Corporate Finance
Pre-Test Questions
Course Introduction
Corporate Finance explores the fundamental principles and techniques that govern financial decision-making within corporations. This course covers topics such as capital budgeting, financial statement analysis, risk and return, cost of capital, capital structure, dividend policy, and working capital management. Through case studies and real-world applications, students learn how financial managers plan for long-term investments, assess funding options, manage financial risks, and ultimately maximize shareholder value. The course equips students with analytical tools and frameworks essential for evaluating corporate finance decisions in a dynamic business environment.
Recommended Textbook Financial Markets and Institutions 12th Edition by Jeff Madura
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Page 2
Chapter 1: Role of Financial Markets and Institutions
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Q1) Which of the following is not a reason why depository financial institutions are popular?
A) They offer deposit accounts that can accommodate the amount and liquidity characteristics desired by most surplus units.
B) They repackage funds received from deposits to provide loans of the size and maturity desired by deficit units.
C) They accept the risk on loans provided.
D) They use their information resources to act as a broker, executing securities transactions between two parties.
E) They have more expertise than individual surplus units in evaluating the creditworthiness of deficit units.
Answer: D
Q2) When security prices fully reflect all available information, the markets for these securities are said to be efficient.
A)True
B)False
Answer: True
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Chapter 2: Determination of Interest Rates
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Q1) If economic expansion is expected to decrease, the demand for loanable funds should ____ and interest rates should ____.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer: C
Q2) Forecasters should consider future plans for corporate expansion and the future state of the economy when forecasting business demand for loanable funds.
A)True
B)False
Answer: True
Q3) To forecast interest rates using the Fisher effect, the real interest rate for an upcoming period can be forecasted by subtracting the expected inflation rate over that period from the nominalinterest rate quoted for that period.
A)True
B)False
Answer: True
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Chapter 3: Structure of Interest Rates
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Q1) Other things being equal, the yield required on A-rated bonds should be ____ the yield required on B-rated bonds whose other characteristics are exactly the same.
A) greater than B) equal to C) less than
D) All of the above are possible, depending on the size of the bond offering.
Answer: C
Q2) According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ____ pressure on the demand for long-term fundsissued by borrowers and the yield curve will be ____ sloping.
A) upward; downward
B) downward; upward
C) upward; upward
D) downward; downward
Answer: D
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Chapter 4: Functions of the Fed
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Sample Questions
Q1) Which of the following is currently a main role of the Federal Reserve's Board of Governors?
A) regulating commercial banks
B) regulating foreign trade
C) controlling monetary policy
D) A and C
Q2) The term "quantitative easing" refers to the Fed's:
A) purchases of only short-term Treasury securities.
B) sales of only short-term Treasury securities
C) purchases of various types of debt securities, including risky debt securities
D) purchases of only commodities such as gold.
Q3) The effects of the credit crisis in 2008 were largely confined to the United States, so central banks in other nations did not have to reduce their targeted interest rate levels.
A)True
B)False
Q4) All commercial banks are required to be members of the Fed.
A)True
B)False
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Chapter 5: Monetary Policy
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Sample Questions
Q1) The interest rate that the Fed targets for its monetary policy is the:
A) commercial paper rate.
B) federal funds rate.
C) Treasury bond coupon rate.
D) one-year certificate of deposit rate.
Q2) Which of the following is not true with respect to inflation targeting?
A) The Fed could lose credibility if the inflation rate deviates substantially from the Fed's target inflation rate.
B) A focus on inflation could result in a much higher unemployment rate.
C) Inflation targeting may not only satisfy the inflation goal, but could also achieve the employment stabilization goal in the long run.
D) If unemployment is slightly higher than normal, while inflation is at the peak of the target range, an inflation targeting approach would like advocate a loose monetary policy.
Q3) If the Fed uses a passive monetary policy during weak economic conditions,
A) it increases the money supply substantially.
B) it reduces the money supply substantially.
C) it allows the economy to fix itself.
D) it purchases commercial paper and mortgage-backed securities.
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Page 7
Chapter 6: Money Markets
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Sample Questions
Q1) T-bills must offer a premium above the negotiable certificate of deposit (NCD) to compensate for less liquidity and safety.
A)True
B)False
Q2) The LIBOR scandal in 2012 involved:
A) banks reporting inflated earnings from their loans.
B) hackers breaking into the loan documentation files.
C) banks falsely reporting the interest rates they offered in the interbank market.
D) collusion among the banks when setting the commercial paper rate.
Q3) When a firm sells its commercial paper at a ____ price than projected, its cost of raising funds will be ____ than what it initially anticipated.
A) higher; higher
B) lower; lower
C) higher; lower
D) lower; higher
E) Answers C and D are correct.
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Page 8
Chapter 7: Bond Markets
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Sample Questions
Q1) Interest earned from Treasury bonds is
A) exempt from all income tax.
B) exempt from federal income tax.
C) exempt from state and local taxes.
D) subject to all income taxes.
Q2) Subordinated indentures have claims against the firm's assets that are junior to the claims of both mortgage bonds and regular debentures.
A)True
B)False
Q3) ____ require the owner to clip coupons attached to the bonds and send them to the issuer to receive coupon payments.
A) Bearer
B) Registered
C) Treasury
D) Corporate
Q4) Savings bonds are bonds issued by the Federal Reserve.
A)True
B)False
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Page 9
Chapter 8: Bond Valuation and Risk
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Sample Questions
Q1) Which of the following will most likely cause bond prices to increase? (Assume no possibility of higher inflation in the future.)
A) reduced Treasury borrowing along with anticipation that money supply growth will decrease
B) reduced Treasury borrowing along with anticipation that money supply growth will increase
C) an anticipated drop in money supply growth along with increasing Treasury borrowing
D) higher levels of Treasury borrowing and corporate borrowing
Q2) An economic announcement signaling ____ economic growth in the future will probably cause bond prices to ____.
A) weak; decrease
B) strong; increase
C) weak; increase
D) strong; decrease
E) Answers C and D are correct.
Q3) A zero-coupon bond makes no coupon payments.
A)True
B)False
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Page 10
Chapter 9: Mortgage Markets
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Sample Questions
Q1) ____ mortgages enabled more people with relatively lower income, or high existing debt, or a small down payment to purchase homes.
A) Prime
B) Balloon
C) Amortized
D) Subprime
Q2) An institution that originates and holds a fixed-rate mortgage is adversely affected by ____ interest rates; the borrower who was provided the mortgage is adversely affected by ____ interest rates.
A) stable; decreasing
B) increasing; stable
C) increasing; decreasing
D) decreasing; increasing
Q3) Strong economic growth tends to reduce the probability that the issuer of a mortgage will default on its debt payments and therefore tends to decrease mortgage prices.
A)True
B)False
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Chapter 10: Stock Offerings and Investor Monitoring
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Sample Questions
Q1) In addition to extended sessions offered by the stock exchanges, some electronic communications networks (ECNs) allow for trading at any time.
A)True
B)False
Q2) Shelf-registration allows firms quick access to funds without repeatedly being slowed by the registration process.
A)True
B)False
Q3) A firm can avoid the time lag between registering new securities with the SEC and actually selling them by using
A) a proxy.
B) shelf registration.
C) a margin call.
D) preemptive rights.
Q4) Initial public offerings (IPOs) tend to occur more frequently during bullish stock markets.
A)True
B)False
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Page 12
Chapter 11: Stock Valuation and Risk
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Sample Questions
Q1) A portfolio's beta is the sum of the individual forecasted betas, weighted by the market value of each stock.
A)True
B)False
Q2) The expected acquisition of a firm typically results in ____ in the target's stock price.
A) an increase
B) a decrease
C) no change
D) none of the above
Q3) Value at risk estimates the ____ a particular investment for a specified confidence level.
A) beta of
B) risk-free rate of
C) largest expected loss to
D) standard deviation of
Q4) The prime rate is commonly used as a proxy for the risk-free rate in the capital asset pricing model (CAPM).
A)True
B)False
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Chapter 12: Market Microstructure and Strategies
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Sample Questions
Q1) The bid-ask spread is negatively related to
A) order costs
B) inventory costs.
C) Risk
D) trading volume
Q2) A ____ order to buy or sell a stock means to execute the transaction at the best possible price.
A) market
B) limit
C) stop-loss
D) stop-buy
Q3) Trading halts are imposed by
A) the SEC.
B) brokers.
C) stock exchanges.
D) the Treasury.
Q4) When investors place a limit order, they can place it for the day only.
A)True
B)False
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Chapter 13: Financial Futures Markets
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Sample Questions
Q1) If speculators believe interest rates will ____, they would consider ____ a T-bill futures contract today.
A) increase; selling
B) increase; buying
C) decrease, selling
D) decrease; purchasing a call option on
Q2) Assume that a T-bill futures contract with a face value of $1 million is purchased at a price of $95.00 per $100 face value. At settlement, the price of T-bills is $95.50. What is the differencebetween the selling and purchase price of the futures contract?
A) $.50
B) $50
C) $500
D) $5,000
E) none of the above
Q3) Financial futures contracts are rarely sold over the counter.
A)True
B)False
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Chapter 14: Options Markets
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Sample Questions
Q1) When a stock index option is exercised, the cash payment is equal to a specified dollar amount
A) multiplied by the index level.
B) multiplied by the exercise price.
C) multiplied by the difference between the index level and the exercise price.
D) multiplied by the sum of the index level and the exercise price.
Q2) The greater the volatility of the underlying stock, the ____ the call option premium and the ____ the put option premium.
A) higher; lower
B) lower; higher
C) higher; higher
D) lower; lower
Q3) Speculators who anticipate a sharp increase in stock market prices overall may consider purchasing put options on one of the market indexes.
A)True
B)False
Q4) American-style stock options can be exercised only just before expiration.
A)True
B)False
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Chapter 15: Swap Markets
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Sample Questions
Q1) A ____ swap involves an exchange of interest rate payments that does not begin until a specified future point in time.
A) plain vanilla
B) zero-coupon-for-floating
C) forward
D) seasoned vanilla
E) putable
Q2) An equity swap involves the exchange of interest payments for payments linked to the degree of change in a bond index.
A)True
B)False
Q3) ____ swap allows the party making fixed-rate payments to terminate the swap prior to maturity.
A) forward
B) extendable
C) callable
D) putable
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Page 17
Chapter 16: Foreign Exchange Derivative Markets
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Sample Questions
Q1) Assume the following information. Interest rate on borrowed euros is 5 percent annualized.
Interest rate on dollars loaned out is 6 percent annualized. Spot rate is 1.10 euros per dollar (one euro = $0.909).
Expected spot rate in five days is 1.15 euros per dollar.
Fabrizio Bank can
If Fabrizio Bank attempts to capitalize on the above information, its profit over the five-day period isborrow 10 million euros.
A) 2,653,597.22 euros.
B) 455,266.81 euros.
C) 452,426.04 euros.
D) none of the above
Q2) Purchasing power parity suggests that the forward rate premium (or discount) should be about equal to the differential in interest rates between the countries of concern.
A)True
B)False
Q3) Financial institutions rarely use the forward market.
A)True
B)False
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Chapter 17: Commercial Bank Operations
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Sample Questions
Q1) When a bank obtains funds through a ____, the provider of the funds receives collateral.
A) retail CD
B) NOW account
C) repurchase agreement
D) money market deposit account
Q2) When a bank in need of funds for a few days sells some of its government securities to a corporation with a temporary excess of funds, then buys them back shortly thereafter, this is a
A) federal funds loan.
B) discount window loan.
C) repurchase agreement.
D) commercial paper transaction.
Q3) For any given bank, federal funds ____ represent a(n) ____.
A) purchased; asset
B) sold; liability
C) purchased; liability
D) A and B
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Chapter 18: Bank Regulation
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Q1) The Reigle-Neal Interstate Banking and Branching Efficiency Act allowed banks to achieve economies of scale through nationwide interstate banking.
A)True
B)False
Q2) The Sarbanes-Oxley Act (2002) was enacted in response to some banks taking too much risk.
A)True
B)False
Q3) Federal deposit insurance
A) has existed since the 1800s.
B) was created in 1933
C) was created after World War II.
D) was created in 1960.
Q4) When the Federal Reserve conducts stress tests of banks, it may examine the U.S. operations of foreign-based banks as well as U.S. banks.
A)True
B)False
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Chapter 19: Bank Management
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Q1) A positive gap (or gap ratio of more than 1.00) suggests that rate-sensitive liabilities exceed rate-sensitive assets.
A)True
B)False
Q2) Which of the following is not a likely method used by a bank to reduce interest rate risk?
A) maturity matching
B) using fixed-rate loans
C) using interest rate futures contracts
D) using interest rate caps
Q3) The performance of a bank that continually concentrates on short-term deposits in euros and adjustable-rate dollar loans with equal rate sensitivity is
A) unaffected if euro interest rates increase and U.S. rates decrease.
B) unaffected if U.S. interest rates increase and euro interest rates decrease.
C) adversely affected if euro interest rates increase and U.S. rates decrease.
D) adversely affected if U.S. interest rates increase and euro rates decrease.
E) A and B
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21
Chapter 20: Bank Performance
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Q1) If a bank has long-term fixed-rate assets and short-term liabilities, and interest rates increase over time, its net interest margin should A) decrease B) increase
C) stay the same.
D) either A or B, depending on whether the asset maturities exceed 10 years
Q2) A bank with ____ management may account for ____ loan losses, which _____ reported earnings now.
A) conservative; smaller; reduces B) conservative; larger; reduces C) aggressive; larger; increases
D) aggressive; smaller; has no effect on
Q3) Banks increase their loan loss reserves in order to boost their reported earnings. A)True
B)False
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22
Chapter 21: Thrift Operations
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Sample Questions
Q1) Because credit unions ____ stock, they are technically owned by the ____.
A) issue; depositors
B) do not issue; depositors
C) issue; stockholders
D) do not issue; management
Q2) Interest-paying checkable accounts offered by credit unions are called
A) NOW accounts.
B) money market deposit accounts.
C) share certificates.
D) share drafts.
Q3) ____ is (are) not a main use of funds for savings institutions.
A) Capital
B) Mortgages
C) Consumer and commercial loans
D) Mortgage-backed securities
Q4) All federally chartered credit unions are required to obtain insurance from the National Credit Union Share Insurance Fund (NCUSIF).
A)True
B)False
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Chapter 22: Finance Company Operations
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Sample Questions
Q1) Which of the following is not a use of finance company funds?
A) consumer loans
B) business loans
C) commercial paper
D) real estate loans
E) All of the above are uses of finance company funds.
Q2) The most important risk for finance companies is ____ risk.
A) settlement
B) accounting
C) credit
D) exchange rate
Q3) When a finance company purchases a firm's receivables at a discount and becomes responsible for processing and collecting the balances of these accounts, it acts as a
A) leasing agent.
B) lessor.
C) lessee.
D) factor.
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Chapter 23: Mutual Fund Operations
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Q1) Capital appreciation funds are suited to investors who are more willing to risk a possible loss in value.
A)True
B)False
Q2) Exchange-traded funds (ETFs)?
A) are traded on an exchange, and their share price changes throughout the day.
B) represent only bonds.
C) are actively managed.
D) None of the above is correct.
Q3) The ____ of a mutual fund indicates the value per share.
A) net asset value
B) gross asset value
C) net stock value
D) net bond value
E) none of the above
Q4) Compared to open-end mutual funds, exchange-traded funds generate much more capital gain income that must be distributed to their shareholders, who must pay tax on the gains.
A)True
B)False
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Chapter 24: Securities Operations
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Q1) Which of the following is not a service that is commonly performed by a securities firm?
A) setting regulatory rules for stock exchanges
B) origination
C) underwriting
D) distribution
Q2) Unlike the standardized provisions of a publicly placed issue, the provisions of a privately placed bond issue can be tailored to the desires of the purchaser.
A)True
B)False
Q3) One of the main functions of securities firms is helping corporations and governments raise funds.
A)True
B)False
Q4) ____ are not included in flotation costs
A) Issue costs
B) Fees paid to the underwriters
C) Taxes paid on income earned from the stock offering
D) Registration expenses
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Chapter 25: Insurance Operations
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Q1) The primary source of funds for a life insurance company income is
A) life insurance premiums.
B) annuity plans.
C) health insurance premiums.
D) investment income.
E) none of the above
Q2) _____ insurance provides a financial payout if specified employees of a business become disabled or die.
A) Best person
B) Employment liability
C) Key employee
D) Credit line
Q3) ____ insurance covers losses due to a contract not being fulfilled.
A) Fidelity bond
B) Credit line
C) Surety bond
D) Business interruption
Q4) Group insurance policies are very popular for employers and employees.
A)True
B)False
Page 27
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Chapter 26: Pension Fund Operations
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Q1) Pension funds whose contributions are dictated by the benefits that will eventually be provided are called ____ plans.
A) defined-benefit
B) defined-contribution
C) beneficiary
D) guarantor-insured
Q2) A defined-benefit plan provides benefits that are determined by the accumulated contributions and the fund's investment performance.
A)True
B)False
Q3) If pension fund investment decisions are made with the objective of generating cash flows at the same time as planned outflow payments, the fund follows a ____ strategy. When comparing matchedfunding and projective funding, ____ is more flexible for portfolio managers.
A) matched funding; matched funding
B) projective funding; matched funding
C) projective funding; projective funding
D) matched funding; projective funding
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