[STT: ] Test Code: 4321

TCH 302 – PRINCIPLES OF FINANCE

MIDTERM EXAM
Name: Student ID:
Class: Time:
• The exam consists of 30 multiple choice questions (9 points) and 2 short answer questions (1
points).
• This is a closed book exam. You are NOT permitted to access any other material in either written
or electronic form.
• You should darken one correct answer.
• Paper must be flat to scan for marking properly.

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 [STT: ] Test Code: 4321
A. Multiple Choices (9 points)
1 Markets in which funds are transferred from 2. A problem for equity contracts is a particular example of _________
those who have excess funds available to those called the _____ problem.
who have a shortage of available funds are a. adverse selection; principal-agent
called b. moral hazard; free-rider
a. commodity markets. c. adverse selection; free-rider
b. fund-available markets. d. moral hazard; costly state verification
c. derivative exchange markets. e. moral hazard; principal-agent
d. financial markets.
3. Investors buy and sell bonds in …………. 4. Solutions to the moral hazard problem include
Markets. a. high net worth.
a. Equity b. monitoring and enforcement of restrictive covenants.
b. Debt c. greater reliance on debt contracts and less on equity contracts.
c. Derivatives d. all of the above.
d. Foreign exchange e. only (A) and (B) of the above.
5. The market in which the initial buyer of a stock 6. You have purchased a savings bond that will pay $16,000 for your
or bond may choose to resell the asset to another newborn child in fifteen years. If the bank discounts this bound at a rate
party is known as the ………. market. of 4.307% per year, what is today’s price for this bond?
a. Primary a. $8,417
b. Money b. $8,500
c. Secondary c. $ 5,654
d. Dealer d. $10,000

7. The process by which a company managers its 8. You have an annuity of equal annual end-of-the year cash flows of
day-to-day operating needs through its current $750 that begin two years from today and last for a total of ten cash
assets and current liabilities is known as………. flows. With a discount rate of 5%, what are those cash flows worth in
a. Capital budgeting today’s dollars?
b. Capital structure a. $3,899.47
c. Accounts receivable management b. $ 5,515.55
d. Working capital management c. $ 4,380.24
d. $5,000
9. The owners’ wealth in a company is represented 10. A credit card that charges a monthly interest rate of 1.5% has an
by……….. effective annual interest rate of:
a. The equity value of the company a. 18.0%
b. The value of assets of the company b. 19.6%
c. The numbers of owners of the company c. 15.0%
d. The bond value d. 17.50%

11. In agency theory, the owners of the business 12. Average U.S wages in 1990 were $28,960 far higher than
are………. And the managers are……………… the average in 1930 of $1,970. What was the average annual increase in
a. Bondholders, principals wages over this sixty year period?
b. Stockholders, bondholders a. 3.31%
c. Agents, principals b. 2.45%
d. Principals, agents c. 24,50%
d. 4.58%

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 [STT: ] Test Code: 4321
13.A company selling a bond is………..money 14. With ____finance, borrowers obtain funds from lenders
a. Borrowing by selling them securities in the financial markets.
b. Lending a. active
c. spending b. determined
d. Reinvesting c. indirect
d. direct
15. Financial institutions that accept deposits and 16. Which transaction(s) increases/increase equity of entity?
make business loans are called . a. issuing bonds
a. insurance companies b. issuing common stock
b. commercial banks c. addition to retained earning
c. investment banks d. only (b) and (c) of the above
d. mutual funds e. all of the above
17. A share of common stock is a claim on a 18. An insurance company is an example of a financial institution that:
corporationʹs ………… a. Transfers risk.
a. debt. b. acts as a broker.
b. liabilities. c. serves as a depository institution.
c. expenses. d. sells derivative securities.
d. earnings and assets
19. Financial intermediaries 20. The problem created by asymmetric information before the
a. provide a channel for linking those who transaction occurs is called
want to save with those who want to , while the problem created after the transaction occurs is
invest. called ………………
b. produce nothing of value and are a. adverse selection; moral hazard
therefore a drain on societyʹs resources. b. moral hazard; adverse selection
c. can hurt the performance of the c. costly state verification; free-riding
economy. d. free-riding; costly state verification
d. hold very little of the average
Americanʹs wealth.
21. The primary assets of a finance company are 22. Economies of scale enable financial institutions to…..
a. municipal bonds. a. reduce transactions costs.
b. corporate stocks and bonds. b. avoid the asymmetric information problem.
c. consumer and business loans. c. avoid adverse selection problems.
d. Mortgages. d. reduce moral hazard.
23. A financial market in which only short-term 24. U.S. dollar deposits in foreign banks outside the U.S. or in
debt instruments are traded is called the foreign branches of U.S. banks are
………… market. called ………………….
a. bond a. Federal funds
b. money b. Eurodollars
c. capital c. foreign dollars
d. stock d. municipal bonds
25. U.S. Treasury bills pay no interest but are 26. Compound interest means that:
sold at a …………………. That is, you will pay a you get an interest deduction for paying your loan off early.
a lower purchase price than the amount you b. you get interest on interest.
receive at maturity. c . you get an interest deduction if you take out a
a. premium loan for longer than one year.

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 [STT: ] Test Code: 4321
b. collateral
c. default d. interest rates will rise on larger loans.
d. discount
27. A debt instrument sold by a bank to its 28. Federal funds are
depositors that pays annual interest of a given a. funds raised by the federal government in the bond market.
amount and at maturity pays back the original b. loans made by the Federal Reserve System to banks.
purchase price is called c. loans made by banks to the Federal Reserve System.
a. commercial paper. d. loans made by banks to each other.
b. a negotiable certificate of deposit.
c. a municipal bond.
d. venture fund
29. Collateral is …….the lender receives if the 30. Which of the following are not traded in a capital market?
borrower does not pay back the loan. a. U.S. government agency securities.
a. a liability b. State and local government bonds.
b. an asset c. Repurchase agreem ents.
c. a present d. Corporate bonds.
d. an offering

B. Short answer questions. Please choose only one question to answer. (1.0 point)
1. Briefly explain one function of financial instruments that can make them very different from
money.
2. Why might a life insurance company insist on an individual having a physical exam before
agreeing to provide life insurance to the individual?