Question 1

Your bank account pays a 5% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Accepted Answer

A)  The periodic rate of interest is 5% and the effective rate of interest is also 5%.
B)  The periodic rate of interest is 1.25% and the effective rate of interest is 2.5%.
C)  The periodic rate of interest is 5% and the effective rate of interest is greater than 5%.
D)  The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%.
E)  The periodic rate of interest is 2.5% and the effective rate of interest is 5%.F) A) and C)
G) A) and B)

Question 2

You agree to make 24 deposits of $500 at the beginning of each month into a bank account.At the end of the 24th month,you will have $13,000 in your account.If the bank compounds interest monthly,what nominal annual interest rate will you be earning?

Accepted Answer

A)  7.62%
B)  8.00%
C)  8.40%
D)  8.82%
E)  9.26%F) A) and E)
G) B) and D)

Question 3

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value.Their nominal yield to maturity is 9.25%,they pay interest semiannually,and they sell at a price of $850.What is the bond's nominal (annual) coupon interest rate?

Accepted Answer

A)  6.27%
B)  6.60%
C)  6.95%
D)  7.32%
E)  7.70%F) C) and D)
G) B) and E)

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  If the risk-free rate rises, then the market risk premium must also rise.
B)  If a company's beta is halved, then its required return will also be halved.
C)  If a company's beta doubles, then its required return will also double.
D)  The slope of the security market line is equal to the market risk premium, (rM − rRF) .
E)  Beta is measured by the slope of the security market line.F) B) and C)
G) C) and D)

Question 5

Company A has a beta of 0.70,while Company B's beta is 1.20.The required return on the stock market is 11.00%,and the risk-free rate is 4.25%.What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium,then find the required returns on the stocks.)

Accepted Answer

A)  2.75%
B)  2.89%
C)  3.05%
D)  3.21%
E)  3.38%F) C) and E)
G) C) and D)

Question 6

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

Accepted Answer

A)  The discount rate decreases.
B)  The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.
C)  The discount rate increases.
D)  The riskiness of the investment's cash flows decreases.
E)  The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.F) B) and E)
G) A) and E)

Question 7

Portfolio AB was created by investing in a combination of Stocks A and B.Stock A has a beta of 1.2 and a standard deviation of 25%.Stock B has a beta of 1.4 and a standard deviation of 20%.Portfolio AB has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is CORRECT?

Accepted Answer

A)  Stock A has more market risk than Stock B but less stand-alone risk.
B)  Portfolio AB has more money invested in Stock A than in Stock B.
C)  Portfolio AB has the same amount of money invested in each of the two stocks.
D)  Portfolio AB has more money invested in Stock B than in Stock A.
E)  Stock A has more market risk than Portfolio AB.F) A) and B)
G) None of the above

Question 8

Connor Publishing's preferred stock pays a dividend of $1.00 per quarter,and it sells for $55.00 per share.What is its effective annual (not nominal) rate of return?

Accepted Answer

A)  6.62%
B)  6.82%
C)  7.03%
D)  7.25%
E)  7.47%F) A) and C)
G) A) and D)

Question 9

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%.

Accepted Answer

A) True 
 B)False

Question 10

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.)

Accepted Answer

A)  Stock B must be a more desirable addition to a portfolio than A.
B)  Stock A must be a more desirable addition to a portfolio than B.
C)  The expected return on Stock A should be greater than that on B.
D)  The expected return on Stock B should be greater than that on A.
E)  When held in isolation, Stock A has more risk than Stock B.F) B) and D)
G) A) and D)

Question 11

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) All of the above

Question 12

Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

Accepted Answer

A)  The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation.
B)  The beta of the portfolio is less than the average of the betas of the individual stocks.
C)  The beta of the portfolio is equal to the average of the betas of the individual stocks.
D)  The beta of the portfolio is larger than the average of the betas of the individual stocks.
E)  The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.F) None of the above
G) D) and E)

Question 13

A perpetuity pays $85 per year and costs $950.What is the rate of return?

Accepted Answer

A)  8.95%
B)  9.39%
C)  9.86%
D)  10.36%
E)  10.88%F) B) and E)
G) B) and D)

Question 14

The YTMs of three $1,000 face value bonds that mature in 10 years and have the same level of risk are equal.Bond A has an 8% annual coupon,Bond B has a 10% annual coupon,and Bond C has a 12% annual coupon.Bond B sells at par.Assuming interest rates remain constant for the next 10 years,which of the following statements is CORRECT?

Accepted Answer

A)  Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity.
B)  Bond C sells at a premium (its price is greater than par) , and its price is expected to increase over the next year.
C)  Bond A sells at a discount (its price is less than par) , and its price is expected to increase over the next year.
D)  Over the next year, Bond A's price is expected to decrease, Bond B's price is expected to stay the same, and Bond C's price is expected to increase.
E)  Bond A's current yield will increase each year.F) C) and E)
G) A) and E)

Question 15

If the discount (or interest)rate is positive,the present value of an expected series of payments will always exceed the future value of the same series.

Accepted Answer

A) True 
 B)False

Question 16

Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%.Each bond has face value of $1,000 and makes semiannual interest payments.If you require an 11.0% nominal yield to maturity on this investment,what is the maximum price you should be willing to pay for the bond?

Accepted Answer

A)  $891.00
B)  $913.27
C)  $936.10
D)  $959.51
E)  $983.49F) A) and B)
G) C) and D)

Question 17

How much would $1,growing at 3.5% per year,be worth after 75 years?

Accepted Answer

A)  $12.54
B)  $13.20
C)  $13.86
D)  $14.55
E)  $15.28F) All of the above
G) A) and B)

Question 18

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years.How much interest would you have to pay in the first year?

Accepted Answer

A)  $1,200.33
B)  $1,263.50
C)  $1,330.00
D)  $1,400.00
E)  $1,470.00F) D) and E)
G) B) and E)

Question 19

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?

Accepted Answer

A)  $225,367
B)  $237,229
C)  $249,090
D)  $261,545
E)  $274,622F) All of the above
G) B) and C)

Question 20

$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?

Accepted Answer

A)  $37.86
B)  $38.83
C)  $39.83
D)  $40.85
E)  $41.69F) None of the above
G) All of the above

Exam 29: Basic Financial Tools: a Review

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value.Their nominal yield to maturity is 9.25%,they pay interest semiannually,and they sell at a price of $850.What is the bond's nominal (annual) coupon interest rate?

Correct Answer
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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
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Which of the following statements is CORRECT?

Correct Answer
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Company A has a beta of 0.70,while Company B's beta is 1.20.The required return on the stock market is 11.00%,and the risk-free rate is 4.25%.What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium,then find the required returns on the stocks.)

Correct Answer
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How much would $1,growing at 3.5% per year,be worth after 75 years?

Correct Answer
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Correct Answer
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$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,r_s,is 9.00%.What is the stock's expected price 3 years from today?

Correct Answer
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Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

Correct Answer
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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.)

Correct Answer
verified

Correct Answer
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Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%.Each bond has face value of $1,000 and makes semiannual interest payments.If you require an 11.0% nominal yield to maturity on this investment,what is the maximum price you should be willing to pay for the bond?

Correct Answer
verified

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years.How much interest would you have to pay in the first year?

Correct Answer
verified

A perpetuity pays $85 per year and costs $950.What is the rate of return?

Correct Answer
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Connor Publishing's preferred stock pays a dividend of $1.00 per quarter,and it sells for $55.00 per share.What is its effective annual (not nominal) rate of return?

Correct Answer
verified

You agree to make 24 deposits of $500 at the beginning of each month into a bank account.At the end of the 24^th month,you will have $13,000 in your account.If the bank compounds interest monthly,what nominal annual interest rate will you be earning?

Correct Answer
verified

If the discount (or interest)rate is positive,the present value of an expected series of payments will always exceed the future value of the same series.

Correct Answer
verified

Portfolio AB was created by investing in a combination of Stocks A and B.Stock A has a beta of 1.2 and a standard deviation of 25%.Stock B has a beta of 1.4 and a standard deviation of 20%.Portfolio AB has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is CORRECT?

Correct Answer
verified

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?

Correct Answer
verified

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

Correct Answer
verified

Your bank account pays a 5% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Correct Answer
verified

Exam 29: Basic Financial Tools: a Review

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value.Their nominal yield to maturity is 9.25%,they pay interest semiannually,and they sell at a price of $850.What is the bond's nominal (annual) coupon interest rate?

Correct AnswerverifiedShow Answer

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Company A has a beta of 0.70,while Company B's beta is 1.20.The required return on the stock market is 11.00%,and the risk-free rate is 4.25%.What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium,then find the required returns on the stocks.)

Correct AnswerverifiedShow Answer

How much would $1,growing at 3.5% per year,be worth after 75 years?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

$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?

Correct AnswerverifiedShow Answer

Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

Correct AnswerverifiedShow Answer

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.)

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%.Each bond has face value of $1,000 and makes semiannual interest payments.If you require an 11.0% nominal yield to maturity on this investment,what is the maximum price you should be willing to pay for the bond?

Correct AnswerverifiedShow Answer

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years.How much interest would you have to pay in the first year?

Correct AnswerverifiedShow Answer

A perpetuity pays $85 per year and costs $950.What is the rate of return?

Correct AnswerverifiedShow Answer

Connor Publishing's preferred stock pays a dividend of $1.00 per quarter,and it sells for $55.00 per share.What is its effective annual (not nominal) rate of return?

Correct AnswerverifiedShow Answer

You agree to make 24 deposits of $500 at the beginning of each month into a bank account.At the end of the 24th month,you will have $13,000 in your account.If the bank compounds interest monthly,what nominal annual interest rate will you be earning?

Correct AnswerverifiedShow Answer

If the discount (or interest)rate is positive,the present value of an expected series of payments will always exceed the future value of the same series.

Correct AnswerverifiedShow Answer

Portfolio AB was created by investing in a combination of Stocks A and B.Stock A has a beta of 1.2 and a standard deviation of 25%.Stock B has a beta of 1.4 and a standard deviation of 20%.Portfolio AB has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

Correct AnswerverifiedShow Answer

Your bank account pays a 5% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct Answer
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$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,r_s,is 9.00%.What is the stock's expected price 3 years from today?

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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You agree to make 24 deposits of $500 at the beginning of each month into a bank account.At the end of the 24^th month,you will have $13,000 in your account.If the bank compounds interest monthly,what nominal annual interest rate will you be earning?

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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