BMAL 590 Business Finance Exam
Questions and Answers
Which of the following is not generally considered to be an advantage of term loans
over publicly issued bonds? - Answer-Liquidity, or how easily investors can trade them
in the secondary markets.
Which of the following are generally considered to be an advantage of term loans over
publicly issued bonds? - Answer-Lower flotation (issuance) costs.
Speed, or how long it takes to bring the issue to market.
Flexibility, or the ability to adjust the bond's terms after it has been issued.
Which of the following statements is false? - Answer-The term Eurobond specifically
applies to any foreign bonds denominated in U.S. currency.
Which of the following is NOT an example of a financial asset? - Answer-inventory
Which of the following is an example of a financial asset? - Answer-convertible bond
certificate of deposit
preferred stock
Which of the following is NOT a source of equity on a firm's balance sheet? - Answer-
property, plant, and equipment
Which of the following is a source of equity on a firm's balance sheet? - Answer-
additional paid-in capital
retained earnings
common stock
Which of the following statements is most correct? Other things held constant, _______
- Answer-the "liquidity preference theory" would generally lead to an upward sloping
yield curve.
Your uncle would like to restrict his interest rate risk and his default risk, but he still
would like to invest in corporate bonds. Which of the possible bonds listed below best
satisfies your uncle's criteria? - Answer-AAA bond with 5 years to maturity.
Which of the following is not one of the fundamental factors that affect the cost of
money? - Answer-Exchange rates
,Which of the following is one of the fundamental factors that affect the cost of money? -
Answer-production opportunities
time preferences for consumption
risk
the skill level of the economy's labor force.
Which of the following assets is the most liquid? - Answer-cash
Which of the following statements is correct? - Answer-Large costs occur at the end of
nuclear power plants' lives because these plants have to be closed down, and shutdown
costs are high due to the difficulty of handling radioactive materials. For this reason, it is
possible that a nuclear plant project could have two IRRs.
Which of the following methods involves calculating an average beta for firms in a
similar business and then applying that beta to determine the beta of its own project? -
Answer-Pure play method
______ projects are a set of projects where the acceptance of one project means that
other projects cannot be accepted. - Answer-Mutually exclusive
Which of the following capital budgeting techniques does not adjust for the riskiness of
the cash flows? - Answer-Payback
two general categories into which we classify assets: - Answer-real assets and financial
assets
real asset - Answer-sometimes is called a physical asset because it typically is a
tangible (that is, physically observable) item, such as a computer, a building, or an
inventory item
financial asset - Answer-it's intangible because it represents an expectation, or promise,
that future cash flows will be paid to the owner of such an asset.
derivative - Answer-a contract that derives its value from the performance of an
underlying entity such as asset, an index, or an interest rate. Common derivatives
include forwards, futures, options, and swaps.
Some derivatives can be quite exotic and complicated, such as credit default obligations
(CDOs) that were involved in the 2008-09 financial crisis.
Typical Financial Assets Issued or Held By Corporations - Answer-Treasury bills
Repurchase agreements
Federal funds
Bankers acceptances
Commercial paper
Eurodollars
, Negotiable certificate of deposit
Money marked funds
Municipal bonds
Term loans
Corporate bonds
Preferred stock
Common stock
Treasury bills - Answer-Short-term debt obligation backed by the U.S. government with
a maturity of less than one year
Repurchase agreements - Answer-Contract for a future transaction between two parties
to be concluded on a known deal date
Federal funds - Answer-Overnight borrowings between banks and other entities to
maintain their bank reserves at the Federal Reserve
Bankers acceptances - Answer-Promised future payment which is accepted and
guaranteed by a bank and drawn on a deposit at the bank
Commercial paper - Answer-Unsecured promissory note with a fixed maturity of not
more than 270 days
Eurodollars - Answer-Time deposits denominated in U.S. dollars at banks outside of the
United States
Negotiable certificate of deposit - Answer-CD with a face value of $100,000 or more,
guaranteed by a bank, that cannot be cashed in before maturity
Money marked funds - Answer-Open-ended mutual fund that invests in short-term debt
securities such as U.S. Treasury bills and commercial paper
Treasury notes and bonds - Answer-U.S. Treasury securities with maturities of at least
one year
Municipal bonds - Answer-Long-term debt issued by a local government or agency,
generally used to finance public projects
Term loans - Answer-Loan from a bank for a specific amount that has a specified
repayment schedule
Corporate bonds - Answer-Long-term debt issued by a corporation and sold to
investors, backed only by the corporation's ability to pay
Preferred stock - Answer-Represents a class of ownership in a corporation with a higher
claim on its assets and earnings than commmon stock
Questions and Answers
Which of the following is not generally considered to be an advantage of term loans
over publicly issued bonds? - Answer-Liquidity, or how easily investors can trade them
in the secondary markets.
Which of the following are generally considered to be an advantage of term loans over
publicly issued bonds? - Answer-Lower flotation (issuance) costs.
Speed, or how long it takes to bring the issue to market.
Flexibility, or the ability to adjust the bond's terms after it has been issued.
Which of the following statements is false? - Answer-The term Eurobond specifically
applies to any foreign bonds denominated in U.S. currency.
Which of the following is NOT an example of a financial asset? - Answer-inventory
Which of the following is an example of a financial asset? - Answer-convertible bond
certificate of deposit
preferred stock
Which of the following is NOT a source of equity on a firm's balance sheet? - Answer-
property, plant, and equipment
Which of the following is a source of equity on a firm's balance sheet? - Answer-
additional paid-in capital
retained earnings
common stock
Which of the following statements is most correct? Other things held constant, _______
- Answer-the "liquidity preference theory" would generally lead to an upward sloping
yield curve.
Your uncle would like to restrict his interest rate risk and his default risk, but he still
would like to invest in corporate bonds. Which of the possible bonds listed below best
satisfies your uncle's criteria? - Answer-AAA bond with 5 years to maturity.
Which of the following is not one of the fundamental factors that affect the cost of
money? - Answer-Exchange rates
,Which of the following is one of the fundamental factors that affect the cost of money? -
Answer-production opportunities
time preferences for consumption
risk
the skill level of the economy's labor force.
Which of the following assets is the most liquid? - Answer-cash
Which of the following statements is correct? - Answer-Large costs occur at the end of
nuclear power plants' lives because these plants have to be closed down, and shutdown
costs are high due to the difficulty of handling radioactive materials. For this reason, it is
possible that a nuclear plant project could have two IRRs.
Which of the following methods involves calculating an average beta for firms in a
similar business and then applying that beta to determine the beta of its own project? -
Answer-Pure play method
______ projects are a set of projects where the acceptance of one project means that
other projects cannot be accepted. - Answer-Mutually exclusive
Which of the following capital budgeting techniques does not adjust for the riskiness of
the cash flows? - Answer-Payback
two general categories into which we classify assets: - Answer-real assets and financial
assets
real asset - Answer-sometimes is called a physical asset because it typically is a
tangible (that is, physically observable) item, such as a computer, a building, or an
inventory item
financial asset - Answer-it's intangible because it represents an expectation, or promise,
that future cash flows will be paid to the owner of such an asset.
derivative - Answer-a contract that derives its value from the performance of an
underlying entity such as asset, an index, or an interest rate. Common derivatives
include forwards, futures, options, and swaps.
Some derivatives can be quite exotic and complicated, such as credit default obligations
(CDOs) that were involved in the 2008-09 financial crisis.
Typical Financial Assets Issued or Held By Corporations - Answer-Treasury bills
Repurchase agreements
Federal funds
Bankers acceptances
Commercial paper
Eurodollars
, Negotiable certificate of deposit
Money marked funds
Municipal bonds
Term loans
Corporate bonds
Preferred stock
Common stock
Treasury bills - Answer-Short-term debt obligation backed by the U.S. government with
a maturity of less than one year
Repurchase agreements - Answer-Contract for a future transaction between two parties
to be concluded on a known deal date
Federal funds - Answer-Overnight borrowings between banks and other entities to
maintain their bank reserves at the Federal Reserve
Bankers acceptances - Answer-Promised future payment which is accepted and
guaranteed by a bank and drawn on a deposit at the bank
Commercial paper - Answer-Unsecured promissory note with a fixed maturity of not
more than 270 days
Eurodollars - Answer-Time deposits denominated in U.S. dollars at banks outside of the
United States
Negotiable certificate of deposit - Answer-CD with a face value of $100,000 or more,
guaranteed by a bank, that cannot be cashed in before maturity
Money marked funds - Answer-Open-ended mutual fund that invests in short-term debt
securities such as U.S. Treasury bills and commercial paper
Treasury notes and bonds - Answer-U.S. Treasury securities with maturities of at least
one year
Municipal bonds - Answer-Long-term debt issued by a local government or agency,
generally used to finance public projects
Term loans - Answer-Loan from a bank for a specific amount that has a specified
repayment schedule
Corporate bonds - Answer-Long-term debt issued by a corporation and sold to
investors, backed only by the corporation's ability to pay
Preferred stock - Answer-Represents a class of ownership in a corporation with a higher
claim on its assets and earnings than commmon stock
