In case of bankruptcy, __________ pay the present value of bankruptcy cost upfront.

• A) Management team
• B) Shareholders
• C) Debt holders
• D) Employees

______________ is considered as an insurance policy in financial terminology.

• A) Put
• B) Call
• C) Forward
• D) Swap

If the return on equity is 50% in case of a strong economy and -25% if the economy gets weak, then the return sensitivity of equity will be:

• A) 75%
• B) -0.5%
• C) 2%
• D) -25%

___________ weighs the benefits of debt that result from shielding cash flows from taxes against the costs of financial distress associated with leverage.

• A) Signalling theory
• B) Push and pull theory
• C) Modigliani & Miller theorem
• D) Trade-off theory

Which method of returning cash to shareholders is more favourable when capital gains are taxed at a lower rate than dividends?

• A) Repurchase
• B) Bonus
• C) Interest
• D) Dividend

According to put-call parity, a portfolio of a call option and a bond is equivalent to a portfolio of a put and __________.

• A) forward
• B) future
• C) stock
• D) warrant

Selling each coupon or principal payment from a whole treasury bond as a separate cash flow is called:

• A) Bond Stripping
• B) Yield Curve
• C) The Term Structure of Interest Rates
• D) None of the given options

A/an __________ in a stock price can be followed by a corresponding increase in the related call option’s value.

• A) decrease
• B) increase
• C) reverse
• D) stagnate

According to Modigliani and Miller Proposition II, cost of levered equity increases with the:

• A) Decrease in firm’s debt to assets ratio
• B) Increase in firm’s debt to equity ratio
• C) Increase in firm’s equity to debt ratio
• D) Decrease in firm’s debt to equity ratio

When a firm faces financial distress, riskiness of the firm’s debt level raises the magnitude of the_____________.

• A) Cost of capital
• B) Agency cost
• C) Installation cost
• D) Liquidity cost

Identify the likely shape of the price curve in the context of sensitivity to the interest rate.

• A) Exact linear
• B) Concave
• C) Flat
• D) Convex

Which type of investor is most likely to buy a stock just before the ex-dividend date to collect the dividend?

• A) Banker
• B) Trader
• C) Insider
• D) Pension

The probability of financial distress of a firm decreases with:

• A) Volatility of the firm’s cash flows
• B) Steady cash flows
• C) Inability to meet debt commitments
• D) Increase in liabilities

__________increases the risk of equity even when there is no risk that a firm will default.

• A) Risk premium
• B) Project
• C) Cost of capital
• D) Leverage

_________ is an option contract that allows the right to sell an underlying asset at a fixed price.

• A) Put
• B) Swap
• C) Future
• D) Call

In a perfect capital market, debt may lead a firm to bankruptcy, but it will not reduce the:

• A) Cost of equity of the firm
• B) Total cash flows of the firm
• C) Default risk of the firm
• D) Total value of the firm

Liquidity Preference Theory shows short-term investors will hold long-term bonds:

• A) if forward rate=expected short rate
• B) if forward rate > expected short rate
• C) None of the given options
• D) if forward rate< expected short rate

Which of the following can be considered as an indirect cost of financial distress?

• A) None of the given options is correct
• B) Administrative cost of bankruptcy
• C) Legal cost of bankruptcy
• D) Fire sales of assets

Which of the following statements is correct regarding the Price–Earnings Ratio method for stock valuation?

• A) Higher b may yield lower g but higher b may not yield a higher PE ratio.
• B) All of the given options
• C) Higher b may yield higher g but higher b may not yield a higher PE ratio.
• D) Lower b may yield higher g but higher b may not yield a higher PE ratio.

In which situation, the duration rule provides quite accurate results.

• A) When a bond’s yield to maturity has a large change
• B) In all stated conditions
• C) When a bond’s yield to maturity has zero change
• D) When a bond’s yield to maturity has a small change