FIN 48437 | Course Paper

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An analyst starts by examining the broad economic environment and then considers the

implications of the economy on the industry in which the firm operates. Finally, the

firm’s position within the industry is examined. This is called __________ analysis.

A. bottom-up

B. outside-inside

C. top-down

D. upside-down

The term excess return refers to ______________.

A. returns earned illegally by means of insider trading

B. the difference between the rate of return earned and the risk-free rate

C. the difference between the rate of return earned on a particular security and the rate

of return earned on other securities of equivalent risk

D. the portion of the return on a security that represents tax liability and therefore

cannot be reinvested

A bond’s price volatility _________ at _________ rate as maturity increases.

A. increases; an increasing

B. increases; a decreasing

C. decreases; an increasing

D. decreases; a decreasing

A firm purchases goods on credit worth $150. The same firm pays off $100 in old credit

purchases. An investment is made via the purchase of a new facility, and equity is

issued in the amount of $300 to pay for the purchase. What is the change in net cash

provided by operations?

A. $50 increase

B. $100 increase

C. $150 increase

D. $250 increase

Net worth represents _____ of the liabilities and net worth of commercial banks.

A. about 51%

B. about 91%

C. about 11%

D. about 31%

Sahali Trading Company has issued $100 million worth of long-term bonds at a fixed

rate of 9%. Sahali Trading Company then enters into an interest rate swap where it will

pay LIBOR and receive a fixed 8% on a notional principal of $100 million. After all

these transactions are considered, Sahali’s cost of funds is __________.

A. 17%

B. LIBOR

C. LIBOR + 1%

D. LIBOR – 1%

Malkiel and Saha (2005) estimate that the survivorship bias for hedge funds equals

4.4%, which is __________ the survivorship bias for mutual funds.

A. about the same as

B. much lower than

C. much higher than

D. only slightly lower than

You are considering investing in one of several mutual funds. All the funds under

consideration have various combinations of front-end and back-end loads and/or 12b-1

fees. The longer you plan on remaining in the fund you choose, the more likely you will

prefer a fund with a

__________ rather than a __________, everything else equal.

A. 12b-1 fee; front-end load

B. front-end load; 12b-1 fee

C. back-end load; front-end load

D. 12b-1 fee; back-end load

In 2015 Huge-Packing repurchased shares of common stock worth $5,241 million and

made dividend payments of $894 million. Other financing activities raised $196

million, and Huge-Packing’s total cash flow from financing was -$6,077 million. How

much did the long-term debt accounts of Huge-Packing change?

A. increased $138 million

B. decreased $138 million

C. increased $836 million

D. decreased $836 million

You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield

6%. You do not sell the bond at year-end. If you are in a 15% tax bracket, at year-end

you will owe taxes on this investment equal to _______.

A. $9.10

B. $4.25

C. $.68

D. $5.20

Transportation stocks currently provide an expected rate of return of 15%. TTT, a large

transportation company, will pay a year-end dividend of $3 per share. If the stock is

selling at $60 per share, what must be the market’s expectation of the constant-growth

rate of TTT dividends?

A. 5%

B. 10%

C. 20%

Which of the following statements is true concerning economic value added?

A. A growing number of firms tie managers’ compensation to EVA.

B. A profitable firm will always have a positive EVA.

C. EVA recognizes that the cost of capital is not a real cost.

D. If a firm has positive present value of growth opportunities, it will have positive

EVA.

The dollar-weighted return is the _________.

A. difference between cash inflows and cash outflows

B. arithmetic average return

C. geometric average return

D. internal rate of return

Arbitrage is __________________________.

A. an example of the law of one price

B. the creation of riskless profits made possible by relative mispricing among securities

C. a common opportunity in modern markets

D. an example of a risky trading strategy based on market forecasting

Which type of investment fund is commonly known to invest in options and futures in

large scale?

A. commingled funds

B. hedge funds

C. ETFs

D. REITs

The duration is independent of the coupon rate only for which one of the following?

A. discount bonds

B. premium bonds

C. perpetuities

D. short-term bonds

In a single-factor market model the beta of a stock ________.

A. measures the stock’s contribution to the standard deviation of the market portfolio

B. measures the stock’s unsystematic risk

C. changes with the variance of the residuals

D. measures the stock’s contribution to the standard deviation of the stock

The SML is valid for _______________, and the CML is valid for ______________.

A. only individual assets; well-diversified portfolios only

B. only well-diversified portfolios; only individual assets

C. both well-diversified portfolios and individual assets; both well-diversified portfolios

and individual assets

D. both well-diversified portfolios and individual assets; well-diversified portfolios

only

According to the CAPM, investors are compensated for all but which of the following?

A. expected inflation

B. systematic risk

C. time value of money

D. residual risk

The financial statements of Flathead Lake Manufacturing Company are shown below.

Note: The common shares are trading in the stock market for $15 per share.

Refer to the financial statements of Flathead Lake Manufacturing Company. The

industry average ACP is 32 days. How is Flathead doing in its collections relative to the

industry? (Please keep in mind that when a ratio involves both income statement and

balance sheet numbers, the balance sheet numbers for the beginning and end of the year

must be averaged.)

A. Flathead’s receivables are outstanding about 9 fewer days than the industry average.

B. Flathead’s receivables are outstanding about 15 fewer days than the industry average.

C. Flathead’s receivables are outstanding about 12 more days than the industry average.

D. Flathead’s receivables are outstanding about 6 more days than the industry average.

A person with a long position in a commodity futures contract wants the price of the

commodity to ______.

A. decrease substantially

B. increase substantially

C. remain unchanged

D. increase or decrease substantially

If your marginal tax rate is 15%, your capital gains tax rate on a stock you have held for

10 years would be ___.

A. 5%

B. 15%

C. 20%

D. 27.5%

Steel Pier Company has issued bonds that pay semiannually with the following

characteristics:

The modified duration for the Steel Pier bond is ______.

A. 6.15 years

B. 5.95 years

C. 6.49 years

D. 9.09 years

In recent years the greatest dollar amount of securitization occurred for which type of

loan?

A. home mortgages

B. credit card debt

C. automobile loans

D. equipment leasing

The __________ index is a widely used index of non-U.S. stocks.

A. CBOE

B. Dow Jones

C. EAFE

D. Lehman Index

A bank has an average duration of its liabilities equal to 2 years. The bank’s average

duration of its assets is 3.5 years. The bank’s market value of equity is at risk if

_______________________.

A. interest rates fall

B. credit spreads fall

C. interest rates rise

D. the price of all fixed-income securities rises

In a __________ underwriting arrangement, the underwriter assumes the full risk that

shares may not be sold to the public at the stipulated offering price.

A. best-efforts

B. firm-commitment

C. private placement

D. none of these options

From 1926 to 2013 the world stock portfolio offered _____ return and _____ volatility

than the portfolio of large U.S. stocks.

A. lower; higher

B. lower; lower

C. higher; lower

D. higher; higher

An Asian call option gives its holder the right to ____________.

A. buy the underlying asset at the exercise price on or before the expiration date

B. buy the underlying asset at a price determined by the average stock price during

some specified portion of the option’s life

C. sell the underlying asset at the exercise price on or before the expiration date

D. sell the underlying asset at a price determined by the average stock price during

some specified portion of the option’s life

The yield on a 1-year bill in the United Kingdom is 6%, and the present exchange rate

is 1 pound = US$2. If you expect the exchange rate to be 1 pound = US$1.95 a year

from now, the return a U.S. investor can expect to earn by investing in U.K. bills is

approximately __________.

A. -3%

B. 3%

C. 3.35%

D. 8.72%

Advantages of cash flow matching and dedicated strategies include:

I. Once the cash flows are matched, there is no need for rebalancing.

II. Cash flow matching typically earns a higher rate of return than active bond portfolio

management.

III. Financial institutions’ liabilities often exceed the maturity of available bonds,

making cash matching even more desirable.

A. I only

B. II only

C. I and III only

D. I, II, and III

A corporate bond has a 10-year maturity and pays interest semiannually. The quoted

coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110%

of par. What is the bond’s yield to call?

A. 6.2%

B. 9.1%

C. 4.49%

D. 8.98%

Consider the capital asset pricing model. The market degree of risk aversion, A, is 3.

The variance of return on the market portfolio is .0225. If the risk-free rate of return is

4%, the expected return on the market portfolio is _________.

A. 6.75%

B. 9%

C. 10.75%

D. 12%

A European call option gives the buyer the right to _________.

A. buy the underlying asset at the exercise price on or before the expiration date

B. buy the underlying asset at the exercise price only at the expiration date

C. sell the underlying asset at the exercise price on or before the expiration date

D. sell the underlying asset at the exercise price only at the expiration date

A level _____ subscriber to the NASDAQ system may enter bid and ask prices.

A. 1

B. 2

C. 3

D. 4