FINA 4310 Exam 3

Retention Ratio (Plowback Ratio)

addition to retained earnings divided by net income

Yield to Maturity

the rate of return a bondholder will receive if the bond is held to maturity

Yield to Call

the rate of return earned on a bond when it is called before its maturity date

Bond Yield

the return an investor would receive on a bond if it were purchased and held to maturity

Liquidity Preference Theory

the theory that the shape of the term structure of interest rates is determined by an investor's additional required interest rate in compensation for additional risks

Duration of a Portfolio

the weighted average of bond durations weighted according to relative market value.

Residual Income Valuation

-Breaks intrinsic value into 1. Current book value of equity 2. Present value of expected future residual income -Current book value of equity + discounted residual income -Must make assumptions about the pattern of residual income growth -Value is recognized earlier in the RI approach than any other -Uncertainty of expected terminal value is greatest -Valuation is less sensitive to terminal value estimates

You are analyzing a callable bond that currently trades at a premium. You calculated that its yield to maturity is equal to 8%. Which of the following would be MOST likely to be the bond's yield to call? A. 7% B. 8% C. 9% D. None of these could make sense

A. 7%

Effective Convexity

A curve convexity statistic that measures the secondary effect of a change in a benchmark yield curve on a bond's price.

You are attempting to implement a net worth immunization strategy. You have outstanding liabilities with a duration of 12. You are able to invest in a zero coupon bond with a maturity of 4 years and a coupon-paying bond with a duration of 22. What would your portfolio weight in the coupon-paying bond be? A. 44.44% B. 46.24% C. 48.89% D. 50% E. A different value

A. 44.44%

You are attempting to value a firm. Unfortunately, its dividends are far too large relative to its net income for you to believe a dividend discount model. In addition, the firm is currently cash flow negative. You estimate that the firm's return on equity will be 20%, given a book value of equity of $15 per share. You expect the firm to grow at a 5% rate going forward, but you project that investors (who are used to the huge dividends) will require a 25% return on the stock. Given this, what would you calculate the value of a share in the firm to be? A. $11.25 B. $13.75 C. $16.25 D. $18.75 E. A different value

A. $11.25

You are considering an investment in DB Industries. The firm is currently growing at a 30% rate. You see that the firm's dividend this year was $1.50 per share. You feel that the firm will only be able to maintain this growth for 2 years from today. At that time, the firm's growth will slow to a long term rate of 10%. If you estimate a 20% market capitalization rate for the firm, what is the value of its stock? A. $22.50 B. $23.68 C. $24.91 D. $26.33 E. A different value

A. $22.50

You have calculated a price target for BA Cal Industries. You believe that the firm's shares will be worth $88.34 one year from now. At the same time, you project that the firm will pay a dividend of $2.50 per share. If you calculate a required return of 20% for the firm, what should be the value of a share? A. $75.70 B. $75.90 C. $76.15 D. $76.40 E. A different value

A. $75.70

You are considering investing in a bond. The bond currently has 18 years to maturity. It has a 12% coupon rate and pays semi-annual coupons. If the bond has a yield to maturity of 14%, what is the price of this bond? A. $869.65; choose if between [$864.65,$874.65] B. $932.87; choose if between [$927.87,$937.87] C. $1,000; choose if between [$995,$1,005] D. $1,093.72; choose if between [$1,088.72,$1,098.72] E. A different value

A. $869.65; choose if between [$864.65,$874.65]

A 3 year coupon-paying bond has a coupon rate of 8% and pays annual coupons. At the same time, a 1 year zero coupon bond trades for $909.09, a 2 year zero coupon bond trades for $811.62, and a 3 year zero coupon bond trades for $711.78. What is the cost to replicate the coupon-paying bond using zero coupon bonds? A. $906.38 B. $909.59 C. $912.87 D. $916.26 E. A different value

A. $906.38

You are considering an investment in a callable bond. The bond currently trades at a price of $1,191.43. It has 20 years to maturity, and it pays annual coupons at a 10% rate. It is callable beginning 5 years from today at a price of $1,050. What is the yield to call on this bond? A. 6.3% B. 8.14% C. 12.6% D. 16.28% E. A different value

A. 6.3%

You are attempting to form an arbitrage strategy. You can purchase a coupon-paying bond with 2 years to maturity for $990. The bond's yield to maturity is currently 8%, while it pays annual coupons at an 11% rate. Alternatively, you could purchase a zero coupon bond with one year to maturity that has a yield to maturity of 10%, and a zero coupon bond with two years to maturity currently sells for $800. What would it cost to purchase the set of zero coupon bonds to replicate the coupon-paying bond? A. $988 B. $989 C. $990 D. $991 E. A different value

A. $988

You are measuring the interest rate risk of a junk bond. The bond has 1 year to maturity. It has a coupon rate of 42%, and it pays semi-annual coupons. If the yield to maturity on this bond is 20%, what is the duration of the bond? A. 0.92 years B. 0.96 years C. 1.84 years D. 1.92 years E. A different value

A. 0.92 years

You are concerned about the interest rate risk of your portfolio. In particular, you have a semi-annual coupon-paying bond that has 2 years to maturity you are curious about. The bond has a coupon rate of 10%, and it currently trades at par. What is the effective maturity of this bond? A. 1.86 years B. 1.93 years C. 3.63 years D. 3.71 years E. A different value

A. 1.86 years

You paid $998.34 for a bond 2 years ago. The bond paid annual interest payments with a coupon rate of 10%, while you now know that interest rates over this period were 11% and 8%, respectively. What would be your realized compound yield over this time period? A. 10% B. 10.1% C. 10.35% D. 10.5% E. A different value

A. 10%

You are considering an investment in a perpetual bond. The bond carries a par value of $1,000, with a 5% annual coupon payment. You estimate that the applicable interest rate for the bond would be 10%. What is the effective maturity of this security? A. 11 years; choose if between [10.8,11.2] B. 14 years; choose if between [13.8,14.2] C. 18 years; choose if between [17.8,18.2] D. 21 years; choose if between [20.8,21.2] E. A different value

A. 11 years; choose if between [10.8,11.2]

You see that you could purchase a 3 year zero coupon bond for $820 or a 6 year zero coupon bond for $690. You also know that the yield on a 9 year zero coupon bond is currently 10%. What is the 6 year forward rate starting 3 years from today? A. 11.62% B. 12.67% C. 13.25% D. 14.1% E. A different value

A. 11.62%

You are evaluating an investment in Smoke Productions. The firm recently paid out $2 million in dividends on $10 million in earnings. You expect this payout ratio to continue going forward. You believe that you need to earn at least 25% on the firm's stock for it to be worthwhile for you to invest in the company, and you think that the firm will grow at a 15% rate going forward. What do you estimate the forward price-to-earnings ratio for the company to be? A. 2 B. 4 C. 6 D. 8 E. A different value

A. 2

You are interested in the interest rate risk of a bond. The bond has 3 years to maturity. It currently holds a 9% yield to maturity, and it has a 10% coupon rate with semi-annual coupon payments. What is the effective maturity of this bond? A. 2.67 years B. 2.88 years C. 3 years D. 5.34 years E. A different value

A. 2.67 years

You are analyzing a bond. It has 4 years to maturity and pays annual coupons. The bond pays an 11% coupon rate, and its yield to maturity is 12.5%. What is the effective maturity of the bond? A. 3.43 years B. 3.57 years C. 3.71 years D. 3.84 years E. A different value

A. 3.43 years

You are analyzing the risk of a bond that matures in 4 years. The bond currently has a yield to maturity of 8%. If it offers a 10% coupon rate via annual coupon payments, what is the effective maturity of the bond? A. 3.5 years B. 3.62 years C. 3.74 years D. 4 years E. A different value

A. 3.5 years

You are trying to value Daniels Storm Products. You know that the firm typically pays out 30% of its earnings as dividends each year, using the remainder to grow at approximately 8% per year. You believe that the appropriate return on the firm's stock would be 16%. What would be the appropriate forward price-to-earnings ratio for this stock? A. 3.75 B. 4.05 C. 4.67 D. 5.1 E. A different value

A. 3.75

You are investing a bond portfolio with the goal of retiring in 20 years. You would like to immunize this portfolio against interest rates over that time period. Suppose that this portfolio is fully invested into the following two securities: (i) A zero coupon bond with 10 years to maturity and a 10% yield to maturity (ii) A coupon-paying bond with a duration of 25 years What percentage of your portfolio would you place in the zero coupon bond? A. 33.33%; choose if between [28.33%,38.33%] B. 50%; choose if between [45%,55%] C. 66.67%; choose if between [61.67%,71.67%] D. 100%; choose if between [95%,105%] E. A different value

A. 33.33%; choose if between [28.33%,38.33%]

You are interested in a putable bond. The bond is putable at any time for a price of $1,000. Currently, it has 8 years left to maturity. It pays annual coupons at a 10% rate. The bond currently trades at a price of $1,114.93, implying a yield of 8%. You fear volatility, believing that yields may change by up to 3% in either direction. Given these beliefs, what is the effective duration of this bond? A. 4.83 years; choose if between [4.73,4.93] B. 5.17 years; choose if between [5.07,5.27] C. 5.67 years; choose if between [5.57,5.77] D. 5.99 years; choose if between [5.89,6.09] E. A different value

A. 4.83 years; choose if between [4.73,4.93]

You are interested in finding out what your return has been on a bond you purchased two years ago. Over that time, you know that the one year interest rates were actually 8% and 3%, respectively. The bond paid 5% interest via annual coupon payments. You initially paid $940 for the bond, and it just matured. What is your realized compound yield over this time? A. 8.25% B. 8.5% C. 8.75% D. 9% E. A different value

A. 8.25%

You are analyzing a bond in your portfolio. The bond has 25 years to maturity, and it currently trades at $1,130. The bond's coupon rate is 10%, and it pays semi-annual coupons. What is the current yield on the bond? A. 8.85% B. 9.44% C. 9.67% D. 10% E. A different value

A. 8.85%

You are attempting to bootstrap the yield curve. You see that you can currently purchase a 1 year zero coupon bond for $909.09, while a 2 year coupon-paying bond sells for $979.75. The coupon-paying bond pays annual coupon payments of 8%. Given this information, what is the 2 year spot rate? A. 9.12% B. 9.25% C. 9.38% D. 9.56% E. A different value

A. 9.12%

You are considering an investment in a perpetual bond. The bond would offer annual 10% interest payments on a par value of $1,000 forever. You figure that the market would price this security with a 12% yield. What would be the effective maturity of this bond? A. 9.33 years B. 9.5 years C. 11 years D. Forever E. A different value

A. 9.33 years

You originally invested in a bond 3 years ago, and it just matured. The bond made annual coupon coupon payments of 8% each year, which you reinvested at current market rates. Over the time you held the bond, interest rates were 12%, 10%, and 6%, respectively. If you originally paid $950 for the bond, what is your realized compound yield over this period? A. 9.81%, choose if between [9.61%,10.01%] B. 10.53%, choose if between [10.33%,10.73%] C. 11.28%, choose if between [11.08%,11.48%] D. 11.94%, choose if between [11.74%,12.14%] E. A different value

A. 9.81%, choose if between [9.61%,10.01%]

All versions of the dividend discount model rely on _________________. A. A constant market capitalization rate B. Dividends not growing C. Dividends growing at a constant rate D. Dividends after a certain date growing at a constant rate E. None of these are true for all versions

A. A constant market capitalization rate

For a callable bond that currently trades at _______________, the ________________ is the worst case return we could receive, while the _______________ is the best case return we could receive. A. A premium; Yield to Call; Yield to Maturity B. A premium; Yield to Maturity; Yield to Call C. Par; Yield to Call; Yield to Maturity D. Par; Yield to Maturity; Yield to Call E. None of these

A. A premium; Yield to Call; Yield to Maturity

Issuing serial bonds or including a sinking fund provision might help to reduce default risk by _______________. A. Amortizing the bond issue B. Guaranteeing seniority C. Including a call provision D. Offering collateral E. They provide none of these

A. Amortizing the bond issue

Which of the following is NOT an issue with using duration to predict price changes as a result of interest rate changes? A. Approximation formula is too complicated B. Duration changes when interest rates change C. Duration projects a straight line, while the actual price-yield relationship is curved D. Excel can calculate exact price changes much faster

A. Approximation formula is too complicated

Suppose you have a choice between two bonds, X and Y. The bonds are identical, except that bond X has a put provision, while bond Y has no such provision. Which of the bonds would you expect to have a higher price? A. Bond X B. Bond Y C. Neither

A. Bond X

The ability of firms to engage in earnings management most obviously presents a problem with what process? A. Calculating the price-to-earnings ratio B. Identifying the abnormal return C. Parsing our trading strengths and weaknesses D. Testing market efficiency

A. Calculating the price-to-earnings ratio

_________________ bonds can exhibit negative effective convexity, which means that their ________________ can decrease when interest rates decrease. A. Callable; Duration B. Callable; Price C. Putable; Duration D. Putable; Price E. None of these

A. Callable; Duration

According to our class discussion, we are unable to precisely immunize our portfolio because duration ___________________. A. Changes with interest rates B. Is an approximation C. Has no meaning D. Is not relevant for immunization E. Is only accurate in certain circumstances

A. Changes with interest rates

Which of the following is NOT true of incorporating a sinking fund into the bond indenture or issuing serial bonds? A. Details a uniform payment schedule B. Increases the firm's tax expense C. Lowers risk of default D. Reduces interest expense E. All of these are true of these arrangements

A. Details a uniform payment schedule

You are looking to value a firm relative to its industry peers. Unfortunately, you know that the companies in this industry have significantly different capital structures—some have low leverage and others have high leverage. What multiple would be best suited to this situation? A. Enterprise Value / EBITDA B. Price / Book Value C. Price / Cash Flow D. Price / Earnings E. Price / Sales

A. Enterprise Value / EBITDA

You are attempting to value Lenest Drink Company's stock. You see that the firm pays dividends, but only very inconsistently. You find that strange, as the firm's capital structure is quite stable. Undeterred, you estimate that the firm will generate free cash flow to equity of $1 million and free cash flow to the firm of $5 million next year. You also estimate that the firm's cost of equity is 20%, while its weighted average cost of capital is 10%. If you expect the firm to grow at a 5% rate going forward, what is the most appropriate valuation measure that you can calculate? A. Equity Value = $6.67 million; choose if between [$6.47 million,$6.87 million] B. Equity Value = $10 million; choose if between [$9.8 million,$10.2 million] C. Firm Value = $50 million; choose if between [$49.8 million,$50.2 million] D. Firm Value = $100 million; choose if between [$99.8 million,$100.2 million] E. A different combination

A. Equity Value = $6.67 million; choose if between [$6.47 million,$6.87 million]

According to our discussion, a poison put provision is an example of an embedded option provision with _________________ redemption. A. Extraordinary B. Fixed C. Optional D. Toxic E. None of these

A. Extraordinary

Which of the following was a requirement for us to be able to use the residual income model when valuing a firm? A. Firm has a clean surplus B. Firm has consistent capital structure C. Firm has positive free cash flow to equity D. Firm pays dividends E. None of these

A. Firm has a clean surplus

Assuming that an investor is interested in taking over the firm, we claimed that using __________________ would be a better measure than the dividend discount model. A. Free cash flow valuation B. Price-to-book value C. Price-to-sales D. Residual income valuation E. None of these

A. Free cash flow valuation

A higher P/E ratio implies higher expected _________________. A. Growth B. Price C. Probabilities D. Returns E. None of these

A. Growth

Which of the following does NOT imply a longer duration? A. Higher coupon rate B. Higher maturity C. Lower coupon rate D. Lower yield to maturity

A. Higher coupon rate

Which of the following is NOT generally true of a callable bond that is currently trading at a premium? A. Its current yield is less than its yield to maturity B. Its yield to call is less than its yield to maturity C. The market yield for an identical bond is less than the bond's coupon rate D. The firm would benefit from calling the bond E. All of these are true

A. Its current yield is less than its yield to maturity

According to our class discussion, a bank would most likely use ___________________ to manage its interest rate risk. A. Net-worth immunization B. Nominal spread C. Serial bonds D. Target date immunization E. Z-spread

A. Net-worth immunization

Which of the following is NOT a reason to use the residual income model when valuing a stock? A. The firm does not have a clean surplus year to year B. The firm has negative free cash flow to the firm C. The firm pays inconsistent dividends D. The firm's free cash flow to equity is positive and its capital structure is constantly changing E. The firm's dividends are too small relative to its profitability

A. The firm does not have a clean surplus year to year

You are evaluating the interest rate risk of a callable bond. The bond has 5 years left to maturity, it pays annual coupons at an 8% rate, and it currently trades at par, making its yield to maturity 8%. It is callable at any time at a price of $1,040. You would like to measure the bond's effective convexity for a 2% change in interest rates in either direction. What is its effective convexity? A. −89.54 B. −35.82 C. 21.08 D. 63.74 E. A different value

A. −89.54

A bond is currently priced at $1,010. It has a 14% coupon rate and pays semi-annual coupons. What price would you actually pay for this bond if it has been 30 days since the last coupon payment? A. $1,015.88 B. $1,021.67 C. $1,027.17 D. $1,033.33 E. A different value

B. $1,021.67

You see a bond is currently trading at 102% of its face value. The bond has a 9% coupon rate, and it pays its coupons semi-annually. You see that it has been 20 days since the bond's last coupon payment. Given this, you want to know what it would actually cost to purchase the bond. What do you figure is the invoice price of the bond? A. $1,020 B. $1,025 C. $1,050 D. $1,070 E. A different value

B. $1,025

You see that Clippy's Office Supply does not pay dividends and is cash flow negative. The firm's book value of equity is currently $10 per share, you expect the firm to post earnings of $2 next period, and you predict the firm will grow at a 10% rate going forward. If you demand a 20% return on your investment, what should Clippy's share price be today? A. $0, choose if between [−$0.20,$0.20] B. $10, choose if between [$9.80,$10.20] C. $12, choose if between [$11.80,$12.20] D. $15, choose if between [$14.80,$15.20] E. A different value

B. $10, choose if between [$9.80,$10.20]

Zoozle recently took its market by storm! The firm has been growing extremely quickly over the past few years. It expects to continue growing at 40% over the next year. At the end of this year, its growth will slow to 10% going forward. The firm's market capitalization rate is 12%. If the firm will pay a dividend of $2 at the end of the year, what would be the value of the stock today? A. $98.21 B. $100 C. $110 D. $111.79 E. A different value

B. $100

AshCo has little room for growth under their current management. Knowing this, the firm pays out 100% of its $2 earnings as dividends each year. Willow Holdings plans to acquire AshCo, believing that new management will allow the firm to grow. To accomplish this, the firm would have to start retaining a large portion of its earnings. Thus, Willow projects a dividend of $0.50 next year, growing at 16% thereafter. Investors currently demand a 20% return on AshCo's stock. Assume that this return will remain the same after the acquisition. What is the value of AshCo's stock once they are acquired? A. $10 B. $12.50 C. $14.50 D. $50 E. A different value

B. $12.50

GoGoDuck Search Company is growing fast! You estimate that the firm will grow at a 40% rate for the next 2 years. Then, you believe that they will settle into a long term growth rate of 20%. Suppose you require a 25% return on the stock. If the firm just paid a $1 dividend per share, what do you estimate the share price should be? A. $31.27, choose if between [$31.07,$31.47] B. $31.89, choose if between [$31.69,$32.09] C. $32.48, choose if between [$32.28, $32.68] D. $33.11, choose if between [$32.91,$33.31] E. A different value

B. $31.89, choose if between [$31.69,$32.09]

You read the Morningstar report on Excel Industries. They gave a 1 year price target of $40, along with an expected dividend of $2 per share in 1 year. If you require a 5% return on the stock, what would you expect the stock price to be right now? A. $38 B. $40 C. $42 D. $45 E. A different value

B. $40

You are looking to invest in Aubie Industries. The firm is pretty hopeless, and they have limited growth opportunities going forward. However, the firm's board realizes this and pays out 100% of its earnings each period. This year, the firm earned $1 per share. You figure that the firm is risky enough that you should earn a 12.5% return for holding it. What would you figure the price of the firm's shares should be? A. $7.14 B. $8 C. $8.33 D. $10 E. A different value

B. $8

You are considering an investment in a bond today. The bond originally had 30 years to maturity when it was issued 5 years ago. The bond has a yield to maturity of 9%, and it has a 7% coupon rate split into semi-annual payments. What should be the price of this bond? A. $793.62 B. $802.38 C. $811.11 D. $820.74 E. A different value

B. $802.38

You are given a quote of 102% on a bond. The bond carries a 12% coupon rate, and it pays semi-annual coupons. You see that the last coupon was paid 27 days ago. What would be the accrued interest on this bond? A. $8 B. $9 C. $10 D. $12 E. A different value

B. $9

You just got a quote of 97% for a bond issued by Big Cola Corporation. The bond pays a semi-annual coupon rate of 6%, while its yield to maturity is 8%. You see that the last coupon payment occurred 60 days ago. What would be your invoice price for this bond? A. $970 B. $980 C. $983.33 D. $1,010 E. A different value

B. $980

A bond issued by Cube-Ah Industries pays semi-annual interest. It has exactly 1 year until its maturity. The firm's underwriter believed the bond to be extremely risky, so it carries a 20.5% coupon rate, but investors appear to demand a 10% annual return on the bond. What is the duration of the bond? A. 0.87 years B. 0.96 years C. 1 year D. 1.96 years E. A different value

B. 0.96 years

You are analyzing a bond investment. The bond pays 10% interest with semi-annual coupons. The bond has 1 year to maturity, and it is currently selling at par. What is the effective maturity of this investment? A. 0.5 years B. 0.98 years C. 1 year D. 1.96 years E. A different value

B. 0.98 years

You are considering an investment in a bond that matures in 18 months. The bond pays 20% interest, with semi-annual coupon payments. Its yield to maturity is currently 16%. What is the effective maturity of this bond? A. 1.29 years B. 1.37 years C. 1.44 years D. 1.5 years E. A different value

B. 1.37 years

You project that Whill Fortunes, Inc. will generate earnings of $3 per share next year. You believe that the firm will pay a dividend of $0.75 per share out of those earnings. The firm is growing at a 10% rate, and you have estimated that the return on the stock should be 25%. What is the forward price-to-earnings ratio for Whill? A. 1.5 B. 1.6667 C. 1.8333 D. 2 E. A different value

B. 1.6667

) You are analyzing the risk of a bond. The bond has 2 years to maturity. It offers a 10% coupon rate, and it pays semi-annual coupon payments. If the market interest rate is 8%, what is the effective maturity of this bond? A. 1.79 years B. 1.86 years C. 1.94 years D. 2 years E. A different value

B. 1.86 years

You are offered an investment in a zero coupon bond with 2 years to maturity. The bond sells for $826.45. What would be your yield on this investment? A. 8% B. 10% C. 12% D. 21% E. A different value

B. 10%

The two year interest rate in the market is 7%. Meanwhile, the six year interest rate is 9%, and the eight year interest rate is 10%. What is the six year forward rate starting two years from today? A. 9.67% B. 11.02% C. 13.17% D. 14.86% E. A different value

B. 11.02%

You are looking to calculate forward rates. Today, you see a 1 year zero coupon bond trading for $909.09. Meanwhile, a 2 year zero coupon bond trades for $804.36. What is the yield to maturity on the 2 year zero coupon bond? A. 10% B. 11.5% C. 13% D. 24.32% E. A different value

B. 11.5%

A bond has 20 years remaining to maturity. It pays a 14% coupon rate, with semi-annual coupons. If the bond trades at a price of $1,120, what is the bond's current yield? A. 11.8%, choose if between [11.6%,12%] B. 12.5%, choose if between [12.35%,12.75%] C. 13.25%, choose if between [13.05%,13.45%] D. 14%, choose if between [13.8%,14.2%] E. A different value

B. 12.5%, choose if between [12.35%,12.75%]

You are interested in a bond. The bond currently trades at a price of $800.71. It has a 12% coupon rate paid in semiannual coupons, and it matures 20 years from today. What is the yield to maturity of this bond? A. 14.5% B. 15.2% C. 15.75% D. 16.33% E. A different value

B. 15.2%

Word United has been focused on growing quickly. The firm retains 75% of its earnings each year in order to grow at a rate of 10% per year. At the same time, investors demand a return on the stock of 20%. What would you estimate is the firm's forward price-to-earnings ratio? A. 1 B. 2.5 C. 5 D. 7.5 E. A different value

B. 2.5

You are concerned about the interest rate risk of a bond you just invested in. The bond has 3 years to maturity, and it pays semi-annual coupons at a 12% rate. If the bond carries a yield to maturity of 15%, what is the duration of this bond? A. 2.37 years; choose if between [2.27,2.47] B. 2.59 years; choose if between [2.49,2.69] C. 3 years; choose if between [2.9,3.1] D. 5.18 years; choose if between [5.08,5.28] E. A different value

B. 2.59 years; choose if between [2.49,2.69]

You are analyzing Tech Demolitions. You observed that the firm just posted earnings of $3 per share. You see that the firm's dividends consistently grow at a 4% rate each year, and it routinely pays out 30% of its earnings as a dividend. If you require a 12% return on the stock, what is the forward P/E ratio for the stock? A. 3.6 B. 3.75 C. 3.9 D. 4.1 E. A different value

B. 3.75

You are assembling a portfolio of two bonds. One is a coupon-paying bond with a duration of 10 years, while the other is a zero coupon bond with a duration of 25 years. If your target duration is 15, what would be the weight of the zero in your portfolio? A. 16.67% B. 33.33% C. 50% D. 66.67% E. A different value

B. 33.33%

You are evaluating the interest rate risk of a bond. You see that the bond has 5 years to maturity, and it makes annual coupon payments of 11%. If the bond's current price is $1,017.50, what is the duration of the bond? A. 4.02 years B. 4.11 years C. 4.28 years D. 4.44 years E. A different value

B. 4.11 years

You are attempting to figure out your actual return from a bond investment. You originally purchased the bond 3 years ago for $1,050, and the bond just matured. It paid annual coupons, with a 6% annual coupon rate. However, you know that interest rates over the three year period were actually 9%, 8%, and 4%, respectively. What was your actual return on this bond investment? A. 4.18% B. 4.25% C. 4.4% D. 4.42% E. A different value

B. 4.25%

Rhetoric 'R' Us just paid $8 million in dividends out of $40 million in earnings. The firm projects future earnings will grow at approximately a 7% rate. If investors demand a 12% rate of return on the stock, what is the trailing price-to-earnings ratio for this stock? A. 4 B. 4.28 C. 4.63 D. 4.92 E. A different value

B. 4.28

A bond currently has a yield to maturity of 10%. Its coupon rate is 6%, and it pays annual coupons. If the bond has 2 years to maturity, what is its convexity? A. 4.62 B. 4.76 C. 4.89 D. 5.05 E. A different value

B. 4.76

) Cookbook Solutions is a firm that retains approximately 50% of its earnings each year. The firm is currently growing at a rate of 5% per year, and the market demands a 15% return on its equity. What would you estimate is the forward price-to-earnings ratio for the stock? A. 3.33 B. 5 C. 6.67 D. 10 E. A different value

B. 5

You just won the Clear Published House grand prize! The prize is $5,000,000 per year forever. You are interested in incorporating this cash flow stream into your portfolio, so you have estimated its yield at 20% per year based on the most similar securities you could find. What would you estimate its duration to be? A. 5 years B. 6 years C. 21 years D. 25 years E. A different value

B. 6 years

You are considering investing in a bond. The bond has 10 years to maturity, a 6% coupon rate, pays its coupons semi-annually, and trades at par. What is the current yield on this bond? A. 5.62% B. 6% C. 6.38% D. 7.11% E. A different value

B. 6%

You are considering the interest rate risk of a putable bond. The bond currently trades at par, with a 5% yield to maturity and a 5% coupon rate. The bond has 20 years left to maturity and it pays annual coupons. The put provision allows the holder to put the bond at any time at a price of $1,000. What is the effective duration of the bond if you are concerned about a 1% change in interest rates? A. 3.93 years B. 6.8 years C. 9.74 years D. 12.53 years E. A different value

B. 6.8 years

You originally purchased a bond 3 years ago for a price of $900.01. The bond just matured. It paid annual coupons of 5%. Over that time, interest rates have varied from 6% to 4% to 7%, respectively. What was your realized compound yield over this period? A. 8.67% B. 8.8% C. 8.89% D. 9.12% E. A different value

B. 8.8%

A bond has a 7% annual coupon payment. Its yield to maturity is 9% and it has 3 years to maturity. What is the convexity of this bond? A. 9.13 B. 9.22 C. 9.36 D. 9.49 E. A different value

B. 9.22

You are considering purchasing a bond at a price of $1,055.01. The bond was originally issued 5 years ago with 30 years to maturity and a 10% coupon rate, with semi-annual coupon payments. The indenture included a call provision, which allowed the firm to call the bonds after 15 years at a price of $1,025. What is the yield to call for this bond? A. 9.2% B. 9.3% C. 9.4% D. 9.5% E. A different value

B. 9.3%

You invested in a bond 3 years ago. The bond just matured. Over that time period, annual interest rates were 8%, 10%, and 15%, respectively. You paid $910.21 for the bond originally, and it paid a 6% coupon rate with annual coupons. What return did you realize on this investment? A. 9.46% B. 9.8% C. 10.21% D. 10.63% E. A different value

B. 9.8%

You are considering a newly issued 20 year bond that pays a 10% coupon rate with semi-annual coupon payments. If the bond currently holds a 10.8% yield to maturity, what quote would you expect to see for this bond? A. 92% B. 93.5% C. 95% D. 96.5% E. A different value

B. 93.5%

You are considering an investment in one of three bonds. The three bonds are essentially identical. You know that bond A contains a call provision, bond B contains a put provision, and bond C has no such provision. As a result, their yields are slightly different. Sort the prices of these bonds from the lowest price to the highest price. A. A, B, C B. A, C, B C. B, A, C D. B, C, A E. C, A, B F. C, B, A

B. A, C, B

A major problem with the yield to maturity measure is that it assumed that we could reinvest _______________ the same rate. A. Above B. At C. Below

B. At

Of the four bond risks that we identified, _____________ and ___________ represent risks of losses we might face when interest rates decrease. A. Call risk; Default risk B. Call risk; Reinvestment rate risk C. Default risk; Interest rate risk D. Default risk; Reinvestment rate risk E. Interest rate risk; Reinvestment rate risk

B. Call risk; Reinvestment rate risk

What is a problem with using duration? A. Boring B. Changes with interest rates C. No clear interpretation D. Only works for zero coupon bonds

B. Changes with interest rates

A(n) ________________ bond is unsecured. A. Collateral trust B. Debenture C. Indenture D. Mortgage E. All of these are secured

B. Debenture

You observe that the Fed's decision to raise short term interest rates results in an increase in long term rates as well. According to our discussion, this is evidence of (the) __________________. A. Earnings management B. Expectations theory C. Forced conversion D. Liquidity preference E. None of these

B. Expectations theory

You are reviewing an analysis of a bond. You see that the bond's current yield is greater than its yield to maturity. Without seeing any other figures, you know that the bond's price must be ________________ its face value. A. Equal to B. Greater than C. Lower than D. Need more information

B. Greater than

You expect the Fed to raise short term rates in the near future. If the market shared your belief, under the expectations theory, you would expect to see long term rates ________________ short term rates. A. Equal to B. Greater than C. Less than

B. Greater than

A high price-to-earnings ratio BEST indicates high expected __________________. A. Earnings B. Growth C. Retention D. Returns E. None of these

B. Growth

You believe that the Fed will lower interest rates in a couple of years. If the liquidity premium in the market is negligible, you would expect long term rates to be ________________ short term rates. A. Equal to B. Higher than C. Lower than D. Unrelated to

B. Higher than

According to our discussion, net worth immunization works by offsetting the interest rate risk of our assets with the ________________. A. Default risk of our assets B. Interest rate risk of our liabilities C. Reinvestment rate risk of our assets D. Reinvestment rate risk of our liabilities E. None of these

B. Interest rate risk of our liabilities

You are considering a bond that matures in 5 years, and you believe that the expectations theory holds. If you were calculating the price of this bond as of the end of year 3, which of the following statements is TRUE of the expected spot rate you would use to calculate its price? A. It is greater than the forward rate B. It is equal to the forward rate C. It is less than the forward rate D. It is unrelated to the forward rate E. Its relationship to the forward rate is unknown

B. It is equal to the forward rate

Suppose that yields are flat at 5%. So, you can get a 1 year zero coupon bond with a yield of 5% and a 2 year zero coupon bond with a yield of 5%. If there is a liquidity preference in the market, the expected return on the 2 year bond in year 2 (from the end of year 1 to the end of year 2) would most accurately be: A. 0% B. Less than 5% C. Equal to 5% D. Greater than 5% E. 10.25%

B. Less than 5%

You are managing an investment company that focuses on investing in bonds, annuities, and other interest rate securities. In addition, your firm needs to issue substantial amounts of debt to get off the ground. What strategy might you employ in order to protect the value of the firm against interest rate risk? A. Immunization B. Net worth immunization C. Target date immunization D. None of these

B. Net worth immunization

You run a small savings and loan. Much like a bank, you pay interest on your liabilities (deposits) and receive interest on your assets (loans). What strategy might you employ in order to protect the value of the firm? A. Hope B. Net worth immunization C. Target date immunization D. None of these

B. Net worth immunization

According to our class discussion, __________________ is generally a good multiple to examine when attempting to value a firm that is not expected to continue as a going concern. A. Enterprise Value-to-EBITDA B. Price-to-Book value C. Price-to-Cash Flow D. Price-to-Earnings E. Price-to-Sales

B. Price-to-Book value

In our discussion, we mentioned that ________________ might be an appropriate ratio to value a firm that is not expected to stay in business. A. Enterprise value-to-EBITDA B. Price-to-book value C. Price-to-cash flow D. Price-to-earnings E. Price-to-sales

B. Price-to-book value

Suppose that the Fed announces a plan to raise short term rates in the future. Given the expectations theory, what would we expect to happen to long term rates today? A. They would decrease B. They would increase C. They would remain the same D. They would be unrelated to the change E. They would change randomly

B. They would increase

For a bond trading at a premium that you don't plan to sell, arrange the three yield measures from LEAST to GREATEST. A. Current Yield < Yield to Maturity < Yield to Call B. Yield to Call < Yield to Maturity < Current Yield C. Yield to Maturity < Yield to Call < Current Yield D. Yield to Maturity < Current Yield < Yield to Call E. None of these relationships are true

B. Yield to Call < Yield to Maturity < Current Yield

You are offered a two year coupon-paying bond. The bond makes annual coupon payments and offers a 12% coupon rate. The bond currently sells for $1,020. At the same time, you know that you could purchase a 1 year zero coupon bond for $909.09. A 2 year zero coupon bond sells for $811.62. What would be the cost to replicate the coupon-paying bond using zero coupon bonds? A. $1,015.28 B. $1,016.73 C. $1,018.11 D. $1,020 E. A different value

C. $1,018.11

You work in a small tradinghouse that focuses on exploiting mispricings in the bond market. You see that a bond with 2 years to maturity that makes annual coupon payments of 16% currently trades for $1,024. At the same time, you see that a 1 year zero coupon bond trades at $892.8571, while a 2 year zero coupon bond is priced to yield 14%. What would be the cost to replicate the coupon-paying bond using the zero coupon bonds? A. $1,000; choose if between [$995,$1,005] B. $1,016.67; choose if between [$1,011.67,$1,021.67] C. $1,035.44; choose if between [$1,030.44,$1,040.44] D. $1,067.60; choose if between [$1,062.60,$1,072.60] E. A different value

C. $1,035.44; choose if between [$1,030.44,$1,040.44]

Business is booming for Bamsung Electronics. The firm just paid a $1 dividend, and you expect the firm to grow at a 10% rate for the foreseeable future. If investors demand an 11% return from the stock, what would you estimate the price of the stock to be? A. $10 B. $11 C. $100 D. $110 E. A different value

C. $100

Gua Kennel Co. just paid a dividend of $1.50 per share. It expects to grow at a rate of 10% going forward, and investors demand a return of 25% from the stock. What is the value of the firm's stock? A. $6.60 B. $10 C. $11 D. $16.50 E. A different value

C. $11

Gator Suction Solutions has paid out a dividend of $2 per share every year for several years. You see no reason to expect this to change in the future. If you require a return on the stock of 10%, what is the value of the stock? A. $10 B. $12 C. $20 D. $22 E. A different value

C. $20

You are attempting to value ChargeInc. The firm just paid a dividend of $3 per share. The firm is currently growing a rapid pace of 30% per year, but you expect that the firm's growth will slow to 10% after 2 years. If you require a 20% return on the stock, what should the stock price be? A. $39 B. $42.33 C. $45 D. $47.25 E. A different value

C. $45

You are analyzing IndiCo's stock. The company expects to begin paying dividends one year from today, and they will pay them annually from that point. You see a Morningstar report that estimates this dividend at $5 per share and sets a price target of $50 one year from today. You estimate a 10% required rate of return if you were to invest in IndiCo. What would you expect the price to be today? A. $40 B. $45 C. $50 D. $55 E. $60

C. $50

Yup Brands just paid a $1 per share dividend. You expect the firm to grow at a 20% rate for the foreseeable future, while the market demands a 40% return from the firm. What would you estimate the share price should be? A. $3 B. $5 C. $6 D. $8 E. A different value

C. $6

10 years ago, you purchased a bond with 30 years to maturity. The bond pays 7% interest, with semi-annual coupon payments. If the bond's yield to maturity is 8%, what is its price today? A. $876.91 B. $891.89 C. $901.04 D. $913.71 E. A different value

C. $901.04

The Blue Dog Corporation pays out 20% of its earnings as a dividend each period. Investors currently demand a return of 24% on the firm's shares, while the firm grows at a rate of approximately 8% per year. What is the forward price-to-earnings ratio for the firm? A. 0.75 B. 1 C. 1.25 D. 1.5 E. A different value

C. 1.25

A 2 year zero coupon bond currently trades at $890, a 6 year zero coupon bond trades at $630.17, and an 8 year zero coupon bond trades at $501.87. What is the 6 year forward rate starting at year 2? A. 9.55% B. 9.87% C. 10.02% D. 10.17% E. A different value

C. 10.02%

You are concerned about the callable bond your investment advisor recommended. You see that the bond has 20 years to maturity, and the bond makes annual coupon payments at a 15% rate. You see that the bond currently has a yield to maturity of 12%. However, the bond is callable after 5 years at a price of $1,060. What is the yield to call for this bond? A. 8.16%, choose if between [7.96%,8.36%] B. 9.21%, choose if between [9.01%,9.41%] C. 10.06%, choose if between [9.86%,10.26%] D. 12%, choose if between [11.8%,12.2%] E. A different value

C. 10.06%, choose if between [9.86%,10.26%]

You are attempting to bootstrap the yield curve. You know that a 1 year zero coupon bond currently trades at $909.0909, while a 2 year zero coupon bond trades at $797.1939. At the same time, a 3 year coupon-paying bond makes annual coupon payments of 11% and trades at par. Assuming that all 3 bonds have equivalent risk, what is the 3 year spot rate in the market? A. 9.76%, choose if between [9.56%,9.96%] B. 10.28%, choose if between [10.08%,10.48%] C. 10.97%, choose if between [10.77%,11.17%] D. 11.43%, choose between [11.23%,11.63%] E. A different value

C. 10.97%, choose if between [10.77%,11.17%]

You are considering an investment in a perpetual bond. The bond pays out $100 each year. You figure that the relevant yield on the bond is 10%. What is the effective maturity of this bond? A. 8 years B. 10 years C. 11 years D. 13.5 years E. It does not have an effective maturity

C. 11 years

You observe the following yields in the market: (i) A 3 year zero coupon bond has a yield of 8% (ii) A 5 year zero coupon bond has a yield of 9% (iii) An 8 year zero coupon bond has a yield of 10% Using this information, what is the 5 year forward rate starting 3 years from today? A. 10.11%, choose if between [9.91%,10.31%] B. 10.52%, choose if between [10.32%,10.72%] C. 11.22%, choose if between [11.02%,11.42%] D. 11.69%, choose if between [11.49%,11.89%] E. A different value

C. 11.22%, choose if between [11.02%,11.42%]

You are considering an investment in a bond. The bond currently pays a coupon rate of 12%, with semi-annual coupons. If the bond currently trades at par, what is the current yield on the bond? A. 10% B. 11% C. 12% D. 13% E. A different value

C. 12%

You are looking to calculate forward rates. Today, you see a 1 year zero coupon bond trading for $909.09. Meanwhile, a 2 year zero coupon bond trades for $804.36. What is the 1 year forward rate starting at year 1? A. 11.5% B. 12.67% C. 13.02% D. 14.17% E. A different value

C. 13.02%

Indy Corp just posted earnings of $1.50 per share. You see that the firm paid a dividend of $0.30 per share. You expect the company to grow at a 6% rate going forward, while you expect a 14% return on its stock. What is the firm's trailing P/E ratio? A. 2.5 B. 2.57 C. 2.65 D. 2.73 E. A different value

C. 2.65

You want to measure the interest rate risk of a bond. The bond has 3 years to maturity. It has a 10% interest rate, paid in semi-annual coupons. If the bond has a yield to maturity of 12%, what is the duration of the bond at that yield? A. 2.57 years B. 2.61 years C. 2.65 years D. 2.69 years E. A different value

C. 2.65 years

You are attempting to bootstrap the yield curve. You know that a T-bill that expires in 6 months is currently trading for $9,090.91, while a T-bill expiring in 1 year trades for $8,416.80. You see that a Treasury bond with 18 months to maturity and a 22% coupon rate currently trades for $1,026.54. What would you estimate is the market 18 month APR? A. 9% B. 10% C. 20% D. 21% E. A different value

C. 20%

You calculated the duration of a perpetuity to be 24 years. What would be duration of this security be in 5 years? Assume there is no change in yield over that time. A. 19 years B. 23 years C. 24 years D. 29 years E. A different duration/It has no duration

C. 24 years

10 years ago, you invested in two securities. The first was a zero coupon bond with 30 years to maturity that you paid $57.31 each for. The second was a series of $50 payments that continued forever. Its yield was 4%. Assume that both securities had a face value of $1,000, and that the yields of these securities have remained constant through time. Now, assume that your portfolio today consists of $250,000 in the zero and $750,000 in the perpetuity. What is the duration of your portfolio? A. 14.5 years B. 23 years C. 24.5 years D. 27 years E. A different value

C. 24.5 years

You have been offered a steady stream of one payment of $100 per year forever. Being a sophisticated investor, you want to know how exposed to interest rate risk this investment is. You know that the yield on this investment is currently 4%. What is the effective maturity of this security? A. 21 years B. 25 years C. 26 years D. A different value E. It doesn't have an effective maturity

C. 26 years

You are considering purchasing a callable bond. The bond currently trades at $1,032. You see that the bond has 20 years to maturity, and it will become callable in 5 years at a price of $1,025. Also, you know that the bond has a coupon rate of 5% and pays semi-annual coupon payments. What is your yield to call for this bond? A. 2.36% B. 2.38% C. 4.72% D. 4.75% E. A different value

C. 4.72%

You are interested in purchasing a bond from ExAm Solutions. The bond had a 30 year maturity when it was issued, which was 5 years ago. Its face value was $1,000. The bond pays semi-annual interest at an 8% coupon rate. The bond currently trades at a price of $1,125, and it is callable at a price of $1,020 after having been on the market for 15 years. If you plan to hold the bond, what is the worst case annual yield you would expect to receive? A. 4.56% B. 5.67% C. 6.43% D. 6.94% E. A different value

C. 6.43%

You are evaluating a callable bond, so you are attempting to find the yield to call. The bond has 22 years to maturity and can be called in 7 years at a price of $1,088. Its coupon rate is currently 10%, its yield to maturity is 8%, and it pays coupons semi-annually. What is the yield to call on this bond in APR terms? A. 3.2% B. 3.6% C. 7.2% D. 7.5% E. A different value

C. 7.2%

You are considering a bond that currently trades for $1,100. The bond has a coupon rate of 8%, with semi-annual coupons. The bond has 10 years left to maturity. What is the current yield of this bond? A. 3.64% B. 5.38% C. 7.27% D. 8% E. A different value

C. 7.27%

You are interested in a bond that currently sells for $978.88. The bond pays an 8% coupon rate, with semi-annual coupon payments. If it has 25 years to maturity, what is the yield to maturity on this bond? A. 4.1% B. 4.2% C. 8.2% D. 8.4% E. A different value

C. 8.2%

You see that a one year zero coupon bond sells for $934.58, while a two year zero coupon bond sells for $857.34. At the same time, you notice that a 3 year coupon-paying bond sells for $926.03. The bond pays annual coupons with a 6% coupon rate. Given this information, what would you estimate the 3 year spot rate to be? A. 8.82% B. 8.91% C. 9% D. 9.04% E. A different value

C. 9%

You are attempting to bootstrap the yield curve. You know you could purchase a zero coupon bond with 1 year to maturity for $909.09 currently, while a coupon-paying bond with 2 years to maturity costs $970.18. The two year bond's coupon rate is 8%, and it pays annual coupon payments. Given this data, what is your estimate for the market 2 year rate? A. 5.51% B. 5.62% C. 9.7% D. 9.83% E. A different value

C. 9.7%

Which of the following bonds would you expect to have the highest interest rate risk? Assume that the maturities are the same. A. A coupon-paying bond with a 5% coupon rate and a 6% yield to maturity B. A coupon-paying bond with a 5% coupon rate and an 8% yield to maturity C. A zero coupon bond with a 6% yield to maturity D. A zero coupon bond with an 8% yield to maturity E. They all have equivalent interest rate risk

C. A zero coupon bond with a 6% yield to maturity

What problematic assumption do we make when calculating yield to maturity? A. Bond income is taxable B. Coupon payments are semi-annual C. Coupons are reinvested at the yield to maturity each period D. The face value is $1,000

C. Coupons are reinvested at the yield to maturity each period

A major problem with using duration to approximate bond price changes is that we are trying to match the actual _________________ relationship with a ___________________ estimate. A. Curled; Curved B. Curved; Curled C. Curved; Straight D. Straight; Curved E. None of these

C. Curved; Straight

According to our discussion, _________________ causes a problem when calculating and interpreting every valuation multiple that relies on an income statement entry. A. Ambiguity B. Complex mathematics C. Earnings management D. Negative values E. None of these

C. Earnings management

Corporate bonds are typically non-amortizing. One way to effectively amortize a bond issue is by actually issuing bonds of different maturities rather than making them all the same. This is approach is known as ______________. A. A sinking fund provision B. Cheating C. Forced conversion D. Senior debt E. Serial bonds

C. Forced conversion

According to our discussion, which of the following does a high price-to-earnings ratio imply? A. Dividend irrelevance B. Earnings management C. High future growth D. High future returns E. None of these

C. High future growth

Which of the following is a reason to prefer the effective duration measure over the "typical" duration measure? A. Doesn't change when interest rates change B. Generates a curved projection C. Includes effect of call/put provisions D. More precise E. None of these

C. Includes effect of call/put provisions

According to our class discussion, we want interest rates to stay stable. If interest rates rise, we face ___________ risk, while if interest rates decrease, we face _______________ risk. A. Call; Reinvestment rate B. Call; Interest rate C. Interest rate; Reinvestment rate D. Reinvestment rate; Interest rate

C. Interest rate; Reinvestment rate

According to our discussion, if interest rates fail to move in parallel, we would need to use a(n) _______________ duration measure to account for how it affects the bond's price. A. Dollar value B. Effective C. Key rate D. Macauley E. Modified

C. Key rate

All else equal, bonds with ________________ are MORE sensitive to interest rate movements. A. Higher coupon rates B. Higher yield to maturities C. Longer maturities D. Shorter durations E. Shorter maturities

C. Longer maturities

All else equal, we would generally expect a(n) ____________ yield on a bond that includes a put provision versus one that does not include a put provision. A. Equivalent B. Higher C. Lower D. There is no relationship between the two

C. Lower

Which of the following choices is NOT a direct factor in calculating a bond's interest rate risk? A. Coupon rate B. Maturity C. Number of bonds issued D. Yield to maturity E. All of these affect interest rate risk

C. Number of bonds issued

You are attempting to set up a net worth-immunized portfolio. You have figured that your liabilities have a duration of 10 years and a convexity of 85. According to our discussion, which of the following would be the most appropriate immunization portfolio? A. Portfolio A: duration of 8 and convexity of 87 B. Portfolio B: duration of 10 and convexity of 60 C. Portfolio C: duration of 10 and convexity of 89 D. Portfolio D: duration of 10 and convexity of 140 E. Portfolio E: duration of 12 and convexity of 90

C. Portfolio C: duration of 10 and convexity of 89

All else equal, a higher __________________ would NOT lead to a higher justified price-to-sales ratio. A. Growth rate B. Profit margin C. Required return D. Return on equity E. All of these would increase the P/S ratio

C. Required return

Interest rate risk is the risk that interest rates _____________, and reinvestment rate risk is the risk that interest rates ______________. A. Fall; Rise B. Fall; Stay the same C. Rise; Fall D. Rise; Stay the same E. Stay the same; Fall

C. Rise; Fall

You are purchasing a bond. if you do not plan on selling the bond, which of these would represent the worst case return you might receive? A. Current yield B. Geometric return C. Yield to call D. Yield to maturity

C. Yield to call

You've calculated the yield to maturity and yield to call for a callable bond that currently trades at a premium. However, you've mixed up the calculations and you don't recall which is which. The two yields are 4.6% and 5.2%. By our class discussion, the ______________ must be 4.6% and the ______________ must be 5.2%. A. Current yield; Yield to call B. Current yield; Yield to maturity C. Yield to call; Yield to maturity D. Yield to maturity; Yield to call

C. Yield to call; Yield to maturity

Free Cash Flow to the Firm

Cash left over after operations and taxes available to creditors and shareholders.

Free Cash Flow to Equity

Cash left over after operations, taxes, and debt/interest payments available to shareholders.

You are about to purchase a bond. You were given a quote that the bond currently sells at 97% of face value. It pays a coupon rate of 15%, with semiannual coupons. It has been 4 months since the last coupon payment. What would you actually pay for this bond? A. $970 B. $980 C. $1,000 D. $1,020 E. A different value

D. $1,020

You are interested in a bond that is currently quoted at 101% of face value. You see that it has been 45 days since the bond last paid a coupon. The bond has a coupon rate of 14%, and it pays semi-annual coupons. What would be the invoice price of this bond? (Assume 180 days between semi-annual payments) A. $1,012.50 B. $1,017.50 C. $1,022.50 D. $1,027.50 E. A different value

D. $1,027.50

You are interested in purchasing a bond. You see that a bond is currently quoted at 102%. It pays semi-annual coupons, with an 18% coupon rate. If it has been 75 days since the bond's last coupon payment, what do you estimate the invoice price of this bond to be? (Hint: Assume 180 days between semi-annual coupons and 360 between annual coupons) A. $1,020; choose if between [$1,018,$1,022] B. $1,035, choose if between [$1,033,$1,037] C. $1,042.50, choose if between [$1,040.50,$1,044.50] D. $1,057.50, choose if between [$1,055.50,$1,059.50] E. A different value

D. $1,057.50, choose if between [$1,055.50,$1,059.50]

You want to know if there is an arbitrage opportunity. You have the following data on a set of zero coupon bonds: Maturity (Years) 1 2 3 Price (FV=$1,000) $940 $880 $810 At the same time, you see that a 3 year coupon-paying bond that offers a 10% coupon rate with annual coupon payments. You see that the bond currently trades at a price of $1,100. What is the cost of replicating the coupon-paying bond using the zero coupon bonds? A. $1,027 B. $1,042 C. $1,059 D. $1,073 E. A different value

D. $1,073

Roof Hunters, Inc. just paid a $3 per share dividend. You don't expect the firm to grow, thinking it will remain at its current size. What would you expect its share price to be today if you require a 15% return on the stock? A. $15 B. $17 C. $18 D. $20 E. A different value

D. $20

You are analyzing Irma Demolitions. You see that the firm just paid a dividend of $1 per share. You figure that the firm will grow at a rate of 5% going forward. If you require a 10% return on the firm's stock, what should the firm's stock price be today? A. $18 B. $19 C. $20 D. $21 E. A different value

D. $21

You are looking to invest in TerryCo. You see that the firm just paid a $2 dividend, and you expect the stock to grow at a 5% rate going forward. Meanwhile, you believe that the firm should return 15% to justify you bearing its risk. What would you pay for this stock? A. $15 B. $18 C. $20 D. $21 E. A different value

D. $21

You are interested in Dawg Productions. The firm just paid a $2 dividend. You believe that the firm will grow at 25% for the next 2 years, before its growth drops to a long term rate of 10%. If the required return on the stock is 20%, what should the stock price be today? A. $24 B. $25.33 C. $27 D. $28 E. A different value

D. $28

You are considering an investment in DawgCorp. The stock currently trades for $20 per share, and analysts predict that the stock will hit $30 at the end of the year. You expect that the stock will pay a $3 dividend at that time. You've estimated that DawgCorp's beta is 0.8. Further, you see that the expected market risk premium is 10%, while the expected T-bill rate is 2%. What would you estimate the true value of the stock to be? A. $20 B. $23 C. $27 D. $30 E. A different value

D. $30

Lame Duck Enterprises is no longer growing. They generate approximately $2 in earnings per year, which they pay out to shareholders. If the market demands a 5% return on this stock, what is the firm's share price? A. $10 B. $20 C. $30 D. $40 E. A different value

D. $40

Check Printers 'R' Us is dominant in their industry, but they find themselves with limited growth opportunities. They have decided to pay out all of their earnings as a dividend. By doing so, they realize that they will likely eliminate any ability for the firm to grow. The dividend is expected to be $5 per share this year. If the market expects a 10% return on the stock, what would you estimate the stock price to be? A. $5 B. $10 C. $45 D. $50 E. $55

D. $50

You are analyzing LeafUnder Software. You expect that the firm will pay a dividend of $1 next year, and you also project that the firm's shares will be trading at $60 at that time. If investors demand a 10% return on the stock, what should the share price be today? A. $53.67, choose if between [$53.47,$53.87] B. $54.25, choose if between [$54.05,$54.45] C. $54.90, choose if between [$54.70,$55.10] D. $55.45, choose if between [$55.25,$55.65] E. A different value

D. $55.45, choose if between [$55.25,$55.65]

You are analyzing the value of Light Beginnings Toy Company. You have set a price target for the stock of $70, and you expect the firm to pay a dividend of $2.50. If you estimate a market capitalization rate for the firm of 16%, what should the value of the stock be today? A. $61.41 B. $61.67 C. $61.92 D. $62.50 E. A different value

D. $62.50

You are evaluating an investment in Arch Finishing. The stock currently costs $60. Based on your analysis, you have set a price target of $68 for 1 year from today. You also predict a dividend 1 year from today of $1.30 per share. You also figure that investors should earn a 10% return on the stock. What is the intrinsic value of the stock today? A. $60 B. $61 C. $62 D. $63 E. A different value

D. $63

You are considering investing in a bond with two years to maturity. The bond currently pays annual coupon payments at a 10% coupon rate. Its face value is $1,000, and the bond currently trades at par. What is the effective maturity of this bond? A. 0 years B. 1 year C. 1.64 years D. 1.91 years E. 2 years F. An infinite number of years

D. 1.91 years

A zero coupon bond has 10 years to maturity. Its yield to maturity is 7%. What is the bond's duration? A. 8.78 years B. 9.13 years C. 9.52 years D. 10 years E. A different value

D. 10 years

You are trying to evaluate your investment in gPhone Telephony bonds. You know that you paid $967 originally, and you held the bond for 3 years, until it matured. The bond paid annual interest, with a coupon rate of 10%. In hindsight, you know that the market rate the first year was 8%, the second year was 6%, and the third year was 7%. Assume that you reinvested all coupons at the market rate. What is your realized compound yield? A. 4.39% B. 7.65% C. 9.5% D. 10.94% E. A different value

D. 10.94%

You are attempting to predict the 1 year interest rate starting one year from today. You know that you can currently earn a 10% APR on a 2 year bond and an 8% APR on a 1 year bond. What is your prediction? A. 10% B. 10.5% C. 11.11% D. 12.04% E. 13%

D. 12.04%

You know that the current 1 year rate in the market is 6%. At the same time, you know that a zero coupon bond that matures in 2 years currently sells for $826.45, while a zero coupon bond that matures in 3 years sells for $751.31. Knowing this, what is your prediction for the 2 year interest rate starting 1 year from today? A. 10% B. 10.89% C. 11.47% D. 12.06% E. A different value

D. 12.06%

You are attempting to bootstrap the yield curve. You know that you could buy a zero coupon bond with 1 year to maturity for $909.09. At the same time, a coupon-paying bond with 2 years to maturity can be purchased for $980. The bond's coupon rate is 11%, and it pays annual coupons. Given this information, what is the current 2 year rate in the market? A. 10.83% B. 11.42% C. 11.94% D. 12.31% E. A different value

D. 12.31%

You observe that a 1 year zero coupon bond currently trades for $952.38. Meanwhile, a 2 year zero coupon bond trades for $873.44. Finally, a 3 year zero coupon bond trades for $772.18. What would you predict the 1 year interest rate to be starting two years from today? A. 9% B. 10.84% C. 11.92% D. 13.11% E. A different value

D. 13.11%

A bond pays 12% interest in annual coupon payments. The bond's yield to maturity is currently 10% per year, and it has 4 years to maturity. What is the bond's convexity? A. 11.74 B. 12.22 C. 12.83 D. 13.36 E. A different value

D. 13.36

You are interested in the interest rate risk of a bond. The bond has 4 years to maturity, and it pays annual coupons at an 8% rate. If the bond currently has a 10% yield to maturity, what is the convexity of this bond using the general (instantaneous) form? A. 12.38 B. 12.81 C. 13.47 D. 14.13 E. A different value

D. 14.13

You are looking to bootstrap the yield curve. You see that you can purchase a zero coupon bond with one year to maturity for $909.09. A two year coupon paying bond is also available. This bond makes annual interest payments, with a coupon rate of 11%. It currently trades for $950. What do you estimate the two year interest rate in the market to be? A. 9.54% B. 10.10% C. 12.27% D. 14.28% E. A different value

D. 14.28%

You are attempting to bootstrap the yield curve. You know that a zero coupon bond with 1 year to maturity currently has a yield of 8%, while a zero coupon bond with 2 years to maturity has a yield of 9%. Meanwhile, a 3 year coupon-paying bond has a coupon rate of 10% and pays annual coupons. The coupon-paying bond currently sells for $900. Given this data, what is the 3 year spot rate? A. 10% B. 11.5% C. 13.33% D. 15% E. A different value

D. 15%

You are trading bonds. You know that you can buy a 1 year zero with an 8% yield, a 2 year zero with a 10% yield, and a 3 year zero with an 11.87% yield. What would you expect the 1 year rate to be 2 years from today? A. 14.3% B. 14.76% C. 15.23% D. 15.71% E. A different value

D. 15.71%

Germ-B-Gone typically pays out 20% of its $4 earnings as a dividend each period. You estimate that the firm should grow at a 5% rate going forward, and you figure that its business model justifies a 15% required return. What is the trailing P/E ratio for this company? A. 1.2, choose if between [1.1,1.3] B. 1.5, choose if between [1.4,1.6] C. 1.8, choose if between [1.7,1.9] D. 2.1, choose if between [2,2.2] E. A different value

D. 2.1, choose if between [2,2.2]

) A bond has 3 years to maturity. It pays semi-annual coupons, and it has a coupon rate of 6%. If its yield to maturity is 5%, what is the duration of this bond? A. 2.56 years B. 2.63 years C. 2.71 years D. 2.79 years E. A different value

D. 2.79 years

You want to know what the one year rate will be starting one year from now. You know that a 1 year zero coupon bond pays 9% interest, while a 2 year zero coupon bond yields 15%. What will you predict for the one year rate starting one year from today? A. 9% B. 15% C. 18.6% D. 21.33% E. A different value

D. 21.33%

10 years ago, you invested in two securities. The first was a zero coupon bond with 30 years to maturity that you paid $57.31 each for. The second was a series of $50 payments that continued forever. Its yield was 4%. Assume that both securities had a face value of $1,000, and that the yields of these securities have remained constant through time. What is the duration of the second security today? A. 10 years B. 16 years C. 25 years D. 26 years E. A different value

D. 26 years

You are analyzing a bond. The bond has 3 years to maturity. It is a zero coupon bond, with a yield to maturity of 10%. What is its duration? A. 2.71 years B. 2.79 years C. 2.89 years D. 3 years E. A different value

D. 3 years

You are able to purchase one of three zero coupon bonds. The first costs $961.17 and matures in 2 years. The second costs $813.09 and matures in 7 years. The third costs $702.58 and matures in 9 years. Given this, what would you predict the 7 year interest rate to be 2 years from today? A. 2.42% B. 3.27% C. 4% D. 4.58% E. A different value

D. 4.58%

You are evaluating a bond for your portfolio. You see that the bond has 26 years left to maturity. It has a coupon rate of 6%, with semi-annual coupon payments. If the bond currently trades for a price of $949.64, what is the yield to maturity of this bond? A. 3.2%, choose if between [3%,3.4%] B. 4.4%, choose if between [4.2%,4.6%] C. 5.2%, choose if between [5%,5.4%] D. 6.4%, choose if between [6.2%,6.6%] E. A different value

D. 6.4%, choose if between [6.2%,6.6%]

Jep Ardy just announced earnings of $1 per share this year. The firm typically retains 40% of its earnings in order to grow at a 15% rate. If investors currently demand a 25% return, what is the trailing P/E ratio for this company? A. 4 B. 5.2 C. 6 D. 6.9 E. A different value

D. 6.9

You are setting up a bond portfolio using a target date immunization strategy. You are investing in a zero coupon bond that has 8 years to maturity, and a coupon-paying bond that has 30 years to maturity and a 24 year duration. How much weight would you invest in the zero coupon bond if your target date is 14 years? A. 37.5% B. 45% C. 55% D. 62.5% E. A different value

D. 62.5%

You are attempting to immunize a portfolio consisting of a perpetuity and a zero coupon bond. The zero has 20 years to maturity, and both bonds have a yield to maturity of 8%. What would the weight be on the perpetuity if your target date is 14.8 years from today? A. 20% B. 40% C. 60% D. 80% E. A different value

D. 80%

You are interested in purchasing some perpetual bonds issued by the Bank of Somesuchia. The bonds offer annual payments of $150 per year, which represents a 12% yield. What is the duration of this security? A. 7.67 years B. 8.1 years C. 8.75 years D. 9.33 years E. A different value

D. 9.33 years

You are concerned about how a bond reacts to interest rates. The bond is a zero coupon bond with 10 years left to maturity. It has a yield to maturity of 10%. What is the convexity of this bond? A. 10, choose if between [5,10] B. 37.26, choose if between [32.26,42.26] C. 63.81, chose if between [58.81,68.81] D. 90.91, choose if between [85.91,95.91] E. A different value

D. 90.91, choose if between [85.91,95.91]

You are considering the value of a firm that does not pay dividends. You have projected that its free cash flow to the firm next year will be $2 million, while its free cash flow to equity will be $1 million. You expect that the firm will then grow at a 5% rate. You have estimated that the firm's weighted average cost of capital is 10%, while its cost of equity is 15%. Unfortunately, you predict that the firm's capital structure will continue to shift for the foreseeable future. Given this information, what is the most appropriate valuation measure that you can calculate? A. Equity Value = $10 million B. Equity Value = $20 million C. Firm Value = $20 million D. Firm Value = $40 million E. A different combination

D. Firm Value = $40 million

A possible explanation for long term rates consistently being higher than short term rates is ________________. A. Convex pricing B. Expectations theory C. Forced conversion D. Liquidity preference E. None of these

D. Liquidity preference

If the ______________ holds, a 5 year bonds will have a higher expected holding period return over a 3 year period than an otherwise-equivalent 3 year bond. A. Absolute priority rule B. Expectations theory C. Immunization portfolio D. Liquidity preference E. None of these

D. Liquidity preference

You see that long term rates are consistently higher than short term rates. This is an example of ________________. A. Bond arbitrage B. Hedging C. Interest rate risk D. Liquidity preference E. None of these

D. Liquidity preference

A firm just issued a 30 year bond. The indenture includes a provision stating that the firm will purchase and retire 10% of the bonds every 3 years. This is an example of a ___________ provision A. Call B. Conversion C. Put D. Sinking fund E. None of these

D. Sinking fund

Based on our discussion, we're able to use duration to accurately approximate price changes for ________________ changes in interest rates. A. Any B. Large C. No D. Small

D. Small

Which of the following is NOT a reason we might use free cash flow to the firm to value a company? A. Firm doesn't pay dividends B. Firm's dividends don't match its cash flows C. Intend to buy out the company D. Stable capital structure E. All of these are reasons to use free cash flow to the firm

D. Stable capital structure

You are planning for retirement. You figure that you'll be able to retire in about 40 years. Which of the following strategies would you employ to protect your investments from interest rate risk? A. Convexity B. Duration C. Net worth immunization D. Target date immunization

D. Target date immunization

Your retirement fund consists of a large amount of bonds. You have 40 years until retirement. Given today's low interest rates, you fear rates rising in the future, so you want to protect your portfolio from interest rate risk until you enter retirement. What strategy might you employ? A. Diversification B. Momentum strategy C. Net worth immunization D. Target date immunization

D. Target date immunization

According to our class discussion, the "best case scenario" for an investor in a callable bond is to receive the _____________. A. Current yield B. Realized compound yield C. Yield to call D. Yield to maturity

D. Yield to maturity

You want to know what the forward rate is. However, the only information you have available is that you know a 1 year zero coupon bond sells for $909.09, while a 2 year zero coupon bond sells for $907.03. What would you estimate the 1 year forward rate starting one year from today to be? A. 10% B. 11% C. 16% D. 21% E. A different

E. A different

You are considering the interest rate risk of a a bond. The bond has 20 years to maturity, and it is callable at any time with a call price of $1,010. The bond pays annual coupons, with a 10% coupon rate and a 10% yield to maturity, meaning that it currently trades at par. If you are concerned about a 1% change in interest rates in either direction, what is the effective convexity of this bond? A. −269.59, choose if between [−274.59,−264.59] B. −128.32, choose if between [−133.32,−123.32] C. −47.65, choose if between [−52.65,−42.65] D. 62.78, choose if between [57.78,67.78] E. A different value

E. A different value

You put a price target on Aivitca shares of $50 next year. You estimate that the firm will pay a dividend at the same time of $4.50 per share. If the market capitalization rate for the firm is 12%, what should the share price be today? A. $55.45 B. $56.34 C. $57.03 D. $57.59 E. A different value

E. A different value

Which of the following is NOT a problem with approximating the price change of a bond when interest rates move using duration? A. Bad at modeling larger rate movements B. Only an approximation C. Takes as much time as exact answers D. Using a straight line to model a curved relationship E. All of these are problems

E. All of these are problems

Which of the following is NOT a reason we might use free cash flow valuation instead of the dividend discount model? A. Dividends are not proportional to cash flow B. Dividends are paid inconsistently C. Firm does not pay dividends D. Planning to take over the firm E. All of these are reasons to prefer free cash flow valuation

E. All of these are reasons to prefer free cash flow valuation

Which of the following is NOT true of the duration of a perpetual bond? A. A higher duration implies higher price sensitivity to interest rate changes B. It has equivalent interest rate risk to a zero coupon bond that matures at its duration C. It only depends on the yield of the bond D. The bond continues after the duration E. All of these are true

E. All of these are true

When implementing a target date immunization strategy, we attempt to offset the _________________ risk of our portfolio with its __________________ risk. A. Call; Reinvestment B. Default; Reinvestment C. Interest rate; Call D. Interest rate; Default E. Interest rate; Reinvestment

E. Interest rate; Reinvestment

Key rates can be used to resolve which problem with our typical duration calculation? A. Cash flows change with interest rates B. Duration changes with interest rates C. Forced conversion D. Instantaneous method E. Interest rates don't move in parallel

E. Interest rates don't move in parallel

Which of the following implies a higher duration? A. A higher coupon rate B. A higher yield to maturity C. A shorter maturity D. All of these E. None of these

E. None of these

Which of the following INCREASES interest rate risk? A. Higher coupon rate B. Higher yield to maturity C. Shorter maturity D. All of these increase interest rate risk E. None of these increase interest rate risk

E. None of these increase interest rate risk

Suppose you are given a bond that has 10 years to maturity, with a 5% annual coupon payment and a 7% yield to maturity. According to our discussion, which of the following would increase this bond's duration? A. Change coupon rate to 6% B. Change maturity to 9 years C. Change yield to maturity to 8% D. All of these would increase its duration E. None of these would increase its duration

E. None of these would increase its duration

Two manufacturing firms are competitors. One firm primarily uses machinery, leading to high fixed costs and low variable costs. The other primarily relies on human labor, leading to low fixed costs and high variable costs. Which multiple might we wish to avoid when comparing the two firms? A. Enterprise Value / EBITDA B. Price / Book Value C. Price / Cash Flow D. Price / Earnings E. Price / Sales

E. Price / Sales

__________________ is a bond strategy that relies on perfectly offsetting the interest rate risk of the portfolio with its reinvestment risk. A. Balancing B. Convexity smoothing C. Duration management D. Net worth immunization E. Target date immunization

E. Target date immunization

Which of the following is NOT an assumption that we made for one of the forms of the dividend discount model? A. Dividends don't grow B. Dividends grow at a constant rate C. Dividends grow at a faster rate followed by a slower rate D. One discount rate for all cash flows E. We used all of these

E. We used all of these

Accrued Interest

Interest earned but not yet paid.

Realized Compound Yield

Rate of return realized over the life of the bond, accounting for reinvestment rate of coupons.

Convexity

The curvature of the price-yield curve; The more convexity, the worse the duration estimate will differ from actual change

Forward Price to Earnings Ratio

The market price of a stock divided by the earnings per share expected over the next 12 months

Trailing Price to Earnings Ratio

The market price of a stock divided by the earnings per share for the last 12 months

Invoice Price

The price the dealer pays the manufacturer

Effective Duration

The sensitivity of a bond's price to a change in a benchmark yield curve.

Expectations Theory

The theory that the shape of the yield curve depends on investors' expectations about future inflation rates.

Payout Ratio

a measure of the percentage of earnings a company distributes in the form of cash dividends to common stockholders

Bond Price

current price that the bond sells for in the bond market

Duration

length of time something lasts

Current Yield

the amount of interest earned on a bond, expressed as a percentage of the bond's current market price