Investment Advisor Securities Analysis and Valuation 2 — Questions and Answers
Question 1: Yield to maturity (YTM) on a bond is best described as:
- The annual coupon payment divided by face value
- The total return anticipated if the bond is held until it matures (Correct answer)
- The current yield adjusted for inflation
- The coupon rate minus the current market yield
Correct answer: The total return anticipated if the bond is held until it matures
YTM is the total annualized return an investor will earn if the bond is purchased at its current price and held to maturity, accounting for coupon payments and capital gain or loss.
Question 2: A bond's duration is primarily used to measure:
- Credit risk relative to government bonds
- The bond's sensitivity to changes in interest rates (Correct answer)
- The likelihood of issuer default
- The bond's liquidity in secondary markets
Correct answer: The bond's sensitivity to changes in interest rates
Duration measures a bond's price sensitivity to interest rate changes; a higher duration means greater price volatility when rates move.
Question 3: In fundamental analysis, which financial ratio measures how efficiently a company uses its assets to generate revenue?
- Debt-to-equity ratio
- Current ratio
- Asset turnover ratio (Correct answer)
- Profit margin
Correct answer: Asset turnover ratio
The asset turnover ratio (revenue ÷ total assets) indicates how effectively management uses the company's assets to produce sales.
Question 4: A 50-day moving average crossing above a 200-day moving average is commonly known as a:
- Death cross
- Golden cross (Correct answer)
- Support breakout
- Bearish divergence
Correct answer: Golden cross
A golden cross occurs when a short-term moving average (e.g., 50-day) crosses above a long-term moving average (e.g., 200-day), which is considered a bullish signal.
Question 5: EBITDA is most useful as a valuation metric because it:
- Reflects actual cash available to shareholders
- Approximates operating cash flow by excluding non-cash and financing items (Correct answer)
- Accounts for capital expenditure requirements
- Includes changes in working capital
Correct answer: Approximates operating cash flow by excluding non-cash and financing items
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) removes non-cash charges and financing structure effects, making it easier to compare operating performance across companies.
Question 6: Which of the following best describes free cash flow (FCF)?
- Net income plus depreciation and amortization
- Operating cash flow minus capital expenditures (Correct answer)
- Gross profit minus operating expenses
- EBITDA minus interest expense
Correct answer: Operating cash flow minus capital expenditures
Free cash flow is calculated as operating cash flow minus capital expenditures, representing the cash a company can use for dividends, debt repayment, or reinvestment.
Question 7: When performing relative valuation, an analyst compares a company's valuation multiples to those of its peers primarily to:
- Determine the precise intrinsic value of the company
- Identify whether the company appears over- or undervalued relative to similar firms (Correct answer)
- Predict future earnings growth with certainty
- Calculate the company's weighted average cost of capital
Correct answer: Identify whether the company appears over- or undervalued relative to similar firms
Relative valuation (comps analysis) benchmarks a company's multiples against industry peers to assess whether its current market price reflects a premium or discount.
Investment Advisor Securities Analysis and Valuation 2
Yield to maturity (YTM) on a bond is best described as: