FIN 3303 Exam 2 (UCF)

Of the following bonds, which one has highest degree of interest rate risk:

20 year 8% bond

Google's IPO involved:

A Dutch Auction.

In regards to Morningstar's gauging of Mutual Fund performance, which of the following statements is LEAST correct?

A fund which produced greater returns than required based on the fund's risk as measured by Beta would have a negative Alpha

Which of the following statements regarding exchange traded notes (ETNs) is MOST correct? A)ETNs are debt instruments issued by large financial institutions that are linked to an underlying index. B)ETNs are securities which, after their initial public offering, trade on stock exchanges in the secondary market, but typically, at a significant discount to their NAV. C)ETNs are similar to open-end mutual funds, but which do not trade like equities on exchanges D)ETNs are stocks which constitute a single security basket of a corresponding underlying index portfolio of stocks

A)ETN are debt instruments issued by large financial institutions that are linked to an underlying index.

TBT is the symbol for the ProShares UltraShort 20+ Year Treasury Bond, leveraged ETF, which seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Index. Since interest rates move inversely to bond prices, which of the following statements is most correct? A)To generate a profit an investor who expects interest rates to increase on a given day should buy TBT. B)To generate a profit an investor who expects interest rates to increase on a given day should sell TBT short. C)To generate a profit an investor who expects bond prices to increase on a given day should buy TBT. D)To generate a profit an investor who expects bond prices to decline on a given day should sell TBT short.

A)To generate a profit an investor who expects interest rates to increase on a given day should buy TBT.

When purchasing open-end mutual funds, the fund's expense ratio constitutes ___________________________________________. A)annual expenses assessed as a percentage against the fund's assets B)the commissions deducted on new money invested in the fund C)the advertising costs incurred by the fund D)the expected annual return from investing in the fund

A)annual expenses assessed as a percentage against the fund's assets

A bank buys bonds with a par value of $50 million for $48,000,000. The coupon rate is 10%, and the bonds pay annual payments. The bonds mature in 4 years. The bank wants to sell them in 2 years, and estimates the required rate of return in 2 years will be 7%. What will the market value of the bonds be in two years? A. $52,712,027 B. $49,472,054 C. $49,226,000 D. $51,401,869

A. $52,712,027

Company B's stock's beta is estimated to be 2.0. The risk-free rate is 5%, and the market return is expected to be 10%. What is the expected return on the stock based on the Capital Asset Pricing Model (CAPM)? A. 15% B. 10% C. 17% D. 12% E. 20%

A. 15%

Morningstar, a mutual fund rating company, publishes detailed data on mutual fund performance and advice on choosing amongst mutual fund investments. Regarding Morningstar's measurement of equity mutual fund risk, and return relative to risk, which of the following statements is most correct? A. Other things equal, a higher Sharpe ratio is superior to a lower one. B. Other things equal, a Bear market rating of 10 is superior to a Bear market rating of 1. C. Other things equal, a higher beta is superior to a lower one. D. Other things equal, a higher standard deviation of returns is superior to a lower one.

A. Other things equal, a higher Sharpe ratio is superior to a lower one.

A manager of a large Equity portfolio, who is anticipating a major decline in stock prices, but who wishes not to sell his/her portfolio, can best hedge against this risk by which of the following strategies? A. Sell short an S&P 500 or other stock index futures contract, or, buy put options on the S&P or other stock index. B. Sell short a Treasury Bond Futures Contract. C. Go long a Treasury Bond Futures Contract. D. Go long an S&P 500 or other stock index futures contract, or, buy call options on the S&P or other stock index.

A. Sell short an S&P 500 or other stock index futures contract, or, buy put options on the S&P or other stock index.

Assume that the value of liabilities equals that of earning assets. If asset portfolio durations are _________ than liability portfolio durations, then the market value of assets are _______ interest-rate sensitive than the market value of liabilities. A. lower; less B. greater; equally C. greater; less D. lower; equally E. lower; more

A. lower; less Look at this one!! greater; more

A _____ mortgage is one in which the interest rate may change annually, based on changes in the specified benchmark index, margin and periodic interest rate caps.

Adjustable-rate (ARM)

Which of the following is NOT a difficulty associated with valuing common stock?

All of the above

Which of the following statements is MOST correct regarding the Efficient Markets Hypothesis (EMH) and Behavioral Finance Theory?

All of these statements are correct

In regards to Morningstar's gauging of Mutual Fund performance, which of the following statements is least correct? A)A Fund which produced greater returns than required based on the Fund's risk as measured by Beta would have a positive Alpha (α). B)A Fund which produced greater returns than required based on the Fund's risk as measured by Beta would have a negative Alpha (α). C)A bear market rating of 1 means the Fund performs well (declines less relative to the market)in a significantly down(bear) market. D)A bear market rating of 10 means the Fund performs poorly (declines more relative to the market) in a significantly down(bear) market. E)The higher the Sharpe Ratio, the greater the Fund's return relative to its risk as measured by the Standard deviation (σ).

B)A Fund which produced greater returns than required based on the Fund's risk as measured by Beta would have a negative Alpha (α).

Bond A has a Modified Duration, DUR* = 5.7 while Bond B has DUR* = 7.5. These DUR* values were calculated on the basis of a current bond yield of 8%. If bond yields RISE to 9%, what will happen to the prices of Bond A and Bond B? A. Bond A's price will decline by 5.7%, while Bond B's price will rise by 7.5% B. Bond A's price will decline by 5.7%, while Bond B's price will decline by 7.5% C. Bond A's price will rise by 5.7%, while Bond B's price will decline by 7.5% D. Bond A's price will rise by 5.7%, while Bond B's price will rise by 7.5%

B. Bond A's price will decline by 5.7%, while Bond B's price will decline by 7.5%

Firms assume ________ risk when they issue preferred stock than when they issue bonds. The payment of dividends on preferred stock _________ be omitted without the firm being forced into bankruptcy. A. less; cannot B. less; can C. more; cannot D. more; can

B. less; can

What is the minimum required for a bond considered investment grade?

BBB

You read in the financial press that a company's Moody's debt rating is one step about junk. What is the rating?

Baa3

With a(n) __________ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity. Thus, this strategy allocates some funds to achieving a relatively high return and other funds to covering liquidity needs.

Barbell

The measurement of risk that indicates, mainly, how well the investment portfolio performs in a significantly down stock market is the:

Bear market rating

The Financial Theory, which proposes that regardless of how knowledgeable or experienced, all financial practitioners eventually let biases, overconfidence and emotion influence their judgment and misguide their investment decisions, is called:

Behavioral Finance

Benefits can be derived from international investing. Which of the following investment actions does Not enable American investors to derive the benefits of international investing?

Buying shares is a diversified portfolio of strictly domestic U.S. companies

The process which enables authorized participants to quickly arbitrage away any price discrepancies in the stock market, between an ETF and the Net Asset Value (NAV) of its underlying portfolio is called the _________________________________________. A)efficient price estoppel trading process B)flash crash intervention trading process C)in-kind, tax free creation/redemption trading process D)stock market circuit breaker trading process

C)in-kind, tax free creation/redemption trading process

If you purchased 100 shares of a $10/share, 3X (300%) leveraged Bull (long) ETF and its target underlying index increased 5%, what would your total return be (before fees and expenses) ? A)plus $50 B)minus $50 C)plus $150 D)plus $100 E)minus $100

C)plus $150

Which of the following statements regarding mortgage markets is LEAST correct? A. Ginnie Mae is a corporation, wholly owned by the Federal Government, that supplies funds to low and moderate income homeowners by facilitating the flow of funds into the secondary mortgage market. B. By securitizing its mortgage loans, a bank can remove these loans, which they originated, from their balance sheets, but still collect fees for servicing the loans. C. Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs), wholly owned by the Federal Government, which issue debt securities and use the proceeds to purchase mortgages in the secondary market. D. Securitization of mortgage loans involves the pooling and repackaging of these loans into securities.

C. Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs), wholly owned by the FEDERAL GOVERNMENT, which issue debt securities and use the proceeds to purchase mortgages in the secondary market. LOOK AT!

Which is the *LEAST* correct statement regarding hedge funds? A. These statements are all incorrect. B. Hedge fund managers make speculative investments and may carry greater risks than the overall market. C. Hedge funds are conservatively managed portfolios of investments and and modern day hedge risk. D. Modern-day hedge funds are not, necessarily, concerned about hedging risk. E. Hedge funds are largely unregulated because they cater to sophisticated investors.

C. Hedge funds are conservatively managed portfolios of investments and and modern day hedge risk.

Which of the following statements regarding Closed End Funds is LEAST correct? A)They frequently trade at a significant discount to their NAV B)After their initial public offering, closed-end mutual fund shares trade on stock exchanges in the secondary market. C)Closed-end mutual funds have fixed capitalizations. D)Closed-end mutual funds, like ETFs, also trade like equities on exchanges, and as such are considered to be ETFs.

D)Closed-end mutual funds, like ETFs, also trade like equities on exchanges, and as such are considered to be ETFs. LOOK AT!

In regards to Morningstar's gauging of Mutual Fund performance, which of the following statements is least correct? A)R2 is a measure of the percentage of variation in the mutual fund's return which is explained by variation in the market for all securities. B)Morningstar's Star Rankings run from one star (lowest) to 5 stars (highest). C)Morningstar recommends that investors place greater reliability on the Standard deviation (σ) as a measure of risk if the R2 is below 70%, and greater reliance on the Beta (β), as a measure of risk if the R2 is 70% or greater. D)Morningstar recommends that investors place greater reliability on the Standard deviation (σ) if the R2 is 70% or greater, and greater reliance on the Beta (β), as a measure of risk if the R2 is less than 70%.

D)Morningstar recommends that investors place greater reliability on the Standard deviation (σ) if the R2 is 70% or greater, and greater reliance on the Beta (β), as a measure of risk if the R2 is less than 70%.

If you purchased 100 shares of a $10/per share, 2X (200%) leveraged Bear (inverse) ETF and its target underlying index declined 5%, what would your total return be (before fees and expenses) ? A)plus $50 B)minus $50 C)plus $150 D)plus $100 E)minus $100

D)plus $100

One major difference between Leveraged Exchange Traded Funds (ETFs) and traditional ETFs is _______________________________________________. A)leveraged ETFs trade like equities while traditional ETFs can only be purchased from the ETF issuer. B)whereas leveraged long and inverse ETFs, typically, constitute a single security basket of the underlying index portfolio of stocks, traditional ETFs use derivatives, such as options, futures contracts and swap agreements, along with equities and money market instruments in seeking a return. C)traditional ETFs trade like equities while leveraged ETFs can only be purchased from the ETF issuer D)whereas traditional ETFs, typically, constitute a single security basket of the underlying index portfolio of stocks, leveraged long and inverse ETFs use derivatives, such as options, futures contracts and swap agreements, along with equities and money market instruments in seeking a return.

D)whereas traditional ETFs, typically, constitute a single security basket of the underlying index portfolio of stocks, leveraged long and inverse ETFs use derivatives, such as options, futures contracts and swap agreements, along with equities and money market instruments in seeking a return.

Bond C is a zero-coupon bond, which matures in 7 years, and its yield to maturity is 8%. The Duration of Bond C is _____ . A. 8 years B. 2.87 years C. 5 years D. 7 years

D. 7 years

American investors can derive the benefits of international investing through which of the following: A. Purchasing international mutual funds or Exchange-Traded funds. B. Buying shares in U.S. multinational companies. C. Direct purchases of foreign stocks. D. All of these answers are correct. E. Purchase of American Depository Receipts.

D. All of these answers are correct.

Which of the following statements is LEAST correct regarding the Efficient Markets Hypothesis (EMH) and Behavioral Finance Theory? A. Weak-Form Efficiency theory contends that security prices reflect historical security price movements and volume. B. In an efficient market, current security prices fully reflect all available information and, thus, all securities are fairly priced. C. Proponents of Behavioral Finance argue that a few psychological phenomena pervade the entire landscape of finance and cause securities' markets to be inefficient. D. Semi-strong Form Efficiency theory suggests that security prices fully reflect all information, including private or insider information.

D. Semi-strong Form Efficiency theory suggests that security prices fully reflect all information, including private or insider information.

On average, IPOs perform ________ for periods of a year or longer after the IPO and ______ on the day following the IPO. A. poorly; poorly B. well; poorly C. well; well D. poorly; well

D. poorly; well

Bond A has a $1,000 par value and an 10% coupon rate, 2 years remaining to maturity, and an 8% yield to maturity. The Modified Duration of Bond A is _____ years. A. 1.73 B. 1.91 C. 2.98 D. 1.77

D.1.77

Sorvino Co. is expected to offer a dividend of $3.20/sh per year forever. The required rate of return on Sorvino stock is 10%. Thus, the price of a share of Sorvino stock, according to the dividend discount model, is __________. A. $24.62 B. None of these answers is correct. C. $40.63 D. $3.20 E. $32

E. $32

Which of the following statements is (are) LEAST correct regarding exchange traded funds (ETFs)? A. Proponents of ETFs claim that they have lower costs and are more tax efficient than comparable open-end mutual funds. B. ETFs have greater transparency than open-end mutual funds. C. ETFs are similar to open-end mutual funds except that they trade like stocks on exchanges. D. Authorized participants can create or redeem ETF shares from the Fund, in exchange for the underlying basket of stocks through an "in-kind" transfer mechanism. E. ETF have less transparency than open-end mutal funds

E. ETF have less transparency than open-end mutual funds

Which of the following statements is LEAST correct regarding P/E ratios? A. Historically, the P/E ratio for the S&P 500 has been regarded as fair priced at a P/E = 15. B. All of these answers are incorrect. C. In general, the highwer a company's earnings growth rate, the higher its P/E ratio. D. Historically, the P/E ratio for the S&P 500 has been regarded as overpriced at a P/E = 20. E. Stock market P/E ratios tend to be directly related to interest rates, since bonds are competitive investments.

E. Stock market P/E ratios tend to be directly related to interest rates, since bonds are competitive investments P/E=15(under priced WRONG) Look!! Historically, the P/E ratio for the S&P 500 has been regarded as underpriced at a P/E=15

Issuer (credit) risk is a prominent risk associated primarily with:

Exchanged traded notes (ETNs)

Which of the following is an example of unsystematic risk?

IBM posts lower than expected earnings

FAS and FAZ are the symbols of two of the more popular?

Leveraged exchanged trade funds (ETFs)

The largest stock exchange in the world is:

NY Stock Exchange

What is the largest (trading volume) over-the-counter (OTC) market in the United States?

Nasdaq

Which of the following stock exchanges has the most strict listing requirements?

New York Stock Exchange

The Over-the-Counter Market for trading equity securities is located:

None of the above

If a mutual fund as a R2 is greater than 70%, Morningstar recommends that investors ________.

Place greater reliance on the Beta, as a measure of risk, than on the standard deviation

A major risk of leveraged Exchanged Trade Funds(ETF) is:

Potential for severe tracking error

Abuses in the IPO market include all of the following EXCEPT:

Shelf-registration

In gauging Mutual Fund performance, all of the following are measures of return relative to risk EXCEPT:

Standard deviation

Stock X has 3 units of systematic risk and 2 units of unsystematic risk while Stock Y has 3 units of systematic risk and 4 units of unsystematic risk. If Stock X is priced to generate an 8% return for investors then what do we know about the return that Stock Y should be priced to return?

Stock Y should be priced to return 8%

SPY, XLF, QQQQ, EEM and IWM represent the symbols of ______________________________________________.

The top 5 most actively traded traditional Exchange Traded Funds (ETFs) LOOK! Mutual funds

Visa's IPO was:

To date, the largest U.S. IPO in history

The measurement of risk that assesses the largest expected loss to a particular investment position for a specified confidence level, is:

Value at Risk (VaR)

The largest ever U.S. IPO in history, on the basis of common stock only, was:

Visa

Usually, only the riskiest type of firms will offer securities to the general public through:

a best-efforts arrangement

When valuing a preferred stock, the type of security that we treat the preferred stock life, for valuation purpose is:

a perpetuity

If you were able to eliminate all of the unsystematic risk in a portfolio then, what is the result?

a portfolio that contains only systematic risk

The relationship between time to maturity and yield to maturity for bonds of equal risk is referred to as:

a term structure of interest rates

A bond issued by the Federal Home Loan Bank or the Federal Home Loan Mortgage Corporation are examples of what type of bond?

agency bonds

When evaluating stock performance, ________ measures volatility that is systematically related to market returns; ________ measures total volatility of a stock's returns.

beta; standard deviation

The total return of an asset captures:

both income paid by an asset over time, and the capital gain or loss on the asset over time both (a) and (b) are correct

What do you call the portion of your total return on a stock investment that is caused by an increase in the value of the stock?

capital gain

Which of the following securities poses the greatest financial risk for the investor?

common equity

A bond that grants the investor the right to exchange their bonds for common stock is called a:

convertible bond

Which of the following investors can force a firm into bankruptcy court if the firm does NOT pay the expected cash flow to the investor?

debt investor

If bond portfolio managers expect interest rates to INCREASE in the future, they would likely _______ their holdings of bonds now, which would cause the prices of bonds to _______ as a result of their actions.

decrease; decrease

Aussie bond portfolio managers actively manage their portfolios. If they expect interest rates to ____, they would shift toward _____.

decrease; long-maturity bonds with zero-coupon rates

Which of the following is not part of the procedure for valuing a risky asset?

determining whether the project is mutually exclusive or not

Consider Company Y with an estimated 18% growth rate in earnings, a P/E multiple of 30, projected earnings at the end of this year of $3/share and projected dividends of $1/sh. What would be the projected share price for Company Y at the end of this year? A. $48/sh B. $10/sh C. $5.40/sh D. $30/sh e E. $90/sh

e E. $90/sh

Retained earnings represent:

earnings that a firm reinvested during the firms history

A bond's coupon rate:

equals its annual coupon payment dividend by its par value

The value of any asset:

equals the present value of future benefits accruing to the asset's owner

From 1900 through 2003, which asset class had the greatest average annual return:

equities

The prices of _______-coupon and ______ maturities are LEAST sensitive to changes in the required rate of return.

high; short

The first public sale of company stock to outside investors is called a/an:

initial public offering

The signature risk of exchange traded notes (ETNs) is:

issuer (credit) risk

What is the risk premium?

it is the difference in annual returns between common stocks and treasury bills

The Morningstar bond mutual fund, style box has nine categories of bond mutual funds classified by quality (high, mid and low) and by Duration (short, intermediate and long) The highest return/highest risk of these categories is _____________________________, and the lowest return/lowest risk of these categories is ______________________________.

low quality - long duration; high quality - short duration

The prices of _______-coupon and _______ maturities are MOST sensitive to changes in the required rate of return.

low; long

What is the purpose of diversification?

lower the overall risk of your portfolio

Which term refers to the number of shares issued by a firm multiplied by the current price of shares on the secondary market?

market capitalization

Inflation, recession, and higher interest rates are economic events that are characterized as:

market risk

Firms assume _____ risk when they issue bonds than when they issue preferred stock, because, the payment of dividends on preferred stock ______ be omitted without the firm being forced into bankruptcy.

more; can

Bonds issued by US states or local governments are called:

municipal bonds

Which of the following is NOT the responsibility of the lead underwriter for an equity issuance?

must buy shares in the green shoe option

Which is TRUE concerning preferred stock?

preferred stock is viewed as less risky than a firms common stock

Which is NOT a feature of common stock?

priority over debt holders for liquidation rights

Which of the following is NOT an important consideration when an underwriter is typing to establish the price for an initial public offering?

providing the absolute maximum price possible for the issuer of the shares

A(n) _________ mortgage is one in which property owners 62 years of age, or older, can draw payments from the equity built up in their homes.

reverse

Which statement about common shareholders is INCORRECT?

shareholders have precedence over all other claim holders in the case of bankruptcy

If you were to plot the return of asset classes on a graph with the standard deviation of returns on the horizontal axis and expected returns on the vertical axis, then which security class is most likely to be in the farthest upper right hand corner of the graph?

stocks

You are presented with 4 distinct investment opportunities involving a Treasury Bill, a Treasury Bond, a Corporate Bond, and a Stock. You are told that each of these investments are expected to produce (after the cash is paid out then no other cash flows are anticipated) $100 one year from now. Which asset should be the least expensive today, in terms of dollars that you will have to pay for the asset?

stocks

Unsecured bonds that have legal claims inferior to other outstanding bonds are:

subordinated debentures

In gauging Mutual Fund performance, a positive Alpha indicates:

that the Fund produced greater returns than required based on the Fund's risk as measured by Beta.

The statistical term, variance is defined as:

the expected value of squared deviations from the mean

Which statement is TRUE regarding diversification?

the greater the systematic risk, the greater the return required by there investor

The greater the uncertainty about an asset's future benefits:

the higher the discount rate investors will apply when discounting those benefits to the present

If viewing a stock quote from the Wall Street Journal, the columns labeled "HI" and "LO" refer to:

the highest and lowest prices at which the stock was sold in the last 52 weeks

What is the market capitalization of a company?

the market value of all outstanding shares

Which of the following is an examples of systematic risk?

the national trade deficit is higher than expected

If you were trying to describe the effect on the yield curve that certain investors have a definite preference for the maturity of the bonds that they invest in, then you would be referring to:

the preferred habitat theory

Which of the following information cannot be found in a bond's indenture:

the price of the bond

Which answer is FALSE regarding bond prices and interest rates:

the prices of short-term bonds display greater price sensitivity to interest rate changes than do the prices of long-term bonds

The additional return offered by a more risky investment relative to a safer one is called:

the risk premium

With respect to the company that issued a callable bond:

the value of the call increases as interest rates decrease

With respect to the owner of a putable bond:

the value of the put increases as interest rates increase

Which statement is FALSE regarding risk and return?

there is a nearly linear relationship between risk and return for individual stocks

Which is one of the MOST important lessons from capital market history?

there is a positive relationship between risk and return

Which of the following asset classes would give you the greatest probability of achieving a return that is closet to its expected return?

treasury bills

Which type of bonds has the highest daily trading volume in our economy?

treasury bonds

When purchasing open-end mutual funds, the fund's tax efficiency is often gauged by the ____________, the lower it is, the more tax efficient the mutual fund.

turnover ratio

Managers of firms may consider a stock repurchase or even a leveraged buyout when they believe their stock is _________ by the market, or a secondary stock offering when they believe their stock is ___________ by the market.

undervalued; overvalued

Which is the term applied to several investment banks joining together to bring an IPO to market to limit risk exposure?

underwriting syndicate

On average, IPOs perform ________ *on the day following the IPO* and ______ for periods of a year or longer after the IPO.

well; poorly