FIN 300 exam 2

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected? Multiple Choice A.)Default risk B.)Taxability C.)Liquidity D.)Inflation E.)Interest rate risk

A.) Default risk

Real rates are defined as nominal rates that have been adjusted for which of the following? Multiple Choice A.)Inflation B.)Default risk C.)Accrued interest D.)Interest rate risk E.)Both inflation and interest rate risk

A.) Inflation

An agent who arranges a transaction between a buyer and a seller of equity securities is called a: Multiple Choice A.)broker. B.)floor trader. C.)capitalist. D.)principal. E.)dealer.

A.) broker

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity? Multiple Choice A.)Default risk B.)Taxability C.)Liquidity D.)Inflation E.)Interest rate risk

C.) Liquidity

Bonds issued by the U.S. government: Multiple Choice A.)are considered to be free of interest rate risk. B.)generally have higher coupons than comparable bonds issued by a corporation. C.)are considered to be free of default risk. D.)pay interest that is exempt from federal income taxes. E.)are called "munis."

C.) are considered to be free of default risk.

A discount bond's coupon rate is equal to the annual interest divided by the: Multiple Choice A.)call price. B.)current price. C.)face value. D.)clean price. E.)dirty price.

C.) face value

Which of the following are advantages of the payback method of project analysis? Multiple Choice A.)Considers time value of money, liquidity bias B.)Liquidity bias, arbitrary cutoff point C.)Liquidity bias, ease of use D.)Ignores time value of money, ease of use E.)Ease of use, arbitrary cutoff point

C.)Liquidity bias, ease of use

Which two methods of project analysis are the most biased towards short-term projects? Multiple Choice A.)Net present value and internal rate of return B.)Internal rate of return and profitability index C.)Payback and discounted payback D.)Net present value and discounted payback E.)Discounted payback and profitability index

C.)Payback and discounted payback

A sinking fund is managed by a trustee for which one of the following purposes? Multiple Choice A.)Paying bond interest payments B.)Early bond redemption C.)Converting bonds into equity securities D.)Paying preferred dividends E.)Reducing bond coupon rates

B.)Early bond redemption

Recently, you discovered a convertible, callable bond with a semiannual coupon of 5 percent. If you purchase this bond you will have the right to: Multiple Choice A.)force the issuer to repurchase the bond prior to maturity. B.)convert the bond into equity shares. C.)defer all taxable income until the bond matures. D.)convert the bond into a perpetuity paying 5 percent. E.)have the principal amount adjusted for inflation.

B.)convert the bond into equity shares.

If a project has a net present value equal to zero, then: Multiple Choice A.)the total of the cash inflows must equal the initial cost of the project. B.)the project earns a return exactly equal to the discount rate. C.)a decrease in the project's initial cost will cause the project to have a negative NPV. D.)any delay in receiving the projected cash inflows will cause the project to have a positive NPV. E.)the project's PI must also be equal to zero.

B.)the project earns a return exactly equal to the discount rate.

Which one of the following transactions occurs in the primary market? Multiple Choice A.)Purchase of 500 shares of GE stock from a current shareholder B.)Gift of 100 outstanding shares to a charitable organization C.)Gift of 200 shares of stock by a mother to her daughter D.)A purchase of newly issued stock from the issuer E.)IBM's purchase of GE stock from a dealer

D.) A purchase of newly issued stock from the issuer

Which one of the following best describes NASDAQ? Multiple Choice A.)Largest U.S. stock market in terms of dollar trading volume B.)Market where dealers buy at the asked price C.)Market where the designated market makers are located at posts D.)Computer network of securities dealers E.)Market with three physical trading floors

D.) Computer network of securities dealers

An agent who maintains an inventory from which he or she buys and sells securities is called a: Multiple Choice A.)broker. B.)trader. C.)capitalist. D.)principal. E.)dealer.

E.) Dealer

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the: Multiple Choice A.)equilibrium. B.)premium. C.)discount. D.)call price. E.)spread.

E.) Spread

Callable bonds generally: Multiple Choice A.)grant the bondholder the option to call the bond any time after the deferment period. B.)are callable at par as soon as the call-protection period ends. C.)are called when market interest rates increase. D.)are called within the first three years after issuance. E.)have a sinking fund provision.

E.) have a sinking fund provision

Interest rates that include an inflation premium are referred to as: Multiple Choice A.)annual percentage rates. B.)stripped rates. C.)effective annual rates. D.)real rates. E.)nominal rates.

E.) nominal rates

The dividend growth model: Multiple Choice A.)assumes dividends increase at a decreasing rate. B.)only values stocks at Time 0. C.)cannot be used to value constant dividend stocks. D.)can be used to value both dividend-paying and non-dividend-paying stocks. E.)requires the growth rate to be less than the required return.

E.) requires the growth rate to be less than the required return.

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the: Multiple Choice A.)required return. B.)zero-sum rate. C.)present value rate. D.)break-even rate. E.)crossover rate.

E.)crossover rate.

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. Multiple Choice A.)a premium; less than B.)a premium; equal to C.)a discount; less than D.)a discount; higher than E.)par; less than

C.) a discount; less than

NYSE designated market makers: Multiple Choice A.)execute trades on behalf of their clients. B.)are guaranteed a profit on every stock purchased and resold. C.)act as dealers. D.)provide a one-sided market. E.)are also referred to as "$2 brokers."

C.) act as dealers

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market? Multiple Choice A.)Auction B.)Private C.)Over-the-counter D.)Regional E.)Insider

C.) over-the-counter

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? Multiple Choice A.)Electing the board of directors B.)Receiving a distribution of company profits C.)Voting either for or against a proposed merger or acquisition D.)Determining the amount of the dividend to be paid per share E.)Having first chance to purchase any new equity shares that may be offered

D.) Determining the amount of the dividend to be paid per share

A decrease in which of the following will increase the current value of a stock according to the dividend growth model? Multiple Choice A.)Dividend amount B.)Number of future dividends, provided the total number of dividends is less than infinite C.)Dividend growth rate D.)Discount rate E.)Both the discount rate and the dividend growth rate

D.) discount rate

Which one of the following represents the capital gains yield as used in the dividend growth model? Multiple Choice A.)D1 B.)D1/P0 C.)P0 D.)g E.)g/P0

D.) g

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? Multiple Choice A.)Electing the board of directors B.)Receiving a distribution of company profits C.)Voting either for or against a proposed merger or acquisition D.)Determining the amount of the dividend to be paid per share E.)Having first chance to purchase any new equity shares that may be offered

D.)Determining the amount of the dividend to be paid per share

Which one of the following will decrease the net present value of a project? Multiple Choice A.)Increasing the value of each of the project's discounted cash inflows B.)Moving each cash inflow forward one time period, such as from Year 3 to Year 2 C.)Decreasing the required discount rate D.)Increasing the project's initial cost at time zero E.)Increasing the amount of the final cash inflow

D.)Increasing the project's initial cost at time zero

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following? Multiple Choice A.)Initial cost of each project B.)Timing of the cash inflows C.)Total cash inflows of each project D.)Net present value E.)Length of each project's life

D.)Net present value

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the: Multiple Choice A.)coupon rate will also increase. B.)current yield will decrease. C.)yield to maturity will be less than the coupon rate. D.)market price of the bond will decrease. E.)coupon payment will increase.

D.)market price of the bond will decrease.

The secondary market is best defined as the market: Multiple Choice A.)in which subordinated shares are issued and resold. B.)conducted solely by brokers. C.)dominated by dealers. D.)where outstanding shares of stock are resold. E.)where warrants are offered and sold.

D.)where outstanding shares of stock are resold.