FI302 Exam 2

____ refers to the assets that support the bond, should the bond issuer fail to make the obligated coupon payments or principal repayment on time and that can be transferred to the lender to satisfy loan repayment

Collateral; security of a bond

A bond originally issued as investment grade that has been downgraded to a speculative bond

Fallen angel

Which of the statements below is TRUE? A: investors want to maximize return and minimize risk B: investors want to maximize return and maximize risk C: investors want to minimize return and max risk D: investors want to minimize return and minimize risk

Investors want to max return and min risk

The __ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of of its life. A: coupon rate B: current yield C: YTM D: prime rate

YTM

If the equation E(r) = rf + [E(rm) - rf] x i is the linear equation for the security market line, what portion represents the market risk premium for a stock that does not have a beta of 1.0? A: rf B: [E(rm) - rf] C: Bi D: Bi * [E(rm) - rf]

[E(rm) - rf]

Bonds are different from stocks because ___ A: bonds promise growth in earnings B: bonds give payments only after other owners are paid C: bonds do not have maturity dates D: bonds promise fixed payments for the length of their maturity

bonds promise fixed payments for the length of their maturity

____ allows the bond issuer to call in the bond prior to maturity at a predetermined price.

callable bond

In ___, current prices already reflect the price history and volume of the stock as well as all available public information A: strong-form efficient markets B: semi-strong-form efficient markets C: weak-form efficient markets D: operational efficient markets

semi-strong-form efficient markets

Which of the following investments is considered to be default risk free? A: currency options B: treasury bills C: common stock D: AAA rated corporate bonds

treasury bills

In ___, current prices reflect the price history and trading volume of the stock. It is of no use to chart historical stock prices to predict future stock prices such that you can identify mis-priced stocks and routinely outperform the market. A: strong-form efficient markets B: semi-strong-form efficient markets C: operational efficient markets D: weak-form efficient markets

weak-form efficient markets

The discount rate (return) for a callable premium bond

yield to call

The ___ is a market derived interest rate used to discount the future cash flows of the bond. A: coupon rate B: yield to maturity C: semiannual coupon rate D: compound rate

yield to maturity

The ___ is the return the bondholder receives on the bond if held to maturity A: yield to maturity B: par rate C: coupon D: coupon rate

yield to maturity

Which of the following is NOT a definition of beta? A: a measure of nondiversifiable risk B: a statistical measure of an individual asset's or portfolio's co-movement with the returns of the market C: a measure of risk that can be avoided D: a measure of systematic risk

a measure of risk that can be avoided

Beta is ___ A: the appropriate measure of risk for a well-diversified portfolio B: a measure of systematic risk C: a measure of nondiversifiable risk D: all of the above

all of the above

Stocks differ from bonds because A: bond cash flows are known while stock cash flows are uncertain B: the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase C: firms pay bond cash flow prior to paying taxes while stock cash flows are after tax D: all of the above

all of the above

Unsystematic risk ____ A: can be diversified way B: is equal to 2 times the systematic risk C: is system-wide risk D: is also known as nondiversifiable risk

can be diversified away

____ means that the percentage increase in the dividend is the same each year A: a constant cash flow B: no growth C: inconsistent growth D: constant growth

constant growth

The ___ is the regular interest payment of the bond A: coupon B: par C: coupon rate D: dividend

coupon

The ___ is the interest rate printed on the bond A: compound rate B: YTM C: semiannual coupon rate D: coupon rate

coupon rate

When the __ is less than the yield to maturity, the bond sells at a/the ___ the par value A: coupon rate; premium over B: time to maturity; discount to C: time to maturity; same price as D: coupon rate; discount to

coupon rate; discount to

When the ____ is more than the yield to maturity, the bond sells for a ____ its par value. A: coupon rate; premium above B: time to maturity; discount to C: time to maturity; same price as D: coupon rate; discount to

coupon rate; premium above

The terms __ and __ mean the same thing. A: diversifiable risk; unsystematic risk B: diversifiable risk; systematic risk C: nondiversifiable risk; unsystematic risk D: total risk; unique risk

diversifiable risk; unsystematic risk

The practice of not putting all of your eggs in one basket is an illustration of ___ A: portion control B: variance C: diversification D: expected return

diversification

The holder of preferred stock is entitled to a constant dividend ___ A: only when the stock price increases B: only when earnings are positive and only when the stock price increases C: every period D: only when earnings are positive

every period

___ refers to how quickly information is reflected in the available prices for trading. A: informational efficiency B: market efficiency C: operational efficiency D: mechanical efficiency

informational efficiency

A bond is a ___ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future A: long-term equity B: short-term equity C: derivative D: long-term debt

long-term debt

A beta of 1.0 of the beta of the ___, while a beta of 0.0 is the measure for a ____ A: risk-free security; market B: market; single security held on its own C: risk-free security; single security held on its own D: market; risk-free security

market; risk-free security

The __ is the expiration date of the bond A: coupon B: future value C: YTM D: maturity date

maturity date

___ has to do with the speed and accuracy of processing a buy or sell order at the best available price. A: Mechanical efficiency B: Operational efficiency C: market efficiency D: informational efficiency

operational efficiency

Components of a Bond:

par value; coupon rate; coupon; YTM

The value of a financial asset is the ____ A: present value of all of the future cash flows that will be received B: future value of just the capital gains but not the dividends C: present value of just the capital gains but not the dividends D: sum of all previous cash flows received

present value of all of the future cash flows that will be received

Zero-Coupon Bonds are__ A: priced using semiannual instead of annual pricing formula B: tax exempt C: priced at a deep discount D: sold at a premium

priced at a deep discount

"Junk" bonds are a street name for ___ grade bonds A: extremely speculative B: speculative and investment C: speculative D: investment

speculative

____ is risk that cannot be diversified away A: unsystematic risk B: systematic risk C: diversifiable risk D: specific risk

systematic risk