Finance Multiple Choice

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A bond with an annual coupon of $70 and originally sold at par for $1,000. The current market interest rate (yield to maturity) is 8%. This bond will sell at _______. Assuming no change in market interest rates, the bond will present the holder with capital ________ as it matures.

.

A.

premium; gains

B.

discount; gains

C.

premium; losses

D.

discount; losses

3 points   

QUESTION 2

Given two comparable bonds A and B with par values of $1000. Both bonds mature in twenty years. Bond A has a coupon rate of 15%. Bond B has a coupon rate of 9%. Which bond has the greater interest rate risk?

.

A.

Bond A

B.

Bond B

3 points   

QUESTION 3

Davy Crockett, Inc. has an 8 percent coupon bond that matures in 8 years. The bond pays interest semiannually. What is the market price of the $1,000 face value bond if the yield to maturity is 10%?

.

A.

$891.62

B.

$780.86

C.

$881.18

D.

$679.90

E.

$600.34

3 points   

QUESTION 6

Given a bond with 8 years to maturity, $1000 face value, 8% coupon, 9% yield to maturity. The bond pays an annual coupon. What is the Duration of the bond?

.

A.

7.20 Years

B.

7.20 Percent

C.

6.58 Percent

D.

6.58 Years

E.

6.10 Percent

F.

6.10 Years

3 points   

QUESTION 9

Skeezix Corporation just paid a $2.35 annual dividend. Analysts expect dividends at Skeezix to grow at a rate of 6% for the next 5 years, slow down to a rate 4% for the following 5 years, and settle on a steady growth of 2.5% thereafter. The appropriate cost of capital given the risk of Skeezix’s common stock is 13%. What the price per share of Skeezix Corporation’s common stock?

.

A

$27.44

B

$26.05

C

$27.32

D

$26.88

E

$25.42

3 points   

QUESTION 14

You recently purchased a stock that is expected to earn 12% in a booming economy, 8% in a normal economy and lose 5% in a recessionary economy. There is a 15% probability of a boom, a 75% chance of a normal economy, and a 10% chance of a recession. What is your expected rate of return on this stock?

.

A.

5.00%

B.

6.45%

C.

7.30%

D.

7.85%

E.

8.30%

3 points   

QUESTION 19

Irene Adler is considering investing in the common stock of Holmes and Watson. The following data are available for the two securities.

.

................... Expected Return ..... Standard Deviation

Holmes .............. 0.12 ......................... 0.08

Watson ............. 0.16 .......................... 0.20

.

If she invests 60% of her funds in Holmes and 40% in Watson, and if the correlation of returns between these two securities is 0.45, what is the portfolio’s expected return and standard deviation?

.

A.

14.4% and 13.70%

B.

13.6% and 11.03%

C.

13.6% and 13.70%

D.

14.4% and 11.03%

E.

None of the above.

3 points   

QUESTION 22

Efficient portfolios are those, which offer:

.

A.

Highest expected return for a given level of risk

B.

Highest risk for a given level of expected return

C.

The maximum risk and expected return

D.

All of the above

3 points   

QUESTION 23

A equally weighted portfolio is formed with 4 securities A, B, C, D. Summary statistics of the securities are listed below. What is the standard deviation of the portfolio?

.

Variance of A = 493.73

Variance of B = 156.25

Variance of C = 1040.06

Variance of D = 400.00

.

Covariance between A and B = 186.09

Covariance between A and C = 394.13

Covariance between A and D = 168.87

Covariance between B and C = 181.41

Covariance between B and D = 167.50

Covariance between C and D = 483.75

.

A. 16.6

B. 24.1

C. 17.7

D. 18.1

24. According to the Capital Asset Pricing Model, the introduction of a risk-free asset renders the efficient frontier of efficient portfolios linear. How many portfolios of risky assets (portfolios of only risky assets) lie on the resulting Capital Market Line?

.

A.

Two portfolios of risky assets lie on the Capital Market Line.

B.

One portfolio of risky assets lies on the Capital Market Line.

C.

ALL portfolios of risky assets must lie on the Capital Market Line.

D.

The number cannot be determined.

38. Which of the following describes a portfolio that plots above the security market line?

.

A.

The security is overvalued.

B.

The security is undervalued.

C.

The security is providing a return that is less than expected.

D.

The security’s beta is too high.

E.

The security provides a return that is less than the average return on the market.

42. Calculate the present value break-even point (also called the financial break-even point).

.

Initial Investment: $700

Fixed Cost: $200 per year

Variable Cost: $3 per unit

Depreciation: $140 per year

Price: $8 per unit

Discount Rate: 12%

Project Life: 3 years

Tax Rate: 34%

.

A.

68 units per year

B.

75 units per year

C.

84 units per year

D.

114 units per year

E.

None of the Above

45. A firm is investing retained earnings in investments earning positive returns. As a result of these investments, earnings-per-share is growing. Can we assume that common stock prices are also increasing as a result of these investments?

.

A.

Yes, because higher earnings translates into higher dividends and, therefore, higher stock prices.

B.

No, earnings will always grow if investment earns a  positive return. But, investments will create shareholder value only if their returns are greater than their opportunity costs of capital.