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EMBA FBS (Quiz 2) FFM Ch.5-8

Total questions: 80

Worksheet time: 40mins

Name
Class
Date
1.

The key reason the effective annual rate differs from the nominal rate is that:

a)

Payments occur at uniform intervals

b)

Compounding frequency alters growth

c)

Discounting is performed annually

d)

Inflation expectations remain constant

e)

Cash flows arrive only at maturity

2.

The primary distinction between ordinary annuities and annuities due affects:

a)

Length of compounding periods

b)

Timing of cash flow reinvestment

c)

Order of discount-rate adjustments

d)

Allocation of principal repayment

e)

Classification under accounting rules

3.

Increasing the discount rate applied to a fixed cash flow stream will:

a)

Increase the present value always

b)

Decrease the future value always

c)

Lower its present value consistently

d)

Raise its annuity factor moderately

e)

Stabilize its compounding behavior

4.

Converting a future sum into present value relies on:

a)

Periodic averaging techniques

b)

Cash flow neutrality assumptions

c)

Time-adjusted opportunity costs

d)

Inflation-controlled reinvestment

e)

Market-driven maturity schedules

5.

The future value of a lump sum increases mainly because:

a)

A. Cash flows shift earlier each year

b)

B. Compounding adds returns to prior returns

c)

C. Discounting adjusts for lower risk

d)

D. Market volatility reduces reinvestment

e)

E. Timing conventions alter growth paths

6.

The value of a growing perpetuity depends most on:

a)

Duration of compounding periods

b)

Spread between return and growth

c)

Level of inflation risk

d)

Stability of expected cash levels

e)

Timing of initial cash distribution

7.

For uneven multi-period cash flows, valuation requires:

a)

A. Averaging cash flows

b)

B. Aggregating nominal returns only

c)

C. Discounting each payment individually

d)

D. Capitalizing the mean payment

e)

E. Using annuity factors unchanged

8.

Effective rates grow more sensitive to compounding when:

a)

Nominal rates remain negligible

b)

Payment intervals lengthen

c)

Growth effects amplify across periods

d)

Cash flows stay stable

e)

Discount factors follow linear paths

9.

The Rule of 72 relies on the assumption that:

a)

Growth is linear

b)

Compounding occurs at maturity

c)

Doubling time relates inversely to rate

d)

Costs of capital remain independent

e)

Future values trace constant trends

10.

Interest paid in amortization declines over time because:

a)

Installments shrink

b)

Principal expands

c)

Outstanding balance falls

11.

The present value of a deferred annuity is lower because:

a)

Coupons rise over time

b)

Initial payments are skipped

c)

Interest exceeds growth

d)

Cash flows inflate faster

e)

Maturity collapses early

12.

A higher compounding frequency increases:

a)

Future value consistently

b)

Present value of perpetuities

c)

Volatility in annuity duration

d)

Flat yield-curve segments

e)

Linear discount adjustments

13.

The main impact of discounting over long horizons is that PV:

a)

Grows with maturity always

b)

Becomes negligible at high rates

c)

Stabilizes due to reinvestment

d)

Matches simple-interest values

e)

Mirrors inflation dynamics

14.

The reinvestment assumption for IRR implies that cash flows are reinvested at:

a)

Risk-free rate

b)

Market rate

c)

IRR itself

d)

Coupon yield

e)

Accounting return

15.

Annuity factors decline when discount rates:

a)

Increase

b)

Fall steadily

c)

Remain unchanged

d)

Match inflation

e)

Reset quarterly

16.

Perpetuity value becomes undefined when:

a)

Risk premium rises

b)

Growth exceeds return

c)

Inflation declines sharply

d)

Yield curve turns flat

e)

Coupons shift semiannually

17.

The future value of periodic deposits is highest for:

a)

Semiannual deposits

b)

Annual deposits

c)

Monthly deposits (more compounding)

d)

Quarterly deposits

e)

Irregular deposits

18.

Loan amortization schedules show:

a)

Discounted coupon spreads

b)

Allocation of payments to interest & principal

c)

Market yield adjustments

d)

Call-premium decay

e)

Duration convergence

19.

The real value of future cash flows falls because:

a)

A. Taxes fall

b)

B. Markets adjust

c)

C. Inflation erodes purchasing power

d)

D. Beta declines

e)

E. Maturity shortens

20.

Continuous compounding leads to:

a)

Lower effective rates

b)

Equal nominal and effective rates

c)

Highest possible effective rate for given nominal

d)

No change in PV

e)

Flat discount curve

21.

The term structure of interest rates primarily reflects:

a)

Accounting-rule changes

b)

Expectations of future rates

c)

Stock-market volatility

d)

Dividend-discount patterns

e)

Government mandates

22.

The real risk-free rate is driven mainly by:

a)

A. Equity shocks

b)

B. Fiscal balances

c)

C. Productivity-driven economic growth

d)

D. Credit-scoring changes

e)

E. Supply-chain distortions

23.

Liquidity premiums arise because:

a)

Investors want taxes

b)

Reinvestment is short

c)

Markets penalize hard-to-sell securities

d)

Banks hold fewer loans

e)

Bondholders want calls

24.

Interest-rate risk is highest for bonds with:

a)

High coupons & short maturities

b)

Low coupons & long maturities

c)

Floating coupons & short maturities

d)

Indexed coupons & mid maturities

e)

Heavy sinking-fund use

25.

The yield curve steepens mainly when:

a)

Short-term rates fall

b)

Long-term rates rise faster

c)

Liquidity premiums collapse

d)

Credit spreads tighten

e)

Government debt shrinks

26.

A positive maturity risk premium compensates for:

a)

Higher default rates

b)

Greater reinvestment risk

c)

Greater price volatility in long maturities

d)

Lower call likelihood

e)

Higher coupon levels

27.

Nominal rates rise when inflation expectations:

a)

Decline steadily

b)

Fall sharply

c)

Increase materially

d)

Remain stable

e)

Reverse cyclically

28.

Default-risk premiums widen most during:

a)

High-growth expansions

b)

Credit booms

c)

Recessionary downturns

d)

Balanced budgets

e)

Strong equity rallies

29.

Treasury yields are often lower because:

a)

A. Longer maturities

b)

B. Higher coupons

c)

C. Lower default risk

d)

D. Greater inflation risk

e)

E. Stronger liquidity needs

30.

A downward-sloping yield curve usually signals:

a)

Expected economic expansion

b)

Rising inflation

c)

Expectations of falling future rates

d)

Commodity shortages

e)

Higher coupon issuance

31.

The pure expectations theory assumes no:

a)

Inflation

b)

Taxes

c)

Risk premiums

d)

Market risk

e)

Credit risk

32.

Higher inflation volatility increases:

a)

Default risk

b)

Liquidity risk

c)

Maturity risk premiums

d)

Call premiums

e)

Coupon spreads

33.

Short-term rates tend to be more volatile because:

a)

A. Long maturities slow reactions

b)

B. Central banks target short-term markets

c)

C. Corporate yields dominate

d)

D. Inflation anchors them

e)

E. Tax shields vary

34.

Nominal yields exceed real yields because they include:

a)

Default risk

b)

Liquidity risk

c)

Expected inflation

d)

Credit demand

e)

Market premiums

35.

The Fisher equation links real rates with:

a)

Bond duration

b)

Market beta

c)

Expected inflation

d)

Liquidity costs

e)

Call features

36.

A bond sells at a discount when:

a)

Coupon exceeds YTM

b)

Market yield below coupon

c)

Market yield above coupon

d)

Coupon paid quarterly

e)

Maturity shortened

37.

Duration represents:

a)

Average coupon time

b)

Weighted maturity of cash flows

c)

Time to repay principal

d)

Schedule of policy payments

e)

Forecast of nominal returns

38.

Reinvestment risk increases when bonds:

a)

Have low coupons

b)

Contain indentures

c)

Pay high coupons

d)

Are foreign-issued

e)

Lack call features

39.

Call provisions benefit issuers because they allow:

a)

Lower issuance costs

b)

Refinance when rates drop

c)

Delay coupon payments

d)

Reduce liquidity premiums

e)

Expand maturity risk

40.

A bond’s price is most sensitive to:

a)

Coupon timing

b)

Yield volatility

c)

Tax brackets

d)

Bondholder wealth

e)

Treasury supply

41.

The yield to maturity assumes reinvestment at:

a)

Treasury yield

b)

Real rate

c)

YTM itself

d)

Coupon rate

e)

Market rate next year

42.

A premium bond’s price will:

a)

Rise over time

b)

Fall toward par

c)

Equal coupon annually

43.

If a bond’s coupon equals its YTM, price will:

a)

Exceed par

b)

Fall below par

c)

Equal par

d)

Exceed duration

e)

Rise with maturity

44.

Longer-term zero-coupon bonds have:

a)

Lower duration

b)

Higher duration

c)

Similar reinvestment risk

d)

Lower price sensitivity

e)

Smaller convexity

45.

Bond convexity measures:

a)

Coupon stability

b)

Default likelihood

c)

Curvature of price-yield relationship

d)

Liquidity needs

e)

Maturity jumps

46.

Callable bonds typically offer:

a)

Lower coupons

b)

Higher coupons

c)

No premiums

d)

No reinvestment risk

e)

Zero convexity

47.

A sinking fund reduces:

a)

Coupon payments

b)

Market volatility

c)

Default risk

d)

Tax liability

e)

Duration flatness

48.

Bond prices fall when:

a)

Yields decline

b)

Liquidity rises

c)

Yields rise

d)

Coupons grow

e)

Taxes fall

49.

A bond’s current yield equals:

a)

YTM

b)

Capital gain rate

c)

Coupon / Price

d)

Nominal rate

e)

Call yield

50.

High-yield spreads widen when:

a)

GDP rises

b)

Inflation falls

c)

Credit risk rises

d)

Taxes shrink

e)

Liquidity increases

51.

A zero-coupon bond’s return comes entirely from:

a)

Coupons

b)

Call premiums

c)

Price appreciation

d)

Dividends

e)

Reinvestment differences

52.

Bond immunization protects against:

a)

Credit risk

b)

Inflation shocks

c)

Interest-rate changes

d)

Liquidity fluctuations

e)

Market sentiment shifts

53.

A lower coupon bond has:

a)

Lower price sensitivity

b)

Equal sensitivity

c)

Higher price sensitivity

54.

The effective annual rate (EAR) increases when:

a)

Nominal rate falls, compounding decreases

b)

Nominal rate rises, compounding decreases

c)

Nominal rate rises, compounding increases

d)

Nominal rate stays constant, compounding decreases

e)

Compounding is eliminated

55.

A perpetuity grows at 3% annually and pays 40 next year. Required return is 8%. Value today?

a)

700

b)

750

c)

800

d)

900

e)

1,000

56.

When the term structure is upward-sloping, the most likely cause is:

a)

Lower inflation expectations

b)

Higher short-term rate expectations

c)

Flight to safety

d)

Declining liquidity premiums

e)

Reduced default premiums

57.

The nominal risk-free rate equals:

a)

Real rate + default premium

b)

Real rate + maturity premium

c)

Real rate + liquidity premium

d)

Real rate + expected inflation

e)

Market rate – inflation

58.

If a bond’s YTM rises, its duration will:

a)

Increase

b)

Decrease

c)

Become negative

d)

Stay constant

e)

Reverse sign

59.

Convexity primarily affects:

a)

Bond yield changes

b)

Linear pricing errors

c)

Coupon reinvestment

d)

Default likelihood

e)

Term structure

60.

Investors require a liquidity premium because:

a)

Short-term bonds are riskier

b)

Illiquid securities are harder to sell quickly

c)

Treasury bonds are volatile

61.

In CAPM, if a stock’s actual return exceeds required return, then:

a)

It lies above SML

b)

It lies on SML

c)

It lies below SML

d)

Beta must be zero

e)

Risk-free rate must rise

62.

Beta measures:

a)

Unsystematic variance

b)

Total market variance

c)

Asset’s sensitivity to market returns

d)

Firm’s capital structure risk

e)

Residual error

63.

Diversifiable risk declines fastest when correlations:

a)

Approach 0

b)

Approach 1

c)

Become negative

d)

Stay constant

e)

Increase towards 0.5

64.

If coupon = YTM, a bond must trade at:

a)

A) Par

b)

B) Discount

c)

C) Premium

d)

D) Zero value

e)

E) Changing parity

65.

Market segmentation theory suggests that:

a)

Investors switch freely across maturities

b)

Rates are independent of maturity preferences

c)

Yields reflect separate supply–demand conditions

d)

Arbitrage equalizes all maturities

e)

Investors ignore duration risk

66.

The real rate of return is approximately:

a)

Nominal – inflation

b)

Nominal + inflation

c)

Nominal × inflation

d)

Market ÷ inflation

e)

Coupon ÷ maturity

67.

Which bond has the greatest interest rate risk?

a)

Short maturity, high coupon

b)

Short maturity, zero coupon

c)

Long maturity, high coupon

d)

Long maturity, zero coupon

68.

Holding all else constant, increasing coupon rate will:

a)

Increase duration

b)

Decrease duration

c)

Set duration equal to maturity

d)

Make duration negative

e)

Make convexity infinite

69.

A semiannual bond with higher compounding will have:

a)

Lower EAR

b)

Higher EAR

c)

No change in yield

d)

Higher duration

e)

Lower convexity

70.

When expected inflation increases, nominal interest rates:

a)

Decrease

b)

Stay constant

c)

Increase

d)

Become negative

e)

Are unaffected

71.

Risk premium in CAPM is:

a)

rm – rf

b)

β(rm – rf)

c)

rf – β

d)

rf + β

e)

rm + rf

72.

A callable bond generally offers:

a)

No premium

b)

Lower yield

c)

Higher yield

d)

Always lower price

e)

No reinvestment risk

73.

Duration is best described as:

a)

Bond maturity

b)

Time to next coupon

c)

Weighted average time to cash flows

d)

Yield to call

e)

Market price sensitivity to inflation

74.

When reinvestment rates fall, investors holding high-coupon bonds face:

a)

Lower reinvestment risk

b)

Higher reinvestment risk

c)

No change in return

d)

Higher default risk

75.

Which component of yield compensates investors for time value?

a)

Default premium

b)

Liquidity premium

c)

Real risk-free rate

d)

Maturity premium

e)

Market premium

76.

If market rates fall sharply, the price of a high-convexity bond:

a)

Falls sharply

b)

Rises more than duration predicts

c)

Rises less than duration predicts

d)

Stays constant

e)

Declines gradually

77.

77. Two risky assets with negative correlation provide:

a)

Higher portfolio variance

b)

Zero diversification benefit

c)

Maximum diversification benefit

d)

No portfolio improvement

e)

Higher beta

78.

A bond’s yield increases when:

a)

Price increases

b)

Duration decreases

c)

Price falls

d)

Inflation decreases

e)

Coupon rises

79.

According to expectations theory, long-term rates reflect:

a)

A) Past inflation

b)

B) Current liquidity only

c)

C) Average expected future short-term rates

d)

D) Maturity premiums only

e)

E) Bond convexity

80.

Which return measure ignores intermediate cash flows?

a)

Holding period return

b)

IRR

c)

Effective annual return

d)

Geometric mean return

e)

Yield to maturity

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