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Finance > Exam 3 > Flashcards

Exam 3 Flashcards

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1
Q

When valuing a stock using the constant-growth model, D1 represents the:

A

next expected annual dividend

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2
Q

The dividend yield is defined as

A

next year’s expected dividend divided by the current market price per share

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3
Q

Type of security has the lowest priority in a bankruptcy proceeding?

A

Common stock

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4
Q

Newly issued securities are sold to investors in which one of the following markets?

A

Primary

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5
Q

What is the market called that facilitates the sale of shares between individual investors?

A

Secondary

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6
Q

An agent who buys and sells securities from inventory is called a

A

dealer

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7
Q

A broker is an agent who

A

brings buyers and sellers together

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8
Q

The dividend yield on a stock will increase if the

A

stock price decreases

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9
Q

Must equal zero if a firm pays a constant annual dividend

A

Capital gains yield

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10
Q

Explain the ladder investment strategy

A

staggers maturity of fixed-income investments, while creating a schedule for reinvesting the proceeds as each bond matures

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11
Q

A bond’s annual interest divided by its face value is referred to as the

A

coupon rate

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12
Q

Principal amount of a semiannual coupon bond repaid:

A

The entire bond is repaid on the maturity date

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13
Q

Current yield on a bond is equal to the annual interest divided by the

A

current market price

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14
Q

Bond that initially sells at a deep discount and only makes one payment to bondholders

A

zero coupon

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15
Q

Price at which a dealer will purchase a bond is referred to as the

A

bid price

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16
Q

The price at which an investor can purchase in the bond market is called the

A

asked price

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17
Q

A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the:

A

bid-asked spread

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18
Q

When a bond’s YTM is less than the bond’s coupon rate, the bond:

A

is selling at a premium

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19
Q

Bonds is the most sensitive to changes in market interest rates:

A

10 year, zero coupon

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20
Q

A risk-adverse investor who prefers to minimize interest rate risk is most apt to invest in:

A

2 year, 7% coupon bonds

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21
Q

Most apt to purchase a municipal bond?

A

Highly compensated business owner

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22
Q

Price of a $1,000 face value bond if the quoted price is 102.1

A

add 2 zeros to the end

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23
Q

A bond dealer sells at the __________ price and buys at the ___________ price

A

asked; bid

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24
Q

On a particular risky investment, investors require an excess return of 7% in addition to the RFR of 4% What is this excess return called?

A

Risk premium

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25
Positive square root of the variance
Standard deviation
26
Bell-shaped frequency distribution that is defined by its average and its standard deviation
Normal distribution
27
Average compound return earned per year over a multiyear period
Geometric average return
28
Combinations will result in a increased dividend yield
Decrease in stock price combined with a higher dividend amount
29
One year ago you purchased 600 shares of stock. This morning you sold those shares and realized a total return of 3.1%. Given this information, you know for sure the:
sum of the dividend yield and the capital gains yield is 3.1%
30
Over the period of 1926-2020, what investment classes had the highest volatility of returns?
Small company stocks
31
Over the period of 1926-2020:
the risk premium on stocks exceeded the risk premium on bonds
32
The rate of return of what has a risk premium of 0%?
U.S. Treasury bills
33
For the period 1926-2020, what had the smallest risk premium?
U.S. Treasury bills
34
The higher the expected rate of return,
the wider the distribution of returns
35
Most apt to have the largest risk premium in the future based on the historical record for 1926-2020?
Small-company stocks
36
The average risk premium on long-term government bonds for the period 1926-2020 was equal to:
The rate of return on the bonds minus the T-bill rate
37
The lower the standard deviation on a security, the ________ the expected rate of return and the _______ the risk
Lower Lower
38
39
40
Explain the barbell investment strategy
purchase short and long term bonds only
41
Explain the bullet investment strategy
purchase several bonds that mature at the same time
42
Advantages of the ladder investment strategy
1. periodic principle return provides additional investing flexibility 2. proceeds from principal & interest pmts invested in additional bonds 3. interest volatility decreases
43
Advantages of the bullet investment strategy
minimizes interest rate risk
44
Advantages of the barbell investment strategy
take advantage of rates when high liquidity reduce risks with rising rates
45
What can you learn from the ladder, barbell, and bullet strategies?
Diversification, which can lead to a more stable return
46
What is P/E ratio?
compares price to company earnings (profit) price/EPS
47
Does a low P/E ratio mean that it is a good investment?
Limited growth potential Invest low price dollar of earnings
48
What is volume?
How many shares are sold in a bond today
49
Market cap
1. stock price multiplied by total shares outstanding 2. higher market cap means priced high or TSO is high 3. how much it would cost to buy all the stock for the company
50
EPS
Ni / total shares outstanding
51
Forward dividend/yield
annual dividend pmt & then the annual yield (%) find by dividing 1 by the bid price & then multiplying by 100
52
Ex-dividend day
invest after that day, you will not be able to receive next dividend date
53
What is DOW? How many stocks in DOW?
30 of largest and most successful companies Companies w highest prices given more weight 30 stocks
54
What is S&P 500? How many stocks in S&P 500?
Measures 500 of the largest public trades Weighted by the market cap Largest market value has the largest impact
55
What is NASDAQ? How many stocks in NASDAQ?
Better gauge for technology industry Over 3,000 stocks Contains other companies that aren't tech companies
56
DOW vs S&P 500, which one better represent the overall stock market performance?
S&P 500 because it contains a lot more companies
57
From Nov 2007 to Feb 2009, by what % did SPY decline?
50.27%
58
When did the market recover to the same level as Nov 2007?
4 years
59
From Nov 2007 to today, what has been SPYs actual annual growth rate?
8.53%
60
As an investor, what can you learn from the performance of SPY?
Short term losses are recovered by long term investments
61
What is the principal amount of a bond that is repaid at the end of the loan term called?
Face value
62
A bond's annual interest divided by its face value is referred to as the
coupon rate
63
Date is the principal amount of a semiannual coupon bond repaid?
the entire bond is repaid on the maturity date
64
The current yield on a bond is equal to the annual interest divided by the
current market price
65
Bond that is initially sells at a deep discount & only makes one payment to bondholders?
Zero coupon
66
The price at which a dealer will purchase a bond is referred to as the
bid price
67
The price at which an investor can purchase in the bond market is called the
asked price
68
A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the
bid-ask spread
69
When a bond's YTM is less than the bond's coupon rate, the bond:
is selling at a premium
70
A risk-adverse investor who prefers to minimize interest rate risk is most apt to invest in
2 yar, 7% coupon bonds
71
Most apt to purchase a municipal bond:
highly compensated business owner
72
When valuing a stock using the constant growth model, D1 represents the
next expected annual dividend
73
The dividend yield is defined as
next year's expected dividend divided by the current market price per share
74
Type of security has the lowest priority in a bankruptcy proceeding?
Common stock
75
Newly issued securities are sold to investors in what market?
Primary
76
What is the market called that facilitates the sale of shares between individual investors?
Secondary
77
An agent who buys and sells securities from inventory is called a
dealer
78
A broker is an agent who
brings buyers and sellers together
79
The dividend yield on a stock will increase if the
stock price decreases
80
What must equal zero if a firm pays a constant annual dividend
Capital gains yield
81
Dividends-> Selling->
Cash income Capital gains
82
Zero growth
Firm will pay a constant dividend forever Like preferred stock Price is computed using perpetuity formula
83
Constant dividend growth
Firm will increase the dividend by a constant % every period

Finance (4 decks)

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