FI 301 Test 2

Everything else being equal, which of the following bond ratings is associated with the highest yield? a. Baa b. A c. Aa d. Aaa

A

From a cost perspective, preferred stock is a less desirable source of capital for a firm than bonds. a. True b. False

A

An example of shareholder activism is a. communication with the firm. b. engaging in a proxy contest. c. filing a lawsuit against the board. d. all of the above

D

Under the STRIP program created by the Treasury, stripped securities are created and sold by the Treasury. a. True b. False

F

The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called a. flipping. b. skiing. c. flopping. d. none of the above

A

When a brokerage firm demands more collateral from investors who have borrowed from the brokerage firm to buy stocks, it is making a a. margin call. b. short sale. c. proxy fight. d. hedge.

A

When would a firm most likely call bonds? a. after interest rates have declined b. if interest rates do not change c. after interest rates increase d. just before the time at which interest rates are expected to decline

A

Zero-coupon bonds do not pay interest. Instead, they are issued at a discount from par value. a. True b. False

A

____ are not barriers to corporate control to eliminate agency problems. a. Leveraged buyouts b. Antitakeover amendments c. Poison pills d. Golden parachutes

A

____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased. a. Competitive b. Noncompetitive c. Negotiable d. Non-negotiable

A

____ bonds have the most active secondary market. a. Treasury b. Zero-coupon corporate c. Junk d. Municipal

A

____ require the owner to clip coupons attached to the bonds and send them to the issuer to receive coupon payments. a. Bearer b. Registered c. Treasury d. Corporate

A

____ sell shares to investors and use the proceeds to invest in portfolios of international stocks created and managed by portfolio managers. a. International mutual funds b. American Depository Receipts c. World Equity Depository Receipts d. Initial Public Depository Receipts

A

Lisa can purchase bonds with 15 years until maturity, a par value of $1,000, and a 9 percent annualized coupon rate for $1,100. Lisa's yield to maturity is ____ percent. a. 9.33 b. 7.84 c. 9.00 d. none of the above

B

Many bonds have different call prices: a higher price for calling the bonds to meet sinking-fund requirements and a lower price if the bonds are called for any other reason. a. True b. False

B

Municipal general obligation bonds are ____. Municipal revenue bonds are ____. a. supported by the municipal government's ability to tax; supported by the municipal government's ability to tax b. supported by the municipal government's ability to tax; supported by revenue generated from the project c. always subject to federal taxes; always exempt from state and local taxes d. typically zero-coupon bonds; typically zero-coupon bonds

B

Interest earned from Treasury bonds is a. exempt from all income tax. b. exempt from federal income tax. c. exempt from state and local taxes. d. subject to all income taxes.

C

Leveraged buyouts are commonly financed by the issuance of: a. money market securities. b. Treasury bonds. c. corporate bonds. d. municipal bonds.

C

Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to pay $25 a share and borrows the remaining funds at a 12 percent annual interest. What is the return if the investor sells the stock for $55 at the end of one year? a. 50 percent b. 30 percent c. 10 percent d. 16 percent e. 8 percent

D

Erin is, a private investor, who can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Erin's yield to maturity is ____ percent. a. 9.96 b. 10.00 c. 10.33 d. 10.24 e. none of the above

D

Preferred shareholders a. typically have the same voting rights as common shareholders. b. do not share the ownership of the firm with common shareholders. c. typically participate in the profits of the firm beyond the stated fixed annual dividend. d. may not receive a dividend every year.

D

Sudden favorable news about the performance of a firm will make investors believe that the firm's stock is ____ at its prevailing price. a. overvalued b. fixed c. appropriate d. undervalued

D

When a firm buys some of its shares that it had previously issued, this is referred to as a: a. reverse IPO. b. leveraged buyout. c. ladder spin. d. stock repurchase.

D

Which of the following statements is not true regarding STRIPS? a. They are not issued by the Treasury. b. They are created and sold by various financial institutions. c. They are backed by the U.S. government. d. They have to be held until maturity. e. All of the above are true regarding STRIPS.

D

The yield to maturity is the annualized discount rate that equates the future coupon and principal payments to the initial proceeds received from the bond offering. a. True b. False

T

A ____ order to buy or sell a stock means to execute the transaction at the best possible price. a. market b. limit c. stop-loss d. stop-buy

A

Bonds are issued in the primary market through a telecommunications network. a. True b. False

A

Bonds issued by ____ are backed by the federal government. a. the Treasury b. AAA-rated corporations c. state governments d. city governments

A

Bonds that are secured by personal property are called a. chattel mortgage bonds. b. first mortgage bonds. c. second mortgage bonds. d. debentures.

A

Corporate bonds that receive a ____ rating from credit rating agencies are normally placed at ____ yields. a. higher; lower b. lower; lower c. higher; higher d. none of the above

A

If interest rates suddenly ____, those existing bonds that have a call feature are ____ likely to be called. a. decline; more b. decline; less c. increase; more d. none of the above

A

Note maturities are usually ____, while bond maturities are ____. a. less than 10 years; 10 years or more b. 10 years or more; less than 10 years c. less than 5 years; 5 years or more d. 5 years or more; less than 5 years

A

Rule 144A creates liquidity for securities that are privately placed. a. True b. False

A

Stripped bonds are bonds whose cash flows have been transformed into a security representing the principal payment only and a security representing interest payments only. a. True b. False

A

A firm can best avoid the time lag between registering new securities with the SEC and actually selling them by a. use of proxy. b. shelf-registration. c. use of a margin call. d. use of preemptive rights.

B

A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n) a. stock repurchase. b. secondary stock offering. c. initial rights issue. d. initial public offering (IPO).

B

A private bond placement has to be registered with the SEC. a. True b. False

B

A ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based on this information, the coupon payment after six months will be $____. a. 250 b. 255 c. 500 d. 510

B

Assume that you purchased corporate bonds one year ago that have no protective covenants. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The market value of your bonds will likely ____ as a result. a. rise b. decline c. be zero d. be unaffected

B

Bond dealers specialize in small transactions (less than $100,000) in order to enable small investors to trade bonds. a. True b. False

B

Firms assume ____ risk when they issue preferred stock than when they issue bonds. The payment of dividends on preferred stock ____ be omitted without the firm being forced into bankruptcy. a. more; can b. less; can c. more; cannot d. less; cannot

B

If a firm believes that it will have sufficient cash flows to cover interest payments, it may consider using ____ debt and ____ equity, which implies a ____ degree of financial leverage. a. more; less; lower b. more; less; higher c. less; more; higher d. none of the above

B

If many investors quickly sell an IPO stock in the secondary market, there will be ____ on the stock's price. a. upward pressure b. downward pressure c. no additional pressure d. none of the above

B

Investors in Treasury notes and bonds receive ____ interest payments from the Treasury. a. annual b. semiannual c. quarterly d. monthly

B

Savings bonds are bonds issued by the Federal Reserve. a. True b. False

B

The ____ the trading volume of a stock, the ____ the spread. a. higher; wider b. higher; narrower c. lower; narrower d. none of the above

B

The bond debenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders. a. True b. False

B

The key difference between a note and a bond is that note maturities are usually less than one year, while bond maturities are one year or more. a. True b. False

B

The prevailing price per share divided by the firm's earnings per share is known as the a. dividend yield. b. price-earnings ratio. c. fully diluted earnings per share. d. annual dividend.

B

The purpose of a lockup provision is to a. keep individual investors from buying and selling stock. b. prevent downward pressure on the stock's price. c. increase the number of outstanding shares. d. allocate a larger proportion of stock to institutional investors.

B

Treasury bond auctions are normally conducted only at the beginning of each year. a. True b. False

B

Treasury bonds are issued by state and local governments. a. True b. False

B

When a corporation first decides to issue stock to the public, it engages in a(n) a. secondary offering. b. initial public offering. c. seasoned equity offering. d. none of the above

B

When firms issue ____, the amount of interest and principal to be paid is based on specified market conditions. The amount of the repayment may be tied to a Treasury bond price index or even to a stock index. a. auction-rate securities b. structured notes c. leveraged notes d. stripped securities

B

When investors buy stock with borrowed funds, this is sometimes referred to as a. use of proxy. b. purchasing stock on margin. c. a margin call. d. a margin residual claim.

B

Whenever _____, the stock price will be driven up. a. supply exceeds demand b. demand exceeds supply c. demand is reduced d. none of the above

B

Which of the following is not true regarding the call provision? a. It typically requires a firm to pay a price above par value when it calls its bonds. b. The difference between the market value of the bond and the par value is called the call premium. c. A principal use of the call provision is to lower future interest payments. d. A principal use of the call provision is to retire bonds as required by a sinking-fund provision. e. A call provision is normally viewed as a disadvantage to bondholders.

B

Which of the following statements is incorrect? a. In a short sale, investors place an order to sell a stock that they do not own. b. Investors sell a stock short when they anticipate that its price will rise. c. When investors sell short, they will ultimately have to provide the stock back to the investor from whom they borrowed it. d. Short-sellers must make payments to the investor from whom the stock was borrowed to cover the dividend payments that the investor would have received of the stock had not been borrowed.

B

Which of the following statements is not true regarding zero-coupon bonds? a. They are issued at a deep discount from par value. b. Investors are taxed on the total amount of interest earned at maturity. c. The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest until maturity. d. Zero-coupon bonds are purchased mainly for tax-exempt investment accounts, such as pension funds and individual retirement accounts. e. All of the above are true.

B

Which of the following statements is true regarding STRIPS? a. they are issued by the Treasury b. they are created and sold by various financial institutions c. they are not backed by the U.S. government d. they have to be held until maturity e. all of the above are true regarding STRIPS

B

You purchase a stock with cash, and you earn a negative return on the stock. If you had purchased the stock with 60 percent cash and 40 percent borrowed funds, your return on your investment would have been a. positive. b. more negative than if you had covered the entire investment with cash. c. negative, but more favorable than if you had covered the entire investment with cash. d. zero.

B

____ are not primary purchasers of bonds. a. Insurance companies b. Finance companies c. Mutual funds d. Pension funds

B

A ____ has first claim on specified assets, while a ____ is a debenture that has claims against a firm's assets that are junior to the claims of mortgage bonds and regular debentures. a. first mortgage bond; second mortgage bond b. first mortgage bond; debenture c. first mortgage bond; subordinated debenture d. chattel mortgage bond; subordinated debenture e. none of the above

C

A ____ requires that dividends cannot be paid on common stock until all current and previously omitted dividends are paid on preferred stock. a. residual claim b. preferred margin c. cumulative provision d. liquidation claim

C

A firm has a current stock price of $15.32. The firm's annual dividend is $1.14 per share. The firm's dividend yield is a. .74 percent. b. 1.34 percent. c. 7.44 percent. d. 1.14 percent.

C

A firm will typically attempt to sell shares from a secondary offering a. far below the prevailing market price. b. far above the prevailing market price. c. at the prevailing market price. d. at the offer price of the IPO.

C

A protective covenant may a. specify all the rights and obligations of the issuing firm and the bondholders. b. require the firm to retire a certain amount of the bond issue each year. c. restrict the amount of additional debt the firm can issue. d. none of the above

C

A short seller a. anticipates that the price of the stock sold short will increase. b. earns the difference between what they initially paid for the stock versus what they later sell the stock for. c. makes a profit equal to the difference between the original sell price and the price paid for the stock, after subtracting any dividend payments made. d. is essentially lending the stock to another investor and will ultimately receive that stock back from that investor. e. none of the above

C

A variable rate bond allows a. investors to benefit from declining rates over time. b. issuers to benefit from rising market interest rates over time. c. investors to benefit from rising market interest rates over time. d. none of the above.

C

Assume U.S. interest rates are significantly higher than German rates. A U.S. firm with a German subsidiary could achieve a lower financing rate, without exchange rate risk by denominating the bonds in a. dollars. b. euros and making payments from U.S. headquarters. c. euros and making payments from its German subsidiary. d. dollars and making payments from its German subsidiary.

C

Bonds that are not secured by specific property are called a. a chattel mortgage. b. open-end mortgage bonds. c. debentures. d. blanket mortgage bonds.

C

In general, variable-rate municipal bonds are desirable to investors who expect that interest rates will ____. a. remain unchanged b. fall c. rise d. none of the above

C

Managers of firms may consider a stock repurchase or even a leveraged buyout when they believe their stock is ____ by the market, or a secondary stock offering when they believe their stock is ____ by the market. a. undervalued; undervalued b. overvalued; overvalued c. undervalued; overvalued d. overvalued; undervalued e. none of the above

C

Mark would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. Mark can either put up the entire amount and purchase the stock, or borrow half of the investment amount from his brokerage firm at an annual interest rate of 12 percent and put up the remainder. Mark thinks he can sell the stock for $100 after one year. If Mark borrows from his brokerage firm, his estimated return on the stock would be ____ percent. a. 42.86 b. 85.71 c. 73.71 d. 30.00

C

Some bonds are "stripped," which means that a. they have defaulted. b. the call provision has been eliminated. c. they are transferred into principal-only and interest-only securities. d. their maturities have been reduced.

C

The Treasury has relied heavily on ____-year bonds to finance the U.S. budget deficit. a. 50 b. 70 c. 10 d. 5

C

The coupon rate of most variable-rate bonds is tied to a. the prime rate. b. the discount rate. c. LIBOR. d. the federal funds rate.

C

The transaction costs to the issuing firm in an IPO is usually ____ percent of the funds raised. a. 1 b. 3 c. 7 d. 25

C

Treasury bond dealers a. quote an ask price for customers who want to sell existing Treasury bonds to the dealers. b. profit from a very wide spread between bid and ask prices in the Treasury securities market. c. may trade Treasury bonds among themselves. d. make a primary market for Treasury bonds.

C

When the lockup period expires, the share price commonly a. remains unchanged. b. increases significantly. c. decreases significantly. d. none of the above

C

Which of the following institutions is most likely to purchase a private bond placement? a. commercial bank b. mutual fund c. insurance company d. savings institution

C

Which of the following is not an example of a municipal bond? a. general obligation bond b. revenue bond c. Treasury bond d. All of the above are examples of municipal bonds.

C

Which of the following statements is incorrect? a. A stock is a certificate representing partial ownership in a corporation. b. Like debt securities, common stock is issued by firms to obtain funds. c. Stocks are issued by corporations to raise short-term funds. d. The secondary stock market enables investors to sell stocks that they had previously purchased.

C

___ facilitate stock transactions by taking positions in specific stocks. a. Board members b. Capstone members c. Market makers d. None of the above

C

____ are acquisitions that require substantial amounts of borrowed funds. a. Stock repurchases b. Corporate controls c. Leveraged buyouts d. Stock splits

C

____ are employed by brokerage firms and execute orders for clients on the floor of the NYSE. a. Specialists b. Commission brokers c. Independent brokers d. Dealers

C

____ facilitate transactions on a stock exchange by executing stock transactions for their clients. a. Board members b. Capstone members c. Floor brokers d. None of the above

C

A call provision on bonds normally a. allows the firm to sell new bonds at par value. b. gives the firm to sell new bonds above market value. c. allows the firm to sell bonds to the Treasury. d. allows the firm to buy back bonds that it previously issued.

D

Which of the following would not be a likely example of a protective covenant provision? a. a limit on the amount of dividends a firm can pay b. a limit on the corporate officers' salaries a firm can pay c. the amount of additional debt a firm can issue d. a call feature

D

With a ____ order, the investor specifies a purchase price that is above the current market price. a. market b. limit c. stop-loss d. stop-buy

D

Which of the following is not true regarding zero-coupon bonds? a. They are issued at a deep discount from par value. b. Investors are taxed annually on the amount of interest earned, even though the interest will not be received until maturity. c. The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest. d. Zero-coupon bonds are purchased mainly for tax-exempt investment account, such as pension funds and individual retirement accounts. e. all of the above are true

E

During weak economic periods, newly issued junk bonds require lower risk premiums than in strong economic periods. a. True b. False

F

Rule 144A, which allows small individual investors to trade privately-placed bonds (and some other securities) with each other without requiring that the firms that issued the securities to register them with the SEC. a. True b. False

F