Exam 2

What is the future value of $1,000 invested for 15 years at a rate of 5%? Multiple Choice $750 $1,000 $1,500 $2,079 $2,790

2079

What is the future value of $1,200 invested for 20 years at a rate of 6%? Multiple Choice $1,200 $1,440 $1,849 $3,079 $3,849

3849

Pick the transaction that occurs in the primary market from below. Multiple Choice Purchase of 500 shares of GE stock from a current shareholder Gift of 100 outstanding shares to a charitable organization Gift of 200 shares of stock by a mother to her daughter A purchase of newly issued stock from the issuer IBM's purchase of GE stock from a dealer

A purchase of newly issued stock from the issuer

Amy and Anna are of the same age. Amy invests $4,000 at 6 percent at age 25. Anna invests the same amount at the same interest rate at age 30. Both investments compound interest annually. Both of them retire at age 60 and neither adds nor withdraws funds prior to retirement.

Amy will have more money than Andrew at any age

Andrew deposited $5,000 today into an account that pays 4 percent interest, compounded annually. Betsy also deposited the same amount at the same interest rate, compounded annually. Andrew will withdraw his interest earnings and spend it as soon as possible. However, Betsy will reinvest her interest earnings into her account. Pick the true statement regarding this from below.

Betsy will earn more interest in Year 2 than Andrew

Which one of the following relationships applies to a par value bond? Multiple Choice Yield to maturity > Current yield > Coupon rate Coupon rate > Yield to maturity > Current yield Coupon rate = Current yield = Yield to maturity Coupon rate < Yield to maturity < Current yield Coupon rate > Current yield > Yield to maturity

Coupon rate = Current yield = Yield to maturity

Which of the following conditions is true for a premium bond? Multiple Choice Yield to maturity > Current yield > Coupon rate Coupon rate = Current yield = Yield to maturity Coupon rate > Yield to maturity > Current yield Coupon rate < Yield to maturity < Current yield Coupon rate > Current yield > Yield to maturity

Coupon rate > Current yield > Yield to maturity

Pick the correct statement related to preferred stock from below. Multiple Choice Preferred shareholders normally receive one vote per share of stock owned. Preferred shareholders determine the outcome of any election that involves a proxy fight. Preferred shareholders are considered to be the residual owners of a corporation. Preferred stock normally has a stated liquidating value of $1,000 per share. Cumulative preferred shares are more valuable than comparable noncumulative shares.

Cumulative preferred shares are more valuable than comparable noncumulative shares

Which one of the following applies to the dividend growth model? Multiple Choice An individual stock has the same value to every investor. Even if the dividend amount and growth rate remain constant, the value of a stock can vary. Zero-growth stocks have no market value. Stocks that pay the same annual dividend will have equal market values. The dividend growth rate is inversely related to a stock's market price.

Even if the dividend amount and growth rate remain constant, the value of a stock can vary

_________________ is a securities market primarily composed of dealers who buy and sell for their own inventories. Multiple Choice Auction Private Over-the-counter Regional Insider

Over-the-counter

Pick the correct statement from below. Multiple Choice Stocks can only be assigned one dividend growth rate. Preferred stocks generally have variable growth rates. Dividend growth rates must be either zero or positive. All stocks can be valued using the dividend discount models. Stocks can have negative growth rates.

Stocks can have negative growth rates

Given a stated future value in Year 5 and an annual percentage rate of 10 percent, ____________________ compounding will yield the lowest effective annual rate annual semi-annual monthly daily continuous

annual

A $1,000 par value corporate bond that pays $60 annually in interest was issued at par last year. The current price of the bond is $996.20. Pick the correct statement about this bond from below. Multiple Choice The bond is currently selling at a premium. The current yield exceeds the coupon rate. The bond is selling at par value. The current yield exceeds the yield to maturity. The coupon rate has increased to 7 percent.

The current yield exceeds the coupon rate.

Pick the correct statement related to dividend growth model from below. Multiple Choice The dividend growth model assumes dividends increase at a decreasing rate. The dividend growth model only values stocks at Time 0. The dividend growth model cannot be used to value constant dividend stocks. The dividend growth model can be used to value both dividend-paying and non-dividend-paying stocks. The dividend growth model requires the growth rate to be less than the required return.

The dividend growth model requires the growth rate to be less than the required return

The effective annual rate decreases as the number of compounding periods per year increases. The effective annual rate equals the annual percentage rate when interest is compounded annually. Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

The effective annual rate equals the annual percentage rate when interest is compounded annually

South Face has a dividend yield of 4.5% and a total return for the year of 3.5%. Which one of the following must be true? Multiple Choice The dividend must be constant. The stock has a negative capital gains yield. Correct The capital gains yield must be zero. The required rate of return for this stock increased over the year. The firm is experiencing supernormal growth.

The stock has a negative capital gains yield.

Soft Lumber has bonds, preferred stock and common stock as its capital components. _____________ is the right most apt to be granted to its preferred shareholders. Multiple Choice To elect the corporate directors To vote on proposed mergers To receive all residual income after the common dividends have been paid To hold a permanent seat on the board of directors To share in company profits prior to other shareholders

To share in company profits prior to other shareholders

The annual percentage rate considers the compounding of interest. When comparing loans you should compare the effective annual rates. Lenders are most apt to quote the effective annual rate. Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate. The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate.

When comparing loans you should compare the effective annual rates.

A bond currently has its market price exceeds its par value. Which of the conditions below will also be true? Multiple Choice Market value < Face value Yield to maturity = Current yield Market value = Face value Current yield > Coupon rate Yield to maturity < Coupon rate

Yield to maturity < Coupon rate

According to the dividend growth model, if you expect the market rate of return to increase for all stocks, then you should also expect ____________________. Multiple Choice an increase in all stock values all stock values to remain constant a decrease in all stock values Correct dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value dividend-paying stocks to increase in price while non-dividend paying stocks remain constant in value

a decrease in all stock values

All else constant, a bond is selling at _____ , its coupon rate must be _____ its yield to maturity. Multiple Choice a premium; less than a premium; equal to a discount; less than a discount; higher than par; less than

a discount; less than

The _______________________ is the interest rate that is most commonly quoted by a lender. Multiple Choice annual percentage rate compound rate effective annual rate simple rate common rate

annual percentage rate

The variables in a future value of a lump sum problem include all of the following, except: Multiple Choice Future Value Time period Annuity Payments Interest rate

annuity payments

_______________ stock receives no preferential treatment regarding either dividends or bankruptcy proceedings. Multiple Choice Dual class Cumulative Non-cumulative Preferred Common

common

_________________ is the interest earned on both the initial principal and the interest reinvested from prior periods. Multiple Choice Free interest Dual interest Simple interest Interest on interest Compound interest

compound interest

Susan invested $5,000 five years ago and earns 3 percent annual interest. She has left her interest earnings in her account since then. _________________ increases the amount of interest she earns each year. Multiple Choice Simplifying Compounding Aggregating Accumulating Discounting

compounding

For each year, your father will receive a payment of $70 in interest on a bond that he owns. How do we call this payment? Multiple Choice Coupon Face value Discount Call premium Yield

coupon

How would a decrease in the interest rate effect the future value of a lump sum, single amount problem (all other variables remain the same)? Multiple Choice Increase the time needed to save. Increase the present value. Decrease the present value. Increase the future value. Decrease the future value.

decrease the future value

The right of ____________ is never directly granted to all shareholders of a publicly held corporation. Multiple Choice electing the board of directors receiving a distribution of company profits voting either for or against a proposed merger or acquisition determining the amount of the dividend to be paid per share having first chance to purchase any new equity shares that may be offered

determining the amount of the dividend to be paid per share

To compute the present value of a $10,000 bonus he will receive next year, the interest rate Tom used in his computation is called ______________. Multiple Choice current yield effective rate compound rate simple rate discount rate

discount rate

Your sister has just been told that she will be given a $1,000 bonus next year. She is very eager to know its present value. So, she applies the ______________ process to estimate the present value of her gift. Multiple Choice growth analysis discounting accumulating compounding reducing

discounting

To be able to apply the two-stage dividend growth model to a stock, the stock must have ______________________. decreasing dividends for six years followed by one final liquidating dividend payment dividends payments that increase by 2, 3, and 4 percent respectively for three years followed by a constant dividend thereafter dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

The ____________rate is the actual interest rate on a loan that is compounded monthly (or in other compounding periods that are shorter than a year) but expressed as an annual rate. Multiple Choice stated discounted annual effective annual periodic monthly consolidated monthly

effective annual

A bond's coupon rate is equal to its annual interest divided by its _____________. Multiple Choice call price current price face value clean price dirty price

face value

Mary owns a bond that will pay her $55 each year in interest. When the bond matures, she will also be paid $1,000 as a principal repayment. How do we call this $1,000? Multiple Choice Coupon Face value Discount Yield Dirty price

face value

A _____________ is a person on the floor of the NYSE who executes buy and sell orders on behalf of customers. Multiple Choice designated market maker dealer specialist supplemental liquidity provider floor broker

floor broker

The variable that you are solving for in a future value of a lump sum problem is: Multiple Choice Future value Present value Time period Interest rate Payments

future value

Your father has invested $200 today in a savings account. The total value of his investment one year from now is referred to as ____________________________. Multiple Choice future value present value principal amount discounted value invested principal

future value

_______________ represents the capital gains yield as used in the dividend growth model. Multiple Choice D1 D1/P0 P0 g g/P0

g

When you use the two-stage dividend growth model, you will find that Multiple Choice Pt = Dt/R. g1 cannot be negative. g1 must be greater than g2. g1 can be greater than R. R must be less than g1 but greater than g2.

g1 can be greater than R.

When we estimate the current price of a stock using the two-stage dividend growth model, we assume that the stock will ____________________. Multiple Choice pay an increasing dividend for a period of time and then cease paying dividends altogether. increase the dividend amount every other year. pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year. grow at a fixed rate for a period of time after which it will grow at

grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely

When we estimate the current price of a stock using the two-stage dividend growth model, we assume that the stock will __________ increase the dividend amount every other year. pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year. grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.

grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.

Arthur invested $500 two years ago at 5 percent interest. The first year, he earned $25 interest on his $500 investment. He left the $25 in his account instead of withdrawing the amount for spending. The second year, he earned $26.25 interest on his $525 investment. The extra $1.25 he earned in interest the second year was due to ____________. Multiple Choice free interest bonus income simple interest interest (earned) on interest present value interest

interest earned on interest

A(n) ____ loan is one that calls for periodic interest payments and a lump sum principal payment. Multiple Choice amortized modified balloon pure discount interest-only

interest only

Supernormal growth is defined as the growth rate that __________________. Multiple Choice is both positive and follows a year or more of negative growth exceeds a firm's previous year's rate of growth is generally constant for an infinite period of time is unsustainable over the long term applies to a single, abnormal year

is unsustainable over the long term

The current yield of a bond can be calculated as equal to its annual interest divided by its________________. Multiple Choice coupon rate face value market price call price par value

market price

On the ______________ day, a bond's principle will be repaid. Multiple Choice coupon yield maturity dirty

maturity

The variables in a future value of a lump sum problem include all of the following, except: Multiple Choice Future Value Payments Time period Interest rate

payments

Nancy has won a lottery today. She will receive $5,000 a year for the next 25 years. We call the current value (value today) of these payments to Nancy the _________________. Multiple Choice single amount future value present value simple amount compounded value

present value

NutriBeauty stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in the _______________ market. Multiple Choice private auction tertiary secondary primary

primary

_________________ are the items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests. Multiple Choice Trustee relationships Bylaws Legal bounds Trust deed Protective covenants

protective covenants

A(n) _____ loan is one where the borrower receives money today and repays a higher single lump sum on a future date. Multiple Choice amortized continuous balloon pure discount interest-only

pure discount

Robert invested $4,000 five years ago at 4 percent interest. He takes out all his interest earnings and spends them immediately. As a result, he only receives interest on his initial $4,000 investment. That is why he is earning __________________ only. Multiple Choice free interest complex interest simple interest interest on interest compound interest

simple interest

Preferred stock is in common with bonds with regard to all the characteristics listed below except Multiple Choice the lack of voting rights. a possible conversion option into common stock. annuity payments. a fixed liquidation value. tax-deductible payments.

tax-deductible payments

The secondary market of stock is the market _________________. Multiple Choice in which subordinated shares are issued and resold conducted solely by brokers dominated by dealers where outstanding shares of stock are resold where warrants are offered and sold

where outstanding shares of stock are resold

Investors in the bond market require a return of 8.6 percent on a 10-year bond issued by Dell Industries. That means, they require to be able to earn on average 8.6 percent each year if they hold the bond until maturity. We call this 8.6 percent the bond's _______. Multiple Choice coupon rate face rate call rate yield to maturity current yield

yield to maturity