Finance 300 Exam 2, FIN300 Exam 2, FIN 300 Exam 2, FIN 300 - Exam 2, FIN 300 Exam 2, Finance Exam 2 HW review Stein, FIN 300 Exam 2-Stein CSU, Finance 300 Exam 2 Stein, FIN 300 Exam 2 - Stein

What is the expected return given the following information? Possible Returns Probability 8% 20% 10% 10% 12% 40% 15% 20% 16% 10%

12% (sum of possible returns X probability)

Calculating Interest and Principal from results above

1st payment Interest= 20,000pv x (.09rate/12months) = $150 Principal= 497.70pmt - 150interest= $347.70 2nd payment Interest= (20,000pv-347.70principalfrom1st) x (.09/12)= $147.40 Principal = $497.70pmt-147.4interest= $350.30

recession

2 consecutive quarters of GDP decline

The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate. (T/F)

True

The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity. (T/F)

True

The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called "interest rate risk," or "price risk." (T/F)

True

True or False: A stock that is more volatile than the market will have a beta of more than 1.0.

True

True or False: Assuming all else is equal, short-term securities are exposed to higher reinvestment rate risk than long-term securities.

True

True or False: Stock A's beta is 1.0; this means that the stock moves in the same direction and magnitude as the market.

True

True or False: The portfolio's risk is not the weighted average of the individual stock's standard deviations.

True

True or False: When returns on Stock A increase, returns on Stock B also increase. In general, this would mean that Stocks A and B are positively correlated.

True

Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, the standard deviation. (T/F)

True

When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk. (T/F)

True

Fill in the Blank: When the bond's coupon rate is equal the the bondholder's required return, the bond's intrinsic value will equal its par value, and the bond will trade _______.

at par

Most investors are risk _______, desiring a higher rate of return for added risk assumed.

averse

Which of the following items on the income statement and balance sheet is most likely to vary spontaneously with sales?

accrued expenses

Each of the following items on the income statement and balance sheet tend to vary spontaneously with sales except?

accumulated depreciation

Nominal rate (INOM)

also called the quoted or stated rate. An annual rate that ignores compounding effects. whats written in contract

Inflation

amount by which prices increase over time

Periodic rate (IPER)

amount of interest charged each period, e.g. monthly or quarterly. IPER = INOM / M M = # of compounding periods

annuity due

an annuity whose payments occur at the beginning of each period

ordinary annuity

an annuity with payments that occur at the end of each period

Normal Yield Curve

an upward-sloping yield curve

Original Issue Discount (OID) Bond

any bond originally offered at a price below its par value

Bond values over time

at maturity, the value of any bond must equal its par value

zero coupon bond

bonds that pay no annual interest but are sold at a discount below par, thus compensating investors in the form of capital appreciation

income bonds

bonds whose interest is paid only if it is earned by the firm

floating rate bonds

bonds whose interest rate fluctuates with shifts in the general level of interest rates

putable bonds

bonds with provision that allows investors to sell them back to company prior to maturity at pre-arranged price

Why do businesses spend time, effort, and money to produce forecasts?

businesses succeed or fail depending on how well prepared they are to deal with the situations they confront in the future.

quantitative easing

buying LT securities to increase liquidity and lower interest rates

A bond issuer is said to be in ______ if it does not pay the interest or the principal in accordance with the terms of indenture agreement or if it violates one or more of the issue's restricted covenants.

default

DRP

default risk premium The difference between the interest rate on a U.S. Treasury bond and a corporate bond of equal maturity and marketability.

In terms of risk, labor union disputes, entry of a new competitor, and embezzlement by management are all examples of factors affecting:

diversifiable risk

Fill in the Blank: When the bond's coupon rate is greater to the bondholder's required return, the bond's intrinsic value will _________ its par value, and the bond will trade at a premium.

exceed

The contract that describes the terms of borrowing arrangement between a firm that sells a bond issue and the investors who purchase the bonds is called an _______

indenture

demand-pull inflation

inflation that is caused by an increase in aggregate demand there is a lag of 6-9 months when fed changes monetary policy

indexed bond

interest rate paid is based upon the rate of inflation

dirty price

invoice price

Which of the following items on the income statement and balance sheet is least likely vary spontaneously with sales?

plant and equipment

Value of a Financial Asset

present value of future cash flows with discount rate based on riskiness

A financial plan consisting of projected future financial statements are called:

pro forma financial statements

When we compare the risk of two investments that have the same expected return, the coefficient of variation:

provides no additional information than the standard deviation

clean price

quoted price

Corporate bond yield

r = r* + IP + DRP + MRP + LP

T-bond yield

r = r* + IP + MRP

historical rates of return

r bar

portfolio expected return

r hat = Σ w x r

The expected return on an investment is:

the mean of the distribution of possible returns

correlation coefficient

the measure of the degree of correlation between variables

Original Maturity

the number of years to maturity at the time a bond is issued

investment horizon

the period of time an investor plans to hold a particular investment

Time preferences for consumption

the preferences of consumers for current consumption as opposed to saving for future consumption

risk-return trade-off

the principle that the greater the risk a lender takes in making a loan, the higher the interest rate required

yield to maturity

the rate of return earned on a bond if it is held to maturity

Yield to Call (YTC)

the rate of return earned on a bond when it is called before its maturity date YTC = Σ INT / (1+r)^t + Call Price / (1+r)^N N = years to call

opportunity cost

the rate of return you could earn on an alternative investment of similar risk

term structure of interest rates

the relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money

The stock beta is a measure of:

the return of the individual stock relative to the return of the market. Hint: It is a component of the CAPM.

systematic risk

the risk associated with all securities and can not be reduced through diversification market risk measured by b ex. COVID, inflation

interest rate risk

the risk of capital losses to which investors are exposed because of changing interest rates

The Capital Asset Pricing Model suggests that an individual stock's required rate of return is the sum of:

the risk-free rate plus the market risk premium times the beta of the stock.

Pure Expectations Theory

the shape of the yield curve depends on investors' expectations about future interest rates if interest rates expected to increase, LT rates will be higher than ST rates assumes MRP = 0 LT rates are AVG of current and future ST rates

beta coefficient

the slope of the regression line Beta measures market risk.

coupon payment

the specified number of dollars of interest paid each year

A good measure of an investor's risk exposure if she/he only holds a single asset in her portfolio is:

the standard deviation of possible returns on the asset

coefficient of variation (CV)

the standardized measure of the risk per unit of return; calculated as the standard deviation divided by the expected return CV = σ / r hat CV = standard deviation / expected return

coupon rate

the stated rate of interest on bonds

Correlation

the tendency of two variables to move together

When adding financial risk to business risk:

the total risk is increased by the compounding effects of the combined risks.

Business risk

the uncertainty a company has with regard to its operating income (also known as earnings before interest and taxes or EBIT). Business risk is brought on by sales volatility and intensified by the presence of fixed operating costs.

Present Value (PV)

the value today of a future cash flow or series of cash flows

duration

the weighted average of the time it takes to receive each of the bond's cash flows

An upward sloping yield curve:

Has higher long term rates than short term rates

Compound interest can best be described as:

Interest on interest and interest on original principal

ST & high-coupon bonds

Low Price Risk High Reinvestment risk

convertible bonds

bonds that are exchangeable at the option of the holder for the issuing firm's common stock

simple interest

occurs when interest is not earned on interest FV = PV + PV (I)(N)

N (Bonds)

# of years before bond matures calculator: N

Sales will grow from $100,000 this year to $150,000 next year. Preferred dividends were $10,000 this year. What is the new projected amount of preferred dividends?

$ 10,000

You get a twenty-year amortized loan of $100,000 with a 5% annual interest rate. What are the annual payments?

$ 8,024

INT (Bonds)

$ of interest paid each year INT = Coupon Rate x Par Value calculator: PMT

Calculate the price of a six-year $1000 face-value bond with a 7% annual coupon rate and a yield-to-maturity of 6% with semi-annual coupon payments.

$1,049

Sales will grow from $100,000 this year to $150,00 next year. Preferred dividends were $10,000 this year. What is the new projected amount of preferred dividends? $ 5,000 $ 1,500 $ 10,000 $15,000

$10,000

What amount would you have to invest at the end of each year for 25 years to accumulate $1 million dollars if your money was earning 9.778%?

$10,513

What is the present value of a semi-annual ordinary annuity payment of $7,000 made for 12 years with a required annual return of 5%?

$125,195

Company XYZ purchased some machinery and gave a five-year note with a maturity value of $20,000. The discount rate is 8% annually and the interest is discounted monthly. How much did the company borrow?

$13,424

You deposit $10,000 in a bank and plan to keep it there for five years. The bank pays 8% annual interest compounded continuously. Calculate the future value at the end of five years.

$14,918

As a gift from your parents, you just received $50,000 for your education for the next four years. You can earn an annual rate of 8% on your investments. How much can you withdraw each year (end of year) just using up the $50,000?

$15,096

What amount would you accumulate if you paid $500 at the start of every quarter for 25 years, earning an annual percentage rate of 8%?

$156,116

What is the standard deviation of the following income statement sales projection given the following information? Possible Sales Level (in 000's) Probability 0 10% 100 15% 400 40% 450 30% 600 5%

$169.26

What is the standard deviation of the following income statement sales projection given the following information? Possible Sales Level (in 000's) Probability 0 10% 100 15% 400 40% 450 30% 600 5% $169.26 $340 $387.50 $400

$169.26

A gallon of milk cost $3.59 today. How much will it cost you to buy a gallon of milk for your grandchildren in 35 years if inflation averages 5% per year?

$19.80

Jones Corp. expects sales to increase 10% from this year's level of $5 million. With a net profit margin of 8% and a dividend payout ratio of 30%, what financing for next year might be provided from internal equity sources?

$308,000

What is the present value of $10,000 to be received at the end of 10 years if your opportunity rate of return is 8.71%?

$4,338

What is the present value of $500 to be received at the end of each year for 12 years if your required rate of return is 5%?

$4,432

Your grandmother is offered a series of $6,000 starting one year from today. The payments will be made at the end of each of the next 10 years. Similar risk investments are yielding 7%. What should she pay for the investment?

$42,141

Amex Corporation forecasts a 15% increase in sales, and similar effects for its accounts receivable ($3 million), inventory ($4 million), and accounts payable ($3.5 million). All other financial statement accounts will remain the same, and Amex will pay out all earnings to shareholders as dividends. What is Amex's expected additional funds needed?

$525,000 (accounts receivable plus inventory minus accounts payable times percentage of increase in sales)

What is the value today of $6,000 received per year forever at 10%?

$60,000

What is the present value of an annual annuity payment of $7,000 made for 12 years with a required return of 5% with the first payment starting today?

$65,145

You get a twenty-year amortized loan of $100,000 with a 5% annual interest rate. What are the annual payments?

$8,024

Calculate the price of a seven-year $1000 bond with a 5% coupon rate and a yield-to-maturity of 7% with annual coupon payments.

$892.21

The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.90, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0?

$9.89

What is the future value in your pension fund if you invest $7,000 per year for 30 years, earning 9%. You make your first $7,000 payment one year from today.

$954,153

What is the present value of $1,000 discounted for 30 years at 8%?

$99.38

One-year forward rate

(1 + yield final)^2 = (1 + yield rate) (1 + yield rate)

three year security, 2 years from now

(1 + yield final)^5 = (1 + yield rate)^2 (1 + yield rate)^3

The Boogie Board Inc firm has a beta of 2.3. If the Risk Free return is 3.5% and in general people earn 7% for putting their money into stocks, how much is the CAPM required rate of return for BBI?

(Return of market -RF)= mrp RF + B(mrp) 3.5 +2.3(7%)= 19.6

You are trying to diversify your portfolio and reduce risk. Which of the following correlations between the returns of your portfolio and those of a proposed addition would give the most diversification benefit (other things equal)?

-1

You are trying to diversify your portfolio and reduce risk. Which of the following correlations between the returns of your portfolio and those of a proposed addition would give the most diversification benefit (other things equal)? -1 +1 0 -.5

-1

Which of the following statements is most incorrect?

-All else equal, if a bond's yield to maturity increases, its current yield will fall. -If a bond's yield to maturity exceeds the coupon rate, the bond will sell at a premium over par.

One of the basic relationships in interest rate theory is that, other things held constant, for a given change in the required rate of return, the the time to maturity, the the change in price.

-Longer; greater -Shorter; smaller

Types of bonds

-Mortgage bonds -Debentures -Subordinated debentures -Investment-grade bonds -Junk bonds

Which of the following statements is most correct?

-Sinking fund provisions sometimes work to the detriment of bondholders--particularly if interest rates have declined over time. -If interest rates have increased since the time a company issues bonds with a sinking fund provision, the company is more likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price.

Chapter 6: Pro Forma Financial Statements

...

Chapter 8: The Time Value of Money

...

What is the coefficient of variation of the following income statement sales projection given the following information? Possible Sales Level (in 000's) Probability 1000 10% 2000 15% 2500 50% 2800 20% 3000 5%

.22

What is the coefficient of variation of the following income statement sales projection given the following information? Possible Sales Level (in 000's) Probability 1000 10% 2000 15% 2500 50% 2800 20% 3000 5% 1.41 .22 12% 18.2x

.22

What 3 things reveal that it is a begin mode problem?

1. Annuities Due 2. 1st payment starts today 3. Payment at start of month

What three things are managers looking for when analyzing a pro forma financial statement?

1) How will the company perform if they maintain similar operations? 2) How will a change or no change in operations effect the company? 3) What problems have become apparent?

You purchase a bond with an invoice price of $1,038. The bond has a coupon rate of 9 percent, and there are four months to the next semiannual coupon date. What is the clean price of the bond?

1,023 Accrued interest = 90/2 X 2/6 = 15.00 Clean price = dirty price - accrued interest 1,038 - 15.00 = 1,023

You just purchased a 15-year bond with an 11 percent annual coupon. The bond has a face value of $1,000 and a current yield of 10 percent. Assuming that the yield to maturity of 9.7072 percent remains constant, what will be the price of the bond one year from now?

1. Bond Today N: 15 I: 9.7072 (yield-to-maturity) PV: $1,099.99 PMT: 1000 x 11%= 110 FV: $1000 2. Because it's in one year. You have to decrease n, the year by 1 N: 14 I: 9.7072 *PV: $1,097 (1096.7758) PMT: 110 FV: $1000

How do you calculate the standard deviation?

1. Cash Flow - Mean for each opportunity 2.Square each 3. Multiply by their corresponding probability 4. Add them all together 5. Square root the total

Macro economics factors influencing Interest Rates

1. Federal Reserve Policy 2. Federal budget deficits/surpluses 3. International Factors 4. Level of BUS activity

Bond Rating Criteria

1. Financial Ratios 2. Bond Contract Terms 3. Miscellaneous Qualitative Factors

There is a 50% probability that the Plum company sales will be $12 million next year, a 20% chance they will be $7 million and a 30% chance they will be $3 million.

1. How much should Plum expect to sell? .5 x 12M =6M .2 x 7M =1.4M .3 x 3M =900,000 1.0 8.3M .5(12M-8.3M)2 .2(7M-8.3M)2 .3(3M-8.3M)2 var=15.61M 2. What is the standard deviation of their sales? Square root of 15.61= 3.95

How do you calculate the Mean?

1. Individually calculate Cash flow X Probability for all opportunities 2. add the sum of each opportunity

Fed's objectives

1. Max employment 2. stable prices (Inflation about 2% - 2.5%)

4 factors affect level of interest rates

1. production opportunities 2. Time preferences for consumption 3. Risk 4. Inflation

inflation rate triggers

1. unemployment - when below 4-5% 2. capacity utilization - when it gets too high about 82% 3. Federal funds rate 4. Yield Curve - shape represents inflation expectations

concerns about CAPM

1. validity concerns 2. no historical relationship b/w stock returns and MKT beta

Cheng Inc. is considering a capital budgeting project that has an expected return of 24% and a standard deviation of 30%. What is the project's coefficient of variation? Do not round your intermediate calculations. Round the final answer to 2 decimal places.

1.25

If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 7.9%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

1.30%

You want to know how much your lottery ticket is worth. If it costs $1 and your probability of winning the $30 million dollar prize is 1 in 62,000,000, what is it worth?

1/62M x 30M = 30M/62M = 0.4838

Based on the corporate valuation model, the total corporate value of Chen Lin Inc. is $500 million. Its balance sheet shows $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of its stock price per share?

11.20

What is the expected return given the following information? Possible Returns Probability 8% 20% 10% 10% 12% 40% 15% 20% 16% 10% 12.2% .12% 12% 18.2%

12%

You get a 25-year loan of $150,000 with an 8% annual interest rate. What are the annual payments?

14,052

Assuming a normal distribution, if the average return on an investment is 15%, which of the following standard deviations represents the highest risk?

15%

How long will it take $10,000 to reach $50,000 if it earns 10% annual interest compounded semiannually?

16.5 years

Given a debt/total asset ratio of 75% and a ROE of 12% we know that: the owners of XYZ are financing 75% of the firm's assets in order to receive a 12% return on their personal investment in the company's stock Profits equal 12% of the firm's sales the firm can cover interest payments with $0.25 of every dollar left for profit 25% of assets are financed with owners' equity

25% of assets are financed with owners' equity

Becker and Company had $150,000 in EBT. Using the schedule below, what was their effective tax rate? Before-Tax Income (EBT) Tax Rate $0 - $50,000 15% $50,001 - $75,000 25% $75,001 - $100,000 34% $100,001 - $335,000 39% $335,001 - $10,000,000 34 $10,000,001 - $15,000,000 35% $15,000,001 - $18,333,333 38% Over $18,333,333 35% 39% 28% 25% equal to the marginal tax rate

28%

Given the information, calculate the earnings per share: Interest expense 40,000 Net income 400,000 Preferred dividends paid 65,000 Common dividends paid 100,000 Common stock outstanding 100,000 1.95 3.35 3.60 2.35

3.35

Kerney's EBT is $450,000. What is the marginal tax rate? Before-Tax Income (EBT) Tax Rate $0 - $50,000 15% $50,001 - $75,000 25% $75,001 - $100,000 34% $100,001 - $335,000 39% $335,001 - $10,000,000 34 $10,000,001 - $15,000,000 35% $15,000,001 - $18,333,333 38% Over $18,333,333 35% 34% 15% 25% 35%

34%

The next dividend payment by Halestorm, Inc., will be $1.80 per share. The dividends are anticipated to maintain a growth rate of 5 percent forever. The stock currently sells for $35 per share. What is the dividend yield? What is the expected capital gains yield?

5.14% 1.80/35 = 5.14% 5%

Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiannual payments, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,045. What is the bond's nominal yield to call?

5.59

You would like to have $500,000 put away in 20 years for your retirement. You plan to put away $14,000 each year (end of year). What is the minimum interest rate that you would need to receive $500,000?

5.72%

The real risk-free rate is 3.05%, inflation is expected to be 3.60% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, i.e., if averaging is required, use the arithmetic average, what is the equilibrium rate of return on a 1-year Treasury bond?

6.65%

Tom invested $3,000 twenty years ago and now has $11,016 in his account. What annual rate of return has Tom earned over the twenty-year period?

6.72%

If the distribution of possible future sales values is normal, then the probability that actual sales will be the expected value plus or minus one standard deviation is approximately?

68%

If the distribution of possible future sales values is normal, then the probability that actual sales will be the expected value plus or minus one standard deviation is approximately? 50% 95% 68% 30%

68%

Empirical Rule

68%, 95%, 99.7%

O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal annual, not semiannual yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $875. What is the bond's nominal coupon interest rate?

7.96%

YGTB, Inc., currently has an EPS of $1.60 and an earnings growth rate of 8 percent. If the benchmark PE ratio is 33, what is the target share price five years from now?

77.58 EPS5 = EPS0(1 + g)5 EPS5 = $1.60(1 + .08)5 EPS5 = $2.35 P5 = Benchmark PE ratio × EPS5 P5 = 33($2.35) P5 = $77.58

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $40, what is the stock's expected total return for the coming year?

8.63

You purchase a bond with a coupon rate of 7.5 percent and a clean price of $850. If the next semiannual coupon payment is due in two months, what is the invoice price?

875.00 Accrued interest = 75/2 X 4/6 = 25.00 Dirty price = clean price + accrued interest 850 + 25.00 = 875

Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 10.7% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

901.80

Dirty (invoice) price

= clean price + accrued interst

accured interest

= coupon payment x # of days since last coupon / # of days in coupon period

Solving for k

A $200 investment has grown to $230 over two years. What is the ANNUAL return on this investment? N= 2 I= ? PV= -200 (investing) FV= 230 (receiving) PMT= 0

Which of the following does not represent a financial plan?

A balance sheet

mortgage bond

A bond backed by fixed assets. First mortgage bonds are senior in priority to claims of second mortgage bonds.

What is the relationship between a bond's market price and its promised yield to maturity?

A bond's market price depends on its yield to maturity (YTM). When a bond has a YTM greater than its coupon rate, it sells at a discount from its face value. When the YTM is equal to the coupon rate, the market price equals the face value. When the YTM is less than the coupon rate, the bond sells at a premium over face value.

Step 7

Additional Funds Needed (AFN) =projected assets - projected claims Projected assets found in step 3 Projected claims found in step 6 Raise AFN using notes payable, LT debt, common stock

A company with rapidly growing sales is likely to experience

A great need for additional funding from outside the firm

probability distribution

A listing of all the outcomes of an experiment and the probability associated with each outcome.

Amortized Loans

A loan that is paid off in equal amounts that include the principal as well as interest Solving for loan payments Solving for interest and principal paid

Debenture

A long-term bond that is not secured by a mortgage on specific property.

beta (b)

A measure of a stock's risk and volatility compared to changes in the overall stock market. b = 1 sec is just as risky b > 1 sec is riskier than avg b < 1 sec is less risky than avg b can be negative ex. gold, collections, dollar tree

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

A premium

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

A reduction in market interest rate

Annuity

A series of equal cash flows spaced evenly over time An example of an annuity is a renting lease (I pay my landlord a sum of money every month for a year.

Perpetuity example

A share of preferred stock pays a constant dividend of $5 per year. What is the present value if k=8%? PVP= 5/.08---> 62.50 (present value of stock to me)

Humped Yield Curve

A yield curve where interest rates on intermediate-term maturities are higher than rates on both short- and long-term maturities.

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) .05 / (1 - t*) = .07. B) .05 - (1 - t*) = .07. C) .07 + (1 - t*) = .05. D) .05 × (1 - t*) = .07. E) .05 × (1 + t*) = .07.

A) .05 / (1 - t*) = .07

You purchase a bond with an invoice price of $1,319. The bond has a coupon rate of 6.25 percent, a face value of $1,000, and there are two months to the next semiannual coupon date. What is the clean price of this bond? A) $1,298.17 B) $1,352.17 C) $1,314.14 D) $1,408.12 E) $1,283.50

A) 1298.17 Accrued interest = (.0625 × $1,000) × 1/2 × 4/6 = $20.83 Clean price = $1,319 - 20.83 = $1,298.17

The common stock of Eddie's Engines, Inc. sells for $45.68 a share. The stock is expected to pay $4.10 per share next year. Eddie's has established a pattern of increasing their dividends by 6.2 percent annually and expects to continue doing so. What is the market rate of return on this stock? A) 15.18 percent B) 11.14 percent C) 8.98 percent D) 17.67 percent E) 7.26 percent

A) 15.18 percent r = $4.10 / $45.68 + 0.062 = 15.18 percent

A firm has a current EPS of $2.54 and a benchmark PE of 16.4. Earnings are expected to grow 3.8 percent annually. What is the target stock price in one year? A) $43.24 B) $42.89 C) $46.08 D) $41.66 E) $48.09

A) 43.24 P1 = $2.54 × (1 + .038) × 16.4 = $43.24

The current dividend yield on CJ's common stock is 1.89 percent. The company just paid a $1.23 annual dividend and announced plans to pay $1.27 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) 5.14 percent B) 5.82 percent C) 6.08 percent D) 6.39 percent E) 6.75 percent

A) 5.14 R = .0189 + [($1.27 - 1.23) / $1.23] = .0514, or 5.14 percent

An investor with a 25 percent marginal tax rate is choosing to invest in either a corporate bond with a before-tax annual yield of 7.3% or a municipal bond. What must be the annual rate of return that the municipal bond offers to make the investor indifferent between the two securities? A) 5.48% B) 5.84% C) 6.08% D) 7.30% E) 9.73%

A) 5.48% 0.73 X (1 - .25) = .0548 = 5.48%

The current dividend yield on Clayton's Metals common stock is 3.2 percent. The company just paid a $1.48 annual dividend and announced plans to pay $1.54 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) 7.25% B) 7.82% C) 8.08% D) 8.39% E) 8.75%

A) 7.25% g = (1.54 - 1.48) / 1.48 = .04054 0.032 + 0.04054 = .0725

A financial planner is examining the portfolios held by several of her clients. Which of the following portfolios is likely to have the smallest standard deviation? A) a portfolio consisting of about three randomly selected stocks form different sectors B) A portfolio containing Microsoft, Apple, and Google Stock C) a portfolio containing only Microsoft stock.

A) A portfolio consisting of about three randomly selected stocks from different sectors.

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

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

Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? A) Higher inflation expectations increase the nominal interest rate demanded by investors. B) A BBB-rated bond has a lower default risk premium as compared to a AAA- rated bond.

A) Higher inflation expectations increase the nominal interest rate demanded by investors.

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

Yield to Maturity (YTM) is the rate of return expected from a bond held until its maturity date. However, the YTM equals the expected rate of return under certain assumptions. Which of the following is one of these assumptions? A) The bond will not be called. B) The bond has an early redemption feature.

A) The bond will not be called.

In the pro forma balance sheet, which of the following is normally the "plug" number inserted to "balance" the balance sheet?

Additional funds needed

Step 4

Forecast increase in spontaneous liabilities A/P x (1+projected sales growth) Accrued expenses x (1+projected sales growth)

Which of the following items on the income statement and balance sheet is most likely to vary spontaneously with sales? notes payable common stock accrued expenses capital in excess of par

Accrued expenses

Each of the following items on the income statement and balance sheet tend to vary spontaneously with sales except? cost of goods sold accumulated depreciation selling expenses taxes

Accumulated depreciation

Which of the following statements is most correct?

All else equal, if a bond's yield to maturity increases, its price will fall.

Which of the following is NOT a determinant of interest rates:

All of the above are determinants (inflation, a liquidity premium, a default premium, a maturity risk premium)

What is an annuity?

An annuity is a series of equal cash flows, spaced evenly over time.

time line

An important tool used in time value analysis; it is a graphical representation used to show the timing of cash flows

Which one of the following is not a method of forecasting future business activity?

Analysis of last year's financial statements

firm-specific risk

Another name for unsystematic risk. Can be diversified away diversable risk ex. fire in bus, CEO leaves

Non-Diversifiable Risk

Another word for market risk. This is measured by beta. Portfolios with higher betas than 1 are more risky. Lower than 1 is considered less risky. Risk-free portfolios have a beta of 0

The outstanding bonds of Roy Thomas, Inc. provide a real rate of return of 3.8 percent. The current rate of inflation is 2.2 percent. What is the nominal rate of return on these bonds? A) 1.06 percent B) 6.08 percent C) 1.02 percent D) 6.00 percent E) 1.60 percent

B (1+R) = (1+r)(1+h) 1 + R = (1+0.038)X(1+0.022) R = 6.08%

A bond with a coupon rate of 7% makes semiannual coupon payments on January 15 and July 15 of each year. The quoted price for the bond on January 30 (i.e., 15 days after the last coupon payment) was $1,001.875. What is the invoice price of the bond? (Assume the current coupon period has 182 days.)? A) $1,001.88 B) $1,004.76 C) $1,019.38 D) $1,033.99 E) $1,036.88

B) 1004.76 ((1000 X .07) / 2) X (15 / 182) = 2.8846 1001.875 + 2.8846 = 1004. 76

Wilton's Market just announced its next annual dividend will be $1.50 a share. It expects the dividends to grow by 1.8 percent annually forever. How much will one share of this stock be worth five years from now if the required return is 15.5 percent?A) $11.76 B) $11.97 C) $14.14 D) $12.19 E) $13.79

B) 11.97 P5 = (1.50 X 1.018 ^5) / (.155 - 0.018) = 11.97

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 N = ? I/Y = 6.72/2 PV = 1023.46 PMT = 35 FV = 1000 N = 25.052 25.052 / 2 = 12.53

The preferred stock of Into Eternity pays an annual dividend of $6.50 and sells for $42.19 a share. What is the dividend yield? A) 2.74% B) 6.49% C) 6.50% D) 14.17% E) 15.41%

B) 15.41% 6.50/42.19 = 15.41%

A newly issued 20-year, $1,000, zero coupon bond just sold for $311.05. What is the implicit interest, in dollars, for the first year of the bond's life? Assume semiannual compounding. A) $17.72 B) $18.70 C) $18.47 D) $17.63 E) $17.89

B) 18.70 Bond price 0 = $311.05 = $1,000 / [1 + (r / 2)](20 × 2); r = 5.925% Bond price 1 = $1,000 / [1 + (.05925 / 2)](19 × 2) = $329.75 Implicit interest = $329.75 - 311.05 = $18.70

You just purchased a 15-year bond with an 10 percent annual coupon. The bond has a face value of $1000 and a current yield of 10.75 percent. Assuming that the yield to maturity of 9.60 percent remains constant, what will be the price of the bond ten years from now?

Between $996.01 and $1080

*Marcel Co. is growing quickly. Dividends are expected to grow at a 24 percent rate for the next 3 years, with the growth rate falling off to a constant 5 percent thereafter. If the required return is 12 percent and the company just paid a $1.70 dividend. what is the current share price? A) $41.70 B) $40.88 C) $40.06 D) $37.17 E) $38.57

B) 40.88 P3 = D3 (1 + g2) / (R - g2) = D0 (1 + g1)3 (1 + g2) / (R - g2) = $1.70(1.24)3(1.05) / (.12 - .05) = $48.62 P0 = $1.70(1.24) / 1.12 + $1.70(1.24)2 / 1.122 + $1.70(1.24)3 / 1.123 + $48.62 / 1.123 P0 = $40.88

Antiques R Us is a mature manufacturing firm. The company just paid a $12 dividend, but management expects to reduce the payout by 6 percent per year indefinitely. If you require an 16 percent return on this stock, what will you pay for a share today? A) $50.76 B) $54.55 C) $51.27 D) $112.80 E) $51.79

B) 54.55 P0 = D0 (1 + g) / (R - g) P0 = $12(1 - .06) / [(.16 - (- .06)] P0 = $51.27

Amon Amarth Co. offers 10-year, 8 percent coupon bonds with semiannual payments and a yield to maturity of 8.24 percent. What is the market price of a $1,000 face value bond? A) $990.32 B) $983.86 C) $1,108.16 D) $1,521.75 E) $591.04

B) 983. 86 N = 20 I = 8.24/2 PV = ? PMT = 40 FV = 1000 PV = 983.86

U. S. Treasury bonds: A) Are highly illiquid. 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

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

Best fit regression line

Best fit line of a regression plot on market index Slope=Rise/Run Slope= Beta (B)

Interpreting Beta

Beta=1, Market Beta=1, company with beta of 1 has average risk Beta<1, Low risk company, return on stock will be less affected by the market than average Beta>1, High market risk company, stock return will be more affected by the market than average

Consider an investment that will pay $680 per month for the next 15 years and will be worth $28,000 at the end of that time. How much is this investment worth to you today at a 5.25 percent discount rate?

Between $10,001 and $25,000

Foreign Bonds

Bonds issued by foreign governments or by foreign corporations

municipal bonds

Bonds issued by state and local governments exempt from fed and states taxes

treasury bonds

Bonds issued by the federal government, sometimes referred to as government bonds. no default risk

investment grade bonds

Bonds rated triple-B or higher; many banks and other institutional investors are permitted by law to hold only investment-grade bonds

Amortized loan house financing

Buy house for $2,000,000, Down payment of $20,000 = Financing of $1,980,000 What is the pmt if interest rate is 6% and loan is for 30 years? N= 360 (12 x 30) I= 6 PV= 1,980,000 FV= 0 PMT= ?---> $-11,871.10

The next dividend payment by Hot Wings, Inc., will be $4.75 per share. The dividends are anticipated to maintain a 5 percent growth rate forever. If the stock currently sells for $60 per share, what is the required return? A) 7.92% B) 5.00% C) 12.92% D) 12.66% E) 12.27%

C) 12.92% R = (D1 / P0) + g = ($4.75 / $60) + .05 = .1292 or 12.92%

A 3.25 percent Treasury bond is quoted at a price of 101.16. The bond pays interest semiannually. What is the current yield? A) 3.06 percent B) 3.17 percent C) 3.21 percent D) 3.33 percent E) 3.38 percent

C) 3.21 percent Current yield = (.0325 × $1,000) / (1.0116 × $1,000) = .0321, or 3.21 percent

Weisbro and Sons common stock sells for $44 a share and pays an annual dividend that increases by 3.1 percent annually. The market rate of return on this stock is 10.80 percent. What is the amount of the last dividend paid by Weisbro and Sons? A) $3.50 B) $3.29 C) $4.61 D) $1.32 E) $3.26

C) 4.61 P0 = $44 = [D0 × (1 + 0.031)] / (0.1080 - 0.031); D0 = $3.29

The outstanding bonds of Dark Tranquility, Inc. provide an annual real rate of return of 2.9 percent. Given the current rate of inflation is 1.8 percent, what is the nominal rate of return on these bonds? A) 1.05 percent B) 1.10 percent C) 4.75 percent D) 5.22 Percent E) 14.75 Percent

C) 4.75 (1 + R) = (1 + r)(1 + h) R = 4.75%

A firm has a current EPS of $2.54 and a benchmark price-earnings (PE) ratio of 16.4. Earnings are expected to grow 3.8 percent annually. What is the expected stock price in one year based on the PE ratio? A) $41.66 B) $42.89 C) $43.24 D) $46.08 E) $48.09

C) 43.24 2.54 X 16.4 X (1 + .038) = 43.24

A share of common stock has just paid a dividend of $3.00. If the expected long-run growth rate for this stock is 5 percent, and if investors require an 11 percent return, what is the price of the stock? A) $50.00 B) $50.50 C) $52.50 D) $53.00 E) $63.00

C) 52.50 (3.00(1.05)) / (0.11-.05) = 52.50

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 $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the: A) Dirty price. B) Redemption value. C) Call premium. D) Original-issue discount. E) Redemption discount.

C) Call Premium

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

Which term is used to describe a call provision in which the issuer is prevented from calling a portion or the entire issue for several years during the early years of the bond issue? A) sinking fund provision B) Declining Call Provision C) Deferred call provision

C) Deferred call provision

A floor broker on the NYSE does which one of the following? A) Supervises the commission brokers of a specific financial firm. B) Trades for his or her personal inventory. C) Executes orders on behalf of a commission broker. D) Maintains an inventory and assumes the role of a market maker. E) Is charged with maintaining a liquid, orderly market.

C) Executes orders on behalf of a commission broker

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?A) Default risk. B) Taxability. C) Liquidity. D) Inflation. E) Interest rate risk

C) Liquidity

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

A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today? A) The face value of the bond today is greater than it was when the bond was issued. B) The bond is worth less today than when it was issued. C) The yield-to-maturity is less than the coupon rate. D) The coupon rate is greater than the current yield. E) The yield-to-maturity equals the current yield.

C) The yield-to-maturity is less than the coupon rate

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

Bonds issued by the U.S. government: A) Are considered to be free of interest rate risk. B) Generally have higher coupons than comparable bonds issued by a corporation. 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 market maker who acts as a dealer in one or more 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 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

Step 2

Calculate projected Net Income: *Calculate New COGS*: Old COGS x (1+projected sales growth) Insert into projected section and eventually calculate NI

federal reserve policy

Can slow or increase growth in the economy by either slowing the growth or increasing the growth in the money supply; buy and sell US Treasury Securities to change bank reserves; increasing money in reserves decreases interest rates and decreasing money in reserves increases interest rates

How do investors calculate their required rate of return?

Capital Asset Pricing Model (CAPM) Required rate = Risk-Free rate + (overall required rate - Risk-free rate) X Beta

Annuity Due

Cash payments occur at the *beginning* of each time period (rent payments) Higher by one extra year of compounding than an ordinary annuity Switch from END--> BEG mode

Characteristic: This is the premium added as a compensation for the risk that an investor will not get paid in full.

Component: Default risk premium Symbol: DRP

Characteristic: Over the past several years, Germany, Japan and Switzerland have had lower interest rates than the US due to lower values of this premium.

Component: Inflation premium Symbol: IP

Characteristic: This is the premium that reflects the risk associated with changes in interest rates for a long-term security.

Component: Maturity Risk Premium Symbol: MRP

Characteristic: This is the rate on short-term U.S. Treasury securities, assuming there is no inflation.

Component: Real risk-free rate Symbol: r*

Characteristic: It is based on the bond's marketability and trading frequency; the less frequently the security is traded, the higher the premium added, thus increasing the interest rate.

Component: Liquidity risk premium Symbol: LP

Characteristic: This is the rate on a Treasury bill or a Treasury bond.

Component: Nominal risk-free rate Symbol: Rrf

compound interest

Compound interest causes the value of a beginning amount to increase at an increasing rate.

Continuous compounding

Compounding frequency is infinitely large. Compounding period is infinitely small. $500 invested at 9% annual interest for 2 years with continuous compounding. FV= PV x e^kn FV = 500 x e^.09 x 2 FV= 598.61

Other types (features) of bonds

Convertible bond: may be exchanged for common stock of the firm, at the holder's option Warrant: long-term option to buy a stated number of shares of common stock at a specified price Putable bond: allows holder to sell the bond back to the company prior to maturity Income bond: pays interest only when interest is earned by the firm Indexed bond: interest rate paid is based upon the rate of inflation

Say you own an asset that had a total return last year of 13.5 percent. If the inflation rate last year was 3 percent, what was your real return? A) 10.09% B) 10.39% C) 10.29% D) 10.19% E) -9.25%

D (1+R) = (1+r)(1+h) r = ((1+0.135)/(1.03)) - 1 = 10.19%

A bond that pays interest annually yields a rate of return of 10.00 percent. The inflation rate for the same period is 4 percent. What is the real rate of return on this bond? A) 4.00 percent B) 1.06 percent C) 2.50 percent D) 5.77 percent E) 14.00 percent

D (1+R) = (1+r)(1+h) r = 1.1000 / 1.04 -1 = 5.77%

Currently, a firm has an EPS of $2.54 and a benchmark PE of 16.4. Earnings are expected to grow 3.8 percent annually. What is the estimated current stock price? A) $43.24 B) $42.89 C) $46.08 D) $41.66 E) $48.09

D) 41.66 P0 = $2.54 × 16.4 = $41.66

A Treasury bond is quoted at a price of 101.6533 with a current yield of 6.276 percent. What is the coupon rate on a $10,000 bond? A) 7.20 percent B) 6.48 percent C) 6.41 percent D) 6.38 percent E) 6.27 percent

D) 6.38 percent Price = 1.016533 × $10,000 = $10,165.33 Annual interest = .06276 × $10,165.33 = $637.98 Coupon rate = $637.98 / $10,000 = 6.38 percent

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 $1,032. What is the yield to maturity? A) 6.87 percent B) 6.92 percent C) 6.08 percent D) 6.48 percent E) 7.20 percent

D) 6.48% N = 16 I/Y = ? PV = 1032 PMT = 35 FV = 1000 I/Y = 3.2405 3.2405 X 2 = 6.48%

Bonner Metals wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 8.5 percent bonds on the market that sell for $959, make semiannual payments, and mature in 16 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) 8.99 percent E) 8.67 percent

D) 8.99 percent N = 32 I/Y = ? PV = 959 PMT = 42.50 FV = 1000 I/Y = 4.494 4.494 X 2 = 8.99%

Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40. If you require a 10 percent return on this investment, which of the following is closest to the price you are willing to pay for the bond? A) $619 B) $674 C) $761 D) $828 E) $902

D) 828 N = 40 I = 5 PV = ? PMT = 40 FV = 1000 PV = 828

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

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

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 first chance to purchase any new equity shares that may be offered.

D) Determining the amount of dividend to be paid per share

A newly issued bond has a 7 percent coupon with 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

Which kind of stock is most affected by changes in risk aversion? A) Low-beta stocks B) Medium-beta stocks C) All stocks affected the same, regardless of beta D) High-beta stocks

D) High beta stocks

The secondary market is best defined by which one of the following? A) Market in which subordinated shares are issued and resold. B) Market conducted solely by brokers. C) Market dominated by dealers. D) Market where outstanding shares of stock are resold. E) Market where warrants are offered and sold.

D) Market where outstanding shares of stock are resold

The bond market requires a return of 9.8 percent on the five-year bonds issued by JW Industries. The 9.8 percent is referred to as which one of the following? A) Coupon rate. B) Face rate. C) Call rate. D) Yield to maturity. E) Current yield

D) Yield to Maturity

The bond market requires a return of 9.8 percent on the five-year bonds issued by JW Industries. The 9.8 percent is referred to as which one of the following? A) Coupon rate. B) Face rate. C) Call rate. D) Yield to maturity. E) Current yield.

D) Yield to Maturity

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

Which of the following income statement accounts is not likely to vary with sales?

Depreciation expense

Step 1

Determine sales growth (projected-current)/current

Discounting Interest

Discounting causes the present value of a future amount to decrease at a decreasing rate.

In terms of risk, labor union disputes, entry of a new competitor, and embezzlement by management are all examples of factors affecting: diversifiable risk market risk systematic risk company specific risk that cannot be diversified away

Diversifiable risk

Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, a par value of $1,000, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is the coupon rate? A) 8.00 percent B) 8.50 percent C) 9.00 percent D) 10.50 percent E) 12.00 percent

E) 12.00 percent Bond price = $1,382. 01 = C × ({1 - [1 / (1 + .075)14]} / .075) + $1,000 / (1 + .075)14 C = $120 Coupon rate = $120 / $1,000 = .12, or 12%

Global Exporters wants to raise $29.6 million to expand its business. To accomplish this, it plans to sell 20-year, $1,000 face value, zero coupon bonds. The bonds will be priced to yield 7.75 percent. What is the minimum number of bonds it must sell to raise the money it needs? Assume semiannual compounding. A) 110,411 B) 139,800 C) 154,907 D) 126,029 E) 135,436

E) 135,436 Bond price = $1,000 / [1 + (.0775 / 2)](20 × 2) = $218.554 Number of bonds = $29,600,000 / $218.544 = 135,436 bonds

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) $17.08 B) $16.30 C) $16.67 D) $16.79 E) $17.50

E) 17.50 P3 = $1.60 / .09 = $17.78 P0 = $1.45 / (1 + .09) + $1.50 / (1 + .09)2 + ($1.53 + 17.78) / (1 + .09)3 P0 = $17.50

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 $972. 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) 5.92 percent

E) 5.92 percent N = 17 I/Y = ? PV = 972 PMT = 27.50 FV = 1000 I/Y = 2.962 2.962 X 2 = 5.92%

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) Floor trader. B) Dealer. C) Specialist. D) Executor. E) Commission broker.

E) Commission broker

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

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

Callable bonds generally: A) Grant the bondholder the option to call the bond anytime 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 after issuance. E) Have a sinking fund provision.

E) Have a sinking fund provision

Which bond would you generally expect to have the highest yield? A) Risk-free Treasury bond B) Non-taxable, 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

A Treasury yield curve plots Treasury interest rates relative to which one of the following? A) Market rates. B) Comparable corporate bond rates. C) The risk-free rate. D) Inflation. E) Maturity.

E) Maturity

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

Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities? A) Senior bond. B) Debenture. C) Warrant. D) Common stock. E) Preferred stock.

E) Preferred stock

Emst & 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 one of the following markets? A) Private. B) Auction. C) Tertiary. D) Secondary. E) Primary.

E) Primary

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

Which one of the following statements is correct? A) The risk-free rate represents the change in purchasing power. B) Any return greater than the inflation rate represents the risk premium. C) Historical real rates of return must be positive. D) Nominal rates exceed real rates by the amount of the risk-free rate. E) The real rate must be less than the nominal rate given a positive rate of inflation.

E) The real rate must be less than the nominal rate given a positive rate of inflation

Which of the following statement is most FALSE? A) Market expectations of interest rates affect shape of the yield curve. B) Because interest rates tend to fall in response to an economic slowdown, an inverted yield curve is often interpreted as a negative forecast for economic growth. C) Bond markets are primarily over-the-counter transactions. D) Inverted yield curve tend to precede recessions. E) The yield curve tends to be sharply decreasing as the economy comes out of a recession and interest rates are expected to rise.

E) The yield curve tends to be sharply decreasing as the economy comes out of a recession and interest rates are expected to rise.

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

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

Equal to 7%

Future value of a lump sum

FV = PV(1+k)^n Plan to put $100 you have today into bank account that earns 8% per year Year 1: FV= 100(1+.08)^1 Year 5: FV= 100(1+.08)^5

FVAdue

FVAdue = FVAn (1+I) PVAdue = PVAn (1+I)

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

Fall

A bond that had a 20-year original maturity with 1 year left to maturity has more price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.) (T/F)

False

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline. (T/F)

False

A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio. (T/F)

False

According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock. (T/F)

False

Assuming the same positive discount rate and the same number of years over which they will be received, a $1,200 annuity with annual payments has a larger present value than a $100 annuity with monthly payments.

False

Because the maturity risk premium is normally positive, the yield curve must have an upward slope. If you measure the yield curve and find a downward slope, you must have done something wrong.(T/F)

False

Even if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone. (T/F)

False

If investors become less averse to risk, the slope of the Security Market Line (SML) will increase.(T/F)

False

One of the four most fundamental factors that affect the cost of money as discussed in the text is the time preference for consumption. The higher the time preference, the lower the cost of money, other things held constant. (T/F)

False

Preferred stock is a hybrid--a sort of cross between a common stock and a bond--in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond. (T/F)

False

Suppose the federal deficit increased sharply from one year to the next, and the Federal Reserve kept the money supply constant. Other things held constant, we would expect to see interest rates decline. (T/F)

False

The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation. (T/F)

False

True or False: Higher-beta stocks are expected to have lower required returns.

False

True or False: The risk in a portfolio will increase if more stocks that are negatively correlated with other stocks are added to the portfolio.

False

True or False: The market risk component of the total portfolio risk can be reduced by randomly adding stocks to the portfolio.

False

Financial Risk

Financial leverage magnifies effect of sales volatility

How do Financial managers contribute to the sales forecasting process?

Financial managers coordinate, collect, and analyze the sales forecasting information.

Risk of a company's stock can be separated into two parts

Firm specific risk Market specific risk

A net profit margin of 3.76% means: for every dollar of sales, income of $3.76 is generated for every dollar of sales, income of $.0376 is generated for every dollar of equity, income of $.0376 is generated for every dollar of assets, income of $3.76 is generated

For every dollar sales, income of $.0376 is generated

Step 3

Forecast increase in assets (% of sales) Current assets x (1+projected sales growth) Net fixed assets x (1+projected sales growth) Total will equal forecasted increase in assets as % of sales

Step 5

Forecast increase in retained earnings New retained earnings = old retained earnings +additions to retained earnings = old retained earnings + [Net income (1-dividend payout)] Net income = decimal version of projection (calculated in step 2) Dividend payout= given in problem

Pro Forma Financial Statements

Forecast of the firm's future financial statements based on a certain set of assumptions about sales trends and the relationships between sales and various financial variables, and between other financial statement variables relative to each other.

A company that is running "lean and mean": has a total asset turnover ratio that is high is utilizing fewer of its assets for generation of sales has a high liquidity ratio has low gross profit margin

Has a total asset turnover ratio that is high

Standard Deviation

Future returns are not known with certainty. Standard deviation is a measure of this uncertainty Measures dispersion of returns (square root of variance)

As the discount rate decreases, the present value of a positive cash flow to be received at a particular time in the future:

Gets larger

LT & low-coupon bonds

High Price Risk Low Reinvestment risk

junk bonds

High-risk, high-yield bonds.

Step 6

Hold other accounts constant to see how much additional funds will be needed Long-term debt--->stays constant Common stock--->stays constant

Present Value of an annuity

How much would the following cash flows be worth to you today if you could earn 8% on your deposits?

Present value of annuity due

How much would the following cash flows be worth to you today if you could earn 8% on your deposits? N=3 I=8 PMT= -100 FV=0 PV=?----> $278.33

ST treasury

IP

Avg. Inflation Rate

IP = ∑Inflation/N

ST Corporate

IP, DRP, LP

LT treasury

IP, MRP

LT Corporate

IP, MRP, DRP, LP

Yield to Maturity (YTM)

If YTM > Coupon Rate bond Sells at a DISCOUNT If YTM < Coupon Rate bond Sells at a PREMIUM

Which of the following pro forma statements is likely to be calculated first by the financial manager who is creating next year's financial plan?

Income statement

Which of the following is a source of cash that would appear on the statement of cash flows? increase in gross fixed assets increase in accrued expenses decrease in notes payable increase in marketable securities

Increase in accrued expenses

IP

Inflation Premium A premium equal to expected inflation that investors add to the real risk-free rate of return

What is the relationship between the discount rate and present value for any stream of cash flows?

Inverse

Capital Asset Pricing Model (CAPM)

Investors adjust their required rates of returns to compensate for risk CAPM measures required rate of return for investments, given the degree of market risk measured by beta.

The income statement: is a financial statement that summarizes a firm's revenues and expenses over a period of time. is a financial statement that summarizes a firm's revenues and expenses at a particular point in time. details the firm's assets and liabilities over a period of time. is a financial statement that shows the firm's financial position at a particular point in time.

Is a financial statement that summarizes a firm's revenues and expenses over a period of time

The spread between treasuries and corporate bonds:

Is usually positive

When we consider the time value of money, a dollar received in the future:

Is worth less than a dollar received today

Security Market Line (Formula)

Kj=Krf+Bj(Km-Krf) Kj= required rate of return on the jth security Krf= risk free rate of return Km= required rate of return on the market Bj= Beta for the jth security

You have just borrowed $10,000 and will be required to make monthly payments of $227.53 for the next five years in order to fully repay the loan. What is the implicit interest rate on this loan?

Less than 2%

Which of the following balance sheet accounts is not likely to vary directly with changes in sales?

Long-term debt

A portfolio earns on average 10%. If the standard deviation of the same stocks was 5%, what is the probability that you will lose money on this portfolio?

M= 10%-5%= 5% M= 5%-5%= 0 2 deviations= 95%

arguments against pure expectations theory

MRP doesnt = 0 Lenders prefer ST securities and view LT securities as risky

Explain how management goals are incorporated into pro forma financial statements.

Management sets a target goal, and forecasters produce pro forma financial statements under the assumption that the goal will be reached.

r (Bonds) and YTM

Market rate of interest on bond calculator: I/YR If r is constant: value of premium bond would decrease value of discount bond would increase value of par bond stays the same

What makes up a sales forecast?

Marketing (sales estimate) + Top Management (policy, strategy) + Production (capacity, schedules) + Accounting (financial statements, depreciation, taxes) = Finance Department (sales forecast)

Sales growth can create needs

May require additional resources: Current Assets: Inventory, AR, Cash Fixed Assets: Plant and Equipment

Time Value of Money

Money grows over time when it earns interest Money to be received in the future is worth less than the same dollar amount to be received today A debt of a given amount to be paid in the future is less burdensome than that debt to be paid now

What is the yield to maturity of a TVA bond that has a 9 1/2 percent coupon, pays interest semiannually, has 12 years to maturity, and sells for $871.50?

N: 12 x 2= 24 *I: 5.7504 PV: 871.50 PMT: 9.5% x 1000= 95/2= 47.5 FV: 1000

Suppose Ford Motor Company sold an issue of bonds with a 12-year maturity, a $1,000 par value, a 12% coupon rate. Two years after the bonds were issued, the going rate of interest on bonds such as these had risen to 14 percent. At what price would the bonds sell?

N: 12-2= 10 I: 14% *PV: 895.6777 PMT: 12% x1000= 120 FV: 1000

Semiannual bonds

Multiply years by 2: number of periods = 2N Divide nominal rate by 2= periodic rate (I/YR)= rd/2 Divide annual coupon by 2: PMT= annual coupon/2

You find a zero coupon bond with a par value of $10,000 and 19 years to maturity. The yield to maturity on this bond is 4.1 percent. Assume semiannual compounding periods. What is the price of the bond?

N = 19X2 I/Y = 4.1%/2 PV = ? FV = 1000 PV = 4624.94

Sqeekers Co. issued 11-year bonds a year ago at a coupon rate of 8.9 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 7.2 percent, what is the current bond price?

N = 20 I/Y = 7.2%/2 PV = ? PMT = 89/2 FV = 1000 PV = 1119.72

Heginbotham Corp. issued 15-year bonds two years ago at a coupon rate of 7.9 percent. The bonds make semiannual payments. If these bonds currently sell for 109 percent of par value, what is the YTM?

N = 26 I/Y = ? PV = 1090 PMT = 79/2 FV = 1000 I/Y = 3.422

Ponzi Corporation has bonds on the market with 14.5 years to maturity, a YTM of 6.1 percent, and a current price of $1,038. The bonds make semiannual payments. What must the coupon rate be on these bonds?

N = 29 I/Y = 6.1%/2 PV = 1038 PMT = ? FV = 1000 PMT = 32.49 (32.49 X 2 (semi)) / 1000 = 6.50%

A bond has a coupon rate of 8.5%, matures in 10 years at a value of $1,000 and has a current market price of $832. What is the current yield?

N: 10 I: PV: 832 PMT: 8.5% x1000= 85 FV: 1000 *Current yield: 85/832= 0.1022

Suppose Ford Motor Company have 10 years remaining to maturity. Interest is paid annually; the bonds have a $1,000 par value; and the coupon interest rate is 12 percent. Compute the yield to maturity for the bonds if the current market price is $910.

N: 10 I: PV: 910 PMT: 12% x 1000= 120 FV: 1000 *Current yield: 120/ 910= 0.1319

The KLM bond has a 8% coupon rate (with interest paid semi-annually), a maturity value of $1,000, and matures in 5 years. If the bond is priced to yield 6%, what is the bond's current price?

N: 10 I: 6%/2= 3% *PV: $1,085 PMT: $40 FV: $1000

You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6 months. If your nominal annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for this bond?

N: 10 x 2= 20 I: 10%/2= 5% *PV: $1,124.62 PMT: $60 FV: $1000

A corporate bond with a $1,000 face value pays a $50 coupon every six months. The bond will mature in 10 years, and has a nominal yield to maturity of 9 percent. What is the price of the bond?

N: 10 x 2= 20 I: 9%/2= 4% *PV: $1,065.04 PMT: 50 FV: $1000

A corporate bond with a $1,000 face value pays a $50 coupon every six months. The bond will mature in ten years, and has a yield to maturity of 9 percent. What is the price of the bond?

N: 10 x 2= 20 I: 9%/2= 4.5 *PV: 739.8413 PMT: 50/2 =25 FV: 1000

What is the value of an Orion bond that has a 10 percent annual coupon, pays interest semiannually, and has 10 years to maturity, if the annual required rate of return is 12 percent?

N: 10 x2 = 20 I: 12%/ 2= 6 *PV: 885.30 PMT: 10% x 1000= 100/2=50 FV: 1000

Joe Kernan Corporation has bonds on the market with 10.5 years to maturity, a YTM of 8.5 percent, and a current price of $1,090. The bonds make semiannual interest payments. What must the coupon rate be on Kernan's bonds?

N: 10.5 x 2=21 I: 8.5/2 =4.25 PV: 1090 *PMT: 49.0638 FV: 1000

Palmer Products has outstanding bonds with an annual 8 percent coupon. The bonds have a par value of $1,000 and a price of $865. The bonds will mature in 11 years. What is the yield to maturity on the bonds?

N: 11 *I: 10.09% (10.0868) PV: -865 PMT: 1000 x 8%= $80 FV: $1000

Consider a bond with a face value of $1,000, currently selling for $1,349.96, and maturing in 11 years. If this bond pays coupons semiannually and its yield to maturity is 4.03%, what is the coupon rate?

N: 11 I: 4.03% PV: $1,349.96 PMT: 80.31 FV: $1000 * Coupon rate: 80.31/1000=0.0803

What should be the price of a bond with 12 years to maturity and a 10% coupon rate if the required rate of return on the bond is 8 percent?

N: 12 I: 8% *PV: 1150.7216 PMT: 10 x 1000= 100 FV: 1000

A 12-year bond pays an annual coupon of 8.5 percent. The bond has a yield to maturity of 9.5 percent and a par value of $1,000. What is the bond's current yield?

N: 12 I: 9.5 *PV: 930.1616 PMT: 8.5 x 1000= 85 FV: 1000

A 12-year bond pays an annual coupon of 8.5 percent. The bond has a yield to maturity of 9.5 percent and a par value of $1,000. What is the bond's current yield?

N: 12 I: 9.5 PV: 930.16 (find first) PMT: 1000 x 8.5= 85 FV: $1000 *Current yield: 85/930.16= 9.14%

A corporate bond has a face value of $1,000, and pays a $50 coupon every six months (that is, the bond has a 10 percent semiannual coupon). The bond matures in 12 years and sells at a price of $1,080. What is the bond's nominal yield to maturity?

N: 12x 2= 24 *I: 4.45 x 2= 8.90% PV: 1080 PMT: $50 FV: $1000

Mustaine Enterprises has bonds on the market making annual payments, with 13 years to maturity, and selling for $850. At this price, the bonds yield 7.4 percent (YTM). What is the coupon rate on these bonds?

N: 13 I: 7.4 PV: 850 *PMT: 55.6433 FV: 1000

Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest paid semiannually. The required nominal rate on this debt has now risen to 16 percent. What is the current value of this bond?

N: 15 x 2= 30 I: 16%/ 2= 8% *PV: $550 PMT: 1000 x 8%= 80, 80/2= 40 FV: $1000

Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest being paid semiannually. The required rate of return on these bonds has now risen to 16 percent. What is the current value of this bond?

N: 15x 2= 30 I: 16%/2= 8 *PV: 549.6887 PMT: 8% x 1000= 80/2=40 FV: 1000

The price of a bond is $736.68, it has 16 years to maturity, a $1,000 face value, and pays an annual coupon of $100. What is the yield to maturity?

N: 16 *I: 14.2596 PV: 736.68 PMT: 100 FV: 1000

Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40. If you require an annual 10 percent rate of return on this investment, what is the maximum price you should be willing to pay for the bond?

N: 20 I: 10% *PV: 829.7287 PMT: 40 x2 =80 FV: 1000

What is the value of a bond with 20 years left to maturity, a coupon payment of $50 every 6 months, and a $1,000 face value if the yield to maturity is 8%?

N: 20 I: 8% *PV: 1,196.3629 PMT: 50 x 2= 100 FV: 1000

Fish & Chips Inc. has two bond issues outstanding, and both sell for $701.22. The first issue has an annual coupon rate of 8 percent and 20 years to maturity. The second has an identical yield to maturity as the first bond, but only 5 years until maturity. Both issues pay interest annually. What is the annual interest payment on the second issue?

N: 20 N: 5 I: 12 I: 12 PV: 701.22 PV: 701.22 *PMT: 8 x 1000= 80 PMT: 37.1155 FV: 1000 FV: 1000

If the YTM on the following bonds are identical except, what is the price of bond B? Bond A Bond B Face value $1,000 $1,000 Semiannual coupon $45 $35 Years to maturity 20 20 Price $1,098.96?

N: 20x 2= 40 N: 40 *I: 4 x 2 =8 I: 8/2=4 PV: 1098.96 Pv: 1098.96 PMT: 45x 2= 90 PMT: 35x 2=70 FV: 1000 FV: 1000

What is the coupon rate for a bond with three years until maturity, a price of $1,053.46, and a required rate of return of 6%?

N: 3 I: 6% PV: 1,053.46 *PMT: 79.999 FV: 1000

What is the yield to maturity of a bond with a coupon rate of 8%, semi-annual payments, current price of $960 and three years until maturity?

N: 3 x 2= 6 *I: 4.7826 PV: 960 PMT: 8% x 1000 =80/2 =40 FV: 1000

J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 7 percent. If the bond has a life of 30 years, pays annual coupons, and the yield to maturity is 9 percent what will the bond sell for?

N: 30 I: 9% PV: 794.5269 PMT: 7% x 1000= 70 FV: 1000

Delta Corporation has a bond issue outstanding with an annual coupon interest rate of 9 percent and 4 years remaining until maturity. The par value of the bond is $1,000.What is the current yield of the Delta Corporation bond is the bond currently sells for $713.75?

N: 4 I: PV: 713.75 PMT: 9% x1000= 90 FV: 1000 *Current yield: 90/ 713.75= 0.1261

What is the current yield of a bond with a 6% coupon, four years until maturity, and a price of $750?

N: 4 I: PV: 750 PMT: 6% x1000 =60 FV: 1000 *Current yield= 60/ 750= 0.0800

Macrohard, Inc. carry a 10% annual coupon, have a $1,000 face value, and mature in 4 years. Yield to maturity is 7%. What is the market value of Microhard's bonds?

N: 4 I: 7% *PV: 1101.6163 PMT: 10 x 1000= 100 FV: 1000

The $1,000 face value EFG bond has a coupon of 10% (paid semi-annually), matures in 4 years, and has current price of $1,140. What is the EFG bond's yield to maturity?

N: 4 x 2= 8 I: 3% (find first) PV: $1,140 PMT: $100/2= $50 FV: $1000 *Yield-to-maturity: 3% x 2= 6%

Cornerstone Industries has a bond outstanding that has a 7% coupon rate and a market price of $887.76. If the bond matures in 5 years, what is the yield to maturity on the bond?

N: 5 *I: 9.9577 PV: 887.76 PMT: 7% x 1000= 70 FV: 1000

The Whitesell athletic Corporation's bonds are currently selling for $900. Each has a face value of $1,000 and a 10% coupon paid semi-annually until maturity 5 years from now. What is the bond's current yield?

N: 5 I: 12.8315 PV: 900 PMT: 10% x 1000= 100 FV: 1000 *Current yield: 100/900= 0.111

The $1,000 face value ABC bond has a coupon rate of 6%, with interest paid semi-annually, and matures in 5 years. If the bond is priced to yield 8%, what is the bond's value today?

N: 5 x 2 = 10 I: 8% /2= 4% *PV: $918.89 PMT: $60/2 = $30 FV: $1000

The NOP bond has an 8% coupon rate (semi-annual interest), a maturity value of $1,000, matures in 5 years, and a current price of $1,200. What is the NOP's yield-to-maturity?

N: 5 x 2= 10 I: 1.797% (find first) PV: $1,200 PMT: 8/2= 4x 10= $40 FV: $1000 *Yield-to-maturity: 1.797% x 2= 3.594%

The HIJ bond has a current price of $800, a maturity value of $1,000, and matures in 5 years. If interest is paid semi-annually and the bond is priced to yield 8%, what is the bond's annual coupon rate?

N: 5 x 2= 10 I: 8%/2 = 4% PV: $800 PMT: $15.34 (find first) FV: $1000 *Coupon rate= $15.34 x 2 = $30.68

Cold Boxes Ltd. has $1,000 par value bonds outstanding. The yield to maturity on these bonds is currently 10 percent. The bonds mature in 5 years, pay interest semi-annually, and have a current market value of $768.35 per bond. What is the annual coupon interest rate?

N: 5x 2=10 I: 10%/2 =5 PV: 768.35 *PMT: 20.0003 FV: 1000

The Whitesell Athletic Corporation's bonds have a face value of $1,000 and a 10% annual coupon, paid semiannually until maturity 5 years from now. What is the current yield that would be reported in the Wall Street Journal if the yield to maturity is 8%? Hint, current yield is stated on an annual basis.

N: 5x2= 10 I: 8%/2= 4 PV: 1081.1090 PMT: 10 x 1000= 100/2 =50 FV: 1000 *Current yield: 50/ 1081.1090

You are evaluating a 9% coupon corporate bond with a face value of $1000. The bond matures in six years. The yield to maturity is 6.8% and the coupon is paid annually. a. What should be the current price of the bond?

N: 6 I: 6.8% *PV: 1,105.5145 PMT: 9% x 1000= 90 FV: $1000

Neverwho Co. has 7 percent coupon bonds on the market with eight years left to maturity. The bonds make annual payments. If the bonds currently sell for $902.25, what is YTM?

N: 8 *I: 8.7497 PV: 902.25 PMT: 7 x 1000= 70 FV: 1000

Whitesell Athletic Corporation's bonds have a face value of $1,000 and a 9% coupon; the bonds mature in 8 years. What is the current yield on the bonds assuming that the required rate of return is 7%?

N: 8 I: 7% PV: 1119.4260 PMT: 9% x 1000= 90 FV: 1000 *Current yield: 90/1119.4260= 0.0804

The required rate of return on a bond issued by Who LTD is 11 percent. "Who" has a bond issue outstanding that pays interest semiannually, is selling for $845 and matures in 8 years. What is the annual coupon rate on the outstanding bond?

N: 8 x 2= 16 I: 11%/2= 5.5 PV: 845 *PMT: 40.1847 FV: 1000

Consider a $1,000 par value bond with a 7 percent annual coupon. The bond pays interest annually. There are 9 years remaining until maturity. What is the current yield on the bond assuming that the required return on the bond is 10 percent?

N: 9 I: 10 PV: 827.2293 PMT: 7x 1000= 70 FV: 1000 *Current yield: 70/827.2293= 0.0846

What is the yield to maturity of a zero-coupon bond selling for $493.63, with nine years to maturity? Assume semiannual compounding.

N: 9 x 2 = 18 *I: 4 (3.999) x2 = 8% PV: -493.63 PMT: 0 FV: 1000

A bond with a fixed coupon rate has the following relationship between its market price and the market required return other things being equal

Negative

The Dallas Development Corporation is considering the purchase of an apartment project for $100,000. They estimate that they will receive $15,000 at the end of each year for the next 10 years. At the end of the 10th year, the apartment project will be worth nothing. If the company insists on a 9 percent return compounded annually on its investment, is this a good investment?

No you pay more than its worth

According to accounting principles: depreciation is a cash expense net working capital should equal zero current assets should equal current liabilities operating expenses during the year are tied to revenues they helped to generate

Operating expenses during the year are tied to revenues they helped to generate

Standard deviation is a: numerical indicator of how widely dispersed possible values are distributed around the mean numerical indicator of how widely dispersed possible values are distributed around the coefficient of variation numerical indicator of how widely dispersed possible values are distributed around the correlation coefficient measure of the relative risk of one asset compared with another

Numerical indicator of how widely dispersed possible values are distributed around the mean

Annuities and annuities due

Ordinary annuity: The cash payments occur at the *end* of each time period

The E. Harris Company issued bonds in September of 2003. When issued, the bonds had 20 years to maturity, a coupon rate of 7.5% and sold for their face value of $1,000. Now, in September of 2013, the bond price has risen to $1,110.40. What is the current yield to maturity (assume that the bonds make annual coupon payments)?

Original N: 20 I: PV: -1,110.40 PMT: 7.5 x10= 75 FV: 1000 Current yield N: 10 *I: 6 PV: -1,110.40 PMT: 75 FV: 1000

What is total payment?

PMT = $11,871,10 + 1,500 (Property taxes) + 500 (interest) = $13,871.10

House financing cont (What is interest and principal for each payment?

PMT= $11,871.10 INT= 1,980,000 x (.06/12) = $9,900 for 1st month Principal= 11,871,10 pmt - 9,900 interest = 1,971,10

M (Bonds)

Par Value of Bond calculator: FV

Bond Terminology

Par value: face amount of the bond, which is paid at maturity (assume $1000) (fv) Coupon interest rate: stated interest rate (generally fixed) paid by the issuer. Multiply by par value to get dollar payment of interest. (pmt) Maturity date: years until the bond must be repaid (pv) Issue date: when the bond was issued (I) Yield to maturity: rate of return earned on a bond held until maturity (also called the "promised yield") (N)

The capital budget would include which of the following items? plant & equipment marketable securities common stock inventory

Plant and equipment

Which of the following items on the income statement and balance sheet is least likely vary spontaneously with sales? plant and equipment accounts payable accrued expenses cost of goods sold

Plant and equipment

A significantly higher average collection period than the industry average suggests (ceteris paribus): high profit levels poor credit decisions low liquidity levels rapid collection of accounts

Poor credit decisions

The common equity section of the balance sheet includes each of the following except: common stock preferred stock retained earnings capital in excess of par

Preferred stock

Each of the following items represents a liability with the exception of: prepaid expenses long-term debt notes payable accrued expenses

Prepaid expenses

How is present value affected by a change in the discount rate?

Present value is inversely related to the discount rate.

*Here are the expected returns from two stocks: Probabilities A B .5 20% -11% .1 10% 5% -4% 18%

Probability: .4 1. If you form a portfolio with 40% of A and 60% of B, what is the expected return for this portfolio? .4(.20)+.6(-.11)= 1.4 .4(.10)+.6(.5)= 7.0 .4(-.04)+.6(.18)= 9.2 .5 x 1.4 = .7 .1 x 7.0 = .7 .4 x 9.2 = 3.68 Expected return = 5.08% (1.4-5.08)2 x .5= (0.7-5.08)2 x .1= (9.2-5.08)2 x .4= var= 13.92 2. What is the standard deviation of this portfolio? = 3.72%

How does production personnel contribute to the sales forecasting process?

Production personnel usually provide estimates of manufacturing capacity and other production constraints.

Return on equity is a measure of the firm's: liquidity asset utilization debt level profitability

Profitability

When we compare the risk of two investments that have the same expected return, the coefficient of variation: provides no additional information than the standard deviation adjusts for the correlation between the two instruments gives conflicting results compared to the standard deviation always gives us a value between 0 and 1

Provides no additional information than the standard deviation

Which of the following is a use of cash that would appear on the statement of cash flows? receipt of interest payments accumulated depreciation decrease in accounts receivable purchase of marketable securities

Purchase of marketable securities

If you knew the required rate for BBI was 17%, and with the same Beta (2.3) and risk for being in stocks of 7%, what would be the risk free rate in this scenario?

RF + 2.3 (7%)= 17% RF= .9

How do you minimize Market risk?

Raising ones required rate of return

Risk Averse Investors

Require higher expected rates of return as compensation for taking on higher levels of risk

On the pro forma balance sheet which accounting variable is least likely to vary by a constant percent of sales? accounts receivable accounts payable inventory retained earnings

Retained earnings

The Modified DuPont equation is most accurately described as a function of: profitability and debt return on assets and debt load return on equity asset utilization

Return on assets and debt load

Firm Specific Risk

Risk due to factors within the firm Example: Stock price will most likely fall if major government contract is lost unexpectedly. *Diversification* can effectively eliminate firm specific (un-systematic) risk

Market Specific Risk (what we're concerned about as investor)

Risk due to overall market conditions Example: Stock price will most likely rise if overall stock market is doing well Diversification *does not* reduce market related (systemic) risk Regress individual stock returns on the returns of the market (S&P 500)

risk aversion

Risk-averse investors dislike risk and require higher rates of return as an inducement to buy riskier securities.

If common stockholders are risk-averse, how do you explain the fact that they often invest in very risky companies?

Risk-averse people will avoid risk if they can, unless they receive additional compensation for assuming that risk. In finance, the added compensation is a higher expected rate of return.

The first accounting variable that needs to be estimated so that the pro forma financial statements can be prepared is: total assets equity sales cost of goods sold

Sales

How does sales and marketing personnel contribute to the sales forecasting process?

Sales and marketing personnel usually provide assessments of demand and the competition.

Annuities

Series of equal payments at a fixed interval for a specified number of periods

Which of the following statements is most incorrect?

Sinking fund provisions do not require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.

Business Risk

Source is sales volatility Operating leverage magnifies effects of sales volatility

Base assumptions for producing pro formas

Spontaneous balance sheet accounts vary with sales Fixed expenses stay fixed Variable expenses vary (COGS) Interest Expense stays fixed Tax rate stays fixed (will be given) Fixed assets stay fixed All financing decisions are static *Any assumption can be overridden by given information*

Which one risk measure, utilizing the concept of frequency distributions, seeks to measure the variability of future returns around the expected value?

Standard deviation

How would management respond if analysis of the pro forma reveals positive trends?

Stick to the current plan. If it ain't broke, why fix it?

State of Nature

Strength of demand

IBM Bond Problem

Suppose IBM makes annual coupon payments. The person who buys the bond at the beginning of 2011 for $966.25 will receive 5 annual coupon payments of $63.75 each and a $1,000 principal payment in 5 years (at the end of 2015). Assume t0 is the beginning of 2011. RROR=8 N=5 I=8 PV=?---->$935.12 FV=1000 P/Y= 1 E,d

market risk premium (RPm)

The additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. RPm = (rm - rRF)

Additional funds needed represents: the amount to be borrowed the amount needed to achieve the necessary asset growth long-term funds needed the desired short-term to long-term debt ratio of the firm

The amount needed to achieve the necessary asset growth

How does the cash budget relate to pro forma financial statements?

The cash budget shows the projected flow of cash in and out of the firm for specified time periods.

How does the capital budget relate to pro forma financial statements?

The capital budget shows planned expenditures for major asset acquisitions.

Compounding

The arithmetic process of determining the final value of a cash flow or series of cash flows when compound interest is applied.

Annual Compounding

The arithmetic process of determining the final value of a cash flow or series of cash flows when interest is added once a year.

semi annual compounding

The arithmetic process of determining the final value of a cash flow or series of cash flows when interest is added twice a year. 1. convert I to periodic rate 2. convert # of years to # of periods

The balancing problem in forecasting refers to which of the following? how many dividends the company should pay out where the firm should borrow new funds where new interest payments should be placed the cost of new debt and its impact on forecasting retained earnings

The cost of new debt and its impact on forecasting retained earnings

How does the market determine the fair value of a bond?

The fair value of a bond is the present value of the bond's coupon interest payments plus the present value of the face value payment at maturity, discounted at the market's required rate of return for the bond in question.

A current ratio of 0.9 means: the firm has $0.90 of current liabilities for every $1.00 of current assets the firm has $0.90 of fixed assets for every $1.00 of current assets the firm has $0.90 of current assets for every $1.00 of current liabilities the firm has a debt ratio of 90%

The firm has $0.90 of current assets for every $1.00 of current liabilities

A debit/equity ratio of 8.1 means: the firm is financing the company with 81% borrowed funds the firm has 81 times more equity than debt debt is turning over 8.1 times a year the firm has 8.1 times more debt than equity

The firm has 8.1 times more debt than equity

If the inventory turnover ratio is very high relative to industry averages: the firm has too high a level of inventory the firm may be losing sales if its inventory is too low the firm has good total assets management practices the firm has too many items that the customers probably do not want

The firm may be losing sales if its inventory is too low

production opportunities

The investment opportunities in productive (cash-generating) assets.

The expected return on an investment is: equal to the required return less than the required return equivalent to the actual return the mean of the distribution of possible returns

The mean of the distribution of possible returns

Expected Return on stock

The mean of the probability distribution of possible returns To calculate expected return, compute weighted average of possible returns

discounting

The process of finding the present value of a cash flow or a series of cash flows; discounting is the reverse of compounding.

What is meant by positive correlation?

The r is closer to +1, the variable tend to move closely with each other

What is meant by Negative correlation?

The r is closer to -1, the variables move opposite of each other.

expected rate of return (r hat)

The rate of return expected to be realized from an investment; the weighted average of the probability distribution of possible results Rate of return = (Amount received - invested) / invested r hat = Σ Pxr

Return on equity is most accurately described as a measure of: return on assets combined with liquidity the return available to all stockholders in the company the return on capital based on common stockholder investment is the amount of net income paid to retained earnings after allowing for dividends paid

The return on capital based on common stockholder investment

Reinvestment Risk

The risk that a decline in interest rates will lead to a decline in income from a bond portfolio

relevant risk

The risk that remains once a stock is in a diversified portfolio is its contribution to the portfolio's market risk. It is measured by the extent to which the stock moves up or down with the market.

A good measure of an investor's risk exposure if she/he only holds a single asset in her portfolio is: the standard deviation of possible returns on the asset the expected value of the asset's returns the correlation coefficient with the market portfolio the normal probability distribution function

The standard deviation of possible returns on the asset

Bond Valuation Model

The value of the bond is the present value of the cash flows the investor expects to receive Three types of cash flows Amount paid to buy the bond (PV) Coupon interest payments made to the bondholders (PMT) Repayment of Par value at end of Bond's life (FV) To calculate the value of a bond we need to know the TIMING of the above cash flows as well as the appropriate DISCOUNT RATE to apply to those cash flows.

YTC is used for n, not for YTM, and the premium is the FV

Then YTCeff=(1+I/Y)2-1 YTC =premium bonds YTM =par and discount bonds

What is the primary assumption behind the experience approach to forecasting?

Things will happen a certain way in the future, because they happened that way in the past.

Cash Flow (CF)

This term designates a cash flow that's not part of an annuity.

General valuation model

Three factors that affect future earnings: Size of cash flows Timing cash flows Risk (higher risk, higher rate of return necessary)

How does top management contribute to the sales forecasting process?

Top management will make strategic decisions affecting the firm as a whole.

Which of the following equations best describes net working capital? cash + inventory-accounts payables total assets - fixed assets - current liabilities fixed assets - long-term liabilities total assets - total liabilities

Total Assets - Fixed Assets - Current Liabilities

House financing cont (What is Principal and interest for whole loan)

Total principal/interest = 11,871.10pmt x 360periods= $4,273,596 P= 1,980,000 (given as PV) I= $2,293,596

Portfolio risk

Total risk of portfolio Correlation coefficient affects diversification effectiveness---> The lower the CV, the less risky the portfolio

A yield curve plots yield against time

True

According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio. (T/F)

True

An upward-sloping yield curve is often call a "normal" yield curve, while a downward-sloping yield curve is called "abnormal." (T/F)

True

Any change in its beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock's price, other things held constant. (T/F)

True

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away. (T/F)

True

Based on the pure expectations theory, is the following statement true or false? The pure expectations theory assumes that investors do not consider long-term bonds to be riskier than short-term bonds.

True

Check My Work One of the four most fundamental factors that affect the cost of money as discussed in the text is the risk inherent in a given security. The higher the risk, the higher the security's required return, other things held constant. (T/F)

True

For a stock to be in equilibrium, two conditions are necessary: (1) The stock's market price must equal its intrinsic value as seen by the marginal investor and (2) the expected return as seen by the marginal investor must equal this investor's required return. (T/F)

True

If a stock's market price exceeds its intrinsic value as seen by the marginal investor, then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value. (T/F)

True

If the pure expectations theory is correct, a downward sloping yield curve indicates that interest rates are expected to decline in the future. (T/F)

True

If the required rate of return on a bond (rd) is greater than its coupon interest rate and will remain above that rate, then the market value of the bond will always be below its par value until the bond matures, at which time its market value will equal its par value. (Accrued interest between interest payment dates should not be considered when answering this question.) (T/F)

True

Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the firm's total corporate value. (T/F)

True

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures. (T/F)

True

Since the market return represents the expected return on an average stock, the market return reflects a certain amount of risk. As a result, there exists a market risk premium, which is the amount over and above the risk-free rate, that is required to compensate stock investors for assuming an average amount of risk. (T/F)

True

Measuring investment risk (standard deviation)

Use in formation provided to calculate (V-u) Then calculate (V-u)^2 Then calculate P(V-u)^2 Add all values up for a total (E)--->Variance Take square root of total to find standard deviation

When comparing risk between two investment options

Use standard deviation when the have the *same* mean Use *Coefficient of Variation (CV)* when they have different means CV= (Standard deviation/mean)

Present Value of a Lump Sum

Value today of an amount to be received or paid in the future PV= FVn x 1/(1+k)^n Receive $100 in a year at 10%--->opportunity cost PV= 100/(1.10)^1= $90.90 Receive $500 in 10 years at 12% PV= 500/(1.12)^10

bonds valuation

Vb = Σ INT/(1+r)^t + M / (1+rd)^n

Excess Financing

When Total claims >Total assets "Take 1.1 million extra and give it back to investors"

Balancing problem

When new debt or equity may affect your original projections Pro forma should be recast, raise after tax cost of additional interest expense

Explain the significance of the term additional funds needed.

When the Pro Forma balance sheet is complete, the totals will rarely balance. If Assets are larger than Liabilities and equity the firm may need additional funds. If the reverse is true, it is called excess financing.

Why does the riskiness of portfolios have to be looked at differently than the riskiness of individual assets?

Why does the riskiness of portfolios have to be looked at differently than the riskiness of individual assets?

call provision

a provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date

Bonds with Semiannual Coupons

YTC = Σ (INT/2) / (1+r/2)^t + Call Price / (1+r/2)^2N

Bond prices and Bind yields move in opposite directions

YTM < Coupon rate, bond sells at premium YTM = Coupon rate, bond sells at par value YTM > Coupon rate, bond sells at discount

Future value of annuity due

You *deposit* $100 at the *beginning* of the year into savings account How much would this account have in it at the end of 3 years if interest were earned at a rate of 8% annually? Set Calculator to begin mode N= 3 I/YR= 8 PMT = -100 FV=?----> $350.61

Amortized Loans (practice problem-monthly payment)

You borrow $20,000 from the bank to purchase a used car. You agree to make payments at the end of each month for the next 4 years. If the annual interest rate on this loan is 9%, how much is your monthly payment? N= 48 (end of each months for 4 years: 12 months x 4 years= 48) I= 9 PV= 20,000 FV= 0 PMT= ?----> $-497.70 P/Y=12 (most important step) END mode

Amortized loans (practice problem-annual)

You borrow $5,000 from your parents to purchase a used car. You agree to make payments at the end of each year for the next 5 years. If the interest rate on this loan is 6%, how much is your annual payment? N=5 I=6 PV= 5,000 (borrowing now, not in future) FV= 0 PMT= ?---> $-1,186.98

Future Value of an annuity

You deposit $100 each year (end of year) into a savings account. How much would this account have in it at the end of 3 years if interest were earned at a rate of 8% annually? N=3 I=8% PMT= $-100 PV=0 FV=?----->$324.64

fixed-rate bond

a bond that pays a fixed amount of interest to the investor each year

Fill in the Blank: When the bond's coupon rate is less than the bondholder's required return, the bond's intrinsic value will be less than its par value, and the bond will trade at _________.

a discount

indenture

a formal agreement between the issuer and the bondholders

Amortized Loan

a loan that is repaid in equal payments over its life INT PMT= BEG Bal (Interest Rate) Principle PMT = PMT - INT END Bal = BEG Bal - Principle PMT

Bond

a long-term debt instrument which borrower agrees to make payments of interest and principle on specific days

Capital Asset Pricing Model (CAPM)

a model based on the proposition that any stock's required rate of return is equal to the risk-free rate of return plus a risk premium that reflects only the risk remaining after diversification

market portfolio

a portfolio consisting of all stocks

Security Market Line (SML)

a positively sloped straight line displaying the relationship between expected return and beta r = rRF + (rm - rRF) b r = rRF + (RPm) b Inflation shifts lines risk aversion pivots line on y-intercept

sinking fund provision

a provision in a bond contract that requires the issuer to retire a portion of the bond issue each year Call x% of issue at par value if YTM is below coupon rate and bind sells at premium buy bindsin open mkt if YTM is above coupon rate and bond sells at discount

Uneven Cash Flows

a series of cash flows where the amount varies from one period to the next PV = Σ CF / (1+I)^t

Perpetuity (think of as perpetual annuity)

a series of equal payments at equal time intervals (an annuity) that will be received into infinity.

An annuity is best defined as:

a series of equal payments occurring at equal intervals for a specified number of periods

standard deviation (σ)

a statistical measure of the variability of a set of observations σ = SQRT Σ (r - r hat)^2 (P) larger σ the lower P actual return = expected Larger σ = wider prob distribution

perpetuity

a stream of equal payments at fixed intervals expected to continue forever PV of perpetuity = PMT / I

inverted yield curve

a yield curve that is downward sloping

Why does money have time value?

because interest rates are positive

premium bond

bond sells above par value

discount bond

bond sells below par value

subordinated debenture

bonds having a claim on assets only after the senior debt has been paid in full in the event of liquidation

corporate bonds

bonds issued by corporations

risk

chance an unfavorable event will occur

Risk

chance investment provides low or neg return

The concept of earning interest on interest over time is called:

compound interest.

price (investment) risk

concern of rising YTM will cause value of bond to fall all else = LT bond prices are more sensitive to interest rate changes than ST bonds 10-yr bonds are more sensitive to interest rate changes than a 1-yr bond, hence more price risk

A bond's _____________ allows a bondholder or preferred stockholder to convert their bond or preferred share, respectively, into a specified number or value of common shares.

convertibility provision

Corporate Bond Yield Spread

corporate bond yield - treasury bond yield

A bond's _________ refers to the interest payment or payments paid by a bond.

coupon payment

Business risk is associated with variations in operating income caused by sales fluctuations magnified by _______________ that produce greater percent changes in EBIT than the percent change in sales.

fixed operating costs

As the discount rate increases, the present value of a positive cash flow to be received at a particular time in the future:

gets closer to zero

As the discount rate decreases (including negative values), the present value of a positive cash flow to be received at a particular time in the future:

gets larger without limit

Expected vs Required Returns

if r hat > r, undervalued if r hat < r, overvalued

Frank Barlowe is retiring soon, so he is concerned about his investments providing him steady income every year. He is aware that if interest rates ______, the potential earnings power of the cash flow from his investments will increase. In particular, he is concerned that a decline in interest rates might lead to ____ annual income from his investments. What kind of risk is Frank most concerned about protecting against? A) Reinvestment rate risk B) Interest rate risk

increase less A) Reinvestment rate risk

Bankruptcy

liquidation or reorginize

LP

liquidity premium

warrents

long-term options to buy a stated number of shares of common stock at a specified price

expansionary policy

loosening credit increases GDP growth increases money supply decreases Inflation

MRP

maturity risk premium premium that reflects interest rate risk MRP = .1%(t-1)

goal of fin. management

max shareholder value and value of bus PV and future cash flows

r

nominal / quoted interest rate r = r* + IP + DRP + LP + MRP r = required return on debt security

rRF

nominal or quoted risk-free rate of return rate of interest free rRF - r* + IP

Standard deviation is a:

numerical indicator of how widely dispersed possible values are distributed around the mean

compound interest

occurs when interest is earned on prior periods' interest FV = PV(1+I)^N PV = FV / (1+I)^N

Sharpe Ratio

ratio of portfolio risk premium to standard deviation = (return - risk free rate) / σ

r*

real risk-free rate of interest if no inflation

fiscal policy

relates to gov spending and taxation conducted by congress and president

Moentary policy

relates to money supply and interest rates conducted by fed

A stock's contribution to the market risk of a well-diversified portfolio is called ________ risk. It can be measured by a metric called the beta coefficient, which calculated the degree to which a stock moves with the movements in the market.

relevant

A well diversified stock portfolio will:

remove the diversifiable risk, leaving only the nondiversifiable risk of the stock portfolio.

realized rate of return

return actually earned

Default risk

risk issuer will not make promised payments on time bond ratings reflect default risk

How would management respond if analysis of the pro forma reveals negative trends?

seek corrective actions

The standard deviation is the:

square root of the sum of the squared deviations from the mean times the probability of occurrence.

2 types of risk

stand alone portfolio

While the standard deviation is an absolute measure of variability, the coefficient of variation, measured by the ________________, is a(n) _________ measure of riskiness.

standard deviation divided by the mean; relative

How do you calculate the coefficient of variation?

standard deviation/mean

The SML helps determine the level of risk aversion among investors. The higher the level of risk aversion, the _____ the slope of the SML.

steeper

total risk

systematic risk + unsystematic risk total risk is standard deviation (σ)

Financial Risk

the additional volatility of net income caused by the presence of interest expense. Firms that have only equity financing have no financial risk because they have no debt on which to make fixed interest payments. Conversely, firms that operate primarily on borrowed money are exposed to a high degree of financial risk.

Additional funds needed represents:

the amount needed to achieve the necessary asset growth

Future Value (FV)

the amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate

Effective Annual Rate (EAR)

the annual rate of interest actually being earned, as opposed to the quoted rate EAR = [1 + INOM/M]^M - 1 used to compare return on investment with diff compounding frequency If M > 1 EAR will always be greater than nominal

When doing the first set of pro forma financial statements, net income is always positive the balance sheet always balances the balance sheet may not balance more than one of the above

the balance sheet may not balance

The balancing problem in forecasting refers to which of the following?

the cost of new debt and its impact on forecasting retained earnings

Risk Premium (RP)

the difference between the expected rate of return on a given risky asset and that on a less risky asset

par value

the face value of a bond

FVAn

the future value of an annuity over N periods FVAn = PMT[((1+I)^N-1)/I] PVAn = PMT[(1-(1+I)^-N)/I]

Payment (PMT)

this term designates equal cash flows coming at regular intervals

contractionary policy

tightening credit decreases GDP growth decreases money supply increases Inflation

TMV

time value of money is the most important concept in FIN

Gross Domestic Product (GDP)

total value of all g/s produced

Krogers in Conway, Arkansas, wants you to make sure they don't run out of toilet paper over Toad Suck weekend in May. If the average number of packages you sell is 600 per week, with a variance of 5250 per week, how many should you make sure you order to be pretty certain that you won't run out?

var= 5250 S.D.=5250= 72.46 units

Foreign Trade Effect

when US price level rises, foreign buyers purchase fewer US goods and Americans buy more foreign goods situation occurs when country imports more than exports

issue date

when the bond was issued

Fill in the Blank: Remember, a bond's coupon rate partially determines the interest-based return that a bond ______ pay, and a bondholder's required return reflects the return that a bondholder _______ to receive from a given investment.

will would like

maturity date

years until bond must be repaid

If the price of a bond is initially discounted and offers no coupon payments, the bond is called a ___________

zero coupon