FINANCIAL MANAGEMENT: CORE CONCEPTS
CERTIFICATION EVALUATION TEST COMPLETE
QUESTIONS AND CORRECT ANSWERS
◉ Who are considered the owners of a public corporation?
Answer: Stockholders.
◉ What must a corporation provide to attract equity investment?
Answer: Competitive returns to investors.
◉ How are financial markets described in terms of their
interconnectedness?
Answer: Money flows worldwide to the highest return.
◉ What is the relationship between risk and return in financial
decision-making?
Answer: Maximize stock price by balancing risk and return.
◉ What are the four principles of financial decision-making?
Answer: Efficient markets, time value of money, risk aversion, and
uncertainty.
,◉ What defines an efficient financial market?
Answer: Many buyers and sellers, liquidity, transparency, and
standardized securities.
◉ What is the time value of money (TVM) principle?
Answer: The value of money depends on when you receive it.
◉ What is present value (PV)?
Answer: Cash received today.
◉ What is future value (FV)?
Answer: Cash received in the future.
◉ What determines interest rates?
Answer: Real risk-free rate, inflation rate, and risk premium.
◉ What is the required return line in financial markets?
Answer: The minimum profit needed to attract investors based on
risk.
◉ What is the difference between risk and uncertainty?
,Answer: Risk has known probabilities of loss; uncertainty has
unknown probabilities and severity.
◉ What are the two main types of securities firms sell to raise cash?
Answer: Bonds and stocks.
◉ What is the principal amount in bond financing?
Answer: $1,000 usually.
◉ What is the difference between bonds and stocks in terms of
investor rights?
Answer: Bonds are loans from investors; stocks make investors part
owners.
◉ What is the primary market in financial trading?
Answer: The market where new securities are issued.
◉ What is the secondary market in financial trading?
Answer: The market where existing securities are traded.
◉ What is liquidity in financial markets?
Answer: The ability to buy/sell quickly with minimal price impact.
, ◉ What is the bid/ask spread?
Answer: The difference between the bid price and the ask price in
trading.
◉ What is the formula for calculating future value (FV)?
Answer: FV = PV x (1 + interest rate).
◉ How do you calculate present value (PV) from future value (FV)?
Answer: PV = FV / (1 + interest rate).
◉ What is compound interest?
Answer: Interest that is reinvested to earn additional interest.
◉ What is the effect of a higher interest rate on future value?
Answer: It increases the future value of an investment.
◉ What is a risk premium?
Answer: Compensation for bearing risk in investments.
◉ What is the significance of market efficiency?
CERTIFICATION EVALUATION TEST COMPLETE
QUESTIONS AND CORRECT ANSWERS
◉ Who are considered the owners of a public corporation?
Answer: Stockholders.
◉ What must a corporation provide to attract equity investment?
Answer: Competitive returns to investors.
◉ How are financial markets described in terms of their
interconnectedness?
Answer: Money flows worldwide to the highest return.
◉ What is the relationship between risk and return in financial
decision-making?
Answer: Maximize stock price by balancing risk and return.
◉ What are the four principles of financial decision-making?
Answer: Efficient markets, time value of money, risk aversion, and
uncertainty.
,◉ What defines an efficient financial market?
Answer: Many buyers and sellers, liquidity, transparency, and
standardized securities.
◉ What is the time value of money (TVM) principle?
Answer: The value of money depends on when you receive it.
◉ What is present value (PV)?
Answer: Cash received today.
◉ What is future value (FV)?
Answer: Cash received in the future.
◉ What determines interest rates?
Answer: Real risk-free rate, inflation rate, and risk premium.
◉ What is the required return line in financial markets?
Answer: The minimum profit needed to attract investors based on
risk.
◉ What is the difference between risk and uncertainty?
,Answer: Risk has known probabilities of loss; uncertainty has
unknown probabilities and severity.
◉ What are the two main types of securities firms sell to raise cash?
Answer: Bonds and stocks.
◉ What is the principal amount in bond financing?
Answer: $1,000 usually.
◉ What is the difference between bonds and stocks in terms of
investor rights?
Answer: Bonds are loans from investors; stocks make investors part
owners.
◉ What is the primary market in financial trading?
Answer: The market where new securities are issued.
◉ What is the secondary market in financial trading?
Answer: The market where existing securities are traded.
◉ What is liquidity in financial markets?
Answer: The ability to buy/sell quickly with minimal price impact.
, ◉ What is the bid/ask spread?
Answer: The difference between the bid price and the ask price in
trading.
◉ What is the formula for calculating future value (FV)?
Answer: FV = PV x (1 + interest rate).
◉ How do you calculate present value (PV) from future value (FV)?
Answer: PV = FV / (1 + interest rate).
◉ What is compound interest?
Answer: Interest that is reinvested to earn additional interest.
◉ What is the effect of a higher interest rate on future value?
Answer: It increases the future value of an investment.
◉ What is a risk premium?
Answer: Compensation for bearing risk in investments.
◉ What is the significance of market efficiency?
