Principles of Finance Exam Review
Course
Introduction
Principles of Finance introduces students to the fundamental concepts and tools of financial management, including the analysis of financial statements, time value of money, risk and return, and valuation of assets. The course covers major topics such as capital budgeting, cost of capital, and the functioning of financial markets. Throughout the course, students will gain insight into how individuals and organizations make investment and financing decisions to maximize value, while considering ethical and global implications. This foundational knowledge prepares students for advanced study in finance and equips them for informed decision-making in personal and professional financial contexts.
Recommended Textbook
Investments An Introduction 9th Edition by Herbert B. Mayo
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24 Chapters
1159 Verified Questions
1159 Flashcards
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Page 2
Chapter 1: An Introduction to Investments
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29 Verified Questions
29 Flashcards
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Sample Questions
Q1) The informed investor can expect to consistently outperform the market.
A)True
B)False
Answer: False
Q2) The term "investment" in economics generally does not refer to the purchase of securities.
A)True
B)False
Answer: True
Q3) Many investments have common characteristics including 1)existence of secondary markets
2)risk
3)potential for capital gains
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Answer: D
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Page 3
Chapter 2: The Creation of Financial Assets
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43 Flashcards
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Sample Questions
Q1) One of the major advantages associated with liquid money market securities is safety of principal.
A)True
B)False
Answer: True
Q2) A shelf-registration involves the selling of new securities without having them registered with the SEC.
A)True
B)False
Answer: False
Q3) If the price of an initial public offering of stock rises,the windfall gain goes to the underwriter.
A)True
B)False
Answer: False
Q4) If the underwriter overprices a new issue,the market price of the securities will rise.
A)True
B)False
Answer: False
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Chapter 3: Securities Markets
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) A round lot is the general unit for trading in a security.
A)True
B)False
Answer: True
Q2) Bid and ask price quotations for many over-the-counter stocks are available through Nasdaq.
A)True
B)False Answer: True
Q3) The level of security prices is set by market makers.
A)True
B)False
Answer: False
Q4) Investors are insured from brokerage firm losses by the
A) SEC
B) Federal Reserve
C) SIPC
D) FDIC Answer: C
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Chapter 4: The Time Value of Money
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35 Flashcards
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Sample Questions
Q1) A state's lottery winner is promised $200,000 a year for twenty years (starting at the end of the first year).How much must the state invest now to guarantee the prize if the state can earn annually 7 percent on its funds? How much must the state invest if the annual payments were made at the beginning of the year?
Q2) Worker A annually invests $1,000 in an IRA for nine years (ages 27 through 35)and never makes another contribution.Worker B annually invests $1,000 in an IRA for thirty years (ages 36 through 65).Which worker will have more in his or her account when he or she retires if they both earn 8 percent on their investments?
Q3) An annuity is a series of
A) rising annual payments
B) random payments
C) equal payments
D) unequal payments
Q4) A firm currently earns $1.00 per share.A financial analyst believes that earnings will grow annually at the rate of 10 percent for five years and then decline to 5 percent.What are the expected earnings after ten years?
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Page 6
Chapter 5: The Tax Environment
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37 Flashcards
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Sample Questions
Q1) Roberta owns a savings account that paid annual interest of $1,000 stock that paid a dividend of $1,000
Q2) Bob owns Stock A that paid $350 in dividends sold Stock B for a long-term capital gain of $1,200
Q3) Securities must be sold before capital gains taxation applies.
A)True
B)False
Q4) Income earned on savings in a life insurance policy is exempt from current income taxation.
A)True B)False
Q5) Capital losses may not be used to offset capital gains.
A)True B)False
Q6) An employee may exercise a stock option and not pay any taxes until the stock is sold.
A)True B)False
Page 7
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Chapter 6: Risk and Portfolio Management
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43 Verified Questions
43 Flashcards
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Sample Questions
Q1) The efficient frontier in portfolio theory
A) indicates the highest return for a given risk
B) illustrates the optimal tradeoff between long- and short-term capital gains
C) quantifies systematic and unsystematic risk
D) identifies the optimal portfolio for the investor
Q2) A higher level of indifference,represented by a higher indifference curve,implies more risk taking.
A)True
B)False
Q3) A portfolio's beta coefficient tends to be stable over time.
A)True
B)False
Q4) The "efficient frontier" relates all the combinations of risk and return that represent the same level of satisfaction.
A)True
B)False
Q5) If a stock's return has a large standard deviation,that suggests the stock has little risk.
A)True
B)False
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Chapter 7: Investment Companies: Mutual Funds
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59 Flashcards
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Sample Questions
Q1) Mutual funds with beta coefficients greater than 1.0
A) have outperformed the market
B) have underperformed the market
C) have more systematic risk than the market
D) have less systematic risk than the market
Q2) Empirical studies of returns earned by mutual funds suggest they consistently outperform the market.
A)True
B)False
Q3) Mutual funds reduce unsystematic risk,but not systematic risk.
A)True
B)False
Q4) A money market mutual fund is an illustration of a no-load fund.
A)True
B)False
Q5) The S&P 500 stock index may be an inappropriate benchmark for a small-cap fund.
A)True
B)False
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Chapter 8: Closed-End Investment Companies
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35 Verified Questions
35 Flashcards
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Sample Questions
Q1) Many unit trusts are self-liquidating.
A)True
B)False
Q2) Distributions from a closed-end investment are subject to federal income taxation.
A)True
B)False
Q3) The discount paid for the shares of a closed-end investment company is fixed by the firm.
A)True
B)False
Q4) A closed-end investment company has a variable capital structure.
A)True
B)False
Q5) As a result of arbitrage,ETFs tend to sell for their net asset value.
A)True
B)False
Q6) An investor may not sell short the shares of an ETF.
A)True
B)False
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Chapter 9: The Valuation of Common Stock
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Sample Questions
Q1) Securities prices tend to adjust slowly as new information is disseminated in an inefficient market.
A)True
B)False
Q2) Your broker recommends that you purchase XYZ Inc.at $60.The stock pays a $2.40 dividend which (like its per share earnings)is expected to grow annually at 8 percent.If you want to earn 12 percent on your funds,is this a good buy?
Q3) The risk-adjusted required rate of return includes 1)the firm's earnings
2)the firm's beta coefficient
3)the treasury bill rate (i.e.,the risk-free rate)
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q4) U.S.securities markets are efficient in part because these markets are very competitive.
A)True
B)False
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Chapter 10: Investment Returns and Aggregate Measures
of Stock Markets
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42 Verified Questions
42 Flashcards
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Sample Questions
Q1) If a stock increased from $25 to $50 in five years,the annual rate of return was 20 percent.
A)True
B)False
Q2) To determine the realized return on an investment,the investor needs to know
1)income received
2)the cost of an investment
3)the sale price of the investment
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q3) Studies of rates of return on large stocks suggest
A) the average return is about 7.4 percent annually
B) over a period of years, the rate is approximately 10 percent
C) equity investors rarely sustain losses
D) dividends account for over half the return
Q4) Averaging down may result in the investor sending good money after bad.
A)True B)False
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Chapter 11: Dividends: Past, present, and Future
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39 Verified Questions
39 Flashcards
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Sample Questions
Q1) The ex-dividend date follows the date of record.
A)True
B)False
Q2) Dividend policy depends on
1)the firm's earnings
2)investment opportunities available to the firm
3)corporate income taxes
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q3) A two-for-one stock split doubles the number of shares and their price.
A)True
B)False
Q4) Stock dividends cause
A) the price of a share of stock to rise
B) the price of a share of stock to fall
C) the value of the firm to rise
D) the value of the firm to fall
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Chapter 12: The Macroeconomic Environment for Investment Decisions
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38 Verified Questions
38 Flashcards
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Sample Questions
Q1) Gross domestic product (GDP)is the sum of spending on consumer goods,government spending,and investing in stocks and bonds.
A)True
B)False
Q2) If the Federal Reserve lowers the target federal funds rate,
A) the discount rate rises
B) liquidity in the banking system is increased
C) security prices fall
D) required reserves are also decreased
Q3) The federal funds rate is the rate federal government pays when it borrows funds.
A)True
B)False
Q4) Deflation is a period of
A) rising unemployment
B) declining unemployment
C) rising prices
D) falling prices
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Chapter 13: Analysis of Financial Statements
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55 Flashcards
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Sample Questions
Q1) Activity ratios measure
A) how rapidly assets flow through the firm
B) how frequently the firm's stock is traded
C) how rapidly employees turn over
D) the profitableness of accounts receivable
Q2) The debt ratio is a measure of
1)financial leverage
2)the use of debt financing
3)asset utilization
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q3) An increase in retained earnings will increase the debt to equity ratio.
A)True
B)False
Q4) Bondholders are concerned with the firm's operating income,while stockholders are concerned with its net income.
A)True
B)False
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Chapter 14: Behavioral Finance and Technical Analysis
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31 Flashcards
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Sample Questions
Q1) The Dow Theory considers price movements in the Dow Jones industrial and transportation averages.
A)True
B)False
Q2) Long dark candlesticks suggest
A) stock prices changed dramatically
B) stock prices rose
C) the daily price change was small
D) an investor should sell short
Q3) Which of the following is not used in technical analysis?
A) moving averages
B) bar graphs
C) point-and-figure charts
D) P/E ratios
Q4) Barron's Confidence Index uses the A) yields on high-quality stocks
B) difference in yields on stocks and bonds
C) difference in yields between high- and low-quality bonds
D) difference in yields between high- and low-quality stocks
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Chapter 15: The Bond Market
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61 Flashcards
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Sample Questions
Q1) Serial bonds
A) have a sinking fund
B) are issued and retired in a series
C) are a type of income bond
D) are primarily issued by the federal government
Q2) A diversified portfolio of high-yield securities may be achieved with ten or fewer bonds.
A)True
B)False
Q3) A strong sinking fund makes the bond riskier because it is harder for the firm to retire the debt.
A)True
B)False
Q4) In general,income bonds are less risky than
A) mortgage bonds
B) secured debt
C) preferred stock
D) short-term debt obligations
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Chapter 16: The Valuation of Fixed-Income Securities
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76 Verified Questions
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Sample Questions
Q1) The market price of preferred stock moves directly with changes in interest rates.
A)True
B)False
Q2) The prices of twenty-year bonds tend to fluctuate less than bonds with five years to maturity.
A)True
B)False
Q3) The prices of low coupon bonds tend to fluctuate more than the prices of high coupon bonds.
A)True
B)False
Q4) Since preferred stock pays a fixed dividend,it is often analyzed as if it were debt. A)True
B)False
Q5) The possibility of default is higher when interest rates are higher. A)True
B)False
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Page 18
Chapter 17: Government Securities
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Sample Questions
Q1) The price of a municipal bond will tend to rise when interest rates decline.
A)True
B)False
Q2) Since Ginnie Mae bonds are debt instruments,the timing and amount of each payment is known.
A)True
B)False
Q3) Investors who acquire indexed bonds avoid the risk associated with inflation.
A)True
B)False
Q4) What is the repayment schedule for the first three years of a $60,000 mortgage loan at 8 percent for twenty-five years? (Assume that payments are made annually.)
Q5) If an investor is in the 28 percent federal income tax bracket,which bond is to be preferred?
a.
Single A, ten-year corporate bond yielding 9.5%
b.
Single A, ten-year municipal bond yielding 7.1%
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Chapter 18: Convertible Bonds and Convertible Preferred Stock
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Sample Questions
Q1) Convertible bonds tend to sell for a premium over their value as stock.
A)True
B)False
Q2) A convertible bond's value fluctuates with the price of the stock into which the bond may be converted.
A)True
B)False
Q3) Generally,convertible bonds lack a call provision. A)True
B)False
Q4) If interest rates fall,the investor will not exercise the option in a put bond.
A)True
B)False
Q5) Convertible bonds have a call feature to
A) protect stockholders from early conversions
B) protect bondholders from conversions by stockholders
C) force stockholders to convert
D) force bondholders to convert
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Chapter 19: An Introduction to Options
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Sample Questions
Q1) The intrinsic value of an option to buy stock is
A) its price
B) its strike price
C) the difference between the stock's price and the option's strike price
D) the difference between the option's strike price and the option's price
Q2) If the price of an option to buy stock were to sell for less than its strike price,an opportunity for arbitrage exists.
A)True
B)False
Q3) Calls are options to sell stock at a specified price within a specified time period.
A)True
B)False
Q4) Options to buy stock offer
A) potential leverage
B) potential income
C) safety of principal
D) liquidity
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Chapter 20: Option Valuation and Strategies
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Sample Questions
Q1) Put-call parity explains why a change in interest rates by the Federal Reserve must affect stock and option prices.
A)True
B)False
Q2) An investor cannot buy and sell two different call options with the same expiration dates.
A)True
B)False
Q3) If an investor sells a stock short,that individual reduces the risk of loss by
A) buying a put
B) buying a call
C) entering a limit order to sell the stock if its price declines
D) increasing the collateral with the broker
Q4) If a call is overvalued,put-call parity suggests that the investor should
A) sell the call and the stock and buy the put and the bond
B) sell the call and the bond and buy the put and the stock
C) sell the bond and the put and buy the stock and the call
D) sell the stock and the put and buy the call and the bond
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22
Chapter 21: Commodity and Financial Futures
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Sample Questions
Q1) One use for futures markets is "price discovery," that is,the futures price mirrors the current consensus of the futures price.If the current price of corn is $2.00 a bushel and the cost of carry is 7 percent,explain what an investor would do if the futures price of corn were $2.40.Is the investor at risk?
Q2) When an investor sells a contract and subsequently offsets (closes)the position,the individual experiences neither losses nor profits.
A)True
B)False
Q3) If the commodity's futures price declines 1.the long position profits
2)the short position profits
3)the buyer of the contract profits
4)the seller of the contract profits
A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4
Q4) Speculators take the opposite positions of hedgers.
A)True
B)False
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Chapter 22: Investing in Foreign Securities
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Sample Questions
Q1) British mutual funds are called unit trusts,and their shares are registered with the Securities and Exchange Commission.
A)True
B)False
Q2) The risk associated with fluctuations in exchange rates is increased through hedging with foreign currencies futures.
A)True
B)False
Q3) The devaluation (depreciation)of one currency implies the revaluation (appreciation)of other currencies.
A)True
B)False
Q4) An American investor may take a position in foreign equities by acquiring
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q5) If the price of the European euro is $1.36,how many euros are necessary to purchase $1.00?
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Chapter 23: Investing in Nonfinancial Assets: Collectibles, resources, and Real Estate
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Sample Questions
Q1) The cash flow generated by an investment in rental properties must be reinvested in the properties in order to receive favorable income tax treatment.
A)True
B)False
Q2) A real estate investment trust
A) pays federal income taxes
B) retains all of its earnings
C) invests in mortgages or rental properties
D) cannot use debt financing
Q3) The cash flow generated by REITs is taxed as income by the federal government.
A)True
B)False
Q4) Sources of risk to investors purchasing collectibles include 1.fraud
2)theft
3)market fluctuations
4)Interest in collectibles as an investment increases during periods of
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
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Chapter 24: Portfolio Planning and Management in an Efficient Market Context
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Sample Questions
Q1) If an investor believes that financial markets are inefficient,that argues for the individual to pursue a more active portfolio strategy.
A)True
B)False
Q2) If an investor earns a return that exceeds the return on the S&P 500 stock index,that investor outperformed the market on a risk-adjusted basis.
A)True
B)False
Q3) An active portfolio strategy is premised on
A) the stock market being efficient
B) the stock market being inefficient
C) the investor's being able to obtain public information
D) the portfolio manager's access to corporate management
Q4) An enumeration of an individual's receipts and disbursements is called an income statement.
A)True
B)False
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