FINA 3770 Test 2

A bond is a​ ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future. short−term equity long−term equity long−term debt short−term debt

long−term debt

​"Junk" bonds are a street name for​ ________ grade bonds. speculative and investment extremely speculative investment speculative

speculative

When a bond is​ callable, the ability to call the bond is an option for​ ________. the bond issuer the bond purchaser the trustee holding the bond a mutual decision between the issuer and the purchaser of the bond

the bond issuer

In regards to the fact that the pricing of stocks is more difficult than the pricing of​ bonds, which of the below statements is​ FALSE? Cash​ dividends, unlike coupons for​ bonds, typically change from year to year. The ending price of the stock at any point in time is not fixed like the par value of the principal. A​ stock's final sale is fixed in time on its maturity date. Because a stock has no maturity​ date, the number of its payments are unknown.

A​ stock's final sale is fixed in time on its maturity date.

Shaky Company has just issued a​ five-year bond with a yield of​ 9%; Stable Company has issued an identical​ five-year bond, but with a yield of​ 7%. Why did the market demand a higher return from​ Shaky? Companies with poor financials tend to compensate investors for the liquidity risk by issuing bonds with high yields. Companies with poor financials tend to compensate investors for the systematic risk by issuing bonds with high yields. Companies with poor financials tend to compensate investors for the inflation risk by issuing bonds with high yields. Companies with poor financials tend to compensate investors for the default risk by issuing bonds with high yields.

Companies with poor financials tend to compensate investors for the default risk by issuing bonds with high yields.

Ben has just purchased a​ long-term government bond and expects to make a​ 7% return. Donna has just purchased a stock in a new startup​ company, but expects to make a​ 20% return. Why is Donna expecting a higher​ return? Donna is expecting a higher return on the stock due to both the maturity premium and default premium. Donna is expecting a higher return on the stock due to the maturity premium only. Donna is expecting a higher return on the stock due to change in the​ risk-free interest rate. Donna is expecting a higher return on the stock due to the default premium only.

Donna is expecting a higher return on the stock due to both the maturity premium and default premium.

A bull market is a prolonged declining market. True False

False

If a bond is selling at a premium above the par value that means that the yield to maturity is greater than the coupon rate. True False

False

Which of the following types of bonds may the buyer sell back before​ maturity? Zero−coupon bond Putable bond Callable bond Convertible bond

Putable bond

Which of the statements below is​ FALSE? The reward for postponing consumption implies that at the end of the year you will be able to buy more goods. The prices of goods and services tend to decrease over time because of inflation. The real interest rate is the reward for waiting. Nominal interest rates are the sum of two major​ components: the real interest rate and expected inflation.

The prices of goods and services tend to decrease over time because of inflation.

Which of the following are issued with the shortest time to​ maturity? Treasury bills Treasury bonds Treasury notes Treasury stocks

Treasury bills

Most U.S. corporate and government bonds choose to make​ ________ coupon payments. quarterly annual monthly semiannual

semiannual

Which of the statements below is​ FALSE? A typical practice of many companies is to distribute part of the earnings to shareholders through cash dividends. For the​ shareholder, receipt of dividends is a taxable event. Unlike coupon payments on​ bonds, which are treated as an interest expense of the​ firm, common stock dividends are considered a return of capital to shareholders and not an expense of the firm. The payment of cash dividends to shareholders is a deductible expense for the company.

The payment of cash dividends to shareholders is a deductible expense for the company.

The most common shape for a yield curve is upward sloping. True False

True

When interest rates are stated or given for loan​ repayments, it is assumed that they are​ ________ unless specifically stated otherwise. effective annual rates APYs daily rates annual percentage rates

annual percentage rates

Stocks differ from bonds​ because: the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase. firms pay bond cash flows prior to paying taxes while stock cash flows are after tax. bond cash flows are known while stock cash flows are uncertain. All of the above

All of the above

Which of the following statements is​ FALSE? The period in which interest is applied or the frequency of times interest is added to an account each year is called the compounding period or compounding periods per year. Although an APR is quoted on an annual​ basis, interest can be paid monthly but never daily. The APR can be referred to as a promised annual percentage rate. Although an APR is quoted on an annual​ basis, interest can be paid quarterly.

Although an APR is quoted on an annual​ basis, interest can be paid monthly but never daily.

​________ refers to how quickly information is reflected in the available prices for trading. Market efficiency Informational efficiency Mechanical efficiency Operational efficiency

Informational efficiency

Which of the statements below is​ FALSE? Selling of shares is the selling of ownership in the company. A company is said to go​ "public" when it opens up its ownership structure to the general public through the sale of common stock. Most companies have the resident expertise to complete an initial public offering​ (IPO) or first public equity issue. Companies choose to sell stock to attract permanent financing through equity ownership of the company.

Most companies have the resident expertise to complete an initial public offering​ (IPO) or first public equity issue.

​________ has to do with the speed and accuracy of processing a buy or sell order at the best available price. Mechanical efficiency Market efficiency Operational efficiency Informational efficiency

Operational efficiency

Which of the statements below is​ FALSE? It is common for companies to issue preferred stock with the right to convert to common shares after a specific waiting period. Preferred stock cannot be converted into common stock. Preferred stock does not have a maturity date. Preferred​ shareholders' dividend claims take precedence over common​ shareholders' dividend claims.

Preferred stock cannot be converted into common stock.

Which of the following statements is​ TRUE? Preferred stock usually has a stated or par value​ and, like​ bonds, this par value is not repaid at maturity because preferred stocks do not have a maturity date. The par value for preferred​ stock, unlike​ bonds, is never paid back. Some preferred stocks are cumulative with respect to​ dividends, meaning that if a company skips a cash​ dividend, it must pay it at some point in the future. A preferred​ stock's cash dividend due each year is based on the stated dividend rate times the market value of the stock.

Some preferred stocks are cumulative with respect to​ dividends, meaning that if a company skips a cash​ dividend, it must pay it at some point in the future.

The U.S. government offers two​ bonds: one selling to yield​ 6.5% and the other to yield​ 8.5%. Why would one bond sell for a lower yield if the originator is the same on both​ bonds? The difference between the yields of the U.S. government bonds is due to the default premium of the investments. The difference between the yields of the U.S. government bonds is due to the liquidity premium of the investments. The difference between the yields of the U.S. government bonds is due to the forward premium of the investments. The difference between the yields of the U.S. government bonds is due to the maturity premium of the investments.

The difference between the yields of the U.S. government bonds is due to the maturity premium of the investments.

Which of the statements below is​ FALSE? The longer the​ loan, the greater the risk of nonpayment and the lower the interest rate the lender demands. The difference in rates as the borrowing time or investment horizon increases is due to the maturity premium of the investments. The maturity premium represents that portion of the yield that compensates the investor for the additional waiting time or the lender for the additional time it takes to receive repayment in full. If you invest money for a short period and buy a six−month ​CD, you will not receive as high an interest rate as if you bought a CD with a longer maturity period.

The longer the​ loan, the greater the risk of nonpayment and the lower the interest rate the lender demands.

Which of the statements below is​ FALSE? Stock is a major financing source for public companies. Shareholders elect the board of​ directors, which ultimately selects the management team that runs the day−to−day operations of the company. The profits for common stock owners come before payment to​ employees, suppliers,​ government, and creditors. Common​ stock's ownership claim on the assets and cash flow of a company is often referred to as a residual claim.

The profits for common stock owners come before payment to​ employees, suppliers,​ government, and creditors.

Which of the statements below is​ FALSE? Some firms issue several classes of common​ stock, and these classes may have unequal voting rights. Shareholders with super voting right shares have multiple votes per share − a fact that increases their influence and control over the company. Common stock usually carries the right to participate in the management of the firm through the right to vote for the members of the Board of Directors and for changes to the charter and bylaws of the company. The standard of one vote for each share cannot be altered.

The standard of one vote for each share cannot be altered.

There are two major markets for the sale of​ stock: the primary market and the secondary market. True False

True

Which of the following statements about the relationship between yield to maturity and bond prices is​ FALSE? A bond selling at a premium means that the coupon rate is greater than the yield to maturity. A bond selling at a discount means that the coupon rate is less than the yield to maturity. When the yield to maturity and coupon rate are the​ same, the bond is called a par value bond. When interest rates go​ up, bond prices go up.

When interest rates go​ up, bond prices go up.

Which of the following statements is TRUE if you increase your monthly payment above the required loan​ payment? The extra portion of the payment increases the principal. The extra portion of the payment does not go to the principal. You can significantly reduce the number of payments needed to pay off the loan. You can significantly increase the number of payments needed to pay off the loan.

You can significantly reduce the number of payments needed to pay off the loan.

A company selling a bond is​ ________ money. taking lending reinvesting borrowing

borrowing

Dividend models suggest that the value of a financial asset is determined by future cash flows. A problem​ arises, however, in that future cash flows may be difficult to predict as to​ ________ of these cash flows. the amount but not the timing neither the timing nor the amount the timing but not the amount both the timing and the amount

both the timing and the amount

When the​ ________ is less than the yield to​ maturity, the bond sells at​ a/the ________ the par value. time to​ maturity; discount to coupon​ rate; premium over time to​ maturity; same price as coupon​ rate; discount to

coupon​ rate; discount to

Strong−form efficient markets theory proclaims that​ ________. current prices reflect the price and volume history of the​ stock, all publicly available​ information, but no private information one can chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market one can exploit publicly available news or financial statement information to routinely outperform the market current prices reflect the price and volume history of the​ stock, all publicly available​ information, and all private information

current prices reflect the price and volume history of the​ stock, all publicly available​ information, and all private information

The​ ________ compensates the investor for the additional risk that the loan will not be repaid in full. default premium inflation premium interest rate real rate

default premium

James is a rational investor wishing to maximize his return over a 20 year period. The current yield curve is inverted with one year rates at​ 5.00% and 20 year rates at​ 3.50%. James will invest in the lower rate 20 year bonds​ if: he thinks rates will fall in the future and locking in long−term rates today may provide the highest long−run average return. he thinks rates will rise in the future and locking in long−term rates today may provide the highest long−run average return. he thinks rates will rise in the future and locking in long−term rates today may provide the lowest long−run average return. he thinks rates will remain flat at​ 5% in the future and locking in long−term rates today will prevent him from appearing greedy to those without this investment opportunity.

he thinks rates will fall in the future and locking in long−term rates today may provide the highest long−run average return.

APRs must be converted to the appropriate periodic rates when compounding is​ ________. less frequent than once every six months more frequent than once a year less frequent than once a year more frequent than once a month

more frequent than once a year

When a company is in financial difficulty and cannot fully pay all of its​ creditors, the first lenders to be paid are the​ ________. sinking fund holders senior debtholders stockholders junior debtholders

senior debtholders

Question Help As the rating of a bond increases​ (for example, from​ A, to​ AA, to​ AAA), it generally means that the credit rating​ increases, the default risk​ decreases, and the required rate of return increases. the credit rating​ decreases, the default risk​ decreases, and the required rate of return decreases. the credit rating​ increases, the default risk​ decreases, and the required rate of return decreases. the credit rating​ increases, the default risk​ increases, and the required rate of return decreases.

the credit rating​ increases, the default risk​ decreases, and the required rate of return decreases.

The two major components of the interest rate that cause rates to vary across different investment opportunities or loans are​ ________. the inflation premium and the maturity premium the default premium and the maturity premium the liquidity premium and the maturity premium the default premium and the bankruptcy premium

the default premium and the maturity premium

A yield curve constructed using Treasury securities has each of the following components embedded in the nominal interest​ rates: the real​ rate, expected​ inflation, and a maturity premium. expected​ inflation, a default risk premium and a maturity premium. the real​ rate, a default risk premium and expected inflation. the real​ rate, expected inflation and a default risk premium.

the real​ rate, expected​ inflation, and a maturity premium.

A sinking fund may be used for each of the following EXCEPT​ ________. to be held on to and used to pay off the principal at maturity to buy back some of the bonds over time to be used to pay off other outstanding debt issues to call in bonds early

to be used to pay off other outstanding debt issues