FNAN 522 MIDTERM QUESTIONS AND ANSWERS
A company needs to raise cash to cover its operating expenses. The company will only
need the funds for a short period of time. What financial market is the most appropriate
for the company to use to raise money (that is, likely the lowest cost and best-matched
maturity)? - Answers -A. Money market.
B. Capital Market
C. Derivative market
D. All of the above
Answer: A MONEY MARKET
What is the primary goal of the Sarbanes-Oxley act according to the Module 1 video-
"The Goal of Financial Management"? - Answers -a. To protect investors from
corporate abuse.
b. To help maintain a primary bull market.
c. To protect corporate executives from frivolous shareholder lawsuits.
d. To prevent a secular bear market.
ANSWER: a. To protect investors from corporate abuse.
Which of the following is an accurate characteristic of a sole proprietorship? - Answers
-a. The owner is personally liable for the business's debt and obligations.
b. There is more than one answer.
c. A sole proprietorship typically elects board members for staggered terms.
d. The owner must file for a separate tax return for the business.
ANSWER: a. The owner is personally liable for the business's debt and obligations.
Which of the following is a source of agency costs in an organization? - Answers -a.
Parties associates with the organization have different risk preferences.
b. The people who make the day-to-day decisions are not the owners.
c. All of these answers.
d. The managers of the organization have different objectives than the other
shareholders.
ANSWER: c. All of these answers.
Which of the following occurred during the financial crisis of 2007-2008? - Answers -a.
All of these answers.
b. Several major institutions failed or were subject to government takeover.
c. A currency crisis, with investors transferring their wealth to countries with stronger
currencies.
d. Significant declines in consumer wealth and prolonged unemployment.
ANSWER: A. All of these answers.
Which of the following terms describes the protection of personal assets stemming from
the corporate structure? - Answers -a. simple transference
, b. double taxation
c. articles of incorporation
d. limited liability
ANSWER: D. Limited Liability
What will $250,000 grow to be in 11 years if it is invested today in an account with an
annual interest rate of 6%? - Answers -$474,574.64
Approximately how many years will it take for $36,000 to grow to be $68,000 if it is
invested in an account interest rate of 8%? Choose the closest answer. - Answers -8
years.
You are offered a loan with a quoted annual interest rate of 13% with monthly
compounding of interest. What is your effective annual interest rate? - Answers -
13.80%
John and Peggy would like to buy a house. They have looked at their budget and
determined that they can afford a maximum monthly mortgage payment of $1,100.
Interest rates on 30-year, fixed-rate mortgages current a nominal annual interest rate of
7 percent with monthly compounding (payments due at the end of each month). Given
these loan terms, what is the maximum amount John and Peggy borrow today to
purchase a house and not exceed a monthly payment of $1,100 on the loan? Round to
the nearest dollar. - Answers -$165,338
A company's security is priced above the security market line. Which of the following
statements regarding that security is true? - Answers -a. All of these answers.
b. This isn't an attractive market situation for a potential investor looking to purchase the
security.
c. This is not an attractive market situation for the company issuing the security.
d. The security is fairly priced for the amount of expected return.
ANSWER: C. This is not an attractive market situation for the COMPANY issuing the
security.
A portfolio is composed of 40% stock, 20% bonds, and 40% mutual funds. The stock is
expected to have a 8% return, the bonds a 4% return and the mutual funds a 6% return.
What is the expected return of the portfolio? - Answers -6.4%
A portfolio is composed of 60% stock and 40% bonds. The variance of stock is 160 and
the variance of the bonds is 120. The covariance is 40. What is the portfolio's variance?
- Answers -96
A relatively new tech company issues a bond that is publicly traded. The company is
based in the US and pays interest in dollars. The potential investor lives in the UK.
Which of the following risks does the investor face if he buys the bond? - Answers -a.
Market risk.
b. All of these answers.
A company needs to raise cash to cover its operating expenses. The company will only
need the funds for a short period of time. What financial market is the most appropriate
for the company to use to raise money (that is, likely the lowest cost and best-matched
maturity)? - Answers -A. Money market.
B. Capital Market
C. Derivative market
D. All of the above
Answer: A MONEY MARKET
What is the primary goal of the Sarbanes-Oxley act according to the Module 1 video-
"The Goal of Financial Management"? - Answers -a. To protect investors from
corporate abuse.
b. To help maintain a primary bull market.
c. To protect corporate executives from frivolous shareholder lawsuits.
d. To prevent a secular bear market.
ANSWER: a. To protect investors from corporate abuse.
Which of the following is an accurate characteristic of a sole proprietorship? - Answers
-a. The owner is personally liable for the business's debt and obligations.
b. There is more than one answer.
c. A sole proprietorship typically elects board members for staggered terms.
d. The owner must file for a separate tax return for the business.
ANSWER: a. The owner is personally liable for the business's debt and obligations.
Which of the following is a source of agency costs in an organization? - Answers -a.
Parties associates with the organization have different risk preferences.
b. The people who make the day-to-day decisions are not the owners.
c. All of these answers.
d. The managers of the organization have different objectives than the other
shareholders.
ANSWER: c. All of these answers.
Which of the following occurred during the financial crisis of 2007-2008? - Answers -a.
All of these answers.
b. Several major institutions failed or were subject to government takeover.
c. A currency crisis, with investors transferring their wealth to countries with stronger
currencies.
d. Significant declines in consumer wealth and prolonged unemployment.
ANSWER: A. All of these answers.
Which of the following terms describes the protection of personal assets stemming from
the corporate structure? - Answers -a. simple transference
, b. double taxation
c. articles of incorporation
d. limited liability
ANSWER: D. Limited Liability
What will $250,000 grow to be in 11 years if it is invested today in an account with an
annual interest rate of 6%? - Answers -$474,574.64
Approximately how many years will it take for $36,000 to grow to be $68,000 if it is
invested in an account interest rate of 8%? Choose the closest answer. - Answers -8
years.
You are offered a loan with a quoted annual interest rate of 13% with monthly
compounding of interest. What is your effective annual interest rate? - Answers -
13.80%
John and Peggy would like to buy a house. They have looked at their budget and
determined that they can afford a maximum monthly mortgage payment of $1,100.
Interest rates on 30-year, fixed-rate mortgages current a nominal annual interest rate of
7 percent with monthly compounding (payments due at the end of each month). Given
these loan terms, what is the maximum amount John and Peggy borrow today to
purchase a house and not exceed a monthly payment of $1,100 on the loan? Round to
the nearest dollar. - Answers -$165,338
A company's security is priced above the security market line. Which of the following
statements regarding that security is true? - Answers -a. All of these answers.
b. This isn't an attractive market situation for a potential investor looking to purchase the
security.
c. This is not an attractive market situation for the company issuing the security.
d. The security is fairly priced for the amount of expected return.
ANSWER: C. This is not an attractive market situation for the COMPANY issuing the
security.
A portfolio is composed of 40% stock, 20% bonds, and 40% mutual funds. The stock is
expected to have a 8% return, the bonds a 4% return and the mutual funds a 6% return.
What is the expected return of the portfolio? - Answers -6.4%
A portfolio is composed of 60% stock and 40% bonds. The variance of stock is 160 and
the variance of the bonds is 120. The covariance is 40. What is the portfolio's variance?
- Answers -96
A relatively new tech company issues a bond that is publicly traded. The company is
based in the US and pays interest in dollars. The potential investor lives in the UK.
Which of the following risks does the investor face if he buys the bond? - Answers -a.
Market risk.
b. All of these answers.
