Q&A Hero

Q: The rightist position is that the market will reward firms that: A. Have high dividend yield. B. Have low dividend yield. C. Are well managed, regardless of dividend yield. D. None of the above.

Q: In an interest-rate swap, the principal amount of the loan, usually called the _________________________, is not exchanged.

Q: One possible reason that shareholders often insist on higher dividends is: A. They agree with Miller and Modigliani B. Tax consideration C. The stock market is efficient D. They do not trust managers to spend retained earnings wisely

Q: Company X has 100 shares outstanding. It earns $1,000 per year and expects repurchase its shares in the open market instead of paying dividends. Calculate the number of shares outstanding at the end of year-1, if the required rate of return is 10%. A. 110 B. 90 C. 100 D. None of the above

Q: A(n)__________________________________________________protects the lender from falling interest rates. It is the minimum rate that the borrower must pay on a variable-rate loan.

Q: Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends. If the firm expects to maintain this dividend forever, Calculate the stock price after the dividend payment. (The required rate of return is 10%) A. $110 B. $90 C. $100 D. None of the above

Q: Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends. If the firm expects to maintain this dividend forever, Calculate the stock price today. (The required rate of return is 10%) A. $110 B. $90 C. $100 D. None of the above

Q: The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy. A. The level of investment does not influence or matter to the dividend decision B. Once the dividend policy is set the investment decision can be made as desired C. The investment policy is set before the dividend decision and not changed by dividend policy D. None of the above

Q: In an interest rate swap agreement , __________________ reduces the default risk. This is where the swap parties exchange only the net difference between interest payments owed.

Q: One key assumption of the Miller and Modigliani (MM) dividend irrelevance is that: A. Future stock prices are certain B. There are no capital gains taxes C. Capital markets are efficient D. All investments are risk-free

Q: A(n)_________________________ is an interest rate swap which offsets the original interest rate swap agreement.

Q: The indifference proposition regarding dividend policy: A. Assumes that tax rates increase at the same rate as inflation B. Assumes that investors are indifferent about the timing of dividend payments C. States that investors are indifferent between stock dividends and cash dividends D. States that investors are indifferent between stock repurchase and cash dividends

Q: One key assumption of the Miller and Modigliani (MM) dividend irrelevance argument is that: A. Future stock prices are certain B. There are no capital gains taxes C. All investments are risk-free D. New shares are sold at a fair price

Q: A(n)_________________________ is where a borrower with a lower credit rating enters into an agreement with a borrower with a higher credit rating to exchange interest payments.

Q: Generally, investors view the announcement of open-market repurchase of stocks as: A. bad news and the stock price drops B. good news and the stock price increases C. a non-event and does not affect the stock prices D. very good news and the stock price jumps up

Q: A(n)_________________________ means that the buyer of the option contract is betting that the market price of the underlying security will increase in the future.

Q: Generally, investors interpret the announcement of a decrease in dividends as: A. bad news and the stock price drops B. good news and the stock price increases C. a non-event and does not affect the stock prices D. very good news and the stock price jumps up

Q: A(n)_________________________ means that the buyer of the option contract is betting that the market price of the underlying security will decline in the future.

Q: Generally, investors interpret the announcement of an increase in dividends as: A. bad news and the stock price drops B. good news and the stock price increases C. a non-event and does not affect the stock price D. very bad news and the stock price plunges

Q: According to financial executives' views about dividend policy, the following statement is the most frequently cited one: I) we try to avoid reducing the dividend II) we try to maintain a smooth dividend stream III) we look at the current dividend level IV) we are reluctant to make a change that may have to be reversed A. I only B. II only C. III only D. IV only

Q: Futures contracts are_________________________ daily which means that the futures contracts settled each day as the market value of the futures contracts change.

Q: Generally, firms resort to repurchase of stock during: I) boom times at an increasing rate as firms accumulate excess cash II) recession at an increasing rate because of the low stock price III) boom as well as recession at a steady rate A. I only B. II only C. III only D. II and III only

Q: Generally, firms resort to repurchase of stock because: I) Firms have accumulated large amount of excess cash II) Firms want to change their capital structure III) Firms want to substitute it for regular dividends A. I only B. II only C. I and II only D. III only

Q: The_________________________ is the fee the buyer must pay to be able to put securities to or to call securities away from the option writer.

Q: Which of the following is not true? A. Firms have long-run target dividend payout ratios B. Dividend changes follows shifts in long-term, sustainable earnings C. Managers are reluctant to make dividend changes that might have to be reversed D. All of the above

Q: _________________________ is the difference in interest rates (or prices) between the cash market and the futures market on an underlying security.

Q: Greenmail refers to the practice of a company purchasing its stock, usually at a high price, from: A. Small shareholders who are happy with performance of the firm B. A hostile shareholder who threatens to take over the firm C. Large shareholders who are happy with performance of the firm D. None of the above

Q: A financial institution goes _________________________ in the futures market by buying a futures contract.

Q: The most important difference between stock repurchases and cash dividends is that they: I) Benefit different groups II) Have different effects on corporate cash flow III) May have different tax consequences A. I only B. II only C. III only D. I, II, and III

Q: The procedure where the firm states a series of prices at which it is prepared to repurchase stock. Shareholders submit offers indicting how many shares they wish to sell at each price. The firm then calculates the lowest price at which it is able to buy the desired number of shares. This procedure is known as: A. Open market transaction B. Dutch auction C. Green mail D. None of the above

Q: A financial institution goes _________________________ in the futures market by selling a futures contract.

Q: A(n) _________________________ is an agreement between a buyer and a seller today which calls for the delivery of a particular security in exchange for cash at some future date for a set price.

Q: The par value of the outstanding shares is defined as: A. Retained earnings B. Legal capital C. Book value of equity D. None of the above

Q: Dutch auction process is the same as: A. discriminatory price auction B. uniform price auction C. English auction D. none of the above

Q: Firms can repurchase shares in the following ways: I) Open market repurchase II) Through a tender offer III) Through a Dutch auction process IV) Through direct negotiation with a major shareholder A. I only B. II only C. III only D. I, II, III, and IV

Q: Which of the following statements is true concerning a bank's duration gap? A) If a bank has a positive duration gap and interest rates rise, the bank's net worth will decline B) A bank with a positive duration gap has a longer average duration for its assets than for its liabilities C) If a bank has a zero duration gap and interest rates rise, the bank's net worth will not change D) If a bank has a negative duration gap and interest rates rise, the bank's net worth will increase E) All of the above are true statements

Q: A bank has $100 million of investment grade bonds with a duration of 9.0 years. This bank also has $500 million of commercial loans with a duration of 5.0 years. This bank has $300 million of consumer loans with a duration of 2.0 years. This bank has deposits of $600 million with a duration of 1.0 years and nondeposit borrowings of $100 million with an average duration of .25 years. What is this bank's duration gap? These are all of the assets and liabilities this bank has. A) This bank has a duration gap of 14.75 years B) This bank has a duration gap of 15.03 years C) This bank has a duration gap of 3.55 years D) This bank has a duration gap of 3.75 years E) This bank has a duration gap of 5.15 years

Q: The following statements are true of dividend reinvestment plans (DRIPs): I) offered by the companies to their shareholders II) generally, new shares are issued at a discount III) the dividends are taxable as ordinary income A. I only B. I and II only C. I, II and III D. III only

Q: A bank has an average asset duration of 5 years and an average liability duration of 9 years. This bank has total assets of $1000 million and total liabilities of $850 million. Currently, market interest rates are 5 percent. If interest rates rise by 2 percent (to 7 percent), what is this bank's duration gap? A) 4 years B) 4 years C) 2.65 years D) 2.65 years E) 12.65 years

Q: Which of the following dividends is never in the form of cash? I) Regular dividend II) Special dividend III) Stock dividend IV) Liquidating dividend A. I only B. II only C. III only D. I, II, and IV only

Q: A bank has an average asset duration of 5 years and an average liability duration of 9 years. This bank has total assets of $1000 million and total liabilities of $850 million. Currently, market interest rates are 5 percent. If interest rates rise by 2 percent (to 7 percent), what is this bank's change in net worth? A) Net worth will decrease by $50.47 million B) Net worth will increase by $50.47 million C) Net worth will decrease by $240.95 million D) Net worth will increase by $240.95 million E) Net worth will not change at all

Q: On January 2, Michigan Mining declared a $25-per-share quarterly dividend payable on March 9th to stockholders of record on February 9. What is the latest date by which you could purchase the stock and still get the recently declared dividend? A. February 5 B. February 6 C. February 7 D. February 8

Q: A bank has an average asset duration of 5 years and an average liability duration of 3 years. This bank has total assets of $500 million and total liabilities of $250 million. Currently, market interest rates are 10 percent. If interest rates fall by 2 percent (to 8 percent), what is this bank's duration gap? A) 2 years B) 2 years C) 3.5 years D) 3.5 years E) None of the above

Q: Which of the following lists events in the chronological order from earliest to latest? A. Record date, declaration date, ex-dividend date B. Declaration date, record date, ex-dividend date C. Declaration date, ex-dividend date, record date D. None of the above

Q: Which of these dates occurs last in time (when arranged in the chronological order)? A. Payment date B. Ex-dividend date C. Record date D. Dividend declaration date

Q: A bank has an average asset duration of 5 years and an average liability duration of 3 years. This bank has total assets of $500 million and total liabilities of $250 million. Currently, market interest rates are 10 percent. If interest rates fall by 2 percent (to 8 percent), what is this bank's change in net worth? A) Net worth will decrease by $31.81 million B) Net worth will increase by $31.81 million C) Net worth will increase by $27.27 million D) Net worth will decrease by $27.27 million E) Net worth will not change at all

Q: Dividends are decided by: I) The managers of a firm II) The government III) The board of directors A. I only B. II only C. III only D. I and II only

Q: A bond has a duration of 7.5 years. Its current market price is $1125. Interest rates in the market are 7% today. It has been forecasted that interest rates will rise to 9% over the next couple of weeks. How will this bank's price change in percentage terms? A) This bond's price will rise by 2 percent. B) This bond's price will fall by 2 percent. C) This bond's price will fall by 14 .02 percent D) This bond's price will rise by 14.02 percent E) This bond's price will not change

Q: Firms can pay out cash to their shareholders in the following ways: I) Dividends II) Share repurchases III) Interest payments A. I only B. II only C. I and II only D. III only

Q: The duration of a bond is the weighted average maturity of the future cash flows expected to be received on a bond. Which of the following is a true statement concerning duration? A) The longer the time to maturity, the greater the duration B) The higher the coupon rate, the higher the duration C) The shorter the duration, the greater the price volatility D) All of the above are true E) None of the above are true

Q: Student: ___________________________________________________________________________

Q: A bank has an average asset duration of 1.15 years and an average liability duration of 2.70 years. This bank has $250 million in total assets and $225 million in total liabilities. This bank has: A) A negative duration gap of 1.55 years. B) A positive duration gap of 1.28 years. C) A negative duration gap of 3.85 years. D) A negative duration gap of 1.28 years. E) None of the above.

Q: A bank has an average asset duration of 4.7 years and an average liability duration of 3.3 years. This bank has $750 million in total assets and $500 million in total liabilities. This bank has: A) A positive duration gap of 8.0 years. B) A negative duration gap of 2.5 years. C) A positive duration gap of 1.4 years. D) A positive duration gap of 2.5 years. E) None of the above.

Q: How does the random walk theory explain market crashes?

Q: If Main Street Bank has $100 million in commercial loans with an average duration of 0.40 years; $40 million in consumer loans with an average duration of 1.75 years; and $30 million in U.S. Treasury bonds with an average duration of 6 years, what is Main Street's asset portfolio duration? A) 0.4 years B) 1.7 years C) 2.7 years D) 4.1 years E) None of the above

Q: List the six lessons of market efficiency.

Q: If Fifth National Bank's asset duration exceeds its liability duration and interest rates rise, this will tend to __________________ the market value of the bank's net worth. A) Lower B) Raise C) Stabilize D) Not affect E) None of the above

Q: Briefly discuss some of the important findings of behavioral finance studies.

Q: What are puzzles and anomalies?

Q: Which of the following is part of funds management? A) The goal of funds management is simply to gain control over the bank's funds sources. B) Since the amount of deposits a bank holds is determined largely by its customers, the focus of the bank should be on managing the assets of the bank. C) Management of the bank's assets must be coordinated with management of the bank's liabilities. D) The spread between interest revenues and interest expenses is unimportant. E) None of the above

Q: State the semi-strong form of market efficiency and its implications.

Q: The Third National Bank of Edmond reports a net interest margin of 5.83%. It has total interest revenues of $275 million and total interest expenses of $210 million. This bank has earnings assets of $1115. Suppose this bank's interest revenues rise by 8 percent and its interest expenses and earnings assets rise by 10 percent next year. What is this bank's new net interest margin? A) 5.83% B) 7.09% C) 3.59% D) 5.38% E) 7.80%

Q: State the weak form of market efficiency and its implications.

Q: The Third National Bank of Edmond reports a net interest margin of 5.83%. It has total interest revenues of $275 million and total interest expenses of $210 million. What does this bank's earnings assets have to be? A) $4717 million B) $3602 million C) $1115 million D) $3.790 million E) None of the above

Q: State the strong form of market efficiency.

Q: A treasury bill currently sells for $9,845, has a face value of $10,000 and has 46 days to maturity. What is the yield to maturity on this security? A) 12.49% B) 12.13% C) 12.30% D) 2% E) None of the above

Q: List the three forms of market efficiency and explain the basis for it.

Q: If a bank has a negative GAP, a decrease in interest rates will cause interest income to __________, interest expense to__________, and net interest income to __________. A) Increase, increase, increase B) Increase, decrease, increase C) Increase, increase, decrease D) Decrease, decrease, decrease E) Decrease, decrease, increase

Q: Briefly explain why, in a competitive securities market, successive price changes are random.

Q: If a bank has a positive GAP, an increase in interest rates will cause interest income to __________, interest expense to__________, and net interest income to __________. A) Increase, increase, increase B) Increase, decrease, increase C) Increase, increase, decrease D) Decrease, decrease, decrease E) Decrease, increase, increase

Q: State the important differences between investment decisions and financing decisions.

Q: A bank has Federal Funds totaling $25 million with an interest rate sensitivity weight of 1.0. This bank also has loans of $105 million and investments of $65 million with interest rate sensitivity weights of 1.40 and 1.15 respectively. This bank also has $135 million in interest-bearing deposits with an interest rate sensitivity weight of .90 and other money market borrowings of $75 million with an interest rate sensitivity weight of 1.0. What is the dollar interest-sensitive gap for this bank? A) $50.25 B) $-15 C) -$50.25 D) $34.25 E) None of the above

Q: A majority of research supports the theory that past stock movements can predict future asset prices.

Q: The fact that a consumer who purchases a particular basket of goods for $100 today has to pay $105 next year for the same basket of goods is an example of which of the following risks: A) Inflation risk B) Default risk C) Liquidity risk D) Price risk E) Maturity risk

Q: Behavioral finance and technical analysis are basically the same theory.

Q: A bank with a positive interest-sensitive gap will have a decrease in net interest income when interest rates in the market: A) Rise B) Fall C) Stay the same D) A bank with a positive interest-sensitive gap will never have a decrease in net interest income

Q: In an efficient market, investors will not pay others what they can do equally well themselves.

Q: Behavioral finance deals with the idea that individual investors have built-in biases and misconceptions that can drive prices away from fair values.

Q: The _______________ is determined by the demand and supply for loanable funds in the market. The term that correctly fills in the blank in the preceding sentence is: A) The yield to maturity B) The banker's discount rate C) The holding period return D) The risk-free real rate of interest E) The market rate of interest on a risky loan

Q: The evidence against market efficiency are called puzzles or anomalies.