Reference no: EM132833277

Ques 1: Choose the best answer:

1. In estimating "after-tax incremental operating cash flows" for a project, you should include all of the following except:

a. Sunk cost
b. Opportunity cost
c. Effects of cannibalization
d. None of the above

2. Determine whether the below statements are true or false.

I. Bond prices are positively related to interest rates.
II. The smaller a bond's duration, the greater its interest-rate risk.

a. Both are true.
b. I is true, II false.
c. I is false, II true.
d. Both are false.

3. Corporate bond issuers generally have the right to buy bonds back before they mature. Bonds subject to this provision are called ------- bonds.

a. Registered
b. Sinking
c. Callable
d. Convertible

4. Using the Gordon growth model, if a stock's next dividend is expected to be Rs.2.0, the discount rate is estimated to be 8%, and dividends are projected to increase at 4% per year indefinitely, then the stock should sell for;

a. Rs. 6.10
b. Rs. 31.25
c. Rs. 22.73
d. None of the above options

5. A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a;

a. Coupon bond.
b. Discounted bond.
c. Simple loan.
d. Fixed-payment loan.

6. When comparing stocks and bonds, investors find stocks attractive because

a. There is potential for greater gains investing in stock than there is investing in bonds.
b. Stockholders have a higher priority than bondholders when a firm is in trouble.
c. Firms are legally required to pay dividends on stock each year.
d. Returns are less volatile on stocks than on bonds.

7. The market portfolio has a beta of:

a. -0.5
b. 1.0
c. 0.5
d. -1.0

8. Process that involves decision making with respect to investment in fixed asset?

a. Risk and Return Analysis
b. Valuation
c. Capital Budgeting
d. Breakeven Analysis

9. Stock A has an expected return of 15% with a standard deviation of returns of 10%. Stock B has an expected return of 15% with a standard deviation of returns of 5%. Most investors are -------, which means they would prefer to invest in -------.

a. Risk averse; Stock B
b. Risk averse; Stock A
c. Risk lovers; Stock A
d. Risk lovers; Stock B

10. A bond's annual interest payment expressed as a percentage of its market price is the bond's

a. Coupon rate.
b. Current yield.
c. Discount rate.
d. Yield to maturity.

11. The ______ is a measure of the average rate of return an investor will earn if the investor buys the bond now and holds until it is called by the company.

a. Yield to call
b. Yield to worst
c. Yield to maturity
d. Yield to put

12. T-Bills, Certificate of deposit, Commercial papers, Mutual funds, Time deposits and Repurchase agreement (repos) etc. are traded in ____________ market.

a. Stock Market
b. Bond Market
c. Derivatives Market
d. Money Market

13. If a bond sells at a premium, where price exceeds face value, then we would expect to see:

a. Market interest rates could be the same, higher, or lower than the coupon rate.
b. Market interest rates below the coupon rate.
c. Market interest rates above the coupon rate.
d. Market interest rate the same as the coupon rate.

14. Which of the following is the variability of return on stocks or portfolios associated with changes in return on the market as a whole?

a. Variance
b. Correlation Coefficient
c. Systematic Risk
d. Unsystematic Risk

15. Which of the following accurately describes the behavior of bond prices?

a. For a given change in market required rate of return, the price of a bond will change by proportionally less, the lower the coupon.
b. For a given change in the market required rate of return, the price of a bond will change by a smaller amount, the longer its maturity.
c. If interest rates rise so that the market required rate of return increases, the bond's price will fall.
d. When the market required rate of return equals the stated coupon rate, the price of the bond be greater than its face value. (Assume annual interest payments and discounting)

16. Which of the following statement is TRUE regarding debt?

a. Debt gives an ownership right in the firm.
b. Unpaid debt can result in bankruptcy or financial failure.
c. Debt provides the voting rights to the bondholders.
d. Debt is the amount invested by the company.

17. Market interest rates (Kd) and the prices of bonds in the secondary market:

a. generally move in opposite directions.
b. generally move in the same direction.
c. sometimes move in the same direction, sometimes in opposite directions.
d. have no relationship with each other (i.e., they are independent).

18. Finance studies and addresses the ways in which individuals, business, and organizations;

a. Use monetary resources during a period after considering the associated risk.
b. Raise monetary resources during a period after considering the associated risk.
c. Allocate monetary resources during a period after considering the associated risk.
d. All of the given options

19. A bond that has only one payment, which occurs at maturity, defines which one of the following?

a. debenture
b. callable
c. junk
d. zero coupon

20. The stock which has fixed payments and failure of payments do not lead to bankruptcy is classified as:

a. common stock
b. preferred stock
c. bonds equity
d. none of the above

21. If you take decision of a project based on its NPV, you will select the project with the__________ NPV?

a. Lowest
b. Zero
c. Highest
d. Negative

22. A deferred call provision is which one of the following?

a. requirement that a bond issuer pay the current market price, plus accrued interest, should the firm decide to call a bond.
b. ability of a bond issuer to delay repaying a bond until after the maturity date should the issuer so opt.
c. prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to maturity.
d. prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date.

23. A call-protected bond is a bond that:

a. is guaranteed to be called.
b. can never be called.
c. is callable at any time.
d. cannot be called during a certain period of time.

24. The type of debt financing securities that matures in less than a year are classified as:

a. money market securities
b. capital market securities
c. saving intermediaries
d. discounted intermediaries

25. A Rs.1,000 face value bond can be redeemed early at the issuer's discretion for Rs.1,030, plus any accrued interest. The additional Rs.30 is called which one of the following?

a. redemption value
b. call premium
c. original-issue discount
d. redemption discount

26. What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

a. Gordon growth model
b. Zero growth model
c. Capital pricing model
d. None of the above

27. A zero-coupon bond is one that

a. Effectively has a zero percent coupon rate.
b. Pays interest to the investor based on the general level of interest rates, rather than at a specified coupon rate.
c. Is issued by state governments because they don't have to pay interest.
d. Is analyzed primarily by focusing ("zeroing in") on the coupon rate.

28. _________securities have no default risk; hence they carry the _______interest rates.

a. Treasury, Lowest
b. Corporate, Lowest
c. Treasury, Highest
d. Corporate, Highest

29. Bonds issued by City District Government Karachi:

a. are considered to be free of interest rate risk.
b. are considered to be free of default risk.
c. pay interest that is exempt from federal income taxes.
d. are called "munis".

30. Treasury bills and notes are examples of which of the following types of bonds.

a. Government Bonds
b.Zero Coupon Bonds
c. Junk Bonds
d.Euro Bonds