FIN TEST 2

A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________.

1. $1,000.00 2. $1,062.81 3. $1,081.82 4. $1,100.03 Correct Calculator entries are N = 16, I/Y = 3, PMT = 35, FV = 1000, CPT PV → −1062.81

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today.

1. $458.11 2. $641.11 3. $789.11 4. $1,100.11 Correct Calculator entries are N = 16, I/Y = 5, PMT = 0, FV = 1000, CPT PV → 458.11

A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the capital gain yield of this bond over the next year?

1. 0.72% 2. 1.85% 3. 2.58% 4. 3.42% Calculator entries to find the YTM are N = 10, PV = −750, PMT = 80, FV = 1000, CPT = I/Y →12.52 The current yield = $80 / $750 = 10.67% Yield to Maturity = Capital Gain Yield + Current Yield 0.1252 = Capital Gain Yield + 0.1067 Capital Gain Yield = 0.0185 = 1.85%

All other things equal, which of the following has the longest duration?

1. A 20-year bond with a 10% coupon yielding 10% 2. A 20-year bond with a 10% coupon yielding 11% 3. A 20-year zero-coupon bond yielding 10% 4. A 21-year bond with a 10% coupon yielding 10% Correct 3. A 20-year zero-coupon bond yielding 10%

All other things equal (YTM = 10%), which of the following has the longest duration?

1. A 30-year bond with a 10% coupon 2. A 20-year bond with a 9% coupon 3. A 20-year bond with a 7% coupon 4. A 10-year zero-coupon bond Correct 1. A 30-year bond with a 10% coupon

__________ in interest rates are associated with stock market declines.

1. Anticipated increases 2. Unanticipated increases 3. Anticipated decreases 4. Unanticipated decreases Correct 2. Unanticipated increases

Which one of the following stocks represents industries with below-average sensitivity to the state of the economy?

1. Financials 2. Technology 3. Food and beverage 4. Cyclicals Correct 3. Food and beverage

The market value of all final goods and services produced during a given period is called __________.

1. GDP 2. industrial production 3. capacity utilization 4. factory orders Correct 1. GDP

If the duration of a bond is 5 and you expect interest rates to decline by 0.5%, what does duration predict with regards to the % change in the bond's price?

1. Increase by 2.5% 2. Decrease by 2.5% 3. Increase by 5% 4. Decrease by 5% Correct 1. Increase by 2.5%

Which of the following industries would most analysts classify as mature?

1. Internet service providers 2. Biotechnology 3. Wireless communication 4. Auto manufacturing Correct 4. Auto manufacturing

If your reinvestment rate is greater than the calculated YTM at purchase, which of the following is true regarding your realized annualized return if held to maturity?

1. It will be greater than the YTM 2. It will be less than the YTM 3. It will equal the YTM Correct 1. It will be greater than the YTM

Inflation-indexed Treasury securities are commonly called __________.

1. PIKs 2. CARs 3. TIPS 4. STRIPS Correct 3. TIPS

Which of the following yield curves generally implies a normal healthy economy?

1. Positive slope 2. Negative slope 3. Flat 4. Hump-shaped curve correct 1. positive slope

Attempting to forecast future earnings and dividends is consistent with which of the following approaches to securities analysis?

1. Technical analysis 2. Fundamental analysis 3. Both technical analysis and fundamental analysis 4. Indexing Correct 2. Fundamental analysis

Because of convexity, when interest rates change, the actual bond price will __________ the bond price predicted by duration.

1. always be higher than 2. sometimes be higher than 3. always be lower than 4. sometimes be lower than Correct 1. always be higher than

If the economy is going into a recession, a good industry to invest in would be the __________ industry.

1. automobile 2. banking 3. construction 4. medical services Correct 4. medical services

An example of a highly cyclical industry is the __________.

1. automobile industry 2. tobacco industry 3. pharmaceutical industry 4. utility industry Correct 1. automobile industry

A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.

1. callable 2. coupon 3. puttable 4, Treasury Correct 1. Callable

A top-down analysis of a firm's prospects starts with an analysis of the __________.

1. firm's position in its industry 2. U.S. economy or even the global economy 3. industry 4. specific firm under consideration Correct 2. U.S. economy or even the global economy

If you believe the economy is about to go into a recession, you might change your asset allocation by selling __________ and buying __________.

1. growth stocks; long-term bonds 2. long-term bonds; growth stocks 3. defensive stocks; growth stocks 4. You Answered defensive stocks; long-term bonds Correct 1. growth stocks; long-term bonds

You can earn abnormal returns on your investments via macro forecasting __________.

1. if you can forecast the economy at all 2. if you can forecast the economy as well as the average forecaster 3. if you can forecast the economy better than the average forecaster 4. only if you can forecast the economy with perfect accuracy Correct 3. if you can forecast the economy better than the average forecaster

Everything else equal, the __________ maturity of a bond and the __________ coupon, the greater the sensitivity of the bond's price to interest rate changes.

1. longer; higher 2. longer; lower 3. shorter; higher 4. shorter; lower Correct 2. longer; lower

Yields on municipal bonds are typically __________ yields on corporate bonds of similar risk and time to maturity.

1. lower than 2. slightly higher than 3. You Answered identical to 4. twice as high as Correct 1. lower than

The __________ of a bond is computed as the ratio of the annual coupon payment to the market price.

1. nominal yield 2. current yield 3. yield to maturity 4. yield to call Correct 2. current yield

In regard to bonds, convexity relates to the __________.

1. shape of the bond price curve with respect to interest rates 2. shape of the yield curve with respect to maturity 3. slope of the yield curve with respect to liquidity premiums 4. size of the bid-ask spread Correct 1. shape of the bond price curve with respect to interest rates