FI 414 Chp 4

Zachary has purchased an investment that he expects to produce income of $3,000 at the end of the first year and $4,000 at the end of the second year. If he requires an 8% rate of return compounded annually, what is the maximum amount that he can pay and still earn the required rate of return?

Answer: $3,000/(1.08)1 + $4,000/(1.08)2 = $6,207.13

Assume that $100 is deposited at the end of each year for five years at 10% compound interest and that no withdrawals are made over the five-year period. Based on this data, which one of the following statements is correct? A) The future value will be $550. B) The present value can be determined by computing the present value of $500 in five years at 10%. C) The present value can be determined by computing the present value of a $100 ordinary annuity for five years at 10%. D) The present value will be $500.

C

Josh purchased 100 shares of XOM for $76.63 per share at the beginning of 2007. He received dividends per share of $1.37 (2007), $1.55 (2008), $1.66 (2009), $1.74 (2010), $1.85 (2011). At the end of 2011, just after receiving the last dividend, he sold the stock for $84.76. At what average annual rate did the price of the stock increase over the 5 year period? A) about 10.61% B) about 2.12% C) about 2.03% D) about 1.64%

C

Kelly bought a stock at a price of $22.50. She received a $1.75 dividend and sold the stock for $24.75. What is Kellys capital gain on this investment? A) $4.00 B) $3.75 C) $2.25 D) $1.75

C

Most investors are risk-averse, which means they... A) refuse to accept any financial risk. B) invest only in government insured securities. C) require an increase in return for any increase in risk. D) gain satisfaction from the excitement of risk.

C

Ryan purchased a bond for $980 at the beginning of 2007. He received annual interest payments of $$55 at the end of each year through 2012 when the bond was redeemed at its face value of $1,000. Compute the yield (internal rate of return) Ryan earned on his bond purchase. A) 5.50% B) 5.61% C) 5.91% D) .34%

C

Samantha bought a stock one year ago for $66 a share. She received a total of $2.00 in dividends. Today she sold the stock for $70 a share. Which one of the following statements is correct concerning this investment? A) Samantha has current income of $6.00. B) Samantha has a capital gain of $2.00. C) Samantha has a total return of 9.1%. D) Samantha has unrealized income of $4 a share.

C

Six years ago, Miguel invested $3,500. Today his investment is worth $5659. The yield on this investment is... A) -7.69%. B) error 5. C) 8.34%. D) 10.28%.

C

The holding period is a useful way to compare investments because it considers... A) the time value of money. B) only capital gains, but not income. C) both income and capital gains or losses. D) the relative size of investments being compared.

C

The present value of $10,000 discounted at 5% per year and received at the end of 5 years is... A) $10,000/1.25. B) $10,000(1.05)5. C) $10,000/(1.05)5. D) $10,000 (1.05)1/5.

C

The risk that the rate of return on an investment will be less than expected due to factors that are independent of the investment, such as political, social or economic events, is called... A) business risk. B) financial risk. C) market risk. D) liquidity risk.

C

Which of the following is(are) issue characteristics of an investment? I. type of investment such as stocks or bonds II. state of the economy III. coupon or dividend payments IV. time to maturity A) I and II only B) III only C) I, III and IV only D) I, II, III and IV

C

Which of the following should be considered when deciding among alternative investments? I. time value of money II. risks associated with each investment III. risk free rate of return IV. personal risk tolerance level A) I and II only B) III and IV only C) I, II and IV only D) I, II, III and IV

C

Which one following will lower required rates of return? A) higher rates of inflation B) higher risk premiums C) lower rates of inflation D) lower dividend yields

C

Alexis bought a stock for $34 a share two years ago. The stock does not pay any dividends. Today she sold the stock for $28.50 a share. What was her internal rate of return on this investment? A) 9.22% B) -9.22% C) 19.30% D) -8.44%

D

An investment costs $3,500 today. This investment is expected to produce annual cash flows of $1,200, $1,400, $1,300 and $1,100, respectively, over the next four years. What is the internal rate of return on this investment? A) 8.1% B) 9.33% C) 14.6% D) 16.2%

D

An investment paying 4% compounded quarterly will have a value at the end of one year equal to... A) an investment paying 16% compounded annually at the end of 1 year. B) an investment paying 2% compounded semi-annually at the end of 1 year. C) an investment paying 4% compounded annually at the end of 4 years. D) an investment paying 1% compounded annually at the end of 4 years.

D

Ashley purchased a stock at a price of $27 a share. She received quarterly dividends of $0.75 per share. After one year, Ashley sold the stock at a price of $29.25 a share. What is her percentage holding period return on this investment? A) 10.3% B) 11.1% C) 17.9% D) 19.4%

D

Christopher invests $400 today at a 4% rate of return which is compounded annually. What is the future value of this investment after four years? A) $342 B) $416 C) $464 D) $468

D

David has purchased an investment that he expects to produce an annual cash flow of $3,000 for five years. He requires an 8% rate of return compounded annually. What is the maximum amount that David can pay and still earn the required rate of return? A) $19,008 B) $15,000 C) $14,764 D) $12,936

D

Each of the following investments produces the same rate of return. Which one has the greatest amount of risk? A) investment A with a standard deviation of 4% B) investment B with a standard deviation of 12% C) investment C with a standard deviation of 8% D) investment D with a standard deviation of 19%

D

If a stock is purchased at the beginning of a year, a single dividend is paid at the end of the year and the stock is sold immediately after the dividend has been received. In this case... A) the internal rate of return is lower than the holding period return. B) the holding period return. is lower than the internal rate of return. C) it is not possible to calculate the internal rate of return. D) the internal rate of return equals the holding period return.

D

In which of the following circumstances would it be most appropriate to use the holding period return? A) to compare the capital gains on a house held for 8 years and a mutual fund held for 6 years B) to compare the calendar year performance of stocks purchased in March to stocks purchased in September C) to compare the dividend yield of stocks to the interest rate on bonds D) to compare the performance of several stocks, each of which was held throughout an entire year

D

Josh purchased 100 shares of XOM for $76.63 per share at the beginning of 2007. He received dividends per share of $1.37 (2007), $1.55 (2008), $1.66 (2009), $1.74 (2010), $1.85 (2011). At the end of 2011, just after receiving the last dividend, he sold the stock for $84.76. What was his average annual rate of return form both dividends and capital gains? (Hint: compute the IRR, assume that all dividends were received at the end of the year.) A) 9.831% B) 3.774% C) 3.423% D) 4.076%

D

Justin invests $4,000 in a savings account for two years. The account pays 2% interest compounded annually. How much interest income will Justin earn on this investment? A) $80.00 B) $81.60 C) $160.00 D) $161.60

D

Justin invests $4,000 in a savings account for two years. The account pays 2% interest compounded annually. How much money will be in the account at the end of the second year? A) $4,161.60 B) $4,160.00 C) $4080.00 D) $1161.60

D

Stocks in which of the following industries may be impacted by government actions? A) health care B) housing C) defense D) all of the above

D

The difficulty many investors experienced in selling mortgage based securities during the financial crisis of 2009 is an example of A) business risk. B) credit risk. C) market risk. D) liquidity risk.

D

The expected rate of return and standard deviations, respectively for four stocks are given below: OPQ 11%, 8% RST 11%, 9% UVW 12%, 10% XYZ 12%, 8% Which stock is clearly most desirable? A) OPQ B) RST C) UVW D) XYZ

D

The markets in general are paying a 2% real rate of return. Inflation is expected to be 3%. ABC stock commands a 6% risk premium. What is the expected rate of return on ABC stock? A) 2% B) 5% C) 8% D) 11%

D

The maximum rate of return that can be earned for a given rate of interest occurs when interest is compounded... A) annually. B) daily. C) monthly. D) continuously.

D

The most predictable component of stock returns is A) capital gains. B) capital losses. C) inflation adjusted return. D) dividend income.

D

To compute the present value of $1,000 annuity received at the end of each of the next three years and discounted at the rate of 5% per year, you should use he following EXCEL command. A) ANN B) TVM C) RATE D) PV

D

When calculating the present value of either a future single sum or a future annuity, the applicable interest rate is usually called the... A) yield to maturity. B) compound interest rate. C) internal rate of return. D) discount rate.

D

When computing an investment's yield using a financial calculator or spreadsheet such as Excel, which of the following should be entered as a negative number? A) the number of time periods B) dividend or interest payments C) the price at which the investment is sold D) the initial cost of the investment

D

When the rate of return is equal to the discount rate... A) the present value of an investment's benefits must be greater than its cost. B) the cost of an investment equals the sum of its benefits. C) the cost of an investment equals the future value of its benefits. D) the cost of an investment equals the present value of its benefits.

D

Which of the following choices is in the correct order from less risk to more risk? A) corporate bonds, certificates of deposit, mutual funds that invest in stock, common stock B) certificates of deposit, corporate bonds, common stock, mutual funds that invest in stock C) certificates of deposit, mutual funds that invest in stock, common stock, corporate bonds D) certificates of deposit, corporate bonds, mutual funds that invest in stock, common stock

D

Which of the following internal characteristics should cause investors to expect the highest rate of return? A) a steady record of past dividends B) interest and principal guaranteed by the U.S. government C) a record of excellent management and consistent dividend payments D) poor management and excessive use of debt financing

D

Which of the following statements about the standard deviation are correct? I. The standard deviation is a measure of relative dispersion. II. Standard deviations should be in conjunction with expected returns to compare investments. III. The standard deviation is calculated by taking the square root of the variance. IV. The higher the standard deviation of an investment, the lower its risk. A) I and IV only B) II and III only C) I, III and IV only D) I, II and III only

D

A capital loss is computed by.. A) subtracting the original cost of an investment from the proceeds received from the sale of that investment minus any income from the investment. B) subtracting the original cost of an investment from the proceeds received from the sale of that investment plus any income from the investment. C) subtracting the proceeds received from the sale of an investment from the original cost of the investment. D) subtracting the original cost of an investment from the proceeds received from the sale of that investment.

D) subtracting the original cost of an investment from the proceeds received from the sale of that investment.

Christopher purchased 200 shares of ABC stock at $21.25 per share. After nine months, he sold all of his shares at a price of $19.88 a share. Jake received a total of $0.55 per share in dividends during the time he owned the shares. Jake's holding period return is... A) -6.4%. B) -3.9%. C) 2.6%. D) 9.7%.

A

Congress considers a bill that would eliminate the mortgage interest deduction for individuals. For the housing industry, this is an example of... A) tax risk. B) interest rate risk. C) business risk. D) event risk.

A

If the present value of an investment's benefits equals the present value of the investment's costs, then the investor would earn a... A) return equal to the discount rate. B) negative rate of return. C) 0% rate of return. D) return greater than the discount rate.

A

Inflation tends to have a favorable impact on A) real estate. B) common stock. C) preferred stock. D) bonds.

A

Investor's are motivated to purchase an asset because of its A) expected returns. B) past returns. C) emotional benefits. D) all of the above.

A

Josh purchased 100 shares of XOM at the beginning of 2007. He received dividends per share of $1.37 (2007), $1.55 (2008), $1.66 (2009), $1.74 (2010), $1.85 (2011). At the end of 2011, just after receiving the last dividend, he sold the stock for $84.76. At what rate did the dividends from the end of 2007 to the end of 2011? Assume that all dividends were received at the end of the year. A) 7.8% B) 6.2% C) 13.1% D) 35%

A

Lauren purchased a stock for $28 a share and sold it six months later for $31. While she owned the stock, Lauren received two quarterly dividends of $0.35 per share. Brittany's holding period return on this stock is... A) 13.2%. B) 10.7%. C) 11.9%. D) 26.4%.

A

Madison purchased a new car for $23,000. She was allowed $3,000 for her trade in and financed the remainder over 48 months at a rate of 4% per year. How much is her monthly payment? A) $451.58 B) $519.32 C) $384.91 D) $459.15

A

Negative reaction to Netflix's change of billing plans is an example of... A) liquidity risk. B) event risk. C) business risk. D) purchasing power risk.

A

Roy is going to receive a payment of $5,000 one year from today. He earns an average of 6% on his investments. What is the present value of this payment? A) $4,717 B) $4,821 C) $5,000 D) $5,300

A

The Sorka Corp. has paid annual dividends of $0.60, $0.63, $0.65, $0.68 and $0.72, respectively, over the past five years. What is the dividend growth rate? A) 4.7% B) 5.2% C) 5.4% D) 5.9%

A

The adage "the sooner one receives a return on a given investment, the better," reflects the financial concept known as the A) time value of money. B) total return concept. C) historical dividend theory. D) expected yield factor.

A

The risk-free rate is equal to the real rate of return plus... A) an expected inflation premium. B) a risk premium. C) both an inflation and a risk premium. D) the prevailing prime rate.

A

The stated rate of interest is equal to the true rate of interest when... A) interest is compounded annually and the period in questions is exactly 1 year. B) interest is compounded continuously over one or more years. C) interest is compounded annually over a period of several years. D) interest is discounted rather than compounded.

A

To compute the present value of $1,000 annuity received at the end of each of the next three years and discounted at the rate of 5% per year, you should enter the following variables into a financial calculator. A) N=3, i=5, PMT=1000 B) N=3, i=5, FV=3000 C) N=3, i=15, PMT=1000 D) N=1, i=5, PMT=3000

A

Which one of the following statements is correct concerning the time value of money? A) The future value of $1 at the end of two years is equal to $1 plus the first year's interest times 1 plus the annual interest rate. B) As the interest rate increases for any given year, the future value interest factor will decrease. C) The future value of $1 decreases with the passage of time. D) The future value interest factor is equal to zero if the interest rate is zero.

A

Which one of the following will tend to decrease the rate of return on an investment? A) elimination of a tax exemption relevant to the investment B) reduction in tax rates C) stabilization of inflation rates at a reasonably low level D) increased assurance of reinvestment rates at the desired rate of return

A

An ordinary annuity has cash flows that occur at the ________ of each time period and are ________ in amount. A) beginning; constant B) beginning; variable C) end; constant D) end; variable

C

A holding period return is calculated by adding the current income to the capital gains and dividing this sum by the... A) average investment value. B) beginning investment value. C) total income received. D) selling price of the investment.

B

An investment produced annual rates of return of 5%, 12%, 8% and 11% respectively over the past four years. What is the standard deviation of these returns? A) 2.7% B) 3.2% C) 3.6% D) 3.8%

B

If you invest $2,000 at the end of each year for five years and you earn 7% interest compounded annually, how much will you have accumulated at the end of the fifth year? A) $10,700 B) $11,501 C) $12,307 D) $14,026

B

Inflation tends to have a particularly negative impact on the price of A) real estate. B) bonds. C) gold. D) crude oil.

B

Liquidity risk is defined as the risk of... A) having to trade a security in a broad market. B) not being able to sell an investment conveniently and at a reasonable price. C) having inflation erode the purchasing power of your investment. D) having declining price levels affect the reinvestment rate of your current income stream.

B

Over the long term, which one of the following has historically had the lowest average annual rate of return? A) small-company stocks B) long-term government bonds C) large-company stocks D) long-term corporate bonds

B

The closest approximation to the real, risk-free rate of interest is... A) The short-term Treasury bill rate plus the inflation rate. B) The short-term Treasury bill rate minus the inflation rate. C) The 10 year Treasury bond rate minus the inflation rate. D) The 10 year Treasury bond rate minus the 1 year Treasury bill rate.

B

The expected rate of return and standard deviations, respectively for four stocks are given below: ABC 9%, 3% CDE 11%, 9% FGH 12%, 8% IJK 14%, 10% Which stock is clearly least desirable? A) ABC B) CDE C) FGH D) IJK

B

The following investment cash flows have been entered into cells B5 through B9 of an EXCEL spreadsheet. B5 $(5,200 ), B6 $2,100, B7 $1,300, B8 $1,800, B9 $1,200, where $5,200 is the cost of the investment and the following amounts are cash flows at the end of years one through four. The correct function for computing the yield on this investment is... A) =irr(B6:B9)+B5. B) =irr(B6:B9). C) =rate(4,0,-5200, 1200). D) =ytm(B5, B6:B9).

B

The holding period return (HPR) can appropriately be used to... A) compare the yield on investments held for any time period. B) compare returns among investments that are held for the same period of time. C) isolate realized capital gains. D) determine the required reinvestment rate for long-term investments.

B

The present value of $1,000 discounted at the rate of 5% per year, to be received at the end of 3 years is equal to... A) $1,000/(1.03)5 B) $1,000/(1.05)3 C) $1,000 x (1.05)3 D) $1,000-($1,000) x .03 x 5

B

The required rate of return on the Cosmos Corporation's common stock is 10%, the current real rate of return in the market is 1%, and the inflation rate is 3%. In this case, the risk premium associated with Cosmos stock is A) 5%. B) 6%. C) 7%. D) 8%.

B

The required return on Beta stock is 14%. The risk-free rate of return is 4% and the real rate of return is 2%. How much are investors requiring as compensation for risk? A) 8% B) 10% C) 12% D) 14%

B

The stock of Plomb Co. falls sharply on news that its CEO has drowned in a boating accident while on vacation. This is an example of... A) liquidity risk. B) event risk. C) accidental risk. D) flotation risk.

B

To determine the compounded annual rate of return on investments held for more than a year, investors typically use the present-value-based measure known as yield or A) holding period return. B) internal rate of return. C) inflation-adjusted return. D) simple return.

B

Which of the following factors will increase the risk level of an investment? I. a firm's decision to use a high percentage of debt financing II. an economic situation in which consumer prices are rising at a rapid rate III. the ability to trade the investment in a broad market rather than in a thin market IV. unstable currency values A) I and II only B) I, II and IV only C) II and IV only D) I, III and IV only

B

Which of the following statements are correct concerning present value? I. The present value interest factor for a single sum is always equal to or less than 1. II. The lower the discount rate for a given year, the smaller the present value interest factor. III. The further in time, the smaller the present value interest factor. IV. The present value is equal to the future value only when the stated interest rate is 1%. A) I and II only B) I and III only C) II and III only D) I, III and IV only

B

Which one of the following is an example of an annuity? A) the receipt of $50 in January, March, April, June, August, September and December B) the payment of $259 a month for three consecutive years C) the payment of $389 in January, $200 in February, and $200 in March D) the receipt of $100 a month for three months and then $150 a month for two months

B

A petroleum refinery in the Gulf region is forced to shut down for several months because of hurricane damage. This is an example of... A) market risk. B) speculation. C) event risk. D) business risk.

C

An investment produced annual rates of return of 4%, 8%, 14% and 6%, respectively, over the past four years. What is the standard deviation of these returns? A) 3.7% B) 4.1% C) 4.3% D) 4.6%

C