FINA 3770 Test 2
A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future. short−term equity long−term equity long−term debt short−term debt
long−term debt
"Junk" bonds are a street name for ________ grade bonds. speculative and investment extremely speculative investment speculative
speculative
When a bond is callable, the ability to call the bond is an option for ________. the bond issuer the bond purchaser the trustee holding the bond a mutual decision between the issuer and the purchaser of the bond
the bond issuer
In regards to the fact that the pricing of stocks is more difficult than the pricing of bonds, which of the below statements is FALSE? Cash dividends, unlike coupons for bonds, typically change from year to year. The ending price of the stock at any point in time is not fixed like the par value of the principal. A stock's final sale is fixed in time on its maturity date. Because a stock has no maturity date, the number of its payments are unknown.
A stock's final sale is fixed in time on its maturity date.
Shaky Company has just issued a five-year bond with a yield of 9%; Stable Company has issued an identical five-year bond, but with a yield of 7%. Why did the market demand a higher return from Shaky? Companies with poor financials tend to compensate investors for the liquidity risk by issuing bonds with high yields. Companies with poor financials tend to compensate investors for the systematic risk by issuing bonds with high yields. Companies with poor financials tend to compensate investors for the inflation risk by issuing bonds with high yields. Companies with poor financials tend to compensate investors for the default risk by issuing bonds with high yields.
Companies with poor financials tend to compensate investors for the default risk by issuing bonds with high yields.
Ben has just purchased a long-term government bond and expects to make a 7% return. Donna has just purchased a stock in a new startup company, but expects to make a 20% return. Why is Donna expecting a higher return? Donna is expecting a higher return on the stock due to both the maturity premium and default premium. Donna is expecting a higher return on the stock due to the maturity premium only. Donna is expecting a higher return on the stock due to change in the risk-free interest rate. Donna is expecting a higher return on the stock due to the default premium only.
Donna is expecting a higher return on the stock due to both the maturity premium and default premium.
A bull market is a prolonged declining market. True False
False
If a bond is selling at a premium above the par value that means that the yield to maturity is greater than the coupon rate. True False
False
Which of the following types of bonds may the buyer sell back before maturity? Zero−coupon bond Putable bond Callable bond Convertible bond
Putable bond
Which of the statements below is FALSE? The reward for postponing consumption implies that at the end of the year you will be able to buy more goods. The prices of goods and services tend to decrease over time because of inflation. The real interest rate is the reward for waiting. Nominal interest rates are the sum of two major components: the real interest rate and expected inflation.
The prices of goods and services tend to decrease over time because of inflation.
Which of the following are issued with the shortest time to maturity? Treasury bills Treasury bonds Treasury notes Treasury stocks
Treasury bills
Most U.S. corporate and government bonds choose to make ________ coupon payments. quarterly annual monthly semiannual
semiannual
Which of the statements below is FALSE? A typical practice of many companies is to distribute part of the earnings to shareholders through cash dividends. For the shareholder, receipt of dividends is a taxable event. Unlike coupon payments on bonds, which are treated as an interest expense of the firm, common stock dividends are considered a return of capital to shareholders and not an expense of the firm. The payment of cash dividends to shareholders is a deductible expense for the company.
The payment of cash dividends to shareholders is a deductible expense for the company.
The most common shape for a yield curve is upward sloping. True False
True
When interest rates are stated or given for loan repayments, it is assumed that they are ________ unless specifically stated otherwise. effective annual rates APYs daily rates annual percentage rates
annual percentage rates
Stocks differ from bonds because: the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase. firms pay bond cash flows prior to paying taxes while stock cash flows are after tax. bond cash flows are known while stock cash flows are uncertain. All of the above
All of the above
Which of the following statements is FALSE? The period in which interest is applied or the frequency of times interest is added to an account each year is called the compounding period or compounding periods per year. Although an APR is quoted on an annual basis, interest can be paid monthly but never daily. The APR can be referred to as a promised annual percentage rate. Although an APR is quoted on an annual basis, interest can be paid quarterly.
Although an APR is quoted on an annual basis, interest can be paid monthly but never daily.
________ refers to how quickly information is reflected in the available prices for trading. Market efficiency Informational efficiency Mechanical efficiency Operational efficiency
Informational efficiency
Which of the statements below is FALSE? Selling of shares is the selling of ownership in the company. A company is said to go "public" when it opens up its ownership structure to the general public through the sale of common stock. Most companies have the resident expertise to complete an initial public offering (IPO) or first public equity issue. Companies choose to sell stock to attract permanent financing through equity ownership of the company.
Most companies have the resident expertise to complete an initial public offering (IPO) or first public equity issue.
________ has to do with the speed and accuracy of processing a buy or sell order at the best available price. Mechanical efficiency Market efficiency Operational efficiency Informational efficiency
Operational efficiency
Which of the statements below is FALSE? It is common for companies to issue preferred stock with the right to convert to common shares after a specific waiting period. Preferred stock cannot be converted into common stock. Preferred stock does not have a maturity date. Preferred shareholders' dividend claims take precedence over common shareholders' dividend claims.
Preferred stock cannot be converted into common stock.
Which of the following statements is TRUE? Preferred stock usually has a stated or par value and, like bonds, this par value is not repaid at maturity because preferred stocks do not have a maturity date. The par value for preferred stock, unlike bonds, is never paid back. Some preferred stocks are cumulative with respect to dividends, meaning that if a company skips a cash dividend, it must pay it at some point in the future. A preferred stock's cash dividend due each year is based on the stated dividend rate times the market value of the stock.
Some preferred stocks are cumulative with respect to dividends, meaning that if a company skips a cash dividend, it must pay it at some point in the future.
The U.S. government offers two bonds: one selling to yield 6.5% and the other to yield 8.5%. Why would one bond sell for a lower yield if the originator is the same on both bonds? The difference between the yields of the U.S. government bonds is due to the default premium of the investments. The difference between the yields of the U.S. government bonds is due to the liquidity premium of the investments. The difference between the yields of the U.S. government bonds is due to the forward premium of the investments. The difference between the yields of the U.S. government bonds is due to the maturity premium of the investments.
The difference between the yields of the U.S. government bonds is due to the maturity premium of the investments.
Which of the statements below is FALSE? The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands. The difference in rates as the borrowing time or investment horizon increases is due to the maturity premium of the investments. The maturity premium represents that portion of the yield that compensates the investor for the additional waiting time or the lender for the additional time it takes to receive repayment in full. If you invest money for a short period and buy a six−month CD, you will not receive as high an interest rate as if you bought a CD with a longer maturity period.
The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands.
Which of the statements below is FALSE? Stock is a major financing source for public companies. Shareholders elect the board of directors, which ultimately selects the management team that runs the day−to−day operations of the company. The profits for common stock owners come before payment to employees, suppliers, government, and creditors. Common stock's ownership claim on the assets and cash flow of a company is often referred to as a residual claim.
The profits for common stock owners come before payment to employees, suppliers, government, and creditors.
Which of the statements below is FALSE? Some firms issue several classes of common stock, and these classes may have unequal voting rights. Shareholders with super voting right shares have multiple votes per share − a fact that increases their influence and control over the company. Common stock usually carries the right to participate in the management of the firm through the right to vote for the members of the Board of Directors and for changes to the charter and bylaws of the company. The standard of one vote for each share cannot be altered.
The standard of one vote for each share cannot be altered.
There are two major markets for the sale of stock: the primary market and the secondary market. True False
True
Which of the following statements about the relationship between yield to maturity and bond prices is FALSE? A bond selling at a premium means that the coupon rate is greater than the yield to maturity. A bond selling at a discount means that the coupon rate is less than the yield to maturity. When the yield to maturity and coupon rate are the same, the bond is called a par value bond. When interest rates go up, bond prices go up.
When interest rates go up, bond prices go up.
Which of the following statements is TRUE if you increase your monthly payment above the required loan payment? The extra portion of the payment increases the principal. The extra portion of the payment does not go to the principal. You can significantly reduce the number of payments needed to pay off the loan. You can significantly increase the number of payments needed to pay off the loan.
You can significantly reduce the number of payments needed to pay off the loan.
A company selling a bond is ________ money. taking lending reinvesting borrowing
borrowing
Dividend models suggest that the value of a financial asset is determined by future cash flows. A problem arises, however, in that future cash flows may be difficult to predict as to ________ of these cash flows. the amount but not the timing neither the timing nor the amount the timing but not the amount both the timing and the amount
both the timing and the amount
When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value. time to maturity; discount to coupon rate; premium over time to maturity; same price as coupon rate; discount to
coupon rate; discount to
Strong−form efficient markets theory proclaims that ________. current prices reflect the price and volume history of the stock, all publicly available information, but no private information one can chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market one can exploit publicly available news or financial statement information to routinely outperform the market current prices reflect the price and volume history of the stock, all publicly available information, and all private information
current prices reflect the price and volume history of the stock, all publicly available information, and all private information
The ________ compensates the investor for the additional risk that the loan will not be repaid in full. default premium inflation premium interest rate real rate
default premium
James is a rational investor wishing to maximize his return over a 20 year period. The current yield curve is inverted with one year rates at 5.00% and 20 year rates at 3.50%. James will invest in the lower rate 20 year bonds if: he thinks rates will fall in the future and locking in long−term rates today may provide the highest long−run average return. he thinks rates will rise in the future and locking in long−term rates today may provide the highest long−run average return. he thinks rates will rise in the future and locking in long−term rates today may provide the lowest long−run average return. he thinks rates will remain flat at 5% in the future and locking in long−term rates today will prevent him from appearing greedy to those without this investment opportunity.
he thinks rates will fall in the future and locking in long−term rates today may provide the highest long−run average return.
APRs must be converted to the appropriate periodic rates when compounding is ________. less frequent than once every six months more frequent than once a year less frequent than once a year more frequent than once a month
more frequent than once a year
When a company is in financial difficulty and cannot fully pay all of its creditors, the first lenders to be paid are the ________. sinking fund holders senior debtholders stockholders junior debtholders
senior debtholders
Question Help As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that the credit rating increases, the default risk decreases, and the required rate of return increases. the credit rating decreases, the default risk decreases, and the required rate of return decreases. the credit rating increases, the default risk decreases, and the required rate of return decreases. the credit rating increases, the default risk increases, and the required rate of return decreases.
the credit rating increases, the default risk decreases, and the required rate of return decreases.
The two major components of the interest rate that cause rates to vary across different investment opportunities or loans are ________. the inflation premium and the maturity premium the default premium and the maturity premium the liquidity premium and the maturity premium the default premium and the bankruptcy premium
the default premium and the maturity premium
A yield curve constructed using Treasury securities has each of the following components embedded in the nominal interest rates: the real rate, expected inflation, and a maturity premium. expected inflation, a default risk premium and a maturity premium. the real rate, a default risk premium and expected inflation. the real rate, expected inflation and a default risk premium.
the real rate, expected inflation, and a maturity premium.
A sinking fund may be used for each of the following EXCEPT ________. to be held on to and used to pay off the principal at maturity to buy back some of the bonds over time to be used to pay off other outstanding debt issues to call in bonds early
to be used to pay off other outstanding debt issues
