1. Market-determined required rate of return is the same thing as discount rate, according to the text.
a. True
b. False

2. When the market interest rate exceeds the coupon rate, bonds sell for less than face value.
a. True
b. False

3. The yield to maturity is defined as the discount rate that makes the present value of the bond's payments equal its price.
a. True
b. False

4. Common stock usually represents a perpetuity.
a. True
b. False

5. Required rate of return = real rate of return + inflation premium + risk premium
a. True
b. False

6. Price-earnings ratio represents a multiplier applied to current earnings to determine the value of a share of stock.
a. True
b. False

7. Supernormal growth pattern is often experienced by firms in mature industries.
a. True
b. False

8. If the annual dividend of a preferred stock is $10 and the required rate of return is 10%, then the price of the preferred stock would be:
a. $10
b. $90
c. $100
d. $110

9. According to the constant growth dividend valuation model, if dividends were $2.00, required rate of return is 12%, and the dividends grow at a constant rate of 7% per year, the price of the stock would be:
a. $24
b. $40
c. $48
d. $60

10. What is the approximate price of a bond if par value is $1000, interest rate of (coupon) 9%, matures in 20 years and the present yield to maturity is 6%?
a. $910
b. $1245
c. $1344
d. $1485

Solution Preview

1. Market-determined required rate of return is the same thing as discount rate, according to the ...

Solution Summary

This discusses the steps to calculate the yield to maturity

A bond has 16 years until maturity, a coupon rate of 5.8%, and sells for $1,109.
a. What is the current yield on the bond? (Round your answer to 2 decimal places.)
Current yield %
b. What is the yield to maturity? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Yield to mat

A co-worker of yours was discussing her investments with a broker. Your coworker was confused because she has purchased a 10% bond, but the broker kept repeating it had a 9% yield to maturity. Explain the concept of yield to maturity to your coworker.

A bond has 16 years until maturity, a coupon rate of 5.8%, and sells for $1,109.
a. What is the current yield on the bond? (Round your answer to 2 decimal places.)
Current yield %
b. What is the yield to maturity? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Yield to mat

ABC Industries bond has a 10 percent coupon rate and a $1000 face value. Interest is paid semiannually, and the bond has 20 years to maturity. If investors require a 12 percent yield, what is the bond's value? What is the effective annual yield on the bond?
XYZ corp. bond carries an 8 percent coupon, paid semiannually. The pa

Instructions
Use the RATE, NPER, and PV functions to solve for the unknowns in the table below.
Yield to
Price MaturityMaturity
$300 30 FORMULA
$300 FORMULA 8%
FORMULA 10 10%

Apple has 8% coupon bonds on the market with 18 years to maturity. The bonds make semiannual payments and currently sell for 93% of par, or $930. Compute:
1. The Current Yield
2. The Yield to Maturity
What is the difference between these two?

A firm issues a bond at par value. Shortly thereafter, interest rates fall. If you calculated the coupon rate, coupon yield, and yield to maturity for this bond after the decline in interest rates, which of the three value would be highest and which would be lowest? Explain

Quigley Inc.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM)?

My company's bonds are currently selling for $1,157.75 per $1,000 par-value bond. The bonds have a 10% coupon rate and will mature in 10 years. What is the approximate yield to maturity of the bonds?

The Pioneer Petroleum Corporation has a bond outstanding with an $80 annual interest payment, a market price of $900, and a maturity date in two years. Assume the par value of the bond is $1,000. Find the Approximate Yield to Maturity.