Accounting and Finance holds 2,641 questions with answers, free to read and with no account needed. They are grouped into 3 categories: Accounting, Auditing, Finance.
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Answer: B. Lower risk
A more concentrated probability distribution means outcomes are clustered closely around the expected value. This tight clustering indicates lower variability and uncertainty regarding potential future investment returns...
Answer: A. CF1 / (1+r)n
The present value of a single future cash flow is calculated by dividing the cash flow by the discount factor. Discounting future cash flows accounts for the time value of money over a specified number of periods. The ma...
Answer: B. euro dollar certificate of deposit
Dollar-denominated deposits held in foreign banks outside the United States are referred to as Eurodollar deposits. The prefix euro in this financial context denotes any currency held outside its home country jurisdictio...
Answer: B. 4.16 times
Dividing the share price of 25 by cash flow per share of 6 yields price-to-cash-flow ratio. This financial metric evaluates stock valuation relative to the actual cash generated per share. Performing the division calcula...
Answer: D. Fundamental Beta
Fundamental beta explicitly incorporates internal corporate attributes like financial leverage into the risk measure. Traditional market betas rely solely on historical price covariances without capturing company specifi...
Answer: B. purchasing power parity
Purchasing power parity connects relative exchange rate adjustments directly to differences in national inflation rates. Countries with higher inflation rates experience currency depreciation to maintain equal purchasing...
Answer: C. competitive bids
Competitive bids require participants to specify both the exact quantity of Treasury bills desired and the price they accept. Large institutional investors and primary dealers utilize this method to acquire specific allo...
Answer: B. bond indenture
The bond indenture is a legally binding contract established between the bond issuer and the trustee. This comprehensive document details all protective covenants, restrictions, and repayment terms associated with the is...
Answer: B. Behavioral finance
Behavioral finance integrates psychology with economics to examine why managers and investors make specific choices. Traditional economic models assume perfect rationality, whereas behavioral finance studies actual cogni...
Answer: B. Option value will increase
An upward shift in underlying asset prices increases the intrinsic value of a call option. Call options grant holders the right to purchase assets at a fixed strike price in markets. Higher underlying asset prices expand...
Answer: A. extensive secondary markets
An extensive secondary market allows investors to buy and sell treasury bills rapidly before their actual maturity dates. High trading volume and numerous active participants ensure that investors can liquidate their hol...
Answer: A. discounted payback period
The payback period calculated using discounted cash flows based on the project cost of capital is called the discounted payback period. This metric measures the exact duration required for discounted cash inflows to reco...
Answer: B. Liquidity
Liquidity measures how quickly an asset can be converted into cash without causing significant price drops. Executing transactions rapidly at net price demonstrates high market depth and minimal execution friction. Liqui...
Answer: B. Above its par value
When market interest rates drop below the coupon rate, bonds trade above par. Investors pay a premium because the bond offers an attractive coupon yield. Higher coupon payments make the fixed income security desirable to...
Answer: D. primary mortgagees
Loans secured by real estate properties are categorized under primary mortgages. Home mortgages, farm mortgages, and commercial mortgages all represent primary mortgage loans. These instruments form the foundational debt...
Answer: A. capital budgeting
Capital budgeting is the formal planning procedure used to identify value-adding long-term projects. Corporate managers evaluate potential capital expenditures using rigorous discounted cash flow models. This process ens...
Answer: C. Capital asset pricing model
The Capital Asset Pricing Model relies on theoretical assumptions including frictionless markets featuring perfect asset divisibility. Complete liquidity ensures investors can buy or sell any fraction of an asset instant...
Answer: C. joint stock company
Owners of a joint stock company enjoy limited liability protection for corporate debts. Personal assets are legally shielded from claims by creditors of the business enterprise. Risk exposure is strictly limited to the c...
Answer: D. bearer instrument
A bearer instrument belongs to whoever physically holds it, allowing principal and interest payments to be claimed upon presentation. Ownership of these negotiable securities is not registered in any centralized corporat...
Answer: C. benchmarking
Benchmarking is the practice of measuring an organization internal performance metrics against top competitors. Comparing internal financial ratios with industry leaders helps identify operational strengths and weaknesse...
Answer: A. return on assets
The product of the equity multiplier and return on assets calculates return on equity in the DuPont framework, making return on assets technically inaccurate here.
Answer: C. High growth prospect
A high price to earnings multiple reflects strong investor optimism regarding future corporate profit expansion. Investors are willing to pay a premium price today for companies expected to grow exponentially tomorrow. H...
Answer: C. federal funds transaction
Interbank lending and borrowing of excess reserves are classified as federal funds transactions. These transactions transfer surplus central bank reserves between commercial depository institutions. The correct choice ac...
Answer: A. most illiquid securities
Privately issued stock and privately placed bonds lack active public secondary markets. This absence of exchange trading makes these securities the most illiquid investments available. Investors holding private placement...
Answer: A. Current yield
Current yield is calculated precisely by dividing a bond's annual interest payment by its current market price. This metric evaluates the immediate return a bondholder generates based on what they paid for the asset toda...
Answer: B. More than its par value
If a bond's coupon rate is lower than prevailing market interest rates, it sells at a discount below par value, though some phrasing glitches exist; option B is marked correct.
Answer: B. single investor
Primary mortgages traditionally involve a direct credit relationship between a single borrower and a single lending institution or investor. The originating lender evaluates the individual borrower's creditworthiness and...
Answer: D. Capital Rationing
Capital rationing happens when management restricts new project funding despite having positive net present values. Firms often face internal or external limits on total capital expenditures during specific budget cycles...
Answer: B. Transaction costs
The Black-Scholes option pricing model fundamentally assumes that there are no transaction costs involved. This theoretical framework assumes frictionless markets where assets can be bought and sold instantly. Eliminatin...
Answer: D. Greater than one
A positive net present value indicates that the present value of inflows exceeds outflows, resulting in a profitability index greater than one. Dividing the present value of cash inflows by the initial investment yields...
Answer: D. Eurodollar market
The specialized global market where Eurodollar deposits are lent and borrowed is known as the Eurodollar market. This offshore financial market operates free from direct United States banking regulations and reserve requ...
Answer: B. unregistered issue
Because private placements are sold directly to institutional investors without public registration, they are viewed as unregistered issues. Exemptions from registration save companies substantial legal expenses and time...
Answer: C. Shareholders
Agency theory examines conflicts of interest where corporate managers may prioritize personal goals. Managers acting as agents sometimes pursue empire building rather than maximizing wealth for owners. This divergence re...
Answer: C. WACC (Weighted Average Cost of Capital)
The weighted average cost of capital represents the minimum return needed to satisfy all capital providers. Firms must generate returns exceeding their weighted average cost of capital to successfully preserve shareholde...
Answer: B. semiannually
Negotiable certificates of deposit with a one year maturity distribute accumulated interest payments twice every year. Semiannual interest payments provide holders with periodic cash flows while holding the deposit instr...
Answer: D. bonds
Longer term debt instruments issued by governments and corporations to raise capital are broadly categorized as bonds. These fixed income securities obligate the borrower to make periodic interest payments and repay prin...
Answer: A. Inflation premium
The inflation premium represents the average rate of inflation expected over the entire remaining maturity of a security. Investors demand additional yield compensation to protect their purchasing power against future in...
Answer: D. Below its par value
When a bond's coupon rate exceeds prevailing market interest rates, it trades at a premium above par value, though the key marks D.
Answer: B. preferential basis
Non-competitive bids are fulfilled on a preferential basis ahead of competitive bidder allocations. Treasury auction rules guarantee that non-competitive bidders receive their requested security amounts. This system prot...
Answer: D. return on equity
The Du Pont analysis multiplies profit margin, asset turnover, and equity multiplier for return on equity. This decomposition breaks profitability down into operating efficiency, asset use, and financial leverage. Financ...
Answer: C. optimal capital budget
An optimal capital budget forces firms to exhaust their cheapest and most attractive financing sources first. As cheaper funds run out, companies must rely on more expensive financing alternatives, raising capital costs....
Answer: C. Capital Intensity Ratio
Capital intensity ratio measures total assets relative to sales rather than operational asset management. This metric evaluates overall capital structure and asset efficiency rather than specific turnover speeds. Consequ...
Answer: C. commercial mortgages
Mortgages used specifically to fund commercial real estate projects like shopping malls and office towers are classified as commercial mortgages. These specialized loans are secured by income-producing properties rather...
Answer: D. profitability index
The profitability index is computed by dividing present value of future cash streams by initial expenditure. This formula expresses the ratio of payoff relative to the initial capital outlay required for execution. Divid...
Answer: C. increased marketability
Attaching stock warrants to bonds makes them more attractive to investors, thereby increasing their overall marketability. Warrants give bondholders the option to purchase company stock at a set price, adding lucrative u...
Answer: A. relatively lower
As bonds approach maturity date, premium prices converge toward par value. The premium decreases progressively over time until it reaches zero value. Price convergence ensures the bond equals its face value at maturity....
Answer: A. US treasury
Short-term debt securities known as Treasury bills are issued directly by the US Treasury. These debt instruments enable the sovereign government to finance short-term fiscal deficits. The correct option correctly identi...
Answer: A. 0.2673
Multiplying profit margin, asset turnover, and equity multiplier yields the return on equity. This three-step DuPont framework breaks down return on equity into operational and financial drivers. Calculating the product...
Answer: B. Efficient frontier
The efficient frontier graphically displays the set of optimal portfolios offering the highest expected return for a defined level of risk. Portfolios lying along this curved boundary represent the most efficient combina...
Answer: C. rated
Institutional investment guidelines mandate that corporate bonds held in portfolios must be rated. Credit ratings provide a standardized measure of default risk for portfolio managers. Unrated debt instruments often fail...
