EXAM 2
Which of the following describes the equation for finding the annuity present value factor?
(1 minus present value factor) divided by the interest rate
Which of the following describes the equation for finding the annuity future value factor?
(future value factor minus 1) divided by the interest rate
Which of the following is NOT a true statement? Present values and discount rates move in the opposite directions from one another B) On monthly compounded loans, the EAR will exceed the APR C) Compounding essentially means earning interest on interest D) Future values increase with increases in interest rates E) All else equal, the longer the term of a loan the lower will be the total interest you pay on it
) All else equal, the longer the term of a loan the lower will be the total interest you pay on it
Which of the following is a legitimate reason the valuation of common stock is generally harder than the valuation of bonds? I. Future cash flows on stocks are not known in advance II. Common stocks don't have a maturity date III. Common stock valuation is sensitive to estimates of the dividend growth rate
) I, II, and III
A bond with an annual coupon of $100 originally sold at par for $1,000. The current market interest rate on this bond is 9%. Assuming no change in risk, this bond would sell at a _________ in order to compensate ______________.
) premium; the seller for the above market coupon rate
Which bond would most likely possess the highest degree of interest rate risk?
8% coupon rate, 20 years to maturity
You have $500 that you would like to invest. You have 2 choices: Savings Account A which earns 8% compounded annually or Savings Account B which earns 7.75% compounded semiannually. Which would you choose and why?
A because it has a higher effective annual rate
Which of the following is a true statement regarding publicly traded stocks and bonds? A) A share of preferred stock is generally easier to value than a share of common stock is B) The price of a stock is greater than the present value of all future dividends C) The dividend growth model can be used to value stocks only if the dividend growth rate is constant from now into infinity D) A share of preferred stock represents an ownership interest in a corporation E) Preferred stock is more like common stock than it is like a bond
A share of preferred stock is generally easier to value than a share of common stock is
You have $500 that you would like to invest. You have 2 choices: Savings Account A which earns 8% compounded annually or Savings Account B which earns 7.75% compounded monthly. Which would you choose and why?
B because it has a higher effective annual rate
ch7 A corporation undertaking an expansion project issues 20 year bonds to finance the project. Which of the following is most likely true?
B) The company has borrowed money and must pay interest on the amount borrowed
When pricing bonds, if a bond's coupon rate is less than the required rate of return, then
B) a portion of the income a buyer of this bond will receive comes from buying the bond at less than the par value
. Your broker offers you the opportunity to purchase a bond with coupon payments of $90 per year and a face value of $1,000. If the yield to maturity on similar bonds is 8%, this bond should
B) sell at a premium
Suppose you are trying to evaluate a bond. Which of the following is NOT true?
Bonds with high coupon payments are generally (all else equal) more sensitive to changes in interest rates than bonds with lower coupon payments
16. Which of the following would NOT be listed on the face of a bond? The coupon interest rate B) The maturity date C) The market price of the bond D) The coupon payment to be made E) The name of the issuer
C) The market price of the bond
. A given rate is quoted as 8% APR, but has an EAR of 8.33%. What is the rate of compounding during the year?
CONTINUOUSLY
A bond with a face value of $1,000 has annual coupon payments of $100 and was issued 7 years ago. The bond currently sells for $1,000 and has 8 years left to maturity. This bond's _______________ must be 10%. I. yield to maturity II. current yield III. coupon rate
E) I, II and III
Which of the following is it NOT possible to compute?
E) future value of a perpetuity
. Assume the anticipated growth rate in dividends is constant for Fly-By-Nite Airlines. The expected value of the firm's stock at the end of four years (P4) is I. D5/(r - g) II. P0*(1 + g)4 III. D0*(1 + g)/(r - g)
I and II only
. Given r and t greater than zero, I. Present value interest factors are less than 1.0 II. Future value interest factors are less than 1.0 III. Present value interest factors are greater than future value interest factors IV. Present value interest factors grow as t grows, provided r is held constant
I only
Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If you are given Stable's last dividend amount, its dividend growth rate, and a discount rate, you can compute __________. I. the price today II. the price at the end of five years from now III. the dividend that is expected to be paid ten years from now
I, II, and III
. Over the past four years, a company has paid dividends of $1.00, $1.10, $1.20, and $1.30 respectively. This pattern is expected to continue into the future. This is an example of a company paying a
PREFERRED STOCK DIVIDEND
A bond sold five weeks ago for $1,100. The bond is worth $1,050 in today's market. Assuming no changes in risk, which of the following is true?
The bond's current yield has increased from five weeks ago
Suppose you are trying to find the present value of two different cash flows using the same interest rate for each cash flow. One is $1,000 ten years from now, the other a $800 flow seven years from now. Which of the following is/are true about the discount factors used to value the cash flows?
The factor for the cash flow ten years away is always less than or equal to the factor for the cash flow that is received seven years from now
Which of the following is a true statement?
When comparing investments it is best not to rely solely on quoted rates
If you multiply a bond's current yield by its market price you get the _______.
annual coupon payment
Which of the following items does NOT usually appear in a Wall Street Journal common stock quote?
capital gains rate
You are planning to save your Christmas bonuses from work and are comparing savings accounts: Account A compounds semiannually while Account B compounds monthly. If both accounts have the same effective annual rate of interest and you place only the bonuses in the account, you should
choose either since you would be indifferent between the two
You are choosing between investments offered by two different banks. One promises a return of 10% for three years in simple interest while the other offers a return of 10% for three years in compound interest. You should
choose the compound interest option because it provides a higher return than the simple interest option
ch6 . In order to compare different investment opportunities (each with the same risk) with interest rates reported in different manners you should
convert each interest rate to an effective annual rate
Which of the following typically applies to preferred stock but NOT to common stock?
cumulative dividends
. As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a
dividend yield and a capital gains yield
2. Given no change in required returns, the value of a share of stock whose dividend is constant will
remain unchanged
You are examining two perpetuities which are identical in every way, except that perpetuity A will begin making annual payments of $P to you two years from today while the first $P payment of perpetuity B will occur one year from today. It must be true that
the current value of perpetuity B exceeds that of A by the PV of $P for one year
You are attempting to value the shares of a new, high-technology firm in a developing industry. You would MOST likely
use the nonconstant growth dividend model
You are considering investing in a firm and wish to place a value on the common stock. The dividend on the firm's stock has not changed in the last five years. Absent any information suggesting future changes in the dividend rate, the most appropriate stock valuation model would be the ________ model.
zero growth