Question 1

A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon paid at the end of each year. The current price of the bond is $932. What is the yield to maturity for this bond?

Accepted Answer

A)  5.05%. 
B)  8.58%. 
C)  10.15%. 
D)  11.92%. 
E)  6.48%.

Question 2

Define what is meant by interest rate risk. Assume you are the manager of a $100 million portfolio of corporate bonds and you believe interest rates will fall. What adjustments should you make to your portfolio based on your beliefs?

Accepted Answer

The answer of Define what is meant by interest rate...

Question 3

Which of the following values is closest to the amount that should be paid for a stock that will pay a dividend of $10 one year from now and $11 two years from now? The stock will be sold in 2 years for an estimated price of $120. The appropriate discount rate is 9%.

Accepted Answer

A)  $114. 
B)  $119. 
C)  $124. 
D)  $129. 
E)  $138.

Question 4

The newly issued bonds of the Cain Corp. offer a 6% coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:

Accepted Answer

A)  equal to 3%. 
B)  greater than 3% but less than 4%. 
C)  equal to 6%. 
D)  greater than 6% but less than 7%. 
E)  equal to 12%.

Question 5

The discount rate in equity valuation is composed entirely of:

Accepted Answer

A)  the dividends paid and the capital gains yield. 
B)  the dividend yield and the growth rate. 
C)  the dividends paid and the growth rate. 
D)  the capital gains earned and the growth rate. 
E)  the capital gains earned and the dividends paid.

Question 6

The closing price of a stock is quoted at 22.87, with a P/E of 26 and a net change of 1.42. Based on this information, which one of the following statements is correct?

Accepted Answer

A)  The closing price on the previous day was $1.42 higher than today's closing price. 
B)  A dealer will buy the stock at $22.87 and sell it at $26 a share. 
C)  The stock increased in value between yesterday's close and today's close by $.0142. 
D)  The earnings per share are equal to 1/26th of $22.87. 
E)  The earnings per share have increased by $1.42 this year.

Question 7

A level coupon bond:

Accepted Answer

A)  pays the same principal every period. 
B)  pays the same taxes every period. 
C)  is a zero-coupon annuity. 
D)  is an annuity over the life of the bond.

Question 8

Which of the following amounts is closest to what should be paid for Overland common stock? Overland has just paid a dividend of $2.25. These dividends are expected to grow at a rate of 5% in the foreseeable future. The risk of this company suggests that future cash flows should be discounted at a rate of 11%.

Accepted Answer

A)  $39.38 
B)  $37.50 
C)  $21.48 
D)  $20.45

Question 9

The term structure can be described as the:

Accepted Answer

A)  relationship of spot rates of interest and bond prices. 
B)  relationship of coupon rates and money rates. 
C)  relationship of spot rates of interest and maturity. 
D)  relationship of coupon rates and maturity.

Question 10

A 12-year, 5% coupon bond pays interest annually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield rises to 6% from the current yield of 4.5%?

Accepted Answer

A)  11.11% decrease 
B)  12.38% decrease 
C)  12.38% increase 
D)  14.13% decrease 
E)  14.13% increase

Question 11

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% per year. The company just paid its annual dividend in the amount of $1.00 per share. What is the current value of one share if the required rate of return is 9.25%?

Accepted Answer

A)  $35.63 
B)  $38.19 
C)  $41.05 
D)  $43.19 
E)  $45.81

Question 12

The liquidity preference hypothesis explains that the 2nd year forward rates are set higher than the expected spot rate over year two because:

Accepted Answer

A)  of a downward sloping yield curve. 
B)  of long term rates being greater than short term rates. 
C)  investors must be induced to buy the riskier two-year bond. 
D)  two year bonds are less risk than one year's bonds when rates are higher.

Question 13

Suppose that there are three zero coupon bonds with maturity date 1 year, 2 year and 3 year respectively. The current price of the 1 year, 2 year and 3 year bonds respectively are $826.45, $718.18 and $640.66 respectively. The yield to maturity of the first year bond is:

Accepted Answer

A)  21%. 
B)  18%. 
C)  12%. 
D)  11%.

Question 14

A stock you are interested in paid a dividend of $1 last month. The anticipated growth rate in dividends and earnings is 25% for the next 2 years before settling down to a constant 5% growth rate. The discount rate is 12%. Calculate the expected price of the stock.

Accepted Answer

A)  $15.38 
B)  $20.50 
C)  $21.05 
D)  $22.27 
E)  $26.14

Question 15

Which of the following amounts is closest to the value of a bond that pays $55 semiannually and has an effective semiannual interest rate of 5%? The face value is $1,000 and the bond matures in 3 years. There are exactly six months before the first interest payment.

Accepted Answer

A)  $1,014. 
B)  $1,055. 
C)  $888. 
D)  $1,025. 
E)  $1,000.

Question 16

The Felix Corp. projects to pay a dividend of $.75 next year and then have it grow at 12% for the following 3 years before growing at 8% indefinitely thereafter. The equity has a required return of 10% in the market. The price of the stock should be ___.

Accepted Answer

A)  $9.38 
B)  $17.05 
C)  $41.67 
D)  $59.80 
E)  $62.38

Question 17

Suppose that a bond that will mature in three years is now traded at $99.83. The annual coupon payment is $5.635. Its yield to maturity is

Accepted Answer

A)  3.42%. 
B)  5.10%. 
C)  5.69%. 
D)  7.20%.

Question 18

The P/E ratio is a multiple of earnings that investors pay for a stock. The P/E is __________ related to growth, __________ related to the discount rate, and __________ related to the stock's risk.

Accepted Answer

A)  positively; positively; negatively. 
B)  negatively; positively; positively. 
C)  positively; negatively; negatively. 
D)  negatively; negatively; positively.

Question 19

Weisbro and Sons common stock sells for $21 a share and pays an annual dividend that increases by 5% annually. The market rate of return on this stock is 9%. What is the amount of the last dividend paid by Weisbro and Sons?

Accepted Answer

A)  $.77 
B)  $.80 
C)  $.84 
D)  $.87 
E)  $.88

Question 20

Spot rates are the interest rates that prevail in the market from:

Accepted Answer

A)  the current period until the sale of the security. 
B)  time zero until the asset's maturity. 
C)  one period forward to maturity. 
D)  some unknown future period.

Exam 6: How to Value Bonds and Stocks