FINA 3770 EXAM 2 Study Guide
Which of the following are issued with the shortest time to maturity?
Treasury bills
A problem with dividen pricing models is that future cash flow may be difficult to predict as to timing and amount. Is the statement above TRUE/FALSE?
True
There are two major markets for the sale of stock: the primary market and the secondary market.
True
In regards to the fact that the pricing of stocks is more difficult than the pricing of bonds, which of the below statements is FALSE?
A stock's final sale is fixed in time on its maturity date.
Which of the following is not a form of informatinal efficient markets?
Semi-weak-form efficient markets
Which of the following statements is TRUE?
Some preferred stocks are cumulative with respect to dividends, meaning that if a company skips a cash dividend, it must pay it at some point in the future
Which of the following statements is INCORRECT?
Speculative bonds, or junk bonds, have a perceived higher default risk. Bond rating agencies help assess the default premium for an individual bond issue and hence establish a yield for the bond. The bond rating on a particular issue can change through time if a company's financial conditions change. None of the above*
You want to invest in a stock that pays $4.00 annual cash dividends for the next three years. At the end of the three years, you will sell the stock for $35.00. If you want to earn 9% on this investment, what is a fair price for this stock if you buy it today?
$37.15
Creative Solutions Inc. has issued 10−year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is ________.
$80
Five years ago, Simpson Warehouses Inc. issued twenty−five−year 10% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the Thompson bonds is now 12%. Given this information, what is the price today for a Thompson Tarps bond?
$850.51
Which of the following statements is CORRECT?
A bond price is simply the present value of the promised or remaining future cash flow discounted at the current yield to maturity. A zero-coupon bond is a bond that paid zero coupons
A privilege that allows current shareholders to buy a fixed percentage of all future issues before the company offers them to the general public and thus to maintain the same percentage of ownership in the firm is called _____
A preemptive right
Which of the following statements is FALSE?
Although an APR is quoted on an annual basis, interest can be paid monthly but never daily.
Which of the following statements is CORRECT?
An indenture or deed of trust is written contract between the bond issuer and the bondholder which pecifies bond agreement details The covenants usually protect the bondholder against actions that the company might take that would diminish the value of the bond. Issuers may sell bonds with attached options. One of the most common attached options is a call option. All of the above*
Shaky Company has just issued a five-year bond with a yield of 9%; Stable Company has issued an identical five-year bond, but with a yield of 7%. Why did the market demand a higher return from Shaky?
Companies with poor financials tend to compensate investors for the default risk by issuing bonds with high yields.
Ben has just purchased a long-term government bond and expects to make a 7% return. Donna has just purchased a stock in a new startup company, but expects to make a 20% return. Why is Donna expecting a higher return?
Donna is expecting a higher return on the stock due to both the maturity premium and default premium.
A bull market is a prolonged declining market.
False
To value stock, we find the present value of the dividend stream and the present value of the par value. Is the statement above TRUE/FALSE?
False
When the coupon rate is less than the yield to maturity, the bond sells for a premium above its par value. Is the statement above TRUE/FALSE?
False
________ refers to how quickly information is reflected in the available prices for trading.
Informational efficiency
Which of the statements below is FALSE?
Most companies have the resident expertise to complete an initial public offering (IPO) or first public equity issue.
________ has to do with the speed and accuracy of processing a buy or sell order at the best available price.
Operational efficiency
Which of the statements below is FALSE?
Preferred stock cannot be converted into common stock.
Which of the following types of bonds may the buyer sell back before maturity?
Putable bond
The U.S. government offers two bonds: one selling to yield 6.5% and the other to yield 8.5%. Why would one bond sell for a lower yield if the originator is the same on both bonds?
The difference between the yields of the U.S. government bonds is due to the maturity premium of the investments.
Which of the statements below is FALSE?
The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands.
Which of the statements below is FALSE?
The payment of cash dividends to shareholders is a deductible expense for the company.
Which of the statements below is FALSE?
The prices of goods and services tend to decrease over time because of inflation.
Which of the statements below is FALSE?
The profits for common stock owners come before payment to employees, suppliers, government, and creditors.
Which of the statements below is FALSE?
The standard of one vote for each share cannot be altered.
Municipal bonds are issued by _______
U.S. county, city, or local government agencies
Which of the following statements is INCORRECT?
Unlike common stocks, preferred stocks do have a maturity date.
Which of the following statements about the relationship between yield to maturity and bond prices is FALSE?
When interest rates go up, bond prices go up.
Which of the following statement is INCORRECT?
With best effort, the investment banker essentially buys the entire stock issue from the company at one price and then sells the issue for a higher price.
Which of the following statements is INCORRECT?
Yield to maturity (YTM) or yield is the bond's discount rate or the return the bondholder receives if he or she holds it to maturity. It normally remains the same throughout the life of the bond
Which of the following statements is TRUE if you increase your monthly payment above the required loan payment?
You can significantly reduce the number of payments needed to pay off the loan.
When interest rates are stated or given for loan repayments, it is assumed that they are ________ unless specifically stated otherwise.
annual percentage rates
Stocks differ from bonds because:
bond cash flows are known while stock cash flows are uncertain. firms pay bond cash flows prior to paying taxes while stock cash flows are after tax. the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase. All of the above*
A company selling a bond is ________ money.
borrowing
Dividend models suggest that the value of a financial asset is determined by future cash flows. A problem arises, however, in that future cash flows may be difficult to predict as to ________ of these cash flows.
both the timing and the amount
When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.
coupon rate; discount to
Strong−form efficient markets theory proclaims that________.
current prices reflect the price and volume history of the stock, all publicly available information, and all private information
APRs must be converted to the appropriate periodic rates when compounding is ________.
more frequent than once a year
The ________ compensates the investor for the additional risk that the loan will not be repaid in full.
default premium
If a bond is selling at a premium above the par value that means that the yield to maturity is greater than the coupon rate.
false
James is a rational investor wishing to maximize his return over a 20−year period. The current yield curve is inverted with one−year rates at5.00% and 20−year rates at 3.50%. James will invest in the lower−rate 20−year bonds if:
he thinks rates will fall in the future and locking in long−term rates today may provide the highest long−run average return.
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.
long−term debt
Most U.S. corporate and government bonds choose to make ________ coupon payments.
semiannual
When a company is in financial difficulty and cannot fully pay all of its creditors, the first lenders to be paid are the ________.
senior debtholders
"Junk" bonds are a street name for ________ grade bonds.
speculative
When a bond is callable, the ability to call the bond is an option for ________.
the bond issuer
As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that
the credit rating increases, the default risk decreases, and the required rate of return decreases.
The two major components of the interest rate that cause rates to vary across different investment opportunities or loans are ________.
the default premium and the maturity premium
A bond may be issued by ________.
the federal government companies state governments
A yield curve constructed using Treasury securities has each of the following components embedded in the nominal interest rates:
the real rate, expected inflation, and a maturity premium.
A sinking fund may be used for each of the following EXCEPT ________.
to be used to pay off other outstanding debt issues
The most common shape for a yield curve is upward sloping.
true
Stocks are different from bonds because ________.
stocks, unlike bonds, represent residual ownership
