Finance Quiz 3

Investors are assumed to: Select one: a. be irrational and risk seeking individuals. b. be rational and risk averse. c. seek certain outcomes or be compensated for added risk. d. A and C only. e. B and C only.

e

Sam and Josie are 55 years old and intend to retire in 5 years time. As their retirement income gap is negative $14,720 they should: Select one: a. work until they are at least 65 and can receive the pension. b. rework their retirement expense worksheet to see if they can save money. c. enjoy a good quality of life in retirement. d. save hard for the next five years to improve their situation in retirement. e. A, B and D only.

c

The biggest unknown variable that should be taken into consideration when buying a house is: a. neighbours b. proximity to work c. interest rate changes d. rates e. C and D only

c

Once a business plan has been developed and the necessary capital has been raised, the plan is of no further use. Select one: True False

FALSE

A business plan: Select one: a. is required by those who provide funds to the firm. b. contains a SWALK analysis of the industry, business, market and labour force. c. once it has been developed and the necessary capital for the firm has been raised, is of no further use. d. All of the above. e. A and C only.

a

Which of the following statements is correct? Select one: a. If interest rates rise, floating rate mortgage payments fall. b. If interest rates fall, floating rate mortgage payments decline. c. If interest rates fall, fixed rate mortgage payments decline. d. All of the above. e. B and C only.

b

Expected inflation: Select one: a. covers the increase in prices over the period of investment. b. compensates the investor for the use of money between two periods of time c. is measured by the Consumer Price Index. d. All of the above. e. B and C only.

a

John and Janet need to save $176,410 in order to eliminate their net income gap. If they plan to retire in 8 years time and expect a life expectancy of 20 years, how much must they save each year. (Assume a 3.25% real rate of return.) Select one: a. $19,662.96. b. $12,254.62. c. $6,745.03. d. $6,399.94. e. $4,439.00.

a

Liquid funds: Select one: a. can be transferred to another person easily with little or no change in price. b. can be converted into cash promptly; although a reduction in the value of the investment will always occur. c. are highly desirable because their price is always discounted against similar financial assets. d. All of the above. e. A and C only.

a

Liquid funds: Select one: a. can be transferred to another person easily with little or no change in price. b. can be converted into cash promptly; although a reduction in the value of the investment will always occur. c. are highly desirable because their price is always discounted against similar financial assets. d. All of the above. e. A and C only.

a

The returns from most ordinary returns are: Select one: a. positively correlated with each other. b. negatively correlated with each other. c. uncorrelated with each other. d. inversely correlated with each other. e. None of the above.

a

The returns from most ordinary returns are: a. positively correlated with each other b. negatively correlated with each other c. uncontrolled with each other d. inversely correlated with each other e. None of the above

a

The term structure of interest rates is the pattern of interest rate yields for securities that differ only in: Select one: a. the length of time to maturity. b. liquidity premiums. c. yield to maturity. d. default risk. e. business risk.

a

Seth Tardi is aged 53 and intends to retire at age 65. Seth has just calculated his retirement income gap and will require an additional $25,680 per annum to achieve his post-65 lifestyle objectives. Assume Seth's retirement will last 20 years and the real rate of return will be 3.5 percent. How much does Seth have to save to reach his target level of savings? Select one: a. $51,097. b. $51,624. c. $364,975. d. $338,712. e. None of the above.

c

TRC is a manufacturing company selling high quality products, made with local ingredients, throughout New Zealand. As a prospective investor in TRC which of the following risks do you need to consider: Select one: a. business, financial and exchange rate risks. b. financial, liquidity and exchange rate risks. c. business, financial, and liquidity risks. d. business, financial and country risks. e. financial, exchange rate and country risks.

c

The __________ rate of interest considers the increase in prices between two periods without expected inflation. The _____ rate of interest includes a premium for expected inflation. a. basic; economic b. inflated; real c. real; nominal d. nominal; real e. None of the above

c

A business plan: Select one: a. highlights the benefits and problems associated with the business. b. is a living document. c. is amended to take account of changes to the business operations. d. All of the above. e. A and C only.

d

A business plan: a. highlights the benefits and problems associated with the business. b. is a living document c. is amended to take account of change to the business operations d. All of the above e. A and C only

d

Seth Tardi is aged 53 and intends to retire at age 65. Seth has just calculated his retirement income gap and will require an additional $25,680 per annum for 20 years to achieve his post-65 lifestyle objectives. How much would Seth have to save each year in order to achieve his desired level of retirement income? (Assume a 3.5 percent real rate of return.) Select one: a. $12,906. b. $18,786. c. $23,196. d. $24,995. e. None of the above.

d

In order to develop financial forecasts for the firm it is necessary to: Select one: a. know the previous sales levels and past market share of the firm. b. know the current level and past growth of sales in the industry. c. know the market share the business expects to achieve. d. A and B only. e. B and C only.

e

An investment scheme has outlined its returns for each of the last five years as being 0%, 8%, 23%, 4%, and 10%. What is the STANDARD DEVIATION of the above sample of returns for this investment opportunity? (Please type your answer in decimals e.g. 10.1% should be shown as 0.101.)

0.087

Over the last 50 years New Zealand's average residential property prices have increased by 7.6% per annum, while New Zealand's inflation has been 5.0 per annum over the same period. What has been the real rate of return on residential property? (Hint: use the real interest rate formula Equation 6.3 from the text. Please enter your answer in decimals and show your answer to the nearest 10th of a percent, i.e. 10.1% would be shown as 0.101)

Answer: 0.025

You need to borrow $300,000 to buy a new home. If the interest rate is 7.6% per annum and you wish to pay off your loan over 15 years, how much will your fortnightly (every two weeks) mortgage payment be? (Please round your answer to the nearest dollar but exclude $ and , when typing your answer.)

As we have fortnightly repayments and therefore 26 compounding periods per year (m) for this question we need to replace all the r's in the formula above with r/m (or r/26) and n will now be nxm (or 15x26=390) The correct answer is: 1290

Over the last 50 years New Zealand's average residential property prices have increased by 9.9% per annum, while New Zealand's inflation has been 4.7 per annum over the same period. What has been the real rate of return on residential property? (Hint: use the real interest rate formula Equation 6.3 from the text. Please enter your answer in decimals and show your answer to the nearest 10th of a percent, i.e. 10.1% would be shown as 0.101)

The correct answer is: 0.050

You need to borrow $300,000 to buy a new home. If the interest rate is 8.7% per annum and you wish to pay off your loan over 15 years, how much will your fortnightly (every two weeks) mortgage payment be? (Please round your answer to the nearest dollar but exclude $ and , when typing your answer.)

The correct answer is: 1378

John and Janet need to save $176,410 in order to eliminate their net income gap. If they plan to retire in 8 years time and expect a life expectancy of 20 years, how much must they save each year. (Assume a 3.25% real rate of return.) Select one: a. $19,662.96. b. $12,254.62. c. $6,745.03. d. $6,399.94. e. $4,439.00.

$19,662.96.

Over the last 50 years New Zealand's average residential property prices have increased by 8.1% per annum, while New Zealand's inflation has been 5.7 per annum over the same period. What has been the real rate of return on residential property? (Hint: use the real interest rate formula Equation 6.3 from the text. Please enter your answer in decimals and show your answer to the nearest 10th of a percent, i.e. 10.1% would be shown as 0.101)

0.023

Over the last 50 years New Zealand's average residential property prices have increased by 9.2% per annum, while New Zealand's inflation has been 6.1 per annum over the same period. What has been the real rate of return on residential property? (Hint: use the real interest rate formula Equation 6.3 from the text. Please enter your answer in decimals and show your answer to the nearest 10th of a percent, i.e. 10.1% would be shown as 0.101)

0.029

Over the last 50 years New Zealand's average residential property prices have increased by 9.7% per annum, while New Zealand's inflation has been 6.1 per annum over the same period. What has been the real rate of return on residential property? (Hint: use the real interest rate formula Equation 6.3 from the text. Please enter your answer in decimals and show your answer to the nearest 10th of a percent, i.e. 10.1% would be shown as 0.101)

0.034

Over the last 50 years New Zealand's average residential property prices have increased by 9.8% per annum, while New Zealand's inflation has been 5.7 per annum over the same period. What has been the real rate of return on residential property? (Hint: use the real interest rate formula Equation 6.3 from the text. Please enter your answer in decimals and show your answer to the nearest 10th of a percent, i.e. 10.1% would be shown as 0.101)

0.039

Over the last 50 years New Zealand's average residential property prices have increased by 9.3% per annum, while New Zealand's inflation has been 5.1 per annum over the same period. What has been the real rate of return on residential property? (Hint: use the real interest rate formula Equation 6.3 from the text. Please enter your answer in decimals and show your answer to the nearest 10th of a percent, i.e. 10.1% would be shown as 0.101)

0.040

Over the last 50 years New Zealand's average residential property prices have increased by 9.4% per annum, while New Zealand's inflation has been 4.9 per annum over the same period. What has been the real rate of return on residential property? (Hint: use the real interest rate formula Equation 6.3 from the text. Please enter your answer in decimals and show your answer to the nearest 10th of a percent, i.e. 10.1% would be shown as 0.101)

0.043

An investment scheme has outlined its returns for each of the last five years as being 2%, 14%, 10%, 4%, and 2%. What is the STANDARD DEVIATION of the above sample of returns for this investment opportunity? (Please type your answer in decimals e.g. 10.1% should be shown as 0.101.)

0.054

Question text An investment scheme has outlined its returns for each of the last five years as being -2%, 14%, 18%, 2%, and 14%. What is the STANDARD DEVIATION of the above sample of returns for this investment opportunity? (Please type your answer in decimals e.g. 10.1% should be shown as 0.101.)

0.061

An investment scheme has outlined its returns for each of the last five years as being -4%, 11%, 10%, 1%, and 9%. What is the STANDARD DEVIATION of the above sample of returns for this investment opportunity? (Please type your answer in decimals e.g. 10.1% should be shown as 0.101.)

0.066

An investment scheme has outlined its returns for each of the last five years as being -3%, 18%, 19%, 5%, and 6%. What is the STANDARD DEVIATION of the above sample of returns for this investment opportunity? (Please type your answer in decimals e.g. 10.1% should be shown as 0.101.)

0.079

An investment scheme has outlined its returns for each of the last five years as being -5%, 10%, 13%, 1%, and 14%. What is the STANDARD DEVIATION of the above sample of returns for this investment opportunity? (Please type your answer in decimals e.g. 10.1% should be shown as 0.101.)

0.083

You are looking to invest in Kiwi Property Ltd, which is an NZX listed company. Before investing you wish to estimate your required return. Kiwi Property has a beta of 0.8, while the market risk premium (MRP) is 6.9% and the risk free rate is 3.7%. What is your expected return in Kiwi Property? (Important: Please state your answer as a decimal, so 10.1% would be entered as 0.101)

0.092

An investment scheme has outlined its returns for each of the last five years as being 0%, 15%, 23%, 3%, and 15%. What is the STANDARD DEVIATION of the above sample of returns for this investment opportunity? (Please type your answer in decimals e.g. 10.1% should be shown as 0.101.)

0.095

You are looking to invest in Kiwi Property Ltd, which is an NZX listed company. Before investing you wish to estimate your required return. Kiwi Property has a beta of 0.8, while the market risk premium (MRP) is 5.8% and the risk free rate is 5.0%. What is your expected return in Kiwi Property? (Important: Please state your answer as a decimal, so 10.1% would be entered as 0.101)

0.096

You are looking to invest in Kiwi Property Ltd, which is an NZX listed company. Before investing you wish to estimate your required return. Kiwi Property has a beta of 0.8, while the market risk premium (MRP) is 6.9% and the risk free rate is 4.3%. What is your expected return in Kiwi Property? (Important: Please state your answer as a decimal, so 10.1% would be entered as 0.101)

0.098

You are looking to invest in Kiwi Property Ltd, which is an NZX listed company. Before investing you wish to estimate your required return. Kiwi Property has a beta of 0.9, while the market risk premium (MRP) is 5.6% and the risk free rate is 5.0%. What is your expected return in Kiwi Property? (Important: Please state your answer as a decimal, so 10.1% would be entered as 0.101)

0.100

You are looking to invest in Kiwi Property Ltd, which is an NZX listed company. Before investing you wish to estimate your required return. Kiwi Property has a beta of 1.1, while the market risk premium (MRP) is 5.0% and the risk free rate is 4.5%. What is your expected return in Kiwi Property? (Important: Please state your answer as a decimal, so 10.1% would be entered as 0.101)

0.100

Your KiwiSaver account was worth $93,000 five years ago and it is now worth $150,000. What is the annual holding period yield (HPY) on your portfolio during this period? (Important: please enter your answer as a decimal, so for example 10.1% or -10.1% would be entered in as .101 or -.101 respectively).

0.100

You are looking to invest in Kiwi Property Ltd, which is an NZX listed company. Before investing you wish to estimate your required return. Kiwi Property has a beta of 0.9, while the market risk premium (MRP) is 6.9% and the risk free rate is 4.2%. What is your expected return in Kiwi Property? (Important: Please state your answer as a decimal, so 10.1% would be entered as 0.101)

0.104

An investment scheme has outlined its returns for each of the last five years as being -8%, 6%, 23%, 3%, and 8%. What is the STANDARD DEVIATION of the above sample of returns for this investment opportunity? (Please type your answer in decimals e.g. 10.1% should be shown as 0.101.)

0.111

You are looking to invest in Kiwi Property Ltd, which is an NZX listed company. Before investing you wish to estimate your required return. Kiwi Property has a beta of 1.4, while the market risk premium (MRP) is 4.6% and the risk free rate is 5.5%. What is your expected return in Kiwi Property? (Important: Please state your answer as a decimal, so 10.1% would be entered as 0.101)

0.119

Your KiwiSaver account was worth $67,000 five years ago and it is now worth $124,000. What is the annual holding period yield (HPY) on your portfolio during this period? (Important: please enter your answer as a decimal, so for example 10.1% or -10.1% would be entered in as .101 or -.101 respectively).

0.131

You are looking to invest in Kiwi Property Ltd, which is an NZX listed company. Before investing you wish to estimate your required return. Kiwi Property has a beta of 1.3, while the market risk premium (MRP) is 7.3% and the risk free rate is 4.4%. What is your expected return in Kiwi Property? (Important: Please state your answer as a decimal, so 10.1% would be entered as 0.101)

0.139

Your KiwiSaver account was worth $70,000 five years ago and it is now worth $135,000. What is the annual holding period yield (HPY) on your portfolio during this period? (Important: please enter your answer as a decimal, so for example 10.1% or -10.1% would be entered in as .101 or -.101 respectively).

0.140

Your KiwiSaver account was worth $59,000 five years ago and it is now worth $130,000. What is the annual holding period yield (HPY) on your portfolio during this period? (Important: please enter your answer as a decimal, so for example 10.1% or -10.1% would be entered in as .101 or -.101 respectively).

0.171

Your KiwiSaver account was worth $85,000 five years ago and it is now worth $187,000. What is the annual holding period yield (HPY) on your portfolio during this period? (Important: please enter your answer as a decimal, so for example 10.1% or -10.1% would be entered in as .101 or -.101 respectively).

0.171

Your KiwiSaver account was worth $86,000 five years ago and it is now worth $223,000. What is the annual holding period yield (HPY) on your portfolio during this period? (Important: please enter your answer as a decimal, so for example 10.1% or -10.1% would be entered in as .101 or -.101 respectively).

0.210

Your KiwiSaver account was worth $53,000 five years ago and it is now worth $151,000. What is the annual holding period yield (HPY) on your portfolio during this period? (Important: please enter your answer as a decimal, so for example 10.1% or -10.1% would be entered in as .101 or -.101 respectively).

0.233

Your KiwiSaver account was worth $58,000 five years ago and it is now worth $249,000. What is the annual holding period yield (HPY) on your portfolio during this period? (Important: please enter your answer as a decimal, so for example 10.1% or -10.1% would be entered in as .101 or -.101 respectively).

0.338

Your investment portfolio was worth $63,000 five years ago and it is now worth $58,000. In the past 5 years you were also paid out $8,000 in cash dividends. What is the holding period return (HPR) on your portfolio during this period? (Important: please enter your answer as a decimal, so for example 10.1% or -10.1% would be entered in as .101 or -.101 respectively).

1.05

Your investment portfolio was worth $54,000 five years ago and it is now worth $65,000. In the past 5 years you were also paid out $11,000 in cash dividends. What is the holding period return (HPR) on your portfolio during this period? (Important: please enter your answer as a decimal, so for example 10.1% or -10.1% would be entered in as .101 or -.101 respectively).

1.41

Your investment portfolio was worth $57,000 five years ago and it is now worth $84,000. In the past 5 years you were also paid out $18,000 in cash dividends. What is the holding period return (HPR) on your portfolio during this period? (Important: please enter your answer as a decimal, so for example 10.1% or -10.1% would be entered in as .101 or -.101 respectively).

1.79

Your investment portfolio was worth $67,000 five years ago and it is now worth $112,000. In the past 5 years you were also paid out $13,000 in cash dividends. What is the holding period return (HPR) on your portfolio during this period? (Important: please enter your answer as a decimal, so for example 10.1% or -10.1% would be entered in as .101 or -.101 respectively).

1.87

You need to borrow $300,000 to buy a new home. If the interest rate is 7.5% per annum and you wish to pay off your loan over 15 years, how much will your fortnightly (every two weeks) mortgage payment be? (Please round your answer to the nearest dollar but exclude $ and , when typing your answer.)

1282

You need to borrow $300,000 to buy a new home. If the interest rate is 8.1% per annum and you wish to pay off your loan over 15 years, how much will your fortnightly (every two weeks) mortgage payment be? (Please round your answer to the nearest dollar but exclude $ and , when typing your answer.)

1330

You need to borrow $300,000 to buy a new home. If the interest rate is 8.2% per annum and you wish to pay off your loan over 15 years, how much will your fortnightly (every two weeks) mortgage payment be? (Please round your answer to the nearest dollar but exclude $ and , when typing your answer.)

1338

You need to borrow $300,000 to buy a new home. If the interest rate is 10% per annum and you wish to pay off your loan over 15 years, how much will your fortnightly (every two weeks) mortgage payment be? (Please round your answer to the nearest dollar but exclude $ and , when typing your answer.)

1486

You need to borrow $300,000 to buy a new home. If the interest rate is 11.5% per annum and you wish to pay off your loan over 15 years, how much will your fortnightly (every two weeks) mortgage payment be? (Please round your answer to the nearest dollar but exclude $ and , when typing your answer.)

1616

Your investment portfolio was worth $81,000 five years ago and it is now worth $148,000. In the past 5 years you were also paid out $17,000 in cash dividends. What is the holding period return (HPR) on your portfolio during this period? (Important: please enter your answer as a decimal, so for example 10.1% or -10.1% would be entered in as .101 or -.101 respectively).

2.04

Your investment portfolio was worth $76,000 five years ago and it is now worth $209,000. In the past 5 years you were also paid out $14,000 in cash dividends. What is the holding period return (HPR) on your portfolio during this period? (Important: please enter your answer as a decimal, so for example 10.1% or -10.1% would be entered in as .101 or -.101 respectively).

2.93

Your investment portfolio was worth $62,000 five years ago and it is now worth $239,000. In the past 5 years you were also paid out $16,000 in cash dividends. What is the holding period return (HPR) on your portfolio during this period? (Important: please enter your answer as a decimal, so for example 10.1% or -10.1% would be entered in as .101 or -.101 respectively).

4.11

Your investment portfolio was worth $55,000 five years ago and it is now worth $229,000. In the past 5 years you were also paid out $16,000 in cash dividends. What is the holding period return (HPR) on your portfolio during this period? (Important: please enter your answer as a decimal, so for example 10.1% or -10.1% would be entered in as .101 or -.101 respectively).

4.45

Assume Brett owes $15,000 on his student loan and is paying it off at the rate required by the Government. The interest rate on this loan is 7% and he can receive 9.0% before tax on his investments. Assuming Brett's tax rate is 21% should he: Select one: a. pay off his loan as quickly as possible. b. pay off his loan at the minimum amount required and invest surplus savings. c. be indifferent to repaying debt promptly or at the minimum amount required. d. B and C only. e. A and C only.

b

Investors are primarily ___________ and therefore prefer __________ to _________ for a given expected ______________ Select one: a. irrational; more risk; less return; risk. b. rational; lower risk; higher risk; return. c. astute; higher risk; lower risk; high return. d. knowledgeable; lower risk; higher risk; high return. e. speculative; lower return; higher return; risk level.

b

The _____________ the standard deviation, the ____________ the investment. Select one: a. smaller, larger the expected return on b. larger, riskier c. smaller, riskier d. larger, smaller the expected return on e. larger, more liquid

b

The amount of interest that will be offered to investors will depend on the investment's: Select one: a. time to maturity, the exchange rate, expected inflationary trend. b. time to maturity, expected inflation, the risk premium. c. time to maturity, expected inflation, liquidity risk. d. B and C only. e. None of the above.

b

The decision to place funds in a security is made ex ante because: Select one: a. the investor knows the returns he/she will receive. b. the investor expects to be compensated for the time the funds are invested. c. the investor does not expect to be compensated for inflation or risk. d. All of the above. e. None of the above.

b

What is the main philosophical reason for buying a business? Select one: a. To provide employment. b. To create value for the owners. c. To generate revenues. d. To pay creditors.

b

When deciding to buy property requiring a mortgage, the following additional expenses will be incurred: Select one: a. bank fees, real estate fees, stamp duty, legal fees. b. bank fees, valuation fees, legal fees, property insurance. c. bank fees, advertising, real estate fees, legal fees. d. bank fees, valuation fees, legal fees, stamp duty. e. bank fees, legal fees, real estate fees, valuation fees.

b

When establishing the financial forecasts for a new business it is important that: Select one: a. there is always sufficient cash on hand to pay the business's financial obligations. b. there is an additional source of short- and long-term funds available when required. c. the forecast financial statements show only positive net profits. d. initial funds raised by issuing shares or raising debt are sufficient to meet all financing requirements. e. None of the above.

b

Which of the following is NOT an advantage associated with renting a house or apartment? Select one: a. Repairs and maintenance are the responsibility of the landlord. b. Changes can be made to the house and/or garden to satisfy the tenant's lifestyle. c. Funds not tied up in the house can be invested elsewhere. d. If it becomes necessary to move to another town, all that is required from the tenant is to serve the landlord with the required notice. e. A and B only.

b

The two elements that make up the risk-free or riskless rate of return are: Select one: a. the supply of funds and the demand for funds. b. the yield on one year Government stock plus an inflation premium. c. the real risk-free rate of return plus an expected inflation premium. d. the required return plus a risk premium. e. the expected return plus an inflation premium.

c

The main purpose of a business plan is to provide information: a. to financiers b. on the business's current and future operations c. on the industry, market labour, SWOT analysis d. All of the above e. A and B only

d

The real risk-free rate of interest: Select one: a. is the compensation an investor should receive for foregoing the purchase of goods and services. b. is affected by the economic events that are occurring within the country. c. will fall if long-run economic growth is low. d. All of the above. e. A and C only.

d

The risk premium differs from the real interest rate and expected inflation premium because: Select one: a. it varies across or within all investment products. b. it guarantees that an expected return will be received. c. it reflects the risks associated with future business activities. d. A and C only. e. B and C only.

d

The risk-return line: Select one: a. always has a positive slope and commences above the origin. b. always has a positive slope and commences at the risk-free rate. c. shows the risk associated with an investment and the returns it should provide. d. All of the above. e. A and C only

d

The risk-return trade off___________________ a. assumes higher return for higher levels of risk b. considers the relationship between risk and return c. assumes that investors are rational d. All of the above e. B and C only

d

The risk-return trade-off _____________________. Select one: a. assumes higher return for higher levels of risk b. considers the relationship between risk and return c. assumes that investors are rational d. All of the above. e. B and C only.

d

The shape of the yield Curves can be explained by: a. expected inflation b. liquidity preferences c. supply and demand pressures d. All of the above e. None of the above

d