C1

1. Financial markets help transfer funds from ________ units to ________ units. b.
surplus; deficit
2. ________ markets facilitate the flow of short-term funds while ________ markets
facilitate the flow of long-term funds. a. Money; capital
3. Which of the following does NOT characterize the primary market? c.Federal
Government is involved.
4. Which of the following does NOT characterize the money market? d. high
expected returns
5. Which is NOT a capital market security? d. Treasury Bills
6. ________ represent partial ownership of a corporation. b.Stocks
7. When securities prices reflect all available information, the markets are: a.
efficient.
8. Asymmetric information says that ________ has (have) information about a
company's financial condition that is not available to ________. c. the company's
managers; investors
9. The ________ established the Securities and Exchange Commission to oversee
securities markets. b. Securities Exchange Act of 1934
10. If all financial markets were ________, all information about securities would be
freely available to investors and there would be no transactions costs. c.
perfect
11. Which of the following is a characteristic of depository institutions? d. All of
the above are characteristics of depository institutions.
12. Savings and loans have concentrated on ________ loans while commercial banks
have concentrated on ________ loans. a. residential mortgage; business-
related
13. The dominant depository institution is _______, while the dominant non-
depository institution is ________. c. commercial banks; mutual funds
14. A ________ makes a market in specific securities by building and trading
inventory. b. dealer
15. Which of the following is commonly used to alter the risk of investments? c.
derivatives
16. Governments are the main supplier of surplus funds. False
17. The primary market is where new issues of stock are sold. True
18. Liquidity is the ability to sell a security quickly at close to the true market value.
True
19. The New York Stock Exchange is a primary market. False
20. The value of derivative securities is dependent on the value of other securities.
True
21. Derivative securities have a high degree of leverage, which results in magnified
returns for investors. True
22. The value of securities is the present value of expected cash flows, discounted
at the risk free rate. False
23. A security is said to be in equilibrium if the demand for the security is equal to
the supply available for sale. True
24. Privatization is the process of selling government-owned firms to individuals.
True
25. Savings institutions are also called thrifts. True
26. Credit unions are usually much larger than commercial banks. False
27. A broker assists in executing trades between two parties. True
28. The Securities Act of 1933 required specific disclosures by a company prior to
offering securities to the public. True
29. An insurance company is a non-depository institution. True
30. Recent activity in the U.S. shows that insurance and banking services are
becoming significantly more segregated from each other. False

C2
1. Which of the following borrowers' demand for funds is least sensitive to interest
rates? c. government
2. Which of the following would not result in an outward shift in the demand for loan
able funds? d. Increase in personal income.
3. Which of the following is the largest provider of loan able funds? b. businesses
4. Which of the following is most likely to result in lower interest rates? a.
Economic recession.
5. Nominal interest rates are 8% and inflation is expected to be 5%. What is the real
rate of interest? b. 3%
6. Which of the following describes the effects of "crowding-out"? b.
Government demand for funds forces
interest rates higher limiting access to businesses.
7. Nominal interest rates compensate suppliers of funds for: d. both a and b.
8. What are the likely effects of an economic expansion? a. increases in
funds demanded
9. Which of the following did NOT lead to lower interest rates following September
11, 2001? c. Increased federal spending on the military.
10. What is the most likely effect of an increase in personal taxes? a. Decreased
supply of loanable funds.
11. Inflation causes the supply curve of loanable funds to shift to the ________ and
the demand curve to shift to the ________. a. left; right
12. An investor wants to buy 3% more goods and services next year. Prices are
expected to rise by 2%. Which of the following is true? a. The investor requires
a 1% real rate of interest.
13. Which of the following is true? a. I only
I. When the supply of loan able funds exceeds the demand, interest rates fall.
II. When the demand of loan able funds exceeds supply, interest rates fall.
14. Which of the following borrowers is LEAST sensitive to interest rates? b.
Federal Government
15. The ________ is the net return to a lender that is earned after adjusting for the
effects of inflation. b. raw rate
16. The demand for loan able funds increases as interest rates decline. True
17. The supply of loan able funds increases as interest rates decline. False
18. The federal government demand for funds is interest inelastic. True
19. Households are net suppliers of loan able funds, while governments are net
demanders of funds. True
20. The quantity of loan able funds supplied is more sensitive to interest rates than
the quantity of demanded funds. False
21. When supplied funds exceed the amount of funds demanded, interest rates
increase. False
22. The real interest rate is the increase in purchasing power earned when delaying
current consumption. True
23. The crowding-out effect was a significant issue in lowering interest rates during
the late 1990's. False
24. Expected declines in the value of the dollar reduce the supply of funds provided
by foreign investors. True
25. When businesses demand more loan able funds than they supply, interest rates
increase. False
26. High levels of inflation in the late 1970s led to higher interest rates. True
27. For businesses, the NPV of projects increases when interest rates decline. True
28. Foreign demand for funds will increase as U.S. interest rates increase. False
29. The equilibrium interest rate is where the supply of loan able funds equals the
demand for loan able funds. True
30. After the attack on the U.S. on September 11, 2001, interest rates increased
dramatically. False

C3
1. Investment grade bonds have a rating of ________ or better. b. BBB
2. Which of the following assets have the least liquidity? a. house
3. An investor is indifferent between a tax-free yield of 5% and a taxable yield of
8%. What is the investor's marginal tax rate? b. 37.5%
4. An investor has a marginal tax rate of 32%. An investor can earn a tax-free yield
of 10%. What is the equivalent pretax yield on a taxable security? d. 14.7%
5. Nominal interest rates are 8% and inflation is expected to be 5%. What is the real
rate of interest? b. 3%
6. Which of the following bonds would have the highest yield? a. 20-year callable
bond
7. The term structure of interest rates shows the relationship between yields and: c.
maturity.
8. Using pure expectations, when interest rates are expected to increase, which of
the following occur? a. Borrowers demand more long-term funds.
9. What would the pure expectations theory predict about the shape of the yield if
interest rates are expected to fall? b. downward sloping
10. The one-year interest rate is 5%, the two-year rate is 6%. Using the pure
expectations theory, what is the implied forward rate from year 1 to year 2? c. 7%

11. If the one-year interest rate is 10% and next year's one-year rate is expected to
be 13%, what is the today's two-year interest rate under the pure expectations
theory? c. 11.5%
12. Use the following term structure and the pure expectations theory to determine
the implied two-year interest rate that begins three years from today. d. 9.3%
Time Rate
1 year 4.5%
2 years 5.0%
3 years 5.5%
4 years 6.0%
5 years 7.0%
13. Suppose the one-year interest rate is 6%, the two-year rate is 7%, and the
liquidity premium on a two-year security is 25 basis points. What is the one-year
forward rate beginning in one year? b. 7.77%
14. What is the effect of the Treasury's decision to stop issuing 30-year bonds? d.
Long-term rates decrease.

15. A corporation is planning to issue 90-day commercial paper to investors at a

yield at 6%. If the T-bill rate is 4%, the default risk premium is 90 basis points, and
there is a 40 basis point tax adjustment, what is the liquidity premium? c. 70
b.p.
16. U.S. Treasury bonds are rated AAA by Standard and Poor's and Aa by Moody's.
False
17. A B-rated bond pays twice the interest rate of an A-rated bond. False
18. Credit risk premiums generally increase during times of uncertainty. True
19. Callable bonds offer higher yields than noncallable bonds. True
20. Investors benefit from investing in callable bonds when interest rates decline.
False
21. If interest rates increase 50 basis points from their current level of 7%, the new
interest rate is 7.05%. False
22. The yield for convertible bonds is generally lower than the yield for callable
bonds, everything else the same. True
23. The liquidity premium presents an explanation for the prevalence of an upward
sloping yield curve. True
24. Savings institutions have historically focused on attracting short-term funds and
lending funds for long-term periods. True
25. An upward sloping yield curve is an indication of possible near-term recession.
False
26. Interest rates were higher in the early 1980s compared to the late 1990s. True
27. AA-rated bonds have higher credit quality than A-rated bonds. True
28. As the liquidity of bonds declines, so does the offered yield. False
29. The term structure of interest rates shows the relationship between credit
quality and the yield on bonds. False
30. Convertible bonds can be exchanged for common stock at the discretion of the
bond issuer. False

C6
1. Which of the following is NOT a characteristic of Treasury bills? c. Make
semiannual interest payments.
2. Treasury bill has six months to maturity and investors require an 8% annualized
return on the bill. What is the price if the par value is $100,000? b. $96,154
3. An investor buys a 3-month (91-day), $100,000 par value Treasury bill for
$98,500. What is the annualized yield for this investor? c. 6.11%

4. Suppose the investor in question #3 plans to sell the bill in one month (30 days)
at a price of $99,250. What is the expected annual yield for this investor? d.
9.26%
5. What is the quoted discount for the T-bill in question #3? d. 5.93%
6. What is the minimum T-bill denomination? a. $1,000
7. What is the name of a short-term, unsecured debt instrument issued by
corporations? d. commercial paper
8. A 60-day, $1 million CD has an 8% annual rate quote. If CD rates fall to 7% after
10 days, what would your profit be if you then sold the CD? b. $3,529
9. What is the rate at which depository institutions borrow and lend short-term
funds to each other? c. federal funds rate
10. Which of the following money market instruments is used to facilitate
international trade? c. federal funds
11. Which of the following money market securities is most liquid? d. treasury
bills
12. Which of the following is NOT a characteristic of money market securities? d.
High participation of individual investors.
13. What effects does a "flight to quality" have on money market yields? a.
The spread between T-bills and other
securities increases.
14. What is the name of dollar deposits in banks outside the U.S.? b. Eurodollar
CDs.
15. Which of the following best describes LIBOR? a. The rate charged for
interbank loans internationally.
16. In auctions for Treasury bills, all competitive bids are allocated a portion of the
offered bill. False
17. Regardless of the price entered, all accepted competitive bids pay the same
price for Treasury bills. True
18. In a repurchase agreement, the party who repurchases the underlying securities
is acting as a lender. False
19. Commercial paper does not need to be registered with the Securities and
Exchange Commission if it doesn't exceed 45 days to maturity. False
20. Commercial paper yields are greater than yields on Treasury bills because of the
risk of default. True
21. Repos and reverse repos are the same transaction, but viewed from different
perspectives. True
22. As interest rates decline, the value of money market securities increases. True
23. Eurodollar CDs are subject to the same reserve requirements imposed by the
Federal Reserve. False
24. Treasury bills are quoted as a percent discount of the par value. True
25. To assist investors in assessing default risk, commercial paper is often rated by
ratings agencies. True
26. Historically, the commercial paper market has experienced high levels of issuer
defaults. False
27. A banker's acceptance is a letter of credit used in international trade. True
28. During uncertain times, investors prefer low default risk securities. True
29. Corporations tend to be the largest participants in the federal funds market.
False
30. Treasury bills are free from default risk. True

C7
1. How often do Treasury bonds make coupon payments? d. annually
2. Why was Salomon Brothers fined for its involvement in a 1990 Treasury bond
auction? c. It purchased too large of a portion of the
bonds issued.
3. Suppose the bid price on a $100,000 T-bond is 109:16 and the ask price is
109:24. How much will you receive if you want to sell the bond? b. $109,500
4. How do inflation-indexed Treasury bonds protect against inflation? a. The
principal of the bond changes with inflation.
5. How do federal agencies use the proceeds from their bonds? c. Purchase
mortgages.
6. A securities firm separates the interest and principal of Treasury bonds and sells
them as distinct investments. What are these new securities called? c. STRIPs
7. Interest income from Treasury securities is exempt from ________, while interest
income of municipal securities is exempt from ________. c. state taxation; federal
taxation
8. Revenue bonds are backed by: c. the cash flows of an underlying project.
9. What is the name of the legal document underlying a bond issue? a. indenture
10. Which of the following reduces the stress of meeting all debt obligations on the
maturity date of the bond? c. call provision
11. Why would an issuer be interested in exercising its right to call a bond prior to
its maturity? c. It can refinance the debt and reduce interest expense.
12. Which of the following bonds of the same issuer would offer the highest yield?
b. subordinated debentures
13. ________ are restrictions on the bond issuer that are designed to protect the
bondholders from excessive risk. c. Protective covenants
14. A 10-year bond sells for $926.40. It has an annual coupon rate of 5% and a par
value of $1,000. What is the yield to maturity on the bond? d. 7%
15.Which of the following issues federal agency bonds? a. Ginnie Mae.
16. Every payment from a typical bond contains components of both principal and
interest. False
17. The underlying principal of a bond is called the par value. True
18. The key distinction between Treasury notes and Treasury bonds is the available
denominations. False
19. The trading of Treasury bonds and notes occurs on the New York Stock
Exchange. False
20. Individual investors wanting to buy a Treasury bond pay the bid price. False
21. Municipal bonds are free from default risk. False
22. Municipal bonds often have lower yields then Treasury bonds. True
23. Callable bonds offer lower interest rates than noncallable bonds of the same
issuer. False
24. Zero coupon bonds always sell at a premium to par value. False
25. The yields on convertible bonds are lower than straight bonds. True
26. Bonds that have no underlying collateral are called junk bonds. False
27. The cost of financing with bonds is indicated by the yield to maturity. True
28. The discount rate that equates the present value of the cash flows of a bond
with its par value is called the yield to maturity. False
29. Investors who buy a bond and hold it to maturity will earn the yield on the bond.
True
30. Treasury bonds are quoted as thirty-seconds of a dollar. True

C8
1. What is the price of a $1,000 par value bond that has a 10% coupon, 5 years to
maturity, and a yield of 8%? Assume the bond makes annual coupon payments. b.
$1,079.85
2. What is the price of a $1,000 par value bond that has a 12% coupon, 8 years to
maturity, and a yield of 14%? Assume the bond makes semiannual coupon
payments. b. $905.53
3. What is the present value of $1 million to be received in five years, if the required
annual interest rate is 7.5%? a. $696,559
4. If the coupon on a bond is equal to the required rate of return demanded by
investors, the bond sells at: c. a premium.
5. Rank the following bonds by price, from lowest to highest. NOTE: You should not
have to calculate the price of all of the bonds to answer the question. c. III, I,
II, IV
I. Five-year bond, 10% coupon, required interest rate = 12%
II. Five-year bond, 10% coupon, required interest rate = 8%
III. Ten-year bond, 10% coupon, required interest rate = 12%
IV. Ten-year bond, 10% coupon, required interest rate = 8%
6. Which of the following would tend to increase interest rates? d. Increases in the
federal budget deficit.
7. Which of the following announcements would tend to drive bond prices up? b.
Decreasing oil prices.
8. When interest rates decline by 1%, the change in a bond's price is ________ the
change in the bonds price if interest rates increase by 1%. a. greater than
9. If financial institutions expect increasing interest rates, which of the following
strategies should they employ? a. Selling bonds and investing in short-term
securities.
10. What is the duration of a four-year, 8% annual coupon bond if the required rate
of return is 9%? b. 3.57
11. A financial institution has the following bond investments. Determine the
duration of the portfolio. c. 5.33
Maturity Duration Coupon Rate (Annual) Amount
Invested
2 years 1.8 10% $1 million
3 years ?? 0% 2 million
5 years 4.5 12% 3 million
10 years 8.0 8% 4 million
12. Determine the price of elasticity of a three-year, 5% annual coupon bond if the
required rate of return goes from 5% to 6%. Assume the par value of the bond is
$1,000. a. -0.137
13. A bond has a duration of 6, a required return of 8%, and a price of $900. What is
the predicted price of the bond if the required return goes to 8.5%? b. $875
14. Using duration to predict the price of a bond given a change in the required
return: a. always understates the actual price.
15. Investing in bonds to generate the necessary cash flows to exactly meet
projected expenses is called a(n) ________ strategy. c. matching
16. Bonds that sell below par value are called discount bonds. True
17. Most bonds pay semiannual coupons. True
18. When the investor's required rate of return exceeds the bond's coupon, the
bond sells at a premium. False
19. Discount bonds are better investments than premium bonds. False
20. Bonds that sell at a discount will increase in value as they approach maturity.
True
21. If inflation is expected to increase, bond prices tend to increase. False
22. Improving economic conditions often lead to increasing interest rates. True
23. Federal budget deficits place downward pressure on interest rates. False
24. The price elasticity of bonds is negative, indicating an inverse relationship
between interest rates and bond prices. False
25. The risk premium on long-term bonds is greater than the risk premium on
money market securities. True
26. Low coupon bonds have higher price elasticity than high coupon bonds. True
27. The modified duration of zero coupon bonds is equal to its maturity. False
28. When asset duration exceeds liability duration, the net worth of financial
institutions declines as interest rates decrease. False
29. Convexity is more pronounced for long maturity bonds than short maturity
bonds. True
30. Allocating the same proportion of invested funds across several different bond
maturities is called a barbell strategy. False

C10
1. Existing shareholders can sell a stock: b. in the secondary market.
2. When a company decides to issue stock to investors for the first time, it is called:
b. initial public offering.
3. The ________ is the term used for the many presentations given to institutional
investors in an attempt to market an IPO. d. road show
4. ________ is the process of gathering the total amount of stock desired at various
offer prices. a. Bookbuilding
5. Preferred stockholders' claims are paid ________ bondholders and ________
common stockholders. c. after; before
6. How was the price of Google's IPO set? b. By individual investors through an
auction.
7. Research shows that for IPOs, there is short-term (first day) ________ and long-
term ________. a. underpricing; overpricing
8. ________ give current shareholders the first opportunity to buy additional stock
from the company. d. Preemptive rights
9. Which of the following is not a physical organized exchange? c. Nasdaq Stock
Exchange
10. You are given the following stock quote from The Wall Street Journal.
YTD% Hi Lo Div Yld% P/E Vol (100s) Last
Chg
+5.2% 96.20 52.99 ?? 1.62 15.2 5810465.00
0.32
What is the company's annual dividend? b. 1.05
11. You are given the following stock quote from The Wall Street Journal.
YTD% Hi Lo Div Yld% P/E Vol (100s) Last
Chg
+5.2% 96.20 52.99 ?? 1.62 15.2 5810465.00
0.32
What is the company's earnings per share? a. 4.28
12. How many stocks are included in the Dow Jones Industrial Average? b. 30
13. The market value of Zipper Industries is $200 million. The company has 10
million shares of stock outstanding. What is the stock price? b. 20
14. Which of the following restrict the ability of corporate raiders to buy a company?
d. All of the answers are correct.
15. ________ allow(s) companies to issue new securities up to two years after filing
with the Securities and Exchange Commission. b. Shelf registration
16. Owners of stock are partial owners of a company. True
17. The secondary market is where the firm issues new shares of stock to investors.
False
18. Shareholders can participate in the election of the board of directors of the
company. True
19. Dividends on preferred stock are a tax-deductible expense to the firm. False
20. When IBM decides to sell additional shares of its stock to the public, it is called a
secondary offering. True
21. A lockup provision restricts initial investors in an IPO from selling the new issue
for some time after the offer. True
22. The number of IPOs tends to increase during bear markets and decline during
bull markets. False
23. The initial day's returns of IPOs have been quite poor historically. False
24. The companies that trade on Nasdaq are generally much larger than those on
the NYSE. False
25. At the end of the bull market of the 1990s, NYSE trading volume had fallen
dramatically. False
26. The ask price is the price that brokers will sell a stock to investors. True
27. The listing requirements of the NYSE are more stringent than the American
Stock Exchange. True
28. The market usually responds negatively to announcements that a firm is
repurchasing its stock. False
29. American Depository Receipts (ADRs) are a means to invest in foreign stocks.
True
30. Flipping refers to an investor that sells a newly issued stock after the favorable
stock performance on its first trading day. True

C11
1. John Smith Widgets Co. is expected to pay a dividend of $2.50 next year. It is
anticipated that the dividend will increase 5% per year forever. If the required rate
of return on the stock is 10%, what is the stock price for John Smith? d. $50
2. Empire Company is expected to earn $4 per share next year. There are three
other stocks in the company's industry whose P/E ratios are 10, 12, and 14. Using
the price-earnings methodology, what is the value of Empire? b. $48
3. A company is expected to pay a dividend of $4 at the end of the next four years
and then pay a liquidating dividend of $40 at the end of the fourth year. It ceases
operations at the end of the fourth year. What is the value of the company's stock if
the required rate of return is 12%? a. $37.57
4. Kettle Won Company is expected to pay a $12 dividend forever. If the required
return on the stock is 14%, what is the stock price? c. $86
5. Alley Cat Food currently has earnings of $5 per share, which are expected to grow
at 8% per year. The P/E ratio of its competitors is 12. What is the expected stock
price in three years? c. $76
6. If a stock tends to go up 12% when the market goes up 10%, the beta of the
stock is: c. 1.20.
7. What month do small stocks tend to go up the most? a. January
8. Theresa buys a stock for $50. During the next year, the stock pays a dividend of
$2 and Theresa sells the stock at the end of the year for $54. What is her return
over the year? d. 12%
9. You invest $100,000 each in two stocks. The first stock has a beta of 1.2 and the
second stock's beta is 0.6. What is the beta of your two-stock portfolio? c. 0.9
10. The beta of Curl Up and Dye stock is 1.4, the T-bond yield is 8%, and the market
risk premium is 6%. What is the required return on Curl Up and Dye? d. 16.4%
11. SuperMegaWidgets has had an average return of 16%, a beta of 0.75, and a
standard deviation of returns of 20%. The average risk-free rate has been 9%. What
is the Sharpe index for SuperMegaWidgets stock? c. 0.35
12. SuperMegaWidgets has had an average return of 16%, a beta of 0.75, and a
standard deviation of returns of 20%. The average risk-free rate has been 9%. What
is the Treynor index for SuperMegaWidgets stock? b. 0.30
13. Wes is a speechwriter for the CEO of Butterfly Industries and trades in the stock
before the CEO makes major announcements of the company. If Wes can earn
abnormal profits, this is evidence of what type of market inefficiency? d.
strong
14. Which of the following is used to measure the risk of a stock? d. All of the
answers are correct.
15. In 1998, when Russian stock and currency values declined abruptly in response
to severe financial problems in Russia, and most stock markets around the world
experienced losses on that day, it was known as: b. bloody Thursday.
16. The dividend discount model is more accurate when companies retain their
income instead of paying dividends. False
17. CAPM ignores the unsystematic risk of a stock when determining the required
rate of return. True
18. The overnight federal funds rate is commonly used as a proxy for the risk-free
rate in the CAPM equation. False
19. Foreign demand for U.S. stocks increases when the dollar is expected to
weaken. False
20. The volatility of a two-stock portfolio increases as the correlation between the
assets decreases. False
21. The reward-to-variability index is also called the Sharpe index. True
22. If the market is semi strong-form efficient, it is also weak-form efficient. True
23. All else the same, riskier stocks have higher value. False
24. The beta of a stock can be estimated by using a regression. True
25. While interest rates affect the value of bonds, they do not affect the value of
stocks. False
26. If the market is weak-form efficient, then prices fully reflect historical
information. True
27. To calculate the beta of a portfolio, you need to account for correlation among
the individual securities. False
28. To use the dividend discount model, the dividends must be constant forever.
False
29. The market risk premium is the excess return of the market over the risk-free
rate. True
30. Compared to the arbitrage pricing theory, the capital asset pricing model is a
more specific method of determining the return on an asset. True
C12
1. A ________ order is when the broker transacts immediately at the best possible
price. d. market
2. A ________ order attempts to protect investors who own stock and want to limit
losses in the event that the stock price falls. c. stop-loss
3. Who establishes margin requirements? c. Federal Reserve
4. Josh buys a stock for $50, depositing $40 in a margin account and borrowing the
remainder from his broker at an interest rate of 10%. During the year, the stock
pays a $2 dividend. What is Josh's return if the stock is worth $56 at the end of the
year? b. 17.5%
5. Compared to buying the stock outright (no borrowing), margin buying ________
returns when the stock price increases and ________ returns when the stock price
falls. b. increases; decreases
6. When buying on margin, if the stock price falls, a request to deposit additional
funds in your account is called a: a. margin call.
7. In a ________, the investor borrows a stock and sells it with the intention of buying
it back later at a lower price. c. short sale
8. Investors concerned about adverse price movements following a short sale would
be interested in a ________ order. d. stop-buy
9. Which of the following does NOT explain an increase in the bid-ask spread? c.
competition increases
10. ________ are designed to mimic the S and P 500. b. Spiders
11. ________ is the simultaneous buying and/or selling of at least 15 different stocks
that have aggregate value of more than $1 million. d. Program trading
12. All of the following are similarities between ETFs and index mutual funds
EXCEPT: c. each can be sold short.
13. The price that a specialist pays to buy a stock is called the: a. bid.
14. A ________ is Web-based trading platform that communicates with ECNs to allow
investors to trade stocks without using a broker. c. direct access broker
15. The "odd-eighths" collusion controversy affected which of the following
markets? c. Nasdaq.
16. Full-service brokers offer investment advice, while discount brokers only execute
trades for their customers. True
17. Market orders are executed if the price is better than the price specified by the
investor. False
18. Buying on margin means borrowing some of the funds to pay for a stock. True
19. The current minimum margin requirement is 50%. True
20. Buying on margin magnifies the return earned on the underlying stock. True
21. The maintenance margin is the minimum amount of equity that must remain in
a margin account at all times. True
22. The risk of short selling is that stock prices will fall. False
23. Cubes (symbol QQQ) are ETFs that mimic the Dow Jones Industrial Average
index. False
24. Specialists monitor trading on Nasdaq. False
25. Restrictions on program trading when the Dow moves by more than 2% are
called collars. True
26. The short interest ratio is the number of shares sold short divided by trading
volume. True
27. Circuit breakers temporarily halt trading if the stock market fluctuates a lot in
one day. True
28. The commissioners of the Securities and Exchange Commission are appointed
by the chairman of the New York Stock Exchange. False
29. When investors borrow stock for short sales, they must make up any dividends
that would have been earned by the original owner. True
30. Specialists offset all incoming orders by taking the opposite side of every
transaction. False

C13
1. Who regulates futures markets? b. Commodity Futures Trading Commission
2. ________ often take positions in financial futures to reduce their exposure to
interest rate risk. a. Hedgers
3. ________ are speculators who typically close out their futures positions on the
same day they were initiated. d. Day traders
4. An owner of a seat of a futures exchange is called a: b. member.
5. Which of the following is NOT specified in a futures contract? d. futures
price
6. ________ is the number of outstanding futures contracts for a specific settlement
date. a. Open interest
7. What is the face value of the Treasury bill underlying a T-bill futures contract? d.
$1,000,000
8. Which of the following would increase Treasury bond futures prices? c.
Increase in unemployment.
9. An investor buys a Treasury bond futures contract at a price of 96.50 and closes
out the contract at 95.60. What is the investor's profit (or loss)? c. 900
10. What is the amount paid on a Treasury bond futures contract if the quote is 94-
16? a. 94,500
11. Using Treasury bond futures contracts to hedge the interest rate risk of
corporate bonds is an example of: d. cross-hedging.
12. In an S and P 500 futures contract, each point in the index has a contract value
of: b. $250
13. A stock index pays a 2% dividend over the next 9 months while the rate of
interest over the same period is 4%. What is the cost of carry over the 9-month
period? a. 2%
14. ________ is a strategy used by institutional investors to switch between risky
investments and risk-free assets as market conditions change. b. Dynamic
asset allocation
15. ________ involves buying or selling stock index futures while simultaneously
taking the opposite position in the underlying stocks of the index. a. Index
arbitrage
16. Position traders are speculators with a longer investment horizon than day
traders. True
17. Floor traders on the futures exchange floor only execute orders on behalf of
their customers. False
18. Changes in the value of futures contracts must be settled every trading day.
True
19. Prices on the futures exchange floor are determined by open outcry. True
20. The face value (contract size) of a Treasury bond futures contract is $100,000.
True
21. As the dividends on a stock index increase, the price of a futures contract on the
index would also increase. False
22. As interest rates increase, the price of futures contracts increases. True
23. T-bond futures prices tend to decline as economy growth increases. True
24. If you want to speculate on increasing interest rates, you would sell Treasury
bond futures contracts. True
25. Less than 5% of futures contracts actually involve delivery of the underlying
instrument. True
26. Treasury bond futures are quoted in thirty-seconds of a percentage point. True
27. A financial institution that hedges with interest rate futures is more sensitive to
economic events. False
28. The difference between a financial institution's volume of rate-sensitive assets
and rate-sensitive liabilities represents its exposure to interest rate risk. True
29. Futures contracts on a bond index are cash settled, not physically delivered.
True
30. Basis risk refers to the possibility of losses due to the default of a counterparty
in a futures transaction. False

C14
1. The ________ price is the fixed price for which a call option owner can buy the
underlying security from the option writer. c. exercise
2. Which of the following best describes an American put option on a stock? b.
Right to sell on or before the maturity
date.
3. If the exercise price is $35 and the underlying market price is $45, a put option is:
a. out of the money.
4. What is the largest options market in the U.S. in terms of trading volume? b.
Chicago Board Options Exchange
5. What is the name of long-term options contracts? d. LEAPS
6. Who regulates options trading? a. Securities and Exchange Commission
7. The ________ guarantees payment under an options contract so that users need
not be concerned about the credit quality of the counterparty. c. options clearing
corporation
8. ________ is another name for the price of an option. b. Premium
9. For call options, the lower the ________, the higher the ________. d. strike
price; premium
10. Belinda buys a put option on IBM stock for $3. The exercise price is $105. When
the option was purchased, the price of IBM was $100, and at the maturity of the
option IBM is worth $115. What is Belinda's profit per share? a. 3
11. Allie sells a call option on Microsoft stock for $6. The exercise price is $30. When
the option was purchased, the price of Microsoft was $31, and at the maturity of the
option the stock is worth $35. What is Belinda's profit per share? c. 1
12. Casey buys a call option on Ford stock for $2. The exercise price is $20 at the
time of the purchase, the price of Ford $17. At what stock price will Casey break
even on the option? d. $22
13. The premium for a call option increases as the ________ decreases. b.
exercise price
14. Selling a call option when you own the underlying instrument is called a ________
strategy. a. covered call
15. One option contract gives the owner the right to buy or sell ________ shares of
stock. b. 100
16. The exercise price of an option is also called the strike price. True
17. An out-of-the-money call option has the exercise price less than the market
price of the underlying security. False
18. Put options increase in value as the stock price declines. True
19. A call option gives the option writer the right to buy the underlying security at a
fixed price before the maturity date. False
20. The decision to list an option is made by the exchanges, not the firms of the
underlying securities. True
21. When buying a call option, the maximum loss is the premium paid for the
option. True
22. When selling a call option, the maximum loss is the premium earned from the
option buyer. False
23. The return from buying an option that winds up out of the money is 100%. True
24. The value of all options increases as the time to maturity increases. True
25. As the exercise price increases, the value of put options decreases, but the
value of call options increases. True
26. The seller of a covered call is fully protected from decreases in the underlying
instrument. False
27. Put options are often granted to managers of firms to provide an incentive to
increase the value of the company's stock. False
28. Put options insure a portfolio from loss over the maturity of the option. True
29. For some options contracts, the underlying instrument is a futures contract.
True
30. Options exchanges in the U.S. are all fully computerized and automated. False