FIN3403 Orange Exam
Which of the following statements is CORRECT? Even if the pure expectations theory is correct, there might at times be an inverted Treasury yield curve. If the yield curve is inverted, short-term bonds have lower yields than long-term bonds. The higher the maturity risk premium, the higher the probability that the yield curve will be inverted. Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve cannot become inverted. The most likely explanation for an inverted yield curve is that investors expect inflation to increase in the future.
Even if the pure expectations theory is correct, there might at times be an inverted Treasury yield curve.
Which of the following statements is CORRECT? If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope. Liquidity premiums are generally higher on Treasury than corporate bonds. The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds. Default risk premiums are generally lower on corporate than on Treasury bonds. Reinvestment risk is lower, other things held constant, on long-term than on short-term bonds.
Reinvestment risk is lower, other things held constant, on long-term than on short-term bonds.
Which of the following statements is CORRECT? The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. The cash flows for an annuity due must all occur at the ends of the periods. The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month. If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.
The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month
Which of the following statements is CORRECT? If the returns on two stocks are perfectly positively correlated (i.e., the correlation coefficient is +1.0) and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks. A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable. If a stock has a negative beta, its expected return must be negative. A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5. According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns.
A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable.
Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par? Adding additional restrictive covenants that limit management's actions. Adding a call provision. The rating agencies change the bond's rating from Baa to Aaa. Making the bond a first mortgage bond rather than a debenture. Adding a sinking fund.
Adding a call provision.
Which of the following statements is CORRECT? If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0. Thus, they would be equally risky from an investor's standpoint, assuming the investor's only asset is one or the other of the mutual funds. If investors become more risk averse but rRF does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change. An investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky. Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk. There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML. Assume that the required rate of return on the market, rM, is given and fixed at 10%. If the yield curve were upward sloping, then the Security Market Line (SML) would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for rRF.
Assume that the required rate of return on the market, rM, is given and fixed at 10%. If the yield curve were upward sloping, then the Security Market Line (SML) would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for rRF.
A 12-year bond has an annual coupon of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT? If market interest rates decline, the price of the bond will also decline. The bond is currently selling at a price below its par value. If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today. The bond should currently be selling at its par value. If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today.
If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.
Which of the following statements is CORRECT? Downward-sloping yield curves are inconsistent with the expectations theory. The actual shape of the yield curve depends only on expectations about future inflation. If the pure expectations theory is correct, a downward-sloping yield curve indicates that interest rates are expected to decline in the future. If the yield curve is upward sloping, the maturity risk premium must be positive and the inflation rate must be zero. Yield curves must be either upward or downward sloping--they cannot first rise and then decline.
If the pure expectations theory is correct, a downward-sloping yield curve indicates that interest rates are expected to decline in the future.
Which of the following statements is CORRECT? If a company's beta doubles, then its required rate of return will also double. Other things held constant, if investors suddenly become convinced that there will be deflation in the economy, then the required returns on all stocks should increase. If a company's beta were cut in half, then its required rate of return would also be halved. If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rates of return on stocks with betas less than 1.0 will decline while returns on stocks with betas above 1.0 will increase. If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rate of return on an average stock will remain unchanged, but required returns on stocks with betas less than 1.0 will rise.
If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rate of return on an average stock will remain unchanged, but required returns on stocks with betas less than 1.0 will rise.
Which of the following statements is CORRECT? When diversifiable risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market. Portfolio diversification reduces the variability of returns on an individual stock. Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihoods of unfavorable events. The SML relates a stock's required return to its market risk. The slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs. A stock with a beta of -1.0 has zero market risk if held in a 1-stock portfolio.
The SML relates a stock's required return to its market risk. The slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs.
Which of the following statements is CORRECT, assuming stocks are in equilibrium? The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield. Assume that the required return on a given stock is 13%. If the stock's dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well. A stock's dividend yield can never exceed its expected growth rate. A required condition for one to use the constant growth model is that the stock's expected growth rate exceeds its required rate of return. Other things held constant, the higher a company's beta coefficient, the lower its required rate of return.
The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.
Which of the following statements is CORRECT? Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation. The preferred stock of a given firm is generally less risky to investors than the same firm's common stock. Corporations cannot buy the preferred stocks of other corporations. Preferred dividends are not generally cumulative. A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.
The preferred stock of a given firm is generally less risky to investors than the same firm's common stock.
In the foreseeable future, the real risk-free rate of interest, r*, is expected to remain at 3%, inflation is expected to steadily increase, and the maturity risk premium is expected to be 0.1(t - 1)%, where t is the number of years until the bond matures. Given this information, which of the following statements is CORRECT? The yield on 2-year Treasury securities must exceed the yield on 5 year Treasury securities. The yield on 5-year Treasury securities must exceed the yield on 10 year corporate bonds. The yield on 5-year corporate bonds must exceed the yield on 8-year Treasury bonds. The yield curve must be "humped." The yield curve must be upward sloping.
The yield curve must be upward sloping.
Which of the following statements is CORRECT? The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond. The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond. The yield on a 3-year Treasury bond should always exceed the yield on a 2-year Treasury bond. If inflation is expected to increase, then the yield on a 2-year bond should exceed that on a 3-year bond. The real risk-free rate should increase if people expect inflation to increase.
The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond.
Which of the following statements is CORRECT? To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital. To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT) at the weighted average cost of capital. To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital. To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital. The corporate valuation model requires the assumption of a constant growth rate in all years.
To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital.
Which of the following statements is CORRECT? You hold two bonds, a 10-year, zero coupon, issue and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline. The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates. You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline. The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates, other things held constant. The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.
You hold two bonds, a 10-year, zero coupon, issue and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline.
For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then ________. the expected future return must be less than the most recent past realized return. the past realized return must be equal to the expected return during the same period. the required return must equal the realized return in all periods. the expected return must be equal to both the required future return and the past realized return. the expected future return must be equal to the required return
the expected future return must be equal to the required return.
