25. ABC Mutual Fund has an investment objective is to provide long-term growth o

Question

25. ABC Mutual Fund has an investment objective is to provide long-term growth of capital by investing primarily in common stocks of issuers located in the U.S. with a record of above-average long-term growth. ABC Mutual Fund would be considered:

a. An Emerging Markets Fund b. An Income Fund c. An S&P ETF d. A Growth Fund

26. Which of the following is not a true statement?

a. An issuer can expect to receive the full value of its offering in a firm commitment underwriting. b. An issuer can directly receive value from a rapid rise in its stock price in the secondary market following an offering. c. In a Dutch Auction offering, successful bidders buy their allotted shares at the lowest quoted price even if they first offered a higher price. d. A pension fund is one type of financial intermediary.

27. Which of the following is not considered a potential financial ethics problem area?

a. Brokering a building owned by a company in which you have a 50% ownership interest without disclosing that to the prospective purchaser. b. Giving prospective customers a list naming your top 5 accounts (without their permission) and how much money your firm manages for each. c. Telling prospective customers that if they give you $10,000 and refer 3 customers that will invest each $10,000, then you will let them invest in a currency arbitrage opportunity that will pay them a return of 10% per year regardless of market performance. d. Pricing an IPO so that demand for its shares will be at least equal to the amount of shares that will be issued.

28. A strategy of diversification would be most effectively used against which of the following risks?

a. Inflation b. Interest Rate Change c. Market Liquidity d. Corporate Bankruptcy

29. Preferred Stock generally has the following characteristics, except:

a. Fixed dividend payment b. An unconditional obligation to pay a dividend c. No voting rights d. Dividends are paid from earnings.

30. A beta coefficient for a risky stock is:

a. Less than 1.0, but greater than 0 b. Equal to 1.0 c. Greater than 1.0 d. Negative

31. An investor may reduce risk by

I. Selecting low beta stocks

II. Constructing a diversified portfolio

III. Writing a covered call

a. I and II b. I and III c. II and III d. Only III

32. A company’s performance is best measured by:

a. Liquidity ratios b. Leverage ratios c. Profitability ratios d. Turnover ratios

33. The cost of equity is generally:

I. Less than the cost of debt

II. Greater than the cost of debt

III. Depends on the perceived risk of the company

IV. Determined by the company’s current ratio

a. I and III b. I and IV c. II and III d. II and IV

34. The yield to maturity for a bond assumes:

a. The bond will be called b. The bond will not be called c. The coupon will increase if market interest rates go up d. The coupon will decrease if market interest rates go down

35. Which of the following is not a source of systematic risk?

a. A change in the inflation rate b. A change in the value of the British Pound c. A change in a firm’s financing strategy d. A change in the S&P 500 Index

Explanation / Answer

Qn 25 . Option (a)

Definition of An Emerging Market Funds states that A fund that invests majority of its assets in developing countries with above average long term growth. In this case ABC mutual fund intends to invest in shares issued by group of companies in US with above average longterm growth rate. At micro level we can conclude that it is an emerging market funds.

Qn 26. Conclusion: Option (d) is correct answer.

Option (a) is true as under firm commitment underwriting underwriter commits to purchase all the securities of the issuer and issuer gets full valuee of its money.

Option (b) is true as in secondary market investor procures security or assets directly from other investor and not from issuing companies themselves and hence if there is any rapid increase in the value of share,profit margin directly goes into the kitty of seller.

Option (c) is true as under dutch offering prices are fixed after taking all the bids and then finalizing the price at which the securities can be sold.In this

Option (d) is false as financial intermediary are instituitions such as Banks,Invetment banks that accumulate funds to give loans etc. Pension fund is give pension to emplyees afterr certain period of time,accumulated from the contribution of employer,employees or both.

Qn 27. Option (d) is the correct answer.In this particular act no exceptional promises are done after concealing certain facts. Further, pricing of shares can be done in order ensure issued shares can be fully absorbed by the market demand. Under dutch offering price is determined after considering all bids. Final price can be lower than the highest bid this ensures that all issued shares are absorbed by the market.

Qn 28. Option (c). As a diversified portfolio acts as sheild for inverstor and he can leverage by investing in cash rich securities and at the same time endure benefit of dividends by investing in long term securities.In all other options benefits of diversification are limited.

Qn 29. Option (b) is correct. As per the definition of preferred stock, investor is not entitled to voting rights but investor is entitled to fixed dividend and dividends re paid out of the earnings.

Qn 30. Option (C). Beta coefficient of greater than "1" is for risky stock. Beta cofficient of 1 means stock is as volatile as market and beta coefficient of less than one means risk on the stock is low.

Qn 31. Option (b) - I & III. Every porfolio can be divided into diversifiable and undiversifiable. We can reduce risk in Diversifiable scenario but not in undiveresifiable. However Risk can be reduced substantially in case of Covered call and low beta stocks.

Qn 32. Option (c): Profitability ratios are best indicator of company's performance. These are used to assess company's ability to generate profit. Liquidity ratio are used to assess the company's ability to pay off short term liabilities.Leverage ratio assess company's ability to meet financial obligation in the form of loan.Turnover ratio measures how much amount invested in the assets,raised through various sources.

Conclusion: As Profitability is true indicator of performance of any organization, profitability ratio are true indicator of company's performance.

Qn 33. Option (a). Cost of equity refers to dividend etc which is generally lower than cost of debt ie; interest on loan etc.Further, Current ratio refers to Current assets/Current liabilities-cost of equity does not form part of this formula.

Qn 34.Option (b).Definition for Yield to maturity-Yield to maturity is the total return on the bond if the bond is held until the end of its lifetime ie; the same is not called.

Qn 35. Option (c). Systematic risk is the risk that affects the entire market and not a particular company. A change in inflation rate, foreign exchange rate or Index impacts entire market and hence, are sources of systematic risk

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