CFIN EXAM 2 QUESTIONS AND CORRECT ANSWERS (GRADED A+)
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CFIN
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CFIN
CFIN EXAM 2 QUESTIONS AND CORRECT ANSWERS (GRADED A+)
If the yield curve is downward sloping, what is the yield to maturity on a 10 year Treasury coupon bond, relative to that on a 1-year T-bond? - Answer- The yield on the 10-year is less than the yield on a 1-year bond
If the expectations of...
CFIN EXAM 2 QUESTIONS
AND CORRECT ANSWERS
(GRADED A+)
If the yield curve is downward sloping, what is the yield to maturity on a 10 year
Treasury coupon bond, relative to that on a 1-year T-bond? - Answer- The yield on the
10-year is less than the yield on a 1-year bond
If the expectations of the term structure of interest rates is correct and if the other term
structure theories are somewhat invalid, and we observe a downward sloping yield
curve , which of the following is a true statement? - Answer- Investors expect a short-
term rates to decrease in the future.
Which of the following is not one of the four fundamental factors that affect the cost of
money? - Answer- Liquidity
Interest rates on 1-year, 2-year, and 3-year Treasury bills are 5%, 6% and 7%
respectively. Assume that the pure expectation theory holds and that the market is in
equilibrium. Which of the following statements is most correct? - Answer- Interest rates
are expected to rise over the next 2 years.
if the federal reserve sells 50 million of short term U.S treasury securities to the public,
other things held constant, what will this tend to do short term security prices and
interest rates? - Answer- Prices will decline and interest rates will raise
Assume that the current yield curve is upward sloping or normal. This implies that.. -
Answer- None of the above statements is necessarily implied by the yield curve given.
The normal yield curve is upward sloping implying that: - Answer- The return on short
term securities are lower than the return on long term securities of similar risk
Treasury Securities - Answer- the bonds sold by the U.S. government to pay for the
national debt
Assume that expected rates of inflation over the next 5 years are 4%, 7%, 10%, 8%,
and 6%,. What is the average expected inflation over this 5 year period? - Answer- 7%
, T-bills - Answer- pure discount bonds with original maturity of one year or less
treasury note - Answer- a government bond that is repaid within two to ten years
A cal - Answer-
The book value per share is computed by taking the sum of common stock, additional
paid in capital, and retained earning and dividing the number by the number of shares
outstanding. T/F - Answer- T
A preemptive right is a provision in the corporate charter or bylaws that gives common
stockholders the right to purchase on a "pro rata" basis new issues of common stock.
T/F - Answer- T
Preemptive right - Answer- Stockholders' right to maintain their proportionate interest in
a corporation with any additional shares issued.
Preemptive right is important to stockholders because they provide protection against
dilution of value when new shares are issued. T/F - Answer- T
One advantage of using common stock as a source of funds is that common stock does
not legally obilate the firm to make payments to stockholders. T/F - Answer- T
The constant growth model used for evaluating the price of a share of common stock
can also be used to find the price of perpetual preferred stock or any other perpetuity.
T/F - Answer- T
Other things held constant, P/E ratios are higher for firms with "high growth" prospects.
At the same time, P/E are lower for riskier firms, other things held constant. These two
factors, growth prospects and riskiness, may either be offsetting or reinforcing as P/E
determinats. - Answer- T
The net income that firm earns can either be paid out to shareholders as ______ or can
be reinvested in the company as _____ - Answer- Dividends; retained earnings
What is the account that shows the difference the stock "par value" and what new
stockholders paid when they bought newly issued shares? - Answer- Additional paid in
capital
Shareholders exert control of the management of the firm by - Answer- electing board
members who can replace management
Stock owned by the organizers of
the firm who have sole voting
rights are: - Answer- founders' shares
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