FINA Exam 2 Conceptual Questions

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. (T/F)

False

A corporation is scheduled to produce a line of products for the next ten years and then go out of business. The firm will pay an annual dividend of​ $1.75 for only those ten years. What is the present value of a share for this company if we want an​ 8% annual return on the​ stock? A. ​$14.97 B. ​$12.97 C. ​$15.97 D. ​$11.74

$11.74

Delagold Corporation is issuing a zero-coupon bond that will have a maturity of fifty years. The bond's par value is $1,000, and the current yield on similar bonds is 7.5%. What is the expected price of this bond, using the semiannual convention? A) $25.19 B) $250.19 C) $750.00 D) $1,000.00

$25.19

Five years ago, Thompson Tarps Inc. issued twenty-five-year 10% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the Thompson bonds is now 12%. Given this information, what is the price today for a Thompson Tarps bond? A) $843.14 B) $850.61 C) $1,181.54 D) $1,170.27

$850.61

A U.S. Treasury bill is currently selling at a discount basis of​ 2.25%. The par value of the bill is​ $100,000, and will mature in ninety days. What is the price of this Treasury​ bill? A. ​$97,952.78 B. ​$97,750.00 C. ​$99,437.5 D. ​$99,952.05

$99,437.5

Benson Biometrics Inc., has outstanding $1,000 face value 8% coupon bonds that make semiannual payments, and have 14 years remaining to maturity. If the current price for these bonds is $987.24, what is the yield to maturity? A) 8.00% B) 8.38% C) 8.15% D) 8.64%

8.15%

Which of the following statements is​ FALSE? A. Although an APR is quoted on an annual​ basis, interest can be paid monthly but never daily. Your answer is correct. B. 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. C. The APR can be referred to as a promised annual percentage rate. D. 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. Your answer is correct.

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? A. Donna is expecting a higher return on the stock due to the default premium only. B. Donna is expecting a higher return on the stock due to the maturity premium only. C. Donna is expecting a higher return on the stock due to both the maturity premium and default premium. D. 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 both the maturity premium and default premium.

A bull market is a prolonged declining market. (T/F)

False

​________ refers to how quickly information is reflected in the available prices for trading. A. Operational efficiency B. Market efficiency C. Mechanical efficiency D. Informational efficiency

Informational efficiency

Which of the statements below is​ FALSE? A. The real interest rate is the reward for waiting. B. Nominal interest rates are the sum of two major​ components: the real interest rate and expected inflation. C. The prices of goods and services tend to decrease over time because of inflation. D. 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.

Which of the following are issued with the shortest time to​ maturity? A. Treasury stocks B. Treasury bills C. Treasury notes D. Treasury bonds

Treasury bills

The most common shape for a yield curve is upward sloping. (T/F)

True

There are two major markets for the sale of​ stock: the primary market and the secondary market. (T/F)

True

Stocks differ from bonds​ because: A. the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase. B. bond cash flows are known while stock cash flows are uncertain. C. firms pay bond cash flows prior to paying taxes while stock cash flows are after tax. D. All of the above

All of the above

MacroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE? A) The bond market currently requires a rate (yield) less than the coupon rate. B) The bonds are selling at a premium to the par value. C) The coupon rate is greater than the yield to maturity. D) All of the above are true.

All of the above are true.

________ has to do with the speed and accuracy of processing a buy or sell order at the best available price. A. Informational efficiency B. Market efficiency C. Mechanical efficiency D. Operational efficiency

Operational efficiency

Which of the statements below is​ FALSE? A. It is common for companies to issue preferred stock with the right to convert to common shares after a specific waiting period. B. Preferred stock does not have a maturity date. C. Preferred stock cannot be converted into common stock. D. Preferred​ shareholders' dividend claims take precedence over common​ shareholders' dividend claims.

Preferred stock cannot be converted into common stock.

Most U.S. corporate and government bonds choose to make​ ________ coupon payments. A. quarterly B. semiannual C. annual D. monthly

semiannual

McCue Inc.'s bonds currently sell for $1,250. They pay a $90 annual coupon, have a 25-year maturity, and a $1,000par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would beincurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected toremain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtractthe YTC from the YTM; it is possible to get a negative answer.) A) 6.88% B) 4.26 C) 2.62% D) None of the above

?

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? A. Because a stock has no maturity​ date, the number of its payments are unknown. B. A​ stock's final sale is fixed in time on its maturity date. C. Cash​ dividends, unlike coupons for​ bonds, typically change from year to year. D. 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.

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? A. Companies with poor financials tend to compensate investors for the systematic risk by issuing bonds with high yields. B. Companies with poor financials tend to compensate investors for the liquidity risk by issuing bonds with high yields. C. Companies with poor financials tend to compensate investors for the inflation risk by issuing bonds with high yields. D. 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.

Which of the statements below is​ FALSE? A. Most companies have the resident expertise to complete an initial public offering​ (IPO) or first public equity issue. B. Selling of shares is the selling of ownership in the company. C. Companies choose to sell stock to attract permanent financing through equity ownership of the company. D. 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.

Your family just bought a new home and now have a mortgage on the home. The amount of the principal is $150,000, the loan is at 5% APR, and the monthly payments are spread out over 30 years. What is your monthly mortgage payment?

PV-150000 FV 0 PMT? $805.23 N 360 r/i/y 0.004166667

Which of the statements below is FALSE? A) Reducing principal at a faster pace reduces the overall interest paid on a loan. B) The more frequent the payment, the lower the total interest expense over the life of the loan, even though the effective rate of the loan is higher. C) Reducing principal at a faster pace increases the overall interest paid on a loan .D) Monthly interest on a loan is equal to the beginning balance times the periodic interest rate.

Reducing principal at a faster pace increases the overall interest paid on a loan

What is the EAR if the APR is 10.52% and compounding is daily? A) Slightly above 10.09% B) Slightly below 11.09% C) Slightly above 11.09% D) Over 11.25%

Slightly above 11.09%

Which of the following statements is​ TRUE? A. 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. B. 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. C. A preferred​ stock's cash dividend due each year is based on the stated dividend rate times the market value of the stock. D. 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.

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? A. The difference between the yields of the U.S. government bonds is due to the maturity premium of the investments. B. The difference between the yields of the U.S. government bonds is due to the liquidity premium of the investments. C. The difference between the yields of the U.S. government bonds is due to the default premium of the investments. D. 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.

Which of the statements below is​ FALSE? A. 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. B. 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. C. The longer the​ loan, the greater the risk of nonpayment and the lower the interest rate the lender demands. D. The difference in rates as the borrowing time or investment horizon increases is due to the maturity premium of the investments.

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? A. For the​ shareholder, receipt of dividends is a taxable event. B. The payment of cash dividends to shareholders is a deductible expense for the company. C. A typical practice of many companies is to distribute part of the earnings to shareholders through cash dividends. D. 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.

Which of the statements below is​ FALSE? A. Stock is a major financing source for public companies. B. The profits for common stock owners come before payment to​ employees, suppliers,​ government, and creditors. C. Common​ stock's ownership claim on the assets and cash flow of a company is often referred to as a residual claim. D. 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.

Which of the statements below is​ FALSE? A. 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. B. Some firms issue several classes of common​ stock, and these classes may have unequal voting rights. C. Shareholders with super voting right shares have multiple votes per share − a fact that increases their influence and control over the company. D. The standard of one vote for each share cannot be altered.

The standard of one vote for each share cannot be altered.

Which of the following statements about the relationship between yield to maturity and bond prices is FALSE? A) When the yield to maturity and coupon rate are the same, the bond is called a par value bond. B) A bond selling at a premium means that the coupon rate is greater than the yield to maturity. C) When interest rates go up, bond prices go up. D) A bond selling at a discount means that the coupon rate is less than the yield to maturity.

When interest rates go up, bond prices go up.

Which of the following statements about the relationship between yield to maturity and bond prices is​ FALSE? A. When interest rates go​ up, bond prices go up. B. A bond selling at a discount means that the coupon rate is less than the yield to maturity. C. A bond selling at a premium means that the coupon rate is greater than the yield to maturity. D. 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.

Which of the following statements is TRUE if you increase your monthly payment above the required loan​ payment? A. You can significantly increase the number of payments needed to pay off the loan. B. The extra portion of the payment does not go to the principal. C. You can significantly reduce the number of payments needed to pay off the loan. D. The extra portion of the payment increases the principal.

You can significantly reduce the number of payments needed to pay off the loan.

When interest rates are stated or given for loan​ repayments, it is assumed that they are​ ________ unless specifically stated otherwise. A. APYs B. daily rates C. annual percentage rates D. effective annual rates

annual percentage rates

A company selling a bond is​ ________ money. A. lending B. borrowing C. taking D. reinvesting

borrowing

When the​ ________ is less than the yield to​ maturity, the bond sells at​ a/the ________ the par value. A. time to​ maturity; same price as B. time to​ maturity; discount to C. coupon​ rate; discount to D. coupon​ rate; premium over

coupon​ rate; discount to

Strong−form efficient markets theory proclaims that​________. A. one can exploit publicly available news or financial statement information to routinely outperform the market B. current prices reflect the price and volume history of the​ stock, all publicly available​ information, and all private information C. current prices reflect the price and volume history of the​ stock, all publicly available​ information, but no private information D. one can chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market

current prices reflect the price and volume history of the​ stock, all publicly available​ information, and all private information

The ________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator. A) current yield B) yield to maturity C) bond discount rate D) coupon rate

current yield

The​ ________ compensates the investor for the additional risk that the loan will not be repaid in full. A. inflation premium B. default premium C. interest rate D. real rate

default premium

Josephine is seeking to expand her rare stamp collection. Each year, rare stamps increase in price at a three percent rate. She believes that if she invests her money for one year, she should be able to buy 16 stamps for what 15 stamps would cost today. What is her real interest rate (or reward for waiting)? What is the approximate nominal rate necessary to compensate for waiting and cover inflation?

real interest rate is about 6.67%.nominal rate 9.87%

When a company is in financial difficulty and cannot fully pay all of its​ creditors, the first lenders to be paid are the​ ________. A. junior debtholders B. senior debtholders C. stockholders D. sinking fund holders

senior debtholders

"Junk" bonds are a street name for​ ________ grade bonds. A. extremely speculative B. investment C. speculative D. speculative and investment

speculative

As the rating of a bond increases​ (for example, from​ A, to​ AA, to​ AAA), it generally means that A. the credit rating​ increases, the default risk​ decreases, and the required rate of return decreases. B. the credit rating​ increases, the default risk​ increases, and the required rate of return decreases. C. the credit rating​ decreases, the default risk​ decreases, and the required rate of return decreases. D. the credit rating​ increases, the default risk​ decreases, and the required rate of return increases

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​ ________. A. the liquidity premium and the maturity premium B. the default premium and the maturity premium C. the default premium and the bankruptcy premium D. the inflation premium and the maturity 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: A. the real​ rate, expected inflation and a default risk premium. B. expected​ inflation, a default risk premium and a maturity premium. C. the real​ rate, expected​ inflation, and a maturity premium. D. the real​ rate, a default risk premium and expected inflation.

the real​ rate, expected​ inflation, and a maturity premium.

A sinking fund may be used for each of the following EXCEPT​ ________. A. to be held on to and used to pay off the principal at maturity B. to be used to pay off other outstanding debt issues C. to call in bonds early D. to buy back some of the bonds over time

to be used to pay off other outstanding debt issues

The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life. A) current yield B) yield to maturity C) prime rate D) coupon rate

yield to maturity

Wallboard​ Inc, plans to pay a dividend in one year ​(Div1​) of​ $0.80, the dividend growth rate​ (g) is expected to be​ 6%, and the required rate of return​ (r) for the​ firm's stock is​ 10%. What is the stock​ price, according to the constant growth dividend​ model? A. ​$20.80 B. ​$20.00 C. ​$30.80 D. ​$15.00

​$20.00

Five years​ ago, Simpson Warehouses Inc. issued twenty−five−year 10% annual coupon bonds with a​ $1,000 face value each. Since​ then, interest rates in general have risen and the yield to maturity on the Thompson bonds is now​ 12%. Given this​ information, what is the price today for a Thompson Tarps​ bond? A. ​$850.61 B. ​$843.14 C. ​$1,170.27 D. ​$1,181.54

A. ​$850.61

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. A. the timing but not the amount B. neither the timing nor the amount C. both the timing and the amount D. the amount but not the timing

both the timing and the amount

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: A. he thinks rates will rise in the future and locking in long−term rates today may provide the lowest long−run average return. B. he thinks rates will rise in the future and locking in long−term rates today may provide the highest long−run average return. C. 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. D. 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 fall in the future and locking in long−term rates today may provide the highest long−run average return.

James is an 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 4.50%. James will invest in the lower-rate 20-year bonds if: A) he thinks rates will fall significantly in the future and locking in long-term rates today may provide the highest long-run average return. B) he thinks rates will rise in the future and locking in long-term rates today may provide the lowest long-run average return. C) 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. D) James has no idea what to do and should just skip this question.

he thinks rates will fall significantly in the future and locking in long-term rates today may provide the highest long-run average return.

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. A. short−term debt B. long−term equity C. long−term debt D. short−term equity

long−term debt

APRs must be converted to the appropriate periodic rates when compounding is​ ________. A. less frequent than once every six months B. more frequent than once a year C. less frequent than once a year D. more frequent than once a month

more frequent than once a year

You want to invest in a stock that pays​ $4.00 annual cash dividends for the next three years. At the end of the three​ years, you will sell the stock for​ $35.00. If you want to earn​ 9% on this​ investment, what is a fair price for this stock if you buy it​ today? A. ​$24.75 B. ​$18.91 C. ​$41.37 D. ​$37.15

​$37.15

Rogue Motors Inc. has a​ 11% required rate of return. The firm does not expect to initiate dividends for 10​ years, at which time it will pay​ $2.00 per share in dividends. At that​ time, the firm expects its dividends to grow at​ 6% forever. What is an estimate of the​ firms' price in 10 years ​(P10​) if its dividend at the end of year 10 is​ $2.00 A. ​$33.40 B. ​$31.20 C. ​$42.80 D. ​$42.40

​$42.40

Creative Solutions Inc. has issued 10−year ​$1,000 face​ value, 8% annual coupon​ bonds, with a yield to maturity of​ 9.0%. The annual interest payment for the bond is​ ________. A. ​$90 B. ​$80 C. ​$40 D. ​$45

​$80

Douglas Dynamics Inc. has outstanding​ $1,000 face value​ 4% coupon bonds that make semiannual​ payments, and have 10 years remaining to maturity. If the current price for these bonds is​ $938.57, what is the annualized yield to​ maturity? A. ​4.78% B. ​5.13% C. ​4.96% D. ​5.02%

​4.78%

Buxton Corp. has outstanding borrowings. One of these borrowings is nonconvertible preferred stock​ (cumulative) with a par value of​ $85 and an annual dividend rate of​ 6.20%. This preferred stock is currently selling for​ $56.50 per share. What is the yield or return​ (r) on this preferred​ stock? A. ​9.89% B. ​9.32% C. ​9.56% D. ​9.22%

​9.32%