Chapter 05 Financial Instruments and Markets

Chapter 05 Financial Instruments and Markets True / False Questions (0.05 each) 1. In the steps a company takes to prepare for an IPO, the "road show" precedes the "bake-off". True False 2. The only reason why the price would fall on a corporate bond is if market interest rates increase. True False 3. After issue, the market price of a fixed-rate bond can differ substantially from its par value. True False 4. Bond investors should be more concerned with real returns than with nominal returns. True False Multiple Choice Questions (0.1 each) 5. Which of the following securities has a purely fixed claim against a firm's cash flows? A. bonds B. options C. common stock D. None of the above. 6. Which of the following securities has a purely residual claim against a firm's cash flows? A. preferred stock B. callable bonds C. common stock D. non-callable bonds E. None of the above. 7. Mike just purchased a bond, which pays $40 every six months in interest. The $40 interest payment is also called the: A. coupon. B. par value. C. discount. D. call premium. E. yield. F. None of the above. 8. Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1928-2013 period)? A. Short-term government bills, long-term corporate bonds, long-term government bonds, common stocks B. Long-term corporate bonds, long-term government bonds, common stocks, short-term government bills C. Common stocks, long-term government bonds, long-term corporate bonds, short-term government bills D. Common stocks, long-term corporate bonds, long-term government bonds, short-term government bills E. Long-term corporate bonds, common stocks, short-term government bills, long-term government bonds F. None of the above. 9. Which one of the following statements is true? A. Equity securities offer fixed claims on future cash payouts. B. Unlike bondholders, for their returns, shareholders rely entirely on price appreciation. C. In theory, common shareholders exercise very little control over company decisions. D. Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds. E. Preferred shareholders are the first investors to be repaid in bankruptcy liquidation. F. None of the above. 10. You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end. What holding period return, measured in yen, did you earn on the bond? A. 3% B. 7% C. 10% D. 13% E. 30% F. None of the above. 11. You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end. The exchange rate was $1 = ¥100 at the beginning of the year and $1 = ¥97 at year-end. What holding period return, measured in U.S. dollars, did you earn on the bond? A. 3.09% B. 6.09% C. 13% D. 16.49% E. 30% F. None of the above.