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BSNS114 Mid-sem > Practice questions > Flashcards

Practice questions Flashcards

1
Q
  1. Which ONE of the following situations is most likely to create an agency cost?
    A. Compensating a manager based on the company’s end of the year net income
    B. Foregoing a profitable project to protect a manager’s job
    C. A manager feeds genuine and transparent information about the company to the financial market
    D. Giving all employees a bonus if a certain level of stock price has been achieved
    E. Hiring an independent consultant to study the operating efficiency of the company
A

B

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2
Q
  1. Which one of the following best matches the long-run objective of financial decision making?
    A. Increasing the dollar amount of each sale
    B. Increasing traffic flow within the firm’s stores
    C. Transforming fixed costs into variable costs
    D. Maximizing the value of the business
    E. Maximizing customer satisfaction
A

D

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3
Q
  1. A primary financial market is one that:
    A. involves the trade of existing securities
    B. offers securities with the highest expected return
    C. frees investors to sell when the need arises while allowing companies to continue using the
    money to finance growth over longer periods of time
    D. offers the greatest choice of shares and bonds
    E. involves the issuance of securities for the first time
A

E

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4
Q
  1. Will and Bill both enjoy sunshine, water and surfboards. Thus, the two friends decided to create a business together in Sydney renting surfboards, paddle boats and inflatable devices. Will and Bill will equally share in the decision making and in the profits or losses. Which type of
    business did they create if they both have full personal liability for the firm’s debts?
    A. Sole proprietorship
    B. Joint stock company
    C. General partnership
    D. Corporation
    E. Limited liability partnership
A

C

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5
Q
  1. When shareholders have little power over managers, managers put their interests over shareholders’ interests. Which ONE of the following is a clear example of managerial interests being put ahead of stockholder interests?
    A. A manager decides not to expand into the US market because he does not want to fly oversees
    even though it presents an opportunity for future company growth
    B. A manager borrows justified amounts to fund a company’s operations abroad
    C. A manager decides to relocate the head office to a new more modern building within the central
    business district
    D. A manager bought a corporate Mercedes-Benz which is used for travel between different
    company locations around the country
    E. A manager decides to reduce the cost of the product produced by a company by introducing
    more cost-efficient technology
A

A

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6
Q
  1. The most important function of a financial market is:
    A. to mobilize the flow of funds between lenders and borrowers
    B. to provide attractive opportunities to invest in different securities
    C. to provide information about an issuing company’s financial situation
    D. to secure profits for brokers and dealers
    E. to provide corporations with large loans
A

A

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7
Q
  1. Which of the following includes working capital management?
    I. Monitoring the company’s inventory level
    II. Monitoring timely payments by suppliers of inventory and by customers
    III. Deciding how much long-term debt to assume
    IV. Monitoring the amount of cash that is readily available
    A. I and II only
    B. I, II and IV only
    C. I and IV only
    D. II and III only
    E. I and III only
A

B

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8
Q
  1. Which ONE of the following statements is related to the investment decision?
    A. A company is managing the amount of its current assets as compared to its current liabilities
    B. A company is looking for expansions. It’s planning to acquire additional plant facilities and
    property
    C. A company is considering raising funds to finance an expansion project by issuing bonds
    D. A company is considering raising funds to finance an expansion project by issuing stocks
    E. A company is considering an optimal mixture of shares and bonds to finance an expansion
    project
A

B

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9
Q
  1. Which ONE of the following is the primary mission of a board of directors in a corporation?
    A. To provide advice to the top managers of the company
    B. To protect top managers from shareholders pressures and defend them against criticism
    C. To ensure that top managers are acting in the best interests of the stockholders
    D. To protect society’s best interests
    E. None of the above
A

C

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10
Q 
10. Suppose you borrow $2000 from a bank today (t=0). You agree to pay back $3500 in two years
(t=2). What interest rate is the bank charging you per annum? Round your answer to two
decimal places, as shown.
A. 132.00% per annum
B. 32.29% per annum
C. 206.25% per annum
D. 75.00% per annum
E. None of the above is correct
A

B

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11
Q
  1. Suppose you plan to backpack around South Africa after you graduate from the university in 4
    years (t=4). You will need $15,000 at t=4 to pursue your dream. How much do you need to
    invest into a saving account today (t=0) to reach your goal in 4 years? Assume your saving
    account earns 6% per annum after all taxes and fees. Round your answer to nearest penny.
    A. $11,881.41
    B. $18,937.15
    C. $11,208.87
    D. $2,288.82
    E. $13,349.95
A

A

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12
Q
  1. Assume you have won $1 million in Lotto. You have been presented with several payout
    choices, and you have to make a decision which one to accept. The choices are as follows:
    I. $1 million today (t=0)
    II. $1.4 million lump sum in 2 years (t=2)
    III. a series of 7 annual payments of $100,000 a year starting at t=1
    IV. a series of 7 annual payments of $100,000 a year starting at t=0
    V. a series of annual payments of $50,000 a year forever starting at t=1
    Provided that the interest rate is 4% p.a., which option gives the highest present value?
    A. I
    B. II
    C. III
    D. IV
    E. V
A

B

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13
Q
  1. Suppose you invest $750 in a bank term deposit today (t=0). You are planning to withdraw your
    money once the balance is $1500. Suppose the bank pays 7% interest per annum. How long will
    it take you to attain your goal? Round your answer to the nearest WHOLE number.
    A. 2 years
    B. 30 years
    C. 10 years
    D. 1 year
    E. None of the above is correct
A

C

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14
Q
  1. How many months would it take for your investment to grow fourfold if it were invested at 16%
    per annum compounded monthly? Round your answer to the nearest WHOLE number.
    A. 105 months
    B. 9 months
    C. 4 months
    D. 18 months
    E. None of the above is correct
A

A

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15
Q
  1. Suppose you are planning to take a loan of $2000 today (t=0). The bank requires you to pay
    back $2100 in four months’ time? What is the EAR and APR on the loan? Round your answer to
    two decimal places.
    A. EAR=14.98%, APR=14.29% with four-monthly compounding
    B. EAR=19.05%, APR=20.45% with four-monthly compounding
    C. EAR=19.05%, APR=20.28% with four-monthly compounding
    D. EAR=15.87%, APR=15.00% with four-monthly compounding
    E. EAR=15.76%, APR=15.00% with four-monthly compounding
A

E

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16
Q
  1. You see a bank term deposit quoting 5% per annum compounded monthly. What is the effective
    annual rate (i.e., the EAR)? Round your answer to two decimal places.
    A. 5.42%
    B. 4.58%
    C. 5.00%
    D. 5.12%
    E. 4.68%
A

D

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17
Q
  1. KiwiBank has approved your application for credit. The maximum repayment they have
    approved is $500 a month for 120 months. The APR is 15.6% with monthly compounding. The
    first repayment is one month from now. How much can you afford to purchase using the credit
    offered by the bank? Round your answer to two decimal places.
    A. $8,163.82
    B. $30,297.72
    C. $142,739.26
    D. $46,625.35
    E. None of the above is correct
A

B

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18
Q
  1. Peter is 30 years old. He comes up with a plan to save for his retirement at 65 years of age. He
    has set himself a retirement target of $2,000,000. How much must be deposited each year into
    his superannuation account starting one year from now to reach his target? Assume his
    contributions are to be invested at 5.5% annually. Please round your answer to two decimal
    places.
    A. $17,350.86
    B. $19,949.85
    C. $18,489.59
    D. $2,599
    E. None of the above is correct
A

B

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19
Q
  1. Mary borrowed $50,000 to purchase a family car. The terms of her loan require making monthly
    payments of $977.51 over 6 years with the first payment due 1 month from now. The discount
    rate is 12% per annum (compounded monthly). How long until will she pay off the loan if she
    makes monthly payments of $1,500 instead? Round your answer to the WHOLE number.
    A. 72 months
    B. 41 months
    C. 20 months
    D. 12 months
    E. None of the above is correct
A

B

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20
Q
  1. It is 2017. My 2-year old wants to go to Harvard (a private U.S. university) starting in 2033 (in
    16 years’ time). The tuition fee is estimated to be $250,000. How much do I need to invest
    starting one month from today, and depositing at the end of every month until I have $250,000
    saved up to pay her tuition fees in 2033? Assume I can earn 1% interest per month on my
    investment account. Please round your answer to two decimal places.
    A. $434.31
    B. $2,934.31
    C. $14,486.15
    D. $1,302.08
    E. None of the above is correct
A

A

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21
Q
  1. An ordinary annuity is characterised by:
    A. a series of cash flows that are identical in amount and occur at the end of consecutive time
    periods over a finite period of time
    B. a series of cash flows that are identical in amount and occur at the start of consecutive time
    periods over a finite period of time
    C. a series of cash flows that are identical in amount and occur at the end of consecutive time
    periods over an infinite period of time
    D. a series of cash flows that are identical in amount and occur at the start of consecutive time
    periods over an infinite period of time
    E. a series of cash flows that grow at a constant rate and occur at the end of consecutive time
    periods over an infinite period of time
A

A

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22
Q
  1. Your grandfather is retiring at the end of next year (i.e, at t=1). He would like to ensure that he
    and, after he dies, his heirs receive payments of $11,309 a year forever, starting when he retires.
    If he can invest at 9.9% per annum, how much does your grandfather need to invest today (i.e.,
    t=0) to receive the desired cash flows? Please round your answer to two decimal places.
    A. $70.06
    B. $114,232.32
    C. $107,504.75
    D. $230,795.92
    E. None of the above is correct
A

B

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23
Q
  1. John plans to invest $10,000 a year at the end of each year for the next 7 years in an investment
    that will pay him a rate of return of 6.5% per annum. How much money will John have at the
    end of 7 years? Please round your answer to the nearest dollar.
    A. $6,435
    B. $54,845
    C. $85,229
    D. $15,540
    E. $22,346
A

C

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24
Q
  1. Peter Clack has decided to save money by his 60th birthday. Peter turns 20 today and needs to
    start saving to meet this new goal. Peter decides to make equal-sized annual deposits of $5,000
    leading up to his 60th birthday (the first deposit is made today; the last deposit is on his 59th
    birthday). His savings scheme earns 6.5% per annum. How much will Peter have when he turns
    60 years old? Round your answer to the nearest dollar.
    A. $878,159
    B. $935,240
    C. $878,160
    D. $819,868
    E. $873,160
A

B

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25
Q

Table Question 25 (Test 2017)

A

…

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26
Q
  1. Read all of the following choices. Which one is best answer?
    A. The bond indenture is the contract between the company and the shareholders
    B. The yield to maturity on a premium bond exceeds the bond’s coupon rate
    C. The yield to maturity on a premium bond is equal to the bond’s coupon rate
    D. A discount bond has a coupon rate that is less than the bond’s yield to maturity
    E. Bondholders have voting rights to protect their interests
A

D

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27
Q
  1. BLIS Biotechnology Corporation issued bonds 4 years ago with a 14-year maturity. The bond
    issue pays an annual coupon of $60 per annum. The YTM is currently 8.5% p.a. The bond’s face
    value is $1,000. What is the annual coupon rate?
    A. 8.5%
    B. 6%
    C. 3%
    D. 4.25%
    E. 2.5%
A

B

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28
Q
  1. Air Transpacific Inc. bonds have 18 years to maturity. The bond issue has a coupon rate of 8%
    p.a. (coupons are paid semi-annually, i.e. twice a year). If the YTM on this bond issue is
    currently at 9% p.a., calculate the price of the bond assuming a face value of $1,000. Please
    round to two decimal places.
    A. $912.44
    B. $939.20
    C. $1,094.54
    D. $911.28
    E. $911.67
A

E

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29
Q
  1. A Commonwealth government bond has three years to maturity. It carries a coupon payment of
    7% per annum. Given that the bond pays interest semi-annually (i.e. twice a year), what is the
    present value of the bond if the YTM is 9% per annum and the face value of the bond is
    $100,000?
    A. $88,693.18
    B. $94,842.13
    C. $101,522.78
    D. $105,875.28
    E. None of the above is correct
A

B

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30
Q 
30. If interest rates are expected to decrease steadily in the future, the term structure of interest rates
will most likely be:
A. upward sloping
B. flat
C. humped
D. downward sloping
E. None of the above is correct
A

D

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31
Q 
31. Which one of the following represents additional compensation provided to bondholders to
offset the possibility that the bond issuer might not pay the interest and/or principal payments as
expected?
A. Interest rate risk premium
B. Inflation premium
C. Liquidity premium
D. Default risk premium
E. Term premium
A

D

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32
Q
  1. Which ONE of the following statements is the best answer:
    A. Zero-coupon bonds are valued using simple interest
    B. Zero-coupon bonds are only issued by the New Zealand government
    C. Zero-coupon bonds have a fixed yield to maturity
    D. Zero-coupon bonds are sold at a price below par value
    E. Zero-coupon bonds are sold at a price above par value
A

D

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33
Q
  1. Bond X is a 4% coupon bond. Bond Y is a 10% coupon bond. Both bonds have 8 years to
    maturity and make half-yearly coupon payments. They are currently priced at par. If yields
    increase by 1.5% p.a. for both bonds, what are the new bond prices for Bond X and Y
    respectively? Assume the par value per bond is $1000.
    A. Price for Bond X=$1160.06; Price for Bond Y=$1436.98
    B. Price for Bond X=$903.97; Price for Bond Y=$924.17
    C. Price for Bond X=$904.99; Price for Bond Y=$924.17
    D. Price for Bond X=$903.97; Price for Bond Y=$922.89
    E. Price for Bond X=$1187.81; Price for Bond Y=$1638.54
A

D

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34
Q
  1. What is the percentage price change of bond X and Y?
    A. Bond X price increases by 9.6%; Bond Y price increases by 7.7%
    B. Bond X price decreases by 9.6%; Bond Y price decreases by 7.7%
    C. Bond X price increases by 9.6%; Bond Y price increases by 7.7%
    D. Bond X price increases by 9.6%; Bond Y price increases by7.7%
    E. Bond X increases by 18.79%; Bond Y increases by 63.86%
A

B

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35
Q
  1. Which ONE of the following bonds would have highest interest rate risk?
    A. 12-year 4% annual coupon bond with $1,000 face value
    B. 12-year 7% annual coupon bond with $1,000 face value
    C. 17-year 4% annual coupon bond with $1,000 face value
    D. 17-year 7% annual coupon bond with $1,000 face value
    E. A 17-year zero-coupon bond with $1,000 face value
A

E

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36
Q
  1. A Cola-Cola bond has eight years until maturity and pays no coupons. It offers a yield to
    maturity (YTM) of 6% p.a. If the prevailing interest rate is expected to decrease by 0.1%, how
    will this change the value of the zero-coupon bond one year later? Assume face value of $1000.
    Please round your answer to two decimal places.
    A. Bond price will increase by 6.70%
    B. Bond price will decrease by 6.70%
    C. Bond price will increase by 4.00%
    D. Bond price will decrease by 3.00%
    E. Bond price will decrease by 0.1%
A

A

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37
Q 
37. Looking only on the following bond ratings, which one indicates that a bond is in default?
I. Baa
II. BB
III. B
IV. Ba
V. D
A. II only
B. II and III only
C. II, III, IV and V only
D. I, II and III only
E. V only
A

E

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38
Q
  1. A share’s intrinsic value reflects:
    A. primarily the future value of the cash flows derived from the share.
    B. solely the anticipated future dividends.
    C. the present value of all the future cash flows from the share.
    D. only the anticipated future stock price.
    E. only the anticipated past stock price.
A

C

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39
Q
  1. A preference share of “B&B” firm is expected to pay a dividend of $5 per share every year
    indefinitely starting one year from now, and the required rate of return for the investor is 7.5%
    p.a. What is the share’s intrinsic value? Round your answer to two decimal places.
    A. $4.65
    B. $5.00
    C. $17.73
    D. $66.67
    E. $71.67
A

D

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40
Q
  1. What is TRUE about a preference share?
    A. The preference share is a form of equity from a legal standpoint.
    B. The preference share has preference over ordinary shares in the payment of dividends.
    C. Holders of the preference shares usually have no voting rights.
    D. Preference shares are usually expected to pay a constant dividend in perpetuity.
    E. All of the options given here are correct.
A

E

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41
Q

Which one of the following statements is an advantage of a corporation business
organization?
A. The business structure of a corporation can result in a separation between
ownership and control between shareholders and managers.
B. Owners of a corporate business are liable for all business debt.
C. Earnings of a corporation are subject to paying tax at the personal tax rate.
D. A corporation is a legal entity separate from its owners; this allows for easy
transfer and trading of ownership shares.
E. All of the above.

A

D

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42
Q

Which ONE of the following statements is FULLY correct about financial management
decisions?
I. Capital budgeting is a process of evaluating the uncertainty concerning a
particular project, and the size and timing of the cash flows associated with
the project.
II. Capital budgeting is a financing decision that determines where to get
funding from to buy assets.
III. Capital structure decision is a process that considers the balance of the mixes
of debt and equity capital use to finance the purchase of an asset.
IV. Working capital management decisions determine how day-to-day financial
matters should be managed so that the company can pay its bills.
A. I., II. and III.
B. I. and II.
C. II., III. and IV.
D. I., III. and IV.
E. II. and III.

A

D

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43
Q

Which ONE of the following statements is correct about the phrase “shareholders’ limited
liability”?
A. Shareholders’ limited liability means that the shareholders are responsible for
the business debt.
B. Shareholders’ limited liability means that shareholders’ loss is limited to the
amount they invest in the business and as well as what the firm borrows.
C. Shareholders’ limited liability means that shareholders are guaranteed to not
make losses.
D. Shareholders’ limited liability means that shareholders’ loss is limited only to
the amount they invest in the business.
E. Shareholders’ limited liability means that shareholders can only borrow a
limited amount of debt for personal use.

A

D

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44
Q

Which ONE of the following statements is related to capital budgeting?
A. A firm should monitor the price of its stock on the share market.
B. A firm should identify how much long-term debt and equity it needs to
finance its operations.
C. A firm should budget for the ideal level of inventory to be kept on hand.
D. A firm should take care to evaluate the size, timing and risk of future cash
flows from specific projects before undertaking long-term investment.
E. A firm should monitor the amount of its current assets as compared to its
current liabilities.

A

D

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45
Q 
The goal of a financial manager of a publicly listed company is to maximise which one of
the following components?
A. Accounting profit.
B. Business expense.
C. Business taxes.
D. Bank loan.
E. Firm value.
A

E

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46
Q

Which one of the following statements is TRUE concerning the different forms of business
organizations?
A. A disadvantage of a partnership over a sole proprietorship is that there is less
capital available in a partnership business structure.
B. A disadvantage of a sole proprietorship over a corporation is that agency
relationship exists in a sole proprietorship business organization but not in a
corporation.
C. A disadvantage of a corporation over a general partnership is that shareholders
of a corporation can lose more than they invest into the business.
D. A disadvantage of a corporation over a sole proprietorship is that separation of
ownership and management may lead to agency problems and therefore agency
costs.
E. A disadvantage of a corporation over a partnership is the difficulty in
ownership transfer in a corporation than in a partnership.

A

D

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47
Q

What are some ways to resolve a conflict of interest that arises between managers and
shareholders of a business?
I. Board of directors oversee the final decision outcome of all business prospects.
II. Give managers a pay package consisted of cash and share-based type
compensation.
III. Allow managers to be members of the “compensation committee” that
determines the pay packages for those same managers.
IV. Hire auditors (accountants that are independent and different from accountants
working within the corporation) to cross-check integrity and accuracy of
information being disclosed in the financial statements.
A. I and III.
B. II only.
C. I, II and IV.
D. All of the above.
E. None of the above

A

C

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48
Q

Which one of the following statements is NOT related to the functions of the financial
markets?
A. Financial markets satisfy the capital need for businesses.
B. Financial markets satisfy the liquidity need for investors.
C. Financial markets satisfy both the investment need of investors and capital
need of corporate businesses.
D. Financial markets conduct the capital budgeting process for businesses.
E. Financial markets allow investors to buy financial securities.

A

D

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49
Q

Scott has $4,500 that he wants to invest for 3 years at Kiwi Bank and earn 8.0% simple
interest per annum. Or, he can open an account at ASB Bank and invest his money for 4
years to earn 4.2% interest compounded annually. Which ONE of the following statements
is correct if he decides to invest at ASB Bank?
A. Earn the same amount as if he had invested with the credit union.
B. Have a total balance of $4,428.29 in his account after two years.
C. Have a total balance of $5,366.09 in his account after two years.
D. Earn $363.73 less than if he had invested in his Kiwi Bank account.
E. Earn $275.02 less than if he had invested with his Kiwi Bank account.

A

E

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50
Q

You just received an inheritance of $100,000 and decided to deposit the money into an
account that pays a steady 6% per annum, compounded monthly. How long will you have
to wait until the value of your inheritance is worth $1,000,000? Round your answer to a
whole month.
A. 17 months
B. 40 months
C. 173 months
D. 200 months
E. 462 months

A

D

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51
Q

All else constant and assuming a positive interest rates, the present value of a future positive
cash amount will ______________ as the interest rate goes down.
A. stay unchanged
B. increase
C. decrease
D. fluctuate
E. be unknown

A

B

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52
Q

Flotsam has deposited $1,200 into a bank account that will compound at 4% per annum.
She will neither deposit nor withdraw money from this account for the next 26 years. What
proportion of her final balance is made up of simple interest? Round your answer to two
decimal places.
A. 26.42%
B. 37.51%
C. 63.93%
D. 36.07%
E. None of the above is correct.

A

B

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53
Q

Nathaniel will deposit $32,000 in a bank account six years from now. The account will pay
8.2% per annum thereafter. He will add another $1,000 in exactly one year after his first
deposit but otherwise leave the money untouched. How much will Nathaniel have in his
account twelve years from now? Assume annual compounding and round your answer to
two decimal places.
A. $34,624.00
B. $1,000.00
C. $35,624.00
D. $82,390.49
E. $52,829.80

A

E

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54
Q

An investment offers to quadruple your money in 10 years. Assume annual compounding,
what annual interest rate are you being offered?
A. 0.00%
B. 7.20%
C. 14.90%
D. 11.60%
E. 149.00%

A

C

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55
Q

My business is planning a major expansion starting 5 years from today. In preparation for
this, I am setting aside $56,000 each quarter, starting today, for the next 5 years. How much
money will my business have when it is ready to expand if it can earn an interest rate of 7%
p.a. compounded quarterly on its savings assuming that today is the first day of a quarterly
period? Round your answer to two decimal places.
A. $248,636.81
B. $266,041.38
C. $1,327,290.23
D. $1,350,517.81
E. $879,733.82

A

D

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56
Q

You see a loan offering by a Finance Company that says for every $200 borrowed today you
are expected to pay back $210 in three months’ time. Alternatively, a three-month bank loan
offered by Westpac Bank is quoting 20% interest rate per annum with monthly compounding.

What is the annual percentage rate on the loan offered by the Finance Company?
A. 1.64%
B. 5.00%
C. 15.00%
D. 20.00%
E. 60.00%
A

D

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57
Q

You see a loan offering by a Finance Company that says for every $200 borrowed today you
are expected to pay back $210 in three months’ time. Alternatively, a three-month bank loan
offered by Westpac Bank is quoting 20% interest rate per annum with monthly compounding.

What is the effective annual rate for the bank loan currently offered by Westpac Bank?
A. 20.00%
B. 5.08%
C. 6.84%
D. 21.94%
E. 1.67%
A

D

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58
Q

You see a loan offering by a Finance Company that says for every $200 borrowed today you
are expected to pay back $210 in three months’ time. Alternatively, a three-month bank loan
offered by Westpac Bank is quoting 20% interest rate per annum with monthly compounding.

Which of the following statements is WHOLLY correct about the loan offered by the
Finance Company and the Westpac bank?
A. Loan offerings from both the Finance Company and the Westpac Bank
respectively are equally desirable because both offer the same APR of 20%
per annum.
B. Westpac bank offers a more desirable interest rate deal because it gives a
higher effective annual rate (i.e., EAR) to borrowers of loan.
C. Westpac bank offers a more desirable interest rate deal because it gives a
lower effective annual rate (i.e., EAR) to borrowers of loan.
D. Westpac bank offers a less desirable interest rate deal because it gives a
higher effective annual rate (i.e., EAR) to borrowers of loan.
E. Westpac bank offers a less desirable interest rate deal because it gives a
lower effective annual rate (i.e., EAR) to borrowers of loan.

A

D

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59
Q

Carl Johnson has decided that he wants $550,000 saved by his 70th birthday. Carl turns 30
today and needs to start saving to meet this new goal. Carl decides to make equal-sized annual
deposits leading up to retirement (the first deposit will be in one year from today when he
turns 31; the last deposit is on his 70th birthday). His retirement savings scheme earns 8% per
annum.

How much will each of Carl's annual deposits be? Round your answer to the nearest
penny.
A. $46,123.09
B. $2,123.09
C. $44,000.00
D. $49,812.94
E. $2,292.94
A

B

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60
Q

Carl Johnson has decided that he wants $550,000 saved by his 70th birthday. Carl turns 30
today and needs to start saving to meet this new goal. Carl decides to make equal-sized annual
deposits leading up to retirement (the first deposit will be in one year from today when he
turns 31; the last deposit is on his 70th birthday). His retirement savings scheme earns 8% per
annum.

Carl plans to spend $5,000 to cover his living expenses at the end of every month after he
retires at 70 years old (his first withdrawal will be in one month from the day he retires).
How many monthly withdrawals can he make from his retirement savings of $550,000
before he completely exhausts all the money in his savings account? Round your answer to
a whole month.
A. 82 months.
B. 83 months.
C. 196 months.
D. 199 months.
E. None of the above answers is correct.

A

D

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61
Q

Susan plans for her children and children’s children to inherit a perpetual annual cash
amount entitlement starting at some point in the future. Susan estimates that her investment
will be worth one million 30 years from today (i.e., t=30). One year after year 30, (i.e.,
t=31), Susan wants her beneficiaries to receive an annual cash amount of $C, and for every
year thereafter into the indefinite future, to receive the same cash amount $C. Given an
interest rate of 7% per annum over the entire valuation horizon, what is the annual cash
amount $C?
A. $10,586.40
B. $70,000.00
C. $80,586.40
D. $131,366.12
E. $131,367.12

A

B

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62
Q

Question 22 Table question (2016 S1 test)

A

D

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63
Q

Question 23 Table question (2016 S1 test)

A

B

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64
Q

You wrote a piece of software that does a better job of allowing computers to undertake
networking than any other existing programmes designed for the purpose. A large
8 BSNS108
TURN OVER
networking company wants to incorporate your software into its systems and is offering to
pay you $6,000 today, plus $6,000 at every month thereafter for the next six years, for
permission to do this. If the appropriate interest rate is 6% p.a. compounded monthly, what
is the present value of the cash flow stream that the company is offering you? Please round
your answer to two decimal places.
A. $8,592.27
B. $104,403.08
C. $362,037.08
D. $363,000.00
E. $363,847.27

A

E

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65
Q

We looked at the relationship between bond price and interest rate in class. For a coupon
bond originally issued to the market would have a coupon rate set equal to the market
interest rate. Sometime has lapsed since the primary issuance and the yield-to-maturity has
now dropped to a lower rate than the coupon rate for this bond that is being issued with a
par of $1,000. Which ONE of the following statements is correct about the bond?
A. The current market price of this bond is $1,000 and this is called a par value bond.
B. The current market price of this bond is greater than $1,000 and this is called a
premium bond.
C. The current market price of this bond is lower than $1,000 and this is called a
premium bond.
D. The current market price of this bond is lower than $1,000 and this is called a
discount bond.
E. The current market price of this bond is $1,000 and this is called a zero-coupon
bond.

A

B

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66
Q

Which ONE of the following statements is WHOLLY correct about some of the basic
features for bonds?
I. Bonds can be secured or not secured against an asset.
II. A bond indenture allows bondholders to take legal action against the issuing
company if coupon interests or principal payments are missed.
III. Types of seniority for a bond determine the priority of which senior or junior class
of bondholders get to receive payment first in the event of assets sales for the
issuing company.
IV. Investment in a zero coupon bond typically generates zero dollar payoff for
investors.
A. I. and II.
B. I., II. and III.
C. I. and III.
D. I., II. and IV.
E. I., II., III. and IV.

A

B

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67
Q

Yield-to-maturity for a corporate bond implicitly contains information about premium for
three components. Which ONE of the following is a correct combination of the three
components in making up the yield-to-maturity of a corporate bond?
A. Term premium (also known as interest rate risk premium), inflation premium and
default risk premium.
B. Term premium (also known as interest rate risk premium), nominal premium and
default risk premium.
C. Term premium (also known as interest rate risk premium), inflation premium and
coupon interest premium.
D. Term premium (also known as interest rate risk premium), par premium and
default risk premium.
E. Coupon interest premium, par premium and default risk premium.

A

A

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68
Q

Rating agencies with the likes of S&P and Moody all provide ratings services for corporate
bond issues based on the financial strength of the bond issuer. Which ONE of the following
best describes the information contained in these bond ratings?
A. A measure of the expected coupon rate of the bond over the next year.
B. A measure of the years to maturity of a bond.
C. A measure of the interest rate risk of the bond over the next year.
D. A measure of a default likelihood of the bond issuer and how that impacts on the
likelihood that the coupon interests or principal might not be repaid to the
bondholders.
E. A measure of the coupon payments of the bond over the next year.

A

D

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69
Q

Assume that a bond will make coupon payments every six months as
shown on the following timeline (following diagram shows one unit represents a six-monthly
period):

T=0 T=1 T=2 T=3 T=30
$40 $40 $40 $40 + $1000

Referring to the given timeline, what is the maturity of this bond (in years)?
A. 30 years.
B. 3 years.
C. 2 years.
D. 10 years.
E. 15 years.
A

E

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70
Q

Assume that a bond will make coupon payments every six months as
shown on the following timeline (following diagram shows one unit represents a six-monthly
period):

T=0 T=1 T=2 T=3 T=30
$40 $40 $40 $40 + $1000

What is the coupon rate of this bond quoted in annual term?
A. 2% p.a.
B. 4% p.a.
C. 8% p.a.
D. 16% p.a.
E. 32% p.a.
A

C

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71
Q

Assume that a bond will make coupon payments every six months as
shown on the following timeline (following diagram shows one unit represents a six-monthly
period):

T=0 T=1 T=2 T=3 T=30
$40 $40 $40 $40 + $1000

Looking at the information given on the timeline, what is the market price of the bond given
an 8% p.a. yield-to-maturity?
A. $100
B. $980
C. $1,000
D. $1,040
E. $1,100
A

C

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72
Q

Assume that a bond will make coupon payments every six months as
shown on the following timeline (following diagram shows one unit represents a six-monthly
period):

T=0 T=1 T=2 T=3 T=30
$40 $40 $40 $40 + $1000

Which ONE of the following statements is correct if the yield-to-maturity of this bond
increases to 10% p.a.?
A. The price of the bond will fall by $155.
B. The price of the bond will rise by $155.
C. The price of the bond stays unchanged because the coupon payments are
guaranteed by the issuer of the bond.
D. New bond price is $846.28 and the rate of change in the bond price is -18.16%.
E. New bond price is $846.28 and the rate of change in the bond price is -15.37%.

A

E

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73
Q

Which ONE of the following statements is correct about bond prices and changes in
interest rate?
A. Bond prices are not affected by interest rate movements.
B. Bond prices rise as interest rate rises.
C. For a given change in interest rates, the prices of longer-term bonds will change
more than the prices of shorter-term bonds.
D. For a given change in interest rates, the prices of longer-term bonds will change
at the same value as the prices of shorter-term bonds.
E. For a given change in interest rates, the prices of longer-term bonds will change
less than the prices of shorter-term bonds.

A

C

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74
Q

An investor who wants to have a share of a company’s current profit and its earnings growth
prospects would choose which one of the following investment options?
A. Buy shares of a publicly listed company.
B. Invest in a bank term deposit.
C. Apply to get a credit card.
D. Open a KiwiSaver account.
E. Get a mortgage (home loan).

A

A

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75
Q

Which ONE of the following statements is WHOLLY correct about dividends?
A. Dividends are distributed to bondholders of a company.
B. Dividends distributed to shareholders are pre-determined ahead of time like
coupon interests are pre-determined for bondholders.
C. The dollar amount of cash dividends distributed to preference shareholders are
always more than the dollar amount of cash dividends distributed to common
shareholders.
D. When investors buy shares of a company, they are always promised to receive
dividends by the company.
E. All of the above are incorrect.

A

E

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76
Q

Suppose you bought some shares of Telecom stock. There are many ways that your
shareholding can generate cash flows in the future. Which One of the following is NOT a
possible way to get a future cash flow from your stock?
A. You hold the stock and the company pays you a cash dividend.
B. You hold the stock and the company pays you coupon interests.
C. You hold the stock, the stock price rises and you sell the stock on the stock
exchange.
D. All of the above are correct.
E. None of the above is correct.

A

B

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77
Q

Only one of the following statements makes sense for preference shares. Which statement
is the ONE that makes sense?
A. Preference shares are legally a form of debt.
B. Preference shares rank behind common shares and ahead of bonds with regards
to the priority of payment on assets sales in the event of liquidation.
C. Preference shares do not take precedence over common shareholders in the
payment of dividends.
D. Investors in preference shares are entitled but not guaranteed to receive fixed
regular preferred dividends for an indefinite future (i.e., no end date to the
preferred dividends).
E. Investors in preference shares have voting rights for the appointment of board
members.

A

D

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78
Q

We looked at the share valuation for Gellibrand Ltd in tutorial. Suppose that the current
value for Gellibrand is $74.85 with a given required return on this share of 10% per annum.
Gellibrand maintains the same dollar amount of dividend per share payment every year for
the next nine years and then ceases paying dividend altogether. What is the annual dividend
per share payment? Please round your answer to two decimal places.
A. $7.49
B. $8.32
C. $11.00
D. $12.50
E. $13.00

A

E

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79
Q

Johnson and Johnson pays annual dividends. It just paid a dividend of $0.80 per share.
Johnson and Johnson is expected to increase its dividend to $1.00 per share one year from
today (an increase of 25% over and above the dividend just paid). Thereafter (i.e. after t=1),
Johnson and Johnson is expected to increase its dividend at a rate of 5% per annum
indefinitely. If the required return for investing in Johnson and Johnson stock is 20% per
annum, what is the fair value of the stock today?
A. $-20.00
B. $5.00
C. $5.20
D. $4.15
E. $6.67

A

E

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80
Q

The value for an issue of preference shares today (i.e., t=0) is the present value of a
perpetuity, where the preferred dividends form the constant cash amount of “$C” paid out
to investors at each regular period starting from t=1; and the required rate of return is “r”.
Suppose that a company does not plan to issue preference shares until six years from today
and that the preference shares outstanding at t=6 will pay $3.80 preferred dividend per year,
in perpetuity. If the expected rate of return for this preference shares is 5% per annum, how
much is the preference share worth today (i.e., t=0)?
A. $2.84
B. $2.98
C. $56.71
D. $59.55
E. $76.00

A

D

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81
Q

Which one of the following would NOT be useful to align the interests of management and
shareholders?
A. Paying high remuneration to CEOs who successfully pursue shareholder goals.
B. Penalizing CEOs for poor firm performance.
C. Paying high remuneration to CEOs regardless of firm performance.
D. Dismissing of a manager who knowingly takes any action contrary to the interests of
shareholders.
E. Requiring that the CEO becomes a substantial owner of company stock.

A

C

82
Q

Which one of the following is FALSE?
A. The goal of financial management is to maximize the current share price.
B. The corporate form of organization is superior when it comes to raising money and transfer
of ownership.
C. A primary market is any market where companies initially sell new security issues (debt or
equity).
D. Financing decision concern is to determine how day-to-day financial matters should be
managed so that the company can pay its bills, and how surplus cash should be invested.
E. An agency relationship arises whenever one party, called the principal, hires another party,
called the agent, to perform some service on behalf of the principal.

A

D

83
Q

Which one of the following is TRUE?
A. Working capital management: choosing the bank with lowest interest rate to finance a
purchase of equipment.
B. Financing decision: choosing the right mixture of inventory and cash to run a project.
C. Investment decision: selecting projects that will increase the value of the business.
D. Financing decision: hiring and firing a manager by the board of directors.
E. Investment decision: choosing the appropriate compensation for CEO to mitigate agency
problems.

A

C

84
Q

Which one of the following is FALSE?
A. An advantage of a sole proprietorship over a general partnership is that there is a limited
liability of single business owner.
B. An advantage of a sole proprietorship over a corporate firm is that profits are not taxed twice.
C. An advantage of a corporation over a general partnership is that there is a limited liability of
all owners.
D. An advantage of a sole proprietorship over a corporation is that separation of ownership in a
corporate form of business and management may lead to agency issues.
E. An advantage of a corporation over a partnership is that it is easier to transfer ownership in a
corporation than in a partnership.

A

A

85
Q

Your bank pays 10% per annum compounded semi-annually on your savings account. Suppose
you deposit $3,500 today (t=0) and wait 4 years. How much money can you expect to have at the
end of year 4 (t=4), rounded to the nearest penny?
A. $2368.94
B. $2390.55
C. $5124.35
D. $5171.09
E. None of the above is correct

A

D

86
Q 
Suppose you invest $150 in an investment fund today (t=0) that pays 9% per annum compounded
quarterly (each 3 months). How long will it take to double your money? Round your answer to the
whole number.
A. 31 quarters
B. 8 quarters
C. 23 quarters
D. 16 quarters
E. 20 quarters
A

A

87
Q

Kira has deposited $12,400 today (t=0). She wants to have saved $50,000 nine years from now
(t=9). What interest rate does she need to earn per annum to get to this goal? Assume annual
compounding. Round your answer to two decimal places.
A. 16.76% per annum
B. 16.67% per annum
C. 17.18% per annum
D. 19.04% per annum
E. 4.03% per annum

A

A

88
Q

Suppose you are in desperate need of cash and you turn to your uncle, who has offered to lend you
some money. You decide to borrow $1,300 today (t=0) and agree to pay back $1,500 in 2 years
(t=2). Alternatively, you could borrow from ASB bank that changes 6.5% per annum. You should:
A. Borrow from your uncle as he offers 0.92% lower interest rate per annum
B. Borrow from your uncle as he offers 0.92% higher interest rate per annum
C. Borrow from ASB bank as it charges 0.92% lower interest rate per annum
D. Borrow from ASB bank as it charges 0.92% higher interest rate per annum
E. You are indifferent between your uncle’s and ASB’s offer as they charge same interest rates
per annum

A

C

89
Q

Suppose you are saving to buy a house in 5 years (t=5). You plan to have a 20% deposit at that
time. You reckon that you will need $80,000 for the deposit. If you can invest in a fund that earns
8.4% per annum, how much do you need to invest today (t=0) to have $80,000 at t=5? Round your
answer to two decimal places.
A. $57,939.25
B. $100,998.2
C. $53,449.49
D. $12,207.03
E. $68,081.86

A

C

90
Q

Suppose you are thinking of purchasing a house. The house costs $800,000. You have $50,000 in
cash that you can use as a down payment on the house, but you need to borrow the rest of the
purchase price. The bank is offering a 20-year mortgage that requires equal monthly payments and
has an interest rate of 5% per annum compounded monthly. The first payment is due one month
after the loan is taken out. What will your monthly payment be if you sign up for this mortgage?
Round your answer to two decimal places.
A. $4,949.67
B. $5,279.65
C. $39,162.22
D. $41,773.04
E. $60,181.94

A

A

91
Q

Suppose you trying to decide how much to save for retirement. Assume you plan to save $600
fortnightly (each 2 weeks) with the first investment made in two weeks. You think you can earn
10% per year compounded fortnightly on your investments and you plan to retire in 43 years,
immediately after making your last $600 investment. How much will you have in your retirement
account on the day you retire? Round your answer to two decimal places. Assume 52 weeks in a
year.
A. $153,865.77
B. $154,457.57
C. $11,203,039.55
D. $11,246,728.17
E. $11,289,984.81

A

D

92
Q

Joshua Li plans to save $4,613 every year for the next 7 years, starting today (t=0) with the last
payment made at the end of year 7 (t=7). At the end of 8 years (t=8), Joshua will turn 30 years old
and plans to use his savings toward the deposit on a house. If his investment in an investment fund
will earn 9.5% per annum, how much will he have saved in 8 years when he will need the money
to buy a house? Round your answer to two decimal places.
A. $51,804.91
B. $47,191.91
C. $56,726.38
D. $52,775.44
E. $43,097.64

A

C

93
Q

Assume you will start a job as soon as you graduate this year (t=0) and that saving for your
retirement through your Kiwisaver starts in 3 month after you get a job. You reckon you can retire
comfortably once you reach $1,000,000. To get to your target you decide to set aside $600 each
quarter. How long you have to wait until you accumulate $1,000,000 if your investment account
earns 4.5% compounded quarterly. Round your answer to the whole number.
A. 97 quarters
B. 266 quarters
C. 98 quarters
D. 267 quarters
E. 91 quarters

A

D

94
Q

What is the Effective Annual Rate (EAR) of a mortgage that is advertised at 7.75% per annum
(APR). Assume monthly compounding. Round the answer to two decimal places.
A. 7.23%
B. 8.03%
C. 7.75%
D. 0.65%
E. 7.98%

A

B

95
Q 
Suppose your bank account pays interest with an Effective Annual Rate (EAR) of 5%. What is the
Annual Percentage Rate (APR) quote for this account based on semi-annual compounding? Round
the answer to two decimal places.
A. 4.90%
B. 4.94%
C. 5.06%
D. 4.89%
E. 5.00%
A

B

96
Q

How much do you have to deposit today (t=0) so that beginning 11 years from now you can
withdraw $10,000 a year for the next 6 years (t=11 through t=16). Assume interest rate of 6% per
annum. Round the answer to two decimal places.
A. $49,173.24
B. $3,936.46
C. $29,105.57
D. $25,903.85
E. $27,458.08

A

E

97
Q

The average life expectancy of male Kiwis is 82 years. Jo is 20 years old today. The perpetual
Life Insurance Co. is trying to sell him an investment policy that will pay him and his heirs $15,000
per year forever starting in one year (t=21). If the required return on this investment is 5.2% per
annum, how much will he pay for the policy? Round the answer to two decimal places.
A. $288,461.54
B. $276,013.18
C. $290,365.87
D. $347,589.88
E. $300,000.00

A

A

98
Q

Suppose Coca-Cola Company plans to generate $26,000 a year of a royalty payments. Suppose
first payment will arrive next year (t=1) and will increase by 3% every year thereafter forever.
Suppose similar soft drink royalties are sold for $500,000 at the market. If the required rate of
return is 15.5% what is the value of Coca-Cola’s royalty today? Round the answer to two decimal
places.
A. $167,741.94
B. $500,000.00
C. $173,333.33
D. $216,666.67
E. $208,000.00

A

E

99
Q

Table question (Q19 2017 S2)

A

D

100
Q

Table question (Q20 2017 S2)

A

B

101
Q

Table question (Q21 2017 S2)

A

E

102
Q

Which one of the following is usually a characteristic of a corporate bond?
A. Fixed coupon payments and near-zero inflation risk.
B. Fixed maturity and senior claim (ahead of shareholders) on the assets of the business.
C. Infinite-maturity and near-zero default risk.
D. Fixed coupon payments and near-zero interest rate risk.
E. Fixed coupon payments and near-zero default risk.

A

B

103
Q

Which one of the following is generally a characteristic of a government bond?
A. Fixed coupon payments and zero inflation risk.
B. Infinite-maturity and zero interest rate risk.
C. Infinite-maturity and zero inflation risk.
D. Fixed coupon payments and zero interest rate risk.
E. Fixed coupon payments and zero default risk.

A

E

104
Q 
Suppose a corporation is about to choose the features of a new bond. They need to choose the
time to maturity and the coupon rate. In general bond’s sensitivity of price to changes in market
interest rates (i.e., its interest rate risk) increases with:
I. longer time to maturity.
II. shorter time to maturity.
III. higher coupon rate.
IV. lower coupon rate.
A. I only.
B. I and III only.
C. I and IV only.
D. II and III only.
E. II and IV only.
A

C

105
Q

Recently Standard and Poors (S&P) announced that they reduced Spark (SPK) bond rating.
This means that S&P is seriously considering downgrading SPK’s credit rating on long-term
debt from its current single A status to a worse rating like A-. The likely effect on SPK’s bonds
will be:
A. The bond price will rise.
B. The bond price will fall.
C. The bond price will remain the same.
D. The bond price will fall to zero.
E. Telecom will find new bond issues impossible.

A

B

106
Q

Which ONE of the following bonds usually would have the lowest interest rate risk?
A. A 5-year 7% annual coupon bond with $1000 face value.
B. A 6-year zero coupon bond with $1000 face value.
C. A 5-year 5% annual coupon bond with $1000 face value.
D. A 5-year 4% annual coupon bond with $1000 face value.
E. A 5-year zero coupon bond with $1000 face value.

A

A

107
Q

A bond has a $1,000 face value, a market price of $1050, a semi-annual coupon of $40, and a
yield to maturity of 6%. What is annual coupon rate?
A. 5%
B. 6%
C. 7%
D. 8%
E. 10%

A

D

108
Q

Consider a 5-year bond with 10% coupon rate that has a yield to maturity (YTM) of 8% p.a.
If interest rates rise by 1%, the price of this bond will be:
A. Higher
B. Lower
C. The same
D. Equal to par value
E. Equal to zero

A

B

109
Q

The default risk premium refers to the higher yield required by:
A. bondholders for credit risk.
B. bondholders on less liquid bonds.
C. investors to compensate for expected future inflation.
D. bondholders to compensate for interest rate risk.
E. bondholders to compensate for higher tax rates.

A

A

110
Q 
Consider a coupon bond that pays interest annually, has a par value of $1,000, matures in 5
years, and has a yield to maturity of 12%. If the coupon rate is 9%, the price of the bond today
would be:
A. $856.04
B. $891.86
C. $926.40
D. $1,000.00
E. $324.43
A

B

111
Q

You can be sure that a bond will sell at a premium when:
A. its coupon rate is greater than its yield to maturity.
B. its coupon rate is less than its yield to maturity.
C. its coupon rate is equal to its yield to maturity.
D. its price is below par value.
E. its price equals par value.

A

A

112
Q
  1. The Queensland Treasury has issued a 10-year zero-coupon bond. It has a face value of $1,000
    and interest is compounded semi-annually. If similar risk bonds are priced with a YTM of
    11.32% per annum, what is the value of these Queensland bonds? Please round your answer
    to two decimal places.
    A. $117.09
    B. $342.19
    C. $576.63
    D. $371.20
    E. $332.50
A

E

113
Q

Table question (Q33 2017 S2)

A

C

114
Q
  1. Contact Energy (CEN) has a 3% coupon bond. Auckland International Airport (AIA) has a
    12% coupon bond. Both bonds have 10 years to maturity, make half-yearly coupon payments
    and have $1000 Face Value. Both bonds are priced at par value. If interest rates fall by 2%,
    what are the new bond prices for Bond CEN and AIA respectively?
    A. Price for Bond CEN =$1474.69; Price for Bond AIA =$1872.36.
    B. Price for Bond CEN =$1189.87; Price for Bond AIA =$1122.90.
    C. Price for Bond CEN =$1189.43; Price for Bond AIA =$1122.90.
    D. Price for Bond CEN =$1189.87; Price for Bond AIA =$1124.62.
    E. Price for Bond CEN =$1556.59; Price for Bond AIA =$2558.44.
A

D

115
Q
  1. What is the percentage price change for each of these bonds?
    A. Bond CEN price decreases by 18.95%; Bond AIA price decreases by 12.29%.
    B. Bond CEN price increases by 18.95%; Bond AIA price increases by 12.29%.
    C. Bond CEN price increases by 18.99%; Bond AIA price increases by 12.29%.
    D. Bond CEN price increases by 18.99%; Bond AIA price increases by12.46%.
    E. Bond CEN increases by 55.66%; Bond AIA increases by 155.85%.
A

D

116
Q
  1. A pure discount loan can be defined as:
    A. the present value of a stream of payments to be paid over a period of time in the future.
    B. the present value of a series of interest payments plus one single principal payment in the
    future.
    C. the present value of a single lump sum to be repaid at some time in the future.
    D. the single lump sum future value of a series of payments over a stated period of time.
    E. the future value of a series of interest payments plus one single loan amount paid at the
    beginning of the period.
A

C

117
Q
  1. What is true about a preference share?
    A. The preference share has preference over ordinary shares in the payment of dividends.
    B. Holders of the preference shares usually have no voting rights.
    C. The preference share is a form of equity from a legal standpoint.
    D. Unpaid preference share dividends are not debts of the company.
    E. All of the given answers are true.
A

E

118
Q
  1. Stocks and bonds have many differences that could encourage investors to invest in one or the
    other. An investor can select to invest in stocks, if he or she is willing to invest in financial
    instrument which:
    A. provides a right to vote for a board of directors.
    B. provides a lower level of risk.
    C. provides a specific maturity date.
    D. provides a known payoff.
    E. never pays interim cash flows.
A

A

119
Q
  1. Ordinary shareholders have all the following rights except the:
    A. right to elect the board of directors.
    B. right to priority in the event of company liquidation.
    C. right to share proportionally in dividends paid.
    D. right to share proportionally in assets remaining after liabilities have been paid in a
    company liquidation.
    E. right to take part in the general meeting.
A

B

120
Q
  1. Read ALL of the following choices. Which ONE is TRUE? Preferred shareholders’ claims on
    income of a firm come________the creditors _______common shareholders.
    A. before; and also before
    B. after; but before
    C. after; and also after
    D. at the same time as; and at the same time as
    E. before; but after
A

B

121
Q

Read the following statement and select the correct order of the following terms that most
appropriately completes the statement:
Terms: financing, real, bonds, investment, executive airplanes, financial, working capital
management.
Companies usually buy ___I._____ assets. These assets can be tangible or intangible,
which are then used to create economic value. To pay for these assets, companies can
source capital by selling ____II.________ assets such as ______III._____. The decision
about which assets to buy is usually termed the _____IV.________ decision. The decision
about how to raise money is usually termed the __V._________ decision.
I. = (First word) II. = (Second word) III. = (Third word) IV. = (Fourth word) V. = (Fifth word)
A. financial real bonds investments financing
B. financial real bonds financing investments
C. real financial bonds investments financing
D. real financial bonds financing investments
E. real bonds financial investments financing

A

C

122
Q

Which of the following two types of business forms have limited liability?
A. A corporation and a sole proprietorship.
B. A corporation and a general partnership.
C. A general partnership and a sole proprietorship.
D. A corporation and a limited partnership.
E. A limited partnership and a sole proprietorship.

A

D

123
Q

Which ONE of the following statements always applies to corporation?
A. Unlimited liability.
B. Firm size is small.
C. Ownership can easily be transferred without affecting operations.
D. Small group of business owners.
E. Profit is taxed at personal income tax rate.

A

C

124
Q

In tutorial, we discussed that limited liability is not always an advantage for a corporation
and its shareholders. Which ONE of the following is a reason why limited liability can be a
potential disadvantage to a corporation?
A. Corporation and shareholders’ income will get taxed twice.
B. Corporation and shareholders will lose more than the required amount
personally invested.
C. Corporation and shareholders’ interests can be separated.
D. Corporation and shareholders’ interests are in unison.
E. Corporation and shareholders can have reduced access to bank financing

A

A

125
Q

Which of the following are important duties for a financial manager?
I. To make investment decisions.
II. To make financing decisions.
III. To ensure that a business has the cash it needs for day-to-day business
transactions.
IV. To facilitate trading of shares of the business.
A. I., II. and III.
B. II., III. and IV.
C. I., II. and IV.
D. None of the above is correct.
E. All of the above are correct.

A

A

126
Q

Which one of the following statements is NOT an agency conflict problem in the behaviour
of the different financial managers?
A. Bill chooses to sponsor a team of athletes for the Special Olympics at some
cost to its shareholders even when this decision does not enhance his firm’s
reputation.
B. Peter chooses to develop a new product which will destroy the firm value.
C. Jenny has a corporate limousine which is used to commute between different
company locations around the country.
D. Mary decides to not expand into the Australian retail market even when this
presents an opportunity for profitability and future earnings growth.
E. James ignores an opportunity for his company to invest in a new drug to
fight Alzheimer’s disease, judging the drug’s chances of succeeding are low

A

E

127
Q

Which of the following statements is correct about the term “IPO ─ initial public offering”?
A. Corporation that sells shares for the first time.
B. Corporation that sells bonds for the first time.
C. Corporation that buys shares for the first time.
D. Corporation that buys bonds for the first time.
E. Corporation that delists from an exchange.

A

A

128
Q

Which one of the following is correct about a primary financial market?
I. A primary financial market is one that offers investors to trade existing shares
or bonds.
II. A primary financial market is one that involves the sale of shares or bonds for
the first time.
III. A primary financial market does not raise new funds but offer liquidity.
IV. A primary financial market is one that facilitates capital-raising for corporate
businesses.
A. I. and III.
B. II. and IV.
C. II. and III.
D. III. and IV.
E. I. and IV.

A

B

129
Q

Simple Bank pays 5% simple interest per year on its investment
principal; Compound Bank pays simple interest and interest on interest on its investment
principal.

For every $100 invested today with Simple Bank, how much do you have in your account
balance eight years later assuming that no contributions or withdrawal is made to and from
the account over the investment horizon?
A. $100.00
B. $120.00
C. $130.00
D. $140.00
E. $147.75
A

D

130
Q

Simple Bank pays 5% simple interest per year on its investment
principal; Compound Bank pays simple interest and interest on interest on its investment
principal.

Compound Bank wants to match Simple Bank over the same investment horizon, (i.e. eight
years). What interest rate per year should Compound Bank offer to pay interest on its
account if interest is compounded annually?
A. 3.98% p.a.
B. 4.30% p.a.
C. 4.38% p.a.
D. 5.00% p.a.
E. 5.12% p.a.

A

B

131
Q

Simple Bank pays 5% simple interest per year on its investment
principal; Compound Bank pays simple interest and interest on interest on its investment
principal.

Suppose that Compound Bank compounds interest monthly instead of annually, what
quoted annual percentage rate (APR) should Compound Bank offer to its customers in order
to match Simple Bank over the same investment horizon of eight years?
A. 3.98% p.a.
B. 4.21% p.a.
C. 4.30% p.a.
D. 5.00% p.a.
E. 5.12% p.a.

A

B

132
Q

Poppy May has invested $2,200.00 into a bank account that will compound at 8.00% per
annum. She will neither deposit nor withdraw money from this account for the next 20
years. What proportion of her final balance is made up of the simple interest and interest on
interest respectively?
A. Simple interest= 34.33%; Interest on interest= 44.22%
B. Simple interest= 34.33%; Interest on interest= 78.55%
C. Simple interest= 34.33%; Interest on interest= 21.45%
D. Simple interest= 21.45%; Interest on interest= 78.55%
E. Simple interest= 21.45%; Interest on interest= 44.22%

A

A

133
Q 
Alan deposited a lump sum to a bank account today and will earn 12.00% per annum with
monthly compounding. How many months until he has quadrupled his money? Round
your answer to the closest month.
A. 139
B. 49
C. 48
D. 3
E. 2
A

A

134
Q

You deposit $80,000 now (i.e. t=0) in a savings account that gives you 12% p.a. interest
compounded monthly. Exactly one year from today (i.e. t=1), you notice that the same
account balance is now $90,146 and that the interest rate has since changed to 8% p.a. (the
account still compounds interest monthly); you decide to not touch the money in the account
but leave it in the same account to continue to earn interest for another six years. How much
money will you have in your account seven years from now assuming the interest remains
unchanged at 8% p.a. compounded monthly? Round your answer to two decimal places.
A. $84,921.61
B. $145,450.77
C. $199,284.09
D. $176,854.51
E. $184,537.82

A

B

135
Q

Suppose you have no money, but you wish to consume $200 at time 2, $300 at time 3, and
$1,000 at time 5. You have a wealthy aunt who is willing to make a deposit into an
investment account today, at time 0, for you to be able to satisfy your consumption needs.
Given that the account pays 5.2% per one time period, how much should she deposit today?
A. $1,214.50
B. $1,264.25
C. $1,500.00
D. An amount smaller than any of the above.
E. An amount larger than any of the above.

A

A

136
Q

If $380.00 invested today gives $450.00 in exactly one year from today, which one of the
following is the interest rate used to discount this investment?
A. -15.56%
B. 18.42%
C. 1.84%
D. 0.18%
E. - 0.16%

A

B

137
Q

You have just joined the investment banking firm Todd’s Case. They have offered you two
different salary arrangements. Salary package one: you can have $7,500 per month for the
next four years with the first payment starting at month end; or salary package two: you can
have $7,000 per month for the next four years with the first payment starting at month end,
along with a $15,500 signing bonus today. If the interest rate is 5.00% p.a. compounded
monthly, which salary package gives you the highest remunerated value today? Round your
calculation to a whole dollar.
A. Salary package one: at t=0, PV is $325,672.
B. Salary package two: at t=0, PV is $325,672.
C. Salary package one: at t=0, PV is $319,461.
D. Salary package two: at t=0, PV is $319,461.
E. Both salary packages give the same remunerated value.

A

A

138
Q

You are 25 years old today and plan to retire when you turn 65 years old. You believe you will
spend $40,000 a year for 20 years once you retire.

Your first withdrawal of $40,000 will be on the day you turn 65 (giving money to live on
for the next year) and for every year thereafter to and including the day you turn 85, you
will withdraw $40,000. How much must you have in your retirement savings account on
the day you turn 65, given a 6% p.a. interest rate in a savings account that compounds
interest annually? Round your answer to two decimal places.
A. $458,796.85
B. $470,563.06
C. $486,324.66
D. $498,796.85
E. $601,851.87

A

D

139
Q

You are 25 years old today and plan to retire when you turn 65 years old. You believe you will
spend $40,000 a year for 20 years once you retire.

In order to meet your retirement savings goal, you plan to make annual deposits every year
into the same savings account until you retire 40 years later. The first deposit starts one year
from today (i.e., when you turn 26 years old) and the last deposit ends when you turn 65.
See the timeline below, which one of the following formulae represents the annual deposit
amount (C) that you need to put aside in order to achieve your retirement saving goal?
Assume interest rate of 6% p.a. compounded annually and AMT= retirement savings goal
you solved in question 18. ($498,796.85)

25 26 27 28 65
{——-{——-{——{———————–{
C C C C

A. 𝐶 =𝐴𝑀𝑇 × 0.06 / ((1.06)^40) − 1
B. 𝐶 =𝐴𝑀𝑇 × 0.06 / ((1.06)^39) − 1
C. 𝐶 =𝐴𝑀𝑇 × 0.06 / (1 − (1 / (1.06)^39))
D. 𝐶 =𝐴𝑀𝑇 × 0.06 / (1 − (1 / (1.06)^40)
E. 𝐶 =𝐴𝑀𝑇 / 40
A

A

140
Q

Peter and Mary who are thinking about retirement, decide to put aside
$3,000 each year in their KiwiSaver account for a total of 30 annual annuity contributions. The
first payment will be one year from today and the next payment takes place on the anniversary
of the last payment. Assume the KiwiSaver account earns 8% p.a. interest rate compounded
annually, answer the following two questions.

What is the final balance in their KiwiSaver account after the 30 annual annuity
contributions, (i.e. on the day after Peter and Mary make the last $3,000 deposit)? Round
your answer to two decimal places.
A. $90,000.00
B. $311,897.81
C. $339,849.63
D. $367,037.60
E. $370,037.60
A

C

141
Q

Peter and Mary who are thinking about retirement, decide to put aside
$3,000 each year in their KiwiSaver account for a total of 30 annual annuity contributions. The
first payment will be one year from today and the next payment takes place on the anniversary
of the last payment. Assume the KiwiSaver account earns 8% p.a. interest rate compounded
annually, answer the following two questions.

If their goal is to retire with $840,000 in their KiwiSaver account and they can only afford
to put aside at most $3,000 on each contribution, how many annual contributions will it take
to accumulate up to $840,000 in their KiwiSaver account balance? Round your answer
closest to one whole payment.
A. 36 payments
B. 37 payments
C. 38 payments
D. 40 payments
E. 41 payments

A

E

142
Q

Your grandfather is retiring at the end of 12 years from now. He would
like to ensure that he and, after he dies, his heirs will receive payments of $7,500 a year and
$7,500 every year thereafter into the indefinite future. The first payment starts at the end of year
12.

If your grandfather can invest at 15% interest per year, how much does he need to have
saved in his retirement saving account in the year before the first payment of $7,500 takes
place, (i.e. at t=11) to achieve the desired cash flow stream?
A. $1,401.80
B. $7,500.00
C. $40,000.00
D. $43,478.26
E. $50,000.00

A

E

143
Q

Your grandfather is retiring at the end of 12 years from now. He would
like to ensure that he and, after he dies, his heirs will receive payments of $7,500 a year and
$7,500 every year thereafter into the indefinite future. The first payment starts at the end of year
12.

How much does your grandfather need to deposit today in order to ensure that he has enough
money in his account in year 11 to meet his objective?
A. $1,401.80
B. $9,344.36
C. $9,345.36
D. $10,747.16
E. $12,000.00

A

D

144
Q

You have borrowed $4,248.68 and agreed to pay back the loan with
monthly payments of $200.

If the interest rate is 12% stated as an APR, how long will it take you to pay back the
loan?
A. 2 days
B. 20 days
C. 2 months
D. 20 months
E. 2 years
A

E

145
Q

You have borrowed $4,248.68 and agreed to pay back the loan with
monthly payments of $200.

What is the effective annual rate for the loan? Round it to the closest answer.
A. 4.0% p.a.
B. 4.7% p.a.
C. 12.0% p.a.
D. 12.7% p.a.
E. 18.8% p.a.
A

D

146
Q

Table question (Q26 2016 S2)

A

A

147
Q

You own a ten-year annual coupon bond (i.e., one coupon cash flow payment per year) with
a 7.5% annual coupon rate and a $1,000 face. The YTM (yield-to-maturity) on the bond is
5.5% per annum. The bond is rated AA. Which ONE of the following is correct?
A. The bond must be priced above par.
B. The bond must be priced at par.
C. The bond must be priced below par.
D. The bond is considered a speculative bond.
E. The market price for the bond is $1,000.

A

A

148
Q 
We talked about YTM (yield-to-maturity) for any given corporate bond can be decomposed
to contain information about different types of premiums. Which of the following are these
types of premiums?
 I. Term premium (also known as the interest rate risk premium).
II. Inflation premium.
III. Default risk premium.
IV. Earnings premium.
A. I. only
B. I., II. and III.
C. I., III. and IV.
D. II. and IV.
E. I. and II.
A

B

149
Q

Which ONE of the following statements is WHOLLY CORRECT?
A. The coupon rate on a bond can sometimes change to match the number as the
YTM on a bond for a fixed-rate coupon bond.
B. The coupon rate is never set at the prevailing yield-to-maturity (YTM) at the time
of issuance.
C. A discount bond is a bond that sells at a price below its face value because the
yield-to-maturity (YTM) is above the coupon rate.
D. A discount bond is a bond that sells at its face value because the yield-to-maturity
(YTM) is the coupon rate.
E. A premium bond is a bond that sells at a price below its face value because the
yield-to-maturity (YTM) is lower than the coupon rate.

A

C

150
Q

Assume that the following bond makes $C coupon payments every
three months as shown on the following timeline (diagram shows that one unit represents one
three-monthly period).

0 1 2 3 120
{——-{——-{——{———————–{
C C C C + $1,000

What is the coupon payment of the bond given a 9% coupon rate per annum?
A. $22.50
B. $25.00
C. $30.00
D. $45.00
E. $90.00
A

A

151
Q

Assume that the following bond makes $C coupon payments every
three months as shown on the following timeline (diagram shows that one unit represents one
three-monthly period).

0 1 2 3 120
{——-{——-{——{———————–{
C C C C + $1,000

Referring to the timeline, what is the maturity of this bond (in years)?
A. 30 years
B. 3 years
C. 2 years
D. 10 years
E. 15 years
A

A

152
Q

Assume that the following bond makes $C coupon payments every
three months as shown on the following timeline (diagram shows that one unit represents one
three-monthly period).

0 1 2 3 120
{——-{——-{——{———————–{
C C C C + $1,000

Looking at the information given on the timeline, what is the price of the bond given an
8.0% p.a. yield-to-maturity? Round your answer to two decimal places.
A. $1,000.00
B. $1,112.58
C. $1,113.39
D. $1,119.69
E. $1,200.00

A

C

153
Q

Which ONE of the following statements is correct about bonds?
I. The coupon cash flow of a bond is the face value of the bond.
II. A bond is said to mature on the date when the issuer of the bond repays its
principal amount to the bondholders.
III. When a company issues a bond, the buyer of that bond becomes a part owner of
the issuing company.
IV. A bond is like a type of loan because when an investor buys a bond from the
issuing company, the investor is giving money to the issuer, with the assurance
that it will be repaid at a later date in the future.
A. I. only
B. I., II. and III.
C. I., III. and IV.
D. II. and IV.
E. I. and II.

A

D

154
Q

Which one of the following bonds will be LEAST sensitive to a change in market interest
rate?
A. A 10-year bond with a $1,000 face value and coupon rate of 5.8% p.a. paid semiannually.
B. A 15-year bond with a $1,000 face value and coupon rate of 5.8% p.a. paid
annually.
C. A 20-year bond with a $1,000 face value and coupon rate of 5.8% p.a. paid semiannually.
D. A 30-year bond with a $1,000 face value and coupon rate of 5.8% p.a. paid
annually.
E. A 29-year bond with a $1,000 face value and coupon rate of 5.8% p.a. paid
annually.

A

A

155
Q

Which ONE of the following statements is WHOLLY CORRECT about zero-coupon
bonds?
A. Such bonds are bought at face value and sold at a premium to face value at
maturity.
B. Such bonds give regular coupon interest income to investors.
C. Such bonds are bought at a discount (i.e. below face value) and at maturity,
investors receive the face value amount.
D. Such bonds are always priced lower than all other bonds of similar terms in the
bond market.
E. All of the above are correct.

A

C

156
Q

What are dividend payments?
A. Payments made to a company by investors for a share of the ownership in that
company.
B. Incremental increases in the value of the stock due to business growth.
C. The difference between the cost price of a share and the price an investor receives
when that share is sold.
D. Profits distributed to each shareholder on the basis of the number of shares they
hold in a company.
E. Payments made to a share broker for transacting shares.

A

D

157
Q

Only one of the following statements is correct about common shares. Which statement is
the one that is correct?
A. Investors in common shares are guaranteed regular dividend payments into the
indefinite future.
B. Investors in common shares can vote for the appointment of board members.
C. Investors in common shares have guaranteed payment of dividends during times
of business distress.
D. We can calculate the intrinsic value of common shares only by using the present
value of an ordinary annuity stream.
E. We cannot calculate the intrinsic value of common shares because dividends are
perpetual cash payoffs without a pre-specified end date.

A

B

158
Q

Peter Smith wants to buy 100 shares of The Warehouse (WHS) stock. The Warehouse stock
is one of many number of stocks listed on the New Zealand Stock Exchange (NZX). Which
ONE of the following is correct in describing the process of which The Warehouse shares
can be bought?
A. Peter can buy WHS shares directly from his share broker, who holds inventories
of the WHS stocks and inventories of other stocks. The share broker also stands
ready to transact with Peter and any other clients wanting to transact shares.
B. Peter can buy WHS shares directly from the Warehouse Limited Company by
submitting a buy order to the Investors Centre at the Warehouse Limited
Company.
C. Peter submits a buy order to his share broker. His broker does not hold inventories
of the WHS stocks but in turn, submits a buy order to the NZX. If there is an
outstanding order to sell at the price that Peter is after, then the orders are matched
and the trading deal is done.
D. Peter submits a sell order to his share broker. His broker does not hold inventories
of the WHS stocks but in turn, submits a sell order to the NZX. If there is an
outstanding order to buy at the price that Peter is after, then the orders are matched
and the trading deal is done.
E. None of the above is correct.

A

C

159
Q

Metro Foods Limited has just paid a dividend of $2.50. Dividend one year from today is
expected to be $3.00, which is then expected to grow at 5% into the indefinite future. Given
a required rate of return of 10% per year, what is the intrinsic value for a share of stock in
Metro Foods Limited today? Round your answer to two decimal places.
A. $25.00
B. $30.00
C. $50.00
D. $52.50
E. $60.00

A

E

160
Q

We looked at the share valuation for Gellibrand Limited in tutorial. Gellibrand is a company
that pays an annual dividend every year for the next nine years and then ceases paying a
dividend altogether after the last dividend in year 9. The current intrinsic value for
Gellibrand is $74.85 together with a required rate of return of 10% per year. What is the
annual dividend per share payment?
A. $7.49
B. $8.32
C. $11.00
D. $12.50
E. $13.00

A

E

161
Q

Which one of the following is considered an investment decision for Microsoft?
a. Issues new shares to buy a small technology company
b. Borrows $500,000 from Deutsche Bank
c. Pays coupon payments of 7% p.a. to bondholders
d. Pays dividends to shareholders
e. Spends $1 billion to upgrade operating processor (core earnings for Microsoft are
from the sales of operating processors).

A

E

162
Q 
To start and to continue running a business, companies need assets to create economic
value for the business. The process in deciding which assets to buy is usually termed the
\_\_\_\_\_\_\_\_\_\_ decision. The decision about how to raise the money is usually termed the
\_\_\_\_\_\_\_\_\_\_\_\_ decision.
a. I. inventory management
II. capital rationing
b. I. governance
II. financing
c. I. investment
II. risk management
d. I. investment
II. financing
e. I. operational
II. financing
A

D

163
Q

Which ONE of the following is considered a working capital management decision for a
financial manager?
a. Do we need a bank loan to help buy machinery?
b. Can we use part of the earnings we make from our business to repay some of the
outstanding bank loan?
c. Should we stock up with inventory ahead of the sales season?
d. Should we buy a software package to manage our inventory system?
e. Should we modify the firm’s credit collection policy with its customers?

A

C and E for some reason?

164
Q

Michael Hill International Limited owns jewellery stores in New Zealand, Australia and the
U.S. It is a publicly listed company in the New Zealand Stock Exchange. It is a separate
legal entity and shareholders in this business entity do not have personal liability for the
firm’s debts. Which of the following are correct features of this form of business
organization?
I. Shareholders will only lose what they invest in the business.
II. Shareholders will lose more than what they invest in the business.
III. Shareholders have to collectively sell out of the entire business (all the jewellery
stores) in order to cash out their investments.
IV. Shareholders can sell their ownership of shares in the stock market.
V. Shareholders are all taxed at the corporate tax rate.
a. I. only
b. I. and IV.
c. I., IV. and V.
d. II. and II.
e. III. and IV. only

A

B

165
Q

Which of the following is NOT a function of the financial market?

a. Helps channel savings of investors to corporate investments.
b. Helps corporate companies raise new cash.
c. Helps with liquidity (how quickly can investors of securities get their hands on
cash) .
d. Helps match up buyers and sellers of a financial security.
e. Helps corporate companies buy real assets.

A

E

166
Q

Which one of the following statements concerning a sole proprietorship business
organization structure is correct?
a. The legal costs to form a sole proprietorship are quite substantial.
b. The profits of a sole proprietorship are taxed twice.
c. The ownership of the firm is easy to transfer to another individual
d. The owner of a sole proprietorship may be forced to sell his/her personal assets
to pay company debts.
e. A sole proprietorship is often being structured as a limited liability company.

A

D

167
Q

Which form of business structure faces the greatest agency problems?

a. Sole proprietorship
b. General partnership
c. Limited partnership
d. Corporation
e. None of the above answer is correct.

A

D

168
Q

Board of directors can take a wide range of actions to reduce a potential of conflict of
interests between shareholders (i.e. owners) and managers in a corporation. Which ONE of
the following would NOT be useful for reducing these conflicts of interests?
a. Board of directors make the final decision to accept or reject all potential business
projects.
b. Give managers a pay package consisted of cash and share-based type
compensation.
c. Allow managers to be members of the “compensation committee” that determines
the pay packages for those same managers.
d. Hire auditors (accountants that are independent and different from accountants
working within the corporation) to cross-check integrity and accuracy of
information being disclosed in the financial statements.
e. All of these.

A

C

169
Q

You deposit $75,000 now in a term deposit account that gives you 15% p.a. interest
compounded monthly. Exactly one year from today, you notice that the interest rate changes
to 10% p.a. (the account still compounds interest monthly); you decide to not touch the
money in the account but leave it in the same account to earn interest for another year. How
much money will you have in your account two years from now? Round your answer to
two decimal places.
a. $90,000.00
b. $90,750.00
c. $94,875.00
d. $96,172.55
e. $99,187.50

A

D

170
Q

How long does it take for me to double my investment that earns an interest rate of 4% p.a.
compounded quarterly? Round your answer to a whole quarter.
a. 18 quarters
b. 35 quarters
c. 70 quarters
d. 139 quarters
e. 209 quarters

A

C

171
Q

An insurance company has an investment product that pays a series of perpetual cash flow
of $15 each month, beginning next month, if the annual interest rate is 12% p.a.
compounded monthly, what is the value of this investment product? Round your answer to
the closest dollar amount.
a. $1500
b. $150
c. $125
d. $1250
e. $149

A

A

172
Q

Assume an interest rate of 10% per year. How much would you lose over 5 years if you had
to give up interest on the interest – that is, if you received just the simple interest amount
instead of the compounded interest? Round your answer to four decimal places.
a. You would break even irrelevant of which interest you receive.
b. You would lose $0.1105 for a $1 invested today.
c. You would lose $0.1716 for a $1 invested today.
d. You would lose $0.0310 for a $1 invested today.
e. None of the answer is correct.

A

B

173
Q

You are comparing two salary arrangements which offer equal monthly payments of $5,000
for one year. Both salary arrangements differ by the timing of the first payment date. Salary
arrangement A pays on the first day of each month while salary arrangement B pays on the
last day of each month. Which one of the following statements is correct concerning these
two annuities given the required rate of return is 5% p.a.?
I. Both options are of equal present value given that they both provide $60,000 of
income.
II. Option A has a higher present value than option B.
III. Option B has a higher present value than option A.
IV. Option A is an annuity due.
V. Both annuities have the same future value as of ten years from today.
a. I. only
b. II. and V. only
c. III. only
d. II. and IV.
e. III., IV. and V. only

A

D

174
Q

You are considering two projects with the following cash flows:
A B
Y1 $2,500 $4,000
Y2 $3,000 $3,500
Y3 $3,500 $3,000
Y4 $4,000 $2,500

Which of the following statements are true concerning these two projects?
I. Both projects have the same future value at the end of year 4, given a positive rate of
return.
II. Both projects have the same future value given a zero rate of return.
III. Both projects have the same future value at any point in time, given a positive rate of
return.
IV. Project A has a higher future value than project B, given a positive rate of return.
a. II only
b. IV only
c. I and III only
d. II and IV only
e. I, II, and III only

A

A

175
Q

The Kitchen Store is planning a major expansion starting 5 years from today. In preparation
for this, the company is setting aside $28,000 each quarter, starting today, for the next 5
years. How much money will the firm have when it is ready to expand if it can earn an
interest rate of 12% p.a. compounded quarterly on its savings? Assume that today is the first
day of a quarterly period. Round your answer to two decimal places.
a. $133,821.18
b. $149,879.73
c. $752,370.49
d. $774,941.60
e. $478,417.08

A

D

176
Q

At present, you can get a loan of $500 from Instant Finance and be expected to pay back $599
in three months’ time; or you can get a loan for the same dollar value with ANZ bank with a
current interest rate of 18.95% p.a. compounded quarterly. Round your answers to two decimal
places.

What is the effective annual rate on the loan from Instant Finance?

a. 105.98%
b. 43.52%
c. 20.34%
d. 71.94%
e. 79.20%

A

A

177
Q

At present, you can get a loan of $500 from Instant Finance and be expected to pay back $599
in three months’ time; or you can get a loan for the same dollar value with ANZ bank with a
current interest rate of 18.95% p.a. compounded quarterly. Round your answers to two decimal
places.

What is the effective annual rate on the loan from ANZ Bank?

a. 18.95%
b. 9.70%
c. 20.34%
d. 71.94%
e. 74.27%

A

C

178
Q

At present, you can get a loan of $500 from Instant Finance and be expected to pay back $599
in three months’ time; or you can get a loan for the same dollar value with ANZ bank with a
current interest rate of 18.95% p.a. compounded quarterly. Round your answers to two decimal
places.

Which one of the above two options: Instant Finance or ANZ Bank would you want to want
get a loan from?
a. Instant Finance
b. ANZ Bank
c. Both banks offer an equally competitive rate for a loan.
d. I don’t have enough information to accurately find a solution.

A

B

179
Q

You retire at age 60 and expect to live another 27 years. On the day you retire, you have
$464,900 in your retirement savings account. You are conservative and expect to earn 4.5%
p.a. compounded monthly on your money from a term-deposit saving account during your
retirement. How much can you withdraw from your retirement savings at the end of each
month from the day you retire and assuming that you plan to die on the day you spend your
last penny? Round your answer to two decimal places.
a. $2,001.96
b. $2,092.05
c. $2,398.17
d. $2,472.00
e. $2,481.27

A

E

180
Q

Newborn Baby opens a KiwiSaver account today & gets $1,000 “kick-start” from the New
Zealand government. In addition, parents of the newborn baby puts in an initial deposit of
$1,000 and a contribution of $800 at the end of every year into an investment fund until the
baby turns 18 year old. Assume a rate of return of 12%p.a., how much is this worth at the
end of year 18? Round your answer to two decimal places.
a. $16,400.00
b. $21,531.90
c. $44,599.77
d. $52,289.74
e. $59,979.70

A

E

181
Q

It is 2009. My 2-year old child wants to go to Harvard (a private U.S. university) starting
2025 (in 16 years’ time). The tuition fees is estimated to be $614,050. How much do I need
to put aside starting one month from today and at the end of every one month until I have
$614,050 saved up to pay her tuition fees in 2025? Assume I can earn 1% interest every one
month in my investment account. Round your answer to two decimal places.
a. $3,198.18
b. $35,580.88
c. $1,066.76
d. $910.00
e. $7,207.26

A

C

182
Q

Table question (Q22 2015 S1)

A

B

183
Q

Referring to the loan amortization schedule in Question 22 above, which ONE of the
following is correct?
a. The APR of the loan is 3.00% with quarterly compounding.
b. The APR of the loan is 6.00% with quarterly compounding.
c. The APR of the loan is 9.00% with quarterly compounding.
d. The APR of the loan is 12.00% with quarterly compounding.
e. We cannot figure out the APR of the loan because we do not have enough
information to do the calculation.

A

D

184
Q
  1. Looking at the loan schedule in Question 22, how many quarters does the borrower plan to
    pay off the loan? Round this to the nearest whole quarter.
    a. 18 quarters
    b. 35 quarters
    c. 70 quarters
    d. 80 quarters
    e. 209 quarters
A

D

185
Q 
25. A bond that makes NO coupon payments and is initially priced at a deep discount is called
a \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ bond.
a. treasury
b. regional council
c. floating-rate
d. junk
e. zero coupon
A

E

186
Q

. A ten-year zero-coupon bond with a face value of $1,000 currently offers an interest rate of
8% p.a. If the prevailing interest rate is expected to decrease by 0.1%, how will this change
the value of the zero coupon bond one year later?
a. The value of the zero coupon bond one year later will become $467.50.
b. The value of the zero coupon bond one year later will remain unchanged.
c. The value of the zero coupon bond one year later will become $463.19.
d. The value of the zero coupon bond one year later will rise by 8.90% from the
current price.
e. The value of the zero coupon bond one year later will rise by 0.93% from the
current price.

A

D

187
Q

A 30-year Corporate Bond issued with a face value of $1,000 that
pays interests of $60 per every six-months is currently priced at par.

What is the market price and the coupon rate of this bond?

a. $1,060; 12% p.a.
b. $1,060; 6% p.a.
c. $1,000; 12% p.a.
d. $1,000; 6% p.a.
e. $1,000; 5.66% p.a.

A

C

188
Q

A 30-year Corporate Bond issued with a face value of $1,000 that
pays interests of $60 per every six-months is currently priced at par.

What happens to the bond price if the market interest rate decreases by 1%? Calculate the
new bond price and the rate of change in the bond price?
a. New bond price is $1,087.25 and the rate of change in the bond price is +8.73%.
b. New bond price is $1,087.25 and the rate of change in the bond price is -
8.73%.
c. New bond price is $1,086.94 and the rate of change in the bond price is +8.69%.
d. New bond price is $1,072.67 and the rate of change in the bond price is +7.27%.
e. New bond price is $924.84 and the rate of change in the bond price is -7.52%.

A

A

189
Q

You own a bond that has a 7% coupon and matures in 12 years. You purchased this bond
at par value when it was originally issued. If the prevailing market rate for this type and
quality of bond is now 7.5%, then you would expect:
a. The bond issuer to increase the amount of each interest payment on these bonds.
b. The yield to maturity to remain constant due to the fixed coupon rate.
c. To realize a value loss if you sold the bond at the market price today.
d. Today’s market price to exceed the face value of the bond.
e. The current yield today to be less than 7%.

A

C

190
Q 
30. The written agreement that contains the specific details related to a bond issue is called the
bond \_\_\_\_\_\_\_\_\_\_\_\_\_:
a. registration statement
b. indenture
c. debenture
d. investment statement
e. income statement
A

B

191
Q
  1. Bondholders are subject to a different degree of interest rate risk because of bond’s
    sensitivity of price to changes in market interest rate. This sensitivity directly depends on
    the time to maturity and the coupon rate of a bond. Which of the following characteristics
    of bonds are most sensitive to interest rate changing?
    I. Lower coupon rate
    II. Higher coupon rate
    III. Shorter time to maturity
    IV. Longer time to maturity
    a. II and IV only.
    b. I and IV only.
    c. II and III only.
    d. I and III only.
    e. I only.
A

B

192
Q

Graph Question (Q32 2015 S1)

A

E

193
Q

The one-year nominal interest rate is 9.0% and the real rate of return is 4.8% per year. If a
basket of goods is $500 today, how much do you expect this basket of goods to cost one
year from today? Round your answer to two decimal places.
a. $480.73
b. $500.00
c. $520.04
d. $571.16
e. $545.00

A

C

194
Q
  1. An investor who wants to have a share of a company’s profit and the future growth prospects
    of the company’s earnings would choose which of the following investment options:
    a. Buy shares of stock of a publicly listed company.
    b. Invest in a bank term deposit.
    c. Apply to get a credit card.
    d. Open a KiwiSaver account.
    e. Get a mortgage (home loan).
A

A

195
Q
  1. Which ONE of the following statements is correct about common shares?
    a. Share price of a publicly listed stock goes up when the supply exceeds the demand
    in the volume of shares.
    b. Dividend paid out to shareholders of common shares ownership is always a 100%
    of the earnings generated by the business.
    c. A publicly listed firm is restricted from going back to the market to issue
    additional shares following on from the first initial public offering of shares.
    d. Bid price on a live quote of a publicly listed stock represents the price a seller is
    prepared to sell at.
    e. None of the above is correct.
A

E

196
Q
  1. Which of the following statements are most correct about preference and common shares?
    I. Preference shares do not have voting rights; common shares have the right to vote
    for the appointment of board members.
    II. Dividend payments for shareholders of common shares are not set at a fixed rate
    and can change as being determined by the board of directors.
    III. Dividend payments for preference and common shares are apportioned out from
    a company’s profit.
    IV. Preferred dividends are an obligation to the issuing company and it cannot be
    deferred when companies are making losses.
    a. I and II only.
    b. I, III and IV only.
    c. I, II and III only.
    d. II and III only.
    e. III only.
A

C

197
Q 
The market in which new securities are originally sold to investors is called the \_\_\_\_\_
market.
a. secondary
b. open
c. initial public
d. free
e. primary
A

E

198
Q

Martin’s Yachts will not pay dividends in the next two years but will start to pay annual
dividends of $1.40, $1.75, and $2.00 for a share over year 3, 4 and 5 respectively. And from
year five thereafter, dividend is expected to grow at a yearly rate of 6% permanently into
the future. If your required rate of return is 15%, what is the maximum amount you are
prepared to pay to buy one share of stock today? Round your answer to two decimal places.
a. $9.54
b. $10.54
c. $13.10
d. $13.96
e. $14.63

A

E

199
Q
  1. The Lighthouse Co. is in a downsizing mode. The company paid a $2.50 annual dividend
    last year. The company has announced plans to lower the dividend by $.50 a year. Once the
    dividend amount becomes zero, the company will cease all dividends permanently. The
    required rate of return is 16%. What is one share of this stock worth? Round your answer
    to two decimal places.
    a. $3.76
    b. $4.08
    c. $4.87
    d. $5.13
    e. $5.39
A

A

200
Q
  1. The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning
    on increasing its annual dividend by 20% a year for the next four years and then decreasing
    the growth rate to 5% per year permanently into the future. The company just paid its annual
    dividend in the amount of $1.00 per share. What is the current value of one share if the
    required rate of return is 9.25%? Round your answer to two decimal places.
    a. $35.63
    b. $38.19
    c. $41.05
    d. $43.19
    e. $45.81
A

C

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