Question 1

The yield to call is always higher than the yield to maturity for coupon bonds.

Accepted Answer

A) True 
 B)False

Question 2

A share of stock has a dividend of D0 = $5.The dividend is expected to grow at a 20 percent annual rate for the next 10 years, then at a 15 percent rate for 10 more years, and then at a long-run normal growth rate of 10 percent forever.If investors require a 10 percent return on this stock, what is its current price?

Accepted Answer

A)  $100.00 
B)  $82.35 
C)  $195.50 
D)  $212.62 
E)  The data given in the problem are internally inconsistent, i.e., the situation described is impossible in that no equilibrium price can be produced. 
A)  $100.00 
B)  $82.35 
C)  $195.50 
D)  $212.62 
E)  The data given in the problem are internally inconsistent, i.e., the situation described is impossible in that no equilibrium price can be produced.

Question 3

Which of the following statements is correct?

Accepted Answer

A)  Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond. 
B)  Other things held constant, a corporation would rather issue noncallable bonds than callable bonds. 
C)  Reinvestment rate risk is worse from a typical investor's standpoint than interest rate price risk. 
D)  If a 10-year, $1,000 par, zero coupon bond were issued at a price which gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium over its $1,000 par value. 
E)  If a 10-year, $1,000 par, zero coupon bond were issued at a price which gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a discount below its $1,000 par value. 
A)  Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond. 
B)  Other things held constant, a corporation would rather issue noncallable bonds than callable bonds. 
C)  Reinvestment rate risk is worse from a typical investor's standpoint than interest rate price risk. 
D)  If a 10-year, $1,000 par, zero coupon bond were issued at a price which gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium over its $1,000 par value. 
E)  If a 10-year, $1,000 par, zero coupon bond were issued at a price which gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a discount below its $1,000 par value.

Question 4

The current market price of Smith Corporation's 10 percent, 10-year bonds is $1,297.58.A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000.What is the YTM (stated on a simple, or annual, basis) if the bonds mature 10 years from today?

Accepted Answer

A)  8% 
B)  6% 
C)  4% 
D)  2% 
E)  1% 
A)  8% 
B)  6% 
C)  4% 
D)  2% 
E)  1%

Question 5

Regardless of the size of the coupon payment, the price of a bond moves in the opposite direction from interest rate movements.For example, if interest rates rise, bond prices fall.

Accepted Answer

A) True 
 B)False

Question 6

One of the basic relationships in interest rate theory is that, other things held constant, for a given change in the required rate of return, the ____ the time to maturity, the ____ the change in price.

Accepted Answer

A)  longer; smaller 
B)  shorter; larger 
C)  longer; greater 
D)  shorter; smaller 
E)  Answers c and d are both correct. 
A)  longer; smaller 
B)  shorter; larger 
C)  longer; greater 
D)  shorter; smaller 
E)  Answers c and d are both correct.

Question 7

Which of the following statements is correct?

Accepted Answer

A)  If the market rate of interest associated with a bond is higher than the coupon rate of that bond, the bond will sell at a premium. 
B)  If the market rate of interest associated with a bond is lower than the coupon rate of that bond, the bond will sell at a discount. 
C)  If the market rate of interest associated with a bond is equal to the coupon rate of that bond, the bond will sell at par value. 
D)  None of the above are correct. 
E)  All of the above are correct. 
A)  If the market rate of interest associated with a bond is higher than the coupon rate of that bond, the bond will sell at a premium. 
B)  If the market rate of interest associated with a bond is lower than the coupon rate of that bond, the bond will sell at a discount. 
C)  If the market rate of interest associated with a bond is equal to the coupon rate of that bond, the bond will sell at par value. 
D)  None of the above are correct. 
E)  All of the above are correct.

Question 8

If interest rates remain below the coupon on a bond, the bond will sell at a premium right up through its maturity.The maturity value will include the bond's face value plus a maturity premium equal to the face value times the percentage of the bond's life during which it sold for a premium.

Accepted Answer

A) True 
 B)False

Question 9

The Satellite Building Company has fallen on hard times.Its management expects to pay no dividends for the next 2 years.However, the dividend for Year 3,   , will be $1.00 per share, and the dividend is expected to grow at a rate of 3 percent in Year 4, 6 percent in Year 5, and 10 percent in Year 6 and thereafter.If the required return for Satellite is 20 percent, what is the current equilibrium price of the stock?

Accepted Answer

A)  $0 
B)  $5.26 
C)  $6.34 
D)  $12.00 
E)  $13.09 
A)  $0 
B)  $5.26 
C)  $6.34 
D)  $12.00 
E)  $13.09

Question 10

Assuming g will remain constant, the dividend yield is a good measure of the required return on a common stock under which of the following circumstances?

Accepted Answer

A) g = 0. B) g > 0. C) g < 0. D) Under no circumstances. E) Answers a and b are both correct. A) g = 0. B) g > 0. C) g < 0. D) Under no circumstances. E) Answers a and b are both correct.

Question 11

According to the textbook model, under conditions of nonconstant growth, the discount rate utilized to find the present value of the expected cash flows will be the same for the initial growth period as for the normal growth period.

Accepted Answer

A) True 
 B)False

Question 12

The ____ yield is the annual dollar coupon interest paid on a bond divided by the bond's current market price.

Accepted Answer

A)  interest 
B)  coupon 
C)  capital gain 
D)  total 
A)  interest 
B)  coupon 
C)  capital gain 
D)  total

Question 13

A share of common stock has just paid a dividend of $2.00.If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?

Accepted Answer

A)  $57.50 
B)  $62.25 
C)  $71.86 
D)  $64.00 
E)  $44.92 
A)  $57.50 
B)  $62.25 
C)  $71.86 
D)  $64.00 
E)  $44.92

Question 14

If the required rate of return on a bond is greater than its coupon interest rate (and rd remains above the coupon rate), the market value of that bond will always be below its par value until the bond matures, at which time its market value will equal its par value.(Accrued interest between interest payment dates should not be considered when answering this question.)

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is correct?

Accepted Answer

A)  Bond prices and interest rates move in the same direction, i.e., if interest rates rise, so will bond prices. 
B)  The market price of a discount bond will approach the bond's par value as the maturity date approaches.Barring changes in the probability of default, there is no way the value of the bond can fail to increase each year as the time to maturity approaches. 
C)  The "current yield" on a noncallable discount bond will normally exceed the bond's yield to maturity. 
D)  The "current yield" on a noncallable discount bond will normally exceed the bond's coupon interest rate. 
A)  Bond prices and interest rates move in the same direction, i.e., if interest rates rise, so will bond prices. 
B)  The market price of a discount bond will approach the bond's par value as the maturity date approaches.Barring changes in the probability of default, there is no way the value of the bond can fail to increase each year as the time to maturity approaches. 
C)  The "current yield" on a noncallable discount bond will normally exceed the bond's yield to maturity. 
D)  The "current yield" on a noncallable discount bond will normally exceed the bond's coupon interest rate.

Question 16

A two-year zero-coupon Treasury bond with a maturity value of $1,000 has a price of $873.4387.A one-year zero-coupon Treasury bond with a maturity value of $1,000 has a price of $938.9671.If the pure expectations theory is correct, for what price should one-year zero-coupon Treasury bonds sell one year from now?

Accepted Answer

A)  $798.89 
B)  $824.66 
C)  $852.28 
D)  $930.23 
E)  $989.11 
A)  $798.89 
B)  $824.66 
C)  $852.28 
D)  $930.23 
E)  $989.11

Question 17

Which of the following statements is correct?

Accepted Answer

A)  Rising inflation makes the actual yield to maturity on a bond greater than the quoted yield to maturity which is based on market prices. 
B)  The yield to maturity for a coupon bond that sells at its par value consists entirely of an interest yield; it has a zero expected capital gains yield. 
C)  On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss. 
D)  The market value of a bond will always approach its par value as its maturity date approaches.This holds true even if the firm enters bankruptcy. 
E)  All of the above statements are false. 
A)  Rising inflation makes the actual yield to maturity on a bond greater than the quoted yield to maturity which is based on market prices. 
B)  The yield to maturity for a coupon bond that sells at its par value consists entirely of an interest yield; it has a zero expected capital gains yield. 
C)  On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss. 
D)  The market value of a bond will always approach its par value as its maturity date approaches.This holds true even if the firm enters bankruptcy. 
E)  All of the above statements are false.

Question 18

The constant growth model used for evaluating the price of a share of common stock can also be used to find the price of perpetual preferred stock or any other perpetuity.

Accepted Answer

A) True 
 B)False

Question 19

The coupon rate and the required rate for a specific issue of bonds, such as IBM's 7% bonds that were issued in 2011, both vary over time as economic factors change.

Accepted Answer

A) True 
 B)False

Question 20

The last dividend paid by Klein Company was $1.00.Klein's growth rate is expected to be a constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10 percent forever.Klein's required rate of return on equity (rs) is 12 percent.What is the current price of Klein's common stock?

Accepted Answer

A)  $21.00 
B)  $33.33 
C)  $42.25 
D)  $50.16 
E)  $58.75 
A)  $21.00 
B)  $33.33 
C)  $42.25 
D)  $50.16 
E)  $58.75

The yield to call is always higher than the yield to maturity for coupon bonds.

Which of the following statements is correct?

The current market price of Smith Corporation's 10 percent, 10-year bonds is $1,297.58.A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000.What is the YTM (stated on a simple, or annual, basis) if the bonds mature 10 years from today?

Regardless of the size of the coupon payment, the price of a bond moves in the opposite direction from interest rate movements.For example, if interest rates rise, bond prices fall.

One of the basic relationships in interest rate theory is that, other things held constant, for a given change in the required rate of return, the the time to maturity, the the change in price.

Which of the following statements is correct?

If interest rates remain below the coupon on a bond, the bond will sell at a premium right up through its maturity.The maturity value will include the bond's face value plus a maturity premium equal to the face value times the percentage of the bond's life during which it sold for a premium.

Assuming g will remain constant, the dividend yield is a good measure of the required return on a common stock under which of the following circumstances?

According to the textbook model, under conditions of nonconstant growth, the discount rate utilized to find the present value of the expected cash flows will be the same for the initial growth period as for the normal growth period.

The ____ yield is the annual dollar coupon interest paid on a bond divided by the bond's current market price.

A share of common stock has just paid a dividend of $2.00.If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?

Which of the following statements is correct?

Which of the following statements is correct?

The constant growth model used for evaluating the price of a share of common stock can also be used to find the price of perpetual preferred stock or any other perpetuity.

The coupon rate and the required rate for a specific issue of bonds, such as IBM's 7% bonds that were issued in 2011, both vary over time as economic factors change.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment Concepts

Security Valuation and Selection

Filters

Exam 10: Valuation Concepts

The yield to call is always higher than the yield to maturity for coupon bonds.

Which of the following statements is correct?

The current market price of Smith Corporation's 10 percent, 10-year bonds is $1,297.58.A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000.What is the YTM (stated on a simple, or annual, basis) if the bonds mature 10 years from today?

Regardless of the size of the coupon payment, the price of a bond moves in the opposite direction from interest rate movements.For example, if interest rates rise, bond prices fall.

One of the basic relationships in interest rate theory is that, other things held constant, for a given change in the required rate of return, the ____ the time to maturity, the ____ the change in price.

Which of the following statements is correct?

If interest rates remain below the coupon on a bond, the bond will sell at a premium right up through its maturity.The maturity value will include the bond's face value plus a maturity premium equal to the face value times the percentage of the bond's life during which it sold for a premium.

Assuming g will remain constant, the dividend yield is a good measure of the required return on a common stock under which of the following circumstances?

According to the textbook model, under conditions of nonconstant growth, the discount rate utilized to find the present value of the expected cash flows will be the same for the initial growth period as for the normal growth period.

The ____ yield is the annual dollar coupon interest paid on a bond divided by the bond's current market price.

A share of common stock has just paid a dividend of $2.00.If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?

Which of the following statements is correct?

Which of the following statements is correct?

The constant growth model used for evaluating the price of a share of common stock can also be used to find the price of perpetual preferred stock or any other perpetuity.

The coupon rate and the required rate for a specific issue of bonds, such as IBM's 7% bonds that were issued in 2011, both vary over time as economic factors change.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment Concepts

Security Valuation and Selection

Filters

One of the basic relationships in interest rate theory is that, other things held constant, for a given change in the required rate of return, the the time to maturity, the the change in price.