Investments & Securities

Q: a state lotto awarded a prize of $560,000 a year for the next 20 years starting today. if the state sold $21,900,000 in lotto tickets, what proportion of the sales will the state distribute if it earns 8% annually on invested funds?

Q: a firm has a $1,000,000 debt (e.g., a bond) outstanding that matures after 10 years. the sinking fund requires the firm to set aside annually an amount so the debt may be retired at maturity. if the firm can earn 10% annually on these funds, how much must it invest annually to meet the sinking fund?

Q: eem, inc has a $1,000,000 debt outstanding that is due after 15 years. the contract required that after five years, the firm must set aside annually an amount so the debt is retired in full at maturity. if eem can earn 8 percent on invested funds, how much must the company set aside each year?

Q: your brother, who is prone to bearing substantial risk, suggests that you buy a security for $10,000 that promises to pay you $100,000 at the end of 15 years. what is the implied annual return or yield on this investment?

Q: you are hurt in a car accident and your lawyer wins a $100,000 settlement to be distributed as follows: $20,000 immediate payment $5,000 a year for ten years $30,000 after ten years. if the lawyer's fee is $10,000, what is the value of this settlement if the interest rate is 6 percent?

Q: a piece of rental property will generate $10,000 a year for five years, $12,000 for the next five years, and then be sold at the end of the tenth year for $100,000. if you can earn 10 percent on your funds, what is the maximum you should pay for the property?

Q: worker a annually invests $1,000 in an ira for nine years (ages 27 through 35) and never makes another contribution. worker b annually invests $1,000 in an ira for thirty years (ages 36 through 65). which worker will have more in his or her account when he or she retires if they both earn 8 percent on their investments?

Q: a firm currently earns $1.00 per share. a financial analyst believes that earnings will grow annually at the rate of 10 percent for five years and then decline to 5 percent. what are the expected earnings after ten years?

Q: air national's capacity is 120 passengers per flight. it currently carries 74 passengers per flight. growth in passengers is expected to be 6 percent annually. new plans will have to be ordered when the company is carrying 90 percent of capacity. how long will it be before the firm must order new planes?

Q: an investment offers $10,000 at the end of each year for ten years. (a) if you can earn 5 percent annually, what is this investment worth today? (b) if you do not spend the annual payment but invest it at 5 percent, how much will you have after the ten years have lapsed?

Q: your uncle plans to leave you an inheritance of $200,000. if his life expectancy is twenty years, what is your inheritance currently worth if the anticipated return on investments is 9 percent?

Q: you wish to have $100,000 after ten years for a major purchase such as a boat. how much must you invest at the end of each year if you earn 8 percent annually on your funds?

Q: a homeowner has a tenyear home-improvement loan for $36,875. what are the annual payments required by the loan if the annual rate of interest is 4 percent?

Q: a state's lottery winner is promised $200,000 a year for twenty years (starting at the end of the first year). how much must the state invest now to guarantee the prize if the state can earn annually 7 percent on its funds? how much must the state invest if the annual payments are to be made at the beginning of the year?

Q: if you open an ira and invest $3,000 a year (at the end of the year), how much will be in the account after twentyfive years if the funds earn 5 percent annually? how much would be in the account if payments were made at the beginning of the year?

Q: an investor expects the price of a stock to double after eight years. what is the expected annual rate of growth?

Q: the future value of an annuity will be larger if 1> the annuity is an ordinary annuity 2> the annuity is an annuity due 3> the payments are made at the beginning of the year 4> the payments are made at the end of the year a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

Q: time value concepts may be used to determine 1> the annual growth rate in dividends 2> the amount in an ira account after ten years 3> the tax owed on a capital gain a. 1 and 2 b. 1 and 3 c. 2 and 3 d. only 2

Q: time value concepts may not be used to determine a. the present value of an annuity b. the margin required on a stock purchase c. the future value of $100 deposited in a bank d. the present value of a lump sum

Q: which is the smallest if interest rates are 8 percent? a. $100 to be received after five years b. the present value of an annuity of $100 for 5 years c. $100 received in the present d. $100 received for two years

Q: the present value of an annuity is 1> larger the greater the rate of interest 2> smaller the greater the rate of interest 3> larger as the number of years increases 4> smaller as the number of years increases a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

Q: which is the largest if interest rates are 7 percent? a. $100 compounded for three years b. the future value of a $100 annuity for three years c. the present value of $100 after three years d. the present value of a $100 annuity

Q: the future value of an annuity is 1> larger the higher the rate of interest 2> smaller the higher the rate of interest 3> larger the greater the number of years 4> smaller the greater the number of years a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

Q: discounting a. expresses the present in the future b. brings the future back to the present c. is synonymous with compounding d. depends on the rate of interest

Q: the present value of a dollar 1> increases as the interest rate increases 2> decreases as the interest rate increases 3> increases as the time period increases 4> decreases as the time period increases a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

Q: an annuity is a series of a. rising annual payments b. random payments c. equal payments d. unequal payments

Q: the future value of a dollar 1> increases with higher interest rates 2> decreases with higher interest rates 3> increases as the time period increases 4> decreases as the time period increases a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

Q: the present value of an annuity due is not affected by the frequency of compounding.

Q: the future value of an ordinary annuity will exceed the future value of an annuity due.

Q: the present value of an annuity due exceeds the present value of an ordinary annuity.

Q: the concept of the time value of money is a means to bring together the present and the future.

Q: the present value of an annuity increases as the number of years increases.

Q: the future value of an annuity of $100 at 6 percent for ten years exceeds $1,000.

Q: if the first payment made by an annuity is today, that is an ordinary annuity and not an annuity due.

Q: if interest rates are 0 percent, an annuity of $100 for ten years is the same as $1,000 today.

Q: a series of equal payments is called an annuity.

Q: if a bank pays 2 percent compounded daily, the true rate of interest is greater than 2 percent.

Q: the larger the rate of interest, the smaller is the future value of a dollar.

Q: compounding refers to the earning of interest on interest earned previously.

Q: an investor sells 100 shares short at $43. the sale requires a margin deposit equal to 60 percent of the proceeds of the sale. the company paid a cash dividend of $2 per share. if the investor closed the position at $36, what was the percentage earned or lost on the investment?

Q: an investor sells 100 shares short at $4 the sale requires a margin deposit equal to 60 percent of the proceeds of the sale. if the investor closes the position at $49, what was the percentage earned or lost on the investment? if the position had been closed when the price of the stock was $27, what would have been the percent earned or lost on the position?

Q: an investor bought on margin 100 shares of copier corp. for $85 a share. the firm paid an annual dividend of $4 a share; the margin requirement was 60 percent with an interest rate of 8 percent on borrowed funds, and commissions on the purchase and sale were $75. the price of the stock rose to $120 in one year. a. what is the percentage earned on the investment if the stock is bought for cash (i.e., the investor did not use margin)? b. what is the percentage earned on the investment if the stock is bought on margin?

Q: an investor purchased on margin orange computer for $30 a share. the stock's price subsequently increased to $50 a share at which time the investor sold the stock. if the margin requirement is 60 percent and the interest rate on borrowed funds was 7 percent, what would be the percentage earned on the investor's funds (excluding commissions)? what would have been the return if the investor had not bought the stock on margin?

Q: concerning a new issue of stock, a lock-up refers to a. a guaranteed profit on the initial purchase b. a guaranteed profit to the underwriter c. the requirement that shares purchased by insiders prior to an initial public offering must retain those shares for a specified period d. initial buyers of the stock in the ipo must hold the shares for a specified period of time

Q: a new issue of corporate securities sold to the general public must be a. registered with the sec b. initially sold through brokers c. offered initially to existing stockholders d. bought by specialists in corporate securities

Q: the final prospectus does not include a. the firm's balance sheet b. the price of the securities sold to the public c. the underwriter's profit on the sale d. the underwriting discount

Q: if the initial offer price of a new issue is too low, 1> demand will exceed supply 2> supply will exceed demand 3> the price of the securities will rise 4> the price of the securities will fall a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

Q: the syndicate 1> facilitates the sale of new securities 2> is formed by the originating house 3> creates a secondary market in stocks a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: which of the following is not part of the underwriting process? a. the prospectus b. the originating house c. the sipc d. the sec

Q: the sarbanes-oxley law a. reduces potential conflicts of between securities analysts and investment bankers b. legalizes the sale of securities by investment bankers c. requires corporate boards of directors to own stock d. mandates that securities analysts file their recommendations with the sec

Q: the value of an adr will tend to increase if 1> the value of the dollar rises 2> the value of the dollar falls 3> foreign stock markets rise 4> foreign stock markets fall a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

Q: profits will result from a short sale if a. stock prices rise b. stock prices fall c. stock prices remain stable d. answer is indeterminate

Q: short selling requires 1> no collateral 2> a margin payment 3> delivering securities owned 4> borrowing securities to deliver a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

Q: american depository receipts represent a. american stocks traded abroad b. european stock traded in europe c. foreign stocks traded in the u.s d. american and foreign stocks traded otc

Q: short selling is a. selling borrowed securities b. selling stock owned for less than a year c. selling an odd lot d. selling against the investor's broker's advice

Q: the margin requirement is set by the a. federal reserve b. sec c. fdic d. sipc

Q: if a stock is bought on margin, a. part of the cost of investment is borrowed b. the commissions on the investment are increased c. the cost of the investment is reduced d. the interest on the borrowed funds is set by the sec

Q: inside information a. is obtained from inside brokerage firms b. is reported in a firm's financial statements c. must be disclosed to the sec d. may not be legally used to obtain security profits

Q: securities regulations protect investors by a. requiring disclosures of information by firms b. stopping investors from buying overpriced stock c. reducing competition among brokers d. establishing commission schedules

Q: investors are insured from brokerage firm losses by a. the sec b. the federal reserve c. the sipc d. the fdic

Q: the cost of investing includes 1> commissions 2> the spread 3> dividends a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: a registered representative a. makes a market b. buys and sells for customers' accounts c. represents brokerage firms with the nyse d. sets the spread

Q: daily securities transactions that are reported in the financial media generally include 1> the volume of transactions 2> the high and low prices for the day 3> the net change in price from the previous day a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: if the quote on stock is reduced, that implies 1> supply exceeded demand 2> demand exceeded supply 3> the price was too high 4> the price was too low a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

Q: a market maker 1> sells stock at the ask price 2> buys stock at the ask price 3> sells stock at the bid price 4> buys stock at the bid price a. 1 and 2 b. 1 and 4 c. 2 and 3 d. 3 and 4

Q: the spread is the a. difference between the bid and ask prices b. commission charged by the broker c. difference between the purchase and sale prices d. difference between the commissions charged by full service and discount brokers

Q: a broker a. stresses one type of investment b. makes a market in securities c. buys securities for customers' accounts d. underwrites stock but not corporate bonds

Q: a shelf-registration involves the selling of new securities without having them registered with the sec.

Q: a "lock-up" refers to a security transaction with an assured profit.

Q: if the price of an initial public offering of stock rises, the windfall gain goes to the underwriter.

Q: the sec establishes the price of a new stock issue.

Q: a new issue of corporate securities sold to the general public must be registered with the sec.

Q: the cost of an underwriting (to the firm issuing the securities) is the difference between the price of the public and the proceeds received by the firm.

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