FINA 3332 EXAM 3 MOCK TEST AND STUDY
MATERIAL WITH FINANCIAL DECISION-
MAKING SCENARIOS
◉ The change in the market value of an asset over some time period
is called the _______.
Answer: Capital gain
◉ If the Federal Reserve tightens the money supply, other things
held constant, short-term interest rates will be pushed upward, and
this increase will probably be greater than the increase in the long-
term market. [T/F].
Answer: True
◉ Open market operations are operations in which:.
Answer: The Federal Reserve buys or sells Treasury securities to
expand or contract the U.S. money supply
◉ The Federal Reserve purchases U.S. Treasury securities to:.
Answer: Loosen the money supply
◉ Firms with the most profitable investment opportunities are
willing and able to pay the most for capital, so they tend to attract it
,away from less efficient firms or from those whose products are not
in demand [T/F].
Answer: True
◉ Your uncle would like to restrict his interest rate risk and his
default risk, but he would still like to invest in corporate bonds.
What bond best satisfies this critera?.
Answer: An AAA bond with 5 years to maturity
◉ The value of an asset is the future value of the future cash flows
that the asset is expected to generate during its life [T/F].
Answer: False
The value of an asset is the present value of the future cash flows
that the asset is expected to generate during its life. The cost of
money is used as the discounting factor to calculate the present
value of future cash flows,
◉ The higher the perceived risk, the higher the required rate of
return [T/F].
Answer: True
, Four fundamental factors that affect the cost of money: (1)
production opportunities , (2) time preferences for consumption, (3)
risk, (4) inflation
The higher the chance that an investor will not earn the return
promised, the higher the expected return on investment will be.
◉ Which of the following bonds has the highest default risk for a
given return?.
Answer: A CCC corporate bond with a 10-year maturity
This is because it has the poorest rating, highest interest rate risk,
and the longest time to maturity. Longer maturity increases maturity
risk.
◉ Andrew purchased a stock for $175 and sold it for $250. If he
earned a dividend income of $30, the stock's yield is =.
Answer: 60%
Yield/rate = Amt/ received / amt paid
◉ Which of the rates indicates the rate that will exist in an inflation-
free world?.
Answer: Real risk-free rate
MATERIAL WITH FINANCIAL DECISION-
MAKING SCENARIOS
◉ The change in the market value of an asset over some time period
is called the _______.
Answer: Capital gain
◉ If the Federal Reserve tightens the money supply, other things
held constant, short-term interest rates will be pushed upward, and
this increase will probably be greater than the increase in the long-
term market. [T/F].
Answer: True
◉ Open market operations are operations in which:.
Answer: The Federal Reserve buys or sells Treasury securities to
expand or contract the U.S. money supply
◉ The Federal Reserve purchases U.S. Treasury securities to:.
Answer: Loosen the money supply
◉ Firms with the most profitable investment opportunities are
willing and able to pay the most for capital, so they tend to attract it
,away from less efficient firms or from those whose products are not
in demand [T/F].
Answer: True
◉ Your uncle would like to restrict his interest rate risk and his
default risk, but he would still like to invest in corporate bonds.
What bond best satisfies this critera?.
Answer: An AAA bond with 5 years to maturity
◉ The value of an asset is the future value of the future cash flows
that the asset is expected to generate during its life [T/F].
Answer: False
The value of an asset is the present value of the future cash flows
that the asset is expected to generate during its life. The cost of
money is used as the discounting factor to calculate the present
value of future cash flows,
◉ The higher the perceived risk, the higher the required rate of
return [T/F].
Answer: True
, Four fundamental factors that affect the cost of money: (1)
production opportunities , (2) time preferences for consumption, (3)
risk, (4) inflation
The higher the chance that an investor will not earn the return
promised, the higher the expected return on investment will be.
◉ Which of the following bonds has the highest default risk for a
given return?.
Answer: A CCC corporate bond with a 10-year maturity
This is because it has the poorest rating, highest interest rate risk,
and the longest time to maturity. Longer maturity increases maturity
risk.
◉ Andrew purchased a stock for $175 and sold it for $250. If he
earned a dividend income of $30, the stock's yield is =.
Answer: 60%
Yield/rate = Amt/ received / amt paid
◉ Which of the rates indicates the rate that will exist in an inflation-
free world?.
Answer: Real risk-free rate
