FIN 310 THIRD TEST Flashcards
- At a given point in time, the interest rate offered on a new adjustable-rate mortgage is typically ____
the initial interest rate offered on a new fixed-rate mortgage.
a. below
b. above
c. equal to
d. all of the above are very common
a. below
- An institution that originates and holds a fixed-rate mortgage is positively affected by ____ interest rates;
the borrower who was provided the mortgage is positively affected by ____ interest rates.
a. stable; decreasing
b. increasing; stable
c. increasing; decreasing
d. decreasing; increasing
d. decreasing; increasing
- Use an amortization schedule. A 15-year $100,000 mortgage has a fixed mortgage rate of 7 percent.
In the first month, the total mortgage payment is $____, and $____ of this amount represents payment of interest.
a. Less than $1,000, less than $600
b. Less than $1,000, more than $600
c. More than $1,000, less than $600
d. More than $1,000, more than $600
a. Less than $1000, less than $600
- Mortgage companies specialize in
a. purchasing mortgages originated by other financial institutions.
b. investing and maintaining mortgages that they create.
c. originating mortgages and selling those mortgages.
d. borrowing money through the creation of mortgages that is used to invest in real estate.
c. originating mortgages and selling those mortgages.
The interest rate on a first mortgage is ____ on a second mortgage created at the same time, because the second mortgage
is ____ the existing first mortgage in priority claim against the property in the event of default.
a. higher than; behind
b. equal to that; equal to
c. lower than; ahead of
d. higher than; ahead of
e. lower than; behind
e. lower than; behind
Mortgage prices would normally be expected to ____ when the interest rates ____, holding other factors constant.
a. increase; increase
b. decrease; decrease
c. increase; decrease
d. none of the above
increase; decrease
Mortgage-backed securities are assigned ratings by:
a. rating agencies.
b. the Treasury.
c. the Fed.
d. the mortgage originator
a. rating agencies
____ mortgages enabled more people with relatively lower income, or high existing debt,
or a small down payment to purchase homes.
a. Prime
b. Balloon
c. Amortized
d. Subprime
d. Subprime
Which of the following statements is incorrect?
a.
A stock is a certificate representing partial ownership in a corporation.
b.
Like debt securities, common stock is issued by firms to obtain funds.
c.
Stocks are issued by corporations to raise short-term funds.
d.
The secondary stock market enables investors to sell stocks that they had previously purchased.
b. Like debt securities, common stock is issued by firms to obtain short term funds.
To the extent that shares sold during an IPO run up from their appropriate price,
the proceeds that the issuing firm receives from the IPO are more than it deserves.
a. True
b. False
a. True
When the lockup period expires, the share price commonly
a. remains unchanged.
b. increases significantly.
c. decreases significantly.
d. none of the above
c. decreases significantly.
The practice of purchasing IPO stock at the offer price and holding the stock indefinitely afterward is called
a. flipping.
b. laddering.
c. buy and hold.
d. none of the above
c. buy and hold.
A new stock issuance by a specific firm that does not have stock outstanding is referred to as a(n)
a. stock repurchase.
b. secondary stock offering.
c. initial rights issue.
d. initial public offering (IPO).
d. initial public offering (IPO).
The NYSE market does not have a trading floor.
a. True
b. False
b. False
A firm has a current stock price of $11.32. The firm’s annual dividend is $1.14 per share. The firm’s dividend yield is
a. Less than 5%
b. Between 5% and 8%
c. Between 8.01% and 11%
d. Greater than 11%
c. Between 8.01% and 11%
The prevailing price per share divided by the firm’s earnings per share is known as the
a. dividend yield.
b. price-earnings ratio.
c. fully diluted earnings per share.
d. annual dividend.
b. price-earnings ratio.
A firm is expected to generate earnings of $3.22 per share next year. The mean ratio of share price to expected earnings of competitors in the same industry is 15. Based on this information, the valuation of the firm’s shares based on the price-earnings (PE) method is
a. Less than $30
b. Between $30 and $37
c. Between $37.01 and $45
d. Greater than $45
d. Greater than $45
Bolwork Inc. is expected to pay a dividend of $4 per share next year. Bolwork’s dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $____ per share.
a. Less than 25
b. Between 25 and 35
c. Between 35.01 and 45
d. Greater than 45
b. Between 25 and 35
A beta of 1.8 implies that the stock has a risk premium of 1.8%.
a. True
b. False
b. False
The January effect refers to the _____ pressure on _____ stocks in January of every year.
a. downward; large
b. upward; large
c. downward; small
d. upward; small
d. upward; small
Stock prices of U.S. firms primarily involved in exporting are likely to be _____ affected by a weak dollar and _____ affected by a strong dollar.
a. favorably; adversely
b. adversely; adversely
c. favorably; favorably
d. adversely; favorably
a. favorably; adversely
The _____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock’s volatility.
a. Sharpe
b. Treynor
c. Arbitrage
d. Margin
a. Sharpe
A stock’s average return is 11 percent. The average risk-free rate is 9 percent. The stock’s beta is 1 and its standard deviation of returns is 10 percent. What is the Sharpe Index?
a. .05
b. .5
c. .1
d. .02
e. .2
e. .2
A call option is “out of the money” when the
a. market price of the underlying security exceeds the exercise price.
b. market price of the underlying security equals the exercise price.
c. market price of the underlying security is less than the exercise price.
d. premium on the option is less than the exercise price.
c. market price of the underlying security is less than the exercise price.
A stock’s beta is estimated to be 1.6. The risk-free rate is 5 percent, and the market return is expected to be 9 percent. What is the expected return on the stock based on the CAPM?
a. Less than 6%
b. Between 6% and 9%
c. Between 9.01% and 12%
d. Between 12.01% and 16%
e. Greater than 16%
c. Between 9.01% and 12%
A put option is “in the money” when the
a. market price of the underlying security exceeds the exercise price.
b. market price of the underlying security equals the exercise price.
c. market price of the underlying security is less than the exercise price.
d. premium on the option is less than the exercise price.
c. market price of the underlying security is less than the exercise price.
The Options Clearing Corporation (OCC) serves as a guarantor on option contracts traded in the United States.
a. True
b. False
a. True
A speculator buys a call option for $5, with an exercise price of $50. The stock is currently priced at $49, and rises to $55 on the expiration date. What is the stick price at which the speculator would break even.
a. Less than $48
b. Between $48 and $52
c. Between $52.01 and $55
d. Between $55.01 and $59
e. Greater than $59
c. Between $52.01 and $55
The _____, the higher the call option premium, other things being equal.
a. lower the existing price of the security relative to the exercise price.
b. lower the variability of the security’s market price.
c. longer the maturity of the option.
d. A and C
c. longer the maturity of the option.
The longer the time to maturity, the _____ the call option premium and the _____ then put option premium.
a. higher; lower
b. lower; higher
c. higher; higher
d. lower; lower
c. higher; higher
The lower the volatility of the underlying stock, the _____ the call option premium and the _____ put option premium.
a. higher; lower
b. lower; higher
c. higher; higher
d. lower; lower
d. lower; lower
The sale of a call option on a stock the seller already owns is referred to as
a. a covered call.
b. a naked call.
c. call on futures.
d. futures on options.
a. a covered call.
