Exam 2

Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will:

Increase

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:

Spread

Five years ago Two Towers Inc. issued bonds that pay a 7 percent coupon. At issue these bonds were rated BBB, but today they are rated AAA. Which of the following is most likely based on this information?

The bonds carry a smaller default premium than when issued.

While not true of common stock, preferred shares:

Are often associated with a sinking fund set-up by the company. Typically don't get voting rights. Have a pre-specified dividend yield usually based on par value.

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected? A. Default risk B. Taxability C. Liquidity D. Inflation E. Interest rate risk

A. Default risk

A sinking fund is managed by a trustee for which one of the following purposes? A. Paying bond interest payments B. Early bond redemption C. Converting bonds into equity securities D. Paying preferred dividends E. Reducing bond coupon rates

B. Early bond redemption

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? A. Real rate risk B. Interest rate risk C. Default risk D. Liquidity risk E. Taxability risk

B. Interest rate risk

Which one of the following is an electronic system used by the NYSE for directly transmitting orders to designated market makers? A. Garage order flow B. Pillar system C. Big Room system D. SLP network E. Order NET

B. Pillar system

An agent who arranges a transaction between a buyer and a seller of equity securities is called a:

Broker

Sam just opened a savings account paying 3.5 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this, Sam: A. will earn the same amount of interest each year for four years B. Will earn simple interest on his savings every year for four years C. Could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest

C. Could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest

You are comparing two investment options that each pay 5 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays three annual payments starting with $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? A. Both options are of equal value since they both provide $12,000 of income B. Option A has a higher future value at the end of Year 3 C. Option B has a higher PV at time 0 D. Option B is a perpetuity E. Option A is an annuity

C. Option B has a higher PV at time 0

You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows?

Comparable real rate

The interest earned on both the initial principal and the interest reinvested from prior periods is called

Compound interest

A company has four open seats on its board of directors. There are seven candidates vying for these four positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400 of your votes for a single candidate. What is this type of voting called?

Cumulative Voting

Rosita paid a total of $1,189, including accrued interest, to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:

Dirty Price

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today?

Dirty price

Nan and Neal are twins. Nan invests $5,000 at 7% at age 25. Neal invests $5,000 at 7% at age 30. Both investments compound interest annually. Both twins retire at age 60 and neither adds nor withdraws funds prior to retirement. Which statement is correct? A. Nan will have less money when she retires than Neal B. Neal will earn more interest on interest than Nan C. Neal will earn more compound interest than Nan D. If both Nan and Neal wait to age 70 to retire they will have equal amounts of savings E. Nan will have more money than Neal at any age

E. Nan will have more money than Neal at any age

Ernst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets? A. Private B. Auction C. Tertiary D. Secondary E. Primary

E. Primary

Which one of these statements related to growing annuities and perpetuities is correct? A. You can compute the PV of a growing annuity but not a growing perpetuity B. In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate C. The FV of an annuity will decrease if the growth rate is increased D. An increase in the rate of growth will decrease the present value of an annuity E. The PV of a growing perpetuity will decrease if the discount rate is increased

E. The PV of a growing perpetuity will decrease if the discount rate is increased

Which one of the following statements correctly defines a TVOM relationship? A. Time and future values are inversely related, all else held constant B. Interest rates and time are positively related, all else held constant C. An increase in a positive discount rate increases the present value D. An increase in time decreases the future value given a zero rate of interest E. Time and Present value are inversely related, all else held constant

E. Time and Present value are inversely related, all else held constant

The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:

Protective Covenants

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today?

Two months' interest

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

Voting by proxy

Interest rates that include an inflation premium are referred to as:

nominal rates.