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Finance Questions

Please see attached file.
All things being equal, a longer term bond ( say 20 yrs) carries a bigger risk than a shorter
term bond .

TRUE

What type of derivative contract would a corporation use to covert fixed interest payments to
floating rate interest payments ?

You want to purchase ATT Preferred Stock that pays a $2 dividend. If similar Preferred shares are earning a 5%
dividend rate, what would be the price per share you would pay for the ATT Preferred shares ?

You can afford to pay $1000/month towards a mortgage ( $12,000 annually).
30 year mortgages are currently @ 6%. How much can you borrow ?
Note: PV of an annuity ( ie periodic payment). The PV would be the mortgage amt. You want to borrow

A stock pays a Dividend of $1.20 per share and the dividend is expected to grow 6% each year. If an investor
expects a 12% return on his investment, what would be the price of the stock ?
Note: use formula for valuing common stock.

Give 2 reasons why the Payback method of evaluating different capital (long term) investment decisions
is flawed.

A stock is currently valued @ $40/share. If the risk involved in this stock increases with no change in
the dividend or the growth rate, what would you expect the price of the stock to do..FALL or RISE ?

How much money will you have in 20 years if you save $5,000 a year and earn 5% every year ?
Note: FV of an Annuity

Explain the difference between convertible bonds and bonds with warrants.

What would you pay for a 10 year savings bond that has a face value of $1000 and an annual return of 4%
Note: there are no interest payments (ie annuities) involved.
The price you pay today represents the PV of $ 1.

Which statement is FALSE ?

A
B
C
D

Under what circumstance will the DCFlow (NPV) of a long term capital project equal zero.
Note: answer involves IRR and the Cost of Capital.

How much will you have in 30 years if you invest a lump sum of $100,000 today and earn 10% per year ?
Note: FV of a $ 1

You have a Yen payable due in 6 months and you want to protect yourself from an increase in the Yen vs the Dollar.
You can use either an option or forward contract to protect you from a stronger Yen.

TRUE
FALSE

An instrument that gives you the right but not the obligation to buy or sell something in
the future at a price determined today is called..

A
B
C
D

A Bond that pay no interest during the life of the bond but is sold at a deep discount
( ie U.S. Savings Bonds) is known as a _____________________________________ Bond

A
B
C
D

The periodic fixed interest payment on a bond is referred to as a

A
B
C
D

A Bond that is issued w/o any collateral is known as a ______________________________

You buy $20,000 in bonds paying 10% coupon. The price is 106.5. What do you pay for these
bonds ?

In the example above, the yield you will earn on these bonds will be

A
B
C

You have an exposure (ie DM payable) and you protect yourself from adverse changes in the price of item
( ie you buy DM's forward at today's price). This action to reduce your risk is known as

_______________________________________

In the example above you enter into a Forward to Buy DM's in the future BUT you have no underlying exposure
(ie no DM payable). You are simply betting on a higher DM to make money on your contract
This type of transaction is considered _____________________________.

Which item below is NOT considered a Capital Market instrument ?

A
B
C
D

Which of the following is NOT a derivative

A
B
C
D
E

Based on total $ amt outstanding what is the largest Capital market instument in use today?

A
B
C
D

Who usually has final approval on the dividend to be paid @ a major Corp ?

A
B
C
D

A Corp. is issuing 3 types of Bonds, all with the same maturity. Which Bond is most likely to have the highest
coupon (interest ) rate?

A
B
C

Which statement is False

A
B
C
D

A primary factor in setting dividend policy is to
A
B
C

You can purchase a 7% taxable bond or a 5% tax free muni. Your marginal
tax rate is 40%. Which provides a higher after tax return ?

The required rate of return involves three premiums. The first is the
real rate of return (usually 2-3%). What are the other two ?

Unlike common and preferred stock valuation models, determining the value of a bond
is a bit more complex (don't worry, you do not have to calculate anything).
It involves: the PV of an annuity on the _________________________ of the bond
and the simple PV of a $ on the _______________________ of the bond.
Fill in the blanks.

If the IRR on a project is 15% and the NPV comes out negative, what can you say about your
Cost of Capital ?

Your capital stucture consist of $300 MM in Debt & $600 MM in Equity. What is your Weighted avg.cost of capital
if your borrowing rate is 9%, your cost of comn stock (equity) is 12% and your tax rate is 50% ?

All things being equal, if the inflation premium in investor's required rate of return were to
increase, you can expect

A
B
C
D

Which is NOT a difference btw common and preferred stock

A
B
C
D

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Solution Summary

The solution provides explanations for various multiple choice questions in finance.

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