FIN 420 COMPREHENSIVE EXAM QUESTIONS AND
ANSWERS
The Money Market - Answers :Subsector of the fixed income market: securities are
short term, liquid, low risk, and often have large denominations.
Money market mutual funds allow.... - Answers :individuals to access the money market
The bond market - Answers :t-notes and bonds.
inflation protected treasury bonds.
federal agency debt.
international bonds.
municipal bonds.
corporate bonds.
mortgages and mortgage backed securities (MBS)
Treasury Notes and Bonds - Answers :T-notes maturities go up to 10 years.
T- Bonds maturities are between 10 and 30 years.
Problem: Interest paid semiannually. Par value - $1,000. price quotes - percentage of
par 98.5 = $a 107.24 = $b - Answers :
Municipal Bonds - Answers :Issued by state and local governments.
Interest is exempt from federal income tax and sometimes from state and local.
Munis Tax Equivalent Yield Problem: An investor in a 40% tax bracket is considering
investing in a 6% corporate bond or a 4.25% muni. What should they pick? - Answers :
Munis Tax Equivalent Yield Problem: At what tax rate would an investor be indifferent
between the 6% corporate and the 4.25% muni? - Answers :
How firms issues secutities: 3 ways - Answers :Primary market.
Secondary Market.
Private held firms.
Primary market - Answers :market for newly issued securities.
firms issue new securities through underwriter (investment banker) to public
Secondary Market - Answers :Investors trade previously issued securities among
themselves
Private held firms - Answers :up to 499 shareholders.
raise funds through private placement.
lower liquidity of shares.
have fewer obligations to release financial statements and other information.
, Types of Markets. - Answers :Direct Search ( ).
Brokered Markets ( ).
Dealer Markets ( ).
Auction Markets ( ).
Direct Search ( ) - Answers :buyers and sellers seek each other
Brokered Markets ( ) - Answers :brokers search out buyers and sellers
Dealer Markets ( ) - Answers :dealers have inventories of assets from which they buy
and sell
Auction Markets ( ) - Answers :traders converge at one physical place to trade
Bid Price - Answers :The price at which investors must sell.
The price at which the dealer is willing to buy.
Ask Price - Answers :The price at which investors must buy.
The price at which the dealer is willing to sell.
Bid Ask Spread - Answers :the profit for making a market in a security
Types of Orders - Answers :Market order.
Limit buy/sell order.
Stop order.
Market Order - Answers :execute immediately at best price.
Limit buy/sell order - Answers :specifies price at which investor will buy/sell
Stop Order - Answers :not to be executed until trigger price reached.
Algorithmic trading - Answers :the use of computer programs to make trading decisions
High-frequency trading - Answers :special class of algorithmic with very short order
execution time
Dark pools - Answers :trading venues that preserve anonymity, mainly relevant in block
trading.
Buying on the Margin - Answers :borrowing part of the total purchase price using a loan
from a broker.
Investor contributes the remaining portion (equity).
Results amplified on either up or down side.
initial margin is set by the fed.
ANSWERS
The Money Market - Answers :Subsector of the fixed income market: securities are
short term, liquid, low risk, and often have large denominations.
Money market mutual funds allow.... - Answers :individuals to access the money market
The bond market - Answers :t-notes and bonds.
inflation protected treasury bonds.
federal agency debt.
international bonds.
municipal bonds.
corporate bonds.
mortgages and mortgage backed securities (MBS)
Treasury Notes and Bonds - Answers :T-notes maturities go up to 10 years.
T- Bonds maturities are between 10 and 30 years.
Problem: Interest paid semiannually. Par value - $1,000. price quotes - percentage of
par 98.5 = $a 107.24 = $b - Answers :
Municipal Bonds - Answers :Issued by state and local governments.
Interest is exempt from federal income tax and sometimes from state and local.
Munis Tax Equivalent Yield Problem: An investor in a 40% tax bracket is considering
investing in a 6% corporate bond or a 4.25% muni. What should they pick? - Answers :
Munis Tax Equivalent Yield Problem: At what tax rate would an investor be indifferent
between the 6% corporate and the 4.25% muni? - Answers :
How firms issues secutities: 3 ways - Answers :Primary market.
Secondary Market.
Private held firms.
Primary market - Answers :market for newly issued securities.
firms issue new securities through underwriter (investment banker) to public
Secondary Market - Answers :Investors trade previously issued securities among
themselves
Private held firms - Answers :up to 499 shareholders.
raise funds through private placement.
lower liquidity of shares.
have fewer obligations to release financial statements and other information.
, Types of Markets. - Answers :Direct Search ( ).
Brokered Markets ( ).
Dealer Markets ( ).
Auction Markets ( ).
Direct Search ( ) - Answers :buyers and sellers seek each other
Brokered Markets ( ) - Answers :brokers search out buyers and sellers
Dealer Markets ( ) - Answers :dealers have inventories of assets from which they buy
and sell
Auction Markets ( ) - Answers :traders converge at one physical place to trade
Bid Price - Answers :The price at which investors must sell.
The price at which the dealer is willing to buy.
Ask Price - Answers :The price at which investors must buy.
The price at which the dealer is willing to sell.
Bid Ask Spread - Answers :the profit for making a market in a security
Types of Orders - Answers :Market order.
Limit buy/sell order.
Stop order.
Market Order - Answers :execute immediately at best price.
Limit buy/sell order - Answers :specifies price at which investor will buy/sell
Stop Order - Answers :not to be executed until trigger price reached.
Algorithmic trading - Answers :the use of computer programs to make trading decisions
High-frequency trading - Answers :special class of algorithmic with very short order
execution time
Dark pools - Answers :trading venues that preserve anonymity, mainly relevant in block
trading.
Buying on the Margin - Answers :borrowing part of the total purchase price using a loan
from a broker.
Investor contributes the remaining portion (equity).
Results amplified on either up or down side.
initial margin is set by the fed.
