Exam 1 Review Problems.docx

Exam 1 Review Problems.docx - 1 FIL 242 PRACTICE QUESTIONS...

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1 FIL 242: PRACTICE QUESTIONS FOR TEST #1 Section 7: 8 questions (3 short essay questions) Chapter 1 (Intro), Chapter 2 (Financial Securities and Stock Indexes), Chapter 3 (Securities Markets) Concept Questions: 1) Describe what money market instruments are. - Short-term and generally “liquid” debt instruments - Usually sold in large denominations ($1 million or more) - Low default risk - Mature in 1 year or less - Generally restricted to institutional investors - Treasury Bills, CDs and money market mutual funds - Some are not available to small investors because it is unsecure 2) Both the federal (fed) fund market and the repurchase (repo) agreement market are interbank lending/borrowing facilities. Explain how fed fund transactions and repo transactions differ. - Fed fund market is only open to banks, strictly lending. - Repo market is open to non-banks including the Federal Reserve System - Collateralized: when a bank borrows from another bank, it gives treasury securities to the other banks until it repays the bank back 3) What is the difference between common stocks and preferred stock? - Common Stock - Residual claim in a firm - Stockholders are the last in line on asset and income of corporation - Stockholders may be entitled to dividends - Limited liability: investors are only liable of the amount they invest in stock market - Preferred Stock - Pays fixed dividends, but may decide not to pay them on regular basis - Has priority over common stock - No voting right 4) What is the difference between option contracts and futures contracts? - Option Contracts - Call Option: Right to buy an asset at a specified price on or before a specified expiration date - Put Option: Right to sell an asset at a specified pre-determined price (“strike price”) on or before a specified expiration date - To acquire an option, you have to pay a premium (non-refundable) - Future Contracts - They are contractual agreements to buy or sell assets at a pre-specified price but for future delivery - Gives the holder the obligation to buy or sell at a certain price -
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