TEST REVIEW QUESTIONS

FINAL EXAM -- SPRING 2014

1. How does your credit score impact getting a mortgage loan?
a. No loan
b. Loan with high IR (similar to subprime mortgage)
2. What are the causes of general inflation?
a. Price goes up without improvement in quality
b. Demand exceeds Supply
3. How does leverage impact investments?
a. IR lower than rate of return on investment increased returns
b. IR higher than rate of return on investment increased loss
4. How do supply/demand impact interest rates according to the loanable funds
theory?
a. Supply increase and Demand stable IR goes down
b. Supply decrease and Demand stable IR goes up
c. Supply stable and Demand increase IR goes up
d. Supply stable and Demand decrease IR goes down
5. What is the nominal interest rate (r)?
a. Nominal interest rate - Market Interest Rate
6. What is the real rate of interest (RR)?
a. Real rate of interest - Risk-free rate with no inflation expected
b. Question US govt bond not true? Govt bonds do not have RR factor
7. What is inflation premium (IP)?
a. Inflation premium average inflation rate expected over the life of the loan
8. What is default risk premium (DRP)?
a. Compensation for risk of non-payment
b. Corporate Bond and Government bond (same duration) IR difference d/t
DRP
i. Govt bond = no DRP
ii. DRP is 2% on corporate bonds
9. What is maturity risk premium (MRP)?
a. Added return to compensate for opportunity cost of possible future IR
increases
b. Question Not true about MRP? Answer None of the above (all are true)
i. MRP represents returns required to compensate for opportunity
costs
ii. Higher on longer bonds
iii. MRP will decrease as bond approaches its maturity date
10. What is liquidity premium (LP)?
a. Added return if debt instrument is not easily turned into cash (for obscure
bonds)
11. What is the IMF?
a. Answer All the Above
b. Created to promote world trade through monitoring and maintaining fixed
exchange rates and making loans to countries with trade imbalances
12. What does the Export-Import Bank do?
a. US agency designed to assist international trade
i. Promote trade/export with the US
b. Loans made to foreign countries and governments to buy US goods
13. How does balance of trade impact exchange rates?
a. Out of balance (negative) trade Exchange rates Increase
14. How do countries benefit from imports/exports?
a. International trade
i. Lowers costs
ii. Provides expanded markets for US goods
iii. Does NOT help strengthen our dollar (not answer)
b. If International trade was eliminated
i. Producers would see decreased markets
ii. Consumers would pay more for products such as clothing, furniture,
etc.)
iii. Answer A and B
15. What is the Social Security Trust Fund?
a. Answer - It will be liquidated over time
i. Has a limited trust fund that will cover shortfalls of contributions
only through the year 2033 (at which time, benefits would have to
be reduced to 75% of historical levels)
16. What are types of fuels used for electric generation? Which are cheapest?
a. Answer Coal is the most polluting fuel
17. What are benefits of outsourcing?
a. Allows company to focus on core competencies
b. Provides access to greater expertise
c. Provides flexibility to labor force
18. What are drawbacks of outsourcing?
a. Contracting work out to an external organization No expertise internally
19. What are benefits of off-shoring?
a. Takes advantage of lower wage rates and skill levels in other countries
i. Cheaper labor
ii. Better skilled (highly educated i.e. technical support)
20. What are risks associated with off-shoring?
a. Contracting work out to be performed in a foreign country
i. Communication barrier
ii. Must address Ethical Issues
iii. Risks and instabilities in Foreign country
21. What is a Ponzi scheme?
a. Funds from new investors are used to pay returns to existing investors
(under pretext that those returns are investment earnings)
b. Money from 1 investor is given to another investor (looks like a return)
22. What did Bernie Madoff do?
a. Most famous Ponzi scheme (15% returns) that lasted for 20 years
b. Earned 50 billion dollars from investors
23. What did Martha Stewart do?
a. Had inside information and lied to the SEC sent to prison
b. Sold 4000 shares to save $46,000
24. What is insider trading?
a. When one acts on specific information that has not been made public yet,
providing an unfair advantage
25. What is a call provision on a bond?
a. Buy back at par/face value
b. Question Why would an issue want to have a call provision on his bond?
Answer B and C
i. In the event IR decreases
ii. In the event he wants to reduce outstanding debt
26. What are zero coupon bonds?
a. Pay zero interest
b. Answer:
i. Purchased at below par value
ii. Could have tax advantage over coupon bonds (Possibility of a tax
benefit)
27. What is impact of a stock split?
a. Twice as many shares at half the price (investment still the same)
b. Answers:
i. Makes it easier for new investors to purchase stock
ii. More shares and lowers the price
iii. Increase value to shareholders (NO!)
iv. Increases dividend payouts (NO!)
28. What type of mutual funds would you expect to have high expense ratios?
a. Small Cap Growth Fund
b. Question What would you expect from a small cap group mutual fund?
i. Higher beta than large cap value mutual fund
ii. Higher expense ratio than a large cap mutual fund
iii. Answer - C
29. What type of mutual funds would you expect to have low expense ratios?
a. Bond Mutual Funds or Large Cap Mutual Funds (fewer stocks)
30. What can you assume about a mutual fund based on its beta?
a. Beta 1= follows the market
b. Beta <1 =doesnt got high/low as much as the market
c. Beta 1.5 = Higher than the market if up; lower than the market if down
d. Question Stock with a beta of >1?
i. If the overall market goes down, you expect stock prices to go down
more than the market
31. When evaluating mutual funds, why should you look at anything other than the
most recent year's performance?
a. Want to see long term trend
b. See how it performs in a different economic time (esp. times of economic
difficulties)
c. 1 year could be a fluke
32. What is systematic risk?
a. Applies to all stocks
b. Question What is systematic risk?
i. Cannot be reduced by diversification
33. What is unsystematic risk?
a. Question Why should you diversity your investments?
i. Answer: Reduces unsystematic risks
b. Question What is unsystematic risk?
i. Risk that can be reduced by diversification
ii. Risk that is specific to individual stocks
iii. Answer: D

34. Why should you always have adequate federal income tax withheld from your
paycheck?
a. Dont want to come up with an unexpected dollar amount come April 15
b. Dont have to worry about spending it (the money withheld) Keeps you
from spending it
c. Dont want to owe the Federal Govt anything
d. Awesome when you get tax refund!
35. Why should you always pay off the full balance of your credit cards?
a. Because IR is unbelievably high
b. Easy to get into the trap and hard to get out of
36. What is a recurring non-recurring item?
a. Stuff always happens
b. Non-recurring items (things that happen one time) recur all the time
37. Why should you not buy ordinary life insurance?
a. Separate out your Life insurance needs from your investments
i. Do investments through your 401K (retirement)
ii. Buy Term Life Policy less expensive
iii. There will be a point in time when you dont need life insurance
anymore
38. How much insurance should you have?
a. As little as possible
b. Only insure the things you cannot afford to lose (e.g. House, Life,
Disabilities)
c. Maximize deductible provided you have savings to cover Take the highest
deductible you can afford to cover
39. What is benefit of having a portion of your paycheck directly deposited to you
savings account?
a. If you dont see it, you will not spend it!
b. No-budget budget you can spend whatever money you have in the bank
(wont see savings)
40. When should you rent rather than buy a house?
a. Rent if you think that a job move may be requires in less than 4 years
i. Get stable and them buy a house
ii. Having to sell a house can limit your ability to accept a better job in
another city
1. House in not a liquid investment
iii. Exception if move is with company that covers moving costs
41. What is the benefit of a "no-budget budget plan"?
a. Benefit Doesnt requires keeping track of individual expenditures
b. Need to have adequate withholding, emergency fund, etc. whatever is
left is there for you to spend it
42. What is drawback of a detailed budget plan?
a. Drawback Can be very time consuming and requires constant monitoring
of expenditures
b. Have to keep track of things
c. See how youre doing relative to your budget and see if you need to make
any adjustments to it
43. What are critical considerations in preparing a detailed budget plan?
a. Determine what individual expense breakouts you want to detail
b. Determine timing of big item payments
c. Be realistic/conservative
d. Dont forget about inflation!!!
e. Provide contingencies
f. Review and make adjustments when needed
g. Note:
i. You do not have to keep track of every little bitty expenditure, you
can group them.
ii. Need to know when the big expenditures are coming in
44. What factors are considered in determining individual health insurance policy
rates?
a. Individuals age, medical history, and regional demographics determine
rates
b. Questions Prior to implementation of Obamacare, individual healthcare
policies
i. Answer: had premiums based on individual age and medical history
45. What were purposes behind Obamacare?
a. Decrease number of uninsured Americans
b. Reduce overall costs of healthcare
c. Improve healthcare outcomes and streamline delivery of healthcare
d. Requires insurance companies to cover all applicants and offer same rates
regardless of pre-existing conditions or gender
e. Question What is not a feature of Obamacare?
i. Answer: All businesses must provide healthcare coverage for all
employees
f. Question What is not a feature of Obamacare?
i. Answer: Small businesses will have all premiums for employees
subsidized for 2 years
46. What is the individual mandate?
a. Individuals must purchase insurance or pay penalty
47. What are health insurance exchanges?
a. Establishes health insurance exchanges by state as marketplace for
individuals and small businesses
b. Insurance companies put on the internet what their rates are
48. What is impact of expanding Medicaid to individuals and families up to 133% of
poverty level?
a. State administers Medicaid and have to pay for it
b. To encourages states to cover Medicaid, the federal government will pay
100% of any additional cost the state incurs by expanding the Medicaid up
to 133% for the first 2 years
i. Govt will pay 90% thereafter
ii. Some states chose not to expand
c. Question how are subsidies funded for low-income?
i. Encourage states to fund Medicaid
ii. Raise taxes?
49. What is impact of Obamacare on companies with over 50 employees?
a. Question: Expected reactions of company to the implementation of
Obamacare?
i. Answer: All the Above
ii. Elect to discontinue providing healthcare with penalty
iii. Small companies try to keep the number of fulltime below 50
iv. Try to raise prices to cover additional healthcare costs
50. What is difference between hedging and speculation?
a. Hedging
i. Seller of commodity wants to lock in price but doesnt want to be
committed in case price goes up substantially
ii. Buyer of commodity wants to lock in purchase price but is
concerned that prices could drop substantially
iii. To reduce risk
b. Speculation
i. Seller, buyer, or speculator believes that option is mispriced and
sees significant profit potential
ii. Speculator believes that prices will be higher/lower than listed price
and will buy/sell with hope of making profit
c. Hedging has the product to back it up, Speculation does not have the
product to back it up
51. Why would seller want to hedge?
a. Seller of commodity wants to lock in price for future months rather than
taking risk on future spot prices
i. May want to lock in profit
ii. May think that prices could go down in future below available
futures price
iii. May be required to lock in by lender/banker
b. He believes theres a good price out there in the Futures Market
52. Why would buyer want to hedge?
a. Buyer of commodity wants to lock in purchase price for future needs rather
than taking risk on future spot price
i. May want to lock in profit on finished product
ii. May think that prices could go up in future above available future
price
iii. May be required to lock in lenders/banker
b. Thinks he can get hurt if the prices go way up

Producer Manufacture Speculator
Hedging Sells
Futures
Cont.
Buy Futures
Cont.
Rather than waiting on
spot market to reduce
risk

Speculation Buy Sell Believe the pricing is
off/try to make money
thinking its a bargain
Sells/Buys
Future Cont.

Speculator middle man, doesnt produce/manufacture the product, always speculating,
never hedging because he doesnt have the product to back it up
Question Who buys Future?
Answer: Manufacture with commodity and speculators.and producers??

53. What is an options contract?
a. Contract with right, but with no obligation, to buy or sell an asset at a
specified price prior to a specified date
54. What is the difference between a put and a call option?
a. Put Option Right to Sell
b. Call Option Right to Purchase
55. Why would seller of a commodity want to purchase a put option?
a. Gives them the right (not the obligation) to sell an asset at a specific price
by a predetermined date to a given party used to protect against the
decline of the price of the commodity
i. The buyer is obligated to buy the commodity at the strike price
56. Why would a buyer of a commodity want to purchase a call option?
a. Gives them the right (not the obligation) to buy an asset from the seller of
the option at a certain time for a certain price
i. The seller is obligated to sell the commodity to the buyer if the
buyer decides so.
57. How are futures contracts priced?
a. Inflation Factor
b. Interest Rate Factor
c. Seasonal Factor
d. Business Factor
e. Based on the Market half the people think its going to go up, half think its
going to go down
58. How are Option contracts priced?
a. Volatility Factor
b. Inflation Factor
c. Interest Rate Factor
d. Business Factor
e. Black- Scholes Model
f. Calculated on the basis of the Black-Scholes Model
59. What are possible solutions to fix the Social Security system?
a. Raise SS taxes, Raise limit on which SS taxes apply, change calculation of
COLA, increase eligibility age, and Means Testing
b. Questions Which is less likely to cure SS Trust Fund?
i. Answer Less likely to raise/change Taxes
60. How is the front-end ratio calculated? Back-end ratio?
a. Front End Ratio
i. Annual Salary X 30%/12 = Maximum Monthly Housing Expense
ii. Pretax Income
iii. Monthly Housing Expenses interest, principle, property taxes,
mortgage insurance, HOA dues, and homeowners insurance
b. Back End Ratio
i. Annual Salary X 45%/12 = Maximum Allowable Debt-to-Income
Ratio
ii. Pretax Income
iii. Monthly Payment Obligations Mortgages, other loans, child
support, credit card payments, car payments, and installment loans
61. What are possible impacts of increase in the minimum wage rate?
a. Not on test

62. What are features of sub-prime mortgages?
a. Question:
i. Higher IR than prime mortgages
ii. Higher likelihood of default
iii. They are marketable
63. What were causes of financial crisis in 2008?
a. Credit Default Swaps and loosen the credit standards, housing market and
raise in credit
b. Question What was NOT as a cause of the financial crisis in 2008?
i. Answer Bankruptcy of the FDIC
64. What are factors affecting the valuation of stocks?
a. Question
i. Domestic and global economic conditions (systematic risks)
ii. Sales Growth
iii. Answer: A and B
1. Has nothing to do with the comparison of stock prices
between competition
65. What does a Morningstar rating indicate?
a. Number of Stars (5 max) are comparing that fund to other similar funds in
similar styles
66. What securities may be included in money market funds?
a. Money market funds are short term (<1)
b. Question Which of the following is not considered as a money market
security?
i. Answer: Treasury Bonds
67. What are factors used in calculating your credit score?
a. Payment history, Amounts Owed, Length of Credit History, New Credit,
Types of Credit used, FICO score
b. INCOME is not considered in calculating your credit score
68. What is Chick-Fil-A's corporate mission?
a. Our mission is to have a positive influence on all who come in contact with
Chick-fil-A
69. What is tax treatment of health insurance premiums?
a. Answer: Deductible for businesses only
70. What is your liability in case of identity theft?
a. Maximum liability based on when theft is REPORTED:
i. Before any unauthorized charges - $0
ii. Within 2 business days after discovery - $50
iii. More than 2 days, less than 60 days - $500
iv. More than 60 days Full balance of account



Interest rate up value of bond goes down (Vice Versa)