1) At what point would an investor be indifferent between a Bridgford corporate bond
yielding 8.0 percent and a tax-free municipal bond of equal financial strength if the
investor’s marginal tax rate is 25 percent?
a. 5.00%
b. 7.10%
c. 8.00%
d. 9.15%
e. 6.00%
2) Exhibit 22.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for a common stock
Calculate the net value of a protective put position at an expiration stock price of $20.
a. $2.85
b. $17.15
c. $19.85
d. $21.65
e. $22.85
3) If the coupon payments are not reinvested during the life of the issue then the
a. Promised yield is greater than realized yield.
b. Promised yield is less than realized yield.
c. Nominal yield declines.
d. Nominal yield is greater than promised yield.
e. Current yield equals the yield to maturity.
4) Exhibit 12.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that the dividend payout ratio will be 55 percent when the rate on long-term
government bonds falls to 9 percent. Since investors are becoming more risk averse, the
equity risk premium will rise to 8 percent and investors will require a 7 percent return.
The return on equity will be 13 percent.
To what price will the market rise if the earnings expectation is $1.5?
a. $138.42
b. $90.36
c. $71.74
d. $105.30
e. $85.14
5) Exhibit 20.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A futures contract on Treasury bond futures with a December expiration date currently
trade at 103:06. The face value of a Treasury bond futures contract is $100,000. Your
broker requires an initial margin of 10%.
Calculate the current value of one contract.
a. $100,000
b. $103,600.5
c. $103,187.5
d. $102,306.3
e. $104,293.5
6) Exhibit 10.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following year end information for All Systems Corporation.
Calculate the financial leverage ratio used in DuPont analysis.
a. 0.61
b. 1.56
c. 1.77
d. 1.98
e. 2.56
7) Exhibit 20.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A futures contract on Treasury bond futures with a December expiration date currently
trade at 103:06. The face value of a Treasury bond futures contract is $100,000. Your
broker requires an initial margin of 10%.
If the futures contract is quoted at 105:08 at expiration calculate the percentage return.
a. 1.99%
b. 19.99%
c. 20.62%
d. 25.37%
e. -13.65%
8) The price-yield relationship for a bond will become more convex
a. For a low coupon bond.
b. For a high coupon bond.
c. For a long maturity bond.
d. b and c.
e. a and c.
9) Exhibit 12.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information that you propose to use to obtain an estimate of
year 2004 EPS for the MacLog Company.
In addition a regression analysis indicates the following relationship between growth in
sales per share for MacLog and GDP growth is
Calculate the per share EBIT for the year 2004.
a. $35.53
b. $41.65
c. $55.89
d. $65.14
e. $75.10
10) Suppose the 8 percent investment of the previous problem is taxable rather than
tax-deferred. What will be the after-tax value of his $10,000 investment after 5 years
(assuming annual compounding)?
a.$10,680
b.$11,765
c.$13,895
d.$14,693
e.$15,528
11) Exhibit 18.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A $1000 par value bond with 4 years to maturity and a 5% coupon has a yield to
maturity of 6%. Interest is paid annually.
Calculate the Macaulay duration for the bond.
a. 3.19 years
b. 3.36 years
c. 3.57 years
d. 3.72 years
e. 3.84 years
12) A ____ contract can be viewed as a prepackaged series of forward rate agreements
to buy or sell LIBOR at the same fixed rate.
a. Swap
b. Cap
c. Floor
d. Collar
e. None of the above
13) Exhibit 21.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The S&P 500 stock index is at 1300. The annualized interest rate is 4.0% and the
annualized dividend is 2%. You are currently considering purchasing a 2-month futures
contract for your portfolio.
Calculate the current price of the futures contract.
a. 1295.66
b. 1304.34
c. 1342.75
d. 1379.29
e. 1393.49
14) A 9.0 percent coupon bond issued by the State of Iowa sells for $1,000. What
coupon rate on a corporate bond selling at $1,000 par value would produce the same
after tax return to the investor as the municipal bond if the investor is in the 30 percent
marginal tax bracket?
a. 6.30%
b. 6.92%
c. 11.70%
d. 12.86%
e. 15.25%
15)
Refer to Exhibit 7.4. What is the expected return of a portfolio of two risky assets if the
expected return E(Ri), standard deviation (si), covariance (COVi,j), and asset weight
(Wi) are as shown above?
a. 8.6%
b. 8.1%
c. 9.3%
d. 10.2%
e. 11.6%
16) Correlations between bond markets in different countries have been changing over
time because
a.Countries are developing closer trade and economic links.
b.Countries are becoming more segmented.
c.There are fewer barriers to travel.
d.U.S. investors are purchasing more foreign securities.
e.Correlations between bond markets of different countries have been rising.
17) When the offer price and the NAV of a mutual fund are equal it is an indication that
a. The fund’s assets are in equilibrium.
b. The fund is trading at par.
c. It is strictly a coincidence.
d. The fund has no initial fee.
e. The fund is backloaded.
18) Margin transaction involves borrowing part of the cost of an investment.
19) Sharpe’s performance assumes that all portfolios are completely diversified.
20) A bond market index is easier to create than a stock market index because the
universe of bonds is much broader than that of stocks.
21) Warrants are options often issued in connection with the sale of fixed income
securities.
22) The capital goods industry typically outperforms other sectors during a recession.
23) The best known measure of relative value for common stock is the P/E ratio.
24) Sharpe’s (1991) study reveals that active managers typically outperform passive
managers even after transaction costs and fees.
25) The Confidence Index increases as the yield on lower grade bonds decreases,
everything else being constant.
26) Financial risk is the uncertainty of operating income caused by the firm’s industry.