Upgrade to remove ads
Only $35.99/year

finance chapters 5, 6, and 7 conceptual questions

Terms in this set (66)

Everything else equal, which of the following actions would tend to increase interest rates in the financial markets?
Investors' time preferences for consumption increase.
The production opportunities that exist in the economy represents one of the four fundamental factors that affect the:
cost of money
_____ is the tendency of prices to increase over time
inflation
In the financial market context, _____ is the chance that a financial asset will not earn the return promised.
risk
Everything else the same, the higher the expected rate of inflation, _____.
the higher the required rate of return on an investment
Which of the following indicates that the cost of money will increase?
Increase in the rate of inflation in an economy
Your uncle would like to restrict his interest rate risk and his default risk, but he would still like to invest in corporate bonds. Which of the bonds listed below best satisfies your uncle's criteria?
An AAA bond with 5 years to maturity
Which of the following is true of the real risk-free rate of interest?
It is the rate of interest that would exist on default-free U.S. Treasury securities if no inflation were expected in the future
Which of the following statements describes a liquidity premium?
It is a premium that is added to the rate on a security if the security cannot be converted to cash on short notice at a price that is close to the original cost.
Which of the following statements is true?
Treasury bonds have zero default risk.
Which of the following bonds has the greatest default risk?
A CCC corporate bond with a 10-year maturity
Securities that can be easily converted into cash on short notice at a price that is close to the original cost generally have a:
low liquidity premium
Assume that the expectations theory of the term structure of interest rates is correct, and other term structure theories are invalid. If a downward sloping yield curve is observed, which of the following is a correct statement?
Investors expect interest rates to decrease in the future.
Assume that the current yield curve is upward sloping or normal. This implies that:
short-term interest rates are lower than the long-term interest rates.
Firms with the most profitable investment opportunities are willing and able to pay the most for capital, so they tend to attract it away from less efficient firms or from those whose products are not in demand.
true
The higher the perceived risk associated with an investment, the higher its required rate of return.
true
Inflation leads to an increase in the purchasing power of investors.
false
The real rate of interest is composed of a risk-free rate of interest plus the default risk premium and liquidity premium that reflects the riskiness of the security.
false
The expectations theory postulates that the term structure of interest rates is based on expectations regarding future inflation rates.
true
The yield curve is downward sloping, or inverted, if the inflation rates are expected to increase.
false
Other things held constant, if a bond indenture contains a call provision, the yield to maturity (YTM) on the bond that would exist without such a call provision will be _____ the YTM with the call provision.
lower than
The terms and conditions of a bond are set forth in its:
indenture
A contract that is negotiated directly between a borrowing firm and a bank and under which the borrower agrees to make a series of interest and principal payments to the bank on specific dates is called:
a term loan
A bond differs from a term loan in that:
a bond has a higher issuance cost.
A debt backed by some form of specific property is known as a:
mortgage bond
In the event of liquidation, a(n) _____ has a claim on assets only after the senior debt has been paid off.
subordinated debenture
A(n) _____ bond can be exchanged for shares of equity at the owner's (bondholder's) discretion.
convertible
A bond that pays interest only when a firm has sufficient earnings to cover the interest payments is called a(n):
income bond
Which of the following events would make it less likely for a company to choose to call its outstanding callable bonds?
An increase in interest rates
A bond that pays no annual interest but is sold at a discount below its par value is called a:
zero coupon bond
_____ bonds are high-risk, high-yield bonds that are often used to finance mergers, leveraged buyouts, and troubled companies.
junk
which of the following statements is true about a zero coupon bond?
a zero coupon bond is issued at a substantial discount below its par value
the par value of debt is:
the amount owed to the lender
A debt is said to be selling at par when:
the market value is equal to the face value of the debt.
A bond's principal value is also referred to as the maturity value because:
it is repaid at the maturity date.
When the market value of debt is the same as its face value, it is said to be selling at the:
par value.
When the market value of debt is the same as its par value, it is:
selling at its face value.
For installment loans, the maturity date is:
the date on which the last installment repayment of the principal amount is due.
A bond's maturity date is the date on which:
the principal amount of the debt is due.
Which of the following statements is true about commercial paper?
Commercial paper is issued at a discount.
Commercial paper is issued in denominations of:
$100,000 or more.
The maturity of commercial paper varies from:
one to nine months.
Federal funds represent:
loans from one bank to another bank.
Banks generally use the federal funds market to:
adjust their reserves.
Banks that need additional funds to meet the reserve requirements of the Federal Reserve:
borrow from banks with excess reserves.
Which of the following is true of a traditional certificate of deposit (CD)?
Traditional CDs must be kept at the issuing institution for a specified time period.
When liquidating a traditional certificate of deposit (CD) prior to maturity, the owner:
must return it to the issuing institution.
Municipal bonds are issued by:
state and local governments.
The two principal types of municipal bonds are:
revenue bonds and general obligation bonds.
Revenue bonds are used to:
raise funds for projects that generate revenues that will contribute to payment of interest and the repayment of debt.
General obligation bonds are backed by the:
government's ability to tax its citizens.
The indentures for publicly traded bonds are approved by:
the Securities and Exchange Commission.
A(n) _____ is a provision that facilitates the orderly retirement of a bond issue.
sinking fund
Which of the following is an advantage of convertible bonds?
Investors can choose to hold the company's bonds or convert the bonds into its common stock.
Which of the following ratings by Moody's is given to the bonds of companies that have the best credit risk?
Aaa
The credit rating assigned to a bond reflects the probability that:
the bond will go into default.
The greater a bond's default risk, the greater the:
default risk premium (DRP) associated with the bond.
The average rate of return earned on a callable bond if it is held until the first call date is the:
yield to call.
If an investor buys a bond and holds it until it matures, the average rate of return the investor will earn per year is called the bond's:
yield to maturity.
What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? - ch.7
Dividend growth.
Which one of the following is computed by dividing next year's annual dividend by the current stock price? - ch.7
Dividend yield.
Which one of following is the rate at which a stock's price is expected to appreciate?
Capital gains yield.
You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?
Voting by proxy.
Emst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?
Primary.
An agent who maintains an inventory from which he or she buys and sells securities is called a:
Dealer.
An agent who arranges a transaction between a buyer and a seller of equity securities is called a:
Broker.
Other sets by this creator