Chapter 1 True or False

Question 1

American exports are hurt by a strengthening US dollar / euro exchange rate

Answer 1

True. When the U.S. dollar/euro exchange rate strengthens, the dollar rises in value relative to the euro. This makes it more difficult for American exporters to sell their goods to Europeans because Europeans will have to pay more in euros for the same American goods.

Question 2

ADRs are not subject to currency risk

Answer 2

False. Since payments from ADRs are made in a foreing currency that must be converted to US dollars, ADRs are subject to currency risk

Question 3

In an inflationary environment, a LIFO assumption results in a lower valued inventory than FIFO.

Answer 3

True

Question 4

During an economic downturn, investors are more likely to purchase bonds because they are perceived to be safer investments than stocks.

Answer 4

True. Bonds, largely because they come with regular interest payments and a return of investment principal, bonds are perceived as safer investments than stocks. As a result, during times of economic uncertainty investors are increasingly likely to purchase bonds.

Question 5

When a stock is heavily shorted, a technical analyst would be likely to recommending buying the stock.

Answer 5

True. Technical analysts assume that a stock’s price will rise after there has been a large amount of short selling on that stock. This is because short sellers will eventually have to buy shares to close out their positions, and that should lead to an uptrend in the stock’s price.

Question 6

Federal funds rate is a higher interest rate than the prime rate

Answer 6

False. The federal funds rate, which is the rate that banks charge each other to borrow funds overnight, is lower than the prime rate, which is the rate banks charge their best customers to borrow money.

Question 7

When a country has a trade surplus, there is less demand for that country’s currency.

Answer 7

False. A country that has a trade surplus is a country with more exports than imports. When a country has a trade surplus, there is a high demand for its products, and this leads to more demand for the country’s currency because foreign purchasers must use that currency when paying for purchased goods.

Question 8

When performing a net present value calculation the present values of future cash inflows are included in the calculation, but the present values of future cash outflows are not included.

Answer 8

False. In an NPV calculation, the present values of both future cash inflows and cash outflows are part of the calculation .

Question 9

Publicly traded companies must file Form 10-K with the SEC no later 30 days after the end of the calendar year.

Answer 9

False. Most public companies are required to file Form 10-K within 90 days after the end of their fiscal years, though “accelerated filers” must file the report within 75 days of the end of their fiscal years

Question 10

When the Federal Reserve wants to stimulate the economy it purchases U.S. Treasuries.

Answer 10

True. When the Fed wants to stimulate the economy it purchases U.S. Treasuries. In doing so, the Fed releases more money into the economy, which helps to lower interest rates. Lower interest rates allow consumers to borrow more money and spend more money, in turn growing the economy.

Question 11

define federal funds rate

Answer 11

the rate that banks charge each other to borrow funds overnight

Question 12

define interest rate risk

Answer 12

the risk that when interest rates rise, the price of bonds or preferred stock will fall

Question 13

To protect herself against currency risk, an investor in foreign securities can buy put options on the currency of the country in which her securities were issued.

Answer 13

true. an investor in foreign securities can buy puts on the issuing company’s home currency to protect against currency risk

Question 14

when spread between lt and st interest rates narrows, it signals that

Answer 14

when the liquidity spread narrows, it’s a sign that an economic contraction may occur. An increase in this spread may signal an expansion

Question 15

hedging can protect an investor from systematic risk

Answer 15

true. an investor for example can protect from mkt decline by purchasing puts on a broad-bnased index

Question 16

inflation and interest rates rise together

Answer 16

true. this is bc lenders need to offer higher int rates to keep up w inflation

Question 17

A company’s market capitalization is equal to its stock price times the number of all shares issued.

Answer 17

A company’s market capitalization is equal to its stock price times the number of all shares issued.
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False. Market capitalization is equal to stock price times the number of outstanding shares. Treasury stock are issued shares that are no longer outstanding, and thus are not included in the calculation for market capitalization.

Question 18

inverterd yield curve predicts what

Answer 18

recession

Question 19

when FRB wants to reduce inflation, it might raise the discount rate

Answer 19

True. When it raises the discount rate, it makes it harder for banks to borrow money, tightening the money supply. More limited supply of money yields reduced infaltion

Question 20

Countries with trade deficits experience currency decline

Answer 20

true. with a trade deficit, it imports > exports. This means there’s reduced foreign demand for the country’s products and currency which causes the value of that currency to decline

Question 21

stocks with higher p/e ratios tend to be riskier investments

Answer 21

true. EPS measures how much of a comp’s earnings belong to each share of stock and EARNINGS PER SHARE indicates a comp’s profitability

Question 22

Investors typically like to invest in bonds during a contraction because as the contraction phase progresses, yields generally increase.

Answer 22

False. B hyields are generalyl high in the early and middle stages of a contraction; however, they gneerally drop during the latter stages of a contraction

Question 23

Callable bonds are subject to greater call risk when int rts are declining

Answer 23

true. When rates decline, callable bonds are more liely to be called by issuer.

Question 24

How do bonds interact w interest rts

Answer 24

bond yields typically follow interest rate patterns. Thus when rates are high, bond yields are also highe

Question 25

the safest invs in terms of principal risk also tend to be the safest in terms of inflation risk

Answer 25

false. safest in terms of principal risk tend to have highest risk of not outpacing inflation

Question 26

EBIT is equal to what

Answer 26

the sum of operating income and non-operating income

Question 27

credit spread

Answer 27

the difference bw a b’s yield and the yield of a low risk benchmark

Question 28

liquidity spread

Answer 28

diff bw the yields of long and short term T securities

Question 29

3 types of systematic risk

Answer 29

market, inflation, interest rate

Question 30

when credit spreads widen, the value of junk bonds decreases more than the value of AAA rated corp bonds

Answer 30

true. when cred spreads widen, the value of lower grade bonds decreases more than the value of higher grade

Question 31

when credit spreads widen, the value of junk bonds decreases more than the value of AAA rated corp bonds

Answer 31

true. when cred spreads widen, the value of lower grade bonds decreases more than the value of higher grade

Question 32

While initial claims for unemployment typically help to predict which phase of the business cycle will occur in the future, the unemployment report typically shows which phase of the business cycle the economy just experienced.

Answer 32

True. Initial claims for unemployment is a leading indicator that is used to predict future economic performance. On the other hand, the unemployment report indicates the economy’s performance in the recent past, and thus, is a lagging indicator.

Question 33

three categories of shareholder’s equity

Answer 33

paid-in capital, retained earnings, and treasury stock

Question 34

A rise in business spending indicates that the economy will likely grow in the future.

Answer 34

False. Business spending is a lagging indicator, meaning its performance often shows economic developments that have already occurred. A rise in business spending would likely show that the economy has been expanding, but it is not necessarily a sign that it will expand in the future.

Question 35

Depreciation and amortization are considered to be operational expenses.

Answer 35

True. Operational expenses are the costs of running a business that are not directly related to the production of goods and services. They include selling, general, and administrative expenses; research and development; and depreciation and amortization.

Question 36

Form 144 must be filed with the SEC when any investor sells more than 5,000 shares or $50,000 worth of a company’s stock.

Answer 36

False. Form 144 must be filed when an insider sells more than 5,000 shares or $50,000 of a company’s stock. An insider is someone who is an officer, director, or someone who owns more than 10% of the company. The form does not need to be filed if the sale is made by a non-insider.