Insurance and Risk Management

231. Other things being equal, a rise in the price of a company's shares:

  1. Reduces the cost of equity capital
  2. Increases its costs of capital
  3. Means that fewer shares will be demanded
  4. Reduces the price of its bonds
  5. Makes it a takeover target

Correct answer: (A)
Reduces the cost of equity capital

232. Other things being equal, according to the base multiplier analysis of money supply determination, a decrease in banks' reserve ratios will lead to:

  1. A larger multiplier and decrease in the money supply
  2. A reduction in demand for deposits
  3. A smaller multiplier and reduction in money supply
  4. A rise in interest rates
  5. A larger multiplier and increase in the money supply

Correct answer: (E)
A larger multiplier and increase in the money supply

233. Other things being equal, according to the base multiplier analysis of money supply determination, an increase in the public's cash ratio will lead to:

  1. Less spending
  2. A larger multiplier and increase in the money supply
  3. An increase in demand for deposits
  4. A smaller multiplier and reduction in money supply
  5. A smaller multiplier and increase in the money supply

Correct answer: (D)
A smaller multiplier and reduction in money supply

234. Other things being equal, lenders prefer to lend for short periods because:

  1. They can earn higher interest
  2. The future is uncertain
  3. They have more choice
  4. They can reinvest frequently
  5. This suits borrowers

Correct answer: (B)
The future is uncertain

235. Pension and life insurance funds hold few short-term assets because:

  1. Their cashflows are predictable
  2. Most people live for a long time
  3. Long-term assets are more profitable
  4. Short-term assetsare too dear
  5. Short-term assets are too risky

Correct answer: (A)
Their cashflows are predictable

236. Shares in ABC plc. have an â-coefficient of 0.9. The risk free rate of interest is 4 per cent p.a. while the return on a whole market portfolio is 15 per cent. The last dividend paid by the firm was 10p per share and earnings have grown steadily in recent years at 9 per cent p.a. The share price (to the nearest whole p) will be:

  1. 222p
  2. 242p
  3. 168p
  4. 204p
  5. 154p

Correct answer: (A)
222p

237. Standard and Poor's bond rating agency reduces your firm's bond rating from AA+ to AA. The likely effect on your firm's bonds will be:

  1. The price will rise
  2. Investors will prefer your company's shares
  3. Investors will not hold them
  4. Your firm will find new bond issues impossible
  5. The price will fall

Correct answer: (E)
The price will fall

238. Suppose that the Bank of England cuts interest rates by 0.5 per cent. Other things being equal, the change in the price of shares in Q.7 will be:

  1. -95p
  2. -3p
  3. 11p
  4. 165p
  5. 70p

Correct answer: (C)
11p

239. Suppose that the β-coefficient of ABC shares (in Q6) increases to 1.1. Other things being equal, the new share price would be:

  1. 62p
  2. 95p
  3. 141p
  4. 68p
  5. 154p

Correct answer: (E)
154p

240. Suppose that three year interest rates rise from 5 per cent to 6 per cent while one year rates remain at 3 per cent. This suggests:

  1. Three year bonds have become less liquid
  2. Short term interest rates are likely to rise in future
  3. Three year bonds have become more risky
  4. Investors have become more risk averse
  5. The central bank has raised three year rates

Correct answer: (B)
Short term interest rates are likely to rise in future

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