Financial Management Exam #2 Uiowa|
Questions and Correct answers
Interest Rate (Price) Risk - Ans changes in bond prices arising from fluctuation market
interest rates
Reinvestment Risk - Ans uncertainty of future interest rates at which investment
proceeds would be reinvested
Default risk - Ans risk that the issuer cannot make payments on the debt
Zero coupon bonds - Ans non periodic interest and issued at huge discount
nominal return - Ans raw % return, not adjusted for inflation
arithmetic average return - Ans sum of periodic returns divided by number of returns;
"typical" return over a given period
geometric average return - Ans compounded rate of return over a given period
, Risk Premium - Ans reward for bearing risk, the difference between a risky
investment return and the risk-free rate
Cumulative dividends - Ans a protective feature on preferred stock that requires
preferred dividends previously not paid to be disbursed before any common
stock dividends can be paid.
Convertibility - Ans most preferred stock recently can be converted to common stock
Voting Rights - Ans Common stock holders have the right to elect the firm's
directors who in turn appoint the officers who manage business
Residual claimants - Ans person who has sole remaining claim on company's cash flows.
Double taxation of dividends - Ans Not tax deductible for corporation but is taxable
for shareholders
Dividends optional - Ans No firm is required to pay dividends. Income stocks usually
pay dividends and growth usually don't.
IPO - Ans initial public offering, file prospectus with SEC and underwriter sells issue
Discount discount approach - Ans price of any security=PV of future cash flows
(dividend stream)
Constant growth - Ans use "Gordon growth model" to find value of stock that
has constant growth
Questions and Correct answers
Interest Rate (Price) Risk - Ans changes in bond prices arising from fluctuation market
interest rates
Reinvestment Risk - Ans uncertainty of future interest rates at which investment
proceeds would be reinvested
Default risk - Ans risk that the issuer cannot make payments on the debt
Zero coupon bonds - Ans non periodic interest and issued at huge discount
nominal return - Ans raw % return, not adjusted for inflation
arithmetic average return - Ans sum of periodic returns divided by number of returns;
"typical" return over a given period
geometric average return - Ans compounded rate of return over a given period
, Risk Premium - Ans reward for bearing risk, the difference between a risky
investment return and the risk-free rate
Cumulative dividends - Ans a protective feature on preferred stock that requires
preferred dividends previously not paid to be disbursed before any common
stock dividends can be paid.
Convertibility - Ans most preferred stock recently can be converted to common stock
Voting Rights - Ans Common stock holders have the right to elect the firm's
directors who in turn appoint the officers who manage business
Residual claimants - Ans person who has sole remaining claim on company's cash flows.
Double taxation of dividends - Ans Not tax deductible for corporation but is taxable
for shareholders
Dividends optional - Ans No firm is required to pay dividends. Income stocks usually
pay dividends and growth usually don't.
IPO - Ans initial public offering, file prospectus with SEC and underwriter sells issue
Discount discount approach - Ans price of any security=PV of future cash flows
(dividend stream)
Constant growth - Ans use "Gordon growth model" to find value of stock that
has constant growth
