Questions:
Question 1
Delagold Corporation is issuing a zero-coupon bond that will have a maturity of 50 years. The bond's par value is $1,000, and the current yield on similar bonds is 7.5%. What is the expected price of this bond, using the semiannual convention?
A. $25.19
B. $250.19
C. $750
D. $1,000
Question 2
When real property is used as collateral for a bond, it is termed a/an:
A. debenture.
B. mortgaged security.
C. indenture.
D. senior bond.
Question 3
Which of the following statements about the relationship between yield to maturity and bond prices is false?
A. When the yield to maturity and coupon rate are the same, the bond is called a par value bond.
B. A bond selling at a premium means that the coupon rate is greater than the yield to maturity.
C. When interest rates go up, bond prices go up.
D. A bond selling at a discount means that the coupon rate is less than the yield to maturity.
Question 4
The __________ is the regular interest payment of the bond.
A. dividend
B. par
C. coupon rate
D. coupon
Question 5
The __________ is the expiration date of the bond.
A. future value
B. yield to maturity
C. maturity date
D. coupon
Question 6
Moody's has developed a corporate bond default-risk rating system using capital and lowercase letters and numbers. Below are several examples of Moody's ratings. Which answer choice lists a collection of ratings for "high credit investment grade" bonds?
A. Baa1, A1, A3
B. Ba1, Baa2, Baa3
C. Aa2, Aa3, A1
D. Caa, Ca, C
Question 7
Which of the following is NOT a category for rating classifications of bonds?
A. Investment grade bonds
B. American grade bonds
C. Extremely speculative grade bonds
D. Speculative grade bonds
Question 8
Which of the following types of bonds, as characterized by a feature, by definition has two coupon payments per year?
A. Consol
B. Semiannual
C. Zero-coupon
D. Putable
Question 9
A bond is a __________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future.
A. long-term equity
B. long-term debt
C. short-term debt
D. short-term equity
Question 10
When the __________ is less than the yield to maturity, the bond sells at a/the __________ the par value.
A. coupon rate; premium over
B. coupon rate; discount to
C. time to maturity; discount to
D. time to maturity; same price as
Question 11
Zero-coupon U.S. Government bonds are known as:
A. STRIPS.
B. muni-bonds.
C. Uncle Sam's Empty Pockets.
D. BLANKS.
Question 12
Which of the following is NOT an example of a bond that contains an option feature?
A. Callable bond
B. Putable bond
C. Convertible bond
D. The above are all examples of bonds with option features.
Question 13
Bonds are sometimes called __________ securities because they pay set amounts on specific future dates.
A. variable-income
B. fixed-income
C. bully
D. real
Question 14
The __________ is the interest rate printed on the bond.
A. coupon rate
B. semiannual coupon rate
C. yield to maturity
D. compound rate
Question 15
__________ are always unsecured bonds.
A. Mortgage bonds
B. Debentures
C. Callable bonds
D. Junior debt bonds
Question 16
Most U.S. corporate and government bonds choose to make __________ coupon payments.
A. annual
B. semiannual
C. quarterly
D. monthly
Question 17
Which of the following types of bonds may the issuer buy back before maturity?
A. Callable bond
B. Putable bond
C. Convertible bond
D. Zero-coupon bond
Question 18
The four steps to determining the price of a bond are:
A. determine the amount and timing of the present cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons.
B. determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the future value of the lump-sum principal and the annuity stream of coupons, and add the FVs of the principal and coupons.
C. determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and multiply the PVs of the principal and coupons.
D. determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons.
Question 19
Blackburn Inc. has issued 30-year, $1,000 face value, 10% annual coupon bonds, with a yield to maturity of 9%. The annual interest payment for the bond is:
A. $100.
B. $90.
C. $50.
D. $45.
Question 20
Espresso Petroleum Inc. has a contractual option to buy back, prior to maturity, bonds the firm issued five years ago. This is an example of what type of bond?
A. Putable bond
B. Callable bond
C. Convertible bond
D. Junior bond
Question 21
__________ means that the percentage increase in the dividend is the same each year.
A. Constant growth
B. Inconsistent growth
C. No growth
D. A constant cash flow
Question 22
Stocks are different from bonds because:
A. stocks, unlike bonds, are major sources of funds.
B. stocks, unlike bonds, represent residual ownership.
C. stocks, unlike bonds, give owners legal claims to payments.
D. bonds, unlike stocks, represent voting ownership.
Question 23
A typical practice of many companies is to distribute part of the earnings to shareholders through:
A. quarterly stock splits.
B. quarterly cash dividends.
C. semiannual cash dividends.
D. annual stock dividends.
Question 24
The dividend model requires that a firm has a cash dividend history and that the dividend history shows a:
A. constant dividend or a constant growth in price where constant growth can be either positive or negative.
B. positive dividend or a negative growth in dividends.
C. constant dividend or a positive growth in dividends.
D. constant price or a positive growth in dividends.
Question 25
Which of the statements below is FALSE?
A. The profits for common stock owners come before payment to employees, suppliers, government, and creditors.
B. Shareholders elect the board of directors, which ultimately selects the management team that runs the day-to-day operations of the company.
C. Stock is a major financing source for public companies.
D. Common stock's ownership claim on the assets and cash flow of a company is often referred to as a residual claim.
Question 26
There are two typical ways to alter the one vote/one share standard. One way is:
A. to have companies buy back nonvoting common stock.
B. to not have companies pay dividends.
C. to have companies issue classes of stock whereby one or more classes have super voting rights.
D. to not have companies issue bonds.
Question 27
If we know the dividend stream, the future price of the stock, the future selling date of the stock, and the required return, we can price stocks just as we priced:
A. annuities.
B. perpetuities.
C. bonds.
D. preferred stocks.
Question 28
The hiring process for an investment banker can happen in two ways. Which of the below is one of these ways?
A. Randomly choose an investment banking firm from a list of underwriting firms.
B. Pick a desirable investment banking firm, usually basing the choice on the reputation and history of the banker in its particular industry.
C. Have the primary government regulator of your industry choose the best investment banking firm for your company.
D. Solicit advice from a government agency and use it as your primary guide in choosing an investment banker.
Question 29
You buy a stock for which you expect to receive an annual dividend of $2.10 for the 15 years that you plan on holding it. After 15 years, you expect to sell the stock for 32.25. What is the present value of a share for this company if you want a 10% return?
A. $7.72
B. $15.97
C. $23.69
D. $31.41
Question 30
Shortcomings of the dividend pricing models suggest that we need a pricing model that is more inclusive than the dividend models and provides expected returns for companies based on aspects besides their historical dividend patterns. Which of the below is NOT one of these aspects?
A. The company's risk
B. The premium for taking on risk
C. The reward for waiting
D. Stable dividends
Question 31
You want to invest in a stock that pays $3.50 annual cash dividends for the next six years. At the end of the six years, you will sell the stock for $22.50. If you want to earn 12.5% on this investment, what is a fair price for this stock if you buy it today?
A. About $25.94
B. About $25.29
C. About $12.45
D. About $14.25
Question 32
The __________ is the market of first sale in which companies first sell
their authorized shares to the public.
A. primary market
B. secondary market
C. bull market
D. Nasdaq market
Question 33
Strong-form efficient markets theory proclaims that:
A. one can chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market.
B. one can exploit publicly available news or financial statement information to routinely outperform the market.
C. current prices reflect the price and volume history of the stock, all publicly available information, and all private information.
D. current prices reflect the price and volume history of the stock, all publicly available information, but no private information.
Question 34
What if the company goes out of business in 15 years and thus pays an annual dividend of $2.10 for only those 15 years? What is the present value of a share for this company if we want a 10% return on the stock?
A. $15.97
B. $16.97
C. $17.97
D. $18.97
Question 35
Which of the statements below is FALSE?
A. In estimating the current price using the constant growth dividend
model, we let g be the growth rate on the dividend stream and r be the
rate of return required by the potential buyer of the stock.
B. Constant growth means that the percentage increase in the dividend is
the same each year.
C.Div0 refers to the dividends that were just been paid to the current owner of the stock.
D. One unlikely dividend pattern is to raise or grow dividends by a fixed
amount at fixed intervals.
Question 36
Which of the following statements is true?
A. The dealers of stock are not allowed to make money on the difference between what they buy the stock for and what they sell it for.
B. A bear market is a prolonged rising market, one in which stock prices in general are increasing.
C. The ask price is the price at which a dealer is willing to sell, and the bid price is the price at which a dealer is willing to buy.
D. A bull market is a prolonged declining market, one in which stock prices in general are decreasing.
Question 37
__________ refers to how quickly information is reflected in the available prices for trading.
A. Market efficiency
B. Mechanical efficiency
C. Informational efficiency
D. Operational efficiency
Question 38
Which of the statements below is true?
A. Buying of shares is the selling of ownership in the company.
B. A company is said to go "private" when it opens up its ownership structure to the general public through the sale of common stock.
C. Private companies choose to sell stock to attract permanent financing through equity ownership of the company.
D. Most companies have the resident expertise to complete an initial public offering (IPO), or first public equity issue.
Question 39
You can think of the __________ as the "used stock" market because these shares have been owned or "used" previously.
A. secondary market
B. primary market
C. NYSE market
D. initial public offering market
Question 40
In the United States, there are three well-known secondary stock markets. Which of the below is NOT one of these?
A. The New York Stock Exchange (NYSE)
B. The Chicago Stock Exchange (CSE)
C. The National Association of Securities Dealers and their trading system NASDAQ (National Association of Securities Dealers Automated Quotation System)
D. The American Stock Exchange (AMEX)