C708 V4 Unit 5 Module Quizzes: Module 10 Bond and Bond Valuation; Module 11: Understanding Equity and Stock Valuation; Module 12: Capital Budgeting Quiz

A floating rate note Floating rate notes (FRNs, floaters) have a variable coupon that is linked to a reference rate of interest, such as LIBOR or Euribor. For example, the coupon may be defined as three month USD LIBOR + 0.20%. The coupon rate is recalculated periodically, typically every one or three months. Corrrect answer- A bond pays a coupon rate equal to the LIBOR rate plus 0.30%. The coupon rate is recalculated every three months. What type of bond is this? Zero-coupon bond Zero-coupon bonds are those that pay no coupons and thus have a coupon rate of 0%. Such bonds make only one payment-the payment of the face value on the maturity date. Normally, to compensate the bondholder for the time value of money, the price of a zero-coupon bond will always be less than its face value on any date before the maturity date. The bondholder receives the full principal amount on the redemption date. An example of zero coupon bonds is Series E savings bonds issued by the U.S. government Corrrect answer- A bond makes only one payment—the payment of the face value on the maturity date. The bond is sold at a discount. What type of bond is this? A bill U.S. Treasury bills are short term instruments with maturities between 1-5 years. Corrrect answer- A US Treasury security matures in 4 years. What type of treasury is it? A note U.S. Treasury notes are medium-term instruments with maturities between 6-12 years. Corrrect answer- A US Treasury security matures in 7 years. What type of security is it? Investors Issuers sell bonds or other debt instruments to investors in the bond market to fund the operations of their organizations. Firms like bonds because typically they help defray costs by going straight to investors. Corrrect answer- In the bond market, firms raise debt financing directly from The right to retain their proportional ownership in a company should it issue another stock offering The term "preemptive right" is specific to the right to purchase additional shares before they are made available to the public. Corrrect answer- Which statement accurately describes a shareholder's preemptive rights? Preemptive rights The right to vote on corporate objectives and policy The right to vote on who gets to sit on the company's Board of Directors Disadvantages-Common shareholders do not get guaranteed dividends, so their returns can be uncertain. Corrrect answer- Which answer is a benefit associated with common stock? Convertibility to common stock Callability at the option of the corporation Preference in dividends Holders of common stock often have voting rights on corporate policy and have a say in electing the firm's Board of Directors. Not associated-voting rights Corrrect answer- Which feature is generally associated with preferred stock? Generally each share of common stock equals one vote. Preferred stock generally does not carry voting rights. Shareholders generally get to vote on who is part of the corporate Board of Directors. Proxy voting allows shareholders to vote when they can't attend a shareholder meeting. Not a rights regarding voting rights- Corporate shareholders are prohibited from casting their vote online. Corrrect answer- Which answer is a true statement regarding voting rights? Callability Convertibility to common shares Preference with regards to receiving dividends Preferred Stock is stock with a dividend, usually fixed, that is paid out of profits before any dividend can be paid on common stock. Preferred dividends are fixed. Not a right granted to owners of preferred share- Variable dividend amounts Corrrect answer- Which answer is generally a right granted to owners of preferred shares? The internal rate of return is the discount rate that gives a net present value of zero. The internal rate of return (IRR) is defined as the discount rate that gives a net present value (NPV) of zero. It is a commonly used measure of investment efficiency. Corrrect answer- Which definition is a correct description of a capital budgeting method? To rank projects by profitability Capital Budgeting is most involved in ranking projects and raising funds when long-term investment is taken into account. Corrrect answer- Which of the following is a function of corporate capital budgeting? The company's reinvestment rate Selection of the discount rate is dependent on the use to which it will be put. If the intent is simply to determine whether a project will add value to the company, using the firm's weighted average cost of capital may be appropriate. If trying to decide between alternative investments in order to maximize the value of the firm, the corporate reinvestment rate would be a better choice. Corrrect answer- A firm is trying to choose the most profitable project to invest in. Which feature should be used as the company's discount rate? the payback method is easy to use and understandable for most people, regardless of training Payback period is widely used because of its ease of use despite the recognized limitations: The time value of money is not taken into account. Corrrect answer- Which statement reflects the best reason to use the payback method to evaluate investments? Payback period Payback period is widely used because of its ease of use despite several recognized limitations, such as not taking into account the time value of money. Corrrect answer- Which investment proposal ranking method is widely used due to its simplicity, despite having several limitations? The price of bond A increases faster than the price of bond B increases. Corrrect answer- The time to maturity of bond A is 20 years, whereas the time to maturity of bond B is 5 years. What happens to the market prices of these bonds if market interest rates rise? Municipal bonds Corrrect answer- Which kind of bonds are issued by cities, counties, or states? Debenture Corrrect answer- Which term describes a bond that is unsecured by any type of collateral? Price risk Corrrect answer- Which category of risk describes the likelihood that a bond's current value will decrease commensurate with a general rise in market interest rates? They have recourse to specific assets of the company should the loan default. Corrrect answer- What describes the rights of creditors holding secured debt? Bonds have less restrictive loan terms than bank loans. Corrrect answer- Why are bonds a better financing option than issuing stock or incurring a bank loan The bank has a normal debt-to-equity ratio for its industry. Corrrect answer- The average debt-to-equity ratio for commercial banks is approximately 2.5. A commercial bank has a debt-to-equity ratio of 2.2. What does this indicate? Holders have company voting rights. Corrrect answer- What is a key feature of common stock? It normally pays a fixed dividend on a recurring basis. Corrrect answer- An investor is only interested in obtaining stable returns in a stock investment. Why would this investor purchase a preferred stock? It is convenient and easy to use. Corrrect answer- What is an advantage of the payback period method? The method must account for the time value of money. Corrrect answer- What describes an ideal criterion for the method used to evaluate a capital investment project? In determining time to recapture the initial investment Corrrect answer- How is the payback period method applied to capital project analysis? It is mistakenly used to represent the actual annual profitability of an investment. Corrrect answer- What is a shortcoming of the internal rate of return (IRR) method?