FINC 332 CH 5-8
Real rates are defined as nominal rates that have been adjusted for which of the following? A. inflation B. default risk C. accrued interest D. interest rate risk E. both inflation and interest rate risk
A
Which of the following statements related to interest rates are correct? I. Annual interest rates consider the effect of interest earned on reinvested interest payments. II. When comparing loans, you should compare the effective annual rates. III. Lenders are required by law to disclose the effective annual rate of a loan to prospective borrowers. IV. Annual and effective interest rates are equal when interest is compounded annually. A. I and II only B. II and III only C. II and IV only D. I, II, and III only E. II, III, and IV only
C
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 given that they both provide $12,000 of income. B. Option A has the higher future value at the end of year three. C. Option B has a higher present value at time zero than does option A. D. Option B is a perpetuity. E. Option A is an annuity.
C
An ECN is best described as: A. an electronic network which transmits orders directly to the floor of the NYSE. B. the network used in the primary market for selling newly issued shares. C. the international trading network of the NYSE. D. a website that allows individual investors to trade directly with one another. E. a computerized network used by independent brokers.
D
The collar of a floating-rate bond refers to the minimum and maximum: A. call periods. B. maturity dates. C. market prices. D. coupon rates. E. yields to maturity.
D
Which of the following defines a note? I. secured II. unsecured III. maturity less than 10 years IV. maturity in excess of 10 years A. III only B. I and III only C. I and IV only D. II and III only E. II and IV only
D
1. A bond's coupon rate is equal to the annual interest divided by which one of the following? A. call price B. current price C. face value D. clean price E. dirty price
C
17. 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. The real rate must be less than the nominal rate given a positive rate of inflation.
E
Which one of the following is defined as a firm's short-term assets less its short-term liabilities? A. working capital B. debt C. investment capital D. net capital E. capital structure
A
5. A bond that can be paid off early at the issuer's discretion is referred to as being which one of the following? A. zero coupon B. callable C. senior D. collateralized E. unsecured
B
Treasury bonds are: A. issued by any governmental agency in the U.S. B. issued only on the first day of each fiscal year by the U.S. Department of Treasury. C. bonds that offer the best tax benefits of any bonds currently available. D. generally issued as semi-annual coupon bonds. E. totally risk-free.
D
Hardy Lumber has a capital structure which includes bonds, preferred stock, and common stock. Which of the following rights have most likely been granted to the preferred shareholders? I. right to share in company profits prior to other shareholders II. right to elect the corporate directors III. right to vote on proposed mergers IV. right to all residual income after the common dividends have been paid A. I only B. I and III only C. I and IV only D. II, III, and IV only E. I, II, III, and IV
A
Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer? A. default risk B. taxability C. liquidity D. inflation E. interest rate risk
A
Which one of the following statements is correct? A. The capital gains yield is the annual rate of change in a stock's price. B. Preferred stocks have constant growth dividends. C. A constant dividend stock cannot be valued using the dividend growth model. D. The dividend growth model can be used to compute the current value of any stock. E. An increase in the required return will decrease the capital gains yield.
A
13. Which of the following are negative covenants that might be found in a bond indenture? I. The company shall maintain a current ratio of 1.10 or better. II. No debt senior to this issue can be issued. III. The company cannot lease any major assets without approval by the lender. IV. The company must maintain the loan collateral in good working order. A. I and II only B. II and III only C. III and IV only D. II, III, and IV only E. I, II, and III only
B
Terry is calculating the present value of a bonus he will receive next year. The process he is using is called: A. growth analysis. B. discounting. C. accumulating. D. compounding. E. reducing.
B
12. Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par. Given this, which one of the following statements is correct? A. The bonds will become discount bonds if the market rate of interest declines. B. The bonds will pay 10 interest payments of $60 each. C. The bonds will sell at a premium if the market rate is 5.5 percent. D. The bonds will initially sell for $1,030 each. E. The final payment will be in the amount of $1,060.
C
2. Which one of the following is computed by dividing next year's annual dividend by the current stock price? A. yield to maturity B. total yield C. dividend yield D. capital gains yield E. growth rate
C
High Country Builders currently pays an annual dividend of $1.35 and plans on increasing that amount by 2.5 percent each year. Valley High Builders currently pays an annual dividend of $1.20 and plans on increasing its dividend by 3 percent annually. Given this information, you know for certain that the stock of High Country Builders' has a higher ______ than the stock of Valley High Builders. A. market price B. dividend yield C. capital gains yield D. total return E. The answer cannot be determined based on the information provided.
C
16. A zero coupon bond: A. is sold at a large premium. B. pays interest that is tax deductible to the issuer when paid. C. can only be issued by the U.S. Treasury. D. has more interest rate risk than a comparable coupon bond. E. provides no taxable income to the bondholder until the bond matures.
D
A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan. A. amortized B. continuous C. balloon D. pure discount E. interest-only
D
A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be: A. 3.5 percent. B. greater than 3.5 percent but less than 7 percent. C. 7 percent. D. greater than 7 percent. E. Answer cannot be determined from the information provided.
D
Who owns the NYSE? A. NYSE members B. specialists C. dealers D. floor brokers E. shareholders
E
Which one of the following statements is correct? A. The capital gains yield is the annual rate of change in a stock's price. B. Preferred stocks have constant growth dividends. C. A constant dividend stock cannot be valued using the dividend growth model. D. The dividend growth model can be used to compute the current value of any stock. E. An increase in the required return will decrease the capital gains yield.
A
9. The liquidity premium is compensation to investors for: A. purchasing a bond in the secondary market. B. the lack of an active market wherein a bond can be sold for its actual value. C. acquiring a bond with an unfavorable tax status. D. redeeming a bond prior to maturity. E. purchasing a bond that has defaulted on its coupon payments.
B
An 8 percent corporate bond that pays interest semi-annually was issued last year. Which two of the following most likely apply to this bond today if the current yield-to-maturity is 7 percent? I. a structure as an interest-only loan II. a current yield that equals the coupon rate III. a yield-to-maturity equal to the coupon rate IV. a market price that differs from the face value A. I and III only B. I and IV only C. II and III only D. II and IV only E. III and IV only
B
As a bond's time to maturity increases, the bond's sensitivity to interest rate risk: A. increases at an increasing rate. B. increases at a decreasing rate. C. increases at a constant rate. D. decreases at an increasing rate. E. decreases at a decreasing rate.
B
The owner of one of the 1,366 trading licenses for the NYSE is called a: A. broker. B. member. C. agent. D. specialist. E. dealer.
B
What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? A. zero growth B. dividend growth C. capital pricing D. earnings capitalization E. discounted dividend
B
Which of the following statements concerning bonds are correct? I. Bonds provide tax benefits to issuers. II. The risk of a firm financially failing increases when the firm issues bonds. III. Most long-term bond issues are referred to as unfunded debt. IV. All bonds are treated equally in a bankruptcy proceeding. A. II and III only B. I and II only C. III and IV only D. II and IV only E. I, II, and III only
B
Which one of the following bonds is the least sensitive to interest rate risk? A. 3-year; 4 percent coupon B. 3-year; 6 percent coupon C. 5-year; 6 percent coupon D. 7-year; 6 percent coupon E. 7-year; 4 percent coupon
B
Which one of the following is a capital budgeting decision? A. determining how many shares of stock to issue B. deciding whether or not to purchase a new machine for the production line C. deciding how to refinance a debt issue that is maturing D. determining how much inventory to keep on hand E. determining how much money should be kept in the checking account
B
Which one of the following is a working capital management decision? A. determining the amount of equipment needed to complete a job B. determining whether to pay cash for a purchase or use the credit offered by the supplier C. determining the amount of long-term debt required to complete a project D. determining the number of shares of stock to issue to fund an acquisition E. determining whether or not a project should be accepted
B
Which one of the following is an underlying assumption of the dividend growth model? A. A stock has the same value to every investor. B. A stock's value is equal to the discounted present value of the future cash flows which it generates. C. A stock's value changes in direct relation to the required return. D. Stocks that pay the same annual dividend have equal market values. E. The dividend growth rate is inversely related to a stock's market price.
B
Which one of the following is the electronic system used by the NYSE for directly transmitting orders to specialists? A. OTCDOT B. SuperDOT C. Instinet D. Internet E. Floornet
B
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
Which two of the following factors cause the yields on a corporate bond to differ from those on a comparable Treasury security? I. inflation risk II. interest rate risk III. taxability IV. default risk A. I and II only B. III and IV only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV
B
You need $25,000 today and have decided to take out a loan at 7 percent for five years. Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis. A. interest-only loan B. amortized loan with equal principal payments C. amortized loan with equal loan payments D. discount loan E. balloon loan where 50 percent of the principal is repaid as a balloon payment
B
4. Which one of the following statements concerning interest rates is correct? A. Savers would prefer annual compounding over monthly compounding. B. The effective annual rate decreases as the number of compounding periods per year increases. C. The effective annual rate equals the annual percentage rate when interest is compounded annually. D. Borrowers would prefer monthly compounding over annual compounding. E. For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.
C
A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called which one of the following? A. dirty price B. redemption value C. call premium D. original-issue discount E. redemption discount
C
A market maker who acts as a dealer in one or more securities on the floor of the NYSE is called a: A. floor trader. B. floor post. C. specialist. D. floor broker. E. commission broker.
C
A monthly interest rate expressed as an annual rate would be an example of which one of the following rates? A. stated rate B. discounted annual rate C. effective annual rate D. periodic monthly rate E. consolidated monthly rate
C
A securities market primarily comprised of dealers who buy and sell for their own inventories is referred to which type of market? A. auction B. private C. over-the-counter D. regional E. electronic network
C
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. A. a premium; less than B. a premium; equal to C. a discount; less than D. a discount; higher than E. par; less than
C
An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values. A. increase in the cash ratio B. increase in the net working capital to total assets ratio C. decrease in the quick ratio D. decrease in the cash coverage ratio E. increase in the current ratio
C
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. an increase in all stock values. B. all stock values to remain constant. C. a decrease in all stock values. D. dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value. E. dividend-paying stocks to increase in price while non-dividend paying stocks decrease in value.
C
Bonds issued by the U.S. government: A. are considered to be free of interest rate risk. B. generally have higher coupons than those issued by an individual state. C. are considered to be free of default risk. D. pay interest that is exempt from federal income taxes. E. are called "munis".
C
Last year, Lexington Homes issued $1 million in unsecured, non-callable debt. This debt pays an annual interest payment of $55 and matures 6 years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt? A. semi-annual coupon B. discount bond C. note D. trust deed E. collateralized
C
National Trucking has paid an annual dividend of $1.00 per share on its common stock for the past fifteen 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: A. basically worthless as it offers no growth potential. B. equal in value to the present value of $1 paid one year from today. C. priced the same as a $1 perpetuity. D. valued at an assumed growth rate of one percent. E. worth $1 a share in the current market.
C
The cash coverage ratio directly measures the ability of a firm's revenues to meet which one of its following obligations? A. payment to supplier B. payment to employee C. payment of interest to a lender D. payment of principle to a lender E. payment of a dividend to a shareholder
C
The specified date on which the principal amount of a bond is payable is referred to as which one of the following? A. coupon date B. yield date C. maturity D. dirty date E. clean date
C
Which of the following increase the price sensitivity of a bond to changes in interest rates? I. increase in time to maturity II. decrease in time to maturity III. increase in coupon rate IV. decrease in coupon rate A. II only B. I and III only C. I and IV only D. II and III only E. II and IV only
C
Which one of the following is the price a dealer will pay to purchase a bond? A. call price B. asked price C. bid price D. bid-ask spread E. par value
C
You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur? A. short-term; low coupon B. short-term; high coupon C. long-term; zero coupon D. long-term; low coupon E. long-term; high coupon
C
11. The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond? A. increase the coupon rate B. decrease the coupon rate C. increase the market price D. decrease the market price E. increase the time period
D
An increase in which of the following will increase the current value of a stock according to the dividend growth model? I. dividend amount II. number of future dividends, provided the current number is less than infinite III. discount rate IV. dividend growth rate A. I and II only B. III and IV only C. I, II, and III only D. I, II, and IV only E. I, II, III, and IV
D
Over the past year, the quick ratio for a firm increased while the current ratio remained constant. Given this information, which one of the following must have occurred? Assume all ratios have positive values. A. current assets increased B. current assets decreased C. inventory increased D. inventory decreased E. accounts payable increased
D
Which one of following is the rate at which a stock's price is expected to appreciate? A. current yield B. total return C. dividend yield D. capital gains yield E. coupon rate
D
Which one of the following is a capital structure decision? A. determining which one of two projects to accept B. determining how to allocate investment funds to multiple projects C. determining the amount of funds needed to finance customer purchases of a new product D. determining how much debt should be assumed to fund a project E. determining how much inventory will be needed to support a project
D
Which one of the following relationships is stated correctly? A. The coupon rate exceeds the current yield when a bond sells at a discount. B. The call price must equal the par value. C. An increase in market rates increases the market price of a bond. D. Decreasing the time to maturity increases the price of a discount bond, all else constant. E. Increasing the coupon rate decreases the current yield, all else constant.
D
Which one of the following statements concerning net working capital is correct? A. Net working capital increases when inventory is purchased with cash. B. Net working capital must be a positive value. C. Total assets must increase if net working capital increases. D. A decrease in the cash balance also decreases net working capital. E. Net working capital is the amount of cash a firm currently has available for spending.
D
You want to buy a bond from a dealer. Which one of the following prices will you pay? A. call price B. auction price C. bid price D. asked price E. bid-ask spread
D
7. 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: A. equilibrium. B. premium. C. discount. D. call price. E. spread.
E
A Treasury yield curve plots Treasury interest rates relative to which one of the following? A. market rates B. comparable corporate bond rates C. the risk-free rate D. inflation E. maturity
E
A call-protected bond is a bond that: A. is guaranteed to be called. B. can never be called. C. is currently being called. D. is callable at any time. E. cannot be called during a certain period of time.
E
Callable bonds generally: A. grant the bondholder the option to call the bond anytime after the deferment period. B. are callable at par as soon as the call-protection period ends. C. are called when market interest rates increase. D. are called within the first three years after issuance. E. have a sinking fund provision.
E
Interest rates that include an inflation premium are referred to as: A. annual percentage rates. B. stripped rates. C. effective annual rates. D. real rates. E. nominal rates.
E
Mary is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own? A. 6-year, putable, high coupon bond B. 5-year TIPS C. 10-year AAA coupon bond D. 5-year floating rate bond E. 7- year income bond
E
The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms? A. note B. discounted C. zero-coupon D. callable E. debenture
E
The dividend growth model: I. assumes that dividends increase at a constant rate forever. II. can be used to compute a stock price at any point in time. III. can be used to value zero-growth stocks. IV. requires the growth rate to be less than the required return. A. I and III only B. II and IV only C. I, III, and IV only D. I, II, and IV only E. I, II, III, and IV
E
Which of the following are characteristics of a premium bond? I. coupon rate < yield-to-maturity II. coupon rate > yield-to-maturity III. coupon rate < current yield IV. coupon rate > current yield A. I only B. I and III only C. I and IV only D. II and III only E. II and IV only
E
Which of the following features do preferred shareholders and bondholders frequently have in common? I. lack of voting rights II. conversion option into common stock III. annuity payments IV. fixed liquidation value A. I and II only B. III and IV only C. II, III, and IV only D. I, III, and IV only E. I, II, III, and IV
E
Which one of the following compounding periods will yield the smallest present value given a stated future value and annual percentage rate? A. annual B. semi-annual C. monthly D. daily E. continuous
E
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. The real rate must be less than the nominal rate given a positive rate of inflation.
E
Which one of the following statements related to corporate dividends is correct? A. Dividends are nontaxable income to shareholders. B. Dividends reduce the taxable income of the corporation. C. The Chief Executive Officer of a corporation is responsible for declaring dividends. D. The Chief Financial Officer of a corporation determines the amount of dividend to be paid. E. Corporate shareholders may receive a tax break on a portion of their dividend income.
E
Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment? A. amortized loan B. modified loan C. balloon loan D. pure discount loan E. interest-only loan
E
Which one of these statements related to growing annuities and perpetuities is correct? A. The cash flow used in the growing annuity formula is the initial cash flow at time zero. B. Growth rates cannot be applied to perpetuities if you wish to compute the present value. C. The future value 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 present value of a growing perpetuity will decrease if the discount rate is increased.
E
Which one of these statements related to preferred stock is correct? A. Preferred shareholders normally receive one vote per share of stock owned. B. Preferred shareholders determine the outcome of any election that involves a proxy fight. C. Preferred shareholders are considered to be the residual owners of a corporation. D. Preferred stock normally has a stated liquidating value of $1,000 per share. E. Cumulative preferred shares are more valuable than comparable non-cumulative shares.
E
