FN Exam 2

A Convertible bond:

Can be swapped for a fixed number of shares of stock anytime before maturity at the holder's option.

The interest earned on both the initial principal and the interest reinvested from prior periods is called:

Compound Interest

Which one of the following best describes Nasdaq?

Computer network of securities dealers

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

Constant growth model

Ana just received the semiannual payment of $35 on a bond she owns. This is called the ______ payment.

Coupon

The Catastrophe Bond:

Covers hurricanes and earthquakes in the U.S.

What is the future value of $1,000 invested for 15 years at a rate of 5%?

$2,079

What is the present value of $400 invested each year for 12 years at a rate of 6%?

$3,354

What is the future value of $1,200 invested for 20 years at a rate of 6%?

$3,849

McCarty Corporation recently paid an annual dividend of $2.62 on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $28.12 per share. What is the market rate of return?

13.47%

All else constant, which one of the following will result in the lowest present value of a lump sum?

8 percent interest for 10 years. (highest % with highest # of years)

Bonds issued by the U.S. government:

are considered to be free of default risk.

Protective covenants:

are primarily designed to protect bondholders.

A bond has a face value of $1,000. It can be redeemed early at the issuer's discretion for $1,015, plus any accrued interest. The additional $15 is called the:

call premium.

Valenica Corporation has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders?

Right to share in company profits prior to other shareholders

A perpetuity is defined as:

Unending equal payments paid at equal time intervals

Municipal bonds:

pay interest that is free from federal taxation.

Kiefer Service Company common stock sells for $36.84 per share and has a market rate of return of 15.8 percent. The company just paid an annual dividend of $1.61 per share. What is the dividend growth rate?

10.95%

Lochmere Corporation is evaluating a taxable bond at 7% and a municipal bond at 5.75%. What is the break-even tax rate?

18%

A $10,000 face value Treasury bond is quoted at a price of 101.6533 with a current yield of 4.87 percent. What is the coupon rate?

4.95%

Assume the real rate was 9.5% and the inflation rate was 4%. Using the Fisher Effect, what was the nominal rate?

13.88%

You are paying an EAR of 16.78 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on this account?

15.61%

The features of Municipal bonds make them attractive to high income, _________ bracket investors.

High-tax

How would a decrease in the interest rate effect the present value of a lump sum, single amount problem (all other variables remain the same)?

Increase the present value

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

Broker

Suppose the first comic book of a classic series was sold in 1954. In 2020, the estimated price for this comic book was $310,000, which is an annually compounded return of 22 percent. For this to be true, what was the original price of the comic book in 1954?

$0.62

You want to buy a new sports car for $55,000. The contract is in the form of a 60-month annuity due at an APR of 5.6 percent compounded monthly. What will be your monthly payment?

$1,048.21

The common stock of Shepard Auto sells for $47.92 per share. The stock is expected to pay $2.28 per share next year when the annual dividend is distributed. The company increases its dividends by 1.65 percent annually. What is the market rate of return on this stock?

6.41%

Franklin Corporation has an opportunity to purchase bonds at a rate of 11%. They are in the 34% tax bracket. What is the after tax yield on these bonds?

7.26%

Lampson bonds have a face value of $1,000 and are currently quoted at 867.25. The bonds have coupon rate of 6.5 percent. What is the current yield on these bonds?

7.49%

What is the EAR if a bank charges you an APR of 7.65 percent compounded quarterly?

7.78%

Assume the nominal rate was 11.50% and the inflation rate was 3%. Using the Fisher Effect, what was the real rate?

8.25%

Sierra Slumber common stock is currently selling for $38.97. The last annual dividend paid was $1.26 per share and the market rate of return is 13.2 percent. At what rate is the dividend growing?

9.65%

An agent who maintains an inventory from which he or she buys and sells securities is called a:

Dealer

How would a decrease in the interest rate effect the future value of a lump sum, single amount problem (all other variables remain the same)?

Decrease the future value

Treasury issues are:

Exempt from state taxes but, not federal income taxes

Which one of the following statements concerning interest rates is correct?

The effective annual rate equals the annual percentage rate when interest is compounded annually

A zero coupon bond:

has more interest rate risk than a comparable coupon bond.

Callable bonds generally:

have a sinking fund provision.

Dilan owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. The $1,000 is referred to as the:

Face value

The variable that you are solving for in a future value of an annuity problem is:

Future Value

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

G

Sara wants to establish a trust fund to provide $75,000 in scholarships each year. She believes the fund can earn a fixed 6.15 percent annual rate of return. How much money must she contribute to establish the fund?

$1,219,512

You invested $6,500 at 6 percent simple interest. How much more could you have earned over a 10-year period if the interest had compounded annually?

$1,240.51

What is the future value in 60 years of $7,440 invested today at 9 percent interest, compounded annually?

$1,309,673

Nasafi Lumber paid an annual dividend of $1.37 per share yesterday. Today, the company announced that future dividends will be increasing by 3 percent annually. If you require a return of 14.6 percent, how much are you willing to pay to purchase one share of this stock today?

$12.16

Arcs and Triangles paid an annual dividend of $1.47 per share last month. The company is planning on paying $1.52, $1.58, and $1.60 per share over the next three years, respectively. After that, the dividend will be constant at $1.65 per share per year. What is the market price of this stock if the market rate of return is 12 percent?

$13.54

How much are you willing to pay for one share of Govender stock if the company just paid an annual dividend of $1.61, the dividends increase by 4.2 percent annually, and you require a return of 16.4 percent?

$13.75

Assume your mother invested a lump sum 28 years ago at 4.05 percent interest, compounded annually. Today, she gave you the proceeds of that investment, totaling $48,613.24. How much did your mother originally invest?

$15,994.70

Mirza's just paid its annual dividend of $1.58 per share. The dividends are expected to grow at 2.7 percent per year indefinitely. What will the price of this stock be in 7 years if investors require an annual return of 15.2 percent?

$15.64

A relative will support your education by paying you $500 a month for 50 months. If you can earn 7 percent on your money, what is this gift worth to you today?

$21,629.93

Vimal just purchased an annuity that will pay him $24,000 a year for 25 years. He will receive the first payment today. Given a discount rate is 8.5 percent, how much did Vimal pay for the annuity?

$266,489

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:

.05/(1 − t*) = .07.

Cabrera Carriers, Incorporated, common stock offers an expected total return of 14.56 percent. The last annual dividend was $2.27 per share. Dividends increase at a constant 2.1 percent per year. What is the dividend yield?

12.46%

The yield to maturity on a bond is the interest rate you earn on your investment if interest rates do not change. If you actually sell the bond before it matures, your realized return is known as the holding period yield. Suppose that today you buy a coupon bond with 9 percent annual interest for $1,000. The bond has 12 years to maturity. Three years from now, the yield to maturity has declined to 7 percent and you decide to sell. What is your holding period yield?

12.83%

Your credit card company charges you 1.15 percent interest per month. What is the APR?

13.80%

A $1,000 face value bond has a coupon rate of 7 percent, a market price of $989.40, and 10 years left to maturity. Interest is paid semiannually. If the inflation rate is 2.2 percent, what is the yield to maturity when expressed in real terms?

4.84%

Assume the total cost of a college education will be $245,000 when your child enters college in 15 years. You presently have $108,000 to invest for this purpose. What annually compounded rate of interest must you earn to cover the cost of your child's college education?

5.61%

Current Yield is the bond's annual coupon divided by its yield to maturity.

False

Municipal bonds are taxable for federal, state and local taxes.

False

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

Floor broker

The Fisher effect primarily emphasizes the effects of ________ on an investor's rate of return.

Inflation

Lescano Corporation is going to pay an annual dividend of $2.05 per share next year. This year, the company paid a dividend of $2 per share. The company adheres to a constant rate of growth dividend policy. What will one share of this common stock be worth six years from now if the applicable discount rate is 11.2 percent?

$27.33

What is the future value of $500 invested each year for 20 years at a rate of 10%?

$28,637

Altitude Group is expected to pay an annual dividend next year of $2.71 per share. Dividends are expected to increase by 4.3 percent annually. What is one share of this stock worth at a required rate of return of 13.9 percent?

$28.23

What is the present value of $500 invested each year for 10 years at a rate of 5%?

$3,861

Finn intends to save $2,000 per year, and expects to earn an annual rate of 6.9 percent. How much will he have in his account at the end of 37 years?

$313,274.38

Jonathan invested $6,220 in an account that pays 11 percent simple interest. How much money will he have at the end of 40 years?

$33,588

Your local toy store just announced its annual dividend will be $4 dividend next year, $3 the following year, and then a final liquidating dividend of $46 per share in Year 3. At a discount rate of 18 percent, what should one share sell for today?

$33.54

Assume you intend to retire 47 years from today. Your current salary is $80,000 per year, and you expect to earn salary increases of 3.25 percent each year. What annual salary do you expect to earn 47 years from today?

$359,685

What is the present value of $1,000 to be received in 12 years invested at a rate of 8%?

$397

Crystal Glass recently paid $3.60 as an annual dividend. Future dividends are projected at $3.80, $4.10, and $4.25 over the next three years, respectively. Beginning four years from now, the dividend is expected to increase by 3.25 percent annually. What is one share of this stock worth today at a discount rate of 12.5 percent?

$42.92

A preferred stock pays an annual dividend of $5.20. What is one share of this stock worth today if the rate of return is 10.44 percent?

$49.81

What is the present value of $1,200 to be received in 18 years invested at a rate of 5%?

$499

A preferred stock sells for $63.60 per share and provides a return of 8.40 percent. What is the amount of the dividend per share?

$5.34

Excellent Yachting is considering acquiring Turquoise Tours. Management believes Turquoise Tours can generate cash flows of $218,000, $224,000, and $238,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 14.5 percent, what is the maximum Excellent Yachting should pay today to acquire Turquoise Coast?

$519,799.59

Petropoulos Resorts common stock sells for $58.49 per share and pays an annual dividend that increases by 1.3 percent annually. The market rate of return on this stock is 12.6 percent. What is the amount of the last dividend paid?

$6.52

Martinez Freight wants to issue 5.4 percent preferred stock with a stated liquidating value of $100 per share. The company has determined that stocks with similar characteristics provide a return of 8.2 percent. What should the offer price be?

$65.85

You are considering two savings options. Both options offer a rate of return of 8.3 percent. The first option is to save $1,500, $1,250, and $6,400 at the end of each year for the next three years, respectively. The other option is to save one lump sum amount today. You want to have the same balance in your savings account at the end of the three years, regardless of the savings method you select. If you select the lump sum method, how much do you need to save today?

$7,489

Your bank pays 1.2 percent compounded daily on its savings accounts. If you deposit $7,500 today, how much will you have in your account 15 years from now?

$8,979.10

Werden Drilling offers 5.5 percent coupon bonds with semiannual payments and a yield to maturity of 7 percent. The bonds mature in 10 years. What is the market price per bond if the face value is $1,000?

$893.41

You have just received notification that you have won the $1.25 million first prize in the Centennial Lottery. The prize will be awarded on your 100th birthday, 79 years from now. The appropriate discount rate is 6.4 percent, compounded annually. What is the present value of your winnings?

$9,300.82

What is the future value of $400 invested each year for 15 years at a rate of 6%?

$9,310

Cullen invested $5,000 five years ago and earns 6 percent annual interest. By leaving his interest earnings in her account, he increases the amount of interest he earns each year. His investment is best described as benefitting from:

Compounding

How would an increase in the interest rate effect the present value of an annuity problem (all other variables remain the same)?

Decrease the present value

A decrease in which of the following will increase the current value of a stock according to the dividend growth model?

Discount Rate

Andrew just calculated the present value of a $15,000 bonus he will receive next year. The interest rate he used in his calculation is referred to as the:

Discount rate

The process of determining the present value of future cash flows in order to know their value today is referred to as:

Discounted cash flow

Madelyn is calculating the present value of a bonus she will receive next year. The process she is using is called:

Discounting

What are the distributions of either cash or stock to shareholders by a corporation called?

Dividends

When short-term rates are higher than long-term rates, we say it is __________________.

Downward sloping

The variables in a future value of a lump sum problem include all of the following, except:

Payments

An Income bond:

States that the bond's coupon payment depends on company income.

The variables in a future value of an annuity problem include all of the following, except:

Volatility

Genova Corporation has a four year 10% annual coupon bond. The price of the bond is $956.12. The Yield to Maturity is 11.43%. What is the current yield on this bond?

10.46%

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

A discount; less than

On your tenth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today?

Age 31

A Put bond:

Allows the holder to force the issuer to buy back the bond at a stated price.

Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ____ rate.

Annual percentage

The interest rate that is most commonly quoted by a lender is referred to as the:

Annual percentage rate

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the _____ rate.

Effective annual

The Fisher Effect has all of the following components, except:

Expected Rate of Return, E

Interest Rate Risk is the risk that arises for bond owners from fluctuating interest rates. All other things being equal, the _______ the time to maturity, the _________ the interest rate risk.

Longer, greater

Interest Rate Risk is the risk that arises for bond owners from fluctuating interest rates. All other things being equal, the _______ the coupon rate, the _________ the interest rate risk.

Lower, greater

A bond's principal is repaid on the ________ date.

Maturity

The term structure of interest rates tells us what _________ interest rate are on default-free, pure discount bonds of all maturities.

Nominal

Which one of the following variables is the exponent in the present value formula?

Number of time periods

The variable that you are solving for in a present value of an annuity problem is:

The Present Value

A $1,000 par value corporate bond that pays $45 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $989.42?

The current yield exceeds the coupon rates

When comparing a 10-year bond versus a 1-year bond, the 10-year bond has a much greater interest rate risk.

True

Which one of the following statements is correct?

Given a positive rate of inflation, the real rate must be less than the nominal rate.

A Warrant Bond:

Gives the buyer of a bond the right to purchase shares of stock in the company at a fixed price.

Howell Corporation deposited $12,000 in an investment account one year ago for the purpose of buying new equipment. Today, it is adding another $15,000 to this account. The company plans on making a final deposit of $10,000 to the account one year from today and plans to purchase the equipment four years from today. Assuming an interest rate of 5.5 percent, how much cash will be available when the company is ready to buy the equipment?

$46,008.30

The variables in a present value of an annuity problem include all of the following, except:

Risk Profile

Which one of the following bonds is the least sensitive to interest rate risk?

3-year; 6 percent coupon

You just paid $480,000 for an annuity that will pay you and your heirs $15,000 a year forever. What rate of return are you earning on this policy?

3.125%

Rollins, Incorporated, has a 15-year bond issue with a coupon rate of 4.5 percent that matures in 11.5 years. The bonds have a par value of $1,000 and a market price of $1,105.50. Interest is paid semiannually. What is the yield to maturity?

3.38%

Javier and Alex plan on retiring 27 years from today. At that time, they plan to have saved the same amount. Javier is depositing $15,000 today at an annual interest rate of 5.2 percent. How will Alex's deposit amount vary from Javier's if Alex also makes a deposit today, but earns an annual interest rate of 6.2 percent? Alex's deposit will need to be ______ than Javier's. (Assume annual compounding on both accounts.)

FV = $15,000(1.05227)= FV = $58,954.40 = PV = $58,954.40/1.06227 =PV = $11,618.61,= Difference = $11,618.61 − 15,000= Difference = −$3,381.39

The variables in a present value of a lump sum problem include all of the following, except:

Free Cash Flows

Assume you are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now?

Future Value

The variable that you are solving for in a future value of a lump sum problem is:

Future Value

The variable that you are solving for in a future value of an annuity problem is

Future Value

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

Hayley won a lottery and will receive $1,000 each year for the next 30 years. The current value of these winnings is called the:

Present Value

The variable that you are solving for in a present value of a lump sum problem is:

Present Value

Ernst & 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

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate? (No calculations needed.)

Project X has both a higher present and a higher future value than project Y

The secondary market is best defined as the market:

Where outstanding shares of stock are resold

Mockingbird Resources is expected to pay a dividend of $2.71 per share in one year. Thereafter, dividends will grow two percent per year forever. The current stock price is $19.60. If you require a return of 15 percent per year, should you buy the stock today? Why or why not?

Yes; The stock has a present value of $20.85 per share.

Assume the current market price of a bond exceeds its par value. Which one of these equations applies?

Yield to maturity < Coupon rate

The 30-year, 5.5 percent bonds issued by Modern Kitchens pay interest semiannually, mature in four years, and have a $1,000 face value. Currently, the bonds sell for $1,020.66. What is the yield to maturity?

4.92%

Claire's coin collection contains fifty 1948 silver dollars. Her grandparents purchased them at their face value in 1948. These coins have appreciated by 7.6 percent annually. How much is the collection expected to be worth in 2025?

$14,077.16

The common stock of Salazar Insurance pays a constant annual dividend of $4.80 per share. What is one share of this stock worth at a discount rate of 13.3 percent?

$36.09

Warren Corporation is interested in a three-year, 11% annual coupon bond. A broker quotes a price of $930.35. What is the yield to Maturity?

14%

Coronel Corporation 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 seven years. What should the coupon rate be on the new bonds if the firm wants to sell them at par?

8.62%

A common error made when solving a future value of an annuity problem is:

Multiplying the annual deposit and the number of years before calculating the problem

A preferred stock pays an annual dividend of $7.95 and sells for $48.89 per share. What is the rate of return?

16.26%

Rao Investments has 6.5 percent coupon bonds outstanding with a current market price of $548. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature?

17.84 years

An annuity that pays $12,500 a year at an annual interest rate of 5.45 percent costs $150,000 today. What is the length of the annuity time period?

20 years

The term structure of interest rates includes all of the following basic components, except:

Weighted Average Cost of Capital

Which one of the following statements related to loan interest rates is correct?

When comparing loans you should compare the effective annual rates