Economics of corporate finance exam 2 study guide

A loan that calls for periodic interest payments and a lump sum principal payment is referred to as a(n) ____ loan.

interest-only

what is APR if monthly rate is .5%?

.5*12=6%

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

3-year; 6 percent coupon

what is an interest only loan

A loan that requires only interest payments. At the end of the loan, the borrower essentially owes a balloon payment of the entire principal of the loan

Which one of the following transactions occurs in the primary market?

Purchase of newly issued stock from the issuer

The term structure of interest rates includes both an inflation premium and an interest rate risk premium. T or F?

True

what is EAR?

actual rate paid or received after accounting for compounding

what is a short cut to calculate multiplpe cashflows?

annuity formula

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

cannot lease any major assets without bondholder approval.

floating rate bond

coupon rate floats depending on soem index value, adjustable mortgages, have a floor and ceiling

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

credit risks

The Fisher effect primarily emphasizes the effects of ________ on an investor's rate of return.

inflation

supernormal growth

dividend growth is not constant, but will likely settle, compute using multistage model

Dilan owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. The $1,000 is referred to as the:

face value

what is an annunity

finite series of equal payments that occur at regular intervals

constant dividend growth

firm will increase dividend by a constant percent every period, compute using the growing perpetuity model

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

floor broker

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:

increases at a decreasing rate.

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

member

zero coupon bond

no periodic interest payments, paid interest and fv at end

ytm = coupon rate then?

par val = bond price

ytm > coupon rate then?

par value > bond price, discount bond

ytm < coupon rate then?

par value > bond price, premium bond

how do you calculate the rate of return for an annunity?

trail and error with options. since there are multiple r w/in the eqn you cannot since for it easily

Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates. T or F

true

The interest rate risk premium increases as the time to maturity increases. t or f??

true

The real rate of return has minimal, if any, effect on the slope of the term structure of interest rates. T or F?

true

annuity due

when first payment occurs at the beginning of the period

ordinary annuity

when first payment occurs at the end of the period

You own one share of a cumulative preferred stock that pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ________ quarter(s) of dividends when the next dividend is paid.

3

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

what is a bond covenant?

A rule to which the issuer must adhere over the life of the bond

Which one of the following best describes Nasdaq?

Computer network of securities dealers

Which one of the following statements related to corporate dividends is correct?

Corporate shareholders may receive a tax break on a portion of their dividend income.

A company has four open seats on its board of directors. There are seven candidates vying for these four positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400 of your votes for a single candidate. What is this type of voting called?

Cumulative

what is an amortization loan

Equal number of payments

The term structure of interest rates and the time to maturity are always directly related. T or F?

False

sukuk

Islamic bond which by Islamic law cannot charge interest

Viveros Foods has an investment-grade bond issue outstanding that pays $30 semiannual interest payments. The bonds sell at par and are callable at a price equal to the present value of all future interest and principal payments discounted at a rate equal to the comparable Treasury rate plus .50 percent. Which one of the following correctly describes this bond?

The bond has a "make whole" call price.

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 4.7 percent?

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

what is APR

annual percent rate, period rate times the number of periods per year

Nirav just opened a savings account paying 2 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this information, Nirav:

could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.

Assume you are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now?

future value

perpetuity

infinite series of equal payments

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 per share long into the future. Given this, one share of the firm's stock is:

priced the same as a $1 perpetuity.

With an interest-only loan the principal is:

repaid in one lump sum at the end of the loan period.

The dividend growth model:

requires the growth rate to be less than the required return.

what is a pure discount loan

the principal amount is repaid at some future date, without any periodic interest payments

constant dividend

zero growth, firm will pay a constant dividend forever, like preffered stock, compute using perpetuity formula