Question 1

Firms that face a _____tax rate structure have an incentive to hedge, because it can reduce the firm's expected tax liability.
A)flat
B)regressive (or concave)
C)decelerating
D)progressive (or convex)

Accepted Answer

Firms facing a progressive (or convex) tax rate structure, where tax rates increase with the level of income, have an incentive to hedge. Hedging can stabilize income, potentially keeping the firm in lower tax brackets and reducing the expected tax liability over time.

Question 2

The ______is a convertible bond in which the date of conversion is fixed in advance.
A)managed convertible.
B)mandatory convertible.
C)fixed convertible.
D)dated convertible.

Accepted Answer

Mandatory convertible bonds are a type of convertible bond that requires the bondholder to convert the bond into a predetermined number of shares of the issuing company at a specific date. This conversion is not optional but mandatory, hence the name.

Question 3

A ____contract is a private, tailored, bilateral agreement between two parties in which one party agrees to purchase, and the other to sell, a specified number of units of a specified asset at a given future date and at a specified price.
A)swap
B)forward
C)futures
D)warrant

Accepted Answer

A forward contract is a private agreement between two parties to buy and sell an asset at a specified price on a future date, which matches the description given. Unlike futures contracts, which are standardized and traded on exchanges, forward contracts are customizable and traded over-the-counter.

Question 4

The ______gives the bond issuer an option to redeem a specified fraction of the bond issue within a specified period at a predetermined price, but only by using funds from a subsequent equity offering.
A)subsequent events provision
B)clawback provision
C)contingency provision
D)conversion provision

Accepted Answer

The clawback provision allows the bond issuer the option to redeem a portion of the bond issue within a certain timeframe at a predetermined price, specifically using funds from a future equity offering. This provision is designed to protect the issuer's interests by allowing them to "claw back" some of the bonds if they can raise money through equity, potentially reducing their debt obligations.

Question 5

The two constructs that form a firm's organizational architecture are:
A)business architecture and economic architecture.
B)economic architecture and financial architecture.
C)business architecture and financial architecture.
D)organizational hierarchy and financial structure.

Accepted Answer

Business architecture defines the firm's core business processes, while financial architecture defines the firm's financial structure and funding sources.

Question 6

With a make whole call provision:
A)the firm to pay a call price that is sufficient to provide bondholders an ex post return equal to the return they would have received on a noncallable Treasury bond with the same original maturity as the called bond.
B)the firm must retire either the entire (or whole) bond issue or none of the bonds.
C)bondholders are allowed to redeem their bonds at par value.
D)the firm has the option to restore bondholders' wealth by issuing new bonds, that would sell at par value, in exchange for the original bonds.

Accepted Answer

A make whole call provision requires the firm to compensate bondholders in such a way that they receive a return equivalent to what they would have earned had they invested in a similar noncallable Treasury bond, ensuring they are not financially disadvantaged by the call.

Question 7

Regarding components and elements of the firm's business architecture, which of the following represents the logical direction of causality (i.e., in terms of which component/element drives another component/element) generally runs as follows (indicated by arrows):
A)macroeconomic & fin.market environments $\rightarrow$internal legal & governance structures.
B)diversification versus focus$\rightarrow$ industry characteristics.
C)business strategies and growth opportunities$\rightarrow$ financial market environment.
D)size and capital intensity$\rightarrow$ macroeconomic & financial market environments.

Accepted Answer

The answer of Regarding components and elements of the firm's...

Question 8

Regarding a firm's overall organizational architecture, the direction of causality (i.e., in terms of which components/elements drive other components/elements) generally runs:
A)business architecture$\rightarrow$financial architecture.
B)financial architecture$\rightarrow$business architecture.
C)economic architecture$\rightarrow$financial architecture.
D)financial architecture$\rightarrow$economic architecture.

Accepted Answer

The business architecture typically drives the financial architecture, as the business model and strategy determine the financial needs and structure.

Question 9

___bonds pay coupon interest in the form of additional bonds instead of cash.
A)Deferred coupon
B)Payment-in-kind
C)Zero-coupon
D)In lieu

Accepted Answer

Payment-in-kind bonds pay coupon interest by issuing additional bonds to the holder instead of paying interest in cash.

Question 10

A swap contract is in essence a portfolio, or series, of _________
A)forward contracts.
B)futures contracts.
C)repurchase agreements.
D)resettlement agreements.

Accepted Answer

A swap contract is essentially a portfolio, or series, of forward contracts. Swaps involve the exchange of cash flows between two parties based on specified variables, with the terms often resembling those of forward contracts, which are agreements to buy or sell an asset at a future date for a price agreed upon today.

Question 11

Which of the following is NOT a valid reason for a firm to establish subsidiaries?
A)to better control risk exposure of either parent-to- subsidiary or subsidiary-to-parent.
B)to enhance the company's ability to evaluate individual performance and to create different compensation systems for a diverse set of its businesses.
C)to obfuscate financial reporting.
D)to conform with regulatory requirements specific to a particular business environment.

Accepted Answer

Establishing subsidiaries to obfuscate financial reporting is not considered a valid or ethical reason. It implies manipulating or hiding financial information, which is against transparency and good corporate governance principles. The other options (A, B, and D) are legitimate strategic reasons for a firm to establish subsidiaries.

Question 12

Which of the following is NOT an element of investors' preferences that influences a firm's financial architecture?
A)preferences for work vs.leisure
B)liquidity needs
C)investment horizon
D)risk tolerance

Accepted Answer

Preferences for work vs. leisure do not directly influence a firm's financial architecture. Financial architecture is shaped by factors directly related to investment decisions, such as liquidity needs, investment horizons, and risk tolerance, rather than personal lifestyle choices like work-leisure balance.

Question 13

Futures trading features daily ____(i)_in cash and ____(ii)____. 
$\begin{array}{ll}
&\_\_(i)\_\_&\_\_(ii)\_\_\
a.&\text { closing } & \text { marking-to-market } \
b.&\text { resettlement } & \text { closing } \
c.&\text { resettlement } & \text { marking-to-market } \
d.&\text { swapping } & \text { marking-to-market }
\end{array}$

Accepted Answer

The answer of Futures trading features daily ____(i)_in cash and...

Question 14

The macroeconomic component of a firm's business architecture includes all of the following elements EXCEPT:
A)economic growth projections, inflation, and taxes.
B)industry characteristics.
C)legal environment.
D)macroeconomic risk factors.

Accepted Answer

Industry characteristics are considered a part of the microeconomic environment of a firm, focusing on the conditions within the industry such as competition, supplier and customer dynamics, rather than the broader macroeconomic components like economic growth, inflation, taxes, legal environment, and overall economic risk factors.

Question 15

____has become an important means by which huge infrastructure projects are privately financed.
A)Private placement financing
B)Infrastructure funding
C)Project finance
D)Country finance

Accepted Answer

Project finance is a method where financial institutions lend money for large infrastructure projects based directly on the projected cash flows of the project rather than the balance sheets of its sponsors. This has become a crucial way to privately finance large-scale infrastructure projects.

Quiz 19: Organizational Architecture, Risk Management, and Security Design

Firms that face a _____tax rate structure have an incentive to hedge, because it can reduce the firm's expected tax liability.

The ______is a convertible bond in which the date of conversion is fixed in advance.

A ____contract is a private, tailored, bilateral agreement between two parties in which one party agrees to purchase, and the other to sell, a specified number of units of a specified asset at a given future date and at a specified price.

The ______gives the bond issuer an option to redeem a specified fraction of the bond issue within a specified period at a predetermined price, but only by using funds from a subsequent equity offering.

The two constructs that form a firm's organizational architecture are:

With a make whole call provision:

Regarding components and elements of the firm's business architecture, which of the following represents the logical direction of causality (i.e., in terms of which component/element drives another component/element) generally runs as follows (indicated by arrows) :

Regarding a firm's overall organizational architecture, the direction of causality (i.e., in terms of which components/elements drive other components/elements) generally runs:

___bonds pay coupon interest in the form of additional bonds instead of cash.

A swap contract is in essence a portfolio, or series, of _________

Which of the following is NOT a valid reason for a firm to establish subsidiaries?

Which of the following is NOT an element of investors' preferences that influences a firm's financial architecture?

The macroeconomic component of a firm's business architecture includes all of the following elements EXCEPT:

____has become an important means by which huge infrastructure projects are privately financed.