Chapter 5 - SB

A derivative is a security whose future payments:

depend upon the value of some other underlying asset.

Fixed claims are fixed as to:

dollar amount and timing.

A fixed claim is fixed as to ______ while residual claims are paid ______ all prior fixed claims have been paid.

dollar amount and timing; after

A call option is worthless at maturity if the price of the underlying asset is:

less than the strike price.

Money market securities usually have _________ risk of default.

low

For a payment of $4,000 today, you can have the right to sell 100,000 euros for $1.25/euro at anytime in the next 90 days. In this case, 90 days is the _______.

maturity

For a payment of $4,000 today, you can have the right to sell 100,000 euros for $1.25/euro at anytime in the next 90 days. In this instance, $4,000 is the ______.

premium

An efficient market is one in which prices adjust ______ to new information and current prices ______ reflect available information about the assets traded.

rapidly; fully

A call option conveys the ______ to ______ an underlying asset at a specific price.

right; buy

A put option conveys the ______ to ______ an underlying asset at a specific price.

right; sell

Secured credit is a form of ______ credit backed by ______.

senior; collateral

In a(n) ______, a firm reduces the amount of time it must wait before selling securities to investors by having the SEC approve the registration in advance.

shelf registration

The managers of a publicly traded company are uncertain of when to issue new securities, but they want to be able to do so quickly when the time is right. The managers can achieve this through a(n):

shelf registration.

The periodic repayment of principal associated with long-term debt is called a:

sinking fund.

For a payment of $4,000 today, you can have the right to sell 100,000 euros for $1.25/euro at anytime in the next 90 days. In this case, $1.25 is the ______.

strike price

A bond's par value is:

the amount of money the bondholder will receive when the bond matures.

A bond's maturity date is the date when:

the bond stops making payments to investors.

The amount a bondholder receives will equal annual interest income plus a specified amount at maturity unless:

the firm goes bankrupt.

In a forward market, the price is set ______ but exchange occurs ______.

today; in the future

An American company that generates a large account receivable denominated in euros will suffer a loss on the receivable if the euro ______.

weakens relative to the dollar

Emily purchased a stock for $45 on January 1. The stock paid a dividend of $2 on December 30, and she sold the stock for $49 on December 31. What was her annual income from this investment?

$6

The return an investor earns on a bond over a period of time is known as the holding period return, defined as interest income plus or minus the change in the bond's price, all divided by the beginning bond price. a. What is the holding period return on a bond with a par value of $1,000 and a coupon rate of 4.5 percent if its price at the beginning of the year was $1,085 and its price at the end was $970? Assume interest is paid annually.

(6.45)%

Select all that apply Which of the following are common types of swaps? Multiple select question. Currency swaps Receivables swaps Interest rate swaps Stock swaps

Currency swaps Interest rate swaps

Preferred stock has characteristics of which two investments?

Debt and equity

Which of the following is not a reason why executives need to understand how to use derivatives for risk management?

Derivatives provide an opportunity to speculate on future prices.

Maple Leaf Corp. is conducting a seasoned equity offering. Which of the following would not be considered part of Maple Leaf's issue costs?

Dividend payments

How do common stockholders receive an investment return?

Dividends Price appreciation

In what forms can common stockholders receive a return on their investment?

Dividends and share price appreciation

True or False A forward market is one in which a price is set today but exchange and payment occurs at a specified future date.

True

True or False A secured credit is a debt which is backed by specific company assets.

True

True or False A sinking fund refers to the periodic repayment of principal on long-term debt.

True

True or False Investors in bonds should focus on inflation-adjusted returns.

True

True or False Private equity investments are structured as limited partnerships with a specified duration.

True

An American company that generates a large account receivable denominated in euros. To offset this currency risk, the American company could:

agree to sell euros for dollars in the forward market.

Jalen purchased a stock for $124 on January 1. The stock paid a dividend of $3 on November 30, and he sold the stock for $123 on December 31. What was his annual income from this investment?

$2

Which of the following describes a call provision?

An option for the issuing company to retire a bond prior to maturity.

In general, corporations buy preferred stock from other companies because of tax exemption on the dividends, ranging from __________ exempt.

70-80%

Which of the following is not a common type of swap?

A common stock swap

Which of the following is a derivative security?

A stock option

Investment-grade bonds are classified by what rating?

BBB and higher

Treasury issues are:

Exempt from state income taxes but, not federal income taxes.

The act of buying or selling the underlying asset via the option contract is called _________ the option.

Exercising

True or False A European option may be exercised anytime up to and including the expiration date.

False

True or False The only reason why the price would fall on a corporate bond is if market interest rates increase.

False

True or False A call option is worthless at maturity if the price of the underlying asset is higher than the strike price.

False

True or False All else equal, bonds with call provisions will have lower coupon rates than those without call provisions.

False

True or False If a company wishes to eliminate the interest rate risk on an existing floating-rate debt, it must pay off that debt.

False

True or False If a market is semistrong-form efficient, it means that investors in that market cannot make money without having private information.

False

True or False Principal is exchanged in interest rate swaps but not in currency swaps.

False

True or False Private equity firms comprise a relatively insignificant portion of the American economy.

False

True or False Stockholders exercise control over a company by voting for candidates for top management positions.

False

Select all that apply Which of the following are differences between forward contracts and futures contracts? Multiple select question. Forward contracts are customizable; futures contracts have standardized terms. Futures contracts are traded on exchanges; forward contracts are not. Futures contracts are customizable; forward contracts have standardized terms. Forward contracts allow prices to be predetermined for a future exchange; futures contracts do not.

Forward contracts are customizable; futures contracts have standardized terms. Futures contracts are traded on exchanges; forward contracts are not.

The features of Municipal bonds make them attractive to high income, _________ bracket investors.

High-tax

Select all that apply Which of the following are synonyms for below-investment-grade bonds? Multiple select question. Subordinated bonds High-yield bonds Speculative bonds Junk bonds

High-yield bonds Speculative bonds Junk bonds

Select all that apply Which of the following is not a financial asset? Multiple select question. Stock Home Bond Machinery

Home Machinery

Which of the following is not a variable that financial managers work with when designing financial instruments?

Investors' expectations of future company performance

Select all that apply Which of the following are key variables that a financial manager has control over when designing securities? Multiple select question. Investors' claim on assets in liquidation Investors' risk aversion Investors' voting rights Investors' claim on future cash flow

Investors' claim on assets in liquidation Investors' voting rights Investors' claim on future cash flow

Select all that apply Which of the following are key variables that a financial manager has control over when designing securities? Multiple select question. Investors' risk aversion Investors' voting rights Investors' claim on future cash flow Investors' claim on assets in liquidation

Investors' voting rights Investors' claim on future cash flow Investors' claim on assets in liquidation

A company wants to raise $510 million in a new stock issue. Its investment banker indicates that the sale of new stock will require 6 percent underpricing and a 5 percent spread. (Hint: the underpricing is 6 percent of the current stock price, and the spread is 5 percent of the issue price.) Assuming the company's stock price does not change from its current price of $76 per share, what would be the issue price to the public after underpricing? How many shares would the company need to sell?

Issue price -

Select all that apply Which of the following are reasons why executives need to understand derivatives? Multiple select question. Misuse of derivatives can be dangerous. Most large companies use derivatives. The market for derivatives is huge. Derivatives allow managers to speculate on commodity prices.

Misuse of derivatives can be dangerous. Most large companies use derivatives. The market for derivatives is huge.

Select all that apply In which of the following ways is preferred stock similar to equity? Multiple select question. Preferred stock has no maturity date Preferred stock dividends do not have to be paid The amount of dividend received, if paid, fluctuates each year Preferred stockholders always have a voice in managerial decisions

Preferred stock has no maturity date Preferred stock dividends do not have to be paid

Select all that apply Which of the following are characteristics of an efficient market? Multiple select question. Prices adjust rapidly to new information Prices fully reflect available information Prices are continually updated by the SEC Investors take a "wait and see" approach to new information

Prices adjust rapidly to new information Prices fully reflect available information

Select all that apply Which of the following are characteristics of an efficient market? Multiple select question. Prices are continually updated by the SEC Investors take a "wait and see" approach to new information Prices adjust rapidly to new information Prices fully reflect available information

Prices adjust rapidly to new information Prices fully reflect available information

What form of financing is structured as a limited partnership with a specified duration of usually 10 years?

Private equity

Select all that apply Which of the following are synonyms for below-investment-grade bonds? Multiple select question. Speculative bonds Junk bonds Subordinated bonds High-yield bonds

Speculative bonds Junk bonds High-yield bonds

Which of the following is not another name for a junk bond?

Stable return

Short-term tax exempt securities are issued by:

States Municipalities Housing agencies Urban renewal agencies

Information about three securities appears next. Beginning-of-Year Price End-of-Year Price Interest/Dividend Paid Stock 1 $42.90 $47.15 $1.90 Stock 2 $1.65 $1.79 $0.00 Bond 1 $1,060 $1,088 $45.00 a. Assuming interest and dividends are paid annually, calculate the annual holding period return on each security.

Stock 1 - 14.3% Stock 2 - 8.5% Bond 1 - 6.9%

Select all that apply When issuing securities, which of the following are considered issue costs? Multiple select question. The underwriter's spread Accounting fees Interest expense Legal fees

The underwriter's spread Accounting fees Legal fees

Which of the following describes an initial public offering?

The first sale of common stock to the general public by a private company

Which of the following is not a variable that is used in the Black-Scholes option-pricing formula?

The future value of the underlying asset

Which of the following is an advantage of using interest rate swaps?

They allow a company to change interest rate risk without retiring current debt.

Select all that apply Which of the following inputs are needed to value a stock option using the Black-Scholes formula? Multiple select question. The option's strike price The future value of the stock The volatility of the stock The current stock price The interest rate The time to maturity of the option

The option's strike price The volatility of the stock The current stock price The interest rate The time to maturity of the option

Can shareholders exercise control over a company's affairs?

Yes, by electing the board of directors

Can an investor in a semistrong-form efficient market earn above-average returns without private information?

Yes, by taking an above-average amount of risk

A ______ asset is a security representing a legal claim to future cash payouts.

financial

A bond is known as a ______ security.

fixed-income

Futures contracts are similar to ______ contracts, but they have standardized terms and are traded on exchanges.

forward

Although most investors think of bonds as very safe investments, they often ignore the impact of:

inflation.

When a private company requires more capital, the management of the company can decide to raise capital from the public. This can be done by selling the company's common shares to the public through a(n) ______.

initial public offering

A call provision is typically advantageous to the ______ which is why bonds with such provisions contain ______ coupon rates.

issuing company; higher

A call provision gives the ______ the ______ to retire the bonds prior to maturity.

issuing company; option