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Finance FIN 212 (Ch.7-12 & 17-18)

Total questions: 76

Worksheet time: 38mins

Name
Class
Date
1.

Which of the following best defines savings in financial terms?

a)

Spending less on consumption

b)

Buying stocks

c)

Borrowing money for investment

d)

Delaying payments

e)

Printing money

2.

In the financial system, investment refers to:

a)

Placing money in a savings account

b)

Consuming durable goods

c)

Acquiring assets that generate income

d)

Purchasing foreign currency

e)

Increasing tax revenue

3.

Which factor most directly influences personal saving behavior?

a)

The GDP growth rate

b)

Household income

c)

Stock market index

d)

Exchange rate

e)

Government spending

4.

Businesses typically fund long-term investments through:

a)

Daily revenues

b)

Short-term bank loans

c)

Retained earnings and capital markets

d)

Central bank financing

e)

Inventory sales

5.

A nation's savings must equal its:

a)

Government expenditure

b)

Investment plus net exports

c)

Current account deficit

d)

Domestic consumption

e)

Fiscal surplus

6.

Which of the following is NOT a determinant of interest rates?

a)

Inflation expectations

b)

Liquidity preference

c)

Currency exchange rates

d)

Risk premiums

e)

Time preference for consumption

7.

The real interest rate is defined as:

a)

Nominal rate plus inflation

b)

Inflation rate minus nominal rate

c)

Nominal rate minus inflation rate

d)

Treasury yield plus tax rate

e)

Market return adjusted for taxes

8.

What does the term structure of interest rates describe?

a)

Interest rates across different sectors

b)

Interest rates over different time horizons

c)

Difference between nominal and real rates

d)

Structure of financial regulation

e)

Fixed vs. floating interest arrangements

9.

An upward-sloping yield curve suggests:

a)

Economic slowdown

b)

Lower inflation expectations

c)

Investors expect higher future rates

d)

Tight monetary policy

e)

Low default risk

10.

Which theory assumes investors have specific maturity preferences?

a)

Expectations theory

b)

Liquidity premium theory

c)

Market segmentation theory

d)

Fisher effect

e)

Time-value theory

11.

The time value of money concept implies:

a)

All cash flows are equal in value

b)

A dollar today is worth more than a dollar tomorrow

c)

Interest rates remain constant

d)

Money loses value with inflation only

e)

Only future value is important

12.

Present value is best described as:

a)

The sum of future earnings

b)

Current worth of a future sum discounted at a given rate

c)

Total investment made today

d)

The minimum rate of return

e)

A tax-adjusted return

13.

The higher the discount rate:

a)

The higher the present value

b)

The lower the present value

c)

The future value increases

d)

The interest earned is reduced

e)

The investment becomes risk-free

14.

An annuity differs from a perpetuity because:

a)

It pays forever

b)

It has no maturity

c)

It has a fixed number of payments

d)

It is based on variable rates

e)

It includes equity risk

15.

Compounding refers to:

a)

Calculating present value

b)

Earning interest on interest

c)

Subtracting inflation

d)

Reducing investment risk

e)

Issuing bonds

16.

A bond's coupon rate refers to:

a)

Current market interest rate

b)

Yield to maturity

c)

Fixed interest paid annually

d)

Bond duration

e)

Bond rating

17.

If a bond is selling at a discount, then:

a)

Coupon rate > market rate

b)

Coupon rate < market rate

c)

Coupon rate = market rate

d)

Price = par

e)

Yield = 0

18.

Common stocks differ from bonds in that they:

a)

Pay fixed income

b)

Have priority in bankruptcy

c)

Represent ownership

d)

Have maturity dates

e)

Are secured by assets

19.

Preferred stock is often referred to as a:

a)

Risk-free asset

b)

Debt-equity hybrid

c)

Zero-coupon bond

d)

Treasury instrument

e)

High-yield bond

20.

The value of a stock is primarily based on:

a)

Par value

b)

Past dividends

c)

Expected future cash flows

d)

Government regulations

e)

Inventory turnover

21.

The standard deviation of returns measures:

a)

Return on capital

b)

Average price

c)

Investment duration

d)

Investment risk

e)

Coupon yield

22.

A diversified portfolio helps reduce:

a)

Systematic risk

b)

Market risk

c)

Interest rate risk

d)

Unsystematic risk

e)

Foreign exchange risk

23.

Beta measures:

a)

A firm's debt level

b)

Risk-free return

c)

Volatility relative to the market

d)

Interest income

e)

Price elasticity

24.

The Capital Asset Pricing Model (CAPM) includes all EXCEPT:

a)

Risk-free rate

b)

Beta

c)

Market risk premium

d)

Historical dividend yield

e)

Expected return

25.

Systematic risk is:

a)

Diversifiable

b)

Specific to one firm

c)

Affected by economic-wide events

d)

A result of insider trading

e)

Eliminated through insurance

26.

NPV is positive when:

a)

IRR is below the cost of capital

b)

Cash inflows are negative

c)

Present value of inflows > outflows

d)

Profit is less than depreciation

e)

Payback is short

27.

The payback method focuses on:

a)

Long-term profitability

b)

Interest rates

c)

Time to recover investment

d)

Market share

e)

Stock price

28.

Cost of capital represents:

a)

Government subsidies

b)

Weighted average of funding costs

c)

Equity only

d)

Bond coupon payments

e)

Loan principal

29.

Debt financing is preferred when:

a)

Tax shields are not available

b)

Interest rates are high

c)

The firm seeks lower cost of capital

d)

Equity market is bullish

e)

Dividends are fixed

30.

The optimal capital structure minimizes:

a)

Dividend payments

b)

Risk premium

c)

WACC

d)

Equity value

e)

Inflation exposure

31.

What is the future value of $1,000 invested for 3 years at 5% compounded annually?

a)

$1,105.00

b)

$1,150.25

c)

$1,157.63

d)

$1,200.00

e)

$1,162.50

32.

Calculate the present value of $2,000 received in 4 years, discounted at 6% annually.

a)

$1,584.70

b)

$1,680.00

c)

$1,650.00

d)

$1,750.00

e)

$1,900.00

33.

A bond pays a $60 annual coupon and has a face value of $1,000. If current price is $950, what is the current yield?

a)

5.7%

b)

6.0%

c)

6.3%

d)

6.5%

e)

7.0%

34.

What is the yield to maturity on a $1,000 bond priced at $950 with a 7% coupon and 5 years to maturity (approximate)?

a)

6.8%

b)

7.2%

c)

7.5%

d)

7.8%

e)

8.1%

35.

If a project costs $5,000 and returns $6,500 after two years, what is the IRR?

a)

12%

b)

13.9%

c)

14.5%

d)

15.6%

e)

17.0%

36.

Calculate the beta of a portfolio with 40% in stock A (β=1.2) and 60% in stock B (β=0.8):

a)

0.92

b)

0.96

c)

1.00

d)

1.04

e)

1.10

37.

What is the WACC for a firm with 50% equity (10% cost) and 50% debt (6% cost), tax rate 30%?

a)

6.5%

b)

7.0%

c)

7.5%

d)

8.0%

e)

8.5%

38.

A stock pays $2 dividend, expected to grow 4%, and required return is 10%. Price = ?

a)

$25

b)

$30

c)

$33.33

d)

$35

e)

$40

39.

A $1,000 bond with 8% coupon pays semi-annually and matures in 10 years. Price = $1,100. Approx. YTM?

a)

6.5%

b)

7.0%

c)

7.2%

d)

7.5%

e)

8.0%

40.

A project has an NPV of $2,000 and IRR of 12%. If the cost of capital rises to 13%, what happens?

a)

NPV becomes positive

b)

IRR increases

c)

NPV becomes negative

d)

IRR equals cost of capital

e)

Payback decreases

41.

If a government increases its budget deficit while households increase their savings rate, what is the most likely short-term effect on national investment, assuming a closed economy?

a)

Investment will increase

b)

Investment will decrease

c)

Investment will remain unchanged

d)

Investment will fluctuate randomly

e)

None of the above

42.

Consider an economy where the private savings function is S = 0.3Y and the consumption function is C = 0.7Y. If GDP increases from 500 to 600, what is the change in total savings?

a)

30

b)

60

c)

90

d)

100

e)

120

43.

If the real interest rate increases, what is the theoretical impact on private saving and private investment, respectively?

a)

Increase, Increase

b)

Increase, Decrease

c)

Decrease, Decrease

d)

Decrease, Increase

e)

No effect on either

44.

The classical loanable funds model assumes which of the following equilibrates saving and investment?

a)

Nominal GDP

b)

Money supply

c)

Real interest rate

d)

Fiscal policy

e)

Government debt

45.

In a small open economy, a sudden increase in world interest rates would most likely lead to:

a)

Capital outflow and lower investment

b)

Capital inflow and higher domestic saving

c)

Lower saving and higher inflation

d)

No effect due to monetary neutrality

e)

Higher inflation due to increase

46.

A liquidity trap implies which of the following?

a)

Savings and investment both rise

b)

Interest rates cannot fall below a certain level

c)

Fiscal policy becomes ineffective

d)

Investment becomes fully responsive to interest rates

e)

Savings become negative

47.

In the Solow growth model, long-term increases in national saving will:

a)

Have no effect on capital accumulation

b)

Lead to temporary GDP growth and permanently higher output level

c)

Permanently increase GDP growth rate

d)

Decrease capital-labor ratio

e)

Decrease technological progress

48.

According to the expectations theory of the term structure, if the one-year interest rate today is 3% and the one-year forward rate one year from now is expected to be 5%, what is the approximate two-year bond yield today?

a)

3.5%

b)

4.0%

c)

4.5%

d)

5.0%

e)

6.0%

49.

If the nominal interest rate is 7%, and the expected inflation rate is 3%, what is the approximate real interest rate using the Fisher equation?

a)

3.5%

b)

4.0%

c)

4.5%

d)

5.0%

e)

2.5%

50.

Which factor is most responsible for an upward-sloping yield curve in a normal market environment?

a)

Expected falling inflation

b)

Increased bond default risk

c)

Term premium and inflation expectations

d)

Central bank liquidity injections

e)

Reduced money supply

51.

In the liquidity preference theory, the yield curve is upward sloping because:

a)

Short-term securities are riskier than long-term ones

b)

Investors require a premium for long-term securities

c)

Central banks manipulate short-term rates

d)

Demand for money is vertical

e)

Inflation is declining

52.

Which of the following changes will most likely lead to an increase in real interest rates, assuming all else constant?

a)

Expansionary fiscal policy

b)

Increase in money supply

c)

Increase in saving rate

d)

Increase in expected inflation

e)

A stock market crash

53.

If the interest rate on a corporate bond is 8% and the risk-free rate is 5%, what is the implied risk premium?

a)

1%

b)

2%

c)

3%

d)

4%

e)

5%

54.

A flattening yield curve generally signals:

a)

Rising inflation and economic expansion

b)

Monetary tightening and expected slowdown

c)

Increased corporate profits

d)

Falling consumer confidence and deflation

e)

Improving labor market conditions

55.

Which of the following is not a determinant of nominal interest rates in the loanable funds theory?

a)

Risk of default

b)

Liquidity preference

c)

Inflation expectations

d)

Marginal propensity to consume

e)

Supply of credit

56.

What does a negative real interest rate imply for savers?

a)

The return on saving exceeds inflation

b)

The value of savings grows in real terms

c)

Savers lose purchasing power over time

d)

Investment becomes less risky

e)

The currency appreciates

57.

In the presence of inflation-indexed bonds, investors with high inflation expectations are likely to:

a)

Choose fixed nominal bonds

b)

Demand lower interest rates

c)

Require lower liquidity premiums

d)

Prefer inflation-protected securities

e)

Ignore the Fisher effect

58.

If interest is compounded semiannually at a nominal rate of 8%, what is the effective annual rate (EAR)?

a)

8.00%

b)

8.16%

c)

8.24%

d)

8.30%

e)

8.50%

59.

Which of the following is true about present value?

a)

PV increases with the interest rate

b)

PV is independent of the timing of cash flows

c)

PV of an annuity is always greater than the PV of a lump sum

d)

PV decreases as the discount rate increases

e)

PV is calculated using future values only

60.

A perpetuity is defined as:

a)

An annuity that ends after a fixed period

b)

A stream of payments that increase over time

c)

A single lump-sum payment

d)

A series of equal payments continuing forever

e)

A bond with no coupons

61.

Which statement is false regarding time value of money?

a)

The future value increases with compounding frequency

b)

Discounting is the reverse of compounding

c)

Time value of money assumes constant inflation

d)

PV of future cash flows is lower at a higher discount rate

e)

Annuities can have different frequencies

62.

What is the future value of a $10,000 investment at 10% interest compounded quarterly for 3 years?

a)

$13,000.00

b)

$13,449.00

c)

$13,482.24

d)

$13,756.73

e)

$14,025.12

63.

Calculate the present value of a $5,000 payment to be received in 4 years, discounted at a 9% annual rate.

a)

$3,534.00

b)

$3,560.15

c)

$3,745.12

d)

$3,842.76

e)

$4,010.00

64.

You deposit $1,000 annually into an account paying 6% interest. What will be the balance after 5 years?

a)

$5,000

b)

$5,650.40

c)

$5,833.04

d)

$6,005.12

e)

$6,204.20

65.

A loan of $50,000 is to be repaid in 5 equal annual payments at 8% interest. What is the annual payment?

a)

$10,500

b)

$12,522

c)

$13,006

d)

$13,732

e)

$14,102

66.

You are offered an investment that pays $1,000 in year 1, $1,500 in year 2, and $2,000 in year 3. If your required rate of return is 12%, what is the present value?

a)

$3,712.24

b)

$3,452.01

c)

$3,298.45

d)

$3,021.12

e)

$2,985.30

67.

A bond has a 6% coupon rate, pays semiannual interest, and has 12 years to maturity. If the market rate is 5%, what is the bond's current price (face value = $1,000)?

a)

$1,062.81

b)

$1,100.45

c)

$1,045.64

d)

$1,024.78

e)

$985.42

68.

A bond is priced at $950 with a 5% annual coupon and 10 years to maturity. What is the approximate yield to maturity?

a)

4.2%

b)

5.0%

c)

5.6%

d)

6.1%

e)

6.7%

69.

A bond sells for $1,100 and has a coupon rate of 8%. What is the bond's current yield?

a)

6.73%

b)

7.27%

c)

8.00%

d)

8.23%

e)

9.09%

70.

If interest rates rise, the price of a long-term bond compared to a short-term bond will:

a)

Increase more

b)

Increase less

c)

Fall more

d)

Fall less

e)

Stay the same

71.

A company just paid a dividend of $2 per share. If dividends grow at 6% annually and the required return is 10%, what is the stock's value using the Gordon model?

a)

$45

b)

$48

c)

$50

d)

$52

e)

$55

72.

Which of the following would most likely cause a bond's yield to increase?

a)

Increase in its credit rating

b)

Decrease in default risk

c)

Rising inflation expectations

d)

Decrease in interest rates

e)

Increased investor demand

73.

A stock is expected to pay dividends of $3, $3.24, and $3.50 over the next 3 years, then grow at 5% perpetually. If the required return is 10%, what is the stock's intrinsic value?

a)

$65.00

b)

$70.24

c)

$74.12

d)

$76.18

e)

$78.45

74.

Which of the following statements about bond valuation is false?

a)

Bond prices move inversely with interest rates

b)

Bonds with longer maturities are more price-sensitive

c)

Callable bonds are more valuable than non-callable bonds

d)

Coupon payments are discounted using the market rate

e)

Zero-coupon bonds are sold at a discount

75.

A stock with high volatility but stable dividends would most likely be valued using:

a)

Dividend discount model

b)

Residual income model

c)

P/E valuation

d)

Book value method

e)

Gordon growth model

76.

Which of the following best explains why equity valuation is more complex than bond valuation?

a)

Bonds trade less frequently

b)

Stocks do not pay regular income

c)

Stock cash flows are more uncertain and infinite

d)

Bonds are subject to greater market risk

e)

Stocks have fixed maturities

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