Sample questions and Answers
What is the “efficient market hypothesis” (EMH)?
A) The theory that all securities are priced accurately based on available information, making it impossible to consistently achieve higher returns than the market
B) The theory that markets are inefficient and prices often deviate from their true value
C) The theory that markets are driven solely by government regulations
D) The theory that stock prices are always unpredictable
Answer: A
Which of the following is an example of “securitization”?
A) The process of buying and selling company shares in the stock market
B) The creation of mortgage-backed securities by pooling mortgage loans and selling them as securities
C) The issuance of corporate bonds
D) The process of valuing a company’s stock based on future earnings
Answer: B
What does “yield curve” represent?
A) The relationship between interest rates and the maturity dates of bonds
B) The number of bonds issued by companies each year
C) The difference between corporate and government bond yields
D) The total returns on an investment portfolio
Answer: A
What is “equity financing”?
A) Raising capital by borrowing money from financial institutions
B) Raising capital by issuing shares of stock in exchange for ownership stakes in a company
C) Raising capital through the issuance of bonds
D) Raising capital by selling assets
Answer: B
What is “price-to-earnings ratio” (P/E ratio)?
A) A measure of a company’s earnings divided by its market price
B) The market value of a company’s stock divided by its earnings per share
C) The total earnings generated by a company over a year
D) The amount of dividends paid per share divided by the stock price
Answer: B
What is a “security?”
A) Any financial instrument that represents ownership or debt
B) A document that records the ownership of land
C) A physical asset like real estate
D) A loan agreement between two parties
Answer: A
What is “private equity”?
A) Capital raised by a company through public offerings
B) Investment in private companies or startups by firms or individuals, typically through venture capital or buyouts
C) Equity traded on public stock exchanges
D) Bonds issued by private firms
Answer: B
What is a “forward contract”?
A) A contract to buy or sell an asset at a future date for a price agreed upon today
B) A financial instrument used to hedge against interest rate changes
C) A contract that provides the holder the right, but not the obligation, to buy an asset
D) A contract to exchange one currency for another
Answer: A
What is “debt financing”?
A) Raising capital by selling shares of stock to investors
B) Raising capital by borrowing funds through loans or the issuance of bonds
C) Raising capital by issuing warrants
D) Raising capital by selling company assets
Answer: B
Which of the following best describes a “bonds yield spread”?
A) The difference between the yields of two bonds, often used to assess relative value
B) The difference between a bond’s price and its par value
C) The difference between dividend yield and bond yield
D) The price difference between bonds with different maturity dates
Answer: A
What is the “principal” of a loan?
A) The total amount of interest to be paid over the life of the loan
B) The total amount borrowed, excluding interest
C) The value of a bond’s coupon payments
D) The total value of dividends paid by a corporation
Answer: B
What is the purpose of the “Securities and Exchange Commission” (SEC)?
A) To provide insurance for investors against market losses
B) To regulate and oversee the securities markets and protect investors
C) To provide financial assistance to failing companies
D) To monitor interest rates for financial institutions
Answer: B
What is a “capital gains tax”?
A) A tax on the income generated from bond investments
B) A tax on the profits made from the sale of an asset such as stock or real estate
C) A tax on the dividends paid by corporations to shareholders
D) A tax imposed on government bond purchases
Answer: B
What is the primary risk associated with “mortgage-backed securities”?
A) Interest rate risk
B) Credit risk
C) Liquidity risk
D) Prepayment risk
Answer: D
What does the “interest rate risk” refer to?
A) The risk that a bond’s price will decline due to an increase in interest rates
B) The risk that a bond will default on its interest payments
C) The risk that interest rates will remain unchanged over time
D) The risk that the interest rate on a bond will increase after purchase
Answer: A
What does “short selling” mean in the context of the stock market?
A) Selling securities you already own
B) Selling securities you do not own, hoping to buy them back at a lower price
C) Selling a bond before it matures
D) Selling securities with a fixed return
Answer: B
Which of the following is a characteristic of “bonds with high credit ratings”?
A) Higher yield and higher risk
B) Lower yield and lower risk
C) High market volatility
D) Higher yield and lower risk
Answer: B
What is the primary function of a “primary market”?
A) To trade securities that have already been issued
B) To allow investors to buy and sell stocks between themselves
C) To allow corporations and governments to raise new capital by issuing securities
D) To regulate the prices of securities in the market
Answer: C
What does “liquidity risk” refer to in the context of financial markets?
A) The risk that a financial asset cannot be quickly sold at its fair market value
B) The risk that a company will fail to meet its financial obligations
C) The risk of a decrease in a security’s market price
D) The risk of losing an investment due to market volatility
Answer: A
What is a “market maker”?
A) An investor who buys stocks in the market to increase demand
B) A financial institution that buys and sells securities to provide liquidity in the market
C) A firm that regulates stock prices
D) An individual investor who sells large quantities of stock
Answer: B
What is the “coupon rate” of a bond?
A) The amount of money the bond issuer pays as interest each year
B) The price at which a bond is sold in the market
C) The amount of capital the bondholder can receive if the bond matures early
D) The yield an investor receives on a bond in a given year
Answer: A
What is “derivatives trading”?
A) Trading stocks, bonds, and mutual funds
B) Trading financial contracts whose value is derived from the performance of an underlying asset
C) Trading physical goods in the commodities market
D) Trading bonds with fixed interest rates
Answer: B
Which of the following best describes “capital gains”?
A) Earnings from interest on bonds
B) Profit from the sale of an asset like a stock or real estate
C) Payments made by a company to its shareholders
D) Funds used to purchase new stocks
Answer: B
What is the “Tobin’s Q ratio”?
A) A measure of a company’s financial leverage
B) The ratio of a company’s market value to the replacement cost of its assets
C) A ratio of a bond’s market price to its coupon rate
D) The price-to-earnings ratio of a stock
Answer: B
What does “quantitative easing” refer to?
A) The process of reducing the supply of money in the economy
B) A type of monetary policy in which a central bank buys government securities to increase the money supply
C) The practice of limiting government spending
D) A method of controlling inflation by increasing interest rates
Answer: B
Which of the following is an example of a “fixed income” investment?
A) Stocks of a technology company
B) Treasury bonds
C) Commodities like gold and oil
D) Equity mutual funds
Answer: B
What is “asset-backed security”?
A) A bond backed by physical assets such as real estate or equipment
B) A security whose value is derived from a company’s stock
C) A government-issued bond that offers tax advantages
D) A stock with a guaranteed dividend payment
Answer: A
What is the “Treasury yield curve”?
A) A graph showing the relationship between the prices and interest rates of U.S. Treasury bonds
B) A measure of the interest rate paid by U.S. corporate bonds
C) A curve that illustrates the current yield on all U.S. securities
D) A plot of U.S. Treasury bond yields over different time periods
Answer: D
What is “hedging”?
A) The practice of increasing investment risk in search of higher returns
B) The process of spreading investments across different asset classes to avoid losses
C) The strategy of reducing risk by taking an offsetting position in a related asset
D) The practice of selling securities in advance of their maturity date
Answer: C
What does “bull market” mean?
A) A market in which prices are falling
B) A market in which investors are pessimistic and selling assets
C) A market in which prices are rising, and investor confidence is high
D) A market characterized by high volatility and unpredictability
Answer: C
What is the “role of the Securities and Exchange Commission (SEC)”?
A) To control the trading prices of securities
B) To enforce rules against insider trading and ensure transparency in financial markets
C) To regulate the issuing of new securities only
D) To determine which securities should be allowed for trading in the market
Answer: B
What is “inflation risk”?
A) The risk that a bond issuer may default on its interest payments
B) The risk that the purchasing power of money will decrease over time due to rising prices
C) The risk that a company’s stock price will decline due to poor management decisions
D) The risk that a company’s stock will become overvalued in the market
Answer: B
What is a “call option”?
A) The right to sell an underlying asset at a set price within a specific period
B) The right to buy an underlying asset at a set price within a specific period
C) The obligation to sell an asset at a set price
D) A bond that can be redeemed before its maturity date
Answer: B
Which of the following is a “primary market transaction”?
A) Buying shares of stock through a public auction
B) Buying newly issued shares of stock directly from the company
C) Trading stocks between investors on the open market
D) Selling bonds on the secondary market
Answer: B
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