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Multiple Choice

Please see attached file.

1. A business created as a distinct legal entity composed of one or more individuals or entities is called an
A corporation
B sole proprietorship
C partnership
D Closed receivership
E Open Structure

2. Agency costs are:
A the total dividends paid to shareholders over the lifetime of the firm
B The costs that result from default and bankruptcy of the firm
C Corporate income subject to double taxation
D The costs of conflict of interest between stockholders and management
E The total interest paid to creditors over the lifetime of the firm

3. The primary market includes:
A The purchase and sale of shares of stock between two shareholders
B the sale of stock by a shareholder in the open market
C the sale of stock by a shareholder by a corporation on an exchange
D The sale of stock by a shareholder in the OTC market

4. Today, you earn a salary of $37, 800. What will your annual salary be twelve years from now if you receive annual raises of 3.6 percent?
A 55, 981.03
B56,324.17
C56, 907.08
D57,784.17
E 58213.46

5. The secondary market is:
A the market for the original sale of securities by governments and corporations
B the market in which dealers by and sell for themselves, at their own risk
C the market in which purchasers are matched with those who wish to sell
D a market which has no central location
E The market in which securities are bought and sold after original sale

6. When you were 26 years old, you received an inheritance of $1500, from your grandfather. You invested that amount in Nu-Wave stock and have not touched the investment since then. Today this investment is worth $109, 533.59. Nu-Wave stock has earned an average rate of return of 11.3 percent per year over this time period? How old are you today?

A) Age 57
B) Age 59
C) Age 62
D) Age 64
E) Age 66

7. To settle a debt of $575, a friend of yours has offered to pay you $50 at the end of each month for the next year. What effective annual rate of interest do these terms imply?
A 4.35%
B 4.44%
C7.95%
D8.24%
E21.3%

8. The Blackwell C. expects to receive a $135,000 from an insurance settlement four years from now. If the company can earn 11% on its investments, what is the value of the insurance settlement worth today?
A) 85, 368.34
B) 87, 693.43
C) 88,928.68
D) 130,161.39
E) 140,018.48

9. Which one of the following statement is correct?
A) The future value decreases as the period of times increases, all else constant
B) The future value of $100 invested at 6% simple interest increases at a constant rate as the period of time increases
C) There is an inverse relationship between the future value of a lump sum investment and the length of the investment period
D) The future value of $100 invested at 6 percent, compounded annually, increases over time in an exponential manner.
E) Because time is the exponent in the future value formula, the length of an investment period has minimal effect on the future value of the investment

10. An Annuity stream where the payments occur forever is called a(n)_________________.
A) Annuity due
B) Indemnity
C) perpetuity
D) amortized cash flow stream
E) amortization table

11. Which one of the following interest rates will produce the largest value at the end of ten years given a lump sum investment of $5000?
A) 5.5 percent, compounded annually
B) 5.5 percent, simple interest
C) 6.0 percent, simple interest
D) 6.0 percent, compounded annually
E) 6.0 percent, compounded semi-annually

12. Sue invested $5000 eleven years ago at 12 percent. Terri has the same amount saved today as Sue has. Terri also earns 12 percent but she only invested
A) 17.1 years
B) 17.4 years
C) 17.9 years
D) 21.5 years
E) 22.0 years

13. Given a constant future value and discount rate, an increase in the number of time periods will ___________ the present value.
A) Decrease
B) Either not affect or decrease
C) Not affect
D) Either increase or not affect
E) Increase

14. When interest is credited the instant it is earned it is referred to as:
A) Simple interest
B) Annually compounded interest
C) Continuously compounded interest
D) Amortized daily interest
E) Annuitized interest

15. You just purchased some furniture from the LB Home store. The store sold you the furniture under the agreement that you will pay $248 a month for 36 months starting one month from today. Your loan can be described as a(n):
A) Discount loan
B) Balloon loan
C) Perpetuity
D) Annuity date
E) Ordinary annuity

16. The interest rate charged per period multiplied by the number of periods per year is called the:
A) Effective annual rate (EAR)
B) Annual Percentage rate (APR)
C) Periodic interest rate
D) Compound interest rate
E) Daily interest rate

17. The company you work for will deposit $600 at the end of each month in your retirement fund. Interest is compounded monthly. You plan to retire 15 years from now and estimate that you will need $2000 per month out of the account for the next 20 years. If the account pays 8% compounded monthly, how much do you need to put into account in addition to your company deposit in order to meet your objective?
A) $0.00
B) $57.59
C) $90.99
D) 95.88
E) 104.49

18. If you deposit $25,000 at the end of each six months into an account, which earns 5.5% interest, compounded quarterly, how much will be in the account in five years?
A) 13, 953
B) 16, 931
C) 26, 605
D) 28, 357
E) 32, 188

19. Your brother in law borrowed $2000 from you four years ago and then disappeared. Yesterday he returned and expressed a desire to pay back the loan, including the interest accrued. Assuming that you had agreed to charge him 10% and assuming the he wishes to make five equal annual payments beginning in one year, how much would your brother-in-law have to pay you annually in order to pay off the debt? (assume that the loan continues to accrue interest at 10% per year)
A) $697.43
B) $738.63
C) $751.46
D) 772.45
E) 798.24

20. You recently departed rich, eccentric uncle has left for you in his will a large sum of money. Unfortunately, rather than give you this sum of money immediately, he has instructed the executor of the will to pay you $10, 000 in one year. This payment is to grow by 9% each year and to be made each year forever. If the appropriate discount rate is 10%, how much have you actually inherited?
A) $100,000
B) 1,000,000
C) $9,090.90
D) 11,111.11
E) 10,000,000

21. The written agreement between the corporation and its bond creditors is called a(n):
A) Bond
B) Protective covenant
C) Indenture
D) Security agreement
E) Contract

22. A financial market is __________ if it is possible to easily observe its prices and trading volume
A) Transparent
B) Open
C) Ordered
D) In equilibrium
E) Chaotic

23. The principal amount of a bond that is repaid at the end of the loan term is called the bonds:
A) Coupon
B) Face Value
C) Maturity
D) Yield to maturity
E) Coupon Rate

24. The rate of return on a bond which reflects the increase in buying power achieved by the bond holder is called the ______ rate of return.
A) Inflated
B) Nominal
C) Adjusted
D) Real
E) Compounded

25. The Fisher effect defines the relationship between:
A) Nominal and real rates of return
B) The yield to maturity and yield to call
C) Inflation and the yield to maturity
D) The market value and face value of a bond
E) A bond's rating and its real rate of return

Solution Preview

Please see the attached files. The answers and explanations in blue. The excel file has the calculations.

1. A business created as a distinct legal entity composed of one or more individuals or entities is called an
A corporation
B sole proprietorship
C partnership
D Closed receivership
E Open Structure

Only a corporation is a distinct legal entity

2. Agency costs are:
A the total dividends paid to shareholders over the lifetime of the firm
B The costs that result from default and bankruptcy of the firm
C Corporate income subject to double taxation
D The costs of conflict of interest between stockholders and management
E The total interest paid to creditors over the lifetime of the firm

The interests of stockholders and management may not be the same and this is referred to as agency costs

3. The primary market includes:
A The purchase and sale of shares of stock between two shareholders
B the sale of stock by a shareholder in the open market
C the sale of stock by a corporation on an exchange
D The sale of stock by a shareholder in the OTC market

In primary market, initial issue of shares happen from the corporation to the investors.

4. Today, you earn a salary of $37, 800. What will your annual salary be twelve years from now if you receive annual raises of 3.6 percent?
A 55, 981.03
B56,324.17
C56, 907.08
D57,784.17
E 58213.46

Use the compound interest formula
Future Value = Present Value X (1+rate)^n
Annual salary in 12 years = 37,800 X (1+3.6%)^12 = 57,784.17

5. The secondary market is:
A the market for the original sale of securities by governments and corporations
B the market in which dealers by and sell for themselves, at their own risk
C the market in which purchasers are matched with those who wish to sell
D a market which has no central location
E The market in which securities are bought and sold after original sale

In the primary market securities are initially sold. The securities are traded in the secondary market.

6. When you were 26 years old, you received an inheritance of 1500, from your grandfather. You invested that amount in Nu-Wave stock and have not touched the investment since then. Today this investment is worth $109, 533.59. Nu-Wave stock has earned an average rate of return of 11.3 percent per year over this time period? How old are you today?

A) Age 57
B) Age 59
C) Age 62
D) Age 64
E) Age 66

Use the compound interest formula to calculate the time period
109,533.59 = 1,500 X(1+11.3%)^n
The ...

Solution Summary

The solution has various multiple choice questions in finance.

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