1|Page
PRINCIPLES OF FINANCE- D076 WGU EXAM
WITH CORRECT ANSWERS
Which component of the required rate of return takes into account the loss of
potential gain from other alternatives?-correct-answer-Opportunity cost
How is inflation calculated?-correct-answer-Inflation is calculated by determining
the rate at which the average price level of particular goods and services increases
over a period of time in an economy.
What is the relationship between risk and return?-correct-answer-The higher risk
an investor takes, the higher return the investor expects to receive.
What is the compensation for risk given to investors called?-correct-answer-Risk
premium is the compensation that investors take for the risk they have to bear.
Which type of interest rate is the rate at which invested money grows for a certain
period time?-correct-answer-Nominal rate
,2|Page
Which component of an interest rate is an indicator of inflation and opportunity
cost?-correct-answer-Risk-free rate
What is the name for a series of equal payments made at the end of consecutive
periods over a fixed length of time?-correct-answer-Ordinary annuity
If you invest $10,000 today and then $5,000 each year for the next 5 years into an
investment with an interest rate of 4%, you can withdraw $39,248.14 in 5 years.
What does $39,248.14 represent?-correct-answer-Future value
What is the name for the concept that a dollar today is worth more than a dollar
in the future?-correct-answer-Time value of money
You are considering purchasing a house for $250,000. You have two options to
finance it. One is a 20-year mortgage with an interest rate of 3.5%, and the other
is a 30-year mortgage with an interest rate of 3.5%. Which mortgage option
requires you to pay more in total interest?-correct-answer-A 30-year mortgage.
Even though the interest rate is the same, the longer the loan is, the more interest
you pay for the mortgage
,3|Page
Why does the time value of money play an important role in financial decision-
making?-correct-answer-Because the benefits of investments received at different
times are comparable only when you consider the time value of money. With the
time value of money, you can find today's value of future cash flows to compare
the costs and benefits of different investments.
Return-correct-answer-The gain or loss on an investment over some period of
time.
A hypothesized estimate of future returns under different scenarios based on
expectational data-correct-answer-An expected return
In 1980, the inflation rate was 5% and a particular investment gave a return of
15%. In 2010, the inflation rate was 5% and the same investment gave a return of
12%. In which year did stockholders gain greater purchasing power and why?-
correct-answer-1980 because the real rate was higher than in 2010. In order to
compare purchasing power, you have to find the real rates. The real rate is
nominal rate minus inflation. Therefore, the investment gave higher purchasing
power in 1980 than in 2010.
The word risk is used in many different contexts. How is risk defined in finance?-
correct-answer-The possibility that the realized or actual return will differ from
the expected return.
, 4|Page
What makes market risk different from firm-specific risk?-correct-answer-Market
risk cannot be diversified away, and firm-specific risk can. Market risk is inherent
in the economy as a whole and therefore cannot be diversified away.
Which statement accurately describes firm-specific risk?-correct-answer-Firm-
specific risk is the risk associated with problems that companies may face because
of lawsuits, labor problems, or management decisions, among other factors.
Which phrase accurately depicts what interest rate risk is?-correct-answer-An
example of market risk where the value of a bond is affected by changes in
interest rates
Which type of risk can be reduced by adding a variety of different assets into a
portfolio?-correct-answer-Firm-specific risk. Firm-specific risk can be diversified
away.
How is risk separation different from diversification?-correct-answer-Risk
separation involves dispersing assets geographically instead of concentrating them
in one location.
PRINCIPLES OF FINANCE- D076 WGU EXAM
WITH CORRECT ANSWERS
Which component of the required rate of return takes into account the loss of
potential gain from other alternatives?-correct-answer-Opportunity cost
How is inflation calculated?-correct-answer-Inflation is calculated by determining
the rate at which the average price level of particular goods and services increases
over a period of time in an economy.
What is the relationship between risk and return?-correct-answer-The higher risk
an investor takes, the higher return the investor expects to receive.
What is the compensation for risk given to investors called?-correct-answer-Risk
premium is the compensation that investors take for the risk they have to bear.
Which type of interest rate is the rate at which invested money grows for a certain
period time?-correct-answer-Nominal rate
,2|Page
Which component of an interest rate is an indicator of inflation and opportunity
cost?-correct-answer-Risk-free rate
What is the name for a series of equal payments made at the end of consecutive
periods over a fixed length of time?-correct-answer-Ordinary annuity
If you invest $10,000 today and then $5,000 each year for the next 5 years into an
investment with an interest rate of 4%, you can withdraw $39,248.14 in 5 years.
What does $39,248.14 represent?-correct-answer-Future value
What is the name for the concept that a dollar today is worth more than a dollar
in the future?-correct-answer-Time value of money
You are considering purchasing a house for $250,000. You have two options to
finance it. One is a 20-year mortgage with an interest rate of 3.5%, and the other
is a 30-year mortgage with an interest rate of 3.5%. Which mortgage option
requires you to pay more in total interest?-correct-answer-A 30-year mortgage.
Even though the interest rate is the same, the longer the loan is, the more interest
you pay for the mortgage
,3|Page
Why does the time value of money play an important role in financial decision-
making?-correct-answer-Because the benefits of investments received at different
times are comparable only when you consider the time value of money. With the
time value of money, you can find today's value of future cash flows to compare
the costs and benefits of different investments.
Return-correct-answer-The gain or loss on an investment over some period of
time.
A hypothesized estimate of future returns under different scenarios based on
expectational data-correct-answer-An expected return
In 1980, the inflation rate was 5% and a particular investment gave a return of
15%. In 2010, the inflation rate was 5% and the same investment gave a return of
12%. In which year did stockholders gain greater purchasing power and why?-
correct-answer-1980 because the real rate was higher than in 2010. In order to
compare purchasing power, you have to find the real rates. The real rate is
nominal rate minus inflation. Therefore, the investment gave higher purchasing
power in 1980 than in 2010.
The word risk is used in many different contexts. How is risk defined in finance?-
correct-answer-The possibility that the realized or actual return will differ from
the expected return.
, 4|Page
What makes market risk different from firm-specific risk?-correct-answer-Market
risk cannot be diversified away, and firm-specific risk can. Market risk is inherent
in the economy as a whole and therefore cannot be diversified away.
Which statement accurately describes firm-specific risk?-correct-answer-Firm-
specific risk is the risk associated with problems that companies may face because
of lawsuits, labor problems, or management decisions, among other factors.
Which phrase accurately depicts what interest rate risk is?-correct-answer-An
example of market risk where the value of a bond is affected by changes in
interest rates
Which type of risk can be reduced by adding a variety of different assets into a
portfolio?-correct-answer-Firm-specific risk. Firm-specific risk can be diversified
away.
How is risk separation different from diversification?-correct-answer-Risk
separation involves dispersing assets geographically instead of concentrating them
in one location.
