fin363 review
Bond portfolio immunization techniques balance ________ and ________ risk. A. price; reinvestment B. price; liquidity C. credit; reinvestment D. credit; liquidity
A. price; reinvestment
The ___ stage of the business cycle would be a good time to invest in firms engaged in natural resource extraction and processing such as minerals and petroleum. A) Peak B) Contraction C) Trough D) Expansion
A) Peak
A big increase in government spending is an example of __________. A) a demand shock B) a supply shock C) an unsurprising shock D) none of the above
A) a demand shock
Which of the following influence the cost of capital? A. All of these choices are correct. B. General economic conditions. C. Marketability of securities. D. Amount of financing the firm requires.
A. All of these choices are correct.
Other things being equal, a low ________ would be most consistent with a relatively high growth rate of firm earnings and dividends. A. dividend payout ratio B. degree of financial leverage C. variability of earnings D. inflation rate E. none of the above
A. dividend payout ratio
A trough is __________. A) a transition from an expansion in the business cycle to the start of a contraction B) a transition from a contraction in the business cycle to the start of an expansion C) only something used by farmers to feed pigs and is not a term in investments D) none of the above
B) a transition from a contraction in the business cycle to the start of an expansion
If you expect a larger interest rate increase than other market participants do, you would A) buy long-term bonds B) buy short-term bonds C) buy long-term government bonds only D) buy short-term government bonds only
B) buy short-term bonds
The most appropriate discount rate to use when applying a FCFF valuation model is the ___________. A. required rate of return on equity B. WACC C. risk-free rate D. A or C depending on the debt level of the firm E. none of the above
B. WACC
A bond's price volatility _________ at a/an _________ rate as maturity increases. A. increases; increasing B. increases; decreasing C. decreases; increasing D. decreases; decreasing
B. increases; decreasing
A version of earnings management that became common in the 1990s was A. when management makes changes in the operations of the firm to ensure that earning do not increase or decrease too rapidly. B. reporting "pro forma" earnings". C. when management makes changes in the operations of the firm to ensure that earning do not increase too rapidly. D. when management makes changes in the operations of the firm to ensure that earning do not decrease too rapidly. E. none of the above.
B. reporting "pro forma" earnings".
In a pure yield pickup swap, ________ bonds are exchanged for _________ bonds. A. longer duration; shorter duration B. shorter duration; longer duration C. high coupon; high yield D. low yield; high yield
B. shorter duration; longer duration
FCF and DDM valuations should be ____________ if the assumptions used are consistent. A. very different for all firms B. similar for all firms C. similar only for unlevered firms D. similar only for levered firms E. none of the above
B. similar for all firms
__________ the ratio of the number of people classified as unemployed to the total labor force.
C) The unemployment rate is
Assume the U.S. government was to decide to increase its budget deficit. This will cause __________ to increase. A) interest rates B) the output of the economy C) both a and b D) neither a nor b
C) both a and b
In the dividend discount model, _______ which of the following are not incorporated into the discount rate? A) real risk-free rate B) risk premium for stocks C) return on assets D) expected inflation rate E) none of the above
C) return on assets
An analyst starts by examining the broad economic environment and then considers the implications of the outside environment on the industry in which the firm operates. Finally, the firm's position within the industry is examined. This is called __________ analysis.
C) top-down
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 ___________________. A. interest rates increase B. interest rates stay the same C. interest rates fall D. one can't tell with the information given
C. interest rates fall
. The ______ is a common term for the market consensus value of the required return on a stock. A. dividend payout ratio B. intrinsic value C. market capitalization rate D. plowback rate E. none of the above
C. market capitalization rate
If a firm has a required rate of return equal to the ROE A. the firm can increase market price and P/E by retaining more earnings. B. the firm can increase market price and P/E by increasing the growth rate. C. the amount of earnings retained by the firm does not affect market price or the P/E. D. A and B. E. none of the above.
C. the amount of earnings retained by the firm does not affect market price or the P/E.
One of the problems with attempting to forecast stock market values is that A. there are no variables that seem to predict market return. B. the earnings multiplier approach can only be used at the firm level. C. the level of uncertainty surrounding the forecast will always be quite high. D. dividend payout ratios are highly variable. E. none of the above.
C. the level of uncertainty surrounding the forecast will always be quite high.
Which of the following would not be considered a supply shock? A) a change in the price of imported oil B) frost damage to the orange crop C) a change in the level of education of the average worker D) an increase in the level of government spending
D) an increase in the level of government spending
Where Y = yield to maturity, the duration of a perpetuity would be _________. A. Y B. Y/(1 + Y) C. 1/Y D. (1 + Y)/Y
D. (1 + Y)/Y
If a firm follows a low-investment-rate plan (applies a low plowback ratio), its dividends will be _______ now and _______ in the future than a firm that follows a high-reinvestment-rate plan. A. higher, higher B. lower, lower C. lower, higher D. higher, lower E. It is not possible to tell.
D. higher, lower
8. A forecast of bond returns based largely on a prediction of the yield curve at the end of the investment horizon is called a _________. A. contingent immunization B. dedication strategy C. duration analysis D. horizon analysis
D. horizon analysis
Earnings managements is A. when management makes changes in the operations of the firm to ensure that earning do not increase or decrease too rapidly. B. when management makes changes in the operations of the firm to ensure that earning do not increase too rapidly. C. when management makes changes in the operations of the firm to ensure that earning do not decrease too rapidly. D. the practice of using flexible accounting rules to improve the apparent profitability of the firm. E. none of the above.
D. the practice of using flexible accounting rules to improve the apparent profitability of the firm
Given its time to maturity the duration of a zero coupon bond is _________. A. higher when the discount rate is higher B. higher when the discount rate is lower C. lowest when the discount rate is equal to the risk free rate D. the same regardless of the discount rate
D. the same regardless of the discount rate
The _________ is the fraction of earnings reinvested in the firm. A. dividend payout ratio B. retention rate C. plowback ratio D. A and C E. B and C
E. B and C
Who popularized the dividend discount model, which is sometimes referred to by his name? A. Burton Malkiel B. Frederick Macaulay C. Harry Markowitz D. Marshall Blume E. Myron Gordon
E. Myron Gordon
Because the DDM requires multiple estimates, investors should A. carefully examine inputs to the model. B. perform sensitivity analysis on price estimates. C. not use this model without expert assistance. D. feel confident that DDM estimates are correct. E. both A and B.
E. both A and B.
American Outlook Inc. is issuing bonds to obtain the funding necessary to acquire a major competitor. Review of the balance sheets indicates that American Outlook has also issued preferred and common stock in the past. Which component cost(s) should American Outlook use in evaluating the financial cost of acquiring the new firm?. The weighted average component cost of common stock, preferred stock, and debt. B. The price the firm paid for its assets divided by their market value. C. Shareholders' equity. D. The cost of the new debt issue alone.
he weighted average component cost of common stock, preferred stock, and debt.
All other things equal, which of the following has the longest duration? A. A 30 year bond with a 10% coupon B. A 20 year bond with a 9% coupon C. A 20 year bond with a 7% coupon D. A 10 year zero coupon bond
A. A 30 year bond with a 10% coupon
_________ is equal to (common shareholders' equity/common shares outstanding). A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q E. none of the above
A. Book value per share
Bond prices are _______ sensitive to changes in yield when the bond is selling at a _______ initial yield to maturity. A. more; lower B. more; higher C. less; lower D. equally; higher or lower
A. more; lower
A bond portfolio manager notices a hump in the yield curve at the five year point. How might a bond manager take advantage of this event? A. Buy the 5 year bonds and short the surrounding maturity bonds B. Buy the 5 year bonds and buy the surrounding maturity bonds C. Short the 5 year bonds and short the surrounding maturity bonds D. Short the 5 year bonds and buy the surrounding maturity bonds
A. Buy the 5 year bonds and short the surrounding maturity bonds
What strategy might an insurance company employ to ensure that it will be able to meet the obligations of annuity holders? A. Cash flow matching B. Index tracking C. Yield pickup swaps D. Substitution swap
A. Cash flow matching
______________ is an important characteristic of the relationship between bond prices and yields. A. Convexity B. Concavity C. Complexity D. Linearity
A. Convexity
WACC is the most appropriate discount rate to use when applying a ______ valuation model. A. FCFF B. FCFE C. DDM D. A or C depending on the debt level of the firm E. P/E
A. FCFF
Which of the following combinations will produce the highest growth rate? Assume that the firm's projects offer a higher expected return than the market capitalization rate. A. a high plowback ratio and a high P/E ratio B. a high plowback ratio and a low P/E ratio C. a low plowback ratio and a low P/E ratio D. a low plowback ratio and a high P/E ratio E. Neither the plowback ratio nor the P/E ratio is related to a firm's growth.
A. a high plowback ratio and a high P/E ratio
The exchange of one bond for a bond with similar attributes but more attractively priced is called ______________. A. a substitution swap B. an intermarket spread swap C. rate anticipation swap D. pure yield pickup swap
A. a substitution swap
Because of convexity, when interest rates change the actual bond price will ____________ the bond price predicted by duration. A. always be higher than B. sometimes be higher than C. always be lower than D. sometimes be lower than
A. always be higher than
If an investment returns a higher percentage of your money back sooner it will ______. A. be less price volatile B. have a higher credit rating C. be less liquid D. have a higher modified duration
A. be less price volatile
As a result of bond convexity an increase in a bond's price when yield to maturity falls is ________ the price decrease resulting from an increase in yield of equal magnitude. A. greater than B. equivalent to C. smaller than D. The answer is indeterminate.
A. greater than
High P/E ratios tend to indicate that a company will _______, ceteris paribus. A. grow quickly B. grow at the same speed as the average company C. grow slowly D. not grow E. none of the above
A. grow quickly
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 ___________________. A. interest rates increase B. interest rates stay the same C. interest rates fall D. one can't tell with the information given
A. interest rates increase
The most appropriate discount rate to use when applying a FCFE valuation model is the ___________. A. required rate of return on equity B. WACC C. risk-free rate D. A or C depending on the debt level of the firm E. none of the above
A. required rate of return on equity
39. The duration rule always ________ the value of a bond following a change in its yield. A. under-estimates B. provides an unbiased estimate of C. over-estimates D. The estimated price may be biased either upward or downward, depending on whether the bond is trading at a discount or a premium
A. under-estimates
The goal of fundamental analysts is to find securities A. whose intrinsic value exceeds market price. B. with a positive present value of growth opportunities. C. with high market capitalization rates. D. all of the above. E. none of the above.
A. whose intrinsic value exceeds market price.
The duration of a 5-year zero coupon bond is ____ years. A. 4.5 B. 5.0 C. 5.5 D. 3.5
B. 5.0
According to James Tobin, the long run value of Tobin's Q should tend toward A. 0. B. 1. C. 2. D. infinity. E. none of the above.
B. 1
________ are analysts who use information concerning current and prospective profitability of a firms to assess the firm's fair market value. A. Credit analysts B. Fundamental analysts C. Systems analysts D. Technical analysts E. Specialists
B. Fundamental analysts
_______ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders. A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q E. None of the above
B. Liquidation value per share
. Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy? A. Switch from low duration to high duration bonds. B. Switch from high duration to low duration bonds. C. Switch from high grade to low grade bonds. D. Switch from low coupon to high coupon bonds
B. Switch from high duration to low duration bonds.
If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to A. V0 = (Expected Dividend Per Share in Year 1)/k B. V0 = (Expected EPS in Year 1)/k C. V0 = (Treasury Bond Yield in Year 1)/k D. V0 = (Market return in Year 1)/k E. none of the above
B. V0 = (Expected EPS in Year 1)/k
A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has _________. A. an anticipated earnings growth rate which is less than that of the average firm B. a dividend yield which is less than that of the average firm C. less predictable earnings growth than that of the average firm D. greater cyclicality of earnings growth than that of the average firm E. none of the above.
B. a dividend yield which is less than that of the average firm
A portfolio manager believes interest rates will drop and decides to sell short duration bonds and buy long duration bonds. This is an example of __________ swap. A. a pure yield pick up B. a rate anticipation C. a substitution D. an inter-market spread
B. a rate anticipation
When interest rates increase, the duration of a 20-year bond selling at a premium _________. A. increases B. decreases C. remains the same D. increases at first, then declines
B. decreases
As compared with equivalent maturity bonds selling at par, deep discount bonds will have ________. A. greater reinvestment risk B. greater price volatility C. less call protection D. shorter average maturity
B. greater price volatility
The _______ is defined as the present value of all cash proceeds to the investor in the stock. A. dividend payout ratio B. intrinsic value C. market capitalization rate D. plowback ratio E. none of the above
B. intrinsic value
The duration of a perpetuity varies _______ with interest rates. A. directly B. inversely C. convexly D. randomly
B. inversely
Which of the following is the best measure of the floor for a stock price? A. book value B. liquidation value C. replacement cost D. market value E. Tobin's Q
B. liquidation value
Pension fund managers can generally best bring about an effective reduction in their interest rate risk by holding ___________________. A. long maturity bonds B. long duration bonds C. short maturity bonds D. short duration bonds
B. long duration bonds
All else equal, bond price volatility is greater for __________. A. higher coupon rates B. lower coupon rates C. shorter maturity D. lower default risk
B. lower coupon rates
Historically, P/E ratios have tended to be _________. A. higher when inflation has been high B. lower when inflation has been high C. uncorrelated with inflation rates but correlated with other macroeconomic variables D. uncorrelated with any macroeconomic variables including inflation rates E. none of the above
B. lower when inflation has been high
All other things equal, a bond's duration is _________. A. higher when the coupon rate is higher B. lower when the coupon rate is higher C. the same when the coupon rate is higher D. indeterminate when the coupon rate is high
B. lower when the coupon rate is higher
All other things equal, a bond's duration is _________. A. higher when the yield to maturity is higher B. lower when the yield to maturity is higher C. the same at all yield rates D. indeterminable when the yield to maturity is high
B. lower when the yield to maturity is higher
In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at a time horizon equal to ____. A. the average bond maturity in the portfolio B. the duration of the portfolio C. the difference between the shortest duration and longest duration of the individual bonds in the portfolio D. the average of the shortest duration and longest duration of the bonds in the portfolio
B. the duration of the portfolio
Convexity of a bond is ___________. A. the same as horizon analysis B. the rate of change of the price-yield curve divided by bond price C. a measure of bond duration D. none of the above
B. the rate of change of the price-yield curve divided by bond price
Investors want high plowback ratios A. for all firms. B. whenever ROE > k. C. whenever k > ROE. D. only when they are in low tax brackets. E. whenever bank interest rates are high.
B. whenever ROE > k.
For most firms, P/E ratios and risk A. will be directly related. B. will have an inverse relationship. C. will be unrelated. D. will both increase as inflation increases. E. none of the above.
B. will have an inverse relationship.
How a company raises capital and how they budget or invest it are considered independently. The financing department is responsible for keeping costs low and using a balance of funding sources. In the short term, a company may overemphasize the most recently issued capital, but in the long run, the firm will ascribe to target weights for each capital type. The investment decision should be made assuming a weighted average cost of capital including each of the different sources of capital and long-run target weights. . risk-free rate. B. net present value of the project to be financed. C. percentage of financing coming from each financing source. D. company's product.
C. percentage of financing coming from each financing source.
All other things equal, which of the following has the longest duration? A. A 20 year bond with a 10% coupon yielding 10% B. A 20 year bond with a 10% coupon yielding 11% C. A 20 year zero coupon bond yielding 10% D. A 20 year zero coupon bond yielding 11%
C. A 20 year zero coupon bond yielding 10%
The pioneer of the duration concept was _________. A. Eugene Fama B. John Herzog C. Frederick Macaulay D. Harry Markowitz
C. Frederick Macaulay
The present value of growth opportunities (PVGO) is equal to I) the difference between a stock's price and its no-growth value per share. II) the stock's price III) zero if its return on equity equals the discount rate. IV) the net present value of favorable investment opportunities. A. I and IV B. II and IV C. I, III, and IV D. II, III, and IV E. III and IV
C. I, III, and IV
The duration is independent of the coupon rate only for which one of the following? A. Discount bonds B. Premium bonds C. Perpetuities D. Short term bonds
C. Perpetuities
When bonds sell above par, what is the relationship of price sensitivity to rising interest rates? A. Price volatility increases at an increasing rate B. Price volatility increases at a decreasing rate C. Price volatility decreases at a decreasing rate D. Price volatility decreases at an increasing rate
C. Price volatility decreases at a decreasing rate
Which of the following would tend to reduce a firm's P/E ratio? A. The firm significantly decreases financial leverage B. The firm increases return on equity for the long term C. The level of inflation is expected to increase to double-digit levels D. The rate of return on Treasury bills decreases E. None of the above
C. The level of inflation is expected to increase to double-digit levels
The historical yield spread between the AA bond and the AAA bond has been 25 basis points. Currently the spread is only 9 basis points. If you believe the spread will soon return to its historical levels you should ________________________. A. buy the AA and short the AAA B. buy both the AA and the AAA C. buy the AAA and short the AA D. short both the AA and the AAA
C. buy the AAA and short the AA
GAAP allows A. no leeway to manage earnings. B. minimal leeway to manage earnings. C. considerable leeway to manage earnings. D. earnings management if it is beneficial in increasing stock price. E. none of the above.
C. considerable leeway to manage earnings.
Dividend discount models and P/E ratios are used by __________ to try to find mispriced securities. A. technical analysts B. statistical analysts C. fundamental analysts D. dividend analysts E. psychoanalysts
C. fundamental analysts
Since 1955, Treasury bond yields and earnings yields on stocks were _______. A. identical B. negatively correlated C. positively correlated D. uncorrelated
C. positively correlated
Low P/E ratios tend to indicate that a company will _______, ceteris paribus. A. grow quickly B. grow at the same speed as the average company C. grow slowly D. P/E ratios are unrelated to growth E. none of the above
C. grow slowly
The dividend discount model A. ignores capital gains. B. incorporates the after-tax value of capital gains. C. includes capital gains implicitly. D. restricts capital gains to a minimum. E. none of the above.
C. includes capital gains implicitly.
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 _______________________. A. interest rates fall B. credit spreads fall C. interest rates rise D. the price of all fixed income securities rises
C. interest rates rise
Banks and other financial institutions can best manage interest rate risk by _____________. A. maximizing the duration of assets and minimizing the duration of liabilities B. minimizing the duration of assets and maximizing the duration of liabilities C. matching the durations of their assets and liabilities D. matching the maturities of their assets and liabilities
C. matching the durations of their assets and liabilities
Duration facilitates the comparison of bonds with differing ___________. A. default risk B. conversion ratios C. maturities D. yields to maturity
C. maturities
Target date immunization would primarily be of interest to _________. A. banks B. mutual funds C. pension funds D. individual investors
C. pension funds
Duration is a concept that is useful in assessing a bond's _________. A. credit risk B. liquidity risk C. price volatility D. convexity risk
C. price volatility
36. A bond swap made in response to forecasts of interest rate changes is called ______. A. a substitution swap B. an intermarket spread swap C. rate anticipation swap D. pure yield pickup swap
C. rate anticipation swap
In the dividend discount model, _______ which of the following are not incorporated into the discount rate? A. real risk-free rate B. risk premium for stocks C. return on assets D. expected inflation rate E. none of the above
C. return on assets
An increase in a bond's yield to maturity results in a price decline that is ________ the price increase resulting from a decrease in yield of equal magnitude. A. greater than B. equivalent to C. smaller than D. The answer is indeterminate
C. smaller than
The duration of a portfolio of bonds can be calculated as _______________. A. the coupon weighted average of the durations of the individual bonds in the portfolio B. the yield weighted average of the durations of the individual bonds in the portfolio C. the value weighed average of the durations of the individual bonds in the portfolio D. averages of the durations of the longest and shortest duration bonds in the portfolio
C. the value weighed average of the durations of the individual bonds in the portfolio
All other things equal, which of the following has the shortest duration? A. A 30 year bond with a 10% coupon B. A 20 year bond with a 9% coupon C. A 20 year bond with a 7% coupon D. A 10 year zero coupon bond
D. A 10 year zero coupon bond
The Gordon model A. is a generalization of the perpetuity formula to cover the case of a growing perpetuity. B. is valid only when g is less than k. C. is valid only when k is less than g. D. A and B. E. A and C
D. A and B.
59. Which of the following set of conditions will result in a bond with the greatest price volatility? A. A high coupon and a short maturity. B. A high coupon and a long maturity. C. A low coupon and a short maturity. D. A low coupon and a long maturity.
D. A low coupon and a long maturity.
Which of the following is not a type of bond swap used in active portfolio management? A. Inter-market spread swap B. Substitution swap C. Rate anticipation swap D. Asset-liability swap
D. Asset-liability swap
The required rate of return on equity is the most appropriate discount rate to use when applying a ______ valuation model. A. FCFF B. FCFE C. DDM D. B or C E. P/E
D. B or C
________ is equal to the total market value of the firm's common stock divided by (the replacement cost of the firm's assets less liabilities). A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q E. None of the above.
D. Tobin's Q
A portfolio manager sells treasury bonds and buys corporate bonds because the spread between corporate and Treasury bond yields is higher than its historical average. This is an example of __________ swap. A. a pure yield pick up B. a rate anticipation C. a substitution D. an intermarket spread
D. an intermarket spread
Many stock analysts assume that a mispriced stock will A. immediately return to its intrinsic value. B. return to its intrinsic value within a few days. C. never return to its intrinsic value. D. gradually approach its intrinsic value over several years. E. none of the above.
D. gradually approach its intrinsic value over several years.
C. rate anticipation swap
D. pure yield pickup swap
The most popular approach to forecasting the overall stock market is to use A. the dividend multiplier. B. the aggregate return on assets. C. the historical ratio of book value to market value. D. the aggregate earnings multiplier. E. Tobin's Q.
D. the aggregate earnings multiplier.
According to Peter Lynch, a rough rule of thumb for security analysis is that A. the growth rate should be equal to the plowback rate. B. the growth rate should be equal to the dividend payout rate. C. the growth rate should be low for emerging industries. D. the growth rate should be equal to the P/E ratio. E. none of the above.
D. the growth rate should be equal to the P/E ratio.
Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to ____________. A. the dollar amount of the investment received in year t B. the percentage of the future value of the investment received in year t C. the present value of the dollar amount of the investment received in year t D. the percentage of the total present value of the investment received in year t
D. the percentage of the total present value of the investment received in year t
An investor who expects declining interest rates would maximize their capital gain by purchasing a bond that has a ___ coupon and a ___ term to maturity. A. low; long B. high; short C. high; long D. zero; long
D. zero; long
