Fin 3400 Spring 2023 Exam 2 Study Guide PDF

Fin 3400 Spring 2023 Exam #2 (Chapters 6, 7, & 11) Study Guide Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) What is the coupon payment of a 25-year $1000 bond with a 4.5% coupon rate with...

Fin 3400 Spring 2023 Exam #2 (Chapters 6, 7, & 11) Study Guide Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) What is the coupon payment of a 25-year $1000 bond with a 4.5% coupon rate with quarterly payments? A) $11.25 B) $3.75 C) $22.50 D) $45.00 Answer: A 2) What is the coupon payment of a 15-year $10,000 bond with a 9% coupon rate with semiannual payments? A) $900.00 B) $1800.00 C) $150.00 D) $450 Answer: D 3) A corporate bond makes payments of $9.67 every month for ten years with a final payment of $2009.67. Which of the following best describes this bond? A) a 10-year bond with a face value of $2,009.67 and a coupon rate of 5.8% with monthly payments B) a 10-year bond with a face value of $2,009.67 and a coupon rate of 4.8% with monthly payments C) a 10-year bond with a face value of $2,000 and a coupon rate of 4.8% with monthly payments D) a 10-year bond with a face value of $2,000 and a coupon rate of 5.8% with monthly payments Answer: D 4) An investor holds a Ford bond with a face value of $5000, a coupon rate of 8.5%, and semiannual payments that matures on January 15, 2029. How much will the investor receive on January 15, 2029? A) $5000.00 B) $2606.25 C) $5212.50 D) $5425.00 Answer: C 5) Which of the following best shows the timeline for cash flows from a five-year bond with a face value of $2,000, a coupon rate of 5.0%, and semiannual payments? A) 0 1 2 3 9 10 B) 0 1 2 3 4 5 +-----+-----+-----+---... -----+-----+ +-----+-----+-----+-----+-----+ $25 $25 $25 $25 $25 $100 $100 $100 $100 $2100 C) 0 1 2 3 9 10 D) 0 1 2 3 9 10 +-----+-----+-----+---... -----+-----+ +-----+-----+-----+---... -----+-----+ $50 $50 $50 $50 $50 $50 $50 $50 $50 $2050 Answer: D 1 6) 0 1 2 3 59 60 +-----+-----+-----+---... -----+-----+ $57.5 $57.5 $57.5 $57.5 $5057.5 A corporation issues a bond that generates the above cash flows. If the periods are of 3-month intervals, which of the following best describes that bond? A) a 15-year bond with a notional value of $5000 and a coupon rate of 1.2% paid annually B) a 15-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly C) a 30-year bond with a notional value of $5000 and a coupon rate of 3.5% paid semiannually D) a 60-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly Answer: B 7) What is the yield to maturity of a one-year, risk-free, zero-coupon bond with a $10,000 face value and a price of $9400 when released? A) 0.009% B) 3.191% C) 6.000% D) 6.383% Answer: D 8) Maturity (years) 1 2 3 4 5 Price $97.25 $94.53 $91.83 $89.23 $87.53 The above table shows the price per $100-face value bond of several risk-free, zero-coupon bonds. What is the yield to maturity of the two year, zero-coupon, risk-free bond shown? A) 5.71% B) 0.05% C) 2.85% D) 1.43% Answer: C 9) Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a given period the risk-free interest rate for that period? A) Since there is, by definition, no risk in investing in such bonds, the return from such bonds is the best that can be expected from any investment over the period. B) Since such a bond provides a risk-free return over that period, the Law of One Price guarantees that the risk-free interest rate equals the yield to maturity. C) Since interest rates will rise and fall in response to the movement in bond prices. D) Since a bond's price will converge on its face value as the bond approaches the maturity date, the Law of One Price dictates that the risk-free interest rate will reflect this convergence. Answer: B 2 Use the figure for the question(s) below. 10) The current zero-coupon yield curve for risk-free bonds is shown above. What is the price of a zero-coupon, four-year, risk-free bond of $100? A) $87.99 B) $96.67 C) $85.64 D) $92.15 Answer: A 11) The current zero-coupon yield curve for risk-free bonds is shown above. What is the risk-free interest rate on a 4-year maturity? A) 3.25% B) 3.00% C) 3.15% D) 6.34% Answer: A 12) A risk-free, zero-coupon bond with a face value of $10,000 has 15 years to maturity. If the YTM is 6.1%, which of the following would be closest to the price this bond will trade at? A) $4937 B) $5760 C) $4114 D) $6582 Answer: C 13) A risk-free, zero-coupon bond has 15 years to maturity. Which of the following is closest to the price per $1000 of face value that the bond will trade at if the YTM is 6.1%? A) $774.42 B) $885.05 C) $553.15 D) $663.78 Answer: C 14) A risk-free, zero-coupon bond with a $5000 face value has 15 years to maturity. The bond currently trades at $3750. What is the yield to maturity of this bond? A) 0.968% B) 75.000% C) 1.936% D) 62.500% Answer: C 15) Which of the following risk-free, zero-coupon bonds could be bought for the lowest price? A) one with a face value of $1,000, a YTM of 3.2%, and 8 years to maturity B) one with a face value of $1,000, a YTM of 4.8%, and 5 years to maturity C) one with a face value of $1,000, a YTM of 5.9%, and 20 years to maturity D) one with a face value of $1,000, a YTM of 6.8%, and 10 years to maturity Answer: C 3 16) Consider a zero-coupon bond with a $1000 face value and 10 years left until maturity. If the YTM of this bond is 10.2%, then the price of this bond is closest to ________. A) $1000 B) $379 C) $530.04 D) $454.32 Answer: B 17) Consider a zero-coupon bond with a $1000 face value and 15 years left until maturity. If the bond is currently trading for $431, then the yield to maturity on this bond is closest to ________. A) 2.89% B) 43.10% C) 5.77% D) 56.90% Answer: C 18) What is the yield to maturity of a(n) eight-year, $5000 bond with a 4.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $4723.70? A) 7.36% B) 6.31% C) 2.63% D) 5.26% Answer: D 19) What is the yield to maturity of a ten-year, $10,000 bond with a 5.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $9207.93? A) 7.79% B) 3.24% C) 9.08% D) 6.49% Answer: D 20) A bond has five years to maturity, a $1000 face value, and a 5.5% coupon rate with annual coupons. What is its yield to maturity if it is currently trading at $846.11? A) 9.51% B) 7.61% C) 13.31% D) 11.41% Answer: A 21) What must be the price of a $10,000 bond with a 6.1% coupon rate, semiannual coupons, and five years to maturity if it has a yield to maturity of 10% APR? A) $11,891.97 B) $6795.41 C) $8494.26 D) $10,193.11 Answer: C 22) What must be the price of a $1000 bond with a 5.8% coupon rate, annual coupons, and 20 years to maturity if YTM is 7.8% APR? A) $960.82 B) $800.68 C) 1120.95 D) $640.54 Answer: B 23) A $1000 bond with a coupon rate of 6.2% paid semiannually has eight years to maturity and a yield to maturity of 8.3%. If interest rates rise and the yield to maturity increases to 8.6%, what will happen to the price of the bond? A) The price of the bond will fall by $15.78. B) The price of the bond will fall by $18.93. C) The price of the bond will rise by $15.78. D) The price of the bond will not change. Answer: A 4  24) A $5000 bond with a coupon rate of 5.7% paid semiannually has ten years to maturity and a yield to maturity of 6.4%. If interest rates fall and the yield to maturity decreases by 0.8%, what will happen to the price of the bond? A) The price of the bond will rise by $410.90. B) The price of the bond will rise by $293.50. C) The price of the bond will fall by $352.20. D) The price of the bond will fall by $293.50. Answer: B 25) What is the coupon rate of an eight-year, $10,000 bond with semiannual coupons and a price of $9006.6568, if it has a yield to maturity of 6.5%? A) 4.888% B) 6.84% C) 3.91% D) 5.87% Answer: A Use the information to answer the question(s) below. 26) Shown above is information from FINRA regarding one of Caterpillar Financial Services' bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid annually? A) $3.95 B) $4.36 C) $4.00 D) $1.38 Answer: C 5 Use the information for the question(s) below. 27) Shown above is information from FINRA regarding one of Bank of America's bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid semiannually? A) $1.49 B) $4.30 C) $2.32 D) $2.15 Answer: D 28) The Sisyphean Company has a bond outstanding with a face value of $5000 that matures in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.9% and that the coupon payments are to be made semiannually. How much will each semiannual coupon payment be? A) $890.0 B) $222.5 C) $667.5 D) $445.0 Answer: B 29) The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.2% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 7.3%, then the price that this bond trades for will be closest to ________. A) $1488 B) $1063 C) $1276 D) $850 Answer: B 30) The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is 10.0% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade at ________. A) a premium B) a discount C) par D) none of the above Answer: A 6 Use the information for the question(s) below. 31) The above information is for a corporate bond issued by the Markel Corporation. What sort of bond is this? A) a speculative bond B) a high-yield bond C) a high-risk bond D) an investment grade bond Answer: D 32) Which of the following best describes a bond rated by Standard & Poor's and Moody as B? A) neither highly protected nor poorly secured B) considered to be medium grade obligations C) generally lacks the characteristics of a desirable investment D) judged to be high quality by all standards Answer: C 33) Why are the interest rates of U.S. Treasury securities less than the interest rates of equivalent corporate bonds? A) There is significant risk that the U.S. government will default. B) U.S. Treasury securities are widely regarded to be risk-free. C) The U.S. government has a high credit spread. D) U.S. Treasury securities yield inflation adjusted interest rates. Answer: B 34) Security: Treasury AAA Corporate BBB Corporate B Corporate Yield (%): 5.2 5.4 6.6 6.9 The above table shows the yields to maturity on a number of three-year, zero-coupon securities. What is the price per $100 of the face value of a three-year, zero-coupon corporate bond with a BBB rating? A) $66.04 B) $99.06 C) $82.55 D) $115.57 Answer: C 35) Security: Treasury AAA Corporate BBB Corporate B Corporate Yield (%): 5.2 5.4 6.8 7.2 The above table shows the yields to maturity on a number of two-year, zero-coupon securities. What is the credit spread on a two-year, zero-coupon corporate bond with a B rating? A) 2.0% B) 2.8% C) 1.6% D) 2.4% Answer: A 7 36) The above screen shot from Google Finance shows basic stock information for PepsiCo. If you owned 1600 shares of PepsiCo for the period shown, how much would you have earned in dividend payments? A) $584.80 B) $688.00 C) $480.00 D) $658.44 Answer: B 8 Use the figure for the question(s) below. 37) The above screen shot from Google Finance shows the basic stock information for Logitech International SA (USA). What is Logitech International SA (USA)'s ticker symbol? A) LOGI B) LOG C) LIS D) LOGITECH Answer: A 38) The above screen shot from Google Finance shows the basic stock information for Logitech International SA (USA) after the close of business on August 22, 2008. What is the difference between the opening and closing price of the stock on this date? A) $0.49 B) $0.24 C) $0.03 D) $0.27 Answer: B 9 Use the figure for the question(s) below. 39) The above screen shot from Google Finance shows the basic stock information for Kraft Foods Inc. after the close of the stock market on May 30, 2008. What is the highest that the stock has traded at in the last 12 months? A) $32.99 B) $35.29 C) $32.44 D) $32.48 Answer: B 10 Use the figure for the question(s) below. 40) The above screen shot from Google Finance shows the price history of Progenics, a pharmaceutical company. In the time period shown, Progenics released information that an intravenously-administered formulation of their leading product had failed in a Phase III clinical trial. In which of the months shown in the price history is this most likely to have occurred? A) May 2008 B) March 2008 C) February 2008 D) April 2008 Answer: B 41) Owen Inc. has a current stock price of $15.00 and is expected to pay a $0.80 dividend in one year. If Owen's equity cost of capital is 12%, what price would its stock be expected to sell for immediately after it pays the dividend? A) $16.00 B) $16.80 C) $12.80 D) $11.20 Answer: A 42) Which of the following will be a source of cash flows for a shareholder of a certain stock? I. Sale of the shares at a future date II. The firm in which the shares are held paying out cash to shareholders in the form of dividends III. The firm in which the shares are held increasing the total number of shares outstanding through a stock split A) I only B) II only C) I and II D) II and III Answer: C 43) Coolibah Holdings is expected to pay dividends of $1.20 every six months for the next three years. If the current price of Coolibah stock is $22.60, and Coolibah's equity cost of capital is 18%, what price would you expect Coolibah's stock to sell for at the end of three years? A) $33.20 B) $31.76 C) $34.64 D) $28.87 Answer: D 11 44) Matilda Industries pays a dividend of $2.10 per share and is expected to pay this amount indefinitely. If Matilda's equity cost of capital is 9%, which of the following would be closest to Matilda's stock price? A) $23.33 B) $14.00 C) $18.66 D) $29.16 Answer: A 45) Jumbuck Exploration has a current stock price of $3.00 and is expected to sell for $3.15 in one year's time, immediately after it pays a dividend of $0.28. Which of the following is closest to Jumbuck Exploration's equity cost of capital? A) 14.33% B) 7.17% C) 8.60% D) 17.91% Answer: A 46) A stock is bought for $23.00 and sold for $27.00 one year later, immediately after it has paid a dividend of $1.50. What is the capital gain rate for this transaction? A) 3.48% B) 8.70% C) 17.39% D) 13.91% Answer: C 47) Credenza Industries is expected to pay a dividend of $1.70 at the end of the coming year. It is expected to sell for $62 at the end of the year. If its equity cost of capital is 9%, what is the expected capital gain from the sale of this stock at the end of the coming year? A) $56.88 B) $3.56 C) $5.12 D) $58.44 Answer: B 48) The Busby Corporation had a share price at the start of the year of $26.10, paid a dividend of $0.59 at the end of the year, and had a share price of $29.50 at the end of the year. Which of the following is closest to the rate of return of investments in companies with equal risk to The Busby Corporation for this period? A) 13% B) 15% C) 14% D) 12% Answer: B 49) Valorous Corporation will pay a dividend of $1.75 per share at this year's end and a dividend of $2.35 per share at the end of next year. It is expected that the price of Valorous' stock will be $41 per share after two years. If Valorous has an equity cost of capital of 9%, what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today? A) $39.99 B) $32.38 C) $38.09 D) $36.19 Answer: C 50) A stock is expected to pay $0.70 per share every year indefinitely. If the current price of the stock is $18.90, and the equity cost of capital for the company that released the shares is 7.9%, what price would an investor be expected to pay per share five years into the future? A) $14.62 B) $14.18 C) $15.06 D) $8.86 Answer: D 51) A stock is expected to pay $1.25 per share every year indefinitely and the equity cost of capital for the company is 8.4%. What price would an investor be expected to pay per share ten years in the future? A) $14.88 B) $37.20 C) $29.76 D) $22.32 Answer: A 12 52) Rylan Industries is expected to pay a dividend of $5.70 year for the next four years. If the current price of Rylan stock is $31.27, and Rylan's equity cost of capital is 12%, what price would you expect Rylan's stock to sell for at the end of the four years? A) $17.57 B) $61.49 C) $21.96 D) $39.53 Answer: C 53) A stock is expected to pay $2.60 per share every year indefinitely and the equity cost of capital for the company is 11%. What price would an investor be expected to pay per share next year? A) $17.73 B) $11.82 C) $5.91 D) $23.64 Answer: D 54) You expect that Bean Enterprises will have earnings per share of $2 for the coming year. Bean plans to retain all of its earnings for the next three years. For the subsequent two years, the firm plans on retaining 50% of its earnings. It will then retain only 25% of its earnings from that point forward. Retained earnings will be invested in projects with an expected return of 20% per year. If Bean's equity cost of capital is 10%, then the price of a share of Bean's stock is closest to ________. A) $66.18 B) $16.54 C) $41.36 D) $24.82 Answer: C 55) You expect that Bean Enterprises will have earnings per share of $2 for the coming year. Bean plans to retain all of its earnings for the next three years. For the subsequent two years, the firm plans on retaining 50% of its earnings. It will then retain only 25% of its earnings from that point forward. Retained earnings will be invested in projects with an expected return of 20% per year. If Bean's equity cost of capital is 15%, then the price of a share of Bean's stock is closest to ________. A) $28.08 B) $7.02 C) $10.53 D) $17.55 Answer: D 56) Avril Synchronistics will pay a dividend of $1.20 per share this year. It is expected that this dividend will grow by 3% each year in the future. What will be the current value of a single share of Avril's stock if the firm's equity cost of capital is 16%? A) $10.15 B) $6.46 C) $6.92 D) $9.23 Answer: D 57) Spacefood Products will pay a dividend of $2.40 per share this year. It is expected that this dividend will grow by 5% per year each year in the future. What will be the current value of a single share of Spacefood's stock if the firm's equity cost of capital is 12%? A) $22.29 B) $30.86 C) $34.29 D) $24.00 Answer: C 58) Gremlin Industries will pay a dividend of $1.90 per share this year. It is expected that this dividend will grow by 4% per year each year in the future. The current price of Gremlin's stock is $23.50 per share. What is Gremlin's equity cost of capital? A) 14% B) 11% C) 12% D) 16% Answer: C 13 59) A company has stock which costs $41.50 per share and pays a dividend of $2.50 per share this year. The company's cost of equity is 7%. What is the expected annual growth rate of the company's dividends? A) 1.96% B) 3.92% C) 0.98% D) 2.94% Answer: C 60) Sinclair Pharmaceuticals, a small drug company, develops a vaccine that will protect against Helicobacter pylori, a bacteria that is the cause of a number of diseases of the stomach. It is expected that Sinclair Pharmaceuticals will experience extremely high growth over the next three years and will reinvest all of its earnings in expanding the company over this time. Earnings were $1.10 per share before the development of the vaccine and are expected to grow by 40% per year for the next three years. After this time, it is expected that growth will drop to 5% and stay there for the expected future. Four years from now Sinclair will pay dividends that are 75% of its earnings. If its equity cost of capital is 12%, what is the value of a share of Sinclair Pharmaceuticals today? A) $33.51 B) $33.96 C) $24.17 D) $20.62 Answer: C 61) Suppose you invested $60 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.63 today and then you sold it for $65. What was your return on the investment? A) 6.57% B) 7.51% C) 10.32% D) 9.38% Answer: D 62) Suppose you invested $59 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of 0.38 today and then you sold it for $66. What was your return on the investment? A) 12.51% B) 10.01% C) 13.76% D) 8.76% Answer: A 63) Suppose you invested $79 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.41 today and then you sold it for $66. What was your return on the investment? A) -$15.94% B) -17.53% C) -20.72% D) -18.33% Answer: A 64) Greg purchased stock in Bear Stearns and Co. at a price of $88 per share one year ago. The company was acquired by JP Morgan at a price of $11 per share. What is Greg's return on his investment? A) -87.50% B) -96.25% C) -113.75% D) -100.62% Answer: A 65) You own shares in Supernova Inc. that were purchased at a price of $23 per share. Quicksilver Inc. has offered to purchase Supernova Inc. and buy your shares at a price of $34 per share. What will be your return if you tender your shares to Quicksilver Inc. and the deal is completed? A) 45.43% B) 50.22% C) 47.83% D) 33.48% Answer: C 14 66) Suppose you invested $93 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $0.53 today and then you sold it for $94. What was your dividend yield and capital gains yield on the investment? A) 0.57%, 1.13% B) 1.08%, 1.18% C) 0.57%, 1.08% D) 0.54%, 1.13% Answer: C 67) Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $100. What was your dividend yield and capital gains yield on the investment? A) 0%, 2% B) 2%, 0% C) 3%, 2% D) 2%, 2% Answer: B 68) Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $95. What was your dividend yield and capital gains yield on the investment? A) -2%, 5% B) 5%, 2% C) 2%, 5% D) 2%, -5% Answer: D 15 Answer Key Testname: FIN_3400_SPRING2023EXAM2-STUDY-GUIDE_STUDENT 1) A Explanation: $1000 × 0.045 / 4 = $11.25 2) D Explanation: $10,000 × 0.09/2 = $450 3) D Explanation: $9.67 × 12 / (2,009.67 - 9.67) = 5.802% 4) C Explanation: $5000 + $5000 × 0.085/2 = $5212.5 5) D Explanation: 6) B Explanation: 7) D Explanation: Calculate the discount rate that equates $10,000 to $9400 in one year. 1 + YTM n = (Face value / price)1/n. YTM n = 6.383% 8) C Explanation: Calculate the discount rate that equates $100 to $94.53 in two years. 1 + YTM n = (Face value / price)1/n. YTM n = 2.85% 9) B Explanation: 10) A Explanation: Price = (Face value) / (1 + YTM)N ; Price = ($100) / (1 + 3.25%)4 = $87.99. 11) A Explanation: 12) C Explanation: Price = (Face value) / (1 + YTM)N. Price = ($10,000) / (1 + 6.1%)15 = $4114 13) C Explanation: Price = (Face value) / (1 + YTM)N. Price = ($1000) / (1 + 6.1%)10 = $553.15 14) C Explanation: YTM = (Face Value / Price)1/n - 1; YTM = ($5000 / $3750)1/15 - 1 = 1.936% 15) C Explanation: Price = $1,000 / (1 + 5.9%)20 = $318 (lowest price) 16) B Explanation: FV = 1000 I = 10.2 PMT = 0 N = 10 FV 1000 Compute PV = = = 378.60 (1 + i)N (1 + 10.200)10 16 Answer Key Testname: FIN_3400_SPRING2023EXAM2-STUDY-GUIDE_STUDENT 17) C Explanation: FV = 1000 PV = -431 PMT = 0 N = 15 Compute I = 5.7714%. 18) D Explanation: Using FV = $5000, periods to maturity = 16, PMT = 110.00, and PV = $4724, calculate discount rate = 2.6275% per period; 2.6275 × 2 = 5.255%. 19) D Explanation: Using FV = $10,000, periods to maturity = 20, PMT = 270.00, and PV = $9207.93, calculate discount rate = 3.2445% per period; 3.2445 × 2 = 6.489%. 20) A Explanation: Using FV = $1000, periods to maturity = 5, PMT = 55.00, and PV = $846.11, calculate discount rate = 9.5089% per period. 21) C Explanation: Using FV = $10,000, periods to maturity = 10, PMT = 305.00, and periodic discount rate = 5.0% per period, calculate PV = $8494.26. 22) B Explanation: Using FV = $1000, periods to maturity = 20, PMT = $58.00, and discount rate = 7.8% per period, calculate PV = $800.68 23) A Explanation: Using FV = $1000, periods to maturity = 16, PMT = 31.00, and discount rate = 4.15%, calculate PV = $878.9937; Using FV = $1000, periods to maturity = 16, PMT = 31.00, and discount rate = 4.30%, calculate PV = $863.2168; difference = $878.9937 - $863.2168 = $15.7769. 24) B Explanation: Using FV = $5000 periods to maturity = 20, PMT = $142.50, and discount rate = 6.4/2%, calculate PV = $4744.3939; Using FV = $5000, periods to maturity = 20, PMT = $142.50, and discount rate = 5.6/2%, calculate PV = $5037.8909; difference = $5037.8909 - $4744.3939 = $293.4969. 25) A Explanation: Using FV = $10,000, periods to maturity = 16, and discount rate = 3.25%, calculate PMT = $244.4000; annual coupon payment = $244.4000 × 2 = $488.8000; coupon rate = 4.888%. 26) C Explanation: $97.05 × 4% = $4.00 27) D Explanation: 100 × 4.300% = $4.30; $4.30 / 2 = $2.15 28) B Explanation: Coupon payment = (coupon rate × face value)/number of coupons per year = (0.089 × 5000) / 2 = $222.5 17 Answer Key Testname: FIN_3400_SPRING2023EXAM2-STUDY-GUIDE_STUDENT 29) B Explanation: FV = $1000 I = 3.65 (7.3/2) PMT = $41 N = 20 (10 × 2) Compute PV = 1063.10 30) A Explanation: As the coupon rate of 10.0% is more than the YTM of 7.5% on the bonds, so the bonds will trade at a premium. 31) D Explanation: 32) C Explanation: 33) B Explanation: 34) C Explanation: Calculate the PV of the bond with FV = $100, YTM = 6.6%, and N = 3, which = $82.55. 35) A Explanation: 7.2 - 5.2% = 2 36) B Explanation: 1600 × $0.43 = $688.00 37) A Explanation: 38) B Explanation: $26.30 - $26.06 = $0.24 39) B Explanation: 40) B Explanation: 41) A Explanation: (1 + 0.12) × $15.00 = $16.80; $16.80 - $0.80 = $16.00 42) C Explanation: 43) D Explanation: Using a financial calculator, PV = -$22.60, PMT = $1.20, n = 6, I = 18% / 2; calculate FV = $28.87. 44) A Explanation: PV0 = $2.10 / 0.09 = $23.33 45) A Explanation: $0.28 + $3.15 - $3.00 = $0.43; cost of capital = $0.43/$3.00 = 14.33% 46) C Explanation: Capital gain rate = (P1 - P0 ) / P0 = ($27.00 - $23.00) / $23.00 = 17.39% 18 Answer Key Testname: FIN_3400_SPRING2023EXAM2-STUDY-GUIDE_STUDENT 47) B Explanation: P0 using the capital gain rate formula = ($1.70 + $62) / (1 + 0.09) = $58.44; Capital gain = P1 - P0 = $62 - $58.44 = $3.56 48) B Explanation: $29.50 + $0.59 - $26.10 = $3.99; $3.99 / $26.10 = 15.29%; rounded to 15% 49) C Explanation: Using a financial calculator, CF0 = 0, CF1 = 1.75, CF2 = (41 + 2.35) = 43.35; calculate NPV at I = 9%, equals $38.09. 50) D Explanation: P0 = $0.70 / 0.079 = $8.86 51) A Explanation: P0 = $1.25 / 0.084 = $14.88 52) C Explanation: Using a financial calculator, PV = -31.27, PMT = 5.70, n = 4, I = 12; Calculate FV = $21.96 53) D Explanation: P0 = $2.60 / 0.11 = $23.64 54) C Explanation: Year Earnings Dividends g 1 $2.00 $0.00 20% 2 $2.40 $0.00 20% 3 $2.88 $0.00 20% 4 $3.46 $1.73 10% 5 $3.80 $1.90 10% 6 $4.18 $3.14 5% P0 = $1.73 / (1 + 0.1)4 + $1.90 / (1 + 0.1)5 + ($3.14 / (10% - 5%)) × (1 / (1 + 11%)5 ) = $41.36 Each g is calculated as the 20% return on the projects × the retention ratio. 55) D Explanation: Year Earnings Dividends g 1 $2.00 $0.00 20% 2 $2.40 $0.00 20% 3 $2.88 $0.00 20% 4 $3.46 $1.73 10% 5 $3.80 $1.90 10% 6 $4.18 $3.14 5% P0 = $1.73 / (1 + 0.15)4 + $1.90 / (1 + 0.15)5 + ($3.14 / (15% - 5%)) × (1 / (1 + 11%)5 ) = $17.55 Each g is calculated as the 20% return on the projects × the retention ratio. 56) D Explanation: P0 = $1.20 / (0.16 - 0.03) = $9.23 19 Answer Key Testname: FIN_3400_SPRING2023EXAM2-STUDY-GUIDE_STUDENT 57) C Explanation: P0 = $2.40 / (0.12 - 0.05) = $34.29 58) C Explanation: Cost of capital = ($1.90 / $23.50) + 0.04 = 12% 59) C Explanation: Growth rate = 0.07 - ($2.50 / $41.50) = 0.98% 60) C Explanation: E4 = $3.16932; D4 = $2.37699; P3 = $2.37699/(0.12 - 0.05) = $33.96; P0 = ($33.96 ) / (1 + 0.12)3 = $24.17 61) D Explanation: $(65 + 0.63) - 60 = 5.63; 5.63 / 60 = 9.38% 62) A Explanation: $(66 + 0.38) - 59 = 7.38; 7.38 / 59 = 12.51% 63) A Explanation: $(66 + 0.41) - 79 = -12.59; -12.59/79 = -15.94% 64) A Explanation: $(11 - 88) = -$77; -$77 / $88 = -87.50% 65) C Explanation: $34 - $23 = $11; $11 / $23 = 47.83% 66) C Explanation: Dividend yield = $0.53 / $94 = 0.57%; cap gain = $94 - $93 = $1; capital gains yield $1 / $93 = 1.08% 67) B Explanation: Dividend yield = $2 / $100 = 2%; cap gains yield = $100 - $100 = 0 68) D Explanation: $2 / $100 = 2%; -$5 / $100 = -5% 20