9. A _______ bond with a _______ is likely to be the most sensitive to changes i
ID: 2649121 • Letter: 9
Question
9. A _______ bond with a _______ is likely to be the most sensitive to changes in interest rates.
a. Short-term; High Coupon Rate
b. Short-term; Low Coupon Rate
c. Long-term; High Coupon Rate
d. Long-term; Low Coupon Rate
10. _________ bonds give bondholders the right to exchange their bonds for shares of common stock.
a. Convertible
b. Callable
c. Sinking Fund
d. Putable
11. A stock expects to pay a dividend of $2 in year one and $3 in year two. From that point onward, dividends are expected to grow by 10% per year forever. How much should the stock be selling for today if it has a required return of 15%?
a) $48 b) $54 c) $58 d) $66
12. A stock with a beta of 1.5 has a required return of 16%. If the expected (required) return on the market is 12%, then what is the risk free rate?
a) 1% b) 2% c) 3% d) 4%
13. Which of the following is NOT an assumption of the Capital Asset Pricing Model?
a. There are no taxes
b. There is no inflation
c. Investors can borrow or lend at the risk-free rate
d. All investors agree on expected return, standard deviation, and correlations
14. The _____________ allows existing shareholders to participate in any new issue of stock.
a. Initial Public Offering
b. Proxy Fight
c. Preemptive Right
d,Seasoned Equity Offering
Explanation / Answer
9) "d" - long term , low coupon rate
10) "a" Convertible Bond
11)
After 3 year Dividend is constant = 3+(3*10% )= 3.3
Using gordon formula =Dividend /(cost of equity -Growth)
= 3.3/(.15-.10)
= $66 (Present value at year 2
So correc ans is "b" =54(apprx)
12) Expected return = Risk free rate +beta(Return on market- rsk free rate)
16=X+1.5(12-X)
16 =X +18-1.5X
.5X = 2
X= 4%
So correct ans "d" =4%
13)Correct ans is "b" =There is no inflation
14)Correct ans is "C" = Preemptive right
Year Dividend present value @ 15 % present value 1 2 .8696 1.7392 2 3 .7561 2.2683 2 66 .7561 49.9026 Total 53.91Related Questions
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