FI 302 Exam 2 terms

speculative

"Junk" bonds are a street name for ________ grade bonds. investment speculative speculative and investment extremely speculative

market; risk-free security

A beta is of 1.0 is the beta of the _______, while a beta of 0.0 is the measure for a _______. market; single security held on its own risk-free security; market market; risk-free security risk-free security; single security held on its own

long-term debt

A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future. long-term debt long-term equity derivative short-term equity

true

A company that is growing too slowly can simply buy growth by purchasing another company. T/F

false

As long as a company is projecting that they will have a big enough cash balance to cover the "external financing needed" on their pro form statement they don't need to worry about issuing new debt and/or equity. T/F

all of the above

Beta is _______. -a measure of nondiversifiable risk -the appropriate measure of risk for a well-diversified portfolio -a measure of systematic risk -all of the above

true

Bond investors should be more concerned with real returns than with nominal returns. T/F

true

Forward contracts can be used to limit some risk exposures that businesses encounter, such as currency exchange risk. T/F

[E(rm)-rf]

If the equation E(ri)=rf+[E(rm)-rf]x1 is the linear equation for the Security Market Line, what portion represents the market risk premium for a stock that does not have a beta of 1.0? [E(rm)-rf] Bi * [E(rm)-rf] rf Bi

weak-form efficient markets

In ______, current prices reflect the price history and trading volume of the stock. It is of no use to chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market. semi-strong-form efficient markets weak-form efficient markets strong-form efficient markets operational efficient markets

semi-strong-form efficient markets

In _________, current prices already reflect the price history and volume of the stock as well as all available public information. semi-strong-form efficient markets weak-form efficient markets strong-form efficient markets operationally efficient markets

true

In a strong-form efficient market, insider trading is not profitable. T/F

false

In general, an investment financed with lots of debt will have less risk than a similar investment financed with no debt. T/F

false

One way to manage an actual growth rate above a sustainable growth rate is to decrease prices. T/F

false

Private equity firms compromise a relatively insignificant portion of the American economy. T/F

false

Share repurchases usually decrease earnings per share. T/F

stocks, unlike bonds, represent residual ownership

Stocks are different from bonds because ______. -stocks, unlike bonds, are major sources of funds -stocks, unlike bonds, gibe owners legal claims to payments -stocks, unlike bonds, represent residual ownership -bonds, unlike stocks, represent voting ownership

all of the above

Stocks differ from bonds because: -bond cash flows are known while stock cash flows are uncertain -firms pay bond cash flows prior to paying taxes while stock cash flows are after tax -the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase -all of the above

false

The M&M irrelevance proposition assures financial managers that their choice between equity or debt financing will ultimately have no impact on firm value. T/F

primary market

The _____ is the market of first sale in which companies first sell their authorized shares to the public. primary market Nasdaq market secondary market both primary and secondary markets

yield to maturity

The _____ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life. current yield yield to maturity prime rate coupon rate

coupon

The ______ is regular interest payment of the bond. dividend coupon rate par coupon

risk-free rate

The ______ is the intercept on the Security Market Line. beta market rate of return risk-free rate prime rate

yield to maturity

The ______ is the return the bondholder receives on the bond if held to maturity. coupon coupon rate yield to maturity par rate

maturity date

The _______ is expiration date of the bond. coupon yield to maturity future value maturity date

coupon rate

The ________ is the interest rate printed on the bond. coupon rate yield to maturity semiannual coupon rate compound rate

yield to maturity

The _________ is a market derived interest rate used to discount the future cash flows of the bond. semiannual coupon rate yield to maturity compound rate coupon rate

every period

The holder of preferred stock is entitled to a constant dividend _________. -only when the stock price increases -only when earnings are positive -every period -only when earnings are positive and only when the stock price increases

beta

The measure of systematic risk is called ___________. covariance beta correlation variance

diversification

The practice of not putting all of your eggs in one basket is an illustration of ________. variance expected return diversification portion control

diversifiable risk; unsystematic risk

The terms ________ and _______ mean the same thing. total risk; unique risk diversifiable risk; unsystematic risk diversifiable risk; systematic risk nondiversifiable risk; unsystematic risk

unsystematic risk

The type of risk that can be diversified away is called _______. unsystematic risk nondiversifiable risk systematic risk system-wide risk

present value of all of the future cash flows that will be received

The value of a financial asset is the _______. -sum of all previous cash flows -present value of all the future cash flows that will be received -present value of just the capital gains but not the dividends -future value of just the capital gains but not the dividends

$100

Trials Inc. has issued 30-year $1,000 face value, 10% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is _______. $45 $100 $90 $50

can be diversified away

Unsystematic risk can be diversified away is equal to 2 times the systematic risk is system-wide risk is also known as nondiversifiable risk

coupon rate; discount to

When the ________ is less than the yield to maturity, the bond sells at a/the _________. -time to maturity; same price as -coupon rate; discount to -coupon rate; premium over -time to maturity; discount to

Treasury bills

Which of the following investments is considered to be default risk-free? AAA rated corporate bonds Common stock Currency options Treasury bills

a measure of risk that can be avoided

Which of the following is NOT a definition of beta? -a measure of nondiversifiable risk -a measure of systematic risk -a measure of risk that can be avoided -a statistical measure of an individual asset's or portfolio's co-movement with the returns of the market

Investors want to maximize return and minimize risk

Which of the following statements is TRUE? -Investors want to maximize return and maximize risk -Investors want to maximize return and minimize risk -Investors want to minimize return and minimize risk -Investors want to minimize return and maximize risk

secondary market

You can think of the _______ as the "used stock" market because these shares have been owned or "used" previously. NYSE market secondary market initial public offering market primary market

priced at a deep discount

Zero-Coupon Bonds are ________ -priced used semiannual instead of annual pricing formula -sold at a premium -tax exempt -priced at a deep discount

systematic risk

______ is risk that cannot be diversified away. systematic risk unsystematic risk firm-specific risk diversifiable risk

informational efficiency

______ refers to how quickly information is reflected in the available prices for trading. operational efficiency mechanical efficiency informational efficiency market efficiency

operational efficiency

_______ has to do with the speed and accuracy of processing a buy or sell order at the best available price. operational efficiency mechanical efficiency informational efficiency market efficiency

constant growth

________ means that the percentage increase in the dividend is the same each year. inconsistent growth a constant cash flow no growth constant growth