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FIN 325 > Chapter 7-8 > Flashcards

Chapter 7-8 Flashcards

1
Q

Ana just received the semiannual payment of $35 on a bond she owns. This is called the ______ payment.
A. coupon
B. face value
C. discount
D. call premium
E. yield

A

A. coupon

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2
Q

Dilan owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. The $1,000 is referred to as the:
A. coupon.
B. face value.
C. discount.
D. yield.
E. dirty price.

A

B. face value.

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3
Q

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

A

C. a discount; less than

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4
Q

Gugenheim, Incorporated, has a bond outstanding with a coupon rate of 5.8 percent and annual payments. The yield to maturity is 7 percent and the bond matures in 14 years. What is the market price if the bond has a par value of $2,000?
A. $1,792.86
B. $1,790.11
C. $1,825.91
D. $1,795.22
E. $1,788.00

A

B. $1,790.11

C=2,000x.058=116 (face value x coupon rate)
F=2,000
t=14
r=.07
Use financial calculator to solve for PV
https://www.calculator.net/finance-calculator.html?ctype=startingamount&cyearsv=14&cinterestratev=7&cstartingprinciplev=-2%2C000&ccontributeamountv=116&ctargetamountv=2%2C000&cpy=1&ccy=1&ciadditionat1=end&printit=0&x=Calculate#cr

N = 14 (14 years with annual payments)
I/Y = 7 (yield to maturity)
PMT = 116 (par value x coupon rate)
FV = 2000 (par value)

plug it into Bond value formula
note (t=n)

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5
Q

Footsteps Company has a bond outstanding with a coupon rate of 5.7 percent and annual payments. The bond currently sells for $992.35, matures in 21 years, and has a par value of $1,000. What is the YTM of the bond?
A. 5.70%
B. 5.76%
C. 4.80%
D. 5.19%
E. 5.74%

A

B. 5.76%

use online financial calculator
C=PMT
F=FV
t=N
r=I/Y
PV=Present Value of bond (selling price)

Solve for I/Y in financial calculator
N = 21 (annual payments for 21 year)
PV = -$992.35 (current value)
PMT = $57 (par value x coupon rate = 1000x.057)
FV = 1000 (par value)

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6
Q

A bond that pays interest semiannually has a price of $1,031.92 and a semiannual coupon payment of $26.75. If the par value is $1,000, what is the current yield?
A. 2.68%
B. 5.18%
C. 4.93%
D. 2.59%
E. 5.35%

A

B. 5.18%

Current Yield=Annual coupon/price

annual coupon = $26.75x2
price=1,031.92

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7
Q

A bond that pays interest semiannually has a coupon rate of 4.96 percent and a current yield of 5.21 percent. The par value is $1,000. What is the bond’s price?
A. $976.01
B. $936.15
C. $1,050.40
D. $1,031.35
E. $952.02

A

E. $952.02

Current Yield=Annual coupon/price
Price = Annual coupon/Current yield
Annual coupon=1000x.0496=49.60
Current Yield = .0521
49.60/.0521=952.02

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8
Q

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.”

A

C. are considered to be free of default risk.

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9
Q

Municipal bonds:
A. are totally risk free.
B. generally have higher coupon rates than corporate bonds.
C. pay interest that is free from federal taxation.
D. are rarely callable.
E. are free of default risk.

A

C. pay interest that is free from federal taxation.

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10
Q

An investment had a nominal return of 10.1 percent last year. The inflation rate was 3.5 percent. What was the real return on the investment?
A. 9.97%
B. 7.09%
C. 5.99%
D. 13.95%
E. 6.38%

A

E. 6.38%

r=[(1+.101)/(1+.035)]-1=6.38%

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11
Q

Which of the following is true about a typical multiple-year bond’s coupon?

A. It is a fixed interest payment paid at the time the bond matures.
B. Interest payments are paid at the discretion of CFO.
C. It is a fixed annuity payment.
D. The interest payment will vary with the market rate of interest.

A

C. It is a fixed annuity payment.

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12
Q

Which of the following are true about a bond’s face value? (choose all that are correct)

A. It is also known as the par value.
B. It is the principal amount repaid at maturity.
C. A bond’s face value is the same for all corporations.
D. It is the market value of the bond at the time of maturity.

A

A. It is also known as the par value.
B. It is the principal amount repaid at maturity.

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13
Q

What is the coupon rate on a bond that has a par value of $1,000, a market value of $1,100, and a coupon interest payment of $100 per year?

A. 9.09%
B. 1%
C. It will depend on the bond rating for that year
D. 10%

A

D. 10%

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14
Q

What is the definition of a bond’s time to maturity?

A. It is the number of years until the face value is due to be repaid.
B. It is the number of years until the bond is sold by the bondholder
C. It is the number of years the corporation is expected to be in existence
D. It the period of time that has elapsed since the bond was issued

A

A. It is the number of years until the face value is due to be repaid.

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15
Q

There is a(n) ______ relationship between market interest rates and bond values.
A. random
B. positive
C. negative
D. unstable

A

C. negative

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16
Q

A bond’s _______________ rate is the stated interest payment made on a bond.

A

coupon

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17
Q

If a $1,000 par value bond is trading at a premium, the bond is _____.

A. not actively traded due to its high price
B. trading for $1,000 in the market
C. trading for more than $1,000 in the market
D. trading for less than $1,000 in the market

A

C. trading for more than $1,000 in the market

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18
Q

A firm decides to raise money by issuing 5 million bonds with a par value of $5,000 each for 10 years at a coupon rate of 7 percent. At the time of issue, the bonds were sold for $5,500 each. What will the par value of the bonds be in year 5?

A. $5,350 per bond
B. $5,500 per bond
C. It will depend on the market price at year 5
D. $5,000 per bond

A

D. $5,000 per bond

Reason: Par value is not affected by interest rates, market price, or time.

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19
Q

A bond pays annual interest payments of $50, has a par value of $1,000, and a market price of $1,200. How is the coupon rate computed?

A. $50/$1,000
B. $50/$1,200
C. $50/($1,200 - 1,000)
D. $50/[($1,000 + 1,200)/2]

A

A. $50/$1,000

Reason: Coupon rate is a percentage of par value, so in this case it’s $50/$1,000 = 0.05 = 5%.

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20
Q

A bond’s time to __________________
is the number of years until the face value is due to be repaid.

A

maturity

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21
Q

The relationship between bond prices and the market rate of interest is ____.
A. positive during the initial years and negative during the later years
B. inverse; if the market rate of interest rises, bond prices will fall
C. non-existent; there is no specific relationship between bond price and market rates
D. direct; if the market rate of interest falls, bond prices will fall

A

B. inverse; if the market rate of interest rises, bond prices will fall

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22
Q

What is a premium bond?

A. A bond that is not risky and rated as investment grade
B. A bond that sells for more than face value
C. A bond that sells for less than face value
D. A bond of superior quality

A

B. A bond that sells for more than face value

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23
Q

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

A. call price.
B. current price.
C. face value.
D. clean price.

A

C. face value.

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24
Q

A bond’s principal is repaid on the ________ date.

A. coupon
B. yield
C. maturity
D. dirty

A

C. maturity

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25
Q

The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwei Manufacturing. The 6.2 percent is referred to as the:

A. coupon rate.
B. face rate.
C. call rate.
D. yield to maturity.
E. current yield.

A

D. yield to maturity.

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26
Q

The current yield is defined as the annual interest on a bond divided by the:

A. Coupon rate.
B. face value.
C. market price.
D. call price.

A

C. market price.

27
Q

Treasury bonds are:

A. issued by any governmental agency in the U.S.
B. issued only on the first day of each fiscal year by the U.S. Department of Treasury.
C. bonds that offer the best tax benefits of any bonds currently available.
D. generally issued as semiannual coupon bonds.

A

D. generally issued as semiannual coupon bonds.

28
Q

An investment had a nominal return of 11.4 percent last year. The inflation rate was 3.8 percent. What was the real return on the investment?

A. 8.14%
B. 15.63%
C. 11.23%
D. 6.82%
E. 7.32%

A

E. 7.32%

29
Q

An investment had a nominal return of 11.4 percent last year. The inflation rate was 3.8 percent. What was the real return on the investment?

A. 8.14%
B. 15.63%
C. 11.23%
D. 6.82%
E. 7.32%

A

E. 7.32%

30
Q

Gugenheim, Incorporated, has a bond outstanding with a coupon rate of 6.5 percent and annual payments. The yield to maturity is 7.7 percent and the bond matures in 21 years. What is the market price if the bond has a par value of $2,000?

A. $1,752.09
B. $1,753.96
C. $1,756.65
D. $1,789.03
E. $1,758.97

A

B. $1,753.96

coupon rate = 6.5%
r=7.7%
t=21
F=2000

C=2000x.065
Plug into financial calculator to solve for PV

31
Q

Footsteps Company has a bond outstanding with a coupon rate of 6.3 percent and annual payments. The bond currently sells for $952.05, matures in 19 years, and has a par value of $1,000. What is the YTM of the bond?

A. 6.76%
B. 6.08%
C. 6.62%
D. 6.30%
E. 5.63%

A

A. 6.76%

C=1000x.063
PV=952.05
t=19
F=1000

put into financial calculator to solve for r (annual payments)

32
Q

A bond that pays interest semiannually has a price of $1,020.37 and a semiannual coupon payment of $26.50. If the par value is $1,000, what is the current yield?

A. 4.93%
B. 2.65%
C. 5.19%
D. 5.30%
E. 2.60%

A

C. 5.19%

current yield = annual coupon/price

25.6x2/1,020.37

33
Q

A bond that pays interest semiannually has a coupon rate of 5.56 percent and a current yield of 4.99 percent. The par value is $1,000. What is the bond’s price?

A. $897.48
B. $1,207.08
C. $1,095.66
D. $1,114.23
E. $1,057.11

A

D. $1,114.23

bond price = Annual Coupon/current yield

34
Q

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?
A. Maximal growth model
B. Constant growth model
C. Capital pricing model
D. Realized earnings model
E. Realized growth model

A

B. Constant growth model

35
Q

The annual dividend yield is computed by dividing _____ annual dividend by the current stock price.
A. this year’s
B. last year’s
C. next year’s
D. the past 5-year average
E. the next 5-year average

A

C. next year’s

D1=next year dividend

36
Q

Which one of following is the rate at which a stock’s price is expected to appreciate?
A. Current yield
B. Total return
C. Dividend yield
D. Capital gains yield
E. Coupon rate

A

D. Capital gains yield

37
Q

When using the two-stage dividend growth model,:
A. g1 cannot be negative.
B. Pt = Dt / R.
C. g1 must be greater than g2.
D. g1 can be greater than R.
E. R must be less than g1 but greater than g2.

A

D. g1 can be greater than R.

8.5 and 8.6 sections

38
Q

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

A

D. g

39
Q

Michael’s, Incorporated, just paid $2.45 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 5.3 percent. If you require a rate of return of 9.5 percent, how much are you willing to pay today to purchase one share of the company’s stock?
A. $61.43
B. $17.43
C. $63.88
D. $27.16
E. $30.71

A

A. $61.43
2.45(1+.053)/.095-.053 = 61.425

40
Q

Stoneheart Group is expected to pay a dividend of $3.23 next year. The company’s dividend growth rate is expected to be 3.6 percent indefinitely and investors require a return of 12 percent on the company’s stock. What is the stock price?
A. $36.53
B. $38.45
C. $34.61
D. $26.92
E. $39.84

A

B. $38.45

use formula D1/R-g when it says “expected to pay”

3.23/.12-.036

41
Q

A stock is expected to maintain a constant dividend growth rate of 4.4 percent indefinitely. If the stock has a dividend yield of 5.7 percent, what is the required return on the stock?
A. 8.4%
B. 9.1%
C. 10.1%
D. 9.6%
E. 9.4%

A

C. 10.1%

R = D1/P0 + g
R=dividend yield + capital gains yield
4.4%+5.7%=required return on the stock

42
Q

CDB stock is currently priced at $72. The company will pay a dividend of $4.25 next year and investors require a return of 10.4 percent on similar stocks. What is the dividend growth rate on this stock?
A. 4.20%
B. 4.27%
C. 4.50%
D. 5.90%
E. 5.16%

A

C. 4.50%

R=D1/P0+g
Required Return=Dividend yield + dividend growth rate

g=R-divident yield
g= 10.4-(72/4.25)=4.5%

43
Q

For the past six years, the stock price of Slippery Rock Mining has been increasing at a rate of 8.4 percent per year. Currently, the stock is selling for $82 per share and has a required return of 10.3 percent. What is the dividend yield?
A. 3.5%
B. 8.4%
C. 5.2%
D. 9.3%
E. 1.9%

A

E. 1.9%

R = D1/P0 + g
D1/P0 = dividend yield
D1/P0 = 10.3-8.4=1.9%

44
Q

The price of a share of common stock is equal to the present value of all expected future ______________

A

dividends

45
Q

The value of a firm is the function of its ______ rate and its _______ rate.
A. growth; discount
B. growth; inflation
C. discount; burn

A

A. growth; discount

46
Q

Which one of the following is true about dividend growth patterns?

A. Dividends always grow at a differential rate.
B Dividends may grow at a constant rate.
C. Dividends never grow.
D. Dividends always grow at a constant rate.

A

B Dividends may grow at a constant rate.

47
Q

Using the dividend growth model requires that the growth rate be _____ the discount rate.

A. twice
B. equal to
C. smaller than
D. greater than

A

C. smaller than

48
Q

All else constant, the dividend yield will increase if the stock price ____.

A. decreases
B. increases

A

A. decreases

49
Q

The price of a share of common stock is equal to the present value of all ______ future dividends.

A. paid
B. expected
C. stable
D. growing

A

B. expected

50
Q

The ______ can be interpreted as the capital gains yield.

A. constant growth rate
B. yield to maturity
C. inflation rate
D. dividend yield

A

A. constant growth rate

51
Q

Three special case patterns of dividend growth include _____.

A. negative growth
B. nonconstant growth
C. discounted growth
D. constant growth
E. zero growth
F. fast growth

A

B. nonconstant growth
D. constant growth
E. zero growth

52
Q

One requirement of the dividend growth model is _____.

g = R

g + R = 1

g < R

g > R

A

g < R

53
Q

The dividend yield is determined by dividing the expected dividend (D1) by _____.

the discount rate (R)

the current price (P0)

the growth (g)

retained earnings

A

the current price (P0)

54
Q

If the growth rate (g) is zero, the capital gains yield is ____.

cyclical

zero

higher than the dividend yield

100 percent

A

zero

55
Q

The ______ can be interpreted as the capital gains yield.

yield to maturity

inflation rate

dividend yield

constant growth rate

A

constant growth rate

56
Q

A decrease in which of the following will increase the current value of a stock according to the dividend growth model?

A. Dividend amount
B. Number of future dividends, provided the total number of dividends is less than infinite
C. Dividend growth rate
D. Discount rate

A

D. Discount rate

57
Q

Read Corporation currently pays an annual dividend of $1.46 per share and plans on increasing that amount by 2.75 percent annually. Cho, Incorporated, currently pays an annual dividend of $1.42 per share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Cho has a higher ________ than the stock of Read.

A. market price
B. Dividend yield
C. capital gains yield
D. total return
E. real return

A

C. capital gains yield

58
Q

The dividend growth model:

A. assumes dividends increase at a decreasing rate.
B. only values stocks at Time 0.
C. cannot be used to value constant dividend stocks.
D. can be used to value both dividend-paying and non-dividend-paying stocks.
E. requires the growth rate to be less than the required return.

A

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

59
Q

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:

A. an increase in all stock values.
B. all stock values to remain constant.
C. a decrease in all stock values.
D. dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value.
E. dividend-paying stocks to increase in price while non-dividend paying stocks remain constant in value.

A

C. a decrease in all stock values.

60
Q

Michael’s, Incorporated, just paid $2.60 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 5.6 percent. If you require a rate of return of 9.8 percent, how much are you willing to pay today to purchase one share of the company’s stock?

$32.69
$65.37
$28.02
$67.97
$17.83

A

$65.37

D0=$2.60
g=5.6%
R=9.8%

P0=2.6(1 + .056)/.098-.056

61
Q

Stoneheart Group is expected to pay a dividend of $2.93 next year. The company’s dividend growth rate is expected to be 4.3 percent indefinitely and investors require a return of 10.5 percent on the company’s stock. What is the stock price?

$49.29

$27.90

$42.53

$44.90

$47.26

A

$47.26

D1 = 2.93
g=.043
R=10.5

2.93/.105-.043

D1/R-g

62
Q

A stock is expected to maintain a constant dividend growth rate of 4.8 percent indefinitely. If the stock has a dividend yield of 6.1 percent, what is the required return on the stock?

10.2%

9.8%

10.3%

9%

10.9%

A

10.9%

g=4.8%
D1/P0 = 6.1%
R = D1/P0 + g

6.1% + 4.8%

63
Q

CDB stock is currently priced at $66. The company will pay a dividend of $4.01 next year and investors require a return of 10.1 percent on similar stocks. What is the dividend growth rate on this stock?

6.08%

3.82%

4.02%

3.76%

5.32%

A

4.02%

P0=66
D1 = 4.01
R = 10.1

g = 10.1% - $4.01/$66

64
Q
A

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