Finance Exam 2

A bond with a coupon rate of 7% makes semiannual coupon payments on January 15 and July 15 of each year. The quoted price for the bond on January 30 (i.e. 15 days after last coupon payment) was $1,001.875. What is the invoice price of the bond? (assume the coupon period has 182 days).

1,004.76

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

Liquidity

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

Long-term, Taxable junk bond (Riskiest Bond sees the highest Yield)

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

Long-term, taxable junk bond

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

Over-The-Counter

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

Over-the-counter

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

Primary Market

You can not attend the shareholder's meetings for Company X, so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

Proxy Voting

A note is generally defined as:

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

What is the price at which a dealer sells a bond?

Ask (asked) price

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

Asked Price

Which of the following statement is most false?

The yield curve tends to be sharply decreasing as the economy comes out of a recession and interest rates are expected to rise.

A treasury yield curve plots Treasury interest rates relative to?

Time To Maturity

Assume that you wish to purchase a 10-year bond that has a par value of $1,000 and makes semiannual interest payments of $70. If you require a 10 percent return on this investment, which of the following is closest to the price you are willing to pay for the bond?

$1,249

Wilton's Market just announced its next annual dividend will be $1.50 a share. It expects the dividends to grow by 1.8 percent annually forever. How much will one share of this stock be worth five years from now if the required return is 15.5 percent?

$11.97

Wilton's Market just paid annual dividend of $1.50 a share. It expects the dividends to grow by 1.8 percent annually forever. How much will one share of this stock be worth ten years from now if the required return is 15.0 percent?

$13.83

Numbers Inc has a current EPS of $3.14 and a benchmark price-earnings (PE) ratio of 5.017. Earnings are expected to grow 2.72 percent annually. What is the expected stock price in one year based on the PE ratio?

$16.18

The outstanding bonds of Roxxon, Inc. provide an annual real rate of return of 4%. If the nominal rate of return is 5.1%, what is the inflation rate under the precise Fisher Effect?

1.058%

The preferred stock of Into Eternity pays an annual dividend of $6.00 and sells for $60.00 a share. What is the dividend yield?

10%

Willie T., Inc. has coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. The bonds pay coupons semi-annually and has an (annual) coupon rate of 7 percent. How many years is it until these bonds mature?

12.53 years

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

12.53 years

The preferred stock of Into Eternity pays an annual dividend of $6.50 and sells for $42.19 a share. What is the dividend yield?

15.41%

The outstanding bonds of Dark Tranquility, Inc. provide an annual real rate of return of 2.9 percent. Given the current rate of inflation is 1.8 percent, what is the nominal rate of return on these bonds?

4.75%

An investor with a 25% marginal tax rate is choosing to invest in either a corporate bond with a before-tax annual yield of 7.3% or a municipal bond. What must be the annual rate of return that the municipal bond offers to make the investor indifferent between the two securities?

5.48%

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

Bearer Form

A bond is quoted at a price of $1,011. This price is referred to as the...

Clean Price

Which one of the following represents the dividend yield as used in the Dividend Growth Model (DGM)?

D1/P0

The Zuffa Company has a semi-annual coupon bond outstanding. A decrease in the market interest rate will have which of the following effects on this bond, all else equal?

Decrease the coupon rate

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

Determining the amount of the dividend to be paid per share.

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

Floor Broker

A newly issued bond has a coupon rate of 7 percent and semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be:

Greater than 7% (The effective rate must be higher than YTM, which equals the coupon rate if a bond is priced at par.)

The pure time value of money is known as the ______

Term structure of interest rates

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

g, Growth Rate

Sew 'N More just paid an annual dividend of $1.42 a share. The firm plans to pay annual dividends of $1.45, $1.50, and $1.53 over the next 3 years, respectively. After that time, the dividends will be held constant at $1.60 per share forever. What is this stock worth today at a discount rate of 9 percent?

$17.50

DB Contracting is growing quickly. Dividends are expected to increase by 8 percent annually for the next three years, with the annual growth rate slows to a constant 3 percent thereafter. The required return is 14 percent and the company just paid its annual dividend of $3.64 per share. What is the current stock price per share?

$38.79

A firm has a current EPS of $2.54 and a benchmark price-earnings (PE) ratio of 16.4. Earnings are expected to grow 3.8 percent annually. What is the expected stock price in one year based on the PE ratio?

$43.24

Antiques R Us is a mature manufacturing firm. The company just paid a $13 dividend per share, but management expects to reduce the dividend payout by 8 percent per year indefinitely. If the require rate of return on the stock is 16 percent, what will you pay for a share of the stock today?

$49.83

A share of common stock has just paid a dividend of $3.00. If the expected long-run growth rate for this stock is 5%, and if investors require an 11% return, what is the price of the stock?

$52.50

Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40. If you require a 10% return on this investment, which of the following is closest to the price you are willing to pay for the bond?

$828

Amon Amarth Co. offers 10-year, 8 percent coupon bonds with semiannual payments and a yield to maturity of 8.24 percent. What is the market price of a $1,000 face value bond?

$983.86

An investor with a 37 percent marginal tax rate is choosing to invest in either a corporate bond with a before-tax annual yield of 9.73% or a municipal bond. What must be the annual rate of return that the municipal bond offers to make the investor indifferent between the two securities?

6.13%

The current dividend yield on Clayton's Metals common stock is 3.7 percent. The company just paid a $5.23 annual dividend per share and announced plans to pay $5.40 per share next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock?

6.95%

The current dividend yield on Clayton's Metals common stock is 3.2%. The company just paid a $1.48 annual dividend and announced plans to pay $1.54 next year. The dividend growth rate is expected to remain constant at the current level. What is the REQUIRED RATE OF RETURN on this stock?

7.25%

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

7.49%

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

8.62%

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

An Early bond redemption

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

Bearer form

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

Broker

Kirchner Corp. bonds mature in 6 years and have a yield to maturity of 8.5%. The par value of the bonds is $1,000. The bonds have a 10% coupon rate and pay interest on a semi-annual basis. What are the current yield and capital gain yield on the bonds for this year? Assume Interest rates do not change.

Current Yield = 9.35% Capital Gains Yield = -.85% N = 6 * 2 = 12, I = 8.5/2 = 4.25, PMT = 10%/2 * 1,000 = 50, FV = 1,000, Solve for PV = $1,069.38 The current yield (CY) = $100/$1,069.3780 = 9.35% Recognizing that the CY and capital gains yield (CG) constitute the total return (YTM) on the bond: CY + CG = YTM, solve for CG: 9.35% + CG = 8.5%, CG = -0.85%

The common stock for Eddie's Engines INC. sells for $36.23 a share. The stock is expected to pay $2.20 per share next year. Eddie's has established a pattern of increasing their dividends by 4.3% annually and expects to continue to do so. What is the market rate of return on this stock?

R= (D1/P0)+g

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

Reducing Bond Coupon Rates