F300 Exam 2

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The​ ________ is a market derived interest rate used to discount the future cash flows of the bond.

yield to maturity

Assume that Ray is 38 years old and has 27 years for saving until he retires. He expects an APR of​ 7.5% on his investments. How much does he need to save if he puts money away annually in equal endminus−ofminus−theminus−year amounts to achieve a future value of​ $1,200,000 dollars in 27​ years' time?

$14,882.44

What if Jennifer were to invest​ $2,750 today, compounded​ semiannually, with an annual interest rate of​ 5.25%. What amount of interest will Jennifer earn in one​ year?

$146.27

As applied to mortgage​ loans, which of the following statements is​ FALSE?

Advertised rates are EARs.

Suppose you deposit money in a certificate of deposit​ (CD) at a bank. Which of the following statements is​ TRUE?

The bank is technically renting money from you with a promise to repay that money with interest.

Differences in borrowing rates can generally be explained by the level of risk of the investment or loan and by the length of the investment or loan.

True

If the par value of a bond is equal to the bond​ price, then we know the yield to maturity is equal to the coupon rate.

True

The NYSE uses a designated−order turnaround computer system​ (SuperDOT) that matches buyers and sellers so that trades can be executed within​ seconds, with buyers and sellers getting the best available price.

True

The dividend models appeal to a fundamental concept of asset pricing—that the value of an asset is determined by the future cash flow to which the owner is entitled while holding the​ asset, and the required rate of return for the cash flow.

True

The​ "Truth in Savings​ Law" requires banks to advertise their rates on investments such as CDs and savings accounts as annual percentage yields​ (APY).

True

We assign a very low probability of default to the U.S. Treasury and thus assume that all Treasury bills will be paid in full at maturity and thus have a zero default premium.

True

When pricing a zero−coupon ​bond, the convention is to use the semiannual pricing formula rather than the annual pricing formula.

True

Zero−coupon bonds are priced at deep discounts.

True

Dividend models suggest that the value of a financial asset is determined by future cash flows. A problem​ arises, however, in that future cash flows may be difficult to predict as to​ ________ of these cash flows.

both the timing and the amount

​________ is risk that cannot be diversified away.

systematic risk

The frequency of default on a home loan is​ ________ the frequency of default on a credit card.

much lower than

In​ ________, current prices already reflect the price history and volume of the stock as well as all available public information.

semi−strong−form efficient markets

Most U.S. corporate and government bonds choose to make​ ________ coupon payments.

semiannual

The difference between the price and the par value of a zero−coupon bond represents​ ________.

the accumulated interest over the life of the bond

Which of the following statements is true about​ variance?

the larger the​ variance, the greater the dispersion. Variance describes how spread out a set of numbers or a value is around its mean or average. Variance is essentially the variability from the average. All of the above statements are true.

The type of risk that can be diversified away is called​ ________.

unsystematic risk

​Correlation, a standardized measure of how stocks perform relative to one another in different states of the​ economy, has a range from​ ________.

−1.0 to​ +1.0

The phrase​ "price to rent​ money" is sometimes used to refer to​ ________.

interest rates

Zero−coupon U.S. Government bonds are known as​________.

STRIPS

You put​ 20% down on a home with a purchase price of​ $250,000. The down payment is thus​ $50,000, leaving a balance owed of​ $200,000. A bank will loan you this remaining balance at​ 3.91% APR. You will make monthly endminus−ofminus−theminus−period payments with a 30minus−year payment schedule. What is the monthly annuity payment under this​ schedule?

$944.48

Suppose you postpone consumption and invest at​ 6% when inflation is​ 2%. What is the approximate real rate of your reward for​ saving?

4%

Stocks​ B, has returns of​ 5%, 15%,​ 30%, and​ 110%, over the most recent four year period. What is the​ stock's standard deviation of return over this time​ period?

47.78%

Find the standard deviation for a security that has three one−year returns of​ 5%, 10%, and​ 15%.

5.00%

The​ ________ is the interest rate printed on the bond.

coupon rate

Nominal interest rates are the sum of two major components. These components are​ ________.

the real interest rate and expected inflation

The primary benefit of diversification​ is:

a reduction in risk.

Find the standard deviation for a security that has three one−year returns of minus−​5%, ​15%, and​ 20%.

​13.23%

​________ means that the percentage increase in the dividend is the same each year.

Constant growth

Interest premium. Shaky Company has just issued a​ five-year bond with a yield of​ 9%; Stable Company has issued an identical​ five-year bond, but with a yield of​ 7%. Why did the market demand a higher return from​ Shaky?

Companies with poor financials tend to compensate investors for the default risk by issuing bonds with high yields.

Which of the statements below is​ FALSE?

The longer the​ loan, the greater the risk of nonpayment and the lower the interest rate the lender demands.

An annual percentage rate must be converted to the appropriate periodic rate when compounding is more frequent than once a year.

True

When quoting rates on​ loans, the​ "Truth in Lending​ Law" requires the bank to state the rate as an​ APR, effectively understating the true cost of the loan when interest is computed more often than once a year.

True

The measure of systematic risk is called​ ________.

beta

If we know the dividend​ stream, the future price of the​ stock, the future selling date of the​ stock, and the required​ return, we can price stocks just as we priced​ ________.

bonds

Bonds are different from stocks because​ ________.

bonds promise fixed payments for the length of their maturity

A company selling a bond is​ ________ money.

borrowing

Assume that you are willing to postpone consumption today and buy a certificate of deposit​ (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year​ ________.

you will be able to buy more goods or services

Rodney invests​ $2,400 today, compounded​ monthly, with an annual interest rate of​ 6.25%. What is​ Rodney's investment worth in one​ year?

​$2,554.37

Which of the following factors affect the future value of the retirement​ account?

. Duration of the retirement account contributions. Your answer is correct. B. Taxation of the retirement contributions. This is the correct answer. C. Rate of return on the retirement account. Your answer is correct. D. Size of the retirement contributions. ALL OF THE ABOVE

When they are first​ born, Grandma gives each of her grandchildren a ​$2,000 savings bond that matures in 18 years. For each of the following​ grandchildren, what is the present value of each savings bonds if the current discount rate is 5​%? a. Seth turned sixteensixteen years old today.

1,814.06

Assuming that stocks represent most​ industries, the number of stocks necessary to eliminate nearly all unsystematic risk varies from​ ________.

20 to 30

Stocks​ A, B,​ C, and D have standard​ deviations, respectively, of​ 20%, 5%,​ 10%, and​ 15%. Which one is the​ riskiest?

Stock A (20%)

Why would we want to assume a constant growth to dividends if we seldom see a firm with this type of​ pattern?

The answer is that we really want to estimate a series of future dividends and can only do this if we have a growth rate

The Security Market Line has​ ________.

a positive slope

The terms​ ________ and​ ________ mean the same thing.

diversifiable​ risk; unsystematic risk

A beta of 1.0 is the beta of the​ ________, while a beta of 0.0 is the measure for a​ ________.

​market; risk−free security.

Stocks are different from bonds because​ ________.

​stocks, unlike​ bonds, represent residual ownership

In​ ________, current prices reflect the price history and trading volume of the stock. It is of no use to chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market.

weak−form efficient markets

Assume that you are willing to postpone consumption of​ $1,000 today and buy a certificate of deposit​ (CD) at your local bank with the​ $1,000. Holding the CD for one year provides you with an​ 8% reward for saving or postponing consumption. This reward for postponing consumption implies that at the end of the year you will have how much more money for​ spending?

​$80.00

Suppose you invest​ $1,000 today, compounded​ quarterly, with the annual interest rate of​ 8.00%. What is your investment worth in one​ year?

$1,082.43

You put​ 20% down on a home with a purchase price of​ $250,000. The down payment is thus​ $50,000, leaving a balance owed of​ $200,000. The bank will loan the remaining balance at​ 3.91% APR. You will make annual payments with a 30minus−year payment schedule. What is the annual annuity payment under this​ schedule?

$11,439.96

Kenna invests​ $5,000 today, compounded​ monthly, with an annual interest rate of​ 8.52%. What amount of interest will she earn in one​ year?

$443.04

Treasury bills have a beta of​ ________.

0.0

Stock​ A, has returns of​ 10%, 20%,​ 30%, and​ 40%, over the last four years. What is the​ stock's standard​ deviation?

12.91%

Present value. The State of Confusion wants to change the current retirement policy for state employees. To do​ so, however, the state must pay the current pension fund members the present value of their promised future payments. There are 250 comma 000250,000 current employees in the state pension fund. The average employee is 1010 years away from​ retirement, and the average promised future retirement benefit is ​$350 comma 000350,000 per employee. If the state has a discount rate of 44​% on all its​ funds, how much money will the state have to pay to the employees before it can start a new pension​ plan?

59,111,864,772.30

You wish to diversify your single−security portfolio in a way that will maximize your reduction in risk. Which of the following securities should you add to your​ portfolio?

Alpha Company stock that has a correlation coefficient of −0.25 with your current security

Interest premium. Estimate the default premium and the maturity premium given the following three investment​ opportunities: a Treasury bill with a current interest rate of 3.5​%; a Treasury bond with a​ twenty-year maturity and a current interest rate of 5.5%; and a​ AAA, corporate bond with a​ twenty-year maturity and an interest rate of 7.0%.

Default - 1.50% Maturity - 2.00%

Estimate the default premium and the maturity premium given the following three investment​ opportunities: a Treasury bill with a current interest rate of 2.52%; a Treasury bond with a​ twenty-year maturity and a current interest rate of 6​%; and a​ AAA, corporate bond with a​ twenty-year maturity and an interest rate of 7.5​%.

Default - 1.50% Maturity - 3.5%

Interest premium.Ben has just purchased a​ long-term government bond and expects to make a​ 7% return. Donna has just purchased a stock in a new startup​ company, but expects to make a​ 20% return. Why is Donna expecting a higher​ return?

Donna is expecting a higher return on the stock due to both the maturity premium and default premium.

Present Value $15,804 Interest Rate 7% Number of Periods 30 Future Value?

Future Value 120,304.08

Present Value $25,960 Interest Rate 17% Number of Periods 11 Future Value?

Future Value 145998.76

Present Value $36,200 Interest Rate 10.5% Number of Periods 23 Future Value?

Future Value 359,783.27

Which of the below is NOT a major component of interest​ rates?

Historical interest rates

​________ refers to how quickly information is reflected in the available prices for trading.

Informational efficiency

Which of the statements below is​ TRUE?

Investors want to maximize return and minimize risk.

The Portland Stallions professional football team is looking at its future revenue stream from ticket sales. ​ Currently, a season package costs $375 per seat. The season ticket holders have been promised this same rate for the next five years. Six years from now the organization will raise season ticket prices based on the estimated inflation rate of 4​%. What will the season tickets sell for in six years?

N=6 I/YR = 4 PV = 375 FV = 474.49

The Fisher Effect involves which of the items​ below?

Nominal​ rate, the real​ rate, and inflation

​________ has to do with the speed and accuracy of processing a buy or sell order at the best available price.

Operational efficiency

For purposes of maximum portfolio​ diversification, which of the following would provide the greatest​ diversification?

Security C with a correlation coefficient of −0.50

What is the EAR if the APR is​ 10.52% and compounding is​ daily?

Slightly above​ 11.09%

What is the EAR if the APR is​ 5% and compounding is​ quarterly?

Slightly above​ 5.09%

A more risky stock has a higher​ ________.

Standard Dev and Variance

MacroMedia Inc.​ $1,000 par value bonds are selling for​ $832. Which of the following statements is​ TRUE?

The bonds are selling at a premium to the par value. The coupon rate is greater than the yield to maturity. The bonds must have more than six years to maturity. (Answer) NONE OF THE ABOVE IS TRUE!

Interest premium. The U.S. government offers two​ bonds: one selling to yield​ 6.5% and the other to yield​ 8.5%. Why would one bond sell for a lower yield if the originator is the same on both​ bonds?

The difference between the yields of the U.S. government bonds is due to the maturity premium of the investments.

Which of the statements below is​ FALSE?

The payment of cash dividends to shareholders is a deductible expense for the company.

The holding period return​ (HPR) is the return measured from the initial purchase to the final sale of the investment without regard to the length of time the investment is held.

True

If the equation ​E(ri​)= rf + (rf + [E(rm​) − rf​]× beta​) is the linear equation for the Security Market​ Line, what portion represents the market risk premium for a stock that does not have a beta of​ 1.0?

[E(rm​) − rf​]

An​ investor's total investment set may be referred to as​ ________.

a financial portfolio

When interest rates are stated or given for loan​ repayments, it is assumed that they are​ ________ unless specifically stated otherwise.

annual percentage rates

When the​ ________ is less than the yield to​ maturity, the bond sells at​ a/the ________ the par value.

coupon rate; discount to

Strong−form efficient markets theory proclaims that​________.

current prices reflect the price and volume history of the​ stock, all publicly available​ information, and all private information

The​ ________ compensates the investor for the additional risk that the loan will not be repaid in full.

default premium

Stocks differ from bonds​ because:

firms pay bond cash flows prior to paying taxes while stock cash flows are after tax. the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase. bond cash flows are known while stock cash flows are uncertain. (Answer) All of the above!

APRs must be converted to the appropriate periodic rates when compounding is​ ________.

more frequent than once a year

Diversification is

not putting all of your eggs in one basket. a common investment strategy. spreading wealth over a variety of investment opportunities. All of the above

To determine the interest paid each compounding​ period, we take the advertised annual percentage rate and simply divide it by the​ ________ to get the appropriate periodic interest rate.

number of compounding periods per year

For most​ stocks, the correlation coefficient with other stocks is​ ________.

positive

The value of a financial asset is the​ ________.

present value of all of the future cash flows that will be received

Present value with periodic rates. Sam​ Hinds, a local​ dentist, is going to remodel the dental reception area and add two new workstations. He has contacted​ A-Dec, and the new equipment and cabinetry will cost ​$18,000. The purchase will be financed with an interest rate of 7.5​%loan over 6years. What will Sam have to pay for this equipment if the loan calls for quarterlyquarterly payments ​(4per​ year) and monthly payments ​(12per​ year)?

quarterly - 938.28 monthly - 311.22

A typical practice of many companies is to distribute part of the earnings to shareholders through​ ________.

quarterly cash dividends

The​ ________ is the intercept on the Security Market Line.

risk-free rate

resent value with periodic rates.Sam​ Hinds, a local​ dentist, is going to remodel the dental reception area and add two new workstations. He has contacted​ A-Dec, and the new equipment and cabinetry will cost ​$25,000.The purchase will be financed with an interest rate of 9.5% loan over 10years. What will Sam have to pay for this equipment if the loan calls for semiannual payments ​(2per​ year) and monthly payments (12per​ year)? Compare the annual cash outflows of the two payments. Why does the monthlypayment plan have less total cash outflow each​ year?

semi annual - 1,963.76 monthly - 323.49 As more payments are made each​ year, the principal is repaid quickly and thus the interest expense is lower.

Most academic research supports markets as​ ________ efficient.

semi-strong-form

MicroMedia Inc.​ $1,000 par value bonds are selling for​ $1,265. Which of the following statements is​ TRUE?

the coupon rate is greater than the yield to maturity. The bonds are selling at a premium to the par value. The bond market currently requires a rate​ (yield) less than the coupon rate.

The two major components of the interest rate that cause rates to vary across different investment opportunities or loans are​ ________.

the default premium and the maturity premium

The real rate is​ 1.25% and inflation is​ 5.25%. What is the approximate nominal​ rate?

​6.50%

Present Value $444 Interest Rate 3% Number of Periods 7 Future Value?

​Future Value $546.06546.06


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