Principles of Finance

Determine the value of a stock with the following variables using the constant growth model: Current annual dividend: $0.85 per share Required return rate: 7% Constant growth rate: 4%

$29.47

You loan $30,000 of your life savings to a friend for five years at 2% simple interest annually. What is the value of your $30,000 in five years?

$33,000

Janice purchased a $1,000 10-year Treasury note that promised to pay her 1.125% interest every 6 months for the life of the loan. Which of those numbers is the par value of the note?

1,000

You would like to have $30,000 in an account after five years' time. If the account earns 3% compounded interest yearly, how much would you have to deposit today?

25,878

Which of the following best describes a bond?

A debt security that typically pays an investor a fixed rate of return for a specified period of time.

Which of the following accurately describes a normal yield curve?

A positively sloping curve that indicates confidence in sustained economic growth in the future.

In calculating the yield of an investment, what is the relationship between APR and APY?

APR is always slightly lower than APY if an investment is earning compounding interest.

Which of the following is true for calculating the present value of multiple cash flows?

All of the cash flows must be discounted to the same point in time.

Select the statement that correctly explains the relationship between interest rates and present or future value.

Assuming other variables stay the same, if the interest rate increases, the future value of an investment increases.

Select the true statement about default risk.

Bondholders have a degree of legal protection against default risk, but it is not comprehensive.

Which descriptor relates to the market-based approach for valuing corporations?

Considered the truest estimate

Consider what you have learned about valuing bonds. A: Coupon rate = 3.5%, YTM = 4% B: Coupon rate = 3.2%, YTM = 3.2% C: Coupon rate = 2.8%, YTM = 3.5% D: Coupon rate = 4%, YTM = 3.7% Which of the bonds is selling at a premium?

D

Rochelle wants to buy a bond, but she wants to avoid interest rate risk. She also prefers to receive a payment every three months instead of the traditional six months. What type of bond should she buy?

Floating-rate

Select one advantage of an annuity for a borrower.

It can be easier to make regular payments rather than a single lump sum.

Select the statement that is true of preferred stock.

Preferred stock can be converted into common stock.

Select the pairing that is correctly matched.

Preferred stock: stockholders' claim to assets is subordinate to that of debtholders

Which of the following is a disadvantage of bonds for a potential investor?

Some bonds can be redeemed early by the issuer.

A corporation that makes shares of stock available for the public to purchase is an example of an __________.

issuer

Nadia is going to receive $1,000 from her grandparents next year. According to the time value of money, the gift of $1,000 is worth __________ a gift of $1,000 if she received it today.

less than

Preemptive rights allow stockholders to acquire __________ before the general public.

new stock