FINA 3770
Five years ago, Thompson Tarps Inc. issued 20-year 8% annual coupon bonds with a $1,000 face value. Since then, interest rates in general have risen, and the yield to maturity on the Thompson Tarps bonds is now 12%. Given this information, what is the price today for a Thompson Tarps bond?
$686.27
The Rapid Growth Company is expected to pay a dividend 0f $1.00 at the end of this year. Thereafter, the dividends are expected to grow at the rate of 25% per year for 3 years, and then drop to 18% for 2 year, before setting at the industry average growth rate of 3% indefinitely. If you require a return of 10% to invest in stock of this risk level, how much would you be justified in paying for this stock?
From 29.5 - 29.65
Nash Inc. has an 12% required rate of return. It does not expect to initiate dividends for 15 years, at which time it will pay $2.50 per share in dividends. At that time, Nash expects its dividends to grow at 3% forever. What is an estimate of Nash's price in 15 years (P15) if its dividend at the end of year 15 is $2.50?
We use the formula: P15 = (Div15 * (1+g)) / (r-g) P10 = ($2.50 * (1+0.03)) / (0.12-0.03) P10 = $2.5758 / 0.03 = $28.61
A bond may be issued by a. Companies b. state governments c. the federal government d. all the above
d. all the above
Your family just bought a new home and now have a mortgage on the home. The amount of the principle is $250,000, the loan is at 3.5% APR, and the monthly payments are spread out over 20 years. What is your monthly mortgage payment?
$1,449.9
Delagold Corporation is issuing a zero-coupon bond that will have a maturity of 30 years. The bond's par value is $1,000 and the current yield on similar bonds is 5.5%. What is the expected price of this bond, using semiannual convention? a. $196.38 b. $25.19 c. $40.26 d. $200.64
a. $196.38
Benson Biometrics Inc., has outstanding $1,000 face value 8% coupon bonds that make semiannual payments, and have 25 years remaining to maturity. If the current price for these bonds is $1037.24, what is the annualized yield to maturity? a. 7.66% b.7.55% c.7.71% d.8.00%
a. 7.66%
Shareholders with super voting right shares have multiple votes per share - a fact that increases their influence and control over the company a. True b. False
a. True
When the bond is callable, the ability to call the bond is an option for bond issuers. a. True b. False
a. True
The ___________ is the regular interest payment of the bond a. coupon b. dividend c. coupon rate d. par value
a. coupon
Which of the following statements is CORRECT? a. stocks, unlike bonds, represent residual ownership b. bonds, unlike stocks, represent voting ownership c.stocks, like bonds, have a maturity date d. stocks, unlike bonds, give owners legal claims to payments
a. stocks unlike bonds, represent residual ownership
Nominal interest rates are the sum of two major components. These components are: a. the real interest rate and expected inflation b. the risk-free rate and expected inflation c. the real interest rate and default premium d. the real interest rate and the T-bill rate
a. the real interest rate and expected inflation
The most recent dividend from Cavalier Custom Design Inc is $0.73. Its stock has a dividend growth rate of 5.62% forever and required return of 10.21%. What is the current stock price if we anticipate dividends stopping in 20 years? a. Not enough information to answer b. $16.80 c. $15.90 d. 7.15
b. $16.80
You buy a stock for which you expect to receive an annual dividend of $2.10 for the ten years that you plan on holding it. After 10 years, you expect to sell the stock for 26.15. What is the present value of a share for this company if you want a 8% return? a. $7.72 b. $26.20 c. $31.41 d. $15.97
b. $26.20
Becky is seeking to expand her rare coin collection. Each year, rare coins increase in price at a three percent rate. She believes that if she invests her money for one year, she should be able to buy 26 coins for what 25 coins would cost today. What is the approximate nominal rate necessary to compensate for waiting and to cover inflation? a. Not enough information to answer b. 7.12% c.4.00% d. 9.87%
b. 7.12%
A privilege that allows current shareholder's to buy a fixed percentage of all future issues before they are offered to the public is called a primary right. a. True b. False
b. False
A yield curve constructed using Treasury securities has each of the following components embedded in the nominal interest rates expected inflation, a default risk premium and a maturity premium a. True b. False
b. False
All else equal, the more frequent the payment, the lower the effective rate of the loan. a. True b. False
b. False
Giant Motorcycles Inc. pays a $0.77 preferred dividend every quarter and will maintain this policy forever. What price should you pay for one share of preferred stock if you want an annual return of 9.25% on your investment? a. $33.04 b.$35.27 c.$31.96 d.$33.30
d.$33.30
Which of the following is CORRECT? a. The coupon payment for an annual coupon bond is equal to the coupon rate multiplied by the current price of the bond b. The coupon rate for a bond is the interest rate for the coupons, stated in annual terms, and printed on the bond. It normally remains the same throughout the life of the bond c. Zero-coupon bonds are more difficult and time-consuming to price because of the extensive revision of the basic bond pricing formula d. The coupon payment for an annual-coupon corporate bond is equal to the yield to maturity multiplied by the par value of the bond
b. The coupon rate for a bond is the interest rate for the coupons, stated in annual terms, and printed on the bond. It normally remains the same throughout the life of the bond
You have a savings account in which you leave the funds for one year without adding or withdrawing from the account. Which would you rather have: a weekly compounded rate of 0.35%, a monthly compounded rate of 2.75%, a quarterly compounded rate of 3.25%, a semiannually compounded rate of 4.12%? a. weekly b. monthly c. quarterly d. semiannually
b. monthly
The appropriate rate to use to discount the cash flows of a bond in order to determine the current price is a. par rate b. yield to maturity c. current yield d. coupon rate
b. yield to maturity
From 1991 to 2000, the U.S. economy had an annual inflation rate of around 2.81%. The historical annual nominalrisk-free rate for this same period was around 5.49%. What is the estimated real interest rate using the approximate nominal interest rate equation for that decade? a. 8.30% b.2.61% c.2.68% d.
b.2.61% Real = Nominal - inflation x = 5.49%-2.81% x=2.61%
Which of the following statements is FALSE? a.The period in which interest is applied or the frequency of times interest is added to an account each year is called the compounding period or compounding periods per year. b.Although an APR is quoted on an annual basis, interest can be paid monthly but never daily. c.The APR can be referred to as a promised annual percentage rate. d.Although an APR is quoted on an annual basis, interest can be paid quarterly.
b.Although an APR is quoted on an annual basis, interest can be paid monthly but never daily.
You just bought a car and took out a loan for $30,000 and are scheduled to make monthly payments for 6 years at an annual rate of 3.9% APR. Suppose you add $132.01 each month to the contracted monthly car payment. This extra amount is applied to the principal. How long will it take you to pay off your loan of $30,000? Use a calculator to determine your answer. a.It will take just over 30 months. b.It will take just over 54 months. c.It will take just over 38 months. d.It will take just over 45 months.
b.It will take just over 54 months.
The two major components of the interest rate that cause rates to vary across different investment opportunities or loans are ________. a.the inflation premium and the maturity premium b.the default premium and the maturity premium c.the liquidity premium and the maturity premium d.the default premium and the bankruptcy premium
b.the default premium and the maturity premium
Portland Brewery Inc. recently issued 30−year $1,000 face value, 12% annual coupon bonds. The market discount rate for this bond is only 7%. What is the current price of this bond? a.$387.59 b.$1,620.45 c.$1,000.00 d.$597.24
b.$1,620.45
McCue Inc.'s bonds currently sell for $1,250. They pay a $90 annual coupon, have a 25-year maturity, and a $1,000 par value, but they can be called in 5 years. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the yield to call? a. 6.05% b. 7.77% c. 3.28% d. 3.02%
c. 3.28%
In regards to the fact the pricing of stocks is more difficult than the pricing of bonds, which of the below statements is FALSE? a. Because a stock has no maturity date, the number of its payments are unknown b. Cash dividends, unlike coupons for bonds, typically change from year to year. c. A stock's final sale is fixed time on its maturity date d. The ending price of the stock at any point in time is not fixed like the par value of the principle
c. A stock's final sale is fixed time on its maturity date
Which of the following about the relationship between yield to maturity and bond prices is FALSE? a. When the yield to maturity and coupon rate are the same, the bond is called a par value bond. b. A bond selling at a premium means that the coupon rate is greater than the yield to maturity. c. When interest rates go up, bond prices go up. d. A bond selling at a discount means that the coupon rate is less than the yield to maturity.
c. When interest rates go up, bond prices go up.
The typical payments on a consumer loan are made at a. the end of each day b. the end of each week c. the end of each month d. the beginning of each month
c. the end of each month
Assume that Ray is 38 years old and has 27 years for saving until he retires. He expects an APR of 7.5% on his investments. How much does he need to save if he puts money away annually in equal endminusofminustheminus year amounts to achieve a future value of $1,200,000 dollars in 27 years' time a. Not enough information to answer b. $14,882.44 c.$3703.70 d. $1,148.81
d. $1,148.81
Agnes wants to purchase common stock of New Frontier Inc. and hold it for 5 years. The most recent dividend is $1.50 per share. The directors of the company just announced that they expect to increase dividend by $0.50 per share for the next 5 years. Agnes believes that she will be able to sell the stock for $40 at the end of 5 years. In order to earn 12% on this investment, how much should Agnes pay for this stock? a. $28.10 b. $29.91 c. Not enough information to answer d. $33.11
d. $33.11
Dividend models suggest that the value of a financial asset is determined by future cash flows. A problem arises, however,in that future cash flows may be difficult to predict as to ________ of these cash flows. a. the amount but not the timing b. the timing but not the amount c. neither the timing nor the amount d. both the timing and the amount
d. both the timing and the amount
APR's must be converted to the appropriate periodic rates when compounding is a. more frequent than once a month b. less frequent than once every six months c. less frequent than once a year d. more frequent than once a year
d. more frequent than once a year
