FIN 301 Quiz 5

Value a 15-yr semi-annual, non-callable bond that pays coupons of 8% assuming market interest rates are 8%. A. $1,200 B. $1,182 C. $1,000 D. $752 E. $1,092

C. $1,000

Assume that a 10-year semi-annual, 9% bond is callable after 5 years at 105% of par value and the discount rate in today's market is 5%. Using the price-to-worst method, what is the value of this bond? A. $1,000 B. $1,149 C. $1,214 D. $1,223 E. $1,010

C. $1,214

Which of the following is definitely true when interest rates are lower than a bond's coupon rate? A. Bond will sell at a premium B. Bond will see at a discount C. Bond will sell at par D. Coupon rate will be decreased to current interest rate E. Principal to be repaid will decrease

A. Bond will sell at a premium

Which of the below is/are considered the risk(s) that the bond issuer will not pay interest or principal? A. Default risk B. Reinvestment risk C. Interest rate risk D. Prepayment risk E. Such risk doesn't exist

A. Default risk

Which of the following is NOT the amount that is originally borrowed or the amount that is repaid when the bond mature is due? A. Indenture B. Par value C. Principal amount D. Maturity value E. Face value

A. Indenture

Which of the following is TRUE regarding fixed rate discount bonds? A. The bond's coupon rate is lower than the yield that it offers B. The bond's coupon rate is higher than the yield that it offers C. The bond's coupon rate is equal to the yield that it offers D. The market value of the bond is higher than par E. The market value of the bond is equal to its par value

A. The bond's coupon rate is lower than the yield that it offers

Which of the following is true about the dividend policy of a company? A. The dividend policy of a company should affect the future value of a stock but not the current value B. Companies with low excess return periods typically pay lower dividends C. The higher the dividend paid, the higher the current value of the stock D. If the dividend is expected to grow, it will reduce the expected future value of the stock because the company is not reinvesting in new projects E. If interest rates increase, the dividend policy of a company will always become more conservative

A. The dividend policy of a company should affect the future value of a stock but not the current value

According to _________________, the yield curve represents a series of expected future short-term interest rates. A. pure expectations hypothesis B. the liquidity preference theory C. the market segmentation hypothesis D. the random walk theory E. the efficient markets theory

A. pure expectations hypothesis

Value a 20-yr semi-annual, non-callable bond that pays coupons of 6% assuming market interest rates are 6%. A. $989 B. $1,000 C. $355 D. $1,455 E. $802

B. $1,000

Assume that a 15-year semi-annual, 8% bond is callable after 10 years at 105% of par value and the discount rate in today's market is 6%. Using the price-to-worst method, what is the value of this bond? A. $1,209 B. $1,176 C. $1,314 D. $1,000 E. $1,089

B. $1,176

Calculate value of a perpetuity with even annual cash flows of $20,000 with 8% discount rate. A. $210,000 B. $250,000 C. $211,664 D. $108,000 E. $233,280

B. $250,000

If you bought a stock for $250 and sold it for $300 after a year, you also received a dividend of $20 in that year. What was the RETURN you received over the year? A. 12.4% B. 28.0% C. 19.6% D. 14.0% E. 13.6%

B. 28.0%

Which of the following is definitely true when interest rates are higher than a bond's coupon rate? A. Bond will sell at a premium B. Bond will sell at a discount C. Bond will sell at par D. Coupon rate will be increased to current interest rate E. Principal to be repaid will increase

B. Bond will sell at a discount

An upward sloping yield curve means that: A. Investors require lower returns for longer maturity Treasuries B. Investors require higher returns for longer maturity Treasuries C. Investors require higher returns for shorter maturity Treasuries D. Investors require the same return for both short and long-term Treasuries E. The yield curve is non related to required return on Treasuries

B. Investors require higher returns for longer maturity Treasuries

Which of the following is true about technical analysis? A. It generally involves holding stock for a long period of time B. It involves charting historic stock price movements and trading volumes C. It is possible to beat the market with technical analysis if strong form efficiency holds true D. Its underlying assumption is that a company's stock has a true or intrinsic value to which its price is anchored E. It involves evaluating overall economic, industry, and company data to estimate a stock's value

B. It involves charting historic stock price movements and trading volumes

The amount that is originally borrowed or the amount that is repaid when the bond mature is due is known as ___________. A. Indenture B. Par value C. Annual amount D. Interest E. Semi-annual amount

B. Par value

Which of the following is the risk that income earned and reinvested from a bond's coupon payments will earn a different rate of return? A. Default risk B. Reinvestment risk C. Prepayment risk D. Interest rate risk E. Systematic risk

B. Reinvestment risk

Which of the following is an example of fundamental analysis? A. Analyzing historical stock price movements B. Studying financial statements C. Analyzing the daily trading volume of the stock D. Analyzing the price and volume relationships E. Analyzing the stock price momentum

B. Studying financial statements

Which of the following is TRUE regarding fixed rate premium bonds? A. The bond's coupon rate is lower than the yield that it offers B. The bond's coupon rate is higher than the yield that it offers C. The bond's coupon rate is equal to the yield that it offers D. The market value of the bond is less than its par value E. The market value of the bond is equal to its par value

B. The bond's coupon rate is higher than the yield that it offers

What is true about the excess return period? A. It refers to the period in which a firm is able to earn returns on new investments that are lower than its cost of capital due to competitive advantage of the firm over others B. The higher the competition in the industry the lower the excess return period C. The excess return period is used to value a stock with technical analysis but not fundamental analysis D. The excess return period does not have a major impact on the value of a stock E. A company that sells commodities will likely have an excess return period of over 7 years

B. The higher the competition in the industry the lower the excess turn period

Under which scenario is an issuer MOST likely to call their bonds? A. Bond prices go down B. The issuer's credit rating improves C. The issuer's credit rating deteriorates D. Interest rates remain the same E. The company faces a liquidity crisis

B. The issuer's credit rating improves

Which of the following is true about bonds? A. The bond rating being changed from BBB+ to B would result in a lower required yield B. The primary advantage to municipal bonds is that interest income received is not taxed by the federal government C. Interest from mortgage bonds are not taxed by the Federal Government D. Spread to treasuries measures the difference between the coupon rate paid by a bond and the coupon rate paid by risk free security with the comparable maturity E. Only bonds issued in the primary market are subject to prepayment risk

B. The primary advantage to municipal bonds is that interest income received is not taxed by the federal government

Which of the following is true of bonds? A. Bonds are an equity instrument B. Bonds repay the principal to the investor in semi-annual payments only C. Bonds have default risk D. Bonds are only issued by governments and municipalities E. Bonds issue the total interest payment at their maturity

C. Bonds have default risk

Which is true about callable bonds when compared to similar non-callable bonds? A. Callable bonds generally have higher credit ratings than similar non-callable bonds B. Callable bonds, generally have lower yields C. Callable bonds usually have higher yields D. Callable bonds and non-callable bonds generally have the same yield E. Callable bonds are subject to less prepayment risk

C. Callable bonds usually have higher yields

A downward sloping yield curve means that: A. Investors require lower returns for shorter maturity Treasuries B. Investors require higher returns for longer maturity C. Investors expect interest rates to decline D. Investors require the same return for both short and long-term Treasuries E. The yield curve is not related to required return on Treasuries

C. Investors expect interest rates to decline

According to the Random Walk Hypothesis, in efficient markets, ________. A. There are predictable stock trends in efficient markets based on past performance B. Technical Analysis is a valid method to determine future stock prices C. Share prices react immediately to news and share price changes are random D. Past historical data can be used to predict future share prices E. Beta is a risk that can be eliminated through diversification

C. Share prices react immediately to news and share price changes are random

Which of the following is true about the dividend policy of a company? A. The dividend policy of a company should not affect the future value of a stock B. The dividend policy of a company must change every year C. The dividend policy should not affect the current value of a stock D. A conservative dividend policy always gives investors dividends and higher stock price E. Companies investing heavily in new projects typically pay a higher dividened

C. The dividend policy should not affect the current value of a stock

Under which scenario is an issuer LEAST likely to call their bonds? A. Bond prices go up B. The issuer's credit rating improves C. The issuer's credit rating deteriorates D. Interest rates remain the same E. The company's cash reserve increases

C. The issuers credit rating deteriorates

Which of the following is NOT true concerning the interest rate risk while investing in fixed-coupon debt obligations? A. The lower the coupon on a bond, the higher the volatility of bond prices, the greater the interest rate risk B. Interest rate risk is the most difficult risk to assess, among the four types of risks C. The longer the maturity of a bond, the lower the volatility of bond prices, the smaller the risk D. Interest rate risk is the risk that a change in the market interest rates will affect the value of the bond E. Fluctuations in the market levels of interest rates would affect the price of a bond

C. The longer the maturity of a bond, the lower the volatility of bond prices, the smaller the risk

Given the following information, calculate the present value of the following bond that pays semi-annual coupons. Par value: $1,000. Coupon Rate: 9%. Interest Rate: 13%. Maturity: 5 years. A. $678 B. $1,000 C. $1,346 D. $856 E. $806

D. $856

Which of the following scenario's is most likely to result in a bond being called? A. 20 year bond with 2 remaining 8% coupon payments in a 7% interest rate environment B. 10 year bond with 18 remaining 8% coupon payments in a 8% interest rate environment C. 10 year bond with 18 remaining 8% coupon payments in a 10% interest rate environment D. 10 year bond with 18 remaining 8% coupon payments is a 6% interest rate environment E. 20 year bond with 2 remaining 8% coupon payments in a 9% interest rate environment

D. 10 year bond with 18 remaining 8% coupon payments in a 6% interest rate environment

Which of the following scenario's is most likely to result in a bond being called? A. 10 year bond with 2 remaining 8% coupon payments in a 7% interest rate environment B. 20 year bond with 30 remaining 8% coupon payments in a 8% interest rate environment C. 20 year bond with 30 remaining 8% coupon payments in a 10% interest rate environment D. 20-year bond with 30 remaining 8% coupon payments in a 6% interest rate environment E. 10 year bond with 2 remaining 8% coupon payments in a 9% interest rate environment

D. 20 year bond with 30 remaining 8% coupon payments in a 6% interest rate environment

Which of the following is a risk associated with bonds? A. Low Principal Risk B. Zero coupon Risk C. Ratings Upgrade Risk D. Default Risk E. Stock Market Risk

D. Default Risk

Which of the following is the risk that changes in market rates will affect the value of a bond? A. Default risk B. Reinvestment risk C. Prepayment risk D. Interest rate risk E. Systematic risk

D. Interest rate risk

According to the Random Walk Hypothesis, in efficient markets, ________. A. Stock prices are not random B. Stock prices can be predicted solely on the basis of past movements C. There is a predictable trend in stock prices D. Stock prices are random and cannot be predicted solely on the basis of past movements E. Stock prices are not random and they can be predicted by past movements

D. Stock prices are random and cannot be predicted solely on the basis of past movements

Calculate value of a perpetuity with even annual cash flows of $25,000 with 5% discount rate. A. $416,381 B. $418,060 C. $172,000 D. $361,200 E. $500,000

E. $500,000

If you bought a stock for $75 and sold it for $105 after a year, you also received a dividend of $10 in that year. What was the RETURN you received over the year? A. -11.8% B. -15.0% C. 45.0% D. 10% E. 53.3%

E. 53.3%

Which of the following is true concerning the duration of a bond? A. Duration is the same as the time until the bond is callable by the issuer B. The higher the coupon payment on a bond, the longer the duration C. Duration is a measure of the price volatility of an asset given a change in the coupon rate D. All bonds with the same coupon rate will have the same duration E. A longer duration signifies a higher level of interest rate risk

E. A longer duration signifies a higher level of interest rate risk

Which of the following is true of bonds? A. Bonds are an equity investment B. Bonds repay the principal to the investor in semi-annual payments only C. Bonds don't have default risk D. Bonds are only issued by governments and municipalities E. Bonds pay principal at maturity

E. Bonds pay principal at maturity

Which of the following is TRUE concerning the interest rate risk while investing in fixed-coupon debt obligations? A. The higher the coupon on a bond, the higher the volatility of bond prices, the greater the interest rate risk B. Interest rate risk is the easiest risk to assess, among the four types of risks C. The longer the maturity of a bond, the lower the volatility of bond prices, the smaller the risk D. Interest rate risk is the risk that a change in market interest rates will affect the interest payments to the bond holders E. Fluctuations in market levels of interest rates would affect the price of a bond

E. Fluctuations in market levels of interest rates would affect the price a bond

Which of the following is NOT a risk associated with bonds? A. Default Risk B. Reinvestment Risk C. Prepayment Risk D. Interest Rate Risk E. Ratings Upgrade Risk

E. Ratings Upgrade Risk

Which of the following is true about bonds? A. The bond rating being changed from BBB+ to A would result in a higher required yield B. The primary advantage to municipal bonds is lower reinvestment risk C. Callable bonds require higher yields than non-callable bonds because of higher default risk D. Treasury securities are priced once per month while other bond prices fluctuate daily E. The issuer retains interest rate risk on floating rate bonds

E. The issuer retains interest rate risk on floating rate bonds

Which of the following is true concerning the interest rate risk of bonds? A. The higher the coupon of a bond, the higher the interest rate risk of that bond B. The shorter the maturity of a bond, the higher the interest rate risk of that bond C. The longer the maturity of a bond, the lower the interest rate risk of that bond D. The length of maturity of a bond does not affect interest rate risk E. The lower the coupon of a bond, the higher the interest rate risk of that bond

E. The lower the coupon of a bond, the higher the interest rate risk of that bond

Which of the below is NOT correct about risks of fixed-coupon debt obligations? A. Default risk is considered a type of risk involved when investing in fixed-coupon debt obligations B. Reinvestment risk is considered a type of risk involved when investing in fixed-coupon debt obligations C. Interest rate risk is considered a type of risk involved when investing in fixed-coupon debt obligations D. Prepayment risk is considered a type of risk involved when investing in fixed-coupon debt obligations E. There is no risk involved when investing in fixed-coupon debt obligations

E. There is no risk involved when investing in fixed-coupon debt obligatons

A callable bond: A. would usually have a lower yield than a similar non-callable bond B. is attractive to the buyer because the immediate receipt of principal and premium usually produces a higher return C. is more apt to be called when interest rates are high because the interest savings will be greater D. generally has a higher credit rating than a similar non-callable bond E. is attractive to the issuer because it allows the issuer to prepay outstanding debt if new debt can be issued at lower rates

E. is attractive to the issuer because it allows the issuer to prepay outstanding debt if new debt can be issued at lower rates