Multiple choice questions 1. The material wealth of a society is a function of _________. a. all real assets b.

all financial assets c. all physical assets d. all real and financial assets e. none of the above 2. Asset allocation refers to ____________. a. choosing which securities to hold based on their valuation b. investing only in "safe" securities c. the allocation of assets into broad asset classes d. bottom-up analysis e. all of the above 3. inancial intermediaries differ from other businesses in that both their assets and their liabilities are mostly! a. illi"uid. b. owned by government. c. real. d. financial. e. regulated. #. inancial assets! a. contribute to the country$s productive capacity both directly and indirectly. b. do not contribute to the country$s productive capacity either directly or indirectly. c. directly contribute to the country$s productive capacity. d. indirectly contribute to the country$s productive capacity. e. are of no value to anyone. %. &hat roles do investment ban'ers perform( a. design securities with desirable properties b. mar'et new stoc' and bond issues for firms c. provide advice to the firms as to mar'et conditions) price) etc. d. none of the above e. A) *) and + ,. &hich one of the following is not a money mar'et instrument( a. a Treasury bond b. a negotiable certificate of deposit c. a -urodollar account d. a Treasury bill e. commercial paper .. The bid price of a T-bill in the secondary mar'et is! a. the price at which the dealer in T-bills is willing to sell the bill. b. the price at which the dealer in T-bills is willing to buy the bill. c. greater than the as'ed price of the T-bill. d. the price at which the investor can buy the T-bill. e. never "uoted in the financial press.

/. The price "uotations of Treasury bonds in the &all 0treet 1ournal show an as' price of 12#!2/ and a bid price of 12#!2#. As a buyer of the bond what is the dollar price you e3pect to pay( a. 41)2#/.22 b. 41)2#2.%2 c. 41)2##.22 d. 41)2#1.22 e. 41)2#2.#2 5. &hich of the following are characteristics of preferred stoc'( 67 6t pays its holder a fi3ed amount of income each year) at the discretion of its managers. 667 6t gives its holder voting power in the firm. 6667 6ts dividends are usually cumulative. 687 ailure to pay dividends may result in ban'ruptcy proceedings. a. 6) 666) and 68 b. 6) 66) and 666 c. 6 and 666 d. 6) 66) and 68 e. 6) 66) 666) and 68 12. The trading of stoc' that was previously issued ta'es place! a. in the secondary mar'et. b. in the primary mar'et. c. usually with the assistance of an investment ban'er. d. A and *. e. * and +. 11. 6n a "firm commitment"! a. the investment ban'er buys the stoc' from the company and resells the issue to the public. b. the investment ban'er agrees to help the firm sell the stoc' at a favorable price. c. the investment ban'er finds the best mar'eting arrangement for the investment ban'ing firm. d. * and +. e. A and *. 12. Assume you purchased %22 shares of +0+9 at 422 per share. The initial margin is #2:. ;our investment was! a. 43)222. b. 4%)222. c. 4#)222. d. 45)222. e. 4.)/22. 13. Assume you sold short 222 shares of common stoc' at 4,2 per share. The initial margin is %2:. &hat would be the maintenance margin if a margin call was made at a stoc' price of 4.2( a. 25: b. #2: c. 2%: d. 33: e. none of the above 1#. Assume you sell short 122 shares of common stoc' at 4#% per share) with initial margin at

%2:. &hat would be your rate of return if you repurchase the stoc' at 4#2 per share( The stoc' paid no dividends during the period) and you did not remove any money from the account before ma'ing the offsetting transaction. a. 2%: b. 22: c. 22: d. ..: e. none of the above 1%. A sale by &al-<art of new stoc' to the public would be a=n7! a. short sale. b. initial public offering. c. secondary mar'et transaction. d. seasoned new issue offering. e. none of the above. 1,. ;ou sell short 222 shares of *ad +o. at a mar'et price of 4%% per share. ;our ma3imum possible loss is! a. 411)222. b. >ero. +. unlimited. d. 422)222. e. cannot tell from the given information. 1.. Assume you purchased 122 shares of common stoc' at 4%2 per share using 42)%22 of your own money. The initial margin re"uirement is %2:. 6f the maintenance margin is 32:) at what price would you get a margin call( a. 42,.1# b. 4%2.22 c. 43%..1 d. 4...12 e. 4./.22 1/. &hich one of the following statements regarding open-end mutual funds is false( a. The funds redeem shares at net asset value. b. The funds offer investors professional management. c. The funds offer investors a guaranteed rate of return. d. * and +. e. A and *. 15. &hich one of the following statements regarding closed-end mutual funds is false( a. The funds always trade at a discount from ?A8. b. The funds redeem shares at their net asset value. c. The funds offer investors diversification. d. A and *. e. ?one of the above. 22. &hich of the following functions do investment companies perform for their investors( a. @ecord 'eeping and administration b. Arofessional management

c. Biversification and divisibility d. Cower transaction costs e. All of the above 21. Dltra und had year-end assets of 4/,2)222)222 and liabilities of 412)222)222. There were 32),.%)2%# shares in the fund at year-end. &hat was Dltra und$s ?et Asset 8alue( a. 42/.1. b. 42%.2# c. 415.,2 d. 42,.21 e. 421.%, 22. Aremier und had year-end assets of 4/2%)222)222 and liabilities of 42%)222)222. 6f Aremier$s ?A8 was 432.1/) how many shares must have been held in the fund( a. 21),15)3#,.52 b. 22)532)%#,.2/ c. 2#)/,2)1,1.%5 d. 2%),53),#%.2% e. ?one of the above. 23. ;ou purchased shares of a mutual fund at a price of 41. per share at the beginning of the year and paid a front-end load of %.2:. 6f the securities in which the fund invested increased in value by 12: during the year) and the fund$s e3pense ratio was 1.2:) your return if you sold the fund at the end of the year would be ____________. a. #..% b. %.#% c. %.,% d. #.35 e. ?one of the above Calculation Problem 1.1 0uppose you short sell 122 shares of 6*<) now selling at 4122 per share. ;ou should increase your position. There is considerable buy pressure at prices Eust below 4%2) meaning that downside ris' is limited. 6n contrast) sell pressure is sparse) meaning that a moderate buy order could result in a substantial price increase. 1.2 a. &hat is your ma3imum possible loss( There is no ma3imum possible loss) because the loss depends on the increase of 6*< share price. b. &hat happens to the ma3imum loss if you simultaneously place a stop-buy order at 412/( <a3imum CossF =12/-1227G122F/22 6f the price rise above 412/) the stop-buy will be e3ecuted) thus investors only pay 412/ to limit the loss to 4/ per share. 1-2 Bee Trader opens a bro'erage account and purchases 322 shares of 6nternet Breamers at 4#2 per share. 0he borrows 4#)222 from the bro'er to help pay for the purchase. The interest rate on the loan is /:. a. &hat is the margin in BeeHs account when she first purchases the stoc'(

The stoc' is purchased for 322 4#2 F 412)222. *orrowed funds are 4#)222. Therefore) the investor put up e"uity or margin of 4/)222. b. 6f the share price falls to 432 per share by the end of the year) what is the remaining margin in her account( 6f the maintenance margin re"uirement is 32:) will she receive a margin call( 6f the share price falls to 432) the value of the stoc' falls to 45)222. The amount of the loan owed to the bro'er grows to 4#)222 1.2/ F 4#)322. Therefore) remaining margin is 5)222 #)322 F 4#),/2. c. &hat is the rate of return on her investment( The rate of return on investment over the years is =-nding value of account initial e"uity7I6nitial e"uity F =#),/2 /)2227I/)222 F .#1% F #1.%:.

1-3 9ld -conomy Trader opened an account to short sell 1)222 shares of 6nternet Breamers from the previous problem. The initial margin re"uirement was %2:. =The margin account pays no interest.7 A year later) the price of 6nternet Breamers has risen from 4#2 to 4%2) and the stoc' has paid a dividend of 42 per share. a. &hat is the remaining margin in the account( The initial margin was .%2 1)222 4#2 F 422)222. The firm loses 412 1)222 F 412)222 due to the increase in the stoc' price so margin falls by 412)222. <oreover) the firm must pay the dividend of 42 per share) which means the margin account falls by an additional 42)222. 0o remaining margin is 4/)222 b. 6f the maintenance margin re"uirement is 32:) will 9ld -conomy Trader receive a margin call( The percentage margin is 4/)222I4%2)222 F .1,) so there will be a margin call. c. &hat is the rate of return on the investment( The margin in the account fell from 422)222 to 4/)222 in one year) for a rate of return of 412)222I422)222 F .,2 F ,2:.

1-# +onsider the following limit-order boo' of a specialist. The last trade in the stoc' occurred at a price of 4%2. Cimit *uy 9rders Arice 4#5..% #5.%2 #5.2% #5.22 #/.2% a. 0hares %22 /22 %22 222 ,22 Arice 4%2.2% %1.%2 %#..% %/.2% Cimit 0ell 9rders 0hares 122 122 322 122

6f a mar'et buy order for 122 shares comes in) at what price will it be filled( The buy order will be filled at the best limit-sell order) 4%2.2%. b. At what price would the ne3t mar'et order be filled( At the ne3t-best price) 4%1.%2.

c. 6f you were the specialist) would you want to increase or decrease your inventory of the stoc'( 6 should increase your position. There is considerable buy pressure at prices Eust below 4%2) meaning that downside ris' is limited. 6n contrast) sell pressure is sparse) meaning that a moderate buy order could result in a substantial price increase. 1-% An open-end fund has a net asset value of 412..2 per share. 6t is sold with a front-end load of ,:. &hat is the offering price( Answer 2.5# J oering price F ?A8 oering price F 12..2I2.5#F 411.3/ 1-, 6f the offering price of an open-end fund is 412.32 per share and the fund is sold with a frontend load of %:) what is its net asset value( 2.5% J oering price F ?A8 ?A8 F 2.5% J 12.32 F 411.,5 . 1-. The +losed und is a closed-end investment company with a portfolio currently worth 4222 million. 6t has liabilities of 43 million and % million shares outstanding. a. &hat is the ?A8 of the fund( ?A8 F =Assets K Ciabilities7I0hares 9utstanding F =4222 K 437I% F 435.#2 b. 6f the fund sells for 43, per share) what is its premium or discount as a percent of net asset value( Aremium =or discount7 F =Arice K ?A87I?A8 F =43, K 435.#27I435.#2 F -2.2/, F -/.,: The fund sells at an /.,: discount from ?A8. 1-/ A closed-end fund starts the year with a net asset value of 412.22. *y year-end) ?A8 e"ualed 412.12. At the beginning of the year) the fund was selling at a 2: premium to ?A8. *y the end of the year) the fund is selling at a .: discount to ?A8. The fund paid year-end distributions of income and capital gains of 41.%2. a. &hat is the rate of return to an investor in the fund during the year( A2 F ?A82 J =1 L Aremium7 F 412.22 1.22 F 412.2# A1 F ?A81 J =1 K Biscount7 F 412.12 2.53 F 411.2% The ?A8 increased by 42.12 but the price of the fund decreased by 42.55 @eturn F =A1 L Bistributions7IA2 K 1 F =411.2% L 41.%27I412.2# K 1 F #.1.: b. &hat would have been the rate of return to an investor who held the same securities as the fund manager during the year( An investor holding the same securities as the fund manager would have earned a rate of return of the ?A8 and not been subEect to the change from premium to discount @eturn F =?A81 L Bistributions7I?A82 K 1 F =412.12 L 41.%27I412.22 K 1 F 13.33:

1-5 ;ou purchased 1)222 shares of the ?ew und at a price of 422 per share at the beginning of the year. ;ou paid a front-end load of #:. The securities in which the fund invests increase in value by 12: during the year. The fundHs e3pense ratio is 1.2:. &hat is your rate of return on the fund if you sell your shares at the end of the year(

+ost of 0hares F A2 F =?A82 J 0hares7I=1 K C7 F =422 J 1)2227I=1 2.2#7 F 422)/33 ?A81 F ?A82=1 L 6nvestment @eturn K -3pense @atio7 F 422=1 L 2.12 K 2.2127 F 422=1.12/7 F 422.1, 8alue of 1)222 shares at time 1 F 422)1,2 ?ote that due to the front-end load) A2 M ?A82 but since there is no bac'-end load) A1 F ?A81 @eturn is calculated from prices! @eturn F A1IA2 K 1 F 422)1,2I422)/33 F ,.3. ?ote that 6nvestment @eturn K -3penses K Coad F 12: 1.2: #: F ,./: M ,.3.: This is because the load is paid at the beginning and increases the invested amount =A 27.