Finance exam 2, FINC 301 Chapter 8 problems (Exam 2), ASU FIN300 Exam 3, FIN 303 FINAL, BFIN320 Chapter 6 and 9, Chapter 6, Finna Exam 2

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Highland Corp., a U.S. company, has a five-year bond whose yield to maturity is 6.5 percent. The bond has no coupon payments. What is the price of this zero coupon bond? (Assume semi-annual compounding for these zero-coupon bonds.)

$725.27

Suppose an investor earned a semiannual yield of 6.4 percent on a bond paying coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round to two decimal places.)

13.21%

The risk-free rate of return is currently 3 percent, whereas the market risk premium is 6 percent. If the beta of Lenz, Inc., stock is 1.8, then what is the expected return on Lenz?

13.80%

Which of the following represents a plot of the relation between expected return and systemic risk?

The security market line

Moshe purchased a stock for $30 last year. He found out today that he had a -100 percent return on his investment. Which of the following must be true?

The stock is worth $0 today. The stock paid no dividends during the year.

Which one of the following statements about bond is NOT true?

The value, or price, of any asset is the future value of its cash flows.

Prices in the corporate bond market also tend to be more volatile than prices of securities sold in markets with greater trading volumes.

This is because a few large trades can have a larger impact on a security's price than numerous trades of various sizes.

one of the most fundamental relations in corporate finance

This negative relation between changes in the level of interest rates and changes in the price of a bond (or any fixed-income security)

The corporate bond market also has little transparency

because it is almost entirely an OTC market.

A bond's yield to maturity changes daily as interest rates increase or decrease,

but its calculation is always based on the issuer's promise to make interest and principal payments as stipulated in the bond contract.

The least efficient of all the different types of secondary markets is the: auction market. direct search market. dealer market. broker market.

direct search market.

The amount borrowed on a loan equals the

discounted value of the loan payments

The amount borrowed on a loan equals:

discounted value of the loan payments.

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.

false

An annuity due is a series of equal cash flows where a cash flow occurs at the end each period.

false

Analysts are constantly looking for positively correlated stocks so as to enhance their portfolio's diversification.

false

To determine the monthly payment on a one-year loan, divide the amount of the loan by 12

false

When interest rates change, the prices of lower-coupon bonds change less than the prices of higher-coupon bonds.

false

to calculate the future value of a series of cash flows we can add up all the cash flows and then calculate their compounded value at the given rate of interest.

flase

Capital rationing implies that funding resources exceed funding needs. funding needs exceed funding resources. funding needs equal funding resources. None of the above

funding needs exceed funding resources. act of placing restrictions on the amount of new investments or projects undertaken by a company

In regard to interest rate risk, short-term bonds:

have less interest rate risk than longer-term bonds.

The compensation received for assuming the risk in a balanced portfolio of risky assets is the _____.

market risk premium

The two components of total risk associated with an investment are : covariance and correlation. short-term risk and long-term risk. variance and standard deviation. systematic risk and diversifiable risk.

systematic risk and diversifiable risk.

Investors care only about _____.

systematic risk Investors should care only about systematic risk because they can eliminate unsystematic risk by holding a diversified portfolio.

The most frequent and regular issuer of zero coupon securities

the U.S. Department of Treasury, and perhaps the best-known zero coupon bond is a United States Saving Bond.

In a typical loan amortization schedule, the amount of interest paid for each period does not remain constant. In a typical loan amortization schedule:

the amount of interest paid each period does not remain constant.

the face value, or par value

the amount on which interest is calculated and that is owed to the bondholder when a bond reaches maturity

coupon rate

the annual coupon payment (C) divided by the bond's face value (F).

A corporate bond's coupon rate is the annual coupon payment divided by:

the bond's face value.

The internal rate of return is

the discount rate that make the NPV equal to zero

The internal rate of return is Entry field with correct answer a. the discount rate that makes the NPV greater than zero. b. the discount rate that makes the NPV equal to zero. c. the discount rate that makes the NPV less than zero. d. both a and c.

the discount rate that makes the NPV equal to zero.

The yield to maturity for a bond is: calculated by dividing market value of the bond by its face value. the interest rate on the bond, relative to its face value, when it is issued. calculated by dividing face value of the bond by market value. the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond.

the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond.

The Capital Asset Pricing Model (CAPM) measures the systematic risk level of an asset. the risk-free rate of return. the expected rate of return of an asset. the realized rate of return of an asset.

the expected rate of return of an asset.

Coupon payments are:

the interest payments made to bondholders.

Realized yield is:

the interest rate at which the present value of the actual cash flows from a bond equals the bond's price.

The cost of capital is the minimum return that a capital project must earn to be accepted. the maximum return a project can earn. the return that a previous project for the firm had earned. None of the above

the minimum return that a capital project must earn to be accepted.

vanilla bonds

the most common bonds issued by corporations have coupon payments that are fixed for the life of the bond, and at maturity the entire original principal is paid and the bonds are retired.

The default risk premium is based on the probability that a bond issuer will not fulfill all of a bond's contractual provisions.

true

The discount rate that makes the present value of a bond's coupons and principal payment equal to its price is the:

yield to maturity

The discount rate that makes the present value of a bond's coupons and principal payment equal to its price is the:

yield to maturity.

The total holding period return on an investment

consists of a capital appreciation component and an income component

In a game of chance, the probability of winning a $50 is 40% and the probability of losing a $50 prize is 60%. What is the expected value of the prize in the game?

$-10

Kevin Rogers is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis. The current market rate for similar bonds is 8.8 percent. What should be the current price of this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

$1,048

Regatta, Inc., has six-year bonds outstanding that pay an 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. How much will you be willing to pay for Regatta's bond today? Assume annual coupon payments. (Do not round intermediate computations. Round your final answer to the nearest dollar.)

$1,066

Your friend recommends that you invest in a three-year bond issued by Trimer, Inc., that will pay annual coupons of 10 percent. Similar investments today will yield 6 percent. How much should you pay for the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

$1,107

Jeremy Kohn is planning to invest in a 10-year bond that pays a 12 percent coupon. The current market rate for similar bonds is 9 percent. Assume semiannual coupon payments. What is the maximum price that should be paid for this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

$1,195

Your father is about to retire, and he wants to buy an annuity that will provide him with $91,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today?

$1,328,557 PVA = [$91,000 × {1-1/ (1.0515)25 / 0.0515} x 1.0515= $1,328,557Financial Calculator: BGN Mode N =25, i=5.15, PMT = 91,000, FV = 0; CPT PV = 1,328,557.

You have won the lottery and will receive 20 annual payments of $10,000 starting today. If you can invest these payments at 8.5%, what is the present value of your winnings? (Round the final answer to the nearest dollar.)

$102,677

Niles is making an investment with an expected return of 12 percent. If the standard deviation of the return is 4.5 percent, and if Niles is investing $100,000, then what dollar amount is Niles 90 percent sure that he will have at the end of the year? (Do not round intermediate computations.)

$104,597.50

University Corp. issued five-year bonds that pay a coupon of 6.5 percent semiannually. The current market rate for similar bonds is 5.5 percent. How much will you be willing to pay for the bond today? Do not round intermediate calculations. Round your answer to the nearest dollar.

$1043 N=5*2=10 I/Y=5.5%/2=2.75 PV=? PMT=$1,000*6.5%=65/2=32.5 FV=1,000 CPT PV

Ransport Company has made an investment in another company that will guarantee it a cash flow of $37,250 each year for the next five years. If the company uses a discount rate of 15 percent on its investments, what is the present value of this investment?

$124,868

Genaro needs a return of 40 percent for his one-year investment in a property. He believes that he can sell the property at the end of the year for $150,000 and that the property will provide him with rental income of $25,000. What is the maximum amount that Genaro should be willing to pay for the property?

$125,000

James Perkins wants to have a million dollars at retirement, which is 15 years away. He already has $200,000 in an IRA earning 8 percent annually. How much does he need to save each year, beginning at the end of this year to reach his target? Assume he could earn 8 percent on any investment he makes.

$13,464

You are purchasing a used car and will make 5 annual payments of $3,500 starting one year from today. If your funds could be invested at 9%, what is the present value of the car? (Round the final answer to the nearest dollar.

$13,614

Sid Phillips has funded a retirement investment with $250,000 earning a return of 6.75 percent. What is the value of the payment that he can receive in perpetuity? (Round to the nearest dollar.)

$14,900

What constant annual cash payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $2,500?

$162.50 CF = PVP x i= $2,500 x 0.065 = $162.50

Ralf Wilson wants to receive $25,000 in perpetuity and will invest his money in an investment that will earn a return of 14 percent annually. What is the value of the investment that he needs to make today to receive his perpetual cash flow stream?

$178,571

The Cyclone Golf Resorts is redoing its golf course at a cost of $2,744,320. It expects to generate cash flows of $1, 223,445, $2,007,812, and $3,147,890 over the next three years. If the appropriate discount rate for the firm is 13 percent, what is the NPV of this project? Entry field with correct answer $7,581,072 $2,092,432 $4,836,752 $3,112,459

$2,092,432

Tim Dodson has borrowed $8,600 to pay for his new car. The annual interest rate on the loan is 9.4 percent, and the loan needs to be repaid in four payments. What will be his annual payment if he begins his payment beginning now?

$2,448

Cassandra Dawson wants to save for a trip to Australia. She will need $12,000 at the end of four years. She can invest a certain amount at the beginning of each of the next four years in a bank account that will pay her 6.8 percent annually. How much will she have to invest annually to reach her target?

$2,538

FoodeliciousCorp. is evaluating whether it should take over the lease of an ethnic restaurant in Manhattan. The current owner had originally signed a 25-year lease, of which 16 years still remain. The restaurant has been growing steadily at a 7 percent growth for the last several years. Foodelicious Corp. expects the restaurant to continue to grow at the same rate for the remaining lease term. Last year, the restaurant brought in net cash flows of $310,000. If the firm evaluates similar investments at 15 percent, what is the present value of this investment?

$2,838,182

What is the value of this 20 year lease? The first payment, due one year from today is $2,000 and each annual payment will increase by 4%. The discount rate used to evaluate similar leases is 9%. (Round final answer to the nearest whole dollar.)

$24,361 PVAn = (CF1 / (i - g)) × [1 - ((1+g) / (1+i))n] = ($2,000 / (9% - 4%)) × [1 - ((1 + 4%) / (1+9%))20] = $40,000 × 0.60903 = $24,361

An insurance company will sell Jack Benny a product that costs $280,000. The product will pay $10,000 at the end of this year. Thereafter, the payments will grow annually at a 3 percent rate forever. Jack will be able to invest his cash flows at a rate of 6.5 percent annually. What is the present value of the insurance product and should Jack buy it?

$285,714, yes

Lloyd Harrisis planning to invest $3,500 every year for the next six years in an investment paying 13 percent annually. What will be the amount he will have at the end of the six years?

$29,129

Shaun Barringer has started on his first job. He plans to start saving for retirement. He will invest $5,000 at the end of each year for the next 45 years in a fund that will earn a return of 10 percent. How much will Shaun have at the end of 45 years? (Round to the nearest dollar.)

$3,594,524

Damien McCoy has loaned money to his brother at an interest rate of 5.85 percent. He expects to receive $987, $1,012, $1,062, and $1,162 at the end of the next four years as complete repayment of the loan with interest. How much did he loan out to his brother? (Round to the nearest dollar.)

$3,657

Security Analysts that have evaluated Concordia Corporation have determined that there is a 15% chance that the firm will generate earnings per share of $2.40; a 60% probability that the firm will generate earnings per share of $3.10; and a 25% probability that the firm will generate earnings per share of $3.80. What are the expected earnings per share for Concordia Corporation? (Round off to the nearest $0.01) Entry field with correct answer $3.10 $2.91 $3.17 $2.75

$3.17

Brandon Ramirez wants to set up a scholarship at his alma mater. He is willing to invest $320,000 in an account earning 11 percent. What will be the annual scholarship that can be given from this investment?

$35,200

David Stephens has made an investment that will pay him $11,455, $16,376, and $19,812 at the end of the next three years. His investment was to fetch him a return of 14 percent. What is the present value of these cash flows?

$36,022

If they can reinvest these cash flows to earn a return of 9.2 percent, what is the future value of this cash flow stream at the end of five years? (Round to the nearest dollar.)

$4,429,046

Nick invested $2,000 in a bank savings account today and another $2000 a year from now. If the bank pays interest of 10 percent per year, how much money will Nick have at the end of two years?

$4,620

Dawson Electricals has borrowed $27,850 from its bank at an annual rate of 8.5 percent. It plans to repay the loan in eight equal installments, beginning in a year. What is its annual loan payment? (Round to the nearest dollar.)

$4,938.66

What is the market value of a stock that paid a dividend of $3.80 last year if the dividend is increasing at 10% annually and the required rate of return on the stock is 20%? (Round the final answer to the nearest two decimals.)

$41.80 $3.80*(1+10%) / (20% - 10%) = $41.80

Noel Klinger is planning to invest in an insurance company product. The product will pay $12,500 at the end of this year. Thereafter, the payments will grow annually at a 2.5 percent rate forever. Jack will be able to invest his cash flows at a rate of 5.5 percent. What is the present value of this investment cash flow stream?

$416,667

You are starting college this month, and your favorite aunt has agreed to give you $4,000 at the end of each of your four years and you can save $8,000 at the end of each year for the first two years after you graduate. If all of these amounts are invested at 14%, how much will you have to start graduate school, six years from now? (Round the final answer to the nearest dollar.)

$42,702

You have received a share of preferred stock that pays an annual dividend of $10. Similar preferred stock issues are yielding 22.5%. What is the value of this share of preferred stock? (Round answer to two decimal places.)

$44.44 PVP = CF / i; $10 / 22.5% = $44.44

You are invited to participate in a new company. The company is projected to payout $10,000 in the first year, and after that the payouts will grow by an annual rate of 6 percent forever. If you can invest the cash flows at 8 percent, how much will you be willing to pay for this perpetuity?

$500,000 PVP = CF1 / (i - g) = $10,000 / (8% - 6%) = $500,000

You plan to buy a new car. The price is $30,000 and you will make a down payment of $4,000. Your annual interest rate is 10% and you intend to pay for the car over five years. What will be your monthly payment? (Round intermediate calculation to four decimal places. Round the final answer to the nearest of two decimals.)

$552.42 N = 5 years × 12 = 60; i = 10% ÷ 12 = 0.8333 By entering the following data into a financial calculator, PMT can be calculated as $552.42.

An investment of $100 generates after-tax cash flows of $40 in Year 1, $80 in Year 2, and $120 in Year 3. The required rate of return is 20 percent. The net present value is closest to $42.22. $58.33. $68.52. $98.95.

$58.33.

Shelton Enterprises is expecting tremendous growth from its newest boutique store. Next year the store is expected to bring in net cash flows of $675,000. The company expects its earnings to grow annually at a rate of 13 percent for the next 15 years. What is the present value of this growing annuity if the firm uses a discount rate of 18 percent on its investments?

$6,448,519

Milner is saving for her retirement. She will make a deposit into her IRA account at the end of each quarter for the next 36 years. The expected return on the account is 8%. How much will she have to deposit each quarter to have $650,000 in the account when she retires 36 years from today? (Round the final answer to the nearest two decimals.)

$796.81 N = 36 years × 4 = 144; i = 8% ÷ 4 = 2% By entering the following data into a financial calculator, PMT can be calculated as $796.81.

Gunther earned a 62.5 percent return on a stock that he purchased one year ago. The stock is now worth $12, and he received a dividend of $1 during the year. How much did Gunther originally pay for the stock?

$8.00

In a game of chance, the probability of winning a $50 prize is 40 percent, and the probability of winning a $100 prize is 60 percent. What is the expected value of the prize in the game?

$80

Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

$872

Triumph Corp. issued five-year bonds that pay a coupon of 6.375 percent annually. The current market rate for similar bonds is 8.5 percent. How much will you be willing to pay for Triumph's bond today? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

$916

Cavincare has 50 years remaining on a service contract with Martin, Inc. Today, Martin paid $120,000 for services received last year and the annual payment increases by 2.5% each year. The firm's required rate of return is 15%. What is the value of the contract to Cavincare? (Do not round intermediate calculations. Round the final answer to the nearest whole dollar amount.)

$980,879

$980,879 PVAn = (CF1 / (i - g)) × [1 - ((1+g)n/ (1+i))n] = ($123,000 / (15% - 2.50%)) × [1 - ((1+2.5%)50 / (1+15%))50] = $984,000 × 0.996828 =$980,879

Given the distributions of returns for the following two stocks, calculate the correlation coefficient of the returns for the two stocks. Assume the expected return is 14.4 percent for Stock 1 and 15.9 percent for Stock 2. (Do not round intermediate computations.)

-0.97169

Cortez Art Gallery is adding to its existing buildings at a cost of $2 million. The gallery expects to bring in additional cash flows of $520,000, $700,000 and $1,000,000 over the next three years. Given a required rate of return of 10 percent, what is the NPV pf this project?

-197,446

Elrond has made an investment that will generate returns that are based on the state of the economy. Use the following information to calculate the variance of the return distribution for Elrond's investment. (Do not round intermediate computations. Round your final answer to four decimal places.) State Return Probability Weak 0.10 0.8 OK 0.17 0.1 Great 0.28 0.1

.0031

Given the distributions of returns for the following two stocks, calculate the covariance of the returns for the two stocks. Assume the expected return is 10.8 percent for Stock 1 and 9.7 percent for Stock 2. Prob Stock 1 Stock 20.4 0.09 0.11 0.5 0.11 0.08 0.1 0.17 0.13

0.000094

The expected return for the asset below is 18.75 percent. If the return distribution for the asset is described as in the following table, what is the variance for the asset's returns?

0.002969

The expected return for the asset below is 18.75 percent. If the return distribution for the asset is described as in the following table, what is the variance for the asset's returns? Return Probability 0.10 0.25 0.20 0.50 0.25 0.25 Entry field with correct answer 0.000613 0.015195 0.002969 0.054486

0.002969

Horse Stock returns have a standard deviation of 0.57, whereas Mod T Stock returns have a standard deviation of 0.63. The correlation coefficient between the returns is 0.078042. What is the covariance of the returns? (Round your answer to six decimal places.)

0.028025

Great 0.25 0.30

0.0467

0.054486

The expected return for the asset shown in the following table is 18.75 percent. If the return distribution for the asset is described as below, what is the standard deviation for the asset's returns? Return Probability 0.10 0.25 0.20 0.50 0.25 0.25 0.015195 0.002969 0.054486 0.000613

0.054486

The covariance of the returns between Einstein stock and Bohr Stock is 0.0087. The standard deviation of Einstein is 0.26 and the standard deviation of Bohr is 0.37. What is the correlation coefficient between the returns of the two stocks?

0.090437

Batman Stock has exhibited a standard deviation in stock returns of 0.5, whereas Superman Stock has exhibited a standard deviation of 0.6. The correlation coefficient between the stock returns is 0.5. What is the variance of a portfolio composed of 70 percent Batman and 30 percent Superman?

0.2179

Stock A has exhibited a standard deviation in stock returns of 0.5, whereas Stock B has exhibited a standard deviation of 0.6. The correlation coefficient between the stock returns is 0.5. What is the variance of a portfolio composed of 70 percent Stock A and 30 percent Stock B? Entry field with correct answer 0.2179 0.4668 0.5500 0.1549

0.2179

Stock A 's returns have a standard deviation of 0.5, and stock B's returns have standard deviation of 0.6.The correlation coefficient between A and B equals 0.5. What is the variance of a portfolio composed of 70 percent Stock A and 30 percent Stock B?

0.2179 Var(port) = x12σ12 + x22σ22 + 2x1x2σ1σ2ρ12 =(0.7)2(0.5)2 + (0.3)2(0.6)2 + 2(0.7)(0.3)(0.5)(0.6)(0.5) = 0.2179

Braniff Ground Services stock has an expected return of 9 percent and a variance o 0.25 percent. What is the coefficient of variation for Braniff?

0.5556

Jim Keys holds a $200,000 portfolio consisting of the following stocks: Stock Investment Beta Alpha $50,000 0.50 Beta $50,000 0.80 Gamma $50,000 1.00 Delta $50,000 1.30 What is the portfolio's beta?

0.90 50,000/200,000=.25 =.25(0.5)+.25(0.8)+.25(1)+.25(1.3) =.125+.2+.25+.325 =0.90

Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent semiannually for $981.10. Today, she sold it for $1,067.22. What is the realized yield on her investment? (Round to the nearest percent.)

10%

The expected return for Stock V is 24.5 percent. If we know the following information about Stock Z, then what is the probability that the Dynamite state of the world will occur? Return Probability Poor 0.15 0.2 Lukewarm 0.28 0.7 Dynamite 0.19 ?

10%

View Point Industries has forecasted a rate of return of 20.00% if the economy booms (25.00% probability); a rate of return of 15.00% if the economy is in a growth phase (45.00% probability); a rate of return of 2.50% if the economy is in decline (20.00% probability); and a rate of return of -15.00% if the economy is in a depression (10.00% probability). What is View Point's standard deviation of returns? Do not round intermediate computations. Round your final answer to two decimal points.

10.46%

Casa Del Sol Property Development Company is refurbishing a 200-unit condominium complex at a cost of $1,875,000. It expects that this will lead to expected annual cash flows of $415,350 for the next seven years. What internal rate of return can the firm earn from this project? (Round to the nearest percent.) Entry field with correct answer 10% 12% 16% 14%

12%

Data for Hugh's Corporation is provided below. Hugh's recently acquired some risky assets that caused its beta to increase by 30%. What is the stock's new expected rate of return according to the CAPM? Initial beta 1.00 Initial expected return (rs) 10.20% Market risk premium, E(Rm - Rrf) 6.00% Percentage increase in beta 30.00% Increase in inflation premium 2.00%

12.00%

You invested $3,000 in a portfolio with an expected return of 10 percent and $2,000 in a portfolio with an expected return of 16 percent. What is the expected return of the combined portfolio?

12.4%

You invested $3,000 in a portfolio with an expected return of 10 percent and $2000 in a portfolio with an expected return of 16%. What is the expected return of the combined portfolio?

12.4%

Beautinator Cosmetics borrowed $152,300 from a bank for three years. If the quoted rate (APR) is 11.75 percent, and the compounding is daily, what is the effective annual rate (EAR)?

12.5%

The risk-free rate of return is currently 3 percent, whereas the market risk premium is 6 percent. If the beta of Lenz, Inc., stock is 1.8, then what is the expected return on Lenz? Entry field with correct answer 8.40% 10.80% 13.80% 19.20%

13.80%

Most of the risk-reduction benefits from diversification can be achieved in a portfolio consisting of Entry field with correct answer 15 to 20 assets. 10 to 15 assets. 20 to 25 assets. 5 to 10 assets.

15 to 20 assets

Use the following table to calculate the expected return for the asset. Return 0.05 0.1 0.15 0.25 Probability 0.1 0.15 0.5 0.25 Entry field with correct answer 12.50% 15.75% 16.75% 13.75%

15.75%

George Wilson purchased Bright Light Industries common stock for $47.50 on January 31, 2010. The firm paid dividends of $1.10 during the last 12 months. George sold the stock today (January 30, 2011) for $54.00. What is George's holding period return? Round off to two decimal points. Entry field with correct answer 14.35% 16.00% 11.28% 19.60%

16%

Lowell Communications, Inc., has been installing a fiber-optic network at a cost of $18 million. The firm expects annual cash flows of $3.7 million over the next 10 years. What is this project's internal rate of return? (Round to the nearest percent.) Entry field with correct answer 16% 12% 10% 14%

16%

George Wilson purchased Bright Light Industries common stock for $47.50 on January 31, 2016. The firm paid dividends of $1.10 during the last 12 months. George sold the stock today (January 30, 2017) for $54.00. What is George's holding period return?

16.00%

You have invested 40 percent of your portfolio in an investment with an expected return of 12 % and 60 % of your portfolio in an investment with an expected return of 20 %. What is the expected return of your portfolio?

16.8%

You have invested 40 percent of your portfolio in an investment with an expected return of 12 percent and 60 percent of your portfolio in an investment with an expected return of 20 percent. What is the expected return of your portfolio? Entry field with correct answer 15.2% 17.6% 16.0% 16.8%

16.8%

0.25 0.25

18.75%

Use the following table to calculate the expected return for an asset. Return 0.1 0.2 0.25 Probability 0.25 0.5 0.25 18.75% 20.00% 15.00% 17.50%

18.75%

Use the following table to calculate the expected return from the asset. Return Probability 0.1 0.25 0.2 0.50. 25 0.25

18.75%

The beta of Elsenore, Inc., stock is 1.6, whereas the risk-free rate of return is 8 percent. If the expected return on the market is 15 percent, then what is the expected return on Elsenore? Entry field with correct answer 32.00% 11.20% 19.20% 24.00%

19.20%

The beta of Elsenore, Inc., stock is 1.6, whereas the risk-free rate of return is 8 percent. If the expected return on the market is 15 percent, then what should investors expect as a return on Elsenore?

19.20%

The beta of Elsinore, Inc. stock is 1.6, whereas the risk free rate of return is 8 percent. If the expected return on the market is 15 percent, then what is the expected return on Elsinore?

19.20%

An investment pays 18 percent interest compounded quarterly. What is the effective annual interest rate? (Do not round intermediate calculations. Round the final answer to the nearest one decimal.)

19.3%

An investment pays 18 percent interest compounded quarterly. What is the effective annual interest rate? (Do not round intermediate calculations. Round the final answer to the nearest one decimal.)

19.3% EAR = (1 + Quoted interest rate/m)m - 1 = (1 + 18% / 4)4 - 1 = (1 + (0.045))4 - 1 = 19.3%

The expected return on Kiwi Computers stock is 16.6 percent. If the risk-free rate is 4 percent and the expected return on the market is 10 percent, then what is Kiwi's beta? Entry field with correct answer 3.15 2.80 1.26 2.10

2.10

If a random variable follows a normal distribution, what is the probability that the random variable is larger than 1.96 standard deviations larger than the mean?

2.50%

Francis purchased a stock one year ago for $20, and it is now worth $24. The stock paid a dividend of $3 during the year. What was the stock's rate of return from capital appreciation during the year?

20%

Kathleen Dancewear Co. has bought some new machinery at a cost of $1,250,000. The impact of the new machinery will be felt in the additional annual cash flows of $375,000 over the next five years. What is the payback period for this project? If its acceptance period is three years, will this project be accepted? Entry field with correct answer 2.67 years; yes 3.33 years; no 2.67 years; no 3.33 years; yes

3.33 years; no

The expected return on Bevo stock is 12.6 percent. If the expected return on the market is 10 percent and the beta for Bevo is 1.4, then what is the risk-free rate?

3.5%

The beta of Ricci Co.'s stock is 3.2, whereas the risk-free rate of return is 9 percent. If the expected return on the market is 18 percent, then what is the expected return on Ricci Co.? Entry field with correct answer 48.60% 28.80% 57.60% 37.80%

37.80%

The beta of Ricci Co.'s stock is 3.2, whereas the risk-free rate of return is 9 percent. If the expected return on the market is 18 percent, then what should investors expect as a return on on Ricci Co.?

37.80%

The beta of RicciCo.'s stock is 3.2, whereas the risk-free rate of return is 9 percent. If the expected return on the market is 18 percent, then what is the expected return on RicciCo.? Entry field with correct answer 48.60% 57.60% 37.80% 28.80%

37.80%

Books Brothers stock was priced at $15 per share two years ago. The stock sold for $13 last year and now it sells for $18. What was the total return for owning Books Brothers stock during the most recent year? Assume that no dividends were paid. Round your answer to the nearest percent.

38%

Carmen Electronics bought new machinery for $5 million. This is expected to result in additional cash flows of 1.2 million over the net seven years. What is the payback period for this project? If their projects must pay back the investment five years, will this project be accepted?

4.17 years; yes

The expected return on Karol. Co. stock is 16.5 percent. If the risk free rate is 5 percent and the beta of KarolCo is 2.3, then what is the risk premium on the market?

5.0%

The expected return on KarolCo. stock is 16.5 percent. If the risk-free rate is 5 percent and the beta of KarolCo is 2.3, then what is the risk premium on the market? Entry field with correct answer 2.5% 5.0% 7.5% 10.0%

5.0%

John Wong purchased a five-year bond today at $1,034.66. The bond pays 6.5 percent semiannually. What will be his yield to maturity? (Round to the closest answer.)

5.7%

Ahmet purchased a stock for $45 one year ago. The stock is now worth $65. During the year, the stock paid a dividend of $2.50. What is Ahmet's total return?

50%

Ahmet purchased a stock for $45 one year ago. The stock is now worth $65. During the year, the stock paid a dividend of $2.50. What is the total return to Ahmet from owning the stock? (Round your Answer to the nearest whole percent.) Entry field with correct answer 35% 5% 50% 44%

50%

You know that the average college student eats 0.75 pounds of food at lunch. If the standard deviation is 0.2 pounds of food, then what is the total amount of food that a cafeteria should have on hand to be 90 percent confident that it will not run out of food when feeding 50 college students?

53.95 pounds

The expected return on Mike's Seafood stock is 17.9 percent. If the expected return on the market is 13 percent and the beta for Kiwi is 1.7, then what is the risk-free rate?

6.0%

The expected return on Mike's Seafood stock is 17.9 percent. If the expected return on the market is 13 percent and the beta for Kiwi is 1.7, then what is the risk-free rate? Entry field with correct answer 6.0% 4.5% 5.0% 5.5%

6.0%

You purchased a share of Blyton Industries common stock 1 year ago for $37.50. During the year you received dividends totaling $0.60 and today the stock can be sold for $39.28. What total return did you earn on this stock over the past year? (Round your percentage answer to one decimal place.)

6.3% [(39.28-37.50)+0.60]/37.50 =.063467 =6.3%

You have invested 20 percent of your portfolio in Homer Inc, 40 percent in Marge Co and 20 percent in Bart resources. What is the expected rate of your portfolio if Homer, Marge, and Bart have expected returns of 2 percent, 18 percent, and 3 percent, respectfully?

8.2 %

You have invested 20 percent of your portfolio in Homer, Inc., 40 percent in Marge Co., and 20 percent in Bart Resources. What is the expected return of your portfolio if Homer, Marge, and Bart have expected returns of 2 percent, 18 percent, and 3 percent, respectively?

8.2%

Kevin knows that the beta of his portfolio is equal to 1, but he does not know the risk-free rate of return or the market risk premium. He also knows that the expected return on the market is 8.25 percent. What is the expected return on Kevin's portfolio? (Round answer to 2 decimal places, e.g. 12.25)

8.25% If the portfolio beta is 1, it means the portfolio is perfectly synced with the market. Since we know the expected return of the market is 8.25%, and the return for the portfolio moves the same as the market (beta = 1), then you also know that the expected return of Damien's portfolio is equal to 8.25%.

Jenny LePlaz is looking to invest in a five-year bond that pays annual coupons of 6.25 percent and currently sells at $912.34. What is the current market yield on such bonds? (Round to the closest answer.)

8.5%

A perpetuity is ___?

A constant stream of cash flows that goes on forever

How do you calculate the future value of a series of cash flows

Add up all the cash flows and then calculate their compounded value at the given rate of interest.

Disadvantages of the payback method include the following

All of the above

A growing annuity is an annuity in which cash flows increase at a constant rate. An inflation-adjusted 25-year lease is an example of growing annuity as the value of 25-year lease adjusts annually for the expected rate of inflation over the life of the contract. Which of the following examples represents a growing annuity?

An inflation-adjusted 25-year lease

Which of the following examples represents a growing annuity?

An inflation-adjusted 25-year lease.

An investor will choose between Asset Q with an expected return of 6.5% and a standard deviation of 5.5%, Asset U with an expected return of 8.8% and a standard deviation of 5.5%, and Asset B with an expected return of 8.8% and a standard deviation of 6.5%. Which one should the investor prefer?

An investor will always choose an investment which has the highest return and lowest risk. Among the three, Asset Q and Asset U have same risk and Asset U and Asset B have same returns. Since Asset U has lower risk than Asset B, the investor will prefer Asset U.

The Truth-in-Lending Act requires borrowers to disclose the ___?

Annual Percentage Rate (APR)

Which of the following equations is correct?

Annuity due value = Ordinary value × (1+i)

Bond prices are negatively related to interest rate movements.

As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of bonds decline.

zero coupon bonds

At times, corporations issue bonds that have no coupon payments but promise a single payment at maturity. The interest paid to a bondholder is the difference between the price paid for the bond and the face value received at maturity. These bonds are sold at a price below the amount that the investor receives at maturity because all of the interest is paid when the bonds are retired at maturity rather than in semiannual or yearly coupon payments

Which of the following alternatives involve calculating the future value of multiple cash flows?

Calculating income after retirement

-Amortizing a home mortgage

Calculating income after retirement involves calculation of future value of multiple cash flows

An annuity due is a series of equal cash flows where a cash flow occurs at the ___?

Beginning of each period

Which of the following is the best measure of the systematic risk in a portfolio? Entry field with incorrect answer Standard deviation Variance Covariance Beta

Beta

Why is the present value of an annuity due is larger than the present value of an ordinary annuity?

Cash flows of the annuity due are shifted forward one year and, thus, are discounted less

Which of the following problems involve calculating the future value of multiple cash flows?

Planning a retirement nest egg

fixed-income securities

Debt instruments where the interest paid to investors is fixed for the life of the contract

Which of the following is not a typical way in which interest rates are quoted in the marketplace?

Discounted interest.

How to determine monthly payment on 1-yr loan

Divide loan amt by 12 and factor in the interest rate

The risk-free rate of return is 2.5% and the expected return on the market is 8%. If the Beta on Ridgeway Co. stock is 0.8, then what is Ridgeway's expected return?

E(Ri) = Rrf + βi[E(Rm) - Rrf ] = 2.5% + [0.8 × (8% - 2.5%)] = 2.5% + [0.8 × 5.5%] = 6.9%.

What is the expected return for a stock that has a beta of 1.5, if the risk-free rate is 6% and the market rate of return is 11%?

E(Ri) = Rrf + βi[E(Rm) - Rrf ] = 6% + [1.5 × (11% - 6%)] = .06 + 1.5(.05)= 0.135= 13.5%

Cash flows take place at the ____ of each period in case of an annuity due

End

The greater the risk associated with an investment, the greater is its ___________

Expected return

If the return distribution for the asset is described as below, what is the standard deviation for the asset's returns? (Do not round your intermediate calculations. Round your percentage answers to two decimal places.) Return Probability 12% 15% 10% 50% 7% 35%

Expected return for the asset = (0.12 × 15%) + (0.10 × 50%) + (0.07 × 35%) = 9.25% Variance = (0.12 − 0.0925)2 × 0.15 + (0.10 − 0.0925)2 × 0.50 + (0.07 − 0.0925)2 × 0.35 =0.0001134 + 0.0000281 + 0.0001772 = 0.0003188. Standard deviation =√Variance = √0.0003188= 0.01785 = 1.79% (rounded).

If you are calculating the variance and standard deviation of returns for a stock, the variance will always be larger than the standard deviation

False

In a typical loan amortization schedule involving a consumer loan, the amount of each loan payment is fixed.

False

Returns on individual stocks tend to be safer than returns on stock indexes over time

False

Returns on individual stocks tend to be safer than returns on stock indexes over time.

False

Robert paid $100 for a stock one year ago. The total return on the stock was 10 percent. Therefore, the stock must be selling for $110 today.

False

The coefficient of variation divides the variance of the returns of an asset by the expected return of that asset.

False

The larger the variance, the smaller the standard deviation.

False

The more peaked the distribution of returns, the riskier the investment.

False

The yield curve that is most commonly observed in the US capital markets tends to slope downwards.

False

Total holding period return is the dollar gain (or loss) from purchasing an asset and selling it later.

False

Rachael Steele wants to borrow $6,000 for a period of four years. She has two choices. Her firm is offering to lend her the amount at 7.25 percent compounded annually. She can also borrow from her bank and will have to repay a total of $8,130.93 at the end of four years. Should Rachael go with her bank or her firm, and what is the interest rate if the borrows from her bank?

Firm: 8%

Which of the following is true of risk and expected returns? If two investments have the same expected return, investors prefer the riskier alternative. The expected return on an investment is independent of the associated risk. The expected return on an investment is inversely proportional to the associated risk. Higher the risk, higher the expected returns on an investment.

Higher the risk, higher the expected returns on an investment.

For a given change in interest rates, the prices of long-term bonds will change more than the prices of short-term bonds.

In other words, long-term bonds have greater price volatility (risk) than short-term bonds because, all other things being equal, long-term bonds have greater interest rate risk than short-term bonds.

Anytime you do a future value or a present value calculation, what must you use?

Interest rate per period or the EAR

The future value of an ordinary annuity is ___ the future value of an annuity due.

Less than

Given the following cash flows for a capital project, calculate the NPV and IRR. The required rate of return is 8 percent. Cash Flows Year 0 -50,000 Year 1 15,000 Year 2 15,000 Year 3 20,000 Year 4 10,000 Year 5 5,000 NPV=1905. IRR=26.0% NPV=3379. IRR=10.9% NPV=1905. IRR=10.9% NPV=3379. IRR=26.0%

NPV=3379. IRR=10.9%

Project A has an IRR of 15% and an NPV of $1 million Project B has an IRR of 20% and an NPV of $900,000. The projects A & B are mutually exclusive. Which project should you chose?

Project A only

Project A is a 1 - year project that requires an investment of $100,000 today and generates a positive cash flow of $130,000 in exactly 1 year. Project B is a 1 year project that requires an investment of $200,000 today and generates a positive cash flow of $250,00 in exactly 1 year. The projects are independent and NOT mutually exclusive. If you require a 28% return which one or ones should you choose?

Project A only

The three ways interest rates are quoted in the market place:

Quoted interest rate, interest rate per period, effective annual interest rate (EAR)

The CEO and CFO of Coral Gables Corp were having a discussion about which stock to buy with the company's surplus cash. The CFO noted that it was important that the company incurs less risk for a given level of return and suggested using the Sharpe Ratio to choose between AMD and Intel. They both noted that the expected return on AMD in the next year is 12% and the average return on INTC is 9%, however the standard deviation on AMD is 0.13164 and on INTC is 0.11140. Assuming the risk-free rate Rrf is expected to be 3% what are the Sharpe Ratios of AMD and INTC, and which is the better investment based on these ratios?

S AMD = 0.68; S INTC = 0.54; AMD S AMD= (.12-.03)/.131164 =.68 S INTC=(.09-.03)/.11140 =.54 This indicates that the return for each one standard deviation of risk is greater for AMD than for INTC are a better investment.

Julie R. won a lottery. She will have a choice of receiving $25,000 at the end of each year for the next 30 years, or a lump-sum payment of $200,500 today. If she can earn a return of 10 percent on any investment she makes, should she choose the cash (lump-sum) option or the annual payment option?

She should choose the annual payment option because its present value is higher than the lump-sump payment of 200,500

Which of the following investment classes had the greatest average return based on recent historical data

Small U.S. stocks

Given the historical information in the chapter, which of the following investment classes had the greatest average return? Entry field with correct answer Long-Term Government Bonds Intermediate-Term Government Bonds Large U.S. Stocks Small U.S. Stocks

Small US Stocks

amortization

The amortization schedule provides the data of equated monthly payments for which the classification of principal and interest along with unpaid principal balance is provided.

Which of the following interest rates is annualized using simple interest?

The annual percentage rate (APR)

discount bonds .

The bond sells at a price below par value;

Which of the following is an aspect of independent projects? The cash flows are related. The cash flows are unrelated. Selecting one would automatically eliminate accepting the other. None of the above.

The cash flows are unrelated.

What is the appropriate interest rate to use when making future or present value calculations?

The effective annual interest rate (EAR)

Based upon annual total returns from 1926 - 2006, the small-size stock portfolio in the US had the largest average return and the highest standard deviation as well.

True

In order for the total return of a stock to be equal to -100 percent, the income return component for that stock must be zero

True

The default risk premium is based on the probability that a bond issuer will not fulfill all of a bond's contractual provisions.

True

The income component of return for a common stock comes from the dividend cash flow stream.

True

Which of the following statements regarding variance is false?

Variance is a measure of systematic risk.

When will effective annual rate (EAR) will equal the annual percentage rate (APR)?

When interest is compounded annually

Which of the following statements is true of amortization?

With an amortized loan, a bigger proportion of each month's payment goes toward interest in the early periods.

Jane Thorpe has been offered a seven-year bond issued by Barone, Inc., for a price of $943.22. The bond has a coupon rate of 9 percent and pays the coupon semiannually. Similar bonds in the market have a yield to maturity of 10 percent today. Should she buy the bonds at the offered price? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

Yes, the bond is worth more at $951.

Your investment in a small business venture will produce cash flows that increase by 15 percent every year for the next 25 years. This cash flow stream is called:

a growing annuity

A firm receives a cash flow from an investment that will increase by 10 percent annually for an infinite number of years. This cash flow stream is called:

a growing perpetuity

In order to calculate the price of a bond, which of the following input is needed?

a maturity period

A preferred stock would be an ideal example of:

a perpetuity

A consol, issued by the British government to finance the Napoleonic Wars is an example of

a perpetuity.

Of the four capital budgeting techniques, the one that managers use the least is accounting rate of return. net present value. payback period. IRR.

accounting rate of return.

Which of the following is a disadvantage of the payback method? Entry field with correct answer It ignores the time value of money. It is inconsistent with the goal of maximizing shareholder wealth. It ignores cash flows beyond the payback period. All of the above.

all of the above

To prepare a loan amortization schedule, we must first compute the:

amount of each loan payout.

An annuity in which the payments are made at the beginning of each period is

an annuity due

convertible bonds

an be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder.

If your investment pays the same amount at the end of each year for a period of six years, the cash flow stream is called:

an ordinary annuity

An annuity in which the payments are made at the end of each period is called:

an ordinary annuity.

The simple interest rate charged per period multiplied by the number of payment periods per year gives the:

annual percentage rate

The EAR will equal the APR if interest is compounded

annually

Risk and return

are directly related

Coupon payments

are the interest payments made to bondholders. These payments are usually made annually or semiannually, and the payment amount (or rate) remains fixed for the life of the bond contract, which for our example is three years.

If a bond's coupon rate is equal to the market rate of interest, then the bond will sell:

at a price equal to its face value.

A typical present value of an annuity formula assumes that:

cash flows occur at the end of each period.

The risk per unit of return is measured by the _____.

coefficient of variation

The risk per unit of return is measured by the

coefficient valerience

The total holding period return on an investment ____ is the difference between the selling price and the purchase price. is the difference between its selling price and its income component. consists of a capital appreciation component and an income component. stays constant every year.

consists of a capital appreciation component and an income component.

Which one of the following statements is NOT true? The largest investors in corporate bonds are life insurance companies and pension funds. The market for corporate bonds is thin compared to the market for corporate stocks. Prices in the corporate bond market tend to be more volatile than the markets for stocks or money market securities. Corporate bonds are more marketable than the securities that have higher daily trading volumes.

corporate bonds are more marketable than the securities that have higher daily trading volume

If a project's IRR exceeds its _____, the project should be _____. Entry field with incorrect answer NPV; accepted MIRR; rejected cost of capital; rejected cost of capital; accepted

cost of capital; accepted

Which one of the following statements about vanilla bonds is NOT true? The bond's coupon rate is calculated as the annual coupon payment divided by the bond's face value. Coupon payments are usually made quarterly. They have fixed coupon payments. The face value, or par value, for most corporate bonds is $1,000.

coupon payments are usually made quarterly

In order to measure the variance of a portfolio consisting of 2 or more assets we need all of the following inputs, except

each asset's beta

In order to measure the variance of a portfolio consisting of two or more assets we need _____.

each asset's variance

A portfolio with a level of systematic risk that is the same as that of the market has a beta that is less than zero. less than the beta of the risk-free asset. equal to one. equal to zero.

equal to one

A portfolio with a level of systematic risk the same as that of the market has a beta that is

equal to one

A portfolio with a level of systematic risk is the same as that of the market has a beta that is Entry field with correct answer equal to zero. less than zero. equal to one. less than the beta of the risk-free asset.

equal to one.

The greater the risk associated with an investment, the greater is its _____. expected return market appeal price book value

expected return

One reason why firms issue convertible bonds is that, the bonds can be sold for:

higher prices with lower interest rates.

A financial market is transparent

if it is easy to view prices and trading volume.

If the yield curve has a positive slope:

interest rates are expected to be higher in the future.

If the yield curve has a positive slope: interest rates are expected to be higher in the future. interest rates are expected to be unchanged in the future. interest rates are expected to be lower in the future. interest rates are expected to be more volatile in the future.

interest rates are expected to be higher in the future.

The yield to maturity

is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond.

The systematic risk of an investment is measured by

its beta

The systematic risk of an investment is measured by _____.

its beta

Bonds sell at a premium when the market rate of interest is:

less than the bond's coupon rate.

When the growth rate is greater than or equal to the required rate, the value of a stock calculated by using the constant growth dividend model will be negative. The reason we cannot apply the constant growth dividend model in the case where the growth rate, g, is greater than or equal to the required rate, R, is because it would result in the value of the stock becoming: Entry field with correct answer negative negative or infinite above infinite zero

negative

A stock's beta is a measure of its _____.

nondiversifiable risk

An investor buys a 30-year bond with a $1,000 face value for $800. The bond's coupon rate is 8% and interest payments are made semi-annually. What is the bond's yield to maturity?

periodic: 5.07 annual: .1014

A consol, issued by the British government to finance the Napoleonic Wars is an example of:

perpetuity.

Preferred stock resembles a bond because Entry field with correct answer preferred stock pays fixed dividends which is similar to the interest paid on bonds. preferred stock do not have a retirement date. dividends on preferred stock reduce a firm's tax obligation. dividends on preferred stock increase over time.

preferred stock pays fixed dividends which is similar to the interest paid on bonds.

The yield to maturity can be viewed as a

promised yield because it is the annual yield that the investor earns if the bond is held to maturity and all the coupon and principal payments are made as promised

The future value of an annuity is typically used when analyzing:

retirement plans.

Two projects are considered to be mutually exclusive if

selecting one would automatically eliminate accepting the other

Diversification provides a benefit to investors when the investor

selects two or more securities whose returns are not highly correlated with each other.

A modern day example of a perpetuity is a

share of preferred stock

A modern day example of a perpetuity is a:

share of preferred stock.

Given the historical information in the chapter, which of the following investment classes had the highest average return?

small u.s. stocks

To calculate an expected return, each scenario return is weighted by

the probability of its occurrence

To calculate an expected return, each scenario return is weighted by _____.

the probability of its occurrence

Unlike stockholders' returns, most bondholders' returns are fixed;

they receive only the interest payments that are promised plus the repayment of the loan amount when the bond matures.

Most secondary market transactions for corporate bonds take place

through dealers in the over-the-counter (OTC) market.

An appropriate method for evaluating different cash flow scenarios is to compare their present values

true

In a typical loan amortization schedule involving a consumer loan the amount of each loan payment is fixed

true

If the expected return on an asset is greater than its required return given on the Security Market Line, the stock is underpriced. fairly priced. overpriced. randomly priced.

underpriced

If the expected return on an asset is greater than its required return given on the Security Market Line, the stock is _____.

underpriced

The bonds that has no coupon payments but promise a single payment at maturity is:

zerocoupon bonds

The bonds that has no coupon payments but promise a single payment at maturity is:

zerocoupon bonds.

In order to calculate the price of a bond, which of the following input is needed?

Maturity period.

Roy is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis. The current market rate for similar bonds is 8.8 percent. He was offered the bond by a friend at a price of 1,100. Should he buy the bond from his friend? Round your final answer to the nearest dollar.) Yes, because the market price of the bond is $1,265 No, because the market price of the bond is $1,048 No, because the market price of the bond is $1,099 none of the above

No, because the market price of the bond is $1,048

Which of the following statements is NOT true about common stock? Owners of common stock are guaranteed dividend payments by the firm. Common-stock holders have the right to vote on the election ofthe board of directors of their company. Common-stock holders have limited liability toward the obligations of the corporation. Common stock isconsidered to have no fixed maturity.

Owners of common stock are guaranteed dividend payments by the firm.

Sayers purchased a stock with a coefficient of variation equal to 0.125. The expected return on the stock is 20 percent. What is the variance of the stock? 0.625000 0.025000 0.790500 0.000625

0.000625

The expected return for an asset is 18.75 percent. If the return distribution for the asset is described as in the following table, what is the variance for the asset's returns? (Round intermediate computations and final answer to 6 decimal places.) Return Probability 0.10 0.25 0.20 0.50 0.25 0.25

0.002969

Elrond has made an investment that will generate returns that are subject to the state of the economy. Use the following information to calculate the variance of the return distribution for Elrond's investment. (Do not round intermediate computations. Round your final answer to four decimal places.) State Return Probability Weak 0.10 0.8 OK 0.17 0.1 Great 0.28 0.1

0.0031

Tommie has made an investment that will generate returns that are subject to the state of the economy during the year. Use the following information to calculate the standard deviation of the return distribution for Tommie's investment. (Do not round intermediate computations. Round your final answer to four decimal places.) State Return Probability Weak 0.13 0.30 OK 0.20 0.40 Great 0.25 0.30

0.0467

The expected return for the asset shown in the following table is 18.75 percent. If the return distribution for the asset is described as below, what is the standard deviation for the asset's returns? (Round intermediate computations and final answer to 6 decimal places.) Return Probability 0.10 0.25 0.20 0.50 0.25 0.25

0.054486

The covariance of the returns between Stock A and Stock B is 0.0087. The standard deviation of Stock A is 0.26, and the standard deviation of Stock B is 0.37. What is the correlation coefficient between the returns of the two stocks? Entry field with correct answer 0.096200 0.90437 0.96200 0.090437

0.090437

0.2179

Braniff Ground Services stock has an expected return of 9 percent and a variance of 0.25 percent. What is the coefficient of variation for Braniff? (Round your final answer to four decimal places.)

0.5556

Aquaman Stock has exhibited a standard deviation in stock returns of 0.7, whereas Green Lantern Stock has exhibited a standard deviation of 0.8. The correlation coefficient between the stock returns is 0.1. What is the standard deviation of a portfolio composed of 70 percent Aquaman and 30 percent Green Lantern? (Round the answer to five decimal points.)

0.56676

The covariance of the returns between Wildcat Stock and Sun Devil Stock is 0.09875. The variance of Wildcat is 0.2116, and the variance of Sun Devil is 0.1369. What is the correlation coefficient between the returns of the two stocks? Entry field with correct answer 0.580199 0.340823 0.170200 0.293347

0.580199

Find today's value of a non-zero, semi-annual coupon bond with 5 years to maturity. The bond has a coupon rate of 6% (nominal rate), but interest is paid semi-annually. The investor's required rate of return, i, is 4%.

1,089.82

Assume you purchased a five-year bond for $882. the bond pays a 6% coupon with a $1,000 maturity value. You decide to sell the bond for $750 after holding it for three years. What is your realized yield from the cash flows you actually received?

1.90

What is the YTM on a 10-year, 9% annual coupon, $1,000 par value bond, selling for $887? Must find the rd so that the present value of the cash flows equals the current selling price.

10.91

If John buys a 5-year bond with a 9% coupon rate paid semiannually and $1000 par value for $925, his yield to maturity would be closest to: Round to two decimal places.

10.99%.

You invested $3,000 in a portfolio with an expected return of 10 percent and $2,000 in a portfolio with an expected return of 16 percent. What is the expected return of the combined portfolio? Entry field with correct answer 12.4% 6.2% 13.6% 13.0%

12.4%

Security Analysts that have evaluated Concordia Corporation, have determined that there is a 15% chance that the firm will generate earnings per share of $2.40; a 60% probability that the firm will generate earnings per share of $3.10; and a 25% probability that the firm will generate earnings per share of $3.80. What are the expected earnings per share for Concordia Corporation? (Round off to the nearest $0.01)

$3.17

What is the price of a zero coupon bond with a $1,000 face value, 10-year maturity, and semiannual compounding? The market rate on similar bonds is 12%.

$331.80

What is the price of a three-year, 5% coupon bond with a market yield of 8% and semi-annual coupon payments?

-921.36

Use the following table to calculate the expected return from an asset. Return Probability 0.05 0.1 0.1 0.15 0.15 0.5 0.25 0.25

15.75%

16.8%

The market price of a 10-year, $1,000 bond is $1,158.91. Interest on this bond is paid semiannually and the YTM is 14%. What is the bond's annual coupon rate? (Round your answer to the nearest percent.)

17%

Use the following table to calculate the expected return from an asset. Return Probability 0.1 0.25 0.2 0.5 0.25 0.25

18.75%

Find the yield to call on a 15 year, 6% annual coupon bond selling for $1,234 which will be called 5 years after its issue for $1,060.

2.16

A 10-year, 8% annual coupon bond selling for $1,135.90 has been called after 4 years for $1,080. What is its yield to call (YTC)?

5.92

What is the YTM on a 10-year, 9% annual coupon, $1,000 par value bond, selling for $1,134.20? Must find the rd so that the present value of the cash flows equals the current selling price

7.08

Generic Inc. issued bonds in 1988 that will mature 16 years from the date of issue. The bond pays a 14.375 percent coupon and the interest is paid semiannually. Its current price is $1,508.72. What is the yield to maturity on the bonds? (Round your answer to two decimal places.)

8.50%

The exhibit shows a time line for a three year bond that pays an 8 percent coupon rate and has a face value of $1,000. How much should we pay for such a bond if the market rate of interest is 10%? We discount the expected cash flows to the present and then add them up...

950.26

The constant growth dividend model would be useful to determine the value of all, but which of the following firms? Entry field with correct answer A firm whose earnings and dividends are declining at a fairly steady rate. A firm whose earnings and dividends are growing at a fairly steady rate. A firm whose expected sales, profits, and dividends are flat. A firm whose sales, profits, and dividends are growing at an annual average compound rate of 5 percent.

A firm whose expected sales, profits, and dividends are flat.

Which of the following is the best measure of the systematic risk in a portfolio? Entry field with correct answer Variance Standard deviation Covariance Beta

Beta

Which of the following statements is NOT true about broker markets? Investors have an incentive to hire a broker because what they charge as a commission is less than the cost of direct search. Brokers can guarantee an order because they have an inventory of securities. Brokers bring buyers and sellers together to earn a fee, called a commission. Brokers' extensive contacts provide them with a pool of price information that individual investors could not economically duplicate themselves.

Brokers can guarantee an order because they have an inventory of securities.

Which one of the following statements about vanilla bonds is NOT true?

Coupon payments are usually made quarterly.

Which of the following steps is necessary when computing the value of a common stock? Entry field with correct answer Estimating the coupon payments Determining the required rate of return based on the riskiness of the cash flows Multiplying each cash flow by the year in which it is expected to be received Dividing each cash flow by the year in which it is expected to be received

Determining the required rate of return based on the riskiness of the cash flows

Which of the following is a simplifying assumption that is made when applying the dividend discount model to common stock valuation? Entry field with correct answer Dividends rate grow lesser than 0. Dividends vary each year. Dividends are constant till the tenure of the firm. Dividend growth rate is not equal to the required rate of return.

Dividend growth rate is not equal to the required rate of return.

Which of the following are the three simplifying assumptions that cover most stock growth patterns? Dividends remain constant over time, dividends grow at a constant rate, and dividends are equal to zero. Dividends have a zero-growth rate, dividends grow at a varying rate, and dividends are equal to zero. Dividends remain constant over time, dividends grow at a constant rate, and dividends have a mixed growth pattern. None of the above.

Dividends remain constant over time, dividends grow at a constant rate, and dividends have a mixed growth pattern.

Which of the following statements about preferred stock is FALSE? Entry field with correct answer Preferred stock typically pays a fixed dividend. Preferred stock has a higher-priority claim on the firm's assets than the common stock. Failure to pay dividends on preferred stocks will result in a default. Preferred stock has a lower-priority claim on the firm's assets than the firm's creditors in the event o

Failure to pay dividends on preferred stocks will result in a default.

Which of the following theorem explains the relationship between interest rates and bond prices? Bond prices are directly related to interest rate movements. For a given change in interest rates, the prices of short-term bonds will change more drastically than the prices of long-term bonds. For a given change in interest rates, the prices of higher-coupon bonds will change more drastically than the prices of lower-coupon bonds. For a given change in interest rates, the prices of long-term bonds will change more drastically than the prices of short-term bonds.

For a given change in interest rates, the prices of long-term bonds will change more drastically than the prices of short-term bonds.

What is the YTM on a 10-year, 9% annual coupon, $1,000 par value bond, selling for $1,000? Must find i so that the present value of the cash flows equals the current selling price.

I/Y=9

Entry field with correct answer From a practical perspective, the growth rate in the constant growth dividend model must be greater than the sum of the long-term rate of inflation and the long-term real growth rate of the economy. In order for the constant growth dividend model to properly value a firm's common stock, g must be greater than R. The constant growth dividend model can be used effectively to value the common shares of a mixed growth stock. In order for the constant growth dividend model to properly value a firm's common stock, R must be greater than g.

In order for the constant growth dividend model to properly value a firm's common stock, R must be greater than g.

Which of the following statements is true? Downward sloping yield curves typically appear in the early to mid-period of a business expansion. Interest rate risk premium always adds an upward bias to the slope of the yield curve. If investors believe that inflation will be increasing in the near future, the yield curve will be downward sloping. Downward-sloping yield curve is the yield curve most commonly observed.

Interest rate risk premium always adds an upward bias to the slope of the yield curve.

Which of the following statements is NOT true? The risk that the lender may not receive payments as promised is called default risk. Investors must pay a premium to purchase a security that exposes them to default risk. U.S. Treasury securities are the best proxy measure for the risk-free rate. All of the above are true statements.

Investors must pay a premium to purchase a security that exposes them to default risk.

Which of the following statements is true about the general dividend valuation model? It implies that the value of a growth stock can be determined by forecasting the future price of the stock. The model cannot be used to calculate the value of a common stock unless the dividends exceed the firm's expected growth rate. It implies that the value of a firm's common stock can be determined only if the expected future dividends are infinite. It implies that the underlying value of a share of stock is determined by the market's expectations of the future dividends that the firm will generate.

It implies that the underlying value of a share of stock is determined by the market's expectations of the future dividends that the firm will generate.

Which of the following statements is NOT true about the general dividend valuation model? The model does not assume any specific pattern for future dividends, such as a constant growth rate. It makes a specific assumption about when the share of stock is going to be sold in the future. The model calls for forecasting an infinite number of dividends for a stock. The price of a share of stock is the present value of all expected future dividends.

It makes a specific assumption about when the share of stock is going to be sold in the future.

Which of the following statements is NOT true about preferred stock? Preferred stock holders have limited voting privileges relative to common-stock owners. Preferred stocks are generally viewed as perpetuities because they have no fixed maturity. Preferred dividend payments are paid by the issuer with after-tax dollars. Preferred dividends are tax deductible just like the interest on bonds.

Preferred dividends are tax deductible just like the interest on bonds.

Which of the following statements is NOT true about preferred stock? Preferred stock holders have limited voting privileges relative to common-stock owners. Preferred stock dividends are paid by the issuer with after-tax dollars. Preferred stock represents ownership in the firm. Preferred stockholders are not eligible for guaranteed dividend payments by the firm.

Preferred stockholders are not eligible for guaranteed dividend payments by the firm.

Purchase price of bond = $981.10 Years investment held = n = 5 Coupon rate = C = 8% Frequency of payment = m = 2 Semiannual coupon = $1,000 × (0.08/2) = $40 Realized Yield = i Selling price of bond = PB = $1,067.22 To compute the realized return, either the trial-and-error approach or the financial calculator can be used. Since the price has increased, market rates must have decreased. So, the realized return is going to be greater than the bond's coupon. Try rates higher than the coupon rate. Try i = 10%, or i/2 = 5%: =$311.89 + $667.79 ≅ $979.68 The realized rate of return is approximately 9.6 percent rounded to 10%. Using a financial calculator provided an exact yield of 9.56 percent.

Given the historical information in the chapter, which of the following investment classes had the greatest average return?

Small U.S. Stocks

Given the historical information in the chapter, which of the following investment classes had the greatest variability in returns?

Small U.S. Stocks

For the constant growth rate dividend model to work, which of the following assumptions must hold? Entry field with correct answer The growth rate should always be equal to zero. The growth rate must be equal to the required rate of return. The growth rate must be less than the required rate of return. The growth rate must be greater than the required rate of return.

The growth rate must be less than the required rate of return.

Which of the following classes of securities is likely to have the lowest corporate borrowing cost?

The issuers of AAA rated bonds should have the lowest borrowing cost because their default risk premium is lower than issuers with weaker credit ratings.

Which of the following statements is true?

The largest investors in corporate bonds are institutional investors such as life insurance companies and pension funds. The market for corporate bonds is thin compared to the market for corporate stocks. Prices in the corporate bond market tend to be more volatile than prices of securities sold in markets with greater trading volumes.

Which of the following is the most typical example of a zero-growth dividend stock? The preferred stock of a utility company. The common stock of a firm in the health care industry. The common stock of a firm in the information technology industry. The common stock of a firm in the biotechnology industry.

The preferred stock of a utility company.

Which one of the following statements is NOT true? Yield curves show graphically how market yields vary as term to maturity changes. The shape of the yield curve is not constant over time. The relationship between yield to maturity and marketability is known as the term structure of interest rates. As the general level of interest rises and falls over time, the yield curve shifts up and down and has different slopes.

The relationship between yield to maturity and marketability is known as the term structure of interest rates.

Which of the following statements is true about growth stocks? These are stocks of firms that grow their sales at above-average rates and are expected to do so for a length of time. These are stocks of firms that grow their earnings at above-average rates and are expected to do so for a length of time. They generally pay dividends during their fast growth phase. None of the above.

These are stocks of firms that grow their earnings at above-average rates and are expected to do so for a length of time.

Which of the following statements is most true about zero coupon bonds?

They typically sell at a deep discount below par when they are first issued.

Which of the following statements is correct? When choosing between two investments that have the same level of risk, investors prefer the investment with the lower return. The greater the risk associated with an investment, the lower the return investors expect from it. If two investments have the same expected return, investors prefer the riskiest alternative. When choosing between two investments that have the same level of risk, investors prefer the investment with the higher return.

When choosing between two investments that have the same level of risk, investors prefer the investment with the higher return.

Price of a bond is calculated by: discounting the sum of coupon payments and principal. discounting the difference between the principal payment and the coupon payments. adding the present value of principal payment and the present value of coupon payments. subtracting the present value of principal payment from the present value of coupon payments.

adding the present value of principal payment and the present value of coupon payments.

Years to maturity = n = 10 Coupon rate = C = 7% Annual coupon = $1,000 × 0.07 = $70 Current market rate = i = 9% $449.24 + $422.41 = $871.65

Huan Zhang bought a 10-year bond that pays 8.25 percent semiannually for $911.10. What is the yield to maturity on this bond? (Roundyour percentage answer to two decimal places.)

Years to maturity = n = 10 Coupon rate = C = 8.25% Semiannual coupon = $1,000 × (0.0825/2) = $41.25 Yield to maturity = i Present value of bond = PB = $911.10 Use the trial-and-error approach to solve for YTM. Since the bond is selling at a discount, we know that the yield to maturity is higher than the coupon rate. Try YTM = 9.4%: = $522.90 + 391.54 ≅ $914.43 The YTM is approximately 9.66 percent. Using a financial calculator provided an exact YTM of 9.656 percent (2 × 4.828%).

Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

Years to maturity = n = 20 Coupon rate = C = 7.8% Frequency of payment = m = 2 Semiannual coupon = $1,000 × (0.078/2) = $39.00 Current market rate = i = 7% Present value of bond = PB $832.85 + $252.57 = $1,085.42

A bond pays a coupon interest rate of 7.5 percent. The market rate on similar bonds is 8.4 percent. The bond will sell at _____. book value par a premium a discount

a discount

Which of the following classes of securities is likely to have the lowest corporate borrowing cost? AAA rated bonds. A rated bonds. BB rated bonds. C rated bonds. All of the above will have the same corporate borrowing cost.

aaa rated bonds

Which one of the following statements is true of a bond's yield to maturity? The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. It is the annual yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised. A bond's yield to maturity changes daily as interest rates increase or decrease. All of the above are true.

all of the above

Which of the following statements is true of zero coupon bonds? Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity. Zero coupon bonds sell well below their face value (at a deep discount) because they offer no coupons. The most frequent and regular issuer of zero coupon securities is the U.S. Treasury Department. All of the above are true.

all of the above are true

Which of the following statements is true? Entry field with correct answer To secure the conversion option on a bond, bondholders would be willing to pay a premium. Typically, the conversion ratio is set so that the firm's stock price must appreciate at least 15 to 20 percent before it is profitable to convert bonds into stock. Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder. All of the above are true.

all of the above are true

Downward-slopping yield curves are observed

before the beginning of a recessio

A bond will sell at a premium when its coupon interest rate: equals the market interest rate on similar bonds. exceeds the market interest rate on similar bonds. is lower than the market interest rate on similar bonds. varies more than the market interest rate on similar bonds.

exceeds the market interest rate on similar bonds.

In regard to interest rate risk, short-term bonds: and longer-term bonds have no interest rate risk because their coupon interest rates are fixed. have less interest rate risk than longer-term bonds. and longer-term bonds have the same amount of interest rate risk because their coupon interest rates are fixed. have more interest rate risk than longer-term bonds.

have more interest rate risk than longer-term bonds.

Companies that issue convertible bonds can borrow at a lower interest rate, which reduces the amount of cash that companies must use to make interest payments and can sell bonds without reducing the price. One reason why firms issue convertible bonds is that, the bonds can be sold for: lower prices with higher interest rates. higher prices with lower interest rates. higher prices with higher interest rates. lower prices with lower interest rates.

higher prices with lower interest rates.

The stocks owned by ___ represent about 35 percent of the total value of all corporate equity. mutual funds households pension funds foreign investors

households

The value of a share of stock depends on Entry field with correct answer the credit rating of the firm. an investor's risk tolerance limit. how long an investor intends to keep it. how often it will pay a dividend.

how often it will pay a dividend.

Which of the following statements is true? For a given change in market interest rates, the prices of higher-coupon bonds change more than the prices of lower-coupon bonds. If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond. If interest rates rise, bond prices will rise. If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond.

if market interest rates rise, a 10 year bond will fall in value more than a 1 year bond

A benefit of a callable bond is the: bondholder may sell it for a higher price. issuer may sell it for a higher price. issuer may replace it with a bond that has a higher coupon rate. issuer may replace it with a bond that has a lower coupon rate.

issuer may replace it with a bond that has a lower coupon rate.

The rate used to discount a bond's cash flow stream in bond valuation is the: coupon interest rate. risk-free rate. market interest rate. prime interest rate.

market interest rate.

Preferred stock is sometimes treated like a debt security because: legally preferred stock is a debt security. preferred stock holders receive a residual value and not a stated value. preferred dividend payments are similar to bond interest payments and are fixedin nature regardless of the firm's earnings. preferred dividends are deductible from taxable income just like interest payments on bonds.

preferred dividend payments are similar to bond interest payments and are fixedin nature regardless of the firm's earnings.

Growth stocks usually do not pay dividends. Therefore the stock value increases because the firms: Entry field with correct answer reinvests earnings to provide dividends in the future. holds large amounts of cash. pay interest to bondholders. increase market share.

reinvests earnings to provide dividends in the future.

All of the following statements about stock indexes are true EXCEPT stock indexes are based on criteria that define the market segment of interest. stock indexes replicate the market activity in a certain segment of the stock market. stock indexes are unbiased and perfect indicators of market activity. stock indexes can serve as a benchmark to evaluate investment manager performance.

stock indexes are unbiased and perfect indicators of market activity.

Realized yield is: the interest rate at which the future value of the expected cash flows from a bond equals the bond's price. the interest rate at which the present value of the expected cash flows from a bond equals the bond's price. the interest rate at which the present value of the actual cash flows from a bond equals the bond's price. the interest rate at which the future value of the actual cash flows from a bond equals the bond's price.

the interest rate at which the present value of the actual cash flows from a bond equals the bond's price.

Which of the following statements is most true about zero coupon bonds? Entry field with correct answer They typically sell for a higher price than similar coupon bonds. They are always convertible to common stock. They typically sell at a deep discount below par when they are first issued. They typically sell at a premium over par when they are first issued.

they typically sell at a deep discount below par when they are first issued

In calculating the current price of a bond paying semiannual coupons, one needs to

use double the number of years for the numberof payments made. use the semiannual coupon. use the semiannual rate as the discount rate.

Which one of the following statements about zero coupon bonds is NOT true? Zero coupon bonds have no coupon payments but promise a single payment at maturity. Zero coupon bonds must sell for less than similar bonds that make periodic coupon payments. Zero coupon bonds make coupon payments but no principal payment at maturity. All of the above statements are true.

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