Financial Management
Practice Questions
Course Introduction
Financial Management explores the fundamental principles and techniques involved in planning, organizing, directing, and controlling an organization's financial resources. The course covers topics such as financial analysis, budgeting, capital structure, cost of capital, investment decisions, working capital management, and financial risk assessment. Students will learn to apply financial concepts and tools to real-world business scenarios, enabling them to make informed decisions aimed at maximizing shareholder value and ensuring the long-term financial stability of an organization.
Recommended Textbook
Essentials of Investments 8th Edition by Zvi Bodie
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1830 Verified Questions
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Chapter 1: Investments: Background and Issues
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Sample Questions
Q1) Liabilities equal approximately _____ of total assets for nonfinancial U.S.businesses.
A) 10%
B) 25%
C) 44%
D) 75%
Answer: C
Q2) ____ is not a derivative security.
A) A share of common stock
B) A call option
C) A futures contract
D) All of the above are derivative securities.
Answer: A
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Chapter 2: Asset Classes and Financial Instruments
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Sample Questions
Q1) TIPS are ______.
A) Treasury bonds that pay a variable rate of interest
B) U.K. bonds that protect investors from default risk
C) securities that trade on the Toronto stock index
D) Treasury bonds that protect investors from inflation
Answer: D
Q2) What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%?
A) 6.48%
B) 7.25%
C) 8.02%
D) 9.00%
Answer: A
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Page 4
Chapter 3: Securities Markets
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Sample Questions
Q1) Which Congressional action directed the SEC to implement a national competitive securities market?
A) Securities Act of 1933
B) SEC Act of 1934
C) Securities Act Amendments of 1975
D) Financial Services Modernization Act of 1999
Answer: C
Q2) The _________ price is the price at which a dealer is willing to purchase a security.
A) bid
B) ask
C) clearing
D) settlement
Answer: A
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Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) The offer price of an open-end fund is $18.00 and the fund is sold with a front-end load of 5%? What is the fund's NAV?
A) $18.74
B) $17.10
C) $15.40
D) $16.57
Q2) Which of the following funds is most likely to have a debt ratio of 70% or higher?
A) Bond fund
B) Commingled fund
C) Mortgage backed securities
D) REIT
Q3) Which one of the following invests in a portfolio that is fixed for the life of the fund?
A) Mutual fund
B) Money market fund
C) Managed investment company
D) Unit investment trust
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Chapter 5: Risk and Return: Past and Prologue
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Sample Questions
Q1) The geometric average of -12%,20% and 25% is _________.
A) 8.42%
B) 11.00%
C) 9.70%
D) 18.88%
Q2) Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in six months.What is the effective annual rate of return for this investment?
A) 6.38%
B) 12.77%
C) 13.17%
D) 14.25%
Q3) Most studies indicate that investors' risk aversion is in the range _____.
A) 1-3
B) 2-4
C) 3-5
D) 4-6
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Page 7
Chapter 6: Efficient Diversification
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Sample Questions
Q1) To eliminate the bias in calculating the variance and covariance of returns from historical data the average squared deviation must be multiplied by _________.
A) n/(n - 1)
B) n * (n - 1)
C) (n - 1)/n
D) (n - 1) * n
Q2) The standard deviation of return on the optimal risky portfolio is _________.
A) 0%
B) 5%
C) 7%
D) 20%
Q3) Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.
A) up, right
B) up, left
C) down, right
D) down, left
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Chapter 7: Capital Asset Pricing and Arbitrage Pricing
Theory
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Sample Questions
Q1) A stock has a beta of 1.3.The unsystematic risk of this stock is ____________ the stock market as a whole.
A) higher than B) lower than C) equal to
D) indeterminable compared to
Q2) In a well diversified portfolio,__________ risk is negligible.
A) nondiversifiable
B) market
C) systematic
D) unsystematic
Q3) One of the main problems with the arbitrage pricing theory is __________.
A) its use of several factors instead of a single market index to explain the risk-return relationship
B) the introduction of non-systematic risk as a key factor in the risk-return relationship
C) that the APT requires an even larger number of unrealistic assumptions than the CAPM
D) the model fails to identify the key macroeconomic variables in the risk-return relationship
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Chapter 8: The Efficient Market Hypothesis
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Sample Questions
Q1) Assume that a company announces unexpectedly high earnings in a particular quarter.In an efficient market one might expect _____________.
A) an abnormal price change immediately following the announcement
B) an abnormal price increase before the announcement
C) an abnormal price decrease after the announcement
D) no abnormal price change before or after the announcement
Q2) Proponents of the EMH typically advocate __________.
A) a conservative investment strategy
B) a liberal investment strategy
C) a passive investment strategy
D) an aggressive investment strategy
Q3) Evidence by Blake,Elton and Gruber indicates that on average actively managed bond funds
A) outperform passive fixed-income indexes __________.
B) under perform passive fixed-income indexes by a wide margin
C) perform as well as passive fixed-income indexes
D) under perform passive fixed-income indexes by an amount equal to fund expenses
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Chapter 9: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) If investors are too slow to update their beliefs about a stock's future performance when new evidence arises they are exhibiting _______.
A) representativeness bias
B) framing error
C) conservatism
D) memory bias
Q2) According to market technicians a trin statistic of less than 1.0 is considered as a
A) bearish signal
B) bullish signal
C) volume decline
D) signal reversal
Q3) If mutual fund portfolios are heavy in cash,market contrarians may interpret this as what kind of signal?
A) Buy signal
B) Sell signal
C) Hold signal
D) This is not interpreted as a signal
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Chapter 10: Bond Prices and Yields
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Sample Questions
Q1) You buy a 10 year $1,000 par 4% annual payment coupon bond priced to yield 6%.You do not sell the bond at year end.If you are in a 15% tax bracket at year end you will owe taxes on this investment equal to _______.
A) $9.10
B) $4.25
C) $7.68
D) $5.20
Q2) If you are holding a premium bond you must expect a _______ each year until maturity.If you are holding a discount bond you must expect a _______ each year until maturity.
A) capital gain; capital loss
B) capital gain; capital gain
C) capital loss; capital gain
D) capital loss; capital loss
Q3) A collateral trust bond is _______.
A) secured by other securities held by the firm
B) secured by equipment owned by the firm
C) secured by property owned by the firm
D) unsecured
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Page 12
Chapter 11: Managing Bond Portfolios
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Sample Questions
Q1) A perpetuity pays $100 each and every year forever.The duration of this perpetuity will be __________ if its yield is 9%.
A) 7
B) 9
C) 9.39
D) 12.11
Q2) An increase in a bond's yield to maturity results in a price decline that is ________ the price increase resulting from a decrease in yield of equal magnitude.
A) greater than
B) equivalent to C) smaller than
D) The answer is indeterminate
Q3) All other things equal,which of the following has the longest duration?
A) A 30 year bond with a 10% coupon
B) A 20 year bond with a 9% coupon
C) A 20 year bond with a 7% coupon
D) A 10 year zero coupon bond
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Chapter 12: Macroeconomic and Industry Analysis
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Sample Questions
Q1) If the economy is going into a recession,a good industry to invest in would be the __________ industry.
A) automobile
B) banking
C) construction
D) medical services
Q2) The federal government decides to pay for the transition to private social security accounts with a one time $1 trillion bond issue.What will be the biggest concern to businesses relative to the "crowding out" effect?
A) Higher interest rates due to the new government borrowing
B) Inflation resulting from more government purchases
C) A negative supply shock
D) Shortage of investment due to new accounts
Q3) A firm in the early stages of its industry life cycle will likely have _________.
A) low dividend payout rates
B) low rates of investment
C) low rates of return on investment
D) low R&D spending
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Chapter 13: Equity Valuation
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Sample Questions
Q1) A firm reports EBIT of $100 million.The income statement shows depreciation of $20 millions.If the tax rate is 35% and total capital expenditures and increases in working capital total $10 million,what is the free cash flow to the firm?
A) $57
B) $65
C) $75
D) $95
Q2) A common stock pays an annual dividend per share of $1.80.The risk-free rate is 5 percent and the risk premium for this stock is 4 percent.If the annual dividend is expected to remain at $1.80 per share,what is the value of the stock?
A) $17.78
B) $20.00
C) $40.00
D) None of the above
Q3) New-economy companies generally have higher _______ than old-economy companies.
A) book value per share
B) P/E multiples
C) profits
D) asset values
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Chapter 14: Financial Statement Analysis
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Sample Questions
Q1) A firm purchases goods on credit worth $90.The same firm pays off $100 in old credit purchases.An investment is made via the purchase of a new facility and equity is issued in the amount of $180 to pay for the purchase.What is the change in net cash provided by investments?
A) $10 decrease
B) $90 decrease
C) $180 decrease
D) $190 decrease
Q2) A firm has an ROA of 8%,a debt/equity ratio of 0.5,its ROE is _________.
A) 4%
B) 6%
C) 8%
D) 12%
Q3) The highest possible value for the interest burden ratio is ______ and this occurs when the firm _________.
A) 0; uses as much debt as possible
B) 1; uses debt to the point where ROA = interest cost of debt
C) 1; uses no interest bearing debt
D) -1; pays down its existing debts
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Page 16
Chapter 15: Options Markets
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Sample Questions
Q1) When issued most convertible bonds are issued _____________.
A) deep in the money
B) deep out of the money
C) slightly out of the money
D) slightly in the money
Q2) The Option Clearing Corporation is owned by _________.
A) the exchanges on which stock options are traded
B) the Federal Deposit Insurance Corporation
C) the Federal Reserve system
D) major U.S. banks
Q3) The maximum loss a buyer of a stock call option can suffer is the _________.
A) call premium
B) stock price
C) stock price minus the value of the call
D) strike price minus the stock price
Q4) Selling a straddle would generate total premium income of _____.
A) $300
B) $400
C) $500
D) $700
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Chapter 16: Option Valuation
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Sample Questions
Q1) The current stock price of Alcoa is $70 and the stock does not pay dividends.The instantaneous risk free rate of return is 6%.The instantaneous standard deviation of Alcoa's stock is 40%.You wish to purchase a call option on this stock with an exercise price of $75 and an expiration date 30 days from now.Based on the Black-Scholes OPM,the call option's delta will be __________.
A) .28
B) .31
C) .62
D) .70
Q2) The _________ is the difference between the actual call price and the intrinsic value.
A) stated value
B) strike value
C) time value
D) binomial value
Q3) What combination of variables is likely to lead to the lowest time value?
A) Short time to expiration and low volatility
B) Long time to expiration and high volatility
C) Short time to expiration and high volatility
D) Long time to expiration and low volatility
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Chapter 17: Futures Markets and Risk Management
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Sample Questions
Q1) The clearing corporation has a net position equal to ______.
A) the open interest
B) the open interest times two
C) the open interest divided by two
D) zero
Q2) The Student Loan Marketing Association (SLMA)has short term student loans funded by long term debt.To hedge out this interest rate risk SLMA could ______________.
I.engage in a swap to pay fixed and receive variable interest payments
II.engage in a swap to pay variable and receive fixed interest payments
III.buy T-bond futures
IV.sell T-bond futures
A) I and II only
B) I and IV only
C) II and III only
D) II and IV only
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Chapter 18: Portfolio Performance Evaluation
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Sample Questions
Q1) The Treynor-Black Model assumes security markets are _________.
A) completely efficient
B) nearly efficient
C) very inefficient
D) random walks
Q2) What is the contribution of asset allocation to relative performance?
A) -0.18%
B) 0.18%
C) -0.15%
D) 0.15%
Q3) What phrase might be used as a substitute for the Treynor-Black model developed in 1973?
A) Solely active management
B) Enhanced index approach
C) Passive management
D) Random selection
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Page 20
Chapter 19: Globalization and International Investing
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Sample Questions
Q1) One year U.S.interest rates are 7% and European interest rates are 5%.The spot euro direct exchange rate quote is 1.30 and the one year forward rate direct quote is 1.25.If you have $1 million dollars or 1 million to start with what would be your dollar profits from an interest arbitrage based on this data?
A) $60,384
B) $42,973
C) $68,422
D) $78,500
Q2) In 2007,U.S.securities represented ______ of the world market for equities.
A) less than 25%
B) more than 2/3
C) between 30% and 40%
D) a consistent 50%
Q3) What is the difference in return of the manager's portfolio due to currency selection?
A) -5%
B) -3%
C) 2%
D) 1%
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Chapter 20: Hedge Funds
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Sample Questions
Q1) How many shares did you purchase?
A) 13,333
B) 25,000
C) 50,000
D) 66,000
Q2) If the risk-free interest rate is r<sub>f</sub> and equals the fund's benchmark,the portfolio net asset value is S<sub>0</sub>,and a hedge fund manager incentive fee is 20% of profit beyond that,the incentive fee is equivalent to receiving ______ call(s)with exercise price ________.
A) 0.2; S<sub>0</sub>
B) 1; S<sub>0</sub>(1 + r<sub>f</sub>)
C) 1.2; S<sub>0</sub>
D) 0.2; S<sub>0</sub>(1 + r<sub>f</sub>)
Q3) ______ are partnerships of wealthy investors but too small to warrant managing on a separate basis.
A) Commingled funds
B) Hedge funds
C) REITs
D) Mutual funds
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Page 22
Chapter 21: Taxes,inflation,and Investment Strategy
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Sample Questions
Q1) A decrease of 1% in both your tax exemption and your income tax rate would on net
A) make you better off B) make you worse off C) make you neither better off or worse off D) make you either better or worse off depending on your age
Q2) Inflation has an adverse effect on your savings because ____________.
I.it erodes the purchasing power of the dollars you have saved II.it increases the real rate of return on the dollars you save III.unless sheltered,it increases the taxes owed on investment income
A) I only
B) II and III only
C) I and III only
D) I, II and III
Q3) If you start saving for retirement only in your later years and your income growth from that point is rapid then ________________________.
A) a traditional IRA is probably a better choice than a Roth IRA
B) a Roth IRA is probably a better choice than a traditional IRA
C) a SEP is probably a better choice than Medicare
D) a 401(k) is probably a better choice than a 403(b)
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Chapter 22: Investors and the Investment Process
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Sample Questions
Q1) For a bank,the difference between the interest rate charged to borrowers and the interest rate paid on liabilities is called the __________.
A) insurance premium
B) interest rate spread
C) risk premium
D) term premium
Q2) The asset universe is the _____________________.
A) set of investments an investment company can legally invest in
B) existing set of assets the investment company currently owns in one or more of its portfolios
C) list of assets approved by the investment committee that may be placed in the investment company's portfolios
D) market portfolio of all available risky assets
Q3) An investor with low risk aversion will likely require which of the following risk return combinations?
A) Expected return = 11%, Historical standard deviation = 12%
B) Expected return = 12%, Historical standard deviation = 14%
C) Expected return = 14%, Historical standard deviation = 18%
D) Expected return = 17%, Historical standard deviation = 21%
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Page 24