1.

Investment bankers perform which services for corporate issuers:

A) evaluate type of security to issue and how to issue it.
B) aid in pricing and selling the new issue.
C) engage in market stabilization.
D) all of the above.
E) none of the above.

Ans: D
2. A group of investment bankers who pool their efforts to underwrite a security are
known as a/an:
A) amalgamate.
B) conglomerate.
C) greenshoe group.
D) klatch.
E) syndicate.

3.

4.

Ans: E
The first public equity issue that is made by a company is referred to as:
A) a rights issue.
B) a general cash offer.
C) an initial public offering.
D) an seasoned issue.
Ans: C
In a best efforts offering the investment banker makes their money primarily by:
A) earning the spread between the buying and offering price.
B) earning a commission on each share sold.
C) earning the discount between the buying and offering price.
D) charging a flat fee for all services.
E) none of the above.

Ans: B
5. A provision that allows members of the underwriting group to purchase
additional shares at the offering price is a/an:
A) aftermarket provision.
B) green shoe provision.
C) privileged subscription provision.
D) red herring provision.

E)

rights offer provision.

Ans: B
6. The special contractual nature giving the owner the right to buy or sell an asset at
a fixed price on or before a given date is the basis of:
A) a common stock.
B) a capital investment.
C) a futures.
D) an option.
E) None of the above.

7.

8.

9.

Ans: D
A call gives the owner the right:
A) and the obligation to buy an asset at a given price.
B) and the obligation to sell an asset at a given price.
C) but not the obligation to buy an asset at a given price.
D) but not the obligation to sell an asset at a given price.
E) none of the above.
Ans: C
Which of the following statements is true?
A) Call options are issued by corporations and bought by investors.
B) Call options are issued by investors and bought by corporations.
C) Call options are issued by investors and bought by investors.
D) Put options are issued by corporations and bought by investors.
E) Both b & d.
Ans: C
An in-the-money put option is one that:
A) has an exercise price greater than the underlying stock price.
B) has an exercise price less than the underlying stock price.
C) has an exercise price equal to the underlying stock price.
D) should not be exercised at expiration.
E) should not be exercised at any time.

Ans: A
10. The buyer of a call option has the choice to exercise, but the writer of the call
option has:

A)
B)
C)
D)
E)

the choice to offset with a put option.

the obligation to deliver the shares at exercise.
the choice to deliver shares or take a cash payoff.
the obligation to call the shares in.
the choice of exercising the call or not.

Ans: B
11. The put option allows:
A) the holder to sell shares if desired and requires the put seller to buy the
shares at a fixed price.
B) the put seller to sell shares and requires the holder to buy shares at a fixed
price.
C) the holder to buy shares if desired and requires the put seller to sell the
shares at a fixed price.
D) the put seller to sell shares and allows the holder to sell shares at a fixed
price.
E) none of the above.
Ans: A
12. Suppose a stock exists with a price of $42, and a call option on the stock exists
with an exercise price of $36. What is the approximate minimum value of the call
option?
A) $36.
B) $42.
C) $ 0.
D) $ 6.
E) Cannot determine without additional information.
Ans: D
13. Suppose a stock exists with a price of $17, and a put option on the stock exists
with an exercise price of $32. What is the approximate minimum value of the put
option?
A) $15.
B) $32.
C) $17.
D) $ 0.
E) Cannot determine without additional information.

Ans: A
14. The higher the exercise price:
A) the higher the call price.
B) The lower the call price.
C) Has no effect on call price.
D) The higher the stock price.
E) The lower the stock price.
Ans: B
15. If a corporate security can be exchanged for a fixed number of shares of stock,
the security is said to be:
A) callable.
B) convertible.
C) protected.
D) putable.
E) none of the above.
Ans: B
16. The holder of a $1,000 face value bond has the right to exchange the bond
anytime before maturity for shares of stock priced at $50 per share. The $50 is called
the:
A) conversion price.
B) stated price.
C) exercise price.
D) striking price.
E) more than one of the above.
Ans: A
17. The holder of a $1,000 face value bond can exchange the bond any time for 25
shares of stock. The conversion ratio is:
A) 40
B) 25
C) 100
D) Depends on the current market price of the bond.
E) none of the above.
Ans: B
18. A derivative is a financial instrument whose value is determined by:

A)
B)
C)
D)
E)

regulatory body such as the FTC.

a primitive or underlying asset.
hedging a risk
hedging a speculation.
none of the above.

Ans: B
19. Derivatives can be used to either hedge or speculate. These actions:
A) increase risk in both cases.
B) decrease risk in both cases.
C) spread or minimize risk in both cases.
D) offsets risk by hedging and increase risk by speculating.
E) offset risks by speculating and increase risk by hedging.
Ans: D
20. A forward contract is described by:
A) agreeing today to buy a product at a later date at a price to be set in the
future.
B) agreeing today to buy a product today at its current price.
C) agreeing today to buy a product at a later date at a price set today.
D) agreeing today to buy a product if and only if its price rises above the
exercise price today at its current price
E) none of the above.
Ans: C
21. The seller of a forward contract:
A) agrees to receive a product at a later date for a pre-specified price.
B) agrees to receive a product at a later date at the price on that later date.
C) agrees to part with a product at a later date for a pre-specified price.
D) agrees to give up a product at a later date for a price set on that later date.
E) either a or c.
Ans: C
22. In a merger or acquisition, a firm should be acquired if:
A) it generates a positive net present value to the shareholders of an acquiring
firm.
B) it is a firm in the same line of business, in which the acquirer has expertise.
C) it is a firm in a totally different line of business which will diversity the

firm.
D) it pays a large dividend which will provide cash pass through to the
acquiror.
E) none of the above.
Ans: A
23. A reason for acquisitions is synergy. Synergy includes:
A) revenue enhancements.
B) cost reductions.
C) lower taxes.
D) all of these.
E) none of the above.
Ans: D
24. Firm A merges with Firm B. The difference between the value of the combined
firm and the values of the separate firms is known as:
A) pooling of interest.
B) consolidation.
C) goodwill.
D) synergy.
E) all of the above.
Ans: D
25. If the direct rate for Deutschemarks (DM) is $.56 and the direct rate for Canadian
dollars (C$) is $.70, what must the cross rate between C$ and DM be to prevent
triangular arbitrage?
A) C$1.25
B) C$ .80
C) C$1.30
D) C$ .39
E) a foreign exchange rate must be determined; there is no such thing as a
cross rate.
Ans: B
26. What kind of trade involves agreeing today on an exchange rate for settlement in
90 days?
A) Spot trade.
B) Futures trade.

C) Forward trade.
D) Triangle trade.
E) None of the above.
Ans: C
27. What kind of trade would involve settling a foreign exchange transaction today?
A) Spot trade.
B) Futures trade.
C) Forward trade.
D) Triangle trade.
E) None of the above.
Ans: A
28. Suppose it takes 6 francs to buy 1 U.S. dollar. The direct exchange rate is:
A) 6.00
B) 5.00
C) 0.20
D) 0.167
E) None of the above.
Ans: D
29. A bottle of Dom Perignon is selling for 550FF in Paris and the exchange rate is
$.167/FF. The champagne is selling for $95 on average in the U.S. exclusive of
transportation cost. The price in the U.S. is:
A) priced just right.
B) is $3.15 undervalued.
C) is $3.15 overvalued.
D) the Law of One Price does not hold for special commodities like
champagne.
E) None of the above.
Ans: C
30. Firm A and Firm B merge to form firm AB. This is an example of:
A) a tender offer.
B) an acquisition of assets.
C) an acquisition of stock.
D) a consolidation.
E) both b and c. Ans: D