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OMGT 5123 Exam Questions and Answers
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OMGT 5123 Exam Questions and Answers
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OMGT 5123 Exam Questions andAnswers
What is a beta? How is it used to calculate r, the investor's required rate of return? -
Answer-Beta is the relationship between an investment's returns and the market's
return. This is a measure of the investment's non-diversifiable risk. To calculate the
required rate of return, the beta is multiplied by the risk premium and added to the risk-
free rate of return.
How do we measure the beta of a portfolio? - Answer-The portfolio's beta is equal to the
weighted average of betas of individual stocks, multiplied by the percentage of invested
in each stock.
How does a bond's par value differ from its market value? - Answer-A bond's par value
is it's face value - the value does not change so it is different from its market value
which changes depending on the current economic condition.
Explain the differences among a bond's coupon interest rate, current yield, and required
rate of return - Answer-The coupon interest rate on a bond indicates the percentage of
the bond value of the bond that will be paid annually in the form of interest. The current
yield on a bond refers to the ratio of the annual interest payment to the bond's current
market price. An investor's required rate of return is equal to a rate earned on a risk-free
security plus a risk premium for assuming risks
Explain the relationship between the required rate of return and the value of a security -
Answer-The value of a security and the required rate of return have an inverse
relationship. As the value of a security increases, the required rate of return decreases,
and vice versa.
Describe the "five-question approach" to using financial ratios - Answer-o How liquid is
the firm? Can assets be converted quickly into cash
o Are the firm's managers generating adequate operating profits on the company's
assets? How does the company's operating return on asset look like
o How is the firm financing its assets? What percent of the firm's asset is financed by
debt
o Are the firm's managers providing a good return on the capital provided by the
shareholders? Are the stockholders receiving an attractive return on their investment
compared to the competition
o Are the firm's managers creating shareholder value? Is the company adding economic
value
What is the time value of money? Why is it important? - Answer-Time value of money is
when a dollar received today is worth more than a dollar received at any future date.
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