Chapter 4: The Valuation of Long-Term Securities
1. What is the market value of a $1,000 face-value bond with a 10 percent coupon rate when the market's rate of return is 9 percent? Answer:
More than its face value.
2. If an investor may have to sell a bond prior to maturity and interest rates have risen since the bond was purchased, the investor is exposed to __________.
interest rate risk
3. Beta Budget Brooms will pay a big $2 dividend next year on its common stock, which is currently selling at $50 per share. What is the market's required return on this investment if the dividend is expected to grow at 5% forever? Answer:
4. If a coupon bond sells at a large discount from par, then which of the following relationships holds true? (P0 > represents the price of a bond and YTM is the bond's yield to maturity.) Answer:
P0 < par and YTM > the coupon rate.
5. Market interest rates and the prices of bonds in the secondary market: Answer:
generally move in opposite directions.
6. A $250 face value share of preferred stock pays a $20 annual dividend and investors require a 7% return on this investment. If the security is currently selling for $276, what is the difference (overvaluation) between its intrinsic and market value (rounded to the nearest whole dollar)? Answer:
7. Which of the following accurately describes the behavior of bond prices? Answer:
If interest rates rise so that the market required rate of return increases, the bond's price will fall.
Chapter 5: Risk and Return
8. The firm of Sun and Moon purchased a share of Acme.com common stock exactly one year ago for $45. During the past year the common stock paid an annual dividend of $2.40. The firm sold the security today for $85. What is the rate of return the firm has earned? Answer:
94.2%. Return is over the two-year period and includes both dividends and capital gains. Return = [($2.40) + ($85 - $45)] /...
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