Finance Quiz1

Roth IRA qualifications

$6,000 max investment $129,000 single $240,000 married

Underpriced by $14.18

A 10-year annual payment corporate bond has a market price of $1,050. It pays an annual interest of $100 and its required rate of return is 9 percent. Is the bond correctly priced, overpriced, or underpriced? If it is overpriced or underpriced, then list by how much.

less than its present value.

A 10-year, annual payment corporate coupon bond has an expected return of 11 percent and a required return of 10 percent. The bond's market price is:

7.2%

A 6% bond pays interest annually and matures in 14 years. The face value is $1,000 and the current market price is $896.30. What is the yield to maturity?

8 years

A bond is currently selling at price of 977.03, the face value is $1,000 and the coupon rate is 8%. Interest is paid semi-annually. How many years is it until the bond matures if the market rate of return is 8.4%

16.6%

A common stock paid a dividend at the end of last year of $3.50. Dividends have grown at a constant rate of 6 percent per year over the last 20 years, and this constant growth rate is expected to continue into the future. The stock is currently selling at a price of $35 per share. What is the expected rate of return on this stock?

$37.04

A preferred stock is expected to pay a constant quarterly dividend of $1.25 per quarter into the future. The required rate of return, Rs, on the preferred stock is 13.5 percent. What is the fair value (or price) of this stock?

I/Y= 9.03%

A six-year, annual payment corporate bond has a required return of 9.5 percent and an 8 percent coupon. Its market value is $20 over its present value. What is the bond's expected rate of return?

Depository institutions include

Banks and thrifts

$1052.55

Bond Price: A bond has 9% coupon rate, matures in 12 years and pays interest semi-annually, the face value is $1,000. What is the current price of this bond if the market rate of return is 8.3%

required rate of return (calculator function)

I/Y

IRA stands for

Individual Retirement Account

_________ and __________ allow a financial intermediary to offer safe liquid liabilities such as deposits while investing the depositors' money in riskier illiquid assets.

Monitoring; diversification

Constant growth formula

P= Div(1+g)/r-g= P0 = D1/(R-g)

Zero growth dividend formula

P= Div/r

IBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public through its mutual funds.

Primary Market Transaction

The interest rate used to find the present value of a financial security is the:

Required rate of return

required rate of return

The interest rate an investor SHOULD receive on a security, given its risk.

Discuss how secondary markets benefit issuers and investors.

The secondary market benefits the issuers and the investors because it gives the individual investor the opportunity to invest in the stock through an exchange and the issuer and the opportunity to raise capital.

p= (D+1+r) x (r-g)

What is the rate of return formula?

Par Bond

When the coupon rate on a bond is equal to the required rate of return on the bond, the fair present value is equal to the face value of the bond. When the coupon rate on a bond is equal to the yield to maturity on the bond, the current market price is equal to the face value of the bond.

$26.25

You are evaluating a company's stock. The stock just paid a dividend of $1.75. Dividends are expected to grow at a constant rate of 5 percent for a long time into the future. The required rate of return (Rs) on the stock is 12 percent. What is the fair present value?

less than or equal to; greater than or equal to

You would want to purchase a security if the price is ________ the present value or if the expected return is ________ the required rate of return.

Roth IRA

an individual retirement account allowing a person to set aside after-tax income up to a specified amount each year. Both earnings on the account and withdrawals after age 59½ are tax-free.

Traditional IRA

an individual retirement account that allows individuals to contribute pre-tax income to investments that grow tax deferred mandatory withdrawal at 70 1/2

A corporation seeking to sell new equity securities to the public for the first time in order to raise cash for capital investment would most likely:

conduct an IPO with the assistance of an investment banker.

PMT

coupon payment (calculator)

zero growth dividends

dividends are expected to remain at a constant level forever

Constant growth in dividends

dividends on a stock are expected to grow at a constant rate, g, each year into the future

Money markets trade securities that

mature in one year or less. have little chance of loss of principal.

coupon rate

the interest paid on a bond instrument used to calculate the annual cash flow the bond issuer promises to pay the bond holder

premium bond

when the coupon rate on a bond is GREATER than the required rate of return on a bond, the fair present value is GREATER than the face value of the bond

Discount Bond

when the coupon rate on a bond is equal to the required rate of return on the bond, the fair present value is less than the face value of the bond