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web.groovymark@gmail.com
- December 23, 2024
Question 41
A bond that pays no periodic interest payments and is issued at a deep discount is called a:
- a) Municipal bond
- b) Callable bond
- c) Zero-coupon bond
- d) Convertible bond
Answer: c) Zero-coupon bond
Explanation: A zero-coupon bond does not pay periodic interest and is sold at a discount to its face value. The investor receives the face value at maturity, which includes the interest.
Question 42
Which of the following formulas calculates the current yield of a bond?
- a) Coupon payment / Face value
- b) Coupon payment / Market price
- c) Face value / Market price
- d) Coupon payment × Market price
Answer: b) Coupon payment / Market price
Explanation: The current yield of a bond is calculated by dividing the annual coupon payment by the bond’s current market price. It provides an estimate of the bond’s return based on its price.
Question 43
What does the debt-to-equity ratio measure?
- a) A company’s liquidity
- b) A company’s ability to pay short-term debt
- c) A company’s financial leverage
- d) A company’s profitability
Answer: c) A company’s financial leverage
Explanation: The debt-to-equity ratio measures a company’s leverage by comparing its total liabilities to its shareholders' equity. It reflects how much debt a company is using to finance its assets.
Question 44
If the risk-free rate is 3%, the expected return on the market is 8%, and a stock has a beta of 1.2, what is the expected return on the stock using CAPM?
- a) 6.0%
- b) 7.5%
- c) 9.0%
- d) 9.6%
Answer: d) 9.6%
Explanation: Using CAPM, the expected return is calculated as Risk-Free Rate + Beta × (Market Return - Risk-Free Rate). In this case, 3% + 1.2 × (8% - 3%) = 9.6%.
Question 45
What is the main benefit of diversification in a portfolio?
- a) It eliminates market risk
- b) It increases potential returns
- c) It reduces unsystematic risk
- d) It guarantees no loss
Answer: c) It reduces unsystematic risk
Explanation: Diversification reduces unsystematic risk, which is specific to individual investments. It does not eliminate market risk or guarantee returns but helps manage overall portfolio risk.
Question 46
If the market interest rate is 7% and a bond’s coupon rate is 5%, how will the bond likely be priced?
- a) At par value
- b) At a discount
- c) At a premium
- d) At face value
Answer: b) At a discount
Explanation: When the market interest rate is higher than the bond’s coupon rate, the bond will be priced at a discount because its interest payments are less attractive than newly issued bonds.
Question 47
What is the primary purpose of hedging?
- a) To increase potential profits
- b) To speculate on market movements
- c) To reduce or eliminate risk
- d) To increase leverage
Answer: c) To reduce or eliminate risk
Explanation: Hedging is a risk management strategy used to reduce or eliminate exposure to adverse price movements in assets. It is not aimed at increasing profits or leverage but rather protecting against losses.
Question 48
Which of the following securities represents a residual claim on a company’s assets?
- a) Bonds
- b) Preferred Stock
- c) Common Stock
- d) Debentures
Answer: c) Common Stock
Explanation: Common stockholders have a residual claim, meaning they are last in line to receive assets in the event of liquidation, after all debt and preferred stock obligations are met.
Question 49
What does the term “capital structure” refer to?
- a) The mix of a company’s assets and liabilities
- b) The amount of equity a company holds
- c) The combination of debt and equity used to finance a company
- d) The method used to allocate a company’s operating expenses
Answer: c) The combination of debt and equity used to finance a company
Explanation: Capital structure refers to the combination of debt and equity that a company uses to finance its operations and growth. It does not include operating expenses or solely assets and liabilities.
Question 50
A company purchases a machine for $200,000. The machine is expected to generate annual cash flows of $50,000 for 5 years. What is the payback period for this investment?
- a) 2 years
- b) 3 years
- c) 4 years
- d) 5 years
Answer: c) 4 years
Explanation: The payback period is calculated by dividing the initial investment by the annual cash inflows. In this case, $200,000 / $50,000 = 4 years.
