Fin 300 ch. 7&8

A company issued a 20yr, 7.25%, unsecured bonds at par. These bonds are what?

Debenture

The bond market requires a rate of 9.8% on 5 yr. bonds. What is the 9.8% referred as?

Yield Maturity

A bond that is payable to whomever has physical possession of that bond is said to be in...

Bearer Form

a note is defined as

unsecured bond with initial maturity in 10 yrs or less

a sinking fund is managed by a trustee for what?

early bond redemption

a bond that can be paid off early at issuers discretion is what kind of bond?

callable

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the

call Premium

The items included in an indenture that limit certain actions of the issuer in order to protect the bondholders interests are referred to as what?

Protective covenants

The bond is quoted at a price of $1011. This price is referred to as?

Clean Price

Real rates are defined as nominal rates that have been adjusted for what?

inflation

interest rates that include an inflation premium are referred to as what?

Nominal rates

The pure time value of money is known as the

Term structure of interest rates

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected

Default risk

A treasury yield curve plots treasury interest rates based on what

maturity

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity

Liquidity

The taxability risk premium compensates bondholders for which one of the following

A bonds unfavorable tax status

Which bond would you generally expect to have the highest yield

Long term taxable junk bond

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity

discount, less than

A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be

Greater than 7%

Callable bonds generally

Have a sinking fund provision

Protective covenants

Are primarily designed to protect bondholders

Bonds issued by the U.S. government:
a)Are considered to be free of interest rate risk.
b)Generally have higher coupons than comparable bonds issued by a corporation.
c)Are considered to be free of default risk.
d)Pay interest that is exempt from federal

c) Are considered to be free of default risk

U. S. Treasury bonds:
a) Are highly illiquid.
b) Are quoted as a percentage of par.
c) Are quoted at the dirty price.
d) Pay interest that is federally tax-exempt.
e) Must be held until maturity.

b) Are quoted as a percentage of par

Which one of the following statements is correct?
a) The risk-free rate represents the change in purchasing power.
b) Any return greater than the inflation rate represents the risk premium.
c) Historical real rates of return must be positive.
d) Nominal r

E) The real rate must be less than the nominal rate given a positive rate of inflation

Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, a par value of $1,000, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is the coupon rate?

Find PMT (on calculator) then divide that by 1000
120/1000=12%

You purchase a bond with an invoice price of $1,319. The bond has a coupon rate of 6.25 percent, a face value of $1,000, and there are two months to the next semiannual coupon date. What is the clean price of this bond?

take( .0625*1000) (1/2) (4/6) =20.83
1319-20.83=1298.17

The Fisher effect primarily emphasizes the effects of _____ on an investor's rate of return

Inflation

World Travel has 7 percent, semiannual, coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature?
a) 12.26 years
b) 12.53 years
c) 18.4

first find PMT= 1000*.07/2=35
I%=6.72/2=3.36
pv=-1023.46
fv=1000
find N=25.05/2=
e) 12.53 years

A Treasury bond is quoted at a price of 101.6533 with a current yield of 6.276 percent. What is the coupon rate on a $10,000 bond?

find the actual price of bond: 10,000*1.016533=10,165.33
find annual interest rate: .06276*10165.33=637.976
637.976/10,000=6.38

A 3.25 percent Treasury bond is quoted at a price of 101.16. The bond pays interest semiannually. What is the current yield?

3,25/101.16= 3.21

Sqeekers Co. issued 12-year bonds a year ago at a coupon rate of 7.8 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 6.1 percent, what is the current bond price?

n: 24
I= YTM 6.1/2=3.05
PMT: .078*1000=78/2=39
Pv? = 1143.18

An investment offers a total return of 14 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 8 percent. What will be the rate of inflation? not on Formula sheet

Formula: realrate= (1+nominal rate/1+inflation rate)-1
1.14/1.08=1+inflation rate
5.56%

You purchase a bond with a coupon rate of 6.9 percent and a clean price of $905.
If the next semiannual coupon payment is due in two months, what is the invoice price?

1000
6.9%/12
4=23
23+905=928

Metroplex Corporation will pay a $3.00 per share dividend next year. The company pledges to increase its dividend by 2.80 percent per year indefinitely.
Required:
If you require an 11.20 percent return on your investment, how much will you pay for the com

3/ (.1120-.028)=35.71

Suppose you know a company's stock currently sells for $50 per share and the required return on the stock is 9 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield.
Required:
If it'

.5*.09=.045
.045*50=2.25

Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.70 next year. The growth rate in dividends for all three companies is 4 percent. The required return for each company's stock is 8.90 percent, 11.90 percent, and 15.50 percent, respe

Red: 2.70/(.089-.04)=55.10
Yellow: 2.70/(.1190-.04)=34.18
Blue: 2.70/(.1550-.04)=23.48

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

Voting by proxy

Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities?

Preferred stock

An agent who maintains an inventory from which he or she buys and sells securities is called a

dealer

An agent who arranges a transaction between a buyer and a seller of equity securities is called a

broke

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?

over the counter

Which one of the following represents the capital gains yield as used in the dividend growth model
a)D1
b)D1 / P0
c)P0
d) g
e) g / P0

d)g

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation

Determining the amount of dividend paid per share

The current dividend yield on CJ's common stock is 1.89 percent. The company just paid a $1.23 annual dividend and announced plans to pay $1.27 next year. The dividend growth rate is expected to remain constant at the current level. What is the required r

.189+((1.27-1.23)/1.23)=5.14

The next dividend payment by Halestorm, Inc., will be $1.84 per share. The dividends are anticipated to maintain a growth rate of 5 percent forever. The stock currently sells for $36 per share.
What is the dividend yield and capital yield?

Dividend Yield:
1.84/36=5.11%
Capital= growth rate=5%

Moraine, Inc., has an issue of preferred stock outstanding that pays a $4.55 dividend every year in perpetuity. If this issue currently sells for $96 per share, what is the required return?

4.55/96=4.74%

YGTB, Inc., currently has an EPS of $1.00 and an earnings growth rate of 4 percent. If the benchmark PE ratio is 15, what is the target share price five years from now

15
1
(1+.04)^5=18.25

Marcel Co. is growing quickly. Dividends are expected to grow at a 23 percent rate for the next 3 years, with the growth rate falling off to a constant 6 percent thereafter.
Required:
If the required return is 12 percent and the company just paid a $3.40

p1= $3.40(1.23)^3(1.06) / (.12 - .06)=111.78
p0= $3.40(1.23) / 1.12 + $3.40(1.23)^2 / 1.12^2 + $3.40(1.23)^3 / 1.12^3 + $111.78 / 1.12^3+111.78/1.12^3
=91.90

Antiques R Us is a mature manufacturing firm. The company just paid a $12 dividend, but management expects to reduce the payout by 8 percent per year indefinitely.
Required :
If you require an 14 percent return on this stock, what will you pay for a share

12(1-.08)/{(.14-(-.08))}= 50.18

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called

voting by proxy

Emst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets

Primary

The secondary market is best defined by which one of the following

Market where outstanding shares of stock are resold.

Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issue

default risk

An indenture is

legal agreement between bondholders and the bond issuer

. The Zuffa Company has a semi-annual coupon bond outstanding. A decrease in the market interest rate will
have which one of the following effects on this bond, all else equal

increase in market

Which of the following statement is most FALSE:
a. Market expectations of interest rates affect shape of the yield curve.
b. Because interest rates tend to fall in response to an economic slowdown, an inverted yield curve
is often interpreted as a negativ

e. The yield curve tends to be sharply decreasing as the economy comes out of a recession and
interest rates are expected to rise.

A share of common stock has just paid a dividend of $3.00. If the expected long-run growth rate for this
stock is 5 percent, and if investors require an 11 percent return, what is the price of the stock?

3(1.05)/(.11-.05)= 52.5

The current dividend yield on Clayton's Metals common stock is 3.2 percent. The company just paid a $1.48
annual dividend and announced plans to pay $1.54 next year. The dividend growth rate is expected to remain
constant at the current level. What is the

(1.54-1.48)/1.48= .04054
.032+.04054=7.25%

Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual
interest payments of $40. If you require a 10 percent return on this investment, which of the following is
closest to the price you are willing to pay

n=40
I%=10/2
PMT=40
FV=1000
solve for PV
pv= 828= answer

. A bond with a coupon rate of 7% makes semiannual coupon payments on January 15 and July 15 of each
year. The quoted price for the bond on January 30 (i.e., 15 days after the last coupon payment) was
$1,001.875. What is the invoice price of the bond? (As

{1000
(.07/2)}
(15/182)=2.8846
2.8846+1001.875=1004.76

Meade Corporation bonds mature in 6 years and have a yield to maturity of 8.5 percent. The par value of the
bonds is $1,000. The bonds have a 10 percent coupon rate and pay interest on a semi-annual basis. What are
the current yield and capital gains yiel

step 1) find PV using TVM function
n:6*2
I%:8.5/2
PMT: .10/2*1000=50
PV: 1069.38
step 2) (.10*1000)/1069.38=9.35%=CY
step 3) .0935+CG=.085
CG=-.85%

. The outstanding bonds of Dark Tranquility, Inc. provide an annual real rate of return of 2.9 percent. Given the
current rate of inflation is 1.8 percent, what is the nominal rate of return on these bonds?

1+R= (1+.029)*(1+.018)
=4.75%

Wilton's Market just announced its next annual dividend will be $1.50 a share. It expects the dividends to grow
by 1.8 percent annually forever. How much will one share of this stock be worth five years from now if the
required return is 15.5 percent?

(1.50*1.018^5)/(.155-.018)
=11.97

The preferred stock of Into Eternity pays an annual dividend of $6.50 and sells for $42.19 a share. What is the
dividend yield?

6.5/42.19
=15.41

An investor with a 25 percent marginal tax rate is choosing to invest in either a corporate bond with a beforetax
annual yield of 7.3% or a municipal bond. What must be the annual rate of return that the municipal
bond offers to make the investor indiffer

.073*(1-.25)
=5,48

Amon Amarth Co. offers 10-year, 8 percent coupon bonds with semiannual payments and a yield to maturity
of 8.24 percent. What is the market price of a $1,000 face value bond?

n:20
I%: .0824/2=4.12
PMT:.08*1000/2=40
pv:?
pv=983.86

A firm has a current EPS of $2.54 and a benchmark price-earnings (PE) ratio of 16.4. Earnings are
expected to grow 3.8 percent annually. What is the expected stock price in one year based on the PE
ratio?

2.54
(1+.038)
16.4=43.24

The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $1,032. What is the yield to maturity

N:16
I%:?
PV: -1032
PMT: .07*1000/2=35
FV=1000
I%= 3.241*2=6.48

You bought a bond with an invoice (= dirty) price of $1,460. The bond has a coupon rate of 7.5%, and there is 1 month to the next semiannual coupon date. What is its quoted (= clean) price?

.075/2
1000
(5/6)=31.75
1460-31.25= 1428.75

The (annual) nominal interest rate is 6% and the (annual) inflation rate is 2.5%. Calculate the real interest rate using the precise Fisher Effect (Keep 6 decimal places).

1+nominal= (1+real)(1+inflation)
=3.41%

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 18 percent each year for the next 4 years and then decreasing the growth rate to 6 percent per year. The company just paid its a

p4= 3.2(1.18^4)(1.06)/(.087-.06)=243.56193
p0=3.2(1.18)/1.087+3.2(1.18^2)/1.087^2+3.2(1.18^3)/1.087^3+3.2(1.18^4)/1.087^4+243.56193/1.087^4=190.24

The common stock of Eddie's Engines, Inc. sells for $36.23 a share. The stock is expected to pay $2.20 per share next year. Eddie's has established a pattern of increasing their dividends by 4.3 percent annually and expects to continue doing so.
What is t

2.2/36.23=.06072
.06072+.043=10.37%

What is the formula for Current Yield

annual coupon/price

What is the formula for Yield to Maturity

current yield + capital gains

YGTB, Inc., currently has an EPS of $1.00 and an earnings growth rate of 4 percent. If the benchmark PE ratio is 15, what is the target share price five years from now?

$1(1+.04^5)=1.2167
15(1.2167)=18.25