Exam 2- FIN 300
Which one of the following transactions occurs in the primary market?
A purchase of newly issued stock from the issuer
Which of the following are true?
AAR is similar to calc. for return on assets.
Winston Co. has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true?
The stock has a negative capital gains yield.
***All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
a discount; less than
Protective covenants:
are primarily designed to protect bondholders
Average Acct Return (AAR)
average NI/Average BV
Which of the following is NOT characteristics of a bond?
bondholders have an ownership interest in the firm
A bond is quoted at a price of $1,011. This price is referred to as the:
clean price
The interest rate risk premium is the:
compensation investors demand for accepting interest rate risk.
NASDAQ is a
computer-based quotation system
A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a
floor broker
Which one of the following represents the capital gains yield as used in the dividend growth model?
g
Interest rates that include an inflation premium are referred to as:
nominal rates
When dividends are constant, we can find the current stock price by applying the
perpetuity formula.
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?
primary market
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.
The dividend growth model:
requires the growth rate to be less than the required return.
A dirty bond price refers to
the clean price + accrued interest.
A Treasury yield curve plots Treasury interest rates relative to:
time to maturity
The term structure of interest rates is usually
upward sloping
Which of the following are not physical to find NPV of a project using our calc?
using expected values
Which of the following is NOT a factor that affects bond yields?
week day premium
The secondary market is best defined as the market:
where outstanding shares of stock are resold.
If the yield to maturity on a bond is greater than coupon rate the bond price
will be less than par value and bond will sell at a discount.
When deciding between mutually exclusive project, we should accept project
with highest NPV.
The rate of return that the mkt requires on a bond is
yield of maturity
The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:
05/(1 − t*) = .07.
A note is generally defined as:
An unsecured bond with an initial maturity of 10 years or less.
A bond is quoted at a price of $1,011. This price is referred to as the:
Clean Price
Which one of the following best describes NASDAQ?
Computer network of securities dealers
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?
Default risk
Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?
Determining the amount of the dividend to be paid per share
A sinking fund is managed by a trustee for which one of the following purposes?
Early bond redemption
Real rates are defined as nominal rates that have been adjusted for which of the following?
Inflation
In actual practice, managers most frequently use which two types of investment criteria
Internal rate of return and net present value
The internal rt of return is return that makes
NPV=0
Which one of the following is an electronic system used by the NYSE for directly transmitting orders to designated market makers?
Pillar system
The Fisher effect is defined as the relationship between which of the following variables?
Real rates, inflation rates, and nominal rates
Which of the following is NOT included in bond indenture?
The yield to maturity on bond.
You cannot attend shareholders meetings for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of thus authority called?
Voting by Proxy
An agent who maintains an inventory from which he or she buys and sells securities is called a:
dealer
A member who acts as a dealer in a limited number of securities on the floor of the NYSE is called a:
designated market maker
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.
A decrease in which of the following will increase the current value of a stock according to the dividend growth model?
discount rate
A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?
callable
Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule?
Project A only
When pricing bonds with semiannual coupon payments using time value of money function on our calculation
we must take 1/2 annual yield to maturity for I/Y and double # of years for N
Which of the following are steps to calculate NPV?
est required rate of return, take PV of CF, est. future CF
Graphing the crossover point helps explain:
how decisions concerning mutually exclusive projects are derived.
Which type of investors are likely to find municipal bonds attractive?
investors in a high tax bracket
Which of the following is NOT an advantage of payback period?
it values long-term projects accuracy
The formula for the bond price includes both formula for PV of annuity a formula for PV of
lump sum
DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:
market price of the bond will decrease.
The current yield is defined as the annual interest on a bond divided by the:
market price.
Features of common stock include
may be multiple classes of common stock, voting rights, common stockholders share proportion in assets during liquidation
Disadvantage of discounted payback period is
not a rt of return, based on acct NI and book value, uses arbitrary benchmark, time value
Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be?
Accept Project B and reject Project A based on the NPVs
Which bond would you generally expect to have the highest yield?
Long-term, taxable junk bond
Recently, you discovered a convertible, callable bond with a semiannual coupon of 5 percent. If you purchase this bond you will have the right to:
convert the bond into equity shares.
We can think of the expected return on a stock as a combination of 2 components
dividend yield and capital gains yield
Which of the following is NOT one of the 3 cases where we will be able to use formulas to find stock price by taking present value of all future dividends?
dividends streams with no discernable pattern
The cash flows that go to stockholders include
dividends, capital gains from selling stock.
A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?
over the counter
The stock price calculated using the formula from this video is most sensitive to changes when the
required rate of return is near the growth rate.
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
The discounted periods differs from payback period in that
the discounted period payback period does need to know required rate of return.
