Finance: Chapter 5

Maria just purchased a bond which pays $40 in interest every six months. The $40 interest payment is also called the

coupon.

You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 2.5% annual interest and was trading for ¥105,000 at year-end. What holding period return, measured in yen, did you earn on the bond?

7.5%

Which of the following securities has a purely fixed claim against a firm's cash flows?

Bonds

What is the holding period return for the year on a bond with a par value of $1,000 and a coupon rate of 8.5% if its price at the beginning of the year was $1,215 and its price at the end of the year was $1,020? Assume interest is paid annually.

−9.05%

Which of the following statements related to market efficiency tend to be supported by current evidence? 1. Markets tend to respond quickly to new information. 2. It is difficult for the typical investor to earn above-average returns without taking above-average risks. 3. Short-run prices are difficult to predict accurately based on public information. 4. Markets are most likely strong-form efficient.

1, 2, and 3 only

Which of the following statements are true? 1. Underwriters help private companies access public stock markets through IPOs. 2. Shelf registrations and private placements are examples of seasoned security issues. 3. Issue costs for debt are typically greater than issue costs for equity. 4. Bearer bonds make it easier for investors to avoid paying taxes on interest income.

1, 2, and 4 only

At the end of 2020, Crane Industries, Incorporated stock price was $30.75. A year later, it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the percentage change in the share price in 2021?

13.43%

At the end of 2020, Crane Industries, Incorporated stock price was $30.75. A year later, it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What rate of return did the common stockholders earn in 2021?

15.22%

Which of the following are the most likely reasons for why a stock price might not react at all on the day that new information related to the stock issuer is released? 1. Insiders knew the information prior to the announcement. 2. Investors need time to digest the information prior to reacting. 3. The information has no bearing on the value of the firm. 4. The information was anticipated.

3 and 4 only

Assume that financial markets are semistrong-form efficient and that no private information is available. Which of the following statements is false?

All of the statements are true.

Which of the following securities has a purely residual claim against a firm's cash flows?

Common stock

Which one of the following accurately orders the average rate of return on financial securities from highest to lowest over most of recorded market history (the 1928-2020 period)?

Common stocks, long-term corporate bonds, long-term government bonds, short-term government bills

Which one of the following statements is true? a. Equity securities offer fixed claims on future cash payouts. b. Unlike bondholders, stockholders rely entirely on price appreciation for their returns. c. Historically, common stockholders have earned a risk premium as compensation for risk borne in excess of government bonds. d. None of the options are correct.

Historically, common stockholders have earned a risk premium as compensation for risk borne in excess of government bonds.

Which of the following statements regarding junk bonds is true?

Junk bonds have higher priority in bankruptcy than preferred stock.

Which of the following would allow a corporation to issue a bond at a lower coupon rate, all else equal?

None of the options are correct.

Which one of the following statements is true? a. Debt instruments offer residual claims to future cash payouts. b. Bonds with call provisions will have lower coupon rates than otherwise identical bonds. c. Bondholders enjoy a direct voice in company decisions. d. None of the options are correct.

None of the options are correct.

True or False: After issue, the market price of a fixed-rate bond can differ substantially from its par value.

True

True or False: Bond investors should be more concerned with real returns than with nominal returns.

True

True or False: In a strong-form efficient market, insider trading is not profitable.

True

Individuals who continually monitor the financial markets seeking mispriced securities

make the markets increasingly more efficient.