FE 14262 | Course Paper

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Riverside Metals recently issued some debt that had an original maturity of nine

months. This debt is best classified as a(n):

A. option contract.

B. money market instrument.

C. fixed-income security.

D. derivative security.

E. futures contract.

Assume that the Federal Reserve injects $45 billion into the financial system. If the

money supply increases by a maximum of $300 billion, what must the reserve

requirement be?

A. 10%

B. 12%

C. 15%

D. 18%

E. 20%

Two bonds have a coupon rate of 6.5 percent, semi-annual payments, face values of

$1,000, and yields to maturity of 7.1 percent. Bond S matures in 6 years and bond L

matures in 12 years. What is the difference in the current prices of these bonds?

A. $15.26

B. $16.19

C. $17.40

D. $18.38

E. $19.02

If you ignore a margin call, your broker:

A. will seize all the assets in your account.

B. will close your account.

C. may place a short sale on your behalf to cover the amount of the call.

D. may sell some of your securities to repay the margin loan.

E. will increase both your margin loan and the rate of interest on that loan.

PAC bondholders receive payments of principal based on which one of the following?

A. an amortization schedule

B. PAC collar’s lower PSA prepayment schedule

C. PAC collar’s upper PSA prepayment schedule

D. receipt of all principal collected on the underlying pool of mortgages until the bond

is paid in full

E. zero principal from the underlying pool of mortgages until after the PAC companion

bonds have been paid in full

Lakeside Sheet Metal is downsizing and plans on completely closing 3 years from now.

The firm’s liquidation plan calls for annual dividends of $3, $6, and $36 over the next 3

years, respectively. What is the current value of this stock given a discount rate of 14

percent?

A. $26.94

B. $27.16

C. $28.46

D. $31.50

E. $36.29

You have decided to pay $1,800 a month on your 30-year, $225,000 mortgage. The

interest rate is 7.75 percent. What is your total prepayment amount for year two?

A. $2,208

B. $2,257

C. $3,387

D. $3,979

E. $4,002

Newcomer Mills is a relatively new firm which will retain all of its earnings for the

next four years. Four years from now, the firm expects to pay its first dividend of $0.25

a share. After that, it intends to increase the dividend by 4 percent annually. What is the

value of this stock today at a discount rate of 12 percent?

A. $1.53

B. $1.78

C. $2.04

D. $2.22

E. $2.60

A stock produced annual returns of 5, -21, 11, 42, and 4 percent over the past five years,

respectively. What is the geometric average return?

A. 5.78 percent

B. 6.03 percent

C. 6.34 percent

D. 7.21 percent

E. 8.20 percent

Investment advisory firms generally provide which of the following services to a

mutual fund?

I. marketing

II. record keeping

III. investment research

IV. tax payment

A. I only

B. II and III only

C. I, II, and III only

D. II, III, and IV only

E. I, II, III, and IV

You purchased six put option contracts with a strike price of $30 and a premium of

$0.90. At expiration, the stock was selling for $26.80 a share. What is the total net

amount you received for your shares, assuming that you disposed of your shares on the

expiration date?

A. $17,955

B. $17,460

C. $17,045

D. $17,815

E. $17,160

What is the beta of an average asset?

A. 0

B. > 0 but < 1

C. < 1

D. 1

E. > 1

Last year, ABC stock returned 11.4 percent, the risk-free rate was 3.2 percent, and the

inflation rate was 2.8 percent. What was the risk premium on ABC stock?

A. 8.20 percent

B. 8.43 percent

C. 8.60 percent

D. 8.88 percent

E. 8.97 percent

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

Sales minus cost of goods sold are equal to which one of the following?

A. net sales

B. operating income

C. gross profit

D. pretax income

E. net income

Which one of the following is defined as anything a firm owns that has value?

A. equity

B. asset

C. liability

D. cash inflow

E. cash outflow

A stock has an average arithmetic return of 10.55 percent and an average geometric

return of 10.41 percent based on the annual returns for the last 15 years. What is

projected average annual return on this stock for the next 10 years?

A. 10.17 percent

B. 10.21 percent

C. 10.38 percent

D. 10.46 percent

E. 10.79 percent

Which of the following occurred during the Crash of 1987?

I. market prices were kept up-to-date which increased investors’ anxiety

II. the market declined another 5 percent within the 2 days following the crash

III. trading volume exceeded the exchange’s capacities

IV. NASDAQ went off-line

A. I and II only

B. III and IV only

C. I, II and IV only

D. II, III, and IV only

E. I, II, III, and IV

What is the total option premium you will receive if you sell 6 October $25 calls on

Texas Instruments?

A. $80

B. $350

C. $695

D. $4,170

E. $4,375

How much will you be paid if you own a bond that is called under a make-whole call

provision?

A. the face value

B. an amount equal to the par value plus the total amount of the remaining interest

payments

C. the present value of all future bond payments that will not be paid because of the call

D. the current market value plus a prespecified call premium

E. an amount equal to the normal maturity value of the bond

You can withdraw funds from your margin account without closing your futures

contract given which two of the following?

I. marking-to-market deducts funds from your margin account

II. marking-to-market adds funds to your margin account

III. margin balance after the withdrawal will exceed the maintenance margin

requirement

IV. margin balance after the withdrawal will exceed the initial margin requirement

A. I and III only

B. I and IV only

C. II and III only

D. II and IV only

E. Funds cannot be withdrawn as long as the futures contract is outstanding.

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

Your broker requires an initial margin of $1,500 and a maintenance margin of $1,000 on

Treasury note futures. Treasury note futures contracts are based on a $100,000 par value

and quoted in points and one-half of 1/32 of a point. You own one Treasury futures

contract that had a closing settlement quote of 113″245 yesterday. Today, the settlement

quote is 112″265. Your margin balance at yesterday’s close was $1,150. All margin calls

restore margin levels to their initial level. Will you receive a margin call based on

today’s settlement quote and if so, for what amount?

A. no margin call

B. call for $1,037.50

C. call for $937.50

D. call for $1,100

E. call for $1,287.50

Which one of the following will increase the current residual income of a firm?

A. an increase in required earnings

B. a decrease in the current earnings per share

C. a decrease in future earnings per share

D. a decrease in the required return on the firm’s equity

E. an increase in the firm’s beginning book equity per share

The U.S. Treasury bill is yielding 1.85 percent and the market has an expected return of

7.48 percent. What is the Treynor ratio of a correctly-valued portfolio that has a beta of

1.33 and a variance of .0045?

A. .056

B. .064

C. .069

D. .082

E. .087

According to the theory of recency bias, investors tend to believe the financial markets

will:

A. gravitate to their long-term average rates of return.

B. react over the next year in direct opposition to the performance of the prior year.

C. have a maximum of three years of positive annual returns before declining

somewhat.

D. continue to perform as they have over the past couple of years.

E. tend to reverse direction at least every five years.

A bond has a dollar value of an 01 of .0684. What is the yield value of a 32nd?

A. .4408

B. .4569

C. .4629

D. .4847

E. .5084

You currently own 300 shares of Microsoft stock. If you purchase options on this stock

to protect against future declines in the price of the stock you are implementing which

one of the following?

A. covered call

B. naked call

C. protective put

D. bear spread

E. straddle

At the beginning of the year, you invested $4,000 in a no-load mutual fund with a NAV

of $20.00. At the end of the year, the fund distributed $1.06 in short-term earnings and

$3.10 in long-term earnings. The end of year NAV was $19.42. What was your annual

rate of return on this investment?

A. -5.90 percent

B. -1.86 percent

C. 11.80 percent

D. 15.36 percent

E. 17.90 percent

Barn Wood Interiors announced today that it is going out of business. As of today, no

more regular dividends will be paid. The firm will, however, pay two liquidating

dividends. The first will be paid one year from now in the amount of $14 a share. The

second and final payment will be paid two years from now at an estimated $38 a share.

What is the value of this stock today at a discount rate of 18.7 percent?

A. $38.76

B. $39.03

C. $41.41

D. $43.78

E. $46.01

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

Historically, Jones Trucking has had a P/E ratio of 14.6. The firm has current net

income of $92,000 with 85,000 shares of stock outstanding. The EPS growth rate is 4.5

percent. What is the expected price of this stock one year from now?

A. $15.32

B. $15.85

C. $16.41

D. $16.51

E. $17.10

Last year, Kathy purchased 3 shares of stock A at $50 a share. At the same time, she

purchased 5 shares of stock B at $35 a share. Today, stock A is valued at $65 a share

and stock B is worth $42 a share. What is the relative strength of stock A as compared

to stock B?

A. .84

B. .88

C. .93

D. 1.04

E. 1.14