FIN 534 MIDTERM EXAM PART I & PART II (50 Questions)

Fin 534 Midterm PART 1
Question 1
Which of the following statements is
CORRECT?
Answer
The New York Stock Exchange is an
auction market with a physical location.
Capital market transactions involve
only the purchase and sale of equity securities, i.e., common stocks.
If an investor sells shares of stock
through a broker, then this would be a primary market transaction.
Consumer automobile loans are
evidenced by legal documents called “promissory notes,” and these
individual notes are traded in the money market.
While the distinctions are blurring
as investment banks are today buying commercial banks, and vice versa,
investment banks generally specialize in lending money, whereas commercial
banks generally help companies raise capital from other parties.
Question
2
Which of the following statements is
CORRECT?
Answer
Capital market instruments include
both long-term debt and common stocks.
An example of a primary market
transaction would be your uncle transferring 100 shares of Wal-Mart stock to
you as a birthday gift.
The NYSE does not exist as a
physical location; rather, it represents a loose collection of dealers who
trade stocks electronically.
If your uncle in New York sold 100
shares of Microsoft through his broker to an investor in Los Angeles, this
would be a primary market transaction.
While the two frequently perform
similar functions, investment banks generally specialize in lending money,
whereas commercial banks generally help companies raise large blocks of capital
from investors.
Question
3
You recently sold 100 shares of your
new company, XYZ Corporation, to your brother at a family reunion. At the
reunion your brother gave you a check for the stock and you gave your brother
the stock certificates. Which of the following statements best describes this
transaction?
Answer
This is an example of an exchange of
physical assets.
This is an example of a primary
market transaction.
This is an example of a direct
transfer of capital.
This is an example of a money market
transaction.
This is an example of a derivatives
market transaction
Question
4
Which of the following
statements is CORRECT?
Answer
While the distinctions are blurring,
investment banks generally specialize in lending money, whereas commercial
banks generally help companies raise capital from other parties.
A security whose value is derived
from the price of some other “underlying” asset is called a liquid
security.
Money market mutual funds usually
invest most of their money in a well-diversified portfolio of liquid common
stocks.
Money markets are markets for common
stocks and long-term debt.
The NYSE operates as an auction
market, whereas the Nasdaq is a dealer market.
Question
5
Money markets are markets for
Answer
Foreign stocks.
Consumer automobile loans.
U.S. stocks.
Short-term debt securities.
Long-term bonds.
Question
6
Which of the following could explain
why a business might choose to operate as a corporation rather than as a sole
proprietorship or a partnership?
Answer
Corporations generally find it
relatively difficult to raise large amounts of capital.
Less of a corporation’s income is
generally subjected to taxes than would be true if the firm were a partnership.
Corporate shareholders escape
liability for the firm’s debts, but this factor may be offset by the tax
disadvantages of the corporate form of organization.
Corporate investors are exposed to
unlimited liability.
Corporations generally face
relatively few regulations.
Question
7
You recently sold 200 shares of
Apple stock to your brother. The transfer was made through a broker, and the
trade occurred on the NYSE. This is an example of:
Answer
An over-the-counter market
transaction
A futures market transaction.
A primary market transaction.
A secondary market transaction.
A money market transaction.
Question
8
Which of the following statements is
CORRECT?
Answer
If expected inflation increases,
interest rates are likely to increase.
If individuals in general increase
the percentage of their income that they save, interest rates are likely to
increase.
If companies have fewer good
investment opportunities, interest rates are likely to increase.
Interest rates on all debt
securities tend to rise during recessions because recessions increase the
possibility of bankruptcy, hence the riskiness of all debt securities.
Interest rates on long-term bonds
are more volatile than rates on short-term debt securities like T-bills.
Question
9
Which of the following statements is
CORRECT?
Answer
The maximum federal tax rate on
personal income in 2010 was 50%.
Since companies can deduct dividends
paid but not interest paid, our tax system favors the use of equity financing
over debt financing, and this causes companies’ debt ratios to be lower than
they would be if interest and dividends were both deductible.
Interest paid to an individual is
counted as income for tax purposes and taxed at the individual’s regular tax
rate, which in 2010 could go up to 35%, but dividends received were taxed at a
maximum rate of 15%.
The maximum federal tax rate on
corporate income in 2010 was 50%.
Corporations obtain capital for use
in their operations by borrowing and by raising equity capital, either by
selling new common stock or by retaining earnings. The cost of debt capital is
the interest paid on the debt, and the cost of the equity is the dividends paid
on the stock. Both of these costs are deductible from income when calculating
income for tax purposes.
Question
10
Other things held constant, which of
the following actions would increase the amount of cash on a company’s balance
sheet?
Answer
The company purchases a new piece of
equipment.
The company repurchases common
stock.
The company pays a dividend.
The company issues new common stock.
The company gives customers more
time to pay their bills.

fin 534 – midterm PART 2
Question 1
1. JG Asset Services
is recommending that you invest $1,500 in a 5-year certificate of deposit (CD)
that pays 3.5% interest, compounded annually. How much will you have when the
CD matures?
Answer
$1,781.53
$1,870.61
$1,964.14
$2,062.34
$2,165.46
Question 2
Your bank account pays
an 8% nominal rate of interest. The interest is compounded quarterly. Which of
the following statements is CORRECT?
Answer
The periodic rate of
interest is 8% and the effective rate of interest is also 8%.
The periodic rate of
interest is 2% and the effective rate of interest is 4%.
The periodic rate of
interest is 8% and the effective rate of interest is greater than 8%.
The periodic rate of
interest is 4% and the effective rate of interest is less than 8%.
The periodic rate of
interest is 2% and the effective rate of interest is greater than 8%.
Question 3
You are considering
two equally risky annuities, each of which pays $15,000 per year for 20 years.
Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an
annuity due. Which of the following statements is CORRECT?
Answer
If the going rate of
interest decreases from 10% to 0%, the difference between the present value of
ORD and the present value of DUE would remain constant.
The present value of
ORD must exceed the present value of DUE, but the future value of ORD may be
less than the future value of DUE.
The present value of
DUE exceeds the present value of ORD, while the future value of DUE is less
than the future value of ORD.
The present value of
ORD exceeds the present value of DUE, and the future value of ORD also exceeds
the future value of DUE.
The present value of
DUE exceeds the present value of ORD, and the future value of DUE also exceeds
the future value of ORD.
Question 4
Which of the following
statements is CORRECT?
Answer
If some cash flows
occur at the beginning of the periods while others occur at the ends, then we
have what the textbook defines as a variable annuity.
The cash flows for an
ordinary (or deferred) annuity all occur at the beginning of the periods.
If a series of unequal
cash flows occurs at regular intervals, such as once a year, then the series is
by definition an annuity.
The cash flows for an
annuity due must all occur at the ends of the periods.
The cash flows for an
annuity must all be equal, and they must occur at regular intervals, such as
once a year or once a month.
Question 5
A U.S. Treasury bond
will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest
rate is 6%, semiannual compounding. Which of the following statements is
CORRECT?
Answer
The PV of the $1,000
lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary
annuity.
The periodic interest
rate is greater than 3%.
The periodic rate is
less than 3%.
The present value
would be greater if the lump sum were discounted back for more periods.
The present value of
the $1,000 would be smaller if interest were compounded monthly rather than
semiannually.
Question 6
At the end of 10
years, which of the following investments would have the highest future value?
Assume that the effective annual rate for all investments is the same and is
greater than zero.
Answer
Investment A pays $250
at the beginning of every year for the next 10 years (a total of 10 payments).
Investment B pays $125
at the end of every 6-month period for the next 10 years (a total of 20
payments).
Investment C pays $125
at the beginning of every 6-month period for the next 10 years (a total of 20
payments).
Investment D pays
$2,500 at the end of 10 years (just one payment).
Investment E pays $250
at the end of every year for the next 10 years (a total of 10 payments).
Question 7
Which of the following
events would make it more likely that a company would choose to call its
outstanding callable bonds?
Answer
Market interest rates
rise sharply.
Market interest rates
decline sharply.
The company’s
financial situation deteriorates significantly.
Inflation increases
significantly.
The company’s bonds
are downgraded.
Question 8
Which of the following
statements is CORRECT?
Answer
All else equal,
long-term bonds have less interest rate price risk than short-term bonds.
All else equal,
low-coupon bonds have less interest rate price risk than high-coupon bonds.
All else equal,
short-term bonds have less reinvestment rate risk than long-term bonds.
All else equal,
long-term bonds have less reinvestment rate risk than short-term bonds.
All else equal,
high-coupon bonds have less reinvestment rate risk than low-coupon bonds.
Question 9
A 10-year corporate
bond has an annual coupon of 9%. The bond is currently selling at par ($1,000).
Which of the following statements is NOT CORRECT?
Answer
The bond’s yield to
maturity is 9%.
The bond’s current
yield is 9%.
If the bond’s yield to
maturity remains constant, the bond will continue to sell at par.
The bond’s current
yield exceeds its capital gains yield.
The bond’s expected
capital gains yield is positive.
Question 10
Which of the following
statements is CORRECT?
Answer
The total yield on a
bond is derived from dividends plus changes in the price of the bond.
Bonds are riskier than
common stocks and therefore have higher required returns.
Bonds issued by larger
companies always have lower yields to maturity (less risk) than bonds issued by
smaller companies.
The market value of a
bond will always approach its par value as its maturity date approaches,
provided the bond’s required return remains constant.
If the Federal Reserve
unexpectedly announces that it expects inflation to increase, then we would
probably observe an immediate increase in bond prices.