FINANCIAL MARKETS
Midterm Examination
Fall 2025
Instruction: Follow the instructions in each part of this midterm examination to answer the questions on the exam. Be certain to incorporate every step instructed in the question into your answer. I will be reading your answers critically for the content.
Your Midterm Examination and Investment Strategy must be submitted to me via email in Word format in class on November 5, 2025.
Part I: Key Principles (25 Points)
Key principles provide foundation for understanding a discipline. From the questions in Part I, select the answer that best responds to the key principle.
A corporation declares a 2:1 stock split. For a customer who owns 100 shares at $60, how many shares will he now have and at what dollar price?
A. 100 shares at $30
B. 200 shares at $30
C. 200 shares at $50
D. 200 shares at $60
A corporation declares a 5:4 stock split. For a customer who owns 100 shares at $60, how many shares will he now have and at what dollar price?
A. 120 shares at $50
B. 125 shares at $48
C. 120 shares at $40
D. 125 shares at $50
ABC Company has outstanding 10% non-cumulative preferred stock. Two years ago, ABC paid a 6% preferred dividend. Last year, ABC paid a 7% preferred stock dividend. This year, ABC wishes to pay a common dividend. The preferred shareholders must receive:
A. 0%
B. 7%
C. 10%
D. 17%
ABC Company has outstanding 10% cumulative preferred stock. Two years ago, ABC paid a 6% preferred dividend.
Last year, ABC paid a 7% preferred stock dividend. This year, ABC wishes to pay a common dividend. The preferred shareholders must receive:
A. 0%
B. 7%
C. 10%
D. 17%
A customer holds 100 shares of ABC Corp $100 par convertible preferred stock convertible at $20 per share. How many shares of ABC common stock will an owner upon conversion?
A. 5 shares of ABC common stock
B. 100 shares of ABC common stock
C. 500 shares of ABC common stock
D. 5,000 shares of ABC common stock
A bond issue with the same day of issuance but with differing maturities is a:
A. term bond offering
B. series bond offering
C. serial bond offering
D. combined serial and term bond offering
A bond issue where every bond has the same interest rate and maturity is a:
A. term bond offering
B. series bond offering
C. serial bond offering
D. combined serial and term bond offering
A bond issue where the bonds have the same maturity, but different dates of issuance is a:
A. term bond offering
B. series bond offering
C. serial bond offering
D. combined serial and term bond offering
U.S. Treasury securities are subject to which of the following risks?
A. default risk
B. marketability risk
C. purchasing power risk
D. credit risk
A risk that rising interest rates will cause bond prices to fall is:
A. Credit risk
B. Purchasing Power risk
C. Legislative risk
D. Interest Rate risk
Exchange rate risk is a factor to consider when investing in foreign debt issues and the:
I. U.S. dollar depreciates in value
II. U.S. dollar appreciates in value
III. foreign currency depreciates in value
IV. foreign currency appreciates in value
A. I and III
B. I and IV
C. II and III
D. II and IV
A customer bought a $1,000 par convertible subordinated debenture at par, convertible into common at $25 per share. If the bond’s market price increases by 20%, the parity price of the stock will be:
A. 25
B. 30
C. 40
D. 48
A convertible debenture is convertible into common at $40 per share. If the market price of the bond rises to a 10-point premium over par, which statements are true?
I. The conversion ratio is 20:1
II. The conversion ratio is 25:1
III. The parity price of the stock is $44
IV. The parity price of the stock is $50
A. I and III
B. I and IV
C. II and III
D. II and IV
A customer in Pennsylvania purchases a NY state G.O. bond. How will the bond interest be taxed?
A. exempt from Federal; subject to state and local
B. exempt from state and local; subject to Federal
C. triple tax free
D. fully taxable
A resident of NY City purchases a Puerto Rico G.O. bond. How will the bond interest be taxed?
A. exempt from Federal; subject to state and local
B. exempt from state and local; subject to Federal
C. triple tax exempt
D. fully taxable
Long-term negotiable certificates of deposit are subject to which of the following risks?
I. Interest rate risk
II. Call risk
III. Reinvestment risk
IV. Marketability risk
A. I and II only
B. III and IV only
C. I, II, and III
D. I, II, III, IV
A customer places an order to buy a mutual fund with:
NAV = $9.15
POP = $10.00
How much will the customer pay for 1 share?
A. $9.15
B. $9.15 + commission
C. $10
D. $10 + commission
A customer places an order to sell a mutual fund with:
• NAV = $9.15
• POP = $10.00
How much will the customer receive for 1 share?
A. $9.15
B. $9.15 – commission
C. $10
D. $10 – commission
A customer places an order to buy a closed end fund with:
• NAV = $9.15 and Market Price = $10
How much will the customer pay for 1 share?
A. $9.15
B. $9.15 + commission
C. $10
D. $10 + commission
A customer places an order to sell a closed end fund with:
• NAV = $9.15 and Market Price = $10
How much will the customer receive for 1 share?
A. $9.15
B. $9.15 – commission
C. $10
D. $10 – commission
A customer has signed a Letter of Intent (LOI) to buy $25,000 of XYZ mutual fund to qualify for a breakpoint that reduces the sales charge from 7% to 6%. The customer deposits $15,000 into the fund over the next 13 months. At the end of 13 months, the NAV is $20,000. How much does the customer have to deposit to complete the LOI?
A. $0
B. $5,000
C. $10,000
D. $15,000
A new customer wishes to open an account at your firm by purchasing $5,000 of DEF mutual fund shares. He informs you that he has previously invested $30,000 in the fund at another broker-dealer. As the registered representative handling the account, you should tell the customer that:
A. To qualify for a breakpoint, he must buy the shares from the other broker-dealer
B. He must transfer the account from the other broker-dealer in order to qualify for a breakpoint
C. He qualifies for a breakpoint sales charge reduction on the $5,000 purchase, if one is offered
D. Cannot qualify for a breakpoint sales charge reduction on the $5,000 purchase
A customer has purchased $25,000 of a mutual fund. Over the past 5 years, the fund has appreciated to $46,000. At this point, the customer wants to buy another $15,000 of the fund. In the prospectus, the breakpoint schedule is:
• Purchase Amount Sales Charge
• 0 – $10,000 8 ½%
• >$10,000 – $20,000 7 ½%
• >$20,000 – $45,000 6 ½%
• >$45,000 – $65,000 5 ½%
• >$65,000 5%
• For the $15,000 purchase, the customer will pay a sales charge of:
A. 7 ½%
B. 6 ½ %
C. 5 ½ %
D. 5%
A customer has placed an GTC order to buy 1,000 shares of PDQ stock at $60. 3 weeks later, PDQ Corporation announces that it is splitting its stock 5:1. What happens to the order?
A. Nothing
B. The order is cancelled
C. The order is adjusted to become “Buy 5,000 shares of PDQ at $12”
D. The order is adjusted to become “Buy 200 shares of PDQ at $300”
A customer owns 100 shares of XYZ. XYZ declares a 5:4 forward stock split. The market price is $40 per share. On the payment date, what will the customer's position be?:
A. 80 shares at 50
B. 100 shares at 40
C. 125 shares at 32
D. 125 shares at 50
Part II: Key Concepts (25 Points)
Key principles develop key concepts. Briefly, discuss the following key concepts and their role in financial interactions. Each discussion should be no less than one page, double spaced. The discussion must include content from the related chapters, the lecture notes, and digital media archive.
Role of Financial Markets
Financial markets play a crucial role in the economy by facilitating the exchange of financial assets between investors and borrowers. Financial markets promote economic growth, allocate capital efficiently, manage risks, and facilitate investment and consumption decisions. Their smooth functioning is essential for the stability and prosperity of modern economies.
Use the following guidelines to discuss the key concepts of the role of financial markets and the impact on you.
Guidelines:
1.) Explain the fundamental principles underlying the role of financial markets;
2.) Use one citation from the required reading to support your discussion on theoretical concepts and one citation from a contemporary news article to demonstrate real-world application; and,
3.) Analyze a recent development or trend in financial markets that has significant implications for you.
Role of Banks
Banks play a crucial role in the economy by facilitating the flow of funds between savers and borrowers. Banks contribute to economic growth and stability. Banks facilitate savings mobilization, efficient allocation of capital, risk management, and economic growth. Their stability and effective operation are vital for maintaining financial stability and fostering sustainable economic development.
Use the following guidelines to discuss the key concepts of the role of banks and the impact on you.
Guidelines:
1.) Explain the fundamental principles underlying the role of banks in financial markets and how they impact you;
2.) Use one citation from the required reading to support your discussion on theoretical concepts and one citation from a contemporary news article to demonstrate real-world application; and,
3.) Analyze a recent development or trend in banking that has significant implications for you.
Personal Investment
Personal investment is paramount for achieving financial security, building wealth, planning for retirement, diversifying risk, realizing financial goals, hedging against inflation, and fostering personal growth. By taking an active role in managing their finances and investing wisely, individuals can secure a brighter financial future.
Use the following guidelines to discuss the key concept of personal investment and the impact on you.
Guidelines:
1. Explain the key principles of financial markets and banking that underlie personal investment and how they impact you;
2. Use one citation from the required reading to support your discussion on theoretical concepts and one citation from a contemporary news article to demonstrate real-world application; and,
3. Analyze a recent development or trend in personal investment that has significant implications for you.
Example Answer Structure for Each Part II Question.
Introduction
Introduce the importance of (Financial Markets, Banking, Personal Investment) and the impact on you.
Key Principles of (Financial Markets, Banks, Personal Investment) (list the key principles of Financial Markets, Banks, Personal Investment)
a. Liquidity and Efficiency (brief definition)
b. Risk and Return (brief definition)
c. Price Discovery (brief definition)
Discussion
Integrate a citation from the required reading to support your discussion on theoretical concepts and one citation from a contemporary news article to demonstrate real-world application.
Analysis
Analyze the implications of a recent development or trend in (Financial Markets, Banking, Personal Investment) that have significant implications for you.
Conclusion
Summarize the importance of understanding the role of (Financial Markets, Banking, Personal Investment) for effective financial assessment.
Part III: Strategic Implementation (25 Points)
Key principles and key concepts underlie strategic implementation. Briefly, discuss the tools for strategic implementation and their role in implementing a personal investment strategy. Your discussion should be no less than one page, double spaced. The discussion must include content from the related chapters, the lecture notes, and digital media archive.
Investment Strategy
Investment strategies can vary greatly depending on individual financial goals, risk tolerance, time horizon, and financial situation. No investment strategy is risk-free, and it's essential to carefully consider your individual financial situation and goals before making any investment decisions. Additionally, keep in mind that past performance is not indicative of future results, and diversification does not guarantee profit or protect against loss.
Use the following guidelines to develop an investment strategy tailored to your investment goals
Guidelines
1. Outline your financial goals, risk tolerance, time horizon, and any other relevant factors influencing your investment strategy;
2. Select appropriate investment vehicles (e.g., stocks, bonds, mutual funds, real estate) based on your financial assessment and objectives;
3. Discuss your rationale for asset allocation and diversification within your investment portfolio; and, 4. Support your investment decisions by integrating theoretical concepts from the required reading and recent developments or current trends from the contemporary news article.
Example Answer Structure for Part III
Introduction
Introduce the importance of developing a personalized investment strategy aligned with financial assessment.
Discussion
Integrate a citation from the required reading to support your discussion on theoretical concepts and one citation from a contemporary news article to demonstrate real-world application. In doing so, be certain to discuss the reasoning behind your investment choices, considering both theoretical principles and real-world observations.
Analysis
Financial Analysis
Assess and discuss the following:
a. Financial Goals (discuss short-term and long-term financial objectives).
b. Time Horizon (discuss the timeframe. for achieving your financial objectives).
c. Risk Tolerance (assess your risk tolerance level and willingness to accept market fluctuations).
Investment Strategy
Assess and discuss the following:
a. Specific Investment Decisions (discuss your selection of individual investment vehicles based on your financial assessment).
b. Asset Allocation (discuss how you decided to allocate assets across different investment classes based on risk-return profiles).
c. Diversification (assess how you decided to spread investments across multiple assets to minimize risk exposure).
Conclusion
Summarize your personalized investment strategy and emphasize its alignment with your financial assessment and objectives.
Part IV Financial Management (25 Points)
Key principles, key concepts, and strategic implementation of an investment strategy guide an individual’s/professional’s financial management of an investment portfolio. Some of you are taking the course to develop your understanding of financial markets for your personal financial development. Others of you are taking the course to develop your understanding of financial markets for your professional development. Regardless of your motivation for taking the course, all of you should be able to evaluate your investment strategy using the eyes of a financial professional. Your discussion should be no less than one page, double spaced. The discussion must include content from the related chapters, the lecture notes, and digital media archive.
Financial Management
The Securities Industry Essentials examination (SIE) license plays a significant role in the field of finance, particularly in investment management. The SIE license serves as a mark of integrity and professionalism in the finance industry. It equips finance professionals with the knowledge, skills, and ethical framework necessary to excel in various roles and make meaningful contributions to the field of finance.
Use the following guidelines to assess your investment strategy.
Guidelines
1. Evaluate the performance of your investment strategy based on predefined financial goals, risk tolerance, and other relevant criteria;
2. Analyze the effectiveness of your decision for asset allocation and diversification strategies in achieving optimal returns and managing risk related to your investment strategy;
3. Consider any significant changes in market conditions or economic factors that may have influenced the performance of your investment strategy;
4. Provide recommendations for adjustments or improvements to your investment strategy based on your assessment; and,
5. Support your investment decisions by integrating theoretical concepts from the required reading and recent developments or current trends from the contemporary news article.
Example Answer Structure for Part IV
Introduction
Introduce the purpose and scope of your assessment of your investment portfolio.
Discussion
Integrate a citation from the required reading to support your discussion on theoretical concepts and one citation from a contemporary news article to demonstrate real-world application. In doing so, be certain to discuss your decision for the allocation of assets and diversification within your client’s portfolio, considering both theoretical principles and real-world observations.
Analysis
Assess the following:
a. Performance Analysis (assess the performance of your investment portfolio against predefined financial goals and benchmarks).
b. Risk Management (assess the effectiveness of your risk management strategies in mitigating volatility to your investment strategy).
c. Recommendations for Improvement (provide recommendations for adjustments or enhancements to your investment strategy based on your assessment).
Conclusion
Summarize your assessment and emphasize the importance of ongoing portfolio monitoring and management to achieve your financial objectives.