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Terms in this set (70)
The highest effective annual rate that can be derived from an annual percentage rate of 9% is computed as:
The annual percentage rate:
equals the effective annual rate when the interest on an account is designated as simple interest.
You borrow $199,000 to buy a house. The mortgage rate is 5.5 percent, compounded monthly. The loan period is 30 years, and payments are made monthly. If you pay for the house according to the loan agreement, how much total interest will you pay?
(find PMT*360) - 199000
A flow of unending and equal payments that occur at regular intervals of time is called a(n):
is actual rate a company is charging
but they report apr
A perpetuity differs from an annuity because:
perpetuity payments never cease.
The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.
You need some money today and the only friend you have that has any is your 'miserly' friend. He agrees to loan you the money you need, if you make payments of $20 a month for the next six months. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 1.5% interest per month. How much total interest does he expect to earn?
120 - (find PV)
You would be making a wise decision if you chose to:
accept the loan with the lower effective annual rate rather than the loan with the lower annual percentage rate.
An interest rate that is compounded monthly, but is expressed as if the rate were compounded annually, is called the _____ rate.
effective annual rate
The pawn shop adds 2 percent to loan balances for every two weeks a loan is outstanding. What is the effective annual rate they are charging?
EAR = (1 + .02)52 / 2 - 1 = .6734, or 67.34%
Wicker Imports established a trust fund that provides $147,300 in scholarships each year for needy students. The trust fund earns a 4.00 percent rate of return. How much money did the firm contribute to the fund assuming that only the interest income is distributed?
pv = 147300 / .04
A prestigious investment bank designed a new security that pays a quarterly dividend of $3.70 in perpetuity. The first dividend occurs one quarter from today.
What is the price of the security if the APR is 3.3 percent, compounded quarterly?
3.70 / (.033/4)
A bond is listed in a newspaper at a bid of 105.4844. This quote should be interpreted to mean:
you can sell that bond at a price equal to 105.4844 percent of face value.
The relationship between nominal rates, real rates, and inflation is known as the:
The stated interest payment, in dollars, made on a bond each period is called the bond's:
The annual interest paid by a bond divided by the bond?s face value is called the:
The term structure of interest rates reflects the:
pure time value of money.
If its yield to maturity is less than its coupon rate, a bond will sell at a _____, and increases in market interest rates will:
premium; decrease this premium.
Rosina purchased a 15-year bond at par value when it was initially issued. The bond has a coupon rate of 7 percent and matures 13 years from now. If the current market rate for this type and quality of bond is 7.5 percent, then Rosina should expect:
to realize a capital loss if she sold the bond at today?s market price.
Nathan is buying a $1,000 face value bond at a quoted price of 101.364. The bond carries a coupon rate of 7.75 percent, with interest paid semiannually. The next interest payment is two months from today. What is the dirty price of this bond?
Dirty price = 101.364% × $1,000 + (.0775 × $1,000 × 4/12) = $1,039.47
A newspaper listing of bond prices has an "Asked yield" column. This yield is based on the asked price and represents the:
yield to maturity.
The _____ premium is that portion of the bond yield that represents compensation for potential difficulties that might be encountered should the bond holder wish to sell the bond prior to maturity.
All else held constant, interest rate risk will increase when the time to maturity:
increases or the coupon rate decreases.
The relationship between nominal interest rates on default-free, pure discount securities and the time to maturity is called the:
term structure of interest rates.
A zero coupon bond:
has a market price that is computed using semiannual compounding of interest.
The principal amount of a bond that is repaid at the end of the loan term is called the bond's:
The dirty price of a bond is defined as the:
quoted price plus the accrued interest.
The interest paid on any municipal bond is:
exempt from federal income taxation and may or may not be exempt from state taxation.
The specified date on which the principal amount of a bond is repaid is called the bond's:
The interest rate for a tax-exempt bond that equates to the rate paid on a taxable bond is computed as:
Taxable rate × (1 - t *).
The yield to maturity: (at par)
equals both the current yield and the coupon rate for par value bonds.
Which one of these bonds is the most interest-rate sensitive?
5-year zero coupon bond
10-year zero coupon bond
5-year, 6 percent, annual coupon bond
10-year, 6 percent, semiannual coupon bond
10-year, 6 percent, annual coupon bond
10-year zero coupon bond
Which one of these combinations of bond ratings represents a crossover situation?
Aspens is preparing a bond offering with a coupon rate of 5.5 percent. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Which one of the following statements is correct?
The bonds will pay 19 interest payments and one principal payment.
The bonds will initially sell at a discount.
At maturity, the bonds will pay a final payment of $1,055.
The bonds will pay ten equal coupon payments.
At issuance, the bond?s yield to maturity is 5.5 percent.
At issuance, the bond?s yield to maturity is 5.5 percent.
The market price of a bond increases when the:
discount rate decreases
Casey just purchased a $1,000 face value bond at an invoice price of $1,288.16. The bond has a coupon rate of 6.2 percent, semiannual interest payments, and the next interest payment occurs one month from today. Of the amount paid for the bond, what was the dollar amount of the accrued interest?
Accrued interest = .062 × $1,000 × 5/12 = $25.83
All else constant, a coupon bond that is selling at a premium, must have:
a yield to maturity that is less than the coupon rate.
The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future loss in purchasing power.
Exactly three years ago, you purchased a $1,000 face value bond for $1,211.16. The coupon rate was 6.5 percent with interest paid semiannually. Today, you sold that bond for $1,089.54. What was your rate of return for the 3-year period, or holding period yield, on this investment?
Clean price = 99.486% ×$1,000 = $994.86
All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.
a discount; greater than
The differential growth model:
requires g to be less than the discount rate.
A limit order to buy:
guarantees the purchase price but not the order execution.
Which one of these statements is correct?
dealers buy at bid price
The Reading Co. has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 3 percent annually. The last dividend it paid (T = 0) was $.90 a share. What will the company's dividend be six years from now?
Div6 = $.90 ×1.036 = $1.07
Beaksley, Inc. is a very cyclical type of business which is reflected in its dividend policy. The firm pays a $2.00 a share dividend every other year with a payment being paid today. Five years from now, the company is repurchasing all of the outstanding shares at a price of $50 a share. What is the current value of one share at a discount rate of 12 percent?
P0 = $2 / 1.122 + $2 / 1.124 + $50 / 1.125 = $31.24
The constant dividend growth model:
can be used to compute a stock price at any point in time.
If a stock pays a constant annual dividend then the stock can be valued using the:
perpetuity present value formula.
Rudy's stock is currently valued at $28.40 a share. The firm had earnings per share of $1.86 last year and projects earnings of $2.09 a share for next year. What is the trailing twelve month price-earnings ratio?
stock price / earnings per share
Kurt's Interiors has annual revenue of $506,000 with costs of $369,400. Depreciation is $64,900 and the tax rate is 34 percent. The firm has debt outstanding with a market value of $240,000 along with 7,500 shares of stock that is valued at $87 a share. The firm has $51,200 of cash, all of which is needed to run the business. What is the firm's EV/EBITDA ratio?
EV/EBITDA = [$240,000 + (7,500 × $87) - (($51,200 - 51,200)] / ($506,000 - 369,400) = 6.53
The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield.
A stop order to sell at $46 will be executed:
as a market order once a trade occurs at a price of $46 or less.
Next year's annual dividend divided by the current stock price is called the:
Supplemental liquidity providers (SLPs):
do not operate on the floor of a stock exchange.
Enterprise value equals the:
combined market value of debt and equity minus excess cash.
What amount of a firm's cash should be included in the enterprise value?
only the amount needed to run the business
The total return on a stock is equal to the:
dividend yield plus the dividend growth rate.
The common stock of Fine China sells for $38.42 a share. The stock is expected to pay an annual dividend of $1.80 next year and increase that amount by 4 percent annually thereafter. What is the market rate of return on this stock?
rate of return = (dividend/current stock price) + g
A day order to sell at a limit of $32 will be:
cancelled at the end of the day if not executed.
One advantage of the EV/EBITDA ratio over the PE ratio is the:
lessened impact of leverage on the ratio.
The closing price of a stock is quoted at 32.08, with a P/E of 21 and a net change of .36. Based on this information, which one of the following statements is correct?
The current stock price is equivalent to 21 years of the firm?s current earnings per share.
Lester's has a return on equity of 11.6 percent, a profit margin of 6.2 percent, and a payout ratio of 35 percent. What is the firm's growth rate?
ROE*retention ratio = g
Assume you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect the:
market values of all stocks to decrease.
If the issuer of a stock receives the proceeds from a sale of that issuer's stock, then the sale:
was conducted in the primary market.
Which one of these stock valuation methods is used for a non-dividend paying firm that is experiencing accounting losses?
The underlying assumption of the dividend growth model is that a stock is worth:
the present value of the future income that the stock is expected to generate.
A stock's PE ratio is primarily affected by which three factors?
risk, opportunities, accounting practices
For a firm with a constant payout ratio, the dividend growth rate can be estimated as:
Return on retained earnings * Retention ratio.
Dexter's has a fixed dividend payout ratio of 40 percent, current net income of $5,200, total assets of $56,400, and total equity of $21,600. Given this information, what estimate would you use as the dividend growth rate if the last dividend paid was $.464 per share?
g = (1 - .40) × ($5,200 / $21,600) = .1444, or 14.44%
Which one of these applies to the dividend growth model of stock valuation?
The growth rate must be less than the discount rate.
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