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1) General obligation bonds are
a. U.S. Treasury bonds backed by the full faith and credit of the issuer.
b. U.S. Treasury bonds backed by income generated form specific projects.
c. Municipal bonds backed by the full faith and credit of the issuer.
d. Municipal bonds backed by income generated from specific projects.
e. A type of U.S. agency security.
2) In 2004, Smiths Corp. issued a $50 par value preferred stock that pays a 6 percent
annual dividend. Due to changes in the overall economy and in the company's financial
condition investors are now requiring an 7 percent return. What price would you be
willing to pay for a share of the preferred if you receive your first dividend one year
from now?
a. $42.86
b. $30.00
c. $31.54
d. $33.38
e. $38.37
3) Relative return portfolio performance measures
a. Adjust portfolio risk to match benchmark risk.
b. Compare portfolio returns to expected returns under CAPM.
c. Evaluate portfolio performance on the basis of return per unit of risk.
d. Indicate historic average differential return per unit of historic variability of
differential return.
e. None of the above.
4) A stock currently sells for $15 per share. A put option on the stock with an exercise
price $15 currently sells for $1.50. The put option is
a. At-the-money.
b. In-the-money.
c. Out-of-the-money.
d. At breakeven.
e. None of the above.
5) Exhibit 25.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The portfolios identified below are being considered for investment. During the period
under consideration Rf= .03.
Using the Sharpe Measure, which portfolio performed best?
a. A
b. B
c. C
d. D
e. Two portfolios are tied
6) Exhibit 14.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
At the end of the year 2010 the BRK Corporation had free cash flow to equity (FCFE)
of $250,000 and shares outstanding of 200,000. The company projects the following
annual growth rates in FCFE:
From year 2019 onward growth in FCFE is expected to remain constant at 5% per year.
The stock has a beta of 1.3 and the current market price is $55. Currently the yield on
10-year Treasury notes is 5% and the equity risk premium is 4%.
Calculate the present value now (Year 2010) of FCFE during the period of constant
growth (that is for years 2019 onwards).
a. $7,153,368
b. $9,703,476
c. $15,558,341
d. $8,986,012
e. $6,789,125
7) Exhibit 17.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
XLR Corporation just issued a $1,000 par value bond with a 7% yield to maturity,
twenty years to maturity, with an 8% semi-annual coupon rate.
If market interest rates rise to 10%, what will the price of the XLR Corporate bond be
in three years?
a. $832.89
b. $838.07
c. $1097.63
d. $1,102.85
e. $1,191.43
8) The best way for an investor to "lock in" to high interest rates would be to purchase a
bond that has a ____ coupon and a ____ term to maturity.
a. Low, short
b. Low, long
c. High, short
d. High, long
e. Zero, very long
9) Which securities can be valued by dividing the annual dividend by the required rate
of return?
a. Low coupon bonds
b. Junk bonds
c. Common stocks
d. Preferred stocks
e. Constant growth common stocks
10) Coupon reinvestment risk arises because the yield to maturity computation
implicitly assumes that all coupon flows will be reinvested at the
a. Coupon rate.
b. Effective rate of interest.
c. Realized yield to maturity.
d. Promised yield to maturity.
e. Existing yield as the coupons are paid.
11) You are considering investing $50,000 in two mutual funds. The first fund is a load
fund with a fee of 6% and you expect the fund to earn 11% over the next year.
Alternatively, you could invest in a no load fund that is expected to earn 8% and has a
0.5 percent redemption fee. What fund has a higher return and how much more value
will it have after the first year?
a. Load fund by $1,360
b. Load fund by $580
c. No load fund by $580
d. No load fund by $1,560
e. No load fund by $1,820
12) Fama and French examined the relationship between the Book Value to Market
Value ratio and average stock returns and found
a.No evidence of a relationship for U.S. stocks.
b.Evidence of a negative relationship in U.S. stocks only.
c.Evidence of a positive relationship for Japanese stocks only.
d.Evidence of a negative relationship for U.S. and Japanese stocks.
e.Evidence of a positive relationship for U.S. and Japanese stocks.
13) With a differentiation strategy, a firm seeks to identify itself as unique in its industry
in an area that is important to buyers.
14) Future tax rates are difficult to estimate because they are politically influenced.
15) The Sharpe and Treynor measures always give different rankings.
16) The correlation of returns between a single pair of countries remains constant over
time.
17) There is an inverse relationship between duration and coupon.
18) The three major theories explaining the term structure of interest rates are the
expectations hypothesis, the liquidity differential hypothesis, and the segmented quality
hypothesis.
