FIN120 Exam 2

Philip purchased a house for $185,000 with a down payment of 20%. If he finances the balance at 10% over 15 years, how much will his monthly payment be? A. $1,590.42 B. $1,577.27 C. $1,971.59 D. $1,988.02

A. $1,590.42

You are offered to buy a financial instrument today for $10,000. If the security promises you a cash flow of $1,627.44 per year for the next ten years, what annual rate of return will be earned on the investment? A. 10% B. 8% C. 9% D. 11%

A. 10%

Given that risk-free rate is 5% and the expected return on the market portfolio is 10%, if Bush Company's beta is 2, what is Dow's expected return? A. 15% B. 21% C. 10% D. 18%

A. 15%

A bond with a $1,000 par value, a 10% coupon rate paid semi-annually, and 5 years to maturity is currently selling for $800. What is the yield to maturity for this bond? A. 15.96% B. 13.88% C. 12.68% D. 10.00%

A. 15.96%

What is the best measure of risk for an asset that is to be held in isolation (one stock portfolio)? A. Standard deviation B. Diversifiable risk C. Market risk D. Beta

A. Standard deviation

Strikes, lawsuits, and increased competition are all examples of A. diversifiable risk B. nondiversifiable risk C. systematic risk D. total risk

A. diversifiable risk

The present value of a future cash flow can be decreased if (other things the same) A. the discount rate is increased. B. both a and c above. C. the discount rate is decreased. D. the future cash flow is received earlier.

A. the discount rate is increased.

T/F: A sinking fund provision is a restrictive provision that is often included in a bond indenture providing for the systematic retirement of bonds prior to their maturity.

True

T/F: Compounding returns on an annual basis rather than on a quarterly basis will (other things the same) lower the effective annual interest rate.

True

T/F: If interest rate is expected to fall (rise), the best bond strategy is to own low (high) coupon and long (short) maturity bonds.

True

T/F: When adding new securities to an existing portfolio, the smaller or more negative the degree of correlation between the new securities and those already in the portfolio, the greater the benefits of the additional portfolio diversification.

True

Jordan Company plans to issue bonds with a par value of $1,000, 10 years to maturity, and a 10 percent coupon rate. Bonds of similar risk are currently selling to yield an 8 percent rate of return. If its coupon payments are paid semi-annually, what is the market value of each Jordan bond? A. $1,245.74 B. $1,135.90 C. $1,198.67 D. $1,228.31

B. $1,135.90

A resort condominium in Hawaii now costs $400,000. The price of the condominium will increase at an annual 4 percent rate for the next 20 years due to inflation. How large an annuity must be deposited into an account earning an annual 10 percent return in order to buy the condominium after 20 years? A. $16,352 B. $15,302 C. $18,359 D. $12,415

B. $15,302

Consolidated Company needs to raise capital. Its investment banker suggests that 20-year zero coupon bonds could be sold at a yield to maturity of 8 percent. What is the market value of each zero coupon bond using the semi-annual formula? A. $224.54 B. $208.29 C. $204.69 D. $218.52

B. $208.29

You are the money manager of a $4 million investment fund. The fund consists of 4 stocks with the following investments and betas: Stock Investment Beta A $400,000 1.40 B 2,000,000 1.20 C 1,000,000 0.80 D 600,000 (0.60) What is the fund's beta? A. 0.78 B. 0.85 C. 0.95 D. 0.75

B. 0.85

A 20-year, 8 percent coupon rate, $1,000-par bond that pays interest semi-annually bought five years ago for $850. This bond is currently sold for 950. What is the realized yield on this bond? A. 12.23% B. 11.23% C. 11.75% D. 12.13%

B. 11.23%

You have just applied for a loan of $50,000 to finance the purchase of a "Lexus." The bank will require you to make annual payments of $13,870 at the end of each year for the next 5 years. What is the annual interest rate on this loan? A. 10% B. 12% C. 8% D. 14%

B. 12%

Joe purchased 10 shares of an aggressive growth mutual fund at $90 per share 7 years ago. Today he sold all 10 shares for $4,500. What was his average annual compound rate of return on this investment before tax? A. 21.73% B. 25.85% C. 17.46% D. 19.58%

B. 25.85%

Stock S has a beta of 1.5 and an expected return of 13 percent. Stock Q has a beta of 0.8 and an expected return of 8.5 percent. If the risk-free rate is 5 percent and the market return is 10 percent, which stock is overvalued and which stock is undervalued? A. S is undervalued and Q is undervalued B. S is undervalued and Q is overvalued C. S is overvalued and Q is undervalued D. S is overvalued and Q is overvalued

B. S is undervalued and Q is overvalued

(1) Which is the best measure of risk for choosing an asset which is to be held in isolation? (2) Which is the best measure for choosing an asset to be held as part of a diversified portfolio? A. Beta; beta B. Standard deviation; beta C. Standard deviation; corrleation coefficient D. Variance; correlation coefficient

B. Standard deviation; beta

A beta coefficient of 0 indicates that this security is riskless. A. False B. True C. Uncertain

B. True

As randomly selected securities are combined to create portfolio, the total risk of the portfolio ______ until the 15 to 20 securities are included. The portion of the risk eliminated is ______ risk, while that remaining is _____ risk. A. increases; diversifiable; nondiversifiable B. decreases; diversifiable; nondiversifiable C. decreases; nondiversifiable; diversifiable D. increases; nondiversifiable; diversifiable

B. decreases; diversifiable; nondiversifiable

Reitzel Corporation has just issued a 20-year, 10 percent coupon rate, $1,000-par bond that pays interest semi-annually. The required return is currently 8 percent, and the company is certain that it will remain at 8 percent until the bond matures in 20 years. Five years later, what is the value of the bond with 15 years to maturity? A. $1,238.35 B. $1,261.68 C. $1,172.92 D. $1,125.84

C. $1,172.92

You just deposit $1,000 into a savings account that bears a nominal 12%, compounded monthly. How much will you receive from this savings account 5 years from now? A. $1,765.9 B. $1,789.4 C. $1,816.7 D. $1,897.6

C. $1,816.7

You borrow $10,000 from a bank and plan to repay the loan in 24 equal monthly installments. If the bank charges 12 percent annual interest on the loan, what monthly payment will be required? A. $463.85 B. $459.50 C. $470.73 D. $485.63

C. $470.73

Stanley plans to contribute $1,000 to his individual retirement account (IRA) at the beginning of each year for the next 20 years. If his contributions can earn 8 percent per year, how much will he have at the end of the twentieth year? A. $53,947 B. $58,623 C. $49,423 D. $44,375

C. $49,423

Last year CMI Company's sales were $2 million. Sales were $1 million five years earlier. To the nearest percentage point, at what rate have sales been growing? A. 12% B. 18% C. 15% D. 10%

C. 15%

When yield to maturity is constant but different from coupon rate, the price of a bond as it approaches its maturity will A. remain constant. B. decrease. C. approach par. D. increase.

C. approach par.

A bond will sell _______ when coupon rate is less than yield to maturity, _______ when coupon rate exceeds yield to maturity, and _______ when coupon rate is equal to yield to maturity. A. at a premium; at a discount; at par. B. at par; at a premium; at a discount. C. at a discount; at a premium; at par. D. at a premium; at par; at a discount.

C. at a discount; at a premium; at par.

The capital asset pricing model (CAPM) implies that __________ is the only relevant risk measure of capital asset pricing for both individual asset and portfolio. A. total risk B. unsystematic risk C. systematic risk D. firm specific risk

C. systematic risk

Johnny currently has $100,000 in a savings account that pays 4% annually. He plans to make additional deposits over the next 10 years plus his current savings to buy a house, which will cost $200,000 in ten years. How much money should Johnny deposit at the end of each year if he wants to buy the house in ten years? A. $4,653.37 B. $4,138.42 C. $4,226.29 D. $4,329.09

D. $4,329.09

Professor Jones recently received an endowment worth $400,000. Portions of the endowment money plus incomes generated will be paid out as salaries to Professor Jones for the next 20 years. The return on investing the endowment money is 20% per year. If the ending balance of the endowment fund is required to be $100,000 at the end of 20 years, how large an annual salary will Professor Jones receive at the beginning of each year (annuity due)? A. $73,658.60 B. $65,346.70 C. $72,823.80 D. $68,005.80

D. $68,005.80

A mortgage company offers to lend you $25,000. The loan calls for payment of $2,738.68 per year for 20 years. What interest rate is the mortgage company charging you? A. 12% B. 11% C. 10% D. 9%

D. 9%

You will receive some money from you rich uncle several years in the future. If the interest rate decreases, the present value of the future amount will be A. lower. B. the same. C. cannot tell. D. higher.

D. higher.

T/F: An increase in interest rates will lead to an increase in the value of outstanding bonds.

False

T/F: An increase in the number of compounded periods per year will increase the present value of a future cash flow.

False