Page 1 of 180
Test bank for derivatives markets third edition by
robert l. Mcdonald EXAM ALL 300 RANDOMIZED
PRACTICE QUESTIONS WITH ANSWERS &
RATIONALES LATEST VERSION THIS YEAR
1. What is the difference between a financial asset and a tangible asset?
A) A tangible asset is a claim to future cash; a financial asset has physical properties
B) A tangible asset's value depends on particular physical properties; a financial asset's value is a claim to
future cash
C) There is no difference between them
D) Financial assets are always more valuable than tangible assets
Answer: B Tangible assets derive value from their physical properties (e.g., gold, real estate), while
financial assets represent claims to future cash flows (e.g., stocks, bonds).
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2. What is the difference between the claim of a debt holder of Chevron Corporation and a common
stockholder of Chevron Corporation?
A) Debt holders and stockholders have equal claims
B) Debt holders will be paid first; common stockholders receive the remaining amount
C) Common stockholders are paid first
D) Debt holders receive dividends; stockholders receive interest
Answer: B Debt holders have priority over stockholders in the event of bankruptcy or liquidation.
Stockholders are residual claimants who receive what remains after debt obligations are satisfied.
3. What is the basic principle followed in determining the value of a financial asset?
A) The price is equal to its book value
B) The price is equal to the present value of its expected cash flow, even if the cash flow is not known
with certainty
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C) The price is determined by the issuer's credit rating only
D) The price is equal to the par value
Answer: B The fundamental valuation principle is that an asset's price equals the present value of its
expected future cash flows, discounted at an appropriate rate that reflects risk.
4. Why is it difficult to determine the cash flow of a financial asset?
A) Cash flows are always fixed and known
B) Cash flow is influenced by a large number of factors that could change in the future
C) Issuers never disclose cash flow information
D) Financial assets do not generate cash flows
Answer: B Cash flows are uncertain because they depend on numerous factors—some controlled by the
issuer, others outside their control—making accurate prediction challenging.
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5. What factors affect the interest rate used to discount the cash flow expected from a financial asset?
A) Purchasing power risk only
B) Credit risk only
C) Currency risk only
D) Purchasing power risk, credit risk, and currency risk
Answer: D The discount rate reflects purchasing power risk (inflation), credit risk (default risk), and
currency risk (exchange rate fluctuations).
6. Why are the characteristics of an issuer important in determining the price of a financial asset?
A) They determine the asset's physical properties
B) They collectively determine the risk level, which impacts expected cash flow and discount rate
C) They determine the asset's maturity date
D) They have no impact on pricing
Test bank for derivatives markets third edition by
robert l. Mcdonald EXAM ALL 300 RANDOMIZED
PRACTICE QUESTIONS WITH ANSWERS &
RATIONALES LATEST VERSION THIS YEAR
1. What is the difference between a financial asset and a tangible asset?
A) A tangible asset is a claim to future cash; a financial asset has physical properties
B) A tangible asset's value depends on particular physical properties; a financial asset's value is a claim to
future cash
C) There is no difference between them
D) Financial assets are always more valuable than tangible assets
Answer: B Tangible assets derive value from their physical properties (e.g., gold, real estate), while
financial assets represent claims to future cash flows (e.g., stocks, bonds).
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2. What is the difference between the claim of a debt holder of Chevron Corporation and a common
stockholder of Chevron Corporation?
A) Debt holders and stockholders have equal claims
B) Debt holders will be paid first; common stockholders receive the remaining amount
C) Common stockholders are paid first
D) Debt holders receive dividends; stockholders receive interest
Answer: B Debt holders have priority over stockholders in the event of bankruptcy or liquidation.
Stockholders are residual claimants who receive what remains after debt obligations are satisfied.
3. What is the basic principle followed in determining the value of a financial asset?
A) The price is equal to its book value
B) The price is equal to the present value of its expected cash flow, even if the cash flow is not known
with certainty
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C) The price is determined by the issuer's credit rating only
D) The price is equal to the par value
Answer: B The fundamental valuation principle is that an asset's price equals the present value of its
expected future cash flows, discounted at an appropriate rate that reflects risk.
4. Why is it difficult to determine the cash flow of a financial asset?
A) Cash flows are always fixed and known
B) Cash flow is influenced by a large number of factors that could change in the future
C) Issuers never disclose cash flow information
D) Financial assets do not generate cash flows
Answer: B Cash flows are uncertain because they depend on numerous factors—some controlled by the
issuer, others outside their control—making accurate prediction challenging.
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5. What factors affect the interest rate used to discount the cash flow expected from a financial asset?
A) Purchasing power risk only
B) Credit risk only
C) Currency risk only
D) Purchasing power risk, credit risk, and currency risk
Answer: D The discount rate reflects purchasing power risk (inflation), credit risk (default risk), and
currency risk (exchange rate fluctuations).
6. Why are the characteristics of an issuer important in determining the price of a financial asset?
A) They determine the asset's physical properties
B) They collectively determine the risk level, which impacts expected cash flow and discount rate
C) They determine the asset's maturity date
D) They have no impact on pricing
