FINANCIAL MARKETS THEORIES
1. The primary goal of financial management is
most associated with increasing the:
 market value of the firm.
2. The primary goal of financial management is
to maximize:
 the market value of existing stock.
3. Margie opened a used bookstore and is both
the 100 percent owner and the store's
manager. Which type of business entity does
Margie own if she is personally liable for all
the store's debts?
4. The Sarbanes-Oxley Act of 2002 has:
 Sole proprietorship
5. The issuer of a security must be involved in
all _____ transactions involving that security.
 Primary Market
6. Which one of the following forms of business
organization offers liability protection to some
of its owners but not to all of its owners?
 Limited Partnership
7. One example of a primary market transaction
would be the:
8. Matt and Alicia created a firm that is a
separate legal entity and will share ownership
of that firm on a 75/25 basis. Which type of
entity did they create if they have no personal
liability for the firm's debts?
9. If you accept a job as a domestic security
analyst for a brokerage firm, you are most
likely working in which one of the following
financial areas?
10. Which one of the following functions should
be assigned to the corporate treasurer rather
than to the controller?
11. Which one of the following statements
correctly applies to a sole proprietorship?
 sale of 1,000 shares of newly issued
stock by Alt Company to Miquel.
 Corporation
12. In a general partnership, each partner is
personally liable for:
13. The daily financial operations of a firm are
primarily controlled by managing the:
14. Which one of the following best describes the
primary intent of the Sarbanes-Oxley Act of
2002?
15. The potential conflict of interest between a
firm's owners and its managers is referred to
as which type of conflict?
16. Which one of the following is a working capital
decision?
 essentially made officers of publicly
traded firms personally responsible for
the firm's financial statements.
 Investment
 Cash Management
 Obtaining additional equity is
dependent on the owner's personal
finances.
 the total debts of the partnership, even
if he or she was unaware of those
debts.
 Working Capital
 Increase the protections against
corporate fraud
 Agency
 How much cash should the firm keep in
reserve?
FINANCIAL MARKETS THEORIES
17. Levi had an unexpected surprise when he
returned home this morning. He found that a
chemical spill from a local manufacturer had
spilled over onto his property. The potential
claim that he has against this manufacturer is
that of a(n):
18. Maria is the sole proprietor of an antique store
that is located in a rented warehouse. The
store has an outstanding loan with the local
bank but no other debt obligations. There are
no specific assets pledged as security for the
loan. Due to a sudden and unexpected
downturn in the economy, the store is unable
to generate sufficient funds to pay the loan
payments due to the bank. Which of the
following options does the bank have to
collect the money it is owed?
I.
Sell the inventory and apply the
proceeds to the debt
II.
Sell the lighting fixtures from the
building and apply the proceeds to
the debt
III.
Withdraw funds from Maria’s
personal account at the bank to pay
the store’s debt
IV.
Sell any assets Maria personally
owns and apply the proceeds to the
store’s debt
19. One advantage of the corporate form of
organization is the:
20. Jenna has been promoted and is now in
charge of all external financing. In other
words, she is in charge of:
21. Which one of the following situations is most
apt to create an agency conflict?
 stakeholder.
 I, III, and IV only
 ability to raise larger sums of equity
capital than other organizational forms.
 capital structure management
 Basing management bonuses on the
length of employment
22. An auction market:
23. Working capital management includes which
one of the following?
 Has a physical trading floor
 Determining which customers will be
granted credit
24. Theo’s BBQ has $48,000 in current assets
and $39,000 in current liabilities. Decisions
related to these accounts are referred to as:
25. Which one of the following combinations will
always result in an increased dividend yield?
 Working capital management
26. An efficient capital market is best defined as a
market in which security prices reflect which
one of the following?
27. According to the efficient market’s hypothesis,
professional investors will earn:
 All available information
 Decrease in the stock price combined
with a higher dividend amount
 a dollar returns equal to the value paid
for an investment.
FINANCIAL MARKETS THEORIES
28. The standard deviation measures the _____
of a security's returns over time.
29. Which one of the following is defined as the
average compound return earned per year
over a multiyear period?
30. Which one of the following had a zerostandard deviation of returns for the period of
1926-2014?
31. Which one of the following categories has the
widest frequency distribution of returns for the
period 1926-2014?
32. Which one of the following is the hypothesis
that securities markets are efficient?
33. Which one of the following statements is
correct?
34. Dan is a chemist for ABC, a major drug
manufacturer. Dan cannot earn excess profits
on ABC stock based on the knowledge he
has related to his experiments if the financial
markets are:
35. The rate of return on which one of the
following has a risk premium of 0%?
36. On a particular risky investment, investors
require an excess return of 7 percent in
addition to the risk-free rate of 4 percent.
What is this excess return called?
37. Assume the securities markets are strong
form efficient. Given this assumption, you
should expect which one of the following to
occur?
38. Over the period of 1926-2014
39. Semi strong form market efficiency states that
the value of a security is based on:
40. The interest rate used to compute the present
value of a future cash flow is called the:
41. Marcos is investing $5 today at 7 percent
interest so he can have $35 later. This $35 is
referred to as the:
42. Katlyn needs to invest $5,318 today in order
for her savings account to be worth $8,000 six
years from now. Which one of the following
terms refers to the $5,318?
43. As the interest rate increases for any given
period, the future value interest factor will
44. What is the relationship between the present
value factor of an ordinary annuity and the
present value factor of an annuity due for the
same interest rate?
45. Jessica invested $2,000 today in an
investment that pays 6.5 percent annual
interest. Which one of the following
statements is correct, assuming all interest is
reinvested?
 volatility
 Geometric average return
 All of the listed security types had a
standard deviation of returns in excess
of zero percent.
 Small-company stocks
 Efficient markets hypothesis
 The higher the expected rate of return,
the wider the distribution of returns.
 strong form efficient.
 U.S. Treasury bills
 Risk premium
 Assume the securities markets are
strong form efficient. Given this
assumption, you should expect which
one of the following to occur?
 the risk premium on long-term
government bonds was zero percent.
 all publicly available information.
 discount rate.
 future value.
 Present value
 Increase.
 The annuity due factor equals one plus
the ordinary annuity factor for n−1
periods.
 She could have the same future value
and invest less than $2,000 initially if
she could earn more than 6.5 percent
interest.
FINANCIAL MARKETS THEORIES
46. In future value or present value problems,
unless stated otherwise, cash flows are
assumed to be
47. Which of the following statements regarding a
30-year monthly payment amortized
mortgage with a nominal interest rate of 10%
is CORRECT?
48. Which one of the following statements
concerning interest rates is correct?
49. The concept of compound interest refers to:
50. Statement 1- Since individuals are always
confronted with opportunities to earn positive
rates of return on their funds, the timing of
cash flows does not have any significant
economic consequences.
Statement 2- Time-value of money is based
on the belief that a dollar that will be received
at some future date is worth more than a dollar
today.
51. If interest is paid m times per year, then the
per-period interest rate equals the:
52. An amortized loan:
53. Statement 1- Compound interest pays
interest for each time period on the original
investment plus the accumulated interest.
Statement 2- When money is invested at
compound interest, the growth rate is the
interest rate.
54. Statement 1- A mortgage loan is an example
of an amortizing loan. "Amortizing" means
that part of the monthly payment is used to
pay interest on the loan and part is used to
reduce the amount of the loan.
Statement 2- Any sequence of equally
spaced, level cash flows is called an annuity.
An annuity is also known as a perpetuity.
55. Which one of the following statements
correctly states a relationship?
56. If an annuity due and an ordinary annuity
have the same number of equal payments
and the same interest rates, then
57. For a given interest rate, as the length of time
until receipt of the funds increases, the
present value interest factor
58. What is the primary difference between an
ordinary annuity and an annuity due?
 At the beginning of a time period.
 A smaller proportion of the last monthly
payment will be interest, and a larger
proportion will be principal, than for the
first monthly payment.
 The effective annual rate equals the
annual percentage rate when interest is
compounded annually.
 Payment of interest on previously
earned interest.
 None of the Statements are True
 Annual percentage rate divided by m.
 Requires that all payments be equal in
amount and include both principal and
interest.
 Both Statements are True
 Only Statement 1 is True
 Time and present value are inversely
related, all else held constant.
 The present value of the annuity due is
greater than the present value of the
ordinary annuity.
 decreases
 The timing of the periodic payment.
FINANCIAL MARKETS THEORIES
59. Which one of the following compounding
periods will yield the smallest present value
given a stated future value and annual
percentage rate?
60. Which one of the following accurately defines
a perpetuity?
61. The future value of a dollar ________ as the
interest rate increases and ________ the
farther in the future an initial deposit is to be
received.
62. The stated interest rate is the interest rate
expressed:
 Continuous
 Unending equal payments paid at equal
time intervals
 Increases; Increases.
 in terms of the interest payment made
each period.
63. Christie is buying a new car today and is
paying a $500 cash down payment. She will
finance the balance at 6.3 percent interest.
Her loan requires 36 equal monthly payments
of $450 each with the first payment due 30
days from today. Which one of the following
statements is correct concerning this
purchase?
64. Which one of the following statements
concerning annuities is correct?
 To compute the initial loan amount, you
must use a monthly interest rate.
65. Which one of the following statements is
correct?
 The EAR, rather than the APR, should
be used to compare both investment
and loan options.
 pure discount loan.
66. Scott borrowed $2,500 today at an APR of 7.4
percent. The loan agreement requires him to
repay $2,685 in one lump sum payment one
year from now. This type of loan is referred to
as a(n):
67. Lew has $3,600 that he wants to invest for 5
years. He can invest this amount at his credit
union and earn 2.2 percent simple interest.
Or, he can open an account at Compass
Bank and earn 2.15 percent interest,
compounded annually. If he decides to invest
at Compass Bank for 5 years, he will:
68. What is the interest rate charged per period
multiplied by the number of periods per
year called?
69. You are comparing two annuities which offer
quarterly payments of $2,500 for five years
and pay 0.75 percent interest per month.
Annuity A will pay you on the first of each
month while annuity B will pay you on the last
day of each month. Which one of the
following statements is correct concerning
these two annuities?
70. An ordinary annuity is best defined by which
one of the following?
 An annuity due has payments that
occur at the beginning of each time
period.
 earn $8 more than if he had invested
with his credit union.
 annual percentage rate
 Annuity B has a smaller present value
than annuity A.
 equal payments paid at regular intervals
over a stated time period
FINANCIAL MARKETS THEORIES
71. You are considering two projects with the
following cash flows:
Which of the following statements are true
concerning these two projects?
 II and III only
I. Both projects have the same future value at
the end of year 4, given a positive rate of
return.
II. Both projects have the same future value
given a zero rate of return.
III. Project X has a higher present value than
Project Y, given a positive discount rate.
IV. Project Y has a higher present value than
Project X, given a positive discount rate.
72. A monthly interest rate expressed as an
annual rate would be an example of which
one of the following rates?
73. Which one of the following terms is used to
describe a loan wherein each payment is
equal in amount and includes both interest
and principal?
74. The interest rate that is quoted by a lender is
referred to as which one of the following?
75. A loan where the borrower receives money
today and repays a single lump sum on a
future date is called a(n) _____ loan.
76. You have some property for sale and have
received two offers. The first offer is for
$89,500 today in cash. The second offer is
the payment of $35,000 today and an
additional $70,000 two years from today. If
the applicable discount rate is 11.5 percent,
which offer should you accept and why?
77. The interest rate that is quoted by a lender is
referred to as which one of the following?
78. Cash flows occurring in different periods
should not be compared unless:
79. The present value of a perpetuity can be
determined by:
80. The interest rate that is quoted by a lender is
referred to as which one of the following?
81. Which one of the following statements
correctly states a relationship?
 effective annual rate
82. Statement 1- Compound interest pays
interest for each time period on the original
investment plus the accumulated interest.
Statement 2- When money is invested at
compound interest, the growth rate is the interest
rate.
 Both Statements are True
83. Which of the following factors is fixed and
thus cannot change for a specific perpetuity?
 Cash payment of a perpetuity.
 amortized loan
 stated interest rate
 pure discount
 You should accept the second offer
because it has the larger net present
value.
 stated interest rate
 The flows have been discounted to a
common date.
 Dividing the payment by the interest
rate.
 Stated interest rate
 Time and present value are inversely
related, all else held constant.
FINANCIAL MARKETS THEORIES
84. For positive interest rates, the future value
interest factor is
85. Which one of the following compounding
periods will yield the smallest present value
given a stated future value and annual
percentage rate?
86. A $50,000 loan is to be amortized over 7
years, with annual end-of-year
payments. Which of these statements is
CORRECT?
87. Statement 1- Comparing the values of
undiscounted cash flows is analogous to
comparing apples to oranges.
Statement 2- To calculate present value, we
discount the future value by some interest rate,
the discount rate.
88. Which one of the following statements
concerning interest rates is correct?
89. You are comparing two annuities which offer
quarterly payments of $2,500 for five years
and pay 0.75 percent interest per month.
Annuity A will pay you on the first of each
month while Annuity B will pay you on the last
day of each month. Which one of the
following statements is correct concerning
these two annuities?
90. Which one of the following statements related
to annuities and perpetuities is correct?
91. What is the relationship between an annually
compounded rate and the annual percentage
rate (APR) which is calculated for truth-inlending laws for a loan requiring monthly
payments?
92. An Amortized loan:
93. An amortizing loan is one in which
 Always greater than 1.0.
 continuous
 The proportion of each payment that
represents interest as opposed to
repayment of principal would be lower if
the interest rate were lower.
 Both statements are true
 The effective annual rate equals the
annual percentage rate when interest is
compounded annually.
 Annuity B has a smaller present value
than Annuity A.
 A perpetuity comprised of $100 monthly
payments is worth more than an annuity
comprised of $100 monthly payments,
given an interest rate of 12 percent,
compounded monthly.
 The APR is lower than the annually
compounded rate.
 May have equal or increasing amounts
applied to the principal from each loan
payment
 The principal balance is reduced with
each payment.
94. A monthly interest rate expressed as an
annual rate would be an example of which
one of the following rates?
95. All else held constant, the future value of a
lump sum investment will decrease if the:
 Effective annual rate
96. Which one of the following is a correct
statement, all else held constant?
 The future value is directly related to
the interest rate.
 interest is changed to simple interest
from compound interest.
FINANCIAL MARKETS THEORIES
97. Lester had $6,270 in his savings account at
the beginning of this year. This amount
includes both the $6,000 he originally
invested at the beginning of last year plus the
$270 he earned in interest last year. This
year, Lester earned a total of $282.15 in
interest even though the interest rate on the
account remained constant. This $282.15 is
best described as:
98. Which one of the following will increase the
present value of a lump sum future amount to
be received in 15 years?
99. The present value of a lump sum future
amount:
 compound interest.
100. Janis just won a scholarship that will pay
her $500 a month, starting today, and
continuing for the next 48 months. Which one
of the following terms best describes these
scholarship payments?
 Annuity due
101. Christie is buying a new car today and is
paying a $500 cash down payment. She will
finance the balance at 6.3 percent interest.
Her loan requires 36 equal monthly payments
of $450 each with the first payment due 30
days from today. Which one of the following
statements is correct concerning this
purchase?
 To compute the initial loan amount, you
must use a monthly interest rate.
102. Travis borrowed $10,000 four years ago at
an annual interest rate of 7 percent. The loan
term is six years. Since he borrowed the
money, Travis has been making annual
payments of $700 to the bank. Which type of
loan does he have?
 Interest-only
103. Which one of the following features
distinguishes an ordinary annuity from an
annuity due?
 Timing of the annuity payments
104. You are comparing two annuities. Annuity
A pays $100 at the end of each month for 10
years. Annuity B pays $100 at the beginning
of each month for 10 years. The rate of return
on both annuities is 8 percent. Which one of
the following statements is correct given this
information?
 Annuity B has both a higher present
value and a higher future value than
Annuity A.
105. Which of the following statements is most
correct?
 A 5-year P100 annuity due will have a
higher present value than a 5- year
P100 ordinary annuity.
 A decrease in the interest rate
 increases as the interest rate
decreases.
FINANCIAL MARKETS THEORIES
106. You are interested in investing your
money in a bank account. Which of the
following banks provides you with the highest
effective rate of interest?
107. Your client is evaluating between the
following two retirement options:
Option 1: Pays a lump sum of P2.5 million today.
Option 2: A 25-year annuity at P180,000 per
year starting today.
 Bank 4; 8 percent with daily (365-day)
compounding
 Option 1 as it has a greater present
value.
If your client’s required rate of return is 6 percent
per year, which option must he choose based on
a higher present value?
108. By definition, a bank that pays simple
interest on a savings account will pay interest:
 only on the principal amount originally
invested.
109. Which one of the following is contained in
the corporate bylaws?
 Procedures for electing corporate
directors
110. The daily financial operations of a firm are
primarily controlled by managing the:
111. Capital budgeting includes the evaluation
of which of the following?
 Working capital
112. Which one of the following types of bonds
permits its issuer to forego paying interest
payments if certain natural events cause
significant losses?
113. Which one of the following statements is
true?
 CAT
114. The lowest rating a bond can receive from
Standard and Poor's and still be classified as
an investment-quality bond is:
115. The written agreement that contains the
specific details related to a bond issue is
called the bond:
116. Municipal bonds are:
117. What term is used to describe an account
that a bond trustee manages for the sole
purpose of redeeming bonds early?
118. The price at which a dealer will purchase a
bond is referred to as the _____ price.
119. Which one of the following bonds is the
most sensitive to changes in market interest
rates?
120. On which one of the following dates is the
principal amount of a semiannual coupon
bond repaid?
121. When a bond's yield to maturity is less
than the bond's coupon rate, the bond:
 BBB
 Size, timing, and risk of future cash
flows
 A discount bond has a coupon rate that
is less than the bond's yield to maturity.
 indenture
 pay interest that is federally tax-free.
 Sinking fund
 Bid
 10-year, zero coupon
 The entire bond is repaid on the
maturity date.
 is selling at a premium.
FINANCIAL MARKETS THEORIES
122. Which one of the following might be
included in a bond's list of negative
covenants?
123. Zero coupon bonds:
 Limit cash dividends to P1 per share or
less
 create annual taxable income to
individual bondholders.
124. The rate of return an investor earns on a
bond prior to adjusting for inflation is called
the:
125. This morning, Jeff found an aged bond
certificate lying on the street. He picked it up
and noticed that it was a 50-year bond that
matured today. He presented the bond to the
bank teller at his local bank and received
payment for both the entire principal and the
final interest payment. The bond that Jeff
found must have been which one of the
following?
126. A callable bond:
 Nominal rate
127. The mix of long-term equity financing and
debt financing that firms use to support their
international activities is known as ________
128. Which of the following statements is/are
TRUE?
Statement 1. The geometric average return
formula (also known as geometric mean return)
is a way to calculate the average rate of return on
an investment that is compounded over multiple
periods.
Statement 2. For volatile numbers, the geometric
average provides a far more accurate
measurement of the true return by taking into
account year-over-year compounding that
smooths the average.
 Capital structure
129. The business world is full of conflicts of
interest. These normally take place when the
agents serve their personal interests rather
than keeping up with their professional
responsibilities. Put simply, a conflict of
interest arises when someone puts their own
personal gain ahead of their own duties to the
corporation or principal. This conflict within
the corporation is known as
130. Computing the present value of a growing
perpetuity is most similar to computing the
current value of which one of the following?
131. On which one of the following dates do
dividends become a liability of the issuer for
accounting purposes?
 Agency problem
 Bearer-form bond
 may be structured to pay bondholders
the current value of the bond on the
date of call.
 Both statements are true
 Stock with a constant-growth dividend
 On the date the board declares the
dividend
FINANCIAL MARKETS THEORIES
132. When valuing a stock using the constantgrowth model, D1 represents the:
133. Supplemental liquidity providers (SLPs)
trade securities on behalf of:
134. Most trades on the NYSE are executed:
135. Gleason, Inc., elects its board of directors
on a staggered basis using cumulative voting.
This implies that:
 the next expected annual dividend.
 their own accounts
 Electronically
 all open positions are filled with one
round of voting, assuming there are no
tie votes.
136. An agent who buys and sells securities
from inventory is called a:
137. Dividends are best defined as:
 dealer
138. The specific location on the floor of an
exchange where a particular security is traded
is called a:
139. The capital gains yield equals which one
of the following?
140. Any person who owns a license to trade
on the NYSE is called a:
141. Which one of the following is an electronic
network that enables Katie to sell her shares
of ABC stock directly to Marti?
142. The interest rate that is quoted by a lender
is referred to as which one of the following?
143. The interest rate that is quoted by a lender
is referred to as which one of the following?
144. You are comparing two annuities. Annuity
A pays $100 at the end of each month for 10
years. Annuity B pays $100 at the beginning
of each month for 10 years. The rate of return
on both annuities is 8 percent. Which one of
the following statements is correct given this
information?
 Post
 cash or stock payments to
shareholders.
 Dividend growth rate
 Member
 ECN
 stated interest rate
 stated interest rate
 Annuity B has both a higher present
value and a higher future value than
Annuity A.