Question 1

Since preferred stock pays a fixed dividend, it is
often valued as if it were a bond.

Accepted Answer

A) True 
 B)False

Question 2

The yield to call

Accepted Answer

A)   is important if interest rates have fallen
B)   is important if interest rates have risen
C)   equals the yield to maturity
D)   equals the current yieldE) A) and B)
F) None of the above

Question 3

The prices of zero coupon bonds fluctuate less than
bonds with large coupons.

Accepted Answer

A) True 
 B)False

Question 4

If a $100 par value preferred stock pays an annual
Dividend of $5 and comparable yields are 10 percent,
The price of this preferred stock will be

Accepted Answer

A)   $100
B)   $75
C)   $50
D)   $25E) All of the above
F) A) and B)

Question 5

The concept of duration stresses when a bond will make its payments to bondholders.

Accepted Answer

A) True 
 B)False

Question 6

If you purchase a $5 preferred stock for $40 a share, what is the current yield? If you anticipate that yields will decline to 10 percent, what will be the anticipated capital gain on this investment?

Accepted Answer

Current yield: $5/$40 = 12.5%
...

Question 7

From the viewpoint of the investor, preferred stock is riskier than bonds issued by the same firm.

Accepted Answer

A) True 
 B)False

Question 8

Bonds that are callable often have a call penalty.

Accepted Answer

A) True 
 B)False

Question 9

Most bonds pay interest semi-annually.

Accepted Answer

A) True 
 B)False

Question 10

If interest rates rise, the price of preferred stock

Accepted Answer

A)   rises
B)   falls
C)   is not affected
D)   rises or fallsE) A) and C)
F) None of the above

Question 11

An investor may expect a bond to be called if its
current yield exceeds the yield to maturity.

Accepted Answer

A) True 
 B)False

Question 12

If interest rates in general were to fall, 1. the prices of existing bonds would rise
2)  the prices of existing bonds would fall
3)  yields to maturity would rise
4)  yields to maturity would fall

Accepted Answer

A)   1 and 3
B)   1 and 4
C)   2 and 3
D)   2 and 4E) B) and D)
F) A) and B)

Question 13

Matching a bond's duration with the time the funds are needed reduces reinvestment risk.

Accepted Answer

A) True 
 B)False

Question 14

A conservative investor will prefer a bond with a smaller duration even though it may have a longer term to maturity.

Accepted Answer

A) True 
 B)False

Question 15

A call penalty is a payment made to the firm to encourage early retirement of the bond.

Accepted Answer

A) True 
 B)False

Question 16

If preferred stock is subject to mandatory retirement, its price is more volatile than preferred stock without the retirement feature.

Accepted Answer

A) True 
 B)False

Question 17

If interest rates have fallen, a firm may prefer to
repurchase the bonds on the market instead of calling and redeeming them.

Accepted Answer

A) True 
 B)False

Question 18

If interest rates increase, a bond may be called.

Accepted Answer

A) True 
 B)False

Question 19

While bond prices fluctuate,

Accepted Answer

A)   yields are constant
B)   coupons are constant
C)   the spread between yields is constant
D)   short?term bond prices fluctuate moreE) None of the above
F) C) and D)

Question 20

Fluctuations in yields is one means by which the economy allocates scarce credit.

Accepted Answer

A) True 
 B)False

Exam 14: The Valuation of Fixed Income Securities

If preferred stock is subject to mandatory retirement, its price is more volatile than preferred stock without the retirement feature.

Correct AnswerverifiedShow Answer

If you purchase a $5 preferred stock for $40 a share, what is the current yield? If you anticipate that yields will decline to 10 percent, what will be the anticipated capital gain on this investment?

Correct AnswerverifiedCurrent yield: $5/$40 = 12.5%...View AnswerShow Answer

The prices of zero coupon bonds fluctuate less than bonds with large coupons.

Correct AnswerverifiedShow Answer

While bond prices fluctuate,

Correct AnswerverifiedShow Answer

Since preferred stock pays a fixed dividend, it is often valued as if it were a bond.

Correct AnswerverifiedShow Answer

An investor may expect a bond to be called if its current yield exceeds the yield to maturity.

Correct AnswerverifiedShow Answer

From the viewpoint of the investor, preferred stock is riskier than bonds issued by the same firm.

Correct AnswerverifiedShow Answer

Bonds that are callable often have a call penalty.

Correct AnswerverifiedShow Answer

The concept of duration stresses when a bond will make its payments to bondholders.

Correct AnswerverifiedShow Answer

Matching a bond's duration with the time the funds are needed reduces reinvestment risk.

Correct AnswerverifiedShow Answer

The yield to call

Correct AnswerverifiedShow Answer

If interest rates have fallen, a firm may prefer to repurchase the bonds on the market instead of calling and redeeming them.

Correct AnswerverifiedShow Answer

Most bonds pay interest semi-annually.

Correct AnswerverifiedShow Answer

If interest rates in general were to fall, 1. the prices of existing bonds would rise 2) the prices of existing bonds would fall 3) yields to maturity would rise 4) yields to maturity would fall

Correct AnswerverifiedShow Answer

If a $100 par value preferred stock pays an annual Dividend of $5 and comparable yields are 10 percent, The price of this preferred stock will be

Correct AnswerverifiedShow Answer

If interest rates increase, a bond may be called.

Correct AnswerverifiedShow Answer

If interest rates rise, the price of preferred stock

Correct AnswerverifiedShow Answer

A call penalty is a payment made to the firm to encourage early retirement of the bond.

Correct AnswerverifiedShow Answer

A conservative investor will prefer a bond with a smaller duration even though it may have a longer term to maturity.

Correct AnswerverifiedShow Answer

Fluctuations in yields is one means by which the economy allocates scarce credit.

Correct AnswerverifiedShow Answer

Correct Answer
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Current yield: $5/$40 = 12.5%
...
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