FIN 491 - Exam 2

A bond's par value can also be called its:

face value

A bond's yield to maturity takes into consideration:

both current yield and price changes of a bond.

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

yield to maturity

Which of the following is fixed (e.g., cannot change) for the life of a given bond?

Coupon rate

Which of the following identifies the distinction between a U.S. Treasury bond and a Treasury note?

Bonds initially have more than 10 years until maturity; notes have fewer than 10 years initially.

Many investors may be drawn to municipal bonds because of the bonds'

exemption from federal taxes

Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?

The bond's maturity value is lower than the bond's price.

Which of the following is correct when a bond investor's rate of return for a particular period equals the bond's coupon rate?

The bond price remained unchanged during the period.

If the coupon rate is lower than current interest rates, then the yield to maturity will be:

higher than the coupon rate.

The yield curve depicts the current relationship between:

bond yields and maturity.

When the yield curve is upward-sloping, then

short-maturity bonds yield less than long-maturity bonds.

If a bond is priced at par value, then:

its coupon rate equals its yield to maturity.

The existence of an upward-sloping yield curve suggests that:

interest rates will be increasing in the future.

Which of the following is correct for a bond investor whose bond offers a 5% current yield and an 8% yield to maturity?

The bond is selling at a discount to par value.

In the calculation of rates of return on common stock, dividends are _______ and capital gains are ______.

not guaranteed; not guaranteed

Which of the following is inconsistent with a firm that sells for very near book value?

High future earning power

The expected return on a common stock is equal to:

the capital appreciation rate + dividend yield

It is possible to ignore cash dividends that occur far into the future when using a dividend discount model because those dividends:

have an insignificant present value.

The value of common stock will likely decrease if:

the discount rate increases.

When valuing stock with the dividend discount model, the present value of future dividends will:

remain constant regardless of the time horizon selected

A positive value for PVGO suggests that the firm has:

investment opportunities with superior returns.

Which of the following situations accurately describes a growth stock, assuming that each firm has a required return of 12%?

A firm with investment opportunities yielding 15%.

Other things equal, a firm's sustainable growth rate could increase as a result of:

increasing the plowback ratio

Investors are willing to purchase stocks having high P/E ratios because:

they expect these shares to have greater growth opportunities

What can be expected to happen when stocks having the same expected risk do not have the same expected return?

At least one of the stocks becomes temporarily mispriced

The terminal value of a share of stock:

refers to the share value at the end of an investor's holding period

The required return on an equity security is comprised of a:

dividend yield and a capital gains yield

Which one of the following situations is most likely to occur today for a stock that went down in price yesterday?

The stock has no predictable price-change pattern

If a firm unexpectedly raises its dividend permanently and by a substantial amount, the firm's stock price:

should rise, given dividend discount models.

Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is

preferred stock, retained earnings, common stock, and new common stock

As a source of financing, once retained earnings have been exhausted, the weighted average cost of capital will