BSNS114 Multichoice Exam With
Complete Solution
What is EAR? - Answer Effective Annual Rate - annual growth rate that takes frequency
of compounding into account.
What is APR? - Answer Annual Percentage Rate - the interest rate quoted by banks
which uses simple interest.
3 fundamental decisions in financial management - Answer Capital budgeting, financing
decisions, working capital management decisions.
What are capital budgeting decisions? - Answer Decisions about which productive
assets the company should purchase to maximise cash flows in the long term.
What are financing decisions? - Answer What combination of debt and equity will be
used to finance assets (capital structure).
What are working capital management decisions? - Answer Decisions relating to day to
day matters - current assets, current liabilities and net working capital.
What are the three forms of business? - Answer sole proprietorship, partnership,
corporation
What is capital structure? - Answer the combination of debt and equity used to finance a
firm
What is the agency problem? - Answer Owners and management are separated.
Managers may act in their own best interest, which does not always maximise share
prices.
What are three potential solutions to the agency problem? - Answer Shareholders
annual meetings, Board of directors, compensation plan
What is an IPO? - Answer Initial Public Offering
What happens in the primary market? - Answer Firms issue new securities (bonds and
stocks) and sell to investors (IPO). Facilitated by investment bank.
What happens in the secondary market? - Answer Securities are traded by investors
without involvement of the firm.
How is interest on interest calculated? - Answer FV - simple interest earnt - principle
Firms will typically raise capital for their investment projects by doing what? - Answer
Selling stocks or bonds to investors
Which of the following is not an example of financial capital:
, a) Money in a cheque account
b) A bond issued by Microsoft.
c) A library card.
d) A share of stock issued by Facebook.
e) A credit card loan. - Answer A library card
The secondary market refers to:
A. the sale of securities faciliated by an investment bank
B. cash changing hands between the issuing firm and the investors
C. the sale of new financial assets by the issuing firm.
D. none of the above
E. all transactions on a stock exchange - Answer all transactions on a stock exchange
What is a pure discount loan? (write full def)
a. interest is paid periodically and principle is paid at maturity
b. interest and principle are paid as a lump sum at maturity
c. equal payments are made regularly, including a portion of principle and interest -
Answer interest and principle are paid as a lump sum at maturity
What is an interest only loan?
a. interest is paid periodically and principle is paid at maturity
b. interest and principle are paid as a lump sum at maturity
c. equal payments are made regularly, including a portion of principle and interest -
Answer interest is paid periodically and principle is paid at maturity
What is an amortised loan?
a. interest is paid periodically and principle is paid at maturity
b. interest and principle are paid as a lump sum at maturity
c. equal payments are made regularly, including a portion of principle and interest -
Answer equal payments are made regularly, including a portion of principle and interest
What loan payment structure do bonds use?
- interest only
Complete Solution
What is EAR? - Answer Effective Annual Rate - annual growth rate that takes frequency
of compounding into account.
What is APR? - Answer Annual Percentage Rate - the interest rate quoted by banks
which uses simple interest.
3 fundamental decisions in financial management - Answer Capital budgeting, financing
decisions, working capital management decisions.
What are capital budgeting decisions? - Answer Decisions about which productive
assets the company should purchase to maximise cash flows in the long term.
What are financing decisions? - Answer What combination of debt and equity will be
used to finance assets (capital structure).
What are working capital management decisions? - Answer Decisions relating to day to
day matters - current assets, current liabilities and net working capital.
What are the three forms of business? - Answer sole proprietorship, partnership,
corporation
What is capital structure? - Answer the combination of debt and equity used to finance a
firm
What is the agency problem? - Answer Owners and management are separated.
Managers may act in their own best interest, which does not always maximise share
prices.
What are three potential solutions to the agency problem? - Answer Shareholders
annual meetings, Board of directors, compensation plan
What is an IPO? - Answer Initial Public Offering
What happens in the primary market? - Answer Firms issue new securities (bonds and
stocks) and sell to investors (IPO). Facilitated by investment bank.
What happens in the secondary market? - Answer Securities are traded by investors
without involvement of the firm.
How is interest on interest calculated? - Answer FV - simple interest earnt - principle
Firms will typically raise capital for their investment projects by doing what? - Answer
Selling stocks or bonds to investors
Which of the following is not an example of financial capital:
, a) Money in a cheque account
b) A bond issued by Microsoft.
c) A library card.
d) A share of stock issued by Facebook.
e) A credit card loan. - Answer A library card
The secondary market refers to:
A. the sale of securities faciliated by an investment bank
B. cash changing hands between the issuing firm and the investors
C. the sale of new financial assets by the issuing firm.
D. none of the above
E. all transactions on a stock exchange - Answer all transactions on a stock exchange
What is a pure discount loan? (write full def)
a. interest is paid periodically and principle is paid at maturity
b. interest and principle are paid as a lump sum at maturity
c. equal payments are made regularly, including a portion of principle and interest -
Answer interest and principle are paid as a lump sum at maturity
What is an interest only loan?
a. interest is paid periodically and principle is paid at maturity
b. interest and principle are paid as a lump sum at maturity
c. equal payments are made regularly, including a portion of principle and interest -
Answer interest is paid periodically and principle is paid at maturity
What is an amortised loan?
a. interest is paid periodically and principle is paid at maturity
b. interest and principle are paid as a lump sum at maturity
c. equal payments are made regularly, including a portion of principle and interest -
Answer equal payments are made regularly, including a portion of principle and interest
What loan payment structure do bonds use?
- interest only
