FIN 301

What is a callable bond? How is it different from a plain vanilla bond?

- Issuers can retire bonds prior to maturity - Bond issuers can use call provisions to take advantage of potential refinancing opportunities should interest rates decrease in the future

What is a sinking fund provision

- Requires the issuer to retire a portion of the bond issue each year - makes the bond less likely to default at maturity because the issuer has paid back more in earlier years and thus can avoid a big lump sum at maturity

what is credit risk (default risk) and what determines it

- Seniority - Collateral - Credit Ratings - Economic Conditions - Company's Financial & Operating Conditions

which of the following statements regarding preferred stocks is correct

- preferred stocks don't typically cary voting rights - preferred stocks pay a fixed amount of dividends each time - preferred shareholders have a priority over common stockholders when it comes to dividends - preferred shareholders have a prior claim on a company's assets if it is liquidated, though they remain subordinate to bondholders - preferred stock investors might have the option to convert their shares into common stocks at a pre determined ratio

Which of the following statements regarding yield spread between Treasury securities and high-yield corporate bonds is CORRECT? 1) Yield spread tends to be higher during economic recessions because investors tend to buy Treasury securities, lowering its rate. 2) Yield spread tends to be higher during economic recessions because investors tend to sell high- yield corporate bonds, boosting its rate. 3) Yield spread tends to be lower during economic recessions because investors tend to buy Treasury securities, boosting its rate 4) Yield spread tends to be lower during economic recessions because investors tend to sell high- yield corporate bonds, lowering its rate. 5) Yield spread tends to move independently of economic conditions.

1 and 2

which of the following will lead to a higher dividend growth rate 1) higher ROE 2) higher dividend payout ratio 3) lower ROE 4) lower dividend payout ratio

1 and 4

an increase in which of the following will increase the current value of a stock according to the Discounted Dividend Model: 1) dividend amount 2) number of future dividends, provided the current number is less than a million 3) investors required rate of return 4) dividend growth rate

1, 3, 4

Which of the following companies are currently rated on AAA by S&P: 1) Microsoft 2) Apple 3) Johnson and Johnson 4) P&G 5) Exxon

1, 3, 5

A bond has a market price that exceeds face value, which of the following features currently apply to this bond: 1) discounted price 2) premium price 3) YTM that exceeds coupon rate 4) YTM less than coupon rate

2 and 4 only

Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?

20 year, zero coupon rate

Which of the following statements is CORRECT regarding bond risk?

All else equal, long-term bonds have less reinvestment risk than short-term bonds.

Which of the following determines the amount of coupon payments the bond issuers have to pay each year?

Annual Coupon Rate

What is the relationship between yield spread and economic conditions?

As economical times get worse, the spread gets wider

What is a convertible bond?

Bondholders have the option to convert bonds to stocks at certain ratio Bondholders tend to convert if the company grows in value

What is interest rate risk (price risk)? What types of bonds have higher interest rate risk?

Bonds with higher average maturity

Which of the following statements about convertible bonds is CORRECT?

Convertible bonds generally have lower yields than non-convertible bonds of similar default risk because they offer the bondholders the option to convert their bonds into common stock.

Which of the following statements about dividend yield is INCORRECT?

Dividend yield is defined as the last quarterly dividend divided by current stock price.

Proxy fight is an attempt by a person or group to gain control of a firm by getting its stockholders to grant them the authority to vote their shares. It is typically used to replace directors on the board and oust the current management team. People implementing the proxy fight have to purchase additional common stock shares in order to increase their voting power during annual meetings. (T/F)

False

Which of the following statements regarding Convertible Bonds is INCORRECT?

Issuers can choose to retire convertible bonds prior to maturity

Which of the following types of bond is exempt from federal taxes

Municipal bonds

What is a puttable bond?

Opposite of callable bonds, bondholders have the right (but not the obligation) to force issuers to repurchase the bond on one or more specified dates prior to maturity

What is a proxy fight? do you need to purchase additional shares to gain votes for a proxy fight?

Outside member of the board is trying to gain support of other shareholders. You don't need to purchase additional shares

Stock XYZ has a P/E ratio of 10. The company has $200 million common stock outstanding and no preferred stock, and its Net Income in the most recent fiscal year is $300 million. Suppose the analysts' consensus about XYZ's fair price is $10, then using P/E valuation approach, stock XYZ is ______.

Overhauled

Which of the following statements regarding shareholders' legal rights is NOT correct?

Preferred shareholders can force the company to pay out dividends.

Which of the following statements is CORRECT? (price risk is another name for interest rate risk)

Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more price risk but less reinvestment risk.

A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?

The bond's YTM is greater than its annual coupon rate

Which of the following statements regarding Callable Bonds is INCORRECT?

The call provision is a favorable option for bond holders

What is Yield to Maturity? How is it different from Annual Coupon rate?

The yield to maturity is the annual rate of return (or interest rate) that a bond buyer will earn under the following assumptions: - The bond is held to maturity (thus the name) - The interest payments are reinvested at the same interest rate (or YTM)

which of the following is an underlying assumption of the discounted dividend model

a stock's value is equal to the discounted present value of the future cash flows which it generates

which is higher? bid or ask price?

ask price

When a bond's YTM is equal to its annual coupon rate, its price should be ________.

at par

the yield spread between high yield corporate bonds and treasury bonds tends to

be higher during economic downturns

What's the relationship between bond price and face value when YTM is equal to annual coupon rate?

bond price and face value are equal to each other

What is reinvestment risk? What types of bonds have higher reinvestment risk?

bonds with lower average maturity

which of the following types of bonds should have a yield that is higher than an otherwise plain vanilla bond

callable bond

all else constant, a bond will sell at ____ when the coupon rate is ____ to maturity

discount; less than

What's the relationship between bond price and YTM?

inverse relationship

which of the following is a type of equity security that has a fixed dividend and a priority status over the other equity securities

preferred stock

in the film "other people's money" jorgey, the chairman of the board directors of the new england wire and cable, fails to agree to all but ___ as the option to save his firm

proxy fight

which of the following statements regarding shareholders legal rights is NOT correct

shareholders have to purchase additional shares from other shareholders in order to increase their voting power during annual meetings

both positive and negative covenants may be included in bond indenture to protect bondholder interest. which of the following is an example of a positive covenant

the firm must disclose financial statements to the bondholders on a regular basis

according to the video about Google's trio-class stock we watched in class, the main reason Google created the class c shares is that ______

the founders wanted to maintain the same control of Google after its stock split

Which of the following statements regarding preferred stock is CORRECT

the preferred stock of a given firm is generally less risky to investors than the same firm's common stock

which of the following represents the rate of return investors could earn if they purchase a bond today at its current price and hold the bond to maturity

yield to maturity