Finance chapter 1-4 Flashcards
Would a depositor prefer an APR of 8% with monthly compounding or an APR of 8.5% with
semiannual compounding?
8.5% with semiannual compounding
Given a set future value, which of the following will contribute to a lower present value?
A) lower discount factor B) fewer time periods
C) higher discount rate D) less frequent discounting
higher discount rate
Investors who buy which type of bond will be guaranteed a capital loss if they hold the bond to
maturity?
A) premium bond B) discount bond
C) junk bond D) zero-coupon bond
premium bond
If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond’s
price will be expected to:
A) be less than the face value at maturity.
B) exceed the face value at maturity.
C) decline over time, reaching par value at maturity.
D) increase over time, reaching par value at maturity.
increase over time, reaching par value at maturity
The existence of an upward-sloping yield curve suggests that:
A) bonds will not return as much as common stocks.
B) bonds should be selling at a discount to par value.
C) interest rates will be increasing in the future.
D) real interest rates will be increasing soon.
interest rates will be increasing in the future
When market interest rates exceed a bond’s coupon rate, the bond will:
A) decrease its coupon rate. B) increase its coupon rate.
C) sell for more than par value. D) sell for less than par value.
sell for less than par value
Which of the following would not be associated with a zero-coupon bond?
A) discount bond B) interest-rate risk C) yield to maturity D) current yield
current yield
Which one of the following is most apt to be correct for a CCC-rated bond, compared to a
BBB-rated bond?
A) the CCC bond will have a higher price for the same term.
B) the CCC bond will have a shorter term.
C) the CCC bond will have a variable-coupon rate.
D) the CCC bond will offer a higher promised yield to maturity
the CCC bond will offer a higher promised yield to maturity.
Many investors may be drawn to bonds with capital gains only because:
A) high coupon payments. B) long periods until maturity.
C) reduced taxation on capital gains. D) no taxation on capital gains.
reduced taxation on capital gains
Stocks that have the same expected risk should:
A) have the same price. B) have the same sustainable growth rate.
C) offer the same dividend payment. D) have the same expected rate of return
have the same expected rate of return
In the calculation of rates of return on common stock, dividends are and capital gains are
.
A) not guaranteed; not guaranteed B) guaranteed; not guaranteed
C) guaranteed; guaranteed D) not guaranteed; guaranteed
not guaranteed; not guaranteed
Security prices are said to follow a “random walk,” which means that:
A) it is impossible to know whether stocks offer higher returns than bonds.
B) successive price changes are unpredictable.
C) stock selection for portfolio composition is unimportant.
D) investment analysts are unnecessary.
successive price changes are unpredictable
If stock prices follow a random walk, which of the following statement(s) is(are) correct?
A) Both successive stock price changes are not related and the history of stock prices cannot be
used to predict future returns to investors
B) the history of stock prices cannot be used to predict future returns to investors
C) successive stock price changes are not related
D) None of the choices are correct
Both successive stock price changes are not related and the history of stock prices cannot be
used to predict future returns to investors
The g in the constant-growth dividend model refers to:
A) the annual growth rate for stock price.
B) The annual growth rate for stock price and for dividends.
C) the annual growth rate for dividends.
D) None of the choices are correct.
The annual growth rate for stock price and for dividends
A project has a payback period of five years and the firm employs a 10 percent cost of capital.
Which of the following statements is correct concerning this Project’s discounted payback?
A) discounted payback will decrease if the Project’s IRR exceeds 10 percent.
B) discounted payback will exceed five years.
C) discounted payback will increase if the Project’s IRR is less than 10 percent.
D) discounted payback will be less than five years.
discounted payback will exceed five years
If a Project’s expected rate of return exceeds its opportunity cost of capital, one would expect:
A) the opportunity cost of capital to be too low.
B) the IRR to exceed the opportunity cost of capital.
C) the NPV to be zero.
D) the profitability index to exceed 1.0.
the IRR to exceed the opportunity cost of capital
soft capital rationing:
A) should be costless to the shareholders of the firm.
B) solves the problem of investment timing.
C) is used to determine mutually exclusive projects.
D) is costly to shareholders.
is used to determine mutually exclusive projects
If projects A and B are independent, which of the following is true?
A) Value (A + B) = value (A) + value (B)
B) Value (A + B) > value (A) + value (B)
C) Value (A + B) < value (A) + value (B)
D) Value (A + B) - value (B) > value (A)
Value (A + B) = value (A) + value (B)
If the opportunity cost of capital for a project exceeds the Project’s IRR, then the project has a(n):
negative NPV
Soft capital rationing is imposed upon a firm from ________ sources, while hard capital rationing is imposed from
________ sources.
A) External; external B) External; internal
C) Internal; external D) Internal; internal
Internal; external
A Project’s payback period is determined to be four years. If it is later discovered that additional cash flows will be
generated in years five and six, then:
A) the Project’s payback period will be reduced.
B) the Project’s payback period will be unchanged.
C) the Project’s payback period will be increased.
D) the discount rate must be known to determine whether the payback period changes.
the Project’s payback period will be unchanged
A stream of equal cash payments lasting forever is termed as:
a. an annuity.
b. an annuity due.
c. an installment plan.
d. a perpetuity.
a perpetuity
When an investment pays only simple interest, this means:
a. the interest rate is lower than on comparable investments.
b. the future value of the investment will be low.
c. the earned interest is nontaxable to the investor.
d. interest is earned only on the original investment.
the future value of the investment will be low
The concept of compound interest refers to:
a. earning interest on the original investment.
b. payment of interest on previously earned interest.
c. investing for a multiyear period of time.
d. determining the APR of the investment
determining the APR of the investment
