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Finance Flashcards

Finance 101 Final

Convertible bond:Can be converted into common stock under certain conditions- usually at the owner’s option, for a specified number of shares of the corporation’s common stock.Generally, the coupon rate on a convertible bond is 100 percent lower than the rate paid on traditional bonds.The bond is trading at a high price, and the company wants to bring the price in line with a theoretical ideal range over 1000.All of the above Can be converted into common stock under certain conditions- usually at the owner’s option, for a specified number of shares of the corporation’s common stock.
Which of the following is not correct about investing in bonds?Secured bonds are issued by corporations and tied to physical asset such as real estate or equipment.Zero coupon bonds are issued at deep discount and redeemed at full face value.The junk bond market is very speculative and not for beginners.Bonds represent common stocks/equity and are extremely risky investments. Bonds represent common stocks/equity and are extremely risky investments.
An unsecured bond that is offered on the credit of the corporation and is backed only by the reputation of the issuing corporation is called a(n) ____________ bond.Debenture.Mortgage.Indenture.Preemptive. Debenture.
Which type of bonds have the following properties? These bonds are used to fund large projects such as new plants and equipment that has a long, useful life. Secured bonds and Debentures are two types of these bonds. Canada Treasury Bonds.Europe Agency Bonds.Municipal Township Bonds.Corporate Bonds. Corporate Bonds.
A bond backed by the taxing authority of the government and is considered less risky because taxes can be raised to cover bond repayment if necessary is called a ____________ bond. Debenture.Mortgage.Secured.General obligation bond. General obligation bond.
Bonds represent A debt owed by a governmental unit or a corporation.A defined contribution plan.An equity/common stock with tax-free features.All of the above. A debt owed by a governmental unit or a corporation.
Which of the following bonds are the most secure bonds and the most secured investment, and they are backed by the “full faith and credit” of the U.S. Government?Convertible Bonds and Callable Bonds.US Treasury Bonds.Junk Bonds.Zero Coupon Bonds. US Treasury Bonds.
Which of the following offers a flexible way to save for retirement and uses a wide variety of investment products to fund your account?IRAThe NASDAQ401 B Plan403 K Plan IRA
As investors approach retirement age, they are often more interested in ______ portfolios. Aggressive.International.Risky or equity mix.Conservative or fixed-income. Conservative or fixed-income.
Which of the following is the top professional designation for financial planners?Certified Financial Planner (CFP)Chartered Financial Consultant (ChFC)Certified Public Accountant and Personal Financial Specialist (CPA and PFS)Charter Life Underwriter (CLU) Certified Financial Planner (CFP)
What does an IRA stand for?Investment Retirement Account.Investment Reduction Account.Income Reduction Account.Individual Retirement Account. Individual Retirement Account.
With the Roth IRA, you can withdraw your contributions at any time with no penalty or taxes to pay. After age of ______, you can make withdrawals of contributions and earnings tax-free.49 1/259 1/26770 1/2 59 1/2
The disadvantages of individual IRAs includeThe limits on the amount you can contribute each year.Income restrictions that reduce or eliminate the benefits for people in higher income brackets.Limit on IRA deduction if you are covered by a retirement plan at work.All of the above. All of the above.
Which of the following is correct about retirement accounts?The 401(k) plan is a salary-reduction plan with early withdrawals being always penalty free.The 401(k) and 403 (b) retirement plans are employer-sponsored programs that offer significant benefis.With the Roth IRA, you can withdraw your contributions at any time, but you always pay taxes and penalty.None of the above. The 401(k) and 403 (b) retirement plans are employer-sponsored programs that offer significant benefis.
Which of the following retirement account may be the best option for some people, where you get no current deduction from your income taxes, but your contributions and earnings grow tax-free and the withdrawals at retirements are tax free.Traditional Deductible IRA.408 (K) plan.Roth IRA.Self-Employed IRA. Roth IRA.
The IRS’s definition of financial hardship of withdrawing money early from your IRA without a penalty is (are)Extraordinary medical expenses.The purchase of a home (first-time home buyer).Emergency payments to stop foreclosure or eviction.All of the above All of the above
Which of the following is correct about retirement accounts?The IRS requires you to withdraw a specific minimum amount out of your 401 (k) beginning no later than April 1 the year you turn age 70 1/2.The IRS requires you to withdraw a specific minimum amount out of your 401 (k) beginning no later than April 1 the year you turn age 59 1/2.Roth IRA and traditional IRA are the same retirement accounts, where you can withdraw your contributions at any time without penalty or paying taxes.All of the above. The IRS requires you to withdraw a specific minimum amount out of your 401 (k) beginning no later than April 1 the year you turn age 70 1/2.
You want to convert equity in your home to cash with a reverse mortgage. What should your minimum age be to qualify?59626988 62
Which of the following provides a retirement benefit based on the number of years you have worked and contributed through payroll taxes to the system?Withholding taxSocial SecurityInflationAnnuity Social Security
Medicare is the federal health care program that provides basic services for people age ____ and older5059 1/26265 65
The main advantage of a 401(k) plan is that it:Provides a high rate of return with little risk.Allows you to shelter retirement savings from taxation.Provides a well diversified mix of investment assets.Has no early withdrawal fees. Allows you to shelter retirement savings from taxation.
Withholding tax isCash balance pensions plan that consists of longevity bonus for the number of years worked.An example of qualified retirement account.The Social Security, Medicare, and income tax withheld each payday by employer.401 (k) tax. The Social Security, Medicare, and income tax withheld each payday by employer.
Which of the following is not correctA retirement plan is a detailed plan for the administration and disposition of your property during your lifetime and at your death.Setting a time frame for retirement: both personal and financial decisions.Compounding is the mathematical means by which interest earned during one period adds to the principal, the next period interest is earned on the resulting principal plus interest.Diversified retirement portfolio reduces the risk by spreading investments dollars over numerous stocks and bonds to minimize the impact should one of the investments turn bad. A retirement plan is a detailed plan for the administration and disposition of your property during your lifetime and at your death.
Which retirement plan may use tax-deferred annuities or mutual funds, and it is the retirement plan for religious, educational, and other non-profit groups.401(k) 403(b)401(t)403 (IRA) 403(b)
John and Jane are in their late 20s with two young children. Their near-term financial planning concerns would include all of the following, except:Asset acquisition and debt planning.Employee benefit and Insurance planning.Investment and tax planning.Estate planning. Estate planning.
A _____________ is a qualified defined contribution plan offered by employers. 301(a) account509(re) account401(k) accountNone of the above 401(k) account
Which of the following is not correct?Purchasing power is what your dollars will buy relative to another point in time.Social Security and Medicare were designed to provide a safety net so elderly citizens could count on some income and health care.Medicare insurance plan is only suitable for low-income and disabled people.All of the above. Medicare insurance plan is only suitable for low-income and disabled people.
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Finance Flashcards

Chapter 9, Corporate Finance

Equity securities are certificates of ownership of a corporation. True
A large number of investors in equities actually own through pension or retirement funds. True
Companies raise capital in secondary markets by issuing new securities. False
The common stockholders of a company have unlimited liability. False
Preferred stockholders are not guaranteed any dividend payments and have the lowest-priority claim on the firm’s assets in the event of bankruptcy. False
In the general dividend-valuation model, the price of a share of stock is the present value of all expected future dividends. True
For a company that has no growth, dividends stay constant over time. True
The constant-growth stock has dividends growing at a constant rate over time. True
Whenever the constant-growth rate for dividends exceeds the required rate of return on the common stock, the constant-growth model provides invalid solutions. True
The bond valuation model can be used to value perpetual preferred stocks. False
Which of the following statements is true about secondary markets? In secondary markets, outstanding shares of stock are bought and sold among investors.
Which of the following statements is NOT true about common stock? Owners of common stock are guaranteed dividend payments by the firm.
Which of the following statements is true about common stock? Owners of common stock have the lowest-priority claim on the firm’s assets in the event of bankruptcy.
Which of the following statements is true? In order for the constant growth dividend model to properly value a firm’s common stock, R must be greater than g.
Which of the following statements about preferred stock is FALSE? Failure to pay dividends on preferred stocks will result in a default.
The dealer’s selling price of a given stock is also known as the ask price. True
Which of the following is a characteristic of common stock? Limited liability for owners
The value of a firm’s equity is calculated as the sum of the present value of all expected future cash flows. True
The bid price is the price that a dealer pays for a security. True
Preferred stock is legally a form of debt of a corporation. False
For the constant growth rate dividend model to work, which of the following assumptions must hold? The growth rate must be less than the required rate of return.
Growth stocks typically pay little or no dividends. True
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Finance Flashcards

Chapter 16 personal finance

Grace period The free period, also called ____, allows you to avoid a finance charge if you pay in full before the due date.
creditor One who lends money or the use of goods and services for the payment at a later date is called….
Credit Paying at a future date for the present use of goodds and services or money is called _.
Line of credit A(n) _ is a pre-established amount that can be borrowed on demand.
Collateral A loan on which the goods purchased with the loan serve as _ is a type of secured loan.
Open ended _ is credit where by you can ad purchases up to a set credit limit.
Close ended A loan for a specific amount that must be repaid in full, including finance charges, by a stated due date, is called _.
Cash advance A(n) _ is money borrowed against the credit card limit.
Sales finance A manufacturer-related company, called a(n) _, makes loans through authorized representatives.
loan sharks _ are unlicensed lenders who charge illegal rates.
Differed billing A service to customers called _ allows you to charge now and not be billed for several months.
Finance charge The interest you pay for the use of credit is called a _.
Service charge Almost everyone uses _ credit, whic is having work performed and paying for it later.
Retail stores Businesses called _ stores offer goods and services directly to consumers and include department stores, drugstores, and clothing stores.
Finance companies Small loan companies, also called _, charge higher interest rates and take more risk.
Usury In some states, maximum interest rates are set by _ laws.
Pawn broker A(n) _ is a legal business where loans are made based on the value of merchandise used as collateral.
Collateral Something of value that can be sold to pay a debt is often referred to as _.
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Finance Flashcards

inquizitive chapter 10

Winners of – elections go on to face each other in the – election. primary general
One advantage digital media has over traditional media concerning campaigns is its low cost. true it does
In 2016, – won the electoral college. In that same election, – won the popular vote. Donald Trump Hillary Clinton
Match the frequency of the election cycle to the corresponding election type.presidential congressional presidential – 4 years congressional – 2 years
Relative to campaigns in the nineteenth century, today’s campaigns require – effort by campaign workers and – campaign money. less more
Which of the following statements are correct regarding the stability of party identification? Looking at the electorate as a whole, party identification is stable.Individuals rarely change their party identification.
One of the unexpected twists of the 2016 election was how strong of a challenge Hillary Clinton faced for the Democratic nomination. Her strongest challenge came from which liberal Senator from Vermont? bernie sanders
Ballot initiatives influence political behavior. Which of the following characteristics are correct regarding citizens in states with ballot initiatives? higher levels of turnoutmore knowledge about politics
Since America’s Founding, candidates for president have been nominated using a variety of methods. Put the following nomination methods in order from earliest in American history to the most recent. congressional “King Caucus”delegates chosen by state party leadersdelegates chosen by primaries and caucuses
Match the type of campaign on the left with each campaign characteristic that describes it on the right.grassroots campaign mass media campaign local campaign-grassroots campaignorganizationally driven-grassroots campaignstatewide campaign-mass media campaignmoney-intensive-mass media campaign
In the United States, which levels of government are most responsible for administering elections? city governmentscounty governmentsstate governments
Maria is deciding whether to vote to re-elect a sitting president or to vote for the other party’s challenger. She decides to engage in retrospective voting. As a retrospective voter, she might consider which of the following? how the economy did during the president’s previous term in office
Which of the following set groups such as 527s and 501(c)(4)s apart from more traditional campaign finance groups such as political action committees? These groups are not subject to the spending limits of the Bipartisan Campaign Finance Reform Act.These groups cannot coordinate directly with campaigns.
McCutcheon et al. v. FEC (2014) removed limits on individuals’ campaign contributions
Citizens United v. FEC (2010) government could not restrict independent expenditures by corporations
Buckley v. Valeo (1974) introduced idea that campaign contributions count as speech
When is party identification most likely to influence a person’s vote choice? when that person is voting on state legislative candidateswhen that person is unfamiliar with the issueswhen that person knows little about the candidates
Direct democracy allows voters the opportunity to directly translate their preferences into government policy. Match the following characteristics of direct democracy to their respective form—ballot initiatives or referenda. Ballot Initiatives: Allow citizens to place proposed laws directly on ballotReferenda: State legislatures refers laws to voters for popular vote; present in 50 states
Order the political candidates on their likelihood of attracting campaign donations from interest groups from most likely to least likely. 1. Incumbent members of majority party2. Incumbent member of minority party3. Challenger candidate from majority party4. Challenger candidate from minority party
Which form of electoral system is most common in the United States? plurality system
Which statement best characterizes the relationship between consumer confidence and presidential elections? the incumbent party tends to win when the confidence exceeds 100
Negative campaign ads are more likely to address -, while positive campaign ads tend to focus on -. policy positions personal characteristics
The trend in campaign finance law over time has been toward which the following? fewer restrictions on campaign donations
By participating in as many newsworthy events as possible, such as visiting orphanages or disaster sites, candidates are often attempting to save money by generating so-called __________ media. free media
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Finance Flashcards

BUDGETS AND FINANCE

The relationship between the federal budget and the national economy is reciprocal, because the budget affects the economy and the economy shapes the budget.
Articulated by his book published in 1936, the theory that government can use the budget to steer the economy can be attributed to John Maynard Keynes.
The Congressional Budget Office estimates that between 2009 and 2020 the federal debt owned by the public as a share of the total economy will increase
The ______ proposes the budget and the ______ authorizes expenditures and determines how revenues are obtained. agencies; Congress
By often drafting appropriations acts as narrowly as possible, Congress attempts to reduce the possibility that the president will exercise the authority to impound?
______ revolutionized the federal budget process and increased presidential power. The Budget and Accounting Act
Top-down budgeting differs from bottom-up budgeting in that the former examines the big picture.
Management by objectives and zero-base budgeting are techniques to reform incrementalism.
Prior to 1921, ______ provided the primary leadership during the federal budget process. Congress
Creating a biennial budget and enacting a balanced-budget constitutional amendment were processes implemented to reform the budget process.
Government taxation and spending is called fiscal policy.
The Federal Reserve manages the money supply, a responsibility also known as monetary policy.
The share of the federal budget that Congress and the president can readily change (control) in any given year went from 66 percent in 1965 to ______ percent in 2009. 35%
A congressional ______ commits money for spending, and congressional ___ create programs and place limits on the amount of money that can be spent. appropriation; authorizations
Congress mainly uses legislative controls and ______ to restrain executive discretion. limits on executive impoundment
The classic question of basic budgeting: “On what basis shall it be decided to allocate x dollars to activity A instead of activity B?” can be attributed to whom? V.O. Key
T/F: The Performance Assessment Rating Tool (PART) was developed by George W. Bush. True
T/F: The larger the federal deficit, the more of the federal budget must be devoted simply to paying interest. True
T/F: The Congressional Budget Office is the congressional equivalent to the president’s Office of Management and Budget. True
T/F: The Impoundment Control Act was created to prevent the gross abuse of impoundment authority by President George W. Bush. False
T/F: The flow of money throughout the bureaucracy provides a tool for controlling the implementation of government programs. True
T/F: The federal budget is just like state and local budgets having the same amount of resources to sustain deficits and the same amount of fiscal authority that state and local governments do. False?
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Finance Flashcards

Operations Management Chapter 1

1. Operations managers are responsible for assessing consumer wants and needs and selling and promoting the organization’s goods or services. FALSE Operation managers are not responsible for promoting goods/services.
2. Often, the collective success or failure of companies’ operations functions will impact the ability of a nation to compete with other nations. TRUE A nation is often only as competitive as its companies.
3. Companies are either producing goods or delivering services. This means that only one of the two types of operations management strategies are used. FALSE Most systems involve a blend of goods and services.
4. Operations, marketing, and finance function independently of each other in most organizations. FALSE Operations, marketing and finance are naturally dependent upon one another
5. The greater the degree of customer involvement, the more challenging the design and management of operations. TRUE Greater customer involvement leads to more complexity in the design and management of operations.
6. Goods producing organizations are not involved in service activities. FALSE Most systems involve a blend of goods and services.
7. Service operations require additional inventory because of the unpredictability of consumer demand. FALSE Service operations cannot use inventory as a hedge against unpredictable demand.
8. The value of outputs is measured by the prices customers are willing to pay for goods or services. TRUE Customers’ willingness to pay for goods or services sets the value of these outputs.
9. The use of models will guarantee the best possible decisions. FALSE Models are useful, but their use does not guarantee the best decisions.
10. People who work in the field of operations should have skills that include both knowledge and people skills. TRUE Operations management requires a blend of knowledge and people skills.
11. Assembly lines achieved productivity but at the expense of standard of living. FALSE Productivity and standard of living go hand in hand.
12. The operations manager has primary responsibility for making operations system design decisions, such as system capacity and location of facilities. FALSE The operations manager plays a role in these decisions but is not primarily responsible for them.
13. The word “technology” is used only to refer to “information technology”. FALSE Technology also refers to the technology involved in resource transformations.
14. ‘Value added’ by definition is always a positive number since ‘added’ implies increases. FALSE Some transformations result in the output being worth less than the inputs.
15. Service often requires greater labor content, whereas manufacturing is more capital intensive. TRUE Service operations tend to be more labor-intensive than manufacturing.
16. Measurement of productivity in service is more straightforward than in manufacturing since it is not necessary to take into account the cost of materials. FALSE Materials cost must be considered in services as well.
17. Special-purpose technology is a common way of offering increased customization in manufacturing or services without taking on additional labor costs. FALSE Special-purpose technology typically reduces costs through standardization.
18. One concern in the design of production systems is the degree of standardization. TRUE How standardized outputs will be is a critical consideration in the system design question.
19. Most people encounter operations only in profit-making organizations. FALSE Operations are also relevant to not-for-profit organizations such as the Red Cross.
0. Service involves a much higher degree of customer contact than manufacturing. TRUE Customer contact tends to be much higher in services.
21. A systems approach emphasizes interrelationships among subsystems, but its main theme is that the whole is greater than the sum of its individual parts. TRUE Optimizing the performance of individual subsystems does not guarantee optimal performance from the overall system.
22. The Pareto phenomenon is one of the most important and pervasive concepts that can be applied at all levels of management. TRUE Pareto phenomena can be observed in a wide variety of organization situations.
23. Operations managers, who usually use quantitative approaches, are not really concerned with ethical decision-making. FALSEEthics issues are touching on all areas of management, including operations.
24. The optimal solutions produced by quantitative techniques should always be evaluated in terms of the larger framework. TRUEQuantitative techniques have limitations that must be considered.
25. Managers should most often rely on quantitative techniques for important decisions since quantitative approaches result in more accurate decisions. FALSEJust as other techniques do, quantitative techniques have limitations.
26. Many operations management decisions can be described as tradeoffs. TRUEManaging tradeoffs is the essence of operations management.
27. A systems approach means that we concentrate on efficiency within a subsystem and thereby assure overall efficiency. FALSESubsystem efficiency doesn’t necessarily translate into overall efficiency.
28. Prior to the Industrial Revolution, goods were produced primarily by craftsmen or their apprentices using custom made parts. TRUEAfter the Industrial Revolution, more standardized approaches became common.
29. Elton Mayo’s “Hawthorne Experiment” was the focal point of the Human Relations Movement, which emphasized the importance of the human element in job design. TRUEThe Hawthorne Experiments were the beginning of the Human Relations Movement.
30. Among Ford’s many contributions was the introduction of mass production, using the concept of interchangeable parts and division of labor. TRUEFord made mass production a practical success.
31. Operations management and marketing are the two functional areas that exist to support activities in other functions such as accounting, finance, IT and human resources. FALSEOperations management and marketing are supported by these functions.
32. Lean production systems incorporate the advantages of both mass production and craft production. TRUELean production blends the best of both worlds.
33. As an abstraction of reality, a model is a simplified version of a real phenomenon. TRUEModels are valuable abstractions and simplifications of real, complex phenomena.
34. Lean production systems use a highly skilled work force and flexible equipment. TRUELean depends on a skilled workforce.
35. The lean production philosophy has been slow to be adopted in service industries. FALSELean concepts apply very well in service industries.
36. Operations Management activities will be less important in the future because many firms are becoming service-oriented operations rather than goods producing operations. FALSEOperations management is just as important for service firms.
37. A modern firm has two supply chain considerations – external links with suppliers and customers, and an internal network of flows to and between the operations function itself. TRUESupply chain considerations are at play both in and beyond the modern firm.
38. Operations management involves continuous decision-making; hopefully most decisions made will be: C. informed Informed decisions incorporate all relevant issues.
39. A ‘product package’ consists of: C. a combination of goods and services Most firms are not pure service or manufacturing firms; they produce combinations of goods and services.
40. Business organizations consist of three major functions which, ideally: A. support one another Finance, Marketing and Operations are these major functions.
41. Which of the following is not a type of operations? E. all the above involve operationsAll of these involve taking inputs and transforming them.
42. Technology choices seldom affect: C. union activity. Union activity can affect a firm’s technology choices, but not the other way around.
43. Measurements taken at various points in the transformation process for control purposes are called: D. feedback Feedback is used to monitor and improve processes.
44. Budgeting, analysis of investment proposals, and provision of funds are activities associated with the _______ function. D. finance These are the primary tasks for the finance function.
45. Which one of the following would not generally be classified under the heading of transformation? C. staffing Staffing doesn’t involve transforming resources so much as it involves acquiring them.
46. Manufacturing work sent to other countries is called: B. outsourced Outsourcing is increasingly a part of operations management.
47. Product design and process selection are examples of _______ decisions. C. system design These major decisions affect decisions made at lower levels.
48. The responsibilities of the operations manager are: B. planning, organizing, staffing, directing, and controlling The scope of operations management ranges across the organization.
49. Knowledge skills usually don’t include: C. communication skills Communication skills generally are considered to be people skills.
50. Which of the following is not true about systems approach? C. A systems approach concentrates on efficiency within subsystems. Subsystem efficiency doesn’t necessarily translate into overall system efficiency.
51. What is credited with gains in industrial productivity, increased standards of living and affordable products? D. assembly lines Mass production has played a prominent role in increasing standards of living.
52. Production systems with customized outputs typically have relatively: E. skilled workersSkilled workers are necessary to accommodate the variation inherent in customized outputs.
53. Which is not a significant difference between manufacturing and service operations? A. cost per unit Manufacturing operations aren’t necessarily more or less efficient than service operations.
54. Which of the following is not a characteristic of service operations? D. easy measurement of productivity The productivity of service operations is often hard to measure.
55. Which of the following is a recent trend in business? C. supply chain management Supply chain management involves a broader systemic view of operations.
56. Farming is an example of: C. non-manufactured goods Farm operations are not manufacturing operations.
57. Dealing with the fact that certain aspects of any management situation are more important than others is called: C. recognition of priorities Solutions tend to be targeted toward higher priority aspects of a situation.
58. The fact that a few improvements in a few key areas of operations will have more impact than many improvements in many other areas is consistent with the: B. Pareto phenomenon Pareto phenomena direct our attention to the difference between the “important few” and the “trivial many.”
59. The process of comparing outputs to previously established standards to determine if corrective action is needed is called: C. controlling Controls are used to maintain performance.
60. Which of the following does not relate to system design? C. inventory management Inventory management is a system operation decision area.
61. Taking a systems viewpoint with regard to operations in today’s environment increasingly leads decision-makers to consider ______________ in response to the ___________. C. sustainability; threat of global warming Sustainability is a relatively recent operations management consideration.
62. Some companies attempt to maximize the revenue they receive from fixed operating capacity by influencing demands through price manipulation. This is an example of __________________: D. Revenue management Revenue management is used to ensure that as much perishable capacity as possible is sold.
63. Which of the following is not an ongoing trend in manufacturing? D. mass production for greater economies of scale Manufacturers are moving away from mass production for economies of scale.
64. Which of the following is not a benefit of using models in decision making? D. All of the above are benefits. Models are useful tools for making decisions without confronting the actual situation with all of its complexity.
65. Modern firms increasingly rely on other firms to supply goods and services instead of doing these tasks themselves. This increased level of _____________ is leading to increased emphasis on ____________ management. A. outsourcing; supply chain Supply chain management takes a more systemic view of the firm, its operations, and its suppliers.
66. Operations and sales are the two ________ functions in businesses. E. line Others are support functions.
67. Marketing depends on operations for information regarding ___________. B. lead time Marketing uses lead time information to make promises to customers.
68. Two widely used metrics of variation are the __________ and the _________. The mean and standard deviation summarize important facets regarding the variation in a process.. mean; standard deviation
69. Which of the following statements about variation is FALSE? D. Any variation makes a production process less productive. The choice to offer customers greater variety might increase variation but increase productivity even more.
70. Which of the following is essential to consider with respect to managing a process to meet demand? A. strategy B. demand forecasts C. capacity D. random variability E. all of the above All of these play a role in determining whether a process can meet demand.
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National Finance

An “Acceleration” clause most nearly means to speed up payment of an overdue debt.
The term, PITI refers to the parts of a mortgage loan payment, which of the following correctly describes PITI, Principal, Interest, Taxes, and Insurance.
When a mortgage is paid off, what clause allows the lender to release the mortgage rights and issue a satisfaction piece? Defeasance
If prioritizing loans as when recording, a second mortgage or deed of trust is referred to as a junior mortgage.
Typically, a mortgage loan monthly payment consists of PITI, (P) the amount borrowed from the lender is called the principal.
Of the following parties to a mortgage, whose interest is benefitted by an acceleration clause? The mortgagee
An agreement to waive prior rights in favor of another is called subordination.
Which is true about a promissory note? It is the primary evidence of a loan
A buyer assumes the mortgage. How is the seller relieved of the liability? Novation
A mortgage clause used in refinancing the first mortgage which allows the second mortgage to take the first place is called subordination.
Foreclosure would terminate which of the following? Equitable redemption rights
Ronald defaulted on his home mortgage loan payments; therefore, the lender obtained a court order to foreclose on the property. At the foreclosure sale, Ronald’s house sold for only $29,000 and the unpaid balance of his loan is $40,000. What must the lender do to recover the $11,000 Ronald still owes? Seek a deficiency judgment
If the amount realized at a Sheriff’s sale upon a delinquent mortgage is more than the indebtedness, the excess belongs to the mortgagor.
Which would be first in priority? Special Assessments
The buyer was required to pay $4,000 in discount points. The loan balance was $80,000. How many points did the lender require? 5
A lender charges discount points on a loan to improve the lender’s yield.
If a borrower purchases a property for $200,000, and borrows $160,000 he/she is said to have a LTV ratio of? 80%
The interest on a real estate mortgage loan is what type of interest? Simple
The loan amount is $70,000, and the monthly principal and interest payment will be $479.00 a month for 30 years. How much interest will be paid over the term of the loan? $102,440.00
A buyer got a 30 year loan with a loan balance of $65,000 with an interest rate of 10% and a factor of 8.78. What will be the borrowers monthly P & I payment? $570.70
Remember for purposes of determining the new loan balance, you will not have to know how to determine the payment amount.
In Step 3 what do you subtract from the monthly payment amount to solve for the monthly principal? Current monthly interest
Determine the monthly interest on a loan with a balance of $168,300, a monthly payment of $1,356.80, and an interest rate of 7.75%? $1,086.94.
A homeowner has a mortgage balance of $149,570.75. If the interest rate on the loan is 9.5% and the monthly payment is $1,303.55 what will be the mortgage balance after the next two payments? $149,330.91
A mortgage has a balance of $70,000 at 11.5% interest for a period of 25 years. The monthly P & I payment is $711.53, what is the interest charge for the second monthly payment? $670.44
What is the balance on an amortized loan of $340,000 after the first payment if the interest rate is 6% with a monthly P&I payment of $2,028? $339,672.00
A type of long term permanent financing for residential construction or large construction projects, that replaces the construction loan is called a (an) takeout loan.
A type of loan where interest and principal are paid on an equal basis until the final payment, which is larger, is called a Balloon Loan or partially amortized loan.
A type of mortgage which allows the lender to increase the outstanding balance of a loan up to the original amount of the loan in order to advance additional funds is called an open-end mortgage.
An Adjustable Rate Mortgage (ARM) contains an escalator clause that allows the interest to adjust over the loan term. How often the loan rate may be changed is determined by the adjustment period.
The purchaser of real estate by deed or the buyer under a contract for deed is called the vendee.
With an Adjustable-rate Loan the interest rate fluctuates and is usually tied to an index. The interest rate for any given period is the indexed rate plus the margin amount.
A loan on real estate, that includes fixtures, and appliances used extensively in the sale of condominiums is a (an) package mortgage.
A real estate loan where a homeowner receives monthly payments based on accumulated equity rather than a lump sum and is repaid upon the death of the owner or sale of the property is a (an) reverse annuity mortgage.
A final payment of a mortgage loan that is considerably larger than the other monthly payments because the loan was not fully amortized is called a balloon payment.
A type of payment plan where a buyer pays interest only and the final payment is principal at the end of the loan period. Straight
A mortgage requires monthly payments of $852.10 for 15 years and a final payment of $29,800. This type of loan is called a (an) balloon or a partially amortized loan.
When a real estate loan uses both real and personal property as collateral for the loan it is called a (an) package mortgage.
A Budget Mortgage is a loan, which has a payment composed of the following? Principal, interest, taxes and insurance
A developer would most likely obtain which of the following types of mortgage on a new subdivision? Blanket mortgage
What can the VA require a veteran do when obtaining a loan? Make the veteran automatically assume liability for the loan
If a Veteran wanted to buy a $60,000 house in a city with a population of 100,000 people, which of the following loans could he NOT apply for? RECD loan
The basic difference between an FHA and a VA loan is The FHA insures loans, the VA guarantees them.
A veteran desired a loan to buy a 200 acre residence. There are no VA lenders in the area. Which could happen? The VA could loan the money themselves.
Conventional mortgage loans are not guaranteed or insured by any government agency.
For a veteran to obtain a VA loan, the VA must issue a certificate of eligibility
When you obtain an FHA loan, what generally happens? An FHA appraiser must appraise the property
Private mortgage insurance is associated with conventional loans.
Rural Economic and Community Development (RECD) loans are either made directly by RECD or made by a private lender with RECD guaranteeing a certain percentage.
A veteran had a VA loan using his full entitlement. He allows another veteran to assume the loan without VA approval. Could he immediately get another VA loan? No, because he is still liable for the loan.
On a government backed loan, which of the following would be permitted concerning pre-payment penalties? Prepayment penalties are not allowed, under any circumstances, on VA or FHA loans.
What is the purpose of FHA? To act as an insurance company of first mortgages
A Buyer has demonstrated the financial capacity and creditworthiness required to afford the asking price by providing the lender with all of the following, except an appraisal equal to or higher than the contract price.
Transfer taxes are generally paid by the seller.
Protection to an owner of property against losses sustained as a result of a defective title to real estate can be accomplished by title Insurance.
Many states charge what is called a transfer tax when the property is conveyed by one of the following means deed.
When underwriting a mortgage loan a lender considers all of the following, except credit worthiness of the seller.
The recorded history of matters that affect the title to a specific parcel of real estate, such as ownership, encumbrances and liens, usually beginning with the original recorded source of the title is called the chain of title.
Under which of the following would one MOST likely see an estoppel certificate? A lender sells a loan and the new mortgagee wants to know the existing balance
Prior to closing, a final walkthrough of the property should be performed to ensure that everything has remained as stated in the sales contract. The walkthrough is generally completed by the buyer.
Assets include all of the following, except revolving and installment loan accounts.
A settlement agent could be all of the above.
A qualified buyer is one who has demonstrated the financial capacity and credit worthiness required to afford the asking price. In qualifying a buyer the lender looks at these factors? Income, net worth and credit history
Settlement is another name for closing and brings the real estate transaction to completion.
A written pledge by a lender to lend a certain amount of money to a qualified borrower on a particular piece of real estate for a specified time under specific terms is a conditional approval.
The legal doctrine by which a person is prevented from asserting rights or facts that are inconsistent with a previous position or representation made by act, conduct or silence is known as estoppel.
Which of the following is considered a part of the secondary mortgage market? Federal Home Loan Mortgage Corporation (FHLMC)
All of the following were originally established to buy and sell mortgages in order to stimulate mortgage lending, except Maggie Mae (MGIC).
An increase in the availability of money would lead to which effects? Interest rates would go down
A mortgage in which the lender participates in the income of the mortgaged property beyond a fixed return is called participation financing.
A commercial bank would usually make all of the following loans EXCEPT, a pension fund loan.
All of the following are sources for obtaining a residential mortgage for the purchase of a single-family residence, except FNMA.
S&Ls are now regulated by the Federal Housing Finance Board (FHFB) and deposits are insured by the Deposit Insurance Fund for at least $250,000.
As a group, the three secondary mortgage market participants; Fannie Mae, Ginnie Mae and Freddie Mac provide an outlet for primary lenders to sell their mortgage loans.
The two biggest money lenders of residential real estate mortgages are savings and loans and banks.
The Federal Reserve controls lenders by telling lenders what percentage of their assets they can loan.
The primary distinction/s between the primary and secondary mortgage market is?
All of the following purchase mortgages from savings and loans in the secondary market EXCEPT the Federal Housing Administration.
The Federal Reserve controls the money supply by requiring how much of a bank’s assets have to be on reserve.
Which of the following secondary market organizations is a quasi-government corporation? Fannie Mae (FNMA)
The Federal National Mortgage Association (FNMA) sells seasoned mortgages and deeds of trust to individual investors and financial institutions. A seasoned mortgage is one that has been in existence for some time and has a good record of repayment by the mortgagor.
The Truth in Lending laws apply to the financing of single family residences.
Real estate can be a poor investment if the investor needs ready cash.
Which agency administers RESPA? Consumer Financial Protection Bureau (CFPB)
In terms of stating mortgage rate interest, the standardized rate required by the Truth in Lending Act to facilitate comparison loan shopping is called the annual percentage rate.
Purchasing an investment property , like an apartment complex may be more rewarding if the investor has the required management skills.
The Equal Credit Opportunity Act prohibits lenders from discriminating against consumers in the granting of credit based on the following protected classes; race, color, religion, national origin, sex, marital status, age or dependency on public assistance.
A settlement agent must provide the seller with the Closing Disclosure at consummation of the mortgage.
A standardized yardstick expressing the true annual cost of borrowing is expressed as the “APR” and includes the contract interest rate and points.
Regulation Z is not concerned with the loan to value ratio
An advantage of real estate investment is tax savings, the capital gain exclusion on a principal residence excludes the gain up to $250,000 per individual (up to $500,000 for a couple).
Which of the following mortgage closing transactions require compliance under TRID rules? Unimproved property
Truth In Lending applies to all of the following, except commercial property.
As with most investments, there is a high degree of risk in buying and selling investment real estate because market conditions are changing all the time.
Under the ECOA, a lender can base lending decisions on all of an individual’s information, except marital status.
Real estate is generally a good investment because it keeps up with inflation trends.
The two major sections of the Truth In Lending law, includes advertising and Annual Percentage Rate (A.P.R.).
RESPA requires lenders to provide a HUD “Guide to Settlement” booklet and a Good Faith Estimate (GFE) of all costs related to settlement to borrowers within 3 days of loan application.
A primary purpose of the Truth in Lending Act is to make loan cost information readily available to consumer borrowers.
The Truth-in-Lending Act applies to which of the following? An advertisement for a house for sale by a broker which discloses financing terms.
The Real Estate Settlement Procedures Act and Regulation Z are separate acts dealing with separate financing issues.
The following real estate financing statements all contain trigger terms under Regulation Z of the Truth in Lending Act, except “Great assumable low interest rate loan”.
Which of the following laws require(s) that finance charges be stated as an annual percentage rate (APR)? Truth in Lending Act, Regulation Z
Under the ECOA, a lender can base lending decisions on all of an individual’s information, except sex.
Unsophisticated investors should seek legal council
A mortgage broker _____________???? is a lender.
A buyer wanted to use a promissory note for consideration on the purchase of a property. Can he do this Yes, this is acceptable as long as the seller agrees.
A borrower bought a $74,000 house with no down payment. The loan was probably ______________ a VA loan.
In most states, by paying the debt after a foreclosure sale, the mortgagor has the right to regain the property. What is this right called Statutory right of redemption
Effective October 1, 2015, the real estate industry has new requirements as specified in the TILA/RESPA Integrated Disclosure (TRID) Rule.
Under an FHA graduated payment mortgage, which of the following fluctuates over the term of the loan Monthly payments
RESPA would prohibit which of the following acts???? Kickbacks
On an 8% straight term loan of $6,071 the borrower paid total interest of $1,700. How long did he have the loan 42
A standardized yardstick expressing the true annual cost of borrowing is expressed as a/an APR
All of the following are true of conventional loans except what? disclose the true costs of obtaining credit.
The primary purpose of Truth in Lending is to _____________ control interest rates on behalf of the consumer.
In which of the following markets may a lender sell a loan that a mortgage banker has previously originated? Secondary market
An owner was selling his own home. Can he advertise the down payment Yes, because it was his own home
Which of the following is considered a conventional loan? Commercial bank ARM loan
An increase in the availability of money would lead to which effect? Interest rates would go down.
If advertised alone, which would be in violation of TRUTH IN LENDING?????? “No down payment required”
A VA loan may be granted for the purchase of a one-family to four-family if the veteran agrees to live there
If a single parent is applying for a real estate loan, when would the fact have to be revealed that part of the parent’s income is from child support? If the parent was relying on the income for repayment of the loan
The finance charges recorded on the Truth in Lending statements would include all of the following EXCEPT: Loan fees charged by the lender
Which of the following would usually occur in a sale-and-leaseback transaction? The property is sold on the condition that the new owner lease it back to the seller at the time title passes.
Who is NOT an originator of primary loans? FHA
A mortgage company makes a number of loans to be assembled into one package and sold to permanent investors. This process is an example of interim financing to the mortgage company and is called: warehousing
An impound or reserve account MOST benefits whom? the lender
The Loan Estimate must be delivered to an applicant within three business days of loan application.
An owner advertised “beautiful acreage only $5,000 down, owner will personally finance down payment.” Would this be in violation of the Truth in Lending Act? No, owners are not covered by Reg. Z.
Which of the following describes a mortgage that requires principal and interest payments at regular intervals and calls for the liquidation of the debt by periodic installments until the debt is satisfied? Amortized loan
is the cost per thousand that is required to create the principal and interest payment necessary to pay off a loan. a point
The lender is not insured or guaranteed against a loss, by reason of the borrower’s default in repayment, under which type of loan? conventional
Who is the largest purchaser in the secondary market? Fannie Mae
A home improvement company was negotiating with a home owner to add two rooms onto a home. The company agreed to take a second mortgage as long as the homeowner also included the rest of the property in the loan. The company and the homeowner agreed to a price and the company provided the necessary disclosure form on Monday and the homeowner signed the agreement at noon the following day. Assuming that the week had five business days, until what time could the homeowner rescind the loan? friday, midnight
Why would a mortgagee (beneficiary) have an appraisal on the property? To assure the property value is sufficient to cover the loan
Under Regulation Z, consummation is defined as the time when a consumer becomes contractually obligated on a credit transaction.
A buyer wants to take out an FHA loan. The broker should refer the buyer directly to any approved lending institution such as a bank or savings and loan association.
When the lender under a deed of trust required title insurance, who would be the most likely person to pay for it? The trustor
A buyer assumes the mortgage. How is the owner relieved of the liability? novation
The Smiths’ purchased a residence for $75,000. They made a down payment of $15,000 and agreed to assume the seller’s existing mortgage, which had a current balance of $23,000. The Smiths’ financed the remaining $37,000 of the purchase price by executing a second mortgage whereby the seller became a mortgagee. This type of loan is called a purchase mortgage
In a repayment of a mortgage loan, which type of interest is used? simple
The seller under a land contract is called vendee
When the amortized payment of a mortgage remains constant over the period of the loan but leaves an outstanding balance to be paid at the end, this payment is called: balloon payment
The clause in a trust deed or mortgage which permits the mortgagee to declare the entire unpaid sum due upon a default by a mortgagor is called a(n) acceleration clause.
In an installment land contract, what type of title did the seller retain? legal
Which transaction requires a securities’ license? selling shares in fannie mae
Usury MOST nearly means illegal interest
The maximum permissible “loan to value ratios” are based on sale price or appraised value, whichever is lower.
Categories
Finance Flashcards

Int. Finance Ch. 5 (Test 2) Bank – Concepts only

Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances?a. Purchase Canadian dollars forward.b. Purchase Canadian dollar futures contracts.c. Purchase Canadian dollar put options.d. Purchase Canadian dollar call options. c. Purchase Canadian dollar put options.
Thornton, Inc. needs to invest 5 million Nepalese rupees in its Nepalese subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction. Thus, Thornton would: convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today’s forward rate.
In the United States, the typical currency futures contract is based on a currency value in terms of: U.S. dollars.
Currency futures contracts sold on an exchange contain: a commitment to the owner, and are standardized.
Currency options sold through an options exchange contain: a right but not a commitment to the owner, and are standardized.
Forward contracts contain: a commitment to the owner, and can be tailored to the owner’s desire.
Which of the following is the most likely strategy for a U.S. firm that will be receiving Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)? Sell a futures contract on francs.
Which of the following is the most unlikely strategy for a U.S. firm that will be purchasing Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)? Sell a futures contract on francs.
If your firm expects the euro to substantially depreciate, it could speculate by ____ euro call options or ____ euros forward in the forward exchange market. selling; selling
When you own ____, there is no obligation on your part; however, when you own ____, there is an obligation on your part. call options; forward contracts
The greater the variability of a currency, the ____ will be the premium of a call option on this currency, and the ____ will be the premium of a put option on this currency, other things being equal. greater; greater
Which of the following is true?A. The futures market is used for both hedging and speculating while the forward market is primarily used for hedging.B. The futures market is used for both hedging and speculating while the forward market is primarily used for speculating.C. Both the futures market and the forward market are primarily used for speculating.D. The futures market is primarily used for hedgingwhile the forward market is used for speculating. A. The futures market is used for both hedging and speculating while the forward market is primarily used for hedging.
Which of the following is true?A. Most forward contracts between firms and banks are for speculative purposes.B. A security deposit is not required for futures contracts. C. The forward contracts offered by banks have maturities for only four possible dates in the future.D. None of these are correct. D. None of these are correct.
If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes. sell a euro call and buy a euro put
If you expect the British pound to appreciate, you could speculate by ____ pound call options or ____ pound put options. purchasing; selling
Which of the following is correct?a. The longer the time to maturity, the lower the value of a currency call option, other things being equal.b. The longer the time to maturity, the lower the value of a currency put option, other things being equal.c. The higher the spot rate relative to the exercise price, the greater the value of a currency put option, other things being equal.d. The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things being equal. d. The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things being equal.
Research has found that the options market is: efficient after controlling for transaction costs.
Assume no transactions costs exist for any futures or forward contracts. The price of British pound futures with a settlement date 180 days from now will: be about the same as the 180-day forward rate.
Assume that a currency’s spot and future prices are the same, and the currency’s interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would ____ the currency’s spot rate and ____ the currency’s futures price. put upward pressure on; put downward pressure on
A firm sells a currency futures contract, and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by: buying an identical futures contract.
If the spot rate of the euro increased substantially over a one-month period, the futures price on euros would likely ____ over that same period. increase substantially
A U.S. firm is bidding for a project needed by the Swiss government. The firm will not know if the bid is accepted until three months from now. The firm will need Swiss francs to cover expenses but will be paid by the Swiss government in dollars if it is hired for the project. The firm can best insulate itself against exchange rate exposure by: buying franc call options.
If you purchase a straddle on euros, this implies that you:A. finance the purchase of a call option by selling a put option in the euros.B. finance the purchase of a call option by selling a call option in the euros.C.finance the purchase of a put option by selling a put option in the euros.D. finance the purchase of a put option by selling a call option in the euros.E. None of these are correct. E. None of these are correct.
Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If it expects the yen to weaken, it could ____ to hedge the exchange rate risk on those exports. sell futures contracts on yen
A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as: out of the money.
Which of the following is NOT an instrument used by U.S.-based MNCs to cover their foreign currency positions?A. forward contractsB. futures contractsC. non-deliverable forward contractsD. optionsE. All of these are instruments used to cover foreign currency positions. E. All of these are instruments used to cover foreign currency positions.
When the futures price on euros is below the forward rate on euros for the same settlement date, astute investors may attempt to simultaneously ____ euros forward and ____ euro futures. Sell; Buy
When the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest rate than the U.S. interest rate, astute investors may attempt to simultaneously ____ the foreign currency, invest it in the foreign country, and ____ futures in the foreign currency. buy; sell
Which of the following would result in a profit on a euro futures contract when the euro depreciates? Sell a euro futures contract; buy a futures contract after the euro has depreciated.
Which of the following is NOT true regarding options?A. Options are traded on exchanges, never over-the-counter.B. Similar to futures contracts, margin requirements are normally imposed on option traders.C. Although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract.D. Currency options can be classified as either put or call options.E. All of these are true. A. Options are traded on exchanges, never over-the-counter.
If the observed put option premium is less than what is suggested by the put-call parity equation, astute speculators could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency. buying; selling; buying
A put option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a put option premium is the ____ price. exercise and spot; exercise
A call option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price. spot and exercise; spot
Which of the following are most commonly traded on an exchange?a. forward contractsb. futures contractsc. currenciesd. None of these are correct. b. futures contracts
Conditional currency options are: options where the premiums are canceled if a trigger level is reached.
Which of the following is true regarding the currency options market? When transaction costs are controlled for, the currency options market is efficient.
The premium of a currency put option should increase if:a. the volatility of the underlying asset increases.b. the spot rate increases.c. the volatility of the underlying asset increases AND the spot rate increases.d. None of these are correct. a. the volatility of the underlying asset increases.
Which of the following is true of options?a. The writer decides whether the option will be exercised.b. The writer pays the buyer the option premium.c. The buyer decides if the option will be exercised.d. More than one of these. c. The buyer decides if the option will be exercised.
The purchase of a currency put option would be appropriate for which of the following?A. Investors who expect to buy a foreign bond in one month.B. Corporations that expect to buy foreign currency to finance foreign subsidiaries.C. Corporations that expect to collect on a foreign account receivable in one month.D. All of these are correct. B. Corporations that expect to buy foreign currency to finance foreign subsidiaries.
If you have bought the right to sell, you are a:a. call writer.b. put buyer.c. futures buyer.d. put writer. b. put buyer.
If you have an options position in which you might be obligated to buy euros, you are a:a. call writer.b. put writer.c. put buyer.d. futures seller. b. put writer.
Which of the following is true for futures, but not for forwards?a. actual deliveryb. no transactions costsc. self-regulating marketd. None of these are correct. d. None of these are correct.
Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets. (T/F) True
The price of a futures contract will generally vary significantly from that of a forward contract. (T/F) False
If the futures rate is lower than the forward rate, astute investors would attempt to simultaneously buy futures and sell forward. Such actions would place downward pressure on the futures price and upward pressure on the forward rate. (T/F) False
Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions. (T/F) True
If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures contracts with the same maturity date. False
The writer of a call option is obligated to sell the underlying currency to the buyer of the option if the option is exercised. True
The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate. True
The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price. True
Due to put-call parity, we can use the same formula to price calls and puts. False
If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted. True
If the futures rate is above the forward rate, actions by rational investors would put upward pressure on the forward rate and downward pressure on the futures rate. True
Futures contracts are standardized with respect to delivery date and the futures price specified for the settlement date. False
If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell an identical futures contract with the same settlement date. True
Margin requirements require investors in futures contracts to make deposits with their respective brokerage firms when they take their position. The deposits are intended to minimize the credit risk associated with futures contracts. True
A European option can only be exercised at the expiration date, while an American option can be exercised any time prior to the expiration date. True
The highest amount a buyer of a call or a put option can lose is the exercise price. True
A currency put option is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date. False
An option writer is the seller of a call or a put option. True
The forward premium is the price specified in a call or put option. False
Hedgers should buy puts if they are hedging an expected inflow of foreign currency. True
Forward contracts are the best technique for managing exposure arising from project bidding. False
The currency futures markets are regulated by the International Monetary Fund. False
It is possible to have an opportunity loss when using futures to hedge. True
Margin is used in the forward market to mitigate default risk. False
There are no transactions costs associated with trading futures or options. False
Futures and options are available for cross rates. True
Options can be traded on an exchange or over the counter. True
The writer of a currency call option is obligated to buy the currency if the option is exercised. False
American-style options can be exercised any time up to maturity. True
If a currency put option is out of the money, then the present exchange rate is less than the strike price. False
Managers of MNCs are typically expected to use currency derivatives for speculation in order to improve profits. False
A call option on Japanese yen has a strike (exercise) price of $.012. The present exchange rate is $.011. This call option can be referred to as: Out of the Money
If you have a position where you might be obligated to sell pounds, you are:a. a call writer.b. a call buyer.c. a put writer.d. a put buyer. a. a call writer.
If you have bought a right to buy foreign currency, you are:a. a call writer.b. a call buyer.c. a put writer.d. a put buyer. b. a call buyer.
The premium on a pound put option is $.04. The spot rate and the exercise price are $1.52. The spot rate at the time of this option expiration is expected to be $1.51. Speculators could profit by:a. writing a put option.b. buying a put option.c. buying a call optiond. writing a call option and buying a call option simultaneously. d. writing a call option and buying a call option simultaneously.
A put option on Swiss franc has a strike (exercise) price of $.92. The present exchange rate is $.89. This put option can be referred to as: In the Money
The ____ the existing spot price relative to the strike price, the ____ valuable the put options will be. Lower; More
Which of the following does NOT represent the risk from using forward contracts? A forward contract is used to hedge receivables, and the spot exchange rate at the time of expiration of the contract is lower than the contract price.
The writer of a put option has a right, but not an obligation, to buy the underlying currency from the option buyer. False
An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign payables. To do so, the MNC can either sell the foreign currency forward or sell futures. False
Hedgers should buy calls if they are hedging an expected outflow of foreign currency. True
If a currency’s forward rate exhibits a discount, the currency is forced to appreciate. False
If a currency’s forward rate exhibits a premium, that currency is forced to depreciate. False
If a currency call option is in the money, then the present exchange rate exceeds the strike price. True
If the forward rate for a currency is less than the spot rate for that currency, the forward rate is said to exhibit a premium. False
If an MNC desires to offset a forward contract that it previously created, it can simply ignore its obligation. False
Non-deliverable forward contracts (NDFs) can be used to hedge existing positions in foreign currencies that are not convertible into dollars. True
Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized exchange. True
Since corporations have specialized needs, they usually prefer futures contracts to forward contracts for hedging purposes. False
A speculator in futures contracts who expects the value of a foreign currency to depreciate would likely sell futures contracts. True
The option exchanges in the United States are regulated by the Consumer Finance Protection Bureau and the Federal Trade Commission. False
A currency call option grants the right to sell a specific currency at a designated price within a specific time period. False
Currency call options allow the purchaser to lock in the price paid for a currency. Therefore, they are often used by MNCs to hedge foreign currency payables. True
When the current exchange rate is less than the strike price, a call option with that strike price will be in the money and a put option with that strike price will be out of the money. False
A high spot price relative to the strike price will result in a relatively high premium for a call option and a relatively high premium for a put option. False
Both call and put option premiums are affected by the level of the existing spot rate relative to the strike price, the length of time before the expiration date, and the potential variability of the currency. True
An advantage of a short straddle is that it provides the option writer with income from two separate sources. True
The choice of a basic versus a conditional option depends on expectations about the currency’s exchange rate over the period of concern. True
The disadvantage of a long strangle relative to a long straddle is that the underlying currency has to fluctuate more prior to expiration. True
With a bull spread, the spreader believes that the underlying currency will appreciate substantially, even more so than with a strangle. False
A forward rate for a currency is said to exhibit a discount if: the forward rate is less than the existing spot rate.
When the futures price is above the forward rate, astute investors may attempt to simultaneously buy a currency forward and sell futures in that currency. These actions would place ____ pressure on the forward rate and ____ pressure on the futures rate. Upward; downward
Which of the following is NOT true regarding futures contracts?a. Unlike forward contracts, they are generally traded on an exchange.b. Futures contracts are standardized with respect to delivery date and size of the contract.c. There is an active over-the-counter market for currency futures contracts.d. Currency futures can be used by speculators who attempt to profit from exchange rate movements. c. There is an active over-the-counter market for currency futures contracts.
Which of the following would result in a profit on a futures contract when the underlying currency depreciates?A. Buy a futures contract; sell a futures contract after the currency has depreciated.B. Sell a futures contract; buy a futures contract after the currency has depreciated.C. Buy a futures contract; buy an additional futures contract after the currency has depreciated.D. None of the above would result in a profit when the underlying currency of the futures contract depreciates. B. Sell a futures contract; buy a futures contract after the currency has depreciated.
Currency futures can be used by MNCs to hedge payables. That is, an MNC would ____ futures to hedge a foreign payable position. Also, currency futures can be used for speculation. For example, a speculator expecting a currency to appreciate would ____ futures. Buy; Buy
When the existing spot rate exceeds the exercise price, a call option is ____, and a put option is ____. in the money; out of the money
Which of the following is true regarding options?a. Options are only traded over-the-counter.b. Speculators sell at-the-money put options when they expect that the currency’s value will rise.c. Speculators purchase at-the-money call options when they expect that the currency’s value will fall.d. Speculators sell at-the-money currency call options when they expect that the currency’s value will rise. b. Speculators sell at-the-money put options when they expect that the currency’s value will rise.
When a currency call option is classified as “in the money,” this indicates that the spot rate of the currency is greater than the exercise price of the option.
Which of the following is NOT true regarding options?a. The buyer of a call option has the right to buy the currency at the strike price.b. The writer of a call option has the obligation to sell the currency to the buyer if the option if exercised.c. The buyer of a put option has the right to sell the currency at the strike price.d. The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised. d. The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised.
Categories
Finance Flashcards

finance exam 2

1) In comparing an ordinary annuity and an annuity due, which of the following is true?A) The future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due.B) All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due.q The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.D) The future value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due. The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.
2) The future value of a dollar as the interest rate increases and the further in the future an initial deposit is to be received.A) decreases; decreasesb increases decreasesq decreases;increasesd increases increases increases increases
the _________ rate of interest creates equilibrium between the supply of savings and the demand for investment funds. —A) Inflationary B) Risk- free q Real D) Nominal q Real
4) Generally, an increase in risk will result in . Hint: use TVM basic formulas 4) _ A)a lower return on investment B) a higher required return or interest rateq a lower required return or interest rate D) a higher return on investment D) a higher return on investment
rate of interest is the actual rate charged by the supplier and paid by the demander of funds _ A) Risk- free B) Nominal q Real D) Inflationary B) Nominal
is a graphic depiction between the maturity and rate of return for bonds with similar 6) _ A) risk- return profileq aggregate demand curve B) yield curveD) supply function B) yield curve
yield curve reflects higher expected future rates of interest. A) linear B) downward- slopingq upward- sloping D) flat q upward- sloping
8) The key inputs to the valuation process include .Hint: Think of most complete description A) returns and risk B) cash flows and discount rateq returns, discount rate, and risk D) cash flow, cash flow timing, and risk D) cash flow, cash flow timing, and risk
9) The value of any asset is the A) sum of all future cash flows it is expected to provide over the relevant time periodB) present value of the sum of all future cash flows it is expected to provide over the relevant time periodq sum of all compounded future cash flows it is expected to provide over the relevant time periodD) sum of the present values of all future cash flows it is expected to provide over the relevant time period B) present value of the sum of all future cash flows it is expected to provide over the relevant time period
10) In the basic valuation model, risk is generally incorporated into the A) cash flows B) discount rate q timing D) total value A) cash flows
11) A type of long- term financing used by both corporations and government entities is _A) retained earnings B) bondsq common stocks D) preferred stocks B) bonds
12) Corporate bonds have a . 12) A) specified coupon rate paid annuallyq par value of $1,000 B) face value of $5,000D) market price of $1,000 A) specified coupon rate paid annually
13) The value of a bond is the present value of its interest payments plus , 13)A) its face value B) future value of its par valueq present value of its par value D) present value of interest payment q present value of its par value
14) Bonds which sell at less than face value are priced at a , while bonds which sell at greater 14) than face value sell at a .A) discount; premiumq par; premium B) coupon;premiumD) discount; par A) discount; premium
15) If the required return is less than the coupon rate, a bond will sell at A) book value B) par q a premium .D) a discount q a premium
16) Which of the following is a difference between common stock and bonds?A) Bondholders have a senior claim on assets and income relative to stockholders.B) Dividend paid to stockholders is tax- deductible but interest paid to bondholders are not.q Bondholders have a voice in management; common stockholders do not.D) Stocks have a stated maturity but bonds do not. A) Bondholders have a senior claim on assets and income relative to stockholders.
17) Holders of equity capital _A) own the firmq receive interest payments B) have loaned money to the firmD) receive guaranteed income A) own the firm
18) Which of the following typically applies to common stock but not to preferred stock?A) voting rights B) legally considered as equity in the firmq par value D) dividend yield 18)_ A) voting rights
20) If the expected return is above the required return on an asset, rational investors will . 20)A) sell the asset, which will drive the price up and cause the expected return to reach the level of the required returnB) sell the asset, since price is expected to decreaseq buy the asset, which will drive the price down and cause the expected return to reach the level of the required returnD) buy the asset, which will drive the price up and cause expected return to reach the level of the required return D) buy the asset, which will drive the price up and cause expected return to reach the level of the required return
is a guide to a firm’s value if it is assumed that investors value the earnings of a given 21)firm in the same way they do the average firm in the industry.A) The present value of the dividends B) The PIE multipleq Liquidation value D) Book value B) The PIE multiple
22) A common approach of estimating the variability of returns involving the forecast of pessimistic, 22)most likely, and optimistic returns associated with an asset is called _A) scenario analysis B) marginal analysisq break- even analysis D) DuPont analysis scenario analysis
23) Risk aversion is the behavior exhibited by managers who require A) an increase in return, for a given increase in riskB) an increase in return, for a given decrease in riskq no changes in return, for a given increase in riskD) decrease in return, for a given increase in risk A) an increase in return, for a given increase in risk
A(n) _________ distribution shows all possible outcomes and associated probabilities for a given A) lognormal B) exponential q probability D) discrete q probability
is the extent of an asset’s risk. It is found by subtracting the pessimistic outcome from the optimistic outcome.A) Rangeq Standard deviation B) VarianceD) Probability distribution A) Range
26) The the coefficient of variation, the the risk. 26)_ A) higher; lower B) more stable; higherq lower; lower D) lower; higher q lower; lower
27) The goal of an efficient portfolio is to _ 27)A) minimize profit in order to minimize riskB) achieve a predetermined rate of return for a given level of riskq maximize risk in order to maximize profitD) minimize risk for a given level of return D) minimize risk for a given level of return
28) A measures the dispersion around the expected value. 28) A) coefficient of variation B) chi squareq standard deviation D) mean q standard deviation
29) Perfectly correlated series move exactly together and have a correlation coefficient of 29) — while perfectly correlated series move exactly in opposite directions and have acorrelation coefficient of _ A) negatively; +1; positively; -1q positively; +1; negatively; -1 B) negatively; -1; positively; +1D) positively; -1; negatively; +1 q positively; +1; negatively; -1
A(n) portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return A) risk- free B) risk- indifferent q efficient D) risk- neutral q efficient
31) The of a given outcome is its chance of occurring. A) standard deviation B) reliabilityq probability D) dispersion q probability
32) The portfolio with a standard deviation of zero .. (See Table 8.1) 32) A) is comprised of Assets A and B B) is comprised of Assets A and Cq is not possible D) cannot be determined B) is comprised of Assets A and C
33) The correlation of returns between Asset A and Asset B can be characterized as Table 8.1) . (See 33) A) perfectly positively correlatedq uncorrelatedperfectly negatively correlated perfectly negatively correlated
34) Risk that affects all firms is called _A) nondiversifiable riskq maturity risk B) reinvestment riskD) unsystematic risk 34) A) nondiversifiable risk
35) A beta coefficient of +1 represents an asset that A) is more responsive than the market portfolioB) is unaffected by market movementq has the same response as the market portfolioD) is less responsive than the market portfolio q has the same response as the market portfolio
36) The portion of an asset’s risk that is attributable to firm- specific, random causes is called _A) market risk B) unsystematic (diversifiable) riskq political risk D) nondiversifiable risk A) market risk B) unsystematic (diversifiable) risk
37) In the most basic sense, risk is a measure of the uncertainty surrounding the return that an investment will earn. T
38) In the valuation process, the higher the risk, the greater is the required return t
39) The inclusion of assets from countries with business cycles that are not highly correlated with theU.S. business cycle reduces the portfolio’s responsiveness to market movements. t
40) The range of an asset’s risk is found by subtracting the worst outcome from the best outcome t
41) Investors should recognize that betas are calculated using historical data and that past performance relative to the market average may not accurately predict future performance. t
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Finance Flashcards

Finance T?F

Agency problems arise due to the separation of ownership and control and can arise between stockholders and managers or between stockholders and bondholders True
The appropriate goal of a financial manager is to maximize stockholder wealth, maximize the price per share of the firm’s common stock, or to maximize the firm’s earnings per share. False
Due to the inverse relationship between interest rates and value, when the yield to maturity of a bond that is selling at par decreases, the bond will sell at a premium True
Standard Deviation of returns measures total risk, and it consists of market or systematic risk as measured by beta and of firm specific risk which can be diversified away. True
Net present value, internal rate of return, and profitability index can give conflicting accept/reject capital budgeting decisions for independent projects with normal cash flows. False
The appropriate costs to use in determining a firm’s weighted average cost of capital are the marginal, after-tax costs of the firm’s individual security issues. True
A firm’s optimal capital budget is the oint where the marginal cost of capital intersects the firm’s investment opportunity. True
The benefit of debt financing comes from the tax deductibility of interest payments and the not from fact that the debt is a cheaper source of financing than equity True
As a general rule, the capital structure that maximizes stock price also Minimizes the weighted average cost of capital
Capital structure theory implies which of the following.. A. Capital Structure changes signal important information to investors B. Firms with higher marginal tax rates have relatively higher optimal levels of debt C. Firms with higher levels of asymmetric information have relatively lower optimal levels of debt.
When a firm pays a stock dividend The number of shares outstanding increases.
Stock Dividends and Stock splits do what to shareholders wealth NOTHING
The Ex-Dividend date refers to the last day on which investors can purchase a stock and receive the previously announced dividend. False