Financial Markets & Institutions — Part 1: 40 MCQs with Explanations

Dow Jones is stock exchange market of New York .

When the stock market is rising it is called Bullish .

Rise in stock market is called bullish .

According to Black Scholes model, stocks with call option pays the No dividends .

Cost of common stock is 16% and bond yield is 9% then bond risk premium would be 7% .

An option that gives investors right to sell a stock at predefined price is classified as Put option .

An investor who writes stock call options in his own portfolio is classified as Covered option .

According to Black Scholes model, selling and buying of stock have Transaction costs .

An investor who buys shares and writes a call option on stock is classified as Hedger .

Markets dealing with residential loans, industry real estate loans, agricultural loans and commercial loans are called Mortgage markets .

In financial markets, period of maturity more than five years of financial instruments is classified as Long-term .

Corporations that buy financial instruments with money accepted from savers are classified as Mutual funds .

Stocks in market portfolio are graphically represented with Dashed line .

Relevant information about stock market price if it is given, then this price is called Intrinsic price .

Financial security issued by banks operating outside U.S is classified as Eurodollar market deposits .

Markets which deal with buying and selling of bonds, mortgages, notes and stocks are considered as Financial asset markets .

Cost of money is affected by factors which includes Inflation .

Process of selling company stock at large to general public and get lending from banks is classified as an Initial public offering .

Markets which bring closer institutions needing funds and with surplus funds are classified as Financial markets .

In situation of bankruptcy, stock which is recorded above common stock and below debt account is Preferred stock .

In time value of money, periodic rate is Shown on timeline .

In calculation of time, value of money, N represents Number of payment periods .

Procedure of finding present values in time value of money is classified as Discounting .

A company who issues bonds or stocks in result raised funds which finally Increases cash .

A stock which is hybrid and works as a cross between debt and common stock is considered as Preferred stock .

An interest rate which is paid by money borrower and charged by lender is considered as Periodic rate .

Correct measure of risk of stock is called Beta .

According to market risk premium, an amount of risk premium depends upon investor Risk aversion .

In an individual stock, relevant risk is classified as Beta coefficient .

Proceeds of company shares of sold stock is recorded in Common stock account .

In time value of money, nominal rate is Not shown on timeline .

Process of calculating future value of money from present value is classified as Compounding .

In balance sheet, sum of retained earnings and common stock are considered as Common equity .

Coefficient of beta is used to measure stock volatility Relative to market .

Stock which has higher correlation with market tend to have High beta, more risky .

Beta coefficient is used to measure market risk which is an index of Stock market volatility .

A portfolio consists of all stocks in a market is classified as Market portfolio .

In capital asset pricing model, stock with high standard deviation tend to have Low beta .

Sum of market risk and diversifiable risk are classified as total risk which is equivalent to Variance .

Stock issued by company have higher rate of return because of High book to market ratio .