The Board of Governors
a. manages the nation’s stock of gold
b. has the substantive control over the money supply
c. controls the U.S. Treasury
d. is appointed by the U.S. Treasurer
A risky $1,000 investment is expected to generate the following cash flows:
Convertible bonds have
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
Leverage ratios measure
a. extent to which the firm uses debt financing
b. the speed with which the firm sells inventory
c. sales relative to some base such as equity
d. capacity of the firm to meet current obligations
The efficient market hypothesis
a. suggests that the market for securities is becoming less efficient
b. implies that investor can consistently outperform the market
c. is built upon competition and the rapid dissemination of information
d. suggests that security prices change slowly over time
If the shares of a closed-end investment company sell for a discount,
a. the shares are undervalued
b. the price of the stock is less than the company’s liabilities
c. the net assets exceed the price of the shares
d. the value of the assets have declined more than the price of the stock
Venture capitalists
a. buy existing securities
b. are a source of funds for large firms
c. buy securities issued by small, emerging firms
d. register the securities they purchase with the SEC
The cost of capital includes
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
By selling securities to the general public, the FED
a. reduces the money supply
b. raises commercial banks’ deposits
c. increases the money supply
d. increases banks’ excess reserves
On a compounded basis, which of the following loans is more expensive?
Money serves as
a. a substitute for equity
b. a precaution against inflation
c. a medium of exchange
d. a risk-free liability
Convertible bonds lack
a. an indenture
b. a call feature
c. dividend payments
d. a maturity date
The regulation of security markets
a. protects investors from poor investments
b. is enforced by the Federal Reserve
c. is enforced by the SEC
d. applies only to government securities
To determine the effective cost of a loan, the borrower needs to know
a. the use of the proceeds
b. the prime rate
c. the length (or term) on the loan
d. the margin requirement
Features of convertible bonds include
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
Which of the following involves a fixed payment?
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. only 1
If you open an individual retirement account (IRA) at a commercial bank and deposit
$1,000 in the account per year, how much will be in the account after 20 years if the
funds earn 7% annually?
The cost of debt is affected by
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
Federally insured investments include
a. savings accounts in national commercial banks
b. certificates of deposit in excess of $500,000
c. life insurance policies
d. commercial bank assets
By lowering the discount rate, the Federal Reserve
a. discourages commercial banks from lending
b. encourages commercial banks to borrow reserves
c. discourages depositors from withdrawing funds
d. contracts the money supply
The future value of a dollar
1) decreases with compounding
2) increases with compounding
3) decreases with higher interest rates
4) increases with higher interest rates
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
Which of the following should tend to decrease the firm’s profitability?
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
The price of a bond depends on
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
Given the following information, answer the following questions.
TR = $3Q
TC = $1,500 + $2Q
a. What is the break-even level of output?
b. If the firm sells 1,300 units, what are its earnings or losses?
c. If sales rise to 2,000 units, what are the firm’s earnings or losses?
d. If the total cost equation were
TC = $2,000 + $1.80Q,
what happens to the break-even level of output units?
Which of the following tends to vary spontaneously with changes in the level of sales?
a. long-term debt
b. plant
c. accounts payable
d. paid-in capital
If the net present value of two mutually exclusive investments is positive, the firm
should
a. make both investments
b. make neither investment
c. make the investment with the higher present value
d. make the investment with the higher net present value
The yield to maturity assumes that
a. the bond will be called
b. the coupon will increase with higher interest rates
c. the coupon will decrease with lower interest rates
d. the bond will not be called
If the internal rates of return of two mutually exclusive investments exceed the firm’s
cost of capital, the firm should
a. make both investments
b. make neither investment
c. make the investment with the lower internal rate of return
d. make the investment with the higher internal rate of return
As a firm uses excessive amounts of debt financing,
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
A pension plan that grants mortgage loans
a. is an example of a financial intermediary
b. cannot suffer losses
c. is called a savings and loan association
d. is not a financial intermediary
If a bond sells for a discount, its price approaches the face value as the bond approaches
maturity.
When an individual buys stock through a secondary market (e.g., the NYSE), the firm
receives the sales proceeds.
If the price of a stock is less than the strike price, a call has no intrinsic value (that is,
out of the money).
The dividend-growth model cannot be adjusted for changes in growth rates or changes
in risk.
The firm will prefer debt to leasing since interest is a tax deductible expense while lease
payments are not tax deductible.
If a creditor owes $24,000 and annually pays $3,000, how quickly will the loan be
retired if the interest rate is 8 percent annually?
Mutual funds do not pay income taxes.
One method to increase the effective cost of a loan is to discount the interest in
advance.
The cost of preferred stock is greater than the cost of debt primarily as the result of the
difference in tax treatment of dividends and interest.
Preferred stock dividends are usually fixed.
If a firm sells equipment and subsequently leases it back, that is illustrative of a
leveraged lease.
If a speculator has a short position and the commodity’s price falls, that individual will
receive a margin call.
The primary reason for purchasing an option is the income it generates.
A recession will cause earnings to fall more rapidly for less financially leveraged firms.
A speculator must make a good faith deposit after entering a futures contract to buy
wheat.
The person who makes a market in a stock traded on the NYSE is called a broker.
Corporate losses can not result in tax refunds.
A P/E ratio may be used as a multiple to forecast a firm’s future earnings.