FIN 320 Exam 2 smartbook
ABC co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?
$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years
What is a real rate of return?
-it is a rate of return that has been adjusted for inflation-it is a percentage change in buying power
If you are holding a municipal bond that is trading at par to yield 6%, by how much will your after-tax yield change if your federal income tax bracket increases from 15% to 20%. Assume there are no state or local taxes
0%
treasury bills yielded a nominal average return over 86 years of 3.5% versus an average inflation rate of 3.0% over the same period. This make the real return on T-bills approximately equal to ____
0.5%
bonds used in Ibbotson SBBI long-term U.S. government bond portfolio had maturities of ______ years
20
Roger Ibbotson and Rex Sinquefield presented year-to-year historical rates of return on _____ types of financial investments
5
If you are in the 20% tax bracket, what is your after-tax yield on a par value municipal bond yielding 5%? Ignore state and local taxes.
5%
crossover bonds can also be called ________ bonds
5B
Which of the following are bonds that have actually been issued?
A put bond, a convertible bond, a CoCo bond
What are crossover bonds?
Bonds that have both an investment grade and a junk bond rating
What are "fallen angel" bonds?
Bonds that have dropped from investment grade to junk bond status
websites that allow investors to trade directly with one another are termed ______
ECNs
What are the cash flows involved in the purchase of a 5 year zero coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5 percent
Pay $800 today and receive $1,000 at the end of 5 years
the sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables?
Time to maturity, coupon rate
What are the two unique features of a U.S. federal government bond?
U.S. treasury issues are considered to be default free, U.S. treasury issues are exempt from state income taxes
What is a corporate bond's yield to maturity (YTM)?
YTM is the expected return for an investor who buys the bond today and hold it to maturity, YTM is the prevailing market invest rate for bonds with similar features
the NYSE differs from the NASDAQ primarily because the NYSE has:
a physical location, a face-to-face auction market
in an efficient market ________ investments have a _________ NPV
all; zero
how does the timing and the size of cash flows affect the payback method? Assume the project does pay back within the project's lifetime.
an increase in the size of the first cash inflow will decrease payback period, all else held constant
to find the total bond value, add the present value of the amount paid at maturity to the ________ of the annual coupon payments
annuity present value
percentage returns are more convenient than dollar returns because they:
apply to any amount invested, allow comparison against other investments
the dividend yield for a one-year period is equal to the annual dividend amount divided by the ______
beginning stock price
a person who brings buyers and sellers together is called _____
broker
the percentage change in the price of a stock over a period of time is called its _________
capital gain yield
as an investor in the bond market, why should you be concerned about changes in interest rates?
changes in interest rates cause changes in bond prices
the average return on the stock market can be used to _______
compare stock returns with the returns on other securities
NASDAQ has which of these features?
computer network of securities dealers, multiple market maker system
the ________ price index is a commonly used measure of inflation
consumer
if unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called ________ dividends
cumulative
when interest rates in the market rise, we can expect the price of bonds to _________
decrease
all else constant, the dividend yield will increase if the stock price ______
decreases
preferred stock has preference over common stock in the:
distribution of corporate assets, payment of dividends
what information do we need to determine the value of a stock using the zero growth model?
dividend, discount rate
which of the following represents the valuation of stock using a zero growth model?
dividend/discount rate = D/R
the two potential ways to make money as a stockholder are through _________ and capital appreciation
dividends
Which one of the following is true about dividend growth patterns?
dividends may grow at a constant rate
the __________ rate of return is the difference between the rate of return on a risky asset and the free rate of return
excess
T/F The higher the coupon rate, the greater the interest rate risk, all other things being equal
false
t/f for investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed
false
true or false: Long-term U.S. government bonds used in the Ibbotson-Singquefield studies had 15 years to maturity
false
true or false: from 1900 to 2010, the average stock market risk premium of the U.S. was the highest of all countries
false
true or false: in the Ibbotson-Sinquefield studies, U.S. Treasury bill data is based on T-bills with a maturity of one year
false
true or false: the discount ted cash flow valuation estimates future value as the difference between the market price and the cost of the investment
false
true or false: the dividend yield minus the capital gains yield is the total return percentage
false
A limitation of bond ratings is that they ______
focus exclusively on default risk
If a bond is selling at a discount from its par value, the YTM must be _______ the coupon rate
greater than
In the dividend growth model, the expected return for investors comes from which two sources?
growth rate, dividend yield
the value of a firm is derived using the firm's _______ rate and its _____ rate
growth; discount
"inside quotes" represent the ______ and the ________
highest bid price; lowest ask price
what is the primary concern of the payback period rule?
how long it takes to recover the initial investment
an efficient market is one in which any change in available information will be reflected in the company's stock price ______
immediately
dividends are the _______ component of the total return from investing in a stock
income
when interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows ______
increases
the capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the:
initial stock price
a corporate bond's yield to maturity
is usually not the same as a bond's coupon rate, changes over time
the payback period can lead to foolish decisions if it is used too literally because:
it ignores cash flows after the cutoff date
What is the nominal rate of return on an investment?
it is the actual percentage change in the dollar value of an investment unadjusted for inflation
the bonds of a firm in financial distress may have a market value that is _______ than the face value at maturity
less
If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is ________ $1,000
less than
The Ibbotson-Sinquefield data shows that:
long-term corporate bonds had less risk or variability than stocks, U.S. t-bills had the lowest risk or variability
When using trial and error to compute the yield to maturity (YTM) for 6 percent coupon bond that trades at a premium, the process can be shortened if the initial guess is ______ 6 percent.
lower than
to get the average, or _______ return, the yearly returns are summed and then divided by the number of returns
mean
the discounted cash flow valuation shows that higher cash flows earlier in a project's life are _______ valuable than higher cash flows later on
more
_________ is a measure of how much value is created or added by undertaking an investment
net present value
in capital budgeting, _______ determines the dollar value of a project to the company
net present value
In the Ibbotson-Sinquefield studies, U.S. Treasury bill data is based on T-bills with a maturity of _______ months
one
the fundamental business of the New York stock exchange is to attract
order flow
the ______ method evaluates a project by determining the time needed to recoup the initial investment
payback
normally, the excess rate of return is _______
positive
the risk _________ can be interpreted as the reward for bearing risk
premium
shares of stock are first brought to the market and sold to investors in the _________ market
primary
the excess return is the difference between the rate of return on a risky asset and the _______ rate
risk free
the trading of existing shares occurs in the _______ market
secondary
if a study of a firm's financial information will not lead to gains in the market, then the market must be at least ________ efficient
semi-strong form
the Ibbotson SBBI data show that over the long-term,__________
small-company stocks generated the highest average return, small-company stocks had the highest risk level, T-bills, which has the lowest risk, generated the lowest return
New York stock exchange designated market markers (DMMs) were formerly called ______
specialists
the variance and its square root, the ________ __________, are the most commonly used measures of volatility
standard deviation
which of the following are reasons that make valuing a share of stock more difficult than valuing a bond?
stock has no set maturity, the required rate of return is unobservable, dividends are unknown and uncertain
Which of the following are true based on the year-to-year returns from 1926-2014?
t-bills sometimes outperform common stocks, common stocks frequently experience negative returns
earnings over the coming year are expected to be $3 and a benchmark PE of 15 applies to earnings over the previous year. The ______, or forecast, price for the coming year is $45.
target
if you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk?
the 10 year bond
If you are holding two bonds - one with a 5% coupon rate and the other with an 8% coupon rate - which one is more sensitive to interest rate risk, all other things being equal?
the bond with a 5% coupon rate
which of the following are needed to describe the distribution of stock returns?
the mean return, the standard deviation of returns
what are advantages of the payback period method for management/
the payback period method is ideal for minor projects, the payback period method is easy to use, it allows lower level managers to make small decisions effectively
which of the following ratios might be used to estimate the value of a stock?
the price/earnings ratio, the price/sales ratio
which of the following defines the primary market?
the primary market is where stocks are issued for the first time
which of the following are rights of common stock holders?
the right to share proportionally in any residual value in the event of liquidation, the right to share proportionally in any common dividends paid, the right to vote on matters of importance
the degree of interest rate risk depends on
the sensitivity of the bond's price to interest rate changes
Junk bonds have the following features
they are rated below investment grade
the following are weaknesses of the payback method:
time value of money principles are ignored, the cutoff date is arbitrary, cash flow received after the payback period are ignored
T/F Low-grade bonds may not be rated by major rating agencies
true
T/F longer - term bonds have greater interest rate sensitivity because a large portion of a bond's value comes from the face amount
true
true or false Roger Ibbotson and Rex Sinquefield conducted a famous set of studies dealing with rates of return in U.S. financial markets
true
true or false a capital gain on a stock is counted as part of the total return whether or not the gain realized from selling the stock
true
true or false: A capital loss is the same thing as a negative capital gain
true
true or false: the normal distribution is completely described by the average and standard deviation
true
true or false: the risk premium can be interpreted as a reward for bearing risk
true
true or false: total return is calculated by adding the dividend yield and the capital gains yield
true
the square of the standard deviations is equal to the _________
variance
the efficient markets hypothesis contends that ________ capital markets such as the NYSE are efficient
well organized
Most of the time, a floating-rate bond's coupon adjusts ____
with a lag to some base rate
What four variables are required to calculate the value of a bond?
yield to maturity, coupon rate, par value, time remaining to maturity
if the growth rate is zero, the capital gains yield is ________
zero
three special case patterns of dividend growth discussed in the text include:
zero growth, non-constant growth, constant growth
