Deck 5: Financial Instruments and Markets

Question 1

In a strong-form efficient market,insider trading is not profitable.

Answer 1

True

Question 2

Which one of the following statements is true?

A) Equity securities offer fixed claims on future cash payouts.
B) Unlike bondholders,for their returns,shareholders rely entirely on price appreciation.
C) In theory,common shareholders exercise very little control over company decisions.
D) Historically,common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds.
E) Preferred shareholders are the first investors to be repaid in bankruptcy liquidation.

Answer 2

Historically,common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds.

Question 3

Shelf registration is possible for both debt and equity issues.

Answer 3

True

Question 4

In the steps a company takes to prepare for an IPO,the "road show" precedes the "bake-off".

Question 5

You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000.The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end.The exchange rate was $1 = ¥100 at the beginning of the year and $1 = ¥122 at year-end.What holding period return,measured in U.S.dollars,did you earn on the bond?

A) -18.03%
B) -7.38%
C) -5.03%
D) 3.0%
E) 10.0%

Question 6

What is the holding period return for the year on a bond with a par value of $1,000 and a coupon rate of 8.5% if its price at the beginning of the year was $1,215 and its price at the end of the year was $1,020? Assume interest is paid annually.

A) -11.00%
B) -10.78%
C) -9.05%
D) 10.50%
(85 + 1,020 - 1,215)/1,215 = -0.0905

Question 7

You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000.The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end.The exchange rate was $1 = ¥100 at the beginning of the year and $1 = ¥97 at year-end.What holding period return,measured in U.S.dollars,did you earn on the bond?

A) 3.09%
B) 6.09%
C) 13%
D) 16.49%
E) 30%

Question 8

Private equity firms comprise a relatively insignificant portion of the American economy.

Question 9

Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1928-2013 period)?

A) Short-term government bills,long-term corporate bonds,long-term government bonds,common stocks
B) Long-term corporate bonds,long-term government bonds,common stocks,short-term government bills
C) Common stocks,long-term government bonds,long-term corporate bonds,short-term government bills
D) Common stocks,long-term corporate bonds,long-term government bonds,short-term government bills
E) Long-term corporate bonds,common stocks,short-term government bills,long-term government bonds

Question 10

Bond investors should be more concerned with real returns than with nominal returns.

Question 11

A $1,000 par value bond with a fixed 10% rate of interest pays coupons semiannually.What amount will the bondholder receive on the bond's maturity date?

A) $50
B) $100
C) $500
D) $1,000
E) $1,050

Question 12

Zack owns a bond that will pay him $35 each year in interest plus a $1,000 principal payment at maturity.The $1,000 principal payment is called the:

A) coupon.
B) par value.
C) discount.
D) yield.
E) call premium.

Question 13

Mike just purchased a bond which pays $40 every six months in interest.The $40 interest payment is also called the:

A) coupon.
B) par value.
C) discount.
D) call premium.
E) yield.

Question 14

Investment-grade bonds are usually defined as bonds with ratings of BBB- or higher.

Question 15

The only reason why the price would fall on a corporate bond is if market interest rates increase.

Question 16

Which one of the following statements is false?

A) Financial executives must design financial securities to meet the needs of the firm and its investors.
B) Financial instruments are subject to full disclosure requirements.
C) The design of financial instruments is greatly constrained by law and regulation.
D) Financial instruments are claims against a company's cash flows and assets.
E) None of the abovE.

Question 17

Which of the following securities has a purely fixed claim against a firm's cash flows?

A) bonds
B) options
C) common stock
D) None of the above.

Question 18

After issue,the market price of a fixed-rate bond can differ substantially from its par value.

Question 19

You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000.The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end.What holding period return,measured in yen,did you earn on the bond?

A) 3%
B) 7%
C) 10%
D) 13%
E) 30%

Question 20

Which of the following securities has a purely residual claim against a firm's cash flows?

A) preferred stock
B) callable bonds
C) common stock
D) non-callable bonds
E) None of the abovE.

Question 21

Himmel Corp.wants to raise $100 million in a new stock issue.Its investment banker indicates that the sale of new stock will require 12 percent underpricing and a 7 percent spread.a.Assuming Himmel's stock price does not change from its current price of $50 per share,how many shares must the company sell and at what price to the public?
b.How much money will the investment banking syndicate earn on the sale?
c.Is the 12 percent underpricing a cash flow? Is it a cost? If so,to whom?

Question 22

Which of the following are the most likely reasons for why a stock price might not react at all on the day that new information related to the stock issuer is released?
I.Insiders knew the information prior to the announcement
II.Investors need time to digest the information prior to reacting
III.The information has no bearing on the value of the firm
IV.The information was anticipated

A) I and II only
B) I and III only
C) II and III only
D) II and IV only
E) III and IV only

Question 23

At the end of 2013,Crane Industries Inc.'s stock price was $30.75.A year later it was $34.88.Per share dividends over the year were $0.55,while earnings per share were $1.33.What was the percentage change in the share price in fiscal year 2014?

A) 1.79%
B) 4.33%
C) 13.43%
D) 15.22%
E) 17.76%

Question 24

At the end of 2013,Crane Industries Inc.'s stock price was $30.75.A year later it was $34.88.Per share dividends over the year were $0.55,while earnings per share were $1.33.What was the dividend yield in fiscal year 2014?

A) 1.79%
B) 4.33%
C) 13.43%
D) 15.22%
E) 17.76%

Question 25

Chapter 5 presents evidence that the average annual rate of return on common stocks over many years has exceeded the return on government bonds in the United States,while returns on common stocks have also exhibited more volatility than returns on U.S.government bonds.Suppose that last year,the realized rate of return on government bonds exceeded the return on common stocks.Your colleague suggests that "last year shows us that investors are now willing to settle for lower returns on stocks than on bonds." How would you interpret this result?

Question 26

Which of the following statements regarding junk bonds is true?

A) Junk bonds typically offer lower yields to maturity than investment-grade bonds.
B) Junk bonds have higher priority in bankruptcy than preferred stock.
C) Junk bonds offer no coupon payments to investors.
D) Junk bonds are typically defined as bonds with default probabilities of 25% or higher.

Question 27

Which of the following statements are true?
i.Underwriters help private companies access public stock markets through IPOs.II.Shelf registrations and private placements are examples of seasoned security issues.III.Issue costs for debt are typically greater than issue costs for equity.IV.Bearer bonds make it easier for investors to avoid paying taxes on interest income.

A) I and II only
B) I and III only
C) I,II,and IV only
D) I,III,and IV only
E) I,II,III,and IV

Question 28

Which of the following variables does NOT affect the value of a stock option?

A) The predicted future price of the underlying stock
B) The current price of the underlying stock
C) The option's time to maturity
D) The option's strike price
E) The interest rate

Question 29

What type of financial instrument is depicted in the position diagram shown below?

A) Forward sale
B) Forward purchase
C) Call option
D) Put option

Question 30

You believe interest rates will soon fall.a.Would you rather own a three-year,6 percent coupon,fixed-rate bond or an equivalent-risk,three-year,floating-rate bond currently paying 6 percent interest?
b.Would your answer to (a)change if you were contemplating issuing a bond rather than owning one? If so,how?
c.Would your answer to (a)change if,as an investor,you believed interest rates would soon rise? If so,why?

Question 31

What would be the carried interest (at 20%)on a private equity portfolio with an initial value of $500 million that was subsequently liquidated for $750 million?

A) $50 million
B) $100 million
C) $150 million
D) $250 million

Question 32

Carbon8 Corporation wants to raise $120 million in a seasoned equity offering,net of all fees.Carbon8 stock currently sells for $28.00 per share.The underwriters will require a fee of $1.25 per share,and indicate that the issue must be underpriced by 7.5%.In addition to the underwriter's fee,the firm will incur $785,000 in legal,administrative,and other costs.How many shares must Carbon8 sell in order to raise the desired amount of capital?

A) 4.3 million
B) 4.5 million
C) 4.6 million
D) 4.9 million
The price will be set at 7.5% below the current price,or at 0.925 × 28.00 = $25.90.The underwriters will take $1.25 per share,leaving $24.65/share for Carbon8.Carbon8 needs to earn $120,785,000 at $24.65/share,so it must sell 120.785mil/24.65 = 4.9 million shares.

Question 33

Which of the following statements related to market efficiency tends to be supported by current evidence?
i.Markets tend to respond quickly to new information.II.It is difficult for the typical investor to earn above-average returns without taking above-average risks.III.Short-run prices are difficult to predict accurately based on public information.IV.Markets are most likely strong-form efficient.

A) I and III only
B) II and IV only
C) I and IV only
D) I,III,and IV only
E) I,II,and III only

Question 34

At the end of 2013,Crane Industries Inc.'s stock price was $30.75.A year later it was $34.88.Per share dividends over the year were $0.55,while earnings per share were $1.33.What rate of return did the common stockholders earn in fiscal year 2014?

A) 1.79%
B) 4.33%
C) 13.43%
D) 15.22%
E) 17.76%

Question 35

Individuals who continually monitor the financial markets seeking mispriced securities:

A) earn excess profits over the long term.
B) make the markets increasingly more efficient.
C) are never able to find a security that is temporarily mispriced.
D) are overwhelmingly successful in earning abnormal profits.
E) are always quite successful using only historical price information as their basis of evaluation.

Question 36

If the stock market in the United States is efficient,how do you explain the fact that some people make very high returns? Would it be more difficult to reconcile very high returns with efficient markets if the same people made extraordinary returns year after year?

Question 37

Which of the following statements regarding preferred stock is true?

A) Holders of preferred stock have the same voting rights as common stockholders.
B) Preferred stock dividend payments are a deductible expense for corporate tax purposes.
C) Almost all public corporations are at least partly financed with preferred stock.
D) None of the above.