PHINMA EXAMINATION

FIN 072 FINANCIAL MARKETS

1. A crucial element of all well-developed financial systems includes

A. Financial management
B. Financial intermediaries
C. Financial markets
D. All of the above
ANS. D

2.A syndicate is
A. A firm that assists in specialized transactions
B. An organization consisting of capital markets
C. The largest group of members on the PSE
D. All of the above
E. None of the above
ANS. D

3. Which of the following provides the highest value if the discount rate applying to the cash flows is a
positive value?
A. The present value of a Php100.00 payment to be received 1 year from today
B. The future value of a Php100.00 payment today but invested for 1 year
C. The present value of a stream of Php100.00 payments to be received at the end of the next 2 years
D. The future value of a stream of Php100.00 payments to be received at the end of the next 2 years
ANS. D

4. Which of the following refers to the ratio of the interest to the principal repayment on an unpaid
loan?
A. It increases as the loan gets older.
B. It remains constant over the life of the loan
C. It decreases as the loan gets older
D. It changes according to the level of market interest rates during the life of the loan.
ANS.C

5. By increasing the number of compounding periods in a year, but holding the annual percentage rate
constant, there will be
A. An increase in the peso return on an investment but a decrease in the annual percentage yield
B. No effect in the annual percentage yield
C. An increase in the annual percentage yield
D. A decrease in the annual percentage yield
ANS. C

6. Suppose you have a choice of two equally risky annuities, each paying Php1,000.00 per year for 20
years. One is an annuity due while the other is an ordinary annuity. Which annuity will you choose?
a. The ordinary annuity
b. The annuity due
c. Either one because the annuities have the same present value
d. Without information about the appropriate interest rate, it cannot be determined which annuity is
better.
ANS. D

7. Putting Van deposited Php10,000.00 in a savings account that paid 10% interest compounded
quarterly. What is the effective rate of interest?

A. 10% C. 10.38%
B. 10.25% D. 10.28%
ANS. C

8. The tighter the probability distribution of its expected future returns, the greater the risk of a given
investment as measured by its standard deviation.
A. True
B. False
C. Either a or b
D. I invoke my rights against self-incrimination
ANS. B

9. The minimum rate of return that an investor must receive in order to invest in a project is
most likely known as the:
A. required rate of return.
B. real risk free interest rate.
C. inflation rate.
D. market risk premium
ANS. A

10. Which of the following is least likely to be an accurate interpretation of interest rates?
A. The rate needed to calculate present value.
B. Opportunity cost.
C. The maximum rate of return an investor must receive to accept an investment.
D. None of the above
ANS. C

11. Given below is information about a security whose nominal interest rate is 15%:
• The real risk free rate of return is 3.5%
• The default risk premium is 3%
• The maturity risk premium 4%
• The liquidity risk premium is 2%
An investor wants to determine the inflation premium in the security’s return. The inflation premium is
closest to:
A. 2.5%.
B. 4.0%.
C. 9.0%.
D. 10%
ANS. A

12. A security pays $150 per year in perpetuity. What is its present value today, given that the
required rate of return is 4.75 percent?
A. $316.
B. $3158.
C. $3185.
D. $315
ANS. B

13. Which is the best measure of risk for a single asset held in isolation, and which is the best
measure for an asset held in a diversified portfolio?
A. Standard deviation; correlation coefficient.
B. Beta; variance.
C. Coefficient of variation; beta.
D. Beta; beta.
E. Variance; correlation coefficient.
ANS. C

14. Freedman Flowers’ stock has a 50% chance of producing a 25% return, a 30% chance of
producing a 10% return, and a 20% chance of producing a -28% return. What is the firm's expected rate
of return?
A. 9.41%
B. 9.65%
C. 9.90%
D. 10.15%
E. 10.40%
ANS. C

15. Which of the following best describes the security market line?

A. It is the slope of a line relating an individual security’s returns of other securities in that firm’s primary
industry
B. It has its slope the beta of the security
C. It is determined by the prevailing level of risk-free interest rates less the risk premium
D. It provides a picture of the risk-return trade-off required by diversified investors considering various
risky assets.
ANS. D

16. The risk premium for an individual security is computed as the

A. Security’s covariance divided by the variance of the market
B. Beta multiplied by the market return
C. Difference between the required return and the risk-free rate
D. Weighted average of the individual security betas in a portfolio
ANS. C

17. This formula b(rm-rf) refers to

A. Market premium C. Risk Premium
B. Market risk D. Portfolio Risk
ANS. C

18. It is the appropriate measure of total risk when comparing two equal investments
A. Coefficient of variation C. Standard deviation
B. Correlation D. Covariance
ANS. C

19. An investor that demands a greater return when risk increases is said to be
A. risk-taker
B. Risk-indifferent
C. Risk-adverse
D. Risk-aware

ANS. A
20. Recession, inflation, and high interest rates are economic events that are best characterized as
being
A. company-specific risk factors that can be diversified away.
B. among the factors that are responsible for market risk.
C. risks that are beyond the control of investors and thus should not be considered by security analysts
or portfolio managers.
D. irrelevant except to governmental authorities like the Federal Reserve.
ANS. B

21. Holders of equity capital

A. own the firm.
B. receive interest payments.
C. receive guaranteed income.
D. have loaned money to the firm.
ANS: A

22. As a form of financing, equity capital

A. has a maturity date.
B. is only liquidated in bankruptcy.
C. is temporary.
D. has priority over bonds.
Answer: B

23. _________ are promised a fixed periodic dividend that must be paid prior to paying any common
stock dividends.
A. Preferred stockholders
B. Common stockholders
C. Bondholders
D. Creditors
Answer: A

24. An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash
dividend of _________.
A. $4.00
B. $8.00
C. $8.80
D. $80.00
Answer: B

25. The cost of preferred stock is

A. lower than the cost of long term debt.
B. higher than the cost of common stock.
C. higher than the cost of long term debt and lower than the cost of common stock.
D. lower than the cost of convertible long term debt and higher than the cost of common stock.
Answer: C

26. Regarding the tax treatment of payments to securities holders, it is true that _________, while
_________.
A. interest and preferred stock dividends are not tax deductible; common stock dividends are tax
deductible
B. interest and preferred stock dividends are tax deductible; common stock dividends are not tax
deductible
C. common stock dividends and preferred stock dividends are tax deductible; interest is not tax
deductible
D. common stock dividends and preferred stock dividends are not tax deductible; interest is tax
deductible
Answer: D

27. Shares of stock currently owned by the firm’s shareholders are called
A. authorized.
B. issued.
C. outstanding.
D. treasury shares.
Answer: C

28. If a firm has class A and class B common stock outstanding, it means that
A. each class receives a different dividend.
B. the par value of each class is different.
C. the dividend paid to one of the classes is tax deductible by the corporation.
D. one of the classes is non voting stock.
Answer: D

29. _________ is hired by a firm to find prospective buyers for its new stock or bond issue.
A. A securities analyst
B. A trust officer
C. A commercial loan officer
D. An investment banker
Answer: D

30. Treasury stock results from the

A. firm selling stock for greater than its par value.
B. cumulative feature on preferred stock.
C. repurchase of outstanding stock.
D. authorization of additional shares of stock by the board of directors.
Answer: C
31. Because equity holders are the last to receive any distribution of assets as a result of bankruptcy
proceedings, common stockholders expect
A. fixed dividend payments.
B. greater compensation in the form of dividends and rising stock prices.
C. all profits to be paid out in dividends.
D. warrants to be attached to the stock issue as a sweetener.
Answer: B

32. The disadvantages of issuing common stock versus long term debt include all of the following
EXCEPT
A. the potential dilution of earnings.
B. high cost.
C. no maturity date.
D. the market perception that management thinks the firm is over valued, causing a decline in stock
price.
Answer: C

33. The preemptive right gives the shareholder the right

A. of one vote for each share owned.
B. to give up their vote to another party.
C. to maintain their proportionate ownership in the corporation when new common stock is issued.
D. to sell their share of stock at a premium.
Answer: C

34. A firm has an issue of preferred stock outstanding that has a stated annual dividend of $4. The
required return on the preferred stock has been estimated to be 16 percent. The value of the preferred
stock is _________.
A. $64
B. $16
C. $25
D. $50
Answer: C

35. A firm has an expected dividend next year of $1.20 per share, a zero growth rate of dividends, and a
required return of 10 percent. The value of a share of the firm’s common stock is _________.
A. $120
B. $10
C. $12
D. $100
Answer: C

36. The _________ is utilized to value preferred stock.

A. constant growth model
B. variable growth model
C. zero growth model
D. Gordon model
Answer: C

37. In the Gordon model, the value of the common stock is the
A. net value of all assets which are liquidated for their exact accounting value.
B. actual amount each common stockholder would expect to receive if the firm’s assets are sold,
creditors and preferred stockholders are repaid, and any remaining money is divided among the
common stockholders.
C. present value of a non growing dividend stream.
D. present value of a constant, growing dividend stream.
Answer: D

38. Emmy Lou, Inc. has an expected dividend next year of $5.60 per share, a growth rate of dividends of
10 percent, and a required return of 20 percent. The value of a share of Emmy Lou, Inc.’s common stock
is _________.
A. $28.00
B. $56.00
C. $22.40
D. $18.67
Answer: B

39. _________ is the actual amount each common stockholder would expect to receive if the firm’s
assets are sold, creditors and preferred stockholders are repaid, and any remaining money is divided
among the common stockholders.
A. Liquidation value
B. Book value
C. The P/E multiple
D. The present value of the dividends
Answer: A

40. The current price of DEF Corporation stock is $26.50 per share. Earnings next year should be $2 per
share and it should pay a $1 dividend. The P/E multiple is 15 times on average. What price would you
expect for DEF’s stock in the future?
A. $13.50
B. $15.00
C. $26.50
D. $30.00
Answer: D

41. Which of the following terms typically applies to common stock but not to preferred stock?
A. Par value.
B. Dividend yield.
C. Legally considered as equity in the firm.
D. Voting rights.
Answer: D

42. Tangshan China’s stock is currently selling for $160.00 per share and the firm’s dividends are
expected to grow at 5 percent indefinitely. Assuming Tangshan China’s most recent dividend was $5.50,
what is the required rate of return on Tangshan’s stock?
A. 7.3%
B. 8.6%
C. 9.5%
D. 10.6%
Answer: B

43. Nico Custom Cycles’ common stock currently pays no dividends. The company plans to begin paying
dividends beginning 3 years from today. The first dividend will be $3.00 and dividends will grow at 5
percent per year thereafter. Given a required return of 15 percent, what would you pay for the stock
today?
A. $26.00
B. $19.73
C. $30.00
D. $22.68
Answer: D

44. The _________ is the rate of return a firm must earn on its investments in projects in order to
maintain the market value of its stock.
A. net present value
B. cost of capital
C. internal rate of return
D. gross profit margin
Answer: B

45. _________ is the risk to the firm of being unable to cover operating costs.
A. Total risk
B. Business risk
C. Financial risk
D. Diversifiable risk
Answer: B

46. The four basic sources of long-term funds for the business firm are
A. current liabilities, long-term debt, common stock, and preferred stock.
B. current liabilities, long-term debt, common stock, and retained earnings.
C. long-term debt, paid-in capital in excess of par, common stock, and retained earnings.
D. long-term debt, common stock, preferred stock, and retained earnings.
Answer: D
47. Firms typically raise long-term funds
A. only at the inception of the firm.
B. on a continuous basis.
C. in lump sums as needed.
D. in proportion to the capital mixture of the target capital structure.
Answer: C

48. The firm’s optimal mix of debt and equity is called its
A. optimal ratio.
B. target capital structure.
C. maximum wealth.
D. maximum book value.
Answer: B

49. The cost to a corporation of each type of capital is dependent upon

A. the risk-free rate of bonds plus the business risk of the firm.
B. the risk-free rate of each type of capital plus the business risk of the firm.
C. the risk-free rate of each type of capital plus the financial risk of the firm.
D. the risk-free rate of each type of capital plus the business risk and the financial risk of the firm.
Answer: D

50. In order to recognize the interrelationship between financing and investments, the firm should use
_________ when evaluating an investment.
A. the least costly source of financing
B. the most costly source of financing
C. the weighted average cost of all financing sources
D. the current opportunity cost
Answer: C

51. A corporation has concluded that its financial risk premium is too high. In order to decrease this, the
firm can
A. increase the proportion of long-term debt to decrease the cost of capital.
B. increase short-term debt to decrease the cost of capital.
C. decrease the proportion of common stock equity to decrease financial risk.
D. increase the proportion of common stock equity to decrease financial risk.
Answer: D

52. A tax adjustment must be made in determining the cost of _________.

A. long-term debt
B. common stock
C. preferred stock
D. retained earnings
Answer: A
53. The _________ from the sale of a security are the funds actually received from the sale after
_________, or the total costs of issuing and selling the security, which have been subtracted from the
total proceeds.
A. gross proceeds; the after-tax costs
B. gross proceeds; the flotation costs
C. net proceeds; the flotation costs
D. net proceeds; the after-tax costs
Answer: C

54. The before-tax cost of debt for a firm which has a 40 percent marginal tax rate is 12 percent. The
after-tax cost of debt is
A. 4.8 percent.
B. 6.0 percent.
C. 7.2 percent.
D. 12 percent.
Answer: C

55. A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost of
issuing and selling the stock was $2 per share. The firm’s marginal tax rate is 40 percent. The cost of the
preferred stock is
A. 3.9 percent.
B. 6.1 percent.
C. 9.8 percent.
D. 10.2 percent.
Answer: D

56. When determining the after-tax cost of a bond, the face value of the issue must be adjusted to the
net proceeds amounts by considering
A. the risk.
B. the flotation costs.
C. the approximate returns.
D. the taxes.
Answer: B

57. The approximate before-tax cost of debt for a 15-year, 10 percent, $1,000 par value bond selling at
$950 is
A. 10 percent.
B. 10.6 percent.
C. 12 percent.
D. 15.4 percent.
Answer: B

58. If a corporation has an average tax rate of 40 percent, the approximate, annual, after-tax cost of
debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950 is
A. 10 percent.
B. 10.6 percent.
C. 7.6 percent.
D. 6.0 percent.
Answer: C

59. Debt is generally the least expensive source of capital. This is primarily due to
A. fixed interest payments.
B. its position in the priority of claims on assets and earnings in the event of liquidation.
C. the tax deductibility of interest payments.
D. the secured nature of a debt obligation.
Answer: C

60. A firm has determined it can issue preferred stock at $115 per share par value. The stock will pay a
$12 annual dividend. The cost of issuing and selling the stock is $3 per share. The cost of the preferred
stock is
A. 6.4 percent.
B. 10.4 percent.
C. 10.7 percent.
D. 12 percent.
Answer: C

61. A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals
6 percent. The estimated cost of common stock equity is
A. 6 percent.
B. 7.2 percent.
C. 14 percent.
D. 15.6 percent.
Answer: D

62. A firm has common stock with a market price of $55 per share and an expected dividend of $2.81
per share at the end of the coming year. The dividends paid on the outstanding stock over the past five
years are as follows:
Year Dividend
1 $2.00
2 2.14
3 2.29
4 2.45
5 2.62
The cost of the firm’s common stock equity is
A. 4.1 percent.
B. 5.1 percent.
C. 12.1 percent.
D. 15.4 percent.
Answer: C

63. In comparing the constant growth model and the capital asset pricing model (CAPM) to calculate the
cost of common stock equity,
A. the constant growth model ignores risk, while the CAPM directly considers risk as reflected in the
beta.
B. the CAPM directly considers risk as reflected in the beta, while the constant growth model uses the
market price as a reflection of the expected risk-return preference of investors.
C. the CAPM directly considers risk as reflected in the beta, while the constant growth model uses
dividend expectations as a reflection of risk.
D. the CAPM indirectly considers risk as reflected in the market return, while the constant growth model
uses dividend expectations as a reflection of risk.
Answer: B

64. Capital budgeting is the process of

A. making long-term equity decisions
B. determining how much capital stock to issue
C. making capital expenditure decisions
D. eliminating unprofitable product line
ANS: C

65. A machinery needed by Myriad Company costs P35,000 and is expected to have a P5,000 salvage
value at the end of its ten-year life. It generates annual net cash inflow of P5,000 each year. Compute for
the machinery’s payback period.
A. 8 years
B. 7 years
C. 6 years
D. 5 years
ANS: B

66. Finnigan Company plans to buy a computer costing P50,000 which has an expected life of 10 years.
The computer is also expected to generate a net income before taxes of P10,000 per year. The firm is
subject to a tax rate of 30%. What is the computer’s payback period?
A. 3.33 years
B. 4.17 years
C. 5.15 years
D. 7.14 years
ANS: B

67. Orlando Corporation is considering an investment in a new cheese-cutting machine to replace its
existing cheese cutter. Information on the existing machine and the replacement machine follow:
Cost of the new machine P400,000
Net annual savings in operating costs 90,000
Salvage value now of the old machine 60,000
Salvage value of the old machine in 8 years 0
Salvage value of the new machine in 8 years 50,000
Estimated life of the new machine 8 years
What is the expected payback period for the new machine?
A. 4.44 years
B. 2.67 years
C. 8.50 years
D. 3.78 years
ANS: D

68. Seamus, Inc. plans to buy a machine costing P50,000 which has an expected life of 10 years. The
computer is also expected to generate a net income before taxes of P10,000 per year. The firm has a
10% cost of capital and is subject to a tax rate of 30%. What is the machine’s payback period?
A. 5.67 years
B. 7.28 years
C. 4.26 years
D. 3.33 years
ANS: A

69. A piece of labor saving equipment that Marubeni Electronics Company could use to reduce costs in
one of its plants in Angeles City has just come onto the market. Relevant data relating to the equipment
follow:
Purchase cost of the equipment P432,000
Annual cost savings that will be provided by the equipment 90,000
Life of the equipment 12 years
What is the simple rate of return to be provided by the equipment?
A. Between 15% and 18%.
B. 12.50%.
C. 20.83%.
D. 25.00%.
ANS: B

70. An asset is purchased for P120,000. It is expected to provide an additional P28,000 of annual net
cash inflows. The asset has a 10-year life and an expected salvage value of P12,000. The hurdle rate is
10%. The present value of an annuity factor of 10% for 10 years is 6.1446, and the present value of P1,
discounted for 10 years at 10% is 0.3855. Given the data provided, the minimum amount of annual cash
inflows that would provide the 10% time-adjusted return is approximately
A. P18,776
B. P24,400
C. P26,600
D. P22,535
ANS: A
71. Solidum Company purchased an asset costing P90,000. Annual cash inflows are expected to be
P20,000 each year for six years. No salvage value is expected at the end of the asset’s life. The company
applies a 16% minimum acceptable rate of return for this kind of investment. What is the asset’s net
present value?
A. 4800
B. (4,514)
C. 30,000
D. (16305)
ANS: D

72. Riche Company is considering an investment that has a positive net present value based on its 16%
hurdle rate. The internal rate of return would be
A. More than 16%
B. Less than 16%
C. 16%
D. Zero
ANS: A

73. Academia La Rosa, Inc. is evaluating the purchase of P500,000 machine. The cash inflows expected
from the investment is P145,000 per year for five years with no residual value. The cost of capital is 12%.
The internal rate of return for this investment is:
A. 3.45%
B. 2.04%
C. 13.80%
D. 15.48%
ANS: C

74. Le Plan, Inc., has 12% cost of capital and is considering a P100,000 investment. The cash inflows
expected from the investment are P60,000 on the first year and P80,000 on the second year. What is the
project’s modified internal rate of return?
A. 13.73%
B. 21.33%
C. 16.67%
D. 18.78%
ANS: B

75. Wakefield evaluates future projects by using the profitability index. The company is currently
reviewing five similar projects and must choose one of the following:

Initial Present Value

Project Investment of Cash Inflows
1 P100,000 P 97,000

2 50,000 80,000
 3 75,000 110,000

4 60,000 100,000

Which project should Wakefield select if the decision is based entirely on the profitability index?
A. Project 1.
B. Project 2.
C. Project 3.
D. Project 4.
ANS: D

76. St. Andrews ranks investments by using the profitability index (PI). The following data relate to
Project X and Project Y:

Project X Project Y
Initial investment P400,000 P1,300,000
Present value of inflows 600,000 1,800,000

Which project would be more attractive as judged by its ranking, and why?
A. Project X because the PI is 1.50.
B. Project Y because the PI is 1.38.
C. Project X because the PI is 0.67.
D. Both projects would be equally attractive in terms of ranking, as indicated by a positive PI.
ANS: A

77. Mutually exclusive projects are those that

A. If accepted, preclude the acceptance of competing projects
B. If accepted, can have a negative effect on the company’s profit
C. If accepted, can also lead to the acceptance of a competing project
D. have high returns
ANS: A

78. A capital investment decision is essentially a decision to:

A. exchange current assets for current liabilities.
B. exchange current cash outflows for the promise of receiving future cash inflows.
C. exchange current cash flow from operating activities for future cash inflows from investing activities.
D. exchange current cash inflows for future cash outflows.
ANS: B

79. Tabucol Aggregates, Inc. plans to replace one of its machines with a new efficient one. The old
machine has a net book value of P120,000 with remaining economic life of 4 years. This old machine
can be sold for P80,000. If the new machine were acquired, the cash operating expenses will be
reduced from P240,000 to P160,000 for each of the four years, the expected economic life of the new
machine. The new machine will cost Tabucol a cash payment to the dealer of P300,000. The company is
subject to 32 percent tax and for this kind of investment, a marginal cost of capital of 9 percent. The
present value of annuity of 1 and the present value of 1 for 4 periods using 9 percent are 3.23972 and
0.70843, respectively.
The net present value to be provided by the replacement of the old machine is
A. P28,493
B. P46,794
C. P15,693
D. P59,594
ANS: C

80. Refeel Company is considering whether or not to replace a machine that has the following
characteristics:
Book Value P120,000
Remaining useful life 5 years
Current market value P 90,000
The replacement machine costs P250,000, has a 5-year life, and saves P60,000 per year in cash
operating costs. It will be depreciated using the straight-line method. The rate is 30%. What is the
increase in the annual net cash flows if the company replaces the machine?
A. 49,800
B. 49,200
C. 42,000
D. 57,000
ANS: A

81. Which of the following may cause a change in the total shareholder’s equity?
A. share dividends
B. share splits
C. recapitalization
D. none of these
ANS: D

82. Norbert Company declared a one-year cash dividend on its outstanding 6% redeemable preference
shares with aggregate par value of P4,000,000. The declaration of the dividends resulted to a(n)
A. increase in retained earnings
B. loss
C. increase in interest expense
D. gain
ANS: C

83. Sanai, Inc., had 100,000 ordinary shares issued and outstanding at January 1, 2020. During 2020,
Sanai took the following actions:
March 15 – Declared a 2-for-1 stock split, when the fair value of the stock was P80 per
share.
December 15 – Declared a P0.50 per share cash dividend
What amount should Sanai report as dividends in its 2020 financial statements?
A. 50,000
B. 100,000
C. 850,000
D. 950,000
ANS: B

84. The effect of a share dividend is to transfer

A. equity from contributed capital to retained earnings
B. equity from retained earnings to contributed capital
C. assets to stockholders
D. assets to contributed capital
ANS: B

85. The exact amount to be distributed on a dividend declaration is finally determined on the
A. Date of declaration
B. Date of record
C. Date of distribution
D. Ex-dividends date
ANS: B

86. A company’s assets and shareholder’s equity are most likely to be reduced by
A. Cash dividends
B. Share dividends
C. Share splits
D. Reverse share splits
ANS: A

87. Verna, Inc. distributes a 20% stock dividend. Before distributing the stock dividend, Verna had 20
million shares. How much outstanding shares does the firm have after it makes the stock dividend
distribution?
A. 24 million
B. 100 million
C. 10 million
D. 20 million
ANS: A

88. Creating value of a firm is influenced by the following financial decisions made by finance manager,
except:
A. Dividend decisions
B. Financing decisions
C. Pricing decisions
D. Investment decisions
ANS: C
89. Dotty Company’s stocks currently sell for P250 per share. The firm wants to get the price down to
P50 per share. What stock split would be necessary in order to get the desire price?
A. 5
B. 7
C. 7.35
D. 7.72
ANS: A

90. It analyzes exposure to risk and determining how to best handle such exposure.
A. risk
B. systematic risk
C. risk management
D. standard deviation
ANS: C

91. Derivatives are financial instruments that derive their value from changes in a benchmark based on
any of the following except
A. Stock prices
B. Mortgage and currency rates
C. Commodity prices
D. Discounts on accounts receivable
ANS: D

92. Hedge accounting is permitted for all of the following types of hedges except:
A. Trading securities
B. Unrecognized firm commitment
C. Available-for-sale securities
D. Net investments in foreign operations
ANS: A

93. ABC Co. expects the value of won to increase in the next 30 days. Accordingly, on December 15,
2021, ABC Co. enters into a 30-day forward contract to buy 10,000 wons at the forward rate of P1.24.
On December 31, 2021, the forward rate was P1.27 and by January 15, 2022, the spot rate moved to
P1.30. How much is the carrying amount of the derivative on December 31, 2021?
A. 0
B. 300 asset
C. 300 liability
D. 1,400 asset
ANS: B

94. It is an agreement between two parties to buy or sell an asset at a certain time in the future for a
certain price. They are normally traded on an exchange.
A. Futures contract
B. Forward contract
C. Call option
D. Put option
ANS: A

95. It is a contract giving the owner the right, but not the obligation, to buy or sell an asset at a specified
price anytime during a specified period in the future.
A. Interest rate swap
B. Forward contract
C. Futures contract
D. Option contract
ANS: D

96. In exchange for the rights inherent in an option contract, the owner of the option will typically pay a
price
A. only when a call option is exercised
B. only when a put option is exercised
C. when either a call option or a put option is exercised
D. at the time the option is received regardless of whether the option is exercised or not
ANS: D

97. Drive Company acquires a call option on 1,000 units of a commodity at a strike price of P100 for
P400 on March 1, 2021. The call option is exercisable on July 1, 2021. The movements in prices are
shown below:
March 1, 2021 June 30, 2021
Spot Prices P100 P120
Time value of Option 400 100

How much is the net cash settlement on July 1, 2021?

A. 20,000 receipt
B. 20,000 payment
C. 20,100 receipt
D. 20,100 payment
ANS: A

98. Bain Publishing Company enters into a “receive variable, pay fixed” interest swap on January 1, 2021
for a notional amount of P1,000,000. Under the terms of the contract, if the current rate increases
above 12%, Bain shall receive the excess interest. If the current rate falls below 12%, Bain shall pay the
deficiency. Swap payment shall be made on December 31, 2022. The current rates are as follows:
Jan. 1, 2021 12%
Jan. 1, 2022 15%
How much is the carrying amount of the derivative on December 31, 2021?
A. 30,000 liability
B. 30,000 asset
C. 26,087 asset
D. 26,987 liability
ANS: C

99. If the price of the underlying is greater than the strike price or exercise price of the underlying, the
call option is
A. At the money
B. In the money
C. On the money
D. Out of the money
ANS: B

100. Uncertainty about the future market value of an asset is referred to as

A. Price risk
B. Credit risk
C. Interest rate risk
D. Exchange rate risk
ANS: A