FRL 3000 CH. 7 Terms

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Is the yield to maturity on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is the coupon rate on the bond? What is the YTM on the bond?

10 %. 8%.

The next dividend payment by Savitz, Inc., will be $4.95 per share. The dividends are anticipated to maintain a growth rate of 3 percent forever. If the stock currently sells for $41 per share, what is the required return?

15.07%

Which one of the following bonds is the least sensitive to interest rate risk? Multiple Choice 3-year; 4 percent coupon 3-year; 6 percent coupon 5-year; 6 percent coupon 7-year; 6 percent coupon 7-year; 4 percent coupon

3-year; 6 percent coupon

Which one of the following statements is correct? Multiple Choice Stocks can only be assigned one dividend growth rate. Preferred stocks generally have variable growth rates. Dividend growth rates must be either zero or positive. All stocks can be valued using the dividend discount models. Stocks can have negative growth rates.

All stocks can be valued using the dividend discount models.

Hudson Corporation will pay a dividend of $5.80 per share next year. The company pledges to increase its dividend by 3.00 percent per year indefinitely. If you require a return of 12.90 percent on your investment, how much will you pay for the company's stock today?

$58.59

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings? Multiple Choice Dual class Cumulative Non-cumulative Preferred Common

Common

A discount bond's coupon rate is equal to the annual interest divided by the

Face Value

Interest Rate Risk is the risk that arises for bond owners from fluctuating interest rates. All other things being equal, the _______ the coupon rate, the _________ the interest rate risk.

Lower; Greater

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?

Liquidity

Interest Rate Risk is the risk that arises for bond owners from fluctuating interest rates. All other things being equal, the _______ the time to maturity, the _________ the interest rate risk.

Longer; Greater

A bond's principal is repaid on the ____ date.

Maturity

Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct?

The bonds will sell at a premium if the market rate is 5.5 percent.

Suppose you buy a 7 percent coupon, 20-year bond today when it's first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond? The price of the bond will fall. The price of the bond will rise.

The price of the bond will fall.

When comparing a 10-year bond versus a 1-year bond, the 10-year bond has a much greater interest rate risk.

True

Which one of these equations applies to a bond that currently has a market price that exceeds par value?

Yield to maturity < Coupon rate

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

convert the bond into equity shares.

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment?

coupon

The price sensitivity of a bond increases in response to a change in the market rate of interest as the:

coupon rate decreases and the time to maturity increases.

Which one of the following represents the capital gains yield as used in the dividend growth model? Multiple Choice D1 D1/P0 P0 g g/P0

g

Treasury bonds are: Multiple Choice issued by any governmental agency in the U.S. issued only on the first day of each fiscal year by the U.S. Department of Treasury. bonds that offer the best tax benefits of any bonds currently available. generally issued as semiannual coupon bonds. totally risk free

generally issued as semiannual coupon bonds.

The Fisher effect primarily emphasizes the effects of _____ on an investor's rate of return.

inflation

A "fallen angel" is a bond that has moved from:

investment grade to speculative grade.

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:

market price of the bond will decrease

Municipal bonds: Multiple Choice are totally risk free. generally have higher coupon rates than corporate bonds. pay interest that is federally tax free. are rarely callable. are free of default risk.

pay interest that is federally tax free.

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

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


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