FIN 385 WEEK 6 QUIZ
Question 1 TCO 7 Which has a greater impact on a bond's price
Decrease in yield
Increase in yield
Coupon rate equal to market rates
None of the above
Instructor Explanation: Chapter 11
Question 2. Question : (TCO 7) To calculate a bond's duration, you must ________.
average the present values of all the coupon payments
take a weighted average of the present values of all the cash inflows
divide the face value by the PV of the coupon annuity
None of the above
Instructor Explanation: Chapter 11
Question 3. Question : (TCO 7) Cash flow matching isn't the ideal solution to reduce bond portfolio interest rate risk because _______.
some firms can't afford to buy the extra zero-coupon bonds
the Federal Reserve may raise interest rates beyond the coupon rate
this strategy puts constraints on the bonds that the investor may wish to buy
None of the above
Instructor Explanation: Chapter 11
Question 4. Question : (TCO 7) Why do investors like convexity?
Because the potential price drop is greater than price gain when yields rise
Because the bonds displaying it are usually priced at a premium
Because they have more potential upside than potential downside
None of the above
Instructor Explanation: Chapter 11
Question 5. Question : (TCO 7) Passive bond managers prefer to ______.
manage the prices of the bonds in their portfolios
manage only the interest rate risk of their fixed-income securities
Both of the above
None of the above
Instructor Explanation: Chapter 11
Question 6. Question : (TCO 9) Why are cost of capital or WACC calculations important?
Because it is this figure that is used to set bonds' coupon rates
Because this figure is the discount rate used for capital budgeting NPV calculations
Because it tells an investor what he or she can expect in terms of ROI
None of the above
Instructor Explanation: Chapter 14 RWJ
Question 7. Question : (TCO 9) Another approach to determining expected return from common stock on the part of stockholders is use of the _______.
convexity chart
preferred stock perpetuity
security market line
None of the above
Instructor Explanation: Chapter 11 RWJ
Question 8. Question : (TCO 9) The cost of debt in a firm's WACC is primarily a function of _______.
the bond's stated interest rate
the interest rate promised on preferred stock
the firm's tax rate and the yield on the bond
None of the above
Instructor Explanation: Chapter 14 RWJ
Question 9. Question : (TCO 9) A way of still using the WACC formula approach for a project in which risk differs from that of the overall company is to _______.
assume the risk will diminish over time
change the slope of the security market line
adjust the WACC result up or down a certain percentage based on the degree of risk of the project versus the overall company
None of the above
Instructor Explanation: Chapter 14 RWJ
Question 10. Question : (TCO 9) If the only source of capital to the firm is an individual investor in the firm's common stock who can earn 10% day in and day out on his other investments, then _______.
the WACC calculation would be immaterial
the firm's cost of capital should be 10%
the firm's cost of capital should be slightly less than the 10%
None of the above
Instructor Explanation: Chapter 14 RWJ
Question 11. Question : (TCO 9) Beta is a measure of _______.
the absolute return of a stock
the percentage change in a bond's valuation as a result of changing interest rates
the covariance of the risk-free rate and the rate of inflation
None of the above
Instructor Explanation: Chapter 14 RWJ
Question 12. Question : (TCO 9) In the formula for WACC the cost of debt is primarily a function of ______.
the bond's stated interest rate
the interest rate promised on preferred stock
the YTM and company's tax rate
None of the above
Instructor Explanation: Chapter 14 RWJ
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