Question 1

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?

Accepted Answer

A)   the bond is currently selling at a price below its par value.
B)   if market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.
C)   the bond should currently be selling at its par value.
D)   if market interest rates remain unchanged, the bond's price one year from now will be higher than it is today.
E)   if market interest rates decline, the price of the bond will also decline.F) C) and E)
G) All of the above

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.
B)   a time line is not meaningful unless all cash flows occur annually.
C)   time lines are not useful for visualizing complex problems prior to doing actual calculations.
D)   time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
E)   time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.F) A) and C)
G) B) and E)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   if a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
B)   the stock valuation model, p0 = d1/(rs σ g) , can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.
C)   the price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.
D)   the constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time.
E)   the constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.F) A) and C)
G) C) and D)

Question 4

Your bank offers a savings account that pays 3.5% interest, compounded annually. If you invest $1,000 in the account, then how much will it be worth at the end of 25 years?

Accepted Answer

A)   $2,245.08
B)   $2,363.24
C)   $2,481.41
D)   $2,605.48
E)   $2,735.75F) A) and E)
G) A) and D)

Question 5

If D0 = $1.75, g (which is constant)  = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?

Accepted Answer

A)   8.37%
B)   8.59%
C)   8.81%
D)   9.03%
E)   9.27%F) A) and B)
G) All of the above

Question 6

The CAPM is built on historic conditions, although in most cases we use expected future data in applying it. Because betas used in the CAPM are calculated using expected future data, they are not subject to changes in future volatility. This is one of the strengths of the CAPM.

Accepted Answer

A) True 
 B)False

Question 7

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

Accepted Answer

A)   8.24%
B)   8.45%
C)   8.66%
D)   8.88%
E)   9.10%F) All of the above
G) A) and C)

Question 8

Charlie and Lucinda each have $50,000 invested in stock portfolios. Charlie's has a beta of 1.2, an expected return of 10.8%, and a standard deviation of 25%. Lucinda's has a beta of 0.8, an expected return of 9.2%, and a standard deviation that is also 25%. The correlation coefficient, r, between Charlie's and Lucinda's portfolios is zero. If Charlie and Lucinda marry and combine their portfolios, which of the following best describes their combined $100,000 portfolio?

Accepted Answer

A)   the combined portfolio's beta will be equal to a simple weighted average of the betas of the two individual portfolios, 1.0; its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios, 10.0%; and its standard deviation will be less than the simple average of the two portfolios' standard deviations, 25%.
B)   the combined portfolio's expected return will be greater than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
C)   the combined portfolio's standard deviation will be greater than the simple average of the two portfolios' standard deviations, 25%.
D)   the combined portfolio's standard deviation will be equal to a simple average of the two portfolios' standard deviations, 25%.
E)   the combined portfolio's expected return will be less than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.F) A) and D)
G) All of the above

Question 9

A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par. These bonds provide compensation to investors in the form of capital appreciation.

Accepted Answer

A) True 
 B)False

Question 10

Stocks A and B are quite similar: Each has an expected return of 12%, a beta of 1.2, and a standard deviation of 25%. The returns on the two stocks have a correlation of 0.6. Portfolio P has 50% in Stock A and 50% in Stock B. Which of the following statements is CORRECT?

Accepted Answer

A)   portfolio p has a standard deviation that is greater than 25%.
B)   portfolio p has an expected return that is less than 12%.
C)   portfolio p has a standard deviation that is less than 25%.
D)   portfolio p has a beta that is less than 1.2.
E)   portfolio p has a beta that is greater than 1.2.F) C) and E)
G) None of the above

Question 11

The slope of the SML is determined by the value of beta.

Accepted Answer

A) True 
 B)False

Question 12

Erickson Inc. is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%. What is the project's coefficient of variation?

Accepted Answer

A)   1.20
B)   1.26
C)   1.32
D)   1.39
E)   1.46F) None of the above
G) D) and E)

Question 13

Your friend is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. She is highly risk averse and has asked for your advice. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter?

Accepted Answer

A)   stock a.
B)   stock b.
C)   neither a nor b, as neither has a return sufficient to compensate for risk.
D)   add a, since its beta must be lower.
E)   either a or b, i.e., the investor should be indifferent between the two.F) A) and C)
G) C) and D)

Question 14

Joel Foster is the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. What rate of return should investors expect (and require)  on this fund?
 StackAmount.BetaA$1,075,0001.20 B675,0000.50C750,0001.40D500,0000.75$3.000.000\begin{array}{lrl}	ext {Stack}& 	ext {Amount.}& 	ext {Beta}\\mathrm{A} & \$ 1,075,000 & 1.20 \\mathrm{~B} & 675,000 & 0.50 \\mathrm{C} & 750,000 & 1.40 \\mathrm{D} & 500,000 & 0.75\&\$ 3.000 .000\end{array}StackA BCD​Amount.$1,075,000675,000750,000500,000$3.000.000​Beta1.200.501.400.75​

Accepted Answer

A)   10.56%
B)   10.83%
C)   11.11%
D)   11.38%
E)   11.67% F) A) and C)
G) C) and E)

Question 15

Megan Ross holds the following portfolio:  StockInvestmentBetaA$150,0001.40B50,0000.80C100,0001.00D75,0001.20Total$375,000\begin{array}{lll}Stock&Investment&Beta\A&\$ 150,000 & 1.40 \B&50,000 & 0.80 \C&100,000 & 1.00 \D&75,000 & 1.20\Total&\$ 375,000 \\end{array}StockABCDTotal​Investment$150,00050,000100,00075,000$375,000​Beta1.400.801.001.20​ 
What is the portfolio's beta?

Accepted Answer

A)   1.06
B)   1.17
C)   1.29
D)   1.42
E)   1.56 F) A) and B)
G) C) and E)

Question 16

You have a portfolio P that consists of 50% Stock X and 50% Stock Y. Stock X has a beta of 0.7 and Stock Y has a beta of 1.3. The standard deviation of each stock's returns is 20%. The stocks' returns are independent of each other, i.e., the correlation coefficient, r, between them is zero. Given this information, which of the following statements is CORRECT?

Accepted Answer

A)   the required return on portfolio p is equal to the market risk premium (rm σ rrf) .
B)   portfolio p has a beta of 0.7.
C)   portfolio p has a beta of 1.0 and a required return that is equal to the riskless rate, rrf.
D)   portfolio p has the same required return as the market (rm) .
E)   portfolio p has a standard deviation of 20%.F) None of the above
G) B) and E)

Question 17

Donald Gilmore has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?

Accepted Answer

A)   0.65
B)   0.72
C)   0.80
D)   0.89
E)   0.98F) B) and D)
G) A) and C)

Question 18

Suppose a State of New Mexico bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

Accepted Answer

A)   $651.60
B)   $684.18
C)   $718.39
D)   $754.31
E)   $792.02F) A) and B)
G) A) and C)

Question 19

Sentry Corp. bonds have an annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?

Accepted Answer

A)   5.56%
B)   5.85%
C)   6.14%
D)   6.45%
E)   6.77%F) A) and B)
G) A) and D)

Question 20

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year. How much would be in the account after 8 months, assuming each month has 30 days?

Accepted Answer

A)   $5,178.09
B)   $5,436.99
C)   $5,708.84
D)   $5,994.28
E)   $6,294.00F) All of the above
G) B) and C)

Exam 29: Basic Financial Tools: A review

Suppose a State of New Mexico bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

Correct Answer
verified

Erickson Inc. is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%. What is the project's coefficient of variation?

Correct Answer
verified

Sentry Corp. bonds have an annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?

Correct Answer
verified

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

Correct Answer
verified

Your bank offers a savings account that pays 3.5% interest, compounded annually. If you invest $1,000 in the account, then how much will it be worth at the end of 25 years?

Correct Answer
verified

Megan Ross holds the following portfolio: $\begin{array}{lll}Stock&Investment&Beta\\A&\$ 150,000 & 1.40 \\B&50,000 & 0.80 \\C&100,000 & 1.00 \\D&75,000 & 1.20\\Total&\$ 375,000 \\\end{array}$ What is the portfolio's beta?

Correct Answer
verified

The slope of the SML is determined by the value of beta.

Correct Answer
verified

Correct Answer
verified

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?

Correct Answer
verified

Stocks A and B are quite similar: Each has an expected return of 12%, a beta of 1.2, and a standard deviation of 25%. The returns on the two stocks have a correlation of 0.6. Portfolio P has 50% in Stock A and 50% in Stock B. Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Donald Gilmore has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?

Correct Answer
verified

Correct Answer
verified

A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par. These bonds provide compensation to investors in the form of capital appreciation.

Correct Answer
verified

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year. How much would be in the account after 8 months, assuming each month has 30 days?

Correct Answer
verified

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?

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

The CAPM is built on historic conditions, although in most cases we use expected future data in applying it. Because betas used in the CAPM are calculated using expected future data, they are not subject to changes in future volatility. This is one of the strengths of the CAPM.

Correct Answer
verified

Exam 29: Basic Financial Tools: A review

Suppose a State of New Mexico bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

Correct AnswerverifiedShow Answer

Erickson Inc. is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%. What is the project's coefficient of variation?

Correct AnswerverifiedShow Answer

Sentry Corp. bonds have an annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?

Correct AnswerverifiedShow Answer

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

Correct AnswerverifiedShow Answer

Your bank offers a savings account that pays 3.5% interest, compounded annually. If you invest $1,000 in the account, then how much will it be worth at the end of 25 years?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The slope of the SML is determined by the value of beta.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?

Correct AnswerverifiedShow Answer

Stocks A and B are quite similar: Each has an expected return of 12%, a beta of 1.2, and a standard deviation of 25%. The returns on the two stocks have a correlation of 0.6. Portfolio P has 50% in Stock A and 50% in Stock B. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Donald Gilmore has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par. These bonds provide compensation to investors in the form of capital appreciation.

Correct AnswerverifiedShow Answer

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year. How much would be in the account after 8 months, assuming each month has 30 days?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The CAPM is built on historic conditions, although in most cases we use expected future data in applying it. Because betas used in the CAPM are calculated using expected future data, they are not subject to changes in future volatility. This is one of the strengths of the CAPM.

Correct AnswerverifiedShow Answer

Correct Answer
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