QUESTION 20

Northwest Mutual holds a 12-year bond that has a 12 percent coupon rate and a marginal tax rate of 40 percent. It is currently selling for $1,000, which is the bond's face value. If interest is paid semiannually, the bond's yield to maturity is _____.

		equal to 12 percent
		greater than 12 percent
		less than 12 percent
		equal to 7.2 percent
		greater than 16.8 percent

2 points

QUESTION 21

If Standard & Poor's ratings of a firm's bonds is below BBB, the _____.

		firm will find it difficult to find potential investors when issuing new bonds
		default risk premium associated with the bonds will be less than the risk premium associated with bonds rated AAA
		firm will easily find investors when issuing new bonds because bonds with high yields have no risk associated with them
		default risk associated with the bonds is less than that of bonds that are rated AAA
		firm will immediately have to exercise the call provision and issue new bonds

2 points

QUESTION 22

The computation for the yield to call is the same as that for the yield to maturity, except that we substitute the _____ of the bond for the maturity (par) value and _____ for the years to maturity.

		market price; the number of years until the bond can be first called
		face value; five years
		call price; the number of years until the bond can be first called
		principal value; 10 years
		issue price; the number of years until the bond can be first called

2 points

QUESTION 23

Glass Corporation's bond with a face value of $1,000 is currently selling at a premium in the financial markets. If the bond's yield to maturity is 11.5 percent, then the bond's _____.

		coupon rate of interest must be less than 11.5 percent
		coupon rate of interest must be greater than 11.5 percent
		coupon rate of interest must be equal to 11.5 percent
		maturity value must be greater than $1,000
		maturity value must be less than $1,000

2 points

QUESTION 24

Which of the following are correct?

A. Bonds issued by Cement Corporation that have a coupon rate of interest equal to 10 percent currently have a yield to maturity equal to 8 percent. Based on this information, it is understood that Cement Corporation bonds must currently be selling at a premium in the financial markets.

B. If there are two bonds with a simple interest rate yield of 9 percent, but one bond is compounded quarterly while the other bond is compounded monthly, the bond with quarterly compounding will have a higher effective annual yield.

C. Southwest Mutual can buy a bond ($1,000 par) for $800. If the coupon rate is 10 percent, the annual interest payments equal $80.

		A
		B
		A and B
		A and C
		B and C

2 points

QUESTION 25

The current market price of Tree Corporation's 10-year bonds is $1,297.58. A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000. What is the yield to maturity, stated on an annual basis if the bonds mature 10 years from today?

		8%
		6%
		4%
		2%
		1%

2 points

QUESTION 26

Which of the following statements about a bond that is selling at a discount is correct?

		Because the coupon rate remains constant, the market value of the bond also remains constant throughout its life.
		The market price of the bond will be greater than the bond's face value.
		The market price of the bond will increase and will approach its face value as the maturity date gets closer.
		Both the market price of the bond and the interest received will increase as the maturity date nears.
		The par value of the bond will increase with every increase in the market price of the bond until the maturity date is reached.

2 points

QUESTION 27

A firm expects to pay dividends at the end of each of the next four years of $2.00, $1.50, $2.50, and $3.50. If growth is then expected to level off at 8 percent, and if you require a 14 percent rate of return, how much should you be willing to pay for this stock?

		$39.38
		$22.49
		$58.15
		$63.00
		$43.96

2 points

QUESTION 28

Which of the following are correct?

A. According to the convertibility provision, a common stock can be converted to a certain number of shares of preferred stock at the stated conversion price.

B. A typical common stock issue has a maturity period of 10 years.

C. A call provision gives the issuing corporation the right to call in the preferred stock for redemption.

		A
		B
		C
		A and C
		B and C

2 points

QUESTION 29

Which of the following is true of American depository receipts?

		With exception of stocks traded in the United States, stocks that are traded in a country other than the issuing company's home country are called American depository receipts.
		American depository receipts are pools of stocks of different American companies issued by foreign companies that are traded in international stock markets.
		An American depository receipt is the stock of an American company that is traded in foreign countries.
		If a Japanese company sells its stocks in the United States, the transaction is termed an American depository receipt.
		American depository receipts provide U.S. investors with the ability to invest in foreign companies with less complexity and difficulty than might otherwise be possible.