FIN 310 UPDATED EXAMS SCRIPT QUESTIONS AND
ANSWERS SURE A+
✔✔2/10 net 45 - ✔✔2% discount if paid within 10 days, otherwise full amount due in 45
days
✔✔Discount period - ✔✔Time allowed to take cash discount
✔✔Credit period - ✔✔Time before full payment required
✔✔Reason firms offer discounts - ✔✔Encourage faster payment
✔✔Effective cost of not taking discount - ✔✔Very high implied borrowing rate
✔✔Credit analysis - ✔✔Process of determining customer creditworthiness
✔✔Five Cs of Credit - ✔✔Character, Capacity, Capital, Collateral, Conditions
✔✔Direct exchange quote - ✔✔Price of foreign currency in U.S. dollars
✔✔Indirect exchange quote - ✔✔Amount of foreign currency per U.S. dollar
✔✔Relationship between direct and indirect quotes - ✔✔They are reciprocals
✔✔Spot rate - ✔✔Exchange rate for immediate trade
✔✔Forward rate - ✔✔Exchange rate for future trade
✔✔Spot trade - ✔✔Immediate currency exchange
✔✔Forward contract - ✔✔Agreement today to exchange currency later at fixed rate
, ✔✔Foreign currency at premium - ✔✔Forward rate > spot rate
✔✔Foreign currency at discount - ✔✔Forward rate < spot rate
✔✔Currency appreciation - ✔✔Currency strengthens relative to another currency
✔✔Currency depreciation - ✔✔Currency weakens relative to another currency
✔✔Cross-rate - ✔✔Exchange rate between two currencies not involving USD
✔✔Triangle arbitrage - ✔✔Riskless profit using mispriced exchange rates
✔✔Purchasing power parity - ✔✔Exchange rates determined by relative purchasing
power
✔✔Absolute PPP - ✔✔Same good should cost same everywhere after exchange
conversion
✔✔Relative PPP - ✔✔Exchange rates change based on inflation differences
✔✔Relative PPP formula - ✔✔Expected future spot rate = Current spot rate × [1 +
(foreign inflation - domestic inflation)]^t
✔✔Higher foreign inflation effect - ✔✔Foreign currency tends to depreciate
✔✔IPO - ✔✔Initial Public Offering
✔✔SEO - ✔✔Seasoned Equity Offering
✔✔Investment banker - ✔✔Financial intermediary helping firms issue securities
✔✔Underwriter - ✔✔Investment bank that helps sell securities
✔✔Underwriting spread - ✔✔Difference between price paid to issuer and price sold to
public
✔✔Firm commitment underwriting - ✔✔Underwriter buys entire issue and resells it
✔✔Best efforts underwriting - ✔✔Underwriter only attempts to sell securities
✔✔Dutch auction - ✔✔Investors bid for IPO shares and all winners pay same price
ANSWERS SURE A+
✔✔2/10 net 45 - ✔✔2% discount if paid within 10 days, otherwise full amount due in 45
days
✔✔Discount period - ✔✔Time allowed to take cash discount
✔✔Credit period - ✔✔Time before full payment required
✔✔Reason firms offer discounts - ✔✔Encourage faster payment
✔✔Effective cost of not taking discount - ✔✔Very high implied borrowing rate
✔✔Credit analysis - ✔✔Process of determining customer creditworthiness
✔✔Five Cs of Credit - ✔✔Character, Capacity, Capital, Collateral, Conditions
✔✔Direct exchange quote - ✔✔Price of foreign currency in U.S. dollars
✔✔Indirect exchange quote - ✔✔Amount of foreign currency per U.S. dollar
✔✔Relationship between direct and indirect quotes - ✔✔They are reciprocals
✔✔Spot rate - ✔✔Exchange rate for immediate trade
✔✔Forward rate - ✔✔Exchange rate for future trade
✔✔Spot trade - ✔✔Immediate currency exchange
✔✔Forward contract - ✔✔Agreement today to exchange currency later at fixed rate
, ✔✔Foreign currency at premium - ✔✔Forward rate > spot rate
✔✔Foreign currency at discount - ✔✔Forward rate < spot rate
✔✔Currency appreciation - ✔✔Currency strengthens relative to another currency
✔✔Currency depreciation - ✔✔Currency weakens relative to another currency
✔✔Cross-rate - ✔✔Exchange rate between two currencies not involving USD
✔✔Triangle arbitrage - ✔✔Riskless profit using mispriced exchange rates
✔✔Purchasing power parity - ✔✔Exchange rates determined by relative purchasing
power
✔✔Absolute PPP - ✔✔Same good should cost same everywhere after exchange
conversion
✔✔Relative PPP - ✔✔Exchange rates change based on inflation differences
✔✔Relative PPP formula - ✔✔Expected future spot rate = Current spot rate × [1 +
(foreign inflation - domestic inflation)]^t
✔✔Higher foreign inflation effect - ✔✔Foreign currency tends to depreciate
✔✔IPO - ✔✔Initial Public Offering
✔✔SEO - ✔✔Seasoned Equity Offering
✔✔Investment banker - ✔✔Financial intermediary helping firms issue securities
✔✔Underwriter - ✔✔Investment bank that helps sell securities
✔✔Underwriting spread - ✔✔Difference between price paid to issuer and price sold to
public
✔✔Firm commitment underwriting - ✔✔Underwriter buys entire issue and resells it
✔✔Best efforts underwriting - ✔✔Underwriter only attempts to sell securities
✔✔Dutch auction - ✔✔Investors bid for IPO shares and all winners pay same price
