Sample Questions and Answers
The “equity risk premium” is:
A) The additional return expected from holding stocks over risk-free securities
B) The cost of issuing equity in the capital markets
C) The risk of owning government bonds relative to corporate bonds
D) The return that corporate bonds offer over government bonds
Answer: A
“Risk-adjusted return” is used to:
A) Measure the absolute return on an investment
B) Adjust returns for changes in the market price of the asset
C) Compare the return on an investment to its risk, helping to assess its performance
D) Calculate the tax implications of earning investment income
Answer: C
A “swap” is a financial contract in which:
A) One party pays a fixed amount in exchange for a variable payment
B) Two parties agree to exchange an asset for a cash payment
C) Two parties agree to exchange cash flows or assets based on an agreed-upon formula
D) One party exchanges foreign currency for domestic currency
Answer: C
A “reverse stock split” involves:
A) A company splitting its shares into smaller units, increasing the number of shares outstanding
B) A company reducing its shares outstanding by consolidating shares into fewer, larger units
C) The issuance of new shares to investors at a lower price
D) The repurchase of shares by the company from shareholders
Answer: B
“Behavioral biases” in investment decision-making include:
A) Objective, rational decision-making based on market data
B) Emotional responses like overconfidence, loss aversion, and herd behavior
C) Strict adherence to a risk-free portfolio
D) A focus on long-term market predictions without any short-term adjustments
Answer: B
The “capital structure” of a company refers to:
A) The mix of debt and equity used to finance the company’s operations
B) The percentage of stock dividends paid to shareholders
C) The structure of the company’s management team
D) The arrangement of assets in the company’s portfolio
Answer: A
“Convertible bonds” are bonds that:
A) Can be exchanged for other types of debt securities
B) Can be converted into shares of the issuing company’s stock
C) Provide a fixed interest rate for the life of the bond
D) Can only be converted into government bonds
Answer: B
A “dividend yield” is:
A) The total return on an investment
B) The annual dividend paid by a company divided by its share price
C) The growth rate of dividends over time
D) The percentage of earnings paid out as dividends
Answer: B
“Arbitrage” in financial markets refers to:
A) The process of taking advantage of price differences in different markets to make a profit
B) The assessment of a company’s internal financial performance
C) The hedging of risks associated with long-term investments
D) The calculation of a company’s value using discounted cash flows
Answer: A
“Economic value added” (EVA) is a measure of:
A) A company’s market share in its industry
B) A company’s profitability after subtracting its cost of capital
C) A company’s total revenue from operations
D) A company’s market value relative to its book value
Answer: B
“Spot market” refers to:
A) A market where financial instruments are bought and sold for immediate delivery
B) A market for future delivery of financial instruments
C) A market for trading government bonds only
D) A market for derivatives such as options and futures
Answer: A
A “bull market” is characterized by:
A) A long-term decline in stock prices
B) A period where stock prices are rising or expected to rise
C) A market dominated by government bonds
D) A market where most investors hold cash
Answer: B
“Government securities” include:
A) Only stocks issued by government entities
B) Debt securities issued by the U.S. government
C) Bonds issued by state governments only
D) Private equity securities backed by the government
Answer: B
“Primary market” refers to:
A) The market where investors buy and sell securities among themselves
B) The market where securities are created and issued for the first time
C) The market where derivatives are traded
D) The market where bonds and other debt instruments are traded
Answer: B
A “collateralized mortgage obligation” (CMO) is:
A) A type of equity security backed by real estate
B) A debt instrument backed by a pool of mortgages
C) A government bond secured by housing loans
D) A derivative product tied to mortgage-backed securities
Answer: B
“Interest rate risk” arises from:
A) Fluctuations in the value of stocks
B) Changes in the interest rates that affect the price of bonds
C) The risk of companies defaulting on their bonds
D) The risk associated with economic recessions
Answer: B
The “credit rating” of a bond is used to assess:
A) The bond’s price relative to other investments
B) The likelihood of default by the bond issuer
C) The time frame for which the bond is issued
D) The bond’s expected return over time
Answer: B
A “currency swap” involves:
A) Exchanging cash flows in one currency for cash flows in another currency
B) Swapping stocks for bonds
C) Trading bonds in different interest rate environments
D) Exchanging physical goods between countries
Answer: A
The “price-to-earnings (P/E) ratio” measures:
A) The cost of equity relative to the company’s assets
B) The relationship between the stock price and the company’s earnings per share
C) The total debt relative to the company’s earnings
D) The growth rate of a company’s dividends
Answer: B
“Private equity” involves:
A) The buying and selling of shares of public companies
B) Investments made in private companies that are not listed on public stock exchanges
C) Trading bonds issued by private firms
D) Government investments in private enterprises
Answer: B
A “money market” consists of:
A) Bonds and stocks traded on stock exchanges
B) Short-term debt securities with high liquidity
C) Long-term government bonds
D) Foreign currencies traded for future delivery
Answer: B
“Securitization” is the process of:
A) Converting an asset into a tradeable financial instrument, such as a bond
B) Creating new investment products based on corporate earnings
C) Selling assets at a premium in the primary market
D) Issuing equity shares to the public for the first time
Answer: A
The “exchange rate risk” refers to:
A) The risk that currency values will fluctuate, affecting international investments
B) The risk that stock prices will be highly volatile in emerging markets
C) The risk that interest rates will change and affect bond prices
D) The risk that a company’s dividend payments will be cut
Answer: A
A “forward contract” is:
A) An agreement to buy or sell an asset at a future date for a predetermined price
B) A short-term government bond with a fixed maturity
C) A type of loan with collateral held in a futures account
D) A derivative instrument based on interest rate movements
Answer: A
The “net present value” (NPV) is:
A) The difference between a company’s total revenue and total costs
B) The sum of the present values of future cash flows minus initial investment
C) The amount of capital required to start a new project
D) The return on an investment expressed as a percentage
Answer: B
The “efficient frontier” in portfolio theory represents:
A) The maximum level of risk a portfolio can bear
B) The best trade-off between risk and return for a portfolio
C) The point where a portfolio’s risk is minimized
D) The level of diversification required to achieve maximum return
Answer: B
A “fixed-rate mortgage” refers to:
A) A mortgage where the interest rate remains constant throughout the term of the loan
B) A mortgage with an interest rate that fluctuates based on market conditions
C) A loan secured by the value of real estate
D) A loan with an adjustable payment schedule based on inflation
Answer: A
A “stock split” results in:
A) A decrease in the total value of an investor’s holdings
B) A reduction in the number of shares an investor holds
C) An increase in the number of shares, with a proportional decrease in stock price
D) The issuance of additional stock dividends to shareholders
Answer: C
“Convertible securities” can be:
A) Converted into physical goods upon maturity
B) Swapped for other types of debt securities
C) Converted into shares of stock at the option of the holder
D) Traded only in government securities markets
Answer: C
The “yield to maturity” (YTM) is:
A) The current annual interest income from a bond
B) The rate of return an investor can expect if a bond is held until maturity
C) The coupon rate of a bond at the time of issuance
D) The interest rate at which the bond’s price equals its face value
Answer: B
A “call option” gives the holder the right to:
A) Sell an asset at a predetermined price
B) Buy an asset at a predetermined price
C) Convert a bond into stock
D) Exchange a foreign currency for a set price
Answer: B
“Margin trading” allows investors to:
A) Borrow funds to buy more securities than they could otherwise afford
B) Trade bonds without paying interest
C) Buy real estate using leverage
D) Purchase commodities on a futures exchange
Answer: A
A “bear market” is characterized by:
A) A steady increase in stock prices over a long period
B) A market where stock prices are falling or are expected to fall
C) A period of high volatility without clear trends
D) A market dominated by fixed-income securities
Answer: B
“Option premium” refers to:
A) The price paid for a bond at issuance
B) The cost to purchase an option contract
C) The amount of interest paid on a loan
D) The additional returns provided by high-risk securities
Answer: B
A “high-yield bond” is:
A) A bond with a low interest rate
B) A bond rated below investment grade, offering higher returns to compensate for higher risk
C) A government bond with a high interest rate
D) A bond that pays no interest but is sold at a significant discount
Answer: B
“Debt-to-equity ratio” measures:
A) The proportion of debt relative to a company’s total capital
B) The total debt a company has relative to its total assets
C) The risk level of a company’s investment portfolio
D) The company’s earnings per share relative to its stock price
Answer: A
“Real estate investment trusts” (REITs) invest in:
A) Stocks of companies engaged in real estate development
B) Commercial and residential real estate properties
C) Bonds secured by real estate
D) Government securities backed by property values
Answer: B
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