Finance
QUESTION 1
A call provision gives bondholders the right to demand, or “call for,” repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.
True False
QUESTION 2
Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor’s perspective than regular bonds.
True False
QUESTION 3
Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.
True False
QUESTION 4
Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity. Many bond indentures allow the company to acquire bonds for a sinking fund by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value.
True False
QUESTION 5
For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.
True False
QUESTION 6
The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.
True False
QUESTION 7
If investors become less averse to risk, the slope of the Security Market Line (SML) will increase.
True False
QUESTION 8
If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the stock with the low standard deviation.
True False
QUESTION 9
It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm are negative.
True False
QUESTION 10
If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the low standard deviation stock.
True False
QUESTION 11
The SML relates required returns to firms’ systematic (or market) risk. The slope and intercept of this line can be influenced by managerial actions.
True False
QUESTION 12
We will almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.
True False
QUESTION 13
Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise. Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.
True False
QUESTION 14
The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.
True False
QUESTION 15
In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are interested in ex ante (future) data.
True False
QUESTION 16
If markets are in equilibrium, which of the following conditions will exist?
a. The expected and required returns on stocks and bonds should be equal.
b. All stocks should have the same realized return during the coming year.
c.Each stock’s expected return should equal its realized return as seen by the marginal investor.
d. Each stock’s expected return should equal its required return as seen by the marginal investor.
e. All stocks should have the same expected return as seen by the marginal investor.
QUESTION 17
A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?
a. The bond’s current yield is greater than 9%.
b. The bond is selling below its par value.
c. If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.
d. The bond is selling at a discount.
e. If the yield to maturity remains constant, the bond’s price one year from now will be higher than its current price.
QUESTION 18
Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?
a. An 8-year bond with a 9% coupon.
b. A 1-year bond with a 15% coupon.
c. A 10-year bond with a 10% coupon.
d. A 10-year zero coupon bond.
e. A 3-year bond with a 10% coupon.
QUESTION 19
A 15-year bond has an annual coupon rate of 8%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 6%. Which of the following statements is CORRECT?
a. If market interest rates decline, the price of the bond will also decline.
b. The bond should currently be selling at its par value.
c. The bond is currently selling at a price below its par value.
d. If market interest rates remain unchanged, the bond’s price one year from now will be lower than it is today.
e. If market interest rates remain unchanged, the bond’s price one year from now will be higher than it is today.
QUESTION 20
Stock A’s beta is 1.7 and Stock B’s beta is 0.7. Which of the following statements must be true about these securities? (Assume market equilibrium.)
a. Stock B must be a more desirable addition to a portfolio than A.
b. The expected return on Stock A should be greater than that on B.
c. When held in isolation, Stock A has more risk than Stock B.
d. Stock A must be a more desirable addition to a portfolio than B.
e. The expected return on Stock B should be greater than that on A.
QUESTION 21
Recession, inflation, and high interest rates are economic events that are best characterized as being
a. Among the factors that are responsible for market risk.
b. Company-specific risk factors that can be diversified away.
c. Systematic risk factors that can be diversified away.
d. Irrelevant except to governmental authorities like the Federal Reserve.
e. Risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.
QUESTION 22
Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?
a. Standard deviation; correlation coefficient.
b. Beta; beta.
c. Coefficient of variation; beta.
d. Beta; variance.
e. Variance; correlation coefficient.
QUESTION 23
If Tall Paul can earn 6.5% on comparable bonds, what value would he place on bonds issued by the Bieg Company that have an 5.25% coupon rate, semi-annual payments, $1,000 face value, and 10 years to maturity? (Round Your Answer to 2 Decimal Places: X.XX)
QUESTION 24
The McDonnell Company has outstanding bonds with a coupon rate of 6.75% and semi-annual payments. The bonds are redeemable at their face value on December 30, 2032. If Weege can earn 5% on comparable investments and settle the transaction on March 24, 2015, how much should he be willing to pay per $100 of face value for the bond? (Round Your Answer to 2 Decimal Places: X.XX)
QUESTION 25
A 10-year, 12% semiannual coupon bond with a par value of $1000 may be called in four years at a call price of $1,060. The bond sells for $1,100. Assume that the bond has just been issued.
What is the bond’s yield to maturity? (Round Your Answer as a Percentage with 2 Decimal Places, For Example: X.XX%)
QUESTION 26
A 10-year, 12% semiannual coupon bond with a par value of $1000 may be called in four years at a call price of $1,060. The bond sells for $1,100. Assume that the bond has just been issued.
What is the bond’s current yield? (Round Your Answer as a Percentage with 2 Decimal Places, For Example: X.XX%)
QUESTION 27
A 10-year, 12% semiannual coupon bond with a par value of $1000 may be called in four years at a call price of $1,060. The bond sells for $1,100. Assume that the bond has just been issued.
What is the bond’s capital gain or loss yield? (Round Your Answer as a Percentage with 2 Decimal Places, For Example: X.XX%)
QUESTION 28
A 10-year, 12% semiannual coupon bond with a par value of $1000 may be called in four years at a call price of $1,060. The bond sells for $1,100. Assume that the bond has just been issued.
What is the bond’s yield to call? (Round Your Answer as a Percentage with 2 Decimal Places, For Example: X.XX%)
QUESTION 29
Onions Tatlow Enterprises is considering a capital project that has a one year life and project returns dependent on the state of the economy. The estimated rates of return are shown below:
estimated rates of return
STATE OF THE ECONOMY PROBABILITY OF EACH STATE OCCURRING RATES OF RETURN IF STATE OCCURS
Boom .20 20%
Normal .40 10
Recession .40 -8
What is the project’s expected return? (Round Your Answer as a Percentage with 2 Decimal Places, For Example: X.XX%)
QUESTION 30
The Geezer Keyes Company is considering two capital projects that have a one year life and project returns dependent on the state of the economy. The estimated rates of return are shown below:
estimated rates of return
STATE OF THE ECONOMY PROBABILITY OF EACH STATE OCCURRING RATES OF RETURN IF STATE OCCURS
A B
Boom .20 4% 25%
Normal .40 5 12
Recession .40 10 -2
Expected Return 6.80% 9.00%
Standard Deviation 2.64% 10.12%
What is the correlation of the returns for projects A and B? (Round Your Answer as a Percentage, For Example XX%)
QUESTION 31
If the risk free rate of return is 2% and the expected return on the market is 8%, what rate of return would investors require on a stock of the Big Bob Kostin Company with a beta of 1.75? (Round Your Answer as a Percentage with 2 Decimal Places, For Example: X.XX %)
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