Finance Test 2 (Chpt 4-9)
Of these choices, a risk-adverse investor who prefers to minimize interest rate risk is most apt to invest in:
2-year, 7 percent coupon bonds (low year, high coupon)
Jensen Shipping has four open seats on its board of directors. How many shares will a shareholder need to control to ensure that his or her candidate is elected to the board given the fact that the firm uses straight voting? Assume each share receives one vote.
50 percent of the shares plus one vote
In relation to bonds, which one of the following terms has the same meaning as the term "crossover"?
5B
Which one of the following bonds is the least sensitive to changes in market interest rates?
8 percent annual coupon, 4 year (high percent, low year)
Which one of the following statements is true? (bond)
A discount bond has a coupon rate that is less than the bond's yield to maturity
The lowest rating a bond can receive from Standard and Poor's and still be classified as an investment quality-bond is:
BBB
The lowest rating a bond can receive from Moody's and still be classified as an investment quality-bond is:
Baa
Which one of the following statements is correct? (bond markets)
Bond markets are dealer based
Which one of the following statements is correct? (stock and bonds)
Both preferred stock and corporate bonds can be callable
Which one of the following is an ordinary annuity, but not a perpetuity?
$25 paid weekly for one year, starting one week from today
Most trades on the NYSE are executed:
electronically
Many of the smaller sell orders sent to the floor of the NYSE are:
electronically transmitted to the specialists
Which one of the following terms is most commonly used to describe the cash flows of a new prroject that are simply an offset of reduced cash flows for a current project?
erosion
Forecasting risk is best defined as:
estimation risk
Newly issued securities are sold to investors in which one of the following markets?
primary
Which one of the following can be defined as a benefit-cost ratio?
profitability index
You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests?
profitability index
Which one of the following indicates that a project is definitely acceptable?
profitability index greater than 1.0
A pro forma financial statement is a financial statement that:
projects future years' operations
The primary purpose of protective covenants is to help:
protect bondholders from issuer actions
Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which term applies to this granting of authority?
proxy
A "floater" bond frequently has a:
put provision
Scenario analysis is best described as the determination of the:
reasonable range of product outcomes
The tax shield approach to computing the operating cash flow, given a tax-paying firm:
recognizes that depreciation creates a cash inflow
The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:
recoup its initial cost
The net working capital invested in a project is generally:
recouped at the end of the project
The purpose of a bond sinking fund is to:
repay bonds early either through purchases or calls
Jamie is analyzing the estimated net present value of a project under various what if scenarios. The type of analysis that Jamie is doing is best described as:
scenario analysis
What is the market called that allows shareholders to resell their shares to other investors?
secondary
Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis.
semi-annual
Mark is analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value. What type of analysis is Mark conducting?
sensitivity analysis
What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?
sinking fund
Which one of the following statements concerning sinking funds is correct?
sinking funds may be used to purchase bonds in the open market
Marcos Enterprises has three separate divisions. The firm allocates each division $1.5 million per year for capital purchases. Which one of the following terms applies to this allocation process?
soft rationing
Which one of the following players on the floor of the NYSE is obligated to maintain a fair, orderly market for a limited number of securities?
specialist
Which one of the following parties on the NYSE floor post bid and asked prices?
specialists
Which one of the following principles efers to the assumption that a project will be evaluated based on its incremental cash flows?
stand-alone principle
The dividend yield on a stock will increase if the:
stock price decreases
Computing the present value of a growing perpetuity is most similar to computing the current value of which one of the following?
stock with a constant growth dividend
There are two open seats on the board of directors. If two separate votes occur to elect the new directors, the firm is using a type of voting that is best described as _____ voting.
straight
Which one of the following refers to the option to expand into related businesses in the future?
strategic option
A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost?
sunk
Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, Weston can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost?
sunk
The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:
tax shield
In November 2013, the NYSE was acquired by:
the Intercontinental Exchange
Which one of the following statements is correct when a firm faces hard rationing?
the firm does not have any funds to finance any new projects
Which one of the following is true if the managers of a firm only accept projects that have a profitability index greater than 1.5?
the firm should increase in value each time the firm accepts a new project
The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?
the investment is mutually exclusive with another investment under consideration
An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true?
the net present value is equal to zero
An upward-sloping term structure of interest rates indicates:
the nominal rate is increasing even though the real rate is constant as the time to maturity increases
Which one of the following statements is correct? (payback)
the payback period ignores the time value of money
Supplemental liquidity providers (SLPs) trade securities on behalf of:
their own accounts
The payback method of analysis ignores which one of the following?
time value of money
Suppose that a small, rural city in the countryside of North Dakota plans to issue $150,000 worth of 10-year bonds. Which one of the following components of the bond's yield will be affected by the fact that no active secondary market is expected for these bonds?
liquidity premium
Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value?
liquidity premium
Payback is best used to evaluate which type of projects?
low-cost, short-term
Inside quotes are defined as the:
lowest asked and highest bid offers
Which one of the following is a correct value to use if you are conducting a best case scenario analysis?
lowest expected value for fixed costs
Which one of the following indicates that a project is expected to create value for its owners?
positive net present value
A proposed project will increase a firm's accounts payables. This increase is generally:
a cash outflow at time zero and a cash outflow at the end of the project
Which one of the following will increase the present value of a lump sum future amount to be received in 15 years?
a decrease in the interest rate
Which one of the following refers to a method of increasing the rate at which an asset is depreciated?
accelerated cost recovery system
Which one of the following statements is true concerning annuities
all else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity
Gleason, Inc. elects its board of directors on a staggered basis using cumulative voting. This implies that:
all open positions are filled with one round of voting, assuming there are no tie votes
Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years. Assuming that all payments are paid on time, his last payment will pay off the loan in full. What type of loan does Bill have?
amortized
Letitia borrowed $6,000 from her bank 2 years ago. The loan term is 4 years. Each year, she must repay the bank $1,500 plus the annual interest. Which type of loan does she have?
amortized
NASDAQ is best described as:
an electronic network of securities dealers.
A debenture is:
an unsecured bond
When you refer to a bond's coupon, you are referring to which one of the following?
annual interest payment
The price at which an investor can purchase a bond from a dealer is called the _____ price.
asked
A bond dealer sells at the _____ price and buys at the _____ price.
asked; bid
Which one of the following classifies as an annuity?
auto loan payment
The average net income of a project divided by the project's average book value is referred to as the project's:
average accounting return
Which one of the following analytical methods is based on net income?
average accounting return
Which one of the following methods of analysis ignores cash flows?
average accounting return
Which one of the following methods of analysis is most similar to computing the return on assets (ROA)?
average accounting return
Which one of the following must equal zero if a firm pays a constant annual dividend?
capital gains yield
Kyle Electric has three positive net present value opportunities. Unfortunately, the firm has not been able to find financing for any of these projects. Which one of the following terms best describes the firm's situation?
capital rationing
Dividends are best defined as:
cash or stock payments to shareholders
A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:
charge interst annually
Which one of the following is the quoted price of a bond?
clean price
You have agreed to pay a 5 percent commission to your best friend if he can locate a buyer for your car. This arrangement is most similar to the compensation arrangement for which one of these individuals who is involved with the stock market?
commission broker
A person who executes customer orders to buy and sell securities on the floor of the NYSE is called a:
commission broker/floor broker
Which one of the following types of securities has no priority in a bankruptcy proceeding?
common stock
***What is the name given to the model that computes the present value of a stock by dividing next year's annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount?
dividend growth model
The capital gains yield equals which one of the following?
dividend growth rate
Kate owns a stock with a market price of $31 per share. This stock pays a constant annual dividend of $0.60 per share. If the price of the stock suddenly increases to $36 a share, you would expect the:
dividend yield to decrease
Nu Tek is comprised of four separate operating divisions. For this year, the firm has decided to allocate capital funds using a soft rationing approach. Which one of the following applies to this situation?
divisions managers will vie with each other for additional capital allocations
If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be:
downward-sloping
Which one of the following is the promary advantage of payback analysis?
ease of use
Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the:
effective annual rate
Which one of the following statements is correct? (IRR)
When the internal rate of return is greater than the required return, the net present value is positive
Jenny needs to borrow $5,500 for four years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny?
6.5 percent simple interest
The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms?
perpetuity
Katlyn needs to invest $5,318 today in order for her savings account to be worth $8,000 six years from now. Which one of the following terms refers to the $5,318?
present value
Cindy is taking out a loan today. The cash amount that she will receive today is equal to the present value of the lump sum payment that she will be required to pay two years from today. Which type of loan is this?
pure discount
Scott borrowed $2,500 today. The loan agreement requires him to repay $2,685 in one lump sum payment one year from now. This type of loan is referred to as a(n):
pure discount loan
Given an interest rate of zero percent, the future value of a lump sum invested today will always:
remain constant, regardless of the investment time period
Which one of the following premiums is paid on a corporate bond due to its tax status?
taxability premium
What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive.
the bond must be priced at par
Which one of the following features distinguishes an ordinary annuity from an annuity due?
timing of the annuity payments
What is the price of a $1,000 face value bond if the quoted price is 102.1?
$1,021.00
Delfino's expects to pay an annual dividend of $1.50 per share next year. What is the anticipated dividend for Year 5 if the firm increases its dividend by 2 percent annually?
$1.50 x (1.02)^4
A DMM is a(n):
NYSE member who functions as a dealer for a limited number of securities
A specialist is a(n):
NYSE member who functions as a dealer for a limited number of securities
Which one of the following indicators offers the best assurance that a project will produce value for its owners?
Positive NPV
A real rate of return is defined as a rate that has been adjusted for which one of the following?
inflation
All else held constant, the future value of a lump sum investment will decrease if the:
interest is changed to simple interest from compound interest
Which one of the following is most closely related to the net present value profile?
internal rate of return
Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently?
internal rate of return and net present value
The relationship between the present value and the investment time period is best described as:
inverse
The profitability index reflects the value created per dollar:
invested
In which one of the following situations would the payback method be the preferred method of analysis?
investment funds available only for a limited period of time
Which one of the following statements is correct regarding mortgage backed securities (MBSs)?
investors in MBSs are subject to real estate deflation risk
The NYSE:
is in the business of attracting order flow
The ability to delay an investment:
is valuable provided there are conditions under which the investment will have a positive net present value
What is the primary purpose of bond covenants?
lender protection (protect the bondholders)
Which one of the following might be included in a bond's list of negative covenants?
limiting cash dividends to $1 per share or less
Donuts Delite just paid an annual dividend of $1.10 a share. The firm expects to increase this dividend by 8 percent per year the following three years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for year 7?
($1.10)(1.08)^3(1.02)^4
The specific location on the floor of an exchange where a particular security is traded is called a:
(specialist's) post
Which one of the following ratings indicate that a bond is low-quality?
-BB -B -Ba
The dividend growth model can be used to value the stock of firms which pay which type of dividends?
-constant annual dividend -annual dividend with a constant increasing rate of growth -annual dividend with a constant decreasing rate of growth
Which of the following should be included in the analysis of a proposed investment?
-erosion effects -opportunity costs -side effects
The term structure of interest rates is affected by which of the following?
-interest rate risk premium -real rate of interest -inflation premium
Which of the following characteristics are most commonly associated with corporate bonds issued in the U.S.?
-registered form -semiannual coupon payments
Which of the following can generally be found in a bond's indenture agreement?
-terms of repayment -protective covenants -total amount of the bond issue (NOT names of shareholders)
Which one of the following bonds is the most sensitive to changes in market interest rates?
10-year, zero coupon (high year, no coupon)
Which one of the following statements is correct? (indenture)
An indenture is a contract between a bond's issuer and its holders
Which one of the following is the annuity present value formula?
C x ({1 - [1/(1+r)^t]}/r)
Which one of the following types of bonds permits its issuer to forego paying interest payments if certain natural events cause significant losses?
CAT
The price of a stock at year 4 can be expressed as:
Dsub5/(R-g)
The more actively traded large companies that are listed on NASDAQ are traded in which one of the NASDAQ markets?
Global Select
The required return on a stock is equal to which one of the following if the dividend on the stock decreases by 1 percent per year?
Dividend yield + capital gains yield
The constant growth model can be used to value the stock of firms that have which type(s) of dividends?
Dividends that are either constant or change annually at a constant rate
Which one of the following is a web site that enables Lester to sell his shares of ABC stock directly to Marti?
ECN
Which one of the following statements is correct? (shares/stock)
From a legal perspective, preferred stock is a form of corporate equity
Which of the following are cash inflows from net working capital? I. increase in accounts payable II. increase in inventory III. decrease in accounts receivable IV. decrease in fixed assets
I and III only
Which of the following have the potential to increase the net present value of a proposed investment? I. ability to immediately shut down a project should the project become unprofitable II. ability to wait until the economy improves before making the investment III. option to place the investment on hold until a more favorable discount discount rate becomes available IV. option to increase production beyond that intitially projected
I, II, III, and IV
Which of the following should be included when compiling pro forma statements for a proporsed investment? I. forecasted sales II. start-up costs III. aftertax salvage value of any assets sold IV. anticipated changes in net working capital
I, II, III, and IV
Steve owns a store that caters primarily to men and their hobbies. He is contemplating greatly expanding the hunting and fishing section of the store. If he does this, he expects his fishing and hunting sales will increase, his camping gear sales will increase, and his model train sales will decrease. Which of the following should Steve include in his revenue projection for the expansion project? I. Increase in fishing and hunting sales II. Increase in camping gear sales III. Decrease in model train sales
I, II, and III
Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. Which of the following are cash flows relevant to the new product? I. Molds needed to form the serving trays II. Projected increase in plate and silverware sales if the trays are produced III. A portion of the production manager's current annual salary of $75,000 IV. Raw materials used in the production of the serving trays
I, II, and IV only
The Shoe Box is considering adding a new line of winter footwear to its product lineup. Which of the following are relevant cash flows for this project? I. Decreased revenue from products currently being offered if this new footwear is added to the lineup II. Revenue from the new line of footwear III. Money spent to date looking for a new product line to add to the store's offerings IV. Cost of new counters to display the new line of footwear
I, II, and IV only
Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of eight years.
Money spent last month repairing a damaged front fender
Lakeside Rides is adding a new roller coaster to its amusement park. The firm expects this addition to increase its overall ticket sales and increase attendance at its park. In particular, the firm expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster. Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly. Which of the following are considered side effects associated with the new roller coaster? I. Ticket sales for the new roller coaster II. Change in ticket sales for the existing coaster III. Change in ticket sales for the boat ride IV. Change in food and beverage sales
II, III, and IV
Which one of the following will increase the current value of a stock?
Increase in the capital gains yield
Which one of the following is an indicator that an investment is acceptable?
Internal rate of return that exceeds the required return
Which one of the following indicates that a project should be rejected?
Profitability index less than 1.0
The electronic system that transmits buy and sell orders directly to a specialist on the floor of the NYSE is called:
SuperDOT
Which one of the following types of bonds should an investor purchase if he or she is primarily concerned about ensuring that bond ownership will increase his or her purchasing power?
TIPS
The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land?
The current market value of the land
You are using a net present value profile to investments A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two?
The net present value of Project A equals that of Project B, but generally does not equal zero
Bruce Moneybags owns several restaurants and hotels near a local interstate. One restaurant, Beef and More, needs modernized. He is trying to decide whether to accept an offer and sell Beef and More as is for the offer price of $1.1 million or renovate the restaurant himself. The projected renovation cost is $1.3 million. The restaurant would need to be shut down completely during the renovation which would cause a net operating cash flow loss of $210,000 in today's dollars. The estimated present value of the cash inflows from the renovated restaurant are $3.2 million. When analyzing the renovation project, what opportunity cost, if any, should be included for the current restaurant? Assume the restaurant is totally paid for and any future costs will be paid in cash.
The opportunity cost is the value of the current offer to buy the restaurant
Which one of the following will ocur when the internal rate of return equals the required return?
The profitability index will equal 1.0
Scenario analysis asks questions such as:
What is the best outcome that should reasonably be expected?
If a trade is made "in the crowd," the trade has occurred:
between two brokers
The price at which a dealer will purchase a bond is called the _____ price.
bid
A broker is an agent who:
brings buyers and sellers together
A bond has a make-whole call provision. Given this, you know that the:
call price is inversely related to the market rate of interest
The reinvestment approach to the modified internal rate of return:
compounds all of the cash flows, except for the intitial cash flow, to the end of the project
***The net present value of an investment represents the difference between the investment's:
cost and its market value
An unexpected decrease in market interest rates will cause a:
coupon bond's yield-to-maturity to decrease
Which one of the following is a unique characteristic of an income bond?
coupon payments are dependent upon the issuer's income
The value of a bond is dependent upon the:
coupon rate and the yield to maturity
Zero-coupon bonds:
create annual taxable income to individual bondholders
Mary owns 100 shares of stock. Each share entitles her to one vote per open seat on the board of directors. Assume there are three open seats in the current election and Mary casts all 300 of her votes for a single candidate. What is the term used to describe this type of voting?
cumulative
Which one of the following generally pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred?
cumulative preferred
The managers of H.R Construction are considering remodeling plans for an old building the firm currently owns. The building was purchased eight years ago for $689,000. Over the past eight years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $898,000. The firm is considering remodeling the building into a conference centre and sandwich bar at an estimated cost of $1.7 million. The estimated present value of the future income from this centre is $2.9 million. Which one of the following defines the opportunity cost of the remodeling project?
current market value of the building
Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following?
incremental cash flows
An agent who buys and sells securities from inventory is called a:
dealer
A bond for which no specific property has been pledged as security is classified as a:
debenture
Which one of the following terms denotes for certain that a bond is unsecured?
debenture
Which one of the following will increase the operating cash flow as computed using the tax shield approach?
decrease in fixed costs
Which of the following combinations is assured to decrease the interest rate sensitivity of a bond?
decrease in the time to maturity and an increase in the coupon rate
The net present value:
decreases as the required rate of return increases
Bond ratings classify bonds based on:
default risk only
The net present value profile illustrates how the net present value of an investment is affected by which one of the following?
discount rate
Which one of the following defines the internal rate of return for a project?
discount rate which results in a zero net present value for the project
Isabella is considering three mutually exclusive options for the additional space she just added to her specialty women's store. The cost of the expansion was $127,000. She can use this additional space to add a fabric and quilting section, add an exclusive gifts department, or expand into imported decorator items for the home. She estimates the present value of these options at $114,000 for fabric and quilting, $163,000 for exclusive gifts, and $138,000 for decorator items. Which option(s), if any, should Isabella accept?
exclusive gifts only
What is the principal amount of a bond that is repaid at the end of the loan term called?
face value
Which one of the following terms applies to a junk bond that was originally issued with a bond rating of AA?
fallen angel
An individual who executes buy and sell orders on the floor of an exchange for a fee is called a:
floor broker
The owner of a trading license who trades on the floor of the NYSE for his or her personal account is called a(n):
floor trader
Discounted cash flow valuation is the process of discounting an investment's:
future cash flows
Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the:
future value
Municipal bonds are:
generally callable
The Blackwell Group is unable to obtain financing for any new projects under any circumstances. Which term best applies to this situation?
hard rationing
If a project with conventional cash flows has a profitability index of 1.0, the project will:
have an internal rate of return that equals the required return
If shareholders are granted a preemptive right they will:
have priority in the purchase of any newly issued shares
Scenario Analysis:
helps determine the reasonable range of expectations for a project's anticipated outcome
Sensitivity Analysis:
helps identify the variable within a project that presents the greatest forecasting risk
Which one of the following individuals is most apt to purchase a municipal bond?
highly-compensated business owner
If intermediate-term, default-free, pure discount bonds have a higher rate of return than either the comparable shorter-term or longer-term bonds, the term structure of interest rates will be:
humped
Which one of the following statements is correct? (NPV)
if the internal rate of return equals the required return, the net present value will equal zero
The operating cash flows of a project:
include erosion effects
Aardvark, Inc. pays a constant annual dividend. At the end of trading on Wednesday, the price of its stock was $28. At the end of trading on the following day, the stock price was $27. As a result of the decline in the stock's price, the dividend yield _____ while the capital gains yield ____.
increased; remained constant
Assume a firm has positive net earnings. The operating cash flow of this firm:
increases when tax rates decrease
The opportunities that a manager has to modify a project once it has started are called:
managerial options
contingency planning focuses on the:
managerial options implicit in a project
A callable bond:
may be structured to pay bondholders the current value of the bond on the date of call
Ignoring the option to wait:
may underestimate the net present value of a project
The average accounting return:
measures profitability rather than cash flow
Any person who owns a license to trade on the NYSE is called a:
member
Which one of the following is specifically designed to compute the rate of return on a project that has unconventional cash flows?
modified internal rate of return
Which one of the following features applies to NASDAQ but not the NYSE?
multiple market maker system
The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:
multiple rates of return
Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?
mutually exclusive
Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation?
net present value
Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?
net present value
Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?
net present value
When valuing a stock using the constant-growth model, D1 represents the:
next expected annual dividend
The dividend yield is defined as:
next year's expected cash dividend divided by the current market price per share
The "R" in the Fisher effect formula represents the:
nominal return
On which one of the following dates do dividends become a liability of the issuer for accounting purposes?
on the declaration date
Firm A uses straight-line depreciation. Firm B uses MACRS depreciation. Both firms bought $60,000 worth of equipment last year. Both firms are in the 35 percent tax bracket. The operating cash flows for each firm are identical except for the depreciation effects. Given this, you know the:
operating cash flow of Firm A is less than that of Firm B for year two
Which one of the following terms refers to the best option that was foregone when a particular investment is selected?
opportunity cost
Turner Industries started a new project three months ago. Sales arising from this project are exceeding all expectations. Given this, which one of the following is management most apt to implement?
option to expand
The stream of customer instructions to buy and sell securities is called the:
order flow
To be a member of the NYSE, you must:
own a trading license
Dividends are which one of the following?
paid out of aftertax profits
Which one of the following methods of analysis has the greatest bias towards short-term projects?
payback
Which one of the following methods of analysis ignores the time value of money?
payback
Companies can list their stock on which one of the following without having to meet listing requirements or filing financial statements with the SEC?
pink sheets
Which one of the following bonds is most apt to have the smallest liquidity premium?
treasury bill
The modified internal rate of return is specifically designed to address the problems associated with which one of the following?
unconventional cash flows
A note is:
unsecured debt that is generally payable within the next 10 years
All else held constant, the present value of a bond increases when the:
yield to maturity decreases
If an investment is producing a return that is equal to the required return, the investment's net present value will be:
zero
Jamie earned $14 in interest on her savings account last year. She has decided to leave the $14 in her account so that she can earn interest on the $14 this year. The interest Jamie earns this year on this $14 is referred to as:
interest on interest
Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk?
interest rate risk premium
Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is six years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have?
interest-only
You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of three years. What type of loan did you obtain?
interest-only
The yield to maturity on a discount bond is:
is greater than both the current yield and the coupon rate
When a bond's yield to maturity is less than the bond's coupon rate, the bond:
is selling at a premium
A protective covenant:
limits the actions of the borrower
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities.
maturity
Which of the following is the rate of return an investor earns on a bond before adjusting for inflation?
nominal rate
By definition, a bank that pays simple interest on a savings account will pay interest:
only on the principal amount originally invested
A call provision grants the bond issuer the:
option of repurchasing the bonds prior to maturity at a pre-specified price
A registered form bond is defined as a bond that:
pays coupon payments directly to the owner of record
Rob wants to invest $15,000 for 7 years. Which one of the following rates will provide him with the largest future value?
4 percent interest, compounded annually
On which of the following dates is the principal amount of a (semiannual coupon) bond repaid?
(the entire bond is repaid on the) maturity date
Which one of the following characteristics apply to a perpetuity?
-constant cash flow dollar amount (equal payments) -infinite time period
Which of the following will decrease the future value of a lump sum investment made today assuming that all interest is reinvested? Assume the interest rate is a positive value.
-decrease in the lump sum amount -decrease in the investment time period
Which of the following will increase the present value of an annuity, all else held constant?
-increase in the number of payments -decrease in the interest rate
Which of the following will increase the future value of a lump sum investment?
-increasing the interest rate -increasing the time period
Which one of the following has the highest effective annual rate?
6 percent compounded monthly (6 percent compounded daily if offered)
Lisa has $1,000 in cash today. Which one of the following investment options is most apt to double her money?
8 percent interest for 9 years
Which one of the following statements concerning annuities is correct?
An annuity due has payments that occur at the beginning of each time period
You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information?
Annuity B has both a higher present value and a higher future value than Annuity A
Which one of the following refers to the relationship between nominal returns, real returns, and inflation?
Fisher effect
Kendall is investing $3,333 today at 3 percent annual interest for three years. Which one of the following will increase the future value of that amount?
Increasing the interest rate
Stacey deposits $5,000 into an account that pays 2 percent interest, compounded annually. At the same time, Kurt deposits $5,000 into an account paying 3.5 percent interest, compounded annually. At the end of three years:
Kurt will have a larger account value than Stacey will
The term structure of interest rates represents the relationship between which of the following?
Nominal rates on default-free, pure discount bonds and time to maturity
Which one of the following is the correct formula for the current value of $600 invested today at 5 percent interest for 6 years?
PV = $600/(1 + 0.05)^6
Which one of the following is the correct formula for computing the present value of $600 to be received in 6 years? The discount rate is 7 percent.
PV = $600/(1 + 0.07)^6
Jessica invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested?
She could have the same future vale and invest less than $2,000 initially if she could earn more than 6.5 percent interest
You are comparing three investments, all of which pay $100 a month and have an 8 percent interest rate. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options?
The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due
Which one of the following statements is correct? (EAR)
The EAR, rather than the APR, should be used to compare both investment and loan options
Which one of the following is a correct statement, all else held constant?
The future value is directly related to the interest rate
Today, Charity wants to invest less than $3,000 with the goal of receiving $3,000 back some time in the future. Which one of the following statements is correct?
The period of time she has to wait decreases as the amount she invests increases
Tomas earned $89 in interest on his savings account last year and has decided to leave the $86 in his account this coming year so it will earn interest. This process of earning interest on prior interest earnings is called:
compounding
Which one of the following is an example of a perpetuity?
Trust income of $1,200 a year forever
A 30-year home mortgage is a classic example of:
an ordinary annuity
Lee pays one percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:
annual percentage rate
Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next 4 years. His car payments can be described by which one of the following terms?
annuity
Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?
annuity due
This morning, Jeff found a bond certificate lying on the floor of a bank. He picked it up and noticed that the bond matured today. He presented the bond to the bank teller and received both the principal and interest payment. The bond that Jeff found must have been which one of the following?
bearer-form bond
A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the:
bid-ask spread
The call premium is the amount by which the:
call price exceeds the par value
Travis recently purchased a callable bond. However, that bond cannot be currently redeemed by the issuer. Thus, the bond must currently be:
call protected
The inflation premium:
compensates investors for expected price increases
Lester had $6,270 in his savings account at the beginning of this year. This amount includes both the $6,000 he originally invested at the beginning of last year plus the $270 he earned in interest last year. This year, Lester earned a total of $282.15 in interest even though the interest rate on the account remained constant. This $282.15 is best described as:
compound interest
A perpetuity in Canada is frequently referred to as which one of the following?
consul
The annual interest rate divided by the face value of a bond is referred to as the:
coupon rate
The current yield on a bond is equal to the annual interest divided by which one of the following?
current market price
Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a:
debenture
Which one of the following will decrease the present value of an annuity
decrease in the annuity payment
Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?
default risk premium
Dexter, Inc. has a bond issue outstanding. The issue's indenture provision prohibits the firm from redeeming the bonds during the first three years. This provision is referred to as the _____ provision.
deferred call
Which one of the following is the price that an investor pays to purchase an outstanding bond?
dirty price
The interest rate used to compute the present value of a future cash flow is called the:
discount rate
Computing the present value of a future cash flow to determine what that cash flow is worth today is called:
discounted cash flow valuation
Lucas expects to receive a sales bonus of $7,500 one year from now. The process of determining how much that bonus is worth today is called:
discounting
Which one of the following can be classified as an annuity but not as a perpetuity?
equal annual payments for life
Manning, Inc. originally issued bonds that were rated investment grade. These bonds have now been downgraded to junk status. Which one of the following terms applies to this situation?
fallen angel
Which one of the following can NOT be computed?
future value of a perpetuity
When comparing savings accounts, you should select the account that has the:
highest effective annual rate
The stated interest rate is the interest rate expressed:
in terms of the interest payment made each period
All else held constant, the future value of an annuity will increase if you:
increase the time period
The future value of a lump sum investment will increase if you:
increase the time period
The present value of a lump sum future amount:
increases as the interest rate decreases
The written agreement that contains the specific details related to a bond issue is called the bond:
indenture
Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 7.25 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase?
to compute the initial loan amount, you must use a monthly interest rate
South Central Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Northern Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today:
will be greater if you invest with Northern Bank
A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:
will be greater than 12.9 percent
Which one of the following terms refers to a bond's rate of return that is required by the market place?
yield to maturity
Which one of the following terms applies to a bond that initially sells at a deep discount and pays no interest payments?
zero coupon