IAR Economic & Financial Concepts 5

Question 1

A company's 'free cash flow' is best described as:

Accepted Answer

Cash flow from operations minus capital expenditures

Answer

Free cash flow equals operating cash flow minus capital expenditures, representing cash available to pay investors after maintaining and expanding the asset base.

Question 2

The yield spread between corporate bonds and comparable U.S. Treasury bonds is primarily driven by:

Accepted Answer

Compensation for credit risk and liquidity risk in corporate bonds

Answer

Corporate bond yield spreads over Treasuries compensate investors for the additional credit default risk and typically lower liquidity of corporate versus government debt.

Question 3

Which scenario best illustrates the concept of 'adverse selection' in financial markets?

Accepted Answer

Borrowers with the highest default risk being most eager to take on loans

Answer

Adverse selection occurs when information asymmetry causes higher-risk borrowers to disproportionately seek credit, as lenders cannot perfectly distinguish risk levels.

Question 4

According to the Capital Asset Pricing Model (CAPM), a stock's expected return is determined by:

Accepted Answer

The risk-free rate plus the stock's beta multiplied by the market risk premium

Answer

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.

Question 5

When GDP is calculated using the expenditure approach, which components are included?

Accepted Answer

Consumption + Investment + Government spending + Net exports

Answer

The expenditure approach sums C (consumption) + I (investment) + G (government spending) + NX (net exports = exports minus imports) to arrive at GDP.

IAR Practice Test

IAR Practice Test

IAR Economic & Financial Concepts 5