FIN 300 Exam 2
The quoted price of a bond is referred to as the
clean price
The Zuffa Company has a semi-annual coupon bond outstanding. A decrease in the market interest rate will:
increase the market price (bond market prices are inversely related to market interest rates (or YTM))
(Fisher Effect) Real interest rates are defined as nominal rates that have been adjusted for
inflation
The compensation investors demand for accepting interest rate risk
interest rate risk premium
In the dividend growth model, the growth rate must be ________ than the required return
less
Winston Co. has a dividend yield of 5.4% and a total return for the year of 4.8%. What must be true about the stock? ________ capital gains yield
negative
Interest rates that include an inflation premium are referred to as
nominal rates
An unsecured bond with an initial maturity of 10 years or less
note
an unsecured bond with an initial maturity of 10 years or less
note
The secondary market is best defined as the market where ________ shares of stock are ________
outstanding, resold
A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?
over the counter
US Treasury bonds are quoted as a percentage of ________
par
An electronic system used by the NYSE for directly transmitting orders to designated market makers
pillar system
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 market?
primary market
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:
protective covenants
You cannot attend the shareholder's meeting for Company X, so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? ________ voting
proxy
Bonds issued by the US government are considered to be free of
risk
Callable bonds generally have a ________ fund provision
sinking
The difference between the price that a dealer is willing to pay and the price at which they will sell
spread
The pure time value of money is known as the
term structure of interest rates
The break-even tax rate between a taxable corporate bond yielding 7% and a comparable nontaxable municipal bond yielding 5% can be expressed as:
.05/(1-t*) = .07
What is the price at which a dealer will sell a bond?
Asked Price
What is the price at which you will sell a bond to a dealer?
Bid price
What represents dividend yield as used in the dividend growth model (DGM)?
D1/P0
A sinking fund is managed by a trustee for what reason?
Early bond redemption
A person on the floor of the NYSE who executes buy and sell orders on behalf of customers
Floor broker
Which risk premium compensates for the inability to easily resell a bond prior to maturity?
Liquidity
A computer network of securities dealers
NASDAQ
(Yield Curve) A Treasury yield curve plots Treasury interest rates relative to
Time to Maturity
2. Which bond would you generally expect to have the highest yield? a. Risk-free Treasury bond b. Long-term, taxable junk bond c. Nontaxable, highly liquid bond d. Long-term, high-quality, tax-free bond e. Short-term, inflation adjusted bond
b (the riskiest bonds see the highest yields)
A bond that is payable to whomever has physical possession of the bond is said to be in
bearer form
Protective covenants are primarily designed to protect who?
bondholders
An agent who arranges a transaction between a buyer and a seller of equity securities
broker
An agent who maintains an inventory from which he or she buys and sells securities
dealer
A long-term security yielding a fixed rate of interest. Unsecured
debenture
What premium is the compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments?
default risk
A member who acts as a dealer in a limited number of securities on the floor of the NYSE
designated market maker
clean price + accrued interest
dirty price
A decrease in ________ rate will increase the current value of a stock
discount
All else constant, a bond will sell at a ________ when the coupon rate is less than the YTM
discount
What right is never directly granted to all shareholders of a publicly held corporation? Determing the amount of the ________ to be paid per share
dividend
1. Which of the following statements is most FALSE? a. Market expectations of interest rates affect shape of the yield curve. b. Because interest rates tend to fall in response to an economic slowdown, an inverted yield curve is often interpreted as a negative forecast for economic growth c. Bond markets are primarily over-the-counter transactions d. Inverted yield curves tend to precede recessions e. The yield curve tends to be sharply decreasing as the economy comes out of a recession and interest rates are expected to rise
e
2. Which of the following statements is most FALSE? a. When a bond currently has a market price that exceeds par value, its yield to maturity (YTM) must be lower than the coupon rate b. Because interest rates tend to fall in response to an economic slowdown, an inverted yield curve is often interpreted as a negative forecast for economic growth c. Bond markets are primarily over-the-counter transactions d. The yield curve tends to be sharply increasing as the economy comes out of a recession and interest rates are expected to rise e. Inverted yield curves tend to follow recessions
e
1. Which bond would you generally expect to have the highest yield? a. Risk-free Treasury bond b. Nontaxable, highly liquid bond c. Long-term, high-quality, tax-free bond d. Short-term, inflation-adjusted bond e. Long-term, taxable speculative grade bond
e (the highest risk bonds see the highest yields)
What is the formula for capital gains yield as used in the dividend growth model (DGM)?
g (capital gains yield = growth rate)
A newly issued bond has a 7% coupon with semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be:
greater than 7% (the effective rate must be higher than YTM, which equals the coupon rate if a bond is priced at par)