FINC 341 EXAM 2 THEORY GUYTON QUESTIONS &
ANSWERS
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 - Answers - 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 - Answers - 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 - Answers - True
Since income bonds cannot bankrupt the issuing company, they carry a lower coupon
rate - Answers - False
Bonds with call protection pay a lower coupon rate than similar bonds without call
protection - Answers - True
The risk of a decline in bond values due to an increase in rates is called interest rate
risk - Answers - True
If a default risk on a bond increases, the bond's price will fall and the yield to maturity
will increase - Answers - True
Under a mortgage bond, the corporation pledges specific assets as security for the
bond - Answers - True
BBB bonds and below are considered "high-yield" (junk) bonds - Answers - False
The United States was downgraded during the financial crisis recovery period - Answers
- 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 - Answers - True
The Security Market Line would probably become steeper if the U.S. had another
financial crisis - Answers - 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 -
Answers - True
Market risk stems from factors such as war, recessions and other macro factors, and
can be diminished through diversification - Answers - False
The best measure of a stock's risk to a nondiversified investor is the stock's coefficient
of variation - Answers - 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) -
Answers - True
The value of a stock is dependent on how long the buyer plans to keep the stock and
receive the dividends - Answers - 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 - Answers - True
Different classes of stock can have different numbers of votes per share - Answers -
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 - Answers - True
A putable bond is riskier to the buyer than a callable bond - Answers - False
All else equal, for a given change in the going rate of return return on bonds, the shorter
the time to maturity, the smaller the change in bond price - Answers - 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 - Answers - True
The P/E Multiple Approach to valuing stock was used by Goldman Sachs during the
Tech Bubble - Answers - 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 - Answers - 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
ANSWERS
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 - Answers - 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 - Answers - 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 - Answers - True
Since income bonds cannot bankrupt the issuing company, they carry a lower coupon
rate - Answers - False
Bonds with call protection pay a lower coupon rate than similar bonds without call
protection - Answers - True
The risk of a decline in bond values due to an increase in rates is called interest rate
risk - Answers - True
If a default risk on a bond increases, the bond's price will fall and the yield to maturity
will increase - Answers - True
Under a mortgage bond, the corporation pledges specific assets as security for the
bond - Answers - True
BBB bonds and below are considered "high-yield" (junk) bonds - Answers - False
The United States was downgraded during the financial crisis recovery period - Answers
- 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 - Answers - True
The Security Market Line would probably become steeper if the U.S. had another
financial crisis - Answers - 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 -
Answers - True
Market risk stems from factors such as war, recessions and other macro factors, and
can be diminished through diversification - Answers - False
The best measure of a stock's risk to a nondiversified investor is the stock's coefficient
of variation - Answers - 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) -
Answers - True
The value of a stock is dependent on how long the buyer plans to keep the stock and
receive the dividends - Answers - 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 - Answers - True
Different classes of stock can have different numbers of votes per share - Answers -
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 - Answers - True
A putable bond is riskier to the buyer than a callable bond - Answers - False
All else equal, for a given change in the going rate of return return on bonds, the shorter
the time to maturity, the smaller the change in bond price - Answers - 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 - Answers - True
The P/E Multiple Approach to valuing stock was used by Goldman Sachs during the
Tech Bubble - Answers - 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 - Answers - 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
