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Finance Flashcards

International Finance Chapter 3

1 The current account balance, which is the difference between a country’s exports and imports, is a component of the country’s GNP. Other components of GNP includea) consumption and investment and government expenditure.b) consumption and government expenditure and net exports.c) consumption and net exports and government expenditure.d) consumption less imports. A
2 If the United States imports more than it exports, then this means that a) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.b) the demand for dollars is likely to exceed the supply in the foreign exchange market, ceteris paribus.c) the U.S. dollar would be under pressure to appreciate against other currencies.d) both b) and c) are correct A
3 Balance of paymentsa) is defined as the statistical record of a country’s international transactions over a certain period of time presented in the form of a double-entry bookkeeping.b) provides detailed information concerning the demand and supply of a country’s currency.c) can be used to evaluate the performance of a country in international economic competition.d) all of the above D
4 If a country is grappling with a major balance-of-payment difficulty, it may not be able to expand imports from the outside world. Instead, the country may be tempted to a) impose measures to restrict imports.b) impose measures to discourage capital outflows. c) Both a) and b)d) None of the above C
5 If the United States imports more than it exports, then a) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.b) one can infer that the U.S. dollar would be under pressure to depreciate against other currencies.c) a) and b)d) None of the above C
6 Generally speaking, any transaction that results in a receipt from foreignersa) will be recorded as a debit, with a negative sign, in the U.S. balance of payments.b) will be recorded as a debit, with a positive sign, in the U.S. balance of payments.c) will be recorded as a credit, with a negative sign, in the U.S. balance of payments.d) will be recorded as a credit, with a positive sign, in the U.S. balance of payments. D
7 Generally speaking, any transaction that results in a payment to foreignersa) will be recorded as a debit, with a negative sign, in the U.S. balance of payments.b) will be recorded as a debit, with a positive sign, in the U.S. balance of payments.c) will be recorded as a credit, with a negative sign, in the U.S. balance of payments.d) will be recorded as a credit, with a positive sign, in the U.S. balance of payments. A
8 If Japan exports more than it imports, then a) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.b) one can infer that the yen would be likely to appreciate against other currencies.c) a) and b)d) None of the above B
9 The balance of payments recordsa) only international trade, (exports and imports).b) only cross-border investments (FDI and portfolio investment).c) not only international trade, (exports and imports) but also cross-border investments.d) none of the above C
10 Credit entries in the U.S. balance of payments a) result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets. b) result from U.S. purchases of foreign goods and services, goodwill, financial claims, and real assets. c) give rise to the demand for dollars.d) give rise to the supply of dollars.e) both a) and c) E
11 A country experiencing a significant balance-of-payments surplus would be likely to a) expand imports, offering marketing opportunities for foreign enterprises.b) refrain from imposing foreign exchange restrictions.c) expand exports, offering international marketing opportunities for domestic enterprises.d) Both a) and b) D
12 The current account includes a) the export and import of goods and services.b) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.c) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).d) none of the above A
13 A country with a current account surplusa) acquires IOUs from foreigners, thereby increasing its net foreign wealth.b) must borrow from foreigners or draw down on its previously accumulated foreign wealth.c) will experience a reduction in the country’s net foreign wealth.d) both b) and c) A
14 The capital account includes a) the export and import of goods and services.b) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.c) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).d) none of the above B
15 The official reserve account includes a) the export and import of goods and services.b) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.c) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).d) none of the above C
16 A country’s international transactions can be grouped into the following three main types:a) current account, medium term account, and long term capital account.b) current account, long term capital account, and official reserve account.c) current account, capital account, and official reserve account.d) capital account, official reserve account, trade account C
17 Invisible trade refers toa) services that avoid tax payments.b) the underground economy.c) legal, consulting, and engineering services.d) tourist expenditures, only. C
18 In 2007 the United States had a current account deficit. The current account deficit implies that the United States a) had a surplus on legal consulting and engineering services. b) produced more output than it consumed.c) consumed more output than it produced.d) none of the above C
19 The current account is divided into four finer categories:a) merchandise trade, services, factor income, and statistical discrepancy.b) merchandise trade, services, factor income, and unilateral transfers.c) merchandise trade, services, portfolio investment, and unilateral transfers.d) merchandise trade, services, factor income, and direct investment. B
20 The “J-curve effect” showsa) the initial deterioration and the eventual improvement of a country’s trade balance following a currency depreciation.b) the initial improvement and the eventual depreciation of a country’s trade balance following a currency depreciation.c) the trade balance’s lack of responsiveness to the exchanges rate changes.d) none of the above A
21 The J-curve effect received wide attention when a) the British trade balance worsened after a strengthening of the pound in 1967.b) the British trade balance worsened after a devaluation of the pound in 1967.c) the British trade balance improved after a devaluation of the pound in 1967.d) none of the above B
22 A currency depreciation will begin to improve the trade balance immediately a) if the demand for imports and exports are inelastic.b) if the demand for imports and exports are elastic. c) if imports decrease and exports decrease.d) none of the above B
23 When a country’s currency depreciates against the currencies of major trading partners, a) the country’s exports tend to rise and imports fall.b) the country’s exports tend to fall and imports rise.c) the country’s exports tend to rise and imports rise.d) the country’s exports tend to fall and imports fall. A
24 A depreciation will begin to improve the trade balance immediately if a) imports and exports are responsive to the exchange rate changes.b) imports and exports are inelastic to the exchange rate changes.c) consumers exhibit brand loyalty and price inelasticity.d) b) and c) A
25 In the short run a currency depreciation can make a trade balance worse ifa) there is no domestic producer of an import.b) there is no domestic buyer for an import.c) there is no export market for a country’s output. A
26 In the long run, both exports and imports tend to bea) unresponsive to changes in exchange rates.b) responsive to changes in exchange rates.c) both a) and b)d) none of the above B
27 With regard to the capital account a) the capital account balance measures the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets. b) U.S. sales (or exports) of assets are recorded as credits, as they result in capital inflow. c) U.S. purchases (imports) of foreign assets are recorded as debits, as they lead to capital outflow.d) all of the above D
28 The difference between Foreign Direct Investment and Portfolio Investment is thata) Portfolio Investment mostly represents the sale and purchase of foreign financial assets such as stocks and bonds that do not involve a transfer of control.b) Foreign Direct Investment mostly represents the sale and purchase of foreign financial assets such as stocks whereas Portfolio Investment mostly involves the sales and purchase of foreign bonds. c) Foreign Direct Investment is about buying land and building factories, whereas portfolio investment is about buying stocks and bonds.d) All of the above A
29 In the latter half of the 1980s, with a strong yen, Japanese firmsa) faced difficulty exporting.b) could better afford to acquire U.S. assets that had become less expensive in terms of yen.c) financed a sharp increase in Japanese FDI in the United States.d) all of the above D
30 International portfolio investments have boomed in recent years, as a result ofa) a depreciating U.S. dollar.b) increased gasoline and other commodity prices.c) the general relaxation of capital controls and regulation in many countries.d) none of the above C
31 If the interest rate rises in the U.S. while other variables remain constanta) capital inflows into the U.S. will increase.b) capital inflows into the U.S. may not materialize.c) capital will flow out of the U.S.d) none of the above A
32 The capital account measuresa) the sum of U.S. sales of assets to foreigners and U.S. purchases of foreign assets.b) the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.c) the difference between U.S. sales of manufactured goods to foreigners and U.S. purchases of foreign products.d) none of the aboveAnswer: b) B
33 When Honda, a Japanese auto maker, built a factory in Ohio, a) it was engaged in foreign direct investment.b) it was engaged in portfolio investment.c) it was engaged in a cross-border acquisition.d) none of the above. A
34 Government controlled investment funds, known as sovereign wealth funds,a) are playing a less-important role in international finance following the end of the fixed exchange rate era.b) are mostly domiciled in Asian and Middle Eastern countries.c) are usually are responsible for converting trade surpluses and oil revenues into foreign exchange reserves.d) none of the above B
35 Foreign direct investment (FDI) occursa) when an investor acquires a measure of control of a foreign business.b) when there is an acquisition, by a foreign entity in the U.S., of 10 percent or more of the voting shares of a business.c) with sales and purchases of foreign stocks and bonds that do not involve a transfer of control.d) both a) and b) D
36 The capital account may be divided into three categories:a) cross-border mergers and acquisitions, portfolio investment, and other investment.b) direct investment, portfolio investment, and Cross-border mergers and acquisitions.c) direct investment, mergers and acquisitions, and other investment.d) direct investment, portfolio investment, and other investment. D
37 Since security returns tend to have low correlations among countries,a) investors can reduce risk more effectively if they diversify their portfolio holdings internationally rather than purely domestically.b) investors who have a domestically diversified portfolio, with exposures across industry types will not gain much from diversifying abroad.c) investors who diversify internationally will likely underperform investors who keep all their investments in one country.d) none of the above A
38 The United States is considered a) a net creditor nation.b) a net debtor nation B
39 The central bank of the United States isa) the New York Fed. b) the Federal Reserve System. c) the EXIM bank.d) none of the above—the U.S. does not have a central bank. B
40 When a country must make a net payment to foreigners because of a balance-of-payments deficit, the central bank of the country a) should do nothing.b) should run down its official reserve assets (e.g. gold, foreign exchanges, and SDRs).c) should borrow anew from foreign central banks.d) either b) or c) will work. D
41 Continued U.S. trade deficits coupled with foreigners’ desire to diversify their currency holdings away from U.S. dollarsa) could further diminish the position of the dollar as the dominant reserve currency.b) could affect the value of U.S. dollar (e.g. through the currency diversification decisions of Asian central banks).c) could lend steam to the emergence of the euro as a credible reserve currency.d) all of the above D
42 Currently, international reserve assets are comprised ofa) gold, platinum, foreign exchanges, and special drawing rights (SDRs).b) gold, foreign exchanges, special drawing rights (SDRs), and reserve positions in the International Monetary Fund (IMF).c) gold, diamonds, foreign exchanges, and special drawing rights (SDRs).d) reserve positions in the International Monetary Fund (IMF), only. B
43 International reserve assets include “foreign exchanges”. These area) Special Drawing Rights (SDRs) at the IMF.b) reserve positions in the International Monetary Fund (IMF).c) foreign currency held by a country’s central bank.d) none of the above C
44 The most important international reserve asset, comprising 94 percent of the total reserve assets held by IMF member countries isa) gold.b) foreign exchange.c) special Drawing Rights (SDRs).d) reserve positions in the International Monetary Fund (IMF). B
45 The “one word that haunts the dollar” isa) (Central bank) diversification.b) Reunification (Korean).c) Euro.d) (Current account) deficit. A
46 The vast majority of the foreign-exchange reserves held by central banks are denominated in a) local currencies.b) U.S. dollars.c) Yen.d) Euro. B
47 Which of the following would not count as a foreign-exchange reserve held by a central bank?a) The local currencyb) U.S. dollarsc) SDRsd) Euro A
48 The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity for a country with a pure flexible exchange rate regimea) BCA + BKA + BRA = 0b) BCA = -BKA c) BCA + BKA = -BRAd) BRA = -BCA B
49 When the balance-of-payments accounts are recorded correctly, the combined balance of the current account, the capital account, and the reserves account must be a) equal in magnitude to the country’s national debt.b) zero.c) equal in magnitude to the Trade Deficit or Surplus.d) none of the above B
50 BCA stands for a) the balance on the current account.b) the balance on the capital account.c) the balance on the official reserves.d) net imports. A
51 BKA stands for a) the balance on the current account.b) the balance on the capital account.c) the balance on the official reserves.d) net imports. B
52 If the central banks of the world chose to diversify their foreign-exchange reserves away from the dollar and into the euro,a) this would have the result of a strengthening of the value of the dollar.b) this have the result of a weakening in the value of the dollar.c) this would not have much impact, as the information would be lost in the day-to-day volatility of exchange rates. B
53 The economic theory of mercantilism holds that a) a continuing trade surplus should be a government’s major policy goal.b) the main source of wealth of a country is its productive capacity.c) free trade is the result of countries exploiting their comparative advantage.d) none of the above A
54 The U.S. Trade Deficita) is a capital account surplus.b) is a current account deficit.c) is both a capital account surplus and a current account deficit.d) none of the above C
55 Over half of all dollar bills in circulation are held outside American’s borders.a) Trueb) False A
56 The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. Direct investment involves a) acquisitions of controlling interests in foreign businesses.b) investments in foreign stocks and bonds that do not involve acquisitions of control. c) bank deposits, currency investment, trade credit, and the like.d) all of the above A
57 The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. Portfolio investment involves a) acquisitions of controlling interests in foreign businesses.b) investments in foreign stocks and bonds that do not involve acquisitions of control. c) bank deposits, currency investment, trade credit, and the like.d) all of the above B
58 The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. “Other” investment involves a) acquisitions of controlling interests in foreign businesses.b) investments in foreign stocks and bonds that do not involve acquisitions of control. c) bank deposits, currency investment, trade credit, and the like.d) all of the above C
59 Over the last several years the U.S. has run persistent a) balance-of-payments deficits.b) balance-of-payments surpluses.c) current Account deficits.d) capital Account deficits. C
60 If a country must make a net payment to foreigners because of a balance-of-payments deficit, the country should a) either increase its official reserve assets or borrow anew from foreigners.b) either run down its official reserve assets or borrow anew from foreigners.c) either run down its official reserve assets or lend more foreigners.d) none of the above B
61 Under the pure flexible exchange rate regimea) the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the change in the official reserves. b) the balance on the current and capital accounts will be equal in size, but opposite in sign. c) a current account surplus or deficit must be matched by an official reserves deficit or surplus.d) a capital account surplus or deficit must be matched by an official reserves deficit or surplus. B
60 If a country must make a net payment to foreigners because of a balance-of-payments deficit, the country should a) either increase its official reserve assets or borrow anew from foreigners.b) either run down its official reserve assets or borrow anew from foreigners.c) either run down its official reserve assets or lend more foreigners.d) none of the above B
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Finance Flashcards

Finance 3303 – Chapter 11 DSM

One of the risks that a firm faces when engaging in foreign direct investment is the risk of the firm’s asset being seized which is a component of __________. political risk
The sale of an ordinary asset for its book value results in: no tax benefit.
Firm XYZ is going to expand operations and has notified a firm that is leasing some of Firm XYZ’s facility that it will need to find another facility and relocate. Firm XYZ’s loss of lease income is __________. a cash outflow that should be considered in the expansion decision
Which of the following is an example of an externality that will generate relevant cash flows? The additional sales revenue of complementary products.
If a firm sells a depreciable asset for less than the asset’s book value it will result in __________. a tax shield
Dann Company sold an asset at the end of a project’s life for $100,000. However, the book value of the asset was $60,000. What is the terminal cash flow of this transaction if Dann Company’s marginal tax rate is 25%? $30,000
When a business undertakes a new project it will often need to invest additional funds in net working capital to cover items such as: increased inventory levels.
Giancarlo has received an inheritance from his rich uncle and is contemplating the purchase of a Suzuki XL7. In an attempt to make a rational decision, Giancarlo has identified the following cash flow estimates:Negotiated price of new Suzuki XL 7 $24,675. Taxes and fees on a new car purchase $1,732. Proceeds from the trade-in of old car $9,285. Estimated value of the Suzuki XL7 in 5 years $7,285. Estimated value of old car in 5 years $3,572. Estimated annual repair cost on Suzuki XL7 $350. Estimated annual repair cost on old car $925. What would be Giancarlo’s initial investment in the Suzuki XL7? $17,122
When a firm acquires existing capital assets in another country it is called __________. foreign direct investment
When a firm expands operations it will also require additional investment in __________. net working capital
A replacement investment is one that: replaces existing assets.
The installed cost of an asset minus its accumulated depreciation is known as __________. book value
Sunk costs are: previous cash outflows not relevant to the project decision.
The relevant cash flows of a project are best described as: incremental cash flows.
Which of the following is an example of a sunk cost? Amount spent on a test market.
Which of the following cash flows should be included in incremental free cash flows? Capital expenditures necessary to fund the new project.
The tax savings generated due to the ability to expense or depreciate an asset for tax purposes is known as: the depreciation tax shield.
We only want to consider incremental earnings in the capital budgeting process. Incremental earnings are the: additional sales and costs associated with the project.
Which of the following formulas is the correct formula used to calculate incremental earnings? (incremental revenues – incremental costs – depreciation) x (1 – T)
The major components of a project’s cash flows are an initial investment, operating cash flows, and __________. a terminal cash flow
Which of the following is a relevant opportunity cost that should be considered an incremental cash flow? Lost facility rental income
Grover Manufacturing Inc. is considered the acquisition of a new piece of machinery for $45,000 that will cost another $10,000 to have shipped and installed. What is the cost of this new asset for project evaluation purposes? $55,000
The relevant cash flows of a project are best described as __________. incremental cash flows
Giancarlo has received an inheritance from his rich uncle and is contemplating the purchase of a Suzuki XL7. In an attempt to make a rational decision, Giancarlo has identified the following cash flow estimates: Negotiated price of new Suzuki XL 7 $24,675. Taxes and fees on a new car purchase $1,732. Proceeds from the trade-in of old car $9,285. Estimated value of the Suzuki XL7 in 5 years $7,285. Estimated value of old car in 5 years $3,572. Estimated annual repair cost on Suzuki XL7 $350. Estimated annual repair cost on old car $925. What would be Giancarlo’s operating cash flow in year 5? -$575
An incremental cash flow valuation considers: all project cash flows including cannibalization.
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Finance Flashcards

Finance 301 Exam 3

Federal Discount Rate Rate that the federal reserve offers to commercial banks for overnight reserve loans
Federal Funds Rate Rate commercial banks charge each other for overnight loans
LIBOR Rate offered by London commercial banks for $-denominated deposits of other banks. Bank lending rates are often quoted as LIBOR+Premium
Prime Rate Rate that large commercial banks charge their most creditworthy customers
Two Primary Types of Financial Capital -Debt(bonds)-Equity
Interest Rate “Cost of Money”-The price lenders receive and that borrowers pay for debt capital.-For bonds the capital allocated through a price system based on supply and demand
Supply of Money Higher the interest rate, the more people will be willing to lend their money to others
Demand for Money Lower the interest rate, the more people want to borrow money
Factors Affecting Interest Rates -Rates that the corp expect to earn with the money they’re borrowing-The saver’s time preference for current vs. future consumption-The riskiness of the loan-Inflation expectations
The higher the risk of the loan… the higher the required rate of return
The higher the inflation… the higher interest rates have to be to keep pace
The Real Rate of Interest Nominal Rate(r-nom)= Real rate of interest(r*)+inflation
Real Risk-Free Rate(r*) The rate on short term US Treasury securities assuming there is no inflation
Maturity Risk Premium(MRP) -The premium that reflects the risk associated with changes in interest rates for a long term security-The longer the maturity of a bond, the more exposure it has to interest rate risk, so long-term bonds have a higher interest rate than short-term bonds to compensate investors for the risk
Inflation Premium(IP) Premium that reflects the risk associated with changes in inflation for a long-term security
Liquidity Risk Premium(LP) Premium added when a security lacks marketability, because it cannot be bought and sold quickly without losing value
Nominal Risk-Free Rate(rRF) The rate for a riskless security that is exposed to changes in inflation
Cross-Rate Effect for Nominal and Real Int Rates Nominal Rate(r-nom)=real rate of interest(r)+ interest(i)+(r x i)
Risk Free Rate(rRF) The rate paid on riskless security(US T-Bill 3-months)
Inflation Expectations Average inflation expected over the life of the security
The higher the expectations for inflation… the higher interest rate will be today
The great the risk of default… the higher the interest rate required to satisfy potential investors
Default Risk Premium(DRP) -Difference between the interest rate on a US Treasury bond and a corporate bond of the same profile(same maturity/marketability)-The risk that a borrower will default, affects the interest rate:
Corporate Bond Spreads(default premium) -Spread is the amount of additional yield above and beyond a benchmark-10 year US treasury is often used as a benchmark
High Yield vs Investment Grade Corporate Bonds The spread between investment bonds and high yield(junk) bonds
Liquidity Premium(LP) Premium added to the equilibrium interest rate on a security if that security cannot be converted to cash quickly and at its fair market value
Term Structure -Relationship between interest rates and maturities
Yield Curve -Graph used to show term structure-Usually upward-sloping
Monetary Policy Federal Reserve Bank will change interest rates to bring about desired outcome
Effect of Economic Boom on Interest Rates Raise rates to slow-down an economy and hold down inflation
Effect of Recession on Interest Rates Lower rates to make money cheaper which spurs the economy
Federal Deficits -US government runs huge deficits so they have to borrow money. -This increased demand for borrowing drives up interest rates
The larger the federal deficit… interest rates and risk of default rise
Pure Expectations Theory The shape of the yield curve depends on investors’ expectations about future interest rates
Bond long-term contract under which a borrower agrees to make payments of interest and principal on specific dates to the holders of the bonds
Types of Bonds -Treasury Notes/bonds-Corporate Bonds-Municipal Bonds-Foreign Bonds
Treasury Notes/Bonds Issued by US Government of various maturities(2-30 years)
Par Value Also known as ‘face value’ or principal; it is the amount originally loaned
Coupon Rate Interest rate, stated annually, that the bond will pay
Coupon Dollar amount of interest paid
Maturity Date Set date when the par value is paid back to the bondholder
Call Provisions Callable bond is one which the issuer can pay you back prematurely
Sinking Fund Provision When issuer is required to retire a portion of bond issue each year
Convertible Bonds Bonds that can convert into the common stock of the company
Bond Valuation Value of anu financial asset is the present value(PV) of the cash flows the asset is expected to generate over time
A bond is worth its par on day 1, but… after that its value will fluctuate as market interest rates move up and down
When Interest Rates Rise, the Value of a Bond… Declines
When Interest Rates Fall, the Value of a Bond… Rises
(Price)When Investors Demand More Bonds… it will drive up the price of the bonds
(Int Rate)When Investors Demand More Bonds… they supply more money to market, driving interests rates down
Premium Bonds -Bond Price>Par Value-Coupon Rate>Current Yield>YTM
Par Bonds -Bond Price=Par Value-Coupon Rate=Current Yield=YTM
Discount Bonds -Bond Price<Par Value-Coupon Rate<Current Yield<YTM
The Price of a Bond Determines… What return you will get
The Higher You Pay for a Bond… The lower your yield/return will be
Yield To Maturity(YTM) -Annual rate of return earned on a bond if held to maturity -Considered a long-term bond but expressed as an annual rate
Yield To Maturity= Current Yield+Capital Gains YIeld
Current Yield(CY) -Annual interest earned relative to the current price of the bond- Current Yield=(Annual Coupon Payment)/(Price of Bond)
Capital Gains Yield(CGY) Calculated as the bond’s annual change in price divided by the beginning of year price
Interest Coupon Payments+Capital Appreciation= Annual return(yield) on the bond held
Callable Bonds -Bonds that can be redeemed prior to maturity date by the borrower-Almost all bonds issued today are callable-Requires borrower to pay an amount above par value(premium)
Call Premium -Additional amount paid above par value for bonds that have been called-Can be a % of par, or one year’s interest
Deferred Call Provision Bond can’t be called until certain amount of time has passed since original issuance date
Yield-to-Call(YTC) Rate of return earned on a bond if held until it is called
Semi-Annual Compounding -Divide annual coupon payment by 2-Multiply years to maturity by 2-Divide APR(nominal/quoted rate) by 2 to determine periodic rate
Zero Coupon Bonds -Bonds which never pay interest. They are sold at a steep discount to par, the difference representing the cumulative interest earned over the life of the Bond-Ex: US Savings Bonds
Two Primary Risks Associated with Bonds -Interest Rate Risk-Reinvestment Risk
Interest Rate Risk -Risk that as interest rates increase, the value of the bond declines-Longer the maturity, the more interest rate risk increases
Reinvestment Risk -Declining rates hurt short-term bondholders who need to reinvest-Affects income level coming from bond investment
The Lower the Rates… the More Likely a Bond Gets Called
Clean Price Price of the bond by itself
Dirty/Invoice Price Bond Price+Accrued Interest
Investment Grade Bonds rated triple-B(S&P) or higher
High Yield aka Junk Bonds rated below triple-B
S&P Bond Ratings Investment Grade:1. AAA2. AA3. A4. BBBJunk:5. BB6. B7. CCC8. C
3 Primary Types of Financial Securities Companies Issue to Raise Capital 1. Bonds2. Preferred Stock3. Common Stock
Characteristics of Common Stock -Ownership-Residual Claim-Dividends-# of Shares Outstanding
Ownership -Own and control company-Elect Board of Directors, who in turn, choose management
Residual Claim -Right to the rewards of running the business-What belongs to common stockholders after all creditors, debt holders, and gov have been paid
Dividends -May or may not receive returns in the form of a dividend-Usually Paid Quarterly-Taxable to investor, not deductible on tax returns for company
# of Shares Outstanding -Amount of shares sold to public
Treasury Stock Shares which the company has repurchased from public
Private Equity When companies seek financing from private parties, as opposed to issuing stock to the public
Public Financing When companies issue securities to the public
Primary Market -Where companies go to sell its stock(IPO)-Primarily done through investment banks
Secondary Market -Where investors can buy/sell their stock from other investors -NYSE and NASDAQ
Bull Market A prolonged, rising stock market
Bear Market A prolonged, declining stock market
Ways to Value Shares of a Company -Dividend Discount Model(DDM)-Discounted Cash Flow Method(Corp Valuation Model)-Using price multiples of similar firms(Relative to Comparables)
Dividend Discount Model(DDM) -Value of a stock is the present value of the future dividends expected to be generated by the stock-If constant, we value it like a perpetuity
Holding Period Return(HPR) Percentage change of the gain/loss relative to the original cost of teh investment
Coefficient of Variation(CV) -Standardized measure of the amount of risk per unit of return-CV=(Standard Deviation)/(Expected Return)
Expected Return(ER) of an Asset The sum of the probabilities multiplied by their respective expected returns
Expected Return of a Portfolio of Assets The weighted average of the expected return of each of the investments within the portfolio
Risk Probability that some unfavorable event will occur or the probability is uncertain
Risk Aversion -Rational investors prefer less risk
The Higher the Risk… the higher return required to attract investors
When a Stock has a Favorable Expected Return -Buyers will purchase stock, driving up price-Price moving up will decrease the future expected return of the stock
Premise An efficiently diversified portfolio will yield the greatest return for a given level of market risk
Systematic/Market Risk Unpreventable risk that is associated with having stock in the market
Total Risk= Company-Specific Risk + Market Risk
Beta Coefficient(B) -Metric that shows the extent to which a given stock’s returns move up and down with the stock market-Measures market risk
Systematic Risk Principle Reward for bearing risk depends solely on the amount of systematic risk of an investment. The unsystematic risk, while present, can easily be diversified away; thus, the market is not going to reward risk borne unnecessarily
The Beta of a Risk-Free Asset(US T-Bill)= 0
Market Risk Premium -Additional amount of return over the risk-free rate needed to compensate investors for assuming an average amount of market risk-Equity Risk Premium=(Market Return)-(Risk-Free Rate)
Capital Asset Pricing Model(CAPM) Determines required rate of return for a stock
Required Return= (Risk-Free Rate)+(Risk Premium for the Stock’s Perceived Risk) or(Risk-Free Rate)+(Market Risk Premium-Risk Free Rate)*(Beta Coefficient)
Current Yield= Annual Interest/Current Price
Total Yield= Dividend Yield+Capital Gains Yield
Price= Div(o)*((1+g)/(g-r))
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Finance Flashcards

Finance 320 Chapter 8

The nominal exchange rate isA.the rate at which a bond may be exchanged for currency.B.the difference between the interest rate in one country and the interest rate in another country.C.the price of one​ country’s currency in terms of​ another’s.D.the rate at which a stock may be exchanged for currency. C
If a British automobile sells for pound£​20,000 and the British pound is worth​ $1.50, then the dollar price of the automobile isA.​$12,500.B.​$20,000.C.​$1.60.D.​$30,000. D
A change in the dollar value of the British pound from​ $1.60 to​ $1.50 representsA.an increase in the pound price of British goods.B.an increase in the dollar price of British goods.C.an appreciation of the pound relative to the dollar.D.an appreciation of the dollar relative to the pound. D
If the Japanese yen appreciates against the U.S.​ dollar,A.U.S. consumers gain by an decrease in the dollar price of Japanese exports to the United States.B.Japanese businesses gain by a decrease in the dollar price of exports to the United States.C.Japanese consumers gain by a decrease in the yen price of U.S. exports to Japan.D.Japanese consumers lose by an increase in the yen price of U.S. exports to Japan. C
In what way is a stronger​ yen/weaker dollar a burden for Japanese​ exporters?A.The stronger yen is likely to increase Japanese​ inflation, resulting in lower profits.B.They received dollars when they sell goods but most of their costs of production are in yen.C.They receive yen when they sell goods but most of their costs of production are in dollars.D.The price of their exports will​ decline, resulting in lower profits. B
If Sony keeps the price of PlayStation 3 constant in terms of​ dollars, what is the impact on Sony of a stronger​ yen?A.lower profitB.higher profitC.a decline in exports to the United StatesD.an increase in imports from the United States A
When it takes more euros to purchase a​ dollar, the dollars is said to​ have:A. depreciatedB. it depends on whether one is considering cross rates or exchange ratesC. it depends on whether one is using direct or indirect quotationsD. appreciated D
In the foreign−exchange ​market, tradingA.may not take place after 5 P.M. London time.B.takes place at prices set by the U.S. government in consultation with the governments of other leading countries.C.takes place at any hour of the night or day.D.is restricted to the hours 10 A.M. to 3 P.M. New York time. C
In forward​ transactions,A.currencies may only be exchanged at rates set by governments well in advance.B.the exchange takes place at the same exchange rate as in the spot market.C.currencies are exchanged at a set date in the future.D.currency is bought and sold for delivery later that same day. C
If the forward exchange rate of the yen in terms of dollars is greater than the spot exchange​ rate,A.U.S. interest rates must be higher than Japanese interest rates.B.market participants must be expecting the dollar to depreciate against the yen.C.market participants must be expecting the dollar to appreciate against the yen.D.Japanese interest rates must be higher than U.S. interest rates. B
Which of the following is an advantage of hedging with options instead of forward​ contracts?A.Options prices tend to be lower than forward prices.B.If the price moves in the opposite direction to the one hedged​ against, the hedger can decline to exercise the option and limit the loss to what was paid for the option.C.Options allow investors to purchase a forward contract at a later date.D.If the price moves in the direction of the one hedged​ against, the hedger can decline to exercise the option and limit the loss to what was paid for the option. B
The largest financial market in the world is​ the:A.options marketB.bond marketC.stock marketD.foreign exchange market D
If the price level in the United States increases more slowly than the price level in​ Canada, we would expectA.U.S. productivity to have increased more slowly than Canadian productivity.B.the Canadian dollar to depreciate against the U.S. dollar.C.interest rates in the United States to be higher than interest rates in Canada.D.the U.S. dollar to depreciate against the Canadian dollar. B
The theory of purchasing power parity assumes thatA.inflation rates are roughly the same in most countries.B.movements in nominal exchange rates are the result of movements in real exchange rates.C.real exchange rates are volatile.D.movements in nominal exchange rates are the result of movements in relative price levels. D
Under the theory of purchasing power​ parity, an increase in the U.S. price level of​ 10% relative to the Japanese price level will result inA.an appreciation of the yen by an amount that depends upon what happens to the real exchange rate.B.a​ 10% appreciation of the dollar.C.a​ 10% appreciation of the yen.D.an appreciation of the dollar by an amount that depends upon what happens to the real exchange rate. C
The demand for U.S. dollars​ represents:A.the willingness of households and firms that own dollars to exchange them for foreign currency.B.the demand for foreign goods and financial assets by households and firms within the United States.C.the demand for U.S. goods and financial assets by households and firms outside the United States.D.the demand for U.S. goods and financial assets by households and firms within the United States. C
Suppose that you expect during the next year the dollar will appreciate against the pound from 0.5 pound to the dollar to 0.75 pound to the dollar. How much will you expect to make on an investment of​ $10,000 in British government securities that will mature in one year and pay interest of​ 8%?A.​28%B.​8%C.−​28%D.−​59.5% C
If the German interest rate is​ 4% and the U.S. interest rate is​ 5%, what is the expected change in the value of the dollar in terms of the​ euro?A.−​1%B. 9%C. -​9%D. ​1% A
The situation in which investors choose to put their funds in a safe asset during uncertain times is known asA.flight to quality.B.arbitrage.C.speculation.D.hedging. A
Which of the following will take place in the foreign exchange market if there is an increase in the demand for products made in the United​ States?A. The supply of dollars will decrease.B. The demand for dollars will increase.C. The demand for dollars will decrease.D. The dollar will decrease in value. B
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Finance Flashcards

Chapter 7 Finance

1. Mary just purchased a bond which pays $60 a year in interest. What is this $60 called? A. couponB. face valueC. discountD. call premiumE. yield A. coupon
2. Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called? A. couponB. face valueC. discountD. yieldE. dirty price B. face value
3. A bond’s coupon rate is equal to the annual interest divided by which one of the following? A. call priceB. current priceC. face valueD. clean priceE. dirty price C. face value
4. The specified date on which the principal amount of a bond is payable is referred to as which one of the following? A. coupon dateB. yield dateC. maturityD. dirty dateE. clean date C. maturity
5. Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following? A. coupon rateB. face rateC. call rateD. yield to maturityE. interest rate D. yield to maturity
6. The current yield is defined as the annual interest on a bond divided by which one of the following? A. couponB. face valueC. market priceD. call priceE. dirty price C. market price
7. An indenture is: A. another name for a bond’s coupon.B. the written record of all the holders of a bond issue.C. a bond that is past its maturity date but has yet to be repaid.D. a bond that is secured by the inventory held by the bond’s issuer.E. the legal agreement between the bond issuer and the bondholders. E. the legal agreement between the bond issuer and the bondholders.
8. Atlas Entertainment has 15-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued: A. at par.B. in registered form.C. in street form.D. as debentures.E. as callable. B. in registered form.
9. A bond that is payable to whomever has physical possession of the bond is said to be in: A. new-issue condition.B. registered form.C. bearer form.D. debenture status.E. collateral status. C. bearer form.
10. The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms? A. noteB. discountedC. zero-couponD. callableE. debenture E. debenture
11. Which of the following defines a note?I. securedII. unsecuredIII. maturity less than 10 yearsIV. maturity in excess of 10 years A. III onlyB. I and III onlyC. I and IV onlyD. II and III onlyE. II and IV only D. II and III only
12. A sinking fund is managed by a trustee for which one of the following purposes? A. paying interest paymentsB. early bond redemptionC. converting bonds into equity securitiesD. paying preferred dividendsE. reducing coupon rates B. early bond redemption
13. A bond that can be paid off early at the issuer’s discretion is referred to as being which one of the following? A. zero couponB. callableC. seniorD. collateralizedE. unsecured B. callable
14. A $1,000 face value bond can be redeemed early at the issuer’s discretion for $1,030, plus any accrued interest. The additional $30 is called which one of the following? A. dirty priceB. redemption valueC. call premiumD. original-issue discountE. redemption discount C. call premium
15. A deferred call provision is which one of the following? A. requirement that a bond issuer pay the current market price, plus accrued interest, should the firm decide to call a bondB. ability of a bond issuer to delay repaying a bond until after the maturity date should the issuer so optC. prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to maturityD. prohibition which prevents bond issuers from redeeming callable bonds prior to a specified dateE. requirement that a bond issuer pay a call premium which is equal to or greater than one year’s coupon should that issuer decide to call a bond D. prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date
16. A call-protected bond is a bond that: A. is guaranteed to be called.B. can never be called.C. is currently being called.D. is callable at any time.E. cannot be called during a certain period of time. E. cannot be called during a certain period of time.
17. The items included in an indenture that limit certain actions of the issuer in order to protect bondholder’s interests are referred to as the: A. trustee relationships.B. bylaws.C. legal bounds.D. “plain vanilla” conditions.E. protective covenants. E. protective covenants.
18. A bond that has only one payment, which occurs at maturity, defines which one of the following? A. debentureB. callableC. floating-rateD. junkE. zero coupon E. zero coupon
19. Which one of the following is the price a dealer will pay to purchase a bond? A. call priceB. asked priceC. bid priceD. bid-ask spreadE. par value C. bid price
20. You want to buy a bond from a dealer. Which one of the following prices will you pay? A. call priceB. auction priceC. bid priceD. asked priceE. bid-ask spread D. asked price
21. The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the: A. equilibrium.B. premium.C. discount.D. call price.E. spread. E. spread.
22. A bond is quoted at a price of $989. This price is referred to as which one of the following? A. call priceB. face valueC. clean priceD. dirty priceE. wholesale price C. clean price
23. Pete paid $1,032 as his total cost of purchasing a bond. This price is referred to as the: A. quoted price.B. spread price.C. clean price.D. dirty price.E. call price. D. dirty price.
24. Real rates are defined as nominal rates that have been adjusted for which of the following? A. inflationB. default riskC. accrued interestD. interest rate riskE. both inflation and interest rate risk A. inflation
25. Interest rates that include an inflation premium are referred to as: A. annual percentage rates.B. stripped rates.C. effective annual rates.D. real rates.E. nominal rates. E. nominal rates.
26. The Fisher effect is defined as the relationship between which of the following variables? A. default risk premium, inflation risk premium, and real ratesB. nominal rates, real rates, and interest rate risk premiumC. interest rate risk premium, real rates, and default risk premiumD. real rates, inflation rates, and nominal ratesE. real rates, interest rate risk premium, and nominal rates D. real rates, inflation rates, and nominal rates
27. The pure time value of money is known as the: A. liquidity effect.B. Fisher effect.C. term structure of interest rates.D. inflation factor.E. interest rate factor. C. term structure of interest rates.
28. Which one of the following premiums is compensation for expected future inflation? A. default riskB. taxabilityC. liquidityD. inflationE. interest rate risk D. inflation
29. The interest rate risk premium is the: A. additional compensation paid to investors to offset rising prices.B. compensation investors demand for accepting interest rate risk.C. difference between the yield to maturity and the current yield.D. difference between the market interest rate and the coupon rate.E. difference between the coupon rate and the current yield. B. compensation investors demand for accepting interest rate risk.
30. A Treasury yield curve plots Treasury interest rates relative to which one of the following? A. market ratesB. comparable corporate bond ratesC. the risk-free rateD. inflationE. maturity E. maturity
31. Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer? A. default riskB. taxabilityC. liquidityD. inflationE. interest rate risk A. default risk
32. The taxability risk premium compensates bond holders for which one of the following? A. yield decreases in response to market changesB. lack of coupon paymentsC. possibility of defaultD. a bond’s unfavorable tax statusE. decrease in a municipality’s credit rating D. a bond’s unfavorable tax status
33. The liquidity premium is compensation to investors for: A. purchasing a bond in the secondary market.B. the lack of an active market wherein a bond can be sold for its actual value.C. acquiring a bond with an unfavorable tax status.D. redeeming a bond prior to maturity.E. purchasing a bond that has defaulted on its coupon payments. B. the lack of an active market wherein a bond can be sold for its actual value.
34. An 8 percent corporate bond that pays interest semi-annually was issued last year. Which two of the following most likely apply to this bond today if the current yield-to-maturity is 7 percent?I. a structure as an interest-only loanII. a current yield that equals the coupon rateIII. a yield-to-maturity equal to the coupon rateIV. a market price that differs from the face value A. I and III onlyB. I and IV onlyC. II and III onlyD. II and IV onlyE. III and IV only B. I and IV only
35. A bond has a market price that exceeds its face value. Which of the following features currently apply to this bond?I. discounted priceII. premium priceIII. yield-to-maturity that exceeds the coupon rateIV. yield-to-maturity that is less than the coupon rate A. III onlyB. I and III onlyC. I and IV onlyD. II and III onlyE. II and IV only E. II and IV only
36. All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. A. a premium; less thanB. a premium; equal toC. a discount; less thanD. a discount; higher thanE. par; less than C. a discount; less than
37. The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond? A. increase the coupon rateB. decrease the coupon rateC. increase the market priceD. decrease the market priceE. increase the time period D. decrease the market price
38. Which of the following are characteristics of a premium bond?I. coupon rate yield-to-maturityIII. coupon rate current yield A. I onlyB. I and III onlyC. I and IV onlyD. II and III onlyE. II and IV only E. II and IV only
39. Which of the following relationships apply to a par value bond?I. coupon rate < yield-to-maturityII. current yield = yield-to-maturityIII. market price = call priceIV. market price = face value A. I and II onlyB. I and III onlyC. II and IV onlyD. I, II, and III onlyE. II, III, and IV only C. II and IV only
40. Which one of the following relationships is stated correctly? A. The coupon rate exceeds the current yield when a bond sells at a discount.B. The call price must equal the par value.C. An increase in market rates increases the market price of a bond.D. Decreasing the time to maturity increases the price of a discount bond, all else constant.E. Increasing the coupon rate decreases the current yield, all else constant. D. Decreasing the time to maturity increases the price of a discount bond, all else constant.
41. Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par. Given this, which one of the following statements is correct? A. The bonds will become discount bonds if the market rate of interest declines.B. The bonds will pay 10 interest payments of $60 each.C. The bonds will sell at a premium if the market rate is 5.5 percent.D. The bonds will initially sell for $1,030 each.E. The final payment will be in the amount of $1,060. C. The bonds will sell at a premium if the market rate is 5.5 percent.
42. A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be: A. 3.5 percent.B. greater than 3.5 percent but less than 7 percent.C. 7 percent.D. greater than 7 percent.E. Answer cannot be determined from the information provided. D. greater than 7 percent.
43. Which of the following increase the price sensitivity of a bond to changes in interest rates?I. increase in time to maturityII. decrease in time to maturityIII. increase in coupon rateIV. decrease in coupon rate A. II onlyB. I and III onlyC. I and IV onlyD. II and III onlyE. II and IV only C. I and IV only
44. Which one of the following bonds is the least sensitive to interest rate risk? A. 3-year; 4 percent couponB. 3-year; 6 percent couponC. 5-year; 6 percent couponD. 7-year; 6 percent couponE. 7-year; 4 percent coupon B. 3-year; 6 percent coupon
45. As a bond’s time to maturity increases, the bond’s sensitivity to interest rate risk: A. increases at an increasing rate.B. increases at a decreasing rate.C. increases at a constant rate.D. decreases at an increasing rate.E. decreases at a decreasing rate. B. increases at a decreasing rate.
46. You own a bond that has a 6 percent annual coupon and matures 5 years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent? A. The current yield-to-maturity is greater than 6 percent.B. The current yield is 6 percent.C. The next interest payment will be $30.D. The bond is currently valued at one-half of its issue price.E. You will realize a capital gain on the bond if you sell it today. E. You will realize a capital gain on the bond if you sell it today.
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Finance Flashcards

Business MGMT Chapter 18

financial management Planning, organizing, directing and controlling the financial resources of a firm
budget An estimation of revenue and expenses over a specified future time period
secured loan A loan agreement where assets are pledged by the borrower to decrease the risk for the lender
finance The business function that involved raising and managing funds
capital budget A plan to finance long-term assets such as plant, machinery and equipment
short-term finance A form of financing with payment due in one year or less
unsecured loan A loan agreement that is not backed by assets of the borrower
cash budget A financial plan that summarizes estimated cash receipts and disbursements for a period of time
capital expenditure Funds used to acquire or upgrade assets such as land, buildings, machinery and equipment
commerical expenditure Unsecured promissory note issued by a corporation or bank with a short maturity date
factoring A financing method in which a business sells accounts receivable at a discount to raise funds
indenture terms An agreement between a lender and borrower that details specific terms of a bond such as maturity date and interest rate
leverage The degree to which a business uses borrowed money to finance production and growth
venture capital Money provided by private investors to startup firms that are believed to have growth potential
financial control The policies and procedures established by an organization for managing, documenting, and reporting costs and expenses
trade credit An arrangement to buy goods or services on account with payment due at a later date
cost of capital The expected rates of return for the different types of capital used to finance the business
debt financing A method of financing in which a company receives a loan, issues bonds and receives trade credit and promises to repay it
line of credit Unsecured credit extended to a borrower by a bank or vendor for a specific time period
revolving credit Line of credit where, for a fee, a customer can borrow up to a preapproved amount and use funds as needed
equity financing A method of financing in which a company issues shares of its stock, reinvests company earnings, or obtains funds from venture capitalists
promissory note A document signed by a borrower promising to repay a loan at a specific date or predetermined terms
operating budget A forecast of estimated income, expenses and revenue for a given period of time
secured bond A debt instrument backed by collateral
cash flow forecast Forecast that predicts the cash inflows and outflow in future periods, usually months or quarters
commercial finance companies Organizations that make short-term loans to borrowers who offer tangible assets as collateral
commerical paper Unsecured promissory notes of $100,000 and up that mature (come due) in 270 days or less
financial managers Managers who examine financial data prepared by accountants and recommend strategies for improving the financial performance of the firm
long-term financing Funds needed for more than a year (usually 2 to 10 years)
long-term forecast Forecast that predicts revenues, costs, and expenses for a period longer than 1 year, and sometimes as far as 5 or 10 years into the future
risk/return trade-off The principles that the greater the risk a lender takes in making a loan, the higher the interest rate required
short-term forecast Forecast that predicts revenues, costs, and expenses for a period of one year or less
term-loan agreement A promissory note that requires the borrower to repay the loan in specified installments
unsecured bond A bond backed only by the reputation of the issuer; also called a debenture bond
(1) cash Forecast the firm’s short-term and long-term financial needs
(2) how to obtain Develop financial plan
(3) planned expenditures Create the capital and cash budget
(4) consolidate create the operating/master budget
(5) reconcile and moderate establishign financial controls to see whether the firm is achieving its goals
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Finance Flashcards

BUS Finance Exam 2

Yield to maturity on a bond with price equal to its par value will​ ________.A. be more than the coupon rateB.always be equal to the coupon rateC.be less than or equal to the coupon rate depending on the required returnD.be less than the coupon rate B.always be equal to the coupon rate
If the required return is greater than the coupon​ rate, a bond will sell at​ ________.A. book valueB.a discountC.a premiumYour answer is not correct.D.par B.a discount
Which of the following is true of risk​ premium?A.The government bonds have a higher risk premium than that of corporate bonds.B.Tminus−bills have a have a higher risk premium than that of Treasury bonds.C.The speculative corporate issues have a lower risk premium than that of the higher rated corporate issues.D.The lower−rated corporate issues have a higher risk premium than that of the higher rated corporate issues. D.The lower−rated corporate issues have a higher risk premium than that of the higher rated corporate issues.
Less certain a cash​ flow, the​ ________ the​ risk, and​ ________ the present value of the cash flow. A.​higher; lowerB.​higher; higherC.​lower; higherD.​lower; lower A.​higher; lower
The​ ________ feature permits the issuer to repurchase bonds at a stated price prior to maturity.A. putB.swapC.conversionD.call D. Call
The inflation risk premium on a bond is 2​ percent, the U.S. Tminus−bill rate is 5​ percent, the maturity risk premium on the bond is 3​ percent, the default risk premium on the bond is 2​ percent, and the liquidity risk premium on the bond is 1 percent. Calculate its nominal rate of return.A.​9%B.​13%C.​11%D.​16% B. 13%
Upward −sloping yield curves result from higher future inflation​ expectations, lender preferences for shorter maturity​ loans, and greater supply of short−term as opposed to long−term loans relative to their respective demand.True or False True
What is the yield to​ maturity, to the nearest​ percent, for the following​ bond: current price is​ $908, coupon rate is 11​ percent, $1,000 par​ value, interest paid​ annually, eight years to​ maturity?A.12 percentB.11 percentC.14 percentD.13 percent D.13 percent
The value of a bond is the present value of the​ ________.dividends and maturity valueB.interest payments and maturity valueC.maturity valueD.interest and dividend payments B. interest payments and maturity value
A firm has an issue of​ $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11​ percent, the​ firm’s bond will sell for​ ________ today.A.​$716.67B.​$1,123.33C.​$840.73D.​$1,000 ​$840.73
7 steps in Investment Banking Process 1. Selecting the Investment Banker-competitive or negotiated2. Pre-underwriting Duties (advising)-amount, type, terms of new issue-due-diligence, best efforts-compensation and fees3. Registration with the S.E.C. (advising)-prospectus-approval – what does it mean?-shelf registration4. Forming the Syndicate (selling)-spreads the risk, wider distribution5. Pricing the Issue (advising)6. Distributing (Selling) the Issue (selling)-road show-oversubscribed or undersubscribed7. Stabilizing the Price (advising)-underwriter acts as NASDAQ dealer
Which of the following is an advantage for a firm to issue common stock over long−term ​debt?A.the primary claim of equity holders on income and assets in the event of liquidationB.the tax deductibility of dividends which lowers the cost of equity financingC.the cost of equity financing being less than the cost of debt financingD.no maturity date on which the par value of the issue must be repaid D.no maturity date on which the par value of the issue must be repaid
________ is the actual amount each common stockholder would expect to receive if a​ firm’s assets are sold for their market​ value, creditors and preferred stockholders are​ repaid, and any remaining money is divided among the common stockholdersA.Book valueB.The present value of the dividendsC.Liquidation valueD.The​ P/E multiple C.Liquidation value
If expected return is less than required return on an​ asset, rational investors will​ ________.A.sell the​ asset, which will drive the price up and cause the expected return to reach the level of the required returnB.buy the​ asset, which will drive the price up and cause expected return to reach the level of the required returnC.buy the​ asset, since price is expected to increaseD.sell the​ asset, which will drive the price down and cause the expected return to reach the level of the required return D.sell the​ asset, which will drive the price down and cause the expected return to reach the level of the required return
A group formed by an investment banker to share the financial risk associated with underwriting new securities is called​ a(n) ________.A.investment banking consortiumB.broker poolC.selling groupD.underwriting syndicate D.underwriting syndicate
Julian is considering purchasing the stock of Pepsi Cola because he really loves the taste of Pepsi. What should Julian be willing to pay for Pepsi today if it is expected to pay a​ $2 dividend in one year and he expects dividends to grow at 5 percent​ indefinitely? Julian requires a 12 percent return to make this investment.A.​$29.33B.​$28.57C.​$43.14D.​$31.43 B.​$28.57
Which of the following is an attribute of investment​ bankers?A.They bear the risk of selling a security issue.B.They provide the issuer with advice relating to the amounts of dividend to be paid.C.They act as middlemen between the issuer and the banker.D.They make longminus−term investments for banking institutions A.They bear the risk of selling a security issue.
In the Gordon​ model, the value of a common stock is the​ ________.A.actual amount each common stockholder would expect to receive if the​ firm’s assets are soldB.net value of all assets which are liquidated for their exact accounting valueC.present value of a nonminus−growing dividend streamD.present value of a constant growing dividend stream D.present value of a constant growing dividend stream
The higher an​ asset’s beta,​ ________.A.the lower the expected return will be in an up marketB.the less responsive it is to changing market returnsC.the higher the expected return will be in a down marketD.the more responsive it is to changing market returns D.the more responsive it is to changing market returns
War, inflation, and the condition of the foreign markets are all examples of​ ________.A.business specific riskB.nondiversifiable riskC.internal riskD.unsystematic risk B.nondiversifiable risk
The goal of an efficient portfolio is to​ ________.A.minimize risk for a given level of returnB.maximize risk in order to maximize profitC.achieve a predetermined rate of return for a given level of riskD.minimize profit in order to minimize risk A.minimize risk for a given level of return
Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that​ ________.A.stabilizes to a level between the asset with the higher risk and the asset with the lower riskB.remains unchangedC.decreases to a level below that of either assetD.increases to a level above that of either asset C.decreases to a level below that of either asset
An increase in the beta of a​ corporation, all else being the​ same, indicates​ ________.A.an increase in​ risk, a higher required rate of​ return, and hence a lower share priceB.an increase in​ risk, a lower required rate of​ return, and hence a higher share priceC.a decrease in​ risk, a higher required rate of​ return, and hence a lower share priceD.a decrease in​ risk, a lower required rate of​ return, and hence a higher share price a
________ risk represents the portion of an​ asset’s risk that can be eliminated by combining assets with less than perfect positive correlation.A.EconomicB.DiversifiableC.SystematicD.Market b
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Finance Flashcards

Personal Finance Test 1

In order for your financial plan to be realistic and attainable it needs to be based upon your income level.
While reviewing your current financial plan, you discover that you most likely won’t achieve your long term financial goals. What should you do now? all of these would be realistic things to do
The term that considers having money readily available when you need it is the concept of liquidity
Which of the following typically occur(s) during stage one of the financial life cycle? all of these
After retirement starts, your most important financial decisions should revolve around estate planning.
An economic condition in which rising prices reduce the purchasing power of money is termed inflation
What is the main factor in determining your potential income level? education and skills that you have attained
Chapter 1 discusses ten principles that form the foundation of personal finance. The concept that emphasizes that people should not put all their eggs in one basket is the ________ principle. diversification reduces risk
Liabilities are best described as financial debts and obligations for which you owe.
Fair market value refers to the current value of assets.
You know you are insolvent when both your assets are less than your liabilities and your net worth is negative
One of the following items would not go on a balance sheet. Which one is it? current balances owed on your utility bills
Which of the following might be found on an income statement? all of these
An expenditure over which you have control, are not obligated to make, and may vary from month to month is call a ________ expenditure. variable
The purpose of using financial ratios is to both help to analyze your raw data to compare how well you are doing and better understand how you are managing your financial resources
The current ratio is a measure of liquidity. What information does it tell you? It tells you how many times you can pay off your current liabilities by using your liquid assets
The ________ states that a dollar today is worth more than a dollar in the future. Time value of money
The current value in today’s dollars of a future sum of money is called present value.
The dollar value of an investment at some future point in time is also known as future value
By allowing the interest that you earn on an investment to stay in the investment and to earn interest on the interest you have already earned is called what? the power of compound interest.
An investment of $200 at 10% yields $242 in two years. The $242 is known as the future value.
John Madrid put $1,000 into a mutual fund yielding 18%. Approximately how long will it take to double in value? four years
This helpful investment rule-of-thumb tells you approximately how many years it takes for a sum of money to double in size. rule of 72
Your money will grow or compound ________ as the number of compounding periods per year becomes ________. faster; larger
The movement into a higher tax bracket as a result of inflation increasing wages is called ________. bracket creep
Identify your filing status, as an unmarried taxpayer with at least one child or relative living with you, for whom you provide all support. head of household
The percentage of the next dollar you will earn that goes toward payment of taxes is called the ________. marginal tax rate
An IRS-allowed reduction in your income for yourself, your spouse, and any dependents that is subtracted before you compute your taxes is called a(n) ________. personal and dependency exemptions
A tax system in which tax rates increase as income increases is called a(n) ________ system. progressive tax
Contributing $2,000 into a tax-deferred retirement plan in a 28% tax bracket will save $560
Which of the following is not allowed as a personal or dependency exemption? your child who lives at home and earns $25,000 a year
The earned income credit serves as a negative income tax and is available to low-income taxpayers.
What characteristics should you look for when selecting an investment alternative for your liquid assets? All but The highest potential return available are important characteristics
Cash and investments that can be easily converted into cash are termed liquid assets.
What is the name of an investment Company that raises funds from investors, pools the money, and invests in stocks or bonds? mutual fund firm
Financial institutions that provide traditional checking and savings accounts are commonly referred to as deposit-type financial institutions
What are short-term notes of debt issued by the federal government commonly called? T-Bills
What is another name for an interest-bearing checking account? none of these
Money market mutual funds provide attractive competition for bank deposits because their short term, higher returns are generally regarded as practically risk-free.
Four typical banking conveniences are listed below. Which one is not typical? all of these are typical Banking services available
The percentage of the credit card sale the retailer owes to the credit card company is the merchant’s discount fee.
Having completed a personal finance class, you are now ready to give some advice to your free-spending friends. Which one is unwise? Look for trouble signs in credit card spending.
Which of the following is the best strategy for controlling and managing your credit cards and open debt? All are good strategies.
When you find you cannot pay your credit card bills you must take action! Several options are available, but one of the following is not advisable. Declare bankruptcy.
Typically, the credit card issuer allows you a grace period, which means you are not charged any interest during this grace period.
Which of the following apply to getting a cash advance with a credit card? all of these
Which method sums the outstanding balances owed each day during the billing period and divides by the number of days in the period? average daily balance
Credit cards are a form of ________ credit. both open ended and revolving
Kendra always thought the grace period feature of her credit card was such a wonderful idea. Why, in essence, she is getting her purchases interest free during this time. After taking Dr. Art Keown’s Personal Finance course she learned a startling truth about grace periods. Most banks eliminate their grace period on new purchases if you don’t pay your balance in full.
The Truth In Lending Act requires that all consumer credit agreements disclose the ________ in bold print? Annual Percentage Rate (APR)
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Finance Flashcards

Ch. 13 Policy

The Texas state budget is exceeded only by those of California and New York
Which of the following is not true about recent state budgets? demands for state services has decreased over time
Adjusting for population and inflation state spending grew at an average annual rate of _________ over the last 20 years. 0.8%
During the 2012-2013 fiscal year ________ of estimated Texas revenues are from state taxes? 44%
During the 2012-2013 fiscal year what percent of estimated Texas revenues came from the federal government? 39%
The income tax became available to the national government with the ratification of which amendment to the United States Constitution? 16th
Individual and corporate income taxes immediately became the national government’s major source of funding and today they constitute approximately _________ of federal tax revenue. 56%
Property taxes were once the major source of state revenue until Great Depression of 1930s
In 1931 Texas adopted a tax on cigarettes
Broadly based taxes collected on the retail price of most items are called general sales tax
Selective sales taxes in Texas are applied to liquor sales
What kinds of taxes are included in the retail prices of the goods and services? hidden taxes
Texas’s largest single individual revenue source is federal funds
All the following items have a hidden tax included in their prices: cigarette gasoline alcohol NOT real estate
A _________ is a tax on raw material (such as oil and natural gas) when they are extracted from their natural state. severance tax
What is Texas’s general sales tax on retail purchases? 6.25%
The general sales tax yielded what percent of the state’s revenue? 24.8 percent
What taxes are the major source of revenue for virtually all local government cities counties and special duties? property taxes
Which of the following has occurred because of Texas’s state government-imposed mandates on local governments? state taxes have remained low but local taxes are higher than in many states
Property taxes are the major source of revenue for virtually all of the following governments except national government
Which tax may be applied to two major types of property including real property and personal property? ad valorem
Ad valorem taxes may not be applied to which of the following? sale of real estate
Ad valorem means “according to value”
Which of the following has the authority to determine the property tax rate on real property in a county? commissioner’s court
Which of the following is incorrect? high income taxes can discourage general economic activity
Which of the following taxes is not considered one of the most effective at raising revenue? narrowed based
__________ is a tax designed to be paid by a large number of taxpayers. broad-based tax
In the battle over taxation one of the most intense issues is what should be taxed
Which of the following is not a common political rationalization for taxing various groups differently? to appease the general public back home
A tax imposed with the intent of exerting social or economic control by reducing taxes on approved behaviors or imposing higher taxes on undesirable activities is regulatory tax
Regulatory taxes are sometimes called a(n) sin tax
An excise or “sin” tax is levied on the sale manufacture or use of all of the following except snacks
The gasoline tax is an example of what type of tax? benefits received
Which of the following does not fall under the category of the benefits-received principle? local school taxes
The most common ability-to-pay taxes are levied on all of the following except gasoline
All of the following are seldom taxed with the exception of real estate
What percentage of Americans pays no income taxes at all? 40%
Tax rates that place more of a burden on low- and middle-income taxpayers than on wealthier ones care called regressive tax rates
Declining marginal propensity to consume means as income increases spending increases proportionately
Which of the following is an example of tax shifting? business tax rises-prices rise. property taxes increase-landlords raise rent. business making their taxes consumer taxes.
Which of the following income groups in Texas paid the highest percentage in effective taxes? lower
Which of the following states does not collect a small percentage of their resident’s income than Texas? Alaska
__________ advocate that taxes on higher-income individuals should be kept low to allow them to save and invest to stimulate the economy. supply-siders
For the 2012-2013 biennium Texas will receive approximately __________ in federal funds which represents 30 percent of state revenue. $71 billion
At the beginning of each legislative session the _________ reports to the legislature the total amount of revenues expected from current taxes and other sources. comptroller of public accounts
State bonds that are repaid with the revenues from the service they finance are called revenue bonds
General-obligation bonds cannot be used for which of the following? higher education bonds financed by tuition income
It is through what process that the legislature legally authorizes the state to spend money to provide its various programs and services? appropriations
Trading votes among legislators especially to fund local projects to benefit their constituents is called logrolling
Texas ranked __________ among the 50 states in overall per capita spending. 47th
The most costly service in Texas is education
In 1949 which law increased state funding and established the Texas Education Agency (TEA) which carries out the state’s educational program. Gilmer Aikin
The State Board of Education does all of the following: establishes guidelines for operating public schools. requires cost accounting and financial reports from local districts. sets curriculum. DOES NOT make routine managerial decisions
The Texas’s ranking of population older than 25 with a high school diploma is 50th
Which law “recaptured” property tax revenue from property-wealthy school districts and distributed those in property-poor districts in an effort to equalize the financing of all districts throughout Texas? the Robinhood plan
When did the state of Texas initiate the top 10 percent plan? when the 5th circuit ruled race could not be considered in affirmative action policies
Which is not a level of state involvement in health care? when it advocates socialized medicine
TxDOT planned to use comprehensive development agreement with private entities to develop a highly ambitious and controversial 50-year program to supplement existing highways. This program was called the Trans-texas corridor
Which of the following did the Trans-Texas Corridor not include? housing
According to the Davis essay the slow decrease of support from the state has led many colleges and universities to rely more on part-time faculty. offering fewer courses. increased class size
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Finance Flashcards

Personal Finance Chapter 4

Factors that influence buying decision Economic Socisl factorsPersonal factors
Credit history To see how good/ responsible you are with paying people back/ good credit
Know the difference between the three factors
Research a product you want to buy Before you shop (background work- identify needs, gathering info, and become aware of the market)
Research a product you want to buy Weighing alternatives: identify what is important (values, time limit, money available, convenience, brand quality), compare prices, comparison shopping
Research a product you want to buy Making the purchase (negotiate prices when available, credit vs. cash, know the real price)
Research a product you want to buy After the purchase (other costs might be present, return possibility, and warranty possibility)
How to get info about a product 1. Friends and aquaintances2. Ads and packaging (check)3. Reports and reviews4. Websites for companies in question
Common myths Return a car after buying it within the next 3 days-don’t believe it, get it in writing -untrue -is it always?, maybe
Common myths #2 Something that you have won (you won a free ipod!) -untrue -don’t believe it
Common myth #3 Is you lose a credit card you’re liable for all the purchases -untrue
Common myth #4 Auto lease is just like a rental
Auto lease Renting under a contract
Common myth #5 You cant reposess your car if it’s on private property
Smart buying strategies -Timing (bargain time)-Store selection (hours, location, reputation, policies, services)-Brand Comparison (consider price and quality, displays lead to “impulse buying”) -Label info (read what it is that you’re buying) (if it’s not there why purchase it)-Price comparison (know how to calculate unit pricing and basic conversions)-Warranty (be aware of warranty and what it states)
Honest branding A term used for you have to tell people what you’re selling and be honest about it -honey nut cheerios .. MAY lower cholesterol (truthful)
Examples of consumer complaints Defective , poor quality, and fraud
Defective vs. poor quality It goes home and doesn’t workWorks but is terrible quality
Fraud -Biggest way money is lost in this country-free opportunities through phone and email-
Two cents! Nothing in this life is freeWhatever you’re trying to get, get it for yourselfNo ones gonna give stuff for free
Receipt benefit You can track back your purchase if you lose it if you’ve used a credit card
To want a return/ problem 1. Go back to the place of purchase2. Contact Company HQ (describe your purchase, state problem, give history of problem, state ressonable time of action)3. Consumer Agency Assistance4. Dispute Resolution
Mediation vs. Arbitration -no law process-law process
Legal Options Small claims court -low cost (no lawyer)-ex: Judge Judy-$500-$10,000Class Action Suits-usually more than one person filing a report-something that defective to someone’s health