Question 1

You own a bond that has a 7% coupon and matures in 12 years.You purchased this bond at par value when it was originally issued.If the current market rate for this type and quality of bond is 7.5%,then you would expect:

Accepted Answer

A) the bond issuer to increase the amount of each interest payment on these bonds. 
B) the yield to maturity to remain constant due to the fixed coupon rate. 
C) to realize a capital loss if you sold the bond at the market price today. 
D) today's market price to exceed the face value of the bond. 
E) the current yield today to be less than 7%.

Question 2

The constant dividend growth model is:

Accepted Answer

A) generally used in practice because most shares have a constant growth rate. 
B) generally used in practice because the historical growth rate of most shares is constant. 
C) generally not used in practice because most shares grow at a non constant rate. 
D) generally not used in practice because the constant growth rate is usually higher than the required rate of return. 
E) based on the assumption the FTSE 100 represents a good estimate of the market index.

Question 3

An equity listing contains the following information: P/E 17.5,closing price 33.10,dividend .80,YTD% chg 3.4,and net chg -.50.Which of the following statements are correct given this information?
I.The share price has increased by 3.4% during the current year.
II.The closing price on the previous trading day was €32.60.
III.The earnings per share are approximately €1.89.
IV.The current yield is 17.5%.

Accepted Answer

A) I and II only. 
B) I and III only. 
C) II and III only. 
D) III and IV only. 
E) I,III,and IV only.

Question 4

Explain whether it is easier to find the required return on a publicly traded share or a publicly traded bond,and explain why.

Accepted Answer

The answer of Explain whether it is easier to find...

Question 5

High Noon Sun has a 5%,semiannual coupon bond with a current market price of €988.52.The bond has a par value of €1,000 and a yield to maturity of 5.29%.How many years is it until this bond matures?

Accepted Answer

A) 4.0 years 
B) 4.5 years 
C) 6.5 years 
D) 8.0 years 
E) 9.0 years

Question 6

Payments made by a corporation to its shareholders,in the form of either cash,shares or payments in kind,are called:

Accepted Answer

A) retained earnings. 
B) net income. 
C) dividends. 
D) redistributions. 
E) infused equity.

Question 7

The Reading Co.has adopted a policy of increasing the annual dividend on its ordinary equity at a constant rate of 3% annually.The last dividend it paid was €0.90 a share.What will the company's dividend be in six years?

Accepted Answer

A) €0.90 
B) €0.93 
C) €1.04 
D) €1.07 
E) €1.11

Question 8

Last week,Railway Cabooses paid its annual dividend of €1.20 per share.The company has been reducing the dividends by 10% each year.How much are you willing to pay to purchase share in this company if your required rate of return is 14%?

Accepted Answer

A) €4.50 
B) €7.71 
C) €10.80 
D) €15.60 
E) €27.00

Question 9

If its yield to maturity is less than its coupon rate,a bond will sell at a _____,and increases in market interest rates will _____.

Accepted Answer

A) discount; decrease this discount. 
B) discount; increase this discount. 
C) premium; decrease this premium. 
D) premium; increase this premium. 
E) None of the above.

Question 10

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) €888 
B) €1,000 
C) €1,014 
D) €1,025 
E) €1,055

Question 11

Nu-Tek,Inc.is expecting a period of intense growth and has decided to retain more of its earnings to help finance that growth.As a result it is going to reduce its annual dividend by 10% a year for the next three years.After that,it will maintain a constant dividend of €.70 a share.Last month,the company paid €1.80 per share.What is the value of this equity if the required rate of return is 13%?

Accepted Answer

A) €6.79 
B) €7.22 
C) €8.22 
D) €8.87 
E) €9.01

Question 12

Your firm offers a 10-year,zero coupon bond.The yield to maturity is 8.8%.What is the current market price of a €1,000 face value bond?

Accepted Answer

A) €430.24 
B) €473.26 
C) €835.56 
D) €919.12 
E) €1,088.00

Question 13

A share you are interested in paid a dividend of €1 last week.The anticipated growth rate in dividends and earnings is 20% for the next year and 10% the year after that before settling down to a constant 5% growth rate.The discount rate is 12%.Calculate the expected price of the share.

Accepted Answer

A) €17.20 
B) €17.90 
C) €18.20 
D) €19.40 
E) €19.75

Question 14

The rate at which a share price is expected to appreciate (or depreciate)is called the _____ yield.

Accepted Answer

A) current 
B) total 
C) dividend 
D) capital gains 
E) earnings

Question 15

The Double Dip Co.is expecting its ice cream sales to decline due to the increased interest in healthy eating.Thus,the company has announced that it will be reducing its annual dividend by 5% a year for the next two years.After that,it will maintain a constant dividend of €1 a share.Two weeks ago,the company paid a dividend of €1.40 per share.What is this equity worth if you require a 9% rate of return?

Accepted Answer

A) €10.86 
B) €11.11 
C) €11.64 
D) €12.98 
E) €14.23

Question 16

Gugenheim offers a 7% coupon bond with annual payments.The yield to maturity is 5.85% and the maturity date is 9 years.What is the market price of a €1,000 face value bond?

Accepted Answer

A) €742.66 
B) €868.67 
C) €869.67 
D) €1,078.73 
E) €1,079.59

Question 17

If a company paid a dividend of €0.40 last month and it is expected to grow at 7% for the next 6 years and then grow at 4% thereafter,the dividend expected in year 8 is ___.

Accepted Answer

A) €0.63 
B) €0.65 
C) €0.68 
D) €0.69 
E) €0.74

Question 18

Ted NV offers a zero coupon bond with an 11.3% yield to maturity.The bond matures in 16 years.What is the current price of a €1,000 face value bond?

Accepted Answer

A) €178.78 
B) €180.33 
C) €188.36 
D) €190.09 
E) €192.18

Question 19

The underlying assumption of the dividend growth model is that a share is worth:

Accepted Answer

A) the same amount to every investor regardless of their desired rate of return. 
B) the present value of the future income which the share generates. 
C) an amount computed as the next annual dividend divided by the market rate of return. 
D) the same amount as any other share that pays the same current dividend and has the same required rate of return. 
E) an amount computed as the next annual dividend divided by the required rate of return.

Question 20

Given the opportunity to invest in one of the three bonds listed below,which would you purchase?
 Assume an interest rate of 7%.
 $\begin{array}{|l|l|l|l|}
\hline \text { Bond } & \text { Face Value } & \text { Armual Coupon Rate } & \text { Maturity Price } \
\hline \text { A } & € 1,000 & 4 \% & 1 \text { year } € 990 \
\hline \text { B } & € 1,000 & 7.5 \% & 17 \text { years } € 990 \
\hline C& € 1,000 & 8.5 \% & 25 \text { years } € 990\
\hline
\end{array}$ C.If funds remain,one may purchase Bond C also since both Bonds B and C are underpriced.

Accepted Answer

The answer of Given the opportunity to invest in one...

Exam 5: How to Value Bonds and Shares