Chapter 10

Question 1

Bond

Answer 1

a long-term debt instrument (loan).

Question 2

yield to maturity (YTM)

Answer 2

The average rate of return earned on a bond if it is held to maturity.

Question 3

yield to call (YTC)

Answer 3

The average rate of return earned on a bond if it is held until the first call date

Question 4

call price

Answer 4

The price a firm has to pay to recall a bond; generally equal to the principal amount plus some interest.

Question 5

discount bond

Answer 5

A bond that sells below its par value. This occurs whenever the going rate of interest rises above the coupon rate

Question 6

premium bond

Answer 6

A bond that sells above its par value. This occurs whenever the going rate of interest falls below the coupon rate.

Question 7

interest (current) yield

Answer 7

The interest payment divided by the market price of the bond

Question 8

Capital gains yields

Answer 8

The percentage change in the market price of a bond over some period of time

Question 9

interest rate price risk

Answer 9

The risk of changes in bond prices to which investors are exposed due to changing interest rates

Question 10

interest rate reinvestment risk

Answer 10

The risk that income from a bond portfolio will vary because cash flows must be reinvested at current market rates

Question 11

market price, P0

Answer 11

The price at which a stock currently sells in the market.

Question 12

intrinsic value

Answer 12

The value of an asset that, in the mind of a particular investor, is justified by the facts; can be different from the asset’s current market price, its book value, or both.

Question 13

growth rate, g

Answer 13

The expected rate of change in dividends per share.

Question 14

dividend yield

Answer 14

The expected divided by the current price of share of stock, D0/P0

Question 15

capital gains yield

Answer 15

The change in price (capital gain) during a given year divided by the price at the beginning of the year

Question 16

required rate return

Answer 16

The minimum rate of return on a common stock that stockholders consider acceptable.

Question 17

expected rate of return

Answer 17

The rate of return on a common stock that an individual stockholder expects to receive. It is equal to the expected dividend yield plus the expected capital gains yield

Question 18

actual (realized) rate of return

Answer 18

The rate of return on a common stock actually received by stockholders; can be greater than or less than the expected return, and/or the required return

Question 19

zero growth stock

Answer 19

A common stock whose future dividends are not expected to grow at all; that is, g=0

Question 20

normal (constant) growth

Answer 20

Growth that is expected to continue into the foreseeable future at about the same rate as that of the economy as a whole; g= a constant

Question 21

constant growth model

Answer 21

Also called the Gordon model; used to find the value of a stock that is expected to experience constant growth

Question 22

nonconstant growth

Answer 22

The part of the life cycle of a firm in which its growth either is much faster or is much slower than that of the economy as a whole