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web.groovymark@gmail.com
- November 27, 2024
Question 01
Why would bondholders set bond contracts that are very strict to deter the company from taking on risky projects?
a) They want to earn higher returns
b) They want to ensure the company grows rapidly
c) Bondholders are primarily interested in ensuring repayment of their loan
d) They want to increase the company’s debt
Correct Answer: c) Bondholders are primarily interested in ensuring repayment of their loan
Explanation: If a company takes on a riskier project, there is a higher probability of the project being unsuccessful, which could result in bondholders not receiving their loan back.
Question 02
Which kind of projects are bondholders interested in?
a) Risky projects that could yield high returns
b) Safe projects with a higher chance of providing compensation
c) Projects that involve taking on more debt
d) Short-term speculative projects
Correct Answer:b) Safe projects with a higher chance of providing compensation
Explanation: Bondholders provide money for a company for a certain period of time and want to ensure that companies can repay their investment safely.
Question 03
What is the term for the percentage of the principal that a lender charges a borrower for the use of assets?
a) Interest rate
b) Dividend yield
c) Risk premium
d) Profit margin
Correct Answer: a) Interest rate
Explanation: The interest rate is the percentage charged by a lender for the use of money.
Question 04
How is the interest rate expressed?
a) As a fraction
b) As a percentage
c) As a ratio
d) As a multiple
Correct Answer: b) As a percentage
Explanation: Interest is the percentage of the principal that a lender receives or a borrower pays for using the money.
Question 05
What is the main purpose of charging interest?
a) It allows lenders to earn a profit
b) It helps borrowers reduce debt
c) It allows borrowers to use the assets of another entity to achieve their goals
d) It reduces inflation
Correct Answer:c) It allows borrowers to use the assets of another entity to achieve their goals
Explanation: Borrowers must pay to use funds that do not belong to them, and this payment is the interest rate.
Question 06
What is a component of the required rate of return?
a) Inflation
b) Risk
c) Opportunity cost
d) All of the above
Correct Answer: d) All of the above
Explanation: The required rate of return is composed of opportunity cost, risk, and inflation.
Question 07
Why would a long-term investment require a higher rate of return?
a) There is greater risk involved and a higher opportunity cost
b) The project is risk-free
c) It involves less liquidity risk
d) It is more easily managed
Correct Answer: a) There is greater risk involved and a higher opportunity cost
Explanation: There is greater risk because long-term investments have more uncertainty, and the money is tied up for a longer period.
Question 08
Why does an increased demand for goods and services cause inflation?
a) The supply increases
b) An increase in demand often causes an insufficient supply, leading to price increases
c) Workers request lower wages
d) Supply and demand are balanced
Correct Answer:b) An increase in demand often causes an insufficient supply, leading to price increases
Explanation: When demand outstrips supply, prices rise, leading to inflation.
Question 09
What happens to prices in a market in which there is inflation?
a) Prices decrease
b) Prices stay the same
c) Prices rise
d) Prices fluctuate randomly
Correct Answer: c) Prices rise
Explanation: Inflation causes an increase in prices, as demand increases and supply struggles to meet demand.
Question 10
What is the compensation for risk given to investors called?
a) Interest rate
b) Yield
c) Risk premium
d) Opportunity cost
Correct Answer: c) Risk premium
Explanation: The risk premium is the compensation investors receive for taking on higher risk.
Question 11
Which component of an interest rate indicates inflation and opportunity cost?
a) Nominal rate
b) Real rate
c) Risk-free rate
d) Dividend yield
Correct Answer: c) Risk-free rate
Explanation: The risk-free rate measures inflation and opportunity cost without considering additional risk.
Question 12
What does the CFO do?
a) Manages day-to-day operations
b) Oversees production decisions
c) Is responsible for all the financial decisions made by the firm
d) Handles legal matters for the firm
Correct Answer: c) Is responsible for all the financial decisions made by the firm
Explanation: The CFO, or Chief Financial Officer, is responsible for making financial decisions for the firm, overseeing financial analysis, and ensuring financial stability.
Question 13
Which task does a financial manager perform when assessing the costs and benefits of potential projects?
a) Making financing decisions
b) Managing working capital
c) Making investment decisions
d) Preparing financial statements
Correct Answer: c) Making investment decisions
Explanation: A financial manager assesses the costs and benefits of potential projects to make informed investment decisions that will maximise shareholder wealth.
Question 14
Which financial career focuses on investing capital into firms whose shares are not currently sold on any public stock exchange?
a) Corporate finance
b) Investment banking
c) Private equity
d) Accounting
Correct Answer: c) Private equity
Explanation: Private equity focuses on investing in privately held companies that are not traded on public stock exchanges, often with the aim of improving these companies and selling them for a profit.
Question 15
Which task does a financial manager perform when choosing to obtain a loan to purchase a piece of equipment for a new project?
a) Making investment decisions
b) Managing working capital
c) Preparing financial statements
d) Making financing decisions
Correct Answer: d) Making financing decisions
Explanation: When a financial manager chooses to obtain a loan to finance a project, they are making a financing decision about where to source funds for company needs.
Question 16
What are the three most important types of securities?
a) Corporate bonds, Treasury bonds, and stocks
b) Bank loans, Treasury bonds, and mutual funds
c) Real estate, private equity, and corporate bonds
d) Corporate bonds, Treasury bonds, and derivatives
Correct Answer: a) Corporate bonds, Treasury bonds, and stocks
Explanation: The three most important types of securities in financial markets are corporate bonds, Treasury bonds, and stocks, as they represent common investment vehicles for raising capital.
Question 17
Why does the SEC oversee financial markets?
a) To prevent companies from issuing too many shares
b) To manage the economy
c) To protect investors and ensure fair practices
d) To provide tax benefits
Correct Answer: c) To protect investors and ensure fair practices
Explanation: The SEC (Securities and Exchange Commission) is responsible for protecting investors by ensuring transparency and fairness in financial markets.
Question 18
What are the purposes of financial markets?
a) To create new types of currencies
b) To provide liquidity and determine prices
c) To regulate monetary policy
d) To issue loans to the public
Correct Answer: b) To provide liquidity and determine prices
Explanation: Financial markets facilitate the buying and selling of financial assets, providing liquidity for investors and helping to determine the price of those assets.
Question 19
In which financial market are securities such as stocks and bonds traded after their initial issuance?
a) Primary market
b) Money market
c) Secondary market
d) Derivatives market
Correct Answer: c) Secondary market
Explanation: Securities like stocks and bonds are traded among investors in the secondary market after they have been initially issued in the primary market.
Question 20
What kind of market primarily allows institutions to borrow and lend in the short term?
a) Primary market
b) Money market
c) Stock market
d) Derivatives market
Correct Answer: b) Money market
Explanation: The money market is a segment of the financial market where short-term borrowing and lending occur, typically for periods of one year or less.
