Lesson 3

Question 1

individuals maximize return for a given level of risk or minimize risk if the returns are the same

Answer 1

Risk aversion

Question 2

defined here as the uncertainty of returns. This definition encompasses the possibility of both gains and losses.

Answer 2

Risk

Question 3

Required return of any investment=

Answer 3

Real Risk-free Rate + Expected Rate of inflation + Risk Premium

Question 4

Related to the nature of the company’s products and its operating strategy.

Answer 4

Business risk (or operating risk)

Question 5

refers to the risk created by the choice of capital structure the financing mix of the issuing company.

Answer 5

Financial risk

Question 6

the combined effect of operating and financial leverage.

Answer 6

total risk or the degree of total leverage

Question 7

affects the cash flows, operating results, financial position, and value of firms that engaged in foreign-currency-denominated transactions and more so those companies that have fully established subsidiaries in international markets

Answer 7

Currency or exchange rate risk

Question 8

provides a low fixed rate of return but provides the convenience of availability

Answer 8

typical savings account

Question 9

can easily deposit and withdraw from the account on any banking day

Answer 9

depositor

Question 10

usually requires a minimum amount of deposit with a fixed term to maturity

This type of account provides a higher fixed rate of return compared to a savings and checking account

Answer 10

time deposit account

Question 11

usually associated with the largest banks in the Philippines

Answer 11

Stability

Question 12

provides a ranking of universal and commercial banks in the Philippines based on total assets.

Answer 12

BSP

Question 13

have maturities of one year or less

Answer 13

Treasury bills

Question 14

three major types of Treasury bills:

Answer 14

91-day, 182-day, and 364-day

Question 15

have maturities longer than one year

Answer 15

Treasury notes (T-notes) and bonds

Question 16

repaid upon maturity of the instrument

Answer 16

principal

Question 17

short-term instruments issued by corporations for their immediate needs.

Answer 17

Commercial papers

Question 18

long-term debt instruments issued by corporations

Answer 18

Corporate bonds

Question 19

financial instruments that represent ownership in a corporation.

Answer 19

Stocks or shares

Question 20

Equity securities are classified under two main categories

Answer 20

ordinary shares (common stocks) and preference shares (preferred stocks).

Question 21

Money which is committed with an intention to earn a return over a period of time

Answer 21

investment

Question 22

The additional return required based on the riskiness of the investment

Answer 22

risk premium

Question 23

Risk related to the nature of the company’s products and its operating strategy

Answer 23

business risk

Question 24

The risk created by choice of capital structure-the financing mix of the issuing company

Answer 24

financial risk

Question 25

Provides a low fixed rate of return but allows transactions from the account any banking day

Answer 25

savings account

Question 26

Provides a very low fixed rate of return but provides the convenience of issuing checks for payments

Answer 26

checking account

Question 27

Government securities that have maturities of one year or less-91-day, 182-day, and 364-day securities

Answer 27

Treasury bills

Question 28

Short-term instruments issued by the corporation for their immediate needs

Answer 28

commercial papers

Question 29

Investors earn through dividends and capital gains

Answer 29

equity securities

Question 30

The investment, the higher is the required rate of return by the investor

Answer 30

riskier

Question 31

Paid first as to dividends and have seniority over claims to assets

Answer 31

preference shares

Question 32

Computed by dividing the standard deviation of returns by the mean return

Answer 32

coefficient of variation

Question 33

The square root of the variance

Answer 33

standard deviation

Question 34

Long-term debt instruments issued by corporations.

Answer 34

corporate bonds

Question 35

Deposits with banks are insured with

Answer 35

Philippine Deposit Insurance Corporation