Question

1. A primary distinction within equity is between: a. Risky stock and risk-free stock.
   b. Short-term stock and long-term stock.
   c. Contractual stock and noncontractual stock. d. Preferred stock and common stock.

2. The liquidation value of a share of common stock is:

   1. The same as its market value.

   2. The value of the company’s obsolete inventory.

   3. The share price anticipated by securities analysts.

   4. The value for common shareholders if the company ceases to operate.

3. The market value of a share of common stock is:

   1. The legal value of the share according to the firm’s investment banker.

   2. The value of the share according to the firm’s accounting records.

   3. The price of the share in the securities markets.

   4. The same as its par value.

4. A

1. Issues the bonds for the borrower.

2. Holds the bonds in trust for the lenders.

3. Collects the interest payments made by the borrower.

4. Represents the interests of the lenders.

bond trustee:

5. A
a. Mortgage bond.

bond with a claim against the assets of the borrower is a:

2. Debenture.

3. Subordinated debenture.

4. Indenture.

6. The base rate of interest most often used by banks making U.S. dollar denominated loans outside the U.S. is:

1. The inter-country rate (ICR).

2. The London Inter-bank offering rate (LIBOR).

3. The Eurodollar rate (EDR).

4. The countrywide rate (CWR).

7. A

   1. Is a legally binding agreement between the firm and its bank.

   2. Permits the firm to borrow up to the limit of the line.

   3. Typically involves payment of a “commitment fee” from the firm to the bank.

   4. All of the above.

8. Equity investors:

revolving credit agreement between a firm and its bankers:

1. Receive a guaranteed rate of return.

2. Are protected from losses if the firm does poorly.

3. Are given bonds in return for the money they invest.

4. Share in the success of the firm.

9. A

   1. Makes no legal promises of repayment.

   2. Makes the lender an owner of the firm.

   3. Is a legal obligation between a lender and the firm.

   4. Is represented by the shares of stock given to the lender.

10. Debt investors:

    1. Are promised a specific rate of return.

    2. Do not receive interest payments unless profits increase.

    3. Are given shares of stock in return for the money they invest.

    4. Share in the success of the firm.

11. The accuracy of a percentage of sales forecast depends upon:

    1. The accuracy of the sales forecast.

    2. The stability of the relationships between sales and the firm’s other accounts.

    3. Accurate identification of spontaneous and discretionary accounts.

    4. All of the above.

12. Pro-forma financial statements are:

    1. Financial statements that have been audited.

    2. Financial statements that do not balance.

    3. Projected financial statements.

    4. Competitive financial statements.

13. The Bretton Woods system fixed the rate of exchange of every currency to:

    1. The U.S. dollar.

    2. The British pound.

    3. The Japanese yen.

    4. Each other.

firm’s debt:

14. In

1. Its imports minus its exports.

2. The amount of foreign investment coming into the country.

3. The amount of gold it gains or loses.

4. The difference between its money inflows and outflows.

any given period of time, a nation’s “balance of payments” is:

15. A

1. The price of a dollar in the U.S.

2. The price of a unit of currency.

3. The price of a unit of currency in terms of another currency.

4. The price of trading with foreign nations.

foreign exchange rate is:

16. The risk that a borrower will be unable to make payments on a loan is:

    1. Default risk.

    2. Interest-rate risk.

    3. Reinvestment risk.

    4. Call risk.

17. The risk that rising interest rates will reduce security values is:

    1. Default risk.

    2. Interest-rate risk.

    3. Reinvestment risk.

    4. Marketability risk.

18. The risk that low interest rates will provide poor investment opportunities when previous investments mature is:

    1. Default risk.

    2. Interest-rate risk.

    3. Reinvestment risk.

    4. Call risk.

19. The risk premium compensates investors for:

    1. Foreign exchange.

    2. Changing interest rates.

    3. Exposure to inflation.

    4. Assuming the risks of the investment.

20. As interest rates change, present values change:

    1. Directly.

    2. There is no connection between interest rates and present values.

    3. Inversely.

    4. Upward.

Answer 1

1]

d. Preferred stock and common stock.

(a) is incorrect. There is no such thing as risk-free stock

(b) is incorrect. Stock has no fixed term of maturity

(c) is incorrect. There is no such thing as contractual or non-contractual stock

2]

The liquidation value of a share of common stock is the value for common shareholders if the company ceases to operate. It is the money acutally available for distribution to shareholders after selling off all assets and paying off all liabilities.

3]

The market value of a share of common stock is the price of the share in the securities markets.

It is not the legal value, accounting value, or par value.

4]

A bond trustee:

Collects the interest payments made by the borrower. It is responsible for collecting the debt service payments and processing them on behalf of the bond investors. It does not hold the bonds in trust, and does not issue bonds for the borrower or repesent interests of the lender.