fina 320 quiz 3 review
The price and yield to maturity on a bond have:
An inverse relation
The highest S&P bond rating category considered to be of junk quality grade is:
BB+
Which of the following bonds would be considered to be of investment grade?
Baa-rated bond
A year ago a company issued a bond with a face value of $1,000 with an 8% coupon. Now the prevailing market yield is 10%. What happens to the bond?
Bond is traded at a market price of less than $1000
The restrictive covenants of a bond indenture are intended to protect the interest of:
Bondholders
You are attempting to value a stock in a mature industry that is steadily shrinking in size. Of the stock valuation models studied, the most appropriate is the
Constant growth model
An illustrated using the dividing growth model, the tot return on a share of common stock is comprised of a ______
Dividend yield and a capital gains yield.
The current yield of a bond can be calculated by:
Dividing the annual coupon payments by the price
Which of the following statements about the constant growth dividend model is FALSE?
For the constant growth dividend model to work, the growth rate must exceed the required return on equity
Investors who own bonds with lower credit ratings should expect:
Higher default possibilities
if dividends on a common stock are expected to grow at a constant rate forever, and if you are told the most recent dividend paid, the dividend growth rate, and the appropriate discount rate today, you can calculate ________________ I. the price of the stock today II. the dividend that is expected to be paid ten years from now III. the expected stock price 5 years from now
I, II, and III
which of the following statements is true? I. the dividend growth model only holds if, at some point in time, the dividend growth rate exceeds the stocks required return II. an increase in the dividend growth rate will increase a stocks market value, all else the same III. an increase in required return on stock will increase its market value, all else the same
II only
Which of the following statements is true?
If a stock's dividend is expected to grow at a constant rate, then the dividend growth rate (g) must be positive
The bond has a larger premium today than it did five weeks ago.
Interest rates must be lower now than they were five weeks ago.
Which of the following statements about IPO is false?
Investors trade a company stocks among themselves during an IPO
Consider a 10%, 10-year bond sold to yield 8%. One year passes and interest rates remained unchanged at 8%. What will have happened to the bond's price during this period? Assume the bond pays coupons semi-annually.
It will have decreased
which of the following is correct for a bond currently selling at a premium?
Its current yield is lower than its coupon rate
Which of the following statements is false about junk bonds?
Junk bonds must be bad investment and should be avoided
Which of the following is a major credit rating agency in the US?
Moody's
stocks A and B have the same required rate of return in the same expected year and dividend. Stock A's dividend is expected to grow at a constant rate of 10% per year, while stock B's dividend is expected to grow at a constant rate of 5% per year. Which of the following statements is most correct?meta
None of the statements above is correct
Most U.S. corporate and government bonds choose to make _____ coupon payments.
Semiannual
The bonds indenture least likely specifies the
Source of funds for repayment
Which of the following statements about the call provision of a bond is most accurate?
Stipulates whether and under what circumstances the issuer can redeem or repay the bond prior to maturity
______Stocks are different from bonds because
Stock, unlike bonds,represent ownership
The current yield on a bond is equal to:
The annual coupon payment divided by the current market price
A bond sold five weeks ago for $1100. The bond is worth $1150 in today's market. Assuming no changes in risk, which of the following is false?
The coupon payment of the bond must have decreased.
Which of the following statements regarding bond pricing is true?
The lower the yield to maturity, the more valuable the bond is
which of the following statements regarding bond pricing is true?
The lower the yield to maturity, the more valuable the bond is
Value of a common stock does not directly depend on _____
The maturity date of common stock
A bond that makes no coupon payments (and thus is initially priced at a deep discount to par value) is called a ________ bond.
Zero Coupon
The coupon rate of a bond equals:
a percentage of its face value
a bond is trading at a premium if its:
all of the above
The restrictive covenants of a bond indenture are intended to protect the interest of ______
bondholers
Which of the following is likely to be correct for a CCC-rated bond, compared to a BBB-rated bond? (Holding everything else equal, i.e, assuming the two bonds have the same maturity, coupon rate and par value)
both b and c
you believe that the required return on Dynegy stock is 16% and that the expected dividend growth rate is 12 %, which is expected to remain constant for the foreseeable future. is the stock currently overvalued, undervalued, or fairly priced?
cannot tell without more information
preferred stocks are different from common stocks in that
common stockholders have voting rights or preferred stockholders do not
you are attempting to value a stock in a mature industry that is steadily shrinking in size. of the stock valuation models studied, the most appropriate is the ____________
constant growth model
the _________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator
current yield
as illustrated using the dividend growth model, the total return on a share of common stock is comprised of a __________
dividend yield and a capital gains yield
common stock can be valued using the perpetuity valuation formula if the:
dividends are not expected to grow
dividend models suggest that ___________ determine the value of a financial asset to which the owner is entitled while holding the asset
future cash flows
For a discount bond, the current yield is _________ the yield to maturity, and the coupon rate is _____________ the yield to maturity.
greater than, less than
Which of the following statements is NOT true?
if a stock has a required rate of return R=12%, and its dividend grows at a constant rate of 5%, this implies that the stock's dividend yield is 5%
a bond sold five weeks ago for $1,100. The bond is worth $1,150 in today's market. Assuming no changes in risk, which of the following is true?
interest rates must be lower now than they were five weeks ago
which of the following statements regards dividend yields is true?
it is analogous to the current yield for a bond
Dividends that are expected to be paid far into the future have:
lesser impact on current stock price due to discounting
The constant-growth dividend discount model would typically be most appropriate in valuing a stock of a:
moderate growth; "mature" company
given no change in required returns, preferred stock prices will:
none of the above
a newly issued- 15-year face value 6.75% semi-annual coupon bond is priced at 1075. which of the following choices describes the bond and the relationship of the bonds market yield to the coupon
premium bond, required market yield is less than 6.75%
A bond with an annual coupon of $100 originally sold at par for $1000. The current market interest rate on this bond is now 9%. Assuming no change in risk, this bond will now sell at a _________ and present the seller (who bought the bond at initial issuance) of the bond today with a capital __________
premium, gain
The ______ is the market of first sale in which companies first sell their authorized shares to the public.
primary market
restrictions on asset sales and borrowing in bond indenture are often known as?
protective covenants
most U.S corporate and government bonds choose to make _______ coupon payments
semi-annual
A bond's indenture least likely specifies the
source of funds for repayment
stocks are different from bonds because ___________
stocks, unlike bonds, represent residual ownership
a bond sold five weeks ago for $1,100. The bond is worth $1,150 in today's market. Assuming no changes in risk, which of the following is false?
the coupon payment of the bond must have decreased
Periodic receipts of interest by bondholders are known as:
the coupon rates
As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that
the default risk decreases and the required rate of return decreases.
as the rating of a bond increases (for example, from A, to AA, to AAA), it generally mean that
the default risk decreases and the required rate of return decreases.
the value of common stock will likely decrease if:
the discount rate inscreases
which of the following statements about preferred stock is false?
the dividends on preferred stocks could be increased or decreased
what happens when a bond's expected cash flows are discounted at a rate lower than the bonds coupon rate?
the price of the bond is higher than the par value
the discount rate that makes the present value of a bonds payments equal to its price is termed the:
yield to maturity
the rate of return required by investors in the market for owning a bond is called the:
yield to maturity
a bond that makes no coupon payments (and thus is initially priced at a deep discount to par value) is called a. __________ bond
zero coupon