(FINA1303)[2013](s)midterm~=ibbidkdt^_50174.pdf

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Hong Kong University of Science and Technology

FINA1303 Introduction to Financial Markets

Quiz 1

There are 20 multiple choice questions in this quiz. Please circle the best answer for each question.

Question 1

Which of the following items is consistent with the cash flow concept in finance?

I. The initial investment of a long-term asset that a company pays for its purchase.

II. The book value of a long-term asset that a company records in its financial statements.

III.

The proceeds from the sale of a long-term asset that a company receives.

A.

III only

B.

I and II only

C.

I and III only

D.

I, II and III

Explanation

I is a cash outflow and III is a cash inflow. The book value of a long-term asset is an

accounting concept, which may not be consistent with the cash flow concept in finance.

Hence, C is the best answer.

Question 2 John has just won a cash prize in a talent competition and the relevant organization gives him several options of how to receive the prize. Given that the prevailing interest rate is 5% per annum and it is compounded on an annual basis, which of the following options will give John the highest present value?

A. To receive $100,000 right away.

B. To receive $104,000 in a years time.

C. To receive $52,500 in each of the coming two years.

D. To receive $110,000 in two years time.

Explanation PV of option A = $100,000 PV of option B = $104,000/(1+5%) = $99,047.62

PV of option C = $52,500/(1+5%) + $52,500/(1+5%)2 = $97,619.05 PV of option D = $110,000/(1+5%)2 = $99,773.24 Option A gives the highest present value and hence A is the best answer.

Question 3 Mary borrows a one-year loan of $50,000 that she has to pay the principal plus interest in year 1. The annual flat rate is quoted as 12%, but actually it is compounded on a monthly basis. What will be the interest payment that Mary has to make in a years time?

A. $6,000

B. $6,275.44

C. $6,341.25

D. $6,373.73

Explanation Principal plus interest in a years time = $50,000*(1+12%/12)12 = $56,341.25 Interest payment = $56,341.25 -$50,000 = $6,341.25 C is the best answer.

Question 4

David has $50,000 spare cash and he wants to invest in a financial instrument for one year.

Given that he prefers more wealth to less and he is risk averse, which of the following

financial instruments is his most preferable choice?

A. Financial instrument A with an expected return of 12% and a volatility of returns of 22%.

B. Financial instrument B with an expected return of 15% and a volatility of returns of 22%.

C. Financial instrument C with an expected return of 12% and a volatility of returns of 25%.

D. Financial instrument D with an expected return of 15% and a volatility of returns of 25%.

Explanation B is more preferred to A because they have the same risk and B offers a higher expected return. D is more preferred to C because they have the same risk and D offers a higher expected return.