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Q4:

 

A bond will sell at a premium when its coupon interest rate

 

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is lower than the market interest rate on similar bonds

 

 

 

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varies more than the market interest rate on similar bonds

 

 

 

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exceeds the market interest rate on similar bonds

 

 

 

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equals the market interest rate on similar bonds

 

A bond will sell at a premium when its coupon interest rate

 

[removed]

is lower than the market interest rate on similar bonds

 

 

 

[removed]

varies more than the market interest rate on similar bonds

 

 

 

[removed]

exceeds the market interest rate on similar bonds

 

 

 

[removed]

equals the market interest rate on similar bonds

 

A bond pays a coupon interest rate of 7.5%. The market rate on similar bonds is 8.4%. The bond will sell at _____.

 

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par

 

 

 

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a discount

 

 

 

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a premium

 

 

 

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book value

 

The Efficient Market Hypotheses (EMH) consist of all of the following forms except

 

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the Strong Form.

 

 

 

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the Weak Form.

 

 

 

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The Semi-Strong Form.

 

 

 

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the Semi-Efficient Form.

 

An example of a stock index is the

 

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New York Stock Exchange

 

 

 

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Chicago Board of Trade

 

 

 

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Dow Jones Industrial Average

 

 

 

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London Stock Exchange

 

An example of a stock index is the

 

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New York Stock Exchange

 

 

 

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Chicago Board of Trade

 

 

 

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Dow Jones Industrial Average

 

 

 

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London Stock Exchange

 

An active secondary market for debt or equity securities makes raising new capital less expensive for firms.

 

 

 

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True

 

 

 

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False

 

Secondary market transactions in the United States mostly take place over the counter and not in exchanges.

 

 

 

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False

 

 

 

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True

 

Preferred dividend payments are fixed amounts paid regularly, similar to the interest payments on corporate bonds.

 

 

 

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False

 

 

 

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True

 

The market considers preferred stock to be a debt security because the dividend payment is a fixed contractual obligation and has credit ratings like bonds.

 

 

 

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False

 

 

 

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True

 

Preferred stock with no fixed maturity can be valued as a perpetuity.

 

 

 

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False

 

 

 

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True

 

 

Assg 4

 

Four years ago, Lisa Stills bought six-year, 14.04 percent coupon bonds issued by the Fairways Corp. for $947.68. If she sells these bonds at the current price of $851.22, what will be her realized yield on the bonds? Assume similar coupon-paying bonds make annual coupon payments. (Round answer to 2 decimal places, e.g. 15.25%.)

 

Realised rate of return ____%

 

Pierre Dupont just received a cash gift from his grandfather. He plans to invest in a five-year bond issued by Venice Corp. that pays an annual coupon of 4.03 percent. If the current market rate is 8.46 percent, what is the maximum amount Pierre should be willing to pay for this bond? (Round answer to 2 decimal places, e.g. 15.25.)

 

Pierre should pay _____%

 

Rockne, Inc., has outstanding bonds that will mature in six years and pay an 8 percent coupon semiannually. If you paid $1,052.06 today and your required rate of return was 6.30 percent.

 

What is the worth of the bond? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25.)

 

Worth of the bond ________%

 

Did you pay the right price for the bond?

 

Adrienne Dawson is planning to buy 10-year zero coupon bonds issued by the U.S. Treasury. If these bonds have a face value of $1,000 and are currently selling at $408.35, what is the expected return on them? Assume that interest compounds semiannually on similar coupon paying bonds. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

 

Effective rate of return _________%

 

Nynet, Inc., paid a dividend of $4.38 last year. The company’s management does not expect to increase its dividend in the foreseeable future. If the required rate of return is 16.0 percent, what is the current value of the stock? (Round answer to 2 decimal places, e.g. 15.25.)

 

Current value _________%

 

Ron Santana is interested in buying the stock of First National Bank. While the bank expects no growth in the near future, Ron is attracted by the dividend income. Last year the bank paid a dividend of $7.05. If Ron requires a return of 16.5 percent on such stocks, what is the maximum price he should be willing to pay for a share of the bank’s stock? (Round answer to 2 decimal places, e.g. 15.25.)

 

Maximum price $____________

 

Reco Corp. is expected to pay a dividend of $2.48 next year. The forecast for the stock price a year from now is $40.00. If the required rate of return is 16.5 percent, what is the current stock price? Assume constant growth. (Round answer to 2 decimal places, e.g. 15.25.)

 

Current stock price S___________

 

The preferred stock of Axim Corp. is currently selling at $50.93. If the required rate of return is 11.1 percent, what is the dividend paid by this stock? (Round answer to 2 decimal places, e.g. 15.25.)

 

Dividend paid $__________

Discusion 4

 

Why are existing bonds affected by changing interest rates? Use examples in your response.

 

For this Web Field Trip you will study the Gordon Growth Model, which you can access by clicking here.

An extensive discussion on growth models can also be found at http://www.retailinvestor.org/valuemetrics.html#divYield.

What happens to the “Calculated Value” as the discount rate changes? What discount rate yields the highest value? Why?