10. Fed funds are generally short term unsecured loans while
repos are short term secured loans.
A) I and III
. B) II and IV
. C) III and IV
. D) I and II
. E) I, II and III
Money market securities exhibit which of the following?
I. II. III. IV.
A) B) C) D) E)
Large denominationMaturity greater than one yearLow
default riskContractually determined cash flows
I, II and IIII, III and IVII, III and IV II and IVI, II, III and
IV
Answer: B Page: 123 Level: Medium
13. A repo is in essence a collateralized
. A) Banker'sacceptance
. B) Certificate of deposit
. C) Fed funds loan
. E) Eurodollar deposit
. A) Commercial paper
. B) T-Bills
. C) Repurchaseagreement
. D) Negotiable CD
. E) Banker's acceptance
. B) T-Bill
. C) Repurchaseagreement
. D) Negotiable CD
. E) Banker's acceptance
. C) Maximumprice;givenquantity
. A) $9,947.67 , $9,946.33
. B) $9,678.00 , $9,686.00
. C) $9,686.00 , $9,678.00
. D) $9,946.33 , $9,947.67
. D) As an EAR
19. The discount yield on a T-Bill differs from the T-bill's bond
equivalent yield (BEY) because
. D) BothAandB
A) 200
B) 22
C) 33
D) 86
E) 12
. D) A and C
. E) B and C
23. A negotiable CD
. B) Isaregisteredinstrument
A) $1,040,000
B) $1,009,863
C) $1,000,000
D) $1,015,012
E) $1,010,000
. D) An add on instrument
. A) Commercial paper
. B) Banker'sacceptances
. C) T-Bills
. D) Fed funds
. E) Repurchase agreements
. A) Commercial paper
. B) Banker'sacceptances
. C) T-Bills
. A) LIBOR
27. LIBOR is generally _____ the Fed funds rate because foreign
bank deposits are generally _____ than domestic bank
deposits
B) Lessthan;morerisky
C) Thesameas;equallyrisk
. D) Greater than; more risky
. E) Less than; less risky
30. A U.S. exporter sells $50,000 of furniture to a Latin
American importer. The exporter requires the importer to
obtain a letter of credit. When the bank accepts the draft the
exporter discounts the 90 day note at a 6% discount. What is
the exporter's true effective annual financing cost?
A) 6.00%
B) 6.18%
C) 6.32%
D) 6.24%
E) 6.45%
A) 3.62%
B) 3.57%
C) 3.35%
D) 3.78%
E) 3.97%
32. If a $10,000 par T-Bill has a 4.5% discount quote and a 180
day maturity, what is the price of the T-Bill?
. A) $9,550
. B) $9,525
. C) $9,775
. D) $9,675
. E) None of the above
31. A 90 day T-Bill is selling for $9,915. The par is $10,000. The
effective annual return on the T- Bill is (watch your
rounding)
A) 4.09%
B) 3.48%
C) 3.47%
D) 3.52%
E) 3.55%
A) 3.627%
B) 4.903%
C) 4.836%
D) 4.934%
A) $5,000,000
B) $5,069,863
C) $4,929,167
D) $5,212,500
E) $5,070,833
. A) Commercial paper
. B) Treasurybills
. D) Negotiable CDs
. E) Banker's Acceptances
. A) 4.44%
. B) 4.28%
. C) 4.93%
. D) 4.31%
. A) Competitive bidders
. B) Noncompetitivebidders
. C) Shortsalecommittedbidders
. E) No group of bidders
. D) Procuringabanker'sacceptance
14. On the run Treasury notes and bonds are newly issued
securities and off the run Treasuries are securities that have
been previously issued.
16. The dirty price plus accrued interest is called the clean price
of the security.
17. Accrued interest owed to the bond seller increases as the next
coupon payment date approaches
IX. Bonds rated below Baa by Moody's or BBB by S&P are junk
bonds.
A) T-Bills
B) T-Bonds
C) Municipalbonds
D) Corporate bonds
A) $986.25
B) $987.50
C) $982.00
D) $982.40
. A) 6.00%
. B) 5.60%
. C) 5.57%
. D) 2.81%
. E) 2.78%
A) STRIP
B) T-Note
C) T-Bond
D) G.O. Bond
E) Revenue Bond
A) $10,000
B) $25,000
C) $49,634
D) $45,649
E) $41,877
A) 60:00
B) 64:03
C) 64:63
D) 64:27
E) 64:12
Which one of the following bonds is likely to have the highest
required rate of return, ceteris paribus?
A) $9,045.63
B) $9,157.47
C) $9,145.63
D) $9,200.02
E) $9,000.10
. B) Taxableatthestatelevelonly;exemptfromstatetaxesonly
. C) Taxableatfederallevelonly;exemptfromfederaltaxes
A) 15.79%
B) 8.33%
C) 9.38%
D) 9.68%
E) 8.47%
A) 80.00%
B) 20.00%
C) 25.00%
D) 66.67%
E) 33.33%
. A) Rights offering
. B) Privateplacement
. C) Firmcommitment
. D) Best efforts
. E) Standby offering
. The entire contract between the bondholders and bond issuer
is called the _____.
. A) Covenant
. B) Debenture
. C) Indenture
. D) Denture
. E) Monitor
. A) Samurai bonds
. B) Zombiebonds
. C) Bulldogbonds
. D) Sovereign bonds
. E) Phoenix bonds
A) 5.00%
B) 4.32%
C) 4.36%
D) 2.16%
E) 2.18%
A) $10,150.00
B) $10,344.15
C) $10,745.68
D) $10,824.32
E) $10,986.69
A) 6.85%
B) 7.00%
C) 9.00%
D) 7.32%
E) 7.55%
You purchase a $1000 par convertible bond that can be converted
into 142 shares of stock. The stock is currently priced at $5.42.
What percentage price increase in the stock is needed to make
conversion worthwhile?
A) 15.5%
B) 29.9%
C) 18.2%
D) 23.7%
E) 19.8%
23. The largest amount of private pension fund assets are held by
uninsured private pension funds.
25. If you believe that taxes and are going to go up and you will
likely have to pay a high tax rate when you retire, you will
probably be better off with a Roth IRA than with a traditional
IRA.
11. A pension plan has promised to payout $15 million per year
over the next 10 years to its employees. Actuaries estimate the rate
of return on the fund's assets will be 5%. What amount of pension
fund reserves (to the nearest dollar) are needed for the plan to be
fully funded?
. A) $115,826,024
. B) $150,000,000
. C) $125,657,890
. D) $111,458,231
. E) None of the above
12. Private pension funds are funds administered by
18. A) The Federal government
19. B) State and local governments
20. C) Insurancecompanies
21. D) Banks and mutual funds
22. E) Both C and D
22. In general terms, which one of the following plan types is the
riskiest for an employee?
I. II. III.
A) B) C) D) E)
Fund assetsNumber of fundsNumber of plan participants
I onlyI and II only II and III only I, II and IIIII only
Answer: D Page: 515-516 Level: Medium
15. Congratulations, you have just been employed! You now have
a choice between a flat benefit at retirement equal to $3,000 times
your years of service, or a career average formula of 3% of your
average salary times your years of service. You expect to work 35
years. At what average salary would you be indifferent between
the two alternatives?
A) $103,000
B) $102,500
C) $101,850
D) $105,000
E) $100,000
16. At your new job you estimate that your average salary over
your working years will be $75,000 per year. How many more
years would you have to work to receive as much benefit from a
flat benefit of $2,250 times years of service as you would receive
from 4% of your average salary times years of service?
24. A) 1.33 times as many years
25. B) 0.75 times as many years
26. C) 1.04 times as many years
27. D) 2.40 times as many years
28. E) 1.50 times as many years
30. An employee who has worked for his firm for 30 years can
retire right now and receive a constant annual benefit of
$45,000. He has a final pay plan that pays his average salary
over his final 5 years times 3% times years of service. He has
decided he will keep working five more years only if by
doing so, his retirement benefits will grow at 6% per year.
How much would his expected average salary (to the nearest
dollar) have to be over the next 5 years to keep him working?
A) $60,220
B) $57,353
C) $50,010
D) $66,911
E) $53,147
. A) Underfunded; $31.75
. B) Underfunded;$215
. C) Overfunded;$31.75
. D) Overfunded; $215
A) Owlrule
B) V esting requirement
C) 403(b) requirement
D) Prudent person rule
E) Funding rule
. A) I, IV and V only
A) 10.00%
B) 51.25%
C) 90.07%
D) 42.22%
E) 29.52%
. A) 3.3 years
. B) 9.7 years
. C) 4.6 years
. D) 2.4 years
. E) 12.2 years
A) I, II and IV
B) II, IV and V
C) I, III and IV
D) II only
E) V only
A) Roth IRA
B) TraditionalIRA
C) Keogh
D) Penny Benny
A) Overfunded
B) Underfunded
C) Fullyfunded
D) Defined contribution
E) Keogh plans
46. Under ERISA the maximum time period allowed for vesting
is ____ years.
A) 3
B) 5
C) 8
D) 10
E) 15
47. ERISA established all but which one of the following?
2. B) Maximumvestingtimes
3. C) Minimumfundingrequirements
A) $900
B) $116
C) $580
D) $224
A) 9.00%
B) 41.25%
C) 64.23%
D) 32.74%
E) 19.67%
54. You want to have $2,000,000 when you retire and you are in
a defined contribution plan. You can earn 8% per year on the
money invested and you will retire in 30 years. Your
employer also contributes to your plan. The employer will
contribute 6% of what you put into the plan each year. How
much do you have to contribute per year to meet your goal?
A) $18,435.43
B) $17,654.87
C) $16,879.32
D) $16,655.53
E) $15,999.44
Vesting refers to
C) Eligibilityrequirementstoretireearly
A) Sweden
B) Italy
C) GreatBritain
D) Chile
E) France
2. In 2004, PBGC had a
A) 2010
B) 2018
C) 2028
D) 2042
E) 2052
Chapter 17 True/False Questions
29. Over the last ten years the number of banks has been
declining, but the number of mutual funds has been growing.
30. Net new cash flows to money market mutual funds vary
inversely with interest rate spreads on money market funds
and savings deposits.
31. Most of the recent growth of long term mutual funds has
occurred because of the bull market of the 1990s.
33. The shares of a closed end fund with market value of assets
of $200 million and 2 million shares outstanding will always
trade at a market value of $100 per share.
XII. The typical household that owns mutual funds owns no more
than 3 mutual funds.
B) Investors a minimum NA V
B) Better diversification
C) Free switching between funds within the same family
A) Foreign currencies
B) Realestate
C) Longtermbonds
D) IPOs
. B) Equity;bond
. C) Municipal bond; money market mutual
. A) Common stock
. B) Commercialpaper
. C) Longtermbonds
. D) Treasury bills
. E) Both A) and C)
. A) Decreased; decreased
. B) Increased;increased
. C) Increased;decreased
. D) Decreased; increased
. C) Arenowfederallyinsured,likebankdeposits
24. The 'profile' of the typical mutual fund owners implies that
he or she is a:
24. Long term investor
III. Employed
IV. College graduate
29. A) III only
30. B) I and III only
31. C) II, III and IV only
32. D) I, III and IV only
33. E) I, II, III and IV
Answer: D Page: 490-491 Level: Easy
31. By type of fund, there are more _____ funds than any other.
. A) Equity
. B) Bond
. C) Taxable money market
. E) Hybrid
32. The largest proportion of long term mutual fund assets are
held by _____ and the largest proportion of money market
mutual fund assets are held by _____.
. A) Load charge
. B) NAV
. C) Expenseratio
. D) 12b-1 fee
. E) Management fee
28. Rank the following types of funds from most risky to least
risky (variations exist but rank them generally)
I. II. III. IV. A) B) C) D) E)
GrowthGrowth and income Money market mutual fund
Bond fund
II, I, III, IV I, II, IV, III I, IV, II, III II, III, I, IV III, IV, II, I
Answer: B Page: 493 Level: Easy
. You have $5,000 to invest and you are considering investing
in Fund A. The fund charges a 5.5% load and an annual
expense fee of 1.25% of the average asset value over the
year. You believe the fund's rate of return will be 10% per
year. If you make the investment what should your
investment be worth in one year?
. A) $5,135.48
. B) $5,197.50
. C) $5,500.00
. D) $5,431.25
. E) $5,162.50
. A fund has a NAV of $30 per share but the shares are
currently selling for $32. This fund must be
C) Abalancedfund
A) $65
B) $55
C) $45
D) $35
E) $25
A) 3.26%
B) 6.50%
C) 6.25%
D) 4.52%
E) 4.02%
. E) 12B-1 remunerations