Chapter Practice (Ch. 7 & 8)

Winston Co. has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true?

The stock has negative capital gains

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

liquidity

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?

over-the-counter

The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:

protective covenants

The Fisher effect is defined as the relationship between which of the following variables?

real rates, inflation rates, and nominal rates

The dividend growth model:

requires the growth rate to be less than the required return

Which one of the following transactions occurs in the primary market?

A purchase of newly issued stock from the issuer

Callable bonds generally

have a sinking fund provision

Interest rates that include an inflation premium are referred to as

nominal rates

Which one of the following represents the capital gains yield as used in the dividend growth model?

g

capital gains yield =

(new price-old price) / old price

current yield =

annual coupon / price

Protective covenants are

primarily designed to protect bondholders

You purchase a bond with an invoice price of $1,119. The bond has a coupon rate of 6.25 percent, a face value of $1,000, and there are four months to the next semiannual coupon date. What is the clean price of this bond?

$1,108.58

Three Corners Markets paid an annual dividend of $1.42 a share last month. Today, the company announced that future dividends will be increasing by 1.3 percent annually. If you require a return of 14.6 percent, how much are you willing to pay to purchase one share of this stock today?

$10.82

A7X Corp. just paid a dividend of $1.55 per share. The dividends are expected to grow at 35 percent for the next 9 years and then level off to a growth rate of 5 percent indefinitely. If the required return is 15 percent, what is the price of the stock today?

$102.74

KNJ Companies is preparing to pay annual dividends of $1.48, $1.60, and $1.75 a share over the next three years, respectively. After that, the annual dividend will be $1.90 per share indefinitely. What is this stock worth to you per share if you require a return of 14.6 percent?

$12.32

Sew 'N More just paid an annual dividend of $1.42 a share. The firm plans to pay annual dividends of $1.45, $1.50, and $1.53 over the next 3 years, respectively. After that time, the dividends will be held constant at $1.60 per share. What is this stock worth today at a discount rate of 11.7 percent?

$13.41

E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $14 in perpetuity, beginning 7 years from now. If the market requires a 6 percent return on this investment, how much does a share of preferred stock cost today?

$164.49

A firm has a current EPS of $1.63 and a benchmark PE of 11.7. Earnings are expected to grow 2.6 percent annually. What is the target stock price in one year?

$19.57

Currently, a firm has an EPS of $2.08 and a benchmark PE of 12.7. Earnings are expected to grow by 3.8 percent annually. What is the estimated current stock price?

$26.42

Your local toy store just announced its annual dividend will be $4 dividend next year, $3 the following year, and then a final liquidating dividend of $46 a share in Year 3. At a discount rate of 18 percent, what should one share sell for today?

$33.54

The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent. What is the amount of each interest payment if the face value of the bonds is $1,000?

$42.25

Crystal Glass recently paid $3.60 as an annual dividend. Future dividends are projected at $3.80, $4.10, and $4.25 over the next three years, respectively. Beginning four years from now, the dividend is expected to increase by 3.25 percent annually. What is one share of this stock worth today at a discount rate of 12.5 percent?

$42.92

A Treasury bond is quoted at a price of 101.4621. What is the market price of this bond if the face value is $5,000?

$5,073.11

Roy's Welding common stock sells for $58.49 a share and pays an annual dividend that increases by 1.3 percent annually. The market rate of return on this stock is 12.6 percent. What is the amount of the last dividend paid?

$6.52

AB Co. stock pays a constant annual dividend, sells for $56.07 a share, and has a market rate of return of 12.2 percent. What is the amount of the next annual dividend?

$6.84

The break-even tax rate between a taxable corporation bond yielding 7% and a comparable nontaxable municipal bond yielding 5% can be expressed as

.05 / (1-t*) = .07

The current dividend yield on CJ's common stock is 1.89 percent. The company just paid an annual dividend of $1.56 and announced plans to pay $1.70 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock?

10.86%

Home Products common stock sells for $36.84 a share and has a market rate of return of 15.8 percent. The company just paid an annual dividend of $1.61 per share. What is the dividend growth rate?

10.95%

World Travel has 7%, semiannual, coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72%. How many years until these mature?

12.53 years

Redesigned Computers has a 6.5% coupon bonds outstanding with a current market price of $548. The YTM is 13.2% and the face value is $1,000. Interest is paid annually. How many years until these bonds mature?

17.84 years

A 3.25 percent Treasury bond is quoted at a price of 99.04. The bond pays interest semiannually. What is the current yield?

3.28%

A $1,000 face value bond has a coupon rate of 7 percent, a market price of $989.40, and 10 years left to maturity. Interest is paid semiannually. If the inflation rate is 2.2 percent, what is the yield to maturity when expressed in real terms?

4.84%

New Homes has a bond issue with a coupon rate of 5.5% that matures in 8.5 years. The bonds have a par value of $1,000 and a market price of $1,022. Interest is paid semiannually. What is the yield to maturity?

5.18%

The 7% bonds issued by Modern Kitchens pay interest semiannually, mature in 8 years, and have a $1,000 face value. Currently, the bonds sell for $987. What is the yield to maturity?

7.22%

Do-Well bonds have a face value of $1,000 and are currently quoted at 86.725. The bonds have coupon rate of 6.5 percent. What is the current yield on these bonds?

7.49%

Bonner Metals wants to issue new 20-year bonds. The company currently has 8.5 percent bonds on the market that sell for $994, make semiannual payments, and mature in 7 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par?

8.62%

Which one of the following is the price at which a dealer will sell a bond?

Asked price

Which one of the following best describes NASDAQ?

Computer network of securities dealers.

Jason's Paints just issued 20-year, 7.25%, unsecured bonds at par. These bonds fit the definition of which on the following terms?

Debenture

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?

Default risk

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?

Determining the amount of the dividend to be paid per share

A decrease in which of the following will increase the current value of a stock according to the dividend growth model?

Discount rate

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):

floor broker

A sinking fund is managed by a trustee for which one of the following purposes?

Early bond redemption

Which bond would you generally expect to have the highest yield?

Long-term, taxable junk bond

Which one of the following is an electronic system used by the NYSE for directly transmitting orders to designated market makers?

Pillar system

Ernst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?

Primary

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

Voting by proxy

NYSE designated market makers:

act as dealers

A note is generally defined as:

an unsecured bond with an initial maturity of 10 years or less

Bonds issued by the US government

are considered to be free of default risk

US Treasury bonds:

are quoted as a percentage of par

A bond that is payable to whomever has physical possession of a bond is said to be in

bearer form

An agent who arranges a transaction between a buyer and a seller of equity securities is called a:

broker

A bond that can be paid off early at the issuer's discretion is referred to as

callable

A bond is quoted for $1,011. This price is referred to as the

clean price

The interest rate risk premium is the:

compensation investors demand for accepting interest rate risk

Yield to maturity =

current yield + capital gains yield

An agent who maintains an inventory from which he or she buys and sells securities is called a:

dealer

A member who acts as a dealer in a limited number of securities on the floor of the NYSE is called a:

designated market maker

Rosita paid a total of $1,189, including accrued interest, to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the

dirty price

All else constant, a bond will sell at _____________ when the coupon rate is _______ ________ the yield to maturity

discount; less than

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the

spread

The pure time value of money is known as the

term structure of interest rates

A Treasury yield curve plots Treasury interest rates relative to

time to maturity

The secondary market is best defined as the market:

where outstanding shares of stock are resold