D775 Financial Markets, Ratios, and Derivatives: Key Concepts Questions and answers 2026

What is true about options in financial derivatives?

They give the buyer the right, but not the obligation, to buy or sell an asset.

How do funds benefit from economies of scale?

By making large-scale investments that reduce transaction costs.

What is an initial public offering (IPO)?

The first sale of a company's stock to the public.

What is an example of a secondary market activity?

The trading of stocks on the New York Stock Exchange.

What are the two main types of financial markets based on their functions?

Primary markets and secondary markets.

What is a role of financial regulators?

Ensuring fair and transparent markets.

What are depository institutions?

Institutions that accept deposits and provide loans.

What is the primary source of revenue for depository institutions?

Interest income from loans.

How does rising Consumer Price Index (CPI) affect businesses?

It indicates increased costs for raw materials and labor.

How can companies demonstrate a commitment to corporate social responsibility (CSR)?

Supporting education and healthcare initiatives.

What is the impact of integrating environmental, social, and governance (ESG) criteria into investment decisions?

Promoting sustainable and ethical practices.

Which role do ethical considerations play in addressing agency problems?

Aligning managers' goals with shareholders' interests.

What is the purpose of using financial ratios for investors?

To evaluate the company's potential for return on investment.

How do financial ratios help in comparing companies?

By providing a standardized basis for performance evaluation.

How do financial ratios aid in performance benchmarking?

They allow comparison with industry standards and competitors.

What do profitability ratios indicate?

Earnings relative to revenue.

What does the current ratio evaluate?

Short-term liquidity.

What does a high average collection period indicate?

A slow conversion of receivables to cash.

What does a high current ratio suggest about a company's financial health?

Strong liquidity.

What does a high accounts receivable turnover rate indicate?

Frequent receivables collection.

What does a high debt-to-assets ratio suggest?

Heavy reliance on liabilities.

What does a high times interest earned ratio signify?

Ability to cover debt payments.

What does a high return on assets suggest?

Effective asset usage.

Which ratio reflects an ability to pay interest on debt as it becomes due?

Times interest earned ratio.

What is the primary difference between fixed asset turnover and return on assets?

Fixed asset turnover is an activity ratio; Return on assets is a profitability ratio.

Which ratio identifies the profitability relative to equity?

Return on equity.