Principles of Finance

Assuming two investments have equal lives, a high discount rate tends to favor:

the investment with large cash flow early

If a corporation were to choose between issuing debenture, a mortgage bond, or a subordinated debenture, which would have the highest yield to maturity, everything else equal?

the subordinated debenture

You sell valuable artifacts from your household estate for $200,000 and want to use the money to supplement your retirement. You receive the money on your 60th birthday, the day you retire. You want to withdraw equal amounts at the end of each of the next 25 years. What constant amount can you withdraw each year and have nothing remaining at the end of 25 years if you are earning 7% interest per yeaR?

$17,162.10

The Western State Company's common stock is expected to pay a $2.00 dividend in the coming year. If investors require a 17% return and the growth rate in dividends is expected to be 8%, what will the market price of the stock be?

$22.22

Your daughter is born today and you want her to be a millionaire by the time she is 35 years old. You open an investment account that promises to pay 12% per year. How much money must you deposit each year, starting on her first birthday and ending on her 35th birthday, so your daughter will have $1,000,000 by her 35th birthday ?

2,316.62

Messenger, Inc. bonds have a 4% coupon rate with semiannual coupon payments and a $1,000 par value. The bonds have 11 years until maturity, and sell for $925. What is the current yield for Messenger's bonds?

4.32%

What is the annual yield to maturity of a corporate bond with 13 years to maturity, a coupon rare of 8% per year, a $1000 par value, and a current market price of $1,250? Assume semiannual coupon payments.

5.3%

D' Anthony borrowed $50,000 today that he must repay in 15 annual end of year installments of $5,000. What annual interest rate is D'Anthony paying on his loan?

5.556%

Lithium Lakes Industries preferred stock has a par value of $100 and pays a dividend of $6.00 per share. I presently sells for $87 per share. What do investors require as a rate of return on this stock?

6.9%

If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the highest risk investment?

Common Stock of Small Firms

Last national bank is offering you a loan at 10% payments on the loan are to be made monthly. Credit onion is offering you a loan where payments are to be made semiannually; the rate on the loan is also 10%. Local Bank down the street is also offering a loan at 10% where the payments are made quarterly

Credit onions loan

Which of the Following is FALSE concerning bonds?

Debentures are secured by specific assets other than real estate.

which of the following is NOT true regarding common stock?

Dividend payments, like interest payments, are fixed

You are considering investing in a Ford Motor Company. Which of the following are examples of diversifiable risk?

Risk resulting from uncertainty regarding a possible strike against Ford Risk resulting from an expensive recall of a Ford product

If the Beta for Stock A equals zero, then

Stock A's required return is equal to the risk-free rate of return.

You have the choice of two equally risk annuities, each paying $5,000 per year for 8 years. One is an annuity due and the other is an ordinary annuity. If you are going to be receiving the annuity payments, which annuity would you choose to maximize your wealth?

The annuity due

U.S. Savings bonds are sold at a discount. The face value of the bond represents its value on its future maturity date. Therefore

The current price of a $50 face value bond that matures in 10 years will be less than the current price of a $50 face value bond that matures in 5 years.

Which of the following conclusions would be true if you earn a higher rate of return on your investments?

The lower present vale would be for any lump sum you would receive in the future.

You can buy a $50 savings bond today fo $25 and redeem the bond in 10 years for its full face value of $50. You could also put your money in a money market account that pays 7% interest per year. Which option is better, assuming they are of equal risk?

The savings bond is better because it earns a higher interest rate

preferred stock is similar to bond in the following way

both investments provide a stated income stream

a small company struggling to reach profitability just announced a major new government contract that will validate its technology and generate revenue for the next several years. The announcement of the contract will

cause the stock price to increase because the required return is likely to decrease and the growth rate in the future dividends is likely to increase

Who bears the greatest risk of loss of value if a firm should fail?

common stockholders

The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the

investor's required rate of return

if market interest rates rise

long term bonds will rise in value more than short term bonds