Details of this Paper

FIN 534 - MIDTERM 2

Description

solution


Question

Question;fin 534 - midterm 2;JG Asset Services is;recommending that you invest $1,500 in a 5-year certificate of deposit (CD);that pays 3.5% interest, compounded annually. How much will you have when the;CD matures?;Answer;$1,781.53;$1,870.61;$1,964.14;$2,062.34;$2,165.46;Your bank account pays;an 8% nominal rate of interest. The interest is compounded quarterly. Which of;the following statements is CORRECT?;Answer;The periodic rate of;interest is 8% and the effective rate of interest is also 8%.;The periodic rate of;interest is 2% and the effective rate of interest is 4%.;The periodic rate of;interest is 8% and the effective rate of interest is greater than 8%.;The periodic rate of;interest is 4% and the effective rate of interest is less than 8%.;The periodic rate of interest is 2% and the effective;rate of interest is greater than 8%.;You are considering;two equally risky annuities, each of which pays $15,000 per year for 20 years.;Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an;annuity due. Which of the following statements is CORRECT?;Answer;If the going rate of;interest decreases from 10% to 0%, the difference between the present value;of ORD and the present value of DUE would remain constant.;The present value of;ORD must exceed the present value of DUE, but the future value of ORD may be;less than the future value of DUE.;The present value of;DUE exceeds the present value of ORD, while the future value of DUE is less;than the future value of ORD.;The present value of;ORD exceeds the present value of DUE, and the future value of ORD also;exceeds the future value of DUE.;The present value of DUE exceeds the present value of;ORD, and the future value of DUE also exceeds the future value of ORD.;Which of the following;statements is CORRECT?;Answer;If some cash flows occur at the beginning of the periods while;others occur at the ends, then we have what the textbook defines as a;variable annuity.;The cash flows for an;ordinary (or deferred) annuity all occur at the beginning of the periods.;If a series of unequal cash flows occurs at regular intervals;such as once a year, then the series is by definition an annuity.;The cash flows for an annuity due must all occur at the ends;of the periods.;The cash flows for an annuity must all be equal, and they must;occur at regular intervals, such as once a year or once a month.;A U.S. Treasury bond;will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest;rate is 6%, semiannual compounding. Which of the following statements is;CORRECT?;Answer;The PV of the $1,000 lump sum has a higher present value than;the PV of a 3-year, $333.33 ordinary annuity.;The periodic interest rate is greater than 3%.;The periodic rate is less than 3%.;The present value would;be greater if the lump sum were discounted back for more periods.;The present value of;the $1,000 would be smaller if interest were compounded monthly rather than;semiannually.;At the end of 10;years, which of the following investments would have the highest future value?;Assume that the effective annual rate for all investments is the same and is;greater than zero.;Answer;Investment A pays $250;at the beginning of every year for the next 10 years (a total of 10;payments).;Investment B pays $125 at the end of every 6-month period for;the next 10 years (a total of 20 payments).;Investment C pays $125 at the beginning of every 6-month;period for the next 10 years (a total of 20 payments).;Investment D pays $2,500 at the end of 10 years (just one;payment).;Investment E pays $250 at the end of every year for the next;10 years (a total of 10 payments).;Which of the following;events would make it more likely that a company would choose to call its;outstanding callable bonds?;Answer;Market interest rates rise sharply.;Market interest rates;decline sharply.;The company's financial situation deteriorates significantly.;Inflation increases significantly.;The company's bonds are downgraded.;Which of the following;statements is CORRECT?;Answer;All else equal, long-term bonds have less interest rate price;risk than short-term bonds.;All else equal, low-coupon bonds have less interest rate price;risk than high-coupon bonds.;All else equal, short-term bonds have less reinvestment rate;risk than long-term bonds.;All else equal, long-term;bonds have less reinvestment rate risk than short-term bonds.;All else equal, high-coupon bonds have less reinvestment rate;risk than low-coupon bonds.;A 10-year corporate;bond has an annual coupon of 9%. The bond is currently selling at par ($1,000).;Which of the following statements is NOT CORRECT?;Answer;The bond's yield to maturity is 9%.;The bond's current yield is 9%.;If the bond's yield to;maturity remains constant, the bond will continue to sell at par.;The bond's current yield exceeds its capital gains yield.;The bond's expected capital gains yield is positive.;Which of the following;statements is CORRECT?;Answer;The total yield on a bond is derived from dividends plus;changes in the price of the bond.;Bonds are riskier than common stocks and therefore have higher;required returns.;Bonds issued by larger companies always have lower yields to;maturity (less risk) than bonds issued by smaller companies.;The market value of a;bond will always approach its par value as its maturity date approaches;provided the bond's required return remains constant.;If the Federal Reserve unexpectedly announces that it expects;inflation to increase, then we would probably observe an immediate increase;in bond prices.;Which of the following;statements is CORRECT?;Answer;Liquidity premiums are generally higher on Treasury than;corporate bonds.;The maturity premiums embedded in the interest rates on U.S.;Treasury securities are due primarily to the fact that the probability of;default is higher on long-term bonds than on short-term bonds.;Default risk premiums are generally lower on corporate than on;Treasury bonds.;Reinvestment rate risk;is lower, other things held constant, on long-term than on short-term bonds.;If the maturity risk premium were zero and interest rates were;expected to decrease in the future, then the yield curve for U.S. Treasury;securities would, other things held constant, have an upward slope.;A 15-year bond has an;annual coupon rate of 8%. The coupon rate will remain fixed until the bond;matures. The bond has a yield to maturity of 6%. Which of the following;statements is CORRECT?;Answer;The bond is currently selling at a price below its par value.;If market interest rates remain unchanged, the bond's price;one year from now will be lower than it is today.;The bond should currently be selling at its par value.;If market interest;rates remain unchanged, the bond's price one year from now will be higher;than it is today.;If market interest rates decline, the price of the bond will;also decline.;Which of the following;statements is CORRECT?;Answer;Most sinking funds require the issuer to provide funds to a;trustee, who saves the money so that it will be available to pay off;bondholders when the bonds mature.;A sinking fund provision makes a bond more risky to investors;at the time of issuance.;Sinking fund provisions never require companies to retire;their debt, they only establish "targets" for the company to reduce;its debt over time.;If interest rates have increased since a company issued bonds;with a sinking fund, the company is less likely to retire the bonds by buying;them back in the open market, as opposed to calling them in at the sinking;fund call price.;Sinking fund provisions;sometimes turn out to adversely affect bondholders, and this is most likely;to occur if interest rates decline after the bond has been issued.;Assume that the;risk-free rate is 5%. Which of the following statements is CORRECT?;Answer;If a stock's beta doubled, its required return under the CAPM;would also double.;If a stock's beta doubled, its required return under the CAPM;would more than double.;If a stock's beta were 1.0, its required return under the CAPM;would be 5%.;If a stock's beta were less than 1.0, its required return;under the CAPM would be less than 5%.;If a stock has a;negative beta, its required return under the CAPM would be less than 5%.;Which of the following;statements is CORRECT?;Answer;A portfolio that;consists of 40 stocks that are not highly correlated with "the;market" will probably be less risky than a portfolio of 40 stocks that;are highly correlated with the market, assuming the stocks all have the same;standard deviations.;A two-stock portfolio will always have a lower beta than a;one-stock portfolio.;If portfolios are formed by randomly selecting stocks, a;10-stock portfolio will always have a lower beta than a one-stock portfolio.;A stock with an above-average standard deviation must also;have an above-average beta.;A two-stock portfolio will always have a lower standard;deviation than a one-stock portfolio.;Assume that the;risk-free rate is 6% and the market risk premium is 5%. Given this information;which of the following statements is CORRECT?;Answer;If a stock has a negative beta, its required return must also;be negative.;An index fund with beta = 1.0 should have a required return;less than 11%.;If a stock's beta doubles, its required return must also;double.;An index fund with beta = 1.0 should have a required return greater;than 11%.;An index fund with beta;= 1.0 should have a required return of 11%.;Which of the following;statements is CORRECT?;Answer;The higher the correlation between the stocks in a portfolio;the lower the risk inherent in the portfolio.;An investor can eliminate almost all risk if he or she holds a;very large and well diversified portfolio of stocks.;Once a portfolio has about 40 stocks, adding additional stocks;will not reduce its risk by even a small amount.;An investor can;eliminate almost all diversifiable risk if he or she holds a very large;well-diversified portfolio of stocks.;An investor can eliminate almost all market risk if he or she;holds a very large and well diversified portfolio of stocks.;If you randomly select;stocks and add them to your portfolio, which of the following statements best;describes what you should expect?;Answer;Adding more such stocks will increase the portfolio's expected;rate of return.;Adding more such stocks will reduce the portfolio's beta;coefficient and thus its systematic risk.;Adding more such stocks will have no effect on the portfolio's;risk.;Adding more such stocks will reduce the portfolio's market;risk but not its unsystematic risk.;Adding more such stocks;will reduce the portfolio's unsystematic, or diversifiable, risk.;If markets are in;equilibrium, which of the following conditions will exist?;Answer;Each stock's expected;return should equal its required return as seen by the marginal investor.;All stocks should have the same expected return as seen by the;marginal investor.;The expected and required returns on stocks and bonds should;be equal.;All stocks should have the same realized return during the coming;year.;Each stock's expected return should equal its realized return;as seen by the marginal investor.;Stocks X and Y have;the following data. Assuming the stock market is efficient and the stocks are;in equilibrium, which of the following statements is CORRECT?;X;Y;Price;$25;$25;Expected dividend;yield;5%;3%;Required return;12%;10%;Answer;Stock X pays a higher dividend per share than Stock Y.;One year from now, Stock X should have the higher price.;Stock Y has a lower expected growth rate than Stock X.;Stock Y has the higher expected capital gains yield.;Stock Y pays a higher;dividend per share than Stock X.;Which of the following;statements is CORRECT?;Answer;Preferred stock is;normally expected to provide steadier, more reliable income to investors than;the same firm's common stock, and, as a result, the expected after-tax yield;on the preferred is lower than the after-tax expected return on the common;stock.;The preemptive right is a provision in all corporate charters;that gives preferred stockholders the right to purchase (on a pro rata basis);new issues of preferred stock.;One of the disadvantages to a corporation of owning preferred;stock is that 70% of the dividends received represent taxable income to the;corporate recipient, whereas interest income earned on bonds would be tax;free.;One of the advantages to financing with preferred stock is;that 70% of the dividends paid out are tax deductible to the issuer.;A major disadvantage of financing with preferred stock is that;preferred stockholders typically have supernormal voting rights.;If a firm's expected;growth rate increased then its required rate of return would;Answer;decrease.;fluctuate less than before.;fluctuate more than before.;possibly increase;possibly decrease, or possibly remain constant.;increase.;Which of the following;statements is CORRECT?;Answer;The preemptive right gives stockholders the right to approve;or disapprove of a merger between their company and some other company.;The preemptive right is;a provision in the corporate charter that gives common stockholders the right;to purchase (on a pro rata basis) new issues of the firm's common stock.;The stock valuation model, P0 = D1/(rs- g), cannot be;used for firms that have negative growth rates.;The stock valuation model, P0 = D1/(rs- g), can be used;only for firms whose growth rates exceed their required returns.;If a company has two classes of common stock, Class A and;Class B, the stocks may pay different dividends, but under all state charters;the two classes must have the same voting rights.;A stock is expected to;pay a dividend of $0.75 at the end of the year. The required rate of return is;rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the;stock's current price?;Answer;$17.39;$17.84;$18.29;$18.75;$19.22;Two constant growth;stocks are in equilibrium, have the same price, and have the same required rate;of return. Which of the following statements is CORRECT?;Answer;If one stock has a;higher dividend yield, it must also have a lower dividend growth rate.;If one stock has a higher dividend yield, it must also have a;higher dividend growth rate.;The two stocks must have the same dividend growth rate.;The two stocks must have the same dividend yield.;The two stocks must have the same dividend per share.

 

Paper#47429 | Written in 18-Jul-2015

Price : $24
SiteLock