Exam 2 Review

Why would I prefer owning a bond with security to one without?

A secured bond since if the company goes bankrupt you can liquidate your security and receive proceeds

The secondary market is best defined as the market:

Where outstanding shares of stock are resold

The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the:

Yield to maturity

Which one of these equations applies to a bond that currently has a market price that exceeds par value?

Yield to maturity < Coupon rate

Which one of the following bonds is the least sensitive to interest rate risk?

3-year; 6 percent coupon

Which one of the following will produce the lowest present value interest factor?

8 percent interest for 10 years

What is the yield-to-maturity of a bond?

A bondholder's required rate of return for holding a bond

The interest rate that is most commonly quoted by a lender is referred to as the:

Annual percentage rate

Bonds issued by the U.S. government:

Are considered to be free of default risk

Which one of following is the rate at which a stock's price is expected to appreciate?

Capital gains yield

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings?

Common

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment?

Coupon

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:

Decrease in all stock values

As the interest rate increases the present value?

Decreases

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

What kind of issues do I get to vote on as a common shareholder?

Directors, mergers, auditors

A decrease in which of the following will increase the current value of a stock according to the dividend growth model?

Discount rate

What are the distributions of either cash or stock to shareholders by a corporation called?

Dividends

Which one of the following statements related to loan interest rates is correct?

When comparing loans you should compare the effective annual rates

An ordinary annuity is best defined as:

Equal payments paid at the end of regular intervals over a stated time period

The greater the risk, the greater/lesser the required return?

Greater

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

If the number of time periods increases, what happens to the future value of a present amount?

Increases

What is the difference between real and nominal returns?

Inflation

What is a bond call option?

It gives the company the right to call or purchase the bonds at a specified price from bondholders

Your goal is to have $1 million in your retirement savings on the day you retire. To fund this goal, you will make one lump sum deposit today. If you plan to retire _____ rather than _____ and earn a _____ rate of interest, then you can deposit a smaller lump sum today.

Later; sooner; high

Nan and Neal are twins. Nan invests $5,000 at 7 percent at age 25. Neal invests $5,000 at 7 percent 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?

Nan will have more money than Neal at any age

What are the differences between debt and equity?

Ownership, voting, tax treatment, bankruptcy and financial distress

Municipal bonds:

Pay interest that is federally tax free

How would I calculate the current value of anything, for example bonds and stocks?

Present value of future cash flows

What is interest rate risk and do all bonds have it?

Price change of bonds due to changes in interest rates. All bonds have it.

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is:

Priced the same as a $1 perpetuity

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate? (No calculations needed)

Project X has both a higher present and a higher future value than Project Y

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

What are the three types of loans?

Pure discount, interest only, and amortized

What factors determine one's yield-to-maturity of a bond?

Real rates of return, inflation expectations, interest rate risk, bond indenture, default risk, taxability, bond type, liquidity of bonds

Preferred stock may have all of the following characteristics in common with bonds with the exception of:

Tax-deductible payments

Suppose you buy a 7 percent coupon, 20-year bond today when it's first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond?

The price of the bond will fall

Why would anyone care what the effective annual rate is?

To compare two investment or loan options

What is a common shareholder entitled to?

Vote (directors, mergers, auditors), share in profits (dividends), residual assets in a liquidation

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