Why do we say that money has a time value?
You can invest money that you have today and the longer you have it invested, the more it will be worth.
1,000 given to you next year is more valuable than 1,000 given to you today.
False
With simple interest, if I invest $100 for 3 years at 6% interest per year, how much will I have after 3 years?
In year 1 I would receive $6.00
In year 2 I would receive $6.00
In year 3 I would receive $6.00
$100 + $18 = $118.00
With compound interest, if I invest $100 for 3 years at 6% interest per year, how much will I have after 3 years?
Period 0 is today- we simply invest $100 at period 0.
Period 1- 6%*100= $6 so now we have $100 + $6 = $106
Period 2- 6% * $106 = 6.36 so now we have $106 + $6.36 = $112.36
Period 3 - 6% * $112.36= 6.74 so now we have $112.36 + $6.74 = $119.10
Which of the following is the formula for finding Future Value?
FV= PV*(1+i)^n
Which of the following is the formula for finding Present Value?
PV= FV/(1+i)^n
In both of our formulas, FV and PV, what does n stand for?
n= the number of periods
When you lend money, you have to pay interest?
False
What do we call the payment that you receive if you provide the loan or the payments you make if you borrow the loan?
The cash flows
We evaluate debt instruments by the amount and timing of the cash flows?
True
What do we call the amount of funds that the lender lends to the borrower?
Loan Principal
The interest rate that makes today's value equal to the present value of all future cash flows is called what?
Yield to maturity
The yield to maturity will always be represented as a dollar amount.
False
Suppose Sammy borrows $200 from you. He pays you back $215 in one year. What is the yield to maturity of this loan?
SECTION 2 SLIDE 9 (7.5 tho)
In a fixed payment loan, how many cash flows are there?
It depends on the length on the loan
In a fixed payment loan the payment is different every month.
False
In a fixed payment loan, the monthly payment includes both principal repayment and interest payments.
True
Which of the following are often structured as fixed payment loans?
Car loans, home loans, and student loans
Suppose you borrow $15,000 to buy a car. Your loan is for 10 years. It has an interest rate of 7.5%. Your monthly payments are $200. What is LV in this example?
LV= FP/(1+i) + FP/(1+i)^2 + FP/(1+i)^3 + ... + FP/(1+i)^n
LV= 200/(1+0.075) + 200/(1+0.075)^2 + 200/(1+0.075)^3...
11,250
Suppose you borrow $15,000 to buy a car. Your loan is for 10 years. It has an interest rate of 7.5%. Your monthly payments are $200. What is i in this example?
0.075
Suppose you borrow $15,000 to buy a car. Your loan is for 10 years. It has an interest rate of 7.5%. Your monthly payments are $200. What is n in this example?
10
Suppose you borrow $15,000 to buy a car. Your loan is for 10 years. It has an interest rate of 7.5%. Your monthly payments are $200. What is FP in this example?
200
Which of the following best describes how a coupon bond works?
The investor lends money to an entity and the borrower pays a fixed amount of interest each year then at maturity returns the face value to the lender.
Another term for face value is par value.
True
What do we call the amount of interest that a coupon bond pays?
Coupon rate
There is a secondary market for bonds
True
When interest rates increase the value of a coupon bond increase
False
What is the yield to maturity on a coupon bond that is bought for $1,000 and has coupon rate of 5%? The market interest rates are 6% and the bond is for 10 years. The bond has a par value $1,000?
QUIZ 4 COUPON BONDS IDK 5% X
What do we call a bond where the payment go on forever?
A perpetuity
When market interest rate decrease, the value of a coupon bond increase.
True
What can we use to estimate the yield to maturity of a coupon bond that has a long maturity and is sold at price near par?
Current yield
What is the current yield of a bond with a price of $980 and a face value of $1,000. the bond is for 10 year sand has a coupon rate of 5%?
QUIZ 4 COUPON BOND 5.1%
A discount bond has only one coupon payment.
False
Which of the following best describes how a discount bond works?
The lender buys the bond at price less than the face value. At maturity the face value is returned to the lender.
What is another name for a discount bond?
A zero coupon bond.
What is the YTM on a discount bond that cost $920 and has a face value of $1,000?
i= F-P/P
$1,000-$920/$920
= 0.086 or 8.7%
Many discount bonds have a maturity of 1 year or less.
True
What is included when we calculate the rate of return on a bond?
interest payments received and the difference the buy price and the sell price
If you buy a bond at one price and sell it at a lower price, this is considered a capital gain.
False
Current yield is calculated by taking one coupon payment and dividing it by the price paid for the bond.
True
When market interest rates increase, the value of a bond increases.
False
Suppose there are bonds that have a coupon grate of 8%. Market interest rates increase to 20$. The bonds have different years to maturity. Which of the following will have the lowest value or price?
The bond with 20 years until it matures.
Real" interest rates refers to what?
Inflation adjusted interest rates
Real interest rates cannot go below 0%
False
When inflation increase, your money loses buying power.
True
If you are concerned about reinvestment risk, you are worried that interest rates will increase.
False
If you are concerned about interest rate risk, you are worried that interest rates will increase.
True
If you are concerned with reinvestment risk, you should obtain long term bonds.
True
If you are concerned with interest risk, you should obtain long term bonds.
False
What is a tool that we have, that measures the impact of interest rate movements on a bond or a portfolio of bonds?
Duration
Suppose we have a bond portfolio with a duration of 5.23. The portfolio earns interest of 4.3%. Interest rates increase by 1/2%. What will the approximate change in my portfolio be?
-DUR*change in i/1+i
-5.23*.005-1.043
=-2.51
Home Depot bonds have a duration of 5.6. Lowe's bonds have a duration of 7.8.
Lowe's bonds have less interest rate risk than Home Depot bonds.
False
You borrow $8,000 to buy a new-to-you car. You pay back his loan over 5 years making equal payment s of $2,000 each year. What type of credit instrument is this?
Fixed payment loan
You borrow $100 from your friend. You pay them back $120 in one month. What type of credit instrument is this?
Simple loan
You buy a bond from Walmart for $1,000. Walmart pays you $40 a year for 10 years. After 10 year, at maturity of the bond, you receive the face value. What type of credit instrument is this?
Coupon bond
You buy a bond for $980. In 6 months when the bond matures, you receive the face value of $1,000. What type of credit instrument is this?
Discount bond
Suppose you invest $5,000 in a savings account that pays 2.7% interest. How much money will you have after 7 years?
FV= PV*(1+i)^n
FV=5,000(1.027)^7
FV=6,025.08
What is the present value of $12,000 to be paid in 3 years if the interest rate is 10%?
PV= FV/(1+i)^n
PV= 12,000/(1.10)^3
PV= 9,015.78
My friend Homer borrowed $5,000 from me 1 year ago. He has paid me back $5,350. What is the yield to maturity of this loan?
UNIT 5 SECTION 2 CHAPTER 3 Tyeps of Loans 7%
Suppose we have a coupon bond where the face value of the bond is $1,000 and the coupon rate is 6.5%. If the yield to maturity is 9.7%. Which of the following is true?
The price paid for the bond was <$1,000
What is the yield to maturity on a bond that has a price of $1,000 and pays $65 a year forever?
6.5% FIGURE IT OUT UNIT 5 SECTION2
What is the yield to maturity on a one-year discount bond with a face value of $1,000 for which we paid $977?
2.35
Money is traded in the money market.
False
Which of the following is NOT a characteristic of money market instruments?
High default risk
Reserve requirements create additional expense for banks that money markets do not have.
True
Which of the following is true about the money market?
It provides borrowers a low cost source of temporary funds
Which of the following entities participate in the money market?
U.S. Treasury department, Individuals, Pension funds, and Businesses
What type of debt instrument is a Treasury bill?
Discount bond
When you buy a Treasury bill, to whom are you loaning money?
The United States government
What is the maturity for a T-bill?
28 days to one year
A Treasury bill has only one coupon payment.
False
You pay $992.65 for a 28 day T-bill. It is worth $1,000 at maturity. What is its discount rate?
i(discount)= F-P/F * 360/n
=$1,000-$992.65/$1,000 *360/28
=0.0945 or 9.45%
You pay $992.65 for a 28-day T-bill. It is worth $1,000 at maturity. What is its annualized yield?
i (yt)= F-P/P * 365/n
=$1,000-$992.65/$992.65 *365/28
=0.0965 or 9.65%
T-bills are auctioned to dealers every Tuesday.
False it is Thursday
Regardless of their bid, all participants in their T-bill auction pay the same price.
True
Everyone is guaranteed to get their orders filled in the T-bill auction process
False
Which of the following is true about U.S. government debt?
The U.S. government has never defaulted in its debt
Which of the following statements best describes what Federal Funds are?
Short term loans between two financial institutions, generally for only one day.
Federal funds rates are very similar to the rates on short term Treasury bills.
True
What are repos?
A short term collateralized loan
Non-banks can participate in the Federal funds market.
False
Non-banks can participate in the repo market.
True
A repo is a bearer instrument.
False
A negotiable CD is a bearer instrument.
True
There is not a secondary market for negotiable CD's.
False
Which of these money market instruments works like a pawn shop works?
Repo
Which of the following describes what commercial paper is?
Unsecured promissory notes, issued by corporations, that mature in no more than 270 days.
Commercial paper can be described as
Loans from one company to another company
Commercial paper is always collateralized.
False
Commercial paper is not protected by the FDIC.
True
Which of the following best describes asset backed commercial paper?
These are loans from one business to another business but they are collateralized by an asset often mortgage backed securities.
Which of the following assets invested heavily in Asset Backed Commercial Paper?
Money Market Mutual Funds
When the mortgages that "backed" the Asset Backed Commercial Paper began to have massive defaults and everyone wanted to sell their paper, what was this similar to?
Bank runs
If a money market mutual fund returns less than $1 for a dollar invested, it is referred to as, "Breaking the buck".
True
Which of the following best describes what a banker's acceptance is ?
An order to pay a specified amount to the bearer on a given date if specified conditions have been met, usually delivery of promised goods
Banker's acceptances are often used when buyers and sellers are from different countries.
True
Banker's acceptances have no secondary market.
False
With a banker's acceptance, it is normally the exporters bank that guarantees payment
False
Eurodollars represent what?
Dollar denominated deposits held in foreign banks
What rate do we have in London that is very similar to the Federal Funds rate in the United Sates?
London Interbank Offer Rate
Which of the following money market instruments is the most liquid?
Treasury Bills
Which of the following money market instruments is the least liquid?
Federal Funds
Which of the following is NOT a characteristic of money market instrumetns?
Issued by banks
Treasury bills are what type of debt instrument?
Discount bonds
What is the discount rate of a 120-day T-bill with a price of $960.45? It is worth $1,000 at maturity?
0
What is the annualized yield of a 120-day T-bill with a price of $993.25? It is worth $1,000 at maturity
0
What do we call a bank issued security that documents a deposit and specifies the interest rate and maturity date?
Negotiable Certificate of Deposti
What do we call an order to pay a specified amount to the bearer on a given date if specified condition have been met, usually delivery of promised goods?
Banker's acceptance
What is a repurchase agreement? Explain how it works.
A repurchase agreement or repos are transactions where a firm will buy a treasury at a certain date approximately 3-14 days later after they sell it.
What are Federal Funds?
Short term funds transferred (loaned or borrowed) between financial institutions usually for a period fo one day.
Which of the following are true statements about liquidity?
Securities with strong secondary markets are more liquid than securities with weak secondary markets and Liquidity refers to how easily we can convert an asset to cash.
Which of the following instruments are not bought and sold after the primary offering?
Federal Funds
What do we call unsecured promissory notes issued by corporations that mature in no more than 270 days?
Commercial paper
Which of the following money market instruments is essentially a short-term collateralized laon?
Repurchase Agreement
What does the term "bearer instrument" mean?
If you have possession of the instrument, it is yours.
What do we call a special type of commercial paper that is secured (has collateral)?
Asset-backed commercial paper (ABCP)
What do we call the market that contains investments with a maturity of 1 year or longer?
Capital market
What are bonds?
securities that represent debt owed by the issuer to the ivnestor
What do we call debt issued by the U.S. government?
Treasury bonds
What do we call debt issued by businesses?
Corporate bonds
What do we call debt issued by state or local governments?
Municipal bonds
A Treasury bill has a maturity of less than 1 year.
True
How often has the U.S. government defaulted on their debt?
The U.S. government has NEVER defaulted on this debt.
Which of the following statements best describes a Treasury Inflation-Indexed Security?
This is a Treasury bond that changes the interest rate paid as inflation changes.
What are agency bonds?
Debt issued by U.S. government sponsored entities.
Agency debt has an explicit guarantee from the U.S. government that it will not let the debt default.
False
What is a municipal bond?
A bond issued by a state, city, county, or other local government
One does not have to pay Federal income tax on gains from municipal bonds.
True
One does not have to pay Federal income tax on gains from corporate bonds.
False
Municipal bonds are often used for public interest projects.
True
No U.S. county has ever defaulted on a municipal bond.
False
Which of the following best explains how a corporate bonds works?
When you buy a corporate bond, you loan money to a business. In return they pay you interest payments. At maturity, they pay you the face value of the bond.
Which of the following is NOT a typical face value of a corporate bond?
A. 10,000
B. 5,000
C. 1,000
D. 100
D
Most corporate bonds pay interest quarterly
False, it is semi-annually
Bond rating agencies use only quantitative measures when evaluating a bond's risk.
False it is qualitative and quantitive
What is another name for junk bonds?
High yield bonds
Which of the following is the safest bond?
Amazon bond
BBB rated bonds pay a lower coupon rate than AAA rated bonds.
False
What does a call provision on a bond do?
Allows the issuer to retire the debt early
A secured bond is one that has collateral
True
Another name for an unsecured bond is....
Debenture
Most corporate bonds are unsecured bonds.
True
What is a credit default swap?
It is a financial instrument that allows one to buy insurance on bonds.
Current yield is based on the perpetuity formula.
True
What is the current yield for a bond with a face value of $1,000, a current price of $950, and a coupon rate of 7%?
i(c)= C/P
C(coupon)= 1,000*7= 7,000 = 70.00
$70.00/950
= 0.0736 or 7.37%
What are the steps for finding the price of a coupon bond?
Identify the cash flows, find the present value of the cash flows, sum the present values
Suppose we have a 4 year coupon bond with a face value of $1000 and a coupon rate of 4%. What are the cash flows?
4 payments of $40 and one final payment of $1,000
Suppose we have a 4 year coupon bond with a face value of $1000 and a coupon rate of 4%. How would we find the present value of the first cash flow if market interest rates are 5%?
PV = $40/(1+ .05)
Suppose we have a 4 year coupon bond with a face value of $1000 and a coupon rate of 4%. How would we find the present value of the final cash flow if market interest rates are 5%?
PV = $,1000/(1+ .05)4
When we have a bond that makes semi-annual payments and we wish to calculate the price, which of the following are the steps we need to take?
Double the number of periods, halve the coupon payment, halve the market interest rate
Bonds are more risky than stock.
False
The bond market is larger than the stock market in the U.S.
True
Bonds are a popular investment for retirement funds.
True
Which of the following is not an issuer of bonds?
Investment Banks
Bonds do not have a secondary market.
False
When you buy a bond, what are you doing?
Loaning money to the issuing entity
Agency debt has an explicit guarantee by the Federal government that they will not let the bond default.
False
Bonds issued by which of the following are considered risk free in terms of default risk?
The U.S. Federal Government
What are bonds Issued by local, county, and state governments called?
Municipal bonds
There have been instances, where counties that have issued municipal bonds in the past have defaulted.
True
Suppose the rate on a corporate bond is 9% and the rate on a municipal bond is 6.55%. Which should you choose if your marginal tax rate is 20%?
The corporate bond offers a higher yield.
Suppose the rate on a corporate bond is 6.8% and the rate on a municipal bond is 4.10%. Which should you choose if your marginal tax rate is 31%?
The corporate bond offers a higher yield.
Suppose the rate on a corporate bond is 5.3% and the rate on a municipal bond is 4.77%. Which should you choose if your marginal tax rate is 16%?
The municipal bond offers a higher yield.
If the municipal bond is for a project that is not expected to raise revenues for the local government and the bond is backed solely by the creditworthiness of the municipality, what do we call this?
General obligation bond.
Which of the following bonds should have the highest coupon rate?
BBB rated corporate bond that is callable
Which of the following is a TRUE statement about junk bonds?
Junk bonds have higher yields than Treasury bonds.
Why do some bonds have restrictive covenants?
1. Because no one in the company has a vested interest in looking out for bond holders.
2. Because stock holders often want riskier ventures that could bankrupt the company.
3. Because the Board of Directors is elected by stock holders.
Who benefits when a bond issuer "calls" a bond?
The bond issuer
What is the current yield for a bond with a face value of $1,000, a current price of $978.01, and a coupon rate of 5.57%?
5.7%
We want to calculate the value of a three year coupon bond with semi-annual payments and the bond has a face value of $1,000, a coupon rate of 8% and the market interest rate is 12% .Which of the following should we use:
Coupon payment of $40, interest rate of 6%, and 6 periods.
Which of the following is a true statement?
Bonds are less risky than stocks but still have price risk, reinvestment risk, and default risk.
What is the price of a two-year, 4% coupon bond (semi-annual coupon payments) with a face value of $1,000 and a required rate of 8%?
$927.40 C12. bonds
What is the price of a two-year, 7% coupon bond (semi-annual coupon payments) with a face value of $1,000 and a required rate of 5%?
$1,037.62 C12.bonds
Suppose you decide to start a retirement fund. You put aside money every pay check to go into this fund. If you decide to invest in bonds, what are you doing?
Loaning money to the issuing entity
We have discussed how the purpose of financial markets and institutions is to move funds from lenders to spenders. If you purchase a bond, what role are you playing?
Lender
Why might you consider loaning money to an entity?
In order to obtain interest and have your money grow
Buying a bond is a contractual agreement. The issuer of the bond does not have a choice about making payments.
True
There are no risks to investing in bonds
False
If the issuing entity goes bankrupt and defaults on the bond, the bond buyer could lose not only the interest payments but also the principal amount invested.
True
Bonds have the same amount of risk as a savings account in a bank.
False
Since bonds have more risk, they generally pay a higher interest rate than a savings account in a bank
True
Suppose you want to invest in a bond, but you are worried about the entity defaulting and you losing everything. Which of the following would be the safest investment for you?
Treasury bonds
If the bond is not structured as a discount bond, what determines the amount of interest that you receive each year?
The coupon rate
Which of the following bonds is likely to have the lowest coupon rate?
Treasury bonds
Suppose that you pay a high tax rate and are worried about the amount of money that you pay in taxes every year. You want to invest in something that will give you good returns, but on which you do not have to pay Federal taxes. Which of the following sho
Bonds issued by the state of Texas
Suppose that you like the idea of investing in bonds and earning interest every year but you want a little more interest than what Treasuries offer. You decide to buy some corporate bonds. You are still worried about default risk, so what should you consi
The likelihood that the company will go out of business before your bond matures.
Suppose that you buy $25,000 worth of bonds from Best Buy. The bonds have 10 years until they mature. If you decide after 3 years that you no longer want these bonds, what can you do?
Bonds have a secondary market and you can sell your bonds.
When you sell a bond on the secondary market, it will always be for the face value of the bond.
False
The price of the bond on the secondary market is determined by the coupon rate of the bond and what the prevailing market interest rates are.
True
Suppose the coupon rate on your Best Buy bonds is 3% and the market interest rates are 4.5%. Which of the following is a true statement?
You will have to sell your bonds at a discount
If you decide to go ahead and sell your Best Buy bonds, which of the following best describes what will occur?
You will keep all the coupon payments you have received so far then you will sell the bonds and receive an amount less than the $25,000 you spent buying them.
The risk that interest rates will increase and your bonds will have a lower price is called interest rate risk.
True
Suppose the coupon rate on your Best Buy bonds is 3% and the market interest rates are 1.5%. Which of the following is a true statement?
You will be able to sell your bonds at a premium
If you decide to go ahead and sell your Best Buy bonds when interest rates are 1.5%, which of the following best describes what will occur?
You will keep all the coupon payments you have received so far then you will sell the bonds and receive an amount greater than the $25,000 you spent buying them.
Interest rate risk is a concern if market interest rates increase or decrease.
False
If you have $25,000 in Best Buy bonds, at Best Buy goes out of business, you will lose all $25,000.
True
What would be a good strategy when buying bonds for a retirement portfolio to reduce the risk of losing your entire retirement savings?
Buy bonds from a number of different businesses so that if one of them goes bankrupt, you do not lose everything.
Suppose you take your $25,000 and buy bonds from 25 different businesses. You feel like you have created a portfolio where you have a decent return with little default risk. You think that at some point you may want to sell some of the bonds and you would
Duration
When you buy a share of stock, what are you doing?
Buying an ownership share in the business
How does one make money investing in stocks?
Dividends and/or capital gains
When you buy a share of stock, you are guaranteed to make a profit as long as you hold it for a year or more.
False
If you invest in a stock that has always paid dividends, you are guaranteed to receive a dividend payment in the future.
False
What makes a stock price increase or decrease?
Prices are set by the market, basically the price for which someone is willing to sell and the price for which what someone is willing to buy.
If you wanted to buy some stock, which of the following would be a way to accomplish this?
Any of the above would work
WWW.Finance.yahoo.com is an excellent website for finding information about stock prices.
True
What do we call a software tool that allows one to enter desired characteristics of a stock and it provides a list of all stocks with those characteristics?
A stock screener
ECN's work best for small, not often traded stocks.
False
What do we call an investment that acts like a single stock, but actually represents a basket of stocks usually that follow a specific index?
an exchange traded fund
Which of the following statements best describes how we value (price) a bond?
We determine the cash flows and find the sum of the present value of the cash flows.
Suppose Target stock pays a dividend of $2.71 and has a growth rate of 2.3%. What is the dividend one year in the future?
D1= D0 * (1 + g)
=2.71*1.023
=$2.77
Which of the following is the most basic assumption of the Gordon Growth model for valuing a stock?
The stock pays a dividend
Suppose Clorox stock pays a dividend of 43 cents and has a growth rate of 3.7%. What is the dividend one year in the future?
D1= D0 * (1 + g)
.43*1.037
=.45
Which of the following statements describes the Gordon Growth model for pricing stocks?
We divide the dividend payment one period in the future by the required rate of return minus the growth rate
Assume that Walmart stock currently pays $2.00 a year in dividends, The expected growth rate for the dividend is 2.50% and assume that you need to earn 8% on stock. What is the present value of this stock using the Gordon Growth model?
P0= [D0 X (1 + g)]/(k(e) - g)
[2.00*1.025]/(0.08-0.025)
=37.27
Assume that Ford stock currently pays 50 cents a year in dividends, The expected growth rate for the dividend is 4% and assume that you need to earn 9.2% on stock. What is the present value of this stock using the Gordon Growth model?
P0= [D0 X (1 + g)]/(k(e) - g)
=.50*1.04/0.092-.04
=10.00
The Gordon Growth model requires that dividends grow at a constant rate.
True
If the industry PE ratio for a firm is 27, what is the current stock price for a firm with earnings for $2.25 / share?
27*2.25
=$60.75
If the industry PE ratio for a firm is 55, what is the current stock price for a firm with earnings for $4.55 / share?
55*4.55
=$250.25
Stock prices are set by the market, in other words a stock is priced at what someone is willing to buy it for.
True
If a business has better than expected profits their stock price will automatically increase.
False
If a company sees a large decrease in sales, their stock price will automatically decrease.
False
If the inputs into the Gordon Growth model are wrong, the resulting stock price will be incorrect.
True
Which of the following is NOT a potential error when using the Gordon Growth model?
Forecasting the wrong number of shares outstanding
Stock prices constantly move up and down. Some times the amount of up and down movement is more than other times. What is our measure of this movement?
Volatility
Stock market volatility increases when investors have confidence in the market
False
Events that worry people, for example President Trump contracting Covid 19 can increase market volatility.
True
What do we use to monitor the behavior of a group of stocks?
Indexes
What do we call the investment that allows foreign firms to trade on U.S. exchanges by U.S. banks buying foreign shares and issuing receipts against the shares in U.S. markets?
American depository receipts
What is the regulatory agency that oversees the stock market?
SEC
Why is it important that the stock market has strict regulation?
Investors have to feel confident or else they would not invest in the market and the market would not exist.
You must be rich in order to invest in the stock market.
False
Some major companies have shares of stock that cost less than $10.
True
Which of the following is true about returns from stock ownership?
Shareholders can make money from capital gains and for some stocks, from quarterly dividend payments.
Most stocks are traded on exchanges.
True
When you buy a share of stock, you are guaranteed to make money.
False
Which of the following is NOT an advantage of ECNs?
Easier to trade unpopular stocks
What do we call a recent innovation that represents a basket of securities? These help keep transaction costs down while offering diversification.
ETF's
Which of the following is NOT a characteristic of an ETF?
Can add a little to it from each pay check
To value a stock (find the price) what 2 things do we need to do?
Determine the cash flows and discount them to the present
Assume that Clorox stock currently pays $3.62 a year in dividends. The expected growth rate for the dividend is 5.1% and assume that you need to earn 12% on stock. What is the present value of this stock using the Gordon Growth model?
$55.14
Assume that Microsoft stock currently pays $4.23 a year in dividends. The expected growth rate for the dividend is 2.7% and assume that you need to earn 7.5% on stock. What is the present value of this stock using the Gordon Growth model?
$90.50
What is a widely watched measure of much the market is willing to pay for $1.00 of earnings from the firms?
P/E ratio
If the industry PE ratio for restaurant firms is 45, what is the current stock price for a Wendy's if they have earnings of $3.65 per share?
$164.25
If a company makes no profit (they have costs higher than revenue) the stock price automatically declines
False
If a company reports that they had more revenue than they expected, the stock price automatically increases.
False
Stock prices are constantly moving up or down. Which of the following might make stock prices move?
1. The feds raise interest rates
2. We go into a recession
3. A vaccine for Covid is created
What refers to how much stock prices change, both up and down?
Market volatility
What are frequently used to monitor the behavior of a groups of stocks?
Stock market indices
What is the primary mission of the SEC?
To protect investors and maintain the integrity of the securities markets.
What allows U.S. banks to buy foreign shares of stock and issue receipts against the shares in U.S. markets, allowing U.S. investors to easily buy stock in a foreign firm?
American Depository Receipts (ADRs)
Which of the following stocks has the highest stock price?
Hint: Use www. finance.yahoo.com
Amazon
You decide to put some of your retirement savings in the stock market. Are you guaranteed to earn a positive return?
NO
Which of the following is a true statement about investing in the stock market relative to the bond market?
The stock market is riskier so you should expect a higher return from the stock market.
Suppose you decide to invest in Walmart stock. You buy 50 shares at $140.97 a share. This means you have invested $7,048.50 in Walmart stock. How long can you keep this investment?
You can keep it indefinitely
Suppose you decide to invest in Walmart stock. You buy 50 shares at $140.97 a share. This means you have invested $7,048.50 in Walmart stock. Which of the following is true?
You are now a partial owner of Walmart
Suppose you decide to invest in Walmart stock. You buy 50 shares at $140.97 a share. This means you have invested $7,048.50 in Walmart stock. Walmart declares that they will pay all shareholders a dividend of 54 cents. How much money will you receive from
$27.00
Suppose you decide to invest in Walmart stock. You buy 50 shares at $140.97 a share. This means you have invested $7,048.50 in Walmart stock. Suppose the price of Walmart goes up to $150 per share and you decide to sell all your shares. What are your capi
$451.50
Suppose you decide to invest in Walmart stock. You buy 50 shares at $140.97 a share. This means you have invested $7,048.50 in Walmart stock. Suppose Walmart cannot compete with Amazon and the price drops to $100 a share. You do not think it will ever rec
$2,048.50
Suppose you decide to invest in Walmart stock. You buy 50 shares at $140.97 a share. This means you have invested $7,048.50 in Walmart stock. What is the most amount of money that you could possibly lose with this investmentt?
$7,048.5
An alternative to investing in Walmart stock is investing in Walmart bonds. With bonds the annual cash flows are the coupon payments, with stocks the annual cash flows are the dividend payments. Which of the following is true regarding the cash flows?
The coupon payments are a known amount, the dividend payments may change
What is one way that you could invest in stocks with your retirement savings , but remove some of the risk?
Invest in multiple businesses from different sectors