EXAM 1
FINANCE 5303-30
May 31, 2011
You have 120 minutes to complete this exam.
Place your answers in the space provided immediately below each question. If additional space is needed, continue on the back side of the page on which your answer begins.
To receive credit for your answers, please show your calculations or calculator key-strokes that determined your answers.
Do not allow others to view your work.
Do not attempt to view the work of others.
Make your responses neat and legible. I cannot grade it if I cannot read it.
1. Define and compare the following terms: 1) corporation
2) proprietorship
Corporation- A Corporation is a legal entity created by a state. The corporation is separate and distinct from its owners and managers
Proprietorship- A business owned by one individual
2. Define and compare the following terms: 1) futures market
2) spot market
Futures Market- Markets where assets are being bought or sold for delivery at some future date
Spot Market- Markets where assets are being bought and sold for “on the spot” delivery
3. Define and compare the following terms: 1) yield to maturity
2) current yield
Yield to Maturity- The rate of interest earned on a bond if it is held to maturity
Current Yield- The annual coupon payment dividend by the current market price
5. The nominal interest rate is made up of the “real” rate plus certain risk premiums. Please explain this concept. Please list and define two of these risk premiums.
Nominal Interest Rate- Refers to two distinct things: the rate of interest before adjustment for inflation (in contrast with the real interest rate); or, for interest rates “as stated” without adjustment for the full effect of compounding (also referred to as the nominal annual rate). An interest rate is called nominal if the frequency of compounding (e.g. a month) is not identical to the basic time unit (normally a year).
6. Assume that a stock will pay dividends of $2.70 in year 1, $2.43 in year…