Money and Capital Markets

Money market securities have all the following characteristics except they are not

• short term

• money

• low risk

• very liquid

Finance companies raise funds in the money market by selling

• commercial paper

• federal funds

• negotiable certificates of deposits

• Eurodollars

Suppose that you purchase a 91-day Treasury bill for $9,850 that is worth $10,000 when it matures. The security's discount rate if held to maturity is about

• 4.87%

• 5.93%

• 6.18%

• 7.00%

Suppose that you purchase a 91-day Treasury bill for $9,850 that is worth $10,000 when it matures. The security's annualized investment rate if held to maturity is about

• 4.87%

• 5.93%

• 6.18%

• 7.00%

Compared to money market securities, capital market securities have

• more liquidity

• longer maturity

• lower yields

• less risk

The primary reason that individuals and firms choose to borrow long-term is to

• reduce the risk that interest rates will fall before they pay off their debt

• reduce the risk that interest rates will rise before they pay off their debt.

• reduce monthly interest payments, as interest rates tend to be higher on short-term than long-term debt instruments

• reduce total interest payments over the life of the debt

Typically, the interest rate on corporate bonds will be ________ the more restrictions are placed on management through restrictive covenants, because ________.

• higher; corporate earnings will be limited by the restrictions

• higher; the bonds will be considered safer by bondholders

• lower; the bonds will be considered safer by buyers

• lower; corporate earnings will be higher with more restrictions in place

A basic principle of finance is that the value of any investment is

• the present value of all future net cash flows generated by the investment

• the undiscounted sum of all future net cash flows generated by the investment

• unrelated to the future net cash flows generated by the investment

• unrelated to the degree of risk associated with the future net cash flows generated by the investment

A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an investor's valuation of this stock if she expects it to be selling for $30 in one year and requires a 15 percent return on equity investments?

• $30.24

• $26.30

• $26.09

• $27.74

Suppose the average industry PE ratio for auto parts retailers is 20. What is the current price of Auto Zone stock if the retailer's earnings per share is projected to be $1.85?

• $21.85

• $9.25

• $10.81

• $37