Study guide Sophia Finance Milestone 2_Complete Questions and Answers (Latest 2020/2021)

Study guide Sophia Finance Milestone 2_Complete Questions and Answers (Latest 2020/2021) Sophia Finance Milestone 2 1 Determine the value of a stock with the following variables using the constant growth model: Current annual dividend: $2.75 per share Required return rate: 8.5% Constant growth rate: 6% $110.00 $116.60 $119.35 $114.70 CONCEPT Stock Valuation 2 You would like to have $8, 000 in an account after four years' time. If the account earns 4% compounded interest yearly, how much would you have to deposit today? $7,249 $6,838 $7,692 $6,897 CONCEPT Present Value, Single Cash Flows 3 Janice purchased a $1,000 10-year Treasury note that promised to pay her 1.125% interest every 6 months for the life of the loan. Which of those numbers is the par value of the note? 1.125 1,000 6 10 CONCEPT Key Characteristics of Bonds 4 Which of the following is true for calculating the future value of multiple cash flows? It is simpler to find the FV of irregular cash flows than of annuities. You must choose the same point in the future for each individual cash flow to determine the FV of multiple investments. You can only find the FV of multiple cash flows if the payments occur with the same regularity. To find the FV of multiple cash flows, add the PV of each cash flow together and use the total in the formula for FV. CONCEPT Valuing Multiple Cash Flows 5 Consider what you have learned about valuing bonds. A: Coupon rate = 3.5%, YTM = 4% B: Coupon rate = 3.2%, YTM = 3.2% C: Coupon rate = 2.8%, YTM = 3.5% D: Coupon rate = 4%, YTM = 3.7% Which of the bonds is selling at a premium? C A B D CONCEPT Valuing Bonds 6 In calculating the yield of an investment, what is the relationship between APR and APY? APR is always slightly lower than APY if an investment is earning compounding interest. APR and APY are two ways of expressing the same measurement of yield. APR can be higher or lower than the APY of a compounding investment, depending on how high the interest rate is. APR is always slightly higher than APY if an investment is earning compounding interest. CONCEPT Yield 7 Nadia is going to receive $1,000 from her grandparents next year. According to the time value of money, the gift of $1,000 is worth __________ a gift of $1,000 if she received it today. the same as more than less than twice as much as CONCEPT Introduction to the Time Value of Money 8 Select the statement that is true of preferred stock. Preferred stock has less protection than common stock if a company goes bankrupt. Preferred stockholders have a degree of control over corporate policy. Preferred stock does not change in value. Preferred stock can be converted into common stock. CONCEPT Types of Stock 9 Select one advantage of an annuity for a borrower. It can be easier to make regular payments rather than a single lump sum. The sum of all the payments will be less than the original loan amount. Annuities do not charge interest. The payment amount may go down if interest rates fall. CONCEPT Annuities 10 Select the pairing that is correctly matched. Preferred stock: the value of the stock is not affected by market factors Common stock: may only be sold on the secondary market Preferred stock: stockholders' claim to assets is subordinate to that of debtholders Common stock: usually has a pre-negotiated dividend CONCEPT Rules and Rights of Common and Preferred Stock 11 Preemptive rights allow stockholders to acquire __________ before the general public. company assets preexisting shares dividends new stock CONCEPT Defining Stock 12 Which descriptor relates to the income approach for valuing corporations? Reflects the equilibrium between buyers and sellers of company stock Estimates the cost of replacing a company's resources Multiplies the share price by the number of shares outstanding Involves the capital asset pricing model CONCEPT Valuing the Corporation 13 An investment fund that uses more complex investment strategies to generate returns for their wealthy or institutional investors is a(n) __________. exchange-traded fund index fund hedge fund mutual fund CONCEPT Stock Markets 14 Rochelle wants to buy a bond, but she wants to avoid interest rate risk. She also prefers to receive a payment every three months instead of the traditional six months. What type of bond should she buy? Government Fixed-rate Zero-coupon Floating-rate CONCEPT Types of Bonds 15 Select the true statement about reinvestment risk. It is the risk that a bond's price will fall below its par value. Callable bonds are less exposed to reinvestment risk. Reinvestment risk is inversely related to interest rate risk. A smart investor can eliminate reinvestment risk in addition to interest rate risk. CONCEPT Bond Risk 16 Which of the following is a disadvantage of bonds for a potential investor? Some bonds can be redeemed early by the issuer. Bondholders risk a significant price drop if a large number of bonds are sold at once. They have less legal protection than stocks. They are more likely than stocks to end up valueless if a company goes bankrupt. CONCEPT Advantages and Disadvantages of Bonds 17 You loan $30,000 of your life savings to a friend for five years at 2% simple interest annually. What is the value of your $30,000 in five years? $26,878 $27,000 $33,000 $33,122 CONCEPT Future Value, Single Cash Flows 18 Select the statement that correctly explains the relationship between interest rates and present or future value. Assuming other variables stay the same, if the interest rate decreases, the future value of an investment increases. Assuming other variables stay the same, if the interest rate increases, the present value of an investment increases. Assuming other variables stay the same, if the interest rate decreases, the present value of an investment decreases. The interest rate and the present value of an investment are inversely related. CONCEPT Additional Detail on Present and Future Values 19 Because a bond is a legal contract, what could happen if a borrower fails to meet their obligation? The lender could then own the bond outright. The borrower could face bankruptcy proceedings. The bond could be reevaluated by a rating agency. The borrower could be required to prepare an offering memorandum. CONCEPT Understanding Bonds 20 Which of the following accurately describes an inverted yield curve? A positively sloping curve that may indicate that the economy is about to enter a deflationary period. A negatively sloping curve that may indicate that the economy is about to enter a period of inflationary growth. A positively sloping curve that indicates that investors are uncertain about the direction of the economy. A negatively sloping curve that may be an indication that the economy is about to enter a period of contraction. CONCEPT The Basics of Interest Rates