Using the Constant Growth Model, an Increase in the Required

question 39

Multiple Choice

Using the constant growth model, an increase in the required rate of return from 14 to 18% combined with an increase in the growth rate from 8 to 12% would cause the price to

• A) Fall more than 4%
• B) Fall less than 4%.
• C) Rise more than 4%
• D) Rise less than 4%.
• E) Remain constant.

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Definitions:

Annual Coupon Bond

A bond that pays interest to the holder annually until its maturity, at which point the principal is repaid.

Real Rate

The interest rate that has been adjusted for inflation, reflecting the true cost of borrowing or real yield on an investment.

Inflation

The rate at which the comprehensive cost of goods and services inflates, sapping the buying power.

Total Percentage Return

The total return on an investment, including both capital gains and dividends, expressed as a percentage of the initial investment.