INTRODUCTION TO FINANCE
1. All money market instruments are short-term debt 2. Commercial paper is more likely to be placed directly by large finance companies. 3. Bankers' acceptances are used primarily for financing international trade. 4. Eurodollars are dollar denominated, foreign-owned deposits in U.S. banks. 5. Capital market securities have better liquidity than money market securities. 6. Capital market interest rates tend to be higher than money market rates for any issuer. 7. Both governments and businesses issue both debt and equity capital market securities 8. Households are the main providers of funds 9. A financial market is a market in which financial assets can be purchased or sold. 10. Those financial markets that facilitate the flow of short-term funds (with maturities of less than one year) are known as capital markets, while those that facilitate the flow of long-term funds are known as money markets. 11. Primary markets facilitate the trading of existing securities. 12. An organized exchange is a telecommunications network. 13. Bonds are long-term debt obligations issued by corporations and government agencies to support their operations. 14. Long-term debt securities tend to have lower risk but a higher return than money market securities. 15. Derivative securities are financial contracts whose values are derived from the values of underlying assets. 16. The price of a bond is the present value of future payments discounted at the coupon rate.
17. If the coupon rate equals the market rate, a bond is likely to be selling at a discount. 18. The coupon rate varies inversely with bond prices.
MULTIPLE CHOICE QUESTIONS
1. Which of the following is not a characteristic of money market instruments?
Which of the following money market instruments would typically be used in international transactions? a.
4. c. b.000 face value T-bill priced at $97. b. maturing in 181 days is: a.b. c.
. . c. d. and promises to sell the securities back to the dealer in 4 days for $997.575. c. a firm to first buy securities with the agreement to sell them back in a short period at a lower price. a firm to first buy securities with the agreement to sell them back in a short period at a higher price. A repurchase agreement calls for a. a firm to first sell securities with the agreement to buy them back in a short period at a higher price. A bank agrees to buy T-bills from a securities dealer for $997.97% 2. a Treasury billb.a.17%
6. d.86% 2. c. a firm to first sell securities with the agreement to buy them back in a short period at a lower price d.97% 5. Treasury bills. repurchase agreement d.500. 4. a negotiable CD
3. The money market security represented by the largest dollar amount outstanding is a. The bank discount rate on a $100. commercial paper negotiable CDs.10% 5. 2.
low default risk high marketability
2. d. b. c.
short-term to maturity small denomination
b. commercial paper b.91% 2.84% 4. a banker's acceptance d. The yield on this reverse repo for the bank is: a.
c. institutional investors d. d.000. 90-day Treasury securities 180-day Treasury securities 10-year Treasury securities 90-day Commercial paper
10.000. c. b. Which security below did the market view as having the greatest default risk? a. Investors will want a higher yield on bond __ and will pay ____ for the bond. the bidder specifying the quantity of bills desired b. c. bond B is callable. more
11. the price the investor wishes to pay c. Which of the following is not an example of capital market securities? a.7. A competitive bid in the Treasury securities auction market has all of the following characteristics except: a. less B. Bond A is not callable. b. d. 8. common stocks convertible bonds commercial paper mortgages
9. a. A. less A. d. b. large. bids for a maximum of $1. more B. Which of the following are not main participants in financial market transactions?
secondary markets. secondary markets. are markets in which financial assets such as stocks and bonds can be purchased and sold.
15. b. primary markets.
households financial institutions governments businesses all of the above are main participants in financial market transactions
12. c. e. money markets. e. e. d. d. capital markets. b. d. primary markets. d. facilitate the flow of funds from surplus to deficit units. An individual investor purchases some existing shares of IBM stock through his broker. c. facilitate the flow of funds from deficit to surplus units. b. Financial markets facilitating the flow of short-term funds with maturities of less than one year are known as a.
13. c. Financial markets facilitating the trading of existing securities are known as a. c. none of the above. none of the above. e. b.a. Financial markets a. money markets. None of the above Only answers b and c are correct. Which of the following transactions would not be considered a secondary market transaction? a. capital markets.
Repurchase agreements Municipal bonds Corporate bonds Equity securities Mortgages
18. d. higher higher. Long-term debt securities tend to have a ___________ expected return and _________ risk than money market securities. c.
According to your text. Treasury bills Treasury notes retail CD banker’s acceptance commercial paper
17. which of the following is not considered a money market security? a. a. b. c. higher
. d. d. lower. Microsoft issues new shares of common stock using its investment bank. d. Common stock Derivative securities Bonds None of the above
19. lower higher. a. b.
An institutional investor sells some Disney stock through his broker. c. d. a. c. b. 16. ____________ are long-term debt obligations issued by corporations and government agencies to support their operations.b. c. e.
________________ are not considered capital market securities. All of the above would occur in the secondary market. b. lower lower. e.
036 c.200 b. If market rates on newly issued similarly rated corporate bonds are now 7. c. has a face value of $1.000.20. par. and maturing in six years is currently yielding 7. $1.42
26. Judy would like to accumulate $70. c. $1. interest paid semiannually.93 d.179 d. $936. $6. a premium.00
27. the bond will sell for a. $39.359
24. Tom deposits $10. Which of the following statements is true? a. d. the lower the price of a bond. $910. $39.
.000 in a savings deposit paying 4%.088 d.000 invested at 6%.19 c.225 b.000. b. $972.159 c.22 c.734 d. A bond currently selling at a premium price above face value a.00 b. b.386
22. paying $65 interest at the end of each year for 6 years.5%.028.000 by the time her son starts college in ten years. d. $13. $880.131.08 b. The higher the coupon. will be worth how much after 5 years? a. What amount would she need to deposit now in a deposit account earning 6%. has a yield equal to its coupon rate. $1.513 c. $13. What amount would he have at the end of seven years? a. compounded quarterly. to accumulate her savings goal? a. $906. A $1000 bond with an 8. $953. compounded yearly.027.691 b. What is the current price of the bond? a. $125. A corporate bond.2% coupon rate.35
25. what is the price of the bond? a. $1. a 4-year maturity. $16.00 c. has a yield below its coupon rate.325
23. what is the current market price of this bond? a. Coupon rates are fixed at the time of issue. $13. All of the above
21. When a bond's coupon rate is equal to the market rate of interest.48 d. $1. and similar bonds are yielding 11%. $4.000. If a $1000 par value bond has an 8% coupon (annual payments) rate. $5. a discount. $13. a variable rate.41 d. $6.06 b. b.6% in the market. compounded monthly. $1. $5. Bond prices and interest rates move together.048.
option contract. b. c.
33.21 b. face value of the bond increases. people do not take risk. $974. people only accept risk when they absolutely have to. The five core principles of Finance include each of the following except: a.000 face value bond with a 10% coupon if the market rate is 10%? a. c.
34. information is the basis for decisions. A standardized. call. cannot ascertain
32.50 d.c. b and d 36. sole proprietor
. d. the a. people will only accept risk when they are rewarded for doing so. c.000 b. market value of the bond is increasing. forward contract. forward contract.
35. exchange-backed contract to deliver assets 3 months from today is a: a. What is the price of a $1. c. If market interest rates fall after a bond is issued. d. b. time has value.026.64
31. 8% Treasury bond maturing in three years is priced to yield 7%. The statement "risk requires compensation" implies: a. market value of the bond is decreasing. general partner IV. A $1. futures contract. $927. Under which of the following forms of business organization are the losses to an owner limited to the amount which he or she has invested in the organization? I. b.50 c. common stockholder II.000 par. all people act rationally. has no risk. $1. securitized asset. people will pay to avoid risk. d.
has a yield above its coupon rate. b. d.
29. A conditional contract granting its holder the right to buy assets in the future is a: a. futures contract. (assuming semiannual compounding) is a. $813. c. risk requires compensation. more than $1. $1. put. investor will sell the bond. d.000 c. limited partner III.000 d. Its market price
30. d. e. b. less than $1.
38. Which one is an advantage enjoyed by a corporation but not by a sole proprietorship? a. What is the total future value six years from now of $125 received in one year.047. If the interest rate were to suddenly increase. $250 received in two years. separation of general and limited owners 40. $25. Today. decreases with each payment . fall. Five years ago. c.000.200 was deposited into a savings account paying 4. the present value of that future amount to you would a. Capital structure refers to the:
b. I. b. In a typical loan amortization schedule.237. mixture of short-term and long-term debt a firm uses to finance its operations. $1. ease of company formation e.495. the dollar amount of interest paid each period a. b.5 percent interest. $75.93 d. the balance in the account is $1. remains constant with each payment 41. amount of long-term debt and equity a firm uses. If interest paid on the account was compounded annually.a. $1.21 b. I and II only e. b.39 b. how much interest on interest was earned? a.00 percent? a. $295.57 b.000 in one year.00 d. You just won a prize! You can either receive $950 today or $1. remain unchanged d. $1. increases with each payment c. $102. Which option do you prefer and why if you can earn 6 percent on your money?
. unlimited liability for the firm's owners c. I only c.22 c.00
43. c. unlimited life of the company d. II and III only 37. rise. and $500 received in six years if the compounded annually rate is 9. $1. cannot be determined without more information
39.145.045. d. $1. double taxation of profits
42. types of equipment a firm employs in its production process. II and IV only d.00 c. composition of a firm's short-term assets. III and IV only
a. II. In 3 years you are to receive $5.
If required return is 14 percent. If the required return is 15 percent.000. except one of the following is an explanation for paying interest on borrowed money? a. either. $950. b. A project whose net present value (NPV) equals zero: a. All.000 a year for 4 years and project B pays $20. c. because it has the higher future value d. what is the net present value (NPV)? a.58 b. You undertake a project that requires an initial investment of $9. $4. has a payback period that is greater than the life of the project. B.000.100 a year for the next 4 years. You should reject both projects d. If a project has non-conventional cash flows. $100 $200 $300 $400 b. should be accepted even if the firm has other potential investments with positive NPVs d.a. b. interest is the penalty paid for consuming income before it is earned.000 a year for 5 years. Project A pays $25. because it has the higher future value b. it may also have more than one IRR. Assume that the interest rate is greater than zero. c. You expect to receive $3. You are trying to choose between two projects as you do not have sufficient funding to accept both projects. which project should you choose and why? a. d. Each project costs $80. interest is the time value of delayed consumption 48. interest is always paid at the maturity of a loan. You are indifferent between project A and B because they pay back the same amount 47. Which of the following cash-inflow streams should you prefer for a 4-year investment? Year1 Year2 Year3 Year4 a. A. is expected to yield a return equal to the firm's required return. should be rejected. because it is more money c. a. $1000.26 c. because it has a higher NPV
. because both options are of equal value to you 44. False
45. $400 $300 $200 $100 b. 49. because it has a higher IRR c.63
46. interest is the rental cost of purchasing power. True b. -$7. -$149. -$235. $1000.57 d.
With continuous compounding at 10 percent for 30 years.000. $40000. Both of them d. If a project's NPV is less than zero. $164. $34.282. You expect annual interest rates will be 8 percent over that time period.000 USD and IRR of 16%. None of them. $32000.000 is closest to a. while it’s IRR is 22%.$40. None of the above 51.500. since they each sum to $1. Which of the following statement is correct? a. The maximum price you would be willing to pay for the annuity is closest to a. then its IRR must be less than zero e. c.249. d. Project Y c. c. then its IRR must be greater than zero c. the future value of an initial investment of $2. 50.898. If a project's NPV is greater than zero. Any of the above. comparable and mutually exclusive to X. b.000 USD. 52. Project X b. b. If a project's NPV is less than zero. then its IRR must be less than zero b. Project X has NPV of 290.000 a year for the next 20 years. You want to buy an ordinary annuity that will pay you $4. $250 $250 $200 $300 d. has NPV of 1. then its IRR must be greater than zero d. $39272. Project Y. If a project's NPV is greater than zero. $80000 53. d.$328. What should be chosen? a.c.171.