Test 3 Review (Finance)

Because a bond's rating serves as an indicator of its default risk, the rating has a direct, measurable influence on the firm's____

cost of using such debt and thus the bond's interest rate

A bond that can be redeemed for cash at the bondholder's option when certain circumstances exist is called a(n)

putable bond

The risk that income from a bond portfolio will vary because cash flows must be reinvested at current market rates is called

interest rate reinvestment risk

In general, long-term unsecured debts have lower interest rates (costs) than long-term secured debts for a particular firm.

false

In the economic value added (EVA) equation, the is subtracted from the after-tax operating income to determine the EVA.

average cost of invested capital

If a preferred stock issue has a conversion feature, the stock can be converted into ____

common stock

A bond backed by tangible (real) assets is known as a .

mortgage bond

Certificates that represent ownership in stocks of foreign companies and are held in trusts at banks located in the countries where the stocks are traded are called

American depository receipts

Which of the following is true of common stock?

Dividends must be paid on preferred stock before they can be paid on common stock

American depository receipts (ADRs) are foreign stocks listed on stock exchanges located outside the country where the firms are headquartered.

False

Eurocredits are bank loans that are denominated in the currency of a country other than where the lending bank is located.

True

Federal funds represents____

loans from one bank to another bank

As junk bonds are high-risk instruments, the returns on such bonds are not very high

False

Which of the following would be considered a Euro stock?

A German company selling stock in Japan

A(n) is a provision that facilitates the orderly retirement of a bond issue

sinking fund

Which of the following is true about the payment of dividends by a firm?

Growth stocks pay little or no dividends; rather, the firms retain most of their earnings each year to reinvest in assets.

A bond with a $100 annual interest payment and $1,000 face value with five years to maturity (not expected to default) would sell for a premium if interest rates were below 9% and would sell for a discount if interest rates were greater than 11%.

True

Which of the following stocks is a nonvoting stock and is referred to as hybrid stock?

Preferred stock

A bond differs from a term loan in that a bond

has a higher issuance cost

A call provision for the redemption of a bond

allows the firm to refinance debt

On January 1 of the current year, the price of a stock is $42.50, whereas on December 31 of the current year, the price of the stock is $48.78. Determine the capital gain yield of the stock

14.78%

Which of the following is true about the price-earnings (P/E) ratio of a firm?

The appropriate value of P/E ratio is multiplied by the earnings per share (EPS) to estimate the appropriate stock price

Common stockholders have the right to ____

vote for the changes in a firm's charter

Other things held constant, if a bond indenture contains a call provision, the yield to maturity (YTM) on the bond that would exist without such a call provision will be the YTM with the call provision.

lower than

The interest rate on a 10 percent, 10-year zero-coupon bond with a $1,000 face value falls from 8 percent to 7 percent. Which of the following is true of the value of the bond?

The value of the bond at 7 percent is $508.34.

If a bond is selling for less than its face, or maturity, value and the market interest rate remains unchanged during the life of the bond, then the price (value) of the bond will increase as the maturity date nears.

True

Banks generally use the federal funds market to ____

adjust their reserves

A firm’s is determined by subtracting the costs associated with both the debt and the equity that the firm uses from its after-tax operating income?

economic value added (EVA)

If the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be ___

selling at a premium; i.e., the bond's market price should be greater than its face value