1. Which of the following statements is most correct?

a) The market value of a bond will always approach its par value as its maturity date approaches, provided the issuer of the bond does not go bankrupt.

b) If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.

c) The total yield on a bond is derived from interest payments and changes in the price of a bond.

d) Statements a and c are correct

e) All of the statements above are correct

2. Which of the following statements is most correct?

a) All else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for a bond of similar risk is 8%.

b) The price of a discount bond will increase over time, assuming that the bond’s yield to maturity remains constant over time.

c) The total return on a bond for a given year consists of only of the coupon interest payments received.

d) Statements b and c are correct.

e) All of the statements are correct.

3. A 10 year bond has a 10% annual coupon and a yield to maturity of 12%. The bond can be called in 5 years at a call price of $1,050 and the bond’s face value is $1,000. Which of the following statements is most correct.

a) The bond’s current yield is greater than 10%.

b) The bond’s yield to call is less than 12%

c) The bond is selling at a price below par.

d) Statements a and c are correct.

e) None of the statements above is correct.

4. Which of the following statements is most correct?

a) The constant growth model takes into consideration the capital gains earned on a stock.

b) It is appropriate to use the constant growth model to estimate stock value even if the growth rate never becomes constant.

c) Two firms with the same dividend and growth rate must also have the same stock price.

d) Statements a and c are correct.

e) All of the statements above are correct.

5. Stocks A and B have the same required rate of return and the same expected year end dividend= (D1). Stock A’s dividend is expected to grow at a constant rate of 10% per year while Stock B’s dividend is expected to grow at a constant rate of 5% per year. Which of the following statements is most correct?

a. The two stocks should sell at the same price

b. Stock A has a higher dividend yield

c. Currently Stock B has a higher price, but over time Stock A will eventually have a higher price.

d. Statements b and ca re correct

e. None of the statements above are correct