Question 1

Suppose that a bond that will mature in two years has a face value of $1000 and 20% coupon rate. The one year spot market interest rate is 13% and the expected second period's forward rate is 12%. According to the expectation hypothesis, the two year spot rate is:

Accepted Answer

A)  11% 
B)  9% 
C)  12.49% 
D)  7%

Question 2

The average Japanese P/E ratio was reported as between 40 and 100 in recent years while the average U.S. P/E ratio was 25. The reason for the higher Japanese P/E ratio has been partially explained by:

Accepted Answer

A)  growth opportunities over stated earnings. 
B)  understated earnings and low interest rates. 
C)  overstated earnings and low interest rates. 
D)  understated earnings and overstated growth opportunities. 
E)  low interest rates and greater growth opportunities.

Question 3

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 4

A number of publicly traded firms pay no dividends yet investors are willing to buy shares in these firms. How is this possible? Does this violate our basic principle of stock valuation? Explain.

Accepted Answer

The answer of A number of publicly traded firms pay...

Question 5

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 6

The value of common stock today depends on:

Accepted Answer

A)  the expected future holding period and the discount rate. 
B)  the expected future dividends and the capital gains. 
C)  the expected future dividends, capital gains and the discount rate. 
D)  the expected future holding period and capital gains.

Question 7

A corporate bond with a face value of $1,000 matures in 4 years and has a 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 8

Zeta Corporation has issued a $1,000 face value zero-coupon bond. Which of the following values is closest to the correct price for the bond if the appropriate discount rate is 4% and the bond matures in 8 years?

Accepted Answer

A)  $968. 
B)  $731. 
C)  $1,000. 
D)  $25,000.

Exam 6: How to Value Bonds and Stocks