Principles of Finance

Principles of Finance

Practice Test 2 Dr. J. Agesa

1.The Bailey Brothers want to issue 20-year, zero coupon bonds that yield 9 percent. What price should it charge for these bonds if the face value is $1,000?
a.$157.25
b.$163.70
c.$178.43
d.$194.49
e.$202.64

2.Cannon Industrial Equipment is currently issuing both 15-year and 25-year bonds at
par. The bonds each pay 7 percent annual interest and have face values of $1,000. You decide to purchase one of each of these bonds. Assume the yield to maturity on each of these bonds is 6.4 percent one year from now. Given this, you will realize _____ percent price appreciation on the 15-year bond and _____ percent price appreciation on the 25-year bond.
a.5.44; 7.39
b.5.44; 7.26
c.5.68; 7.26
d.5.68; 7.39
e.5.90; 7.51

3.The bonds of Quality Manufacturing, Inc. have an 8 percent coupon and pay interest annually. Currently, the bonds are quoted at 94.158. The bonds mature in 4 years. What is the yield to maturity?
a.9.80 percent
b.9.84 percent
c.10.36 percent
d.10.75 percent
e.11.35 percent

4.An 8 percent semiannual coupon bond is priced at $1,204.60. The bond has a $1,000 face value and a yield to maturity of 4.88 percent. How many years will it be until this bond matures?
a.8.00 years
b.8.65 years
c.15.91 years
d.16.00 years
e.17.29 years

5.Lambert, Inc. bonds have a face value of $1,000. The bonds carry a 9 percent coupon, pay interest semiannually, and mature in 11 years. What is the current price of these bonds if the yield to maturity is 8.79 percent?
a.$705.14
b.$710.36
c.$1,014.62
d.$1,020.15
e.$1,641.04

6.A 7 percent bond has a yield to maturity of 6.75 percent, 10 years to maturity, a face value of $1,000, and semiannual interest payments. What is the amount of each coupon payment?
a.$33.75
b.$35.00
c.$50.00
d.$67.50
e.$70.00

7.Which one of the following is most apt to have the smallest liquidity premium?
a.Treasury bill
b.corporate bond issued by a young start-up firm
c.bond issued by the State of Florida
d.municipal bond issued by a rural city
e.corporate bond issued by General Electric (GE)

8.The Treasury yield curve is affected by which of the following?
I. interest rate risk premium
II. real rate
III. default risk premium
IV. inflation risk premium
a.I and II only
b.II and III only
c.I, III, and IV only
d.I, II, and IV only
e.I, II, III, and IV

9.A bond dealer buys at the _____ price and sells at the _____ price.
a.clean; dirty
b.dirty; clean
c.bid; asked
d.asked; bid
e.asked; asked

10.A $1,000 face value bond quoted as 102.16 sells for _____ and a bond quoted as 99:08 sells for _____.
a.$1020.16; $990.80
b.$1020.16; $992.50
c.$1,021.60; $992.50
d.$1,021.60; $990.80
e.$1025.00; $992.50

11.Municipal bonds:
a.are appealing to individuals with high marginal tax rates.
b.are considered risk-free.
c.are rarely callable.
d.generally have a higher coupon rate than comparable corporate bonds.
e.are issued only by incorporated cities.

12.A bond for which no specific property has been pledged as security is classified as a:
a.blanket mortgage bond.
b.trust deed bond.
c.registered bond.
d.debenture.
e.sinking fund bond.

13.Which one of the following bonds is the most sensitive to interest rate movements?
a.zero-coupon, 5 year
b.7 percent annual coupon, 5 year
c.zero-coupon, 10 year
d.5 percent semi-annual coupon, 10 year
e.5 percent annual coupon, 10 year

14.Generally, bonds issued in the U.S. pay interest on a(n) _____ basis.
a.annual
b.semi-annual
c.quarterly
d.monthly
e.daily

15.The rate of return you earn on an investment before adjusting for inflation is called the _____ rate.
a.nominal
b.real
c.premium
d.coupon
e.discounted

16.Which one of the following represents the profit of a bond dealer?
a.market yield
b.bid price
c.bid-ask spread
d.current yield
e.bond premium

17.The call premium is the amount by which the:
a.market price exceeds the par value.
b.market price exceeds the call price.
c.face value exceeds the market price.
d.call price exceeds the par value.
e.call price exceeds the market price.

18.Amy found a bond lying in a street. She picked it up, detached the appropriate bond coupon, and collected the current interest payment. Which type of bond did Amy find?
a.bearer
b.coupon
c.street
d.registered
e.secure

19.The written agreement between a corporation and its lender that spells out the terms of a bond issue is called the:
a.indenture.
b.debenture.
c.private placement agreement.
d.registration statement.
e.issue paper.

20.Joanne's Jewelry has decided to offer new preferred stock for sale that it will call an 8-8 offering. This stock will pay an annual dividend of $8 a share starting 8 years from now. If your required return is 8 percent, how much are you willing to pay for one share of this stock today?
a.$54.03
b.$58.35
c.$92.59
d.$96.16
e.$100.00

21.Investors receive a total return of 15 percent on the common stock of Nickel and Dime, Inc. The stock is selling for $28.25 a share. What is the growth rate of the firm if the company plans to pay an annual dividend of $1.70 a share next year?
a.4.24 percent
b.8.98 percent
c.11.80 percent
d.13.19 percent
e.16.62 percent

22.The common stock of Bethel Baked Goods is valued at $8.76 a share. The company increases its dividend by 1.5 percent annually and expects its next dividend to be $.65 per share. What is the required rate of return on this stock?
a.6.64 percent
b.7.53 percent
c.8.92 percent
d.9.03 percent
e.10.17 percent

23.Samson Enterprises increases its annual dividend by 2 percent each year. The common stock has a market price of $36.20 a share on a required return of 13 percent. What is the amount of the last dividend this company paid?
a.$3.83
b.$3.90
c.$3.98
d.$4.06
e.$4.14

24.The common stock of Ridgeway Properties will pay an annual dividend of $2.70 one year from now. The company increases the dividends by 4 percent annually. Your required return on this stock is 13 percent. Assume that you purchase the stock today and sell it five years from now. What will be the dollar amount of your capital gain for those five years?
a.$3.75
b.$5.10
c.$6.50
d.$7.96
e.$8.90

25.The common stock of Carter & Sons is selling for $29 a share and has a 17 percent rate of return. The growth rate of the dividends is 12 percent annually. What is the amount of the next dividend?
a.$1.38
b.$1.45
c.$1.52
d.$4.25
e.$4.34

26.Presto's just paid an annual dividend of $1.25 per share. The firm has a policy whereby it increases its dividend by 2 percent annually. Which one of the following is the correct computation for the capital gains yield if the current stock price is $21 a share?
a.(.02 $1.25) / $21
b.$1.25 / $21
c..02
d..02 / $21
e.[$1.25 (1 + .02)] / $21

27.An agent who buys and sells securities from inventory is called a:
a.floor trader.
b.dealer.
c.commission broker.
d.broker.
e.floor broker.

Answer Key for the Test 2