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Banking
Q:
All of the following are commonly used takeover tactics, except for
a. Poison pills
b. Bear hug
c. Tender offer
d. Proxy contest
e. Litigation
Q:
Prices for long-term bonds are more volatile than for shorter-term bonds.
Q:
Poison pills represent a new class of stock issued by a company to its shareholders, usually as a dividend. True or False
Q:
The current yield is the yearly coupon payment divided by the current market price.
Q:
A no-shop agreement prohibits the takeover target from seeking other bids. True or False
Q:
Unless a bond defaults, an investor cannot lose money investing in bonds.
Q:
In a two-tiered offer, target shareholders typically received two offers, which potentially have different values. True or False
Q:
The current yield is the best measure of an investor's return from holding a bond.
Q:
In a one-tier offer, the acquirer announces the same offer to all target shareholders. True or False.
Q:
Discounting the future is the procedure used to find the future value of a dollar received today.
Q:
Purchasing target stock in the open market is a rarely used takeover tactic. True or False
Q:
A bond's current market value is equal to the present value of the coupon payments plus the present value of the face amount.
Q:
The primary forms of proxy contests are those for seats on the board of directors, those concerning management proposals, and those seeking to force management to take a particular action. True or False
Q:
A ________ is a type of loan that has the same cash flow payment every year throughout the life of the loan.
A) discount loan
B) simple loan
C) fixed-payment loan
D) interest-free loan
Q:
A standstill agreement prevents an investor who has signed the agreement from ever again buying stock in the target firm. True or False
Q:
Bonds whose term to maturity is shorter than the holding period are also subject to
A) default.
B) reinvestment risk.
C) both of the above.
D) none of the above.
Q:
Executive stock option plans have little impact on the way management runs the firm. True or False
Q:
The return on a bond is equal to the yield to maturity when
A) the holding period is longer than the maturity of the bond.
B) the maturity of the bond is longer than the holding period.
C) the holding period and the maturity of the bond are identical.
D) none of the above.
Q:
Institutional activism has assumed a larger role in ensuring good corporate governance practices in recent years. True or False
Q:
The change in the bond's price relative to the initial purchase price is
A) the current yield.
B) coupon payment.
C) yield to maturity.
D) rate of capital gain.
Q:
The threat of corporate takeover has little impact on how responsibly a corporate board and management manage a firm. True or False
Q:
The interest rate that is adjusted for actual changes in the price level is called the
A) ex post real interest rate.
B) expected interest rate.
C) ex ante real interest rate.
D) none of the above.
Q:
Corporate anti-takeover defenses are necessarily a sign of bad corporate governance. True or False
Q:
A discount bond
A) is also called a coupon bond.
B) is also called a zero-coupon bond.
C) is also called a fixed-payment bond.
D) is also called a corporate bond.
Q:
Stakeholders in a firm refer to shareholders only. True or False
Q:
When the lender provides the borrower with an amount of funds that must be repaid to the lender at the maturity date, along with an additional payment for the interest, it is called a ________.
A) fixed-payment loan
B) discount loan
C) simple loan
D) none of the above
Q:
Corporate governance refers to a system of controls both internal and external to the firm that protects
stakeholders interests. True or False
Q:
The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is 6.76 years. What happens to the price of the bond if the interest rate falls to 8 percent?
A) It rises 20 percent.
B) It rises 12.3 percent.
C) It falls 20 percent.
D) It falls 12.3 percent.
Q:
The threat of hostile takeovers is a factor in encouraging a firm to implement good governance practices.
True or False
Q:
(I) The average lifetime of a debt security's stream of payments is called duration.
(II) The duration of a portfolio is the weighted average of the durations of the individual securities, with the weights reflecting the proportion of the portfolio invested in each.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
Corporate governance refers to the way firms elect CEOs. True or False
Q:
Reinvestment risk is the risk that
A) a bond's value may fall in the future.
B) a bond's future coupon payments may have to be invested at a rate lower than the bond's yield to maturity.
C) an investor's holding period will be short and equal in length to the maturity of the bonds he or she holds.
D) a bond's issuer may fail to make the future coupon payments and the investor will have no cash to reinvest.
Q:
Tender offers apply only for share for share exchanges. True or False
Q:
If an investor's holding period is longer than the term to maturity of a bond, he or she is exposed to
A) interest-rate risk.
B) reinvestment risk.
C) bond-market risk.
D) yield-to-maturity risk.
Q:
Golden parachutes are employee severance arrangements, which are triggered whenever a change in
control takes place. They are generally held by a large number of employees at all levels of management throughout the firm. True or False
Q:
The riskiness of an asset's return that results from interest rate changes is called
A) interest-rate risk.
B) coupon-rate risk.
C) reinvestment risk.
D) yield-to-maturity risk.
Q:
By facilitating the merger, the Fed sent a message to Wall Street that certain financial institutions are "too big to fail." What effect do you think the merger will have on the future investment activities of investment banks? Be specific.
Q:
(I) Prices of longer-maturity bonds respond less dramatically to changes in interest rates.
(II) Prices and returns for long-term bonds are less volatile than those for shorter-term bonds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
What are the risks to Anthem and WellPoint of delaying the closing date? Be specific.
Q:
If you were the Anthem CEO, would you withdraw from the deal, initiate a court battle, drop the Blue Cross subsidiary from the transaction, agree to regulators demands, or adopt some other course of action? Explain your answer.
Q:
(I) Prices of longer-maturity bonds respond more dramatically to changes in interest rates.
(II) Prices and returns for long-term bonds are less volatile than those for short-term bonds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of 15 percent. If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course of the year, what is the yearly return on the bond you are holding?
A) 5 percent
B) 10 percent
C) 15 percent
D) 20 percent
Q:
Was Microsoft a good antitrust case in which to test the effectiveness of antitrust policy on
promoting innovation? Why or why not?
Q:
If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?
A) A bond with one year to maturity
B) A bond with five years to maturity
C) A bond with ten years to maturity
D) A bond with twenty years to maturity
Q:
Comment on whether antitrust policy can be used as an effective means of encouraging innovation.
Q:
Which of the following are true concerning the distinction between interest rates and return?
A) The rate of return on a bond will not necessarily equal the interest rate on that bond.
B) The return can be expressed as the sum of the current yield and the rate of capital gains.
C) The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1.
D) All of the above are true.
E) Only A and B of the above are true.
Q:
Do you believe that the FTC might approve of Microsoft acquiring Intuit today? Why or why not?
Q:
Which of the following are generally true of all bonds?
A) The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period.
B) A rise in interest rates is associated with a fall in bond prices, resulting in capital losses on bonds whose term to maturities are longer than the holding period.
C) The longer a bond's maturity, the greater is the price change associated with a given interest rate change.
D) All of the above are true.
E) Only A and B of the above are true.
Q:
How might the proliferation of Internet usage in the twenty-first century change your answer to question 1?
Q:
The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $900 one year later is
A) -10 percent.
B) -5 percent.
C) 0 percent.
D) 5 percent.
Q:
Explain how Microsofts acquisition of Intuit might limit the entry of new competitors into the
financial software market.
Q:
The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 one year later is
A) 5 percent.
B) 10 percent.
C) 14 percent.
D) 15 percent.
Q:
Do you believe the FTC was being reasonable in not approving the merger even though? Staples agreed to divest 63 stores in markets where market concentration would be the greatest following the merger? Explain your answer.
Q:
What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 one year later?
A) 5 percent
B) 10 percent
C) -5 percent
D) -10 percent
E) None of the above
Q:
How important is properly defining the market segment in which the acquirer and target companies compete to determining the potential increased market power if the two are permitted to combine? Explain your answer.
Q:
What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later?
A) 5 percent
B) 10 percent
C) -5 percent
D) 25 percent
E) None of the above
Q:
How do the divestitures address perceived anti-competitive problems?
Q:
In which of the following situations would you prefer to be borrowing?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent.
B) The interest rate is 4 percent and the expected inflation rate is 1 percent.
C) The interest rate is 13 percent and the expected inflation rate is 15 percent.
D) The interest rate is 25 percent and the expected inflation rate is 50 percent.
Q:
Should the size of the combined companies be an important consideration in the regulators analysis of the proposed merger?
Q:
In which of the following situations would you prefer to be making a loan?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent.
B) The interest rate is 4 percent and the expected inflation rate is 1 percent.
C) The interest rate is 13 percent and the expected inflation rate is 15 percent.
D) The interest rate is 25 percent and the expected inflation rate is 50 percent.
Q:
Why are the Exxon and Mobil executives emphasizing efficiencies as a justification for this merger?
Q:
The nominal interest rate minus the expected rate of inflation
A) defines the real interest rate.
B) is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate.
C) is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate.
D) defines the discount rate.
Q:
Why might it be important to distinguish between a global and a regional oil and gas market?
Q:
The nominal interest rate minus the expected rate of inflation
A) defines the real interest rate.
B) is a better measure of the incentives to borrow and lend than the nominal interest rate.
C) is a more accurate indicator of the tightness of credit market conditions than the nominal interest rate.
D) all of the above.
E) only A and B of the above.
Q:
How does the FTC define market share?
Q:
If you expect the inflation rate to be 5 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is
A) -12 percent.
B) -2 percent.
C) 2 percent.
D) 12 percent.
Q:
Under what circumstances, if any, do you believe the government should relax the imposition of such fines in the SBC case?
Q:
If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is
A) 7 percent.
B) 22 percent.
C) -15 percent.
D) -8 percent.
E) none of the above.
Q:
Comment on the fairness and effectiveness of using the imposition of heavy fines to promote social policy.
Q:
The Fisher equation states that
A) the nominal interest rate equals the real interest rate plus the expected rate of inflation.
B) the real interest rate equals the nominal interest rate less the expected rate of inflation.
C) the nominal interest rate equals the real interest rate less the expected rate of inflation.
D) both A and B of the above are true.
E) both A and C of the above are true.
Q:
What factors other than market share should be considered in determining whether a potential merger might result in an increased pricing power?
Q:
If a $5,000 face value discount bond maturing in one year is selling for $5,000, then its yield to maturity is
A) 0 percent.
B) 5 percent.
C) 10 percent.
D) 20 percent.
Q:
What is anti-trust policy and why is it important?
Q:
If a $10,000 face value discount bond maturing in one year is selling for $5,000, then its yield to maturity is
A) 5 percent.
B) 10 percent.
C) 50 percent.
D) 100 percent.
Q:
Why do you believe the antitrust regulators were successful in this instance but so unsuccessful limiting the powers of cartels such as the Organization of Petroleum Exporting Countries (OPEC), which currently controls more than 40 percent of the worlds oil production?
Q:
If a $10,000 face value discount bond maturing in one year is selling for $9,000, then its yield to maturity is approximately
A) 9 percent.
B) 10 percent.
C) 11 percent.
D) 12 percent.
Q:
If a $10,000 face value discount bond maturing in one year is selling for $8,000, then its yield to maturity is
A) 10 percent.
B) 20 percent.
C) 25 percent.
D) 40 percent.
Q:
A remedy to antitrust regulators is any measure that would limit the ability of parties in a business combination from achieving what is viewed as excessive market or pricing power. What remedies do you believe could have been put in place by the regulators that might have been acceptable to both Rio and BHP? Be specific.
Q:
What are the arguments for and against regulators permitting "natural monopolies"?
Q:
The yield to maturity for a one-year discount bond equals
A) the increase in price over the year, divided by the initial price.
B) the increase in price over the year, divided by the face value.
C) the increase in price over the year, divided by the interest rate.
D) none of the above.