FIN 300 Exam 2

The quoted price of a bond is referred to as the

clean price

The Zuffa Company has a semi-annual coupon bond outstanding. A decrease in the market interest rate will:

increase the market price (bond market prices are inversely related to market interest rates (or YTM))

(Fisher Effect) Real interest rates are defined as nominal rates that have been adjusted for

inflation

The compensation investors demand for accepting interest rate risk

interest rate risk premium

In the dividend growth model, the growth rate must be ________ than the required return

less

Winston Co. has a dividend yield of 5.4% and a total return for the year of 4.8%. What must be true about the stock? ________ capital gains yield

negative

Interest rates that include an inflation premium are referred to as

nominal rates

An unsecured bond with an initial maturity of 10 years or less

note

an unsecured bond with an initial maturity of 10 years or less

note

The secondary market is best defined as the market where ________ shares of stock are ________

outstanding, resold

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?

over the counter

US Treasury bonds are quoted as a percentage of ________

par

An electronic system used by the NYSE for directly transmitting orders to designated market makers

pillar system

Emst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which market?

primary market

The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:

protective covenants

You cannot attend the shareholder's meeting for Company X, so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? ________ voting

proxy

Bonds issued by the US government are considered to be free of

risk

Callable bonds generally have a ________ fund provision

sinking

The difference between the price that a dealer is willing to pay and the price at which they will sell

spread

The pure time value of money is known as the

term structure of interest rates

The break-even tax rate between a taxable corporate bond yielding 7% and a comparable nontaxable municipal bond yielding 5% can be expressed as:

.05/(1-t*) = .07

What is the price at which a dealer will sell a bond?

Asked Price

What is the price at which you will sell a bond to a dealer?

Bid price

What represents dividend yield as used in the dividend growth model (DGM)?

D1/P0

A sinking fund is managed by a trustee for what reason?

Early bond redemption

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers

Floor broker

Which risk premium compensates for the inability to easily resell a bond prior to maturity?

Liquidity

A computer network of securities dealers

NASDAQ

(Yield Curve) A Treasury yield curve plots Treasury interest rates relative to

Time to Maturity

2. Which bond would you generally expect to have the highest yield? a. Risk-free Treasury bond b. Long-term, taxable junk bond c. Nontaxable, highly liquid bond d. Long-term, high-quality, tax-free bond e. Short-term, inflation adjusted bond

b (the riskiest bonds see the highest yields)

A bond that is payable to whomever has physical possession of the bond is said to be in

bearer form

Protective covenants are primarily designed to protect who?

bondholders

An agent who arranges a transaction between a buyer and a seller of equity securities

broker

An agent who maintains an inventory from which he or she buys and sells securities

dealer

A long-term security yielding a fixed rate of interest. Unsecured

debenture

What premium is the compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments?

default risk

A member who acts as a dealer in a limited number of securities on the floor of the NYSE

designated market maker

clean price + accrued interest

dirty price

A decrease in ________ rate will increase the current value of a stock

discount

All else constant, a bond will sell at a ________ when the coupon rate is less than the YTM

discount

What right is never directly granted to all shareholders of a publicly held corporation? Determing the amount of the ________ to be paid per share

dividend

1. Which of the following statements is most FALSE? a. Market expectations of interest rates affect shape of the yield curve. b. Because interest rates tend to fall in response to an economic slowdown, an inverted yield curve is often interpreted as a negative forecast for economic growth c. Bond markets are primarily over-the-counter transactions d. Inverted yield curves tend to precede recessions e. The yield curve tends to be sharply decreasing as the economy comes out of a recession and interest rates are expected to rise

e

2. Which of the following statements is most FALSE? a. When a bond currently has a market price that exceeds par value, its yield to maturity (YTM) must be lower than the coupon rate b. Because interest rates tend to fall in response to an economic slowdown, an inverted yield curve is often interpreted as a negative forecast for economic growth c. Bond markets are primarily over-the-counter transactions d. The yield curve tends to be sharply increasing as the economy comes out of a recession and interest rates are expected to rise e. Inverted yield curves tend to follow recessions

e

1. Which bond would you generally expect to have the highest yield? a. Risk-free Treasury bond b. Nontaxable, highly liquid bond c. Long-term, high-quality, tax-free bond d. Short-term, inflation-adjusted bond e. Long-term, taxable speculative grade bond

e (the highest risk bonds see the highest yields)

What is the formula for capital gains yield as used in the dividend growth model (DGM)?

g (capital gains yield = growth rate)

A newly issued bond has a 7% coupon with semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be:

greater than 7% (the effective rate must be higher than YTM, which equals the coupon rate if a bond is priced at par)