Fin 221 Spring 2008 Exam 2 Covers Chapters 5-9. Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Which of the following statements is CORRECT? (Ch 5) A. The NYSE does not exist as a physical location; rather it represents a loose collection of dealers who trade stock electronically. B. An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift. C. Capital market instruments include both long-term debt and common stocks. D. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction. E. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors. 2. You recently sold to your brother 200 shares of Disney stock, and the transfer was made through a broker. This is an example of: (Ch 5) A. A money market transaction. B. A primary market transaction. C. A secondary market transaction. D. A futures market transaction. E. An over-the-counter market transaction. 3. If the stock market is semistrong-form efficient, which of the following statements would be CORRECT? (Ch 5) A. The required returns on all stocks are the same, and the required returns on stocks are higher than the required returns on bonds. B. The required returns on stocks equal the required returns on bonds. C. A trading strategy in which you buy stocks that have recently fallen in price is likely to provide you with a return that exceed the return on the overall stock market. D. If you have insider information about a particular stock, you cannot expect to earn an above average return on this information because it is already incorporated into the current stock price. E. Even if a market is semistrong-form efficient, an investor could still earn a better return than the market return if he or she had inside information. 4. If the Federal Reserve sells $50 billion of short-term U.S. Treasury securities to the public, other things held constant, what would be the most likely effect on short-term securities prices and interest rates? A. Prices and interest rates will both rise. B. Prices will rise and interest rates will decline. C. Prices and interest rates will both decline. D. Prices will decline and interest rates will rise. E. There is no reason to expect a change in either prices or interest rates.
5. Suppose the rate of return on a 10-year T-bond is currently 5.00% and that on a 10-year Treasury Inflation Protected Security (TIP) is 2.10%. Suppose further that the MRP on a 10-year T-bond is 0.9%, that no MRP is required on TIPs, and that no liquidity premiums are required on any T-bonds. Given this data, what is the expected rate of inflation over the next 10 years? Disregard cross-product terms, i.e., if averaging is required, use
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