Part One: Short Answers:

1. Which of the following is not a typical money market instrument:

a. eurodollar deposits b. repurchase agreements

c. commercial paper d. treasury bonds

2. Which of the following is a depository-type of financial institution:

a. mutual fund b. insurance company

c. savings institution d. investment firm

3. What is the effective yield the investor would expect if the tax rate of the investor is 30% & the nominal yield offered on a taxable investment is 16%?

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4. Government securities are considered default risk free because (one best answer) remember the past is an indication of the future, but not a guarantee:

a. the government never lies;

b. the government has never defaulted;

c. the government can always raise taxes or print the money;

d. there is no fault found in the products produced in America.

5. The store of value purpose for money:

a. is aided by inflation b. is harmed by inflation

c. is not considered a serious issue d. implies automatic growth.

6. Given a 40% tax bracket and 7% offered on a traditional 20^th Century municipal issue, the effective rate 9of return is:

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7. Given a 40% federal tax bracket and 8% offered on a treasury issue, the nominal rate on a corporate issue to equal the treasury rate is:

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8. The initial issuer of securities does not normally receive funds in which market:

a. secondary b. primary c. deficit d. surplus

9. Money market securities generally have _________; capital market instruments are typically expected to have ________.

a. less liquidity; higher annualized return b. more liquidity; lower annualized return

c. less liquidity; lower annualized return d. more liquidity; higher annualized return

10. Which of the following is not a major investor in stocks?

a. commercial banks b. insurance companies c. mutual funds d. pension funds

11. Which of the following would be considered a primary market transaction:

1. An individual purchases existing shares of stock in IBM through a broker.
2. Microsoft issues a seasoned offering of common stock using an underwriter.
3. An institutional investor sells some Disney stock through its broker.
4. You arrange to sell a portfolio of stock from an inheritance.

12. With the participation of financial intermediaries in financial market transactions, _______ than they otherwise would be.

1. information and transaction costs are lower;
2. transaction costs would be higher but information costs are unchanged;
3. information costs would be higher but transaction costs are unchanged;
4. information and transaction costs are higher.

13. If an investor buys a T-bill with 180 days till maturity and $350,000 par value for $342,000. He plans to sell it after 60 days, and forecasts a selling price of $347,000 at that time. What is the compounded annualized yield based on this expectation? (Use the geometric approach.):

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14. If an investor buys a $50,000, 90-day T-bills for $49,250 and holds it till maturity, the annualized return (on a simple basis) is:

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15. A newly issued T-bill with a $10,000 par value that sells for $9,850 and has a 90-day maturity has a discount return of:

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16. Both T-bills and commercial paper are sold:

a. with a stated coupon rate c. at a discount from par value

b. at a premium above par value d. only through a financial intermediary.

17. The federal funds market allows depository institutions to:

a. borrow short-term funds from one another;

b. borrow long-term funds from one another;

c. borrow long-term funds from the Treasury;

d. borrow short-term funds from the Federal Reserve.

18. When a bank guarantees a future payment for a firm to another firm (usually involving exporting or importing), then the instrument used is:

a. repurchase agreement b. negotiated CD

c. bankers acceptance d. commercial paper

19. Note maturities are usually ______; while bond maturities are _____.

1. less than 10 years; 10 years or more; c. 10 years or more; less than 10 years;
2. less than 1 year; 1 year or more; d. 91 days; 180 days.

20. Interest earned from Treasury bonds is:

a. exempt from all income tax b. exempt from federal income tax

c. exempt from state and local tax d. subject to all income tax

21. Which of the following is true of money market instruments?

1. their yields are highly correlated over time
2. they typically sell for par value when they are initially sold
3. treasury bills have the highest yield
4. they all make periodic coupon payments

22. The rate on which Eurodollar floating rate CDs is based is:

1. the weighted average of European prime rates
2. the London Interbank Offer Rate (LIBOR)
3. the US Prime Rate
4. the weighted average of European discount rates

23. Which of the following is issued in the primary market by non-financial institutions?

a. NCDs b. commercial paper c. federal funds d. eurodollar accounts

24. Flight to Quality (investors more to avoid risk shift to safer instruments) causes the risk differential between risky and risk-free securities:

a. to be eliminated b. to be reduced c. to be increased d. to be unchanged

25. Municipal general obligation bonds ______; municipal revenue bonds _____.

1. both are supported by the municipal governments ability to tax
2. are supported by the municipal governments ability to tax; are supported by revenue generated from the project financed
3. are always subject to federal tax; are always exempt from state and local tax
4. are typically zero-coupon bonds; are typically coupon bonds

26. A call provision normally:

1. allows the firm to call bonds at par value
2. gives the firm the option to call bonds at market value
3. allows the firm to call bonds at a price below par value
4. requires the firm to call bonds at a price above par value

27. When would a firm most likely call bonds if they are certain of their interest rate forecast? Remember: bond price and yield are inversely related.

a. after interest rates have declined b. if interest rates do not change

c. after interest rates increase d. just before interest rates decline.

28. Some bonds are stripped, which means that:

1. they have defaulted on promised payments;
2. the call provision has been eliminated;
3. they are transferred into principal-only and interest-only securities;
4. their maturities have been reduced.

29. Firms assume _____ risk when they issue preferred stock than when they issue bonds, since the payment of the dividends on preferred stock _____ be omitted without the firm being forced into bankruptcy.

a. more; can b. less; can c. more; cannot d. less; cannot

30. A new issuance of stock by a firm that does not already have stock outstanding is referred to as:

a. ADR b. seasoned offering c. rights offering d. initial public offering