Investment Management Midterm Review
The current yield curve for default-free zero-coupon bonds is as follows: 1: 9.5% 2: 10.5% 3: 11.5% a. What are the implied one-year forward rates? b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will the pure yield curve (that is, the yields to maturity on one- and two-year zero-coupon bonds) be next year? There will be a shift upwards in next year's curve. There will be a shift downwards in next year's curve. There will be no change in next year's curve. c. What will be the yield to maturity on two-year zeros? d. If you purchase a two-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current and expected future prices.) Ignore taxes. e. If you purchase a three-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current and expected future prices.) Ignore taxes.
a. 2: 11.51% a. 3: 13.53% b. there will be a shit upwards in next years curve. c. 12.51% d. 9.5% e. 9.5%
The duration of a 5-year zero-coupon bond is ____ years. Multiple Choice 4.5 5 5.5 3.5
b
You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wanted to construct an index to track your portfolio performance, your best match for your portfolio would be to construct ______. Multiple Choice a value-weighted index an equally weighted index a price-weighted index a bond price index
c
You have an investment that in today's dollars returns 15% of your investment in year 1, 12% in year 2, 9% in year 3, and the remainder in year 4. What is the duration of this investment? Multiple Choice 4 years 3.5 years 3.22 years 2.95 years
c
You have purchased a guaranteed investment contract (GIC) from an insurance firm that promises to pay you a 5% compound rate of return per year for 6 years. If you pay $10,000 for the GIC today and receive no interest along the way, you will get __________ in 6 years (to the nearest dollar). Multiple Choice $12,565 $13,000 $13,401 $13,676
c
__________ assets generate net income to the economy, and __________ assets define allocation of income among investors. Multiple Choice Financial, financial Financial, real Real, financial Real, real
c
The material wealth of society is determined by the economy's _________, which is a function of the economy's _________. Multiple Choice investment bankers; financial assets investment bankers; real assets productive capacity; financial assets productive capacity; real assets
d
Which one of the following invests in a portfolio that is fixed for the life of the fund? Multiple Choice mutual fund money market fund managed investment company unit investment trust
d
You are considering investing in a no-load mutual fund with an annual expense ratio of 0.6% and an annual 12b-1 fee of 0.75%. You could also invest in a bank CD paying 6.0% per year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD? Multiple Choice 6.60% 6.75% 8.40% 7.35%
d
Suppose that in a wave of pessimism, housing prices fall by 10% across the entire economy. a. Has the stock of real assets of the economy changed? Yes No b. Are individuals less wealthy? Yes No
no, yes
Consider the following $1,000 par value zero-coupon bonds: A- yrs to maturity: 1, YTM 5.7% B- yrs: 2, YTM 7.2% C- yrs: 3, YTM 7.7% D- yrs: 4, YTM 8.2% E- yrs: 5, YTM 10.5% The expected 1-year interest rate 2 years from now should be _________
8.71% ([(1+.077)^3/(1+.072)^2] -1)
_____________________ are often called mutual funds. Multiple Choice Unit investment trusts Open-end investment companies Closed-end investment companies REITs
b
A __________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date. Multiple Choice call option futures contract put option interest rate swap
c
A pension fund must pay out $1 million next year, $2 million the following year, and then $3 million the year after that. If the discount rate is 8%, what is the duration of this set of payments? Multiple Choice 2 years 2.15 years 2.29 years 2.53 years
c
Banks and other financial institutions can best manage interest rate risk by _____________. Multiple Choice maximizing the duration of assets and minimizing the duration of liabilities minimizing the duration of assets and maximizing the duration of liabilities matching the durations of their assets and liabilities matching the maturities of their assets and liabilities
c
If a Treasury note has a bid price of $996.25, the quoted bid price in the Wall Street Journal would be _________. Multiple Choice 99:5/8 99:6/10 99.6250 none of the options
c
Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market. Multiple Choice overpriced correctly priced underpriced mispriced, but without any particular bias
c
Rank the following from highest average historical return to lowest average historical return from 1926 to 2017. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills Multiple Choice I, II, III, IV III, IV, II, I I, III, II, IV III, I, II, IV
c
You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $2.50. Your HPR was ____. Multiple Choice 4.0% 2.5% 5.0% 9.0%
d ($50*1.04=52 $2+$2.5=4.5/50= 9%)
A coupon bond paying semiannual interest is reported as having an ask price of 117% of its $1,000 par value. If the last interest payment was made one month ago and the coupon rate is 6%, what is the invoice price of the bond? Assume that the month has 30 days. Invoice Price:
$1,174.95
Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares?
$9
A firm has current assets that could be sold for their book value of $10 million. The book value of its fixed assets is $60 million, but they could be sold for $90 million today. The firm has total debt with a book value of $40 million, but interest rate declines have caused the market value of the debt to increase to $50 million. What is this firm's market-to-book ratio?
1.67
Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350 million, and $150 million, respectively. If you were to construct a price-weighted index of the three stocks, what would be the index value?
39 (12+75+30/3)
The Chompers Index is a price weighted stock index based on the 3 largest fast food chains. The stock prices for the three stocks are $58, $25, and $48. What is the price weighted index value of the Chompers Index?
43.67
The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss?
48% (loss: (22-25)*100= -300 amount invested: .25*$25*100= $625 return: 300/625= -48%
Treasury bonds paying an 7.75% coupon rate with semiannual payments currently sell at par value. What coupon rate would they have to pay in order to sell at par if they paid their coupons annually? Coupon Rate:
7.9%
The yield to maturity on one-year zero coupon bonds is 5.86%. The yield to maturity on two-year zero coupon bonds is 7.58%. a. What is the forward rate of interest for the second year? b. According to the expectations hypothesis, what is the expected value of the one-year interest rate for next year?
9.33%, 9.33% ((1.0760)2 = (1.0590) x (1+f2))
A big increase in government spending is an example of a _________. Multiple Choice positive demand shock positive supply shock negative demand shock negative supply shock
a
All other things equal (YTM = 10%), which of the following has the longest duration? Multiple Choice a 30-year bond with a 10% coupon a 20-year bond with a 9% coupon a 20-year bond with a 7% coupon a 10-year zero-coupon bond
a
An example of a highly cyclical industry is the _________. Multiple Choice automobile industry tobacco industry pharmaceutical industry utility industry
a
Because of convexity, when interest rates change, the actual bond price will ____________ the bond price predicted by duration. Multiple Choice always be higher than sometimes be higher than always be lower than sometimes be lower than
a
Bond portfolio immunization techniques balance ________ and ________ risk. Multiple Choice price; reinvestment price; liquidity credit; reinvestment credit; liquidity
a
Bond prices are _______ sensitive to changes in yield when the bond is selling at a _______ initial yield to maturity. Multiple Choice more; lower more; higher less; lower equally; higher or lower
a
If economic conditions are such that very slow growth is expected in the foreseeable future, one would want to invest in industries with __________ sensitivity to economic conditions. Multiple Choice below-average average above-average Since growth is expected to be slow, sensitivity to economic conditions is not an issue.
a
If you believe the economy is about to go into a recession, you might change your asset allocation by selling _______ and buying ______. Multiple Choice growth stocks; long-term bonds long-term bonds; growth stocks defensive stocks; growth stocks defensive stocks; long-term bonds
a
Items that are ____________ and product purchases for which ________ is not important tend to be less cyclical in nature. Multiple Choice necessities; income luxuries; leverage discretionary goods; time of purchase produced with high fixed costs; entertainment
a
The invoice price of a bond is the ______. Multiple Choice stated or flat price in a quote sheet plus accrued interest stated or flat price in a quote sheet minus accrued interest bid price average of the bid and ask price
a
The market value of all final goods and services produced during a given time period is called ______. Multiple Choice GDP industrial production capacity utilization factory orders
a
You can be sure that a bond will sell at a premium to par when _________. Multiple Choice its coupon rate is greater than its yield to maturity its coupon rate is less than its yield to maturity its coupon rate is equal to its yield to maturity its coupon rate is less than its conversion value
a
You would expect the beta of cyclical industries to be ______ and the beta of defensive industries to be ______. Multiple Choice greater than 1; less than 1 less than 1; less than 1 less than 1; greater than 1 greater than 1; greater than 1
a
Assuming semiannual compounding, a 10-year zero coupon bond with a par value of $1,000 and a required return of 10.6% would be priced at _________. Multiple Choice $355.99 $365.13 $904.16 $949.67
a (Calculator entries are N = 20, I/Y = 5.3, PMT = 0, FV = 1,000, CPT PV → 355.99)
A two-year bond with par value $1,000 making annual coupon payments of $110 is priced at $1,000. a. What is the yield to maturity of the bond? b. What will be the realized compound yield to maturity if the one-year interest rate next year turns out to be (a) 9.0%, (b) 11.0%, (c) 13.0%?
a. 11% b. 10.9%, 11% 11.10%
The yield to maturity on one-year zero-coupon bonds is 7%. The yield to maturity on two-year zero-coupon bonds is 8%. a. What is the forward rate of interest for the second year? b. If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? c. If you believe in the liquidity preference theory, is your best guess as to next year's short-term interest rate higher or lower than in (b)? Lower Higher
a: 9.01% ((1 + 7%) ×(1 + f2) = (1 + 8%)2 ⇒⇒ f2 = 0.0901 = 9.01%) b: 9.01% c: Lower
Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future. Multiple Choice increase decrease not change change in an unpredictable manner
b
Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. Multiple Choice a higher yield on short-term bonds than on long-term bonds a higher yield on long-term bonds than on short-term bonds the same yield on both short-term bonds and long-term bonds none of these options (The liquidity preference theory cannot be used to make any of the other statements.)
b
Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. Multiple Choice longer; higher longer; lower shorter; higher shorter; lower
b
Pharmaceuticals, food, and other necessities would be good performers during the ____ stage of the business cycle. Multiple Choice peak contraction trough expansion
b
Stock prices are _____ measures of firm value. Multiple Choice backward-looking forward-looking coincident lagging
b
Which industry had the highest ROE in 2016 according to the text? Multiple Choice electric utilities business software aerospace money center banks
c
Which of the following statements is false? Multiple Choice Bond prices and yields are inversely related. An increase in a bond's YTM results in a smaller price change than a decrease in yield of equal magnitude. Prices of short-term bonds tend to be more sensitive to interest rate changes than prices of long-term bonds. Interest rate risk is inversely related to the bond's coupon rate.
c
Which type of risk is most significant for bonds? Multiple Choice maturity risk default risk interest rate risk reinvestment rate risk
c
A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 122% of its $1,000 par value. If the last interest payment was made 3 months ago and the coupon rate is 6.50%, the invoice price of the bond will be _________. Multiple Choice $1,220.00 $1,252.50 $1,236.25 $1,187.50
c (Invoice price = 1.22(1,000) + 32.50(3/6) = 1,236.25)
An example of a real asset is: I. A college education II. Customer goodwill III. A patent Multiple Choice I only II only I and III only I, II, and III
d
Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. Multiple Choice both bonds will increase in value but bond A will increase more than bond B both bonds will increase in value but bond B will increase more than bond A both bonds will decrease in value but bond A will decrease more than bond B both bonds will decrease in value but bond B will decrease more than bond A
d
Firm B produces gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300,000 and variable costs of $1.40 per gadget. The corporate tax rate is 30%. If the economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell only half as many gadgets. If the economy is strong, the after-tax profit of firm B will be _________. Multiple Choice $90,000 $210,000 $300,000 $630,000
d
Generally speaking, the higher a firm's ROA, the _________ the dividend payout ratio and the _________ the firm's growth rate of earnings. Multiple Choice higher; lower higher; higher lower; lower lower; higher
d
If interest rates increase, business investment expenditures are likely to ______ and consumer durable expenditures are likely to _________. Multiple Choice increase; increase increase; decrease decrease; increase decrease; decrease
d
If the economy is going into a recession, a good industry to invest in would be the __________ industry. Multiple Choice automobile banking construction medical services
d
Mutual funds provide the following for their shareholders. Multiple Choice diversification professional management record keeping and administration all of these options
d
Real assets in the economy include all but which one of the following? Multiple Choice land buildings consumer durables common stock
d
Here are four industries and four forecasts for the macroeconomy. Industries: housing construction, health care, gold mining, steel production Economic Forecasts: Deep recession: falling inflation, falling interest rates, falling GDP.Superheated economy: rapidly rising GDP, increasing inflation and interest rates.Healthy expansion: rising GDP, mild inflation, low unemployment.Stagflation: falling GDP, high inflation. Choose the industry that you would expect to perform best in each scenario. Deep Recession: Superheated Industry: Healthy Expansion: Stagflation:
health care, steel production, housing construction, gold mining
A stock quote indicates a stock price of $67 and a dividend yield of 4%. The latest quarterly dividend received by stock investors must have been ______ per share.
$0.67
On a given day a stock dealer maintains a bid price of $1,000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades that totaled 500 bonds traded that day. What was the dealer's gross trading profit for this security?
$1,375
Barnegat Light sold 200,000 shares in an initial public offering. The underwriter's explicit fees were $90,000. The offering price for the shares was $35, but immediately upon issue, the share price jumped to $43. What is the best estimate of the total cost to Barnegat Light of the equity issue?
$1,690,000
Assume you purchased 800 shares of XYZ common stock on margin at $45 per share from your broker. If the initial margin is 70%, the amount you borrowed from the broker is _________.
$10,800
If the offering price of an open-end fund is $12.30 per share and the fund is sold with a front-end load of 5%, what is its net asset value?
$11.69 (NAV = Offering price × (1 - load) = $12.30 × (1 - 0.05) = $11.69.)
A firm has current assets that could be sold for their book value of $10 million. The book value of its fixed assets is $60 million, but they could be sold for $95 million today. The firm has total debt at a book value of $40 million, but interest rate changes have increased the value of the debt to a current market value of $50 million. This firm's market-to-book ratio is ________. Multiple Choice 1.83 1.5 1.35 1.46
a
An increase in the value of the yen against the U.S. dollar can cause the Japanese automaker Toyota to either _____________ on its U.S. sales. Multiple Choice lose market share or reduce its profit margin gain market share or reduce its profit margin lose market share or increase its profit margin gain market share or increase its profit margin
a
An individual who goes short in a futures position _____. Multiple Choice commits to delivering the underlying commodity at contract maturity commits to purchasing the underlying commodity at contract maturity has the right to deliver the underlying commodity at contract maturity has the right to purchase the underlying commodity at contract maturity
a
If you place an order to buy or sell a share of a mutual fund during the trading day, the order will be executed at _____. Multiple Choice the NAV calculated at the market close at 4 pm New York time the real time NAV the NAV delayed 15 minutes the NAV calculated at the opening of the next day's trading
a
Management fees for open-end and closed-end funds typically range between _____ and _____. Multiple Choice .2%; 2.0% .5%; 5% 2%; 5% 3%; 8%
a
Money market securities are sometimes referred to as cash equivalents because _____. Multiple Choice they are safe and marketable they are not liquid they are high-risk they are low-denomination
a
The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________. Multiple Choice net asset value average asset value gross asset value total asset value
a
The excess return is the _________. Multiple Choice rate of return that can be earned with certainty rate of return in excess of the Treasury-bill rate rate of return to risk aversion index return
b
_____________ in interest rates are associated with stock market declines. Multiple Choice Anticipated increases Unanticipated increases Anticipated decreases Unanticipated decreases
b
The arithmetic average of -22%, 37%, and 42% is ________. Multiple Choice 33.67% 19.00% 26.33% 14.25%
b ((-.22+.37+.42)/3)
Bill, Jim, and Shelly are all interested in buying the same stock that pays dividends. Bill plans on holding the stock for 1 year. Jim plans on holding the stock for 3 years. Shelly plans on holding the stock until she retires in 10 years. Which one of the following statements is correct? Multiple Choice Bill will be willing to pay the most for the stock because he will get his money back in 1 year when he sells. Jim should be willing to pay three times as much for the stock as Bill will pay because his expected holding period is three times as long as Bill's. Shelly should be willing to pay the most for the stock because she will hold it the longest and hence will get the most dividends. All three should be willing to pay the same amount for the stock regardless of their holding period.
d
Net asset value is defined as ________________________. Multiple Choice book value of assets divided by shares outstanding book value of assets minus liabilities divided by shares outstanding market value of assets divided by shares outstanding market value of assets minus liabilities divided by shares outstanding
d
Rank the following types of markets from least integrated and organized to most integrated and organized: Brokered markets Continuous auction markets Dealer markets Direct search markets Multiple Choice IV, II, I, III I, III, IV, II II, III, IV, I IV, I, III, II
d
The Hang Seng index reflects market performance on which of the following major stock markets? Multiple Choice Japan Singapore Taiwan Hong Kong
d
The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV? Multiple Choice 9.26% premium 8.47% premium 9.26% discount 8.47% discount
d
You invest in a mutual fund that charges a 8% front-end load, 2% total annual fees, and a 3% back-end load, which decreases 0.5% per year. How much will you pay in fees on a $10,500 investment that does not grow if you cash out after 3 years of no gain? Multiple Choice $212 $840 $1,224 $1,544
d
he composition of the Fingroup Fund portfolio is as follows: Stock Shares Price A 200,000 $35 B 300,000 40 C 400,000 20 D 600,000 25 The fund has not borrowed any funds, but its accrued management fee with the portfolio manager currently totals $30,000. There are 4 million shares outstanding. What is the net asset value of the fund?
$10.49
You short-sell 500 shares of Tuckerton Trading Co., now selling for $52 per share. What is your maximum possible gain, ignoring transactions cost?
$26,000
The Closed Fund is a closed-end investment company with a portfolio currently worth $200 million. It has liabilities of $3 million and 5 million shares outstanding. a. What is the NAV of the fund? b. If the fund sells for $36 per share, what is its premium or discount as a percent of NAV?
$39.40, 8.63% discount
A benchmark market value index is comprised of three stocks. Yesterday the three stocks were priced at $12, $20, and $60. The number of outstanding shares for each is 600,000 shares, 500,000 shares, and 200,000 shares, respectively. If the stock prices changed to $16, $18, and $62 today respectively, what is the 1-day rate of return on the index?
6.16%
SEC Rule 12b-1 allows managers of certain funds to deduct __________ expenses from fund assets; however, these expenses may not exceed __________ of the fund's average net assets per year. Multiple Choice marketing; 1% marketing; 5% administrative; .5% administrative; 2%
a
Security selection refers to _________. Multiple Choice choosing specific securities within each asset class deciding how much to invest in each asset class deciding how much to invest in the market portfolio versus the riskless asset deciding how much to hedge
a
The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________. Multiple Choice book value market value liquidation value Tobin's q
a
Which one of the following is equal to the ratio of common shareholders' equity to common shares outstanding? Multiple Choice book value per share liquidation value per share market value per share Tobin's q
a
Which security should sell at a greater price?a. An 8-year Treasury bond with a 9.50% coupon rate or an 8-year T-bond with an 8.50% coupon. An 8-year Treasury bond with a 9.5% coupon rate An 8-year T-bond with an 8.5% coupon
a
You want to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant-growth DDM, the intrinsic value of stock A _________. Multiple Choice will be higher than the intrinsic value of stock B will be the same as the intrinsic value of stock B will be less than the intrinsic value of stock B The answer cannot be determined from the information given.
a
n a ___________ index, changes in the value of the stock with the greatest market value will move the index value the most, everything else equal. Multiple Choice value-weighted index equally weighted index price-weighted index bond price index
a
The free cash flow to the firm is reported as $275 million. The interest expense to the firm is $60 million. If the tax rate is 35% and the net debt of the firm increased by $33 million, what is the free cash flow to the equity holders of the firm? Multiple Choice $269 million $296 million $305 million $327 million
a (FCFE = 275 − 60(1 − 0.35) + 33 = 269)
Eagle Brand Arrowheads has expected earnings of $1.25 per share and a market capitalization rate of 12%. Earnings are expected to grow at 5% per year indefinitely. The firm has a 40% plowback ratio. By how much does the firm's ROE exceed the market capitalization rate? Multiple Choice .5% 1% 1.5% 2%
a (ROE = g/b = 0.05/0.4 = 12.5%; k is given as 12%, so ROE − k = 0.5%)
A firm cuts its dividend payout ratio. As a result, you know that the firm's _______. Multiple Choice return on assets will increase earnings retention ratio will increase earnings growth rate will fall stock price will fall
b
A firm's earnings per share increased from $10 to $12, its dividends increased from $4 to $4.40, and its share price increased from $80 to $100. Given this information, it follows that _________. Multiple Choice the stock experienced a drop in its P/E ratio the company had a decrease in its dividend payout ratio both earnings and share price increased by 20% the required rate of return increased
b
A four-month expiration call option with an exercise price of $33 or a four-month call on the same stock with an exercise price of $38. A four-month call on the same stock with an exercise price of $38 A four-month expiration call option with an exercise price of $33
b
A market order has: Both price uncertainty and execution uncertainty. Price uncertainty but not execution uncertainty. Execution uncertainty but not price uncertainty.
b
A put option on a stock selling at $58 or a put option on another stock selling at $48. (All other relevant features of the stocks and options are assumed to be identical.)A put option on a stock selling at $58A put option on another stock selling at $48
b
If the currency of your country is depreciating, this should __________ exports and __________ imports. Multiple Choice stimulate; stimulate stimulate; discourage discourage; stimulate discourage; discourage
b
Purchases of new issues of stock take place _________. Multiple Choice at the desk of the Fed in the primary market in the secondary market in the money markets
b
Suppose an investor is considering one of two investments that are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to _____ . Multiple Choice earn no more than the Treasury-bill rate on either security. pay less for the security that has higher risk. pay less for the security that has lower risk. earn more if interest rates are lower.
b
The ______ measure of returns ignores compounding. Multiple Choice geometric average arithmetic average IRR dollar-weighted
b
The bid price of a Treasury bill is _________. Multiple Choice the price at which the dealer in Treasury bills is willing to sell the bill the price at which the dealer in Treasury bills is willing to buy the bill greater than the ask price of the Treasury bill expressed in dollar terms the price at which the investor can buy the Treasury bill
b
The discount rate is the ________. Multiple Choice interest rate banks charge each other for overnight loans of deposits on reserve at the Fed interest rate the Fed charges commercial banks on short-term loans interest rate that the U.S. Treasury pays on its bills interest rate that banks charge their best corporate customers
b
The holding period return on a stock is equal to _________. Multiple Choice the capital gain yield over the period plus the inflation rate the capital gain yield over the period plus the dividend yield the current yield plus the dividend yield the dividend yield plus the risk premium
b
The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________. Multiple Choice interest building book building market analysis customer identification
b
The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period. Multiple Choice risky assets; Treasury bills Treasury bills; risky assets excess returns; risky assets index assets; bonds
b
Which one of the following is a true statement regarding the Dow Jones Industrial Average? Multiple Choice It is a value-weighted average of 30 large industrial stocks. It is a price-weighted average of 30 large industrial stocks. It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange. It is a value-weighted average of all stocks traded on the New York Stock Exchange.
b
You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a __________ rather than a __________, everything else equal. Multiple Choice 12b-1 fee; front-end load front-end load; 12b-1 fee back-end load; front-end load 12b-1 fee; back-end load
b
A T-bill quote sheet has 90-day T-bill quotes with a 5.77 ask and a 5.71 bid. If the bill has a $10,000 face value, an investor could sell this bill for _____. $9,855.75 $9,857.25 $10,000 $9,859.21
b ($9,857.25=$10,000×[1−(0.0571×90)360])
Suppose you pay $9,700 for a $10,000 par Treasury bill maturing in 3 months. What is the holding-period return for this investment? Multiple Choice 3.01% 3.09% 12.42% 16.71%
b (10,000−9,700/9,700)
The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 50%, its P/E ratio will be _________. Multiple Choice 8.33 12.5 19.23 24.15
b (Dividend payout ratio = 1 − 0.5 = 0.5 Expected dividend = 0.5 × $5 = $2.50 Growth rate = 0.5 × 12% = 6% Value = $2.50/(0.10 − 0.06) = $62.50 P/E = $62.50/$5 = 12.5)
A firm has PVGO of 0 and a market capitalization rate of 7.0%. What is the firm's P/E ratio? Multiple Choice 7.00 14.29 10.64 24.93
b (P = E/k + 0; P/E = 1/0.070 = 14.29)
You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for 1 year. You expect to receive both $1.40 in dividends and $50 from the sale of the share at the end of the year. The maximum price you would pay for a share today is __________ if you wanted to earn a 11% return. Multiple Choice $45.05 $46.31 $45.75 $57.75
b (V0= (1.40+50)/(1+.11)= 46.31)
Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be _____. Multiple Choice 4.5% 10.5% 15% 30%
b (b = 1 − 0.3 = 0.7 g = b × ROE = 0.7 × 15% = 10.5%)
Firm A is high-risk, and Firm B is low-risk. Everything else equal, which firm would you expect to have a higher P/E ratio? Multiple Choice Firm A Firm B Both would have the same P/E if they were in the same industry. There is not necessarily any linkage between risk and P/E ratios.
c
If a stock is correctly priced, then you know that ____________. Multiple Choice the dividend payout ratio is optimal the stock's required return is equal to the growth rate in earnings and dividends the sum of the stock's expected capital gain and dividend yield is equal to the stock's required rate of return the present value of growth opportunities is equal to the value of assets in place
c
The Standard & Poor's 500 is __________ weighted index. Multiple Choice an equally a price- a value- a share-
c
The commission, or front-end load, paid when you purchase shares in mutual funds may not exceed __________. Multiple Choice 3.5% 6% 8.5% 10%
c
The constant-growth dividend discount model (DDM) can be used only when the ___________. Multiple Choice growth rate is less than or equal to the required return growth rate is greater than or equal to the required return growth rate is less than the required return growth rate is greater than the required return
c
The price quotations of Treasury bonds in the Wall Street Journal show a bid price of 104.5313 and an ask price of 104.5489. If you sell a Treasury bond, you expect to receive _________. Multiple Choice $ 1,000.00 $ 1,045.00 $ 1,045.31 $ 1,045.48
c
The purchase of a futures contract gives the buyer _________. Multiple Choice the right to buy an item at a specified price the right to sell an item at a specified price the obligation to buy an item at a specified price the obligation to sell an item at a specified price
c
Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses directly from the fund assets rather than billing investors. These fees are known as ____________. Multiple Choice direct operating expenses back-end loads 12b-1 charges front-end loads
c
Which of the following is not a money market instrument? Multiple Choice Treasury bill commercial paper preferred stock bankers' acceptance
c
Which of the following is the rate at which the general level of prices for goods and services is rising? Multiple Choice the exchange rate the gross domestic product growth rate the inflation rate the real interest rate
c
Which type of fund generally has the lowest average expense ratio? Multiple Choice actively managed bond funds hedge funds indexed funds actively managed international funds
c
You can earn abnormal returns on your investments via macro forecasting ______. Multiple Choice if you can forecast the economy at all if you can forecast the economy as well as the average forecaster if you can forecast the economy better than the average forecaster only if you can forecast the economy with perfect accuracy
c
__________ funds stand ready to redeem or issue shares at their net asset value. Multiple Choice Closed-end Index Open-end Hedge
c
__________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis. Multiple Choice Active Momentum Passive Market-timing
c
A firm is planning on paying its first dividend of $2 three years from today. After that, dividends are expected to grow at 6% per year indefinitely. The stock's required return is 14%. What is the intrinsic value of a share today? Multiple Choice $25 $16.87 $19.24 $20.99
c (Intrinsic value at time 3 = $2*(1+0.06)/(0.14−0.06) = $26.50 plus $2 dividend paid in year 3Intrinsic value today = $28.50/(1.14)3 =$19.24)
The geometric average of −17%, 55%, and 60% is _________. Multiple Choice 24.50% 32.67% 27.21% 42.63%
c ([(1 + −0.17)(1 + 0.55)(1 + 0.60)]1/3 − 1 = 27.21%)
Sanders, Inc., paid a $5 dividend per share last year and is expected to continue to pay out 70% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 12% return on equity in the future, and if you require a 14% return on the stock, the value of the stock is _________. $29.43 $67.35 $49.81 $96.79
c (g = (1 - 0.7) × 12% = 3.6%D1 = $5 × (1.036) = $5.180Intrinsic value = $5.180/(0.14 - 0.036) = $49.81)
_________ are examples of financial intermediaries. Multiple Choice Commercial banks Insurance companies Investment companies All of the options
d
