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Exam 8: Valuation of Financial Securities

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Question 71

Multiple Choice

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The_________ rate of interest creates an equilibrium between the supply of savings and the demandfor investment funds.

A) inflationary
B) nominal
C) risk-free
D) real

E) B) and D)
F) C) and D)

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Question 72

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The market for a security should have both breadth and depth in order to minimize the amount oftime required to convert it into cash.

A) True
B) False

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Question 73

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Shares of stock sold into the market for the first time by a company would utilize the primary market.

Generally, long-term loans have higher interest rates than short-term loans because of

The current price of DEF Corporation stock is $26.50 per share. Earnings next year should be $2 per share and it should pay a $1 dividend. The P/E multiple is 15 times on average. What price would you expect for DEF's stock in the future?

Following the theory of the "efficient market hypothesis" all of the following are true EXCEPT

The required return on the bond is likely to differ from the stated interest rate for either of two reasons: 1) economic conditions have changed, causing a shift in the basic cost of long-term funds, or 2) the firm's risk has changed.

When the required return is greater than the coupon interest rate, the bond value will be less thanits par value.

A Credit Union is the largest type of financial intermediary handling individual savings.

Since Treasury bills are issued in bearer form, they are considered to be virtually risk-free.

The_________ is the annual rate of interest earned on a security purchased on a given date and held to maturity.

To be truly marketable, a security must have three basic characteristics: a ready market, to be risk-free, and to have safety of principal.

Stock rights allow stockholders to purchase additional shares of stock in direct proportion to the number of shares they own.

The value of an asset is determined by discounting the expected cash flows back to their present value, using the market return as the discount rate.

An upward-sloping yield curve that indicates generally cheaper short-term borrowing costs than long-term borrowing costs is called

Company XYZ just paid a $2 dividend, and future dividends are expected to grow at a rate of 4%forever. If the required rate of return on similar stocks is 12%, what is the value of a share of stockin Company XYZ?

The value of a bond with semiannual interest is greater than a bond with annual interest,everything else the same.

Primary and secondary markets are markets for short-term and long-term securities, respectively.

Mugwump Industries has issued a bond which has a $1,000 par value and a 15 percent annual coupon interest rate. The bond will mature in ten years and currently sells for $1,250. Using the approximation formula to calculate the yield to maturity (YTM) of this bond results in a YTM of

When the required return is different from the coupon interest rate and is assumed to be constant until maturity, the value of the bond will approach its par value as the passage of time moves the bond's value closer to maturity.