Finance Exam 2

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:

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

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

Liquidity

Which bond would you generally expect to have the highest yield?

Long-term, taxable junk bond

Real rates are defined as nominal rates that have been adjusted for which of the following?

Inflation

The real rate must be less than the nominal rate given a

positive rate of inflation.

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?

Default risk.

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?

Determining the amount of the dividend to be paid per share.

which bond would have the highest yield?

long term, taxable, non investment grade

a treasury yield curve plots the interest rates relative to which of the following?

maturity

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:

Call Premium

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

Callable

A bond is quoted at a price of $1,011. This price is referred to as the:

Clean Price

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):

Commission broker

an agent who arranges a transaction between a buyer and a seller of equity securities is called a ________?

broker

the company has a semi-annual coupon bond outstanding. A decrease in the market interest rate will have one of the following effects on this bond, all else equal?

increase in market price

you cannot attend the shareholders meeting for company X, so you authorize another shareholder to vote in your behalf. What is the granting of this authority called?

proxy voting

an indenture is

the legal agreement between a bond issuer and its bondholders

U.S. Treasury bonds are quoted as

percentage of par

A bond that is payable to whomever has physical possession of the bond is said to be in:

Bearer Form

Bonds issued by the U.S. government:

Are considered to be free of default risk.

Callable bonds generally:

Have a sinking fund provision.

The taxability risk premium compensates bondholders for which one of the following?

A bond's unfavorable tax status.

A note is generally defined as:

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

Protective covenants:

Are primarily designed to protect bondholders.

U. S. Treasury bonds:

Are quoted as a percentage of par.

An agent who arranges a transaction between a buyer and a seller of equity securities is called a:

Broker

An agent who maintains an inventory from which he or she buys and sells securities is called a:

Dealer

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?

Debenture

A sinking fund is managed by a trustee for which one of the following purposes?

Early bond redemption.

A floor broker on the NYSE does which one of the following?

Executes orders on behalf of a commission broker.

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:

Greater than 7 percent.

The secondary market is best defined by which one of the following?

Market where outstanding shares of stock are resold.

A Treasury yield curve plots Treasury interest rates relative to which one of the following?

Maturity

Interest rates that include an inflation premium are referred to as:

Nominal rates.

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?

Over-the-counter.

Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities?

Preferred Stock

Emst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?

Primary

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:

Protective covenants.

The pure time value of money is known as the:

Term structure of interest rates.

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?

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

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

Voting by proxy

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?

Yield to Maturity

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

a discount; less than

A market maker who acts as a dealer in one or more securities on the floor of the NYSE is called a:

designated market maker.

Which one of the following represents the capital gains yield as used in the dividend growth model?

g