11. You own a bond that has a 7% coupon and matures in 12 years. You purchased this bond at par value when it was originally issued. If the current market rate for this type and quality of bond is 7.5%, then you would expect:
A. to realize a capital loss if you sold the bond at the market price today.
B. today’s market price to exceed the face value of the bond.
C. the bond issuer to increase the amount of each interest payment on these bonds.
D. the yield to maturity to remain constant due to the fixed coupon rate.
E. the current yield today to be less than 7%.
12. Wine and Roses, Inc. offers a 7% coupon bond with semiannual payments and a yield to maturity of 7.73%. The bonds mature in 9 years. What is the market price of a $1,000 face value bond?
A. $1,108.16
B. $963.88
C. $1,401.26
D. $1,401.86
E. $953.28
13. The constant dividend growth model:
I. assumes that dividends increase at a constant rate forever.
II. can be used to compute a stock price at any point of time.
III. states that the market price of a stock is only affected by the amount of the dividend.
IV. considers capital gains but ignores the dividend yield.
A. II only
B. III and IV only
C. I and II only
D. I only
E. I, II, and III only
14. The common stock of Eddie’s Engines, Inc. sells for $25.71 a share. The stock is expected to pay $1.80 per share next month when the annual dividend is distributed. Eddie’s has established a pattern of increasing its dividends by 4% annually and expects to continue doing so. What is the market rate of return on this stock?
A. 11%
B. 7%
C. 15%
D. 13%
E. 9%
15. A stock you are interested in paid a dividend of $1 last week. The anticipated growth rate in dividends and earnings is 20% for the next year and 10% the year after that before settling down to a constant 5% growth rate. The discount rate is 12%. Calculate the expected price of the stock.
A. $19.75
B. $17.20
C. $17.90
D. $18.20
E. $19.40
16. A risk that affects a large number of assets, each to a greater or lesser degree is called:
A. systematic risk.
B. unsystematic risk.
C. standard error.
D. total risk.
E. economic risk.
17. You recently purchased a stock that is expected to earn 12% in a booming economy, 8% in a normal economy and lose 5% in a recessionary economy. There is a 15% probability of a boom, a 75% chance of a normal economy, and a 10% chance of a recession. What is your expected rate of return on this stock?
A. 7.65%
B. 6.45%
C. 8.30%
D. 7.30%
E. 5.00%
18. Which one of the following stocks is correctly priced if the risk-free rate of return is 2.5% and the market risk premium is 8%?
A. D
B. C
C. A
D. B
E. E
19. According to the CAPM:
A. the expected return on a security is negatively and linearly related to the security’s beta.
B. the expected return on a security is negatively and non-linearly related to the security’s beta.
C. the expected return on a security is positively and non-linearly related to the security’s beta.
D. the expected return on a security is positively related to the security’s beta.
E. the expected return on a security is positively and linearly related to the security’s variance.
20. Weson, Inc. has sales of $462,000, costs of goods sold of $308,000 and average accounts receivable of $48,900. How long does it take its credit customers to pay for their purchases?
A. 41.23 days
B. 57.95 days
C. 36.09 days
D. 44.20 days
E. 38.63 days
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