1) Which of the following investments can be purchased with future contracts?
a.Commodities
b.T-bills
c.Treasury bonds
d.Eurobonds
e.All of the above
2) Exhibit 19.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are creating a portfolio that consists of the following two bonds. Bond A pays an
annual 7% coupon, matures in two years, has a yield to maturity of 8%, and a face
value of $1,000. Bond B pays an annual 8% coupon, matures in three years, has a yield
to maturity of 9%, and a face value of $1,000.
Calculate the Modified Duration for Bond B.
a. 1.44
b. 2.47
c. 2.55
d. 2.70
e. 2.78
3) 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 increasing
growth (that is for years 2011 to 2014).
a. $1,719,119
b. $1,715,784
c. $1,115,195
d. $1,434,903
e. $1,809,171
4) If an investor swaps identical issues to establish a loss, the loss is disallowed and the
transaction is known as a
a. Switch sale.
b. Wash sale.
c. Green shoe.
d. Flashback.
e. White knight.
5) Exhibit 19.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds, both pay semiannual interest. Bond A has a coupon of 8% per
year, maturity of 30 years, yield to maturity of 9% per year, and a face value of $1000.
Bond B has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9.5%
per year, and a face value of $1000.
Calculate the percentage gain per invested dollar for Bond B assuming a one year
horizon, and a reinvestment rate of 9.5% per year.
a. 9.73%
b. 9.93%
c. 9.20%
d. 8.20%
e. 9.50%
6) You purchased 100 shares of Highlight Company for $20 a share one year ago with a
margin of 50%. The stock is currently selling for $28 a share and no dividends were
ever paid. The broker charges an annual interest rate of 8% and a $100 commission on
both the purchase and sale of these shares. What is your annual rate of return on this
investment?
a.21%
b.47%
c.52%
d.60%
e.72%
7) Exhibit 21.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
As a relationship officer for a money-center commercial bank, one of your corporate
accounts has just approached you about a one-year loan for $3,000,000. The customer
would pay a quarterly interest expense based on the prevailing level of LIBOR at the
beginning of each quarter. As is the bank’s convention on all such loans, the amount of
the interest payment would then be paid at the end of the quarterly cycle when the new
rate for the next cycle is determined. You observe the following LIBOR yield curve in
the cash market:
If 90-day LIBOR rises to the levels “predicted” by the implied forward rates, what will
the dollar level of the bank’s interest receipt be at the end of the first quarter?
a. $35,250.00
b. $36,375.00
c. $38,250.00
d. $40,500.00
e. None of the above
8) Exhibit 11.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The National Motor Company’s last dividend was $1.25 and the directors expect to
maintain the historic 4 percent annual rate of growth. You plan to purchase the stock
today because you feel that the growth rate will increase to 7 percent for the next three
years and the stock will then reach $25.00 per share.
How much should you be willing to pay for the stock if you feel that the 7 percent
growth rate can be maintained indefinitely and you require a 16 percent return?
a. $11.15
b. $14.44
c. $14.86
d. $18.90
e. $19.24
9) For a bond investor selecting a buy-and-hold strategy, which of the following would
be the least important consideration?
a. Term to maturity
b. Indenture provisions
c. Coupon levels
d. Liquidity
e. Quality
10) Examples of anomalies providing contrary evidence to the semi-strong efficient
market hypothesis include studies of all of the following except
a.Quarterly earnings reports.
b.Price earnings ratios.
c.Total market value.
d.Stocks ranked by Standard & Poor’s.
e.The January effect.
11) Which of the following statements is true?
a. An inverse relationship exists between coupon and convexity.
b. A direct relationship exists between maturity and convexity.
c. An inverse relationship exists between yield and convexity.
d. Choices a and c only
e. All of the above statements are true
12) Recently your broker has advised you that he believes that the stock of Casey
Incorporated is going to rise from $55.00 to $70.00 per share over the next year. You
know that the annual return on the S&P 500 has been 12.5% and the 90-day T-bill rate
has been yielding 6% per year over the past 10 years. If beta for Casey is 1.3, will you
purchase the stock?
a. Yes, because it is overvalued.
b. Yes, because it is undervalued.
c. No, because it is undervalued.
d. No, because it is overvalued.
e. Yes, because the expected return equals the estimated return.
13) Which of the following statements is a true definition of an out-of-the-money
option?
a. A call option in which the stock price exceeds the exercise price.
b. A call option in which the exercise price exceeds the stock price.
c. A call option in which the exercise price exceeds the stock price.
d. A put option in which the exercise price exceeds the stock price.
e. A call option in which the call premium exceeds the stock price.