Reference no: EM13818397

1. Preferred stock and bonds are similar because

A. they both have voting power.
B. both may be subject to a call option.
C. neither interest nor dividends are tax deductible.
D. interest and dividend payments are legal obligations.

2. A $1,000 bond has an annual coupon of 5 percent and a price of $692. Find the number of years to maturity if comparable bonds yield 10 percent.

A. 20 years
B. 30 years
C. 10 years
D. 5 years

3. If interest rates in general fall, the

A. prices of existing bonds rise.
B. coupon rate adjusts for the change in interest rates.
C. prices of existing bonds fall.
D. prices of existing bonds are unaffected.

4. The dividend paid by a preferred stock is usually

A. paid in stock.
B. tax deductible.
C. variable.
D. fixed.

5. Investment in investment companies reduce _______ risk.

A. interest rate
B. market
C. unsystematic
D. systematic

6. Interest on _______ is exempt from federal income taxation.

A. zero coupon bonds
B. federal bonds such as savings bonds
C. state of Florida bonds
D. equipment trust certificates

7. An increase in investors' required return will cause the value of a common stock to

A. rise.
B. remain unchanged.
C. fall.
D. remain stable or rise slightly.

8. Which of the following are supported by collateral?

A. Equipment trust certificates
B. Debentures
C. Convertible bonds
D. Income bonds

9. Which of the following is a correct statement about default?

A. Default is failure to maintain more assets than liabilities.
B. Default is failure to make interest payments only.
C. Default is failure to meet any of the terms of the indenture.
D. Default is failure to make dividend payments.

10. A 20-year $1,000 bond has a coupon of 8 percent. What would be the price if the coupon is paid semiannually and comparable bonds yield 10 percent?

A. $1,000
B. $624
C. $828
D. $895

11. Dividends come at the expense of

A. stock.
B. retained earnings.
C. liabilities.
D. interest.

12. If interest rates rise, which of the following is false?

A. The market price of a zero coupon bond falls.
B. The yield to maturity rises more than the current yield.
C. Existing bonds may be called.
D. Prices of existing bonds fall.

13. The yield to maturity on a bond is the

A. interest plus price appreciation (or loss) achieved by holding the bond to maturity.
B. price appreciation earned by the bond.
C. bond's coupon divided by the principal amount.
D. interest paid divided by the price of the bond.

14. The value of common stock depends on the

A. coupon rate.
B. retirement date.
C. present value of cash flows.
D. price of the stock.

15. Dividends are paid on the

A. declaration date.
B. distribution date.
C. ex dividend date.
D. date of record.

16. If a perpetual preferred stock pays a dividend of $5 a year, and yields rise from 10 percent to 12 percent, the price of the stock will

A. rise from $41.67 to $50.
B. fall from $50 to $41.67.
C. rise from $50 to $60.
D. fall from $60 to $50.

17. Management may prefer not paying dividends in order to

A. reduce corporate income taxes.
B. use money to reduce investments in assets.
C. increase the firm's liabilities.
D. finance growth and increase the value of their shares.

18. Which of the following preferred stock properties would provide the best argument favoring purchase of preferred stock by an investor?

A. Preferred stockholders receive preferential treatment over lower-class, common stockholders when the corporation earns sufficient profit to pay creditors and shareholders.
B. The yield differential between preferred stock and bonds is smaller than would be expected on the basis of risk differentials.
C. Because preferred stock trading volume is lower than common stock trading volume, preferred stock prices are less volatile than common stock prices.
D. When long-term bond yields decline, the value of preferred stock can potentially rise.

19. A common stock costs $40.50, the current dividend is $1.50, and the growth in the value of the shares and the dividend is 8 percent. What is the annual rate of return on an investment in this stock?

A. 10 percent
B. 8 percent
C. 4.5 percent
D. 12 percent

20. If a company fails to meet the terms of indenture, the company is

A. profitable.
B. in registration.
C. in default.
D. bankrupt.