Finance Exam 2

Baker Aluminum is planning on paying a dividend of $.60 a share next year. They expect to increase this dividend by 20 percent per year in both years 2 and 3 and by 10 percent in year 4. Which one of the following is the correct method of computing the dividend for year 4?

$.60 × (1.22 × 1.1)

A $1,000 face value bond quoted as 101.23 sells for _____ and a bond quoted as 98:06 sells for:

$1,012.30; $981.875.

If the dividend in year 3 is $1.20 and the growth rate is 3 percent, then the dividend in year 7 is equal to:

$1.20 × (1.03)^4

Last year, the Brown Bike Co. paid an annual dividend of $1.80 per share. The company has a dividend policy which calls for constant dividends. The sales of the firm are increasing by 2 percent each year. What is the anticipated dividend for year 4?

$1.80

Which one of the following is an annuity but NOT a perpetuity?

$600 on the last day of each month for two years

Which one of the following is an annuity due?

$600 paid at the beginning of every quarter for five years, starting today

Which one of the following has the highest effective annual rate?

6 percent compounded daily

Which one of the following statements is correct concerning the annuity interest rate?

An increase in the annuity interest rate will increase the annuity future value factor.

The lowest rating a bond can receive from Moody's and still be classified as investment grade is:

Baa

Which one of the following statements is correct concerning the bond markets?

Bonds are generally bought from and sold to electronically-connected dealers.

Which one of the following is the correct formula for computing the future value of an annuity? *X-/r*

C × (Future value factor − 1) / r

Which one of the following is the correct formula for the present value of an ordinary annuity? *double parenthesis/r*

C × {{1−[1/(1+r)t]}/r}

Which of the following are considered exotic bonds?

Cats, Corts and Pets

A Web site that enables an investor to trade directly with another investor is called a(n):

ECN (Electronic Communications Network)

Which of the following are common characteristics of a floating-rate bond?

I. The bonds generally contain a put feature. II. The coupon rate fluctuates based on an interest rate index. III. The coupon rate generally is capped at the upper collar.

To qualify as an annuity, the cash flows must:

I. be equal in amount. II. occur at equal intervals of time.

Which of the following can generally be found in the indenture agreement?

I. description of the loan collateral II. call provisions IV. protective covenants

The NYSE

I. is the largest stock market in the world based on dollar volume of activity.

A bond that is selling at par value has a:

I. market price equal to the face value. IV. yield to maturity that equals the coupon rate.

preferred stock:

I. may be callable. ]II. may be convertible. III. may have a sinking fund.

Which of the following can you calculate?

I. present value of an ordinary annuity II. present value of a perpetuity III. future value of an annuity due

The clean price of a bond includes which of the following?

I. quoted price

Which of the following are rights that are generally provided to common shareholders?

I. right to vote on a proposed merger III. right to determine the amount of a quarterly dividend payment IV. right to share in any assets remaining after the liabilities have been paid in a liquidation.

The degree of sensitivity a bond has to changes in interest rates decreases the:

I. shorter the time period to maturity. IV. higher the coupon rate.

The present value of an annuity considers which of the following factors?

I. the timing of each cash flow II. the amount of each cash flow III. the discount rate IV. the number of cash flows

Which of the following are positive covenants that might be found in an indenture?

I.The firm must maintain a current ratio of 1.5 or better. III. The firm shall provide audited financial statements annually.

Which of the following will increase the value of an annuity present value interest factor?

II. a decrease in the interest rate III. an increase in the number of time periods

The current yield will increase when a bond's:

II. price decreases. III. coupon increases.

All else constant, the present value of a stream of equal cash flows occurring at equal intervals of time will increase when the:

II.discount rate is decreased. III.number of time periods is increased.

You are comparing two separate investments. Each one is for a period of 10 years and pays $2,500 a year. You require a 10 percent return on these investments. Investment A pays at the beginning of each year and investment B pays at the end of each year. Given this situation, which one of the following statements is accurate?

Investment A has both a higher present value and a higher future value than investment B.

Cumulative voting refers to the process in which a shareholder:

MAY cast all votes for one member of the board of directors.

Which one of the following statements concerning municipal bonds is correct?

Municipal bonds are generally callable.

The price of a stock at year 10 can be expressed as:

P(sub)11 ÷ (1+g)

The electronic system that transmits orders directly to a specialist on the floor of the NYSE is called the:

SuperDOT system.

Which one of the following statements is correct concerning annual percentage rates (APRs)?

The APR is equal to the monthly interest rate multiplied by 12 for a credit card that computes interest on a monthly basis.

Which one of the following statements is correct concerning an annuity interest rate?

The annuity interest rate is the discount rate used to find the present value of the annuity payments.

Under which of the following conditions is a bond most likely to be called?

The bond is a 20-year bond and has 3 years to maturity.

Which one of the following comparisons between debt and equity is correct?

The creditors have first claim to the firm's assets but the stockholders are the owners.

Which one of the following is a positive covenant?

The firm will maintain a minimal level of net working capital.

Which one of the following statements is true about zero coupon bonds?

The implicit interest is taxable income to the bondholder each year.

Which one of the following bonds tends to be the most interest rate sensitive?

a 20-year, zero coupon bond

Which one of the following individuals is most apt to purchase a newly issued municipal bond?

a high-income, high-tax bracket executive

Which one of the following best defines an annuity?

a level stream of payments occurring at equal intervals of time

A type of loan where the principal amount is reduced over the life of the loan by the borrower making regular payments is called a(n):

amortized loan

Peter borrowed $10,000 from his bank and agreed to pay $1,000 on the principal plus the interest each year. This is an example of a(n):

amortized loan

Theo just financed a new car through his credit union. His car loan requires payments of $420 a month for five years. Assuming that all payments are paid timely, his last payment will pay off the car loan in full. Theo has a(n):

amortized loan

The coupon rate is best defined as the:

annual coupon divided by the face value of a bond.

The current yield is defined as the:

annual coupon divided by the market price.

An annuity for which the cash flows occur at the beginning of each time period is called a(n):

annuity due

Trading on an ECN is conducted between an investor and:

another investor.

The price a dealer is willing to take for a security is called the _____ price.

asked

A credit card has an APR of 18 percent and charges interest monthly. The effective annual rate on this account will:

be greater than 18 percent.

When interest payments are made to whoever holds the bond, the bond is said to be in _____ form.

bearer

The price at which you can sell a bond and at which the dealer will purchase it is called the _____ price.

bid

A security arrangement where all the real property of a firm is used as collateral for a bond issue is called a(n):

blanket mortgage.

Dividends are paid at the discretion of the:

board of directors

An unexpected decrease in market interest rates will cause:

bond prices to increase and the current yield to decrease.

The general purpose of a put bond is to give the:

bondholder the right to force the issuer to purchase the bond at a stated price.

An agent who arranges security transactions among investors is a called a:

broker

A dealer is an agent who:

buys and sells securities from inventory.

Which one of the following provisions allows a firm to repurchase its bonds prior to the planned maturity date?

call

The call premium is the amount by which the:

call price exceeds the par value

A bond which an issuer is currently restricted from redeeming is referred to as a:

call protected bond

The right of the bond issuer to repurchase the bond at a predetermined price prior to maturity is referred to as the:

call provision

Assume that you own a stock with a market price of $30. This stock pays a constant dividend of $1.50 a share. If the price of the stock suddenly rises to $40, you would expect the:

capital gains yield to increase and the dividend yield to decrease.

The rate at which the value of an investment grows is called the:

capital gains yield.

A type of bond issued by insurance firms which allow them to forego paying interest under certain natural conditions are classified as _____ bonds.

cat

The interest rate risk premium is the compensation investors require for their assumption of the risk related to:

changes in interest rates.

The annual percentage rate is the interest rate:

charged per period multiplied by the number of periods per year.

The persons who execute customer buy and sell orders on the floor of the NYSE are called:

commission brokers

The largest number of owners of the NYSE are registered as:

commission brokers.

The type of security which represents ownership in a firm without priority for dividends or priority in a bankruptcy is called _____ stock.

common

A collateral trust bond generally means that the security on a bond issue is provided by the _____ held by the corporation.

common stock

In Canada and the United Kingdom, a perpetuity is also called a(n):

consol

The Bigelow Co. increases their annual dividend by 3 percent each and every year. This stock is referred to as a(n) _____ stock.

constant growth

Which one of the following is most apt to have the largest taxability premium?

corporate bond

The stated interest payment made on a bond is called the:

coupon

A bond for which no specific property has been pledged as security is classified as a:

debenture

All else equal, a bond with a rating of B will have a larger _____ premium than a bond with an A rating.

default risk

The portion of a bond's yield that compensates investors for the possibility that the bond's interest or principal might not be paid is called the:

default risk premium.

The provision which prohibits a bond issuer from repurchasing a bond for a period of time after issue is called the _____ provision

deferred call

A bond which sells for less than the face value is called a:

discount bond

The stock valuation process which determines the price of a stock by dividing the next period's dividend by the discount rate less the dividend growth rate is called the:

dividend growth model

Next year's expected annual dividend divided by today's stock price is called the stock's:

dividend yield

The current yield on a bond is most similar to the:

dividend yield on a stock

Payments to shareholders by a corporation that represent a return on capital are called:

dividends

If inflation is expected to decrease in the future, the graph depicting the term structure of interest rates will be:

downward-sloping

When comparing loans of equal amounts and equal time periods, you should select the loan that has the lowest:

effective annual rate.

NASDAQ is a(n):

electronic dealer market.

Many of the smaller orders sent to the floor of the NYSE are:

electronically transmitted to the specialists.

With straight voting, the only means of guaranteeing yourself a seat on the corporate board of directors is to:

ensure that you have enough votes to control the entire election.

A discount bond has a yield to maturity that:

exceeds the coupon rate

A premium bond has a coupon rate that:

exceeds the yield to maturity

The clean price of a bond is the price:

excluding any accrued interest.

The effective annual rate is defined as the interest rate that is:

expressed as if it were compounded once per year.

The principal amount of a bond that is repaid at the end of term is called the par value or the:

face value

A bond which was previously rated as investment grade but which has fallen to junk status is commonly referred to as a:

fallen angel.

Members who execute orders on a fee basis for commission brokers are referred to as:

floor brokers

An independent individual who trades for his or her own account by buying and selling on the floor of the NYSE is referred to as a(n):

floor trader

The capital gains yield, as used in the dividend growth model, is symbolized as:

g

If shareholders are granted a preemptive right they will be:

given the first right to purchase any new shares of stock that are issued.

Preferred stock:

has a higher claim in a liquidation than the common stock

A premium bond is a bond that:

has a market price which exceeds the face value.

A relatively rare bond that pays interest based on the profits of the firm are generally described as _____ bonds.

income

An increase in the amount of an annuity payment will:

increase the future value of the annuity

The amount of a bond issue along with the repayment terms are generally included in the:

indenture

The written agreement between the corporation and its creditors is called the bond:

indenture

To offset the decreasing value of a dollar over time, bond investors demand a(n) _____ premium.

inflation

The compensation investors require to offset expected future increases in prices is called the:

inflation premium.

A loan which requires the borrower to pay interest each period and to pay the entire principal at some point in the future is called a(n):

interest only loan

Licheng borrowed $1,000 from his bank three years ago. The interest rate on the loan was 10 percent. Licheng has been paying annual payments of $100 on this loan. This year, he must pay $1,100 to the bank. Licheng took out a(n):

interest only loan

Today, you borrowed $1,000 from your bank for five years at 8 percent interest. The loan requires that you make a payment of $80 one year from today. Based on this information, it appears that you have a(n):

interest only loan

A bond investor believes, based on statements made by the Federal Reserve governors, that interest rates will increase in the future. Therefore, this investor will demand a(n) _____ premium if they purchase a bond today.

interest rate risk

The dirty price of a bond:

is also called the full price

The Treasury yield curve:

is based on coupon bond yields.

When a bond's yield to maturity equals the bond's coupon rate, the bond:

is priced at par

A crossover bond is one which:

is rated as investment grade by one rating agency and rated as junk by another rating agency.

The liquidity premium is the portion of a nominal interest rate that represents compensation for the:

lack of the ability to sell the bond at its fair value in a timely manner.

The general purpose of protective covenants is to help protect the:

lenders from company actions contrary to the lenders' benefit.

The longer the time period until the maturity of a bond, the:

less value the bond's principal has TODAY.

Eat 'n Run pays a constant dividend. At the end of trading on Monday, the price of their stock was $21.64. At the end of trading on Tuesday, the stock price was $22.03. The dividend yield Tuesday night is _____ it was on Monday night.

lower than

Inside quotes are defined as the:

lowest ask quotes and the highest bid quotes for a security

The date on which the principal amount of a bond is paid is referred to as the:

maturity

The Over-the-Counter Bulletin Board (OTCBB):

may quote prices as low as .0001.

An owner of a seat on the NYSE is called a:

member

The nickname for a bond issued by a state is:

muni

Which one of the following is most apt to have the largest liquidity premium?

municipal bond issued by a rural city

The rate of return you earn on an investment before adjusting for inflation is called the _____ rate.

nominal

The yield to maturity on a Marshall Co. premium bond is 7.6 percent. This is the:

nominal rate.

The dividends paid by the Jon Stone Co. over the past 4 years were $.40, $1.00, $1.10, and $1.13, respectively. The name given to this type of stock is:

nonconstant growth.

An unsecured debt which generally matures in less than ten years is called a:

note

The future value of an annuity will decrease when either the:

number of periods decreases or the interest rate declines.

The current price of a stock is based:

on the present value of all the future cash flows from that stock.

Straight voting is defined as the process where the directors are elected:

one at a time

The indenture is a legal document which:

outlines the terms and provisions of a bond issue.

Bond ratings primarily help potential investors measure the likelihood that the bond issuer will:

pay both the bond interest and principal in a timely fashion

The present value of a stream of equal cash flows occurring at regular intervals of time can be computed using a financial calculator. In this case, the amount of each cash flow is input as the:

payment

A low dividend yield on a stock indicates that the stock:

pays out a small percentage of the stock's value in dividends.

An annuity where the cash flows continue forever is called a(n):

perpetuity

The required return for a stock is based on the dividend yield:

plus the capital gains yield.

Stock which generally pays a fixed dividend and receives priority in the payment of dividends and the distribution of corporate assets is called _____ stock.

preferred

Which one of the following is generally valued as a perpetuity?

preferred stock

A pure discount loan can be defined as the:

present value of a single lump sum to be repaid at some time in the future.

The total value of a bond is equal to the:

present value of all the future cash flows related to that bond.

The market in which new securities are originally sold to investors is called the _____

primary market

The stipulations in a bond indenture agreement which limit the actions a firm can take while the bond issue is outstanding are called:

protective covenants.

The required return:

provides an estimate of the return an investor might expect if he or she purchases a stock at today's market price.

The authority granted by a shareholder that permits another individual to vote that shareholder's shares is called a:

proxy

Phil would like to borrow some money today but not make any payments at all for three years. At the end of the three years, he would like to pay the loan in full in one lump sum payment. What type of loan should Phil request from his bank?

pure discount loan

Theresa borrows $800 today in exchange for one payment of $1,000 five years from now. This is an example of a(n):

pure discount loan

An interest rate that has been adjusted for inflation is called a _____ rate.

real

Which one of the following rates is the best measure of the increased purchasing power you can realize from a bond investment?

real rate

A sinking fund is an account managed by the bond trustee for the purpose of:

redeeming bonds early.

When interest payments on a bond are made directly to the owner of record, the bond is said to be in _____ form.

registered

A dealer earns a profit by:

retaining the spread

The market where one shareholder sells shares to another shareholder is called the _____ market.

secondary

Generally, bonds issued in the U.S. pay interest on a(n) _____ basis.

semi-annual

The indenture often calls for a bond issue to be at least partially repaid prior to maturity. The means of doing this is frequently a:

sinking fund

The market maker who deals in a small number of securities on the exchange floor is called the:

specialist

The location on the floor of an exchange where an individual security is traded is called the:

specialist's post.

The profit that a dealer earns on the purchase and subsequent resale of a bond is called

spread

The quoted interest rate which is expressed in terms of the interest payment made each period is called the:

stated interest rate

An investment states that it will pay interest of 8 percent with payments being made on a quarterly basis. The 8 percent is the:

stated rate

Order flow can be defined as the:

stream of customer orders to buy and sell securities.

The future value of a series of cash flows over time can be computed by:

summing the future values of each of the individual cash flows.

The extra compensation investors demand for a corporate bond over that of a comparable municipal bond is called the:

taxability premium.

The pure time value of money, as illustrated by the nominal interest rates on default- free, pure discount bonds, is called the:

term structure of interest rates.

The benefit of cumulative voting is:

the ability of shareholders, who own fewer shares, to elect at least one corporate director of their choice.

A convertible bond has features of both debt and equity because:

the bond can be exchanged for shares of stock.

If two loans have same annual percentage rates, then:

the borrower might still save money by selecting one loan over the other.

The Fisher effect can be described as differentiating between:

the income you receive and the increase in your purchasing power from that income.

The difference between an ordinary annuity and an annuity due is the:

timing of the annuity payments.

The NASDAQ consists of:

two separate markets, a National Market and a SmallCap market.

A debenture is a(n):

unsecured debt which generally matures in ten years or more.

If interest rates are expected to increase in the future, the graph depicting the term structure of interest rates will be:

upward sloping

Dividends become a liability of a firm:

when the dividend is declared but are not tax deductible at any time.

When the yields of Treasury notes and bonds are plotted on a graph in relation to their respective times to maturity, the resulting curve is called the Treasury _____ curve.

yield

The rate required in the market on a bond is called the:

yield to maturity

All of the following are generally included in the indenture EXCEPT the:

yield to maturity.

A deep discount bond that pays no regular interest payments is called a(n) _____ bond.

zero coupon

A stock which pays a constant dollar dividend over an extended period of time is referred to as a _____ stock.

zero-growth