Which of the following is true of the market segmentation theory?
according to the market segmentation theory, the slope of the yield curve depends on supply/demand conditions of a security in the long and short-term markets
The change in the market value of an asset over a particular time period is called the ____.
none of the other answers
The value of an asset is determined by discounting the future cash flows generated by the asset using the:
none of the other answers
Everything else the same, the higher the expected rate of inflation, ____.
none of the other answers
Everything else the same, if the yield curve is downward sloping, what is the yield to maturity on a 10 year treasury cousin bind, relative to that on a one year treasury bond?
the yield on the 10 year bond is less than the yield on a one year bond
the yield curve is downward sloping, or inverted, if the inflation rates are expected to decrease
true
a federal deficit occurs when ____.
none of the other answers
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
The _________ theory that has been developed to explain the shape of the yield curve suggests that the curve should normally be upward sloping, because, everything else equal, an upward sloping curve implies that lenders prefer to lend short-term funds at
none of the other answers
everything else equal, if the united states runs a large foreign trade deficit, the financing of the deficit will:
none of the other answers
everything else equal, which of t following actions would tend to increase interest rates in the financial markets?
inflation
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 us treasury securities if no inflation were expected in the future
the real rate of interest is the interest that would exist on default free us treasury securities if no inflation were expected
true
which of the following statements are correct
reinvestment rate risk is lower, other things held constant, on long term than on short term bonds
everything else equal, as a country increases its borrowing to finance its foreign trade deficit, interest rates will be driven down
false
the expectations theory postulates that the term structure of interest rates is based on expectations regarding future inflation rates
true
a nominal yield curve that is upward sloping implies that
the returns on short term securities are lower than the returns on long term securities of similar risk
inflation leads to an increase in the purchasing power of investors
false
the federal reserve purchases US treasury securities to
none of these answers
If the Federal Reserve sells $50 billion of short-term U.S. Treasury securities to the public, other things held constant, what will this tend to do to short-term security prices and interest rates?
prices will decline and interest rates will rise
in the financial market context, ____ is the chance that a financial asset will not earn the return promised
none of the above
Assume that the expected rates of inflation over the next 5 years are 4 percent, 7 percent, 10 percent, 8 percent, and 11 percent, respectively. What is the average expected inflation rate over this 5-year period?
8%
during or near recessions yield curves generally are neither flat or downward sloping
true
5.2 Treasury securities that mature in 6 years currently have an interest rate of 9.50 percent. Inflation is expected to be 5 percent in each of the next three years and 6 percent each year thereafter. The maturity risk premium is estimated to be 0.10% �
1.75%
everything else the same, the higher the expected rate of inflation, ____
none of the answers
which of the following is the yield of a bond that offers a risk free rate of 4% and a risk premium of 4%?
8%
in general, when rates in the financial markets increase, the prices (values) of financial assets increase
false
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 value of an asset is the future value of the cash flows that the asset is expected to generate during its life and the rate of return at which investors are willing to provide funds to purchase the investment.
true
5.2 Assume that real risk-free rate (r*) = 1.00%; the maturity risk premium is found as MRP = 0.20% � (t - 1), where t = years to maturity; the default risk premium for AT&T bonds is found as DRP = 0.07% � (t - 1); the liquidity premium (LP) is 0.10 perce
0.73%
a deficit trade balance hinders the federal reserve's ability to lower interest rates when combatting a recession
true
_____ is the tendency of prices to increase over time
none of the other answers
5.2b Assume that a three-year Treasury note (T-note) has no maturity premium and that the real risk-free rate of interest is 3 percent. If the T-note carries a nominal risk-free rate of return of 13 percent and if the expected average inflation rate over
18%
Following is information about three bonds:
?
?
Issuer Yield Time to Maturity
Treasury 2.0% 6 months
Company A 5.0 5 years
Company B 5.3 8 years
2.5%
Following are the yields on selected Treasury securities:
?
Maturity Yield
2 years. 1.6%
3 years 2.2
4 years 2.4
3.4%
5.2e Assume that the real risk-free rate is 4 percent, and that inflation is expected to be 9 percent in Year 1, 6 percent in Year 2, and 4 percent thereafter. Also, assume that all Treasury bonds are highly liquid and free of default risk. If 2-year and
2.10%
5.2e A corporate bond that yields 14 percent includes a risk-free rate of 7 percent and a default risk premium of 3 percent. The bond's maturity risk premium is _____.
4%
...
...
The yield on a one-year Treasury bond is 4 percent, and the yield on a two-year Treasury bond is 6 percent. Assume that the pure expectations theory holds and that the market is in equilibrium. Which of the following statements is correct?
the market expects one year interest rate during the second year to be 8%
which of the following statements is correct?
other things held constant, the "liquidity preference theory" would generally lead to an upward sloping yield curve
the value of an asset is determined by discounting the future cash flows generated by the asset using the
none of these answers
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
which of the following statements is true of federal deficit
none of the other answers
during ____, both the demand for money and the rate of inflation tend to fall, which prompts the Fed to take actions to decrease interest rates
none of the other answers
zero coupon bonds sell at premiums above their par values
false
the two principal types of municipal bonds are
revenue bons and general obligation bonds
general obligation bonds are backed by the
governments ability to tax its citizens
6.4a Cold Boxes Corporation has 100 bonds outstanding with a maturity value of $1,000. The required rate of return on these bonds is currently 10 percent, and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $8
6%
the terms and conditions of a bond are set forth in its
indenture
6.5b A bond with a $100 annual interest payment and $1,000 face value with five years to maturity (not expected to default) would sell for a premium if interest rates were below 9% and would sell for a discount if interest rates were greater than 11%.
true
the face value of debt is
the amount owed to the lender
a bond that can be redeemed for cash at the bondholders option when certain circumstances exist is called
putable bond
if a firm raises capital by selling new bonds, the buyer is called the "issuing firm: and the coupon rate is generally set equal to the firms required rate
false
the conversion ratio is
when bondholders convert bonds into a certain number of shares of company common stock
the securities and exchange commission is required to verify that
all previous indenture provisions have been met before allowing a company to sell new securities to the public
lower rated bonds offer high returns than higher grade bonds because their
higher risk of default
although common stock represents a riskier investment to an individual than bonds, bonds represent a safer method of financing to a corporation than common stock
false
commercial paper is issued in denomination of
$100,000 or more
6.3b Assume that an investor wishes to purchase a 20-year bond with a maturity value of $1,000 and semiannual interest payments of $30. If the investor requires a 10 percent simple yield to maturity on this investment, what is the maximum price she should
$657
at the time a bond is issued, the coupon rate on the bond is set at a level that will cause
the issuing price to be equal the face (par) value of the bond
if eurocredits are bank loans that are denominated in the currency of a country other than where the lending bank is located
true
6.4a JRJ Corporation issued 10-year bonds at a price of $1,000. These bonds pay $60 interest every six months. Their price has remained the same since they were issued; that is, the bonds still sell for $1,000. Due to additional financing needs, the firm
3,696
which of the following statements is true about a zero coupon bond?
most zero coupon bonds re currently held by institutional investors, such as pension funds and mutual funds, rather than by individual investors
6.1d 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:
private debt
one of the disadvantages of issuing a zero coupon bond is that any tax shield associated with the bonds price appreciation cannot be claimed until the bond matures
false
per standard and poors corporation (s&p), a bond whose rainy is BBB is considered
investment grade with a medium investment risk
which of the following is an advantage go convertible bonds
investors can choose to hold a company's bond or convert the bond into its common stock
because a bonds rating serves as an indicator of its default risk, the rating has a direct, measurable influence on the firms
cost of using such debt and thus the bonds interest rate
which of the following statements is true about zero coupon bonds
none of the other answers - most zero coupon bonds are currently held by institutional investors, such as pension funds and mutual funds, rather than by individual investors
which of the following statements about a bond that sells for its par value is correct
as long as market rates remain constant, the bonds capital gains yield will equal to zero
6.5b If a bond is selling for less than its face, or maturity, value and the market interest rate remains unchanged during the life of the bond, then the price (value) of the bond will increase as the maturity date nears.
true
6.3b Rick bought a bond when it was issued by Macroflex Corporation 14 years ago. The bond, which has a $1,000 face value and a coupon rate equal to 10 percent, matures in six years. Interest is paid every six months; the next interest payment is schedule
$916.16
which of the following statements is true about federal funds
federal funds have very short maturities, often overnight
which of the following is true of a traditional certificate of deposit (CD)
none of the other answers - CD represents a time deposit at a bank or other financial intermediary. to liquidate a traditional CD prior to maturity, the owner must return it to the issuing institution
6.3b If there are two bonds with a simple interest rate yield of 9 percent, but one bond is compounded quarterly while the other bond is compounded monthly, the bond with quarterly compounding will have a higher effective annual yield.
false
all else being equal, an increase in the yield to maturity of a bond will result in
a greater interest rate price risk on a long term bond than on a short term bond
if a bonds yield to maturity is less than its coupon rate, the bond should be selling at a discount i.e. the bonds market price should be less than its face (maturity) value
false
in the event of liquidation, a ____ has a claim on assets only after the senior debt has been paid off
subordinated debenture
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 bonds
none of the other answers - yield to maturity
when the market value of debt is the same as its face value, it is said to be selling at the
none of the other answers - par value
6.5 Rolling Coast Inc. issued BBB bonds two years ago. These bonds provided a yield to maturity (YTM) of 11.5 percent. Long-term risk-free government bonds were yielding 8.7 percent at the time. The current risk premium on BBB bonds versus government bond
9.2%
the indentures for publicly traded bonds are approved by
none of the other answers - the securities and exchange commission
7.4 The current expected value of a stock is $32. If investors demand a higher rate of return of 10 percent instead of the 8 percent rate of return, what will the impact on the stock price of the firm be?
the stock price will decrease as a result of the higher rate of return demanded by investors
which of the following types of stock generally pays a fixed amount of dividends each year?
none of the other answers
which of the following is true of american depository receipts
american depository receipts provide US investors with the ability to invest in foreign companies with less complexity and difficulty than might otherwise be possible
if a preferred stock issue has a conversion feature, the stock can be converted into ____
none of the other answers
____ is determined by subtracting the costs associated with the debt and the equity that the firm uses from its after tax operating income
none of the other answers
common shareholders can exert control of the management of the firm by
electing board members who can replace the management
which of the following provisions/features allows the firm to repurchase and retire a given percentage of its preferred stock each year
sinking fund
which of the following formulas calculates price-earnings (P/E) ratio
market price per share / earnings per share
certificates that represent ownership in stocks of foreign companies and are held in trusts at banks located in countries where the stocks are traded are called ____
none of the other anwers
a shareholder can transfer the right to vote to another person by means of an instrument known as ____
none of the other answers
american depository receipts are foreign stocks listed on stock exchanges located outside the country where the firms are headquartered
false
assume that a firm distributes all of its earnings as dividends. which of the following is indicated by a price-earnings ratio of 10?
it would take 10 years for an investor to recover his or her initial investment
7.2b You are trying to determine the appropriate price to pay for a share of common stock. If you purchase this stock, you plan to hold it for 1 year. At the end of the year you expect to receive a dividend of $5.50 and to sell the stock for $154. The app
$137.50
Stock prices move the same direction te to the changes in the dividends stockholders expect to be paid in the future, but they move in the opposite direction as changes in rates of return.
true
which of the following is true about the price-earnings ratio of a firm
the appropriate value of P/E ratio is multiplied by the earnings per share to estimate the appropriate stock price
A share of preferred stock pays an annual dividend of $6 per share. If investors require a 10 percent rate of return, what should be the price of this preferred stock?
$60.00
which of the following is true about the payment of dividends by a firm
growth stocks pay little to no dividends; rather, the firms retain most of their earnings each year to reinvest in assets
7.2b On January 1 of the current year, the price of a stock is $32.50, whereas on December 31 of the current year, the price of the stock is $48.78. Determine the capital gain yield of the stock.
50.09%
7.2b A share of a preferred stock pays a dividend of $0.35 each quarter. If you are willing to pay $20.00 for this preferred stock, what is the simple (not effective) annual rate of return?
7%
Changes in stock prices occur because investors change the rates of return they require to invest in stocks and/or the expectations about the cash flows associated with stocks change.
true
the amount in excess of par value that a company must pay when it repurchases a security is known as the ____
none of the other answers
71.b Scubapro Corporation currently has 1,000,000 shares of common stock outstanding and plans to issue 500,000 more shares in a seasoned equity offering. The current shareholders have preemptive rights on any new issues of common stock by Scubapro Corpor
10,000 shares
which of the following is considered as a euro stock
a german company selling stock in japan
a firm undertakes stock repurchase when the price of its stock os undervalued
true
which if the following is true of founders shares
none of the other answers
7.2b Nahanni Treasures Corporation is planning a new common stock issue of five million shares to fund a new project. The increase in shares will bring the number of shares outstanding to 25 million. Nahanni's long-term growth rate is 6 percent, and its c
-$4.23
7.1c Certificates that represent ownership in stocks of foreign companies and are held in trusts at banks located in the countries where the stocks are traded are called _____.
none of the other snwers
7.1b A common stock's par value is always equal to the market value of the stock on the last day of the fiscal year in which the stock is issued.
false
7.1a What is another name for the par value of a preferred stock?
none of the other answers
7.2b A firm expects to pay dividends at the end of each of the next four years of $2.00, $1.50, $2.50, and $3.50. If growth is then expected to level off at 6 percent, and if you require a 14 percent rate of return, how much should you be willing to pay f
$34.12
7.2b The constant growth dividend discount model (DDM) may be written as _____.
P0=D1/(Rs-g)
7.1a Which of the following securities can be converted into common stock by investors?
none of the other answers
7.1a According to the convertibility provision, a common stock can be converted to a certain number of shares of preferred stock at the stated conversion price.
false
If a firm wants to be able to redeem some of its preferred stock at some date after issue, it must _____.
incorporate a call provision in the preferred stock issue
which of the following is true of the call provisions found in preferred stocks?
none of the other answers
7.1b _____ have sole voting rights, are owned by the persons who started the company, and generally pay only restricted dividends (if any) for a specified number of years.
founders shares
8.1 Risk is indicated by variability of returns, whether the variability is considered positive or negative. Both the positive and negative outcomes must be evaluated when considering risk.
true
8.1 A probability distribution consists of a listing of only the largest possible outcomes, or events, with the chance of occurrence assigned to each.
false
8.2 Darren has the option of investing in either Stock A or Stock B. There is a 45 percent chance that the return on Stock A will be 25 percent, a 25 percent chance it will be 14 percent, and a 30 percent chance it will be 4 percent. There is a 45 percent
15.95%; 16.35%
8.2b Which of the following measures captures the effects of both risk and return, which makes it a better measure than standard deviation for evaluating stand-alone risk in situations where investments differ with respect to both their amounts of total r
coefficient of variation
8.2a The standard deviation of the returns of Stock A is 45.9 percent, and the standard deviation of the returns of Stock B is 52.7 percent. Which of the following statements about the stocks is correct?
stock A has a tighter probability distribution than stock B, and hence lower total risk
8.2b Dividing the standard deviation of the returns of a stock by the stock's expected return gives us the stock's _____.
none of the other answers
which of the following statements about correlation is correct
the weaker the positive correlation two stock exhibit, the more risk can be reduced when they are combined in a portfolio
8.3b A stock's standard deviation indicates how the stock affects the riskiness of a diversified portfolio. Therefore, the standard deviation is a better measure of a stock's relevant risk than its beta coefficient, which measures total, or stand-alone, r
false
which of the following statements about diversification is correct
when two perfectly correlated stocks with the same risk are combined, the portfolio risk is equal to the risk associated with the individual stocks
8.3a The part of a security's risk associated with random outcomes generated by events or behaviors specific to the firm is known as _____.
none of the other answers
8.4 Which of the following statements about the risk-return relationship observed in investing is correct?
an increase in the expected inflation rate would lead to an increase in the required return on all the risky assets by the same amount, assuming all other things were held constant
8.4 The beta of Stock A is 2.1. The risk-free rate is 6 percent, and the market return is 13 percent. The expected rate of return of Stock A is 15.5 percent. Based on the above information, which of the following statements is true?
an investor should not buy Stock A because its expected rate of return is less than the required rate of return
which of the following statements about the security market line and investors risk aversion is correct
the steeper the slope of the line, the greater the average investors risk aversion, and thus the greater the return investors require as compensation for risk
8.4 The beta coefficient of Zed Corporation is equal to 0.7 and the required rate of return on the stock equals 15.75 percent. If the expected return on the market is 12.5 percent, what is the risk-free rate of return?
23.33%
8.5 The risk-free rate of return is 5 percent, and the market return is 8 percent. The betas of Stocks A, B, C, D, and E are 0.75, 0.50, 0.25, 1.50, and 1.25, respectively. The expected rates of return for Stocks A, B, C, D, and E are 8 percent, 6.5 perce
stock E
8.5 The next expected dividend for Stock P is $2.50, the current price of the stock is $32.50, and the firm is expected to grow at a constant rate of 4 percent per year forever. The risk free rate is 3 percent, the market risk premium is 5.5 percent, and
an investor should buy this stock because its expected rate of return, 11.69% is greater than it required rate of retune 9.6%
8.5 The risk-free rate of return is 4 percent, and the market return is 10 percent. The betas of Stocks A, B, C, D, and E are 0.85, 0.95, 1.20, 1.35, and 0.5, respectively. The expected rates of return for Stocks A, B, C, D, and E are 8 percent, 9 percent
D
the total risk associated with an investment can be divided into ____
none of the other answers
8.6 The relevant risk, which is the risk for which investors should be compensated, is the portion of the total risk that cannot be diversified away.
true
8.6 Systematic risk is nondiversifiable, so it is an investment's relevant risk. Unsystematic risk is diversifiable risk and therefore not relevant.
true
8.1 The probability distribution of the payoffs on an investment consists of a _____.
listing of all possible outcomes with a chance of occurrence assigned to each outcome
8.1The greater the variability of the possible returns on an investment, _____.
none of the other answers
8.2a For Investment A, the probability of the return being 10 percent is 0.5, 10 percent is 0.4, and -10 percent is 0.1. Compute the standard deviation for the investment with the given information.
10.3%
diversification refers to the ____
reduction of the stand-alone risk of an individual investment, which is measured by the standard deviation of its returns, by combining it with other investments in a portfolio
8.3 Steve Brickson currently has an investment portfolio that contains four stocks with a total value equal to $80,000. The portfolio has a beta (?) equal to 1.4. To earn higher returns, Steve wants to invest an additional $20,000 in a stock that has ? eq
1.8
8.4 A stock has a beta coefficient, ?, equal to 1.20. The risk premium associated with the market is 6 percent, and the risk-free rate is 5 percent. Application of the capital asset pricing model indicates that the stock's appropriate return should be ___
12.2%
8.4 The market portfolio contains only systematic risk, therefore the market risk premium represents the return that investors require to be compensated for taking an average amount of relevant, or systematic, risk.
true
8.5 The risk-free rate is 5 percent and the market risk premium is 8 percent. Stock Y's beta is 1.0 and the standard deviation of its returns is 62.5 percent. What should be the stock's expected rate of return for the stock price to be considered in equil
13.00%
the market for a stock is said to be in equilibrium when the ___
none of the other answers
8.5 The risk-free rate is 5 percent and the market risk premium is 8 percent. Stock Y's beta is 1.85 and the standard deviation of its returns is 62.5 percent. What should be the stock's expected rate of return for the stock price to be considered in equi
19.80%
8.6 Which of the following statements about market risk and firm-specific risk is true?
none of the other answers
8.6 Which of the following activities would most likely affect a particular company's systematic risk?
a product recall related to product safety