Tutorial Questions

1. Which of the following securities are considered to be risk-free instruments:

[I] US Treasury Bills
[II] A diversified portfolio of corporate bonds
[III] Hang Seng Index

A. I only
B. I and II only
C. I, II, and III
D. I and III only
E. None of the statements are true

2. Which of the following statements is/are TRUE of a US Treasury Bill:

[I] Is safe because it has the same payout/payment in a bull market or a bear
market
[II] Is safe because it has negligible default risk
[III] Is safe because it protects against inflation

A. I only
B. I and II only
C. I, II, and III
D. I and III only
E. None of the statements are true

3. Real assets in the economy include all but which one of the following?
A. Land
B. Buildings
C. Consumer durables
D. Common stock

4. Financial markets allow for all but which one of the following?
A. Shift consumption through time from higher-income periods to lower
B. Price securities according to their riskiness
C. Channel funds from lenders of funds to borrowers of funds
D. Allow most participants to routinely earn high returns with low risk

5. Which of the following are TRUE statements regarding short-sale?

[I] Losses are unlimited.

[II] The short-seller must pay out any issued dividends to the party that lent the shares.
[III] The broker does not require any form of collateral from the short-seller.
 A. I only
B. I and II
C. I, II and III
D. I and III
E. II and III

6. Which of the following statements are TRUE about buying securities using a margin account?

[I] It allows the investor to use leverage.

[II] Investors buy on margin when they are cautious about the market.
[III] Losses are unlimited.

A. I only
B. I and II only
C. I and III only
D. II and III only
E. I, II and III

7. Purchases of new issues of stock take place _________.

A. at the desk of the Fed
B. in the primary market
C. in the secondary market
D. in the money markets

8. Initial margin requirements on stocks are set by _________ in US.

A. the Federal Deposit Insurance Corporation
B. the Federal Reserve
C. the New York Stock Exchange
D. the Securities and Exchange Commission

9. An order to buy or sell a security at the current price is ______________.

A. a limit order
B. a market order
C. bid price
D. ask price
10. You find that the bid and ask prices for a stock are $10.25 and $10.30 respectively. If you
purchase or sell the stock you must pay a flat commission of $25. If you buy 100 shares of
the stock and immediately sell them, what is your total implied and actual transaction cost in
dollars?
A. $50
B. $25
C. $30
D. $55

11. An investor puts up $5,000 but borrows an equal amount of money from their broker to
double the amount invested to $10,000. The broker charges 7% on the loan. The stock was
originally purchased at $25 per share and in one year the investor sells the stock for $28. The
investor's rate of return was ____.

12. You sell short 300 shares of XYZ which are currently selling at $30 per share. You post
the 50% margin required on the short sale. If you earn no interest on the funds in your margin
account what will be your rate of return after one year if XYZ is selling at $27? (Ignore any
dividends)

13. In which markets, can buyers purchase goods or securities from sellers directly?

I. Brokered markets
II. Dealer markets
III. Auction markets

A. All of the above.

B. I and II.
C. I and III.
D. II and III.
E. III only.

14. The bid price of a Treasury bill is _________.

A. the price at which the dealer in Treasury bills is willing to sell the bill
B. the price at which the dealer in Treasury bills is willing to buy the bill
C. greater than the ask price of the Treasury bill expressed in dollar terms
D. the price at which the investor can buy the Treasury bill
15. You short sell 1000 shares of stock ABC at $40 per share. The initial margin requirement
was 50% (the margin account pay no interest). A year later, the stock price has risen from
$40 to $43, and the stock has paid an annual dividend of $2 per share.

(1) What is the remaining equity in your account?

(2) If the maintenance margin requirement is 30%, will you receive a margin call?
(3) What is your rate of return on the investment?

16. Consider the following limit order book for a share of stock. The last trade in the stock
occurred at a price of $50.

17.
18.