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77 Cards in this Set
- Front
- Back
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Two characteristics that make owning stock attractive are:
A. Unlimited liability and first claim on assets B. Share prices are relatively inexpensive and are transferable C. Each share represents a large percentage of ownership and dividends are fixed D. Dividends are paid before any other distributions are made and stocks are transferable |
B. Share prices are relatively inexpensive and are transferable
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The fact that common stockholders are residual claimants means
A. The stockholders have a claim against the revenue that remains after everyone else is paid. B. The stockholders receive their dividends before any other residuals are paid C. The stockholders are paid any past due dividends before other claims are paid D. The stockholders are paid before the bondholders but after any taxes are paid |
A. The stockholders have a claim against the revenue that remains after everyone else is paid.
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The concept of limited liability says a stockholder of a corporation:
A. Is liable for the corporation's liabilities, but nothing more B. Cannot receive dividends that exceed his/her investment C. Cannot lose more than his/her investment D. Is only responsible for any taxes that the corporation may owe but not its other debts |
C. Cannot lose more than his/her investment
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If a public corporation goes bankrupt and does not have enough assets to pay off all creditors:
A. The stockholders are personally liable for the balance B. The fact that stockholders are residual claimants means they may have to pay in additional capital to cover the obligations C. The stockholders receive any dividends due before the other creditors are paid D. The stockholders cannot lose more than their investment |
D. The stockholders cannot lose more than their investment
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A share of stock resembles a consol in all of the following ways except that:
A. The share of stock does not have a maturity date B. The annual dividend the stock pays resembles the coupon on a consol C. The prices of both can be computed using a variation of the net present value formula D. They are both residual claims |
D. They are both residual claims
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People differ on the method by which stock should be valued. Some people are chartists,
others behavioralists. The basic difference between these groups is: A. Chartists rely on astrological charts to predict stock values, behavioralists rely on psychology B. Behavioralists are finance based, chartists study charts of investor psychology C. Chartists study charts of stock prices; behavioralists focus on investor psychology and behavior D. Chartists and behavioralists are the same in their approach; essentially there aren't any differences |
C. Chartists study charts of stock prices; behavioralists focus on investor psychology and behavior
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If the Dow Jones Industrial Average is currently at 10,000 and the price of one stock included in the index increases by $10, the Dow Jones Industrial Average will:
A. Not change; it is a value-weighted index B. Increase by 10.0% C. Increase by 1.0% D. Increase by 0.1% |
D. Increase by 0.1%
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If the Dow Jones Industrial Average is at 10,205 and it is up 4% from the previous day, what
was the index at the close of the market the previous day? A. 10,201.0 B. 9,805.0 C. 9,812.5 D. 9800.0 |
C. 9,812.5
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You start with a $1000 portfolio; it loses 50% over the next year, the following year it gains 50% in value. At the end of two years your portfolio is worth:
A. $1000 B. $500 C. $750 D. $950 |
C. $750
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You start with a portfolio valued at $500. Over the next twelve months it loses 40%; the following year it has a gain of 30%. At the end of two years your portfolio is worth:
A. $390 B. $450 C. $300 D. $410 |
A. $390
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You have a portfolio valued at $1000. Over the next twelve months it loses 75% of its value. What return does the portfolio need to earn over the following twelve months to restore the portfolio to its original value?
A. 75% B. 200% C. 300% D. 25% |
C. 300%
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You have a portfolio valued at $10,000. Over the next twelve months it loses 50% of its value. What return does the portfolio need to earn over the following twelve months to be restored to its original value?
A. 100% B. 50% C. 200% D. 25% |
A. 100%
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A stock has an annual dividend of $10.00 and it is expected not to grow. It is believed the stock will sell for $100 one year from now, and an investor has a discount (interest) rate of 6% (0.06). The dividend discount model predicts the stock's current price should be:
A. $94.67 B. $116.00 C. $103.77 D. $106.60 |
C. $103.77
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A stock has a current annual dividend of $6.00 per year and it is expected to grow by 3% (0.03) a year. It is expected that two years from now the stock will sell for $90.00 a share. If the interest rate is 5% (0.05), the dividend discount model predicts the stock's current price should be:
A. $94.90 B. $93.12 C. $101.30 D. $94.30 |
B. $93.12
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A stock currently does not pay an annual dividend. An investor expects this policy to remain in force. She believes, however, the stock of this company will sell for $110.00 per share four years from now. If she has an interest (discount) rate of 7% (0.07), the dividend discount model predicts the current price of this stock should be:
A. You cannot apply the model to this example since it requires a dividend be offered B. $82.00 C. $83.92 D. $86.35 |
C. $83.92
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Next year, the price of a stock is expected to be $2200 and the stock will pay a $55 dividend. The interest rate is 10%. Based on the dividend-discount model, what is the current price of this stock?
A. $1980 B. $2000 C. $2050 D. $2035 |
C. $2050
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The price of a stock is currently $750 and the stock will pay a $43 dividend. The interest rate is 7.5%. Based on the dividend-discount model, what is the expected price of this stock for next year?
A. $651.17 B. $657.67 C. $691.17 D. $763.25 |
D. $763.25
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Stock market bubbles can lead to all of the following except:
A. An efficient allocation of resources. B. Stock market crashes. C. Patterns of volatile returns from the stock market. D. Gaps between actual stock prices and those warranted by the fundamentals. |
A. An efficient allocation of resources.
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The theory of efficient markets assumes that:
A. Prices of bonds, but not stocks, reflect all available information. B. The prices of all financial instruments reflect all available information. C. Stock prices are relatively rigid because it takes a while for information to efficiently move through the market. D. The best approach to determining stock prices is to follow the chartists. |
B. The prices of all financial instruments reflect all available information.
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In the first calendar quarter a company reports that it expects profits to rise in the fourth quarter. The theory of efficient markets says we should expect the price of the company's stock to:
A. Rise in the fourth quarter when the higher profits are actually seen. B. Fall immediately as stockholders will be disappointed about having to wait until the fourth quarter for higher profits. C. Rise immediately on the expectation of higher profits in the future. D. Rise around the third quarter since this information will take time to disseminate. |
C. Rise immediately on the expectation of higher profits in the future.
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Asymmetric information exists when
a)one party to a transaction knows more than another. b)the government has imperfect credibility. c)opportunity costs are larger for one person than another. d)People do not have rational expectation. |
a)one party to a transaction knows more than another.
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The main problems caused by asymmetric information are
a)irrational expectations and moral hazard. b)imperfect credibility and adverse selection. c)adverse selection and irrational expectations. d)adverse selection and moral hazard. |
d)adverse selection and moral hazard.
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When people or firms that are worse-than-average risks are most likely to enter a contract that is
offered to everyone, the problem is called a)irrational expectations. b)adverse selection. c)opportunity cost. d)moral hazard. |
b)adverse selection.
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If a business firm takes out a loan from a bank, but does not use the funds as the bank intended, the problem is
a)moral hazard. b)adverse selection. c)intermediation. d)securitization. |
a)moral hazard
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A situation in which a bank do not lend as they ordinarily would, but rather have much higher requirements for borrowers to qualify for loans than normal, is known as a
a)lending crisis. b)moral hazard issue. c)credit crunch. d)Adverse selection response. |
c)credit crunch.
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A bank’s reserves equal its
a)government securities. b)transactions deposits. c)vault cash plus deposits at the Federal Reserve. d)cash assets plus government securities. |
c)vault cash plus deposits at the Federal Reserve.
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The reserve requirement is 0 percent on the first $7 million in transaction deposits, 3 percent on
amounts between $7 million and $47.6 million, and 10 percent on amounts above $47.6 million. A bank with transaction deposit totaling $57.3 million has required reserves equal to a)$1.22 million. b)$2.19 million. c)$2.40 million. d)$5.73 million. |
b)$2.19 million.
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The reserve requirement is 0 percent on the first $8 million in transaction deposits, 3 percent on amounts between $8 million and $50 million, and 10 percent on amounts above $50 million. A bank with transaction deposit totaling $83 million has required reserves equal to
a)$2.49 million. b)$4.56 million. c)$6.54 million. d)$8.30 million. |
b)$4.56 million.
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A bank’s reserves minus required reserves equal is
a)excess reserves. b)vault cash plus deposits at the Federal Reserve. c)reserve requirement times transactions deposits. d)vault cash plus required reserves. |
a)excess reserves.
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The federal funds rate is the interest rate in the market for
a)federal government loans. b)loans of reserves between banks. c)loans of government securities. d)federal agency securities. |
b)loans of reserves between banks.
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The United States has a dual banking system, which means that a bank
a)has two regulators. b)may hold its reserves either in the form of vault cash or as deposits at a Federal Reserve Bank. c)may take out a primary credit discount loan or a secondary credit discount loan. d)may choose whether to be chartered by federal government authorities or by a state government. |
d)may choose whether to be chartered by federal government authorities or by a state government.
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A bank which manages the investment portfolio and pays the bills of an elderly lady who is unable to do it for herself is carrying out the ------------ of banks.
a)the intermediation role b)the payment role c)the guarantor role d)the agency role |
a)the intermediation role
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A bank that wires funds for the purchase of a beach house in South Carolina for a customer in New York City is carrying out the---------------of banks.
a)the intermediation role b)the payment role c)the guarantor role d)the agency role |
b)the payment role
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The banking system generates new money totaling $127 million from new deposits in the system
of $22.5 million. With no leakages in the system, what must the required reserve ratio be? a)5.64% b)17.72% c)4.64% d)21.53% |
b)17.72%
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Which of the following financial statements shows the bank at a single point in time?
a)the statement of stockholders equity b) the funds-flow statement c)the report of financial condition d)the report of income |
c)the report of financial condition
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Which of the following financial statements shows the revenues and expenses of a bank over a set of period of time?
a)the statement of stockholders equity b)the funds-flow statement c)the report of financial condition d)the report of income |
d)the report of income
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The noncash-expense item on a bank’s report of income designed to shelter a bank’s current earnings from taxes and to help prepare for bad loans is called
a)short-term debt interest. b)noninterest expense. c)provision for taxes. d)provision for possible loan losses. |
d)provision for possible loan losses.
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A bank’s bad-debt reserve, as reported on its balance sheet is called
a)unearned income or discount. b)allowance for possible loan losses. c)intangible assets. d)customer liability on acceptances. |
b)allowance for possible loan losses.
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The difference between noninterest income and noninterest expenses on a bank’s report of income is called
a)net profit margin. b)net interest income. c)net income after provision for possible loan losses. d)income or loss before income taxes. |
b)net interest income.
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Nonperforming loans are credits on which any scheduled loan repayments and interest payments
are past due for more than a)30 days b) 60 days c) 90 days d) 180 days. |
c) 90 days
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A bank which starts with Allowance for loan losses (ALL) of $1.48 million at the beginning of the year,charges off worthless loans of $0.94 million during the year, recovers $0.12 million on loans previously charged off and charges current income for a $1.02 million provision for loan losses will have an ALL at the end of the year of
a)$.66 million. b) $3.32 million. c) $1.68 million. d) $1.28 million. |
c) $1.68 million.
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A bank has a total interest income of $67 million and total noninterest income of $14 million. This bank has total interest expenses of $35 million and total noninterest expenses (excluding PLL) of $28 million. Its provision for loan losses is $6 million and its taxes are $5 million. What is this bank’s net-interest income?
a)$7 b) -$14 c) $18 d) $32 |
d) $32
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A bank has a total interest income of $67 million and total noninterest income of $14 million. This
bank has total interest expenses of $35 million and total noninterest expenses (excluding PLL) of $28 million. Its provision for loan losses is $6 million and its taxes are $5 million. What is this bank’s noninterest income? a)$7 b) -$14 c) $18 d) $32 |
b) -$14
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When a loan is considered uncollectible, the bank’s accounting department will write it off the books by reducing the -----------------account. Which choice below is most appropriate to fill the blank space?
a)provision for loan losses b)unearned discounts on loans c)allowance for possible loan losses d)loans available for sale |
c)allowance for possible loan losses
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Noninterest revenue sources for a bank are called
a)commitment fees on loans b)fee income c)supplemental income d)noninterest margin |
b)fee income
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A bank’s temporary lending of excess reserves to other banks is labeled on the balance sheet as
a)federal funds rate b)federal funds sold c)money market deposit d)securities purchased for resale |
b)federal funds sold
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Net Income ---------------------$55 million
Total operating revenue -----$650 million Total assets-------------------$4,055 million Total equity capital-----------$350 million 1. What is the bank’s return on equity capital (ROE)? 2.What is this bank’s net-profit margin? 3.What is the bank’s return on assets (ROA)? a)8.46% b) 16.03% c) 15.71% d) 1.36% |
1.c) 15.71%
2.a)8.46% 3.d) 1.36% |
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A bank that has a low-profit margin most likely
a)is doing a poor job of controlling expenses. b)has a small amount of financial leverage. c)has a small amount of liquidity risk. d)has assets that are not very productive. |
a)is doing a poor job of controlling expenses.
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Cash, fixed assets, and intangible represent what for a bank?
a)non-earnings assets b)classified assets c)discretionary accounts d)nonmarket-valued assets |
a)non-earnings assets
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The ratio of a bank’s interest income from its loans and security investments less interest expenses on debt issued divided by total earning assets measures a bank’s
a)net-operating margin b)net return before special transactions c)net-interest margin d)return on assets |
c)net-interest margin
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A bank with a negative interest-sensitive GAP
a)has a greater dollar volume of interest-sensitive liabilities than interest-sensitive assets. b)will generate a higher interest margin if interest rates rise. c)will generate a higher interest margin if interest rate falls. d)A and C only e)B and C |
d)A and C only
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A bank with a positive interest-sensitive GAP will have a decrease in net income in net-interest income when interest rates in the market
a) rise b)fall c)stay the same d)a bank with a positive interest-sensitive gap will never have a decrease in net-interest income |
a) rise
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The principal goal of interest-rate hedging strategy is to hold fixed a bank’s
a)net-interest margin. b)net income before taxes. c)value of loans and securities. d)noninterest spread. |
a)net-interest margin
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A bond held by a bank carries a duration of 3 years and a current market price of $10,000. Market interest rate attached to comparable bonds are 10% currently, but recent forecasts suggest that market rates may rise to 12%. If this forecast turns out correct, what percentage change will occur in the bond’s market value?
a)-0.0364 b) -0.00465 c) -0.0545 d) -0.455 |
c) -0.0545
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A bond is selling in the market for $1100 and has a duration of 4.5 years. Market interest rates are 5% and are expected to increase to 7% in the near future. What will this bond’s price be after the change in market interest rates?
a)$1006 b) $1194 c) $1122 d) $1078 |
a)$1006
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A bank has an average asset duration of 5 years and an average liability duration of 3 years. This
bank has a total assets of $500 million and total liabilities of $250 million. Currently, market interest rates are 10 percent. If interest rates fall by 2 percent (to 8 percent), what is this bank’s duration gap? a)2 years b)-2 years c) 3.5 years d) none of these. |
c) 3.5 years
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A zero-coupon bond refers to a bond which:
A. Does not pay any coupon payments because the issuer is in default B. Promises a single future payment C. Pays coupons only once a year D. Pays coupons only if the bond price is above face value |
B. Promises a single future payment
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A consol is:
A. Another name for a zero-coupon bond B. A bond with a maturity date exceeding 10 years C. A bond that makes periodic interest payments forever but never matures D. A form of a bond that is issued quite often by the U.S. Treasury |
C. A bond that makes periodic interest payments forever but never matures
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The most common form of zero-coupon bonds found in the United States is:
A. AAA rated corporate bonds B. U.S. Treasury bills C. 30-year U.S. Treasury bonds D. Municipal bonds |
B. U.S. Treasury bills
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A 10-year Treasury note has a face value of $1,000, price of $1,200, and a 7.5% coupon rate. Based on this information, we know:
A. The present value is greater than its price B. The current yield is equal to 8.33% C. The coupon payment on this bond is equal to $75 D. The coupon payment on this bond is equal to $90 |
C. The coupon payment on this bond is equal to $75
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If the annual interest rate is 5% (.05), the price of a one-year Treasury bill per $100 of face value would be:
A. $95.00 B. $97.50 C. $95.24 D. $96.10 |
C. $95.24
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If the annual interest rate is 5% (.05), the price of a six-month Treasury bill would be:
A. $97.50 B. $97.59 C. $95.25 D. $95.00 |
B. $97.59
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If the annual interest rate is 5% (.05), the price of a three-month Treasury bill would be:
A. $98.79 B. $95.00 C. $98.75 D. $97.59 |
A. $98.79
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The difference in the prices of a zero-coupon bond and a coupon bond with the same face value and maturity date is simply:
A. Zero, since they are the same B. The present value of the final payment C. The present value of the coupon payments D. The future value of the coupon payments |
C. The present value of the coupon payments
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If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of the consol is:
A. $47.17 B. $813.00 C. $833.33 D. $8333.33 |
C. $833.33
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Which of the following statements is most accurate?
A. Yield to maturity is equal to the coupon rate if the bond is held to maturity B. Yield to maturity is the same as the coupon rate C. Yield to maturity will exceed the coupon rate if the bond is purchased for face value D. Yield to maturity is the same as the coupon rate if the bond is purchased for face value and held to maturity |
D. Yield to maturity is the same as the coupon rate if the bond is purchased for face value and held to maturity
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When the price of a bond is above face value:
A. The yield to maturity is below the coupon rate B. The yield to maturity will be above the coupon rate C. The yield to maturity will equal the current yield D. The yield to maturity will equal the coupon rate |
A. The yield to maturity is below the coupon rate
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When the price of a bond is below the face value, the yield to maturity:
A. Is below the coupon rate B. Will be above the coupon rate C. Will equal the current yield D. Will equal the coupon rate |
B. Will be above the coupon rate
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A $1000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has:
A. A current yield and coupon rate equal to 6.22% B. A current yield equal to 6.22% and a coupon rate below this C. A coupon rate equal to 6.00% and a current yield below this D. A yield to maturity and current yield equal to 6.00% |
B. A current yield equal to 6.22% and a coupon rate below this
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A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a purchase price of $980 has:
A. A current yield that equals 4.00% B. A coupon rate that equals 4.08% C. A current yield that equals 4.08% and a yield to maturity that equals 6.12% D. A current yield that equals 4.08% and a yield to maturity that equals 4.0% |
C. A current yield that equals 4.08% and a yield to maturity that equals 6.12%
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A 30-year Treasury bond as a face value of $1,000, price of $1,200 with a $50 coupon payment. Assume the price of this bond decreases to $1,100 over the next year. The one-year holding period return is equal to:
A. -9.17% B. -8.33% C. -4.17% D. -3.79% |
C. -4.17%
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The yield on a discount basis for a $100 Treasury bill that sells for $98.50 and matures in 90 days is:
A. 1.50% B. 4.80% C. 6.00% D. 4.94% |
C. 6.00%
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The holding period return on a bond:
A. Can never be more than the yield to maturity B. Will equal the yield to maturity if the bond is purchased for face value and sold at a lower price C. Will be less than the yield to maturity if the bond is sold for more than face value D. Will be less than the yield to maturity if the bond is sold for less than face value |
D. Will be less than the yield to maturity if the bond is sold for less than face value
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One characteristic that distinguishes holding period return from the coupon rate, the current yield, and the yield to maturity is:
A. All of the other returns can be calculated at the time the bond is purchased, but holding period return cannot B. Holding period return will always be the highest return C. Holding period return will usually be less than the other returns D. Only the holding period return includes the capital gain/loss |
A. All of the other returns can be calculated at the time the bond is purchased, but holding period return cannot
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If a one-year zero-coupon bond has a face value of $100, is purchased for $94, and is held to maturity:
A. The holding period return will exceed the yield to maturity B. The yield to maturity will exceed the holding period return C. The yield to maturity will be 6.38% D. The holding period return will be 6.38% |
C. The yield to maturity will be 6.38%
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Fly-By-Night Inc. issues $100 face value, zero-coupon, one-year bonds. The current return on one-year, zero-coupon U.S. government bonds is 3.5%. If the Fly-By-Night bonds are selling for $92.00, what is the risk premium for these bonds?
A. 8.7% B. 1.5% C. 5.2% D. 8.0% |
C. 5.2%
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Consider a one-year corporate bond that has a 20% probability of default. The payoff on the bond is $2,000 if the corporation does not default. The interest rate is 10%. If buyers of this bond are risk-neutral, this bond will sell for:
A. $400 B. $909.09 C. $1,454.54 D. $1,600 |
C. $1,454.54
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