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
An asset had annual returns of 12, 18, 6, -9, and 5 percent, respectively, for the last five
years.
What is the variance of these returns?
A. .00810
B. .01013
C. .01065
D. .02038
E. .04052
Which one of the following is measured by the Jensen-Treynor alpha?
A. total return relative to systematic risk
B. risk premium relative to systematic
C. risk premium relative to total risk
D. excess return relative to systematic risk
E. excess return relative to total risk
Which one of the following is the type of mortgage pool that guarantees timely
payment of interest and principal?
A. prepaid
B. refinanced
C. secured
D. fully amortized
E. fully modified
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
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
Municipal bonds are yielding 4.4 percent if they are insured and 4.7 percent if they are
uninsured. Your marginal tax rate is 28 percent. Your equivalent taxable yield on the
insured bonds is _____ percent and on the uninsured bonds is _____ percent.
A. 5.89; 6.27
B. 6.11; 6.53
C. 6.31; 6.81
D. 6.67; 7.10
E. 6.76; 7.10
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.
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
Rose wants to invest in a bond fund. She is a very conservative investor with a high
marginal tax rate. Which one of the following types of bond funds might be most suited
for her situation?
A. high-yield corporate
B. long-term world
C. short-term municipal
D. single-state corporate
E. mortgage
You own 300 shares of stock which you would like to have the right to sell at $40 a
share. The 40 call option is quoted at $0.35 bid, $0.40 ask. The 40 put is quoted at $0.45
bid, $0.50 ask. How much will it cost you to obtain the right to sell all of your shares at
$40 a share?
A. $135
B. $50
C. $150
D. $105
E. $75
You want to create the best portfolio that can be derived from two assets. Which one of
the following will help you identify that portfolio?
A. highest portfolio beta
B. market equivalent level of risk
C. highest possible rate of return
D. Treynor-minimal portfolio
E. Sharpe-optimal portfolio
The price-sales ratio helps measure the ability of a firm to generate:
A. net profits.
B. quality cash flows.
C. higher earnings per share.
D. higher cash flow per share.
E. revenue growth.
Over the past ten years, large-company stocks have returned an average of 10.4 percent
annually, long-term corporate bonds have earned 4.6 percent, and U.S. Treasury bills
have returned 3.2 percent. How much additional risk premium would you have earned
if you had invested in large-company stocks rather than long-term corporate bonds over
those ten years?
A. 1.7 percent
B. 3.7 percent
C. 5.2 percent
D. 5.8 percent
E. 8.1 percent
Which one of the following returns is computed as the observed return minus the
expected return?
A. visible
B. distinct
C. abnormal
D. subjective
E. efficient
Stock X has a beta of .95 and an expected return of 10.8 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. 2.06 percent
D. 3.30 percent
E. 3.50 percent
One year ago, Allison purchased 350 shares of a mutual fund which has a front-end
load of 5.25 percent. The NAV at the time of purchase was $30. Today, the NAV is $33.
The fund had total annual expenses of 1.65 percent. There were no fund distributions
this past year. What is Allison’s rate of return for the year?
A. -1.10 percent
B. -1.04 percent
C. 4.23 percent
D. 4.76 percent
E. 5.00 percent
What is the operating cash flow, given the following information?
A. $400
B. $470
C. $530
D. $540
E. $610
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.
Corn is currently selling for $6.15 a bushel while the 3-month futures price is $6.20.
Carlos believes that corn will actually sell for $6.45 a bushel 3 months from now.
Which one of the following positions in corn should he take today, given this belief?
A. sell in the spot market
B. sell in the futures market
C. take a long position in the futures market
D. take a short position in the futures market
E. take a short position in the spot market
The geometric return on an asset over the past 12 years has been 13.47 percent. The
arithmetic return over the same period was 13.86 percent. What is the best estimate of
the average return on this asset over the next 5 years?
A. 13.47 percent
B. 13.67 percent
C. 13.72 percent
D. 13.81 percent
E. 13.86 percent
Which one of the following set of mortgage terms will cause the borrower to pay the
most interest, assuming the mortgage is paid according to the amortization schedule?
A. 10-year, 6.5 percent
B. 10-year, 7.0 percent
C. 15-year, 7.0 percent
D. 30-year, 6.5 percent
E. 30-year, 7.0 percent
An investor who follows a fully active strategy will:
A. move money between asset classes as well as try to select the best performers in
each class.
B. move money between asset classes but will not be concerned about which individual
securities are owned.
C. focus on picking individual stocks only.
D. maintain a relatively constant mix of asset classes while continually buying and
selling individual securities.
E. concentrate solely on asset allocation to maximize potential returns.
Mike was granted stock options on 1,000 shares of his employer’s stock. The stock is
currently selling for $27.70 a share and has a standard deviation of 36 percent. The
option’s strike price is $27.50 and the time to maturity is 10 years. What is the value of
each option given a risk-free rate of 3 percent? Assume that no dividends are paid.
A. $14.35
B. $15.67
C. $17.80
D. $20.15
E. $22.70
A portfolio has an expected annual return of 15.7 percent and a standard deviation of
19.6 percent. What is the smallest expected loss over the next calendar quarter given a
probability of 1 percent?
A. -15.11 percent
B. -16.23 percent
C. -16.49 percent
D. -18.08 percent
E. -18.87 percent
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
Loss aversion is defined as:
A. the inability to mentally acknowledge a loss on a security.
B. selling any security for less than the price paid to acquire it.
C. selling a security as soon as it has increased significantly in value.
D. the reluctance to sell a security after it has decreased in value.
E. the tendency to quickly sell any investment that has decreased in value.
Which one of the following has the greatest duty to provide liquidity to the financial
market?
A. floor broker
B. independent broker
C. dealer
D. designated market maker
E. floor trader
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
Which one of the following statements concerning the relationship between the
volatility of the underlying stock price, as measured by sigma, and call and put prices is
correct?
A. Call and put prices react fairly similarly in response to changes in sigma.
B. Call prices increase and put prices decrease as sigma increases.
C. Put price increase and call prices decrease as sigma increases.
D. Call prices increase and put prices remain relatively constant and sigma increases.
E. Neither put nor call prices are affected by changes in sigma.