Corporate Finance
Midterm Exam
Course Introduction
Corporate Finance explores the principles and practices of financial management within corporations, focusing on key topics such as capital budgeting, capital structure, risk analysis, valuation of financial assets, and working capital management. The course examines how organizations raise and allocate capital, assess investment opportunities, manage financial risks, and make decisions that enhance firm value for stakeholders. Through theoretical frameworks, real-world case studies, and financial modeling, students develop an understanding of the financial decision-making process and the impact of these decisions on business strategy and performance.
Recommended Textbook
Financial Markets and Institutions 8th Edition by Frederic Mishkin
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27 Chapters
2334 Verified Questions
2334 Flashcards
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Page 2
Chapter 1: Why Study Financial Markets and Institutions?
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67 Verified Questions
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Sample Questions
Q1) Holding everything else constant,as the dollar strengthens foreigners will buy more U.S.exports.
A)True
B)False
Answer: False
Q2) Financial markets and institutions
A) involve the movement of huge quantities of money.
B) affect the profits of businesses.
C) affect the types of goods and services produced in an economy.
D) do all of the above.
E) do only A and B of the above.
Answer: D
Q3) From 1980 to early 1985 the dollar ________ in value,thereby benefiting American ________.
A) appreciated; businesses
B) appreciated; consumers
C) depreciated; businesses
D) depreciated; consumers
Answer: B
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Page 3
Chapter 2: Overview of the Financial System
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Sample Questions
Q1) The capital market is a financial market in which only short-term debt instruments (generally those with an original maturity of less than one year)are traded.
A)True
B)False
Answer: False
Q2) Which of the following are not investment intermediaries?
A) A life insurance company
B) A pension fund
C) A mutual fund
D) Only A and B of the above
Answer: D
Q3) Distinguish between money markets and capital markets.
Answer: Money markets are a part of the debt markets in which securities with high liquidity and very short maturities are traded. For example, government treasuries with 1 month maturity would be traded in the money markets.
Capital markets is a broader term for financial markets which involves everything from equities, bonds, and other financial securities those are part of long term investments.
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4
Chapter 3: What Do Interest Rates Mean and What Is Their
Role in Valuation?
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106 Verified Questions
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Sample Questions
Q1) Changes in interest rates make investments in long-term bonds risky.
A)True
B)False
Answer: True
Q2) For a simple loan,the simple interest rate equals the A) real interest rate.
B) nominal interest rate.
C) current yield.
D) yield to maturity.
Answer: D
Q3) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 one year later is
A) 5 percent.
B) 10 percent.
C) 14 percent.
D) 15 percent.
Answer: D
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Page 5
Chapter 4: Why Do Interest Rates Change?
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Sample Questions
Q1) In Keynes's liquidity preference framework,individuals are assumed to hold their wealth in two forms:
A) real assets and financial assets.
B) stocks and bonds.
C) money and bonds.
D) money and gold.
Q2) The higher the standard deviation of returns on an asset,the ________ the asset's ________.
A) greater; risk
B) smaller; risk
C) greater; expected return
D) smaller; expected return
Q3) The supply curve for bonds has the usual upward slope,indicating that as the price ________,ceteris paribus,the ________ increases.
A) falls; supply
B) falls; quantity supplied
C) rises; supply
D) rises; quantity supplied
Q4) What is the difference between systematic and nonsystematic risk?
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Chapter 5: How Do Risk and Term Structure Affect Interest
Rates?
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Sample Questions
Q1) The risk premium on corporate bonds becomes smaller if
A) the riskiness of corporate bonds increases.
B) the liquidity of corporate bonds increases.
C) the liquidity of corporate bonds decreases.
D) the riskiness of corporate bonds decreases.
E) either B or D of the above occur.
Q2) Holding everything else constant,if a corporation begins to suffer large losses,then the default risk on its bonds will ________ and the expected return on those bonds will ________.
A) increase: increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease
Q3) How would a severe recession affect the risk premium on corporate bonds?
Q4) According to the liquidity premium theory of the term structure,when the yield curve has its usual slope,the market expects
A) short-term interest rates to rise sharply.
B) short-term interest rates to drop sharply.
C) short-term interest rates to stay near their current levels.
D) none of the above.
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Chapter 6: Are Financial Markets Efficient?
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Sample Questions
Q1) It is probably a good use of an investor's time to watch as many shows featuring technical analysts as possible.
A)True
B)False
Q2) Discuss why Black Monday,the day when the DJIA declined more than 20%,is not evidence against the efficient market hypothesis.
Q3) If the security markets are truly efficient,there is no need to pay for help selecting securities.
A)True
B)False
Q4) Which of the following types of information will most likely enable the exploitation of a profit opportunity?
A) Financial analysts' published recommendations
B) Technical analysis
C) Hot tips from a stockbroker
D) Insider information
Q5) Why are expectations important in understanding how financial instruments are valued?
Q6) Give evidence both for and against market efficiency.
Page 8
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Chapter 7: Why Do Financial Institutions Exist?
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Sample Questions
Q1) A conflict of interest occurs when
A) a financial firm sells a service to its customers for a price that exceeds the cost of producing the service.
B) lenders prefer higher interest rates and borrowers prefer lower interest rates.
C) riskier borrowers are the ones who are more likely to apply for loans.
D) people expected to provide reliable information to the public have incentives not to do so.
Q2) The concept of adverse selection helps to explain why indirect finance is more important than direct finance as a source of business finance.
A)True
B)False
Q3) The Sarbanes-Oxley Act of 2002 established a Public Company Accounting Oversight Board (PCAOB),overseen by the SEC,to supervise accounting firms and ensure that audits are independent and controlled for quality.
A)True
B)False
Q4) Distinguish between adverse selection and moral hazard.
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9
Chapter 8: Why Do Financial Crises Occur and
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Sample Questions
Q1) The Internet stock market bubble of the late 1990s led to one of the worst financial crises in U.S.history.Banks lost billions of dollars as Internet companies went bankrupt.
A)True
B)False
Q2) Stage Three of a financial crisis in an advanced economy features
A) a general increase in inflation.
B) debt deflation.
C) an increase in general price levels.
D) a full-fledged financial crisis.
Q3) The process of deleveraging refers to
A) cutbacks in lending by financial institutions.
B) a reduction in debt owed by banks.
C) both A and B.
D) none of the above.
Q4) A financial crisis occurs when information flows in financial markets experience a particularly large disruption.
A)True
B)False
Q5) Describe how the European debt crisis evolved.
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Chapter 9: Central Banks and the Federal Reserve System
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Sample Questions
Q1) Although it enjoys a high degree of autonomy,the Fed is still subject to the influence of Congress because
A) Congress can pass legislation that would restrict the Fed's independence.
B) Congress can withhold the Fed's budget requests.
C) Congress can remove members of the Board of Governors whose views on policy differ from those of key members of Congress.
D) All of the above.
Q2) Suppose legislation requiring the Fed to keep the inflation rate between 1.5% and 2.5% per year is passed by Congress.This law restricts the Fed's A) instrument independence.
B) goal independence.
C) both A and B of the above.
D) neither A nor B of the above.
Q3) Describe the structure and responsibility for policy tools in The Federal Reserve System.
Q4) Are central banks in other nations moving toward more or less independence? Why?
Q5) What are the factors that promote the independence of the Federal Reserve?
Q6) Describe similarities and differences between the ECB and the US Fed.
Q7) In recent years,has Fed policymaking become more or less transparent? Why?
Page 11
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Chapter 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
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Sample Questions
Q1) Assets on the Fed's balance sheet include
A) government securities and currency in circulation.
B) discount loans and reserves.
C) government securities and discount loans.
D) currency in circulation and reserves.
Q2) Holding everything else constant,if the federal funds rate rises,then the demand for
A) excess reserves rises because they have a higher return.
B) excess reserves falls because they have a higher cost.
C) required reserves falls because the cost of borrowing from the Fed is relatively higher.
D) required reserves rises because the cost of borrowing from the Fed is relatively lower.
E) reserves will not change because the Fed sets the level of required reserves.
Q3) What goals are continually mentioned by central bank officials when discussing the objectives of monetary policy?
A) High unemployment
B) Instability in foreign exchange markets
C) Interest-rate stability
D) All of the above
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Page 12
Chapter 11: The Money Markets
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Sample Questions
Q1) Money market securities are short-term instruments with an original maturity of less than one year.
A)True B)False
Q2) The U.S.Treasury Department is the single most influential participant in the U.S.money market.
A)True B)False
Q3) The Fed is an active participant in money markets mainly because of its responsibility to
A) lower borrowing costs to encourage capital investment.
B) control the money supply.
C) increase the interest income of retirees holding money market instruments.
D) assist the Securities and Exchange Commission in regulating the behavior of other money market participants.
Q4) The Treasury accepts noncompetitive bids in ascending order of yield until the accepted bids reach the offering amount.
A)True B)False
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Chapter 12: The Bond Market
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Sample Questions
Q1) (I)Callable bonds usually have a higher yield than comparable noncallable bonds. (II)Convertible bonds are attractive to bondholders and sell for a higher price than comparable nonconvertible bonds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q2) Individuals and households frequently purchase capital market securities through financial institutions such as A) mutual funds.
B) pension funds.
C) money market mutual funds.
D) all of the above.
E) only A and B of the above.
Q3) A financial guarantee ensures that the lender (bond purchaser)will be paid both principal and interest in the event the issuer defaults. A)True
B)False
Q4) What is a bond indenture?
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Chapter 13: The Stock Market
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Sample Questions
Q1) To list on the NYSE,a firm must
A) have earnings of at least $10 million per year.
B) have at least $500 million in outstanding debt.
C) have a total of $100 million in market value.
D) meet all of the above requirements.
E) meet A and C of the above requirements.
Q2) Exchange traded funds (ETFs)have which of the following features?
A) They are listed and traded as individual stocks on a stock exchange.
B) They are indexed rather than actively managed.
C) Their value is based on the underlying net asset value of the stocks held in the index basket.
D) All of the above.
Q3) A lower than average PE may mean that the market expects earnings to rise in the future.
A)True
B)False
Q4) All stocks pay dividends,as that is the only way an investor can profit from holding stock.
A)True
B)False
Page 15
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Chapter 14: The Mortgage Markets
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Sample Questions
Q1) Discount points (or simply points)are interest payments made at the beginning of a loan.
A)True
B)False
Q2) Mortgage interest rates loosely track interest rates on three-month Treasury bills.
A)True
B)False
Q3) Ginnie Mae
A) insures qualifying mortgages.
B) insures pass-through certificates.
C) insures collateralized mortgage obligations.
D) does only A and B. of the above.
E) does only B and C of the above.
Q4) Distinct elements of a mortgage loan include
A) origination.
B) investment.
C) servicing.
D) all of the above.
E) only B and C of the above.
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Chapter 15: The Foreign Exchange Market
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Sample Questions
Q1) When the value of the dollar changes from 0.50 pounds to 0.75 pounds,the pound has appreciated and the dollar has depreciated.
A)True
B)False
Q2) In the short run,the quantity of dollars supplied is relatively fixed,and is best represented with a vertical supply curve.
A)True
B)False
Q3) Explain the theory of purchasing power parity.
Q4) The more modern asset market approach to exchange rate determination
A) emphasizes the role of import and export demand.
B) emphasizes stocks of assets.
C) emphasizes both of the above.
D) emphasizes neither of the above.
Q5) With the start of the financial crisis in August 2007,the dollar began an accelerated decline in value,falling by 9% against the euro.At that point,the financial crisis appeared to be a U.S.problem.However,by mid-2008,the crisis spread to Europe.Discuss the reaction of the dollar to actions taken by European central banks in late 2008 to deal with the widening financial crisis.
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Chapter 16: The International Financial System
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Sample Questions
Q1) A central bank sale of ________ to purchase ________ in the foreign exchange market results in an equal decline in its international reserves and the monetary base.
A) foreign assets; domestic currency
B) foreign assets; foreign currency
C) domestic currency; foreign assets
D) domestic currency; domestic currency
Q2) A current account ________ indicates that the United States is ________ its claims on foreign wealth. A) surplus; increasing B) surplus; decreasing C) deficit; increasing D) balance; decreasing
Q3) By the end of 2012,China had accumulated more than $3 trillion of international reserves.How did China accomplish this? Is the policy sustainable?
Q4) Explain graphically how a country must intervene in the foreign exchange market under a fixed exchange rate regime if its currency is undervalued.
Q5) Describe the pros and cons for controls on capital inflows and outflows.
Q6) What was the European Monetary System? How did its exchange rate mechanism work?
Page 18
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Chapter 17: Banking and the Management of Financial Institutions
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Sample Questions
Q1) When you deposit $50 in currency at the Old National Bank,
A) its assets increase by $50.
B) its reserves increase by less than $50 because of reserve requirements.
C) its liabilities decrease by $50.
D) only A and B of the above occur.
Q2) Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called
A) return on assets.
B) return after taxes.
C) return on equity.
D) equity multiplier.
Q3) Which of the following is checkable deposits?
A) Savings accounts
B) Small-denomination time deposits
C) Money market deposit accounts
D) Certificates of deposit
Q4) To keep enough cash on hand to meet depositors' demand for withdrawals,banks must engage in liquidity management.
A)True
B)False
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Chapter 18: Financial Regulation
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Sample Questions
Q1) When regulators engage in macroprudential regulation,they focus on ________.
A) the safety and soundness of the entire financial institution
B) the credit standards of all loans held by the financial institution
C) the safety and soundness of the financial system in aggregate
D) the safety and soundness of each liability of the financial institution
Q2) Which of the following is not true regarding the Basel 2 proposal to reform the original 1988 Basel Accord?
A) It attempts to link capital requirements more closely to actual risk by expanding the number of risk categories.
B) It focuses on assessing the quality of risk management in banking institutions.
C) It attempts to improve market discipline by requiring increased disclosure of pertinent information about banks.
D) It has been well received by banks and national regulatory agencies.
Q3) How does Dodd-Frank claim to eliminate the too-big-to-fail problem?
Q4) To be classified as a well-capitalized bank,a bank's leverage ratio must exceed 8 percent.
A)True
B)False
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Page 20
Chapter 19: Banking Industry: Structure and Competition
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Sample Questions
Q1) The Glass-Steagall Act prohibited commercial banks from A) issuing equity to finance bank expansion.
B) engaging in underwriting of and dealing in corporate securities.
C) selling new issues of government securities.
D) purchasing any debt securities.
Q2) Adjustable-rate mortgages
A) protect households against higher mortgage payments when interest rates rise.
B) keep financial institutions' earnings high even when interest rates are falling.
C) have many attractive attributes, explaining why so few households now seek fixed-rate mortgages.
D) do only A and B of the above.
E) do none of the above.
Q3) Describe Edge Act corporations,international banking facilities,and the structure of foreign banks in the United States.
Q4) The principle underlying Treasury strips is that an investor will earn a higher interest rate when reinvestment risk is eliminated.
A)True
B)False
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21
Chapter 20: The Mutual Fund Industry
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Sample Questions
Q1) ________ funds are the simplest type of investment funds to manage.
A) Balanced
B) Global equity
C) Growth
D) Index
Q2) Mutual fund companies frequently offer a number of separate mutual funds called
A) indexes
B) complexes
C) components
D) actuaries
Q3) The net asset value of a mutual fund is the average market price of the stocks,bonds,and other assets the fund owns.
A)True
B)False
Q4) Which of the following is most likely to be a no-load fund?
A) Value funds
B) Hedge funds
C) Growth funds
D) Index funds
Page 22
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Chapter 21: Insurance Companies and Pension Funds
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Sample Questions
Q1) Adverse selection occurs when those most likely to get insurance payoffs are the ones who want to purchase the insurance the most.
A)True
B)False
Q2) If automobile insurance companies were prevented from charging risk-based premiums,but could selectively screen potential policyholders,the likely effect would be to
A) increase the number of young men obtaining insurance coverage relative to young women.
B) decrease the number of young women obtaining insurance coverage relative to young men.
C) decrease the number of young men obtaining insurance coverage relative to young women.
D) do both A and B of the above.
Q3) The fastest growing financial intermediary is ________.
A) commercial banks
B) pension plans
C) life insurance companies
D) mutual funds
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Page 23
Chapter 22: Investment Banks, Security Brokers and Dealers,
and Venture Capital Firms
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Sample Questions
Q1) Since the stock market decline in 2000,the number of companies funded and the total funds invested by venture capital firms have ________.
A) held steady
B) declined C) increased slightly D) increased sharply
Q2) The process of underwriting a stock or bond issue requires that the investment bank A) assure investors that the issue will provide them a high return.
B) purchase the entire issue at a predetermined price if the quantity demanded by consumers is insufficient at the predetermined price.
C) purchase the entire issue at a predetermined price and then resell it in the market. D) do both A and B of the above.
Q3) How do best efforts agreements and private placements differ from the usual process of underwriting new securities issues?
Q4) What niche in the financial system do venture capital firms fill?
Q5) Describe the differences between securities brokers and securities dealers.
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Chapter 23: Risk Management in Financial Institutions
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Sample Questions
Q1) When banks offer borrowers smaller loans than they have requested,banks are said to ________.
A) shave credit
B) discount the loan
C) raze credit
D) ration credit
Q2) Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals by the change in the interest rate is called duration analysis.
A)True
B)False
Q3) The difference between rate-sensitive liabilities and rate-sensitive assets is known as the duration gap.
A)True
B)False
Q4) What is the difference between credit risk and interest-rate risk?
Q5) Explain how banks benefit from specialization in lending.
Q6) What special assumptions do income and duration gap analyses make about interest rate changes and the yield curve?
Page 25
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Chapter 24: Hedging with Financial Derivatives
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Q1) The main disadvantage of futures contracts as compared to options on futures contracts is that futures
A) remove the possibility of gains.
B) increase the transactions cost.
C) are not as effective a hedge.
D) do not remove the possibility of losses.
Q2) Options on futures contracts are referred to as ________.
A) stock options
B) futures options
C) American options
D) individual options
Q3) An option that gives the holder the right to buy an asset in the future is a put.
A)True
B)False
Q4) The disadvantage of swaps is that
A) they lack liquidity.
B) it is difficult to arrange for a counterparty.
C) they suffer from default risk.
D) they are all of the above.
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Chapter 25: Financial Crises In Emerging Market Economies
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Q1) Describe the sequence of events in a financial crisis in an emerging market economy and explain why they can cause economic activity to decline.
Q2) Describe the differences in the evolution of the financial crises in South Korea (1997-1998)and Argentina (2001-2002).
Q3) The experience with financial crises in emerging market economies suggests a number of government policies that can help make financial crises in emerging market countries less likely,including
A) rapid financial liberalization.
B) better bank risk disclosure.
C) limiting the currency mismatch.
D) all of the above.
E) only B and C of the above.
Q4) Stage Three of a financial crisis in an emerging market economy features
A) a general increase in inflation.
B) debt deflation.
C) an increase in general price levels.
D) a full-fledged financial crisis.
Q5) What are some of the steps that emerging market economies can take to avoid a financial crisis?
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Chapter 26: Savings Associations and Credit Unions
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Sample Questions
Q1) The day-to-day liquidity needs of credit unions are met by the ________.
A) National Credit Union Administration
B) Federal Reserve System
C) state central credit unions
D) Central Liquidity Facility
Q2) Examiners from the Federal Home Loan Bank Board of San Francisco recommended that Lincoln Savings and Loan be seized when they discovered that
A) officials at the thrift had attempted to mislead them.
B) it had exceeded the 10 percent limit on equity investments by $600 million.
C) its owner, Charles Keating, had been convicted of embezzlement ten years before he purchased the thrift.
D) all of the above occurred.
E) only A and B of the above occurred.
Q3) The mutual form of ownership accentuates the principal-agent problem that exists in corporations.
A)True
B)False
Q4) Explain how the Lincoln Savings and Loan scandal is an application of the principal-agent problem.
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Chapter 27: Finance Companies
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Sample Questions
Q1) By the beginning of 2013,banks held $1,191 billion in consumer loans.Finance companies held about ________ of that figure.
A) 42%
B) 68%
C) 90%
D) 117%
Q2) The earliest examples of finance companies date back to the beginning of the ________ when retailers offered installment credit to customers.
A) 1800s
B) 1900s
C) 1950s
D) 1980s
Q3) In the early 1900s,banks did not offer loans to purchase automobiles.This is because A) banks could not make a profit on car loans.
B) only finance companies were permitted to offer car loans.
C) banks could not repossess a car if the loan defaulted.
D) banks did not view a car as a productive asset.
Q4) Describe the process of factoring? When and why is it used?
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