Study questions for Financial Management

Category : Archieve

Study questions for Financial Management

First exam

  • What is the difference between privately held company and publicly traded company?
  • What is the difference between a market and an exchange?
  • What rights do shareholders have in a company?
  • What rights do credit holders have in a company?
  • What is double taxation in corporations?
  • What are the differences between Mutual Funds and ETFs?
  • What is an index? What are some popular indices?
  • What does SEC stand for? What does SEC do? What are the responsibilities of SEC?
  • What do financial analysts do? Could they be biased? Why or why not?
  • What do credit analysts do? Could they be biased? Why or why not?
  • What do auditors do? Who do they work for?
  • What is Quantitative Easing? Who is doing it? Is it still continuing? Why or why not?
  • Please explain what an income statement entails?
  • Please explain what a balance sheet entails?
  • What is ratio analysis? Why do we do ratio analysis?
  • Please explain liquidity ratios. Is it better to have high liquidity ratios? Why or why not?
  • Please explain asset management ratios. Is it better to have high asset management ratios? Why or why not?
  • Please explain debt management ratios. Is it better to have high debt management ratios? Why or why not?
  • Please explain profitability ratios. Is it better to have high profitability ratios? Why or why not?
  • Please explain price to earnings ratio. What does it mean to have high price to earnings ratio? What does it mean to have low price to earnings ratio?
  • Please explain market to book ratio. What does it mean to have high market to book ratio? What does it mean to have low market to book ratio?
  • Please explain the difference between interest, net return and yield.
  • What does FED do? What does Treasury do? What is the difference between FED and Treasury?
  • What are the current levels of Dow Jones Industrial Average, S&P-500 index, USD-EUR FX rate and crude Oil?
  • Please provide 5 stock symbols along with their current price levels.
  • Please provide 5 ETF symbols along with their current price levels.
  • I will invest $1,000 into a savings account every year for the next 10 years at 1% interest. If I withdraw the interest at the end of each year, how much compounded interest will I earn at the end of the 10 years?
  • I will invest $1000 into a savings account every year for the next 5 years at 2% interest. If I leave the interest in the account to be re-invested at 2%, how much compounded interest will I earn at the end of the 5 years?
  • A savings account pays 2% annual interest. How much do I need to invest in this account annually to accumulate $1 million at the end of 20 years?
  • A savings account pays 2% annual interest. How many years do I need to invest $5,000/per year in order to accumulate $1 million.
  • I can invest $5,000 per year for the next 20 years. What interest do I need to earn in my investment in order to accumulate $1 million at the end of the 20 years.
  • I will invest $1,000 in 2016 at 2%, $1,000 in 2017 at 3%, $1,500 in 2018 at 4% and $2,000 in 2019 at 3.5%. All these investments will compound annually. All these investments will mature in 2030. How much will I have in 2030?
  • Assume that Apple, Inc will pay $8.65 per year to shareholders for the next 10 years. Currently Apple, Inc. stock price is $115. What is the yield on Apple, Inc. stock after the first year? What is the yield on Apple, Inc. stock after the tenth year?
  • I will invest $1,000 every other year for the next 10 years at 5% annual interest rate. I will stop investing after my 5th investment. The account will continue paying 5% to whatever accumulated in the account. How much will I have in the account at the end of the 20th year?
  • What are the differences between Bond, Bill and Note?
  • What are the differences between current yield and yield to maturity?
  • Do all bonds pay coupon? Why or why not?
  • What is market risk for bonds? How is it possible to avoid it? What type of bonds have more of this type of risk?
  • What is interest rate risk for bonds? How is it possible to avoid it? What type of bonds have more of this type of risk?
  • What is default risk for bonds? How is it possible to avoid it? What type of bonds have more of this type of risk?
  • What is liquidity risk for bonds? How is it possible to avoid it? What type of bonds have more of this type of risk?
  • What is a callable attribute for a bond? Why would companies issue bonds with this attribute?
  • What is a sinking fund attribute for a bond? Why would companies issue bonds with this attribute?
  • What is a convertible bond? Why would companies issue convertible bonds? What type of companies issue convertible bonds?
  • What is a secured bond? Why would companies issue secured bonds? What type of companies issue secured bonds?
  • What is a seniority in bonds? How does seniority effect bond rating, bond default risk and bond liquidity risk?
  • What is a collateralized bond? Why would companies issue collateralized bonds? What type of companies issue collateralized bonds?
  • Who does the bond rating? Can a company bond receive different rating then the company itself? Can multiple issues by the same company receive different ratings?
  • What is a treasury bond? What are some characteristics for this type of bond in terms of default risk, market risk, liquidity risk and interest rate risk?
  • What is a corporate bond? What are some characteristics for this type of bond in terms of default risk, market risk, liquidity risk and interest rate risk?
  • What is a municipal bond? What are some characteristics for this type of bond in terms of default risk, market risk, liquidity risk and interest rate risk?
  • What is a Eurobond? What are some characteristics for this type of bond in terms of default risk, market risk, liquidity risk and interest rate risk?
  • What is a preferred stock? Are they bonds or stocks? Please compare preferred stocks to stocks and bonds.
  • What is a junk bond? What are some characteristics for this type of bond in terms of default risk, market risk, liquidity risk and interest rate risk?
  • What is TIPS? What are some characteristics for this type of bond in terms of default risk, market risk, liquidity risk and interest rate risk? How do they actually adjust for inflation?
  • What are Bullet funds? Why would these type of ETFs appeal to investors?
  • Please explain why while investing in TIPS would save investors from inflation risk, investing in TIPS ETFs may not?
  • A treasury bond has a face value of $10,000, maturity of 20 years and a zero coupon. Comparable bonds are selling at 3% yield. What would be the current price for this bond?
  • A treasury bond has a face value of $10,000, maturity of 20 years and a zero coupon. If this bond just sold for $9,700, what would be the effective yield?
  • A corporate bond has a face value of $1,000, maturity of 20 years and a coupon payment of $10 per year. Comparable bonds are selling at 4% yield. What would be the current price for this bond?
  • A corporate bond has a face value of $1,000, maturity of 20 years and a coupon payment of $10 per year. Comparable bonds are selling at 4% yield. What would be; 1) the current price for the face value and 2) the current price for the coupons?
  • A municipal bond has a face value of $10,000, maturity of 20 years and a coupon payment of $10 per year. Comparable corporate bonds are selling at 4% yield. What would be the current price for this bond?
  • A callable corporate bond has a face value of $1,000, maturity of 20 years and a coupon payment of $10 per year. This corporate bond can be called after the 10th year. If the current price for this bond is $865, what would be the yield for this bond?
  • Is there an age limit to board membership? Is there a size limit to the boards? Are board members paid like company executives? Can board members serve on multiple company boards? Can the CEO be the chairman of the board?
  • Please explain agency theory and agency conflict.
  • What is general assembly? How often? Who attends? What is proxy voting? What is activist investor?
  • What is an ETF? What is an ETN? What are the main differences between the two?
  • What is an ADR? Who can buy ADRs? Why do companies issue ADRs? What risks do ADRs eliminate?
  • What are the main differences between commercial banks and investment banks?
  • What is IPO? Who can have an IPO? Please explain how IPO works step-by-step.
  • Please explain the IPO discounting.
  • What is SEO? Who can have an SEO? Please explain how SEO works step-by-step.
  • What is a primary market? What is a secondary market? What are the differences between the two?
  • What is a preferred stock? Is it a bond or a stock? Why is it a bond or stock?
  • You will invest $12,000 into your retirement account every year. The balance of your retirement account will be invested in high yield securities earnings 6% a year. How much will you accumulate at the end of 30 years?
  • You will invest $12,000 into your retirement account every year. The balance of your retirement account will be invested in high yield securities earnings 6% a year. At the end of every 5th year, you will invest an additional $20,000 as a bonus. How much will you accumulate at the end of 30 years?
  • You would like to have $1,000,000 when you retire in 30 years. The balance of your retirement account will be invested in high yield securities earnings 6% a year. How much do you need to invest every year?
  • I have a deal for you. I will pay you the following. Today is Year zero. I am asking $30,000 for this deal, today. Your required rate of return is 5%. Year 1: $10,000, Year 2: Nothing, Year 3: $5,000, Year 4: Nothing, Year 5: $20,000. What is your NPV? What is your IRR? Would you accept my deal?
  • I have a deal for you. I will pay you the following. Today is Year zero. I am asking $30,000 for this deal, today. Your required rate of return is 2%. Year 1: Nothing, Year 2: $10,000, Year 3: Nothing, Year 4: $20,000, Year 5: $5,000. What is your NPV? What is your IRR? Would you accept my deal?
  • You want to buy a car for $40,000 and finance it. The car dealership offers you a two deals: 1) You pay $921.17 monthly for 48 months or 2) You pay $736.66 monthly for 60 months. Which deal offers you the lower interest rate? You need to show your work. No work = No points (not even partial) (even if your answer is correct).

Second exam

  • What is return? How do we calculate return? What is the most common measurement for return?
  • What is risk? How do we calculate risk? What is the most common measurement for risk?
  • What is standard deviation? What is variance? What do they measure?
  • Please explain Capital Asset Pricing Model. What does it measure? What does it do? What do we use it for?
  • What is Capital Asset Pricing Model Beta? How is it calculated? What does it do? What do we use it for?
  • Please write the common Capital Asset Pricing Model. Please write the Capital Asset Pricing Model for a company that has a Beta of 1.2 and alpha of 0.2.
  • What is systematic risk? Please provide an example of a systematic risk. How can you diversify against systematic risk.
  • What is unsystematic risk? Please provide an example of an unsystematic risk. How can you diversify against unsystematic risk. What is the more common name for unsystematic risk.
  • What is a portfolio? Why do people invest in portfolios instead of keeping single companies?
  • What is diversification (in finance)? How do you diversify (in finance)? What is the main principle behind diversification of financial risk?
  • If you are asked to create a well diversified investment portfolio, what security characteristics would you consider most important? Why (for each characteristic)?
  • What is correlation? What is covariance? Please explain with examples. What is the difference between the two?
  • What is diversifiable risk and what is un-diversifiable risk? Please provide examples for each.
  • With a well diversified portfolio, what sort of risk are you really diversifying?
  • Please explain investors’ rational choice in terms of risk and reward. Please provide an example.
  • Please explain risk averse investors’ behavior in terms of risk and reward.
  • How does efficient markets work? What makes them efficient? What do we mean by market efficiency?
  • There are different market efficiencies (3 to be exact), that we discussed throughout semester. What are these? Please explain each.
  • Is it possible to make profits in financial markets by following certain historic price patterns? Why or why not?
  • Historically, small stock companies had higher risk and higher return compared to large company stocks. Why this is so? Is this the case for the past 8 years?
  • Historically, large stock companies had lower risk and lower return compared to small company stocks. Why this is so? Is this the case for the past 8 years?
  • Historically, bonds had lower risk and lower return compared to stocks. Why this is so? Is this the case for the past 8 years?
  • Historically, short-term bonds had lower risk and lower return compared to long-term bonds. Why this is so? Is this the case for the past 8 years?
  • CAPM Betas for IBM, AAPL and XOM are 0.60, 1.27 and 0.75, respectively. You would like to have a portfolio Beta of one (Beta = 1). You also would like to invest half your portfolio in AAPL. What percent of your portfolio should be invested in XOM? What percent of your portfolio should be invested in IBM?
  • Please explain following Betas in terms of risk relation to the entire market: Beta of zero, Beta of one, Beta of two and Beta of negative two.