Bond Yields, Coupon Rates, and Term Structure of Interest Rates, Exams of Marketing Business-to-business (B2B)

Download Bond Yields, Coupon Rates, and Term Structure of Interest Rates and more Exams Marketing Business-to-business (B2B) in PDF only on Docsity! WVU Boor 340 Exam 2 Questions with Verified Answers- 2024 Update. 1. What is the principal amount of a bond that is repaid at the end of the loan term called? - Correct answer face value 2. A bond's annual interest divided by its face value is referred to as the: - Correct answer coupon rate 3. The market-required rate of return on a bond that is held for its entire life is called the: - Correct answer yield to maturity 4. The written agreement that contains the specific details related to a bond issue is called the bond - Correct answer indenture 5. This morning, Jeff found an aged bond certificate lying on the street. He picked it up and noticed that it was a 50-year bond that matured today. He presented the bond to the bank teller at his local bank and received payment for both the entire principal and the final interest payment. The bond that Jeff found must have been which one of the following? - Correct answer bearer-form bond 6. Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a: - Correct answer debenture 7. A call provision grants the bond issuer the: - Correct answer option of repurchasing the bonds prior to maturity at a prespecified price. 8. Travis recently purchased a callable bond. However, that bond cannot be currently redeemed by the issuer. Thus, the bond must currently be - Correct answer call protected 9. Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders? - Correct answer zero coupon 10.The price at which a dealer will purchase a bond is referred to as the _____ price. - Correct answer bid 11.The price at which an investor can purchase in the bond market is called the _____ price. - Correct answer asked 12.A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the: - Correct answer bid-ask spread 13.Which one of the following is the quoted price of a bond? - Correct answer clean price 14.Which one of the following is the price that an investor pays to purchase an outstanding bond? - Correct answer dirty price 15.A real rate of return is defined as a rate that has been adjusted for which one of the following? - Correct answer inflation 16.The rate of return an investor earns on a bond prior to adjusting for inflation is called the: - Correct answer nominal rate 17.The relationship between nominal returns, real returns, and inflation is referred to as the: - Correct answer fisher effect P a g e 1 | 12 18.The term structure of interest rates represents the relationship between which of the 19.Following? - Correct answer nominal rates on default free, pure discount bonds and time to maturity 20.The inflation premium: - Correct answer compensates investors for expected price increases. 21.Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk? - Correct answer interest rate risk premium 22.The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____of those securities - Correct answer maturity 23.Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected? - Correct answer default risk premium 24.Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value? - Correct answer liquidity premium 25.When a bond's yield to maturity is less than the bond's coupon rate, the bond: - Correct answer is selling at a premium 26.The yield to maturity on a discount bond is: - Correct answer greater than both the current yield and the coupon rate. 27.All else held constant, the present value of a bond increases when the - Correct answer yield to maturity decreases 28.Generally speaking, bonds issued in the U.S. pay interest on a (n) _____ basis. - Correct answer semiannual 29.Which one of the following bonds is the most sensitive to changes in market interest rates? - Correct answer 10 year, zero coupon 30.An unexpected decrease in market interest rates will cause a: - Correct answer coupon bond's yield to maturity to decrease. 31.Of these choices, a risk-adverse investor who prefers 32.To minimize interest rate risk is most apt to invest in: - Correct answer 2-year, 7 percent coupon bonds. 33.Which statement is true? - Correct answer an indenture is a contract between a bond's issuer and its holders. 34.A debenture is: - Correct answer an unsecured bond. 35.The primary purpose of protective covenants is to help: - Correct answer protect bondholders from issuer actions. 36.Bond ratings classify bonds based on - Correct answer default risk only 37.A bond dealer sells at the _____ price and buys at the _____ price. - Correct answer asked; bid 38.The R in the Fisher effect formula represents the: - Correct answer nominal return P a g e 2 | 12 85.Newly issued securities are sold to investors in which one of the following markets? - Correct answer primary 86.What is the market called that facilitates the sale of shares between individual investors? - Correct answer secondary 87.An agent who buys and sells securities from inventory is called a: - Correct answer dealer 88.A broker is an agent who: - Correct answer brings buyers and sellers together 89.Any person who owns a license to trade on the NYSE is called a: - Correct answer member 90.A person who executes customer orders to buy and sell securities on the floor of the NYSE is called a: - Correct answer floor broker 91.Most trades on the NYSE are executed: - Correct answer electronically 92.Which one of the following will increase the current value of a stock? - Correct answer increase the capital gains yard 93.Gleason, Inc., elects its board of directors on a staggered basis using cumulative voting. This implies that: - Correct answer all open positions are filled with one round of voting, assuming there are no tie votes. 94.Which statement is true? - Correct answer from a legal perspective, preferred stock is a form of corporate equity. 95.Which one of the following statements is correct? - Correct answer Preferred stock can be callable 96. If shareholders are granted a preemptive right they will: - Correct answer have priority in the purchase of any newly issued shares. 97.Dividends are: - Correct answer paid out of after-tax profits 98.NASDAQ is best described as: - Correct answer an electronic network of securities dealers. 99.Companies can list their stock on which one of the following without having to meet listing requirements or filing financial statements with the SEC? - Correct answer pink sheets 100. Healthy Foods just paid its annual dividend of $1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one? 101. Share of this stock worth to you if you require a rate of return of 15.7 percent? - Correct answer $12.16 102. The common stock of Up-Towne Movers sells for $33 a share, has a rate of return of 11.4 percent, and a dividend growth rate of 2 percent annually. What was the amount of the last annual dividend paid? - Correct answer $3.04 103. This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the dividend increases at 3.5 percent annually. What will your capital gain be in dollars on this stock if you sell it three years from now? - Correct answer $2.43 104. Horseshoe Stables is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual P a g e 5 | 12 dividend was $.86 a share but all future dividends will be decreased by 3.5 percent annually. What is a share of this stock worth today at a required return of 17.8 percent? - Correct answer $3.90 105. Lame Gardens has a dividend growth rate of 5.6 percent, a market price of $13.16 a share, and a required return of 14 percent. What is the amount of the last dividend this 106. Company paid? - Correct answer $1.05 107. The common stock of Sweet Treats has a total return of 11.62 percent, a stock price of $48.20, and recently paid an annual dividend of $2.38. What is the capital gains rate if the? 108. Company maintains a constant dividend? - Correct answer 6.68 percent 109. River Rock, Inc., just paid an annual dividend of $2.80. The company has increased its dividend by 2.5 percent a year for the past 10 years and expects to continue doing so. What will a share of this stock be worth 6 years from now if the required return is 16 percent? - Correct answer $24.65 110. Business Solutions is expected to pay its first annual dividend of $.84 per share in Year 3. Starting in Year 6, the company plans to increase the dividend by 2 percent per year. What is the value of this stock today, Year 0, at a required return of 14.4 percent? - Correct answer $5.01 111. Toy Mart recently announced that it will pay annual dividends at the end of the next two years of $1.60 and $1.10 per share, respectively. Then, in Year 5 it plans to pay a final 112. Dividend of $13.50 a share before closing its doors permanently. At a required return of 13.5 percent, what should this stock sell for today? - Correct answer $9.43 113. Village East expects to pay an annual dividend of $1.40 per share next year, and $1.68 per share for the following two years. After that, the company plans to increase the dividend by 3.4 percent annually. What is this stock's current value at a discount rate of 13.7 percent? - Correct answer $15.15 114. The Toy Chest will pay an annual dividend of $2.64 per share next year and currently sells for $48.30 a share based on a market rate of return of 11.67 percent. What is the capital gains yield? - Correct answer 6.20 percent 115. Last year, when the stock of Alpha Minerals was selling for $49.50 a share, the dividend yield was 3.4 percent. Today, the stock is selling for $41 a share. What is the total return on this stock if the company maintains a constant dividend growth rate of 2.2 percent? - Correct answer 6.40 percent 116. According to today's stock report, BL Lumber shares were up .14, the stock dividend yield is 2.6 percent, and the PE ratio is 9.8. What is the amount of the next annual dividend if 117. Yesterday’s closing price was $35.14? - Correct answer $0.917 118. TMS just paid an annual dividend of $2.84 per share on its stock. The dividends are expected to grow at a constant rate of 1.85 percent per year. If investors require a rate of 119. Return of 10.4 percent, what will be the stock price be in Year 11? - Correct answer $41.39 120. The next dividend payment by S&S will be $1.38 per share. The dividends are anticipated to maintain a 2.5 percent growth rate, forever. If the stock currently sells for 121. $26.90 per share, what is the required return? - Correct answer 7.63 percent P a g e 6 | 12 122. A particular stock sells for $43.20 share and provides a total return of 11.6 percent. The total return is evenly divided between the capital gains yield and the dividend yield. 123. Assuming a constant dividend growth rate, what is the current dividend per share? - Correct answer $2.37 124. Russell Foods pays a fixed annual dividend of $2.28 a 125. Share. At a required return of 11.5 percent, the stock is valued at $43.20 a share. What is the dividend growth rate at this price? - Correct answer 6.22 percent 126. JL Tools is a young start-up company. The company expects to pay its first dividend of $.20 a share in Year 6 with annual dividend increases of 1.5 percent thereafter. At a required 127. Return of 12 percent, what is the current share price? - Correct answer $1.08 128. Gamma Corp. is expected to pay the following dividends over the next four years: $7.50, $8.25, $15, and $1.80. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends, forever. If the required return is 14 percent, what is the current share price? - Correct answer $35.20 129. KIT Kars stock currently sells for $54.10 per share and has a fixed 2.5 percent dividend growth rate. What was the amount of the last dividend paid if the required rate of return is 11 percent? - Correct answer $4.49 130. Belasco International has sales of $389,700 and costs of $413,210. The company has 120,000 shares outstanding. What is the price-sales ratio if the stock has a book value of? 131. $19.20 per share and a market value per share of $8.60? - Correct answer 2.65 132. The net present value of an investment represents the difference between the investments... - Correct answer cost and its market value 133. Net present value involves discounting an investment's...... - Correct answer future cash flows 134. The payback period is the length of the time it takes an investment to generate sufficient cash flows to enable the project to....... - Correct answer recoup its initial cost 135. The internal rate of return is the.... - Correct answer discount rate that results in a zero net present value for the project 136. Which one of the following indicates that a project is expected to create value for its owners? - Correct answer positive net present value 137. The net present value.... - Correct answer decreases as the required rate of return increases 138. Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? - Correct answer net present value 139. Which one of the following statements is correct? - Correct answer if the internal rate of return equals the required return, the net present value will equal zero 140. If an investment is producing a return that is equal to the required return, the investment's net present value will be..... - Correct answer zero P a g e 7 | 12 168. British Metals is reviewing its current accounts to determine how a proposed project might affect the account balances. The firm estimates the project will initially require $81,000 in additional current assets and $57,000 in additional current liabilities. The firm also estimates the project will require an additional $8,000 a year in current assets in each of the first three of the four years of the project. How much net working capital will the firm recoup at the end of the project assuming that all net working capital can be recaptured? - Correct answer $48,000 169. Mike's Fish Market is implementing a project that will initially increase accounts payable by $6,100, increase inventory by $2,800, and decrease accounts receivable by $1,300. All net working capital will be recouped when the project terminates. What is the cash flow related to the net working capital for the last year of the project? - Correct answer -$4,600 170. Jim's Hardware is adding a new product to its sales lineup. Initially, the firm will stock $36, 00 of the new inventory, which will be purchased on 30 days' credit from a supplier. The firm will also invest $13,000 in accounts receivable and $11,000 in equipment. What amount should be included in the initial project costs for net working capital? - Correct answer -$13,000 171. A nine-year project is expected to generate annual revenues of $137,800, variable costs of $82,600, and fixed cost of $11,000. The annual depreciation is $23,500 and the tax rate is 34 percent. What is the annual operating cash flows? - Correct answer $37,162 172. Your local athletic center is planning a $1.08 million expansion to its current facility. This cost will be depreciated on a straight-line basis of a 20-year period. The expanded area is expected to generate $489,000 in additional annual sales. Variable costs are 46 percent of sales, the annual fixed costs are $129,400, and the tax rate is 34 percent. What is the operating cash flow for the first year of this project? - Correct answer $107,235.60 173. A cost-cutting project will decrease costs by $37,400 a year. The annual depreciation on the project's fixed assets will be $4,700 and the tax rate is 34 percent. What is the amount on the change in the firm's operating cash flow resulting from this project? - Correct answer $26,282 174. The Blue Lagoon in considering a project with a five-year life. The project requires $32,000 of fixed assets that are classified as five-year property for MARCS. Variable costs equal 67 percent of sales, fixed costs are $12,600, and the tax rate is 34 percent. What is the operating cash flow for Year 4 given the following sales estimates and MARC’s depreciation allowance percentages? - Correct answer $1,409.80 175. A new project is expected to generate an operating cash flow of $38,728 and will initially free up $11,610 in net working capital. Purchases of fixed assets costing $52,800 will be required to start up the project. What is the total cash flow for this project at Time zero? - Correct answer -$41,190 176. The Outpost currently sells short leather jackets for $369 each. The firm is considering selling long coats also. The long coats would sell for $719 each and the company expects to sell 820 a year. If the company decides to carry the long coat, management feels that the annual sales of the short jacket will decline from 1,120 to 1,040 units. Variable costs on the jacket are $228 and $435 on the long coat. The fixed costs for this project are $23,100, depreciation is $10,400 a year, and the tax rate is 34 percent. What is the projected operating cash flow for this project? - Correct answer $134,546 177. A project has sales of $511,800, costs of $322,400, depreciation of $22,260, interest expense of $3,062, and a tax rate of 34 percent. What is the value of the depreciation tax shield? - Correct answer $7,690.80 P a g e 10 | 12 178. A project will reduce costs by$62,750 but increase depreciation by $14,812. What is the operating cash flow of this project based on the tax shield approach is the tax rate is 34 percent? - Correct answer $46,451.08 179. A project has annual depreciation of $15,028, costs of $82,592, and sales of $138,765. The applicable tax rate is 34 percent. What is the operating cash flow according to the tax shield approach? - Correct answer $42,183.70 180. A project requires $428,000 of equipment that is classified as seven-year property. What is the depreciation expense in Year 3 given the following MARCS depreciation allowances, starting with Year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent? - Correct answer $74,857.20 181. Better Chocolates has a new project that requires $838,000 of equipment. What is the depreciation in Year 6 of this project if the equipment is classified as seven-year property for MARC’s purpose? The MARCS allowance percentages are as follows, commencing with year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent. - Correct answer $74,749.60 182. Newton Industries is considering a project and has developed the following estimates: unit sales= 4,800, price per unit = $67, variable cost per unit = $42, annual fixed costs = $11,900. The depreciation is $14,700 a year and the tax rate is 34 percent. What effect would an increase of $1 in the selling price have on the operating cash flows? - Correct answer $3,168 183. Lakeside Winery is considering expanding its wine making operations. The expansion will require new equipment costing $708,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. The equipment can be sold for $220,000 after the four years. The project requires $46,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $211,500 a year. What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 34 percent? - Correct answer -$7,632.77 184. Outdoor Sports is considering adding a miniature golf course to its facility. The course would cost $138,000, would be depreciated on a straight-line basis over its five-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost. The fixed cost would be $11,600. In addition, the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added. The project will require $3,000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 12 percent and a tax rate of 34 percent? - Correct answer $14,438.78 185. A project has an initial requirement of $318,000 for fixed assets and $29,500 for net working capital. The fixed assets will be depreciated to a zero book value over the four-year life of the project and have an estimated salvage value of $110,000. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $96,200 and the discount rate is 14 percent. What is the project's net present value is the tax rate is 34 percent? - Correct answer -$6,749.48 186. The Book Store is considering a new four-year expansion project that requires an initial fixed asset investment of $2.1 million. The fixed asset will be depreciated straight-line to zero over its four-year life, after which time it will be worthless. The project is estimated to generate $.98 million in annual sales, with costs of $.79 million. If the tax rate is 34 percent, what is the OCF for this project? - Correct answer $303,900 P a g e 11 | 12 187. The Sausage Hut is looking at a new sausage system with an installed cost of $187,400. This cost will be depreciated straight-line to zero over the project's four-year life, at the end of which the sausage system can be scrapped for $25,000. The sausage system will save the firm $69,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $9,000, which will be recouped at the end of the project end. If the tax rate is 34 percent and the discount rate is 12 percent, what is the NPV of this project? - Correct answer $6,508.54 P a g e 12 | 12