# Chapter 10 Smartbook Questions -- Finance

If preferred stock had a maturity date, it would be valued in the same manner as Blank______. Multiple choice question. lease obligations bonds common stock

bonds

Select all that apply Types of risk(s) associated with the risk premium include Blank______? Multiple select question. business risk bond valuation risk financial risk inflationary risk

business risk financial risk

If the rate of return required of a financial asset increases, the value of the financial asset will Multiple choice question. decrease remain unchanged increase

decrease

There is a strong Blank______ between the risk the investor takes and the return the investor demands. Multiple choice question. correlation valuation inverse relationship imbalance

correlation

If the required rate of return increases as a result of inflation or increased risk, the value of common stock will Blank______. Multiple choice question. decrease increase remain unchanged

decrease

Select all that apply The rate of return required by bondholders is called Blank______? Multiple select question. discount rate bond rate stated rate yield to maturity

discount rate yield to maturity

The required rate of return is also known as the Blank______ rate? Multiple choice question. lower-of-market interest discount present

discount

Preferred stock usually represents a perpetuity because it has Multiple choice question. no dividend payments no interest payments no maturity date

no maturity date

If the interest rate stated on the bond is equal to the yield to maturity (discount rate), the bonds will sell for Multiple choice question. par value more than par value (a premium) less than par value (a discount)

par value

The valuation of a financial asset is based on determining the Blank______ value of future cash flows. Multiple choice question. market future present return

present

The value of a share of common stock may be interpreted as the Multiple choice question. present value of an expected stream of future dividends future value of an expected stream of dividends present value of the expected principal payment future value of the expected principal payment

present value of an expected stream of future dividends

The real rate of return is the financial Blank______ the investor charges for using his or her funds for a given period of time. Multiple choice question. discount premium rent allowance

rent

The Blank______ rate of return depends on the market's perceived level of risk associated with a security. Multiple choice question. required market risky formal

required

Y, in the bond market, represents the required rate of return for bonds of a given Blank______ and maturity. Multiple choice question. return risk rate amount

risk

Select all that apply The market allocates capital to companies based on Multiple select question. risk efficiency expected returns lowest costs

risk efficiency expected returns

A premium associated with special risks associated with a given investment is known as Blank______. Multiple choice question. real rate premium risk premium risk-free premium inflation premium

risk premium

Select all that apply What needs to be known to determine the current value of a financial asset. Multiple select question. future cash flows discount rate future value factor price of the asset

future cash flows discount rate

The capital gains yield can be interpreted as the Blank______ rate in a dividend growth model because we know that the dividend growth rate is the rate at which the share price grows also. Multiple choice question. risk-free inflation discount growth

growth

If the required rate of return decreases as a result of deflation or decreased risk, the value of common stock will Blank______. Multiple choice question. decrease remain unchanged increase

increase

An addition to the real rate of return required by investors to compensate for the effect of inflations is known as Blank______? Multiple choice question. float premium inflation premium risk premium yield to maturity

inflation premium

Select all that apply The price at which a bond sells for is equal to the present value of the Multiple select question. yield to maturity required rate of return principal interest payments

principal interest payments

The rate of return the investor demands for giving up the current use of funds on a noninflation-adjusted basis is called Blank______? Multiple choice question. stated rate of return risk premium inflation premium real rate of return

real rate of return

The real rate of return is the financial Blank______ the investor charges for using his or her funds for a given period of time. Multiple choice question. allowance discount rent premium

rent

A premium associated with special risks associated with a given investment is known as Blank______. Multiple choice question. real rate premium risk-free premium inflation premium risk premium

risk premium

Match the risk premium with the appropriate investment Instructions 0% 15% 3% 10% Very-short-term U.S. government backed securities Low -risk corporate bonds High-risk corporate bonds Gold mining expedition

0% Very-short-term U.S. government backed securities 15% Gold mining expedition 3% Low -risk corporate bonds 10% High-risk corporate bonds

If the stated interest rate on the bond is 10%, what is the yield to maturity (discount rate) that will cause the bond to trade at par value? Multiple choice question. 12% 10% 8% 0%

10%

Historically, the real rate of return demanded by investors has been about Blank______? Multiple choice question. 2 to 3 percent 1 to 2 percent 3 to 5 percent 6 to 10 percent

2 to 3 percent

If the real rate of return is 5% and the inflation premium is 3%, what is the risk-free rate of return? Multiple choice question. 8% 3% 5% 2%

8%

What is the reward to financial managers who use capital efficiently? Multiple choice question. Lower costs Higher profits A lower present value A lower required return

A lower required return

Assume a bond's stated rate is 8% and the yield to maturity is 6%, will the bonds sell for par value, above par value, or below par value? Multiple choice question. Below par value Par value Above par value

Above par value

Assume a bond's stated rate is 5% and the yield to maturity is 6%, will the bonds sell for par value, above par value, or below par value? Multiple choice question. Above par value Par value Below par value

Below par value

A bond provides an _______ _______ which is a stream of interest payments of equal amount for a period of time.

Blank 1: annuity Blank 2: stream

Select all that apply Which factor(s) would cause the bond to sell above par value (for a premium)? Multiple select question. Decreased business risk Decreased inflation Increased inflation Increased business risk

Decreased business risk Decreased inflation

Match the term on the left with the appropriate definition on the right Instructions risk-free rate of return inflation premium real rate of return the amount required by the investor for the use of funds adjusted for the erosion of the value of the dollar combines the real rate of return and the inflation premium the amount required by the investor for the use of funds on a noninflation-adjusted basis

risk-free rate of return combines the real rate of return and the inflation premium inflation premium the amount required by the investor for the use of funds adjusted for the erosion of the value of the dollar real rate of return the amount required by the investor for the use of funds on a noninflation-adjusted basis

The longer the life of a financial asset Multiple choice question. the more attractive the investment the less attractive the investment the less the impact of a change in the required rate of return the greater the impact of a change in the required rate of return.

the greater the impact of a change in the required rate of return.

The Blank______ has the shortest time to maturity among government bonds. Multiple choice question. interest rate base rate treasury bill

treasury bill

To determine the price of a bond, the interest payments and the principal must be discounted by the Blank______ Multiple choice question. yield to maturity interest payments future value bonds stated interest rate

yield to maturity

Higher risk investments potentially lead to higher potential return and lower potential loss. True false question.

False

Which of the following is a hybrid security? Multiple choice question. Common Stock Lease obligation Preferred Stock Bonds

Preferred Stock

Select all that apply Preferred stock is a hybrid security because it Multiple select question. does not have the ownership privilege of common stock does have the ownership privilege of common stock does not have the legally enforceable provisions of debt does have the legally enforceable provisions of debt

does not have the ownership privilege of common stock does not have the legally enforceable provisions of debt

Stockholders may be influenced by changes in earnings and other factors, but the ultimate value rests with the distribution of Multiple choice question. earnings interest principal preferred stock dividends

earnings

Select all that apply The market allocates capital to companies based on Multiple select question. efficiency lowest costs risk expected returns

efficiency risk expected returns

The two components of the dividend growth model are the dividend yield and growth rate (capital gains yield). How is the dividend yield calculated in this model? Multiple choice question. Current price divided by the expected cash dividend. Total return divided by the expected cash dividend. Expected cash dividend divided by the total return. Expected cash dividend divided by the current price.

Expected cash dividend divided by the current price.

Select all that apply Which factor(s) would cause the bond to sell below par value (for a discount)? Multiple select question. Increased inflation Increased business risk Decreased inflation Decreased business risk

Increased inflation Increased business risk

Select all that apply What factors influence the bondholder's or investor's required rate of return? Multiple select question. Inflation premium Real rate of return Risk premium Amount of investment

Inflation premium Real rate of return Risk premium

Select all that apply The price of a bond is based on which cash flow(s)? Multiple select question. Interest payments Principal payment at maturity The amount received for the bond The future values

Interest payments Principal payment at maturity

Select all that apply The price of a bond is based on which cash flow(s)? Multiple select question. The amount received for the bond Interest payments Principal payment at maturity The future values

Interest payments Principal payment at maturity

The rate of return that compensates the investor for current use of funds and the loss in purchasing power. Multiple choice question. Risk premium rate of return Stated rate of return Risk-free rate of return Inflation premium rate of return

Risk-free rate of return

The rate of return that compensates the investor for current use of funds and the loss in purchasing power. Multiple choice question. Stated rate of return Risk premium rate of return Risk-free rate of return Inflation premium rate of return

Risk-free rate of return

Risk premiums on common stock are generally higher than bonds due to bonds' contractually required interest payments to the investors. True false question.

True

Cash flows are discounted at Y. What does Y represent? Multiple choice question. Valuation concept Time value of money Market position Yield to maturity

Yield to maturity

The size of the inflation premium required by an investor is Multiple choice question. above 10% based on expectations of future inflation based on past results of inflation 2 to 3 percent

based on expectations of future inflation

The inability of a firm to hold its competitive position and maintain stability and growth in earnings is known as Blank______. Multiple choice question. business risk inflationary risk premium risk financial risk

business risk

The value of stocks and bonds is based on the present value of the future Multiple choice question. value table factor costs only cash flows revenues only

cash flows

Select all that apply Valuation concepts can be applied to Multiple select question. common stock retained earnings preferred stock bonds

common stock preferred stock bonds

At the time of maturity, the repayment amount for bonds is equal to the: Multiple choice question. face amount less unamortized discount face amount of the bonds face amount plus unamortized premium

face amount of the bonds

The inability of a firm to meet debt obligations as they come due is known as Blank______. Multiple choice question. premium risk inflationary risk financial risk business risk

financial risk