Finance exam 2

The beta of the risk free security is -0 -> 0 but < 1 -1 -> 1

0

The beta in the market is defined at this number

1

The existence of _____ in a bond by the bond issuer will require investors to increase the required return on a bond, all other things being equal. -a call provision -if the bond has seniority -sinking fund -some collateral amount

A call provision

Which of the following is an example of diversifiable risk? -Interest rates rising -A stock market crash -A company's CEO being arrested for fraud -A terrorist event like 9/11

A company's CEO being arrested for Fraud

Which one of the following portfolios will have a beta of zero? -A portfolio that is equally as risky as the overall market -A portfolio that consists of a single stock -A portfolio comprised solely of U. S. Treasury bills -No portfolio can have a beta of zero.

A portfolio comprised solely of US treasury bills

In the CAPM formula βA is what

Beta of the stock

A legal contract between the issuer (borrower) and the owner of the bond

Bond indenture

The coupon rate and the face value of the bond is contained in the -bond indenture. -bond's positive covenants. -the bond investor kit. -bond offering statement.

Bond indenture

CAPM stands for

Capital Asset Pricing Model

Portfolio diversification eliminates which one of the following? -Standard deviation risk -All risk in stocks -Market risk -Company-specific risk

Company specific risk

Which one of the following terms applies to a bond that can be exchanged for the issuing company's common stock in the future? -Callable -Municipal -Zero coupon -Convertible

Convertible

____________ allows for less risk in the market

Diversification

Calculating Dividend %

Dividend=Paid amount/Stock Price

The CAPM formula for a stocks fair return is

E(RA) = Rf + (E(RM) - Rf) * βA

Required return using CAPM

ERi=Rf+Bi(ERm-Rf)

A area where there is large potential conflict between management and shareholders

Executive Compensation

In the CAPM formula E(RA) is what

Expected (Required asset return)

In the CAPM formula E(RM) is what

Expected market return

Companies CAN maximize short term shareholder value and survive (T or F)

False

Most corporate bonds in the U.S. have which of the following features? I. Registered form II. Bearer form III. Quarterly coupon payments IV. Semiannual coupon payments

I and IV only

Trading on inside information is illegal and the SEC prosecutes people for _____________ trading

Insider

Which one of the following best describes systematic risk in owning the common stock of the Ford Motor Automobile company? -Lower car sales announced by the auto sector in general -An increase in the price of steel used in automobiles -Lower interest rates leading to an increase in the stock market in general -The Ford Motor Company announcing a large new sales order.

Lower interest rates leading to an increase in the stock market in general

The lower the Beta on a security, the market risk is _____ and the investor should expect a _____ level of return. lower; lower lower; higher higher; lower higher; higher

Lower; Lower

Means the two stock prices move in the opposite direction

Negatively Correlated

The stream of customer instructions received by an stock exchange to buy and sell common stock is called the: -order flow. -market instructions. -execution stream. -operations flow.

Order Flow

Means the two stock prices move in the same direction

Positively Correlated

Which one of the following statements is the most correct? -Preferred stock has a fixed dividend that does not change. -All classes of common stock have one vote per share. -Common shareholders elect the CEO of the company -Dividends are tax-free income for individual investors.

Preferred stock has a fixed dividend that does not change.

Acts as an enforcement mechanism

Reputation

__________ Is the total gain or loss experienced on an investment over a given period of time

Return

_______ is a measure of the uncertainty surrounding the return that an investment will earn

Risk

In the CAPM formula Rf is what

Risk free rate of return

A bond sold 2 months ago for $1,089. The bond is worth $1,047 today. Assuming no changes in risk, which one of the following is true? -The face value of the bond must be $1,100. -Interest rates must be lower now than they were five weeks ago. -The bond's current yield has increased. -The coupon payment of the bond must have increased.

The bond's current yield has increased

Which of the following is the best explanation of what the call premium is? -The amount above the face value an investor must pay to purchase the bond. -The additional amount above the face value that the company must pay to repay the bond early. -The additional amount above the market price that a company must pay to repay the bond early. -The amount above the market price that an investor must pay to purchase the bond.

The additional amount above the face value that the company must pay to repay the bond early.

Which of the following is the most correct answer for the beta of a portfolio of 35 stocks where the lowest beta for an individual security is 0.84 and the highest is 1.51? -The beta of the portfolio must be 1.0 because of the large number of securities in the portfolio. -The beta of the portfolio must be less than 1.0 because of the large number of securities in the portfolio. -The beta of the portfolio will be between 0 and 1.51. -The beta of the portfolio will be between 0.84 and 1.51.

The beta of the portfolio will be between 0.84 and 1.51.

If a 10-year bond's coupon rate exactly equals the market's required return on that bond, then: -a portion of the return a buyer of this bond will earn will come from buying the bond at a discount. -the bond sells at par. -the bond sells at a premium because the bond matures in 10 years. -the bond will be repaid by the issuer at a discounted price.

The bond sells at par

An inverted yield curve generally means that -the real rate of interest is decreasing in the future. -there is an expectation of higher inflation rates in the future. -there is an expectation of lower inflation rates in the future. -the market requires a higher interest rate premium for longer maturity bonds.

There is an expectation of lower inflation rates in the future

Most shareholders do not vote in person and tell the company how they want their shares to be voted on their behalf. This is called: -Straight voting -Cumulative voting -Voting in absentia -Voting by proxy

Voting by proxy

Which one of the following terms refers to a bond's rate of return that is required by an investor in the marketplace? -Coupon rate -Yield to maturity -Call yield -Price

Yield to maturity

If the beta is lower than 1 that means it is _______ volatile

less

If the beta is higher than 1 that means it is ____________ volatile

more

Capital Gain

{Capital Gain= Stock price after one year-Current stock price} [Capital Gain/Stock price=Capital gains %]