bfin exam 2 review

1. Which of the following describes a case in which it would be a good idea for you to purchase a zero-coupon bond instead of a coupon bond? a. You are trying to minimize reinvestment risk. b. You are trying to minimize interest rate risk. c. You are trying to minimize default risk. d. You expect interest rates to increase in the future. e. None are good reasons.

a

If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill? a. The yield on a 10-year bond would be less than that on a 1-year bill. b. The yield on a 10-year bond would have to be higher than that on a 1‑year bill because of the maturity risk premium. c. It is impossible to tell without knowing the coupon rates of the bonds. d. The yields on the two securities would be equal. e. It is impossible to tel

a

1. Which of the following is CORRECT? a. Stocks are contracts with a required return. b. Bonds are contracts with a required payment. c. If stock dividends are not paid then the stock holders can take the company to court. d. Bonds represent an ownership contract. e. None of the above.

B

1. Stocks A and B have the following data. Assuming the stock market is efficient, the stocks are expected to grow at a constant rate, and the stocks are in equilibrium, which of the following statements is CORRECT? Required return Stock A: 10% Stock B: 12% Market price Stock A:$25 Stock B: $40 Expected growth Stock A: 7% Stock B: 9% a. These two stocks should have the same price. b. These two stocks must have the same dividend yield. c. These two stocks should have the same expected return. d

B

1. Fay Corp. bonds have 7 years left until maturity. Interest is paid annually and the coupon rate is 8%. The bonds are currently selling for $890. What is the yield to maturity of this bond? a. 10.28% b. 9.45% c. 6.67% d. 5.11% e. None of the above

A

1. What is the yield to maturity of a 7% annual coupon bond that has 8 years left until maturity and costs $1085? a. 5.65% b. 6.00% c. 7.7% d. 8.00% e. None of these

A 70 8 1085 1000 = RATE(8,70,-1085,1000) = 5.65%

1. What is the fair price for a bond with a 5.5% annual coupon and 8 years left until maturity that yields 9%? a. $806.28 b. $1,221.71 c. $304.42 d. $803.40 e. None of these

A =1000*.055 Fv: 1000 NPER:8 YTM: .09 =PV(.09,8,.55,1000) = (806.28)

1. How much would you pay for a semi-annual 6% coupon bond with 25 years left until maturity that yields 3.50%? a. $1,414.27 b. $994.24 c. $1,412.04 d. $678.38 e. None of these

A CPN .06/2 .03 X par value (1000) - 30 NPER 25 * 2 = 5- YTM 3.5/2 = .0175 =PV(.0175,50,30,1000) (1414.27)

1. A treasury bond that matures in 10 years has a yield of 3.7%. A 10-year corporate bond has a yield of 7% and a default risk premium of 2%. What is the liquidity premium of the corporate bond? a. 1.3% b. 5.7% c. 3.3% d. 1.7% e. None of the other answers

A R=r*+IP+DRP+LP+TP 3.7+2 = 5.7 5.7-7 - 1.3

1. Which of the following statements is CORRECT? a. The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks. b. If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio. c. The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus t

C

2. Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant? A. If there is a positive maturity risk premium, the Treasury yield curve must be upward sloping. B. If inflation is expected to decline, there can be no maturity risk premium. C. If the pure expectations theory holds, the Treasury yield curve must be downward sloping. D. If the pure expectati

C

Which of the following is true? a. Corporate yield curves are lower than that of Treasury securities. b. Corporate yield curves are parallel to the treasury curve. c. The spread between corporate and Treasury yield curves widens as the corporate bond get riskier. d. Corporate yield curves cannot be downward sloping. e. None of the above

C

1. Katia Corp. bonds have 17 years left until maturity. The bonds are currently trading for $1440 and the yield to maturity is 8%. What is the annual coupon rate if the bonds pay semiannually? a. 12.92% b. 6.39% c. 12.78% d. 8.16% e. None of the above

C NPER 17 FV 1000 PV 1440 YTM 8% =PMT(17*2,.08/2,1440,1000) 6390*2 (SEMI) - 12.78

1. You have the following stock data: Stock A: Prior Year Return:5.26% Standard Deviation: 9% Beta: 1.31 Stock B: Prior Year Return: 7.34% Standard Deviation: 8% Beta: 1.42 Which of the following is CORRECT? a. The capital gains yield of Stock A was 5.26%. b. The expected return of Stock B is expected to be 11.26% c. Stock A has more systematic risk exposure. d. Stock B is expected to earn a lower future return than Stock A. e. Stock A has higher total risk.

E (Standard Deviation = Higher Risk)

1. If you purchased a semi-annual 8% coupon bond for $1185.00, that yields 6%, how many years are left before this bond matures? a. 27.39 b. 13.70 c. 7.06 d. 14.12 e. None of these

PV 1185 FV 1000 YTM 6% / 2 3% CPB .08 /2 .04 X PAR VALUE 1000 =PMT(FILL IN)

1. Which of the following statements is most likely to be CORRECT? a. The beta of an airline company is less than 1. b. The beta of a Treasury Bill is 1. c. The beta of the S&P500 index is 0. d. The beta of a luxury jewelry store is greater than 1. e. The beta of a fast-food chain is less than 0.

d