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Chapter2AssetClassesandFinancialInvestments18MultipleChoiceQuestions1.Whichofthefollowingisnotacharacteristicofamoneymarketinstrument?A)liquidityB)marketabilityC)longmaturityD)liquiditypremiumE)CandDAnswer:EDifficulty:EasyRationale:Moneymarketinstrumentsareshort-terminstrumentswithhighliquidityandmarketability;theydonothavelongmaturitiesnorpayliquiditypremiums.2.Whichoneofthefollowingisnotamoneymarketinstrument?A)aTreasurybillB)anegotiablecertificateofdepositC)commercialpaperD)aTreasurybondE)aEurodollaraccountAnswer:DDifficulty:EasyRationale:Moneymarketinstrumentsareinstrumentswithmaturitiesofoneyearorless,whichappliestoalloftheaboveexceptTreasurybonds.SeeTable2.1.3.T-billsarefinancialinstrumentsinitiallysoldby________toraisefunds.A)commercialbanksB)theU.S.governmentC)stateandlocalgovernmentsD)agenciesofthefederalgovernmentE)BandDAnswer:BDifficulty:EasyRationale:OnlytheU.S.governmentsellsT-billsintheprimarymarket.Chapter2AssetClassesandFinancialInvestments194.ThebidpriceofaT-billinthesecondarymarketisA)thepriceatwhichthedealerinT-billsiswillingtosellthebill.B)thepriceatwhichthedealerinT-billsiswillingtobuythebill.C)greaterthantheaskedpriceoftheT-bill.D)thepriceatwhichtheinvestorcanbuytheT-bill.E)neverquotedinthefinancialpress.Answer:BDifficulty:EasyRationale:T-billsaresoldinthesecondarymarketviadealers;thebidpricequotedinthefinancialpressisthepriceatwhichthedealeriswillingtobuythebill.5.Commercialpaperisashort-termsecurityissuedby________toraisefunds.A)theFederalReserveBankB)commercialbanksC)large,well-knowncompaniesD)theNewYorkStockExchangeE)stateandlocalgovernmentsAnswer:CDifficulty:EasyRationale:Commercialpaperisshort-termunsecuredfinancingissueddirectlybylarge,presumablysafecorporations.6.WhichoneofthefollowingtermsbestdescribesEurodollars:A)dollar-denominateddepositsinEuropeanbanks.B)dollar-denominateddepositsatbranchesofforeignbanksintheU.S.C)dollar-denominateddepositsatforeignbanksandbranchesofAmericanbanksoutsidetheU.S.D)dollar-denominateddepositsatAmericanbanksintheU.S.E)dollarsthathavebeenexchangedforEuropeancurrency.Answer:CDifficulty:ModerateRationale:AlthoughoriginallyEurodollarswereusedtodescribedollar-denominateddepositsinEuropeanbanks,todaythetermhasbeenextendedtoapplytoanydollar-denominateddepositoutsidetheU.S.Chapter2AssetClassesandFinancialInvestments207.DepositsofcommercialbanksattheFederalReserveBankarecalled__________.A)bankers'acceptancesB)repurchaseagreementsC)timedepositsD)federalfundsE)reserverequirementsAnswer:DDifficulty:EasyRationale:Thefederalfundsarerequiredforthebanktomeetreserverequirements,whichisawayofinfluencingthemoneysupply.Nosubstitutesforfedfundsarepermitted.8.TheinterestratechargedbybankswithexcessreservesataFederalReserveBanktobanksneedingovernightloanstomeetreserverequirementsiscalledthe_________.A)primerateB)discountrateC)federalfundsrateD)callmoneyrateE)moneymarketrateAnswer:CDifficulty:Easy9.Whichofthefollowingstatementsis(are)trueregardingmunicipalbonds?I)Amunicipalbondisadebtobligationissuedbystateorlocalgovernments.II)Amunicipalbondisadebtobligationissuedbythefederalgovernment.III)Theinterestincomefromamunicipalbondisexemptfromfederalincometaxation.IV)Theinterestincomefromamunicipalbondisexemptfromstateandlocaltaxationintheissuingstate.A)IandIIonlyB)IandIIIonlyC)I,II,andIIIonlyD)I,III,andIVonlyE)IandIVonlyAnswer:DDifficulty:ModerateRationale:Stateandlocalgovernmentsandagenciesthereofissuemunicipalbondsonwhichtheinterestincomeisfreefromallfederaltaxesandisexemptfromstateandlocaltaxationintheissuingstate.Chapter2AssetClassesandFinancialInvestments2110.Whichofthefollowingstatementsistrueregardingacorporatebond?A)Acorporatecallablebondgivestheholdertherighttoexchangeitforaspecifiednumberofthecompany'scommonshares.B)Acorporatedebentureisasecuredbond.C)Acorporateindentureisasecuredbond.D)Acorporateconvertiblebondgivestheholdertherighttoexchangethebondforaspecifiednumberofthecompany'scommonshares.E)Holdersofcorporatebondshavevotingrightsinthecompany.Answer:DDifficulty:EasyRationale:StatementDistheonlytruestatement;allotherstatementsdescribesomethingotherthanthetermspecified.11.Intheeventofthefirm'sbankruptcyA)themostshareholderscanloseistheiroriginalinvestmentinthefirm'sstock.B)commonshareholdersarethefirstinlinetoreceivetheirclaimsonthefirm'sassets.C)bondholdershaveclaimtowhatisleftfromtheliquidationofthefirm'sassetsafterpayingtheshareholders.D)theclaimsofpreferredshareholdersarehonoredbeforethoseofthecommonshareholders.E)AandD.Answer:EDifficulty:ModerateRationale:Shareholdershavelimitedliabilityandhaveresidualclaimsonassets.Bondholdershaveapriorityclaimonassets,andpreferredshareholdershavepriorityovercommonshareholders.12.Whichofthefollowingistrueregardingafirm'ssecurities?A)Commondividendsarepaidbeforepreferreddividends.B)Preferredstockholdershavevotingrights.C)Preferreddividendsareusuallycumulative.D)Preferreddividendsarecontractualobligations.E)Commondividendsusuallycanbepaidifpreferreddividendshavebeenskipped.Answer:CDifficulty:EasyRationale:Theonlyadvantageso