Practice_Questions_2a_solution - Practice Questions#2 1...

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Practice Questions #2 1. Bonds with a Ba rating are sometimes referred to as junk bonds. True ___X____ False _______ 2. A corporation has two bond issues outstanding. One bond issue is designated the “senior” bond while the other bond issue is designated the “subordinated” bond. Holding all else equal, the subordinated bond will have a higher yield-to-maturity than the senior bond. True ___X____ False _______ 3. Two corporate bonds are equvalent in all respects except that one is callable while the other is not. The callable bond will generally have a higher yield-to-maturity than the non-callable (straight) bond. True ___X____ False _______ 4. A firm like Dell Computer Corporation will generally have a larger Price/Earnings ratio than a firm like General Mills (a maker of breakfast cereal) because Dell is a riskier investment. True _______ False ___X__ 5. Preferred stock cannot be valued using the dividend discount model. True _______ False ___X__ 6. Holding all else equal, a bond with collateral (collateralized) will have a lower yield-to-maturity than a bond without collateral. True ___X__ False _______ 7. When a bond’s coupon rate is less than its yield-to-maturity the bond will be a discount bond. True ___X___ False _______ 8. Stocks with large Price/Earnings (P/E) ratios are generally stocks which investors believe will experience significant growth in the future. True ___X___ False ________ 9. A Treasury Note has a maturity of greater than ten years. True ________ False ___X____ 10. The “Money Market” generically refers to trading of debt securities with maturities of less than one year. True ____X___ False ________ 11. A bond rated “A” will generally have a higher yield to maturity than a bond rated “BBB” True ________ False ____X___
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12. Assume that a bond has a coupon rate of 6% and a yield-to-maturity of 7%. The price of this bond will increase as we get closer to the maturity date. True ____X___ False ________ 13. Short term bond prices are more sensitive to changes in interest rates than long term bond prices. True ________ False ___X____ 14. The dividend discount model formula: Price = D 1 / (k-g) is only valid if dividends grow at a constant rate. True ___X___ False ________ 15. As a firm's credit rating improves, the coupon rates of its existing bonds (i.e. those already issued and currently trading) will generally decrease. True _______ False ___X____ 16. Assume that your firm's bonds are currently rated A and the ratings agency has decided to change their rating to BBB. In most cases, the yield-to-maturity of your bonds will increase. True ___X___ False ________ 17. You are interested in buying Intel stock. Your broker tells you that the most competitive dealer has a bid price of 40.10 and an ask price of 40.12. The price at which you will be able to purchase the stock is 40.12. True ___X___ False ________
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Practice_Questions_2a_solution - Practice Questions#2 1...

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