FIN 491 – Exam 2 – Flashcards
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A bond's par value can also be called its:
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face value
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A bond's yield to maturity takes into consideration:
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both current yield and price changes of a bond.
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The discount rate that makes the present value of a bond's payments equal to its price is termed the:
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yield to maturity
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Which of the following is fixed (e.g., cannot change) for the life of a given bond?
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Coupon rate
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Which of the following identifies the distinction between a U.S. Treasury bond and a Treasury note?
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Bonds initially have more than 10 years until maturity; notes have fewer than 10 years initially.
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Many investors may be drawn to municipal bonds because of the bonds'
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exemption from federal taxes
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Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?
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The bond's maturity value is lower than the bond's price.
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Which of the following is correct when a bond investor's rate of return for a particular period equals the bond's coupon rate?
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The bond price remained unchanged during the period.
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If the coupon rate is lower than current interest rates, then the yield to maturity will be:
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higher than the coupon rate.
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The yield curve depicts the current relationship between:
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bond yields and maturity.
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When the yield curve is upward-sloping, then
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short-maturity bonds yield less than long-maturity bonds.
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If a bond is priced at par value, then:
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its coupon rate equals its yield to maturity.
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The existence of an upward-sloping yield curve suggests that:
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interest rates will be increasing in the future.
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Which of the following is correct for a bond investor whose bond offers a 5% current yield and an 8% yield to maturity?
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The bond is selling at a discount to par value.
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In the calculation of rates of return on common stock, dividends are _______ and capital gains are ______.
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not guaranteed; not guaranteed
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Which of the following is inconsistent with a firm that sells for very near book value?
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High future earning power
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The expected return on a common stock is equal to:
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the capital appreciation rate + dividend yield
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It is possible to ignore cash dividends that occur far into the future when using a dividend discount model because those dividends:
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have an insignificant present value.
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The value of common stock will likely decrease if:
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the discount rate increases.
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When valuing stock with the dividend discount model, the present value of future dividends will:
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remain constant regardless of the time horizon selected
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A positive value for PVGO suggests that the firm has:
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investment opportunities with superior returns.
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Which of the following situations accurately describes a growth stock, assuming that each firm has a required return of 12%?
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A firm with investment opportunities yielding 15%.
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Other things equal, a firm's sustainable growth rate could increase as a result of:
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increasing the plowback ratio
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Investors are willing to purchase stocks having high P/E ratios because:
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they expect these shares to have greater growth opportunities
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What can be expected to happen when stocks having the same expected risk do not have the same expected return?
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At least one of the stocks becomes temporarily mispriced
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The terminal value of a share of stock:
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refers to the share value at the end of an investor's holding period
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The required return on an equity security is comprised of a:
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dividend yield and a capital gains yield
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Which one of the following situations is most likely to occur today for a stock that went down in price yesterday?
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The stock has no predictable price-change pattern
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If a firm unexpectedly raises its dividend permanently and by a substantial amount, the firm's stock price:
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should rise, given dividend discount models.
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Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is
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preferred stock, retained earnings, common stock, and new common stock
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As a source of financing, once retained earnings have been exhausted, the weighted average cost of capital will
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increase
