Fin test 2

Gugenheim, Inc. offers a 10.00 percent coupon bond with annual payments. The yield to maturity is 5.4 percent and the maturity date is 7 years. What is the market price of a $1,000 face value bond?

$1,262.36

$1,985,976.79The Great Giant Corp. has a management contract with its newly hired president. The contract requires a lump sum payment of $24,800,000 be paid to the president upon the completion of her first 9 years of service. The company wants to set aside an equal amount of funds each year to cover this anticipated cash outflow. The company can earn 8 percent on these funds. How much must the company set aside each year for this purpose?

$1,985,976.79 math: $24,800,000 = C × [(1.089 -1) / 0.08]; C = $1,985,976.79

Leslie's Unique Clothing Stores offers a common stock that will pay an annual dividend of $1.90 a share in one year. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 14.30 percent return on your equity investments?

$13.29 math: $1.90 / 0.1430 = $13.29

Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.90 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 11.70 percent return on your equity investments?

$24.79 math: $2.90 / 0.1170 = $24.79

Your employer contributes $60 a week to your retirement plan. Assume you work for your employer for another 20 years and the applicable discount rate is 9 percent. Given these assumptions, what is this employee benefit worth to you today?

$28,927.38 math: $60 × [(1 - {1 / [1 + (.09 / 52)](20 × 52)}) / (.09 / 52)] = $28,927.38

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $0.45 a share. The following dividends will be $0.50, $0.65, and $0.95 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.2 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 13 percent?

$7.96 math: P4 = ($0.95 × 1.032) / (0.13 - 0.032) = $10.00408 P0 = $0.45 / 1.13 + $0.50 / 1.132 + $0.65 / 1.133 + $0.95/ 1.134 + $10.00408 / 1.134 = $7.96

What is the future value of $12,000 a year for 40 years at 11.5 percent annual interest?

$8,014,195 math: $12,000 × {[(1 + .115)40 - 1] / .115} = $8,014,195

George Jefferson established a trust fund that provides $167,500 in scholarships each year for worthy students. The trust fund earns a 2 percent rate of return. How much money did Mr. Jefferson contribute to the fund assuming that only the interest income is distributed?

$8,375,000 math: $167,500 / 0.02 = $8,375,000

Wine and Roses, Inc. offers a 6.0 percent coupon bond with semiannual payments and a yield to maturity of 6.48 percent. The bonds mature in 7 years. What is the market price of a $1,000 face value bond?

$973.33

What is the annual percentage rate on a loan with a stated rate of 2.75 percent per quarter?

11.00 percent

Your credit card company charges you 1.15 percent per month. What is the annual percentage rate on your account?

13.80 percent math: 1.15 percent × 12 = 13.80 percent

Your local pawn shop loans money at an annual rate of 23 percent and compounds interest weekly. What is the actual rate being charged on these loans?

25.80 percent math: [1 + (.23 / 52)]52 - 1 = .2580, or 25.80 percent

Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $742. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature?

5.73 years

The outstanding bonds of Roy Thomas, Inc. provide a real rate of return of 4.1 percent. The current rate of inflation is 2.4 percent. What is the nominal rate of return on these bonds?

6.60 percent math: (1 + 0.041) × (1 + 0.024)

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at year 5 and an annual percentage rate of 10 percent?

Annual.

You are comparing two annuities that offer quarterly payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities?

Annuity B has a smaller present value than annuity A.

Which one of the following is the price at which a dealer will sell a bond?

Asked price

Which one of the following terms is defined as a loan wherein the regular payments, including both interest and principal amounts, are insufficient to retire the entire loan amount, which then must be repaid in one lump sum?

Balloon loan.

An agent who arranges a transaction between a buyer and a seller of equity securities is called a:

Broker.

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 the:

Call premium.

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

Capital gains yield.

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings?

Common.

The interest rate risk premium is the:

Compensation investors demand for accepting interest rate risk.

Interest earned on both the initial principal and the interest reinvested from prior periods is called:

Compound interest.

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?

Default risk.

Which one of the following best describes NASDAQ?

Computer network of securities dealers.

A company has four open seats on its board of directors. There are seven candidates vying for these four positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400 of your votes for a single candidate. What is this type of voting called?

Cumulative.

Rosita paid a total of $1,189 to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:

Dirty price.

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today?

Dirty price.

A decrease in which of the following will increase the current value of a stock according to the dividend growth model?

Discount rate.

A sinking fund is managed by a trustee for which one of the following purposes?

Early bond redemption.

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

Face value.

Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?

In today's dollars, Luis's money is worth more than Soo Lee's.

Your grandmother has promised to give you $10,000 when you graduate from college. She is expecting you to graduate three years from now. What happens to the present value of this gift if you speed up your graduation by one year and graduate two years from now?

Increases.

Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $0.64 he earned in interest the second year is referred to as:

Interest on interest.

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 secondary market is best defined by which one of the following?

Market where outstanding shares of stock are resold.

Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:

Must still declare each dividend before it becomes an actual company liability.

You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate.

Option B has a higher present value at time zero.

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

Over-the-counter.

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is:

Priced the same as a $1 perpetuity.

Emst & Frank 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 which one of the following markets?

Primary.

The items included in an indenture that limit certain actions of the issuer in order to protect a 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 nominal rates

Samantha opened a savings account this morning. Her money will earn 3.5 percent interest, compounded annually. After four years, her savings account will be worth $5,000. Assume she will not make any withdrawals. Given this, which one of the following statements is true?

Samantha could have deposited less money today and still had $5,000 in four years if she could have earned a higher rate of interest.

Renee invested $2,000 six years ago at 4.5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

Simple interest.

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:

Spread.

Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming neither Sue nor Neal withdraw any money from their accounts prior to retiring?

Sue will have more money than Neal at age 60.

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

SuperDOT.

Which one of these statements related to growing annuities and perpetuities is correct?

The present value of a growing perpetuity will decrease if the discount rate is increased.

This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in 40 years. Which one of the following statements is correct?

The present value of this investment is equal to $1,000.

Which one of the following accurately defines a perpetuity?

Unending equal payments paid at equal time intervals.

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.

A bond has a market price that exceeds its face value. Which one of these features currently applies to this bond?

Yield to maturity less than the coupon rate.

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?

Zero coupon.