Investments

Cindy owns a bond with a par value of $1,000. The bond matures in 5 years. The bond has a 7% semiannual coupon. Comparable debt yields 8%. What is the intrinsic value of Cindy's bond?

$959.45

The standard deviation of variable X is .20. The standard deviation of variable Y is 0.12. The covariance between X an Y is 0.0096. This correlation between X and Y is which of the following? A. .20 B. .24 C. .36 D. .40

.0096 ÷ (.20 x .12) = .40

If a fund has a beta of 2.4 in relation to the S&P 500, how much would the fund be expected to move if the S&P 500 decreased by 10%? A. Lose 2.4% B. Lose 10% C. Lose 24% D. Lose 76% E. Lose 14%

10% x 2.4 = 24% The S&P decreased.

If a fund has a beta of 1.05 in relation to the S&P 500, how much would the fund be expected to increase if the S&P 500 increased by 15%? A. 14.25% B. 15% C. 15.75% D. 22.5%

15% x 1.05 = 15.75%

Stock ABC has an average (mean) return of 16% with a standard deviation of 16%. Within what range could an investor expect a return to fall 68% of the time? A. -16% to 32% B. 0% to 32% C. 16% to 32% D. 0% to 16% E. 32%

16% ± 16% 0% to 32%

The weighted beta of the following portfolio is which of the following? Weighting Beta Stock 1 25% 1.2 Stock 2 35% .5 Stock 3 40% .9 A. .815 B. .835 C. .845 D. .85

25% x 1.2 = .300 35% x .5 = .175 40% x .9 = .360 .835

Which of the following is true about I bonds? I. Series I bonds earn interest up to 30 years. II. Series I bonds accrue earnings based on both a fixed rate of return and the semiannual inflation rate. III. The special tax benefits available for education savings with Series EE bonds also apply to Series I bonds. IV. The difference between the purchase price and the redemption value is taxable interest (redeemed or matures).

All of the above. I bond earnings are based on both a fixed rate of return and the semiannual inflation rate. I bonds are taxed the same way EEs are taxed. Like EE bonds, the I bonds only earn interest for up to 30 years.

Which of the following is true about GNMAs? - If mortgage rates decrease, prepayment may increase. - The amount received each month can vary. - The certificates are guaranteed by the US Government. - Payments include interest and principal. - The realized yield on the bonds can be somewhat variable.

All of the stated. The amount received each month and the realized yield on the certificates are somewhat variable because of principal prepayments.

Which of the following is not covered by the indenture agreement? - Bond Quality - Amount of issue - Property Pledge - Call provisions

Bond quality. The rating agencies rate the bonds for quality.

Which of the following investments is least risky? Stock X 20% average return standard deviation 3 Stock Y 25% average return standard deviation 5 Stock Z 15% avergage return standard deviation 2 A. Stock X because it has a lower coefficient of variation. B. Stock Y because it has a higher coefficient of variation. C. Stock Z because it has a lower coefficient of variation. D. Stock X because it has a higher coefficient of variation.

CV = SD ÷ mean (average return) X. 3% ÷ 20% = .15 Y. 5% ÷ 25% = .20 Z. 2% ÷ 15% = .13 Z has the lowest coefficient of variation.

Which of the following is true about EE bonds? - The are marketable investments. - They are purchased at their face value. - Investors can declare the interest annually or at redemption. - Interest is subject to federal income tax. - Interest is paid semiannually.

EEs are not marketable investments. They are purchased at full face value.

The prior question (#14) is an example of which of the following? A. Currency futures B. Exchange rate risk C. Devaluation D. Revaluation

Exchange rate risk Nasty. This is an example of the uncertainty of returns after the investor converts back to the original currency. Depending on your perspective, both answers C and D are correct. Two things have occurred. The Mexican peso has been devalued versus the U.S. dollar, and the U.S. dollar has revalued versus the peso, so the answer must be exchange rate risk - a forced answer.

If you wanted to purchase a mutual fund that would have the lowest correlation with a U.S. common stock fund, which fund would you select? A. Global fund B. International fund C. Gold fund D. Emerging markets fund

Gold fund The correlation coefficient between the U.S. market and an emerging markets fund is about 1. Gold continues to have a near zero correlation. Emerging markets: Less developed countries Global: World (including U.S.) International: Non-U.S./foreign only

The risk level quantification of beta is which of the following? I. Volatility II. Systematic risk III. Non-systematic risk IV. Unsystematic risk V. Total risk

I, II III, IV, V refer to standard deviation.

Which of the following is true? I. A negative correlation coefficient will reduce the portfolio risk. II. A negative correlation coefficient will increase the portfolio risk. III. A negative correlation coefficient will make the beta negative. IV. A negative correlation coefficient will increase the portfolio standard deviation. A. I, III B. II, III C. II, IV D. III, IV E. I

I, III A negative correlation will reduce the portfolio beta. The formula for beta includes the correlation coefficient. When it is negative, the beta will be negative.

U.S. Treasury securities are subject to which of the following risks? I. Credit Risk II. Purchasing Power Risk III. Marketability Risk IV. Default Risk

II At this time very little credit, marketability, and default risk exists.

David invests $10,000 (U.S. dollars) in Tex Mex Foods (Mexican Exchange) when the exchange rate is 29 pesos to the dollar. Tex Mex increases in value by 20%. If David sells Tex Mex when the exchange rate is 30 pesos to the U.S. dollar, what will he receive in U.S. dollars? A. $10,900 B. $11,600 C. $12,100 D. $12,414

Initially invested $10,000 x 29 = 290,000 Pesos + 20% increase in Tex Mex value 58,000 Pesos 348,000 Pesos Convert to U.S. dollars 348,000 ÷ 30 = $11,600

Which of the following is not a source of systematic risk? A. Purchasing power risk B. Liquidity risk C. Interest rate risk D. Market risk E. Exchange rate risk

Liquidity risk The answer is PRIME (answers A, C, D & E).

Which of the following investments (rate of returns shown) has the highest standard deviation? Year Stock #1 Stock #2 Stock #3 1 -10% 10% 0% 2 20% 15% 20% 3 30% 20% 20% 4 -15% -10% 0% A. Stock #1 B. Stock #2 C. Stock #3

Refer to keystrokes in the lesson. You must know how to write the keystrokes as they will NOT be given on the exam. Stock #1: 22.13 Stock #2: 13.15 Stock #3: 11.55

Which of the following is the best known bond rating company? - GNMA - S&P - A.M. Best - BRC -FNMA

Standard & Poor's (S&P) and Moody's are the best known bond rating companies.

At the beginning of the year, one U.S. dollar could buy 80 Japenese yen. At the end of the year, one U.S. dollar could buy 100 Japanese yen. What happened to the U.S. dollar during the year? A. The U.S. dollar was revalued. B. The U.S. dollar was devalued. C. The U.S. dollar was inflated. D. The U.S. dollar was deflated

The U.S. dollar was revalued. By definition, the U.S. dollar was revalued. Revaluation refers to an increase in the currency's value.

Mrs. Lanier (39.6% federal tax bracket) lives in New York City. She bought EE education bonds for her grandchildren (who also live in New York City) some years ago. If she redeems the bonds for her grandchildren's education, taxation will be which of the following? A. Interest taxable at federal, state and local rates (her bracket) B. Interest taxable at federal, state, and local rates (her grandchildren's bracket) C. Interest taxable at federal rates (her bracket) D. Interest taxable at state and local rates (her bracket) E. No tax

The correct answer is: C In order to qualify for the education interest exclusion, the taxpayer generally must be the parent. The grandparent can take the exclusion only if the grandchild is the grandparent's dependent (can't make that assumption). At a 39.6% federal tax bracket, her income exceeds the EE phaseout. The bond's interest is subject to federal but not state and local taxes.

When are two investments perfectly positively correlated? A. When the covariance is +1.0 B. When the correlation coefficient is 0.0 C. When the covariance is -1.0 D. When the correlation coefficient is +1.0

When the correlation coefficient is +1.0

Does a covariance of 10 of two stocks have any meaning? A. Yes, the correlation is positive. B. Yes, the correlation is very high. C. No, it is just a number. D. No, only correlation has meaning

Yes, the correlation is positive. Without other data there is no way to answer B. Covariance has a meaning. It is used in the formula calculation.