Module 3 Honors Quiz :Honors Assignments (Financial Markets) Answers 2025

Question 1

Which did Eugen von Böhm-Bawerk NOT believe caused interest rates to be positive?

❌ There are advantages to roundaboutness.
✅ Financial knowledge and expertise accumulates at a societal level at approximately this rate.
❌ This is approximately the rate of technological progress.
❌ People value money more today than in a year.

Explanation:
Böhm-Bawerk explained interest via time preference, roundabout production, and productivity, not accumulation of financial expertise.

Question 2

$1000 invested at 20% with continuous compounding → final value?

✅ 1221

Explanation:
Continuous compounding:

FV=1000×e0.20≈1000×1.221=1221FV = 1000 \times e^{0.20} \approx 1000 \times 1.221 = 1221FV=1000×e0.20≈1000×1.221=1221

Question 3

Consol pays £6 per £100 notional, price = £150. Yield?

❌ 1%
❌ 2%
❌ 3%
✅ 4%

Explanation:
Yield = Coupon / Price = 6 / 150 = 4%

Question 4

R₁ = 6%, R₂ = 6.5%. One-year forward rate in one year?

✅ 7%
❌ 5%
❌ 6%
❌ 6.5%

Explanation:

(1.065)2=(1.06)(1+f)⇒f≈7%(1.065)^2 = (1.06)(1+f) \Rightarrow f \approx 7\%(1.065)2=(1.06)(1+f)⇒f≈7%

Question 5

Investment return = 3% real, borrowing = 6% nominal, inflation = 1%

❌ The real rate is 3%
❌ The investment will be profitable
✅ The investment will be unprofitable
❌ The real rate is 2%

Explanation:
Real borrowing rate ≈ 6% − 1% = 5%, which is greater than 3%, so investment loses money.

Question 6

If expected inflation < actual inflation, wealth shifts from:

✅ Lenders to borrowers
❌ Borrowers to lenders
❌ Consumers to government
❌ Government to consumers

Explanation:
Unexpected inflation reduces real debt burden, helping borrowers.

Question 7

Market capitalization tells us:

❌ Pension benefits
❌ Capital expenditures
✅ The value of a company
❌ Industry classification

Explanation:
Market cap = share price × shares outstanding, a measure of firm value.

Question 8

True statements about stock splits (check all that apply):

✅ Market price per share is reduced
✅ Number of outstanding shares increases
✅ Proportional ownership unchanged
❌ Retained earnings change

Explanation:
Splits are purely cosmetic—no change in firm value.

Question 9

Rationale for preferred stock:

❌ Lowers cost vs debt
❌ Dividends are tax-deductible
✅ Expands capital base without diluting common equity
❌ Increases ownership

Explanation:
Preferred stock adds capital without voting dilution.

Question 10

Pecking Order Theory: firms prefer ______ to ______ financing

❌ flexible; risky
❌ stock; debt
✅ internal; external
❌ stock; retained earnings

Explanation:
Firms prefer internal funds first, then debt, then equity.

Question 11

5% stock dividend effect:

❌ raised, 1.05/1, worse off
❌ lowered, 1/1.05, worse off
❌ raised, 1.05/1, better off
✅ lowered, 1/1.05, better off

Explanation:
Price adjusts downward but total value remains the same.

Question 12

Correct statement:

❌ Cash dividends don’t affect price
❌ Repurchases always raise price
❌ Repurchases give more income
✅ Stock repurchases are more tax advantageous than cash dividends

Explanation:
Capital gains taxes are deferred, unlike dividends.

Question 13

Firm with higher P/E than market likely has:

❌ Smaller dividend yield
❌ Larger dividend yield
❌ Lower growth expectations
✅ An unpredictable future stream of earnings

Explanation:
High P/E reflects uncertainty or high growth expectations.

Question 14

Main implication of Lintner’s dividend model:

❌ Always pay EPS
✅ Firms should smooth dividends and avoid cuts
❌ Use repurchases if EPS < dividend
❌ Never pay dividends

Explanation:
Investors dislike dividend cuts, so firms adjust slowly.

🧾 Summary Table