FA Capital Markets and Investment Analysis 3

Question 1

What is the yield to maturity (YTM) of a bond?

Accepted Answer

The total return anticipated if held to maturity, expressed as an annual rate

Answer

YTM is the total return an investor earns if a bond is purchased at its current price and held until maturity, accounting for all coupon payments and capital gain/loss.

Question 2

Which valuation method estimates a company's value based on how similar companies are priced in the market?

Accepted Answer

Comparable Company Analysis (Comps)

Answer

Comparable company analysis values a business using valuation multiples (P/E, EV/EBITDA) derived from publicly traded peer companies.

Question 3

The equity risk premium (ERP) is defined as:

Accepted Answer

The excess return that investing in equities provides over a risk-free rate

Answer

The equity risk premium represents the additional return investors demand for taking on the higher risk of stocks compared to risk-free investments like Treasuries.

Question 4

What is a leveraged buyout (LBO)?

Accepted Answer

The acquisition of a company using a significant amount of borrowed money

Answer

An LBO uses substantial debt financing (leverage) to acquire a company, with the target's assets and cash flows typically serving as collateral for the debt.

Question 5

Which of the following is a measure of the duration of a bond's cash flows?

Accepted Answer

Modified Duration

Answer

Modified duration measures a bond's price sensitivity to interest rate changes and represents the weighted average time to receive cash flows.

FA - Finance Analyst Practice Test

FA - Finance Analyst Practice Test

FA Capital Markets and Investment Analysis 3