FIN 323: Practice questions and solution explain for stock and bond
FIN 323: Practice questions and solution explain for stock and bond FIN 323
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This 5 page Bundle was uploaded by Winn on Wednesday March 2, 2016. The Bundle belongs to FIN 323 at Marshall University taught by in Spring 2016. Since its upload, it has received 47 views. For similar materials see Principles of Finance in Business at Marshall University.
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Date Created: 03/02/16
Practice question and Solutions with explaining for Bond and Stock 1) When you refer to a bond’s coupon, you are referring to which one of the following? A ) difference between the purchase price and the face value ( which means between PV and FV ) B) Annual interest divided by the current bond price ( undefined formula ) C) Difference between the bid and ask price D) Annual interest payment E) Principal amount of the bond Answer D : because the annual interest payment affect to the bond’s coupon , if the interest payment increase , the bond’s coupon increased also. 2) A broker is an agent who A) Trades on the floor of an exchange for himself or herself. B) Buys and sells from inventory. C) Offers new securities for sale to dealers only. D) Is ready to buy or sell at any time E) Brings buyers and sellers together. Answer E : a broker is like an individual person that arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. 3) A real rate of return is defined as a rate that has been adjusted for which one of the following ? A) Inflation B) Interest rate risk C) Taxes D) Liquidity E) Default risk Answer A : because A real rate of return is the annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external effects. This method expresses the nominal rate of return in real terms, which keeps the purchasing power of a given level of capital constant over time 4) A six-year , semiannual coupon bond is selling for $991.38. The bond has a face value of $1000 and a yield to maturity of 9.19 percent. What is the coupon rate ? A) 4.5 % B) 4.6 % C) 6.00 % D) 9.00% E) 9.19 % Answer D : because we have : PV = -991.38 FV = par value = 1000 I/Y = yield to maturity = 9.19 / 2 ( because of semiannual ) N = 6 years x 2 = 12 ( periods ) use financial calculator, we have PMT = C = 45 => 4.5 % (semiannual) C = 4.5 % x 2 = 9.00 % ( annual ) 5) Vegan Delite stock is valued at $124.20 a share. The company pays a constant annual dividend of $8.80 per share. What is the total return on this stock ? A. 6.62 percent B. 7.00 percent C. 7.09 percent D. 7.49 percent E. 7.82 percent Answer C : because we have a constant dividend , we use the formula P = D / R We have R = 124.20 / 8.80 = 0.079 => 7.09 % 6) Which one of the following will increase the current value of stock ? A) Decrease in the dividend growth rate B) Increase in the required return C) Increase in the dividend growth rate D) Decrease in the expected dividend for next year. Answer C : because we have a formula : Po = D / R with R is the return on stock so if D = dividend increases , the Po will increase. 7) Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk ? A) Taxability risk premium B) Default risk premium C) Interest rate risk premium D) Real rate of return E) Bond premium Answer C ( interest rate risk premium ) : because change in price due to changes in interest rates, long-term bonds have more price risk than short-term bonds,low coupon rate bonds have more price risk than short- term bonds. 8) The price of a stock at year 4 can be expressed as : A) Do/(R+g4) B) Do x (1+R)5. C) D1 x ( 1+R)5 D) D4/(R-g) E) D5/(R-g) Answer E : because of the formula : Po= D1 / (R-g) = Do ( 1 + g) / (R-g) 9) When a bond’s yield to maturity is less than the bond’s coupon rate , the bond: A) Had to be recently issued. B) is selling at a premium C) has reached its maturity date D) is priced at par E) is selling at a discount Answer B : let me give you an example : Coupon rate = 11% Annual Coupons Part = $1000 Maturity = 7 years YTM = 10% B = 1048.68 When YTM < Coupon rate -> bond price > par value = “Premium Bond” 10) Donuts Delite just paid an annual dividend of $1.10 a share. The firm expects to increase this dividend by 8 percent per year the following three years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for year 7 ? A) (1.1) ( 1.08 x 3 ) (1.02 x 4) B) (1.1) ( 1.08 x 3 ) (1.02 x 3 ) C) (1.1) (1.08) 3 (1.02) 4 D) (1.1) (1.08) 3 (1.02)3 E) (1.1) (1.08)3 (1.02)2 Answer C : because we have the formula Year 0 ( today ) : 1.1 Year 1 , 2 ,3 with 8 percent : 1.08 . 3 Year 4 , 5 , 6, 7 with 2 percent : 1.02 .4
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