AAFM MCQ 3 — Questions and Answers
Question 1: Net present value (NPV) analysis accepts a project when the NPV is:
- Negative
- Zero only
- Greater than zero (Correct answer)
- Equal to the discount rate
Correct answer: Greater than zero
A positive NPV indicates the project adds value beyond its cost of capital, so it should be accepted.
Question 2: Which asset class is generally considered to carry the highest long-term risk and return?
- Treasury bills
- Corporate bonds
- Equities (stocks) (Correct answer)
- Money market funds
Correct answer: Equities (stocks)
Equities historically offer higher returns but with greater volatility than fixed-income or cash.
Question 3: What is the primary purpose of a company's statement of cash flows?
- Report net income only
- Show changes in cash from operating, investing, and financing activities (Correct answer)
- List all assets and liabilities
- Detail shareholder votes
Correct answer: Show changes in cash from operating, investing, and financing activities
The cash flow statement tracks cash movements across operating, investing, and financing activities.
Question 4: In anti-money laundering (AML) practice, 'KYC' stands for:
- Keep Your Cash
- Know Your Customer (Correct answer)
- Key Yield Calculation
- Known Yearly Contribution
Correct answer: Know Your Customer
KYC (Know Your Customer) requires verifying client identity to prevent illicit financial activity.
Question 5: The Capital Asset Pricing Model (CAPM) uses beta to measure:
- Company profitability
- Systematic risk relative to the market (Correct answer)
- Dividend growth
- Book value
Correct answer: Systematic risk relative to the market
Beta in CAPM measures an asset's sensitivity to overall market movements (systematic risk).
Question 6: Which of the following is a characteristic of a progressive tax system?
- Everyone pays the same flat percentage
- Higher earners pay a higher marginal rate (Correct answer)
- Only corporations are taxed
- Tax decreases as income rises
Correct answer: Higher earners pay a higher marginal rate
In a progressive system, the marginal tax rate increases as taxable income rises.
Question 7: Compound interest differs from simple interest because it:
- Ignores time entirely
- Earns interest on previously accumulated interest (Correct answer)
- Applies only to loans
- Reduces the principal each year
Correct answer: Earns interest on previously accumulated interest
Compound interest calculates returns on both the principal and accumulated interest.
AAFM MCQ 3
Net present value (NPV) analysis accepts a project when the NPV is: