Exam 2 Concepts

On which one of the following dates is the principal amount of a bond repaid?

• coupon date

• issue date

• discount date

• maturity date

• face date

The current yield on a bond is equal to the annual interest divided by which one of the following?

• Issue price

• maturity value

• face amount

• current market price

• current par value

A protective covenant:

• protects the borrower from unscrupulous practices by the lender.

• is designed to protect the bond dealer from potential legal liability related to the bond issue.

• prevents a bond from being called.

• limits the actions of the borrower.

• guarantees that a bond will be repaid in full with interest.

Which one of the following bonds is the
most sensitive to changes in market interest rates?

• Zero-coupon, 10 year

• 6 percent annual coupon, 10 year

• Zero-coupon, 4 year

• 8 percent annual coupon, 4 year

• 6 percent annual coupon, 4 yea

The dividend growth model can be used to value the stock of firms which pay which type of dividends?

I. constant annual dividend

II. annual dividend with a constant increasing rate of growth

III. annual dividend with a constant decreasing rate of growth

IV. zero dividend

• I only

• II only

• II and III only

• I, II, and III only

• I, II, III, and IV

Dividends are which one of the following?

• Payable at the discretion of a firm's president.

• Treated as a tax-deductible expense to the paying firm

• Paid out of aftertax profits

• Paid to holders of record as of the declaration date

• Only partially taxable to high-income individual shareholders

The net present value of an investment represents the difference between the investment's:

• cash inflows and outflows.

• cost and its net profit

• cost and its market value.

• cash flows and its profits

• assets and liabilities

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

• produce a positive annual cash flow.

• produce a positive cash flow from assets.

• 
  offset its fixed expenses.

• offset its total expenses

• 
  recoup its initial cost

Which one of the following defines the internal rate of return for a project?

• Discount rate that creates a zero cash flow from assets

• Discount rate which results in a zero net present value for the project

• Discount rate which results in a net present value equal to the project's initial cost

• Rate of return required by the project's investors

• The project's current market rate of return

. The net present value profile illustrates how the net present value of an investment is affected by which one of the following?

• Project's initial cost

• Discount rate

• Timing of the project's cash inflows

• Inflation rate

• Real rate of return