Question 1

If you paid $6,000 for a two-year maturity bond with a face value of $8,640 and a zero percent coupon rate, what would be your rate of return?

Accepted Answer

A) 25% 
B) 20% 
C) 15% 
D) 12% 
E) 8% 
A) 25% 
B) 20% 
C) 15% 
D) 12% 
E) 8%

Question 2

Assume an investment costs you $8,800 right now and promises to pay back $5,500 after one year and another $4,840 after the second year.What is the highest market interest rate at which this investment project is still profitable?

Accepted Answer

A) 15% 
B) 13% 
C) 11% 
D) 9% 
E) 7% 
A) 15% 
B) 13% 
C) 11% 
D) 9% 
E) 7%

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) the timing of large stock market swings can often be predicted 
B) changes in stock values tend to affect the value of pensions for many people 
C) rates of return in financial markets feed back into goods markets 
D) asset prices and interest rates are inversely related 
E) many people see stock market volatility as a sign of market efficiency 
A) the timing of large stock market swings can often be predicted 
B) changes in stock values tend to affect the value of pensions for many people 
C) rates of return in financial markets feed back into goods markets 
D) asset prices and interest rates are inversely related 
E) many people see stock market volatility as a sign of market efficiency

Question 4

If a consol (perpetual bond) pays $250 a year and yields 5%, what is its present discounted value?

Accepted Answer

A) $5,000 
B) $2,500 
C) $1,250 
D) $1,000 
E) it cannot be determined with this information 
A) $5,000 
B) $2,500 
C) $1,250 
D) $1,000 
E) it cannot be determined with this information

Question 5

If we look at the interest rates on three-month Treasury bills and ten-year government bonds over the last four decades, we can see that

Accepted Answer

A) there is no clear pattern 
B) they are both volatile but follow similar patterns 
C) ten-year bonds have always had a lower yield than three-month Treasury bills 
D) interest rates on average were lower in the 1980s than they were after 2000 
E) interest rates were at their highest around 2010 
A) there is no clear pattern 
B) they are both volatile but follow similar patterns 
C) ten-year bonds have always had a lower yield than three-month Treasury bills 
D) interest rates on average were lower in the 1980s than they were after 2000 
E) interest rates were at their highest around 2010

Question 6

If the market interest rate stays at i = 10% over the next four years, what is the net present discounted value of a bond that pays $100 in coupon payments for each of the next four years and has a face value of $1,000?

Accepted Answer

A) $1,100 
B) $1,000 
C) $980 
D) $900 
E) $800 
A) $1,100 
B) $1,000 
C) $980 
D) $900 
E) $800

Question 7

Assume you are promised that $40,000 will be paid to you three years from now.If the market interest rates remains i = 10% over these three years, what is the present discounted value of the $40,000?

Accepted Answer

A) roughly $44,000 
B) roughly $38,240 
C) roughly $36,330 
D) roughly $32,550 
E) roughly $30,050 
A) roughly $44,000 
B) roughly $38,240 
C) roughly $36,330 
D) roughly $32,550 
E) roughly $30,050

Question 8

The efficient-markets hypothesis states that

Accepted Answer

A) you can consistently outperform the stock market by efficient use of information 
B) financial markets are much more efficient than goods markets 
C) stock markets are only efficient if experts manage people's portfolios 
D) stock prices rarely change significantly based on unexpected new information 
E) none of the above 
A) you can consistently outperform the stock market by efficient use of information 
B) financial markets are much more efficient than goods markets 
C) stock markets are only efficient if experts manage people's portfolios 
D) stock prices rarely change significantly based on unexpected new information 
E) none of the above

Question 9

Which of the following is generally TRUE for the stock market?

Accepted Answer

A) it takes time for new information to be reflected in new stock values 
B) a stock's dividend is the net present value of the stock's price 
C) stock market returns tend to be lower on average than the returns on Treasury bills 
D) stock market prices tend to fall when long-term interest rates rise 
E) stock market prices can be accurately predicted by carefully observing their long-term trend 
A) it takes time for new information to be reflected in new stock values 
B) a stock's dividend is the net present value of the stock's price 
C) stock market returns tend to be lower on average than the returns on Treasury bills 
D) stock market prices tend to fall when long-term interest rates rise 
E) stock market prices can be accurately predicted by carefully observing their long-term trend

Question 10

Security A is a one-year maturity bond with a coupon rate of 10% and a face value of $2,000; Security B is a consol that pays $200 for each year you own it.If the market interest rate falls from 10% to 5%, by how much do the values of these two securities change?

Accepted Answer

A) the value of A increases by $95; the value of B increases by $2,000 
B) the value of A increases by $95; the value of B increases by $1,000 
C) the value of A increases by $100; the value of B increases by $100 
D) the value of A increases by $200; the value of B increases by $1,000 
E) the value of A increases by $200; the value of B increases by $2,000 
A) the value of A increases by $95; the value of B increases by $2,000 
B) the value of A increases by $95; the value of B increases by $1,000 
C) the value of A increases by $100; the value of B increases by $100 
D) the value of A increases by $200; the value of B increases by $1,000 
E) the value of A increases by $200; the value of B increases by $2,000

Question 11

What would be true if stock prices did NOT follow a random walk?

Accepted Answer

A) stock markets would work much more efficiently 
B) stock markets would outperform bond markets 
C) bond markets would outperform stock markets 
D) financial investors would not be able to outperform the stock market 
E) some financial investors could benefit by taking advantage of opportunities that have not been realized by others 
A) stock markets would work much more efficiently 
B) stock markets would outperform bond markets 
C) bond markets would outperform stock markets 
D) financial investors would not be able to outperform the stock market 
E) some financial investors could benefit by taking advantage of opportunities that have not been realized by others

Question 12

Assume you put $8,000 in a savings account and leave it there for four years.If you get a compounded yearly interest rate of 5% the first two years but only 4% the last two years, how much will be in the account after the four years?

Accepted Answer

A) $9,640 
B) $9,540 
C) $9.340 
D) $9,240 
E) $9,040 
A) $9,640 
B) $9,540 
C) $9.340 
D) $9,240 
E) $9,040

Question 13

Assume you bought rental property for $100,000.Approximately how much would you have to charge in monthly rent to get a 9% rate of return?

Accepted Answer

A) $1,000 
B) $900 
C) $750 
D) $600 
E) $450 
A) $1,000 
B) $900 
C) $750 
D) $600 
E) $450

Question 14

Generally one can expect the yield of a corporate bond to be higher

Accepted Answer

A) if the maturity of a bond is shorter 
B) if the bond is more liquid 
C) if the bond is less liquid 
D) if the corporation has a better rating 
E) if the earnings of the corporation are higher 
A) if the maturity of a bond is shorter 
B) if the bond is more liquid 
C) if the bond is less liquid 
D) if the corporation has a better rating 
E) if the earnings of the corporation are higher

Question 15

If the market interest rate is 10%, what is the price of a one-year maturity bond with a 15% coupon rate and a face value of $4,400?

Accepted Answer

A) $4,000 
B) $4,400 
C) $4,600 
D) $4,840 
E) $5,060 
A) $4,000 
B) $4,400 
C) $4,600 
D) $4,840 
E) $5,060

Question 16

Assume you would like to buy a stock that promises to pay a fixed dividend of $120 per year.If the current market interest rate is 6%, how much would you pay for this stock?

Accepted Answer

A) $7,720 
B) $7,200 
C) $4,800 
D) $2,000 
E) $720 
A) $7,720 
B) $7,200 
C) $4,800 
D) $2,000 
E) $720

Question 17

If interest rates in the U.S.increase but they stay the same in the rest of the world, then

Accepted Answer

A) the exchange rate of foreign currency to U.S. dollars will increase 
B) the exchange rate of U.S. dollars to foreign currency will increase 
C) the U.S. dollar will depreciate 
D) U)S. bond prices are likely to increase 
E) U)S. stock market values are likely to increase sharply 
A) the exchange rate of foreign currency to U.S. dollars will increase 
B) the exchange rate of U.S. dollars to foreign currency will increase 
C) the U.S. dollar will depreciate 
D) U)S. bond prices are likely to increase 
E) U)S. stock market values are likely to increase sharply

Question 18

Payments made on government bonds in periodic instances (once a year, for example) are called

Accepted Answer

A) face values 
B) par values 
C) dividends 
D) coupon payments 
E) none of the above 
A) face values 
B) par values 
C) dividends 
D) coupon payments 
E) none of the above

Question 19

The expectations theory of the term structure says that an upward-sloping yield curve means that financial markets expect

Accepted Answer

A) yields on corporate bonds to be higher than yields on government bonds 
B) stock market values to increase drastically 
C) interest rates to go up in the future 
D) the economy to go into a recession 
E) none of the above 
A) yields on corporate bonds to be higher than yields on government bonds 
B) stock market values to increase drastically 
C) interest rates to go up in the future 
D) the economy to go into a recession 
E) none of the above

Question 20

The concept of arbitrage

Accepted Answer

A) applies to the stock, bond, and foreign currency markets 
B) only applies to the stock market 
C) only applies to the stock and bond markets 
D) only applies to the foreign currency market 
E) doesn't apply to any of these markets 
A) applies to the stock, bond, and foreign currency markets 
B) only applies to the stock market 
C) only applies to the stock and bond markets 
D) only applies to the foreign currency market 
E) doesn't apply to any of these markets

Exam 19: Financial markets and asset prices

If you paid $6,000 for a two-year maturity bond with a face value of $8,640 and a zero percent coupon rate, what would be your rate of return?

Assume an investment costs you $8,800 right now and promises to pay back $5,500 after one year and another $4,840 after the second year.What is the highest market interest rate at which this investment project is still profitable?

Which of the following statements is FALSE?

If a consol (perpetual bond) pays $250 a year and yields 5%, what is its present discounted value?

If we look at the interest rates on three-month Treasury bills and ten-year government bonds over the last four decades, we can see that

If the market interest rate stays at i = 10% over the next four years, what is the net present discounted value of a bond that pays $100 in coupon payments for each of the next four years and has a face value of $1,000?

Assume you are promised that $40,000 will be paid to you three years from now.If the market interest rates remains i = 10% over these three years, what is the present discounted value of the $40,000?

The efficient-markets hypothesis states that

Which of the following is generally TRUE for the stock market?

Security A is a one-year maturity bond with a coupon rate of 10% and a face value of $2,000; Security B is a consol that pays $200 for each year you own it.If the market interest rate falls from 10% to 5%, by how much do the values of these two securities change?

What would be true if stock prices did NOT follow a random walk?

Assume you put $8,000 in a savings account and leave it there for four years.If you get a compounded yearly interest rate of 5% the first two years but only 4% the last two years, how much will be in the account after the four years?

Assume you bought rental property for $100,000.Approximately how much would you have to charge in monthly rent to get a 9% rate of return?

Generally one can expect the yield of a corporate bond to be higher

If the market interest rate is 10%, what is the price of a one-year maturity bond with a 15% coupon rate and a face value of $4,400?

Assume you would like to buy a stock that promises to pay a fixed dividend of $120 per year.If the current market interest rate is 6%, how much would you pay for this stock?

If interest rates in the U.S.increase but they stay the same in the rest of the world, then

Payments made on government bonds in periodic instances (once a year, for example) are called

The expectations theory of the term structure says that an upward-sloping yield curve means that financial markets expect

The concept of arbitrage

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