Question 1

Kessen Inc.'s bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?

Accepted Answer

A)  $923.22 
B)  $946.30 
C)  $969.96 
D)  $994.21 
E)  $1,019.06

Question 2

The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?

Accepted Answer

A)  exactly 8% of the first monthly payment represents interest. 
B)  the monthly payments will decline over time. 
C)  a smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment. 
D)  the total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity. 
E)  the amount representing interest in the first payment would be higher if the nominal interest rate were 6% rather than 8%.

Question 4

Zacher Co.'s stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return?

Accepted Answer

A)  11.36% 
B)  11.65% 
C)  11.95% 
D)  12.25% 
E)  12.55%

Question 5

Southwestern Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Woodburn Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Woodburn versus the rate charged by Southwestern?

Accepted Answer

A)  0.52% 
B)  0.44% 
C)  0.36% 
D)  0.30% 
E)  0.24%

Question 6

The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

Accepted Answer

A) True 
 B)False

Question 7

Diversification will normally reduce the riskiness of a portfolio of stocks.

Accepted Answer

A) True 
 B)False

Question 8

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual) coupon interest rate?

Accepted Answer

A)  6.27% 
B)  6.60% 
C)  6.95% 
D)  7.32% 
E)  7.70%

Question 9

You expect to receive $5,000 in 25 years. How much is it worth today if the discount rate is 5.5%?

Accepted Answer

A)  $1,067.95 
B)  $1,124.16 
C)  $1,183.33 
D)  $1,245.61 
E)  $1,311.17

Question 10

Portfolio A has but one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion to its market value. Because of its diversification, Portfolio B will by definition be riskless.

Accepted Answer

A) True 
 B)False

Question 11

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.

Accepted Answer

A) True 
 B)False

Question 12

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Accepted Answer

A)  the stock's dividend yield is 5%. 
B)  the price of the stock is expected to decline in the future. 
C)  the stock's required return must be equal to or less than 5%. 
D)  the stock's price one year from now is expected to be 5% above the current price. 
E)  the expected return on the stock is 5% a year.

Question 13

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 14

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Accepted Answer

A)  $8,509 
B)  $8,957 
C)  $9,428 
D)  $9,924 
E)  $10,446

Question 15

You sold your motorcycle and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?

Accepted Answer

A)  $5,987 
B)  $6,286 
C)  $6,600 
D)  $6,930 
E)  $7,277

Question 16

Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

Accepted Answer

A)  standard deviation; correlation coefficient. 
B)  beta; variance. 
C)  coefficient of variation; beta. 
D)  beta; beta. 
E)  variance; correlation coefficient.

Question 17

Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, its standard deviation.

Accepted Answer

A) True 
 B)False

Question 18

Macintosh Lumber believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock?
 $\begin{array}{lcc}
\text { State of } & \begin{array}{c}
\text { Probability } \
\text { of State }
\end{array} & \begin{array}{c}
\text { Stock's } \
\text { Expected }
\end{array} \

\text { the Economy } &\text { Occurring } &\text { Return }\
\text { Boom } & 0.45 & 25 \% \
\text { Normal }  & 0.50 & 15 \% \
\text { Repeseion }& 0.05 & 5 \%
\end{array}$

Accepted Answer

A)  0.2839 
B)  0.3069 
C)  0.3299 
D)  0.3547 
E)  0.3813

Question 19

Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has 1/3 of its value invested in each stock. Each stock has a standard deviation of 25%, and their returns are independent of one another, i.e., the correlation coefficients between each pair of stocks is zero. Assuming the market is in equilibrium, which of the following statements is CORRECT?

Accepted Answer

A)  portfolio p's expected return is equal to the expected return on stock a. 
B)  portfolio p's expected return is less than the expected return on stock b. 
C)  portfolio p's expected return is equal to the expected return on stock b. 
D)  portfolio p's expected return is greater than the expected return on stock c. 
E)  portfolio p's expected return is greater than the expected return on stock b.

Question 20

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Accepted Answer

A) True 
 B)False

Exam 29: Basic Financial Tools: A review

Kessen Inc.'s bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?

The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?

Zacher Co.'s stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return?

The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

Diversification will normally reduce the riskiness of a portfolio of stocks.

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual) coupon interest rate?

You expect to receive $5,000 in 25 years. How much is it worth today if the discount rate is 5.5%?

Portfolio A has but one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion to its market value. Because of its diversification, Portfolio B will by definition be riskless.

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

You sold your motorcycle and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?

Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, its standard deviation.

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.