FIN TEST 1 Terms

an example of a loan with non-constant interest rate is a(n)

ARM

Credit risk, or default risk, is the risk that:

Bond interest payments or the principal payment will not be made.

Which of the following is one of the top three bond rating firms?

Standard and Poor's

A bond will sell at __________ if the required return is greater than the coupon rate.

a discount

Which of the following is true of a competitive market?

a goof can be bought and sold at the same price

when an individual or organization acquires enough stock ownership and / or the ability to vote on behalf of other shareholders to replace the board of directors against their will it is known as

a hostile takeover

a limited liability company combines the

a limited liability of a corporation with the ownership of a partnership

The cash flows of a 10% coupon bond with four years to maturity and a $1,000 par value can be replicated with

a series of zero-coupon bonds

one technique often used in the time value of money problem that provides a linear representation of cash flows is

a timeline

When using the net present value (NPV) to evaluate capital budgeting projects, you should:

accept all projects with a positive NPV

which of the following is considered a current liability

accounts paybale

which of these is an asset

accounts receivable

if the managers of a company are not the owners of the company, they are considered:

agents

which of the following statements about amortizing a loan is true

although the payment is the same each month the interest that accrues each month decreases

Kevin sees that gold is selling for $1,675 an ounce in London and $1,705 an ounce in New York. Kevin quickly buys gold in London and sells it immediately in New York. Kevin is practicing

arbitrage

Treasury bills have maturities of up to one year and;

are zero-coupon bonds.

Accountants prepare financial statements using a set of guidelines established by the profession to ensure that all financial statements are comparable. These guidelines are known as:

generally accepted accounting principles

firms with high market- to -book ratios are often referred to as

growth stocks

All other things equal, a corporation will pay a __________ coupon rate on __________ bonds.

higher;higher risk

the market where financial securities are offered for sale to the public for the very first time is known as the:

primary market

DuPont analysis relates ROE to

profitability, asset efficiency and leverage

One of the most important functions of a liquid market for a given asset is to:

provide information on value.

the most important function of a market maker on the NYSE is to

provide liquidity

one of the most important functions of the secondary market is to:

provide liquidity to investors

firms that are the easiest to value are

publicly traded firms

dark pools are alternative trading systems that

reveal limited pricing and volume information

the __ the cash flows, the ____ the discount rate that should be used to compute the present value of the cash flows

riskier;higher

An investment opportunity that trades in a financial market is known as a(n):

security

In a normal market we can evaluate a project's NPV without regard to the source of financing. This ability is known as the:

separation priciple

When an investors borrows a stock they do not own and sells it but promises to buy the stock at a later date and repay the borrower it is known as a(n):

short sale

the amount of interest that you can earn in one year that does not factor in the effects of compounding is known as

simple interest

Default-free, zero-coupon yields are also referred to as interest rates by some financial professionals.

spot

the three main financial statements are the balance sheet, the income statement and the statement of cash flows. however, there is a fourth financial statement know as the

statement of stockholders' equity

the sarbanes-oxley act attempts to improve the accuracy of information given to both boards and shareholders by

stiffening penalties for false information

a fractional share of ownership in a corporation is known as

stock

In order to calculate a project's NPV, you need to know the appropriate discount rate, the amount of the initial outlay, and:

the amount and timing of the expected cash flows

justin is considering an investment that will pay him $5000 a year for the next 20 years. which of the following should justin use to discount these future cash flows to the present

the opportunity cost of capital

the concept that a dollar received today is worth more than a dollar received at some point in the future is known as

the time value of money

the present value is equivalent to

the value of a cash flow today

a disadvantage of a partnership is

unlimited liability

If Company X and Company Z have the same series of cash flows combined as Company Y, then the price of X + Z should equal the price of Y. This concept is known as:

value additivity

which of the following is one of the primary questions addressed by financial managers

which projects should the firm invest resources in to increase shareholder wealth

The law of one price states that the same good or financial asset:

will have the same price in a competitive market

one of the primary tasks of the financial manager is to manage short-term cash need, which is known as:

working capital management

The __________ is a graphical representation of the term structure of interest rates.

yield curve

In a normal competitive market, the net present value of trading securities should be

zero

The no-arbitrage price of a coupon bond can be calculated by discounting the annual cash flows using the respective yields of:

zero-coupon bonds with the same maturities

researchers estimate that including dark polls there are as many as _____ stock trading venues where investors can buy and sells stock

50

When portfolio C is equivalent to a portfolio comprised of A and B, value additivity maintains that the:

Price of C = Price of A + Price of B

What is the opportunity cost associated with not receiving a lump sum of money today, but instead receiving it one year from now?

The amount of interest you could have earned placing the money in a savings account.

A very conservative investor that was seeking a low-risk investment would be most interested in which of these investments?

U.S. Treasuries

Which of these is an example of a sovereign bond?

U.S. Treaury bonds

Any publicly-traded U.S. firm must file quarterly financial statements and annual financial statements with the __________ and also send an annual report that includes their financial statements to their shareholders.

U.S. securities and exchange commission

corporations are required to hire a neutral third party, know as ___ to verify that the firm's financial statements are reliable and prepared according to GAAP

auditor

a firm's assets and liabilities are reported on the

balance sheet

If cash flows from an investment are taxed, the investor's actual cash flow from a specific investment will;

be reduced by the amount of the tax payments.

technology that allows a transaction to be recorded in a publicly verifiable way without the need for a trusted third party to certify its authenticity is referred to as

blockchain technology

A financial security sold by corporations and governments that promises future payments to the investor is known as a(n):

bond

A long-term debt instrument issued by a business or government to raise capital is known as a:

bond

which of these bonds should have the highest risk and therefore return?

bonds issued by the gap

discounting cash flows refers to

calculating the present value of cash flows to be received at some point in the future

which of the following positions typically reports to the chief financial officer?

controller

a _____ is a form of business organization that is considered an artificial being and has limited liability

corporation

The present value of a bond's __________ determines the value of the bond.

coupon payment and maturity value

accounts receivables are

credit sales that have not been collected

net working capital equals

current assets minus current liabilities

An inverted yield curve indicates that most investors believe interest rates will:

decrease

As market interest rates increase, the value of a bond will __________ all other things equal.

decrease

the practice of spreading the expense of a long-term asset over its useful life is known as

depreciation

According to the Valuation Principle, the value of an asset is:

determined by its competitive market price

When converting an APR to a discount rate you need to;

divide the APR by the annual compounding frequency.

a corporation may elect to make a periodic cash distribution to its shareholders which is known as

dividend payment

The __________ measures how sensitive a bond's price is to changes in interest rates.

duration

shareholders exercise control of a corporation by;

electing a board of directors

One of the largest accounting scandals of the past 20 years, which was involved in the bankruptcy of an energy trading firm, is:

enron

an annuity refers to a series of

equal cash flows occurring at equal intervals for a finite period

Bonds mature on a specific date and the is repaid to the bondholder at that time.

face value

the interest rate banks charge each other for overnight loan is known as the

federal funds rate

compounding is the process of

finding the future value of some amount when interests is reinvested

Two firms are issuing 20-year bonds. Firm 1 is offering a 5% coupon bond and Firm 2 is offering a 7% coupon bond. What is the likely reason for the difference in coupon rates

firm 2 is riskier than firm 1

Investors, analysts and managers often use the yield curve to:

forecast interest rates

U.S. Treasury notes have maturities that range;

from one to ten years

when an investor submits a market order to sell stock the order will be executed

immediately

Market rates of interest are partially determined by the Federal Reserve Bank through:

increasing or decreasing the amount of bank reserves

a steeply upward-sloping yield curve indicates that

interest rates are expected to rise in the future

the term structure of interest rates refers to the different

interest rates of securities with the same risk but different maturity dates

The top four categories of bond ratings are collectively known as __________.

investment-grade bonds

In general, a dollar received today:

is worth more than a dollar received tomorrow

The ability to sell an investment quickly at a price close to the price at which you could contemporaneously buy it is known as;

liquidity

which of the following is considered to be a financing activity

making a dividend payment

which of the following is one of the primary functions of the financial manager

making financing decisions

an agency problem occurs when

managers put their own self-interests above shareholders

the market-to-book ratio is the ratio of

market value of equity to the book value equity

the primary goal of the financial manager is to

maximize shareholder wealth

As you increase the required return used in an NPV calculation, the likelihood of a __________ NPV __________.

negative, increases

which type of income may be distributed to the company's owners or reinvested in the company?

net income

The interest rate is the interest rate that has not been adjusted for inflation.

nominal

A competitive market with no arbitrage opportunities is known as a(n):

normal market

the primary advantage of an S corporation is that profits are

not taxed at the corporate level

the financial statements include an introduction known as the management discussion and analysis. this preface must contain information about

off-balance sheet transactions

a statement of cash flows has which three parts

operating, investing, and financing

EBITDA or earning before interest, taxes, depreciation, and amortization shows how much cash a firm has earned from

operations

the discount rate an investor uses to evaluate investment options should be that

oppotuniy cost of capital

british government bonds, known as consoles are one example

perpetuity

A yield curve can be constructed using similar risk corporate bonds. The yield curves constructed with corporate bonds will __________ the U.S. Treasury yield curve.

plot above

retained earning are the sum of

previous years' of earnings less dividends

The no-arbitrage price of an asset is the:

price at which no opportunities for arbitrage exist