FA Capital Markets and Investment Analysis 1 — Questions and Answers
Question 1: What is the primary market in securities?
- A market where investors trade securities among themselves
- A market where companies issue new securities directly to investors (Correct answer)
- A market for derivatives and options only
- A market regulated exclusively by the SEC
Correct answer: A market where companies issue new securities directly to investors
The primary market is where companies raise capital by issuing new securities (IPOs, secondary offerings) directly to investors for the first time.
Question 2: Which of the following best describes the weighted average cost of capital (WACC)?
- The cost of only equity financing
- The blended cost of all financing sources weighted by their proportions (Correct answer)
- The average interest rate on all bank loans
- The risk-free rate used in discounting
Correct answer: The blended cost of all financing sources weighted by their proportions
WACC combines the cost of equity and cost of debt, weighted by their respective proportions in the capital structure, representing the minimum return a company must earn.
Question 3: What does NPV stand for in capital investment analysis?
- Net Present Value (Correct answer)
- Net Profit Variance
- Normalized Price Variance
- Net Portfolio Value
Correct answer: Net Present Value
Net Present Value (NPV) discounts all future cash flows of an investment to the present using a required rate of return to determine if the investment adds value.
Question 4: An investment with a positive NPV indicates:
- The project will break even
- The investment is expected to destroy shareholder value
- The investment is expected to add value beyond the required rate of return (Correct answer)
- The payback period exceeds 5 years
Correct answer: The investment is expected to add value beyond the required rate of return
A positive NPV means the project's discounted future cash flows exceed the initial investment, indicating value creation above the cost of capital.
Question 5: What does the Internal Rate of Return (IRR) represent?
- The average accounting return on investment
- The discount rate that makes the NPV of an investment equal to zero (Correct answer)
- The annual interest earned on a bond
- The rate of inflation used in capital budgeting
Correct answer: The discount rate that makes the NPV of an investment equal to zero
IRR is the discount rate at which the present value of future cash flows equals the initial investment, effectively the break-even rate of return.
Question 6: Which bond characteristic directly moves in the opposite direction from interest rates?
- Coupon Rate
- Face Value
- Bond Price (Correct answer)
- Maturity Date
Correct answer: Bond Price
Bond prices and interest rates have an inverse relationship: when rates rise, existing bond prices fall, and vice versa.
FA Capital Markets and Investment Analysis 1
What is the primary market in securities?