FINC 341 Exam 2 Theory Statements
Common stockholders often have the preemptive right to purchase on a pro rata basis
any additional shares sold by the firm. This enables current stockholders to maintain
control and protects current stockholders from dilution of stock value. - CORRECT
ANSWER-True
When investing overseas, you are betting that foreign stock prices will increase in their
local markets, and that the currencies in which you will be paid will fall relative to the
dollar. - CORRECT ANSWER-False - everything is correct except you are betting
currencies you will be paid in will strengthen relative to the dollar.
According to the stock valuation model presented in the textbook, the value that an
investor assigns to a share of stock is independent of the length of time that investor
plans to hold the stock. - CORRECT ANSWER-True
Zero coupon bonds provide low interest income rather than capital appreciation. -
CORRECT ANSWER-False - Zero coupon bonds provide no interest income, only
capital appreciation
If a bond gets called (because of a sinking fund provision) that has a coupon rate that is
less than the current interest rate on similar bonds, the bondholder was actually hurt by
the sinking fund provision rather than protected. - CORRECT ANSWER-False - If a
bond gets called with a lower coupon rate than the current interest rate, investors will be
able to reinvest their money at the higher interest rate so they aren't hurt by the call
provision, rather they are protected.
If current interest rates are below an outstanding callable bond's coupon rate, then that
callable bond is likely to be called, and investors will estimate its expected rate of return
as the yield to call rather than as the yield to maturity. - CORRECT ANSWER-True
A decrease in interest rates will cause the price of outstanding bonds to fall. -
CORRECT ANSWER-False - A decrease in interest rates will cause the prices of
outstanding bonds to increase.
A bond with an S&P rating of BBB would be classified as a junk bond. - CORRECT
ANSWER-False - A bond with an S&P rating of AAA, AA, A, or BBB are classified as
investment grade bonds. BB or below are classified as junk bonds.
For bonds, price sensitivity to a given change in interest rates generally decreases as
years remaining to maturity decreases. - CORRECT ANSWER-True
, Ignoring interest accrued between payment dates, if the going rate of return on a bond
is less than a bond's coupon interest rate, and kd remains below the coupon rate of that
bond until maturity, then the market value of that bond will be above its par value until
the bond matures, at which time its market value will equal its par value. - CORRECT
ANSWER-True
Assuming equal coupon rates, a 15-year original maturity bond with five years left to
maturity has the same amount of interest rate risk as a 10-year original maturity bond
with five years left to maturity. - CORRECT ANSWER-True
If a company's bonds are selling at a premium, the current yield (CY) will be below the
expected rate of return for the year since the expected capital gains yield will be
positive. - CORRECT ANSWER-False - If a bond is selling at a premium (an amount
above $1,000), the bond's price will decrease each period until maturity (at which time it
will equal $1,000). If a price of a bond is decreasing, this is referred to as a negative
capital gain yield.
The higher (better) the rating on a bond, the lower is the default risk and hence the
lower is the required rate of return. - CORRECT ANSWER-True
In an amortized loan, the payment of principal is largest in the first payment, and
decreases with each payment thereafter. - CORRECT ANSWER-False - payment of
principal is smallest in the first payment and increases with each payment thereafter.
If a firm's earnings per share grew from $1 to $1.50 over a 10-year period, the total
growth would be 50%, and the annual growth rate would be equal to 5%. - CORRECT
ANSWER-False - The annual growth rate would be less than 5% (specifically, 4.14% ←
solved in TVM)
The nominal rate, the periodic rate, and the effective rate can all be equal when
compounding is semiannual and the payments are made semiannually. - CORRECT
ANSWER-False - they will only all be equal when compounding is annual.
The value of a perpetuity decreases when the required rate of return increases. -
CORRECT ANSWER-True
You would rather be invested in an account that pays you interest compounded
quarterly than one that pays interest compounded monthly. - CORRECT ANSWER-
False - Compounding more frequently will always yield a higher future value. Therefore
you'd rather have monthly compounding rather than quarterly if you are earning interest.
Founders' shares are stock owned by the firm's founders that have sole voting rights but
restricted dividends for a specified number of years. - CORRECT ANSWER-True
Common stockholders often have the preemptive right to purchase on a pro rata basis
any additional shares sold by the firm. This enables current stockholders to maintain
control and protects current stockholders from dilution of stock value. - CORRECT
ANSWER-True
When investing overseas, you are betting that foreign stock prices will increase in their
local markets, and that the currencies in which you will be paid will fall relative to the
dollar. - CORRECT ANSWER-False - everything is correct except you are betting
currencies you will be paid in will strengthen relative to the dollar.
According to the stock valuation model presented in the textbook, the value that an
investor assigns to a share of stock is independent of the length of time that investor
plans to hold the stock. - CORRECT ANSWER-True
Zero coupon bonds provide low interest income rather than capital appreciation. -
CORRECT ANSWER-False - Zero coupon bonds provide no interest income, only
capital appreciation
If a bond gets called (because of a sinking fund provision) that has a coupon rate that is
less than the current interest rate on similar bonds, the bondholder was actually hurt by
the sinking fund provision rather than protected. - CORRECT ANSWER-False - If a
bond gets called with a lower coupon rate than the current interest rate, investors will be
able to reinvest their money at the higher interest rate so they aren't hurt by the call
provision, rather they are protected.
If current interest rates are below an outstanding callable bond's coupon rate, then that
callable bond is likely to be called, and investors will estimate its expected rate of return
as the yield to call rather than as the yield to maturity. - CORRECT ANSWER-True
A decrease in interest rates will cause the price of outstanding bonds to fall. -
CORRECT ANSWER-False - A decrease in interest rates will cause the prices of
outstanding bonds to increase.
A bond with an S&P rating of BBB would be classified as a junk bond. - CORRECT
ANSWER-False - A bond with an S&P rating of AAA, AA, A, or BBB are classified as
investment grade bonds. BB or below are classified as junk bonds.
For bonds, price sensitivity to a given change in interest rates generally decreases as
years remaining to maturity decreases. - CORRECT ANSWER-True
, Ignoring interest accrued between payment dates, if the going rate of return on a bond
is less than a bond's coupon interest rate, and kd remains below the coupon rate of that
bond until maturity, then the market value of that bond will be above its par value until
the bond matures, at which time its market value will equal its par value. - CORRECT
ANSWER-True
Assuming equal coupon rates, a 15-year original maturity bond with five years left to
maturity has the same amount of interest rate risk as a 10-year original maturity bond
with five years left to maturity. - CORRECT ANSWER-True
If a company's bonds are selling at a premium, the current yield (CY) will be below the
expected rate of return for the year since the expected capital gains yield will be
positive. - CORRECT ANSWER-False - If a bond is selling at a premium (an amount
above $1,000), the bond's price will decrease each period until maturity (at which time it
will equal $1,000). If a price of a bond is decreasing, this is referred to as a negative
capital gain yield.
The higher (better) the rating on a bond, the lower is the default risk and hence the
lower is the required rate of return. - CORRECT ANSWER-True
In an amortized loan, the payment of principal is largest in the first payment, and
decreases with each payment thereafter. - CORRECT ANSWER-False - payment of
principal is smallest in the first payment and increases with each payment thereafter.
If a firm's earnings per share grew from $1 to $1.50 over a 10-year period, the total
growth would be 50%, and the annual growth rate would be equal to 5%. - CORRECT
ANSWER-False - The annual growth rate would be less than 5% (specifically, 4.14% ←
solved in TVM)
The nominal rate, the periodic rate, and the effective rate can all be equal when
compounding is semiannual and the payments are made semiannually. - CORRECT
ANSWER-False - they will only all be equal when compounding is annual.
The value of a perpetuity decreases when the required rate of return increases. -
CORRECT ANSWER-True
You would rather be invested in an account that pays you interest compounded
quarterly than one that pays interest compounded monthly. - CORRECT ANSWER-
False - Compounding more frequently will always yield a higher future value. Therefore
you'd rather have monthly compounding rather than quarterly if you are earning interest.
Founders' shares are stock owned by the firm's founders that have sole voting rights but
restricted dividends for a specified number of years. - CORRECT ANSWER-True
