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Exam 29: Basic Financial Tools: A review

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Question 71

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You have purchased a U.S. Treasury bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate will you earn on this bond?

A) 3.82%
B) 4.25%
C) 4.72%
D) 5.24%
E) 5.77%

F) None of the above
G) D) and E)

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Question 72

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The $10.00 million mutual fund Henry manages has a beta of 1.05 and a 9.50% required return. The risk-free rate is 4.20%. Henry now receives another $5.00 million, which he invests in stocks with an average beta of 0.65. What is the required rate of return on the new portfolio?(Hint: You must first find the market risk premium, then find the new portfolio beta.)

A) 8.83%
B) 9.05%
C) 9.27%
D) 9.51%
E) 9.74%

F) A) and E)
G) B) and D)

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Question 73

Multiple Choice

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Geraldine was injured in a car accident, and the insurance company has offered her the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave her as well off financially as with the annuity?

Stock X has a beta of 0.7 and Stock Y has a beta of 1.7. Which of the following statements must be true, according to the CAPM?

Assume that the risk-free rate, rRF, increases but the market risk premium, (rM σ rRF) , declines, with the net effect being that the overall required return on the market, rM, remains constant. Which of the following statements is CORRECT?

For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value.

$35.50 per share is the current price for Foster Farms' stock. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from today?

Burke Tires just paid a dividend of D0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?

You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. You should buy the bond if your required return on bonds with this risk is 12%.

A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio. It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

Which of the following statements is CORRECT?

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

Your Green Investment Tips subscription is about to expire. You plan to subscribe to the magazine for the rest of your life, and you can renew it by paying $85 annually, beginning immediately, or you can get a lifetime subscription for $850, also payable immediately. Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant, how many years must you live to make the lifetime subscription the better buy?

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

You are considering two equally risky annuities, each of which pays $15,000 per year for 20 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Martin Ortner holds a $200,000 portfolio consisting of the following stocks: $\begin{array}{lll}Stock&Investment&Beta\\A&\$ 50,000 & 0.95\\B&50,000 & 0.80 \\C&50,000 & 1.00 \\D&50,000 & 1.20\\Total&\$ 200,000 \\\end{array}$ What is the portfolio's beta?

You borrowed $50,000 which you must repay in 10 years. You plan to make an initial deposit today, then make 9 more deposits at the beginning of each the next 9 years, but with the deposits increasing at the inflation rate. You expect to earn 5% on your funds, and you expect a 3% inflation rate. To the nearest dollar, how large must your initial deposit be to enable you to reach your $50,000 target?