1) For technical trading rules to generate returns that are superior to a buy-and-hold
strategy, net of transaction costs, the market would have to be
a. Rising.
b. Falling.
c. Inefficient.
d. Overvalued.
e. Undervalued.
2) Given the following fees and expected returns for fund X, assuming an initial
investment of $1000 calculate the value of the investment at the end of 5 years.
a. $1069.82
b. $1550.77
c. $1042.36
d. $1689.95
e. $1389.95
3) Exhibit 19.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a pure yield pick-up swap: You currently
hold a 10 year, 7 percent coupon bond priced to yield 8 percent. As a swap candidate
you are considering a 10 year, 8 percent coupon bond priced to yield 9 percent. Assume
a reinvestment at 9 percent, semiannual compounding, and a one-year workout period.
The interest on one coupon for the candidate bond is
a. $2.97
b. $2.03
c. $1.80
d. $1.37
e. $3.49
4) Which of the following are not typically considered a threat of new entrants to an
industry?
a. Low current prices relative to costs
b. Large capital requirements
c. Extensive distribution channels with exclusive distribution contracts
d. Government policy restricting access to raw materials
e. Large volume purchases relative to the sales of a supplier
5) Exhibit 21.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume you are the Treasurer for the Johnson Pharmaceutical Company and in late July
2004, the company is considering the sale of $500 million in 20-year debentures that
will most likely be rated the same as the firm’s other debt issues. The firm would like to
proceed at the current rate of 8.5%, but you know that it will probably take until
November to bring the issue to market. Therefore, you suggest that the firm hedge the
pending issue using Treasury bond futures contracts which each represent $100,000.
How you would go about hedging the bond issue?
a. Buy 5,000 contracts
b. Buy 50,000 contracts
c. Sell 5,000,000 contracts
d. Sell 5,000 contracts
e. None of the above
6) Exhibit 2.1
USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING
PROBLEM(S)
Refer to Exhibit 2.1. What is the tax liability for a single individual with taxable income
of $85,000?
a.$23,800
b.$18,427
c.$24,958
d.$16,867
e.$19,650
7) A bond that only pays a principal payment at maturity date is known as a(n):
a. Blank bond.
b. Maturity bond.
c. Interest free bond.
d. Mini-coupon bond.
e. Zero coupon bond.
8) The performance of four major groups of investors has been studied in connection
with tests of the strong-form of the efficient market hypothesis. These include all of the
following except
a.Professional money managers.
b.Stock exchange specialists.
c.Securities Exchange officers.
d.Security analysts.
e.Corporate insiders.
9) Exhibit 21.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
In late January 2004, The Union Cosmos Company is considering the sale of $100
million in 10-year debentures that will probably be rated AAA like the firm’s other bond
issues. The firm is anxious to proceed at today’s rate of 10.5 percent. As treasurer, you
know that it will take until sometime in April to get the issue registered and sold.
Therefore, you suggest that the firm hedge the pending issue using Treasury bond
futures contracts each representing $100,000.
What is the dollar gain or loss assuming that future conditions described in Case 2
actually occur? (Ignore commissions and margin costs, and assume a naive hedge ratio.)
a. $2,965,000.00 gain
b. $45,500.00 gain
c. $2,965,000.00 loss
d. $45,500.00 loss
e. None of the above
10) During a recession which industry is most likely to excel?
a. Consumer staples
b. Consumer durables
c. Basic industries
d. Financial stocks
e. Capital goods
11) Exhibit 12.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are using the free cash flow to equity (FCFE) technique to analyze U.S. equity
market. The beginning FCFE is $90 and the required rate of return is 10%. Free cash
flows are expected to grow at a 10% rate for the next two years and then grow at a
constant rate of 7% forever.
What will FCFE be three years from now?
a. 108.90
b. 116.52
c. 117.00
d. 119.79
e. 120.21
12) Exhibit 12.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that the dividend payout ratio will be 65 percent when the rate on long-term
government bonds falls to 8 percent. Since investors are becoming more risk averse, the
equity risk premium will rise to 7 percent and investors will require a 15 percent return.
The return on equity will be 12 percent.
What is the expected sustainable growth rate?
a. 2.80%
b. 4.20%
c. 5.25%
d. 7.80%
e. 9.75%
13) Calculate the modified duration of a bond that has a Macaulay duration of 7.6 and
the bond pays interest semi-annually with a coupon rate of 6% and a required rate of
return of 8%.
a. 7.04
b. 7.17
c. 7.31
d. 7.38
e. 8.12
14) Candlestick charts indicate the price change from open to close by shading whether
the market went down or up for the day.
15) The U.S. equity and bond markets have grown in terms of their relative size of the
world equity and bond market.
16) In the present value of operating free cash flow technique, the firm’s operating free
cash flow to the firm is discounted at the firm’s weighted average cost of capital
(WACC).
17) Structural changes do have a cyclical pattern.
18) With a matched funding technique portfolio managers try to match specific liability
obligations due at specific times to a portfolio of bonds that minimize the portfolio’s
interest rate risk.