Deck 9: Overview of Capital Markets: Long-Term Financing Instruments

Question 1

What type of risk is assessed by credit rating agencies? Do these agencies generally assign individuals or teams to assess a firm's risk? What are some of the ways the rating agencies are paid for their services?

Answer 1

Credit agencies for the most part assess a firm's creditworthiness,or its chance of default.To do this they assemble teams of analysts who consider market as well as proprietary information provided by the firm.They look at the firm,the industry,the economy and even country risk is determining a firm's default risk. Agencies are most commonly paid by the issuer of new securities who pay the agency to rate them.

Question 2

The ________ is a benchmark set by each financial institution as the rate at which interest is charged to its most-favored (i.e.,least risky)customers.

A)LIBOR
B)prime rate
C)discount window rate
D)federal funds

Answer 2

B

Question 3

What is a callable bond,who "calls" a bond,and under what circumstances?

Answer 3

Callable bonds have the added feature that at contractually specified times and prices the issuer can repurchase or "call" the bonds away from the owners.In effect,a callable bond is the combination of a regular bond will a call option for the issuer.The issuer calls a bond when interest rates drop and they can refinance the bonds at a lower rate.

Question 4

An INVERTED yield curve is characterized by long-term rates exceeding short-term rates.

Question 5

Corporate bond yields are higher than similar maturity government bond yields due to:

A)greater risk on the part of corporate bonds.
B)higher overall tax rates on corporate bonds than on government bonds.
C)a "thinner" secondary market for corporate bonds than government bonds.
D)All of the above.

Question 6

Which of the following statements is NOT true?

A)Investments rated below BBB- are known as high quality bonds.
B)Investment grade securities should include those with a bond rating of AA.
C)A "fallen angel" is a bond that at one time was an investment grade security,but whose bond ratings has subsequently dropped.
D)Another colorful term for non-investment grade bonds is "junk bonds."

Question 7

A bond rated AAA is perceived to have GREATER default risk than a bond rated BBB.

Question 8

Which of the following interest rates would be inappropriate for use as a base rate for a variable rate bond?

A)The prime rate
B)LIBOR
C)A rate determined by the bond issuer's board of directors.
D)The 10-year Treasury bond rate.

Question 9

Bond covenants place some restrictions on the firm in such a way as to improve the odds that the bondholders will be repaid.

Question 10

A bond rated "D" by Standard and Poor's rating service is in default on its financial commitments.

Question 11

The least frequently issued capital financial instruments listed herein are:

A)preferred shares.
B)common shares.
C)bonds.
D)In reality,these instruments are issued in similar magnitude.

Question 12

Which of the following statements is NOT true?

A)For investors,bond yields and hence prices can change dramatically over time.
B)Firms may face different costs over time,i.e.,varying yields,when issuing bonds.
C)The relative cost of issuing short-term bonds (such as those with a one-year maturity)versus long-term bonds (such as those with a thirty-year maturity)may change over time.
D)All of the statements above are true.

Question 13

With ________ bonds a firm can choose to pay back the investor at a pre-specified date prior to the maturity date,usually at a pre-specified price above the face value,representing a premium to the bondholder

A)callable
B)convertible
C)variable rate
D)premium

Question 14

Typically,the rate of return on ________ exceeds the rate of return on ________.

A)long-term bonds; short-term bonds.
B)government bonds; similar maturity corporate bonds.
C)short-term bonds; long-term bonds.
D)marketable securities; common stock.

Question 15

________ place some restrictions on the firm in such a way as to improve the odds that the bondholders will be repaid.

A)Bond ratings
B)Bond covenants
C)Bond rating agencies
D)Bond exchanges

Question 16

________ are financial creditors for the firm whereas ________ are the firm owners.

A)Bankers; bondholders
B)Bondholders; stockholders
C)Stockholders; bondholders
D)Stockholders; bankers

Question 17

Bond rating agencies:

A)assess the credit worthiness of the firm.
B)assess the possibility of default by a firm on the payment of its bonds.
C)include firm's such a Moody's and Fitch.
D)all of the statements above are true.

Question 18

Bond yields move inversely to bond price changes.

Question 19

Which of the following statements about corporate bonds is NOT true?

A)They are typically issued at or near face value.
B)The maturity date my range from one to thirty years or beyond.
C)They generally are not tax deductible for the issuing corporation.
D)They are a relatively inexpensive source for obtaining capital.

Question 20

A bond feature that requires firms to repurchase a portion of its bonds on a regular basis throughout the life of the bonds,or to set aside an equivalent amount is known as a:

A)debenture contract.
B)call option feature.
C)sinking fund.
D)put option feature.

Question 21

Core Concepts Inc,.has experienced a stock price increase from $100.00 to $131.59 in only three years.Over this time period,what has been the firm's geometric average annual rate of return?

A)9.58%
B)9.63%
C)9.88%
D)9.92%

Question 22

Rank the order of standard deviation of returns from highest to lowest for the following classes of U.S.securities for the time period 1926 - 2011.

A)small stocks,large stocks,30-year Treasury bonds,and 90-day T-bills
B)large stocks,small stocks,30-year Treasury bonds,and 90-day T-bills
C)90 -day T-bills,large stocks,30-year Treasury bonds,small stocks
D)30-year Treasury bonds,large stocks,small stocks,90-day T-bills

Question 23

The cumulative feature of preferred stock means that preferred dividends cannot be paid until all common dividends have been paid.

Question 24

In the event of bankruptcy and liquidation by a firm,all preferred shareholders receive any claims before common shareholders but after both secured and unsecured creditors.

Question 25

In what ways are preferred shares like debt and in what ways are they like common equity?

Question 26

If the firm has earnings available to common shareholders,it has two choices of what to do with these earnings: it can either ________ or ________.

A)pay dividends to the common shareholders; retain the earnings to finance future projects and investments.
B)pay dividends to the preferred shareholders; repurchase common stock.
C)pay dividends to the bondholders; retain the earnings to finance future projects and investments.
D)pay dividends to the common shareholders; pay dividends to the bondholders.

Question 27

Firms must make regular payments to ________ but are under no contractual obligation to pay dividends to ________.

A)common stockholders; preferred stockholders.
B)preferred stockholders; bondholders.
C)bondholders; common stockholders.
D)common stockholders,bondholders.

Question 28

In the United States,a corporation's board of directors is elected by:

A)bondholders only.
B)bondholders and preferred stockholders
C)bondholders,preferred stockholders,and common stockholders.
D)common stockholders only.

Question 29

Rank the order of returns from highest to lowest for the following classes of U.S.securities for the time period 1926 - 2011.

A)large stocks,small stocks,30-year Treasury bonds,and 90-day T-bills
B)small stocks,large stocks,30-year Treasury bonds,and 90-day T-bills
C)30-year Treasury bonds,large stocks,small stocks,90-day T-bills
D)90 -day T-bills,large stocks,30-year Treasury bonds,small stocks

Question 30

Core Concepts Inc,.has experienced stock returns of 8.4%,6.3%,and 14.2% over the last three years.Over this time period,what has been the firm's arithmetic average annual rate of return?

A)9.58%
B)9.63%
C)9.88%
D)9.92%

Question 31

Which of the following have payments that are tax deductible for the corporation?

A)bond interest payments
B)preferred dividends
C)common dividends
D)retained earnings

Question 32

The ________ feature found with many issues of preferred stock requires that all current and past due preferred dividends must be paid prior to any dividend payout to common shareholders.

A)cumulative
B)participating
C)convertible
D)historical

Question 33

Which of the following classes of U.S.securities have NOT averaged an annual rate of return that exceeds the average annual rate of inflation? (Data from 1926 - 2011)

A)small company stocks
B)large company stocks
C)90-day Treasury bills
D)All of these classes of securities have averaged higher average annual rates of return than that of the average annual rate of inflation.

Question 34

Ransom Industries Inc,has issued preferred stock that pays $3.00 dividends annually.If the market requires a 12.5% rate of return on the shares,what is the current price of the firm's preferred shares?

A)$21.33
B)$24.00
C)$41.67
D)There is not enough information to answer this question.

Question 35

Which of the following statements comparing preferred stock to other financial instruments is NOT true?

A)Like common shares,preferred dividends are after-tax payments for the firm.
B)Like bonds,preferred shares are issued with a face value.
C)Like bonds,most preferred shares have maturities of up to 30 years.
D)Like common shares,preferred dividends are typically paid quarterly.

Question 36

Preferred shares earn their name in part because they have priority payment over:

A)short-term debt obligations.
B)long-term debt obligations.
C)common stock dividends.
D)all of the above.

Question 37

Due to regulatory capital requirements,there tends to be a concentration of preferred shares in the ________ industry.

A)airline
B)railroad
C)power generation
D)banking

Question 38

Preferred shares are a form of SHORT-TERM financing available to the firm.

Question 39

________ are the residual claimants of a firm's cash flows.

A)Preferred shareholders
B)Common shareholders
C)Bondholders
D)Bankers

Question 40

From a firm's perspective,preferred shares are at least as desirable as bonds because the firm is able to deduct preferred dividend payments for tax purposes like it can bond interest expenses.

Question 41

In the U.S.,for issues less than $500 million,the typical fee paid to underwriters to issue stock is ________ of the amount of stock raised.

A)1% to 2%
B)3% to 5%
C)6% to 8%
D)over 10%

Question 42

Non-U.S.firms may list their equity securities on U.S.exchanges by issuing negotiable certificates that represent an equivalent amount of stock ownership.These certificates are known as:

A)American Depositary Receipts.
B)Initial Public Offerings.
C)Seasoned Public Offerings.
D)Negotiable Certificates of Deposit.

Question 43

In the short-run,firms tend to stick to a stable dollar-dividend policy.

Question 44

Which of the following is NOT commonly cited as a reason why management needs to understand capital markets?

A)Issuing securities to acquire capital is an ongoing process.
B)Active markets have developed for the trading of securities,management needs to understand how these markets impact the firm's constantly changing shareholder base.
C)Capital markets evolve over time,so management needs to be aware of any new methods or new locations for issuing securities that may come available.
D)All of the above are commonly cited reasons for understanding financial markets.

Question 45

Which of the following is NOT a potential disadvantage associated with a firm going public?

A)A more liquid market for owners to sell their ownership shares.
B)Because shares are more dispersed,management must work with a more diverse group of stakeholders.
C)The firm faces more rigorous disclosure of its financial situation,and this disclosure requirement has both monetary and time costs.
D)Management needs to more actively manage shareholder expectations and deal with some investors who have a short-term focus on profitability rather than long-term growth.

Question 46

When a firm needs to raise money via a bond issue,one of the quickest ways is through a ________.This activity involves the purchase of a large block of securities by a large institutional investor such as a pension fund,an endowment fund,or an insurance company.

A)private placement.
B)public placement.
C)secondary offering.
D)none of the above.

Question 47

$1.00 (one dollar)invested in a portfolio of 90-day U.S.Treasury bills in 1925 would have grown to a value in excess of ________ by 2011 assuming that all cash flows had been reinvested in the portfolio.(Choose the answer closest to the research provided dollar amount.)

A)$1.00
B)$10.00
C)$100.00
D)$1,000.00

Question 48

Which of the following is NOT a generally accepted method of differentiating in the financial markets?

A)The Money market vs the Capital market
B)The Primary market vs the Secondary market
C)The Public market vs the Private market
D)All of the methods above are used to differentiate in the financial markets.

Question 49

Advantages to going public with a firm include all but WHICH of the following?

A)The ability for management to offer stock options as a recruiting tool for key employees.
B)A greater ability for the firm to raise capital.
C)A more liquid market for owners to sell their ownership shares.This liquidity typically leads to higher prices.
D)An overall decreased public awareness of the firm.

Question 50

________ tend to invest locally and recognize the risk of investing in start-ups.

A)Venture capitalists
B)Angel investors
C)Initial public offerings
D)Private equity firms

Question 51

When a private firm makes its equity available to the public in order to meet its need for equity capital,it undertakes a process known as:

A)a shelf registration.
B)an addition to retained earnings.
C)an initial public offering.
D)a secondary stock offering.

Question 52

The empirical evidence from various and historical U.S.financial asset classes reported by the author DOES NOT support the financial axiom that to achieve greater return an investor must take greater risk.

Question 53

Common shares are perpetual instruments,lasting as long as the firm itself lasts.

Question 54

A public equity offering

A)makes the securities being issued available to "retail" investors.
B)makes the securities being issued available to large institutional investors.
C)is usually more expensive than a private placement.
D)All of the above are true.

Question 55

The mandate of the board of directors is to ensure that management makes decisions that are consistent with maximizing the value of PREFERRED shares.

Question 56

Currently in the United States,it is not legal to issue different classes of common stock.For instance,issuing two classes of common stock where one class has superior voting rights compared to the other.

Question 57

Which of the following statements about public offerings is NOT true?

A)A public offering is the most common type (vs private)for equity securities.
B)Public offerings are usually more expensive than a private placement.
C)The issuing process typically completes within one month.
D)All of the above are true.

Question 58

________ placement of securities restricts the ability to resell the securities,thus investors often require ________ interest rates on bonds issued in this manner.

A)Private; lower
B)Private; higher
C)Public; higher
D)Public; identical

Question 59

$1.00 (one dollar)invested in a portfolio of "small " U.S.stocks in 1925 would have grown to a value in excess of ________ by 2011 assuming that all dividends had been reinvested in the portfolio.(Choose the answer closest to the research provided dollar amount.)

A)$100
B)$1,000
C)$10,000
D)$100,000

Question 60

The ________ is a regulatory document filed with the SEC that describes the details of the IPO and is meant to help investors make informed decisions.

A)red herring
B)prospectus
C)indenture
D)debenture

Question 61

________ is the practice of examining patterns and trends in historical stock prices.

A)Technical analysis
B)Fundamental analysis
C)Event studying
D)Insider trading

Question 62

A company that you are following in anticipation of making an investment therein has just announced an unexpected dividend increase.You believe that you have one week to purchase the stock before the market price increases in reaction to the news.This behavior PROVES that the market is at least ________ form efficient.

A)weak
B)semi-strong
C)strong
D)This behavior proves nothing.We still don't know the level of market efficiency.

Question 63

Empirical evidence supports the notion that U.S.financial markets are generally ________ form efficient.

A)weak
B)semi-strong
C)strong
D)none of the above

Question 64

Despite relatively high first-day returns for U.S.IPOs,on average IPOs tend to underperform relative to the market in the first three to five years following their issuance.

Question 65

Private placements of debt issues are more common than private placements of equities.

Question 66

A firm's stock price tends to decline on the firm's announcement of a seasoned equity offering.

Question 67

Identify and define the three forms of financial market efficiency.If we could prove that insider trading could not exist in the market place,what level of efficiency would the market have obtained? Why?

Question 68

If a financial market is semi-strong form efficient,then it must also be at least weak-form efficient.

Question 69

Markets are said to be efficient if the prices of securities fully and immediately reflect all relevant information.

Question 70

List and describe the three methods used to distribute shares in an IPO.

Question 71

In the last 50 years it has been far more common for U.S.IPOs to suffer negative first-day returns on average.

Question 72

The volume of venture capital activities tends to INCREASE in the years following an economic crisis.For instance,in the years following 2000 and 2008 the number of deals increased.

Question 73

Equities are more commonly issued as public offerings than as private offerings.

Question 74

Roger has been following a stock chart for TechMart Inc.and believes he has detected a pattern that he can use to earn abnormally large returns.If this is true he has demonstrated a violation of which form of market efficiency?

A)weak form
B)semi-strong form
C)strong form
D)all three forms of market efficiency have been violated