MULTIPLE-CHOICE QUESTIONS (MOSTLY BONUS C5)

Question 1: Standard deviation is an indicator of observations dispersion around an expected central

value.
A. True B. False
Question 2: You are considering borrowing $10,000 for 4 years at an annual interest rate of 6%. The loan
agreement calls for 4 equal payments, to be paid at the end of each of the next 4 years. The annual
payment that will fully pay off (amortize) the loan is closest to:
A 1
10000 = (1- )
6% (1+6 % )4
A. $2,674 B. $2,886 C. $3,741 D. $4,020
Question 3: You want to have $25,000 in your savings account give years from now, and you’re prepared
to make equal annual deposits into the account at the end of each year. If the account pays 9.5% interest,
what amount must you deposit each year?
A. $4135.9 B. $4273.5 C. $4613.4 D. $4722.1
Question 4: Which financial instrument below did the market view as having the lowest default risk:
A. 90-day Treasury bill C. 90-day commercial paper
B. 5-year Municipal bond D. 5-year corporate bond
Question 5: Suppose you have just celebrated your 19 th birthday. A rich uncle has set up a fund for you
that will pay you $150,000 when you turn 30. If the discount rate is 9%, how much is this fund worth
today:
PV(1+9%)^11 = 150000
A. $58,130 B. $63,362 C. $53,330 D. $60,620
Question 6: You’ve been offered an investment that will pay you 9% per year. If you invest $15,000,
how long until you have $30,000
15000 (1+9%)^n = 30000
A. 7 years B. 8 years C. 9 years D. 10 years
Question 7: You are offerec an investment that requires you to put up $13,000 today in exchange for
$39,000 twelves years from now. What is the annual rate of return on this investment?
13000(1 + x%)^12 = 39000

A. 8.02% B. 8.75% C. 9.59% D. 10.21%

Question 8: You are looking into an investment that will pay you $12,000 per year for the next 10 years.
If you require a 15% return, what is the most you would pay for this investment?
12000 1
PV = (1- 10 )
15 % (1+15 %)

A. $60,225 B. $58,763 C. $55,650 D. $52,750

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Question 9: There is a 50% probability that the Plum Company’s sales will be 6 mil. USD next year, a
40% probability thaht they will be 4 mil. USD and a 10% probability that they will be 1 mil USD. The
standard deviation of Plum’s next year’s sales is:
Mean = 50%x6 +40%x4 + 10%x1 = 4.7
Variance = 50%(6 – 4.7)^2 + 40%(4 - 4.7)^2 + 10%(1 - 4.7%)^2 = 2.41

Standard deviation = √ 2.41 = 1.1552

A. $3.12 mil B. $3.1765 mil C. $2.125 mil D. $1.552 mil
Question 10: Which of the following is not a characteristic of money market instruments?
A. short-term to maturity C. small denomination
B. low default risk D. high marketability
Question 11: Which of the following money market instruments would typically be used in international
transactions?
A. a Treasury bill. C. commercial paper
B. a banker's acceptance D. a negotiable CD
Question 12: The money market security represented by the largest dollar amount outstanding is:
A. commercial paper. C. negotiable CDs
B. repurchase agreement. D. Treasury bills.
Question 13: Calculate the T-Bill discount of a $100,000 face value T-bill priced at $97,500, maturing in
181 days is:
Par −PP 360 100000−97500 360
T bill discount = * = * = 4.97%
Par n 100000 181
A. 4.84% B. 4.97% C. 5.10% D. 5.17%
Question 14: 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:
Par −PP 360 997575−997250 360
* = *
Par n 997575 4

A. 2.97% B. 2.91% C. 2.86% D. 2.93%

Question 15: Which of the following is not an example of capital market securities?
A. common stocks B. convertible bonds C. commercial paper D. mortgages
Question 16: Which security below did the market view as having the greatest default risk?
A. 90-day Treasury securities C. 10-year Treasury securities
B. 180-day Treasury securities D. 90-day Commercial paper
Question 17: Financial markets:
A. facilitate the flow of funds from deficit to surplus units.

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 B. facilitate the flow of funds from surplus to deficit units.
C. are markets in which financial assets such as stocks and bonds can be purchased and sold.
D. None of the above
E. Only answers b and c are correct.
Question 18: Financial markets facilitating the trading of existing securities are known as:
A. money markets. D. secondary markets.
B. capital markets. E. none of the above.
C. primary markets.
Question 19: 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. An institutional investor sells some Disney stock through his broker.
C. Microsoft issues new shares of common stock using its investment bank.
D. All of the above would occur in the secondary market.
Question 20: According to your text, which of the following is not considered a money market security?
A. Treasury bills D. banker’s acceptance
B. Treasury notes E. commercial paper
C. retail CD
Question 21: ________________ are not considered capital market securities.
A. Repurchase agreements C. Corporate bonds
B. Municipal bonds D. Equity securities
Question 22: ____________ are long-term debt obligations issued by corporations and government
agencies to support their operations.
A. Common stock B. Derivative securities C. Bonds D. None of the above
Question 23: Long-term debt securities tend to have a ___________ expected return and _________ risk
than money market securities.
A. lower; lower B. lower; higher C. higher; lower D. higher; higher
Question 24: Which of the following statements is true?
A. Bond prices and interest rates move together.
B. Coupon rates are fixed at the time of issue.
C. The higher the coupon, the lower the price of a bond.
D. All of the above
Question 25: 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.
Question 26: A bond currently selling at a premium price above face value:
A. has a yield equal to its coupon rate. C. has a yield above its coupon rate.
B. has a yield below its coupon rate. D. has no risk.
Question 27: If market interest rates fall after a bond is issued, the:

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 A. face value of the bond increases. C. market value of the bond is increasing.
B. investor will sell the bond. D. market value of the bond is decreasing
Question 28: 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
Question 29: 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
Question 30: T-bills and commercial paper are sold:
A. with a stated coupon rate. C. at a premium about par value.
B. at a discount from par value. D. none of these above.
Question 31: An investor initially purchased securities at a price of $9,923,418, with an agreement to sell
them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is _______ percent.
Par −PP 365 10000000−9923418 365
* = *
Par n 10000000 91
A. 3.10 B. 0.77 C. 1.00 D. none of these
Question 32: Treasury bills are sold through _______ when initially issued.
A. insurance companies C. auctions
B. commercial paper dealers D. finance companies
Question 33: Bill Yates, a private investor, purchases a six-month (182-day) T-BILL with a $10,000 par
value for $9,700. If Bill Yates holds the Treasury bill to maturity, his annualized yield is _______
P ar−PP 365 10000−9700 365
percent. * = *
PP n 9700 182
A. 6.02 B. 1.54 C. 1.50 D. 6.20
Question 34: Financial managers are responsible for determining:
I. how suppliers will be paid
II. The appropriate level of debt for a firm
III. Which projects a firm should undertake
IV. How to invest the firm's cash
A. I and II only D. II, III, and IV only
B. II and III only E. I, II,III, and IV
C. I, II, and III only
Question 35: Which of the following are incorporated into the calculation of the Du Pont identity?
I. return on assets
II. Equity multiplier
III. Total asset turnover
IV. Profit margin
A. III and IV only D. II, III, and IV only
B. I, II, and III E. I, II, III, and IV
C. I, III, and IV only

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Question 36: Which of the following is (are) a measure of profitability?
I. return on assets
II. Return on equity
III. Market-to-book ratio
IV. Profit margin
A. I only D. III and IV only
B. III only E. I, II, and IV only
C. I and II only
Question 37: Which one of the following is a current liability?
A. account receivable D. inventory
B. mortgage payable over thirty years E. retained earnings
C. account payable