Fin 3100 - chapter 5, 6, 7

A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future.

long-term debt

The ________ is the expiration date of the bond.

maturity date

When a company is in financial difficulty and cannot fully pay all of its creditors, the first lenders to be paid are the ________.

senior debtholders

The difference between the price and the par value of a zero-coupon bond represents________.

the accumulated interest over the life of the bond

The constant growth dividend model requires that ________.

the return rate r is greater than the growth rate g of the dividend stream

Walker Laboratories, Inc. pays a $2.00 dividend every quarter and will maintain this policy forever. What price should you pay for one share of common stock if you want an annual percentage return (APR) of 8% on your investment?

$100

The ________ is the written contract between the bond issuer and the bondholder.

indenture

With a bearer bond, whoever held it was entitled to the ________ and the ________.

interest payments; principal

The most recent dividend (Div0) from Wallboard Inc, is $0.80, the dividend growth rate (g) is expected to be 6.25%, and the required rate of return (r) on the firm's stock is 10%. What is the stock price according to the constant growth dividend model?

$22.67

Creative Solutions Inc. has issued 10-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is ________.

$80

The real rate is 1.25% and inflation is 5.25%. What is the approximate nominal rate?

6.50% Roughly speaking, the nominal rate is the real rate plus inflation. Thus, the nominal rate is 1.25% plus 5.25% equals 6.50%.

When a bond is first issued the corporation tries to set the coupon close to the yield. Which of the following is TRUE (holding all else equal)?

A callable bond will have a higher coupon compared to an non-callable bond

A bond may be issued by ________.

All of these Companies, state governments, the federal government

The coupon payment for an annual-coupon corporate bond is equal to the yield to maturity multiplied by the par value of the bond

False

You just entered into a $150,000 30-year home mortgage at an annual interest rate of 4.25% making monthly payments of $737.91. Suppose you add an additional payment of $295.97 each month to the $737.91 house payment making your total monthly payments equal to $1,033.88. This extra amount is applied against the principal of the original loan. How long will it take you to pay off your loan of $150,000?

It will take about 204 months.

________ has to do with the speed and accuracy of processing a buy or sell order at the best available price.

Operational efficiency

What is the EAR if the APR is 10.52% and compounding is daily?

Slightly above 11.09% Using the EAR formula, we get 11.0916% or slightly above 11.09%.EAR = [(1 + APR/m)m] -1 = [(1 + 0.1052/365)365] -1 = 11.0916%.

Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE?

The bank is technically renting money from you with a promise to repay that money with interest.

You want to invest in a stock that pays $1.50 annual cash dividends for the next six years. At the end of the six years, you will sell the stock for $18.50. If you want to earn 7.5% on this investment, what is a fair price for this stock if you buy it today?

about $19.03

A company selling a bond is ________ money.

borrowing

The ________ is the interest rate printed on the bond.

coupon rate

When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.

coupon rate; discount to

The ________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator.

current yield

A ________ is an unsecured bond.

debenture

The actual rate paid or received after accounting for compounding is called the

effective annual rate

In a bull market stock prices have been falling for a prolonged period of time. true/false

false

Zero-coupon bonds are priced at steep premiums.

false

To determine the interest paid each compounding period, take the advertised annualpercentage rate and divide it by the _________ to get the appropriate periodic interestrate, often called the "period rate."

number of compounding periods per year

To determine the interest paid each compounding period, we take the advertised annual percentage rate and simply divide it by the ________ to get the appropriate periodic interest rate.

number of compounding periods per year

In ________, current prices reflect the price history and trading volume of the stock. It is of no use to chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market.

weak-form efficient markets

The ________ is the return the bondholder receives on the bond if held to maturity.

yield to maturity

The appropriate rate to use to discount the cash flows of a bond in order to determine the current price is the ________.

yield to maturity

Bonds are sometimes called ________ securities because they pay set amounts on specific future dates.

fixed-income

MicroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE?

All of these are true: The bond market currently requires a rate (yield) less than the coupon rate The bonds are selling at a premium to the par value The coupon rate is greater than the yield to maturity

Which of the statements below is FALSE? A) Unlike coupon payments on bonds, which are treated as an interest expense of the firm, common stock dividends are considered a return of capital to shareholders and not an expense of the firm. B) The payment of cash dividends to shareholders is a deductible expense for the company. C) A typical practice of many companies is to distribute part of the earnings to shareholders through cash dividends. D) For the shareholder, receipt of dividends is a taxable event.

B) The payment of cash dividends to shareholders is a deductible expense for the company.

What is the EAR if the APR is 5% and compounding is quarterly?

Slightly above 5.09% Using the EAR formula, we get 5.0945%, or slightly above 5.09%.EAR = [(1 + APR/m)m] -1 = [(1 + .05/4)4] - 1 = 5.0945%.

Lily invested $10,000 five years ago with an insurance company that has paid her 4 percent (APR), compounded semi-annually (twice per year). How much interest did Lily earn over the 5 years?

$2,189.94 6-month rate = 4%/2 = 2% = 0.02, Number of 6-month periods = 10 FV= 10,000(1.02)^10 = $12189.94 Interest earned = $12189.94- $10,000 = $2189.94

Four years ago, the XYZ Corporation issued an 8% coupon (paid semi-annually), 20-year, AA-rated bond at its par value of $1000. Currently, the yield to maturity on these bonds is 10%. Calculate the price of the bond today.

$841.97

Suppose you postpone consumption and invest at 14% when inflation is 2%. What is the approximate real rate of your reward for saving?

12%

John wants to buy a 20-year, AAA-rated, $1000 par value, zero-coupon bond being sold by Diversified Industries Inc. The yield to maturity on similar bonds is estimated to be 9%. How much would he have to pay for it? (It is customary to price these bonds as semiannual bonds.)

171.93

Sahali Shopping Center Corporation is expected to grow its dividends by 5% per year forever. The required rate of return on the stock is 7%. What is the dividend yield?

2% r= dividend yield + g dividend yield = r- g = 7% - 5% = 2%

Suppose you postpone consumption and invest at 6% when inflation is 2%. What is the approximate real rate of your reward for saving?

4% We can see that an inflation rate of 2% is 4% less than our 6% investment rate. Thus, 4% is the real rate of your reward for saving

Suppose you postpone consumption and invest at 6% when inflation is 2%. What is the approximate real rate of your reward for saving?

4% We can see that an inflation rate of 2% is 4% less than our 6% investment rate. Thus, 4% is the real rate of your reward for saving.

Becky is seeking to expand her stamp collection. Each year, stamps increase in price at a seven percent rate. She believes that if she invests her money for one year, she should be able to buy 24 stamps for what 23 stamps would cost today. What is her real interest rate or reward for waiting?

4.35% 24/23 - 1

If your nominal rate of return is 6.59 percent and the inflation rate is 2.0 percent, what is the real rate of return?

4.50% Precisely (1+0.659)/(1+0.02) - 1 = 4.5%

Moore Company is about to issue a bond with semi-annual coupon payments, a coupon rate of8%, and par value of $1,000. The yield-to-maturity for this bond is 10%. What is the price %. What bond if the bond matures in five years?

At five years to maturity Semi-annual coupon = (.08*1000)/2 = $40 Price = $1,000.00 × 1/(1.05)^10 + $40.00 (1 - 1/(1.05)^10)/ 0.05 Price = $1,000.00 × 0.6139 + $40.00 × 7.7217 Price = $613.91 + $308.87 = $922.78

A basis point is ________.

one-hundredth of a percentage point

The ________ is the face value of the bond.

par value

Most U.S. corporate and government bonds choose to make ________ coupon payments.

semiannual

Which of the following types of bonds, as characterized by a feature, by definition has two coupon payments per year?

semiannual

Monthly interest on a loan is equal to ________.

the beginning balance times the monthly interest rate

As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that

the credit rating increases, the default risk decreases, and the required rate of return decreases.

Assume that you are willing to postpone consumption today and buy a certificate of deposit (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year ________.

you will be able to buy more goods or services

Ten years ago Salmon Acqua Farming Inc. issued twenty-five-year 8% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have fallen and the yield to maturity on the Bacon bonds is now 7%. Given this information, what is the price today for such a bond?

$1,091.08

Assume you just bought a new boat and now have a boat loan to repay. The amount of the principal is $68,000, the loan is at 6.75% APR, and the monthly payments are spread out over 7 years. What is the monthly loan payment?

$1,1018.01

Assume that Ray is 38 years old and has 27 years for saving until he retires. He expects an APR of 7.5% on his investments. How much does he need to save if he puts money away monthly in equal end-of-the-month amounts to achieve a future value of $1,200,000 dollars in 27 years' time?

$1,148.81 Monthly rate = 7.5%/12 = 0.625% =0.00625, Number of months = 27*12=324 1,200,000 = PMT [ (1.00625^324 - 1) / 0.00625] PMT = $1148.81

Quality Production Products Inc. has issued 20-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 12% and the yield to maturity today is 10%, what is the firm's current price per bond?

$1,171.59

You want to buy a new sports car for $50,000. The contract is in the form of a 60-month annuity due at an 18% APR. What will your monthly payment be?

$1,250.91 Monthly rate = 18% / 12 = 1.5% = 0.015# of months = 60 50,000 = (1+0.015) PMT [(1 - 1/1.015^60 ) / 0.015 ] 50,000 = (1.015) PMT [39.38027] PMT = 50,000 / 39.971 = 1250.91

TravelEasy Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 14% and the yield to maturity today is 8%, what is the firm's current price per bond?

$1,678.70

You put 20% down on a home with a purchase price of $250,000. The down payment is thus $50,000, leaving a balance owed of $200,000. The bank will loan the remaining balance at 3.91% APR. You will make annual payments with a 30-year payment schedule. What is the annual annuity payment under this schedule?

$11,439.96 PV=PMT[1-1/(1+r)^n]/r

Lily invested $10,000 eight years ago with an insurance company that has paid her 10 percent (APR), compounded semi-annually (twice per year). How much interest did Lily earn over the 8 years?

$11,828.75 6-month rate = 10%/2 = 5% = 0.05, Number of 6-month periods = 16 FV= 10,000(1.05)^16 = $21828.75 Interest earned = $21828.75- $10,000 = $11828.75

Five years ago, CleanEnergy Corporation issued an 10% coupon per year (paid semi-annually), 15-year, AA-rated bond at its par value of $1000. Currently, the annual yield to maturity (APR) on these bonds is 8%. What is the current price per bond?

$1135.90 Price = 1000/1.04^20 + 50[1-1/1.04^20]/0.04 = $1135.90

Five years ago, CleanEnergy Corporation issued an 12% coupon per year (paid semi-annually), 25-year, AA-rated bond at its par value of $1000. Currently, the annual yield to maturity (APR) on these bonds is 10%. What is the current price per bond?

$1171.59 Price = 1000/1.05^40 + 60[1-1/1.05^40]/0.05 = $1171.59

Fifteen years ago McDemott's Motels Inc. issued twenty-five-year 10% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have fallen and the yield to maturity on the firm's bonds is now 6%. Given this information, what is the price today for such a bond?

$1294.40

Five years ago, CleanEnergy Corporation issued an 12% coupon per year (paid semi-annually), 20-year, AA-rated bond at its par value of $1000. Currently, the annual yield to maturity (APR) on these bonds is 8%. What is the current price per bond?

$1345.84 Price = 1000/1.04^30 + 60[1-1/1.04^30]/0.04 = $1345.84

What if Jennifer were to invest $2,750 today, compounded semiannually, with an annual interest rate of 5.25%. What amount of interest will Jennifer earn in one year?

$146.27 With PV = $2,750, Rate =5.25%/2, Periods = 2, compounding semiannually solve for FV = $2,896.27. To solve for the interest earned use FV - PV = $2,896.27 - $2,750 = $146.27.

Lily invested $10,000 ten years ago with an insurance company that has paid her 10 percent (APR), compounded semi-annually (twice per year). How much interest did Lily earn over the ten years?

$16,533 6-month rate = 10%/2 = 5% = 0.05, Number of 6-month periods = 20 FV= 10,000(1.05)^20 = $26532.98 Interest earned = $26532.98- $10,000 = $16532.98

Tesla is expected to pay no dividends over the next 4 years, pay a dividend of $5 at the end of year 5, and then grow the dividends by 6% each year afterwards. The required rate of return (r) is8%. What is the stock price today according to the two-stage growth model?

$183.76 P4 = D5/(r-g) = 5/(0.08-0.06)= $250. P0 = $250/1.08^4 = $183.76

The British government decided to issue a consol or bond with no maturity date. The bond will pay $40 in interest every six months with the first payment in six months. If the current annual discount rate is 4.0%, what should this bond sell for in the market?

$2,000 $40/0.02 = 2,000

A stock is currently priced at $16.00 per share. The firm is expected to pay a constant dividend every year in the future. If the required rate of return is 12.5%, what is the dividend?

$2.00 P=D/k 16=D/0.125 D=2

Wallboard Inc, plans to pay a dividend in one year (Div1) of $0.80, the dividend growth rate (g) is expected to be 6%, and the required rate of return (r) for the firm's stock is 10%. What is the stock price, according to the constant growth dividend model?

$20.00

Walmart is expected to pay a dividend of $2.12 next year, and then grow the dividend by 3%each year afterwards. The required rate of return (r) is 4%. What should be the stock price today?

$212 P0 = D1/(r-g) = 2.12/(0.04-0.03)= $212

RadicaL CREATIONS Inc. just issued zero-coupon bonds with a par value of $1,000. If the bond has a maturity of 15 years and a yield to maturity of 10%, what is the current price of the bond if it is priced in the conventional manner?

$231.38

You buy a stock for which you expect to receive an annual dividend of $2.10 for the ten years that you plan on holding it. After 10 years, you expect to sell the stock for $26.15. What is the present value of a share for this company if you want an 8% return?

$26.20

Susan's goal is to retire with $1,000,000 in her retirement account. The local bank advertises an APR of 12% with monthly compounding on retirement fund accounts. If she retires in 30 years how much should Susan save each month to reach her goal?

$286.13 Monthly rate = 12%/12 = 1% =0.01 Number of months = 360 1,000,000 = PMT [ (1.01^360 - 1) / 0.01] PMT = $286.13

Lily invested $10,000 twenty years ago with an insurance company that has paid her7 percent (APR), compounded semi-annually (twice per year). How much interest did Lily earn over the 20 years?

$29,592.60 6-month rate = 7%/2 = 3.5% = 0.035 Number of 6-month periods = 40 FV= 10,000(1.035)^40 = $39,592.60 Interest earned = $39,592.60 - $10,000 = $29,592.60

Assume you just bought a new car and now have a car loan to repay. The amount of the principal is $22,000, the loan is at 6% APR, and the monthly payments are spread out over 6 years. What is the monthly loan payment?

$364.60

Tennessee Fiddles, Inc. will pay a dividend of $2.00 a share at the end of the year. The dividend is expected to increase by 50% for the following 2 years and then the firm expects to maintain a constant dividend growth rate of 4 percent per year. The required return is 12percent. a) What are the expected dividends in years 1, 2, 3, and 4?

$4.68 . D1 = $2 D2 = $2(1+0.5) = $3 D3 = $3(1+0.5) = $4.5 D4 = $4.5(1+0.04) = $4.68

You want to invest in a stock that pays $6.00 annual cash dividends for the next five years. At the end of the five years, you will sell the stock for $30.00. If you want to earn 10% on this investment, what is a fair price for this stock if you buy it today?

$41.37

Walker Laboratories, Inc. pays a $1.37 dividend every quarter and will maintain this policy forever. What price should you pay for one share of common stock if you want an annual percentage return (APR) of 12.5% on your investment?

$43.84

Kenna invests $5,000 today, compounded monthly, with an annual interest rate of 8.52%. What amount of interest will she earn in one year?

$443.04 With PV = -$5,000, Monthly Rate =8.52%/12, Periods = 12, compounding monthly solve for FV = $5,443.04. To solve for the interest earned use FV - PV = $5,443.04 - $5,000 = $443.04.

Tennessee Fiddles, Inc. will pay a dividend of $2.00 a share at the end of the year. The dividend is expected to increase by 50% for the following 2 years and then the firm expects to maintain a constant dividend growth rate of 4 percent per year. The required return is 12percent. c) What would you be willing to pay for this stock today?

$49.02

Susan's goal is to retire with $500,000 in her retirement account. The local bank advertises an APR of 6% with monthly compounding on retirement fund accounts. If she retires in 30 years how much should Susan save each month to reach her goal?

$497.75 Monthly rate = 6%/12 = 0.5% =0.005, Number of months = 360, 500,000 = PMT [ (1.0005^360 - 1) / 0.005] PMT = $497.75

Tennessee Fiddles, Inc. will pay a dividend of $2.00 a share at the end of the year. The dividend is expected to increase by 50% for the following 2 years and then the firm expects to maintain a constant dividend growth rate of 4 percent per year. The required return is 12percent. b) What would you be willing to pay for this stock at the end of year 3?

$58.50

Big House Nursery Inc. has issued 20-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 10%. The current price of the bond is ________.

$829.73

Susan's goal is to retire with $1,000,000 in her retirement account. The local bank advertises an APR of 12% with monthly compounding on retirement fund accounts. If she retires in 40 years how much should Susan save each month to reach her goal?

$85 Monthly rate = 12%/12 = 1% =0.01, Number of months = 40*12=480 1,000,000 = PMT [ (1.01^480 - 1) / 0.01] PMT = $85

Five years ago, Simpson Warehouses Inc. issued twenty-five-year 10% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the Thompson bonds is now 12%. Given this information, what is the price today for a Thompson Tarps bond?

$850.61

Douglas Distributing Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 6% and the yield to maturity today is 7%, what is the firm's current price per bond?

$875.28

Four years ago, CleanEnergy Corporation issued an 10% coupon per year (paid semi-annually), 15-year, AA-rated bond at its par value of $1000. Currently, the annual yield to maturity (APR) on these bonds is 12%. What is the current price per bond?

$879.58 Price = 1000/1.06^22 + 50[1-1/1.06^22]/0.06 = $879.58

Ten years ago Pancake House Inc. issued twenty-five-year 8% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the Bacon bonds is now 9%. Given this information, what is the price today for such a bond?

$919.39

TravelEasy Enterprises Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 14% and the yield to maturity today is 15%, what is the firm's current price per bond?

$934.20

You put 20% down on a home with a purchase price of $250,000. The down payment is thus $50,000, leaving a balance owed of $200,000. A bank will loan you this remaining balance at 3.9% APR. You will make monthly end-of-the-period payments with a 30-year payment schedule. What is the monthly annuity payment under this schedule?

$943.34

You are running short of cash and really need to pay your rent. A friend suggests that you check out the local title pawn shop. At the shop they offer to loan you $1,000 if you pay them back $1,200 in one week. It seems like a good idea to you because you don't want to sell your car and you are sure you will be able to pay the money back in a week. What is the APR on this loan?

1040% (1200-1000)/1000=20% 20%*52=1040%

You are running short of cash and really need to pay your rent. A friend suggests that you check out the local title pawn shop. At the shop they offer to loan you $2,000 if you pay them back $2,200 in one week. It seems like a good idea to you because you don't want to sell your car and you are sure you will be able to pay the money back in a week. What is the APR on this loan?

520% (2200-2000)/1000=10% 10%*52=52%

You are running short of cash and really need to pay your rent. A friend suggests that you check out the local title pawn shop. At the shop they offer to loan you $6,000 if you pay them back $6,600 in one week. It seems like a good idea to you because you don't want to sell your car and you are sure you will be able to pay the money back in a week. What is the APR on this loan?

520% (6600-6000)/6000 = 10% 10% × 52 weeks = 520%

Suppose you postpone consumption and invest at 9% when inflation is 2%. What is the approximate real rate of your reward for saving?

7%

The effective annual rate (EAR) is 8.4% with quarterly compounding. What is the stated rate (APR)?

8.15% (1+ quarterly rate)^4 -1 = 0.084 (1+ quarterly rate)^4 = 1.084 1+ quarterly rate = 1.084^(1/4) quarterly rate = 1.084^0.25 - 1 = 0.02037 APR = quarterly rate × 4 = 8.15%

The stated rate (APR) is 9% with monthly compounding. What is the equivalent annual rate (EAR)?

9.38% Monthly rate = 9%/12 = 0.0075 EAR = (1+0.0075)^12 - 1 = 9.38%

The typical payments on a consumer loan are made at ________.

the end of each month