Financial Economics (University Carlos III)

MULTIPLE CHOICE QUIZ TOPIC 1: Introduction to Financial Markets

1. Finance is the part of economics that studies: a. firms financing decisions. b. firms and individuals financing decisions. c. financing and investment decisions. d. the choice between consumption, investment and saving. 2. Financial assets are: a. Contracts that give their holders the right to receive future payments in exchange for a payment today. b. Intangible assets. c. The assets that are sold by the agents whose current wealth exceeds their current consumption needs. d. All of the above are correct. 3. One of the main differences between debt and equity is that: a. Firms can finance themselves issuing debt but they cannot finance themselves issuing equity. b. Creditors have the right to terminate the contract and recover their money at any point in time. c. Debt contracts are more liquid than shares. d. Contrarily to what happens with shares, the buyer of a debt contract has the right to a stream of predetermined payoffs. 4. You transfer your wealth into the future when you: a. borrow money. b. buy financial assets. c. sell financial assets. d. short-sell financial assets. 5. Short-selling a financial asset: a. makes sense if an investor wants to get rid of an asset in her portfolio of assets whose price she believes is going to fall. b. allows an investor to transfer part of her wealth into the future. c. consists of lending a financial asset to another investor for a given period of time. d. allows investors to benefit from future falls in the price of an asset which is not initially included in their portfolio of assets. 6. The difference between primary and secondary markets is that: a. firms finance themselves in primary markets but they cannot do so in secondary markets. b. financial assets are only issued in primary markets. c. secondary markets provide liquidity by allowing investors to trade their financial assets amongst themselves. d. All of the above are correct.

Copyright of Spanish version from David Moreno and Mara Gutirrez. Translation into English by Beatriz Mariano.

Financial Economics (University Carlos III)

7. An investment bank is an institution whose main role is to: a. give institutional investors advice on how to invest. b. help firms obtain financing in financial markets. c. undertake speculative transactions in financial markets in order to generate profits. d. offer deposit accounts and provide loans with the funds obtained.

8. Technical analysis: a. consists of using historical data on prices and trade volumes for a given financial asset to determine whether its price is going to rise or to fall. b. consists of studying the economic and financial situation of a firm and its competitors to determine whether its market price is correct. c. is performed by firms to determine when it is optimal to issue securities. d. is performed by rating agencies to determine the credit quality of a firm.

9. A mutual fund manager: a. Is the person or agency that performs as an intermediary between the buyer and the seller in a given transaction. b. Is the person that works for an investment bank buying and selling financial assets. c. Is the person or institution that manages an investment scheme that pools money from a group of investors. d. Is the person that performs technical and fundamental analysis to select the best investment opportunities.

10. Suppose that shares of Telefnica sell for 10.56 at the Madrid Stock Exchange and for 10.52 at the New York Stock Exchange. There is an arbitrage opportunity that consists of: a. Simultaneously buying in Madrid and selling in New York. b. Simultaneously selling in Madrid and buying in New York.

Solutions Topic 1: 1.c, 2.a, 3.d, 4.b, 5.d, 6.d, 7.b, 8.a, 9.c, 10.b.

Copyright of Spanish version from David Moreno and Mara Gutirrez. Translation into English by Beatriz Mariano.

Financial Economics (University Carlos III)

MULTIPLE CHOICE QUIZ

TOPIC 2: Useful Tools: Financial Mathematics
1. A given amount of money is worth less in the future than today because waiting for the future implies: a. giving up consumption today. b. giving up investment opportunities today. c. a and b are correct d. a and b are false

2. The price or reward that is paid by the borrower per unit of time and capital is called: a. Coupon b. Principal c. Interest rate d. Depreciation

3. You borrowed 57 euros from a friend to be repaid in one year and at an annual interest rate of 5%. This means that: a. your friend is indifferent between having 57 euros today and the promise of receiving 62 euros in one year. b. your promise to pay 59.85 euros in one year is ''worth'' the same as 57 euros today. c. 59.85 euros is the present value (today) of your promise to pay 57 euros in one year. d. your promised payment of 59.36 euros is the future value of 57 euros in one year.

4. The difference between having simple interest and compound interest is that with compound interest: a. interests are charged. b. interests are charged continuously. c. interests are accumulated to generate further interests. d. the principal is returned when the transaction expires.

5. Suppose you lend 10,000 euros for four years at a simple interest rate of 3%. Compute how much you receive in interests from this operation. a. 1,200 euros b. 120 euros c. 1,255 euros d. 125.50 euros

6. If the a. b. c. d.

simple annual interest rate is equal to 3.25%: the 6-month simple interest rate is equal to 1.625% the 3-month simple interest rate is equal to 0.83% the 1-month simple interest rate is equal to 0.24% All of the above are correct.

Copyright of Spanish version from David Moreno and Mara Gutirrez. Translation into English by Beatriz Mariano.

Financial Economics (University Carlos III)

7. Compute the annual simple interest rate equivalent to a 1-month simple interest rate of 1%? a. 2% b. 6% c. 8% d. 12%

8. A loan of 55,000 euros for a period of 5 years at an interest rate of 6% compounded annually generates a total amount of interest that is equal to: a. 13,200 euros b. 73,602.40 euros c. 18,602.40 euros d. None of the above is correct.

9. The total amount obtained after investing for 10 years at 2.5% interest compounded annually is: a. 1.28 euros for each euro invested b. 2.5 euros for each euro invested c. 9.31 euros for each euro invested d. 10 euros for each euro invested

10. If the a. b. c. d.

annually compounded interest is equal to 3.25%: the effective six-month interest rate is equal to 1.612% the effective three-month interest rate is equal to 0.8023% the effective monthly interest rate is equal to 0.266% All of the above are correct.

11. Compute the annualized interest rate annually compounded that is equivalent to an effective monthly interest rate of 1%: a. 13.87% b. 12.68% c. 12.25% d. 12%

12. The annualized interest rate annually compounded is equal to 2.5%. Compute the future value of 5,670 euros in two years time. a. 5,957.04 euros b. 5,987.06 euros c. 6,123.54 euros d. 6,334.97 euros

13. The annualized interest rate annually compounded is equal to 2.5%. Compute the present value of 10,000 euros in one year. a. 9,460.33 euros b. 9,756.09 euros c. 9,967.78 euros d. 1,0234.07 euros

Copyright of Spanish version from David Moreno and Mara Gutirrez. Translation into English by Beatriz Mariano.

Financial Economics (University Carlos III)

14. Compute the final value of a fixed term deposit of 9,870 euros made today for a period of two years at a compounded interest rate of 1.75%. a. 99,785 euros b. 10,178.45 euros c. 10,218.47 euros d. 10,286.03 euros

15. The discount factor: a. is equal to 1/(1+i)N b. is the number that multiplied by a given amount generates its value within N periods. c. is the value within N periods of investing one euro today. d. always exceeds the discount rate.

16. Compute the present value of a 5-year growing annuity whose first payment takes place in one year and is equal to 1,000 euros and whose remaining payment grows at an annual rate of 2%. The interest rate is equal to 4%. a. 4,626.3 euros b. 4,685.24 euros c. 4,753.03 euros d. 4,766.7 euros

17. Compute the future value of a 7-year annuity whose first payment is equal to 100,000 euros and takes place in one year. The interest rate is equal to 4%. a. 756,450.73 euros b. 789,829.44 euros c. 795,78.35 euros d. 801,23.23 euros

Solutions TOPIC 2: 1.c, 2.c, 3.b, 4.c, 5.a, 6.a, 7.d, 8.c, 9.a, 10.d, 11.b, 12.a, 13.b, 14.c, 15.a, 16.a, 17.b.

Copyright of Spanish version from David Moreno and Mara Gutirrez. Translation into English by Beatriz Mariano.

Financial Economics (University Carlos III)

MULTIPLE CHOICE QUIZZ TOPIC 3 Investment Appraisal: Introduction to NPV

1. Which of the following are used to calculate the incremental cash-flows from an investment project: a. Accounting depreciation. b. Sunk costs. c. Taxes savings or tax costs. d. None of the above.

2. What happens to a project's NPV if the firm chooses an accelerated depreciation method for its equipment and everything else remains unchanged? a. Increases b. Decreases c. Could increase or decrease d. Remains constant

3. Which of the following is true for a project with a zero-NPV? a. It has a zero return. b. It has a return equal to the return of the best alternative investment with the same level of risk. c. The present value of its future cash-flows is lower than its initial cost. d. It has a zero present value.

4. According to the NPV criteria: a. a firm should undertake the project with the highest NPV. b. a firm should undertake the project with the highest positive NPV. c. a firm should not undertake a project with a negative NPV if there is another project with a positive NPV. d. the firm should undertake all projects with a positive NPV. 5. In financial markets: a. it is difficult to find an investment with a NPV> or <0. b. the barriers to entry are small. c. competition makes investments with a positive NPV disappear very quickly d. All of the above are correct.

6. There is strong capital rationing: a. when the retained earnings of a firm limit its investment opportunities. b. when a firm borrows money to undertake its investment projects. c. When the firm's management artificially imposes a limit on how much to invest in each period. d. when there are limited human, technological or other resources that prevent a firm from growing rapidly.

Copyright of Spanish version from David Moreno and Mara Gutirrez. Translation into English by Beatriz Mariano.

Financial Economics (University Carlos III)

7. Using the payback period as a criteria to select investment projects is wrong because: a. The payback period does not take into account the time value of money of the cash-flows that are generated before the cutoff date. b. The payback period ignores the cash-flows that are generated after the cutoff date and consequently it penalizes long-term projects. c. Both are correct. d. Both are false.

8. The internal rate of return of a project is: a. The required discount rate for this project. b. The discount rate that makes the NPV equal to zero. c. The rate of return of alternative investments with the same level of risk. d. All of the above are correct.

9. What happens when the IRR of a project is equal to the opportunity cost of capital? a. The NPV is positive. b. The project does not generate cash-inflows. c. The NPV is zero. d. The firm should not undertake the project.

10. Which of the following criteria does not have into account the time value of money? a. The payback period. b. The discounted payback period. c. The internal rate of return d. The net present value.

11. An investment project last for one year and requires an initial investment of 1,500. It generates the following cash-flows: 350 at the end of the first trimester, 450 at the end of the second trimester, 600 at the end of the third trimester and 750 at the end of the fourth and final trimester. The required rate return is equal to 10% per year. Compute the NPV. a. 511.24 euros b. 134.23 euros c. -46.34 euros d. -122.43 euros

12. An investment project requires an initial investment of 2,000 euros and generates a constant annual cash-flow of 600 euros for five years. The required rate return is equal to 10% per year. Compute the NPV. a. -57.24 euros b. -87.98 euros c. 134.26 euros d. 274.47euros

Copyright of Spanish version from David Moreno and Mara Gutirrez. Translation into English by Beatriz Mariano.

Financial Economics (University Carlos III)

13. An investment project that last for three years requires an initial investment of 1,000$. Next year it generates a cash-flow of 500$ and the annual cashflows for the remaining years grow at a rate of 5%. The required rate return is equal to 12% per year. Compute the NPV and the IRR. a. 257.32$ and 14.05% b. 257.32$ and 26.02% c. -134.02$ and 14.05% d. -134.02$ and 26.02%

14. An investment project requires an initial investment of 900 euros, lasts for 2 years and generates annual constant cash-flows of 500 euros. The required rate return is equal to 5% per year. Compute the maximum interest rate that makes this investment project interesting. a. 6.43% b. 7.32% c. 8.64% d. 9.76%

15. Compute the IRR for this project: CF(0) = - 1000, CF(1) = 600, CF(2) = 700. The interest rate is equal to 10% per year. a. IRR = 18.88% b. IRR = 11.3% c. IRR = 10% d. IRR= 8.8%

Solutions TOPIC 3: 1.c, 2d, 3b., 4.d, 5.d, 6.a, 7.c, 8.b, 9.c, 10.a, 11.a, 12.d, 13.b, 14.b, 15.a.

Copyright of Spanish version from David Moreno and Mara Gutirrez. Translation into English by Beatriz Mariano.