Finn 3120 Exam 2

What is the value of a bond that matures in 17 years, makes an annual coupon payment of $50, and has a par value of $1,000? Assume a required rate of return of 5.90%.

$905.02

You have been depositing money at the end of each year into an account drawing 8% interest. What is the balance in the account at the end of year four if you deposited the following amounts? Year End of Year Deposit 1 $350 2 $500 3 $725 4 $400 Select one: a. $2,207 b. $1,622 c. $2,687 d. $2,384

a. $2,207

Bacon Signs Company preferred stock pays a perpetual annual dividend of 4.5% of its $100 par value. If investors' required rate of return on this stock is 12%, what is the value per share?

$37.50

Surf and Spray Inc. has a beta equal to 1.8 and a required return of 15% based on the CAPM. If the risk free rate of return is 4.2%, the expected return on the market portfolio is

10.2%

A $1,000 par value 14-year bond with a 10 percent coupon rate recently sold for $965. The yield to maturity is

10.49%. -----

Backford Company just paid a dividend yesterday of $2.25 per share. The company's stock is currently selling for $60 per share, and the required rate of return on Backford Company stock is 16%. What is the growth rate expected for Backford Company dividends assuming constant growth?

11.81%

Whistle Corp. has a preferred stock that pays a dividend of $2.40. If you are willing to purchase the stock at $11, what is your required rate of return (round your answer to the nearest .1% and assume that there are no transaction costs)?

21.8%

At 6 percent compounded monthly, how long will it take to triple your money?

220 months

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 Messinger's bonds?

4.32%

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%

Suppose a corporation can change its depreciation method so that its tax payments will decrease by $5,000 this year but increase by $5,000 next year. A) The change will have no impact on the value of the company because its cash flow over time will be the same. B) The change will decrease the value of the company because investors don't like changes in accounting methods. C) The change will decrease the value of the company because lower tax payments this year result from lower reported income. D) The change will increase the value of the company because the value of the cash savings this year exceeds the cost of the cash payments next year.

Answer: D. Remember the time value of money! The discount on our taxes we are receiving is happening this year so it is worth $5,000 today. The extra cost is happening next year, so it is worth $5,000 / (1+r) today, which is less than $5,000. Then the cash savings we receive today are worth more than the cash payments we have to pay next year, so the firm's value should increase.

$10,000 invested at 10% per year for 5 years earns interest equal to $6,105.10; therefore, $10,000 invested at 10% per year for 10 years will earn interest equal to $12,210.20 (2 times $6,105.10). Select one: True False

False

A company with a AAA bond rating will command a higher interest rate on its bonds than a company with a lesser BBB bond rating. Select one: True False

False

An investor with a required return of 8% for stock A will purchase stock A if the expected return for stock A is less than or equal to 8%. Select one: True False

False

As market rates of interest rise, investors move their funds into bonds, thus increasing their price and lowering their yield.

False

If the interest rate is positive, then the future value of an annuity due will be greater than the future value of an ordinary annuity. Select one: True Correct False

True

Preferred stock is riskier than long-term debt because its claim on assets and income come after those of bonds

True

Restrictive provisions in bond indenture agreements are designed to protect bondholders and lessen the agency problems between bondholders and stockholders.

True

A corporate bond has a coupon rate of 9%, a face value of $1,000, and matures in 15 years. Which of the following statements is MOST correct? Select one: a. An investor with a required return of 10% will value the bond at more than $1,000. b. An investor who buys the bond for $900 will have a yield to maturity on the bond greater than 9%. c. An investor who buys the bond for $900 and holds the bond until maturity will have a capital loss. d. If the bond's market price is $900, then the annual interest payments on the bond will be $81.

b. An investor who buys the bond for $900 will have a yield to maturity on the bond greater than 9%

Which type of value is shown on the firm's balance sheet? Select one: a. market value b. intrinsic value c. book value d. liquidation value

c. book value

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. Which loan has the lowest annual cost? Select one: a. Last National Bank's loan b. All of the loans will have the same annual cost. c. Local Bank's loan d. Credit Onion's loan

d. Credit Onion's loan

Which of the following investments is clearly preferred to the others for an investor who is not holding a well-diversified portfolio? Investment σ A 18% 20% B 20% 20% C 20% 22% Select one: a. Cannot be determined without information regarding the risk-free rate of return. b. Investment C c. Investment A d. Investment B

d. Investment B

Beginning with an investment in one company's securities, as we add securities of other companies to our portfolio, which type of risk declines? Select one: a. systematic risk b. unsystematic risk c. non-diversifiable risk d. market risk

unsystematic risk

LRQ Inc. bonds on July 1, 2006. The bonds had a coupon rate of 5.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on July 1, 2021. What is the intrinsic value of an LRQ Corporation bond on July 1, 2012 to an investor with a required return of 7%?

$901.08

Master Craft Control Inc. has bonds that mature in 6 1/2 years with a par value of $1,000. They pay a coupon rate of 9% with semiannual payments. If the required rate of return on these bonds is 11% what is the bond's value?

$908.83

PBJ Corporation issued bonds on January 1, 2006. The bonds had a coupon rate of 5.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on January 1, 2021. What is the yield to maturity for an PBJ Corporation bond on January 1, 2012 if the market price of the bond on that date is $950?

6.34%

Biff deposited $9,000 in a bank account, and 10 years later he closes out the account, which is worth $18,000. What annual rate of interest has he earned over the 10 years?

7.18%

You charged $1,000 on your credit card for Christmas presents. Your credit card company charges you 26% annual interest, compounded monthly. If you make the minimum payments of $25 per month, how long will it take ( to the nearest month) to pay off your balance?

94 months

You are considering investing in a project with the following possible outcomes: Probability of Investment States Occurrence Returns State 1: Economic boom 18% 20% State 2: Economic growth 42% 16% State 3: Economic decline 30% 3% State 4: Depression 10% -25% Calculate the expected rate of return and standard deviation of returns for this investment, respectively. Select one: a. 8.72%, 12.99% b. 2.18%, 1.69% c. 3.50%, 1.69% d. 7.35%, 12.99%

a. 8.72%, 12.99%

Which of the following statements is MOST correct regarding beta? Select one: a. Even professionals may not agree on the measurement of beta. b.Beta must be calculated using at least 5 years of monthly returns data to be accurate. c. Beta can only be measured properly using daily returns. d. Beta for a particular company remains constant over time.

a. Even professionals may not agree on the measurement of beta.

If markets were entirely efficient (perfect), which of the following would we conclude? Select one: a. Market value and intrinsic value would be the same. b. There would be no inflation. c. No firms would ever default on their bonds. d. Book value would be the same as market value.

a. Market value and intrinsic value would be the same.

Biff deposited $9,000 in a bank account, and 10 years later he closes out the account, which is worth $18,000. What annual rate of interest has he earned over the 10 years?

$9,000 * (1.0718^10) = $18,004.46.

What is the value of a bond that matures in 5 years, has an annual coupon payment of $110, and a par value of $2,000? Assume a required rate of return of 8.69%.

$1,749.83

The Johnson Corporation issues a bond which has a coupon rate of 10.20%, a yield to maturity of 10.55%, a face value of $1,000, and a market price of $850. Therefore, the annual interest payment is

$102

You want $20,000 in 5 years to take your spouse on a second honeymoon. Your investment account earns 7% compounded semiannually. How much money must you put in the investment account today? (round to the nearest $1).

$14,178

What is the present value of $11,463 to be received 7 years from today? Assume a discount rate of 3.5% compounded annually and round to the nearest $1.

$9,010

Two sisters each open IRAs in 2011 and plan to invest $3,000 per year for the next 30 years. Mary makes her first deposit on January 1, 2011, and will make all future deposits on the first day of the year. Jane makes her first deposit on December 31, 2011, and will continue to make her annual deposits on the last day of each year. At the end of 30 years, the difference in the value of the IRAs (rounded to the nearest dollar), assuming an interest rate of 7% per year, will be

$19,837

You have been depositing money at the end of each year into an account drawing 8% interest. What is the balance in the account at the end of year four if you deposited the following amounts? Year End of Year Deposit 1 $350 2 $500 3 $725 4 $400

$2,207

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 1st birthday and ending on her 35th birthday, so your daughter will have $1,000,000 by her 35th birthday?

$2,317

If you invest $750 every six months at 8 percent compounded semiannually, how much would you accumulate at the end of 10 years?

$22,334

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

If you put $10,000 in an investment that returns 11 percent compounded monthly what would you have after 10 years (round to nearest $1)?

$29,892

If you want to have $5,000 in 10 years, how much money must you put in a savings account today? (Assume that the savings account pays 4% and it is compounded daily; round to the nearest $1).

$3,352

If you put $15 in a savings account at the beginning of each month for 15 years, how much money will be in the account at the end of the 10th year? Assume that the account earns 12% compounded monthly and round to the nearest $1.

$3,485

Manny and Irene will be retiring in fifteen years and would like to buy a Mexican villa. The villa costs $500,000 today, and housing prices in Mexico are expected to increase by 6% per year. Manny and Irene want to make fifteen equal annual payments into an account, starting today, so there will be enough money to purchase the villa in fifteen years. If the account earns 10% per year, what is the amount of each deposit?

$37,714

Perrine Industrial Inc. just paid a dividend of $5 per share. Future dividends are expected to grow at a constant rate of 7% per year. What is the value of the stock if the required return is 16%?

$59.44

Nunavet Ocean Cruises sold an issue of 12-year $1,000 par bonds to build new ships. The bonds pay 4.85% interest, semiannually. Today's required rate of return is 9.7%. How much should these bonds sell for today? Round off to the nearest $1.

$660.45

A bond issued by Liberty, Inc. 10 years ago has a coupon rate of 8% and a face value of $1,000. The bond will mature in 15 years. What is the value to an investor with a required return of 12.5%?

$701.52

Assume that you have $330,000 invested in a stock that is returning 11.50%, $170,000 invested in a stock that is returning 22.75%, and $470,000 invested in a stock that is returning 10.25%. What is the expected return of your portfolio?

12.9%

If Cathy deposits $12,000 into a bank account that pays 6% interest compounded quarterly, what will the account balance be in seven years?

18,207

White Company stock has a beta of 2 and a required return of 23%, while Black Company stock has a beta of 1.0 and a required return of 14%. The standard deviation of returns for White Company is 10% more than the standard deviation for Black Company. The risk free rate of return according to the CAPM is

5%.

The value of a bond is equal to the present value of the bond's interest payments plus the present value of the bond's maturity value, all discounted at the bond's coupon rate.

False

Which of the following conclusions would be true if you earn a higher rate of return on your investments? Select one: a. The lower the present value would be for any lump sum you would receive in the future. b. The greater the present value would be for any lump sum you would receive in the future. c. Your rate of return would not have any effect on the present value of any sum to be received in the future. d. The greater the present value would be for any annuity you would receive in the future.

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

You are considering a sales job that pays you on a commission basis or a salaried position that pays you $50,000 per year. Historical data suggests the following probability distribution for your commission income. Which job has the higher expected income? Probability of Commission Occurrence $15,000 .15 $35,000 .20 $48,000 .35 $67,000 .22 $80,000 .18 Select one: a. The salary of $50,000 is less than the expected commission of $55,190. b. The salary of $50,000 is greater than the expected commission of $48,400. c. The salary of $50,000 is less than the expected commission of $52,720. d. The salary of $50,000 is less than the expected commission of $50,050.

a. The salary of $50,000 is less than the expected commission of $55,190.

How is preferred stock affected by a decrease in the required rate of return? Select one: a. The value of a share of preferred stock increases. b. The dividend yield increases. c. The dividend increases. d. The dividend decreases.

a. The value of a share of preferred stock increases.

Of the following different types of securities, which is typically considered most risky? Select one: a. common stocks of small companies b. common stocks of large companies c. long-term corporate bonds d. long-term government bonds

a. common stocks of small companies

The yield to maturity on a bond is the rate of return that equates the present value of the bond's future cash flows with the bond's Select one: a. market value. b. liquidation value. c. face value. d. book value.

a. market value.

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? Select one: a. the annuity due b. the ordinary annuity c. Since we don't know the interest rate, we can't find the value of the annuities and hence we cannot tell which one is better. d. either one because they have the same present value

a. the annuity due

Which of the following statements is MOST correct? Select one: a. If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rate. b. If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value. c. Answers B and C are correct. d. If a bond's yield to maturity exceeds its coupon rate, the bond's current yield (interest yield) must also exceed its coupon rate.

b. If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.

Which of the following statements is MOST correct concerning diversification and risk? Select one: a. Only wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks to gain the benefits of diversification. b. Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry. c. Proper diversification generally results in the elimination of risk. d. Risk-averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk.

b. Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.

Harold considers investing in an LM Corp. bond and decides not to purchase the bond. Which of the following statements is MOST correct? Select one: a. The intrinsic value of the bond for the investor is less than the par value of the bond. b. The intrinsic value of the bond for the investor is less than the market value of the bond. c. The liquidation value of the bond is greater than the market value of the bond. d. The intrinsic value of the bond for the investor is greater than the book value of the bond.

b. The intrinsic value of the bond for the investor is less than the market value of the bond.

Charlie Corporation has two bonds outstanding. Both bonds mature in 10 years, have a face value of $1,000, and have a yield to maturity of 8%. One bond is a zero coupon bond and the other bond has a coupon rate of 8%. Which of the following statements is true? Select one: a. All rational investors will prefer the 8% bond because it pays more interest. b. The zero coupon bond must sell for a lower price than the bond with an 8% coupon rate. c. The zero coupon bond must have a higher price because of its greater capital gain potential. d. Both bonds must sell for the same price if markets are in equilibrium.

b. The zero coupon bond must sell for a lower price than the bond with an 8% coupon rate.

Investment A has an expected return of 15% per year, while investment B has an expected return of 12% per year. A rational investor will choose Select one: a. investment A only if the standard deviation of returns for A is higher than the standard deviation of returns for B. b. investment A if A and B are of equal risk. c. investment A because of the higher expected return. d. investment B because a lower return means lower risk.

b. investment A if A and B are of equal risk.

Preferred stock is similar to a bond in the following way Select one: a. both provide interest payments. b. preferred stock always contains a maturity date. c. both investments provide a stated income stream. d. both contain a growth factor similar to common stock.

c. both investments provide a stated income stream.

Preferred stock differs from common stock in that Select one: a. common stock investors have a required return and preferred stock investors do not. b. preferred stock investors have a higher required return than common stock investors. c. preferred stock dividends are fixed. d. preferred stock usually has a maturity date.

c. preferred stock dividends are fixed.

How is preferred stock similar to common stock? Select one: a. Preferred stock dividends and common stock dividends are fixed. b. Both preferred and common stockholders have voting control of a firm. c. Preferred dividend payments usually have unlimited growth potential. d. Investors cannot sue a corporation for the non-payment of dividends.

d. Investors cannot sue a corporation for the non-payment of dividends.

You are going to invest all of your funds in one of three projects with the following distribution of possible returns: PROJECT 1 PROJECT 2 Standard Standard Probability Return Deviation Beta Probability Return Deviation Beta 50% Chance 22% 12% 1.1 30% Chance 36% 19.5% 1.0 50% Chance -4% 40% Chance 10.5% 30% Chance -20% PROJECT 3 Standard Probability Return Deviation Beta 10% Chance 28% 12% 1.2 70% Chance 18% 20% Chance -8% If you are a risk averse investor, which one should you choose? Select one: a. Project 2 b. either Project 1 or Project 2 because they have the same expected return c. Project 1 d. Project 3

d. Project 3

Which of the following statements is true regarding convertible bonds? Select one: a. The holder has the right to sell these bonds back to the issuer if the bonds don't perform well. b. These bonds have a variable interest rate. c. The holder can convert these bonds into an equal number of new bonds if they choose to do so. d. These bonds are convertible into common stock of the issuing firm at a prespecified price.

d. These bonds are convertible into common stock of the issuing firm at a prespecified price.

Which of the following investments has the highest effective annual return (EAR)? (Assume that all CDs are of equal risk.) Select one: a. a bank CD that pays 7.30 percent annually b. a bank CD that pays 7.10 percent compounded monthly c. a bank CD that pays 7.00 percent interest compounded daily d. a bank CD that pays 7.25 percent compounded semiannually

d. a bank CD that pays 7.25 percent compounded semiannually

If a firm were to experience financial insolvency, the legal system provides an order of hierarchy for the payment of claims. Assume that a firm has the following outstanding securities: mortgage bonds, common stock, debentures, and preferred stock. Rank the order in which investors that own mortgage bonds would have their claim paid? Select one: a. second b. third c. fourth d. first

d. first

If the market price of a bond decreases, then Select one: a. the coupon rate increases. b. the yield to maturity decreases. c. the coupon rate decreases. d. the yield to maturity increases.

d. the yield to maturity increases.

Put the following in order of their claim on assets of a firm, starting with the LAST to have a claim: A. Subordinated debentures B. Debentures (unsubordinated) C. Common Stock D. Preferred stock Select one: a. B, A, C, D b. D, C, A, B c. D, C, B, A d. C, B, A, D e. C, D, A, B

e. C, D, A, B