Kantian ethics, and Utilitarianism. Choose the theory that you thi.docx

Kantian ethics, and Utilitarianism. Choose the theory that you
think is better out of these two and briefly describe it. Then
discuss why you think this is the better of these two theories.
Can you think of a moral rule that all cultures follow (that you
are aware of)? If so, what is this rule and why does every
culture practice this moral rule? If not, do you think that there
is a moral rule that every culture should practice? What does
your answer say about cultural relativism and why?
Choose one of the following theorists - Hobbes, Locke,
Rousseau, or Rawls - and briefly describe their views of human
nature and their version of the social contract. Then, explain
why you chose to discuss this theorist in particular.
One of the biggest objections to Virtue Ethics is that there is no
consensus on what counts as a virtue. List two qualities that you
believe are virtuous and explain why you feel this way. Given
this, do you think that there are any general criteria we can use
to decide whether an action is virtuous or not? Why?
Do you think that we have a moral obligation to treat animals
well? Why or why not? Does our moral obligation include not
eating them?
Moral antirealism, or moral non-objectivism, claims that here
are no objective moral rules. If such theories are true, is there
any way that we could determine whether something is 'good' or
'bad'? If so, how? If not, why? Finish your post by explaining
your views on the idea of moral non-objectivism - do you agree
or disagree with this theory? Does it have any merit in its
claims?
To what extent have your choices in life been a result of free
will? Given this, which theory do you agree with most and why:

fatalism, determinism, or existentialism?
FINC 340 INVESTMENTS
FINAL EXAMINATION_04
DIRECTIONS: Here is the Final Examination Question Sheet.
Please submit your Final Examinaiton Answer Sheet to your
Final Examination Folder.
Please submit your Midterm Examination MS Word format with
the following file name:
LastNameFirstInitial_MidtermExamAnswerSheet.docx. For
example, if you name is John Smith, the file name of your
Answer Sheet should be
SmithJ_MidtermExamAnswerSheet.docx.
NAME: _____________________________________
Quiz Number
Question
Answer
1
A company has paid $2 per share in dividends for the past
several years and plans to continue to do so indefinitely. If an
investor’s required return is 13%, what is the most she should
pay for a share of this firm’s stock?
A:$15.38
B:$20.00
C:$22.60
D:$26.13
E:$65.00

2
Bond mutual funds offer the following advantages over direct
investment in bonds EXCEPT:
A:Better diversification
B:Transaction cost economies
C:Buy and sell individual bonds at individual investor’s
discretion
D:Reinvestment of intermediate cash flows
E:Better liquidity
3
A $1,000 par value bond with a 5% coupon that pays interest
semiannually and matures in 2 ½ years and has a current price
of $977. What is the annualized yield to maturity?
A:3.0%
B:4.0%
C:5.0%
D:6.0%
E:7.0%
4
An immunization strategy protects a portfolio from:
A:Interest rate risk
B:Default risk
C:Liquidity risk
D:Prepayment risk
E:Event risk

5
1. Market multiple methods include valuations based on all of
the following EXCEPT:
A:Price/earnings
B:Price/free cash flow
C:Price/dividends
D:Price/sales
E:All of the above are acceptable market multiples
6
Factors that should be considered in taking a stock option
position include:
A:The dividend paid on the underlying stock
B:The volatility of the underlying stock
C:The time to expiration
D:The anticipated direction of market movement
E:All of the above are relevant factors in the option decision
7
A three-year project costs $50,000 and returns $20,000 the first
year, $30,000 the second year, and $25,000 the third year. If the
required return is 10.0%, what is the Net Present Value (NPV)?
A:$11,758
B:$12,547
C:$25,000
D:$61,758
E:$62,547

8
Disadvantages of investing in the futures market include all of
A:Market is extremely volatile
B:Daily mark-to-market
C:Clearinghouse
D:Possibility of frequent margin calls
E:Possibility of losing more than the original investment
9
A portfolio has a standard deviation of 22%. If the risk-free rate
is 3.5%, the expected return on the market portfolio is 12%, and
the standard deviation of the market portfolio is 25%, what is
the required return on the market portfolio?
A: 7.48%
B:10.98%
C:12.00%
D:13.16%
E:14.06%
10
Factors that should be considered in the purchase of a stock
includes all of the following EXCEPT:
A:Dividend
B:Growth potential
C:Quality of firm’s management
D:Coupon rate on the firm’s bonds

E:Price
11
The risk-free rate is 3.6% and the required return on the market
portfolio is 11.8%. A company that has just paid $1.80 per share
in annual dividends has a beta of 0.9 and long-term growth rate
of 5.2%. What is the dollar value of this stock?
A:$17.25
B:$20.99
C:$24.56
D:$31.14
E:$32.76
12
Rob pays 28% in combined local, state, and federal taxes. If a
corporate bond yields 8.3%, what is the after-tax yield?
A: 2.3%
B: 6.0%
C: 8.3%
D:10.7%
E:11.5%
13
The risk-free rate is currently 2.8%. In one year the price of a
given share of stock that currently trades at $40 per share is
expected to either increase by 8% or decrease by 2%. What is
the current value of a call on this stock with exercise price of
$40?
A:$0.00

B:$1.09
C:$1.24
D:$1.49
E:$1.62
14
Information included in “tombstone ads” include all of the
following EXCEPT:
A:The bond issuer
B:The price of the bond
C:The size of the issue
D:The maturity date
E:The coupon
15
Advantages of investing in tax-exempt bond funds include all of
A:Diversification
B:Provides additional benefits to tax-deferred retirement plans
C:Automatic reinvesting
D:Fund maintains individual investor’s tax reports and records
E:Low initial deposit

The next two problems refer to a four year project with an
opportunity cost of 9% and the following cash flows:
16
What is the safe-rate-reinvestment-rate IRR for this project?
A:10.6%
B:11.1%
C:11.6%
D:12.1%
E:12.6%
17
What is the borrowing-rate-reinvestment-rate IRR for this
project?
A:10.6%
B:11.1%
C:11.6%
D:12.1%
E:12.6%
18
The satisfaction an investor gets out of consumption of goods
and services and out of obtaining a given level of wealth is
A:Greed
B:Utility
C:Return
D:Risk
E:Beta

19
Susan has 40% of her portfolio invested in a mutual fund to
track the S&P 500 and 40% in a mutual fund to track the Dow
Jones Industrial Average (DJIA) and 20% in government
securities. To evaluate the performance of her portfolio, what is
Susan’s best benchmark?
A:the DJIA Index
B:the S&P 500 Index
C:a government security index
D:a 50%/50% combination of A and B
E:a combination of A, B, and C
20
Duration
A: Increases with maturity
B:Measures the linear relationship between bond prices and
bond yields
C:Is always greater than the maturity
D:All of the above are true
E:A and B are true, but C is false
21
What is the Sharpe ratio for Portfolio P?
A:0.478
B:0.577
C:0.582

D:0.783
E:0.817
22
What is the Treynor ratio for Portfolio P?
A: 8.40%
B:10.20%
C:11.79%
D:12.92%
E:14.43%
23
What is Jensen’s alpha for Portfolio P?
A:-1.81%
B:-0.63
C:0.00%
D:+1.58%
E:+1.79%
24
The financial planning process include all of the following
EXCEPT
A:assessing the current status of the financial markets.
B:analyzing the client’s financial status.
C:monitoring the portfolio.
D:developing a policy statement.
E:establishing a client-advisor relationship.

25
Techniques to actively select securities include:
A:Bottom-up approach
B:Top-down approach
C:Indexing approach
D:All of the above are acceptable approaches
E:A and B are active approaches, but C is not
26
What is the correlation with the greatest potential for
diversification?
A:-1.0
B:-0.5
C:0.0
D:+1.0
E:+2.0
27
Regular, periodic investments in a security without regard to
price is
A:income averaging.
B:dollar cost averaging.
C:dividend reinvesting.
D:fundamental investing.
E:time investing.
28
Hedging strategies are

A:designed to limit investment losses.
B:a form of investment insurance.
C:transfers risk from one entity to another.
D:all of these statements are true.
E:statements A and C are true, but B is not.
29
To calculate the total asset turnover, the following financial
statements are needed:
A:Balance Sheet
B:Income Statement
C:Statement of Cash Flows
D:All of the above are needed
E:A and B, but not C
30
Variables in the put-call parity include all of the following
EXCEPT:
A:Risk-free rate
B:Time to maturity
C:Strike price
D:Price of the underlying asset
E:Price earnings ratio
31
In the accumulation phase of the investor life cycle
A:investors with long-term time horizons should accept only
low risk.

B:investors have high net worth.
C:investors are saving for retirement only.
D:investors may seek to accumulate wealth through higher risk
investments.
E:none of these choices apply.
32
The semi-strong form of the efficient market hypothesis states:
A:Security prices reflect all information, public and private
B:Security prices reflect all public information
C:Security prices reflect all market information
D:Security prices reflect all accounting information
E:Security prices reflect all economic information
33
A company currently has $3.50 earnings per share of which
$1.05 is paid in annual dividends per share. If the growth rate
for the firm is 4% per year and the required return is 9%, what
is the theoretical P/E ratio?
A:5.71
B:6.00
C:6.24
D:6.66
E:7.00
34
Given returns of 15%, -8%, 12%, and 5%, what is the difference
between the arithmetic average and geometric average?

A:0.00%
B:0.07%
C:0.39%
D:1.30%
E:1.53%
35
Deviations of a straddle include:
A:Butterfly
B:Collar
C:Strangle
D:All of the above are deviations of a straddle
E:A and C are deviations of a straddle, but B is not
36
An immunization strategy protects a portfolio from:
A:Interest rate risk
B:Default risk
C:Liquidity risk
D:Prepayment risk
E:Event risk
37
The semi-strong form of the efficient market hypothesis states:
A:Security prices reflect all information, public and private
B:Security prices reflect all public information
C:Security prices reflect all market information
D:Security prices reflect all accounting information

E:Security prices reflect all economic information
38
Susan has a 5-year “bunny bond” with a yield to maturity of
6.4% that will be automatically reinvested next month. She is
considering liquidating the bond and reinvesting in a 10-year
3.5% coupon bond with a yield to maturity of 6.5%. Market
rates are very unstable and are just as likely to rise or fall over
Susan’s 5 year time horizon. The best action for Susan is to
A:Invest in the 10-year bond since the yield is higher
B:Invest in the 10-year bond because it has greater maturity
C:Invest in the 10-year bond since the coupons can be
reinvested
D:Reinvest in the “bunny bond” to avoid lost of accrued interest
E:Reinvest in the “bunny bond” to lock-in the yield
39
High price multiples:
A:May indicate the firm is overvalued
B:May indicate high expected future growth
C:May indicate high levels of earnings or book value
D:All of the above are true
E:A and B are true, but C is not true
40
Three years ago, an ETF was initiated with 1 million shares in
10 stocks each with a market value of $10. The total market
value of the ETF was then $100 million (1 million shares * 10
stocks * $10). The ETF issued 20 million shares which
originally sold for $5 a share. Last year, Nancy purchased

100,000 shares for $7 a share. The price has now increased to
$12 a share, and Nancy is considering redeeming her shares.
Assume none of the original shares have been sold or redeemed.
If Nancy redeems her shares, her cost basis when she sells the
shares is
A:$ 200,000
B:$ 500,000
C:$ 700,000
D:$1,000,000
E:$1,200,000
1
FINC 340 Investments
Week 07 Non-Graded Quiz
INSTRUCTOR KEY
DIRECTIONS: Here is the Week07 Non-Graded Quiz Answer
Sheet that you should submit to your P7- Homework
Assignment Folder.
Please submit your Week07 Non-Graded Quiz in MS Word
fromat with the following file name:
LastNameFirstInitial_Week07NonGradedQuizAnswerSheet.docx
. For example, if you name is John Smith, the file name of your
Answer Sheet should be
SmithJ_Week07NonGradedQuizAnswerSheet.docx.
If you have any questions or comments, please do not hesitate
to contact me.

NAME: _____________________________________
Non-Graded
Quiz Number
Source
Question
Answer
1
Ch43_MC01
A short sale occurs when an investor does which of the
following?
A:Buys a stock and uses it as collateral for a loan
B:Sells a stock at a loss
C:Borrows a stock and then sells it
D:Sells a stock for less than fair market value
E:None of the above
Correct Answer C
2
Ch43_MC02
A wash sale occurs when investors sell or trade stock or
securities at a loss and acquire substantially identical stock or
securities within how many days before or after the sale?
A:15
B:30
C:60
D:180
E:365
Correct Answer B
3
Ch43_MC03
Investors are treated as having made a constructive sale of an

appreciated financial position if they
A:Enter into a short sale of the same or substantially identical
property
B:Enter into an offsetting notional principal contract relating to
the same or substantially identical property
C:Enter into a futures or forward contract to deliver the same or
substantially identical property
D:Acquire the same or substantially identical property (if the
appreciated financial position is a short sale, an offsetting
notional principal contract, or a futures or forward contract)
E:All of the above
Correct Answer E
4
Ch43_MC04
Which of the following is not qualified dividend income?
A:Procter & Gamble common stock dividends
B:Cohen & Steers Realty Shares (REIT) dividends
C:Microsoft common stock dividends
D:Fidelity Magellan Fund dividends
Correct Answer B
5
Ch44_MC01
Tax-efficient investment strategies include:
A:Adjusting for taxable and after-tax yields
B:Adjusting for capital gains taxes versus ordinary income
taxes
C:Controlling the timing of recognition of gains and losses
D:Considering tax effects of mutual fund investing
E:All of the above are tax-efficient strategies
Correct Answer E

6
Ch44_MC02
Methods to defer capital gains taxes include all of the following
EXCEPT:
A:Delay the sale of the asset
B:Like-kind exchange of tangible property
C:Installment sales
D:All of the above will delay capital gains
E:A and C will delay the capital gains, but B will not
Correct Answer D
7
Ch44_MC03
Jason is unhappy with the performance of his mutual fund. He
sells his shares in the current fund and repurchases shares in a
similar fund with the same firm. This transaction
A:Is not a taxable event since the two funds are similar
B:Is not a taxable event since the funds are with the same
company
C:Is a taxable event
D:May not be a taxable event if the shares have been held for
more than one year
E:May not be a taxable event if the managers of the two funds
are different
Correct Answer C
8
Ch44_AP04
An investor deposited $5,000 into an account that earns 8% per
year. The proportion of taxable gains is 90%, ordinary tax rate
is 35%, the capital gains and dividends rate is 15%, and the
built-in gain is zero. How much will the investor have at the end
of 30 years?

A:$38,489
B:$40,732
C:$45,282
D:$46,544
E:$50,313
Correct Answer B: ar = (g * r) + ((1 - to) * (1 - g) * r) = 0.9 *
0.08 + 0.65 * 0.10 * 0.08 = 0.072 + 0.0052 = 0.0772. And
1.077230 = 9.30873 making FV = 5,000 * [9.30873 – 0.15 *
(0.9 * 0.08 * (9.30873 - 1)/0.0772 + 0)] = 5,000 * [9.30873 –
1.16236] = 5,000 * 8.14637 = $40,732.
9
Ch45_MC 01
Qualified distributions for a Roth IRA that are tax-free include
all of the following EXCEPT:
A:Distributions received after age 59 ½
B:Some first-time homeowners
C:Some distributions for college expenses
D:Distributions due to disability
E:All of the above are qualified distributions
Correct Answer C
10
Ch45_MC 02
Traditional IRAs produce better results than a Roth IRA if
A:Tax-equivalent contributions are the same and taxes remain
constant
B:Tax-equivalent contributions are the same and taxes decrease
after retirement
C:Tax-equivalent contributions are the same and taxes increase

after retirement
D:The traditional IRA and Roth IRA will always produce the
same results
E:The Roth IRA always produces better results than the
traditional IRA
Correct Answer B: Contributions to the Roth IRA are taxed
when the contributions are made, but taxes are deferred until
after retirement for the traditional IRA. If taxes decrease, and
the contributions are tax-equivalent, the traditional IRA will
produce better results.
11
Ch45_MC 03
The retirement vehicle that will provide the highest after-tax
return to an investor is
A:Fully tax deductible, fully tax deferred investment
B:Nondeductible, fully taxable investment
C:Nondeductible investment in an equity mutual fund
D:Taxed-deferred annuity
E:All of the above provide equivalent after-tax returns
Correct Answer A
12
Ch45_MC 04
Factors that influence the impact of the 10% early withdrawal
penalty include all of the following EXCEPT:
A:Rate of return earned on the investment
B:Tax rates applicable to the distribution
C:Taxable amount
D:All of the above are relevant factors for the penalty impact
E:A and B are relevant factors, but C is not

Correct Answer D
1
FINC 340 INVESTMENTS
MIDTERM EXAMINATION_02
INSTRUCTOR KEY
Quiz Number
Source Number
Question
Solution
1
CH1-A1
Betty has saved $60,000 for a down payment on a home. She is
now actively looking for her dream house and anticipates
making an offer on a home within the next two months. If the
offer is accepted, it will take up to three additional months to
close on the house. Betty will need to deposit about $1,000 in
an escrow account as “good faith” money when she makes the
offer. The rest of the down payment is made at closing. The best
place for Betty to deposit her funds now is

A:the stock market.
B:a municipal bond.
C:a six-month certificate of deposit (CD).
D:$1,000 in a two month certificate of deposit (CD) and the
remainder
in a six-month CD.
E:a money market mutual fund.
Correct Answer E:
Both the stock and bond are poor choices due to the volatility of
the market value of these assets. Since the timing of the cash
flow is uncertain, neither CD is an appropriate investment.
Betty should park her funds in a money market account where
the funds are relatively safe; she can earn some interest, and she
has easy access to the funds when she needs them.
2
Ch2-A1
Three years ago, Charles purchased a $1,000 face value 10-year
Treasury note for par. The market value of this bond is now
$950. If Charles sells the bond today, the tax implications of
sale are
A:$50 loss against ordinary income

B:$50 capital gain
C:$50 capital loss
D:$50 gain against ordinary income
E:No tax effects since Treasury securities are exempt from taxes
Correct Answer C:
Since the market value is less than the original purchase price
by $50 ($950 less $1,000), this is a loss. Since the holding
period is greater than one year, it is a capital loss.
3
Ch3-A1
Two years ago, an investor purchased a $1,000 par 6% coupon
bond that pays interest semiannually. Inflation over the last two
years has been 2% per year. The inflation-adjusted value of the
next interest payment is
A:$28.84
B:$30.00
C:$31.21
D:$57.67
E:$60.00
Correct Answer A:

The actual calculation of inflation-adjusted value has not been
discussed, but A is the only answer less than the nominal
semiannual interest of $30 (1,000*6%/2). The calculation is
30/1.022 = $28.835
4
Ch27-A1
Cameron pays 15% in dividend and capital gains taxes and 35%
in ordinary income taxes. Ten years ago, Cameron purchased a
position in a limited partnership for $10,000. Three years later,
she was required to contribute $2,000 more to the partnership.
Two years ago, she was required to contribute an additional
$2,000. If Cameron sells her limited partnership investment
today for $20,000, what are the taxes?
A:$ 900
B:$1,500
C:$2,100
D:$2,700
E:$3,500
Correct Answer A:
Cameron’s total investment is the original investment of
$10,000 plus two contributions at $2,000 each for a total cost
basis of $14,000 (10,000 + 2*2,000). Because she has held the

partnership for more than 1 year, the gain of $6,000 (20,000-
14,000) is taxed as a capital gain for a tax bill of $900 (6,000 *
0.15).
5
Ch7-A1
Bonds A, B and C are all zero-coupon bonds. Bond A matures in
3 years; Bond B matures in 7 years, and Bond C matures in 10
years. Paul is uncertain as to the direction of interest rates over
the next several years, so he wants to lock-in his return over his
7 year time horizon. Which bond is best for Paul?
A:Bond A because it matures in 3 years, and Paul can then roll-
over the funds to a 4 year bond.
B:Bond B because it matches Paul’s time horizon.
C:Bond C because it has a longer maturity, it will probably have
a higher yield.
D:Since these are zero-coupon bonds, it does not matter which
bond Paul
chooses.
E:Bonds are too risky for Paul to be investing.
Correct Answer: B

6
Ch15-A1
Assume that the futures price of gold is $390 a troy ounce, and
the contract is for 100 troy ounces. The initial margin is $2,000.
If the future price increases by 5.0%, what is the return to the
investor?
A: 1.0%
B: 2.5%
C: 5.0%
D:19.5%
E:97.5%
Correct Answer E:
The value of the contract is 390 * 100 = $39,000. A 5% increase
is $1,950 = 39,000 * 0.05. The return on the future contract =
1,950/2,000 = 0.975 = 97.5%.
7
Ch23-A1
Iris pays 15% in dividends and capital gains taxes and 35% in
ordinary income taxes. Several years ago, she purchased a
Mortgage-Backed Security (MBS) for $20,000 which was the
par value of the underlying assets. At the end of this year, she
received a statement stating she had received $700 in scheduled

amortization of principal, $1,200 in interest, and $500 in
unscheduled collection of principal. What is Iris’s after-tax cash
flow this year from this investment?
A:$1,560
B:$1,695
C:$1,980
D:$2,040
E:$2,400
Correct Answer C:
The return of scheduled principal of $700 and prepayment of
principal $500 are both return of capital and not subjected to
taxation. Interest is taxed at the ordinary income rate for a total
tax of $420 (1,200 * 0.35). The funds received are $2,400 (700
+ 1,200 + 500) for an after-tax cash flow of $1,980 (2,400 –
420).
8
Ch10-A1
Before the new tax law enacted in 2003, dividends were taxed
as ordinary income. Now the maximum tax rate on dividends
paid to individuals is 15%. As a result of the law, an investor in
the 25% tax bracket who received $70,000 in qualifying
dividends had a tax savings of

A:$ 0.
B:$ 7,000.
C:$ 9,000.
D:$10,500.
E:$17,500.
Correct Answer B:
70,000 * 0.25 – 70,000 * 0.15 = 17,500 – 10,500 = $7,000
9
Ch30-A1
Abby buys a position in a closed-end mutual fund that is selling
at an 8% discount. The fund earns 12%, but the discount
decreases to 5%. What is Abby’s return on this investment?
A: 8.5%
B:12.0%
C:12.4%
D:14.2%
E:15.7%
Correct Answer E:
A share with NAV of $100 costs $92 (100 * (1-0.08)). A 12%

increase, gives a NAV of $112 (100 * 1.12), but the 5%
discount reduces the share price to $106.40 (112 * (1-0.05)).
This is a gain of $14.40 (106.40 – 92) and a return of 15.65% =
(14.40/92).
10
Ch28-A2
Corey pays 15% in dividend and capital gains taxes and 35% in
ordinary income taxes. Four years ago, she invested $500,000 in
a private placement offering with some friends. The initial price
was $50 a share. The investment group is now discussing the
possibility of publicly selling their shares. One of the members
of the group believes they could get at least $75 a share. If this
is correct, what are Corey’s taxes when she sells her shares
(ignoring commissions and fees)?
A:$0 because the group is not allowed to sell their private
placement shares to the public
B:$37,500
C:$54,000
D:$70,000
E:$87,500
Correct Answer B:
After two years, the group will be able to sell their shares to the

public. Corey has 10,000 shares ($500,000/$50) for a selling
price of $750,000 (10,000 shares * 0.75) and a gain of $250,000
(750,000-500,000). Because Corey has held these shares for
more than 1 year, she is taxes at the 15% capital gain rate or
250,000 * 0.15 = $37,500.
11
Ch9-A2
A firm has $10 million to invest in safe securities. The time
horizon is five years, and interest rates are anticipated to
decrease over this period. The best investment for this firm is
A:Six-month CDs
B:Nonparticipating GICs
C:Treasury bills
D:Participating GICs
E:Two-year corporate bonds
Correct Answer B: The nonparticipating GIC will lock-in high
rates. All the other investments will have some or all of their
funds reinvested at the anticipated lower future rates
12
Ch32-A2

What is the standard deviation of returns given returns of 10%,
-5%, 8%, 3%?
A:3.7%
B:4.0%
C:5.8%
D:6.7%
E:7.1%
Correct Answer D:
The mean is 4. The variance is [(10-4)2+(-5-4)2+(8-4)2+(3-
4)2]/(4-1) = [36+81+16+1]/3 = 134/3 = 44.667. The standard
deviation is 44.6671/2 = 6.68%.
13
Ch12-A1
Claire has 200 shares of stock in a firm that just issued 1 right
per share. The right gives the holder the opportunity to purchase
0.125 shares of stock. If Claire exercises all her rights, how
many addition shares of stock will she be able to obtain?
A:8
B:25
C:125

D:200
E:1,600
Correct Answer B:
200 rights * 0.125 shares/right = 25 shares
14
Ch24-A1
Luke is 35 years old, has a good job, a wife and two small
children, and is financially conservative. He has heard about the
large returns that may be achieved by investing in the oil and
gas field. Luke is interested, but he has no expertise to provide
day-to-day management. Which of the following investments
would be best for Luke?
A:direct investment through a working interest
B:general partner
C:limited partner
D:all of these options would be a reasonable investment for
Frank
E:either B or C (partnership) would be a reasonable investment
for Frank, but a direct investment (A) is not reasonable
Correct Answer C:

Both general partnership and direct investment require practical
knowledge and experience to be successful.
15
Ch4-A3
A $1,000 par 1.4% coupon convertible bond with a stock
purchase warrant for 1 share of stock at $35 per share is
purchased for $900. The common stock has a current market
price of $38 per share and the warrant’s market price is $4. If
the market price of the stock increases to $41.80, the minimum
percentage increase in the value of the warrant is
A: 10.0%
B: 17.8%
C: 19.4%
D: 70.0%
E:119.4%
Correct Answer D:
The warrant will sell for at least its theoretical value = Price of
the stock – Exercise price = $41.80-$35 = $6.80. Since the
current market value of the warrant is $4, this is a gain of $2.80
($6.80-$4.00) or 70% (2.80/4 = 0.70 = 70%)
16

Ch25-A1
Stella pays 15% in dividend and capital gains taxes and 35% in
ordinary income taxes. In 1990, she paid $1,000 for three
American Eagle $50 gold coins (1 oz gold) and $340 for one
coin in December 2003. In July 2004, she sold all four coins to
net $460 each. What is the after-tax cash flow from this
investment?
A:$150
B:$247
C:$401
D:$425
E:$500
Correct Answer C:
The investment purchased in 1990 was sold for a total of $1,380
(460 * 3) for a gain of $380 (1,380 – 1,000) which is taxed at
the capital gains rate of 15% or $57 (380 * 0.15). The coin
purchased last year, is a short-term gain taxed at the ordinary
income tax rate of 35% for a tax of $42 ((460-340)*0.35). The
total tax is $99 (57 + 42). The net after-tax cash flow is sell –
purchase – tax = 4*460 – (1,000+340) – 99 = 1,840 – 1,340 – 99
= $401.

17
Ch11-A1
A 6.4% preferred stock has a par value of $30 and is currently
selling in the market at $40. The quarterly dividend for this
stock is
A:$0.16.
B:$0.48.
C:$0.64.
D:$1.92.
E:$2.56.
Correct Answer B:
The annual fixed dividend is a percentage of par or 30*0.064 =
$1.92. On a quarterly basis this becomes 1.92/4 = $0.48
18
Ch10-MC06
Round lots are
A:10 shares
B:100 shares
C:1,000 shares

D:10,000 shares
E:100,000 shares
Correct Answer: B
19
Ch13-MC06
Factors that should be considered in taking a stock option
position include:
A:The dividend paid on the underlying stock
B:The volatility of the underlying stock
C:The time to expiration
D:The anticipated direction of market movement
E:All of the above are relevant factors in the option decision
Correct Answer: E
20
Ch13-A1
Last month when IBM was selling for $86, Dan purchased a call
option on IBM with an exercise price of $90 for $2 per option
or $200 total. Yesterday IBM closed at $95. Based on the
minimum value of the contract, if Dan sells his call at

yesterday’s close, what would his return be?
A:4%
B:6%
C:50%
D:150%
E:250%
Correct Answer D:
The minimum value of the contract is (stock price – exercise
price)*number of options = (95-90)*100 = $500. With a $200
initial cost, this is a gain of 500-200 = $300 for a return of
300/200 = 1.5 = 150%.
21
Ch26-A1
One of the most successful collection programs is the 50 State
Quarters program developed by the U.S. Mint. This program
began in 1999 and permitted each state to put a design on the
back of the U.S. quarter. There are 5 state quarters issued each
year over the 10-year program. According to CoinWorld.com, in
1999 4.43 billion quarters were minted across the first five
states issued. In 2000, the U.S. Mint increased the mintage by
46%. What was the number of state quarters minted in 2000?

A:2.04 billion
B:4.43 billion
C:4.63 billion
D:6.47 billion
E:6.65 billion
Correct Answer D:
An increase of 46% is 2.04 billion (4.43 * 0.46) for a total
mintage of 6.47 billion (4.43 + 2.04).
22
Ch16-A1
Wendy’s broker has recommended she purchase 500 shares of a
mutual fund that is currently priced at $25 a share. The
commission on the purchase price is 3%, and the fund charges a
1% annual management fee and a $10 annual administrative
charge. What is the total cost over the first year to invest in this
fund?
A:$12,500
B:$12,875
C:$13,000

D:$13,010
E:$13,014
Correct Answer D:
The first year cost is the purchase price + commission +
management fee + administrative fee = 500*25 + 500*25*0.03 +
500*25*0.01 + 10 = 12,500 + 375 + 125 + 10 = $$13,010.
23
Ch5-MC6
Advantages of investing in tax-exempt bond funds include all of
A:Diversification
B:Provides additional benefits to tax-deferred retirement plans
C:Automatic reinvesting
D:Fund maintains individual investor’s tax reports and records
E:Low initial deposit
Correct Answer B: Since retirement plans are already tax-
deferred, they will not benefit from tax-exempt securities
24
Ch32-A1

Angie deposits $250 in an account that earns 12% per year. If
no other deposits or withdrawals are made, how much will
Angie have in her account at the end of 15 years?
A:$ 280
B:$ 700
C:$1,368
D:$3,450
E:$4,200
Correct Answer C: By equation: 250*1.1215 = 250*5.4736 =
$1,368.
25
Ch8-A2
Zack needs a $100,000 loan to start his new business. Due to his
age and inexperience, he is unable to obtain a bank loan.
Possible alternatives to raise the funds include all of the
following EXCEPT
A:promissory note from his mother.
B:having his mother co-sign a bank loan.
C:selling personal assets.
D:issuing debt in the market.
E:all of the above are possible sources of funds for Zack.

Correct Answer D: Zack only needs $100,000 which is too small
for a debt issue.
26
Ch6-A1
A portfolio of Treasury bonds with coupon payment dates of
February 15 and August 15 that matures in 10 years may be
stripped into how many zero-coupon bonds?
A:0 since Treasury securities and not eligible for stripping
B:1
C:10
D:11
E:21
Correct Answer E:
The 10 year bond is stripped into 20 coupon-based zero coupon
bonds and the principal based zero for a total of 21 bonds.
27
Ch5-A1
Jason is in the 28% Federal income tax bracket and 7% New

York state income tax. He has invested in New York State
bonds that yields a 6% return. The taxable equivalent yield on
this bond is
A:6.45%
B:7.32%
C:8.54%
D:9.23%
E:10.61%
Correct Answer D:
Federal and state taxes = 28% + 7% = 35%. The tax equivalent
yield = 6/(1-0.35) = 6/0.65 = 9.23%.
28
Ch4-A1
XYZ Corporation has a cumulative preferred stock that pays $1
per share per quarter. The firm did not declare a dividend the
last two quarters. To be able to pay dividends to common
shareholders, the preferred stock dividend this coming quarter
must be
A:XYZ does not need to pay preferred stock dividends to be
able to pay common stock dividends

B:$1
C:$2
D:$3
E:$4
Correct Answer D:
All current and past dividends on cumulative preferred stock
must be paid for common shareholders to receive a dividend. At
$1 per quarter, the two missed quarters plus the current quarter
results in a $3 preferred stock dividend.
29
Ch11-MC4
Preferred stock with cumulative fixed dividends
A:Are required to pay dividends each quarter
B:Must pay the missed dividend before common shareholders
can receive dividends
C:Are taxed on the accumulated dividends
D:Are considered to be bankrupted if one year of dividends is
missed
E:All of the above are true
Correct Answer: B

30
Ch2-A2
Diane has $85,000 to invest. She wants to invest in relatively
safe securities. Diane believes interest rates will decrease and
stabilize at a lower level over the next 5-10 years. She should
invest in
A:Treasury bills
B:Long-term Treasury notes or bonds
C:Equity
D:B-rated corporate bonds
E:Commercial paper
Correct Answer B:
Both Treasury bills and commercial paper are short-term and
will mature as interest rates decrease. This is not good since the
funds will have to be reinvested at the lower rates. The equity
and lower-quality corporate bond have too much risk for Diane.
She should lock-in the high rates of the relatively default-free
long-term Treasury notes or bonds.
11

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