Quiz #1 Smartbook Questions

The model that precisely specifies the relationship between the nominal rate and the real rate is: R = the nominal rate r = the real rate h = the rate of inflation

(1 + R) = (1 + r)×(1 + h)

When interest rates in the market rise, we can expect the price of bonds to ____.

Decrease

If a company's growth for Years 1 through 3 is 20% bus stabilized at 5% beginning in Year 4, its growth pattern would be described as ______

Non-constant

When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows:

One vote per share held

The fundamental business of the NYSE is to attract ___.

Order flow

The constant growth model assumes that ____

dividends change at a constant rate

Websites that allow investors to trade directly with one another are termed ___.

ECNs

The price of a shade of common stock is equal to the present value of all ______ future dividends

Growing

What is the nominal rate of return on an investment?

It is the actual percentage change in the dollar value of an investment unadjusted for inflation

A zero-coupon bond is a bond that ______

Makes no interest payments

True or false: Longer-term bonds have greater interest rate sensitivity because a large portion of a bond's value comes from the face amount

True

True or false: The government sells Treasury notes and bonds to the public every month

True

True or false: Zero coupon bond calculations use semiannual periods to be consistent with coupon bond calculations

True

What are the two unique features of a U.S. federal government bond?

- U.S. Treasury issues are exempt from state income taxes. - U.S. Treasury issues are considered to be default-free.

Which one of the following is true about dividend growth patterns?

Dividends may grow at a constant rate

A limitation of bond ratings is that they ____.

Focus exclusively on default risk

Which of the following variables is NOT required to calculate the value of a bond?

Original issue price of bond

ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?

$60 at the end of each year in interest and $100 at the end of each year in principal payments

The coupon payments on floating-rate bonds are _____

Adjustable

New York Stock Exchange Designated Market Makers (DMM's) were formerly called ______

Specialists

Which of the following are cash flows to investors in stocks?

- Capital gains - Dividends

NASDAQ has which of these features?

- Computer Network of Securities Dealers - Multiple Market Maker System

What is a corporate bond's yield to maturity (YTM)?

- YTM is the prevailing market interest rate for bonds with similar features - YTM is the expected return for an investor who buys the bond today and holds it to maturity

Which of the following are rights of common stock holders?

-The right to share proportionally in any residual value in the event of liquidation -The right to share proportionally in any common dividends paid -The right to vote on matters of importance

The NYSE differs from the NASDAQ primarily because the NYSE has:

-a physical location -a face-to-face auction market

Preferred stock has preference over common stock in the:

-distribution of corporate assets -payment of dividends

If you are holding a municipal bond that is trading at par to yield 6%, by how much will your after-tax yield change if your federal income tax bracket increases from 15% to 20%. Assume there are no state or local taxes.

0%

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

5%

Crossover bonds can also be called _____ bonds

5B

A bond's coupon payment is:

A fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders

To find the total bond value, add the present value of the amount paid at maturity to the _____ of the annual coupon payments

Annuity present value

What are municipal bonds?

Bonds that have been issued by state or local governments

What are crossover bonds?

Bonds that have both an investment grade and a junk bond rating

What are "fallen angel" bonds?

Bonds that have dropped from investment grade to junk bond status

As an investor in the bond market, why should you be concerned about changes in interest rates?

Changes in interest rates cause changes in bond prices

A bond's ______ payment is a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders

Coupon

When interest rates in the market rise, we can expect the price of bonds to _______

Decrease

All else constant, the dividend yield will increase if the stock price _____

Decreases

What is a discount bond?

Discount bonds are bonds that sell for less than the face value

True or False: For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed

FALSE

True or False: Common stock has a set maturity

False

True or false: Bond ratings are concerned only with the possibility of price changes

False

True or false: Bonds that have dropped into junk territory are called "trash" bonds

False

True or false: The higher the coupon rate, the greater the interest rate risk, all other things being equal

False

A bond with a BB rating has a ______ than a bond with an BBB rating.

Higher risk of default

"Inside Quotes" represent the _____ and the _____

Highest bid price; Lowest ask price

The nominal rate is found by adding the _____ and the real rate of return

Inflation

What is the definition of a bond's time to maturity?

It is the number of years until the face value is paid off

The bonds of a firm in financial distress may have a market value that is ______ than the fact value at maturity

Less

The bonds of a firm in financial distress may have a market value that is _______ than the face value at maturity.

Less

When using trial and error to compute the yield to maturity (YTM) for a 6 percent coupon bond that trades at a premium, the process can be shortened if the initial guess is ____ 6 percent

Lower than

When using trial and error to compute the yield to maturity (YTM) for a 6 percent coupon bond that trades at a premium, the process can be shortened if the initial guess is ______ 6 percent.

Lower than

Which one of the following is the most important source of risk from owning bonds?

Market interest rate fluctuations

Bonds issued by state and local governments are called _______ ______

Municipal bonds

What are the cash flows involved in the purchase of a 5-year zero-coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5 percent

Pay $800 today and receive $1,000 at the end of 5 years

What is the equation for approximating the nominal rate of return? R = the nominal rate of interest r = the real rate of interest h = the inflation rate

R = r + h

If you are holding two 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 rate risk?

The 10-year bond

The relationship between nominal rates, real rates and inflation is called ________

The Fisher Effect

What does a bond's rating reflect?

The ability of the firm to repay its debt and interest on time

Bond ratings are based on the probability of default risk, which is the risk that _____

The bond's issuer may not be able make all the required payments

What does the AAA rating assigned by S&P mean?

The firm is in a strong position to meet its debt obligations

The degree of interest rate risk depends on ____.

The sensitivity of the bond's price to interest rate changes

Junk bonds have the following features:

They are rated below investment grade bonds

If a $1,000 par value bond is trading at a premium, the bond is:

Trading for more than $1,000 in the market

True or false: All else being equal, a one-year bond's price is less sensitive to interest rate changes as compared to that of a ten-year bond's price

True

True or false: Current yield = Annual coupon payment/Price

True

True or false: Low-grade bonds may not be rated by major rating agencies

True

Most of the time, a floating-rate bond's coupon adjusts ______

With a lag to some base rate

A benchmark PE ratio can be determined using:

- The PE's of similar companies - A company's own historical PE's

Which of the following are features of municipal bonds?

- The interest on municipal bonds is, in some cases exempt from state taxes in the state of issue - The interest on municipal bonds is exempt from federal taxes - They are issued by state and local governments

Which of the folloeinf might be used to estimate the value of a stock?

- The price/earnings ratio - The price/sales ratio

Which of the following are true of bonds?

- They are issued by both corporations and governments - They are normally interest-only loans

Which of these correctly identify differences between U.S. Treasury bonds and corporate bonds?

- Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk. - Treasury bonds are issued by the US government while corporate bonds are issued by corporations. - Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer.

The sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables?

- Coupon rate - Time to maturity

What information do we need to determine the value of a stock using the zero growth model?

- Discount rate - Dividend

In the dividend growth model, the expected return for investors comes from which two sources?

- Growth rate - Dividend yield

What is a real rate of return?

- It is a rate of return that has been adjusted for inflation - It is a percentage change in buying power

Which of the following are true about a bond's face value?

- It is the principal amount repaid at maturity - It is also known as the par value

Three special case patterns of dividend growth discussed in the text include:

- Non-constant growth - Zero growth - Constant growth

What four variables are required to calculate the value of a bond?

- Par value - Coupon rate - Yield to maturity - Time remaining to maturity

The US government borrows money by issuing:

- Treasury notes - Treasury bonds