Chapter 4-7

A) 5 percent.

An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of A) 5 percent. B) 8 percent. C) 10 percent. D) 40 percent.

B) a fixed-payment loan.

A fully amortized loan is another name for A) a simple loan. B) a fixed-payment loan. C) a commercial loan. D) an unsecured loan.

B) U.S. Treasury bills.

All of the following are examples of coupon bonds EXCEPT A) corporate bonds. B) U.S. Treasury bills. C) U.S. Treasury notes. D) U.S. Treasury bonds.

C) 6 percent.

A $1000 face value coupon bond with a $60 coupon payment every year has a coupon rate of A) .6 percent. B) 5 percent. C) 6 percent. D) 10 percent.

D) discount bond; face

A ________ is bought at a price below its face value, and the ________ value is repaid at the maturity date. A) coupon bond; discount B) discount bond; discount C) coupon bond; face D) discount bond; face HOMEWORK

C) coupon bond; face

A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid. A) coupon bond; discount B) discount bond; discount C) coupon bond; face D) discount bond; face HOMEWORK

D) discount bond.

A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond.

A) positive; raise

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium. A) positive; raise B) positive; lower C) negative; raise D) negative; lower

C) coupon bond.

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond.

A) simple loan.

A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond.

B) fixed-payment loan.

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond.

A) increases; lowers

A decrease in default risk on corporate bonds ________ the demand for these bonds, and ________ the demand for default-free bonds, everything else held constant. A) increases; lowers B) lowers; increases C) does not change; greatly increases D) moderately lowers; does not change

D) increase; reduce

A decrease in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant. A) increase; increase B) reduce; reduce C) reduce; increase D) increase; reduce

D) decrease; increase

A decrease in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities, everything else held constant. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase

B) pays the bondholder the face value at maturity.

A discount bond A) pays the bondholder a fixed amount every period and the face value at maturity. B) pays the bondholder the face value at maturity. C) pays all interest and the face value at maturity. D) pays the face value at maturity plus any capital gain.

B) vote and be the residual claimant of all cash flows.

A stockholder's ownership of a company's stock gives her the right to A) vote and be the primary claimant of all cash flows. B) vote and be the residual claimant of all cash flows. C) manage and assume responsibility for all liabilities. D) vote and assume responsibility for all liabilities.

B) increase; decrease; increase

A(n) ________ in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds, all else equal. A) increase; increase; increase B) increase; decrease; increase C) decrease; increase; increase D) decrease; decrease;decrease

A) increases

An increase in an asset's expected return relative to that of an alternative asset, holding everything else constant, ________ the quantity demanded of the asset. A) increases B) decreases C) has no effect on D) erases

B) lowers; increases

An increase in default risk on corporate bonds ________ the demand for these bonds, but ________ the demand for default-free bonds, everything else held constant. A) increases; lowers B) lowers; increases C) does not change; greatly increases D) moderately lowers; does not change

B) reduce; real

An increase in the expected rate of inflation will ________ the expected return on bonds relative to the that on ________ assets, everything else held constant. A) reduce; financial B) reduce; real C) raise; financial D) raise; real

C) reduce; increase

An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant. A) increase; increase B) reduce; reduce C) reduce; increase D) increase; reduce

C) increase; reduce

An increase in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities, everything else held constant. A) increase; increase B) reduce; reduce C) increase; reduce D) reduce; increase

A) decreases

An increase in the time to the promised future payment ________ the present value of the payment. A) decreases B) increases C) has no effect on D) is irrelevant to

A) increases; less

As default risk decreases, the expected return on corporate bonds ________, and the return becomes ________ uncertain, everything else held constant. A) increases; less B) increases; more C) decreases; less D) decreases; more

D) decreases; more

As default risk increases, the expected return on corporate bonds ________, and the return becomes ________ uncertain, everything else held constant. A) increases; less B) increases; more C) decreases; less D) decreases; more

B) increases; decreases

As their relative riskiness ________, the expected return on corporate bonds ________ relative to the expected return on default-free bonds, everything else held constant. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; does not change

C) default-free bonds.

Bonds with no default risk are called A) flower bonds. B) no-risk bonds. C) default-free bonds. D) zero-risk bonds.

B) junk bonds.

Bonds with relatively high risk of default are called A) Brady bonds. B) junk bonds. C) zero coupon bonds. D) investment grade bonds.

C) reduces the demand for silver.

Everything else held constant, a decrease in wealth A) increases the demand for stocks. B) increases the demand for bonds. C) reduces the demand for silver. D) increases the demand for gold.

C) falls; rises

Everything else held constant, if the expected return on RST stock declines from 12 to 9 percent and the expected return on XYZ stock declines from 8 to 7 percent, then the expected return of holding RST stock ________ relative to XYZ stock and demand for XYZ stock ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls

A) rises; rises

Everything else held constant, if the expected return on U.S. Treasury bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of holding GE stock ________ relative to U.S. Treasury bonds and the demand for GE stock ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls

D) falls; falls

Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected return of corporate bonds ________ relative to U.S. Treasury bonds and the demand for corporate bonds ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls

C) decrease; increase

Everything else held constant, if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future, the interest rate on corporate bonds will ________ and the interest rate on Treasury securities will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

A) positively related to wealth.

Holding all other factors constant, the quantity demanded of an asset is A) positively related to wealth. B) negatively related to its expected return relative to alternative assets. C) positively related to the risk of its returns relative to alternative assets. D) negatively related to its liquidity relative to alternative assets.

A) $37.50.

If a $1000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment every year is A) $37.50. B) $3.75. C) $375.00. D) $13.75 HOMEWORK

A) $650.

If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is A) $650. B) $1,300. C) $130. D) $13.

A) increase and the bond's return will become more uncertain, meaning the expected return on the corporate bond will fall.

If a corporation begins to suffer large losses, then the default risk on the corporate bond will A) increase and the bond's return will become more uncertain, meaning the expected return on the corporate bond will fall. B) increase and the bond's return will become less uncertain, meaning the expected return on the corporate bond will fall. C) decrease and the bond's return will become less uncertain, meaning the expected return on the corporate bond will fall. D) decrease and the bond's return will become less uncertain, meaning the expected return on the corporate bond will rise. HOMEWORK

B) 10 percent.

If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is A) 5 percent. B) 10 percent. C) 12.5 percent. D) 15 percent.

B) increase; decrease

If brokerage commissions on bond sales decrease, then, other things equal, the demand for bonds will ________ and the demand for real estate will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

D) increase; decrease

If gold becomes acceptable as a medium of exchange, the demand for gold will ________ and the demand for bonds will ________, everything else held constant. A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease

B) increase; decrease

If housing prices are expected to increase, then, other things equal, the demand for houses will ________ and that of Treasury bills will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

A) increases; decreases

If prices in the diamond market become less volatile, all else equal, then the demand for diamonds ________ and the demand for gold ________. A) increases; decreases B) increases; increases C) decreases; decreases D) decreases; increases

D) decrease; increase

If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

B) increase; more

If the possibility of a default increases because corporations begin to suffer losses, then the default risk on corporate bonds will ________, and the bonds' returns will become ________ uncertain, meaning that the expected return on these bonds will decrease, everything else held constant. A) increase; less B) increase; more C) decrease; less D) decrease; more

A) decreases; increases

If the price of diamonds is expected to decrease, all else equal, then the demand for diamonds ________ and the demand for platinum ________. A) decreases; increases B) decreases; decreases C) increases; increases D) increases; decreases

C) decrease; decrease

If the price of gold becomes less volatile, then, other things equal, the demand for stocks will ________ and the demand for antiques will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

D) increase; decrease

If the probability of a bond default increases because corporations begin to suffer large losses, then the default risk on corporate bonds will ________ and the expected return on these bonds will ________, everything else held constant. A) decrease; increase B) decrease; decrease C) increase; increase D) increase; decrease

A) increase; current

In a one-period valuation model, a decrease in the required return on investments in equity causes a(n) ________ in the ________ price of a stock. A) increase; current B) increase; expected sales C) decrease; current D) decrease; expected sales

D) set by the buyer willing to pay the highest price.

In asset markets, an asset's price is A) set equal to the highest price a seller will accept. B) set equal to the highest price a buyer is willing to pay. C) set equal to the lowest price a seller is willing to accept. D) set by the buyer willing to pay the highest price.

C) less than

In the Gordon Growth Model, the growth rate is assumed to be ________ the required return on equity. A) greater than B) equal to C) less than D) proportional to

A) increases the current stock price.

In the Gordon growth model, a decrease in the required rate of return on equity A) increases the current stock price. B) increases the future stock price. C) reduces the future stock price. D) reduces the current stock price.

A) lenders; borrowers

In the bond market, the bond demanders are the ________ and the bond suppliers are the ________. A) lenders; borrowers B) lenders; advancers C) borrowers; lenders D) borrowers; advancers

C) price; interest rate

In the bond market, the market equilibrium shows the market-clearing ________ and market-clearing ________. A) price; deposit B) interest rate; deposit C) price; interest rate D) interest rate; premium

B) the present value is almost zero.

In the generalized dividend model, a future sales price far in the future does not affect the current stock price because A) the present value cannot be computed. B) the present value is almost zero. C) the sales price does not affect the current price. D) the stock may never be sold.

A) it does not affect the current stock price.

In the generalized dividend model, if the expected sales price is in the distant future A) it does not affect the current stock price. B) it is more important than dividends in determining the current stock price. C) it is equally important with dividends in determining the current stock price. D) it is less important than dividends but still affects the current stock price.

B) the present value of the future dividend stream.

In the generalized dividend model, the current stock price is the sum of A) the actual value of the future dividend stream. B) the present value of the future dividend stream. C) the present value of the future dividend stream plus the actual future sales price. D) the present value of the future sales price.

D) reduces the current price of a stock.

In the one-period valuation model, an increase in the required return on investments in equity A) increases the expected sales price of a stock. B) increases the current price of a stock. C) reduces the expected sales price of a stock. D) reduces the current price of a stock.

A) the expected sales price increases.

In the one-period valuation model, the current stock price increases if A) the expected sales price increases. B) the expected sales price falls. C) the required return increases. D) dividends are cut.

A) the present value of both the dividends and the expected sales price.

In the one-period valuation model, the value of a share of stock today depends upon A) the present value of both the dividends and the expected sales price. B) only the present value of the future dividends. C) the actual value of the dividends and expected sales price received in one year. D) the future value of dividends and the actual sales price. HOMEWORK

B) risk.

Information plays an important role in asset pricing because it allows the buyer to more accurately judge A) liquidity. B) risk. C) capital. D) policy. HOMEWORK

A) an expected decrease in the level of future dividends.

New information that might lead to a decrease in a stock's price might be A) an expected decrease in the level of future dividends. B) a decrease in the required rate of return. C) an expected increase in the dividend growth rate. D) an expected increase in the future sales price. HOMEWORK

A) wealth

Of the four factors that influence asset demand, which factor will cause the demand for all assets to increase when it increases, everything else held constant? A) wealth B) expected returns C) risk D) liquidity

C) a constant

One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate. A) an increasing B) a fast C) a constant D) an escalating

B) right; left

Other things being equal, a decrease in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________. A) right; right B) right; left C) left; right D) left; left HOMEWORK

C) left; right

Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________. A) right; right B) right; left C) left; right D) left; left

B) dividends.

Periodic payments of net earnings to shareholders are known as A) capital gains. B) dividends. C) profits. D) interest.

A) assets.

Pieces of property that serve as a store of value are called A) assets. B) units of account. C) liabilities. D) borrowings.

D) receive the remaining cash flow after all other claims are paid.

Stockholders are residual claimants, meaning that they A) have the first priority claim on all of a company's assets. B) are liable for all of a company's debts. C) will never share in a company's profits. D) receive the remaining cash flow after all other claims are paid. HOMEWORK

C) coupon payment

The ________ is calculated by multiplying the coupon rate times the par value of the bond. A) present value B) face value C) coupon payment D) maturity payment

C) face value

The ________ is the final amount that will be paid to the holder of a coupon bond. A) discount value B) coupon value C) face value D) present value

A) downward; inverse

The bond demand curve is ________ sloping, indicating a(n) ________ relationship between the price and quantity demanded of bonds, everything else equal. A) downward; inverse B) downward; direct C) upward; inverse D) upward; direct

A) present value

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today. A) present value B) future value C) interest D) deflation HOMEWORK

B) interest rates are expected to rise.

The demand for gold increases, other things equal, when A) the market for silver becomes more liquid. B) interest rates are expected to rise. C) interest rates are expected to fall. D) real estate prices are expected to increase.

D) gold prices are expected to increase.

The demand for houses decreases, all else equal, when A) wealth increases. B) real estate prices are expected to increase. C) stock prices become more volatile. D) gold prices are expected to increase.

A) the gold market is expected to boom.

The demand for silver decreases, other things equal, when A) the gold market is expected to boom. B) the market for silver becomes more liquid. C) wealth grows rapidly. D) interest rates are expected to rise.

A) coupon rate.

The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's A) coupon rate. B) maturity rate. C) face value rate. D) payment rate. HOMEWORK

A) falls

The present value of an expected future payment ________ as the interest rate increases. A) falls B) rises C) is constant D) is unaffected HOMEWORK

B) the relationship among interest rates of different bonds with the same maturity.

The risk structure of interest rates is A) the structure of how interest rates move over time. B) the relationship among interest rates of different bonds with the same maturity. C) the relationship among the term to maturity of different bonds. D) the relationship among interest rates on bonds with different maturities. HOMEWORK

D) default risk.

The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is A) interest rate risk. B) inflation risk. C) liquidity risk. D) default risk. HOMEWORK

A) risk premium.

The spread between the interest rates on bonds with default risk and default-free bonds is called the A) risk premium. B) junk margin. C) bond margin. D) default premium. HOMEWORK

D) rises; quantity supplied

The supply curve for bonds has the usual upward slope, indicating that as the price ________, ceteris paribus, the ________ increases. A) falls; supply B) falls; quantity supplied C) rises; supply D) rises; quantity supplied

D) present value of all future cash flows.

The value of any investment is found by computing the A) present value of all future sales. B) present value of all future liabilities. C) future value of all future expenses. D) present value of all future cash flows.

D) discounting the future.

To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of A) face value. B) par value. C) deflation. D) discounting the future.

B) the federal government can increase taxes or print money to pay its obligations.

U.S. government bonds have no default risk because A) they are issued in strictly limited quantities. B) the federal government can increase taxes or print money to pay its obligations. C) they are backed with gold reserves. D) they can be exchanged for silver at any time. HOMEWORK

B) $20.

Using the Gordon growth formula, if D1 is $1.00, ke is 10% or 0.10, and g is 5% or 0.05, then the current stock price is A) $10. B) $20. C) $30. D) $40.

C) $100.

Using the Gordon growth formula, if D1 is $2.00, ke is 12% or 0.12, and g is 10% or 0.10, then the current stock price is A) $20. B) $50. C) $100. D) $150. HOMEWORK

D) the growth rate of dividends decreases.

Using the Gordon growth model, a stock's current price decreases when A) the dividend growth rate increases. B) the required return on equity decreases. C) the expected dividend payment increases. D) the growth rate of dividends decreases. HOMEWORK

A) the dividend growth rate increases.

Using the Gordon growth model, a stock's current price will increase if A) the dividend growth rate increases. B) the growth rate of dividends falls. C) the required rate of return on equity rises. D) the expected sales price rises.

B) $25.

Using the Gordon growth model, if D1 is $.50, ke is 7%, and g is 5%, then the present value of the stock is A) $2.50. B) $25. C) $50. D) $46.73.

C) $100.10.

Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%, the current price of the stock would be A) $110.11. B) $121.12. C) $100.10. D) $100.11

D) $96.19.

Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5%, the current price of the stock would be A) $110.00. B) $101.00. C) $100.00. D) $96.19. HOMEWORK

A) $453.51

What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent? A) $453.51 B) $500.00 C) $476.25 D) $550.00

A) par value

When talking about a coupon bond, face value and ________ mean the same thing. A) par value B) coupon value C) amortized value D) discount value

B) Installment loans and mortgages are frequently of the fixed payment type.

Which of the following are TRUE of fixed payment loans? A) The borrower repays both the principal and interest at the maturity date. B) Installment loans and mortgages are frequently of the fixed payment type. C) The borrower pays interest periodically and the principal at the maturity date. D) Commercial loans to businesses are often of this type.

C) U.S. Treasury bonds

Which of the following bonds are considered to be default-risk free? A) municipal bonds B) investment-grade bonds C) U.S. Treasury bonds D) junk bonds

B) The expected return on corporate bonds decreases as default risk increases.

Which of the following statements are TRUE? A) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. B) The expected return on corporate bonds decreases as default risk increases. C) A corporate bond's return becomes less uncertain as default risk increases. D) As their relative riskiness increases, the expected return on corporate bonds increases relative to the expected return on default-free bonds.

C) $94.

With an interest rate of 6 percent, the present value of $100 next year is approximately A) $106. B) $100. C) $94. D) $92. HOMEWORK

Answer: Use the Gordon Growth Model. $5(1 + .05)/(.12 - .05) = $75

You believe that a corporation's dividends will grow 5% on average into the foreseeable future. If the company's last dividend payment was $5 what should be the current price of the stock assuming a 12% required return?

C) gold becomes more liquid.

You would be less willing to purchase U.S. Treasury bonds, other things equal, if A) you inherit $1 million from your Uncle Harry. B) you expect interest rates to fall. C) gold becomes more liquid. D) stock prices are expected to fall.

A) the brokerage commissions on bond sales become cheaper.

You would be more willing to buy AT&T bonds (holding everything else constant) if A) the brokerage commissions on bond sales become cheaper. B) interest rates are expected to rise. C) your wealth has decreased. D) you expect diamonds to appreciate in value.