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. What

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. What 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. What 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. What 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. What 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. What 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