Business finance exam 2

Which one of the following is the price a dealer will pay to purchase a bond?

bid price

A bond is quoted at a price of $989. This price is referred to as which one of the following?

clean price

The liquidity premium is compensation to investors for:

the lack of an active market wherein a bond can be sold for its actual value.

You purchase a bond with a coupon rate of 5.0 percent and a clean price of $1,040. If the next semiannual coupon payment is due in three months, what is the invoice price?

$1,052.50

Gugenheim, Inc. offers a 6.75 percent coupon bond with annual payments. The yield to maturity is 3.775 percent and the maturity date is 8 years. What is the market price of a $1,000 face value bond?

$1,202.17

What is the Net Present Value of an investment with the following cash flows if the required rate of return is 12 percent? Year Cash Flow 0 -$4,555 1 $2,025 2 $4,000 3 $1,225

$1,313.74

You purchase a bond with an invoice price of $1,390. The bond has a coupon rate of 8.4 percent, and there are 2 months to the next semiannual coupon date. What is the clean price of the bond?

$1,362.00

Langsam Enterprises pays a constant dividend of $0.85 a share. The company announced today that it will continue to pay the dividend for another 2 years after which time all dividends will cease. What is one share of this stock worth today if the required rate of return is 16.5 percent?

$1.36

Atlas Mines has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 2.75 percent annually. The firm just paid an annual dividend of $1.67. What will the dividend be six years from now?

$1.97

Diets For You announced today that it will begin paying annual dividends next year. The first dividend will be $0.12 a share. The following dividends will be $0.15, $0.20, $0.50, and $0.75 a share annually for the following 4 years, respectively. After that, dividends are projected to increase by 4 percent per year. How much are you willing to pay to buy one share of this stock today if your desired rate of return is 8.5 percent?

$12.78

The common stock of Textile Mills pays an annual dividend of $1.65 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 12 percent annual return?

$13.75

You are purchasing a 20-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is $1,000. What is the current market price? Assume semiannual periods.

$182.80

Christopher Reed Communications is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 15 percent a year for the next 4 years and then decreasing the growth rate to 3.5 percent per year. The company just paid its annual dividend in the amount of $0.20 per share. What is the current value of one share of this stock if the required rate of return is 15.5 percent?

$2.49

J. Heller Hair Products just paid an annual dividend of $3.10 a share and is expected to increase that amount by 4 percent per year. If you are planning to buy 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 12 percent at the time of your purchase?

$41.91

A Treasury bond is quoted at a price of 105:10. What is the market price of this bond if the face value is $5,000?

$5,265.63

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 15 percent a year for the next 4 years and then decreasing the growth rate to 4 percent per year. The company just paid its annual dividend in the amount of $1.50 per share. What is the current value of one share of this stock if the required rate of return is 7.00 percent?

$76.59

Today, you want to sell a $1,000 face value zero coupon bond you currently own. The bond matures in 4.5 years. How much will you receive for your bond if the market yield to maturity is currently 5.33 percent? Ignore any accrued interest.

$789.22

Jake Barnes Booksellers announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $0.43 a share. The following dividends will be $0.48, $0.63, and $0.93 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.1 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 12 percent?

$8.65

How much are you willing to pay for one share of Buffalo Industries stock if the company just paid a $0.70 annual dividend, the dividends increase by 2.5 percent annually, and you require a 10 percent rate of return?

$9.57

Grohl Co. issued 15-year bonds a year ago at a coupon rate of 8 percent. The bonds make semiannual payments. If the YTM on these bonds is 9 percent, what is the current bond price?

$921.29

Michael Markets has a 6.75 percent coupon bond outstanding that matures in 10.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent?

$967.24

Wine and Roses, Inc. offers a 5.0 percent coupon bond with semiannual payments and a yield to maturity of 5.63 percent. The bonds mature in 5 years. What is the market price of a $1,000 face value bond?

$972.87

Northern Gas recently paid a $2.80 annual dividend on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $26.91 a share. What is the market rate of return?

14.60%

Ackerman Co. has 9 percent coupon bonds on the market with fourteen years left to maturity. The bonds make annual payments. If the bond currently sells for $850.46, what is its YTM?

11.16%

Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is the coupon rate?

12.00 percent

The zero coupon bonds of D&L Movers have a market price of $319.24, a face value of $1,000, and a yield to maturity of 8.45 percent. How many years is it until these bonds mature?

13.80 years

Lily Bart is considering two mutually exclusive projects with the following cash flows. What is the crossover rate? If the required rate of return is lower than the crossover rate, which project should be accepted? Year Project A Project B 0 -$50,000 -$50,000 1 $31,000 $42,000 2 $26,000 $21,000 3 $27,000 $18,000

15.99%;A

The Lo Sun Corporation offers a 6.1 percent bond with a current market price of $781.50. The yield to maturity is 8.43 percent. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures?

18.93 years

Connor Computers has 6.5 percent coupon bonds outstanding with a current market price of $832. The yield to maturity is 16.28 percent and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature?

2.10 years

A project has an initial cost of $6,500. The cash inflows are $900, $2200, $3600, and $4100 over the next four years, respectively. What is the payback period?

2.94 years

A. Dufresne Industries has an issue of preferred stock outstanding that pays a $20.00 dividend every year in perpetuity. What is the required return if this issue currently sells for $80 per share?

25%

The next dividend payment by Matthew Markets will be $2.35 per share. The dividends are anticipated to maintain a 4.5 percent growth rate forever. The stock currently sells for $65 per share. What is the dividend yield?

3.62%

Northern Warehouses wants to raise $11.4 million to expand its business. To accomplish this, it plans to sell 40-year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield 8.75 percent. What is the minimum number of bonds it must sell to raise the $11.4 million it needs?

350,448

The yield to maturity on a bond is currently 8.46 percent. The real rate of return is 3.22 percent. What is the rate of inflation?

5.08 percent

The outstanding bonds of The Red River Gorge Ferry carry a 6.5 percent coupon. The bonds have a face value of $1,000 and are currently quoted at 102.9. What is the current yield on these bonds?

6.32%

Denver Shoppes will pay an annual dividend of $1.46 a share next year with future dividends increasing by 4.2 percent annually. What is the market rate of return if the stock is currently selling for $42.10 a share?

7.67%

Staind, Inc., has 7 percent coupon bonds on the market that have 13 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 11 percent, what is the current bond price?

730.01

Say you own an asset that had a total return last year of 11.5 percent. If the inflation rate last year was 3 percent, what was your real return?

8.25%

The bonds issued by "Stan's NoTubes" bear an 8 percent coupon, payable semiannually. The bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell for $952. What is the yield to maturity?

8.69%

What is the Internal Rate of Return on an investment with the following cash flows? Year Cash Flow 0 -$250,000 1 $80,000 2 $100,000 3 $125,000

9.85%

Which one of the following is an underlying assumption of the dividend growth model?

A stock's value is equal to the discounted present value of the future cash flows which it generates.

You are considering two mutually exclusive projects with the following cash flows. Which project should you accept if the discount rate is 2.5 percent? What if the discount rate is 4.8 percent? Year Project A Project B 0 -$120,000 -$120,000 1 $42,000 $0 2 $49,000 $0 3 $44,000 $139,000

Accept Project B at 2.5 percent and A at 4.8 percent

CGJ Electronics is considering two mutually exclusive projects with the following cash flows. Which projects should CGJ Electronics accept if the discount rate is 6 percent? What if the discount rate is 15 percent? Year Project A Project B 0 -$40,000 -$75,000 1 $13,000 $0 2 $21,000 $0 3 $17,000 $99,000

Accept Project B at 6 percent and neither at 15%

A bond that is payable to whomever has physical possession of the bond is said to be in:

Bearer form.

A bond that is payable to whomever has physical possession of the bond is said to be in:

BearerForm

Which one of the following represents the capital gains yield as used in the dividend growth model? A. D1 B. D1/P0 C. g D. g/P0 E. P0

C. g

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called which one of the following?

Call Premium

A bond that can be paid off early at the issuer's discretion is referred to as being which one of the following?

Callable

A call-protected bond is a bond that:

Cannot be called during a certain period of time

Which one of following is the rate at which a stock's price is expected to appreciate?

Capital Gains Yield

The ________ price of a bond is the price of a bond net of accrued interest; this is the price that is typically quoted.

Clean Price

An agent who maintains an inventory from which he or she buys and sells securities is called a:

Dealer

A bond's coupon rate is equal to the annual interest divided by which one of the following?

Face Value

Sally owns a bond that will pay her $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?

Face Value

Which of the following increase the price sensitivity of a bond to changes in interest rates? I. increase in time to maturity II. decrease in time to maturity III. increase in coupon rate IV. decrease in coupon rate

I and IV only

Which of the following relationships apply to a par value bond? I. coupon rate < yield-to-maturity II. current yield = yield-to-maturity III. market price = call price IV. market price = face value

II and IV only

The discount rate that makes the NPV of an investment zero is known as the:

Internal Rate of Return

The specified date on which the principal amount of a bond is payable is referred to as which one of the following?

Maturity

A graphical representation of the relationship between an investment's NPVs and various discount rates is known as:

Net Present Value Profile

The stream of customer orders coming in to the NYSE trading floor is called the:

Order Flow

A securities market primarily comprised of dealers who buy and sell for their own inventories is referred to which type of market?

Over-the-counter

Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities?

Preferred Stock

The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the:

Protective Covenants

The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the:

Protective Covenants.

The Fisher effect is defined as the relationship between which of the following variables?

Real Rates, Inflation Rates, and Nomina lRates

If the yield to maturity is less than the coupon rate, the bond will:

Sell at a Premium

Jay Gatsby is considering an investment with the following cash flows. If the required rate of return for this investment is 12.6 percent, should Jay Gatsby accept the investment based solely on the internal rate of return rule? Why or why not? Year Project A 0 -$107,000 1 $68,200 2 $110,750 3 -$25,200

She cannot apply the IRR rule in this case

In the event of default, ______ debt holders must give preference to more ______ debt holders in the priority of repayment distributions.

Subordinated; Senior

Which one of the following is the electronic system used by the NYSE for directly transmitting orders to specialists?

Super DOT

The Net Present Value Rule is:

The best criterion for making capital budgeting decisions.

An indenture is:

The legal agreement between the bond issuer and the bondholders.

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

Voting by Proxy

Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?

Yield to Maturity

Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?

Yield to maturity

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

a discount; less than

A bond's coupon rate is equal to the annual interest divided by which one of the following?

face value

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

long-term; zero coupon

The Fisher effect is defined as the relationship between which of the following variables?

real rates, inflation rates, and nominal rates