REVIEW FOR FINAL EXAM
Chapters 6 and 7 Bond and Stock Valuation
1. What is the basic valuation model for all assets?
2. What are the key inputs in the valuation model?
3. What is the relationship between bond price and bond yield?
4. How is the bond price related to its face value when the coupon rate is smaller
than the market rate? The coupon rate is greater than the market rate?
5. What happens to the price of a bond as it approaches maturity if market rates of
interest don’t change?
6. What is the purpose of a call feature on a bond?
7. Identify the various risks associated with bond ownership.
8. What is the purpose of bond rankings? Identify an agency that ranks bonds.
9. Distinguish among shares authorized, shares issued, and shares outstanding.
10. How does preferred stock differ from debt? from common stock?
11. What is the role of the investment banker in the securities markets?
12. What does the term “underwrite” mean?
13. What is the purpose of an underwriting syndicate?
14. If the (stock) markets are efficient, what impact should this have on investor
15. What is a perpetuity?
16. How does one value a perpetuity?
17. Three growth conditions were described for common stock valuation. What are
18. How can a price/earnings multiple be of help in valuation of equity?
19. Why might a firm’s book value and its liquidation value differ?
20. If the required rate of return is above the expected rate of return for a common
stock, what will happen to its price?
21. What is the Gordon model?
22. What are the two components to total yield? (For either a bond or a stock)
Valuing bonds, both interest bearing and zero coupon, with either annual or semi-
Valuing preferred stock
Valuing no growth and constant growth common stock
Calculating the required rate of return on common stock under conditions of constant
Calculate return on investment
Applying Time Value