FINC 425 - Mock Exam with Accurate
Solutions
Which of the following is correct regarding certificates of deposits (CDs)?
A. CDs are short term securities that may be bought or sold in the open market at a
market determined price.
B. CDs typically invest in high quality, short term investments, such as commercial
paper, T Bills, and money market funds.
C. CDs are known as "time deposits".
D. The financial institution pays a variable rate of interest for the term of the CD. - ANS-
C.
CDs are known as "time deposits"
All but which of the following are correct regarding Treasury Bills?
A. Have maturities of one year or less.
B. Sold in minimum denominations of $500.
C. Considered to be default risk free.
D. Sold at a discount to par. - ANS-B.
Sold in minimum denominations of $500
Which of the following describes the relationship between total risk, systematic risk, and
unsystematic risk?
A. Total risk = systematic - unsystematic
B. Total risk - systematic risk = unsystematic risk
C. Unsystematic risk - total risk = systematic risk
D. Total risk + unsystematic risk = systematic risk - ANS-B.
Total risk - systematic risk = unsystematic risk
Common stock is referred to as ___________ because the owner of the stock is also an
owner of the corporation and may participate in its capital and income growth.
A. Debt
B. Equity
C. cumulative stock
D. Preferred stock - ANS-B.
Equity
Which of the following are correct regarding a bond's yield to maturity (YTM)?
,1. The YTM assumes that coupon payments are reinvested at the YTM rate of return for
the life of the bond.
2. When the market rate of interest for the same term and risk is higher than the coupon
rate, a discount will be priced into the bond.
3. Bonds that are riskier will have lower yields to maturity.
4. The YTM is the internal rate of return for cash flow associated with a bond, including
the purchase price, coupon payments, and maturity value.
A. (1) and (2) only
B. (3) and (4) only
C. (1), (2), and (4) only
D. (1), (3), and (4) only - ANS-C.
(1), (2), and (4) only
An investment grade bond is one that is rated __________ or higher by the Standard &
Poor's bond rating service. A high yield bond is rated __________ or lower by Standard
& Poor's.
A. BBB, BB
B. BBB+, BB-
C. BBB-, BB+
D. BB, BBB - ANS-C.
BBB-, BB+
Which of the following describes bonds that have a legal claim to specific assets in the
event of default, insolvency, or liquidation?
A. Debenture bonds
B. Secured bonds
C. Unsecured bonds
D. Indenture bonds - ANS-B.
Secured bonds
Which of the following are characteristics of EE bonds?
1. May be purchased for an amount that is equal to one half of face value.
2. May be purchased for a minimum price of $25 for a $50 bond.
3. US Treasury guarantees an EE bond's value will double after 10 years.
4. May be purchased for a maximum price of $5,000 for a $10,000 bond.
A. (1) only
B. (1), (2), and (4) only
C. (2), (3), and (4) only
D. All of the above - ANS-B.
(1), (2), and (4) only
, Which of the following are characteristics of zero coupon bonds?
1. A zero coupon bond does not make periodic interest payments throughout the term of
the bond.
2. Zero coupon bonds have significant reinvestment risk because no payments are
made until the bond matures.
3. Zero coupon bonds require taxes to be paid currently on accrued interest each year,
even though no interest is received.
4. The duration of a zero coupon bond is less than its term to maturity.
A. (1) and (3) only
B. (2) and (4) only
C. (1), (2), and (3) only
D. (2), (3), and (4) only - ANS-A.
(1) and (3) only
All but which of the following are characteristics of exchange traded funds (ETFs)?
A. Traded on an exchange like individual securities.
B. Trades settle at the end of the trading day, similar to mutual funds.
C. Lower expenses than mutual funds.
D. Income tax efficient - ANS-B.
Trades settle at the end of the trading day, similar to mutual funds.
Which of the following is/are correct regarding the capital structure of open end mutual
funds?
1. Open end mutual funds issue new shares and redeem existing shares from
shareholders.
2. The price an investor pays when buying shares of an open end mutual fund is based
on supply and demand.
A. (1) only
B. (2) only
C. None of the above
D. All of the above - ANS-A.
(1) only
How is the net asset value (NAV) of a mutual fund calculated?
A. NAV = (total value of investment + liabilities) / shares outstanding
B. NAV = (total value of investment / shares outstanding) - liabilities
C. NAV = (total value of investment - liabilities) / shares outstanding
D. NAV = total value of investment / shares outstanding - ANS-C.
NAV = (total value of investment - liabilities) / shares outstanding
Solutions
Which of the following is correct regarding certificates of deposits (CDs)?
A. CDs are short term securities that may be bought or sold in the open market at a
market determined price.
B. CDs typically invest in high quality, short term investments, such as commercial
paper, T Bills, and money market funds.
C. CDs are known as "time deposits".
D. The financial institution pays a variable rate of interest for the term of the CD. - ANS-
C.
CDs are known as "time deposits"
All but which of the following are correct regarding Treasury Bills?
A. Have maturities of one year or less.
B. Sold in minimum denominations of $500.
C. Considered to be default risk free.
D. Sold at a discount to par. - ANS-B.
Sold in minimum denominations of $500
Which of the following describes the relationship between total risk, systematic risk, and
unsystematic risk?
A. Total risk = systematic - unsystematic
B. Total risk - systematic risk = unsystematic risk
C. Unsystematic risk - total risk = systematic risk
D. Total risk + unsystematic risk = systematic risk - ANS-B.
Total risk - systematic risk = unsystematic risk
Common stock is referred to as ___________ because the owner of the stock is also an
owner of the corporation and may participate in its capital and income growth.
A. Debt
B. Equity
C. cumulative stock
D. Preferred stock - ANS-B.
Equity
Which of the following are correct regarding a bond's yield to maturity (YTM)?
,1. The YTM assumes that coupon payments are reinvested at the YTM rate of return for
the life of the bond.
2. When the market rate of interest for the same term and risk is higher than the coupon
rate, a discount will be priced into the bond.
3. Bonds that are riskier will have lower yields to maturity.
4. The YTM is the internal rate of return for cash flow associated with a bond, including
the purchase price, coupon payments, and maturity value.
A. (1) and (2) only
B. (3) and (4) only
C. (1), (2), and (4) only
D. (1), (3), and (4) only - ANS-C.
(1), (2), and (4) only
An investment grade bond is one that is rated __________ or higher by the Standard &
Poor's bond rating service. A high yield bond is rated __________ or lower by Standard
& Poor's.
A. BBB, BB
B. BBB+, BB-
C. BBB-, BB+
D. BB, BBB - ANS-C.
BBB-, BB+
Which of the following describes bonds that have a legal claim to specific assets in the
event of default, insolvency, or liquidation?
A. Debenture bonds
B. Secured bonds
C. Unsecured bonds
D. Indenture bonds - ANS-B.
Secured bonds
Which of the following are characteristics of EE bonds?
1. May be purchased for an amount that is equal to one half of face value.
2. May be purchased for a minimum price of $25 for a $50 bond.
3. US Treasury guarantees an EE bond's value will double after 10 years.
4. May be purchased for a maximum price of $5,000 for a $10,000 bond.
A. (1) only
B. (1), (2), and (4) only
C. (2), (3), and (4) only
D. All of the above - ANS-B.
(1), (2), and (4) only
, Which of the following are characteristics of zero coupon bonds?
1. A zero coupon bond does not make periodic interest payments throughout the term of
the bond.
2. Zero coupon bonds have significant reinvestment risk because no payments are
made until the bond matures.
3. Zero coupon bonds require taxes to be paid currently on accrued interest each year,
even though no interest is received.
4. The duration of a zero coupon bond is less than its term to maturity.
A. (1) and (3) only
B. (2) and (4) only
C. (1), (2), and (3) only
D. (2), (3), and (4) only - ANS-A.
(1) and (3) only
All but which of the following are characteristics of exchange traded funds (ETFs)?
A. Traded on an exchange like individual securities.
B. Trades settle at the end of the trading day, similar to mutual funds.
C. Lower expenses than mutual funds.
D. Income tax efficient - ANS-B.
Trades settle at the end of the trading day, similar to mutual funds.
Which of the following is/are correct regarding the capital structure of open end mutual
funds?
1. Open end mutual funds issue new shares and redeem existing shares from
shareholders.
2. The price an investor pays when buying shares of an open end mutual fund is based
on supply and demand.
A. (1) only
B. (2) only
C. None of the above
D. All of the above - ANS-A.
(1) only
How is the net asset value (NAV) of a mutual fund calculated?
A. NAV = (total value of investment + liabilities) / shares outstanding
B. NAV = (total value of investment / shares outstanding) - liabilities
C. NAV = (total value of investment - liabilities) / shares outstanding
D. NAV = total value of investment / shares outstanding - ANS-C.
NAV = (total value of investment - liabilities) / shares outstanding
