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21 Cards in this Set

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Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?

A. coupon rate

B. face rate

C. call rate

D. yield to maturity

E. interest rate
D. yield to maturity
3. The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?


A. note

B. discounted

C. zero-coupon

D. callable

E. debenture
E. debenture
4. Real rates are defined as nominal rates that have been adjusted for which of the following?


A. inflation

B. default risk

C. accrued interest

D. interest rate risk

E. both inflation and interest rate risk
A. inflation
The Fisher effect is defined as the relationship between which of the following variables?


A. default risk premium, inflation risk premium, and real rates

B. nominal rates, real rates, and interest rate risk premium

C. interest rate risk premium, real rates, and default risk premium

D. real rates, inflation rates, and nominal rates

E. real rates, interest rate risk premium, and nominal rates
D. real rates, inflation rates, and nominal rates
Which one of the following premiums is compensation for expected future inflation?

A. default risk

B. taxability

C. liquidity

D. inflation

E. interest rate risk
D. inflation
A Treasury yield curve plots Treasury interest rates relative to which one of the following?

A. market rates

B. comparable corporate bond rates

C. the risk-free rate

D. inflation

E. maturity
E. maturity
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.


A. a premium; less than

B. a premium; equal to

C. a discount; less than

D. a discount; higher than

E. par; less than
C. a discount; less than
Which of the following relationships apply to a par value bond?

I. coupon rate < yield-to-maturity
II. current yield = yield-to-maturity
III. market price = call price
IV. market price = face value


A. I and II only

B. I and III only

C. II and IV only

D. I, II, and III only

E. II, III, and IV only
C. II and IV only
Which of the following increase the price sensitivity of a bond to changes in interest rates?

I. increase in time to maturity
II. decrease in time to maturity
III. increase in coupon rate
IV. decrease in coupon rate


A. II only

B. I and III only

C. I and IV only

D. II and III only

E. II and IV only
C. I and IV only`
Which one of the following bonds is the least sensitive to interest rate risk?


A. 3-year; 4 percent coupon

B. 3-year; 6 percent coupon

C. 5-year; 6 percent coupon

D. 7-year; 6 percent coupon

E. 7-year; 4 percent coupon
B. 3-year; 6 percent coupon
The dividend growth model:

I. assumes that dividends increase at a constant rate forever.
II. can be used to compute a stock price at any point in time.
III. can be used to value zero-growth stocks.
IV. requires the growth rate to be less than the required return.


A. I and III only

B. II and IV only

C. I, III, and IV only

D. I, II, and IV only

E. I, II, III, and IV
B. II and IV only
Which one of the following is an underlying assumption of the dividend growth model?

A. A stock has the same value to every investor.

B. A stock's value is equal to the discounted present value of the future cash flows which it generates.

C. A stock's value changes in direct relation to the required return.

D. Stocks that pay the same annual dividend have equal market values.

E. The dividend growth rate is inversely related to a stock's market price.
B. A stock's value is equal to the discounted present value of the future cash flows which it generates.
The length of time a firm must wait to recoup the money it has invested in a project is called the:


A. internal return period.

B. payback period.

C. profitability period.

D. discounted cash period.

E. valuation period.
B. payback period.
If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:


A. independent.

B. interdependent.

C. mutually exclusive.

D. economically scaled.

E. operationally distinct.
C. mutually exclusive.
The present value of an investment's future cash flows divided by the initial cost of the investment is called the:


A. net present value.

B. internal rate of return.

C. average accounting return.

D. profitability index.

E. profile period.
D. profitability index.
A project has a net present value of zero. Which one of the following best describes this project?


A. The project has a zero percent rate of return.

B. The project requires no initial cash investment.

C. The project has no cash flows.

D. The summation of all of the project's cash flows is zero.

E. The project's cash inflows equal its cash outflows in current dollar terms.
E. The project's cash inflows equal its cash outflows in current dollar terms.
Net present value:


A. is the best method of analyzing mutually exclusive projects.

B. is less useful than the internal rate of return when comparing different sized projects.

C. is the easiest method of evaluation for non-financial managers to use.

D. is less useful than the profitability index when comparing mutually exclusive projects.

E. is very similar in its methodology to the average accounting return.
A. is the best method of analyzing mutually exclusive projects.
Which one of the following statements related to the internal rate of return (IRR) is correct?


A. The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects.

B. A project with an IRR equal to the required return would reduce the value of a firm if accepted.

C. The IRR is equal to the required return when the net present value is equal to zero.

D. Financing type projects should be accepted if the IRR exceeds the required return.

E. The average accounting return is a better method of analysis than the IRR from a financial point of view.
C. The IRR is equal to the required return when the net present value is equal to zero.
The internal rate of return is:


A. the discount rate that makes the net present value of a project equal to the initial cash outlay.

B. equivalent to the discount rate that makes the net present value equal to one.

C. tedious to compute without the use of either a financial calculator or a computer.

D. highly dependent upon the current interest rates offered in the marketplace.

E. a better methodology than net present value when dealing with unconventional cash flows.
A. the discount rate that makes the net present value of a project equal to the initial cash outlay.
Roger's Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following?


A. conflicts with the results of the net present value decision rule

B. assumes the firm has sufficient funds to undertake both projects

C. agrees with the decision that would also apply if the projects were mutually exclusive

D. bases the accept/reject decision on the same variables as the average accounting return

E. fails to provide useful information as the firm must reject at least one of the projects
B. assumes the firm has sufficient funds to undertake both projects
Which one of the following is the best example of two mutually exclusive projects?


A. building a retail store that is attached to a wholesale outlet

B. producing both plastic forks and spoons on the same assembly line at the same time

C. using an empty warehouse to store both raw materials and finished goods

D. promoting two products during the same television commercial

E. waiting until a machine finishes molding Product A before being able to mold Product B
E. waiting until a machine finishes molding Product A before being able to mold Product B