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business
financial markets institutions

Questions and Answers of Financial Markets Institutions

What are the primary responsibilities of the Federal Open Market Committee? (LG 4-2) LO.1
What are the primary responsibilities of the Federal Reserve Board?(LG 4-1) LO.1
Describe the structure of the Board of Governors of the Federal Reserve System. (LG 4-2) LO.1
Define the discount rate and the discount window. (LG 4-2) LO.1
Describe the functions performed by Federal Reserve Banks. (LG 4-1) LO.1
Calculate the current spread of Aaa- and Baa-rated corporate bonds over the 10-year T-bond rate. How have these spreads changed over the last two years? LO.1
Calculate the percentage change in the 10-year T-bond and Aaa- and Baa-rated corporate bonds since June 2016. LO.1
Which has the longest duration: a 30-year, 8 percent yield to maturity, 5 percent coupon bond or a 30-year, 10 percent yield to maturity, 5 percent coupon bond? (LG 3-7) LO.1
What is the relation between the coupon rate on a bond and its duration? (LG 3-7) LO.1
How is duration related to the price elasticity of a fixed-income security? What is the relationship between duration and the price of a fixed-income security? (LG 3-6) LO.1
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?(LG 3-5) LO.1
All else equal, which bond’s price is more affected by a change in interest rates, a short-term bond or a long-term bond? Why? (LG 3-5) LO.1
What happens to the fair present value of a bond when the required rate of return on the bond increases? (LG 3-4) LO.1
How does equity valuation differ from bond valuation? (LG 3-3) LO.1
For each of the following situations, identify whether a bond would be considered a premium bond, a discount bond, or a par bond. (LG 3-2)a. A bond’s current market price is greater than its face
What is the difference between a zero-coupon bond and a coupon bond? (LG 3-2) LO.1
What is the relation between the expected rate of return and the required rate of return as they pertain to the fair market price and the current market price of a security? (LG 3-1) LO.1
What is the difference between a required rate of return and an expected rate of return? (LG 3-1) LO.1
You have discovered that when the required rate of return on a bond you own fell by 0.50 percent from 9.75 percent to 9.25 percent, the fair present value rose from $975 to $995. The bond pays
MLK Bank has an asset portfolio that consists of $100 million of 30-year, 8 percent annual coupon, $1,000 bonds that sell at par. (LG 3-4, LG 3-6)a. What will be the bonds’ new prices if market
An insurance company is analyzing the following three bonds, each with five years to maturity, annual interest payments, and is using duration as its measure of interest rate risk: (LG 3-6)a. $10,000
Suppose that you purchase a bond that matures in five years and pays a 13.76 percent annual coupon rate. The bond is priced to yield 10 percent. (LG 3-6)a. Show that the duration is equal to four
What is the duration of a zero-coupon bond that has eight years to maturity? What is the duration if the maturity increases to 10 years? If it increases to 12 years? (LG 3-7) LO.1
Consider the following. (LG 3-7)a. What is the duration of a four-year Treasury bond with a 10 percent semiannual coupon selling at par?b. What is the duration of a three-year Treasury bond with a 10
Consider the following. (LG 3-7)a. What is the duration of a five-year Treasury bond with a 10 percent semiannual coupon selling at par?b. What is the duration of the above bond if the yield to
Consider a five-year, 15 percent annual coupon bond with a face value of $1,000. The bond is trading at a rate of 12 percent. (LG 3-4)a. What is the price of the bond?b. If the rate of interest
Consider a 12-year, 12 percent annual coupon bond with a required rate of return of 10 percent. The bond has a face value of $1,000. (LG 3-4)a. What is the fair present value of the bond?b. If the
What is the duration of a five-year, $1,000 Treasury bond with a 10 percent semiannual coupon selling at par? Selling with a yield to maturity of 12 percent? 14 percent? What can you conclude about
Two bonds are available for purchase in the financial markets. The first bond is a two-year, $1,000 bond that pays an annual coupon of 10 percent. The second bond is a two-year, $1,000, zero-coupon
Consider the following two banks:Bank 1 has assets composed solely of a 10-year, 12 percent coupon, $1 million loan with a 12 percent yield to maturity. It is financed with a 10-year, 10 percent
a. What is the duration of a two-year bond that pays an annual coupon of 10 percent and has a current yield to maturity of 12 percent? Use$1,000 as the face value. (LG 3-6)b. What is the duration of
Consider a firm with a 9.5 percent growth rate of dividends expected in the future. The current year’s dividend was $1.32. What is the fair present value of the stock if the required rate of return
Paychex Inc. (PAYX) recently paid a $0.84 dividend. The dividend is expected to grow at a 15 percent rate. At a current stock price of$40.11, what return are shareholders expecting? (LG 3-3) LO.1
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 return are shareholders expecting? (LG 3-3) LO.1
A stock you are evaluating is expected to experience supernormal growth in dividends of 8 percent over the next six years. Following this period, dividends are expected to grow at a constant rate of
You are considering the purchase of a stock that is currently selling at$64 per share. You expect the stock to pay $4.50 in dividends next year. (LG 3-3)a. If dividends are expected to grow at a
A stock you are evaluating just paid an annual dividend of $2.50.Dividends have grown at a constant rate of 1.5 percent over the last 15 years and you expect this to continue. (LG 3-3)a. If the
Financial analysts forecast L Brands (LB) growth for the future to be 12.5 percent. LB’s most recent dividend was $0.60. What is the fair present value of L Brands’s stock if the required rate of
Financial analysts forecast Safeco Corp. (SAF) growth for the future to be 10 percent. Safeco’s recent dividend was $1.20. What is the fair present value of Safeco stock if the required rate of
A preferred stock from Hecla Mining Co. (HLPRB) pays $3.50 in annual dividends. If the required rate of return on the preferred stock is 6.8 percent, what is the fair present value of the stock? (LG
A preferred stock from Duquesne Light Company (DQUPRA) pays$2.10 in annual dividends. If the required rate of return on the preferred stock is 5.4 percent, what is the fair present value of the
Calculate the fair present value on a stock that pays $5 in dividends per year (with no growth) and has a required rate of return of 10 percent. (LG 3-3) LO.1
A $1,000 par value bond with seven years left to maturity has a 9 percent coupon rate (paid semiannually) and is selling for $945.80.What is its yield to maturity? (LG 3-2) LO.1
A $1,000 par value bond with five years left to maturity pays an interest payment semiannually with a 6 percent coupon rate and is priced to have a 5 percent yield to maturity. If interest rates
Repeat parts (a) through (c) of Problem 13 using a required rate of return on the bond of 11 percent. What do your calculations imply about the relation between time to maturity and bond price
Calculate the fair present value of the following bonds, all of which have a 10 percent coupon rate (paid semiannually), face value of$1,000, and a required rate of return of 8 percent. (LG 3-5)a.
Repeat parts (a) through (c) of Problem 11 using a required rate of return on the bond of 8 percent. What do your calculations imply about the relation between the coupon rates and bond price
Calculate the fair present values of the following bonds, all of which pay interest semiannually, have a face value of $1,000, have 12 years remaining to maturity, and have a required rate of return
Calculate the yield to maturity on the following bonds: (LG 3-2)a. A 9 percent coupon (paid semiannually) bond, with a $1,000 face value and 15 years remaining to maturity. The bond is selling
A bond you are evaluating has a 10 percent coupon rate (compounded semiannually), a $1,000 face value, and is 10 years from maturity. (LG 3-4)a. If the required rate of return on the bond is 6
You have just been offered a bond for $863.73. The coupon rate is 8 percent payable annually, and the yield to maturity on new issues with the same degree of risk are 10 percent. You want to know how
BSW Corporation has a bond issue outstanding with an annual coupon rate of 7 percent paid quarterly and four years remaining until maturity. The par value of the bond is $1,000. Determine the fair
Using a Spreadsheet to Calculate Yield to Maturity. What is the yield to maturity on the following bonds; all have a maturity of 10 years, a face value of $1,000, and a coupon rate of 9 percent (paid
A 10-year, 12 percent semiannual coupon bond, with a par value of$1,000 sells for $1,100. What is the bond’s yield to maturity? (LG 3-2) LO.1
Using a Spreadsheet to Calculate Bond Values. What is the value of a $1,000 bond with a 12-year maturity and an 8 percent coupon rate (paid semiannually) if the required rate of return is 5 percent,
Johnson Motors’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon rate is 8 percent. The bonds have a yield to maturity of 9
Calculate the percentage change in the 10-year T-bond and Aaa- and Baa-rated corporate bonds since June 2010.
You have discovered that when the required return of a bond you own fell by 0.50 percent from 9.75 percent to 9.25 percent, the price rose from $975 to $995. What is the duration of this bond?
MLK Bank has an asset portfolio that consists of $100 million of 30-year, 8 percent coupon, $1,000 bonds that sell at par. ( LG 3-4, LG 3-6 )a. What will be the bonds’ new prices if market yields
An insurance company is analyzing the following three bonds, each with five years to maturity, and is using duration as its measure of interest rate risk: ( LG 3-6 )a. $10,000 par value, coupon rate
Suppose that you purchase a bond that matures in five years and pays a 13.76 percent coupon rate. The bond is priced to yield 10 percent. ( LG 3-6 )a. Show that the duration is equal to four years.b.
What is the duration of a zero-coupon bond that has eight years to maturity? What is the duration if the maturity increases to 10 years? If it increases to 12 years? ( LG 3-7 )
Consider the following. ( LG 3-7 )a. What is the duration of a four-year Treasury bond with a 10 percent semiannual coupon selling at par?b. What is the duration of a three-year Treasury bond with a
Consider the following. ( LG 3-7 )a. What is the duration of a five-year Treasury bond with a 10 percent semiannual coupon selling at par?b. What is the duration of the above bond if the yield to
Consider a five-year, 15 percent annual coupon bond with a face value of $1,000. The bond is trading at a rate of 12 percent. ( LG 3-4 )a. What is the price of the bond?b. If the rate of interest
Consider a 12-year, 12 percent annual coupon bond with a required return of 10 percent. The bond has a face value of $1,000. ( LG 3-4 )a. What is the price of the bond?b. If interest rates rise to 11
What is the duration of a five-year, $1,000 Treasury bond with a 10 percent semiannual coupon selling at par? Selling with a yield to maturity of 12 percent? 14 percent? What can you conclude about
Two bonds are available for purchase in the financial markets. The first bond is a two-year, $1,000 bond that pays an annual coupon of 10 percent. The second bond is a twoyear, $1,000, zero-coupon
Consider the following two banks: ( LG 3-4 ) Bank 1 has assets composed solely of a 10-year, 12 percent coupon, $1 million loan with a 12 percent yield to maturity. It is financed with a 10-year, 10
a. What is the duration of a two-year bond that pays an annual coupon of 10 percent and has a current yield to maturity of 12 percent? Use $1,000 as the face value. ( LG 3-6 )b. What is the duration
A company recently paid a $0.35 dividend. The dividend is expected to grow at a 10.5 percent rate. At a current stock price of $24.25, what return are shareholders expecting? ( LG 3-3 )
Consider a firm with a 9.5 percent growth rate of dividends expected in the future. The current year’s dividend was $1.32. What is the fair present value of the stock if the required return is 13
Paychex Inc. (PAYX) recently paid a $0.84 dividend. The dividend is expected to grow at a 15 percent rate. At a current stock price of $40.11, what return are shareholders expecting? ( LG 3-3 )
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 return are shareholders expecting? ( LG 3-3 )
A stock you are evaluating is expected to experience supernormal growth in dividends of 8 percent over the next six years. Following this period, dividends are expected to grow at a constant rate of
You are considering the purchase of a stock that is currently selling at $64 per share. You expect the stock to pay $4.50 in dividends next year. ( LG 3-3 )a. If dividends are expected to grow at a
A stock you are evaluating just paid an annual dividend of $2.50. Dividends have grown at a constant rate of 1.5 percent over the last 15 years and you expect this to continue. ( LG 3-3 )a. If the
Financial analysts forecast Limited Brands (LTD) growth for the future to be 12.5 percent. LTD’s most recent dividend was $0.60. What is the value of Limited Brands’s stock when the required
Financial analysts forecast Safeco Corp. (SAF) growth for the future to be 10 percent. Safeco’s recent dividend was $1.20. What is the value of Safeco stock if the required return is 12 percent? (
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? ( LG 3-3 )
A preferred stock from Duquesne Light Company (DQUPRA) pays $2.10 in annual dividends. If the required return on the preferred stock is 5.4 percent, what is the value of the stock? ( LG 3-3 )
Calculate the present value on a stock that pays $5 in dividends per year (with no growth) and has a required rate of return of 10 percent. ( LG 3-3 )
A $1,000 par value bond with seven years left to maturity has a 9 percent coupon rate (paid semiannually) and is selling for $945.80. What is its yield to maturity? ( LG 3-2 )
A $1,000 par value bond with five years left to maturity pays an interest payment semiannually with a 6 percent coupon rate and is priced to have a 5 percent yield to maturity. If interest rates
Repeat parts (a) through (c) of Problem 13 using a required rate of return on the bond of 11 percent. What do your calculations imply about the relation between time to maturity and bond price
Calculate the fair present value of the following bonds, all of which have a 10 percent coupon rate (paid semiannually), face value of $1,000, and a required rate of return of 8 percent. ( LG 3-5
Repeat parts (a) through (c) of Problem 11 using a required rate of return on the bond of 8 percent. What do your calculations imply about the relation between the coupon rates and bond price
Calculate the fair present values of the following bonds, all of which pay interest semiannually, have a face value of $1,000, have 12 years remaining to maturity, and have a required rate of return
Calculate the yield to maturity on the following bonds. ( LG 3-2 )a. A 9 percent coupon (paid semiannually) bond, with a $1,000 face value and 15 years remaining to maturity. The bond is selling at
A bond you are evaluating has a 10 percent coupon rate (compounded semiannually), a $1,000 face value, and is 10 years from maturity. ( LG 3-4 )a. If the required rate of return on the bond is 6
You have just been offered a bond for $863.73. The coupon rate is 8 percent payable annually, and interest rates on new issues with the same degree of risk are 10 percent. You want to know how many
BSW Corporation has a bond issue outstanding with an annual coupon rate of 7 percent paid quarterly and four years remaining until maturity. The par value of the bond is $1,000. Determine the fair
e cel x Using a Spreadsheet to Calculate Yield to Maturity. What is the yield to maturity on the following bonds; all have a maturity of 10 years, a face value of $1,000, and a coupon rate of 9
A 10-year, 12 percent semiannual coupon bond, with a par value of $1,000 sells for $1,100. What is the bond’s yield to maturity? ( LG 3-2 )
e cel x Using a Spreadsheet to Calculate Bond Values. What is the value of a $1,000 bond with a 12-year maturity and an 8 percent coupon rate (paid semiannually) if the required return is 5
Johnson Motors’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon rate is 8 percent. The bonds have a yield to maturity of 9
You expect to hold the bond for three more years, then sell it for $990. If the bond is expected to continue paying $75 per year over the next three years, what is the expected rate of return on the
Refer again to the bond information in Problem
You bought a bond five years ago for $935 per bond. The bond is now selling for $980. It also paid $75 in interest per year, which you reinvested in the bond. Calculate the realized rate of return
How is duration related to the interest elasticity of a fixedincome security? What is the relationship between duration and the price of a fixed-income security?

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