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buskin 3222 3
Terms in this set (70)
$1,000 par value zero-coupon bonds (ignore liquidity premiums, The expected 1-year interest rate 1 year from now should be about _________.
1,000 par value zero-coupon bonds (ignore liquidity premiums),One year from now bond C should sell for ________ (to the nearest dollar).
onsider the following $1,000 par value zero-coupon bonds:The expected 1-year interest rate 3 years from now should be _________.
A discount bond that pays interest semiannually will:
I. Have a lower price than an equivalent annual payment bond II. Have a higher EAR than an equivalent annual payment bond III. Sell for less than its conversion value
I and II only
You buy a 10-year $1,000 par value zero-coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket, you will owe taxes on this investment after the first year equal to _______.
Floating-rate bonds have a __________ that is adjusted with current market interest rates.
C. coupon rate
TIPS offer investors inflation protection by ______________ by the inflation rate each year.
C. increasing both the par value and the coupon payment
To earn a high rating from the bond rating agencies, a company would want to have:
I. A low times-interest-earned ratio II. A low debt-to-equity ratio
III. A high quick ratio
II and III only
_________ are examples of synthetically created zero-coupon bonds.
10. TIPS are an example of _______________.
C. indexed bonds
11. The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________.
D. junk bonds
Which one of the following statements is correct?
B. Invoice price = Flat price + Accrued interest
Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years?
D. Sinking fund
Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity.
A. lower than
Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called _____
B. horizon analysis
A bond's price volatility _________ at _________ rate as maturity increases.
B. increases; a decreasing
Bond prices are _______ sensitive to changes in yield when the bond is selling at a _______ initial yield to maturity.
A. more; lower
An increase in a bond's yield to maturity results in a price decline that is ________ the price increase resulting from a decrease in yield of equal magnitude.
C. smaller than
A 20-year maturity bond pays interest of $90 once per year and has a face value of $1,000. Its yield to maturity is 10%. You expect that interest rates will decline over the upcoming year and that the yield to maturity on this bond will be only 8% a year from now. Using horizon analysis, the return you expect to earn by holding this bond over the upcoming year is _________.
When bonds sell above par, what is the relationship of price sensitivity to rising interest rates?
C. Price volatility decreases at a decreasing rate.
The duration of a 5-year zero-coupon bond is ____ years.
Where y = yield to maturity, the duration of a perpetuity would be _________.
1 + y)/y
A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be __________ if its yield is 9%.
Compute the modified duration of a 9% coupon, 3-year corporate bond with a yield to maturity of 12%.
Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to ____________.
D. the percentage of the total present value of the investment received in year t
26. ______________ is an important characteristic of the relationship between bond prices and yields.
Convexity implies that duration predictions:
I. Underestimate the percentage increase in bond price when the yield falls. II. Underestimate the percentage decrease in bond price when the yield rises. III. Overestimate the percentage increase in bond price when the yield falls. IV. Overestimate the percentage decrease in bond price when the yield rises.
C. I and IV only
Convexity of a bond is ___________.
B. the rate of change of the slope of the price-yield curve divided by the bond price
29. A bank has an average duration of its liabilities equal to 2 years. The bank's average duration of its assets is 3.5 years. The bank's market value of equity is at risk if _______________________.
C. interest rates rise
A forecast of bond returns based largely on a prediction of the yield curve at the end of the investment horizon is called a _________.
D. horizon analysis
All else equal, bond price volatility is greater for __________.
B. lower coupon rates
Target date immunization would primarily be of interest to _________.
C. pension funds
Bond portfolio immunization techniques balance ________ and ________ risk.
A. price; reinvestment
A top-down analysis of a firm's prospects starts with an analysis of the ____.
B. U.S. economy or even the global economy
Which one of the following stocks represents industries with below-average sensitivity to the state of the economy?
C. Food and beverage
The market value of all goods and services produced during a given time period is called ______.
Everything else equal, if you expect a larger interest rate increase than other market participants, you should _________
B. buy short-term bonds
Which of the following would not be considered a supply shock?
D. An increase in the level of government spending
In macroeconomic terms, an increase in the price of imported oil or a decrease in the availability of oil is an example of a _________.
B. supply shock
The ratio of the purchasing power of two economies is termed the _______.
B. real exchange rate
Pharmaceuticals, food, and other necessities would be good performers during the ____ stage of the business cycle.
Which of the following describes the percentage of the total labor force that has yet to find work?
The unemployment rate
Which of the following is the rate at which the general level of prices for goods and services is rising?
C. The inflation rate
An analyst starts by examining the broad economic environment and then considers the implications of the economy on the industry in which the firm operates. Finally, the firm's position within the industry is examined. This is called __________ analysis.
The goal of supply-side policies is to _______.
B. create an environment where workers and owners of capital have the maximum incentive
and ability to produce and develop goods
Characteristics 4 and 5 would indicate that the industry is in the _________ stage.
The supply of funds in the economy is controlled primarily by ________
A. the Federal Reserve System
Stalwarts are typically found in the _________ stage of the industry life cycle.
The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ___
The price-to-sales ratio is probably most useful for firms in which phase of the industry life cycle?
Which one of the following statements about market and book value is correct?
D. Most firms have a market-to-book ratio above 1, but not all.
Which one of the following is a common term for the market consensus value of the required return on a stock?
C. Market capitalization rate
Which one of the following is equal to the ratio of common shareholders' equity to common shares outstanding?
A. Book value per share
A firm cuts its dividend payout ratio. As a result, you know that the firm's _______.
B. earnings retention ratio will increase
__________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders.
B. Liquidation value per share
An underpriced stock provides an expected return that is ____________ the required return based on the capital asset pricing model (CAPM).
C. greater than
Stockholders of Dogs R Us Pet Supply expect a 12% rate of return on their stock. Management has consistently been generating an ROE of 15% over the last 5 years but now believes that ROE will be 12% for the next 5 years. Given this, the firm's optimal dividend payout ratio is now ______.
The constant-growth dividend discount model (DDM) can be used only when the ___________.
C. growth rate is less than the required return
Firm A is high-risk, and Firm B is low-risk. Everything else equal, which firm would you expect to have a higher P/E ratio?
C. Both would have the same P/E if they were in the same industry.
Firms with higher expected growth rates tend to have P/E ratios that are ___________ the P/E ratios of firms with lower expected growth rates.
A. higher than
In what industry are investors likely to use the dividend discount model and arrive at a price close to the observed market price?
Estimates of a stock's intrinsic value calculated with the free cash flow methodology depend most critically on _______.
the terminal value used
The greatest value to an analyst from calculating a stock's intrinsic value is _______.
C. how the process forces analysts to understand the critical variables that have the greatest
impact on value
Which of the following valuation measures is often used to compare firms that have no earnings?
D. Price-to-sales ratio
You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for 1 year. You expect to receive both $1.25 in dividends and $35 from the sale of the share at the end of the year. The maximum price you would pay for a share today is __________ if you wanted to earn a 12% return.
A firm that has an ROE of 12% is considering cutting its dividend payout. The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information, which of the following statements is (are) correct?
I. All else equal, the firm's growth rate will accelerate after the payout change. II. All else equal, the firm's stock price will go up after the payout change.
III. All else equal, the firm's P/E ratio will increase after the payout change.
A. I only
Eagle Brand Arrowheads has expected earnings of $1.25 per share and a market capitalization rate of 12%. Earnings are expected to grow at 5% per year indefinitely. The firm has a 40% plowback ratio. By how much does the firm's ROE exceed the market capitalization rate?
Grott and Perrin, Inc., has expected earnings of $3 per share for next year. The firm's ROE is 20%, and its earnings retention ratio is 70%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities?
Ace Ventura, Inc., has expected earnings of $5 per share for next year. The firm's ROE is 15%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 10%, what is the present value of its growth opportunities?
Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using the CAPM, an appropriate required return on Westsyde Tool Company's stock is _________.
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