F300 Exam 2
The ________ is a market derived interest rate used to discount the future cash flows of the bond.
yield to maturity
Assume that Ray is 38 years old and has 27 years for saving until he retires. He expects an APR of 7.5% on his investments. How much does he need to save if he puts money away annually in equal endminus−ofminus−theminus−year amounts to achieve a future value of $1,200,000 dollars in 27 years' time?
$14,882.44
What if Jennifer were to invest $2,750 today, compounded semiannually, with an annual interest rate of 5.25%. What amount of interest will Jennifer earn in one year?
$146.27
As applied to mortgage loans, which of the following statements is FALSE?
Advertised rates are EARs.
Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE?
The bank is technically renting money from you with a promise to repay that money with interest.
Differences in borrowing rates can generally be explained by the level of risk of the investment or loan and by the length of the investment or loan.
True
If the par value of a bond is equal to the bond price, then we know the yield to maturity is equal to the coupon rate.
True
The NYSE uses a designated−order turnaround computer system (SuperDOT) that matches buyers and sellers so that trades can be executed within seconds, with buyers and sellers getting the best available price.
True
The dividend models appeal to a fundamental concept of asset pricing—that the value of an asset is determined by the future cash flow to which the owner is entitled while holding the asset, and the required rate of return for the cash flow.
True
The "Truth in Savings Law" requires banks to advertise their rates on investments such as CDs and savings accounts as annual percentage yields (APY).
True
We assign a very low probability of default to the U.S. Treasury and thus assume that all Treasury bills will be paid in full at maturity and thus have a zero default premium.
True
When pricing a zero−coupon bond, the convention is to use the semiannual pricing formula rather than the annual pricing formula.
True
Zero−coupon bonds are priced at deep discounts.
True
Dividend models suggest that the value of a financial asset is determined by future cash flows. A problem arises, however, in that future cash flows may be difficult to predict as to ________ of these cash flows.
both the timing and the amount
________ is risk that cannot be diversified away.
systematic risk
The frequency of default on a home loan is ________ the frequency of default on a credit card.
much lower than
In ________, current prices already reflect the price history and volume of the stock as well as all available public information.
semi−strong−form efficient markets
Most U.S. corporate and government bonds choose to make ________ coupon payments.
semiannual
The difference between the price and the par value of a zero−coupon bond represents ________.
the accumulated interest over the life of the bond
Which of the following statements is true about variance?
the larger the variance, the greater the dispersion. Variance describes how spread out a set of numbers or a value is around its mean or average. Variance is essentially the variability from the average. All of the above statements are true.
The type of risk that can be diversified away is called ________.
unsystematic risk
Correlation, a standardized measure of how stocks perform relative to one another in different states of the economy, has a range from ________.
−1.0 to +1.0
The phrase "price to rent money" is sometimes used to refer to ________.
interest rates
Zero−coupon U.S. Government bonds are known as________.
STRIPS
You put 20% down on a home with a purchase price of $250,000. The down payment is thus $50,000, leaving a balance owed of $200,000. A bank will loan you this remaining balance at 3.91% APR. You will make monthly endminus−ofminus−theminus−period payments with a 30minus−year payment schedule. What is the monthly annuity payment under this schedule?
$944.48
Suppose you postpone consumption and invest at 6% when inflation is 2%. What is the approximate real rate of your reward for saving?
4%
Stocks B, has returns of 5%, 15%, 30%, and 110%, over the most recent four year period. What is the stock's standard deviation of return over this time period?
47.78%
Find the standard deviation for a security that has three one−year returns of 5%, 10%, and 15%.
5.00%
The ________ is the interest rate printed on the bond.
coupon rate
Nominal interest rates are the sum of two major components. These components are ________.
the real interest rate and expected inflation
The primary benefit of diversification is:
a reduction in risk.
Find the standard deviation for a security that has three one−year returns of minus−5%, 15%, and 20%.
13.23%
________ means that the percentage increase in the dividend is the same each year.
Constant growth
Interest premium. Shaky Company has just issued a five-year bond with a yield of 9%; Stable Company has issued an identical five-year bond, but with a yield of 7%. Why did the market demand a higher return from Shaky?
Companies with poor financials tend to compensate investors for the default risk by issuing bonds with high yields.
Which of the statements below is FALSE?
The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands.
An annual percentage rate must be converted to the appropriate periodic rate when compounding is more frequent than once a year.
True
When quoting rates on loans, the "Truth in Lending Law" requires the bank to state the rate as an APR, effectively understating the true cost of the loan when interest is computed more often than once a year.
True
The measure of systematic risk is called ________.
beta
If we know the dividend stream, the future price of the stock, the future selling date of the stock, and the required return, we can price stocks just as we priced ________.
bonds
Bonds are different from stocks because ________.
bonds promise fixed payments for the length of their maturity
A company selling a bond is ________ money.
borrowing
Assume that you are willing to postpone consumption today and buy a certificate of deposit (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year ________.
you will be able to buy more goods or services
Rodney invests $2,400 today, compounded monthly, with an annual interest rate of 6.25%. What is Rodney's investment worth in one year?
$2,554.37
Which of the following factors affect the future value of the retirement account?
. Duration of the retirement account contributions. Your answer is correct. B. Taxation of the retirement contributions. This is the correct answer. C. Rate of return on the retirement account. Your answer is correct. D. Size of the retirement contributions. ALL OF THE ABOVE
When they are first born, Grandma gives each of her grandchildren a $2,000 savings bond that matures in 18 years. For each of the following grandchildren, what is the present value of each savings bonds if the current discount rate is 5%? a. Seth turned sixteensixteen years old today.
1,814.06
Assuming that stocks represent most industries, the number of stocks necessary to eliminate nearly all unsystematic risk varies from ________.
20 to 30
Stocks A, B, C, and D have standard deviations, respectively, of 20%, 5%, 10%, and 15%. Which one is the riskiest?
Stock A (20%)
Why would we want to assume a constant growth to dividends if we seldom see a firm with this type of pattern?
The answer is that we really want to estimate a series of future dividends and can only do this if we have a growth rate
The Security Market Line has ________.
a positive slope
The terms ________ and ________ mean the same thing.
diversifiable risk; unsystematic risk
A beta of 1.0 is the beta of the ________, while a beta of 0.0 is the measure for a ________.
market; risk−free security.
Stocks are different from bonds because ________.
stocks, unlike bonds, represent residual ownership
In ________, current prices reflect the price history and trading volume of the stock. It is of no use to chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market.
weak−form efficient markets
Assume that you are willing to postpone consumption of $1,000 today and buy a certificate of deposit (CD) at your local bank with the $1,000. Holding the CD for one year provides you with an 8% reward for saving or postponing consumption. This reward for postponing consumption implies that at the end of the year you will have how much more money for spending?
$80.00
Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 8.00%. What is your investment worth in one year?
$1,082.43
You put 20% down on a home with a purchase price of $250,000. The down payment is thus $50,000, leaving a balance owed of $200,000. The bank will loan the remaining balance at 3.91% APR. You will make annual payments with a 30minus−year payment schedule. What is the annual annuity payment under this schedule?
$11,439.96
Kenna invests $5,000 today, compounded monthly, with an annual interest rate of 8.52%. What amount of interest will she earn in one year?
$443.04
Treasury bills have a beta of ________.
0.0
Stock A, has returns of 10%, 20%, 30%, and 40%, over the last four years. What is the stock's standard deviation?
12.91%
Present value. The State of Confusion wants to change the current retirement policy for state employees. To do so, however, the state must pay the current pension fund members the present value of their promised future payments. There are 250 comma 000250,000 current employees in the state pension fund. The average employee is 1010 years away from retirement, and the average promised future retirement benefit is $350 comma 000350,000 per employee. If the state has a discount rate of 44% on all its funds, how much money will the state have to pay to the employees before it can start a new pension plan?
59,111,864,772.30
You wish to diversify your single−security portfolio in a way that will maximize your reduction in risk. Which of the following securities should you add to your portfolio?
Alpha Company stock that has a correlation coefficient of −0.25 with your current security
Interest premium. Estimate the default premium and the maturity premium given the following three investment opportunities: a Treasury bill with a current interest rate of 3.5%; a Treasury bond with a twenty-year maturity and a current interest rate of 5.5%; and a AAA, corporate bond with a twenty-year maturity and an interest rate of 7.0%.
Default - 1.50% Maturity - 2.00%
Estimate the default premium and the maturity premium given the following three investment opportunities: a Treasury bill with a current interest rate of 2.52%; a Treasury bond with a twenty-year maturity and a current interest rate of 6%; and a AAA, corporate bond with a twenty-year maturity and an interest rate of 7.5%.
Default - 1.50% Maturity - 3.5%
Interest premium.Ben has just purchased a long-term government bond and expects to make a 7% return. Donna has just purchased a stock in a new startup company, but expects to make a 20% return. Why is Donna expecting a higher return?
Donna is expecting a higher return on the stock due to both the maturity premium and default premium.
Present Value $15,804 Interest Rate 7% Number of Periods 30 Future Value?
Future Value 120,304.08
Present Value $25,960 Interest Rate 17% Number of Periods 11 Future Value?
Future Value 145998.76
Present Value $36,200 Interest Rate 10.5% Number of Periods 23 Future Value?
Future Value 359,783.27
Which of the below is NOT a major component of interest rates?
Historical interest rates
________ refers to how quickly information is reflected in the available prices for trading.
Informational efficiency
Which of the statements below is TRUE?
Investors want to maximize return and minimize risk.
The Portland Stallions professional football team is looking at its future revenue stream from ticket sales. Currently, a season package costs $375 per seat. The season ticket holders have been promised this same rate for the next five years. Six years from now the organization will raise season ticket prices based on the estimated inflation rate of 4%. What will the season tickets sell for in six years?
N=6 I/YR = 4 PV = 375 FV = 474.49
The Fisher Effect involves which of the items below?
Nominal rate, the real rate, and inflation
________ has to do with the speed and accuracy of processing a buy or sell order at the best available price.
Operational efficiency
For purposes of maximum portfolio diversification, which of the following would provide the greatest diversification?
Security C with a correlation coefficient of −0.50
What is the EAR if the APR is 10.52% and compounding is daily?
Slightly above 11.09%
What is the EAR if the APR is 5% and compounding is quarterly?
Slightly above 5.09%
A more risky stock has a higher ________.
Standard Dev and Variance
MacroMedia Inc. $1,000 par value bonds are selling for $832. Which of the following statements is TRUE?
The bonds are selling at a premium to the par value. The coupon rate is greater than the yield to maturity. The bonds must have more than six years to maturity. (Answer) NONE OF THE ABOVE IS TRUE!
Interest premium. The U.S. government offers two bonds: one selling to yield 6.5% and the other to yield 8.5%. Why would one bond sell for a lower yield if the originator is the same on both bonds?
The difference between the yields of the U.S. government bonds is due to the maturity premium of the investments.
Which of the statements below is FALSE?
The payment of cash dividends to shareholders is a deductible expense for the company.
The holding period return (HPR) is the return measured from the initial purchase to the final sale of the investment without regard to the length of time the investment is held.
True
If the equation E(ri)= rf + (rf + [E(rm) − rf]× beta) is the linear equation for the Security Market Line, what portion represents the market risk premium for a stock that does not have a beta of 1.0?
[E(rm) − rf]
An investor's total investment set may be referred to as ________.
a financial portfolio
When interest rates are stated or given for loan repayments, it is assumed that they are ________ unless specifically stated otherwise.
annual percentage rates
When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.
coupon rate; discount to
Strong−form efficient markets theory proclaims that________.
current prices reflect the price and volume history of the stock, all publicly available information, and all private information
The ________ compensates the investor for the additional risk that the loan will not be repaid in full.
default premium
Stocks differ from bonds because:
firms pay bond cash flows prior to paying taxes while stock cash flows are after tax. the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase. bond cash flows are known while stock cash flows are uncertain. (Answer) All of the above!
APRs must be converted to the appropriate periodic rates when compounding is ________.
more frequent than once a year
Diversification is
not putting all of your eggs in one basket. a common investment strategy. spreading wealth over a variety of investment opportunities. All of the above
To determine the interest paid each compounding period, we take the advertised annual percentage rate and simply divide it by the ________ to get the appropriate periodic interest rate.
number of compounding periods per year
For most stocks, the correlation coefficient with other stocks is ________.
positive
The value of a financial asset is the ________.
present value of all of the future cash flows that will be received
Present value with periodic rates. Sam Hinds, a local dentist, is going to remodel the dental reception area and add two new workstations. He has contacted A-Dec, and the new equipment and cabinetry will cost $18,000. The purchase will be financed with an interest rate of 7.5%loan over 6years. What will Sam have to pay for this equipment if the loan calls for quarterlyquarterly payments (4per year) and monthly payments (12per year)?
quarterly - 938.28 monthly - 311.22
A typical practice of many companies is to distribute part of the earnings to shareholders through ________.
quarterly cash dividends
The ________ is the intercept on the Security Market Line.
risk-free rate
resent value with periodic rates.Sam Hinds, a local dentist, is going to remodel the dental reception area and add two new workstations. He has contacted A-Dec, and the new equipment and cabinetry will cost $25,000.The purchase will be financed with an interest rate of 9.5% loan over 10years. What will Sam have to pay for this equipment if the loan calls for semiannual payments (2per year) and monthly payments (12per year)? Compare the annual cash outflows of the two payments. Why does the monthlypayment plan have less total cash outflow each year?
semi annual - 1,963.76 monthly - 323.49 As more payments are made each year, the principal is repaid quickly and thus the interest expense is lower.
Most academic research supports markets as ________ efficient.
semi-strong-form
MicroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE?
the coupon rate is greater than the yield to maturity. The bonds are selling at a premium to the par value. The bond market currently requires a rate (yield) less than the coupon rate.
The two major components of the interest rate that cause rates to vary across different investment opportunities or loans are ________.
the default premium and the maturity premium
The real rate is 1.25% and inflation is 5.25%. What is the approximate nominal rate?
6.50%
Present Value $444 Interest Rate 3% Number of Periods 7 Future Value?
Future Value $546.06546.06