Exam 3 Review Flashcards
A corporate bond with a 6 percent coupon was issued last year. Which one of these would apply to this bond today if the current yield to maturity is 7 percent?
A. The bond is selling at par value.
B. The bond is currently selling at a premium.
C. The current yield exceeds the coupon rate.
D. The current yield exceeds the yield-to-maturity.
E. The coupon rate has increased to 7 percent.
C
A forward PE is based on:
A. estimated future earnings.
B. the last dividend payment multiplied by 2.
C. the last four quarterly dividend payments.
D. industry averages.
E. historical earnings.
A
Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond’s interest or principal payments as expected? A. Interest rate risk. B. Liquidity. C. Inflation. D. Default risk. E. Taxability.
D
Individual investors who continually monitor the financial markets seeking mispriced securities:
A. Are overwhelmingly successful in earning abnormal profits.
B. Are always quite successful using only historical price information as their basis of evaluation.
C. Earn excess profits on all of their investments.
D. Make the markets increasingly more efficient.
E. Are never able to find a security that is temporarily mispriced.
D
Which one of the following relationships is stated correctly?
A. The coupon rate exceeds the current yield when a bond sells at a discount.
B. Increasing the coupon rate decreases the current yield, all else constant.
C. An increase in market rates increases the market price of a bond.
D. The call price must equal the par value.
E. Decreasing the time to maturity increases the price of a discount bond, all else constant.
E
Which one of the following applies to a premium bond?
A. Coupon rate > current yield > yield to maturity.
B. Coupon rate > yield-to-maturity > current yield.
C. Coupon rate = current yield = yield-to-maturity.
D. Yield to maturity > current yield > coupon rate.
E. Coupon rate
A
Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock’s issuer is released? Assume the market is semi strong form efficient.
A. The information was expected
B. Investors do not pay attention to daily news
C. Investors tend to overreact
D. The news was positive
E. Company insiders were aware of the information prior to the announcement
A
A decrease in which of the following will increase the current value of a stock according to the dividend growth model?
A. Dividend growth rate.
B. Dividend amount.
C. Both the discount rate and the dividend growth rate.
D. Discount rate.
E. Number of future dividends, provided the number is less than infinite.
D
Efficient financial markets fluctuate continuously because:
A. Investments produce varying levels of net present values.
B. The markets are continually reacting to old information as that information is absorbed.
C. The markets are continually reacting to new information.
D. Current trading systems require human intervention.
E. Arbitrage trading is limited.
C
Protective covenants:
A. Are primarily designed to protect bondholders.
B. Only apply to bonds that have a deferred call provision.
C. Apply to short-term debt issues but not to long-term debt issues.
D. Only apply to privately issued bonds.
E. Are a feature found only in government-issued bond indentures.
A
The price sensitivity of a bond increases in response to a change in the market rate of interest as the:
A. Time to maturity and coupon rate both decrease.
B. Coupon rate increases.
C. Coupon rate and time to maturity both increase.
D. Coupon rate decreases and the time to maturity increases.
E. Time to maturity decreases.
D
