FINA 3000 UGA TEST 1 QUESTIONS WITH CORRECT
ANSWERS
T/F: The term, residual claim, refers to existing shareholders having the right to
participate in any new share offering. -- Answer ✔✔ False
Residual claim - The right of a shareholder or some other party to the profit of a
company after all prior obligations have been paid.
current yield -- Answer ✔✔ a bond's annual return based on its annual coupon
payments and current price (as opposed to its original price or face)
annual coupon / trading price
how to calculate interest paid -- Answer ✔✔ per period interest rate x outstanding
principal
when do you use an effective interest rate as opposed to APR? -- Answer ✔✔ if
payments are being made in yearly increments but the account the money is in
compounds monthly, you need to account for the monthly compounding and would use
EAR to do that!
EAR > APR!
what are the 5 guiding principles of finance? -- Answer ✔✔ *Maximization of Wealth* -
the creation of as much wealth as possible with the available resources.
*Time value of money* - the opportunity cost of tying up funds in projects, stocks, or
other assets & the approach to valuing future cash flows in today's dollars
, *Risk vs Return* - The expected return versus risk trade off is the concept that greater
risks yield higher returns
*Leverage* - the concept of how much debt a firm issues for its projects
*Diversification* - the idea of removing risk from a portfolio of stocks or other
investments
debt -- Answer ✔✔ an agreement between a borrower and lender to repay principal +
interest on loan
Five basic characteristics:
- Maturity date
- Set interest payment dates
- Fixed payment amount (unless loan terms change)
- No ownership in the company
- No voting rights
equity -- Answer ✔✔ an ownership claim in the issuer.
Five basic characteristics:
- Ownership (proportional to equity given)
- Voting rights - whoever has the most shares controls the board
- Variable dividend - could be cash or more shares
- Residual claim - last in line for payment
- Pre-emptive rights - the right to buy/participate in any new share offering
The __________ an initial value is compounded, the greater the power of
compounding -- Answer ✔✔ longer
Why is a dollar worth less tomorrow than today? -- Answer ✔✔ People prefer present
consumption
Monetary inflation → value of the dollar decreases over time
uncertainty/risk
ANSWERS
T/F: The term, residual claim, refers to existing shareholders having the right to
participate in any new share offering. -- Answer ✔✔ False
Residual claim - The right of a shareholder or some other party to the profit of a
company after all prior obligations have been paid.
current yield -- Answer ✔✔ a bond's annual return based on its annual coupon
payments and current price (as opposed to its original price or face)
annual coupon / trading price
how to calculate interest paid -- Answer ✔✔ per period interest rate x outstanding
principal
when do you use an effective interest rate as opposed to APR? -- Answer ✔✔ if
payments are being made in yearly increments but the account the money is in
compounds monthly, you need to account for the monthly compounding and would use
EAR to do that!
EAR > APR!
what are the 5 guiding principles of finance? -- Answer ✔✔ *Maximization of Wealth* -
the creation of as much wealth as possible with the available resources.
*Time value of money* - the opportunity cost of tying up funds in projects, stocks, or
other assets & the approach to valuing future cash flows in today's dollars
, *Risk vs Return* - The expected return versus risk trade off is the concept that greater
risks yield higher returns
*Leverage* - the concept of how much debt a firm issues for its projects
*Diversification* - the idea of removing risk from a portfolio of stocks or other
investments
debt -- Answer ✔✔ an agreement between a borrower and lender to repay principal +
interest on loan
Five basic characteristics:
- Maturity date
- Set interest payment dates
- Fixed payment amount (unless loan terms change)
- No ownership in the company
- No voting rights
equity -- Answer ✔✔ an ownership claim in the issuer.
Five basic characteristics:
- Ownership (proportional to equity given)
- Voting rights - whoever has the most shares controls the board
- Variable dividend - could be cash or more shares
- Residual claim - last in line for payment
- Pre-emptive rights - the right to buy/participate in any new share offering
The __________ an initial value is compounded, the greater the power of
compounding -- Answer ✔✔ longer
Why is a dollar worth less tomorrow than today? -- Answer ✔✔ People prefer present
consumption
Monetary inflation → value of the dollar decreases over time
uncertainty/risk
