CH3

Question 1

1) Which one of the following is the best definition of a money market instrument?
A) corporate debt that matures in 90 days or less
B) investment issued by a financial institution that matures in one year or less
C) investment issued by a financial institution that matures in 30 days or less
D) debt issued by the government or a corporation that matures in one year or less
E) bank savings account

Answer 1

D

Question 2

2) A fixed-income security is defined as:
A) any security originally issued as either debt or equity that pays a fixed, pre-set
payment.
B) common or preferred stock that pays a fixed annual dividend.
C) long-term debt issued solely by a federal or state government.
D) a long-term debt obligation that pays scheduled fixed payments.
E) a debt obligation that pays a fixed rate of return for a one-year period of time.

Answer 2

D

Question 3

3) The annual interest payment divided by the current price of a bond is called the:
A) market yield.
B) coupon rate.
C) current yield.
D) yield-to-market.
E) yield-to-maturity.

Answer 3

C

Question 4

4) A security originally sold by a business or government to raise money is called a(n):
A) option contract.
B) derivative.
C) futures contract.
D) primary asset.
E) primary debt.

Answer 4

D

Question 5

5) A financial asset that represents a claim on another financial asset is classified as a ________ asset.
A) derivative
B) optioned
C) primary
D) contracted
E) secondary

Answer 5

A

Question 6

6) A futures contract is an agreement:
A) to exchange goods on a specified date in the future at a price that is agreed upon
today.
B) to exchange a specified quantity of goods on a specified date in the future at the
current market price.
C) that obligates a corporation to issue additional securities at a specified date in the
future.
D) to exchange financial assets on a specified date in the future with the price
determined on that date.
E) to deliver goods today in exchange for an agreed upon payment to be paid on a
specified date in the future.

Answer 6

A

Question 7

7) An agreement that grants the owner the right, but not the obligation, to buy or sell a specific asset at a specified price during a specified time period is called a(n) ________ contract.
A) option
B) quoted
C) fixed
D) futures
E) obligatory

Answer 7

A

Question 8

8) A call option is an agreement that:
A) presets a price but not a time period.
B) obligates both the buyer and seller to a future transaction.
C) gives the buyer the right to purchase an asset at some point in the future.
D) grants the seller the right, but not the obligation, to sell an asset.
E) grants the seller the right to buy a security at a predetermined price.

Answer 8

C

Question 9

9) A contract that grants its buyer the right, but not the obligation, to sell an asset at a specified price is called a:
A) call option.
B) put option.
C) preset contract.
D) futures contract.
E) primary contract.

Answer 9

B

Question 10

10) The price paid to purchase an option contract is called the:
A) exercise price.
B) current yield.
C) option premium.
D) strike price.
E) future premium.

Answer 10

C

Question 11

11) The amount of money per share that will be received when a put option on stock is exercised is called the ________ price.
A) obligated
B) market
C) stock
D) future
E) strike

Answer 11

E

Question 12

12) Riverview Chemical recently issued some debt that had an original maturity of nine months. This debt is best classified as a(n):
A) fixed-income security.
B) money market instrument.
C) derivative security.
D) futures contract.
E) option contract.

Answer 12

B

Question 13

13) Money market instruments:
A) cannot be resold.
B) may be sold on a discount basis.
C) are generally sold in small denominations.
D) are quoted in terms of a spread.
E) tend to be illiquid.

Answer 13

B

Question 14

14) Money market instruments issued by a corporation:
A) are default-free.
B) are risk-free.
C) must be held by the original purchaser until maturity.
D) are less liquid than those issued by the government.
E) can only be resold to the original issuer.

Answer 14

D

Question 15

15) Which one of the following is classified as a fixed-income security?
A) 9-month bank certificate of deposit
B) U.S. Treasury bill
C) common stock that pays regular quarterly dividends
D) 2-year U.S. Treasury security
E) 6-month municipal bond

Answer 15

D

Question 16

16) Which one of the following sentences is correct concerning fixed-income securities?
A) Fixed-income securities tend to be more liquid than money market securities.
B) Fixed-income securities are default free.
C) The price of a fixed-income security is inversely related to the current yield.
D) Fixed-income securities include all debt instruments issued by the U.S.
government.
E) The coupon rate on a fixed-income security is equal to the current yield

Answer 16

C

Question 17

17) Assume a semi-annual coupon bond matures in 3 years, has a face value of $1,000, a current market price of $989, and a 5 percent coupon. Which one of the following statements is correct concerning this bond?
A) The current yield exceeds the coupon rate.
B) The bond will pay semi-annual payments of $50 each.
C) The current coupon rate is greater than 5 percent.
D) The bond is a money market instrument.
E) The bond will pay less annual interest now than when it was originally issued.

Answer 17

A

Question 18

18) Bond trades are reported:
A) on a weekly basis only.
B) only on government issues.
C) by theSEC.
D) on TRACE.
E) only when originally sold.

Answer 18

D

Question 19

22) Which one of the following represents a residual ownership interest in the issuer?
A) preferred stock
B) U.S. Treasury bond
C) corporate bond
D) municipal bond
E) common stock

Answer 19

E

Question 20

23) Which one of the following statements related to common stock is correct?
A) Corporations have the right to discontinue paying dividends.
B) Corporations are required to pay annual dividends to its common stockholders.
C) Common stock has a pre-defined liquidation value.
D) Common stock is a form of corporate debt.
E) Corporations pay dividends at the discretion of the firm’s president.

Answer 20

A

Question 21

24) Preferred stock:
A) is generally issued only by new firms that are small in size.
B) has a fixed maturity date similar to a bond.
C) may or may not be cumulative.
D) dividends can be skipped at the discretion of the company president.
E) represents the residual ownership of a corporation.

Answer 21

C

Question 22

25) Preferred stock:
A) is treated like debt for tax purposes.
B) is a type of corporate debt.
C) is listed in the liabilities section of a balance sheet.
D) is treated like equity for both tax and accounting purposes.
E) has a stated dividend but no stated liquidation value.

Answer 22

D

Question 23

28) Which one of the following is a derivative asset?
A) government bond
B) preferred stock
C) corporate bond
D) option contract
E) common stock

Answer 23

D

Question 24

29) Great Lakes Farm agreed this morning to sell General Mills 25,000 bushels of wheat six months from now at a price per bushel of $9.75. This is an example of a:
A) fixed-income security.
B) futures contract.
C) call option.
D) put option.
E) money market security.

Answer 24

B

Question 25

30) Cole’s Jewelers purchased a futures contract on 200 ounces of gold to be exchanged 3-months from now. As the contract holder, Cole’s Jewelers:
A) has an obligation to buy 200 ounces of gold but only if the price of gold increases within the next 3 months.
B) will profit if the price of gold is higher three months from now.
C) is expecting the price of gold to decrease and thus is locking in a selling price.
D) has the obligation to purchase 200 ounces of gold at the market price three months
from now.
E) has the right, but not the obligation, to purchase 200 ounces of gold 3 months from
now.

Answer 25

B

Question 26

31) Futures contracts:
A) require payment in full at the time the contract is written.
B) can be resold.
C) are primary financial assets.
D) establish both the quantity to be exchanged and the exchange date but not the price.
E) establish the quantity to be exchanged but not the date of the exchange.

Answer 26

B

Question 27

32) At the time a futures contract is written:
A) the underlying asset is specifically identified.
B) the buyer is granted the right, but not the obligation, to exercise the contract.
C) the buyer pays a good faith deposit to the seller.
D) the current market price of the underlying asset must be less than the agreed upon
futures price.
E) the current market price of the underlying asset becomes the contract price.

Answer 27

A

Question 28

33) Which of the following are generally included in a standardized futures contract?
I. delivery date
II. quantity to be delivered
III. specific item to be delivered
IV. delivery location
A) I, II, and III only
B) II, III, and IV only
C) I, II, III, and IV
D) I, III, and IV only
E) I and II only

Answer 28

C

Question 29

34) Harvest Fields sold ten September futures contracts on oats. Harvest Fields will:
A) take delivery of the oats in September.
B) receive payment now and deliver in September.
C) pay for the oats now and take delivery in September.
D) both receive payment and deliver in September.
E) pay for the oats in September.

Answer 29

D

Question 30

35) Investing in a futures contract:
A) creates a gain for one party without causing a loss for the other party.
B) guarantees a sale but not a sale price.
C) can be offset by taking an opposing position.
D) can be profitable for both the buyer and the seller simultaneously.
E) guarantees the buyer a profit on the contract.

Answer 30

C

Question 31

39) If you want the right, but not the obligation, to buy a stock at a specified price you should:
A) either sell a call or buy a put.
B) buy a put.
C) buy a call.
D) sell a put.
E) sell a call.

Answer 31

C

Question 32

40) If you want the right, but not the obligation, to sell a stock at a specified price you should:
A) sell a call.
B) sell a put.
C) buy a call.
D) buy a put.
E) either sell a call or buy a put.

Answer 32

D

Question 33

41) If you are willing to buy a stock and you wish to receive the option premium you should:
A) sell a put.
B) either sell a call or buy a put.
C) buy a call.
D) buy aput.
E) sell acall.

Answer 33

A

Question 34

42) If you are willing to sell a stock and wish to receive the option premium you should:
A) sell a put.
B) sell a call.
C) either sell a call or buy a put.
D) buy a put.
E) buy a call.

Answer 34

B

Question 35

43) A European put option grants the holder the right to:
A) sell the underlying asset at the strike price only on the expiration date.
B) buy the underlying asset at the exercise price on the expiration date.
C) sell the underlying security at the strike price on or before the expiration date.
D) buy the underlying asset at or below the exercise price on or before the expiration
date.
E) buy the underlying security at a stated price at any time up to and including the
expiration date.

Answer 35

A

Question 36

44) An American call option grants the holder the right to:
A) buy the underlying security at a stated price on or before the expiration date.
B) buy the underlying asset at the exercise price only on the expiration date.
C) sell the underlying asset at the strike price only on the expiration date.
D) buy the underlying asset at or below the exercise price on or before the expiration
date.
E) sell the underlying security at the strike price on or before the expiration date.

Answer 36

A

Question 37

45) When a put option is exercised, the:
A) seller of the option must buy the underlying asset and pay the strike price.
B) seller of the option receives the strike price.
C) buyer of the option pays the option premium and receives the underlying asset.
D) seller of the option receives the option premium.
E) buyer of the option sells the underlying asset and receives the option premium.

Answer 37

A

Question 38

46) You will earn a profit as the owner of a call option if the price of the underlying asset:
A) remains constant or increases.
B) decreases.
C) increases.
D) remains constant or decreases.
E) remains constant.

Answer 38

C

Question 39

47) The seller of a naked call is betting that the price of the underlying asset will:
A) increase.
B) will remain constant for a period of time and then increase prior to the expiration date.
C) decrease.
D) have no effect on the value of the call.
E) decrease and then increase prior to the expiration date.

Answer 39

C

Question 40

48) Options expire on the ________ of the expiration month.
A) last Friday
B) Saturday following the 3rd Friday
C) 3rd Friday
D) last trading day
E) Saturday following the last Friday

Answer 40

B