兹维博迪金融学第二版试题库2TB.doc

Chapter TwoFinancial Markets and InstitutionsThis chapter contains 49 multiple-choice questions, 20 short problems and 10 longer problems.Multiple Choice1. A market that has no one specific location is termed a(n) _ market.(a) over-the-counter(b) geographic location(c) intermediary(d) conceptualAnswer: (a)2. _ problems arise because parties to contracts often cannot easily monitor or control one another.(a) Payment(b) Counter(c) Incentive(d) ExchangeAnswer: (c)3. Incentive problems take a variety of forms and include:(a) moral hazard(b) adverse selection(c) principal-agent(d) all of the aboveAnswer: (d)4. The _ problem exists when having insurance against some risk causes the insured party to take greater risk or to take less care in preventing the event that gives rise to the loss.(a) moral hazard(b) adverse selection(c) principal-agent (d) all of the aboveAnswer: (a)5. Life annuities are examples of _ problems.(a) moral hazard(b) adverse selection(c) principal-agent (d) all of the aboveAnswer: (b)6. _ means giving the lender the right to seize specific business assets in the event of default.(a) Increasing moral hazard(b) Increasing adverse selection(c) Collateralization of loans(d) All of the aboveAnswer: (c)7. _ instruments are also called fixed-income instruments.(a) Debt(b) Equity(c) Derivative(d) All of the aboveAnswer: (a)8. The market for short-term debt (less than one year) is called the _ market, and the market for long-term debt and equity securities is called the _ market.(a) capital; money(b) money; capital(c) fixed-income; money(d) derivative; equityAnswer: (b)9. _ securities are financial instruments that derive their value from the prices of one or more other assets.(a) Debt (b) Equity (c) Derivative (d) Fixed-income Answer: (c)10. A call option gives its holder the right to _ some asset at a specified price on or before some specified expiration date.(a) sell(b) buy(c) loan(d) borrowAnswer: (b)11. A put option gives its holder the right to _ some asset at a specified price on or before some specified expiration date.(a) sell(b) buy(c) loan(d) borrowAnswer: (a)12. _ contracts oblige one party to the contract to buy, and the other party to sell, some asset at a specified price on some specified date.(a) Options(b) Uncertainty(c) Money market(d) ForwardAnswer: (d)13. The _ curve depicts the relation between interest rates on fixed-income instruments issued by the U.S. Treasury and the maturity of the instrument.(a) long-term (b) short-term (c) yield (d) exchange rateAnswer: (c)14. If the short-term rates are higher than the long-term rates, then the yield curve is _.(a) upward sloping(b) downward sloping(c) horizontal(d) verticalAnswer: (b)Questions 15 and 16 are intended to be calculated as a pair.15. Suppose you are a French investor, who wants a safe investment in terms of francs. You are investing for one year and the interest rate on a one-year French government bond is 5% and at the same time it is 9% on a U.S. government bond. The exchange rate is currently 6.15 French francs to the dollar. Suppose you invest $1,000 in a U.S. bond. Also suppose that a year from now the French franc/dollar exchange rate is 6.50 French francs to the dollar. What will be the realized French franc rate of return on the U.S. bond?(a) 5.69%(b) 9.00%(c) 15.2%(d) 7.00%Answer: (c) 16. In question 15, what would the exchange rate at years end have to be in order for the French investor to earn exactly 4% per year on the investment in U.S. bonds?(a) 6.20 FF/$(b) 5.87 FF/$(c) 6.40 FF/$(d) 5.42 FF/$Answer: (b)Use the following yield data to answer questions 17 and 18.2/29/98Treasury 1-10 yr 5.58% 10+ yr 5.72Corporate 1-10 yr High Qlty 5.98 Med Qlty 6.17Corporate 10+ yr High Qlty 6.26 Med Qlty 6.5717. Calculate the yield spread for Treasury bonds with maturity 1-10 year and corporate bonds of high quality of the same maturity. (a) 11.56%(b) 0.68%(c) 0.59%(d) 0.40%Answer: (d)18. Calculate the yield spread for Treasury bonds with maturity 10+ years and corporate bonds of medium quality of the same maturity. (a) 12.29%(b) 0.85%(c) 0.54%(d) 0.45%Answer: (b)19. You invest in a stock that costs $45.50 per share. It pays a cash dividend during the year of $1.20 and you expect its price to be $49 at years end. What is your expected rate of return if you sell the stock for $49 at the end of the year?(a) 2.64%(b) 7.69%(c) 10.33%(d) 5.05%Answer: (c)20. You invest in a stock that costs $45.50 per share. It pays a cash dividend during the year of $1.20 and you expect its price to be $49 at years end. What is your expected rate of return if you do not sell the stock at the end of the year?(a) 2.64%(b) 7.69%(c) 10.33%(d) 5.05%Answer: (c)21. You invest in a stock that costs $45.50 per share. It pays a cash dividend during the year of $1.20 and you expect its price to be $49 at years end. What is your realized rate of return if the stocks price is actually $42 at years end?(a) 5.05%(b) 18.02%(c) 10.33%(d) 5.05%Answer: (a)22. The _ the standard deviation, the _ the volatility of the rate of return.(a) higher, lower(b) lower, higher(c) higher, higher(d) none of the aboveAnswer: (c)23. _ is an investment strategy that seeks to match the returns of a specified stock market index.(a) Indexing(b) Benchmarking(c) Replicating(d) DiversifyingAnswer: (a)24. Suppose the risk-free nominal interest rate on a one-year U.S. Treasury bill is 7% per year and the expected rate of inflation is 3% per year. What is the expected real rate of return on the T-bill?(a) 4%(b) 3.88%(c) 1.34%(d) 3.74%Answer: (b)25. Suppose the risk-free nominal interest rate on a one-year U.S. Treasury bill is 6% per year and the expected rate of inflation is 4% per year. What is the expected real rate of return on the T-bill?(a) 2%(b) 5%(c) 1.92%(d) 1.89%Answer: (c)26. Suppose that the real rate of interest on a TIPS is 4.5% per year and the expected rate of inflation in the U.S. is 5% per year. What is the expected nominal rate of return on these bonds?(a) 0.476%(b) 4.75%(c) 9.73%(d) 9.75%Answer: (c)27. Currently you have a bank account containing $6,000, which earns interest at a rate of 4% per year. You also have an unpaid balance on your credit card of $3,000 on which you are paying an interest rate of 18% per year. If the time frame is one year, the arbitrage opportunity you face is:(a) $420(b) $540(c) $120(d) $300Answer: (a)28. A _ interest rate is denominated in units of some currency, whereas a _ interest rate is denominated in units of some commodity or “basket” of goods and services.(a) real, nominal(b) real, treasury(c) nominal, real(d) treasury, realAnswer: (c)29. _ are firms whose primary function is to help businesses, governments, and other entities raise funds to finance their activities by issuing securities.(a) Closed-end funds(b) Investment banks(c) Asset management funds(d) Open-end fundsAnswer: (b)30. Currently, you have $24,000 in a bank account earning an interest rate of 4% per year. At the same time you have an unpaid balance on your credit card of $12,000 on which you are paying an interest rate of 18% per year. If the time frame is one year, the arbitrage opportunity you face is:(a) $2,160(b) $1,200(c) $480(d) $1,680Answer: (d)31. In the United States, the _ establishes the precise disclosure requirements that must be satisfied for a public offering of securities.(a) Financial Accounting Standards Board(b) World Bank(c) Federal Reserve(d) Securities and Exchange CommissionAnswer: (d)32. Investment professionals typically use a(n) _ index as a benchmark for measuring the performance of common stock mutual funds.(a) inflation adjusted(b) firm-size weighted (c) market-weighted (d) book-weighted Answer: (c)33. The Dow Jones Industrial Index has some major defects, which include:(a) It is not broadly diversified enough to accurately reflect the wide spectrum of stocks in the United States.(b) It corresponds to a portfolio strategy that is unsuitable as a performance benchmark.(c) It only includes the 30 largest corporations.(d) (a) and (b)Answer: (d)34. Interest-rate arbitrage is _ at a lower rate and _ at a higher rate.(a) borrowing, lending(b) borrowing, defaulting(c) defaulting, lending(d) lending, borrowingAnswer: (a)35. _ invest their funds in a new businesses and help the management team get the firm to the point at which it is ready to “go public.”(a) Investment banks(b) Venture capitalists(c) Asset management firms(d) Mutual fundsAnswer: (b)36. The case where there is an imbalance in the exchange of information about a business opportunity is known as _.(a) information symmetry(b) information asymmetry(c) information assets(d) (a) and (c)Answer: (b)37. Which of the following represents a defined-contribution pension plan?(a) A pension plan into which the employer and employee make regular contributions.(b) A pension plan whose benefit is determined by a formula that takes into account years of service, wages, and salary.(c) A pension plan whose benefit formula is 1% of retirement salary for each year of service.(d) All of the aboveAnswer: (a)38. Which of the following are characteristic of a mutual fund?(a) professional management(b) diversification(c) efficient record keeping and administration(d) all of the aboveAnswer: (d)39. Net asset value is defined as the _.(a) future value of all assets held divided by the number of shares outstanding(b) book value of all securities held divided by the number of shares outstanding(c) market value of all securities held divided by the number of shares outstanding(d) book value of all assets held divided by the number of shares outstandingAnswer: (c)40. Which of the following describes a money market instrument?a. long-termb. liquidc. high-riskd. all of the aboveAnswer: (b)41. A countrys _ provides the supply of local currency and operates the clearing system for the banks.(a) stock exchange(b) underwriter(c) central bank(d) investment bankAnswer: (c)42. Which of the following statements is most correct?(a) open-end mutual funds and closed-end funds are identical(b) open-end mutual funds stand ready to redeem or issue shares at NAV(c) closed-end mutual funds stand ready to redeem or issue shares at NAV(d) mutual funds provide a poor means of diversificationAnswer: (b)43. Which of the following statements is most correct?(a) closed-end mutual funds do not redeem or issue shares at NAV(b) closed-end mutual fund prices can differ from NAV(c) shares of closed-end funds are traded through brokers(d) all of the above are correctAnswer: (d)44. In the United States, the _ prohibited commercial banks from engaging in most underwriting activities.(a) Investment Bank Act of 1909(b) SEC Act(c) Glass Steagall Act of 1933(d) Commercial Bank Act of 1952Answer: (c)45. Rules for trading securities serve the function of _.(a) recognizing when government inaction is the best choice(b) standardizing procedures to keep transaction costs low(c) presenting financial information in a standardized format(d) establishing arbitrary rules to ensure the maximum revenue from transaction feesAnswer: (b)46. In Germany, the central bank is called the _.(a) Riksbank(b) Bundesbank(c) Bank of Germany(d) ExchequerAnswer: (b)47. For the period 1926-2003, which of the following asset classes provided the highest average rate of return?(a) Long-term U.S. Treasury bonds(b) U.S. T-bills(c) Inflation(d) Small stock Answer: (d)48. For the period 1926-2003, which of the following asset classes provided the lowest volatility of the rate of return?(a) Long-term U.S. Treasury bonds(b) U.S. T-bills(c) Inflation(d) Small stock Answer: (b)49. The _ is the unit of account for computing the real rate of return.(a) nominal interest rate on stock(b) standardized basket of consumption goods(c) countrys rate of inflation(d) none of the aboveAnswer: (b)Short Problems1. Give a brief definition of financial intermediaries. Provide three examples of financial intermediaries and the products they offer.Answer: Financial intermediaries are defined as firms whose primary business is to provide financial services and products. Among the main types of intermediaries are banks, investment companies and insurance companies. Products offered include checking accounts, commercial loans, mortgages, mutual funds and a wide range of insurance contracts.Consider the following yield data and answer questions 2 and 3:2/29/98Treasury 1-10 yr 5.58% 10+ yr 5.72Corporate 1-10 yr High Qlty 5.98 Med Qlty 6.17Corporate 10+ yr High Qlty 6.26 Med Qlty 6.572. Calculate the yield spread for Treasury bonds with maturity 10+ years and corporate bonds of high quality of the same maturity.Answer: Yield Spread = 6.26 5.72% = 0.54%3. Calculate the yield spread for Treasury bonds with maturity 1-10 years and corporate bonds of medium quality of the same maturity.Answer: Yield Spread = 6.17 5.58% = 0.59%4. Discuss the level and shape of the Treasury yield curves that have appeared in the latest media.Answer: Answers will vary depending on media announcements at the time.5. You invest in a stock that costs $42.50 per share. It pays a cash dividend during the year of $1.80 and you expect its price to be $45 at years end. What is your expected rate of return if you sell the stock for $45 at the end of the year?Answer: Expected rate of return = Ending Price Beginning Price + Cash DividendBeginning Price= $45 - $42.50 + $1.80$42.50= 10.12%6. Refer to Question 5. What if you do not sell the stock at the end of the year?Answer: You measure the rate of return exactly the same way, whether or not you sell. The price appreciation is as much a part of your returns the dividend. That you choose to keep it does not change the fact that you could convert it into $45 cash at the end of the year. 7. You invest in a stock that costs $42.50 per share. It pays a cash dividend during the year of $1.80 and you expect its price to be $45 at years end. What is your realized rate of return if the stocks price is actually $39 at years end?Answer: Realized rate of return = Ending Price Beginning Price + Cash DividendBeginning Price= $39 - $42.50 + $1.80$42.50= -4%8. Suppose the risk-free nominal interest rate on a one-year U.S. Treasury bill is 5% per year and the expected rate of inflation is 3%. What is the expected real rate of return on the T-bill?Answer: Real rate = Nominal interest rate Rate of Inflation1 + Rate of inflation = 0.05 0.03 1 + 0.03 = 0.02 1.03= 1.94%9. Suppose you are a Dutch investor, who wants a safe investment in terms of Guilders. You are investing for one year and the interest rate on a one-year Netherlands government bond is 6% and at the same time it is 9% on a U.S. government bond. The exchange rate is currently 2.05 Guilders to the dollar. Suppose you invest $1,000 in a U.S. bond. Also suppose a year from now that the Guilder/dollar exchange rate is 2.15 Guilders to the dollar. What will be the realized Dutch rate of return on the U.S. bond?Answer: Dutch realized rate of return = $1090 x Future Guilder price of dollar 20502050 = $1090 x 2.15 20502050 = 14.32%10. Refer to Question 9. What does the exchange rate have to be at years end for the Dutch investor to earn exactly 12% per year on the investment in U.S. bonds?Answer: Dutch rate of return = $1090 x Future Guilder price of dollar 205020500.12 = $1090 x Guilder price 20502050 Future price of Guilder = 2.11 Guilder per dollar11. Distinguish between nominal interest rates and real interest rates.Answer: The nominal interest rate is the promised amount of money you receive per unit you lend. The real rate of return is the nominal interest rate you earn corrected for the change in purchasing power of money. A nominal interest rate is denominated in units of some currency; a real interest rate is denominated in units of some commodity or basket of goods and services (commonly, whatever basket is used to compute the CPI).12. Discuss the costs associated with trading stocks and why index funds provide a low-cost advantage.Answer: Costs can come in the form of:1. the funds expense ratio (which includes advisory fees, distribution charges, and operating expenses).2. Portfolio transaction costs (brokerage and after trading costs).One of the prime advantages of an index fund should be its low cost. An index fund should pay only minimal advisory fees, keep operating expenses at the lowest