Overview of the Financial System
Multiple Choice Questions
Every financial market performs the following function:
It determines the level of interest rates.
It allows common stock to be traded.
It allows loans to be made.
Behavior of Bond Prices
The amount by which the face value of a bond exceeds its current price.
When the market required rate of return is:
more than the states coupon rate, the price of the bond will be less than its face value.
The Banking System
exist because there are substantial information and transaction costs in the economy.
improve the lot of the small saver.
are involved in the process of indirect finance.
do all of the above.
Calculating Simple Interest
The process of calculating what dollars received in the future are worth today is called
(a) calculating the yield to maturity.
(b) discounting the future.
(c) compounding the future.
(d) compounding the present.
Why Study Financial Markets and Institutions?
Multiple Choice Questions
Financial markets and institutions
involve the movement of huge quantities of money.
affect the profits of businesses.
affect the types of goods and services
Maturity and how it works with banking
Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of
15 percent. If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course
of the year,
MULTIPLE CHOICE. Choose the one alternative that best completes the
statement or answers the question.
The term structure of interest rates is
A) the structure of how interest rates move over time.
B) the relationship among interest rates of different
FIN 218 Homework 1
Chapter 2 (pg35)
7. Because you know your family member better than a stranger, you know more about
the borrowers honesty, propensity for risk taking, and other traits. There is less
asymmetric information than with a stra
Inflation Rate Exam
The nominal interest rate minus the expected rate of inflation
(a) defines the real interest rate.
(b) is a better measure of the incentives to borrow and lend than is the nominal interest rate.
(c) is a more accurate indicator of
What Do Interest Rates Mean and What Is Their
Role in Valuation?
Multiple Choice Questions
A loan that requires the borrower to make the same payment every period until the maturity date is
(a) simple loan.
(b) fixed-payment loan.
Similar to interest rates, but applies to compound growth of any sort. Ex. Gas prices,
tuition fees, corporate earnings or dividends.
Present (or Discounted Rate)
Allows us to place all cash flows on a current footing so that comparisons
The concept of value includes:
liquidation value, going-concern value, book value, market value, and intrinsic value.
The valuation approach:
taken in this chapter is one of determining a securitys intrinsic value what the security
ought to be worth based
Corporation purchases bonds in the open market and delivers them to the trustee
When a bond is callable, the call price is usually above par value and often decreases
Call provisions provide financing flexibility
Greater the volatility of intere
Conversion to an Earning Multiplier Approach
V = [(1 b)E1]/(ke g) :
where b is assumed to be a companys constant proportion of its earnings each year
the dividend payout ratio(dividends per share divided by earnings per share) is
corporate raider buy corporate at bargain price in hostile takeover
Threat of firing
Threat of takeover
Know how to calculate TMV
Remember if given 4 of 5 TMV then 5th can be found
To calculate N and given PMT, PV, and FV, both PMT and PV
Interest-rate (or yield) Risk
The variation in the market price of a security caused by changes in interest rates.
It is important to note:
that an investor incurs a loss due to interest-rate (or yield) risk
-only if a security is sold prior to maturity
It is also know as the bonds internal rate of return.
Interest rates and bond prices move in opposite directions.
In general, the longer the maturity for a bond, the greater the bonds price fluctuations
associated with a given change in market required re
The intrinsic value of a share of common stock:
can be viewed as the discounted value of all the cash dividends provided by the issuing
for which the future cahs flows are contractually stated, much more uncertainty
surrounds the future stream of re
Investors having stocks of companies that:
pay no dividends have positive value expect to sell the stock in the future at a price
higher than they paid for it.
Instead of dividend income plus terminal value:
they rely only on the terminal value (which dep
Credit Risk Assessments
When the least desirable credit risks are the ones most likely to seek loans, lenders are subject to
moral hazard problem.
adverse selection problem.
Long-term debt and equity instruments are traded in the _ market.
Which of the following are primary markets?
The New York Stock Exchange
The U.S. government bond mark
U.S treasury bills have a comparatively lower interest rate as they are considered to be risk free
debt instruments. Hence lower the risk lower the interest rate in this case
When the business cycle is booming a very small amount of