Question 1

Which of the following statements is most correct?

Accepted Answer

When a bond's yield to maturity is greater than its coupon rate, it means that the bond is selling at a discount because its effective interest rate is higher than the coupon rate. Therefore, the bond's price must be less than its maturity value. Option A is incorrect because current yield is calculated by dividing the annual interest payment by the current market price of the bond, and is not directly related to the yield to maturity. Option C is incorrect because the coupon rate does impact the price of a bond, even if it has the same yield to maturity and maturity date as another bond with a different coupon rate.

Question 2

If the model below is to give a "reasonable" valuation of a stock,which of the following is not a valid assumption for the model?

Accepted Answer

C

Question 3

An increase in a firm's expected growth rate would normally cause the firm's required rate of return to

Accepted Answer

An increase in a firm's expected growth rate can have varying effects on its required rate of return. It might increase due to higher risk associated with growth, decrease if the growth is seen as reducing risk, or remain unchanged if the market perceives the growth as neutral in terms of risk.

Question 4

Which of the following statements is correct?

Accepted Answer

A lower coupon bond has more interest rate price risk than a higher coupon bond of the same maturity because the lower coupon bond's cash flows are more heavily weighted towards the maturity date, making it more sensitive to interest rate changes.

Question 5

Which of the following statements is correct?

Accepted Answer

The answer of Which of the following statements is correct?
...

Question 6

Which of the following statements is correct?

Accepted Answer

The discount or premium on a bond is the difference between the present value of the bond's future cash flows and its face value. The present value of the bond's future cash flows is calculated by discounting the bond's coupon payments and face value at the market interest rate. If the market interest rate is higher than the bond's coupon rate, the bond will sell at a discount. If the market interest rate is lower than the bond's coupon rate, the bond will sell at a premium.

Question 7

Assuming g will remain constant,the dividend yield is a good measure of the required return on a common stock under which of the following circumstances?

Accepted Answer

When g = 0, the dividend yield alone represents the required return on the stock, as there is no growth component to consider.

Question 8

Which of the following statements is correct?

Accepted Answer

The answer of Which of the following statements is correct?
...

Question 9

If the expected rate of return on a stock exceeds the required rate,

Accepted Answer

If the expected rate of return on a stock exceeds the required rate, it means that the stock is undervalued and has potential for growth. Therefore, it is a good buy.

Question 10

Suppose a stock is not currently paying dividends,and its management has announced that it will not pay a dividend for at least 5 years,but that it does expect to start paying dividends sometime in the future.Under these conditions,which of the following statements is correct?

Accepted Answer

The best choice is D because it states that the value of the stock could be found by DCF (discounted cash flow) procedures, but only by inserting zeros for expected future dividends until the company begins to pay dividends. Option A is incorrect because it assumes a known growth rate, whereas the question only provides information on when dividends will begin. Option B is incorrect because the present value of future dividends is a common method of valuing stocks. Option C is incorrect because stocks without dividends can still have value based on the company's assets, earnings potential, and other factors.

Question 11

One of the basic relationships in interest rate theory is that,other things held constant,for a given change in the required rate of return,the ____ the time to maturity,the ____ the change in price.

Accepted Answer

The answer of One of the basic relationships in interest...

Question 12

Which of the following statements is most correct?

Accepted Answer

A is correct because long-term bonds are more sensitive to changes in interest rates than short-term bonds because long-term bonds have a longer time horizon for price volatility. 
C is correct because zero-coupon bonds have no coupon payments and their entire return is dependent on the price appreciation of the bond at maturity. Therefore, an increase in interest rates will have a greater effect on the present value of the zero-coupon bond than on a bond with a 10 percent annual coupon payment.

Question 13

Which of the following is not true about bonds? In all of the statements,assume other things are held constant.

Accepted Answer

Statement B is incorrect because for a given bond, a percentage point increase in interest rates causes a smaller dollar capital loss than the capital gain from an identical decrease in interest rates, due to the convexity of bond prices.

Question 14

Which of the following statements is correct?

Accepted Answer

When a coupon bond sells at its par value, the yield to maturity consists entirely of an interest yield because there is no gain or loss associated with the bond. Choices A, C, and D are incorrect statements.

Question 15

Which of the following statements is correct?

Accepted Answer

The current yield on a noncallable discount bond is calculated by dividing the annual coupon interest payment by the market price of the bond. As the market price of a discount bond approaches its par value as the maturity date approaches, the current yield increases. Therefore, the current yield will normally exceed the bond's coupon interest rate, which is fixed at the time of issuance.

Question 16

Which of the following statements is most correct?

Accepted Answer

Statement A is incorrect because current yield only reflects the annual interest payment as a percentage of the bond's current market price, while yield to maturity reflects the total return an investor would receive if the bond is held until maturity. Therefore, a higher current yield does not necessarily mean a higher yield to maturity.
Statement B is incorrect because yield to maturity is a better measure of return than current yield since it takes into account the difference between the bond's purchase price and its face value at maturity. Current yield only reflects the annual interest payment as a percentage of the bond's current market price.
Statement C is correct because when a coupon bond is selling at par, its current yield equals the annual coupon payment divided by the bond's par value, which is also the same as its yield to maturity.

Question 17

You have just purchased a 10-year,$1,000 par value bond.The coupon rate on this bond is 8 percent annually,with interest being paid each 6 months.If you expect to earn a 10 percent simple rate of return on this bond,how much did you pay for it?

Accepted Answer

The bond pays semi-annual interest of $40 (8% of $1,000 divided by 2), and the face value is $1,000. To find the price of the bond given a 10% annual simple interest rate (5% per period since interest is semi-annual), we use the present value formula for an annuity to calculate the present value of the interest payments, plus the present value of the face value. The formula for the present value of an annuity is PV = PMT * [(1 - (1 + r)^-n) / r], and the present value of a lump sum is PV = FV / (1 + r)^n. Here, PMT = $40, r = 0.05 (since 10% annual rate divided by 2 for semi-annual), n = 20 periods (10 years * 2), and FV = $1,000. Plugging these into the formulas gives us the bond's price, which is closest to $875.38.

Question 18

You intend to purchase a 10-year,$1,000 face value bond that pays interest of $60 every 6 months.If your simple annual required rate of return is 10 percent with semiannual compounding,how much should you be willing to pay for this bond?

Accepted Answer

The answer of You intend to purchase a 10-year,$1,000 face...

Question 19

If interest rates fall from 8 percent to 7 percent,which of the following bonds will have the largest percentage increase in its value?

Accepted Answer

When interest rates fall, the bond prices rise. The percentage increase in value depends on the bond's maturity and coupon rate. Zero-coupon bonds have no coupon payments, so they are more sensitive to changes in interest rates than coupon-bearing bonds. Also, longer-maturity bonds are more sensitive to interest rate changes than shorter-maturity bonds. Therefore, the 10-year zero-coupon bond (choice A) will have the largest percentage increase in its value when interest rates fall from 8 percent to 7 percent.

Question 20

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 simple yield to maturity on this investment,what is the maximum price you should be willing to pay for the bond?

Accepted Answer

The answer of Assume that you wish to purchase a...

Quiz 10: Valuation Concepts

Which of the following statements is most correct?

If the model below is to give a "reasonable" valuation of a stock,which of the following is not a valid assumption for the model?

An increase in a firm's expected growth rate would normally cause the firm's required rate of return to

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following statements is correct?

Assuming g will remain constant,the dividend yield is a good measure of the required return on a common stock under which of the following circumstances?

Which of the following statements is correct?

If the expected rate of return on a stock exceeds the required rate,

Suppose a stock is not currently paying dividends,and its management has announced that it will not pay a dividend for at least 5 years,but that it does expect to start paying dividends sometime in the future.Under these conditions,which of the following statements is correct?

One of the basic relationships in interest rate theory is that,other things held constant,for a given change in the required rate of return,the the time to maturity,the the change in price.

Which of the following statements is most correct?

Which of the following is not true about bonds? In all of the statements,assume other things are held constant.

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following statements is most correct?

You have just purchased a 10-year,$1,000 par value bond.The coupon rate on this bond is 8 percent annually,with interest being paid each 6 months.If you expect to earn a 10 percent simple rate of return on this bond,how much did you pay for it?

You intend to purchase a 10-year,$1,000 face value bond that pays interest of $60 every 6 months.If your simple annual required rate of return is 10 percent with semiannual compounding,how much should you be willing to pay for this bond?

If interest rates fall from 8 percent to 7 percent,which of the following bonds will have the largest percentage increase in its value?

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 simple yield to maturity on this investment,what is the maximum price you should be willing to pay for the bond?