Business Finance Exam 2 (5,6,7,8)

If a bond has a market value that is higher than its par value, then the required return on the bond must be less than the bond's coupon rate.

True

For a given stated interest rate, an investor would receive a greater future value with daily compounding as opposed to monthly compounding.

True

If a bond sells for its par value, the coupon interest rate and yield to maturity are equal.

True

In an efficient market, the market value and intrinsic value of a security should be equal.

True

The expected rate of return implied by a given market price equals the required rate of return for investors at the margin.

True

The present value of a deferred annuity (e.g., an annuity that starts 10 years from today) can be calculated in two steps: (1) calculate the future value of the annuity, and (2) calculate the present value of the amount determined in step (1).

True

The same underlying formula is used for computing both the future value and present value.

True

The use of a call provision in addition to a sinking fund can effectively create a maturity date for preferred stock.

True

Total risk equals systematic risk plus unsystematic risk.

True

A call provision allows the issuing firm the opportunity to avoid rising interest rates by calling investors and asking for more cash.

False

Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value.

False

An investment earning simple interest is preferred over an investment earning compound interest because the simplicity adds value.

False

Because risk is measured by variability of returns, how long we hold our investments does not matter very much when it comes to reducing risk.

False

Bond A has a current yield of 6% and Bond B has a current yield of 8%. If the market price of both bonds is the same, then the yield to maturity on Bond B must be higher than the yield to maturity on Bond A.

False

Convertibility is a common feature of common stock; it allows the common stockholders to convert their common shares into preferred shares or into bonds.

False

For a well-diversified investor, an investment with an expected return of 10% with a standard deviation of 3% dominates an investment with an expected return of 10% with a standard deviation of 5%.False

False

If a firm does not have enough money to pay any preferred stock dividends, it is technically in default to the shareholders.

False

In general, interest on bonds, like dividends on preferred stock, may be deferred until a later date at the discretion of management, making debt financing more appealing to corporate managers.

False

Shareholders, as owners of the corporation, face unlimited liability for the corporationʹs debts, while bondholders, as creditors, may only lose the value of their investment if the company goes bankrupt.

False

The S&P 500 index must be used as the measure of market return in the CAPM or the results are not theoretically accurate.

False

The Wall Street Journal bond quotes indicate that the net close for a bond with a $1,000 par value is100 3/4. The closing price for that bond was $100.75.

False

The beta of a T-bill is one.

False

The change in the value of a corporationʹs common stock as the result of growth is the same regardless of whether the growth is the result of internal growth or the infusion of new capital.

False

The most relevant form of growth for valuing a firmʹs common stock is infusion of new capital.

False

The value of a bond is the present value of both the future interest to be received and the price of the bond.

False

A common stock with an expected dividend growth rate of zero would be valued in the same way as preferred stock, that is, the expected dividend divided by the required return.

True

A firm's bond rating would be favorably affected if they have a low use of financial leverage (debt).

True

A rational investor would prefer to receive $1,200 today rather than $100 per month for 12 months.

True

A share of preferred stock that pays the same annual dividend forever is an example of a perpetuity.

True

Although under normal operating conditions preferred shareholders do not have voting rights, protective provision generally allow for voting rights in the event of nonpayment of preferred dividends.

True

An example of a Eurobond is a bond issued in Asia by a U.S. Corporation with interest and principal payments made in U.S. dollars.

True

It is never appropriate to compare nominal rates unless they include the same number of compounding periods per year.

True

Small company stocks have historically had higher average annual returns than large company stocks, and also a higher risk premium.

True

Subordinated debentures are more risky than unsubordinated debentures because the claims of subordinated debenture holders are less likely to be honored in the event of liquidation.

True

The CAPM designates the risk-return trade-off existing in the market, where risk is defined in terms of beta.

True

The T-bill return is used in the CAPM model as the risk-free rate

True

The amount of the preferred stock dividend is generally fixed either as a dollar amount or as a percentage of the par value.

True

The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

True

Another name for an asset's expected rate of return is holding-period return.

False