Chapter 7 Finance
An inverted yield curve occurs when: a. Short term bonds pay higher yields than longer term bonds. b. Tax free bonds pay a higher yield than taxable bonds. c. Corporate bonds pay higher yields than government bonds. d. Longer term bonds pay higher yields than shorter term bonds.
a. Short term bonds pay higher yields than longer term bonds.
Suppose you must estimate the cost of equity for a firm, and you have the following data: rRF = 5.5%; rM - rRF = 6%; b = 0.8; D1 = $1.00; P0 = $25.00; g = 6%; and rd = the firm's bond yield = 6.5%. What is this firm's cost of equity using the CAPM approach? a. 10.0% b. 8.8% c. 10.3% d. 9.3% e. 10.5%
c. 10.3%
The key difference between investment grade bonds and junk bonds are: a. Liquidity risk. b. Prepayment risk. c. Default risk. d. Length to maturity.
c. Default risk.
Which of the following accounts is EXCLUDED when calculating net operating working capital? a. Accounts payable b. Inventories c. Notes payable to banks d. Accruals e. Accounts receivable
c. Notes payable to banks
Which of the following statements is CORRECT? a. The yield to call is the return calculated on a bond that is held to maturity. b. The yield to maturity is the return calculated on a bond that is held until it is called, which is a shorter period than the bond's original life. c. There are 2 different ways to calculate a bond's return. The main difference is with the life-span of the bond. If an issuer can call its bonds early, the relevant return calculation is the yield to call. However, if an issuer cannot call its bonds, the relevant return calculation is the yield to maturity. d. The main difference between the yield to call and the yield to maturity calculations is that the dollar coupon payment differs on a callable bond than on a non-callable bond.
c. There are 2 different ways to calculate a bond's return. The main difference is with the life-span of the bond. If an issuer can call its bonds early, the relevant return calculation is the yield to call. However, if an issuer cannot call its bonds, the relevant return calculation is the yield to maturity.
What does an inverted yield curve usually signal? a. A flight to quality. b. The onset of an asset bubble. c. Future hyper inflation. d. Current or future recession.
d. Current or future recession.
A stock with a Beta of more than one: a. Has paid more dividends than the average stock in the market. b. Has paid out more than the rate of inflation. c. Will reduce the overall volatility of a stock portfolio. d. Has experienced price changes that are more volatile than the over market.
d. Has experienced price changes that are more volatile than the over market.
Which of the following statements is NOT CORRECT? a. When a bond's coupon interest rate is less than the market interest rate, the bond will sell at a value less than its par value and is known as a discount bond. b. When a bond's coupon rate is equal to the market interest rate, the bond will sell for its face value, or what is known as selling at par. c. For a fixed-rate bond, the coupon interest rate is set for the life of the bond. Unlike a fixed-rate bond's coupon interest rate, the market interest rate changes throughout the life of the bond and has a huge impact on the bond's price. d. When the market interest rate is higher than the coupon interest rate, the bond price rises above the par value and is called a premium bond. e. Bonds are basically loans, so they usually make regular interest payments to the bondholders. The percentage of this interest payment relative to the bond's face value is called the coupon interest rate.
d. When the market interest rate is higher than the coupon interest rate, the bond price rises above the par value and is called a premium bond.