09 May WHICH OF THE FOLLOWING STATEMENTS IS TRUE REGARDING CONVERTIBLE BONDS
Q1. Preferred stock and common stock issued by the same firm will have the same required return because the riskiness of the firm’s cash flows is the same for both securities. a. True b. FalseQ2. Common stock does not mature. a. True b. FalseQ3. TC Corp paid a dividend today of $5 per share. The dividend is expected to grow at a constant rate of 6.5% per year. If TC Corp stock is selling for $50.00 per share the stockholders’ expected rate of return is a. 11.50%. b. 13.56%. c. 15.49%. d. 16.50%.Q4. Bacon Signs Company preferred stock pays a perpetual annual dividend of 4.5% of its $100 par value. If investors’ required rate of return on this stock is 12% what is the value per share? a. $37.50 b. $31.82 c. $8.50 d. $45.00Q5. Most preferred stocks have a feature that requires all past unpaid preferred dividend payments be paid before any common stock dividends can be paid. What is the name of this feature? a. participating b. cumulative c. provisional d. convertibleQ6. A call provision allows the issuing firm the opportunity to avoid rising interest rates by calling investors and asking for more cash. a. True b. FalseQ7. An example of the growth factor in common stock is a. acquiring a loan to fund an investment in Asia. b. retaining profits in order to reinvest into the firm. c. issuing new stock to provide capital for future growth. d. two strong companies merging together to increase their economy of scale.Q8. A firm can increase the growth rate of common stockholders’ investment in the firm by retaining more earnings or increasing return on equity. a. True b. FalseQ9. What provision entitles the common shareholder to maintain a proportionate share of ownership in a firm? a. the cumulative feature b. the convertible feature c. the proportionality clause d. the preemptive rightQ10. Preferred stock is riskier than long-term debt because its claim on assets and income come after those of bonds. a. True b. FalseQ11. Common stock valuation can be based on the present value of future dividends or alternatively on the present value of the firm’s future quarterly net income. a. True b. FalseQ12. Public perception and reputation do not affect stock prices which are strictly a function of dividends and required returns. a. True b. FalseQ13. Convertibility is a common feature of common stock; it allows the common stockholders to convert their common shares into preferred shares or into bonds. a. True b. FalseQ14. The most relevant form of growth for valuing a firm’s common stock is internal growth. a. True b. FalseQ15. The capital asset pricing model a. provides a risk-return trade off in which risk is measured in terms of the market volatility. b. provides a risk-return trade off in which risk is measured in terms of beta. c. measures risk as the coefficient of variation between security and market rates of return. d. depicts the total risk of a security.Q16. Proper diversification generally results in the elimination of risk. a. True b. FalseQ17. Changes in the general economy like changes in interest rates or tax laws represent what type of risk? a. company-unique risk b. market risk c. unsystematic risk d. diversifiable riskQ18. You are considering an investment in Citizens Bank Corp. The firm has a beta of 1.6. Currently U.S. Treasury bills are yielding 2.75% and the expected return for the S & P 500 is 14%. What rate of return should you expect for your investment in Citizens Bank? a. 11.15% b. 15.39% c. 16.75% d. 20.75%Q19. Rogue Recreation Inc. has normally distributed returns with an expected return of 15% and a standard deviation of 5% while Lake Tours Inc. has normally distributed returns with an expected return of 15% and a standard deviation of 15%. Which of the following is true? a. Lake Tours’ investors are not being adequately compensated for relevant risk. b. Rogue Rec is likely to experience returns larger than those of Lake Tours. c. Lake Tours is more likely to have negative returns than Rogue Rec. d. Rational investors will prefer Lake Tours Inc. over Rogue Recreation Inc.Q20. A well-diversified portfolio includes investments in 50 securities. The portfolio’s systematic risk is likely to be about a. 50% of the total risk. b. 40% of the total risk. c. 25% of the total risk. d. zero because risk is eliminated with a portfolio of 50 securities or more.Q21. How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return? a. Wait until the stock market rises. b. Increase the amount of money invested in the portfolio. c. Purchase a variety of securities; i.e. diversify. d. Purchase stocks that have exceptionally high standard deviations.Q22. Marble Corp. has a beta of 2.5 and a standard deviation of returns of 20%. The return on the market portfolio is 15% and the risk free rate is 4%. According to CAPM what is the required rate of return on Collectible’s stock? a. 37.5% b. 31.5% c. 26.5% d. 23.5%Q23. The rate on T-bills is currently 2%. Environment Help Company stock has a beta of 1.5 and a required rate of return of 17%. According to CAPM determine the return on the market portfolio. a. 27.5% b. 19.0% c. 14.0% d. 12.0%Q24. Variation in the rate of return of an investment is a measure of the riskiness of that investment. a. True b. FalseQ25. Diversifying among different kinds of assets is called asset allocation. a. True b. FalseQ26. If the market price of a bond decreases then a. the yield to maturity decreases. b. the coupon rate increases. c. the yield to maturity increases. d. the coupon rate decreases.Q27. If a corporation were to choose between issuing a debenture a mortgage bond or a subordinated debenture which would have the highest yield to maturity everything else equal? a. the debenture b. the mortgage bond c. the subordinated debenture d. all of the aboveQ28. Which of the following statements is true? a. Short-term bonds have greater interest rate risk than do long-term bonds. b. Long-term bonds have greater interest rate risk than do short-term bonds. c. All bonds have equal interest rate risk. d. Interest rate risk is highest during periods of high interest rates.Q29. Market efficiency implies which of the following? a. book value = intrinsic value b. market value = intrinsic value c. book value = market value d. liquidation value = book valueQ30. In general interest on bonds like dividends on preferred stock may be deferred until a later date at the discretion of management making debt financing more appealing to corporate managers. a. True b. FalseQ31. Other things being equal investors will value which of the following bonds the highest? a. callable bonds b. convertible bonds c. bonds that are both callable and convertible d. unsecured callable bondsQ32. PBJ Corporation issued bonds on January 1 2006. The bonds had a coupon rate of 5.5% with interest paid semiannually. The face value of the bonds is $1 000 and the bonds mature on January 1 2021. What is the yield to maturity for an PBJ Corporation bond on January 1 2012 if the market price of the bond on that date is $950? a. 5.50% b. 6.23% c. 8.43% d. 10.50%Q33. Which of the following statements concerning bonds and risk is true? a. Because the interest payments and maturing value are known the only risk associated with investing in bonds is default risk. b. Zero coupon bonds are always more risky than bonds with high coupon rates because of the time value of money. c. Bonds are generally less risky than common stock because of the preference for debt over equity in the event of bankruptcy and liquidation. d. B-rated bonds are above average for risk i.e. less risky than the average bond.Q34. Andre owns a corporate bond with a coupon rate of 8% that matures in 10 years. Ruth owns a corporate bond with a coupon rate of 12% that matures in 25 years. If interest rates go down then a. the value of Andre’s bond will decrease and the value of Ruth’s bond will increase. b. the value of both bonds will increase. c. the value of Ruth’s bond will decrease more than the value of Andre’s bond due to the longer time to maturity. d. the value of both bonds will remain the same because they were both purchased in an earlier time period before the interest rate changed.Q35. Which of the following statements is true regarding convertible bonds? a. The holder has the right to sell these bonds back to the issuer if the bonds don’t perform well. b. The holder can convert these bonds into an equal number of new bonds if they choose to do so. c. These bonds are convertible into common stock of the issuing firm at a prespecified price. d. These bonds have a variable interest rate.Q36. Cabell Corp. bonds pay an annual coupon rate of 10%. If investors’ required rate of return is now 12% on these bonds they will be priced at a. par value. b. a premium to par value. c. a discount to par value. d. Cannot be determined without knowing the number of years to maturity.Q37. If a bond’s rating declines the interest rate demanded by investors called the required return also decreases. a. True b. FalseQ38. Messenger Inc. bonds have a 4% coupon rate with semiannual coupon payments and a $1 000 par value. The bonds have 11 years until maturity and sell for $925. What is the current yield for Messinger’s bonds? a. 2.16% b. 3.45% c. 4.32% d. 5.52%Q39. In an efficient securities market the market value of a security is equal to a. its liquidation value. b. its book value. c. its intrinsic value. d. par value.Q40. A financial analyst tells you that investing in stocks will allow you to double your money in 7 years. What annual rate of return is the analyst assuming you can earn? a. 8.76% b. 9.87% c. 10.01% d. 10.41%Q41. Manny and Irene will be retiring in fifteen years and would like to buy a Mexican villa. The villa costs $500 000 today and housing prices in Mexico are expected to increase by 6% per year. Manny and Irene want to make fifteen equal annual payments into an account starting today so there will be enough money to purchase the villa in fifteen years. If the account earns 10% per year what is the amount of each deposit? a. $79 885 b. $72 623 c. $34 286 d. $32 947Q42. One bank offers you 4% interest compounded semiannually. What is the equivalent rate if interest is compounded quarterly? a. 3.98% b. 3.96% c. 3.92% d. 1.00%Q43. You want $20 000 in 5 years to take your spouse on a second honeymoon. Your investment account earns 7% compounded semiannually. How much money must you put in the investment account today? (round to the nearest $1). a. $14 178 b. $12 367 c. $15 985 d. $13 349Q44. Two sisters each open IRAs in 2011 and plan to invest $3 000 per year for the next 30 years. Mary makes her first deposit on January 1 2011 and will make all future deposits on the first day of the year. Jane makes her first deposit on December 31 2011 and will continue to make her annual deposits on the last day of each year. At the end of 30 years the difference in the value of the IRAs (rounded to the nearest dollar) assuming an interest rate of 7% per year will be a. $19 837. b. $12 456. c. $6 300. d. $210.Q45. You are going to pay $800 into an account at the beginning of each of 20 years. The account will then be left to compound for an additional 20 years until the end of year 40 when it will turn into a perpetuity. You will receive the first payment from the perpetuity at the end of the 41st year. If the account pays 14% how much will you receive from the perpetuity each year (round to nearest $1 000)? a. $140 000 b. $150 000 c. $160 000 d. $170 000Q46. The present value of $1 000 to be received in 5 years is ________ if the discount rate is 12.78%. a. $368 b. $494 c. $548 d. $687Q47. You charged $1 000 on your credit card for Christmas presents. Your credit card company charges you 26% annual interest compounded monthly. If you make the minimum payments of $25 per month how long will it take ( to the nearest month) to pay off your balance? a. 94 months b. 79 months c. 54 months d. 40 monthsQ48. You estimate you’ll need $200 000 per year for 25 years starting on your 65th birthday to live on during your retirement. Today is your 50th birthday and you want to make equal deposits into an account paying 9% interest per year the first deposit today and the last deposit on your 64th birthday. How much must each deposit be (rounded to the nearest $10)? a. $99 920 b. $85 840 c. $61 385 d. $49 380Q49. A deferred annuity will pay you $500 at the end of each year for 10 years however the first payment will not be made until three years from today (payments will be made at the end of years 3 through 12). What amount will you have to deposit today to fund this deferred annuity? Use an 8% discount rate and round your answer to the nearest $100. a. $2 200 b. $2 400 c. $2 900 d. $3 400Q50. Auto Loans R Them loans you $24 000 for four years to buy a car. The loan must be repaid in 48 equal monthly payments. The annual interest rate on the loan is 9 percent. What is the monthly payment? a. $500.92 b. $543.79 c. $563.82 d. $597.24
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