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EXAM 2 TEST BANK CHAPTERS 7-

8-9 Practice Exam


to accompany
Werner and Stoner
!N"AMENTA#S $ %NANC%A#
MANA&%N&
3
rd
Edition
ran' M( Werner
Fordham University
)ame* A(( Stoner
Fordham University
2
CHAPTER 7
1. Financial markets and institutions perform which of the following functions:
a.They are a payments mechanism.
b.They are a vehicle for savings.
c.They are a supplier of credit.
d. All of the above.
. Financial markets and institutions provide a policy vehicle in that:
a.!arkets and institutions are regulated by the "ecurities and E#change
$ommission %"E$&.
b.The government used the markets to influence the economy.
c.Financial policy is set by bank and brokerage house e#ecutives.
d. 't is the policy of financial markets and institutions to accept money from
all investors.
3. The money markets are where:
a."hort(term e)uity is traded.
b.*ong(term e)uity is traded.
c."hort(term debt is traded.
d. *ong(term debt is traded.
+. The capital markets are for:
a.'ntermediate and long(term securities.
b."hort(term debt.
c."hort(term e)uity.
d. 'nvesting in marketable securities.
,. -articipants in the money markets include:
a.'ndividuals taking short term loans.
b.$ompanies financing working capital needs.
c.The ..". government issuing three(month treasury bills.
d. All of the above.
/. The primary financial markets are:
a.The oldest markets in any country.
b.0here securities are initially issued.
c.0here securities are traded.
d. The markets in the country1s ma2or financial center.
3. 0hich of the following transactions would occur in the primary market4
1. 5ne hundred shares of 6ero# are bought from 6ero# $orporation.
. A certificate of deposit is bought from local bank.
3. 5ne hundred shares of 6ero# are bought from another individual.
+. A 7ero(coupon bond is bought direct from 6ero#.
a.1 only.
b.1 and .
c.18 and +.
d. 18 38 and +.
9. An initial public offering %'-5& is an e#ample of financing:
a.5n the :ew ;ork "tock E#change.
b.'n the primary markets.
c.Through a financial intermediary.
d. 'n the secondary markets.
<. A ma2or advantage of issuing securities through an investment banker is that the
firm:
a.$an purchase underwriting services.
b.=eceives e#pert advice on the pricing of the issue.
c.$an issue securities at a lower cost than if it did it itself.
d. All of the above.
1>. 'nvestment bankers perform all but one of the following for their clients:
a..nderwrite security issues.
b.-rice security issues.
c."ell security issues.
d. 'nvest in security issues for the long term.
11. Flotation costs depend on:
a.The si7e of the issue.
b.?ow difficult it is to sell the issue.
c.The type of security issued.
d.All of the above.
1. The components of an underwriting spread include the following e#cept:
a.The managing underwriter1s fee.
b.The underwriting %risk& fee.
c.The concession %selling& fees.
d. The attorney1s %legal& fees.
13. -rivate placements of securities:
a.@enerally only involve common stock.
b.Are commonly purchased by financial intermediaries such as insurance
4
companies.
c.!ust go through the public securities markets.
d. =e)uire the services of an investment banker.
1+. The secondary financial markets are:
a.The oldest markets in any country.
b.0here securities are initially issued.
c.0here e#isting securities are traded.
d. The markets in the country1s ma2or financial center.
1,. A membership in a stock e#change is called a:
a.-osition.
b."eat.
c.Aroker.
d. -lace.
1/. !embers of the :ew ;ork "tock E#change include all the following e#cept:
a.'nvestment bankers.
b.$ommission brokers.
c.Floor traders.
d. "pecialists.
13. $ommission brokers:
a.E#ecute trades for their customers.
b.?andle overflow business for other brokers.
c.Trade for themselves.
d. !anage the trading of one or more securities.
19. 'ndependent brokers:
a. E#ecute trades for their customers.
b. ?andle overflow business for other brokers.
c. Trade for themselves.
d. !anage the trading of one or more securities.
1<. Floor traders:
a.E#ecute trades for their customers.
b.?andle overflow business for other brokers.
c.Trade for themselves.
d. !anage the trading of one or more securities.
>. "pecialists:
a.E#ecute trades for their customers.
b.?andle overflow business for other brokers.
c.Trade for themselves.
d.!anage the trading of one or more securities.
1. The purpose of financial market inde#es is to:
a.'ncrease stock prices.
b.'ncrease the demand for securities.
c. !easure security performance.
d. Betermine whether a security is properly valued.
. All the following are financial market inde#es e#cept:
a.The Bow Cones Transportation Average.
b.The "D- ,>>.
c.The 0ilshire ,>>>.
d. The Bun and Aradstreet >>.
3. All the following are ..". financial market inde#es e#cept:
a.The Bow Cones 'ndustrial Average.
b.The :A"BAE $omposite 'nde#.
c.The Falue *ine "tock 'nde#.
d. The Financial Times "tock E#change 1>>.
+. A model of stock price behavior based on repetitive human behavior is:
a.Fundamental theory and analysis.
b.Efficient market theory.
c.=andom walk theory.
d.Technical theory and analysis.
,. A model of stock price behavior based on true economic value is:
a. Fundamental theory and analysis.
b. Efficient market theory.
c. =andom walk theory.
d. Technical theory and analysis.
/. The version of the efficient market hypothesis that states that security prices
contain all price and volume data is the:
a.0eak form.
b."emistrong form.
c."trong form.
d. =andom walk form.
3. The version of the efficient market hypothesis that states that security prices
contain all public information is the:
a.0eak form.
6
b."emistrong form.
c."trong form.
d. =andom walk form.
9. The version of the efficient market hypothesis that states that security prices
contain all information8 both public and private8 is the:
a.0eak form.
b."emistrong form.
c."trong form.
d. =andom walk form.
<. The efficient market hypothesis is formulated as:
a.GFinancial markets are accurate.H
b.G"ecurities are priced correctly.H
c.G"tock prices appear to change randomly.H
d. G-rices contain all information.H
3>. The Grandom walkH concept is that:
a.$hanges in security prices appear to be drawn from a probability distribution.
b."ecurity prices seem to be set at random.
c."ecurity prices can be any amount8 regardless of the security1s underlying
economic value.
d. "ecurity prices are set by the roll of a pair of dice.
Answers
1. B
. A
3. $
+. A
,. B
/. A
3. $
9. A
<. B
1>. B
11. B
1. B
13. A
1+. $
1,. A
1/. A
13. A
19. A
1<. $
>. B
1. $
. B
3. B
+. B
,. A
/. A
3. A
9. $
<. B
3>. A
CHAPTER 8
1. To say that an investor is a risk seeker means that the investor:
a. 0ill only buy the stock of new8 start(up companies.
b. Finds the stock market too tame.
c. Bislikes stocks that pay a regular dividend.
d. 's willing to pay to assume additional risk.
. To say that an investor is risk neutral means that the investor:
a. ?ates risk.
b. Boes not consider risk when making investment decisions.
c. "ees risk as a problem.
d. 0ill only invest in risk(free securities.
3. To say that an investor is risk(averse means that the investor:
a. 0ill only buy ..". government securities.
b. The investor re)uires more return to take on more risk.
c. 0ill not invest in the stock market at all.
d. 's willing to pay to assume additional risk.
+. 'f the stakeholders of a business are risk averters8 they will respond to the risks
assumed by the business by :
a. =e)uiring added compensation8 thus lowering the firm1s value.
b. Boing a poor 2ob in their work.
c. "taying away from the risks.
d. Avoiding the company.
,. The re)uired rate of return on all securities having the same degree of risk:
8
a. 's determined by the managers of the firms issuing the securities.
b. 's determined by investors in the financial markets.
c. Biffers depending on who owns the securities.
d. Biffers depending on the type of security.
/. "tatistics is used to measure risk because:
a. "tatistics was originally designed to measure financial activities.
b. =isk creates variability in the firm1s results.
c. Financial risk is identical to flipping a coin.
d. The business of statistics is risk.
3. A probability distribution for the returns from an investment typically contains:
a. Each outcome.
b. The probability of each outcome.
c. The economic condition that produces each outcome.
d. All of the above.
9. The statistical measure used to summari7e the anticipated rate of return from an
investment is:
a. E#pected value.
b. "tandard deviation.
c. Fariance.
d. $orrelation.
<. E#pected value is not a good measure of risk because:
a. The e#pected value may not be one of predicted outcomes.
b. E#pected value is a weighted average.
c. E#pected value does not indicate the dispersion of the potential outcomes.
d. The values use e#pected rather than historical data.
1>. A graph of a probability distribution for an investment shows:
a. ?ow much money the investor will make on the investment.
b. The probability of each possible rate of return from the investment.
c. The probability that the investor will make the investment.
d. 0hether the investment will have a positive or negative rate of return.
11. The relationship of standard deviation and variance is:
a. Fariance e)uals the standard deviation.
b. Fariance is twice the standard deviation.
c. Fariance is the s)uare of the standard deviation.
d. There is no relationship between them.
1. The probability that the rate of return from an investment will fall within one
standard deviation of the e#pected value is:
a. >I.
b. /9I.
c. <,I.
d. 1>>I.
%.se the information in Table 9A to answer )uestions /J33&
Ta+,e 8A
%n-e*tment A %n-e*tment B %n-e*tment C
Pro+a+i,it. Ca*/ ,o0 Pro+a+i,it. Ca*/ ,o0 Pro+a+i,it. Ca*/ ,o0
.>,
.1,
.3,
.+,
K ,>>
K 3,>
K 18>>>
K 18,>
.>
.3>
.3>
.>
K />>
K 3>>
K 18>>>
K 18>>
.1,
.3,
.3,
.1,
K +>>
K 3>>
K 181>>
K 18+>>
12( W/at i* t/e ex3ected -a,4e o5 t/e ca*/ 5,o0 5rom %n-e*tment A67777777777777(
18( W/at i* t/e *tandard de-iation o5 t/e ca*/ 5,o0 5rom %n-e*tment A 6
77777777777(
1,. The $apital !arket *ine:
a. "hows the rate of return an investor will get from a given investment.
b. "hows the rate of return an investor will get from assuming a given level of risk.
c. "hows how risk declines when return increases.
d. "ummari7es the risk(return relationship for a single asset.
19( %5 t/e ri*'-5ree rate i* 2 3ercent and t/e mar'et 3rice o5 tota, ri*' re:4ired +.
in-e*tor* i* ;(;2< 5or eac/ do,,ar o5 *tandard de-iation= 0/at i* t/e re:4ired
rate o5 ret4rn 5rom an in-e*tment 0it/ a *tandard de-iation e:4a, to >2;;6
a( 2<(
+( 2(;2<(
c( 9<(
d( 12<(
13. An investor who holds a portfolio:
a. 5wns investments in several industries.
b. 5wns more than one investment.
c. 5wns both bonds and stocks.
d. ?as invested an e)ual amount in several securities.
19. Biversification refers to the process of:
10
a. 'ncreasing e#pected return by investing in more than one asset.
b. .sing the correlation between assets to increase risk and hence e#pected return.
c. -urchasing a portfolio.
d. =educing risk by holding only ..". government bonds.
1<. The rate of return from a portfolio is:
a. Always greater than the return from any security within the portfolio.
b. E)ual to the rate of return from the best performing security in the portfolio.
c. The weighted average of the rates of return of the securities in the portfolio.
d. :ot related to the rates of return of the securities in the portfolio.
2;( W/at i* t/e ex3ected rate o5 ret4rn 5rom t/e 5o,,o0in? 3ort5o,io@
Sec4rit. Ex3ected Ret4rn Amo4nt %n-e*ted
A 12< > 2;=;;;
B 1A< > 2;=;;;
C 1;< > A;=;;;
a( 11(7A<(
+( 11(9;<(
c( 12(22<(
d( 1A(;;<(
1. The risk of a portfolio of securities is:
a. The same as the risk of the component securities.
b. Almost always greater than the risk of the component securities8
c. Almost always less than the risk of the component securities.
d. A function of the investor1s risk preference.
. 'f an investor combines two securities that are perfectly positively correlated8 the
risk of the resulting portfolio will be:
a. @reater than the risk of either security.
b. The same as the risk of either security.
c. *ess than the risk of either security.
d. *ess than it would be if the stocks were not perfectly positively correlated.
3. 'f an investor combines two securities that are not perfectly positively correlated:
a. The return from the resulting portfolio will always be greater than the return
from either security.
b. The return from the resulting portfolio will always be less than the return from
either security.
c. The risk of the resulting portfolio will always be greater than the risk of either
security.
d. The risk of the resulting portfolio will always be less than it would be if the
stocks were perfectly positively correlated.
+. 'f an investor combines two securities with a correlation of J1:
a. The risk of the portfolio will be the average of the risks of the component
securities.
b. The risk of the portfolio will be e)ual to the risks of the component securities.
c. The risk of the resulting portfolio will always be greater than the risk of either
security.
d. 't is possible to end up with 7ero risk.
,. 0hich of the following stocks8 if added to an investor1s portfolio8 would assist
diversification attempts the most4
a. "tock A8 whose returns and the portfolio1s returns have a correlation coefficient
of L>.<.
b. "tock A8 whose returns and the portfolio1s returns have a correlation coefficient
of L>..
c. "tock $8 whose returns and the portfolio1s returns have a correlation coefficient
of J>.1.
d. "tock B8 whose returns and the portfolio1s returns have a correlation coefficient
of >.>.
/. 'f a stock whose returns have moved e#actly with a portfolio of stocks is added to
that portfolio8 it:
a. 0ill not reduce portfolio risk.
b. 0ill add substantially to diversification efforts.
c. 0ill not decrease or increase portfolio risk.
d. 0ill not increase the risk of the portfolio.
3. "ystematic risk refers to the component of total risk that:
a. $an be reduced if enough securities are held in a portfolio.
b. 's caused by fluctuations in the stock market and economy as a whole.
c. 's uni)ue to specific companies or industries.
d. ?olders of well(diversified portfolios can safely ignore.
9. .nsystematic risk refers to the component of total risk that:
a. 's not shared by other companies.
b. Bepends on events in the overall economy.
c. $annot be eliminated by holding a well diversified portfolio.
d. 's caused by overall stock market movements.
12
<. An e#ample of systematic risk is when the company1s value declines due to:
a. A strike at the company1s plant.
b. "tatements by the company president.
c. =ising inflation.
d. A product recall.
3>. An e#ample of unsystematic risk is when the company1s value declines due to:
a. $hanges in foreign e#change rates.
b. A failed marketing campaign.
c. A national political crisis.
d. =ising interest rates.
31. An advantage to naive diversification is that it:
a. Eliminates systematic risk.
b. Eliminates unsystematic risk.
c. 'ncreases portfolio returns.
d. There is no advantage since it is naive.
3. $ompared to a domestic portfolio8 a portfolio of e)ual si7e that is diversified across
countries will have:
a. *ess systematic risk.
b. *ess unsystematic risk.
c. A greater rate of return.
d. A higher e#pected value.
33. 0hat determines how much risk can be diversified away in a portfolio4
a. The degree of correlation between stocks in the portfolio.
b. Fluctuations in overall market returns.
c. The number of stocks in the portfolio.
d. a and c.
3+. The slope of an investment1s characteristic line identifies the investment1s:
a. "ystematic risk.
b. .nsystematic risk.
c. Total risk.
d. All of the above.
3,. The betas of industrial stocks tend to be:
a. *ess than 1.
b. E)ual to 1.
c. @reater than 1.
d. Bistributed around 1.
3/. The betas of utility stocks:
a. *ess than 1.
b. E)ual to 1.
c. @reater than 1.
d. Bistributed around 1.
33. Aeta coefficients:
a. Euantify the degree of naive diversification in the portfolio.
b. $an be averaged to determined a portfolio1s beta.
c. Are always greater than 7ero and less than .>.
d. $annot be determined for most securities.
39. The beta of a portfolio is calculated as the:
a. @eometric average of the betas of the component securities.
b. Arithmetic average of the betas of the component securities.
c. 0eighted average of the betas of the component securities.
d. "um of the betas of the component securities.
3<. A security1s GalphaH is:
a. 'ts rate of return.
b. A measure of its risk.
c. 'ts rate of return when the return from the overall market e)uals 7ero.
d. 'ts risk when the risk from the overall market e)uals 7ero.
+>. The characteristic line of a security with negative alpha:
a. *ies above the characteristic line of the average stock of the same risk.
b. *ies below the characteristic line of the average stock of the same risk.
c. 's identical to the characteristic line of the average stock of the same risk.
d. 'ntersects the characteristic line of the average stock of the same risk at the
origin.
+1. 'n a perfectly efficient market8 the alpha of every security would be e)ual to:
a. J1.
b. >.
c. L1
d. 't would vary according to the risk of the security.
+. 'nvestors MMMMMMMMMMMMMM a security with positive alpha.
a. are eager to invest in.
b. are indifferent to.
c. would be willing to sell.
d. do not want to hold.
14
+3. The slope of the security market line %"!*& is the:
a. =isk(free rate of interest.
b. Aeta line.
c. !arket price of portfolio risk.
d. =eturn on the market portfolio.
++. The market price of portfolio risk is e)ual to the re)uired return from the market
portfolio minus the:
a. =isk(free rate of interest.
b. =eturn on an average stock.
c. E#pected rate of inflation.
d. =eturn on an average corporate bond.
+,. A diversified investment in all the "tandard and -oor1s ,>> stocks would:
a. ?ave no risk.
b. Earn the risk(free rate of interest.
c. Earn a rate to compensate for the total risk of each of the securities in the
portfolio.
d. Earn a rate e)ual to the sum of the risk(free rate plus the market price of risk.
89( %5 t/e re:4ired ret4rn 5rom t/e mar'et i* 18<= t/e ri*'-5ree rate i* 11<= and
t/e +eta o5 S Cor3( i* 1(2= 0/at i* t/e re:4ired rate o5 ret4rn on S Cor3 *toc'6
a( 8(8;(<(
+( 11(;;<(
c( 12(2;<(
d( 19(8;<(
Answers
1. d
. b
3. b
+. a
,. b
/. b
3. d
9. a
<. c
1>. b
11. c
1. b
13. 1>,>
1+. 13.<+
1,. d
1/. d
13. b
19. c
1<. c
>. b
1. c
. b
3. d
+. d
,. c
/. a
3. b
9. a
<. c
3>. b
31. b
3. a
33. d
3+. c
3,. d
3/. a
33. b
39. c
3<. c
+>. b
+1. b
+. a
+3. c
++. a
+,. d
+/. d
CHAPTER 9
1. 'n what respects are bonds similar to stocks for any given firm4
a. Aoth securities have the same risk.
b. The value of each security is found by discounting the asset1s e#pected future
cash flows at the re)uired rate of return.
c. Aoth securities have the same priority with respect to settlement of claims in a
16
bankruptcy proceeding.
d. :one of the above.
. The value of a security:
a. Boes not depend on the investor1s planned holding period.
b. 'ncreases as the investor1s planned holding period increases.
c. Becreases as the investor1s planned holding period increases.
d. $ould increase or decrease as the investor1s planned holding period increases.
3. The value of a security is:
a. The same to all investors.
b. 0hat the security is selling for.
c. The security1s worth.
d. 'mpossible to determine.
+. The price of a security:
a. The security1s worth.
b. Always unknown.
c. Bifferent for different investors.
d. 0hat the security is selling for.
,. The price of a security e)uals the value of the security:
a. 0hen the price is greater than the re)uired rate of return.
b. 0hen the security is traded in an efficient market.
c. 'f the future cash flows of the security are unknown.
d. 5n the day when interest payments are paid by the borrower.
/. 'n an efficient financial market:
a. The price of a security e)uals its value.
b. -rice and value cannot be the same.
c. There is much information about a security that is not reflected in its price.
d. 'nvestors consistently overpay for securities.
3. Academic studies of the security markets have generally found:
a. !ost trading takes place during the morning.
b. 5nly large investors trade stocks.
c. A high degree of efficiency.
d. "tock prices are set by a few powerful investors.
9. Technical analysts:
a. .se present value analysis to make their investment decisions.
b. "tudy company8 industry and economic data looking for clues to value that other
analysts have missed.
c. Aelieve that mass psychology significantly influences security prices.
d. Aelieve that security prices tend to oscillate around their true values.
<. Fundamental analysts:
a. Aelieve that security prices tend to oscillate around their true values.
b. Aelieve that mass psychology significantly influences security prices.
c. "earch for trends in stock prices.
d. -ay little attention to value in their investment decisions.
1>. 'nvestors who believe that mass psychology is a significant factor in the setting of
security prices are called:
a. =andom 0alk analysts.
b. Technical analysts.
c. Fundamental analysts.
d. Financial "tatement analysts.
11. The cash flows investors receive from a bond are its MMMMMMMMMMMMMM and its
MMMMMMMMMMMMMM.
a. price8 maturity value
b. interest payments8 price
c. coupon8 face value
d. par value8 yield to maturity
1. A traditional bond:
a. ?as both an interest coupon and a face value.
b. 's only issued by Fortune ,>> companies.
c. Tends to have a maturity of five years or less.
d. 's no longer popular with investors.
13. 0hat is the value of a ..". Treasury bond maturing in 1> years with a K18>>> face
value and a /I coupon to an investor who re)uires an <I rate of return4
a. K 39,.>/.
b. K +.+1.
c. K 9>3.+3.
d. K18>>>.>>.
1+. 0ith everything else held constant8 if the market interest rate for a bond falls:
a. The price of the bond falls.
b. The price of the bond rises.
c. The coupon rate of the bond falls.
d. The coupon rate of the bond rises.
1,. 0ith everything else held constant8 if the market interest rate for a bond rises:
18
a. The price of the bond falls.
b. The price of the bond rises.
c. The coupon rate of the bond falls.
d. The coupon rate of the bond rises.
19( T/e o0,er Com3an.B* +ond* /a-e a >1=;;; 5ace -a,4e= 3a. an 7< co43on=
and mat4re in 17 .ear*( W/at i* t/e -a,4e o5 one o0,er Com3an. +ond to an
in-e*tor 0/o re:4ire* a 9< rate o5 ret4rn6
a( > 722(81(
+( > 9;2(27(
c( >1=;;;(;;(
d( >1=1;8(77(
13. All else held constant8 as a bond selling at par value approaches its maturity date8 its
price:
a. 'ncreases.
b. Becreases.
c. =emains the same.
d. $an do any of the above.
19. All else held constant8 as a bond selling at a discount approaches its maturity date8 its
price:
a. 'ncreases.
b. Becreases.
c. =emains the same.
d. $an do any of the above.
1<. All else held constant8 as a bond selling at a premium approaches its maturity date8
its price:
a. 'ncreases.
b. Becreases.
c. =emains the same.
d. $an do any of the above.
2;( W/at i* t/e -a,4e o5 a >1=;;; 5ace -a,4e Cero-co43on +ond t/at mat4re* in 9
.ear* to an in-e*tor 0/o re:4ire* a 1;< rate o5 ret4rn6
a( > 187(29(
+( > AA8(29(
c( > A98(87(
d( >1=;;;(;;(
21( ir*t Nationa, Ban' i* o55erin? a certi5icate o5 de3o*it t/at 0i,, ret4rn >1=;;; to
in-e*tor* *ix .ear* a5ter t/eir 34rc/a*e( %5 t/e*e certi5icate* *e,, 5or >92;(17=
0/at i* t/e mar'etB* re:4ired rate o5 ret4rn on t/i* in-e*tment6
a( 9<(
+( 7<(
c( 8<(
d( 9<(
22( Mi,ner Cor3oration i* *e,,in? Cero co43on +ond* at t/at 3a. >1=;;; in *e-en
.ear*( W/at rate o5 ret4rn 0i,, +e earned +. an in-e*tor 0/o 34rc/a*e* t/e
+ond 5or >922(7A and /o,d* it 4nti, it* mat4rit.6
a( 7<(
+( 8<(
c( 9<(
d( 1;<(
22( T/e $'on Com3an. 0i*/e* to rai*e >1;; mi,,ion( %t* in-e*tment +an'er*
indicate t/at a ten-.ear= Cero-co43on +ond i**4e co4,d +e *o,d at a .ie,d-to-
mat4rit. o5 18<( Ho0 man. >1=;;; 5ace -a,4e +ond* 0o4,d $'on Com3an.
/a-e to *e,, 4nder t/i* 3,an6
a( A33roximate,. 1;;=;;;(
+( A33roximate,. 1A9=;;;(
c( A33roximate,. 297=;;;(
d( A33roximate,. 271=;;;(
+. 0ith everything else held constant8 the yield to maturity of a bond:
a. 0ill e)ual the coupon rate if the bond sells at face value.
b. 's constant in the financial market over the life of the bond.
c. 0ill increase if the risk of the bond decreases.
d. 's e)ual to the return an investor will actually receive on the bond8 provided he
or she sells it at least one year before maturity.
2A( W/at i* t/e .ie,d-to-mat4rit. o5 a >1=;;; 5ace -a,4e= 12< co43on +ond *e,,in?
5or >1=281(82 t/at /a* 5i5teen .ear* remainin? to mat4rit.6
a( 8<(
+( 9<(
c( 1;<(
d( 11<(
29( T/e +ond* o5 Wi,cox Cor3oration /a-e a 5ace -a,4e o5 >1=;;;= a co43on rate o5
12<= and mat4re in ten .ear*( %5 .o4 can +4. t/i* +ond 5or >1=2A;= 0/at i* t/e
ann4a,iCed .ie,d-to-mat4rit.6
a( 8DA<(
+( 9D7<(
c( 8D9<(
20
d( 9D1;<(
3. A bond with a face value of K18>>> matures five years from today. The coupon rate
is 1+I8 and current market rates for this type of bond are 1I. 'f the bond is
currently selling for K181>>.>>8 it:
a. 's selling below its value and is a good buy.
b. 's selling above its value and should not be bought.
c. ?as a yield to maturity of 1I.
d. ?as a yield to maturity of 1+I.
9. A bond issued by a AAA company can MMMMMMMM .
a. is guaranteed by the govt
b. can never default
c. has a very low probability of default
d. has a greater default risk than a AAA bond
29( Meredit/ +o4?/t a >1=;;; 5ace -a,4e 11< co43on +ond 5or >1=2;;( o4r .ear*
,ater= 0/en t/e +ond /ad 19 .ear* to mat4rit.= intere*t rate* 5e,,= and in-e*tor*
increa*ed t/eir re:4ired rate o5 ret4rn 5rom t/i* +ond to 1;<( At t/at 3oint=
Meredit/ *o,d t/e +ond( W/at 0a* /er /o,din? 3eriod .ie,d6
a( 9(89<(
+( 8(82<(
c( 1;(;;<(
d( 11(;;<(
3>. ?ow does the valuation of stocks differ from that of bonds4
a. The cash flows of stocks must be discountedN the cash flows of bonds need not
be discounted.
b. The cash flows of stocks are )uite uncertainN the cash flows of bonds are
relatively certain.
c. "tocks theoretically have an infinite lifeN bonds generally have a known and finite
life.
d. b and c.
31. $onsider two stocks that have the same re)uired rate of return. 0ith everything else
held constant8 if "tock A has a higher price than "tock A8 then you can e#pect that:
a. A has a higher growth rate of dividends.
b. A has a higher growth rate of dividends.
c. A has a higher dividend yield.
d. A has a lower dividend yield.
%.se the following information to answer problems 3>J3&
?arte $orp. e#pects to pay a K.>> dividend in the coming year8 and security
analysts e#pect ?arte1s dividends and earnings to grow at a rate of <I for the
indefinite future. ?arte1s current stock price is K1.,> per share.
22( W/at i* t/e mar'etB* re:4ired rate o5 ret4rn on Harte *toc'6
a( 9<(
+( 19<(
c( 22<(
d( 2A<(
22( W/at i* t/e ex3ected di-idend .ie,d on Harte *toc'6
a( 9<(
+( 19<(
c( 22<(
d( 2A<(
28( W/at i* t/e ex3ected ca3ita, ?ain* .ie,d on Harte *toc'6
a( 9<(
+( 19<(
c( 22<(
d( 2A<(
An*0er*
1( +
2( a
2( c
8( d
A( +
9( a
7( c
8( c
9( a
1;( +
11( c
12( a
12( c
18( +
1A( a
19( d
17( c
18( a
19( +
22
2;( c
21( c
22( a
22( d
28( a
2A( +
29( c
27( +
28( c
29( a
2;( d
21( a
22( d
22( +
28( a