Chapter 2 Self Test

1. Prices of securities that are traded on the organized exchanges are determined by

Which of the following refers to all institutions and procedures that provide for transactions in

1. short-term debt instruments generally issued by borrowers with very high credit ratings?

Which of the following represents the correct ordering of returns over the period 1926 to 2008

1. (from lowest to highest return)?
2. Private placements are
3. Insurance companies invest in the “long-end” of the securities market by purchasing securities with longer maturities. In which of the following instruments would an insurance company be least likely to invest most of its assets?
4. Three ways that savings can be transferred through the financial markets include all of the following except
5. The investment banker does underwrite the securities to be issued in which of the following?
6. What is the term for a graphical representation of the relationship between interest rates and the maturities of debt securities?
7. Which of the following statements is most correct concerning flotation costs?
8. The Sarbanes-Oxley Act of 2002, in order to protect investors, requires a higher level of accountability for which of the following groups?
9. During the period 1984 to 2008, the average yield on 3-Month U.S. Treasury bills was 4.76%, the average inflation rate was 2.97%, the average yield on 30-year Treasury bonds was 6.89%, and the average return on 30-year Aaa-Rated Corporate Bonds was 7.73%. The real risk-free short-term interest rate is
10. You are considering an investment in a U.S. Treasury bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA rated corporate bonds is 3.5%. What rate of interest should the U.S. Treasury bond pay?
11. You are considering an investment in a AAA-rated U.S. corporate bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA rated corporate bonds is 3.5%. What rate of interest should the U.S. corporate bond pay?
12. An actively traded, AAA-rated, Intel Corporation bond, maturing in 2015, provides an expected yield of 8%. The AAA-rated bond of a local Chicago-based company, not actively traded on any exchange, maturing in 2015, provides an expected yield to investors of 10%. The difference in expected yields is primarily due to
13. Suppose the following rates are averages for banks in your area: interest checking accounts pay 1%, savings accounts pay 2%, and one-year certificates of deposit pay 3%. All accounts are federally insured by the FDIC. The difference in rates can be explained mainly by
14. General Electric (GE) has been a public company for many years with its common stock traded on the New York Stock Exchange. If GE decides to sell 500,000 shares of new common stock, the transaction will be describe as
15. When a company repurchases its own common stock, it is likely that
16. The investment banker performs what three basic functions?
17. The one-year interest rate is 4%. The interest rate for a two-year security is 6%. According to the unbiased expectations theory, the one-year interest rate one year from now must be equal to
18. The Securities and Exchange Commission (SEC)
19. Activities of the investment banker include
20. A basis point is equal to
21. Which of the following represents the correct ordering of standard deviation of returns over the period 1926 to 2008 (from highest to lowest standard deviation of returns)?
22. The costs associated with issuing securities to the public can be high. Some types of securities have greater expenses associated with them than others. Which of the following is the most costly security to issue?
23. Investment banking firms offer to facilitate the sale of securities to the public in a variety of ways. Which of the following methods guarantees the corporation with a pre-determined price for the securities?
24. During the period 1984 to 2008, the average yield on 3-Month U.S. Treasury bills was 4.76%, the average inflation rate was 2.97%, the average yield on 30-year Treasury bonds was 6.89%, and the average return on 30-year Aaa-Rated Corporate Bonds was 7.73%. The real risk-free short-term interest rate is
25. The nominal interest rate is 7% and the expected inflation rate is 2%. Based on the Fisher effect, the real rate of interest is
26. You are considering an investment in a U.S. Treasury bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA rated corporate bonds is 3.5%. What rate of interest should the U.S. Treasury bond pay?
27. An actively traded, AAA-rated, Intel Corporation bond, maturing in 2015, provides an expected yield of 8%. The AAA-rated bond of a local Chicago-based company, not actively traded on any exchange, maturing in 2015, provides an expected yield to investors of 10%. The difference in expected yields is primarily due to
28. Suppose the following rates are averages for banks in your area: interest checking accounts pay 1%, savings accounts pay 2%, and one-year certificates of deposit pay 3%. All accounts are federally insured by the FDIC. The difference in rates can be explained mainly by
29. A life insurance company purchases $1 billion of corporate bonds from premiums collected on its life insurance policies. Therefore,
30. The risk premium would be greater for an investment in an oil and gas exploration in unproven fields than an investment in preferred stock because
31. Advantages of private placements do include which of the following?
32. A “normal” yield curve is
33. A commitment fee is
34. Which of the following is a benefit provided by the existence of organized security exchanges?
35. The prime lending rate is the base rate on
36. Money market transactions include which of the following?
37. Capital market transactions include which of the following?
38. A “Dutch auction” was used by Google to raise money in 2004. A Dutch auction involves
39. Commercial banks that also provide investment banking services are called
40. Which of the following is an example of both a capital market and a primary market transaction?
41. The Sarbanes-Oxley Act of 2002 holds all of the following groups strictly accountable in a legal sense for any instances of misconduct :
42. All of the following are benefits of organized stock exchanges :
43. Which of the following is a valid theory that attempts to explain the shape of the term structure of interest rates?
44. Reynolds, Inc. needs to raise $5 million by selling common stock. Reynolds sells 1 million shares of stock at $5 each to Goldman Sachs, who then is responsible for selling the shares to investors. This is an example of a
45. A wealthy private investor providing a direct transfer of funds is called
46. Private placements usually have several advantages associated with them, but also tend to suffer from specific disadvantages. Which of the following is a disadvantage of a private placement when compared to other methods of selling new securities?
47. Capital market instruments include
48. Money market instruments include:
49. When an investment banking firm “underwrites” an issue of securities, the firm is performing which of the following?
50. Which of the following securities will likely have the highest maturity risk premium?
51. General Motors raises money by selling a new issue of common stock. This transaction occurs in
52. Which of the following statements is false?
53. An example of a primary market transaction is
54. Common examples of financial intermediaries include all of the following except
55. Which of the following would normally be considered a “flotation cost”?
56. An example of a secondary market transaction involving a capital market security is
57. Which of the following statements is an example of a futures market transaction?
58. The New York Stock Exchange (NYSE) is
59. Financial intermediaries
60. Spandra Electronics wants to raise money by selling stock. After talking to several investment banking firms, Spandra decides to hire Goldman Sachs to sell 5 million shares of its common stock. Goldman sells 4.5 million shares and returns the rest to Spandra. This is an example of
61. The Sarbanes-Oxley Act, or SOX,
62. All of the following securities are sold in money markets :
63. ExxonMobil generates about $50 billion in cash annually from its operations and invests about half of that on new exploration. Therefore, ExxonMobil is an example of a(n)
64. The one-year interest rate is 4%. The interest rate for a two-year security is 6%. The one-year interest rate one year from now is 8.34%. According to the liquidity preference theory, the risk premium for the second one-year investment is
65. Which of the following statements concerning private placements is most correct?
66. A corporation sells securities to an investment banking firm on January 1st. The next day an international oil crisis causes stock prices to drop dramatically. The corporation is immune from the drop in price of its stock due to which function of the investment banking firm?
67. The real rate of return is the return earned above the
68. The stock market with the most stringent listing requirements is the
69. In August 2004, Google first sold its common stock to the public at $85 per share and raised $1.76 billion. This is an examples of
70. All of the following are typically advantages of private placements :
71. The nominal interest rate is 7% and the expected inflation rate is 2%. Based on the Fisher effect, the real rate of interest is
72. Which of the following securities will likely have the highest liquidity premium?
73. Prices of securities that are traded in the Over-the-Counter Markets are determined by