BMAL 590 BUSINESS FINANCE
EXAM QUESTIONS WITH
COMPLETE SOLUTIONS
Which of the following statements is correct? - Answer- Income bonds pay interest only
when the amount of the interest is actually earned by the company. Thus, these
securities cannot bankrupt a company and this makes them riskier to investors than
regular bonds
Which of the following statements concerning common stock and the investment
banking process is false? - Answer- Stockholders have the right to elect the firm's
directors, who in turn select the officers who manage the business. If stockholders are
dissatisfied with management's performance, an outside group may ask the
stockholders to vote for it in an effort to take control of the business. This action is called
a margin call
Which of the following statements is false? - Answer- The term Eurobond specifically
applies to any foreign bonds denominated in U.S. currency
A(n) ________ is generally obtained from a bank or insurance company and the
borrower agrees to make a series of payments consisting of interest and principal -
Answer- Term loan
A(n) ________ is a bond that pays no annual interest but is sold at a discount below
bar, thus providing compensation to investors in the form of capital appreciation -
Answer- Zero coupon bond
A protective feature on preferred stock that requires preferred dividends previously not
paid to be disbursed before any common stock dividends can be paid is called what? -
Answer- Cumulative dividends
A ________ is a financial instrument which gives the owner the right but not the
obligation to sell shares of stock at a specified price during a particular time period -
Answer- Put option
Which of the following is NOT an example of a financial asset? - Answer- Inventory
Which of the following is NOT a source of equity on a firm's balance sheet? - Answer-
Property, plant, and equipment
, A ________ is an agreement between two firms where one firm agrees to sell some of
its financial assets to another and then buy the financial assets back from that firm at a
later time - Answer- Repurchase agreement
Bond ratings of ________ and higher are considered investment grade - Answer- BBB
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
satisfies your uncle's criteria? - Answer- AAA bond with 5 years to maturity
If the yield curve is downward sloping, what is the yield to maturity on a 10-year
Treasury coupon bond, relative to that on a 1-year T-bond? - Answer- The yield on the
10-year bond is less than a yield on a 1-year bond
An inverted yield curve - Answer- Exists when short-term rates exceed long-term rates
If the expectations theory of the term structure of interest rates is correct, and if the
other term structure theories are invalid, and we observe a downward sloping yield
curve, which of the following is a true statement? - Answer- Investors expect short-term
rates to decrease in the future
Which of the following statements is most correct? - Answer- If the maturity risk
premium were zero and the rate of inflation were expected to increase in the future,
then the yield curve for U.S. Treasury securities would, other things held constant, have
an upward slope
Which of the following statements is correct? - Answer- Reinvestment rate risk is lower,
other things held constant, on long-term than short-term bonds
Which of the following is not one of the fundamental factors that affect the cost of
money? - Answer- Exchange rates
Most experts think that in the United States the real risk-free rate fluctuates between -
Answer- Two to four percent
Which of the following assets is the most liquid? - Answer- Cash
During recessions the demand for funds typically - Answer- Decreases
As the demand for fund increase, the demand curve will shift to the ________ resulting
in ________ market clearing interest rate - Answer- Right; higher
EXAM QUESTIONS WITH
COMPLETE SOLUTIONS
Which of the following statements is correct? - Answer- Income bonds pay interest only
when the amount of the interest is actually earned by the company. Thus, these
securities cannot bankrupt a company and this makes them riskier to investors than
regular bonds
Which of the following statements concerning common stock and the investment
banking process is false? - Answer- Stockholders have the right to elect the firm's
directors, who in turn select the officers who manage the business. If stockholders are
dissatisfied with management's performance, an outside group may ask the
stockholders to vote for it in an effort to take control of the business. This action is called
a margin call
Which of the following statements is false? - Answer- The term Eurobond specifically
applies to any foreign bonds denominated in U.S. currency
A(n) ________ is generally obtained from a bank or insurance company and the
borrower agrees to make a series of payments consisting of interest and principal -
Answer- Term loan
A(n) ________ is a bond that pays no annual interest but is sold at a discount below
bar, thus providing compensation to investors in the form of capital appreciation -
Answer- Zero coupon bond
A protective feature on preferred stock that requires preferred dividends previously not
paid to be disbursed before any common stock dividends can be paid is called what? -
Answer- Cumulative dividends
A ________ is a financial instrument which gives the owner the right but not the
obligation to sell shares of stock at a specified price during a particular time period -
Answer- Put option
Which of the following is NOT an example of a financial asset? - Answer- Inventory
Which of the following is NOT a source of equity on a firm's balance sheet? - Answer-
Property, plant, and equipment
, A ________ is an agreement between two firms where one firm agrees to sell some of
its financial assets to another and then buy the financial assets back from that firm at a
later time - Answer- Repurchase agreement
Bond ratings of ________ and higher are considered investment grade - Answer- BBB
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
satisfies your uncle's criteria? - Answer- AAA bond with 5 years to maturity
If the yield curve is downward sloping, what is the yield to maturity on a 10-year
Treasury coupon bond, relative to that on a 1-year T-bond? - Answer- The yield on the
10-year bond is less than a yield on a 1-year bond
An inverted yield curve - Answer- Exists when short-term rates exceed long-term rates
If the expectations theory of the term structure of interest rates is correct, and if the
other term structure theories are invalid, and we observe a downward sloping yield
curve, which of the following is a true statement? - Answer- Investors expect short-term
rates to decrease in the future
Which of the following statements is most correct? - Answer- If the maturity risk
premium were zero and the rate of inflation were expected to increase in the future,
then the yield curve for U.S. Treasury securities would, other things held constant, have
an upward slope
Which of the following statements is correct? - Answer- Reinvestment rate risk is lower,
other things held constant, on long-term than short-term bonds
Which of the following is not one of the fundamental factors that affect the cost of
money? - Answer- Exchange rates
Most experts think that in the United States the real risk-free rate fluctuates between -
Answer- Two to four percent
Which of the following assets is the most liquid? - Answer- Cash
During recessions the demand for funds typically - Answer- Decreases
As the demand for fund increase, the demand curve will shift to the ________ resulting
in ________ market clearing interest rate - Answer- Right; higher
