FIN 8020 Exam 1

A firm that issues new stocks and sell them to the general public is an example of

A) Initial public offering

A corporate bond with a $1,000 face value quoted as 102.78 sells for ................... and a $1,000 face value treasury bond quoted as 97:09 sells for (assume a 1/32 tick):

$1,027.78 ; $97.09 xxx

A Treasury bond with a $1,000 face value is quoted with a bid price of 125:12 and an ask price of 125:14. How much would you pay to buy this bond?

$1,254.38 xxx

You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 2 years form now?

$13,267 2nd -> P/Y -> 1 -> Enter 4,200 -> PMT 5.2 -> I/Y N -> 3 PV -> 0 CPT -> FV = 13, 2666

Assume one year of collect costs $38,000 today. If these costs increase at an annual rate of 6.9 percent, what will one year of college cost 20 years from now?

$144,324 2nd -> P/Y -> 1 -> Enter 38,000 -> PV 6.9 -> I/Y N -> 20 PMT -> 0 CPT -> FV = 144,323.715

Sam was injured in an accident, and the insurance company has offered him the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave him as well off financially as with the annuity?

$237,229 2nd -> P/Y -> 1 -> Enter 25,000 -> PMT 15 -> N 7.5 -> I/Y FV -> 0 CPT -> PV = 220,677.9936 xxx

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

$5,000 Present value of perpetuity = Cash amount / Rate of return 250 / 0.05 = 5,000

You want to have $150,000 in your savings account 20 years from today. Today, you invest $15,000 in your savings account and you decide to make equal annual deposits into the account at the end of each year. Assuming that your savings account can earn you 8% annual interest, what amount you must deposit each year?

1,750.05 2nd -> P/Y -> 1 -> Enter FV -> 150,000 N -> 20 PV -> -15,000 I/Y -> 8 CPT -> PMT = 1,750.048

A bond has a 8% annual coupon rate, a $1,000 face value, pays interest semi-annually, matures in 15 years, and has a yield to maturity of 8.45%. What is the current market price of the bond?

962.13 xxx

A bond that gives the bondholder the right to force the issuer to purchase the bond at a stated price is called

A) Put bond

The balance on your credit card is $6,000. You commit to pay $300 per month to pay it off. If the credit card company charges you 15% annual interest rate compounded monthly, how long will it take you to pay off your accoount?

1.93 years 2nd -> P/Y -> 12 -> Enter -6,000 -> PV 300 -> PMT 15 -> I/Y FV -> 0 CPT -> N = 23.15811 / 12 = 1.9298

Your uncle has $300,000 invested at 7.5%, and he now wants to retire. he wants to withdraw $35,000 at the end of each year, beginning at the end of this year. He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account. What is the maximum number of $35,000 withdrawals that he can make and still have at least $25,000 left in the account? (Hint: If your solution for N is not an integer, round down to the nearest whole number).

13 2nd -> P/Y -> 1 -> Enter 300,000 -> PV 7.5 -> I/Y -35,000 -> PMT 25,000 -> FV CPT -> N = 14 (down) 13

Five years ago, Greenery Inc. earned $1.50 per share. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?

16.36% xxx

A company wants to issue zero-coupon bonds that yield 7% annually and will mature in 15 years. What price should they charge for these bonds if they have a face value of $1,000?

2nd -> P/Y -> 1 -> Enter 15 -> N 7 -> I/Y 0 -> PMT 1,000 -> FV CPT -> PV = -362.45

A bond has an 8% annual coupon rate, is selling for $1,052.75, have a face value of $1,000, pays coupons semi-annually and has a yield to maturity of 7.45%. How many years will it take the bond to mature?

2nd -> P/Y -> 2 -> Enter 7.45 -> I/Y -1,052.75 -> PV 1,000 -> FV 40 -> PMT CPT -> N = 34.28 / 2 = 17.14 years

A bond has 6% coupon rate, a $1,000 face value, pays interest semi-annually, matures in 9 years, and has a yield to maturity of 6.75%. What is the current market price of the bond?

2nd -> P/Y -> 2 -> Enter 9 -> 2nd -> N (18) 6.75 -> I/Y 30 -> PMT 1,000 -> FV CPT -> PV = -950.02

A bond pays $80 annual coupon, is selling for $1,025.18. If the bond has a $1,000 face value and mature in 8 years, what is the yield to maturity?

2nd -> PV -> 1 -> Enter 8 -> N -1,025.18 -> PV 80 -> PMT 1,000 -> FV CPT -> I/Y = 7.5689%

5-year Treasury bonds yield 5.5%. The expected inflation is 1.9%, and the default risk premium (MRP) on 5-year bonds is 1.4%. What is the real risk-free rate, r*?

3.53%

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

7.49% 2nd -> P/Y -> 1 -> Enter -2,550,000 -> PV 20 -> N 250,000 -> PMT FV -> 0 CPT -> I/Y = 7.492

O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual) coupon interest rate?

7.70% xxx

You recently sold to your brother 200 shares of Disney stock, and the transfer was made through a broker, and the trade occurred on the NYSE. This is an example of

A secondary market transaction

Last year, your bond investment has earned you a 8.25 % rate of return. During that time the inflation rate was 1.75%. What is your real rate of return?

A) 6.39 percent xxx

A bond with a $1,000 face value is currently quoted as 98.42. The bond pays semi-annual payments of $45 and matures in 6 years. What is the coupon rate?

A) 9 percent Coupon rate = annual rate / face value x = 984.2 / 1000 =

Any situation where a potential conflict can arise between the firm's owners and its managers is referred to as

A) Agency problem

___ is the right of the bond's issuer to repurchase the bond at a predetermined price prior to maturity. However, the ___ is the provision prohibiting the company form redeeming the bond prior to a certain date.

A) Call provision; Deferred call provision

The price of a bond quoted net of accrued interest is the ................... price; the price which includes accrued interest (and which the buyer actually pays) is the.................. price

A) Clean; Dirty

The bond-ratings of Moody's and Standard and Poor's are concerned only with the possibility of ...................; these bond ratings do not address the volatility of the bond price due to ........................

A) Default; Interest rate risk

Which of the following statements about a limited partnership are correct?

A) I and III I- A limited partner can sell his or her interest without dissolving the partnership III- A limited partner is not involved in the day-to-day operations of the partnership

The coupon payments of a ..................... bond are paid only when the firm's income is sufficient to do so. A ............. Bond can be swapped (exchanged) for a fixed number of stocks.

A) Income; Convertible

The observed relationship between short-term and long-term interest rates is known as the .....................; it is depicted graphically as the .......................

A) Term structure of interest rates; Yield curve

The current yield on a bond is defined as:

A) The bond annual coupon divided by the current price

Among the following bonds, which one has a price that is most sensitive to changes in interest are

A) a 30-year, zero coupon

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

Agency

Which of the following statements is NOT CORRECT?

All else equal, bonds with larger coupons have greater interest rate (price) than bonds with smaller coupons.

Which of the following statements is CORRECT?

All else equal, senior debt generally has a lower yield to maturity than subordinated debt.

A corporate bond with a $1,000 face value quoted as 102.78 sells for ................... and a $1,000 face value treasury bond quoted as 97:09 sells for:

B) $1,027.80 ; $972.8125 selling price = face value * quote x = 1,000 * 1.0278 = 1,027.80 xxx

A bond has a face value of $1,000, a current yield of 8.553%, annual interest payments, and a 15 years to maturity. The bond quote is 93.539. What is the amount of each coupon payment?

B) 80.00 93.539% * $1,000 = $935.39 Current yield = annual coupon payment / current price Coupon payment = current yield * current price x = 0.08553 * 935.39 = 80.00

A bond that has the features of both debt and equity, and can be exchanged for shares of stock of the issuing firm is called:

B) Convertible bond

Which of the following bonds is expected to have a higher taxability premium?

B) Corporate bond

A bond coupon payments are calculated based on the ___ when the bond is issued. However, bond valuation requires that we determine the ___, which is the market required rate of return on that bond at the time of the valuation.

B) Coupon rate; Yield to maturity

The portion of a bond's yield that investors require to compensate for the possibility that the bond's interest or principal might not be paid is called:

B) Default risk premium

Which of the following statements are true for a partnership?

B) I and II only I- Income generated is taxed only once at the partners level II- Partners generally have an unlimited liability

Which of the following are characteristics of a dealer market?

B) I and IV only I- Trading is carried out electronically over a network IV- Trading takes place at anytime in the day

Which of the following statements are true for a general partnership?

B) I, II, and IV only I- Each partner can be responsible for 100 percent of the partnership debts regardless of his ownership II- Each partner receives only a proportionate share of the profits IV- Creditors can go after anyone of the partners to seek paymen

Which of the following actions best represents the primary goal of a financial manager?

B) Increasing the market value of the equity by improving the efficiency operations

___ governs priority of payment to creditors in the even of bankruptcy. A debt is ___ when creditors must be repaid first.

B) Indenture; Preferred

A ___ is an unsecured debt that generally matures in less than ten years; a ___ is an unsecured debt that generally matures in ten years or more.

B) Note; Debenture

A .................. restricts actions of the bond issuer. A ...................... restricts the issuer actions, where as a .................. requires that certain actions be taken by the corporation.

B) Protective covenant; Negative covenant; Positive covenant

The yield to maturity for a bond is the bond's ___. When the market value of the bond is equal to its face value, the yield to maturity should be equal to the ___

B) Rate of return; Coupon rate

The market for trading securities after the initial public offering is known as

B) Secondary market

The ........................ is the portion of a nominal rate that represents compensation for unfavorable tax status. The ................ is the portion of a nominal rate that represents compensation for liquidity

B) Taxability premium; Liquidity premium

The relationship between the nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money is called the:

B) Term structure of interest rates

When investors expect that interest rates in the future to be higher than the current interest rates, the graph depicting the term structure of interest rates will be:

B) Upward-slopping

A ....................... bond makes no coupon payments and is initially priced at a deep discount from par value. A......................... bond has adjustable coupon payments, which are tied to a specific index.

B) Zero-Coupon; Floating-rate

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.

The process of managing the firm's long-term investments and deciding which project to undertake is called

C) Capital budgeting

the interest rate risk premium is the compensation that investors require for their assumption of the risk related to:

C) Changes in interest rates

The agency problem arises mostly in situations where there is a separation of

C) Company ownership and company management

A ......................... is an unsecured bond, for which no specific pledge of property is made

C) Debenture

When a bond cannot be called for a number of years after issue; this is a .............. call, and the bond is ..................... during this period.

C) Deferred; Call protected

A bond selling for less than the face value is ___; and a bond with the yield to maturity higher than the coupon rate is ___

C) Discount bond; Discount bond

A bond that was previously rated as investment grade but has been downgraded to a junk bond status is called a:

C) Fallen angel

A par value bond is a bond having the following features

C) I and III only I- yield to maturity equals the coupon rate III- market price equal to the face value

The written agreement between the corporation and the lender detailing the terms of the debt issue is called the bond

C) Indenture

The compensation investors require to offset expected future increases in prices is generally called:

C) Inflation premium

The major advantage of being a limited partner in a limited partnership is the ability to:

C) Invest in a partnership while limiting your losses to the amount you invested

................. rates are "observed" rates, since they are what we observe in the financial markets, these rates are not adjusted for inflation. However, ................ rates are rates that have been adjusted for inflation.

C) Nominal; Real

Most bond trading takes place ..................., therefore it is ............. to obtain data on bond prices and volumes and the bond market is considered ...................

C) Over the counter; Difficult: not transparent

If a bond is ___, the company's registrar mails the interest payment to the owner of record. However, ___ bonds have dated coupons attached to them; the bondholder has to detach a coupon and mail to the firm which then makes the interest payment.

C) Registered; Bearer

- A ..................... bond have no default risk. A .................. bond carries some default risk and is exempt from federal income taxation.

C) Treasury; Municipal

Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a regular corporation. Which of the following statements is CORRECT?

Cheers' shareholders (the ex-partners) will now be exposed to less liability.

Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?

Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.

A bond with 7.5 coupon rate has a yield to maturity of 8%, 25 years to maturity, a $1,000 face value, and pays interest semi-annually. What is the amount of each coupon payment?

D) $37.50 xxx

Last year, your bond investment has a 5.05% real rate of return and during that time the inflation rate was 3.25%. What is your actual nominal rate of return?

D) 8.46 percent xxx

A sole proprietor

D) Assumes personal responsibility for all the debts of the business

A ___ allows the issuer to repurchase the bond debt issue prior to maturity. In most cases, the call price will be equal to the ..............................of the bond plus a

D) Call provision; Face value; Call premium

The control of a corporation ultimately lies with the

D) Company shareholders

The business entity that is regarded as a "Legal Person" is a

D) Corporation

Bonds are rated according to the likelihood of ................; high ratings indicate ................ probability of default.

D) Default; Low

All other things being equal, the longer the time to maturity, the ___ interest rate risk, and the lower the coupon rate, the ___ the interest rate risk.

D) Greater; Greater

A premium bond is a bond that

D) Has a market value greater than the par value

The dirty price of a bond includes which of the following?

D) I and III I- quoted price III- accrued interest

Which one of the following statements are correct about bond market?

D) I, II, and III I- bond market is less transparent that stock market II- Bonds are generally bought from and sold to electronically-connected dealers III- Getting up-to-date prices on individual bonds is often difficult

A ............................. bond is a bond that pays fixed coupon payments at regular period of time. A ........................ bond is a bond that is sold at a deep discount and it makes only one payment at maturity

D) Level-Coupon; Zero-coupon

The yield to maturity of a bond is also the bond:

D) Nominal rate

The Fisher effect addresses the relationship between

D) Nominal rates, real rates, and inflation rates

When the yield to maturity is lower than the coupon rate, the bond should be

D) Premium bond

The value of a bond equals to the sum of the ___ of both the future ___ and the ___

D) Present value; Coupon payments; Face value

The account managed by the bond trustee for the purpose of the early bond redemption is the

D) Sinking fund

The profit that a securities dealer earns from the purchase and the subsequent sale of a security is called

D) Spread

The disadvantages of a partnership are the following

I and II only I- Unlimited liability of the owners II- Difficult to transfer ownership

Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero.

Investment ! pays $250 at the beginning of every year for the next 10 years (a total of 10 payments)

Which of the following statements is CORRECT?

It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.

Which one of the following is an advantage of being a limited partner?

Losses limited to capital invested

Which of the following statements is CORRECT

One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership.

A sinking fund is an account managed by the bond trustee for the purpose of

Redeeming bonds early

Which of the following statements is CORRECT

Sole proprietorships are subject to fewer regulations than corporations

A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?

The bond's yield to maturity is greater than its coupon rate.

Face value and par value are synonymous terms

True

To determine the value of a bond at a particular point in time we use the yield to maturity, which is the market interest rate at that time for bonds with similar features.

True

The primary goal of financial management is to maximize the

market value of the existing stock (share price)