Exam #3 (ch. 6-7)

Kasey Corp. has a bond outstanding with a coupon rate of 5.98 percent and semiannual payments. The bond has a yield to maturity of 5.5 percent, a par value of $2,000, and matures in 18 years. What is the quoted price of the bond? a.) 2,108.82 b.) 107.55 c.) 105.74 d.) 105.44 e.) 2,319.70

d.) 105.44 N = 36 I/Y = 5.5% / 2 PMT = -$59.80 FV = =$2,000 *** CPT PV

Gugenheim, Inc., has a bond outstanding with a coupon rate of 5.6 percent and annual payments. The yield to maturity is 6.8 percent and the bond matures in 12 years. What is the market price if the bond has a par value of $2,000? a.) $1,807.33 b.) $1,810.11 c.) $1,805.26 d.) $1,812.49 e.) $1,843.47

a.) $1,807.33 PV = ? FV = $2,000 I/Y = 6.8 N = 12 PMT = $2,000 x .056 = $112

A bond has a par value of $1,000, a current yield of 7.11 percent, and semiannual coupon payments. The bond is quoted at 103.57. What is the amount of each coupon payment? a.) $36.82 b.) $41.42 c.) $71.10 d.) $73.64 e.) $35.55

a.) $36.82 Coupon payment = [.0711 × (1.0357 × $1,000)/2] = $36.82

Wine and Roses, Inc., offers a bond with a coupon of 6.0 percent with semiannual payments and a yield to maturity of 6.91 percent. The bonds mature in 12 years. What is the market price of a $1,000 face value bond? a.) $926.59 b.) $1,410.62 c.) $1,442.55 d.) $1,484.04 e.) $1,023.89

a.) $926.59 PV = ? FV = $1,000 I/Y = 6.91 / 2 = 3.455 N = 24 PMT = $1,000 x .06 = $60 / 2 = $30

An investment had a nominal return of 9.4 percent last year. If the real return on the investment was only 6.4 percent, what was the inflation rate for the year? a.) 2.82% b.) 9.57% c.) 16.40% d.) 2.74% e.) 3.13%

a.) 2.82% h = [(1 +.094) / (1 + .064)] - 1 = .0282 or 2.82%

Which statement is true? a.) From a legal perspective, preferred stock is a form of corporate equity. b.) All classes of stock must have equal voting rights per share. c.) Common shareholders elect the corporate directors while the preferred shareholders vote on mergers and acquisitions. d.) Preferred dividends provide tax-free income to individual investors. e.) Preferred shareholders prefer noncumulative dividends over cumulative dividends.

a.) From a legal perspective, preferred stock is a form of corporate equity.

A bond with 16 years to maturity and a semiannual coupon rate of 6.16 percent has a current yield of 5.75 percent. The bond's par value is $2,000. What is the bond's price? a.) $2,106.90 b.) $2,142.61 c.) $2,321.16 d.) $1,866.88 e.) $2,071.30

b.) $2,142.61 current yield = ann. coupon pmts. / bond price 5.75% = $2,000 x 6.16% / bond price 5.75% = $123.20 / bond price bond price = $123.20 / 5.75% = $2,142.61

A 21-year, semiannual coupon bond sells for $961.87. The bond has a par value of $1,000 and a yield to maturity of 6.99 percent. What is the bond's coupon rate? a.) 3.32% b.) 6.64% c.) 5.98% d.) 6.31% e.) 4.98%

b.) 6.64%

Which one of the following must equal zero if a firm pays a constant annual dividend? a.) dividend yield b.) capital gains yield c.) total return d.) par value per share e.) book value per share

b.) capital gains yield

A stock currently sells for $52. The dividend yield is 3 percent and the dividend growth rate is 4.3 percent. What is the amount of the dividend that was just paid? a.) $1.42 b.) $1.31 c.) $1.50 d.) 1.40 e.) $1.56

c.) $1.50 dividend yield = annual dividend / current price annual dividend = $52 x .03 = $1.56 dividend JUST paid = ann. dividend x PV of discounting factor = $1.56 / 1.043 = $1.50

There is a bond that has a quoted price of 106.818 and a par value of $2,000. The coupon rate is 7.11 percent and the bond matures in 17 years. If the bond makes semiannual coupon payments, what is the YTM of the bond? a.) 3.04% b.) 4.83% c.) 6.44% d.) 3.22% e.) 5.80%

c.) 6.44% N = 34 PV = -$2,136.36 --> $1,068.18 x 2 PMT = $71.10 --> $2,000 x .0711 = $142.20 / 2 = $71.10 FV = $2,000 ** CPT I/Y

Which statement is true? a.) Bonds are generally called at par value. b.) A current list of all bondholders is maintained whenever a firm issues bearer bonds. c.) An indenture is a contract between a bond's issuer and its holders. d.) Collateralized bonds are called debentures. e.) A bondholder has the right to determine when his or her bond is called.

c.) An indenture is a contract between a bond's issuer and its holders.

Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk? a.) Taxability risk premium b.) Default risk premium c.) Interest rate risk premium d.) Real rate of return e.) Bond premium

c.) Interest rate risk premium

A bond's annual interest divided by its face value is referred to as the: a.) market rate. b.) call rate. c.) coupon rate. d.) current yield. e.) YTM.

c.) coupon rate.

Ghost Riders Co. has an EPS of $1.45 that is expected to grow at 6.5 percent per year. If the PE ratio is 17.15 times, what is the projected stock price in 4 years? a.) $34.07 b.) $30.04 c.) $31.99 d.) $28.39 e.) $33.03

current price = EPS x PE ratio current price = 1.45 x 17.15 = 24.87 price in yr. 4 = current price x (1 + growth)^4 = 24.87 x (1 + 0.065)^4 = $31.99

Symon's Suppers Co. has announced that it will pay a dividend of $4.37 per share one year from today. Additionally, the company expects to increase its dividend by 4.3 percent annually. The required return on the company's stock is 11.3 percent. What is the current share price? a.) $65.11 b.) $59.31 c.) $38.67 d.) $62.43 e.) $58.60

d.) $62.43 $4.37 / (.113 - .43) $4.37 / .07 $62.43

Of these choices, a risk-adverse investor who prefers to minimize interest rate risk is most apt to invest in: a.) 5-year, 7 percent coupon bonds. b.) 20-year, 6 percent coupon bonds. c.) 20-year, zero coupon bonds. d.) 2-year, 7 percent coupon bonds. e.) 3-year, zero coupon bonds.

d.) 2-year, 7 percent coupon bonds.

Broke Benjamin Co. has a bond outstanding that makes semiannual payments with a coupon rate of 6.4 percent. The bond sells for $1,066.57 and matures in 22 years. The par value is $1,000. What is the YTM of the bond? a.) 4.39% b.) 5.56% c.) 2.93% d.) 5.86% e.) 5.27%

d.) 5.86%

A bond has a $1,000 face value, a market price of $989, and pays interest payments of $69.50 every year. What is the coupon rate? a.) 6.76 percent b.) 7.00 percent c.) 7.03 percent d.) 6.95 percent e.) 8.14 percent

d.) 6.95 percent

There is a zero coupon bond that sells for $4,187.32 and has a par value of $10,000. If the bond has 11 years to maturity, what is the yield to maturity? Assume semiannual compounding. a.) 7.87% b.) 7.80% c.) 7.75% d.) 8.07% e.) 8.24%

d.) 8.07% N = 22 PV = -$4,187.32 PMT = -- FV = $10,000 *** CPT I/Y

This morning, Jeff found an aged bond certificate lying on the street. He picked it up and noticed that it was a 50-year bond that matured today. He presented the bond to the bank teller at his local bank and received payment for both the entire principal and the final interest payment. The bond that Jeff found must have been which one of the following? a.) Debenture b.) Note c.) Registered-form bond d.) Bearer-form bond e.) Callable bond

d.) Bearer-form bond

The constant growth model can be used to value the stock of firms that have which type(s) of dividends? a.) Dividends that change by either a constant amount or a constant rate b.) Dividends that change annually by a constant amount or that are zero c.) Dividends that change annually by a constant amount d.) Dividends that are either constant or change annually at a constant rate e.) Only dividends that increase at a constant rate

d.) Dividends that are either constant or change annually at a constant rate

The term structure of interest rates is primarily based on which three of the following? I. Interest rate risk premium II. Real rate of interest III. Default risk premium IV. Inflation premium V. Liquidity premium a.) I, II, and V b.) I, III, and V c.) II, III, and IV d.) I, II, and IV e.) II, IV, and V

d.) I, II, and IV

What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive. a.) The clean price of the bond must equal the bond's dirty price. b.) The bond must be a zero coupon bond and mature in exactly one year. c.) The market price must exceed the par value by the value of one year's interest. d.) The bond must be priced at par. e.) There is no condition under which this can occur.

d.) The bond must be priced at par.

Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which term applies to this granting of authority? a.) straight b.) cumulative c.) consent-form d.) proxy e.) in absentia

d.) proxy

General Importers announced that it will pay a dividend of $4.15 per share one year from today. After that, the company expects a slowdown in its business and will not pay a dividend for the next 7 years. Then, 9 years from today, the company will begin paying an annual dividend of $2.25 forever. The required return is 12.4 percent. What is the price of the stock today? a.) $18.15 b.) $3.69 c.) $11.70 d.) $10.03 e.) $10.81

e.) $10.81 price = dividend / (required return - growth rate) = $2.25 / (0.124 - 0) = $18.15 price0 = dividend1 / (1 + req. return) + price9 / (1 + req. return)^8 = ($4.15 / 1.124) + ($18.15 / (1.124)^8) = 10.81

New Gadgets, Inc., currently pays no dividend but is expected to pay its first annual dividend of $5.00 per share exactly 9 years from today. After that, the dividends are expected to grow at 3.7 percent forever. If the required return is 11.5 percent, what is the price of the stock today? a.) $47.93 b.) $24.07 c.) $64.10 d.) $31.31 e.) $26.83

e.) $26.83 value after year 9 = (D9 x (1 + growth rate)) / (req. return - growth rate) = ($5.00 x 1.037) / (0.115 - 0.037) = $66.47 P0 = (D8 / (1 + req. return)^9) x (val. after yr. 9 / (1 + req. return)^9) = ($5.00 / 1.115^9) x ($66.47 / 1.115^9) = $26.83

Which one of the following statements is true? a.) The current yield on a par value bond will exceed the bond's yield to maturity. b.) The yield to maturity on a premium bond exceeds the bond's coupon rate. c.) The current yield on a premium bond is equal to the bond's coupon rate. d.) A premium bond has a current yield that exceeds the bond's coupon rate. e.) A discount bond has a coupon rate that is less than the bond's yield to maturity.

e.) A discount bond has a coupon rate that is less than the bond's yield to maturity.

An unexpected decrease in market interest rates will cause a: a.) coupon bond's current yield to increase. b.) zero coupon bond's price to decrease. c.) fixed-rate bond's coupon rate to decrease. d.) zero coupon bond's current yield to decrease. e.) coupon bond's yield to maturity to decrease.

e.) coupon bond's yield to maturity to decrease.

If shareholders are granted a preemptive right they will: a.) be given the choice of receiving dividends either in cash or in additional shares of stock. b.) be paid dividends prior to the preferred shareholders during the preemptive period. c.) be entitled to two votes per share of stock. d.) be able to choose the timing and amount of any future dividends. e.) have priority in the purchase of any newly issued shares.

e.) have priority in the purchase of any newly issued shares.