Q. 1: The difference between a common stock and a preferred stock is due to a. t
ID: 1159830 • Letter: Q
Question
Q. 1: The difference between a common stock and a preferred stock is due to
a. the fact that anyone can buy common stock whereas preferred stocks are reserved for a group of shareholders such as top executives
b. the regulation that common stocks must be offered in the open market while preferred stocks may not
c. the fact that preferred stock pay a higher dividend
d. None of the above
Q 2. A firm’s market capitalization is the total market value of a firm’s common stock.
True ---- b. False -----
Q 3. Say, you purchased 10 shares of IBM at $100 each at the beginning of last year and IBM pays a dividend of $2.40 per share. You are expecting that the IBM stock price would reach $150 at the end of the year. So you are expecting a rate of return of:
40% b. 75% c. 52.4% d. 42%
Q 4. The price of a stock held for two years should be equal to the sum of:
the present values of the dividend payments the investor expects to receive during the two years
the present value of the expected price of the stock at the end of two years
(a) + (b)
(b) – (a)
None of the above
Q 5. People form their expectations about price of an asset (e.g., stocks) based on the theorycalled Adaptive Expectations or Rational Expectations. As such there is No difference between these two theories.
True ----; b. False ---
Q 6. Behavioral financeis the application of concepts from behavioral economics to understand how people make choices in financial markets.
True ----; b. False ----
Q 7. In the financial markets a Derivative is known as an asset that derives its value from an underlying stock or a bond
True ----; b. False ----
Q 8. A forward contract is an agreement to:
Buy or sell an asset at an agreed upon price at a future time.
Buy now but sell at a future date
Sell now but buy back at a future date
None of the above
Q 9. A general manager in a large commodities trading firm such as ADM is expecting that next year Corn prices are going to increase at least 25%, he should then hedge against this risk by
Buying future contracts
Selling future contracts
Not do anything waiting for the price of Corn to go up and then decide what to do
None of the above
Q 10. Acall option gives the buyer the right to buy the underlying asset at a set price during a set period of time whereas aput option gives the buyer the right to sell the underlying asset at a set price during a set period of time.
True ---- b. False ---
Q 11. A Nominal Exchange rate is the:
Price of one currency in terms of another currency
Price of US dollar in terms of Japanese Yen
Price of British pound in terms of US dollars
All of the above
None of the above
12. The real exchange rate is the rate at which goods and services in one country can be exchanged for goods and services in another country.
a. True ---- b. False ----
13. The current Exchange rate between US dollar and Mexican Peso is about 18.60 Peso to 1 US dollar. Given that the Consumer price Index in the US (2015 base year) is about 103.5 and 118.75 in Mexico, the Real Exchange rate between US Dollar and Mexican Peso is:
a. 20; b. 19; c. 17.50; d. 16.21.
14. Exchange-rate risk is the risk that a firm will suffer losses because of fluctuations in exchange rates.
a. True ------; b. False ---
15. Theory of purchasing power parity (PPP)states that exchange rates move to equalize the purchasing power of different currencies
a. True ------; b. False -----
16. Given that the annual Inflation rate in India is about 5% and the annual inflation rate in China is also 5, what is the percentage change in Nominal exchange rate between the two countries’ currencies?
a. 10%; b. 0%; c. 4% d. 1%
17. If Pizza Hut is selling a Medium Supreme Pizza in Santiago, Chile at 12000 peso, and the same Pizza in New York Costs $12.0; given the fact that the nominal exchange rate between Dollar and Peso is $1 = 671 Chilean Peso, do you think there is Purchasing power parity between US and Chile?
a. Yes -----; b. No -------
Following three questions (18-20) are based on the diagram below. Analyze the Diagram and answer.
Q 18. The Nominal Exchange rate is $1.15 per one Euro and the present market condition states that there are 300 billion euros are bought and sold daily.
a.. True -------; b. False -----
Q 19. Given the following factors which one do you think would cause a shift of the Supply curve to the left holding demand curve at its present position causing the equilibrium exchange rate to go up and quantity to go down?
European Central bank starts to buy Euro denominated Bonds
American tourists travel to Europe in large numbers
Chinese Investors who purchased Euro-denominated bonds now start selling those bonds
None of the above
20. Say, due to some policy changes the market experiences a surge in Demand for Euro as a result the demand curve shifts to D2 causing both the nominal exchange rate and the quantity to go up. Which one of the following may be a good reason for that?
a. European Central bank starts to SELL Euro denominated Bonds at a discounted price
b. American tourists travel to Europe in large numbers
c. Chinese Investors who purchased Euro-denominated bonds now are holding those bonds
d. All of the above
None of the
21. Return on equity(ROE) is the ratio of the value of a bank’s after-tax profit to the value of its capital.
a. True -------; b. False ------
22. The Federal Open Market Committee (FOMC) is headed by the President of the United States
a. True ------; b. False-----
23. The main argument for Fed independence is that:
Monetary policy is too important and technical to be determined by politicians.
Because of the frequency of elections, politicians may be shortsighted, concerned with short-term benefits without regard for potential long-term costs.
The public may well prefer that the experts at the Fed, rather than politicians, make monetary policy decisions.
All of the above
None of the above
24. A country’s monetary base depends on its:
a. Total currency in circulation plus all bank deposits
b. Total currency in circulation plus reserves
c. All deposits including bond holdings and excess reserves
d. None of the above
25. Required reserve ratio is defined as the percentage of checkable deposits that the Fed specifies that banks must hold as reserves
a. True; b. False ----
26. Simple deposit multiplier is the ratio of the amount of deposits created by banks to the amount of new reserves
a. True -----; b. False-----
27. Key assumptions for deriving the money multiplier are:
a. Banks hold no excess reserves.
b. The nonbank public does not increase its holdings of currency.
c. a and b both
d. None of the above
28. Given that South Africa’s Central Bank’s reserve ratio being 2.5% and Kenya’s Reserve ratio being 5.25% where do you think a $1 million dollar investment will generate more money supply?
a. Kenya -----; b. South Africa ----
29. Suppose Vietnam’s current financial systems show that it has 300 billion dollars of Currency in circulation; 600 billion dollars of deposits and 100 billion dollars of Excess reserve. Given that its Central bank’s reserve requirement being 5% one can safely say that it’s money multiplier is:
a. 2.1; b. 4.5; c. 8; d. 10
30 The U.S. Central bank or the Federal Reserve has dual mandates -- price stability and maximum employment
a. True ----; b. False -----
31 The U.S. Fed has mainly three major policy tools which are:
a. Open market operation; Reserve requirement and Discount window
b. Open market operation, Buying and selling bonds and setting of the discount rate
c. Open market operation, intervening in the foreign exchange market and changing the reserve requirement
d. None of the above
Answer Questions 32-34 based on the following diagram:
32. Due to Fed’s Open market purchase of securities the supply curve for Reserves shifts from S1 to S2.
a. True -----; b. False ----
33. The federal Funds Rate increases from 4.5% to 5% because of:
a. Fed’s open market Purchase of treasury securities
b. Fed’s open market Sale of treasury Securities
c. Demand for Treasury increases because banks buy more treasury securities
d. None of the above
34. Because of Fed’s Open market action, the Federal Funds rate increases from 4.5% to 5%, this would lead to increase in money supply
a. True -----; b. False ----
35. An open market purchase by the Fed is an expansionary policy because it reduces interest rates whereas an open market sale is a contractionary policy.
a. True -----; b. False ----
36. Quantitative easingis thecentral bank policy that attempts to stimulate the economy
a. by buying long-term securities
b. by selling long-term securities
c. by changing the Reserve requirement
Funds rate 5.0 S2 4.5 S1 R2 R1 Reserves (R)Explanation / Answer
1) The correct choice is d. None of the above
Explanation:- The holders of preferred stock have priority over holders of common stock over dividends and payment on dissolution of corporation
2) True
Explanation:- The market capitalization of a firm is the total market value of its common stock outstanding.
3) The correct choice is 52.4%
Rate of return = Income / investment
rate of return = ($ 2.4*10 + $ 500 ) / 1000
rate of return = 52.4%
4) The correct choice is none of the above
Explanation:- According to the dividend discount model the current price of the stock is equal to the sum of the future dvidends and discounts them into a net present value.
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