1. (TCO 1) Which of the following is true about fixed-income securities? (Points : 6)
A. They are usually found on the income statement.
B. They are always found on the left side of the balance sheet.
C. They are usually shown on the right side of the balance sheet.
D. None of the above
2. (TCO 2) The concept of risk versus return _______. (Points : 6)
A. dictates that higher risk investments should earn a higher return
B. dictates that risk and return usually have a covariance of -1
C. shows that risk-loving investors always want to earn double the return of risk-averse investors
D. None of the above
3. (TCO 5) Which of the following is true? (Points : 6)
A. YTM is the same as a bond’s coupon yield in all cases.
B. YTM reflects the total return to a bondholder, taking time value of money into account.
C. Yield to call is of interest to companies issuing redeemable bonds only.
D. None of the above
4. (TCO 9) Financial leverage is _______. (Points : 6)
A. always a good thing
B. a good thing when sales are falling
C. a good thing when sales are rising
D. None of the above
5. (TOC 9) A firm’s WACC refers to what? (Points : 6)
A. Relevance to the capital budgeting process called simple payback
B. The cost of capital used for NPV calculations
C. The maximum amount of return at which a project should be accepted
D. None of the above
6. (TCO 7) What can be said about the optimal capital structure of a firm? (Points : 6)
A. The point at which added tax savings from debt just equals cost of bankruptcy
B. Point where financial leverage = 1
C. The point where a firm’s WACC is maximized
7. (TCO 3) Which of the following is not true about corporate bonds? (Points : 6)
A. Once sold in the initial offering, they are rarely sold again in the open market.
B. Bond offerings are overseen by the SEC just like stock IPOs.
C. The shelf registration process is sometimes used.
D. None of the above
8. (TCO 9) What is the concept behind M&M Principle 1 in a world of no taxes? (Points : 6)
A. The higher the corporate tax rate, the higher the firm value.
B. If there are no taxes, the value of the firm is unaffected by capital structure.
C. Capital structure is primarily determined by a firm’s WACC.
D. None of the above
9. (TCO 6) Which is true about the normal yield curve? (Points : 6)
A. It’s rarely a straight, horizontal line.
B. Its primary component is liquidity risk.
C. Its primary component is inflation premium.
D. None of the above
10. (TCO 4) Where could you find trend information about the bond market? (Points : 6)
A. Dow Jones Average
B. NASDAQ
C. S&P 500
D. None of the above
11. (TCO 8) Who would normally be concerned about the creation of an investment policy? (Points : 6)
A. Institutional investors
B. 401k plan managers
C. Pension fund managers
D. All of the above
12. (TCOs 1, 8) Corporate bonds, T-bonds, and preferred stock are all examples of which of the following? (Points : 6)
A. Investment options for an investor seeking low risk
B. Investment options for an investor seeking high return for the high risk he or she is taking
C. Fixed-income securities
D. None of the above
13. (TCO 6) What is the objective of portfolio diversification? (Points : 6)
A. Maximize return
B. Minimize risk
C. Minimize return per unit of risk
D. Maximize return per unit of risk
14. (TCO 5) What does the term structure of interest rates refer to? (Points : 6)
A. The fact that long-term interest rates are always higher than short-term interest rates
B. The relationship between bond maturities and interest rates
C. Why the expectations theory and liquidity preference theory are contradictory
D. None of the above
