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FIN300 unit 2
| Question | Answer |
|---|---|
| The rate of return that the market requires on a bond is | the yield to maturity |
| The formula for the bond price includes | both the formula for the present value of an annuity and the formula for the present value of a lump sum |
| If the yield to maturity on a bond is greater than the coupon rate | the bond price will be less than the par value, and the bond will sell at a discount |
| When pricing bonds with semiannual coupon payments using the time value of money function on our calculator, we must | both double the number of years for the N input and take half the annual yield to maturity for the I/Y input |
| Default risk is | the risk that the bond issuer does not pay the promised payments in the full amount or on time |
| Interest rate risk is higher for | - low coupon rate bonds than high coupon rate bonds - long-term bonds than short-term bonds. |
| Which type of investors are likely to find municipal bonds attractive? | investors in a high tax bracket |
| Zero coupon bonds | have no coupon payments. |
| Bond payments | generally have low daily trading volume in any single bond issue, are made up primarily of over-the-counter transactions, trade in an extremely large number of bond issues. |
| A dirty bond price refers to | the clean price plus accrued interest |
| Which of the following is NOT a factor that affects bond yields - weekday premium - default risk - liquidity - taxibility - real rate of interest | weekday premium |
| The term structure of interest rates is usually | upward sloping |
| True or false: Given a positive rate of inflation, the real rate must be less than the nominal rate | true |
| A bond has a face value of $1,000. It can be redeemed early at the issuer's discretion for $1,015, plus any accrued interest. The additional $15 is called the: | call premium |
| Treasury bonds are | generally issued as semiannual coupon bonds |
| The interest rate risk premium is the: | compensation investors demand for accepting interest rate risk. |
| Which one of the following applies to a premium bond? | Coupon rate > Current yield > Yield to maturity |
| Interest rates that include an inflation premium are referred to as: | nominal rates |
| The yields on a corporate bond differ from those on a comparable Treasury security primarily because of | credit risk. |
| An example of a negative covenant that might be found in a bond indenture is a statement that the company: | cannot lease any major assets without bondholder approval. |
| Municipal bonds: | pay interest that is free from federal taxation. |
| A Treasury yield curve plots Treasury interest rates relative to: | time to maturity. |
| Suppose you buy a 7 percent coupon, 20-year bond today when it’s first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond? | The price of the bond will fall. |
| A bond has a face value of $1,000. It can be redeemed early at the issuer's discretion for $1,015, plus any accrued interest. The additional $15 is called the: | call premium |
| treasury bonds are: | generally issued as semiannual coupon bonds. |
| The interest rate risk premium is the: | compensation investors demand for accepting interest rate risk. |
| Which one of the following applies to a premium bond? | Coupon rate > Current yield > Yield to maturity |
| Interest rates that include an inflation premium are referred to as: | nominal rates. |
| A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today? | The yield to maturity is less than the coupon rate. |
| Recently, you discovered a convertible, callable bond with a semiannual coupon of 5 percent. If you purchase this bond you will have the right to: | convert the bond into equity shares. |
| What rates represents the change, if any, in your purchasing power as a result of owning a bond? | Real rate |
| All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity | a discount; less than |
| A bond's principal is repaid on the ________ date. | maturity |
| Which bond would you generally expect to have the highest yield? | Long-term, taxable junk bond |
| Dilan owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. The $1,000 is referred to as the: | face value |
| true or false: Stocks can have negative growth rate | true |
| Supernormal growth is a growth rate that | is unsustainable over the long term |
| The annual dividend yield is computed by dividing _____ annual dividend by the current stock price | next year's |
| Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? | Determining the amount of the dividend to be paid per share |
| Which one of the following best describes Nasdaq? | Computer network of securities dealers |
| A member who acts as a dealer in a limited number of securities on the floor of the NYSE is called a: | designated market maker. |
| Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings? | Common |
| 5 shareholders who all vote independently and want personal control over the firm. What is min % of outstanding shares one of these shareholders must own if they gain personal control over this firm using straight voting? | 50 percent plus one vote |
| An agent who maintains an inventory from which he or she buys and sells securities is called a | dealer |
| NYSE designated market makers | acts as a dealer |
| Ernst & 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? | primary |
| The owner of a trading license for the NYSE is called a(n): | member |
| The dividend growth model: | requires the growth rate to be less than the required return. |
| Preferred stock may have all of the following characteristics in common with bonds with the exception of: | tax-deductible payments |
| A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market? | over the counter |
| as interest rates decrease, bond prices | increase |
| as interest rates increase, PV | decreases |
| Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows? | Discounted cash flow valuation |
| Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted | net present value |
| The internal rate of return is: | tedious to compute without the use of either a financial calculator or a computer. |
| If a firm accepts Project X it will not be feasible to also accept Project Z because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be: | mutually exclusive. |
| Which one of the following methods of analysis provides the best information on the benefits to be received from a project per dollar invested? | Profitability index |
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cqfe222