BSNS114 Exam with Questions and 100%
Correct Answers
What are some disciplinary mechanisms for the agency problem? - Answer Shareholders
annual meeting
Board of directors
Compensation plan (incentives such as salary bonus connected to performance)
Why does the shareholder's annual meeting often fail in practice? - Answer Most
shareholders do not show up to meetings because they are not important enough
Large shareholders if dissatisfied sell stock and move on
Why does the board of directors often fail in practice? - Answer Board members do not
work because no one polices them
Why does a compensation plan often fail in practice? - Answer May induce managers to
take company killing risks
Removes inherent satisfaction in doing their job
How does a firm raise money? - Answer The firm will trade securities (debt and equity)
in exchange for funds from savers (who have a surplus of resource)
What do investors get back in exchange? - Answer Debt holders have percentage of
interest on money lent returned, Principal is also returned, and contractual obligation
Shareholders have ownership claims and share in profit
,What is the primary market? - Answer Firm issues new securities and sell them to
investors in the Initial Public Offering
Cash is exchanged between firm and investors
Facilitated by investment bank
What is the secondary market? - Answer Securities trade between investors without
involvement of the firm
Cash is exchanged between investors only
Facilitated by a dealer (buyers/sellers) and and a broker (who trades on behalf of
others)
NZ stock exchange, NZ debt exchange
What is FV? - Answer Principal + interest earned
Future value is what investment is worth after earning interest for one or more periods
What is PV? - Answer Present value is what the investment is worth today
What is r? - Answer The rate of return - or the interest rate/discount rate
What is simple interest? - Answer Applied on principal only
What is interest on interest? - Answer Earned upon the reinvestment of interest
payments
What is compound interest? - Answer Interest rate is applied to principal and
accumulated interest
, How do you apply compounding frequency? - Answer r/n
t*n
What is APR? - Answer Annual percentage rate
Quoted rate
Annualised interest rate using simple interest
What is EAR? - Answer Effective annual rate
Annual growth rate that takes compounding into account
What are the features of an ordinary perpetuity? - Answer Cash flows are:
Equally spaced in time (weekly/monthy/quarterly/yearly)
Equal in size
Inifinite
Occur at the end of the payment period
What are the features of a growing perpetuity? - Answer Cash flows are:
Equally spaced in time
Not equal in size, they grow by constant growth rate "g" per period
Infinite
Occur at the end of the payment period
What are the features of an ordinary annuity? - Answer Cash flows are:
Equally spaced in time
Equal in size
Finite in number
Correct Answers
What are some disciplinary mechanisms for the agency problem? - Answer Shareholders
annual meeting
Board of directors
Compensation plan (incentives such as salary bonus connected to performance)
Why does the shareholder's annual meeting often fail in practice? - Answer Most
shareholders do not show up to meetings because they are not important enough
Large shareholders if dissatisfied sell stock and move on
Why does the board of directors often fail in practice? - Answer Board members do not
work because no one polices them
Why does a compensation plan often fail in practice? - Answer May induce managers to
take company killing risks
Removes inherent satisfaction in doing their job
How does a firm raise money? - Answer The firm will trade securities (debt and equity)
in exchange for funds from savers (who have a surplus of resource)
What do investors get back in exchange? - Answer Debt holders have percentage of
interest on money lent returned, Principal is also returned, and contractual obligation
Shareholders have ownership claims and share in profit
,What is the primary market? - Answer Firm issues new securities and sell them to
investors in the Initial Public Offering
Cash is exchanged between firm and investors
Facilitated by investment bank
What is the secondary market? - Answer Securities trade between investors without
involvement of the firm
Cash is exchanged between investors only
Facilitated by a dealer (buyers/sellers) and and a broker (who trades on behalf of
others)
NZ stock exchange, NZ debt exchange
What is FV? - Answer Principal + interest earned
Future value is what investment is worth after earning interest for one or more periods
What is PV? - Answer Present value is what the investment is worth today
What is r? - Answer The rate of return - or the interest rate/discount rate
What is simple interest? - Answer Applied on principal only
What is interest on interest? - Answer Earned upon the reinvestment of interest
payments
What is compound interest? - Answer Interest rate is applied to principal and
accumulated interest
, How do you apply compounding frequency? - Answer r/n
t*n
What is APR? - Answer Annual percentage rate
Quoted rate
Annualised interest rate using simple interest
What is EAR? - Answer Effective annual rate
Annual growth rate that takes compounding into account
What are the features of an ordinary perpetuity? - Answer Cash flows are:
Equally spaced in time (weekly/monthy/quarterly/yearly)
Equal in size
Inifinite
Occur at the end of the payment period
What are the features of a growing perpetuity? - Answer Cash flows are:
Equally spaced in time
Not equal in size, they grow by constant growth rate "g" per period
Infinite
Occur at the end of the payment period
What are the features of an ordinary annuity? - Answer Cash flows are:
Equally spaced in time
Equal in size
Finite in number
