FINC_300
$100 at the end of each year forever at 10% per year is worth how much today?
$1,000
Assume a $100 investment earns a stated interest rate of 10%, compounded monthly. What will be the investment value after one year?
$110.47
Use a financial calculator to compute the present value of $100 per year for 30 years if the discount rate is 5%
$1537.25
Find the future value of an annuity of 100 per year for 10 years at 10 percent per year.
$1593.74
If C=$100, g=10%, r=15%, and t=2 years, then what is the PV of this growing annuity?
$170.13 PV = 100[[1-(1.10)/(1.15)]^2]/(0.15-0.10)
Scott Corporation does not pay dividends. The PE ratio for its industry is 13.3, and Scott's EPS were $1.47. At what price should Scott's stock trade?
$19.55
What is the total return for a stock that currently sells for $100, pays a dividend on one year of $2, and has a constant growth rate of 8 percent?
10%
What is the total return for a stock that currently sells for $100, is expected to pay a dividend in one year of $2, and has a constant growth rate of 8%?
10% R=(2/100)+0.08
What is the current yield on a $1,000 par value bond that sells for $900 if the coupon rate is 10 percent?
11.11%
If the rate of inflation is 3 percent and the real rate of return is 9 percent, the nominal rate is approximately
12%
Which of the following is equal to an effective annual rate of 12.36 percent?
12% compounded semiannually EAR = (1+0.12/2)^2 -1 = 12.36%
If the interest rate is 10 percent per week, what is the EAR? [Please note that 10 percent per week is not an APR. It is a weekly rate (Quoted rate/m)]. Assume 52 weeks in a year.
14104% EAR = (1.10^52 - 1)
A credit card charges 18 percent interest per year (APR) (1.5 percent each month). What is the EAR?
19.56% (1.015)^12 - 1
At what tax rate will you be indifferent between a muni that yields 7 percent and a comparable corporate bond yielding 9 percent? Assume no state taxes.
22.2%
Use your calculator to find the YTM on a 20 year, $1,000 par value bond that pays coupons of 4.5% semi-annually and currently sells for $1,104.89
3.75%
To find the present value of an annuity of $100 per year for 5 years at 10 percent per year using the tables, look up the present value formula which is ___ and multiply that by ___
3.7908; $100
To find the present value of an annuity of $100 per year for 5 years at 10 percent per year using the tables, look up the present value interest factor which is ___ and multiply that by ___.
3.7908; $100
You owe $1,200 on your credit card, which charges 1.5% per month. If you pay $50 per month starting at the end of the month, how many months will it take to pay off your credit card?
30 months Using Financial Calculator: pym = -50; pv = 1200; int = 1.5; solve for n
If you are in the 20 percent tax bracket, what is your aftertax yield on a par value municipal bond yielding 5 percent? Ignore state and local taxes
5%
What will your aftertax yield be on a corporate bond that is currently trading at par and yielding 8 percent if you are in the 20 percent tax bracket?
6.4%
What is the effective annual rate for a bond with 7 percent yield to maturity that makes semi-annual interest payments? (Hint: 7 percent annually is 3.5 percent per six-month period)
7.12%
Your bank quotes a 9% APR on your car loan (.75 percent interest each month). What is the EAR?
9.38%
The annuity present value factor for a 30-year annuity with an interest rate of 10 percent per year is
9.4269 [1-(1/1.10^30)/.10]
The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is
9.8181
The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is
9.8181 {1-[1/1.08^20)]/0.08}=9.8181
Which of the following speadsheet [Excel] functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10 percent per year?
=PV(.10,10,-100,0)
Which of the following spreadsheet (Excel) functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 year at 10 percent?
=PV(.10,10,-100,0,)
What is a bond's current yield?
Current yield = annual coupon payment / current price
Which of the following is the formula for the future value of an annuity?
FV = C {([1+r]^t+1)/r}
Is a company required to pay preferred dividends?
No; the company may defer dividends on preferred stock; however they can not pay dividends to common shareholders until preferred dividends are paid
The formula for valuing a constant growth stock is
P₀ = D₁/(R-g)
How is APR computed?
Rate per period x Number of period per year
In the excel setup of a loan amortization problem, which of the following occurs?
The payment is found using PMT(rate,nper,-pv,fv) to find the principal payment each month, you subtract the interest payment from the total payment
Will is deciding whether or not to buy Dang Corporation stock, whose current price is $54.95. Dang paid a dividend of $2.17 this year. Will estimates that dividends will grow very quickly, at a rate of 12% for the next four years. After that, he expects the dividend growth rate to fall to 5%. Should will buy the stock if his required rate of return is 10%?
Yes; using the two stage growth model, the stock's value is $58.06
What is a premium bond?
a bond that sells for more than face value
A benchmark PE ratio can be determined using
a company's own historical PEs the PEs of similar companies
How is a conventional bond different from a zero coupon bond?
a conventional bond pays periodic interest while zeroes make no interest payments conventional bonds can still sell at par, at a discount from par, or at a premium over par while zeroes must be offered at a discount from par
Which of the following should be valued using a perpetuity formula?
cash flow from a product whose sales are expected to remain constant forever a consol (bond that pay interest only and does not mature) perferred stock
Which of the following processes can be used to calculate future value for multiple cash flows?
compound the accumulated balance forward one year at a time calculate the future value of each cash flow first and then add them up
The effective annual rate (EAR) takes into account the ___ of interest that occurs within a year.
compounding
NASDAQ has which of these features?
computer network and securities dealers multiple market maker system
One example of a perpetuity is a British
consol
Which of these is included in the calculation of a bond's yield to maturity?
coupon rate par value current price
Which of these are required to calculate the current value of a bond
coupon rate time remaining to maturity applicable market rate par value
Suppose Bob owns 20 shares and Vikki owns 30 shares in Good Company, and there are five members of the board of directors. Under which voting arrangement can Bob assure himself of a board member that represents his interests?
cumulative voting
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a
dealer
All else constant, the dividend yield will increase if the stock price
decreases
A firm's bond rating sheds light on its ___ risk.
default
What information do we need to determine the value of stock using the zero-growth model?
discount rate annual dividend amount
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _________ of each period.
end
The price of a share of common stock is equal to the present value of all ___ future dividends.
expected
What are two ways to calculate a balloon payment?
find the present value of the payments remaining after the loan term amortize the loan over the loan life to find the ending balance
A growing annuity has a(n)
finite number of growing cash flows
Which of the following payment methods amortizes a loan?
fixed payments that result in a zero loan balance interest plus fixed amount
A PE ratio that is based on estimated future earnings is known as a ___ PE ratio.
forward
An asset's value is determined by the present value of its ___ cash flows.
future
One requirement of the dividend growth model is
g<R
If the interest rate is greater than zero, the value of an annuity due is always ___ an ordinary annuity.
greater than
In an inflationary environment, the nominal rate will be ___ the real rate
greater than
The value of a firm is the function of its __ rate and its ___ rate.
growth; discount
All junk bonds typically have which of these features?
high profitability of default less than investment-grade rating
Given the same APR, more frequent compounding results in
higher EARs
A bond with a BBB rating has a ___ than a bond with an A rating
higher risk of default
A perpetuity is a constant stream of cash flows for a ___ period of time
infinite
A bond's yield to maturity considers the interest earnings and the change in the bond's price while the current yield considers
interest earnings only
The most common way to repay a loan is to pay
interest plus a fixed principal amount every period
Stock price reporting has increasingly moved from traditional print media to the ___ in recent years
internet
In general, a corporate bond's coupon rate
is fixed until the bond matures
What is a corporate bond's yield to maturity (YTM)?
is the prevailing market interest rate for bonds with similar features is the expected return for an investor who buys the bond today and holds it to maturity
Which of the following are features of common stock?
it has no special preference in receiving dividends it has no special preference in bankruptcy it generally has voting rights
Which of the following is true about a multi-year typical bond's coupon?
it is a fixed annuity payment
What is a real rate of return?
it is a rate of return that has been adjusted for inflation
One common reason for having two classes of common stock with different voting rights is
it is easier for insiders such as founding families to maintain control of the company
What is the definition of a bond's time to maturity?
it is the number of years until the face value is due to be repaid
What is the nominal rate of return on an investment?
it is the rate that has not been adjusted for inflation
A market is considered transparent if
its prices and trading volume are easily observed
For a positive stated annual interest rate and multiple compounding periods per year, the EAR is always ___ the APR.
larger than
If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is ___ $1,000
less than
A traditional (non-growing) annuity consists of a ___ stream of cash flows for a fixed period of time
level
The reason that interest rate risk is greater for ___ term bonds than for ___ bonds is that the change in rates has a greater effect on the present value of the ___ than on the present value of the ___
long; short; face value; coupon payments
A single cash flow is known as a
lump sum
A zero-coupon bond is a bond that
makes no interest payments
Why is the bond market less transparent than the stock market?
many bond transactions are negotiated privately
Which of the following variables are required to calculate the value of a bond?
market yield remaining life of bond coupon rate
Which of the following are annuities?
monthly rent payment in a lease installment loan payments
Most voting in large corporations is done by proxy because
most shareholders do not attend the annual meeting
Most investments invlove:
multiple cash flows
WinWin Corporation has five board members, and each shareholder gets one vote per share. The company uses a straight board voting procedure. How does this arrangement affect minority shareholders?
no minority shareholders would have enough votes to win any seat on the board
When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows
one vote per share held
The constant growth formula calculates the stock price
one year prior (year t) to the first dividend payment (D(t+1)
Fundamentally, the business of the NYSE is to attract and process
order flow
The present value of an annuity due is equal to the present value of a(n) ___ annuity multiplied by (1+r)
ordinary
The payments in a ___ amortization loan are NOT based on the life of the loan.
partial
Which of the following are ways to amortize a loan?
pay principal and interest every period in a fixed payment pay the interest each period plus some fixed amount of the principal
Preferred stock has preference over common stock in the
payments of dividends distribution of corporate assets
The present value formula of a(n) ___ is PV= C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.
perpetuity
In which way(s) is a preferred stock like a bond?
preferred shareholders receive a dividend, similar to interest on a bond preferred shareholders receive a stated value if the firm liquidates, like bondholders preferred stock sometimes has a sinking fund, giving it a set maturity like bonds some preferred stock has credit ratings, like bonds
The formula for the ___ value interest factor of an annuity is {1-[1/(1+r)^t]}/(r)
present
Initial public offerings of stock occur in the ___ market.
primary
The original loan amount is called the
principal
The NYSE member who acts a dealer in a small number of securities is called a(n)
specialist
The NYSE differs from the NASDAQ primarily because the NYSE has
specialists a physical location an auction market
Mota Motors has eight board of directors on its board, two of who go up for election each year. This is an example of
staggered board
The goal of many successful organizations is a(n) ___ rate of growth in dividends.
steady
Which of the following are true about a partial amortization loan?
the amortization period is longer than the loan period the monthly payment is based on a longer amortization period than the maturity of the loan the monthly payments do not fully pay off the loan by the end of the loan period the borrower make a large balloon payment at the end of the loan period
Which two prices can be found in the Wall Street Journal's daily Treasury bond listing?
the ask price the bid price
Which of the following entities declares a dividend?
the board of directors
The amount by which the call price exceeds the par value of the bond is called
the call premium
Which of the following is true about a growing annuity?
the cash flows grow at a constant rate the cash flows grow for a finite period
Why does a bond's face value fluctuate over time?
the coupon rate and par value are fixed, while market interest rates change
When the stock being value does not currently pay dividend,
the dividend growth model can still be used based on the future dividends
Which of the following are common protective covenants?
the firm cannot merge with any other firm the firm must maintain working capital at or above a specific level the firm must limit dividends to equity holders
What does the AAA rating assigned by S&P mean?
the firm is in a strong position to meet its debt obligations
APR
the interest rate per period multiplied by the number of periods in the year
EPR
the interest rate stated as though it were compounded once per year
If you own corporate bonds, you will be concerned about interest rate risk as it affects ___.
the market price of the bonds
What is the asked price?
the price at which a dealer is willing to sell
Which of the following are reasons why it is more difficult to value common stock than it is to value bonds?
the rate of return required by the market is not easily observed common stock cash flows are not known in advance the life of a common stock is essentially forever
Which of the following are usually included in a bond's indenture?
the repayment agreements the total amount of bonds issued
Which of the following is USUALLY a right of common shareholders?
the right to a proportional share of dividends paid voting rights
Because of ___ and ___, interest rates are often quoted in many different ways
tradition; legislation
Which of these correctly identify differences between US Treasury bonds and corporate bonds?
treasury bonds are considered free of default risk while corporate bonds are exposed to default risk treasury bonds are issued by US government while corporate bonds are issued by corporations treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer
The US government borrows money by issuing
treasury notes
Semi-annual compounding means that interest is paid ___ per year
two times
The first cash flow at the end of week 1 is $100, the second cash flow at the end of month 2 is $100, and the third cash flow at the end of year 3 is $100. This cash flow pattern is a(n) ___ type of cash flow.
uneven
If the growth rate (g) is zero, the capital gains yield is
zero
Three special case patterns of dividend growth includes
zero growth constant growth non-constant growth
What is the present value of an annuity that makes payments of $100 per year for ten years if the first payment is made immediately and the discount rate is 10 percent per year?
$675.90 $100[(1-1/1.10^10)/0.10][1.10]
Dusty Corporation has an issue of preferred stock that pays a dividend of 7% of its state value, which is $100. Which of the following would be a commonly used name for that preferred stock?
$7 preferred
What is the present value of an ordinary annuity that pays $100 per year for 20 years if the interest rate is 10 percent per year?
$851.36
What is the value of a bond if the present value of interest cash flows is $200 and the present value of the par value to be received when the bond matures is $750?
$950
The formula for the present value of an annuity due is
(1+r) x (PV of an ordinary annuity)
The general formula for EAR is
(1+r/m)^m - 1
What is the price of a stock at the end of one year (P1) if the dividend for year 2 (D2) is $5, the price for year 2 (P2) is $20, and the discount rate is 10%?
$22.73 P1 = ($5 + $20)/ 1.10 = $22.73
If you purchase a bond costing $1,143 with a par value of $1,000 that pays a semi-annual coupon of 5%, how much will each coupon payment be?
$25
You have decided to fund an account that will pay your descendants the inflation-adjusted equivalent of $100 per year forever. You assume inflation will equal 3% per year, and you expect the account to earn 7% per year. How much do you need to put in the account today to ensure your gift will continue forever?
$2500 PV=C/(r-g)=100/(0.07-0.03)=2500
Ralph has $1,000 in an account that pays 10 percent per year. Ralph wants to give this money to his favorite charity by making three equal donations at the end of the next 3 years. How much will Ralph give to the charity each year?
$402.11
If you invest in a $1,000 corporate bond that has a 9 percent coupon and makes semi-annual payments, you can except to receive ___ every 6 months.
$45
Use your financial calculator to find the future value of an annuity of $400 per year for 10 years at 5%.
$5,031.16 Using Financial Calculator PV = 0; Pymt = -400; rate = 5, per = 10
Amy took out a mortgage of $100,000 at 4.5% with monthly payments for 30 years. What is her payment to principal and interest each month?
$506.69
An annuity due is a series of payments that are made
at the beginning of each period
What are municipal bonds?
bonds that have been issued by state or local governments
Secondary markets in sukuk are extremely illiquid because most sukuk are:
bought and held to maturity