FINA 363 Exam 1

Topics: Bonds, Monetary policy, Bond Pages: 7 (816 words) Published: February 12, 2014
BUSI 3013

ACCOUNTING CONCEPTS FOR FINANCIAL DECISIONS
Mid-term Exam 1 - Chapters 1 8
PRACTICE
March 5, 2013

Name: ___________________________________
1.

Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6 percent, and Carter's marginal income tax rate is 40 percent, what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two? A. 2.40%

B. 3.60%
C. 4.50%
D. 5.25%
E. 6.00%

2.

Managers can increase the value of a firm by making decisions that A. increase the future cash flows of the firm.
B. increase the amount of time required to generate future cash flows. C. increase the riskiness of future cash flows.
D. decrease

3.

All of the following may serve to reduce the coupon rate that would otherwise be required on a bond issued at par, except a
A. Sinking fund.
B. Restrictive covenant.
C. Call provision.
D. Change in rating from Aa to Aaa.
E. None of the above (all may reduce the required coupon rate).

4.

Rollincoast Incorporated issued BBB bonds two years ago that provided a yield to maturity of 11.5 percent. Long-term risk-free government bonds were yielding 8.7 percent at that time. The current risk premium on BBB bonds versus government bonds is half what it was two years ago. If the risk-free long-term governments are currently yielding 7.8 percent, then at what rate should Rollincoast expect to issue new bonds?

A.
B.
A.
C.
D.

7.8%
8.7%
9.2%
10.2%

FINA 363 Exam 1: Ch 1 - 8

Page 1 of 4

E. 12.9%
5.

____ efficiency states that all private and publicly available information is reflected in the current market prices.
A. Weak-form
B. Semistrong-form
C . Strong-form
D. Economic

6.

If you purchase stock from a firm conducting a seasoned equity offering, this transaction will take place in ____ markets and ____ markets. A. capital; primary
B. capital; secondary
C. money; primary
D. money; secondary

7.

A small state bank currently has reserves equal to $300,000. If the state reserve requirement is 20%, but the bank feels more comfortable with maintaining a 30% reserve, what amount of deposits does the bank currently have?

8.

9.

A. $1,500,000
B. $600,000
A. $1,000,000
C.
D. $300,000
E. None of the above.
Suppose the Federal Reserve increases deposits at financial institutions by $50 billion through its open market operations. If the reserve requirements for all deposits is 8%, what is the maximum impact the Fed's actions can have on total deposits? A. $575 billion increase

B. $54.3 billion increase
C. $625 billion increase
A.
D. An increase greater than $1 trillion
E. Total deposits would decrease, but there is not enough information to compute the amount.

An inverted yield curve
A. Exists when short-term rates exceed long-term rates.
B. Exists when long-term rates exceed short-term rates.
C. Represents the "normal term structure."
D.
A. Signifies that investors can get higher returns by investing in bonds than by investing in stocks.
E. Signifies that investors can get higher returns on stocks than on bonds.

FINA 363 Exam 1: Ch 1 - 8

Page 2 of 4

10.

The real risk-free rate of interest is 3 percent. Inflation is expected to be 4 percent this coming year, jump to 5 percent next year, and run at 6 percent the year after (Year 3). According to the expectations theory, what should be the interest rate on 3-year, riskfree securities today? A. 18%

B. 12%
A.C. 6%
D. 8%
E. 10%
!

11.

You are given the following information: Stockholders' equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; market/book ratio = 1.5. Calculate the market price of a share of the company's stock.

A. $33.33
B. $75.00
C. $10.00
D. $166.67
E. $133.32

12.

A firm has notes payable of...
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