FIN 320 Exam 2 smartbook

¡Supera tus tareas y exámenes ahora con Quizwiz!

ABC co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?

$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years

What is a real rate of return?

-it is a rate of return that has been adjusted for inflation-it is a percentage change in buying power

If you are holding a municipal bond that is trading at par to yield 6%, by how much will your after-tax yield change if your federal income tax bracket increases from 15% to 20%. Assume there are no state or local taxes

0%

treasury bills yielded a nominal average return over 86 years of 3.5% versus an average inflation rate of 3.0% over the same period. This make the real return on T-bills approximately equal to ____

0.5%

bonds used in Ibbotson SBBI long-term U.S. government bond portfolio had maturities of ______ years

20

Roger Ibbotson and Rex Sinquefield presented year-to-year historical rates of return on _____ types of financial investments

5

If you are in the 20% tax bracket, what is your after-tax yield on a par value municipal bond yielding 5%? Ignore state and local taxes.

5%

crossover bonds can also be called ________ bonds

5B

Which of the following are bonds that have actually been issued?

A put bond, a convertible bond, a CoCo bond

What are crossover bonds?

Bonds that have both an investment grade and a junk bond rating

What are "fallen angel" bonds?

Bonds that have dropped from investment grade to junk bond status

websites that allow investors to trade directly with one another are termed ______

ECNs

What are the cash flows involved in the purchase of a 5 year zero coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5 percent

Pay $800 today and receive $1,000 at the end of 5 years

the sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables?

Time to maturity, coupon rate

What are the two unique features of a U.S. federal government bond?

U.S. treasury issues are considered to be default free, U.S. treasury issues are exempt from state income taxes

What is a corporate bond's yield to maturity (YTM)?

YTM is the expected return for an investor who buys the bond today and hold it to maturity, YTM is the prevailing market invest rate for bonds with similar features

the NYSE differs from the NASDAQ primarily because the NYSE has:

a physical location, a face-to-face auction market

in an efficient market ________ investments have a _________ NPV

all; zero

how does the timing and the size of cash flows affect the payback method? Assume the project does pay back within the project's lifetime.

an increase in the size of the first cash inflow will decrease payback period, all else held constant

to find the total bond value, add the present value of the amount paid at maturity to the ________ of the annual coupon payments

annuity present value

percentage returns are more convenient than dollar returns because they:

apply to any amount invested, allow comparison against other investments

the dividend yield for a one-year period is equal to the annual dividend amount divided by the ______

beginning stock price

a person who brings buyers and sellers together is called _____

broker

the percentage change in the price of a stock over a period of time is called its _________

capital gain yield

as an investor in the bond market, why should you be concerned about changes in interest rates?

changes in interest rates cause changes in bond prices

the average return on the stock market can be used to _______

compare stock returns with the returns on other securities

NASDAQ has which of these features?

computer network of securities dealers, multiple market maker system

the ________ price index is a commonly used measure of inflation

consumer

if unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called ________ dividends

cumulative

when interest rates in the market rise, we can expect the price of bonds to _________

decrease

all else constant, the dividend yield will increase if the stock price ______

decreases

preferred stock has preference over common stock in the:

distribution of corporate assets, payment of dividends

what information do we need to determine the value of a stock using the zero growth model?

dividend, discount rate

which of the following represents the valuation of stock using a zero growth model?

dividend/discount rate = D/R

the two potential ways to make money as a stockholder are through _________ and capital appreciation

dividends

Which one of the following is true about dividend growth patterns?

dividends may grow at a constant rate

the __________ rate of return is the difference between the rate of return on a risky asset and the free rate of return

excess

T/F The higher the coupon rate, the greater the interest rate risk, all other things being equal

false

t/f for investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed

false

true or false: Long-term U.S. government bonds used in the Ibbotson-Singquefield studies had 15 years to maturity

false

true or false: from 1900 to 2010, the average stock market risk premium of the U.S. was the highest of all countries

false

true or false: in the Ibbotson-Sinquefield studies, U.S. Treasury bill data is based on T-bills with a maturity of one year

false

true or false: the discount ted cash flow valuation estimates future value as the difference between the market price and the cost of the investment

false

true or false: the dividend yield minus the capital gains yield is the total return percentage

false

A limitation of bond ratings is that they ______

focus exclusively on default risk

If a bond is selling at a discount from its par value, the YTM must be _______ the coupon rate

greater than

In the dividend growth model, the expected return for investors comes from which two sources?

growth rate, dividend yield

the value of a firm is derived using the firm's _______ rate and its _____ rate

growth; discount

"inside quotes" represent the ______ and the ________

highest bid price; lowest ask price

what is the primary concern of the payback period rule?

how long it takes to recover the initial investment

an efficient market is one in which any change in available information will be reflected in the company's stock price ______

immediately

dividends are the _______ component of the total return from investing in a stock

income

when interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows ______

increases

the capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the:

initial stock price

a corporate bond's yield to maturity

is usually not the same as a bond's coupon rate, changes over time

the payback period can lead to foolish decisions if it is used too literally because:

it ignores cash flows after the cutoff date

What is the nominal rate of return on an investment?

it is the actual percentage change in the dollar value of an investment unadjusted for inflation

the bonds of a firm in financial distress may have a market value that is _______ than the face value at maturity

less

If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is ________ $1,000

less than

The Ibbotson-Sinquefield data shows that:

long-term corporate bonds had less risk or variability than stocks, U.S. t-bills had the lowest risk or variability

When using trial and error to compute the yield to maturity (YTM) for 6 percent coupon bond that trades at a premium, the process can be shortened if the initial guess is ______ 6 percent.

lower than

to get the average, or _______ return, the yearly returns are summed and then divided by the number of returns

mean

the discounted cash flow valuation shows that higher cash flows earlier in a project's life are _______ valuable than higher cash flows later on

more

_________ is a measure of how much value is created or added by undertaking an investment

net present value

in capital budgeting, _______ determines the dollar value of a project to the company

net present value

In the Ibbotson-Sinquefield studies, U.S. Treasury bill data is based on T-bills with a maturity of _______ months

one

the fundamental business of the New York stock exchange is to attract

order flow

the ______ method evaluates a project by determining the time needed to recoup the initial investment

payback

normally, the excess rate of return is _______

positive

the risk _________ can be interpreted as the reward for bearing risk

premium

shares of stock are first brought to the market and sold to investors in the _________ market

primary

the excess return is the difference between the rate of return on a risky asset and the _______ rate

risk free

the trading of existing shares occurs in the _______ market

secondary

if a study of a firm's financial information will not lead to gains in the market, then the market must be at least ________ efficient

semi-strong form

the Ibbotson SBBI data show that over the long-term,__________

small-company stocks generated the highest average return, small-company stocks had the highest risk level, T-bills, which has the lowest risk, generated the lowest return

New York stock exchange designated market markers (DMMs) were formerly called ______

specialists

the variance and its square root, the ________ __________, are the most commonly used measures of volatility

standard deviation

which of the following are reasons that make valuing a share of stock more difficult than valuing a bond?

stock has no set maturity, the required rate of return is unobservable, dividends are unknown and uncertain

Which of the following are true based on the year-to-year returns from 1926-2014?

t-bills sometimes outperform common stocks, common stocks frequently experience negative returns

earnings over the coming year are expected to be $3 and a benchmark PE of 15 applies to earnings over the previous year. The ______, or forecast, price for the coming year is $45.

target

if you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk?

the 10 year bond

If you are holding two bonds - one with a 5% coupon rate and the other with an 8% coupon rate - which one is more sensitive to interest rate risk, all other things being equal?

the bond with a 5% coupon rate

which of the following are needed to describe the distribution of stock returns?

the mean return, the standard deviation of returns

what are advantages of the payback period method for management/

the payback period method is ideal for minor projects, the payback period method is easy to use, it allows lower level managers to make small decisions effectively

which of the following ratios might be used to estimate the value of a stock?

the price/earnings ratio, the price/sales ratio

which of the following defines the primary market?

the primary market is where stocks are issued for the first time

which of the following are rights of common stock holders?

the right to share proportionally in any residual value in the event of liquidation, the right to share proportionally in any common dividends paid, the right to vote on matters of importance

the degree of interest rate risk depends on

the sensitivity of the bond's price to interest rate changes

Junk bonds have the following features

they are rated below investment grade

the following are weaknesses of the payback method:

time value of money principles are ignored, the cutoff date is arbitrary, cash flow received after the payback period are ignored

T/F Low-grade bonds may not be rated by major rating agencies

true

T/F longer - term bonds have greater interest rate sensitivity because a large portion of a bond's value comes from the face amount

true

true or false Roger Ibbotson and Rex Sinquefield conducted a famous set of studies dealing with rates of return in U.S. financial markets

true

true or false a capital gain on a stock is counted as part of the total return whether or not the gain realized from selling the stock

true

true or false: A capital loss is the same thing as a negative capital gain

true

true or false: the normal distribution is completely described by the average and standard deviation

true

true or false: the risk premium can be interpreted as a reward for bearing risk

true

true or false: total return is calculated by adding the dividend yield and the capital gains yield

true

the square of the standard deviations is equal to the _________

variance

the efficient markets hypothesis contends that ________ capital markets such as the NYSE are efficient

well organized

Most of the time, a floating-rate bond's coupon adjusts ____

with a lag to some base rate

What four variables are required to calculate the value of a bond?

yield to maturity, coupon rate, par value, time remaining to maturity

if the growth rate is zero, the capital gains yield is ________

zero

three special case patterns of dividend growth discussed in the text include:

zero growth, non-constant growth, constant growth


Conjuntos de estudio relacionados

Mastering Biology CH. 3&4 (Pearson)

View Set