FI 302 Exam 2 Questions

Today Cody Copper Inc. will issue 20-year, zero-coupon bonds that are expected to have a yield to maturity of 4.7%. If you buy one bond today, how much will you owe in taxes after one year if your marginal tax rate is 5%

$0.94 N = 40 I/Y = 4.7 PMT = 0 FV = 1000 *PV = 394.90* N = 38 I/Y = 4.7 PMT = 0 FV = 1000 *PV = 413.68* (413.68 - 394.90) * 0.05 = 0.94

Eight years ago North Central Positronics (NPC) issued thirty year semi-annual coupon bonds with a $1000 face value. Since then, interest rates have generally fallen and the yield to maturity on the NPC bonds is now 3.5%. Give this information, what is the price today for a NPC bond?

$1,534 N = (30 - 8) * 2 = 44 I/Y = 3.5 PMT (1000 * 0.07) / 2 = 35 FV = 1000

Trials Inc. has issued 30-year $1000 face value, 10% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is _______

$100 annual coupon * face value = 1000 * 0.10 = 100

Sirius Cybernetics Corp does not plan to issue a dividend for 10 years . On the 11th year, the company plans to issue a dividend of $2.30 and expects future dividends to grow by 1.9% each year thereafter. If you require a return of 9.2%, what is the maximum price you are willing to pay today for this stock?

$13.07 N = 10 I/Y = 9.2 PMT = 0 FV = 2.30/(0.092 - 0.019) = 31.51

Dunder Mifflen just issued a 20-year annual bond with a par value of $1000 and a coupon rate of 10.6%. The current yield-to-maturity is 3.0%. What is the intrinsic value of the bond and if the bond's current market price is $4416, what should you do?

$2131 so you do not buy the bond N = 20 I/Y = 3 PMT = (0.106 * 1000) = 106 FV = 1000 PV is less than current market price so do not buy

Three years ago, Dinoco issued 30-year, 4.0% semi-annual coupon bonds that currently trade for $832. If each bond features a 7-year deferred call feature with a 4 coupon payment penalty in addition to face value ($1000), what is the yield to call?

10.9% N = 8 PV = -832 PMT = (1000 * 0.04) / 2 = 20 FV = 1000 + (20 * 4) = 1080

Yesterday Tyrell Corp paid its annual dividend of $2.30 per share and today you wish to purchase the stock at today's quoted price of $27.49. You believe that the dividend growth rate is 4.0%. According to the dividend growth model, what is the stock's total expected rate of return?

12.7% r = [div * (1 + g)] / price] + g = [2.30 * (1 + 0.04) / 27.49] + 0.04 (2.30 * 1.04)/ 27.49 + 0.04 (2.392/27.49) + 0.04 = 12.7%

Given an expected market return of 13%, a beta of 1.95 and a risk-free rate of 5%, what is the expected return for this stock

20.60% 0.05 + [ (0.13 - 0.05) * 1.95] = 0.05 + (0.08 * 1.95) = 0.05 + 0.156 = 0.206 = 20.6%

You purchase 100 shares of stock for $7 a share. After holding the stock for 4 years and not receiving any dividends, you sell the stock for $49 per share. What are the holding period and effective annual returns on this investment?

600%, 63% HPR = profit / cost profit = (49 * 100) - (7 * 100) = 4900 - 700 = 4200 HPR = 4200 / 700 = 6 6 * 100 = 600% N = 4, PV = -7, PMT = 0, FV = 49 I/Y = 63%

Last year, the XYZ Corporation had issued 7.0% coupon (semi-annual), 30 year, AA-rated bonds with a face value of $1000 to finance its business expansion. As of today, the market price of XYZ's bond are $900. What is the current yield to maturity and how can the bonds be classified?

7.9%, so these are discounts N = 58 PV = -900 PMT = 35 FV = 1000 discount b/c coupon rate < yield to maturity

You notice that the local electric company yesterday paid a $6.00 annual dividend on its preferred stock. The current price of the stock is $67. Find the promised rate of return for the preferred stock.

9.0% rate of return = dividend / price = 6.00 / 67 = 9%

Stocks differ from bonds because: A.) bond cash flows are known while stock cash flows are uncertain B.) the ending par value of a bond is known at purchase while the ending value of a shore of stock is unknown at purchase C.) firms pay bond cash flows prior to paying taxes while stock cash flows are after tax D.) all of the above

D.) all of the above

If the equation E(ri) = rf + [E(rm) - rf]Xi is the linear equation for the security market line, what portion represents the market risk premium for a stock that does not have a beta of 1.0?

[E(rm) - rf]

Which of the following is NOT a definition of beta? A.) a measure of nondiversifiable risk B.) a statistical measure of an individual asset's or portfolio's co-movement with the returns of the market C.) a measure of risk that can be avoided D. a measure of systematic risk

a measure of risk that can be avoided

Beta is ________ A.) the appropriate measure of risk for a well-diversified portfolio B.) a measure of systematic risk C.) a measure of nondiversifiable risk D. ) all of the above

all of the above

Bonds are different from stocks because ________

bonds promise fixed payments for the length of their maturity

Unsystematic risk

can be diversified away

__________ means that the percentage increase in the dividend is the same each year

constant growth

The ____ is the regular interest payment of the bond

coupon

the ______ is the interest rate printed on the bond

coupon rate

When the ___ is less than the yield to maturity, the bond sells at a/the ___ the par value.

coupon rate; discount to

The terms ________ and ________ mean the same thing

diversifiable risk; unsystematic risk

The practice of not putting all of your eggs in one basket is an illustration of __________.

diversification

The holder of preferred stock is entitled to a constant dividend ______

every period

________ refers to how quickly information is reflected in the available prices for trading

informational efficiency

Which of the statements below is TRUE? A.) investors want to maximize return and minimize risk B.) investors want to maximize return and minimize risk C.) investors want to minimize return and maximize risk D.) investors want to minimize return and minimize risk

investors want to maximize return and minimize risk

a bond is a __________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future

long-term debt

A beta of 1.0 is the beta of the ________, while a beta of 0.0 is the measure for a ____________

market; risk-free security

the _________ is the expiration date of the bond

maturity date

________ has to do with the speed and accuracy of processing a buy or sell order at the best available price

operational effiency

The value of a financial asset is the ______

present value of all the future ash flows that will be received

Zero-Coupon bonds are _______

priced at a deep discount

You can think of the ______ as the "used stock" market because these shares have been owned or "used" previously.

secondary market

In _________, current prices already reflect the price history and volume of the stock as well as all available public information

semi-strong efficient markets

"junk" bonds are a street name for _______ grade bonds

speculative

___________ is risk that cannot be diversified away

systematic risk

Kathleen has two investment opportunities. She can invest in the sunglasses company or the umbrella company. She estimates there is a 75% chance it will remain sunny and sunglasses co. stock will rise 75% and umbrella co. stock will stay flat. She also estimates there is a 25% chance it will rain and sunglasses co. stock will remain flat and Umbrella Co. stock will rise by 50% If she diversifies her investment by putting 50% of her money in each company. what is the expected return and standard deviation of her portfolio?

the expected return is 34.38% and the standard deviation is 5.41% Sunglass Er = (.75)(.75) = 0.5625 Umbrella Er = (.25)(.50) = 0.125 Portfolio Er = 0.50(0.5625) + 0.50(0.125) = 0.3438 SD = .75(.5(.75) - .3438)^2 + .25(.5(.5) - .3438)^2 = sqrt(0.00292961) = 0.0541 = 5.41%

Which of the following investments is considered to be default risk-free?

treasury bills

In _______, current prices reflect the price history and trading volume of the stock. It is of no use to chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market

weak-form efficient markets

The _____ is the yield an individual would receive if the individual purchased the bond toay and held the bond to the end of its life

yield to maturity

The appropriate rate to use to discount the cash flows of a bond in order to determine the current price is the ___________

yield to maturity

the ______ is a market derived interest rate used to discount the future cash flows of the bond

yield to maturity