Chapter 05 - Financial Instruments and Markets

hapter 05
Financial Instruments and Markets

Multiple Choice Questions

1. Which one of the following statements is false?

A. Financial executives must design financial securities to meet the needs of the firm and its investors.
B. Financial instruments are subject to full disclosure requirements.
C. Financial instruments are greatly constrained by law and regulation.
D. Financial instruments are claims against a company's cash flows and assets.
E. None of the above.

2. Which of the following securities has a purely fixed claim against a firm's cash flows?
A. preferred stock
B. options
C. common stock
D. bonds
E. None of the above.

3. Which of the following securities has a purely residual claim against a firm's cash flows?
A. preferred stock
B. callable bonds
C. common stock
D. non-callable bonds
E. None of the above.

4. Mike just purchased a bond which pays $40 each year in interest. The $40 interest payment is also called the:
A. coupon.
B. par value.
C. discount.
D. call premium.
E. yield.
F. None of the above.

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Chapter 05 - Financial Instruments and Markets

5. Zack owns a bond that will pay him $35 each year in interest plus a $1,000 principal payment at maturity. The
$1,000 principal payment is called the:
A. coupon.
B. par value.
C. discount.
D. yield.
E. call premium.
F. None of the above.

6. Which one of the following statements is true?

A. Debt instruments offer residual claims to future cash payouts.
B. Bonds with call provisions will have lower coupon rates than otherwise identical bonds.
C. Bondholders enjoy a direct voice in company decisions.
D. Bonds are low-risk investments that do well in inflationary periods.
E. Preferred shareholders are the first investors to be repaid in bankruptcy liquidation.
F. None of the above.

7. Which one of the following accurately orders the rate of return on financial securities from highest to lowest
over most of recorded market history (the 1900-2010 period)?
A. Short-term government bills, long-term corporate bonds, long-term government bonds, common stocks
B. Long-term corporate bonds, long-term government bonds, common stocks, short-term government bills
C. Common stocks, long-term government bonds, long-term corporate bonds, short-term government bills
D. Common stocks, long-term corporate bonds, long-term government bonds, short-term government bills
E. Long-term corporate bonds, common stocks, short-term government bills, long-term government bonds
F. None of the above.

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Chapter 05 - Financial Instruments and Markets

8. Which one of the following statements is true?

A. Equity securities offer fixed claims on future cash payouts.
B. Unlike bondholders, for their returns, shareholders rely entirely on price appreciation.
C. In theory, common shareholders exercise very little control over company decisions.
D. Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of
government bonds.
E. Preferred shareholders are the first investors to be repaid in bankruptcy liquidation.
F. None of the above.

9. You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 3
percent annual interest and was trading for ¥110,000 at year-end. The exchange rate was $1 = ¥100 at the
beginning of the year and $1 = ¥122 at year-end. What was your U.S. dollar holding period return on the bond?
A. 3%
B. 7%
C. 10%
D. 13%
E. 30%
F. None of the above.

10. You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 3
percent annual interest and was trading for ¥110,000 at year-end. The exchange rate was $1 = ¥100 at the
beginning of the year and $1 = ¥122 at year-end. What holding period return, measured in yen, did you earn on
the bond?
A. -18.03%
B. -7.38%
C. -5.03%
D. 3.0%
E. 10.0%
F. None of the above.

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Chapter 05 - Financial Instruments and Markets

11. You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 3
percent annual interest and was trading for ¥110,000 at year-end. The exchange rate was $1 = ¥100 at the
beginning of the year and $1 = ¥97 at year-end. What would be your U.S. dollar holding return on the bond?
A. 3.09%
B. 6.09%
C. 13%
D. 16.49%
E. 30%
F. None of the above.

12. Which of the following statements are true?

I. Underwriters help private companies access public stock markets through IPOs.
II. Shelf registrations and private placements are examples of seasoned security issues.
III. Issue costs for debt are typically greater than issue costs for equity.
IV. Private equity financing is a common source of financing for startup firms.
A. I and II only
B. I and III only
C. I, II, and IV only
D. I, III, and IV only
E. I, II, III, and IV
F. None of the above.

13. At the end of fiscal year 2011, Crane Industries, Inc.'s stock price was $30.75. A year later it was $34.88. Per
share dividends over the year were $0.55, while earnings per share were $1.33. What rate of return did the
common stock owners earn in fiscal year 2012?
A. 1.79%
B. 4.33%
C. 13.43%
D. 15.22%
E. 17.76%
F. None of the above.

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Chapter 05 - Financial Instruments and Markets

14. At the end of fiscal year 2011, Crane Industries, Inc.'s stock price was $30.75. A year later it was $34.88. Per
share dividends over the year were $0.55, while earnings per share were $1.33. What was the dividend yield in
fiscal year 2012?
A. 1.79%
B. 4.33%
C. 13.43%
D. 15.22%
E. 17.76%
F. None of the above.

15. At the end of fiscal year 2011, Crane Industries, Inc.'s stock price was $30.75. A year later it was $34.88. Per
share dividends over the year were $0.55, while earnings per share were $1.33. What was the percentage change
in the share price in fiscal year 2012?
A. 1.79%
B. 4.33%
C. 13.43%
D. 15.22%
E. 17.76%
F. None of the above.

16. Which of the following statements related to market efficiency tends to be supported by current evidence?

I. Markets tend to respond quickly to new information.

II. It is difficult for the typical investor to earn above-average returns without taking above-average risks.
III. Short-run prices are difficult to predict accurately based on public information.
IV. Markets are most likely weak form efficient.
A. I and III only
B. II and IV only
C. I and IV only
D. I, III, and IV only
E. I, II, and III only
F. None of the above.

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Chapter 05 - Financial Instruments and Markets

17. Individuals who continually monitor the financial markets seeking mispriced securities:
A. earn excess profits over the long-term.
B. make the markets increasingly more efficient.
C. are never able to find a security that is temporarily mispriced.
D. are overwhelmingly successful in earning abnormal profits.
E. are always quite successful using only historical price information as their basis of evaluation.
F. None of the above.

18. Which of the following are the most likely reasons for why a stock price might not react at all on the day that
new information related to the stock issuer is released?

I. Insiders knew the information prior to the announcement

II. Investors need time to digest the information prior to reacting
III. The information has no bearing on the value of the firm
IV. The information was anticipated
A. I and II only
B. I and III only
C. II and III only
D. II and IV only
E. III and IV only
F. None of the above.

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