finance

What condition must exist if a bond’s coupon rate is to equal both the bond’s current yield and its yield to maturity? Assume the market rate of interest for this bond is positive.The clean price of the bond must equal the bond’s dirty price.The bond must be a zero coupon bond and mature in exactly one year.The market price must exceed the par value by the value of one year’s interest.The bond must be priced at par.There is no condition under which this can occur. The bond must be priced at par
All else held constant, the present value of a bond increases when the:coupon rate decreases.yield to maturity decreases.current yield increases.time to maturity of a premium bond decreases.time to maturity of a zero coupon bond increases. yield to maturity decreases
What is the principal amount of a bond that is repaid at the end of the loan term called?CouponMarket priceAccrued priceDirty priceFace value face value
A bond’s annual interest divided by its face value is referred to as the:market rate.call rate.coupon rate.current yield.yield-to-maturity. coupon rate
Which one of the following statements is true?The current yield on a par value bond will exceed the bond’s yield to maturity.The yield to maturity on a premium bond exceeds the bond’s coupon rate.The current yield on a premium bond is equal to the bond’s coupon rate.A premium bond has a current yield that exceeds the bond’s coupon rate.A discount bond has a coupon rate that is less than the bond’s yield to maturity. A discount bond has a coupon rate that is less than the bond’s yield to maturity
The rate of return an investor earns on a bond prior to adjusting for inflation is called the:nominal rate.real rate.dirty rate.coupon rate.clean rate. nominal rate
The written agreement that contains the specific details related to a bond issue is called the bond:indenture.debenture.document.registration statement.issue paper. indenture
A callable bond:is generally call protected during the entire term of the bond issue.generally will have a call protection period during the final three years prior to maturity.may be structured to pay bondholders the current value of the bond on the date of call.is prohibited from having a sinking fund also.is frequently called at a price that is less than par value. may be structured to pay bondholders the current value on the date of a call
A bond’s indenture agreement generally includes all of the following except the:terms of repayment.details of protective covenants.total amount of the bond issue.names of registered shareholders.description of property used as security. names of registered shareholders
A bond has a make-whole call provision. Given this, you know that the:bond will always sell at par.call premium must equal the annual coupon payment.call price is directly related to the market rate of interest.call price is inversely related to the market rate of interest.bond must be a zero coupon bond. call price is inversely related to the market rate of interest
An unexpected decrease in market interest rates will cause a:coupon bond’s current yield to increase.zero coupon bond’s price to decrease.fixed-rate bond’s coupon rate to decrease.zero coupon bond’s current yield to decrease.coupon bond’s yield to maturity to decrease. coupon bond’s yield to maturity to decrease
Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk?Taxability risk premiumDefault risk premiumInterest rate risk premiumReal rate of returnBond premium interest rate risk premium
Suppose that a small, rural city in the countryside of North Dakota plans to issue $150,000 worth of 10-year bonds. Which one of the following components of the bond’s yield will be affected by the fact that no active secondary market is expected for these bonds?Real rateLiquidity premiumInterest rate risk premiumInflation premiumTaxability premium Liquidity premium
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities.face valuemarket pricematuritycoupon rateissue date maturity
The term structure of interest rates represents the relationship between which of the following?Nominal rates on risk-free and risky bondsReal rates on risk-free and risky bondsNominal and real rates on default-free, pure discount bondsMarket and coupon rates on default-free, pure discount bondsNominal rates on default-free, pure discount bonds and time to maturity nominal rates on default free, pure discount bonds and time to maturity
Which one of the following types of securities has the lowest priority in a bankruptcy proceeding?Convertible bondSenior debtCommon stockPreferred stockStraight bond Common stock
Which statement is true?From a legal perspective, preferred stock is a form of corporate equity.All classes of stock must have equal voting rights per share.Common shareholders elect the corporate directors while the preferred shareholders vote on mergers and acquisitions.Preferred dividends provide tax-free income to individual investors.Preferred shareholders prefer noncumulative dividends over cumulative dividends. From a legal perspective, preferred stock is a form of corporate equity
The constant growth model can be used to value the stock of firms that have which type(s) of dividends? Dividends that change by either a constant amount or a constant rateDividends that change annually by a constant amount or that are zeroDividends that change annually by a constant amountDividends that are either constant or change annually at a constant rateOnly dividends that increase at a constant rate Dividends that are either constant or change annually at a constant rate
The price of a stock at Year 4 can be expressed as:D0/(R + g4).D0 × (1 + R)5.D1 × (1 + R)5.D4/(R – g).D5/(R – g). D5/(R – g).
What is the market called that facilitates the sale of shares between individual investors?PrimaryProxySecondaryInsideInitial secondary
If shareholders are granted a preemptive right they will:be given the choice of receiving dividends either in cash or in additional shares of stock.be paid dividends prior to the preferred shareholders during the preemptive period.be entitled to two votes per share of stock.be able to choose the timing and amount of any future dividends.have priority in the purchase of any newly issued shares. have priority in the purchase of any newly issued shares.
Which one of the following must equal zero if a firm pays a constant annual dividend?Dividend yieldCapital gains yieldTotal returnPar value per shareBook value per share capital gains yield
The dividend yield on a stock will increase if the:dividend growth rate decreases.stock price decreases.capital gains rate decreases.stock price increases.tax rate on dividends increases. stock price decreases
If a trade is made “in the crowd,” the trade has occurred:between a broker and a DMM.between two brokers.electronically on NASDAQ.onSuperDOT.on an ECN. between two brokers
A person who executes customer orders to buy and sell securities on the floor of the NYSE is called a:supplemental liquidity provider (SLP).designated market maker (DMM).runner.Floor broker.market maker. floor broker
A DMM is a(n):employee who executes orders to buy and sell for clients of his or her brokerage firm.individual who trades on the floor of an exchange for his or her personal account.NYSE member who functions as a dealer for a limited number of securities.broker who buys and sells securities from a market maker.trader who deals only with primary offerings. NYSE member who functions as a dealer for a limited number of securities.
Supplemental liquidity providers (SLPs) trade securities on behalf of:their own accounts.the customers of a specific brokerage firm.designated market makers.any stock exchange member.any stock exchange customer. their own accounts
Dividends are:payable at the discretion of a firm’s president.treated as a tax-deductible expense of the issuing firm.paid out of net income.paid only to preferred stockholders.only partially taxable to high-income individual shareholders. paid out of net income
Inside quotes are defined as the:bid and asked prices presented by NYSE DMMs.last bid and asked price offered prior to the market close.lowest asked and highest bid offers.daily opening bid and asked quotes.last traded bid and asked prices. lowest asked and highest bid offers
The specific location on the floor of an exchange where a particular security is traded is called a:box office.Figure 6.post.trading booth.seat. post
Which one of the following features applies to NASDAQ but not the NYSE?Trading in the crowdMultiple market maker systemSuperDotBroker marketPhysical trading floor multiple market maker system
Most trades on the NYSE are executed:by floor brokers on the exchange floor.independent brokers on the exchange floor.electronically.by designated market makers of the floor of the exchange.bydealers. electronically
NASDAQ is best described as:a modern-day trading floor with locations in Chicago and London.an electronic communication network.an electronic network of securities dealers.an internet broker’s market.a primary market. an electronic network of securities dealers.
Which one of the following players on the floor of the NYSE is obligated to maintain a two-sided, orderly market for a limited number of securities?Designated market makerFloor sweeperInvestment firmsSupplemental liquidity providerFloor broker designated market maker
Companies can list their stock on which one of the following without having to meet listing requirements or filing financial statements with the SEC?NASDAQ Capital MarketOver-the-Counter Bulletin BoardPink sheetsNASDAQ Global MarketNYSE pink sheets
Which one of the following individuals is most apt to purchase a municipal bond?Minimum-wage employeeRetired individual with minimal current incomeRecent college graduateTax-exempt organizationHighly compensated business owner Highly compensated business owner
What is the price of a $1,000 face value bond if the quoted price is 102.1?$102.10$1,002.10$1,020.01$1,020.10$1,021.00 $1,021.00
The relationship between nominal returns, real returns, and inflation is referred to as the:call premium.Fisher effect. conversion ratio.spread.current yield. Fisher effect.
Which statement is true?Bonds are generally called at par value.A current list of all bondholders is maintained whenever a firm issues bearer bonds.An indenture is a contract between a bond’s issuer and its holders.Collateralized bonds are called debentures.A bondholder has the right to determine when his or her bond is called. An indenture is a contract between a bond’s issuer and its holders.
A protective covenant:protects the borrower from unscrupulous practices by the lender.guarantees the interest and principal payments will be paid in full on a timely basis.prevents a bond from being called.limits the actions of the borrower.guarantees the market price of a bond will never be less than par value. limits the actions of the borrower.
A call provision grants the bond issuer the:right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds.option to exchange the bonds for equity securities.right to automatically extend the bond’s maturity date.right to repurchase the bonds on the open market prior to maturity.option of repurchasing the bonds prior to maturity at a prespecified price. option of repurchasing the bonds prior to maturity at a prespecified price.
Which one of the following occupations best fits into the corporate area of finance?Chief financial officerTreasury bill analystMortgage brokerInsurance risk managerLocal bank manager chief financial officer
Which one of the following is a capital structure decision?Setting the terms of sale for credit salesDetermining when suppliers should be paidEstablishing the preferred debt-equity levelSelecting new equipment to purchaseDetermining the optimal inventory level Establishing the preferred debt-equity level
Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners?Limited liability companySole proprietorshipCorporationLimited partnershipGeneral partnership Limited partnership
Will and Bill both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Will and Bill will equally share in the decision making and in the business profits or losses. Which type of business did they create if they both have full personal liability for the firm’s debts?Joint stock companyLimited partnershipCorporationGeneral partnershipSole proprietorship General partnership
Security dealers:buy and sell from their own inventory.match buyers with sellers.are limited to trading non-listed stocks.operate on a physical trading floor.operate exclusively in auction markets. buy and sell from their own inventory
Which one of the following is an advantage of being a limited partner?Unlimited profits without risk of incurring a lossNontaxable share of any profitsControl over the daily operations of the firmLosses limited to capital investedActive market for ownership interest losses limited to capital invested
Which one of the following situations is most apt to create an agency conflict?Giving all employees a bonus if a certain level of efficiency is maintainedCompensating a manager based on his or her division’s net incomeLaying off employees during a slack periodHiring an independent consultant to study the operating efficiency of the firmBasing management bonuses on the length of employment Basing management bonuses on the length of employment
Which one of the following statements is correct?The APR is the best measure of the actual rate you are paying on a loan.The APR is equal to the EAR for a loan that charges interest monthly.The EAR, rather than the APR, should be used to compare both investment and loan options.The APR on a monthly loan is equal to (1 + monthly interest rate)12- 1.The EAR is always greater than the APR. he EAR, rather than the APR, should be used to compare both investment and loan options.
Which statement is true?All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity.An annuity with payments at the beginning of each period is called an ordinary annuity.All else equal, a decrease in the number of payments increases the future value of an annuity due.All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.All else equal, an ordinary annuity is more valuable than an annuity due. All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.
All else held constant, the present value of an annuity will decrease if you:decrease the annuity payment.increase the annuity’s future value.increase the time period.decrease the discount rate.increase the payment amount. decrease the annuity payment.
You are comparing three investments, all of which pay $100 a month and have an interest rate of 8 percent. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options?The future value of all three investments must be equal.The ordinary annuity would be more valuable than the annuity due if both had a life of 10 years.To be the perpetuity, the payments must occur on the first day of each monthly period.The present value of all three investments must be equal.The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due. The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due.
Which one of the following features distinguishes an ordinary annuity from an annuity due?Annuity interest rateFrequency of the paymentsTiming of the annuity paymentsAmount of each paymentNumber of equal payments Timing of the annuity payment
Which one of the following is an ordinary annuity, but not a perpetuity?$75 paid at the beginning of each monthly period for 50 years$25 paid weekly for 1 year, starting one week from today$40 paid quarterly for 5 years, starting today$15 paid at the end of each monthly period for an infinite period of time$50 paid every year for ten years, starting today $25 paid weekly for 1 year, starting one week from today
Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional.Modified internal rate of return that is equal to zeroProfitability index of zeroInternal rate of return that exceeds the required returnPayback period that exceeds the required periodNegative average accounting return Internal rate of return that exceeds the required return
Which one of the following indicators offers the best assurance that a project will produce value for its owners?PI equal to zeroNegative rate of returnPositive AARPositive IRRPositive NPV Positive NPV
Which one of the following statements is correct?The net present value is a measure of profits expressed in today’s dollars.The net present value is positive when the required return exceeds the internal rate of return.If the initial cost of a project is increased, the net present value of that project will also increase.If the internal rate of return equals the required return, the net present value will equal zero.Net present value is equal to an investment’s cash inflows discounted to today’s dollars. If the internal rate of return equals the required return, the net present value will equal zero.
Which one of the following methods of analysis has the greatest bias toward short-term projects?Net present valueInternal rate of returnAverage accounting returnProfitability indexPayback payback
The payback method of analysis ignores which one of the following?Initial cost of an investmentArbitrary cutoff pointCash flow directionTime value of moneyTiming of each cash inflow Time value of money
The analysis of a new project should exclude:tax effects.erosion effects.side effects.sunk costs.opportunity costs. sunk costs
Ed owns a store that caters primarily to men. Each of the answer options represents an item related to a planned store expansion. Each of these items should be included in the expansion analysis with the exception of the cost:of the property insurance premium increase.of the exterior landscaping that will be required once the expansion is complete.of the additional sales person that will be required.of the inventory required to fill the additional retail space.of the blueprints that have been drawn of the expansion area. of the blueprints that have been drawn of the expansion area.
Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, the company can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost?ErosionBookSunkMarketOpportunity sunk
The tax shield approach to computing the operating cash flow, given a tax-paying firm:ignores both interest expense and taxes.separates cash inflows from cash outflows.considers the changes in net working capital resulting from a new project.ignores all noncash expenses and their effects.recognizes that depreciation creates a cash inflow. recognizes that depreciation creates a cash inflow.
CrossTown Builders is considering remodeling an old building it currently owns. The building was purchased ten years ago for $1.2 million. Over the past ten years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $1.9 million. The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million. The estimated present value of the future income from these apartments is $4.1 million. Which one of the following defines the opportunity cost of the remodeling project?Present value of the future incomeCost of the remodelingCurrent market value of the buildingInitial cost of the building plus the remodeling costsCurrent market value of the building plus the remodeling cost Current market value of the building
If an investment is producing a return that is equal to the required return, the investment’s net present value will be:positive.greater than the project’s initial investment.zero.equal to the project’s net profit.less than, or equal to, zero. zero
Which one of the following indicates that a project is expected to create value for its owners?Profitability index less than 1.0Payback period greater than the requirementPositive net present valuePositive average accounting rate of returnInternal rate of return that is less than the requirement positive net present value
Generally speaking, payback is best used to evaluate which type of projects?Low-cost, short-termHigh-cost, short-termLow-cost, long-termHigh-cost, long-termAny size of long-term project low cost short term
The amount by which a firm’s tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:tax shield.credit.erosion.opportunity cost.adjustment. tax shield
The tax shield approach to computing the operating cash flow, given a tax-paying firm:ignores both interest expense and taxes.separates cash inflows from cash outflows.considers the changes in net working capital resulting from a new project.ignores all noncash expenses and their effects.recognizes that depreciation creates a cash inflow. recognizes that depreciation creates a cash inflow

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