Finance Exam 2

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

A. 3-year; 6 percent coupon

The taxability risk premium compensates bondholders for which one of the following?

A. A bond's unfavorable tax status

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

A. Callable

Which one of the following applies to a premium bond?

A. Coupon rate > Current yield > Yield to maturity

Which one of the following relationships is stated correctly?

A. Decreasing the time to maturity increases the price of a discount bond, all else constant

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?

A. Determining the amount of the dividend to be paid per share

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

A. Discount rate

Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model?

A. Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

A sinking fund is managed by a trustee for which one of the following purposes?

A. Early bond redemption

Which one of the following statements is correct? A. The risk-free rate represents the change in purchasing power. B. Any return greater than the inflation rate represents the risk premium. C. Historical real rates of return must be positive. D. Nominal rates exceed real rates by the amount of the risk-free rate. E. Given a positive rate of inflation, the real rate must be less than the nominal rate.

A. Given a positive rate of inflation, the real rate must be less than the nominal rate.

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. Interest rate risk

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

A. Liquidity

Which bond would you generally expect to have the highest yield?

A. Long-term, taxable junk bond

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?

A. Over-the-counter

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. Primary

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?

A. Real rate

Valenica Corporation has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders?

A. Right to share in company profits prior to other shareholders

Which one of the following statements concerning bond ratings is correct?

A. Split-rated bonds are called crossover bonds.

Which one of the following statements is false concerning the term structure of interest rates?

A. The term structure of interest rates and the time to maturity are always directly related.

Jonathan has researched Tejeda Tech and believes the firm is poised to vastly increase in value. He has decided to purchase Tejeda Tech bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholders. Which one of the following bond features will help him fulfill his wish?

A. Warrant

Assume the current market price of a bond exceeds its par value. Which one of these equations applies?

A. Yield to maturity< Coupon rate

You purchased a 10-year bond at par value when it was originally issued. It has an annual coupon of 5 percent and matures five years from now. Coupons are paid semiannually. Which one of the following statements applies to this bond if the relevant market interest rate is now 4.7percent?

A. You will realize a capital gain on the bond if you sell it today.

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:

A. a decrease in all stock values

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

A. a discount; less than

Bonds issued by the U.S. government:

A. are considered to be free of default risk.

If you sell a bond with a coupon of 6 percent to a dealer when the market rate is 7 percent, which one of the following prices will you receive?

A. bid price

A bond has a face value of $1,000. It can be redeemed early at the issuer's discretion for $1,015, plus any accrued interest. The additional $15 is called the:

A. call premium

An example of a negative covenant that might be found in a bond indenture is a statement that the company:

A. cannot lease any major assets without bondholder approval.

Read Corporation currently pays an annual dividend of $1.46 per share and plans on increasing that amount by 2.75 percent annually. Cho, Incorporated, currently pays an annual dividend of $1.42 per share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Cho has a higher ________ than the stock of Read.

A. capital gains yield

The interest rate risk premium is the:

A. compensation investors demand for accepting interest rate risk.

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:

A. convert the bond into equity shares.

In response to a change in the market rate of interest, the price sensitivity of a bond increases as the:

A. coupon rate decreases and the time to maturity increases.

The collar of a floating-rate bond refers to the minimum and maximum:

A. coupon rates

The yields on a corporate bond differ from those on a comparable Treasury security primarily because of:

A. credit risk.

A member who acts as a dealer in a limited number of securities on the floor of the NYSE is called a:

A. designated market maker.

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a:

A. floor broker

Which one of the following represents the capital gains yield as used in the dividend growth model?

A. g

Treasury bonds are:

A. generally issued as semiannual coupon bonds

A newly issued bond has a coupon rate of 5 percent and semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be:

A. greater than 5 percent.

A zero coupon bond:

A. has more interest rate risk than a comparable coupon bond.

Callable bonds generally:

A. have a sinking fund provision.

Olivares, Incorporated, bonds mature in 17 years and have a coupon rate of 5.4 percent. If the market rate of interest increases, then the:

A. market price of the bond will decrease.

The owner of a trading license for the NYSE is called a(n):

A. member.

The average time for a trade on the NYSE Arca is best defined as less than:

A. one second.

Municipal bonds:

A. pay interest that is free from federal taxation.

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

A. tax-deductible payments.

A Treasury yield curve plots Treasury interest rates relative to:

A. time to maturity

The pure time value of money is known as the:

term structure of interest rates

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

broker

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