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Finance Flashcards

Personal Finance: Chapter 2: Career Planning

Which of the following is likely to be the largest cost of withdrawing the funds from an employer-based retirement plan when you change jobs prior to retirement?A. the ten percent penalty for early withdrawal B. the taxes you must pay on the withdrawalC. the lost future growth if the funds had been left on deposit D. the penalty assessed by the employer C. the lost future growth if the funds had been left on deposit
Which of the following persons can assist your career advancement for a fee?A. sponsorB. mentor C. reference D. career coach D. career coach
_____ are topics and activities that engage your attention.A. professional interests B. career plans C. career goals D. professional abilities A. professional interests
In preparation for a job interview, you should?A. B. C. anticipate interview questions and prepare response D. C. anticipate interview questions and prepare response
When comparing the buying power of a salary offer of $52,000 in Boston with a $49,000 offer in Los Angeles, the Boston salary offer would buy ______ of goods and services in Los Angeles, assuming the index was 130.6 for Boston and 114.9 for Los Angeles.A. $55,695B. $45,748C. $43,109D. $59,105 B. $45,748
A ________ is the most important part of your employment search. A. cover letter B. job application C. job interview D. reference letter C. job interview
After hiring an employee, the law requires to do all of the following except?A. B.C.D. pay all of the employee’s health care expenses D. pay all of the employee’s health care expenses
Your ______ determines the unique approach you take to working with and regarding to your job requirements, surroundings, and associates.A. values B. work-style personality C. aptitudes D. interest inventory B. work-style personality
To assign monetary value to employee benefits, you can place a market value on the benefit or calculate the _____ value of the benefit.A. present B. future C. index D. physical B. future
A _______ is powerfully positioned champion who advocates on a job protege’s behalf and guides the protege toward key players and assignments.A. mentor B. sponsor C. interneeD. career coach B. sponsor
Which of the following resources would be least helpful in your job search?A. classified advertisements B. career fairs C. information from professional friends and acquaintances D. employment agencies A. classified advertisements
When changing employers, wisest options for the money you have in your current employee-sponsered retirement plan typically involves all but which of the following?A. moving the balance to an IRA rollover account B. transferring the money to your employer’s 401(k) plan C. leaving the money in your old employer’s planD. withdrawing and spending the money D. withdrawing and spending the money
Popular formats for resumes include all of the following except?A. skills formatB. chronological format C. salary formatD. functional format C. salary format
When comparing the buying power of a salary offer of $50,000 in Boston with a $53,000 offer in Los Angeles, the Los Angeles salary offer could buy _____ of goods and services in Boston assuming the index of 130.6 for Boston and 114.9 for Los Angeles?A. $56,832B. $46,628 C. $60,241D. $43,989 C. $60,241
Which of the following describes the progression from entry level of position to higher levels of pay, skill, responsibility, or authority?A. career plan B. career ladder C. employment patternD. interest inventory B. career ladder
The act of recommending someone to another for possible employment is called a?A. internship B. mentor C. referral D. cover letter C. referral
A _____ is one where a worker is expected to represent their employer on call day and night?A. career B. STEM career C. no-limits job D. internship C. no-limits job
The ______ is a highly regarded interest inventory. A. stanford-binest assessment B. likert inventory C. simpson test of preferences D. strong interest inventory D. strong interest inventory
A _________ is an experienced person, such as a coworker, who offers friendly career-related advice, guidance, and coaching to a less experiences worker. A. mentor B. sponsor C. internee D. career coach A. mentor
College majors in science, technology, engineering and mathematics are?A. declining in importance among employersB. are among only a few that pay good salaries upon graduation dayC. referred to STEM majors D. less attractive to employers that vague majors that imply a broad range of skills C. referred to STEM majors
All are examples of non salary benefits except?A. paid sick leaveB. bonusC. child careD. tuition reimbursement B. bonus
Websites developed to helping employers find suitable new employees by providing job listings, job sites, job search tips, job search engines and the possible posting of resumes are called?A. job boardsB. career blogs C. career fairs D. job posts a. job boards
All of the following would be considered wise moves in career planning except?A. learning as much as possible about a company before your interview B. assuming that your need for higher education is finished once you obtain a job in your chosen fieldC. transferring your 401(k) to your new employers plan when you change jobs D. continued participation in your previous employers health care plan until you are covered by a new employers plan B. assuming that your need for higher education is finished once you obtain a job in your chosen field
To advance you career, you should?A. stay alert to what is happening in your career fieldB. both volunteer for new assignments and stay alert to what is happening in your career field C. volunteer for new assignments D. avoid outside activities such as coaching your child’s soccer team B. both volunteer for new assignments and stay alert to what is happening in your career field
It is especially important to use key phrases when preparing your resume because?A. computer software is typically used to scan resumes and select better qualified candidates B. it saves time when writing your resume C. you want to show that you are well educated D. many employers will be impressed with your vocabulary A. computer software is typically used to scan resumes and select better qualified candidates
According to the U.S. Census Bureau a person with a bachelors degree earns about how much more per year than someone with a high school diploma?A. $56,000B. $16,000C. $34,000D. $26,000 B. $16,000
According to the U.S. Census Bureau a person with an advanced degree earns about how much more than someone with a bachelors degree? A. $34,000B. $16,000C. $23,000D. $56,000 A. $34,000
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Finance Flashcards

Financial Management (1)

What is generally the largest source of short-term credit for small firms Trade Credit
Trade credit may be used to finance a major part of the firm’s working capital when: the firm extends less liberal credit terms than the supplier.
LIBOR is an interest rate paid on deposits of US dollars in the London market.
A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes its credit terms to 2/20, net 90. What change might be expected on the balance sheets of its customers? Increased payables and decreased bank loans.
In determining the cost of bank financing, which is the important factor? Annual Rate
The bank rate is determined by: the Bank of Canada overnight rate.
Financial managers may prefer financial futures markets in the United States to the Montreal Futures Exchange because of: greater liquidity
Sears Canada Receivables Trust receives a better credit rating than Sears Canada because: credit card receivables have a low default rate.
Holland Construction Co. has an outstanding 180-day bank loan of $400,000 at an annual interest rate of 9.5%. The company is required to maintain a 15% compensating balance in its chequing account. What is the annual interest cost on the loan? Assume the company would not normally maintain this average amount. 11.18%
Which of the following is not a characteristic of commercial paper? One-to-two year maturity.
The extent to which inventory financing may be used depends on: how perishable the goods are.
Which of the following is not a method for lenders to control pledged inventory Factoring
Multinational firms have found that they can lower borrowing costs: by borrowing foreign currencies through foreign subsidiaries at rates lower than the Canadian prime and then converting these foreign loans into dollars.
Bank loans to business firms: may require compensating balances.
The cost of not taking the discount on trade credit of 3/10, net 30 is equal to: 56.44%.
Ms. Smith borrowed $1,250 at an 11% stated rate of interest and was to pay back the installment loan in 24 monthly payments. What is her annual rate of interest? 11.60%
If Analog computers can borrow at 9.5% for 3 years, what is the annual rate of interest on an $800,000 loan where a 15% compensating balance is required? 11.18%
The financial futures market: allows for the trading of a financial instruments at a future point in time.
The prime rate: is affected by economic and political factors.
Bank term loans are offered to superior credit applicants.
Firms exposed to the risk of interest rate changes may reduce that risk by: hedging in the financial futures market.
A firm has invested in corporate bonds; it may engage in a financial futures contract in order to protect itself from: rising interest rates
Other things being equal, an increase in the number of days that a commercial bank loan is outstanding will mean: an increase in the dollar amount of the interest.
When calculating a loan with a 20% compensating balance a firm would borrow ____ in order to have available funds of $200,000. $250,000
Commercial paper that is sold without going through a broker or dealer is known as: direct paper.
Commercial paper that is sold without the use of an actual paper certificate is known as: book-entry paper
Accounts receivable may be used as a source of financing by: factoring the receivables to a finance company.
Which method of controlling pledged inventory provides the greatest degree of security to the lender? Warehousing
A term loan is usually characterized by: monthly or quarterly instalment payments.
The required compensating balance is usually computed as a: percentage of customer loans outstanding.
Which of the following is not a true statement about commercial paper? Dealer paper is sold directly to the lender by a finance company.
Which of the following best describes the benefits to the borrower of selling asset backed securities? The asset-backed security may carry a better credit rating.
Compensating balances: are used by banks as a substitute for charging service fees.
Securitized paper: is backed by a variety of assets.
After treasury bills, the largest outstanding short-term security is: bankers’ acceptances.
The London Interbank Offered Rate (LIBOR): is the rate used when banks lend to each other.
A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes its credit terms to 3.5/9, net 25. What change might be expected on the balance sheets of its customers? Decreased payables and increased bank loans.
Francis Construction Co. has an outstanding 180-day bank loan of $600,000 at an annual interest rate of 8%. The company is required to maintain a 20% compensating balance in its chequing account. What is the annual interest cost on the loan? Assume the company would not normally maintain this average amount. 10.0%
Which of the following is a characteristic of commercial paper? Issued by large firms.
The cost of forgoing the discount on trade credit of 1/10, net 30 is equal to 18.43%
Bank loans to business firms: are preferred by the banker to be self-liquidating.
Mrs. Robinson borrows $5,000 for 90 days and pays $80 interest. What is her annual rate of interest? 6.49%
Mr. Phelps borrows $3,000 for 30 days and pays $80 interest. What is his annual rate of interest? 32.44%
The bank rate: is the rate that the Bank of Canada charges Chartered banks.
The London Interbank Offered Rate (LIBOR): (2) often is lower than the domestic prime rate.(2)
You are considering buying a new big screen TV from the BIG Electronics Co. BIG has offered to finance your purchase by extending credit to you. The terms of the credit are 12 easy monthly payments of $95. If you choose to finance this purchase, rather than pay the cash price of $850, what would your annual interest on this loan be? 57.99%
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Finance Flashcards

Personal Finance UNIT 2

“free” items only cost the company that gives them away false
entrepreneurial ability refers to the human resource of finding resources, making business decision, and creating new products true
the new york stock exchange is an example of what type of stock market physical
a balanced economy generally has which economic stance neutral
the NASDAQ features an open outcry false
what is a sort of auction for stocks in which traders verbally submit their offers open outcry
what is true about economic resources they are limited
what is true about the stock market even non investors are influenced by it
a share of ownership in a company is known as stock
what is a benefit of stock markets they create jobs, they allow companies to generate income, they allow individuals to invest money and create more money
what is the governmental allocation and collection of money within the state fiscal policy
governments collect money through what taxes, bonds, selling resources
While we talk about the stock market as if it were one big entity, the reality is that there are many stock markets around the world true
the most common way for government to raise money is through taxes true
why do most companies sell shares of stock to generate income for the company
includes natural and manufactured resources that go into products and services economic resources
economic choices where resources could have been used to create another item for another purpose opportunity costs
the buying and selling of stocks trading
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Finance Flashcards

Chapter 19- International Finance

Balance of Payment Accounts Record a country’s international trading, borrowing, and lending1) Current account2) Capital and finance account3) Official settlements account*The sum of these three accounts will always equal zero
Current Account Records receipts from the sale of goods and services to other countries (exports), minus payments for goods an services bought from other countries (imports), plus the net amount of interest and transfers (such as foreign aid payments) received from and paid to other countries*Net exports + Net interest + Net transfers
Capital and Financial Account Records foreign investment in the United States minus U.S. investment abroad*Net investment + [Other] net investment + Statistical Discrepancy
Official Settlements Account Records the changes in the U.S. official reserves*Official settlements account balance
U.S. Official Reserves The government’s holdings of foreign currency*If reserves increase, the official settlements account balance is negative; if reserves decrease, the official settlements account balance is positive(holding foreign money is like investing abroad)
Components of the Balance of Payments Accounts Current Account:Exports = ( + ) > like income from workImports = ( – ) > like expenditures on goods and servicesNet interest = ( +/- )Net transfers = ( +/- )Capital and Financial Account:Foreign Investment in the U.S. = ( + ) > like income from investmentU.S. Investment Abroad = ( – )Other net Foreign Investment in the U.S. = ( +/- ) > like taking out a mortgageStatistical Discrepancy = ( +/- )Official Settlements Account:Official Settlements Account Balance = ( +/- ) > like a change in one’s bank account
U.S. Balance of Payments Historically 1) Current account deficit during the 1980s (capital and financial account surplus)2) Near-zero balance in the recession of the early 1990s3) Current account deficit growing larger until 2006 (capital and financial account surplus growing larger)4) Current account deficit shrinking since 2006 (capital and financial account surplus shrinking)5) Official settlements balance changes very slightly, and is always at a near-zero deficit/surplus
U.S. Balance of Payments in 2012 Current Account:Exports of goods and services = +$2,211 billionImports of goods and services = -$2,745 billionNet interest = +$224 billionNet transfers = -$130 billionCurrent account balance = -$440 billionCapital and Financial Account:Foreign investment in the United States = +$544 billionU.S. investment abroad = -$98 billionOther net foreign investment in the United States = +$4 billionStatistical discrepancy = -$6 billionCapital and financial account balance = +$444 billionOfficial Settlements Account:Official settlements account balance = -$4 billion
Net Borrower A country that is borrowing more from the rest of the world than it is lending to the rest of the world*Starting in 1983 and continuing through 1987; borrowing was zero in 1991; increased through 2006 then started decreasing- Average net foreign borrowing by the U.S. between 1983 and 2012 was $306 billion a year
Net Lender A country that is lending more to the rest of the world than it is borrowing from the rest of the world *U.S. throughout the 1960’s and 1970’s-Oil rich countries such as Saudi Arabia
Debtor Nation A country that during its entire history has borrowed more from the rest of the world than it has lent to the rest of the world (national stock of foreign investment is low)-Based on interest payments
Creditor Nation A country that during its entire history has invested more in the rest of the world than other countries have investment in that country-Based on investment(investing ≠ lending)
Flows and Stocks Flows = borrowing and lending (per unit of time)Stocks = debts (owed at a point of time)Following a string of current account deficits, the U.S. became a debtor nation again in 1989 (only other time was the 1800s)*Common in developing nations (“Third World Debt Crisis”)Borrowing is bad if is financing consumption because higher interest rates are being incurred, and consumption eventually has to be reduced; borrowing is good if it is financing investment because that generates more money
Current Account Balance CAB = NX + Net interest and transfers from abroad*Fluctuations in net exports are the main source of fluctuations in the current account balance
Net Exports Determined by the government budget and private saving and investment
Private Sector Balance Saving – Investment (S – I)1) If Saving > Investment, private sector surplus is lent to other sectors2) If Investment > Saving, borrowing from other sectors finances private sector deficit
Government Sector Balance Net Taxes – Government Expenditure on Goods and Services (NT – G)1) If NT > G, government sector surplus is lent to other nations2) If G > NT, borrowing from other sectors is used to finance government sector deficit*Sum of federal, state, and local governments
Breakdown of U.S. Account Balance in 2012 Exports (X) = $2,196 billionImports (M) = $2,743 billionInvestment (I) = $2,475 billionSaving (S) = $3,167 billionNet Taxes (NT) = $1,660 billionNet Exports (X – M) = $-547 billionPrivate Sector Balance (S – I) = $960 billionGovernment Sector Balance (NT – G) = $-1507 billionEquation: Y = C + I + G + X – M = C + S + NTRearrange: (X – M) = (S – I) + (NT – G)(Net Exports = Private Sector Balance + Government Sector Balance)*U.S. borrowing finances investment ($2,475 billion on new buildings, plant, and equipment; $619 billion on defense equipment and public structures)
Current Account Balances Around the World 1) U.S. has the largest international payment deficit2) For every deficit there is a corresponding surplus3) China, Japan, and other advanced economies have a surplus that in total equals the U.S. deficitU.S. ≈ $450 billion deficitLatin American & the Caribbean ≈ $100 billion deficitAfrica ≈ $25 billion deficitJapan ≈ $50 billion surplusDeveloping Asia ≈ $125 billion surplusChina ≈ $225 billion surplusEuro Area ≈ $225 billion surplusOther Advanced Economies ≈ $300 billion surplusMiddle East ≈ $375 billion surplus
Foreign Exchange Market The market in which the currency of one country is exchanges for the currency of another *Made up of importers, exporters, banks, traders, brokers, etc.Opens on Monday morning in Hong Kong (while west coast markets are closing on Sunday); the market is open all day in different parts of the world- in 2013, typically $4 trillion changed hands each day
Foreign Exchange Rate The price at which one currency is traded for another (i.e. one dollar per 0.75 Euros in August 2013)
Currency Appreciation (e.g. Dollar v. Euro) The rise in the value of one currency in terms of another currency (e.g. the dollar rose from 86 Euro cents in 1999 to 1.17 Euros in 2000; 36% appreciation)*Dollar fell to 0.63 Euros per dollar in 2008; has since fluctuated between 0.70 and 0.80 euros per dollar
Currency Depreciation The fall in the value of one currency in terms of another currency (e.g. the dollar fell from 1.17 Euros in 2000 to 0.63 Euros in 2008; 46% depreciation)*Always calculate based on the previous value
Demand in the Foreign Exchange Market The quantity of U.S. dollars that traders plan to buy in the foreign exchange market during a given time period depends on mainly:1) The exchange rate2) Interest rate in the United States and other countries3) The expected future exchange rate
The Law of Demand for Foreign Exchange 1) Derived demand – people want dollars to buy other things in the U.S. (goods, stocks, etc.)2) Other things remaining the same, the higher the exchange rate, the smaller is the quantity of dollars demanded (like the opposite of inflation)-Increase in exchange rate = movement down along the demand curve; decrease in exchange rate = movement up along the demand curve3) Influences – Exports Effect, Expected Profit Effect
Exports Effect (for foreigners) The larger the value of U.S. exports, the larger is the quantity of dollars demanded to pay for these exports1) Exchange rate falls2) Price of U.S. goods/services falls3) U.S. increases exports (other countries increase imports)4) The quantity of dollars demanded increases to pay for increased exports (imports)
Expected Profit Effect (for foreigners) The larger the expected profit from holding dollars, the greater is the quantity of dollars demanded in the foreign exchange market*For a given expected future exchange rate, the lower the exchange rate today, the larger is the expected profit from holding dollars and the greater is the quantity of dollars demanded in the foreign exchange market- The lower the exchange rate today, the more people think that they can profit when the exchange rate eventually rises
Changes in Demand for Dollars Influences that change demand/buying plans (shift curve):1) Interest rates in the United States and other countries2) The expected future exchange rate
Interest Rates in the United States and Other Countries Borrowing at a higher interest rate in a different country brings higher profits (gap determines demand)1) The U.S. interest rate minus the foreign interest rate is called the U.S. interest rate differential2) The larger the U.S. interest rate differential, the greater is the demand for U.S. assets and the greater is the demand for dollars*Direct Relationship with Demand for Money
The Expected Future Exchange Rate (for Demand) Other things remaining the same, the higher the expected future exchange rate, the greater is the demand for dollars(i.e. if the exchange rate is 0.70 dollars/euro now, and is expected to be 0.80 next month, you will spend 700,000 euros now to get 1,000,000 dollars, and trade it in to get 800,000 euros- shifts the demand curve to the right)*Direct Relationship with Demand for Money
Supply in the Foreign Exchange Market The quantity of U.S. dollars that traders plan to sell in the foreign exchange market during a given time period depends mainly on:1) The exchange rate2) Interest rates in the United States and other countries3) The expected future exchange rate*Same as factors affecting the quantity demanded
The Law of Supply in the Foreign Exchange Market 1) Traders supply U.S. dollars when people buy other currencies and traders buy other currencies so that they can buy foreign-made goods and services2) Other things remaining the same, the higher the exchange rate, the greater is the quantity of dollars supplied in the foreign exchange market (like price)-Increase in exchange rate = movement up along the supply curve; decrease in exchange rate = movement down along the supply curve3) Influences – Imports Effect, Expected Profit Effect
Imports Effect (for Americans) The larger the value of U.S. imports, the larger is the quantity of foreign currency demanded to pay for these imports1) Exchange rate rises2) Price of foreign-made goods/services falls3) U.S. increases imports (other countries increase exports)4) The quantity of U.S. dollars supplied increases to pay for these imports
Expected Profit Effect (for Americans) The larger the expected profit from holding a foreign currency, the greater is the quantity of that currency demanded in the foreign exchange market and the greater is the quantity of dollars supplied*For a given expected future exchange rate, the higher the exchange rate today, the larger is the expected profit from selling dollars and the greater is the quantity of dollars supplied in the foreign exchange market- The higher the exchange rate today, the more people think that they can profit when the exchange rate eventually falls (people are profiting on a currency other than dollars)
Changes in the Supply of Dollars Influences that change supply/selling plans (shift curve):1) Interest rates in the United States and other countries2) The expected future exchange rate
Interest Rates in the United States 1) The larger (more positive) the U.S. interest rate differential, the smaller is the demand for foreign assets and the smaller is the supply of dollars in the foreign exchange market2) The smaller (more negative) the U.S. interest rate differential, the larger is the demand for foreign assets and the larger is the supply of dollars in the foreign exchange market *Inverse relationship with the supply of money
The Expected Future Exchange Rate (for Supply) Other things remaining the same, the higher the expected future exchange rate, the smaller is the supply of dollars(i.e. if the exchange rate is at 0.70 euros per dollar and is expected to be 0.80 euros per dollar next month, you will hold onto your dollars, and instead of selling them now for 700,000 euros, you will sell them later for 800,000 euros)- Shifts the supply curve to the left*Inverse relationship with the supply of money
Market Equilibrium 1) If the exchange rate it too high, there is a surplus(the quantity supplied exceeds the quantity demanded)- the exchange rate will fall2) If the exchange rate is too low, there is a shortage(the quantity demanded exceeds the quantity supplied)- the exchange rate will rise*The foreign exchange market adjusts second-by-second because traders want the best prices possible, and they share information on buying and selling plans
Reasons for Fluctuations in the Dollar 1) 1999-2000: the dollar appreciated against the euro (from 0.86 to 1.17 euros per dollar) because the U.S. economy expanded faster than the European economy- interest rates in Europe were 2% lower (positive U.S. interest rate differential and expected dollar appreciation)- demand for dollars increased and supply of dollars decreased (graph shifts –> higher exchange rate)2001-2008: the dollar depreciated against the euro (from 1.17 to 0.63 euros per dollar) because U.S. growth rate slipped behind European growth rate- U.S. interest rate differential became negative and the U.S. current account deficit increased and expected exchange rate decreased- demand for dollars decreased and supply of dollars increased (graph shifts –> lower exchange rate)*Since 2008, the dollar has fluctuated and risen slightly
Reasons for Exchange Rate Volatility 1) The exchange rates of other countries are changing at the same time as the U.S. exchange rate2) Because everyone is a potential buyer or seller in the foreign exchange market, the exchange rate changes dramatically but the quantity traded remains the same (everyone has a price limit)3) Supply and Demand are not independent; changes in the market cause opposite effects in supply and demand which results in large price changes and small quantity changes (interest rate differential and expected future exchange rate)- A rise in the U.S. interest rate differential increases the demand for U.S. dollars in the foreign exchange market and decreases the supply- A rise in the expected future exchange rate increases the demand for U.S. dollars in the foreign exchange market and decreases the supply
Exchange Rate Expectations Changes in exchange rate occur because the exchange rate is expected to changeExpectations change because:1) Purchasing power parity2) Interest rate parity
Purchasing Power Parity Money is worth what it will buy; i.e. if a Big Mac costs $3 in the U.S. and 4 Canadian dollars in Canada and the exchange rate is 1.33 Canadian dollars per U.S. dollar, the Big Mac costs the same amount in either countryIf purchasing power parity is lost (i.e. the price changes in one place, but not the other, and the exchange rate remains the same, money will buy more in the place will the lower real price)Example: If most prices in the U.S. increase, but not in Canada, people will expect the U.S. dollar exchange rate to decreases; the demand for U.S. dollars decreases and the supply of U.S. dollars increases, so the exchange rate falls*If the price rise was in Canada, the exchange rate would rise- If the prices in the United States rise faster than those in other countries, the exchange rate falls (depreciation); if the prices in the United States rise more slowly than those in other countries, the exchange rate rises (appreciation)
Purchasing Power Parity Around the World August 2013:Overvalued currencies will depreciate at some point in the future, and undervalued currencies will appreciateTurkish Lira ≈ 49% undervaluedSouth African Rand ≈ 47% undervaluedRussian Ruble ≈ 44% undervaluedPolish Zloty ≈ 41% undervaluedMexican Peso ≈ 37% undervaluedCzech Koruna ≈ 28% undervaluedEuropean Euro ≈ 7% overvaluedJapanese Yen ≈ 8% overvaluedCanadian Dollar ≈ 9% overvaluedNew Zealand Dollar ≈ 14% overvaluedDanish Krone ≈ 39% overvaluedAustralian Dollar ≈ 40% overvaluedNorwegian Krone ≈ 44% overvalued (50%%*)Swiss Franc ≈ 58% overvalued (60%%*)
Interest Rate Parity While the nominal interest rate may be higher than one country in another, the net interest rate may be the same in both countries depending on the exchange rate(i.e. if the interest rate in Canada is 5%, and the interest rate in the U.S. is 3%, but the Canadian dollar is supposed to depreciate by 2% per year, then the net return on investment in either country is 3%)- Interest rate parity always prevails because funds move to the place where they will get the highest returns
Monetary Policy and the Exchange Rate 1) If the Fed increases the U.S. interest rate and other central banks keep the interest rates in other countries unchanged, the value of the U.S. dollar rises in the foreign exchange market2) If other central banks increase their interest rates and the Fed keeps the U.S. interest rate unchanged, the value of the U.S. dollar falls in the foreign exchange market
Pegging the Exchange Rate Some central banks try to avoid exchange rate fluctuations by pegging the value of their currency against another currency1) If the exchange rate rises, the central banks sells dollars2) If the exchange rate falls, the central bank buys dollars* Equilibrium exchange rate is the central bank’s target- If the demand for dollars increases, the Fed increases the supply of dollars (sells dollars) and prevents the exchange rate from rising- If the demand for dollars decreases, the Fed decreases the supply of dollars (buys dollars) and prevents the exchange rate from fallingWhen the Fed buys dollars, it uses its reserves of foreign currency, and when the Fed sells dollars, it takes foreign currency in exchange and its reserves increase – If the demand for dollars decreased permanently, the Fed would have to buy dollars and sell euros every day to maintain the exchange rate, and when they ran out of euros, the dollar would sink- If the demand for dollars decrease increased permanently, the Fed would have to buy dollars and sell euros every day; they would be piling up unwanted reserves, and eventually have to let the dollar risePersistent intervention on the side of the market cannot be sustained
The People’s Bank of China in the Foreign Exchange Market 1) Fed does not peg the value of the dollar2) People’s Bank of China pegs the value of the yuan at 6.10 yuan per dollar; China has massive reserves of U.S. dollars (2007-2009, reserves increased by more than $1 trillion); if the bank took no action, there would be a different equilibrium exchange rate
China’s Foreign Exchange Market Interventions 1) Piling up reserves since 20002) Buildup of reserves was especially large from 2007-20113) Yuan appreciates when the number of yuan per dollar decreases, and depreciates when the number of yuan per dollar increases4) The actual equilibrium was below the target exchange rate, so China had to continue buying U.S. dollars in exchange for yuan
Management of the Yuan 1) Pegged the value of the yuan for more than 10 years 2) Devalued the yuan in 1994; the yuan appreciated in 1994 and 1995, but was pegged then at 8.28 yuan per dollar for more than 10 years3) In July 2005, the yuan began a managed float (appreciation/decreased exchange rate)4) In July 2008, the yuan was pegged at 6.8 yuan per U.S. dollar5) Since 2010, the yuan has been floating again
Actions of the Fed 1) Open Market Sale:- quantity of money decreases- interest rates rise- U.S. interest rate differential increases- demand for U.S dollars increases- supply of U.S. dollars decreases- U.S. dollar exchange rate rises2) Open Market Purchase:- quantity of money increases- interest rates fall- U.S. interest rate differential decreases- demand for U.S. dollars decreases- supply of U.S. dollars increases- U.S. dollar exchange rate falls
Aggregate Demand 1) Increases if the exchange rate falls or the global economy expands2) Decreases if the exchange rate rises or the global economy contracts
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Finance Flashcards

Finance 301 Exam 4

The variance is the average squared difference between which of the following? Actual return and average return
Which one of the following is the positive square root of the variance? Standard deviation
Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average and its standard deviation? Normal distribution
Which one of the following best describes an arithmetic average return? Return earned in an average year over a multiyear period
An efficient capital market is best defined as a market in which security prices reflect which one of the following? All available information
Which one of the following is the hypothesis that securities markets are efficient? Efficient markets hypothesis
Which one of the following combinations will always result in an increased dividend yield? Decrease in the stock price combined with a higher dividend amount
Which one of the following could cause the total return on an investment to be a negative rate? Stock price that declines over the investment period
Which one of the following statements is correct concerning both the dollar return and the percentage return on a stock investment? Without the size of an investment, the dollar return has less value than the percentage return.
Which answer creates a false sentence? Percentage returns: are difficult to compute.
The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield and reported in your textbook, are based on the: stocks of the 500 companies included in the S&P 500 index.
Over the period of 1926-2014, which one of the following investment classes had the highest volatility of returns? Small-company stocks
Over the period of 1926-2014: long-term government bonds underperformed long-term corporate bonds.
The rate of return on which one of the following has a risk premium of 0%? U.S. Treasury bills
Which one of the following had a zero standard deviation of returns for the period of 1926-2014? All of the listed security types had a standard deviation of returns in excess of zero percent.
Which one of the following categories has the widest frequency distribution of returns for the period 1926-2014? Small-company stocks
The period 1926-2014 illustrates that U.S. Treasury bills: can either outperform or underperform inflation on an annual basis.
The historical record for the period 1926-2014 shows that the annual nominal rate of return on: U.S. Treasury bills have had a positive rate of return for every year in the period.
What was the average annual risk premium on small-company stocks for the period 1926-2014? 13.2 percent
Based on the period 1926-2014, what rate of return should you expect to earn over the long-term if you are unwilling to bear risk? Between 3 and 4 percent
Which one of the following statements is true regarding the period 1926-2014? U.S. Treasury bills had a positive average real rate of return.
For the period 1926-2014, which one of the following had the smallest risk premium? U.S. Treasury bills
Which one of the following statements is correct? The higher the expected rate of return, the wider the distribution of returns.
Which one of the following is the most apt to have the largest risk premium in the future based on the historical record for 1926-2014? Small-company stocks
The average risk premium on long-term government bonds for the period 1926-2014 was equal to: the rate of return on the bonds minus the T-bill rate.
The standard deviation measures the _____ of a security’s returns over time. volatility
Which one of the following has the narrowest distribution of returns for the period 1926-2014? Intermediate-term government bonds
What is the probability associated with a return that lies in the upper tail when the mean plus two standard deviations is graphed? 2.5 percent
When, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns? Never
Assume the securities markets are strong form efficient. Given this assumption, you should expect which one of the following to occur? The price of each security in that market will frequently fluctuate.
New Labs just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient? The price of New Labs stock increases rapidly to a higher price and then remains at that price.
According to the efficient markets hypothesis, professional investors will earn: a dollar return equal to the value paid for an investment.
Semistrong form market efficiency states that the value of a security is based on: all publicly available information.
Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess profits on ABC stock based on the knowledge he has related to his experiments if the financial markets are: strong form efficient.
If the financial markets are semistrong form efficient, then: only individuals with private information have a marketplace advantage.
Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate? Expected return
Stock A comprises 28 percent of Susan’s portfolio. Which one of the following terms applies to the 28 percent? Portfolio weight
Systematic risk is defined as: any risk that affects a large number of assets.
Unsystematic risk can be defined by all of the following except: market risk.
Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk? Diversification
The systematic risk principle states that the expected return on a risky asset depends only on the asset’s ___ risk. market
The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the: beta coefficient.
The security market line is a linear function that is graphed by plotting data points based on the relationship between the: expected return and beta.
The slope of the security market line represents the: market risk premium.
The security market line is defined as a positively sloped straight line that displays the relationship between the: expected return and beta of either a security or a portfolio.
Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive? Cost of capital
A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock? A decrease in the probability of an economic boom
Which one of the following is the computation of the risk premium for an individual security? E(R) is the expected return on the security, Rf is the risk-free rate, β is the security’s beta, and E(RM) is the expected rate of return on the market. β[E(RM) -Rf]
Which one of the following statements is correct? If a risky security is correctly priced, its expected risk premium will be positive.
If a risky security is correctly priced, its expected risk premium will be positive. The weights of the securities held in any portfolio must equal 1.0.
Which one of the following is the best example of an announcement that is most apt to result in an unexpected return? Statement by a firm that it has just discovered a manufacturing defect and is recalling its product
Which one of the following is the best example of unsystematic risk? A warehouse fire
Which one of these represents systematic risk? Increase in consumption created by a reduction in personal tax rates
Which one of these is the best example of systematic risk? Decrease in gross domestic product
Standard deviation measures _____ risk while beta measures _____ risk. total; systematic
Which one of the following best exemplifies unsystematic risk? Unexpected increase in the variable costs for a firm
The risk premium for an individual security is based on which one of the following types of risk? Systematic
Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security? Zero
Which statement is correct? An underpriced security will plot above the security market line.
Portfolio diversification eliminates: unsystematic risk.
Diversifying a portfolio across various sectors and industries might do more than one of the following. However, this diversification must do which one of the following? Reduce the portfolio’s unique risks
For a risky security to have a positive expected return but less risk than the overall market, the security must have a beta: that is > 0 but < 1.
The addition of a risky security to a fully diversified portfolio: may or may not affect the portfolio beta.
A portfolio is comprised of 35 securities with varying betas. The lowest beta for an individual security is .74 and the highest of the security betas of 1.51. Given this information, you know that the portfolio beta: will be greater than or equal to .74 but less than or equal to 1.51.
The beta of a risky portfolio cannot be less than _____ nor greater than ____. the lowest individual beta in the portfolio; the highest individual beta in the portfolio
If a security plots to the right and below the security market line, then the security has ____ systematic risk than the market and is ____. more; overpriced
Assume you own a portfolio of diverse securities which are each correctly priced. Given this, the reward-to-risk ratio: of each security must equal the slope of the security market line.
Which statement is correct? A security with a beta of 1.54 will plot on the security market line if it is correctly priced.
Which one of the following is the vertical intercept of the security market line? Risk-free rate
According to the capital asset pricing model, the expected return on a security will be affected by all of the following except the: security’s standard deviation.
World United stock currently plots on the security market line and has a beta of 1.04. Which one of the following will increase that stock’s rate of return without affecting the risk level of the stock, all else constant? Increase in the market risk-to-reward ratio
The expected return on a security is not affected by the: security’s unique risks.
The capital asset pricing model: considers the relationship between the fluctuations in a security’s returns versus the market’s returns.
Julie wants to create a $5,000 portfolio. She also wants to invest as much as possible in a high risk stock with the hope of earning a high rate of return. However, she wants her portfolio to have no more risk than the overall market. Which one of the following portfolios is most apt to meet all of her objectives? Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0
Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC? Cost of equity
Lester lent money to The Corner Store by purchasing bonds issued by the store. The rate of return that he and the other lenders require is referred to as the: cost of debt.
In an efficient market, the cost of equity for a highly risky firm: increases in direct relation to the stock’s systematic risk.
Assume a firm has a beta of 1.2. All else held constant, the cost of equity for this firm will increase if the: risk-free rate decreases.
Which one of the following will increase the cost of equity, all else held constant? Increase in the dividend growth rate
Which one of the following is used as the pretax cost of debt? Weighted average yield to maturity on the firm’s outstanding debt
Which one of the following will decrease the aftertax cost of debt for a firm? Increase in tax rates
All else constant, an increase in a firm’s cost of debt: will result in an increase in the firm’s cost of capital.
The cost of preferred stock: is equal to the stock’s dividend yield.
is equal to the stock’s dividend yield. The cost of preferred stock is unaffected by the issuer’s tax rate.
Which one of the following will affect the capital structure weights used to compute a firm’s weighted average cost of capital? Increase in the market value of the firm’s common stock
Which one of the following statements concerning capital structure weights is correct? The repurchase of preferred stock will increase the weight of debt.
Which one of the following represents the minimum rate of return a firm must earn on its assets if it is to maintain the current value of its securities? Weighted average cost of capital
All else constant, the weighted average cost of capital for a risky, levered firm will decrease if: the firm’s bonds start selling at a premium rather than at a discount.
Which one of the following is most apt to cause a wise manager to increase a project’s cost of capital? Assume the firm is levered. She learns the project is riskier than previously believed.
The use of borrowing by an individual to adjust his or her overall exposure to financial leverage is referred to as: homemade leverage.
Which one of the following states that a firm’s cost of equity capital is a positive linear function of the firm’s capital structure? M&M Proposition II without taxes
Paying interest reduces the taxes owed by a firm. Which one of the following terms applies to this relationship? Interest tax shield
Assume you are comparing two firms that are identical in every aspect, except one is levered and one is unlevered. Which one of the following statements is correct regarding these two firms? The unlevered firm will have higher EPS at relatively low levels of EBIT.
You are comparing two possible capital structures for a firm. The first option is an all-equity firm. The second option involves the use of $3.8 million of debt. The break-even point between these two financing options occurs when the earnings before interest and taxes (EBIT) are $428,000. Given this, you know that leverage is beneficial to the firm: whenever EBIT exceeds $428,000.
Which one of the following statements concerning financial leverage is correct? Changes in the capital structure of a firm will generally change the firm’s earnings per share.
T.L.C. Enterprises just revised its capital structure from a debt-equity ratio of .37 to a debt-equity ratio of .48. The firm’s shareholders who prefer the old capital structure should: sell some shares and loan out the sale proceeds.
Which one of the following statements is the core principle of M&M Proposition I, without taxes? The capital structure of a firm is totally irrelevant.
Which one of the following supports the theory that the value of a firm increases as the firm’s level of debt increases? M&M Proposition I with taxes
M&M Proposition II, without taxes, states that the: cost of equity increases as a firm increases its debt-equity ratio.
Which one of the following represents the present value of the interest tax shield? Tc ×D
According to M&M Proposition I with taxes, the value of a levered firm will increase when the: value of the unlevered firm increases.
M&M Proposition I with taxes states that: the levered value of a firm exceeds the firm’s unlevered value.
Which one of the following conditions exists at the point where a firm maximizes its value? WACC is minimized.
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Finance Flashcards

Finance chapter 12

Total Dollar Return Income from investment + Capital Gain (loss) due to change in stock priceex: Stock price $37 beginning of year and $40.33 end of year, 100 shares, $1.85/dividendscapital gain (40.33 – 37) x 100 = $333; total dollar return= $185 + $333 = $518
Total Percentage Returns = Dividends paid at the end of the period (income from investment) + Capital Gains / beginning price of stockex: dividend yield= $1.85/37= 5% capital gains= ($40.33-37)/37= 9% (Pt+1 – Pt)/ Ptpercentage return= $0.14 on the dollar invested
Risk Premium The excess return required from an investment in a risky asset over that required from a risk-free investment
Variance of an investments annual return The average squared difference between the actual returns and the arithmetic average return
Standard Deviation The measure of volatility; positive square root of the variance
Normal Distribution Defined by its mean and standard deviation
Efficient Capital Market Market prices of the securities that trade in a particular market fairly reflect the available information related to those securities.
Dividend Yield Next year’s annual dividend / today’s stock price
Small company stocks Smallest twenty percent of the firms listed on the NYSE
Which one of the following best defines the variance of an investment’s annual returns over a number of years? The average squared difference between the actual returns and the arithmetic average return
Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return? Risk Premium
Standard deviation is a measure of which one of the following? Volatility
Which one of the following is defined by its mean and its standard deviation? Normal distribution
Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. Which one of the following terms best defines that market? Efficient capital market
Which one of the following correctly describes the dividend yield? next year’s annual dividend / by today’s stock price
As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return Less than
Small-company stocks, as the term is used in the textbook, are best defined as the: smallest twenty percent of the firms listed on the NYSE
Which one of the following categories of securities had the highest average return since 1926? Small-company stocks
Which one of the following categories of securities had the lowest average risk premium for the period 1926-2007? U.S Treasury bills
Efficient Capital Market Current market prices fully reflect available information
3 forms of Market Efficiency – Weak: Prices reflect all past (historical) market information such as price and volume- Semi-strong: all public information is reflected in the stock price (annual reports and press releases)- Strong: all information of every kind is reflected in stock prices* Abnormal returns cannot be earned
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Finance Flashcards

Personal finance modules 1-5

Interest is:A. A charge for lending money to a bankB. The amount owed for borrowing money C. The amount added into your savings when opening a bank accountD. A charge for the convenience of accessing money stored in your bank account B
Jade is deciding between savings accounts at her bank. She has four options based on how frequently interés compounds. Which should she choose if she wants the best rate of return on her interest.A. Daily compounding B. Monthly compoundingC. Semi-annual compoundingD. Annual compounding A
What is the typical relationship between time and interest rate?A. Longer time period usually equals higher interest ratesB. Shorter time period usually equals higher interest ratesC. Longer time periods usually have no effect on interest ratesD. Shorter time periods usually have no effect on interest rates A
To earn as much interest as possible, you should open a savings account that earns ________ interest has the ________ interest rate.A. Compound; lowestB. Compound; highest C. Simple; lowestD. Simple; highest B
Morgan just opened a savings account and wants to maximize the amount she earns. Which of the oink following actions would enable her to earn MORE interest?A. Selection an account with a high interest rateB. Leaving her money in the account for a long period of timeC. Transferring money into her checking account each monthD. Both A & B D
Circle all that apply. Which of the following are examples of types of saving vehicles?A. Certificate of deposit (CD)B. Money market accountC. Checking accountD. Savings account A B D
Which of the following is generally true about savings vehicles?A. Savings vehicles are only useful for long-term investments B. People should evaluate different forms of savings vehicles based on their needsC. Savings vehicles are never insuredD. All of the above B
Which of the following savings vehicles usually requires a high minimum balance?A. Simple savings accountB. Certificate of Deposit (CD)C. Checking accountD. All of the above B
Which of the following accounts will give you the LEAST access to your money?A. Simple savings account B. Certificate of Deposit (CD)C. Checking accountD. Cash B
Jazzmyn earns $250 per month. Which statement below is most correct?A. Jazzmyn makes more than she spendsB. Jazzmyn spends more than she makesC. Jazzmyn should save more in the futureD. Jazzmyn should stop saving in the future B
Which of the following is NOT one of the responsibilities of the Federal Reserve?A. Supervising the Reserve banksB. Maintains a stable banking system C. Setting the nation’s monetary policy D. Establishing the federal budget D
Which type of financial institution typically has membership requirements?A. Credit unionB. Online commercial bankC. Commercial bankD. Federal reserve bank A
Which type of account is typically the MOST liquid?A. Checking accountB. Savings accountC. Certificate of deposit D. Exchange traded fund A
Which of the following is a primary responsibility of the Federal Reserve Bank?A. Establish monetary policyB. Write monetary lawsC. Collect taxes D. Print money A
Savings accounts usually offer ______ interest rates than checking accounts. It is ________ to access your money in a savings account than in a checking account.A. Lower; harderB. Lowers easierC. Higher; harderD. Higher; easier C
Which type of account will typically have the highest interest rate?.A. Checking accountB. Savings accountC. Money market accountD. Certificate of deposit (CD) D
The three parts of the Federal Reserve System are the Reserve Banks, the Federal Open Market Committee (FOMC), and the:A. Board of Governors B. United States MintC. Department of the Treasury D. Secretary of State A
Which of the following fees would likely be the highest?A. Overdraft feeB. Account transfer feeC. Monthly service feeD. ATM fee A
Which of the following is a unique feature of credit unions?A. Credit unions are typically owned and run by their membersB. Credit unions limit membership to certain people and groups C. Credit unions offer a wide variety of banking services D. Both A & B D
The first set of numbers (74894934) on the ce=heck represents the: A. Bank account numberB. Check numberC. Bank routing numberD. Member number C
The set of numbers (101) on the top right of the check represents the:A. Check numberB. Bank account numberC. Member numberD. The bank routing number A
Which of the following payment types require you to pay upfront?A. Money orderB. Cashier’s checkC. Pre-paid cardD. All of the above D
Which of the following is true?A. Checks and debit cards both withdraw money directly from a bank accountB. Checks are the most widely accepted form of paymentC. Debit cards often have a higher interest rate than credit cardsd. Debit cards offer the highest level of fraud protection A
Which of the following statements comparing debit cards to credit cards is TRUE?A. Debit cards allow you to draw funds directly from your checking accountB. Debit cards typically offer greater fraud protection than credit cards C. Debit cards never require a signature to finalize a purchase like credit cardsD. Debit cards charge higher interest rates on purchases than credit cards A
Which of the following is NOT true of credit cards?A. They offer the highest level of fraud protectionB. They are the best payment type to use when trying to stick to a budgetC. You can be charged a fee if you are late making a monthly paymentD. Some offer rewards, like cash back or airline miles B
Which payment method typically charges the highest interest rates?A. Credit cardsB. Cashier’s checksC. Pre-paid cardsD. Payday loans D
Which of the following tells you how much your credit card interest will be if you only pay the minimum balance each month?A. Late feeB. Annual membership feeC. Balance transfer feeD. Annual percentage rate D
Which payment type can help you stick to a budget?A. Credit cardsB. Debit cardsC. Payday loans D. Cash advances B
Which of the following will happen if you miss a monthly card payment?A. You will be charged a latte feeB. You lose rewards pointsC. Your APR will increase the next monthD. Both A&B A
If you are planning to carry a large balance on your credit cards, which of the following credit card features should you look for?A. Low APRB. Low balance transfer feeC. Lots of credit card rewardsD. A large credit limit A
What is a credit limit?A. The required payment to your credit card companyB. The amount of interest you are charged each monthC. The maximum amount you can chard each billing cycleD. How many credit cards you can own C
The annual percentage rate on a credit card determines A. The amount of interest you are charged on credit card purchasesB. The amount your credit limit can go up within a yearC. How many credit cards you can nowD. None of the above A
What is the customary APR on purchases after the initial 12 months?A. 36.5%B. 27.357%C. 18.25%D. 5.65% C
What is the annual fee for this card?A. $0B. $5C. $29d. $39 A
Which of the following statements about credit scores is TRUE?A. Credit scores reflect how likely individuals are to repay their debtsB. Credit scores range from the low 300’s to the mid 800’sC. Each person has three credit scoresD. All of the above D
Which of the following is NOT true of credit scores?A. Only the credit bureaus truly know credit scores are calculated B. Having a high score means you are more likely to repay debtsC. The more money you make, the higher your credit scoreD. Your credit score can impact the care or home you can buy C
Having a good credit score is important because:A. It can impact your ability to get a driver’s licenseB. It can impact your ability to be approved for bank loansC. It can impact how much you will have to pay the government in taxesD. It can impact how much you will have to pay for college B
Which action can hurt your credit score? I. Paying your phone bill late II. Taking the bus to work. III. Making out several credit cards. IV. Using the internet to pay your billsA. IB. I and IIc. I and IIID. III and IV C
All of the following make up the big three credit reporting agencies EXCEPT A. EquifaxB. TransUnionC. Experian D. Federal reserve D
Jose wants to be sure he maintains a high credit score as he is planning to buy a new car soon. What should he do to ensure his score stays high, allowing him to buy his dream car?A. Open a savings account at the local bankB. Pay off his credit card balance each monthC. Test drive several cars before deciding which to buyD. All are things he should do to increase or maintain his credit score B
Which of the following actions can NEGATIVELY impact your credit score?A. You disputed an item on your credit reportB. You forgot to pay the cable billC. You pay all your bills in cashD. You use a small amount of your available credit B
Which is true of someone with a low credit score?A. They probably make on time paymentsB. They may not be able to rent the apartment they wantC. They are mor likely to miss a payment than someone with a high credit scoreD. All of the above B or c
Which of the following actions has NO impact on your credit score?A. You inquire about a credit card chargeB. You use a large percentage on your credit limit C. You opened several new credit cards last weekD. You send in your credit card payment a couple days late A
What can you do to make sure you have a healthy credit report?A. Review your credit report each yearB. Make sure everything on your credit report is correct C. Dispute any errors you find on your report with your credit agencyD. All of the above D
Which of the following MOST influences your credit score?A. Types of credit usedB. Payment history C. Length of credit history D. Amount owed B
Which best explains what a credit score represents?A. A number showing how likely you are to have more than one credit cardB. A numerical rating that expresses how likely you are yo repay your debtsC. A numerical rating that shows how much money you have in your bank accountD. A number expressing your yearly income B
Which of the following actions would improve your credit score?A. Closing out old credit cardsB. Paying off your credit card billC. Using a large portion of your credit limit D. Opening a new savings account B
Your credit history is tracked by all of the following EXCEPTA. EquifaxB. Federal reserveC. ExperianD. Trans union B
(Check all that apply) good credit is usually required for which of the following 1. Buying a new car2. Purchasing a home3. Getting a credit card4. Adopting a pet5. Buying new furniture 6. Renting an aparentement 1 2 6
Which of the following could potentially damage your credit score?1. Paying a credit card bill late2. Opening a checking account3. Paying a roommate back4. Opening 3 credit cards at once5. Paying a speeding ticket 6. Ignoring a late payment notice 1 4 6
The return on investment (ROÍ) from education is typically the highest forA. A high school graduate B. A college applicant C. Someone with a 2-year (associate) degreeD. Someone with a 4-year (bachelor’s) degree D
Select the answer that best describes why the return on investment (ROI) for higher education is high even though the cost of college is increasing.A. You have the potential to earn more money in the future when you continue your education past high school.B. You have the potential to earn less money in the future when you continue your education past college.C. Higher education is not an investment but a debt.D. Earning potential is not affected by education level. A
Your sister is starting 9th grade next year and is thinking about going to college. What step would you recommend she take first?a. Fill out her FAFSA formb. Start applying for grants & scholarshipsc. Look for school clubs & organizations she’s interested ind. Sign up for college admission exams C
Which of the following types of financial aid do not require you to pay the money back?a. Grantsb. Private Loansc. Federal Loansd. All of the above A
Which of the following loans will typically offer the lowest interest rate?a. Payday loanb. Federal Student Loan c. Private Loand. Both A & B B
Which type of loan requires that you pay the interest accumulated during college?a. Pell Grantb. Subsidized federal loanc. Unsubsidized federal loan d. University scholarship C
When referring to student loans, what is a grace period?a. The time period between graduating college and starting your first job when you don’t have to pay back student loansb. The period after graduating or leaving school before you must begin paying back student loansc. The amount of time you have to pay back your entire student loan amount d. None of the above B
Which of the following statements about the Federal Application for Student Aid (FAFSA) is TRUE?a. You can only apply online.b. The earliest you can submit your FAFSA application is December 1st.c. The IRS Data Retrieval Tool allows you to view and transfer your tax information directly into your FAFSA form.d. Both A & B are true. C
Which loan type requires you to make loan payments while you’re attending school?a. Unsubsidized federal loanb. Subsidized federal loanc. Pell Grantd. None of the above D
Which of the following statements about federal student loans is TRUE?A. The interest rate on your loan will be fixed over timeB. The interest rates on federal loans and private loans are similar C. You can only get federal student loans if you demonstrate financial D. You do not accumulate interest on federal loans A
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Finance Flashcards

FINANCE CHAPTER 7

Bond prices are quoted in terms of which of the following? Original issue discountPERCENT OF PAR VALUECoupon rate in dollarsMarket rate in dollars
Which of the following determines the dollar amount of interest paid to bondholders? Original issue discountCall premiumCOUPON RATEMarket rate
Which of these statements is false? Bonds are more important capital sources than stocks for companies and governments.Some bonds offer high potential for rewards and, consequently, higher risk.The bond market is larger than the stock market.BONDS ARE ALWAYS LESS RISKY THAN STOCKS
Bonds are issued by which of the following? CorporationsFederal government or its agenciesState and local governments***All of these
Which of these statements answers why bonds are known as fixed income securities? Many investors on fixed incomes buy them.***Investors know how much they will receive in interest payments.Investors will not receive their principal when the bond’s term is up.All of these.
Regarding a bond’s characteristics, which of the following is the principal loan amount that the borrower must repay? Call premiumMaturity date***Par or face valueTime to maturity value
To compensate the bondholders for getting the bond called, the issuer pays which of the following? Call feature***Call premiumCoupon rateOriginal issue premium
Which of the following issues Treasury Inflation Protected Securities (TIPS)? ***U.S. TreasuryCorporationsMunicipalitiesNonprofits
Which of the following is a debt security whose payments originate from other loans, such as credit card debt, auto loans, and home equity loans? ***Asset-backed securitiesCredit quality securitiesDebenturesJunk bonds
Which of the following is NOT a factor that determines the coupon rate of a company’s bonds? The amount of uncertainty about whether the company will be able to make all the payments.The term of the loan.The level of interest rates in the overall economy at the time.***All of these are factors that determine the coupon rate of a company’s bonds.
Which of the following bonds makes no interest payments? A bond whose coupon rate is equal to the market interest ratesA bond whose coupon rates are greater than market interest ratesA bond whose coupon rates are less than the market interest ratesZero coupon bondtface
Which of the following is a true statement? ***If interest rates fall, U.S. Treasury bonds will have decreasing values.If interest rates fall, corporate bonds will have decreasing values.If interest rates fall, no bonds will enjoy rising values.If interest rates fall, all bonds will enjoy rising values.
Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments? Credit quality risk***Interest rate riskLiquidity rate riskReinvestment rate risk
A bond’s current yield is defined as: the bond’s annual coupon rate divided by the bond’s par value.the bond’s annual coupon rate divided by the market interest rate.***the bond’s annual coupon rate divided by the bond’s current market price.the bond’s annual coupon rate divided by the bond’s original issue price.
Which of the following is a reason municipal bonds offer lower rates of interest income for their investors? They are able to avoid interest rate risk.They are able to avoid reinvestment rate risk.They are able to offer reduced credit risk as they are backed by the federal government.***They are tax exempt—at least at the federal level.
Which of the following terms is the chance that the bond issuer will not be able to make timely payments? ***Credit quality riskInterest rate riskLiquidity of interest rate riskTerm structure of interest rates
Which of the following bonds carry significant risk that the issuer will not make current or future payments? Credit quality risk bondsInterest rate risk bondsLiquidity rate risk bonds***Junk bonds
Determine the interest payment for the following three bonds: 2.5 percent coupon corporate bond (paid semi-annually), 3.15 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.) $2.50, $3.15, $0, respectively***$12.50, $15.75, $0, respectively$12.50, $15.75, $100, respectively$25.00, $31.50, $0, respectively
A bond issued by a corporation on May 1, 1999, is scheduled to mature on May 1, 2019. If today is May 2, 2009, what is this bond’s time to maturity? (Assume annual interest payments.) 9 years***10 years19 years20 years
A 3.75 percent TIPS has an original reference CPI of 175.8. If the current CPI is 207.7, what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.) $1,000, $18.75, respectively$1,000, $37.50, respectively$1,181.46, $22.15, respectively$1,181.46, $37.50, respectively
Consider the following three bond quotes; a Treasury note quoted at 102:30, and a corporate bond quoted at 99.45, and a municipal bond quoted at 102.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars? $1,002.30, $1,000, $1,000, respectively$1,000, $1,000, $5,000, respectively$1,002.30, $994.50, $5,012.25 respectively***$1,029.38, $994.50, $5,122.50, respectively
Calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. (Assume semi-annual compounding and $1,000 par value.) ***$553.68$558.66$940.00$1,000.00
What’s the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70? ***5.9 percent6.0 percent6.1 percent10.2 percent
Rank the following bonds in order from lowest credit risk to highest risk all with the same time to maturity, by their yield to maturity: JM Corporate bond with yield of 12.25 percent, IB Corporate bond with yield of 4.49 percent, TC Corporate bond with yield of 8.76 percent, and B&O Corporate bond with a yield of 5.99 percent. .JM bond, TC bond, B&O bond, IB bond***IB bond, B&O bond, TC bond, JM bondTC bond, B&O bond, IB bond, JM bondJM bond, IB bond, B&O bond, TC bond
Compute the price of a 4.75 percent coupon bond with 15 years left to maturity and a market interest rate of 6.25 percent. (Assume interest payments are semi-annual and par value is $1,000.) Is this a discount or premium bond? ***discountpremium
A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.) 3.00 percent3.09 percent5.75 percent***6.00 percent
Calculate the price of a 6.5% coupon bond with 17 years left to maturity and a market interest rate of 10.5%. (Assume interest rates are semiannual and par value is $1,000.) Is this a discount or premium bond? ***$685.93; discount$791.03; discount$1,051.83; premium$1,176.31; premium
Which of the following statements is correct? ***Bonds with short-term maturities will have very little interest rate risk.Bonds with large coupon payments will have very little interest rate risk.Bonds with higher credit ratings will have very little interest rate risk.All of these statements are correct.
Under what conditions is a bond likely to be called? The firm is in financial duress.The firm is planning a massive expansion and needs to raise a lot of capital.Interest rates have significantly declined.The firm wants to increase its debt ratio.
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Finance Flashcards

Finance Final

The difference between amount of cash on the firm’s books and the amount credited to its bank float
which security trades on a discount basis? treasury bill
a firm that wishes to minimize risk when investing idle cash would be least likely to buy long term corporate bonds
the three primary policy variable to consider when extending credit are? credit standards, the terms of trade, and collection policy
what are eurodollars? US dollars held on deposit by foreign banks
what is not a valid reason for holding cash? to earn highest return possible
what is not a method of speeding up collections of cash? extended disbursement float
which of the following securities represents an unsecured promissory note issued by a corporation? commercial paper
what is the practice of maintaining a minimum checking account balance? compensating balance
what is the most important factor of determining the cost of bank financing? the effective rate
large firms tend to be? net suppliers of trade credit
in the general sense, the value of any asset is the? present value of the cash flows expected to be received
what are the components included in the required rate of return on a bond? risk premium, real rate of return, and inflation premium
if the inflation premium for a bond goes up, the sales price of the bond will? go down
what is a characteristic of the price of preferred stock? preferred stock is valued as a perpetuity
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Finance Flashcards

Essentials of Corporate Finance Ch8

Molly is considering a project with cash inflows of $811, $924, $638, and $510 over the next four years, respectively. The relevant discount rate is 11.2 percent. What is the net present value of this project if it the start-up cost is $2,700?A $10.45B -$425.91C -$131.83D -$383.01E $229.50 B
You are using a net present value profile to compare Projects A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two?A The net present value of Project A equals that of Project B, but generally does not equal zero.B The internal rate of return for Project A equals that of Project B, but generally does not equal zero.C The net present value of each project is equal to the respective project’s initial cost.D The internal rate of return of each project is equal to zero.E The net present value of each project is equal to zero. A
What is the net present value of a project with the following cash flows if the discount rate is 15 percent? A -$2,687.98B $1,035.24C -$1,618.48D $9,593.19E $1,044.16 A
The reinvestment approach to the modified internal rate of return:A individually discounts each separate cash flow back to the present.B discounts all negative cash flows back to the present and combines them with the initial cost.C reinvests all the cash flows, including the initial cash flow, to the end of the project.D compounds all of the cash flows, except for the initial cash flow, to the end of the project.E discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project. D
What is the net present value of a project that has an initial cost of $42,700 and produces cash inflows of $9,250 a year for 9 years if the discount rate is 14.65 percent?A $2,111.41B $798.48C $2,470.01D $1,240.23E $1,992.43 E
Which one of the following methods of analysis ignores cash flows?A Average accounting returnB Profitability indexC PaybackD Modified internal rate of returnE Internal rate of return A
The net present value profile illustrates how the net present value of an investment is affected by which one of the following?A Project’s initial costB Inflation rateC Real rate of returnD Timing of the project’s cash inflowsE Discount rate E
The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?A The cash flows are conventional.B The initial cash flow is negative.C One of the time periods within the investment period has a cash flow equal to zero.D The investment has cash inflows that occur after the required payback period.E The investment is mutually exclusive with another investment of a different size. E
Generally speaking, payback is best used to evaluate which type of projects?A Low-cost, short-termB Any size of long-term projectC High-cost, long-termD High-cost, short-termE Low-cost, long-term A
Joe and Rich are both considering investing in a project that costs $25,500 and is expected to produce cash inflows of $15,800 in Year 1 and $15,300 in Year 2. Joe has a required return of 8.5 percent but Rich demands a return of 12.5 percent. Who, if either, should accept this project? A Joe, but not RichB Joe, and possibly Rich, who will be neutral on this decision as his net present value will equal zeroC Neither Joe nor RichD Rich, but not JoeE Both Joe and Rich E
The average net income of a project divided by the project’s average book value is referred to as the project’s:A average accounting return.B discounted rate of return.C required return.D internal rate of return.E market rate of return. A
Which one of the following indicates that an independent project is definitely acceptable?A Modified internal rate return that is lower than the requirementB Profitability index greater than 1.0C Negative net present valueD Zero internal rate of returnE Positive average accounting return B
Net present value involves discounting an investment’s:A liabilities.B assets.C costs.D future profits.E future cash flows. E
Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative.A Payback period that is shorter than the requirement periodB Internal rate of return that exceeds the required returnC Positive net present valueD Average accounting return that exceeds the requirementE Profitability index less than 1.0 E
The profitability index reflects the value created per dollar:A of sales.B of shareholders’ equity.C of net income.D invested.E of taxable income. D
The net present value of an investment represents the difference between the investment’s:A cost and its market value.B cash inflows and outflows.C cash flows and its profits.D cost and its net profit.E assets and liabilities. A
Which one of the following statements is correct?A The net present value is positive when the required return exceeds the internal rate of return.B If the initial cost of a project is increased, the net present value of that project will also increase.C If the internal rate of return equals the required return, the net present value will equal zero.D The net present value is a measure of profits expressed in today’s dollars.E Net present value is equal to an investment’s cash inflows discounted to today’s dollars. C
Which one of the following is the primary advantage of payback analysis?A Incorporation of the time value of money conceptB Ease of useC Research and development biasD Arbitrary cutoff pointE Long-term bias B
Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?A CrosswiseB Dual returnC ConventionalD Mutually exclusiveE Multiple choice D
The net present value:A ignores cash flows that are distant in the future.B method of analysis cannot be applied to mutually exclusive projects.C is unaffected by the timing of an investment’s cash flows.D decreases as the required rate of return increases.E is equal to the initial investment when the internal rate of return is equal to the required return. D
Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation?A Internal rate of returnB Net present valueC PaybackD Average accounting rate of returnE Profitability index B
You are making an investment of $110,000 and require a rate of return of14.6 percent. You expect to receive $48,000 in the first year, $52,500 in the second year, and $55,000 in the third year. There will be a cash outflow of $900 in the fourth year to close out the investment. What is the net present value of this investment?A $633.33B $7,881.55C $1,879.63D $8,534.25E $4,305.56 B