Quiz on chapters 1 & 2

This is to help you understand, learn and remember the material in

Chaps 1 & 2.
1. Gold is:
a. the best asset to hold as an investment as it always rises in
price
b. an asset which does not generate any P&I flows
c. a speculative asset
d. b & c
2. The law of one price in relation to financial assets implies that in
competitive markets:
a. supermarkets will always sell identical goods at the same
price as each other
b. if two financial assets are essentially the same, they will
trade at the same market price
c. if a single asset is traded in more than one market it will
trade at the same price in each of them
d. b & c
3. When interest rates rise, the price of a bond will:
a. rise
b. fall
c. may rise or fall
d. automatically adjust to reflect regulations which determine
bond prices
4. Assets can be valued in different ways depending on:
a. the intention of the asset owner with respect to its assets
b. the free choice of the valuer of the assets
c. whether the assets belong to the asset owner or to its
client
d. whether the asset owner wishes to realise a profit or loss in
that particular year
5. Bank shares may trade below net asset value because:
a. Asset values are overstated
b. Stock markets dont consider asset values in determining
the correct price
c. The bank has little or no franchise value
d. a & c
6. Real estate valuers of residential property, in valuing a house
would consider:
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a. comparable houses
b. realised sales prices from such houses
c. any differences between the house being valued and
comparables
d. all of the above
7. Derivatives have little value because:
a. they do not generate P&I
b. they involve substantial risk
c. they trade on a derivative market not on a cash market
d. the statement may be considered to be untrue
8. Risk management could mean:
a. avoiding risk by holding savings only in government
guaranteed bank deposits
b. holding a wide range of assets with different characteristics
c. never buying shares
d. any of the above
9. The capital budgeting department in a company discounts
expected costs and revenues at a rate equal to:
a. the cost of equity
b. the cost of debt
c. the weighted average cost of capital of the company
d. the government 10 year bond yield adjusted for the
additional risk of the proposed investment and the
proportion of equity that is guaranteed by the company
10.

A loan is:
a. a way of obtaining liquidity
b. always a bad way to finance consumption expenditures
c. always a good way to finance capital investment
d. always a good way to finance share purchase
e. all of the above

11.

A financial asset is:

a. a contract
b. an agreement for future capital expenditure to be approved
c. a piece of paper guaranteeing certain returns
d. only valid if countersigned by a government official

12.

A bubble results when:

a. market prices exceed what a scientific valuation based on
expected future cash flows would estimate as the value of
an asset
b. everyone is buying an asset class and no-one at all is
willing to sell to them to meet their demand
c. prices are based on an analysis of supply and demand
which suggests an undervaluation of the asset

d. all of the above

13. An asset should be allocated to either the trading book or the
banking book according to whether:
a. the asset is a bank asset or a non-bank asset
b. the asset is a long lived asset or a short maturity asset
c. the asset is a fixed asset or a financial asset
d. the intention is to trade it or to hold it
14.

A bank is insolvent if:

a. its assets are worth less than its liabilities
b. is liabilities are worth less than its assets
c. its assets and liabilities are both of zero value
d. it has a positive net worth

15.

A society is likely to become richer over time as a result of:

a. capital widening
b. capital deepening
c. venture capital investment
d. all of the above

16.

Pricing in credit and capital markets involves:

a. the time value of money
b. an assessment of risk
c. judging how much interest someone can afford to pay
d. a and b

17.

If shares are always correctly priced this means:

a. in relation to the shares of similar companies
b. in relation to the expected cash flows and risk of the asset
c. both of the above
d. neither of the above

18.

Real investment means:

a. investment in real shares of companies rather than in
paper certificates representing share ownership
b. investment in physical tangible assets such as real estate,
research and development and other non-financial assets
c. investment in reality television shows
d. none of the above

19.

An example of an opportunity cost would be:

a. income forgone by taking a long holiday rather than taking
a job
b. an opportunity to invest that absorbed a large proportion of
current income
c. a cost such as a tax which an opportunist would find a way
to avoid paying
d. a & b

20.

Pari-passu means:
a. preferentially and in proportion to class
b. proportionally without preference
c. particular preference to equity
d. none of the above

21.

Companies are subject to only which types of risk:

a. business risk
b. financial risk
c. business and financial risk
d. business risk, financial risk and shareholder risk

22.

Credit enhancement is a result of:

a. seniority/ priority ranking and subordination
b. equity having rights above other classes of capital
c. debt seniority being a function of equal flow of cash to
junior and senior debt
d. all of the above

23. Companies benefit from a tax shield by employing debt in

their capital structure. The optimum amount of debt is
determined by:
a. the tax authorities putting a limit on tax deductibility
b. the shareholders demanding that the company employ as
much debt as possible in order to leverage return on
equity
c. the trade-off between the tax shield benefit and
bankruptcy costs
d. all of the above
24. A type of financial intermediary which generally has a capital
structure with undivided interest is:
a. a private equity fund
b. an investment bank
c. an insurance company
d. a mutual fund
25.

P&I flows come from:

a. Employment
b. Tax revenue
c. Rental income
d. a & c
e. a, b & c