Finance Exam 2

Supernormal growth is a growth rate that:

Is unsustainable over the long term.

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 the:

Call premium

Which one of the following applies to a premium bond?

Coupon rate > Current yield > Yield to maturity

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

Discount rate

Which one of these equations applies to a bond that currently has a market price that exceeds par value?

Yield to maturity < coupon rate

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

Early bond redemption

The annual dividend yield is computed by dividing _________ annual dividend by the current stock price.

Next year's

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

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?

Primary

Which one of the following statements correctly defines a time value of money relationship?

Time and present values are inversely related, all else held constant.

Which one of the following is the price at which a dealer will sell a bond?

Asked price

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

Callable

Which one of following is the rate at which a stock's price is expected to appreciate?

Capital gains yield

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

Constant-growth model

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

Broker

AI is retired and his sole source of income is his bond portfolio. Although he has sufficient principal to live on, he only wants to spend the interest income and thus is concerned about the purchasing power of that income. Which one of the following bonds should best ease the AI's concerns?

5 - year TIPS

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

Coupon rate decreases and the time to maturity increases.

DLQ Inc, bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:

Market price of the bond will decrease.

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate?

Project X has both a higher present and a higher future value than Project Y

The secondary market is best defined as the market:

Where outstanding shares of stock are resold.