Alpha-seeking hedge funds typically ______ relative mispricing of specific securities
and ______ broad market exposure.
A. bet on; bet on
B. hedge; hedge
C. hedge; bet on
D. bet on; hedge
E. None of the options are correct.
A 7% coupon bond with an ask price of $100.00 pays interest every 182 days. If the
bond paid interest 32 days ago, the invoice price of the bond would be
A. $1,005.67.
B. $1,007.35.
C. $1,006.35.
D. $1,006.15.
E. $1,007.12.
A ___________ is established when an individual confers legal title to property to
another person or institution to manage the property for one or more beneficiaries.
A. tax shelter
B. defined contribution plan
C. personal trust
D. fixed annuity
E. Keogh plan
Forward rates ____________ future short rates because ____________.
A. are equal to; they are both extracted from yields to maturity
B. are equal to; they are perfect forecasts
C. differ from; they are imperfect forecasts
D. differ from; forward rates are estimated from dealer quotes while future short rates
are extracted from yields to maturity
E. are equal to; although they are estimated from different sources, they both are used
by traders to make purchase decisions
Suppose that the risk-free rates in the United States and in Canada are 5% and 3%,
respectively. The spot exchange rate between the dollar and the Canadian dollar (C$) is
$0.80/C$. What should the futures price of the C$ for a one-year contract be to prevent
arbitrage opportunities, ignoring transactions costs.
A. $1.00/C$
B. $0.82/C$
C. $0.88/C$
D. $0.78/C$
E. $1.22/C$
For a taxpayer in the 15% marginal tax bracket, a 15-year municipal bond currently
yielding 6.2% would offer an equivalent taxable yield of
A. 6.2%.
B. 5.27%.
C. 8.32%.
D. 7.29%.
The security characteristic line (SCL) associated with the single-index model is a plot
of
A. the security’s returns on the vertical axis and the market index’s returns on the
horizontal axis.
B. the market index’s returns on the vertical axis and the security’s returns on the
horizontal axis.
C. the security’s excess returns on the vertical axis and the market index’s excess returns
on the horizontal axis.
D. the market index’s excess returns on the vertical axis and the security’s excess returns
on the horizontal axis.
E. the security’s returns on the vertical axis and Beta on the horizontal axis.
Some economists believe that the anomalies literature is consistent with investors’
A. ability to always process information correctly, and therefore, they infer correct
probability distributions about future rates of return; and given a probability distribution
of returns, they always make consistent and optimal decisions.
B. inability to always process information correctly, and therefore, they infer incorrect
probability distributions about future rates of return; and given a probability distribution
of returns, they always make consistent and optimal decisions.
C. ability to always process information correctly, and therefore, they infer correct
probability distributions about future rates of return; and given a probability distribution
of returns, they often make inconsistent or suboptimal decisions.
D. inability to always process information correctly, and therefore, they infer incorrect
probability distributions about future rates of return; and given a probability distribution
of returns, they often make inconsistent or suboptimal decisions.
Some economists believe that the anomalies literature is consistent with investors’
inability to always process information correctly and therefore they infer incorrect
probability distributions about future rates of return; and given a probability distribution
of returns, they often make inconsistent or suboptimal decisions.
A coupon bond that pays interest of $100 annually has a par value of $1,000, matures in
five years, and is selling today at a $72 discount from par value. The yield to maturity
on this bond is
A. 6.00%.
B. 8.33%.
C. 12.00%.
D. 60.00%.
E. None of the options are correct.
Exchange-rate risk
A. results from changes in the exchange rates between the currency of the investor and
the country in which the investment is made.
B. can be hedged by using a forward or futures contract in foreign exchange.
C. cannot be eliminated.
D. results from changes in the exchange rates between the currency of the investor and
the country in which the investment is made and cannot be eliminated.
E. results from changes in the exchange rates between the currency of the investor and
the country in which the investment is made and can be hedged by using a forward or
futures contract in foreign exchange.
The growth in dividends of ABC, Inc. is expected to be 15% per year for the next three
years, followed by a growth rate of 8% per year for two years. After this five-year
period, the growth in dividends is expected to be 3% per year, indefinitely. The required
rate of return on ABC, Inc. is 13%. Last year’s dividends per share were $1.85. What
should the stock sell for today?
A. $8.99
B. $25.21
C. $40.00
D. $27.74
E. None of the options are correct.
Which of the following statements is true regarding a corporate bond?
A. A corporate callable bond gives the holder the right to exchange it for a specified
number of the company’s common shares.
B. A corporate debenture is a secured bond.
C. A corporate indenture is a secured bond.
D. A corporate convertible bond gives the holder the right to exchange the bond for a
specified number of the company’s common shares.
E. Holders of corporate bonds have voting rights in the company.
The maximum maturity of commercial paper that can be issued without SEC
registration is
A. 270 days.
B. 180 days.
C. 90 days.
D. 30 days.
Suppose the 1-year risk-free rate of return in the U.S. is 4.5% and the 1-year risk-free
rate of return in Britain is 7.7%. The current exchange rate is 1 pound = U.S. $1.60. A
1-year future exchange rate of __________ for the pound would make a U.S. investor
indifferent between investing in the U.S. security and investing in the British security.
A. 1.5525
B. 2.0411
C. 1.7500
D. 2.3369
The intrinsic value of an in-the-money put option is equal to
A. the stock price minus the exercise price.
B. the put premium.
C. zero.
D. the exercise price minus the stock price.
E. None of the options are correct.
Your professor finds a stock-trading rule that generates excess risk-adjusted returns.
Instead of publishing the results, she keeps the trading rule to herself. This is most
closely associated with
A. regret avoidance.
B. selection bias.
C. framing.
D. insider trading.
Suppose that the average P/E multiple in the gas industry is 17. KMP is expected to
have an EPS of $5.50 in the coming year. The intrinsic value of KMP stock should be
A. $28.12.
B. $93.50.
C. $63.00.
D. $72.00.
E. None of the options are correct.
Earnings management is
A. when management makes changes in the operations of the firm to ensure that
earnings do not increase or decrease too rapidly.
B. when management makes changes in the operations of the firm to ensure that
earnings do not increase too rapidly.
C. when management makes changes in the operations of the firm to ensure that
earnings do not decrease too rapidly.
D. the practice of using flexible accounting rules to improve the apparent profitability
of the firm.
Earnings management is the practice of using flexible accounting rules to improve the
apparent profitability of the firm.
Which of the following researchers have contributed significantly to bond portfolio
management theory?
I) Sidney Homer
II) Harry Markowitz
III) Burton Malkiel
IV) Martin Liebowitz
V) Frederick Macaulay
A. I and II
B. III and V
C. III, IV, and V
D. I, III, IV, and V
E. I, II, III, IV, and V
The APT differs from the CAPM because the APT
A. places more emphasis on market risk.
B. minimizes the importance of diversification.
C. recognizes multiple unsystematic risk factors.
D. recognizes multiple systematic risk factors.
Assume you sold short 100 shares of common stock at $40 per share. The initial margin
is 50%. What would be the maintenance margin if a margin call is made at a stock price
of $50?
A. 40%
B. 20%
C. 35%
D. 25%
The index that includes the largest number of actively-traded stocks is
A. the NASDAQ Composite Index.
B. the NYSE Composite Index.
C. the Wilshire 5000 Index.
D. the Value Line Composite Index.
E. the Russell Index.
If a 6.75% coupon bond is trading for $1,016.00, it has a current yield of
A. 7.38%.
B. 6.64%.
C. 7.25%.
D. 8.53%.
E. 7.18%.
An 8%, 30-year corporate bond was recently being priced to yield 10%. The Macaulay
duration for the bond is 10.20 years. Given this information, the bond’s modified
duration would be
A. 8.05.
B. 9.44.
C. 9.27.
D. 11.22.
E. None of the options are correct.
Old Style Corporation produces goods that are very mature in their product life cycles.
Old Style Corporation is expected to have per share FCFE in year 1 of $1.00, per share
FCFE of $0.90 in year 2, and per share FCFE of $0.85 in year 3. After year 3, per share
FCFE is expected to decline at a rate of 2% per year. An appropriate required rate of
return for the stock is 8%. The stock should be worth _______ today.
A. $127.63
B. $10.57
C. $20.00
D. $22.22
E. $8.98
If an 8% coupon bond is trading for $1,025.00, it has a current yield of
A. 7.8%.
B. 8.7%.
C. 7.6%.
D. 7.9%.
E. 8.1%.
The possibility of experiencing a drop in revenue or an increase in cost in an
international transaction due to a change in foreign exchange rates is called
A. foreign exchange risk.
B. political risk.
C. translation exposure.
D. hedging risk.
Return on total assets is the product of
A. interest rates and pre-tax profits.
B. the debt-equity ratio and P/E ratio.
C. the after-tax profit margin and the asset turnover ratio.
D. sales and fixed assets.
E. None of the options are correct.
In the context of the Arbitrage Pricing Theory, as a well-diversified portfolio becomes
larger, its nonsystematic risk approaches
A. one.
B. infinity.
C. zero.
D. negative one.
If the value of a Treasury bond was higher than the value of the sum of its parts
(STRIPPED cash flows), you could
A. profit by buying the stripped cash flows and reconstituting the bond.
B. not profit by buying the stripped cash flows and reconstituting the bond.
C. profit by buying the bond and creating STRIPS.
D. not profit by buying the stripped cash flows and reconstituting the bond and profit by
buying the bond and creating STRIPS.
E. None of the options are correct.
Over the past year, you earned a nominal rate of interest of 8% on your money. The
inflation rate was 3.5%
over the same period. The exact actual growth rate of your purchasing power was
A. 15.55%.
B. 4.35%.
C. 5.02%.
D. 4.81%.
E. 15.04%.
Stephanie Watson is 23 years old and has accumulated $4,000 in her selfdirected
defined contribution pension plan. Each year she contributes $2,000 to the plan, and her
employer contributes an equal amount. Stephanie thinks she will retire at age 67 and
figures she will live to age 81. The plan allows for two types of investments. One offers
a 3.5% riskfree real rate of return. The other offers an expected return of 10% and has a
standard deviation of 23%. Stephanie now has 5% of her money in the riskfree
investment and 95% in the risky investment. She plans to continue saving at the same
rate and keep the same proportions invested in each of the investments. Her salary will
grow at the same rate as inflation. How much can Stephanie expect to have in her risky
account at retirement?
A. $2,731,838
B. $2,915,415
C. $1,425,316
D. $224,651
E. $3,545,886