Financial Markets and Banking Operations MCQs

Multiple Choice Questions 30 Pages

Savitribai Phule Pune University

Financial Management

Contributed by

Yogesh Singh

DNYANSAGAR INSTITUTE OF MANAGEMENT AND RESEARCH

Dr. Varsha Goyal www.dimr.edu.in

MCQs
Course Name: Financial Markets and Banking Operations
Course Code: 205 fin

Sr.
No.
Question
Answers
1
Financial intermediation is the process that the financial intermediaries
connect ________________ and _____________ by transferring funds from
one side to another.
A. Banks and account holders
B. Borrowers and lenders
C. Borrowers and securities firms
D. Investors and lender
ANSWER:
B
2
Which of the following does financial services industry consist of?
A. Telecommunication
B. Insurance
C. Fund Management
D Trusts
ANSWER:
A
3
Which one of the following is not a money market security?
A. Treasury bills
B. National savings certificate
C. Certificate of deposit.
D. Commercial papers.
ANSWER:
B
4
Which one of the following is not a money market security?
A. Treasury bills
B. National savings certificate
C. Certificate of deposit.
D. Commercial papers.
ANSWER:
B
5
Using futures contracts to transfer price risk is called:
A. Hedging
B. Speculating.
C. Diversifying.
D. Arbitrage
ANSWER:
A
6
The stock is
A. Small units of equal value called shares
B. Expressed in terms of money.
C. Expressed in terms of number of shares.
D. Fully paid p and partly paid up shares
ANSWER:
B

7
Equity shareholders rights are listed below: One of the rights is incorrect
A. Right to have first claim in the case of winding up of the company.
B. Right to vote at the general body meeting of the company
C. Right to share profits in the form of the dividends.
D. Right to receive a copy of the statutory report.
ANSWER:
A
8
In a limited company
ANSWER:
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A. The shareholders have to divide the debt of the company and pay.
B. The shareholders are not liable to pay the debt
C. The shareholders have to pay the debt to the extent of their shares in the
capital.
D. Common stock and preference shareholders have to pay the debt
C
9
Zero coupon bond shares its origin in
A. U.S security market.
B. Wall street.
C. Japan's security market
D. Dalal street.
ANSWER:
A

10
Capital Index bonds are linked with
A. BSE Sensex
B. NSE Nifty
C. Consumer price index
D. BSE-100
ANSWER:
C

11
The aggressive investor buys more of -------
A. Money Market Instruments
B. Gold
C. Equity shares
D. Options and Futures
ANSWER:
C

12
Financial intermediaries differ from other businesses in that both their assets
and their liabilities are mostly
A. Illiquid
B. Owned by government
C. Real
D. Financial
ANSWER:
D

13
Sweat Equity is ---------------
A. A New class of equity shares
B. Issued to the employees and directors
C. Issued to the investor also
D. Issued out of the class of equity shares already issued by the company.
ANSWER:
D
14
Financial assets
A. Contribute to the country’s productive capacity both directly and
indirectly
B. Do not contribute to the country’s productive capacity both directly and
indirectly
C. Directly contribute to the country’s productive capacity.
D. Indirectly contribute to the country’s productive capacity.
ANSWER:
D

15
Mutual fund can make investment
A. In any company listed or unlisted
B. In privately placed securities of associated company.
C. Up to 40% of the listed or unlisted securities of group companies.
D. Should not exceed 10% of the funds in securities of a single company.
ANSWER:
D
16
14. Registrar to the issue
A. Helps in the appointment of lead managers
B. Drafts the prospectus.
ANSWER:
C
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C. Recommends the basis of allotment
D. Directs the various agencies involved in the issue.
17
Primary and secondary markets
A. Compete with each other.
B. Complement each other.
C. Function independently
D. Control each other.
ANSWER:
B

18
Stock exchange
A. Helps in the fixation stock price
B. Ensure safe and fair dealings.
C. Induces good performance by the company.
D. All the above.
ANSWER:
D

19
The broker has bought 10,000 ABC shares at Rs.200 and sold 8,000 shares at
Rs.190 on the same day the margin he has to pay is
A. Gross exposure margin
B. Special margin
C. Mark to market margin
D. Concentration ratio margin
ANSWER:
C

20
Which one of the following statements regarding orders is false?
A. A market order is simply an order to buy or sell a stock immediately at the
prevailing market price
B. A limit sell order is where investors specify prices at which they are
willing to sell a security.
C. If stock ABC is selling at $50, a limit-buy order may instruct the broker to
buy the stock if and when the share price falls below $45.
D. None of the above.
ANSWER:
D

21
The use of the Internet to trade and underwrite securities
A. Is illegal under SEC regulations
B. Is regulated by the New York Stock Exchange.
C. Decreases underwriting costs for a new security issue.
D. Increases underwriting costs for a new security issue.
ANSWER:
C

22
Sell Reliance X Company shares at Rs. 60/- . This order is a
A. Best rate order
B. Limit Order
C. Discretionary order
D. Stop Loss order
ANSWER:
B

23
The Bombay Stock Exchange Ltd was originally known as
A. The Native share and Stock Brokers Association
B. The Native share and stock brokers union
C. The Native Stock Brokers Association
D. The Native share and stock brokers association of India
ANSWER:
A

24
Shares for short transactions
A. Are usually borrowed from other brokers
B. Are typically shares held by the short seller's broker in street name?
C. Are borrowed from commercial banks.
D. B and C.
ANSWER:
B
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25
FII's are permitted
A. To invest in the listed companies only
B. To invest in the listed and unlisted companies only
C. Not to invest in the debentures
D. To invest in shares of listed, unlisted companies and debentures.
ANSWER:
D
26
One of the following factors leads the activity stock market
A. Money supply
B. Per capita income
C. Unemployment rate
D. Manufacturing and trade
ANSWER:
A
27
The share prices
A. Move either in declining trend or increasing trend.
B. May remain flat for a period of time.
C. The movements of the share prices form a straight line.
D. The increasing or decreasing move may be Zigzag.
ANSWER:
D
28
Investors invest more in stocks during their:
A. Early career period.
B. Mid-career level.
C. Retirement stage with huge money.
D. All the above-mentioned period
ANSWER:
A
29
The duration of a bond is a function of the bond's
A. coupon rate.
B. time to maturity
C. yield to maturity.
D. all of the above
ANSWER:
D

30
A firm has a higher asset turnover ratio than the industry average, which
implies
A. the firm is utilizing assets more efficiently than other firms in the
industry.
B. the firm is more likely to avoid insolvency in the short run than other
firms in the industry.
C. the firm is more profitable than other firms in the industry.
D. the firm has a higher P/E ratio than other firms in the industry.
ANSWER:
A
31
Hedge funds are ______ transparent than mutual funds because of ______
strict SEC regulation on hedge funds.
A. more; more
B. more; less
C. less; less
D. less; more
ANSWER:
C
32
Gross domestic product is a logical factor to analyse the economy in picking
up a stock because it indicates
A. Inflation or deflation
B. The market value of assets
C. The status of the economy
D. The condition of the stock market
ANSWER:
C
33
A statistic that measures how the returns of two risky assets move together is
ANSWER:
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A. Correlation
B. Standard deviation.
C. Covariance.
D. A and C.
D
34
Portfolio theory as described by Markowitz is most concerned with
A. The elimination of systematic risk.
B. The identification of unsystematic risk.
C. The effect of diversification on portfolio risk.
D. Active portfolio management to enhance returns
ANSWER:
C

35
Which statement about portfolio diversification is correct?
A. Proper diversification can reduce or eliminate systematic risk
B. The risk-reducing benefits of diversification do not occur meaningfully
until at least 50-60 individual securities have been purchased.
C. Because diversification reduces a portfolio's total risk, it necessarily
reduces the portfolio's expected return
D. Typically, as more securities are added to a portfolio, total risk would be
expected to decrease at a decreasing rate
ANSWER:
D

36
The standard deviation of a two-asset portfolio is a linear function of the
assets' weights when
A. The assets have a correlation coefficient less than zero
B. The assets have a correlation coefficient equal to zero.
C. The assets have a correlation coefficient greater than zero
D. The assets have a correlation coefficient equal to one.
ANSWER:
B

37
The presence of risk means that
A. More than one outcome is possible.
B. Investors will lose money.
C. The standard deviation of the payoff is larger than its expected value.
D. Final wealth will be greater than initial wealth.
ANSWER:
A

38
The exact indifference curves of different investors
A. Can be calculated precisely with the use of advanced calculus
B. Cannot be known with perfect certainty.
C. Although not known with perfect certainty, do allow the advisor to create
more suitable portfolios for the client
D. B and C.
ANSWER:
D

39
Given the capital allocation line, an investor's optimal portfolio is the
portfolio that
A. Maximizes her expected utility
B. Maximizes her risk.
C. Minimizes both her risk and return.
D. Maximizes her expected profit.
ANSWER:
A

40
Olivia is a risk-averse investor. Alex is a less risk-averse investor than Olivia.
Therefore,
A. For the same risk, Alex requires a higher rate of return than Olivia.
B. For the same return, Alex tolerates higher risk than Olivia.
C. For the same risk, Olivia requires a lower rate of return than Alex.
D. the same return, Olivia tolerates higher risk than Alex
ANSWER:
B

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41
Deferral of capital gains tax
I. means that the investor doesn't need to pay taxes until the investment is
sold.
II. allows the investment to grow at a faster rate.
III. means that you might escape the capital gains tax if you live long enough.
IV. provides a tax shelter for investors.
A. II and III
B. I, II, IV
C. I, III, and V
D. II, III, and IV
ANSWER:
B
42
A risk-free intermediate or long-term investment
A. is free of all types of risk.
B. Does guarantee the future purchasing power of its cash flows.
C. Does not guarantee the future purchasing power of its cash flows as it is
insured by the U.S. Treasury.
D. A and B.
ANSWER:
C

43
In words, the real rate of interest is approximately equal to
A. The nominal rate times the inflation rate.
B. The inflation rate minus the nominal rate
C. The nominal rate minus the inflation rate
D. The inflation rate divided by the nominal rate.
ANSWER:
C
45
Suppose that the pre-tax holding period returns on two stocks are the same.
Stock X has a high dividend pay-out policy and stock Y has a low dividend
pay-out policy. If you are an individual in a high marginal tax bracket and do
not intend to sell the stocks during the holding period
A. stock X will have a higher after-tax holding period return than stock Y.
B. the after-tax holding period returns on stocks X
C. it is impossible to determine which stock will have a higher after-tax
holding period return given the information available
D. stock Y will have a higher after-tax holding period return than stock X.
ANSWER:
D
46
The first step a pension fund should take before beginning to invest is to A.
establish investment objectives.
B. develop a list of investment managers with superior records to
interview.
C. establish asset allocation guidelines.
D. decide between active and passive management.
ANSWER:
A
47
Investors seeking to diversify are likely to find that their largest investment is
in
A. stocks.
B. bonds.
C. foreign securities
D. their job
ANSWER:
D
48
Workers who change jobs may wind up with lower pension benefits at
retirement than otherwise identical workers who stay with the same
employer, even if the employers have defined benefit plans with the same
final-pay benefit formula. This is referred to as
ANSWER:
C

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A. an accumulated benefit obligation.
B. an unfunded liability.
C. the portability problem
D. indexation.
49
A remainder man is
A. A stock broker who remained working on Wall Street after the 1987
crash.
B. One who receives the principal of a trust when it is dissolved.
C. One who receives interest and dividend income from a trust during their
lifetime.
D. an employee of a trustee.
ANSWER:
B
50
A hedge fund pursuing a ______ strategy is attempting to exploit temporary
misalignments in relative
pricing
A. directional
B. non-directional
C. stock or bond
D. arbitrage or speculation
ANSWER:
B
51
A hedge fund attempting to profit from a change in the spread between
mortgages and Treasuries is using a ______ strategy
A. market neutral
B. directional
C. relative value
D. divergence
ANSWER:
C

52
__________ refer to strategies aimed at attaining the established rate of
return requirements while meeting expressed risk tolerance and applicable
constraints
A. Investment constraints
B. Investment objectives
C. Investment policies
D. All of the above
ANSWER:
C
53
An important benefit of Keogh plans is that
A. they are not taxable until funds are withdrawn as benefits
B. they are protected against inflation.
C. they are automatically insured by the Federal government
D. A and B
ANSWER:
A
54
One incorrect belief that is often cited as a reason for fully-funded pension
funds to invest in equities is
A. stocks provide a hedge against inflation.
B. bonds have lower returns.
C. stocks have higher risk.
D. stocks have higher returns
ANSWER:
A
55
A measure of asset utilization is
A. sales divided by working capital.
B. return on equity capital.
C. return on total assets.
ANSWER:
C
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D. operating profit divided by sales.
56
Violation of a trend line means
A. Moving away from the trend line.
B. Changing the direction
C. Presentation of the trend line
D. Cutting the rising trend line from above.
ANSWER:
C
57
In the bull market
A. The stock prices are increasing
B. Each peak is higher than the previous peak.
C. Each bottom is higher than the previous bottom.
D. B and C
ANSWER:
D

58
Overbought region indicates.
A. More shares are sold.
B. The supply is more.
C. Potential fall in the price level.
D. Potential rise in the share price.
ANSWER:
C
59
A growth industry is defined as
A. An industry with 15% rate of growth per annum
B. An industry where demand for its product is growing
C. An industry with high capital investment
D. An industry with average growth higher than the growth of economy
ANSWER:
D
60
Mr. A is a daring portfolio manager. He wants to increase the return of his
portfolio. He should choose stocks from
A. Defensive industry
B. Industry at growth stage
C. Industry in the maturity period
D. Industry with more export potential
ANSWER:
B

61
The rise of dividend taxes affects
A. Investor
B. The corporate
C. The stock market
D. The financial institution
ANSWER:
D
62
Which of the following items might result in dilution of a corporate s
earnings per share at present?
A. Convertible bonds
B. Warrants
C. Stock options given as incentive to top executives
D. All of the above
ANSWER:
C
63
In the stock market psychology
A. Investors forget the past
B. History repeats itself
C. More faith in future prediction
D. A and b
ANSWER:
B
64
The growth in book value per share shows the
A. Rise in the share prices
B. Increase in the physical assets of the firm.
ANSWER:
D
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C. Increase in the net worth.
D. Growth in reserves
65
A common stock pay-out ratio
A. Is directly related to the company s growth rate.
B. Can be zero for a growth firm.
C. Measures the earnings of shares as a percentage of its market price.
D. Indicates the future cash dividends to be expected.
ANSWER:
B
66
The price earnings ratio of a stock reflects
A. The growth of the company
B. The market mood for the company’s stock
C. The earnings retained and invested in the company
D. The dividend paid out for the company s stock
ANSWER:
B
67
The market value of the scrip is determined by
A. The dividend declared by the company.
B. The present status of the stock market.
C. The number of floating shares
D. The interaction of demand and supply.
ANSWER:
D
68
The "modified duration" used by practitioners is equal to the Macaulay
duration
A. times the change in interest rate.
B. times (one plus the bond's yield to maturity).
C. divided by (one plus the bond's yield to maturity).
D. divided by (one minus the bond's yield to maturity).
ANSWER:
C
69
The interest-rate risk of a bond is
A. the risk related to the possibility of bankruptcy of the bond's issuer
B. the risk that arises from the uncertainty of the bond's return caused by
changes in interest rates.
C. the unsystematic risk caused by factors unique in the bond
D. A and B above

ANSWER:
B
70
_______ is the amount of money per common share that could be realized by
breaking up the firm, selling the assets, repaying the debt, and distributing the
remainder to shareholders.
A. Book value per share
B. Liquidation value per share
C. Market value per share
D. Tobin's Q
ANSWER:
B

71
Indexing of bond portfolios is difficult because
A. the number of bonds included in the major indexes is so large that it would
be difficult to purchase them in the proper proportions
B. many bonds are thinly traded so it is difficult to purchase them at a fair
market price.
C. the composition of bond indexes is constantly changing
D. all of the above
ANSWER:
D
72
Contingent immunization
A. is a mixed-active passive bond portfolio management strategy
ANSWER:
D
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B. is a strategy whereby the portfolio may or may not be immunized
C. is a strategy whereby if and when some trigger point value of the portfolio
is reached, the portfolio is immunized to insure an minimum required return
D. A , B and C.

73
A highly liquid security is a
A. Mutual fund unit
B. Treasury bill
C. Share
D. Commercial paper
ANSWER
B
74
Which of the following two bonds is more price sensitive to changes in
interest rates? A par value bond, X, with 10 years-to-maturity and a 10%
coupon rate or a zero-coupon bond, Y, with 10 years-to maturity and a 10%
yield-to-maturity.
A. Bond Y because of the longer duration.
B. Bond X because of the longer time to maturity
C. Bond X because of the higher yield to maturity
D. Both have the same sensitivity because both have the same yield to
maturity.
ANSWER:
A
75
You wish to earn a return of 10% on each of two stocks, C and D. Each of the
stocks is expected to pay a dividend of $2 in the upcoming year. The
expected growth rate of dividends is 9% for stock C and 10% for stock D.
The intrinsic value of stock C _____.
A. will be greater than the intrinsic value of stock D
B. will be the same as the intrinsic value of stock D
C. will be less than the intrinsic value of stock D
D. cannot be calculated without knowing the rate of return on the market
portfolio
ANSWER:
C
76
The goal of fundamental analysts is to find securities
A. with high market capitalization rates.
B. with a positive present value of growth opportunities
C. whose intrinsic value exceeds market price.
D. all of the above
ANSWER:
A
77
Many stock analysts assume that a mispriced stock will
A. immediately returns to its intrinsic value.
B. gradually approach its intrinsic value over several years.
C. never returns to its intrinsic value.
D. return to its intrinsic value within a few days.
ANSWER:
B
78
An investor is having their portfolio with the combination of stock and bonds
in the ratio of 75:25 . He is
A. Risk averse
B. Risk neutral
C. A risk taker
D. Active in portfolio management.
ANSWER:
C
79
In the active approach the investor continuously studies
A. Group related risk
B. Market related risk
ANSWER:
D
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