BFIN420 Final Review

Which of the following assets is most liquid?

cash equivalents

Investor A bought a call option that expires in 6 months. Investor B wrote a put option with a 9-month maturity. All else equal, as the time to expiration approaches, the value of investor A's position will ________ and the value of investor B's position will ________.

decrease; increase

When the market risk premium rises, stock prices will ________.

fall

Depreciation expense is in what broad category of expenditures? Question options:

operating expenses

The duration of a 5-year zero-coupon bond is ________ years.

5

You find a 5-year AA Xerox bond priced to yield 6%. You find a similar-risk 5-year Canon bond priced to yield 6.5%. If you expect interest rates to rise, which of the following should you do?

Buy the Canon bond, and short the Xerox bond.

The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity

I, II, and III

A high price-to-book ratio may indicate which one of the following?

Investors may believe that this firm has opportunities for earning a rate of return in excess of the market capitalization rate.

Suppose you own two stocks, A and B. In year 1, stock A earns a 2% return and stock B earns a 9% return. In year 2, stock A earns an 18% return and stock B earns an 11% return. __________ has the higher arithmetic average return. Question options:

The two stocks have the same arithmetic average return.

All other things equal, which of the following has the longest duration?

a 20-year zero-coupon bond yielding 10%

All other things equal (YTM = 10%), which of the following has the longest duration?

a 30-year bond with a 10% coupon

Because of convexity, when interest rates change, the actual bond price will ________ the bond price predicted by duration.

always be higher than

According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to ________.

an increase in expected interest rate volatility

Which one of the following performance measures is the Sharpe ratio?

average excess return to standard deviation ratio

Following a period of falling prices, the moving average will ________.

be above the current price

Everything else equal, if you expect a larger interest rate increase than other market participants, you should _________.

buy short-term bonds

In an era of particularly low interest rates, which of the following bonds is most likely to be called?

coupon bonds selling at a premium

A firm increases its dividend plowback ratio. All else equal, you know that _____________.

earnings growth will increase and the stock's P/E may or may not increase

You have an investment horizon of 6 years. You choose to hold a bond with a duration of 10 years. Your realized rate of return will be larger than the promised yield on the bond if ________.

interest rates fall

The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are ________.

junk bonds

All other things equal, a bond's duration is ________.

lower when the coupon rate is higher

Banks and other financial institutions can best manage interest rate risk by ________.

matching the durations of their assets and liabilities

An investor has her money segregated into checking, savings, and investments. The allocation among the categories is subjective, yet the investor spends freely from the checking account and not the others. This behavior can be explained as ________.

mental accounting

An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in ________.

mental accounting

An investor needs cash to pay some hospital bills. He is willing to use his dividend income to pay the bills, but he will not sell any stock to do so. He is engaging in ________.

mental accounting

In regard to bonds, convexity relates to the ________.

shape of the bond price curve with respect to interest rates

The price-to-sales ratio is probably most useful for firms in which phase of the industry life cycle?

start-up phase

A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock ________.

will generate a positive alpha

The process of decomposing ROE into a series of component ratios is called ______________. Question options:

DuPont analysis

Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least sensitive: I. 8% coupon, noncallable 20-year maturity par bond II. 9% coupon, currently callable 20-year maturity premium bond III. Zero-coupon 30-year maturity bond

III, I, II

All other things equal (YTM = 10%), which of the following has the shortest duration?

a 10-year zero-coupon bond

A company with an expected earnings growth rate which is greater than that of the typical company in the same industry most likely has ________.

a dividend yield which is less than that of the typical company

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require ________.

a higher yield on long-term bonds than on short-term bonds

Which of the following set of conditions will result in a bond with the greatest price volatility?

a low coupon and a long maturity

Proponents of the EMH typically advocate ________.

a passive investment strategy

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to ________ in the future.

decrease

If you believe the economy is about to go into a recession, you might change your asset allocation by selling _______ and buying ______.

growth stocks; long-term bonds

The Sharpe, Treynor, and Jensen portfolio performance measures are derived from the CAPM,

however, the Sharpe and Treynor measures use different risk measures. Therefore, the measures vary as to whether or not they are appropriate, depending on the investment scenario.

You have an investment horizon of 6 years. You choose to hold a bond with a duration of 4 years. Your realized rate of return will be larger than the promised yield on the bond if ________.

interest rates increase

A bank has an average duration of its liabilities equal to 2 years. The bank's average duration of its assets is 3.5 years. The bank's market value of equity is at risk if ________.

interest rates rise

Everything else equal, the ________ the maturity of a bond and the ________ the coupon, the greater the sensitivity of the bond's price to interest rate changes.

longer; lower

All else equal, bond price volatility is greater for ________.

lower coupon rates

Jill is offered a choice between receiving $50 with certainty or possibly receiving the proceeds from a gamble. In the gamble a fair coin is tossed, and if it comes up heads, Jill will receive $100; if the coin comes up tails, she will receive nothing. Jill chooses the $50 instead of the gamble. Jill's behavior indicates ________.

that she has a diminishing marginal utility of wealth

Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both stocks. You require a return of 10% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the intrinsic value of stock A ________.

will be higher than the intrinsic value of stock B

An investor who expects declining interest rates would maximize her capital gain by purchasing a bond that has a ________ coupon and a ________ term to maturity.

zero; long