QUIZ 2 Quiz Paper A 1, Quiz Paper B 6 Which one of the following measures a bond’s sensitivity to changes in market interest rates? a. yield to call b.

QUIZ 2 Quiz Paper A 1, Quiz Paper B 6 Which one of the following measures a bond’s sensitivity to changes in market interest rates? a. yield to call b. yield to market c. duration d. immunization e. target date valuation JJ Industries will pay a regular dividend of $2.40 per share for each of the next four years. At the end of the four years, the company will also pay out a liquidating dividend, and the company will cease operations. If the current share price is $50 and the discount rate is 10%, what must the liquidating dividend be? a. $40 b. $50 c. $58.60 d. $62.07 e. $65.87 Quiz Paper A 3, Quiz Paper B 8 An 8.5 percent coupon bond pays interest semiannually and has 10.5 years to maturity. The bond has a face value of $1,000 and a market value of $878.50. is the yield to maturity? a. 5.16 percent b. 8.37 percent c. 8.78 percent d. 10.43 percent e. 11.21 percent Quiz Paper A 4, Quiz Paper B 9 LKD Co. has 10 percent coupon bonds with a YTM of 8.6 percent. The current yield on these bonds is 9.2 percent. How many years do these bonds have left until they mature? (Face value is $1,000 and coupons are paid semiannually.) a. 18.52 years b. 18.14 years c. 9.26 years d. 9.07 years Quiz Paper A 5, Quiz Paper B 10 Atlantis Seafood Company stock currently sells for $70 per share. The company is expected to pay a dividend of $4.35 per share next year, and analysts project that dividends should increase at 4.5% per year for the indefinite future. must the relevant discount rate be for Atlantis stock? a. 7.869% b. 8.255% c. 10.334% d. 10.714% e. 10.994% Quiz Paper A 6, Quiz Paper B 16 Landon Air Corporation reported net income of $25 million for last year. Depreciation expense totaled $10 million and capital expenditures came to $3 million. Free cash flow is expected to grow at a rate of 3% for the foreseeable future. Landon Air faces a 35% tax rate and has $100 million (market value) in debt outstanding. If required return on Landon Air’s assets is 10.65%, what is the current total value of Landon Air’s equity (in millions)? a. $296.21 b. $318.30 c. $330.85 d. $418.30 e. $430.85 Quiz Paper A 7, Quiz Paper B 17 Which one of the following rates is used by brokerage firms as the basis for determining margin loan rates? a. discount b. Fed funds c. prime d. brokerage e. call money Quiz Paper A 8, Quiz Paper B 18 An increase in the retention ratio will: a. increase the payout ratio. b. decrease a firm’s sustainable rate of growth. c. not affect the value of a firm’s stock. d. decrease the value of a firm’s stock. e. increase the value of a firm’s stock. Quiz Paper A 9, Quiz Paper B 19 Which one of the following orders is frequently used as a means to limit losses resulting from a short sale? a. limit b. market c. day d. stop-sell e. stop-buy Quiz Paper A 10, Quiz Paper B 20 Which one of the following rates is the rate a commercial bank must pay the Federal Reserve to borrow reserves overnight? a. Fed funds b. discount c. financial overnight d. daily e. institutional Quiz Paper A 11, Quiz Paper B 1 A Treasury bill has 36 days left to maturity. The bank discount yield on the bill is 4.14 percent. is the effective annual rate? a. 4.30 percent b. 4.36 percent c. 4.40 percent d. 4.45 percent e. 4.49 percent Quiz Paper A 12, Quiz Paper B 2 A discount bond: a. has a coupon rate which is greater than the yield to maturity. b. has a coupon rate which is less than the market rate of interest. c. has a par value which is less than the market value. d. is selling for more than face value. e. is the name given to a bond that has been called prior to maturity. Quiz Paper A 13, Quiz Paper B 3 Best Value Outlet recently announced that it intends to pay dividends of $0.40, $0.60, $0.75, and $1.00 per share over the next four years, respectively. After that, the plan is to increase the dividend by 3.5 percent annually. is the current value of this stock if the applicable discount rate is 13.5 percent? a. $6.44 b. $7.83 c. $8.17 d. $9.55 e. $13.10 Quiz Paper A 14, Quiz Paper B 4 Which one of the following models can be used to value the stock of a firm that maintains a one hundred percent retention ratio? a. two-stage dividend growth b. residual income c. perpetual dividend growth d. supernormal dividend growth e. dividend discount Quiz Paper A 15, Quiz Paper B 5 Pure discount bonds which are created by separating the interest and principal payments from U.S. Treasury bonds are called U.S. Treasury: a. notes. b. bills. c. STRIPS. d. SWAPS. e. tax-exempts. Quiz Paper A 16, Quiz Paper B 11 A price-weighted index consists of stocks A, B, and C which are priced at $38, $21, and $26 a share, respectively. The current index divisor is 2.7. will the new index divisor be if stock B undergoes a 3-for-1 stock split? a. 2.1684 b. 2.2553 c. 2.5890 d. 2.7000 e. 3.1447 Quiz Paper A 17, Quiz Paper B 12 Which of the following strategies is most likely to yield the best interest rate risk immunization results for a bond portfolio? a. Maturity matching b. Duration matching c. Buy and hold d. Investing in interest rate-sensitive stocks. Quiz Paper A 18, Quiz Paper B 13 GL Enterprises has 130,000 shares of stock outstanding. Janet wants to sell 400 of these shares. The price she will have to pay is the _____ price. a. margin b. bid c. ask d. broker e. spread Quiz Paper A 19, Quiz Paper B 14 You own a bond that pays semiannual interest payments of $40. The bond is callable in 3 years at a premium of $80. is the callable bond price if the yield to call is 9.7 percent? (The face value of this bond is $1,000.) a. $995.46 b. $1,016.86 c. $1,119.02 d. $1,124.87 e. $1,220.87 Quiz Paper A 20, Quiz Paper B 15 The _____ theory states that the shape of the yield curve reveals the financial market’s projections of future interest rates. a. market segmentation b. market yield c. maturity preference d. expectations e. rational rate

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