Question 1

Government of Canada 20-year bonds have a higher yield to maturity than Government of NewBrunswick 20-year bonds.

Accepted Answer

Government of Canada bonds are generally considered to be less risky than provincial bonds like those from New Brunswick, leading to lower yields compared to the higher yields of riskier provincial bonds.

Question 2

The longer the maturity of a Treasury bill, the smaller the interest rate risk.

Accepted Answer

Interest rate risk increases with the maturity of a Treasury bill because longer maturities are more sensitive to changes in interest rates.

Question 3

Preemptive rights allow common stockholders to maintain their proportionate ownership in thecorporation when new issues are made.

Accepted Answer

Preemptive rights give common stockholders the opportunity to purchase new shares issued by the company in order to maintain their percentage of ownership in the company. This means that they can prevent their ownership from being diluted by the issuance of new shares.

Question 4

Any action taken by the financial manager that increases risk will also increase the required return.

Accepted Answer

This statement is true as investors require a higher return to compensate for the increased risk associated with an investment. Financial managers who take actions that increase the risk of a project or investment will also increase the required return in order to attract investors.

Question 5

The cost of preferred stock financing is generally higher than that of debt financing.

Accepted Answer

Preferred stock financing typically involves paying dividends to shareholders, which can be higher than the interest payments on debt financing. Additionally, preferred stockholders may have priority over debt holders in the event of bankruptcy, which adds to the cost of this type of financing.

Question 6

In the valuation process, the higher the risk, the greater the required return.

Accepted Answer

This is because the higher the risk, the more uncertain the future cash flows are, and investors will demand a higher return to compensate for the increased uncertainty and risk of losing their investment.

Question 7

A Credit Union is the largest type of financial intermediary handling individual savings.

Accepted Answer

A commercial bank is the largest type of financial intermediary handling individual savings as they typically have more branches and a wider range of services compared to credit unions.

Question 8

Primary and secondary markets are markets for short-term and long-term securities, respectively.

Accepted Answer

Primary markets are where new securities are issued and sold for the first time by companies, while secondary markets are where already issued securities are traded by investors. While stocks and bonds can be traded in both markets, the primary market is typically associated with longer-term securities such as initial public offerings (IPOs) and corporate bond issuances, while the secondary market is associated with shorter-term trading of already issued securities.

Question 9

To a buyer the asset's value represents the minimum price that he or she would pay to acquire it,while a seller views the asset's value as a minimum share price.

Accepted Answer

The statement is reversed. To a seller, the asset's value represents the minimum price they would accept to sell it, while a buyer views the asset's value as a maximum price they would pay to acquire it.

Question 10

A Eurobond is a bond issued by an international borrower and sold to investors in countries with currencies other than the country in which the bond is denominated.

Accepted Answer

This definition accurately describes a Eurobond.

Question 11

The value of a bond with semiannual interest is greater than a bond with annual interest,everything else the same.

Accepted Answer

This is true because the bond with semiannual interest payments will provide more frequent cash flow to the investor, which can be reinvested at a potentially higher rate of return. This results in a higher overall value for the bond compared to one with annual interest payments.

Question 12

Commercial paper is a short-term fund on deposit at commercial banks having variable yields based on size, maturity, and prevailing money market conditions.

Accepted Answer

Commercial paper is an unsecured, short-term debt instrument issued by corporations, not a deposit at commercial banks.

Question 13

The tax deductibility of interest lowers the cost of debt financing, thereby causing the cost of debt financing to be lower than the cost of equity financing.

Accepted Answer

The tax deductibility of interest means that interest expenses can be subtracted from taxable income, reducing the amount of taxes owed. This reduces the effective cost of debt financing for the company, making it a more attractive option than equity financing which does not have this tax advantage.

Question 14

In subordinated debentures, payment of interest is required only when earnings are available.

Accepted Answer

The answer of In subordinated debentures, payment of interest is...

Question 15

In exchange for the tailor-made maturity date provided by the repurchase agreement, the bank orsecurity dealer provides a return slightly below that obtainable through outright purchase ofsimilar marketable securities.

Accepted Answer

This statement is true. In a repurchase agreement, the borrower (usually a bank or security dealer) pays interest to the lender (usually an investor) in exchange for receiving cash to purchase securities. The interest rate on a repurchase agreement is typically slightly lower than the rate on outright purchase of similar marketable securities, as the lender is taking on less risk by having collateral (the securities being purchased) to secure the loan.

Question 16

A call premium is the amount by which the call price exceeds the market price of the bond.

Accepted Answer

A call premium is the amount by which the call price of a bond exceeds its par value, not the market price.

Question 17

Valuation is the process that links risk and return to determine the worth of an asset.

Accepted Answer

Valuation takes into consideration different factors such as market conditions, expected future cash flows, and the level of risk associated with the asset. The ultimate goal is to determine the fair value of the asset based on its risk-return profile.

Question 18

To sell a callable bond, the issuer must pay a higher interest rate than on a noncallable bond ofequal risk.

Accepted Answer

This is true because the option for the issuer to call the bond is beneficial to them, allowing them to refinance at a lower rate in the future if interest rates drop. To compensate for this option, investors require a higher yield upfront on callable bonds.

Question 19

High-quality (high-rated) bonds provide lower returns than lower quality (low-rated) bonds.

Accepted Answer

This statement is true as high-quality bonds, also known as investment-grade bonds, are issued by companies with strong credit ratings and financial stability, so they typically offer lower returns as they are considered less risky. On the other hand, lower quality bonds, also known as high-yield or junk bonds, are issued by companies with lower credit ratings and higher risk of default, so they offer higher returns to compensate for the increased risk.

Question 20

To carry out the sinking fund requirement, the corporation makes semiannual or annual payments to a trustee, who uses these funds to retire bonds by purchasing them in the marketplace.

Accepted Answer

This is true.

Quiz 8: Valuation of Financial Securities