FINC exam 3 learnsmart questions
Suppose a bond's clean price is $1050 and the bond currently has accrued interest of $30. What is the dirty price? $1080 $1020 $1030 $1050
$1080
The geometric rate of return takes ___ into account -Compounding -Inflation -Volatility
Compounding
Systematic risk is also called ___ risk. -Diversifiable -Market -Industry-specific
Market
Most of the time, a floating-rate bond's coupon adjusts ___. -Dramatically -On a continuous basis -With a lag to some base rate -With a lead to some base rate
With a lag to some base rate
If Joan owns 100 shares of ABC company and the company is electing 4 directors, under cumulative voting, Joan would usually have ___ votes. 1600 25 400 1
400
If the variance of a portfolio is .0025, what is the standard deviation? 12.5% 6.25% 5% 25%
5%
A firm decides to raise money by issuing 5 million bonds with a par value of $5000 each for 10 years at a coupon rate of 7%. At the time of issue, the bonds were sold for $5500 each. What will the par value of the bonds be in year 5? $5350 per bond $5500 per bond $5000 per bond
$5000 per bond Par value is not affected by interest rates, market price, or time
The US gov't borrows money by issuing... a. Treasury notes b. Treasury bonds c. Treasury certificates
A & B
In the dividend growth model, the expected return for investors comes from which 2 sources? a. Dividend yield b. Tax rate c. Growth rate d. Amount of last year's earnings
A & C
What 2 factors determine a stock's total return? a. Unexpected return b. Bond rates c. Expected return d. Abnormal return
A & C
___ risk is reduced as more securities are added to the portfolio. a. Unsystematic b. Company-specific c. Marketwide d. Diversifiable
A, B, & D
Which of the following are examples of systematic risk? a. Labor strikes b. Regulatory changes in tax rates c. An increase in the competition in the industry d. Future rates of inflation
B & D
What is an uncertain or risky return? a. The portion of return that is unaffected by present or future information b. The return that is classified as risky by bond rating agencies c. The portion of return that depends on information that is currently unknown d. The portion of return that depends on information that is currently known
C
WACC is used to discount ___. -Cash flows -Common stock dividends
Cash flows
The dividend growth model is applicable to companies that pay ___.
Dividends
The calculation of a portfolio beta is similar to the calculation of a portfolio's... -Standard deviation -Expected return -Variance
Expected return
True or False: Since the CAPM equation can be used only for individual securities, it cannot be used with portfolios
False
True or False: A debenture is a bond secured with collateral.
False A debenture is an unsecured bond
Dividends are the ___ component of the total return form investing in a stock -Price appreciation -Capital gains -Amortization -Income
Income
When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows ___. -Increases -Decreases -Remains unchanged
Increases
Components of the WACC include funds that come from -Non cash expenses -Accruals -Investors
Investors
Components of the WACC include funds that come from ____. -Accruals -Investors -Non-cash expenses
Investors
If the dispersion of returns on a particular security is very spread out from the security's mean return, the security ___. -Is risk-free -Is highly risk -Has a low level of risk
Is highly risky
What is the definition of a bond's time to maturity? a. It is the period of time that has elapsed since the bond was issued b. It is the number of years the corporation is expected to be in existence c. It is the number of years until the face value is paid off d. It is the number of years until the bond is sold by the bondholder
It is the number of years until the face value is paid off
If a firm issues no debt, its average cost of capital will equal ___. -Its dividend yield -Its cost of equity -Its cost of debt
Its cost of equity
If a $1000 par value bond is trading at a discount, it means that the market value of the bond is ___ $1000. -Greater than -Less than -Equal to
Less than
The interest rate risk premium is the additional compensation demanded by investors for holding ___ bonds. -Lower rated -High coupon -Longer term -Corporate
Longer term
Using a benchmark PE ratio against current earnings yields a forecasted price called a ___ price. -Target -Benchmark -Future -Expected
Target
If you are holding 2 identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rte risk? -The 5 year bond -The 10 year bond
The 10 year bond
Bond ratings are based on the probability of default risk, which is the risk that ___. -The bond's maturity may change -Inflation may increase in the short term -The bond's issuer may not be able to make all the required payments -The bond's interest rates may change unexpectedly
The bond's issuer may not be able to make all the required payments
What does the clean price for a bond represent? -The original issue price -The quoted price plus accrued interest -The quoted price excluding accrued interest -The original issue price plus accrued interest
The quoted price excluding accrued interest
Which statement best describes junk bonds? -They have a low probability of default -They are rated below investment grade bonds -They all have very long maturities -They paw a low rate of interest -They are all zero coupon bonds
They are rated below investment grade bonds
When long-term rates are higher than short-term rates, which of the following shapes will the term structure of interest rates usually have? -Humped -Downward sloping -Upward sloping -Flat
Upward sloping
The cost of capital depends primarily on the ___ (use/source) of funds, not the ___ (use/source).
Use; source
If the growth rate (g) is zero, the capital gains yield is ___. -Cyclical -100 percent -Zero -Higher than the dividend yield
Zero
What is the beta of the risk-free asset? 1 0.5 0
Zero
The return an investor in a security receives is ___ the cost of the security to the company that issued it. -Greater than -Less than -Equal to -Unrelated to
equal to
The nominal distribution is completely described by the ___ and ___.
mean & variance/standard deviation
Equity represents an ___ interest of a firm
ownership
Geometric averages are usually ___ than arithmetic averages -Smaller -Larger
Smaller
What is a real rate of return? a. It is a percentage change in buying power b. It is an average rate of return on similar investments c. It is a rate of return that has not been adjusted for inflation d. It is a rate of return that has been adjusted for inflation
A & D
Which of the following are true? a. Ideally, we should use market values in the WACC b. Ideally, we should use book values in the WACC c. Book values are often similar to market values for equity d. Book values are often similar to market values for debt
A & D
Finding a firm's overall cost of equity is difficult because: a. It cannot be observed directly b. It requires the use of differential equations c. The federal gov't refuses to disclose equity costs
A
As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk? a. It is likely to decrease b. It is likely to increase c. It may eventually be almost totally eliminated d. It will not change
A &C
Preferred stock has preference over common stock in the: a. Portfolios of individual investors b. Payment of dividends c. Distribution of corporate assets d. Number of votes given
B & C
The following are disadvantages of the SML approach a. Does not regulate the company to pay a dividend b. Requires estimation of beta c. Requires estimation of the market risk premium d. Adjusts for risk
B & C
The growth rate of dividends can be found using... a. The perpetuity model b. Security analysts' forecasts c. Historical dividend growth rates d. The capital asset pricing model
B & C
What is the asked price? a. The percentage change in a bond's price since its issue b. The price at which a dealer is willing to buy a particular security c. The price at which a dealer is willing to sell a particular security d. The price at which an investor can buy a particular security from a dealer
C & D
Which of the following are advantages of the SML approach? a. Requires estimation of beta b. Requires estimation of the market risk premium c. Adjusts for risk d. Does not require the company to pay a dividend
C & D
The average return on the stock market can be used to... -Compare stock returns with the returns on other securities -Accurately forecast the market's returns in the future -Find ways to beat the market
Compare stock returns with the returns on other securities
The risk-return relationship states that a riskier investment should demand a ___ return. -Higher -Lower -Equal
Higher
The 2 most important stock markets in the US are
NYSE & NASDAQ
Systematic risk will ___ when securities are added to a portfolio -Not change -Increase -Decrease -Be eliminated
Not change
If you use an arithmetic average to project long-run wealth levels, your results will most likely be ___ -About right -Pessimistic -Optimistic
Optimistic
___ risk is the only risk important to the well diversified investor. -Diversifiable -Systematic -Firm-specific -Unsystematic
Systematic
Which of the following types of risk is not reduced by diversification? -Unsystematic risk -Systematic risk aka market risk -Asset-specific risk
Systematic risk aka market risk
Studying market history can reward us by demonstrating that a. The greater the potential reward is, the greater the risk b. The stock market is nothing but a casino c. There is a reward for bearing risk d. The greater the potential reward is, the lower the risk
A & C
What does the security market line depict? a. The relationship between systematic risk & unsystematic risk b. It is a graphical depiction of the capital asset pricing model c. It depicts the relationship between expected return and the standard deviation of returns
B
What is the bid price? a. The price at which a dealer is willing to sell securities b. The price an investor will receive if he sells a bond to a dealer c. The price at which a dealer is willing to buy securities d. The highest price at which bonds can be bought
B & C
Which of the following are true about a firm's cost of debt? a. Yields can be checked by using the DDE model b. It is easier to estimate than the cost of equity c. Yields can be calculated from observable data
B & C
Unsystematic risk will affect a. The market as a whole b. A specific firm c. All manufacturing firms d. Firms in a single industry
B & D
The true risk of any investment comes from a. Expectations b. Forecasts c. Unanticipated events d. Surprises
C & D
Using capital market history as a guide, it would appear the greatest reward would come from investing in -US Treasury bills -Small company common stock -Long-term corporate bonds -Large company common stocks -Long term gov't bonds
Small company common stock
If you are holding 2 bonds - one with a 5% coupon rate and other with an 8% coupon rate - which one is more sensitive to interest rate risk, all other things being equal? -The bond with a 5% rate -The bond with an 8% rate -Both are equally sensitive
The bond with a 5% rate
What is the intercept of the security market line (SML)? -The risk-free rate -The market rate of return -The market-risk premium -Beta
The risk-free rate
How are the unsystematic risks of 2 difference companies in 2 different industries related? -There is a positive relationship -There is a negative relationship -There is no relationship
There is no relationship
What are crossover bonds? -Bonds that have both an investment grade and a junk bond rating -Bonds that have moved completely from junk bond to investment grade status -Bonds that have fallen to all junk bond ratings status -Bonds that are continually improving their ratings
Bonds that have both an investment grade and a junk bond rating
Which of the following are examples of unsystematic risk? a. Labor strikes b. Changes in management c. The expected rate of inflation next year d. Changes in the federal tax code
A & B
What is a premium bond? -A bond of superiority quality -A bond that sells for less than face value -A bond that sells for more than face value -A bond that is not risky and rated as investment grade
A bond that sells for more than face value
What are the 2 unique features of a US federal government bond? a. US treasury issues are exempt from state and federal income taxes b. US treasury issues are considered to be default-free c. US treasury issues are exempt from federal income taxes d. US treasury issues are exempt from state income taxes
B & D
___ risk is reduced as more securities are added to the profile. a. Marketwide b. Company-specific c. Diversifiable d. Unsystematic
B, C, & D
Which of the following are bonds that have actually been issued? a. A bunt and run bond b. A Coco bond c. A convertible bond d. A silent bond e. A put bond
B, C, & E
Percentage returns are more convenient than dollar returns because they... a. Are more accurate than dollar amounts b. Avoid using the dollar sign c. Allow comparison against other investments d. Apply to any amount invested
C & D
Which of the following are true based on the year-to-year returns from 1926 to 2014? a. T-bills sometimes outperform common stocks b. Common stocks frequently experience negative returns c. Consumer price index is always positive
A & B
What will happen over time if a firm uses its overall WACC to evaluate all projects, regardless of each project's risk level? a. Using the firm's WACC to evaluate all projects is appropriate b. The firm's risk will not change over time c. It will accept projects that it should have rejected d. The firm overall will become riskier e. It will reject projects that it should have accepted
C, D, & E
If you buy a stock for $10 and later sell it for $16, you will have a capital gain of $6 $16
$6
What are the cash flows involved in the purchase of a 5-year zero-coupon bond that has a par value of $1000, if the current price is $800? Assume the market rate of interest is 5%. a. Pay $800 today and receive $1000 at the end of 5 years b. Pay $800 today, receive $50 for every year for 5 years, and receive $1000 at the end of 5 years c. Pay $800 today and receive $1250 at the end of five years d. Pay $800 today and receive $800 plus $250 at the end of 5 years
A
Which of the following ratios might be used to estimate the value of a stock? a. The Price/Earnings Ratio b. The Price/Sales Ratio c. The Book to Value ratio
A & B
What is a corporate bond's yield to maturity (YTM)? a. The expected return for an investor who buys the bond today and holds it to maturity b. Another term for the bond's coupon rate c. The prevailing market interest rate for bonds with similar features d. The yield that will be earned if the bond is sold immediately in the market
A & C
Finding a firm's overall cost of equity is difficult because: a. It requires the use of differential equations b. It can only be guessed at c. It cannot be observed directly d. The federal gov't refuses to disclose equity costs
C
What does historical data suggest about the nature of short-term and long-term interest rates? a. Short term rates are always higher than long term rates b. Short term rates are equal to the long term rates c. Sometimes short term rates are higher and sometimes long term rates are higher d. Long term rates are always higher than short term rates
C
The sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables? a. Coupon rate b. Par value c. Bond rating d. Time to maturity
A & D
What does the AAA rating assigned by the S&P mean? -The firm is likely to enjoy high stock valuations in the future -The firm is in a weak position to meet its debt obligations -The firm is unlikely to pay interest on time -The firm is in a strong position to meet its debt obligations
The firm is in a strong position to meet its debt obligations
You invest in a bond paying 6% interest paid semi-annually with a face value of $1000. The bond matures in 8 years and similar bonds yield 5%. What is the current value of the bond? $1065.28 $1108.38 $738.24 $1000
$1065.28 N=16; I/Y=2.5%; PMT=30; FV=1000
If the present value of the interest payments on a bond is $320 and the present value of the par value to be paid at maturity is $900, the total value of the bond must be... $320 $900 $1220 $1000
$1220
A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10%. What will the stock's price be? $12.29 $20.00 $1.81
$20
Preferred stock ... a. Pays dividends in perpetuity b. Pays a constant dividend c. Will never be repaid d. Does not pay dividends
A & B
Which of the following are true about a bond's face value? a. It is also known as the par value b. A bond's face value is the same for all corporations c. It is the principal amount repaid at maturity d. It is the market value of the bond at the time of maturity
A & C
Which of the following may increase the yield on corporate bonds as compensation to investors but will not impact Treasury bond yields? a. Liquidity premium b. Interest rate risk premium c. Default risk premium d. Inflation premium
A & C
To estimate the dividend yield of a particular stock, we need: a. The last dividend paid, D0 b. Forecasts of the dividend growth rate, g c. The current stock price d. The risk-free rate from a bank's CD rates e. Beta from the Wall Street Journal
A, B, & C
What is a discount bond? a. Bonds that a distressed corporation sells at fire sale prices to raise emergency funds b. Junk bonds that are rated below investment grade c. Bonds that sell for less than the face value d. Bonds with short maturities
C
The relationship between nominal rates, real rates, and inflation is called ___. -The real rate equation -The Fisher effect -The inflation adjustment model -The nominal-real equation
The Fisher effect
The WACC is the overall rate of return the firm must earn on its existing assets to maintain the ___ of its stock.
Value
If your total dollar return was $7 and your dividend was $2, then the price change on your stock must have been... +$5 -$9 +$9 -$5
+$5
The rate used to discount project cash flows is known as the ___. a. Discount rate b. Required return c. Cost of capital d. Market rate
A, B, & C
To estimate a firm's equity cost of capital using the CAPM, we need to know the ___. a. Risk-free rate b. Market risk premium c. Stock's beta d. Annual dividend amount
A, B, & C
The rate used to discount project cash flows is known as the ___. a. Required return b. Cost of capital c. Market rate d. Discount rate
A, B, & D
Which of the following are features of municipal bonds? a. They are issued by state and local governments b. The interest on municipal bonds is exempt from federal taxes c. The interest on municipal bonds is always exempt from state taxes d. The interest on municipal bonds is, in some cases exempt from state taxes in the state of issue e. They are not subject to default risk
A, B, & D
The Ibbotson SBBI data show that over the long term... a. Small-company stocks had the highest risk level b. T-bills, which had the lowest risk, generated the lowest return c. Long-term corporate bonds had the lowest risk d. Small-company stocks generated the highest average return e. Large-company stocks generated the highest average return
A, B, & E
To estimate a firm's equity cost of capital using CAPM, we need to know the ___. a. Risk-free rate b. Annual dividend amount c. Market risk premium d. Stock's beta
A, C, & D
The probability of an outcome being at least 2 standard deviations below the mean in a normal distribution is approximately 5% 95% 68% 2.5%
2.5%
A corporate bond's yield to maturity... a. Changes over time b. Remains fixed over the life of the bond c. Is usually not the same as a bond's coupon rate d. Is always equal to a bond's coupon rate
A & C
All else constant, the dividend yield will increase if the stock price ___ -Increases -Decreases
Decreases
The ___ can be interpreted as the capital gains yield. -Yield to maturity -Dividend yield -Inflation rate -Growth rate
Growth rate
What is the intercept of the security market line (SML)? -The risk free rate -The market rate of return -Beta -The market risk premium
The risk-free rate
The security market line (SML) shows that the relationship between a security's expected return and its beta is ___. -Negative -Positive
Positive
The excess return is the difference between the rate of return on a risky asset and the ___ rate. -Prime -Risk free -Inflation -Federal funds
Risk-free
According to the capital asset pricing model (CAPM), what is the expected return on a security with a beta of zero? -The risk free rate of return -The return on market -The market risk premium -Zero
The risk free rate of return
If a firm uses its overall cost of capital to discount cash flows from projects in higher risk divisions, it will accept ___ projects. -Too many -Too few -The optimal number of
Too many
The price of XYZ stock rises from $10 to $15. If you own 100 shares, your capital gain is ___. $500 $5 $100 $10
$500
True or false: A capital gain on a stock is counted as part of the total return whether or not the gain is realized from selling the stock
True
The square of the standard deviation is equal to the ___. -Sharpe ratio -Median return -Mean -Variance
Variance
A part of the indenture limiting certain actions during the term of the loan are termed ___. -Protective covenants -Bond protections -Bond restrictions -Indenture restrictions
Protective covenants
Other companies that specialize only in projects similar to the project your firm is considering are called ___. -Pure plays -Conglomerates -Matched pairs
Pure plays
Bonds issued by state and local governments are called ___. -Regional bonds -State treasury bonds -Municipal bonds
Municipal bonds
ABC Co. issued 1 million 6% annual coupon bonds that mature in 10 years. The face value is $1000 per bond. What are the expected cash flows from one of these bonds? a. $60 in interest at the end of each year for 10 years and a $1000 repayment of principal at the end of 10 years b. $1060 at the end of 10 years c. $60 at the end of each year and $100 at the end of each year in principal payments d. Interest at the end of each year, the amount of which is based on the current market rate of interest, and $1000 at the end of 10 years
A
A benchmark PE ratio can be determined using a. The PEs of similar companies b. A company's own historical PEs c. The constant growth model
A & B
What are the 2 major forms of long-term debt? a. Public issue b. Canadian debt c. Private issue d. Debentures
A & C
What are some features of the OCT market for bonds? a. OTC dealers are connected electronically b. The OTC has no designated physical location c. Dealers are restricted geographically to be in the US
A & B
Which of the following are true of bonds? a. They are issued by both corporations and governments b. They are normally interest-only loans c. Bond principal does not have to be repaid
A & B
Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond? a. Dividends are unknown & uncertain b. Different stock issues have different maturity dates c. Dividends are unknown but certain d. Stock has no set maturity e. The required rate of return is unobservable
A, D, & E
The term structure of interest rates examines the ___. a. Relationship between coupon rates and market yield b. Relationship between short term and long term interest rates c. Relationship between par value and market price d. Changes in bond values over time
B
Which of the following are usually included in a bond's indenture? a. The details of previous bond issues b. The total amount of bonds issued c. The names of the bondholders d. The repayment arrangements
B & D
Which three of the following are common shapes for the term structure of interest rates? a. V shaped b. Humped c. Downward sloping d. Upward sloping
B, C, & D
Which of the following variables is NOT required to calculate the value of a bond? -Original issue price of bond -Remaining life of bond -Market yield to maturity -Coupon rate
Original issue price of bond
The trading of existing shares occurs in the ___ market. -Primary -Tertiary -Secondary -Federal
Secondary
Which of the following is commonly used to measure inflation? -Dow Jones Industrial Average -CBOE volatility index -The Case-Schiller Index -The Consumer Price Index (CPI)
The Consumer Price Index (CPI)
Historically, the real return on Treasury bills has been -Quite high -Quite low -Negative
Quite low
More volatility in returns produces ___ difference between the arithmetic and geometric averages. -A smaller -A larger -No change in the
A larger
If security ABC has a beta of 1.5 and security XYZ has a beta of 1, what is the beta of a portfolio that is equally invested in both securities? 1.5 1.25 2.5 0.5
1.25 beta = 0.5 x 1.5 + 0.5 x 1 = 1.25
If a preferred stock pays a dividend of $2 per year and is selling for $20, its yield is: 18% 20% 10% 22%
10%
What is the coupon rate on a bond that has a par value of $1000, a market value of $1100, and a coupon interest payment of $100 per year? a. 1% b. 9.09% c. 10%
10%
If you are in the 20% federal income tax bracket, what is your after-tax yield on a municipal bond that is currently trading at par to yield 5? Assume there are no state or local taxes. 6% 5% 4% 20%
5%
The probability of a return being with +/- 1 standard deviation of the mean in a normal distribution is approximately ___ percent. 95% 99% 68%
68%
A provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a ___. -Call provision -Recall allowance -Refunding provision -Callback provision
Call provision
The percentage change in the price of a stock over a period of time is called its -Total return -Capital gain yield -Growth yield -Price change yield
Capital gain yield
True or False: The surprise part of any announcement is the information the market uses to form the expectation of the return on the stock
False
True or False: Projects should always be discounted at the firm's overall cost of capital
False Project's discount rates should reflect their particular level of risk
A limitation of bond ratings is that they... -Focus exclusively on default risk -Change every day -Are generated by the issuing corporations, not an external independent agency -Focus on both default risk and interest rate risk
Focus exclusively on default risk
A PE ratio that is based on estimated future earnings is known as a ___ PE ratio. -Target -Voodoo -Forward -Relative
Forward
A zero-coupon bond is a bond that... -Produces no taxable income -Is sold at a premium -Has no market value -Makes no interest payments
Makes no interest payments
The most appropriate weights to use in the WACC are the ___ weights. -Book value -Salvage value -Market value
Market value
What is the slope of the security market line (SML)? -The risk-free rate of return -The market-risk premium -The expected return on market -The expected return on the market plus the risk-free rate of return
The market-risk premium
According to the CAPM, what is the expected return on a stock if its beta is equal to zero? -The risk free rate -Zero -The market risk premium -The return on the market minus the risk-free rate
The risk free rate
What is the price of a US Treasury bond listed at 90 if the par value is $1000? $1000 $90 $900 $1090
$900
If a firm is funded with $400 in debt and $1200 in equity, the weight of equity in the capital structure is ___% and the weight of debt is ___%.
75; 25
A portfolio can be described by its portfolio weights which are defined as ___. a. The percentage of dollars invested in each asset b. The percentage of dollars invested in each asset class c. The dollars invested in each asset class d. The dollars invested in each asset
A
If an all-equity firm discounts a project's cash flows with the firm's overall weighted average cost of capital even though the project's beta is less than the firm's overall beta, it is possible that the project might be... a. Rejected, when it should be accepted b. Accepted, when it should be rejected
A
Some risk adjustment to a firm's WACC for projects of differing risk, even if it is subjective, is probably: a. Better than no risk adjustment b. Preferred over the pure play approach c. Unnecessary
A
The growth rate of dividends can be found using: a. Security analysts' forecasts b. The perpetuity model c. Historical dividend growth rates d. The capital asset pricing model
A & C
Which of the following statements are true about variance? a. Standard deviation is the square root of variance b. Variance measures a security's expected return over many periods c. Variance is a measure of the squared deviations of a security's return from its expected return
A & C
WACC was used to compute the following project NPVs: Project A = $100 Project B = -$50 Project C = -$10 Project D = $40 Which projects should the firm accept?
A & D
What are the 2 components of risky return (U) in the total return equation? a. Unsystematic risk b. Expected return c. Expected risk d. Market risk
A & D
If an asset has a reward-to-risk ratio of 6.0%, that means it has a ___ of 6.0% per unit of ___. a. Return; risk b. Risk premium; systematic risk c. Systematic risk; risk premium d. Return; systematic risk
B
Which of the following are components used in the construction of the WACC? a. Cost of accounts payable b. Cost of common stock c. Cost of debt d. Cost of preferred stock
B, C, & D
When a dollar in the future is discounted to the present it is worth less bc of the time value of money, but when a news item is discounted, it means that the market: a. Doesn't pay attention to news items b. Reversed its position based on the news c. Already knew about most of the news item
C
What is the definition of expected return? a. The expected variation in return on a risky asset b. The return that was earned in the past on a risky asset c. The variation in return during the last period d. The return that an investor expects to earn on a risky asset in the future
D
Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio -Increases -Declines -Does not change
Declines
If the firm is all equity, the discount rate is equal to the firm's cost of ___ capital. -Equity -Government -Derivative -Debt
Equity
Normally, the excess rate of return is... -Positive -Negative -Zero
Positive
Which type of debt is given preference in the event of default? -Senior -Junior
Senior
True or False: In general, the price that is paid for a bond will exceed its quoted price
True
True or False: The price you actually pay to purchase a bond will generally exceed the clean price
True
True or False: the risk premium can be interpreted as a reward for bearing risk
True
When interest rates in the market rise, we can expect the price of bonds to... -Increase -Decrease -Not change
Decrease
Which statements correctly identify differences between US treasury bonds & corporate bonds? a. Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk b. Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer c. Treasury bonds are issued by the US gov't while corporate bonds are issued by corporations d. Treasury bonds do not offer any tax benefits to investors but corporate bonds do
A, B, & C
Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond? a. The required rate of return is unobservable b. Dividends are unknown & uncertain c. Different stock issues have different maturity dates d. Dividends are unknown but certain e. Stock has no set maturity
A, B, & E
Which of the following are rights of common stock holders? a. The right to share proportionally in any residual value in the event of liquidation b. The right to vote on matters of importance c. The right to dividends each year d. The right to share proportionally in any common dividends paid e. First claim on any assets in the event of liquidation
A, B, & E
"Inside quotes" represent the ___ and the ___. a. Average bid price; average ask price b. Highest bid price; lowest ask price c. Lowest bid price; highest ask price d. Median bid price; median ask price
B
A bond's coupon payment is a. A variable interest amount that is paid to bondholders based on the federal funds rate b. Interest that is paid by the bond issuer when a bond matures c. A fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders d. A coupon that can be used by bondholders to receive discounts on goods produced by the corporation issuing the bonds
C
As a general rule, which of the following are true of debt and equity? a. Creditors generally have voting power b. Debt and equity represent the same financial claims c. Equity represents an ownership interest d. The maximum reward for owning debt is fixed
C & D
Which of the following terms apply to a bond? a. Dividend yield b. Time to maturity c. Coupon rate d. Par value
B, C, & D
If a bond is selling at a discount from its par value, the YTM must be ___ the coupon rate. -Less than -Greater than -Equal to
Greater than
Which one of the following is the most important source of risk from owning brands? -Mergers -Market interest rate fluctuations -Loss of a bond certificate -Coupon interest rate fluctuations
Market interest rate fluctuations
The term structure of interest rates describes ___. a. The relationship between rates on corporate bonds and Treasury bonds b. The relationship between nominal rates and time to maturity c. The relationship between nominal rates of interest and inflation d. The relationship between real rates and inflation e. The pure time value of money
B & E
What are the 3 components that influence the Treasury yield curve? a. The default risk premium b. Expected future inflation c. The interest rate risk premium d. The real rate of return
B, C, & D
What does a treasury yield curve show? a. The changes in the yield of Treasury bonds over time b. The changes in the yield of T-bills over time c. The difference between the yield on Treasury bonds and corporate bonds d. The yield for different maturities of Treasury notes and bonds
D
The constant growth model assumes that -Stock prices remain constant -Debt remains constant -Dividends change at a constant rate
Dividends change at a constant rate
A corporation issues 50,000 bonds at a face value of $1000 each. The bonds mature in 5 years and have a coupon rate of 7%. What will the total annual interest expense be for the corporation? $3.5 million $175 million $17.5 million $350 million $350,000
$3.5 million 50,000 x 1,000 x .07 = 3,500,000
What are crossover bonds? a. Bonds that are continually improving their ratings b. Bonds that have both an investment grade and a junk bond rating c. Bonds that have moved completely form junk bond to investment grad status d. Bonds that have fallen to all junk bond ratings status
B
What are "fallen angel" bonds? -Bonds that have been bought by angel investors -Bonds that have been dropped from investment grade to junk bond status -Bonds that have flown into higher a ratings category -Bonds that cannot be rated due to their unique cash flow patterns
Bonds that have been dropped from investment grade to junk bond status
