FIN3715 Chapter 7, Finance Chp. 6, EXAM 2 CHAPTER 7 and 8 FIN

Which one of the following statements related to corporate dividends is correct?

Corporate shareholders may receive a tax break on a portion of their dividend income.

Who can access Level 3 of NASDAQ's information?

NASDAQ market makers

A forward PE is based on:

estimated future earnings.

You own one share of a cumulative preferred stock that pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ____ quarter(s) of dividends when the next dividend is paid.

3

Browning, Inc. owns 50,000 shares of preferred stock in Omega, Inc. What percentage, if any, of the dividend income received by Browning, Inc. from this investment is excluded from federal income taxation in 2018?

50 percent

The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting?

50 percent plus one vote

Which one of the following transactions occurs in the primary market?

A purchase of newly issued stock from the issuer

The stated interest payment, in dollars, made on a bond each period is called the bond's: A. coupon. B. face value. C. maturity. D. yield to maturity. E. coupon rate.

A. coupon.

A bond with a face value of $1,000 that sells for $1,000 in the market is called a _____ bond. A. par value B. discount C. premium D. zero coupon E. floating rate

A. par value

A newspaper listing of bond prices has an "Asked yield" column. This yield is based on the asked price and represents the: A. yield to maturity. B. difference between the current yield and the yield to maturity. C. difference between the bond's yield and the yield of a comparable Treasury issue. D. coupon rate. E. current yield.

A. yield to maturity.

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? A. real rate risk B. interest rate risk C. default risk D. liquidity risk E. taxability risk

B

Which one of these bonds is the most interest-rate sensitive? A. 5-year zero coupon bond B. 10-year zero coupon bond C. 5-year, 6 percent, annual coupon bond D. 10-year, 6 percent, semiannual coupon bond E. 10-year, 6 percent, annual coupon bond

B. 10-year zero coupon bond

The relationship between nominal rates, real rates, and inflation is known as the: A. Miller and Modigliani theorem. B. Fisher effect. C. Gordon growth model. D. term structure of interest rates. E. interest rate risk premium.

B. Fisher effect.

A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond. A. par B. discount C. premium D. zero coupon E. floating rate

B. discount

The principal amount of a bond that is repaid at the end of the loan term is called the bond's: A. coupon. B. face value. C. maturity. D. yield to maturity. E. coupon rate.

B. face value.

A bond is listed in a newspaper at a bid of 105.4844. This quote should be interpreted to mean: A. the bond will pay semiannual interest payments of $105.4844 per $1,000 of face value. B. you can sell that bond at a price equal to 105.4844 percent of face value. C. the bond will pay annual interest payments of $105.4844 per $1,000 of face value. D. you can buy that bond at a price equal to 105.4844 percent of face value. E. the bond dealer is willing to sell that bond for a price equal to 105.4844 percent of par.

B. you can sell that bond at a price equal to 105.4844 percent of face value.

Municipal bonds: A. are totally risk-free. B. generally have higher coupon rates than corporate bonds. C. pay interest that is federally tax-free. D. are rarely callable. E. are free of default-risk.

C

The market price of a bond increases when the: A. face value decreases. B. coupon rate decreases. C. discount rate decreases. D. par value decreases. E. coupon is paid annually rather than semiannually.

C. discount rate decreases.

The specified date on which the principal amount of a bond is repaid is called the bond's: A. coupon. B. face value. C. maturity. D. yield to maturity. E. coupon rate.

C. maturity.

If its yield to maturity is less than its coupon rate, a bond will sell at a _____, and increases in market interest rates will: A. discount; decrease this discount. B. discount; increase this discount. C. premium; decrease this premium. D. premium; increase this premium. E. premium; not affect this premium.

C. premium; decrease this premium.

The relationship between nominal interest rates on default-free, pure discount securities and the time to maturity is called the: A. liquidity effect. B. Fisher effect. C. term structure of interest rates. D. inflation premium. E. interest rate risk premium.

C. term structure of interest rates.

Rosina purchased a 15-year bond at par value when it was initially issued. The bond has a coupon rate of 7 percent and matures 13 years from now. If the current market rate for this type and quality of bond is 7.5 percent, then Rosina should expect: A. the bond issuer to increase the amount of all future interest payments. B. the yield to maturity to remain constant due to the fixed coupon rate. C. to realize a capital loss if she sold the bond at today's market price. D. today's market price to exceed the face value of the bond. E. the current yield today to be less than 7 percent.

C. to realize a capital loss if she sold the bond at today's market price.

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings?

Common

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

Constant-growth model

. A zero coupon bond: A. is sold at a large premium. B. pays interest that is tax deductible to the issuer when paid. C. can only be issued by the U.S. Treasury. D. has more interest rate risk than a comparable coupon bond. E. provides no taxable income to the bondholder until the bond matures.

D

The collar of a floating-rate bond refers to the minimum and maximum: A. call periods. B. maturity dates. C. market prices. D. coupon rates. E. yields to maturity.

D

Treasury bonds are: A. issued by any governmental agency in the U.S. B. issued only on the first day of each fiscal year by the U.S. Department of Treasury. C. bonds that offer the best tax benefits of any bonds currently available. D. generally issued as semi-annual coupon bonds. E. totally risk-free.

D

A bond with a coupon rate of 6 percent that pays interest semiannually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each. A. $1,006; $60 B. $1,060; $30 C. $1,060; $60 D. $1,000; $30 E. $1,000; $60

D. $1,000; $30

All else constant, a coupon bond that is selling at a premium, must have: A. a coupon rate that is equal to the yield to maturity. B. a market price that is less than par value. C. semi1nnual interest payments. D. a yield to maturity that is less than the coupon rate. E. a coupon rate that is less than the yield to maturity.

D. a yield to maturity that is less than the coupon rate.

The interest paid on any municipal bond is: A. free of default risk. B. subject to default risk and is exempt from state income taxation. C. free of both default risk and federal income taxation. D. exempt from federal income taxation and may or may not be exempt from state taxation. E. taxable at the federal level and tax exempt at the state and local level.

D. exempt from federal income taxation and may or may not be exempt from state taxation.

A par value bond offers a coupon rate of 7 percent with semiannual interest payments. The effective annual rate provided by these bonds must be: A. equal to 3.5 percent. B. greater than 3.5 percent but less than 4 percent. C. equal to 7 percent. D. greater than 7 percent but less than 8 percent. E. equal to 14 percent.

D. greater than 7 percent but less than 8 percent.

All else held constant, interest rate risk will increase when the time to maturity: A. decreases or the coupon rate increases. B. decreases or the coupon rate decreases. C. increases or the coupon rate increases. D. increases or the coupon rate decreases. E. decreases and the coupon rate equals zero.

D. increases or the coupon rate decreases.

The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future loss in purchasing power. A. default risk B. taxability C. liquidity D. inflation E. interest rate risk

D. inflation

The _____ premium is that portion of the bond yield that represents compensation for potential difficulties that might be encountered should the bond holder wish to sell the bond prior to maturity. A. default risk B. taxability C. inflation D. liquidity E. interest rate risk

D. liquidity

The term structure of interest rates reflects the: A. real rate of interest. B. real rate of interest plus the inflation premium. C. nominal interest rate plus the interest rate risk premium. D. pure time value of money. E. real rate, inflation premium, interest rate risk premium, and the liquidity premium.

D. pure time value of money.

The dirty price of a bond is defined as the: A. market price minus any taxes due on the accrued interest. B. market price minus the accrued interest. C. clean price minus the accrued interest. D. quoted price plus the accrued interest. E. clean price minus any taxes due on the accrued interest.

D. quoted price plus the accrued interest.

The rate of return required by investors in the market for owning a bond is called the: A. coupon. B. face value. C. maturity. D. yield to maturity. E. coupon rate.

D. yield to maturity.

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?

Determining the amount of the dividend to be paid per share

A decrease in which of the following will increase the current value of a stock according to the dividend growth model?

Discount rate

What are the distributions of either cash or stock to shareholders by a corporation called?

Dividends

Aspens is preparing a bond offering with a coupon rate of 5.5 percent. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Which one of the following statements is correct? A. The bonds will pay 19 interest payments and one principal payment. B. The bonds will initially sell at a discount. C. At maturity, the bonds will pay a final payment of $1,055. D. The bonds will pay ten equal coupon payments. E. At issuance, the bond's yield to maturity is 5.5 percent.

E. At issuance, the bond's yield to maturity is 5.5 percent.

All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate. A. a premium; greater than B. a premium; equal to C. at par; greater than D. at par; less than E. a discount; greater than

E. a discount; greater than

The annual interest paid by a bond divided by the bond's face value is called the: A. coupon. B. face value. C. maturity. D. yield to maturity. E. coupon rate.

E. coupon rate.

The yield to maturity: A. that is expected will be realized any time a bond is sold. B. will exceed the coupon rate when the bond is selling at a premium. C. equals the current yield for all annual coupon bonds. D. can only be realized if a bond is purchased on the issue date at par value. E. equals both the current yield and the coupon rate for par value bonds.

E. equals both the current yield and the coupon rate for par value bonds.

A zero coupon bond: A. is sold at a large premium. B. has a price equal to the future value of the face amount given a positive rate of return. C. can only be issued by the U.S. Treasury. D. has less interest rate risk than a comparable coupon bond. E. has a market price that is computed using semiannual compounding of interest.

E. has a market price that is computed using semiannual compounding of interest.

A bond that makes no coupon payments and is initially priced at a deep discount is called a _____ bond. A. Treasury B. municipal C. floating-rate D. junk E. zero coupon

E. zero coupon

Which one of the following applies to the dividend growth model?

Even if the dividend amount and growth rate remain constant, the value of a stock can vary.

Which one of the following statements related to the NYSE is correct?

Exchange members must purchase trading licenses.

A floor broker on the NYSE does which one of the following?

Executes orders on behalf of customers

Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information?

If cumulative voting applies, Jen is assured one seat on the board.

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

Ernst & 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 one of the following markets?

Primary

Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following is the most likely outcome of this situation given that some shareholders are happy with the existing management?

Proxy fight for control of the board

Hardy Lumber has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders?

Right to share in company profits prior to other shareholders

Which one of the following statements is correct?

Stocks can have negative growth rates.

You want to be on the board of directors of Uptown Communications. Since you are the only shareholder who will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What is the type of voting called that requires this level of stock ownership to be successfully elected?

Straight

Winston Co. has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true?

The stock has a negative capital gains yield.

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:

a decrease in all stock values.

NYSE designated market makers:

act as dealers.

Bonds issued by the U.S. government: A. are considered to be free of interest rate risk. B. generally have higher coupons than those issued by an individual state. C. are considered to be free of default risk. D. pay interest that is exempt from federal income taxes. E. are called "munis".

c

Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher ______ than the stock of Dixie South.

capital gains yield

An agent who maintains an inventory from which he or she buys and sells securities is called a:

dealer.

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):

floor broker.

An individual on the floor of the NYSE who owns a trading license and buys and sells for his or her personal account is called a:

floor trader.

The owner of a trading license for the NYSE is called a:

member.

The annual dividend yield is computed by dividing _____ annual dividend by the current stock price.

next year's

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is:

priced the same as a $1 perpetuity.

The dividend growth model:

requires the growth rate to be less than the required return.

Preferred stock may have all of the following characteristics in common with bonds with the exception of:

tax-deductible payments.

NASDAQ has:

three separate markets.