Sample Questions 2

1- You have $500 that you would like to invest. You have two choices: Savings
account A which earns 8% compounded annually, or savings account B which
earns 7.75% compounded semiannually (ear=7.9%). Which would you choose
and why?
A) A because it has a higher effective annual rate.
B) A because the future value in one year is lower.
C) B because it has a higher effective annual rate.
D) B because the future value in one year is lower.
E) B because it has the higher quoted rate.
2- Which of the following is NOT a true statement?
A) Present values and discount rates move in the opposite directions from one
another.
B) On monthly compounded loans, the EAR will exceed the APR.
C) Compounding essentially means earning interest on interest.
D) Future values increase with increases in interest rates.
E) All else the same, the longer the term of a loan the lower will be the total
interest you pay on it.
3- To compare interest rates offered by various financial institutions, you should compare
the:
A) Quoted rates.
B) Annual percentage rates.
C) Stated annual rates.
D) Nominal rates.
E) Effective annual rates.
4- Which one of the following would have the greatest present value?
A) $1,000 today plus $100 a month for 2 years
B) $1,000 today plus $200 a month for a year
C) $1,000 today plus $400 a month for six months
D) $2,200 today plus $200 a month for six months
E) $2,200 today plus $100 a month for a year

5- Which one of the following will increase the future value of a stream of unequal
payments for a ten year project? The rate of return is positive.
A) Delaying some cash inflows from years 1 and 2 until year 9
B) Lowering the discount rate applicable to all ten years
C) Increasing the initial cash outflow to start the project
D) Moving more of the cash inflows to the earlier years of the project
E) Lowering the effective annual rate applicable to the project
6- Which of the following is (are) correct concerning perpetuities?
I. Perpetuities consist of a stream of equal payments.
II. Perpetuities have a life of between twenty and one hundred years.
III. Perpetuities have a variable rate of return.
IV. The present value perpetuity formula for a stream of annual payments is:
C / (1 + r/12)12.
A) I only
B) I and IV only
C) II and IV only
D) I, II, and III only
E) I, II, and IV only
7- Beatrice has a credit card that applies interest every month to her account balance. In
this case, Beatrice is paying an interest rate that:
A) Equals the rate stated on her billing statement as the APR.
B) Is equal to the APR compounded continuously.
C) Is greater than the APR shown on her billing statement.
D) Is equal to the annual percentage rate as required by the government.
E) Will decline automatically as her account balance declines.
8- The effective annual rate on your savings account assumes that:
A) You withdraw the interest as soon as it is earned.
B) All interest is withdrawn from the account at the end of each year.
C) The annual percentage rate varies as the prime rate varies.
D) All interest is compounded continuously and immediately added to the
account balance.
E) All interest payments are reinvested at the same rate as the original deposit
into the account.

9- Which one of the following is correct concerning ordinary annuities and annuities due?
A) An ordinary annuity will have a larger present value than an annuity due
given that the annuities are otherwise identical.
B) An annuity due will have a larger future value than an ordinary annuity
given that the annuities are otherwise identical.
C) An annuity due applies only to equal payments made in annual increments.
D) The majority of annuities are annuities due.
E) An ordinary annuity is one where the payment occurs at the beginning of the
period.
10- In the annuity present value formula, the variable "r" must be expressed as a(n):
A) Annual percentage rate.
B) Effective annual rate.
C) Stated annual rate.
D) Stated rate per period of time t.
E) Continuously compounded rate.
11- Suppose you read that a bond with a face value of $1,000 and a coupon of $80 per
year has a yield to maturity of exactly 8%. How many years remain until
maturity?
I. Greater than 20 years
II. Greater than 10 years but less than 20
III. Less than 10 years
A) I only
B) II only
C) III only
D) I, II, or III may be correct
E) Cannot be calculated since price is not given
12- All else equal, the market value of a corporate bond is always inversely related to its
I. time to maturity
II. coupon rate
III. yield-to-maturity
A) I only
B) II only
C) III only
D) I and III only
E) I, II, and III

13- Which of the following provisions would NOT be listed in the bond indenture?
A) Amount of bonds issued
B) Repayment arrangements
C) The total amount of bonds issued
D) Protective covenants
E) Interest rate on similar risk bonds
14- Which of the following items is/are included in the bond indenture?
I. Call provisions
II. Sinking fund provisions
III. Negative covenants
IV. A description of the property used as security
A) I and II only
B) I and III only
C) I, II, and IV only
D) II, III, and IV only
E) I, II, III, and IV
15- All else the same, the existence of a ______________ will increase the required
return on a bond.
A) call provision
B) conversion feature
C) sinking fund
D) trust deed
E) protective covenant
16- For a bond selling at par, the yield to maturity must be _____________.
A) greater than the coupon rate
B) less than the coupon rate
C) greater than the face value
D) greater than the required rate of return
E) equal to the coupon rate

17- A firm intends to take on a significant amount of new debt in order to fund the
purchase of a close competitor. However, before it can complete the transaction,
the firm must call one of its outstanding bond issues. It is plausible that the called
bonds:
A) Are backed by the corporation's fixed assets.
B) Have a higher interest rate than the new bonds will.
C) Have an inferior tax status than the new bonds will.
D) Can be called at a price that is very near par.
E) Have covenants which restrict such increase in debt.
18- Which of the following statements about bond ratings is/are accurate?
I. Bond ratings are typically paid for by a company's bondholders.
II. Bond ratings are based solely on information acquired from sources other
than the firm itself.
III. Bond ratings represent an independent assessment of the creditworthiness
of bonds.
A) II only
B) I and II only
C) III only
D) I and III only
E) II and III only
19- Your neighbour is bragging that the coupon payment on the bonds he bought five
years ago has increased in each of the last three years. You know he must own
_______________.
A) a zero coupon bond
B) an income bond
C) a convertible bond
D) a put bond
E) a floating rate bond
20- The component(s) of nominal returns NOT described in the Fisher effect is (are) :
I. The real return on investment.
II. The default risk premium.
III. The taxability premium.
IV. The inflation premium.
A) II only
B) I and III only
C) I, III, and IV only
D) II and III only
E) I, II, III, and IV

21- If the management of a corporation wants to raise equity capital while maintaining
control over the corporation and limiting their cash outflows, they should issue
shares of:
A) Non-voting preferred stock.
B) Voting preferred stock.
C) Voting common stock.
D) Non-voting common stock.
E) Zero coupon bonds.
22- It is more difficult to value a stock than it is to value a bond because:
A) The future cash flows of a stock are known.
B) The life of an equity security is limited.
C) The required market rate of return on a stock is known in advance.
D) Equity securities have no maturity date.
E) The maturity value of a stock is known.
23- Which of the following rights are granted to shareholders of common stock?
I. Election of corporate directors
II. Selection of all senior management executives
III. The option of voting by proxy
IV. The right to share in any remaining assets in a liquidation
A) I and III only
B) II and IV only
C) I, II, and III only
D) I, III, and IV only
E) I, II, III, and IV
24- Which of the following statements concerning dividends is (are) correct?
I. Dividends become a liability of the corporation at the time they are declared.
II. The stockholders determine the amount of dividend to be paid.
III. Dividends are a tax deductible expense.
IV. Common stock dividends can be either cumulative or non-cumulative.
A) I only
B) II only.
C) I and IV only
D) II and IV only
E) I and III only

25- The coattail provision gives the preferred stockholders the:

A) Right to convert their shares into bonds with an equivalent yield-to-maturity.
B) Obligation to convert their shares into callable shares of common stock.
C) Obligation to convert their shares into shares of common stock.
D) Right to convert their shares into cash at par value at their discretion.
E) Right to convert their shares into shares of common stock.
26- The capital gain yield:
A) When subtracted from the dividend yield is equal to the required rate of
return.
B) Is the rate at which the price of the stock grows.
C) Must always be a positive value.
D) Is equal to the dividend amount divided by the current market price of the
stock.
E) Is the same as the current yield for shares of common stock.
27- The dividend growth model assumes that:
A) The rate of growth is constant.
B) Next year's dividend is the same amount as last year's dividend.
C) The rate of growth exceeds the required rate of return.
D) The dividend amount used in the formula is the last dividend paid.
E) The valuation is as of the year following the payment of the dividend used in
the computation.
28- ____________ can freeze out minority shareholders.
A) Straight voting
B) Cumulative dividends
C) Proxy voting
D) Cumulative voting
E)
Multiple classes of stock
29- You wish to be on the board of directors of a company. If you wish to buy as low a
percentage of the total outstanding shares as is necessary to guarantee yourself a
seat on the board, you should look for a firm that has ____________.
A) cumulative preferred stock
B) cumulative voting Class B stock
C) convertible debentures
D) straight voting common stock
E) cumulative voting common stock

30- Which of the following would be considered a violation of the rights of one or more
classes of a firm's stakeholders?
A) Common dividends are paid even though preferred dividends are in arrears.
B) Preferred stockholders are paid before common shareholders in a
liquidation.
C) Common stockholders are able to place members on the board of directors
to represent their interests in opposition to the board candidates backed by
preferred shareholders.
D) Common shareholders are able to vote by proxy even when they are unable
to attend a shareholders' meeting in person.
E) Debt is repaid before preferred shareholders are paid anything in a
liquidation.
31- A report given to potential investors that contains information about a security
offering but does not include any pricing information is called a(n):
A) Registration statement.
B) SEC Regulation A publication.
C) Green Shoe.
D) Red herring.
E) Tombstone.
32- A type of underwriting where the firm receives the agreed-upon amount and the
underwriter assumes all of the risk is called a _______underwriting.
A) Guaranteed
B) Green Shoe
C) Firm commitment
D) Red herring
E) Best efforts
33- The action that is based on the preemptive privilege that allows current shareholders
to maintain their percentage ownership in a corporation is called a(n):
A) Rights offering.
B) Green Shoe provision.
C) Standby underwriting.
D) Oversubscription privilege.
E) Ex-right.

34- Which of the following is/are important in choosing a venture capitalist?

I. The financial strength of the venture capitalist.
II. References regarding how successful the venture capitalist has been in the
past.
III. The venture capitalist's exit strategy.
A) I only
B) I and III only
C) I and II only
D) II and III only
E) I, II, and III
35- Which of the following correctly describes the sequence of events in a new issue?
A) Distribution of "red herring"; approval of the board of directors; distribution
of prospectus; sale of securities
B) Approval of the board of directors; distribution of prospectus; distribution of
a "red herring"; sale of securities
C) Distribution of "red herring"; distribution of prospectus; approval of the
board of directors; sale of securities
D) Approval of the board of directors; distribution of a "red herring";
distribution of prospectus; sale of securities
E) Approval of the board of directors; distribution of prospectus; sale of
securities; distribution of a "red herring"
36- Which of the following is a characteristic of an IPO?
A) They are usually sold as a private placement.
B) Small issues are predominately sold on a firm commitment basis.
C) The general form of offer is a rights offering.
D) IPOs are typically overpriced.
E) Determination of the correct offering price is relatively difficult.
37- Each of the following is sometimes performed by underwriters EXCEPT:
A) They stand ready to take up the slack if some of the shares in a best-efforts
offering are not purchased
B) They purchase and resell extra shares from the issuer in an oversubscribed
offering
C) They spread the risk of issuing the securities by forming a syndicate
D) They provide advice to the issuing firm
E) They act as an intermediary between the company selling the securities and
the

38- Empirical evidence suggests that the market price of a firm's existing shares are most
likely to decline upon the announcement of a new equity issue. Which of the
following have been advanced as possible explanations for this phenomenon?
I. Issuing new equity requires the firm to incur substantial issue costs.
II. An equity issue is a signal that the firm may have too little liquidity.
III. Management will issue equity only when it believes that existing shares
are undervalued.
A) I only
B) III only
C) I and II only
D) II and III only
E) I, II, and III
39- The direct costs of issuing equity include which of the following?
A) Underpricing
B) Filing fees
C) Green Shoe option
D) Costs of management time spent working on the new issue
E) Abnormal returns
40- Which of the following is NOT a cost of issuing securities
A) legal fees, filing fees, taxes
B) losses related to underpricing
C) the spread
D) losses on share value one year after the issue
E) abnormal returns on seasoned offerings
41- An annuity stream of cash flow payments is:
A) A set of level cash flows occurring each time period for a fixed length of
time.
B) A set of level cash flows occurring each time period forever.
C) A set of increasing cash flows occurring each time period for a fixed length
of time.
D) A set of increasing cash flows occurring each time period forever.
E) A set of arbitrary cash flows occurring each time period for no more than 10
years

42- Annuities where the payments occur at the end of each time period are called
________, whereas _____________ refer to annuity streams with payments
occurring at the beginning of each time period.
A) ordinary annuities; early annuities
B) late annuities; straight annuities
C) straight annuities; late annuities
D) annuities due; ordinary annuities
E) ordinary annuities; annuities due
43- An annuity stream where the payments occur forever is called a(n) ___________.
A) annuity due
B) indemnity
C) perpetuity
D) amortized cash flow stream
E) amortization table
44- Which of the following fit the definition of an annuity?
I. $100 a quarter for 10 years
II. $200 a year forever
III. $10 a week for 1,000 weeks
IV $150 a month for 72 months
A) I and IV only
B) II only
C) III and IV only
D) I, III, and IV only
E) I, II, III, and IV
45- An annuity due is a series of:
A) Equal payments that occur at the beginning of each time period and continue
forever.
B) Unequal payments that occur at the beginning of each time period for a set
period of time.
C) Equal payments that occur at the beginning of each time period for a set
period of time.
D) Unequal payments that occur at the end of each time period for a set period
of time.
E) Equal payments that occur at the end of each time period and continue
forever

46- The specified date on which the principal amount of a bond is repaid is called the
bond's:
A) Coupon.
B) Face value.
C) Maturity.
D) Yield to maturity.
E) Coupon rate.
47- A bond with face value $1,000 that sells for $1,000 in the market is called a
___________ bond.
A) par
B) discount
C) premium
D) zero coupon
E) floating rate
48- The written, legally binding agreement between the corporate borrower and the
lender detailing the terms of a bond issue is called the:
A) Indenture.
B) Covenant.
C) Terms of trade.
D) Form 5140.
E) Call provision.
49- A/an _______ bond is issued without record of the purchaser's name.
A) straight
B) unfunded
C) registered
D) bearer
E) income
50- In the event of default, _____________ debt holders must give preference to more
__________ debt holders in the priority of repayment distributions.
A) short-term; long-term
B) long-term; short-term
C) senior; junior
D) senior; subordinated
E) subordinated; senior

51- Preemptive rights refers to:

A) The right of shareholders to share proportionately in dividends paid.
B) The right of shareholders to share proportionately in any new stock issues
sold.
C) The right of shareholders to share proportionately in liquidated assets.
D) The right of shareholders to vote at annual shareholder meetings.
E) None of the above.
52- Equity with differential voting rights and/or dividend payment claims is called:
A) Dual class stock.
B) Cumulative stock.
C) Deferred stock.
D) Preferred stock.
E) Common stock.
53- Equity with priority for dividends and in the event of bankruptcy is called:
A) Dual class stock.
B) Cumulative stock.
C) Deferred stock.
D) Preferred stock.
E) Common stock.
54- The voting procedure where shareholders may cast all of their votes for one member
of the board is:
A) Democratic voting.
B) Cumulative voting.
C) Straight voting.
D) Deferred voting.
E) Proxy voting.
55- Given a price at year 5, the dividend in the dividend growth model would be defined
as:
A) The last annual dividend paid.
B) The annual dividend in year 1.
C) The quarterly dividend in year 5.
D) The quarterly dividend in year 6.
E) The annual dividend in year 6.

56- A corporation's first sale of equity made available to the public is called a(n):
A) Share repurchase program.
B) Shelf registration filing.
C) Private placement.
D) Seasoned equity offering (SEO).
E) Initial public offering (IPO).
57- The investment banks that act as intermediaries between the company issuing
securities and the investing public are called __________________.
A) privileged intermediaries
B) venture capitalists
C) underwriters
D) standby investors
E) primary investors
58- A group of underwriters formed to share the risk in marketing and distributing a sale
of securities to the investing public is called a(n) __________________.
A) cartel
B) syndicate
C) cooperative venture capital system
D) oligopoly
E) insider consortium
59- Underwriting where the syndicate sells as much of the issue as possible, but can
return unsold securities to the issuing firm without any further financial
responsibility, is called a:
A) Best efforts offering.
B) Shelf offering.
C) Direct rights offering.
D) Private placement offering.
E) Firm commitment offering.
60- The contract provision whereby the underwriting syndicate may, at their option,
purchase additional securities from the issuing corporation at the initial offering
price is called (the) :
A) Regulation A.
B) Red herring provision.
C) Green Shoe provision.
D) Best efforts option.
E) Direct rights option.