. financial

D. commodity

2. A person with a long position in a commodity futures contract wants the price of the commodity to ______.

A. decrease substantially

B. increase substantially

C. remain unchanged

D. increase or decrease substantially

3. If an asset price declines, the investor with a _______ is exposed to the largest potential loss.

A. long call option

B. long put option

C. long futures contract

D. short futures contract

4. The clearing corporation has a net position equal to ______.

A. the open interest

B. the open interest times 2

C. the open interest divided by 2

D. zero

5. The S&P 500 Index futures contract is an example of a(n) ______ delivery contract. The pork bellies contract is an example of a(n) ______ delivery contract.

A. cash; cash

B. cash; actual

C. actual; cash

D. actual; actual

6. Which one of the following contracts requires no cash to change hands when initiated?

A. Listed put option

B. Short futures contract

C. Forward contract

D. Listed call option

7. Synthetic stock positions are commonly used by ______ because of their ______.

A. market timers; lower transaction cost

B. banks; lower risk

C. wealthy investors; tax treatment

D. money market funds; limited exposure

8. _____________ are likely to close their positions before the expiration date, while ____________ are likely to make or take delivery.

A. Investors; regulators

B. Hedgers; speculators

C. Speculators; hedgers

D. Regulators; investors

9. Futures contracts have many advantages over forward contracts except that _________.

A. futures positions are easier to trade

B. futures contracts are tailored to the specific needs of the investor

C. futures trading preserves the anonymity of the participants

D. counterparty credit risk is not a concern on futures

10. An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have _______.

A. an arbitrage

B. a cross-hedge

C. an over hedge

D. a spread hedge

11. The open interest on silver futures at a particular time is the number of __________.

A. all outstanding silver futures contracts

B. long and short silver futures positions counted separately on a particular trading day

C. silver futures contracts traded during the day

D. silver futures contracts traded the previous day

12. An investor who goes short in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset.

A. pay; pay

B. pay; receive

C. receive; pay

D. receive; receive

13. An investor who goes long in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset.

A. pay; pay

B. pay; receive

C. receive; pay

D. receive; receive

14. The advantage that standardization of futures contracts brings is that _____ is improved because ____________________.

A. liquidity; all traders must trade a small set of identical contracts

B. credit risk; all traders understand the risk of the contracts

C. pricing; convergence is more likely to take place with fewer contracts

D. trading cost; trading volume is reduced

15. The fact that the exchange is the counterparty to every futures contract issued is important because it eliminates _________ risk.

A. market

B. credit

C. interest rate

D. basis

16. In the futures market the short position’s loss is ___________ the long position’s gain.

A. greater than

B. less than

C. equal to

D. sometimes less than and sometimes greater than

17. A wheat farmer should __________ in order to reduce his exposure to risk associated with fluctuations in wheat prices.

A. sell wheat futures

B. buy wheat futures

C. buy a contract for delivery of wheat now and sell a contract for delivery of wheat at harvest time

D. sell wheat futures if the basis is currently positive and buy wheat futures if the basis is currently negative

18. Which of the following provides the profit to a long position at contract maturity?

A. Original futures price – Spot price at maturity

B. Spot price at maturity – Original futures price

C. Zero

D. Basis

19. You take a long position in a futures contract of one maturity and a short position in a contract of a different maturity, both on the same commodity. This is called a __________.

A. cross-hedge

B. reversing trade

C. spread position

D. straddle

20. Interest rate futures contracts exist for all of the following except __________.

A. federal funds

B. Eurodollars

C. banker’s acceptances

D. repurchase agreements

21. Initial margin is usually set in the region of ________ of the total value of a futures contract.

A. 5%-15%

B. 10%-20%

C. 15%-25%

D. 20%-30%

22. Margin must be posted by ________.

A. buyers of futures contracts only

B. sellers of futures contracts only

C. both buyers and sellers of futures contracts

D. speculators only

23. The daily settlement of obligations on futures positions is called _____________.

A. a margin call

B. marking to market

C. a variation margin check

D. the initial margin requirement

24. Which of the following provides the profit to a short position at contract maturity?

A. Original futures price – Spot price at maturity

B. Spot price at maturity – Original futures price

C. Zero

D. Basis

25. Margin requirements for futures contracts can be met by ______________.

A. cash only

B. cash or highly marketable securities such as Treasury bills

C. cash or any marketable securities

D. cash or warehouse receipts for an equivalent quantity of the underlying commodity

26. An established value below which a trader’s margin may not fall is called the ________.

A. daily limit

B. daily margin

C. maintenance margin

D. convergence limit

27. Which one of the following is a true statement?

A. A margin deposit can be met only by cash.

B. All futures contracts require the same margin deposit.

C. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract.

D. The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call.

28. At maturity of a futures contract, the spot price and futures price must be approximately the same because of __________.

A. marking to market

B. the convergence property

C. the open interest

D. the triple witching hour

29. A futures contract __________.

A. is a contract to be signed in the future by the buyer and the seller of a commodity

B. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract

C. is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract

D. gives the buyer the right, but not the obligation, to buy an asset some time in the future

30. Which one of the following exploits differences between actual future prices and their theoretically correct parity values?

A. Index arbitrage

B. Marking to market

C. Reversing trades

D. Settlement transactions

31. Which one of the following refers to the daily settlement of obligations on future positions?

A. Marking to market

B. The convergence property

C. The open interest

D. The triple witching hour

32. The most actively traded interest rate futures contract is for ___________.

A. LIBOR

B. Treasury bills

C. Eurodollars

D. Treasury bonds

33. The CME weather futures contract is an example of ______________.

A. a cash-settled contract

B. an agricultural contract

C. a financial future

D. a commodity future

34. Single stock futures, as opposed to stock index futures, are _______________.

A. not yet being offered by any exchanges

B. offered overseas but not in the United States

C. currently trading on One Chicago, a joint venture of several exchanges

D. scheduled to begin trading in 2015 on several exchanges

35. You are currently long in a futures contract. You instruct a broker to enter the short side of a futures contract to close your position. This is called __________.

A. a cross-hedge

B. a reversing trade

C. a speculation

D. marking to market

36. A company that mines bauxite, an aluminum ore, decides to short aluminum futures. This is an example of __________ to limit its risk.

A. cross-hedging

B. long hedging

C. spreading

D. speculating

37. Futures markets are regulated by the __________.

A. CFA Institute

B. CFTC

C. CIA

D. SEC

38. A hog farmer decides to sell hog futures. This is an example of __________ to limit risk.

A. cross-hedging

B. short hedging

C. spreading

D. speculating

39. On May 21, 2012, you could have purchased a futures contract from Intrade for a price of $5.70 that would pay you $10 if Barack Obama won the 2012 presidential election. This tells you _____.

A. that the market believed that Obama had a 57% chance of winning

B. that the market believed that Obama would not win the election

C. nothing about the market’s belief concerning the odds of Obama winning

D. that the market believed Obama’s chances of winning were about 43%

40. An investor would want to __________ to exploit an expected fall in interest rates.

A. sell S&P 500 Index futures

B. sell Treasury-bond futures

C. buy Treasury-bond futures

D. buy wheat futures

41. Forward contracts _________ traded on an organized exchange, and futures contracts __________ traded on an organized exchange.

A. are; are

B. are; are not

C. are not; are

D. are not; are not

42. If the S&P 500 Index futures contract is overpriced relative to the spot S&P 500 Index, you should __________.

A. buy all the stocks in the S&P 500 and write put options on the S&P 500 Index

B. sell all the stocks in the S&P 500 and buy call options on S&P 500 Index

C. sell S&P 500 Index futures and buy all the stocks in the S&P 500

D. sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

43. A long hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market.

A. long; long

B. long; short

C. short; long

D. short; short

44. Investors who take short positions in futures contract agree to ___________ delivery of the commodity on the delivery date, and those who take long positions agree to __________ delivery of the commodity.

A. make; make

B. make; take

C. take; make

D. take; take

45. An investor would want to __________ to hedge a long position in Treasury bonds.

A. buy interest rate futures

B. buy Treasury bonds in the spot market

C. sell interest rate futures

D. sell S&P 500 futures

46. Futures contracts are said to exhibit the property of convergence because _______________.

A. the profits from long positions and short positions must ultimately be equal

B. the profits from long positions and short positions must ultimately net to zero

C. price discrepancies would open arbitrage opportunities for investors who spot them

D. the futures price and spot price of any asset must ultimately net to zero

47. In the context of a futures contract, the basis is defined as ______________.

A. the futures price minus the spot price

B. the spot price minus the futures price

C. the futures price minus the initial margin

D. the profit on the futures contract

48. The __________ is among the world’s largest derivatives exchanges and operates a fully electronic trading and clearing platform.

A. CBOE

B. CBOT

C. CME

D. Eurex

49. Violation of the spot-futures parity relationship results in _______________.

A. fines and other penalties imposed by the SEC

B. arbitrage opportunities for investors who spot them

C. suspension of delivery privileges

D. suspension of trading

50. When dividend-paying assets are involved, the spot-futures parity relationship can be stated as _________________.

A. F1 = S0(1 + rf)

B. F0 = S0(1 + rf – d)T

C. F0 = S0(1 + rf + d)T

D. F0 = S0(1 + rf)T

51. An investor establishes a long position in a futures contract now (time 0) and holds the position until maturity (time T). The sum of all daily settlements will be __________.

A. F0 – FT

B. F0 – S0

C. FT – F0

D. FT – S0

52. A short hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market.

A. long; long

B. long; short

C. short; long

D. short; short

53. Approximately __________ of futures contracts result in actual delivery.

A. 0%

B. less than 1% to 3%

C. less than 5% to 15%

D. less than 60% to 80%

54. A long hedger will __________ from an increase in the basis; a short hedger will __________.

A. be hurt; be hurt

B. be hurt; profit

C. profit; be hurt

D. profit; profit

55. At year-end, taxes on a futures position _______________.

A. must be paid if the position has been closed out

B. must be paid if the position has not been closed out

C. must be paid regardless of whether the position has been closed out or not

D. need not be paid if the position supports a hedge

56. A speculator will often prefer to buy a futures contract rather than the underlying asset because:

I. Gains in futures contracts can be larger due to leverage.
II. Transaction costs in futures are typically lower than those in spot markets.
III. Futures markets are often more liquid than the markets of the underlying commodities.

A. I and II only

B. II and III only

C. I and III only

D. I, II, and III

57. On January 1, you sold one April S&P 500 Index futures contract at a futures price of 1,300. If the April futures price is 1,250 on February 1, your profit would be __________ if you close your position. (The contract multiplier is 250.)

A. -$12,500

B. -$15,000

C. $15,000

D. $12,500

58. The current level of the S&P 500 is 1,250. The dividend yield on the S&P 500 is 3%. The risk-free interest rate is 6%. The futures price quote for a contract on the S&P 500 due to expire 6 months from now should be __________.

A. 1,274.33

B. 1,286.95

C. 1,268.61

D. 1,291.29

59. The spot price for gold is $1,550 per ounce. The dividend yield on the S&P 500 is 2.5%. The risk-free interest rate is 3.5%. The futures price for gold for a 6-month contract on gold should be __________.

A. $1,504.99

B. $1,569.08

C. $1,554.04

D. $1,557.73

60. If you expect a stock market downturn, one potential defensive strategy would be to __________.

A. buy stock-index futures

B. sell stock-index futures

C. buy stock-index options

D. sell foreign exchange futures

61. At contract maturity the basis should equal ___________.

A. 1

B. 0

C. the risk-free interest rate

D. -1

62. You believe that the spread between the September T-bond contract and the June T-bond futures contract is too large and will soon correct. This market exhibits positive cost of carry for all contracts. To take advantage of this, you should ______________.

A. buy the September contract and sell the June contract

B. sell the September contract and buy the June contract

C. sell the September contract and sell the June contract

D. buy the September contract and buy the June contract

63. A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%.

The arbitrage profit implied by these prices is _____________.

A. $3.27

B. $4.39

C. $5.24

D. $6.72

64. A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%.

Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits?

A. Buy gold in the spot with borrowed money, and sell the futures contract.

B. Buy the futures contract, and sell the gold spot and invest the money earned.

C. Buy gold spot with borrowed money, and buy the futures contract.

D. Buy the futures contract, and buy the gold spot using borrowed money.

65. A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 1 year. If the T-bill rate is 5%, what should the futures price be?

A. $95.24

B. $100

C. $105

D. $107

66. A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 4 years. If the T-bill rate is 7%, what should the futures price be?

A. $76.29

B. $93.46

C. $107

D. $131.08

67. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract’s face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.

After Monday’s close the balance on your margin account will be ________.

A. $2,700

B. $2,000

C. $3,137.50

D. $2,262.50

68. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract’s face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.

At the close of day on Tuesday your cumulative rate of return on your investment is _____.

A. 16.2%

B. -5.8%

C. -.16%

D. -2.2%

69. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract’s face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.

On which of the given days do you get a margin call?

A. Monday

B. Tuesday

C. Wednesday

D. None of these options

70. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract’s face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.

The cumulative rate of return on your investment after Wednesday is a ____.

A. 79.9% loss

B. 2.6% loss

C. 33% gain

D. 53.9% loss

71. The volume of interest rate swaps increased from almost zero in 1980 to over __________ today.

A. $40 million

B. $400 million

C. $400 billion

D. $400 trillion

72. If the risk-free rate is greater than the dividend yield, then we know that _______________.

A. the futures price will be higher as contract maturity increases

B. F0 < S0 C. FT > ST

D. arbitrage profits are possible

73. Sahali Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 9%. Sahali Trading Company then enters into an interest rate swap where it will pay LIBOR and receive a fixed 8% on a notional principal of $100 million. After all these transactions are considered, Sahali’s cost of funds is __________.

A. 17%

B. LIBOR

C. LIBOR + 1%

D. LIBOR – 1%

74. Interest rate swaps involve the exchange of ________________.

A. actual fixed-rate bonds for actual floating-rate bonds

B. actual floating-rate bonds for actual fixed-rate bonds

C. net interest payments and an actual principal swap

D. net interest payments based on notional principal, but no exchange of principal

75. From the perspective of determining profit and loss, the long futures position most closely resembles a levered investment in a ____________.

A. long call

B. short call

C. short stock position

D. long stock position

76. The _________ contract dominates trading in stock-index futures.

A. S&P 500

B. DJIA

C. Nasdaq 100

D. Russell 2000

77. The ________ and the _______ have the lowest correlations with the large-cap indexes.

A. Nasdaq Composite; Russell 2000

B. NYSE; DJIA

C. S&P 500; DJIA

D. Russell 2000; S&P 500

78. The use of leverage is practiced in the futures markets due to the existence of _________.

A. banks

B. brokers

C. clearinghouses

D. margin

79. You purchase an interest rate futures contract that has an initial margin requirement of 15% and a futures price of $115,098. The contract has a $100,000 underlying par value bond. If the futures price falls to $108,000, you will experience a ______ loss on your money invested.

A. 31%

B. 41%

C. 52%

D. 64%

80. You own a $15 million bond portfolio with a modified duration of 11 years. Interest rates are expected to increase by 5 basis points, or .05%. What is the price value of a basis point?

A. $10,400

B. $14,300

C. $16,500

D. $21,300

81. The price of a corn futures contract is $2.65 per bushel when the contract is issued, and the commodity spot price is $2.55. When the contract expires, the two prices are identical. What principle is represented by this price behavior?

A. Convergence

B. Margin

C. Basis

D. Volatility

82. A corporation will be issuing bonds in 6 months, and the treasurer is concerned about unfavorable interest rate moves in the interim. The best way for her to hedge the risk is to _________________.

A. buy T-bond futures

B. sell T-bond futures

C. buy stock-index futures

D. sell stock-index futures

83. A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn.

What are the farmer’s proceeds from the sale of corn?

A. $27,500

B. $31,875

C. $33,875

D. $35,950

84. A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn.

Ignoring the transaction costs, how much did the farmer improve his cash flow by hedging sales with the futures contracts?

A. $0

B. $2,000

C. $31,875

D. $33,875

85. A bank has made long-term fixed-rate mortgages and has financed them with short-term deposits. To hedge out its interest rate risk, the bank could ________.

A. sell T-bond futures

B. buy T-bond futures

C. buy stock-index futures

D. sell stock-index futures

86. A market timer now believes that the economy will soften over the rest of the year as the housing market slump continues, and she also believes that foreign investors will stop buying U.S. fixed-income securities in the large quantities that they have in the past. One way the timer could take advantage of this forecast is to ________________.

A. buy T-bond futures and sell stock-index futures

B. sell T-bond futures and buy stock-index futures

C. buy stock-index futures and buy T-bond futures

D. sell stock-index futures and sell T-bond futures

87. The Student Loan Marketing Association (SLMA) has short-term student loans funded by long-term debt. To hedge out this interest rate risk, SLMA could:

I. Engage in a swap to pay fixed and receive variable interest payments
II. Engage in a swap to pay variable and receive fixed interest payments
III. Buy T-bond futures
IV. Sell T-bond futures

A. I and II only

B. I and IV only

C. II and III only

D. II and IV only

Chapter 18: ___________________________________________________________________________
1. A mutual fund with a beta of 1.1 has outperformed the S&P 500 over the last 20 years. We know that this mutual fund manager _____.

A. must have had superior stock selection ability.

B. must have had superior asset allocation ability.

C. must have had superior timing ability.

D. may or may not have outperformed the S&P 500 on a risk-adjusted basis.

2. The comparison universe is __________.

A. the bogey portfolio

B. a set of mutual funds with similar risk characteristics to your mutual fund

C. the set of all mutual funds in the United States

D. the set of all mutual funds in the world

3. Which one of the following performance measures is the Sharpe ratio?

A. Average excess return to beta ratio

B. Average excess return to standard deviation ratio

C. Alpha to standard deviation of residuals ratio

D. Average return minus required return

4. The M2 measure is a variant of ________________.

A. the Sharpe measure

B. the Treynor measure

C. Jensen’s alpha

D. the appraisal ratio

5. A managed portfolio has a standard deviation equal to 22% and a beta of .9 when the market portfolio’s standard deviation is 26%. The adjusted portfolio P* needed to calculate the M2 measure will have ________ invested in the managed portfolio and the rest in T-bills.

A. 84.6%

B. 118%

C. 18%

D. 15.4%

6. Your return will generally be higher using the __________ if you time your transactions poorly, and your return will generally be higher using the __________ if you time your transactions well.

A. dollar-weighted return method; dollar-weighted return method

B. dollar-weighted return method; time-weighted return method

C. time-weighted return method; dollar-weighted return method

D. time-weighted return method; time-weighted return method

7. Consider the Sharpe and Treynor performance measures. When a pension fund is large and well diversified in total and it has many managers, the __________ measure is better for evaluating individual managers while the __________ measure is better for evaluating the manager of a small fund with only one manager responsible for all investments, which may not be fully diversified.

A. Sharpe; Sharpe

B. Sharpe; Treynor

C. Treynor; Sharpe

D. Treynor; Treynor

8. Consider the theory of active portfolio management. Stocks A and B have the same beta and the same positive alpha. Stock A has higher nonsystematic risk than stock B. You should want __________ in your active portfolio.

A. equal proportions of stocks A and B

B. more of stock A than stock B

C. more of stock B than stock A

D. The answer cannot be determined from the information given.

9. Suppose that over the same time period two portfolios have the same average return and the same standard deviation of return, but portfolio A has a higher beta than portfolio B. According to the Sharpe ratio, the performance of portfolio A __________.

A. is better than the performance of portfolio B

B. is the same as the performance of portfolio B

C. is poorer than the performance of portfolio B

D. cannot be measured since there is no data on the alpha of the portfolio

10. Which model is preferred by academics, and is gaining in popularity with practitioners, when evaluating investment performance?

A. The Treynor-Black model

B. The single-index model

C. The Fama-French three-factor model

D. The Sharpe model

11. The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below.

What is the Treynor measure for portfolio A?

A. 12.38%

B. 2.38%

C. .91%

D. 3.64%

12. The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below.

What is the M2 measure for portfolio B?

A. .43%

B. 1.25%

C. 1.77%

D. 1.43%

13. The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below.

If these portfolios are subcomponents that make up part of a well-diversified portfolio, then portfolio ______ is preferred.

A. A

B. B

C. C

D. S&P 500

14. The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below.

Based on the M2 measure, portfolio C has a superior return of _____ as compared to the S&P 500.

A. -1.33%

B. 1.43%

C. 2%

D. 0%

15. Which one of the following is largely based on forecasts of macroeconomic factors?

A. Security selection

B. Passive investing

C. Market efficiency

D. Market timing

16. Based on the example used in the book, a perfect market timer would have made _______ by 2008 on a $1 investment made in 1926.

A. $100

B. $1,626

C. $1.5 million

D. $36.7 billion

17. The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%.

You want to evaluate the three mutual funds using the Sharpe ratio for performance evaluation. The fund with the highest Sharpe ratio of performance is __________.

A. fund A

B. fund B

C. fund C

D. The answer cannot be determined from the information given.

18. The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%.

You want to evaluate the three mutual funds using the Treynor measure for performance evaluation. The fund with the highest Treynor measure of performance is __________.

A. fund A

B. fund B

C. fund C

D. The answer cannot be determined from the information given.

19. The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%.

You want to evaluate the three mutual funds using the Jensen measure for performance evaluation. The fund with the highest Jensen measure of performance is __________.

A. fund A

B. fund B

C. fund C

D. S&P 500

20. In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The total excess return on the managed portfolio was __________.

A. 2%

B. 3%

C. 4%

D. 5%

21. In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The contribution of asset allocation across markets to the total excess return was __________.

A. 1.5%

B. 2%

C. 2.5%

D. 3.5%

22. In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The contribution of security selection within asset classes to the total excess return was __________.

A. 1.5%

B. 2%

C. 2.5%

D. 3.5%

23. In a particular year, Lost Hope Mutual Fund made the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The total extra return on the managed portfolio was __________.

A. 1%

B. 2%

C. 3%

D. 4%

24. In a particular year, Lost Hope Mutual Fund made the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The contribution of asset allocation across markets to the total extra return was __________.

A. -1%

B. 0%

C. 1%

D. 2%

25. In a particular year, Lost Hope Mutual Fund made the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The contribution of security selection within asset classes to the total extra return was __________.

A. -1%

B. 0%

C. 1%

D. 2%

26. Which one of the following averaging methods is the preferred method of constructing returns series for use in evaluating portfolio performance?

A. Geometric average

B. Arithmetic average

C. Dollar weighted

D. Internal

27. The __________ calculates the reward to risk trade-off by dividing the average portfolio excess return by the portfolio beta.

A. Sharpe ratio

B. Treynor measure

C. Jensen measure

D. appraisal ratio

28. 28. In creating the P* portfolio, one mixes the original portfolio P and T-bills to match the _________ of the market.

A. alpha

B. beta

C. excess return

D. standard deviation

29. The M2 measure of portfolio performance was developed by ______________.

A. Modigliani and Miller

B. Modigliani and Modigliani

C. Merton and Miller

D. Fama and French

30. Probably the biggest problem with evaluating the portfolio performance of actively managed funds is the assumption that __________________________.

A. the markets are efficient

B. portfolio risk is constant over time

C. diversification pays off

D. security selection is more valuable than asset allocation

31. Perfect-timing ability is equivalent to having __________ on the market portfolio.

A. a call option

B. a futures contract

C. a put option

D. a forward contract

32. One hundred fund managers enter a contest to see how many times in 13 years they can earn a higher return than their competitors. The probability distribution of the number of successful years out of 13 for the best-performing money managers is

Out of this sample, chance alone would indicate that there is a ______ probability that someone would beat the market at least 11 times out of 13 years.

A. 51.3%

B. 65.9%

C. 67.1%

D. 10.83%

33. The Treynor-Black model is a model that shows how an investment manager can use security analysis and statistics to construct __________.

A. a market portfolio

B. a passive portfolio

C. an active portfolio

D. an index portfolio

34. If an investor is a successful market timer, his distribution of monthly portfolio returns will __________.

A. be skewed to the left

B. be skewed to the right

C. exhibit kurtosis

D. exhibit neither skewness nor kurtosis

35. Recent analysis indicates that the style of investing is a critical component of fund performance. In fact, on average about _____ of fund performance is attributable to the asset allocation decision.

A. 68%

B. 74%

C. 88%

D. 97%

36. In the Treynor-Black model, the active portfolio will contain stocks with __________.

A. alphas equal to zero

B. negative alphas

C. positive alphas

D. some negative and some positive alphas

37. Portfolio performance is often decomposed into various subcomponents, such as the return due to:

I. Broad asset allocation across security classes
II. Sector weightings within equity markets
III. Security selection with a given sector

The one decision that contributes most to the fund performance is _____.

A. I

B. II

C. III

D. All contribute equally to fund performance.

38. The theory of efficient frontiers has __________.

A. no adherents among practitioners

B. a small number of adherents among practitioners

C. a significant number of adherents among practitioners

D. complete support by practitioners

39. In the Treynor-Black model, security analysts __________.

A. analyze a relatively small number of stocks

B. analyze all stocks that are publicly traded

C. are redundant

D. devote their attention to market timing rather than fundamental analysis

40. In the Treynor-Black model, security analysts __________.

A. analyze the entire universe of stocks

B. assume that markets are inefficient

C. treat market index as a baseline portfolio from which an active portfolio is constructed

D. focus on selecting the best-performing bogey

41. Active portfolio management consists of:

I. Market timing
II. Security selection
III. Sector selection within given markets
IV. Indexing

A. I and II only

B. II and III only

C. I, II, and III only

D. I, II, III, and IV

42. A market-timing strategy is one in which asset allocation in the stock market __________ when one forecasts that the stock market will outperform Treasury bills.

A. decreases

B. increases

C. remains the same

D. may increase or decrease

43. In the Treynor-Black model, the contribution of individual security to the active portfolio should be based primarily on the stock’s _________.

A. alpha

B. beta

C. residual variance

D. information ratio

44. If all ______ are ______ in the Treynor-Black model, there would be no reason to depart from the passive portfolio.

A. alphas; zero

B. alphas; positive

C. betas; positive

D. standard deviations; positive

45. In the Treynor-Black model, the weight of each analyzed security in the portfolio should be proportional to its __________.

A. alpha/beta

B. alpha/residual variance

C. beta/residual variance

D. none of these options

46. The critical variable in the determination of the success of the active portfolio is the stock’s __________.

A. alpha/nonsystematic risk ratio

B. alpha/systematic risk ratio

C. delta/nonsystematic risk ratio

D. delta/systematic risk ratio

47. Consider the theory of active portfolio management. Stocks A and B have the same positive alpha and the same nonsystematic risk. Stock A has a higher beta than stock B. You should want __________ in your active portfolio.

A. equal proportions of stocks A and B

B. more of stock A than stock B

C. more of stock B than stock A

D. The answer cannot be determined from the information given.

48. Consider the theory of active portfolio management. Stocks A and B have the same beta and nonsystematic risk. Stock A has a higher positive alpha than stock B. You should want __________ in your active portfolio.

A. equal proportions of stocks A and B

B. more of stock A than stock B

C. more of stock B than stock A

D. The answer cannot be determined from the information given.

49. The market-timing form of active portfolio management relies on __________ forecasting, and the security selection form of active portfolio management relies on __________ forecasting.

A. macroeconomic; macroeconomic

B. macroeconomic; microeconomic

C. microeconomic; macroeconomic

D. microeconomic; microeconomic

50. Active portfolio managers try to construct a risky portfolio with _______.

A. a higher Sharpe ratio than a passive strategy

B. a lower Sharpe ratio than a passive strategy

C. the same Sharpe ratio as a passive strategy

D. very few securities

51. In performance measurement, the bogey portfolio is designed to _________.

A. measure the returns to a completely passive strategy

B. measure the returns to a similar active strategy

C. measure the returns to a given investment style

D. equal the return on the S&P 500

52. __________ portfolio managers experience streaks of abnormal returns that are hard to label as lucky outcomes, and _________ anomalies in realized returns have been sufficiently persistent that portfolio managers could use them to beat a passive strategy over prolonged periods.

A. No; no

B. No; some

C. Some; no

D. Some; some

53. A passive benchmark portfolio is:

I. A portfolio in which the asset allocation across broad asset classes is neutral and not determined by forecasts of performance of the different asset classes
II. One in which an indexed portfolio is held within each asset class
III. Often called the bogey

A. I only

B. I and III only

C. II and III only

D. I, II, and III

54. The correct measure of timing ability is ____________ for a portfolio manager who correctly forecasts 55% of bull markets and 55% of bear markets.

A. -5%

B. 5%

C. 10%

D. 95%

55. It is very hard to statistically verify abnormal fund performance because of all of the following except which one?

A. Inevitably, some fund managers experience streaks of good performance that may just be due to luck.

B. The noise in realized rates of return is so large as to make it hard to identify abnormal performance in competitive markets.

C. Portfolio composition is rarely stable long enough to identify abnormal performance.

D. Even if successful, there is really not much value to be added by active strategies such as market timing.

56. The term alpha transport refers to _____.

A. establishing alpha and then using index products to hedge market exposure and reduce exposure to particular sectors.

B. establishing alpha and then using sector mutual funds to hedge market exposure and reduce exposure to the general market.

C. establishing alpha and then using sector mutual funds to hedge market exposure and gain exposure to the general market.

D. establishing alpha and then using index products to hedge market exposure and gain exposure to particular sectors.

57. Portfolio managers Martin and Krueger each manage $1 million funds. Martin has perfect foresight, and the call option value of his perfect foresight is $150,000. Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The correct measure of timing ability for Krueger is __________.

A. 20%

B. 60%

C. 75%

D. 120%

58. Portfolio managers Martin and Krueger each manage $1 million funds. Martin has perfect foresight, and the call option value of his perfect foresight is $150,000. Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The value of Krueger’s imperfect forecasting ability is __________.

A. $30,000

B. $67,500

C. $108,750

D. $217,500

59. Douglass, an imperfect forecaster, correctly predicts 57% of all bull markets and 68% of all bear markets. Simmonds is a perfect forecaster. If Douglass is able to charge a fee of $125,000, the fee that Roy Simmonds should charge is __________. Assume that both forecasters manage similar-size funds.

A. $31,250

B. $200,000

C. $500,000

D. $625,000

60. A mutual fund invests in large-capitalization stocks. Its performance should be measured against which one of the following?

A. Russell 2000 Index

B. S&P 500 Index

C. Wilshire 5000 Index

D. Dow Jones Industrial Average

61. Assume you purchased a rental property for $100,000 and sold it 1 year later for $115,000 (there was no mortgage on the property). At the time of the sale, you paid $3,000 in commissions and $1,000 in taxes. If you received $10,000 in rental income (all received at the end of the year), what annual rate of return did you earn?

A. 6%

B. 11%

C. 21%

D. 25%

62. The table presents the actual return of each sector of the manager’s portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4.

What was the manager’s return in the month?

A. 2.07%

B. 2.21%

C. 2.24%

D. 4.8%

63. The table presents the actual return of each sector of the manager’s portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4.

What was the bogey’s return in the month?

A. 2.07%

B. 2.21%

C. 2.24%

D. 4.8%

64. The table presents the actual return of each sector of the manager’s portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4.

What was the manager’s over- or underperformance for the month?

A. Underperformance = .03%

B. Overperformance = .03%

C. Overperformance = .14%

D. Underperformance = 3%

65. The table presents the actual return of each sector of the manager’s portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4.

What is the contribution of security selection to relative performance?

A. -.15%

B. .15%

C. -.3%

D. .3%

66. The table presents the actual return of each sector of the manager’s portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4.

What is the contribution of asset allocation to relative performance?

A. -.18%

B. .18%

C. -.15%

D. .15%

67. Morningstar’s RAR produce results that are similar but not identical to ________.

A. Jensen’s alpha

B. M2

C. the Treynor ratio

D. the Sharpe ratio

68. The Treynor-Black model assumes that security markets are _________.

A. completely efficient

B. nearly efficient

C. very inefficient

D. random walks

69. The information ratio is equal to the stock’s ____ divided by its ______.

A. diversifiable risk; beta

B. beta; alpha

C. alpha; beta

D. alpha; diversifiable risk

70. Empirical tests to date show ______________.

A. that many investors have earned large rewards by market timing

B. little evidence of market-timing ability

C. clear-cut evidence of substantial market-timing ability

D. evidence that absolutely no market-timing ability exists

71. A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the M2 measure of the portfolio if the risk-free rate is 5%?

A. .58%

B. .68%

C. .78%

D. .88%

72. A portfolio generates an annual return of 17%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the M2 measure of the portfolio if the risk-free rate is 4%?

A. 2.15%

B. 2.76%

C. 2.94%

D. 3.14%

73. A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the Treynor measure of the portfolio if the risk-free rate is 5%?

A. .1143

B. .1233

C. .1354

D. .1477

74. A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the Treynor measure of the portfolio if the risk-free rate is 6%?

A. .0833

B. .1083

C. .1114

D. .1163

75. A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the Sharpe measure of the portfolio if the risk-free rate is 5%?

A. .3978

B. .4158

C. .4563

D. .4706

76. A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the Sharpe ratio of the portfolio if the risk-free rate is 6%?

A. .4757

B. .5263

C. .6842

D. .7252

77. A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is Jensen’s alpha of the portfolio if the risk-free rate is 5%?

A. .017

B. .034

C. .067

D. .078

78. A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is Jensen’s alpha of the portfolio if the risk-free rate is 6%?

A. .017

B. .028

C. .036

D. .078

79. The portfolio that contains the benchmark asset allocation against which a manager will be measured is often called _____________.

A. the bogey portfolio

B. the Vanguard Index

C. Jensen’s alpha

D. the Treynor measure

80. An attribution analysis will not likely contain which of the following components?

A. Asset allocation

B. Index returns

C. Risk-free returns

D. Security selection

81. Which of the following investment strategies would have produced the highest returns in the time period since 1926?

A. T-bills portfolio

B. S&P 500 Index fund

C. Perfect market timing

D. Random stock selection

82. What phrase might be used as a substitute for the Treynor-Black model developed in 1973?

A. Solely active management

B. Enhanced index approach

C. Passive management

D. Random selection

83. What is the term for the process used to assess portfolio manager performance?

A. Active analysis

B. Attribution analysis

C. Passive analysis

D. Treynor-Black Analysis

84. A fund has excess performance of 1.5%. In looking at the fund’s investment breakdown, you see that the fund overweighted equities relative to the benchmark and that the average return on the fund’s equity portfolio was slightly lower than the equity benchmark return. The excess performance for this fund is probably due to _______________.

A. security selection ability

B. better sector weightings in the equity portfolio

C. the asset allocation decision

D. finding securities with positive alphas

85. For a market timer, the _____________ will be higher when RM is higher.

A. portfolio’s alpha and beta

B. portfolio’s unsystematic risk

C. portfolio’s beta and slope of the characteristic line

D. security selection component of the portfolio

86. The Treynor-Black model combines an actively managed portfolio with an efficiently diversified portfolio in order to:

I. Improve the diversification of the overall portfolio
II. Improve the overall portfolio’s Sharpe ratio
III. Reach a higher CAL than would otherwise be possible

A. I only

B. I and II only

C. II and III only

D. I, II, and III

ECO 450 Week 9 Quiz – Strayer University New

ECO/450 Week 9 Quiz – Strayer

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Quiz 7 Chapter 13 and 14

CHAPTER 13
The Theory of Income Taxation
TRUE/FALSE QUESTIONS
1. The actual federal income tax currently taxes all income irrespective of its source or use at the same tax rate.
2. Comprehensive income excludes unrealized capital gains.
3. Under a comprehensive income tax, transfer payments received by Social Security recipients would be fully taxable.
4. Homeowners earn rental income-in-kind from their home that would be taxable under a compre¬hensive income tax.
5. A comprehensive income tax is a lump-sum tax.
6. A comprehensive income tax will result in a divergence between gross wages paid by employers and net wages received by workers.
7. A comprehensive income tax will always reduce work effort by taxpayers.
8. The substitution effect of a tax-induced decline in wages always leads workers to work less.
9. The market wage elasticity of labor is zero. If this is the case, the excess burden of a tax on labor income will also be zero.
10. Points on a compensated labor supply curve are always more elastic than points for corresponding wage levels on a regular labor supply curve.
11. Comprehensive income is the sum of annual consumption and the change in net worth.
12. A tax on interest income does not prevent credit market from efficiently allocating resources.
13. If an individual is subject to a 30-percent income tax, then the net interest on a certificate of deposit yielding 5 percent would be 3.5 percent after taxes.
14. Because a tax on interest income results in income and substitution effects, it is not possible to pre¬dict the effect it will have on saving.
15. Most empirical studies indicate that the interest elasticity of supply of savings is close to zero.
16. Income tax became a permanent fixture in the United States starting in the early nineteenth century.
17. The Haig-Simons definition of income is different from comprehensive income.
18. Comprehensive income equals consumption plus the change in net worth.
MULTIPLE CHOICE QUESTIONS
1. Comprehensive income:
a. is the sum of annual consumption and realized capital gains.
b. is the sum of annual consumption and changes in net worth.
c. excludes corporation income.
d. is the sum of annual consumption and net worth.
2. A tax on labor income:
a. results only in an income effect that always decreases hours worked per year.
b. results in a substitution effect that always decreases hours worked per year.
c. results in an income effect that increases hours worked per year if leisure is a normal good.
d. both (a) and (b)
e. both (b) and (c)
3. The market supply of labor is perfectly inelastic. Then it follows that:
a. the substitution effect of wage changes is zero.
b. the income effect of wage changes is zero.
c. leisure is a normal good and the income effect of wage changes exactly offsets the substitution effect.
d. the excess burden of a tax on labor income will be zero.
4. The compensated labor supply curve:
a. will always be vertical.
b. will always be upward sloping.
c. will always be downward sloping.
d. reflects both the income and substitution effects of wage changes.
5. Using a regular labor supply curve instead of a compensated supply curve to calculate the excess burden of a tax on labor income will:
a. result in an accurate estimate of the excess burden.
b. overestimate the excess burden.
c. underestimate the excess burden.
d. accurately estimate the excess burden only if the market supply of labor is perfectly inelastic.
6. Most empirical research indicates that the market supply curve of labor hours by prime-age males is:
a. very elastic.
b. almost perfectly inelastic.
c. always upward sloping.
d. perfectly elastic.
7. A flat-rate tax on labor income will:
a. always reduce hours worked per year.
b. always increase hours worked per year.
c. either increase or decrease hours worked per year.
d. never have any effect on the amount of leisure hours per year.
8. A tax on interest income:
a. causes the gross interest rate paid by investors to exceed the net interest rate received by savers.
b. will always reduce saving.
c. will always increase saving.
d. is equivalent to a lump-sum tax.
9. If the market supply curve of savings is upward sloping, a tax on interest income will:
a. increase the amount of saving.
b. increase the market rate of interest.
c. decrease the market rate of interest.
d. have no effect on the market rate of interest.
10. If the supply of labor is perfectly inelastic, then the incidence of a payroll tax levied entirely on employers will be:
a. borne by employers as a reduction in profits.
b. split between workers and employers.
c. paid entirely by workers.
d. shifted forward to consumers.
11. Which of the following is true about comprehensive income?
a. Only labor income is included.
b. Only capital income is included.
c. Capital gains are not included.
d. Both realized and unrealized capital gains are included.
12. Which of the following will increase a person’s comprehensive income?
a. an increase in the market value of the person’s home
b. a decrease in the value of the person’s stock portfolio
c. a decrease in labor income
d. a decrease in consumption
13. A tax on labor income will:
a. increase the net wage received by workers.
b. decrease the net wage received by workers.
c. cause that net wage received by workers to decline below the gross wage paid by employers.
d. both (b) and (c)
14. If the return to savings, r, is subject to taxation at rate t, then in equilibrium a saver’s marginal rate of time preference will equal:
a. r
b. t
c. (1 + r)
d. [1 + r(1 – t)]
15. The higher the compensated elasticity of supply of savings,
a. the lower the excess burden of a tax on capital income.
b. the higher the excess burden of a tax on capital income.
c. the higher the excess burden of a tax on labor income.
d. both (b) and (c)
16. The Haig-Simons definition of income:
a. is the sum of annual consumption and realized capital gains.
b. is the sum of annual consumption and changes in net worth.
c. excludes corporation income.
d. is the sum of annual consumption and net worth.
17 Comprehensive income:
a. includes realized capital gains, but not unrealized capital gains
b. includes both realized and unrealized capital gains.
c. excludes cash from the sale of assets.
d. excludes increases in the value of assets.
18. Income-in-kind:
a. is exemplified by nonpecuniary returns.
b. is generally non-taxable because there is no monetary transaction.
c. is generally taxable.
d. both (a) and (b).
19. An example of a nonpecuniary return is:
a. job satisfaction.
b. unemployment benefits.
c. employer contributions to a retirement plan.
d. both (b) and (c).

20. Income from labor services (wages) account for what percentage of gross income in the U.S.?
a. 90%
b. 75%
c. 60%
d. 50%

CHAPTER 14
Taxation of Personal Income
in the United States
TRUE/FALSE QUESTIONS
1. Taxable income in the United States exceeds adjusted gross income.
2. Taxable income in the United States includes all capital gains earned, whether or not they are realized.
3. Taxable income in the United States amounts to less than 50 percent of personal income.
4. Tax preferences are really subsidies to certain activities.
5. A tax deduction allowed for an activity for which positive externalities are not likely to exist (such as home ownership) is likely to cause the marginal social cost of the activity to exceed its marginal social benefit.
6. The value of a personal exemption to a taxpayer varies with his or her marginal tax rate.
7. The U.S. personal income tax is not a progressive tax.
8. The highest statutory marginal tax rate under the federal personal income tax is 50 percent.
9. Under current rules, only real interest earned is subject to income tax.
10. Realized, long-term capital gains that reflect inflation are currently exempt from taxation.
11. The tax base under the personal income tax in the United States is the Haig-Simons definition of comprehensive income.
12. Tax credits vary with a person’s marginal tax rate.
13. The cuts in marginal tax rates initiated in 2001 are likely to reduce the excess burden of tax pref¬erences.
14. The earned income tax credit is a negative tax the subsidizes the earnings of low-income workers.
15. If a progressive income tax is replaced with an equal-yield, flat-rate tax, then work effort will unequivocally increase.
16. As of 2009, there is no marriage penalty for an adjusted gross income of $60,000.
17. Tax preferences are exclusions, exemptions, and deductions from the tax base.
18. Income-in-kind is not considered a tax preference.
MULTIPLE CHOICE QUESTIONS
1. Adjusted gross income, as defined by the United States Tax Code,
a. exceeds taxable income.
b. equals taxable income.
c. is less than taxable income.
d. is greater than comprehensive income.
2. Tax preferences:
a. are exclusions, exemptions, and deductions from the tax base.
b. are in the tax code by accident.
c. are extra taxes on certain taxpayers.
d. increase the amount of income that is taxable.
e. both (a) and (d)
3. Currently, the tax treatment of capital gains in the United States is such that:
a. all capital gains are taxed.
b. all realized capital gains are taxed.
c. most realized capital gains are taxed.
d. only capital gains adjusted for inflation are taxed.
4. The exclusion of interest of state and local bonds from taxation by the federal government:
a. decreases interest costs for state and local governments.
b. increases interest costs for state and local governments.
c. benefits lower-income taxpayers more than upper-income taxpayers.
d. discourages borrowing by local governments.
5. The value of personal exemptions in terms of taxes saved:
a. is the same for all taxpayers.
b. varies with family size.
c. varies with taxpayers’ marginal tax rates.
d. both (b) and (c)
6. A taxpayer is in a 33-percent tax bracket and itemizes deductions. He obtains a mortgage from a bank at 9-percent interest. The actual rate of interest he pays is:
a. 6 percent.
b. 9 percent.
c. 20 percent.
d. 25 percent.
7. Tax expenditures are:
a. expenditures made to collect taxes.
b. losses in revenue due to tax preferences.
c. less than 1 percent of tax revenue.
d. both (b) and (c)
8. Under the federal personal income tax rules prevailing as of 2009,
a. all interest expense is tax deductible.
b. the interest expense for mortgages on first and second homes is tax deductible.
c. the interest expense for mortgages only on first homes is tax deductible.
d. no interest is tax deductible.
9. The reduction in marginal tax rates will:
a. increase the excess burden of tax preferences.
b. increase tax expenditures.
c. decrease the excess burden of tax preferences.
d. have no effect of tax expenditures.
10. “Bracket creep” is no longer a problem in the United States because:
a. the tax brackets are indexed.
b. capital gains are now fully taxable.
c. only real interest is taxed.
d. capital gains are indexed.
11. Which of the following is true for the federal income tax in the United States?
a. All income irrespective of its source or use is taxed at the same rate.
b. Comprehensive income is the tax base.
c. The tax base is less than 50 percent of comprehensive income.
d. All realized and unrealized capital gains are included in the tax base.
12. Because of the Earned Income Tax Credit, the effective tax rate for the lowest-income taxpayers in the United States is:
a. only 15 percent.
b. higher than that paid by upper-income taxpayers.
c. zero.
d. negative.
13. The excess burden of tax preferences:
a. depends on average tax rates.
b. will be higher, the higher the marginal tax rate is.
c. will be lower, the higher the marginal tax rate is.
d. is independent of marginal tax rates.
14. A shift to an equal-yield, flat-rate personal income tax from the current progressive income tax rate structure will:
a. reduce the tax burden on upper-income groups.
b. increase the tax burden on upper-income groups.
c. increase the share of taxes paid by lower-income groups.
d. both (a) and (c)
15. Removing savings from the tax base of the personal income tax is likely to:
a. increase work effort.
b. decrease work effort.
c. lower market equilibrium interest rates by increasing the supply of loanable funds.
d. increase market equilibrium interest rates, thereby increasing the demand for loanable funds.
16. Which is a justification for tax preferences?
a. administrative difficulties
b. improving equity
c. encouraging private expenditures that create external benefits
d. all of the above
17. If the excess burden from tax is $10 million, lowering marginal tax rates should make the excess burden:
a. more than $10 million.
b. less than $10 million.
c. remain at $10 million.
d. none of the above is certain to occur
18. Which of the following is the result of The Economic Growth and Tax Relief Reconciliation Act enacted in 2001?
a. reduction of the highest marginal tax rate
b. increased the marriage penalty
c. created a new 40% tax bracket
d. both (a) and (c)
19. As of 2009, the highest marginal tax rate is:
a. 39.6%
b. 38%
c. 35%
d. 32.5%
20. Which is an example of an itemized deduction under the U.S. code as of 2009?
a. state and local income tax
b. state and local property tax
c. all medical expenses
d. both (a) and (b)