1.
What is the present
value of an annuity of $120 received at the end of the year for 11 years?
Assume a discount rate of 7%. The first payment will be received one year from
today (round to the nearest $1).
a. $570
b. $250
c. $400
d. $900
2. You
bought a racehorse that has had a winning streak for six years, bringing in
$250,000 at the end of each year before dying of a heart attack. If you paid
$1,155,720 for the horse 4 years ago, what was your annual return over this
4-year period?
a. 12%
b. 8%
c. 18%
d. 33%
3. How
much money do I need to place into a bank account that pays a 1.08% rate in
order to have $500 at the end of the 7 years?
a. $751.81
b. $463.78
c. $629.51
d. $332.54
4. Your
daughter is born today and you want her to be a millionaire by the time she is
40 years old. You open an investment account that promises to pay 11.5% per
year. How much money must you deposit today so your daughter will have
$1,000,000 by her 35th birthday?
a. $20,100
b. $18,940
c. $28,575
d. $22,150
5. If
you want to have $3,575 in 29 months, how much money must you put in a savings
account today? Assume that the savings account pays 12% and it is compounded
monthly (round to the nearest $1).
a. $2,438
b. $2,679
c. $3,147
d. $3,008
6. U.S.
Savings Bonds are sold at a discount. The face value of the bond represents its
value on its future maturity date. Therefore:
a. The
current price of a $50 face value bond that matures in 10 years will be greater
than the current price of a $50 face value bond that matures in 5 years
b. The
current prices of all $50 face value bonds will be the same, regardless of
their maturity dates because they will all be $50 in the future
c. The
current price of a $50 face value bond will be higher if interest rates
increase
d. The
current price of a $50 face value bond that matures in 10 years will be less
than the current price of a $50 face bond that matures on 5 years
7. You
are considering a sales job that pays you a commission basis or a salaried
position that pay you $50,000 per year. Historical data suggests the following
probability distribution for your commission income. Which job has the higher
expected income?
a. The
salary of $50,000 is less than the expected commission of $50,050
b. The
salary of $50,000 is less than the expected commission of $52,720
c. The
salary of $50,000 is greater than the expected commission of $49,630
d. The
salary of $50,000 is greater than the expected commission of $48,400
8. Beginning
with an investment in one companyâs securities, as we add securities of other
companies to our portfolio, which type of risk declines?
a. Unsystematic
risk
b. Market
risk
c. Systematic
risk
d. Non-diversifiable
risk
9. Assume
the risk-free rate of return is 2% and the market risk premium is 8%. If you
are a risk averse investor, which project should you choose?
a. Project
3
b. Project
2
c. Project
1
d. Either
Project 2 or Project 3 because the higher expected return on project 3 offsets
its higher risk
10. Stock
A has a beta of 1.2 and a standard deviation of returns of 14%. Stock B has a
beta of 1.8 and a standardization of returns of 18%. If the risk-free rate of
return increases and the market risk premium remains constant, then:
a. The
required returns on stocks A and B will not change
b. The
required returns on stocks A and B will both increase by the same amount
c. The
required return on stocks A will increase more than the required return on
stock B
d. The
required return on stock B will increase more than the required return on stock
A
11. Suppose
the interest rates have been at historically low levels the past two years. A
reasonable strategy for bond investors during this time period would be to:
a. Buy
only junk bonds which have higher interest rate
b. Invest
in long-term bonds to reduce interest rate risk
c. Invest
in short-term bonds to reduce interest rate risk
d. Invest
in long-term bonds to lock in a bond position for when interest rates increase
in the future
12. Fred
and Ethel are both considering buying a corporate bond with a coupon rate of
8%, a face value of $1,000, and a maturity date of January 1, 2025. Which of
the following statements is MOST correct?
a. Fred
and Ethel will only buy the bonds if the bonds are rated BBB or above
b. Because
both Fred and Ethel will receive the same cash flows if they can each buy a
bond they both must assign the same value to the bond
c. If
Fred decides to buy the bond, then Ethel will also decide to buy the bond if
markets are efficient
d. Fred
may determine a different value for a bond than Ethel because each investor may
have a different level of risk aversion, and hence a different required return
13. Which
of the following statements is true?
a. Short-term
bonds have greater interest rate risk than do long-term bonds
b. Long-term
bonds have greater interest rate risk than do short-term bonds
c. Interest
rate risk is highest during periods of high interest rates
d. All
bonds have equal interest rate risk
14. Crandleâs
common stock is currently selling for $79.00. It just paid a dividend of $4.60
and dividends are expected to grow at a rate of 5% indefinitely. What is the
required rate of return on Crandleâs stock?
a. 11.76%
b. 11.11%
c. 12.2
%
d. 14.21%
15. An
example of the growth factor in common stock is:
a. Retaining
profits in order to reinvest into the firm
b. Two
strong companies merging together to increase their economies of scale
c. Acquiring
a loan to fund an investment in Asia
d. Issuing
new stock to provide capital for future growth
16. Waterfront
Solutions, Inc. paid a dividend of $5.00 per share on its common stock
yesterday. Dividends are expected to grow at a constant rate of 4% for the next
two years, at which point the stock is expected to sell for $56.00. If
investors require a rate of return on Waterfrontâs common stock of 18%, what
should the stock sell for today?
a. $40.22
b. $50.22
c. $44.76
d. $48.51
17. Andreâs
parents established a college savings plan for him when he was born. They
deposited $50 into the account on the last day of each month. The account has
earned 10.9% compounded monthly, tax-free. How much can they withdraw on his 18th
birthday to spend on his education?
a. $33,307
b. $30,028
c. $43,730
d. $27,560
18. Charlie
wants to retire in 15 years, and he wants to have an annuity of $50,000 a year
for 20 years after retirement. Charlie wants to receive the first annuity
payment the day he retires. Using an interest rate of 8%, how much must Charlie
invest today in order to have his retirement annuity (round to the nearest
$10).
a. $167,130
b. $315,240
c. $256,890
d. $200,450
19. The
beta for the portfolio is:
a. 1.45
b. 1.27
c. 1.99
d. 1.77
20. Which
of the following will cause the value of a bond to increase, if other things
held the same?
a. Interest
rates decrease
b. The
companyâs debt rating drops from AAA to BBB
c. Investorâs
required rate of return increases
d. The
bond is callable
21. A
small biotechnology research corporation has been experiencing losses for the
first three years of its existence, and thus has a negative balance in retained
earnings. The corporationâs stock price, however, is $1 per share. Which of the
following statements is most accurate?
a. The
required return on the stock will be small because the company has very few
assets
b. Investors
believe the stock is worth $1 per share because the earnings (and cash flow)
are expected to be positive
c. The
corporationâs accountants must have made a mistake because retained earnings
may not be negative
d. Investors
are irrational to pay $1 per share when earnings per share have been negative
for three years
22. How
much money must be put into a bank account yielding 6.42% (compounded annually)
in order to have $1,671 at the end of 11 years? (round to the nearest $1).
a. $798
b. $886
c. $921
d. $843
23. Wendy
purchased 800 shares of Robotics Stock at $3 per share on 1/1/09. Wendy sold
the shares on 12/31/09 for $3.45. Genetics stock has a beta of 1.3, the
risk-free rate of return is 3%, and the market risk premium is 8%. The required
return on Genetics Stock is:
a. 21.1%
b. 13.4%
c. 16.5%
d. 17.6%
24. Bartâs
Moving Company bonds have an 11% coupon rate. Interest is paid semiannually.
The bonds have a par value of $1,000 and will mature 8 years from now. Compute
the value of Bartâs Moving Company bonds if investors required rate of return
is 9.5%.
a. $1,133.05
b. $1,098.99
c. $1,082.75
d. $1,197.27
25. Jackson
Corp. common stock paid $2.50 in dividends last year (DO). Dividends are
expected to grow at a 12% annual rate forever. If Jacksonâs current market
price is $40.00, what is the stockâs expected rate of return? (round to nearest
.01%)
a. 18.25%
b. 5.50%
c. 11.00%
d. 19.00%
