Finance Exam 3

Interest rate risk is the risk that results from the changes in interest rates and thereby impact the bond value.

​A(n) ________ is secured by real estate.

The​ ________ feature allows bondholders to change each bond into stated number of shares of stock.

The coupon rate on a bond represents the percentage of the​ bond's par value that will be paid​ annually, typically in two equal semiannual​ payments, as interest.

The theory suggesting that for any given​ issuer, longdash-term interest rates tends to be higher than shortdash-term rates is called​ ________.

The riskiness of publicly traded bond issues is rated by independent agencies. According to​ Moody's rating​ system, an Aaa bond and a Caa bond are​ ________ and​ ________ respectively.

​________ are commonly issued in the reorganization of a failed or failing firm.

Which of the following is TRUE of the risk​ premium?

A putable bond gives the bondholder​ ________.

the primary goal of financial management is creating value by​ ________.

If the required return is greater than the coupon​ rate, a bond will sell at​ ________.

​________ have a short​ maturities, typically one to five​ years, and which can be renewed for a similar period at the option of their holders.

There is an inverse relationship between the quality or rating of a bond and the rate of return it must provide bondholders

The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to​ ________.

A call feature in a bond allows bondholders to change each bond into a stated number of shares of common stock.

A debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under clearly defined terms is called​ a(n) ________.

Stock purchase warrants are instruments that give their holders​ ________.

The lower a​ bond's default​ risk, the higher is the interest rate.

When the required return is different from the coupon interest rate and is constant until​ maturity, the value of the bond will approach its par value as it nears maturity.

The size of a loan and its issuance costs​ (as a percentage of the amount​ borrowed) are​ ________.

A nominal rate of interest is approximately equal to the sum of the real rate of interest plus the risk free rate of interest.

The components of risk premium includes business​ risk, financial​ risk, interest rate​ risk, liquidity​ risk, and tax risk.

For an investor who plans to purchase a bond maturing in one​ year, the primary consideration should be​ ________.

The purpose of the restrictive debt covenant that requires that subsequent borrowing be subordinated to the original loan is to​ ________.

The shorter the amount of time until a​ bond's maturity, the more responsive is its market value to a given change in the required return.

A downward-sloping yield curve that indicates generally cheaper long-term borrowing costs than short-term borrowing costs is called​ ________.

Restrictive​ covenants, coupled with standard debt​ provisions, help the lender to monitor the​ borrower's activities to ensure efficient use of funds

The value of a bond is the present value of the​ ________.

The term structure of interest rates is the relationship between​ ________.

The​ ________ rate of interest is the rate that balances the supply of savings and the demand for investment funds.

The less certain a cash​ flow, the​ ________ the​ risk, and the​ ________ the present value of the cash flow.

Bond indentures include restrictive covenants.These provisions protect the bondholders against​ ________.

The market segmentation theory suggests that the shape of the yield curve is determined by the supply and demand for funds within each maturity segment.

Corporate bonds usually have a​ ________.

Putable bonds give the bondholders an option to sell the bond at a price higher than par value by the amount of one year interest payment when and if the firm takes specified actions such as being​ acquired, acquiring another​ company, or issuing a large amount of additional debt.

The value of an asset is determined by discounting the expected cash flows back to its present​ value, using an appropriate discount rate.

A downward-sloping yield curve indicates generally cheaper short-term borrowing costs than long-term borrowing costs.

​A(n) ________ gives purchasers inflation protection.

A conversion feature in a bond has a greater chance of being exercised​ (to the detriment of the​ bondholder) if market interest rates have risen since the bond was issued.

When a​ bond's value differs from​ par, its yield to maturity will differ from its coupon interest rate.

An inverted yield curve is a downward-sloping yield curve that indicates that short-term interest rates are generally higher than long-term interest rates.

When a​ bond's required return is greater than its coupon interest​ rate, the bond value will be less than its par value.

A bond will sell​ ________ when the stated rate of interest exceeds the required rate of​ return, ________ when the stated rate of interest is less than the required​ return, and​ ________ when the stated rate of interest is equal to the required return.

The reason for a difference in the yield between a Aaa corporate bond and an otherwise identical Baa bond is the risk​ premium; other things being equal.

The value of a bond is the present value of its interest payments plus​ ________.

The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to​ ________.

Floating-rate bonds are bonds that can be redeemed at par at the option of their holder either at specific date after the date of issue and every 1 to 5 years thereafter or when and if the firm takes specified actions such as being​acquired, acquiring another​company, or issuing a large amount of additional debt.

The​ ________ is the compound annual rate of interest earned on a debt security purchased on a given date and held to maturity.

The nominal interest rate on a risky investment equals the risk-free rate plus a risk premium.

Bonds that can be redeemed at par at the option of their holders either at specific date after the date of issue and every 1 to 5 years thereafter or when and if the firm takes specified actions such as being​ acquired, acquiring another​ company, or issuing a large amount of additional debt are called​ ________.

Which of the following is a restrictive​ covenant?

Convertible bonds are normally​ _______

The yield to maturity on a bond with a current price equal to its par or face​ value, will always be equal to the coupon interest rate.

​________ allow bondholders to purchase a certain number of shares of the​ firm's common stock at a specified price over a certain period of time.

The value of an asset depends on the historical cash​ flow(s) up to the present time.

Which of the following affects the cost of a bond to the​ issuer?

Which of the following explains the general shape of the yield​ curve?

An interest rate or a required rate of return represents the cost of money.

​________ are claims that are not satisfied until those of the creditors holding certain​ (senior) debts have been fully satisfied.

​________ bonds are characterized by interest payments that are required only when earnings are available.

​Generally, an increase in risk will result in​ ________.

A bond rated Aaa according to​ Moody's, is considered​ ________.

The liquidity preference theory suggests that the shape of the yield curve is determined by the supply and demand for funds within each maturity segment.

The key inputs to the valuation process are​ ________.

A conversion feature in a bond allows bondholders to change each bond into a stated number of shares of common stock.

Restrictive​ covenants, coupled with standard debt​ provisions, help the lender to monitor the​ borrower's activities to ensure efficient use of funds.

An A rated bond should provide investors with a higher yield than an otherwise identical B rated bond.

Dilution of ownership occurs when a new stock issue results in each present stockholder having a larger number of shares​ and, thus, a claim to a larger part of the​ firm's earnings than previously.

Investors purchase a stock when they believe that it is undervalued and sell when they feel that it is overvalued.

Which of the following is TRUE of efficient-market ​hypothesis?

Most investors pay taxes on dividends at the same rate at which their ordinary income is taxed.

Which of the following is TRUE of a common​ stock?

A call feature is a feature that allows preferred stockholders to change each share into a stated number of shares of common stock.

The​ ________ is utilized to value preferred stock.

Any action taken by a financial manager that increases risk will also increase the required return.

Holders of equity capital​ ________.

Common stockholders are sometimes referred to as​ ________.

Which of the following is an advantage for a firm to issue common stock over long-term ​debt?

Unlike​ equity holders, creditors are owners of the firm.

Preferred stock is characterized by​ ________.

The attempt by a nonmanagement group to gain control of the management of a firm by soliciting a sufficient number of proxy votes is called a​ ________.

Which of the following is TRUE of​ equity?

If an​ asset's expected return is less than its required​ return, rational investors will​ ________.

​________ is the actual amount each common stockholder would expect to receive if a​ firm's assets are sold for their market​ value, creditors and preferred stockholders are​ repaid, and any remaining money is divided among the common stockholders

Which of the following is TRUE of the issuance of nonvoting common​ stock?

Preferred stockholders are often referred to as residual claimants.

The liquidation value per share of common stock is the amount per share of common stock that would be received if all of a​ firm's assets were sold for their accounting value and the proceeds remaining were divided among common stockholders.

The free cash flow valuation model is based on the same principle as the​ P/E valuation​ approach; that​ is, the value of a share of stock is the present value of future cash flows.

Which of the following is a disadvantage of issuing preferred stock from the common​ stockholders' perspective?

Treasury stock generally does not have voting​ rights, does not earn​ dividends, and does not have a claim on assets in liquidation.

Treasury stocks held within the corporation do not have voting rights but have a claim on assets in liquidation.

Dividends paid to stockholders are tax deductible.

The constant growth model is an approach to dividend valuation that assumes a constant future dividend.

Treasury stock refers to the​ ________.

In a​ ________, new shares are sold to the existing shareholders

The market value of common stock is completely unrelated to its par value.

In an inefficient​ market, securities are typically in​ equilibrium, which means that they are fairly priced and that their expected returns equal their required returns.

The amount of the claim of preferred stockholders in liquidation is normally equal to the market value of the preferred stock.