Financial Management
Chapter Exam Questions
Course Introduction
Financial Management is a comprehensive course designed to provide students with a solid foundation in the principles and practices of managing an organizations financial resources. The course covers key topics such as financial analysis, budgeting, risk assessment, capital structure, investment decisions, and working capital management. By integrating theoretical concepts with real-world applications, students develop analytical and decision-making skills essential for effective financial planning and control in both corporate and personal finance contexts. Through case studies, group projects, and quantitative methods, the course prepares students to navigate financial challenges and optimize organizational value.
Recommended Textbook
Fundamentals of Investments Valuation and Management 7th Edition by Bradford Jordan
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Page 2
Chapter 1: A Brief History of Risk and Return
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Q1) A portfolio had an original value of $7,400 seven years ago.The current value of the portfolio is $11,898.What is the average geometric return on this portfolio?
A)7.02 percent
B)7.47 percent
C)7.59 percent
D)7.67 percent
E)7.88 percent
Answer: A
Q2) Based on the period 1926-2012,the risk premium for U.S.Treasury bills was:
A)0.0 percent.
B)1.2 percent.
C)2.0 percent.
D)2.4 percent.
E)2.7 percent.
Answer: A
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Chapter 2: The Investment Process
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Q1) On August 8 of this year,Brent sold 500 shares of ADO stock for $24 a share.On September 6 of this year,he purchased 500 shares of ADO stock to cover his position.The transaction on August 8:
A)was a short sale.
B)was a margin trade.
C)was a wrap transaction.
D)created a long transaction.
E)was a pooling transaction.
Answer: A
Q2) What is the purpose of a margin call?
A)to inform you that your margin loan is due and payable
B)to demand funds to increase your margin position
C)to let you know the amount of funds that are now available for you to borrow
D)to advise you that the interest rate on your loan has changed
E)to remind you of the upcoming monthly payment due on your margin loan
Answer: B
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Chapter 3: Overview of Security Types
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Q1) If you want the right,but not the obligation,to sell a stock at a specified price you should:
A)buy a call.
B)sell a call.
C)buy a put.
D)sell a put.
E)either sell a call or buy a put.
Answer: C
Q2) Which one of the following is the best definition of a money market instrument?
A)corporate debt that matures in 90 days or less
B)bank savings account
C)investment issued by a financial institution that matures in 30 days or less
D)investment issued by a financial institution that matures in one year or less
E)debt issued by the government or a corporation that matures in one year or less
Answer: E
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Chapter 4: Mutual Funds and Other Investment Companies
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Q1) Currently,the term "hedge fund" refers to:
A)any registered fund with a stated investment objective.
B)any unregistered fund pursuing any type of investment style.
C)any fund that equally invests in long and short positions.
D)any fund that adheres to a "market-neutral" investment strategy.
E)any private fund that has a minimum investment requirement of $1 million or more.
Q2) You want to purchase shares in a fund and also ensure that your money does not support firms that harm the environment.Which type of fund should you purchase?
A)international fund
B)income fund
C)tax-managed fund
D)index fund
E)social conscience fund
Q3) You want to purchase a security that tracks the S&P 500.What types of securities can you purchase to accomplish this goal?
Which type of security would you purchase and why would you choose that security over your other options?
Q4) What are the primary differences between an ETF and an ETN?
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Page 6
Chapter 5: The Stock Market
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Q1) The market where individual investors directly trade exchange-listed securities with other individual investors is referred to as the _____ market.
A)home
B)independent
C)third
D)fourth
E)SuperDot
Q2) An order to sell that involves a preset trigger point is called a _____ order.
A)limit
B)day
C)stop
D)short
E)market
Q3) In order to currently trade on the floor of the NYSE,members must:
A)be registered as a floor trader
B)own a seat
C)purchase a trading license
D)be a specialist
E)be designated as a floor broker
Q4) Describe some of the recent changes in the structure and operations of the NYSE.
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Chapter 6: Common Stock Valuation
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Q1) The price-sales ratio helps measure the ability of a firm to generate:
A)net profits.
B)quality cash flows.
C)higher earnings per share.
D)higher cash flow per share.
E)revenue growth.
Q2) The last dividend paid by New Technologies was an annual dividend of $1.40 a share.Dividends for the next 3 years will be increased at an annual rate of 8 percent.After that,dividends are expected to increase by 3 percent each year.The discount rate is 16 percent.What is the current value of this stock?
A)$10.40
B)$12.60
C)$13.33
D)$14.10
E)$15.55
Q3) Identify three causes for a decrease in a firm's sustainable rate of growth.
Q4) The residual income model for valuing a stock suffers from some of the same estimating errors as the dividend growth model.Identify and explain these estimating errors.
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Chapter 7: Stock Price Behavior and Market Efficiency
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Q1) In an efficient market,stocks with similar risks will:
A)have the same market price.
B)pay similar dividends.
C)yield the market rate of return.
D)produce abnormal returns.
E)have similar rates of return.
Q2) Which one of the following terms is used to describe a sudden and significant collapse in market prices?
A)dive
B)recession
C)crash
D)adjustment
E)rebound
Q3) The Asian stock market crash of 1990 was followed by a:
A)long bull market.
B)rapid recovery.
C)prolonged flat market.
D)short-term decline.
E)long bear market.
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Page 9
Chapter 8: Behavioral Finance and the Psychology of Investing
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Sample Questions
Q1) According to the theory of recency bias,investors tend to believe the financial markets will:
A)gravitate to their long-term average rates of return.
B)react over the next year in direct opposition to the performance of the prior year.
C)have a maximum of three years of positive annual returns before declining somewhat.
D)continue to perform as they have over the past couple of years.
E)tend to reverse direction at least every five years.
Q2) Draw a basic Elliott Wave Pattern.Identify each wave and indicate the waves that are "corrective" and those that are "impulsive".
Q3) According to Dow theory,which one of the following is the primary means of eliminating secondary market trends?
A)corrections
B)confirmations
C)continuations
D)conversions
E)coordinated trades
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10
Chapter 9: Interest Rates
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Sample Questions
Q1) A $1,000 face value,120-day bond is quoted at a bank discount yield of 3.38 percent.What is the current bond price?
A)$957.60
B)$960.09
C)$974.18
D)$982.02
E)$988.73
Q2) City Bank needs a one-day reserve loan of $2.6 million from Country Bank.Which one of the following interest rates will be charged on this loan?
A)money market
B)Federal funds
C)discount
D)prime
E)Treasury bill
Q3) Identify and describe five interest rates that directly apply to the money market.
Q4) Write a short paragraph comparing a bank discount rate to a bond equivalent rate.
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Page 11
Chapter 10: Bond Prices and Yields
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Sample Questions
Q1) A bond pays semiannual interest payments of $42.50.What is the coupon rate if the par value is $1,000?
A)5.75 percent
B)6.50 percent
C)7.80 percent
D)8.50 percent
E)9.38 percent
Q2) Josh is saving money to purchase a home in 9 years.Explain why Josh should create a coupon bond portfolio with a duration of 9 years,rather than purchasing coupon bonds that mature in 9 years.
Q3) Davis Industrial bonds have a current market price of $990 and a 6 percent coupon.The bonds pay interest semi-annually on March 1 and September 1.Assume today is January 1.How many months of accrued interest are included in the dirty price of these bonds?
A)zero
B)two
C)three
D)four
E)five
Q4) Identify and briefly explain four of Malkiel's five theorems.
Page 12
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Chapter 11: Diversification and Risky Asset Allocation
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Q1) A portfolio comprised of which one of the following is most apt to be the minimum variance portfolio?
A)100 percent stocks
B)100 percent bonds
C)50/50 mix of stocks and bonds
D)30 percent stocks and 70 percent bonds
E)30 percent bonds and 70 percent stocks
Q2) Which of the following affect the expected rate of return for a portfolio?
I.weight of each security held in the portfolio
II.the probability of various economic states occurring
III.the variance of each individual security
IV.the expected rate of return of each security given each economic state
A)I and IV only
B)II and IV only
C)II, III, and IV only
D)I, II, and IV only
E)I, II, III, and IV
Q3) Foreign securities are generally considered to be more risky than domestic securities.Given this assumption,explain how adding foreign securities into a domestic portfolio can affect the Markowitz efficient portfolios.
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Chapter 12: Return, Risk, and the Security Market Line
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Q1) Where will a security plot in relation to the security market line (SML)if it is considered to be a good purchase because it is underpriced?
A)above the SML
B)either on or above the SML
C)on the SML
D)on or below the SML
E)below the SML
Q2) Reed Plastics just announced the earnings per share for the quarter just ended were $.45 a share.Analysts were expecting $.51.What is the amount of the surprise portion of the announcement?
A)-$.12
B)-$.06
C)$.06
D)$.00
E)$.03
Q3) Explain the relationship between the security market line and market efficiency.
Q4) Identify and describe each of the three components of a security's expected return according to the capital asset pricing model.
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Chapter 13: Performance Evaluation and Risk Management
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Q1) A portfolio has an average return of 12.4 percent,a standard deviation of 15.8 percent,and a beta of 1.35.The risk-free rate is 2.6 percent.What is the Sharpe ratio?
A).49
B).52
C).62
D).71
E).75
Q2) The unadjusted total percentage return on a security that has not been compared to any benchmark is referred to as which one of the following?
A)raw return
B)indexed return
C)real return
D)marginal return
E)absolute return
Q3) Explain a key advantage and a key disadvantage of Jensen's alpha.
Q4) Explain the similarities and differences between the Sharpe and Treynor ratios.Also,explain the most appropriate application for each.
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Chapter 14: Futures Contracts
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Q1) You own a portfolio which is valued at $6.4 million and which has a beta of 1.27.You would like to create a riskless portfolio by hedging with S&P 500 futures contracts.The contract size is $250 times the index level.How many futures contracts are needed if the current S&P 500 index is 1406?
A)short 16 contracts
B)short 18 contracts
C)short 23 contracts
D)long 18 contracts
E)long 23 contracts
Q2) You are trying to value a 3-month futures contract on a stock.The market rate of return is 11.2 percent,the risk-free rate is 3.8 percent,and the dividend yield on the stock is 2.6 percent.The stock is currently selling for $33 a share.What is the value of "T" as used in the formula for computing the future stock price (F<sub>T</sub> = S(1 - r)^T)?
A).112
B).250
C).026
D).038
E).064
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Page 16
Chapter 15: Stock Options
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Sample Questions
Q1) Which one of the following refers to selling an option contract?
A)calling
B)writing
C)exercising
D)striking
E)spotting
Q2) A stock is valued at $25.75 a share.A European 6-month call option has a strike price of $25 and an option premium of $1.50.The market rate is 9.5 percent and the risk-free rate is 2.5 percent.What is the price of a European 6-month put option with a $25 strike price?
A)$0.00
B)$0.09
C)$0.44
D)$1.48
E)$1.61
Q3) You wrote a put with a strike price of $20 and a premium of $1.Draw a graph depicting your profits or losses for stock prices ranging from $0 to $40.Be sure to completely label your graph.
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Chapter 16: Option Valuation
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Q1) Which one of the following situations will produce the highest call price,all else constant? Assume the options are all in-the-money.
A)$20 strike price; 45 days to option expiration
B)$20 strike price; 60 days to option expiration
C)$25 strike price; 45 days to option expiration
D)$25 strike price; 60 days to option expiration
E)Insufficient information is provided to answer this question.
Q2) Which one of the following statements is correct concerning the Black-Scholes option pricing model?
A)The model assumes a stock pays a constant annual dividend.
B)The model expresses time in terms of years.
C)The model is based on American-style options.
D)The model assumes that the current stock price is equal to the strike price.
E)The model assumes the put is in-the-money.
Q3) Create a stock price tree for three periods for a stock that is currently valued at $10 a share.The up amount per period is 1.15 and the down amount per period is .90.Show all dollar amounts to 3 decimal places.
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Chapter 17: Projecting Cash Flow and Earnings
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Q1) Which one of the following is defined as anything a firm owns that has value?
A)equity
B)asset
C)liability
D)cash inflow
E)cash outflow
Q2) Pro forma financial statements are statements based on which one of the following?
A)projected future income, cash flows, and other non-cash items
B)historical revenue and expenses
C)historical asset and liability values
D)current period cash flows
E)current period revenues and expenses
Q3) Which one of the following is an ownership interest in a firm?
A)asset
B)expense
C)net income
D)liability
E)equity
Q4) Why is the expected rate of sales growth so critical to pro forma statements?
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Chapter 18: Corporate and Government Bonds
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Q1) Which one of the following terms is given to the value of a convertible bond that would equate to the value of a comparable nonconvertible bond?
A)out-of-the money value
B)in-the-money value
C)discounted value
D)external value
E)intrinsic value
Q2) Lester is considering a municipal bond yielding 5.5 percent and a corporate bond yielding 8.2 percent.His marginal tax rate is 28 percent.He should invest in the _____ bond because the critical marginal tax rate is _____ percent.
A)corporate; 26
B)corporate; 29
C)corporate; 33
D)municipal; 35
E)municipal; 37
Q3) What is the advantage of purchasing a STRIPS over a Treasury note?
Q4) How is the minimal value for a convertible bond determined?
Q5) Explain how the imputed interest is computed on a U.S.Treasury bill.
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Chapter 19: Global Economic Activity and Industry Analysis
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Q1) A common rule of thumb on Wall Street says that the sum of the inflation rate plus the market price-earnings ratio equals _____.
A)10
B)15
C)20
D)25
E)30
Q2) The so-called "M1" money supply includes which of the following?
A)currency and checking deposits
B)currency and money markets
C)currency and time deposits
D)currency, time deposits and money markets
E)checking and time deposits
Q3) Which index measures the average prices paid by urban consumers for a basket of consumer goods and services?
A)Urban Inflation Index (UII)
B)Price Inflation Index (PII)
C)Urban Consumer Index (UCI)
D)Consumer Inflation Index (CII)
E)Consumer Price Index (CPI)
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Chapter 20: Mortgage-Backed Securities
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Q1) After month 30,assuming that prepayments remain within the PAC collar,the holders of a PAC bond will receive which one of the following payments?
A)a fixed principal payment only
B)a fixed interest payment only
C)a fixed principal payment plus a declining interest payment
D)a declining principal payment only
E)a declining principal payment and a declining interest payment
Q2) How long is the expected average mortgage life of a mortgage held in a 30-year mortgage pool with a 100 PSA?
A)14.68 years
B)18.29 years
C)21.33 years
D)23.90 years
E)25.25 years
Q3) What are the advantages and the disadvantages of a homeowner selecting a 30-year mortgage rather than a 20-year mortgage?
Q4) Explain what a reverse mortgage is,how it works,and who it is intended to help.
Q5) How do CMOs increase the availability of mortgage funds?
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