Finance 450 Exam 2 Concepts
The NYSE differs from the NASDAQ primarily because the NYSE has:
-a physical location -a face-to-face auction market
real rate of return
-change of percentage in buying power -rate of return that has been adjusted for inflation
Preferred stock has preference over common stock in the:
-distribution of corporate assets -payment of dividends
What information do we need to determine the value of a stock using the zero growth model?
-dividend -discount rate
In the dividend growth model, the expected return for investors comes from which two sources?
-dividend yield -growth rate
As a general rule, which of the following are true of debt and equity:
-equity represents an ownership interest -the maximum reward for owning debt is fixed
What are the three components that influence the Treasury yield curve?
-expected future inflation -the interest rate risk premium -the real rate of return
Which three components determine the shape of the term structure of interest rates?
-interest rate risk premium -inflation premium -real interest rate
The term structure of interest rates is primarily based on which three of the following?
-interest rate risk premium -real rate of interest -inflation premium
Synonyms for dirty price
-invoice price -full price
NASDAQ has which of these features?
-multiple market maker system -computer network of securities dealers
Which of the following ratios might be used to estimate the value of a stock?
-price to earnings -price to sales
2 major forms of long-term debt
-public issue -private issue
Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond?
-stock has no set maturity -the required rate of return is unobservable -dividends are unknown and uncertain
Which of the following represents the valuation of stock using a zero growth model?
Dividend/Discount rate = D/R
What is the formula for the present value of a growing perpetuity where C1 is the net cash flow, R is the required return and g is the growth rate?
P = C1/(R-g)
The relationship between nominal rates, real rates and inflation is called ________
The Fisher Effect
A PE ratio that is based on estimated future earnings is known as a ____________ PE ratio.
forward
Longer-term bonds have __________ interest rate sensitivity because a large portion of a bond's value comes from the face amount
greater
The higher the coupon rate, the _______ the interest rate risk, all other things being equal
greater
The __________ can be interpreted as the capital gains yield.
growth rate
The value of a firm is derived using the firm's ______ rate and its _______ rate
growth; discount
If shareholders are granted a preemptive right they will:
have priority in the purchase of any newly issued shares.
"Inside Quotes" represent the _________ and the ________.
highest bid price; lowest ask price
When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows ____.
increases
A(n) _______________ is a contract between a bond's issuer and its holders.
indenture
The bonds of a firm in financial distress may have a market value that is ____________ than the face value at maturity.
less
higher coupon is ________ risk
less
shorter time is ______ risk
less
The model that precisely specifies the relationship between the nominal rate and the real rate is
(1 + R) = (1 + r)×(1 + h)
P0=
(D1 + P1)/(1 + R)
A corporate bond's yield to maturity:
- is usually not the same as a bond's coupon rate - changes over time
What are some features of the OTC market for bonds?
-OTC dealers are connected electronically -The OTCH has no designated physical location
Which of these correctly identify differences between U.S. Treasury bonds and corporate bonds?
-Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk. -Treasury bonds are issued by the US government while corporate bonds are issued by corporations. -Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer.
What is a corporate bond's yield to maturity (YTM)?
-YTM is the expected return for an investor who buys the bond today and holds it to maturity. -YTM is the prevailing market interest rate for bonds with similar features.
Which of the following are bonds that have actually been issued?
-a CoCo bond -a convertible bond -a put bond
A benchmark PE ratio can be determined using:
-a company's own historical PEs -the PEs of similar companies
What is the bid price?
-the price a dealer is willing to pay for a security -the price an investor will receive if he sells a bond to a dealer
Bid price
-the price a dealer is willing to pay for a security -the price an investor will receive if he sells a bond to a dealer.
The term structure of interest rates describes ________.
-the pure time value of money -the relationship between nominal rates and time to maturity
The term structure of interest rates describes:
-the relationship between nominal rates and time to maturity -the pure time value of money
Which of the following are rights of common stock holders?
-the right to share proportionally in any residual value in the event of liquidation. -the right to share proportionally in any common dividends paid. -the right to vote on matters of importance.
Which of the following are true of bonds?
-they are normally interest only bonds -they are issued by both corporations and governments
Which three of the following are common shapes for the term structure of interest rates?
-upward sloping -humped -downward sloping
Four variables required to calculate the value of a bond:
-yield to maturity -coupon rate -par value -time remaining to maturity
If you are holding a municipal bond that is trading at par to yield 6%, by how much will your after-tax yield change if your federal income tax bracket increases from 15% to 20%. Assume there are no state or local taxes
0%
Crossover bonds can also be called
5B bonds
What are municipal bonds?
Bonds that have been issued by state or local governments
Dividend Yield Formula=
D1/P0
R=
D1/P0+g
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
Websites that allow investors to trade directly with one another are termed _______.
ECNs
Bonds that have dropped into junk territory are called:
Fallen Angels
What does the dirty price represent?
It includes the quoted price and accrued interest
What is a bond's accrued interest?
It is interest that has been earned but not yet received by the current bondholder
What is the nominal rate of return on an investment?
It is the actual percentage change in the dollar value of an investment unadjusted for inflation.
What is the inflation premium?
It is the additional return demanded by investors to compensate for expected inflation
inflation premium
It is the additional return demanded by investors to compensate for expected inflation
What does a Treasury yield curve show?
It shows the yield for different maturities of Treasury notes and bonds
What will happen to a bond's time to maturity as the years go by?
It will decline.
What does a bond's rating reflect?
The ability of the firm to repay its debt and interest on time
What does the AAA rating assigned by S&P mean?
The firm is in a strong position to meet its debt obligations
___________ is calculated by adding the dividend yield and the capital gains yield.
Total return
Low-grade bonds (junk bonds) may not be rated by major rating agencies T/F
True
Two unique features of U.S. fedreal government bonds
U.S Treasury issues are: -exempt from state income taxes -considered to be default free
When long-term rates are higher than short-term rates, which of the following shapes will the term structure of interest rates usually have?
Upward sloping
The nominal rate is found by adding the _____ and the real rate of return.
`inflation
zero-coupon bonds
a bond that makes no interest payments and is thus initially priced at a deep discount
What is a premium bond?
a bond that sells for more than face value
A bond's coupon payment is:
a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders
proxy vote
a vote cast by one person for or in place of another
The coupon payments on floating-rate bonds are _____.
adjustable
A debenture is:
an unsecured bond
Current yield=
annual coupon payment/price
To find the total bond value, add the present value of the amount paid at maturity to the _________ of the annual coupon payments
annuity present value
A person who brings buyers and sellers together is called a(n) ______.
broker
A provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a
call provision
Which one of the following must equal zero if a firm pays a constant annual dividend?
capital gains yield
As an investor in the bond market, why should you be concerned about changes in interest rates?
changes in interest rates can cause changes in bond prices
From a legal perspective, preferred stock is a form of ____________ _________.
corporate equity
If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called _________ dividends.
cumulative
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ___________
dealer
The bid-ask spread represents the _________
dealer's profit
All else constant, the dividend yield will increase if the stock price ___________
decreases
Bond ratings are concerned only with the possibility of __________
default
Treasury bonds have no
default risk
YTM > coupon rate
discount bond
What is a discount bond?
discount bonds are bonds that sell for less than the face value
A key difference between interest payments and dividend payments is?
dividends are not tax deductible and interest is tax deductible
The constant-growth model assumes that ____________.
dividends change at a constant rate
When short-term rates are higher than long-term rates, we say it is __________________.
downward sloping
Debt cannot be subordinated to
equity
In general, the price that is paid for a bond will __________ its quoted price.
exceed (because of accrued interest)
The price of a share of common stock is equal to the present value of all ______ future dividends.
expected
The price of a share of common stock is equal to the present value of all _________ future dividends.
expected
Which one of the following components of a bond's yield will be affected by the fact that no active secondary market is expected for these bonds?
liquidity premium
The interest rate risk premium is the additional compensation demanded by investors for holding ____ bonds
longer-term
A zero-coupon bond is a bond that ____.
makes no interest payments
Why is the bond market less transparent than the stock market?
many bond transactions are negotiated privately
Which one of the following is the most important source of risk from owning bonds?
market interest rate fluctuations
The government sells Treasury notes and bonds to the public every __________.
month
Bonds issued by state and local governments are called _______ ______
municipal bonds
When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows:
one vote per share held
The fundamental business of the New York Stock Exchange is to attract _______.
order flow
Which of the following variables is NOT required to calculate the value of a bond?
original issue price of bond
Investors require a __________ for the risk that issuers other than the Treasury may not make all promised payments on the issued bonds.
premium
YTM<coupon rate
premium bond
Initial public offerings of stock occur in the ________ market.
primary
A part of the indenture limiting certain actions during the term of the loan are termed ________.
protective covenants
A _______ bond allows the holder to force the issuer to buy the bond back at a stated price.
put
The term structure of interest rates examines the _____________
relationship between short-term and long-term interest rates
The trading of existing shares occurs in the _________ market.
secondary
New York Stock Exchange Designated Market Makers (DMMs) were formerly called _____________
specialists
Earnings over the coming year are expected to be $3 and a benchmark PE of 15 applies to earnings over the previous year. The _____, or forecast, price over the coming year is $45.
target
If you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk?
the 10-year bond
A put bond allows
the holder to force the issuer to buy the bond back at a stated price
Clean price
the quoted price excluding accrued interest
The current yield on a bond is:
the return an investor would expect to earn they purchased the bond and held it for a year
The degree of interest rate risk depends on ____________
the sensitivity of the bond's price to interest rate changes
A debenture is a(n) _____ bond, for which no specific pledge of property is made.
unsecured
Most of the time, a floating-rate bond's coupon adjusts __________
with a lag to some base rate
The market-required rate of return on a bond that is held for its entire life is called the
yield to maturity
All else held constant, the present value of a bond increases when the
yield to maturity decreases
Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?
zero coupon