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Economics MCQ

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1. All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.
a. a premium; higher than
b. a premium; equal to
c. at par; higher than
d. at par; less than
e. a discount; higher than

2. All else constant, a coupon bond that is selling at a premium, must have:
a. a coupon rate that is equal to the yield to maturity.
b. a market price that is less than par value.
c. semi–annual interest payments.
d. a yield to maturity that is less than the coupon rate.
e. a coupon rate that is less than the yield to maturity.

3. The market price of a bond is equal to the present value of the:
a. face value minus the present value of the annuity payments.
b. annuity payments plus the future value of the face amount.
c. face value plus the present value of the annuity payments.
d. face value plus the future value of the annuity payments.
e. annuity payments minus the face value of the bond.

4. As the yield to maturity increases, the:
a. amount the investor is willing to pay to buy a bond decreases.
b. longer the time to maturity.
c. lower the coupon rate desired by that investor.
d. higher the price the investor offers to buy a bond.
e. lower the rate of return desired by the investor.

5. American Fortunes is preparing a bond offering with an 8 % coupon rate. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Given this, which of the following statements are correct?
I. The initial selling price of each bond will be $1,000.
II. After the bonds have been outstanding for 1 year, you should use 9 as the number of compounding periods when calculating the market value of the bond.
III. Each interest payment per bond will be $40.
IV. The yield to maturity when the bonds are first issued is 8 %.

a. I and II only
b. II and III only
c. II, III, and IV only
d. I, II, and III only
e. I, III, and IV only

6. The newly issued bonds of the Wynslow Corp. offer a 6 % coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:
a. equal to 3 %.
b. greater than 3 % but less than 4 %.
c. equal to 6 %.
d. greater than 6 % but less than 7 %.
e. equal to 12 %.

7. Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to:
a. interest rate risk and time value of money.
b. time value of money and inflation.
c. taxes and potential default.
d. taxes and inflation.
e. inflation and interest rate risk.
c. taxes and potential default.

8. ______ are debt rated BA or lower by Moody's or BB or lower by Standard & Poor's and are commonly used by rapidly growing firms to obtain growth capital, most often to finance mergers and takeovers of other firms, particularly during the 1980s.
a. Subordinated debentures
b. Mortgage bonds
c. Junk bonds
d. Equipment trust certificates
e. Senior debentures

9. The weighted average cost of capital for a firm is the:
a. discount rate which the firm should apply to all of the projects it undertakes.
b. overall rate which the firm must earn on its existing assets to maintain the value of its stock.
c. rate the firm should expect to pay on its next bond issue.
d. maximum rate which the firm should require on any projects it undertakes.
e. rate of return that the firm’s preferred stockholders should expect to earn over the long term.

10. The overall cost of capital for a retail store:
a. is equivalent to the after–tax cost of the firm’s liabilities.
b. should be used as the required return when analyzing a potential acquisition of a wholesale distributor.
c. reflects the return investors require on the total assets of the firm.
d. remains constant even when the debt–equity ratio changes.
e. is unaffected by changes in corporate tax rates.

11. If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to:
I. reject some positive net present value projects.
II. accept some negative net present value projects.
III. favor low risk projects over high risk projects.
IV. become riskier over time.

a. I and III only
b. III and IV only
c. I and II only
d. I, II, and IV only
e. I, II, III, and IV
d. I, II, and IV only

12. The costs incurred by the firm when new issues of stocks or bonds are sold are called:
a. required rates of return.
b. costs of capital.
c. flotation costs.
d. capital structure weights.
e. costs of equity and debt.
c. flotation costs.

  • SubjectEconomics
  • TopicGeneral Economics
  • Difficulty LevelCollege/University
  • Answer has attachmentsNo
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