Question 1

Which of the following is NOT a benefit provided by the existence of organized security exchanges?

Accepted Answer

A)  providing a continuous market 
B)  establishing and publicizing fair security prices 
C)  helping businesses raise new capital 
D)  standardization of all debt agreements 
A)  providing a continuous market 
B)  establishing and publicizing fair security prices 
C)  helping businesses raise new capital 
D)  standardization of all debt agreements D

Question 2

Within the financial markets,explain what we mean by "private placements" and name the advantages and disadvantages.

Accepted Answer

Private placements are an alternative to the sale of securities to the public or to a restricted group of investors through a privileged subscription.Any type of security can be privately placed (directly placed).The major investors in private placements are large financial institutions.Based on the volume of securities purchased,the three most important investor groups are (1)life insurance companies,(2)state and local retirement funds,and (3)private pension funds.
Private placements have advantages and disadvantages compared with public offerings.
The advantages associated with private placements are:
1.Speed: The firm usually obtains funds more quickly through a private placement than a public offering.The major reason is that registration of the issue with the SEC is not required.
2.Reduced costs: These savings result because the lengthy registration statement for the SEC does not have to be prepared,and the investment-banking underwriting and distribution costs do not have to be absorbed.
3.Financing flexibility: In a private placement,the firm deals on a face-to-face basis with a small number of investors.This means that the terms of the issue can be tailored to meet the specific needs of the company.
The following disadvantages of private placements must be evaluated.
1.Interest costs: It is generally conceded that interest costs on private placements exceed those of public issues.Whether this disadvantage is enough to offset the reduced costs associated with a private placement is a determination the financial manager must make.
2.Restrictive covenants: A firm's dividend policy,working capital levels,and the raising of additional debt capital may all be affected by burdensome provisions especially in the private placement debt contract.
3.The possibility of future SEC registration: If the lender (investor)should decide to sell the issue to a public buyer before maturity,the issue must be registered with the SEC.Some lenders,then,require that the issuing firm agree to a future registration at their option.

Question 3

A group of investment bankers organized to distribute large securities issues is known as a syndicate.

Accepted Answer

A) True 
 B)False  True

Question 4

Which of the following statements is false?

Accepted Answer

A)  Brokers purchase securities for their own account. 
B)  Most corporate bond trading takes place over the counter. 
C)  Broker-dealers stand ready to buy and sell specific securities at selected prices. 
D)  none of the above 
A)  Brokers purchase securities for their own account. 
B)  Most corporate bond trading takes place over the counter. 
C)  Broker-dealers stand ready to buy and sell specific securities at selected prices. 
D)  none of the above

Question 5

Only individual investors participate in public offerings,while institutional investors participate in private placements.

Accepted Answer

A) True 
 B)False

Question 6

Investment banking firms are prohibited from selling securities due to conflicts of interest.

Accepted Answer

A) True 
 B)False

Question 7

An investor buys a 20-year Bbb-rated corporate bond with a nominal annual rate of return of 10%.The average inflation rate is expected to be 2%.The default risk premium is expected to be 5% and the maturity premium is 4%.Calculate the real rate of interest.

Accepted Answer

krf = k* + IRP + (k*

Question 8

Common stock is considered a short-term security because it has no maturity date and a long-term security is one with a maturity date of more than one year.

Accepted Answer

A) True 
 B)False

Question 9

A liquidity-risk premium is the additional return required by investors in longer-term securities to compensate them for the greater risk of price fluctuation on those securities caused by interest rate changes.

Accepted Answer

A) True 
 B)False

Question 10

All of the following securities are sold in money markets EXCEPT

Accepted Answer

A)  common stock. 
B)  commercial paper. 
C)  3-month U.S. Treasury bills. 
D)  6-month certificates of deposit. 
A)  common stock. 
B)  commercial paper. 
C)  3-month U.S. Treasury bills. 
D)  6-month certificates of deposit.

Question 11

Which of the following securities will likely have the highest default risk premium?

Accepted Answer

A)  U.S. Treasury bond maturing in 2027 
B)  Bbb-rated corporate bond maturing in 2020 actively traded on a major exchange 
C)  Aaa-rated corporate bond maturing in 2015 not actively traded 
D)  U.S. Treasury bill 
A)  U.S. Treasury bond maturing in 2027 
B)  Bbb-rated corporate bond maturing in 2020 actively traded on a major exchange 
C)  Aaa-rated corporate bond maturing in 2015 not actively traded 
D)  U.S. Treasury bill

Question 12

What was the average annual rate of return on long-term corporate bonds during the period 1926 to 2014?

Accepted Answer

A)  8.3% 
B)  6.5% 
C)  6.10% 
D)  7.00% 
A)  8.3% 
B)  6.5% 
C)  6.10% 
D)  7.00%

Question 13

If provided the nominal rate of interest (r)of 7.4% and the anticipated rate of inflation (i)of 4.5%,what is the real rate of interest (R)?

Accepted Answer

r = R + i + Ri
.074

Question 14

Reynolds,Inc.needs to raise $5 million by selling common stock.Reynolds sells 1 million shares of stock at $5 each to Goldman Sachs,who then is responsible for selling the shares to investors.This is an example of a

Accepted Answer

A)  privileged subscription. 
B)  standby agreement. 
C)  negotiated purchase. 
D)  commission or best-efforts agreement. 
A)  privileged subscription. 
B)  standby agreement. 
C)  negotiated purchase. 
D)  commission or best-efforts agreement.

Question 15

A "normal" yield curve is

Accepted Answer

A)  downward sloping. 
B)  downward sloping, then upward sloping. 
C)  upward sloping. 
D)  upward sloping, then downward sloping. 
A)  downward sloping. 
B)  downward sloping, then upward sloping. 
C)  upward sloping. 
D)  upward sloping, then downward sloping.

Question 16

The real rate of return is the return earned above the

Accepted Answer

A)  default risk premium. 
B)  risk-adjusted return. 
C)  inflation risk premium. 
D)  variability of returns measured by standard deviation. 
A)  default risk premium. 
B)  risk-adjusted return. 
C)  inflation risk premium. 
D)  variability of returns measured by standard deviation.

Question 17

Capital market transactions include which of the following?

Accepted Answer

A)  any security that is purchased from a brokerage firm that is well capitalized 
B)  common stock of a public corporation 
C)  all securities that are purchased in the open market 
D)  U.S. Treasury bills 
A)  any security that is purchased from a brokerage firm that is well capitalized 
B)  common stock of a public corporation 
C)  all securities that are purchased in the open market 
D)  U.S. Treasury bills

Question 18

The date today is January 1,2010.A one-year security maturing on 1/1/11 yields 3%.A two-year security maturing on 1/1/12 yields 6%.A three-year security maturing on 1/1/13 yields 11%.Calculate the expected annual return on a two-year security beginning 1/1/11 and maturing on 1/1/13.

Accepted Answer

$1,000 × (1.11)3 = $1,367.63 at the end

Question 19

Which of the following statements concerning private placements is MOST correct?

Accepted Answer

A)  Private placements do not involve investment bankers. 
B)  Although not selling the securities to the public, investment bankers may provide advice on the evaluation of prospective buyers and the terms of sale for private placements. 
C)  Private placements are limited to stocks, not bonds. 
D)  More than half of all private placements are sold to federal, state, or local governments or government agencies. 
A)  Private placements do not involve investment bankers. 
B)  Although not selling the securities to the public, investment bankers may provide advice on the evaluation of prospective buyers and the terms of sale for private placements. 
C)  Private placements are limited to stocks, not bonds. 
D)  More than half of all private placements are sold to federal, state, or local governments or government agencies.

Question 20

Preferred stock is traded in the money market,while common stock is traded in the capital market.

Accepted Answer

A) True 
 B)False

Which of the following is NOT a benefit provided by the existence of organized security exchanges?

Within the financial markets,explain what we mean by "private placements" and name the advantages and disadvantages.

A group of investment bankers organized to distribute large securities issues is known as a syndicate.

Which of the following statements is false?

Only individual investors participate in public offerings,while institutional investors participate in private placements.

Investment banking firms are prohibited from selling securities due to conflicts of interest.

An investor buys a 20-year Bbb-rated corporate bond with a nominal annual rate of return of 10%.The average inflation rate is expected to be 2%.The default risk premium is expected to be 5% and the maturity premium is 4%.Calculate the real rate of interest.

Common stock is considered a short-term security because it has no maturity date and a long-term security is one with a maturity date of more than one year.

A liquidity-risk premium is the additional return required by investors in longer-term securities to compensate them for the greater risk of price fluctuation on those securities caused by interest rate changes.

All of the following securities are sold in money markets EXCEPT

Which of the following securities will likely have the highest default risk premium?

What was the average annual rate of return on long-term corporate bonds during the period 1926 to 2014?

If provided the nominal rate of interest (r)of 7.4% and the anticipated rate of inflation (i)of 4.5%,what is the real rate of interest (R)?

Reynolds,Inc.needs to raise $5 million by selling common stock.Reynolds sells 1 million shares of stock at $5 each to Goldman Sachs,who then is responsible for selling the shares to investors.This is an example of a

A "normal" yield curve is

The real rate of return is the return earned above the

Capital market transactions include which of the following?

The date today is January 1,2010.A one-year security maturing on 1/1/11 yields 3%.A two-year security maturing on 1/1/12 yields 6%.A three-year security maturing on 1/1/13 yields 11%.Calculate the expected annual return on a two-year security beginning 1/1/11 and maturing on 1/1/13.

Which of the following statements concerning private placements is MOST correct?

Preferred stock is traded in the money market,while common stock is traded in the capital market.

An Introduction to the Foundations of Financial Management

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

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Exam 2: The Financial Markets and Interest Rates

Which of the following is NOT a benefit provided by the existence of organized security exchanges?

Within the financial markets,explain what we mean by "private placements" and name the advantages and disadvantages.

A group of investment bankers organized to distribute large securities issues is known as a syndicate.

Which of the following statements is false?

Only individual investors participate in public offerings,while institutional investors participate in private placements.

Investment banking firms are prohibited from selling securities due to conflicts of interest.

An investor buys a 20-year Bbb-rated corporate bond with a nominal annual rate of return of 10%.The average inflation rate is expected to be 2%.The default risk premium is expected to be 5% and the maturity premium is 4%.Calculate the real rate of interest.

Common stock is considered a short-term security because it has no maturity date and a long-term security is one with a maturity date of more than one year.

A liquidity-risk premium is the additional return required by investors in longer-term securities to compensate them for the greater risk of price fluctuation on those securities caused by interest rate changes.

All of the following securities are sold in money markets EXCEPT

Which of the following securities will likely have the highest default risk premium?

What was the average annual rate of return on long-term corporate bonds during the period 1926 to 2014?

If provided the nominal rate of interest (r)of 7.4% and the anticipated rate of inflation (i)of 4.5%,what is the real rate of interest (R)?

Reynolds,Inc.needs to raise $5 million by selling common stock.Reynolds sells 1 million shares of stock at $5 each to Goldman Sachs,who then is responsible for selling the shares to investors.This is an example of a

A "normal" yield curve is

The real rate of return is the return earned above the

Capital market transactions include which of the following?

The date today is January 1,2010.A one-year security maturing on 1/1/11 yields 3%.A two-year security maturing on 1/1/12 yields 6%.A three-year security maturing on 1/1/13 yields 11%.Calculate the expected annual return on a two-year security beginning 1/1/11 and maturing on 1/1/13.

Which of the following statements concerning private placements is MOST correct?

Preferred stock is traded in the money market,while common stock is traded in the capital market.

An Introduction to the Foundations of Financial Management

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters