FINC 341 Exam 2 Theory Guyton
The yield spread between corporate bonds and treasury bonds increases as the bonds have longer
lengths to maturity. This is because the DRP and LP on corporate bonds increase with longer
length to maturity, but they don't exist on a Treasury bond regardless of length to maturity –
CORRECT ANSWER–True
The price of a 10% coupon bond trading at par of $1,000 will remain at $1,000 if the market
interest rate remains at 10%. Therefore, its current yield will remain at 10% and its capital gains
yield will be zero each year – CORRECT ANSWER–True
You could own three different bonds with 5 years left to maturity (but different original
maturities) equal credit risk, and thus the same going rate of return, but different current prices –
CORRECT ANSWER–True
Since income bonds cannot bankrupt the issuing company, they carry a lower coupon rate –
CORRECT ANSWER–False
Bonds with call protection pay a lower coupon rate than similar bonds without call protection –
CORRECT ANSWER–True
The risk of a decline in bond values due to an increase in rates is called interest rate risk –
CORRECT ANSWER–True
If a default risk on a bond increases, the bond's price will fall and the yield to maturity will
increase – CORRECT ANSWER–True
Under a mortgage bond, the corporation pledges specific assets as security for the bond –
CORRECT ANSWER–True
BBB bonds and below are considered "high-yield" (junk) bonds – CORRECT ANSWER–False
The United States was downgraded during the financial crisis recovery period – CORRECT
ANSWER–True
The fluctuation of a company's stock price caused by one of the company's products failing is
known as company-specific risk (also known as unsystematic risk) and can be completely
eliminated in a well-diversified portfolio – CORRECT ANSWER–True
The Security Market Line would probably become steeper if the U.S. had another financial crisis
– CORRECT ANSWER–True
, A negative beta of 0.7 means that a stock has only 70% of the movement of the market, but that
movement is in the opposite direction than the movement of the market – CORRECT
ANSWER–True
Market risk stems from factors such as war, recessions and other macro factors, and can be
diminished through diversification – CORRECT ANSWER–False
The best measure of a stock's risk to a nondiversified investor is the stock's coefficient of
variation – CORRECT ANSWER–True
If the expected rate of return is less than the required rate of return, stockholders will want to sell
the stock and there will be a tendency for the stock price to decrease (thus making the expected
rate of return increase toward the required rate of return) – CORRECT ANSWER–True
The value of a stock is dependent on how long the buyer plans to keep the stock and receive the
dividends – CORRECT ANSWER–False
The preemptive right has two primary goals – to prevent management from issuing a large
number of additional shares and purchasing those shares itself, and to protect stockholders from
the dilution of value of their stock – CORRECT ANSWER–True
Different classes of stock can have different numbers of votes per share – CORRECT
ANSWER–True
If the current Kd for bonds stays constant from now until a particular bond matures, and that
bond is currently selling at a premium on the secondary market, that particular bond will have a
current yield that is greater than its yield to maturity – CORRECT ANSWER–True
A putable bond is riskier to the buyer than a callable bond – CORRECT ANSWER–False
All else equal, for a given change in the going rate of return on bonds, the shorter the time to
maturity, the smaller the change in bond price – CORRECT ANSWER–True
As the Fed continues to increase rates, bond owners will lose value on their existing bonds since
the price of bonds will have to decrease in order to yield higher rates of return – CORRECT
ANSWER–True
The P/E Multiple Approach to valuing stock was used by Goldman Sachs during the Tech
Bubble – CORRECT ANSWER–True
When a company has a sinking fund requirement, it will call bonds in those years when the bond
is selling at a significant premium – CORRECT ANSWER–True
If you currently own a bond (with three years left until maturity) and you think bond interest
rates are going to decrease this year to less than the corporate rate that exists on this bond, you
The yield spread between corporate bonds and treasury bonds increases as the bonds have longer
lengths to maturity. This is because the DRP and LP on corporate bonds increase with longer
length to maturity, but they don't exist on a Treasury bond regardless of length to maturity –
CORRECT ANSWER–True
The price of a 10% coupon bond trading at par of $1,000 will remain at $1,000 if the market
interest rate remains at 10%. Therefore, its current yield will remain at 10% and its capital gains
yield will be zero each year – CORRECT ANSWER–True
You could own three different bonds with 5 years left to maturity (but different original
maturities) equal credit risk, and thus the same going rate of return, but different current prices –
CORRECT ANSWER–True
Since income bonds cannot bankrupt the issuing company, they carry a lower coupon rate –
CORRECT ANSWER–False
Bonds with call protection pay a lower coupon rate than similar bonds without call protection –
CORRECT ANSWER–True
The risk of a decline in bond values due to an increase in rates is called interest rate risk –
CORRECT ANSWER–True
If a default risk on a bond increases, the bond's price will fall and the yield to maturity will
increase – CORRECT ANSWER–True
Under a mortgage bond, the corporation pledges specific assets as security for the bond –
CORRECT ANSWER–True
BBB bonds and below are considered "high-yield" (junk) bonds – CORRECT ANSWER–False
The United States was downgraded during the financial crisis recovery period – CORRECT
ANSWER–True
The fluctuation of a company's stock price caused by one of the company's products failing is
known as company-specific risk (also known as unsystematic risk) and can be completely
eliminated in a well-diversified portfolio – CORRECT ANSWER–True
The Security Market Line would probably become steeper if the U.S. had another financial crisis
– CORRECT ANSWER–True
, A negative beta of 0.7 means that a stock has only 70% of the movement of the market, but that
movement is in the opposite direction than the movement of the market – CORRECT
ANSWER–True
Market risk stems from factors such as war, recessions and other macro factors, and can be
diminished through diversification – CORRECT ANSWER–False
The best measure of a stock's risk to a nondiversified investor is the stock's coefficient of
variation – CORRECT ANSWER–True
If the expected rate of return is less than the required rate of return, stockholders will want to sell
the stock and there will be a tendency for the stock price to decrease (thus making the expected
rate of return increase toward the required rate of return) – CORRECT ANSWER–True
The value of a stock is dependent on how long the buyer plans to keep the stock and receive the
dividends – CORRECT ANSWER–False
The preemptive right has two primary goals – to prevent management from issuing a large
number of additional shares and purchasing those shares itself, and to protect stockholders from
the dilution of value of their stock – CORRECT ANSWER–True
Different classes of stock can have different numbers of votes per share – CORRECT
ANSWER–True
If the current Kd for bonds stays constant from now until a particular bond matures, and that
bond is currently selling at a premium on the secondary market, that particular bond will have a
current yield that is greater than its yield to maturity – CORRECT ANSWER–True
A putable bond is riskier to the buyer than a callable bond – CORRECT ANSWER–False
All else equal, for a given change in the going rate of return on bonds, the shorter the time to
maturity, the smaller the change in bond price – CORRECT ANSWER–True
As the Fed continues to increase rates, bond owners will lose value on their existing bonds since
the price of bonds will have to decrease in order to yield higher rates of return – CORRECT
ANSWER–True
The P/E Multiple Approach to valuing stock was used by Goldman Sachs during the Tech
Bubble – CORRECT ANSWER–True
When a company has a sinking fund requirement, it will call bonds in those years when the bond
is selling at a significant premium – CORRECT ANSWER–True
If you currently own a bond (with three years left until maturity) and you think bond interest
rates are going to decrease this year to less than the corporate rate that exists on this bond, you
