FIN 3403 FSU Exam 2

Which of the following are weakness of the payback period

- the cutoff date is arbitrary - time value of money principles are ignored - cash flows received after the payback period are ignored

When interest rate in the market rise, we can expect the price of bonds to __. a. decrease b. increase c. no change

A

If a project has multiple internal rate of return, which of the following methods should be used?

NPV MIRR

Which of the following are usually included in a bonds indenture

The total amount of bonds issued The repayment arrangements

Which of the following are weaknesses of the payback method

Time value of money principles are ignored cash flows received after the pay period are ignored the cutoff date is arbitrary

The US government borrows money by issuing

Treasury notes Treasury bills Treasury bonds

How is a zero coupon bond different from a conventional bond?

Zero coupon bonds are always issued at a discount Zero coupon bonds make no interest payments

Which of the following is true about a multi-year typical bonds coupon? a. its a fixed annuity payment b. it is a fixed interest payment paid at the time the bond matures. c. the interest will vary with the market rate of interest d. interest payment are paid at the discretion of CFO

a

Which of the following issue bonds that are traded in the bond market? a. public corporation b. state government c. the federal government d. sole proprietorships

a b c

Which of these are required to calculate the current value of a bond? a. par value b. time remaining to maturity c. price at the time of bond issue d. coupon rate e. applicable market value

a b d e

The PI rule for an independent project is to __ the project if the PS is greater than 1

accept

A project should be accepted it is NPV is greater than zero

accepted

Payback period tells the time it takes to break even in an __ sense. Discounted payback period tells the time it takes to break even in an __ of financial sense

accounting, economic

Convertible bond

can be exchanged for shares of stock

the liquidity premium compensates investors based on bonds

degree of marketability

When the term structure of interest rates is downward sloping

short term rates are higher than long term rates

What is the nominal rate of return on an investment?

it is the rate that has been adjusted for inflation

A market is considered transparent if

its prices and trading volume are easily observed

The crossover rate is the rate at which the NPVs of two projects are equal

true

What is an interest-only loan? a. Its a loan in which the borrower pays both the interest and principal periodically b. its a loan in which the borrower never repays the principal c. its a loan in which the borrower pays all the interest owed when the bond matures. d. its a loan in which the borrower pays interest periodically and repays the principal when the bond matures

d

What information do we need to determine the value of stock using the zero growth model

discount rate annual dividend amount

NPV ___ cash flows properly

discounts

The present value of all cash flows is dividend by the __ to calculate the profitability index

initial investment

why is the bond market less transparent than the stock market

many bonds transactions are negotiated privately

A bonds value is not affected by changes in the market rate of interest.

false

when calling a stock the advantage to considering the stock price in the distant future as a cash flow is that

when discounted to present value, a stock price in the distant future is nearly zero

Which of the following features of municipal bonds? A. the interest on municipal bonds is always exempt from state taxes B. the interest on municipal bonds is exempt from federal taxes C. they are issued by state and local government D. they are not subject to default risk

B C

What is the definition of a bonds time to maturity? a. its a period of time that has elapsed since the bond was issued b. its the number of years until the face value is due to be repaid c. it is the number of years until the bond is sold by the bondholder d. it is the number of years the corporation is expected to be in existence

B

the profitability index is calculated by dividing the PV of the __ cash flows by the initial investment

future

Which of the following are common protective covenants?

-The firm cannot merge with any other firm -The firm must limit dividends to equity holders -The firm must maintain working capital at or above a specified level

ABC Co. issued 1 million 6 percent annual coupon bonds that matures in 10 years. The face value is 1,000 per bond. What are the expected cash flows from one of these bonds?

60 in interest at the end of each year for 10 years and a 1,000 repayment of principal at the end of 10 years

Which of the following are true about a bonds face value? a. It is also known as the par value b. a bonds face value is the same for all corporation c. it is the market value of the bond at the time of maturity d. it is the principal amount repaid at maturity

a d

Which of the following is true about dividend growth patterns?

dividends may grow at a constant rate

Which of the following are advantages of AAR

easy to compute needed information is always available

A PE ratio that is based on estimated future earnings is known as

forward

In capital budgeting, the net __ determines the value of a projects to the company

present value

Which of these correctly identify differences between US treasury bonds and corporate bonds

treasury bonds offer certain tax benefit to investors that corporate bonds cannot offer Treasury bonds are issued by the US government while corporate bonds are issued by corporations Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk

The three attributes of NPV are that it:

uses all the cash flows of a project discounts the cash flows properly uses cash flows

A bonds yield to maturity considers the interest earnings and the change in the bonds price while the current yield considers

interest earnings only

The most important alternative to NPV is the __ method

internal rate of return

Cat bond

protects insurance companies from natural disasters

What two prices can be found on the wall street journal treasury bond listing?

the asked price the bid price

When the stock being valued doe snot pay dividends

the dividend growth model can still be used

When the stock being valued does not pay dividends,

the dividend growth model can still be used

If you own corporate bonds, you will be concerned about interest rate risk as it affects

the market price of the bonds

How is the real rate of return different from the nominal rate of return

the real rate of return removes the effect of inflation from the nominal rate

A bond pays annual interest payments of 50, has a par value of 1,000, and a market of 1,200. How is the coupon rate computed?

50/1000

A firm decides to raise money by issuing 5 million bonds with a par value of 5,000 each for 10 years at a coupon rate of 7 percent. At the time of issue, the bonds were sold for 5,500 each. What will the par value of the bonds be in year 5?

5000 per bond

A benchmark PE ratio can be determined using:

a company own historical PE the PEs of similar companies

The discounted payback period has which of the following of these weakness

artibitary cutoff date exclusive of some cash flows Loss of simplicity as compared to the payback period

Structured note

based on financial securities, commodities ore currencies

What are municipal bonds?

bonds that have been issued by state or local governments

Secondary market in sukuk are extremely illiquid because most are:

bought and held to maturity

Capital ___ is the decision making process of accepting an rejecting projects

budgeting

A corporate bond's yield to maturity___. a. remains fixed over time of the bond b. can be greater than, equal to or less than the bonds coupon rate d. is always equal to the bonds coupon rate

c d

THE ___ can be interpreted at the capital gains yeild

constant growth rate

When cash flows are conventional, NPV is

equal to zero when the discount rate equals the IRR negative for discount rates below the IRR positive for discount rates above the IRR

All junk bonds typically have which of these features

high probability of default less than investment grade rating

Which three of the following are common shapes for the term structure of interest rates?

humped downward sloping upward sloping

The point at which the NPV profile crosses the horizontal axis is the:

internal rate of return

IRR continues to be very popular in practice, partly because,

it gives a rate of return rather than a dollar value

What is a real rate of return?

it is the rate of return that has been adjusted for inflation

The default risk premium refers to the extra compensation demanded by investors for the possibility that the issuer might

not make all the promised payments

Put bond

owner can force issuer to repay prior to maturity at a stated price

The amount of time needed for the cash flows form an investment to pay for its initial cost is the

payback period

This capital budgeting method allows lower management to make smaller, everyday financial decisions effectively

payback period

Which of the following variables are required to calculate the value of a bonds?

remaining life of bond coupon rate market yield

Internal rate of return must be compared to the __ in order to determine the acceptability of a project

required return

The NYSE member who acts as a dealer in a small number of securities is called an

specialist

What are three important feature of treasury notes and bonds?

taxable, default free, and highly liquid