Exam 1 F 11.pdf - FINANCE 4-020 — INVESTMENTS EXAM ONE...

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Unformatted text preview: FINANCE 4-020 — INVESTMENTS EXAM ONE FALL SEMESTER 2011 NAME /(€( W flail/7W7 STUDENT#‘ M’O 45?0 9 PAGES (including cover sheet) 40 QUESTIONS 60 POINTS ~75 MINUTES FIN 4020 EXAM ONE September 27, 2011 NAME: W444 Mm/fl‘ 1. The material wealth of society is determined by the economy's . which is a function of the economy's . (1 point) A. investment bankers, financial assets B. investment bankers, real assets / C. productive capacity, financial assets D. roductive capacity, real assets 2. Active trading in markets and competition among securities analysts helps ensure that (1 point) 1. security prices approach informational efficiency 11. riskier securities are priced to offer higher potential returns III. investors are unlikely to be able to consistently find under- or overvalued securities A. I only B. I and 11 only 11 and III only . , II and III 3. The success of common stock investments depends on the success of _. (1 point) A. derivative securities B. fixed income securities @he firm and its real assets D. government methods of allocating capital . llocation of the investment portfolio across broad asset classes . analysis of the value of securities C. choice of specific assets within each asset class D. none of the answers define asset allocation fisset allocation refers to the . (1 point) A 5. portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis. (1 point) A. Active ’ B..Momentum C assive D. Market timing 6. Firms that specialize in helping companies raise capital by selling securities to the public are called I nmdm'gf Ban/V: . (1 point) 7. The Sarbanes—Oxley Act of 2002 tightened corporate governance rules by requiring all but which one of the following? (2 points) A. Required corporations to have more independent directors . equired the CFO to personally vouch for the corporation's financial statements @equired that firms could no longer employ investment bankers to sell securities to the public D. The creation of a new board to oversee the auditing of public companies za— i.c. / 8 FIN 4020 EXAM ONE September 27, 2011 NAME: MW“ 8. The type of mutual fund that primarily engages in market timing is called a/ an . (1 point) @sector fund . index fund C. TF . asset allocation fund 9. Which one of the following invests in a portfolio that is fixed for the life of the fund? (1 point) A. Mutual fund B. Money market fund . Managed investment company © Unit investment trust 10. A is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds. (1 point) A. commingled pool B. unit trust hedge fund . money market fund 11. Higher portfolio turnover . (1 point) 1. results in greater tax liability for investors 11. results in greater trading costs for the fund, which investors have to pay for 111. is a characteristic of asset allocatiOn funds A. I only B. 11 only @ and 11 only . I, II and III 12. After considering current market conditions an investor decides to place 60% of their funds in e ' ies and the rest in bonds. This is an example of . (1 point) fiat allocation @security analysis top down portfolio management D. passive management 13. Suppose an investor is considering one of two investments which are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security they invest in they can expect to . (1 point) A. earn no more than the Treasury bill rate on either security B. pay less for the security that has higher risk ay less for the security that has lower risk D. earn more if interest rates are lower Zia. / 6 FlN 4020 EXAM ONE September 27, 2011 NAME: Mill/mm 14. The efficient markets hypothesis suggests that_ .(1 point] active portfolio management strategies are the most appropriate investment strategies uassive portfolio management strategies are the most appropriate investment strategies C. either active or passive strategies may be appropriate, depending on the expected direction of the market D. a bottom up approach is the most appropriate investment strategy 15. Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay back the loan over 5 years. (2 points) ‘ new financial asset was created in this transaction. =.A financial asset was traded for a real asset in this transaction. ‘8. A financial asset was destroyed' 1n this transaction. llA real asset was created' in this transaction. 16. Which one of the following is a true statement regarding corporate bonds? [1 point) A. A corporate callable bond gives its holder the right to exchange it for a specified number of the company's common shares A corporate debenture is a secured bond A corporate convertible bond gives its holder the right to exchange it for a specified number of e company's common shares 11. Holders of corporate bonds have voting rights in the company 17. Which one of the following provides the best example of securitization? (1 point) A. convertible bond @c 11 option . mortgage pass-through security D. preferred stock 18. A firm that has large securities holdings that wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following? (1 point) A. Reverse repurchase agreement B. Banker's acceptance ommercial paper . Repurchase agreement 19. Currently the Dow Jones Industrial Average is computed by . (1 point) A. adding the prices of 30 large "blue-chip" stocks and dividing by 30 B. calculating the total market value of the 30 firms in the index and dividing by 30 C. measuring the current total market value of the 30 stocks in the index relative to the total value on the previous day = dding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits . nd large stock dividends FIN 4020 EXAM ONE September 27, 2011 NAME: Mvfllm 20. A contingent deferred sales charge is commonly called a _. (1 point) A. ont-end load back-end load 2b-1 charge .top end sales commission 21. You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and backfend loads and/ or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a rather than at everything else equal. (1 point) A. 12b-1 fee; front-end load @front—end load; 12b-1 fee C. back—end load, front-end load D. 12b—1 fee; back-end load 22. Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the Net Asset Value (NAV) of these shares? (1 point) A. $12.00 ‘$9.00 120’ c. $10.00 50 D. $1.00 23. Money Market Mutual Funds (MMMF'S) are structured to maintain an NAV of 1.00 in order to provide safety of capital and liquidity. In late 2008, the Primary Reserve Fund, the largest MMMF "broke the buck" when the NAV of this fund fell to 0.97. Please explain the primary cause of this event and the subsequent run on worldwide MMMF’s. (3 points) The MMMF wwt be/aw ‘Hw MV¢F [.00 f4 (1002 W 0% 9'” +11 mqrégc 5%;wa gecw’fl'g- fluff wen CrIWf sew/“l WW" Wjfi o/«Aw/P‘to‘ 7—4"; (”M5/ 4 éy" AW 700/ #544037“ 4// Avril; alfa/ ;”"’""’W¢ bank; mat/n} a// MMMF} 7‘0 Ave war/n evccuse »? UEc-NAAP fifl/b‘x/WEM /?> 2$Lic/6 FIN 4020 EXAM ONE September 27, 2011 NAME: MHZ/VIM 24. If a treasury note has a bid price of $996.25, the quoted bid price in the Wall Street Journal would be . (1 point) A. 99:25 99:63 9:20 D. 99:08 25. The price quotations of treasury bonds in the Wall Street Journal show a bid price of 102:12 and an ask price of 102:14. If you sold the bond you expect to receive . (2 points) A. $1,024.75 . $1,024.38 $1,023.75 D. $1,022.50 26. List four (4) options of corporate managers when considering what to do with free cash flow (profits). (1 point each) 1. /"Z dl‘w‘oém/g . 2% 3. (Va/Yd [’4‘ air Saar/7"?) or (mg/axe; 4.. bl! bdét S7Lac/r 27. As discussed in class, what is the best method to avoid inVesting in a fraudulent Ponzi scheme structuredbusiness? (2points) 3”!”va '71 a (om/Mry 7147; /@5‘ a/l/IIMéx/é- 28. What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11, 2001? (2 points) A. change, as both yields will remain the same. firease, the spread usually increases in response to a crisis. @gjecrease, the spread usually decreases in response to a crisis. . No change, as both yields will move in the same direction. ‘—_i.c./11 FIN 4020 EXAM ONE September 27, 2011 NAME: mum/“4 29. A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend received by stock investors must have been per share. (2 points) A. $0.55 30. A corporation in a 34% tax bracket invests in the preferred stock of another company and earns a 6% pre-tax rate of return. An individual investor in a 15% tax bracket invests in the same preferred stock and earns the same prejtax return. The after tax return to the corporation is and the after tax return to the individual investor is . (2 points) . .96%; 5.1% figmwsm .Oé- £23696?!) *— . 0597‘ c. 6.00%; 6.00% 0. 3.96%; 6.00% .0é(lv.15) : , ae/ 31. List three (3) exchange traded funds and the associated index they track. (1 point each) gfl'fi" S-flf/M/ p £00 mez/ ’ p091 3”“‘51 My 1 may, 1912mm 1m (Ah. cams ‘. 32. On a given day a stock dealer maintains a bid price of $1000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades which totaled 500 bonds traded that day. What was the er's gross trading profit for this security? (2 points) A. 1,375 .$500 003,15 ~ 000‘ ' ' . 0. $275 / / '5 [5 ”‘0 ’ D. $1,450 5):» I 75 / 33. Your investment profits will be maximized if your broker seeks to do trades at the (1 point) A. lowest outstanding bid price and highest outstanding ask price B. highest outstanding bid price and highest outstanding ask price C. lowest outstanding bid price and lowest outstanding ask price @highest outstanding bid price and lowest outstanding ask price s i.c./1O FIN 4020 EXAM ONE September 27, 2011 NAME: 4 Z ;(/Wm 34. As discussed in class, briefly explain the two main costs of raising equity capital in the primary market. (1.5 points) Isa/{y If”? 01’ ””0715 $795k /\.I>/ 35. Consider the following limit‘order book of a specialist. The last trade in the stock occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled? (1 point) Limit Buy Ordeis Limit Sell Orders Price Shares Price Shares $39.75 100 $40.25 100 $39.50 100 ‘ $40.50 100 A. $3 9. 7 5 $40.2 5 . 0.375 .$40.25 or less 36. You sold short 300 shares of common stock at $30 per share. If the initial margin is 50% you must put up and if the maintenance margin is 30% you will get a margin call at a price of . (2 points) ’ - 30000) C 5) ago/01.1., MNfi/n ”(L—’1: L—gsmwad .30/5'00)+‘7“’0 ' I __l 300W ”W99” [“9 37. An investor buys $100, 000 worth of a stock priced at $62. 50 per share using 70% initial margin. The broker charges 6% on the margin loan and requires a 35% maintenance margin. In one year the investor gets a margin call. At the time of the margin call the stock's price must have been _. 7.440 a (2 pointS) 00 sh . , o $20.00 i: W“ 700006 0.6) 7 41m 35) 1/,9 7 7 B 29.77 L3 ”0” M” ”A?“ x, .- “£130 I 76 3 L 20000 Half/1.4.. C. $31.29 50 6 - D. $32.45 0 ‘1 4 ,. .. , . ,/ Woo . L, . 7o 0 0 0' 38. often accompany short sales, and are used to limit potential losses from the short position. (1 point) A. Limit orders . Restricted orders C mit-loss orders . Stop-buy orders 2, ‘ Sic. / 7.5 FIN 4020 EXAM ONE September 27, 2011 NAME: MUM m 39. All possible investments fall into five (5) asset classes [investment classes). List the five investment classes. (0.5 points each) Rea/ €Sh7lt {oh/1M0 d." He: [of/M: (14’ Sfoc/(f 96ml; 40. The Gramm-Leach-Bliley Act also known as the Financial Services Modernization Act, signed into law by President Clinton in 1999 was intended to repeal portions of the Glass-Steagall Act of 1933. What was the ultimate goal of this law and what has been the ultimate result since? (2 points) 771 9,“ I Wi‘} 7%) flfl’l’lflf Sdmci/“Afy baa! 70/2744 bar/fen I/k EWL Somfliy (”l/Se La/ hafl/Oflh/ WIS/(JIM ; Mil/Itmétr émacffipj «lame +4.3 74m 7% mm 5% Am. 7w Mm Wl’lfl i ’Hm 1” Vii"4 g p #0)“ kW It,” ‘ j ,w'l’ $4); WNL‘PS ; ’ Z. "gm/4.5 RAW SCORE l:tl§_°g60 ...
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