Test 2 Finance Book Review

ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?

$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years.

The Ibbotson SBBI data show that over the long-term, ___.

- small-company stocks had the highest risk level - small-company stocks generated the highest average return - T-bills, which had the lowest risk, generated the lowest return

Common stock is more difficult to value than a bond because

1. there is no amount is known in advance 2. the life of the investment is essentially forever b/c no maturity 3. there is no easy way to observe the rate of return that the market requires

The probability of an outcome being at least 2 standard deviations below the mean in a normal distribution is approximately:

2.5 = 100-95=5/2

If you are in the 20% federal income tax bracket, what is your after-tax yield on a municipal bond that is currently trading at par to yield 5%. Assume there are no state or local taxes.

5% - Interest income from munis is exempt from federal income tax.

As an investor in the bond market, why should you be concerned about changes in interest rates?

Changes in interest rates cause changes in bond prices.

Which of the following are true based on the year-to-year returns from 1926-2014?

Common stocks frequently experience negative returns. T-bills sometimes outperform common stocks.

Which of the following is commonly used to measure inflation?

Consumer Price Index

The two potential ways to make money as a stockholder are through _______ and capital appreciation.

Dividends

True or false: The average return of a given period is typically not a good estimate of the returns over that same period.

False

True or false: In the Ibbotson-Sinquefield studies, U. S. Treasury bill data is based on T-bills with a maturity of one year.

False: 1 month!

What is the definition of a bond's time to maturity?

It is the number of years until the face value is paid off

What is the equation for approximating the nominal rate of return? R = the nominal rate of interest r = the real rate of interest h = the inflation rate

R=r+h

What does the AAA rating assigned by S&P mean?

The firm is in a strong position to meet its debt obligations

Which of the following are needed to describe the distribution of stock returns?

The mean return The standard deviation of returns

The dividend yield = Dt+1/Pt

True

What is a corporate bond's yield to maturity (YTM)?

YTM is the prevailing market interest rate for bonds with similar features. YTM is the expected return for an investor who buys the bond today and holds it to maturity.

A positive capital gain on a stock results from ___.

an increase in price

To find the total bond value, add the present value of the amount paid at maturity to the _____ of the annual coupon payments.

annuity present value

The dividend yield for a one-year period is equal to the annual dividend amount divided by the ____.

beginning stock price

The percentage change in the price of a stock over a period of time is called its ___________.

capital gain yield

Which of the following are ways to make money by investing in stocks?

capital gains and dividends

When a company declares a dividend, shareholders generally receive ____.

cash

The average return on the stock market can be used to ___.

compare stock returns with the returns on other securities

3 bonds that have actually been issued?

convertible bonds Coco bond put bond

When interest rates in the market rise, we can expect the price of bonds to ____.

decrease

n 2008, the prices on long-term U.S. Treasury bonds __________ .

gained 40%

If a bond is selling at a discount from its par value, the YTM must be _____ the coupon rate.

greater than If a bond is selling at a discount from its par value, the YTM must be greater than the coupon rate. If the YTM is less than the coupon rate, investors are willing to pay more than par value for the bond.

If the dispersion of returns on a particular security is very spread out from the security's mean return, the security ____.

high risk

An efficient market is one in which any change in available information will be reflected in the company's stock price ___.

immediately

The nominal rate is found by adding the _____ and the real rate of return.

inflation

A corporate bond's yield to maturity:

is usually not the same as a bond's coupon rate changes over time

Which of the following are features of municipal bonds?

issued by state and local gov lower yield than normal bonds no tax

When using trial and error to compute the yield to maturity (YTM) for a 6 percent coupon bond that trades at a premium, the process can be shortened if the initial guess is ____ 6 percent.

lower than

An unrealized gain is treated the same as a realized gain when computing the total _____

return

The degree of interest rate risk depends on ____.

the sensitivity of the bond's price to interest rate changes

True or false: A capital gain on a stock is counted as part of the total return whether or not the gain is realized from selling the stock.

true

True or false: A capital loss is the same thing as a negative capital gain.

true

True or false: The normal distribution is completely described by the average and standard deviation.

true