BUAD 306 Business Finance Fall 2014 Midterm Exam 2 There are 28 questions on the exam You have 90 minutes I agree that I will not give or receive unauthorized help during this test I understand that giving or receiving such help during the test is cheating and will result in a failure of the test and other possible repercussions according to University policy I pledge my honor that I have not violated the USC Student Conduct Code in this examination Name Print Clearly Signature Date ID Number Your grade will be based on answers recorded on your scantron not this paper Therefore make sure you fill in your scantron sheet as you go along because you will not be given any extra time at the end of the exam to fill out your form Fill the oval in completely with an appropriate pencil Students are responsible for any incorrect erasure so make sure you completely erase any unintended answers You are allowed to use calculators for this test but not any device that can connect wirelessly to other devices This test is closed book no notes are allowed Formulas are provided at the end of the test Do all of the following BEFORE answering any test questions 1 Write your name on the front side of the scantron sheet 2 Write your Student ID Number in the subject box 3 Write the test form letter in the Test No box EXAM FORM A 1 If the yield to maturity on a bond that makes annual coupon payments increases from 6 to 8 which of the following is true a The bond s price will increase b The bond issuer has a legal obligation to increase the coupon rate c The bond issuer has a legal obligation to increase the frequency of coupon payments d The EAR of the bond will remain constant e The EAR of the bond will increase 2 Bond A and Bond B are identical except Bond A has a coupon rate of 3 5 while Bond B has a coupon rate of 2 If interest rates rise which of the following is true a Both bonds will increase in price b Both bonds will decrease in price but Bond A will decrease by a larger percentage c Both bonds will decrease in price but Bond B will decrease by a larger percentage d Bond A will increase in price while Bond B will decrease in price e Bond A will decrease in price while Bond B will increase in price 3 Bond Y and Bond Z are identical except Bond Y is a 30 year bond while Bond Z is a 1 year bond If interest rates rise and Bond Y decreases in price by 5 which of the following is true a Bond Z will increase in price b Bond Z will experience a 5 decrease in price c Bond Z will experience a 25 decrease in price d The price of Bond Z will remain the same e Bond Z will experience a price decrease of less than 5 4 All else equal if the coupon rate is the yield to maturity then a bond will sell at a Greater than a premium b Greater than par c Equal to a premium d Equal to a discount e Less than a premium 5 Suppose a bond with a 10 coupon rate and semiannual coupons has a face value of 1 000 20 years to maturity and is selling for 1394 22 What is the YTM a 3 23 b 6 46 c 7 53 d 9 10 e 9 53 6 BNK Corp has bonds on the market with 13 years to maturity a yield to maturity of 9 2 percent and a current price of 895 09 The bonds make semi annual payments What is the coupon rate a 7 80 b 8 00 c 8 25 d 8 40 e 8 65 7 Grohl Co issued 19 year bonds a year ago at a coupon rate of 7 percent The bonds make semiannual payments If the YTM on these bonds is 11 percent what is the current bond price a 772 85 b 699 28 c 689 28 d 640 25 e 1 858 48 8 A newly issued bond has an 8 percent coupon rate with semi annual interest payments The bonds are currently priced at par value The effective annual rate provided by these bonds is a 4 b Greater than 4 but less than 8 c 8 d Greater than 8 e Cannot be determined from the information provided 9 A bond that can be paid off early at the issue s discretion is referred to as being which one of the following a Zero coupon b Callable c Senior d Collateralized e Unsecured 10 Which of the following increase the price sensitivity of a bond to changes in interest rates I Increase in time to maturity II Decrease in time to maturity III Increase in coupon rate IV Decrease in coupon rate a II only b I and III only c I and IV only d II and III only e II and IV only 11 An increase in which of the following would affect the yield curve a Real rate of interest b Default risk c Liquidity premium d Taxability premium e A bond issuer s capacity to make interest payments 12 A bond rating agency is typically hired to measure what factor that affects a bond s yield a Inflation premium b Price risk c Default Risk d Taxability premium e Liquidity premium 13 You are considering buying a callable bond that is classified as junior debt and pays a coupon rate of 5 All else equal which of the following bonds would offer a coupon rate above 5 a Callable and senior debt b Callable and subordinated debt c Non callable and senior debt d Non callable and junior debt e Cannot be determined from the information given 14 Metroplex Corporation makes annual dividend payments and will pay a 5 10 per share dividend next year The company pledges to increase its dividend by 5 per year indefinitely If you require a 12 5 return on your investment how much will you pay for the company s stock today a 68 00 b 27 76 c 70 72 d 64 76 e 65 28 15 Southern Utilities just issued some new preferred stock The issue will pay a 19 annual dividend in perpetuity beginning 9 years from now What is one share of this stock worth today if the market requires a 7 percent return on this investment a 157 97 b 164 16 c 189 08 d 241 41 e 271 43 16 Galloway Inc has an odd dividend policy The company just paid a dividend today of 7 per share and has announced that it will increase the dividend by 2 per share for each of the next 5 years and then never pay another dividend How much are you willing to pay per share today to buy this stock if you require a 15 percent return a 27 08 b 34 …