Economic & Financial Concepts Flashcards
7 cards from real IAR practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Economic & Financial Concepts flashcards as text
A company's 'free cash flow' is best described as:
Answer: Cash flow from operations minus capital expenditures
Free cash flow equals operating cash flow minus capital expenditures, representing cash available to pay investors after maintaining and expanding the asset base.
The yield spread between corporate bonds and comparable U.S. Treasury bonds is primarily driven by:
Answer: Compensation for credit risk and liquidity risk in corporate bonds
Corporate bond yield spreads over Treasuries compensate investors for the additional credit default risk and typically lower liquidity of corporate versus government debt.
Which scenario best illustrates the concept of 'adverse selection' in financial markets?
Answer: Borrowers with the highest default risk being most eager to take on loans
Adverse selection occurs when information asymmetry causes higher-risk borrowers to disproportionately seek credit, as lenders cannot perfectly distinguish risk levels.
According to the Capital Asset Pricing Model (CAPM), a stock's expected return is determined by:
Answer: The risk-free rate plus the stock's beta multiplied by the market risk premium
CAPM calculates expected return as the risk-free rate plus beta (systematic risk) times the market risk premium, linking return to non-diversifiable market risk.
When GDP is calculated using the expenditure approach, which components are included?
Answer: Consumption + Investment + Government spending + Net exports
The expenditure approach sums C (consumption) + I (investment) + G (government spending) + NX (net exports = exports minus imports) to arrive at GDP.
Which of the following would most accurately describe a 'liquidity trap'?
Answer: A condition where interest rates are so low that monetary policy becomes ineffective at stimulating the economy
A liquidity trap occurs when interest rates are near zero, making conventional monetary policy (rate cuts) ineffective because people hoard cash instead of spending or investing.
In analyzing a company's financial health, a DECREASING current ratio over time most likely indicates:
Answer: Declining short-term liquidity, suggesting potential cash flow challenges
The current ratio (current assets ÷ current liabilities) measures short-term liquidity; a declining ratio suggests the company has fewer current assets relative to its short-term obligations.