Finance 425- Exam 1 practice exam

A municipal bond carries a coupon rate of 6¾% and is trading at par. What would be the equivalent taxable yield of this bond to a taxpayer in a 35% tax bracket?

10.38%

Find the after-tax return to a corporation that buys a share of preferred stock at $32, sells it at year-end at $32, and receives a $4 year-end dividend. The firm is in the 30% tax bracket. (Round your answer to 2 decimal places.) After-tax rate of return ?

11.38%

An investor is in a 30% combined federal plus state tax bracket. If corporate bonds offer 9% yields, what must municipals offer for the investor to prefer them to corporate bonds? aka after tax yield

6.3

____ is not a derivative security. A call option None of the options (All of the answers are derivative securities.) A futures contract A share of common stock

A share of common stock

1. A bond has a 5% coupon rate. The coupon is paid semi-annually and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest? A) $4.81 B) $9.72 C) $25.00 D) $50.00 E) None of the above are within $1 of the correct answer

A) $4.81

1. A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. A) $458 B) $641 C) $789 D) $1,000 E) $1,100

A) $458

1. An investor who goes short in a futures position ____________. A) commits to selling the underlying commodity at contract maturity B) commits to purchasing the underlying commodity at contract maturity C) has the right to selling the underlying commodity at contract maturity D) has the right to purchase the underlying commodity at contract maturity E) None of the above.

A) commits to selling the underlying commodity at contract maturity

1. You sold short 200 shares of common stock at $55 per share. Initial margin requirements are 55%, and maintenance margin is 30%. Assuming that when you first short the stock you put up the minimum required margin, at what price will you get a margin call? (Assume the price change happens immediately) A) $121.78 B) $65.57 C) $63.46 D) $35.36 E) None of the above are within $1 of the correct answer

B) $65.57

1. The efficient market hypothesis suggests that ____________ A) Active portfolio management strategies are the most appropriate investment strategies B) Passive portfolio management strategies are the most appropriate investment strategies. C) Either active or passive strategies may be appropriate, depending on the expected direction of the market. D) A bottom-up approach is the most appropriate investment strategy E) A top-down approach is the most appropriate investment strategy

B) Passive portfolio management strategies are the most appropriate investment strategies.

1. The city of Birmingham issues two bonds that are identical in every way except for the following. The first bond is a General Obligation bond while the second bond is a Sewer Revenue bond. As such you would expect the General Obligation bond to ______________ when compared to the Sewer Revenue bond. A) Pay a higher rate of interest B) Pay a lower rate of interest C) Pay the same rate of interest D) Not enough information given to determine the answer

B) Pay a lower rate of interest

1. Corporate bonds are currently offering yields of 7.2%. What must municipal bond yields be for an investor to prefer corporate bonds to municipals? (assume the investor is in the 28% federal tax bracket, and ignore state and local taxes) A) greater than 5.18% B) less than 5.18% C) greater than 9.22% D) less than 9.22% E) None of the above are within 0.50% of the correct answer

B) less than 5.18%

1. An order to buy or sell a security at the current quoted price is a _________. A) limit order B) market order C) stop-loss order D) stop-buy order

B) market order

1. You purchase a stock for $45. One year later you receive a $2 dividend and sell the stock for $48. What is the capital gain from your investment? A) 4.2% B) 4.4% C) 6.7% D) 7.0% E) 11.11%

C) 6.7%

1. The interest rate charged by large banks in London to lend money among themselves is called ________. A) The prime rate B) The discount rate C) LIBOR D) The fed funds rate E) The money market rate

C) LIBOR

1. Coca-Cola (KO) is currently trading for $47 per share. Which of the following options is more valuable? (Assume all of the following options expire in the same month) A) A call option with strike price = $45 B) A call option with strike price = $50 C) A put option with strike price = $45 D) A put option with strike price = $50 E) Not enough information is given

D) A put option with strike price = $50

1. A bond rated by S&P is considered "junk" if it falls below what rating? A) C B) B C) BB D) BBB E) A

D) BBB

1. A bond that has no collateral is called a ________________. A) Callable bond B) Junk bond C) Mortgage bond D) Debenture bond E) Municipal bond

D) Debenture bond

1. In general, all else being equal, a callable bond will pay a rate of interest _________ than a non-callable bond. a) higher than b) lower than c) equal to d) cannot be determined with the information given.

a) higher than

nancial markets allow for all but which one of the following? price securities according to their riskiness shift consumption through time from higher-income periods to lower allow most participants to routinely earn high returns with low risk channel funds from lenders of funds to borrowers of funds

allow most participants to routinely earn high returns with low risk

Which security should sell at a greater price? (LO 2-3) A three-month expiration call option with an exercise price of $40 or a three-month call on the same stock with an exercise price of $35.

call with lower exercise price 35

Real assets in the economy include all but which one of the following? buildings consumer durables land common stock

common stock

The right to buy an asset at a specified price?

long call

The right to sell an asset at a specified price?

long put

What features of money market securities distinguish them from other fixed-income securities?

low risk short term highly liquid their unit of value almost never changes

Which security should sell at a greater price? (LO 2-3) A put option on a stock selling at $50 or a put option on another stock selling at $60. (All other relevant features of the stocks and options are assumed to be identical.)

put option on the lower priced stock selling at 50

The obligation to sell an asset at a specified price?

short call

The obligation to buy an asset at a specified price?

short put

Asset allocation refers to _________. the analysis of the value of securities the allocation of the investment portfolio across broad asset classes the choice of specific assets within each asset class none of the options

the allocation of the investment portfolio across broad asset classes

Which security should sell at a greater price? (LO 2-3) a.A 10-year Treasury bond with a 9% coupon rate or a 10-year T-bond with a 10% coupon.

the higher coupon bond 10 yr bond with 10% coupon