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Fin 221 Exam 1

Terms in this set (24)

D.
Which of the following is a primary market transaction? A. One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction.
B. You buy 200 shares of IBM stock from your brother. The trade is not made through a broker--you just give him cash and he gives you the stock.
C. IBM sells 2,000,000 shares of treasury stock to its employees when they exercise options that were granted in prior years.
D. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.
E. You sell 200 shares of IBM stock on the NYSE through your broker.
D.
Inflation is expected to increase steadily over the next 10 years, there is a positive maturity risk premium on both Treasury and corporate bonds, and the real risk-free rate of interest is expected to remain constant. Which of the following statements is CORRECT?
A. The yield on any corporate bond must exceed the yields on all Treasury bonds.
B. The yield on 7-year corporate bonds must exceed the yield on 10-year Treasury bonds.
C. The Treasury yield curve under the stated conditions would be humped rather than have a consistent positive or negative slope.
D. The yield on 10-year Treasury securities must exceed the yield on 7-year Treasury securities.
E. The stated conditions cannot all be true- they are internally inconsistent.
A.
Which of the following events (everything else constant) would cause a decrease in nominal interest rates?
A. Households dramatically increase their savings rate
B. Corporations see an increase in investment opportunities.
C. There is an increase in expected inflation
D. The Federal Reserve sells some of its bond holdings
C.
Why are investors in US financial markets are concerned about the Federal Reserve selling some of the bonds acculmulated during its bond buying program that ended 2 years ago?
A. They believe this action will decrease both bond prices and interest rates.
B. They believe this action will increase bond prices and decrease interest rates.
C. They believe this action will decrease bond prices and increase interest rates.
D. They believe this action will increase both bond prices and interest rates.
B.
What is the meaning of a downward sloping yield curve?
A. Inflation rates are less than nominal rates.
B. Short-term interest rates are greater than long-term rates.
C. Short-term interest rates are equal to long-term rates.
D. Short-term interest rates are less than long-term rates
A.
Which of the following is NOT tax deductible for a corporation?
A. Dividends paid to stockholders
B. Depreciation
C. Interest paid to creditors
D. All of the above are tax deductible
E.
Money markets are...
A. Consumer automobile loans.
B. Long-term bonds.
C. Common stocks.
D. Foreign currencies.
E. Short-term debt securities such as Treasury bills and commercial paper.
A.
Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT?
A. Relaxant's shareholders (the ex-partners) will now be exposed to less liability.
B. The company will probably be subject to fewer regulations and required disclosures.
C. Assuming the firm is profitable, none of its income will be subject to federal income taxes.
D. The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.
E. The firm will find it more difficult to raise additional capital to support its growth.
C.
32) Which of the following balance sheet changes represent an outflow of cash?
A. A decrease in accounts receivable
B. An increase in notes payable
C. An increase in inventory
D. An increase in long-term debt
E. An increase in common stock
B.
35) What could a company do with its positive Free Cash Flow?
A. Increase cash holdings
B. Repay long-term debt
C. Increase inventory
D. Buy more fixed assets
E. Sell more common stock
D.
Which of the following statements are CORRECT?
A. Corporations are taxed more favorably than proprietorships.
B. Because of their size, large corporations face fewer regulations than smaller corporations and proprietorships.
C. Corporations have unlimited liability.
D. Bond covenants are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders.
E. Reducing the threat of corporate takeover increases the likelihood that managers will act in shareholders' interests.
E.
MAD Inc.'s bond rating is downgraded by Standard and Poor's from AAA to BBB. Which of the following would occur in light of this news?
A. MAD Inc.'s bond price would fall.
B. MAD Inc.'s bond price would increase.
C. MAD Inc.'s bond price would remain the same.
D. MAD Inc.'s default risk premium would increase.
E. Both A and D would occur.
B.
Which of the following statements is most correct?
a. If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must also exceed its coupon rate.
b. If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.
c. If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rate.
d. Answers b and c are both correct.
e. None of the above answers is correct.
D.
If you purchase commercial paper that matures in 180 days from the issuing firm this transaction will take place in ____ markets and ____ markets.
a. money; secondary
b. capital; secondary
c. capital; primary
d. money; primary
C.
Which of the following is a price-weighted stock index?
a. the Wilshire 5000
b. the S&P 500 Index
c. the Dow Jones Industrial Average
d. the NASDAQ composite index
A.
Which of the following is not one of the fundamental factors that affect the cost of money?
a. Exchange rates
b. Risk
c. Inflation
d. Production opportunities
e. Time preferences for consumption
C.
Managerial (corporate) finance entails making decisions about a. Investment portfolios held by individual investors.
b. The regulation and deregulation of the banking industry.
c. How businesses acquire and use (invest) funds.
d. Which corporate stocks and bonds are mispriced in the financial markets. e. All of the above.
A.
Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?
a. A reduction in market interest rates.
b. The company's bonds are downgraded.
c. An increase in the call premium.
d. Answers a and b are both correct.
e. Answers a, b, and c are all correct.
E.
An option which gives the holder the right to sell a stock at a specified price at some time in the future is called a(n) a. Out-of-the-money option.
b. Naked option.
c. Covered option.
d. Call option.
e. Put option.
A.
If the expectations theory of the term structure of interest rates is correct, and if the other term structure theories are invalid, and we observe a downward sloping yield curve, which of the following is a true statement?
a. Investors expect short-term rates to decrease in the future.
b. Investors expect short-term rates to be constant over time.
c. It is impossible to say unless we know whether investors require a positive or negative maturity risk premium. d. The maturity risk premium must be positive.
e. Investors expect short-term rates to increase in the future.
B.
____ efficiency states that all publicly available information is reflected in current market prices.
a. Economic
b. Semistrong-form
c. Weak-form
d. Strong-form
A.
You have determined the profitability of a planned project by finding the present value of all the cash flows form that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?
a. The discount rate decreases.
b. The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same.
c. The discount rate increases.
d. Answers b and c above.
e. Answers a and b above.
B.
Which of the following trade (are bought and sold) at the fund's Net Asset Value?
a. closed-end mutual funds
b. open-end mutual funds
c. ETFs
d. all of the above
B.
Which of the following trade (are bought and sold) at the fund's Net Asset Value? a. closed-end mutual funds
b. open-end mutual funds
c. ETFs
d. all of the above
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