FINA 5311 Exam 1 Prep Chapters 2-7

coupon rate

Annual interest payment as a percentage of face value.

statement of cash flows

Financial statement that shows the firm's cash receipts and cash payments over a period of time.

income statement

Financial statement that shows the revenues, expenses, and net income of a firm over a period of time.

balance sheet

Financial statement that shows the value of the firm's assets and liabilities at a particular time.

initial public offering (IPO)

First offering of stock to the general public.

payout ratio

Fraction of earnings paid out as dividends.

Fixed income market

Market for debt securities (ex: corporate bonds)

Kindle Fire Prevention Corp. has a profit margin of 6.3 percent, total asset turnover of 2.2, and ROE of 18.44 percent. What is this firm's debt-equity ratio?

ROE = (PM)(TAT)(EM) ROE = 0.1844 = (0.063)(2.20)(EM) EM = 0.1844 / (0.063)(2.20) = 1.33 D/E = EM - 1 = 1.33 - 1 = 0.33

nominal interest rate

Rate at which money invested grows.

What is receivables turnover?

Sales/Receivables

A firm has a debt-equity ratio of 0.42. What is the total debt ratio?

0.30 (add 1 divide by .42)

31. A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, current.

C. $18,700

The equity multiplier

1+ D/E

Russel's Deli has cash of $136, accounts receivable of $95 accounts payable of $210, and inventory of $409. What is the value of the quick ratio?

1.10

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as: A. .05 / (1-t*) = .07 B. .05 - (1-t*) = .07 C. .07 + (1-t*) = .05 D. .05 x (1-t*) = .07

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

future value (FV)

Amount to which an investment will grow after earning interest.

Financial intermediary

An organization that raises money from investors and provides financing for individuals, corporations, or other organizations

Capital market

Market for long-term financing

Money market

Market for short-term financing (less than one year)

efficient market

Market in which prices reflect all available information.

default risk

The risk that a bond issuer may default on its bonds. Also called credit risk.

market capitalization

Total market value of equity, equal to share price times number of shares outstanding.

average tax rate

Total taxes owed divided by total income.

Days' sales in receivables

365/Receivables turnover

Mutual fund

An investment company that pools the savings of many investors and invests in a portfolio of securities

current yield

Annual coupon payment divided by bond price.

2. Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called? A. Coupon. B. Face value. C. Discount. D. Yield. E. Dirty price.

B. Face value.

42. Which one of the following statements is correct?

B. Financial statements are frequently used as the basis for performance evaluations.

Road Hazards has 12-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued: A. At Par B. In Registered Form C. In Street Form D. At debentures

B. In Registered Form

45. As a bond's time to maturity increases, the bond's sensitivity to interest rate risk: A. Increases at an increasing rate. B. Increases at a decreasing rate. C. Increases at a constant rate. D. Decreases at an increasing rate. E. Decreases at a decreasing rate.

B. Increases at a decreasing rate.

62. Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? A. Real rate risk B. Interest rate risk C. Default risk D. Liquidity risk E. Taxability risk

B. Interest rate risk

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? A. Real rate risk B. Interest rate risk C. Default risk D. Liquidity risk

B. Interest rate risk

The yields on a corporate bond differ from those on a comparable Treasury security primarily because of: A. Interest rate risk and taxes. B. Taxes and default risk. C. Default and interest rate risks. D. Liquidity and inflation rate risks. E. Default, inflation, and interest rate risks.

B. Taxes and default risk.

The yields on a corporate bond differ from those on a comparable Treasury security primarily because of: A. Interest rate risk and taxes B. Taxes and default risk C. Default and interest rate risks D. Liquidity and inflation rate risks

B. Taxes and default risks

Which one of these is a negative covenant that might be found in a bond indenture? A. The company shall maintain a current ratio of 1.1 or higher B. The company cannot lease any major assets without bondholder approval C. The company must maintain the loan collateral in good working order D. The company shall provide audited financial statements in a timely manner

B. The company cannot lease any major assets without bondholder approval

You are purchasing a 20-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is $1,000. What is the current market price? A. $106.67 B. $108.18 C. $182.80 D. $221.50

C. $182.80

New Homes has a bond issue with a coupon rate of 5.5 percent that matures in 8.5 years. The bonds have a par value of $1,000 and a market price of $972. Interest is paid semiannually. What is the yield to maturity? A. 6.36 percent B. 6.42 percent C. 5.61 percent D. 5.92 percent

D. 5.92 percent

16. A call-protected bond is a bond that: A. Is guaranteed to be called. B. Can never be called. C. Is currently being called. D. Is callable at any time. E. Cannot be called at this point in time.

E. Cannot be called at this point in time.

38. Which one of the following applies to a premium bond? A. Yield to maturity > current yield > coupon rate. B. Coupon rate = current yield = yield-to-maturity. C. Coupon rate > yield-to-maturity > current yield. D. Coupon rate < yield to maturity < current yield. E. Coupon rate > current yield > yield to maturity.

E. Coupon rate > current yield > yield to maturity.

10. Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms? A. Note. B. Discounted. C. Zero-coupon. D. Callable. E. Debenture.

E. Debenture.

Callable bonds generally: A. Grant the bondholder the option to call the bond anytime after the deferment period. B. Are callable at par as soon as the call-protection period ends. C. Are called when market interest rates increase. D. Are called within the first three years after issuance. E. Have a sinking fund provision.

E. Have a sinking fund provision.

Cat bonds are primarily designed to help: A. Municipalities survive economic recessions. B. Corporations respond to overseas competition. C. The federal government cope with huge deficits. D. Corporations recover from involuntary reorganizations. E. Insurance companies fund excessive claims.

E. Insurance companies fund excessive claims.

A "fallen angel" is a bond that has moved from: A. Being publicly traded to being privately traded. B. Being a long-term obligation to being a short-term obligation. C. Being a premium bond to being a discount bond. D. Senior status to junior status for liquidation purposes. E. Investment grade to speculative grade.

E. Investment grade to speculative grade.

33. 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 junk bond

E. Long-term, taxable junk bond

30. A Treasury yield curve plots Treasury interest rates relative to which one of the following? A. Market rates. B. Comparable corporate bond rates. C. The risk-free rate. D. Inflation. E. Maturity.

E. Maturity.

25. Interest rates that include an inflation premium are referred to as: A. Annual percentage rates. B. Stripped rates. C. Effective annual rates. D. Real rates. E. Nominal rates.

E. Nominal rates.

17. 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: A. Trustee relationships. B. Bylaws. C. Legal bounds. D. Trust deed. E. Protective covenants.

E. Protective covenants.

21. The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the: A. Equilibrium. B. Premium. C. Discount. D. Call price. E. Spread.

E. Spread.

Which one of the following statements is correct? A. The risk-free rate represents the change in purchasing power. B. Any return greater than the inflation rate represents the risk premium. C. Historical real rates of return must be positive. D. Nominal rates exceed real rates by the amount of the risk-free rate. E. The real rate must be less than the nominal rate given a positive rate of inflation.

E. The real rate must be less than the nominal rate given a positive rate of inflation.

35. A bond has a market price that exceeds its face value. Which one of these features currently applies to this bond? A. Discount bond. B. Yield to maturity equal to the current yield. C. Currently selling at par. D. Current yield greater than coupon rate. E. Yield to maturity less than the coupon rate.

E. Yield to maturity less than the coupon rate.

You own a bond that has a 6 percent annual coupon and matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent? A. The current yield-to-maturity is greater than 6 percent. B. The current yield is 6 percent. C. The next interest payment will be $30. D. The bond is currently valued at one-half of its issue price. E. You will realize a capital gain on the bond if you sell it today.

E. You will realize a capital gain on the bond if you sell it today.

18. A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds? A. Debenture. B. Callable. C. Floating-rate. D. Junk. E. Zero coupon.

E. Zero coupon

20. The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called the:

E. cash flow to stockholders.

14. Net working capital is defined as:

E. current assets minus current liabilities.

40. If a firm produces a twelve percent return on assets and also a twelve percent return on equity, then the firm:

E. has an equity multiplier of 1.0.

18. The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate.

E. marginal

24. Shareholders' equity:

E. represents the residual value of a firm.

41. Shareholders probably have the most interest in which one of the following sets of ratio.

E. return on equity and price-earnings

35. A common-size income statement is an accounting statement that expresses all of a firm's expenses as percentage of:

E. sales.

9. Which one of the following parties has ultimate control of a corporation?

E. shareholders

4. The controller of a corporation generally reports directly to the:

E. vice president of finance.

30. A firm has net working capital of $640. Long-term debt is $4,180, total assets are $6,230, and fixed assets are $3,910. What is the amount of the total liabilities?

E.$5,860

yield curve

Graph of the relationship between time to maturity and yield to maturity.

common size income statement

Income statement that presents items as a percentage of revenues.

economic value added (EVA)

Income that is measured after deduction of the cost of capital. Also called residual income.

compound interest

Interest earned on interest.

simple interest

Interest earned only on the original investment; no interest is earned on interest.

yield to maturity

Interest rate for which the present value of the bond's payments equals the price.

effective annual interest rate

Interest rate that is annualized using compound interest.

annual percentage rate (APR)

Interest rate that is annualized using simple interest.

discount rate

Interest rate used to compute present values of future cash flows.

fundamental analysts

Investors who attempt to find mispriced securities by analyzing fundamental information, such as firm performance and earnings prospects.

technical analysts

Investors who attempt to identify undervalued stocks by searching for patterns in past prices.

annuity

Level stream of cash flows at regular intervals with a finite maturity.

annuity due

Level stream of cash flows starting immediately.

Primary market

Market for the sale of newly issued securities that requires intermediary (indirect)

Secondary market

Market in which previously issued securities are traded among investors (direct)

internal growth rate

Maximum rate of growth without external financing.

discounted cash flow (DCF)

Method of calculating present value by discounting future cash flows.

Return on Assets

Net Income/Total Assets

return on equity (ROE)

Net income as a percentage of shareholders' equity.

present value of growth opportunities (PVGO)

Net present value of a firm's future investments.

book value

Net worth of the firm according to the balance sheet.

NYSE

New York Stock Exchange.

common stock

Ownership shares in a corporation.

face value

Payment at the maturity of the bond. Also called principal or par value.

annuity factor

Present value of an annuity of $1 per period.

Hedge fund

Private investment fund that pursues complex, high-risk investment strategies

inflation

Rate at which prices as a whole are increasing.

price-earnings multiple (P/E ratio)

Ratio of stock price to earnings per share.

primary offering

Sale of new securities by corporations.

default premium

The additional yield that bond investors require for bearing credit risk.

market value added

The difference between the market value of firm's equity and its book value.

coupon

The interest payments paid to the bondholder.

intrinsic value

The present value of the cash payoffs anticipated by an investor in a security.

All else unchanged, which of the following occurs when a firm buys inventory with cash?

The quick ratio declines but the current radio remains unchanged

interest rate risk

The risk in bond prices due to fluctuations in interest rates.

Diamond Eyes, Inc., has sales of $18 million, total assets of $16.7 million, and total debt of $7.2 million. Assume the profit margin is 5 percent. What is Net Income?

$900,000

Return on Equity

(PM)(TAT)(EM)

High Mountain Foods has an equity multiplier of 1.55, a total asset turnover of 1.3, and a profit margin of 7.5 percent. What is the return on equity?

(TAT)(PM)(EM)

12. Public offerings of debt and equity must be registered with which one of the following?

D. Securities and Exchange Commission

dividend discount model

Discounted cash-flow model which states that today's stock price equals the present value of all expected future dividends.

49. What is the operating cash flow for 2011? (Use income statement and balance information on the screen)

E. $4,267

27. Which one of the following is true according to Generally Accepted Accounting Principles?

E. Costs of goods sold are recorded based on the matching principle.

generally accepted accounting principles (GAAP)

U.S. procedures for preparing financial statements.

constant growth dividend discount model

Version of the dividend discount model in which dividends grow at a constant rate.

Which one of the following correctly defines the retention ratio?

addition to retained earnings divided by net income

Which one of the following accurately describes the three parts of the Du Point Identity?

equity multiplier, profit margin, and total asset turnover

*Which one of the following is a primary market transaction?

sale of new share of stock to an individual investor

*The purchase and sale of securities after the original issuance occurs in the:

secondary market

market

to-book ratio - Ratio of market value of equity to book value of equity.

market

value balance sheet - Financial statement that shows the market value of all assets and liabilities.

real interest rate

Rate at which the purchasing power of an investment increases.

If Roten Rooters, Inc., has an equity multiplier of 1.54, total asset turnover of 1.80, and a profit margin of 6.4 percent, what is its ROE?

.1774 of 17.74%

Diamond Eyes, Inc., has sales of $18 million, total assets of $16.7 million, and total debt of $7.2 million. Assume the profit margin is 5 percent. What is Return on Assets?

.539

Perry, Inc., has a total debt ratio of 0.36. What is its debt-equity ratio?

.56

Financial institution

A bank (investment/commercial), insurance company, credit union, or similar financial intermediary

Du Pont formula

A breakdown of ROE and ROA into component ratios.

You purchase a bond with an invoice price of $1,319. The bond has a coupon rate of 6.25 percent, a face value of $1,000, and there are two months to the next semiannual coupon date. What is the clean price of this bond? A. $1,298.17 B. $1,352.17 C. $1,314.14 D. $1,408.13

A. $1,298.17

50. What is the cash flow from assets for 2011? (Use income statement and balance sheet on the screen)

A. $1,732

You will receive $5,000 a year in real terms for the next 5 years. Each payment will be received at the end of the period with the first payment occurring one year from today. The relevant nominal discount rate is 10.725 percent and the inflation rate is 3 percent. What are your winnings worth today in real dollars? A. $20,229 B. $17,367 C. $17,401 D. $21,500

A. $20,229

Luxury Properties offers bond with a coupon rate of 9.5 percent paid semiannually. The yield to maturity is 11.2 percent and the maturity date is 11 years from today. What is the market price of this bond if the face value is $1,000? A. $893.99 B. $896.67 C. $941.20 D. $946.18

A. $893.99

A 10-year, 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000 face value. The bond is currently quoted at 98.7. What is the clean price of this bond if the next interest payment will occur 2 months from today? A. $987.00 B. $994.50 C. $1,002.00 D. $1,011.25

A. $987.00

60. The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as: A. .05 / (1 - t*) = .07. B. .05 - (1 - t*) = .07 C. .07 + (1 - t*) = .05. D. .05 (1 - t*) = .07. E. .05 (1 + t*) = .07.

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

A 13-year, 6 percent coupon bond pays interest semiannually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent? A. 1.79 percent decrease B. 1 percent decrease C. 1.6 percent decrease D. 1.9 percent increase

A. 1.79 percent decrease

44. A firm has sales of $2,190, net income of $174, net fixed assets of $1,600, and current assets of $720. The firm has $310 in inventory. What is the common-size statement value of inventory.

A. 13.36 percent

You own a bond that pays $64 in interest annually. The face value is $1,000 and the current market price is $1,062.50. The bond matures in 11 years. What is the yield to maturity? A. 5.62 percent B. 6.22 percent C. 6.46 percent D.. 6.71 percent

A. 5.62 percent

Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $742. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature? A. 5.73 years B. 4.19 years C. 7.41 years D. 6.16 years

A. 5.73 years

The yield to maturity on a bond is currently 9.84 percent. The real rate of return is 3.29 percent. What is the rate of inflation? A. 6.34 percent B. 5.64 percent C. 6.24 percent D. 6.53 percent

A. 6.34 percent

Wheeler's has bonds on the market with 13 years to maturity, a YTM of 7.6 percent, and a current price of $901.98. The bonds make semiannual payments and have a face value of $1,000. What is the coupon rate? A. 6.40 percent B. 6.33 percent C. 6.60 percent D. 6.67 percent

A. 6.40 percent

Allison just received her semiannual payment of $35 on a bond she owns. Which term refers to this payment? A. Coupon B. Face value C. Discount D. Call premium E. Yield

A. Coupon

Allison just received her semiannual payment of $35 on a bond she owns. Which term refers to this payment? A. Coupon. B. Face value. C. Discount. D. Call premium. E. Yield.

A. Coupon.

47. What is the change in the net working capital from 2010 to 2011? (Use income statement and balance information on the screen)

B. $1,306

You purchased an investment that will pay you $8,000, in real dollars, a year for the next three years. Each payment will be received at the end of the period with the first payment occurring one year from today. The nominal discount rate is 9.897 percent and the inflation rate is 2.9 percent. What is the present value of these payments in real dollars? A. $21,720 B. $21,072 C. $22,511 D. $25,112

B. $21,072

The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent. What is the amount of each interest payment if the face value of the bonds is $1,000? A. $41.50 B. $42.25 C. $43.15 D. $85.00

B. $42.25

The 7 percent, semiannual coupon bonds offered by House Renovators are callable in two years at $1,054. What is the amount of the call premium on a $1,000 par value bond? A. $52 B. $54 C. $72 D. $84

B. $54

Oil Wells offers 6.5 percent coupon bonds with semiannual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if the face value is $1,000? A. $989.70 B. $975.93 C. $996.48 D. $902.60

B. $975.93

46. The Burger Hut has sales of $29 million, total assets of $43 million, and total debt of $13 million. The profit margin is 11 percent. What is the return on equity?

B. 10.63 percent

World Travel has 7 percent, semiannual, coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature? A. 12.26 years B. 12.53 years C. 18.49 years D. 24.37 years

B. 12.53 years

Which one of the following bonds is the least sensitive to interest rate risk? A. 3-year; 4 percent coupon B. 3-year; 6 percent coupon C. 5-year; 6 percent coupon D. 7-year; 6 percent coupon

B. 3-year; 4 percent coupon

44. Which one of the following bonds is the least sensitive to interest rate risk? A. 3-year; 4 percent coupon. B. 3-year; 6 percent coupon. C. 5-year; 6 percent coupon. D. 7-year; 6 percent coupon. E. 7-year; 4 percent coupon.

B. 3-year; 6 percent coupon

A corporate bond is quoted at a price of 98.96 and has a coupon rate of 4.8 percent, paid semiannually. What is the current yield? A. 4.24 percent B. 4.85 percent C. 5.36 percent D. 5.62 percent

B. 4.85 percent

Al is retired and his sole source of income is his bond portfolio. Although he has sufficient principal to live on, he only wants to spend the interest income and thus is concerned about the purchasing power of that income. Which one of the following bonds should best ease Al's concerns? A. 6-year coupon bonds B. 5-year TIPS C. 20 year coupon bonds 220 D. 5 year municipal bonds

B. 5 year TIPS

A bond that is payable to whomever has physical possession of the bond is said to be in: A. New-issue Condition B. Registered Form C. Bearer Form D. Debenture Status

C. Bearer Form

Al is retired and his sole source of income is his bond portfolio. Although he has sufficient principal to live on, he only wants to spend the interest income and thus is concerned about the purchasing power of that income. Which one of the following bonds should best ease Al's concerns? A. 6-year coupon bonds B. 5-year TIPS C. 20-year coupon bonds 220 D. 5-year municipal bonds E. 7- year income bonds

B. 5-year TIPS

8. Road Hazards has 12-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued: A. At par. B. In registered form. C. In street form. D. As debentures. E. As callable bonds.

B. In registered form.

As a bond's time to maturity increases; the bond's sensitivity to interest rate risk: A. Increases at an increasing rate B. Increases at a decreasing rate C. Increases at a constant rate D. Decreases at an increasing rate

B. Increases at a decreasing rate

convertible bond

Bond that the holder may exchange for a specified amount of another security.

2. Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?

C. agency problem

A Treasury bond is quoted at a price of 105.4620. What is the market price of this bond if the face value is $5,000? A. $5,005.46 B. $5,105.46 C. $5273.10 D. $5,264.44

C. $5273.10

43. A firm generated net income of $862. The depreciation expense was $47 and dividends were paid in the amount of $25. Accounts payables decreased by $13, accounts receivables increased by $28, inventory decreased by $14, and net fixed assets decreased by $8. There was no interest expense. What was the net cash flow from operating activity?

C. $882

You want to have $2 million in real dollars in an account when you retire in 43 years. The nominal return on your investment is 9.939 percent and the inflation rate is 3.2 percent. What is the real amount you must deposit each year to achieve your goal? A. $10,403 B. $10,878 C. $9,210 D. $8,887

C. $9,210

An investment offers a total return of 12.4 percent over the coming year. You believe the total real return will be only 9.7 percent. What do you believe the exact inflation rate will be for the next year? A. 2.52 percent B. 2.67 percent C. 2.46 percent D. 2.70 percent

C. 2.46 percent

The zero coupon bonds of JK Industries have a market price of $211.16, a face value of $1,000, and a yield to maturity of 7.39 percent. How many years is it until these bonds mature? A. 23.92 years B. 22.28 years C. 21.43 years D. 44.01 years

C. 21.43 years

A 3.25 percent Treasury bond is quoted at a price of 101.16. The bond pays interest semiannually. What is the current yield? A. 3.06 percent B. 3.17 percent C. 3.21 percent D, 3.33 percent

C. 3.21 percent

A bond that pays interest annually yielded 6.48 percent last year. The inflation rate for the same period was 2.5 percent. What was the actual real rate of return? A. 4.19 percent B. 4.25 percent C. 3.88 percent D. 3.41 percent

C. 3.88 percent

Suppose the real rate is 2.45 percent and the inflation rate is 1.8 percent. What rate would you expect to see on a Treasury bill? A. 3.35 percent B. 3.30 percent C. 4.29 percent D. 3.56 percent

C. 4.29 percent

The $1,000 par value bonds of Uptown Tours have a coupon rate of 6.5 and a current price quote of 101.23. What is the current yield? A. 6.60 percent B. 6.37 percent C. 6.42 percent D. 6.49 percent

C. 6.42 percent

Do-Well bonds have a face value of $1,000 and are currently quoted at 86.725. The bonds have a 7 percent coupon rate. What is the current yield on these bonds? A. 7.42 percent B. 7.67 percent C. 8.07 percent D. 9.03 percent

C. 8.07 percent

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. A. A premium; less than B. A premium; equal to C. A discount; less than D. A discount; higher than

C. A discount; less than

7. Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Alfredo will be involved as an active consultant and manager and will also contribute funds. Sam and Alfredo are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt?

C. limited partnership

free cash flow

Cash available for distribution to investors after the company has paid for any new capital investments or additions to working capital.

protective covenant

Condition imposed on borrowers to protect lenders from unreasonable risks.

The current ratio is measured as:

Current assets divided by current liabilities.

Dexter Mills issued 20-year bonds a year ago at a coupon rate of 10.2 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 9.2 percent, what is the current bond price? A. $985.44 B. $991.90 C. $1,042.16 D. $1,089.03

D. $1,089.03

48. What is the amount of the noncash expenses for 2011? (Use income statement and balance information on the screen)

D. $1,611

23. Which one of the following represents the most liquid asset (Think this one through)?

D. $100 of inventory that is sold today for $100 cash

The yield-to-maturity on a bond is the interest rate you earn on your investment if interest rates do not change. If you actually sell the bond before it matures, your realized return is known as the holding period yield. Suppose that today you buy a 9 percent annual coupon bond for $1,000. The bond has 12 years to maturity. Three years from now, the yield-to-maturity has declined to 7 percent and you decide to sell. What is your holding period yield? A. 8.84 percent B. 9.49 percent C. 10.96 percent D. 12.83 percent

D. 12.83 percent

Global Exporters wants to raise $29.6 million to expand its business. To accomplish this, it plans to sell 20-year, $1,000 face value, zero coupon bonds. The bonds will be priced to yield 7.75 percent. What is the minimum number of bonds it must sell to raise the money it needs? A. 110,411 B. 139,800 C. 154,907 D. 135,436

D. 135,436

32. A firm uses 2011 as the base year for its financial statements. The common-size, base-year statement for 2012 has an inventory value of 1.08. This is interpreted to mean that the 2012 inventory is equal to 108 percent of which one of the following?

D. 2011 inventory expressed as a percent of 2011 total assets

You own a bond that has a 6 percent annual coupon and matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent? A. The current yield to maturity is greater than 6 percent B. The current yield is 6 percent C. The next interest payment will be $30 D. You will realize a capital gain on the bond if you sell it today

D. You will realize a capital gain on the bond if you sell it today

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds? A. Debenture B. Callable C. Floating-Rate D. Zero Coupon

D. Zero Coupon

5. Which of the following accounts are included in working capital management?

D. accounts payable, accounts receivable, and inventory

19. The _____ tax rate is equal to total taxes divided by total taxable income.

D. average

17. Noncash items refer to:

D. expenses which do not directly affect cash flows.

22. Cash flow from assets is also known as the firm's:

D. free cash flow.

28. Which one of these is most apt to be a fixed cost?

D. office salaries

67. Nadine is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own? A. 6-year, high-coupon, put bond. B. 5-year TIPS C. 10-year AAA coupon bond. D. 5-year floating rate bond. E. 7- year income bond.

E. 7- year income bond.

Protective covenants: A. Apply to short-term debt issues but not to long-term debt issues. B. Only apply to privately issued bonds. C. Are a feature found only in government-issued bond indentures. D. Only apply to bonds that have a deferred call provision. E. Are primarily designed to protect bondholders.

E. Are primarily designed to protect bondholders.

In other words, what does an equity multiplier of 2 mean?

Each dollar in equity the firm has supports $2 in assets

plowback ratio

Fraction of earnings retained by the firm.

Pension fund

Fund set up by an employer to provide for employees' retirement

Financial market

Market where securities are issued and traded

random walk

Security prices change randomly, with no predictable trends or patterns.

bond

Security that obligates the issuer to make specified payments to the bondholder.

sustainable growth rate

Steady rate at which a firm can grow without changing leverage; return on equity × plowback ratio.

perpetuity

Stream of level cash payments that never ends.

Relationship determined from a firm's financial information and used for comparison purposes are known as:

financial ratios

Ratios that measure a firm's financial leverage known as ___ ratios.

long-term-solvency

The management of the firm's short-term assets and liabilities is called:

working capital management

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which of the following?

0.5

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected? A. Default Risk B. Taxability C. Liquidity D. Inflation

A. Default Risk

28. Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected? A. Default risk. B. Taxability. C. Liquidity. D. Inflation. E. Interest rate risk.

A. Default risk.

Real rates are defined as nominal rates that have been adjusted for which of the following? A. Inflation B. Default Risk C. Accrued Interest D. Interest Rate Risk

A. Inflation

24. Real rates are defined as nominal rates that have been adjusted for which of the following? A. Inflation. B. Default risk. C. Accrued interest. D. Interest rate risk. E. Both inflation and interest rate risk.

A. Inflation.

25. The higher the degree of financial leverage employed by a firm, the:

A. higher the probability that the firm will encounter financial distress.

16. Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

A. income statement

6. A general partner:

A. is personally responsible for all the partnership debts

21. Which term relates to the cash flow which results from a firm's ongoing, normal business activities?

A. operating cash flow

1. Which one of the following is defined as a firm's short-term assets and its short-term liabilities?

A. working capital

marginal tax rate

Additional taxes owed per dollar of additional income.

return on capital (ROC)

After-tax operating income as a percentage of long-term capital.

operating profit margin

After-tax operating income as a percentage of sales.

return on assets (ROA)

After-tax operating income as a percentage of total assets.

loan covenant

Agreement between firm and lender requiring the firm to fulfill certain conditions to safeguard the loan.

Interest rates that include an inflation premium are referred to as: A. Annual percentage rates B. Stripped rates C. Effective annual rates D. Nominal Rates

D. Nominal Rates

A corporate bond was quoted yesterday at 102.16 while today's quote is 102.19. What is the change in the value of a bond that has a face value of $5,000? A. $0.30 B. $1.50 C. $3.00 D. $15.00

B. $1.50

A newly issued 20-year, $1,000, zero coupon bond just sold for $311.05. What is the implicit interest, in dollars, for the first year of the bond's life? A. $17.72 B. $18.70 C. $18.47 D. $17.63

B. $18.70

Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called? A. Coupon B. Face Value C. Discount D. Call Premium E. Yield

B. Face Value

Bare Trees United issued 15-year bonds 2 years ago at a coupon rate of 8.5 percent. The bonds make semiannual payments. If these bonds currently sell for 98.6 percent of par value, what is the YTM? A. 8.98 percent B. 8.68 percent C. 9.13 percent D. 9.27 percent

B. 8.68 percent

U.S. Treasury bonds: A. Are highly illiquid B. Are quoted as a percentage of par C. Are quoted at a dirty price D, Pay interest that is federally tax exempt

B. Are quoted as a percentage of par

U. S. Treasury bonds: A. Are highly illiquid. B. Are quoted as a percentage of par. C. Are quoted at the dirty price. D. Pay interest that is federally tax-exempt. E. Must be held until maturity.

B. Are quoted as a percentage of par.

Which one of the following is the price at which a dealer will sell a bond? A. Call Price B> Ask Price C. Bid Price D. Bid-Ask Spread

B. Ask Price

19. Which one of the following is the price at which a dealer will sell a bond? A. Call price B. Asked price C. Bid price D. Bid-ask spread E. Par value

B. Asked price

Which one of these statements is correct? A. Most long term bond issues are referred to as unfunded debt B. Bonds provide tax benefits to issuers C. The risk of a firm financially falling decreases when a firm issues bonds D. All bonds are treated equally in a bankruptcy proceeding

B. Bonds provide tax benefits to issuers

Which one of these statements is correct? A. Most long-term bond issues are referred to as unfunded debt. B. Bonds provide tax benefits to issuers. C. The risk of a firm financially failing decreases when a firm issues bonds. D. All bonds are treated equally in a bankruptcy proceeding. E. A debenture is a senior secured debt.

B. Bonds provide tax benefits to issuers.

A bond can be paid off early at the issuer's discretion is referred to as being which type of bond? A. Par Value B. Callable C. Senior D. Unsecured

B. Callable

13. A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond? A. Par value. B. Callable. C. Senior. D. Subordinated. E. Unsecured.

B. Callable.

29. The interest rate risk premium is the: A. Additional compensation paid to investors to offset rising prices. B. Compensation investors demand for accepting interest rate risk. C. Difference between the yield to maturity and the current yield. D. Difference between the market interest rate and the coupon rate. E. Difference between the coupon rate and the current yield.

B. Compensation investors demand for accepting interest rate risk.

The interest rate risk premium is the: A. Additional compensation paid to investors to offset rising prices B. Compensation investors demand for accepting interest rate risk C. Difference between the yield to maturity and the current yield D. Difference between the market interest rate and the coupon rate

B. Compensation investors demand for accepting the interest rate risk

Recently, you discovered a convertible, callable bond with a 5 percent semiannual coupon. If you purchase this bond you will have the right to: A. Force the issuer to repurchase the bond prior to maturity B. Convert the bond into equity shares C. Defer all taxable income until the bond matures D. Convert the bond into a 5 percent perpetuity

B. Convert the bond into equity shares

Recently, you discovered a convertible, callable bond with a 5 percent semiannual coupon. If you purchase this bond you will have the right to: A. Force the issuer to repurchase the bond prior to maturity B. Convert the bond into equity shares. C. Defer all taxable income until the bond matures. D. Convert the bond into a 5 percent perpetuity. E. Have the principal amount adjusted for inflation.

B. Convert the bond into equity shares.

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today? A. Clean price B. Dirty price C. Ask Price D. Quoted price

B. Dirty price

72. Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today? A. Clean price. B. Dirty price. C. Asked price. D. Quoted price. E. Bid price.

B. Dirty price.

A sinking fund is managed by a trustee for which one of the following purposes? A. Paying bond interest payments B. Early bond redemption C. Converting bonds into equity securities D. Paying preferred dividends

B. Early bond redemption

12. A sinking fund is managed by a trustee for which one of the following purposes? A. Paying bond interest payments. B. Early bond redemption. C. Converting bonds into equity securities. D. Paying preferred dividends. . E. Reducing bond coupon rates.

B. Early bond redemption.

Which one of these is a negative covenant that might be found in a bond indenture? A. The company shall maintain a current ratio of 1.1 or higher. B. The company cannot lease any major assets without bondholder approval. C. The company must maintain the loan collateral in good working order. D. The company shall provide audited financial statements in a timely manner. E. The company shall maintain a cash surplus of $100,000 at all times.

B. The company cannot lease any major assets without bondholder approval.

A corporate bond with a 6 percent coupon was issued last year. Which one of these would apply to this bond today if the current yield to maturity is 7 percent? A. The bond is currently selling at a premium B. The current yield exceeds the coupon rate C. The bond is selling at par value D. The current yield exceeds the yield to maturity

B. The current yield exceeds the coupon rate

34. A corporate bond with a 6 percent coupon was issued last year. Which one of these would apply to this bond today if the current yield to maturity is 7 percent? A. The bond is currently selling at a premium. B. The current yield exceeds the coupon rate. C. The bond is selling at par value. D. The current yield exceeds the yield-to-maturity. E. The coupon rate has increased to 7 percent.

B. The current yield exceeds the coupon rate.

8. Which one of the following best states the primary goal of financial management?

B. maximize the current value per share

33. Activities of a firm which require the spending of cash are known as:

B. uses of cash.

29. A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable, and $70 in cash. What is the amount of the current assets?

B.$780

26. The book value of a firm is:

B.based on historical cost.

common size balance sheet

Balance sheet that presents items as a percentage of total assets.

junk bond

Bond with a rating below Baa or BBB.

investment grade

Bonds rated Baa or above by Moody's or BBB or above by Standard & Poor's or Fitch.

11. Which one of the following is a primary market transaction?

Bsale of a new share of stock to an individual investor

Bonds issued by the U.S. government: A. Are considered to be free of interest rate risk B. Generally have higher coupons then comparable bonds issued by a corporation C. Are considered to be free of default risk D. Are called "munis"

C. Are considered to be free of default risk

57. Bonds issued by the U.S. government: A. Are considered to be free of interest rate risk. B. Generally have higher coupons than comparable bonds issued by a corporation. C. Are considered to be free of default risk. D. Pay interest that is exempt from federal income taxes. E. Are called "munis."

C. Are considered to be free of default risk.

9. A bond that is payable to whomever has physical possession of the bond is said to be in: A. New-issue condition. B. Registered form. C. Bearer form. D. Debenture status. E. Collateral status.

C. Bearer form.

If you sell a 6 percent bond to a dealer when the market rate is 7 percent, which one of the following prices will you receive? A. Call Price B. Par Value C. Bid Price D. Ask Price

C. Bid Price

20. If you sell a 6 percent bond to a dealer when the market rate is 7 percent, which one of the following prices will you receive? A. Call price. B. Par value. C. Bid price. D. Asked price. E. Bid-ask spread.

C. Bid price.

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the: A. Dirty Price B. Redemption Value C. Call Premium D. Original-issue Discount

C. Call Premium

14. A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the: A. Dirty price. B. Redemption value. C. Call premium. D. Original-issue discount. E. Redemption discount.

C. Call premium.

A bond is quoted at a price of $1,011. This price is referred to as the: A. Call Price B. Face Value C. Clean Price D. Dirty Price

C. Clean Price

22. A bond is quoted at a price of $1,011. This price is referred to as the: A. Call price. B. Face value. C. Clean price. D. Dirty price. E. Maturity price.

C. Clean price.

Which one of the following relationships applies to a par value bond? A. Yield to maturity > current yield > coupon rate B. Coupon rate > yield to maturity > current yield C. Coupon rate = current yield = yield to maturity D. Coupon rate < yield to maturity < current yield

C. Coupon rate = current yield = yield to maturity

39. Which one of the following relationships applies to a par value bond? A. Yield to maturity > current yield > coupon rate. B. Coupon rate > yield-to-maturity > current yield. C. Coupon rate = current yield = yield-to-maturity. D. Coupon rate < yield to maturity < current yield. E. Coupon rate > current yield > yield to maturity.

C. Coupon rate = current yield = yield-to-maturity.

The price sensitivity of a bond increases in response to a change in the market rate of interest as the: A. Coupon rate increases B. Time to maturity decreases C. Coupon rate decreases and the time to maturity increases D. Time to maturity and coupon rate both decrease

C. Coupon rate decreases and the time to maturity increases

43. The price sensitivity of a bond increases in response to a change in the market rate of interest as the: A. Coupon rate increases. B. Time to maturity decreases. C. Coupon rate decreases and the time to maturity increases. D. Time to maturity and coupon rate both decrease. E. Coupon rate and time to maturity both increase.

C. Coupon rate decreases and the time to maturity increases.

A bond's coupon rate is equal to the annual interest divided by which one of the following? A. Call Price B. Current Price C. Face Value D. Clean Price E. Dirty Price

C. Face Value

A bond's coupon rate is equal to the annual interest divided by which one of the following? A. Call price B. Current price. C. Face value. D. Clean price. E. Dirty price.

C. Face value.

15. The common set of standards and procedures by which audited financial statements are prepared is known as the:

C. Generally Accepted Accounting Principles.

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity? A. Default Risk B. Taxability C. Liquidity D. Inflation

C. Liquidity

31. Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity? A. Default risk. B. Taxability. C. Liquidity. D. Inflation. E. Interest rate risk.

C. Liquidity.

Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued? A. Current yield B. Written record of all the current bond holders C. List of collateral used as bond security D. Current market price

C. List of collateral used as bond security

7. Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued? A. Current yield. B. Written record of all the current bond holders. C. List of collateral used as bond security. D. Current market price. E. Price at which a bondholder can resell the bond to another bondholder

C. List of collateral used as bond security.

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur? A. Short-term; low coupon B. Short-term; high coupon C. Long-term; zero coupon D. Long-term; low coupon

C. Long-term; zero coupon

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur? A. Short-term; low coupon. B. Short-term; high coupon. C. Long-term; zero coupon. D. Long-term; low coupon. E. Long-term; high coupon.

C. Long-term; zero coupon.

Last year, you purchased a TIPS at par. Since that time, both market interest rates and the inflation rate have increased by .25 percent. Your bond has most likely done which one of the following since last year? A. Decreased in value due to the changes in inflation rates B. Experienced an increase in its bond rating C. Maintained a fixed real rate of return D. Increased in value in response to the change in market rates

C. Maintained a fixed real rate of return

64. Last year, you purchased a TIPS at par. Since that time, both market interest rates and the inflation rate have increased by .25 percent. Your bond has most likely done which one of the following since last year? A. Decreased in value due to the change in inflation rates. B. Experienced an increase in its bond rating. C. Maintained a fixed real rate of return. D. Increased in value in response to the change in market rates. E. Increased in value due to a decrease in time to maturity.

C. Maintained a fixed real rate of return.

The current yield is defined as the annual interest on a bond divided by which one of the following? A. Coupon Rate B. Face Value C. Market Price D. Call Price

C. Market Price

6. The current yield is defined as the annual interest on a bond divided by which one of the following? A. Coupon rate. B. Face value. C. Market price. D. Call price. E. Par value.

C. Market price.

The bond principal is repaid on which of these dates? A. Coupon Date B. Yield Date? C. Maturity Date D. Dirty Date E. Clean Date

C. Maturity Date

4. The bond principal is repaid on which one of these dates? A. Coupon date. B. Yield date. C. Maturity date. D. Dirty date. E. Clean date.

C. Maturity date.

Last year, Lexington Homes issued $1 million in unsecured, noncallable debt. This debt pays an annual interest payment of $55 and matures six years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt? A. Semiannual coupon B. Discount bond C. Note D. Trust deed

C. Note

51. Last year, Lexington Homes issued $1 million in unsecured, noncallable debt. This debt pays an annual interest payment of $55 and matures six years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt? A. Semiannual coupon. B. Discount bond. C. Note. D. Trust deed. E. Collateralized.

C. Note.

Municipal bonds: A. Are totally risk free B. Generally have higher coupon rates than corporate bonds C. Pay interest that is federally tax free D. Are rarely callable

C. Pay interest that is federally tax free

Municipal bonds: A. Are totally risk free. B. Generally have higher coupon rates than corporate bonds. C. Pay interest that is federally tax free. D. Are rarely callable. E. Are free of default risk.

C. Pay interest that is federally tax free.

Which one of the following statements concerning bond ratings is correct? A. Investment grade bonds are rated BB or higher by Standard AMP; Poor's B. Bond ratings assess both interest rate risk and default risk C. Split-rater bonds are called crossover bonds D. The highest rating issued by Moody's is AAA.

C. Split-rated bonds are called crossover bonds

Which one of the following statements concerning bond ratings is correct? A. Investment grade bonds are rated BB or higher by Standard amp; Poor's. B. Bond ratings assess both interest rate risk and default risk. C. Split-rated bonds are called crossover bonds. D. The highest rating issued by Moody's is AAA. E. A "fallen angel" is a term applied to all "junk" bonds.

C. Split-rated bonds are called crossover bonds.

37. The U.S. government coding system that classifies a firm by the nature of its business operations is known as the:

C. Standard Industrial Classification code.

The pure time value of money is known as the: A. Liquidity Effect B. Fisher Effect C. Term structure of interest rates D. Inflation Factor

C. Term structure of interest rates

27. The pure time value of money is known as the: A. Liquidity effect. B. Fisher effect. C. Term structure of interest rates. D. Inflation factor. E. Interest rate factor.

C. Term structure of interest rates.

41. Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct? A. The bonds will become discount bonds if the market rate of interest declines. B. The bonds will pay 10 interest payments of $60 each. C. The bonds will sell at a premium if the market rate is 5.5 percent. D. The bonds will initially sell for $1,030 each. E. The final payment will be in the amount of $1,060.

C. The bonds will sell at a premium if the market rate is 5.5 percent.

Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct? A. The bonds will become discount bonds if the market rate of interest declines B. The bonds will pay 10 interest payments of $60 each C. The bonds will sell at a premium if the market rate is 5.5 percent D. The bonds will initially sell for $1,030 each

C. The bonds will sell at premium if the market rate is 5.5 percent

Which one of the following statements is false concerning the term structure of interest rates? A. Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates. B. The term structure of interest rates includes both an inflation premium and an interest rate risk premium. C. The term structure of interest rates and the time to maturity are always directly related D. The interest rate risk premium increases as the time to maturity increases.

C. The term structure of interest rates and the time to maturity are always directly related

77. Which one of the following statements is false concerning the term structure of interest rates? A. Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates. B. The term structure of interest rates includes both an inflation premium and an interest rate risk premium. C. The term structure of interest rates and the time to maturity are always directly related. D. The real rate of return has minimal, if any, affect on the slope of the term structure of interest rates. E. The interest rate risk premium increases as the time to maturity increases.

C. The term structure of interest rates and the time to maturity are always directly related.

A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today? A. The face value of the bond today is greater than it was when the bond was issued B. The bond is worth less today then when it was issued C. The yield-to-maturity is less than the coupon rate D. The coupon rate is greater than the current yield

C. The yield-to-maturity is less than the coupon rate

A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today? A. The face value of the bond today is greater than it was when the bond was issued. B. The bond is worth less today than when it was issued. C. The yield-to-maturity is less than the coupon rate. D. The coupon rate is greater than the current yield. E. The yield-to-maturity equals the current yield.

C. The yield-to-maturity is less than the coupon rate.

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today? A. No difference B. One month's interest C. Two month's interest D. Four month's interest

C. Two month's interest

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today? A. No difference. B. One month's interest. C. Two month's interest. D. Four month's interest. E. Five month's interest.

C. Two month's interest.

Kurt has researched T-Tek and believes the firm is poised to vastly increase in value. He has decided to purchase T-Tek bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholders. Which one of the following bond features will help him fulfill his wish? A. Put provision B. Positive covenant C. Warrant D. Crossover rating

C. Warrant

69. Kurt has researched T-Tek and believes the firm is poised to vastly increase in value. He has decided to purchase T-Tek bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholders. Which one of the following bond features will help him fulfill his wish? A. Put provision. B. Positive covenant. C. Warrant. D. Crossover rating. E. Call provision.

C. Warrant.

36. All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. A. a premium; less than B. a premium; equal to C. a discount; less than D. a discount; higher than E. par; less than

C. a discount; less than

13. Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?

C. balance sheet

39. On the Statement of Cash Flows, which of the following are considered operating activities?

C. cost of goods sold, decrease in accounts payable, and interest paid only

10. Which of the following parties are considered stakeholders of a firm:

C. employee and government

net working capital

Current assets minus current liabilities.

A Treasury bond is quoted as 99.6325 asked and 99.1250 bid. What is the bid-ask spread in dollars on a $5,000 face value bond? A. $.508 B. $.675 C. $17,500 D. $25,375

D. $25,375

Today, you want to sell a $1,000 face value zero coupon bond you currently own. The bond matures in 3.5 years. How much will you receive for your bond if the market yield to maturity is currently 6.19 percent? Ignore any accrued interest. A. $896.60 B. $798.09 C. $741.08 D. $807.86

D. $807.86

Roadside Markets has a 6.75 percent coupon bond outstanding that matures in 10.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent? A. $899.80 B. $899.85 C. $903.42 D. $967.24

D. $967.24

A bond has a coupon rate of 8 percent, 7 years to maturity, semiannual interest payments, and a YTM of 7 percent. If interest rates suddenly rise by 2 percent, what will be the percentage change in the bond price? A. -10.16 percent B. -9.87 percent C. -9.56 percent D. -10.02 percent

D. -10.02 percent

45. Uptown Men's Wear has accounts payable of $2,214, inventory of $7,950, cash of $1,263, fixed assets of $8,400, accounts receivable of $3,907, and long-term debt of $4,200. What is the value of the net working capital to total assets ratio?

D. 0.51

The outstanding bonds of Winter Tires Inc. provide a real rate of return of 5.6 percent. If the current rate of inflation is 4.68 percent, what is the actual nominal rate of return on these bonds? A. 8.58 percent B. 9.33 percent C. 9.71 percent D. 10.54 percent

D. 10.54 percent

Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, a par value of $1,000, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is the coupon rate? A. 8.00 percent B. 8.50 percent C. 9.00 percent D. 12.00 percent

D. 12.00 percent

38. A firm uses 2011 as the base year for its financial statements. The common-size, base-year statement for 2012 has an inventory value of 1.08. This is interpreted to mean that the 2012 inventory is equal to 108 percent of which one of the following?

D. 2011 inventory expressed as a percent of 2011 total assets

A $1,000 face value bond has a coupon rate of 7 percent, a market price of $911.02, and 10 years left to maturity. Interest is paid semiannually. If the inflation rate is 2.8 percent, what is the yield-to-maturity when expressed in real terms? A. 5.50 percent B. 4.68 percent C. 4.92 percent D. 5.38 percent

D. 5.38 percent

A Treasury bond is quoted at a price of 101.6533 with a current yield of 6.276 percent. What is the coupon rate on a $10,000 bond? A. 7.20 percent B. 6.48 percent C. 6.41 percent D. 6.38 percent

D. 6.38 percent

The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $1,032. What is the yield to maturity? A. 6.87 percent B. 6.92 percent C. 6.08 percent D. 6.48 percent

D. 6.48 percent

Nadine is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own? A. 6-year, high-coupni, put bond B. 5-year TIPS C. 10 year AAA coupon bond D. 7-year income bond

D. 7-year income bond

Sunset Sales has 7.2 percent coupon bonds on the market with 11 years left to maturity. The bonds make semiannual payments and currently sell for 98.6 percent of par. What is the effective annual yield? A. 7.34 percent B. 7.39 percent C. 7.93 percent D. 7.52 percent

D. 7.52 percent

A bond has a yield to maturity of 11.68 percent. If the inflation rate is 3.2 percent, what is the real rate of return on the bond? A. 8.86 percent B. 15.90 percent C. 15.04 percent D. 8.22 percent

D. 8.22 percent

Bonner Metals wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 8.5 percent bonds on the market that sell for $959, make semiannual payments, and mature in 16 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par? A. 8.75 percent B. 9.23 percent C. 8.41 percent D. 8.99 percent

D. 8.99 percent

32. The taxability risk premium compensates bondholders for which one of the following? A. Yield decreases in response to market changes. B. Lack of coupon payments. C. Possibility of default. D. A bond's unfavorable tax status. E. Decrease in a municipality's credit rating.

D. A bond's unfavorable tax status.

The taxability risk premium compensates bondholders for which one of the following? A. Yield decreases in reprise to market changes B. Lack of coupon payments C. Possibility of default D. A bonds unfavorable tax status

D. A bonds unfavorable tax status

A note is generally defined as: A. A secured bong with an initial maturity of 10 years or more B. A secured bond that initially matures in less than 10 years C. Any bond secured by a blanket mortgage D. An unsecured bond with an initial maturity of 10 years or less

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

11. A note is generally defined as: A. A secured bond with an initial maturity of 10 years or more. B. A secured bond that initially matures in less than 10 years. C. Any bond secured by a blanket mortgage. D. An unsecured bond with an initial maturity of 10 years or less. E. Any bond maturing in 10 years or more.

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

Protective covenants: A. Apply to short-term debt issues but not to long-term debt issues. B. Only apply to privately issued bonds. C. Are a feature found only in government issued bond indentures D. Are primarily designed to protect bondholders

D. Are primarily designed to protect bondholders

3. The _________ is ultimately responsible for overseeing the firm and its management.

D. Board of Directors

A call-protected bond is a bond that: A. Is guaranteed to be called B. Can never be called C. Is currently being called D. Cannot be called at this point in time

D. Cannot be called at this point in time

You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows? A. 8 percent B. EAR of 8 percent compounded monthly C. Comparable risk free rate D. Comparable real rate

D. Comparable real rate

You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows? A. 8 percent. B. EAR of 8 percent compounded monthly. C. Comparable risk-free rate. D. Comparable real rate. E. Nominal rate-risk-free rate

D. Comparable real rate.

Which of the following applies to a premium bond? A. Yield to maturity > Current yield > coupon rate B. Coupon rate = current yield = yield to maturity C. Coupon rate > yield to maturity > current yield D. Coupon rate > current yield > yield to maturity

D. Coupon rate > current yield > yield to maturity

The collar of a floating-rate bond refers to the minimum and maximum: A. Call periods B. Maturity dates C. Market prices D. Coupon rates

D. Coupon rates

The collar of a floating-rate bond refers to the minimum and maximum: A. Call periods. B. Maturity dates. C. Market prices. D. Coupon rates. E. yields to maturity.

D. Coupon rates.

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms? A. Note B. Discounted C. Zero-Coupon D. Debenture

D. Debenture

40. Which one of the following relationships is stated correctly? A. The coupon rate exceeds the current yield when a bond sells at a discount. B. The call price must equal the par value. C. An increase in market rates increases the market price of a bond. D. Decreasing the time to maturity increases the price of a discount bond, all else constant. E. Increasing the coupon rate decreases the current yield, all else constant.

D. Decreasing the time to maturity increases the price of a discount bond, all else constant.

Which one of the following relationships is stated correctly? A. The coupon rate exceeds the current yield when a bond sells at a discount B. The call price must equal the par value C. An increase in market rates increases the market price of a bond D. Decreasing the time to maturity increases the price of a discount bond, all else constant

D. Decreasing the time to maturity increases the price of a discount bond, all else held constant

Rosita paid a total of $1,189 to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the: A. Quoted Price B. Spread Price C. Clean Price D. Dirty Price

D. Dirty Price

23. Rosita paid a total of $1,189 to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the: A. Quoted price. B. Spread price. C. Clean price. D. Dirty price. E. Call price.

D. Dirty price.

36. The formula which breaks down the return on equity into three component parts is referred to as which one of the following?

D. Du Pont identity

Treasury bonds are: A. Issued by any government agency in the U.S. B. Issued only on the first day of rich fiscal year by the U.S. Department of Treasury C. Bonds that offer the best tax benefits of any bonds currently available D. Generally issued as semiannual coupon bonds

D. Generally issued as semiannual coupon bonds

Treasury bonds are: A. Issued by any governmental agency in the U.S. B. Issued only on the first day of each fiscal year by the U.S. Department of Treasury. C. Bonds that offer the best tax benefits of any bonds currently available. D. Generally issued as semiannual coupon bonds. E. Totally risk-free.

D. Generally issued as semiannual coupon bonds.

A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be: A. 3.5 percent B. Greater than 3.5 percent but less than 7 percent C. 7 percent D. Greater than 7 percent

D. Greater than 7 percent

42. A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be: A. 3.5 percent. B. Greater than 3.5 percent but less than 7 percent. C. 7 percent. D. Greater than 7 percent. E. Less than 3.5 percent.

D. Greater than 7 percent.

A zero coupon bond: A. Is sold at a large premium B. Pays interest that is tax deductible to the issuer at the time of payment C. Can only be issued by the U.S. treasury D. Has more interest rate risk than a comparable coupon bond

D. Has more interest rate risk than a comparable coupon bond

A zero coupon bond: A. Is sold at a large premium. B. Pays interest that is tax deductible to the issuer at the time of payment. C. Can only be issued by the U.S. Treasury. D. Has more interest rate risk than a comparable coupon bond. E. Provides no taxable income to the bondholder until the bond matures.

D. Has more interest rate risk than a comparable coupon bond.

Callable bonds generally: A. Grant the bondholder the option to call the bond anytime after the deferment period B. Are callable at par as soon as the call-protection period ends C. Are called when market interest rates increase D. Have a sinking fund provision

D. Have a sinking fund provision

The Fisher effect primarily emphasizes the effects of _____ on an investor's rate of return A. Default B. Market movements C. interest rate changes D. Inflation

D. Inflation

The Fisher effect primarily emphasizes the effects of _____ on an investor's rate of return. A. Default. B. market movements. C. Interest rate changes. D. Inflation. E. The time to maturity.

D. Inflation.

Cat bonds are primarily designed to help: A. Municipalities survive economic recessions B. Corporations respond to overseas competition C. The federal government cope with huge deficits D. Insurance companies fund excessive claims

D. Insurance companies fund excessive claims

A "fallen angel" is a bond that has moved from: A. Being publicly traded to being privately traded B. Being a long-term obligation to being a short-term obligation C. Being a premium bond to being a discount bond D. Investment grade to speculative grade

D. Investment grade to speculative grade

Hot Foods has an investment-grade bond issue outstanding that pays $30 semiannual interest payments. The bonds sell at par and are callable at a price equal to the present value of all future interest and principal payments discounted at a rate equal to the comparable Treasury rate plus .50 percent. Which one of the following correctly describes this bond? A. The bond rating is B B. Market value is less than face value C. The coupon rate is 3 percent D. It has a "make whole" call price

D. It has a "make whole" call price

Hot Foods has an investment-grade bond issue outstanding that pays $30 semiannual interest payments. The bonds sell at par and are callable at a price equal to the present value of all future interest and principal payments discounted at a rate equal to the comparable Treasury rate plus .50 percent. Which one of the following correctly describes this bond? A. The bond rating is B. B. Market value is less than face value. C. The coupon rate is 3 percent. D. It has a "make whole" call price. E. Variable Interest payments are variable.

D. It has a "make whole" call price.

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the: A. Coupon rate will also increase B. Current yield will decrease C. Yield to maturity will be less than the coupon rate D. Market price of the bond will decrease

D. Market price of the bond will decrease

37. DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the: A. Coupon rate will also increase. B. Current yield will decrease. C. Yield to maturity will be less than the coupon rate. D. Market price of the bond will decrease. E. Coupon payment will increase.

D. Market price of the bond will decrease.

A Treasury yield curve plots Treasury interest rates relative to which one of the following? A. Market rates B. Comparable corporate bond rates C. The risk-free rate D. Maturity

D. Maturity

A deferred call provision is which one of the following? A. Requirement that a bond issuer pay the current market price, plus accused interest, should the firm decide to call the bond B. Ability pf a bond issuer to delay repaying a bond until after the maturity date should the issuer so opt C. Prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to maturity D. Prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date

D. Prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date

15. A deferred call provision is which one of the following? A. Requirement that a bond issuer pay the current market price, plus accrued interest, should the firm decide to call a bond. B. Ability of a bond issuer to delay repaying a bond until after the maturity date should the issuer so opt. C. Prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to maturity. D. Prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date. E. Requirement that a bond issuer pay a call premium that is equal to or greater than one year's coupon should that issuer decide to call a bond.

D. Prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date.

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: A. Trustee Relationships B. Bylaws C. Legal Bounds D. Protective Covenants

D. Protective Covenants

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond? A. risk free rate B. realized rate C. nominal rate D. real rate

D. Real Rate

73. Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond? A. Risk-free rate. B. Realized rate. C. Nominal rate. D. Real rate. E. Current rate.

D. Real rate.

26. The Fisher effect is defined as the relationship between which of the following variables? A. Default risk premium, inflation risk premium, and real rates B. Nominal rates, real rates, and interest rate risk premium C. Interest rate risk premium, real rates, and default risk premium D. Real rates, inflation rates, and nominal rates E. Real rates, interest rate risk premium, and nominal rates

D. Real rates, inflation rates, and nominal rates

The Fisher effect is defined as the relationship between which of the following variables? A. Default risk premium, inflation risk premium, and real rates B. Nominal rates, real rates, and interest rate risk premium C. Interest rate risk premium, real rates, and default risk premium D. Real rates, inflation rates, and nominal rates

D. Real rates, inflation rtes, and nominal rates

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the: A. Equilibrium B. Premium C. Discount D. Spread

D. Spread

79. Sue is considering purchasing a bond that will only return its principal at maturity if the stock market declines. However, if the stock market increases in value during the bond term, at maturity, she will receive both the bond principal and a percentage of the stock market gain. What type of bond is this? A. NoNo bond. B. Put bond. C. Contingent, callable bond. D. Structured note. E. Sukuk.

D. Structured note.

The Corner Grocer has a 7-year, 6.5 percent semiannual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the following statements is correct if the market yield suddenly increases to 7 percent? A. The bond price will increase by 1.14 percent B. The bond price will increase by 2.29 percent C. The bond price will increase by 1.74 percent D. The bond price will decrease by 1.92 percent

D. The bond price will decrease by 1.92 percent

Which one of the following statements is correct? A. The risk free rate represents the change in purchasing power B. Any return greater than the inflation rate represents the risk premium C. Historical real rates of return must be positive D. The real rate must be less than the nominal rate given a positive rate of inflation

D. The real rate must be less than the nominal rate given a positive rate of inflation

The bond market requires a return of 9.8 percent on the five-year bonds issued by JW Industries. The 9.8 percent is referred to as which one of the following? A. Coupon Rate B. Face Rate C. Call Rate D. Yield to Maturity

D. Yield to Maturity

A bond has a market price that exceeds its face value. Which one of these features currently applies to this bond? A. Discount bond B. Yield to maturity equal to the current yield C. Currently selling at par D. Yield to maturity less than the coupon rate

D. Yield to maturity less than the coupon rate

5. The bond market requires a return of 9.8 percent on the five-year bonds issued by JW Industries. The 9.8 percent is referred to as which one of the following? A. Coupon rate. B. Face rate. C. Call rate. D. Yield to maturity. E. Current yield.

D. Yield to maturity.

34. The sources and uses of cash over a stated period of time are reflected on the:

D. statement of cash flows.

Sue is considering purchasing a bond that will only return its principal at maturity if the stock market declines. However, if the stock market increases in value during the bond term, at maturity, she will receive both the bond principal and a percentage of the stock market gain. What type of bond is this? A. NoNo bond B. Put bond C. Contingent, callable bond D. Structured note

D. structured note

financial leverage

Debt financing to amplify the effects of changes in operating income on the returns to stockholders.

subordinated debt

Debt that may be repaid in bankruptcy only after senior debt is paid.

secured debt

Debt that, in the event of a default, has first claim on specified assets.