Question

The value of a derivative security

		is worthless today.
		depends on the value of the related security.
		is unable to be calculated.
		is unrelated to the value of the related security.
		has been enhanced due to the recent misuse and negative publicity regarding these instruments.

Which of the following is not a characteristic of a money market instrument?

		Long maturity
		Liquidity premium
		Long maturity and liquidity premium
		Liquidity
		Marketability

Which of the following are characteristics of preferred stock?

I) It pays its holder a fixed amount of income each year at the discretion of its managers.

II) It gives its holder voting power in the firm.

III) Its dividends are usually cumulative.

IV) Failure to pay dividends may result in bankruptcy proceedings.

		I, II, and III
		I, III, and IV
		I and III
		I, II, and IV
		I, II, III, and IV

Security selection refers to

		the allocation of assets into broad asset classes.
		choosing which securities to hold based on their valuation.
		top-down analysis.
		investing only in "safe" securities.

Commercial paper is a short-term security issued by ________ to raise funds.

		the Federal Reserve Bank
		state and local governments
		the New York Stock Exchange
		commercial banks
		large, well-known companies

Answer 1

1]

The value of a derivative security depends on the value of the related security.

Derivatives by definition are instruments whose value is "derived" from the value of an underlying asset

2]

Long maturity is not a characteristic of a money market instrument

Money market instruments are short-term (less than 1 year) debt securities

3]

III) Its dividends are usually cumulative. This statement is true.

The remaining statements are incorrect. They do not give voting rights, do not pay discretionary dividends (they pay mandatory dividends) and failure to pay does not result in bankruptcy proceedings.

4]

Security selection is choosing which securities to hold based on their valuation.

5]

Commercial paper is a short-term security issued by large, well-known companies to raise funds.