Investment Strategies and Market Indices Quiz
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Questions and Answers

What is the main advantage of using an ADR for an investor?

  • It offers greater liquidity than directly investing in the foreign company's shares.
  • It provides a way to invest in foreign companies without having to deal with currency exchange risks.
  • It simplifies the process of investing in foreign companies by meeting US security registration requirements. (correct)
  • It allows investors to purchase fractional shares of a foreign company.

    • Which of the following is NOT a characteristic of the Dow Jones Industrial Average (DJIA)?

  • It is a price-weighted average of 30 large blue-chip corporations.
  • It has been computed since 1896.
  • It is a broad-based index that reflects the performance of the entire stock market. (correct)
  • The investment in each company within the index is proportional to that company's share price.

    • What does the price-earnings ratio (P/E ratio) of a stock tell us?

  • The total market value of a company's outstanding shares.
  • The amount of profit a company makes per share.
  • The amount of dividends a company distributes per share.
  • How much investors are willing to pay for each dollar of earnings generated by the company. (correct)

    • Which of the following types of indexes is NOT a market value index?

    <p>Equally weighted indexes</p> Signup and view all the answers

    Which of these options correctly describes a put option?

    <p>It gives the holder the right to sell an asset for a specified price on or before a specified date.</p> Signup and view all the answers

    What is the key difference between a future contract and a forward contract?

    <p>Future contracts are standardized and traded on exchanges, while forward contracts are customized and traded over-the-counter.</p> Signup and view all the answers

    Which of the following is NOT considered a derivative asset?

    <p>Stock shares</p> Signup and view all the answers

    What is the main difference between a long position and a short position in a futures contract?

    <p>A long position is held by a trader who commits to buying the asset on the delivery date, while a short position is held by a trader who commits to selling the asset on the delivery date.</p> Signup and view all the answers

    What happens when the market price of an asset exceeds the exercise price of a call option?

    <p>The option holder has the right to purchase the asset at the exercise price and potentially profit from the difference between the market price and exercise price.</p> Signup and view all the answers

    What is the main purpose of an index fund?

    <p>To provide a yield of return that is equal to that of the index, offering a low-cost passive investment strategy.</p> Signup and view all the answers

    What distinguishes a Yankee bond from other types of bonds?

    <p>It is dollar denominated and sold in the US by a non-US issuer.</p> Signup and view all the answers

    Which type of municipal bond is backed by the general taxing power of the issuer?

    <p>General obligation bond</p> Signup and view all the answers

    What is the main feature of corporate secured bonds?

    <p>They are backed by specified collateral.</p> Signup and view all the answers

    Which statement accurately describes subordinated debentures?

    <p>They are lower priority than other debentures.</p> Signup and view all the answers

    What is the primary purpose of a proxy in corporate governance?

    <p>To vote on behalf of a shareholder.</p> Signup and view all the answers

    What characteristic of common stock provides limited liability to shareholders?

    <p>The maximum loss is limited to the original investment.</p> Signup and view all the answers

    What do subprime mortgages entail compared to conforming mortgages?

    <p>They are issued to financially weaker borrowers.</p> Signup and view all the answers

    What is dividend yield expressed as?

    <p>Annual dividend payment as a percentage of the stock price.</p> Signup and view all the answers

    What is the primary characteristic of money market securities?

    <p>Short-term and low-risk</p> Signup and view all the answers

    Which of the following best describes Treasury Bills (T-bills)?

    <p>Short-term government-issued debt</p> Signup and view all the answers

    What does the bid-ask spread represent in the context of T-bills?

    <p>The profit margin for the dealer</p> Signup and view all the answers

    What is the role of commercial paper in money markets?

    <p>Short-term unsecured debt notes issued by wealthy companies</p> Signup and view all the answers

    Which security is characterized as an order to a bank to pay a specific amount at a future date?

    <p>Banker's acceptance</p> Signup and view all the answers

    What distinguishes Eurodollars from other money market instruments?

    <p>They are deposits denominated in dollars outside the U.S.</p> Signup and view all the answers

    Which type of yield is primarily associated with money market instruments?

    <p>Low risk but not risk-free yield</p> Signup and view all the answers

    What type of bonds provide a hedge against inflation risk?

    <p>Treasury Inflation-Protected Securities (TIPS)</p> Signup and view all the answers

    What is the primary distinction between Treasury notes and Treasury bonds?

    <p>Notes have maturities of up to 10 years, while bonds range from 10 to 30 years.</p> Signup and view all the answers

    What was the primary reason for replacing LIBOR with SOFR?

    <p>LIBOR was based on bank surveys and not actual transactions.</p> Signup and view all the answers

    What is the purpose of federal agency debt instruments?

    <p>To channel credit to sectors lacking sufficient private funding.</p> Signup and view all the answers

    Which type of money market security can be sold before maturity if needed?

    <p>Certificates of deposit (CDs)</p> Signup and view all the answers

    What unique feature do repos offer in money market transactions?

    <p>They involve sales of securities with an agreement to repurchase.</p> Signup and view all the answers

    What aspect defines the federal funds rate?

    <p>The interest charged for very short-term loans between financial institutions.</p> Signup and view all the answers

    Study Notes

    Asset Classes and Financial Instruments

    • Asset allocation involves dividing investments among different asset classes.
    • Securities selection is choosing specific investments within each asset class.

    Financial Markets

    • Money markets are short-term, liquid, low-risk markets for debt securities.
      • Subset of fixed income market
      • Accessible to small investors
    • Capital markets are longer-term, higher-risk markets.
      • Divided into four segments: longer-term bonds, equities, options, and futures.

    Money Market Securities

    • Treasury Bills (T-bills)

      • Government-issued debt sold to the public.
      • Highly marketable
      • Exempt from state and local taxes
      • Easily converted to cash
      • Low transaction costs
      • Ask price is the purchase price
      • Bid price is the selling price
      • Bid-ask spread is the difference between ask and bid prices.

    • Certificates of Deposit (CDs)

      • Bank pays interest and principal to the depositor at maturity.

    Money Market Securities (Continued)

    • Commercial Paper
      • Short-term unsecured debt notes issued by large, well-known companies.
      • Backed by a bank line of credit
      • Mature in up to 270 days.
      • Considered a fairly safe asset.
    • Banker's Acceptance
      • An order by a customer to a bank to pay a sum of money at a future date.
      • Safe because the bank's credit standing is substituted for the customer's.
    • Eurodollars
      • Dollar-denominated deposits at foreign banks or foreign branches of American banks.
      • Banks avoid Federal Reserve regulation.
    • Repurchase Agreements (Repos)
      • Short-term sales of securities with an agreement to repurchase them the next day at a higher price.
      • The implicit loan can last 30 days or more.

    Money Market Securities (Continued)

    • Reverse Repos
      • Dealers buy securities from investors and agree to sell them back later.
      • This is a very safe investment.
    • Federal Funds
      • Funds in a bank's reserve account at the Federal Reserve.

    Bond Market

    • The bond market deals with longer-term borrowing or debt instruments.
    • Debt Instruments: examples are treasury notes/bonds, corporate bonds, municipal bonds, mortgage securities, and federal agency debt.
      • Treasury bonds/notes: government securities
      • Corporate bonds: issued by corporations to raise capital
      • Municipal bonds: issued by state and local governments
      • Mortgage-backed securities: bonds backed by mortgage loans.
    • Inflation-protected treasury bonds: linked to the cost of living index.

    Equity Securities

    • Common Stock represents ownership in a company.
      • Each share entitles the owner to one vote on corporate governance issues.
      • Stockholders have residual claims on the company’s assets and income, but are last in line.
      • Stockholders have limited liability: they can lose only their invested amount in bankruptcy.

    Equity Securities (continued)

    • Depository Receipts (ADRs): certificates traded in US markets representing foreign company shares.
    • Dow Jones Industrial Average (DJIA): a widely known stock market index.

    Derivatives Markets

    • Derivative assets: claims whose values are dependent on the value of underlying assets.
      • Options: give the right, but not the obligation, to buy or sell an asset at a set price by a specific date.
      • Call options: the right to buy
      • Put options: the right to sell.
    • Futures contracts: oblige the buyer or seller to make/take delivery of an asset at a specified price on a specific date.
    • Future contracts are entered into without cost.

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    Related Documents

    Chapter 2: Asset Classes and Financial Instruments PDF

    Description

    Test your knowledge on investment strategies and market indices with this quiz. Explore key concepts such as ADRs, P/E ratios, and options to deepen your understanding of the financial landscape. Challenge yourself with questions on derivatives and futures contracts.

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