1) Given the following fees and expected returns for fund Y, 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. $1642.36
d. $1389.95
e. $1362.59
2) Exhibit 19.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a substitution swap. You currently hold
a 25 year, Aa 10 percent coupon bond priced to yield 12 percent. As a swap candidate
you are considering a 25 year, Aa 10 percent coupon bond priced to yield 13 percent.
Assume a reinvestment rate of 12 percent, semiannual compounding, and a one-year
workout period.
The realized compound yield on the current bond is
a. 10.00%
b. 11.9985%
c. 12.9397%
d. 13.9399%
e. 12.3585%
3) Exhibit 19.11
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds, both pay semiannual interest. Bond X has a coupon of 7% per
year, maturity of 20 years, yield to maturity of 8% per year, and a face value of $1000.
Bond Y has a coupon of 7% per year, maturity of 20 years, yield to maturity of 8.5%
per year, and a face value of $1000.
Calculate the percentage gain per invested dollar for Bond Y assuming a one year
horizon, and a reinvestment rate of 8.5% per year.
a. 7.84%
b. 7.97%
c. 8.18%
d. 8.34%
e. 8.56%
4) Using the constant growth model, an increase in the required rate of return from 14
to 18 percent combined with an increase in the growth rate from 8 to 12 percent would
cause the price to
a. Fall more than 4%
b. Fall less than 4%.
c. Rise more than 4%
d. Rise less than 4%.
e. Remain constant.
5) Evidence supporting the strong-form efficient market hypothesis (EMH) resulted
from examining
a.Value Line rankings.
b.Corporate insiders.
c.Stock exchange specialists.
d.Both b and c only.
e.All of the above.
6) All of the following factors affect the required rate of return except
a. The economy’s risk free rate.
b. Corporate business risk.
c. Return on equity.
d. Country risk.
e. Expected rate of inflation.
7) Exhibit 6.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Rit= return for stock i during period t
Rmt= return for the aggregate market during period t
Refer to Exhibit 6.1. What is the abnormal rate of return for Stock C during period t
using only the aggregate market return (ignore differential systematic risk)?
a.4.0%
b.1.2%
c.-1.05%
d.2.0%
e.-8.50
8) All of the following are ways in which a firm can increase its growth rate of equity
earnings without any external financing except
a. Decreasing its dividend payments
b. Increasing its retention ratio
c. Increasing its return on equity (ROE)
d. Increasing its return on assets (ROA)
e. All of the above will increase the firm’s growth rate without external financing
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 1
actually occur? (Ignore commissions and margin costs, and assume a naive hedge ratio.)
a. $2,945,000.00 gain
b. $65,500.00 gain
c. $2,945,000.00 loss
d. $65,500.00 loss
e. None of the above
10) You are given a two asset portfolio with a fixed correlation coefficient. If the
weights of the two assets are varied the expected portfolio return would be ____ and the
expected portfolio standard deviation would be ____.
a. Nonlinear, elliptical
b. Nonlinear, circular
c. Linear, elliptical
d. Linear, circular
e. Circular, elliptical
11) In a ladder strategy
a. One half of funds are invested in short duration bonds and the test in long duration
bonds.
b. Seventy five percent of funds are invested in short duration bonds and the test in long
duration bonds.
c. Twenty five percent of funds are invested in short duration bonds and the test in long
duration bonds.
d. An equal amount of funds are invested in a wide range of maturities.
e. None of the above.
12) The value of a call option is inversely related to:
a. Underlying stock price.
b. Time to expiration
c. Exercise price.
d. a and b
e. b and c
13) Exhibit 23.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Chimichango Industries has decided to borrow $50,000,000.00 for six months in two
three-month issues. As the Treasurer, you are concerned that interest rates will rise over
the next three months and the rate upon which the second payment will be based will be
undesirable. (The amount of Chimichango’s first payment will be known at origination.)
To reduce the company’s interest rate exposure, you decide to purchase a 3 – 6 FRA
whereby you pay the dealer’s quoted fixed rate of 5.91% in exchange for receiving
3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys
LIBOR from Megabuks Industries at its bid rate of 5.85%. (Assume a notional principal
of $50,000,000.00 and that there are 60 days between month 3 and month 6.)
Refer to Exhibit 23.3. How much compensation does the dealer receive for transaction
costs, credit risk and other costs associated with matching the FRA’s?
a. $30,000
b. $31,250
c. $7,500
d. $5,000
e. None of the above
14) Exhibit 25.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Given the following information evaluate the performance of Tyler Incorporated (TI).
Calculate TI’s selectivity.
a. 0.0113
b. 0.1200
c. 0.0687
d. 0.0530
e. 0.0696
15) Tom Gettback buys 100 shares of Johnson Walker stock for $87.00 per share and a
3-month Johnson Walker put option with an exercise price of $105.00 for $20.00. What
is Tom’s dollar gain/loss if at expiration the stock is selling for $105.00 per share?
a. $1000 gain
b. $200 loss
c. $1000 loss
d. $200 gain
e. None of the above
16) What is the value of a 10% semi-annual coupon bond with a par value of $1,000
that matures in 5 years and has a required rate of return of 9%?
a. $1,021.95
b. $1,038.90
c. $1,039.56
d. $1,064.18
e. $1,078.23
17) The general purpose of a market indicator series is to provide an overall indication
of aggregate market changes or movements.
18) Risk tolerance is exclusively a function of an individual’s psychological makeup.
19) A good portfolio is a collection of individually good assets.
20) Markowitz assumed that, given an expected return, investors prefer to minimize
risk.
21) Discounted cash flow techniques for equity valuation may use one of the following:
(1) dividends, (2) Free cash flow or (3) coupons.