FIN TEST 1 Terms
an example of a loan with non-constant interest rate is a(n)
ARM
Credit risk, or default risk, is the risk that:
Bond interest payments or the principal payment will not be made.
Which of the following is one of the top three bond rating firms?
Standard and Poor's
A bond will sell at __________ if the required return is greater than the coupon rate.
a discount
Which of the following is true of a competitive market?
a goof can be bought and sold at the same price
when an individual or organization acquires enough stock ownership and / or the ability to vote on behalf of other shareholders to replace the board of directors against their will it is known as
a hostile takeover
a limited liability company combines the
a limited liability of a corporation with the ownership of a partnership
The cash flows of a 10% coupon bond with four years to maturity and a $1,000 par value can be replicated with
a series of zero-coupon bonds
one technique often used in the time value of money problem that provides a linear representation of cash flows is
a timeline
When using the net present value (NPV) to evaluate capital budgeting projects, you should:
accept all projects with a positive NPV
which of the following is considered a current liability
accounts paybale
which of these is an asset
accounts receivable
if the managers of a company are not the owners of the company, they are considered:
agents
which of the following statements about amortizing a loan is true
although the payment is the same each month the interest that accrues each month decreases
Kevin sees that gold is selling for $1,675 an ounce in London and $1,705 an ounce in New York. Kevin quickly buys gold in London and sells it immediately in New York. Kevin is practicing
arbitrage
Treasury bills have maturities of up to one year and;
are zero-coupon bonds.
Accountants prepare financial statements using a set of guidelines established by the profession to ensure that all financial statements are comparable. These guidelines are known as:
generally accepted accounting principles
firms with high market- to -book ratios are often referred to as
growth stocks
All other things equal, a corporation will pay a __________ coupon rate on __________ bonds.
higher;higher risk
the market where financial securities are offered for sale to the public for the very first time is known as the:
primary market
DuPont analysis relates ROE to
profitability, asset efficiency and leverage
One of the most important functions of a liquid market for a given asset is to:
provide information on value.
the most important function of a market maker on the NYSE is to
provide liquidity
one of the most important functions of the secondary market is to:
provide liquidity to investors
firms that are the easiest to value are
publicly traded firms
dark pools are alternative trading systems that
reveal limited pricing and volume information
the __ the cash flows, the ____ the discount rate that should be used to compute the present value of the cash flows
riskier;higher
An investment opportunity that trades in a financial market is known as a(n):
security
In a normal market we can evaluate a project's NPV without regard to the source of financing. This ability is known as the:
separation priciple
When an investors borrows a stock they do not own and sells it but promises to buy the stock at a later date and repay the borrower it is known as a(n):
short sale
the amount of interest that you can earn in one year that does not factor in the effects of compounding is known as
simple interest
Default-free, zero-coupon yields are also referred to as interest rates by some financial professionals.
spot
the three main financial statements are the balance sheet, the income statement and the statement of cash flows. however, there is a fourth financial statement know as the
statement of stockholders' equity
the sarbanes-oxley act attempts to improve the accuracy of information given to both boards and shareholders by
stiffening penalties for false information
a fractional share of ownership in a corporation is known as
stock
In order to calculate a project's NPV, you need to know the appropriate discount rate, the amount of the initial outlay, and:
the amount and timing of the expected cash flows
justin is considering an investment that will pay him $5000 a year for the next 20 years. which of the following should justin use to discount these future cash flows to the present
the opportunity cost of capital
the concept that a dollar received today is worth more than a dollar received at some point in the future is known as
the time value of money
the present value is equivalent to
the value of a cash flow today
a disadvantage of a partnership is
unlimited liability
If Company X and Company Z have the same series of cash flows combined as Company Y, then the price of X + Z should equal the price of Y. This concept is known as:
value additivity
which of the following is one of the primary questions addressed by financial managers
which projects should the firm invest resources in to increase shareholder wealth
The law of one price states that the same good or financial asset:
will have the same price in a competitive market
one of the primary tasks of the financial manager is to manage short-term cash need, which is known as:
working capital management
The __________ is a graphical representation of the term structure of interest rates.
yield curve
In a normal competitive market, the net present value of trading securities should be
zero
The no-arbitrage price of a coupon bond can be calculated by discounting the annual cash flows using the respective yields of:
zero-coupon bonds with the same maturities
researchers estimate that including dark polls there are as many as _____ stock trading venues where investors can buy and sells stock
50
When portfolio C is equivalent to a portfolio comprised of A and B, value additivity maintains that the:
Price of C = Price of A + Price of B
What is the opportunity cost associated with not receiving a lump sum of money today, but instead receiving it one year from now?
The amount of interest you could have earned placing the money in a savings account.
A very conservative investor that was seeking a low-risk investment would be most interested in which of these investments?
U.S. Treasuries
Which of these is an example of a sovereign bond?
U.S. Treaury bonds
Any publicly-traded U.S. firm must file quarterly financial statements and annual financial statements with the __________ and also send an annual report that includes their financial statements to their shareholders.
U.S. securities and exchange commission
corporations are required to hire a neutral third party, know as ___ to verify that the firm's financial statements are reliable and prepared according to GAAP
auditor
a firm's assets and liabilities are reported on the
balance sheet
If cash flows from an investment are taxed, the investor's actual cash flow from a specific investment will;
be reduced by the amount of the tax payments.
technology that allows a transaction to be recorded in a publicly verifiable way without the need for a trusted third party to certify its authenticity is referred to as
blockchain technology
A financial security sold by corporations and governments that promises future payments to the investor is known as a(n):
bond
A long-term debt instrument issued by a business or government to raise capital is known as a:
bond
which of these bonds should have the highest risk and therefore return?
bonds issued by the gap
discounting cash flows refers to
calculating the present value of cash flows to be received at some point in the future
which of the following positions typically reports to the chief financial officer?
controller
a _____ is a form of business organization that is considered an artificial being and has limited liability
corporation
The present value of a bond's __________ determines the value of the bond.
coupon payment and maturity value
accounts receivables are
credit sales that have not been collected
net working capital equals
current assets minus current liabilities
An inverted yield curve indicates that most investors believe interest rates will:
decrease
As market interest rates increase, the value of a bond will __________ all other things equal.
decrease
the practice of spreading the expense of a long-term asset over its useful life is known as
depreciation
According to the Valuation Principle, the value of an asset is:
determined by its competitive market price
When converting an APR to a discount rate you need to;
divide the APR by the annual compounding frequency.
a corporation may elect to make a periodic cash distribution to its shareholders which is known as
dividend payment
The __________ measures how sensitive a bond's price is to changes in interest rates.
duration
shareholders exercise control of a corporation by;
electing a board of directors
One of the largest accounting scandals of the past 20 years, which was involved in the bankruptcy of an energy trading firm, is:
enron
an annuity refers to a series of
equal cash flows occurring at equal intervals for a finite period
Bonds mature on a specific date and the is repaid to the bondholder at that time.
face value
the interest rate banks charge each other for overnight loan is known as the
federal funds rate
compounding is the process of
finding the future value of some amount when interests is reinvested
Two firms are issuing 20-year bonds. Firm 1 is offering a 5% coupon bond and Firm 2 is offering a 7% coupon bond. What is the likely reason for the difference in coupon rates
firm 2 is riskier than firm 1
Investors, analysts and managers often use the yield curve to:
forecast interest rates
U.S. Treasury notes have maturities that range;
from one to ten years
when an investor submits a market order to sell stock the order will be executed
immediately
Market rates of interest are partially determined by the Federal Reserve Bank through:
increasing or decreasing the amount of bank reserves
a steeply upward-sloping yield curve indicates that
interest rates are expected to rise in the future
the term structure of interest rates refers to the different
interest rates of securities with the same risk but different maturity dates
The top four categories of bond ratings are collectively known as __________.
investment-grade bonds
In general, a dollar received today:
is worth more than a dollar received tomorrow
The ability to sell an investment quickly at a price close to the price at which you could contemporaneously buy it is known as;
liquidity
which of the following is considered to be a financing activity
making a dividend payment
which of the following is one of the primary functions of the financial manager
making financing decisions
an agency problem occurs when
managers put their own self-interests above shareholders
the market-to-book ratio is the ratio of
market value of equity to the book value equity
the primary goal of the financial manager is to
maximize shareholder wealth
As you increase the required return used in an NPV calculation, the likelihood of a __________ NPV __________.
negative, increases
which type of income may be distributed to the company's owners or reinvested in the company?
net income
The interest rate is the interest rate that has not been adjusted for inflation.
nominal
A competitive market with no arbitrage opportunities is known as a(n):
normal market
the primary advantage of an S corporation is that profits are
not taxed at the corporate level
the financial statements include an introduction known as the management discussion and analysis. this preface must contain information about
off-balance sheet transactions
a statement of cash flows has which three parts
operating, investing, and financing
EBITDA or earning before interest, taxes, depreciation, and amortization shows how much cash a firm has earned from
operations
the discount rate an investor uses to evaluate investment options should be that
oppotuniy cost of capital
british government bonds, known as consoles are one example
perpetuity
A yield curve can be constructed using similar risk corporate bonds. The yield curves constructed with corporate bonds will __________ the U.S. Treasury yield curve.
plot above
retained earning are the sum of
previous years' of earnings less dividends
The no-arbitrage price of an asset is the:
price at which no opportunities for arbitrage exist