Practice test FIN3244 EXAM 3 KHOUSHNOUD

From 2014 to 2015, the Dow Jones Industrial Average has fluctuated between

16,000 and 19,000

A stock's market value will be higher the higher the investor's required rate of return is, all else being equal.

False

Commercial banks are large holders of ________ and are the major issuer of ________

U.S government securities; negotiable certificates of deposit

Federal funds are

- borrowed by banks that have a deficit of reserves.
- lent by banks that have an excess of reserves
- usually overnight investments

Electronic Communications Networks apply technology to make organized exchanges more efficient and speedy.

False

In its simplest form, a credit default swap provides

Insurance against default in the principle and interest payments of a credit instrument

The Securities Acts of 1933 and 1934 established the S.E.C. to enforce which of the follow laws?

- require all forms to tell truth about business
- require brokers, dealers, and exchanges to treat investors fairly

In the one-period valuation model, a stock's value will be higher

The higher it's expected future price is

Most of the time, the interest rate on Treasury notes and bonds is ________ that on money market securities because of ________ risk.

A) above; interest rate

When an old bond's market value is above its par value, the bond is selling at a ________. This occurs because the old bond's coupon rate is ________ the coupon rates of new bonds with similar risk.

Premium; above

Money market securities are short-term instruments with an original maturity of less than one year.

True

A share of common stock in a firm represents an ownership in that firm

True

A share of preferred stock is as much like a bond as it is like common stock

True

The main role of investment companies in the money market is to

Trade on behalf of commercial accounts

Elements of the Gordon growth model of stock valuation

- the required return on investments in equity
- the stocks most recent paid dividend
- the expected constant growth rate of dividends

Bonds typically sell in public markets where bid and ask prices are readily available and transparent. By contrast, stocks typically trade over the counter, where transaction details can be hidden from the public.

False

Finance companies raise funds in the money market by selling

Commercial paper

More stock trading in the U.S. occurs in over-the-counter markets rather than on organized exchanges.

False

Capital market trading occurs in

Both primary & secondary market

Volume of outstanding commercial paper peaked around 2007 with about how much outstanding?

2 trillion

The primary issues of capital market securities include

The federal and local governments, and corporations

Exchange Traded Fund (ETF)

-Their value is based on the underlying net asset value of the stocks held in the index basket.
-They are listed and traded as individual stocks on a stock exchange.
-They are indexed rather than actively managed.

The P� ratio approach to valuing stocks is especially useful for valuing

Firms that don't pay dividends & that are privately held

The coupon rate is the rate of interest that the issuer of the bond must pay

True

The coupon rate on old bonds fluctuates with market interest rates so they will remain attractive to investors

False

Policies that limit the discretion of managers as a way of protecting bondholders' interests are called

Restrictive covenants

The main cause of fluctuations in stock prices is changes in

Information available to investors

Stock values computed by valuation models may differ from actual market prices because it is difficult to

- estimate risk of a stock
- estimate future dividend growth rates
- forecast a stock's future dividends

Money market securities
true

- the secondary market for Treasury bills is extensive and well developed
- there is no well developed secondary market for commercial paper
- the interest rates on all money market instruments move very closely together over time

Capital market securities fall into two categories: bonds and stocks

False

Long-term bonds include gov bonds, and long term notes, municipal bonds, and corporate bonds

True

Money market instruments

- Mature in one year or less
- are usually sold in large denominations
- have low default risk

The U.S treasury department is the single largest borrower in the U.S money market

True

Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation

True

In situations where asymmetric information problems are not severe

The money markets have distinct cost advantage over banks in providing short term funds

The fed can influence the federal funds rate by adjusting the level of reserves in the banking system

True

The primary reason that individuals and firms choose to borrow long-term is to

Reduce the risk that interest rates will rise before they pay off their debt

Government securities dealers frequently engage in repos to

- lend or borrow for a day or two for what is essentially a collateralized loan
- manage liquidity
- take advantage of anticipated changes in the interest rates

If your competitive bid for a Treasury bill is successful, then you will

Pay the same as other successful competitive bidders

The Treasury accepts non competitive bids in ascending order of yield until the accepted bids reach the offering amount

False

Rep�s are

- usually collateralized with Treasury securities
- low interest rate loans
- usually low risk