Question 1

Which of the following best describes the primary function of financial markets?

Accepted Answer

To facilitate the flow of funds between agents with investment needs and agents with excess funds.

Question 2

A corporation issues a bond with a face value of $$1,000, a coupon rate of 5%, and a maturity of 3 years. If the market interest rate is 4%, what is the price of the bond? Use the formula: 
$$
	ext{Price} = \frac{50}{1.04} + \frac{50}{$$1.04^2$$} + \frac{1050}{$$1.04^3$$}
$

Accepted Answer

$1,027.75

Question 3

Which of the following statements about the relationship between bond prices and market interest rates is correct?

Accepted Answer

Bond prices decrease when market interest rates increase.

Question 4

A 6-year bond has a 9% coupon and $$100 face value. If the market interest rate is 12%, what is the price of the bond? Use the formula: 
$$
	ext{Price} = \frac{9}{0.12} \left(1 - \frac{1}{$$1.12^6$$}ight) + \frac{100}{$$1.12^6$$}
$

Accepted Answer

$87.66

Question 5

Which of the following is NOT a function of financial markets?

Accepted Answer

Production of consumer goods

Question 6

If a bond is trading at a discount, which of the following must be true?

Accepted Answer

The coupon rate is lower than the market interest rate.

Question 7

A company has a payout ratio of 40% and a return on equity (ROE) of 12.5%. What is the sustainable growth rate of dividends? Use the formula: 
$$
g = (1 - 	ext{payout}) 	imes ROE
$$

Accepted Answer

0.075

Question 8

Which of the following best describes the difference between equity and debt securities?

Accepted Answer

Equity holders have voting rights and residual claims, while debtholders have fixed payoffs and priority in repayment.

Question 9

A stock pays a dividend of $$2 next year, and dividends are expected to grow at 4% per year. If the required rate of return is 10%, what is the value of the stock according to the Gordon-Shapiro model? Use the formula: 
$$
$$P_0$$ = \frac{$$D_1$$}{k_E - g}
$

Accepted Answer

$50.00

Question 10

Which of the following is a reason why the market value of a company may differ from its book value?

Accepted Answer

Market value reflects investor expectations about future returns and intangible assets.

Question 11

A 2-year bond with a face value of $$100 and a coupon of 5 is $$priced at $$104. What is the yield to maturity? Use the formula:

104$$ = \frac{5}{1 + y} + \frac{105}{(1 + $$y)^2$$}
$

Accepted Answer

2.91%

Question 12

Which of the following best explains why long-term bonds tend to offer higher yields than short-term bonds?

Accepted Answer

The prices of long-term bonds fluctuate more, so investors require higher yields as compensation for risk.

Question 13

A company’s stock is currently priced at $$40. It is expected to pay a dividend of 2 $$next year, and dividends are expected to grow at 5%. What is the required rate of return according to the dividend discount model? Use the formula: 
$$
k_E = \frac{D_1$}{P_0$} + g
$$

Accepted Answer

10%

Question 14

Which of the following is NOT a protection against default risk for bondholders?

Accepted Answer

Dividend yield

Question 15

If a company pays all of its net income as dividends, what happens to the growth rate of dividends?

Accepted Answer

The growth rate is zero.

Question 16

Which of the following best describes the yield to maturity (YTM) of a bond?

Accepted Answer

The rate that equates the present value of the bond’s payments to its price.

Question 17

A company has a book value of equity per share of $$10, a payout ratio of 40%, and a ROE of 12.5%. If investors require a return of 9%, what is the stock price using the dividend discount model? Use the formula: 
$$
$$P_0$$ = \frac{$$D_0 (1 + g$$)}{k_E - g}
$$ where D_0$ = 0.5$$ and $$g = 0.075$.

Accepted Answer

$35.83

Question 18

Which of the following is a characteristic of secondary financial markets?

Accepted Answer

Securities are exchanged between investors with no participation of the issuer.

Question 19

If the market interest rate rises from 4% to 6%, which bond will experience a greater price decrease: a 3-year bond or a 30-year bond (all else equal)?

Accepted Answer

The 30-year bond

Question 20

Which of the following best describes the use of valuation by comparables?

Accepted Answer

It uses the market values of similar firms to estimate the value of a company.

Valuation of Financial Assets: Bonds and Stocks

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