FIN 300 - Exam 2

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market? a. Auction b. Private c. Over-the-counter d. Regional e. Insider

c. Over-the-counter

All else constant, a bond will sell at ____ when the coupon rate is ____ the yield to maturity. a. a premium; less than b. a premium; equal to c. a discount; less than d. a discount; higher than e. par; less than

c. a discount; less than

Oil Wells offers a 5.65 percent coupon bonds with semiannual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if the face value is $1,000? a. $949.70 b. $929.42 c. $936.48 d. $902.60 e. $913.48

b. $929.42

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity? a. default risk b. taxibility c. liquidity d. inflation e. interest rate risk

c. liquidity

The current yield is defined as the annual interest on a bond divided by the: a. coupon rate b. face value c. market price d. call price e. par value

c. market price

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

Currently, a firm has an EPS of $2.08 and a benchmark PE of 12.7. Earnings are expected to grow 3.8 percent annually. What is the estimated current stock price? a. $27.42 b. $27.09 c. $26.08 d. $26.42 e. $28.13

d. $26.42

AB Co. stock pays a constant annual dividend, sells for $56.07 a share, and has a market rate of return of 12.2 percent. What is the amount of the next annual dividend? a. $5.67 b. $5.94 c. $6.21 d. $6.84 e. $7.30

d. $6.84

The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $987. What is the yield to maturity? a. 6.97 percent b. 6.92 percent c. 6.88 percent d. 7.22 percent e. 7.43 percent

d. 7.22 percent

Bonner Metals wants to issue new 20-year bonds. The company currently has 8.5 percent bonds on the market that sell $994, make semiannual payments, and mature in 7 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par? a. 8.75 percent b. 9.23 percent c. 8.41 percent d. 8.62 percent e. 8.87 percent

d. 8.62 percent

The taxability risk premium compensates bondholders for which one of the following? a. Yield decreases in response to market changes b. Lack of coupon payments c. Possibility of default d. A bond's unfavorable tax status e. Decrease in a municipality's credit rating

d. A bond's unfavorable tax status

Which one of the following transactions occurs in the primary market? a. Purchase of 500 shares of GE stock from a current shareholder b. Gift of 100 outstanding shares to a charitable organization c. Gift of 200 shares of stock by a mother to her daughter d. A purchase of newly issued stock from the issuer e. IBM's purchase of GE stock from a dealer

d. A purchase of newly issued stock from the issuer

Which one of the following best describes NASDAQ? a. Largest US stock market in terms of dollar trading volume b. Market where dealers buy at the asked price c. Market where the designated market makers are located at posts d. Computer network of securities dealers e. Market with three physical trading floors

d. Computer network of securities dealers

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? a. Electing the board of directors b. Receiving a distribution of company profits c. Voting either for or against a proposed merger or acquisition d. Determining the amount of the dividend to be paid per share e. Having the first chance to purchase any new equity shares that may be offered

d. Determining the amount of the dividend to be paid per share

A decrease in which of the following will increase the current value of a stock according to the dividend growth model? a. Dividend amount b. Number of future dividends, provided the total number of dividends is less than infinite c. Dividend growth rate d. Discount rate e. Both the discount rate and the dividend growth rate

d. Discount rate

A note is generally defined as: a. a secured bond with an initial maturity of 10 years or more b. a secured bond that initially matures in less than 10 years c. any bond secured by a blanket mortgage d. an unsecured bond with an initial maturity of 10 years or less e. any bond maturing in 10 years or more

d. an unsecured bond with an initial maturity of 10 years or less

Rosita paid a total of $1,189, including accrued interest, to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the: a. quoted price b. spread price c. clean price d. dirty price e. call price

d. dirty price

Three Corners Markets paid an annual dividend of $1.42 a share last month. Today, the company announced that future dividends will be increasing by 1.3 percent annually. If you require a return of 14.6 percent, how much are you willing to pay to purchase one share of this stock today? a. $11.23 b. $10.82 c. $10.68 d. $9.68 e. $11.57

b. $10.82

The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent. What is the amount of each interest payment if the face value of the bonds is $1,000? a. $41.50 b. $42.25 c. $43.15 d. $85.00 e. $86.29

b. $42.25

Which one of the following represents the capital gains yield as used in the dividend growth model? a. D1 b. D1/P0 c. P0 d. g e. g/P0

d. g

An agent who maintains an inventory from which he or she buys and sells securities is called a: a. broker b. trader c. capitalist d. principal e. dealer

e. dealer

A Treasury bond is quoted at a price of 101.4621. What is the market price of this bond if the face value is $5,000? a. $5,005.46 b. $5,105.46 c. $5,073.11 d. $5,264.44 e. $5,215.00

$5,073.11

You purchase a bond with an invoice price of $1,119. The bond has a coupon rate of 6.25 percent, a face value of $1,000, and there are four months to the next semiannual coupon date. What is the clean price of the bond? a. $1,108.58 b. $1,502.17 c. $1,114.14 d. $1,087.75 e. $1,083.50

a. $1,108.58

A firm has a current EPS of $1.63 and a benchmark PE of 11.7. Earning are expected to grow 2.6 percent annually. What is the target stock price in one year? a. $19.57 b. $22.89 c. $19.07 d. $20.14 e. $21.08

a. $19.57

Crystal Glass recently paid $3.60 as an annual dividend. Future dividends are projected at $3.80, $4.10, and $4.25 over the next 3 years, respectively. Beginning 4 years from now, the dividend is expected to increase by 3.25 percent annually. What is one share of this stock worth to you if you require a 12.5 percent rate of return on similar investments? A. $42.92 B. $43.40 C. $45.12 D. $45.88 E. $46.50

a. $42.92

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as: a. 0.05/(1-t*) = 0.07 b. 0.05 - (1-t*) = 0.07 c. 0.07 + (1-t*) = 0.07 d. 0.05(1-t*) = 0.07 e. 0.05(1+t*) = 0.07

a. 0.05/(1-t*) = 0.07

The current dividend yield on CJ's common stock is 1.89 percent. The company just paid an annual dividend of $1.56 and announced plans to pay $1.70 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock? a. 10.86 percent b. 15.82 percent c. 9.08 percent d. 13.39 percent e. 12.75 percent

a. 10.86 percent

Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $548. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature? a. 17.84 years b. 14.19 years c. 17.41 years d. 16.16 years e. 18.31 years

a. 17.84 years

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected? a. Default risk b. Taxability c. Liquidity d. Inflation e. Interest rate risk

a. Default risk

An agent who arranges a transaction between a buyer and a seller of equity securities is called a: a. broker b. floor trader c. capitalist d. principal e. dealer

a. broker

Real rates are defined as nominal rates that have been adjusted for which of the following? a. inflation b. default risk c. accrued interest d. interest rate risk e. both inflation and interest rate risk

a. inflation

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. 18.49 years d. 24.37 years e. 25.05 years

b. 12.53 years

Which one of the following is the price at which a dealer will sell a bond? a. Call price b. Asked price c. Bid price d. Bid-ask spread e. Par value

b. Asked price

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond? a. Par value b. Callable c. Senior d. Subordinated e. Unsecured

b. Callable

A sinking fund is managed by a trustee for which one of the following purposes? a. Paying bond interest payments b. Early bond redemption c. Converting bonds into equity securities d. Paying preferred dividends e. Reducing bond coupon rates

b. Early bond redemption

Which one of the following is an electronic system used by the NYSE for directly transmitting orders to designated market makers? a. Garage order flow b. Pillar system c. Big Room system d. SLP network e. Order NET

b. Pillar system

Winston Co. has a dividend yield of 5.4 percent and a total return for the year of 4.8 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 capital gains yield must be zero d. The required rate of return for this stock increased over the year e. The firm is expecting supernormal growth

b. The stock has a negative capital gains yield

US Treasury bonds: a. are highly liquid b. are quoted as a percentage of par c. are quoted at the dirty price d. pay interest that is federally tax-exempt e. must be held until maturity

b. are quoted as a percentage of par

The interest rate risk premium is the: a. additional compensation paid to investors to offset rising prices b. compensation investors demand for accepting interest rate risk c. difference between the yield to maturity and the current yield d. difference between the market interest rate and the coupon rate e. difference between the coupon rate and the current yield

b. compensation investors demand for accepting interest rate risk

Recently, you discovered a convertible, callable bond with a 5 percent semiannual coupon. If you purchase this bond you will have the right to: a. force the issuer to repurchase the bond prior to maturity b. convert the bond into equity shares c. defer all taxable income until the bond matures d. convert the bond into a perpetuity paying 5 percent e. have the principal amount adjusted for inflation

b. convert the bond into equity shares

KNJ Companies is preparing to pay annual dividends of $1.48, $1.60, and $1.75 a share over the next three years, respectively. After that, the annual dividend will be $1.90 per share indefinitely. What is this stock worth to you per share if you require a return of 14.6 percent? a. $11.22 b. $12.21 c. $12.32 d. $11.47 e. $12.03

c. $12.32

Roy's Welding common stock sells for $58.49 a share and pays an annual dividend that increases by 1.3 percent annually. The market rate of return on this stock is 12.6 percent. What is the amount of the last dividend paid? a. $6.60 b. $5.86 c. $6.52 d. $6.98 e. $5.64

c. $6.52

Do-Well bonds have a face value of $1,000 and are currently quoted at 86.725. The bonds have coupon rate of 6.5 percent. What is the current yield on these bonds? a. 7.45 percent b. 7.67 percent c. 7.49 percent d. 8.03 percent e. 8.47 percent

c. 7.49 percent

NYSE designated market makers: a. execute trades on behalf of their clients b. are guaranteed a profit on every stock purchased and resold c. act as dealers d. provide a one-sided market e. are also referred to as "$2 brokers."

c. act as dealers

Bonds issued by the US government: a. are considered to be free of interest rate risk b. generally have higher coupons than comparable bonds issued by a corporatoin c. are considered to be free of default risk d. pay interest that is exempt from federal income taxes e. are called "munis"

c. are considered to be free of default risk

A bond that is payable to whomever has physical possession of the bond is said to be in: a. new-issue condition b. registered form c. bearer form d. debenture status e. collateral status

c. bearer form

A bond is quoted at a price of $1,011. This price is referred to as the: a. call price b. face value c. clean price d. dirty price e. maturity price

c. clean price

A member who acts as a dealer in a limited number of securities on the floor of the NYSE is called a: a. floor trader b. floor post c. designated market maker d. floor broker e. commission broker

c. designated market maker

A discount bond's coupon rate is equal to the annual interest rate divided by the: a. call price b. current price c. face value d. clean price e. dirty price

c. face value

A newly issued bond has a coupon rate of 7 percent and semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be: a. 3.5 percent b. greater than 3.5 percent but less than 7 percent c. 7 percent d. greater than 7 percent e. less than 3.5 percent

d. greater than 7 percent

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

The Fisher effect is defined as the relationship between which of the following variable? a. default risk premium, inflation risk premium, and real rates b. nominal rates, real rates, and interest rate risk premium c. interest rate risk premium, real rates, and default risk premium d. real rates, inflation rates, and nominal rates e. real rates, interest rate risk premium, and nominal rates

d. real rates, inflation rates, and nominal rates

The secondary market is best defined as the market: a. in which subordinated shares are issued and resold b. conducted solely by brokers c. dominated by dealers d. where outstanding shares of stock are resold e. where warrants are offered and sold

d. where outstanding shares of stock are resold

The bond market requires a return of 9.8 percent on the 5-year bonds issues by JW Industries. The 9.8 percent is referred to as the: a. coupon rate b. face rate c. call rate d. yield to maturity e. current yield

d. yield to maturity

Sew 'N More just paid an annual dividend of $1.42 a share. The firm plans to pay annual dividends of $1.45, $1.50, and $1.53 over the next 3 years, respectively. After that time, the dividends will be held constant at $1.60 per share. What is this stock worth today at a discount rate of 9 percent? a. $12.39 b. $13.30 c. $13.67 d. $12.79 e. $13.41

e. $13.41

Your local toy store just announced its annual dividend will be $4 dividend next year, $3 the following year, and then a final liquidating dividend of $46 a share in Year 3. At a discount rate of 18 percent, what should one share sell for today? a. $36.21 b. $31.48 c. $35.64 d. $39.09 e. $33.54

e. $33.54

Home Products common stock sells for $36.84 a share and has a market rate of return of 15.8 percent. The company just paid an annual dividend of $1.61 per share. What is the dividend growth rate? a. 11.43 percent b. 11.06 percent c. 10.87 percent d. 11.18 percent e. 10.95 percent

e. 10.95 percent

New Homes has a bond issue with a coupon rate of 5.5 percent that matures in 8.5 years. The bonds have a par value of $1,000 and a market price of $1,022. Interest is paid semiannually. What is the yield to maturity? a. 6.36 percent b. 6.42 percent c. 5.61 percent d. 5.74 percent e. 5.18 percent

e. 5.18 percent

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms? a. Note b. Discounted c. Zero-coupon d. Callable e. Debenture

e. Debenture

Which bond would you generally expect to have the highest yield? a. Risk-free Treasury bond b. Nontaxable, highly liquid bond c. Long-term, high-quality, tax-free bond d. Short-term, inflation-adjusted bond e. Long-term, taxable junk bond

e. Long-term, taxable junk bond

Ernst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which of the following markets? a. Private b. Auction c. Tertiary d. Secondary e. Primary

e. Primary

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? a. Alternative voting b. Cumulative voting c. Straight voting d. Indenture voting e. Voting by proxy

e. Voting by proxy

Protective covenants: a. apply to short-term debt issues but not to long-term debt issues b. only apply to privately issued bonds c. are a feature found only in government-issued bond indentures d. only apply to bonds that have a deferred call provision e. are primarily designed to protect bondholders

e. are primarily designed to protect bondholders

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n): a. designated market maker b. dealer c. specialist d. supplemental liquidity provider e. floor broker

e. floor broker

Callable bonds generally: a. grant the bondholder the option to call the bond any time after the deferment period b. are callable at par as soon as the call-protection period ends c. are called when market interest rates increase d. are called within the first three years of issuance e. have a sinking fund provision

e. have a sinking fund provision

Interest rates that include an inflation premium are referred to as: a. annual percentage rates b. stripped rates c. effective annual rates d. real rates e. nominal rates

e. nominal rates

The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the: a. trustee relationships b. bylaws c. legal bounds d. trust deed e. protective covenants

e. protective covenants

The dividend growth model: a. assumes dividends increase at a decreasing rate b. only values stocks at Time 0 c. cannot be used to value constant dividend stocks d. can be used to value both dividend-paying and non-dividend-paying stocks e. requires the growth rate to be less than the required return

e. requires the growth rate to be less than the required return

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the: a. equilibrium b. premium c. discount d. call price e. spread

e. spread

A Treasury yield curve plots Treasury interest rates relative to: a. market rates b. comparable corporate bond rates c. the risk-free rate d. inflation rate e. time to maturity

e. time to maturity

Which one of these equations applied to a bond that currently has a market price that exceeds par value? a. market value < face value b. yield to maturity = current yield c. market value = face value d. current yield > coupon rate e. yield to maturity < coupon rate

e. yield to maturity < coupon rate