quiz 6

Suppose a company's bond sold for $900 last month and this month the price is $1,200. The annual interest payment is $90. The current yield on this bond is

7.5 percent

Suppose you purchase shares in Papa's Pizza for $20 per share. The company believes there is a 40 percent chance it will fail to earn a discounted future profit of $2.59. What is the expected rate of return on your investment?

7.77 percent

Suppose a company's bond sold for $900 last month and this month the price is $750. The annual interest payment is $60. The current yield on this bond is

8.0 percent

Liquidity is

the ability of an asset to be converted to cash

The supply of loanable funds is determined by all of the following except

Demand for loanable funds

A major problem of owning a corporation is unlimited liability

FALSE

If the present discounted value of a payment is $1,000,000 and there is a 40 percent chance that the payment will not occur, then the expected value is

$600,000. (Expected value is equal to (1 - Risk factor) × PDV. Therefore the expected value is (1 - .4) × $1,000,000 = $600,000.)

Suppose Regis has a 25 percent chance of not collecting $1,000 in one year. If the interest rate is 10 percent, what is the expected value of the future payment?

$682

Which of the following statements about money is NOT true

Currency can be exchanged for gold only in the United States and Europe

If the opportunity cost of money is zero, the expected value of future dollars is equal to their present value

True

The primary economic function of financial intermediaries is to help allocate scare resources to desired uses

True

a bond is

a promise to repay a loan

Stock prices will increase, ceteris paribus, when the prevailing interest rate increases

FALSE

The longer one has to wait for a future payment, the greater the present value it has

FALSE

The present discounted value of a future payment will decrease when interest rates decrease

FALSE

Venture capital reduces the rate of economic growth

FALSE

A price/earnings ratios the price of a stock divided by the earnings per share

TRUE

An initial public offering occurs when a stock is first solo to the general public

TRUE

One reason why present dollars are worth more than future dollars is because income-earning investment opportunities exist

TRUE

Potential investors expect to be compensated for additional risk by above-average interest rates

TRUE

The par value is the amount to be repaid when a bond matures

TRUE

Venture Capitalists share in the risks and rewards by financing new ventures

TRUE

Venture capital increase the pace of innovation

TRUE

The primary economic role of financial markets is to

allocate resources to profitable business and away from businesses with losses

Par value is the

amount to be repaid when the bond is due

Capital gains are

an increase in the market value of an asset

As the prevailing interest rate decreases, the opportunity cost of money

decreases for both lender and borrower

bonds may be issues by all of the following except

individuals ( can be corporations, local governments, or the federal government)

The present discounted value of a future payment will decrease when the

interest rate increases

How does a recession impact the financial markets

it decreases loanable funds

the decision to save is influenced by all of the following except

occupation ( can be the level of risk, time preferences, interest rates)

The purpose of an initial public offering is to

raise funds for investment and growth by selling shares of the company to the public

Changes in expectations or opportunity costs

shift the bond supply and demand curves

As the prevailing interest rate increases, all of the following occur except

supply curve for savings shifts to the right

A motivation for holding stock is

the anticipation of capital gains

if a corporation issues bonds that it cannot sell, this is an indication that

the coupon rate is too low

If the expected rate of return decreases

the demand for loanable funds will decrease

The most important determinant of how much an individual will pay for a share of stock is

the expectation of future payment

All of the following are allowed to issue bonds except

the federal reserve ( can be the US treasury, General Motors, or the City of Arlington- has to be an institution)

Th price of a stock will decrease, ceteris paribus, when

the interest rate increases

The advantage to a corporation of issuing bonds instead of stock is that

the owners keep control of the company

the owners of a corporation are

the shareholders of the corporation's stock

treasury bonds typically have lower coupon rates that corporate bonds because

there is a lower risk that the US treasury will default

Profits used by a corporation for investment or unforeseen contingencies are known as retained earnings

true

large swings in stock prices are usually case by

widespread changes in expectation s