Ch. 7 and 8 Practice Questions

University Corp. issued five-year bonds that pay a coupon of 6.5 percent semiannually. The current market rate for similar bonds is 5.5 percent. How much will you be willing to pay for the bond today? Do not round intermediate calculations. Round your answer to the nearest dollar.

$1,043

What is the price of a zero coupon bond with a $1,000 face value, 10-year maturity, and semiannual compounding? The market rate on similar bonds is 12%. (Slide 196)

$311.80

A client has expressed interest in a ten-year zero coupon bonds with a face value of $1,000. His opportunity cost is 7 percent. Assuming annual compounding, what would be the current market price of these bonds? Round to the nearest dollar.

$508

A bond with a $1,000 face value and an 8 percent annual coupon pays interest semiannually. The bond will mature in 15 years. The yield to maturity is 11 percent. The price of the bond should be: Do no round intermediate computations. Round the final answer to two decimal places.

$781.99

What is the price of a three-year, 5% coupon bond with a market yield of 8% and semi-annual coupon payments? (Slide 186)

$921.36

A portfolio consists of $100,000 in Treasury bills that yield 4.5%; $150,000 in Proctor and Gamble stock with an expected return of 7.5%; and $150,000 in Exxon Mobil stock with an expected return of 9.0%. What is the expected return for this portfolio? (Slide 128)

.073 or 7.3%

An investor buys a 30-year bond with a $1,000 face value for $800. The bond's coupon rate is 8% and interest payments are made semi-annually. What is the bond's yield to maturity? (Slide 207)

.1014

A stock has a beta of 1.5. The expected return on the market is 10% and the risk-free rate is 4%. What is the required expected return for the stock? (Slide 153)

0.013 or 13%

The variance of the annual returns of CSX and Wal-Mart stock are 0.03949 and 0.02584. The covariance between returns is 0.00782. Calculate the variance of a portfolio consisting of 50% CSX and 50% Wal-Mart. (Slide 131)

0.02024

There is 30% chance the total return on Dell stock will have a 3% loss in value; a 30% chance there will be a gain of 5.00% , and a 40% chance there will be a gain of 12.00%. Calculate the expected return. (Slide 106)

0.054 or 5.40%

In the previous problem, what rate of return would you expect to earn from the portfolio if the risk-free rate is 4% and the expected return on the market 10%? (Slide 158)

0.115 or 11.5%

Ella bought a share of common stock for $26.00. After one year, the stock sells for $29.00. Ella also received a dividend of $0.80. What rate of return did she earn? (Slide 104)

0.14615 or 14.62%

Stock A has an expected return of 12% and a standard deviation of 12% while Stock B has an expected return of 20% and a standard deviation of 16%. What is the coefficient of variation for these stocks? (Slide 121)

1 and .80

Find today's value of a non-zero, semi-annual coupon bond with 5 years to maturity. The bond has a coupon rate of 6% (nominal rate), but interest is paid semi-annually. The investor's required rate of return, i, is 4%. (Slide 190)

1,089.82

If you invest 25% of your retirement savings in a fully diversified market fund (e.g., same as the market), 25% in risk-free Treasury bills, and 50% in a house with twice as much systematic risk as the market, what is the beta of your portfolio? (Slide 156)

1.25

You purchased a five-year bond for $882. The bond pays a 6% coupon with a $1,000 maturity value. You sell the bond for $750 after holding it for three years. What is your realized yield? (Slide 218)

1.90

Invest $1,000 and get $1,100 after one year, then the realized rate of return (??) is? (Slide 102)

10%

What is the YTM on a 10-year, 9% annual coupon, $1,000 par value bond, selling for $887? (Slide 202)

10.91

If John buys a 5-year bond with a 9% coupon rate paid semiannually and $1000 par value for $925, his yield to maturity would be closest to: Round to two decimal places.

10.99%

What is the expected return for a stock that has a beta of 1.5, if the risk-free rate is 6% and the market rate of return is 11%?

13.5%

The market price of a 10-year, $1,000 bond is $1,158.91. Interest on this bond is paid semiannually and the YTM is 14%. What is the bond's annual coupon rate? (Round your answer to the nearest percent.)

17%

Anna purchased a share of stock one year ago for $22) Today, she received a dividend of $0.97 and sold the stock for $25.30) Her total holding period return is _____ (Round your percentage answer to two decimal places.)

19.40%

Find the yield to call on a 15-year, 6% annual coupon bond selling for $1,234 which will be called 5 years after its issue for $1,060. (Slide 214)

2.16

The expected return on Bevo stock is 12.6 percent. If the expected return on the market is 10 percent and the beta for Bevo is 1.4, then what is the risk-free rate?

3.5%

Three years ago, Joe bought a 5-year, 10% coupon paid semiannually bond for $1000. Currently, with interest rates having risen sharply, the bond is selling for $800 and you decide to sell it off. If you had re-invested the semi-annual coupons as you received them, what would your realized yield be over the 3-year holding period? Round to two decimal places.

3.63%

A 10-year, 8% annual coupon bond selling for $1,135.90 has been called after 4 years for $1,080. What is its yield to call (YTC)? (Slide 212)

5.92

You purchased a share of Blyton Industries common stock 1 year ago for $37.50. During the year you received dividends totaling $0.60 and today the stock can be sold for $39.28. What total return did you earn on this stock over the past year? (Round your percentage answer to one decimal place.)

6.3%

The risk-free rate of return is 2.5% and the expected return on the market is 8%. If the Beta on Ridgeway Co. stock is 0.8, then what is Ridgeway's expected return?

6.9%

What is the YTM on a 10-year, 9% annual coupon, $1,000 par value bond, selling for $1,134.20? (Slide 204)

7.08

Mary just bought a 20-year bond with an 8% coupon rate (paid semi-annually) and $1000 par value for $1050. She is expecting an effective annual yield (EAY) of: (Round to two decimal places.)

7.65%

Generic Inc. issued bonds in 1988 that will mature 16 years from the date of issue. The bond pays a 14.375 percent coupon and the interest is paid semiannually. Its current price is $1,508.72. What is the yield to maturity on the bonds? (Round your answer to two decimal places.)

8.50%

What is the YTM on a 10-year, 9% coupon, $1,000 par value bond, selling for $1,000? (Slide 199)

9

Why is there a limit to the benefits of diversification?

Diversification cannot eliminate market risk

Which of the following theorem explains the relationship between interest rates and bond prices?

For a given change in interest rates, the prices of long-term bonds will change more drastically than the prices of short-term bonds

Which is true of risk and expected returns?

Higher the risk, higher the expected returns on an investment

In order to calculate the price of a bond, which of the following input is needed?

Maturity period

Most secondary market transactions for corporate bonds take place through dealers in the:

Over-the-counter market

Which of the following statements regarding variance is true?

Variance is a measure of the uncertainty surrounding an outcome.

A bond pays a coupon interest rate of 7.5 percent. The market rate on similar bonds is 8.4 percent. The bond will sell at _____.

a discount

According to the independent broker/dealer, stock represents

a tiny portion of ownership in the corporation

Price of a bond is calculated by:

adding the present value of principal payment and the present value of coupon payments

An investor will choose between Asset Q with an expected return of 6.5% and a standard deviation of 5.5%, Asset U with an expected return of 8.8% and a standard deviation of 5.5%, and Asset B with an expected return of 8.8% and a standard deviation of 6.5%. Which one should the investor prefer?

asset U

The risk per unit of return is measured by the _____.

coefficient of variation

The total holding period return on an investment ____

consists of a capital appreciation component and an income component

If a bond's coupon rate is less than its yield, its price is less than its face value, and it sells at a _______.

discount

In order to measure the variance of a portfolio consisting of two or more assets we need _____.

each asset's variance

A bond will sell at a premium when its coupon interest rate:

exceeds the market interest rate on similar bonds

The greater the risk associated with an investment, the greater is its _____.

expected return

In regard to interest rate risk, short-term bonds:

have less interest rate risk than longer-term bonds

One reason why firms issue convertible bonds is that, the bonds can be sold for:

higher prices with lower interest rates

If the yield curve has a positive slope:

interest rates are expected to be higher in the future

The correlation between the return on two assets _____

is calculated by dividing the covariance of returns by the product of the standard deviations of the returns for the two assets, will always have a value between -1.0 and +1.0, and measures the relative relationship between the returns of pair of assets

The return provided to the owners by their investment in Finagle a Bagel

is difficult to measure because some additional projects provided negative returns

A benefit of a callable bond is the:

issuer may replace it with a bond that has a lower coupon rate

The franchise business model was originally chosen because

it transferred the building of the bagel stores to the franchisees, which lowered the risk and also provided more opportunity for profit to the owners of Finagle a Bagel and it allowed Finagle a Bagel to grow more quickly with less investment provided by the owners

The systematic risk of an investment is measured by _____.

its beta

Bonds have _________________________ than stock.

less risk and less upside potential for return

Based on the CAPM, the relationship between the expected return of an asset and its systematic risk is _____.

linear

The rate used to discount a bond's cash flow stream in bond valuation is the:

market interest rate

The compensation received for assuming the risk in a balanced portfolio of risky assets is the _____.

market risk premium

The normal distribution is described by its _____.

mean and standard deviation

A stock's beta is a measure of its _____.

nondiversifiable risk

If a bond's coupon rate is equal to the its yield, its price equals its face value, and it sells at ___________.

par value

If a bond's coupon rate is greater than its yield, its price is greater than its face value and it sells for a ___________.

premium

In the retail model, the revenue at the store level represents

profit

Diversification provides a benefit to investors when the investor

selects two or more securities whose returns are not highly correlated with each other

All of the following statements about stock indexes are true EXCEPT

stock indexes are unbiased and perfect indicators of market activity

Investors care only about _____.

systematic risk

The two components of total risk associated with an investment are _____.

systematic risk and diversifiable risk

When choosing between two investments

that have the same level of risk, investors prefer the investment with the higher return

According to the independent broker/dealer, individual investors must never lose sight of the fundamental nature of the stock market, which means..

that the stock market is a market—it is the pairing of the seller and the buyer of the stock

Covariance measures _____.

the absolute relationship between the returns of each pair of assets

A bond's coupon rate is defined as:

the annual coupon payment of a bond divided by the bond's face value

A corporate bond's coupon rate is the annual coupon payment divided by:

the bond's face value

The Capital Asset Pricing Model (CAPM) measures

the expected rate of return of an asset

The factors the owners considered in their evaluation of unsystematic risk and systemic risk associated with moving to the wholesale model include all of the following EXCEPT

the expiration of the retail space leases

The decision to move from retail to wholesale was made primarily because

the firm would have gone bankrupt had it not done so

Coupon payments are:

the interest payments made to bondholders

Realized yield is:

the interest rate at which the present value of the actual cash flows from a bond equals the bond's price

Bond contracts include specific terms, including all of the following EXCEPT

the price at which the bond will be sold in the bond market

To calculate an expected return, each scenario return is weighted by _____.

the probability of its occurrence

If the expected return on an asset is greater than its required return given on the Security Market Line, the stock is _____.

underpriced

The discount rate that makes the present value of a bond's coupons and principal payment equal to its price is the:

yield to maturity

The bonds that has no coupon payments but promise a single payment at maturity is:

zerocoupon bonds