Quiz 3 Chapter 4

Calculate the price of a six-year $1,000 face-value bond with a 7% annual coupon rate and a yield-to-maturity of 6% with semi-annual coupon payments.

$1049

Calculate the price of a seven-year $1,000 bond with a 5% coupon rate and a yield-to-maturity of 7% with annual coupon payments.

$892.21

A bond is selling for 105% of par, has a coupon rate of 7%, and will mature in five years. There are annual coupon payments. Calculate the yield-to-maturity on an annualized basis.

5.82%

A bond is selling for 95% of par and has an annual coupon rate of 6% and will mature in 5 years. There are semi-annual coupon payments. Calculate the yield-to-maturity on an annualized basis (APR).

7.21%

There is an increase in expected inflation. All else equal, bond prices will:

Fall

The price (or present value) of the bond will drop to compensate for the decrease in market interest rates.

False

Unicorp issued 8% annual coupon rate bonds five years ago. Interest is paid semi-annually. The bonds have a par value of $1000 and had an original maturity of 20 years when issued. If the bond is currently priced at $1142.36, its annual yield-to-maturity is 9.5%.

False

You wish to purchase a ten-year bond selling at 80% of par with a coupon rate of 8%. Your required annual yield-to-maturity (YTM) is 9%. You should not purchase this bond if the coupon payments were made semi-annually.

False

Which of the following is (are) true?

If the yield to maturity is less than the coupon rate, the bond will sell at a premium.

A constant dividend growth model assumes that common stock dividends will be paid regularly and grow at a constant rate.

True

A firm's common stock is currently selling for $12.50 per share. The required rate of return is 9% and the company will pay an annual dividend of $.50 per share one year from now which will grow at a constant rate for the next several years. The growth rate should be 5%.

True

All zero-coupon bonds are sold at a discount; there is no coupon payment.

True

Balance sheet valuation approaches view the firm as if it were about to cease operations immediately.

True

Both bond and stock valuation models use discounted cash flows to estimate the present value or value of the security.

True

The P/E model indicates how much investors are willing to pay for each dollar of a stock's earnings.

True

The bond prices and market interest rates are inversely related.

True

The coupon interest rate is the amount of interest to be paid to the bondholder regardless of market interest rates; it remains fixed throughout the life of the bond.

True

The price of a ten-year $1,000 par-value bond with a 9% annual coupon rate and a 10% annual yield to maturity should be $937.69, assuming semi-annual coupon payments.

True

The yield-to-maturity (YTM) is based on current market rates. It can fluctuate over the life of the bond given changing interest rate environments.

True

Total assets of a firm are $1,000,000 and the total liabilities are $400,000. 500,000 shares of common stock have been issued and 250,000 shares are outstanding. The market price of the stock is $15 and net income for the past year was $150,000. Then the book value per share should be $2.40.

True

Unicorp issued 8% annual coupon rate bonds five years ago. Interest is paid semi-annually. The bonds have a par value of $1000 and had an original maturity of 20 years when issued. If the bond is currently priced at $1142.36, its annual yield-to-maturity is 6.5%.

True

You have an issue of preferred stock that is paying a $3 annual dividend. A fair rate of return on this investment is calculated to be 13.5%. The value of this preferred stock issue should be $22.22.

True

If the yield-to-maturity of a bond is more than the coupon rate, the bond will sell at:

a discount

If the yield-to-maturity of a bond is less than the coupon rate, the bond will sell at:

a premium

A bond sold at par with a coupon rate of 7% will have a YTM:

equal to 7%

A zero-coupon bond will have a price:

less than par

The discounted cash flow model for bonds:

uses the required rate of return to discount all promised bond cash flows