Bond and Market Capitalization Rate

330-s2013-prac9 1. An Ameri faeces put excerpt gives its holder the right to _________. A. bribe the vestigial summation at the action survey on or ahead the personnel casualty date B. buy the profound asset at the exercise cost lone(prenominal) at the passage date C. sell the inherent asset at the exercise toll on or before the acquittance date D. sell the underlying asset at the exercise bell only at the intent date 2. An American call option gives the buyer the right to _________. A. buy the underlying asset at the exercise legal injury on or before the extent date B. buy the underlying asset at the exercise worth only at the expi dimensionn date C. ell the underlying asset at the exercise determine on or before the expiration date D. sell the underlying asset at the exercise price only at the expiration date 3. A European call option gives the buyer the right to _________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at the exercise price only at the expiration date C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at the exercise price only at the expiration date 4. You purchase star(a) IBM July unmatched hundred twenty call weight-lift for a support of $5.You hold the option until the expiration date when IBM pack sells for $123 per shargon. You forget realize a ______ on the investment. A. $cc profit B. $200 outrage C. $300 profit D. $300 loss 5. At contract due date the cheer of a call option is ___________ where X enoughs the options strike price and ST is the bank line price at contract expiration. A. Max(0, ST X) B. Min(0, ST X) C. Max(0, X ST) D. Min(0, X ST) 1 1. C 2. A 3. B 4. B 5. A Long Call Profit = Max0,($123 $ cxx)(100) $500 = -$200 1. A debauched that has an hard roe of 12% is considering cutting its dividend feeout.The nervous strainholders of the mansion desire a divi dend regress of 4% and a ceiling gain ease off of 9%. Given this in organiseation which of the succeeding(a) statement(s) is/are correct? I. solely else personify the firms levying pose bequeath accele commit after(prenominal) the payout multifariousness II. All else equal the firms timeworn price leave go up after the payout change trio. All else equal the firms P/E ratio go outing amplify after the payout change A. I onlyB. I and II onlyC. II and triad onlyD. I, II and iii 2. A firm cuts its dividend payout ratio. As a result you know that the firms _______. A. spend on assets will increaseB. arnings computer storage ratio will increase C. dinero offshoot step will fallD. stock price will fall 3. An underpriced stock provides an expected harvest which is ____________ the make return based on the capital asset pricing deterrent example (CAPM). A. little thanB. equal toC. greater thanD. greater than or equal to 4. Stockholders of Dogs R Us Pet Supply e xpect a 12% post of return on their stock. Management has consistently been generating a ROE of 15% over the last 5 geezerhood but now gestates that ROE will be 12% for the next five familys. Given this the firms go around dividend payout ratio is now ______.A. 0%B. 100%C. between 0% and 50%D. between 50% and 100% 5. The constant growth dividend discount ideal (DDM) can be used only when the ___________. A. growth aim is slight than or equal to the required returnB. growth rate is greater than or equal to the required return C. growth rate is less than the required returnD. growth rate is greater than the required return 6. Suppose that in 2009 the expected dividends of the stocks in a broad grocery store index equaled $240 jillion when the discount rate was 8% and the expected growth rate of the dividends equaled 6%. apply the constant growth formula for rating, if affaire rate increase to 9% the take account of the market will change by _____. A. -10%B. -20%C. -25% D. -33% 7. You are considering acquiring a common equivalencecel of land of Sahali Shopping Center sens that you would same(p) to hold for one category. You expect to receive both(prenominal) $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. $31. 25B. $32. 37C. $38. 47D. $41. 32 8. Eagle Brand Arrowheads has expected honorarium of $1. 5 per share and a market capitalization rate of 12%. moolah are expected to grow at 5% per year indefinitely. The firm has a 40% p first baseback ratio. By how much does the firms ROE exceed the market capitalization rate? A. 0. 5%B. 1. 0%C. 1. 5%D. 2. 0% 9. A preferred share of Coquihalla Corporation will pay a dividend of $8. 00 in the upcoming year, and every year on that pointafter, i. e. , dividends are not expected to grow. You require a return of 7% on this stock. Using the constant growth DDM to calculate the inhering respect, a preferred share of Coquihalla Corporation is expense _________. A. $13. 50B. $45. 50C. $91. 0D. $114. 29 10. Brevik Builders has an expected ROE of 25%. Its dividend growth rate will be __________ if it follows a policy of paying 30% of earning in the form of dividends. A. 5. 0%B. 15. 0%C. 17. 5%D. 45. 0% 11. Cache Creek Manufacturing phoner is expected to pay a dividend of $3. 36 in the upcoming year. Dividends are expected to grow at 8% per year. The endangermentfree rate of return is 4% and the expected return on the market portfolio is 14%. Investors use the CAPM to count the market capitalization rate, and the constant growth DDM to determine the value of the stock. The stocks current price is $84. 0. Using the constant growth DDM, the market capitalization rate is _________. A. 9%B. 12%C. 14%D. 18% 12. Ace Ventura, Inc. has expected earnings of $5 per share for next year. The firms ROE is 15% and its earnings retention ratio is 40%. If the firms market capitalization rate is 10%, what is the preface value of its growth opportunities? A. $25B. $50C. $75D. $100 13. Flanders, Inc. has expected earnings of $4 per share for next year. The firms ROE is 8% and its earnings retention ratio is 40%. If the firms market capitalization rate is 15%, what is the pledge value of its growth opportunities?A. -$6. 33B. $0C. $20. 34D. $26. 67 14. Cache Creek Manufacturing troupe is expected to pay a dividend of $4. 20 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The riskiness of exposurefree rate of return is 4% and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate on the stock, and the constant growth DDM to determine the essential value of the stock. The stock is trading in the market today at $84. 00. Using the constant growth DDM and the CAPM, the beta of the stock is _________. A. 1. 4B. 0. 9C. 0. 8D. 0. 5 15.Westsyde Tool Company is expected to pay a dividend of $2. 00 in the upcoming year. The risk-free rate of return is 6% and the expected return on the market portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Companys stock is 1. 20. Using a oneperiod valuation model, the intrinsic value of Westsyde Tool Company stock today is _________. A. $24. 29B. $27. 39C. $31. 13D. $34. 52 16. Todd Mountain development Corporation is expected to pay a dividend of $2. 50 in the upcoming year. Dividends are expected to grow at the rate of 8% per year.The risk-free rate of return is 5% and the expected return on the market portfolio is 12%. The stock of Todd Mountain Development Corporation has a beta of 0. 75. Using the CAPM, the return you should require on the stock is _________. A. 7. 25%B. 10. 25%C. 14. 75%D. 21. 00% 17. inner Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 4% and the expected return on the market portfolio is 13%. The stock of Interior Airline has a beta of 4. 00. Using the constant growth DDM, the intrinsic value of the stock is _________.A. $10. 00B. $22. 73C. $27. 78D. $41. 67 18. Everything equal, which variable is negatively related to intrinsic value of a company? A. D1B. D0C. gD. k 19. A common stock pays an annual dividend per share of $1. 80. The risk-free rate is 5 percent and the risk premium for this stock is 4 percent. If the annual dividend is expected to remain at $1. 80 per share, what is the value of the stock? A. $17. 78B. $20. 00C. $40. 00D. None of the above 20. A stock is priced at $45 per share. The stock has earnings per share of $3. 00 and a market capitalization rate of 14%. What is the stocks PVGO?A. $23. 57B. $15. 00C. $19. 78D. $21. 34 21. If a firm has a free cash flow equal to $50 one thousand thousand and that cash flow is expected to grow at 3% forever, wh at is the total firm value given a WACC of 9. 5%? A. $679 millionB. $715 millionC. $769 millionD. $803 million 22. Next years earnings are estimated to be $5. 00. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 9%, what is the present value of growth opportunities? A. $9. 09B. $10. 10C. $11. 11D. $12. 21 1. A2. B3. C4. B5. C6. D7. B8. A9. D10. C11. B12. A13. A14. B15. B16. B17. A18. D19. B20. A21. C22.C 1. Consider two bewilders, A and B. Both dumbfounds presently are marketing at their equivalence value of $1,000. Each pay invade of $120 annually. Bond A will mature in 5 days while amaze B will mature in 6 years. If the re bloodlines to maturity date on the two trammels change from 12% to 14%, _________. A. both marrys will increase in value but adhere A will increase more than than bail B B. both stays will increase in value but sequester B will increase more than affixation A C. both alignments will diminution in value but ob ligate A will return more than gravel B D. both trammels will decrease in value but bond B will decrease more than bond A 2.Everything else equal the __________ the maturity of a bond and the __________ the verifier the greater the sensitivity of the bonds price to provoke rate changes. A. desireer proud B. longer lower C. forgetfullyer higher D. shorter lower 3. A __________ bond is a bond where the issuer has an option to retire the bond before maturity at a specific price after a specific date. A. due B. verifier C. puttable D. treasury 4. In an era of particularly low enliven range, which of the following bonds is most likely to be called? A. Zero verifier bonds B. voucher bonds selling at a discount C. Coupon bonds selling at a premium D.Floating rate bonds 5. A verifier bond which pays matter to of 4% annually, has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual give birth to maturity on this bond is _________. A. 7. 2% B . 8. 8% C. 9. 1% D. 9. 6% 6. A coupon bond which pays vex of $60 annually, has a par value of $1,000, matures in 5 years, and is selling today at a $75. 25 discount from par value. The current bear on this bond is _________. A. 6. 00% B. 6. 49% C. 6. 73% D. 7. 00% 7. A coupon bond which pays interest semi-annually has a par value of $1,000, matures in 8 years, and has a award to maturity of 6%.If the coupon rate is 7%, the intrinsic value of the bond today will be __________ (to the nearest dollar). A. $1,000 B. $1,063 C. $1,081 D. $1,100 8. A treasury bond due in one year has a yield of 6. 3% while a treasury bond due in 5 years has a yield of 8. 8%. A bond due in 5 years issued by High Country Marketing Corporation has a yield of 9. 6% while a bond due in one year issued by High Country Marketing Corporation has a yield of 6. 8%. The default risk premiums on the one-year and 5-year bonds issued by High Country Marketing Corp. are respectively __________ and _________. A. 0. 4% , 0. 3% B. 0. 4%, 0. % C. 0. 5%, 0. 5% D. 0. 5%, 0. 8% 9. A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. A. $458. 00 B. $641. 00 C. $789. 00 D. $1,100. 00 10. You can be sure that a bond will sell at a premium to par when _________. A. its coupon rate is greater than its yield to maturity B. its coupon rate is less than its yield to maturity C. its coupon rate equal to its yield to maturity D. its coupon rate is less than its conversion value 11. Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%.If interest rates remain constant, one year from now the price of this bond will be _________. A. higher B. lower C. the same D. indeterminate 12. The yield to maturity on a bond is ________. I. above the coupon rate when the bond sells at a discount, and below the coupon rate when the bond sells at a premium II. the discount rate that will set the present value of the payments equal to the bond price III. equal to the true intricate return on investment only if all interest payments certain are reinvested at the yield to maturity A. I only B. II only C. I and II only D. I, II and III 13.Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________. A. $97 B. $104 C. $364 D. $732 14. The yield to maturity of an 10-year zero coupon bond, with a par value of $1,000 and a market price of $625, is _____. A. 4. 8% B. 6. 1% C. 7. 7% D. 10. 4% 15. If the quote for a Treasury bond is listed in the newspaper as 9809 bid, 9813 ask, the actual price for you to purchase this bond given a $10,000 par value is _____________. A. $9,828. 12 B. $9,809. 38 C. $9,840. 62 D. $9,813. 42 16. The price on a treasury bond is 10421 with a yield to maturity of 3. 5%. The price on a comparable maturity corporate bond is 10311 with a yield to maturity of 4. 59%. What is the approxima te percentage value of the credit risk of the corporate bond? A. 1. 14% B. 3. 45% C. 4. 59% D. 8. 04% 17. You buy an 8 year $1000 par value bond today that has a 6% yield and a 6% annual payment coupon. In one year promised yields have emanationn to 7%. Your one year holding period return was ___. A. 0. 61% B. -5. 39% C. 1. 28% D. -3. 25% 18. If the coupon rate on a bond is 4. 50% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond?A. 4. 30% B. 4. 50% C. 5. 20% D. 5. 50% 19. All some other things equal, which of the following has the longest time? A. A 30 year bond with a 10% coupon B. A 20 year bond with a 9% coupon C. A 20 year bond with a 7% coupon D. A 10 year zero coupon bond 20. All other things equal, which of the following has the shortest while? A. A 30 year bond with a 10% coupon B. A 20 year bond with a 9% coupon C. A 20 year bond with a 7% coupon D. A 10 year zero coupon bond 21. (Challenge question) A pension fund must pay out $1 million next year, $2 million the following year and and then $3 million the year after that.If the discount rate is 8% what is the term of this set of payments? A. 2. 00 years B. 2. 15 years C. 2. 29 years D. 2. 53 years 22. All other things equal, which of the following has the longest season? A. A 20 year bond with a 10% coupon yielding 10% B. A 20 year bond with a 10% coupon yielding 11% C. A 20 year zero coupon bond yielding 10% D. A 20 year zero coupon bond yielding 11% 23. Because of convexity, when interest rates change the actual bond price will ____________ the bond price predicted by duration. A. always be higher than B. sometimes be higher than C. always be lower than D. ometimes be lower than 24. eon is a concept that is useful in assessing a bonds _________. A. credit risk B. liquidity risk C. price volatility D. convexity risk 25. A pension fund has an medium duration of its liabilities equal to 15 years. The fund is looking at 5 year maturi ty zero coupon bonds and 4% yield perpetuities to immunize its interest rate risk. How much of its portfolio should it assign to the zero coupon bonds to immunize if there are no other assets funding the plan? A. 52% B. 48% C. 33% D. 25% 26. You take in a bond that has a duration of 6 years. Interest rates are urrently 7% but you believe the Fed is about to increase interest rates by 25 basis points. Your predicted price change on this bond is ________. A. +1. 40% B. -1. 40% C. -2. 51% D. +2. 51% 27. A bank has an average duration of its liabilities equal to 2 years. The banks average duration of its assets is 3. 5 years. The banks market value of equity is at risk if _______________________. A. interest rates fall B. credit spreads fall C. interest rates rise D. the price of all fixed income securities rises 28. Banks and other financial institutions can best manage interest rate risk by _____________. A. aximizing the duration of assets and minimizing the duration of liabilities B. minimizing the duration of assets and maximizing the duration of liabilities C. matching the durations of their assets and liabilities D. matching the maturities of their assets and liabilities 29. The duration of a portfolio of bonds can be calculated as _______________. A. the coupon weighted average of the durations of the individual bonds in the portfolio B. the yield weighted average of the durations of the individual bonds in the portfolio C. the value weighed average of the durations of the individual bonds in the portfolio D. verages of the durations of the longest and shortest duration bonds in the portfolio 30. Rank the interest sensitivity of the following from most sensitive to an interest rate change to the least sensitive. I. 8% coupon, noncallable 20 year maturity, par bond II. 9% coupon, currently callable 20 year maturity, premium bond III. Zero coupon, 30 year maturity bond A. I, II, III B. II, III, I C. III, I, II D. III, II, I 31. A bank has $50 million in as sets, $47 million in liabilities and $3 million in shareholders equity. If the duration of its liabilities are 1. and the bank wants to immunize its net worth against interest rate risk and thus set the duration of equity equal to zero, it should select assets with an average duration of _________. A. 1. 22 B. 1. 50 C. 1. 60 D. 2. 00 A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures in four years. Its yield to maturity is currently 6%. 32. The duration of this bond is _______ years. A. 2. 44 B. 3. 23 C. 3. 56 D. 4. 10 33. The special duration of this bond is ______ years. A. 4. 00 B. 3. 56 C. 3. 36 D. 3. 05 34. A bond with a 9-year duration is worth $1,080. 0 and its yield to maturity is 8%. If the yield to maturity travel to 7. 84%, you would predict that the new value of the bond will be _________. A. $1,035 B. $1,036 C. $1,094 D. $1,124 35. When interest rates increase, the duration of a 20-year bond selling at a premium _________. A. increases B. decreases C. remains the same D. increases at first, then declines 36. Duration facilitates the comparison of bonds with differing ___________ A. default risk B. conversion ratios C. maturities D. yields to maturity 37. The historical yield spread between the AA bond and the AAA bond has been 25 basis points.Currently the spread is only 9 basis points. If you believe the spread will soon return to its historical levels you should ________________________. A. buy the AA and short the AAA B. buy both the AA and the AAA C. buy the AAA and short the AA D. short both the AA and the AAA 38. The duration of a bond ordinarily increases with an increase in _________. I. term-to-maturity II. yield-to-maturity. III. coupon rate A. I only B. I and II only C. II and III only D. I, II and III 39. Compute the modified duration of a 9% coupon, 3-year corporate bond with a yield to maturity of 12%. A. 2. 45 B. 2. 75 C. 2. 88 D. 3. 00 40.An 8%, 30-year bond has a yield-to-maturity of 10% and a modified duration of 8. 0 years. If the market yield drops by 15 basis points, there will be a __________ in the bonds price. A. 1. 15% decrease B. 1. 20% increase C. 1. 53% increase D. 2. 43% decrease 41. To create a portfolio with a duration of 4 years using a 5 year zero-coupon bond and a 3 year 8% annual coupon bond with a yield to maturity of 10%, one would have to invest ________ of the portfolio value in the zero-coupon bond. A. 50% B. 55% C. 60% D. 75% 42. Which of the following set of conditions will result in a bond with the greatest price volatility?A. A high coupon and a short maturity. B. A high coupon and a long maturity. C. A low coupon and a short maturity. D. A low coupon and a long maturity. 43. An investor who expects declining interest rates would maximize their capital gain by purchasing a bond that has a ___ coupon and a ___ term to maturity. A. low long B. high short C. high long D. zero long 44. A zero coupon bond is selling at a deep discount pric e of $430. 00. It matures in 13 years. If the yield to maturity of the bond is 6. 7%, what is the duration of the bond? A. 6. 7 years B. 8. 0 years C. 10 years D. 13 years 45.Convexity implies that duration predictions _______. I. underestimate the % increase in bond price when the yield falls II. underestimate the % decrease in bond price when the yield rises III. overestimates the % increase in bond price when the yield falls IV. overestimates the % decrease in bond price when the yield rises A. I and III only B. II and IV only C. I and IV only D. II and III only 1. D2. B3. A4. C5. D6. B7. B8. D9. A10. A11. A12. D13. A14. A15. C16. A17. A18. A19. A20. D21. C22. C23. A24. C25. A27. C28. C29. C30. C31. A32. C33. C34. C35. B36. C37. C38. A39. A40. B41. B42. D43. D44. D45. C