MID-TERM FINANCIAL INSTITUTION CH. 3

Price sensitivity to interest rate changes increases with increasing maturity at a ________ rate. Multiple choice question. indeterminate constant decreasing increasing

decreasing

Economically, duration is a(n) _________ between price changes and interest rate changes. Multiple choice question. supply curve demand curve indifference curve elasticity

elasticity

The duration of a zero coupon bond is Multiple choice question. zero. equal to a coupon bond. smaller than a coupon bond. equal to its maturity.

equal to its maturity.

The relationship between bond prices and changes in interest rate is ________, leading to a _______ sign for duration in the elasticity equation. Multiple choice question. inverse; negative inverse; positive direct; negative direct; positive

inverse; negative

True or false: All else being equal, the higher the coupon rate, the lower the price of the bond.

FALSE

Which of the following would be the correct method for using the time value of money functionality of a financial calculator to find the expected rate of return for a security? Multiple choice question. Given N,PV,PMT, and FV solve for I. Given N,I,PV, and PMT solve for FV.

Given N,PV,PMT, and FV solve for I.

Which of the following is the equation for valuing a stock with a dividend growth rate of zero? Multiple choice question. P0 = Rs/DIV P0 = DIV1/DIV2 DIV = P0/Rs P0 = DIV/Rs

P0 = DIV/Rs

If you are given the most recent dividend, DIV0 (but not DIV1), the growth rate, g, and the return, Rs, the correct equation for valuing a constant dividend growth stock is which of the following? Multiple choice question. P0 = DIV0(1 + g)/Rs P0 = DIV0/Rs P0 = DIV0/(Rs - g) P0 = DIV0(1+g)/(Rs - g)

P0 = DIV0(1+g)/(Rs - g)

Which of the following is true regarding the transition from the nonconstant dividend growth period to the constant dividend growth period? Multiple choice question. The last nonconstant growth dividend marks the beginning of the constant growth period. The dividend following the last nonconstant growth dividend marks the beginning of the constant growth period. The second dividend following the last nonconstant growth dividend marks the beginning of the constant growth period. The second last nonconstant growth dividend marks the beginning of the constant growth period.

The last nonconstant growth dividend marks the beginning of the constant growth period

The return that the bondholder will earn on a bond if he or she buys it at its current market price, receives all coupon and principal payments as promised, and holds the bond to maturity is the YTM COUPON RATE

YTM

The coupon rate determines the ___________ that will be made by the bond issuer to the bond holder. Multiple choice question. interest payments principal payments dividend payments terminal payment

interest payments

Convexity is good because the __________ of large interest rate increases tends to be smaller than the ________ of large interest rate decreases. capital loss effect; capital gain effect capital gain effect; capital loss effect

capital loss effect; capital gain effect

Duration provides a direct relationship between the _______ for a ________. Multiple choice question. change in security price; small change in coupon rate change in security price; small change in interest rates change in security price; small change in maturity change in coupon value; small change in interest rates

change in security price; small change in interest rates

The exact bond price/interest rate relationship is _______, while duration is ________. Multiple choice question. convex; linear linear; linear convex; convex linear; convex

convex; linear

The total return on a bond instrument incorporates both the _________ and _________. Multiple choice question. coupon payments; repayment of principal interest payments; dividend payments coupon payments; dividend payments dividend payments; repayment of principal

coupon payments; repayment of principal

For a bond instrument, the periodic cash flow that the bond issuer contractually promises to pay the bond holder is called the Multiple choice question. payment rate.. coupon rate. interest rate. dividend rate.

coupon rate

As long as financial markets are efficient, the ________ of a security tends to equal its ________. Multiple choice question. current market price; fair present value fair present value; realized return expected rate of return; realized rate of return realized rate of return; coupon rate

current market price; fair present value

When new bonds are issued, their coupon rate is generally set to the Multiple choice question. federal funds rate. current required rate of return. risk-free rate. ten-year U.S. T-bond rate.

current required rate of return.

When investors determine that a security is overvalued, a(n) _______ in demand causes the security price to ________ and equilibrium is reestablished. Multiple choice question. increase; decrease increase; increase decrease; increase decrease; decrease

decrease; decrease

As the maturity of a bond _______, the duration _______, but at a(n) _______ rate. Multiple select question. increases; increases; increasing decreases; increases; decreasing decreases; decreases; increasing increases; increases; decreasing

decreases; decreases; increasing increases; increases; decreasing

Price sensitivity to interest rate changes increases with increasing maturity at a ________ rate. Multiple choice question. constant decreasing indeterminate increasing

decreasing

The return that investors anticipate earning if they buy the security at the current market price and earn all of the projected cash flows over the life of the investment is the Multiple choice question. realized rate of return. expected rate of return. required rate of return. coupon rate.

expected rate of return.

In the equation for valuing a zero dividend growth stock, if we use the _________ we will solve for the ________ of the stock. Multiple select question. expected rate of return; current market price required rate of return; fair present value expected rate of return; fair present value required rate of return; current market price

expected rate of return; current market price required rate of return; fair present value

The dividend pattern for a stock with supernormal dividend growth can be most correctly described as Multiple choice question. having no discernible pattern to its dividend growth. experiencing a period of nonconstant growth followed by constant growth forever. experiencing a period of constant growth followed by nonconstant growth forever. experiencing a period of nonconstant growth forever.

experiencing a period of nonconstant growth followed by constant growth forever.

As the rate of return on a bond _______, the duration _______. Multiple select question. increases; decreases decreases; decreases increases; increases decreases; increases

increases; decreases decreases; increases

The equity valuation model assumes that the stream of dividend cash flows produced by an equity instrument is Multiple choice question. infinite and varying. a constant stream. a perpetuity. an annuity.

infinite and varying.

A long maturity bond will have a _______ decrease in price for a unit increase in interest rates than a short maturity bond would have. Multiple choice question. identical smaller larger similar

larger

Higher coupon bonds return a ________ portion of the investor's required rate of return in the form of coupon payments compared to lower coupon bonds. Multiple choice question. constant smaller variable larger

larger

The ________ the coupon on the bond, the ________ its duration. larger; shorter smaller; longer smaller; shorter larger; longer

larger; shorter smaller; longer

The speed with which security prices adjust to unexpected news is referred to as _________. Multiple choice question. price efficiency market efficiency the law of one price speed adjustment

market efficiency

The speed with which security prices adjust to unexpected news is referred to as _________. Multiple choice question. the law of one price market efficiency price efficiency speed adjustment

market efficiency

Greater early payment of returns makes larger coupon bonds _______ valuable and ________ price variable. Multiple choice question. less; more less; less more; more more; less

more; less

The relationship between bond price sensitivity and maturity is Multiple choice question. indeterminate. linear. hyperbolic. not linear.

not linear.

The cash flows from a zero coupon bond consist of a lump sum payment of principal at PAR value at maturity, plus Multiple choice question. a fixed interest payment paid at the issue of the bond and one paid at maturity. nothing. Zero coupon bonds have no coupon payments. a single interest payment paid at maturity with the principal repayment. an annuity of fixed interest payments paid over the life of the

nothing. Zero coupon bonds have no coupon payments.

The interest rate actually earned on a financial security is called the Multiple choice question. expected rate of return. coupon rate. realized rate of return. required rate of return.

realized rate of return

The fair present value of a security is the present value of its projected cash flows discounted to the present at the Multiple choice question. expected rate of return. required rate of return. realized rate of return. coupon rate.

required rate of return.

The current market price of a security can temporarily diverge from its fair market value due to ________. Multiple choice question. anticipated interest rate changes expected increases in dividends unexpected events

unexpected events

To determine the contribution of the nonconstant dividends to the current stock price assuming the rate of return is Rs, you must Multiple choice question. use Rs to discount each dividend to the present and add them together. use Rs to discount only the first nonconstant dividend to the present. use Rs to discount only the last nonconstant dividend to the present. add the nonconstant dividends and apply them to the current stock price.

use Rs to discount each dividend to the present and add them together.