Finance exam 2
The value of a share of stock depends on Entry field with correct answer the credit rating of the firm. an investor's risk tolerance limit. how long an investor intends to keep it. how often it will pay a dividend.
how often it will pay a dividend.
Roy is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis. The current market rate for similar bonds is 8.8 percent. He was offered the bond by a friend at a price of 1,100. Should he buy the bond from his friend? Round your final answer to the nearest dollar.) Yes, because the market price of the bond is $1,265 No, because the market price of the bond is $1,048 No, because the market price of the bond is $1,099 none of the above
No, because the market price of the bond is $1,048
Which of the following statements is NOT true about common stock? Owners of common stock are guaranteed dividend payments by the firm. Common-stock holders have the right to vote on the election ofthe board of directors of their company. Common-stock holders have limited liability toward the obligations of the corporation. Common stock isconsidered to have no fixed maturity.
Owners of common stock are guaranteed dividend payments by the firm.
Which of the following statements is true? For a given change in market interest rates, the prices of higher-coupon bonds change more than the prices of lower-coupon bonds. If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond. If interest rates rise, bond prices will rise. If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond.
if market interest rates rise, a 10 year bond will fall in value more than a 1 year bond
Price of a bond is calculated by: discounting the sum of coupon payments and principal. discounting the difference between the principal payment and the coupon payments. adding the present value of principal payment and the present value of coupon payments. subtracting the present value of principal payment from the present value of coupon payments.
adding the present value of principal payment and the present value of coupon payments.
The least efficient of all the different types of secondary markets is the: auction market. direct search market. dealer market. broker market.
direct search market.
A benefit of a callable bond is the: bondholder may sell it for a higher price. issuer may sell it for a higher price. issuer may replace it with a bond that has a higher coupon rate. issuer may replace it with a bond that has a lower coupon rate.
issuer may replace it with a bond that has a lower coupon rate.
The constant growth dividend model would be useful to determine the value of all, but which of the following firms? Entry field with correct answer A firm whose earnings and dividends are declining at a fairly steady rate. A firm whose earnings and dividends are growing at a fairly steady rate. A firm whose expected sales, profits, and dividends are flat. A firm whose sales, profits, and dividends are growing at an annual average compound rate of 5 percent.
A firm whose expected sales, profits, and dividends are flat.
Which of the following statements is NOT true about broker markets? Investors have an incentive to hire a broker because what they charge as a commission is less than the cost of direct search. Brokers can guarantee an order because they have an inventory of securities. Brokers bring buyers and sellers together to earn a fee, called a commission. Brokers' extensive contacts provide them with a pool of price information that individual investors could not economically duplicate themselves.
Brokers can guarantee an order because they have an inventory of securities.
Which of the following steps is necessary when computing the value of a common stock? Entry field with correct answer Estimating the coupon payments Determining the required rate of return based on the riskiness of the cash flows Multiplying each cash flow by the year in which it is expected to be received Dividing each cash flow by the year in which it is expected to be received
Determining the required rate of return based on the riskiness of the cash flows
Which one of the following statements is NOT true? The largest investors in corporate bonds are life insurance companies and pension funds. The market for corporate bonds is thin compared to the market for corporate stocks. Prices in the corporate bond market tend to be more volatile than the markets for stocks or money market securities. Corporate bonds are more marketable than the securities that have higher daily trading volumes.
corporate bonds are more marketable than the securities that have higher daily trading volume
Which one of the following statements about vanilla bonds is NOT true? The bond's coupon rate is calculated as the annual coupon payment divided by the bond's face value. Coupon payments are usually made quarterly. They have fixed coupon payments. The face value, or par value, for most corporate bonds is $1,000.
coupon payments are usually made quarterly
The rate used to discount a bond's cash flow stream in bond valuation is the: coupon interest rate. risk-free rate. market interest rate. prime interest rate.
market interest rate.
All of the following statements about stock indexes are true EXCEPT stock indexes are based on criteria that define the market segment of interest. stock indexes replicate the market activity in a certain segment of the stock market. stock indexes are unbiased and perfect indicators of market activity. stock indexes can serve as a benchmark to evaluate investment manager performance.
stock indexes are unbiased and perfect indicators of market activity.
The yield to maturity for a bond is: calculated by dividing market value of the bond by its face value. the interest rate on the bond, relative to its face value, when it is issued. calculated by dividing face value of the bond by market value. the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond.
the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond.
A bond will sell at a premium when its coupon interest rate: equals the market interest rate on similar bonds. exceeds the market interest rate on similar bonds. is lower than the market interest rate on similar bonds. varies more than the market interest rate on similar bonds.
exceeds the market interest rate on similar bonds.
If the yield curve has a positive slope: interest rates are expected to be higher in the future. interest rates are expected to be unchanged in the future. interest rates are expected to be lower in the future. interest rates are expected to be more volatile in the future.
interest rates are expected to be higher in the future.
When the growth rate is greater than or equal to the required rate, the value of a stock calculated by using the constant growth dividend model will be negative. The reason we cannot apply the constant growth dividend model in the case where the growth rate, g, is greater than or equal to the required rate, R, is because it would result in the value of the stock becoming: Entry field with correct answer negative negative or infinite above infinite zero
negative
Growth stocks usually do not pay dividends. Therefore the stock value increases because the firms: Entry field with correct answer reinvests earnings to provide dividends in the future. holds large amounts of cash. pay interest to bondholders. increase market share.
reinvests earnings to provide dividends in the future.
For the constant growth rate dividend model to work, which of the following assumptions must hold? Entry field with correct answer The growth rate should always be equal to zero. The growth rate must be equal to the required rate of return. The growth rate must be less than the required rate of return. The growth rate must be greater than the required rate of return.
The growth rate must be less than the required rate of return.
Which of the following statements about preferred stock is FALSE? Entry field with correct answer Preferred stock typically pays a fixed dividend. Preferred stock has a higher-priority claim on the firm's assets than the common stock. Failure to pay dividends on preferred stocks will result in a default. Preferred stock has a lower-priority claim on the firm's assets than the firm's creditors in the event o
Failure to pay dividends on preferred stocks will result in a default.
Which of the following statements is true? Downward sloping yield curves typically appear in the early to mid-period of a business expansion. Interest rate risk premium always adds an upward bias to the slope of the yield curve. If investors believe that inflation will be increasing in the near future, the yield curve will be downward sloping. Downward-sloping yield curve is the yield curve most commonly observed.
Interest rate risk premium always adds an upward bias to the slope of the yield curve.
Which of the following statements is NOT true? The risk that the lender may not receive payments as promised is called default risk. Investors must pay a premium to purchase a security that exposes them to default risk. U.S. Treasury securities are the best proxy measure for the risk-free rate. All of the above are true statements.
Investors must pay a premium to purchase a security that exposes them to default risk.
Which of the following statements is NOT true about preferred stock? Preferred stock holders have limited voting privileges relative to common-stock owners. Preferred stocks are generally viewed as perpetuities because they have no fixed maturity. Preferred dividend payments are paid by the issuer with after-tax dollars. Preferred dividends are tax deductible just like the interest on bonds.
Preferred dividends are tax deductible just like the interest on bonds.
Which of the following statements is NOT true about preferred stock? Preferred stock holders have limited voting privileges relative to common-stock owners. Preferred stock dividends are paid by the issuer with after-tax dollars. Preferred stock represents ownership in the firm. Preferred stockholders are not eligible for guaranteed dividend payments by the firm.
Preferred stockholders are not eligible for guaranteed dividend payments by the firm.
Companies that issue convertible bonds can borrow at a lower interest rate, which reduces the amount of cash that companies must use to make interest payments and can sell bonds without reducing the price. One reason why firms issue convertible bonds is that, the bonds can be sold for: lower prices with higher interest rates. higher prices with lower interest rates. higher prices with higher interest rates. lower prices with lower interest rates.
higher prices with lower interest rates.
Realized yield is: the interest rate at which the future value of the expected cash flows from a bond equals the bond's price. the interest rate at which the present value of the expected cash flows from a bond equals the bond's price. the interest rate at which the present value of the actual cash flows from a bond equals the bond's price. the interest rate at which the future value of the actual cash flows from a bond equals the bond's price.
the interest rate at which the present value of the actual cash flows from a bond equals the bond's price.
Which of the following statements is most true about zero coupon bonds? Entry field with correct answer They typically sell for a higher price than similar coupon bonds. They are always convertible to common stock. They typically sell at a deep discount below par when they are first issued. They typically sell at a premium over par when they are first issued.
they typically sell at a deep discount below par when they are first issued
Which of the following is a simplifying assumption that is made when applying the dividend discount model to common stock valuation? Entry field with correct answer Dividends rate grow lesser than 0. Dividends vary each year. Dividends are constant till the tenure of the firm. Dividend growth rate is not equal to the required rate of return.
Dividend growth rate is not equal to the required rate of return.
Which of the following is the most typical example of a zero-growth dividend stock? The preferred stock of a utility company. The common stock of a firm in the health care industry. The common stock of a firm in the information technology industry. The common stock of a firm in the biotechnology industry.
The preferred stock of a utility company.
Which one of the following statements about zero coupon bonds is NOT true? Zero coupon bonds have no coupon payments but promise a single payment at maturity. Zero coupon bonds must sell for less than similar bonds that make periodic coupon payments. Zero coupon bonds make coupon payments but no principal payment at maturity. All of the above statements are true.
zero coupon bonds make coupon payments but no principal payment at maturity
Which of the following are the three simplifying assumptions that cover most stock growth patterns? Dividends remain constant over time, dividends grow at a constant rate, and dividends are equal to zero. Dividends have a zero-growth rate, dividends grow at a varying rate, and dividends are equal to zero. Dividends remain constant over time, dividends grow at a constant rate, and dividends have a mixed growth pattern. None of the above.
Dividends remain constant over time, dividends grow at a constant rate, and dividends have a mixed growth pattern.
Which of the following theorem explains the relationship between interest rates and bond prices? Bond prices are directly related to interest rate movements. For a given change in interest rates, the prices of short-term bonds will change more drastically than the prices of long-term bonds. For a given change in interest rates, the prices of higher-coupon bonds will change more drastically than the prices of lower-coupon bonds. For a given change in interest rates, the prices of long-term bonds will change more drastically than the prices of short-term bonds.
For a given change in interest rates, the prices of long-term bonds will change more drastically than the prices of short-term bonds.
Which of the following statements is NOT true about the general dividend valuation model? The model does not assume any specific pattern for future dividends, such as a constant growth rate. It makes a specific assumption about when the share of stock is going to be sold in the future. The model calls for forecasting an infinite number of dividends for a stock. The price of a share of stock is the present value of all expected future dividends.
It makes a specific assumption about when the share of stock is going to be sold in the future.
Entry field with correct answer From a practical perspective, the growth rate in the constant growth dividend model must be greater than the sum of the long-term rate of inflation and the long-term real growth rate of the economy. In order for the constant growth dividend model to properly value a firm's common stock, g must be greater than R. The constant growth dividend model can be used effectively to value the common shares of a mixed growth stock. In order for the constant growth dividend model to properly value a firm's common stock, R must be greater than g.
In order for the constant growth dividend model to properly value a firm's common stock, R must be greater than g.
Which of the following statements is true about the general dividend valuation model? It implies that the value of a growth stock can be determined by forecasting the future price of the stock. The model cannot be used to calculate the value of a common stock unless the dividends exceed the firm's expected growth rate. It implies that the value of a firm's common stock can be determined only if the expected future dividends are infinite. It implies that the underlying value of a share of stock is determined by the market's expectations of the future dividends that the firm will generate.
It implies that the underlying value of a share of stock is determined by the market's expectations of the future dividends that the firm will generate.
Which of the following statements is true about growth stocks? These are stocks of firms that grow their sales at above-average rates and are expected to do so for a length of time. These are stocks of firms that grow their earnings at above-average rates and are expected to do so for a length of time. They generally pay dividends during their fast growth phase. None of the above.
These are stocks of firms that grow their earnings at above-average rates and are expected to do so for a length of time.
Which one of the following statements is NOT true? Yield curves show graphically how market yields vary as term to maturity changes. The shape of the yield curve is not constant over time. The relationship between yield to maturity and marketability is known as the term structure of interest rates. As the general level of interest rises and falls over time, the yield curve shifts up and down and has different slopes.
The relationship between yield to maturity and marketability is known as the term structure of interest rates.
Which of the following classes of securities is likely to have the lowest corporate borrowing cost? AAA rated bonds. A rated bonds. BB rated bonds. C rated bonds. All of the above will have the same corporate borrowing cost.
aaa rated bonds
A bond pays a coupon interest rate of 7.5 percent. The market rate on similar bonds is 8.4 percent. The bond will sell at _____. book value par a premium a discount
a discount
Which one of the following statements is true of a bond's yield to maturity? The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. It is the annual yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised. A bond's yield to maturity changes daily as interest rates increase or decrease. All of the above are true.
all of the above
Which of the following statements is true of zero coupon bonds? Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity. Zero coupon bonds sell well below their face value (at a deep discount) because they offer no coupons. The most frequent and regular issuer of zero coupon securities is the U.S. Treasury Department. All of the above are true.
all of the above are true
Which of the following statements is true? Entry field with correct answer To secure the conversion option on a bond, bondholders would be willing to pay a premium. Typically, the conversion ratio is set so that the firm's stock price must appreciate at least 15 to 20 percent before it is profitable to convert bonds into stock. Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder. All of the above are true.
all of the above are true
In regard to interest rate risk, short-term bonds: and longer-term bonds have no interest rate risk because their coupon interest rates are fixed. have less interest rate risk than longer-term bonds. and longer-term bonds have the same amount of interest rate risk because their coupon interest rates are fixed. have more interest rate risk than longer-term bonds.
have more interest rate risk than longer-term bonds.
The stocks owned by ___ represent about 35 percent of the total value of all corporate equity. mutual funds households pension funds foreign investors
households
Preferred stock is sometimes treated like a debt security because: legally preferred stock is a debt security. preferred stock holders receive a residual value and not a stated value. preferred dividend payments are similar to bond interest payments and are fixedin nature regardless of the firm's earnings. preferred dividends are deductible from taxable income just like interest payments on bonds.
preferred dividend payments are similar to bond interest payments and are fixedin nature regardless of the firm's earnings.
Preferred stock resembles a bond because Entry field with correct answer preferred stock pays fixed dividends which is similar to the interest paid on bonds. preferred stock do not have a retirement date. dividends on preferred stock reduce a firm's tax obligation. dividends on preferred stock increase over time.
preferred stock pays fixed dividends which is similar to the interest paid on bonds.
