Le123

Financial Instruments and Markets: Sample Mid-Semester Test

The test consists of 30 questions, and students have 1-hour to attempt ALL questions.

Note your answer on the sheet provided.

1. A book publisher requires substantial quantities of paper. The publisher and a paper producer have entered into an agreement for the publisher to buy and the producer to supply a given quantity of paper four months later at a price agreed upon today. This agreement is a:

1. Futures contract
2. Forward contract
3. Commodity swap

1. The current price of a stock is $25 per share. You have $10,000 to invest. You borrow an additional $10,000 from your broker and invest $20,000 in the stock. If the maintenance margin is 30 percent, at what price will a margin call first occur?

1. $9.62
2. $17.86
3. $19.71

1. In an underwritten offering, the risk that the entire issue may not be sold to the public at the stipulated offering price is borne by the:

1. Issuer
2. Investment bank
3. Buyers of the part of the issue that is sold

1. A financial analyst is examining whether a country’s financial market is well functioning. She finds that the transaction costs in this market are low and trading volumes are high. She concludes that the market is quite liquid. In such a market:

1. Traders will find it hard to make use of their information
2. Traders will find it easy to trade and their trading will make the market less informationally efficient
3. Traders will find it easy to trade and their trading will make the market more informationally efficient

1. Security market indices are:

1. Constructed and managed like a portfolio of securities
2. Simple interchangeable tools for measuring the returns of different asset classes
3. Valued on a regular basis using the actual market prices of the constituent securities

1. A float-adjusted market-capitalization-weighted index weights each of its constituent securities by its price and:

1. Its trading volume
2. The number of shares outstanding
3. The number of its share available to the investing public

1. Commodity index values are based on:

1. Futures contract prices
2. The market price of the specific commodity
3. The average market price of a basket of similar commodities

1. A unique feature of hedge fund indices is that they:

1. Are frequently equal weighted
2. Are determined by the constituents of the index
3. Reflect the value of private rather than public investments

1. If a market is semi-strong-form efficient, the risk-adjusted returns of a passively managed portfolio relative to an actively managed portfolio are most likely

1. Lower
2. Higher
3. The same

1. Which of the following market anomalies is inconsistent with weak-form market efficiency?

1. Earnings surprise
2. Momentum pattern
3. Closed-end fund discount

1. The type of equity voting right that grants one vote for each share of equity owned is referred to as:

1. Proxy voting
2. Statutory voting
3. Cumulative voting

1. Participating preference shares entitle shareholders to:

1. Participate in the decision-making process of the company
2. Convert their shares into a specified number of common shares
3. Receive an additional dividend if the company’s profits exceed a predetermined level

1. Which of the following statements is most accurate in describing a company’s book value?

1. Book value increases when a company retains its net income
2. Book value is usually equal to the company’s market value
3. The ultimate goal of management is to maximise book value

1. Which of the following measures is the most difficult to estimate?

1. The cost of debt
2. The cost of equity
3. Investors’ required rate of return on debt

1. Which industry classification system uses a three-tier classification system?

1. Russell Global Sectors
2. Industry Classification Benchmark
3. Global Industry Classification Standard

1. Which of the following is not a limitation of the cyclical/noncyclical descriptive approach to classifying companies?

1. A cyclical company may have a growth component in it
2. Business-cycle sensitivity is a discrete phenomenon rather than a continuous spectrum
3. A global company can experience economic expansion in one part of the world while experiencing recession in another part

1. Which of the following companies most likely has the greatest ability to quickly increase its capacity?

1. Restaurant
2. Steel producer
3. Legal services provider

1. In which of the following life-cycle phases are price wars most likely to be absent?

1. Mature
2. Decline
3. Growth

1. An analyst estimates the intrinsic value of a stock to be in the range of $17.85 to $21.45. The current market price of the stock is $24.35. This stock is most likely:

1. Overvalued
2. Undervalued
3. Fairly valued

1. The Beasley Corporation has just paid a dividend of $1.75 per share. If the required rate of return is 12.3 percent per year and dividends are expected to grow indefinitely at a constant rate of 9.2 percent per year, the intrinsic value of Beasley Corporation stock is closest to:

1. $15.54
2. $56.45
3. $61.65

1. The primary difference between P/E multiples based on comparables and P/E multiples based on fundamentals is that fundamentals-based P/Es take into account:

1. Future expectations
2. The law of one price
3. Historical information

1. Enterprise value is most often determined as market capitalization of common equity and preferred stock minus the value of cash equivalents plus the:

1. Book value of debt
2. Market value of debt
3. Market value of long-term debt

1. In analysing a price chart, high or increasing volume most likely indicates which of the following?

1. Predicts a reversal in the price trend
2. Predicts that a trendless period will follow
3. Confirms a rising or declining trend in prices

1. Based on the decennial pattern of cycles, how would the return of the Dow Jones Industrial Average (DJIA) in the year 2015 compare with the return in 2020?

1. The return would be better
2. The return would be worse
3. The answer cannot be determined because the theory does not apply to both of those years