Finance 380 Exam 2 (Answered) With Complete Verified Solution

Finance 380 Exam 2 (Answered) With Complete Verified Solution A bond with several years to maturity has a coupon rate that is greater than its yield to maturity. The bond will: have a price greater than its par value or be priced at a premium The risk that the bond issuer might not make the promised coupon and/or par value payments is referred to as: default risk What is the current yield for a bond with a par value of $1,000 and a 6% annual coupon rate if the bond sells for $900? 6.67% What is the price of a bond with a par value of $1,000, an 8% coupon rate paid annually, and a yield to maturity of 6% if the bond matures in 10 years? $1,147.20 A bond with a par value of $1,000 has a 6% coupon rate with semi-annual coupon payments made on July 1 and January 1. If the bond changes hands on December 1, which of the following is true with respect to accrued interest? The buyer will pay the seller $25 of accrued interest What is the price of a bond with a par value of $1,000, 11 years to maturity and a 7% coupon rate with semi-annual coupon payments if the bond has a yield to maturity of 8%? $927.74 What is the pre-tax equivalent yield for a municipal bond with a 5.14% yield if an investor has a tax rate of 10%? 5.71% What is the yield to maturity of a bond with a par value of $1,000, a 6% coupon rate with semi-annual payments, and 5 years to maturity if the bond sells for $1,100? 3.79% What is the yield to maturity of a bond with a par value of $1,000, a coupon rate of 7% with annual payments, and 9 years to maturity if the bond sells for $1,100? 5.56% The risk that the currency in which a bond is denominated may decline versus the bondholder's home currency is referred to as: Current risk A YTM for a semiannual coupon bond is calculated by taking the semiannual rate and multiplying it by two. Is the YTM for a semiannual bond an APR or EAR? APR = rate per period x number of periods per year A bond has an 8% coupon rate, semiannual coupons, $1,000 par value, and six years to maturity. Price the bond using a 10% YTM. $911.37 Explain when and why a bond might sell for a discount price. YTM Coupon rate Discount = Price Par value Explain when a a bond might sell for a premium price. YTM Coupon rate Price Par value What is the price of a zero coupon bond with a $1,000 face value if investors require a 7.0% YTM with a maturity of: A) Six years B) Eight years C) Ten years A) $666.34 B) $582.01 C) $508.35 What is the yield to maturity of a bond with a par value of $1,000, a coupon rate of 7% with annual payments, and 9 years to maturity if the bond sells for $1,300? 3.12% The risk that interest rates may decline and the bondholder will earn a lower rate as they invest the coupon payments that they receive is referred to as: Reinvestment risk What is the yield to maturity of a bond with a par value of $1,000, a 6% coupon rate with semi-annual payments, and 5 years to maturity if the bond sells for $1,200? 1.80% What is the pre-tax equivalent yield for a municipal bond with a 4% yield if an investor has a tax rate of 10%? 4.44% The risk that a bond's price may need to be lowered to sell it quickly is referred to as: Lack of marketability risk What is the price of a bond with a par value of $1,000, an 8% coupon rate paid annually, and a yield to maturity of 6% if the bond matures in 9 years? $1,136.03 What is the current yield for a bond with a par value of $1,000 and a 6% annual coupon rate if the bond sells for $1,100? 5.45% What is the price of a bond with a par value of $1,000, 11 years to maturity and a 7% coupon rate with semi-annual coupon payments if the bond has a yield to maturity of 4%? $1,264.87 What is the price of a bond with a par value of $1,000 if it is quoted at 104? $1,040 What is the price of a bond with a par value of $1,000, 11 years to maturity and a 7% coupon rate with semi-annual coupon payments if the bond has a yield to maturity of 6%? $1,079.68 A stock is expected to pay a dividend of $2.50 next year. Dividends are expected to grow at an annual rate of 6%. What is the price of the stock if the required rate of return is 16%? $25.00 A share of preferred stock pays an annual dividend of $2.00. What is the price of the preferred stock if the required rate of return is 12%? $16.67 _____________________ facilitate secondary market transactions (bring buyers and sellers together) and earn a commission or charge a fee. Brokers A share of preferred stock pays an annual dividend of $3.00. What is the required rate of return on the stock if the current market price is $40? 7.50% What are the dividend yield, capital gains yield, and total required rate of return based on the following. P0 = $15, D1 = $1.20, P1 = $17.00 8%, 13.33%, 21.33% You have inside (non-public) information about a firm, but are unable to "beat the market," or "earn abnormal returns" from trading in that stock. This indicates that the market is _____________________. (Select the highest/strongest level that applies) Strong form efficient A stock just paid a dividend of $1.00. Dividends are expected to grow at an annual rate of 5%. What is the price of the stock if the required rate of return is 15%? $10.50 Funds set aside to be used to repurchase shares in the open market or call the shares is a _______________________. sinking fund Which of the following pertain(s) to common stock: -limited liability -residual claim -voting rights to elect the Board of Directors A stock is expected to pay a dividend of $3.00 next year. Dividends are expected to grow at an annual rate of 4%. What is the required rate of return on the stock if the current market price is $30.00? 14% AEH, Inc. just paid a $1.00 dividend and is expected to pay a $1.06 dividend next year. What is AEH's capital gains yield? 6%