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INTRODUCTION TO FINANCE

TRUE-FALSE QUESTIONS
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?

a. c.

short-term to maturity small denomination

b. d.

low default risk high marketability

2. Which of the following money market instruments would typically be used in international transactions? a. c. a Treasury billb. commercial paper b. a banker's acceptance d. a negotiable CD

3. The money market security represented by the largest dollar amount outstanding is a. c. commercial paper negotiable CDs. .b. repurchase agreement d. Treasury bills.

4. The bank discount rate on a $100,000 face value T-bill priced at $97,500, maturing in 181 days is: a. b. c. d. 4.84% 4.97% 5.10% 5.17%

5. A bank agrees to buy T-bills from a securities dealer for $997,250, and promises to sell the securities back to the dealer in 4 days for $997,575. The yield on this reverse repo for the bank is: a. b. c. d. 2.97% 2.91% 2.86% 2.93%

6. 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. b. a firm to first buy securities with the agreement to sell them back in a short period at a higher price. c. a firm to first sell securities with the agreement to buy them back in a short period at a lower price d. a firm to first buy securities with the agreement to sell them back in a short period at a lower price.

7. A competitive bid in the Treasury securities auction market has all of the following characteristics except: a. the bidder specifying the quantity of bills desired b. the price the investor wishes to pay c. large, institutional investors d. bids for a maximum of $1,000,000. 8. Which of the following is not an example of capital market securities? a. b. c. d. common stocks convertible bonds commercial paper mortgages

9. Which security below did the market view as having the greatest default risk? a. b. c. d. 90-day Treasury securities 180-day Treasury securities 10-year Treasury securities 90-day Commercial paper

10. Bond A is not callable; bond B is callable. Investors will want a higher yield on bond __ and will pay ____ for the bond. a. b. c. d. A; less A; more B; less B; more

11. Which of the following are not main participants in financial market transactions?

a. b. c. d. e.

households financial institutions governments businesses all of the above are main participants in financial market transactions

12. Financial markets a. b. c. d. e. facilitate the flow of funds from deficit to surplus units. facilitate the flow of funds from surplus to deficit units. are markets in which financial assets such as stocks and bonds can be purchased and sold. None of the above Only answers b and c are correct.

13. Financial markets facilitating the flow of short-term funds with maturities of less than one year are known as a. b. c. d. e. money markets. capital markets. primary markets. secondary markets. none of the above.

14. Financial markets facilitating the trading of existing securities are known as a. b. c. d. e. money markets. capital markets. primary markets. secondary markets. none of the above.

15. Which of the following transactions would not be considered a secondary market transaction? a. An individual investor purchases some existing shares of IBM stock through his broker.

b. c. d. 16.

An institutional investor sells some Disney stock through his broker. Microsoft issues new shares of common stock using its investment bank. All of the above would occur in the secondary market.

According to your text, which of the following is not considered a money market security? a. b. c. d. e. Treasury bills Treasury notes retail CD bankers acceptance commercial paper

17.

________________ are not considered capital market securities. a. b. c. d. e. Repurchase agreements Municipal bonds Corporate bonds Equity securities Mortgages

18. ____________ are long-term debt obligations issued by corporations and government agencies to support their operations. a. b. c. d. Common stock Derivative securities Bonds None of the above

19. Long-term debt securities tend to have a ___________ expected return and _________ risk than money market securities. a. b. c. d. lower; lower lower; higher higher; lower higher; higher

20. Which of the following statements is true? a. b. c. d. Bond prices and interest rates move together. Coupon rates are fixed at the time of issue. The higher the coupon, the lower the price of a bond. All of the above

21. $5,000 invested at 6%, compounded quarterly, will be worth how much after 5 years? a. $6,691 b. $16,036 c. $6,734 d. $5,386

22. Tom deposits $10,000 in a savings deposit paying 4%, compounded monthly. What amount would he have at the end of seven years? a. $13,225 b. $13,159 c. $13,179 d. $13,325

23. Judy would like to accumulate $70,000 by the time her son starts college in ten years. What amount would she need to deposit now in a deposit account earning 6%, compounded yearly, to accumulate her savings goal? a. $4,200 b. $39,513 c. $39,088 d. $125,359

24. If a $1000 par value bond has an 8% coupon (annual payments) rate, a 4-year maturity, and similar bonds are yielding 11%, what is the price of the bond? a. $1,000.00 b. $880.22 c. $906.93 d. $910.35

25. A corporate bond, paying $65 interest at the end of each year for 6 years, has a face value of $1,000. If market rates on newly issued similarly rated corporate bonds are now 7.5%, what is the current market price of this bond? a. $953.06 b. $1,000.00 c. $1,048.41 d. $936.42

26. A $1000 bond with an 8.2% coupon rate, interest paid semiannually, and maturing in six years is currently yielding 7.6% in the market. What is the current price of the bond? a. $1,027.08 b. $1,131.19 c. $1,028.48 d. $972.00

27. When a bond's coupon rate is equal to the market rate of interest, the bond will sell for a. a discount. b. a premium. c. par. d. a variable rate.

28. A bond currently selling at a premium price above face value a. b. has a yield equal to its coupon rate. has a yield below its coupon rate.

c. d.

has a yield above its coupon rate. has no risk.

29. If market interest rates fall after a bond is issued, the a. b. c. d. face value of the bond increases. investor will sell the bond. market value of the bond is increasing. market value of the bond is decreasing. Its market price

30. A $1,000 par, 8% Treasury bond maturing in three years is priced to yield 7%. (assuming semiannual compounding) is a. $974.21 b. $813.50 c. $927.50 d. $1,026.64

31. What is the price of a $1,000 face value bond with a 10% coupon if the market rate is 10%? a. more than $1,000 b. $1,000 c. less than $1,000 d. cannot ascertain

32. A standardized, exchange-backed contract to deliver assets 3 months from today is a: a. forward contract. b. securitized asset. c. futures contract. d. option contract.

33. A conditional contract granting its holder the right to buy assets in the future is a: a. put. b. forward contract. c. futures contract. d. call.

34. The five core principles of Finance include each of the following except: a. all people act rationally. c. time has value. b. information is the basis for decisions. d. risk requires compensation.

35. The statement "risk requires compensation" implies: a. people only accept risk when they absolutely have to. b. people will only accept risk when they are rewarded for doing so. c. people do not take risk. d. people will pay to avoid risk. e. b and d 36. 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. common stockholder II. limited partner III. general partner IV. sole proprietor

a. I only c. I and II only e. II and III only 37. Capital structure refers to the:

b. I, II and IV only d. II, III and IV only

a. types of equipment a firm employs in its production process. b. mixture of short-term and long-term debt a firm uses to finance its operations. c. amount of long-term debt and equity a firm uses. d. composition of a firm's short-term assets. 38. In 3 years you are to receive $5,000. If the interest rate were to suddenly increase, the present value of that future amount to you would a. fall. c. rise. b. remain unchanged d. cannot be determined without more information

39. Which one is an advantage enjoyed by a corporation but not by a sole proprietorship? a. unlimited liability for the firm's owners c. ease of company formation e. separation of general and limited owners 40. In a typical loan amortization schedule, the dollar amount of interest paid each period a. increases with each payment c. remains constant with each payment 41. What is the total future value six years from now of $125 received in one year, $250 received in two years, and $500 received in six years if the compounded annually rate is 9.00 percent? a. $1,045.22 c. $1,145.57 b. $1,047.93 d. $1,237.21 b. decreases with each payment . b. unlimited life of the company d. double taxation of profits

42. Five years ago, $1,200 was deposited into a savings account paying 4.5 percent interest. Today, the balance in the account is $1,495. If interest paid on the account was compounded annually, how much interest on interest was earned? a. $25.00 c. $102.39 b. $75.00 d. $295.00

43. You just won a prize! You can either receive $950 today or $1,000 in one year. Which option do you prefer and why if you can earn 6 percent on your money?

a. $950; because it has the higher future value b. $1000; because it is more money c. $1000; because it has the higher future value d. either; because both options are of equal value to you 44. If a project has non-conventional cash flows, it may also have more than one IRR. a. True b. False

45. You undertake a project that requires an initial investment of $9,000. You expect to receive $3,100 a year for the next 4 years. If the required return is 15 percent, what is the net present value (NPV)? a. -$235.26 c. -$7.58 b. -$149.57 d. $4.63

46. You are trying to choose between two projects as you do not have sufficient funding to accept both projects. Each project costs $80,000. Project A pays $25,000 a year for 4 years and project B pays $20,000 a year for 5 years. If required return is 14 percent, which project should you choose and why? a. A; because it has a higher IRR c. You should reject both projects d. You are indifferent between project A and B because they pay back the same amount 47. All, except one of the following is an explanation for paying interest on borrowed money? a. interest is the rental cost of purchasing power. b. interest is the penalty paid for consuming income before it is earned. c. interest is always paid at the maturity of a loan. d. interest is the time value of delayed consumption 48. A project whose net present value (NPV) equals zero: a. should be rejected. b. has a payback period that is greater than the life of the project. c. should be accepted even if the firm has other potential investments with positive NPVs d. is expected to yield a return equal to the firm's required return. 49. Assume that the interest rate is greater than zero. Which of the following cash-inflow streams should you prefer for a 4-year investment? Year1 Year2 Year3 Year4 a. $400 $300 $200 $100 b. $100 $200 $300 $400 b. B; because it has a higher NPV

c. $250 $250 $200 $300 d. Any of the above, since they each sum to $1,000. 50. Which of the following statement is correct? a. If a project's NPV is greater than zero, then its IRR must be less than zero b. If a project's NPV is less than zero, then its IRR must be greater than zero c. If a project's NPV is greater than zero, then its IRR must be greater than zero d. If a project's NPV is less than zero, then its IRR must be less than zero e. None of the above 51. Project X has NPV of 290,000 USD, while its IRR is 22%. Project Y, comparable and mutually exclusive to X, has NPV of 1,249,000 USD and IRR of 16%. What should be chosen? a. Project X b. Project Y c. Both of them d. None of them. 52. You want to buy an ordinary annuity that will pay you $4,000 a year for the next 20 years. You expect annual interest rates will be 8 percent over that time period. The maximum price you would be willing to pay for the annuity is closest to a. $32000. b. $39272. c. $40000. d. $80000 53. With continuous compounding at 10 percent for 30 years, the future value of an initial investment of $2,000 is closest to a. $34,898. b.$40,171. c. $164,500. d.$328,282.