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fundamentals of investments valuation

Questions and Answers of Fundamentals Of Investments Valuation

Which of the following are advantages of mortgage-backed securities (MBS)? a. b. C. d. I and II only II and III only I and III only I, II, and III
Which of the following are characteristics that would make mortgage-backed securities (MBSS) inappropriate for less sophisticated, conservative investors? I. The maturity of MBSs is quite variable
For a given mortgage pool, which of the following CMOs based on that pool is the riskiest investment? a. b. C. d. 100/300 PAC bond A-tranche sequential CMO interest-only (IO) strip principal-only
For a given mortgage pool, which of the following CMOS based on that pool is most likely to increase in price when market interest rates increase? a. b. C. d. 100/300 PAC bond A-tranche sequential
In the United States, what is the normal face value for corporate and U.S. government bond? How are coupons calculated? How often are coupons paid?
What is difference between a bond's promised yield and its realized yield? Which is more relevant? When we calculate a bond's yield to maturity, which of these are we calculating?
CIR Inc. has 7 percent coupon bonds on the market that have 11 years left to maturity. If the YTM on these bonds is 8.5 percent, what is the current bond price?
Trincor Company bonds have a coupon rate of 10.25 percent, 14 years to maturity, and a current price of $1,225. What is the YTM? The current yield?
Dunbar Corporation has bonds on the market with 10.5 years to maturity, a YTM of 10 percent, and a current price of $860. What must the coupon rate be on Dunbar's bonds?
Jane's Pizzeria issued 10-year bonds one year ago at a coupon rate of 8.75 percent. If the YTM on these bonds is 7.25 percent, what is the current bond price?
Jerry's Spaghetti Factory issued 12-year bonds two years ago at a coupon rate of 9.5 percent. If these bonds currently sell for 96 percent of par value, what is the YTM?
Bond X is a premium bond with a 9 percent coupon, a YTM of 7 percent, and 15 years to maturity. Bond Y is a discount bond with a 6 percent coupon, a YTM of 9 percent, and also 15 years to maturity.
Both bond A and bond B have 8 percent coupons and are priced at par value. Bond A has 2 years to maturity, while bond B has 15 years to maturity. If interest rates suddenly rise by 2 percent, what is
Bond J is a 4 percent coupon bond. Bond K is a 10 percent coupon bond. Both bonds have 10 years to maturity and have a YTM of 9 percent. If interest rates suddenly rise by 2 percent, what is the
ABC Co. has 10 percent coupon bonds with a YTM of 8,5 percent. The current yield on these bonds is 9.01 percent. How many years do these bonds have left until they mature?
Suppose you buy a 10 percent coupon bond today for $1,100. The bond has 10 years to maturity. What rate of retum do you expect to earn on your investment? Two years from now, the YTM on your bond has
XYZ Company has a 9 percent callable bond outstanding on the market with 12 years to maturity, call protection for the next 5 years, and a call premium of $100. What is the yield to call (YTC) for
What is the Macaulay duration of an 8 percent coupon bond with three years to maturity and a current price of $937.10? What is the modified duration?
A particular bond matures in 30 years. It is callable in 10 years at 110. The call price is cut by 1 percent of par each year until the call price reaches par. If the bond is called in 12 years, how
A convertible bond features a conversion ratio of 50. What is the conversion price? If the stock sells for $30 per share, what is the conversion value?
An airline elects to finance the purchase of some new airplanes using equipment trust certificates. Under the legal arrangement associated with such certificates. the airplanes are pledged as
What does the call feature of a bond mean? a. investor can call for payment on demand investor can only call if the firm defaults on an interest payment issuer can call the bond issue prior to the
Who benefits from a call provision on a corporate bond? a. b. C. d. the issuer the bondholders the trustee the government regulators
Which of the following describes a bond with a call feature? a. b. C. d. it is attractive, because the immediate receipt of principal plus premium produces a high retum it is more likely to be called
What does positive convexity on a bond imply? a. b. C. d. the direction of change in yield is directly related to the change in price prices increase at a faster rate as yields drop, than they
Which of the following is not a responsibility of a corporate trustee with regard to a bond's trust indenture? a. b. C. d. checking compliance authenticating the bonds issued negotiating the terms
The refunding provision of an indenture allows bonds to be retired unless: a. b. C. d. they are replaced with a new issue having a lower interest cost the remaining time to maturity is less than five
Holders of unsecured debentures with a negative pledge clause can claim which of the following assurances? a. no additional secured debt will be issued in the future b. C. d. if any secured debt is
Nonconvertible preferred stock has which of the following in comparison to common stock? a. b. C. d. preferential claim on a company's earnings a predetermined dividend rate preferential voting
A preferred stock that is entitled to dividends in arrears is known as: a. convertible b. cumulative C. d. extendible participating
Why does a firm's preferred stock often sell at yields below its bond's? b. a. PRIP C. d. preferred stock generally carries a higher agency rating owners of preferred stock have a prior claim on the
Which one of the following statements about convertible bonds is true? a. b. C. d. The longer the call protection on a convertible, the less the security is worth The more volatile the underlying
Which one of the following statements about convertible bonds is false? a. b. C. PD d. The yield on the convertible will typically be higher than the yield on the underlying common stock The
Consider the possible advantages of convertible bonds for investors: I. II III. IV. the conversion feature enables the convertible to participate in major upward moves in the price of the underlying
A convertible bond sells at \($1,000\) par with a conversion ratio of 40 and an accompanying stock price of \($20\) per share. The conversion price and conversion value are, respectively. a. $20 and
What a are the four main types of corporate bonds?
What is the impact on a bond's coupon rate from: a. b. a call feature? a put feature?
A convertible bond has a $1,000 face value and a conversion ratio of 40. What is the conversion price?
A convertible bond has a \($1,000\) face value and a conversion ratio of 80. If the stock sells for \($10\) per share, what is the conversion value?
What is the difference between an convertible bond? exchangeable bond and a Convertible bond?
What is event risk? In addition to protective covenants, what bond feature do you think best reduces or eliminates such risk?
A convertible bond has a 6 percent coupon, paid semiannually, and will mature in 8 years. If the bond were not convertible, it would be priced to yield 9 percent. The conversion ratio on the bond is
You own a convertible bond with a conversion ratio of 40. The stock is currently selling for $30 per share. The issuer of the bond has announced a call; the call price is 105. What are your options
Does the decision to include a sinking fund increase or decrease the coupon rate on a newly issued bond? Does your answer depend on the issuer?
An "inverse floater" is a bond with a coupon that is adjusted down when interest rates rise and up when rates fall. What is the impact of the floating coupon on the bond's price volatility?
A callable Treasury bond's price is 140:25. It has a coupon rate of 10 percent, makes semiannual payments, and matures in 21 years. What yield would be reported in the financial press?
A particular investor faces a 40 percent tax rate. If a AA-rated municipal bond yields 4 percent, what must a similar taxable issue yield for the investor to be impartial to them?
What is a zero-coupon bond? How does it differ from a pure discount security?
With regard to STRIPS, what do "ci," "np," and "bp" represent?
How much would you pay for a U.S. Treasury bill with 89 days to maturity quoted at a discount yield of 5.50 percent?
The yield to maturity on a bond is: a. b. C. d. below the coupon rate when the bond sells at a discount and above the coupon rate when the bond sells at a premium the interest rate that makes the
In which one of the following cases is the bond selling at a discount? a. b. coupon rate is greater than current yield, which is greater than yield-to-maturity coupon rate, current yield and
When are yield-to-maturity and current yield on a bond equal? a. b. C. d. when market interest rates begin to level off if the bond sells at a price in excess of its par value when the expected
Another term for bond duration is: a. b. C. d. actual maturity effective maturity calculated maturity near-term maturity
Which statement is true for the Macaulay duration of a zero-coupon bond? a. it is equal to the bond's maturity in years b. it is equal to one-half the bond's maturity in years c. d. it is equal to
Which one of the following bonds has the shortest duration? a. b. C. d. zero coupon, 10-year maturity zero coupon, 13-year maturity 8 percent coupon, 10-year maturity 8 percent coupon, 13-year
Identify the bond that has the longest duration (no calculations necessary). a. b. C. d. 20-year maturity with an 8 percent coupon 20-year maturity with a 12 percent coupon 15-year maturity with a 0
Which bond has the longest duration? a. b. 8-year maturity, 6 percent coupon 8-year maturity, 11 percent coupon C. 15-year maturity, 6 percent coupon d. 15-year maturity, 11 percent coupon
The duration of a bond normally increases with an increase in: a. b. c. d. term-to-maturity yield-to-maturity coupon rate all of the above
When interest rates decline, what happens to the duration of a 30-year bond selling at a premium? a. b. C. d. it increases it decreases it remains the same it increases at first, then declines
An 8 percent, 20-year corporate bond is priced to yield 9 percent. The Macaulay duration for this bond is 8.85 years. Given this information, how many years is the bond's modified duration? a. 8.12
A nine-year bond has a yield-to-maturity of 10 percent and a modified duration of 6.54 years. If the market yield changes by 50 basis points, what is the change in the bond's price? a. b. c. d. 3.27
A 6 percent coupon bond paying interest semiannually has a modified duration of 10 years, sells for $800, and is priced at a yield-to-maturity (YTM) of 8 percent. If the YTM increases to 9 percent,
Assuming that the yield curve and term structure are both upward sloping at all maturities, which of the following debt instruments will have the highest interest rate as measured by its yield to
What is the earnings yield on a stock?
CJ Industries will pay a regular dividend of \($3.50\) per share for each of the next three years. At the end of the three years, the company will also pay out a \($40\) per share liquidating
Trust Bankers just paid an annual dividend of \($2\) per share. The expected dividend growth rate is 5 percent, the discount rate is 10 percent, and the dividends will last for 5 more years. What is
Apple Grove, Inc., will pay dividends for the next 10 years. The expected dividend growth rate for this firm is 8 percent, the discount rate is 15 percent, and the stock currently sells for \($25\)
Suppose that Kojak, Inc., just paid a dividend of \($3.75\) per share. The company will continue to pay dividends for the next 20 years, and then go out of business. If the discount rate is 12
Atlantis Seafood Company stock currently sells for \($70\) per share. The company is expected to pay a dividend of \($4\) per share next year, and analysts project that dividends should increase at 4
Xytex Products just paid a dividend of \($1.25\) per share, and the stock currently sells for \($25.\) If the discount rate is 15 percent, what is the dividend growth rate?
Sturgis Light & Power increases its dividend 5 percent per year every year. This utility is valued using a discount rate of 8 percent, and the stock currently sells for $85 per share. If you buy a
Johnson Products earned \($12.50\) per share last year and paid a \($5\) per share dividend. If ROE was 20 percent, what is the sustainable growth rate?
Caterwallar stock has a sustainable growth rate of 5 percent, ROE of 20 percent, and dividends per share of \($3.00.\) If the P/E ratio is 15, what is the value of a share of stock?
PerfectlySoft Corp. is experiencing rapid growth. Dividends are expected to grow at 30 percent per year during the next three years, 20 percent over the following year, and then 6 percent per year
Callaway Corporation is expected to pay the following dividends over the next four years: $2.25, $4.00, $3.00, $1.00. Afterwards, the company pledges to maintain a constant & percent growth rate in
My Money, Inc., just paid a dividend of \($2.50\) per share on its stock. The growth rate in dividends is expected to be a constant 6.5 percent per year indefinitely. Investors require a 20 percent
Use the following income statement for McGwire-Sosa Lumber Co. to calculate gross and operating margins. Net sales McGwire-Sosa Limber 1999 Income Statement Cost of goods sold Gross profit Operating
Which of the following profitability ratios is incorrect? a. b. C. d. = Gross margin Gross profit/Cost of goods sold Operating margin = Operating income / Net sales Return on assets = Net income /
Which of the following per-share ratios is incorrect? a. b. C. d. Book value per share = Total assets / Shares outstanding Earnings per share = Net income / Shares outstanding Cash Flow per share =
A company repurchase of common stock outstanding has which of the following effects on the balance sheet? a. b. C. d. an increase in shares outstanding an increase in stockholder equity a decrease in
Suppose Microsoft is currently trading at \($100.\) You want to buy it if it reaches \($120.\) What type of order should you submit?
Suppose Dell is currently trading at \($65.\) You think that if it reaches \($70,\) it will continue to climb, so you want to buy it if and when it gets there. Should you submit a limit order to buy
What is a stop-limit order? How many prices do you have to specify?
Price-Weighted Indexes Suppose the following three defense stocks are to be combined into a stock index in January 1998 (perhaps a portfolio manager believes these stocks are an appropriate benchmark
Suppose dividends for a particular company are projected to grow at 6 percent forever. If the discount rate is 16 percent and the current dividend is \($2,\) what is the value of the stock?
A company has a return on equity of ROE = 20 percent, and, from earnings per share of EPS = \($5,\) it pays a \($2\) dividend. What is the company's sustainable growth rate? a. b. C. d. 8 percent 10
If the return on equity for a firm is 15 percent and the retention ratio is 40 percent, the sustainable growth rate of earnings and dividends is which of the following? a. b. C. d. 6 percent 9
Suppose a security pays a current dividend of $5 and all future dividends will grow at a rate of 8 percent per year forever. Assuming the appropriate discount rate is 12 percent, what is the value of
The constant-growth dividend discount model will not produce a finite value if the dividend growth rate is which of the following? a. b. C. d. above its historical average above the required rate of
In applying the constant-growth dividend discount model, a stock's intrinsic value will be which of the following when the required rate of return is lowered? increase a. decrease b. C. d. remain
The constant-growth dividend discount model would typically be most appropriate for valuing the stock of which of the following? a. b. C. d. new venture expected to retain all earnings for several
A stock has a required return of 15 percent, a constant growth rate of 10 percent, and a dividend payout ratio of 50 percent. What should the stock's P/E ratio should be? a. 3.0 b. 4.5 C. 9.0 d. 11.0
If the U.S. Treasury bill rate is 5 percent and the stock market risk premium is 8 percent, then the CAPM discount rate for a security with a beta of 1.25 is a. b. C. d. 12 percent 13 percent 14.25
If the U.S. Treasury bill rate is 5 percent and the stock market risk premium is 8 percent, then the CAPM discount rate for a security with a beta of .75 is a. b. C. d. 6 percent 8 percent 11 percent
A stock will not pay dividends until three years from now. The dividend then will be $2.00 per share, the dividend payout ratio will be 40 percent, and return on equity will be 15 percent. If the
Assume that at the end of the next year, Company A will pay a \($2.00\) dividend per share, an increase from the current dividend of \($1.50\) per share. After that, the dividend is expected to
A share of stock will pay a dividend of \($1.00\) one year from now, with dividend growth of 5 percent thereafter. In the context of a dividend discount model, the stock is correctly priced at
Which of the following best defines cash flow? a. b. net income plus depreciation net income minus depreciation C. net income plus taxes minus depreciation d. net income plus taxes divided by
Two similar companies have the same price-sales and price-earnings ratios. However, company A has a lower price-cash flow ratio than company B. This most likely simply indicates that a. A has lower

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