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Questions and Answers of Finance

The Wall Street Journal reports that the rate on 3-year Treasury securities is 5.25 percent and the rate on 4-year Treasury securities is 5.50 percent. The 1-year interest rate expected in three
Suppose we observe the following rates: 1R1 = 0.75 percent, 1R2 = 1.20 percent, and E(2r1) = 0.907 percent. If the liquidity premium theory of the term structure of interest rates holds, what is the
On March 11, 20XX, the existing or current (spot) 1-, 2-, 3-, and 4-year zero-coupon Treasury security rates were as follows:1R1 = 0.75%, 1R2 = 1.35%, 1R3 = 1.75%, 1R4 = 1.90%Using the
Suppose we observe the 3-year Treasury security rate (1R3) to be 8 percent, the expected 1-year rate next year,(E(2r1), to be 4 percent, and the expected 1-year rate the following year, E(3r1), to be
A recent edition of The Wall Street Journal reported interest rates of 1.25 percent, 1.60 percent, 1.98 percent, and 2.25 percent for three-year, four-year, five-year, and six-year Treasury security
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.25
Dakota Corporation 15-year bonds have an equilibrium rate of return of 8 percent. For all securities, the inflation risk premium is 1.75 percent and the real risk free rate is 3.50 percent. The
A 2-year Treasury security currently earns 1.94 percent. Over the next two years, the real risk free rate is expected to be 1.00 percent per year and the inflation premium is expected to be 0.50
Tom and Sue’s Flowers, Inc.’s, 15-year bonds are currently yielding a return of 8.25 percent. The expected inflation premium is 2.25 percent annually and the real risk free rate is expected to be
Nikki G’s Corporation’s 10-year bonds are currently yielding a return of 6.05 percent. The expected inflation premium is 1.00 percent annually and the real risk free rate is expected to be 2.10
You note the following yield curve in The Wall Street Journal. According to the unbiased expectations theory, what is the 1-year forward rate for the period beginning one year from today,
The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 7.25 percent, on 20-year Treasury bonds is 7.85 percent, and on a 20-year corporate bond issued by MHM Corp. is 8.75
The Wall Street Journal reports that the current rate on 8-year Treasury bonds is 5.85 percent, on 15-year Treasury bonds is 6.25 percent, and on a 15-year corporate bond issued by MHM Corp. is 7.35
The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 1.85 percent and on 10-year Treasury bonds is 3.35 percent. Assume that the maturity risk premium is zero. Calculate
The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 2.25 percent and on 20-year Treasury bonds is 4.50 percent. Assume that the maturity risk premium is zero. Calculate
The Wall Street Journal reports that the rate on 3-year Treasury securities is 1.20 percent and the rate on 5-year Treasury securities is 2.15 percent. According to the unbiased expectations
Assume the current interest rate on a 1-year Treasury bond (1R1) is 4.50 percent, the current rate on a 2-year Treasury bond (1R2) is 5.25 percent, and the current rate on a 3-year Treasury bond
From discussions with your broker, you have determined that the expected inflation premium is 1.35 percent next year, 1.50 percent in year 2, 1.75 percent in year 3, and 2.00 percent in year 4 and
What does a call provision allow issuers to do, and why would they do it?
List the differences between the new TIPS and traditional Treasury bonds.
Explain how mortgage-backed securities work.
Provide the definitions of a discount bond and a premium bond. Give examples.
Describe the differences in interest payments and bond price between a 5 percent coupon bond and a zero coupon bond.
All else equal, which bond’s price is more affected by a change in interest rates, a bond with a large coupon or a small coupon? Why?
Compare and contrast the advantages and disadvantages of the current yield computation versus yield to maturity calculations.
Why does a Treasury bond offer a lower yield than a corporate bond with the same time to maturity? Could a corporate bond with a different time to maturity offer a lower yield? Explain.
Describe the difference between a bond issued as a high-yield bond and one that has become a “fallen angel.”
All else equal, which bond’s price is more affected by a change in interest rates, a short-term bond or a longer-term bond? Why?
Explain how a bond’s interest rate can change over time even if interest rates in the economy do not change.
What is the yield to call and why is it important to a bond investor?
What is the purpose of computing the equivalent taxable yield of a municipal bond?
Explain why high income and wealthy people are more likely to buy a municipal bond than a corporate bond.
Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 3.8 percent.
Calculate the price of a zero coupon bond that matures in 15 years if the market interest rate is 5.75 percent.
Compute the price of a 3.8 percent coupon bond with 15 years left to maturity and a market interest rate of 6.8 percent. (Assume interest payments are semiannual.) Is this a discount or premium bond?
Compute the price of a 5.6 percent coupon bond with 10 years left to maturity and a market interest rate of 7.0 percent. (Assume interest payments are semiannual.) Is this a discount or premium bond?
Calculate the price of a 5.2 percent coupon bond with 18 years left to maturity and a market interest rate of 4.6 percent. (Assume interest payments are semiannual.) Is this a discount or premium
Price Calculate the price of a 5.7 percent coupon bond with 22 years left to maturity and a market interest rate of 6.5 percent. (Assume interest payments are semiannual.) Is this a discount or
A 5.75 percent coupon bond with 10 years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.0 percent. What is the
A 6.5 percent coupon bond with 14 years left to maturity is priced to offer a 7.2 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.8 percent. What is the
A client in the 39 percent marginal tax bracket is comparing a municipal bond that offers a 4.5 percent yield to maturity and a similar-risk corporate bond that offers a 6.45 percent yield. Which
A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 4.5 percent yield to maturity and a similar-risk corporate bond that offers a 6.45 percent yield. Which
Reconsider the 3.5 percent TIPS discussed in problem 7-19. It was issued with CPI reference of 185.6. The bond is purchased at the beginning of the year (after the interest payment), when the CPI
Reconsider the 2.25 percent TIPS discussed in problem 7-20. It was issued with CPI reference of 187.2. The bond is purchased at the beginning of the year (after the interest payment), when the
A 6.25 percent coupon bond with 22 years left to maturity is priced to offer a 5.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.0 percent. If this
A 7.5 percent coupon bond with 13 years left to maturity is priced to offer a 6.25 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.0 percent. If this
A 2.50 percent coupon municipal bond has 12 years left to maturity and has a price quote of 98.45. The bond can be called in four years. The call premium is one year of coupon payments. Compute and
A 3.85 percent coupon municipal bond has 18 years left to maturity and has a price quote of 103.20. The bond can be called in eight years. The call premium is one year of coupon payments. Compute
A corporate bond with a 6.5 percent coupon has 15 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.2 percent. The firm has recently gotten into some trouble and
A corporate bond with a 6.75 percent coupon has 10 years left to maturity. It has had a credit rating of BB and a yield to maturity of 8.2 percent. The firm has recently become more financially
Say that in June of 2014, a company issued bonds that are scheduled to mature in June of 2017. The coupon rate is 5.75 percent and is paid semiannually. The bond issue was rated AAA. a. Build a
Determine the interest payment for the following three bonds: 3.5 percent coupon corporate bond (paid semiannually), 4.25 percent coupon Treasury note, and a corporate zero coupon bond maturing in
Determine the interest payment for the following three bonds: 4.5percent coupon corporate bond (paid semiannually), 5.15 percent coupon Treasury note, and a corporate zero coupon bond maturing in 15
A 2.75 percent TIPS has an original reference CPI of 185.4. If the current CPI is 210.7, what is the current interest payment and par value of the TIPS?
A 3.125 percent TIPS has an original reference CPI of 180.5. If the current CPI is 206.8, what is the current interest payment and par value of the TIPS?
Consider the following three bond quotes; a Treasury note quoted at 97:27, and a corporate bond quoted at 103.25, and a municipal bond quoted at 101.90. If the Treasury and corporate bonds have a par
Consider the following three bond quotes; a Treasury bond quoted at 106:14, a corporate bond quoted at 96.55, and a municipal bond quoted at 100.95. If the Treasury and corporate bonds have a par
What is the taxable equivalent yield on a municipal bond with a yield to maturity of 3.5 percent for an investor in the 33 percent marginal tax bracket?
What is the taxable equivalent yield on a municipal bond with a yield to maturity of 2.9 percent for an investor in the 28 percent marginal tax bracket?
Rank from highest credit risk to lowest risk the following bonds, with the same time to maturity, by their yield to maturity: Treasury bond with yield of 5.55 percent, IBM bond with yield of 7.49
Rank the following bonds in order from lowest credit risk to highest risk, all with the same time to maturity, by their yield to maturity: Treasury bond with yield of 4.65 percent, United Airline
Consider a 3.5 percent TIPS with an issue CPI reference of 185.6. At the beginning of this year, the CPI was 193.5 and was at 199.6 at the end of the year. What was the capital gain of the TIPS
Consider a 2.25 percent TIPS with an issue CPI reference of 187.2. At the beginning of this year, the CPI was 197.1 and was at 203.8 at the end of the year. What was the capital gain of the TIPS in
A 5.65 percent coupon bond with 18 years left to maturity is offered for sale at $1,035.25. What yield to maturity is the bond offering? (Assume interest payments are semiannual.)
A 4.30 percent coupon bond with 14 years left to maturity is offered for sale at $943.22. What yield to maturity is the bond offering? (Assume interest payments are semiannual.)
A 6.75 percent coupon bond with 26 years left to maturity can be called in six years. The call premium is one year of coupon payments. It is offered for sale at $1,135.25. What is the yield to call
A 5.25 percent coupon bond with 14 years left to maturity can be called in four years. The call premium is one year of coupon payments. It is offered for sale at $1,075.50. What is the yield to call
Land’o’Toys is a profitable, medium-sized, retail company. Several years ago, it issued a 6.5 percent coupon bond, which pays interest semiannually. The bond will mature in 10 years and is
As owners, what rights and advantages do shareholders obtain?
Get the trading statistics for the three main U.S. stock exchanges. Compare the trading activity to that of Table.
Why might the Standard & Poor’s 500 Index be a better measure of stock market performance than the Dow Jones Industrial Average? Why is the DJIA more popular than the S&P 500?
Which is higher, the ask quote or the bid quote? Why?
Illustrate through examples how trading commission costs impact an investor’s return.
Describe the difference in the timing of trade execution and the certainty of trade price between market orders and limit orders.
What are the differences between common stock and preferred stock?
How important is growth to a stock’s value? Illustrate with examples.
The expected return derived from the constant growth rate model relies on dividend yield and capital gain. Where do these two parts of the return come from?
Describe, in words, how to use the variable growth rate technique to value a stock.
Differentiate the characteristics of growth stocks and value stocks?
Describe the process for using the P/E ratio to estimate a future stock price.
Obtain a current quote of McDonald’s (MCD) from the Internet. Describe what has changed since the quote in figure.
Explain how it is possible for the DJIA to increase one day while the Nasdaq Composite decreases during the same day.
Can the variable growth rate model be used to value a firm that has a negative growth rate in Stage 1 and a stable and positive growth rate in Stage 2? Explain.
Explain why using the P/E relative value approach may be useful for companies that do not pay dividends.
How is a firm’s changing P/E ratio reflected in the stock price? Give examples.
What’s the relationship between the P/E ratio and a firm’s growth rate?
On March 5, 2013, the Dow Jones Industrial Average set a new high. The index closed at 14,253.77, which was up 125.95 that day. What was the return (in percent) of the stock market that day?
On March 9, 2009, the Dow Jones Industrial Average reached a new low. The index closed at 6,547.05, which was down 79.89 that day. What was the return (in percent) of the stock market
A preferred stock from Duquesne Light Company (DQUPRA) pays $3.55 in annual dividends. If the required return on the preferred stock is 6.7 percent, what’s the value of the stock?
A preferred stock from Hecla Mining Co. (HLPRB) pays $3.50 in annual dividends. If the required return on the preferred stock is 6.8 percent, what is the value of the stock?
A firm is expected to pay a dividend of $2.05 next year and $2.35 the following year. Financial analysts believe the stock will be at their price target of $110 in two years. Compute the value of
Annual dividends of AT&T Corp (T) grew from $0.96 in 2000 to $1.76 in 2012. What was the annual growth rate?
Annual dividends of General Electric (GE) grew from $0.66 in 2001 to $1.03 in 2006. What was the annual growth rate?
Ecolap, Inc. (ECL) recently paid a $0.46 dividend. The dividend is expected to grow at a 14.5 percent rate. At a current stock price of $44.12, what is the return shareholders are expecting?
Paychex Inc. (PAYX) recently paid an $0.84 dividend. The dividend is expected to grow at a 15 percent rate. At a current stock price of $40.11, what is the return shareholders are expecting?
A firm does not pay a dividend. It is expected to pay its first dividend of $0.20 per share in three years. This dividend will grow at 11 percent indefinitely. Using a 12 percent discount rate,
A firm does not pay a dividend. It is expected to pay its first dividend of $0.25 per share in two years. This dividend will grow at 10 percent indefinitely. Using an 11.5 percent discount rate,
Kellogg Co. (K) recently earned a profit of $2.52 per share and has a P/E ratio of 13.5. The dividend has been growing at a 5 percent rate over the past few years. If this growth rate continues,
New York Times Co. (NYT) recently earned a profit of $1.21 per share and has a P/E ratio of 19.59. The dividend has been growing at a 7.25 percent rate over the past six years. If this growth rate
A firm recently paid a $0.45 annual dividend. The dividend is expected to increase by 10 percent in each of the next four years. In the fourth year, the stock price is expected to be $80. If the

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