Fil Exam 2 Quizzes (4-6)

You purchased 500 shares of A.M.J. Inc. common stock one year ago for $50 per share. You received a dividend of $2 per share today and decide to take your profits by selling at $54.50 per share. What is your holding period return? 9.0% 6.5% 13.0% 4.0%

13.0%

Assume that you have $100,000 invested in a stock that is returning 14%, $150,000 invested in a stock that is returning 18%, and $200,000 invested in a stock that is returning 15%. What is the expected return of your portfolio? 14.97% 15.67% 15.78% 13.25%

15.78%

You decide to buy a 10-year Treasury bond with a coupon rate of 5.5% and a market yield of 3.25%. Your required rate of return for similar investments is 4%. How much are you willing to pay for the bond, rounded to the nearest dollar? $1,191 $1,180 $1,123 $1,000

$1,123 (present value of bond equation)

Assume that an investment is estimated to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $1,500 return. What is the expected dollar return for this investment? $1,540 $2,140 $4,040 $6,600

$4,040

You have been depositing money at the end of each year into an account drawing 10% interest per year. What is the balance in the account at the end of year three if you deposited $350 at the end of year one and $500 at the end of year two? $850 $924 $974 $891

$974

Koppenhaver, Inc. issues a bond which has a coupon rate of 10.20%, a yield to maturity of 10.55%, a face value of $1,000, and a market price of $850. Therefore, the annual interest payment is: $102 $120.0 $105.50 $101.75

102

An ISU donor want to endow a $2,500 undergraduate scholarship in perpetuity. How much should the ISU Foundation ask the donor to give if the Foundation earns 8% on contributions? $42,721 $50,000 $31,250 $25,397

31,250

You have an new amortizing car loan of $10,000 and the loan rate is 6% per year. If your annual loan payment is $2,400, how much of your first payment goes to paying loan interest? $600 Impossible to determine without knowing the loan term to maturity. $1,800 $2,400

600

The annual yield to maturity for a zero-coupon bond paying $1,000 in ten years and selling for $450 is: 8.15% 9.00% 4.07% 2.22%

8.15% (yield to maturity question)

Which of the following equally risky investments has the highest effective annual return (EAR)? Without the number of discount periods, the investments are not comparable. A bank certificate of deposit that pays 7.25% interest compounded semi-annually. A bank certificate of deposit that pays 7.00% interest compounded daily. A bank certificate of deposit that pays 7.30% interest compounded annually.

A bank certificate of deposit that pays 7.25% interest compounded semi-annually.

Which of the following is TRUE? A stock with a beta of 1.4 has 40% more variability in returns than the average stock. The beta of a Treasury bill is one. Adding stocks to a bond portfolio will increase the riskiness of the portfolio because stocks have a higher standard deviation of returns than bonds. Proper diversification generally results in the elimination of portfolio risk.

A stock with a beta of 1.4 has 40% more variability in returns than the average stock.

Of the following different types of securities, which is typically considered most risky? Common stocks of large companies Long-term government bonds Common stocks of small companies Long-term corporate bonds

Common stocks of small companies

Which of the following will cause the market value of a bond to increase, other things held the same? The company's Standard & Poors debt rating drops from AAA to BBB. Interest rates decrease. The bond is callable. Investors' required rate of return increases.

Interest rates decrease.

In an efficient securities market, the market value of a security is equal to: par value. its book value. its liquidation value. its intrinsic value

Its intrinsic value

You are thinking of adding one of two investments to an already well- diversified portfolio. If you are a risk-averse investor, which one is the better choice? Security A Expected Return = 14%, Std. Dev. of Returns = 16%, Beta = 1.2 Security B Expected Return = 16%, Std. Dev. of Returns = 20%, Beta = 1.2 Security B Security A Security A, provided Security A's required return is greater than 12%. Either security would be acceptable because they have the same beta.

Security B

. You have the choice of two equally risky annuities, each paying $5,000 per year for 8 years. One is an annuity due and the other is an ordinary annuity. If you are receiving the annuity payments, which annuity would you choose to maximize your wealth? The annuity due. Because we don't know the interest rate, we can't find the value of the annuities. Either one because they have the same present value. The ordinary annuity.

The annuity due.

Which of the following statements is TRUE? Convertible bonds decrease in value whenever the price of the company's stock increases. The expected yield on junk bonds is higher than the yield on AAA-rated bonds because of the higher default risk associated with junk bonds. Other things held equal, a bond with a call provision is worth more to investors than a bond without a call provision. Subordinated debentures are less risky than unsubordinated debentures because the claims of subordinated debt holders are less likely to be honored in the event of liquidation.

The expected yield on junk bonds is higher than the yield on AAA-rated bonds because of the higher default risk associated with junk bonds.

The relevant variable a financial manager uses to measure returns is: cash flows. earnings per share minus dividends per share. dividends. net income determined using generally accepted accounting principles.

cash flows

The present value of a single future sum increases as the number of discount periods increases. decreases as the discount rate increases. is independent of the number of discount periods. is generally larger than the future sum if rates are positive.

decreases as the discount rate increases.

According to bond pricing principles: maturity and price sensitivity to interest rate changes are indirectly related. price sensitivity to interest rate changes decreases with high bond coupon rates. a decrease in interest rates decreases bond prices. price sensitivity to interest rate changes decreases with maturity.

price sensitivity to interest rate changes decreases with high bond coupon rates.

If the coupon payments on a bond are not reinvested: the actual compound yield to maturity will be larger than the expected yield. wealth at maturity will be less than initial wealth. the annual coupon payment and face value will be the sole source of wealth at maturity. the actual compound yield to maturity will be the expected mean return.

the annual coupon payment and face value will be the sole source of wealth at maturity.

Assuming two investments have equal lives, a high discount rate affects the present value of: the investment with large cash flows early. the investment with large cash flows late. the investment with even cash flows. neither investment since they have equal lives.

the investment with large cash flows late.

To measure value, the concept of time value of money is used to ensure that expected future profits exceed current profits today. to bring the future benefits and costs of a project, measured by its cash flows, back to the present. to determine the interest rate paid on corporate debt. to bring the future benefits and costs of a project, measured by its expected profits, back to the present.

to bring the future benefits and costs of a project, measured by its cash flows, back to the present.