Consider a preferred stock that currently pays $2.25 annual dividend. The current interest rate in the market is 5.6%. How does a preferred stock price change if the interest rate increases to 6.3%?

• increases by $4.5
• increases by $0.70
• decreases by $4.5
• decreases by $5.6

14. For which of the following investors would zero-coupon bonds be MOST appropriate?

• John, age 25, graduate student living on stipend
• Anabelle, age 34, aggressive risk tolerance, has a stable job
• Peter and Mary, parents of Rosa who will need $50,000 for college tuition in 4 years
• Catherine, age 65, retired but in need of fixed cash flows in addition to her retirement benefits

15. Company XYZ issued a ten-year corporate bond three years ago. The bond has 8% coupon rate, par value of $1,000 and pays interest semiannually. If the current interest rate is 6.5%, should XYZ call the bond?

• No because it is an extremely attractive investment compared to other corporate bonds
• No because if XYZ issues a new bond, investors will be greatly exposed to financial risk
• Yes because it decreases investors exposure to reinvestment risk
• Yes because it can decrease payments if XYZ calls the bond and issues a new one

16. Go to the Federal Reserve website and obtain daily yields for November 1, 1999. The yield for securities with ten years till maturity equals ____:

• 6.06%
• 6.55%
• 4.57%
• 3.12%

17. On November 1, 1999 the yield curve share could be described as _____:

• normal because long-term interest rates are lower than mid-term interest rates
• normal because interest rates are positively related to maturities
• flat because most interest rates remain similar
• inverted because interest rates decrease with maturities