Finance Exam 2- HW and practice test multiple choice

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: Dirty price. Redemption value. Call premium. Original-issue discount. Redemption discount.

call premium

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

callable

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

clean price

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n): Floor trader. Dealer. Specialist. Executor. Commission broker.

commission broker

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

are quoted as a percentage of par

Which one of the following is the price at which a dealer will sell a bond? Call price Asked price Bid price Bid-ask spread Par value

asked price

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

liquidity

Which bond would you generally expect to have the highest yield? Risk-free Treasury bond Non-taxable, highly-liquid bond Long-term, high-quality, tax-free bond Short-term, inflation-adjusted bond Long-term, taxable junk bond

long term taxable junk bond

The secondary market is best defined by which one of the following? Market in which subordinated shares are issued and resold. Market conducted solely by brokers. Market dominated by dealers. Market where outstanding shares of stock are resold. Market where warrants are offered and sold.

market where outstanding shares of stock are resold

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

maturity

Interest rates that include an inflation premium are referred to as: Annual percentage rates. Stripped rates. Effective annual rates. Real rates. Nominal rates.

nominal rates

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market? Auction. Private. Over-the-counter. Regional. Insider.

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? Senior bond. Debenture. Warrant. Common stock. Preferred stock.

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? Private. Auction. Tertiary. Secondary. Primary.

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: Trustee relationships. Bylaws. Legal bounds. Trust deed. Protective covenants.

protective covenants

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

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

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? Alternative voting. Cumulative voting. Straight voting. Indenture voting. Voting by proxy.

voting by proxy

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. .05 - (1 - t*) = .07. .07 + (1 - t*) = .05. .05 × (1 - t*) = .07. .05 × (1 + t*) = .07.

0.05 / (1-t) = 0.07

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

a bond's unfavorable tax status

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

a discount; less than

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

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

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

are considered to be free of default risk

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

are primarily designed to protect bondholders

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

bearer form

An agent who arranges a transaction between a buyer and a seller of equity securities is called a: Broker. Floor trader. Capitalist. Principal. Dealer.

broker

An agent who maintains an inventory from which he or she buys and sells securities is called a: Broker. Trader. Capitalist. Principal. Dealer.

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? Note. Discounted. Zero-coupon. Callable. Debenture.

debenture

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. Taxability. Liquidity. Inflation. Interest rate risk.

default risk

A market maker who acts as a dealer in one or more securities on the floor of the NYSE is called a: Floor trader. Floor post. designated market maker. Floor broker. Commission broker.

designated market maker

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? Electing the board of directors. Receiving a distribution of company profits. Voting either for or against a proposed merger or acquisition. Determining the amount of the dividend to be paid per share. Having first chance to purchase any new equity shares that may be offered.

determining the amount of the dividend to be paid per share

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

early bond redemption

A floor broker on the NYSE does which one of the following? Supervises the commission brokers of a specific financial firm. Trades for his or her personal inventory. Executes orders on behalf of a commission broker. Maintains an inventory and assumes the role of a market maker. Is charged with maintaining a liquid, orderly market.

executes orders on behalf of a commission broker

Which one of the following represents the capital gains yield as used in the dividend growth model? D1 D1 / P0 P0 g g / P0 References

g

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: 3.5 percent. Greater than 3.5 percent but less than 7 percent. 7 percent. Greater than 7 percent. Less than 3.5 percent.

greater than 7 percent

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

have a sinking fund provision

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

inflation

The pure time value of money is known as the: Liquidity effect. Fisher effect. Term structure of interest rates. Inflation factor. Interest rate factor.

interest rate factor

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 face value of the bond today is greater than it was when the bond was issued. The bond is worth less today than when it was issued. The yield-to-maturity is less than the coupon rate. The coupon rate is greater than the current yield. The yield-to-maturity equals the current yield.

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

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? Coupon rate. Face rate. Call rate. Yield to maturity. Current yield.

yield to maturity