1. Market indexes are used for which of the following reasons? a. To keep track of trends in an overall market b. To compare performance of different investment strategies c. To compare performance of your portfolio with the market d. All of the above 2. Which of the following is not a type of market index? a. Price-weighted index b. Market value-weighted index c. Share-weighted d. Sector indexes. 3. Which of the following helps US investors to purchase stock of non-US firms by trading on US exchanges? a. ADRs b. Large-cap indexes c. GDRs d. FDRs
> Explain the terms diversification and correlation in the context of forming portfolios.
> Define what is meant by a portfolio and describe how the expected return on a portfolio is computed.
> How do mutual fund return data present evidence for or against efficient markets? Explain.
> Explain if you agree or disagree with this statement: “After the merger announcement the stock price greatly increased. Then it fell for the next 1-2 days before becoming relatively stable. This is proof against the efficient market hypothesis.”
> 1. What is the difference between the funds received by the company from the underwriters and the value of the firm’s shares in the aftermarket known as? a. Spread b. Underpricing c. Flotation costs d. Sum of the spread and underpricing 2. Direct co
> 1. Which of the following is the largest component of the M1 money supply definition? a. Currency b. Traveler’s checks c. Demand deposits d. Other checkable deposits 2. The M2 definition of the money supply does not include which of the following?
> What type of market efficiency—none, weak, semi-strong, or strong—exists under each of the following statements? a) I know which stocks are going to rise in value by looking at their price changes over the past two weeks. b) Returns earned by company off
> What are the differences among the weak, semi-strong, and strong forms of the efficient market hypothesis?
> Explain how a percentage return is calculated and describe the calculation of an arithmetic average return.
> Describe the inroads into investment banking being made by commercial banks.
> Briefly describe how investment banking is regulated.
> Identify the costs associated with going public.
> Briefly describe the process of competitive bidding and discuss the relative advantages and disadvantages.
> What were some of the reasons for the decline in Facebook’s stock price after its IPO?
> Explain what is meant by market stabilization.
> Discuss how investment bankers assume risk in the process of marketing securities of corporations. How do investment bankers try to minimize these risks?
> 1. The Facebook IPO was not as successful as initially hoped because: a. not enough shares were offered. b. the investment banks set the offering price too low. c. disappointing news occurred shortly before the IPO. d. of uncertainty about when the IPO w
> Between 2007 and 2014, the costs of unethical behavior in investment banks (fines, lawyer costs, trading losses) were estimated at over $100 billion, about 6.6% of industry revenue during that time. Will this be a deterrent?
> What is Regulation FD and how does it affect security trading?
> Why is it illegal to trade on insider information?
> What are American Depository Receipts (ADRs)?
> Give some examples of market indexes. Why are there so many different indexes?
> What are some factors that influence the commission on a stock trade with a broker?
> Why may a stock trade that takes one second to execute be preferable to a trade that takes nine seconds to execute?
> A security’s liquidity is affected by what influences?
> Identify the primary market functions of investment bankers.
> What factors differentiate a “good market” from a “poor market”?
> 1. Why was the Facebook IPO not as successful as was initially hoped? a. Not enough shares were offered b. The investment banks set the offering price too low c. Disappointing news occurred shortly before the IPO d. Uncertainty about when the IPO wou
> How do the third and fourth markets differ from other secondary markets?
> Describe several differences between the organized exchanges and the over-the-counter (OTC) market.
> What is meant by program trading?
> Describe the meaning of buying on margin.
> What is meant by a short sale?
> Describe the differences among the following three types of orders: market, limit, and stop-loss.
> Why is there a difference between bid and ask prices at some point in time for a specific security?
> Describe the types of members of the New York Stock Exchange.
> What are some of the characteristics of an organized securities exchange?
> Why do corporations employ investment bankers?
> 1. Which are examples of professional designations with ethics requirements? a. ADR and GDR b. CFA and CFP c. SEC and FINRA d. Merrill Lynch and Charles Schwab 2. Which of the following is a law passed to correct ethical lapses in the financial mar
> Why might a firm want to maintain a high bond rating? What has been happening to bond ratings in recent years?
> Why are investment-grade bonds given that name? Why are “junk bonds” also known as “high-yield bonds”?
> What is meant by the following terms: convertible bonds, callable bonds, putable bonds, and Eurodollar bonds?
> What are bond ratings?
> Describe what is meant by bond covenants.
> Let’s assume energy prices are forecast to go higher. How would this affect your decision to purchase the stocks and bonds of a) ExxonMobil? b) American Airlines? c) Ford? d) Archer Daniels Midland, a food processor?
> Give examples of firms you believe have been successful over time because they are industry leaders in quality; they are the low-cost producer; they are innovative; they offer superior customer service.
> Can only large institutional investors purchase bonds? Explain.
> Is industry competition good or bad if you are looking for attractive stock investments?
> What can looking at data on inventories tell us about the condition of the economy? Data on business expansion or investment plans?
> Discuss how changes in exchange rates can affect the outlook for both global and domestic firms.
> Under what economic forecast would you believe an auto manufacturer would be a good investment? A computer manufacturer?
> Discuss the risks faced by common shareholders that are not related to the general level of interest rates.
> Describe the process for valuing a common stock when the cash dividend is expected to grow at a constant rate.
> Describe the process for valuing a preferred stock.
> Explain how a capital loss on the sale of a firm’s stock can affect an investor’s taxes.
> Taxes on capital gains can be deferred.” Explain what is meant by this statement.
> What is a capital gain? Is it taxed the same way as dividends?
> Why would firms raise capital in markets other than their domestic or home market?
> What is a “flight to quality”? Under what economic conditions might we see this?
> 1. Which of the following is NOT a primary market function of investment banks? a. Originating new securities issues b. Underwriting new issues c. Selling newly issued securities to investors d. Assisting investors who want to trade existing securitie
> How do you think credit spreads behave over the course of the economic cycle?
> What does it mean with the horizon spreads in dip below the X-axis? Why do some feel that this was not to be the case in 2006?
> According to the behavior of interest rates were investors more concerned or less concerned about risk over the 2002-2006 time period? Explain.
> What risk does a zero-coupon bond address?
> Briefly describe the types of risk faced by investors in domestic bonds. Also indicate the additional risks associated with nondomestic bonds.
> What is meant by the “yield to maturity” on a bond?
> Describe the process for valuing a bond.
> Briefly describe how securities are valued.
> Explain how an investor may view a stock dividend, a stock split, and a stock repurchase plan with regards to the value of his stock holdings.
> What are the major sources of long-term funds available to business corporations? Indicate their relative importance.
> 1. It is more difficult to estimate a stock’s intrinsic value than to estimate a bond’s intrinsic value because a. of credit rating differences. b. dividends can vary over time. c. the Fed’s actions don’t affect the stock market. d. stocks prices do not
> How do firms decide how much of their earnings to distribute as dividends?
> Why does dividend income growth exceed that of bond income growth over a period of time?
> Why should investors consider common stock as an investment vehicle if they have a long-term time horizon?
> Why study stocks if the net amount of stock issues is negative?
> List and briefly explain the special features usually associated with preferred stock.
> Describe some of the characteristics of common stock.
> What is a round lot of common stock?
> Why might an investor find a zero-coupon bond an attractive investment?
> Briefly describe the types of bonds that can be issued to provide bondholder security.
> How does a TIPS bond differ from the typical U.S. Treasury security?
> 1. What is the horizon risk premium? a. A bond’s time to maturity is longer than the investor’s time frame for investing in the bond. b. It equals the expected return on a short-term bond minus the expected return on a long-term bond. c. The extra return
> Describe the relationship between internal and external financing in meeting the long-term financial needs of a firm.
> Describe the process for solving for the time period in present and future value problems.
> Describe the process for solving for the interest rate in present value and future value problems.
> Briefly explain how present values and future values are related.
> What is discounting? Give an illustration.
> Briefly describe how inflation, or purchasing power, impacts stated or nominal interest rates.
> Describe the process of compounding and the meaning of compound interest.
> Explain the meaning of simple interest.
> Briefly describe what is meant by the time value of money.
> Explain the difference between the annual percentage rate and the effective annual rate.
> 1. How is a bond’s price computed? a. Compute the present value of the coupon payment and subtract the par value of the bond. b. Sum the coupons to be paid over the bond’s time to maturity and its par value. c. Compute the present value of the coupon pay
> What is usury, and how does it relate to the cost of consumer credit?
> Describe compounding or discounting that is done more often than annually.
> Describe the process for determining the size of a constant periodic payment that is necessary to fully amortize a loan such as a home mortgage.
> Briefly describe how to solve for the interest rate or the time period in annuity problems.
> Describe how the present value of an annuity can be found.
> What is an ordinary annuity? What is an annuity due?
> How can the Rule of 72 be used to determine how long it will take for an investment to double in value?
