BF - Exam 2 Review (FROM PROFESSOR)
The ________ is a market derived interest rate used to discount the future cash flows of the bond. A) coupon rate B) semiannual coupon rate C) yield to maturity D) compound rate
C
Bonds are sometimes called ________ securities because they pay set amounts on specific future dates. A) variable-income B) fixed-income C) bully D) real
B
Most U.S. corporate and government bonds choose to make ________ coupon payments. A) annual B) semiannual C) quarterly D) monthly
B
7) A basis point is ________. A) one-thousandth of a percentage point B) one percentage point C) one-tenth of a percentage point D) one-hundredth of a percentage point
D
The ________ is the regular interest payment of the bond. A) dividend B) par C) coupon rate D) coupon
D
A typical practice of many companies is to distribute part of the earnings to shareholders through ________. A) quarterly stock splits B) quarterly cash dividends C) semiannual cash dividends D) annual stock dividends
B
As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that A) the credit rating increases, the default risk increases, and the required rate of return decreases. B) the credit rating increases, the default risk decreases, and the required rate of return increases. C) the credit rating increases, the default risk decreases, and the required rate of return decreases. D) the credit
C
You can think of the ________ as the "used stock" market because these shares have been owned or "used" previously. A) secondary market B) primary market C) NYSE market D) initial public offering market
A
Assume that today's date is August 15, 2015 and that the Kroger Bond is an annual-coupon bond. The par value is $100. What is the current price of this bond? price: ??? cr: 6.875% md: 8-15-2020 cy: ??? rating: b2 A) $86.17 B) $102.32 C) $95.27
A) Coupon = $100*6.875% = $6.875 Year to maturity = 8-15-2020 minus 8-15-2015 = 5 year
4) Blackburn Inc. has issued 30-year $1,000 face value, 10% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is ________. A) $100 B) $90 C) $50 D) $45
A) The annual interest or coupon payment is equal to the coupon rate multiplied by the par value of the bond. Here that is (0.10) × ($1,000) = $100.
Ringtones Inc. wishes to issue new bonds but is uncertain how the market would set the yield to maturity. The bonds would be 20-year, 7% annual coupon bonds with a $1,000 par value. The firm has determined that these bonds would sell for $1,050 each. What is the yield to maturity for these bonds? A) 7.00% B) 6.55% C) 7.35% D) 6.54%
D
Western Auto Inc. pays a $1.77 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) $66.54 B) $70.54 C) $74.54 D) $76.54
D
Which of the following statements is TRUE? A) The dealers of stock are not allowed to make money on the difference between what they buy the stock for and what they sell it for. B) A bear market is a prolonged rising market, one in which stock prices in general are increasing. C) The ask price is the price at which a dealer is willing to sell, and the bid price is the price at which a dealer is willing to buy. D) A bull market is a prolonged declining market, one in which stock prices in general are decreasing.
C
Bonds are different from stocks because ________. A) bonds promise fixed payments for the length of their maturity B) bonds give payments only after other owners are paid C) bonds do not have maturity dates D) bonds promise growth in earnings
A
In applying the constant dividend model with infinite horizon to price a stock for purchase, we assume the company will pay dividends forever and that we will hold onto our stock forever. A) TRUE B) FALSE C) Not enough information
A
Plymouth Fountains Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If the coupon rate is 6% and the current yield to maturity is 7%, what is the firm's current price per bond? A) $875.28 B) $1,000.00 C) $934.34 D) $466.79
A
Simpson Industries Inc. pays a $1.37 dividend every quarter and will maintain this policy forever. What price should you pay for one share of common stock if you want an annual return of 12.5% on your investment? A) $43.84 B) $43.94 C) $44.84 D) $44.94
A
The ________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator. A) current yield B) yield to maturity C) bond discount rate D) coupon rate
A
The ________ is the market of first sale in which companies first sell their authorized shares to the public. A) primary market B) secondary market C) both primary and secondary markets D) Nasdaq market
A
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. A) TRUE B) FALSE C) Can not answer
A
The dividend stream we would have legal claim to is for only that period of the company's life during which we own the stock or until the company goes out of business and stops paying dividends. A) TRUE B) FALSE C) Not enough information
A
The next dividend payment by Hot Wings, Inc., will be $3.55 per share. The dividends are anticipated to maintain a 3.88 percent growth rate forever. If the stock currently sells for $64 per share, what is the required return? A) 9.43% B) 10.60% C) 13.46%
A
Vitmix Industries Inc. is issuing a zero-coupon bond that will have a maturity of fifty years. The bond's par value is $1,000, and the current yield on similar bonds is 7.5%. What is the expected price of this bond, using the semiannual convention A) $25.19 ? B) $250.19 C) $750.00 D) $1,000.00
A
Which of the statements below is FALSE? A) The profits for common stock owners come before payment to employees, suppliers, government, and creditors. B) Shareholders elect the board of directors, which ultimately selects the management team that runs the day-to-day operations of the company. C) Stock is a major financing source for public companies. D) Common stock's ownership claim on the assets and cash flow of a company is often referred to as a residual claim.
A
If we assume that a company will be in business forever and that it continues to pay dividends during its existence, then we have an annuity dividend stream. A) TRUE B) FALSE C) Not enough information
B
In the United States, there are three well known secondary stock markets. Which of the below is NOT one of these? A) The New York Stock Exchange (NYSE) B) The Chicago Stock Exchange (CSE) C) The National Association of Securities Dealers and their trading system NASDAQ (National Association of Securities Dealers Automated Quotation System) D) The New York Stock Exchange MKT LLC (formerly the AMEX)
B
Preferred stock ________. A) reflects residual ownership of a company B) represents a preferential claim on dividends C) will be "paid" before the bondholders D) always has a legal and specific claim to a fixed amount (listed as a liability)
B
RC Inc. just issued zero-coupon bonds with a par value of $5,000. If the bond has a maturity of 15 years and a yield to maturity of 12.2%, what is the current price of the bond if it is priced in the conventional manner A) $872.15 ? B) $889.36 C) $931.38 D) $1101.21
B
Stocks are different from bonds because ________. A) stocks, unlike bonds, are major sources of funds B) stocks, unlike bonds, represent residual ownership C) stocks, unlike bonds, give owners legal claims to payments D) bonds, unlike stocks, represent voting ownership
B
Ten years ago Bacon Signs Inc. issued twenty-five-year 8% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the Bacon bonds is now 9%. Given this information, what is the price today for a Bacon Signs bond? A) $1,000 B) $919.39 C) $901.77 D) $1.085.59
B
The Commuter Solutions Company just paid an annual dividend of $1.12. If you expect a constant growth rate of 4% and have a required rate of return of 13%, what is the current stock price according to the constant growth dividend model? A) $12.44 B) $12.94 C) $13.46 D) There is not enough information to answer this question.
B
The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life. A) current yield B) yield to maturity C) prime rate D) coupon rate
B
Which of the following types of bonds, as characterized by a feature, by definition has two coupon payments per year? A) Consol B) Semiannual C) Zero-coupon D) Putable
B
Johnson Construction Inc. has issued 20-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 10%. The current price of the bond is ________. A) $1,000.00 B) $1,196.36 C) $829.73 D) There is not enough information to answer this question.
C
The Bonsai Nursery Corporation has $1,000 par value bonds with a coupon rate of 8% per year making semiannual coupon payments. If there are twelve years remaining prior to maturity and these bonds are selling for $876.40, what is the yield to maturity for these bonds? A) 9.80% B) 8.00% C) 9.77% D) 8.33%
C
The ________ is the expiration date of the bond. A) future value B) yield to maturity C) maturity date D) coupon
C
The ________ is the face value of the bond. A) coupon rate B) maturity date C) par value D) coupon
C
The ________ is the return the bondholder receives on the bond if held to maturity. A) coupon B) coupon rate C) yield to maturity D) par rate
C
The next dividend is $1.80, the growth rate (g) is 6%, and the required rate of return (r) is 12%. What is the stock price, according to the constant growth dividend model? A) $31.80 B) $30.80 C) $30.00 D) $15.00
C
A bond may be issued by ________. A) companies B) state governments C) the federal government D) all of the above
D
MacroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE? A) The bond market currently requires a rate (yield) less than the coupon rate. B) The bonds are selling at a premium to the par value. C) The coupon rate is greater than the yield to maturity. D) All of these are true.
D
Which of the below statements is FALSE? A) Cash dividends, unlike coupons for bonds, typically change from year to year. B) The ending price of the stock at any point in time is not fixed like the par value of the principal. C) Because a stock has no maturity date, the number of its payments are unknown. D) A stock's final sale is fixed in time on its maturity date.
D
Which of the statements below is FALSE? A) For common stock, there is no maturity date and the promised cash flow is not stated on the asset, but is determined at a later date by the board of directors. B) An equity claim is a claim to all the assets and cash flows of a company once debt claimants have been paid. C) Like a bond, common stock entitles the owner to some of the cash flow of a company. D) Bond ownership gives the right to participate in the management of the company.
D
Which of the statements below is FALSE? A) In estimating the current price using the constant growth dividend model, we let g be the growth rate of the dividend stream and r be the rate of return required by the potential buyer of the stock. B) Constant growth means that the percentage increase in the dividend is the same each year. C) Div0 refers to the dividends that have just been paid to the current owner of the stock. D) One unlikely dividend pattern is to raise or grow dividends by a fixed amount at fixed intervals.
D
Which of the statements below is FALSE? A) Selling of shares is the selling of ownership in the company. B) A company is said to go "public" when it opens up its ownership structure to the general public through the sale of common stock. C) Companies choose to sell stock to attract permanent financing through equity ownership of the company. D) Most companies have the resident expertise to complete an initial public offering (IPO) or first public equity issue.
D
