Name: ……………………………………………….. Student ID………………………….

Answer Sheet

Questions Answers
1 A B C
2 A B C
3 A B C
4 A B C
5 A B C
6 A B C
7 A B C
8 A B C
9 A B C
10 A B C
11 A B C
12 A B C
13 A B C
14 A B C
15 A B C
16 A B C
17 A B C
18 A B C
19 A B C
20 A B C
1. An investor who buys a government bond from a dealer’s inventory is said to obtain:

A. a real asset in a primary market transaction.

B. a financial asset in a primary market transaction.
C. a financial asset in a secondary market transaction.

2. Daniel Ferramosco is concerned that a long-term bond he holds might default. He therefore buys a contract that
will compensate him in the case of default. What type of contract does he hold?
A. Physical derivative contract.
B. Primary derivative contract.
C. Financial derivative contract.

3. A financial intermediary buys a stock and then resells it a few days later at a higher price. Which intermediary
would this most likely describe?
A. Broker.
B. Dealer.
C. Arbitrageur.

4. An investor buys 1,000 shares of a stock on margin at a price of $50 per share. The initial margin requirement is
40% and the margin lending rate is 3%. The investor’s broker charges a commission of $0.01 per share on
purchases and sales. The stock pays an annual dividend of $0.30 per share. One year later, the investor sells the
1,000 shares at a price of $56 per share. The investor’s rate of return is closest to:
A. 12%.
B. 27%.
C. 36%.

5. New issues of securities are transactions in:

A. the primary market.
B. the secondary market.
C. the seasoned market.

6. A market is said to be informationally efficient if it features:

A. market prices that reflect all available information about the value of the securities traded.
B. timely and accurate information about current supply and demand conditions.
C. many buyers and sellers that are willing to trade at prices above and below the prevailing market price.

7. Which of the following would least likely be an objective of market regulation?

A. Reduce burdensome accounting standards.
B. Make it easier for investors to evaluate performance.
C. Prevent investors from using inside information in securities trading.

8. Choices that must be made when constructing a security market index least likely include whether to:
A. use a nominal or interval scale.
B. measure the performance of an entire market or market segment.
C. weight the securities equally or by some firm-specific characteristic.

9. The 1-year return on a price-weighted index of these three stocks is closest to:
A. 12.5%.
B. 13.5%.
 C. 18.0%.
10. The 1-year return on an equal-weighted index of these three stocks is closest to:
A. 12.0%.
B. 12.5%.
C. 13.5%.
11. The 1-year return on a market capitalization-weighted index of these stocks is closest to:
A. 12.5%.
B. 13.5%.
C. 18.0%.
12. Market float of a stock is best described as its:
A. total outstanding shares.
B. shares that are available to domestic investors.
C. outstanding shares, excluding those held by controlling shareholders.
13. For which of the following indexes will rebalancing occur most frequently?
A. A price-weighted index.
B. An equal-weighted index.
C. A market capitalization-weighted index.
14. The advantage of participating preferred shares versus non-participating preferred shares is that participating
preferred shares can:
A. obtain voting rights.
B. receive extra dividends.
C. be converted into common stock.

15. Which of the following best describes the benefit of cumulative share voting?
A. It provides significant minority shareholders with proportional representation on the board.
B. It prevents minority shareholders from exercising excessive control.
C. If cumulative dividends are not paid, preferred shareholders are given voting rights.

16. Compared to public equity, which of the following is least likely to characterize private equity?
A. Lower reporting costs.
B. Potentially weaker corporate governance.
C. Lower returns because of its less liquid market.

17. Global depository receipts are most often denominated in:

A. the currency of the country where they trade and issued outside the United States.
B. U.S. dollars and issued in the United States.
C. U.S. dollars and issued outside the United States.
18. Which of the following best describes the book value of equity?
A. Management should attempt to maximize book value of equity.
B. Book value of equity decreases when retained earnings increase.
C. Book value of equity reflects investors’ perceptions of the firm’s future.

19. Jason Williams purchased 500 shares of a company at $32 per share. The stock was bought on 75 percent
margin. One month later, Williams had to pay interest on the amount borrowed at a rate of 2 percent per month. At
that time, Williams received a dividend of $0.50 per share. Immediately after that he sold the shares at $28 per
share. He paid commissions of $10 on the purchase and $10 on the sale of the stock. What was the rate of return on
this investment for the one-month period?
A −12.5 percent.
B –15.4 percent.
C –50.1 percent.

20. A trader has purchased 200 shares of a non-dividend-paying frm on margin at a price of $50 per share. Te
leverage ratio is 2.5. Six months later, the trader sells these shares at $60 per share. Ignoring the interest paid on the
borrowed amount and the transaction costs, what was the return to the trader during the six-month period?
A 20 percent.
B 33.33 percent.
C 50 percent.