Finance Final (old exam questions)

Which one of the following bonds is the most sensitive to changes in market interest rates? A) 10-year, 5 percent coupon B) 5-year, zero coupon C) 5-year, 5 percent coupon D) 5-year, 8 percent coupon E) 10-year, zero coupon

10-year, zero coupon

Your aunt loaned you money at 1.00 percent interest per month. What is the APR of this loan? A) 12.16 percent B) 12.00 percent C) 16.28 percent D) 11.88 percent E) 16.00 percent

12.00 percent

Of these choices, a risk-adverse investor who prefers to minimize interest rate risk is most apt to invest in: A) 3-year, zero coupon bonds. B) 5-year, 7 percent coupon bonds. C) 20-year, 6 percent coupon bonds. D) 2-year, 7 percent coupon bonds. E) 20-year, zero coupon bonds.

2-year, 7 percent coupon bonds.

Which one of the following has the highest effective annual rate? A) 6 percent compounded semiannually B) 6 percent compounded daily C) 6 percent compounded annually D) 6 percent compounded quarterly E) 6 percent compounded every 2 years

6 percent compounded daily

A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock? A) An increase in the probability of an economic boom B) An increase in the rate of return for a normal economy C) A decrease in the probability of an economic boom D) An increase in the rate of return in a recessionary economy E) A decrease in the probability of a recession occurring

A decrease in the probability of an economic boom

Which statement is true? A) All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity. B) All else equal, an ordinary annuity is more valuable than an annuity due. C) All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity. D) An annuity with payments at the beginning of each period is called an ordinary annuity. E) All else equal, a decrease in the number of payments increases the future value of an annuity due.

All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

The lowest rating a bond can receive from Standard and Poor's and still be classified as an investment-quality bond is: A) Ba. B) B. C) BBB. D) BB. E) A.

BBB.

Which one of these is the best example of systematic risk? A) Decrease in textile imports B) Decrease in gross domestic product C) Discovery of a major gas field D) Decrease in management bonuses for banking executives E) Increase in agricultural exports

Decrease in gross domestic product

The capital gains yield equals which one of the following? A) Dividend growth rate B) Dividend yield C) Market rate of return D) Total yield E) Required rate of return

Dividend growth rate

Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate? A) Risk premium B) Expected return C) Market rate D) Real return E) Systematic return

Expected return

Which one of the following is defined as the average compound return earned per year over a multiyear period? A) Normal distribution of returns B) Geometric average return C) Standard deviation of returns D) Variance of returns E) Arithmetic average return

Geometric average return

Which one of the following statements is correct? A) The risk premium on a risk-free security is generally considered to be one percent. B) If a risky security is correctly priced, its expected risk premium will be positive. C) The expected rate of return on any security, given multiple states of the economy, must be positive. D) There is an inverse relationship between the level of risk and the risk premium given a risky security. E) If a risky security is priced correctly, it will have an expected return equal to the risk-free rate.

If a risky security is correctly priced, its expected risk premium will be positive.

Which one of the following will increase the current value of a stock? A) Decrease in the dividend growth rate B) Increase in the capital gains yield C) Decrease in the expected dividend for next year D) Increase in the required return E) Increase in the market rate of return

Increase in the capital gains yield

A real rate of return is defined as a rate that has been adjusted for which one of the following? A) Default risk B) Inflation C) Interest rate risk D) Taxes E) Liquidity

Inflation

Stacey deposits $5,000 into an account that pays 2 percent interest, compounded annually. At the same time, Kurt deposits $5,000 into an account paying 3.5 percent interest, compounded annually. At the end of three years: A) Stacey will have more money saved than Kurt. B) Both Stacey and Kurt will have accounts of equal value. C) Kurt will earn exactly twice the amount of interest that Stacey earns. D) Kurt will have a larger account value than Stacey will. E) Kurt will have twice the money saved that Stacey does.

Kurt will have a larger account value than Stacey will.

When, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns? A) When the set of returns has a wide frequency distribution B) Never C) When the set of returns includes only risk-free rates D) When the set of returns has a very narrow frequency distribution E) When all of the rates of return in the set of returns are equal to each other

Never

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent? A) Portfolio weight B) Portfolio beta C) Portfolio variance D) Portfolio expected return E) Portfolio standard deviation

Portfolio weight

Diversifying a portfolio across various sectors and industries might do more than one of the following. However, this diversification must do which one of the following? A) Reduce the portfolio's systematic risk level B) Increase the security's risk premium C) Reduce the portfolio's unique risks D) Reduce the beta of the portfolio to one E) Increase the expected risk premium

Reduce the portfolio's unique risks

On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called? A) Real return B) Inflation premium C) Risk premium D) Average return E) Required return

Risk premium

What is the market called that facilitates the sale of shares between individual investors? A) Primary B) Initial C) Inside D) Proxy E) Secondary

Secondary

Which one of the following could cause the total return on an investment to be a negative rate? A) Stock price that declines over the investment period B) Stock price that increases over the investment period C) Stock price that remains constant over the investment period D) Constant annual dividend amount E) Increase in the annual dividend amount

Stock price that declines over the investment period

The risk premium for an individual security is based on which one of the following types of risk? A) Total B) Surprise C) Diversifiable D) Systematic E) Unsystematic

Systematic

On which one of the following dates is the principal amount of a semiannual coupon bond repaid? A) A portion of the principal is repaid on each coupon date. B) The entire bond is repaid on the issue date. C) The entire bond is repaid on the maturity date. D) Half of the principal is repaid evenly over each coupon period with the remainder paid on the issue date. E) Half of the principal is repaid evenly over each coupon period with the remainder paid on the maturity date.

The entire bond is repaid on the maturity date.

New Labs just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient? A) The price of New Labs stock increases rapidly to a higher price and then remains at that price. B) All stocks quickly increase in value and then all but New Labs stock fall back to their original values. C) The price of New Labs stock increases rapidly and then settles back to its pre-announcement level. D) The value of all stocks suddenly increase and then level off at their higher values. E) The price of New Labs stock remains unchanged.

The price of New Labs stock increases rapidly to a higher price and then remains at that price.

Which one of the following best exemplifies unsystematic risk? A) Unexpected increase in the variable costs for a firm B) Unexpected increase in interest rates C) Unexpected economic collapse D) Expected increase in tax rates E) Sudden decrease in inflation

Unexpected increase in the variable costs for a firm

Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security? A) Risk-free rate of return B) Market risk premium C) Security beta multiplied by the market rate of return D) Security beta multiplied by the market risk premium E) Zero

Zero

A debenture is: A) a bearer form bond. B) a bond with a call provision. C) a bond secured by a blanket mortgage. D) a bond with a sinking fund provision. E) an unsecured bond.

an unsecured bond.

A bond dealer sells at the _____ price and buys at the _____ price. A) asked; asked B) dirty; clean C) asked; bid D) bid; asked E) clean; dirty

asked; bid

A broker is an agent who: A) is ready to buy or sell at any time. B) brings buyers and sellers together. C) trades on the floor of an exchange for himself or herself. D) buys and sells from inventory. E) offers new securities for sale to dealers only.

brings buyers and sellers together.

The goal of financial management is to increase the: A) book value of equity. B) number of shares outstanding. C) dividends paid per share. D) current market value per share. E) future value of the firm's total equity.

current market value per share.

An agent who buys and sells securities from inventory is called a: A) dealer. B) commission broker. C) floor trader. D) broker. E) floor broker.

dealer.

All else held constant, the present value of an annuity will decrease if you: A) increase the payment amount. B) increase the annuity's future value. C) decrease the discount rate. D) decrease the annuity payment. E) increase the time period.

decrease the annuity payment.

Bond ratings classify bonds based on: A) default and liquidity risks. B) default risk only. C) liquidity, interest rate, and default risk. D) liquidity, market, and default risk. E) interest rate, inflation rate, and default risk.

default risk only.

Assume all else is equal. When comparing savings accounts, you should select the account that has the: A) lowest effective annual rate. B) highest stated rate. C) highest effective annual rate. D) lowest annual percentage rate. E) highest annual percent rate.

highest effective annual rate.

All else held constant, the future value of an annuity will increase if you: A) decrease both the interest rate and the time period. B) increase the time period. C) decrease the interest rate. D) decrease the present value. E) decrease the payment amount.

increase the time period.

When a bond's yield to maturity is less than the bond's coupon rate, the bond: A) is selling at a discount. B) had to be recently issued. C) is priced at par. D) is selling at a premium. E) has reached its maturity date.

is selling at a premium.

Unsystematic risk can be defined by all of the following except: A) diversifiable risk. B) unique risk. C) asset-specific risk. D) market risk. E) unrewarded risk.

market risk.

Systematic risk is: A) measured by beta. B) totally eliminated when a portfolio is fully diversified. C) defined as the total risk associated with surprise events. D) measured by standard deviation. E) risk that affects a limited number of securities.

measured by beta.

If the financial markets are Semistrong form efficient, then: A) only the most talented analysts can determine the true value of a security. B) no one individual has an advantage in the marketplace. C) only individuals with private information have a marketplace advantage. D) technical analysis provides the best tool to use to gain a marketplace advantage. E) every security offers the same rate of return.

only individuals with private information have a marketplace advantage.

A call provision grants the bond issuer the: A) right to repurchase the bonds on the open market prior to maturity. B) right to automatically extend the bond's maturity date. C) option to exchange the bonds for equity securities. D) right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds. E) option of repurchasing the bonds prior to maturity at a prespecified price.

option of repurchasing the bonds prior to maturity at a prespecified price.

The primary purpose of protective covenants is to help: A) protect bondholders from issuer actions. B) bondholders whose bonds are called. C) convert bearer bonds into registered form. D) the issuer in case of default. E) reduce interest rate risk.

protect bondholders from issuer actions.

Given an interest rate of zero percent, the future value of a lump sum invested today will always: A) decrease if the investment time period is lengthened. B) decrease if the investment time period is shortened. C) remain constant, regardless of the investment time period. D) be infinite in value. E) be equal to $0.

remain constant, regardless of the investment time period.

Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis. A) annual B) monthly C) quarterly D) semiannual E) daily

semiannual

The dividend yield on a stock will increase if the: A) stock price increases. B) capital gains rate decreases. C) tax rate on dividends increases. D) dividend growth rate decreases. E) stock price decreases.

stock price decreases.

For a risky security to have a positive expected return but less risk than the overall market, the security must have a beta: A) that is > 0 but < 1. B) that is infinite. C) of zero. D) that is > 1. E) of one.

that is > 0 but < 1.

An agency issue is most apt to develop when: A) the control of a firm is separated from the firm's ownership. B) a firm is structured as a general partnership. C) a firm downsizes. D) the firm's owner is also its key manager. E) a firm encounters a period of stagnant growth.

the control of a firm is separated from the firm's ownership.

Standard deviation measures _____ risk while beta measures _____ risk. A) unsystematic; systematic B) systematic; unsystematic C) total; unsystematic D) total; systematic E) asset-specific; market

total; systematic

A portfolio is comprised of 35 securities with varying betas. The lowest beta for an individual security is .74 and the highest of the security betas of 1.51. Given this information, you know that the portfolio beta: A) is the geometric average of the individual security betas. B) will be between 0 and 1.0. C) must be less than the market beta. D) must be 1.0 because of the large number of securities in the portfolio. E) will be greater than or equal to .74 but less than or equal to 1.51.

will be greater than or equal to .74 but less than or equal to 1.51.

All else held constant, the present value of a bond increases when the: A) yield to maturity decreases. B) current yield increases. C) time to maturity of a zero coupon bond increases. D) time to maturity of a premium bond decreases. E) coupon rate decreases.

yield to maturity decreases.

The market-required rate of return on a bond that is held for its entire life is called the: A) dirty yield. B) coupon rate. C) call premium. D) current yield. E) yield to maturity.

yield to maturity.