WorksheetsFIN301_Review
Total questions: 36
Worksheet time: 18mins
What is the primary role of financial markets?
To guarantee profits for investors.
To transfer funds from those who have excess funds to those who need funds
To manage the operations of financial institutions.
To issue new securities exclusively.
Participants who receive more money than they spend, such as investors, are classified as:
Deficit units.
Equity units.
Surplus units.
Credit units.
Derivative securities allow an investor to speculate on movements in the value of underlying assets without having to purchase those assets. This is known as:
Risk management.
Diversification
Speculation.
Liquidation.
Financial institutions are primarily needed to resolve limitations caused by market imperfections, specifically concerning:
The high cost of financial assets.
The difficulty in selling existing securities.
Limited information regarding the creditworthiness of borrowers.
The volatility of stock prices.
The Loanable Funds Theory suggests that the market interest rate is determined by factors controlling the supply of and demand for:
Real assets
Consumer debt.
Consumer debt.
Equity securities.
Economic growth places upward pressure on interest rates by:
Shifting the supply of loanable funds inward
Shifting the demand for loanable funds outward.
Reducing the expected inflation rate.
Decreasing business investment needs.
According to the Fisher effect, the nominal or quoted rate of interest () is composed of:
The real interest rate only
The expected inflation rate only.
The expected inflation rate plus the real interest rate.
The expected inflation rat minus the real interest rate (.
The phenomenon where excessive government demand for funds tends to "crowd out" the private demand for funds is known as the:
Fisher effect.
Substitution effect.
Crowding-out Effect.
Foreign flow effect.
Holding all other factors constant, how does a higher degree of default (credit) risk affect the yield a security must offer?
The yield must be lower.
The yield must be higher.
The yield is unaffected.
The yield only changes for short-term securities.
According to the Liquidity Premium Theory, how is the relationship between the liquidity premium () and the term to maturity expressed?
LP1=LP2=LP3.
LP1>LP2>LP3
LP1>LP2>LP3...LP20
LPn must be 0 for all maturities n.
The model used to determine the appropriate yield to be offered on an -day debt security () incorporates which four components?
Risk-free yield (Rf,n), inflation premium, liquidity premium (LP), and tax adjustment (TA)
Risk-free yield (Rf,n), default premium (DP), foreign exchange premium, and inflation adjustment.
Risk-free yield (Rf,n), default premium (DP), liquidity premium (LP), and tax adjustment (TA).
Default premium (DP), liquidity premium (LP), exchange rate adjustment, and inflation expectation.
According to Moody's, the highest quality rating assigned to debt securities is:
AAA.
Aaa.
Aa
BBB.
What is the maximum maturity of money market securities?
13 weeks.
6 months.
One year.
9 months.
What are the common maturities for T-bills that the Treasury issues on a weekly basis?
4-week, 13-week, and 52-week.
13-week, 26-week, and 1-year.
4-week, 13-week, and 26-week.
1-day, 7-day, and 15-day.
Negotiable Certificates of Deposit (NCDs) are large, dollar-denominated deposits issued by commercial banks and other depository institutions with a minimum denomination of $100,000 and maturities normally ranging from:
1 day to 7 days.
1 day to 270 days.
Two weeks to one year.
1 year to 5 years.
How is the value of a T-bill determined?
As the face value divided by the required interest rate.
It is priced at par value.
As the sum of coupon payments.
It is priced at a discount from its par value, representing the present value of the par value.
What is the typical maturity range for most bonds?
Less than 5 years.
Between 1 and 10 years.
Between 10 and 30 years
Between 10 and 30 years
Corporate bonds perceived as very high risk and offering a high yield compared to Treasury yields are known as:
Junk Bonds
Investment-grade bonds.
General obligation bonds.
Treasury notes
General obligation bonds issued by state and local governments are primarily supported by:
Revenues of a specific project.
The municipal government's ability to tax.
Federal government guarantees.
Sales of municipal assets.
Treasury Inflation-Protected Securities (TIPS) provide returns tied to the:
Federal funds rate.
Inflation rate.
Stock market index.
Foreign exchange rate.
A characteristic of private equity is that the business is privately held and the owners:
Cannot sell their shares to the public.
Must issue debt rather than equity.
Must sell their shares to the public immediately.
Are usually financial institutions.
Preferred stock typically represents an equity interest in a firm that:
Is tax-deductible for the firm.
Has a cumulative provision preventing common stock dividends until preferred dividends are paid.
Allows for significant voting rights.
Is tax-deductible for the firm.
The Price-Earnings Ratio is calculated by dividing the prevailing stock price per share by the firm’s:
Annual dividend paid per share.
Earnings per share (earnings divided by number of existing shares).
Highest price over the last 52 weeks.
Total revenue generated.
A new stock offering by a specific firm whose stock is already publicly traded is known as a(n):
Secondary stock offering.
IPO.
Private placement.
Primary market offering.
An order to buy or sell a stock that is executed at the best possible current price is a:
Limit Order.
Stop-Buy Order.
Market Order.
Stop-Loss Order.
The Federal Reserve currently imposes an initial margin requirement, which represents the minimum proportion of funds that must be covered with cash, set at
25%.
50%.
75%
100%.
If an investor places an order to sell a stock they do not own, borrowing the stock from another investor, this transaction is a
Short selling
Long hedge.
Margin trade.
Limit order.
On the New York Stock Exchange, individuals who match up buy and sell orders, and who stand ready to buy or sell certain stocks even if no other investors are willing to participate, are known as:
Floor brokers.
Dark pool traders.
Market-Makers (Specialists)
High-frequency traders.
A standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specified price and date is the definition of a:
Financial futures contract.
Financial futures contract.
Call option.
Repurchase agreement.
The operations of financial futures exchanges in the U.S. are regulated by the
Commodity Futures Trading Commission (CFTC)
Federal Reserve.
The operations of financial futures exchanges in the U.S. are regulated by the
Financial Stability Oversight Council.
In the context of hedging with futures contracts, basis risk is defined as:
The spread between the futures price and the spot price.
The risk that price volatility increases dramatically.
The risk that the counterparty defaults on the contract.
The risk that the position being hedged is not affected in the same manner as the instrument underlying the futures contract.
The CME Group imposes circuit breakers on stock index futures primarily to:
Eliminate the need for clearinghouses.
Ensure that single stock futures are traded simultaneously.
Increase the required margin deposit
Prohibit trading for short time periods when prices decline to specified threshold levels, allowing investors time to absorb information or work out credit arrangements.
A Call Option is considered "in the money" when the market price of the underlying financial instrument is:
Expected to increase.
Less than the exercise price.
Equal to the exercise price.
Greater than the exercise price.
A Put Option is considered "out of the money" when the market price of the underlying financial instrument is
Equal to the exercise price.
Less than the exercise price.
Greater than the exercise price.
Greater than the exercise price.
Holding other factors constant, if the existing market price of the underlying stock relative to the exercise price is higher, the put option premium will be:
Higher.
Lower.
Equal to the call option premium.
Unaffected.
If speculators anticipate a decrease in the price of a stock, which stock option position would they typically purchase?
Sell a call option.
Purchase a call option.
Sell a put option.
Purchase a put option.
