fina 320 quiz 3 review

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The price and yield to maturity on a bond have:

An inverse relation

The highest S&P bond rating category considered to be of junk quality grade is:

BB+

Which of the following bonds would be considered to be of investment grade?

Baa-rated bond

A year ago a company issued a bond with a face value of $1,000 with an 8% coupon. Now the prevailing market yield is 10%. What happens to the bond?

Bond is traded at a market price of less than $1000

The restrictive covenants of a bond indenture are intended to protect the interest of:

Bondholders

You are attempting to value a stock in a mature industry that is steadily shrinking in size. Of the stock valuation models studied, the most appropriate is the

Constant growth model

An illustrated using the dividing growth model, the tot return on a share of common stock is comprised of a ______

Dividend yield and a capital gains yield.

The current yield of a bond can be calculated by:

Dividing the annual coupon payments by the price

Which of the following statements about the constant growth dividend model is FALSE?

For the constant growth dividend model to work, the growth rate must exceed the required return on equity

Investors who own bonds with lower credit ratings should expect:

Higher default possibilities

if dividends on a common stock are expected to grow at a constant rate forever, and if you are told the most recent dividend paid, the dividend growth rate, and the appropriate discount rate today, you can calculate ________________ I. the price of the stock today II. the dividend that is expected to be paid ten years from now III. the expected stock price 5 years from now

I, II, and III

which of the following statements is true? I. the dividend growth model only holds if, at some point in time, the dividend growth rate exceeds the stocks required return II. an increase in the dividend growth rate will increase a stocks market value, all else the same III. an increase in required return on stock will increase its market value, all else the same

II only

Which of the following statements is true?

If a stock's dividend is expected to grow at a constant rate, then the dividend growth rate (g) must be positive

The bond has a larger premium today than it did five weeks ago.

Interest rates must be lower now than they were five weeks ago.

Which of the following statements about IPO is false?

Investors trade a company stocks among themselves during an IPO

Consider a 10%, 10-year bond sold to yield 8%. One year passes and interest rates remained unchanged at 8%. What will have happened to the bond's price during this period? Assume the bond pays coupons semi-annually.

It will have decreased

which of the following is correct for a bond currently selling at a premium?

Its current yield is lower than its coupon rate

Which of the following statements is false about junk bonds?

Junk bonds must be bad investment and should be avoided

Which of the following is a major credit rating agency in the US?

Moody's

stocks A and B have the same required rate of return in the same expected year and dividend. Stock A's dividend is expected to grow at a constant rate of 10% per year, while stock B's dividend is expected to grow at a constant rate of 5% per year. Which of the following statements is most correct?meta

None of the statements above is correct

Most U.S. corporate and government bonds choose to make _____ coupon payments.

Semiannual

The bonds indenture least likely specifies the

Source of funds for repayment

Which of the following statements about the call provision of a bond is most accurate?

Stipulates whether and under what circumstances the issuer can redeem or repay the bond prior to maturity

______Stocks are different from bonds because

Stock, unlike bonds,represent ownership

The current yield on a bond is equal to:

The annual coupon payment divided by the current market price

A bond sold five weeks ago for $1100. The bond is worth $1150 in today's market. Assuming no changes in risk, which of the following is false?

The coupon payment of the bond must have decreased.

Which of the following statements regarding bond pricing is true?

The lower the yield to maturity, the more valuable the bond is

which of the following statements regarding bond pricing is true?

The lower the yield to maturity, the more valuable the bond is

Value of a common stock does not directly depend on _____

The maturity date of common stock

A bond that makes no coupon payments (and thus is initially priced at a deep discount to par value) is called a ________ bond.

Zero Coupon

The coupon rate of a bond equals:

a percentage of its face value

a bond is trading at a premium if its:

all of the above

The restrictive covenants of a bond indenture are intended to protect the interest of ______

bondholers

Which of the following is likely to be correct for a CCC-rated bond, compared to a BBB-rated bond? (Holding everything else equal, i.e, assuming the two bonds have the same maturity, coupon rate and par value)

both b and c

you believe that the required return on Dynegy stock is 16% and that the expected dividend growth rate is 12 %, which is expected to remain constant for the foreseeable future. is the stock currently overvalued, undervalued, or fairly priced?

cannot tell without more information

preferred stocks are different from common stocks in that

common stockholders have voting rights or preferred stockholders do not

you are attempting to value a stock in a mature industry that is steadily shrinking in size. of the stock valuation models studied, the most appropriate is the ____________

constant growth model

the _________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator

current yield

as illustrated using the dividend growth model, the total return on a share of common stock is comprised of a __________

dividend yield and a capital gains yield

common stock can be valued using the perpetuity valuation formula if the:

dividends are not expected to grow

dividend models suggest that ___________ determine the value of a financial asset to which the owner is entitled while holding the asset

future cash flows

For a discount bond, the current yield is _________ the yield to maturity, and the coupon rate is _____________ the yield to maturity.

greater than, less than

Which of the following statements is NOT true?

if a stock has a required rate of return R=12%, and its dividend grows at a constant rate of 5%, this implies that the stock's dividend yield is 5%

a bond sold five weeks ago for $1,100. The bond is worth $1,150 in today's market. Assuming no changes in risk, which of the following is true?

interest rates must be lower now than they were five weeks ago

which of the following statements regards dividend yields is true?

it is analogous to the current yield for a bond

Dividends that are expected to be paid far into the future have:

lesser impact on current stock price due to discounting

The constant-growth dividend discount model would typically be most appropriate in valuing a stock of a:

moderate growth; "mature" company

given no change in required returns, preferred stock prices will:

none of the above

a newly issued- 15-year face value 6.75% semi-annual coupon bond is priced at 1075. which of the following choices describes the bond and the relationship of the bonds market yield to the coupon

premium bond, required market yield is less than 6.75%

A bond with an annual coupon of $100 originally sold at par for $1000. The current market interest rate on this bond is now 9%. Assuming no change in risk, this bond will now sell at a _________ and present the seller (who bought the bond at initial issuance) of the bond today with a capital __________

premium, gain

The ______ is the market of first sale in which companies first sell their authorized shares to the public.

primary market

restrictions on asset sales and borrowing in bond indenture are often known as?

protective covenants

most U.S corporate and government bonds choose to make _______ coupon payments

semi-annual

A bond's indenture least likely specifies the

source of funds for repayment

stocks are different from bonds because ___________

stocks, unlike bonds, represent residual ownership

a bond sold five weeks ago for $1,100. The bond is worth $1,150 in today's market. Assuming no changes in risk, which of the following is false?

the coupon payment of the bond must have decreased

Periodic receipts of interest by bondholders are known as:

the coupon rates

As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that

the default risk decreases and the required rate of return decreases.

as the rating of a bond increases (for example, from A, to AA, to AAA), it generally mean that

the default risk decreases and the required rate of return decreases.

the value of common stock will likely decrease if:

the discount rate inscreases

which of the following statements about preferred stock is false?

the dividends on preferred stocks could be increased or decreased

what happens when a bond's expected cash flows are discounted at a rate lower than the bonds coupon rate?

the price of the bond is higher than the par value

the discount rate that makes the present value of a bonds payments equal to its price is termed the:

yield to maturity

the rate of return required by investors in the market for owning a bond is called the:

yield to maturity

a bond that makes no coupon payments (and thus is initially priced at a deep discount to par value) is called a. __________ bond

zero coupon


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