Question 1

A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Accepted Answer

A)   $839.31
B)   $860.83
C)   $882.90
D)   $904.97
E)   $927.60F) C) and D)
G) B) and D) C

Question 2

Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

Accepted Answer

A)   $205.83
B)   $216.67
C)   $228.07
D)   $240.08
E)   $252.08F) C) and D)
G) A) and C)

Question 3

The present value of a future sum decreases as either the discount rate or the number of periods per year increases, other things held constant.

Accepted Answer

A) True 
 B)False

Question 4

Even if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

Accepted Answer

A)   the riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation.
B)   the beta of the portfolio is less than the average of the betas of the individual stocks.
C)   the beta of the portfolio is equal to the average of the betas of the individual stocks.
D)   the beta of the portfolio is larger than the average of the betas of the individual stocks.
E)   the riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.F) A) and D)
G) A) and C)

Question 6

Bonds A, B, and C all have a maturity of 15 years and a yield to maturity of 9%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. Which of the following statements is CORRECT?

Accepted Answer

A)   bond a has the most interest rate risk.
B)   if the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year.
C)   if the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.
D)   bond c sells at a premium over its par value.
E)   if the yield to maturity on each bond decreases to 6%, bond a will have the largest percentage increase in its price.F) A) and E)
G) None of the above

Question 7

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Accepted Answer

A)   $16,806
B)   $17,690
C)   $18,621
D)   $19,601
E)   $20,633F) C) and D)
G) B) and C)

Question 8

Curtis Corporation's noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

Accepted Answer

A)   6.20%
B)   6.53%
C)   6.87%
D)   7.24%
E)   7.62%F) B) and D)
G) C) and E)

Question 9

You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?

Accepted Answer

A)   bank 1; 6.1% with annual compounding.
B)   bank 2; 6.0% with monthly compounding.
C)   bank 3; 6.0% with annual compounding.
D)   bank 4; 6.0% with quarterly compounding.
E)   bank 5; 6.0% with daily (365-day)  compounding.F) A) and E)
G) B) and D)

Question 10

Your aunt wants to retire and has $375,000. She expects to live for another 25 years and to earn 7.5% on her invested funds. How much could she withdraw at the end of each of the next 25 years and end up with zero in the account?

Accepted Answer

A)   $28,843.38
B)   $30,361.46
C)   $31,959.43
D)   $33,641.50
E)   $35,323.58F) C) and D)
G) A) and E) D

Question 11

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Accepted Answer

A)   the pv of the $1,000 lump sum has a higher present value than the pv of a 3-year, $333.33 ordinary annuity.
B)   the periodic interest rate is greater than 3%.
C)   the periodic rate is less than 3%.
D)   the present value would be greater if the lump sum were discounted back for more periods.
E)   the present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.F) A) and B)
G) B) and D)

Question 12

Because of differences in the expected returns on different investments, the standard deviation is not always an adequate measure of risk. However, the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments' stand-alone risk.

Accepted Answer

A) True 
 B)False

Question 13

Because your mother is about to retire, she wants to buy an annuity that will provide her with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost her to buy the annuity today?

Accepted Answer

A)   $825,835
B)   $869,300
C)   $915,052
D)   $963,213
E)   $1,011,374F) A) and E)
G) A) and D)

Question 14

If D1 = $1.25, g (which is constant)  = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Accepted Answer

A)   4.12%
B)   4.34%
C)   4.57%
D)   4.81%
E)   5.05%F) A) and E)
G) B) and E)

Question 15

Scott and Linda have been saving to pay for their daughter Casie's college education. Casie just turned 10 at (t = 0) , and she will be entering college 8 years from now (at t = 8) . College tuition and expenses at State U. are currently $14,500 a year, but they are expected to increase at a rate of 3.5% a year. Ellen should graduate in 4 yearsσif she takes longer or wants to go to graduate school, she will be on her own. Tuition and other costs will be due at the beginning of each school year (at t = 8, 9, 10, and 11) .σσSo far, Scott and Linda have accumulated $15,000 in their college savings account (at t = 0) . Their long-run financial plan is to add an additional $5,000 in each of the next 4 years (at t = 1, 2, 3, and 4) . Then they plan to make 3 equal annual contributions in each of the following years, t = 5, 6, and 7. They expect their investment account to earn 9%. How large must the annual payments at t = 5, 6, and 7 be to cover Casie's anticipated college costs?

Accepted Answer

A)   $1,965.21
B)   $2,068.64
C)   $2,177.51
D)   $2,292.12
E)   $2,412.76F) A) and D)
G) A) and C)

Question 16

A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Accepted Answer

A)   $1,412.84
B)   $1,487.20
C)   $1,565.48
D)   $1,643.75
E)   $1,725.94F) A) and C)
G) None of the above C

Question 17

Which of the following statements regarding a 20-year (240-month)  $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

Accepted Answer

A)   the outstanding balance declines at a slower rate in the later years of the loan's life.
B)   the remaining balance after three years will be $225,000 less one third of the interest paid during the first three years.
C)   because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments)  are constant.
D)   interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.
E)   the proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.F) A) and C)
G) All of the above

Question 18

If D1 = $1.50, g (which is constant)  = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

Accepted Answer

A)   6.50%
B)   6.83%
C)   7.17%
D)   7.52%
E)   7.90%F) A) and E)
G) A) and D)

Question 19

The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is Jameson's current stock price, P0?

Accepted Answer

A)   $18.62
B)   $19.08
C)   $19.56
D)   $20.05
E)   $20.55F) B) and D)
G) D) and E)

Question 20

If D1 = $1.25, g (which is constant)  = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

Accepted Answer

A)   7.54%
B)   7.73%
C)   7.93%
D)   8.13%
E)   8.34%F) A) and E)
G) All of the above

Exam 29: Basic Financial Tools: A review

A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Correct Answer
verified
C

Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

Correct Answer
verified

The present value of a future sum decreases as either the discount rate or the number of periods per year increases, other things held constant.

Correct Answer
verified

Even if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.

Correct Answer
verified

Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

Correct Answer
verified

Bonds A, B, and C all have a maturity of 15 years and a yield to maturity of 9%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. Which of the following statements is CORRECT?

Correct Answer
verified

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Correct Answer
verified

Curtis Corporation's noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

Correct Answer
verified

You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?

Correct Answer
verified

Your aunt wants to retire and has $375,000. She expects to live for another 25 years and to earn 7.5% on her invested funds. How much could she withdraw at the end of each of the next 25 years and end up with zero in the account?

Correct Answer
verified
D

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Because your mother is about to retire, she wants to buy an annuity that will provide her with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost her to buy the annuity today?

Correct Answer
verified

If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Correct Answer
verified

Correct Answer
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A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Correct Answer
verified
C

Which of the following statements regarding a 20-year (240-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

Correct Answer
verified

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

Correct Answer
verified

The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is Jameson's current stock price, P₀?

Correct Answer
verified

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

Correct Answer
verified

Exam 29: Basic Financial Tools: A review

A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Correct AnswerverifiedC

Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

Correct AnswerverifiedShow Answer

The present value of a future sum decreases as either the discount rate or the number of periods per year increases, other things held constant.

Correct AnswerverifiedShow Answer

Even if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.

Correct AnswerverifiedShow Answer

Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

Correct AnswerverifiedShow Answer

Bonds A, B, and C all have a maturity of 15 years and a yield to maturity of 9%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Correct AnswerverifiedShow Answer

Curtis Corporation's noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

Correct AnswerverifiedShow Answer

You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?

Correct AnswerverifiedShow Answer

Your aunt wants to retire and has $375,000. She expects to live for another 25 years and to earn 7.5% on her invested funds. How much could she withdraw at the end of each of the next 25 years and end up with zero in the account?

Correct AnswerverifiedD

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Because your mother is about to retire, she wants to buy an annuity that will provide her with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost her to buy the annuity today?

Correct AnswerverifiedShow Answer

If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Correct AnswerverifiedC

Which of the following statements regarding a 20-year (240-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

Correct AnswerverifiedShow Answer

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

Correct AnswerverifiedShow Answer

The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is Jameson's current stock price, P0?

Correct AnswerverifiedShow Answer

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?

Correct AnswerverifiedShow Answer

Correct Answer
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C

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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D

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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C

Correct Answer
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Correct Answer
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The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is Jameson's current stock price, P₀?

Correct Answer
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Correct Answer
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