Actual Test 3 Test Bank

Chapter 5 Money Markets True/False Questions

1. Everything else equal, an effective annual rate will be greater than the bond equivalent yield on the same security. Answer:

2. Money markets exist to help reduce the opportunity cost of holding cash balances.

3. The majority of money market securities are low denomination, low risk investments designed to appeal to individual investors with excess cash.

4. Most money market securities are initially sold to individual investors.

5. Commercial paper, negotiable certificates of deposit and banker's acceptance rates are all quoted as discount yields.

6. Euro commercial paper is a short term obligation of the European Central Bank.

7. The U.S. Treasury recently switched from a discriminating price auction to a single price auction because the latter lowered the average price paid by investors.

8. In the T-Bill secondary market the ask yield will normally be less than the bid yield.

9. The largest secondary money market in the U.S. is the secondary market for T-Bills.

10. Fed funds are generally short term unsecured loans while repos are short term secured loans.

Multiple Choice Questions

11. For the purposes for which they are used, money market securities should have which of the following characteristics?

I.Low trading costs

II. Little price risk

III. High rate of return

IV. Life greater than one year

A) I and III

. B) II and IV

. C) III and IV

. D) I and II

. E) I, II and III

Money market securities exhibit which of the following?

I. II. III. IV.

A) B) C) D) E)

Large denominationMaturity greater than one yearLow default riskContractually determined cash flows

I, II and IIII, III and IVII, III and IV II and IVI, II, III and IV

Answer: B Page: 123 Level: Medium

13. A repo is in essence a collateralized

. A) Banker'sacceptance

. B) Certificate of deposit

. C) Fed funds loan

. D) Commercial paper loan

. E) Eurodollar deposit

14. A short term unsecured promissory note issued by a company is

. A) Commercial paper

. B) T-Bills

. C) Repurchaseagreement

. D) Negotiable CD

. E) Banker's acceptance

15. A time draft payable to a seller of goods, with payment guaranteed by a bank is a

. A) Commercial paper security

. B) T-Bill

. C) Repurchaseagreement

. D) Negotiable CD

. E) Banker's acceptance

16. In the T-Bill auction process the competitive bidder is guaranteed a _____ and a noncompetitive bidder is guaranteed a _____.

. A) Minimum price; maximum price

. B) Maximumprice;minimumprice

. C) Maximumprice;givenquantity

. D) Minimum price; maximum quantity

. E) None of the above

59

17. A dealer is quoting a $10,000 face 60 day T-Bill quoted at 3.22 bid, 3.14 ask. You could buy this bill at _____ or sell it at _____.

. A) $9,947.67 , $9,946.33

. B) $9,678.00 , $9,686.00

. C) $9,686.00 , $9,678.00

. D) $9,946.33 , $9,947.67


18. Rates on federal funds and repurchase agreements are stated

. A) On a bond equivalent basis with a 360 day year

. B) On a bond equivalent basis with a 365 day year

. C) As a discount yield with a 360 day year

. D) As an EAR

. E) As a discount yield with a 365 day year

19. The discount yield on a T-Bill differs from the T-bill's bond

equivalent yield (BEY) because

. A) The discount yield is a percentage of face value instead of price

. B) A 360 day year is used on the discount yield instead of 365 days

. C) The discount yield is without compounding, the BEY is with compounding

. D) BothAandB

. E) A, B and C are all reasons for the difference

20. The typical spread on prime quality commercial paper and medium grade commercial paper has been about ______ basis points.

A) 200

B) 22

C) 33

D) 86

E) 12

21. The rate of return on a repo is

. A) Determined by the rate of return on the underlying collateral

. B) Strongly affected by the current Fed funds rate at the time of the repo

. C) Determined at the time of the repo

. D) A and C

. E) B and C

22. Which one of the following statements about commercial paper is NOT true? Commercial paper issued in the U.S.:

. A) Is an unsecured short term promissory note

. B) Has a maximum maturity of 270 days

. C) Is virtually always rated by at least one ratings agency

. D) Has no secondary market

. E) Carries an interest rate above the prime rate

23. A negotiable CD

. A) Is a bank issued transactions deposit

. B) Isaregisteredinstrument

. C) Is a bank issued time deposit

. D) Has denominations ranging from $50,000 to $10 million

. E) Pays discount interest

24. A 90 day $1 million CD has a 4% annual rate quote. If you buy the CD, how much will you collect in 90 days?

A) $1,040,000

B) $1,009,863

C) $1,000,000

D) $1,015,012

E) $1,010,000

25. A banker's acceptance is

. A) A time draft drawn on the exporter's bank

. B) A method to help importers evaluate the creditworthiness of exporters

. C) A liability of the importer and the importer's bank

. D) An add on instrument

. E) For greater than 1 year maturity

26. The most liquid of the money market securities are


. B) Banker'sacceptances

. C) T-Bills

. D) Fed funds

. E) Repurchase agreements

25. In dollars outstanding in 2004 the largest money market security was


. B) Banker'sacceptances

. C) T-Bills

. D) Fed funds & repos

26. The international version of the fed funds rate is called

. A) LIBOR

. B) The repo rate

. C) The Euro rate

. D) International dollar rate

. E) The exchange rate

27. LIBOR is generally _____ the Fed funds rate because foreign bank deposits are generally _____ than domestic bank deposits

A) Greater than; less risky

B) Lessthan;morerisky

C) Thesameas;equallyrisk

. D) Greater than; more risky

. E) Less than; less risky

30. A U.S. exporter sells $50,000 of furniture to a Latin American importer. The exporter requires the importer to obtain a letter of credit. When the bank accepts the draft the exporter discounts the 90 day note at a 6% discount. What is the exporter's true effective annual financing cost?

A) 6.00%

B) 6.18%

C) 6.32%

D) 6.24%

E) 6.45%

31. A Chinese exporter sells $75,000 of toys to a French importer. The Chinese exporter requires the French importer to obtain a letter of credit. When the bank accepts the draft the exporter discounts the 60 day note at a 3.5% discount. What is the exporter's true effective annual financing cost?

A) 3.62%

B) 3.57%

C) 3.35%

D) 3.78%

E) 3.97%

32. If a $10,000 par T-Bill has a 4.5% discount quote and a 180 day maturity, what is the price of the T-Bill?

. A) $9,550

. B) $9,525

. C) $9,775

. D) $9,675


31. A 90 day T-Bill is selling for $9,915. The par is $10,000. The effective annual return on the T- Bill is (watch your rounding)

A) 4.09%

B) 3.48%

C) 3.47%

D) 3.52%

E) 3.55%

32. Suppose that $10 million face value commercial paper with a 270 day maturity is selling for $9.65 million. What is the BEY on the paper?

A) 3.627%

B) 4.903%

C) 4.836%

D) 4.934%

E) None of the above

35. A $5 million jumbo CD is paying a quoted 4.25% interest rate on 120 day maturity CDs. How much money could you withdraw at maturity if you invest in the CD?

A) $5,000,000

B) $5,069,863

C) $4,929,167

D) $5,212,500

E) $5,070,833

36. From 1990 to 2004 which one of the following money market securities actually declined in terms of dollar amount outstanding?


. B) Treasurybills

. C) Federal funds and repos

. D) Negotiable CDs

. E) Banker's Acceptances

36. A 120 day maturity money market security has a bond equivalent yield of 4.25%. The security's EAR is

. A) 4.44%

. B) 4.28%

. C) 4.93%

. D) 4.31%


37. In a Treasury auction, preferential bidding status is granted to

. A) Competitive bidders

. B) Noncompetitivebidders

. C) Shortsalecommittedbidders

. D) Commercial bank bidders

. E) No group of bidders

38. If your firm enters into an overnight reverse repurchase agreement your firm is

. A) Borrowing fed funds temporarily

. B) Selling a security now while agreeing to buy it back tomorrow

. C) Giving an unsecured loan to the counterparty

. D) Procuringabanker'sacceptance


39. Eurodollar CDs would include

. A) CDs denominated in Euros

. B) Dollar investments by European entities in the U.S.

. C) Dollars deposited in Caribbean banks

D) Dollars deposited in Europe

E) Both C & D

Chapter 6 Bond Markets True/False Questions

11. A Treasury STRIP is sometimes referred to as a TIPS.

12. A callable bond is one where the issuer is required to retire a certain amount of the outstanding bonds each year to ensure that all the bond principle is paid by final maturity.

13. Of the three major sectors of bond issuers, corporations have the greatest dollar value of bonds outstanding.

14. “On the run” Treasury notes and bonds are newly issued securities and “off the run” Treasuries are securities that have been previously issued.

15. Bonds that give the bondholder the opportunity to purchase common stock at a prespecified price up to a specified date are called convertible bonds.

16. The dirty price plus accrued interest is called the clean price of the security.

17. Accrued interest owed to the bond seller increases as the next coupon payment date approaches

18. Revenue bonds are backed by the full revenue of the municipality.

V. An institutional investor that pays no taxes and is looking for a bond investment will probably not invest in municipal bonds.

VI. An unsecured bond that has no specific collateral other than the general creditworthiness of the issuing firm is called a debenture.

VII. With TIPS, the security's coupon rate is changed every six months by the inflation rate as measured by the CPI.

VIII. Bond ratings use a classification system to give investors an idea of the amount of interest rate risk associated with the bond issue.

IX. Bonds rated below Baa by Moody's or BBB by S&P are junk bonds.

X. Euro bonds are bonds denominated in the issuer's home currency, but are issued outside their home country.

XI. Callable bonds have lower required yields than similar convertible bonds, ceteris paribus.


. The largest component of bond market instruments outstanding in 2004 was comprised of

A) T-Bills

B) T-Bonds

C) Municipalbonds

D) Corporate bonds


. A T-Bond with a $1000 par is quoted at 98:20 Bid, 98:24 Ask. The clean price for you to buy this bond is

A) $986.25

B) $987.50

C) $982.00

D) $982.40


. The quoted ask yield on a 15 year $1000 par T-Bond with a 6% semiannual payment coupon and a price quote of 104:12 is

. A) 6.00%

. B) 5.60%

. C) 5.57%

. D) 2.81%

. E) 2.78%

. A Treasury security in which periodic coupon interest payments can be separated from each other and from the principal payment is called a

A) STRIP

B) T-Note

C) T-Bond

D) G.O. Bond

E) Revenue Bond

20. An 18 year T-Bond can be stripped into how many separate securities?

A) 18

B) 19

C) 36

D) 37

E) 38

17. A life insurer owes $75,000 in 6 years. To fund this outflow the insurer wishes to buy strips that mature in 6 years. The strips have a $3,000 face value per strip and pay a 7% EAR. How much must the insurer spend now to fully fund the outflow (to the nearest dollar)?

A) $10,000

B) $25,000

C) $49,634

D) $45,649

E) $41,877

The January 1, 2005 ask yield on a Treasury STRIP maturing in 8 years is 5.488%. If the face value is $1000, what should be the QUOTED cost of the strip today (use semiannual compounding)?

A) 60:00

B) 64:03

C) 64:63

D) 64:27

E) 64:12

Which one of the following bonds is likely to have the highest required rate of return, ceteris paribus?

. A) AAA rated noncallable corporate bond with a sinking fund.

. B) AA rated callable corporate bond with a sinking fund

. C) AAA rated callable corporate bond with a sinking fund

. D) High quality municipal bond

. E) AA rated callable corporate bond without a sinking fund

24. On June 1, 2000 you purchase a $10,000 par T-Note that matures in 5 years. The coupon rate is 6% and the price quote is 98:6. The last coupon payment was May 1, 2000 and the next is November 1, 2000 (184 days total). The accrued interest is

A) $75.35

B) $101.00

C) $50.54

D) $40.65

E) $35.67

21. On September 1, 2000 an investor purchases a $10,000 par T-Bond that matures in 15.67 years. The coupon rate is 6% and the investor buys the bond 60 days after the last coupon payment (120 days before the next). The ask yield is 7%. The dirty price of the bond is:

A) $9,045.63

B) $9,157.47

C) $9,145.63

D) $9,200.02

E) $9,000.10

Interest income from Treasury securities is _____, and interest income from municipal bonds is always _____.

. A) Exempt from federal taxes; exempt from all taxes

. B) Taxableatthestatelevelonly;exemptfromstatetaxesonly

. C) Taxableatfederallevelonly;exemptfromfederaltaxes

. D) Taxable at the state level; taxed at the federal level

. E) Totally tax exempt; exempt from state taxes

23. An investor is in the 28% federal tax bracket, pays an 8% state tax rate and 2% in local income taxes. For this investor a municipal bond paying 6% interest is equivalent to a corporate bond paying _____ interest

A) 15.79%

B) 8.33%

C) 9.38%

D) 9.68%

E) 8.47%

An investor is trying to decide between a muni paying 6% or an equivalent taxable corporate paying 7.5%. What is the minimum marginal tax rate the investor must have to

consider buying the municipal bond?

A) 80.00%

B) 20.00%

C) 25.00%

D) 66.67%

E) 33.33%

28. Standard revenue bonds are

. A) Backed by the full taxing authority of the municipality

. B) Collateralized by the earnings from a specific project

. C) Bonds backed by mortgages

. D) Backed by the U.S. Treasury

. E) Always offered with a best efforts offering

29. When an investment banker purchases an offering from a bond issuer and then resells it to the public this is known as a

. A) Rights offering

. B) Privateplacement

. C) Firmcommitment

. D) Best efforts

. E) Standby offering

. The entire contract between the bondholders and bond issuer is called the _____.

. A) Covenant

. B) Debenture

. C) Indenture

. D) Denture

. E) Monitor

. Which of the following is/are true about callable bonds?

I. II. III. IV.

A) B) C) D) E)

Must always be called at parWill normally be called after interest rates dropCan be called by either the bondholder or the bond issuer Have higher required returns than non-callable bonds

I and II onlyII and IV onlyII and IV onlyI, II and III onlyI, II, III and IV are true

Answer: B Page: 178-179 Level: Medium

32. SEC Rule 144 A does which of the following?

. A) Allows privately placed investments to be traded on a limited basis

. B) Allows bond issuers to call their bonds when desired

. C) Determines the limits of responsibility of bond covenants

. D) Requires that bonds traded on the NYSE bond market utilize the ABS system


33. Convertible bonds are

. A) Bonds that give the bondholder the right to purchase stock at a preset price without giving up the bond

. B) Bonds in which the issue matures (converts) a little each year

. C) Bonds collateralized with certain types of automobiles

. D) Bonds that allow the issuing company to require bondholders to purchase stock in exchange for the bond


35. A holder of Rainbow Funds convertible bonds with a $1,000 price can convert the bond to 20 shares of common stock. The stock is currently priced at $44/share. By what percent does the stock price have to rise to make conversion potentially attractive?

A) 10.00%

B) 14.73%

C) 11.11%

D) 13.64%

E) 10.69%

With respect to private placements of bonds, which of the following is correct?

Answer: DRationale: [(1000 / 20) / 44] - 1

I.

II.

III. IV.

A) B) C) D) E)

Issuers of privately placed bonds tend to be less well known than public bond issues

Interest rates on privately placed debt tend to be higher than for similar public issues

Purchasers of privately placed debt have assets of at least $100 million

Once bonds have been privately placed, the original buyers must hold the bonds until maturity

I onlyI and III onlyI, II and III only I, III and IV only I, II, III and IV

Level: Difficult

Answer: C Page: 173 Level: Medium37. Which of the following statements about Euro bonds is/are true?

I. II.

III. IV.

A) B) C) D) E)

The issuer chooses the currency of denomination

Spreads on firm commitment offers are lower for Euro bonds than for U.S. bonds

Euro bonds typically have denomination of $5,000 and $10,000 Euro bonds are bearer bonds

I and II onlyI, III and IV onlyII, III and IV onlyII and III onlyI, II, III and IV are true

Answer: B Page: 187-188 Level: Medium

78

40. Brady bonds are sometimes converted to _____ when the issuer's credit rating improves.

. A) Samurai bonds

. B) Zombiebonds

. C) Bulldogbonds

. D) Sovereign bonds

. E) Phoenix bonds

41. Bearer bonds are bonds

. A) With coupons attached that are redeemable by whoever has the bond

. B) Where the registered owner automatically receives bond payments when scheduled.

. C) In which the issue matures on a series of dates

. D) Issued in another currency other than the bond issuer's home currency

. E) Issued in a different country other than the bond issuer's home country

42. A T-Bond with a $1000 par is quoted at a bid of 110:12 and an ask of 110:15. If you

sell the bond you will receive

41. A) $1,103.75

42. B) $1,104.69

43. C) $1,101.20

44. D) $1,101.50

45. E) None of the above

41. A T-Bond with a $10,000 par is quoted at a bid of 96:10 and an ask of 96:14. If you bought the bond and then immediately sold it at the same quotes, how much money would you gain or lose (ignore commissions)?

A) $12.50

B) -$12.50

C) -$4.00

D) $4.00

E) $0.00

47. The quoted ask yield on a 12 year $1000 par T-Bond with a 5% coupon and a price quote of 106:22 is (use semiannual compounding)

A) 5.00%

B) 4.32%

C) 4.36%

D) 2.16%

E) 2.18%

An investor buys a $10,000 par, 3% coupon TIPS security with 2 years to maturity. If inflation every six months over the investor's holding period is 2%, what is the final payment the TIPS investor will receive?

A) $10,150.00

B) $10,344.15

C) $10,745.68

D) $10,824.32

E) $10,986.69

A bond investor has a 99% chance of receiving all of her promised payments on a particular bond issue in the first year of holding the bond, but only a 97% chance in the second year and beyond. What is the cumulative default probability over the first three years she holds the bond?

A) 6.85%

B) 7.00%

C) 9.00%

D) 7.32%

E) 7.55%

You purchase a $1000 par convertible bond that can be converted into 142 shares of stock. The stock is currently priced at $5.42. What percentage price increase in the stock is needed to make conversion worthwhile?

A) 15.5%

B) 29.9%

C) 18.2%

D) 23.7%

E) 19.8%

An investor buys a corporate callable bond at par that has a 6 year maturity. The bond is called after three years at a call price of $1045.12. You reinvested your money for the remaining three years in the same risk level of investment. Which one of the following is true?

I. II. III. IV.

A) B) C) D) E)

Over the full six years you earned less than the yield rate you were promised when you originally purchased the bond.

At the end of the first three years, interest rates were probably higher than when you bought the bond.

Over the full six years you earned more than the yield rate you were promised when you originally purchased the bond.

You were able to reinvest the coupons at a higher rate of interest in the last three years than the reinvestment rate you earned in the first three years.

I onlyIII onlyI and II only III and IV only II and IV only

Page: 177

Level: Medium

Answer: A Page: 178-179 Level: Medium

81

Chapter 18 Pension Funds True/False Questions

19. Of the different types of defined benefit plans, plans using the final pay method will usually produce the biggest retirement benefit to employees.

20. A Keogh plan is designed for self-employed individuals.

21. Pension plans administered by the federal government are called insured pension plans.

22. Insured pension plans are backed by a percentage of the sponsor's assets but do not have separate asset backing.

23. The largest amount of private pension fund assets are held by uninsured private pension funds.

24. Noninsured pension plans generally invest in riskier assets than insured pension plans.

25. If you believe that taxes and are going to go up and you will likely have to pay a high tax rate when you retire, you will probably be better off with a Roth IRA than with a traditional IRA.

26. If you are terminated before you are fully vested in an employer sponsored plan you may not get to keep previous contributions to your pension made by your employer.

27. In a defined benefit plan the retirement benefit will vary according to rates of return on pension fund reserves.

28. In terms of assets managed and numbers of plans, defined contribution plans are becoming more predominant and defined benefit plans are declining.


11. A pension plan has promised to payout $15 million per year over the next 10 years to its employees. Actuaries estimate the rate of return on the fund's assets will be 5%. What amount of pension fund reserves (to the nearest dollar) are needed for the plan to be fully funded?

. A) $115,826,024

. B) $150,000,000

. C) $125,657,890

. D) $111,458,231


12. Private pension funds are funds administered by

18. A) The Federal government

19. B) State and local governments

20. C) Insurancecompanies

21. D) Banks and mutual funds

22. E) Both C and D

22. In general terms, which one of the following plan types is the riskiest for an employee?

. A) Defined contribution plan invested in fixed income securities

. B) Defined contribution plan invested in equities

. C) Final pay defined benefit plan

. D) Career average defined benefit plan

. E) Overfunded defined benefit plan

23. Over the last 10 years defined contribution plans have grown faster than defined benefit plans in which of the following areas?

I. II. III.

A) B) C) D) E)

Fund assetsNumber of fundsNumber of plan participants

I onlyI and II only II and III only I, II and IIIII only

Answer: D Page: 515-516 Level: Medium

15. Congratulations, you have just been employed! You now have a choice between a flat benefit at retirement equal to $3,000 times your years of service, or a career average formula of 3% of your average salary times your years of service. You expect to work 35 years. At what average salary would you be indifferent between the two alternatives?

A) $103,000

B) $102,500

C) $101,850

D) $105,000

E) $100,000

16. At your new job you estimate that your average salary over your working years will be $75,000 per year. How many more

years would you have to work to receive as much benefit from a flat benefit of $2,250 times years of service as you would receive from 4% of your average salary times years of service?

24. A) 1.33 times as many years

25. B) 0.75 times as many years

26. C) 1.04 times as many years

27. D) 2.40 times as many years

28. E) 1.50 times as many years

30. An employee who has worked for his firm for 30 years can retire right now and receive a constant annual benefit of $45,000. He has a final pay plan that pays his average salary over his final 5 years times 3% times years of service. He has decided he will keep working five more years only if by doing so, his retirement benefits will grow at 6% per year. How much would his expected average salary (to the nearest dollar) have to be over the next 5 years to keep him working?

A) $60,220

B) $57,353

C) $50,010

D) $66,911

E) $53,147

The main advantage of a profit sharing Keogh plan over a money sharing Keogh plan is that profit sharing plans

. A) Are eligible for PBGC insurance and money sharing plans are not

. B) Have higher maximum contributions than money sharing plans

. C) Can have contributions that vary from year to year with profits, while money sharing plan contributions are fixed

. D) Both A and B are advantages


.

. A defined benefit pension plan has expected payouts of $15 million per year over the next 25 years. The fund can be expected to earn an average of 6% on its assets. It currently has reserves of $160 million. The fund is __________ by about ___________ million.

. A) Underfunded; $31.75

. B) Underfunded;$215

. C) Overfunded;$31.75

. D) Overfunded; $215

. Under ERISA, pension fund managers are required to invest fund assets as if wisely as if they were investing their own money. This requirement is called the

A) Owlrule

B) V esting requirement

C) 403(b) requirement

D) Prudent person rule

E) Funding rule

. A ___________ plan does not require the employer to guarantee retirement benefits nor to maintain a minimum level of pension reserves

34. A) Defined benefit

35. B) Insured pension

36. C) Corporatepension

37. D) Uninsured pension

38. E) Defined contribution

43. Which of the following statements about 401(k) plans are true?

. They are defined benefit plans

. They allow employer and employee contributions

. Earnings accrue tax free during the employee's working years

. They allow employee discretion in asset allocation

. They always have minimum guaranteed rates of return

. A) I, IV and V only

. B) II, II and V only

. C) II and III only

. D) II, III and IV only

. E) All are true

44. An employee contributes 8% of his salary to their 401(k) plan and the employer matches with 3%. The employee earns $60,000 and is in a 28% tax bracket. If the employee also invests the tax savings generated by his contribution and earns 10% on all funds invested, what is his one year rate of return relative to the amount of money he invested?

A) 10.00%

B) 51.25%

C) 90.07%

D) 42.22%

E) 29.52%

Employee plus employer contributions to a 401(k) are $15,000 per year. Equity funds are earning 15%, bond funds 8% and money market funds 6%. The employee wants to retire as soon as possible with $1 million in retirement assets. How much more quickly can he retire if he puts all his money in equity than if he puts 1/3 in each?

. A) 3.3 years

. B) 9.7 years

. C) 4.6 years

. D) 2.4 years

. E) 12.2 years

25. Which of the following statements are true about a traditional IRA?

I.

II. III. IV. V.

per

Subject to an income limit, in 2005 a single person may contribute up to $4000 year of pretax income to an IRAAll withdrawals are tax freeEarnings on the IRA account are not taxed until withdrawn

You must begin withdrawals at age 59 1⁄2 Withdrawal(s) can be a lump sum or installments

46. A) I, II, IV

47. B) I, II, IV and V

48. C) I, III and V

49. D) II, IV and V

50. E) III, IV and V

Answer: C Page: 521 Level: Medium

48. Which of the following are true about a Roth IRA?

Contributions are tax deductible

Withdrawals after retirement are not taxed

You must begin withdrawals at age 70 1⁄2

Employers match contributions

They are only available to individuals earning less than $50,000, or households earning less than $90,000

A) I, II and IV

B) II, IV and V

C) I, III and IV

D) II only

E) V only

49. A retirement account specifically designed for self-employed persons is a

A) Roth IRA

B) TraditionalIRA

C) Keogh

D) Penny Benny

E) Public Pension plan

45. Most public pension funds are

A) Overfunded

B) Underfunded

C) Fullyfunded

D) Defined contribution

E) Keogh plans

46. Under ERISA the maximum time period allowed for vesting is ____ years.

A) 3

B) 5

C) 8

D) 10

E) 15

47. ERISA established all but which one of the following?

1. A) Prudent man rule

2. B) Maximumvestingtimes

3. C) Minimumfundingrequirements

4. D) Insurance for pension plan participants

5. E) Minimum payouts for defined contribution plans

48. The PBGC

1. A) Insures participants of defined benefit plans if plan funds are insufficient to meet contractual pension obligations

2. B) Insures participants of defined contribution plans if investment returns are insufficient to meet expected pension obligations

3. C) Regulates day to day pension fund operations

4. D) Both A and C are correct

5. E) A, B and C are correct

258

51. A defined benefit pension plan has expected payouts of $20 million per year for 10 years and then $35 million over the following 20 years. The fund can be expected to earn an average of 4.75% on its assets. It currently has reserves of $320 million. The plan is underfunded by about ___________ million.

A) $900

B) $116

C) $580

D) $224

An employee contributes 5% of her salary to her 401(k) plan and her employer contributes another $1,900. The employee earns $75,000 and is in a 28% tax bracket. If the employee does not invest the tax savings generated by her contribution and earns 9% on all funds invested, what is her one year rate of return relative to the amount of money she invested?

A) 9.00%

B) 41.25%

C) 64.23%

D) 32.74%

E) 19.67%

34. Employee plus employer contributions to a 401(k) are $14,000

per year. Equity funds are earning 11%, bond funds 6% and money market funds 4%. The employee will retire in 30 years. How much money will he have if puts 60% of his money in equities, 30% in bond funds and the rest in money market funds?

A) $1,456,960

B) $1,838,526

C) $1,654,320

D) $1,978,565

E) $1,248,550

259

54. You want to have $2,000,000 when you retire and you are in a defined contribution plan. You can earn 8% per year on the money invested and you will retire in 30 years. Your employer also contributes to your plan. The employer will contribute 6% of what you put into the plan each year. How much do you have to contribute per year to meet your goal? A) $18,435.43

B) $17,654.87

C) $16,879.32

D) $16,655.53

E) $15,999.44

Vesting refers to

A) How long until an employee owns any employer contributions to the employee's pension plan

B) How long until an employee can transfer any of their own contributions to a new plan if they switch jobs

C) Eligibilityrequirementstoretireearly

D) Restrictions on asset allocations with in a defined contribution plan

E) The extent to which an employee materially participated in a given business in a given year

55. IRAs are

A) Self directed investment vehicles designed to provide supplemental retirement income

B) Corporate retirement plans for self employed individuals and small businesses

C) Specific classes of investments such as equities or bonds issued by certain corporations

D) Investment vehicles created by ERISA

1. Countries where the link between public pension benefits and amounts paid in are weak include

A) Sweden

B) Italy

C) GreatBritain

D) Chile

E) France

2. In 2004, PBGC had a

A) Small deficit of $1.5 billion

B) Record surplus of $9.5 billion

C) Record deficit of $23.5 billion

D) Small surplus of $2.25 billion

3. Social Security is projected to begin running deficits in the year

A) 2010

B) 2018

C) 2028

D) 2042

E) 2052

Chapter 17 True/False Questions

29. Over the last ten years the number of banks has been declining, but the number of mutual funds has been growing.

30. Net new cash flows to money market mutual funds vary inversely with interest rate spreads on money market funds and savings deposits.

31. Most of the recent growth of long term mutual funds has occurred because of the bull market of the 1990s.

32. As of 2001 total U.S. mutual fund assets exceeded U.S. insurer's assets but were less than commercial bank total assets.

33. The shares of a closed end fund with market value of assets of $200 million and 2 million shares outstanding will always trade at a market value of $100 per share.

34. If invest $10,000 in a mutual fund with a NAV of $50 per share and a 5.5% load you will receive less than 200 shares in the fund.

XII. The typical household that owns mutual funds owns no more than 3 mutual funds.

XIII. Each fund's prospectus is required to disclose the fund's beta risk and total risk.

XIV. The market value of a fund's net assets divided by the number of mutual fund shares outstanding is called the NAV of the fund.

XV. Open end fund shares often trade at a discount or premium relative to NAV.

XVI. Load funds typically provide investors with higher rates of return and offer more services such as check writing, transfers between funds, etc.

XVII. A 12 b-1 fee is an implicit load charge.

XVIII. Of long term equity funds, municipal funds and growth and income funds are the largest categories.

XIX. A drop in interest rates will usually result in an increase in the number of money market mutual fund shares.

15. The Federal Mutual Fund Commission (FMFC) is the primary regulator of the mutual fund industry.


. Open end mutual funds guarantee

A) Investors a minimum rate of return

B) Investors a minimum NA V

C) To redeem investor's shares upon demand at current NAV

D) To earn the rate promised in the prospectus


. As compared to purchasing a stock, a no load mutual fund investor will usually get

A) Commissionless reinvestment opportunities

B) Better diversification

C) Free switching between funds within the same family

D) Lower commissions costs

E) All of the above

. Money market mutual funds invest primarily in

A) Foreign currencies

B) Realestate

C) Longtermbonds

D) IPOs


. In terms of asset size, rank the top three U.S. financial intermediaries from largest to smallest.

I. II. III. IV. A) B) C) D) E)

Commercial banksState and local government pension funds Private pension fundsMutual funds

I, IV, III I, III, II IV, I, II I, II, IV II, III, I

Answer: A Page: 488 Level: Medium

23. As the economy weakens, one would expect investment in _________ funds to increase and investment in __________ funds to decrease, ceteris paribus.

. A) Money market mutual; equity

. B) Equity;bond

. C) Municipal bond; money market mutual

. D) Corporate bond; Municipal bond

. E) Long term; short term

24. Hybrid mutual funds normally invest significant amounts in

. A) Common stock

. B) Commercialpaper

. C) Longtermbonds

. D) Treasury bills

. E) Both A) and C)

25. During 2001 investment in money market mutual funds _____ and the investment in long term mutual funds ____.

. A) Decreased; decreased

. B) Increased;increased

. C) Increased;decreased

. D) Decreased; increased

. E) Stayed the same; increased

26. Money market mutual funds (MMMFs) have caused disintermediation at banks. This is because MMMFs

. A) Allow investors access to higher interest rate money market securities with a relatively small capital investment

. B) Are less risky than bank deposits

. C) Arenowfederallyinsured,likebankdeposits

. D) Offer guaranteed rates of return


24. The 'profile' of the typical mutual fund owners implies that he or she is a:

24. Long term investor

25. Generation Xer

III. Employed

IV. College graduate

29. A) III only

30. B) I and III only

31. C) II, III and IV only

32. D) I, III and IV only

33. E) I, II, III and IV

Answer: D Page: 490-491 Level: Easy

31. By type of fund, there are more _____ funds than any other.

. A) Equity

. B) Bond

. C) Taxable money market

. D) Tax exempt money market

. E) Hybrid

32. The largest proportion of long term mutual fund assets are held by _____ and the largest proportion of money market mutual fund assets are held by _____.

. A) Bank trusts and estates, the household sector

. B) The household sector, private pension funds

. C) The household sector, the household sector

. D) Private pension funds, nonfinancial corporate business

. E) Life insurance firms, funding corporations

33. The market value of a mutual fund's assets divided by the number of fund shares outstanding is equal to the

. A) Load charge

. B) NAV

. C) Expenseratio

. D) 12b-1 fee

. E) Management fee

28. Rank the following types of funds from most risky to least risky (variations exist but rank them generally)

I. II. III. IV. A) B) C) D) E)

GrowthGrowth and income Money market mutual fund Bond fund

II, I, III, IV I, II, IV, III I, IV, II, III II, III, I, IV III, IV, II, I

Answer: B Page: 493 Level: Easy

. You have $5,000 to invest and you are considering investing in Fund A. The fund charges a 5.5% load and an annual expense fee of 1.25% of the average asset value over the year. You believe the fund's rate of return will be 10% per year. If you make the investment what should your investment be worth in one year?

. A) $5,135.48

. B) $5,197.50

. C) $5,500.00

. D) $5,431.25

. E) $5,162.50

. A fund has a NAV of $30 per share but the shares are currently selling for $32. This fund must be

A) An open ended fund

B) A closed end fund

C) Abalancedfund

D) An aggressive growth fund

E) A money market mutual fund

39. An open end mutual fund owns 1000 share of Krispy Kreme priced at $40. The fund also owns 2000 shares of Ben & Jerry's priced at $55, and 1000 shares of Pepsi priced at $45. The fund itself has 3000 of its own shares outstanding. What is the NAV of a fund's share?

A) $65

B) $55

C) $45

D) $35

E) $25

40. You have $8,000 to invest in a mutual fund with a NAV = $45. You choose a fund with a 5.5% load, a 1% management fee and a 0.25% 12b-1 fee. Assume that the management and 12b-1 fees are charged on year end assets. The gross annual return on the fund's shares was 12%. What was your net annual rate of return to the nearest basis point?

A) 3.26%

B) 6.50%

C) 6.25%

D) 4.52%

E) 4.02%

41. Investors pay load changes to receive

. A) Higher returns on their investments

. B) Additionalservicesfromfunds

. C) Voting shares of stock

. D) Advice on which fund to buy

. E) 12B-1 remunerations

42. A money market mutual fund's total assets increase from $100 to $105 when the fund has 100 shares outstanding. Which of the following will happen?

. A) The fund's NAV will rise from $100 to $105

. B) The fund's NAV per share will rise from $1 to $1.05

. C) The fund will issue a total of 5 new shares

. D) The fund's NAV will fall 5%

. E) The fund will close to new investors

35. The primary regulator of mutual funds is the

A) NASD

B) CFTC

C) NYSE

D) SEC

E) NSMIA

Actual Test 3 Test Bank

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