Business Finance 343 Chapter 7, 8 and 9
Wee Beastie Animal Farm bonds have 8 years to maturity and pay an annual coupon at the rate of 6 %. The face value of the bonds is $ 1 comma 000. The price of the bonds is $ 1 comma 089.89 to yield 4.63 %. What is the capital gain yield on the bonds? The capital gain yield is:
-0.88%
What is the yield to maturity of a 9.4 % semiannual coupon bond with a face value of $1,000 selling for $ 857.62 that matures in 11 years? The annual yield to maturity of the bond is
11.738%
What is the yield on an "old masters" painting of Elvis Presley (acrylic on velvet) that sells for $ 1 comma 560 comma 000 today and is expected to be sold at a Sotheby's auction in 4 years for $ 2 comma 000 comma 000? The yield (return) is:
6.4%
zero coupon bond
A bond that does not pay coupons
Stock is all of the following except:
A seasoned issue.
All of the following are weaknesses of the payback period technique except:
Difficulty of calculation.
Which of the following is an advantage of the net present value (NPV) technique for evaluating cash flows?
Discount rate adjusts for risk.
Investors who purchase bonds at a discount will:
Earn a capital gain if they hold the bond to maturity.
The yield on 20-year T-Bonds is 12%. Because T-bonds are issued by the government, this is a real rate.
False
True or False? Banker's Acceptances are an increasingly popular money market security.
False
True or False? The difference between a coupon bond and a zero coupon bond is that the zero coupon bond pays all of its coupons at maturity.
False
True or False? The face value of a zero coupon bond varies daily as the bonds are bought and sold.
False
True or False? Zero coupon bonds only have maturity dates of less than one year.
False
True or False? Three-month commerical paper has a lower yield than three-month T-bills.
False
A long position in a stock is all of the following except:
Used to take advantage of expected declines in a stock's price
A 9% coupon bond has a yield of 9.75%. The bond is selling at a price that is ______ par.
lower than
bond
represent loans from the holder to the issuer
Which of the following is false: A. Investors want stock prices to rise when they take a long position and drop when they take a short position. B. In a long position the investor owns the stock. C. In both long and short positions the investor hopes that stock prices will rise. D.In a short position the investor has sold stock that is borrowed.
In both long and short positions the investor hopes that stock prices will rise.
A bond that sold for $900 three months ago is selling for $1,000 today. Which of the following must be true?
Interest rate must have decreased over the last three months.
The possibility of a bond holder suffering losses when yield to maturity on similar bonds change is called:
Interest rate risk.
The implication for investors of efficient markets is that if they really are efficient:
Investors should not expend resources picking stocks since all will represent fair values.
All of the following are true about profitability index (PI) except: A. Works well as a supplement for the NPV method. B. Is best used by itself. C. Calculated by dividing the present value of inflow by the present value of the outflows. D. Will always give the same accept/reject decision as NPV.
Is best used by itself
The yield to maturity on a bond:
Is the discount rate that equates the market price of a bond with the present value of all its future cash flows.
The difference between the internal rate of return (IRR) and the modified internal rate of return (MIRR) is:
MIRR solves the reinvestment rate assumption problem
The reason why investors may think that the markets operate efficiently is because:
Many investors are looking for the same thing, a good deal. When one is found they will either buy or sell it until the good deal disappears, thus driving it back to its correct price.
Which of the following is not true about stock?
Only public companies can issue stock.
The steps of capital budgeting include all of the following except: A. Post Audit. B. Pre Audit. C. Selection. D. Evaluation of Opportunities.
Pre Audit
Which of the following is not a characteristic of an efficient market? A. The market has a large number of buyers and sellers. B. A market that functions with a minimum of waste or excessive trading costs. C. Prices vary for a single asset or commodity as a D. Information is rapidly reflected in market prices. E. Prices reflect the intrinsic value of an asset.
Prices vary for a single asset or commodity as a result of differences in people's willingness to pay
What is the face value of a zero coupon bond?
The amount of money that the issuer pays the bond holder (owner) at maturity.
Puffy Comb Corp. bonds have been downgraded by Standard and Poor's because a growing number of men shave their heads for improved aerodynamics. Which of the following should result from this development?
The bond price should fall.
Jerry just purchased a bond paying semiannual interest for a price of $ 1 comma 000. Yields on bonds of similar risk are 9.5 %. The bond has a face value of $ 1 comma 000. Based on this information, the coupon rate of the bond is:
The coupon rate of the bond is 9.5 %.
The internal rate of return (IRR) can be defined as:
The discount rate that sets NPV to 0.
Of the different techniques available for evaluating cash flows, which is technically the worst? A. The net present value (NPV) B. The profitability index (PI) C. The payback period D. The internal rate of return (IRR) E. The modified internal rate of return (MIRR)
The payback period
Which of the following is not a fixed feature of a bond? A. The price of the bond B. The coupon dates C. The maturity date D. The coupon
The price of the bond
As the maturity date of a bond approaches:
The price of the bond approaches its face value.
Capital Budgeting is:
The process of deciding which long-term investments or projects to acquire.
Holding the market yield and the coupon rate of a bond constant, as the time to maturity increases:
The sum of the present value of the coupon payments represents a larger share of the total bond value than the present value of the principal.
True or False? An investment may change the whole face of a firm.
True
True or False? Most money market securities are zero coupon bonds.
True
fixed income securities
a class of securities that pay a fixed income to the holder.
yield curve
a graphical representation of the term structure. A graph of yields on the y-axis against time to maturity (term) on the x-axis
The issuer of a zero coupon bond _________ money. The owner has a ________ position in the bond and the issuer has a _________ position.
borrows, long, short
