FNCE 101 Practice Set 4

1. Today, you want to sell a $1,000 face value zero coupon bond you currently own. The bond matures in 4.5
years. How much will you receive for your bond if the market yield to maturity is currently 5.33 percent?
Ignore any accrued interest.
A. $696.60
B. $698.09
C. $741.08
D. $756.14
E. $789.22

2. You are purchasing a 25-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is
$1,000. What is the current market price?
A. $106.67
B. $108.18
C. $119.52
D. $121.50
E. $128.47

3. Redesigned Computers has 5.25 percent coupon bonds outstanding with a current market price of $546.19.
The yield to maturity is 16.28 percent and the face value is $1,000. Interest is paid semiannually. How many
years is it until these bonds mature?
A. 6.64 years
B. 7.08 years
C. 12.41 years
D. 14.16 years
E. 28.32 years

4. The bonds issued by Stainless Tubs bear a 6 percent coupon, payable semiannually. The bonds mature in 11
years and have a $1,000 face value. Currently, the bonds sell for $989. What is the yield to maturity?
A. 5.87 percent
B. 5.92 percent
C. 6.08 percent
D. 6.14 percent
E. 6.20 percent

5. Roadside Markets has a 6.75 percent coupon bond outstanding that matures in 10.5 years. The bond pays
interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity
is 6.69 percent?
A. $999.80
B. $999.85
C. $1,003.42

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 D. $1,004.47
E. $1,007.52

6. The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of
interest will have which one of the following effects on this bond?
A. increase the coupon rate
B. decrease the coupon rate
C. increase the market price
D. decrease the market price
E. increase the time period

7. All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
A. a premium; less than
B. a premium; equal to
C. a discount; less than
D. a discount; higher than
E. par; less than

8. Which one of the following risk premiums compensates for the possibility of nonpayment by the bond
issuer?
A. default risk
B. taxability
C. liquidity
D. inflation
E. interest rate risk

9. Real rates are defined as nominal rates that have been adjusted for which of the following?
A. inflation
B. default risk
C. accrued interest
D. interest rate risk
E. both inflation and interest rate risk

10. A bond that has only one payment, which occurs at maturity, defines which one of the following?
A. debenture
B. callable
C. floating-rate
D. junk
E. zero coupon

11. Big Falls Tours just paid a dividend of $1.55 per share. The dividends are expected to grow at 30 percent for
the next 8 years and then level off to a 7 percent growth rate indefinitely. What is the price of this stock today
given a required return of 15 percent?
A. $67.54
B. $69.90
C. $72.47
D. $77.67
E. $78.19

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12. Winter Time Adventures is going to pay an annual dividend of $2.86 a share on its common stock next year.
This year, the company paid a dividend of $2.75 a share. The company adheres to a constant rate of growth
dividend policy. What will one share of this common stock be worth five years from now if the applicable
discount rate is 11.7 percent?
A. $43.45
B. $43.87
C. $44.15
D. $45.19
E. $47.00

13. Roy's Welding Supplies common stock sells for $38 a share and pays an annual dividend that increases by 3
percent annually. The market rate of return on this stock is 8.20 percent. What is the amount of the last
dividend paid?
A. $1.80
B. $1.86
C. $1.92
D. $1.98
E. $2.10

14. Southern Utilities just issued some new preferred stock. The issue will pay a $19 annual dividend in perpetuity
beginning 9 years from now. What is one share of this stock worth today if the market requires a 7 percent
return on this investment?
A. $157.97
B. $164.16
C. $189.08
D. $241.41
E. $271.43

15. Galloway, Inc. has an odd dividend policy. The company has just paid a dividend of $7 per share and has
announced that it will increase the dividend by $2 per share for each of the next 5 years, and then never pay
another dividend. How much are you willing to pay per share today to buy this stock if you require a 15
percent return?
A. $27.08
B. $34.15
C. $41.72
D. $42.60
E. $43.33

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16. Last year, Hansen Delivery paid an annual dividend of $3.20 per share. The company has been reducing the
dividends by 10 percent annually. How much are you willing to pay to purchase stock in this company if your
required rate of return is 11.5 percent?
A. $1.92
B. $7.87
C. $13.40
D. $21.16
E. $24.08

17. Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the
following must be true?
A. The dividend must be constant.
B. The stock has a negative capital gains yield.
C. The dividend yield must be zero.
D. The required rate of return for this stock increased over the year.
E. The firm is experiencing supernormal growth.

18. Which one of the following is computed by dividing next year's annual dividend by the current stock price?
A. yield to maturity
B. total yield
C. dividend yield
D. capital gains yield
E. growth rate

19. Which one of the following transactions occurs in the primary market?
A. purchase of 500 shares of GE stock from a current shareholder
B. gift of 100 shares of stock to a charitable organization
C. gift of 200 shares of stock by a mother to her daughter
D. a purchase of newly issued stock from AT&T
E. IBM's purchase of GE stock

20. Miller Brothers Hardware paid an annual dividend of $1.15 per share last month. Today, the company
announced that future dividends will be increasing by 2.6 percent annually. If you require a 12 percent rate of
return, how much are you willing to pay to purchase one share of this stock today?
A. $12.23
B. $12.55
C. $12.67
D. $12.72
E. $12.88