FINANCE
The ________ compensates the investor for the additional risk that the loan will not be repaid in full. A) default premium B) inflation premium C) real rate D) interest rate
A) default premium
The ________ a capital asset is NOT part of the MACRS and is ignored for depreciation expense. A) salvage value of B) dividends paid from C) inventory from D) straight-line value of
A) salvage value of
In ________, current prices reflect the price history and trading volume of the stock. It is of no use to chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market. A) weak-form efficient markets B) strong-form efficient markets C) semi-strong-form efficient markets D) operational efficient markets
A) weak-form efficient markets
18.A never-ending stream of equal periodic, end-of-the-period cash flows is called a/an ________. A) annuity B) annuity due C) perpetuity D) amortization
C) perpetuity
12)A/An ________ is a series of equal end-of-the-period cash flows. A) ordinary annuity B) annuity due C) perpetuity due D) None of the above
A) ordinary annuity
The remaining book value when a project is terminated is the ________ minus accumulated depreciation over the life of the project. A) original cost B) ending cost C) salvage cost D) sunk cost
A) original cost
The ________ is the market of first sale in which companies first sell their authorized shares to the public. A) primary market B) secondary market C) both primary and secondary markets D) Nasdaq market
A) primary market
When a depreciable asset is sold, a tax gain or tax loss on disposal is calculated, based on the book value of the asset at the time of disposal. If a ________ has occurred, ________ are incurred. A) gain, tax reductions B) gain, taxes C) gain, tax credits D) loss, taxes
B) gain, taxes
The ________ model is usually considered the best of the capital budgeting decision-making models. A) internal rate of return (IRR) B) net present value (NPV) C) profitability index (PI) D) discounted payback period
B) net present value (NPV)
The ________ is the intercept on the Security Market Line. A) prime rate B) risk-free rate C) market rate of return D) beta
B) risk-free rate
Stocks are different from bonds because ________. A) stocks, unlike bonds, are major sources of funds B) stocks, unlike bonds, represent residual ownership C) stocks, unlike bonds, give owners legal claims to payments D) bonds, unlike stocks, represent voting ownership
B) stocks, unlike bonds, represent residual ownership
You can think of the ________ as the "used stock" market because these shares have been owned or "used" previously. A) secondary market B) primary market C) NYSE market D) initial public offering market
A) secondary market
The Security Market Line has ________. A) a positive slope B) a negative slope C) no slope D) a beta of 1.0
A) a positive slope
________ is risk that cannot be diversified away. A) Unsystematic risk B) Systematic risk C) Firm-specific risk D) Diversifiable risk
B) Systematic risk
22.What type of loan requires both principal and interest payments as you go by making equal payments each period? A) Amortized loan B) Interest-only loan C) Discount loan D) Compound loan
A) Amortized loan
41.Which of the following types of bonds may the issuer buy back before maturity? A) Callable bond B) Putable bond C) Convertible bond D) Zero-coupon bond
A) Callable bond
1. The set of financial activities that support the OPERATIONS of a business is best described by which main area of finance? A) Corporate finance B) Investments C) Financial institutions and markets D) International finance
A) Corporate finance
10.Which of the following actions will INCREASE the present value of an investment? A) Decrease the interest rate. B) Decrease the future value. C) Increase the amount of time. D) All of the above will increase the present value.
A) Decrease the interest rate.
15.Which of the following is NOT an example of ordinary annuity cash flows? A) Insurance payments due at the start of the period B) Car loans due at the end of the period C) Mortgage payments due at the end of the period D) All of the examples above are ordinary annuity cash flows.
A) Insurance payments due at the start of the period
60 Which of the following is NOT a definition of beta? A) A measure of systematic risk B) A measure of risk that can be avoided C) A statistical measure of an individual asset's or portfolio's co-movement with the returns of the market D) A measure of nondiversifiable risk
B) A measure of risk that can be avoided
When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value. A) coupon rate; premium over B) coupon rate; discount to C) time to maturity; discount to D) time to maturity; same price as
B) coupon rate; discount to
Which of the statements below is NOT correct? A) If two investments have the same expected return, the investment with the lower risk is preferred. B) If two investments have the same expected return, the investment with the greater risk is preferred. C) If two investments have the same expected risk, the investment with the higher expected return is preferred. D) If one investment has a higher expected return and a greater level of risk than another, it is not clear which investment is the preferred choice.
B) If two investments have the same expected return, the investment with the greater risk is preferred.
21.What type of loan makes interest payments throughout the life of the loan and then pays the principal and final interest payment at the maturity date? A) Amortized loan B) Interest-only loan C) Discount loan D) Compound loan
B) Interest-only loan
24. If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay the interest of $8,000 at the end of each year prior to maturity and the final payment of $108,000 at the end of 10 years, then you have just repaid what type of loan? A) Amortized loan B) Interest-only loan C) Discount loan D) Compound loan
B) Interest-only loan
6. Which of the following is NOT an example of an equity market transaction? A) Mary sells her shares of Apple stock. B) Mark contacts his broker and requests a purchase of IBM bonds. C) Sahid buys shares of a small company stock traded on the NASDAQ. D) All of the above are equity market transactions.
B) Mark contacts his broker and requests a purchase of IBM bonds.
23.If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay the total amount of principal and interest due of $215,892.50 at the end of 10 years, what type of loan did you have? A) Amortized loan B) Interest-only loan C) Discount loan D) Compound loan
C) Discount loan
The terms ________ and ________ mean the same thing. A) nondiversifiable risk; unsystematic risk B) diversifiable risk; systematic risk C) diversifiable risk; unsystematic risk D) total risk; unique risk
C) diversifiable risk; unsystematic risk
In the NPV model, all cash flows are stated ________. A) in future value dollars, and the total inflow is "netted" against the outflow to see if the net amount is positive or negative B) in present value or current dollars, and the outflow is "netted" against the total inflow to see if the gross amount is positive or negative C) in present value or current dollars, and the total inflow is "netted" against the initial outflow to see if the net amount is positive or negative D) in future dollars, and the initial outflow is "netted" against the total inflow to see if the net amount is positive
C) in present value or current dollars, and the total inflow is "netted" against the initial outflow to see if the net amount is positive or negative
9. In finance, we separate operating decisions from financing decisions and thus exclude ________ as a part of operating income from the income statement. A) cash flow B) dividends C) interest expense D) earnings
C) interest expense
13.Which of the following is NOT an example of annuity cash flows? A) Regular equal monthly rent payments B) Equal annual deposits into a retirement account C) The $50 of gasoline you put into your car every two weeks on pay day D) All of the examples above are annuity cash flows.
D) All of the examples above are annuity cash flows.
The four steps to determining the price of a bond are: A) determine the amount and timing of the present cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons. B) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the future value of the lump-sum principal and the annuity stream of coupons, and add the FVs of the principal and coupons. C) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and multiply the PVs of the principal and coupons. D) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons.
D) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons.
Cash flow at disposal of an asset can be calculated as the disposal value plus the ________ on the loss. A) alternative minimum tax B) statutory tax C) tax shield D) tax credit
D) tax credit
16.Which of the following is NOT an example of ordinary annuity cash flows? A) Insurance payments due at the start of the period B) Car loans due at the end of the period C) Mortgage payments due at the end of the period D) All of the examples above are ordinary annuity cash flows.
A) Insurance payments due at the start of the period
2. ________ is the area of finance concerned with the activities of buying and selling financial assets such as stocks and bonds. A) Investments B) Corporate finance C) International finance D) Financial markets and institutions
A) Investments
Which of the statements below is TRUE of the payback period method? A) It ignores the cash flow after the initial outflow has been recovered. B) It is biased against projects with early-term payouts. C) It incorporates time-value-of-money principles. D) It focuses on cash flows after the initial outflow has been recovered.
A) It ignores the cash flow after the initial outflow has been recovered.
The Fisher Effect involves which of the items below? A) Nominal rate, the real rate, and inflation B) Nominal rate and the real rate only C) Nominal rate and inflation only D) Nominal rate, the bond rate, and inflation
A) Nominal rate, the real rate, and inflation
7.Which of the below statements is FALSE? A) Typically, income statements are prepared quarterly and annually for distribution outside the company, but usually semiannually for internal managers. B) Typically, income statements are prepared quarterly and annually for distribution outside the company. C) The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes (EBIT). D) The income statement reports the performance of the firm over the past period. It summaries and categorizes a company's revenues and expenses for that period.
A) Typically, income statements are prepared quarterly and annually for distribution outside the company, but usually semiannually for internal managers.
46 Bonds are different from stocks because ________. A) bonds promise fixed payments for the length of their maturity B) bonds give payments only after other owners are paid C) bonds do not have maturity dates D) bonds promise growth in earnings
A) bonds promise fixed payments for the length of their maturity
A major metric of a company's health and its prospects for a long life is how much ________ it can generate. A) cash flow B) depreciation C) tax deferral D) net income
A) cash flow
The ________ is the interest rate printed on the bond. A) coupon rate B) semiannual coupon rate C) yield to maturity D) compound rate
A) coupon rate
The ________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator. A) current yield B) yield to maturity C) bond discount rate D) coupon rate
A) current yield
A gain on disposal is recognized when the selling price of the asset is ________ the book value. A) greater than B) equal to C) less than D) greater than or equal to
A) greater than
The hurdle rate should be set so that it reflects the proper risk level for the project. If we have to choose between two projects with similar risk and therefore similar hurdle rates, we would select the project that ________. A) has a higher internal rate of return B) has a lower internal rate of return C) has a hurdle rate that is consistent with the payback period method D) has a hurdle rate that is consistent with the discounted payback period model
A) has a higher internal rate of return
Bonds that pay interest tied to the earnings of the company are known as ________ bonds. A) income B) exotic C) floating rate D) variable earnings
A) income
The frequency of default on a home loan is ________ the frequency of default on a credit card. A) much lower than B) much higher than C) a bit lower than D) a bit higher than
A) much lower than
Which of the following types of bonds may the buyer sell back before maturity? A) Callable bond B) Putable bond C) Convertible bond D) Zero-coupon bond
B) Putable bond
In the United States, there are three well known secondary stock markets. Which of the below is NOT one of these? A) The New York Stock Exchange (NYSE) B) The Chicago Stock Exchange (CSE) C) The National Association of Securities Dealers and their trading system NASDAQ (National Association of Securities Dealers Automated Quotation System) D) The New York Stock Exchange MKT LLC (formerly the AMEX)
B) The Chicago Stock Exchange (CSE)
14.Which of the following is NOT an example of annuity cash flows? A) The university tuition bill you pay every month that is always the same B) The grocery bill that changes every week C) The $3.50 you pay every morning for a bagel and coffee as you run to your first morning class D) All of the examples above are annuity cash flows.
B) The grocery bill that changes every week
Which of the following is NOT true with regard to an amortization table? A) The interest payment for a period is equal to the periodic interest rate multiplied by the beginning-of-the-period principal balance. B) The remaining principal balance at the end of a payment period is equal to the beginning-of-the-period principal less the total payment. C) The total payment is calculated by using the present value of an annuity formula. D) All of the above are true.
B) The remaining principal balance at the end of a payment period is equal to the beginning-of-the-period principal less the total payment.
17.A series of equal periodic finite cash flows that occur at the beginning of the period are known as a/an ________. A) ordinary annuity B) annuity due C) perpetuity D) amortization
B) annuity due
The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life. A) current yield B) yield to maturity C) prime rate D) coupon rate
B) yield to maturity
4.The organized financial intermediaries and the forums that promote the cycle of money is a good definition of which of the following main areas of finance? A) Corporate finance B) Investments C) Financial institutions and markets D) International finance
C) Financial institutions and markets
________ refers to how quickly information is reflected in the available prices for trading. A) Market efficiency B) Mechanical efficiency C) Informational efficiency D) Operational efficiency
C) Informational efficiency
The advantage of ________ over ________ depreciation is that you can write off more of your capital costs in the earlier years. A) straight-line depreciation; the modified accelerated cost recovery system B) straight-line depreciation; straight-line deductions C) MACRS; straight-line depreciation D) MACRS; straight-line deductions
C) MACRS; straight-line depreciation
64) We can separate short-term and long-term decisions into three dimensions. Which of the below is NOT one of these? A) Degree of information gathering prior to the decision B) Cost C) Personality of CEO making the decisions D) Length of impact
C) Personality of CEO making the decisions
3.Which of the following is NOT typically thought of as an investment activity? A) Accurately pricing financial assets B) The process of buying and selling financial assets C) Repaying borrowed funds D) Negotiating the rules and regulations of financial transactions
C) Repaying borrowed funds
________ of a project are those that have already been incurred and cannot be reversed. A) Erosion costs B) Opportunity costs C) Sunk costs D) Working capital costs
C) Sunk costs
50 Which of the following statements is TRUE? A) The dealers of stock are not allowed to make money on the difference between what they buy the stock for and what they sell it for. B) A bear market is a prolonged rising market, one in which stock prices in general are increasing. C) The ask price is the price at which a dealer is willing to sell, and the bid price is the price at which a dealer is willing to buy. D) A bull market is a prolonged declining market, one in which stock prices in general are decreasing.
C) The ask price is the price at which a dealer is willing to sell, and the bid price is the price at which a dealer is willing to buy.
Which of the statements below describes the IRR decision criterion? A) The decision criterion is to accept a project if the IRR falls below the desired or required return rate. B) The decision criterion is to reject a project if the IRR exceeds the desired or required return rate. C) The decision criterion is to accept a project if the IRR exceeds the desired or required return rate. D) The decision criterion is to accept a project if the NPV is positive.
C) The decision criterion is to accept a project if the IRR exceeds the desired or required return rate.
Which of the following statements about the relationship between yield to maturity and bond prices is FALSE? A) When the yield to maturity and coupon rate are the same, the bond is called a par value bond. B) A bond selling at a premium means that the coupon rate is greater than the yield to maturity. C) When interest rates go up, bond prices go up. D) A bond selling at a discount means that the coupon rate is less than the yield to maturity.
C) When interest rates go up, bond prices go up.
An investor's total investment set may be referred to as ________. A) the stock market B) diversification C) a financial portfolio D) None of the above
C) a financial portfolio
Strong-form efficient markets theory proclaims that ________. A) one can chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market B) one can exploit publicly available news or financial statement information to routinely outperform the market C) current prices reflect the price and volume history of the stock, all publicly available information, and all private information D) current prices reflect the price and volume history of the stock, all publicly available information, but no private information
C) current prices reflect the price and volume history of the stock, all publicly available information, and all private information
20.When you pay off the principal and all of the interest at one time at the maturity date of the loan, we call this type of loan a/an ________. A) amortized loan B) interest-only loan C) discount loan D) compound loan
C) discount loan
The ________ is a market derived interest rate used to discount the future cash flows of the bond. A) coupon rate B) semiannual coupon rate C) yield to maturity D) compound rate
C) yield to maturity
19.Which of the following is NOT a form of perpetuity? A) A British consol bond B) Preferred stock that pays the same dividend forever C) A philanthropic endowment fund that pays the same charitable amount every year forever D) All are examples of perpetuities.
D) All are examples of perpetuities.
A bond may be issued by ________. A) companies B) state governments C) the federal government D) All of the above
D) All of the above
Diversification is A) not putting all of your eggs in one basket. B) spreading wealth over a variety of investment opportunities. C) a common investment strategy. D) All of the above
D) All of the above
Stocks differ from bonds because: A) bond cash flows are known while stock cash flows are uncertain. B) firms pay bond cash flows prior to paying taxes while stock cash flows are after tax. C) the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase. D) All of the above
D) All of the above
Which of the following is NOT true regarding the total payment in an equal payment amortization table? A) The total payment for any period is equal to the principal plus interest payments for that same period. B) The total payment is calculated using the present value of an annuity formula rearranged to solve for the payment. C) The final total payment will be greater than the beginning principal for the final period, assuming a positive interest rate. D) All of the above are true.
D) All of the above are true.
5.Financial markets can be classified by which of the following? A) Type of asset traded B) Maturity of the financial asset C) Owner of the financial asset D) All of the above can be classifications of financial markets.
D) All of the above can be classifications of financial markets.
Amortization tables are common and can be used for all but which of the following? A) Car loans B) Mortgage loans C) Consumer product loans D) Amortization tables may be used for all of the above.
D) Amortization tables may be used for all of the above.
11) ________ is simply the interest earned in subsequent periods on the interest earned in prior periods. A) Quoted interest B) Anticipated interest C) Simple interest D) Compound interest
D) Compound interest
8. The income statement begins with revenue and subtracts various operating expenses until arriving at the intermediate point of ________. A) earnings after taxes B) net income C) taxable income D) EBIT
D) EBIT
67) In regard to the NPV method, which of the statements below is TRUE? A) In the NPV model, if two projects are being compared, the one with the highest IRR is selected. B) In the NPV model, the present cash flows are discounted at the rate r, the cost of capital. C) In the NPV model, most future cash flows are stated in present value or current dollars and the inflow is "netted" against the outflow to see if the net amount is positive or negative. D) In the NPV model, the net present value of an investment is the present value of all benefits (cash inflow) minus the present value of all costs (cash outflow) of the project.
D) In the NPV model, the net present value of an investment is the present value of all benefits (cash inflow) minus the present value of all costs (cash outflow) of the project.
________ has to do with the speed and accuracy of processing a buy or sell order at the best available price. A) Market efficiency B) Mechanical efficiency C) Informational efficiency D) Operational efficiency
D) Operational efficiency
________ involve(s) a cash flow that never occurs, but we need to add it as a cost or outflow of a new project. A) Cost recovery of divested assets B) Capital expenditures C) Sunk costs D) Opportunity costs
D) Opportunity costs
Which of the statements below is TRUE? A) The frequency of bankruptcy for a high-tech up-start firm is lower than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms. B) The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see lower borrowing rates for start-ups than for mature firms. C) The frequency of bankruptcy for a high-tech up-start firm is lower than for a blue-chip firm, so we see lower borrowing rates for start-ups than for mature firms. D) The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms.
D) The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms.
70) Which of the statements below is TRUE? A) The hurdle rate is the cost of debt needed to fund a project. B) If the IRR exceeds a project's hurdle rate, the project should be rejected. C) If the IRR clears the hurdle rate, the project is rejected. D) The hurdle rate should be set so that it reflects the proper risk level for the project.
D) The hurdle rate should be set so that it reflects the proper risk level for the project.
Which of the statements below is FALSE? A) If you invest money for a short period and buy a six-month CD, you will not receive as high an interest rate as if you bought a CD with a longer maturity period. B) The difference in rates as the borrowing time or investment horizon increases is due to the maturity premium of the investments. C) The maturity premium represents that portion of the yield that compensates the investor for the additional waiting time or the lender for the additional time it takes to receive repayment in full. D) The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands.
D) The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands.
