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GISI Intermediate - independent subject foundations study materials
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GISI Intermediate - independent subject foundations practice questions

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Question 1National accounts, money and fiscal reasoning

How does a significant depreciation of the Ghana Cedi (GHS) against major currencies like the US Dollar typically affect inflation in Ghana?

  1. It lowers inflation by making foreign products cheaper for local consumers.
  2. It causes cost-push inflation due to higher import costs of fuel, raw materials, and finished goods. Correct answer.
  3. It has no impact on inflation because Ghana is entirely self-sufficient in manufacturing.
  4. It lowers inflation by reducing the nominal money supply in the domestic banking system.

Explanation

As a net importer of fuel, raw materials, and finished goods, a weaker Ghana Cedi directly raises the domestic price of imports, leading to imported cost-push inflation.

Question 2National accounts, money and fiscal reasoning

In macroeconomics, the "crowding-out effect" refers to a situation where:

  1. High commercial bank reserve requirements crowd out foreign direct investment (FDI).
  2. Increased government borrowing to finance fiscal deficits drives up interest rates, reducing private investment. Correct answer.
  3. A surge in equity listings on the Ghana Stock Exchange crowds out investor demand for government bonds.
  4. Central bank open market sales crowd out commercial banks from secondary bond markets.

Explanation

When the government borrows aggressively from the domestic market to fund its budget deficit, it competes with the private sector for loanable funds, pushing up interest rates and crowding out private sector investment.

Question 3National accounts, money and fiscal reasoning

Under the Balance of Payments (BOP) accounting framework, where would a direct investment by a foreign multinational company to build a factory in Ghana be recorded?

  1. The Current Account under merchandise trade.
  2. The Capital and Financial Account under Foreign Direct Investment (FDI). Correct answer.
  3. The Current Account under net secondary income.
  4. The Official Reserve Account under IMF drawings.

Explanation

Foreign Direct Investment (FDI), which involves purchasing physical assets or establishing a business presence, is recorded in the financial account of the Capital and Financial Account.

Question 4National accounts, money and fiscal reasoning

Which of the following is a direct consequence of a country operating under a structural fiscal deficit that is continuously monetized by the central bank?

  1. A steady appreciation of the domestic currency.
  2. An increase in the domestic money supply leading to demand-pull inflationary pressures. Correct answer.
  3. A long-term decrease in nominal interest rates.
  4. A structural surplus in the Balance of Payments current account.

Explanation

Monetizing fiscal deficits (printing money to buy government debt) directly increases the monetary base, expanding credit and demand, which leads to demand-pull inflation.

Question 5National accounts, money and fiscal reasoning

According to the Fisher Effect, if the expected real interest rate in a stable economy is 3% and the expected inflation rate increases from 10% to 15%, what will happen to the nominal interest rate?

  1. The nominal interest rate will remain constant at 13%.
  2. The nominal interest rate will increase from approximately 13% to approximately 18%. Correct answer.
  3. The nominal interest rate will fall to 5% to stimulate growth.
  4. The nominal interest rate will increase to 28% to double the inflation rate.

Explanation

The Fisher Equation states that Nominal Interest Rate ≈ Real Interest Rate + Expected Inflation. When expected inflation increases by 5 percentage points (from 10% to 15%), the nominal rate adjusts upward from 13% (3% + 10%) to 18% (3% + 15%).

Question 6National accounts, money and fiscal reasoning

How is the Gross Domestic Product (GDP) deflator calculated, and what does it measure?

  1. Nominal GDP divided by Real GDP, multiplied by 100; it measures changes in consumer price inflation only
  2. Nominal GDP divided by Real GDP, multiplied by 100; it measures price changes for all domestically produced goods and services Correct answer.
  3. Real GDP divided by Nominal GDP, multiplied by 100; it measures the purchasing power of the national currency
  4. Nominal GDP minus Real GDP; it measures the net economic growth adjusted for international trade balances

Explanation

The GDP deflator is calculated as (Nominal GDP / Real GDP) * 100. It measures the level of prices of all new, domestically produced, final goods and services in an economy, reflecting aggregate price changes across the entire GDP rather than a fixed basket of consumer goods.

Question 7National accounts, money and fiscal reasoning

Which of the following describes the marginal lending facility of the European Central Bank (ECB)?

  1. A facility used by commercial banks to make overnight deposits with the national central banks
  2. A facility for commercial banks to obtain overnight liquidity from the Eurosystem against eligible assets Correct answer.
  3. The rate at which the ECB conducts weekly standard tenders to provide liquidity to commercial banks
  4. The regulatory body that manages the reserve requirements for banks operating in the Eurozone

Explanation

The marginal lending facility is a standing facility of the ECB that commercial banks can use to obtain overnight liquidity from the Eurosystem against eligible collateral. The interest rate on this facility normally provides a ceiling for the overnight market interest rate.

Question 8National accounts, money and fiscal reasoning

How does a policy of Quantitative Easing (QE) by the European Central Bank typically affect the sovereign yield curve?

  1. It leads to a parallel shift upward of the yield curve due to increased money supply expectations
  2. It flattens the yield curve by lowering long-term interest rates through the purchase of long-term government bonds Correct answer.
  3. It steepens the yield curve because short-term interest rates fall faster than long-term yields
  4. It makes the yield curve highly volatile and inverted across all maturities due to credit rating downgrades

Explanation

Quantitative Easing (QE) involves the central bank purchasing long-term securities, such as government bonds, in the open market. This increase in demand raises bond prices and lowers their yields, which typically flattens the sovereign yield curve by compressing long-term interest rates.

Question 9National accounts, money and fiscal reasoning

What is deflation, and why is it considered a major risk to economic stability?

  1. A persistent decrease in the general price level of goods and services; it increases the real burden of debt and causes consumers to delay purchases Correct answer.
  2. A temporary drop in prices of specific agricultural commodities; it reduces agricultural production and leads to food supply shocks
  3. An increase in the value of the currency on foreign exchanges; it hurts export industries by making domestic goods more expensive abroad
  4. A rapid rise in interest rates by the central bank; it stops investment projects and raises unemployment rates

Explanation

Deflation is a sustained decrease in the general price level of goods and services. It is risky because it raises the real value of debt (debt deflation) and encourages consumers and businesses to postpone spending in anticipation of even lower prices, potentially leading to a recessionary spiral.

Question 10National accounts, money and fiscal reasoning

According to the Phillips Curve concept, what is the relationship between the output gap and inflation?

  1. A negative output gap (actual output below potential) is associated with rising demand-pull inflation
  2. A positive output gap (actual output above potential) leads to upward pressure on wages and inflation Correct answer.
  3. There is no relationship between the output gap and inflation in either the short run or the long run
  4. A positive output gap leads to supply-side deflation due to productivity improvements

Explanation

A positive output gap occurs when actual economic output exceeds potential output, indicating that resources are over-utilized. This high demand for labor and inputs leads to wage hikes and rising production costs, putting upward pressure on inflation.

Question 11National accounts, money and fiscal reasoning

In which phase of the business cycle is an investor most likely to see fixed income assets outperform equities?

  1. Expansion, because corporate earnings are rising rapidly
  2. Peak, because consumer demand and capacity utilization are at their highest
  3. Contraction (Recession), because interest rates fall and demand for safe-haven assets increases Correct answer.
  4. Trough, because the economy starts to recover and inflationary pressures begin to build

Explanation

During a contraction or recession, corporate earnings contract, causing equity values to fall. Central banks typically lower interest rates to stimulate the economy, which drives bond prices up, allowing fixed income assets to outperform equities.

Question 12National accounts, money and fiscal reasoning

Which of the following economic indicators is considered a leading indicator of economic activity?

  1. The unemployment rate, as it changes months after an economic shift has occurred
  2. Purchasing Managers' Index (PMI) new orders component, as it reflects future production plans Correct answer.
  3. The Consumer Price Index (CPI), because it measures the current inflation level
  4. The duration of average unemployment, as it reflects structural changes in labor dynamics

Explanation

The PMI new orders component is a leading indicator because purchasing managers adjust their raw materials orders based on anticipated customer demand, which signals future changes in industrial output before they appear in aggregate production statistics.

Question 13National accounts, money and fiscal reasoning

In the balance of payments of a country, where are unilateral transfers (such as foreign aid or personal remittances) recorded?

  1. Capital account, because they involve transfers of wealth
  2. Financial account, as they involve financial claims against foreigners
  3. Current account, under secondary income (current transfers) Correct answer.
  4. Errors and omissions, to balance the statistical differences

Explanation

Unilateral transfers such as personal remittances, foreign aid, and charitable donations do not involve any quid pro quo (exchange of goods or financial assets). They are recorded in the current account under the category of secondary income (current transfers).

Question 14National accounts, money and fiscal reasoning

According to the theory of Purchasing Power Parity (PPP), what determines the long-run exchange rate between two currencies?

  1. The nominal interest rate differential between the two countries
  2. The ratio of the price levels of a basket of goods in the two countries Correct answer.
  3. The relative supply of gold and foreign exchange reserves held by their central banks
  4. The balance on the capital account between the two nations

Explanation

Purchasing Power Parity (PPP) states that in the long run, exchange rates adjust so that a basket of identical goods costs the same in both countries when expressed in a common currency. Thus, the exchange rate is determined by the ratio of the domestic price levels.

Question 15National accounts, money and fiscal reasoning

Which of the following is an example of an automatic stabilizer in Eurozone fiscal policy?

  1. A discretionary tax cut passed by parliament during a recession
  2. Progressive income taxes and unemployment benefit systems Correct answer.
  3. Emergency liquidity assistance provided to banks by the national central bank
  4. The annual adjustment of the minimum wage in response to trade union agreements

Explanation

Automatic stabilizers are structural features of government budgets that automatically dampen business cycle fluctuations without explicit legislative action. Progressive income taxes (tax revenue falls during downturns) and unemployment benefits (spending rises during downturns) naturally support aggregate demand during recessions.

Question 16Economic data, indices and statistical reasoning

An investor places GHS 20,000 in a fixed-deposit account at a Ghanaian bank. If the account pays an annual interest rate of 12% compounded quarterly, what will be the value of the investment at the end of 2 years?

  1. GHS 24,800.00
  2. GHS 25,088.00
  3. GHS 25,335.40 Correct answer.
  4. GHS 25,424.12

Explanation

Using the compound interest formula: FV = PV * (1 + r/m)^(m*n). Here, PV = 20,000, r = 0.12, compounding periods per year (m) = 4, and years (n) = 2. FV = 20,000 * (1 + 0.12/4)^(4*2) = 20,000 * (1.03)^8 = GHS 25,335.40.

Question 17Economic data, indices and statistical reasoning

Which of the following statements regarding the relationship between the present value (PV) and future value (FV) of a cash flow is correct, holding other factors constant?

  1. As the discount rate increases, the present value of a future cash flow increases.
  2. As the number of compounding periods increases, the future value of a present sum decreases.
  3. As the time until a cash flow is received increases, its present value decreases. Correct answer.
  4. The present value of an annuity due is always less than the present value of an ordinary annuity.

Explanation

The present value formula PV = FV / (1 + r)^n shows that time (n) is in the denominator. As time increases, the discount factor grows, making the present value smaller.

Question 18Economic data, indices and statistical reasoning

What is the present value of a perpetual stream of GHS 5,000 annual dividends from a preferred stock, assuming a required rate of return of 16%?

  1. GHS 31,250.00 Correct answer.
  2. GHS 36,250.00
  3. GHS 42,000.00
  4. GHS 80,000.00

Explanation

The present value of a perpetuity is calculated as PV = PMT / r. Here, PMT = GHS 5,000 and r = 0.16. PV = 5,000 / 0.16 = GHS 31,250.00.

Question 19Economic data, indices and statistical reasoning

An investment project has an initial cash outlay of GHS 100,000. It is expected to generate GHS 40,000 in Year 1, GHS 50,000 in Year 2, and GHS 60,000 in Year 3. If the cost of capital is 15%, what is the Net Present Value (NPV) of the project?

  1. GHS 8,245.50
  2. GHS 12,040.76 Correct answer.
  3. GHS 15,000.00
  4. GHS 50,000.00

Explanation

NPV = -Initial Outlay + [CF1 / (1+r)^1] + [CF2 / (1+r)^2] + [CF3 / (1+r)^3]. Discounting at 15%: PV of CF1 = 40,000 / 1.15 = 34,782.61; PV of CF2 = 50,000 / 1.15^2 = 37,807.18; PV of CF3 = 60,000 / 1.15^3 = 39,450.97. Sum of PV of cash inflows = GHS 112,040.76. Subtracting the initial cost of GHS 100,000 yields NPV = GHS 12,040.76.

Question 20Economic data, indices and statistical reasoning

An analyst calculates the historical annual returns of a mutual fund over three years as: +20%, -10%, and +15%. What is the geometric mean return of the fund over this period?

  1. 7.49% Correct answer.
  2. 8.33%
  3. 9.12%
  4. 25.00%

Explanation

Geometric Mean = [(1.20) * (0.90) * (1.15)]^(1/3) - 1 = (1.242)^(1/3) - 1 = 1.0749 - 1 = 7.49%.

Question 21Economic data, indices and statistical reasoning

Which measure of portfolio performance or return calculation is preferred when assessing the performance of a fund manager whose client controls the timing of capital additions and withdrawals?

  1. Money-weighted rate of return (MWRR)
  2. Time-weighted rate of return (TWRR) Correct answer.
  3. Holding period return (HPR)
  4. Arithmetic average return

Explanation

The Time-weighted rate of return (TWRR) is not affected by cash inflows and outflows, making it the preferred method to evaluate the investment choices of a fund manager who has no control over the timing of client cash deposits/withdrawals.

Question 22Economic data, indices and statistical reasoning

Assume that the correlation coefficient between the returns of Stock A and Stock B is -0.60. If the standard deviation of Stock A is 15% and Stock B is 20%, what is the covariance between the returns of Stock A and Stock B?

  1. -0.0180 Correct answer.
  2. -0.0300
  3. 0.0450
  4. 0.1200

Explanation

Covariance = Correlation * SD_A * SD_B. Covariance = -0.60 * 0.15 * 0.20 = -0.0180 (or -1.8%).

Question 23Financial statements, assets, inventory and cash-flow models

Under International Financial Reporting Standards (IFRS), which of the following is NOT required to be included in a complete set of financial statements?

  1. Statement of Financial Position
  2. Statement of Profit or Loss and Other Comprehensive Income
  3. Corporate Social Responsibility (CSR) Report Correct answer.
  4. Notes to the Financial Statements, including summary of accounting policies

Explanation

A complete set of financial statements under IAS 1 includes Statement of Financial Position, Statement of Profit or Loss and Other Comprehensive Income, Statement of Changes in Equity, Statement of Cash Flows, and Notes. A CSR report is voluntary and not a mandated core financial statement.

Question 24Financial statements, assets, inventory and cash-flow models

A retail firm operating in Accra has Current Assets of GHS 80,000, consisting of GHS 20,000 cash, GHS 30,000 accounts receivable, and GHS 30,000 inventory. If its Current Liabilities are GHS 40,000, what is the firm's Quick Ratio?

  1. 0.50
  2. 1.25 Correct answer.
  3. 2.00
  4. 2.50

Explanation

Quick Ratio = (Current Assets - Inventory) / Current Liabilities = (80,000 - 30,000) / 40,000 = 50,000 / 40,000 = 1.25.

Question 25Financial statements, assets, inventory and cash-flow models

If a company reports Net Income of GHS 50,000, Depreciation Expense of GHS 10,000, an Increase in Accounts Receivable of GHS 5,000, and a Decrease in Accounts Payable of GHS 3,000, what is its Cash Flow from Operating Activities (CFO) using the indirect method?

  1. GHS 32,000
  2. GHS 52,000 Correct answer.
  3. GHS 58,000
  4. GHS 62,000

Explanation

CFO = Net Income + Depreciation - Increase in Accounts Receivable - Decrease in Accounts Payable. CFO = 50,000 + 10,000 - 5,000 - 3,000 = GHS 52,000.

Question 26Financial statements, assets, inventory and cash-flow models

Under IFRS 15 (Revenue from Contracts with Customers), what is the first step in the five-step model for revenue recognition?

  1. Identify the performance obligations in the contract.
  2. Identify the contract(s) with a customer. Correct answer.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations.

Explanation

The five steps are: 1) Identify the contract(s) with a customer; 2) Identify the performance obligations; 3) Determine the transaction price; 4) Allocate the transaction price; 5) Recognize revenue when/as performance obligations are satisfied.

Question 27Financial statements, assets, inventory and cash-flow models

Using the three-part DuPont analysis framework, a firm's Return on Equity (ROE) can be decomposed into which three ratios?

  1. Net Profit Margin, Asset Turnover, and Financial Leverage Multiplier. Correct answer.
  2. Gross Profit Margin, Inventory Turnover, and Debt-to-Equity Ratio.
  3. Operating Profit Margin, Current Ratio, and Debt Ratio.
  4. Net Profit Margin, Total Asset Turnover, and Quick Ratio.

Explanation

ROE = Net Profit Margin (Profitability) * Total Asset Turnover (Efficiency) * Equity Multiplier (Leverage). This is the classic 3-step DuPont equation.

Question 28Financial statements, assets, inventory and cash-flow models

During a period of rising prices (inflation), which inventory valuation method allowed under IFRS results in the highest reported net income and highest ending inventory balance?

  1. First-In, First-Out (FIFO) Correct answer.
  2. Last-In, First-Out (LIFO)
  3. Weighted Average Cost
  4. Specific Identification

Explanation

Under inflation, FIFO assigns the oldest, lower-cost inventory to Cost of Goods Sold (COGS), resulting in lower COGS and higher net income. The remaining ending inventory is valued at recent higher prices. Note: LIFO is not permitted under IFRS.

Question 29Financial statements, assets, inventory and cash-flow models

A manufacturing company purchases equipment for GHS 120,000 with an expected useful life of 5 years and a salvage value of GHS 20,000. In the second year, what will be the depreciation expense under the straight-line method vs. the double-declining balance (DDB) method?

  1. Straight-line: GHS 20,000; DDB: GHS 28,800 Correct answer.
  2. Straight-line: GHS 24,000; DDB: GHS 48,000
  3. Straight-line: GHS 20,000; DDB: GHS 48,000
  4. Straight-line: GHS 24,000; DDB: GHS 28,800

Explanation

Straight-line = (Cost - Salvage) / Life = (120,000 - 20,000) / 5 = GHS 20,000/year. Double-declining rate = 2/5 = 40%. Year 1 DDB = 120,000 * 40% = GHS 48,000. Book value at start of Year 2 = 120,000 - 48,000 = GHS 72,000. Year 2 DDB = 72,000 * 40% = GHS 28,800.

Question 30Financial appraisal, financing and conditional valuation models

What is the cost of equity capital for a firm listed on the Ghana Stock Exchange if its beta is 1.2, the risk-free rate (yield on 91-day Treasury bill) is 15%, and the expected market return is 22%?

  1. 15.00%
  2. 22.00%
  3. 23.40% Correct answer.
  4. 31.40%

Explanation

Using CAPM: Cost of Equity = Rf + Beta * (Rm - Rf) = 15% + 1.2 * (22% - 15%) = 15% + 1.2 * (7%) = 15% + 8.4% = 23.4%.

Question 31Financial appraisal, financing and conditional valuation models

Which of the following capital budgeting evaluation methods is structurally superior when evaluating mutually exclusive projects with differing scales of investment and conflicting IRR and NPV results?

  1. Net Present Value (NPV) because it measures absolute wealth creation. Correct answer.
  2. Internal Rate of Return (IRR) because it measures percentage efficiency.
  3. Payback Period because it measures liquidity and cash recovery time.
  4. Accounting Rate of Return (ARR) because it uses book profit metrics.

Explanation

NPV is the preferred metric for mutually exclusive projects because it maximizes absolute shareholder wealth and assumes reinvestment at the cost of capital, whereas IRR assumes reinvestment at the project's IRR (which can be unrealistic).

Question 32Financial appraisal, financing and conditional valuation models

A corporate manager calculates a firm's Degree of Financial Leverage (DFL) as 2.5. If the firm's Operating Income (EBIT) increases by 10%, what will be the percentage change in Earnings Per Share (EPS)?

  1. 4.00%
  2. 10.00%
  3. 25.00% Correct answer.
  4. 250.00%

Explanation

DFL measures the sensitivity of EPS to changes in EBIT: % Change in EPS = DFL * % Change in EBIT = 2.5 * 10% = 25%.

Question 33Financial appraisal, financing and conditional valuation models

A company's capital structure consists of 60% equity and 40% debt. The cost of equity is 20%, and the before-tax cost of debt is 12%. If the marginal corporate tax rate in Ghana is 25%, what is the firm's Weighted Average Cost of Capital (WACC)?

  1. 14.80%
  2. 15.60% Correct answer.
  3. 16.80%
  4. 18.00%

Explanation

WACC = (Weight of Equity * Cost of Equity) + (Weight of Debt * Cost of Debt * [1 - Tax Rate]) = (0.60 * 20%) + (0.40 * 12% * [1 - 0.25]) = 12% + (4.8% * 0.75) = 12% + 3.6% = 15.6%.

Question 34Financial appraisal, financing and conditional valuation models

Which working capital policy is characterized by a firm financing all its permanent current assets and a portion of its seasonal temporary current assets with long-term debt and equity?

  1. Conservative approach Correct answer.
  2. Aggressive approach
  3. Matching (maturity matching) approach
  4. Restrictive approach

Explanation

The conservative approach uses long-term capital (low risk, high cost) to finance permanent assets and some temporary assets, keeping short-term debt financing to a minimum.

Question 35Financial appraisal, financing and conditional valuation models

According to the "bird-in-the-hand" theory of dividend policy proposed by Myron Gordon and John Lintner:

  1. Shareholders are indifferent between dividends and capital gains.
  2. Dividends are taxed at a lower rate than capital gains, so investors prefer high payouts.
  3. Investors prefer high current dividends over future capital gains because current dividends are less risky. Correct answer.
  4. Dividends serve as a negative signal about a firm's future investment opportunities.

Explanation

The bird-in-the-hand theory argues that investors value current dividend payments more highly than uncertain future capital gains, so a higher dividend payout reduces the required return and increases stock price.

Question 36Financial appraisal, financing and conditional valuation models

An Accra-based distributor has a Cash Conversion Cycle (CCC) of 45 days. If its Days Inventory Outstanding (DIO) is 30 days and Days Sales Outstanding (DSO) is 40 days, what is the firm's Days Payable Outstanding (DPO)?

  1. 15 days
  2. 25 days Correct answer.
  3. 35 days
  4. 115 days

Explanation

Cash Conversion Cycle = DIO + DSO - DPO. Substituting values: 45 = 30 + 40 - DPO → 45 = 70 - DPO → DPO = 70 - 45 = 25 days.

Question 37Financial appraisal, financing and conditional valuation models

A company listed on the Ghana Stock Exchange paid a dividend of GHS 2.00 yesterday. If the dividends are expected to grow at a constant rate of 6% per year indefinitely, and the required rate of return is 14%, what is the estimated intrinsic value of the stock using the Gordon Growth Model?

  1. GHS 14.28
  2. GHS 25.00
  3. GHS 26.50 Correct answer.
  4. GHS 33.33

Explanation

Gordon Growth Model: V0 = D1 / (k - g). Here, D0 = GHS 2.00. Expected dividend next year (D1) = D0 * (1 + g) = 2.00 * (1.06) = GHS 2.12. V0 = 2.12 / (0.14 - 0.06) = 2.12 / 0.08 = GHS 26.50.

Question 38Financial appraisal, financing and conditional valuation models

A bond has a face value of GHS 1,000, a coupon rate of 10% paid annually, and a maturity of 3 years. If the market required yield (YTM) is 12%, what is the price of the bond?

  1. GHS 951.96 Correct answer.
  2. GHS 1,000.00
  3. GHS 1,050.00
  4. GHS 1,120.00

Explanation

Bond Price = PV of coupons + PV of principal. Coupon = 10% * 1000 = GHS 100. Price = [100 / (1.12)^1] + [100 / (1.12)^2] + [100 / (1.12)^3] + [1,000 / (1.12)^3] = 89.29 + 79.72 + 71.18 + 711.78 = GHS 951.97 (closest option: 951.96).

Question 39Financial appraisal, financing and conditional valuation models

If a GHS 1,000 face value bond with a coupon rate of 12% is currently trading in the secondary market at GHS 960, what is the Current Yield of the bond?

  1. 11.50%
  2. 12.00%
  3. 12.50% Correct answer.
  4. 13.20%

Explanation

Current Yield = Annual Coupon Payment / Bond Market Price = (12% * 1,000) / 960 = 120 / 960 = 0.125 = 12.50%.

Question 40Financial appraisal, financing and conditional valuation models

Under equity valuation, the Price-to-Earnings (P/E) multiple of a firm is directly related to its dividend payout ratio (payout) and inversely related to its:

  1. Expected earnings growth rate (g).
  2. Required rate of return (k). Correct answer.
  3. Book value of assets.
  4. Debt-to-equity ratio.

Explanation

P/E = (Payout Ratio) / (k - g). As k (required rate of return) increases, the denominator (k - g) increases, causing the P/E ratio to fall. Thus, P/E is inversely related to the required return.

Question 41Financial appraisal, financing and conditional valuation models

What is the value of a share of preferred stock that pays a constant annual dividend of GHS 8.00 if the required rate of return is 10%?

  1. GHS 8.00
  2. GHS 80.00 Correct answer.
  3. GHS 100.00
  4. GHS 180.00

Explanation

Preferred stock value is valued as a perpetuity: V0 = D / k = 8.00 / 0.10 = GHS 80.00.

Question 42Financial appraisal, financing and conditional valuation models

If a bond's Macaulay duration is 6 years, and its yield to maturity is 8%, what is the modified duration of the bond?

  1. 4.82 years
  2. 5.56 years Correct answer.
  3. 6.00 years
  4. 6.48 years

Explanation

Modified Duration = Macaulay Duration / (1 + y/m). For annual payments (m=1): Modified Duration = 6 / (1 + 0.08) = 6 / 1.08 = 5.56 years.

Question 43Financial appraisal, financing and conditional valuation models

Which of the following describes the relationship between bond price sensitivity and coupon rate, holding maturity and yield constant?

  1. Bonds with lower coupon rates have higher interest rate sensitivity (duration) than bonds with higher coupon rates. Correct answer.
  2. Bonds with higher coupon rates have higher interest rate sensitivity than bonds with lower coupon rates.
  3. Coupon rates have no effect on bond price sensitivity.
  4. Bond price sensitivity is only affected by maturity, not coupon.

Explanation

Bonds with lower coupon rates pay less of their cash flows early. Thus, more of the bond's total value is concentrated at maturity, resulting in a higher duration and greater price sensitivity to interest rate changes.

Question 44Financial appraisal, financing and conditional valuation models

Enterprise Value (EV) of a firm is calculated as:

  1. Market Capitalization + Total Debt - Cash and Cash Equivalents. Correct answer.
  2. Market Capitalization + Total Assets - Total Liabilities.
  3. Net Income * P/E Multiple.
  4. Total Equity + Long-term Debt.

Explanation

EV measures the total value of a company as a functioning business. It is computed as the market value of equity (market cap) plus debt (which an acquirer must assume) minus cash (which reducing the acquisition cost).

Question 45Investment instruments, portfolios and measured performance

An open-end mutual fund has total assets of GHS 12,000,000 and total liabilities of GHS 2,000,000. If the fund has 1,000,000 shares outstanding, what is its Net Asset Value (NAV) per share?

  1. GHS 10.00 Correct answer.
  2. GHS 12.00
  3. GHS 14.00
  4. GHS 20.00

Explanation

NAV per share = (Total Assets - Total Liabilities) / Shares Outstanding = (12,000,000 - 2,000,000) / 1,000,000 = 10,000,000 / 1,000,000 = GHS 10.00.

Question 46Investment instruments, portfolios and measured performance

An investor wishes to buy shares in an "open-end" mutual fund. How are these shares purchased and priced?

  1. Purchased from other investors on the stock exchange at a price determined by supply and demand.
  2. Purchased directly from the fund company at the current Net Asset Value (NAV) per share calculated at the next market close. Correct answer.
  3. Purchased from the central bank at a fixed coupon price.
  4. Purchased on the primary market during an initial public offering (IPO) only.

Explanation

Open-end mutual funds continuously issue new shares and redeem existing shares directly with investors. Transactions occur at the NAV per share calculated at the end of the trading day (forward pricing).

Question 47Investment instruments, portfolios and measured performance

Which of the following is a primary duty of a fund manager of a collective investment scheme in Ghana under Act 929?

  1. Holding physical possession of all securities in the portfolio.
  2. Making investment decisions and managing the portfolio in accordance with the scheme's investment objectives. Correct answer.
  3. Guaranteeing that the fund will out-perform the Ghana Stock Exchange index.
  4. Executing independent audits of the fund's accounting records.

Explanation

The fund manager is responsible for investment management, selecting and trading assets to achieve the fund's objectives.

Question 48Investment instruments, portfolios and measured performance

A closed-end fund is currently trading on the Ghana Stock Exchange at a price of GHS 8.50. The fund's reported Net Asset Value (NAV) per share is GHS 10.00. How should this fund be characterized?

  1. Trading at a premium of 15%
  2. Trading at a discount of 15% Correct answer.
  3. Trading at par value
  4. Trading in a speculative bubble

Explanation

Discount or Premium = (Market Price - NAV) / NAV = (8.50 - 10.00) / 10.00 = -1.50 / 10.00 = -15%. Since the market price is below NAV, the fund is trading at a 15% discount.

Question 49Investment instruments, portfolios and measured performance

According to portfolio theory, which type of risk can be effectively reduced or eliminated through diversification across a large number of uncorrelated assets?

  1. Market risk (systematic risk)
  2. Unsystematic risk (specific risk) Correct answer.
  3. Inflation risk
  4. Interest rate risk

Explanation

Unsystematic (specific or business) risk is unique to individual companies. By holding a diversified portfolio, these idiosyncratic events offset each other, reducing unsystematic risk to near zero.

Question 50Investment instruments, portfolios and measured performance

In the Capital Asset Pricing Model (CAPM), what does a stock's beta measure?

  1. The standalone volatility (standard deviation) of the stock's returns.
  2. The systematic risk of the stock relative to the overall market portfolio. Correct answer.
  3. The expected dividend growth rate of the stock.
  4. The historical pricing error relative to book value.

Explanation

Beta measures the sensitivity of a security's returns relative to the returns of the market portfolio. It is the measure of systematic risk used in CAPM.