Ultimate Trivia On Finance! Quiz Questions
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Finance is a wide-ranging term that describes activities associated with banking, leverage, debt, capital markets, money, and investments. Finance also involves cooperative creation and the study of money. According to this quiz, you will need to know which form of invested capital is subject to the firm’s business and financial risk and the ultimate owner of an ongoing corporation. This quiz proves that the best things in life are free, including a high score on this quiz.
Questions and Answers
- 1.
If you would like to work in finance by trading debt and equity securities for the customer then which finance career classification should you target?
- A.
Corporate finance
- B.
Commercial banking
- C.
Investment banking
- D.
Money management
Correct Answer
C. Investment bankingExplanation
If you want to trade debt and equity securities for customers, you should target a career in investment banking. Investment bankers are professionals who assist individuals, corporations, and governments in raising capital by underwriting and issuing securities. They also provide advisory services for mergers and acquisitions, as well as trading securities on behalf of their clients. Investment banking is specifically focused on the buying and selling of financial assets, making it the most suitable career classification for trading debt and equity securities.Rate this question:
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- 2.
Which form of invested capital is subject to most of the firm's business and financial risk?
- A.
Debt capital
- B.
Equity capital
- C.
Borrowed capital
- D.
Intellectual capital
Correct Answer
B. Equity capitalExplanation
Equity capital is subject to most of the firm's business and financial risk because it represents the ownership stake in the company. Equity investors bear the risk of the company's performance and are the last to be paid in case of liquidation. They are exposed to fluctuations in the value of the company's assets and earnings, and their returns are dependent on the success of the business. In contrast, debt capital, borrowed capital, and intellectual capital do not have the same level of risk as equity capital.Rate this question:
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- 3.
Which of the following is not a true capital raising event for the firm?
- A.
Primary market transaction.
- B.
Secondary market transaction.
- C.
Initial public offering.
- D.
A corporate loan from a bank.
Correct Answer
B. Secondary market transaction.Explanation
A secondary market transaction refers to the buying and selling of existing securities among investors, such as stocks or bonds, without the involvement of the issuing company. This type of transaction does not directly raise capital for the firm because the securities being traded are already in circulation. In contrast, a primary market transaction involves the issuance of new securities by the firm, such as through an initial public offering (IPO), which directly raises capital for the company. Additionally, a corporate loan from a bank is a form of debt financing that can also raise capital for the firm. Therefore, the correct answer is that a secondary market transaction is not a true capital raising event for the firm.Rate this question:
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- 4.
The ultimate owner(s) of an ongoing corporation are
- A.
The federal government.
- B.
The debt holders.
- C.
The equity holders.
- D.
The executive staff of the corporation.
Correct Answer
C. The equity holders.Explanation
The ultimate owners of an ongoing corporation are the equity holders. Equity holders, also known as shareholders or stockholders, are individuals or entities that hold shares of the company's stock. They have ownership rights and are entitled to a portion of the company's profits and assets. They also have voting rights and can influence the company's decisions through voting on important matters. The equity holders bear the risk and reap the rewards of the company's performance, making them the ultimate owners of the corporation.Rate this question:
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- 5.
Agency costs refer to
- A.
The costs associated with managing the demands of federal agencies.
- B.
The costs involved when converting an entity from a proprietorship to a corporation.
- C.
The costs that arise due to conflicts of interest between shareholders and managers.
- D.
None of the above.
Correct Answer
C. The costs that arise due to conflicts of interest between shareholders and managers.Explanation
Agency costs refer to the costs that arise due to conflicts of interest between shareholders and managers. These conflicts occur because managers may prioritize their own interests over the interests of shareholders, leading to potential financial losses for shareholders. These costs can include excessive executive compensation, inefficient decision-making, and wasteful spending. Managing these conflicts and minimizing agency costs is an important aspect of corporate governance.Rate this question:
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- 6.
Managers of firms should only take actions that
- A.
Increase the value of the firm’s future cash flows.
- B.
They expect will increase the firm’s share price.
- C.
Have marginal benefits which are at least as great as the marginal cost of those actions.
- D.
All of the above.
Correct Answer
D. All of the above.Explanation
The correct answer is "all of the above." Managers of firms should only take actions that increase the value of the firm's future cash flows, as this is crucial for the long-term sustainability and profitability of the business. Additionally, they should also consider actions that they expect will increase the firm's share price, as this is an important indicator of investor confidence and market perception. Lastly, managers should ensure that the marginal benefits of their actions are at least as great as the marginal cost, to ensure that the benefits outweigh the costs and that the firm is making rational decisions.Rate this question:
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- 7.
Which of the following is a strength of a sole proprietorship?
- A.
Unlimited life
- B.
Easy to form
- C.
Limited liability
- D.
Limited access to capital
Correct Answer
B. Easy to formExplanation
A sole proprietorship is a business structure that is owned and operated by a single individual. One of the strengths of a sole proprietorship is that it is easy to form. Unlike other business structures, such as corporations or partnerships, there are minimal legal requirements and paperwork involved in setting up a sole proprietorship. This makes it a convenient option for individuals who want to start their own business quickly and with minimal hassle.Rate this question:
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- 8.
You were just hired as the CEO of a company. Your primary objective should be
- A.
To maximize the company's earnings.
- B.
To maximize profits.
- C.
To maximize the company's price of common stock.
- D.
To eliminate the company's competitors.
Correct Answer
C. To maximize the company's price of common stock.Explanation
As the CEO of a company, your primary objective should be to maximize the company's price of common stock. This is because the price of common stock reflects the overall value and performance of the company. By maximizing the stock price, you are increasing the wealth of the shareholders and attracting more investors. This, in turn, can provide the company with more capital for growth and expansion. It also signals confidence in the company's future prospects, which can lead to increased market share and competitive advantage. Maximizing profits and earnings are important, but ultimately, the stock price is a key indicator of the company's success and value.Rate this question:
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- 9.
When is the return on assets equal to the return on equity?
- A.
When the current ratio of the firm equals 1.
- B.
When the firm issues equal amounts of long term debt and common stock.
- C.
When the firm issues no dividends for a given time period.
- D.
When the firm only issues equity to finance its borrowing.
Correct Answer
D. When the firm only issues equity to finance its borrowing.Explanation
When the firm only issues equity to finance its borrowing, the return on assets will be equal to the return on equity. This is because the return on assets measures the profitability of the firm's total assets, while the return on equity measures the profitability of the firm's shareholders' equity. When the firm only issues equity to finance its borrowing, the shareholders' equity will be the same as the total assets, resulting in the return on assets being equal to the return on equity.Rate this question:
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- 10.
A bond that grants the investor the right to exchange their bonds for common stock is called a
- A.
Zero coupon bond.
- B.
Treasury bond.
- C.
Convertible bond.
- D.
Mortgage bond
Correct Answer
C. Convertible bond.Explanation
A convertible bond is a type of bond that gives the investor the option to convert their bonds into common stock of the issuing company. This means that the bondholder has the opportunity to exchange their bond for shares of the company's stock at a predetermined conversion price. This feature provides the investor with the flexibility to potentially benefit from any future increase in the company's stock price. Therefore, a convertible bond is the correct answer as it specifically mentions the right to exchange the bond for common stock.Rate this question:
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- 11.
With respect to the company that has issued a callable bond
- A.
The value of the call increases as the stock price increases.
- B.
The value of the call increases as interest rates increase.
- C.
The value of the call increases as interest rates decrease.
- D.
None of the above.
Correct Answer
C. The value of the call increases as interest rates decrease.Explanation
When a company issues a callable bond, it has the option to redeem the bond before its maturity date. The value of the call refers to the amount the company would need to pay to redeem the bond early. As interest rates decrease, the value of the call increases because it becomes more advantageous for the company to call the bond and issue new debt at a lower interest rate. This is because the company can save money on interest payments by refinancing at a lower rate. Therefore, the correct answer is that the value of the call increases as interest rates decrease.Rate this question:
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- 12.
The relationship between time to maturity and yield to maturity for bonds of equal risk is referred to as
- A.
The term structure of interests rates.
- B.
The forward rate.
- C.
The spot curve.
- D.
The forward curve.
Correct Answer
A. The term structure of interests rates.Explanation
The term structure of interest rates refers to the relationship between the time to maturity and the yield to maturity for bonds of equal risk. It provides a graphical representation of how interest rates vary across different maturities. This term structure is important for investors and analysts to understand as it can provide insights into market expectations, inflation, and economic conditions. The other options, such as the forward rate, spot curve, and forward curve, are related concepts but do not specifically capture the relationship between time to maturity and yield to maturity.Rate this question:
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- 13.
Which of the following securities poses the greatest financial risk for the investor?
- A.
Common equity
- B.
Preferred equity
- C.
Debt
- D.
Convertible death
Correct Answer
A. Common equityExplanation
Common equity poses the greatest financial risk for the investor. Common equity represents ownership in a company and gives investors the right to share in its profits and losses. However, common equity holders are the last to be paid in the event of bankruptcy or liquidation. This means that if the company fails, common equity holders may lose their entire investment. In contrast, preferred equity holders have a higher claim on the company's assets and are paid before common equity holders. Debt holders have a legal obligation to be repaid and are also prioritized over common equity holders. Convertible debt can be converted into equity, but it still carries less risk than common equity.Rate this question:
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- 14.
Which of the following is an example of unsystematic risk?
- A.
IBM posts lower than expected earnings.
- B.
The Fed raises interest rates unexpectedly.
- C.
The rate of inflation is higher than expected.
- D.
None of the above.
Correct Answer
A. IBM posts lower than expected earnings.Explanation
The correct answer is IBM posts lower than expected earnings. This is an example of unsystematic risk because it is specific to the company and its performance. Unsystematic risk refers to risks that are unique to a particular investment or company, such as poor management decisions or negative news about the company. The other options, such as the Fed raising interest rates unexpectedly or the rate of inflation being higher than expected, are examples of systematic risk, which affects the overall market or economy and cannot be diversified away.Rate this question:
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- 15.
What do you call the portion of your total return on a stock investment that is caused by an increase in the value of the stock?
- A.
Dividend yield
- B.
Risk-free return
- C.
Capital gain
- D.
None of the above
Correct Answer
C. Capital gainExplanation
Capital gain refers to the portion of the total return on a stock investment that is caused by an increase in the value of the stock. It represents the profit made when the stock is sold at a higher price than the purchase price. Dividend yield, on the other hand, refers to the portion of the return that is generated from the dividends paid by the company. Risk-free return refers to the return on an investment that carries no risk, such as a government bond. None of the above options accurately describe the portion of the return caused by an increase in the stock's value.Rate this question:
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- 16.
What is the purpose of diversification?
- A.
Maximize possible returns.
- B.
Increase the risk of your portfolio.
- C.
Lower the overall risk of your portfolio.
- D.
None of the above.
Correct Answer
C. Lower the overall risk of your portfolio.Explanation
The purpose of diversification is to lower the overall risk of your portfolio. By spreading investments across different asset classes, industries, and geographic regions, diversification helps to reduce the impact of any single investment's performance on the entire portfolio. This strategy aims to minimize the potential losses that could occur if one investment performs poorly, while also allowing for potential gains from other investments. By diversifying, investors can achieve a balance between risk and return, ultimately aiming to protect their portfolio from significant volatility and potential losses.Rate this question:
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- 17.
Which statement is true regarding diversification?
- A.
The greater the systematic risk, the greater the return required by the investor.
- B.
The greater the diversifiable risk, the greater the return required by the investor.
- C.
We are able to remove all systematic risk if enough stocks are added to a portfolio.
- D.
Systematic risk is diversifiable.
Correct Answer
A. The greater the systematic risk, the greater the return required by the investor.Explanation
The greater the systematic risk, the greater the return required by the investor. This statement is true because systematic risk refers to the risk that affects the entire market or a specific industry, such as economic factors or political events. This risk cannot be eliminated through diversification. Therefore, investors require higher returns to compensate for the increased risk. Diversifiable risk, on the other hand, can be reduced through diversification by adding a variety of assets to a portfolio, which helps to offset the specific risks of individual investments.Rate this question:
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- 18.
In the equation below, the number 100 represents? $75.13 = $100 / (1 + .1)3
- A.
The present value a cash flow to be received at a later date.
- B.
The future value a cash flow to be received at a later date.
- C.
The discount rate for the future cash flow.
- D.
The number of periods before the cash flow is to be received.
Correct Answer
B. The future value a cash flow to be received at a later date.Explanation
The number 100 represents the future value of a cash flow to be received at a later date. In the given equation, the future value is being calculated by dividing $100 by the present value factor, which is determined by the discount rate and the number of periods before the cash flow is to be received. This equation is commonly used in finance to calculate the future value of an investment or cash flow.Rate this question:
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- 19.
Suppose a professional sports team convinces a former player to come out of retirement and play for three seasons. They offer the player $2 million in year 1, $3 mil in year 2, and $4mil in year 3. Assuming end of year payments of the salary, how would we find the value of his contract today if the player has a discounted rate of 12%?
- A.
PV= $2/1.12 + $3/1.12 + $4/1.12
- B.
PV= $2 + $3/(1.12)^2 + $4/(1.12)^3
- C.
PV= $2/(1.12) + $3/(1.12)^2 + $4/(1.12)^3
- D.
PV= $2 + $3 + $4/ (1.12)^3
Correct Answer
C. PV= $2/(1.12) + $3/(1.12)^2 + $4/(1.12)^3Explanation
The correct answer is PV= $2/(1.12) + $3/(1.12)^2 + $4/(1.12)^3 because this formula calculates the present value of the contract. The present value is the current worth of future cash flows, taking into account the time value of money. In this case, the formula discounts each year's payment by dividing it by the discount rate raised to the power of the number of years in the future. By summing up the present values of each year's payment, we can determine the total value of the contract today.Rate this question:
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- 20.
A 15 year, 8%, $1000 face value bond is currently trading at $958. The yield to maturity of this bond must be
- A.
Less than 8%
- B.
Equal to 8%
- C.
Greater than 8%
- D.
Unknown
Correct Answer
C. Greater than 8%Explanation
The bond is currently trading at a price lower than its face value, which indicates that the yield to maturity must be higher than its coupon rate of 8%. This is because investors are willing to pay less for the bond in order to achieve a higher yield. Therefore, the yield to maturity of this bond must be greater than 8%.Rate this question:
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- 21.
What is the equation to price Kramerica Stock?
- A.
Po=$200/1.15 + $240/1.15 + $2.88/1.15 + $30.24/1.15
- B.
Po=$2.40/(1.15) + $2.88/(1.15)^2 + $30.24/(1.15)^3
- C.
Po=$2.00 + $2.40/(1.15) + $33.12/(1.15)^2
- D.
Po= $2.40/(1.15) + $33.12/(1.15)^2
Correct Answer
D. Po= $2.40/(1.15) + $33.12/(1.15)^2Explanation
The equation to price Kramerica Stock is Po= $2.40/(1.15) + $33.12/(1.15)^2. This equation calculates the present value of the expected future cash flows from owning the stock. The first term represents the present value of the cash flow expected in the first year, while the second term represents the present value of the cash flow expected in the second year. By discounting the cash flows at a rate of 15%, the equation determines the fair price of the stock.Rate this question:
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Current Version
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Mar 22, 2023Quiz Edited by
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Oct 22, 2010Quiz Created by
Kcarter052
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