IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 961:

  Which one of the following is not a characteristic of a negotiable certificate of deposit?

  Negotiable certificates of deposit

  A. Have a secondary market for investors.

  B. Are regulated by the Federal Reserve System.

  C. Are usually sold in denominations of a minimum of $100,000.

  D. Have yields considerably greater than bankers' acceptances and commercial paper.

  Correct Answer: D

  A certificate of deposit (CD) is a form of savings deposit that cannot be withdrawn before maturely without incurring a high penalty. A negotiable CD can be traded. CDs usually have a fairly high rate of return compared with other savings instruments because they are for fixed, usually long-term periods. However, their yield is 1less than that of commercial paper and bankers' acceptances because they are less risky.

• Question 962:

  Which of the following statements does not properly describe a Eurodollar deposit?

  A. Eurodollar deposits are U.S. dollar deposits in bank outside of the U.S.

  B. Eurodollar deposits are outside the direct control of the U.S. monetary authorities.

  C. Eurodollar deposits rates tend to be lower than domestic U.S. rates on equivalent instruments.

  D. Interest rates on Eurodollar deposits are tied to the London Interbank Offer Rate (LIBOR).

  Correct Answer: C

  Eurodollar are U.S. dollars on deposit in a foreign bank. These deposits are created when a check is drawn on a dollar deposit in a U.S. bank and then deposited in a bank outside the U.S. This amount is then available for lending by the foreign bank to its customers. However, the depositors still hold claims denominated in dollars. Because Eurodollar are outside the direct control of the U.S. monetary authorities,

  U.S.

  banking regulations with respect to reserves, insurance, interest ceilings etc. do no apply. The absence of these costs means that Eurodollar deposits rates tend to be higher, not lower, than domestic

  U.S.

  rates on equivalent instruments.

• Question 963:

  An investor is currently holding income bonds, debentures, subordinated debentures, and first-mortgage bonds. Which of these securities traditionally is considered to have the least risk?

  A. Income bonds.

  B. Debentures.

  C. Subordinated debentures.

  D. First-mortgage bonds.

  Correct Answer: D

  A mortgage bond is secured with specific fixed assets, usually real property. Thus, under the rights enumerated in the bond indenture, creditors will be able to receive payments from liquidation of the property in case of default. In a bankruptcy proceeding, these amounts are paid before any transfers are made to other creditors, including those preferences. Hence, mortgage bonds are less risky than the others listed.

• Question 964:

  The principal advantage of using commercial paper as a short-term financing instrument is that it

  A. Is usually cheaper than a commercial bank loan.

  B. Is readily available to almost all companies.

  C. Offers security, i.e., collateral, to the lender.

  D. Can be purchased without commission costs.

  Correct Answer: A

  Commercial papers form of unsecured note that is sold by only the most creditworthy companies. Leis issued ate discount from its face value and has a maturity period of less than 270 days. Commercial paper usually carries a low interest rate in comparison to other means of financing.

• Question 965:

  Which of the following classes of securities are listed in order from lowest risk/opportunity for return to highest risk opportunely for return?

  A. U.S. Treasury bonds; corporate first mortgage bonds; corporate income bonds; preferred stock.

  B. Corporate income bonds; corporate mortgage bonds; coverable preferred stock subordinated debentures.

  C. Common stock corporate first mortgage bonds; corporate second mortgage bonds; corporate income bonds.

  D. Preferred stock common stock corporate mortgage bonds; corporate debentures.

  Correct Answer: A

  The general principle is that risk and return are directly correlated. U.S. Treasury securities are backed by the full faith and credit of the federal government and are therefore the least risky form of investment. However, their return is correspondingly lower. Corporate first mortgage bonds are less risky than income bonds or stock because they are secured by specific property. In the event of default, the bondholders can have the property sold to satisfy their claims. Holders of first mortgages have rights paramount to those of any other parties, such as holders of second mortgages. Income bonds pay interest only in the event the corporation earns income. Thus1 holders of income bonds have less risk than shareholders because meeting the condition makes payment of interest mandatory. Preferred shareholders receive dividends only if they are declared, and the directors usually have complete discretion in this matter. Also, shareholders have claims junior to those of debt holders if the enterprise is liquidated.

• Question 966:

  From the view point of the investor, which of the following securities provides the least risk?

  A. Mortgage bond.

  B. Subordinated debenture.

  C. Income bond.

  D. Debentures.

  Correct Answer: A

  A mortgage bond is secured with specific fixed assets, usually real property. Thus, under the rights enumerated in the bond indenture, creditors will be able to receive payments from liquidation of the properly in case of default. In a bankruptcy proceeding, these amounts are paid before any transfers are made to other creditors, including those preferences. Hence, mortgage bonds are less risky than the others listed.

• Question 967:

  The marketable securities with the least amount of default risk are

  A. Federal government agency securities.

  B. U.S. Treasury securities.

  C. Repurchase agreements.

  D. Commercial paper.

  Correct Answer: B

  The marketable securities with the lowest default risk are those Issued by the federal government because they are backed by the full faith and credit of the U.S. government and are therefore the least risky form of investment.

• Question 968:

  Sylvan Corporation has the following capital structure. Debenture bonds $1O, 000.000 Preferred equally 110001000 Common equally 39,000000

  The financial leverage of Sylvan Corporation would increase as a result of

  A. Issuing common stock and using the proceeds to retire preferred stock.

  B. Maintaining the same dollar level of cash dividends as the prior year, even though earnings have increased by 7%.

  C. Financing its future investments with a higher percentage of bonds.

  D. Financing its future investments with a higher percentage of equally funds.

  Correct Answer: C

  Financial leverage is the use of borrowed money to earn money for the benefit of shareholders. The expectation is that investment earnings will be greater than the interest paid on the borrowed funds. Increasing debt (such as bonds) increases financial leverage.

• Question 969:

  The risk of loss because of fluctuations in the relative value of foreign currencies is called

  A. Expropriation risk.

  B. Multinational beta.

  C. Exchange rate risk.

  D. Undiversifiable risk.

  Correct Answer: C

  When amounts to be paid or received are denominated in a foreign currency, exchange rate Fluctuations may result in exchange gains or losses. or example, if a U.S. firm has a receivable fixed in terms of units of a foreign currency, a decline in the value of that currency relative to the U.S. dollar results in a foreign exchange loss.

• Question 970:

  The percentage change in earnings before interest and taxes associated with the percentage change in sales volume is the degree of

  A. Operating leverage.

  B. Financial leverage.

  C. Breakeven leverage.

  D. Combined leverage.

  Correct Answer: A

  Operating leverage is based on the degree to which fixed costs are used in production. Firms may increase fixed costs, such as by automation, to reduce variable costs. The result is a greater degree of operating leverage (DOL), which is the percentage change in net operating income (earnings before interest and taxes) divided by the percentage change in unit sales. Thus, operating leverage is related to the price elastically concept in economics. It can also be determined from dividing the total contribution margin by operating income as expressed in the following formula, given that Q is quantity of units sold, P is unit price, V is unit variable cost, and F is fixed cost Q(P--V) Q(P--V)--F