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Terms in this set (67)

Which of the following accounts pays the lowest interest rate? (Hint: Make sure to convert the rates such that they are comparable.)

Which of the following accounts pays the lowest interest rate? (Hint: Make sure to convert the rates such that they are comparable.)

one that pays 25.55% every two years

one that pays 1.00% per month

one that pays 6.11% every six months

one that pays 3.05% every three months

one that pays 12.32% per year
25.55 = (( 1 + 25.55% ) ^.5-1) = 12.05

12.32 = 12.32

3.05 = (( 1 + 3.05% ) ^4-1) = 12.77

6.11 = (( 1 + 6.11% ) ^2-1) = 12.59

1= (( 1 + 1% ) ^12-1) = 12.68

answer:
one that pays 25.55% every two years
An 18% APR with bimonthly compounding (i.e., compounding every two months) is equivalent to an EAR of ________.
If the compounding is bimonthly, then the compounding frequency is 6 times per year,

=(1+nominal rate)^nper-1

=(1+18%/6)^6-1

=19.41%
Which of the following is/are TRUE?

I. The EAR can never exceed the APR.
II. The APR can never exceed the EAR.
III. The APR and EAR can never be equal.
Only II. is true
A $35,000 new amortizing car loan is taken out with the terms 9.00% APR for 60 months. How much are monthly payments on this loan?
35,000 x .0075 ( 1 + .0075 ) ^60
----------------------------------
( 1 + .0075 ) ^60 -1

= $726.54
A construction company takes a loan of $1,531,000 to cover the cost of a new grader. If the interest rate is 8.50% APR, and payments are made monthly for five years, what is the interest portion and what is the principal portion of the first monthly payment?
interest $10,844.58; principal $20,566.23
A Xerox DocuColor photocopier costing $48,200 is paid off in 60 monthly installments at 8.40% APR. After three years the company wishes to sell the photocopier. What is the minimum price for which they can sell the copier so that they can cover the cost of the balance remaining on the loan?
$21,726

r = APR / time
r = .084 / 12 = .007

48200
--------------
1 ( 1- 1
----- X. -----
.007 ( 1 + .007 ) ^60

= 986.58

Find remaining balance after 3 years
986.58*((1-(1/(1.007^24)))/0.007) $0.007

= 21,726
In​ 2007, interest rates were about​ 4.4% and inflation was about​ 2.9%. What was the real interest rate in ​2007, approximately?
Real interest rate = Interest rates - Inflation = 4.4% - 2.9% = 1.5%
In an effort to maintain price stability, it is expected that the European Central Bank will raise interest rates in the future. Which of the following is the most likely effect of such an action on short-term and long-term interest rates in Europe?

No relative change in short- and long-term interest rates could be predicted.

Long-term interest rates will be about the same as short-term interest rates.

The yield curve is expected to become inverted.

Long-term interest rates will tend to be higher than short-term interest rates.

Both long- and short-term interest rates would be expected to fall sharply.
Long-term interest rates will tend to be higher than short-term interest rates.
Jolana is asked to invest $5000 in a friend's business with the promise that the friend will repay $5800 in one year. Jolana finds her best alternative to this investment, with similar risk, is one that will pay her $5500 in one year for an investment of $5000 today. U.S. Treasury securities of similar term offer a rate of return of 2%. What is the opportunity cost of capital in this case?
16%
10%
2%
12%
8%
...
Effective annual rate is used as --- in time money calculations
discount rate (r)
Which of the following statements regarding bonds and their terms is FALSE?

Annual coupon is determined by the coupon rate and the face value.

By convention, the coupon rate is expressed as an effective annual rate.

The time remaining until the repayment date is known as the term of the bond.

Bonds are securities sold by governments and corporations to raise money from investors today in exchange for a promised future payment.

Bonds typically make two types of payments to their holders.
By convention, the coupon rate is expressed as an effective annual rate.
A risk-free, zero-coupon bond with a face value of $10,000 has 12 years to maturity. If the YTM is 5.46%, which of the following would be closest to the price this bond will trade at?

$5762
$5284
$4116
$4939
$6584
$5284
An investor holds a Ford bond with a face value of $5000, a coupon rate of 6.5%, and semiannual payments that matures on January 15, 2029. How much will the investor receive on January 15, 2029?
$5000.00
$5325.00
$5162.50
$5016.25
$2581.25
Maturity date = January 15, 2029
On maturity, Bondholders receive face value plus coupon payment.

As the coupon is semi-annual payment, each coupon amount is 5000 * 0.065 / 2

Amount received at maturity = 5000 + 5000 * 0.065 / 2 = $5,162.5
What is the yield to maturity of a(n) eight-year, $5,000 bond with a 4.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $4,723.70?
2.632%
5.255%
6.319%
5.264%
2.628%
5.255%
What must be the price of a $10,000 bond with a 6.2% coupon rate, semiannual coupons, and five years to maturity if it has a yield to maturity of 10% APR?
$8,485.27
$8,559.50
$10,620.00
$8,532.87
$9,187.22
Nper = 5*2 = 10 (indicates the period over which interest payments are made)

PMT = 10000 .063% 1/2 = 315 (indicates the amount of interest payment)

PV = ? (indicates the current price)
FV = 10000 (indicates the future/face value)
Rate = 10%/2 = 5% (indicates the rate of interest)
Which of the following bonds is trading at a premium?

a ten-year bond with a $1,000 face value whose yield to maturity is 6.0% and coupon rate is 5.9% APR paid semiannually

a two-year bond with a $50,000 face value whose yield to maturity is 5.2% and coupon rate is 5.2% APR paid annually

a 15-year bond with a $10,000 face value whose yield to maturity is 8.0% and coupon rate is 7.8% APR paid semiannually

a five-year bond with a $5,000 face value whose yield to maturity is 5.0% and coupon rate is 5.2% APR paid semiannually

a seven-year zero coupon bond whose yield to maturity is 9.0% and the face value is $5,000
a five-year bond with a $5,000 face value whose yield to maturity is 5.0% and coupon rate is 5.2% APR paid semiannually
A newly issued, ten-year, zero-coupon bond with a yield to maturity of 3.80% has a face value of $1000. An investor purchases the bond when it is initially traded, and then sells it four years later. What is the annual rate of return of this investment, assuming the yield to maturity does not change?
4.0%
3.2%
3.8%
2.4%
2.8%
3.8%
Which of the following bonds will be most sensitive to a change in interest rates if all bonds have the same initial yield to maturity?

a 15-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually

a 15-year bond with a $1,000 face value whose coupon rate is 7.4% APR paid semiannually

a 15-year bond with a $1,000 face value whose coupon rate is 8.7% APR paid semiannually

a 30-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually

a 30-year bond with a $1,000 face value whose coupon rate is 7.4% APR paid semiannually

a 30-year bond with a $1,000 face value whose coupon rate is 8.7% APR paid semiannually
a 30-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually
A firm issues 5-year bonds with a coupon rate of 4.7%, paid semiannually. The credit spread for this firm's 5-year debt is 1.5%. New 5-year Treasury notes are being issued at par with a coupon rate of 5.1%. What should the price of the firm's outstanding 5-year bonds be if their face value is $1,000?

$1049.53
$920.19
$923.17
$938.25
$935.71
...
Assume a private corporation goes public in an IPO. Which of these is NOT an advantage of going public?

More information about stock value
Greater liquidity for company's shares
Greater need for regulatory reporting
Easier access to equity capital
Greater need for regulatory reporting
How is preferred stock similar to​ bonds?

Preferred stockholders expect to receive a stated value at maturity (much like bondholders do).

Investors can sue the firm if preferred dividend payments are not paid​ (much like bondholders can sue for nonpayment of interest​ payments).

Dividend payments to preferred shareholders​ (much like bond interest payments to​ bondholders) are tax deductible.

Preferred stock is not like bonds in any way.

Preferred stockholders receive a dividend payment​ (much like interest payments to​ bondholders) that is usually fixed.
Preferred stockholders receive a dividend payment​ (much like interest payments to​ bondholders) that is usually fixed.
You placed an order to purchase stock where you specified the maximum price you were willing to pay. This type of order is known as a ________.
ceiling order
limit order
market order
short order
maximum order
floor order
limit order
A stock is bought for $22.00 and sold for $26.00 one year later, immediately after it has paid a dividend of $1.80. What is the capital gain rate for this transaction?
6.92%
26.36%
15.38%
12.33%
8.18%
18.18%
(1) Capital gain rate = (P1 - P0) / P0(26 - 22) / 22 = 4 / 22 = 0.18181818Capital gain rate = 18.18%
Which of the following is NOT a way that a firm can increase its dividend?

by decreasing its shares outstanding
by increasing its retention rate
by increasing its dividend payout rate
by increasing its earnings (net income)
by increasing its retention rate
Von Bora Corporation (VBC) is expected to pay a $2.00 dividend at the end of this year. If you expect VBC's dividend to grow by 6% per year forever and VBC's equity cost of capital to be 12%, then the value of a share of VBC stock is closest to ________.
$27.5
$35.3
$39.7
$37.4
$33.3
$42.2
solution :
Value of share = expected dividend/(cost of equity - growth)

2/(0.12 - 0.06)

33.3
Spacefood Products has just paid a dividend of $2.50 per share. It is expected that this dividend will grow by 5.5% per year each year in the future. What will be the current value of a single share of Spacefood's stock if the firm's equity cost of capital is 12.5%?
37.7
JRN Enterprises just announced that it plans to cut its next year's dividend from $3.00 to $2.50 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow indefinitely at 4% per year and JRN's stock was trading at $27.60 per share. With the new expansion, JRN's dividends are expected to grow at 6% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to ________.
Required return=(D1/Current price)+Growth rate
=(3/27.6)+0.04
=14.8695652%
Hence to compute value of share after the announcement:
Value of share=Dividend for next period/(Required return-Growth rate)
=2.5/(0.148695652-0.06)
=2.5/0.088695652
=$28.2 (Approx)
Jumbo Transport, an air-cargo company, expects to have earnings per share of $2.00 in the coming year. It decides to retain 20% of these earnings in order to lease new aircraft. The return on this investment will be 15%. If its equity cost of capital is 12%, what is the expected share price of Jumbo Transport?
First step: Compute growth rate as follows:
Growth rate =return on investedcapital×retention
=15% ×20%
=3%
Thus, the growth rate is 3%.

$2.00 x ( 1 - 20%)
------------------
12% - 3%

= 17.78
Assume Target Corp just paid a dividend of $2.72 this past year. Also assume that Target dividend is expected to grow at 15% in the next four years. After that, the growth rate in dividends is expected to level off to a perpetual 6%. Finally, assume that the cost of equity for the stock of Target is estimated at 8%. Given these assumptions, what is the estimated value of the stock of Target? If the stock trades at $230 in the stock market, would you consider the stock undervalued or overvalued?
$252.20; overvalued
$237.86; undervalued
$252.20; undervalued
$198.09; undervalued
$237.86; overvalued
$198.09; overvalued
198.09 , overvalued
Which of the following is FALSE about the constant growth dividend discount model?

Future dividend growth rate is often difficult to predict.

The results from it are very sensitive to small changes in growth rate.

It cannot estimate the value of a stock when the growth rate in dividends is not constant.

It cannot estimate the value of a stock that pays no dividends.

It requires that the growth rate always be higher than the required rate of return, which is not realistic.
It requires that the growth rate always be higher than the required rate of return, which is not realistic.
Shore Services has 1.5 million shares outstanding. It expects earnings at the end of the year of $6.0 million. Shore pays out 60% of its earnings in total: 40% paid out as dividends and 20% used to repurchase shares. If Shore's earnings are expected to grow by 5% per year, these payout rates do not change, and Shore's equity cost of capital is 10%, what is Shore's share price?
...
The effective annual rate (ear) indicates
actual amount of interest earned in one year
T/F

the EAR (effective annual rate) can be used as a discount rate for annual cash flows
true
the actual interst rate per period =
the APR / number of compounding periods per year
T/F

APR can be used as a discount rate
false
T/F

for a given APR, the EAR increases with the compounding frequency
true
the outstanding balance of a loan is equal to
the present value of the loan cash flows
T/F

in each loan payment to an amotizing loan, you pay interest on the loan + some part of the loan balance
true
What type of rate is indicated by the rate of growth of the money invested
nominal rate
What type of rate is indicated by the rate of growth of ones purchasing power after adjusting for inflation
real rate
what type of interest rates tend to be high when inflation is high and low when inflation is low
nominal interest rates
Which of the following statements is FALSE about interest​ rates?

A.
The annual percentage rate indicates the amount of simple interest earned in one year.
B.
The effective annual rate indicates the amount of interest that will be earned at the end of one year.
C.
The annual percentage rate indicates the amount of interest including the effect of compounding.
D.
As interest rates may be quoted for different time​ intervals, it is often necessary to adjust the interest rate to a time period that matches that of cash flows.
C.
The annual percentage rate indicates the amount of interest including the effect of compounding.
Which of the following reasons for considering long−term loans inherently more risky than short−term loans is most​ accurate?

A.
The penalties for closing out a long term loan early make them unattractive to many investors.
B.
The loan values are very sensitive to changes in market interest rates.
C.
Long−term
loans typically have ongoing costs that accumulate over the life of the loan.
D.
There is a greater chance that inflation may fall in a longer time frame.
B.
The loan values are very sensitive to changes in market interest rates.
Given that the inflation rate in 2006 was about​ 3.24%, while a short−term municipal bond offered a rate of​ 2.9%, which of the following statements is​ correct?

A.
The purchasing power of investors in these bonds grew over the course of the year.
B.
The nominal interest rate offered by these bonds gave the true increase in purchasing power that resulted from investing in these bonds.
C.
The real interest rate for investors in these bonds was greater than the rate of inflation.
D.
Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year
D.
Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year
Which of the following situations would result in lowering of interest rates by the banking authority of a​ country?

A.
Inflation is rising rapidly.
B.
The level of investment is quite high.
C.
The economy is slowing down.
D.
The rate of savings is quite low.
C.
The economy is slowing down.
The coupon rate of a bond is expressed as an
APR
TF

zero coupon bonds make no coupon payments so investors only recieve the bonds face value
true
Which part of a bond is the discount rate that sets the present value of the promised bond payments equal to the current market price of the bond
yield to maturity
a bond will trade at a --- if its coupon rate exceeds it yield to maturity
premium
as a bond appraches maturity, the price if the bond approaches its
face value
T/F

long term zero coupon bonds are more sensitive to changed in interest rates than short term zero coupon bonds
true
when a bond issuer has not made a bond payment in full, the issuer has
defaulted
The US treasury is free of default risks
true
what summarizes the credit worthiness of bonds for investors
bond ratings
what compensates investors for the difference between promised and expected cash flows and for the risk of default
credit spead / default spread
If​ short-term and​ long-term interest rates​ increase, fixed-income bond prices typically

A.
remain unaffected.
B.
change in an unknown direction.
C.
also increase.
D.
decline.
decline
the most basic form of ownership, gives oweners rights to any common dividends and voting rights on major issues, in a company
the most basic form of ownership, gives oweners rights to any common dividends and voting rights on major issues, in a company
if a company has ---- then each shareholder has as many votes for each director as shares held
stright voting
if a company has ---- then each shareholders total vote allocation for all directors is equal to the number of open spots multiplied by their amount of shares
cumulative voting
a written authorization for someone to vote on your shares
proxy
if we define a fims dividend payout rate, then we are able to
write the firms dividend at date "t"
what are the 2 reasons that we cant use the dividend growth model to value to stock of a firm
1. frims often pay no dividends when they are young

2. their growth rate continues to change over time until they mature
ownership in a corperation is divided into
shares of stock
the --- states that the value of a stock = to the present value of the dividends and future sale price the investor will recieve
the valuation principle
the constant dividend growth model assumes that ---
dividends grow at a constant expected rate
Cutting a firm's dividend to increase investment will raise the firm's stock price only if and only if
the return on the new investments exceeds the firm's cost of capital.
the growth rate of a firms total payout is governed by
the growth rate of earnings
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