Download 103

Principles of Finance
Test 2
Dr. Jacqueline Agesa
1. The Bailey Brothers want to issue 20-year, zero coupon bonds that yield 9 percent. What price
should it charge for these bonds if the face value is $1,000?
a. $157.25
b. $163.70
c. $178.43
d. $194.49
e. $202.64
2. A corporate bond pays 8.5 percent interest. How much would a municipal bond have to pay to
be equivalent to this on an aftertax basis if you are in the 35 percent tax bracket?
a. 2.98 percent
b. 5.53 percent
c. 7.95 percent
d. 11.48 percent
e. 13.08 percent
3. Cannon Industrial Equipment is currently issuing both 15-year and 25-year bonds at
par. The bonds each pay 7 percent annual interest and have face values of $1,000. You decide to
purchase one of each of these bonds. Assume the yield to maturity on each of these bonds is 6.4
percent one year from now. Given this, you will realize _____ percent price appreciation on the
15-year bond and _____ percent price appreciation on the 25-year bond.
a. 5.44; 7.39
b. 5.44; 7.26
c. 5.68; 7.26
d. 5.68; 7.39
e. 5.90; 7.51
4. The bonds of Quality Manufacturing, Inc. have an 8 percent coupon and pay interest annually.
Currently, the bonds are quoted at 94.158. The bonds mature in 4 years. What is the yield to
maturity?
a. 9.80 percent
b. 9.84 percent
c. 10.36 percent
d. 10.75 percent
e. 11.35 percent
5. An 8 percent semiannual coupon bond is priced at $1,204.60. The bond has a $1,000 face
value and a yield to maturity of 4.88 percent. How many years will it be until this bond matures?
a. 8.00 years
b. 8.65 years
c. 15.91 years
d. 16.00 years
e. 17.29 years
6. Lambert, Inc. bonds have a face value of $1,000. The bonds carry a 9 percent coupon, pay
interest semiannually, and mature in 11 years. What is the current price of these bonds if the
yield to maturity is 8.79 percent?
a. $705.14
b. $710.36
c. $1,014.62
d. $1,020.15
e. $1,641.04
7. A 7 percent bond has a yield to maturity of 6.75 percent, 10 years to maturity, a face value of
$1,000, and semiannual interest payments. What is the amount of each coupon payment?
a. $33.75
b. $35.00
c. $50.00
d. $67.50
e. $70.00
8. Which one of the following is most apt to have the smallest liquidity premium?
a. Treasury bill
b. corporate bond issued by a young start-up firm
c. bond issued by the State of Florida
d. municipal bond issued by a rural city
e. corporate bond issued by General Electric (GE)
9. The Treasury yield curve is affected by which of the following?
I. interest rate risk premium
II. real rate
III. default risk premium
IV. inflation risk premium
a. I and II only
b. II and III only
c. I, III, and IV only
d. I, II, and IV only
e. I, II, III, and IV
10. If inflation is expected to increase in the future, the term structure of interest rates will most
likely be:
a. upward-sloping.
b. flat.
c. humped.
d. downward-sloping.
e. double-humped.
11. A bond dealer buys at the _____ price and sells at the _____ price.
a. clean; dirty
b. dirty; clean
c. bid; asked
d. asked; bid
e. asked; asked
12. A $1,000 face value bond quoted as 102.16 sells for _____ and a bond quoted as 99:08 sells
for _____.
a. $1020.16; $990.80
b. $1020.16; $992.50
c. $1,021.60; $992.50
d. $1,021.60; $990.80
e. $1025.00; $992.50
13. Municipal bonds:
a. are appealing to individuals with high marginal tax rates.
b. are considered risk-free.
c. are rarely callable.
d. generally have a higher coupon rate than comparable corporate bonds.
e. are issued only by incorporated cities.
14. The primary purpose of bond covenants is to protect the:
a. general public.
b. lender.
c. borrower.
d. bond issuer.
e. firm's employees.
15. A bond for which no specific property has been pledged as security is classified as a:
a. blanket mortgage bond.
b. trust deed bond.
c. registered bond.
d. debenture.
e. sinking fund bond.
16. Which one of the following bonds is the most sensitive to interest rate movements?
a. zero-coupon, 5 year
b. 7 percent annual coupon, 5 year
c. zero-coupon, 10 year
d. 5 percent semi-annual coupon, 10 year
e. 5 percent annual coupon, 10 year
17. Generally, bonds issued in the U.S. pay interest on a(n) _____ basis.
a. annual
b. semi-annual
c. quarterly
d. monthly
e. daily
18. Which one of the following statements is true?
a. The coupon rate of a par value bond will exceed the bond's current yield.
b. The yield to maturity on a premium bond exceeds the bond's coupon rate.
c. The current yield on a discount bond is equal to the bond's coupon rate.
d. A premium bond has a current yield that exceeds the bond's coupon rate.
e. A discount bond has a coupon rate that is less than the bond's yield to maturity.
19. The rate of return you earn on an investment before adjusting for inflation is called the _____
rate.
a. nominal
b. real
c. premium
d. coupon
e. discounted
20. Which one of the following represents the profit of a bond dealer?
a. market yield
b. bid price
c. bid-ask spread
d. current yield
e. bond premium
21. The call premium is the amount by which the:
a. market price exceeds the par value.
b. market price exceeds the call price.
c. face value exceeds the market price.
d. call price exceeds the par value.
e. call price exceeds the market price.
22. Amy found a bond lying in a street. She picked it up, detached the appropriate bond coupon,
and collected the current interest payment. Which type of bond did Amy find?
a. bearer
b. coupon
c. street
d. registered
e. secure
23. The written agreement between a corporation and its lender that spells out the terms of a
bond issue is called the:
a. indenture.
b. debenture.
c. private placement agreement.
d. registration statement.
e. issue paper.
24. Joanne's Jewelry has decided to offer new preferred stock for sale that it will call an 8-8
offering. This stock will pay an annual dividend of $8 a share starting 8 years from now. If your
required return is 8 percent, how much are you willing to pay for one share of this stock today?
a. $54.03
b. $58.35
c. $92.59
d. $96.16
e. $100.00
25. Happy Valley, Inc. stock is valued at $51.40 a share. The company pays a constant dividend
of $3.80. What is the required return on this stock?
a. 3.70 percent
b. 5.21 percent
c. 7.39 percent
d. 10.56 percent
e. 14.79 percent
26. Investors receive a total return of 15 percent on the common stock of Nickel and Dime, Inc.
The stock is selling for $28.25 a share. What is the growth rate of the firm if the company plans
to pay an annual dividend of $1.70 a share next year?
a. 4.24 percent
b. 8.98 percent
c. 11.80 percent
d. 13.19 percent
e. 16.62 percent
27. The Johnston Company will pay an annual dividend of $2.05 next year. The company has
increased its dividend by 3.5 percent a year for the past twenty years and expects to continue
doing so. What will a share of this stock be worth three years from now if the required return is
14 percent?
a. $20.21
b. $20.91
c. $21.65
d. $22.41
e. $22.79
28. The common stock of Bethel Baked Goods is valued at $8.76 a share. The company
increases its dividend by 1.5 percent annually and expects its next dividend to be $.65 per share.
What is the required rate of return on this stock?
a. 6.64 percent
b. 7.53 percent
c. 8.92 percent
d. 9.03 percent
e. 10.17 percent
29. Samson Enterprises increases its annual dividend by 2 percent each year. The common stock
has a market price of $36.20 a share on a required return of 13 percent. What is the amount of the
last dividend this company paid?
a. $3.83
b. $3.90
c. $3.98
d. $4.06
e. $4.14
30. The common stock of Ridgeway Properties will pay an annual dividend of $2.70 one year
from now. The company increases the dividends by 4 percent annually. Your required return on
this stock is 13 percent. Assume that you purchase the stock today and sell it five years from
now. What will be the dollar amount of your capital gain for those five years?
a. $3.75
b. $5.10
c. $6.50
d. $7.96
e. $8.90
31. The common stock of Carter & Sons is selling for $29 a share and has a 17 percent rate of
return. The growth rate of the dividends is 12 percent annually. What is the amount of the next
dividend?
a. $1.38
b. $1.45
c. $1.52
d. $4.25
e. $4.34
32. Presto's just paid an annual dividend of $1.25 per share. The firm has a policy whereby it
increases its dividend by 2 percent annually. Which one of the following is the correct
computation for the capital gains yield if the current stock price is $21 a share?
a. (.02 $1.25) / $21
b. $1.25 / $21
c. .02
d. .02 / $21
e. [$1.25 (1 + .02)] / $21
33. Rosie's just paid a dividend of $1 per share. The firm maintains a constant dividend policy
and distributes dividends on an annual basis. The firm is growing by 2.5 percent per year. What
is the anticipated dividend for year 3?
a. $1
b. $1 (1.025)1
c. $1 (1.025)2
d. $1 (1.025)3
e. $1 (1.025)4
34. An agent who buys and sells securities from inventory is called a:
a. floor trader.
b. dealer.
c. commission broker.
d. broker.
e. floor broker.
35. The market where one shareholder sells shares to another shareholder is called the _____
market.
a. primary
b. main
c. secondary
d. principal
e. dealer