FINA Test 2

Calculate the effective annual interest rate for the following: A. A 3 mont Tbill selling at $98,660 with par value $100,000. B. A 15% coupon bond selling at par and paying coupons semiannually.

A. (100,000/98,660)^4-1=.0554= 5.54% B. Effective annual interest rate on coupon bond paying 7.5% semiannually: (1.075)^2-1=.1556=15.56%

Investors are slow to update their beliefs when given new evidence.

Conservatism bais

Investors are reluctant to bear losses caused by their unconventional decisions

Regret avoidance

A trin ratio of less than 1.0 is considered as a _________.

bullish signal

The risk-free rate is 7 percent. The expected market rate of return is 15 percent. If you expect a stock with a beta of 1.3 to offer a rate of return of 12 percent, you should

sell short the stock because it is overpriced

All of the following actions are consistent with feelings of regret except:

selling losers quickly

If you believe in the __________ form of the EMH, you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm, but not information that is available only to insiders.

semistrong

The debate over whether markets are efficient will probably never be resolved because of ____________.

the lucky event issue, magnitude issue, and selection bias issue

Collateralized bonds

are backed by specific assets of the issuing firm and are considered the safest variety of bonds.

You have just purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1,000. What would your rate of return at the end of the year be if you sell the bond? assume the yield to maturity on the bond is 11% at the time you sell.

1.4% $1,000/1.10)10=$385.54; $1,000/(1.11)9= $390.92; ($390.93-385.53)/385.54=1.4%

A 12% coupon bond, semiannual payments, is callable in 5 years. The call price is $1,120; if the bond is selling today for $1,110, what is the yield to call?

10.95% FV= 1120 N= 10 PMT= 60 PV -1110 CPT I/Y

A 9-year bind has a yield of 8% and a duration of 7.706 years. If the market yield increases by 55 baises points, what is the percentage change in the bonds price?

3.92% decrease 7.706/1.080*.055=-.0392=3.92% decline

Midwest airlines is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of midwest airline has a beta of 3.00. The return you should require on the stock is ______.

30% 6%+3(14%-6%)= 30%

A convertible bond has a par value of $1,000 and a current market price of $850. The current price of the issuing firms stock is $29 and the conversion ratio is 30 shares. The bonds market conversion value is ____________.

30*$29= 870

Low Tech Company has an expected ROE of 10%. The dividend growth rate will be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends.

6% 10%*.60=6%

If a 7% coupon bond is trading for 975.00, it has a current yield of

7.18% 70/975=7.18

You purchased an annual interest coupon bond one year ago that had 6 years remaining to maturity at the time. The coupon interest rate was 10% and the par value was $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%, your annual total rate of return on holding the bind for that year would have been _________.

8% FV= 1000 PMT= 100 N= 6 I= 8 CPT PV= 1092.46 FV= 1000 PMT= 100 N= 5 I= 8 CPT PV= 1079.85 (1079.85-1092.46+100)=1092.46=8%

A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 5 years and has a yield to maturity of 10%. The intrinsic value of the bond today will be ________ if the coupon rate 8%.

922.78 FV= 1000 PMT= 40 N= 10 I/Y= 5 CPT PV= 922.78

The FI Corporation dividends per share are expected to grow indefinitely by 5% per year. A. If this years year-end dividend is $8 and the market capitalization rate is 10% per year, what must the current stock price be according to the DDM? B. If the expected earnings per share are $12, what is the implied value of the ROE on future investment opportunities? C. How much is the market paying per share for growth opportunities?

A. 8/(.10-.5)=160 B. 5%*1/3=15% C. 12/.10=120

In each of the following pairs of bonds, select the bind that has the highest duration or effective duration: A. Bond A 8% coupon with 20-year time to maturity selling at par value Bond B 20- year maturity time selling below par value B. Bond A is 20- year noncallable coupon bond with a coupon rate of 8%, selling at par Bond B is a 20-year callable bond with a coupon rate of 9%, also selling at par

A. Bond A B. Bond A

A. Stocks with a beta of zero offer an expected rate of return of zero. B. The CAPM implies that investors require a higher return to hold highly volatile securities. C. You can construct a portfolio with beta of .75 by investing .75 of the investment budget in T-Bills and the remainder in the market port.

A. False B. False C. Flase

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10% ________.

Both bonds will increase in value, but bond B will increase more than bond A

Investors are reluctant to sell stocks with "paper" losses.

Disposition effect

Information processing errors consist of: I) forecasting errors II) overconfidence III) conservatism IV) framing

I, II, and III

Which of the following statements are true if the efficient market hypothesis holds?

It implies that prices reflect all available information

Jill Davis tells her broker that she does not want to sell her stocks that are below the price she paid for them. She believes that if she just holds on to them a little longer, they will recover, at which time she will sell them. What behavioral characteristic does Davis have as the basis for her decision making?

Loss Adversion

Investors exhibit less risk tolerance in their retirement accounts versus their other stock accounts.

Mental accounting

_________ focus more on past price movements of a firms stock than on the underlying determinate of future profitably.

Technical analysts

Which statement is not true regarding the capital market line (CML)?

The CML is also called the security market line

Two bonds have identical times to maturity and coupon rates. On other at 110. Which should have the higher yield to maturity?

The bond callable at 105, should have the higher yield to maturity.

Given the time to maturity, the duration of a zero-coupon bond is higher when the discount rate is

The bonds duration is independent of the discount rate

Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bonds:

Yield to maturity is lower

You predict that interest rates are about to fall. Which bond will capital gain?

Zero coupon long maturity

Jand, Inc., currently pays a dividend of $1.22, which is expected to grow indefinitely at 5%. If the current value of Jand's shares based on the constant-growth dividend discount model is $32.03, what is the required rate of return?

[1.22*1.05/32.03]+.05=9%

___________ above which is it difficult for the market to rise.

a resistance level is a value

An underpriced security will plot above the security market line

above the security market line

The duration of a bond is a function of the bonds

all of these are correct

The CAPM applies to

all portfolios and individual securities

_____________ the return on a stock beyond what would be predicted form market movements alone.

an abnormal return is

Conventional theories presume that investors _________ and behavioral finance presumes that they ______________.

are rational; may not be rational

standard deviation and beta both measure risk, but they are different in that

beta measures only systematic risk while standard deviation is a measure of total risk

In regard to moving averages, it is considered to be a ______ signal when market price break through the moving average from _____.

both bullish; below and bearish; above

Which of the following would be a viable way to earn abnormally high trading profits if markets are semistrong-form efficient?

buy shares in companies for which you have advance knowledge of an improvement in the management team

The bond market

can be quite "thin" and primarily consists of a network of bond dealers in the over-the-counter market.

Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bonds:

coupon rate is lower

Behavioral finance argues that _______.

even if security prices are wrong it may be difficult to exploit them, and the failure to uncover successful trading rules or traders cannot be taken as proof of market efficiency

an example of __________ is that a person may reject an investment when it is posed in terms of risk surrounding potential gains, but may accept the same investment if it is posed in terms of risk surrounding potential losses

framing

Convertible bonds

give their holders the ability to share in price appreciation of the underlying stock and offer lower coupon rates than similar nonconvertible bonds

According to the capital asset pricing model (CAPM), underpriced securities

have positive alphas

When interest rates decline, the duration of a 10-year bond selling at premium

increases

The __________ is defined as the present value of all cash proceeds to the investor in the stock.

intrinsic value

Proponents of the EMG typically advocate

investing in an index fund and a passive investment strategy

Nicholas Manufacturing just announced yesterday that its 4th quarter earnings will be 10% higher than last year's 4th quarter. You observe that Nicholas had an abnormal return of -1.2% yesterday. This suggests that

investors expected the earnings increase to be larger than what was actually announced.

Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates remain constant, one year from now the price of this bond will be ________.

lower

According to the capital asset pricing model (CAPM) a well diversified portfolio rate of return is a function of

market risk

Accrued interest

must be paid by the buyer of the bond and remitted to the seller of the bond

Single men trade far more often than women. This is due to greater ________ among men.

overconfidence

Psychologists have found that people who make decisions that turn out badly blame themselves more when that decision was unconventional. The name for this phenomenon is

regret avoidance

Investors disregard sample size when forming views about the future from the past.

representativeness bias

Forecasting errors are potentially important becuase

research suggests that people overweight recent information

The __________ is the fraction of earnings reinvested in the firm.

retention rate and plowback ratio

A treasury bond quoted at 107:16 107:18 has a bid price of _________ and an ask price of _________.

$1075.00, $1,075.63

The market portfolio has a beta of

1

The Market risk, beta, of a security is equal to

the covariance between the security return and the market return divided by the variance of the markets return

The yield to maturity on a bond is _________.

the discount rate that will set the present value of the payments equal to the bond price

The expected return - beta relationship of the CAPM is graphically represented by

the security market line

Your opinion is that CSCO has an expected rate of return of 0.15 it has a beta of 1.3. The risk-free rate is .04 and the market expected rate of return is .115. According to the capital asset pricing model, the security is

underpriced 15%-[4%+1.3(11.5%-4%)]=1.25%

In a well diversified portfolio

unsystematic risk is negligible

High P/E ratios tend to indicate that a company will _______, ceteris paribus.

Grow Quickly

Which of the following is the best measure of the floor for a stock price?

Liquidation Value

An 8% coupon U.S. Treasury note pays interest on May 30 and November 30 and is traded for settlement on August 15. The accrued interest on the $100,000 face value of this note is ________.

$1,661.20 76/183(4,000)= 1661.20 .08/12*100,000=666.67 per month 666.67*2.5 months

Siri had a FCFE of $1.6M last yea and has 3.2M shares outstanding. Siri's required return on equity is 12% and WACC is 9.8%. If FCFE is expected to grow at 9% forever, the intrinsic value of Siri's shares are ____________.

$18.17 1.6M/3.2M=.50 .50*1.09=.545 .545/(.12-.09)= 18.17

Sunshine Corporation is expected to pay a dividend of $1.50 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Sunshine Corporation has a beta of 0.75. The intrinsic value of the stock is _________.

$25.00 6%+.75(14%-6%)=12% p= 1.50/(.12-.06)= 25

Using semiannual compounding a 15-year zero coupon bond that has a par value of $1,000 and a required return of 8% would be priced at approximately ________.

$308 FV= 1000 N= 30 I= 4 CPT PV= 308.32

Low Tech Chip Company is expected to have EPS of $2.50 in the coming year. The expected ROE is 14%. An appropriate required return on the is 11%. If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be

$38.46 G= 14%*.6=8.4% Expected DPS= $2.50(.4)=$1.00 P=1/(.11-.084)=$38.46

Exercise Bicycle Company is expected to pay a dividend in year 1 of $1.20, a dividend in year 2 of $1.50, and a dividend in year 3 of $2.00. After year 3, dividends are expected to grow at the rate of 10% per year. An appropriate requirement return for the stock is 14%. The stock should be worth ___________ today.

$40.60 1.20/1.14=1.50 1.50/1.14^2=1.15 2.00/1.14^3=1.35 Sum: 3.56 2(1.10)/(.14-.10)=55 55/1.14^3=37.12 3.56+37.12=40.60

Suppose that the average P/E multiple in the oil industry is 20. Dominion Oil is expected to have an EPS of $3.00 in the coming year. The intrinsic value of Dominion Oil stock should be ______.

$60.00 20*3.00=$60

Deployment specialists pays a current (annual) dividend of $1.00 and is expected to grow at 20% for 2 years and then at 4% thereafter. If the required return for Deployment Specialists is 8.5%, what is the intrinsic value of Deployment Specalisits stock?

year 1 and 2=2.33 [(1.44*1.04)/(.085-.04)]/(1.085^2)=28.27 28.27+2.33=30.66