Finance
Exam Practice Tests
Course Introduction
Finance is the study of how individuals, businesses, and organizations manage and allocate their financial resources over time, considering the risks and returns involved. The course covers foundational concepts such as time value of money, asset valuation, portfolio management, capital budgeting, financial markets, and instruments. Students also explore financial planning, risk management, corporate finance, and the role of financial institutions. By understanding both theoretical frameworks and practical applications, students gain the skills necessary to make informed financial decisions in a dynamic global economy.
Recommended Textbook Fundamentals of Investment Management 9th Edition by
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Page 2
Geoffrey A. Hirt
Chapter 1: The Investment Setting
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Sample Questions
Q1) Finding high income (yield)and growth in the same investment is a relatively standard practice.
A)True
B)False
Answer: False
Q2) (a)The stock of Furniture Unlimited went from $90 to $99 last year.The firm also paid 80 cents in dividends.Compute the rate of return.
(b)During the next year,the dividend paid was 1.60 cents per share and the stock closed at $93 per share,down from $99 per share at the beginning of the year.Compute the annual gain or loss for the second year holding period.
Answer: (a) ($99 - $90)+ $.80 = Rate of Return $90 $9.80 = 10.9% $90 (b) ($93 - $99)+
$1.60 = Rate of Return $99 -$4.40 = (4.4%)loss $99
Q3) The tax Act of 2001 lowered the capital gains tax rate.
A)True
B)False
Answer: False
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Chapter 2: Security Markets: Present and Future
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Sample Questions
Q1) Under the Securities Act of 1933,the SEC can certify that a stock is fairly priced.
A)True
B)False
Answer: False
Q2) ECNs provide several advantages to investors.Which of the following is not an advantage?
A)They lower the cost of trading compared to organized exchanges with floor trading
B)They let everyone know who is making the trade and at what price
C)They provide the ability to trade after hours when the exchanges are closed
D)They provide more price transparency than organized exchanges.
Answer: B
Q3) A security traded on an exchange must meet listing requirements.
A)True
B)False
Answer: True
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Chapter 3: Participating in the Market
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Sample Questions
Q1) The Securities and Exchange Commission publishes a list of approved securities that may be borrowed against.
A)True
B)False
Answer: True
Q2) The index which gives equal weight to every company included and is therefore not dominated by any single company is the
A)Dow Jones Composite Average
B)Standard and Poor's 400 Index
C)The Value Line Average
D)American Stock Exchange Index
E)Dow Jones World Index
Answer: C
Q3) The Russell 2000 measures performance of the 2000 largest stocks based on market value.
A)True
B)False
Answer: False
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Chapter 4: Sources of Investment Information
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Sample Questions
Q1) The 10Q report is
A)A quarterly report to the Securities Exchange Commission providing financial statements,changes in stockholders,and other significant corporate changes
B)A monthly report to the SEC of insider stock activity by officers and directors as well as large stockholders owning more than 5% of the companies shares outstanding
C)An annual report to the SEC providing a company's detailed annual financial statements.While it has the same information as the annual report to stockholders,there is often more detail in the 10K
D)Issued to the SEC any time a significant corporate event occurs such as change of control,bankruptcy,change of officers,etc
Q2) An investor could find consensus earnings per share for the 30 Dow Jones Industrial Companies in Barron's.
A)True
B)False
Q3) The Survey of Current Business is published by the Conference Board.
A)True
B)False
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Chapter 5: Economic and Industry Analysis
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Sample Questions
Q1) The Federal Reserve Bank's buying and selling of securities for its own portfolio is known as open market operations.
A)True
B)False
Q2) In the last few years (since 2001),the trade deficit has increased dramatically.
A)True
B)False
Q3) During President Reagan's first term,the three-year tax cut and negotiated cuts in government spending reduced inflation dramatically and sparked growth in the GNP,but also boosted the federal deficit to record levels.
A)True
B)False
Q4) It is critical for financial analysts to specialize in a particular industry or group or related industries because of the large variety of factors which affect each industry significantly.
A)True
B)False
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Chapter 6: Industry Analysis
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Sample Questions
Q1) The crossover point on the life cycle curve is the point where:
A)The company issues stock in an initial public offering (IPO)
B)The company gets listed on an organized exchange
C)The company's industry moves from the growth stage to the expansion stage
D)The industry's products begin to be accepted by the marketplace
E)The company goes into decline and can no longer compete within the industry
Q2) Which of the following economic structures of industries was not specifically mentioned in the chapter?
A)Monopoly
B)Pure competition
C)Semi-strong competition
D)Oligopolies
Q3) Companies that have a strong ability to control suppliers enjoy a competitive advantage.
A)True
B)False
Q4) Companies in mature industries still have a dramatic need for internal cash flows to finance future growth.
A)True
B)False
Page 8
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Chapter 7: Valuation of the Individual Firm
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Q1) Firms with highly liquid cash positions may be attractive merger candidates mainly because their cash can be used to pay dividends.
A)True
B)False
Q2) The general dividend model assumes the value of a firm is equal to the present value of future dividends.
A)True
B)False
Q3) The strong inverse relationship between P/E ratios and changes in the Consumer Price Index can be directly traced to investors' required rate of return.
A)True
B)False
Q4) The appropriate P/E ratio to be used for stock valuation can be calculated at any time by dividing the current stock price by the last twelve months of earnings per share.
A)True B)False
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Chapter 8: Financial Statement Analysis
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Sample Questions
Q1) The liquidity ratios measure how quickly a firm can dispose of inventory.
A)True
B)False
Q2) Treasury stock represents shares of common stock that have been authorized but not issued.
A)True
B)False
Q3) Ratio analysis is equally effective in identifying either winners or losers.
A)True
B)False
Q4) A stock is a good buy when the value of these ratios except one is low compared to a market index or company history.Which one doesn't belong?
A)Price to book value
B)Price to earnings
C)Dividend yield
D)All of the above belong
Q5) An increase in assets is considered a source of funds.
A)True
B)False
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Chapter 9: A Basic View of Technical Analysis and Market Efficiency
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Q1) ______________ analysis focuses on charts and graphs based on internal market data,while _____________ analysis emphasizes earnings reports,management capabilities and new product development.
A)Technical; fundamental
B)Fundamental; technical
C)Technical; external
D)Technical; semi-strong
Q2) Under the Dow theory,all of the following represent trends in the market except A)Daily fluctuations
B)Secondary movement
C)Primary trends
D)Linear trends
Q3) When short sellers are bearish,it is thought to be a bullish signal.
A)True
B)False
Q4) Point and figure charts emphasize significant price changes and price reversals. A)True
B)False
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Chapter 10: Investment in Special Situations and Anomalies
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Sample Questions
Q1) One reason a firm may repurchase its own shares is
A)Management views the firm's future prospects to be bright
B)To go public
C)To qualify for an exchange listing
D)To adhere to SEC requirements on number of shares outstanding
Q2) The stock price of an acquiring company generally changes parallel to that of the target.
A)True
B)False
Q3) When a merger becomes relatively certain,arbitragers come in and attempt to lock in profits.
A)True
B)False
Q4) The stock price of an acquisition candidate changes dramatically prior to announcement because of
A)The candidate's estimated cost of capital
B)The high premium offered for the stock of the candidate
C)Information leaks
D)More than one of the above
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Chapter 11: Bond and Fixed Income Fundamentals
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Q1) The difference between a general obligation and a revenue bond is:
A)The general obligation bond is backed by full faith,credit,and "taxing power" of the governmental unit
B)That for a revenue bond,the repayment of the issue is fully dependent on the revenue-generating capability of a specific project or venture
C)General obligation bonds are usually of high quality because of the taxing power behind most of them
D)All of the above
Q2) Income bonds specify that interest is to be paid only to the extent that it is earned in current income.
A)True
B)False
Q3) Municipal bonds normally pay
A)Higher rates than taxable bonds
B)Lower rates than taxable bonds
C)The same rate as taxable bonds
D)None of the above
Q4) What is the dollar value of a U.S.government bond quoted at 98 8/32 ?
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Chapter 12: Principles of Bond Valuation and Investment
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Sample Questions
Q1) Inflationary expectations have no effect on bond prices.
A)True
B)False
Q2) Yield to maturity can be thought of as the internal rate of return of the bond.
A)True
B)False
Q3) Current yield is the annual interest divided by the price of the bond.
A)True
B)False
Q4) Which is not a theory related to the term structure of interest ratio?
A)Expectations hypothesis
B)Liquidity preference theory
C)Efficient market hypothesis
D)Market segmentation theory
Q5) The price of a bond represents simply the future value of interest payments.
A)True
B)False
Q6) Short-term rates are more volatile than long-run rates.
A)True
B)False
Page 14
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Chapter 13: Duration and Reinvestment Concepts
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Sample Questions
Q1) Weighted average life refers to the weighted average life of the payout.
A)True
B)False
Q2) The duration on an 8 percent,25-year bond is ______ the duration on a 9 percent,30-year bond.
A)Greater than
B)Less than
C)Equal to
D)There is not enough information to tell
Q3) High coupon bonds will usually have higher durations than low coupon bonds of the same maturity.
A)True
B)False
Q4) Terminal wealth analysis is the process of measuring the effects of shifting market rates on bond prices.
A)True
B)False
Q5) A zero-coupon bond has a duration equal to its maturity.
A)True
B)False
15
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Chapter 14: Convertible Securities and Warrants
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Sample Questions
Q1) A convertible bond has a face value of $1000 and the conversion price is $40 per share.The stock is selling at $30 per share.The bond pays $65 per year in interest and is selling in the market for $950.It matures in 7 years.Market rates are 10 percent annually.
(a)What is the conversion ratio?
(b)What is the conversion value?
(c)What is the conversion premium (in dollars and percent)?
(d)What is the floor or pure bond value? (use annual analysis)
(e)Compute the downside risk as a percentage.
Q2) The leverage associated with a warrant increases as the stock price increases. A)True B)False
Q3) Assume that a firm has warrants outstanding that allow the holder to buy one share of stock at $22 per share.Also assume the stock is selling at $28 per share and warrants are now selling at $10 per warrant.You can invest $1000 in the stock or the warrants.Assume the stock goes to $44 and the warrants trade at their intrinsic value when the stock is at $44.Would you have a larger total dollar profit by initially investing in the stock or the warrants? Compute the leverage.
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Chapter 15: Put and Call Options
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Sample Questions
Q1) "In-the-money" and "out-of-the-money" generally mean the same thing regarding put and call options.
A)True
B)False
Q2) The strike price refers to the premium paid by the option buyer for the right to exercise the option.
A)True
B)False
Q3) Calls used to cover a short sale guarantee that no loss can occur.
A)True
B)False
Q4) Unlike a covered call writer,a naked call writer will always lose if
A)The stock price rises above the strike price plus the speculative premium
B)The stock price declines
C)A closing transaction is executed
D)None of the above
Q5) Writers of naked call options generally expect stock prices to decline or remain stable.
A)True
B)False
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Chapter 16: Commodities and Financial Futures
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Sample Questions
Q1) As opposed to a farmer,a miller (processor of wheat)is likely to go __________ in the futures market.
A)Long
B)Short
C)Long and short
D)Around in circles
Q2) The interest rate futures market includes all of the following except
A)Treasury bonds,notes and bills
B)Eurodollars
C)GNMA certificates and bank CDs
D)All of the above are traded in the interest rate futures market
Q3) The margin requirement,relative to size,is less for financial futures,than traditional commodities.
A)True
B)False
Q4) Treasury bond futures trade on the New York Stock Exchange.
A)True
B)False
Q5) If a $100,000 treasury bond futures contract changes by 15/32,what is the dollar change?
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Chapter 17: Stock Index Futures and Options
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Q1) Futures contracts exist for the
A)Dow Jones Industrial Average
B)NASDAQ 100 Stock Index
C)S & P 500
D)All of the above
Q2) With a given size portfolio,the higher the portfolio beta
A)The more likely the portfolio is to go up rather than down
B)The more likely the portfolio is to go down rather than up
C)The fewer contracts necessary to hedge the portfolio
D)The more contracts necessary to hedge the portfolio
Q3) The value of a stock index futures contract is the product of ____ and the appropriate multiplier
A)The settle price
B)The change in the settle price
C)The difference between the settle price and the change
D)None of the above
Q4) The profit on a stock index option is determined by the change in the underlying value of the futures contract.
A)True
B)False
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Chapter 18: Mutual Funds
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Q1) An end load fund has
A)No charge upon purchase,but a fixed charge upon sale
B)A smaller charge on purchase,and another small charge again on sale
C)No charge upon purchase,and a declining charge based on time owned,on sale
D)Two of the above
Q2) Open-end common stock funds are much less common than closed-end funds.
A)True
B)False
Q3) Advantages of mutual funds include
A)Mutual funds outperform the market on average
B)Efficient diversification
C)Exceptionally low level of risk
D)All of the above
Q4) A closed-end fund stands ready to buy your shares back at all times.
A)True
B)False
Q5) Load mutual funds outperform no-load funds.
A)True
B)False
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Chapter 19: International Securities Markets
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Q1) An "emerging market" is defined as a market where the country has a small capital market relative to the industrialized world.
A)True
B)False
Q2) The best possible way of achieving international diversification is to invest in United States companies having a large share of their business coming from foreign investment.
A)True
B)False
Q3) Which of the following statements about the information available on publicly traded foreign firms is NOT ?
A)At least the accounting standards are the same for U.S.and international companies
B)Comparative industry data is generally not available
C)If you purchase a foreign firm directly on a foreign market you will receive your annual reports in the language of the country which most likely will not be English
D)The information is less rigorously regulated than in the United States
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Chapter 20: Investment in Real Assets
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Sample Questions
Q1) Real assets in comparison to financial assets are more likely to produce
A)Superior returns
B)High liquidity
C)Psychic pleasure
D)Deflationary benefits
Q2) A problem with real estate investments is that all require direct management by the owner.
A)True
B)False
Q3) In a(n)____ arrangement,the borrower may end up making payment to cover not only the loan amortization,but also interest on deferred interest from an earlier period.
A)Graduated payment mortgage
B)Shared appreciation mortgage
C)Adjustable rate mortgage
D)More than one of the above
Q4) Gold ownership is considered a hedge against inflation.
A)True
B)False
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Chapter 21: A Basic Look at Portfolio Management and Capital Market Theory
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Sample Questions
Q1) A good way to minimize risk and receive an optimum return on your portfolio is:
A)Through diversification
B)Buy only risk-free securities
C)Through blue-chip stock purchases only
D)Through junk-bonds
Q2) The correlation coefficient:
A)Measures the amount of risk associated with a given security at a given moment in time
B)Measures the joint movement between two variables
C)Measures the expected value of a security at a specified moment in time
D)All of the above
Q3) Systematic risk measures risk that is related to the market.
A)True
B)False
Q4) There is debate in regard to the capital asset pricing model about the appropriate Rf,Km,and stability of beta.
A)True
B)False
Page 23
Q5) An investment has the following range of outcomes and probabilities.
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Chapter 22: Measuring Risks and Returns of Portfolio Managers
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Q1) Using the Jensen approach,the adequacy of a portfolio manager's performance cannot be judged against the market line.
A)True
B)False
Q2) Professional money managers may be evaluated based on
A)Their adherence to stated objectives
B)Their ability to efficiently diversify the portfolio
C)Their return relative to degree of risk
D)All of the above
Q3) The least risk exposure would be appropriate for a mutual fund which
A)Generates income for investors living on a fixed income
B)Is oriented toward capital gains for wealthy investors
C)Is designed for young,upwardly mobile professionals
D)None of the above
Q4) Assume a second firm that evaluates portfolios uses the Treynor approach to measuring performance.This firm is also evaluating the three portfolios.The portfolio betas are as shown below:
Q5) Alpha must always be a positive number.
A)True
B)False
Page 24
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Chapter 23: Sustainable Growth Model
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Q1) Based on the sustainable growth model,a decrease in the dividend payout ratio (1the retention ratio)will increase the growth in earnings per share in the future.
A)True
B)False
Q2) A firm had earnings per share of $3.25 for the year.The book value per share at the beginning of the year was $13.If the firm paid out $.975 in dividends per share at the end of the year,how much will the book value per share be at the end of the year?
A)$16.25
B)$13.975
C)$15.275
D)$4.225
E)$12.025
Q3) The sustainable growth model is appropriate for firms that exhibit a constant pattern of growth and reinvestment.
A)True
B)False
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Chapter 24: a Black Scholes Option Pricing Model
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Q1) One of the foundations of the Black Scholes Option Pricing Model was that the shares of stock and call option combined to form
A)A riskless hedge that,by definition,had to duplicate the return of a discount bond with the same maturity length as the option
B)A hedge that by definition had the same risk as a 1 year U.S.Treasury bill
C)A hedge that by definition had to equal the risk of the underlying common stock on which the option was priced
D)None of the above are true
Q2) The Black and Scholes option pricing model makes an assumption that markets have taxes and transactions costs.
A)True
B)False
Q3) The Black and Scholes option pricing model makes an assumption that markets are frictionless.
A)True
B)False
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Chapter 26: A Comprehensive Analysis for Real Estate
Investment Decisions
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Q1) A duplex was purchases for $120,000 and depreciation of $3,300 has been taken for the last seven years.The net proceeds from the sale of the property is $135,000.
(a)Assuming the property qualifies for capital gains treatment at a 15% rate,what is the tax owed?
(b)What are the net funds from the sale?
Q2) An apartment complex has net operating income of $15,000,depreciation of $8,000,and interest expense of $13,000.The tax rate is 30 percent.
(a)What is taxable income or loss?
(b)what is the tax shield benefit or tax owed?
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Chapter 25: Unit Investment Trusts Uits
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Q1) Unit investment trusts have all of the following features except
A)They usually invest in tax-exempt municipals
B)Stipulated end to the life of the fund
C)Little interest rate risk
D)Actively trading the bonds in the portfolio
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Chapter 27: The Makeup of Institutional Investors
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Q1) Which of the following are NOT examples of institutional investors?
A)Mutual funds and pension funds
B)Insurance companies
C)Commercial Banks
D)All of the above are institutional investors
Q2) Organizations responsible for bringing together large pools of capital for purposes of reinvestment are called:
A)Individual investors
B)Institutional investors
C)Social security clubs
D)B and C
Q3) Pension funds represent a declining segment of the institutional market.
A)True
B)False
Q4) ___________ represent permanent capital funds that are donated to universities,churches or civic organizations.
A)Trusts
B)Endowments
C)Commingled funds
D)Annuities
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