FECM Multiple choice questions 1 PDF

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FECM Multiple choice questions

1. You are scheduled to receive $10,000 in one year. An increase in the interest rate will have what effect on the future value of this cash flow? A. The effect cannot be determined with the information provided B. It will cause the future value to rise C. It will cause the future value to fall D. It will have no effect on the future value Ans- D 2. True or False: The Law of One Price states that if equivalent goods or securities are traded simultaneously in different competitive markets, they will trade for the same price in each market. Ans- true 3. You are schedule to receive $10,000 in one year. An increase in the interest rate will have what effect on the present value of this cash flow? A. It will cause the present value to rise B. It will have no effect on the present value C. It will cause the present value to fall D. The effect cannot be determined with the information provided Ans- C 4. Why are arbitrage opportunities short-lived? A. Prices will fluctuate up and down as traders take advantage of the opportunity, resulting in the net present value (NPV) fluctuating between positive and negative values B. Federal regulations will kick in to restrict trade and effectively shut the opportunity down C. Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal D. Arbitrage opportunities need a lot of information processing, which is very slow to arrive Ans- C 5. True or False: If an arbitrage opportunity exists, an investor can act quickly in the hope of making a risk-free profit. Ans- true 6. Investment X and Investment Y are both growing perpetuities with initial cash flow of $100. Both investments have the same interest rate (r). The present value of Investment X is $5,000, while the present value of Investment Y is $4,000. Which of the following is true? A. Investment X has a lower growth rate than Investment Y. B. Investment X has a higher growth rate than Investment Y. C. The answer cannot be determined without knowing the interest rate for both investments. D. This makes no sense - with the same initial cash flow and the same interest rate, Investment X and Investment Y should have the same present value. Ans- B 7. Which of the following statements regarding annuities is FALSE? A. Most car loans, mortgages, and some bonds are annuities. B. An annuity is a stream of N equal cash flows paid at regular intervals. C. PV of an annuity = C * (1/r){1-[1/(1+r)^N]} D. The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments.

Ans- D 8. True or False: Cash flows from an annuity occur every year in the future. Ans- false 9. Which of the following is true about perpetuities? A. All else equal, the value of a perpetuity is higher when the interest rate is lower. B. All else equal, the value of a perpetuity is higher when the periodic cash flow is higher. C. If two perpetuities have the same present value and the same interest rate, they must have the same cash flows. D. All of the above are true statements. Ans- D 10. Which of the following statements regarding perpetuities is FALSE? A. To find the value of a perpetuity one cash flow at a time would take forever B. One example of a perpetuity is the British government bond called a consol. C. A perpetuity is a stream of equal cash flows that occurs at regular intervals and lasts forever. D. PV of a perpetuity = r/c Ans- D 11. You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4% and Investment B has a discount rate of 5%. Which of the following is true? A. The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. B. The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B. C. The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. D. No comparison can be made - we need to know the cash flows to calculate the present value

Ans- C...