Financial Planning Exam Review
Course Introduction
Financial Planning is a comprehensive course designed to introduce students to the principles and practices of managing personal and organizational finances. The course covers key concepts such as budgeting, saving, investing, insurance, retirement planning, and tax strategies. Students will gain practical skills in setting financial goals, analyzing financial statements, and creating long-term financial plans. Through real-world case studies and hands-on exercises, the course prepares students to make informed financial decisions, navigate risk, and develop strategies for achieving financial security and success in a dynamic economic environment.
Recommended Textbook Fundamentals of Investments Valuation and Management 7th Edition by Bradford Jordan
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Page 2
Chapter 1: A Brief History of Risk and Return
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Sample Questions
Q1) Which one of the following had the smallest standard deviation of returns for the period 1926-2012?
A)large-company stocks
B)small-company stocks
C)long-term government bonds
D)intermediate-term government bonds
E)long-term corporate bonds
Answer: E
Q2) Which category(ies)of investments had an annual rate of return that exceeded 100 percent for at least one year during the period 1926-2012?
A)only large-company stocks
B)both large-company and small-company stocks
C)only small-company stocks
D)corporate bonds, large-company stocks, and small-company stocks
E)No category earned an annual return in excess of 100 percent for any given year during the period
Answer: C
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Chapter 2: The Investment Process
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Sample Questions
Q1) Nelson purchased 1,600 shares of stock for $18.75 a share.The initial margin requirement is 70 percent and the maintenance margin is 40 percent.What is the maximum percent by which the stock price can decline before he receives a margin call?
A)30 percent
B)45 percent
C)50 percent
D)65 percent
E)70 percent
Answer: C
Q2) When your equity position in a security is less than the required amount,your brokerage firm will issue a:
A)margin call.
B)margin certificate.
C)cash certificate.
D)limit order.
E)leverage call.
Answer: A
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Page 4
Chapter 3: Overview of Security Types
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Sample Questions
Q1) An agreement that grants the owner the right,but not the obligation,to buy or sell a specific asset at a specified price during a specified time period is called a(n)_____ contract.
A)futures
B)obligatory
C)quoted
D)fixed
E)option
Answer: E
Q2) A pension fund purchased 25 round lots of Baker Company stock at the closing price of the day yesterday.What was the cost of that purchase?
A)$7,810
B)$8,040
C)$201,000
D)$241,200
E)$256,800
Answer: C
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Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) Which one of the following statements is correct concerning mutual funds?
A)Mutual funds generally pay no taxes.
B)Mutual funds are risk-free.
C)Profits on the sale of mutual fund shares are tax-free.
D)All mutual funds are diversified.
E)Investments in mutual funds are guaranteed from loss by a private agency of the federal government.
Q2) Which one of the following correctly applies to hedge funds?
A)highly liquid
B)must be highly diversified
C)available to the general public
D)vast array of investment objectives
E)limited investment options
Q3) A 12b-1 fee is a fee charged by a mutual fund:
A)at the time shares are issued.
B)if shares are sold within a stated period of time.
C)to cover trading costs.
D)to pay the fund's managers.
E)to cover marketing costs.
Q4) Which type of investor is most apt to purchase municipal bond funds and why?
Page 6
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Chapter 5: The Stock Market
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Sample Questions
Q1) When stocks are held in an index in proportion to their total company market value,the index is:
A)dollar-weighted.
B)front-weighted.
C)back-weighted.
D)price-weighted.
E)value-weighted.
Q2) Which one of the following best describes a broker?
A)intermediary who arranges trades between a buyer and a seller
B)trader who buys and sells from his or her inventory
C)firm which charges a commission for arranging a transaction
D)person who buys securities for his or her own account on an exchange floor
E)trader who transacts business on behalf of a securities issuer
Q3) A trading floor broker:
A)is a NYSE member who trades on the floor for his or her personal account.
B)executes orders on behalf of commission brokers in exchange for a fee.
C)executes customers' orders in exchange for a commission.
D)trades a limited number of securities and is obligated to maintain an orderly market for those securities.
E)is any party who owns a NYSE trading license.
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Chapter 6: Common Stock Valuation
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Sample Questions
Q1) The Free Cash Flow Model: I.can be used to value a company with negative earnings II.is based on a firm having positive cash flows III.requires that a firm pay a dividend IV.directly estimates a value for a firm's equity
A)I only
B)I and II only
C)I and III only
D)I, II, and III only
E)I, II, III, and IV
Q2) The Retail Box has an historical P/CF ratio of 21.5.The current CFPS is $1.42 and the projected CFPS growth rate is 5.6 percent.The current EPS is $1.02.What is the expected price of this stock one year from now?
A)$30.53
B)$32.24
C)$32.88
D)$34.11
E)$34.20
Q3) Identify three causes for a decrease in a firm's sustainable rate of growth.
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Page 8
Chapter 7: Stock Price Behavior and Market Efficiency
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Sample Questions
Q1) Which one of the following items is most apt to be considered material non-public information? Assume that none of this information is known publicly.
A)Barb knows that Sue, an accounting clerk, is planning on resigning on Friday.
B)Linda knows a new receptionist has just been hired.
C)Wendy knows that her firm's net income is continuing to increase at a steady rate.
D)Tracey knows her employer just received patent approval on a key new product.
E)Maria is the chief financial officer and knows the firm intends to maintain its current dividend policy.
Q2) Immediately following the Crash of 1987,the stock market:
A)remained in a slump for five years.
B)remained flat for an extended period of time.
C)had one of the biggest short-term gains ever.
D)began a very slow and choppy recovery.
E)began a very slow and smooth recovery.
Q3) A trader was found guilty of violating insider trading laws.As part of his sentencing,he had to forfeit the excessive profits earned on the illegal trades.What does this conviction indicate about the current form of market efficiency?
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9
Chapter 8: Behavioral Finance and the Psychology of Investing
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Sample Questions
Q1) What is the primary purpose of Dow theory?
A)to measure the level of investor optimism and pessimism
B)to analyze daily market movements
C)to identify and measure market waves
D)to eliminate market corrections
E)to signal changes in the market's primary direction
Q2) Explain the basics of prospect theory and provide an example that illustrates this theory.
Q3) Peter hesitates when it comes to picking an individual stock to purchase as he feels that he will later realize that a different stock would have been a better investment.Peter is suffering from:
A)money illusion.
B)frame dependence.
C)regret aversion.
D)risk-taking.
E)mental accounting.
Q4) Draw a basic Elliott Wave Pattern.Identify each wave and indicate the waves that are "corrective" and those that are "impulsive".
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Chapter 9: Interest Rates
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Sample Questions
Q1) Money market rates are generally one or the other of which two rates?
I.bank discount rate
II.bond equivalent rate
III.annual percentage rate
IV.effective annual rate
A)I and II only
B)I and III only
C)I and IV only
D)II and III only
E)II and IV only
Q2) Identify and describe five interest rates that directly apply to the money market.
Q3) A Treasury bill has a face value of $250,000,an asked yield of 2.02 percent,and matures in 32 days.What is the price of this bill?
A)$249,397.19
B)$249,408.08
C)$249,511.11
D)$249,670.22
E)$249,717.08
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11
Chapter 10: Bond Prices and Yields
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Sample Questions
Q1) A dedicated portfolio is a bond portfolio created to:
A)maximize current interest income.
B)provide an increasing steady stream of income.
C)maximize the return given declining interest rates.
D)fund a future cash outlay.
E)avoid taxation.
Q2) Identify and briefly explain four of Malkiel's five theorems.
Q3) Which one of the following involves creating a portfolio in a manner which minimizes the uncertainty of the portfolio's maturity target date value?
A)duration
B)reinvestment
C)immunization
D)modification
E)call protection
Q4) A callable bond:
A)can be paid off early at either the issuer's or the bondholder's request.
B)can be redeemed early if the bondholder so requests.
C)can have its maturity date extended by the issuer.
D)can be redeemed by the issuer prior to maturity.
E)is a bond that pays a variable interest payment.
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Chapter 11: Diversification and Risky Asset Allocation
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Sample Questions
Q1) You own a stock which is expected to return 14 percent in a booming economy and 9 percent in a normal economy.If the probability of a booming economy decreases,your expected return will:
A)decrease.
B)either remain constant or decrease.
C)remain constant.
D)increase.
E)either remain constant or increase.
Q2) A portfolio comprised of which one of the following is most apt to be the minimum variance portfolio?
A)100 percent stocks
B)100 percent bonds
C)50/50 mix of stocks and bonds
D)30 percent stocks and 70 percent bonds
E)30 percent bonds and 70 percent stocks
Q3) Explain the primary goal of portfolio diversification as it relates to asset allocation and correlation.
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Chapter 12: Return, Risk, and the Security Market Line
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Sample Questions
Q1) Which one of the following is expressed as "E(R<sub>M</sub>)- R<sub>f</sub>"?
A)market risk premium
B)individual security risk premium
C)real rate of return
D)total expected rate of return
E)market rate of return
Q2) The common stock of Industrial Technologies has an expected return of 12.4 percent.The market return is 9.2 percent and the risk-free return is 3.87 percent.What is the stock's beta?
A)0.42
B)1.00
C)1.32
D)1.42
E)1.60
Q3) Which one of the following is the best example of unsystematic risk?
A)decrease in company sales
B)increase in market interest rates
C)change in corporate tax rates
D)increase in inflation
E)This risk is related to expected portfolio returns
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Chapter 13: Performance Evaluation and Risk Management
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Sample Questions
Q1) The unadjusted total percentage return on a security that has not been compared to any benchmark is referred to as which one of the following?
A)raw return
B)indexed return
C)real return
D)marginal return
E)absolute return
Q2) A portfolio has a beta of 1.52 and an actual return of 13.7 percent.The risk-free rate is 2.7 percent and the market risk premium is 7.8 percent.What is the value of Jensen's alpha?
A)-0.86 percent
B)1.01 percent
C)1.14 percent
D)1.23 percent
E)1.37 percent
Q3) Explain a key advantage and a key disadvantage of Jensen's alpha.
Q4) Explain the similarities and differences between the Sharpe and Treynor ratios.Also,explain the most appropriate application for each.
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Page 15
Chapter 14: Futures Contracts
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Sample Questions
Q1) A financial instrument on which a futures contract is based is called which one of the following?
A)hedged security
B)short position
C)long position
D)speculative asset
E)underlying asset
Q2) You have 50,000 pounds of cotton in storage.You don't want to sell the cotton today as you believe the price of cotton will be higher six months from now than what the markets currently predict.However,you also realize that the price could decline.Which one of the following would hedge your risk of owning the cotton for the next few months?
A)short futures position
B)long futures position
C)short spot position
D)long spot position
E)long futures position combined with a short spot position
Q3) You are a wheat farmer with a crop that will be ready to harvest in approximately three months.How can you hedge this crop and what are the advantages and disadvantages of doing so?
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Page 16
Chapter 15: Stock Options
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Sample Questions
Q1) Which one of the following is the upper price bound for the intrinsic value of a European put option on a stock?
A)0
B)strike price
C)stock price
D)Max (S - K, 0)
E)Max (K - S, 0)
Q2) Which one of the following values is discounted in the put-call parity formula?
A)call price
B)put price
C)stock price
D)strike price
E)option premium
Q3) Which one of the following applies to a naked call?
A)unlimited potential profits
B)unlimited potential losses
C)sale of a put on a stock you do not own
D)sale of a call on a stock you currently own
E)purchase of a call on a stock you do not own
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Page 17
Chapter 16: Option Valuation
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Sample Questions
Q1) A stock with a current price of $25 will either move up to $32 or down to $20 over the next period.The risk-free rate of interest is 3.5 percent.What is the value of a call option with a strike price of $30?
A)$0.61
B)$0.72
C)$0.93
D)$1.11
E)$1.36
Q2) You own 1,800 shares of Textile stock which is currently valued at $62 a share.The $65 put has a premium of $4.26 and a put delta of -.60.What position should you take in $65 put contracts to hedge your stock against a $1 decrease in price?
A)buy 3 contracts
B)buy 30 contracts
C)buy 300 contracts
D)write 3 contracts
E)write 30 contracts
Q3) Draw a graph with the option price on the vertical axis and the time to expiration on the horizontal axis.Illustrate how put and call option prices vary as the time to expiration increases.
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Page 18
Chapter 17: Projecting Cash Flow and Earnings
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Sample Questions
Q1) Which one of the following is NOT a financing cash flow according to standard accounting practice?
A)new issue of stock
B)repurchase of stock
C)new issue of debt
D)interest payments
E)dividend payments
Q2) Green Recycling,Inc.has 150,000 shares of stock outstanding.The firm has total assets of $568,000 and total liabilities of $415,000.The firm's stock is selling for $31 a share.What is the price-book ratio?
A)22.3
B)26.5
C)27.5
D)30.4
E)37.8
Q3) Why is the expected rate of sales growth so critical to pro forma statements?
Q4) What value does the Statement of Cash Flows add to the financial statements of a firm?
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19
Chapter 18: Corporate and Government Bonds
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Sample Questions
Q1) What is the method of selling Treasury bills at less than face value called?
A)imputed basis
B)par value method
C)discount basis
D)STRIP basis
E)face value method
Q2) A bond has 6 years until it can be called,a 7 percent coupon,and a $1,000 face value.The bond has a market value of $1,031.90 and a yield to call of 7.35 percent.What is the call premium?
A)$45
B)$55
C)$65
D)$75
E)$85
Q3) A moral obligation bond is which type of a bond?
A)municipal revenue
B)municipal GO
C)municipal hybrid
D)U.S. Treasury
E)U.S. agency
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Chapter 19: Global Economic Activity and Industry Analysis
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Sample Questions
Q1) If the nominal GDP was reported at $122.3 billion and real GDP was reported at $120.1 billion,what was the inflation rate for the period?
A)1.59%
B)1.83%
C)2.32%
D)2.62%
E)2.88%
Q2) If the number of Euros required to buy $1 (USD)increases then the Euro has _______ versus the U.S.dollar.
A)depreciated
B)appreciated
C)declined
D)improved
E)increased
Q3) Briefly outline and discuss Porter's Five Forces and their use.
Q4) Explain the three tiers of "top-down analysis".
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21
Chapter 20: Mortgage-Backed Securities
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Sample Questions
Q1) Which one of the following terms applies to the process of reducing the mortgage principal over the life of the mortgage according to a schedule?
A)mortgage amortization
B)mortgage prepayment
C)mortgage elimination
D)mortgage securitization
E)mortgage passthrough
Q2) You just assumed a 30-year mortgage for $300,000 at 6 percent interest.How much of the first monthly payment will be applied to the principal balance?
A)$253.14
B)$267.35
C)$272.17
D)$281.16
E)$298.65
Q3) Explain what a reverse mortgage is,how it works,and who it is intended to help.
Q4) What are the advantages and the disadvantages of a homeowner selecting a 30-year mortgage rather than a 20-year mortgage?
Q5) How do CMOs increase the availability of mortgage funds?
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