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1) The primary market is a market in which securities are traded among investors.
2) In actual practice, most corporate bonds pay interest four times a year.
3) For any firms given growth strategy, its dividend decision directly affects its capital
structure decision.
4) The primary types of policy decisions used by policy makers to achieve economic
objectives include trade policy, exchange rate policy, and regulatory decisions.
5) The shorter the maturity of a fixed-rate debt instrument, the greater the reduction in
its value to a given interest rate increase.
6) The ratio of debt to stock market equity has generally been highest for the smallest of
U.S. firms.
7) The most important holders of Treasury bills are corporations and individuals.
8) A sight draft is one that is not accompanied by any special documents and is
generally used when the exporter has confidence in the importers ability to meet the
draft when presented.
9) The transactions motive is the demand for holding cash.
10) Unsystematic risk is the risk that cannot be eliminated through diversification.
11) The return provided by a $100 annuity deposited for 10 years that results in a future
value of $1,593.74 is 15%.
12) The greater the total fixed operating costs of a firm, the greater the degree of
operating leverage and the greater the degree of combined leverage.
13) Bonds rated higher than BB+ by Standard & Poors and Fitch are considered to be
investment grade issues.
14) The present value of a $100 deposit in 10 years at 10% is $38.55.
15) A convertible bond can be converted, at the issuing firms option, into a specific
number of shares of the issuers common stock.
16) Which of the following is not considered to be a major financial management
function?
a.financial planning and analysis
b.asset management
c.managing the firms accounting system
d.raising funds
17) Corporate debt as a percentage of GDP grew from around ______ in 1970 to nearly
______ in 2007.
a.35%; 50%
b.40%; 55%
c.45%; 60%
d.50%; 60%
18) Which of the following bond types would describe unsecured obligations that
depend on the general credit strength of the corporation?
a.collateralized bonds
b.mortgage bonds
c.equipment trust certificates
d.debenture bonds
19) The basic function served by requiring adequate bank reserves in the monetary
system is to:
a.assure bank liquidity
b.provide the basis for the regulation of credit expansion and contraction
c.maintain adequate capital for investors
d.impose a burden of risk on bank stockholders
20) All of the following statements are correct except:
a.The internal growth rate measures how quickly a firm can increase its asset base over
the next year without raising outside funds
b.The retention rate represents the proportion of every $1 of earnings per share that is
retained by the firm; in other words, it is equal to one minus the dividend payout ratio
c.The sustainable growth rate measures how quickly the firm can grow when it uses
only debt financing to keep its capital structure constant over time
d.The internal and sustainable growth rate relationships suggest that there are three
measurable influences on growth: dividend policy (as reflected in the retention rate),
profitability (as measured by ROA), and the firms capital structure (as measured by the
equity multiplier)
e.All of the above statements are correct
21) BP has an average age of inventory of 60 days, an average collection period of 45
days, and an average payment period of 30 days. Based on this information, BPs cash
conversion cycle is ________ days.
a.55
b.65
c.75
d.85
e.none of the above
22) If prices in a particular market fully reflect all public and private knowledge, the
market is efficient in the:
a.weak form
b.semi-strong form
c.strong form
d.both a and b
23) Which one of the following sources provides the least backing (collateral) today for
U.S. Federal Reserve notes?
a.gold certificates
b.Special Drawing Rights
c.eligible paper in the form of business notes and drafts
d.U.S. government and agency securities
24) Which of the following statements is most correct?
a.Capital markets include short-term and long-term debt securities such as Treasury
bills, notes, and bonds
b.Money market instruments include commercial paper, federal funds, repurchase
agreements, and Treasury notes
c.Real estate mortgages are money market instruments
d.Federal agencies, and state and local governments, generally issue longer-term
financial claims which trade in the capital market
25) Gross domestic product is equal to the sum of all of the following EXCEPT:
a.personal consumption expenditures
b.gross exports
c.government expenditures
d.all of the above are included
26) The linear relation between the returns on a stock and the returns on the market
portfolio is called the:
a.alpha
b.beta
c.covariance
d.coefficient of variance
27) If the value of the securities that you borrowed money from your broker to purchase
falls, you may receive a:
a.maintenance margin call
b.margin call
c.limit order call
d.specialist call
28) The portion of current assets financed through long-term financing is referred to as
the:
a.net working capital
b.current ratio
c.seasonal current assets
d.fixed assets
29) The liquidity preference theory holds that interest rates are determined by the:
a.supply of and demand for liquids such as oil
b.supply of and demand for better returns
c.flow of funds over time
d.flow of bank credit over time
e. none of the above
30) If a Microsoft January 20 put option with a strike price of $20 was selling for $5.00
and the market price of the underlying Microsoft stock was $15.00, the price of the put
option would be _______________.
a.in-the-money
b.out-of-the-money
c.fairly priced
d.not enough information to tell
31) Before arbitragers take action with respect to exchange rate differentials:
a.central bank approval must be obtained
b.loans to cover transactions must be obtained
c.a market differential of at least 1 must exist between two currencies
d.a differential of as little as 1/16 of 1 may trigger action
32) Which of the following borrowing sectors is the most important on an annual basis
for raising funds in the credit markets?
a.U.S. governments
b.state and local governments
c.households
d.corporations
33) A ________ which is a security backed by mortgage-backed securities could be
sliced and diced into different tranches are parts such that the different parts would
appeal to different investors.
a.MPO
b.CDO
c.MDS
d.MDO
e.none of the above
34) The six principles of finance are:
a. (1) Money has a time value, (2) Rational investors focus on the highest return, (3)
Diversification of investments can reduce risk, (4) Financial markets are efficient in
pricing securities, (5) Manager and stockholder objectives may differ, and (6)
Reputation matters
b. (1) Money has a time value, (2) Higher returns are expected for taking on more risk,
(3) Diversification of investments can reduce risk, (4) Financial markets are efficient in
pricing securities, (5) Manager and stockholder objectives should always be the same,
and (6) Reputation matters
c. (1) Money has a time value, (2) Higher returns are expected for taking on more risk,
(3) Diversification of investments can reduce risk, (4) Financial markets are efficient in
pricing securities, (5) Manager and stockholder objectives may differ, and (6)
Reputation matters
d. (1) Money has a time value, (2) Higher returns are expected for taking on more risk,
(3) Diversification of investments can reduce risk, (4) Financial markets are efficient in
pricing securities, (5) Manager and stockholder objectives may differ, and (6)
Competitive advantages are sustainable
35) As defined in accordance with efficient markets notions, a strong-form efficient
market would be a market in which asset prices reflect all:
a.past information
b.current information
c.public information
d.public and private information
36) The ________ of a firm is the amount of time that elapses from the point when the
firm makes an outlay to purchase raw materials to the point when cash is collected from
bad debt.
a.cash conversion cycle
b.operating cycle
c.average age of inventory
d.average collection period
e.none of the above
37) Which one of the following instruments is the least important in terms of funds
raised in the credit markets?
a.U.S. government securities
b.tax-exempt obligations
c.corporate bonds
d.mortgages
38) The annual rate of return is often referred to as the
a.discount rate
b.opportunity cost
c.cost of capital
d.all of the above
39) The value of a share of stock currently selling for $100 after a 5 for 1 split is:
a.$20
b.$40
c.$500
d.$1000
e.none of the above
40) In a perfect world, a firm would prefer to have a
a.positive operating cycle
b.negative operating cycle
c.positive cash conversion cycle
d.negative cash conversion cycle
e. none of above are correct
41) Daniel deposits $2,000 per year at the end of the year for the next 15 years into an
IRA account that currently pays 7%. How much will Daniel have on deposit at the end
of the 15 years?
a.$39,981
b.$46,753
c.$49,002
d.$50,258
42) If a firm pays out 30% of its earnings as dividends and has averaged a 20 percent
return on assets, how quickly can the firm grow without needing to secure outside
funding sources?
a.6.4%
b.10.2%
c.16.3%
d.20.0%
e.none of the above
43) Of the four options listed below and encountered in project evaluation, which one is
most likely to make a project seem less attractive?
a.underestimating negative cash flows
b.overestimating positive cash flows
c.using a higher cost of capital
d.ignoring the time value of money
44) Sales of securities that the seller does not own is called a:
a.stop-loss order
b.short sale
c.limit order
d.maintenance margin
45) A firm with a total asset turnover lower than the industry standard and a current
ratio which meets the industry standard may have
a.excessive fixed assets
b.excessive inventory
c.excessive accounts receivable
d.excessive plant and equipment
e.both a and d are correct
46) Which of the following statements is false?
a.Preferred stock that is both cumulative and convertible is a popular financing choice
for investors purchasing shares of stock in small firms with high growth potential
b.Bond issues of a single firm can have different bond ratings if their security
provisions differ
c.Yankee bonds are dollar-denominated bonds that are sold outside the United States
d.All of the above statements are correct
47) The Capital Asset Pricing Model (CAPM) states that the expected return on an asset
depends upon its level of:
a.systematic risk
b.unsystematic risk
c.beta
d.two of the above
e. none of the above
48) Commercial finance companies:
a.make riskier unsecured business loans but charge higher interest rates
b.specialize in loans secured by inventories and real estate
c.concentrate their lending activity to firms pledging the notes receivable of their
customers
d.are primarily interested in loans secured by a business customers accounts receivable
and inventories
49) Insider trading laws are intentionally designed to be _________________.
a.ambiguous
b.precise
c.clear
d.fair
e. none of the above
50) In purchasing a claim to foreign exchange:
a.it is necessary only to go to a local bank
b.a permit must first be received from a Federal Reserve Bank
c.a bank specializing in foreign exchange must be contacted
d.a cable, telephone call, or letter must be directed to a foreign bank
51) A firms degree of combined leverage can be measured as degree of operating
leverage __________ the degree of financial leverage:
a.plus
b.minus
c.times
d.divided by
52) A sinking fund:
a.is a special fund set up to pay of the creditors of bankrupt firms
b.requires specific approval by the firms the board of directors
c.requires the issuer to retire a bond issue incrementally over time
d.none of the above
