Question 1

The last dividend on GTE stock was $4,and the expected growth rate is 10%.If you require a rate of return of 20%,what is the highest price you should be willing to pay for GTE stock?

Accepted Answer

The answer of The last dividend on GTE stock was...

Question 2

In actual practice,most corporate bonds pay interest:

Accepted Answer

Most corporate bonds pay interest semi-annually, which means twice a year. This is a standard practice in the bond market. While some bonds may pay interest annually, quarterly or monthly payments are not common for corporate bonds.

Question 3

You are considering buying a 10-year,$1,000 par value bond issued by IBM.The coupon rate is 8% annually,with interest being paid semiannually.If you expect to earn a 10% rate of return on this bond,what is the maximum price you should be willing to pay for this IBM bond?

Accepted Answer

To find the maximum price you should be willing to pay for the bond, you need to calculate its present value given the desired rate of return (yield to maturity) of 10%. The bond pays semiannual interest, so the coupon payment is $40 ($1,000 * 8% / 2), and the yield per period is 5% (10% / 2). The bond has 20 periods (10 years * 2). The present value of the bond is the sum of the present value of the annuity (coupon payments) and the present value of the par value ($1,000) received at maturity. Using the present value formula for an annuity and the present value formula for a lump sum, the calculation is as follows:$$ PV = \frac{C}{r} \left(1 - \frac{1}{(1 + r)^n}\right) + \frac{F}{(1 + r)^n} $$Where:- $PV$ = present value of the bond- $C$ = semiannual coupon payment = $40- $r$ = semiannual yield = 5% or 0.05- $n$ = total number of periods = 20- $F$ = face value of the bond = $1,000$$ PV = \frac{40}{0.05} \left(1 - \frac{1}{(1 + 0.05)^{20}}\right) + \frac{1000}{(1 + 0.05)^{20}} $$$$ PV \approx 875.39 $$Therefore, the maximum price you should be willing to pay for the bond, given a 10% desired rate of return, is approximately $875.39.

Question 4

According to the Gordon dividend model,which of the following variables would not affect a stock's price?

Accepted Answer

According to the Gordon dividend model, stock price is only affected by the expected growth rate in dividends and the shareholder's required return. The number of shares outstanding does not directly affect stock price, as it is simply a reflection of the firm's capital structure.

Question 5

A bond that allows investors to force the issuer to redeem the bond prior to maturity is called a:

Accepted Answer

A putable bond allows the investor to require the issuer to redeem the bond before its maturity date. Callable bond allows the issuer to redeem the bond before maturity, not the investor. Convertible bond can be converted into common stock of the issuer, but does not allow for early redemption on the investor's part. Debenture bond is a type of bond that is not secured by any specific asset, but can still have a maturity date and interest payments.

Question 6

A firm's stock is expected to pay a $3 annual dividend next year,the current stock price is $60,and the expected growth rate in dividends is 8%.Using the Gordon approach,what is the expected return?

Accepted Answer

The Gordon Growth Model (Dividend Discount Model) formula is: Expected Return = (Dividend/Current Price) + Growth Rate. Here, Expected Return = ($3/$60) + 8% = 5% + 8% = 13%.

Question 7

Ameritech has just issued a $1,000 par value bond that will mature in 10 years.This bond pays interest of $45 every six months.If the annual yield to maturity of this bond is 8%,what is the price of the Ameritech bond if the market is in equilibrium?

Accepted Answer

The answer of Ameritech has just issued a $1,000 par...

Question 8

Suppose a firm just issued a $1,000 par value convertible bond.Its conversion ratio is 30 and the stock currently sells for $25 per share.Would it make better financial sense to hold onto the bond or convert it?

Accepted Answer

The answer of Suppose a firm just issued a $1,000...

Question 9

A firm's stock is expected to pay a $2 annual dividend next year,and the current $50 stock price is expected to rise to $53 over the next year.What is the expected return?

Accepted Answer

Expected return can be calculated using the following formula:

Expected Return = (Dividend Payment / Current Stock Price) + (Expected Stock Price - Current Stock Price) / Current Stock Price

Plugging in the given values, we get:

Expected Return = (2 / 50) + (53 - 50) / 50
Expected Return = 0.04 + 0.06
Expected Return = 0.10 or 10%

Therefore, the answer is B) 10%.

Question 10

Dollar-denominated bonds that are issued in the United States by a foreign issuer are called:

Accepted Answer

Dollar-denominated bonds issued in the United States by a foreign issuer are called Yankee bonds. Eurodollar bonds are actually just another name for U.S. dollar-denominated deposits that are held in banks outside the United States. Foreign bonds refer to bonds that are issued in a domestic market by a foreign issuer. Global bonds are securities that are issued in several countries at once, with simultaneous offering in different capital markets around the world.

Question 11

Which of the following types of bonds have the lowest risk?

Accepted Answer

Closed-end mortgage bonds are secured by specific assets and do not allow the issuer to issue additional bonds secured by the same assets, making them less risky compared to subordinated debentures and open-end mortgage bonds.

Question 12

The constant dividend growth model assumes:

Accepted Answer

The answer of The constant dividend growth model assumes:
...

Question 13

Mary wants to purchase a 20-year bond that has a par value of $1,000 and makes semiannual interest payments of $40.If her required yield to maturity is 10%,how much should Mary be willing to pay for the bond?

Accepted Answer

The answer of Mary wants to purchase a 20-year bond...

Question 14

What is the value of GM which currently has a dividend of $2 and is growing at 7%? The investor's required rate of return is 11%.

Accepted Answer

The answer of What is the value of GM which...

Question 15

Which of the following is considered to be the most risky?

Accepted Answer

Common stocks are considered to be the most risky investment option as their value can be highly volatile and subject to significant fluctuations based on market conditions, company performance, and other factors. On the other hand, U.S. government bonds are generally considered to be the least risky option as they are backed by the full faith and credit of the U.S. government. Mortgage bonds and corporate bonds offer some level of risk, with corporate bonds generally considered to be riskier than mortgage bonds due to the higher chance of default.

Question 16

Which of the following bonds may be secured by home mortgages?

Accepted Answer

The answer of Which of the following bonds may be...

Question 17

A bond's value will be below its maturity value of $1,000 if it pays interest of $100 per year and investors require a rate of return of,all other things being equal:

Accepted Answer

If the bond pays interest of $100 per year and investors require a rate of return higher than 10%, then the bond's value will be below its maturity value of $1,000. This is because investors can earn a higher rate of return on other investments with similar risk. Therefore, they will only be willing to purchase the bond at a discount to compensate for the lower rate of return.

Question 18

To determine risks of nondomestic bonds,a multinational corporation must consider all but which one of the following risks?

Accepted Answer

Stabilized currencies are not a risk factor in determining the risks of nondomestic bonds. The other options - political and economic risks, seizure or expropriation of assets, foreign exchange controls, and tax regulations - are all important factors that should be considered when evaluating the risks of investing in nondomestic bonds.

Question 19

AT&T 10-year,$1,000 par value bond is selling at $1,158.91.Interest on this bond is paid semianually.If the annual yield to maturity is 14%,what is the annual coupon rate of the AT&T bond?

Accepted Answer

The answer of AT&T 10-year,$1,000 par value bond is selling...

Question 20

Which of the following types of stocks have the lowest risk to shareholders?

Accepted Answer

Cumulative preferred stock has the lowest risk among the options because it guarantees the payment of dividends in arrears before any dividends can be distributed to common stockholders. This feature provides a layer of financial security to the shareholders.

Quiz 10: Bonds and Stocks: Characteristics and Valuation