Exam 2
A U.S. Treasury bond pays 3.05 percent interest. You are in the 28 percent marginal tax bracket. What is your after tax yield on this bond?
2.20% After tax yield = .0305 ×(1 -.28) = .0220, or 2.20 percent
A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the:
Bid-ask spread
Which one of the following terms applies to a junk bond that was originally issued with a bond rating of AA?
Fallen angel
The dividend yield on a stock will increase if the:
stock price decreases.
When valuing a stock using the constant-growth model, D1 represents the:
the next expected annual dividend.
The price at which a dealer will purchase a bond is referred to as the _____ price.
Bid
Triad common stock is selling for $27.80 a share and has a dividend yield of 2.8 percent. What is the dividend amount?
$.78 Dividend =.028 ×$27.80 = $.78
You purchase a bond with a coupon rate of 6.15 percent, semiannual coupons, and a clean price of $998.40. If the next coupon payment is due in two months, what is the invoice price?
$1,018.90 Invoice price = $998.40 + [(.0615 ×$1,000)/2]× 4/6 = $1,018.90
You are buying a bond at a clean price of $1,140. The bond has a face value of $1,000, a coupon rate of 3.8 percent, and pays interest semiannually. The next coupon payment is one month from now. What is the dirty price of this bond?
$1,155.83 Dirty price = $1,140 + [(.038 ×$1,000) / 2×5/6] Dirty price = $1,155.83
Lamey Gardens has a dividend growth rate of 5.6 percent, a market price of $13.16 a share, and a required return of 14 percent. What is the amount of the last dividend this company paid?
$1.05 $13.16 = (D0 ×1.056)/(.14 -.056) D0= $1.05
The Impulse Shopper recently paid an annual dividend of $1.13 per share. The company just announced that it is suspending all dividend payments on its common stock for the next five years. After that, the company expects to pay $.50 a share at the end of each year. At a required return of 18 percent, what is this stock worth today?
$1.21 P0 = ($.50/.18) / (1 + .18)5 = $1.21
Delfino's expects to pay an annual dividend of $1.50 per share next year. What is the anticipated dividend for Year 5 if the firm increases its dividend by 2 percent annually?
$1.50 ×(1.02)4
The Glass Ceiling paid an annual dividend of $1.64 per share last year and just announced that future dividends will increase by 1.3 percent annually. What is the amount of the expected dividend in Year 6?
$1.77 D6= $1.64 ×(1.013)6 = $1.77
Healthy Foods just paid its annual dividend of $1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one share of this stock worth to you if you require a rate of return of 15.7 percent?
$12.16 P0 = ($1.62 × 1.021)/(.157-.021) = $12.16
This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the dividend increases at 3.5 percent annually. What will your capital gain be in dollars on this stock if you sell it three years from now?
$2.43 P0 = $1.90/(.12 -.035) = $22.35 P3 = [$1.90 × (1.035)3]/(.12 -.035) = $24.78 Capital gain = $24.78 -22.35 = $2.43
Best Ever Toys just paid its annual dividend of $1.78 per share. The required return is10.6 percent and the dividend growth rate is 1.23 percent. What is the expected value of this stock five years from now?
$20.44 P5 = [$1.78 ×(1 + .0123)6]/(.106-.0123) = $20.44
River Rock, Inc., just paid an annual dividend of $2.80. The company has increased its dividend by 2.5 percent a year for the past 10 years and expects to continue doing so. What will a share of this stock be worth 6 years from now if the required return is 16 percent?
$24.65 P6 = ($2.80 ×1.0257)/(.16 -.025) = $24.65
Sugar Cookies will pay an annual dividend of $1.23 a share next year. The firm expects to increase this dividend by 8 percent per year the following four years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for Year 7?
($1.23) ×(1.08)4×(1.02)2
Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at that level through Year 3, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share?
$25.51 P3 = ($2.40 ×1.10 ×1.02)/(.12 -.02) = $26.928 P0 = [($2.40 ×1.10)/1.12] + [($2.40 ×1.10)/1.122] + {[($2.40 ×1.10) + $26.928]/1.123} P0= $25.51
The common stock of Up-Towne Movers sells for $33 a share, has a rate of return of 11.4 percent, and a dividend growth rate of 2 percent annually. What was the amount of the last annual dividend paid?
$3.04 D0 = [$33 × (.114 - .02)] / (1 + .02) = $3.04
Braxton's Cleaning Company stock is selling for $32.60 a share based on a rate of return of 13.8 percent. What is the amount of the next annual dividend if the dividends are increasing by 2.4 percent annually?
$3.72 D1 = $32.60 ×(.138-.024) = $3.72
Horseshoe Stables is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $.86 a share but all future dividends will be decreased by 3.5 percent annually. What is a share of this stock worth today at a required return of 17.8 percent?
$3.90 P0 = {$.86 × [1 + (-.035)]} / [.178 - (-.035)] = $3.90
A bond has a par value of $1,000, a current yield of 6.25 percent, and semiannual interest payments. The bond quote is 100.8. What is the amount of each coupon payment?
$31.50 Coupon payment = [.0625×(1.008 ×$1,000)]/2 = $31.50
The 6.5 percent bond of ABCO has a yield to maturity of 6.82 percent. The bond matures in seven years, has a face value of $1,000, and pays semiannual interest payments. What is the amount of each coupon payment?
$32.50 Coupon payment = ($1,000 ×.065)/2 = $32.50
Arts and Crafts Warehouse wants to issue 15-year, zero-coupon bonds that yield 7.5 percent. What price should it charge for these bonds if the face value is $1,000? Assume semiannual compounding.
$331.40 PV = $1,000 / [1 + (.075 / 2)]30 PV = $331.40
Business Solutions is expected to pay its first annual dividend of $.84 per share in Year 3. Starting in Year 6, the company plans to increase the dividend by 2 percent per year. What is the value of this stock today, Year 0, at a required return of 14.4 percent?
$5.01 P5 = ($.84 ×1.02)/(.144-.02) = $6.91 P0 =($.84/1.1443) + ($.84/1.1444) + [($.84 + 6.91)/1.1445] = $5.01
Nu-Tek is expanding rapidly. As a result, the company expects to pay annual dividends of $.62, .80, and $1.05 per share over the next three years, respectively. After that, the dividend is projected to increase by 4 percent annually. What is the current value of this stock if the required return is 16 percent?
$7.63 P3 = ($1.05 ×1.04)/(.16 -.04) = $9.10 P0 = ($.62 /1.16) + ($.80/1.162) + [($1.05 + 9.10)/1.163] = $7.63
The Fish House is expected to pay annual dividends of $1.23 and $1.25 at the end of the next two years, respectively. After that, the company expects to pay a constant dividend of $1.35 a share. What is the value of this stock at a required return of 16.4 percent?
$8.05 P2 = ($1.35/.164) = $8.23 P0 = [$1.23 /1.164] + [($1.25 + 8.23)/1.1642] P0 = $8.05
Breakfast Hut pays a constant annual dividend of $1.39 per share. How much are you willing to pay for one share if you require a rate of return of 14.6 percent?
$9.52 P = $1.39 /.146 = $9.52
The Sports Club plans to pay an annual dividend of $1.20 per share next year, $1.12 per share a year for the following two years, and then a final liquidating dividend of $14.20 per share four years from now. How much is one share of this stock worth to you today if you require a rate of return of 18.7 percent of this risky investment?
$9.63 P0 = ($1.20 / 1.1871) + ($1.12 / 1.1872) + ($1.12 / 1.1873) + ($14.20 / 1.1874) = $9.63
The 4.5 percent bond of JL Motors has a face value of $1,000, a maturity of 7 years, semiannual interest payments, and a yield to maturity of 6.23 percent. What is the current market price of the bond?
$903.05 PV = [(.045 × $1,000)/ 2] ×{(1 - {1 / [1 + (.0623/ 2)]14}) / (.0623 / 2)} + $1,000 / [1 + ( .0623 / 2)]14 PV = $903.05
Jeffries, Inc.,has semiannual, 6 percent coupon bonds on the market that currently have 11 years left to maturity. If the market rate of return for this bond is 7.13 percent three years from now, what will be the bond's clean price at that time?
$932.00 PV =[(.06 × $1,000) / 2] ×{(1 - {1 / [1 + (.0713 / 2)]16}) / (.0713/ 2)} + $1,000 / [1 + (.0713 / 2)]16 PV = $932.00
Last year, Forest Products issued both 5-year and 10-year bonds at par. The bonds each have a coupon rate of 5.5 percent, paid semiannually, and a face value of $1,000. Assume the yield to maturity on each of these bonds is now 7.4 percent. What is the percentage change in the price of the 5-year bond since it was issued? The 10-year bond?
-6.48; -12.33 PV5 =[(.055 × $1,000) / 2] ×{(1 - {1 / [1 + (.074 / 2)]8}) / (.074/ 2)} + $1,000 / [1 + (.074 / 2)]8 PV5 = $935.24 Percentage change in price5 = ($935.24 - 1,000) / $1,000 Percentage change in price5 = -.0648, or -6.48 percent PV10 =[(.055 × $1,000) / 2] ×{(1 - {1 / [1 + (.074 / 2)]18}) / (.074 / 2)} + $1,000 / [1 + (.074 / 2)]18 PV10 = $876.75 Percentage change in price10 = ($876.75- 1,000) / $1,000 Percentage change in price10 = -.1233, or -12.33 percent
Dry Dock Marina is expected to pay an annual dividend of $1.58 next year. The stock is selling for $18.53 a share and has a total return of 9.48 percent. What is the dividend growth rate?
.95 percent g =.0948- ($1.58/$18.53) = .0095, or .95 percent
Blue Water bonds have a face value of $1,000, a coupon rate of 6.5 percent, semiannual interest payments, and mature in 11.5 years. What is the current price of these bonds if the yield to maturity is 6.36 percent?
1011.30 PV = [(.065 × $1,000) / 2]×{(1 - {1 / [1 + (.0636/ 2)]23}) / (.0636 / 2)} + $1,000 / [1 + (.0636 /2)]23 PV= $1,011.30
New Markets has $1,000 face value bonds outstanding that pay interest semiannually, mature in 14.5 years, and have a 4.5 percent coupon. The current price is quoted at 97.6. What is the yield to maturity?
4.73% PV = $976 = [(.045 × $1,000) / 2] ×{(1 - {1 / [1 + (r / 2)]29}) / (r / 2)} + $1,000 / [1 + (r/ 2)]29 r = .0473, or 4.73 percent
The 6 percent semiannual coupon bonds of IPO, Inc., are selling for $1,087. The bonds have a face value of $1,000 and mature in 11 years. What is the yield to maturity?
4.96% PV = $1,087 = [(.06 × $1,000) / 2] ×{(1 - {1 / [1 + (r / 2)]22}) / (r / 2)} + $1,000 / [1 + (r/ 2)]22 r = .0496, or 4.96 percent
A corporate bond pays 6.65 percent interest. How much would a municipal bond have to pay to be equivalent to this on an after tax basis if you are in the 25 marginal percent tax bracket?
4.99% After tax yield = .0665 ×(1 -.25) = .0499, or 4.99 percent
A 12-year, annual coupon bond is priced at $1,102.60. The bond has a $1,000 face value and a yield to maturity of 5.33 percent. What is the coupon rate?
6.51 percent PV = $1,102.60 = PMT ×{1 - [1 / (1 + .0533)12]} / .0533 + $1,000 / (1 + .0533)12 PMT = $65.09 Coupon rate = $65.09 / $1,000 = .0651, or 6.51 percent
Smiley Industrial Goods has $1,000 face value bonds on the market with semiannual interest payments, 13.5 years to maturity, and a market price of $1,023. At this price, the bonds yield 6.4 percent. What must be the coupon rate on these bonds?
6.66% PV = $1,023 = C ×{(1 - {1 / [1 + (.064 / 2)]27}) / (.064 / 2)} + $1,000 / [1 + ( .064 / 2)]27 C = $33.28 Coupon rate = ($33.28×2) / $1,000 Coupon rate = .0666, or 6.66 percent
A bond has a $1,000 face value, a market price of $1,045, and pays interest payments of $74.50 every year. What is the coupon rate?
7.45% Coupon rate = $74.50/$1,000 = .0745, or 7.45 percent
If your nominal rate of return is 14.38 percent and your real rate of return is 4.97 percent, what is the inflation rate?
8.96 percent 1 + .1438) = (1 + .0497)(1 + h) h = .0896, or 8.96 percent
A six-year, semiannual coupon bond is selling for $991.38. The bond has a face value of $1,000 and a yield to maturity of 9.19 percent. What is the coupon rate?
9.00 percent PV = $991.38 = PMT ×{(1 - {1 / [1 + (.0919/ 2)]12}) / (.0919 / 2)} + $1,000 / [1 + ( .0919/ 2)]12 PMT = $45.00 Coupon rate = (2 ×$45.00) / $1,000 = .0900, or 9.00 percent
Whitts BBQ would like to issue some 10-year, semiannual coupon bonds at par. Comparable bonds have a current yield of 9.16 percent, an effective annual yield of 9.68 percent, and a yield to maturity of 9.50 percent. What coupon rate should Whitts BBQ set on its bonds?
9.50 To sell bonds at par, the coupon rate must be set equal to the yield to maturity on comparable bonds, which in this case is 9.50 percent.
Which one of the following is a unique characteristic of an income bond?
Coupon payments are dependent on the issuer's income.
bond Markets are...
Dealer based
Which one of the following is the price that an investor pays to purchase an outstanding bond?
Dirty Price
The capital gains yield equals which one of the following?
Dividend growth rate
The required return on a stock is equal to which one of the following if the dividend on the stock decreases by a constant percent per year?
Dividend yield + Capital gains yield
Which one of the following individuals is most apt to purchase a municipal bond?
Highly compensated business owner
If intermediate-term, default-free, pure discount bonds have a higher rate of return than either the comparable shorter-term or longer-term bonds, the term structure of interest rates will be:
Humped
Which one of the following will increase the current value of a stock?
Increase in the capital gains yield
A real rate of return is defined as a rate that has been adjusted for which one of the following?
Inflation
Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value?
Liquidity premium
What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?
Sinking fund
Computing the present value of a growing perpetuity is most similar to computing the current value of which one of the following?
Stock with a constant-growth dividend
A semiannual 5.4 percent coupon bond currently sells for par value. What is the maturity on this bond?
The bond could have any maturity date.
What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive.
The bond must be priced at par.
Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis.
semi-annual
The market-required rate of return on a bond that is held for its entire life is called the:
Yield To maturity
Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?
Zero coupon
A debenture is:
an unsecured bond
A bond dealer sells at the _____ price and buys at the _____ price.
asked; bid
A broker is an agent who:
brings buyers and sellers together.
Zero coupon bonds:
create annual taxable income to individual bondholders.
An agent who buys and sells securities from inventory is called a:
dealer.
Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a:
debenture.
Bond ratings classify bonds based on:
default risk only
If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be:
downward sloping.
Most trades on the NYSE are executed:
electronically.
The yield to maturity on a discount bond is:
greater than both the current yield and the coupon rate
When a bond's yield to maturity is less than the bond's coupon rate, the bond:
is selling at a premium.
A protective covenant:
limits the actions of the borrower
A callable bond:
may be structured to pay bondholders the current value of the bond on the date of call.
The R in the Fisher effect formula represents the:
nominal return.
The primary purpose of protective covenants is to help:
protect bondholders from issuer actions.
The primary purpose of bond covenants is to:
protect the bondholders.
A floating-rate bond frequently has a:
put provision.
The purpose of a bond sinking fund is to:
repay bonds early either through purchases or calls.