Two characteristics that make owning

stock attractive are:

A. Unlimited liability and first claim on
assets
B. Share prices are relatively
inexpensive and are transferable
C. Each share represents a large
percentage of ownership and
dividends are fixed
D. Dividends are paid before any
other distributions are made and
stocks are transferable
B. Share prices are relatively
inexpensive and are transferable
The fact that common stockholders
are residual claimants means
A. The stockholders have a claim
against the revenue that remains
after everyone else is paid.
B. The stockholders receive their
dividends before any other residuals
are paid
C. The stockholders are paid any
past due dividends before other
claims are paid
D. The stockholders are paid before
the bondholders but after any taxes
are paid
A. The stockholders have a claim
against the revenue that remains
after everyone else is paid.
The concept of limited liability says a
stockholder of a corporation:
A. Is liable for the corporation's
liabilities, but nothing more
B. Cannot receive dividends that
exceed his/her investment
C. Cannot lose more than his/her
investment
D. Is only responsible for any taxes
C. Cannot lose more than his/her
investment
that the corporation may owe but not
its other debts
If a public corporation goes bankrupt
and does not have enough assets to
pay off all creditors:
A. The stockholders are personally
liable for the balance
B. The fact that stockholders are
residual claimants means they may
have to pay in additional capital to
cover the obligations
C. The stockholders receive any
dividends due before the other
creditors are paid
D. The stockholders cannot lose
more than their investment
D. The stockholders cannot lose
more than their investment
A share of stock resembles a consol
in all of the following ways except
that:
A. The share of stock does not have
a maturity date
B. The annual dividend the stock
pays resembles the coupon on a
consol
C. The prices of both can be
computed using a variation of the net
present value formula
D. They are both residual claims
D. They are both residual claims
People differ on the method by which
stock should be valued. Some people
are chartists,
others behavioralists. The basic
difference between these groups is:
A. Chartists rely on astrological
C. Chartists study charts of stock
prices; behavioralists focus on
investor psychology and behavior
charts to predict stock values,
behavioralists rely on psychology
B. Behavioralists are finance based,
chartists study charts of investor
psychology
C. Chartists study charts of stock
prices; behavioralists focus on
investor psychology and behavior
D. Chartists and behavioralists are
the same in their approach;
essentially there aren't any
differences
If the Dow Jones Industrial Average
is currently at 10,000 and the price of
one stock included in the index
increases by $10, the Dow Jones
Industrial Average will:
A. Not change; it is a value-weighted
index
B. Increase by 10.0%
C. Increase by 1.0%
D. Increase by 0.1%
D. Increase by 0.1%
If the Dow Jones Industrial Average
is at 10,205 and it is up 4% from the
previous day, what
was the index at the close of the
market the previous day?
A. 10,201.0
B. 9,805.0
C. 9,812.5
D. 9800.0
C. 9,812.5
You start with a $1000 portfolio; it
loses 50% over the next year, the
following year it gains 50% in value.
C. $750
At the end of two years your portfolio
is worth:
A. $1000
B. $500
C. $750
D. $950
You start with a portfolio valued at
$500. Over the next twelve months it
loses 40%; the following year it has a
gain of 30%. At the end of two years
your portfolio is worth:

A. $390
B. $450
C. $300
D. $410
A. $390
You have a portfolio valued at $1000.
Over the next twelve months it loses
75% of its value. What return does
the portfolio need to earn over the
following twelve months to restore the
portfolio to its original value?

A. 75%
B. 200%
C. 300%
D. 25%
C. 300%
You have a portfolio valued at
$10,000. Over the next twelve
months it loses 50% of its value.
What return does the portfolio need
to earn over the following twelve
months to be restored to its original
value?
A. 100%

A. 100%
B. 50%
C. 200%
D. 25%
A stock has an annual dividend of
$10.00 and it is expected not to grow.
It is believed the stock will sell for
$100 one year from now, and an
investor has a discount (interest) rate
of 6% (0.06). The dividend discount
model predicts the stock's current
price should be:
A. $94.67
B. $116.00
C. $103.77
D. $106.60
C. $103.77
A stock has a current annual dividend
of $6.00 per year and it is expected to
grow by 3% (0.03) a year. It is
expected that two years from now the
stock will sell for $90.00 a share. If
the interest rate is 5% (0.05), the
dividend discount model predicts the
stock's current price should be:

A. $94.90
B. $93.12
C. $101.30
D. $94.30
B. $93.12
A stock currently does not pay an
annual dividend. An investor expects
this policy to remain in force. She
believes, however, the stock of this
C. $83.92
company will sell for $110.00 per
share four years from now. If she has
an interest (discount) rate of 7%
(0.07), the dividend discount model
predicts the current price of this stock
should be:

A. You cannot apply the model to this
example since it requires a dividend
be offered
B. $82.00
C. $83.92
D. $86.35
Next year, the price of a stock is
expected to be $2200 and the stock
will pay a $55 dividend. The interest
rate is 10%. Based on the dividend-
discount model, what is the current
price of this stock?

A. $1980
B. $2000
C. $2050
D. $2035
C. $2050
The price of a stock is currently $750
and the stock will pay a $43 dividend.
The interest rate is 7.5%. Based on
the dividend-discount model, what is
the expected price of this stock for
next year?
A. $651.17
B. $657.67
C. $691.17
D. $763.25
D. $763.25
Stock market bubbles can lead to all
of the following except:
A. An efficient allocation of resources.
B. Stock market crashes.
C. Patterns of volatile returns from
the stock market.
D. Gaps between actual stock prices
and those warranted by the
fundamentals.
A. An efficient allocation of
resources.
The theory of efficient markets
assumes that:
A. Prices of bonds, but not stocks,
reflect all available information.
B. The prices of all financial
instruments reflect all available
information.
C. Stock prices are relatively rigid
because it takes a while for
information to efficiently move
through the market.
D. The best approach to determining
stock prices is to follow the chartists.
B. The prices of all financial
instruments reflect all available
information.
In the first calendar quarter a
company reports that it expects
profits to rise in the fourth quarter.
The theory of efficient markets says
we should expect the price of the
company's stock to:

A. Rise in the fourth quarter when the
higher profits are actually seen.
B. Fall immediately as stockholders
will be disappointed about having to
wait until the fourth quarter for higher
profits.
C. Rise immediately on the
C. Rise immediately on the
expectation of higher profits in the
future.
expectation of higher profits in the
future.
D. Rise around the third quarter since
this information will take time to
disseminate.
Asymmetric information exists when

a)one party to a transaction knows
more than another.
b)the government has imperfect
credibility.
c)opportunity costs are larger for one
person than another.
d)People do not have rational
expectation.
a)one party to a transaction knows
more than another.
The main problems caused by
asymmetric information are

a)irrational expectations and moral
hazard.
b)imperfect credibility and adverse
selection.
c)adverse selection and irrational
expectations.
d)adverse selection and moral
hazard.
d)adverse selection and moral
hazard.
When people or firms that are worse-
than-average risks are most likely to
enter a contract that is
offered to everyone, the problem is
called

a)irrational expectations.
b)adverse selection.
b)adverse selection.
c)opportunity cost.
d)moral hazard.
If a business firm takes out a loan
from a bank, but does not use the
funds as the bank intended, the
problem is

a)moral hazard.
b)adverse selection.
c)intermediation.
d)securitization.
a)moral hazard
A situation in which a bank do not
lend as they ordinarily would, but
rather have much higher
requirements for borrowers to qualify
for loans than normal, is known as a

a)lending crisis.
b)moral hazard issue.
c)credit crunch.
d)Adverse selection response.
c)credit crunch.
A banks reserves equal its

a)government securities.
b)transactions deposits.
c)vault cash plus deposits at the
Federal Reserve.
d)cash assets plus government
securities.
c)vault cash plus deposits at the
Federal Reserve.
The reserve requirement is 0 percent
on the first $7 million in transaction
deposits, 3 percent on
amounts between $7 million and
b)$2.19 million.
$47.6 million, and 10 percent on
amounts above $47.6 million. A bank
with transaction deposit totaling $57.3
million has required reserves equal to

a)$1.22 million.
b)$2.19 million.
c)$2.40 million.
d)$5.73 million.
The reserve requirement is 0 percent
on the first $8 million in transaction
deposits, 3 percent on amounts
between $8 million and $50 million,
and 10 percent on amounts above
$50 million. A bank with transaction
deposit totaling $83 million has
required reserves equal to

a)$2.49 million.
b)$4.56 million.
c)$6.54 million.
d)$8.30 million.
b)$4.56 million.
A banks reserves minus required
reserves equal is

a)excess reserves.
b)vault cash plus deposits at the
Federal Reserve.
c)reserve requirement times
transactions deposits.
d)vault cash plus required reserves.
a)excess reserves.
The federal funds rate is the interest
rate in the market for

b)loans of reserves between banks.
a)federal government loans.
b)loans of reserves between banks.
c)loans of government securities.
d)federal agency securities.
The United States has a dual banking
system, which means that a bank

a)has two regulators.
b)may hold its reserves either in the
form of vault cash or as deposits at a
Federal Reserve Bank.
c)may take out a primary credit
discount loan or a secondary credit
discount loan.
d)may choose whether to be
chartered by federal government
authorities or by a state government.
d)may choose whether to be
chartered by federal government
authorities or by a state government.
A bank which manages the
investment portfolio and pays the bills
of an elderly lady who is unable to do
it for herself is carrying out the ---------
--- of banks.

a)the intermediation role
b)the payment role
c)the guarantor role
d)the agency role
a)the intermediation role
A bank that wires funds for the
purchase of a beach house in South
Carolina for a customer in New York
City is carrying out the---------------of
banks.

a)the intermediation role
b)the payment role
b)the payment role
c)the guarantor role
d)the agency role
The banking system generates new
money totaling $127 million from new
deposits in the system
of $22.5 million. With no leakages in
the system, what must the required
reserve ratio be?

a)5.64%
b)17.72%
c)4.64%
d)21.53%
b)17.72%
Which of the following financial
statements shows the bank at a
single point in time?

a)the statement of stockholders
equity
b) the funds-flow statement
c)the report of financial condition
d)the report of income
c)the report of financial condition
Which of the following financial
statements shows the revenues and
expenses of a bank over a set of
period of time?

a)the statement of stockholders
equity
b)the funds-flow statement
c)the report of financial condition
d)the report of income
d)the report of income
The noncash-expense item on a
banks report of income designed to
shelter a banks current earnings
from taxes and to help prepare for
bad loans is called

a)short-term debt interest.
b)noninterest expense.
c)provision for taxes.
d)provision for possible loan losses.
d)provision for possible loan losses.
A banks bad-debt reserve, as
reported on its balance sheet is
called

a)unearned income or discount.
b)allowance for possible loan losses.
c)intangible assets.
d)customer liability on acceptances.
b)allowance for possible loan losses.
The difference between noninterest
income and noninterest expenses on
a banks report of income is called

a)net profit margin.
b)net interest income.
c)net income after provision for
possible loan losses.
d)income or loss before income
taxes.
b)net interest income.
Nonperforming loans are credits on
which any scheduled loan
repayments and interest payments
are past due for more than

a)30 days
c) 90 days
b) 60 days
c) 90 days
d) 180 days.
A bank which starts with Allowance
for loan losses (ALL) of $1.48 million
at the beginning of the year,charges
off worthless loans of $0.94 million
during the year, recovers $0.12
million on loans previously charged
off and charges current income for a
$1.02 million provision for loan losses
will have an ALL at the end of the
year of

a)$.66 million.
b) $3.32 million.
c) $1.68 million.
d) $1.28 million.
c) $1.68 million.
A bank has a total interest income of
$67 million and total noninterest
income of $14 million. This bank has
total interest expenses of $35 million
and total noninterest expenses
(excluding PLL) of $28 million. Its
provision for loan losses is $6 million
and its taxes are $5 million. What is
this banks net-interest income?

a)$7
b) -$14
c) $18
d) $32
d) $32
A bank has a total interest income of
$67 million and total noninterest
b) -$14
income of $14 million. This
bank has total interest expenses of
$35 million and total noninterest
expenses (excluding PLL) of
$28 million. Its provision for loan
losses is $6 million and its taxes are
$5 million. What is this
banks noninterest income?

a)$7
b) -$14
c) $18
d) $32
When a loan is considered
uncollectible, the banks accounting
department will write it off the books
by reducing the -----------------account.
Which choice below is most
appropriate to fill the blank space?

a)provision for loan losses
b)unearned discounts on loans
c)allowance for possible loan losses
d)loans available for sale
c)allowance for possible loan losses
Noninterest revenue sources for a
bank are called

a)commitment fees on loans
b)fee income
c)supplemental income
d)noninterest margin
b)fee income
A banks temporary lending of excess
reserves to other banks is labeled on
the balance sheet as
b)federal funds sold

a)federal funds rate
b)federal funds sold
c)money market deposit
d)securities purchased for resale
Net Income ---------------------$55
million
Total operating revenue -----$650
million
Total assets-------------------$4,055
million
Total equity capital-----------$350
million
1. What is the banks return on equity
capital (ROE)?
2.What is this banks net-profit
margin?
3.What is the banks return on assets
(ROA)?
a)8.46%
b) 16.03%
c) 15.71%
d) 1.36%
1.c) 15.71%
2.a)8.46%
3.d) 1.36%
A bank that has a low-profit margin
most likely

a)is doing a poor job of controlling
expenses.
b)has a small amount of financial
leverage.
c)has a small amount of liquidity risk.
d)has assets that are not very
productive.
a)is doing a poor job of controlling
expenses.
Cash, fixed assets, and intangible a)non-earnings assets
represent what for a bank?

a)non-earnings assets
b)classified assets
c)discretionary accounts
d)nonmarket-valued assets
The ratio of a banks interest income
from its loans and security
investments less interest expenses
on debt issued divided by total
earning assets measures a banks

a)net-operating margin
b)net return before special
transactions
c)net-interest margin
d)return on assets
c)net-interest margin
A bank with a negative interest-
sensitive GAP

a)has a greater dollar volume of
interest-sensitive liabilities than
interest-sensitive assets.
b)will generate a higher interest
margin if interest rates rise.
c)will generate a higher interest
margin if interest rate falls.
d)A and C only
e)B and C
d)A and C only
A bank with a positive interest-
sensitive GAP will have a decrease in
net income in net-interest income
when interest rates in the market

a) rise
a) rise
b)fall
c)stay the same
d)a bank with a positive interest-
sensitive gap will never have a
decrease in net-interest income
The principal goal of interest-rate
hedging strategy is to hold fixed a
banks

a)net-interest margin.
b)net income before taxes.
c)value of loans and securities.
d)noninterest spread.
a)net-interest margin
A bond held by a bank carries a
duration of 3 years and a current
market price of $10,000. Market
interest rate attached to comparable
bonds are 10% currently, but recent
forecasts suggest that market rates
may rise to 12%. If this forecast turns
out correct, what percentage change
will occur in the bonds market value?

a)-0.0364
b) -0.00465
c) -0.0545
d) -0.455
c) -0.0545
A bond is selling in the market for
$1100 and has a duration of 4.5
years. Market interest rates are 5%
and are expected to increase to 7%
in the near future. What will this
bonds price be after the change in
a)$1006
market interest rates?

a)$1006
b) $1194
c) $1122
d) $1078
A bank has an average asset
duration of 5 years and an average
liability duration of 3 years. This
bank has a total assets of $500
million and total liabilities of $250
million. Currently, market
interest rates are 10 percent. If
interest rates fall by 2 percent (to 8
percent), what is this banks
duration gap?

a)2 years
b)-2 years
c) 3.5 years
d) none of these.
c) 3.5 years
A zero-coupon bond refers to a bond
which:

A. Does not pay any coupon
payments because the issuer is in
default
B. Promises a single future payment
C. Pays coupons only once a year
D. Pays coupons only if the bond
price is above face value
B. Promises a single future payment
A consol is:

A. Another name for a zero-coupon
C. A bond that makes periodic
interest payments forever but never
matures
bond
B. A bond with a maturity date
exceeding 10 years
C. A bond that makes periodic
interest payments forever but never
matures
D. A form of a bond that is issued
quite often by the U.S. Treasury
The most common form of zero-
coupon bonds found in the United
States is:

A. AAA rated corporate bonds
B. U.S. Treasury bills
C. 30-year U.S. Treasury bonds
D. Municipal bonds
B. U.S. Treasury bills
A 10-year Treasury note has a face
value of $1,000, price of $1,200, and
a 7.5% coupon rate. Based on this
information, we know:

A. The present value is greater than
its price
B. The current yield is equal to 8.33%
C. The coupon payment on this bond
is equal to $75
D. The coupon payment on this bond
is equal to $90
C. The coupon payment on this
bond is equal to $75
If the annual interest rate is 5% (.05),
the price of a one-year Treasury bill
per $100 of face value would be:

A. $95.00
B. $97.50
C. $95.24
C. $95.24
D. $96.10
If the annual interest rate is 5% (.05),
the price of a six-month Treasury bill
would be:
A. $97.50
B. $97.59
C. $95.25
D. $95.00
B. $97.59
If the annual interest rate is 5% (.05),
the price of a three-month Treasury
bill would be:
A. $98.79
B. $95.00
C. $98.75
D. $97.59
A. $98.79
The difference in the prices of a zero-
coupon bond and a coupon bond with
the same face value and maturity
date is simply:
A. Zero, since they are the same
B. The present value of the final
payment
C. The present value of the coupon
payments
D. The future value of the coupon
payments
C. The present value of the coupon
payments
If a consol is offering an annual
coupon of $50 and the annual
interest rate is 6%, the price of the
consol is:
A. $47.17
B. $813.00
C. $833.33
C. $833.33
D. $8333.33
Which of the following statements is
most accurate?
A. Yield to maturity is equal to the
coupon rate if the bond is held to
maturity
B. Yield to maturity is the same as
the coupon rate
C. Yield to maturity will exceed the
coupon rate if the bond is purchased
for face value
D. Yield to maturity is the same as
the coupon rate if the bond is
purchased for face value and held to
maturity
D. Yield to maturity is the same as
the coupon rate if the bond is
purchased for face value and held to
maturity
When the price of a bond is above
face value:
A. The yield to maturity is below the
coupon rate
B. The yield to maturity will be above
the coupon rate
C. The yield to maturity will equal the
current yield
D. The yield to maturity will equal the
coupon rate
A. The yield to maturity is below the
coupon rate
When the price of a bond is below the
face value, the yield to maturity:
A. Is below the coupon rate
B. Will be above the coupon rate
C. Will equal the current yield
D. Will equal the coupon rate
B. Will be above the coupon rate
A $1000 face value bond purchased B. A current yield equal to 6.22%
for $965.00, with an annual coupon of
$60, and 20 years to maturity has:
A. A current yield and coupon rate
equal to 6.22%
B. A current yield equal to 6.22% and
a coupon rate below this
C. A coupon rate equal to 6.00% and
a current yield below this
D. A yield to maturity and current
yield equal to 6.00%
and a coupon rate below this
A $1,000 face value bond, with an
annual coupon of $40, one year to
maturity and a purchase price of
$980 has:
A. A current yield that equals 4.00%
B. A coupon rate that equals 4.08%
C. A current yield that equals 4.08%
and a yield to maturity that equals
6.12%
D. A current yield that equals 4.08%
and a yield to maturity that equals
4.0%
C. A current yield that equals 4.08%
and a yield to maturity that equals
6.12%
A 30-year Treasury bond as a face
value of $1,000, price of $1,200 with
a $50 coupon payment. Assume the
price of this bond decreases to
$1,100 over the next year. The one-
year holding period return is equal
to:
A. -9.17%
B. -8.33%
C. -4.17%
D. -3.79%
C. -4.17%
The yield on a discount basis for a C. 6.00%
$100 Treasury bill that sells for
$98.50 and matures in 90 days is:
A. 1.50%
B. 4.80%
C. 6.00%
D. 4.94%
The holding period return on a bond:
A. Can never be more than the yield
to maturity
B. Will equal the yield to maturity if
the bond is purchased for face value
and sold at a lower price
C. Will be less than the yield to
maturity if the bond is sold for more
than face value
D. Will be less than the yield to
maturity if the bond is sold for less
than face value
D. Will be less than the yield to
maturity if the bond is sold for less
than face value
One characteristic that distinguishes
holding period return from the coupon
rate, the current yield, and the yield to
maturity is:
A. All of the other returns can be
calculated at the time the bond is
purchased, but holding period return
cannot
B. Holding period return will always
be the highest return
C. Holding period return will usually
be less than the other returns
D. Only the holding period return
includes the capital gain/loss
A. All of the other returns can be
calculated at the time the bond is
purchased, but holding period return
cannot
If a one-year zero-coupon bond has a
face value of $100, is purchased for
C. The yield to maturity will be
6.38%
$94, and is held to maturity:
A. The holding period return will
exceed the yield to maturity
B. The yield to maturity will exceed
the holding period return
C. The yield to maturity will be 6.38%
D. The holding period return will be
6.38%
Fly-By-Night Inc. issues $100 face
value, zero-coupon, one-year bonds.
The current return on one-year, zero-
coupon U.S. government bonds is
3.5%. If the Fly-By-Night bonds are
selling for $92.00, what is the risk
premium for these bonds?
A. 8.7%
B. 1.5%
C. 5.2%
D. 8.0%
C. 5.2%
Consider a one-year corporate bond
that has a 20% probability of default.
The payoff on the bond is $2,000 if
the corporation does not default. The
interest rate is 10%. If buyers of this
bond are risk-neutral, this bond will
sell for:
A. $400
B. $909.09
C. $1,454.54
D. $1,600
C. $1,454.54