Q&A Hero

Q: Two years ago, Trans-Atlantic Airlines sold $250 million worth of bonds at $1,000 each. The bonds had a maturity of 12 years and a coupon rate of 12%. Today these bonds are selling for $910. Determine the yield-to-maturity (to the nearest tenth of one percent). a. 13.2% b. 5.6% c. 13.7% d. 12.0%

Q: Two-years ago, Trans-Atlantic Airlines sold a $250 million bond issue to finance the purchase of new jet airliners. These bonds were issued in $1000 denominations with an original maturity of 12 years and a coupon rate of 12%. Determine the value today of one of these bonds to an investor who requires a 14% rate of return on these securities. a. $626 b. $463 c. $896 d. $270

Q: A WPI 10s 08 bond closed at 89. What is the current yield on this bond? a. 10.10% b. 11.35% c. 10.73% d. 11.24%

Q: J. C. Penney has an 11s 97 bond that closed at 102 3/8. What is the current yield on this bond? a. 10.74% b. 10.84% c. 10.78% d. 11.00%

Q: A General Electric 7 1/2s 96 bond closed at 98. What is the current yield? a. 7.65% b. 7.81% c. 7.50% d. 7.34%

Q: The State of Adaven issued $50 million of perpetual bonds in 1960. The bonds were issued in $100 denominations with an annual coupon interest rate of 5%. Determine the rate of return or yield on these bonds if they are purchased at the current price of $40. a. 12.5% b. 8.0% c. 5.0% d. 1.25%

Q: The State of Adaven issued $50 million of perpetual bonds in 1960. The bonds were issued in $100 denominations with an annual coupon interest rate of 5%. Determine the value of these bonds today to an investor who requires a 10% return on his investment. a. $25 b. $5 c. $10 d. $50

Q: If an Allied Chemical zero coupon bond due in 12 years is selling for $420.00, what is its yield to maturity? a. 7.50% b. 4.64% c. 6.51% d. 2.85%

Q: What is the yield to maturity for a Pep Boys zero coupon bond that matures in 14 years if the bond is selling for $530.00? a. 5.84% b. 4.64% c. 4.28% d. 5.49%

Q: An AT&T 5 1/2s 97 bond with a current yield of 6.2% must be selling ____ its face value. a. above b. at c. below d. any of these could be correct

Q: The two elements that make up the risk-free rate of return are a. the supply of funds and the demand for funds b. the yield on 90-day Treasury bills plus an inflation premium c. the real rate of return plus an inflation premium d. the required return plus a risk premium

Q: The risk-free rate of return is composed of which of the following elements: a. risk premium and inflation b. cost of capital and risk premium c. real rate of return and risk premium d. real rate of return and inflation

Q: ____ refers to the ability of an investor to buy and sell a company's securities quickly and without a significant loss of value. a. Default risk b. Business and financial risk c. Maturity risk d. Marketability risk premium

Q: The term structure of interest rates is related to the ____. a. default risk premium b. seniority risk premium c. marketability risk premium d. maturity risk premium

Q: According to the ____, long-term interest rates are a function of expected short-term interest rates. a. Maturity theory b. Expectations theory c. Market segmentation theory d. Preferred habitat theory

Q: The ability of an investor to buy and sell a company's securities quickly and without a significant loss of value is known as the a. financial risk b. marketability risk c. business risk d. security risk

Q: The following yields on 20 year bonds prevailed in January for the three securities shown: Aa-rated corporate bond 9.98% Baa-rated corporate bond 10.34% B-rated corporate bond 11.12% The difference in yields is due primarily to a. maturity risk premium b. default risk premium c. seniority risk premium d. financial risk premium

Q: The default risk premium reflects the fact that a. the premium remains constant over time b. there is a positive relationship between risk and maturity c. there is a positive relationship between default risk and required returns d. the premium varies depending on the time to maturity

Q: The maturity premium reflects a preference by many lenders for a. shorter maturities b. reducing yields c. high yield securities d. longer maturities

Q: The term structure of interest rates is the pattern of interest rate yields for securities that differ only in a. default risk b. liquidity premiums c. the yield to maturity d. the length of time to maturity

Q: The term structure of interest rates is the pattern of interest rate yields for debt securities that are similar in all respects except for differences in a. tax status b. liquidity c. risk of default d. maturity

Q: A zero coupon bond is a bond that a. originally sold at a discount b. will sell for a premium c. is a premium value bond d. has a high current yield

Q: The ____ of a debt issue is equal to the difference between the ____ and the ____. a. call price; market price; par value b. call price; market price; call premium c. call premium; call price; par value d. call premium; market price; par value

Q: Which of the following features (if any) of preferred stock provides the investor with a measure of protection against inflation? a. adjustable dividend rate b. cumulative feature c. call feature d. par value

Q: Junk bonds (i.e., bonds issued by companies with weak financial positions) rated ____ or lower by Moody's. a. Baa b. BBB c. Ba d. CCC

Q: A zero coupon bond is an example of ____. a. a fixed income security b. an original issue deep discount bond c. a tax-exempt bond d. both a fixed income security and an original issue deep discount bond

Q: ____ are notsecured by specific assets. a. Equipment trust certificates b. Mortgage bonds c. Debentures d. Collateral trust bonds

Q: The basic relationship in bond valuation is for a given percentage point change in the required rate of return, the ____ the time to maturity, the ____ the change in value. a. shorter, greater b. longer, smaller c. longer, greater d. shorter, smaller

Q: "Junk bond" is a term used to describe a bond that a. is in default b. is rated Ba or lower c. is currently paying interest d. has been downgraded by Moody's

Q: If an American Water Company bond has a coupon rate of 9.0 percent and is selling for $920, then the yield to maturity must be: a. greater than 9% b. equal to 9% c. less than 9% d. cannot be determined

Q: The ____ represents the debtholders in dealings with the issuing company. a. trustee b. stakeholders c. broker d. investment banker

Q: There is a(n) ____ relationship between the value of a bond and its required rate of return. a. direct b. distant c. inverse d. turgid

Q: The call feature is an advantage to the issuing firm a. if the bond has a floating rate b. if interest rates decline c. if the bond has a low par value d. if interest rates increase

Q: When the required rate of return is ____ the coupon rate, the bond will sell at a discount. a. less than b. greater than c. the same as d. equal to

Q: The value of a 15-year bond ____ for a given change in the required rate of return than the value of a 5-year bond. a. will change more b. will change less c. will not change d. cannot be determined from the information given

Q: The major advantages of long-term debt include all the following except: a. decrease in financial risk b. relatively low, explicit after-tax cost c. owners are able to maintain control d. increased earnings per share through using financial leverage

Q: Junk bonds are a. usually rated Ba or higher b. are issued by firms with a high debt ratio c. issued with coupon rates at least 8 percentage points or more above the highest quality issues d. none of these are correct

Q: Normally the coupon rates on new bonds a. do not change over the life of the issue b. are set equal to the market rate plus an inflation premium c. float with changes in the prime rate d. are set just over the prevailing prime rate

Q: A sinking fund allows the issuer to a. redeem an entire debt issue prior to maturity b. purchase a portion of the debt each year in the open market or call a portion of the debt for mandatory redemption c. call the entire debt issue d. accumulate interest expenses into a sinking fund account

Q: The call feature of a long-term bond a. is an optional retirement provision b. states the call price c. allows the issuer to replace a high coupon bond with one with a lower coupon bond d. all these are correct answers.

Q: The indenture is a contract between the issuer and lenders that does all the following except: a. specifies the manner in which the principal must be repaid b. details the nature of the debt issue c. gives management's expectations about return of the proceeds d. lists any restrictive covenants

Q: The quality of a debenture depends on the a. general credit-worthiness of the issuing company b. value of the assets used as collateral c. the coupon rate of the debenture d. length of time to maturity

Q: Which of the following is nota characteristic of long- term debt? a. interest paid to bond holders is a tax-deductible expense to the firm b. firm is not legally required to pay interest to bond-holders c. usually has a specific maturity d. all of these are characteristics of long-term debt

Q: The yield-to-maturity of a bond with a finite maturity date is a function of all of the following variables except: a. the current price b. the required rate of return on the bond c. the uniform annual interest payments d. the maturity value

Q: The value of a perpetual bond is equal to the annual interest payment divided by the: a. risk-free rate b. required rate of return c. bank interest rate d. after-tax historical cost of capital

Q: The ____ the investor's required rate of return on a bond, the ____ will be the value of the bond to the investor. a. lower, higher b. higher, higher c. lower, lower d. higher, lower

Q: If a firm could sell a mortgagebond at an 8% interest rate, it could sell an otherwise identical debentureat a. a rate less than 8% b. 8% c. a rate greater than 8% d. cannot be determined

Q: Zero coupon bonds are an example of a. original issue deep discount bonds b. extendible notes c. convertible bonds d. floating rate notes

Q: What is an indenture?

Q: What would a GMA 6% coupon bond maturing in 14 years sell for if the current yield is 6.9% and the yield-to-maturity is 7.48%?a. $950.20b. $920.02c. $1051.54d. $872.90

Q: WXAM has an outstanding bond issue with a coupon rate of 6 1/8%, and a current yield of 6.9%. The yield to maturity on this bond is 7 5/8%. What is the market price of this bond if it pays interest semi-annually and has 12 years to maturity? a. $883.42 b. $937.45 c. $943.65 d. $1000.00

Q: What is the yield-to-maturity of a Viacom bond which is selling for $948.75 with 6 years to maturity and a 7% coupon?a. 7.01%b. 8.11%c. 8.38%d. 7.38%

Q: What is the yield-to-maturity of an Acme bond selling for $1107.50 with 5 years to maturity, a 12 1/2% coupon, and semi-annual compounding?a. 10.36%b. 11.29%c. 9.73%d. 10.20%

Q: How does the Security Market Line identify undervalued and overvalued stocks?

Q: What is the Security Market Line?

Q: Which of the following measures the variation from an expected value? a. standard deviation b. probability distribution c. mean d. chi square

Q: Which of the following statements is/are correct? I. Valuation is the process that links risk and return to determine the worth of an asset. II. Any action taken by the financial manager that increases risk will also increase the required return. a. I only b. II only c. Both I and II d. Neither I nor II

Q: Systematic risk is also referred to as: a. diversifiable risk b. economic risk c. nondiversifiable risk d. not relevant

Q: What is the required rate of return on a stock that has a beta of 2.3, the market risk premium is 12% and the risk-free rate is 3%? a. 15.7% b. 12.8% c. 21.9% d. 30.6%

Q: What is the risk premium of a stock if the risk-free rate is 3%, the return in the market is 12% and beta is 1.1? a. 12.9% b. 13.2% c. 9.9% d. 15.1%

Q: Comfy Camelback Travel Agencies has a beta of 1.2. The return in the market is 14% and the risk-free rate is 3.5%. What is the risk premium? a. 16.1% b. 15.7% c. 12.6% d. 18.2%

Q: Using the beta of Mucho Macho Tuxedo Shop, what would be an investor's required rate of return if he/she had bought a share of Mucho Macho stock? The market return is 12% and the risk-free rate is 2.5%. Past Returns inthe Market Returns on thisCorporation's Stock4 39 115 227 18-1 -9a. 22.6%b. 15.7%c. 19.2%d. 13.7%

Q: What is the beta of this corporation's stock? Past Returns inthe Market Returns on thisCorporation's Stock4 39 115 227 18-1 -9a. 2.6b. 1.01c. 1.76d. .85

Q: What is the beta for Always Good Corporation if the past market returns are as listed?Past MarketReturns Returns forAlways Good Corp.-10 -1510 1219 174 -3-4 4a. 1.07b. 2.1c. .5d. .98

Q: Security A offers an expected return of 14% with a standard deviation of 8%. Security B offers an expected return of 11% with a standard deviation of 6%. If you wish to construct a portfolio with a 12.8% expected return, what percentage of the portfolio will consist of security A? a. 55% b. 60% c. 65% d. 45%

Q: The beta of Sanafil is 1.2. Sanafil is evaluating a merger with Matra, a firm that has a beta of 0.95. Sanafil's stock sells for $40 per share and there are 10 million shares outstanding. Matra's stock sells for $60, but there are only 2 million shares outstanding. If these two firms merge, what will be the merged firm's beta? a. 1.00 b. 1.14 c. 1.05 d. 1.16

Q: Determine the beta of a portfolio consisting of the following common stocks:Security Market Value BetaGlaxo $2,600 1.24SCANA 3,700 .88BancOne 2,900 .95Pepsi 3,400 1.05AFLAC 3,000 1.09Votec 4,400 1.41a. 1.00b. 1.12c. 1.09d. 1.11

Q: Jim Bowles is an investor who believes the economy is gaining strength and, therefore, wishes to increase the risk of his 14 security portfolio. Each security has a current market value of $5,000 and the current beta of the portfolio is 1.02. The beta of the least risky security is .76. If Jim replaces the least risky security with another security with the same market value but a beta of 1.45, what will the portfolio beta be then?a. 1.03b. 1.07c. 1.08d. 1.04

Q: Determine the beta of a portfolio consisting of the following common stocks:Security Market Value BetaBoeing $5,000 1.2Exxon $4,000 0.8Duke Power $2,500 0.6Blockbuster Video $2,000 1.4Coca-Cola $7,500 1.0a. 0.93b. 0.85c. 1.00d. cannot be determined

Q: An investor, who believes the economy is slowing down, wishes to reduce the risk of her portfolio. She currently owns 12 securities, each with a market value of $3,000. The current beta of the portfolio is 1.21 and the beta of the riskiest security is 1.62. What will the portfolio beta be if the riskiest security is replaced with a security of equal market value but a beta of 0.80?a. 1.14b. 1.18c. 1.05d. 1.17

Q: Determine the beta of a portfolio consisting of equal investments in the following common stocks:Security BetaApple Computer 1.15Coca-Cola 1.05Harley-Davidson 1.50Homestake Mining 0.50a. 1.05b. 1.00c. 1.10d. 0.95

Q: Assume you want to construct a portfolio with a 14 percent return from the following two securities:Security Expected Return Beta1 16% 1.122 12.5% 0.94What percentage of your portfolio should be invested in Security 1?a. 57%b. 47%c. 43%d. 53%

Q: Sally's broker told her that the expected return from her portfolio was 14.2%. If 40% of her securities have an expected return of 10.3 percent and 20% have an expected return of 12.8 percent, what is the expected return of the remaining portion of her portfolio?a. 20.9%b. 18.8%c. 12.5%d. cannot be determined

Q: Don has $3,000 invested in AT&T with an expected return of 11.6 percent; $10,000 in IBM with an expected return of 12.8 percent; and $6,000 in GM with an expected return of 12.2 percent. What is Don's expected return on his portfolio? a. 12.42% b. 12.20% c. 11.81% d. Cannot be determined

Q: Compute the risk premium for the stock of Omega Tools if the risk-free rate is 6%, the expected market return is 12%, and Omega's stock has a beta of .8. a. 10.8% b. 4.8% c. 48.0% d. 16.8%

Q: An investor plans to invest 75 percent of her funds in the common stock of Gamma Industries and 25 percent in Epsilon Company. The expected return on Gamma is 12 percent and the expected return on Epsilon is 16 percent. The standard deviation of returns on Gamma is 8 percent and on Epsilon is 12 percent. The correlation between the returns for Gamma and Epsilon is +0.8. Determine the standard deviation of returns for this investor's portfolio. a. 73.8% b. 6.71% c. 3.00% d. 8.59%

Q: An investor plans to invest 75 percent of her funds in the common stock of Gamma Industries and 25 percent in Epsilon Company. The expected return on Gamma is 12 percent and the expected return on Epsilon is 16 percent. The standard deviation of returns for Gamma is 8 percent and for Epsilon is 12 percent. The correlation between the returns for Gamma and Epsilon is +0.8. Determine the expected return on the investor's portfolio. a. 14% b. 12% c. 13% d. 9%

Q: Energetic Elephant Company's common stock has a beta of 1.2. The risk-free rate is 6 percent and the expected market rate of return is 12 percent. Determine the required rate of return on the security. a. 7.2% b. 14.4% c. 19.2% d. 13.2%

Q: Phoenix Company common stock is currently selling for $20 per share. Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now:Price Rate of Return Probability$16 -20% 0.2520 0% 0.3024 +20% 0.2528 +40% 0.20Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the standard deviation of possible rates of return on Phoenix stock (to the nearest tenth of a percent).a. 456%b. 20.9%c. 2.2%d. 21.4%

Q: Phoenix Company common stock is currently selling for $20 per share. Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now:Price Rate of Return Probability$16 -20% 0.2520 0% 0.3024 +20% 0.2528 +40% 0.20Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the expected rate of return on Phoenix Stock.a. 8%b. 0%c. 10%d. 40%