FIN 6100 exam 1 Questions and Answers Already Passed Latest Update 2025-2026
A bond that makes no coupon payments and is initially priced at a deep discount is called a
_____ bond. - Answers zero coupon
The written agreement between a corporation and the bondholder's representative is called the -
Answers indenture
Bonds below BBB or Baa are called - Answers junk bonds
If a bond was issued at par, the quoted price of the bond will not necessarily equal the par value
of the bond after issuance because - Answers market interest rates have changes and or
interest have accrued
The call policy that maximizes shareholder wealth is to call a bond issue when the - Answers
bond's price equals or exceeds the call price
Floating rate bonds are bonds with - Answers floating coupon rates tied to an interest rate index
A bond has a call provision. The call provision allows the _________ to _________ the bonds before
maturity - Answers issuer; call in
If its yield to maturity is less than its coupon rate, a bond will sell at a _____, and increases in
market interest rates will _____ - Answers premium; decrease this premium
Debt ratings issued by companies such as Moody's and Standard and Poor's depend on -
Answers the probability of firm default and protection given in the indenture in case of default
All else constant, a bond will sell at ______ when the yield to maturity is _____ the coupon rate -
Answers discount; higher than
Suppose that a bond is issued at its par value or face value. If market interest rates rise after the
issue, the price of the bond will likely - Answers fall below its par value
The efficient portfolios - Answers provide highest returns for a given level of risk and provide
least risk for a given level of returns
The correlation meausres the - Answers direction of movement between the returns of two
stocks
Maximum diversification is obtained by combining two stocks with a correl. coefficient equal to
- Answers -1
Beta of the market portfolio is - Answers +1
Beta of treasury bills portfolio is - Answers 0
The CAPM states that - Answers the expected risk premium on an investment is proportion to
, beta
Bet measure indicates - Answers the change in the rate of return on an investment for a given
change in the market return
T/F Financial leverage affects the risk of the firm's assets - Answers False
A stock with a beta of zero would be expected to - Answers have a rate of return equal to the
risk-free rate
The beta is a measure of - Answers market risk
Cost of capital is the same as cost of equity for firms - Answers financed entirely by equity
Total capitalization is defined as - Answers total long-term liabilities plus stockholders' equity
Modigliani and Miller's Proposition I states that - Answers the market value of any firm is
independent of its capital structure
For a levered firm, - Answers as EBIT increases, EPS increases by a larger percentage.
When comparing levered vs. unlevered capital structures, leverage works to increase EPS for
high levels of operating income because - Answers interest payments on the debt stay fixed,
leaving more income to be more distributed over less shares
T/F According to Proposition II, the cost of equity increases as more debt is issued, but the
weighted average cost of capital remains unchanged - Answers True
T/F Financial leverage increases the expected return and risk of the shareholder - Answers True
Risk shifting implies - Answers When faced with bankruptcy, managers tend to invest in high ris,
high return projects
The trade-off theory of capital structure predicts that - Answers safe firms should borrow more
than risky ones
T/F Financial leverage affects the risk of the firm's common stock - Answers True
The pecking order theory of capital structure implies that - Answers Firms prefer internal
finance and debt to equity when external financing is required
Corporations typically have the right to repurchase a debt issue prior to maturity at a fixed price,
but only after some number of years have passed. Such debt is said to feature - Answers
Callable
Which of the following is not a common method used to align managerial incentives to those of
the investor - Answers higher base salary
A bond that makes no coupon payments and is initially priced at a deep discount is called a
_____ bond. - Answers zero coupon
The written agreement between a corporation and the bondholder's representative is called the -
Answers indenture
Bonds below BBB or Baa are called - Answers junk bonds
If a bond was issued at par, the quoted price of the bond will not necessarily equal the par value
of the bond after issuance because - Answers market interest rates have changes and or
interest have accrued
The call policy that maximizes shareholder wealth is to call a bond issue when the - Answers
bond's price equals or exceeds the call price
Floating rate bonds are bonds with - Answers floating coupon rates tied to an interest rate index
A bond has a call provision. The call provision allows the _________ to _________ the bonds before
maturity - Answers issuer; call in
If its yield to maturity is less than its coupon rate, a bond will sell at a _____, and increases in
market interest rates will _____ - Answers premium; decrease this premium
Debt ratings issued by companies such as Moody's and Standard and Poor's depend on -
Answers the probability of firm default and protection given in the indenture in case of default
All else constant, a bond will sell at ______ when the yield to maturity is _____ the coupon rate -
Answers discount; higher than
Suppose that a bond is issued at its par value or face value. If market interest rates rise after the
issue, the price of the bond will likely - Answers fall below its par value
The efficient portfolios - Answers provide highest returns for a given level of risk and provide
least risk for a given level of returns
The correlation meausres the - Answers direction of movement between the returns of two
stocks
Maximum diversification is obtained by combining two stocks with a correl. coefficient equal to
- Answers -1
Beta of the market portfolio is - Answers +1
Beta of treasury bills portfolio is - Answers 0
The CAPM states that - Answers the expected risk premium on an investment is proportion to
, beta
Bet measure indicates - Answers the change in the rate of return on an investment for a given
change in the market return
T/F Financial leverage affects the risk of the firm's assets - Answers False
A stock with a beta of zero would be expected to - Answers have a rate of return equal to the
risk-free rate
The beta is a measure of - Answers market risk
Cost of capital is the same as cost of equity for firms - Answers financed entirely by equity
Total capitalization is defined as - Answers total long-term liabilities plus stockholders' equity
Modigliani and Miller's Proposition I states that - Answers the market value of any firm is
independent of its capital structure
For a levered firm, - Answers as EBIT increases, EPS increases by a larger percentage.
When comparing levered vs. unlevered capital structures, leverage works to increase EPS for
high levels of operating income because - Answers interest payments on the debt stay fixed,
leaving more income to be more distributed over less shares
T/F According to Proposition II, the cost of equity increases as more debt is issued, but the
weighted average cost of capital remains unchanged - Answers True
T/F Financial leverage increases the expected return and risk of the shareholder - Answers True
Risk shifting implies - Answers When faced with bankruptcy, managers tend to invest in high ris,
high return projects
The trade-off theory of capital structure predicts that - Answers safe firms should borrow more
than risky ones
T/F Financial leverage affects the risk of the firm's common stock - Answers True
The pecking order theory of capital structure implies that - Answers Firms prefer internal
finance and debt to equity when external financing is required
Corporations typically have the right to repurchase a debt issue prior to maturity at a fixed price,
but only after some number of years have passed. Such debt is said to feature - Answers
Callable
Which of the following is not a common method used to align managerial incentives to those of
the investor - Answers higher base salary
