Test: Advanced Investing A – Pricing Financial Assets

The “time value of money” states that £1 today is worth more than £1 in future.  What is the reason for this?

Note:  There can be several correct answers to this question

To convert a future cash flow to its present value, you divide it each year by 1 plus the following factor:

The discount rate used to translate future cash flows into present value equals:

If an asset is expected to generate a higher return, e.g., because it is more risky or less liquid, what does this imply for its market price:

An asset is expected to generate revenue of £100 after 1 year, £200 after 2 years, and £700 after 3 years.  What is its net present value?

You have the choice between 2 bonds paying interest of £500 in each of the next 5 years and principal of £10,000 at the end of year 5.  One is issued by the UK government and the other by a high-tech start-up.  Which one should cost less?

You have the choice between 2 government bonds paying interest of 5% per year and principal in either 5 or 10 years’ time.  Which one should be cheaper?

What are gilts?

Government bonds are generally low risk, in particular when the government can borrow in its own currency.  Which of the following government bonds is relatively more risky:

Which of the following government bonds is more risky:

Which of the following bonds is at greater risk of default:

What is the spread on a corporate bond?

Which  of the following factors leads to a higher spread on a bond:

If market interest rates rise, how does this affect the price of bonds?

If market interest rates change, which type of bond will fluctuate more in price?

How do bond yields influence the stock market?

How do interest rates influence the housing market?

Stock markets tend to move in cycles.  They are called “bull” and “bear” markets.  Which of these terms describes a market where prices are in an upward trend?

The most widely used yardstick for valuing a stock is its Price-Earnings Ratio (PER).  It is calculated by dividing the share price by:

Which of the following leads to a higher Price-Earnings Ratio for a stock?

A company’s share price is £200, its net profit £50 million, and there are 5 million shares of stock outstanding.  What is its price-earnings ratio (PER)?

An airline has a PER of 15, while other airlines have PERs of 10 on average and the stock market as a whole has a PER of 18.  Does the share of the airline appear:

The cyclically adjusted PER or CAPE is a valuation measure dividing the share price by the average of 10 years of earnings.  Can this be a good measure of value?

What does it mean when financial statements have been “audited”?

Which of the following is true:

What is the book value of a company?

Note:  There can be several correct answers to this question

If a share price is less than its book value, this could be due to the following factors:

Note:  There can be several correct answers to this question

The dividend discount model states that the value of a share equals:

What is the payout ratio of a stock?

Do stocks provide inflation protection?

In a takeover bid, one company (A) tries to acquire a majority ownership in another company (B).  What is the most likely impact on stock prices:

What is leverage:

Which of the following investments is relatively more risky and should therefore earn a higher return:

Which of the following investments is relatively more risky and should therefore earn a higher return?

What means buying stocks on margin?

In general, buying stocks on margin:

Financial markets can be subject to “herd mentality”.  What does this mean?

If the market price of a share differs from its underlying value, what could be the reasons?

Note:  There can be several correct answers to this question