FIN 355 quiz 4-6

if the yeild curve were downward sloping, the yield maturity on a 10 year T-coupon bond would be higher than that on a 1 year T-bill a. True b. False

b. False

Stocks A and B have the same price and are in equilibrium, but stock A has the higher required rate of return. Which of the following is CORRECT? a. If stock A has a lower dividend yield than stock B, its expected capital gains yield must be higher than stock B's b. Stock B must have a higher dividend yield than Stock A. c. Stock B must have a higher dividend yield than stock B. d. If Stock A has a higher dividend yield than stock B, its expected capital gains yield must be lower than stock B's. e. Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B.

a. If stock A has a lower dividend yield than stock B, its expected capital gains yield must be higher than stock B's

If the demand curve for the funds increased but the supply curve remained constant, we would expect to see the total amount of funds supplied and demanded increase and interest rates in general also increase. a. True b. False

a. True

The four most important factors that affect the cost of money are production opportunities, time preference for consumption, risk, and inflation. a. True b. False

a. True

The risk that interest rates will decline, and that decline will lead to a decline in the income provided by a bond portfolio as interest and maturity payments are reinvested, is called "reinvestment rate risk." a. True b. False

a. True

Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par? a. Adding additional restrictive covenants that limit managements actions. b. Adding a call provision c. The rating agencies change the bonds rating from Baa to Aaa d. Making the bond a first mortgage bond rather than a debenture e. Adding a sinking fund.

b. Adding a call provision

If the markets in equilibrium, which of the following conditions will exist? a. Each stocks expected return should equal its realized return as seen by the marginal investor. b. Each stocks expected return should equal its required return as seen by the marginal investor. c. All stocks should have the same expected return as seen by the marginal investor. d. The expected and required returns on stocks and bonds should be equal. e. All stocks should have the same realized return during the coming year.

b. Each stocks expected return should equal its required return as seen by the marginal investor.

During periods when inflation is increasing, interest rates tend to decrease, while interest rates tend to increase when inflation is declining. a. True b. False

b. False

Which of the following statements is correct? a. a major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights. b. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firms common stock and as a result the expected after tax yield on the preferred is lower than the after tax expected return on the common stock c. the preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase new issues of preferred stock. d. one of the disadvantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible

b. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firms common stock and as a result the expected after tax yield on the preferred is lower than the after tax expected return on the common stock

Assume that interest rates on a 20-yr treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond= 7.72% A=9.64% AAA=8.72% BBB= 10.18% The difference in rates among these issues were most probably caused by: a. Real risk free rate differences b. Tax effects c. Default and Liquidity risk differences d. maturity risk differences e. Inflation differences

c. Default and Liquidity risk differences

A 15 year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT? a. The bonds coupon rate exceeds its current yield b. The bonds current yield exceeds its yield to maturity c. The bonds yield to maturity is greater than its coupon rate. d. The bonds current yield is equal to its coupon rate e. If the yield to maturity stays constant until the bond matures, the bonds price will remain at $850

c. The bonds yield to maturity is greater than its coupon rate.

If in the opinion of a given investor a stocks expected return exceeds its required return, this suggests that the investors think: a. the stock is experiencing supernormal growth. b. the stock should be sold. c. the stock is a good buy. d. management is probably not trying to maximize the price per share. e. dividends are not likely to be declared.

c. the stock is a good buy.

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price. a. An 8 year bond with 9% coupon b. A 1 year bond with 15% coupon c. A 3 year bond with a 10% coupon d. A 10 year zero coupon bond e. A 10 year bond with a 10% coupon

d. A 10 year zero coupon bond

For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true? a. The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation. b. The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation. c. The beta of the portfolio is less than the weighted average of the betas of the individual stocks. d. The beta of the portfolio is equal to the weighted average of the betas of the individual stocks e. The beta of the portfolio is larger than the weighted average of the betas of the individual stocks.

d. The beta of the portfolio is equal to the weighted average of the betas of the individual stocks

The preemptive right is important to shareholders because it: a. allows managers to buy additional shares below the current market price. b. will result in higher dividends per share. c. is included in every corporate charter d. protects the current shareholders against dilution of their ownership interests. e. protects bondholders, and thus enables the firm to issue debt with a relatively low interest.

d. protects the current shareholders against dilution of their ownership interests.

Which of the following statements is CORRECT? a. All else equal, high-coupon bonds have less reinvestment risk than low coupon bonds. b. All else equal, long term bonds have less price risk than short term bonds. c. All else equal, low coupon bonds have less price risk than high coupon bonds. d. All else equal, short term bonds have less reinvestment risk than long term bonds e. All else equal, long term bonds have less reinvestment risk than short term bonds.

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