Model Exit Exam - Financial Management I 2

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1. Which of the following is not a function of financial system?

A. It provides convenient mode of payments.


B. It helps in transferring risks to others
C. It reduces the borrowing capacity of firms
D. It helps government in influencing macro-economic variables
2. ____________ allocates saving efficiently in an economy to ultimate users either for
investment in real assets or for consumption.
A. Economic system
B. Financial system
C. Technology system
D. Market system
3. When the borrower engages in activities that make it less likely that the loan will be repaid,
_________ is said to exist.
A. asymmetric information
B. adverse selection
C. moral hazard
D. fraud
4. Identify which item is not one of the six parts of the financial system.
A. Financial markets
B. Legal Framework
C. Financial instruments
D. Commodities
5. Which of the following is a reason for the existence of financial intermediaries?
A. The existence of long-term financial instruments.
B. Problems related to asymmetric information.
C. The ability to borrow funds directly from savers.
D. All of the above
E. Which of the following can be
described as involving direct finance?
F. A) A corporation’s stock is traded
in an over-the-counter market.
G. B) People buy shares in a mutual
fund.
H. C) A pension fund manager buys
commercial paper in the secondary
market.
I. D) An insurance company buys
shares of common stock in the over-
the-counter
J. markets
6. Which of the following can be described as involving indirect finance?
A. A corporation’s stock is traded in an over-the-counter market.
B. A household obtains a mortgage loan from saving & loan association.
C. A pension fund manager buys commercial paper in the secondary market.
D. An insurance company buys shares of common stock in the over-the-counter markets
7. How do banks facilitate international trade and investment?
A. They are reluctant to lend for projects involving foreign trade and investment.
B. They bundle up assets with varying degrees of risk and sell them on.
C. They offer payment systems making it easier to export and import goods and services.
D. They charge low rates of interest on their loans.

8. Which of the following functions do financial institutions traditionally perform?


A. They immobilize savings.
B. They concentrate risk.
C. They spread risk.
D. They offer only short-term finance.
9. How do financial institutions evaluate the creditworthiness of potential borrowers?
A. They offer high interest rates because only the best borrowers will be able to afford them.
B. They cannot evaluate creditworthiness so everyone is treated the same.
C. They do not evaluate the creditworthiness because they know the borrower will honor
his/her obligation to repay the loan.
D. They gather information regarding the borrowers' finances.
10. An investor is aware of a taxable security that offers a yield of 8.4 percent. The investor is in
the 30 percent tax bracket. What is the equivalent before-tax yield necessary to match the
after-tax yield of the tax-exempt security?
A. 8.4%
B. 12%
C. 10.92%
D. None of the above
11. In which of the following situations would you prefer to be a borrower?
A. The nominal interest rate is 15% and the expected inflation rate is 12%.
B. The real interest rate is 5% and the expected inflation rate is 7%.
C. The nominal interest rate is 10% and the expected inflation rate is 14%.
D. The real interest rate is 8% and the expected inflation rate is 6%.
12. According to the liquidity preference theory of the term structure,
A. The present long-term interest rates depend entirely on future short-term rates.
B. The choice of long-term versus short-term securities is determined according to the
need for the securities
C. Securities of different maturities are substitutes but not perfect substitutes.
D. All of the above.
13. Which of the following is not related with Money Market?
A. Treasury Bills
B. Commercial Bills
C. Certificates of Deposit
D. mortgage notes
An important financial institution that
assists in the initial sale of securities in
the
primary market is the
A) investment bank.
B) commercial bank.
C) stock exchange.
D) brokerage house
An important financial institution that
assists in the initial sale of securities in
the
primary market is the
A) investment bank.
B) commercial bank.
C) stock exchange.
D) brokerage house
14. An important financial institution that assists in the initial sale of securities in the primary
market is the
A. investment bank.
B. commercial bank.
C. stock exchange.
D. brokerage house
15. Prospectus is not issued in
A. public issue
B. private placement
C. right issue
D. none the above
16. The size of the initial margin payable on a futures contract is mostly related to:
A. The past financial record of the buyer of the contract
B. The number of contracts entered into by the buyer
C. The volatility of the price of the underlying asset
D. The length of the contract
17. Hedging strategy
A. Removes losses
B. Helps to reduce risk
C. Helps to make excess profits
D. Is independent of risk

!The bond markets are important


because
!
(a) they are easily the most
widely followed financial markets
in the United States.
!
(b) they are the markets where
interest rates are determined
!The bond markets are important
because
!
(a) they are easily the most
widely followed financial markets
in the United States.
!
(b) they are the markets where
interest rates are determined
18. The bond markets are important because
A. they are easily the most widely followed financial markets in the world.
B. they are the markets where interest rates are determined
C. they are the markets where foreign exchange rates are determined
D. all of the above

!
E. (c) they are the markets
where foreign exchange rates
are determined.
F. !
(d) all of the above.they are the markets
where foreign exchange rates are determined.
19. All of the following are arguments against regulation of financial system except
A. Protecting firms from failure B. Increasing compliance costs
C. Discouraging innovation D. Discouraging efficiency
20. Effective regulation of financial institutions is required at international level because that
would:
A. Help avoid a credit crunch that would make it difficult for business and consumers to
borrow from the banks.
B. Help ensure the stability of the global financial system.
C. Regulate banks in their domestic and their foreign operations.
D. All of the options above.
21. Of the following types of financial regulation, which one is mostly implemented to improve
monetary control?
A. Reserve requirements
B. Restrictions on Entry
C. Limits on Competition
D. Restrictions on Assets and Activities

22. The regulatory body for Ethiopian Capital Market would be?
A. Accounting & Auditing Board of Ethiopia
B. Ethiopian Capital Market Clearing House
C. Ethiopian Capital Markets Authority
D. Federal Office of Auditors General
23. The central bank of Ethiopia is:
A. National Bank of Ethiopia
B. The Federal Reserve System
C. Commercial Bank of Ethiopia
D. Ministry of Finance
24. The former bank of Abyssinia was established in 1905 and owned by
A. National Bank of Ethiopia
B. National Bank of Egypt
C. Bank of America
D. Bank of France

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