Investing
Dante555
testbank_-_exam_4.docxChapter 13
Performance Evaluation and Risk Management
Multiple Choice Questions
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1. |
Which one of the following assesses the ability of a money manager to balance high returns with an acceptable level of risk?
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2. |
The unadjusted total percentage return on a security that has not been compared to any benchmark is referred to as which one of the following?
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3. |
The risk premium of a portfolio divided by the portfolio's standard deviation defines which one of the following performance measures?
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4. |
Which one of the following is computed by dividing a portfolio's risk premium by the portfolio beta?
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5. |
Which one of the following measures a portfolio's raw return against the expected return based on the Capital Asset Pricing Model?
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6. |
Which one of the following concerns a money manager's control over investment risks, particularly potential short-run losses?
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7. |
Which one of the following assesses risk by stating the probability of a loss a portfolio might incur within a stated time period given a specific probability?
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8. |
Which one of the following is a statistical model, defined by its mean and standard deviation, that is used to assess probabilities?
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9. |
Which one of the following measures a security's return in relation to the total risk associated with that security?
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10. |
The Sharpe ratio measures a security's return relative to which one of the following?
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11. |
The Sharpe ratio is best used to evaluate which one of the following?
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12. |
Which one of the following measures returns in relation to total risk?
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13. |
Which one of the following values would be the most preferable as a Sharpe ratio?
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14. |
Which one of the following measures risk premium in relation to systematic risk?
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15. |
You are comparing three securities and discover they all have identical Treynor ratios. Given this information, which one of the following must be true regarding these three securities?
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16. |
You are comparing three assets which have differing Treynor ratios. Given this, which one of the following must be true?
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17. |
You are considering the purchase of a mutual fund. You have found three funds that meet your basic criteria. Each fund has a different alpha. Which alpha indicates the preferred investment?
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18. |
Which one of the following statements is correct in relation to a security that has a negative Jensen's alpha?
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19. |
Which one of the following is the best indication that a security is correctly priced according to the Capital Asset Pricing Model?
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20. |
Tony brags that his portfolio's rate of return is "beating the market". Which one of the following would best substantiate his claim?
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21. |
Which of the following should generally only be used to evaluate relatively diversified portfolios rather than individual securities? I. Sharpe ratio II. Treynor ratio III. Jensen's alpha
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22. |
Which of the following measures are dependent upon the accuracy of a security's beta? I. Sharpe ratio II. Treynor ratio III. Jensen's alpha
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23. |
Which one of the following is probably the best measure of the performance of a well-diversified portfolio?
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24. |
Which of the following measures should be used to determine if a security should be included in a master portfolio? I. Sharpe ratio II. Treynor ratio III. Jensen's alpha
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25. |
The Jensen-Treynor alpha is equal to:
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26. |
Which one of the following is measured by the Jensen-Treynor alpha?
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27. |
The Sharpe-optimal portfolio will be the investment opportunity set which lies on a straight line that has which of the following characteristics?
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28. |
A Sharpe-optimal portfolio provides which one of the following for a given set of securities?
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29. |
You want to create the best portfolio that can be derived from two assets. Which one of the following will help you identify that portfolio?
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30. |
Which measure would you use to know whether alpha is truly significant or just the result of random chance?
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31. |
Which metric measures how volatile a fund's returns are relative to its benchmark?
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32. |
Which metric describes the percentage of a fund's movement which can be explained by movements in the market?
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33. |
Which one of the following is the primary purpose of the Value-at-Risk computation?
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34. |
Which one of the following is the best interpretation of this VaR statistic: Prob (Rp ≤ -.15) = 37%?
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35. |
The Value-at-Risk measure assumes which one of the following?
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36. |
Which one of the following Value-at-Risk measures would be most appropriate for a portfolio designed for a very risk-adverse investor?
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37. |
Which one of the following statements is true concerning VaR?
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38. |
Which of the following are related to VaR analysis? I. beta II. standard deviation III. expected return IV. time
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39. |
You have computed the expected return using VaR with a 2.5 percent probability for a one-year period of time. How would this expected return be expressed on a normal distribution curve?
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40. |
Which one of the following correctly states the VaR for a 3-year period with a 2.5 percent probability?
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41. |
A portfolio has a 2.5 percent chance of losing 16 percent or more according to the VaR when T = 1. This can be interpreted to mean that the portfolio is expected to have an annual loss of 16 percent or more once in every how many years?
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42. |
A portfolio has an average return of 12.4 percent, a standard deviation of 15.8 percent, and a beta of 1.35. The risk-free rate is 2.6 percent. What is the Sharpe ratio?
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43. |
A portfolio has a beta of 1.26, a standard deviation of 15.9 percent, and an average return of 15.07 percent. The market rate is 12.7 percent and the risk-free rate is 3.6 percent. What is the Sharpe ratio?
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44. |
The U.S. Treasury bill is yielding 2.25 percent and the market has an expected return of 9.8 percent. What is the Sharpe ratio of a portfolio that has a beta of 1.32 and a variance of .027556?
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45. |
A portfolio has a beta of 1.23 and a standard deviation of 11.6 percent. What is the Sharpe ratio if the market return is 12.4 percent and the market risk premium is 7.9 percent?
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46. |
A portfolio has a variance of .0165, a beta of 1.05, and an expected return of 12.65 percent. What is the Sharpe ratio if the expected risk-free rate is 3.4 percent?
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47. |
A portfolio has a Sharpe ratio of .80, a standard deviation of 17.4 percent, and an expected return of 15.9 percent. What is the risk-free rate?
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48. |
Your portfolio has an expected return of 14.2 percent, a beta of 1.31, and a standard deviation of 15.3 percent. The U.S. Treasury bill rate is 3.48 percent. What is the Sharpe ratio of your portfolio?
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49. |
A portfolio has a beta of 1.16, a standard deviation of 12.2 percent, and an expected return of 11.55 percent. The market return is 10.4 percent and the risk-free rate is 3.2 percent. What is the portfolio's Sharpe ratio?
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50. |
Your portfolio has a beta of 1.17, a standard deviation of 14.3 percent, and an expected return of 12.5 percent. The market return is 11.3 percent and the risk-free rate is 3.1 percent. What is the Treynor ratio?
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51. |
A portfolio has an expected return of 13.8 percent, a beta of 1.14, and a standard deviation of 12.7 percent. The U.S. Treasury bill rate is 3.2 percent. What is the Treynor ratio?
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52. |
A portfolio has a Treynor ratio of .070, a standard deviation of 16.40 percent, a beta of 1.16, and an expected return of 14.3 percent. What is the risk-free rate?
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53. |
A portfolio has a variance of .027556, a beta of 1.54, and an expected return of 11.2 percent. What is the Treynor ratio if the expected risk-free rate is 2.7 percent?
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54. |
The U.S. Treasury bill is yielding 3.0 percent and the market has an expected return of 11.6 percent. What is the Treynor ratio of a correctly-valued portfolio that has a beta of 1.02, and a standard deviation of 12.2 percent?
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55. |
A portfolio has an average return of 9.7 percent, a standard deviation of 8.6 percent, and a beta of .72. The risk-free rate is 2.1 percent. What is the Treynor ratio?
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56. |
A portfolio has a standard deviation of 14.1 percent, a beta of 1.30 and a Treynor ratio of .094. The risk-free rate is 3.2 percent. What is the portfolio's expected rate of return?
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57. |
The U.S. Treasury bill is yielding 1.85 percent and the market has an expected return of 7.48 percent. What is the Treynor ratio of a correctly-valued portfolio that has a beta of 1.33 and a variance of .0045?
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58. |
Your portfolio actually earned 6.2 percent for the year. You were expecting to earn 8.6 percent based on the CAPM formula. What is Jensen's alpha if the portfolio standard deviation is 12.1 percent and the beta is .93?
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59. |
A portfolio has a beta of 1.52 and an actual return of 13.7 percent. The risk-free rate is 2.7 percent and the market risk premium is 7.8 percent. What is the value of Jensen's alpha?
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60. |
The U.S. Treasury bill has a return of 2.84 percent while the S&P 500 is returning 10.84 percent. Your portfolio has an actual return of 14.76 percent and a beta of 1.31. What is the portfolio's Jensen's alpha?
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61. |
A diversified portfolio has a beta of 1.47 and a raw return of 14.28 percent. The market return is 11.74 percent and the market risk premium is 7.85 percent. What is Jensen's alpha of the portfolio?
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62. |
A portfolio has an actual return of 15.17 percent, a beta of .85, and a standard deviation of 7.2 percent. The market return is 13.4 percent and the risk-free rate is 2.8 percent. What is the portfolio's Jensen's alpha?
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63. |
A portfolio has a Jensen's alpha of 0.82 percent, a beta of 1.40, and a CAPM expected return of 13.7 percent. The risk-free rate is 2.5 percent. What is the actual return of the portfolio?
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64. |
What is the Treynor ratio of a portfolio comprised of 45 percent portfolio A and 55 percent portfolio B?
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65. |
What is the Treynor ratio of a portfolio comprised of 25 percent portfolio A, 35 percent portfolio B, and 40 percent portfolio C?
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66. |
What is Jensen's alpha of a portfolio comprised of 45 percent portfolio A and 55 percent of portfolio B?
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67. |
A stock has a return of 16.18 percent and a beta of 1.47. The market return is 10.65 percent and the risk-free rate is 3.20 percent. What is the Jensen-Treynor alpha of this stock?
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68. |
A stock has a return of 16.9 percent, a standard deviation of 11.7 percent, and a beta of 1.50. The risk-free rate is 2.65 percent and the market risk premium is 8.45 percent. What is the Jensen-Treynor alpha of this stock?
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69. |
A portfolio consists of the following two funds.
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70. |
A portfolio consists of the following two funds.
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71. |
A portfolio consists of the following two funds.
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72. |
A fund has an alpha of 0.73 percent and a tracking error of 4.9 percent. What is the fund's information ratio?
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73. |
The Miller Fund's correlation with the market is .648. What percentage of the fund's movement can be explained by movements in the overall market?
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74. |
A portfolio has an average return of 14.2 percent and a standard deviation of 14.5 percent. Given this, you should expect to lose at least _____ percent on an annual basis once every century.
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75. |
A portfolio has a standard deviation of 15.8 percent and an average return of 14.2 percent. What loss is associated with a 2.5 percent probability?
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76. |
Your portfolio has a standard deviation of 12.3 percent and an average return of 9.6 percent. You have a 5 percent probability of losing _____ percent or more in any given year.
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77. |
Lester has a portfolio with an average return of 12.8 percent and a standard deviation of 9.1 percent. He has a one percent probability of losing _____ percent or more in any given year.
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78. |
You have a portfolio which has an average return of 10.3 percent. In any given year, you have a 2.5 percent probability of earning either a zero or a negative annual return. What is the approximate standard deviation of your portfolio?
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79. |
Your portfolio has an expected annual return of 11.6 percent. What is the two-year expected return?
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80. |
Angie owns a portfolio which has an expected annual return of 11.70 percent. What is the two-year expected return on her portfolio?
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81. |
Mike's portfolio has a two-year expected return of 21.70 percent. What is the expected return for one year?
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82. |
The one-year standard deviation of your portfolio is 14.8 percent. What is the two-year standard deviation?
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83. |
Your portfolio has a standard deviation of 11.7 percent. What is the two-year standard deviation?
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84. |
A portfolio has a 3-year standard deviation of 18.1 percent. What is the one-year standard deviation?
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85. |
A stock has an annual standard deviation of 14.1 percent and an expected annual return of 11.5 percent. What is the smallest expected loss for the next 6 months given a probability of 2.5 percent?
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86. |
Trailer Co. stock has an expected return of 12.2 percent and a standard deviation of 11.8 percent. What is the smallest expected loss over the next month given a probability of 5 percent?
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87. |
A portfolio has an expected annual return of 15.7 percent and a standard deviation of 19.6 percent. What is the smallest expected loss over the next calendar quarter given a probability of 1 percent?
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88. |
High Mountain Homes has an expected annual return of 16.1 percent and a standard deviation of 20.3 percent. What is the smallest expected loss over the next month given a probability of 2.5 percent?
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Essay Questions
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89. |
Explain the similarities and differences between the Sharpe and Treynor ratios. Also, explain the most appropriate application for each.
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90. |
Explain a key advantage and a key disadvantage of Jensen's alpha.
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91. |
A conservative investor has a well-diversified portfolio but is still concerned about two things. First, he is concerned about the downside risk and secondly, he is concerned whether he is earning a sufficient rate of return to compensate for the total risk he is assuming. How could you quantify these concerns for this investor?
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Chapter 13 Performance Evaluation and Risk Management Answer Key
Multiple Choice Questions
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1. |
Which one of the following assesses the ability of a money manager to balance high returns with an acceptable level of risk?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Performance Evaluation |
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2. |
The unadjusted total percentage return on a security that has not been compared to any benchmark is referred to as which one of the following?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Raw Return |
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3. |
The risk premium of a portfolio divided by the portfolio's standard deviation defines which one of the following performance measures?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Sharpe Ratio |
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4. |
Which one of the following is computed by dividing a portfolio's risk premium by the portfolio beta?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Treynor Ratio |
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5. |
Which one of the following measures a portfolio's raw return against the expected return based on the Capital Asset Pricing Model?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Jensen's Alpha |
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6. |
Which one of the following concerns a money manager's control over investment risks, particularly potential short-run losses?
See Section 13.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.3 Topic: Investment Risk Management |
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7. |
Which one of the following assesses risk by stating the probability of a loss a portfolio might incur within a stated time period given a specific probability?
See Section 13.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.3 Topic: Value-At-Risk |
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8. |
Which one of the following is a statistical model, defined by its mean and standard deviation, that is used to assess probabilities?
See Section 13.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.3 Topic: Normal Distribution |
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9. |
Which one of the following measures a security's return in relation to the total risk associated with that security?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Sharpe Ratio |
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10. |
The Sharpe ratio measures a security's return relative to which one of the following?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Sharpe Ratio |
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11. |
The Sharpe ratio is best used to evaluate which one of the following?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Sharpe Ratio |
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12. |
Which one of the following measures returns in relation to total risk?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Sharpe Ratio |
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13. |
Which one of the following values would be the most preferable as a Sharpe ratio?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Sharpe Ratio |
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14. |
Which one of the following measures risk premium in relation to systematic risk?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Treynor Ratio |
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15. |
You are comparing three securities and discover they all have identical Treynor ratios. Given this information, which one of the following must be true regarding these three securities?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Treynor Ratio |
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16. |
You are comparing three assets which have differing Treynor ratios. Given this, which one of the following must be true?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Treynor Ratio |
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17. |
You are considering the purchase of a mutual fund. You have found three funds that meet your basic criteria. Each fund has a different alpha. Which alpha indicates the preferred investment?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Jensen's Alpha |
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18. |
Which one of the following statements is correct in relation to a security that has a negative Jensen's alpha?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Jensen's Alpha |
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19. |
Which one of the following is the best indication that a security is correctly priced according to the Capital Asset Pricing Model?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Jensen's Alpha |
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20. |
Tony brags that his portfolio's rate of return is "beating the market". Which one of the following would best substantiate his claim?
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Jensen's Alpha |
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21. |
Which of the following should generally only be used to evaluate relatively diversified portfolios rather than individual securities? I. Sharpe ratio II. Treynor ratio III. Jensen's alpha
See Section 13.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Sharpe |
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22. |
Which of the following measures are dependent upon the accuracy of a security's beta? I. Sharpe ratio II. Treynor ratio III. Jensen's alpha
See Section 13.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-02 The strengths and weaknesses of these portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.2 Topic: Treynor and Jensen |
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23. |
Which one of the following is probably the best measure of the performance of a well-diversified portfolio?
See Section 13.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-02 The strengths and weaknesses of these portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.2 Topic: Sharpe |
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24. |
Which of the following measures should be used to determine if a security should be included in a master portfolio? I. Sharpe ratio II. Treynor ratio III. Jensen's alpha
See Section 13.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-02 The strengths and weaknesses of these portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.2 Topic: Sharpe, Treynor, Jensen |
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25. |
The Jensen-Treynor alpha is equal to:
See Section 13.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-02 The strengths and weaknesses of these portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.2 Topic: Jensen-Treynor Alpha |
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26. |
Which one of the following is measured by the Jensen-Treynor alpha?
See Section 13.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-02 The strengths and weaknesses of these portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.2 Topic: Jensen-Treynor Alpha |
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27. |
The Sharpe-optimal portfolio will be the investment opportunity set which lies on a straight line that has which of the following characteristics?
See Section 13.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-03 How to calculate a Sharpe-optimal portfolio. Level of Difficulty: 1 Easy Section: 13.2 Topic: Sharpe-Optimal Portfolio |
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28. |
A Sharpe-optimal portfolio provides which one of the following for a given set of securities?
See Section 13.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-03 How to calculate a Sharpe-optimal portfolio. Level of Difficulty: 1 Easy Section: 13.2 Topic: Sharpe-Optimal Portfolio |
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29. |
You want to create the best portfolio that can be derived from two assets. Which one of the following will help you identify that portfolio?
See Section 13.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-03 How to calculate a Sharpe-optimal portfolio. Level of Difficulty: 1 Easy Section: 13.2 Topic: Sharpe-Optimal Portfolio |
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30. |
Which measure would you use to know whether alpha is truly significant or just the result of random chance?
See Section 13.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-02 The strengths and weaknesses of these portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.2 Topic: Information Ratio |
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31. |
Which metric measures how volatile a fund's returns are relative to its benchmark?
See Section 13.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-02 The strengths and weaknesses of these portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.2 Topic: Tracking Error |
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32. |
Which metric describes the percentage of a fund's movement which can be explained by movements in the market?
See Section 13.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-02 The strengths and weaknesses of these portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.2 Topic: R Squared |
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33. |
Which one of the following is the primary purpose of the Value-at-Risk computation?
See Section 13.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.3 Topic: Value-At-Risk |
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34. |
Which one of the following is the best interpretation of this VaR statistic: Prob (Rp ≤ -.15) = 37%?
See Section 13.3 |
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Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.3 Topic: Value-At-Risk |
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35. |
The Value-at-Risk measure assumes which one of the following?
See Section 13.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.3 Topic: Value-At-Risk |
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36. |
Which one of the following Value-at-Risk measures would be most appropriate for a portfolio designed for a very risk-adverse investor?
See Section 13.3 |
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Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.3 Topic: Value-At-Risk |
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37. |
Which one of the following statements is true concerning VaR?
See Section 13.4 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.4 Topic: Value-At-Risk |
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38. |
Which of the following are related to VaR analysis? I. beta II. standard deviation III. expected return IV. time
See Section 13.4 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.4 Topic: Value-At-Risk |
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39. |
You have computed the expected return using VaR with a 2.5 percent probability for a one-year period of time. How would this expected return be expressed on a normal distribution curve?
See Section 13.4 |
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Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.4 Topic: Value-At-Risk |
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40. |
Which one of the following correctly states the VaR for a 3-year period with a 2.5 percent probability?
See Section 13.4 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.4 Topic: Multi-Year Return |
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41. |
A portfolio has a 2.5 percent chance of losing 16 percent or more according to the VaR when T = 1. This can be interpreted to mean that the portfolio is expected to have an annual loss of 16 percent or more once in every how many years?
See Section 13.4 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.4 Topic: Value-At-Risk |
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42. |
A portfolio has an average return of 12.4 percent, a standard deviation of 15.8 percent, and a beta of 1.35. The risk-free rate is 2.6 percent. What is the Sharpe ratio?
Sharpe ratio = (.124 - .026)/.158 = .62 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Sharpe Ratio |
|
43. |
A portfolio has a beta of 1.26, a standard deviation of 15.9 percent, and an average return of 15.07 percent. The market rate is 12.7 percent and the risk-free rate is 3.6 percent. What is the Sharpe ratio?
Sharpe ratio = (.1507 - .036)/.159 = .72 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Sharpe Ratio |
|
44. |
The U.S. Treasury bill is yielding 2.25 percent and the market has an expected return of 9.8 percent. What is the Sharpe ratio of a portfolio that has a beta of 1.32 and a variance of .027556?
E(RP) = .0225 + 1.32(.980 - .0225) = .1222 Sharpe ratio = (.1222 - .0225)/√.027556 = .6004 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 2 Medium Section: 13.1 Topic: Sharpe Ratio |
|
45. |
A portfolio has a beta of 1.23 and a standard deviation of 11.6 percent. What is the Sharpe ratio if the market return is 12.4 percent and the market risk premium is 7.9 percent?
Risk-free rate = .124 - .079 = .045 E(RP) = .045 + 1.23(.079) = .14217 Sharpe ratio = (.14217 - .045)/.116 = .84 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 2 Medium Section: 13.1 Topic: Sharpe Ratio |
|
46. |
A portfolio has a variance of .0165, a beta of 1.05, and an expected return of 12.65 percent. What is the Sharpe ratio if the expected risk-free rate is 3.4 percent?
Sharpe ratio = (.1265 - .034)/√.0165 = .7201 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Sharpe Ratio |
|
47. |
A portfolio has a Sharpe ratio of .80, a standard deviation of 17.4 percent, and an expected return of 15.9 percent. What is the risk-free rate?
.80 = (.159 - rf)/.174; rf = 1.98 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Sharpe Ratio |
|
48. |
Your portfolio has an expected return of 14.2 percent, a beta of 1.31, and a standard deviation of 15.3 percent. The U.S. Treasury bill rate is 3.48 percent. What is the Sharpe ratio of your portfolio?
Sharpe ratio = (.142 - .0348)/.153 = .7007 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Sharpe Ratio |
|
49. |
A portfolio has a beta of 1.16, a standard deviation of 12.2 percent, and an expected return of 11.55 percent. The market return is 10.4 percent and the risk-free rate is 3.2 percent. What is the portfolio's Sharpe ratio?
Sharpe ratio = (.1155 - .032)/.122 = .68 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Sharpe Ratio |
|
50. |
Your portfolio has a beta of 1.17, a standard deviation of 14.3 percent, and an expected return of 12.5 percent. The market return is 11.3 percent and the risk-free rate is 3.1 percent. What is the Treynor ratio?
Treynor ratio = (.125 - .031)/1.17 = .0803 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Treynor Ratio |
|
51. |
A portfolio has an expected return of 13.8 percent, a beta of 1.14, and a standard deviation of 12.7 percent. The U.S. Treasury bill rate is 3.2 percent. What is the Treynor ratio?
Treynor ratio = (.138 - .032)/1.14 = .093 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Treynor Ratio |
|
52. |
A portfolio has a Treynor ratio of .070, a standard deviation of 16.40 percent, a beta of 1.16, and an expected return of 14.3 percent. What is the risk-free rate?
.070 = (.143 - rf)/1.16; rf = 6.18 percent |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Treynor Ratio |
|
53. |
A portfolio has a variance of .027556, a beta of 1.54, and an expected return of 11.2 percent. What is the Treynor ratio if the expected risk-free rate is 2.7 percent?
Treynor ratio = (.112 - .027)/1.54 = .055 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Treynor Ratio |
|
54. |
The U.S. Treasury bill is yielding 3.0 percent and the market has an expected return of 11.6 percent. What is the Treynor ratio of a correctly-valued portfolio that has a beta of 1.02, and a standard deviation of 12.2 percent?
E(RP) = .03 + .92(.116 - .03) = .11772 Treynor ratio = (.11772 - .03)/1.02 = .086 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Treynor Ratio |
|
55. |
A portfolio has an average return of 9.7 percent, a standard deviation of 8.6 percent, and a beta of .72. The risk-free rate is 2.1 percent. What is the Treynor ratio?
Treynor ratio = (.097 - .021)/.72 = .106 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Treynor Ratio |
|
56. |
A portfolio has a standard deviation of 14.1 percent, a beta of 1.30 and a Treynor ratio of .094. The risk-free rate is 3.2 percent. What is the portfolio's expected rate of return?
.094 = (Rp - .032)/1.30; Rp = 15.42 percent |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Treynor Ratio |
|
57. |
The U.S. Treasury bill is yielding 1.85 percent and the market has an expected return of 7.48 percent. What is the Treynor ratio of a correctly-valued portfolio that has a beta of 1.33 and a variance of .0045?
E(RP) = .0185 + 1.33(.0748 - .0185) = .093379 Treynor ratio = (.093379 - .0185)/1.33 = .056 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Treynor Ratio |
|
58. |
Your portfolio actually earned 6.2 percent for the year. You were expecting to earn 8.6 percent based on the CAPM formula. What is Jensen's alpha if the portfolio standard deviation is 12.1 percent and the beta is .93?
Jensen's alpha = 6.2 percent - 8.6 percent = -2.4 percent |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Jensen's Alpha |
|
59. |
A portfolio has a beta of 1.52 and an actual return of 13.7 percent. The risk-free rate is 2.7 percent and the market risk premium is 7.8 percent. What is the value of Jensen's alpha?
Jensen's alpha = .137 - [.027 + 1.52(.078)] = -0.86 percent |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Jensen's Alpha |
|
60. |
The U.S. Treasury bill has a return of 2.84 percent while the S&P 500 is returning 10.84 percent. Your portfolio has an actual return of 14.76 percent and a beta of 1.31. What is the portfolio's Jensen's alpha?
Jensen's alpha = .1476 - [.0284 + 1.31(.1084 - .0284)] = 1.44 percent |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Jensen's Alpha |
|
61. |
A diversified portfolio has a beta of 1.47 and a raw return of 14.28 percent. The market return is 11.74 percent and the market risk premium is 7.85 percent. What is Jensen's alpha of the portfolio?
Jensen's alpha = .1428 - [(.1174 - .0785) + 1.47(.0785)] = -1.15 percent |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Jensen's Alpha |
|
62. |
A portfolio has an actual return of 15.17 percent, a beta of .85, and a standard deviation of 7.2 percent. The market return is 13.4 percent and the risk-free rate is 2.8 percent. What is the portfolio's Jensen's alpha?
Jensen's alpha = .1517 - [.028 + .85(.134 - .028)] = 3.36 percent |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Jensen's Alpha |
|
63. |
A portfolio has a Jensen's alpha of 0.82 percent, a beta of 1.40, and a CAPM expected return of 13.7 percent. The risk-free rate is 2.5 percent. What is the actual return of the portfolio?
.082 = RP - .137; RP = 21.9 percent |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Jensen's Alpha |
|
64. |
What is the Treynor ratio of a portfolio comprised of 45 percent portfolio A and 55 percent portfolio B?
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Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Portfolio Treynor Ratio |
|
65. |
What is the Treynor ratio of a portfolio comprised of 25 percent portfolio A, 35 percent portfolio B, and 40 percent portfolio C?
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Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Portfolio Treynor Ratio |
|
66. |
What is Jensen's alpha of a portfolio comprised of 45 percent portfolio A and 55 percent of portfolio B?
Portfolio average return = (.45 × .189) + (.55 × .132) = .1577 Portfolio beta = (.45 × 1.92) + (.55 × 1.27) = 1.56 CAPM return = .031 + 1.56(.068) = .1373 Jensen's alpha = .1577 - .1373 = 2.04 percent |
|
Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 2 Medium Section: 13.1 Topic: Portfolio Jensen's Alpha |
|
67. |
A stock has a return of 16.18 percent and a beta of 1.47. The market return is 10.65 percent and the risk-free rate is 3.20 percent. What is the Jensen-Treynor alpha of this stock?
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Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.2 Topic: Jensen-Treynor Alpha |
|
68. |
A stock has a return of 16.9 percent, a standard deviation of 11.7 percent, and a beta of 1.50. The risk-free rate is 2.65 percent and the market risk premium is 8.45 percent. What is the Jensen-Treynor alpha of this stock?
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|
Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.2 Topic: Jensen-Treynor Alpha |
|
69. |
A portfolio consists of the following two funds.
Portfolio weight of A = $6,000/($6,000 + $14,000) = .30
Portfolio weight of B = $14,000/($6,000 + $14,000) = .70
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|
Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 2 Medium Section: 13.2 Topic: Sharpe Ratio for Two-Asset Portfolio |
|
70. |
A portfolio consists of the following two funds.
Portfolio weight of A = $8,000/($12,000 + $8,000) = .40
Portfolio weight of B = $12,000/($12,000 + $8,000) = .60
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|
Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 2 Medium Section: 13.2 Topic: Sharpe Ratio for Two-Asset Portfolio |
|
71. |
A portfolio consists of the following two funds.
Portfolio weight of A = $27,000/($27,000 + $33,000) = .45
Portfolio weight of B = $33,000/($27,000 + $33,000) = .55
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|
Blooms: Apply Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 2 Medium Section: 13.2 Topic: Sharpe Ratio for Two-Asset Portfolio |
|
72. |
A fund has an alpha of 0.73 percent and a tracking error of 4.9 percent. What is the fund's information ratio?
Information ratio = 0.73/4.9 = 0.149 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-02 The strengths and weaknesses of these portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.2 Topic: Information Ratio |
|
73. |
The Miller Fund's correlation with the market is .648. What percentage of the fund's movement can be explained by movements in the overall market?
R2 = (0.648)2 = 42 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-02 The strengths and weaknesses of these portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.2 Topic: R Squared |
|
74. |
A portfolio has an average return of 14.2 percent and a standard deviation of 14.5 percent. Given this, you should expect to lose at least _____ percent on an annual basis once every century.
Loss percent = .142 - 2.326(.145) = -19.53 percent |
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Blooms: Apply Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.3 Topic: Probability Ranges |
|
75. |
A portfolio has a standard deviation of 15.8 percent and an average return of 14.2 percent. What loss is associated with a 2.5 percent probability?
Loss percent = .142 - 1.96(.158) = -16.77 percent |
|
Blooms: Apply Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.3 Topic: Probability Ranges |
|
76. |
Your portfolio has a standard deviation of 12.3 percent and an average return of 9.6 percent. You have a 5 percent probability of losing _____ percent or more in any given year.
Loss percent = .96 - 1.645(.123) = -10.634 percent |
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Blooms: Apply Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.3 Topic: Probability Ranges |
|
77. |
Lester has a portfolio with an average return of 12.8 percent and a standard deviation of 9.1 percent. He has a one percent probability of losing _____ percent or more in any given year.
Loss percent = .128 - 2.326(.091) = -8.37 percent |
|
Blooms: Apply Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.3 Topic: Probability Ranges |
|
78. |
You have a portfolio which has an average return of 10.3 percent. In any given year, you have a 2.5 percent probability of earning either a zero or a negative annual return. What is the approximate standard deviation of your portfolio?
0.0 = .103 - 1.96(σ); σ = 5.26 percent |
|
Blooms: Apply Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.3 Topic: Probability Ranges |
|
79. |
Your portfolio has an expected annual return of 11.6 percent. What is the two-year expected return?
Two-year return = 2 × .116 = 23.2 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.4 Topic: Multi-Year Return |
|
80. |
Angie owns a portfolio which has an expected annual return of 11.70 percent. What is the two-year expected return on her portfolio?
Two-year return = 2 × .1170 = 23.40 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.4 Topic: Multi-Year Return |
|
81. |
Mike's portfolio has a two-year expected return of 21.70 percent. What is the expected return for one year?
Annual return = .2170/2 = 10.85 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.4 Topic: Multi-Year Return |
|
82. |
The one-year standard deviation of your portfolio is 14.8 percent. What is the two-year standard deviation?
Two-year standard deviation = .148 × √2 = 20.93 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.4 Topic: Multi-Year Standard Deviation |
|
83. |
Your portfolio has a standard deviation of 11.7 percent. What is the two-year standard deviation?
Two-year standard deviation = .117 × √2 = 16.55 percent |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.4 Topic: Multi-Year Standard Deviation |
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84. |
A portfolio has a 3-year standard deviation of 18.1 percent. What is the one-year standard deviation?
.1810 = σ × √3; σ = 10.45 percent |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 1 Easy Section: 13.4 Topic: Multi-Year Standard Deviation |
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85. |
A stock has an annual standard deviation of 14.1 percent and an expected annual return of 11.5 percent. What is the smallest expected loss for the next 6 months given a probability of 2.5 percent?
Smallest expected loss = (.115 × .5) - 1.96 × (.141 × √.5) = -13.79 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 2 Medium Section: 13.4 Topic: Value-At-Risk |
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86. |
Trailer Co. stock has an expected return of 12.2 percent and a standard deviation of 11.8 percent. What is the smallest expected loss over the next month given a probability of 5 percent?
Smallest loss = (.122 × 1/12) - 1.645 × (.118 × √1/12) = -4.59 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 2 Medium Section: 13.4 Topic: Value-At-Risk |
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87. |
A portfolio has an expected annual return of 15.7 percent and a standard deviation of 19.6 percent. What is the smallest expected loss over the next calendar quarter given a probability of 1 percent?
Smallest loss = (.157 × .25) - 2.326 × (.196 × √.25) = -18.87 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 2 Medium Section: 13.4 Topic: Value-At-Risk |
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88. |
High Mountain Homes has an expected annual return of 16.1 percent and a standard deviation of 20.3 percent. What is the smallest expected loss over the next month given a probability of 2.5 percent?
Smallest loss = (.161 × 1/12) - 1.96 × (.203 × √1/12) = -10.14 percent |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 2 Medium Section: 13.4 Topic: Value-At-Risk |
Essay Questions
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89. |
Explain the similarities and differences between the Sharpe and Treynor ratios. Also, explain the most appropriate application for each. Answer will vary Feedback: The Sharpe and Treynor ratios both measure risk premium per unit of risk. Sharpe measures the risk premium in relation to total risk (standard deviation) while Treynor measures the risk premium against systematic risk (beta). The Sharpe ratio is best used to evaluate diversified portfolios where most of the unsystematic risk has been eliminated. The Treynor ratio is useful in analyzing a single asset to determine if it should be added to a portfolio. |
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Blooms: Understand Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 2 Medium Section: 13.1 Topic: Sharpe and Treynor Ratios |
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90. |
Explain a key advantage and a key disadvantage of Jensen's alpha. Answer will vary Feedback: An advantage of Jensen's alpha is that it indicates whether a security is outperforming or underperforming in relation to the amount of systematic risk inherent in the security. This also indicates whether a security is overpriced or underpriced. The key disadvantage lies in the fact that a security's actual return is compared to its CAPM return. However, the CAPM return is highly dependent upon the accuracy of the security's beta. If the beta is inappropriate, then Jensen's alpha is unreliable. |
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Blooms: Understand Learning Objective: 13-01 How to calculate the best-known portfolio evaluation measures. Level of Difficulty: 1 Easy Section: 13.1 Topic: Jensen's Alpha and the SML |
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91. |
A conservative investor has a well-diversified portfolio but is still concerned about two things. First, he is concerned about the downside risk and secondly, he is concerned whether he is earning a sufficient rate of return to compensate for the total risk he is assuming. How could you quantify these concerns for this investor? Answer will vary Feedback: The VaR values would quantify the downside risks given a stated period of time and a probability of loss percentage. The Sharpe ratio would quantify the risk premium per unit of total risk. By quantifying these concerns, the investor should gain a greater understanding of the risk-return aspects of his portfolio. |
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Blooms: Understand Learning Objective: 13-04 How to calculate and interpret Value-at-Risk. Level of Difficulty: 2 Medium Section: 13.4 Topic: Value-At-Risk |
Chapter 17
Projecting Cash Flow and Earnings
Multiple Choice Questions
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1. |
You are interested in reviewing the information corporations file with the SEC. Which one of the following is the archive of these filings?
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2. |
How frequently do corporations file 10K reports with the SEC?
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3. |
Better Products just filed its quarterly report with the SEC. This report is referred to as which one of the following?
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4. |
Regulation FD requires companies to do which one of the following when disclosing material non-public information?
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5. |
Material nonpublic information is defined as any information that could reasonably be expected to do which one of the following?
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6. |
Which one of the following provides information on a firm's assets and liabilities as of a particular date?
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7. |
Which one of the following is an accounting statement that provides information on a firm's revenues and expenses?
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8. |
Which one of the following is an analysis of a firm's sources and uses of cash over a period of time?
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9. |
Which one of the following is defined as anything a firm owns that has value?
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10. |
Which one of the following represents the amounts owed by a firm to other parties?
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11. |
Which one of the following is an ownership interest in a firm?
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12. |
Which one of the following is used to pay dividends or kept as retained earnings by a firm?
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13. |
Which one of the following is income realized in cash form?
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14. |
Income and expense items NOT realized in cash form are called which one of the following?
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15. |
Which one of the following is the definition of operating cash flow?
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16. |
Which one of the following is the definition of investment cash flow?
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17. |
Which one of the following is the cash flow resulting from the payment of dividends and the issuance or repurchase of equity securities?
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18. |
Which one of the following is equal to net income expressed as a percentage of total assets?
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19. |
Return on equity is equal to which one of the following?
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20. |
Pro forma financial statements are statements based on which one of the following?
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21. |
Which one of the following is a financial planning method wherein some account values vary in relation to expected sales?
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22. |
Which one of the following ratios tells you the amount of assets a firm needs to generate $1 in sales?
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23. |
Which of the following reports are always included in a 10K filing with the SEC? I. statement of cash flows II. balance sheet III. pro-forma statement IV. income statement
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24. |
Which one of the following means of communication do most firms use for announcements in order to comply with Regulation FD?
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25. |
Which of the following are current assets? I. inventory II. goodwill III. fixed assets IV. cash
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26. |
Which one of the following is an intangible fixed asset?
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27. |
Which one of the following is a tangible fixed asset?
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28. |
Stephen's Auto recently purchased Auto Express for $9.8 million. Auto Express had a market value of $9.5 million at the time of acquisition. The additional $0.3 million that Stephen's Auto paid for Auto Express will be treated on Stephen's Auto's balance sheet as which type of account?
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29. |
Winter's Clothing has a loan payable to a bank which is due 18 months from now. How is this loan classified on the firm's financial statements?
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30. |
Sugar Tree Cookies has current net income of $268,000 of which $110,000 was paid out in dividends. The remaining $158,000 will be shown in which account on the firm's financial statements for next year?
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31. |
Which of the following are classified as equity accounts on a balance sheet? I. goodwill II. paid in capital III. net income IV. retained earnings
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32. |
Sales minus cost of goods sold are equal to which one of the following?
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33. |
The costs of materials used in the production of a product are recorded in which one of the following accounts?
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34. |
Which one of the following is NOT included in operating income?
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35. |
Net income is equal to which one of the following?
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36. |
Which one of the following statements is correct?
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37. |
Which one of the following is the primary difference between operating cash flow and net income?
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38. |
Which one of the following will increase the investment cash flow?
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39. |
Which one of the following is NOT a financing cash flow according to standard accounting practice?
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40. |
The summation of the operating, investment, and financing cash flows for a stated period of time must equal which one of the following for the same time period?
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41. |
A decrease in which one of the following will increase the gross margin?
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42. |
Which one of the following is generally used as the basis for computing the cash flow per share?
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43. |
A decrease in which one of the following will increase the return on assets?
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44. |
Which one of the following will increase the return on equity?
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45. |
Which of the following affect the earnings per share? I. decrease in interest expense II. share repurchase III. increase in tax rates IV. preferred stock dividend
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46. |
Which one of the following statements related to book value per share (BVPS) is correct?
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47. |
Which one of the following accounts is least likely to vary directly with the level of sales?
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48. |
Which one of the following is most apt to be constant given the percentage of sales approach to creating pro forma statements?
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49. |
A firm maintains a constant dividend payout ratio of .40. What must the plowback ratio be?
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50. |
Which one of the following is most apt to vary directly with sales?
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51. |
Which two of the following are generally used to fund the external financing need? I. sale of fixed assets II. increase in accounts payable III. issuance of long-term debt IV. sale of equity securities
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52. |
The management of the Uptown Bikes recently voted to limit any future borrowing or sales of company stock. By taking this action, management has effectively done which one of the following?
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53. |
A firm has $2,500 of cash, equipment worth $45,000, inventory of $16,300, $14,000 worth of patents, and $12,200 of accounts receivable. What is the value of the total current assets?
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54. |
A firm has $4,200 of cash, equipment worth $46,300, inventory of $38,400, a building worth $130,500, and $21,500 of accounts receivable. What is the value of the total fixed assets?
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55. |
Young Industries has a 3-year bank loan of $85,000, a 6-month note payable of $6,000, a $67,300 mortgage, and accounts payable of $22,500. What is the amount of the total current liabilities? (Ignore the current portion of any long-term debt.)
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56. |
ABC Construction, Inc. has buildings and equipment of $315,600, long-term debt of $154,700, accounts payable of $52,000, cash of $9,800, accounts receivable of $18,300, inventory of $62,000, and retained earnings of $147,000. What is the total equity of the firm?
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57. |
GH Enterprises has annual sales of $5.2 million, depreciation of $350,000, operating expenses of $390,000, and cost of goods sold of $3.1 million. What is the gross profit?
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58. |
Behrend Corporation has annual sales of $4.5 million, depreciation of $425,000, operating expenses of $679,000, cost of goods sold of $2.3 million, and interest expense of $230,000. What is the operating income?
|
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59. |
Gold Jewelry, Inc. has annual sales of $4.5 million and a gross profit margin of 55 percent. The operating expenses are $540,750 and depreciation is $170,300. Interest expense is $95,000 and the tax rate is 35 percent. What is the net income?
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60. |
The Cruise Ship Co. has taxable income of $4,000,000. The company paid out $550,000 in interest expense. The tax rate is 35 percent and the dividend payout ratio is 30 percent. What is the amount that was paid out in dividends?
|
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61. |
Handy Man Services, Inc. has net income of $525,000. What is the addition to retained earnings if the dividend payout ratio is 40 percent?
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62. |
HNW Manufacturing, Inc. has 255,000 shares of stock outstanding. The firm paid out $255,000 in dividends, $195,000 in interest, and added $193,700 to retained earnings for the year. What is the amount of the earnings per share?
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63. |
O'Hara's Market has net income of $1.6 million and 525,000 shares of stock outstanding. What is the amount of the dividends per share if the plowback ratio is 60 percent?
|
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64. |
Glassmakers, Inc. purchased $137,600 of new equipment this year and also increased the inventory by $36,800. Thirty-three thousand dollars worth of old equipment was sold. What is the investment cash flow for the year?
|
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65. |
For the year, Widgets Manufacturing, Inc. increased its current accounts by $52,000, decreased its current liabilities by $38,000, and decreased its fixed assets by $31,000. What is the investment cash flow for the year?
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66. |
Healthy Supplements, Inc. paid $7,300 in interest and $4,300 in dividends for the year. The firm also issued $15,000 worth of new equity securities. What is the amount of the financing cash flow?
|
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67. |
Whole Wheat Farms, Inc. has a net income of $20,000 and a dividend payout ratio of 30 percent. The firm issued $12,000 worth of common stock during the period. The firm has no long-term debt. What is the financing cash flow for the period?
|
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68. |
Marley Enterprises has financing cash flow of -$41,400 and investment cash flow of $28,600 for the year. The beginning cash balance was $65,300 and the ending cash balance was $44,800. What was the operating cash flow for the period?
|
|
69. |
A firm has net sales of $35,000, operating expenses of $6,100, depreciation of $1,700, and cost of goods sold of $18,300. What is the gross margin?
|
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70. |
A firm has net sales of $65,000, operating expenses of $21,300, depreciation of $5,000, cost of goods sold of $36,500, and interest expense of $4,500. What is the operating margin?
|
|
71. |
Smith's Corner Market had annual sales of $425,300 and total assets of $366,000. What is the return on assets if the profit margin is 11 percent?
|
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72. |
Wholesale Grocer's has total assets of $580,000 and total liabilities of $375,000. Net sales for the year are $523,000 and the profit margin is 10.5 percent. What is the return on equity?
|
|
73. |
A firm has a price-cash flow ratio of 12.5 and a price-book value ratio of 7.6. If the cash flow per share is $4.67, what is the book value per share?
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74. |
A company has a price-earnings ratio of 23 and a price-cash flow ratio of 11.5. If the earnings per share are $1.75, what is the cash flow per share?
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75. |
Green Recycling, Inc. has 150,000 shares of stock outstanding. The firm has total assets of $568,000 and total liabilities of $415,000. The firm's stock is selling for $31 a share. What is the price-book ratio?
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76. |
A firm has net income of $22,500 and a book value per share of $3.10. The firm has 30,000 shares of stock outstanding and a price-earnings ratio of 15.9. What is the price-book ratio?
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77. |
Children's Books, Inc. has net income of $48,000 and a plowback ratio of 85 percent. There are 25,000 shares of stock outstanding at a market price of $18.64 a share. What is the price-earnings ratio?
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78. |
Bay Marina, Inc. has net income of $53,700 and has 30,000 shares of stock outstanding. Similar firms have a price-earnings ratio of 20. Given this, what should the market price of Bay Marina, Inc. stock be per share?
|
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79. |
A firm has earnings per share of $3.50 and cash flow per share of $3.84. The price-earnings ratio is 24.1. What is the price-cash flow ratio?
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80. |
A company has net income of $65,430, a price-earnings ratio of 22.6, and 25,800 shares of stock outstanding. If the price-cash flow ratio is 20.4, what is the cash flow per share?
|
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81. |
A firm has total equity of $61,600 and total liabilities of $18,900. Current assets are $44,700 and current liabilities are $15,200. What is the value of the net fixed assets?
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82. |
A company has the following account balances. How much cash does the firm have assuming there are no other accounts?
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83. |
The Erie Bay Liner Company has sales of $2.6 million and operating expenses of $175,000. The firm uses the percentage of sales approach and estimates next year's sales at $2.8 million. What are the operating expenses expected to be next year?
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84. |
A firm has sales of $685,000 and cost of goods sold of $435,000. The firm expects sales to increase by 6 percent next year. What is the gross profit amount expected to be next year if the firm uses the percentage of sales approach when compiling pro forma statements?
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85. |
Your company has pretax income of $52,000 on sales of $506,000. Sales are expected to increase by 6 percent next year and the tax rate is 40 percent. What is the expected net income for next year if your firm uses the percentage of sales approach when compiling pro forma statements?
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86. |
A firm has net income of $25,000 on sales of $210,000. Sales are expected to increase by 8 percent next year and the dividend payout ratio is 35 percent. The firm uses the percentage of sales approach when compiling pro forma statements. What amount is expected to be added to retained earnings next year?
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87. |
Last year, a firm had net income of $62,000 on sales of $595,000. The projected sales for next year are $654,500. Assume the firm uses the percentage of sales method for pro forma statements. What is the projected net income?
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88. |
Zonvier, Inc. has sales of $53,800, a profit margin of 10.5 percent, and a plowback ratio of 40 percent. The company has 15,000 shares of stock outstanding. The firm uses the percentage of sales method for pro forma statements and estimates next year's sales will increase by 15 percent. What is the dividend per share expected to be next year?
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89. |
A firm has current sales of $32,000. Projected sales for next year are $35,520. The percentage of sales approach is used for pro forma purposes. All balance sheet accounts, except long-term debt and common stock, change according to that approach. The expected increase in retained earnings is $2,200. What is the projected external financing need given the following current account values?
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90. |
A firm has the following account balances for this year. Sales for the year are $500,000. Projected sales for next year are $545,000. The percentage of sales approach is used for pro forma purposes. All balance sheet accounts, except long-term debt and common stock, change according to that approach. The firm plans to decrease the long-term debt balance by $5,000 next year. Retained earnings is expected to increase by $3,500 next year. What is the projected external financing need?
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91. |
A firm has the following account balances for this year. Sales for the year are $420,000. Projected sales for next year are $441,000. The percentage of sales approach is used for pro forma purposes. All balance sheet accounts, except long-term debt and common stock, change according to that approach. The firm plans to decrease the long-term debt balance by $23,500 next year. Retained earnings is expected to increase by $5,400 next year. What is the projected external financing need?
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92. |
What is the operating cash flow, given the following information?
|
|
93. |
What is the investment cash flow, given the following information?
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|
94. |
What is the financing cash flow, given the following information?
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95. |
What is the operating cash flow, given the following information?
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96. |
What is the investment cash flow?
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97. |
What is the financing cash flow, given the following information?
|
Essay Questions
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98. |
Explain the role the external financing need plays in the future growth outlook for a firm.
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99. |
Why is the expected rate of sales growth so critical to pro forma statements?
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100. |
What value does the Statement of Cash Flows add to the financial statements of a firm?
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Chapter 17 Projecting Cash Flow and Earnings Answer Key
Multiple Choice Questions
|
1. |
You are interested in reviewing the information corporations file with the SEC. Which one of the following is the archive of these filings?
See Section 17.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-01 How to obtain financial information about companies. Level of Difficulty: 1 Easy Section: 17.1 Topic: EDGAR |
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2. |
How frequently do corporations file 10K reports with the SEC?
See Section 17.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-01 How to obtain financial information about companies. Level of Difficulty: 1 Easy Section: 17.1 Topic: 10K |
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3. |
Better Products just filed its quarterly report with the SEC. This report is referred to as which one of the following?
See Section 17.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-01 How to obtain financial information about companies. Level of Difficulty: 1 Easy Section: 17.1 Topic: 10K |
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4. |
Regulation FD requires companies to do which one of the following when disclosing material non-public information?
See Section 17.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-01 How to obtain financial information about companies. Level of Difficulty: 1 Easy Section: 17.1 Topic: Regulation FD |
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5. |
Material nonpublic information is defined as any information that could reasonably be expected to do which one of the following?
See Section 17.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-01 How to obtain financial information about companies. Level of Difficulty: 1 Easy Section: 17.1 Topic: Material Nonpublic Information |
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6. |
Which one of the following provides information on a firm's assets and liabilities as of a particular date?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Balance Sheet |
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7. |
Which one of the following is an accounting statement that provides information on a firm's revenues and expenses?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Income Statement |
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8. |
Which one of the following is an analysis of a firm's sources and uses of cash over a period of time?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Cash Flow Statement |
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9. |
Which one of the following is defined as anything a firm owns that has value?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Asset |
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10. |
Which one of the following represents the amounts owed by a firm to other parties?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Liability |
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11. |
Which one of the following is an ownership interest in a firm?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Equity |
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12. |
Which one of the following is used to pay dividends or kept as retained earnings by a firm?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Net Income |
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13. |
Which one of the following is income realized in cash form?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Cash Flows |
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14. |
Income and expense items NOT realized in cash form are called which one of the following?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Noncash Items |
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15. |
Which one of the following is the definition of operating cash flow?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Operating Cash Flow |
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16. |
Which one of the following is the definition of investment cash flow?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Investment Cash Flow |
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17. |
Which one of the following is the cash flow resulting from the payment of dividends and the issuance or repurchase of equity securities?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Financing Cash Flow |
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18. |
Which one of the following is equal to net income expressed as a percentage of total assets?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 1 Easy Section: 17.2 Topic: Return on Assets |
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19. |
Return on equity is equal to which one of the following?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 1 Easy Section: 17.2 Topic: Return on Equity |
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20. |
Pro forma financial statements are statements based on which one of the following?
See Section 17.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 1 Easy Section: 17.3 Topic: Pro Forma Financial Statements |
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21. |
Which one of the following is a financial planning method wherein some account values vary in relation to expected sales?
See Section 17.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 1 Easy Section: 17.3 Topic: Percentage of Sales Approach |
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22. |
Which one of the following ratios tells you the amount of assets a firm needs to generate $1 in sales?
See Section 17.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 1 Easy Section: 17.3 Topic: Capital Intensity Ratio |
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23. |
Which of the following reports are always included in a 10K filing with the SEC? I. statement of cash flows II. balance sheet III. pro-forma statement IV. income statement
See Section 17.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-01 How to obtain financial information about companies. Level of Difficulty: 1 Easy Section: 17.1 Topic: Information Sources |
|
24. |
Which one of the following means of communication do most firms use for announcements in order to comply with Regulation FD?
See Section 17.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-01 How to obtain financial information about companies. Level of Difficulty: 1 Easy Section: 17.1 Topic: Regulation FD |
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25. |
Which of the following are current assets? I. inventory II. goodwill III. fixed assets IV. cash
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Current Assets |
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26. |
Which one of the following is an intangible fixed asset?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Intangible Fixed Asset |
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27. |
Which one of the following is a tangible fixed asset?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Fixed Assets |
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28. |
Stephen's Auto recently purchased Auto Express for $9.8 million. Auto Express had a market value of $9.5 million at the time of acquisition. The additional $0.3 million that Stephen's Auto paid for Auto Express will be treated on Stephen's Auto's balance sheet as which type of account?
See Section 17.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Goodwill |
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29. |
Winter's Clothing has a loan payable to a bank which is due 18 months from now. How is this loan classified on the firm's financial statements?
See Section 17.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Current Liability |
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30. |
Sugar Tree Cookies has current net income of $268,000 of which $110,000 was paid out in dividends. The remaining $158,000 will be shown in which account on the firm's financial statements for next year?
See Section 17.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Retained Earnings |
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31. |
Which of the following are classified as equity accounts on a balance sheet? I. goodwill II. paid in capital III. net income IV. retained earnings
See Section 17.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Equity Accounts |
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32. |
Sales minus cost of goods sold are equal to which one of the following?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Gross Profit |
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33. |
The costs of materials used in the production of a product are recorded in which one of the following accounts?
See Section 17.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Cost of Goods Sold |
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34. |
Which one of the following is NOT included in operating income?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Operating Income |
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35. |
Net income is equal to which one of the following?
See Section 17.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Net Income |
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36. |
Which one of the following statements is correct?
See Section 17.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Operating Expenses |
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37. |
Which one of the following is the primary difference between operating cash flow and net income?
See Section 17.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Operating Cash Flow |
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38. |
Which one of the following will increase the investment cash flow?
See Section 17.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Investment Cash Flow |
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39. |
Which one of the following is NOT a financing cash flow according to standard accounting practice?
See Section 17.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Financing Cash Flow |
|
40. |
The summation of the operating, investment, and financing cash flows for a stated period of time must equal which one of the following for the same time period?
See Section 17.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Cash Flows |
|
41. |
A decrease in which one of the following will increase the gross margin?
See Section 17.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 1 Easy Section: 17.2 Topic: Gross Margin |
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42. |
Which one of the following is generally used as the basis for computing the cash flow per share?
See Section 17.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 1 Easy Section: 17.2 Topic: Cash Flow Per Share |
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43. |
A decrease in which one of the following will increase the return on assets?
See Section 17.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 1 Easy Section: 17.2 Topic: Return on Assets |
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44. |
Which one of the following will increase the return on equity?
See Section 17.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 1 Easy Section: 17.2 Topic: Return on Equity |
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45. |
Which of the following affect the earnings per share? I. decrease in interest expense II. share repurchase III. increase in tax rates IV. preferred stock dividend
See Section 17.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 1 Easy Section: 17.2 Topic: Earnings Per Share |
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46. |
Which one of the following statements related to book value per share (BVPS) is correct?
See Section 17.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 2 Medium Section: 17.2 Topic: Book Value Per Share |
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47. |
Which one of the following accounts is least likely to vary directly with the level of sales?
See Section 17.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 1 Easy Section: 17.3 Topic: Percentage of Sales Approach |
|
48. |
Which one of the following is most apt to be constant given the percentage of sales approach to creating pro forma statements?
See Section 17.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 1 Easy Section: 17.3 Topic: Percentage of Sales Approach |
|
49. |
A firm maintains a constant dividend payout ratio of .40. What must the plowback ratio be?
See Section 17.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 1 Easy Section: 17.3 Topic: Plowback Ratio |
|
50. |
Which one of the following is most apt to vary directly with sales?
See Section 17.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 1 Easy Section: 17.3 Topic: Percentage of Sales |
|
51. |
Which two of the following are generally used to fund the external financing need? I. sale of fixed assets II. increase in accounts payable III. issuance of long-term debt IV. sale of equity securities
See Section 17.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 1 Easy Section: 17.3 Topic: External Financing Need |
|
52. |
The management of the Uptown Bikes recently voted to limit any future borrowing or sales of company stock. By taking this action, management has effectively done which one of the following?
See Section 17.3 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 1 Easy Section: 17.3 Topic: External Financing Need |
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53. |
A firm has $2,500 of cash, equipment worth $45,000, inventory of $16,300, $14,000 worth of patents, and $12,200 of accounts receivable. What is the value of the total current assets?
Total current assets = $2,500 + $16,300 + $12,200 = $31,000 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Total Current Assets |
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54. |
A firm has $4,200 of cash, equipment worth $46,300, inventory of $38,400, a building worth $130,500, and $21,500 of accounts receivable. What is the value of the total fixed assets?
Total fixed assets = $46,300 + $130,500 = $176,800 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Total Fixed Assets |
|
55. |
Young Industries has a 3-year bank loan of $85,000, a 6-month note payable of $6,000, a $67,300 mortgage, and accounts payable of $22,500. What is the amount of the total current liabilities? (Ignore the current portion of any long-term debt.)
Total current liabilities = $6,000 + $22,500 = $28,500 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Total Current Liabilities |
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56. |
ABC Construction, Inc. has buildings and equipment of $315,600, long-term debt of $154,700, accounts payable of $52,000, cash of $9,800, accounts receivable of $18,300, inventory of $62,000, and retained earnings of $147,000. What is the total equity of the firm?
Total assets = $325,600 + $11,000 + $26,000 + $65,000 = $427,600 Total liabilities = $144,600 + $55,000 = $199,600 Total equity = $427,600 - $199,600 = $228,000 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Total Equity |
|
57. |
GH Enterprises has annual sales of $5.2 million, depreciation of $350,000, operating expenses of $390,000, and cost of goods sold of $3.1 million. What is the gross profit?
Gross profit = $5,200,000 - $3,100,000 = $2,100,000 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Gross Profit |
|
58. |
Behrend Corporation has annual sales of $4.5 million, depreciation of $425,000, operating expenses of $679,000, cost of goods sold of $2.3 million, and interest expense of $230,000. What is the operating income?
Operating income = $4,500,000 - $425,000 - $679,000 - $2,300,000 = $1,096,000 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Operating Income |
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59. |
Gold Jewelry, Inc. has annual sales of $4.5 million and a gross profit margin of 55 percent. The operating expenses are $540,750 and depreciation is $170,300. Interest expense is $95,000 and the tax rate is 35 percent. What is the net income?
Net income = [($4,500,000 × .55) - $540,750 - $170,300 - $95,000] × (1 - .35) = $1,084,818 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Net Income |
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60. |
The Cruise Ship Co. has taxable income of $4,000,000. The company paid out $550,000 in interest expense. The tax rate is 35 percent and the dividend payout ratio is 30 percent. What is the amount that was paid out in dividends?
Dividends = $3,500,000 × (1 - .35) × .30 = $682,500 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Dividends |
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61. |
Handy Man Services, Inc. has net income of $525,000. What is the addition to retained earnings if the dividend payout ratio is 40 percent?
Addition to retained earnings = $525,000 × (1 - .40) = $315,000 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Addition to Retained Earnings |
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62. |
HNW Manufacturing, Inc. has 255,000 shares of stock outstanding. The firm paid out $255,000 in dividends, $195,000 in interest, and added $193,700 to retained earnings for the year. What is the amount of the earnings per share?
Earnings per share = ($255,000 + $193,700)/255,000 = $1.76 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 1 Easy Section: 17.2 Topic: Earnings Per Share |
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63. |
O'Hara's Market has net income of $1.6 million and 525,000 shares of stock outstanding. What is the amount of the dividends per share if the plowback ratio is 60 percent?
Dividends per share = [$1,600,000 × (1 - .60)]/525,000 = $1.22 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 1 Easy Section: 17.2 Topic: Dividends per Share |
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64. |
Glassmakers, Inc. purchased $137,600 of new equipment this year and also increased the inventory by $36,800. Thirty-three thousand dollars worth of old equipment was sold. What is the investment cash flow for the year?
Investment cash flow = -$137,600 + $33,000 = -$104,600 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 1 Easy Section: 17.2 Topic: Investment Cash Flow |
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65. |
For the year, Widgets Manufacturing, Inc. increased its current accounts by $52,000, decreased its current liabilities by $38,000, and decreased its fixed assets by $31,000. What is the investment cash flow for the year?
Investment cash flow = $31,000 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Investment Cash Flow |
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66. |
Healthy Supplements, Inc. paid $7,300 in interest and $4,300 in dividends for the year. The firm also issued $15,000 worth of new equity securities. What is the amount of the financing cash flow?
Financing cash flow = - $7,300 + $15,000 = $10,700 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Financing Cash Flow |
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67. |
Whole Wheat Farms, Inc. has a net income of $20,000 and a dividend payout ratio of 30 percent. The firm issued $12,000 worth of common stock during the period. The firm has no long-term debt. What is the financing cash flow for the period?
Financing cash flow = ($20,000 × .30 × -1) + $12,000 = $6,000 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Financing Cash Flow |
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68. |
Marley Enterprises has financing cash flow of -$41,400 and investment cash flow of $28,600 for the year. The beginning cash balance was $65,300 and the ending cash balance was $44,800. What was the operating cash flow for the period?
Operating cash flow = ($44,800 - $65,300) - (-$41,400) - $28,600 = -$7,700 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Operating Cash Flow |
|
69. |
A firm has net sales of $35,000, operating expenses of $6,100, depreciation of $1,700, and cost of goods sold of $18,300. What is the gross margin?
Gross margin percentage = ($35,000 - $18,300)/$35,000 = 47.7 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 1 Easy Section: 17.2 Topic: Gross Margin |
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70. |
A firm has net sales of $65,000, operating expenses of $21,300, depreciation of $5,000, cost of goods sold of $36,500, and interest expense of $4,500. What is the operating margin?
Operating margin = ($65,000 - $21,300 - $5,000 - $36,500)/$65,000 = 3.4 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 1 Easy Section: 17.2 Topic: Operating Margin |
|
71. |
Smith's Corner Market had annual sales of $425,300 and total assets of $366,000. What is the return on assets if the profit margin is 11 percent?
Return on assets = (.11 × $425,300)/$366,000 = 12.8 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 1 Easy Section: 17.2 Topic: Return on Assets |
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72. |
Wholesale Grocer's has total assets of $580,000 and total liabilities of $375,000. Net sales for the year are $523,000 and the profit margin is 10.5 percent. What is the return on equity?
Return on equity = (.105 × $523,000)/($580,000 - $375,000) = 26.8 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 1 Easy Section: 17.2 Topic: Return on Equity |
|
73. |
A firm has a price-cash flow ratio of 12.5 and a price-book value ratio of 7.6. If the cash flow per share is $4.67, what is the book value per share?
Price = $4.67 × 12.5 = $58.375 BVPS = $58.375/7.6 = $7.68 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 2 Medium Section: 17.2 Topic: Book Value Per Share |
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74. |
A company has a price-earnings ratio of 23 and a price-cash flow ratio of 11.5. If the earnings per share are $1.75, what is the cash flow per share?
Price = $1.75 × 23 = $40.25 CFPS = $40.25/11.5 = $3.50 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 2 Medium Section: 17.2 Topic: Cash Flow Per Share |
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75. |
Green Recycling, Inc. has 150,000 shares of stock outstanding. The firm has total assets of $568,000 and total liabilities of $415,000. The firm's stock is selling for $31 a share. What is the price-book ratio?
BVPS = ($568,000 - $415,000)/150,000 = $1.02 Price-book ratio = $31/$1.02 = 30.4 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 2 Medium Section: 17.2 Topic: Price-Book Ratio |
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76. |
A firm has net income of $22,500 and a book value per share of $3.10. The firm has 30,000 shares of stock outstanding and a price-earnings ratio of 15.9. What is the price-book ratio?
Price = ($22,500/30,000) × 15.9 = $11.93 Price-book ratio = $11.93/$3.10 = 3.8 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 2 Medium Section: 17.2 Topic: Price-Book Ratio |
|
77. |
Children's Books, Inc. has net income of $48,000 and a plowback ratio of 85 percent. There are 25,000 shares of stock outstanding at a market price of $18.64 a share. What is the price-earnings ratio?
Price-earnings ratio = $18.64/($48,000/25,000) = 9.7 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 2 Medium Section: 17.2 Topic: Price-Earnings Ratio |
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78. |
Bay Marina, Inc. has net income of $53,700 and has 30,000 shares of stock outstanding. Similar firms have a price-earnings ratio of 20. Given this, what should the market price of Bay Marina, Inc. stock be per share?
Price = ($53,700/30,000) × 20 = $35.80 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 2 Medium Section: 17.2 Topic: Price-Earnings Ratio |
|
79. |
A firm has earnings per share of $3.50 and cash flow per share of $3.84. The price-earnings ratio is 24.1. What is the price-cash flow ratio?
Price = $3.50 × 24.1 = $84.35 Price-cash flow ratio = $84.35/$3.84 = 22.0 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 2 Medium Section: 17.2 Topic: Price-Cash Flow Ratio |
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80. |
A company has net income of $65,430, a price-earnings ratio of 22.6, and 25,800 shares of stock outstanding. If the price-cash flow ratio is 20.4, what is the cash flow per share?
Price = ($65,430/25,800) × 22.6 = $57.3147 Cash flow per share = $57.3147/20.4 = $2.81 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-03 How to use performance and price ratios. Level of Difficulty: 2 Medium Section: 17.2 Topic: Price-Cash Flow Ratio |
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81. |
A firm has total equity of $61,600 and total liabilities of $18,900. Current assets are $44,700 and current liabilities are $15,200. What is the value of the net fixed assets?
Net fixed assets = ($61,600 + $18,900) - $44,700 = $35,800 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Balance Sheet Identity |
|
82. |
A company has the following account balances. How much cash does the firm have assuming there are no other accounts?
Cash = ($98,800 + $19,100 + $34,000) - ($22,500 + $20,200 + $78,300) = $30,900 |
|
Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 1 Easy Section: 17.2 Topic: Balance Sheet Identity |
|
83. |
The Erie Bay Liner Company has sales of $2.6 million and operating expenses of $175,000. The firm uses the percentage of sales approach and estimates next year's sales at $2.8 million. What are the operating expenses expected to be next year?
Next year's operating expenses = ($175,000/$2,600,000) × $2,800,000 = $188,462 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 2 Medium Section: 17.3 Topic: Percentage of Sales Approach |
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84. |
A firm has sales of $685,000 and cost of goods sold of $435,000. The firm expects sales to increase by 6 percent next year. What is the gross profit amount expected to be next year if the firm uses the percentage of sales approach when compiling pro forma statements?
Pro forma gross profit = ($685,000 - $435,000) × (1 + .06) = $265,000 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 2 Medium Section: 17.3 Topic: Percentage of Sales Approach |
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85. |
Your company has pretax income of $52,000 on sales of $506,000. Sales are expected to increase by 6 percent next year and the tax rate is 40 percent. What is the expected net income for next year if your firm uses the percentage of sales approach when compiling pro forma statements?
Pro forma net income = $52,000 × (1 + .06) × (1 - .40) = $33,072 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 2 Medium Section: 17.3 Topic: Percentage of Sales Approach |
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86. |
A firm has net income of $25,000 on sales of $210,000. Sales are expected to increase by 8 percent next year and the dividend payout ratio is 35 percent. The firm uses the percentage of sales approach when compiling pro forma statements. What amount is expected to be added to retained earnings next year?
Addition to retained earnings = $25,000 × (1 + .08) × (1 - .35) = $17,550 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 2 Medium Section: 17.3 Topic: Percentage of Sales Approach |
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87. |
Last year, a firm had net income of $62,000 on sales of $595,000. The projected sales for next year are $654,500. Assume the firm uses the percentage of sales method for pro forma statements. What is the projected net income?
Percentage increase in sales = ($654,500 - $595,000)/$595,000 = .10 Pro forma net income = $62,000 × (1 + .10) = $68,200 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 1 Easy Section: 17.3 Topic: Percentage of Sales Approach |
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88. |
Zonvier, Inc. has sales of $53,800, a profit margin of 10.5 percent, and a plowback ratio of 40 percent. The company has 15,000 shares of stock outstanding. The firm uses the percentage of sales method for pro forma statements and estimates next year's sales will increase by 15 percent. What is the dividend per share expected to be next year?
Pro forma dividend per share = [$53,800 × (1 + .15) × .105 × (1 - .40)]/15,000 = $0.260 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 2 Medium Section: 17.3 Topic: Percentage of Sales Approach |
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89. |
A firm has current sales of $32,000. Projected sales for next year are $35,520. The percentage of sales approach is used for pro forma purposes. All balance sheet accounts, except long-term debt and common stock, change according to that approach. The expected increase in retained earnings is $2,200. What is the projected external financing need given the following current account values?
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Blooms: Apply Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 2 Medium Section: 17.3 Topic: External Financing Need |
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90. |
A firm has the following account balances for this year. Sales for the year are $500,000. Projected sales for next year are $545,000. The percentage of sales approach is used for pro forma purposes. All balance sheet accounts, except long-term debt and common stock, change according to that approach. The firm plans to decrease the long-term debt balance by $5,000 next year. Retained earnings is expected to increase by $3,500 next year. What is the projected external financing need?
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Blooms: Apply Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 2 Medium Section: 17.3 Topic: External Financing Need |
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91. |
A firm has the following account balances for this year. Sales for the year are $420,000. Projected sales for next year are $441,000. The percentage of sales approach is used for pro forma purposes. All balance sheet accounts, except long-term debt and common stock, change according to that approach. The firm plans to decrease the long-term debt balance by $23,500 next year. Retained earnings is expected to increase by $5,400 next year. What is the projected external financing need?
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Blooms: Apply Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 2 Medium Section: 17.3 Topic: External Financing Need |
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92. |
What is the operating cash flow, given the following information?
Operating cash flow = $550 + $60 = $610 |
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Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 2 Medium Section: 17.2 Topic: Operating Cash Flow |
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93. |
What is the investment cash flow, given the following information?
Investment cash flow = $40 - $60 = -$20 |
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Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 2 Medium Section: 17.2 Topic: Investment Cash Flow |
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94. |
What is the financing cash flow, given the following information?
Financing cash flow = $25 - $30 - $70 = -$75 |
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Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 2 Medium Section: 17.2 Topic: Financing Cash Flow |
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95. |
What is the operating cash flow, given the following information?
Operating cash flow = $800 + $130 = $930 |
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Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 2 Medium Section: 17.2 Topic: Operating Cash Flow |
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96. |
What is the investment cash flow?
Investment cash flow = $45 - $65 = -$20 |
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Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 2 Medium Section: 17.2 Topic: Investment Cash Flow |
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97. |
What is the financing cash flow, given the following information?
Financing cash flow = $60 - $80 - $30 = -$50 |
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Blooms: Apply Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 2 Medium Section: 17.2 Topic: Financing Cash Flow |
Essay Questions
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98. |
Explain the role the external financing need plays in the future growth outlook for a firm. Answer will vary Feedback: The external financing need is the difference between the expected total assets and the expected total liabilities and equity. If this need is positive, external funding must be raised through external debt and/or equity financing. If the financing is not available, or not acceptable to management, then the projected sales growth of the firm is unattainable. If the external financing need is negative, then the firm will be able to increase its dividend, reduce its debt, or grow at a faster rate. |
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Blooms: Understand Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 2 Medium Section: 17.3 Topic: External Financing Need |
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99. |
Why is the expected rate of sales growth so critical to pro forma statements? Answer will vary Feedback: Sales is the starting point for the percentage of sales approach (as well as other approaches) to creating pro forma statements. Most expenses as well as the net working capital accounts tend to vary in direct relation to sales. If the sales estimate is unreliable, then the pro forma statements are also unreliable. |
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Blooms: Understand Learning Objective: 17-04 How to use the percentage of sales method in financial forecasting. Level of Difficulty: 2 Medium Section: 17.3 Topic: Percentage of Sales Approach |
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100. |
What value does the Statement of Cash Flows add to the financial statements of a firm? Answer will vary Feedback: The balance sheet and income statement are compiled according to Generally Accepted Accounting Principles (GAAP) and do not reveal the actual receipt and disbursement of cash. The Statement of Cash Flows shows the cash flows by category - operating, investment, and financing. This allows management to determine if a firm is generating sufficient income to meet its needs without accessing external funds. Firms do not go bankrupt because they have negative net income; they go bankrupt because they have no cash. |
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Blooms: Understand Learning Objective: 17-02 How to read basic financial statements. Level of Difficulty: 2 Medium Section: 17.2 Topic: Cash Flows |
Chapter 18
Corporate and Government Bonds
Multiple Choice Questions
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1. |
Which one of the following best defines a plain vanilla bond?
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2. |
Which one of the following terms is defined as debt issued without specific collateral pledged as security?
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3. |
Which one of the following is an unsecured bond issued by a corporation?
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4. |
Which one of the following is the portion of a prospectus that outlines the contractual terms of a new bond issue?
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5. |
What is the document called that is distributed to potential bondholders and provides detailed information on the financial position and operations of the bond issuer?
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6. |
Which one of the following is an unsecured bond that has a higher claim on a firm's assets than other unsecured bonds?
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7. |
During a bankruptcy proceeding, Bond A will be paid only if funds remain after the bonds that have a higher claim on the issuer's assets have been paid. What type of bond is Bond A?
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8. |
Which one of the following is the clause which prevents a bond issuer from issuing new debt that has seniority over current debt?
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9. |
Which one of the following accurately describes bond refunding?
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10. |
Which one of the following provisions grants the bondholder the option of selling the bond back to the issuer at a prespecified price on prespecified dates?
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11. |
Which one of the following provisions grants the bondholder the option of exchanging a bond for a prespecified number of shares of stock of the same issuer?
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12. |
Which one of the following defines an in-the-money bond?
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13. |
Which one of the following terms is given to the value of a convertible bond that would equate to the value of a comparable nonconvertible bond?
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14. |
What is a bond called if it can be converted into shares of stock of a firm other than the bond issuer?
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15. |
Term bonds are defined as all bonds in a bond issue having which one of the following characteristics?
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16. |
Bonds issued with a regular sequence of maturity dates are called which one of the following?
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17. |
Which one of the following is an account used to provide for scheduled redemptions of outstanding bonds?
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18. |
What are the various provisions within a bond indenture that are designed to protect bondholders by restricting the actions of the issuer called?
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19. |
Which one of the following identifies a new bond issue as being a private placement?
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20. |
Adjustable-rate bonds are identified by which one of the following characteristics?
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21. |
Which one of the following is an assessment of the credit quality of a bond based on the financial condition of the bond issuer?
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22. |
What are the restrictions on investment portfolios that require that all securities held within the portfolio meet a specified level of safety called?
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23. |
Bonds with relatively high coupons due to their speculative credit ratings are called which one of the following?
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24. |
Which of the following are common characteristics associated with corporate bonds? I. specified cash flows II. equity ownership III. call feature IV. set maturity date
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25. |
Which one of the following parties is the largest holder of U.S. corporate bonds?
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26. |
Which one of the following features of corporate bonds has the greatest appeal to pension fund investors?
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27. |
A pension fund purchases bonds so that the payments from the bonds provide sufficient cash inflow in a timely manner to offset the cash outflows from the pension fund. What is this investment strategy called?
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28. |
Which of the following features would you expect a plain vanilla bond to have? I. semi-annual coupon payments II. $1,000 face value III. stated maturity date IV. multiple bonds within one issue
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29. |
The entire formal contract between a bond issuer and the bondholders is found in which one of the following documents?
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30. |
Which one of the following statements related to callable bonds is correct?
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31. |
How much will you be paid if you own a bond that is called under a make-whole call provision?
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32. |
After the call protection period, which one of the following basically serves as the upper price limit on a callable bond?
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33. |
Which one of the following statements related to a put bond is correct?
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34. |
Which one of the following statements related to convertible bonds is correct?
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35. |
Which one of the following statements related to convertible bonds is correct?
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36. |
Which one of these statements regarding corporate bond credit ratings is correct?
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37. |
Which one of the following is another name for a junk bond?
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38. |
What is the method of selling Treasury bills at less than face value called?
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39. |
What is the interest on a Treasury bill called when it is determined by the size of the bill's discount from face value?
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40. |
Which one of the following is the Treasury program allowing interest and principal payments from Treasury notes or bonds to be sold separately?
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41. |
Which one of the following descriptors is used to identify a bond that pays one single payment at maturity?
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42. |
Which one of the following is the difference between the price a bond dealer is willing to pay to buy and the price at which he or she is willing to sell?
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43. |
What is the lowest accepted competitive bid in a U.S. Treasury auction called?
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44. |
Which one of the following is the risk that a bond issuer will cease paying the interest and principal payments as scheduled?
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45. |
Municipal bonds that are secured by the full faith and credit of the issuer are referred to as which one of the following?
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46. |
Which one of the following is a municipal bond that is secured by the income collected from a specific project?
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47. |
Which one of the following is a municipal bond that is secured by both the revenues from a project and also by the taxing authority of the municipality?
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48. |
Which one of the following is a taxable municipal bond used to finance a facility used by a private business?
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49. |
Which of the following features apply to T-bills? I. original maturities of 4, 13, or 26 weeks II. minimum face value of $10,000 III. sold at a discount IV. semiannual interest payments
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50. |
Which one of the following statements applies to U.S. Treasury bonds?
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51. |
You just purchased a 5-year STRIPS security that was created from a 30-year T-bond. How many payments will you receive?
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52. |
Which one of the following statements related to TIPS is correct assuming an inflationary environment?
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53. |
Which of the following statements correctly apply to TIPS? I. They are quoted as a percentage of the current accrued principal. II. They pay a variable interest rate that responds to movements in the inflation rate. III. They are backed by the full faith and credit of the U.S. government. IV. They adjust for inflation on an annual basis.
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54. |
Which one of the following applies to U.S. Treasury auctions?
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55. |
What price will a noncompetitive bidder pay for a security being purchased through a U.S. Treasury auction?
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56. |
U.S. government agency bonds pay interest which is subject to which of the following taxes?
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57. |
Kathy lives in State A and owns a municipal bond issued by State B. The interest earned on this bond is most apt to be exempt from taxation at which of the following levels?
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58. |
Which one of the following generally applies to municipal bonds?
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59. |
A moral obligation bond is which type of a bond?
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60. |
Which of the following uses of proceeds from private activity bonds will most likely qualify those bonds as federally tax-exempt? I. public airport runway II. baseball stadium III. multifamily housing project IV. mass rail transit
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61. |
A bond that is currently selling for $933.38 has a conversion price of $40.00. If the par value is $1,000, what is the conversion ratio?
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62. |
A bond has a par value of $1,000 and a market value of $833.40. The conversion price is $45.45. What is the conversion ratio?
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63. |
A bond has a conversion price of $47.62, a par value of $1,000, and a market price of $833.40. What is the conversion ratio?
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64. |
What is the conversion ratio of a $1,000 par value bond that is selling for $888.96 and has a conversion price of $58.82?
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65. |
A convertible bond has a par value of $1,000 and a market price of $1,116.76. If the conversion ratio is 19, what is the conversion price?
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66. |
A convertible bond has a par value of $1,000, a market value of $875, and a conversion ratio of 14. What is the conversion price?
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67. |
A bond is currently priced at $1,076.88 and has a par value of $1,000. If the conversion ratio is 25, what is the conversion price?
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68. |
A bond has a conversion ratio of 24 and a market price of $1,080. If the par value is $1,000, what is the conversion price?
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69. |
A bond has a conversion ratio of 22, a $1,000 par value, and a market price of $1,038. The stock is selling for $46.14. What is the conversion value?
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70. |
A $1,000 par value bond has a market price of $986 and a conversion ratio of 15. The stock is selling for $60.74. What is the conversion value?
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71. |
A bond has a par value of $1,000 and a market price of $1,087.20. The conversion price is $40 and the stock price is $41.75. What is the conversion value?
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72. |
A 4.5 percent, semi-annual coupon bond has a face value of $1,000 and a time to maturity of 4 years. The bonds are convertible into shares of common stock at a conversion price of $42.50. The stock price currently is $40.70. Similar, non-convertible bonds have a yield to maturity of 4.5 percent. The intrinsic value of this bond is _____ and the conversion value is _____.
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73. |
A semi-annual coupon bond has a 6.5 percent coupon rate, a $1,000 face value, a current value of $1,054.54, and 4 years until the first call date. What is the call price if the yield to call is 6.7 percent?
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74. |
A bond has 6 years until it can be called, a 7 percent coupon, and a $1,000 face value. The bond has a market value of $1,031.90 and a yield to call of 7.35 percent. What is the call premium?
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75. |
A bond has a face value of $1,000 and a call price of $1,030. The bond is callable in 3.5 years and pays a 5 percent, semi-annual coupon. What is the current price if the yield to call is 6 percent?
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76. |
You own a bond that has a face value of $1,000 and a conversion ratio of 26. You have just received notification that the bond is being called at a premium of $40. The stock price is $41.20 a share. You should _____ your bond because the conversion value is _____.
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77. |
Slater Mines just called its outstanding bonds at a call price of $1,025. The bonds have a conversion price of $33.33 and a par value of $1,000. The stock price is currently $33.10. In response to this call, the bondholders should _____ because _____.
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78. |
A Treasury bond has a face value of $25,000 and a quoted price of 102:20. What is the bond's dollar price?
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79. |
A Treasury bond has a quoted bid price of 100:10 and a quoted ask price of 100:11. What is the amount you will receive if you sell your bond that has a par value of $20,000?
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80. |
A Treasury bond has a yield to maturity of 5.2 percent, a time to maturity of 8 years, and a coupon rate of 7 percent. What is the bond price?
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81. |
A Treasury bond has a dollar price of $1,015.63. What would you expect the bond quote to be?
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82. |
A Treasury note has 3.5 years left to maturity, a yield to maturity of 4.25 percent, and a coupon rate of 4.40 percent. What is the price of the bond?
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83. |
A Treasury bond matures in 13 years, has a 5.25 percent coupon, and a quoted price of 98:01. What is the yield to maturity?
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84. |
A Treasury bond has a 3.4 percent coupon, a quoted price of 101:06, and 9 years to maturity. What is the yield to maturity?
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85. |
A STRIPS matures in 6 years, has a face value of $17,000, and has a yield to maturity of 4.8 percent. What is the price?
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86. |
A STRIPS has a yield to maturity of 6.2 percent, a par value of $25,000, and a time to maturity of 10 years. What is the price?
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87. |
A STRIPS has a $9,000 par value and a market value of $7,050. The time to maturity is 5 years. What is the yield to maturity?
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88. |
A STRIPS that matures in 8 years is selling for $11,490. The par value is $15,000. What is the yield to maturity?
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89. |
You own a principal STRIPS which is based on a 4.5 percent coupon Treasury bond that matures in 20 years. The STRIPS is priced at $22,868 and has a par value of $50,000. What is the yield to maturity on the STRIPS?
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90. |
The Federal Reserve is offering Treasury bills with a par value of $25 billion for sale. They have received $7 billion of noncompetitive bids. The competitive bids for a $10,000 par value bond are: (Qty in billions)
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91. |
The Federal Reserve is offering Treasury bills with a par value of $30 billion for sale. They have received $11 billion of noncompetitive bids. The competitive bids for a $10,000 par value bond are:
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92. |
The Federal Reserve is offering Treasury bills with a par value of $10 billion for sale. They have received $3 billion of noncompetitive bids. The competitive bids for a $10,000 par value bond are: (Qty in billions)
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93. |
A municipal bond is yielding 4.8 percent. Jeremy has a marginal tax rate of 24 percent. What is his equivalent taxable yield?
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94. |
You have a marginal tax rate of 32 percent and an average tax rate of 28 percent. Municipal bonds in your area are yielding 4.25 percent. What is your equivalent taxable yield?
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95. |
Municipal bonds are yielding 4.8 percent currently. Alicia has a marginal tax rate of 35 percent and Yvonne has a marginal tax rate of 22 percent. Alicia's equivalent taxable yield is _____ percent and Yvonne's is _____ percent.
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96. |
Municipal bonds are yielding 4.4 percent if they are insured and 4.7 percent if they are uninsured. Your marginal tax rate is 28 percent. Your equivalent taxable yield on the insured bonds is _____ percent and on the uninsured bonds is _____ percent.
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97. |
You own a corporate bond which is yielding 8.2 percent. What is your after-tax yield if your marginal tax rate is 28 percent?
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98. |
Laura has an average tax rate of 22 percent and a marginal tax rate of 28 percent. What is her after-tax yield on a corporate bond which has a 6.7 percent yield?
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99. |
Jeff owns a taxable bond portfolio which is yielding 8.76 percent. His after-tax yield is 6.57 percent. What is his marginal tax rate?
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100. |
A corporate bond is yielding 6.8 percent and a municipal bond is yielding 4.75 percent. What is the critical marginal tax rate?
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101. |
Sonya has a marginal tax rate of 36 percent. A corporate bond is yielding 7.4 percent and a municipal bond is yielding 3.6 percent. Sonya should invest in the _____ bond because the critical marginal tax rate is _____ percent.
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102. |
Lester is considering a municipal bond yielding 5.5 percent and a corporate bond yielding 8.2 percent. His marginal tax rate is 28 percent. He should invest in the _____ bond because the critical marginal tax rate is _____ percent.
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103. |
A $5,000 face value municipal bond matures in 14 years and is priced at $4,862. The coupon rate is 4.5 percent with interest paid semiannually. What is the yield to maturity on the bond?
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104. |
A $5,000 face value municipal bond matures in 6 years and has a market value of $5,110. The coupon rate is 3.5 percent with interest paid semiannually. What is the yield to maturity?
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Essay Questions
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105. |
Explain how the imputed interest is computed on a U.S. Treasury bill.
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106. |
What is the advantage of purchasing a STRIPS over a Treasury note?
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107. |
Why would an investor prefer a TIPS which offers a lower coupon rate over a comparable T-note with a higher coupon rate?
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108. |
How is the minimal value for a convertible bond determined?
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Chapter 18 Corporate and Government Bonds Answer Key
Multiple Choice Questions
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1. |
Which one of the following best defines a plain vanilla bond?
See Section 18.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.1 Topic: Plain Vanilla Bonds |
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2. |
Which one of the following terms is defined as debt issued without specific collateral pledged as security?
See Section 18.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.1 Topic: Unsecured Debt |
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3. |
Which one of the following is an unsecured bond issued by a corporation?
See Section 18.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.1 Topic: Debentures |
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4. |
Which one of the following is the portion of a prospectus that outlines the contractual terms of a new bond issue?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.2 Topic: Indenture Summary |
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5. |
What is the document called that is distributed to potential bondholders and provides detailed information on the financial position and operations of the bond issuer?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.2 Topic: Prospectus |
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6. |
Which one of the following is an unsecured bond that has a higher claim on a firm's assets than other unsecured bonds?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.2 Topic: Senior Debenture |
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7. |
During a bankruptcy proceeding, Bond A will be paid only if funds remain after the bonds that have a higher claim on the issuer's assets have been paid. What type of bond is Bond A?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.2 Topic: Subordinated Debenture |
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8. |
Which one of the following is the clause which prevents a bond issuer from issuing new debt that has seniority over current debt?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.2 Topic: Negative Pledge Clause |
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9. |
Which one of the following accurately describes bond refunding?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Bond Refunding |
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10. |
Which one of the following provisions grants the bondholder the option of selling the bond back to the issuer at a prespecified price on prespecified dates?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.2 Topic: Put Bond |
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11. |
Which one of the following provisions grants the bondholder the option of exchanging a bond for a prespecified number of shares of stock of the same issuer?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Convertible Bond |
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12. |
Which one of the following defines an in-the-money bond?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: In-the-Money Bond |
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13. |
Which one of the following terms is given to the value of a convertible bond that would equate to the value of a comparable nonconvertible bond?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Intrinsic Bond Value |
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14. |
What is a bond called if it can be converted into shares of stock of a firm other than the bond issuer?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Exchangeable Bond |
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15. |
Term bonds are defined as all bonds in a bond issue having which one of the following characteristics?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.2 Topic: Term Bonds |
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16. |
Bonds issued with a regular sequence of maturity dates are called which one of the following?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.2 Topic: Serial Bond |
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17. |
Which one of the following is an account used to provide for scheduled redemptions of outstanding bonds?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.2 Topic: Sinking Fund |
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18. |
What are the various provisions within a bond indenture that are designed to protect bondholders by restricting the actions of the issuer called?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.2 Topic: Protective Covenants |
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19. |
Which one of the following identifies a new bond issue as being a private placement?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.2 Topic: Private Placement |
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20. |
Adjustable-rate bonds are identified by which one of the following characteristics?
See Section 18.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.2 Topic: Adjustable-Rate Bond |
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21. |
Which one of the following is an assessment of the credit quality of a bond based on the financial condition of the bond issuer?
See Section 18.8 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-04 The basics of bond ratings. Level of Difficulty: 1 Easy Section: 18.8 Topic: Credit Rating |
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22. |
What are the restrictions on investment portfolios that require that all securities held within the portfolio meet a specified level of safety called?
See Section 18.8 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-04 The basics of bond ratings. Level of Difficulty: 1 Easy Section: 18.8 Topic: Prudent Investment Guidelines |
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23. |
Bonds with relatively high coupons due to their speculative credit ratings are called which one of the following?
See Section 18.8 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-04 The basics of bond ratings. Level of Difficulty: 1 Easy Section: 18.8 Topic: High-Yield Bonds |
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24. |
Which of the following are common characteristics associated with corporate bonds? I. specified cash flows II. equity ownership III. call feature IV. set maturity date
See Section 18.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.1 Topic: Bond Characteristics |
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25. |
Which one of the following parties is the largest holder of U.S. corporate bonds?
See Section 18.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.1 Topic: Bond Ownership |
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26. |
Which one of the following features of corporate bonds has the greatest appeal to pension fund investors?
See Section 18.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.1 Topic: Bond Ownership |
|
27. |
A pension fund purchases bonds so that the payments from the bonds provide sufficient cash inflow in a timely manner to offset the cash outflows from the pension fund. What is this investment strategy called?
See Section 18.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.1 Topic: Cash Flow Matching |
|
28. |
Which of the following features would you expect a plain vanilla bond to have? I. semi-annual coupon payments II. $1,000 face value III. stated maturity date IV. multiple bonds within one issue
See Section 18.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.1 Topic: Plain Vanilla Bonds |
|
29. |
The entire formal contract between a bond issuer and the bondholders is found in which one of the following documents?
See Section 18.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.2 Topic: Indenture Agreement |
|
30. |
Which one of the following statements related to callable bonds is correct?
See Section 18.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Callable Bond |
|
31. |
How much will you be paid if you own a bond that is called under a make-whole call provision?
See Section 18.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Make-Whole Call Provision |
|
32. |
After the call protection period, which one of the following basically serves as the upper price limit on a callable bond?
See Section 18.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Callable Bond |
|
33. |
Which one of the following statements related to a put bond is correct?
See Section 18.2 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.2 Topic: Put Provision |
|
34. |
Which one of the following statements related to convertible bonds is correct?
See Section 18.2 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Convertible Bond |
|
35. |
Which one of the following statements related to convertible bonds is correct?
See Section 18.2 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Convertible Bond |
|
36. |
Which one of these statements regarding corporate bond credit ratings is correct?
See Section 18.8 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-04 The basics of bond ratings. Level of Difficulty: 1 Easy Section: 18.8 Topic: Bond Ratings |
|
37. |
Which one of the following is another name for a junk bond?
See Section 18.8 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-04 The basics of bond ratings. Level of Difficulty: 1 Easy Section: 18.8 Topic: Junk Bond |
|
38. |
What is the method of selling Treasury bills at less than face value called?
See Section 18.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.4 Topic: Discount Basis |
|
39. |
What is the interest on a Treasury bill called when it is determined by the size of the bill's discount from face value?
See Section 18.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.4 Topic: Imputed Interest |
|
40. |
Which one of the following is the Treasury program allowing interest and principal payments from Treasury notes or bonds to be sold separately?
See Section 18.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.4 Topic: STRIPS |
|
41. |
Which one of the following descriptors is used to identify a bond that pays one single payment at maturity?
See Section 18.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.4 Topic: Zero Coupon Bond |
|
42. |
Which one of the following is the difference between the price a bond dealer is willing to pay to buy and the price at which he or she is willing to sell?
See Section 18.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.4 Topic: Bid-Ask Spread |
|
43. |
What is the lowest accepted competitive bid in a U.S. Treasury auction called?
See Section 18.5 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.5 Topic: Stop-Out Bid |
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44. |
Which one of the following is the risk that a bond issuer will cease paying the interest and principal payments as scheduled?
See Section 18.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-01 The basic types of corporate bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Default Risk |
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45. |
Municipal bonds that are secured by the full faith and credit of the issuer are referred to as which one of the following?
See Section 18.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: General Obligation Bonds |
|
46. |
Which one of the following is a municipal bond that is secured by the income collected from a specific project?
See Section 18.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Revenue Bond |
|
47. |
Which one of the following is a municipal bond that is secured by both the revenues from a project and also by the taxing authority of the municipality?
See Section 18.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Hybrid Bond |
|
48. |
Which one of the following is a taxable municipal bond used to finance a facility used by a private business?
See Section 18.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Private Activity Bonds |
|
49. |
Which of the following features apply to T-bills? I. original maturities of 4, 13, or 26 weeks II. minimum face value of $10,000 III. sold at a discount IV. semiannual interest payments
See Section 18.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.4 Topic: Treasury Bills |
|
50. |
Which one of the following statements applies to U.S. Treasury bonds?
See Section 18.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.4 Topic: Treasury Bonds |
|
51. |
You just purchased a 5-year STRIPS security that was created from a 30-year T-bond. How many payments will you receive?
See Section 18.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.4 Topic: STRIPS |
|
52. |
Which one of the following statements related to TIPS is correct assuming an inflationary environment?
See Section 18.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.4 Topic: TIPS |
|
53. |
Which of the following statements correctly apply to TIPS? I. They are quoted as a percentage of the current accrued principal. II. They pay a variable interest rate that responds to movements in the inflation rate. III. They are backed by the full faith and credit of the U.S. government. IV. They adjust for inflation on an annual basis.
See Section 18.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.4 Topic: U.S. Treasury inflation-protected security |
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54. |
Which one of the following applies to U.S. Treasury auctions?
See Section 18.5 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.5 Topic: U.S. treasury auction |
|
55. |
What price will a noncompetitive bidder pay for a security being purchased through a U.S. Treasury auction?
See Section 18.5 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.5 Topic: U.S. treasury auction |
|
56. |
U.S. government agency bonds pay interest which is subject to which of the following taxes?
See Section 18.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.6 Topic: Agency Bonds |
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57. |
Kathy lives in State A and owns a municipal bond issued by State B. The interest earned on this bond is most apt to be exempt from taxation at which of the following levels?
See Section 18.7 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Municipal Bond Taxation |
|
58. |
Which one of the following generally applies to municipal bonds?
See Section 18.7 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Municipal Bonds |
|
59. |
A moral obligation bond is which type of a bond?
See Section 18.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Municipal Bonds |
|
60. |
Which of the following uses of proceeds from private activity bonds will most likely qualify those bonds as federally tax-exempt? I. public airport runway II. baseball stadium III. multifamily housing project IV. mass rail transit
See Section 18.7 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Private Activity Bonds |
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61. |
A bond that is currently selling for $933.38 has a conversion price of $40.00. If the par value is $1,000, what is the conversion ratio?
Conversion ratio = $1,000/$40.00 = 25 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Conversion Ratio |
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62. |
A bond has a par value of $1,000 and a market value of $833.40. The conversion price is $45.45. What is the conversion ratio?
Conversion ratio = $1,000/$45.45 = 22 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Conversion Ratio |
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63. |
A bond has a conversion price of $47.62, a par value of $1,000, and a market price of $833.40. What is the conversion ratio?
Conversion ratio = $1,000/$47.62 = 21 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Conversion Ratio |
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64. |
What is the conversion ratio of a $1,000 par value bond that is selling for $888.96 and has a conversion price of $58.82?
Conversion ratio = $1,000/$58.82 = 17 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Conversion Ratio |
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65. |
A convertible bond has a par value of $1,000 and a market price of $1,116.76. If the conversion ratio is 19, what is the conversion price?
Conversion price = $1,000/19 = $52.63 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Conversion Price |
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66. |
A convertible bond has a par value of $1,000, a market value of $875, and a conversion ratio of 14. What is the conversion price?
Conversion price = $1,000/14 = $71.43 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Conversion Price |
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67. |
A bond is currently priced at $1,076.88 and has a par value of $1,000. If the conversion ratio is 25, what is the conversion price?
Conversion price = $1,000/25 = $40.00 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Conversion Price |
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68. |
A bond has a conversion ratio of 24 and a market price of $1,080. If the par value is $1,000, what is the conversion price?
Conversion price = $1,000/24 = $41.67 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Conversion Price |
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69. |
A bond has a conversion ratio of 22, a $1,000 par value, and a market price of $1,038. The stock is selling for $46.14. What is the conversion value?
Conversion value = 22 × $46.14 = $1,015.08 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Conversion Value |
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70. |
A $1,000 par value bond has a market price of $986 and a conversion ratio of 15. The stock is selling for $60.74. What is the conversion value?
Conversion value = 15 × $60.74 = $911.10 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Conversion Value |
|
71. |
A bond has a par value of $1,000 and a market price of $1,087.20. The conversion price is $40 and the stock price is $41.75. What is the conversion value?
Conversion value = ($1,000/$40) × $41.75 = $1,043.75 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Conversion Value |
|
72. |
A 4.5 percent, semi-annual coupon bond has a face value of $1,000 and a time to maturity of 4 years. The bonds are convertible into shares of common stock at a conversion price of $42.50. The stock price currently is $40.70. Similar, non-convertible bonds have a yield to maturity of 4.5 percent. The intrinsic value of this bond is _____ and the conversion value is _____.
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Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Conversion Value |
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73. |
A semi-annual coupon bond has a 6.5 percent coupon rate, a $1,000 face value, a current value of $1,054.54, and 4 years until the first call date. What is the call price if the yield to call is 6.7 percent?
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Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Callable Bond |
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74. |
A bond has 6 years until it can be called, a 7 percent coupon, and a $1,000 face value. The bond has a market value of $1,031.90 and a yield to call of 7.35 percent. What is the call premium?
|
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Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Callable Bond |
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75. |
A bond has a face value of $1,000 and a call price of $1,030. The bond is callable in 3.5 years and pays a 5 percent, semi-annual coupon. What is the current price if the yield to call is 6 percent?
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Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Callable Bond |
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76. |
You own a bond that has a face value of $1,000 and a conversion ratio of 26. You have just received notification that the bond is being called at a premium of $40. The stock price is $41.20 a share. You should _____ your bond because the conversion value is _____.
Conversion value = 26 × $41.20 = $1,071.20 Call price = $1,000 + $40 = $1,040 Difference = $1,071.20 - $1,040 = -$31.20 You should convert your bond because the conversion value is $31.20 greater than the call price. |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Callable/Convertible bond |
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77. |
Slater Mines just called its outstanding bonds at a call price of $1,025. The bonds have a conversion price of $33.33 and a par value of $1,000. The stock price is currently $33.10. In response to this call, the bondholders should _____ because _____.
Conversion value = ($1,000/$33.33) × $33.10 = $993.10 The call price of $1,025 exceeds the conversion value of $993.10. Bondholders should redeem their bonds at the call price because that price exceeds the conversion value. |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.2 Topic: Callable/Convertible bond |
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78. |
A Treasury bond has a face value of $25,000 and a quoted price of 102:20. What is the bond's dollar price?
Price = $25,000 × 102 and 20/32nds percent = $25,000 × 1.02625 = $25,656.25 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 2 Medium Section: 18.4 Topic: Treasury Bond Price |
|
79. |
A Treasury bond has a quoted bid price of 100:10 and a quoted ask price of 100:11. What is the amount you will receive if you sell your bond that has a par value of $20,000?
Sale price = $20,000 × 100 and 10/32nds percent = $20,000 × 1.00313 = $20,062.60 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 2 Medium Section: 18.4 Topic: Treasury Bond Price |
|
80. |
A Treasury bond has a yield to maturity of 5.2 percent, a time to maturity of 8 years, and a coupon rate of 7 percent. What is the bond price?
|
|
Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 2 Medium Section: 18.4 Topic: Treasury Bond Price |
|
81. |
A Treasury bond has a dollar price of $1,015.63. What would you expect the bond quote to be?
$1,015.63 = bond quote price of 101:18. $1,010 quote = 101% .563 × 32 = 18.016 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 2 Medium Section: 18.4 Topic: Treasury Bond Price |
|
82. |
A Treasury note has 3.5 years left to maturity, a yield to maturity of 4.25 percent, and a coupon rate of 4.40 percent. What is the price of the bond?
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Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 2 Medium Section: 18.4 Topic: Treasury Bond Price |
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83. |
A Treasury bond matures in 13 years, has a 5.25 percent coupon, and a quoted price of 98:01. What is the yield to maturity?
Price = $1,000 × 98 and 1/32nds percent = $1,000 × .9803125 = $980.3125
Payment = (.0525 × $1,000)/2 = $26.25
Using a financial calculator:
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Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 2 Medium Section: 18.4 Topic: Treasury Yield to Maturity |
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84. |
A Treasury bond has a 3.4 percent coupon, a quoted price of 101:06, and 9 years to maturity. What is the yield to maturity?
Price = $1,000 × 101 and 6/32nds percent = $1,000 × 1.011875 = $1,011.875
Payment = (.034 × $1,000)/2 = $17
Using a financial calculator:
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|
Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 2 Medium Section: 18.4 Topic: Treasury Yield to Maturity |
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85. |
A STRIPS matures in 6 years, has a face value of $17,000, and has a yield to maturity of 4.8 percent. What is the price?
|
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Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.4 Topic: STRIPS Price |
|
86. |
A STRIPS has a yield to maturity of 6.2 percent, a par value of $25,000, and a time to maturity of 10 years. What is the price?
|
|
Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.4 Topic: STRIPS Price |
|
87. |
A STRIPS has a $9,000 par value and a market value of $7,050. The time to maturity is 5 years. What is the yield to maturity?
|
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Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.4 Topic: STRIPS YTM |
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88. |
A STRIPS that matures in 8 years is selling for $11,490. The par value is $15,000. What is the yield to maturity?
|
|
Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.4 Topic: STRIPS YTM |
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89. |
You own a principal STRIPS which is based on a 4.5 percent coupon Treasury bond that matures in 20 years. The STRIPS is priced at $22,868 and has a par value of $50,000. What is the yield to maturity on the STRIPS?
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Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.4 Topic: STRIPS YTM |
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90. |
The Federal Reserve is offering Treasury bills with a par value of $25 billion for sale. They have received $7 billion of noncompetitive bids. The competitive bids for a $10,000 par value bond are: (Qty in billions)
Amount available to competitive bidders = $25b - $7b = $18b Lowest acceptable bid price is $9,600, which is Bidder C. All bidders pay the stop-out bid which is $9,600. |
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Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.5 Topic: Treasury Auction |
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91. |
The Federal Reserve is offering Treasury bills with a par value of $30 billion for sale. They have received $11 billion of noncompetitive bids. The competitive bids for a $10,000 par value bond are:
Amount available to competitive bidders = $30b - $11b = $19b Lowest acceptable bid price is $9,750, which is Bidder C. Amount raised = $30b × ($9,750/$10,000) = $29.25b |
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Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.5 Topic: Treasury Auction |
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92. |
The Federal Reserve is offering Treasury bills with a par value of $10 billion for sale. They have received $3 billion of noncompetitive bids. The competitive bids for a $10,000 par value bond are: (Qty in billions)
Amount available to competitive bidders = $10b - $3b = $7b Lowest acceptable bid price is $9,850, which is Bidder B. Amount raised = $10b × ($9,850/$10,000) = $9.85b |
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Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.5 Topic: Treasury Auction |
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93. |
A municipal bond is yielding 4.8 percent. Jeremy has a marginal tax rate of 24 percent. What is his equivalent taxable yield?
Equivalent taxable yield = .048/(1 - .24) = 6.32 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Equivalent Taxable Yield |
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94. |
You have a marginal tax rate of 32 percent and an average tax rate of 28 percent. Municipal bonds in your area are yielding 4.25 percent. What is your equivalent taxable yield?
Equivalent taxable yield = .0425/(1 - .31) = 6.25 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Equivalent Taxable Yield |
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95. |
Municipal bonds are yielding 4.8 percent currently. Alicia has a marginal tax rate of 35 percent and Yvonne has a marginal tax rate of 22 percent. Alicia's equivalent taxable yield is _____ percent and Yvonne's is _____ percent.
Equivalent taxable yield = .048/(1 - .35) = 7.39 percent Equivalent taxable yield = .048/(1 - .22) = 6.15 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Equivalent Taxable Yield |
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96. |
Municipal bonds are yielding 4.4 percent if they are insured and 4.7 percent if they are uninsured. Your marginal tax rate is 28 percent. Your equivalent taxable yield on the insured bonds is _____ percent and on the uninsured bonds is _____ percent.
Equivalent taxable yield = .044/(1 - .28) = 6.11 percent Equivalent taxable yield = .047/(1 - .28) = 6.53 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Equivalent Taxable Yield |
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97. |
You own a corporate bond which is yielding 8.2 percent. What is your after-tax yield if your marginal tax rate is 28 percent?
After-tax yield = .082 × (1 - .28) = 5.90 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Aftertax Yield |
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98. |
Laura has an average tax rate of 22 percent and a marginal tax rate of 28 percent. What is her after-tax yield on a corporate bond which has a 6.7 percent yield?
After-tax yield = .067 × (1 - .28) = 4.82 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Aftertax Yield |
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99. |
Jeff owns a taxable bond portfolio which is yielding 8.76 percent. His after-tax yield is 6.57 percent. What is his marginal tax rate?
.0657 = .0876 × (1 - x); x = 25 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Marginal tax rate |
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100. |
A corporate bond is yielding 6.8 percent and a municipal bond is yielding 4.75 percent. What is the critical marginal tax rate?
Critical marginal tax rate = 1 - (.0475/.068) = 30 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Critical Marginal Tax Rate |
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101. |
Sonya has a marginal tax rate of 36 percent. A corporate bond is yielding 7.4 percent and a municipal bond is yielding 3.6 percent. Sonya should invest in the _____ bond because the critical marginal tax rate is _____ percent.
Critical marginal tax rate = 1 - (.036/.074) = 51 percent Sonya should invest in the corporate bond because her marginal tax rate is lower than the critical marginal rate. |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Critical Marginal Tax Rate |
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102. |
Lester is considering a municipal bond yielding 5.5 percent and a corporate bond yielding 8.2 percent. His marginal tax rate is 28 percent. He should invest in the _____ bond because the critical marginal tax rate is _____ percent.
Critical marginal tax rate = 1 - (.055/.082) = 33 percent Lester should invest in the corporate bond because his marginal tax rate is less than the critical marginal rate. |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Critical Marginal Tax Rate |
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103. |
A $5,000 face value municipal bond matures in 14 years and is priced at $4,862. The coupon rate is 4.5 percent with interest paid semiannually. What is the yield to maturity on the bond?
Using a financial calculator:
Payment = (.045 × $5,000)/2 = $112.50
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|
Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Municipal Yield to Maturity |
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104. |
A $5,000 face value municipal bond matures in 6 years and has a market value of $5,110. The coupon rate is 3.5 percent with interest paid semiannually. What is the yield to maturity?
Using a financial calculator:
Payment = (.035 × $5,000)/2 = $87.50
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|
Blooms: Apply Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.7 Topic: Municipal Yield to Maturity |
Essay Questions
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105. |
Explain how the imputed interest is computed on a U.S. Treasury bill. Answer will vary Feedback: The total imputed interest is the difference between the purchase price and the face value. The imputed interest for one year is the difference between the price at the beginning and the price at the end of the year, assuming a constant rate of return. |
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Blooms: Understand Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 1 Easy Section: 18.4 Topic: T-Bills |
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106. |
What is the advantage of purchasing a STRIPS over a Treasury note? Answer will vary Feedback: With a Treasury note, you receive semiannual interest payments plus the principal at maturity. With a STRIPS, you receive one payment at maturity. If you have a cash need at one point in time, it is much easier to match that need with a STRIPS than with a T-note. |
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Blooms: Understand Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 2 Medium Section: 18.4 Topic: STRIPS |
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107. |
Why would an investor prefer a TIPS which offers a lower coupon rate over a comparable T-note with a higher coupon rate? Answer will vary Feedback: If an investor is concerned about future inflation, he or she would prefer the TIPS over the T-note because the TIPS offers a guaranteed positive real rate of return. The comparison between the two should be done on a real return basis, not a nominal return basis. |
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Blooms: Understand Learning Objective: 18-03 The different types of government bonds. Level of Difficulty: 2 Medium Section: 18.4 Topic: TIPS |
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108. |
How is the minimal value for a convertible bond determined? Answer will vary Feedback: The minimal value is the larger of either the bond's intrinsic value or its conversion value. The intrinsic value is the value of the bond assuming it is not convertible. The conversion value is the value that would be realized if the bond were converted into shares of stock. |
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Blooms: Understand Learning Objective: 18-02 How callable and convertible bonds function. Level of Difficulty: 1 Easy Section: 18.3 Topic: Convertible Bond |
Chapter 20
Mortgage-Backed Securities
Multiple Choice Questions
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1. |
Which one of the following is defined as bonds which represent a claim on the cash flows of an underlying pool of mortgages which flow through to bondholders?
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2. |
Mortgage-backed securities are defined as securities whose investment returns are based on which one of the following?
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3. |
Which one of the following terms is applied to the process of creating mortgage-backed securities from a pool of mortgages?
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4. |
When a borrower pays a fixed monthly amount on his or her home mortgage based on a fixed rate of interest, he or she has which type of mortgage?
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5. |
Which one of the following is the amount of a mortgage loan outstanding?
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6. |
Which one of the following terms applies to the process of reducing the mortgage principal over the life of the mortgage according to a schedule?
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7. |
Mortgage prepayments are best defined by which one of the following?
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8. |
Which one of the following is the government agency assigned the responsibility of promoting liquidity in the home mortgage market?
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9. |
Which one of the following is the type of mortgage pool that guarantees timely payment of interest and principal?
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10. |
Which one of the following is the risk associated with receiving a mortgage bond's principal payments sooner than anticipated?
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11. |
FHLMC and FNMA are government-sponsored enterprises charged with which one of the following duties?
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12. |
What is the probability that a mortgage will be prepaid during a given year called?
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13. |
Seasoned mortgages are defined as mortgages that are, or have been, which of the following?
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14. |
Which one of the following statements correctly applies to an unseasoned mortgage?
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15. |
Which one of the following is the prepayment rate for a mortgage pool which is dependent upon the age of the mortgages comprising the pool?
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16. |
The average time it takes for a mortgage in a pool to be paid off is referred to as which one of the following?
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17. |
Which one of the following is the measure of interest rate risk for fixed-income securities?
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18. |
The _____ duration for mortgage-backed securities is the duration measure that accounts for how mortgage prepayments are affected by changes in interest rates.
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19. |
What are the securities which are created by splitting the cash flows from mortgage pools according to specific allocation rules called?
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20. |
Interest-only strips are securities that do which one of the following?
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21. |
Which one of the following is a security that only pays the principal cash flows to investors?
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22. |
What are the securities that are created when a mortgage pool is divided into a number of tranches called?
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23. |
Which one of the following is a mortgage-backed security that has first priority to scheduled principal payments?
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24. |
A mortgage-backed security that has only a subordinate claim to principal payments is referred to as which type of bond?
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25. |
Which one of the following is the range defined by the upper and lower prepayment schedules of a PAC bond?
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26. |
Which one of the following is defined as the yield to maturity for a mortgage-backed security computed on an assumed prepayment pattern?
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27. |
Which one of the following correctly applies to a mortgage passthrough bond?
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28. |
You own a mortgage passthrough. Which one of the following statements correctly describes the payments you will receive on that security?
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29. |
Which one of the following financing terms will provide the lowest monthly payment for a fixed-rate $175,000 mortgage? (No calculations are required.)
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30. |
Which one of the following set of mortgage terms will cause the borrower to pay the most interest, assuming the mortgage is paid according to the amortization schedule?
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31. |
You have a 30-year, fixed-rate mortgage with equal monthly payments. The amount of interest you pay each month will _____ and the amount of principal you pay each month will ____.
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32. |
You have a 15-year, fixed-rate, $150,000 mortgage. The monthly payment amount is constant and the mortgage is amortized on a monthly basis. How much will the principal balance be after the 90th payment has been paid?
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33. |
When can a homeowner prepay on his or her home mortgage?
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34. |
Borrowers must pay which one of the following if they are to pay off their home mortgage?
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35. |
A mortgage prepayment is similar to which one of the following features of a corporate bond?
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36. |
Which one of the following is NOT a reason why mortgage prepayments occur?
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37. |
Mortgage prepayments are generally a(n) ______ to the mortgage borrower and a(n) ____ to the mortgage investor.
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38. |
Which one of the following is most apt to create an environment that increases mortgage prepayments?
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39. |
Which one of the following statements correctly relates to reverse mortgages?
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40. |
Which of the following affect the amount of funds available to a homeowner from a reverse mortgage? I. current mortgage balance on the home II. age of homeowner III. location of the home IV. appraised value of the home
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41. |
Which one of the following is the key function of GNMA?
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42. |
Which one of the following statements correctly relates to GNMA securities?
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43. |
GNMA mortgage pools are based on mortgages issued by which of the following? I. FHLMC II. FNMA III. FHA IV. FmHA
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44. |
Which one of the following is a government agency?
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45. |
The greater the prepayment rate for a mortgage pool, the:
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46. |
After 30 months, what is the 100 PSA benchmark conditional prepayment rate per year?
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47. |
You acquired a 30-year mortgage two years ago to purchase your current residence. Your mortgage is classified as which one of the following?
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48. |
How much faster will a mortgage pool with a PSA of 150 be prepaid as compared to the benchmark?
|
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49. |
Generally, the average life of a mortgage is _____ the mortgage's stated maturity.
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50. |
How long is the expected average mortgage life of a mortgage held in a 30-year mortgage pool with a 100 PSA?
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51. |
A mortgage pool was created six years ago. Which one of the following PSA values is most apt to apply to that pool if market mortgage rates have been declining quite rapidly over the past five years?
|
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52. |
Monthly payments to investors in GNMA mortgage-backed bonds include which of the following cash flows? I. mortgage interest II. fixed principal payment III. scheduled amortization of mortgage principal IV. mortgage prepayments
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53. |
You just purchased a GNMA mortgage-backed security. Which one of the following should you expect to receive?
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54. |
Which one of the following statements regarding an original issue $25,000 GNMA bond is correct?
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55. |
Which one of the following is the reason that Macaulay duration is NOT a good measure of interest rate risk for mortgage bonds?
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56. |
Historically, what has been the relationship between bond prepayment rates and the market rate of interest?
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57. |
Which one of the following is the preferred method of evaluating interest rate risk on mortgage bonds?
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58. |
If the prepayment schedule for a mortgage pool increases to 100 PSA from 50 PSA, the related interest-only strips will _____ in value and the related principal-only strips will _____ in value.
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59. |
Which of the following affect the value of a PO strip based on a GNMA bond? I. changes in the PSA schedule II. prepayment rates III. time value of money IV. changes in the default rates for the underlying mortgages
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60. |
Which one of the following is correct concerning the total payment amount on a PO strip?
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61. |
The total payment amount on an IO strip is:
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62. |
The value of an IO strip will most likely increase when:
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63. |
Which one of the following will maximize the value of an IO strip?
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64. |
A mortgage pool is divided into A, B, C, and Z-tranches based on the textbook example. The mortgage principal will initially be paid to which one of the tranches?
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65. |
A mortgage pool is divided into A, B, C, and Z-tranches based on the textbook example. Which tranche will have the longest life?
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66. |
A mortgage pool is divided into A, B, C, and Z-tranches as discussed in the textbook. What happens to the initial interest payment for the Z tranche?
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67. |
Which one of the following statements regarding PAC bonds is correct?
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68. |
Which one of the following is required for the cash flows on a PAC bond to be predictable?
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69. |
A PAC support bond is most similar to which tranche in a sequential CMO?
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70. |
PAC bondholders receive payments of principal based on which one of the following?
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71. |
After month 30, assuming that prepayments remain within the PAC collar, the holders of a PAC bond will receive which one of the following payments?
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72. |
How are the cash flows allocated when actual prepayments fall below a PAC collar's lower bound?
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73. |
Assume that a mortgage pool follows a specified PSA prepayment schedule. Given this, the cash flow yield on the mortgage pool will do which one of the following?
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74. |
What is the monthly mortgage payment on a $255,000, 25-year loan if the interest rate is 5.50 percent?
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75. |
You want to borrow $180,000 at 6.25 percent interest. If you assume a 10-year loan, the monthly payment will be _____ as compared to _____ if you assume a 20-year loan.
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76. |
You took out a 20-year, $125,000, 4.5 percent loan 8 years ago. What is your current principal balance, assuming payments are made monthly?
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77. |
Ten years ago, you borrowed $165,000 for 25 years at 7.5 percent interest. What is the current principal balance, assuming payments are made monthly?
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78. |
You are borrowing $260,000 for 25 years at 5.5 percent. Payments will be made monthly. What is the total amount of interest you will pay if you pay the loan as agreed over the 25 years?
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79. |
Four years ago, you borrowed $250,000 for 20 years at 8 percent. Payments are made monthly. How much interest have you paid thus far?
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80. |
You just assumed a 30-year mortgage for $300,000 at 6 percent interest. How much of the first monthly payment will be applied to the principal balance?
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81. |
You recently assumed a 15-year mortgage for $150,000 at 6.5 percent interest. How much of the second monthly payment will be applied to the principal balance?
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82. |
You have a 25-year mortgage at 5 percent interest. The initial loan amount was $250,000. By how much did the principal decrease over the first 10 years of the loan? Payments are made monthly.
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83. |
You have a 30-year, $180,000 mortgage. The interest rate is 7.5 percent. What is the amount of the mortgage prepayment if you pay $1,400 as your first payment?
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84. |
You have a 25-year, $225,000 mortgage at 5.5 percent interest. What is the amount of your mortgage prepayment if you pay $1,650 as your second mortgage payment? Assume your first payment was the agreed upon amount.
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85. |
You have decided to pay $1,800 a month on your 30-year, $225,000 mortgage. The interest rate is 7.75 percent. What is your total prepayment amount for year two?
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86. |
You are currently borrowing $175,000 to buy a house. The mortgage is for 15 years at 6 percent. How much would you save each month if you could finance this amount at 5 percent for the same time period?
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87. |
You are assuming a 30-year mortgage for $230,000 at 7.75 percent interest. How much would you save in interest if you financed this loan at 7.25 percent for 20 years?
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88. |
The CPR for a seasoned 150 PSA mortgage is 9.8 percent. What is the single monthly mortality?
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89. |
The CPR for an unseasoned 100 PSA mortgage is 4.5 percent. What is the single monthly mortality?
|
Essay Questions
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90. |
What are the advantages and the disadvantages of a homeowner selecting a 30-year mortgage rather than a 20-year mortgage?
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91. |
How do CMOs increase the availability of mortgage funds?
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92. |
Explain what a reverse mortgage is, how it works, and who it is intended to help.
|
Chapter 20 Mortgage-Backed Securities Answer Key
Multiple Choice Questions
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1. |
Which one of the following is defined as bonds which represent a claim on the cash flows of an underlying pool of mortgages which flow through to bondholders?
See Section 20.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.1 Topic: Mortgage Passthroughs |
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2. |
Mortgage-backed securities are defined as securities whose investment returns are based on which one of the following?
See Section 20.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.1 Topic: Mortgage-Backed Securities |
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3. |
Which one of the following terms is applied to the process of creating mortgage-backed securities from a pool of mortgages?
See Section 20.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.1 Topic: Mortgage Securitization |
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4. |
When a borrower pays a fixed monthly amount on his or her home mortgage based on a fixed rate of interest, he or she has which type of mortgage?
See Section 20.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Fixed-Rate Mortgage |
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5. |
Which one of the following is the amount of a mortgage loan outstanding?
See Section 20.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Principal |
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6. |
Which one of the following terms applies to the process of reducing the mortgage principal over the life of the mortgage according to a schedule?
See Section 20.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Amortization |
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7. |
Mortgage prepayments are best defined by which one of the following?
See Section 20.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Prepayments |
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8. |
Which one of the following is the government agency assigned the responsibility of promoting liquidity in the home mortgage market?
See Section 20.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-02 Government's role in the secondary market for home mortgages. Level of Difficulty: 1 Easy Section: 20.3 Topic: Gnma |
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9. |
Which one of the following is the type of mortgage pool that guarantees timely payment of interest and principal?
See Section 20.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.3 Topic: Fully Modified Mortgage Pool |
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10. |
Which one of the following is the risk associated with receiving a mortgage bond's principal payments sooner than anticipated?
See Section 20.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.3 Topic: Prepayment Risk |
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11. |
FHLMC and FNMA are government-sponsored enterprises charged with which one of the following duties?
See Section 20.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-02 Government's role in the secondary market for home mortgages. Level of Difficulty: 1 Easy Section: 20.3 Topic: Fhlmc and Fnma |
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12. |
What is the probability that a mortgage will be prepaid during a given year called?
See Section 20.4 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.4 Topic: Prepayment Rate |
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13. |
Seasoned mortgages are defined as mortgages that are, or have been, which of the following?
See Section 20.4 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.4 Topic: Seasoned Mortgages |
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14. |
Which one of the following statements correctly applies to an unseasoned mortgage?
See Section 20.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.4 Topic: Unseasoned Mortgages |
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15. |
Which one of the following is the prepayment rate for a mortgage pool which is dependent upon the age of the mortgages comprising the pool?
See Section 20.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.4 Topic: Conditional Prepayment Rate |
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16. |
The average time it takes for a mortgage in a pool to be paid off is referred to as which one of the following?
See Section 20.4 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.4 Topic: Average Life |
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17. |
Which one of the following is the measure of interest rate risk for fixed-income securities?
See Section 20.5 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.5 Topic: Macaulay Duration |
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18. |
The _____ duration for mortgage-backed securities is the duration measure that accounts for how mortgage prepayments are affected by changes in interest rates.
See Section 20.5 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.5 Topic: Effective Duration for Mbs |
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19. |
What are the securities which are created by splitting the cash flows from mortgage pools according to specific allocation rules called?
See Section 20.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: CMOs |
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20. |
Interest-only strips are securities that do which one of the following?
See Section 20.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Interest-Only Strips |
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21. |
Which one of the following is a security that only pays the principal cash flows to investors?
See Section 20.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Principal-Only Strips |
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22. |
What are the securities that are created when a mortgage pool is divided into a number of tranches called?
See Section 20.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Sequential Cmos |
|
23. |
Which one of the following is a mortgage-backed security that has first priority to scheduled principal payments?
See Section 20.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Protected Amortization Class Bond |
|
24. |
A mortgage-backed security that has only a subordinate claim to principal payments is referred to as which type of bond?
See Section 20.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Pac Support Bond |
|
25. |
Which one of the following is the range defined by the upper and lower prepayment schedules of a PAC bond?
See Section 20.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Pac Collar |
|
26. |
Which one of the following is defined as the yield to maturity for a mortgage-backed security computed on an assumed prepayment pattern?
See Section 20.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.7 Topic: Cash Flow Yield |
|
27. |
Which one of the following correctly applies to a mortgage passthrough bond?
See Section 20.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.1 Topic: Passthrough Bond |
|
28. |
You own a mortgage passthrough. Which one of the following statements correctly describes the payments you will receive on that security?
See Section 20.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.1 Topic: Passthrough Bond |
|
29. |
Which one of the following financing terms will provide the lowest monthly payment for a fixed-rate $175,000 mortgage? (No calculations are required.)
See Section 20.2 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Fixed-Rate Mortgage |
|
30. |
Which one of the following set of mortgage terms will cause the borrower to pay the most interest, assuming the mortgage is paid according to the amortization schedule?
See Section 20.2 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Fixed-Rate Mortgage |
|
31. |
You have a 30-year, fixed-rate mortgage with equal monthly payments. The amount of interest you pay each month will _____ and the amount of principal you pay each month will ____.
See Section 20.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Amortization |
|
32. |
You have a 15-year, fixed-rate, $150,000 mortgage. The monthly payment amount is constant and the mortgage is amortized on a monthly basis. How much will the principal balance be after the 90th payment has been paid?
See Section 20.2 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Amortization |
|
33. |
When can a homeowner prepay on his or her home mortgage?
See Section 20.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.2 Topic: Prepayment |
|
34. |
Borrowers must pay which one of the following if they are to pay off their home mortgage?
See Section 20.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Payoff |
|
35. |
A mortgage prepayment is similar to which one of the following features of a corporate bond?
See Section 20.2 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Prepayments |
|
36. |
Which one of the following is NOT a reason why mortgage prepayments occur?
See Section 20.2 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Prepayments |
|
37. |
Mortgage prepayments are generally a(n) ______ to the mortgage borrower and a(n) ____ to the mortgage investor.
See Section 20.2 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Prepayments |
|
38. |
Which one of the following is most apt to create an environment that increases mortgage prepayments?
See Section 20.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Prepayments |
|
39. |
Which one of the following statements correctly relates to reverse mortgages?
See Section 20.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Reverse Mortgage |
|
40. |
Which of the following affect the amount of funds available to a homeowner from a reverse mortgage? I. current mortgage balance on the home II. age of homeowner III. location of the home IV. appraised value of the home
See Section 20.2 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Reverse Mortgage |
|
41. |
Which one of the following is the key function of GNMA?
See Section 20.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-02 Government's role in the secondary market for home mortgages. Level of Difficulty: 1 Easy Section: 20.3 Topic: Gnma |
|
42. |
Which one of the following statements correctly relates to GNMA securities?
See Section 20.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-02 Government's role in the secondary market for home mortgages. Level of Difficulty: 1 Easy Section: 20.3 Topic: Gnma |
|
43. |
GNMA mortgage pools are based on mortgages issued by which of the following? I. FHLMC II. FNMA III. FHA IV. FmHA
See Section 20.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-02 Government's role in the secondary market for home mortgages. Level of Difficulty: 2 Medium Section: 20.3 Topic: Gnma |
|
44. |
Which one of the following is a government agency?
See Section 20.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-02 Government's role in the secondary market for home mortgages. Level of Difficulty: 1 Easy Section: 20.3 Topic: Gnma |
|
45. |
The greater the prepayment rate for a mortgage pool, the:
See Section 20.4 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 2 Medium Section: 20.4 Topic: Prepayment Rate |
|
46. |
After 30 months, what is the 100 PSA benchmark conditional prepayment rate per year?
See Section 20.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.4 Topic: Psa Benchmark |
|
47. |
You acquired a 30-year mortgage two years ago to purchase your current residence. Your mortgage is classified as which one of the following?
See Section 20.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.4 Topic: Seasoned Mortgages |
|
48. |
How much faster will a mortgage pool with a PSA of 150 be prepaid as compared to the benchmark?
See Section 20.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.4 Topic: Psa Rates |
|
49. |
Generally, the average life of a mortgage is _____ the mortgage's stated maturity.
See Section 20.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.4 Topic: Average Mortgage Life |
|
50. |
How long is the expected average mortgage life of a mortgage held in a 30-year mortgage pool with a 100 PSA?
See Section 20.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.4 Topic: Average Mortgage Life |
|
51. |
A mortgage pool was created six years ago. Which one of the following PSA values is most apt to apply to that pool if market mortgage rates have been declining quite rapidly over the past five years?
See Section 20.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.4 Topic: Psa Values |
|
52. |
Monthly payments to investors in GNMA mortgage-backed bonds include which of the following cash flows? I. mortgage interest II. fixed principal payment III. scheduled amortization of mortgage principal IV. mortgage prepayments
See Section 20.5 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.5 Topic: Gnma Cash Flows |
|
53. |
You just purchased a GNMA mortgage-backed security. Which one of the following should you expect to receive?
See Section 20.5 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.5 Topic: Gnma Cash Flows |
|
54. |
Which one of the following statements regarding an original issue $25,000 GNMA bond is correct?
See Section 20.5 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.5 Topic: Gnma |
|
55. |
Which one of the following is the reason that Macaulay duration is NOT a good measure of interest rate risk for mortgage bonds?
See Section 20.5 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.5 Topic: Macaulay Duration |
|
56. |
Historically, what has been the relationship between bond prepayment rates and the market rate of interest?
See Section 20.5 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.5 Topic: Prepayment Rate |
|
57. |
Which one of the following is the preferred method of evaluating interest rate risk on mortgage bonds?
See Section 20.5 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-03 The impact of mortgage prepayments. Level of Difficulty: 1 Easy Section: 20.5 Topic: Macaulay Duration |
|
58. |
If the prepayment schedule for a mortgage pool increases to 100 PSA from 50 PSA, the related interest-only strips will _____ in value and the related principal-only strips will _____ in value.
See Section 20.6 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Io and Po Strip Values |
|
59. |
Which of the following affect the value of a PO strip based on a GNMA bond? I. changes in the PSA schedule II. prepayment rates III. time value of money IV. changes in the default rates for the underlying mortgages
See Section 20.6 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Po Strip Values |
|
60. |
Which one of the following is correct concerning the total payment amount on a PO strip?
See Section 20.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Po Strip |
|
61. |
The total payment amount on an IO strip is:
See Section 20.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Io Strip |
|
62. |
The value of an IO strip will most likely increase when:
See Section 20.6 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Io Strip |
|
63. |
Which one of the following will maximize the value of an IO strip?
See Section 20.6 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Io Strip |
|
64. |
A mortgage pool is divided into A, B, C, and Z-tranches based on the textbook example. The mortgage principal will initially be paid to which one of the tranches?
See Section 20.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Tranches |
|
65. |
A mortgage pool is divided into A, B, C, and Z-tranches based on the textbook example. Which tranche will have the longest life?
See Section 20.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Tranches |
|
66. |
A mortgage pool is divided into A, B, C, and Z-tranches as discussed in the textbook. What happens to the initial interest payment for the Z tranche?
See Section 20.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Tranches |
|
67. |
Which one of the following statements regarding PAC bonds is correct?
See Section 20.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Pac Bonds |
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68. |
Which one of the following is required for the cash flows on a PAC bond to be predictable?
See Section 20.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Pac Bonds |
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69. |
A PAC support bond is most similar to which tranche in a sequential CMO?
See Section 20.4 |
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Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.4 Topic: Pac Support Bond |
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70. |
PAC bondholders receive payments of principal based on which one of the following?
See Section 20.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Pac Bonds |
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71. |
After month 30, assuming that prepayments remain within the PAC collar, the holders of a PAC bond will receive which one of the following payments?
See Section 20.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Pac Bonds |
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72. |
How are the cash flows allocated when actual prepayments fall below a PAC collar's lower bound?
See Section 20.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: Pac Bonds |
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73. |
Assume that a mortgage pool follows a specified PSA prepayment schedule. Given this, the cash flow yield on the mortgage pool will do which one of the following?
See Section 20.7 |
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Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.7 Topic: Cash Flow Yield |
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74. |
What is the monthly mortgage payment on a $255,000, 25-year loan if the interest rate is 5.50 percent?
Calculator solution: |
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Blooms: Apply Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Payment |
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75. |
You want to borrow $180,000 at 6.25 percent interest. If you assume a 10-year loan, the monthly payment will be _____ as compared to _____ if you assume a 20-year loan.
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Blooms: Apply Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Payment |
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76. |
You took out a 20-year, $125,000, 4.5 percent loan 8 years ago. What is your current principal balance, assuming payments are made monthly?
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Blooms: Apply Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Balance |
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77. |
Ten years ago, you borrowed $165,000 for 25 years at 7.5 percent interest. What is the current principal balance, assuming payments are made monthly?
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Blooms: Apply Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Balance |
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78. |
You are borrowing $260,000 for 25 years at 5.5 percent. Payments will be made monthly. What is the total amount of interest you will pay if you pay the loan as agreed over the 25 years?
Total interest = ($1,596.63 × 25 × 12) - $260,000 = $314,785.89 |
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Blooms: Apply Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Interest |
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79. |
Four years ago, you borrowed $250,000 for 20 years at 8 percent. Payments are made monthly. How much interest have you paid thus far?
Interest paid to date = ($2,091.10 × 4 × 12) - ($250,000 - $226,083) = $76,456 |
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Blooms: Apply Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 2 Medium Section: 20.2 Topic: Mortgage Interest |
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80. |
You just assumed a 30-year mortgage for $300,000 at 6 percent interest. How much of the first monthly payment will be applied to the principal balance?
Interest included in first payment = $300,000 × (.06/12) = $1,500 Principal portion of first payment = $1,798.65 - $1,500.00 = $298.65 |
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Blooms: Apply Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 2 Medium Section: 20.2 Topic: Mortgage Amortization |
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81. |
You recently assumed a 15-year mortgage for $150,000 at 6.5 percent interest. How much of the second monthly payment will be applied to the principal balance?
Interest on the first payment = $150,000 × (.065/12) = $812.50 Principal on the first payment = $1,306.66 - $812.50 = $494.16 Interest on the second payment = ($150,000 - $494.16) × (.065/12) = $809.82 |
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Blooms: Apply Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 2 Medium Section: 20.2 Topic: Mortgage Amortization |
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82. |
You have a 25-year mortgage at 5 percent interest. The initial loan amount was $250,000. By how much did the principal decrease over the first 10 years of the loan? Payments are made monthly.
Decrease in principal = $250,000 - $184,811 = $65,189 |
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Blooms: Apply Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 2 Medium Section: 20.2 Topic: Mortgage Amortization |
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83. |
You have a 30-year, $180,000 mortgage. The interest rate is 7.5 percent. What is the amount of the mortgage prepayment if you pay $1,400 as your first payment?
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Blooms: Apply Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Prepayments |
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84. |
You have a 25-year, $225,000 mortgage at 5.5 percent interest. What is the amount of your mortgage prepayment if you pay $1,650 as your second mortgage payment? Assume your first payment was the agreed upon amount.
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Blooms: Apply Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Mortgage Prepayments |
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85. |
You have decided to pay $1,800 a month on your 30-year, $225,000 mortgage. The interest rate is 7.75 percent. What is your total prepayment amount for year two?
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Blooms: Apply Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 2 Medium Section: 20.2 Topic: Mortgage Prepayments |
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86. |
You are currently borrowing $175,000 to buy a house. The mortgage is for 15 years at 6 percent. How much would you save each month if you could finance this amount at 5 percent for the same time period?
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Blooms: Apply Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 2 Medium Section: 20.2 Topic: Mortgage Financing |
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87. |
You are assuming a 30-year mortgage for $230,000 at 7.75 percent interest. How much would you save in interest if you financed this loan at 7.25 percent for 20 years?
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Blooms: Apply Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 2 Medium Section: 20.2 Topic: Mortgage Financing |
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88. |
The CPR for a seasoned 150 PSA mortgage is 9.8 percent. What is the single monthly mortality?
SMM = 1 - (1 - .098)1/12 = 0.8558 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.4 Topic: Single Monthly Mortality |
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89. |
The CPR for an unseasoned 100 PSA mortgage is 4.5 percent. What is the single monthly mortality?
SMM = 1 - (1 - .045)1/12 = 0.3830 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.4 Topic: Single Monthly Mortality |
Essay Questions
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90. |
What are the advantages and the disadvantages of a homeowner selecting a 30-year mortgage rather than a 20-year mortgage? Answer will vary Feedback: The primary advantage is the lower required monthly payment. The primary disadvantages are the higher total interest cost for the loan and the longer period of payments. However, if the homeowner has sufficient funds, he or she can prepay on the 30-year mortgage such that the loan is paid off in 20 years. However, if funds are not available to do that, the homeowner does have the option of paying the lower 30-year payment amount. Another disadvantage may be that the longer term loan may carry a higher interest rate. |
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Blooms: Understand Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Fixed Mortgages |
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91. |
How do CMOs increase the availability of mortgage funds? Answer will vary Feedback: CMOs are packaged mortgages which are combined into a mortgage pool. This pool distributes its cash flows to IOs, POs, and PACs which allow individuals and institutions to purchase those investments which meet their investment needs and goals. These investments increase the amount of money available for financing mortgages and thus provide liquidity to the mortgage market. |
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Blooms: Understand Learning Objective: 20-04 How collateralized mortgage obligations are created and divided. Level of Difficulty: 1 Easy Section: 20.6 Topic: CMOs |
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92. |
Explain what a reverse mortgage is, how it works, and who it is intended to help. Answer will vary Feedback: A reverse mortgage provides money to a homeowner in exchange for increasing the mortgage amount due on a home. The homeowner receives payments, either as he or she needs funds or on a regular basis. These payments, plus the accrued interest and costs, become a lien on the home. The homeowner pays no payments on this mortgage as long as he or she is residing in the home. The mortgage becomes due and payable only when the homeowner either moves from the home or passes away. These mortgages are designed to aid an individual 62 years of age or older by providing liquidity from the equity ownership in the home. |
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Blooms: Understand Learning Objective: 20-01 The workings of a fixed-rate mortgage. Level of Difficulty: 1 Easy Section: 20.2 Topic: Reverse Mortgage |
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