Finance Principles
Study Guide Questions
Course Introduction
Finance Principles introduces students to the foundational concepts and tools essential for understanding the management of financial resources in both personal and organizational contexts. The course covers key topics such as time value of money, risk and return, financial statement analysis, capital budgeting, and the functioning of financial markets. Through practical examples and case studies, students learn how financial decisions are made, the factors influencing investment and funding choices, and the ethical considerations in financial management. This course provides a solid groundwork for further study in finance and equips students with the analytical skills needed for effective financial decision-making.
Recommended Textbook
Fundamentals of Investment Management, 10e by Geoffrey A. Hirt
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Chapter 1: The Investment Setting
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Sample Questions
Q1) An investment in common stock carries a higher return than a bank certificate of deposit. The difference in returns is called:
A)the risk-free rate.
B)the real rate of return.
C)the risk premium.
D)the beta.
E)None of the above
Answer: C
Q2) Which of the following investments would theoretically always carry the highest risk premium?
A)U.S. treasury bill
B)Common stock
C)Preferred stock
D)Corporate bond
E)Any one of the above
Answer: B
Q3) Retirement questions should be asked 5-10 years before retirement.
A)True
B)False
Answer: False
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Chapter 2: Security Markets
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Sample Questions
Q1) One of the functions of a specialist is:
A)to manipulate price continuity.
B)to change quotation spreads.
C)to measure market depth as needed.
D)to execute special orders for floor brokers.
Answer: D
Q2) The rise of financial-service firms through mergers and the consolidation of brokerage companies have resulted from significant changes in the banking laws.
A)True
B)False
Answer: True
Q3) What are ECNs?
Answer: ECNs are electronic trading systems that automatically match buy and sell orders at specified prices.
Explanation: ECNs are electronic trading systems that automatically match buy and sell orders at specified prices.
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Chapter 3: Participating in the Market
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Sample Questions
Q1) The NYSE sets margin requirements.
A)True
B)False
Answer: False
Q2) You buy 100 shares of stock at $50 per share on margin of 40 percent. If the price of the stock declines to $35, what is your percentage loss?
Answer: 75% loss
Explanation: \(\begin{array} { l r r r } \text { Purchase: }&\text { 100 shares @ \$ 50} &\$ 5,000\\
\text { Borrow } & \$ 5,000 ( 1 - .40 ) &\underline{3.000 } \\ \text { Equity } &&\$2,000 & \text { Initial Position } \end{array}\)
\(\begin{array} { l r }\text { Stock selling at \(\$ 35\) per share} & \$ 3,500\\ \text { Loan } & \underline{3,000} \\ \text { Equity } & \$ 500 \end{array}\) Change in equity/initial equity = return ($500 - $2,000)/$2,000 = 75% loss
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Chapter
Exchange-Traded Funds, Closed-End Funds, and Unit
Investment Trusts
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Sample Questions
Q1) A back-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) An investor should expect a mutual fund to maintain its historical track record of returns.
A)True
B)False
Q3) A characteristic of a closed-end fund is that:
A)it stands ready at all times to sell the investor new shares or buy back the old ones.
B)the method of purchase is the stock exchange or over-the-counter market.
C)the closed-end fund does not deal with shareholders.
D)it trades shares at the Net Asset Value.
Q4) One can purchase shares in a closed-end mutual fund
A)from shareholders.
B)directly from the fund at all times.
C)directly from the fund at inception.
D)A and C
Page 6
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Chapter 5: Economic Activity
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Sample Questions
Q1) The Federal Reserve Board of Governors controls money supply and interest rates through its monetary policy.
A)True
B)False
Q2) Since late 2002, the Bush administration has followed a weak dollar policy, and
A)the euro has fallen against the dollar.
B)the euro has risen against the dollar.
C)the Chinese renminbi has declined against the dollar.
D)None of the above happened
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 GDP, but also boosted the federal deficit to record levels.
A)True
B)False
Q4) High interest rates in the United States relative to foreign interest rates have a tendency to attract foreign investors to the U.S. money markets.
A)True
B)False
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Chapter 6: Industry Analysis
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Sample Questions
Q1) Competition can be intense in oligopolies due to price wars and international competition.
A)True
B)False
Q2) The grocery industry shows a fairly constant relationship between grocery store sales versus real GDP data.
A)True
B)False
Q3) Which of the following competitive forces is not one of the five mentioned in this chapter?
A)Threat of market entry by new competitors
B)Threat of substitute goods
C)Bargaining power of customers
D)Intensity of rivalry among competitors
Q4) Companies in mature industries still have a dramatic need for internal cash flows to finance future growth.
A)True
B)False
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Page 8
Chapter 7: Valuation of the Individual Firm
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Sample Questions
Q1) Under the constant dividend growth model, it is possible for a negative stock value to result.
A)True B)False
Q2) The problem with the pure short-term earnings model is that the stock value is highly sensitive to short-term swings in earnings per share (EPS).
A)True B)False
Q3) Widji Outfitters is expected to pay a dividend (D<sub>1</sub>) of $1.00 next year, with an expected constant growth in dividends of 5%. The required rate of return is 11%.
a) Calculate the present value of this stock.
b) What will be the new price of this stock if the discount rate rises to 12%?
c) What will be the new price of this stock if the discount rate falls to 10%?
Q4) Tate Realty is expected to pay a dividend (D<sub>1</sub>) of $3.00 next year, with the growth in dividends expected to remain constant at 5%. The required rate of return, K<sub>e</sub>, is 10%. Calculate P<sub>0</sub>.
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Chapter 8: Financial Statement Analysis
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Sample Questions
Q1) The major device that indicates what the firm owns, and how these assets are financed, in the form of liabilities or ownership interest is:
A)the balance sheet.
B)the statement of cash flows.
C)the income statement.
D)the general ledger.
Q2) Balance sheet items are carried at original cost or market value, at the discretion of the individual firm.
A)True
B)False
Q3) DuPont analysis illustrates the interaction of financial leverage, profit margin, and asset turnover on generating return on equity.
A)True
B)False
Q4) Corporate diversification eases the task of the financial analyst.
A)True
B)False
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Chapter 9: Efficient Markets and Anomalies
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Sample Questions
Q1) All of the following are minimum listing requirements for a New York Stock Exchange listing except:
A)the market value of publicly held shares should be at least $100 million.
B)there should be at least 2,000 round lot holders.
C)there should be at least 1,200 employees.
D)a total of at least 1,100,000 shares should be held publicly.
Q2) There is rarely a significant change in stock price when an OTC stock becomes listed on a national exchange.
A)True
B)False
Q3) The semi-strong form of the efficient market hypothesis says that investors are not able to use _____________ information for their gain.
A)public
B)insider
C)charting
D)leading indicators
Q4) The strong form of the EMH is generally confirmed by research evidence.
A)True
B)False
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Chapter 10: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) 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.
Q2) When short sellers are bearish, it is thought to be a bullish signal.
A)True
B)False
Q3) Barron's Confidence Index has only a mixed record of success.
A)True
B)False
Q4) The higher the mutual fund cash position,
A)the more likely the market is to go down.
B)the more likely the market is to go up.
C)the more likely the market is to stay relatively unchanged.
D)the higher mutual fund redemptions will be in the future.
Q5) Chartists do not consider volume significant in reading market indicators. A)True B)False
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Chapter 11: Bond and Fixed-Income Fundamentals
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Sample Questions
Q1) An after-acquired clause requires that new property must be placed under the original mortgage.
A)True
B)False
Q2) Interest on federally-sponsored credit agency issues (such as the Federal Home Loan Bank) is not tax-free to the recipient.
A)True
B)False
Q3) Assume a $1,000 Treasury bill is quoted to pay 9.5% interest over a six-month period.
a) How much interest would an investor receive?
b) What will be the price of the Treasury bill?
c) What will be the true rate of return?
Q4) A legal document which is administered by an independent trustee and spells out the major provisions of a bond agreement is called the
A)bond contract.
B)bond indenture.
C)debenture.
D)bond subordination.
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Chapter 12: Principles of Bond Valuation and Investment
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Sample Questions
Q1) Yield to maturity takes into account everything except:
A)annual interest received.
B)the difference between the current bond price and its maturity value.
C)the number of years to maturity.
D)the number of years since the bond's purchase.
Q2) Interest rate changes affect low-quality issues to a greater degree than high-quality issues.
A)True
B)False
Q3) When should an investor calculate both yield to maturity and yield to call?
A)Whenever there is a call provision
B)When the sum of the present values of the interest payments exceeds the call price
C)When the market price is greater than or equal to the call price
D)Whenever the funds can be reinvested
E)When interest rates increase above the coupon rate
Q4) Historically, interest rates have been coincident indicators in the economy.
A)True
B)False
Q5) What would be the current yield of a 6% coupon bond priced at $950?
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Chapter 13: Convertible Securities and Warrants
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Sample Questions
Q1) The value of a warrant is the market value of the stock minus the option price of the warrant divided by the number of shares it will buy.
A)True
B)False
Q2) What variables are needed to calculate basic earnings per share?
A)Adjusted earnings after taxes, number of shares outstanding, and number of common shares from all potential securities convertible into common stock
B)Earnings after taxes and number of shares outstanding
C)Adjusted earnings after taxes, shares outstanding, common stock equivalents, and all convertibles
D)Earnings after taxes, common shares outstanding, and all convertible preferred stock
Q3) When is the best time to convert a convertible bond to common stock?
A)When the call price exceeds the conversion value
B)After the conversion ratio decreases
C)When the conversion value is below the pure bond value
D)None of the above
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Chapter 14: Put and Call Options
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Sample Questions
Q1) Beltran Industries' common stock trades at $42 per share. The 40 call option trades at $4. This option would be:
A)in-the-money by $2.
B)in-the-money by $4.
C)out-of-the money by $2.
D)out-of-the-money by $4.
Q2) A stock is selling for $45.75, with a put option available at a $50 strike that has a premium of $7.50. What is the intrinsic value of the put?
A)$4.25
B)$1.25
C)$3.25
D)$5.25
E)$7.50
Q3) If an option is traded on more than one exchange, it may be bought, sold, or closed out on any exchange.
A)True
B)False
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Chapter 15: Commodities and Financial Futures
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Sample Questions
Q1) A speculator purchases a 37,000-pound contract for coffee for $1.08 per pound with an initial margin requirement of 7%. The price goes up to $1.13 in three months. What is the percentage of profit?
A)252.8%
B)264.4%
C)51.2%
D)63.2%
E)66.1%
Q2) If a financial manager wishes to protect against an interest rate drop, he can go long in the futures market.
A)True
B)False
Q3) Which of the following exchanges is more important within the financial futures market?
A)AMEX Commodity Exchange
B)New York Futures Exchange
C)IMM of the Chicago Mercantile Exchange
D)May be either A or B
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Chapter 16: Stock Index Futures and Options
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Sample Questions
Q1) The profit on a stock index option is determined by the change in the underlying value of the futures contract.
A)True
B)False
Q2) You buy an S&P 500 Index Call Option for $15. The strike price is $1,250. If the index closes at $1,290, what is your total profit?
Q3) An investor earns a profit on a put option when:
A)the increase in the index is greater than the premium paid.
B)the index decreases.
C)the decrease in the index is greater than the premium paid.
D)None of the above
Q4) In a declining market, stock index futures can be used to hedge a stock portfolio to help offset losses in the portfolio.
A)True
B)False
Q5) A combination of a futures and options contract is an option to purchase the futures contract.
A)True
B)False
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Chapter 17: A Basic Look at Portfolio Management and Capital Market Theory
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Sample Questions
Q1) An investment has the following range of outcomes and probabilities. \(\begin{array}{cc}
\underline{\text { Outcomes (Percent)}}&\underline{\text { Probabilities of Outcomes }}\\
5 \% & .25 \\
7 \% & .50 \\
12 \% & .25
\end{array}\)
Calculate the expected value and the standard deviation (round to two places after the decimal point where necessary).
Q2) The capital market line enables investors to achieve a higher level of utility than they could on the efficient frontier.
A)True B)False
Q3) The expected value is a commonly used measure of dispersion. A)True B)False
19
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Chapter 18: Duration and Bond Portfolio Management
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Sample Questions
Q1) Compute the duration for a bond with an 8% coupon rate, maturing in five years. A discount rate of 10% should be applied.
Q2) For all bonds of equal risk, the type of bond that had the greatest duration, and therefore the greatest price sensitivity, is:
A)Treasury bonds.
B)zero-coupon bonds.
C)corporate bonds.
D)long-term government bonds.
Q3) Duration times the reinvestment rate will give the approximate change in bond price for a 1% change in interest rates.
A)True
B)False
Q4) Duration will not help international bond managers choose bonds for their portfolios because of the foreign exchange risk.
A)True
B)False
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Chapter 19: International Securities Markets
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Sample Questions
Q1) a) You invest in the Canadian Equity market and you lose 20% (quoted in Canadian dollars). In the meantime, the United States dollar declines by 5% against the Canadian dollar. What is your percentage gain or loss, translated into dollars? b) If the United States dollar declines by 10% against the Canadian dollar, what would be your percentage gain or loss, translated into dollars?
Q2) The investor can maximize risk reduction benefits by combining United States securities with those of countries which are ________.
A)oil-exporting nations.
B)negatively or least positively correlated with the United States.
C)correlated with the United States.
D)None of the above
Q3) Countries are divided into developed and emerging markets based on the market capitalization of their stock market.
A)True
B)False
Q4) Generally, foreign markets are more liquid and efficient than U.S. capital markets.
A)True
B)False
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Page 21
Chapter 20: Investments in Real Assets
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Sample Questions
Q1) Dealer spreads on real assets tend to be less than on stocks or bonds.
A)True
B)False
Q2) A shopping center has annual net operating income of $1,050,000 and a capitalization rate of 8%. What is its value?
Q3) The best time to buy collectibles such as art, antiques, musical instruments, and the like is when:
A)the stock market is down.
B)no one else seems very interested.
C)a period of high inflation begins to level off.
D)None of the above
Q4) Equity participation:
A)is popular in commercial real estate.
B)lets the lender provide borrowed capital.
C)lets the lender provide part of the equity or ownership funds.
D)All of the above
Q5) Evidence shows real assets to be an inflation hedge.
A)True
B)False
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Chapter 21: Alternative Investments: Private Equity and Hedge Funds
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Sample Questions
Q1) Why do alternative investments make sense for institutional investors?
A)They reduce the rate of return and increase the standard deviation of the portfolio
B)They increase the rate of return and reduce the standard deviation of the portfolio
C)They reduce the rate of return and reduce the standard deviation of the portfolio
D)They increase the rate of return and increase the standard deviation of the portfolio
Q2) A strategy that buys a convertible security for the income and then sells the common stock short is called:
A)convertible arbitrage.
B)no-bias arbitrage.
C)long/short bias.
D)merger arbitrage.
Q3) A corporate venture capital fund is:
A)a fund operated by private investors.
B)a fund operated by a corporation.
C)a fund operated for a non-profit.
D)None of the above
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Chapter 22: Measuring Risks and Returns of Portfolio Managers
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Sample Questions
Q1) If the portfolio return is 10%, and the U.S. T-bill rate is 5.75%, what is the Treynor measure of excess returns?
A).4250
B).0425
C).7391
D)There is not enough information to tell
Q2) Under the Jensen approach, if the market rate of excess returns is 5.75%, a portfolio with beta of .9 should provide excess returns of:
A)5.175%.
B)4.5%.
C)5%.
D)There is not enough information to tell
Q3) 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
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Page 24
Chapter 23: A Comprehensive Analysis for Real Estate
Investment Decisions
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Q1) 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%. a) What is taxable income or loss?
B) What is the tax shield benefit or tax owed?
Q2) A duplex was purchased 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 were $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?
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Chapter 24: 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) ___________ represent permanent capital funds that are donated to universities, churches, or civic organizations.
A)Trusts
B)Endowments
C)Commingled funds
D)Annuities
Q3) Pension funds represent a declining segment of the institutional market.
A)True
B)False
Q4) 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
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