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Essentials of Investments 11th Edition by Zvi Bodie Professor – Test Bank
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Chapter 2 Asset Classes and Financial Instruments
1) Which of the following is not a money market instrument?
- A) Treasury bill
- B) commercial paper
- C) preferred stock
- D) bankers’ acceptance
Answer: C
Difficulty: 1 Easy
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
2) T-bills are issued with initial maturities of:
- 4 weeks
- 16 weeks
III. 26 weeks
- 32 weeks
- A) I and II only
- B) I and III only
- C) I, II, and III only
- D) I, II, III, and IV
Answer: B
Difficulty: 1 Easy
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
3) When computing the bank discount yield, you would use ________ days in the year.
- A) 260
- B) 360
- C) 365
- D) 366
Answer: B
Difficulty: 1 Easy
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
4) A dollar-denominated deposit at a London bank is called ________.
- A) eurodollars
- B) LIBOR
- C) fed funds
- D) bankers’ acceptance
Answer: A
Difficulty: 1 Easy
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
5) Money market securities are sometimes referred to as cash equivalents because ________.
- A) they are safe and marketable
- B) they are not liquid
- C) they are high-risk
- D) they are low-denomination
Answer: A
Difficulty: 1 Easy
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
6) The most marketable money market security is ________.
- A) Treasury bills
- B) bankers’ acceptances
- C) certificates of deposit
- D) common stock
Answer: A
Difficulty: 1 Easy
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
7) The minimum tick size, or spread between prices in the Treasury bond market, is
- A) 1/8 of a point.
- B) 1/16 of a point.
- C) 1/32 of a point.
- D) 1/128 of a point.
Answer: D
Difficulty: 2 Medium
Topic: The Bond Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
8) An investor in a T-bill earns interest by ________.
- A) receiving interest payments every 90 days
- B) receiving dividend payments every 30 days
- C) converting the T-bill at maturity into a higher-valued T-note
- D) buying the bill at a discount from the face value to be received at maturity
Answer: D
Difficulty: 1 Easy
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
9) ________ would not be included in the EAFE index.
- A) Australia
- B) Canada
- C) France
- D) Japan
Answer: B
Difficulty: 3 Hard
Topic: Stock and Bond Market Indexes
Learning Objective: 02-02 Describe the construction of stock market indexes.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
10) ________ is considered to be an emerging market country.
- A) France
- B) Norway
- C) Brazil
- D) Canada
Answer: C
Difficulty: 2 Medium
Topic: Stock and Bond Market Indexes
Learning Objective: 02-02 Describe the construction of stock market indexes.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
11) Which one of the following is a true statement?
- A) Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors.
- B) Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock.
- C) Preferred stockholders have voting power.
- D) Investors can sue managers for nonpayment of preferred dividends.
Answer: B
Difficulty: 2 Medium
Topic: Equity Securities
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
12) The bid price of a Treasury bill is ________.
- A) the price at which the dealer in Treasury bills is willing to sell the bill
- B) the price at which the dealer in Treasury bills is willing to buy the bill
- C) greater than the ask price of the Treasury bill expressed in dollar terms
- D) the price at which the investor can buy the Treasury bill
Answer: B
Difficulty: 1 Easy
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
13) The German stock market is measured by which market index?
- A) FTSE
- B) Dow Jones 30
- C) DAX
- D) Nikkei
Answer: C
Difficulty: 1 Easy
Topic: Stock and Bond Market Indexes
Learning Objective: 02-02 Describe the construction of stock market indexes.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
14) Deposits of commercial banks at the Federal Reserve are called ________.
- A) bankers’ acceptances
- B) federal funds
- C) repurchase agreements
- D) time deposits
Answer: B
Difficulty: 1 Easy
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
15) Which of the following is not a true statement regarding municipal bonds?
- A) A municipal bond is a debt obligation issued by state or local governments.
- B) A municipal bond is a debt obligation issued by the federal government.
- C) The interest income from a municipal bond is exempt from federal income taxation.
- D) The interest income from a municipal bond is exempt from state and local taxation in the issuing state.
Answer: B
Difficulty: 1 Easy
Topic: The Bond Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
16) Which of the following is not a characteristic of a money market instrument?
- A) liquidity
- B) marketability
- C) low risk
- D) maturity greater than 1 year
Answer: D
Difficulty: 1 Easy
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
17) An individual who goes short in a futures position ________.
- A) commits to delivering the underlying commodity at contract maturity
- B) commits to purchasing the underlying commodity at contract maturity
- C) has the right to deliver the underlying commodity at contract maturity
- D) has the right to purchase the underlying commodity at contract maturity
Answer: A
Difficulty: 1 Easy
Topic: Derivative Markets
Learning Objective: 02-03 Calculate the profit or loss on investments in options and futures contracts.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
18) Which of the following is not a nickname for an agency associated with the mortgage markets?
- A) Fannie Mae
- B) Freddie Mac
- C) Sallie Mae
- D) Ginnie Mae
Answer: C
Difficulty: 1 Easy
Topic: The Bond Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
19) Commercial paper is a short-term security issued by ________ to raise funds.
- A) the Federal Reserve
- B) the New York Stock Exchange
- C) large well-known companies
- D) all of these options
Answer: C
Difficulty: 1 Easy
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
20) The maximum maturity on commercial paper is ________.
- A) 270 days
- B) 180 days
- C) 90 days
- D) 30 days
Answer: A
Difficulty: 2 Medium
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
21) Which one of the following is a true statement regarding the Dow Jones Industrial Average?
- A) It is a value-weighted average of 30 large industrial stocks.
- B) It is a price-weighted average of 30 large industrial stocks.
- C) It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange.
- D) It is a value-weighted average of all stocks traded on the New York Stock Exchange.
Answer: B
Difficulty: 1 Easy
Topic: Stock and Bond Market Indexes
Learning Objective: 02-02 Describe the construction of stock market indexes.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
22) Treasury bills are financial instruments issued by ________ to raise funds.
- A) commercial banks
- B) the federal government
- C) large corporations
- D) state and city governments
Answer: B
Difficulty: 1 Easy
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
23) Which of the following are true statements about T-bills?
- T-bills typically sell in denominations of $10,000.
- Income earned on T-bills is exempt from all federal taxes.
III. Income earned on T-bills is exempt from state and local taxes.
- A) I only
- B) I and II only
- C) I and III only
- D) I, II, and III
Answer: C
Difficulty: 2 Medium
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
24) A bond that has no collateral is called a ________.
- A) callable bond
- B) debenture
- C) junk bond
- D) mortgage
Answer: B
Difficulty: 1 Easy
Topic: The Bond Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
25) A ________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date.
- A) call option
- B) futures contract
- C) put option
- D) interest rate swap
Answer: C
Difficulty: 1 Easy
Topic: Derivative Markets
Learning Objective: 02-03 Calculate the profit or loss on investments in options and futures contracts.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
26) A T-bill quote sheet has 90-day T-bill quotes with a 4.92 ask and a 4.86 bid. If the bill has a $10,000 face value, an investor could sell this bill for ________.
- A) $10,000
- B) $9,878.50
- C) $9,877
- D) $9,880.16
Answer: B
Explanation: $9,878.50 = $10,000 ×
Difficulty: 3 Hard
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
27) Which one of the following is a true statement regarding corporate bonds?
- A) A corporate callable bond gives its holder the right to exchange it for a specified number of the company’s common shares.
- B) A corporate debenture is a secured bond.
- C) A corporate convertible bond gives its holder the right to exchange it for a specified number of the company’s common shares.
- D) Holders of corporate bonds have voting rights in the company.
Answer: C
Difficulty: 2 Medium
Topic: The Bond Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
28) The yield on tax-exempt bonds is ________.
- A) usually less than 50% of the yield on taxable bonds
- B) normally about 90% of the yield on taxable bonds
- C) greater than the yield on taxable bonds
- D) less than the yield on taxable bonds
Answer: D
Difficulty: 1 Easy
Topic: The Bond Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
29) ________ is not a money market instrument.
- A) A certificate of deposit
- B) A Treasury bill
- C) A Treasury bond
- D) Commercial paper
Answer: C
Difficulty: 1 Easy
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
30) An investor buys a T-bill at a bank discount quote of 4.80 with 150 days to maturity for $9800. The bill has a face value of $10,000. The investor’s bond equivalent yield on this investment is ________.
- A) 4.8%
- B) 4.97%
- C) 5.47%
- D) 5.74%
Answer: B
Explanation: $9,800 = $10,000 ×
× = 4.97
Difficulty: 3 Hard
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
31) The U.K. stock index is the ________.
- A) DAX
- B) FTSE
- C) GSE
- D) TSE
Answer: B
Difficulty: 1 Easy
Topic: Stock and Bond Market Indexes
Learning Objective: 02-02 Describe the construction of stock market indexes.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
32) A ________ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date.
- A) call option
- B) futures contract
- C) put option
- D) interest rate swap
Answer: A
Difficulty: 1 Easy
Topic: Derivative Markets
Learning Objective: 02-03 Calculate the profit or loss on investments in options and futures contracts.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
33) Which one of the following provides the best example of securitization?
- A) convertible bond
- B) call option
- C) mortgage pass-through security
- D) preferred stock
Answer: C
Difficulty: 1 Easy
Topic: The Bond Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
34) Which of the following indexes are market value-weighted?
- The NYSE Composite
- The S&P 500
III.The Wilshire 5000
- A) I and II only
- B) II and III only
- C) I and III only
- D) I, II, and III
Answer: D
Difficulty: 1 Easy
Topic: Stock and Bond Market Indexes
Learning Objective: 02-02 Describe the construction of stock market indexes.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
35) The interest rate charged by large banks in London to lend money among themselves is called ________.
- A) the prime rate
- B) the discount rate
- C) the federal funds rate
- D) LIBOR
Answer: D
Difficulty: 1 Easy
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
36) A firm that has large securities holdings and wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following?
- A) reverse repurchase agreement
- B) bankers’ acceptance
- C) commercial paper
- D) repurchase agreement
Answer: D
Difficulty: 2 Medium
Topic: The Money Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
37) Currently, the Dow Jones Industrial Average is computed by ________.
- A) adding the prices of 30 large “blue-chip” stocks and dividing by 30
- B) calculating the total market value of the 30 firms in the index and dividing by 30
- C) measuring the current total market value of the 30 stocks in the index relative to the total value on the previous day
- D) adding the prices of 30 large “blue-chip” stocks and dividing by a divisor adjusted for stock splits and large stock dividends
Answer: D
Difficulty: 2 Medium
Topic: Stock and Bond Market Indexes
Learning Objective: 02-02 Describe the construction of stock market indexes.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
38) An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and 6.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, ________.
- A) 5% and 6.4%
- B) 5% and 5.44%
- C) 4.25% and 6.4%
- D) 5.75% and 5.44%
Answer: B
Explanation: After-tax return on municipal bond = 0.05 = 5%
After-tax return on corporate bond = 0.064(1 – 0.15) = 0.0544 = 5.44%
Difficulty: 2 Medium
Topic: The Bond Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
39) If a Treasury note has a bid price of $996.25, the quoted bid price in the Wall Street Journal would be ________.
- A) 99:5/8
- B) 99:6/10
- C) 99.6250
- D) none of the options
Answer: C
Explanation: Quoted price = 996.25 = 99.625
Difficulty: 2 Medium
Topic: The Bond Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Apply
Accessibility: Keyboard Navigation
40) TIPS are ________.
- A) Treasury bonds that pay no interest and are sold at a discount
- B) U.K. bonds that protect investors from default risk
- C) securities that trade on the Toronto stock index
- D) Treasury bonds that protect investors from inflation
Answer: D
Difficulty: 2 Medium
Topic: The Bond Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
41) The price quotations of Treasury bonds in the Wall Street Journal show a bid price of 104.5313 and an ask price of 104.5489. If you sell a Treasury bond, you expect to receive ________.
- A) $ 1,000.00
- B) $ 1,045.00
- C) $ 1,045.31
- D) $ 1,045.48
Answer: C
Explanation: P= 104.5313% (1000) = 1,045.31
Difficulty: 2 Medium
Topic: The Bond Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
42) The Dow Jones Industrial Average is ________.
- A) a price-weighted average
- B) a value weight and average
- C) an equally weighted average
- D) an unweighted average
Answer: A
Difficulty: 1 Easy
Topic: Stock and Bond Market Indexes
Learning Objective: 02-02 Describe the construction of stock market indexes.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
43) Investors will earn higher rates of returns on TIPS than on equivalent default-risk standard bonds if ________.
- A) inflation is lower than anticipated over the investment period
- B) inflation is higher than anticipated over the investment period
- C) the U.S. dollar increases in value against the euro
- D) the spread between commercial paper and Treasury securities remains low
Answer: B
Difficulty: 2 Medium
Topic: The Bond Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
44) Preferred stock is like long-term debt in that ________.
- A) it gives the holder voting power regarding the firm’s management
- B) it promises to pay to its holder a fixed stream of income each year
- C) the preferred dividend is a tax-deductible expense for the firm
- D) in the event of bankruptcy preferred stock has equal status with debt
Answer: B
Difficulty: 2 Medium
Topic: Equity Securities
Learning Objective: 02-02 Describe the construction of stock market indexes.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
45) Which of the following does not approximate the performance of a buy-and-hold portfolio strategy?
- A) an equally weighted index
- B) a price-weighted index
- C) a value-weighted index
- D) all of these options (Weights are not a factor in this situation.)
Answer: A
Difficulty: 2 Medium
Topic: Stock and Bond Market Indexes
Learning Objective: 02-02 Describe the construction of stock market indexes.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
46) In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs ________.
- A) automatically
- B) by adjusting the divisor
- C) by adjusting the numerator
- D) by adjusting the market value weights
Answer: B
Difficulty: 2 Medium
Topic: Stock and Bond Market Indexes
Learning Objective: 02-02 Describe the construction of stock market indexes.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
47) A bond issued by the state of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket, this bond would provide you with an equivalent taxable yield of ________.
- A) 4.5%
- B) 7.25%
- C) 8.68%
- D) none of these options
Answer: C
Explanation: 8.68% = 0.0625/(1 – 0.28)
Difficulty: 2 Medium
Topic: The Bond Market
Learning Objective: 02-01 Distinguish among the major assets that trade in money markets and in capital markets.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
48) The purchase of a futures contract gives the buyer ________.
- A) the right to buy an item at a specified price
- B) the right to sell an item at a specified price
- C) the obligation to buy an item at a specified price
- D) the obligation to sell an item at a specified price
Answer: C
Difficulty: 1 Easy
Topic: Derivative Markets
Learning Objective: 02-03 Calculate the profit or loss on investments in options and futures contracts.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Essentials of Investments, 11e (Bodie)
Chapter 4 Mutual Funds and Other Investment Companies
1) Which one of the following invests in a portfolio that is fixed for the life of the fund?
- A) mutual fund
- B) money market fund
- C) managed investment company
- D) unit investment trust
Answer: D
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
2) ________ are partnerships of investors with portfolios that are larger than most individual investors but are still too small to warrant managing on a separate basis.
- A) Commingled funds
- B) Closed-end funds
- C) REITs
- D) Mutual funds
Answer: A
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
3) A ________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.
- A) commingled pool
- B) unit trust
- C) hedge fund
- D) money market fund
Answer: C
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
4) Advantages of investment companies to investors include all but which one of the following?
- A) record keeping and administration
- B) low-cost diversification
- C) professional management
- D) guaranteed rates of return
Answer: D
Difficulty: 1 Easy
Topic: Investment Companies
Learning Objective: 04-01 Cite advantages and disadvantages of investing with an investment company rather than buying securities directly.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
5) Which of the following typically employ significant amounts of leverage?
- Hedge funds
- REITs
III. Money market funds
- Equity mutual funds
- A) I and II only
- B) II and III only
- C) III and IV only
- D) I, II, and III only
Answer: A
Difficulty: 2 Medium
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
6) The NAV of which funds is fixed at $1 per share?
- A) equity funds
- B) money market funds
- C) fixed-income funds
- D) commingled funds
Answer: B
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
7) The two principal types of REITs are equity trusts, which ________, and mortgage trusts, which ________.
- A) invest directly in real estate; invest in mortgage and construction loans
- B) invest in mortgage and construction loans; invest directly in real estate
- C) use extensive leverage; distribute less than 95% of income to shareholders
- D) distribute less than 95% of income to shareholders; use extensive leverage
Answer: A
Difficulty: 2 Medium
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
8) A contingent deferred sales load is commonly called a ________.
- A) front-end load
- B) back-end load
- C) 12b-1 charge
- D) top-end sales commission
Answer: B
Difficulty: 1 Easy
Topic: Costs of Investing in Mutual Funds
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
9) In the United States in 2017, there were approximately ________ mutual funds offered by fewer than ________ fund complexes.
- A) 12,000; 650
- B) 7,000; 100
- C) 8,000; 850
- D) 9,000; 300
Answer: C
Difficulty: 2 Medium
Topic: Mutual Funds
Learning Objective: 04-04 Classify mutual funds according to investment style.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
10) Part B of a mutual fund prospectus contains information about:
- Fund holdings by directors and officers
- Front-end and back-end loads
III. Securities held by the fund at the end of the fiscal year
- A) I only
- B) I and II only
- C) I and III only
- D) I, II, and III
Answer: C
Difficulty: 1 Easy
Topic: Information on Mutual Funds
Learning Objective: 04-01 Cite advantages and disadvantages of investing with an investment company rather than buying securities directly.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
11) Mutual funds provide the following for their shareholders.
- A) diversification
- B) professional management
- C) record keeping and administration
- D) all of these options
Answer: D
Difficulty: 1 Easy
Topic: Investment Companies
Learning Objective: 04-01 Cite advantages and disadvantages of investing with an investment company rather than buying securities directly.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
12) The average maturity of fund investments in a money market mutual fund is ________.
- A) slightly more than 1 month
- B) slightly more than 1 year
- C) about 9 months
- D) between 2 and 3 years
Answer: A
Difficulty: 1 Easy
Topic: Mutual Funds
Learning Objective: 04-04 Classify mutual funds according to investment style.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
13) Rank the following fund categories from most risky to least risky:
- Equity growth fund
- Balanced fund
III. Sector fund
- Money market fund
- A) IV, I, III, II
- B) III, II, IV, I
- C) I, II, III, IV
- D) III, I, II, IV
Answer: D
Difficulty: 2 Medium
Topic: Mutual Funds
Learning Objective: 04-04 Classify mutual funds according to investment style.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
14) Which of the following result in a taxable event for investors?
- Short-term capital gain distributions from the fund
- Dividend distributions from the fund
III. Long-term capital gain distributions from the fund
- A) I only
- B) II only
- C) I and II only
- D) I, II, and III
Answer: D
Difficulty: 1 Easy
Topic: Taxation of Mutual Fund Income
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
15) The type of mutual fund that primarily engages in market timing is called ________.
- A) a sector fund
- B) an index fund
- C) an ETF
- D) an asset allocation fund
Answer: D
Difficulty: 2 Medium
Topic: Mutual Funds
Learning Objective: 04-04 Classify mutual funds according to investment style.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
16) As of 2017, approximately ________ of mutual fund assets were invested in equity funds.
- A) 5%
- B) 52%
- C) 30%
- D) 12%
Answer: B
Difficulty: 1 Easy
Topic: Mutual Funds
Learning Objective: 04-04 Classify mutual funds according to investment style.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
17) As of 2017, approximately ________ of mutual fund assets were invested in bond funds.
- A) 22%
- B) 32%
- C) 37%
- D) 47%
Answer: A
Difficulty: 1 Easy
Topic: Mutual Funds
Learning Objective: 04-04 Classify mutual funds according to investment style.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
18) As of 2017, approximately ________ of mutual fund assets were invested in money market funds.
- A) 5%
- B) 17%
- C) 44%
- D) 66%
Answer: B
Difficulty: 1 Easy
Topic: Mutual Funds
Learning Objective: 04-04 Classify mutual funds according to investment style.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
19) Management fees for open-end and closed-end funds typically range between ________ and ________.
- A) .2%; 2.0%
- B) .5%; 5%
- C) 2%; 5%
- D) 3%; 8%
Answer: A
Difficulty: 1 Easy
Topic: Costs of Investing in Mutual Funds
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
20) The primary measurement unit used for assessing the value of one’s stake in an investment company is ________.
- A) net asset value
- B) average asset value
- C) gross asset value
- D) total asset value
Answer: A
Difficulty: 1 Easy
Topic: Investment Companies
Learning Objective: 04-01 Cite advantages and disadvantages of investing with an investment company rather than buying securities directly.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
21) Net asset value is defined as ________.
- A) book value of assets divided by shares outstanding
- B) book value of assets minus liabilities divided by shares outstanding
- C) market value of assets divided by shares outstanding
- D) market value of assets minus liabilities divided by shares outstanding
Answer: D
Difficulty: 1 Easy
Topic: Investment Companies
Learning Objective: 04-01 Cite advantages and disadvantages of investing with an investment company rather than buying securities directly.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
22) Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares?
- A) $12
- B) $9
- C) $10
- D) $1
Answer: B
Explanation: NAV = ($500 – $50)/50 = $9
Difficulty: 2 Medium
Topic: Investment Companies
Learning Objective: 04-01 Cite advantages and disadvantages of investing with an investment company rather than buying securities directly.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
23) Assume that you have recently purchased 100 shares in an investment company. Upon examining the balance sheet, you note that the firm is reporting $225 million in assets, $30 million in liabilities, and 10 million shares outstanding. What is the net asset value (NAV) of these shares?
- A) $25.50
- B) $22.50
- C) $19.50
- D) $1.95
Answer: C
Explanation: NAV = (225 – 30)/10 = 19.50
Difficulty: 2 Medium
Topic: Investment Companies
Learning Objective: 04-01 Cite advantages and disadvantages of investing with an investment company rather than buying securities directly.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
24) The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so, the fund buys shares in each S&P 500 company ________.
- A) in proportion to the market value weight of the firm’s equity in the S&P 500
- B) in proportion to the price weight of the stock in the S&P 500
- C) by purchasing an equal number of shares of each stock in the S&P 500
- D) by purchasing an equal dollar amount of shares of each stock in the S&P 500
Answer: A
Difficulty: 1 Easy
Topic: Mutual Funds
Learning Objective: 04-04 Classify mutual funds according to investment style.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
25) Which of the following is not a type of managed investment company?
- A) unit investment trusts
- B) closed-end funds
- C) open-end funds
- D) hedge funds
Answer: A
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
26) Which of the following funds invest specifically in stocks of fast-growing companies?
- A) balanced funds
- B) growth equity funds
- C) REITs
- D) equity income funds
Answer: B
Difficulty: 1 Easy
Topic: Mutual Funds
Learning Objective: 04-04 Classify mutual funds according to investment style.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
27) A fund that invests in securities worldwide, including the United States, is called ________.
- A) an international fund
- B) an emerging market fund
- C) a global fund
- D) a regional fund
Answer: C
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
28) The greatest percentage of mutual fund assets are invested in ________.
- A) bond funds
- B) equity funds
- C) hybrid funds
- D) money market funds
Answer: B
Difficulty: 1 Easy
Topic: Mutual Funds
Learning Objective: 04-04 Classify mutual funds according to investment style.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
29) Sponsors of unit investment trusts earn a profit by ________.
- A) deducting management fees from fund assets
- B) deducting a percentage of any gains in asset value
- C) selling shares in the trust at a premium to the cost of acquiring the underlying assets
- D) charging portfolio turnover fees
Answer: C
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
30) Investors who want to liquidate their holdings in a unit investment trust may ________.
- A) sell their shares back to the trustee at a discount
- B) sell their shares back to the trustee at net asset value
- C) sell their shares on the open market
- D) sell their shares at a premium to net asset value
Answer: B
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
31) Investors who want to liquidate their holdings in a closed-end fund may ________.
- A) sell their shares back to the fund at a discount if they wish
- B) sell their shares back to the fund at net asset value
- C) sell their shares on the open market
- D) sell their shares at a premium to net asset value if they wish
Answer: C
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
32) ________ fund is defined as one in which the fund charges a sales commission to either buy into or exit from the fund.
- A) A load
- B) A no-load
- C) An index
- D) A specialized-sector
Answer: A
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
33) Which of the following is a false statement regarding open-end mutual funds?
- A) They offer investors a guaranteed rate of return.
- B) They offer investors a well-diversified portfolio.
- C) They redeem shares at their net asset value.
- D) They offer low-cost diversification.
Answer: A
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
34) ________ funds stand ready to redeem or issue shares at their net asset value.
- A) Closed-end
- B) Index
- C) Open-end
- D) Hedge
Answer: C
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
35) Revenue sharing with respect to mutual funds refers to ________.
- A) fund companies paying brokers if the broker recommends the fund to investors
- B) allowing certain classes of investors to engage in market timing
- C) charging loads to new investors in a mutual fund
- D) directly marketing funds over the Internet
Answer: A
Difficulty: 1 Easy
Topic: Mutual Funds
Learning Objective: 04-04 Classify mutual funds according to investment style.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
36) Higher portfolio turnover:
- Results in greater tax liability for investors
- Results in greater trading costs for the fund, which investors have to pay for
III. Is a characteristic of asset allocation funds
- A) I only
- B) II only
- C) I and II only
- D) I, II, and III
Answer: D
Difficulty: 2 Medium
Topic: Mutual Fund Performance
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
37) Low-load mutual funds have front-end loads of no more than ________.
- A) 2%
- B) 3%
- C) 4%
- D) 5%
Answer: B
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
38) Most real estate investment trusts (REITs) have a debt ratio of around ________.
- A) 10%
- B) 30%
- C) 50%
- D) 70%
Answer: D
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
39) Measured by assets, about ________ of funds are money market funds.
- A) 25%
- B) 17%
- C) 40%
- D) 60%
Answer: B
Difficulty: 1 Easy
Topic: Mutual Funds
Learning Objective: 04-04 Classify mutual funds according to investment style.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
40) Which of the following is not a type of real estate investment trust?
- Equity trust
- Debt trust
III. Mortgage trust
- Unit trust
- A) I and II only
- B) II only
- C) II and IV only
- D) I, II, and III
Answer: C
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
41) ________ are often called mutual funds.
- A) Unit investment trusts
- B) Open-end investment companies
- C) Closed-end investment companies
- D) REITs
Answer: B
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
42) Mutual funds account for roughly ________ of investment company assets.
- A) 30%
- B) 50%
- C) 70%
- D) 90%
Answer: D
Difficulty: 1 Easy
Topic: Mutual Funds
Learning Objective: 04-04 Classify mutual funds according to investment style.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
43) An official description of a particular mutual fund’s planned investment policy can be found in the fund’s ________.
- A) prospectus
- B) indenture
- C) investment statement
- D) 12b-1 forms
Answer: A
Difficulty: 1 Easy
Topic: Mutual Funds
Learning Objective: 04-04 Classify mutual funds according to investment style.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
44) Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ________.
- A) income funds
- B) balanced funds
- C) asset allocation funds
- D) index funds
Answer: B
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
45) ________ are mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager’s forecast of the performance of that market sector.
- A) Asset allocation funds
- B) Balanced funds
- C) Index funds
- D) Income funds
Answer: A
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
46) Specialized-sector funds concentrate their investments in ________.
- A) bonds of a particular maturity
- B) geographic segments of the real estate market
- C) government securities
- D) securities issued by firms in a particular industry
Answer: D
Difficulty: 1 Easy
Topic: Types of Investment Companies
Learning Objective: 04-02 Contrast open-end mutual funds with closed-end funds, unit investment trusts, hedge funds, and exchange-traded funds.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
47) If a mutual fund has multiple-class shares, which class typically has a front-end load?
- A) Class A
- B) Class B
- C) Class C
- D) Class I
Answer: A
Difficulty: 2 Medium
Topic: Costs of Investing in Mutual Funds
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
48) The commission, or front-end load, paid when you purchase shares in mutual funds may not exceed ________.
- A) 3.5%
- B) 6%
- C) 8.5%
- D) 10%
Answer: C
Difficulty: 1 Easy
Topic: Costs of Investing in Mutual Funds
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
49) You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a ________ rather than a ________, everything else equal.
- A) 12b-1 fee; front-end load
- B) front-end load; 12b-1 fee
- C) back-end load; front-end load
- D) 12b-1 fee; back-end load
Answer: B
Difficulty: 2 Medium
Topic: Costs of Investing in Mutual Funds
Learning Objective: 04-05 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
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