1. Considering the value of a financial instrument, the sooner the promised payment is made:
A. The less valuable is the promise to make it since time is valuable
B. The greater the risk, therefore the promise has greater value
C. The more valuable is the promise to make it
D. The less relevant is the likelihood that the payment will be made
2. A bond's yield to maturity will differ from its holding period return when
A. The coupon rate is less than the yield to maturity
B. The coupon rate is greater than the yield to maturity
C. The current yield is equal to the coupon rate
D. The bond is sold prior to its maturity.
3. What does a share of common stock represent?
A. A debt obligation.
B. A liability for the firm's debts.
C. Primary claim to a firm's earnings.
D. Part ownership of the firm.
4. Suppose a bond's rating moves from A to AA-. What should we expect?
A. We should expect the demand and yield for this bond to decrease, all other factors constant.
B. We should expect the demand and the yield for this bond to increase, all other factors constant.
C. We should expect the demand for this bond to decrease, and its yield to increase, all other factors constant.
D. We should expect both the demand and price of the bond to increase, all other factors constant.
5. The risk structure of interest rates says:
A. Interest rates on different bonds are not correlated.
B. Lower rated bonds will have lower yields
C. Lower rate bonds will have higher yields
D. Interest rates never compensate for risk
6. For any security, the bond rating measures:
A. The size of the coupon payment relative to the face value
B. The holding period return
C. The likelihood the lender/borrower will be repaid by the borrower/issuer
D. The size of the coupon rate relative to other interest rates
7. Consider a buyer of a futures contract for a Treasury bill. The buyer’s position
A. will gain value if the Treasury bill yield rises.
B. will gain value if the price of a Treasury bill falls.
C. will lose value if the price of a Treasury bill rises.
D. will gain value if the Treasury bill yield falls.
8. Option contracts that can be exercised ONLY at maturity are known as
A. out of the money options.
B. in the money options.
C. American options.
D. European options.
9. A business is considering buying a machine with an upfront cost of $10,000, but with an annual revenue stream of $2,000. In order to have a positive IRR, this machine would need to be in use for
A. over 5 five years.
B. between 2 and five years.
C. less than 2 years.
D. at least 10 years.
10. If an individual is concerned only about the time value of money, which of the follow options would s/he prefer?
A. $1000 today.
B. $2000 in 5 years, assuming an annual interest rate of 10%.
C. $2500 in 7 years, assuming an annual interest rate of 10%.
D. $1200 in one year, assuming an annual interest rate of 5%.