Multiple choice

1. Andrew bought an 8.5% annual coupon bond at par. One year later, he sold the bond at a quoted price of 98. During the year, market interest rates rose and inflation was 3%. What real rate of return did Andrew earn on this investment?

A) 3.40%

B) 3.50%

C) 6.40%

D) 6.50%

E) 6.70%

2. Okie, Inc. has some 8% preferred stock (stated value $100) outstanding. How much are you willing to pay for one share of Okie preferred stock if you require a 7% rate of return?

A) $87.50

B) $98.11

C) $114.29

D) $123.87

E) $125.14

3. Muon purchased 1,000 shares of Quark stock this morning at a price of $45.67 a share. The stock paid a dividend last year of $1.80 per share. Muon's required rate of return is 13% on this type of investment. What is the capital gains yield on Quark stock?

A) 7.41%

B) 8.72%

C) 9.06%

D) 13.85%

E) 16.94%

4. Kay purchases a $100, 30-year annuity. Kam purchases a $100 perpetuity. In both cases, payments begin in one year, and the appropriate interest rate is 10%. What is the present value of Kam's payments that will occur from year 31 onwards?

A) $57.31

B) $58.11

C) $81.21

D) More than $100