Finance Midterm 2

The bond's expected capital gains yield is zero.

A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is CORRECT?

False

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.

Which of the following statements is CORRECT about long terms bonds

All else equal, long-term bonds have less reinvestment risk than short-term bonds.

The required return will fall for all stocks, but it will fall more for stocks with higher betas.

During the coming year, the market risk premium (rM - rRF), is expected to fall, while the risk-free rate, rRF, is expected to remain the same. Given this forecast, which of the following statements is CORRECT?

Which of the following statements is CORRECT about eliminating diversifiable risk.

An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks.

Default and liquidity risk differences.

Assume that interest rates on 20-year Treasury and corporate bonds are as follows: T-bond = 7.72% AAA = 8.72% A = 9.64% BBB = 10.18%The differences in these rates were probably caused primarily by:

True

Because the maturity risk premium is normally positive, the yield curve is normally upward sloping.

True

For a stock to be in equilibrium, two conditions are necessary: (1) The stock's market price must equal its intrinsic value as seen by the marginal investor and (2) the expected return as seen by the marginal investor must equal this investor's required return.

True

From an investor's perspective, a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer's standpoint, these risk relationships are reversed: bonds are the most risky for the firm, preferred is next, and common is least risky.

Yes only if Stock A has half of what Stock B's Expected growth is

If Stock A and B both of have the same Price and Required return can Stock A's expected dividend be 1?

Which of the following statements is CORRECT about inflation.

If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.

True

If investors expect a zero rate of inflation, then the nominal rate of return on a very short-term U.S. Treasury bond should be equal to the real risk-free rate, r*.

True

If investors expect the rate of inflation to increase sharply in the future, then we should not be surprised to see an upward sloping yield curve.

False

If the Treasury yield curve were downward sloping, the yield to maturity on a 10-year Treasury coupon bond would be higher than that on a 1-year T-bill.

lower BETA, lower Standard Deviation

If you are a strict risk minimizer, you would choose Stock A if it is to be held in isolation and Stock B if it is to be held as part of a well-diversified portfolio.

True

Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.

True

Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.

If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's.

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

True

The Y-axis intercept of the SML (security market line) represents the required return of a portfolio with a beta of zero, which is the risk-free rate.

True

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

The stock price is expected to be $54 a share one year from now

The expected return on Natter Corporation's stock is 14%. The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?

True

The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity.

Which of the following statements is CORRECT about yield68790- on a two year curve

The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond.

True

There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.

The required rate of return would increase because the bond would then be more risky to a bondholder.

Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

True

When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk

True

You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. You should buy the bond if your required return on bonds with this risk is 12%.