Finance Exam 2

Which of the following statements about probabilities is INCORRECT? The sum of all probabilities of a particular event must sum to 100%. Probability is a statistical tool for estimating future outcomes. Each possible outcome must have a non-negative probability. Probability is associated with an ex-post view.

Probability is associated with an ex-post view.

The difference between the price and the par value of a zero-coupon bond represents ________. the accumulated interest over the life of the bond taxes payable by the bond buyer the bond premium the accumulated principal over the life of the bond

the accumulated interest over the life of the bond

You want to invest in a stock that pays a $6.00 annual cash dividend for the next seven years. At the end of that time, you will sell the stock for $100.00. If you want to earn 5% on this investment, what is a fair price for this stock if you buy today? $73.46 $88.16 $126.94 $105.79 $152.33

$105.79

Today Cody Copper Inc. will issue 5-year, zero-coupon bonds that are expected to have a yield to maturity of 2.0%. If you buy one bond today, how much will you owe in taxes after one year if your marginal tax rate is 20%? $1.49 $2.33 $3.64 $1.86 $2.91

$3.64

Blackburn Inc. has issued 10-year $1,000 face value, 5% annual coupon bonds with a yield to maturity of 8.0%. What is the annual interest payment for the bond? $50 $26 $63 $32 $40

$50

Given an expected market return of 10%, a beta of 1.99 and a risk-free rate of 5%, what is the expected return for this stock? 25.83% 17.94% 12.46% 14.95% 21.53%

14.95%

Yesterday Tyrell Corp paid its annual dividend of $2.70 per share and today you wish to purchase the stock at today's quoted price of $34.47 . You believe that the dividend growth rate is 9.8%. According to the dividend growth model, what is this stock's total expected rate of return? 13.8% 16.7% 18.4% 12.6% 15.2%

18.4%

Last year, the XYZ Corporation had issued 8.0% coupon (semi-annual), 15 year, AA-rated bonds with a face value of $1,000 to finance its business expansion. As of today, the market price of XYZ's bonds are $1,300. What is the current yield to maturity and how can the bonds be classified? 5.7% , so these are premium bonds 4.3% , so these are discount bonds 5.7% , so these are discount bonds 4.3% , so these are premium bonds 5.0% , so these are premium bonds

5.0% , so these are premium bonds

Samuel estimates that there are three possible return outcomes for a stock he is considering for purchase. He thinks that there is a 37% chance the economy will boom and his stock will return 18%, a 30% chance the economy will continue at its current pace and the stock will return 6% and a 33% the economy will fall into a recession and the stock will yield -1%. Given this, what is Samuel's expected return on this stock he is considering for purchase? 6.78% 8.13% 9.76% 4.70% 5.65%

8.13%

Ajax Inc. just issued a dividend of $3.01. Investor analysis suggests that the company's dividend will grow based on its historical average over the past 6 years. If you require a return of 8.2% per year, what price are you willing to pay for this stock assuming it follows the constant growth dividend model? Please use the historical dividends below to answer this question. 2013: $2.50 2014: $2.60 2015: $2.69 2016: $2.80 2017: $2.90 2018: $3.01 $70.78 $58.98 $84.93 $49.15 $40.96

$70.78

The measure of systematic risk is called ________. covariance variance beta correlation

beta

________ refers to how quickly information is reflected in the available prices for trading. Informational efficiency Market efficiency Mechanical efficiency Operational efficiency

informational efficiency

________ has to do with the speed and accuracy of processing a buy or sell order at the best available price. Informational efficiency Market efficiency Mechanical efficiency Operational efficiency

operational efficiency

The ________ is a market derived interest rate used to discount the future cash flows of the bond. coupon rate semiannual coupon rate compound rate yield to maturity

yield to maturity

Stocks differ from bonds because: bond cash flows are known while stock cash flows are uncertain. firms pay bond cash flows prior to paying taxes while stock cash flows are after tax. the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase. All of these

All of these

Let's say that you are looking to invest in two stocks A and B. Stock A has a beta of 0.95 and based on your best estimates is expected to have a return of 15%. Stock B has a beta of 1.66 and is expected to earn 15%. If the risk-free rate is currently 4% and the expected return on the market is 15%, which stock(s) should you invest in, if any? Do not buy stock A , buy stock B Do not buy stock A , do not buy stock B Buy stock A , do not buy stock B Buy stock A , buy stock B Do not buy stock A , do not buy stock B

Buy stock A , do not buy stock B

Dunder Mifflen just issued a 20-year annual bond with a par value of $1,000 and a coupon rate of 9.6%. The current yield-to-maturity is 10.0%. What is the intrinsic value of the bond and if the bond's current market price is $1,072,what should you do? $1,111 so you do not buy the bond $1,277 so you buy the bond $966 so you do not buy the bond $966 so you buy the bond $1,111 so you buy the bond

$966 so you do not buy the bond

Which of the following types of bonds may the issuer buy back before maturity? Zero-coupon bond Putable bond Callable bond Convertible bond

Callable bond

Which of the statements below is FALSE? One unlikely dividend pattern is to raise or grow dividends by a fixed amount at fixed intervals. In estimating the current price using the constant growth dividend model, we let g be the growth rate of the dividend stream and r be the rate of return required by the potential buyer of the stock. Div0 refers to the dividends that have just been paid to the current owner of the stock. Constant growth means that the percentage increase in the dividend is the same each year.

One unlikely dividend pattern is to raise or grow dividends by a fixed amount at fixed intervals.

A bond may be issued by ________. companies state governments the federal government All of these

all of these

Beta is ________. a measure of systematic risk a measure of nondiversifiable risk the appropriate measure of risk for a well-diversified portfolio All of these

all of these

If we know the dividend stream, the future price of the stock, the future selling date of the stock, and the required return, we can price stocks just as we priced ________. annuities bonds preferred stocks perpetuities

bonds

________ means that the percentage increase in the dividend is the same each year. No growth Inconsistent growth A constant cash flow Constant growth

constant growth

The practice of not putting all of your eggs in one basket is an illustration of ________. portion control diversification variance expected return

diversification

Treasury ________ and ________ are semiannual bonds, while Treasury ________ are zero-coupon instruments. bonds; bills; notes notes; bonds; bills notes; bills; bonds bills; bonds; notes

notes; bonds; bills

You can think of the ________ as the "used stock" market because these shares have been owned or "used" previously. secondary market initial public offering market NYSE market primary market

secondary market

Most U.S. corporate and government bonds choose to make ________ coupon payments. semiannual quarterly monthly annual

semiannual

"Junk" bonds are a street name for ________ grade bonds. speculative and investment extremely speculative speculative investment

speculative

A more risky stock has a higher ________. expected return standard deviation variance standard deviation and variance

standard deviation and variance

Stocks are different from bonds because ________. Selected Answer: stocks, unlike bonds, are major sources of funds bonds, unlike stocks, represent voting ownership stocks, unlike bonds, represent residual ownership stocks, unlike bonds, give owners legal claims to payments

stocks, unlike bonds, represent residual ownership

________ is the absence of knowledge of the outcome of an event before it happens. Return Diversification Uncertainty Certainty

uncertainty

The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life. coupon rate yield to maturity current yield prime rate

yield to maturity