Financial Markets MCQs

The material wealth of a society is a function of

all financial assets.
all real assets.
all financial and real assets.
all physical assets.

_______ are real assets.

Machines
Stocks and bonds
Knowledge
Land, machines, and knowledge

The means by which individuals hold their claims on real assets in a well-developed economy are

investment assets.
depository assets.
derivative assets.
financial assets.

_________ financial asset(s).

Derivatives and U.S. agency bonds are
Buildings are
Derivatives are
U.S. agency bonds are

directly contribute to the country's productive capacity.
indirectly contribute to the countryâ€™s productive capacity.
contribute to the country's productive capacity, both directly and indirectly.
do not contribute to the countryâ€™s productive capacity, either directly or indirectly.

In 2016, ____________ was the most significant real asset of U.S. households in terms of total value.

consumer durables
automobiles
real estate
mutual fund shares

In 2016, ____________ was the least significant financial asset of U.S. households in terms of total value.

real estate
mutual fund shares
debt securities
life insurance reserves

In 2016, ____________ was the most significant financial asset of U.S. households in terms of total value.

pension reserves
debt securities
mutual fund shares
life insurance reserves

In 2016, ____________ was the most significant asset of U.S. households in terms of total value.

real estate
mutual fund shares
debt securities
life insurance reserves

In 2016, ____________ were the most significant liability of U.S. households in terms of total value.

credit cards
mortgages
bank loans
student loans

In 2016, which of the following financial assets make up the greatest proportion of the financial assets held by U.S. households?

Pension reserves
Life insurance reserves
Mutual fund shares
Debt securities

In 2016, _______ of the assets of U.S. households were financial assets as opposed to tangible assets.

20.4%
34.2%
69.4%
71.7%

The largest component of domestic net worth in 2016 was

nonresidential real estate.
residential real estate.
inventories.
consumer durables.

The smallest component of domestic net worth in 2016 was

nonresidential real estate.
residential real estate.
inventories
consumer durables.

The domestic net worth of the U.S. in 2016 was

$15.411 trillion.
$26.431 trillion.
$42.669 trillion.
$64.747 trillion.

A fixed-income security pays

a fixed level of income for the life of the owner.
a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.
a variable level of income for owners on a fixed income.
a fixed or variable income stream at the option of the owner.

A debt security pays

a fixed level of income for the life of the owner.
a variable level of income for owners on a fixed income.
a fixed or variable income stream at the option of the owner.
a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.

Money market securities

are highly marketable.
are generally very low risk.
are highly marketable and are generally very low risk.
All of the options.

An example of a derivative security is

a common share of Microsoft.
a call option on Intel stock.
a commodity futures contract.
a call option on Intel stock and a commodity futures contract.

The value of a derivative security

depends on the value of the related security.
is unable to be calculated.
is unrelated to the value of the related security.
has been enhanced due to the recent misuse and negative publicity regarding these instruments.

Although derivatives can be used as speculative instruments, businesses most often use them to

attract customers.
appease stockholders.
offset debt.
hedge risks.

Financial assets permit all of the following except

consumption timing.
allocation of risk.
separation of ownership and control.
elimination of risk.

The ____________ refers to the potential conflict between management and shareholders.

agency problem
diversification problem
liquidity problem
solvency problem

A disadvantage of using stock options to compensate managers is that

it encourages managers to undertake projects that will increase stock price.
it encourages managers to engage in empire building.
it can create an incentive for managers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects.
All of the above.

Which of the following are mechanisms that have evolved to mitigate potential agency problems? I) Using the firm's stock options for compensatio...

II and V
I, III, and IV
I, III, IV, and V
III, IV, and V

Corporate shareholders are best protected from incompetent management decisions by

the ability to engage in proxy fights.
management's control of pecuniary rewards.
the ability to call shareholder meetings.
the threat of takeover by other firms.

Theoretically, takeovers should result in

improved management.
increased stock price.
increased benefits to existing management of the taken-over firm.
improved management and increased stock price.

During the period between 2000 and 2002, a large number of scandals were uncovered. Most of these scandals were related to I) manipulation of finan...

II, III, and IV
II and IV
I, III, and IV
I, II, and III

The Sarbanes-Oxley Act

requires corporations to have more independent directors.
prohibits auditing firms from providing other services to clients.
requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements.
All of the above.

Asset allocation refers to

choosing which securities to hold based on their valuation.
investing only in "safe" securities.
the allocation of assets into broad asset classes.
bottom-up analysis.

Security selection refers to

choosing which securities to hold based on their valuation.
investing only in "safe" securities.
the allocation of assets into broad asset classes.
top-down analysis.

Which of the following portfolio construction methods starts with security analysis?

Top-down
Bottom-up
Middle-out
Buy and hold

Which of the following portfolio construction methods starts with asset allocation?

Top-down
Bottom-up
Middle-out
Buy and hold

_______ are examples of financial intermediaries.

Insurance companies
Investment companies
Credit unions
All of the options

Financial intermediaries exist because small investors cannot efficiently

diversify their portfolios.
advertise for needed investments.
diversify their portfolios and assess credit risk of borrowers.
All of the options.

________ specialize in helping companies raise capital by selling securities.

Commercial bankers
Investment bankers
Investment issuers
Credit raters

Commercial banks differ from other businesses in that both their assets and their liabilities are mostly

illiquid
financial
real
owned by the government.

In 2016, ____________ was(were) the most significant financial asset(s) of U.S. commercial banks in terms of total value.

loans and leases
cash
real estate
deposits

In 2016, ____________ was(were) the most significant liability(ies) of U.S. commercial banks in terms of total value.

loans and leases
cash
real estate
deposits

In 2016, ____________ was(were) the most significant real asset(s) of U.S. nonfinancial businesses in terms of total value.

equipment and software
inventory
real estate
trade credit

In 2016, ____________ was(were) the least significant real asset(s) of U.S. nonfinancial businesses in terms of total value.

equipment and software
inventory
real estate
trade credit

In 2016, ____________ was(were) the least significant liability(ies) of U.S. nonfinancial businesses in terms of total value.

bonds and mortgages
bank loans
inventories
trade debt

In terms of total value, the most significant liability(ies) of U.S. nonfinancial businesses in 2016 was(were)

bank loans.
bonds and mortgages.
trade debt.
other loans.

In 2016, ____________ was(were) the least significant financial asset(s) of U.S. nonfinancial businesses in terms of total value.

cash and deposits
trade credit
inventory
marketable securities

New issues of securities are sold in the ________ market(s).

primary
secondary
over-the-counter
primary and secondary

Investors trade previously issued securities in the ________ market(s).

primary
secondary
primary and secondary
derivatives

Investment bankers perform which of the following role(s)?

Market new stock and bond issues for firms
Provide advice to the firms as to market conditions, price, etc.
Design securities with desirable properties
All of the options

Until 1999, the ________ Act(s) prohibited banks in the United States from both accepting deposits and underwriting securities.

Sarbanes-Oxley
Glass-Steagall
SEC
Sarbanes-Oxley and SEC

The spread between the LIBOR and the Treasury-bill rate is called the

term spread.
T-bill spread.
LIBOR spread.
TED spread.

Mortgage-backed securities were created when ________ began buying mortgage loans from originators and bundling them into large pools that could be tr...

GNMA
FNMA
FHLMC
FNMA and FHLMC

The sale of a mortgage portfolio by setting up mortgage pass-through securities is an example of

credit enhancement.
credit swap.
unbundling
derivatives

Which of the following is true about mortgage-backed securities? I) They aggregate individual home mortgages into homogeneous pools.II) The purchaser...

II, III, and IV
I, II, and IV
II and IV
I, III, and IV

________ were designed to concentrate the credit risk of a bundle of loans on one class of investor, leaving the other investors in the pool relative...

Stocks
Bonds
Derivatives
Collateralized debt obligations

________ are, in essence, an insurance contract against the default of one or more borrowers.

Credit default swaps
CMOs
ETFs
Collateralized debt obligations

The trading of stock that was previously issued takes place

in the secondary market.
in the primary market.
usually with the assistance of an investment banker.
in the secondary and primary markets.

A purchase of a new issue of stock takes place

in the primary market.
usually with the assistance of an investment banker.
in the secondary and primary markets.
in the primary market and usually with the assistance of an investment banker.

Firms raise capital by issuing stock

in the secondary market.
in the primary market.
to unwary investors.
only on days when the market is up.

Which of the following statements regarding the specialist are true?

Specialists earn income from commissions and spreads in stock prices.
Specialists stand ready to trade at quoted bid and ask prices.
Specialists cannot trade in their own accounts.
Specialists maintain a book listing outstanding, unexecuted limit orders, earn income from commissions and spreads in stock prices, and stand ready to trade at quoted bid and ask prices.

Investment bankers

act as intermediaries between issuers of stocks and investors.
act as advisors to companies in helping them analyze their financial needs and find buyers for newly-issued securities.
accept deposits from savers and lend them out to companies.
act as intermediaries between issuers of stocks and investors and act as advisors to companies in helping them analyze their financial needs and find buyers for newly-issued securities.

In a "firm commitment," the investment banker

buys the stock from the company and resells the issue to the public.
agrees to help the firm sell the stock at a favorable price.
finds the best marketing arrangement for the investment-banking firm.
agrees to help the firm sell the stock at a favorable price and finds the best marketing arrangement for the investment-banking firm.

The secondary market consists of

transactions on the AMEX.
transactions in the OTC market.
transactions through the investment banker.
transactions on the AMEX and in the OTC market.

Initial margin requirements are determined by

the Securities and Exchange Commission.
the Federal Reserve System.
the New York Stock Exchange.
the Federal Reserve System and the New York Stock Exchange.

You purchased JNJ stock at $50 per share. The stock is currently selling at $65. Your gains may be protected by placing a

stop-buy order.
limit-buy order.
market order.
limit-sell order.

You sold JCP stock short at $80 per share. Your losses could be minimized by placing a

limit-sell order.
limit-buy order.
stop-buy order.
day-order.

Which one of the following statements regarding orders is false?

A market order is simply an order to buy or sell a stock immediately at the prevailing market price.
A limit-sell order is where investors specify prices at which they are willing to sell a security.
If stock ABC is selling at $50, a limit-buy order may instruct the broker to buy the stock if and when the share price falls below $45.
A market order is an order to buy or sell a stock on a specific exchange (market).

Restrictions on trading involving insider information apply to the following, except

corporate officers.
corporate directors.
major stockholders.
All of the individuals.

The cost of buying and selling a stock consists of

dealer's bid-asked spread.
a price concession an investor may be forced to make.
broker's commissions and dealer's bid-asked spread.
brokerâ€™s commissions, dealerâ€™s bid-asked spread, and a price concession an investor may be forced to make.

Assume you purchased 200 shares of GE common stock on margin at $70 per share from your broker. If the initial margin is 55%, how much did you borrow ...

$4,000
$7,700
$7,000
$6,300

You sold short 200 shares of common stock at $60 per share. The initial margin is 60%. Your initial investment was

$4,800.
$12,000.
$5,600.
$7,200.

You purchased 100 shares of IBM common stock on margin at $70 per share. Assume the initial margin is 50%, and the maintenance margin is 30%. Below wh...

$21
$50
$49
$80

You purchased 100 shares of common stock on margin at $45 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the ...

0.33
0.43
0.23
0.25

You purchased 300 shares of common stock on margin for $60 per share. The initial margin is 60%, and the stock pays no dividend. What would your rate ...

25.00%
â€“33.33%
44.31%
â€“41.67%

Assume you sell short 100 shares of common stock at $45 per share, with initial margin at 50%. What would be your rate of return if you repurchase the...

20.03%
25.67%
22.22%
77.46%

You sold short 300 shares of common stock at $55 per share. The initial margin is 60%. At what stock price would you receive a margin call if the main...

$51.00
$65.19
$35.22
$40.36

Assume you sold short 100 shares of common stock at $50 per share. The initial margin is 60%. What would be the maintenance margin if a margin call is...

40%
33%
35%
25%

Specialists on stock exchanges perform which of the following functions?

Analyze the securities in which they specialize
Provide liquidity to the market
Act as dealers in their own accounts and analyze the securities in which they specialize
Act as dealers in their own accounts and provide liquidity to the market

Shares for short transactions

are usually borrowed from other brokers.
are typically shares held by the short sellerâ€™s broker in street name.
are borrowed from commercial banks.
are typically shares held by the short seller's broker in street name and are borrowed from commercial banks.

Which of the following orders is most useful to short sellers who want to limit their potential losses?

Limit order
Discretionary order
Limit-loss order
Stop-buy order

Which of the following orders instructs the broker to buy at the current market price?

Discretionary order
Limit-loss order
Stop-buy order
Market order

Which of the following orders instructs the broker to buy at or below a specified price?

Limit-loss order
Discretionary order
Limit-buy order
Stop-buy order

Which of the following orders instructs the broker to sell at or below a specified price?

Limit-sell order
Stop-loss
Limit-buy order
Stop-buy order

Which of the following orders instructs the broker to sell at or above a specified price?

Limit-buy order
Discretionary order
Limit-sell order
Stop-buy order

Which of the following orders instructs the broker to buy at or above a specified price?

Limit-buy order
Discretionary order
Limit-sell order
Stop-buy order

Shelf registration

is a way of placing issues in the primary market.
allows firms to register securities for sale over a two-year period.
increases transaction costs to the issuing firm.
is a way of placing issues in the primary market and allows firms to register securities for sale over a two-year period.

Block transactions are transactions for more than ___ shares, and they account for about _ percent of all trading on the NYSE.

1,000; 5
500; 10
100,000; 50
10,000; 30

A program trade is

a trade of 10,000 (or more) shares of a stock.
a trade of many shares of one stock for one other stock.
a trade of analytic programs between financial analysts.
a coordinated purchase or sale of an entire portfolio of stocks.

When stocks are held in street name,

the investor receives a stock certificate without the owner's street address.
the investor does not receive a stock certificate.
the investor does not receive a stock certificate, and the broker holds the stock in the brokerage firmâ€™s name on behalf of the client.
the broker holds the stock in the brokerage firm's name on behalf of the client.

NASDAQ subscriber levels

permit those with the highest level, 3, to "make a market" in the security; permit those with a level 2 subscription to receive all bid and ask quotes but not to enter their own quotes; and permit level 1 subscribers to receive general information about prices.
permit those with the highest level, 3, to "make a market" in the security.
permit level 1 subscribers to receive general information about prices.
include all OTC stocks.

You want to buy 100 shares of Hotstock Inc. at the best possible price as quickly as possible. You would most likely place a

stop-loss order.
stop-buy order.
market order.
limit-sell order.

You want to purchase XON stock at $60 from your broker using as little of your own money as possible. If initial margin is 50% and you have $3,000 to ...

100 shares
200 shares
50 shares
500 shares

A sale by IBM of new stock to the public would be a(n)

short sale.
seasoned equity offering.
private placement.
secondary-market transaction.

The finalized registration statement for new securities approved by the SEC is called

a red herring.
the preliminary statement.
the prospectus.
a best-efforts agreement.

One outcome from the SEC investigation of the "Flash Crash of 2010" was

a prohibition of short selling.
higher margin requirements.
approval of new circuit breakers.
establishment of electronic communications networks (ECNs).

All of the following are considered new trading strategies, except

high frequency trading.
algorithmic trading.
dark pools.
short selling.

You sell short 100 shares of Loser Co. at a market price of $45 per share. Your maximum possible loss is

$4,500.
unlimited
zero
$9,000.

You buy 300 shares of Qualitycorp for $30 per share and deposit initial margin of 50%. The next day, Qualitycorp's price drops to $25 per share. ...

50%
40%
33%
60%

When a firm markets new securities, a preliminary registration statement must be filed with

the exchange on which the security will be listed.
the Securities and Exchange Commission.
the Federal Reserve.
all other companies in the same line of business.

In a typical underwriting arrangement, the investment-banking firm I) sells shares to the public via an underwriting syndicate.II) purchases the secur...

I, II, and III
I, III, and IV
I and IV
II and III

Which of the following is true regarding private placements of primary security offerings?

Extensive and costly registration statements are required by the SEC.
For very large issues, they are better suited than public offerings.
They trade in secondary markets.
The shares are sold directly to a small group of institutional or wealthy investors.

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Financial Markets MCQs