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    21. One argument why farmers in poor countries remain poor is: A. They know very little about farming techniques needed for the crop they are growing.B. They are poor assessors of the risks they face.C. Risk taking is a deterrent to growth.D. Poor farmers in many countries lack access to commodity futures markets.   22. Futures markets and derivatives.
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  128. Why might we expect to see a high correlation between increases in the risk structure of interest rates and the yield curve becoming inverted?          129. Does the Expectations Hypothesis allow for people to have a preference for longer-term investments? Explain          130. Explain why most retired individuals are not likely to be heavily invested in.
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    51. The main difference between European and American options is: A. Holders of European options have more options than holders of American options.B. American option holders have more options than European option holders.C. European option holders can exercise the option prior to expiration.D. European options cannot be resold.   52. One key difference between options contracts and futures contracts.
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    61. The theory of efficient markets implies: A. Stock prices should be highly unpredictable.B. The price at which stocks currently trade only reflect past information.C. Expectations do not play a role in stock prices because this isn't real information.D. The chartists are in fact correct that there are patterns in stock prices.   62. The theory of efficient markets.
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    21. The Standard & Poor's 500 Index: A. Gives more weight to large companies than small companiesB. Actually includes more than 500 of the largest corporations in the U.SC. Is a price-weighted indexD. Assigns equal weight to all the prices of all the stocks in the index   22. Considering the S&P 500 Index, if each company's stock price.
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  113. What possibilities exist to explain the claim made by many professional money managers that they can exceed the average stock market return year after year?          114. From the perspective of the theory of efficient markets, explain why it may be difficult for professional money managers who have an exceptional year to continuously.
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    41. A company currently pays a dividend of $4.00 per share. It expects the growth rate of the dividend to be 3% (0.03) annually. If the interest rate is 6% (0.06) what does the dividend-discount model predict the current price of the stock should be? A. $103.33B. It doesn't, you need an expected future.
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    51. As a company issues more debt: A. Its leverage decreases.B. The share of financing from equity increases.C. The expected return to equity holders falls.D. Risk increases.   52. All other things equal, a decrease in the equity risk premium leads to a(n): A. Increase in the required return on stock.B. Decrease in the present value of stock.C. Increase in the price of.
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Multiple Choice Questions  1. Derivatives are financial instruments that: A. Present high levels of risk and should only be used by the wealthy.B. When used correctly can actually lower risk.C. Should only be used by people seeking high returns from low risk.D. Represents the outright purchase of a bond.   2. The value of a derivative is determined by: A. The Federal.
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Short Answer Questions    91. As the chapter points out, there have been many cases where derivatives have led to a lot of abuse. If this is the case, why do derivatives exist?          92. Explain how an interest rate futures contract differs from an outright purchase of a bond.          93. What are the three main ways to.
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    41. If Great Britain experiences higher rates of inflation than the United States over a long period of time, we should expect the British ? (pound) per U.S. $ (dollar) exchange rate to: A. IncreaseB. Hold constant, there isn't any link between inflation and exchange ratesC. DecreaseD. Hold constant since exchange rates are fixed   42. If inflation in.
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  122. XYZ Inc. announces plans to finance the expansion of the firm by issuing hundreds of millions of dollars of bonds. Discuss how the current stockholders of XYZ Inc. will feel about this plan.          123. Discuss how changes in economic conditions are likely to affect the equity-risk premium and stock prices. Considering the.
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  Essay Questions  132. Please use the graphs to show what happens to the risk (yield) differential in each situation and why.   Assume the corporate and Treasury bonds have the same maturity; if the corporate bonds are default-risk free what could you tell about the price and yields of each? Explain.If the corporate.
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  95. Explain why the two parties in a futures contract technically do not make a bilateral agreement with each other.          96. Explain how the clearing corporation reduces the risk it faces in the futures market through the use of margin accounts and marking-to-market.          97. We have a futures contract for the purchase of 10,000 bushels.
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    81. Stock market bubbles can lead to all of the following except: A. An efficient allocation of resources.B. Stock market crashes.C. Patterns of volatile returns from the stock market.D. Gaps between actual stock prices and those warranted by the fundamentals.   82. Which of the following could cause a stock market bubble? A. Changes in the real interest rateB. Changes in the.
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Multiple Choice Questions  1. From October 1997 to January 1998, the economy of South Korea was in turmoil. One of the problems was: A. The currency of South Korea appreciated considerably making it very difficult for Korean exporters to sell goods abroadB. The value of the U.S. $ compared to the Korean won fell by.
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  103. After one year, a company will pay $20 in dividends. It commits to paying $21 two years from the current date. This growth rate in dividends is expected to continue indefinitely. The interest rate is 8%. Compute the current price of this stock, using the dividend-discount model.          104. Identify the ways in.
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    71. Stocks appear to present risk, yet many people have substantial parts of their wealth invested in them. This behavior could be explained by: A. People are irrational in their investment behavior, only focusing on positive outcomes.B. People are not very risk-averse and do not require a risk premium for stocks.C. Investing in stocks over.
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  98. A lender obtains funds from depositors by offering short-term interest rates on savings accounts. The lender uses these funds to make longer-term installment loans. Explain how the lender might make use of the futures market to hedge the risk taken.          99. How can we link the lack of futures markets in poor.
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    31. Which of the following does not contribute to the failure of the law of one price? A. TariffsB. Transportations costsC. The fact that all goods can be tradedD. Technical specifications   32. Concrete likely does not follow the law of one price due to: A. Technical differencesB. Lack of information regarding pricesC. TariffsD. High transportation costs   33. The law of one price is a useful.
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    71. At expiration, the value of an option: A. Is greater than the intrinsic value.B. Is less than the intrinsic value.C. Is equal to the time value of the option.D. Is equal to the intrinsic value.   72. At expiration, the time value of an option: A. Is equal to the intrinsic value.B. Is greater than the intrinsic value.C. Is zero.D. Is less than.
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  123. When we compare the graphs of GDP growth over time to the corresponding risk spread on Baa bonds compared to 10-year U.S. Treasury bonds, what relationship can be inferred?          124. Describe the concept of flight to quality in terms of the Russian government default of August 1998.          125. Why do yield curves usually slope.
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  Short Answer Questions  88. Explain why being a residual claimant can increase the risk from owning stocks.          89. Does the concept of limited liability make owning stocks more or less attractive? Explain.          90. Explain why the willingness to purchase stocks is influenced heavily by shareholders' legal rights.              91. Why isn't the actual level of an index, for example.
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    61. The two parts that make up an option's price are: A. Extrinsic value and the time value of the option.B. The commission and the time value of the option.C. The intrinsic value and the time value of the option.D. The price of the underlying asset and the time value of the option.   62. The intrinsic value of.
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    11. Which of the following stock price indexes is a price-weighted index? A. Dow Jones Industrial AverageB. Standard & Poor's 500 IndexC. NasdaqD. Wilshire 5000   12. An index number is valuable because: A. It provides useful information to the viewerB. It is more stable than the data it reflectsC. It provides a meaningful measurement scale to calculate percentage changesD. It does not require.
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    81. Which of the following would tend to decrease the size of the time value of the option? A. The price volatility of the underlying asset is high.B. The time to expiration of the contract is far away.C. The interest rate on U.S. Treasury bonds increases.D. The time to expiration of the options contract is near.   82. Interest-rate.
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  117. Explain how a well-functioning stock market contributes to the efficiency of the economy.          118. From information presented in Chapter 8, you should be able to identify at least two reasons an investor may want to consider an index fund over a managed (mutual) fund. What are these reasons?          119. Discuss the inefficiencies that can.
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  134. Under the Expectations Hypothesis of the term structure of interest rates, explain the impact of a U.S. Treasury decision to phase out the 30-year bond and to only focus on 3-month, 1-year, 5-year and 10-year bonds?          135. We have heard the predictions regarding the large number of people that will be retiring.
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    31. If a futures contract for U.S. Treasury bonds increases by "12" in the financial page listings, the value of the contract increased by: A. $120.00B. $1200.00C. $375.00D. $240.00   32. If a futures contract for U.S. Treasury bonds decreases by "17" in the financial page listings, the price of the contract decreased by: A. $531.25B. $170.00C. $340.00D. $1700.00   33. A price of a futures contract.
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  96. Compare/contrast the Nasdaq Composite Index with the Dow Jones Industrial Average.          97. Why must caution be employed in comparing stock indexes across countries?          98. Briefly explain the different focus of valuing stocks taken by behavioralists, chartists, and those who focus on Pnext year.          99. Many small companies currently pay no dividends to their shareholders. Based on.
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    51. A country with a current account surplus: A. Has imported more than it has exportedB. Has borrowed heavily from the rest of the worldC. Has exported more than it has importedD. Also has a capital account surplus   52. A country that exports more than it imports will: A. Have a current account deficit and a capital account deficitB. Have a.
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  104. Explain the difference between American and European options.          105. If the option holder is the individual with the options, why is anyone an option writer?          106. Suppose you purchase a call option to purchase General Motors common stock at $80 per share in March. The current price of GM stock is $83 and the.
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    11. The process of marking to market: A. Is done by the clearing corporation to reduce risk in futures contracts.B. Involves the margin accounts of only the buyers of future contracts.C. Involves the margin accounts of only the sellers of future contracts.D. Usually requires margin accounts to be adjusted weekly by the clearing corporation.   12. Marking to market.
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    41. The strike price of an option is: A. The market price at the time the option is written.B. The market price at the time the option is exercised.C. The price at which the option holder has the right to buy or sell.D. Always above the market price.   42. With a call option, the option holder: A. Has the right.
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  121. Explain the popularity of options in the sense of the potential gains and losses they offer.          122. Explain why for speculation, the purchase of an option may be more attractive than a futures contract or the outright purchase of the underlying asset.          123. What questions should an employee ask before accepting options as part.
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Multiple Choice Questions  1. A share of common stock represents: A. A claim from a lender against a borrowerB. A share in the company's debtsC. A share of ownership of the companyD. An unlimited liability to the owner of the stock   2. Two characteristics that make owning stock attractive are: A. Unlimited liability and first claim on assetsB. Share prices are relatively.
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  101. Consider a call option; in terms of the option writer and option holder, who is the buyer? Who is the seller? Finally, who has the option? Explain.          102. With a put option, what specifically does the option holder receive for the price paid for the option?          103. Describe the condition that would have a.
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  Essay Questions  120. Do the voting rights possessed by common stockholders ensure that managers and directors have the same objectives as stockholders? Explain.          121. If you understood the discussion of the characteristics of common stocks, you should be able to explain the following statement: One of the benefits from stock ownership is the unlimited.
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