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1) A bond will sell at a discount if its required return or discount rate is greater than its
coupon rate.
2) Because interest compounds, the annual percentage rate formula will overstate the
true interest cost.
3) Most bonds currently issued in the United States today are bearer bonds.
4) The par value of a preferred stock is meaningful in that it is often used to determine
the fixed annual dividend.
5) Gross investment may or may not equal gross savings.
6) The direct quotation method indicates the amount of a foreign currency necessary to
purchase one unit of the home countrys currency.
7) GDP includes personal consumption expenditures, government purchases of goods
and services, gross private domestic investment, and net exports of goods and services.
8) External financing needs can be calculated by subtracting the addition to retained
earnings and an increase in spontaneous financing from a firms change in assets.
9) The degree of combined leverage is the percentage change in earnings per share that
results from a one percent change in EBIT.
10) Credit extended on purchases to a firms customers is called trade credit.
11) 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.14.3%
d.20.0%
e.none of the above
12) When the market interest rate rises above the coupon rate for a particular quality of
bond, the current yield:
a.will be below the coupon rate
b.will be the same as the coupon rate
c.will be above the coupon rate
d. cannot be determined
13) Paid-in-capital in excess of par represents:
a.the net proceeds from the original sale of stock
b.the proceeds in excess of par value from the original sale of stock
c.the current market value of the stock
d.the current book value of the stock
e.none of the above
14) The _____________ is the difference in return earned by investing in a longer term
bond that has the same credit risk as a shorter-term bond.
a.purchasing power spread
b.credit risk premium
c.horizon risk premium
d.two of the above
e.none of the above
15) Which of the following categories is not considered to be one of the four basic
economic units in the U.S. financial system?
a.business firms
b.financial intermediaries
c.governments
d.not-for-profit organizations
e.all are considered among the four basic economic units of the financial
system
16) Which of the following statements is false?
a.More frequent compounding results in additional return on the investment
b.An amortized loan is repaid in equal payment over a specified time period
c.The effective annual rate is determined by multiplying the interest rate charged per
period by the number of periods in a year
d.Each of the above statements is true
17) __________________ assess both the collateral and underlying bonds as well as the
ability of the issuer to make timely interest and principal payments.
a.Bond covenants
b.Bond indentures
c.Bond ratings
d.none of the above
18) In reaction to the then developing 2007-2009 financial crisis, short-term interest
rates _______ sharply and were ______ than ______ percent by October, 2008.
a.declined, less, 0.5
b.rose, more, 10
c.declined, more, 6
d.declined, less, 20
e. none of the above
19) The _____________ policy states that dividends will vary based upon how much
excess funds the firm has from year-to-year, whereas under a ________________
policy the firm pays a constant percentage of earnings as dividends, so as earnings rise
and fall so does the dollar amount of dividends.
a.constant payout ratio, regular dividend
b.regular dividend, constant payout ratio
c.constant dividend, variable payout ratio
d.variable payout ratio, constant dividend
e.none of the above
20) Assume JP Morgan has a choice between two deposit accounts. Account A has an
annual percentage rate of 7.55 percent but with interest compounded monthly. Account
B has an annual percentage rate of 7.45 percent with interest compounded continuously.
Which account provides the highest effective annual return?
a.Account A
b.Account B
c.Both provide the same effective annual return
d.We don't have sufficient information to make a choice
21) If the Fed wishes to stimulate the economy, it may:
a.raise the discount rate
b.raise reserve requirements
c.sell securities through open market operations
d.raise both the discount rate and the reserve requirements
e.none of the above
22) Which of the following statements is most correct?
a.Corporate after-tax profits rose from $473.8 billion in 2006 to $616.2 billion in 2008.
This rise coincided with the 2007-09 financial crisis
b.Corporate after-tax profits remained about the same at $500 million between 2006
and 2008
c.Corporate after-tax profits declined from $616.2 million in 2006 to $473.8 million in
2008. This decline coincided with the 2007-09 financial crisis
d.Corporate after-tax profits rose from $473.8 million in 2006 to $616.2 million in
2008. This rise coincided with the 2007-09 financial crisis
e.none of the above
23) If you expect the inflation premium to be 2%, the default risk premium to be 1%
and the real interest rate to be 4%, what interest would you expect to observe in the
marketplace on short term treasury securities?
a.8%
b.7%
c.6%
d.5%
24) A basic requirement for an effective financial system is a monetary system that
performs which of the following financial functions?
a.formation and transferring of money
b.storing gold and silver to back up money
c.creating jobs
d.transferring real assets
25) The IRR
a.shows the graphical relationship between a projects NPV and cost of capital
b.is the return that causes the NPV to be zero
c.is the return that causes the NPV to be positive
d.measures the firm and projects required rate of return
e.none of the above
26) The budget-making process rests with the:
a.Congress
b.U.S. Treasury
c.Presidents Council of Economic Advisors
d.U.S. Treasury in cooperation with the Fed
27) Positive NPV projects may originate from cost saving projects such as those that
a.reduce economies of scale
b.reduce product differentiation
c.reduce absolute cost advantages
d.fail to exploit advantages in distribution channels
e.none of the above statements are correct
28) Direct securities:
a.are contracts between savers and institutions
b.are contracts between savers and borrowers
c.represent the financial asset of the borrower and the claim on the saver
d.represent the claim on the institution
29) Which of the following statements is most correct?
a.As levels of income decrease, an individual may dissave, that is, reduce further
consumption expenditures rather than liquidate accumulated savings
b.The ability to provide adequate funds to meet our investment needs is dependent
primarily on the savings of corporations and the government
c.In terms of the amount of funds raised annually in the credit markets, borrowing by
the state and local government sector is smaller than borrowing by the U.S. government
d.All of the above statements are correct
30) The ________________________, the greater the chance of the option becoming
_____________________.
a.shorter the time to expiration, in-the-money
b.longer the time to expiration, out-of-the-money
c.less the volatility, in-the-money
d.two of the above are correct
e. none of the above
31) Crucial elements of well-developed financial systems include:
a.financial management
b.financial intermediaries
c.financial markets
d.all of the above
32) In 1966, the average tuition for one year in the MBA program at the University of
Chicago was $3,600. Thirty years later, in 1996, the average tuition was $27,400. What
is the compound annual growth rate in tuition (rounded to the nearest whole percentage)
over the 30-year period?
a.6%
b.7%
c.8%
d.10%
33) Should a business fail after receiving shipping documents from its bank on the basis
of a trust receipt, the bank:
a.becomes a preferred creditor to the extent of the amount due less cash deposits with
the bank
b.repossesses the merchandise on the basis of a specific lien thereon
c.repossesses the merchandise on the basis of its holding of title to the merchandise
d.has a prior claim relative to other general creditors
34) The multiplying capacity of primary deposits is reduced if:
a.no additional cash is withdrawn for hand-to-hand circulation
b.businesses increase their petty cash funds in U.S. banks
c.foreign countries deposit funds in U.S. banks
d.the U.S. Treasury deposits funds
35) Jill Clinton puts $1,000 in a savings passbook that pays 4% compounded quarterly.
How much will she have in her account after five years?
a.$1,200.50
b.$1,220.20
c.$1,174.80
d.$1,217.50
36) All of the following represent bonds secured by real assets except a (n):
a.closed-end mortgage bond
b.equipment trust certificate
c.debenture
d.more than one of the above
37) Calculation of a firms average collection period is the same as calculating the:
a.accounts receivable cycle
b.inventory cycle
c.accounts payable cycle
d.short-term operating cycle
38) Of the following forms of organization, which businesses are the greatest in
numbers?
a.proprietorships
b.partnerships
c.corporations
d.limited partnerships
39) Which of the following statements is false?
a.diversification cannot eliminate risk that is inherent in the macroeconomy or market
risk
b.the expected rate of return on a portfolio does not depend on the correlation between
the return on each stock
c.although gold is a risky investment by itself, including gold in a stock portfolio may
reduce total risk of the portfolio
d.all of the above statements are correct
40) Holding demand constant, an increase in the supply of loanable funds will result in
a (n) ___________ in interest rates.
a.increase
b.decrease
c.increase or decrease
d.none of the above
41) Primary securities markets are markets where the transfer of existing debt and
equity securities between investors occurs.
42) The six principles of finance include (1)Money has a time value, (2) Higher returns
are expected for taking on less risk, (3) Diversification of investments can increase risk,
(4) Financial markets are inefficient in pricing securities, (5) Manager and stockholder
objectives may differ, and (6) Reputation matters.
43) Personal finance is the study of how individuals prepare for financial emergencies,
protect against premature death and property losses, and accumulate wealth.
44) Securitization is the process of securing a mortgage through the purchase of
insurance.
45) A prime mortgage is a home loan to a borrower with relatively high credit
worthiness indicating a relatively high likelihood that mortgage payments will be made
when due; scores above 900 reflect the highest credit quality classification.
46) During the past couple of decades, generally low fixed-rate mortgage loan interest
rates and the desire to extend housing ownership to more individuals in the U.S., the
use of adjustable-rate mortgages fell.
47) An adjustable-rate mortgage (ARM) has an interest rate that is usually adjusted
annually to reflect changes in Treasury bill rates (or other benchmark); ARMs typically
have variable interest rates for one to five years with a provision to switch to a
fixed-rate over the remaining life of the ARM.
