BUSI 420 Exam 3 solutions complete answers

BUSI 420 Exam 3 solutions complete answers 

 

The market has an expected return of 11.3% and a risky asset with a beta of 1.18 has an expected return of 13%. Based on this information, what is the pure time value of money?

 

Pat realized a total return of 13.2%, which is more than his expected return of 12.5%. What is the amount of his unexpected return?

 

Dinner Foods stock has a beta of 1.45 and an expected return of 13.43%. Edwards' Meals stock has a beta of .95 and an expected return of 10.27%. Assume that both stocks are correctly priced. Given this, the risk-free rate is ________% and the market rate of return is ________%.

 

John owns a bond that has a modified duration of 5.29 and a yield to maturity of 6.1%. If interest rates increase by 50 basis points, the bond's price will change by ________.

 

The Country Inn has bonds outstanding with a par value of $1,000 each and a 5.25% coupon. The bonds mature in 8.5 years and pay interest semiannually. What is the current value of each of these bonds if the yield to maturity is 6.0%?

 

A bond has a modified duration of 7.22 and a yield to maturity of 8.1%. If interest rates increase by 75 basis points, the bond's price will decrease by ________%.

 

The market rate on a bond fell from 5.76% to 5.73%. This is a decline of how many basis points?

 

You want to earn a real rate of return of 3.75% at a time when the inflation rate is 2.33%. What is the approximate nominal rate that you must earn?

 

Which one of the following rates is the rate that banks charge each other for overnight loans of $1 million or more?

 

What is the present value of a $15,000 face value STRIPS with 8 years to maturity and a yield to maturity of 5.25%?

 

Both Bond A and Bond B have 7 percent coupons and are priced at par value. Bond A has 5 years to maturity, while Bond B has 16 years to maturity.

 

a. If interest rates suddenly rise by 1.4 percent, what is the percentage change in price of Bond A and Bond B? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

b. If interest rates suddenly fall by 1.4 percent instead, what would be the percentage change in price of Bond A and Bond B? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 6.0 percent, the expected return on the market is 13.8 percent, and the betas of the two stocks are 2.2 and .8, respectively. Landon’s own forecasts of the returns on the two stocks are 25.20 percent for Furhman Labs and 12.00 percent for Garten.

 

A stock has an expected return of 14.4 percent and a beta of 1.70, and the expected return on the market is 9.60 percent. What must the risk-free rate be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Stock Y has a beta of .97 and an expected return of 14.35 percent. Stock Z has a beta of .70 and an expected return of 11 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

A stock has an expected return of 12.8 percent, the risk-free rate is 2.1 percent, and the market risk premium is 10.1 percent. What must the beta of this stock be? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

You own a stock portfolio invested 25 percent in Stock Q, 35 percent in Stock R, 18 percent in Stock S, and 22 percent in Stock T. The betas for these four stocks are 1.3, .7, 1.4, and .9, respectively. What is the portfolio beta? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

 

a. Your portfolio is invested 30 percent each in Stocks A and C and 40 percent in Stock B. What is the expected return of the portfolio? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Calculate the expected return on a portfolio of 45 percent Roll and 55 percent Ross by filling in the following table: (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

A bond sells for $963.33 and has a coupon rate of 7.70 percent. If the bond has 25 years until maturity, what is the yield to maturity of the bond? Assume semiannual compounding. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Atlantis Fisheries issues zero coupon bonds on the market at a price of $421 per bond. These are callable in 7 years at a call price of $640. Using semiannual compounding, what is the yield to call for these bonds? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Rolling Company bonds have a coupon rate of 8.00 percent, 16 years to maturity, and a current price of $1,286. What is the YTM? The current yield? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

A bond has a coupon rate of 10 percent and 4 years until maturity. If the yield to maturity is 10.3 percent, what is the price of the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

A bond with 25 years until maturity has a coupon rate of 6.6 percent and a yield to maturity of 7.3 percent. What is the price of the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

LKD Co. has 13 percent coupon bonds with a YTM of 8.9 percent. The current yield on these bonds is 9.5 percent. How many years do these bonds have left until they mature? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

A Treasury bill that settles on May 18, 2019, pays $100,000 on August 21, 2019. Assuming a discount rate of 1.67 percent, what are the price and bond equivalent yield? Use Excel to answer this question. (Round your price answer to 2 decimal places. Enter your yield answer as a percent rounded to 3 decimal places.)

 

A Treasury STRIPS matures in 5 years and has a yield to maturity of 13.9 percent. Assume the par value is $100,000.

 

What is the price of a U.S. Treasury bill with 93 days to maturity quoted at a discount yield of 1.65 percent? Assume a $1 million face value. (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

The rate which an investor pays a brokerage firm for a margin loan is based on a negotiated premium which is added to which one of the following rates?

 

Which one of the following is correct when computing the price of a debt security when using a discount yield?

 

Which of the following comprise the nominal interest rate on default-free securities according to the modern view of the term structure of interest rates?

liquidity premium
real rate
interest rate risk premium
inflation premium
 

Pure discount bonds which are created by separating the interest and principal payments from U.S. Treasury bonds are called U.S. Treasury:

 

For a premium bond, the:

 

Which combination of bond characteristics causes a bond to be most sensitive to changes in market interest rates?

low coupon rates
high coupon rates
short time to maturity
long time to maturity
 

A bond pays interest semiannually on February 1 and August 1. Assume today is October 1. How many months of accrued interest are included in the clean price of this bond?

 

According to Malkiel's theorems, bond prices and bond yields are:

 

You own a portfolio comprised of 4 stocks and the economy has 3 possible states. Assume you invest your portfolio in a manner that results in an expected rate of return of 7.5 percent, regardless of the economic state. Given this, what must be value of the portfolio's variance be?

 

To reduce risk as much as possible, you should combine assets which have one of the following correlation relationships?

 

The division of a portfolio's dollars among various types of assets is referred to as:

 

Where will a security plot in relation to the security market line (SML) if it has a beta of 1.1 and is overvalued?

 

Which one of the following has the highest expected risk premium?

 

Which one of the following qualifies as diversifiable risk?

 

 

1. Which one of the following is the interest rate that the largest commercial banks charge their most creditworthy corporate customers for short-term loans? 
A. discount
B. Federal funds
C. prime
D. bid
E. call money

 

2. Which one of the following terms applies to a rate that serves as an indicator of future trends? 
A. bellwether
B. prime
C. call
D. discount
E. nominal

 

3. Which one of the following rates is the rate that banks charge each other for overnight loans of $1 million or more? 
A. institutional
B. financial overnight
C. Federal funds
D. monetary
E. daily

 

4. Which one of the following rates is the rate a commercial bank must pay the Federal Reserve to borrow reserves overnight? 
A. discount
B. Fed funds
C. financial overnight
D. daily
E. institutional

 


5. Which one of the following rates is used by brokerage firms as the basis for determining margin loan rates? 
A. discount
B. Fed funds
C. prime
D. brokerage
E. call money

 

6. Which one of the following is unsecured debt issued by corporations on a short-term basis? 
A. commercial paper
B. interbank offered loan
C. equipment bond
D. collateralized debt
E. banker's acceptance

 

7. A $100,000 or more term deposit at a bank is called which one of the following? 
A. interbank deposit
B. bankers' acceptance
C. collateralized deposit
D. call bond
E. certificate of deposit

 

8. Which one of the following describes a banker's acceptance? 
A. agreement to loan money in exchange for an agreement by the borrower to offer an asset as collateral
B. written agreement to loan funds in the future once the loan terms have been accepted
C. postdated check with payment guaranteed by a bank
D. agreement by a bank to provide short-term funds for the construction phase of a project
E. the sale of a security by a bank accompanied by an agreement to repurchase the security the following day

 


9. Which one of the following is defined as U.S. dollar-denominated deposits held in a foreign bank? 
A. Eurodollars
B. foreign funds
C. certificates of deposits
D. banker's acceptances
E. T-bills

 

10. Which one of the following abbreviations is the interest rate that international banks charge one another for overnight Eurodollar loans? 
A. EIOEL
B. EUDOR
C. LEDOR
D. EDBOR
E. LIBOR

 

11. Which one of the following is a short-term debt instrument issued by the U.S. Treasury? 
A. Freddie Mac
B. Ginnie Mae
C. T- note
D. T-bill
E. T-bond

 

12. A pure discount security is an interest-bearing asset that pays: 
A. interest on a semi-annual basis.
B. interest on an annual basis.
C. a single payment at maturity.
D. no interest.
E. a variable-rate interest.

 


13. Which one of the following is a basis point? 
A. 1 percent
B. 0.1 percent
C. 0.01 percent
D. 0.001 percent
E. 0.0001 percent

 

14. Which one of the following is the method used to quote interest rates on money market instruments? 
A. short basis
B. floating-rate basis
C. call rate method
D. bank discount basis
E. prime rate method

 

15. The Treasury yield curve is a graph which plots Treasury yields against which one of the following? 
A. corporate bond yields
B. Fed funds rate
C. maturities
D. inflation rates
E. S&P 500 yield

 

16. Which one of the following is defined as the relationship between the interest rate on default-free, pure discount bonds and the time to maturity? 
A. discount rate curve
B. Treasury yield curve
C. risk premium structure
D. term structure of interest rates
E. market interest rate curve

 


17. Pure discount bonds which are created by separating the interest and principal payments from U.S. Treasury bonds are called U.S. Treasury: 
A. notes.
B. bills.
C. STRIPS.
D. SWAPS.
E. tax-exempts.

 

18. Which one of the following rates is the normally quoted rate? 
A. nominal
B. deflated
C. inflated
D. real
E. indexed

 

19. Which one of the following best describes a real interest rate? 
A. current rate on a U.S. Treasury bill
B. nominal rate minus the risk-premium on an individual security
C. market return minus the risk-free rate
D. nominal rate minus inflation
E. historical rate rather than a projected rate

 

20. Which one of the following best describes the Fisher hypothesis? 
A. long-term interest rates are based on current inflation rates
B. nominal interest rates are inversely related to real rates
C. interest rates tend to be higher than inflation rates
D. nominal interest rates tend to be relatively constant over time
E. future interest rates must be higher than current interest rates

 


21. Which one of the following theories states that the term structure of interest rates reveals the financial market's projections of future interest rates? 
A. market rate theory
B. market yield theory
C. Fisher hypothesis
D. expectations theory
E. rational rate hypothesis

 

22. Which one of the following is defined as a forward rate? 
A. rate agreed upon today for a long-term loan
B. interest rate quoted today which will apply to all loans made this week
C. interest rate on a loan made today that will vary as the market rate varies
D. interest rate adjusted for the anticipated rate of inflation
E. expected future interest rate implied by current interest rates

 

23. Which one of the following proposes that lenders must be financially rewarded for loaning funds on a long-term versus a short-term basis? 
A. expectations theory
B. forward rate theory
C. market hypothesis
D. maturity preference theory
E. Fisher hypothesis

 

24. The market segmentation theory states that interest rates on debt vary dependent upon market segments which are segmented based upon which one of the following? 
A. time to maturity
B. principal amount
C. use of funds
D. type of lender
E. type of borrower

 


25. U.S. Treasury bill rates were the highest during which one of the following time periods? 
A. 1930-1933
B. 1943-1945
C. 1979-1981
D. 1997-1999
E. 2002-2007

 

26. Which one of the following statements is correct concerning U.S. Treasury bill rates for the period 1800 - 2007? 
A. T-bill rates never exceeded 10 percent.
B. T-bill rates never exceeded T-bond rates.
C. T-bill rates were lower than 1 percent for a period of time.
D. T-bill rates were less volatile than T-bond rates.
E. T-bill rates were the highest during the World War II years of the 1940's.

 

27. Banks are most apt to quote short-term loan rates as: 
A. prime plus a spread.
B. prime plus inflation.
C. prime minus inflation.
D. Federal funds plus prime.
E. prime minus the discount.

 

28. Which one of the following rates is generally considered the bellwether rate for bank loans to business firms? 
A. money market
B. Fed funds
C. discount
D. prime
E. call money

 


29. City Bank needs a one-day reserve loan of $2.6 million from Country Bank. Which one of the following interest rates will be charged on this loan? 
A. money market
B. Federal funds
C. discount
D. prime
E. Treasury bill

 

30. First Bank needs to borrow money overnight from the Federal Reserve in order to meet its reserve requirements. Which one of the following interest rates will be charged on this loan? 
A. money market
B. Federal funds
C. discount
D. prime
E. Treasury

 

31. Which one of the following actions is the Federal Reserve most likely to take if it is concerned about a slowing economy? 
A. lower the tax rate
B. lower the discount rate
C. increase the call rate
D. increase the tax rate
E. increase the discount rate

 

32. The rate which an investor pays a brokerage firm for a margin loan is based on a negotiated premium which is added to which one of the following rates? 
A. prime
B. call
C. discount
D. T-bill
E. Federal funds

 


33. Assume that a large corporation, such as General Electric, needs money in the short-term. Which one of the following securities is that corporation most likely to issue to meet this need? 
A. commercial paper
B. prime rate loan
C. corporate bond
D. secured bill
E. banker's acceptance

 

34. Which one of the following statements is correct concerning large-denomination certificates of deposit? 
A. The security can be sold to another investor.
B. The face amount is equal to $10,000 or more.
C. The security is a bank time deposit.
D. The security is a form of a commercial check.
E. The security is issued by the U.S. Treasury.

 

35. Which one of the following facilitates international trade? 
A. secured bond
B. Treasury security
C. banker's acceptance
D. commercial paper
E. Eurodollar loan

 

36. You notice that the interest rate on your credit card is set at LIBOR plus 8.9 percent. Given this, the rate you will pay is primarily influenced by the money market rates in which one of the following? 
A. Lisbon, Portugal
B. New York, USA
C. Frankfort, Germany
D. London, England
E. Chicago, USA

 


37. Which one of the following is the largest market in the world for new debt securities with maturities of one year or less? 
A. commercial paper
B. U.S. Treasury bill
C. banker's acceptance
D. Eurodollar money market
E. certificates of deposit

 

38. The overnight repurchase rate is the rate charged on overnight loans which are collateralized by which one of the following securities? 
A. Treasury securities
B. Municipal bonds
C. commercial paper
D. banker's acceptances
E. Eurodollar deposits

 

39. Which one of the following features applies to a U.S. Treasury bill? 
A. U.S. agency debt
B. pure discount security
C. taxable at the state level
D. semi-annual interest payments
E. annual interest payments

 

40. The market rate on a bond fell from 8.76 percent to 8.73 percent. This is a decline of how many fbasis points? 
A. 0.003
B. .0003
C. 0.03
D. 0.3
E. 3

 


41. Which one of the following is correct when computing the price of a debt security when using a discount yield? 
A. The price will exceed the face value.
B. An increase in the discount yield will increase the current price.
C. The current price will decrease as the days to maturity decrease.
D. The computation will be based on a 360-day year.
E. The computation will consider leap years.

 

42. Which of the following will increase the price of a money market instrument computed using a discount yield?
I. increase in discount yield
II. decrease in discount yield
III. increase in days to maturity
IV. decrease in days to maturity 
A. I only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only

 

43. Which one of the following is used by Treasury dealers to indicate the price they are willing to pay to purchase a Treasury bill? 
A. par rate
B. bid discount
C. face rate
D. asked discount
E. bank discount

 

44. Which one of the following statements is correct concerning a Treasury bill? 
A. The asked discount indicates the amount a bond dealer is willing to pay to purchase a Treasury bill.
B. The asked yield on a Treasury bill is a bond equivalent yield.
C. The asked discount for a Treasury bill is greater than the bid discount.
D. The asked yield for a Treasury bill is computed based on a 360-day year.
E. The bid price on a Treasury bill is computed based on a 365, or 366-day year.

 


45. The bond equivalent yield adjusts for leap years by using 366 days starting with: 
A. January 1 of the leap year and ending with December 31 of the leap year.
B. February 1 of the year prior to the leap year and ending with February 29 of the leap year.
C. March 1 of the year prior to the leap year and ending with February 29 of the leap year.
D. the second quarter of the year prior to the leap year and ending with the first quarter of the leap year.
E. February 1 of the leap year and ending with February 29 of the leap year.

 

46. Money market rates are generally one or the other of which two rates?
I. bank discount rate
II. bond equivalent rate
III. annual percentage rate
IV. effective annual rate 
A. I and II only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only

 

47. Consider a money market instrument with 48 days to maturity and a quoted ask price of 99. Which two of the following statements are correct as they relate to this instrument?
I. The bond equivalent yield is an effective annual rate.
II. The bank discount rate is lower than the bond equivalent yield.
III. The bank discount rate is an effective annual rate.
IV. The bond equivalent yield is lower than the effective annual rate. 
A. I and II only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only

 


48. Which two of the following are the largest categories of fixed-income securities in the U.S.?
I. U.S. government debt
II. corporate debt
III. municipal government debt
IV. real estate mortgage debt 
A. I and II only
B. I and III only
C. III and IV only
D. I and IV only
E. II and IV only

 

49. Which one of the following borrowers will pay the rates depicted on a Treasury yield curve? 
A. large corporation
B. municipal government
C. bank's best customers
D. high-risk borrower
E. default-free borrower

 

50. Which of the following statements are true as applied to U.S. agency debt? 
I. It is equally as risky as Treasury debt.
II. It is frequently subject to state taxes.
III. It has the same credit guarantee as U.S. Treasury debt.
IV. It generally has a lower yield than U.S. Treasury debt with the same maturity. 
A. II only
B. III only
C. I and III only
D. III and IV only
E. I, III, and IV only

 


51. Which one of the following applies to "Yankee bonds"? 
A. U.S. corporate bonds that are sold internationally
B. U.S. corporate bonds denominated in a foreign currency
C. U.S. government bonds that are sold internationally
D. any bond that is denominated in U.S. dollars
E. foreign-issued bonds sold in the U.S.

 

52. Which one of the following statements is correct? 
A. The yield curve relates time to maturity to interest rates on zero-coupon bonds.
B. The yield curve is based on Treasury bill yields.
C. The term structure of interest rates is based on default-free, pure discount securities.
D. The term structure of interest rates is based on default-free, coupon bonds.
E. The yield curve ignores default risk while the term structure includes a default risk premium.

 

53. Treasury STRIPS are: 
A. zero-coupon bonds issued by the U.S. Treasury with maturities of one year or less.
B. currently quoted in 32nds of a dollar.
C. zero-coupon securities.
D. a type of mortgage bond.
E. coupon securities created from the interest and principal payments of Treasury bonds.

 

54. The approximate nominal interest rate is computed as the real rate: 
A. minus the risk-free rate.
B. minus the inflation rate.
C. plus the risk-free rate.
D. plus the inflation rate.
E. divided by the inflation rate.

 


55. Which one of the following statements is correct? 
A. All real interest rates will be positive as long as the inflation rate is positive.
B. Real rates must exceed inflation rates.
C. Short-term interest rates are affected by future inflation expectations.
D. Treasury bill returns tend to vary in direct relation to inflation rates.
E. The Fisher hypothesis advocates that real interest rates follow inflation rates.

 

56. Which one of the following debt instruments guarantees investors a positive real rate of return? 
A. zero-coupon bond
B. default-free, pure-discount bond
C. T-bill
D. TIPS
E. T-bond

 

57. Inflation-indexed Treasury securities:
I. adjust the principal amount on an annual basis.
II. are default-free.
III. offer a positive real rate of return.
IV. have a variable coupon rate. 
A. II and III only
B. III and IV only
C. I, II, and III only
D. I, II, and IV only
E. I, II, III, and IV

 

58. Based on expectations theory, the term structure of interest rates will be _____ anytime investors believe that interest rates will be higher in the future than they are today. 
A. volatile
B. flat
C. downward sloping
D. upward sloping
E. vertical

 


59. The variable f1,1 as used in the expectations theory is interpreted as the forward rate for one year: 
A. based on the prior one-year rate.
B. at 1 percent.
C. based on a 1 percent increase from the current rate.
D. commencing in one year.
E. based on a 1 percent probability of occurrence.

 

60. According to the expectations theory and the Fisher hypothesis, a downward-sloping term
structure is indicative of which of the following based on market expectations?
I. nominal interest rates are expected to increase
II. nominal interest rates are expected to decline
III. inflation rates are expected to increase
IV. inflation rates are expected to decrease 
A. I only
B. II only
C. IV only
D. I and III only
E. II and IV only

 

61. Which of the following statements are true?
I. Lenders have a preference for shorter maturities.
II. Lenders have a preference for longer maturities.
III. Borrowers have a preference for shorter maturities.
IV. Borrowers have a preference for longer maturities. 
A. I only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only

 


62. Based solely on the maturity preference theory, long-term interest rates: 
A. should equal short-term rates.
B. are unrelated to short-term rates.
C. may be higher than or lower than short-term rates.
D. should be lower than short-term rates.
E. should be higher than short-term rates.

 

63. Which one of the following statements concerning the modern fixed-income market is correct? 
A. Pension funds generally have a preference for short maturities.
B. Current maturity preference theory states that both borrowers and lenders prefer short maturities.
C. Market segmentation theory does little to explain the modern fixed-income market.
D. The major borrower in the modern market borrows primarily on a long-term basis.
E. Institutional investors tend to invest in only one maturity range.

 

64. Which of the following comprise the nominal interest rate on default-free securities according to the modern view of the term structure of interest rates?
I. liquidity premium
II. real rate
III. interest rate risk premium
IV. inflation premium 
A. I and II only
B. II and III only
C. III and IV only
D. II, III, and IV only
E. I, II, III, and IV

 

65. Modern term structure theory supports the contention that the term structure of interest rates will: 
A. be upward sloping.
B. be downward sloping.
C. be upward sloping in the short-term and relatively flat in the long-term.
D. be constant over time.
E. change over time.

 


66. You want to purchase a security that will pay you $1,000 six years from now. If you want to earn an annual nominal rate of 7.5 percent, how much should you pay for this investment today? 
A. $627.41
B. $630.17
C. $641.41
D. $647.96
E. $662.01

 

67. You invest $3,600 today at a nominal annual rate of 5.5 percent. This investment will pay one payment five years from now. What will be the amount of that payment? 
A. $2,754.48
B. $2,906.16
C. $4,705.06
D. $4,818.09
E. $5,018.62

 

68. An investment will make one payment of $24,000 eleven years from now. What is the current value of this investment if the nominal rate of return is 5.8 percent? 
A. $11,980.86
B. $12,124.29
C. $12,390.08
D. $12,908.30
E. $13,515.46

 

69. A $1,000 face value, 120-day bond is quoted at a bank discount yield of 3.38 percent. What is the current bond price? 
A. $957.60
B. $960.09
C. $974.18
D. $982.02
E. $988.73

 


70. A bond has a face value of $20,000 and matures in 62 days. What is the bank discount yield if the bond is currently selling for $19,792.30? 
A. 4.67 percent
B. 4.87 percent
C. 5.48 percent
D. 5.78 percent
E. 6.03 percent

 

71. A $5,000 face value bond is quoted at a bank discount yield of 2.8 percent. What is the current value of the bond if it matures in 36 days? 
A. $4,972
B. $4,978
C. $4,982
D. $4,986
E. $4,991

 

72. A $50,000 face value bond matures in 68 days and has a bank discount yield of 4.5 percent. What is the current value of the bond? 
A. $49,392.19
B. $49,473.14
C. $49,486.47
D. $49,511.39
E. $49,575.00

 

73. A Treasury bill has 21 days to maturity and a bank discount yield of 1.89 percent. What is the bond equivalent yield? 
A. 1.89 percent
B. 1.90 percent
C. 1.92 percent
D. 1.94 percent
E. 1.96 percent

 


74. A Treasury bill is quoted at a bank discount yield of 1.08 percent and has 12 days to maturity. What is the bond equivalent yield given that this is a leap year? 
A. 1.06 percent
B. 1.08 percent
C. 1.10 percent
D. 1.12 percent
E. 1.13 percent

 

75. What is the bond equivalent yield on a 30-day Treasury bill that has a bank discount yield of 2.01 percent? 
A. 1.97 percent
B. 1.99 percent
C. 2.02 percent
D. 2.04 percent
E. 2.07 percent

 

76. A Treasury bill has a face value of $200,000, an asked yield of 2.12 percent, and matures in 28 days. What is the price of this bill? 
A. $199,397.19
B. $199,408.08
C. $199,531.76
D. $199,670.22
E. $199,717.08

 

77. A Treasury bill has a face value of $100,000, a price of $99,797.12, and matures in 35 days. What is the asked yield? 
A. 1.98 percent
B. 2.12 percent
C. 2.28 percent
D. 3.67 percent
E. 3.74 percent

 


78. A Treasury bill has a face value of $50,000, an asked yield of 2.87 percent, and matures in 31 days. What is the price of this bill? 
A. $49,687.14
B. $49,706.03
C. $49,819.80
D. $49,868.00
E. $49,878.42

 

79. Your credit card has an annual percentage rate of 18.9 percent and compounds interest daily. What is the effective annual rate? 
A. 19.47 percent
B. 19.58 percent
C. 19.82 percent
D. 19.94 percent
E. 20.80 percent

 

80. A Treasury bill matures in 73 days and has a bond equivalent yield of 4.18 percent. What is the effective annual rate? 
A. 4.25 percent
B. 4.47 percent
C. 4.50 percent
D. 4.54 percent
E. 4.57 percent

 

81. A Treasury bill matures in 81 days and has a bond equivalent yield of 2.79 percent. What is the effective annual rate? 
A. 2.79 percent
B. 2.82 percent
C. 2.85 percent
D. 2.88 percent
E. 2.91 percent

 


82. A Treasury bill has 36 days left to maturity. The bank discount yield on the bill is 4.14 percent. What is the effective annual rate? 
A. 4.30 percent
B. 4.36 percent
C. 4.40 percent
D. 4.45 percent
E. 4.49 percent

 

83. A 90-day Treasury bill has a bank discount yield of 4.2 percent. What is the effective annual rate? 
A. 4.22 percent
B. 4.25 percent
C. 4.28 percent
D. 4.32 percent
E. 4.37 percent

 

84. A $25,000 face value STRIPS is quoted at 93.400. What is the dollar price? 
A. $23,067.50
B. $23,210.94
C. $23,215.00
D. $23,277.78
E. $23,350.00

 

85. What is the current value of a $5,000 face value STRIPS with 6 years to maturity and a yield to maturity of 8.1 percent? 
A. $2,998.09
B. $3,009.16
C. $3,105.02
D. $3,128.10
E. $3,133.40

 


86. A $50,000 face value STRIPS matures in 9 years and has a yield to maturity of 7.76 percent. What is the current dollar price of this security? 
A. $25,199.68
B. $27,211.08
C. $29,038.18
D. $34,141.41
E. $36,809.18

 

87. A $5,000 face value STRIPS matures in 7 years and is currently quoted at a price of 64.238. What is the yield-to-maturity? 
A. 3.21 percent
B. 3.38 percent
C. 4.87 percent
D. 6.42 percent
E. 6.76 percent

 

88. A $10,000 face value STRIPS is currently quoted at 38.642 and has 11 years to maturity. What is the yield-to-maturity? 
A. 4.26 percent
B. 4.30 percent
C. 8.48 percent
D. 8.65 percent
E. 8.83 percent

 

89. A bond has a nominal rate of return of 5.87 percent and the inflation rate is 4.13 percent. What is the approximate real rate? 
A. 1.62 percent
B. 1.70 percent
C. 1.74 percent
D. 1.83 percent
E. 1.88 percent

 


90. You want to earn a real rate of return of 3.25 percent at a time when the inflation rate is 2.41 percent. What is the approximate nominal rate which you must earn? 
A. 5.42 percent
B. 5.66 percent
C. 5.68 percent
D. 5.74 percent
E. 5.81 percent

 

91. The one-year interest rate is 4.80 percent and the two-year interest rate is 5.13 percent. What is the one year interest rate one year from now? Assume the rates are effective annual rates. 
A. 5.02 percent
B. 5.23 percent
C. 5.46 percent
D. 5.51 percent
E. 5.74 percent

 

92. What is the one year interest rate one year from now if the current one-year interest rate is 2.87 percent and the two-year interest rate is 3.11 percent? Assume the rates are effective annual rates. 
A. 3.22 percent
B. 3.27 percent
C. 3.31 percent
D. 3.35 percent
E. 3.38 percent

 

93. A one-year STRIPS sells at an interest rate of 3.54 percent and a two-year STRIPS sells at an interest rate of 3.49 percent. What is the implied one year forward rate? Assume the rates are effective annual rates. 
A. 3.44 percent
B. 3.50 percent
C. 3.54 percent
D. 3.57 percent
E. 3.60 percent

 


94. A two-year STRIPS sells at an interest rate of 4.84 percent and a three-year STRIPS sells at a rate of 4.97 percent. What is the implied one year interest rate two years from now? Assume the rates are effective annual rates. 
A. 5.23 percent
B. 5.36 percent
C. 5.41 percent
D. 5.45 percent
E. 5.50 percent

 

95. The following premiums apply to a 3-month bond: interest rate risk premium = 0.2 percent; real return = 1.9 percent; default premium = 0.8 percent; inflation premium = 1.4 percent. What is the expected nominal interest rate on a default-free security that has 3 months to maturity? 
A. 1.9 percent
B. 2.0 percent
C. 2.1 percent
D. 3.3 percent
E. 3.6 percent

 

96. The following premiums apply to a 7-month bond: interest rate risk premium = 0.35 percent; liquidity premium = 0.40 percent; default premium = 1.20 percent; inflation premium = 3.15 percent; real rate = 3.00 percent. What is the expected nominal interest rate on a 7-month risky security given these values? 
A. 5.85 percent
B. 6.45 percent
C. 7.55 percent
D. 8.10 percent
E. 9.30 percent

 


97. The following premiums apply to a 6-month bond: interest rate risk premium = 0.22 percent; real rate = 3.50 percent; default premium = 0.12 percent; inflation premium = 1.45 percent. What is the expected difference in nominal interest rates between a 6-month risky security and a 6-month, default-free security? 
A. 0.12 percent
B. 0.34 percent
C. 0.37 percent
D. 1.57 percent
E. 1.60 percent

 

 

1. Which one of the following is the correct definition of a coupon rate? 
A. semi-annual interest payment/par value
B. annual interest/par value
C. annual interest/market value
D. semi-annual coupon/bond price
E. annual coupon/bond price

 

2. What is the annual interest divided by the market price of a bond called? 
A. coupon rate
B. effective annual yield
C. current yield
D. yield to maturity
E. yield to market

 

3. The yield to maturity is the: 
A. discount rate that equates a bond's price with the present value of the bond's future cash flows.
B. rate you will earn if your bond is called on the earliest possible date.
C. rate computed by dividing the annual interest by the par value.
D. rate used to compute the amount of each interest payment.
E. rate computed as the annual interest divided by the market value.

 

4. A premium bond is defined as a bond that: 
A. has a duration that is less than 1.0.
B. has a face value that exceeds its market value.
C. is callable at a price which exceeds the face value.
D. has a market price that exceeds par value.
E. is selling for less than face value.

 


5. A discount bond: 
A. pays a variable coupon payment.
B. has a market price in excess of face value.
C. has a duration that is less than that required by an investor.
D. has a par value that is less than $1,000.
E. has a face value that exceeds the market value.

 

6. The price of a bond, net of accrued interest, is referred to as the bond's: 
A. dirty price.
B. par value.
C. clean price.
D. maturity value.
E. discount value.

 

7. The dirty price of a bond is the: 
A. invoice price.
B. quoted price.
C. issue price.
D. average of the bid and asked prices.
E. dealer purchase price.

 

8. A callable bond: 
A. can be paid off early at either the issuer's or the bondholder's request.
B. can be redeemed early if the bondholder so requests.
C. can have its maturity date extended by the issuer.
D. can be redeemed by the issuer prior to maturity.
E. is a bond that pays a variable interest payment.

 

9. Which one of the following does an issuer pay to redeem a bond prior to maturity? 
A. par value
B. face value
C. put price
D. call price
E. discounted price

 


10. Which one of the following prices is equal to the present value of a bond's future cash flows and is paid when a bond is redeemed prior to maturity? 
A. call protected
B. face value
C. make-whole call
D. tender-offer
E. deferred

 

11. An issuer has a bond outstanding that matures in 18 years. Which one of the following prevents the issuer from buying back that bond today? 
A. make-whole provision
B. call protection period
C. newly issued provision
D. put provision
E. call premium

 

12. The yield that a bond will earn given that it is bought back by the issuer at the earliest possible date is the: 
A. market yield.
B. current yield.
C. yield to maturity.
D. yield to put.
E. yield to call.

 

13. Which one of the following is the risk that market interest rates may increase causing the price of a bond to decline? 
A. inflation risk
B. reinvestment risk
C. yield risk
D. interest rate risk
E. default risk

 


14. The rate of return an investor actually earns from owning a bond is called which one of the following? 
A. market return
B. realized yield
C. annualized coupon yield
D. maturity yield
E. call yield

 

15. Which one of the following measures a bond's sensitivity to changes in market interest rates? 
A. yield to call
B. yield to market
C. duration
D. immunization
E. target date valuation

 

16. A change in a bond's price caused by which one of the following is defined as the dollar value of an 01? 
A. change in yield to call due to passage of one year
B. change in yield to maturity of one percent
C. change in yield to maturity of one basis point
D. change in coupon rate of one percent
E. change in coupon rate of one basis point

 

17. The yield value of a 32nd is the change needed in which one of the following to cause a bond's price to change by 1/32nd? 
A. current yield
B. yield to maturity
C. coupon rate
D. call premium
E. call date

 


18. A dedicated portfolio is a bond portfolio created to: 
A. maximize current interest income.
B. provide an increasing steady stream of income.
C. maximize the return given declining interest rates.
D. fund a future cash outlay.
E. avoid taxation.

 

19. Which one of the following risks is associated with investing a coupon payment at a rate that is lower than the bond's yield-to-maturity? 
A. reinvestment rate risk
B. current rate risk
C. payment risk
D. current yield risk
E. maturity risk

 

20. Which one of the following involves creating a portfolio in a manner which minimizes the uncertainty of the portfolio's maturity target date value? 
A. duration
B. reinvestment
C. immunization
D. modification
E. call protection

 

21. Price risk is the risk that: 
A. coupon payments will be reinvested at a rate that is less than the bond's yield-to-maturity.
B. the bond principal will not be paid in full or on time.
C. the bonds in a dedicated portfolio will decrease in value in response to an increase in interest rates.
D. market prices increase due to market interest rate changes making bonds more expensive to purchase.
E. the yield-to-maturity will be less than the inflation risk causing the real rate of return to be negative.

 


22. Periodically rebalancing a portfolio so that the duration continues to match the target date is called: 
A. risk assessment.
B. duration testing.
C. dedication matching.
D. portfolio matching.
E. dynamic immunization.

 

23. A basic bond that has a face value of $1,000 and pays regular semiannual coupon payments is referred to as which one of the following? 
A. pure discount bond
B. premium bond
C. inflation bond
D. straight bond
E. conversion bond

 

24. Which of the following will increase if the coupon rate increases?
I. face value
II. market value
III. yield-to-maturity
IV. current yield 
A. I and II only
B. III and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV

 

25. Which one of the following will decrease the current yield of a bond? 
A. increase in the face value
B. change from semi-annual to annual coupon payments
C. decrease in the call premium
D. decrease in the coupon rate
E. decrease in the bond price

 


26. Which one of the following will occur if a bond's discount rate is lowered? 
A. market price will increase
B. coupon payment amount will decrease
C. current yield will increase
D. call premium will increase
E. coupon rate will decrease

 

27. Which one of the following statements is correct concerning premium bonds? 
A. The premium increases when interest rates increase.
B. The coupon rate is less than the current yield.
C. As the time to maturity decreases, the premium increases.
D. The yield to maturity is less than the coupon rate.
E. The par value exceeds the face value.

 

28. Which one of the following statements is correct concerning discount bonds? 
A. The current yield is less than the yield to maturity.
B. The bonds will be redeemed at maturity for less than face value.
C. The coupon rate is greater than the current yield.
D. The clean price is greater than the dirty price.
E. Only zero-coupon bonds sell at a discount.

 

29. Which one of the following statements applies to a par value bond? 
A. The current yield is less than the coupon rate.
B. The yield-to-maturity equals the risk-free, or Treasury bill, rate.
C. The par value exceeds the market price.
D. The current yield, coupon rate, and yield-to-maturity are equal.
E. The dirty price equals the clean price.

 


30. Assuming there is no default risk, both a premium bond and a discount bond must share which one of the following characteristics? 
A. market price less than a par value bond
B. yield-to-maturity less than the coupon rate
C. maturity value equal to a par value bond
D. current yield equal to that of a par value bond
E. coupon rate exceeding the yield-to-maturity

 

31. A bond has a current yield that is equal to the yield-to-maturity. Given this, which one of the following must also be true? 
A. The bond must pay annual interest.
B. The maturity value must be greater than the bond price.
C. The bond can have any maturity date.
D. The coupon rate must exceed the current yield.
E. The price must exceed the par value.

 

32. For a premium bond, the: 
A. current yield is equal to the coupon rate but less than the yield to maturity.
B. yield to maturity exceeds both the coupon rate and the current yield.
C. coupon rate is equal to the yield to maturity but less than the current yield.
D. current yield is less than either the coupon rate or the yield to maturity.
E. coupon rate exceeds both the yield to maturity and the current yield.

 

33. Davis Industrial bonds have a current market price of $990 and a 6 percent coupon. The bonds pay interest semi-annually on March 1 and September 1. Assume today is January 1. How many months of accrued interest are included in the dirty price of these bonds? 
A. zero
B. two
C. three
D. four
E. five

 


34. A bond pays interest semiannually on February 1 and August 1. Assume today is October 1. How many months of accrued interest are included in the clean price of this bond? 
A. zero
B. two
C. three
D. four
E. five

 

35. The yield-to-maturity assumes which one of the following? 
A. The bond is purchased at par value.
B. All interest payments earn the latest rate of market interest.
C. The bond is called on the earliest possible date.
D. The bond is a pure discount bond.
E. All coupon payments are reinvested at the yield-to-maturity rate.

 

36. Which one of the following increases the probability that a bond will be called? 
A. The call premium is relatively high.
B. The bond is within the call protection period.
C. The bond was issued within the past year.
D. Market interest rates decline.
E. The bond is selling at par.

 

37. Which one of the following statements is correct concerning a callable bond that is currently selling below face value? Assume there is no risk of default. Also assume the issuer only calls bonds when they can be refinanced at a lower rate of interest. 
A. The bond will most likely be called while the bonds are selling at a discount.
B. The yield-to-maturity is presently more relevant to an investor than the yield-to-call.
C. The bond is likely going to be called due to the low current interest rates.
D. The bond is currently paying a premium.
E. The bond issue will most likely be replaced with a new bond issue.

 


38. Which one of the following statements is correct? 
A. Investors know the rate of return they will earn with certainty provided they hold bonds until they mature.
B. Reinvestment risk causes realized yields to differ from promised yields.
C. Realized yields generally equal promised yields as long as a bond is not called.
D. Redeeming a bond early helps ensure an investor earns the promised yield.
E. Realized yields cannot exceed promised yields.

 

39. According to Malkiel's theorems, bond prices and bond yields are: 
A. inversely related.
B. uncorrelated.
C. positively related.
D. directly related.
E. independent of each other.

 

40. Which combination of bond characteristics causes a bond to be most sensitive to changes in market interest rates?
I. low coupon rates
II. high coupon rates
III. short time to maturity
IV. long time to maturity 
A. III only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only

 

41. How does the size of the change in a bond's price react in response to a given change in the yield to maturity as the time to maturity increases? 
A. decreases at an increasing rate
B. decreases at a diminishing rate
C. increases at a constant rate
D. increases at a diminishing rate
E. increases at an increasing rate

 


42. Which one of the following statements is correct according to Malkiel's Theorems? 
A. For a given change in a bond's yield to maturity, the shorter the term to maturity, the greater will be the magnitude of the change in the bond's price.
B. The price of an outstanding bond is unaffected by changes in market interest rates.
C. The size of the change in a bond's price increases at a constant rate given even incremental increases in a bond's yield-to-maturity even as the term to maturity lengthens.
D. For a given change in a bond's yield-to-maturity, the absolute magnitude of the resulting change in the bond's price is directly related to the bond's coupon rate.
E. For a given absolute change in a bond's yield-to-maturity, a decrease in yield will cause a greater change in the bond's price than will an increase in yield.

 

43. Which one of the following must be equal for two bonds if they are to have similar changes in their prices given a relatively small change in bond yields? 
A. coupon payment
B. time to maturity
C. market price
D. duration
E. current yield

 

44. All else constant, which of the following will decrease the Macaulay duration of a straight bond?
I. reducing the coupon payment
II. shortening the time to maturity
III. lowering the yield to maturity 
A. I only
B. II only
C. II and III only
D. I and II only
E. I and III only

 


45. Which one of the following statements is correct concerning Macaulay duration? 
A. The duration of a zero coupon bond is equal to the time to maturity.
B. Most bonds have durations in excess of 15 years.
C. The duration of a coupon bond is a linear function between the time to maturity and the duration.
D. The duration of a coupon bond is greater than that of a zero coupon bond given equal maturity dates.
E. The percentage change in a bond's price is approximately equal to the change in the yield to maturity multiplied by (-1 ´ Macaulay duration).

 

46. The modified duration: 
A. is equal to the Macaulay duration divided by (1 + Yield to maturity).
B. multiplied by (-1 ´ Change in the yield to maturity) equals the approximate percentage change in a bond's price.
C. will be the same for any bonds that have equal times to maturity.
D. only applies to pure discount securities.
E. must be converted to a Macaulay duration before computing the percentage change in a bond's price.

 

47. To immunize your portfolio, you should: 
A. avoid callable bonds.
B. match bond maturity dates to your target dates.
C. match bond durations to your target dates.
D. purchase only par value bonds.
E. purchase only high-coupon bonds.

 

48. Last year, you created an immunized portfolio with an average maturity date of 14.5 years, a yield-to-maturity of 9.8 percent, and a duration of 9.6 years. According to the policy of dynamic immunization, you should now modify your portfolio in which one of the following ways? 
A. modify the yield-to-maturity to 9.1 percent
B. modify the portfolio so the average maturity remains at 14.5 years
C. modify the portfolio so the average maturity becomes 13.5 years
D. modify the portfolio so the duration remains at 9.6 years
E. modify the portfolio so the duration becomes 8.6 years

 


49. Dynamic immunization is primarily aimed at reducing which one of the following risks? 
A. default
B. liquidity
C. reinvestment
D. inflation
E. taxation

 

50. A bond pays semiannual interest payments of $37.50. What is the coupon rate if the par value is $1,000? 
A. 3.75 percent
B. 4.50 percent
C. 6.80 percent
D. 7.50 percent
E. 10.38 percent

 

51. A bond has a face value of $1,000 and a coupon rate of 5.5 percent. What is your annual interest payment if you own 8 of these bonds? 
A. $110
B. $220
C. $330
D. $440
E. $880

 

52. A bond has a par value of $1,000 and a coupon rate of 6 percent. What is the dollar amount of each semiannual interest payment if you own 6 of these bonds? 
A. $180
B. $210
C. $320
D. $420
E. $840

 


53. A bond has a par value of $1,000, a market price of $1,012, and a coupon rate of 5.75 percent. What is the current yield? 
A. 5.68 percent
B. 5.71 percent
C. 5.75 percent
D. 5.78 percent
E. 5.80 percent

 

54. A 6.5 percent coupon bond has a face value of $1,000 and a current yield of 6.61 percent. What is the current market price? 
A. $983.36
B. $989.18
C. $1,011.82
D. $3,933.43
E. $4,067.47

 

55. A bond has 8 years to maturity, a 7 percent coupon, a $1,000 face value, and pays interest semiannually. What is the bond's current price if the yield to maturity is 6.91 percent? 
A. $799.32
B. $848.16
C. $917.92
D. $1,005.46
E. $1,009.73

 

56. The Country Inn has bonds outstanding with a par value of $1,000 each and a 6.5 percent coupon. The bonds mature in 7.5 years and pay interest semiannually. What is the current value of each of these bonds if the yield to maturity is 6.8 percent? 
A. $982.60
B. $1,003.29
C. $1,005.88
D. $1,008.36
E. $1,009.47

 


57. Last year, BT Motors issued 10-year bonds with a 9 percent coupon and semi-annual interest payments. What is the market price of a $1,000 bond if the yield to maturity is 8.9 percent? 
A. $1,003.97
B. $1,006.53
C. $1,042.89
D. $1,414.14
E. $1,585.36

 

58. A $1,000 face value bond matures in 9 years, pays interest semiannually, and has a 6.5 percent coupon. The bond currently sells for $1,015. What is the yield to maturity? 
A. 6.17 percent
B. 6.22 percent
C. 6.28 percent
D. 6.34 percent
E. 6.37 percent

 

59. A $1,000 par value 5 percent Treasury bond pays interest semiannually and matures in 7.5 years. What is the yield to maturity if the bond is currently quoted at a price of 112.34? 
A. 3.14 percent
B. 3.18 percent
C. 3.23 percent
D. 6.28 percent
E. 6.36 percent

 

60. A $1,000 semiannual coupon bond matures in 13 years, has a coupon rate of 7.5 percent, and a market price of $982. What is the yield to maturity? 
A. 3.86 percent
B. 4.01 percent
C. 4.08 percent
D. 7.69 percent
E. 7.72 percent

 


61. An 8.5 percent coupon bond pays interest semiannually and has 10.5 years to maturity. The bond has a face value of $1,000 and a market value of $878.50. What is the yield to maturity? 
A. 5.16 percent
B. 8.37 percent
C. 8.78 percent
D. 10.43 percent
E. 11.21 percent

 

62. A $1,000 par value bond is currently valued at $1,033.53. The bond pays interest semi-annually, has 6 years to maturity, and has a yield to maturity of 7.3 percent. The coupon rate is _____ percent and the current yield is _____ percent. 
A. 6.80; 7.21
B. 8.00; 7.74
C. 8.00; 7.81
D. 8.50; 8.22
E. 8.50; 8.30

 

63. A $1,000 face value bond is selling for $1,016.36. The bond pays interest semiannually and has 3.5 years to maturity. The yield to maturity is 5.48 percent. The current yield is _____ percent and the coupon rate is _____ percent. 
A. 5.86; 5.90
B. 5.90; 6.00
C. 5.90; 5.86
D. 6.00; 5.90
E. 6.00; 5.86

 

64. The outstanding bonds of International Plastics mature in 4 years and pay semiannual interest payments of $32.50 on a $1,000 face value bond. The bonds are currently selling for $1,008.64. The coupon rate is _____ percent, the current yield is _____ percent, and the yield to maturity is _____ percent. 
A. 6.50; 6.44; 6.25
B. 6.50; 6.56; 6.75
C. 6.44; 6.50; 6.75
D. 6.75; 6.56; 6.50
E. 6.75; 6.81; 6.95

 


65. A bond has a $1,000 par value, semiannual interest payments of $40, and a current market value of $1,054. The bonds mature in 12.5 years. The coupon rate is _____ percent, the current yield is _____ percent, and the yield to maturity is _____ percent. 
A. 8.00; 7.67; 7.72
B. 8.00; 7.72; 7.64
C. 8.00; 7.59; 7.33
D. 8.50; 7.87; 7.73
E. 8.50; 8.12; 8.19

 

66. Alaskan Motors has outstanding bonds that mature in 14 years and pay $32.50 every 6 months in interest. The par value is $1,000 per bond and the market value is $981. The coupon rate is _____ percent, the current yield is _____ percent, and the yield to maturity is _____ percent. 
A. 6.50; 6.37; 6.67
B. 6.50; 6.63; 6.71
C. 6.50; 6.67; 6.71
D. 7.00; 6.37; 6.67
E. 7.00; 6.67; 6.71

 

67. You are considering two bonds. Both have semi-annual, 8 percent coupons, $1,000 face values, and yields to maturity of 7.5 percent. Bond S matures in 4 years and Bond L matures in 8 years. What is the difference in the current prices of these bonds? 
A. $10.51
B. $11.33
C. $11.52
D. $12.67
E. $12.88

 

68. Two bonds have a coupon rate of 7 percent, semi-annual payments, face values of $1,000, and yields to maturity of 7.4 percent. Bond S matures in 5 years and bond L matures in 10 years. What is the difference in the current prices of these bonds? 
A. $8.26
B. $9.19
C. $9.40
D. $10.38
E. $11.45

 


69. You want to buy a bond that has a quoted price of $923. The bond pays interest semiannually on April 1 and October 1. The coupon rate is 6 percent. What is the clean price of this bond if today's date is June 1? Assume a 360-day year. 
A. $927.62
B. $923.00
C. $923.23
D. $936.85
E. $1,076.83

 

70. You are buying a bond at a quoted price of $887. The bond has a 8.0 percent coupon and pays interest semiannually on February 1 and August 1. What is the dirty price of this bond if today is April 1? Assume a 360-day year. 
A. $896.17
B. $900.33
C. $913.67
D. $938.50
E. $942.00

 

71. Green Roofing Materials has 7.5 percent bonds outstanding that are currently priced at $1,068 each. The bonds pay interest on December 1 and June 1. What is the dirty price of this bond if today's date is May 1? Assume a 360-day year. 
A. $1,099.25
B. $1,105.75
C. $1,112.00
D. $1,118.25
E. $1,124.50

 

72. You own a bond that pays semiannual interest payments of $40. The bond is callable in 3 years at a premium of $80. What is the callable bond price if the yield to call is 9.7 percent? 
A. $995.46
B. $1,016.86
C. $1,119.02
D. $1,124.87
E. $1,220.87

 


73. Ted owns a bond which is callable in 2.5 years. The bond has a 6 percent coupon, pays interest semiannually, has a par value of $1,000, and has a yield to call of 6.3 percent. What is the call premium if the bond currently sells for $1,044.54? 
A. $50
B. $60
C. $70
D. $75
E. $80

 

74. Cochran's Furniture Outlet is issuing 30-year, 10 percent callable bonds. These bonds are callable in 5 years with a call premium of $50. The bonds are being issued at par and pay interest semi-annually. What is the yield to call? 
A. 10.78 percent
B. 11.72 percent
C. 12.00 percent
D. 12.47 percent
E. 12.89 percent

 

75. Blue Water Homes has 8 percent bonds outstanding that mature in 13 years. The bonds pay interest semiannually. These bonds have a par value of $1,000 and are callable in 2 years at a premium of $75. What is the yield to call if the current price is equal to 103.25 percent of par? 
A. 7.51 percent
B. 7.70 percent
C. 8.06 percent
D. 8.98 percent
E. 9.66 percent

 


76. Will owns a bond with a make-whole call provision. The bond matures in 14 years but is being called today. The coupon rate is 9 percent with interest paid semiannually. What is the current call price if the applicable discount rate is 7.5 percent and the make-whole call provision applies? 
A. $932.84
B. $957.11
C. $1,074.13
D. $1,110.28
E. $1,128.66

 

77. Ferrous Metals has bonds outstanding which it is calling today under the make-whole call provision. The bonds mature in 6 years, have a 10 percent coupon, pay interest semiannually, and have a par value of $1,000. What is today's call price given that the applicable discount rate is 7.20 percent? 
A. $879.12
B. $968.35
C. $1,015.55
D. $1,134.49
E. $1,172.71

 

78. Alex purchased a $1,000 par value bond one year ago at a price of $1,008. At the time of purchase, the bond had 14 years to maturity and a 6 percent, semiannual coupon. Today, the bond has a yield to maturity of 6.5 percent. What is his realized yield as of today? 
A. 0.43 percent
B. 0.86 percent
C. 1.29 percent
D. 1.72 percent
E. 2.60 percent

 


79. One year ago, you purchased a $1,000 face value bond at a yield to maturity of 9.45 percent. The bond has a 9 percent coupon and pays interest semiannually. When you purchased the bond, it had 12 years left until maturity. You are selling the bond today when the yield to maturity is 8.20 percent. What is your realized yield on this bond? 
A. 14.54 percent
B. 15.27 percent
C. 16.35 percent
D. 17.60 percent
E. 18.11 percent

 

80. You own a 7 percent, semiannual coupon bond that matures in 8 years. The par value is $1,000 and the current yield to maturity is 7.6 percent. What will the percentage change in the price of your bond be if the yield to maturity suddenly increases by 75 basis points? 
A. -4.37 percent
B. -4.49 percent
C. -4.54 percent
D. -4.61 percent
E. -4.77 percent

 

81. Phil owns a 7 percent, semiannual coupon bond that has a face value of $1,000 and matures in 16 years. The bond has a current yield to maturity of 7.1 percent. What will the percentage change in the price of his bond be if interest rates decrease by 50 basis points? 
A. 4.33 percent
B. 4.68 percent
C. 4.91 percent
D. 5.17 percent
E. 5.26 percent

 

82. A $1,000 face value bond has a 7 percent coupon and pays interest semiannually. The bond matures in 2 years and has a yield to maturity of 6.8 percent. What is the Macaulay duration? 
A. 1.80 years
B. 1.85 years
C. 1.90 years
D. 1.93 years
E. 1.97 years

 


83. A zero-coupon bond has a par value of $1,000 and matures in 4.5 years. The yield to maturity is 6.4 percent. What is the Macaulay duration? 
A. 3.67 years
B. 3.81 years
C. 3.92 years
D. 4.26 years
E. 4.50 years

 

84. A bond has a Macaulay duration of 5.75 years. What will be the percentage change in the bond price if the yield to maturity increases from 6 percent to 6.4 percent? 
A. -2.23 percent
B. -2.41 percent
C. -3.30 percent
D. -3.38 percent
E. -3.46 percent

 

85. The price of a bond decreased by 1.45 percent in response to an increase in the yield to maturity from 7.2 to 7.6 percent. What is the bond's Macaulay duration? 
A. 3.39 years
B. 3.76 years
C. 3.92 years
D. 4.04 years
E. 4.16 years

 

86. A bond has a Macaulay duration of 7.5, a yield to maturity of 6.6 percent, a coupon rate of 7.5 percent, and semiannual interest payments. What is the bond's modified duration? 
A. 6.59 years
B. 6.84 years
C. 6.92 years
D. 7.06 years
E. 7.26 years

 


87. A 6 percent, semiannual coupon bond has a yield to maturity of 7.4 percent and a Macaulay duration of 5.7. The bond has a modified duration of _____ and will have a _____ percentage increase in price in response to a 25 basis point decrease in the yield to maturity. 
A. 5.4829; 1.35
B. 5.4966; 1.32
C. 5.4966; 1.37
D. 5.3073; 1.33
E. 5.3073; 1.38

 

88. A bond has a modified duration of 7.22 and a yield to maturity of 8.9 percent. If interest rates increase by 75 basis points, the bond's price will decrease by _____ percent. 
A. -0.46
B. -0.54
C. -4.60
D. -5.42
E. -6.18

 

89. The outstanding bonds of Alpha Extracts have a yield to maturity of 8.4 percent and a modified duration of 10.8. If the yield to maturity instantly decreased to 7.5 percent, the bond's price would increase/decrease by _____ percent. 
A. -10.08
B. -9.67
C. 8.45
D. 9.72
E. 10.08

 

90. A bond has a modified duration of 6.87 years, a par value of $1,000, and a current market value of $1,016. What is the dollar value of an 01? 
A. $0.0698
B. $0.0700
C. $0.6980
D. $0.7001
E. $0.7023

 


91. Jefferson-Smith bonds are quoted at a price of $952.42 for a $1,000 face value bond. These bonds have a modified duration of 9.84. What is the dollar value of an 01? 
A. $0.0977
B. $0.0963
C. $0.1028
D. $0.9372
E. $0.9767

 

92. A bond has a dollar value of an 01 of .0634. What is the yield value of a 32nd? 
A. .4608
B. .4921
C. .4929
D. .5047
E. .5084

 

 

1. Which one of the following returns is the average return you expect to earn in the future on a risky asset? 
A. realized return
B. expected return
C. market return
D. real return
E. adjusted return

 

2. What is the extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset called? 
A. efficient return
B. correlated value
C. risk premium
D. expected return
E. realized return

 

3. A group of stocks and bonds held by an investor is called which one of the following? 
A. weights
B. grouping
C. basket
D. portfolio
E. bundle

 

4. The value of an individual security divided by the portfolio value is referred to as the portfolio: 
A. beta.
B. standard deviation.
C. balance.
D. weight.
E. variance.

 


5. Diversification is investing in a variety of assets with which one of the following as the primary goal? 
A. increasing returns
B. minimizing taxes
C. reducing some risks
D. eliminating all risks
E. increasing the variance

 

6. Correlation is the: 
A. squared measure of a security's total risk.
B. extent to which the returns on two assets move together.
C. measurement of the systematic risk contained in an asset.
D. daily return on an asset compared to its previous daily return.
E. spreading of an investment across a number of assets.

 

7. The division of a portfolio's dollars among various types of assets is referred to as: 
A. the minimum variance portfolio.
B. the efficient frontier.
C. correlation.
D. asset allocation.
E. setting the investment opportunities.

 

8. Which one of the following is a collection of possible risk-return combinations available from portfolios consisting of individual assets? 
A. minimum variance set
B. financial frontier
C. efficient portfolio
D. allocated set
E. investment opportunity set

 


9. An efficient portfolio is a portfolio that does which one of the following? 
A. offers the highest return for the lowest possible cost
B. provides an evenly weighted portfolio of diverse assets
C. eliminates all risk while providing an expected positive rate of return
D. lies on the vertical axis when graphing expected returns against standard deviation
E. offers the highest return for a given level of risk

 

10. Which one of the following is the set of portfolios that provides the maximum return for a given standard deviation? 
A. minimum variance portfolio
B. Markowitz efficient frontier
C. correlated market frontier
D. asset allocation relationship
E. diversified portfolio line

 

11. Which of the following are affected by the probability of a state of the economy occurring?
I. expected return of an individual security
II. expected return of a portfolio
III. standard deviation of an individual security
IV. standard deviation of a portfolio 
A. I and III only
B. I and II only
C. II and IV only
D. III and IV only
E. I, II, III, and IV

 


12. Which one of the following statements must be true? 
A. All securities are projected to have higher rates of return when the economy booms versus when it is normal.
B. Considering the possible states of the economy emphasizes the fact that multiple outcomes can be realized from an investment.
C. The highest probability of occurrence must be placed on a normal economy versus either a boom or a recession.
D. The total of the probabilities of the economic states can vary between zero and 100 percent.
E. Various economic states affect a portfolio's expected return but not the expected level of risk.

 

13. You own a portfolio of 5 stocks and have 3 expected states of the economy. You have twice as much invested in Stock A as you do in Stock E. How will the weights be determined when you compute the rate of return for each economic state? 
A. The weights will be the probability of occurrence for each economic state.
B. Each stock will have a weight of 20 percent for a total of 100 percent.
C. The weights will decline steadily from Stock A to Stock E.
D. The weights will be based on the amount invested in each stock as a percentage of the total amount invested.
E. The weights will be based on a combination of the dollar amounts invested as well as the economic probabilities.

 

14. Terry has a portfolio comprised of two individual securities. Which one of the following computations that he might do is NOT a weighted average? 
A. correlation between the securities
B. individual security expected return
C. portfolio expected return
D. portfolio variance
E. portfolio beta

 


15. You own a stock which is expected to return 14 percent in a booming economy and 9 percent in a normal economy. If the probability of a booming economy decreases, your expected return will: 
A. decrease.
B. either remain constant or decrease.
C. remain constant.
D. increase.
E. either remain constant or increase.

 

16. You own three securities. Security A has an expected return of 11 percent as compared to 14 percent for Security B and 9 percent for Security C. The expected inflation rate is 4 percent and the nominal risk-free rate is 5 percent. Which one of the following statements is correct? 
A. There is no risk premium on Security C.
B. The risk premium on Security A exceeds that of Security B.
C. Security B has a risk premium that is 50 percent greater than Security A's risk premium.
D. The risk premium on Security C is 5 percent.
E. All three securities have the same expected risk premium.

 

17. Which of the following will increase the expected risk premium for a security, all else constant?
I. an increase in the security's expected return
II. a decrease in the security's expected return
III. an increase in the risk-free rate
IV. a decrease in the risk-free rate 
A. I only
B. III only
C. IV only
D. I and IV only
E. II and III only

 


18. If the future return on a security is known with absolute certainty, then the risk premium on that security should be equal to: 
A. zero.
B. the risk-free rate.
C. the market rate.
D. the market rate minus the risk-free rate.
E. the risk-free rate plus one-half the market rate.

 

19. You own a stock that will produce varying rates of return based upon the state of the economy. Which one of the following will measure the risk associated with owning that stock? 
A. weighted average return given the multiple states of the economy
B. rate of return for a given economic state
C. variance of the returns given the multiple states of the economy
D. correlation between the returns give the various states of the economy
E. correlation of the weighted average return as compared to the market

 

20. Which of the following affect the expected rate of return for a portfolio?
I. weight of each security held in the portfolio
II. the probability of various economic states occurring
III. the variance of each individual security
IV. the expected rate of return of each security given each economic state 
A. I and IV only
B. II and IV only
C. II, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV

 


21. You own a portfolio comprised of 4 stocks and the economy has 3 possible states. Assume you invest your portfolio in a manner that results in an expected rate of return of 7.5 percent, regardless of the economic state. Given this, what must be value of the portfolio's variance be? 
A. negative, but not -1
B. -1.0
C. 0.0
D. 1.0
E. positive, but not +1

 

22. As the number of individual stocks in a portfolio increases, the portfolio standard deviation: 
A. increases at a constant rate.
B. remains unchanged.
C. decreases at a constant rate.
D. decreases at a diminishing rate.
E. decreases at an increasing rate.

 

23. Which one of the following is eliminated, or at least greatly reduced, by increasing the number of individual securities held in a portfolio? 
A. number of economic states
B. various expected returns caused by changing economic states
C. market risk
D. diversifiable risk
E. non-diversifiable risk

 

24. Non-diversifiable risk: 
A. can be cut almost in half by simply investing in 10 stocks provided each stock is in a different industry.
B. can almost be eliminated by investing in 35 diverse securities.
C. remains constant regardless of the number of securities held in a portfolio.
D. has little, if any, impact on the actual realized returns for a diversified portfolio.
E. should be ignored by investors.

 


25. Which one of the following correlation coefficients can provide the greatest diversification benefit? 
A. -1.0
B. -0.5
C. 0.0
D. 0.5
E. 1.0

 

26. To reduce risk as much as possible, you should combine assets which have which one of the following correlation relationships? 
A. strong positive
B. slightly positive
C. slightly negative
D. strongly negative
E. zero

 

27. What is the correlation coefficient of two assets that are uncorrelated? 
A. -100
B. -1
C. 0
D. 1
E. 100

 

28. How will the returns on two assets react if those returns have a perfect positive correlation?
I. move in the same direction
II. move in opposite directions
III. move by the same amount
IV. move by either equal or unequal amounts 
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
E. III only

 


29. If two assets have a zero correlation, their returns will: 
A. always move in the same direction by the same amount.
B. always move in the same direction but not necessarily by the same amount.
C. move randomly and independently of each other.
D. always move in opposite directions but not necessarily by the same amount.
E. always move in opposite directions by the same amount.

 

30. Which one of the following correlation relationships has the potential to completely eliminate risk? 
A. perfectly positive
B. positive
C. negative
D. perfectly negative
E. uncorrelated

 

31. Assume the returns on Stock X were positive in January, February, April, July, and November. The other months the returns on Stock X were negative. The returns on Stock Y were positive in January, April, May, July, August, and October and negative the remaining months. Which one of the following correlation coefficients best describes the relationship between Stock X and Stock Y? 
A. -1.0
B. -0.5
C. 0.0
D. 0.5
E. 1.0

 

32. Which one of the following statements is correct? 
A. A portfolio variance is a weighted average of the variances of the individual securities which comprise the portfolio.
B. A portfolio variance is dependent upon the portfolio's asset allocation.
C. A portfolio variance is unaffected by the correlations between the individual securities held in the portfolio.
D. The portfolio variance must be greater than the lowest variance of any of the securities held in the portfolio.
E. The portfolio variance must be less than the lowest variance of any of the securities held in the portfolio.

 


33. A portfolio comprised of which one of the following is most apt to be the minimum variance portfolio? 
A. 100 percent stocks
B. 100 percent bonds
C. 50/50 mix of stocks and bonds
D. 30 percent stocks and 70 percent bonds
E. 30 percent bonds and 70 percent stocks

 

34. Which one of the following statements is correct concerning asset allocation? 
A. Because there is an ideal mix, all investors should use the same asset allocation for their portfolios.
B. The minimum variance portfolio will have a 50/50 asset allocation between stocks and bonds.
C. Asset allocation affects the expected return but not the risk level of a portfolio.
D. There is an ideal asset allocation between stocks and bonds given a specified level of risk.
E. Asset allocation should play a minor role in portfolio construction.

 

35. You currently have a portfolio comprised of 70 percent stocks and 30 percent bonds. Which one of the following must be true if you change the asset allocation? 
A. The expected return will remain constant.
B. The revised portfolio will be perfectly negatively correlated with the initial portfolio.
C. The two portfolios could have significantly different standard deviations.
D. The portfolio variance will be unaffected.
E. The portfolio variance will most likely decrease in value.

 

36. Which one of the following distinguishes a minimum variance portfolio? 
A. lowest risk portfolio of any possible portfolio given the same securities but in differing proportions
B. lowest risk portfolio possible given any specified expected rate of return
C. the zero risk portfolio created by maximizing the asset allocation mix
D. any portfolio with an expected standard deviation of 9 percent or less
E. any portfolio created with securities that are evenly weighted in respect to the asset allocation mix

 


37. Where does the minimum variance portfolio lie in respect to the investment opportunity set? 
A. lowest point
B. highest point
C. most leftward point
D. most rightward point
E. exact center

 

38. Which one of the following correlation coefficients must apply to two assets if the equally weighted portfolio of those assets creates a minimum variance portfolio that has a standard deviation of zero? 
A. -1.0
B. -0.5
C. 0.0
D. 0.5
E. 1.0

 

39. Which one of the following statements about efficient portfolios is correct? 
A. Any efficient portfolio will lie below the minimum variance portfolio when the expected portfolio return is plotted against the portfolio standard deviation.
B. An efficient portfolio will have the lowest standard deviation of any portfolio consisting of the same two securities.
C. There are multiple efficient portfolios that can be constructed using the same two securities.
D. Any portfolio mix consisting of only two securities will be an efficient portfolio.
E. There is only one efficient portfolio that can be constructed using two securities.

 

40. You are graphing the portfolio expected return against the portfolio standard deviation for a portfolio consisting of two securities. Which one of the following statements is correct regarding this graph? 
A. Risk-taking investors should select the minimum variance portfolio.
B. Risk-averse investors should select the portfolio with the lowest rate of return.
C. Some portfolios will be efficient while others will not.
D. The minimum variance portfolio will have the lowest portfolio expected return of any of the possible portfolios.
E. All possible portfolios will graph as efficient portfolios.

 


41. You are graphing the investment opportunity set for a portfolio of two securities with the expected return on the vertical axis and the standard deviation on the horizontal axis. If the correlation coefficient of the two securities is +1, the opportunity set will appear as which one of the following shapes? 
A. conical shape
B. linear with an upward slope
C. combination of two straight lines
D. hyperbole
E. horizontal line

 

42. A portfolio that belongs to the Markowitz efficient set of portfolios will have which one of the following characteristics? Assume the portfolios are comprised of five individual securities. 
A. the lowest return for any given level of risk
B. the largest number of potential portfolios that can achieve a specific rate of return
C. the largest number of potential portfolios that can achieve a specific level of risk
D. a positive rate of return and a zero standard deviation
E. the lowest risk for any given rate of return

 

43. You combine a set of assets using different weights such that you produce the following results.
   
Which one of these portfolios CANNOT be a Markowitz efficient portfolio? 
A. A
B. B
C. C
D. D
E. E

 


44. What is the expected return on this stock given the following information?
    
A. -10.07 percent
B. -9.69 percent
C. -9.30 percent
D. -8.70 percent
E. -8.22 percent

 

45. What is the expected return on this stock given the following information?
    
A. -2.05 percent
B. -1.08 percent
C. 0.47 percent
D. 1.22 percent
E. 1.43 percent

 

46. What is the expected return on this stock given the following information?
    
A. 9.36 percent
B. 9.74 percent
C. 10.70 percent
D. 11.78 percent
E. 12.05 percent

 


47. An investor owns a security that is expected to return 14 percent in a booming economy and 6 percent in a normal economy. The overall expected return on the security is 8.88 percent. Given there are only two states of the economy, what is the probability that the economy will boom? 
A. 28 percent
B. 33 percent
C. 36 percent
D. 41 percent
E. 45 percent

 

48. Rosita owns a stock with an overall expected return of 14.40 percent. The economy is expected to either boom or be normal. There is a 48 percent chance the economy will boom. If the economy booms, this stock is expected to return 15 percent. What is the expected return on the stock if the economy is normal? 
A. 12.00 percent
B. 12.83 percent
C. 13.15 percent
D. 13.85 percent
E. 14.40 percent

 

49. What is the expected return on this stock given the following information?
    
A. 6.40 percent
B. 6.57 percent
C. 8.99 percent
D. 13.40 percent
E. 14.25 percent

 


50. The risk-free rate is 4.35 percent. What is the expected risk premium on this security given the following information?
    
A. 6.09 percent
B. 6.54 percent
C. 7.65 percent
D. 7.87 percent
E. 8.15 percent

 

51. The risk-free rate is 4.15 percent. What is the expected risk premium on this stock given the following information?
    
A. 5.88 percent
B. 5.95 percent
C. 6.10 percent
D. 6.23 percent
E. 6.27 percent

 

52. The risk-free rate is 3.15 percent. What is the expected risk premium on this stock given the following information?
    
A. 5.85 percent
B. 6.59 percent
C. 8.22 percent
D. 10.87 percent
E. 11.21 percent

 


53. There is a 30 percent probability that a particular stock will earn a 17 percent return and a 70 percent probability that it will earn 11 percent. What is the risk-free rate if the risk premium on the stock is 8.60 percent? 
A. 4.20 percent
B. 4.80 percent
C. 5.20 percent
D. 5.40 percent
E. 5.80 percent

 

54. Tall Stand Timber stock has an expected return of 17.3 percent. What is the risk-free rate if the risk premium on the stock is 12.4 percent? 
A. 4.90 percent
B. 5.30 percent
C. 5.67 percent
D. 6.55 percent
E. 7.17 percent

 

55. What is the variance of the expected returns on this stock?
    
A. 1.21
B. 1.42
C. 1.56
D. 3.84
E. 4.03

 


56. What is the variance of the expected returns on this stock?
    
A. 16.09
B. 29.00
C. 61.53
D. 78.97
E. 80.03

 

57. What is the variance of the returns on a security given the following information?
    
A. 239.77
B. 284.05
C. 321.16
D. 347.15
E. 362.98

 

58. What is the variance of the returns on a security given the following information?
    
A. 28.18
B. 46.23
C. 54.38
D. 62.87
E. 77.31

 


59. What is the standard deviation of the returns on this stock?
    
A. 3.33 percent
B. 4.62 percent
C. 5.01 percent
D. 5.77 percent
E. 6.06 percent

 

60. What is the standard deviation of the returns on this stock?
    
A. 16.94 percent
B. 17.08 percent
C. 17.17 percent
D. 17.59 percent
E. 17.90 percent

 

61. What is the standard deviation of a security which has the following expected returns?
    
A. 7.48 percent
B. 7.61 percent
C. 7.67 percent
D. 7.82 percent
E. 7.91 percent

 


62. A portfolio consists of the following securities. What is the portfolio weight of stock B?
    
A. .429
B. .459
C. .482
D. .506
E. .521

 

63. A portfolio consists of the following securities. What is the portfolio weight of stock X?
    
A. .183
B. .202
C. .219
D. .246
E. .285

 

64. Travis has a portfolio consisting of two stocks, A and B, which is valued at $42,900. Stock A is worth $23,900. What is the portfolio weight of stock B? 
A. .428
B. .443
C. .449
D. .452
E. .454

 


65. Alicia has a portfolio consisting of two stocks, X and Y, which is valued at $89,100. Stock X is worth $57,800. What is the portfolio weight of stock Y? 
A. .351
B. .390
C. .523
D. .610
E. .649

 

66. You have a portfolio which is comprised of 70 percent of stock A and 30 percent of stock B. What is the expected rate of return on this portfolio?
    
A. 11.76 percent
B. 11.88 percent
C. 12.44 percent
D. 12.56 percent
E. 12.85 percent

 

67. You have a portfolio which is comprised of 65 percent of stock A and 35 percent of stock B. What is the expected rate of return on this portfolio?
    
A. 5.45 percent
B. 6.62 percent
C. 7.14 percent
D. 7.60 percent
E. 8.22 percent

 


68. You have a portfolio which is comprised of 55 percent of stock A and 45 percent of stock B. What is the expected rate of return on this portfolio?
    
A. 9.46 percent
B. 9.88 percent
C. 10.03 percent
D. 11.79 percent
E. 12.40 percent

 

69. You have a portfolio which is comprised of 75 percent of stock A and 25 percent of stock B. What is the expected rate of return on this portfolio?
    
A. 10.70 percent
B. 10.87 percent
C. 11.13 percent
D. 12.11 percent
E. 12.80 percent

 


70. You have a portfolio which is comprised of 72 percent of stock A and 28 percent of stock B. What is the variance of this portfolio?
    
A. 190.9
B. 203.8
C. 268.1
D. 290.9
E. 315.6

 

71. You have a portfolio which is comprised of 44 percent of stock A and 56 percent of stock B. What is the variance of this portfolio?
    
A. 57.86
B. 61.05
C. 66.84
D. 70.15
E. 75.93

 

72. You have a portfolio which is comprised of 35 percent of stock A and 65 percent of stock B. What is the standard deviation of this portfolio?
    
A. 4.39 percent
B. 5.68 percent
C. 6.17 percent
D. 7.14 percent
E. 9.08 percent

 


73. Roger has a portfolio comprised of $8,000 of stock A and $12,000 of stock B. What is the standard deviation of this portfolio?
    
A. 4.67 percent
B. 9.97 percent
C. 7.23 percent
D. 8.83 percent
E. 10.42 percent

 

74. You have a portfolio which is comprised of 20 percent of stock A and 80 percent of stock B. What is the portfolio standard deviation?
    
A. 4.00 percent
B. 5.18 percent
C. 6.07 percent
D. 6.82 percent
E. 7.47 percent

 


75. You have a portfolio which is comprised of 48 percent of stock A and 52 percent of stock B. What is the standard deviation of this portfolio?
    
A. 1.98 percent
B. 2.06 percent
C. 2.13 percent
D. 2.27 percent
E. 2.30 percent

 

76. Stock A has a standard deviation of 12 percent per year and stock B has a standard deviation of 16 percent per year. The correlation between stock A and stock B is .37. You have a portfolio of these two stocks wherein stock B has a portfolio weight of 35 percent. What is your portfolio variance? 
A. .01245
B. .01314
C. .01329
D. .01437
E. .01470

 

77. Stock X has a standard deviation of 22 percent per year and stock Y has a standard deviation of 8 percent per year. The correlation between stock A and stock B is .21. You have a portfolio of these two stocks wherein stock Y has a portfolio weight of 40 percent. What is your portfolio variance? 
A. .02022
B. .02156
C. .02239
D. .02247
E. .02350

 


78. Stock A has a standard deviation of 15 percent per year and stock B has a standard deviation of 21 percent per year. The correlation between stock A and stock B is .32. You have a portfolio of these two stocks wherein stock B has a portfolio weight of 60 percent. What is your portfolio standard deviation? 
A. 14.87 percent
B. 15.59 percent
C. 16.91 percent
D. 17.45 percent
E. 18.03 percent

 

79. Stock X has a standard deviation of 21 percent per year and stock Y has a standard deviation of 6 percent per year. The correlation between stock A and stock B is .38. You have a portfolio of these two stocks wherein stock X has a portfolio weight of 42 percent. What is your portfolio standard deviation? 
A. 8.89 percent
B. 9.85 percent
C. 10.64 percent
D. 11.84 percent
E. 12.92 percent

 

80. A stock fund has a standard deviation of 18 percent and a bond fund has a standard deviation of 11 percent. The correlation of the two funds is .24. What is the approximate weight of the stock fund in the minimum variance portfolio? 
A. 16 percent
B. 19 percent
C. 21 percent
D. 24 percent
E. 27 percent

 


81. A stock fund has a standard deviation of 16 percent and a bond fund has a standard deviation of 4 percent. The correlation of the two funds is .11. What is the weight of the stock fund in the minimum variance portfolio? 
A. 3.47 percent
B. 6.48 percent
C. 11.92 percent
D. 14.67 percent
E. 18.22 percent

 

 

1. Which one of the following is the type of risk that affects a large number of assets? 
A. unique
B. systematic
C. asset-specific
D. unsystematic
E. firm-specific

 

2. Which one of the following is the type of risk that only affects either a single firm or just a small number of firms? 
A. unexpected
B. market
C. systematic
D. unsystematic
E. expected

 

3. According to the systematic risk principle, the reward for bearing risk is based on which one of the following types of risk? 
A. unsystematic
B. firm specific
C. expected
D. systematic
E. diversifiable

 

4. Which one of the following measures systematic risk? 
A. beta
B. alpha
C. variance
D. standard deviation
E. correlation coefficient

 


5. The security market line depicts the graphical relationship between which two of the following?
I. expected return
II. surprise return
III. systematic risk
IV. unsystematic risk 
A. I and III
B. I and IV
C. II and III
D. II and IV
E. none of the above

 

6. Which one of the following is expressed as "E(RM) - Rf"? 
A. market risk premium
B. individual security risk premium
C. real rate of return
D. total expected rate of return
E. market rate of return

 

7. Which one of the following is the theory which states that the value of a security is dependent upon the pure time value of money, the reward for bearing systematic risk, and the amount of systematic risk? 
A. reward-to-risk theory
B. capital asset pricing model
C. risk premium proposal
D. market slope hypothesis
E. security market line proposition

 

8. Which one of the following terms is the measure of the tendency of two things to move or vary together? 
A. variance
B. squared deviation
C. standard deviation
D. alpha
E. covariance

 


9. Retail Specialties just announced that its Chief Operating Officer is retiring at the end of this month. This announcement will cause the firm's stock price to: 
A. increase.
B. either increase or remain constant.
C. remain constant.
D. decrease.
E. either increase, decrease, or remain constant.

 

10. Which one of the following is the best example of a risk associated with stock ownership? 
A. The stock paid a regular quarterly dividend.
B. The firm's net income decreased by 4 percent for the quarter, as had been expected.
C. One of the firm's patent applications was unexpectedly rejected.
D. The firm's cost of debt increased as the result of an expected tax cut.
E. The firm's production costs increased in line with previous years.

 

11. Which one of the following announcements is most apt to cause the price of a firm's stock to increase? 
A. The firm met its quarterly earnings forecast.
B. An unpopular CEO unexpectedly announced he is resigning effective immediately.
C. A firm officially confirmed the rumors that it is merging with a competitor.
D. The firm just lowered its projected earnings per share for next year.
E. Analysts are expected to lower the firm's credit rating on its debt.

 

12. Which one of the following terms is another name for systematic risk? 
A. unique risk
B. firm risk
C. market risk
D. asset-specific risk
E. diversifiable risk

 


13. Which one of the following is the best example of systematic risk? 
A. there is a shortage of nurses
B. a fire destroys a warehouse
C. gas prices rise sharply
D. the cost of sugar increases
E. two firms merge their operations

 

14. Which one of the following statements applies to unsystematic risk? 
A. It can be eliminated through portfolio diversification.
B. It is also called market risk.
C. It is a type of risk that applies to most, if not all, securities.
D. Investors receive a risk premium as compensation for accepting this risk.
E. This risk is related to expected returns.

 

15. Which one of the following is the best example of unsystematic risk? 
A. decrease in company sales
B. increase in market interest rates
C. change in corporate tax rates
D. increase in inflation
E. This risk is related to expected portfolio returns

 

16. Which one of the following qualifies as diversifiable risk? 
A. market risk
B. systematic risk associated with an individual security
C. market crash
D. the systematic portion of an expected return
E. the unsystematic portion of an unexpected return

 

17. Which one of the following betas represents the greatest level of systematic risk? 
A. .05
B. .68
C. 1.00
D. 1.19
E. 1.27

 


18. A stock with which one of the following betas has an expected return that most resembles the overall market expected rate of return? 
A. .33
B. .74
C. .99
D. 1.06
E. 1.22

 

19. What is the beta of a risk-free security? 
A. .00
B. .50
C. 1.00
D. 1.50
E. 2.00

 

20. Which one of the following stocks has the highest expected risk premium?
    
A. A
B. B
C. C
D. D
E. E

 


21. Of the following, Stock _____ has the greatest level of total risk and Stock _____ has the highest risk premium.
    
A. A; B
B. B; E
C. C; D
D. D; C
E. C; E

 

22. A portfolio beta is computed as which one of the following? 
A. weighted average
B. arithmetic average
C. geometric average
D. correlated value
E. covariance value

 

23. You own a portfolio which is invested equally in two stocks and a risk-free security. The stock betas are .89 for Stock A and 1.26 for Stock B. Which one of the following will increase the portfolio beta, all else constant? 
A. increasing the amount invested in the risk-free security
B. decreasing the weight of Stock B and increasing the weight of Stock A
C. replacing Stock A with a security that has a beta of .77
D. increasing the weight of Stock A and decreasing the weight of the risk-free security
E. replacing Stock B with Stock C, which has a beta equal to that of the market

 

24. A portfolio of securities has a beta of 1.14. Given this, you know that: 
A. adding another security to the portfolio must lower the portfolio beta.
B. the portfolio has more risk than a risk-free asset but less risk than the market.
C. each of the securities in the portfolio has more risk than an average security.
D. the portfolio has 14 percent more risk than a risk-free security.
E. the expected return on the portfolio is greater than the expected market return.

 


25. You own three stocks which have betas of 1.16, 1.34, and 1.02. You would like to add a fourth security such that your portfolio beta will match that of the market. Given this situation, the new security: 
A. must have a beta of 1.0.
B. must have a beta of zero.
C. could be a U.S. Treasury bill.
D. could have any beta greater than 1.0.
E. must have a portfolio weight of 50 percent or more.

 

26. The amount of risk premium allocated to Security A is dependent upon which one of the following? 
A. unsystematic risk associated only with Security A
B. total risk associated with Security A's classification
C. total surprise associated with Security A
D. the difference between the expected return and the actual return on Security A
E. systematic risk associated with Security A

 

27. What is the beta of an average asset? 
A. 0
B. >0 but <1
C. <1
D. 1
E. >1

 

28. All else held constant, which of the following will increase the expected return on a security based on CAPM? Assume the market return exceeds the risk-free rate and both values are positive. Also assume the beta exceeds 1.0.
I. decrease in the security beta
II. increase in the market risk premium
III. decrease in the risk-free rate
IV. increase in the market rate of return 
A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV

 


29. The slope of the security market line is equal to the: 
A. market risk premium.
B. risk-free rate of return.
C. market rate of return.
D. market rate of return multiplied by any security's beta, given an inefficient market.
E. market rate of return multiplied by the risk-free rate.

 

30. Where will a security plot in relation to the security market line (SML) if it has a beta of 1.1 and is overvalued? 
A. to the right of the overall market and above the SML
B. to the right of the overall market and below the SML
C. to the left of the overall market and above the SML
D. to the left of the overall market and below the SML
E. on the SML

 

31. Where will a security plot in relation to the security market line (SML) if it is considered to be a good purchase because it is underpriced? 
A. above the SML
B. either on or above the SML
C. on the SML
D. on or below the SML
E. below the SML

 

32. According to the capital asset pricing model, which of the following will increase the expected rate of return on a security that has a beta that is less than that of the market? Assume the market rate of return is greater than the risk-free rate and both rates are positive.
I. increase in the risk-free rate
II. decrease in the risk-free rate
III. increase in the market risk premium
IV. decrease in the market rate of return 
A. I and III only
B. II and III only
C. I and IV only
D. II and IV only
E. II, III, and IV only

 


33. Which one of the following has the highest expected risk premium? 
A. stock portfolio with a beta of 1.06
B. U.S. Treasury bill
C. individual stock with a beta of 1.46
D. a stock mutual fund with a beta of .89
E. individual stock with a beta of .94

 

34. Which one of the following must be equal for two individual securities with differing betas if those securities are correctly priced according to the capital asset pricing model? 
A. standard deviation
B. rate of return
C. beta
D. risk premium
E. reward-to-risk ratio

 

35. Stocks D, E, and F have actual reward-to-risk ratios of 7.1, 6.8, and 7.4, respectively. Given this, you know for certain that: 
A. stock E is preferable to stock F.
B. stock D has a higher beta than stock F.
C. the market risk premium is greater than 6.8 and less than 7.4.
D. stock F is riskier than stock D.
E. at least two of the securities are mispriced.

 

36. Which one of the following will increase the slope of the security market line? Assume all else constant. 
A. increasing the beta of an efficiently-priced portfolio
B. increasing the risk-free rate
C. increasing the market risk premium
D. decreasing the market rate of return
E. replacing a low-beta stock with a high-beta stock within a portfolio

 


37. Which two of the following determine how sensitive a security is relative to movements in the overall market?
I. the standard deviation of the security
II. correlation between the security's return and the market return
III. the volatility of the security relative to the market
IV. the amount of unsystematic risk inherent in the security 
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
E. III and IV only

 

38. Which of the following are needed to compute the beta of an individual security?
I. average return on the market for the period
II. standard deviation of the security and the market
III. returns on the security and the market for multiple time periods
IV. correlation of the security to the market 
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
E. I, II, and III only

 

39. A security has a zero covariance with the market. This means that: 
A. the return on the security is always equal to that of the market.
B. the return on the security moves in the same direction as the market return.
C. the security is a risk-free security.
D. there is no identifiable relationship between the return on the security and that of the market.
E. the return on the security must vary more than that of the market.

 


40. Which of the following will affect the beta value of an individual security?
I. interval of time frequency used for the data sample
II. length of the time period used for the data sample
III. particular time period selected for the sampling
IV. choice of index used as the measure of the market 
A. I and II only
B. I and III only
C. II and IV only
D. II, III, and IV only
E. I, II, III, and IV

 

41. Which one of the following is most commonly used as the measure of the overall market rate of return? 
A. DJIA
B. S&P 500
C. NASDAQ 100
D. Wilshire 5000
E. Wilshire 3000

 

42. Which one of the following statements is true? 
A. Risk and return are inversely related.
B. Investors are compensated only for diversifiable risk.
C. The beta of a portfolio may be lower than the lowest beta of any individual security held within the portfolio.
D. How a security affects the risk of a portfolio is less important than the actual risk of the security itself.
E. Investing has two dimensions: risk and return.

 

43. Which of the following correctly identifies the factors included in the Fama-French three-factor model? 
A. standard deviation, beta, and company size
B. the risk-free rate, beta, and the market risk premium
C. company size, company industry, and beta
D. price-earnings ratios, beta, and book-to-market ratios
E. beta, company size, and book-to-market ratios

 


44. Which one of the following combinations will tend to produce the highest rate of return according to the Fama-French three-factor model? Assume beta is constant in all cases. 
A. large market capitalization and high book-to-market ratio
B. large market capitalization and low book-to-market ratio
C. small market capitalization and high book-to-market ratio
D. small market capitalization and a book-to-market ratio of 1.0
E. small market capitalization and a low book-to-market ratio

 

45. Phil realized a total return of 13.2 percent which is less than his expected return of 14.4 percent. What is the amount of his unexpected return? 
A. -1.2 percent
B. -0.6 percent
C. 0.6 percent
D. 1.2 percent
E. 1.3 percent

 

46. Brooke invested $3,500 in the stock market with the expectation of earning 9.5 percent. She actually earned 10.7 percent for the year. What is the amount of her unexpected return? 
A. -1.2 percent
B. -0.6 percent
C. 1.2 percent
D. 1.9 percent
E. 2.4 percent

 

47. Reed Plastics just announced the earnings per share for the quarter just ended were $.45 a share. Analysts were expecting $.51. What is the amount of the surprise portion of the announcement? 
A. -$.12
B. -$.06
C. $.06
D. $.00
E. $.03

 


48. The risk-free rate is 3.1 percent and the expected return on the market is 11 percent. Stock A has a beta of 1.34. For a given year, Stock A returned 16.7 percent while the market returned 12.2 percent. The systematic portion of Stock A's unexpected return was _____ percent and the unsystematic portion was _____ percent. 
A. 1.41; 1.61
B. 1.61; 1.41
C. 1.61; 3.01
D. 1.41; 1.20
E. 4.62; 1.41

 

49. The risk-free rate is 3.4 percent and the expected return on the market is 10.8 percent. Stock A has a beta of 1.18. For a given year, stock A returned 13.6 percent while the market returned 11.8 percent. The systematic portion of the unexpected return was _____ percent and the unsystematic portion was _____ percent. 
A. 1.045; 0.207
B. 1.145; 0.126
C. 1.180; 0.288
D. 1.344; 1.443
E. 1.500; 1.449

 

50. A portfolio is comprised of two stocks. Stock A comprises 55 percent of the portfolio and has a beta of 1.31. Stock B has a beta of .98. What is the portfolio beta? 
A. .98
B. 1.03
C. 1.08
D. 1.16
E. 1.22

 

51. A portfolio consists of two stocks and has a beta of 1.07. The first stock has a beta of 1.48 and comprises 38 percent of the portfolio. What is the beta of the second stock? 
A. .41
B. .66
C. .82
D. 1.28
E. 1.35

 


52. What is the beta of a portfolio which consists of the following?
    
A. 1.01
B. 1.24
C. 1.26
D. 1.29
E. 1.31

 

53. What is the beta of a portfolio which consists of the following?
    
A. 1.18
B. 1.22
C. 1.23
D. 1.32
E. 1.37

 

54. A portfolio consists of one risky asset and one risk-free asset. The risky asset has an expected return of 13.2 percent and a beta of 1.43. The risk-free asset has an expected return of 3.8 percent. How much of the portfolio is invested in the risk-free asset if the portfolio beta is 1.06? 
A. 26 percent
B. 34 percent
C. 42 percent
D. 65 percent
E. 74 percent

 


55. The following portfolio has an expected return of _____ percent and a beta of _____.
    
A. 10.53; 1.13
B. 10.99; 1.11
C. 11.03; 1.28
D. 11.16; 1.11
E. 11.11; 1.16

 

56. The following portfolio has an expected return of _____ percent and a beta of _____.
    
A. 12.45; 1.38
B. 12.83; 1.38
C. 13.39; 1.23
D. 13.39; 1.40
E. 13.45; 1.32

 

57. Laura has one risk-free asset and one risky stock in her portfolio. The risk-free asset has an expected return of 3.2 percent. The risky asset has a beta of 1.3 and an expected return of 14.9 percent. What is the expected return on the portfolio if the portfolio beta is .975? 
A. 7.65 percent
B. 9.83 percent
C. 10.73 percent
D. 11.98 percent
E. 12.37 percent

 


58. A risky asset has a beta of .88 and an expected return of 7.4 percent. What is the reward-to-risk ratio if the risk-free rate is 2.8 percent? 
A. 4.04 percent
B. 5.23 percent
C. 6.51 percent
D. 8.41 percent
E. 11.59 percent

 

59. The reward-to-risk ratio is 6.8 percent and the risk-free rate is 5.3 percent. What is the expected return on a risky asset if the beta of that asset is 1.03? 
A. 7.00 percent
B. 12.00 percent
C. 12.02 percent
D. 12.07 percent
E. 12.30 percent

 

60. A risky asset has a beta of 1.58 and an expected return of 17.6 percent. What is the risk-free rate if the risk-to-reward ratio is 8.4 percent? 
A. 2.74 percent
B. 4.03 percent
C. 4.33 percent
D. 5.32 percent
E. 5.82 percent

 

61. Stock A is a risky asset that has a beta of 1.4 and an expected return of 13.2 percent. Stock B is also a risky asset and has a beta of 1.25. The risk-free rate is 5.5 percent. Assuming both stocks are correctly priced, what is the expected return on stock B? 
A. 11.90 percent
B. 12.11 percent
C. 12.29 percent
D. 12.38 percent
E. 12.46 percent

 


62. Stock X has a beta of .87 and an expected return of 9.8 percent. Stock Y has a beta of 1.2 and an expected return of 13.1 percent. What is the risk-free rate of return assuming that both stock X and stock Y are correctly priced? 
A. 1.10 percent
B. 1.20 percent
C. 2.07 percent
D. 3.30 percent
E. 3.50 percent

 

63. The stock of Healthy Eating, Inc., has a beta of .88. The risk-free rate is 3.8 percent and the market return is 9.6 percent. What is the expected return on Healthy Eating's stock? 
A. 6.25 percent
B. 6.07 percent
C. 8.90 percent
D. 11.15 percent
E. 11.47 percent

 

64. The common stock of Industrial Technologies has an expected return of 15.6 percent. The market return is 11.2 percent and the risk-free return is 4.6 percent. What is the stock's beta? 
A. 0.42
B. 1.00
C. 1.32
D. 1.42
E. 1.67

 

65. A stock has an expected return of 14.59 percent and a beta of 1.35. What is the risk-free rate if the market rate is 12.7 percent? 
A. 6.48 percent
B. 6.92 percent
C. 7.01 percent
D. 7.30 percent
E. 7.90 percent

 


66. Farm Tractors, Inc., stock has a beta of 1.02 and an expected return of 12.8 percent. The risk-free rate is 3.9 percent. What is the market rate of return? 
A. 6.67 percent
B. 8.90 percent
C. 9.08 percent
D. 11.57 percent
E. 12.63 percent

 

67. Wilson Farms' stock has a beta of .84 and an expected return of 7.8 percent. The risk-free rate is 2.6 percent and the market risk premium is 6 percent. This stock is _____ because the CAPM return for the stock is _____ percent. 
A. undervalued; 7.34
B. undervalued; 7.49
C. undervalued; 7.64
D. overvalued; 7.34
E. overvalued; 7.49

 

68. Home Interior's stock has an expected return of 12.89 percent and a beta of 1.28. The market return is 10.7 percent and the risk-free rate is 2.8 percent. This stock is _____ because the CAPM return for the stock is _____ percent. 
A. greatly overvalued; 16.50
B. slightly overvalued; 12.91
C. priced correctly; 12.89
D. slightly undervalued; 12.91
E. greatly undervalued; 16.50

 

69. A stock has a beta of 1.58 and an expected return of 16.2 percent. The risk-free rate is 3.8 percent. What is the market risk premium? 
A. 7.85 percent
B. 10.01 percent
C. 11.72 percent
D. 12.50 percent
E. 13.40 percent

 


70. The risk-free rate is 5.1 percent, the market rate is 13.3 percent, and the expected return on a stock is 15.84 percent. What is the beta of the stock? 
A. .52
B. .81
C. 1.13
D. 1.19
E. 1.31

 

71. The market has an expected return of 11.4 percent and a risky asset with a beta of 1.18 has an expected return of 13 percent. Based on this information, what is the pure time value of money? 
A. 1.84 percent
B. 1.90 percent
C. 2.38 percent
D. 2.51 percent
E. 2.90 percent

 

72. Dinner Foods stock has a beta of 1.55 and an expected return of 15.43 percent. Edwards' Meals stock has a beta of .95 and an expected return of 10.27 percent. Assume that both stocks are correctly priced. Given this, the risk-free rate is _____ percent and the market rate of return is _____ percent. 
A. 2.02; 11.53
B. 2.09; 12.35
C. 2.10; 11.53
D. 2.26; 12.35
E. 2.10; 10.70

 


73. What is the covariance of security A to the market given the following information?
    
A. 75.0
B. 80.1
C. 83.8
D. 87.0
E. 91.1

 

74. What is the covariance of security A to the market given the following information?
    
A. 507.9
B. 514.1
C. 517.5
D. 521.6
E. 528.8

 

75. What is the covariance of security A to the market given the following information?
    
A. 23.14
B. 29.88
C. 48.83
D. 99.18
E. 114.01

 


76. A risky security has a variance of .035109 and a covariance with the market of .0222. The variance of the market is .019538. What is the correlation of the risky security to the market? 
A. .51
B. .65
C. .72
D. .82
E. .85

 

77. Uptown Markets stock has a standard deviation of 16.8 percent and a covariance with the market of .0178. The market has a standard deviation of 13.6 percent. What is the correlation of this stock with the market? 
A. .74
B. .78
C. .87
D. .89
E. .91

 

78. Western Exports stock has a standard deviation of 15.6 percent and a covariance with the market of .0124. The market has a standard deviation of 13.7 percent. What is the correlation of this stock with the market? 
A. .58
B. .61
C. .68
D. .72
E. .77

 

79. The common stock of Blasco Books has a standard deviation of 16.4 percent as compared to the market standard deviation of 12.7 percent. The covariance of this stock with the market is .0217. What is the beta of Blasco Books' stock? 
A. .96
B. 1.05
C. 1.07
D. 1.35
E. 1.42

 


80. A stock has a standard deviation of 22.4 percent and a covariance with the market of .0169. The market has a standard deviation of 13.2 percent. What is the beta of this stock? 
A. .29
B. .57
C. .92
D. .97
E. 1.01

 

81. The market has a standard deviation of 10.8 percent (0.108) while a risky security has a standard deviation of 22.5 (0.225) percent. The covariance of the stock with the market is .0149. What is the beta of the stock? 
A. 1.09
B. 1.11
C. 1.15
D. 1.19
E. 1.28

 

Question

 

You observe that the current interest rate on short-term U.S. Treasury bills is 4.23 percent. You also read in the newspaper that the GDP deflator, which is a common macroeconomic indicator used by market analysts to gauge the inflation rate, currently implies that inflation is 1.2 percent. What is the approximate real rate of interest on short-term Treasury bills? (Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

A Treasury STRIPS matures in 11 years and has a yield to maturity of 10.4 percent. Assume the par value is $100,000.

 

a. What is the price of the STRIPS? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

b. What is the quoted price? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

 

Question

 

A Treasury bill purchased in December 2016 has 115 days until maturity and a bank discount yield of 2.43 percent. Assume a $100 face value.

 

a. What is the price of the bill as a percentage of face value? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

 

b. What is the bond equivalent yield? (Do not round intermediate calculations. Enter your answer as a percent rounded to 3 decimal places.)

 

Question

 

A Treasury bill with 130 days to maturity is quoted at 98.540. What are the bank discount yield, the bond equivalent yield, and the effective annual return? (Do not round intermediate calculations. Enter your answers as a percent rounded to 3 decimal places.)

 

Question

 

Consider the following spot interest rates for maturities of one, two, three, and four years.

 

What are the following forward rates, where f1, k refers to a forward rate for the period beginning in one year and extending for k years? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Question

 

LKD Co. has 13 percent coupon bonds with a YTM of 9.7 percent. The current yield on these bonds is 10.2 percent. How many years do these bonds have left until they mature? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Question

 

A bond with 21 years until maturity has a coupon rate of 7.6 percent and a yield to maturity of 7.7 percent. What is the price of the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Question

 

Atlantis Fisheries issues zero coupon bonds on the market at a price of $567 per bond. Each bond has a face value of $1,000 payable at maturity in 19 years. What is the yield to maturity for these bonds? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

Atlantis Fisheries issues zero coupon bonds on the market at a price of $406 per bond. These are callable in 8 years at a call price of $650. Using semiannual compounding, what is the yield to call for these bonds? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

Atlantis Fisheries issues zero coupon bonds on the market at a price of $431 per bond. If these bonds are callable in 5 years at a call price of $529, what is their yield to call? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

A bond sells for $925.36 and has a coupon rate of 7.60 percent. If the bond has 20 years until maturity, what is the yield to maturity of the bond? Assume semiannual compounding. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

Both Bond A and Bond B have 9.6 percent coupons and are priced at par value. Bond A has 8 years to maturity, while Bond B has 20 years to maturity.

 

a. If interest rates suddenly rise by 2.2 percent, what is the percentage change in price of Bond A and Bond B? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

b. If interest rates suddenly fall by 2.2 percent instead, what would be the percentage change in price of Bond A and Bond B? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Question

 

Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone: (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

Use the following information on states of the economy and stock returns to calculate the standard deviation of returns. Assume that all three states are equally likely. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

Calculate the expected return on a portfolio of 65 percent Roll and 35 percent Ross by filling in the following table: (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Question

 

a. Calculate the expected return for the two stocks. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

b. Calculate the standard deviation for the two stocks. (Do not round your intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Question

 

Fill in the missing information in the following table. Assume that Portfolio AB is 60 percent invested in Stock A. (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Question

 

A stock has an expected return of 15.1 percent, the risk-free rate is 3.7 percent, and the market risk premium is 8.3 percent. What must the beta of this stock be? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Question

 

You own a stock portfolio invested 10 percent in Stock Q, 20 percent in Stock R, 15 percent in Stock S, and 55 percent in Stock T. The betas for these four stocks are 1.8, 0.7, 1.9, and 0.9, respectively. What is the portfolio beta? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

 

Question

 

Asset W has an expected return of 17.6 percent and a beta of 1.90. If the risk-free rate is 3.4 percent, what is the market risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.72 and the total portfolio is exactly as risky as the market, what must the beta be for the other stock in your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Question

 

You own 400 shares of Stock A at a price of $60 per share, 370 shares of Stock B at $85 per share, and 500 shares of Stock C at $29 per share. The betas for the stocks are 0.8, 1.4, and 0.5, respectively. What is the beta of your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Question

 

A stock has an expected return of 13.1 percent, a beta of 1.60, and the return on the market is 9.10 percent. What must the risk-free rate be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

A stock has an expected return of 8.2 percent, its beta is 2.10, and the risk-free rate is 5.2 percent. What must the expected return on the market be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

What is the price of a Treasury STRIPS with a face value of $100 that matures in 11 years and has a yield to maturity of 6.0 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Question

 

Use the following information on states of the economy and stock returns to calculate the standard deviation of returns. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

Great Wall Pizzeria issued 8-year bonds one year ago at a coupon rate of 6.1 percent. If the YTM on these bonds is 7.5 percent, what is the current bond price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Question

 

Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 4.9 percent, the expected return on the market is 11.6 percent, and the betas of the two stocks are 1.1 and 0.9, respectively. Stevens’s own forecasts of the returns on the two stocks are 15.80 percent for Furhman Labs and 12.10 percent for Garten.

 

a. Calculate the required return for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

b. Is each stock undervalued, fairly valued, or overvalued?

 

Question

 

Your investments increased in value by 12.3 percent last year, but your purchasing power increased by only 8.3 percent. What was the approximate inflation rate? (Enter your answer as a percent rounded to 1 decimal place.)

 

Question

 

Calculate the expected returns for Roll and Ross by filling in the following table: (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Calculate the product using the decimal value of the probability and the percentage value of the return. Input all your answers as a percent rounded to 2 decimal places.)

 

Question

 

Ghost Rider Corporation has bonds on the market with 9 years to maturity, a YTM of 8.6 percent, and a current price of $947. What must the coupon rate be on the company’s bonds? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

Suppose you observe the following situation:

 

Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Question

 

A U.S. Treasury bill with 83 days to maturity is quoted at a discount yield of 1.85 percent. Assume a $1 million face value. What is the bond equivalent yield? (Do not round intermediate calculations. Enter your answer as a percent rounded to 3 decimal places.)

 

Question

 

a. Your portfolio is invested 40 percent each in A and C and 20 percent in B. What is the expected return of the portfolio? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

b-1. What is the variance of this portfolio? (Do not round intermediate calculations. Round your answer to 5 decimal places.)

 

b-2. What is the standard deviation? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

May Industries has a bond outstanding that sells for $907. The bond has a coupon rate of 4.7 percent and 27 years until maturity. What is the yield to maturity of the bond? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

Stock Y has a beta of 1.17 and an expected return of 13.20 percent. Stock Z has a beta of 0.70 and an expected return of 10 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

A U.S. Treasury bill with 112 days to maturity is quoted at a discount yield of 4.50 percent. Assume a $1 million face value. What is the bond equivalent yield? (Do not round intermediate calculations. Enter your answer as a percent rounded to 3 decimal places.)

 

Question

 

Given the following information, calculate the expected return and standard deviation for a portfolio that has 37 percent invested in Stock A, 34 percent in Stock B, and the balance in Stock C. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Question

 

Rolling Company bonds have a coupon rate of 4.20 percent, 15 years to maturity, and a current price of $1,096. What is the YTM? The current yield? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Question

 

The treasurer of a large corporation wants to invest $14 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 6.46 percent; that is, the EAR for this investment is 6.46 percent. However, the treasurer wants to know the money market yield on this instrument to make it comparable to the T-bills and CDs she has already bought. If the term of the instrument is 92 days, what are the bond equivalent and discount yields on this investment? (Do not round intermediate calculations. Enter your answers as a percent rounded to 3 decimal places.)

 

Question

 

A stock has a beta of 1.1 and an expected return of 13 percent. A risk-free asset currently earns 3.7 percent.

 

a. What is the expected return on a portfolio that is equally invested in the two assets? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

b. If a portfolio of the two assets has a beta of 0.23, what are the portfolio weights? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

c. If a portfolio of the two assets has an expected return of 12.25 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 4 decimal places.)

 

d. If a portfolio of the two assets has a beta of 1.32, what are the portfolio weights? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Question

 

You have a car loan with a nominal rate of 7.30 percent. With interest charged monthly, what is the effective annual rate (EAR) on this loan? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

A stock had a return of 9.1 percent last year. If the inflation rate was 1.5 percent, what was the approximate real return? Enter your answer as a percent rounded to 1 decimal place.)  

 

Question

 

A bond has a coupon rate of 11 percent and 5 years until maturity. If the yield to maturity is 10.1 percent, what is the price of the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Question

 

A Treasury STRIPS is quoted at 61.159 and has 10 years until maturity. What is the yield to maturity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)  

 

Question

 

A stock has a beta of 1.5 and an expected return of 14.9 percent. If the risk-free rate is 4.2 percent, what is the market risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

Consider the following spot interest rates for maturities of one, two, three, and four years.

 

Assuming a constant real interest rate of 2 percent, what are the approximate expected inflation rates for the next four years? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Question

 

How much would you pay for a U.S. Treasury bill with 104 days to maturity quoted at a discount yield of 2.26 percent? Assume a $1 million face value. (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Question

 

Aloha Inc. has 6 percent coupon bonds on the market that have 8 years left to maturity. If the YTM on these bonds is 7.5 percent, what is the current bond price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Question

 

A stock has a beta of 0.85, the expected return on the market is 19 percent, and the risk-free rate is 3.80 percent. What must the expected return on this stock be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question

 

What is the price of a U.S. Treasury bill with 100 days to maturity quoted at a discount yield of 1.40 percent? Assume a $1 million face value. (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Question

 

A Treasury bill that settles on May 18, 2016, pays $100,000 on August 21, 2016. Assuming a discount rate of 3.48 percent, what are the price and bond equivalent yield? Use Excel to answer this question. (Round your price answer to 2 decimal places. Enter your yield answer as a percent rounded to 3 decimal places.)

 

Question

 

Use the following information on states of the economy and stock returns to calculate the standard deviation of returns. Assuming that all three states are equally likely. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)