1. If a perpetual preferred stock pays a dividend of $5 a year, and yields rise from 10 percent to 12
percent, the price of the stock will
A. fall from $50 to $41.67.
B. fall from $60 to $50.
C. rise from $50 to $60.
D. rise from $41.67 to $50.
2. If investors require a rate of return of 8 percent, what is the value of a perpetual preferred stock that
pays a fixed dividend of $2?
A. $32
B. $16
C. $25
D. $50
3. An increase in investors’ required return will cause the value of a common stock to
A. remain unchanged.
B. remain stable or rise slightly.
C. rise.
D. fall.
4. A $1,000 bond has an annual coupon of 5 percent and a price of $692. Find the number of years to
maturity if comparable bonds yield 10 percent.
A. 30 years
B. 20 years
C. 10 years
D. 5 years
5. The dividend paid by a preferred stock is usually
A. fixed.
B. tax deductible.
C. paid in stock.
D. variable.
6. Which of the following is a correct statement about default?
A. Default is failure to maintain more assets than liabilities.
B. Default is failure to meet any of the terms of the indenture.
C. Default is failure to make interest payments only.
D. Default is failure to make dividend payments.
7. Preferred stock and bonds are similar because
A. neither interest nor dividends are tax deductible.
B. they both have voting power.
C. both may be subject to a call option.
D. interest and dividend payments are legal obligations.
8. Which of the following is a correct statement about a stock split?
A. A stock split does not affect liabilities.
B. A stock split increases equity.
C. A stock split increases retained earnings.
D. A stock split generates capital gains.
9. If a company defaults on its bonds,
A. subordinate debt is redeemed before senior debt.
B. interest continues to accrue but may not be paid.
C. equipment trust certificates have an inferior position to income bonds.
D. Debentures have a superior position to other bonds.
10. If a company fails to meet the terms of indenture, the company is
A. profitable.
B. in registration.
C. in default.
D. bankrupt.
11. A 20-year $1,000 bond has a coupon of 8 percent. What would be the price if the coupon is paid
semiannually and comparable bonds yield 10 percent?
A. $828
B. $624
C. $1,000
D. $895
12. If interest rates in general fall, the
A. prices of existing bonds are unaffected.
B. prices of existing bonds fall.
C. coupon rate adjusts for the change in interest rates.
D. prices of existing bonds rise.
13. If interest rates rise, which of the following is false?
A. The yield to maturity rises more than the current yield.
B. Prices of existing bonds fall.
C. The market price of a zero coupon bond falls.
D. Existing bonds may be called.
14. The yield to maturity on a bond is the
A. interest paid divided by the price of the bond.
B. bond’s coupon divided by the principal amount.
C. price appreciation earned by the bond.
D. interest plus price appreciation (or loss) achieved by holding the bond to maturity.
15. Interest on _______ is exempt from federal income taxation.
A. state of Florida bonds
B. zero coupon bonds
C. equipment trust certificates
D. federal bonds such as savings bonds
16. Dividends come at the expense of
A. interest.
B. retained earnings.
C. stock.
D. liabilities.
17. What is the value of a $100 par preferred stock that must be retired after 10 years if it pays a dividend
of $5 annually and the investor requires a 6 percent rate of return?
A. $122
B. $110
C. $100
D. $92
18. A 30-year $1,000 bond has an annual coupon of 6 percent. What would be the current yield if the bond
sells for $622?
A. 9.6 percent
B. 5 percent
C. 6 percent
D. 5.6 percent
19. Dividends are paid on the
A. distribution date.
B. ex dividend date.
C. date of record.
End of exam
D. declaration date.
20. A 10-year $1,000 bond has a coupon of 9 percent. What would be the price if the coupon is paid
annually and comparable bonds yield 10 percent?
A. $1,000
B. $1,900
C. $938
D. $1,159
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