Exam 2 Investments (Part 2)

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk: A. Increases at an increasing rate. B. Increases at a decreasing rate. C. Increases at a constant rate. D. Decreases at an increasing rate. E. Decreases at a decreasing rate.

B. Increases at a decreasing rate.

Your broker offers you the opportunity to purchase a bond with coupon payments of $90 per year and a face value of $1000. If the yield to maturity on similar bonds is 8%, this bond should: A. Sell for the same price as the similar bond regardless of their respective maturities. B. Sell at a premium. C. Sell at a discount. D. Sell for either a premium or a discount but it's impossible to tell which. E. Sell for par value

B. Sell at a premium.

A corporate bond with a 6 percent coupon was issued last year. Which one of these would apply to this bond today if the current yield to maturity is 7 percent? A. The bond is currently selling at a premium. B. The current yield exceeds the coupon rate. C. The bond is selling at par value. D. The current yield exceeds the yield-to-maturity. E. The coupon rate has increased to 7 percent.

B. The current yield exceeds the coupon rate.

Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true? A. The dividend must be constant. B. The stock has a negative capital gains yield. C. The dividend yield must be zero. D. The required rate of return for this stock increased over the year. E. The firm is experiencing supernormal growth.

B. The stock has a negative capital gains yield.

A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today? A. The face value of the bond today is greater than it was when the bond was issued B. The yield-to-maturity is less than the coupon rate C. The bond is worth less today than when it was issued D. The coupon rate is greater than the current yield E. The yield-to-maturity equals the current yield

B. The yield-to-maturity is less than the coupon rate

If investors are uncertain that they will be able to sell a corporate bond quickly, the investors will demand a higher yield in the form of a(n) ____________. A. inflation premium B. liquidity risk premium C. interest rate risk premium D. default risk premium E. increased real rate of interest

B. liquidity risk premium

The pure time value of money is known as the: A. Liquidity effect. B. Fisher effect. C. Term structure of interest rates. D. Inflation factor. E. Interest rate factor.

C. Term structure of interest rates.

What is the market value of a bond that will pay a total of fifty semiannual coupons of $80 each over the remainder of its life? Assume the bond has a $1,000 face value and a 12% yield to maturity. A. $734.86 B. $942.26 C. $1,135.90 D. $1,315.24 E. $1,545.62

D. $1,315.24

A bond with a face value of $1,000 has annual coupon payments of $100 and was issued 10 years ago. The bond currently sells for $1,000 and has 8 years remaining to maturity. This bond's ______________ must be 10%. I. yield to maturity II. market premium III. coupon rate A. I only B. I and II only C. III only D. I and III only E. I, II and III

D. I and III only

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the: A. Coupon rate will also increase. B. Current yield will decrease. C. Yield to maturity will be less than the coupon rate. D. Market price of the bond will decrease. E. Coupon payment will increase.

D. Market price of the bond will decrease.

If you divide a bond's annual coupon payment by its current yield you get the ___________. A. yield to maturity B. investors' required rate of return C. annual coupon rate D. cost of capital E. bond price

E. bond price

The use of duration model to predict changes in bond prices for given changes in interest rate changes will always underestimate the amount of the true price change.

False

You interview for a job in a fixed income mutual fund and before you leave the house you observe that a 10-year Treasury note has a YTM of 2.4%. The price is par. You calculated that the modified duration is 9.1 years. During the interview, you are told that the interest rate on the 10- year just rose by 20 bp to 2.6%. To make a good impression you respond with, "That's a 1.95 percent loss!"

False

A zero-coupon bond has more interest rate risk than a comparable coupon bond

True

As interest rates rise, the duration of a perpetuity bond decreases.

True

The dividend growth model determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate.

True

What would you pay today for a stock that is expected to make a $2 dividend in one year if the expected dividend growth rate is 5% and you require a 12% return on your investment? A. $28.57 B. $29.33 C. $31.43 D. $34.58 E. $40.05

A. $28.57

Three Corners Markets paid an annual dividend of $1.37 a share last month. Today, the company announced that future dividends will be increasing by 2.8 percent annually. If you require a return of 11.6 percent, how much are you willing to pay to purchase one share of this stock today? A. $18.23 B. $16.00 C. $16.67 D. $17.68 E. $15.57

B. $16.00

What would you pay for a share of ABC Corporation stock today if the next dividend will be $3 per share, your required return on equity investments is 15%, and the stock is expected to be worth $90 one year from now? A. $78.26 B. $80.87 C. $82.56 D. $90.00 E. $98.12

B. $80.87

World Travel has 7 percent, semiannual, coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature? A. 12.26 years B. 12.53 years C. 13.76 years D. 15.37 years E. 17.86 years

B. 12.53 years

The $1,000 par value bonds of Uptown Tours have a coupon rate of 6.5 and a current price quote of 101.23. What is the current yield? A. 6.37% B. 6.42% C. 6.49% D. 6.58% E. 6.60%

B. 6.42%

Llano's stock is currently selling for $40.00. The expected dividend one year from now is $2 and the required return is 13%. What is this firm's dividend growth rate assuming the constant dividend growth model is appropriate? A. 7.3% B. 8.0% C. 9.5% D. 10.6% E. 11.2%

B. 8.0%

SLU Enterprises wants to issue sixty 20-year, $1,000 zero-coupon bonds. If each bond is to yield 7%, how much will J&J receive (ignoring issuance costs) when the bonds are first sold? A. $11,212 B. $12,393 C. $15,505 D. $18,880 E. $20,000

C. $15,505

The dividend on Simple Motors common stock will be $3 in 1 year, $4.25 in 2 years, and $6.00 in 3 years. You can sell the stock for $100 in 3 years. If you require a 12% return on your investment, how much would you be willing to pay for a share of this stock today? A. $75.45 B. $77.24 C. $81.52 D. $85.66 E. $91.30

C. $81.52

The price sensitivity of a bond increases in response to a change in the market rate of interest as the: A. Coupon rate increases B. Time to maturity decreases C. Coupon rate decreases and the time to maturity increases D. Time to maturity and coupon rate both decrease E. Coupon rate and time to maturity both increase

C. Coupon rate decreases and the time to maturity increases

A stock's next expected dividend divided by the current stock price is the: A. Current yield. B. Total yield. C. Dividend yield. D. Capital gains yield. E. Earnings yield.

C. Dividend yield.

What is the yield to maturity on an 18-year, zero coupon bond selling for 30% of par value? A. 4.86% B. 5.86% C. 6.37% D. 6.92% E. 7.45%

D. 6.92%

Future Motors is expected to pay a $3.30 a share annual dividend next year. Dividends are expected to increase by 2.75 percent annually. What is one share of this stock worth to you today if your required rate of return is 15 percent? A. $25.06 B. $26.30 C. $24.56 D. $26.94 E. $27.59

D. $26.94

D&G Enterprises issues bonds with a $1,000 face value that make coupon payments of $30 every 3 months. What is the coupon rate? A. 0.30% B. 3.00% C. 9.00% D. 12.00% E. 15.00%

D. 12.00%

A stock that pays a constant dividend of $1.50 forever currently sells for $10.71. What is the required rate of return? A. 10% B. 12% C. 13% D. 14% E. 15%

D. 14%

Which one of the following relationships is stated correctly? A. The coupon rate exceeds the current yield when a bond sells at a discount. B. The call price must equal the par value. C. An increase in market rates increases the market price of a bond. D. Decreasing the time to maturity increases the price of a discount bond, all else constant. E. Increasing the coupon rate decreases the current yield, all else constant.

D. Decreasing the time to maturity increases the price of a discount bond, all else constant.

A zero coupon bond: A. Is sold at a large premium B. Pays interest that is tax deductible to the issuer at the time of payment C. Can only be issued by the U.S. Treasury D. Has more interest rate risk than a comparable coupon bond E. Provides no taxable income to the bondholder until the bond matures

D. Has more interest rate risk than a comparable coupon bond

Whitesell Athletic Corporation's bonds have a face value of $1,000 and a 9% coupon paid semiannually; the bonds mature in 8 years. What current yield would be reported in The Wall Street Journal if the yield to maturity is 7%? A. 4% B. 5% C. 6% D. 7% E. 8%

E. 8%

Which one of the following applies to a premium bond? A. Yield to maturity> current yield > coupon rate. B. Coupon rate = current yield = yield-to-maturity. C. Coupon rate > yield-to-maturity > current yield. D. Coupon rate < yield to maturity < current yield. E. Coupon rate > current yield > yield to maturity.

E. Coupon rate > current yield > yield to maturity.

You own a bond that has a 6 percent annual coupon and matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent? A. The current yield-to-maturity is greater than 6 percent. B. The current yield is 6 percent. C. The next interest payment will be $60. D. The bond is currently valued at one-half of its issue price. E. You will realize a capital gain on the bond if you sell it today

E. You will realize a capital gain on the bond if you sell it today