Finance Test: Conceptual Problems from Chapter 7,8,12,13

A bond's coupon rate is equal to the annual interest divided by which one of the following? A. Dirty price. B. Face value. C. Call price. D. Clean price. E. Current price.

Face 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: A. Current yield will decrease. B. Coupon rate will also increase. C. Coupon payment will increase. D. Market price of the bond will decrease. E. Yield to maturity will be less than the coupon rate.

Market price of the bond will decrease.

The secondary market is best defined by which one of the following? A. Market conducted solely by brokers. B. Market where outstanding shares of stock are resold. C. Market dominated by dealers. D. Market in which subordinated shares are issued and resold. E. Market where warrants are offered and sold.

Market where outstanding shares of stock are resold.

Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities? A. Common stock. B. Warrant. C. Senior bond. D. Preferred stock. E. Debenture.

Preferred Stock

Emst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets? A. Auction. B. Tertiary. C. Private. D. Secondary. E. Primary.

Primary

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond? A. Unsecured. B. Callable. C. Senior. D. Par value. E. Subordinated.

Callable

Which one of following is the rate at which a stock's price is expected to appreciate? A. Current yield. B. Capital gains yield. C. Dividend yield. D. Total return E. Coupon rate.

Capital Gains Yield

Recently, you discovered a convertible, callable bond with a 5 percent semiannual coupon. If you purchase this bond you will have the right to: A. Have the principal amount adjusted for inflation. B. Defer all taxable income until the bond matures. C. Convert the bond into a 5 percent perpetuity. D. Convert the bond into equity shares. E. Force the issuer to repurchase the bond prior to maturity.

Convert the bond into equity shares.

The dividend growth model: A. Can be used to value both dividend-paying and non-dividend-paying stocks. B. Cannot be used to value constant dividend stocks. C. Assumes dividends increase at a decreasing rate. D. Only values stocks at Time 0. E. Requires the growth rate to be less than the required return.

Requires the growth rate to be less than the required return.

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? A. Default risk. B. Liquidity. C. Taxability. D. Interest rate risk. E. Inflation.

Default risk

What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? A. Capital pricing. B. Discounted dividend. C. Earnings capitalization. D. Zero growth. E. Dividend growth.

Dividend growth

The bond market requires a return of 9.8 percent on the five-year bonds issued by JW Industries. The 9.8 percent is referred to as which one of the following? A. Call rate. B. Yield to maturity. C. Current yield. D. Coupon rate. E. Face rate.

Yield to Maturity

A bond has a market price that exceeds its face value. Which one of these features currently applies to this bond? A. Yield to maturity equal to the current yield. B. Yield to maturity less than the coupon rate. C. Discount bond. D. Current yield greater than coupon rate. E. Currently selling at par.

Yield to maturity less than the coupon rate.

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds? A. Junk. B. Zero coupon. C. Callable. D. Floating-rate. E. Debenture.

Zero Coupon

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

a discount; less than