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Question 1

Moral hazard is a problem associated with debt and equity contratcs arising from:
A, the borrower’s incentive to undertake highly risky investments
B, the owners’ inability to ensure that managers will act in the owner’s interest
c. the difficutly lenders have in sorting out good credit risks from bad credit risks
d, Both A and B of the above

Answer 1

A, the borrower’s incentive to undertake highly risky investments

Question 2

Cash flow to investors is equal to the sum of the:
A, operation cashflow to the firm and dividens
B, capital spending minus cash dividens
c, Cash flow to the firm
D, cash flow to creditors

Answer 2

c, Cash flow to the firm

Question 3

To sell and old bond when interest rates have \_\_\_, the holder will have to \_\_\_\_ the price of the bond until the yield to the buyer is the same as the market rate
A, Risen, lower
B, Risen; raise
C, Fallen; lower
D, Risen; inflate

Answer 3

A, Risen, lower

Question 4

A \_\_\_\_ PE may indicate that the market fells the firm's earnings are very \_\_\_\_ risk and is therefore willing to pay a \_\_\_\_ for them
A, High; low; Premium
B, High; High, Discount
C, Low; low; discount
D, High, High, Premium

Answer 4

A, High; low; Premium

Question 5

In percentage terms, higher coupon bonds experiance a \_\_\_\_ price change compared with lower coupon bonds of the same maturity given a change in yield to maturity.
A, smaller
B, Greater
c, Similar
D, smaller or greater

Answer 5

A, smaller

Question 6

Which of the following executive compensations are less conditional on the performance of a firm?
A, Stop options
B, Salaries
C, Bonus
D, Golden parachutes

Answer 6

B, Salaries

Question 7

Which of the following cannot be used by investors to pursue a social agenda?
A, divetment
B, socially responsible Investing (SRI) screen
C, Investmest policy statements (IPS) screen
D, Both A and B

Answer 7

C, Investmest policy statements (IPS) screen

Question 8

Investment banks find it less difficult to price securities if the firm has prior issues currently selling in the market, called \_\_\_
A, Secondary issues
B, Seasoned issues
C, outstanding issues
D, experianced issues

Answer 8

C, outstanding issues

Question 9

A credit defualt swap, or CDS, is essentially:
A, a method for swapping credit agreements between banks
B, insurance against default on a financial instrument
C, a method for companies in default to swap credit ratings
D, insurance against the default of a party in a swap agreement

Answer 9

B, insurance against default on a financial instrument

Question 10

The lower is the bank capital, :
A, the same is its ROE
B, the higher is its ROE
C, the lower is its ROE
D, None of the above

Answer 10

B, the higher is its ROE