Multiple Choice Questions
SECTION A – Answer ALL questions in this section which is COMPULSORY.
Question 1
Which of the following is NOT a capital market security?
a). Bond.
b). Consol.
c). Common stock.
d). Commercial paper.
e). All of the above are securities traded in the capital market.
(5 marks)
Question 2
Preferred stock is like long-term debt in that ___________.
a). it gives the holder voting power regarding firm’s management
b). it promises to pay its holder a fixed stream of income each year
c). in the event of bankruptcy preferred stock has equal status with debt holder
d). all of the above are true
e). none of the above is true
(5 marks)
Question 3
The success of common stock investments depends on the success of _________.
a). derivative securities
b). fixed income securities
c). the firm and its real assets
d). government methods of allocating capital
e). none of the above
(5 marks)
Question 4
Which of the following statistics cannot be negative?
a). Covariance.
b). Correlation.
c). Variance.
d). Expected return.
e). All cannot be negative.
(5 marks)
Question 5
Commercial papers are financial instruments initially sold by ___________.
a). commercial banks
b). the government
c). large corporations
d). investment banks
e). thrifts
(5 marks)
Question 6
Adverse selection is a problem associated with equity and debt contracts arising from ______________.
a). the lender’s relative lack of information about the borrower’s potential returns and risks of his investment activities
b). the lender’s inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults
c). the borrower’s lack of incentive to seek a loan for highly risky investments
d). the borrower’s lack of good options for obtaining funds
e). all of the above are adverse selection issues
(5 marks)
(TOTAL FOR SECTION A: 30 marks)
