When Maurice Kendall first examined stock price patterns in
1953, he found that
Select one:
a. certain patterns tended to repeat within the business cycle.
b. there were no predictable patterns in stock prices.
c. stocks whose prices had increased consistently for one week
tended to have a net decrease the following week.
d. stocks whose prices had increased consistently for one week
tended to have a net increase the following week.
e. the direction of change in stock prices was unpredictable, but
the amount of change followed a distinct pattern.
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The correct answer is: there were no predictable patterns in
stock prices.
Question 2
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Work by Amihud and Mendelson (1986, 1991)
Select one:
a. argues that investors will demand a rate of return premium to
invest in less liquid stocks.
b. may help explain the small firm effect.
c. may be related to the neglected firm effect.
d. may help explain the small firm effect and may be related to
the neglected firm effect.
e. All of the options are correct.
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The correct answer is: All of the options are correct.
Question 3
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The likelihood of an investment newsletter's successfully
predicting the direction of the market for three consecutive
years by chance should be
Select one:
a. between 50% and 70%.
b. between 25% and 50%.
c. between 10% and 25%.
d. less than 10%.
e. greater than 70%.
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The correct answer is: between 10% and 25%.
Question 4
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Basu (1977, 1983) found that firms with low P/E ratios
Select one:
a. earned higher average returns than firms with high P/E ratios.
b. earned the same average returns as firms with high P/E ratios.
c. earned lower average returns than firms with high P/E ratios.
d. had higher dividend yields than firms with high P/E ratios.
Feedback
Firms with high P/E ratios already have an inflated price
relative to earnings and thus tend to have lower returns than
low P/E ratio stocks. However, the P/E ratio may capture risk
not fully impounded in market betas so this may represent an
appropriate risk adjustment rather than a market anomaly.
The correct answer is: earned higher average returns than
firms with high P/E ratios.
Question 5
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Studies of stock price reactions to news are called
Select one:
a. reaction studies.
b. event studies.
c. drift studies.
d. reaction studies and event studies.
e. event studies and drift studies.
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Studies of stock price reactions to news are called event
studies.
The correct answer is: event studies.
Question 6
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Studies of negative earnings surprises have shown that there
is
Select one:
a. a negative abnormal return on the day that negative earnings
surprises are announced.
b. a positive drift in the stock price on the days following the
earnings surprise announcement.
c. a negative drift in the stock price on the days following the
earnings surprise announcement.
d. a negative abnormal return on the day that negative earnings
surprises are announced and a positive drift in the stock price
on the days following the earnings surprise announcement.
e. a negative abnormal return on the day that negative earnings
surprises are announced and a negative drift in the stock price
on the days following the earnings surprise announcement.
Feedback
The market appears to adjust to earnings information
gradually, resulting in a sustained period of abnormal returns.
The correct answer is: a negative abnormal return on the day
that negative earnings surprises are announced and a
negative drift in the stock price on the days following the
earnings surprise announcement.
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Proponents of the EMH think technical analysts
Select one:
a. should focus on relative strength.
b. should focus on resistance levels.
c. should focus on support levels.
d. should focus on financial statements.
e. are wasting their time.
Feedback
Technical analysts attempt to predict future stock prices from
historic stock prices; proponents of EMH believe that stock
price changes are random variables.
The correct answer is: are wasting their time.
Question 8
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Basu (1977, 1983) found that firms with high P/E ratios
Select one:
a. earned higher average returns than firms with low P/E ratios.
b. earned the same average returns as firms with low P/E ratios.
c. earned lower average returns than firms with low P/E ratios.
d. had higher dividend yields than firms with low P/E ratios.
Feedback
Firms with high P/E ratios already have an inflated price
relative to earnings and thus tend to have lower returns than
low P/E ratio stocks. However, the P/E ratio may capture risk
not fully impounded in market betas, so this may represent
an appropriate risk adjustment rather than a market anomaly.
The correct answer is: earned lower average returns than
firms with low P/E ratios.
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Two basic assumptions of technical analysis are that security
prices adjust
Select one:
a. rapidly to new information, and market prices are determined
by the interaction of supply and demand.
b. rapidly to new information, and liquidity is provided by
security dealers.
c. gradually to new information, and market prices are
determined by the interaction of supply and demand.
d. gradually to new information, and liquidity is provided by
security dealers.
e. rapidly to information and to the actions of insiders.
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The correct answer is: gradually to new information, and
market prices are determined by the interaction of supply and
demand.
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The weather report says that a devastating and unexpected
freeze is expected to hit Florida tonight during the peak of the
citrus harvest. In an efficient market, one would expect the
price of Florida Orange's stock to
Select one:
a. drop immediately.
b. unable to determine.
c. increase immediately.
d. gradually decline for the next several weeks.
e. gradually increase for the next several weeks.
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The correct answer is: drop immediately.
Question 11
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A support level is the price range at which a technical analyst
would expect the
Select one:
a. supply of a stock to increase dramatically.
b. supply of a stock to decrease substantially.
c. demand for a stock to increase substantially.
d. demand for a stock to decrease substantially.
e. price of a stock to fall.
Feedback
A support level is considered to be a level below that the
price of the stock is unlikely to fall and is believed to be
determined by market psychology.
The correct answer is: demand for a stock to increase
substantially.
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A common strategy for passive management is
Select one:
a. creating an index fund.
b. creating a small firm fund.
c. creating an investment club.
d. creating an index fund and creating an investment club.
e. creating a small firm fund and creating an investment club.
Feedback
The index fund is, by definition, passively managed. The other
investment alternatives may or may not be managed
passively.
The correct answer is: creating an index fund.
Question 13
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In an efficient market the correlation coefficient between
stock returns for two nonoverlapping time periods should be
Select one:
a. positive and large.
b. positive and small.
c. zero.
d. negative and small.
e. negative and large.
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In an efficient market there should be no serial correlation
between returns from nonoverlapping periods.
The correct answer is: zero.
Question 14
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Studies of positive earnings surprises have shown that there
is
Select one:
a. a positive abnormal return on the day positive earnings
surprises are announced.
b. a positive drift in the stock price on the days following the
earnings surprise announcement.
c. a negative drift in the stock price on the days following the
earnings surprise announcement.
d. a positive abnormal return on the day positive earnings
surprises are announced and a positive drift in the stock price
on the days following the earnings surprise announcement.
e. a positive abnormal return on the day positive earnings
surprises are announced and a negative drift in the stock price
on the days following the earnings surprise announcement.
Feedback
The market appears to adjust to earnings information
gradually, resulting in a sustained period of abnormal returns.
The correct answer is: a positive abnormal return on the day
positive earnings surprises are announced and a positive drift
in the stock price on the days following the earnings surprise
announcement.
Question 15
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Matthews Corporation has a beta of 1.2. The annualized
market return yesterday was 13%, and the risk-free rate is
currently 5%. You observe that Matthews had an annualized
return yesterday of 17%. Assuming that markets are efficient,
this suggests that
Select one:
a. bad news about Matthews was announced yesterday.
b. good news about Matthews was announced yesterday.
c. no news about Matthews was announced yesterday.
d. interest rates rose yesterday.
e. interest rates fell yesterday.
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The correct answer is: good news about Matthews was
announced yesterday.
Question 16
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Cumulative abnormal returns (CAR)
Select one:
a. are used in event studies.
b. are better measures of security returns due to firm-specific
events than are abnormal returns (AR).
c. are cumulated over the period prior to the firm-specific event.
d. are used in event studies and are better measures of security
returns due to firm-specific events than are abnormal returns
(AR).
e. are used in event studies and are cumulated over the period
prior to the firm-specific event.
Feedback
As leakage of information occurs, the accumulated abnormal
returns that are abnormal returns summed over the period of
interest (around the event date) are better measures of the
effect of firm-specific events.
The correct answer is: are used in event studies and are
better measures of security returns due to firm-specific
events than are abnormal returns (AR).
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Nicholas Manufacturing just announced yesterday that its
fourth quarter earnings will be 10% higher than last year's
fourth quarter. Nicholas had an abnormal return of -1.2%
yesterday. This suggests that
Select one:
a. the market is not efficient.
b. Nicholas' stock will probably rise in value tomorrow.
c. investors expected the earnings increase to be larger than
what was actually announced.
d. investors expected the earnings increase to be smaller than
what was actually announced.
e. earnings are expected to decrease next quarter.
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The correct answer is: investors expected the earnings
increase to be larger than what was actually announced.
Question 18
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On November 22, the stock price of WalMart was $69.50,
and the retailer stock index was 600.30. On November 25,
the stock price of WalMart was $70.25, and the retailer stock
index was 605.20. Consider the ratio of WalMart to the
retailer index on November 22 and November 25. WalMart is
_______ the retail industry, and technical analysts who follow
relative strength would advise _______ the stock.
Select one:
a. outperforming; buying
b. outperforming; selling
c. underperforming; buying
d. underperforming; selling
e. equally performing; neither buying nor selling
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The correct answer is: outperforming; buying
Question 19
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The weak form of the efficient-market hypothesis asserts that
Select one:
a. stock prices do not rapidly adjust to new information
contained in past prices or past data.
b. future changes in stock prices cannot be predicted from past
prices.
c. technicians cannot expect to outperform the market.
d. stock prices do not rapidly adjust to new information
contained in past prices or past data, and future changes in
stock prices cannot be predicted from past prices.
e. future changes in stock prices cannot be predicted from past
prices, and technicians cannot expect to outperform the
market.
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The correct answer is: future changes in stock prices cannot
be predicted from past prices, and technicians cannot expect
to outperform the market.
Question 20
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The debate over whether markets are efficient will probably
never be resolved because of
Select one:
a. the lucky event issue.
b. the magnitude issue.
c. the selection bias issue.
d. All of the options are correct.
e. None of the options are correct.
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The correct answer is: All of the options are correct.
Google has a beta of 1.0. The annualized market return
yesterday was 11%, and the risk-free rate is currently 5%. You
observe that Google had an annualized return yesterday of
14%. Assuming that markets are efficient, this suggests that
Select one:
a. bad news about Google was announced yesterday.
b. good news about Google was announced yesterday.
c. no news about Google was announced yesterday.
d. interest rates rose yesterday.
e. interest rates fell yesterday.
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correct
The correct answer is: good news about Google was
announced yesterday.
Question 2
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At freshman orientation, 1,500 students are asked to flip a
coin 20 times. One student is crowned the winner (tossed 20
heads). This is most closely associated with
Select one:
a. regret avoidance.
b. selection bias.
c. overconfidence.
d. the lucky event issue.
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This is an example of the lucky event issue.
The correct answer is: the lucky event issue.
Question 3
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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
Select one:
a. regret avoidance.
b. selection bias.
c. framing.
d. insider trading.
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This is an example of selection bias.
The correct answer is: selection bias.
Question 4
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QQAG just announced yesterday that its fourth quarter
earnings will be 35% higher than last year's fourth quarter.
You observe that QQAG had an abnormal return of -1.7%
yesterday. This suggests that
Select one:
a. the market is not efficient.
b. QQAG stock will probably rise in value tomorrow.
c. investors expected the earnings increase to be larger than
what was actually announced.
d. investors expected the earnings increase to be smaller than
what was actually announced.
e. earnings are expected to decrease next quarter.
Feedback
Anticipated earnings changes are impounded into a security's
price as soon as expectations are formed. Therefore a
negative market response indicates that the earnings surprise
was negative; that is, the increase was less than anticipated.
The correct answer is: investors expected the earnings
increase to be larger than what was actually announced.
Question 5
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Which of the following are used by fundamental analysts to
determine proper stock prices?
I) Trendlines
II) Earnings
III) Dividend prospects
IV) Expectations of future interest rates
V) Resistance levels
Select one:
a. I, IV, and V
b. I, II, and III
c. II, III, and IV
d. II, IV, and V
e. All of the items are used by fundamental analysts.
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The correct answer is: II, III, and IV
Question 6
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Music Doctors just announced yesterday that its first quarter
sales were 35% higher than last year's first quarter. You
observe that Music Doctors had an abnormal return of -2%
yesterday. This suggests that
Select one:
a. the market is not efficient.
b. Music Doctors stock will probably rise in value tomorrow.
c. investors expected the sales increase to be larger than what
was actually announced.
d. investors expected the sales increase to be smaller than what
was actually announced.
e. earnings are expected to decrease next quarter.
Feedback
The negative abnormal return suggests that investors
expected the sales increase to be larger than what was
actually announced.
The correct answer is: investors expected the sales increase to
be larger than what was actually announced.
Question 7
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Which of the following are investment superstars who have
consistently shown superior performance?
I) Warren Buffet
II) Phoebe Buffet
III) Peter Lynch
IV) Merrill Lynch
V) Jimmy Buffet
Select one:
a. I, III, and IV
b. II, III, and IV
c. I and III
d. III and IV
e. I, III, IV, and V
Feedback
Warren Buffet manages Berkshire Hathaway and Peter Lynch
managed Fidelity's Magellan Fund. Phoebe Buffet is a
character on NBC's "Friends" and Jimmy Buffet is "Wasting
Away in Margaritaville." Merrill Lynch isn't a person.
The correct answer is: I and III
Question 8
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Del Guerico and Reuter (2014) report that the average
underperformance of actively-managed mutual funds is
driven largely by
Select one:
a. sector mutual funds.
b. index funds.
c. direct-sold funds.
d. broker-sold funds.
e. bank-sold mutual funds.
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The correct answer is: broker-sold funds.
Question 9
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Music Doctors has a beta of 2.25. The annualized market
return yesterday was 12%, and the risk-free rate is currently
4%. You observe that Music Doctors had an annualized return
yesterday of 15%. Assuming that markets are efficient, this
suggests that
Select one:
a. bad news about Music Doctors was announced yesterday.
b. good news about Music Doctors was announced yesterday.
c. no news about Music Doctors was announced yesterday.
d. interest rates rose yesterday.
e. interest rates fell yesterday.
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correct
The correct answer is: bad news about Music Doctors was
announced yesterday.
Question 10
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Sehun (1986) finds that the practice of monitoring insider
trade disclosures, and trading on that information, would be
Select one:
a. extremely profitable for long-term traders.
b. extremely profitable for short-term traders.
c. marginally profitable for long-term traders.
d. marginally profitable for short-term traders.
e. not sufficiently profitable to cover trading costs.
Feedback
The practice of monitoring insider trade disclosures, and
trading on that information, would be not sufficiently
profitable to cover trading costs.
The correct answer is: not sufficiently profitable to cover
trading costs.
Question 11
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The Food and Drug Administration (FDA) just announced
yesterday that they would approve a new cancer-fighting drug
from King. You observe that King had an abnormal return of
0% yesterday. This suggests that
Select one:
a. the market is not efficient.
b. King stock will probably rise in value tomorrow.
c. King stock will probably fall in value tomorrow.
d. the approval was already anticipated by the market.
Feedback
The approval was already anticipated by the market.
The correct answer is: the approval was already anticipated
by the market.
Question 12
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If you believe in the reversal effect, you should
Select one:
a. sell bonds in this period if you held stocks in the last period.
b. sell stocks in this period if you held bonds in the last period.
c. sell stocks this period that performed well last period.
d. go long.
e. sell stocks this period that performed well last period and go
long.
Feedback
The reversal effect states that stocks that do well in one
period tend to perform poorly in the subsequent period, and
vice versa.
The correct answer is: sell stocks this period that performed
well last period.
Question 13
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Which of the following are used by technical analysts to
determine proper stock prices?
I) Trendlines
II) Earnings
III) Dividend prospects
IV) Expectations of future interest rates
V) Resistance levels
Select one:
a. I and V
b. I, II, and III
c. II, III, and IV
d. II, IV, and V
e. All of the items are used by fundamental analysts.
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The correct answer is: I and V
Question 14
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QQAG has a beta of 1.7. The annualized market return
yesterday was 13%, and the risk-free rate is currently 3%. You
observe that QQAG had an annualized return yesterday of
20%. Assuming that markets are efficient, this suggests that
Select one:
a. bad news about QQAG was announced yesterday.
b. good news about QQAG was announced yesterday.
c. no significant news about QQAG was announced yesterday.
d. interest rates rose yesterday.
e. interest rates fell yesterday.
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correct
The correct answer is: no significant news about QQAG was
announced yesterday.
Question 15
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According to proponents of the efficient-market hypothesis,
the best strategy for a small investor with a portfolio worth
$40,000 is probably to
Select one:
a. perform fundamental analysis.
b. exploit market anomalies.
c. invest in Treasury securities.
d. invest in derivative securities.
e. invest in mutual funds.
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The correct answer is: invest in mutual funds.
Question 16
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LJP Corporation just announced yesterday that it would
undertake an international joint venture. You observe that LJP
had an abnormal return of 3% yesterday. This suggests that
Select one:
a. the market is not efficient.
b. LJP stock will probably rise in value again tomorrow.
c. investors view the international joint venture as bad news.
d. investors view the international joint venture as good news.
e. earnings are expected to decrease next quarter.
Feedback
The positive abnormal return suggests that investors view the
international joint venture as good news.
The correct answer is: investors view the international joint
venture as good news.
Psychologists have found that people who make decisions
that turn out badly blame themselves more when that
decision was unconventional. The name for this phenomenon
is
Select one:
a. regret avoidance.
b. framing.
c. mental accounting.
d. overconfidence.
e. obnoxicity.
Feedback
An investments example given in the text is buying the stock
of a start-up firm that shows subsequent poor performance,
versus buying blue chip stocks that perform poorly. Investors
tend to have more regret if they chose the less conventional
start-up stock. DeBondt and Thaler say that such regret
theory is consistent with the size effect and the book-tomarket effect.
The correct answer is: regret avoidance.
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DeBondt and Thaler believe that high P/E result from
investors'
Select one:
a. earnings expectations that are too extreme.
b. earnings expectations that are not extreme enough.
c. stock-price expectations that are too extreme.
d. stock-price expectations that are not extreme enough.
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The correct answer is: earnings expectations that are too
extreme.
Question 3
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Conventional theories presume that investors ____________,
and behavioral finance presumes that they ____________.
Select one:
a. are irrational; are irrational
b. are rational; may not be rational
c. are rational; are rational
d. may not be rational; may not be rational
e. may not be rational; are rational
Feedback
Conventional theories presume that investors are rational,
and behavioral finance presumes that they may not be
rational.
The correct answer is: are rational; may not be rational
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An example of ________ is that it is not as painful to have
purchased a blue-chip stock that decreases in value as it is to
lose money on an unknown start-up firm.
Select one:
a. mental accounting
b. regret avoidance
c. overconfidence
d. conservatism
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The correct answer is: regret avoidance
Question 5
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Single men trade far more often than women. This is due to
greater ________ among men.
Select one:
a. framing
b. regret avoidance
c. overconfidence
d. conservatism
Feedback
Single men trade far more often than women. This is due to
greater overconfidence among men.
The correct answer is: overconfidence
Question 6
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Barber and Odean (2000) ranked portfolios by turnover and
report that the difference in return between the highest and
lowest turnover portfolios is 7% per year. They attribute this
to
Select one:
a. overconfidence.
b. framing.
c. regret avoidance.
d. sample neglect.
Feedback
They attribute this to overconfidence.
The correct answer is: overconfidence.
Question 7
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____________ may be responsible for the prevalence of
active versus passive investments management.
Select one:
a. Forecasting errors
b. Overconfidence
c. Mental accounting
d. Conservatism
e. Regret avoidance
Feedback
Overconfidence may be responsible for the prevalence of
active versus passive investments management.
The correct answer is: Overconfidence
Question 8
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Statman (1977) argues that ________ is consistent with some
investors' irrational preference for stocks with high cash
dividends and with a tendency to hold losing positions too
long.
Select one:
a. mental accounting
b. regret avoidance
c. overconfidence
d. conservatism
Feedback
Statman (1977) argues that mental accounting is consistent
with some investors' irrational preference for stocks with high
cash dividends and with a tendency to hold losing positions
too long.
The correct answer is: mental accounting
Question 9
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An example of ________ is that a person may reject an
investment when it is posed in terms of risk surrounding
potential gains, but may accept the same investment if it is
posed in terms of risk surrounding potential losses.
Select one:
a. framing
b. regret avoidance
c. overconfidence
d. conservatism
Feedback
An example of framing is that a person may reject an
investment when it is posed in terms of risk surrounding
potential gains, but may accept the same investment if it is
posed in terms of risk surrounding potential losses.
The correct answer is: framing
Question 10
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If a person gives too much weight to recent information
compared to prior beliefs, they would make ________ errors.
Select one:
a. framing
b. selection bias
c. overconfidence
d. conservatism
e. forecasting
Feedback
If a person gives too much weight to recent information
compared to prior beliefs, they would make forecasting
errors.
The correct answer is: forecasting
Question 11
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____________ measures the extent to which a security has
outperformed or underperformed either the market as a
whole or its particular industry.
Select one:
a. Put-call ratio
b. Trin ratio
c. Breadth
d. Relative strength
e. All of the options are correct.
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The correct answer is: Relative strength
Question 12
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Information processing errors consist of
I) forecasting errors.
II) overconfidence.
III) conservatism.
IV) framing.
Select one:
a. I and II
b. I and III
c. III and IV
d. IV only
e. I, II, and III
Feedback
Information processing errors consist of forecasting errors,
overconfidence, and conservatism.
The correct answer is: I, II, and III
Question 13
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________ bias means that investors are too slow in updating
their beliefs in response to evidence.
Select one:
a. Framing
b. Regret avoidance
c. Overconfidence
d. Conservatism
e. None of the options are correct.
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The correct answer is: Conservatism
Question 14
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The premise of behavioral finance is that
Select one:
a. conventional financial theory ignores how real people make
decisions and that people make a difference.
b. conventional financial theory considers how emotional people
make decisions, but the market is driven by rational utilitymaximizing investors.
c. conventional financial theory should ignore how the average
person makes decisions because the market is driven by
investors who are much more sophisticated than the average
person.
d. conventional financial theory considers how emotional people
make decisions, but the market is driven by rational utilitymaximizing investors and should ignore how the average
person makes decisions because the market is driven by
investors who are much more sophisticated than the average
person.
e. None of the options are correct.
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correct
The correct answer is: conventional financial theory ignores
how real people make decisions and that people make a
difference.
Question 15
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Forecasting errors are potentially important because
Select one:
a. research suggests that people underweight recent
information.
b. research suggests that people overweight recent information.
c. research suggests that people correctly weight recent
information.
d. research suggests that people either underweight recent
information or overweight recent information depending on
whether the information was good or bad.
e. None of the options are correct.
Feedback
correct
The correct answer is: research suggests that people
overweight recent information.
Question 16
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Some economists believe that the anomalies literature is
consistent with investors'
Select one:
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.
Feedback
correct
The correct answer is: 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.
Conservatism implies that investors are too __________ in
updating their beliefs in response to new evidence and that
they initially __________ to news.
Select one:
a. quick; overreact
b. quick; under react
c. slow; overreact
d. slow; under react
Feedback
Conservatism implies that investors are too slow in updating
their beliefs in response to new evidence and that they
initially underreact to news.
The correct answer is: slow; under react
Question 2
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In regard to moving averages, it is considered to be a
____________ signal when market price breaks through the
moving average from ____________.
Select one:
a. bearish; below
b. bullish; below
c. bullish; above
d. None of the options are correct.
Feedback
correct
The correct answer is: bullish; below
Question 3
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A trin ratio of less than 1.0 is considered as a
Select one:
a. bearish signal.
b. bullish signal.
c. bearish signal by some technical analysts and a bullish signal
by other technical analysts.
d. bullish signal by some fundamentalists.
e. bearish signal by some technical analysts, a bullish signal by
other technical analysts, and a bullish signal by some
fundamentalists.
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correct
The correct answer is: bullish signal.
Question 4
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Errors in information processing can lead investors to
misestimate
Select one:
a. true probabilities of possible events and associated rates of
return.
b. occurrence of possible events.
c. only possible rates of return.
d. the effect of accounting manipulation.
e. fraud.
Feedback
Errors in information processing can lead investors to
misestimate true probabilities of possible events and
associated rates of return.
The correct answer is: true probabilities of possible events
and associated rates of return.
Question 5
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Barber and Odean (2001) report that men trade __________
frequently than women and the frequent trading leads to
__________ returns.
Select one:
a. less; superior
b. less; inferior
c. more; superior
d. more; inferior
Feedback
Barber and Odean (2001) report that men trade more
frequently than women and the frequent trading leads to
inferior returns.
The correct answer is: more; inferior
Question 6
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Suppose on August 27, there were 1,455 stocks that advanced
on the NYSE and 1,553 that declined. The volume in
advancing issues was 852,581, and the volume in declining
issues was 1,058,312. The trin ratio for that day was
________, and technical analysts were likely to be ________.
Select one:
a. 0.87; bullish
b. 0.87; bearish
c. 1.15; bullish
d. 1.15; bearish
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correct
The correct answer is: 1.15; bearish
Question 7
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____________ are good examples of the limits to arbitrage
because they show that the law of one price is violated.
I) Siamese twin companies
II) Unit trusts
III) Closed-end funds
IV) Open-end funds
V) Equity carve-outs
Select one:
a. I and II
b. I, II, and III
c. I, III, and V
d. IV and V
e. V
Feedback
Siamese twin companies, closed end funds, and equity carveouts are good examples of the limits to arbitrage because
they show that the law of one price is violated.
The correct answer is: I, III, and V
Question 8
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The efficient-market hypothesis
Select one:
a. implies that security prices properly reflect information
available to investors.
b. has little empirical validity.
c. implies that active traders will find it difficult to outperform a
buy-and-hold strategy.
d. has little empirical validity and implies that active traders will
find it difficult to outperform a buy-and-hold strategy.
e. implies that security prices properly reflect information
available to investors and that active traders will find it
difficult to outperform a buy-and-hold strategy.
Feedback
correct
The correct answer is: implies that security prices properly
reflect information available to investors and that active
traders will find it difficult to outperform a buy-and-hold
strategy.
Question 9
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The anomalies literature
Select one:
a. provides a conclusive rejection of market efficiency.
b. provides conclusive support of market efficiency.
c. suggests that several strategies would have provided superior
returns.
d. provides a conclusive rejection of market efficiency and
suggests that several strategies would have provided superior
returns.
e. None of the options are correct.
Feedback
correct
The correct answer is: suggests that several strategies would
have provided superior returns.
Question 10
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The assumptions concerning the shape of utility functions of
investors differ between conventional theory and prospect
theory. Conventional theory assumes that utility functions are
__________, whereas prospect theory assumes that utility
functions are __________.
Select one:
a. concave and defined in terms of wealth; s-shaped (convex to
losses and concave to gains) and defined in terms of losses
relative to current wealth
b. convex and defined in terms of losses relative to current
wealth; s-shaped (convex to losses and concave to gains) and
defined in terms of losses relative to current wealth
c. s-shaped (convex to losses and concave to gains) and defined
in terms of losses relative to current wealth; concave and
defined in terms of wealth
d. s-shaped (convex to losses and concave to gains) and defined
in terms of wealth; concave and defined in terms of losses
relative to current wealth
e. convex and defined in terms of wealth; concave and defined
in terms of gains relative to current wealth
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The correct answer is: concave and defined in terms of
wealth; s-shaped (convex to losses and concave to gains) and
defined in terms of losses relative to current wealth
Question 11
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The confidence index is computed from ____________, and
higher values are considered ____________ signals.
Select one:
a. bond yields; bearish
b. odd lot trades; bearish
c. odd lot trades; bullish
d. put/call ratios; bullish
e. bond yields; bullish
Feedback
The confidence index is computed from bond yields, and
higher values are considered bullish signals.
The correct answer is: bond yields; bullish
Question 12
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If information processing was perfect, many studies conclude
that individuals would tend to make __________ decisions
using that information due to __________.
Select one:
a. less than fully rational; behavioral biases
b. fully rational; behavioral biases
c. less than fully rational; fundamental risk
d. fully rational; fundamental risk
e. fully rational; utility maximization
Feedback
If information processing was perfect, many studies conclude
that individuals would tend to make less than fully rational
decisions using that information due to behavioral biases.
The correct answer is: less than fully rational; behavioral
biases
Question 13
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Kahneman and Tversky (1973) report that __________ and
__________.
Select one:
a. people give too little weight to recent experience compared
to prior beliefs; tend to make forecasts that are too extreme
given the uncertainty of their information
b. people give too much weight to recent experience compared
to prior beliefs; tend to make forecasts that are too extreme
given the uncertainty of their information
c. people give too little weight to recent experience compared to
prior beliefs; tend to make forecasts that are not extreme
enough given the uncertainty of their information
d. people give too much weight to recent experience compared
to prior beliefs; tend to make forecasts that are not extreme
enough given the uncertainty of their information
Feedback
Kahneman and Tversky (1973) report that people give too
much weight to recent experience compared to prior beliefs
and tend to make forecasts that are too extreme given the
uncertainty of their information.
The correct answer is: people give too much weight to recent
experience compared to prior beliefs; tend to make forecasts
that are too extreme given the uncertainty of their
information
Question 14
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Tests of market efficiency have focused on
Select one:
a. the mean-variance efficiency of the selected market proxy.
b. strategies that would have provided superior risk-adjusted
returns.
c. results of actual investments of professional managers.
d. strategies that would have provided superior risk-adjusted
returns and results of actual investments of professional
managers.
e. the mean-variance efficiency of the selected market proxy and
strategies that would have provided superior risk-adjusted
returns.
Feedback
Tests of market efficiency have focused on strategies
that would have provided superior risk-adjusted returns and
results of actual investments of professional managers.
The correct answer is: strategies that would have provided
superior risk-adjusted returns and results
of actual investments of professional managers.
Question 15
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Markets would be inefficient if irrational investors
__________ and actions of arbitragers were __________.
Select one:
a. existed; unlimited
b. did not exist; unlimited
c. existed; limited
d. did not exist; limited
Feedback
Markets would be inefficient if irrational investors existed and
actions if arbitragers were limited.
The correct answer is: existed; limited
Question 16
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Arbitrageurs may be unable to exploit behavioral biases due
to
I) fundamental risk.
II) implementation costs.
III) model risk.
IV) conservatism.
V) regret avoidance.
Select one:
a. I and II only
b. I, II, and III
c. I, II, III, and V
d. II, III, and IV
e. IV and V
Feedback
Arbitrageurs may be unable to exploit behavioral biases due
to fundamental risk, implementation costs, and model risk.
The correct answer is: I, II, and III
Question 17
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Behavioral finance argues that
Select one:
a. even if security prices are wrong, it may be difficult to exploit
them.
b. the failure to uncover successful trading rules or traders
cannot be taken as proof of market efficiency.
c. investors are rational.
d. even if security prices are wrong, it may be difficult to exploit
them and the failure to uncover successful trading rules or
traders cannot be taken as proof of market efficiency.
e. All of the options are correct.
Feedback
correct
The correct answer is: even if security prices are wrong, it
may be difficult to exploit them and the failure to uncover
successful trading rules or traders cannot be taken as proof of
market efficiency.
Question 18
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The put/call ratio is computed as ____________, and higher
values are considered ____________ signals.
Select one:
a. the number of outstanding put options divided by
outstanding call options; bullish or bearish
b. the number of outstanding put options divided by
outstanding call options; bullish
c. the number of outstanding put options divided by outstanding
call options; bearish
d. the number of outstanding call options divided by
outstanding put options; bullish
e. the number of outstanding call options divided by
outstanding put options; bearish
Feedback
The put/call ratio is computed as the number of outstanding
put options divided by outstanding call options, and higher
values are considered bullish or bearish signals.
The correct answer is: the number of outstanding put options
divided by outstanding call options; bullish or bearish
Question 19
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____________ is a measure of the extent to which a
movement in the market index is reflected in the price
movements of all stocks in the market.
Select one:
a. Put-call ratio
b. Trin ratio
c. Breadth
d. Confidence index
e. All of the options are correct.
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The correct answer is: Breadth
Question 20
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__________ can lead investors to misestimate the true
probabilities of possible events or associated rates of return.
Select one:
a. Information processing errors
b. Framing errors
c. Mental accounting errors
d. Regret avoidance
Feedback
Information processing errors can lead investors to
misestimate the true probabilities of possible events or
associated rates of return.
The correct answer is: Information processing errors
Question 21
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DeBondt and Thaler (1990) argue that the P/E effect can be
explained by
Select one:
a. forecasting errors.
b. earnings expectations that are too extreme.
c. earnings expectations that are not extreme enough.
d. regret avoidance.
e. forecasting errors and earnings expectations that are too
extreme.
Feedback
DeBondt and Thaler (1990) argue that the P/E effect can be
explained by forecasting errors and earnings expectations
that are too extreme.
The correct answer is: forecasting errors and earnings
expectations that are too extreme.
Barber and Odean (2001) report that men trade __________
frequently than women.
Select one:
a. less
b. less in down markets
c. more in up markets
d. more
Feedback
Barber and Odean (2001) report that men trade more
frequently than women.
The correct answer is: more
Question 2
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Kahneman and Tversky (1973) reported that people give
__________ weight to recent experience compared to prior
beliefs when making forecasts. This is referred to as
____________.
Select one:
a. too little; hyper rationality
b. too little; conservatism
c. too much; framing
d. too much; memory bias
Feedback
Kahneman and Tversky (1973) reported that people give too
much weight to recent experience compared to prior beliefs
when making forecasts. This is referred to as memory bias.
The correct answer is: too much; memory bias
Question 3
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Barber and Odean (2001) report that women __________
men.
Select one:
a. earn higher returns than
b. earn lower returns than
c. earn about the same returns as
d. generate higher trading costs than
Feedback
Barber and Odean (2001) report that men trade more
frequently than women and have lower returns.
The correct answer is: earn higher returns than
Question 4
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Barber and Odean (2001) report that women trade
__________ frequently than men.
Select one:
a. less
b. less in down markets
c. more in up markets
d. more
Feedback
Barber and Odean (2001) report that men trade more
frequently than women.
The correct answer is: less
Question 5
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Barber and Odean (2001) report that men __________
women.
Select one:
a. earn higher returns than
b. earn lower returns than
c. earn about the same returns as
d. generate lower trading costs than
Feedback
Barber and Odean (2001) report that men trade more
frequently than women and have lower returns.
The correct answer is: earn lower returns than
Question 6
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Studies of Siamese twin companies find __________, which
__________ the EMH.
Select one:
a. correct relative pricing; supports
b. correct relative pricing; does not support
c. incorrect relative pricing; supports
d. incorrect relative pricing; does not support
Feedback
Studies of Siamese twin companies find incorrect relative
pricing, which does not support the EMH.
The correct answer is: incorrect relative pricing; does not
support
Question 7
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Kahneman and Tversky (1973) reported that __________ give
too much weight to recent experience compared to prior
beliefs when making forecasts.
Select one:
a. young men
b. young women
c. people
d. older men
e. older women
Feedback
Kahneman and Tversky (1973) reported that people give too
much weight to recent experience compared to prior beliefs
when making forecasts.
The correct answer is: people
Question 8
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Studies of closed-end funds find __________, which
__________ the EMH.
Select one:
a. prices at a premium to NAV; is consistent with
b. prices at a premium to NAV; is inconsistent with
c. prices at a discount to NAV; is consistent with
d. prices at a discount to NAV; is inconsistent with
e. prices at premiums and discounts to NAV; is inconsistent with
Feedback
Studies of closed-end funds find prices at premiums and
discounts to NAV, which is inconsistent with the EMH.
The correct answer is: prices at premiums and discounts to
NAV; is inconsistent with
Question 9
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__________ effects can help explain momentum in stock
prices.
Select one:
a. Conservatism
b. Regret avoidance
c. Prospect theory
d. Mental accounting
e. Model risk
Feedback
Mental accounting effects can help explain momentum in
stock prices.
The correct answer is: Mental accounting
Question 10
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Studies of equity carve-outs find __________, which
__________ the EMH.
Select one:
a. strong support for the law of one price; supports
b. strong support for the law of one price; violates
c. evidence against the law of one price; violates
d. evidence against the law of one price; supports
Feedback
Studies of equity carve-outs find evidence against the law of
one price, which violates the EMH.
The correct answer is: evidence against the law of one price;
violates
In the empirical study of a multifactor model by Chen, Roll,
and Ross, a factor (the factors) that appeared to have
significant explanatory power in explaining security returns
was (were)
Select one:
a. the change in the expected rate of inflation.
b. the risk premium on corporate bonds.
c. the unexpected change in the rate of inflation.
d. industrial production.
e. the risk premium on corporate bonds, the unexpected change
in the rate of inflation, and industrial production.
Feedback
Of the variables tested, Chen, Roll, and Ross found that the
risk premium on corporate bonds, the unexpected change in
the rate of inflation, and industrial production were significant
predictors of security returns.
The correct answer is: the risk premium on corporate
bonds, the unexpected change in the rate of inflation, and
industrial production.
Question 2
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If a professionally-managed portfolio consistently
outperforms the market proxy on a risk-adjusted basis and
the market is efficient, it should be concluded that
Select one:
a. the CAPM is invalid.
b. the proxy is inadequate.
c. either the CAPM is invalid or the proxy is inadequate.
d. the CAPM is valid and the proxy is adequate.
e. None of the options are correct.
Feedback
correct
The correct answer is: either the CAPM is invalid or the proxy
is inadequate.
Question 3
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The expected return/beta relationship is not used
Select one:
a. by regulatory commissions in determining the costs of capital
for regulated firms.
b. in court rulings to determine discount rates to evaluate claims
of lost future incomes.
c. to advise clients as to the composition of their portfolios.
d. by regulatory commissions in determining the costs of capital
for regulated firms and to advise clients as to the composition
of their portfolios.
e. None of the options are correct.
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The correct answer is: None of the options are correct.
Question 4
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In the 1972 empirical study by Black, Jensen, and Scholes,
they found that the estimated slope of the security market
line was _______ what the CAPM would predict.
Select one:
a. flatter than
b. equal to
c. steeper than
d. one-half as much as
e. None of the options are correct.
Feedback
correct
The correct answer is: flatter than
Question 5
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Jagannathan and Wang (2006) find that the CCAPM explains
returns ______ the Fama-French three-factor model, and that
the Fama-French three-factor model explains returns ______
the traditional CAPM.
Select one:
a. worse than; worse than
b. worse than; better than
c. better than; better than
d. better than; worse than
e. equally as well as; equally as well as
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correct
The correct answer is: better than; better than
Question 6
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Fama and MacBeth (1973) found that the relationship
between average excess returns and betas was
Select one:
a. linear.
b. nonexistent.
c. as expected, based on earlier studies.
d. linear and as expected, based on earlier studies.
e. Fama and MacBeth did not examine the relationship between
excess returns and beta.
Feedback
correct
The correct answer is: linear and as expected, based on
earlier studies.
Question 7
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The Fama and French three-factor model uses ___, ___, and
___ as factors.
Select one:
a. industrial production; term spread; default spread
b. industrial production; inflation; default spread
c. firm size; book-to-market ratio; market index
d. firm size; book-to-market ratio; default spread
e. None of the options are correct.
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correct
The correct answer is: firm size; book-to-market ratio; market
index
Question 8
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In the empirical study of a multifactor model by Chen, Roll,
and Ross, a factor that did not appear to have significant
explanatory power in explaining security returns was
Select one:
a. the change in the expected rate of inflation.
b. the risk premium on corporate bonds.
c. the unexpected change in the rate of inflation.
d. industrial production.
Feedback
Of the variables tested, Chen, Roll, and Ross found that the
risk premium on corporate bonds, the unexpected change in
the rate of inflation, and industrial production were significant
predictors of security returns.
The correct answer is: the change in the expected rate of
inflation.
Question 9
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In the results of the earliest estimations of the security
market line by Miller and Scholes (1972), it was found that
the average difference between a stock's return and the riskfree rate was ________ to its beta.
Select one:
a. positively related
b. negatively related
c. unrelated
d. inversely related
e. not proportional
Feedback
correct
The correct answer is: positively related
Question 10
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In the 1972 empirical study by Black, Jensen, and Scholes,
they found that the risk-adjusted returns of high beta
portfolios were _____________ the risk-adjusted returns of
low beta portfolios.
Select one:
a. greater than
b. equal to
c. less than
d. unrelated to
e. More information is necessary to answer this question.
Feedback
These results are inconsistent with what would be predicted
with the CAPM.
The correct answer is: less than
Question 11
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If a market proxy portfolio consistently beats all
professionally-managed portfolios on a risk-adjusted basis, it
may be concluded that
Select one:
a. the CAPM is valid.
b. the market proxy is mean/variance efficient.
c. the CAPM is invalid.
d. the CAPM is valid and the market proxy is mean/variance
efficient.
e. the market proxy is mean/variance efficient and the CAPM is
invalid.
Feedback
correct
The correct answer is: the CAPM is valid and the market proxy
is mean/variance efficient.
Question 12
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In developing their test of a multifactor model, Chen, Roll,
and Ross hypothesized that __________ might be a proxy for
systematic factors.
Select one:
a. the monthly growth rate in industrial production
b. unexpected inflation
c. expected inflation
d. the monthly growth rate in industrial production and
unexpected inflation
e. the monthly growth rate in industrial production, unexpected
inflation, and expected inflation
Feedback
In their model, Chen, Roll, and Ross hypothesized that the
monthly growth rate in industrial production, unexpected
inflation, and expected inflation might be proxies for
systematic risk. However, of the above factors, only the
monthly growth rate in industrial production and unexpected
inflation appeared to have significant explanatory power.
The correct answer is: the monthly growth rate in industrial
production, unexpected inflation, and expected inflation
Question 13
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In the 1972 empirical study by Black, Jensen, and Scholes,
they found that the estimated slope of the security market
line was _______ what the CAPM would predict.
Select one:
a. higher than
b. equal to
c. less than
d. twice as much as
e. More information is required to answer this question.
Feedback
These studies found that the SML was "too flat" compared to
CAPM predictions by a statistically significant margin.
The correct answer is: less than
Question 14
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Given the results of the early studies by Lintner (1965) and
Miller and Scholes (1972), one would conclude that
Select one:
a. high beta stocks tend to outperform the predictions of the
CAPM.
b. low beta stocks tend to outperform the predictions of the
CAPM.
c. there is no relationship between beta and the predictions of
the CAPM.
d. high beta stocks and low beta stocks tend to outperform the
predictions of the CAPM.
e. None of the options are correct.
Feedback
correct
The correct answer is: low beta stocks tend to outperform the
predictions of the CAPM.
Question 15
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In the results of the earliest estimations of the security
market line by Lintner (1965) and by Miller and Scholes
(1972), it was found that the average difference between a
stock's return and the risk-free rate was ________ to its
nonsystematic risk.
Select one:
a. positively related
b. negatively related
c. unrelated
d. related in a nonlinear fashion
e. None of the options are correct.
Feedback
correct
The correct answer is: positively related
Question 16
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The Fama and French three-factor model does not use ___ as
one of the explanatory factors.
Select one:
a. industrial production
b. inflation
c. firm size
d. book-to-market ratio
e. industrial production or inflation
Feedback
correct
The correct answer is: industrial production or inflation
Question 17
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In the results of the earliest estimations of the security
market line by Miller and Scholes (1972), it was found that
the average difference between a stock's return and the riskfree rate was ________ to its nonsystematic risk and
________ to its beta.
Select one:
a. positively related; negatively related
b. negatively related; positively related
c. positively related; positively related
d. negatively related; negatively related
e. not related; not related
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The correct answer is: positively related; positively related
Question 18
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The expected return/beta relationship is used
Select one:
a. by regulatory commissions in determining the costs of capital
for regulated firms.
b. in court rulings to determine discount rates to evaluate claims
of lost future incomes.
c. to advise clients as to the composition of their portfolios.
d. All of the options are correct.
e. None of the options are correct.
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The correct answer is: All of the options are correct.
Question 19
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__________ argued in his famous critique that tests of the
expected return/beta relationship are invalid and that it is
doubtful that the CAPM can ever be tested.
Select one:
a. Kim
b. Markowitz
c. Modigliani
d. Roll
e. None of the options are correct.
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The correct answer is: Roll
CDOs are divided in tranches
Select one:
a. that provide investors with securities with varying degrees of
credit risk.
b. and each tranch is given a different level of seniority in terms
of its claims on the underlying pool.
c. and none of the tranches is risky.
d. and equity tranch is very low risk.
e. that provide investors with securities with varying degrees of
credit risk, and each tranch is given a different level of
seniority in terms of its claims on the underlying pool.
Feedback
CDOs are divided into tranches that provide investors with
securities with varying degrees of credit risk, and each tranch
is given a different level of seniority in terms of its claims on
the underlying pool.
The correct answer is: that provide investors with securities
with varying degrees of credit risk, and each tranch is given a
different level of seniority in terms of its claims on the
underlying pool.
Question 2
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A CDO is a
Select one:
a. command duty officer.
b. collateralized debt obligation.
c. commercial debt originator.
d. collateralized debenture originator.
e. common debt officer.
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A CDO is a collateralized debt obligation.
The correct answer is: collateralized debt obligation.
Question 3
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Of the following five investments, ________ is (are)
considered the least risky.
Select one:
a. Treasury bills
b. corporate bonds
c. U.S. agency issues
d. Treasury bonds
e. commercial paper
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The correct answer is: Treasury bills
Question 4
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The invoice price of a bond that a buyer would pay is equal to
Select one:
a. the asked price plus accrued interest.
b. the asked price less accrued interest.
c. the bid price plus accrued interest.
d. the bid price less accrued interest.
e. the bid price.
Feedback
The buyer of a bond will buy at the asked price and will be
invoiced for any accrued interest due to the seller.
The correct answer is: the asked price plus accrued interest.
Question 5
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The ________ is used to calculate the present value of a
bond.
Select one:
a. nominal yield
b. current yield
c. yield to maturity
d. yield to call
e. None of the options are correct.
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The correct answer is: yield to maturity
Question 6
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A coupon bond is a bond that
Select one:
a. pays interest on a regular basis (typically every six months).
b. does not pay interest on a regular basis but pays a lump sum
at maturity.
c. can always be converted into a specific number of shares of
common stock in the issuing company.
d. always sells at par value.
e. None of the options are correct.
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The correct answer is: pays interest on a regular basis
(typically every six months).
Question 7
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Floating-rate bonds are designed to ___________, while
convertible bonds are designed to __________.
Select one:
a. minimize the holders' interest rate risk; give the investor the
ability to share in the price appreciation of the company's
stock
b. maximize the holders' interest rate risk; give the investor the
ability to share in the price appreciation of the company's
stock
c. minimize the holders' interest rate risk; give the investor the
ability to benefit from interest rate changes
d. maximize the holders' interest rate risk; give investor the
ability to share in the profits of the issuing company
e. None of the options are correct.
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The correct answer is: minimize the holders' interest rate risk;
give the investor the ability to share in the price appreciation
of the company's stock
Question 8
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A credit default swap is
rev: 02_09_2015_QC_CS-7091
Select one:
a. a fancy term for a low-risk bond.
b. an insurance policy on the default risk of a federal
government bond or loan.
c. an insurance policy on the default risk of a corporate bond or
loan.
d. an insurance policy on the default risk of federal government
and corporate bonds and loans.
e. None of the options are correct.
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The correct answer is: an insurance policy on the default risk
of federal government and corporate bonds and loans.
Question 9
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Accrued interest
Select one:
a. is quoted in the bond price in the financial press.
b. must be paid by the buyer of the bond and remitted to the
seller of the bond.
c. must be paid to the broker for the inconvenience of selling
bonds between maturity dates.
d. is quoted in the bond price in the financial press and must be
paid by the buyer of the bond and remitted to the seller of
the bond.
e. is quoted in the bond price in the financial press and must be
paid to the broker for the inconvenience of selling bonds
between maturity dates.
Feedback
Accrued interest must be paid by the buyer, but is not
included in the quotations page price.
The correct answer is: must be paid by the buyer of the bond
and remitted to the seller of the bond.
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A coupon bond that pays interest semi-annually has a par
value of $1,000, matures in five years, and has a yield to
maturity of 10%. The intrinsic value of the bond today will be
__________ if the coupon rate is 8%.
Select one:
a. $922.78
b. $924.16
c. $1,075.80
d. $1,077.20
e. None of the options
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The correct answer is: $922.78
Question 11
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If a 6% coupon bond is trading for $950.00, it has a current
yield of
Select one:
a. 6.5%.
b. 6.3%.
c. 6.1%.
d. 6.0%.
e. 6.6%.
Feedback
60/950 = 6.3.
The correct answer is: 6.3%.
Question 12
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Mortgage-backed CDOs were a disaster in 2007 because
Select one:
a. they were formed by pooling high quality fixed-rate loans with
low interest rates.
b. they were formed by pooling subprime mortgages.
c. home prices stalled.
d. the mortgages were variable rate loans, and interest rates
increased.
e. they were formed by pooling subprime mortgages, home
prices stalled, the mortgages were variable rate loans, and
interest rates increased.
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The correct answer is: they were formed by pooling subprime
mortgages, home prices stalled, the mortgages were variable
rate loans, and interest rates increased.
Question 13
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A zero-coupon bond has a yield to maturity of 9% and a par
value of $1,000. If the bond matures in eight years, the bond
should sell for a price of _______ today.
Select one:
a. $422.41
b. $501.87
c. $513.16
d. $483.49
e. None of the options are correct.
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The correct answer is: $501.87
Question 14
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A coupon bond is reported as having an ask price of 113% of
the $1,000 par value in the Wall Street Journal. If the last
interest payment was made two months ago and the coupon
rate is 12%, the invoice price of the bond will be
Select one:
a. $1,100.
b. $1,110.
c. $1,150.
d. $1,160.
e. None of the options are correct.
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The correct answer is: $1,150.
Question 15
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An 8% coupon U.S. Treasury note pays interest on May 30 and
November 30 and is traded for settlement on August 15. The
accrued interest on the $100,000 face value of this note is
Select one:
a. $491.80.
b. $800.00.
c. $983.61.
d. $1,661.20.
e. None of the options are correct.
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The correct answer is: $1,661.20.
Question 16
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The ______ is a measure of the average rate of return an
investor will earn if the investor buys the bond now and holds
until maturity.
Select one:
a. current yield
b. dividend yield
c. P/E ratio
d. yield to maturity
e. discount yield
Feedback
The yield to maturity is a measure of the average rate of
return an investor will earn if the investor buys the bond now
and holds until maturity.
The correct answer is: yield to maturity
Question 17
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A coupon bond is reported as having an ask price of 108% of
the $1,000 par value in the Wall Street Journal. If the last
interest payment was made one month ago and the coupon
rate is 9%, the invoice price of the bond will be
Select one:
a. $1,087.50.
b. $1,110.10.
c. $1,150.00.
d. $1,160.25.
e. None of the options are correct.
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The correct answer is: $1,087.50.
Question 18
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The current yield on a bond is equal to
Select one:
a. annual interest payment divided by the current market price.
b. the yield to maturity.
c. annual interest divided by the par value.
d. the internal rate of return.
e. None of the options are correct.
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The correct answer is: annual interest payment divided by the
current market price.
Question 19
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The compensation from a CDS can come from
Select one:
a. the CDS holder delivering the defaulted bond to the CDS
issuer in return for the bond's par value.
b. the CDS issuer paying the swap holder the difference between
the par value of the bond and the bond's market price.
c. the federal government paying off on the insurance claim.
d. the CDS holder delivering the defaulted bond to the CDS
issuer in return for the bond's par value, and the CDS issuer
paying the swap holder the difference between the par value
of the bond and the bond's market price.
e. None of the options are correct.
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The correct answer is: the CDS holder delivering the defaulted
bond to the CDS issuer in return for the bond's par value, and
the CDS issuer paying the swap holder the difference between
the par value of the bond and the bond's market price.
Question 20
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If an 8% coupon bond is trading for $1,025.00, it has a current
yield of
Select one:
a. 7.8%.
b. 8.7%.
c. 7.6%.
d. 7.9%.
e. 8.1%.
Feedback
80/1025 = 7.8.
The correct answer is: 7.8%.
Question 21
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If a 7% coupon bond is trading for $975.00, it has a current
yield of
Select one:
a. 7.00%.
b. 6.53%.
c. 7.24%.
d. 8.53%.
e. 7.18%.
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The correct answer is: 7.18%.
Question 22
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A CDS is a
Select one:
a. command duty supervisor.
b. collateralized debt security.
c. commercial debt servicer.
d. collateralized debenture security.
e. credit default swap.
Feedback
A CDS is a credit default swap.
The correct answer is: credit default swap.
Question 23
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A coupon bond that pays interest annually has a par value of
$1,000, matures in five years, and has a yield to maturity of
10%. The intrinsic value of the bond today will be ______ if
the coupon rate is 7%.
Select one:
a. $712.99
b. $620.92
c. $1,123.01
d. $886.28
e. $1,000.00
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The correct answer is: $886.28
Question 24
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A coupon bond that pays interest semi-annually has a par
value of $1,000, matures in five years, and has a yield to
maturity of 10%. The intrinsic value of the bond today will be
________ if the coupon rate is 12%.
Select one:
a. $922.77
b. $924.16
c. $1,075.80
d. $1,077.22
e. None of the options are correct.
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The correct answer is: $1,077.22
Question 25
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To earn a high rating from the bond-rating agencies, a firm
should have
Select one:
a. a low times-interest-earned ratio.
b. a low debt-to-equity ratio.
c. a high quick ratio.
d. a low debt-to-equity ratio and a high quick ratio.
e. a low times-interest-earned ratio and a high quick ratio.
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The correct answer is: a low debt-to-equity ratio and a high
quick ratio.
Question 26
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At issue, coupon bonds typically sell
Select one:
a. above par value.
b. below par value.
c. at or near par value.
d. at a value unrelated to par.
e. None of the options are correct.
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The correct answer is: at or near par value.
Question 27
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A firm with a low rating from the bond-rating agencies would
have
Select one:
a. a low times-interest-earned ratio.
b. a low debt-to-equity ratio.
c. a low quick ratio.
d. a low debt-to-equity ratio and a low quick ratio.
e. a low times-interest-earned ratio and a low quick ratio.
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The correct answer is: a low times-interest-earned ratio and a
low quick ratio.
Question 28
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If a 7.5% coupon bond is trading for $1,050.00, it has a
current yield of
Select one:
a. 7.0%.
b. 7.4%.
c. 7.1%.
d. 6.9%.
e. 6.7%.
Feedback
75/1050 = 7.1.
The correct answer is: 7.1%.
Question 29
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A coupon bond pays annual interest, has a par value of
$1,000, matures in four years, has a coupon rate of 8.25%,
and has a yield to maturity of 8.64%. The current yield on this
bond is
Select one:
a. 8.65%.
b. 8.45%.
c. 7.95%.
d. 8.36%.
e. None of the options are correct.
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The correct answer is: 8.36%.
Question 30
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A ___________ bond is a bond where the bondholder has the
right to cash in the bond before maturity at a specified price
after a specific date.
Select one:
a. callable
b. coupon
c. put
d. Treasury
e. zero-coupon
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The correct answer is: put
Question 31
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SIVs raise funds by ______ and then use the proceeds to
______.
Select one:
a. issuing short-term commercial paper; retire other forms of
their debt
b. issuing short-term commercial paper; buy other forms of debt
such as mortgages
c. issuing long-term bonds; retire other forms of their debt
d. issuing long-term bonds; buy other forms of debt such as
mortgages
Feedback
SIVs raise funds by issuing short-term commercial paper and
then use the proceeds to buy other forms of debt such as
mortgages.
The correct answer is: issuing short-term commercial paper;
buy other forms of debt such as mortgages
Question 32
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A zero-coupon bond has a yield to maturity of 11% and a par
value of $1,000. If the bond matures in 27 years, the bond
should sell for a price of _______ today.
Select one:
a. $59.74
b. $501.87
c. $513.16
d. $483.49
Feedback
$1,000/(1.11)27 = $59.74.
The correct answer is: $59.74
Question 33
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A coupon bond pays annual interest, has a par value of
$1,000, matures in 12 years, has a coupon rate of 8.7%, and
has a yield to maturity of 7.9%. The current yield on this bond
is
Select one:
a. 8.39%.
b. 8.43%.
c. 8.83%.
d. 8.66%.
e. None of the options are correct.
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The correct answer is: None of the options are correct.
Question 34
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A coupon bond pays annual interest, has a par value of
$1,000, matures in four years, has a coupon rate of 10%, and
has a yield to maturity of 12%. The current yield on this bond
is
Select one:
a. 10.65%.
b. 10.45%.
c. 10.95%.
d. 10.52%.
e. None of the options are correct.
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The correct answer is: 10.65%.
Question 35
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A coupon bond that pays interest annually has a par value of
$1,000, matures in seven years, and has a yield to maturity of
9.3%. The intrinsic value of the bond today will be ______ if
the coupon rate is 8.5%.
Select one:
a. $712.99
b. $960.14
c. $1,123.01
d. $886.28
e. $1,000.00
Feedback
FV = 1,000, PMT = 85, n = 7, i = 9.3, PV = 960.138.
The correct answer is: $960.14
Question 36
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A zero-coupon bond has a yield to maturity of 12% and a par
value of $1,000. If the bond matures in 18 years, the bond
should sell for a price of _______ today.
Select one:
a. $422.41
b. $501.87
c. $513.16
d. $130.04
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The correct answer is: $130.04
Question 37
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SIVs are
Select one:
a. structured investment vehicles.
b. structured interest rate vehicles.
c. semi-annual investment vehicles.
d. riskless investments.
e. structured insured variable rate instruments.
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The correct answer is: structured investment vehicles.
Question 38
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If a 7.25% coupon bond is trading for $982.00, it has a current
yield of
Select one:
a. 7.38%.
b. 6.53%.
c. 7.25%.
d. 8.53%.
e. 7.18%.
Feedback
72.50/982 = 7.38.
The correct answer is: 7.38%.
Question 39
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Of the following five investments, ________ is (are)
considered the safest.
Select one:
a. commercial paper
b. corporate bonds
c. U.S. agency issues
d. Treasury bonds
e. Treasury bills
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The correct answer is: Treasury bills
Question 40
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If a 7.75% coupon bond is trading for $1,019.00, it has a
current yield of
Select one:
a. 7.38%.
b. 6.64%.
c. 7.25%.
d. 7.61%.
e. 7.18%.
Feedback
77.50/1019 = 7.605.
The correct answer is: 7.61%.
Question 41
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A coupon bond that pays interest semi-annually has a par
value of $1,000, matures in seven years, and has a yield to
maturity of 9.3%. The intrinsic value of the bond today will be
________ if the coupon rate is 9.5%.
Select one:
a. $922.77
b. $1,010.12
c. $1,075.80
d. $1,077.22
e. None of the options are correct.
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The correct answer is: $1,010.12
Question 42
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A coupon bond pays annual interest, has a par value of
$1,000, matures in 12 years, has a coupon rate of 11%, and
has a yield to maturity of 12%. The current yield on this bond
is
Select one:
a. 10.39%.
b. 10.43%.
c. 10.58%.
d. 11.73%.
e. None of the options are correct.
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The correct answer is: 11.73%.
Question 43
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The _________ gives the number of shares for which each
convertible bond can be exchanged.
Select one:
a. conversion ratio
b. current ratio
c. P/E ratio
d. conversion premium
e. convertible floor
Feedback
The conversion premium is the amount for which the bond
sells above conversion value; the price of bond as a straight
bond provides the floor. The other terms are not specifically
relevant to convertible bonds.
The correct answer is: conversion ratio
Question 44
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A coupon bond that pays interest annually has a par value of
$1,000, matures in five years, and has a yield to maturity of
10%. The intrinsic value of the bond today will be _________
if the coupon rate is 12%.
Select one:
a. $922.77
b. $924.16
c. $1,075.82
d. $1,077.20
e. None of the options
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correct
The correct answer is: $1,075.82
Question 45
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If a 6.75% coupon bond is trading for $1,016.00, it has a
current yield of
Select one:
a. 7.38%.
b. 6.64%.
c. 7.25%.
d. 8.53%.
e. 7.18%.
Feedback
67.50/1016 = 6.6437.
The correct answer is: 6.64%.
Consider a bond selling at par with modified duration of 22
years and convexity of 415. A 2% decrease in yield would
cause the price to increase by 44% according to the duration
rule. What would be the percentage price change according
to the duration-with-convexity rule?
Select one:
a. 21.2%
b. 25.4%
c. 17.0%
d. 52.3%
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MC Qu. 73 Consider a bond selling at par with...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Challenge
Gradable: automatic
Topic: Convexity
The correct answer is: 52.3%
Question 2
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The duration of a par-value bond with a coupon rate of 7%
and a remaining time to maturity of 3 years is
Select one:
a. 3 years.
b. 2.71 years.
c. 2.81 years.
d. 2.91 years.
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MC Qu. 75 The duration of a par value bond with...
AACSB: Knowledge Application
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: 2.81 years.
Question 3
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The duration of a 15-year zero-coupon bond is
Select one:
a. smaller than 15.
b. larger than 15.
c. equal to 15.
d. equal to that of a 15-year 10% coupon bond.
e. None of the options are correct.
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MC Qu. 60 The duration of...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Gradable: automatic
Topic: Duration
The correct answer is: equal to 15.
Question 4
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The duration of a perpetuity with a yield of 6% is
Select one:
a. 13.50 years.
b. 12.11 years.
c. 17.67 years.
d. Cannot be determined
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MC Qu. 63 The duration of a perpetuity with a yield...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Gradable: automatic
Topic: Duration
The correct answer is: 17.67 years.
Question 5
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A 10%, 30-year corporate bond was recently being priced to
yield 12%. The Macaulay duration for the bond is 11.3 years.
Given this information, the bond's modified duration would
be
Select one:
a. 8.05.
b. 10.09.
c. 9.27.
d. 11.22.
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MC Qu. 68 A...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Gradable: automatic
Topic: Duration
The correct answer is: 10.09.
Question 6
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Which of the following bonds has the longest duration?
Select one:
a. A 12-year maturity, 0% coupon bond.
b. A 12-year maturity, 8% coupon bond.
c. A 4-year maturity, 8% coupon bond.
d. A 4-year maturity, 0% coupon bond.
e. Cannot tell from the information given
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MC Qu. 67 Which of the following bonds has...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: A 12-year maturity, 0% coupon bond.
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Par-value-bond GE has a modified duration of 11. Which one
of the following statements regarding the bond is true?
Select one:
a. If the market yield increases by 1%, the bond's price will
decrease by $55.
b. If the market yield increases by 1%, the bond's price will
increase by $55.
c. If the market yield increases by 1%, the bond's price will
decrease by $110.
d. If the market yield increases by 1%, the bond's price will
increase by $110.
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MC Qu. 65 Par value bond GE has a modified duration...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: If the market yield increases by 1%, the
bond's price will decrease by $110.
Question 8
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A 6%, 30-year corporate bond was recently being priced to
yield 8%. The Macaulay duration for the bond is 8.4 years.
Given this information, the bond's modified duration would
be
Select one:
a. 8.05.
b. 9.44.
c. 9.27.
d. 7.78.
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MC Qu. 69 A...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Gradable: automatic
Topic: Duration
The correct answer is: 7.78.
Question 9
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The duration of a 20-year zero-coupon bond is
Select one:
a. equal to 20.
b. larger than 20.
c. smaller than 20.
d. equal to that of a 20-year 10% coupon bond.
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MC Qu. 61 The duration of...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
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Difficulty: 1 Basic
Gradable: automatic
Topic: Duration
The correct answer is: equal to 20.
Question 10
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Which of the following bonds has the longest duration?
Select one:
a. A 15-year maturity, 0% coupon bond.
b. A 15-year maturity, 9% coupon bond.
c. A 20-year maturity, 9% coupon bond.
d. A 20-year maturity, 0% coupon bond.
e. Cannot tell from the information given
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MC Qu. 66 Which of the following bonds has...
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Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: A 20-year maturity, 0% coupon bond.
Question 11
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A 9%, 16-year bond has a yield to maturity of 11% and
duration of 9.25 years. If the market yield changes by 32 basis
points, how much change will there be in the bond's price?
Select one:
a. 1.85%
b. 2.01%
c. 2.67%
d. 6.44%
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MC Qu. 70 A ..
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: 2.67%
Question 12
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The duration of a par-value bond with a coupon rate of 8.7%
and a remaining time to maturity of 6 years is
Select one:
a. 6.0 years.
b. 5.1 years.
c. 4.27 years.
d. 3.95 years.
e. None of the options are correct.
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MC Qu. 76 The duration of a par value bond with...
AACSB: Knowledge Application
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: None of the options are correct.
Question 13
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Consider a bond selling at par with modified duration of 12
years and convexity of 265. A 1% decrease in yield would
cause the price to increase by 12%, according to the duration
rule. What would be the percentage price change according
to the duration-with-convexity rule?
Select one:
a. 21.2%
b. 25.4%
c. 17.0%
d. 13.3%
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MC Qu. 72 Consider a bond selling at par with...
AACSB: Knowledge Application
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Blooms: Apply
Difficulty: 3 Challenge
Gradable: automatic
Topic: Convexity
The correct answer is: 13.3%
Question 14
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Par-value-bond F has a modified duration of 9. Which one of
the following statements regarding the bond is true?
Select one:
a. If the market yield increases by 1%, the bond's price will
decrease by $90.
b. If the market yield increases by 1%, the bond's price will
increase by $90.
c. If the market yield increases by 1%, the bond's price will
decrease by $60.
d. If the market yield decreases by 1%, the bond's price will
increase by $60.
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MC Qu. 64 Par value bond F has a modified duration of...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: If the market yield increases by 1%, the
bond's price will decrease by $90.
Question 15
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The duration of a perpetuity with a yield of 10% is
Select one:
a. 13.50 years.
b. 11 years.
c. 6.66 years.
d. Cannot be determined
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MC Qu. 62 The duration of a perpetuity with...
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Difficulty: 1 Basic
Gradable: automatic
Topic: Duration
The correct answer is: 11 years.
Question 16
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The duration of a par-value bond with a coupon rate of 6.5%
and a remaining time to maturity of 4 years is
Select one:
a. 3.65 years.
b. 3.45 years.
c. 3.85 years.
d. 4.00 years.
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MC Qu. 74 The duration of a par value bond with...
AACSB: Knowledge Application
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: 3.65 years.
Question 17
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A 7%, 14-year bond has a yield to maturity of 6% and duration
of 7 years. If the market yield changes by 44 basis points, how
much change will there be in the bond's price?
Select one:
a. 1.85%
b. 2.91%
c. 3.27%
d. 6.44%
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MC Qu. 71 A...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: 2.91%
Siri had a FCFE of $1.6M last year and has 3.2M shares
outstanding. Siri's required return on equity is 12%, and
WACC is 9.8%. If FCFE is expected to grow at 9% forever, the
intrinsic value of Siri's shares is
Select one:
a. $68.13.
b. $18.17.
c. $26.35.
d. $14.76.
e. None of the options are correct.
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The correct answer is: $18.17.
Question 2
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SGA Consulting had a FCFE of $3.2M last year and has 3.2M
shares outstanding. SGA's required return on equity is 13%,
and WACC is 11.5%. If FCFE is expected to grow at 8.5%
forever, the intrinsic value of SGA's shares is
Select one:
a. $21.60.
b. $26.56.
c. $244.42.
d. $24.11.
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The correct answer is: $24.11.
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The growth in per share FCFE of CBS, Inc. is expected to be
10% per year for the next two years, followed by a growth
rate of 5% per year for three years. After this five-year period,
the growth in per share FCFE is expected to be 2% per year,
indefinitely. The required rate of return on CBS, Inc. is 12%.
Last year's per share FCFE was $2.00. What should the stock
sell for today?
Select one:
a. $8.99
b. $22.51
c. $40.00
d. $25.21
e. $27.12
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The correct answer is: $25.21
Question 4
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Goodie Corporation produces goods that are very mature in
their product life cycles. Goodie Corporation is expected to
have per share FCFE in year 1 of $2.00, per share FCFE of
$1.50 in year 2, and per share FCFE of $1.00 in year 3. After
year 3, per share FCFE is expected to decline at a rate of 1%
per year. An appropriate required rate of return for the stock
is 10%. The stock should be worth __________ today.
Select one:
a. $9.00
b. $101.57
c. $10.57
d. $22.22
e. $47.23
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The correct answer is: $10.57
Question 5
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Highpoint had a FCFE of $246M last year and has 123M
shares outstanding. Highpoint's required return on equity is
10%, and WACC is 9%. If FCFE is expected to grow at 8.0%
forever, the intrinsic value of Highpoint's shares is
Select one:
a. $21.60.
b. $108.
c. $244.42.
d. $216.00.
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The correct answer is: $108.
Question 6
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Stingy Corporation is expected have EBIT of $1.2M this year.
Stingy Corporation is in the 30% tax bracket, will report
$133,000 in depreciation, will make $76,000 in capital
expenditures, and will have a $24,000 increase in net working
capital this year. What is Stingy's FCFF?
Select one:
a. 1,139,000
b. 1,200,000
c. 1,025,000
d. 921,000
e. 873,000
Feedback
FCFF = EBIT(1 - T) + depreciation - capital expenditures increase in NWC or 1,200,000(.7) + 133,000 - 76,000 - 24,000
= 873,000.
The correct answer is: 873,000
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See Candy had a FCFE of $6.1M last year and has 2.32M
shares outstanding. See's required return on equity is 10.6%,
and WACC is 9.3%. If FCFE is expected to grow at 6.5% forever,
the intrinsic value of See's shares is
Select one:
a. $108.00.
b. $68.30.
c. $26.35.
d. $14.76.
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The correct answer is: $68.30.
Question 8
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Fly Boy Corporation is expected have EBIT of $800k this year.
Fly Boy Corporation is in the 30% tax bracket, will report
$52,000 in depreciation, will make $86,000 in capital
expenditures, and will have a $16,000 increase in net working
capital this year. What is Fly Boy's FCFF?
Select one:
a. 510,000
b. 406,000
c. 542,000
d. 596,000
e. 682,000
Feedback
FCFF = EBIT(1 - T) + depreciation - capital expenditures increase in NWC or 800,000(.7) + 52,000 - 86,000 - 16,000 =
510,000.
The correct answer is: 510,000
Question 9
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Rome Corporation is expected have EBIT of $2.3M this year.
Rome Corporation is in the 30% tax bracket, will report
$175,000 in depreciation, will make $175,000 in capital
expenditures, and will have no change in net working capital
this year. What is Rome's FCFF?
Select one:
a. 2,300,000
b. 1,785,000
c. 1,960,000
d. 1,610,000
e. 1,435,000
Feedback
FCFF = EBIT(1 - T) + depreciation - capital expenditures increase in NWC or 2,300,000(.7) + 175,000 - 175,000 - 0 =
1,610,000.
The correct answer is: 1,610,000
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Seaman had a FCFE of $4.6B last year and has 113.2M shares
outstanding. Seaman's required return on equity is 11.6%,
and WACC is 10.4%. If FCFE is expected to grow at 5% forever,
the intrinsic value of Seaman's shares is
Select one:
a. $646.48.
b. $64.66.
c. $6,464.80
d. $6.46.
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The correct answer is: $646.48.
Question 11
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Zero had a FCFE of $4.5M last year and has 2.25M shares
outstanding. Zero's required return on equity is 10%, and
WACC is 8.2%. If FCFE is expected to grow at 8% forever, the
intrinsic value of Zero's shares is
Select one:
a. $108.00.
b. $1080.00.
c. $26.35.
d. $14.76.
e. None of the options are correct.
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The correct answer is: $108.00.
Question 12
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SI International had a FCFE of $122.1M last year and has
12.43M shares outstanding. SI's required return on equity is
11.3%, and WACC is 9.8%. If FCFE is expected to grow at 7.0%
forever, the intrinsic value of SI's shares is
Select one:
a. $108.00.
b. $68.29.
c. $244.43.
d. $14.76.
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The correct answer is: $244.43.
Question 13
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Consider the free cash flow approach to stock valuation. F&G
Manufacturing Company is expected to have before-tax cash
flow from operations of $750,000 in the coming year. The
firm's corporate tax rate is 40%. It is expected that $250,000
of operating cash flow will be invested in new fixed assets.
Depreciation for the year will be $125,000. After the coming
year, cash flows are expected to grow at 7% per year. The
appropriate market capitalization rate for unleveraged cash
flow is 13% per year. The firm has no outstanding debt. The
total value of the equity of F&G Manufacturing Company
should be
Select one:
a. $1,615,156.50.
b. $2,479,168.95.
c. $3,333,333.33.
d. $4,166,666.67.
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The correct answer is: $4,166,666.67.
Question 14
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Smart Draw Company is expected to have per share FCFE in
year 1 of $1.20, per share FCFE in year 2 of $1.50, and per
share FCFE in year 3 of $2.00. After year 3, per share FCFE is
expected to grow at the rate of 10% per year. An appropriate
required return for the stock is 14%. The stock should be
worth _______ today.
Select one:
a. $33.00
b. $40.68
c. $55.00
d. $66.00
e. $12.16
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The correct answer is: $40.68
Question 15
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Consider the free cash flow approach to stock valuation. F&G
Manufacturing Company is expected to have before-tax cash
flow from operations of $750,000 in the coming year. The
firm's corporate tax rate is 40%. It is expected that $250,000
of operating cash flow will be invested in new fixed assets.
Depreciation for the year will be $125,000. After the coming
year, cash flows are expected to grow at 7% per year. The
appropriate market capitalization rate for unleveraged cash
flow is 13% per year. The firm has no outstanding debt. The
projected free cash flow of F&G Manufacturing Company for
the coming year is
Select one:
a. $250,000.
b. $180,000.
c. $300,000.
d. $380,000.
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The correct answer is: $250,000.
Question 16
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Lamm Corporation is expected have EBIT of $6.2M this year.
Lamm Corporation is in the 40% tax bracket, will report $1.2M
in depreciation, will make $1.4M in capital expenditures, and
will have a $160,000 increase in net working capital this year.
What is Lamm's FCFF?
Select one:
a. 6,200,000
b. 6,160,000
c. 3,360,000
d. 3,680,000
e. 4,625,000
Feedback
FCFF = EBIT(1 - T) + depreciation - capital expenditures increase in NWC or 6,200,000(.6) + 1,200,000 - 1,400,000 160,000 = 3,360,000.
The correct answer is: 3,360,000
Question 17
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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.
Select one:
a. $127.63
b. $10.57
c. $20.00
d. $22.22
e. $8.98
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The correct answer is: $8.98
Question 18
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The growth in per share FCFE of SYNK, Inc. is expected to be
8% per year for the next two years, followed by a growth rate
of 4% per year for three years. After this five-year period, the
growth in per share FCFE is expected to be 3% per year,
indefinitely. The required rate of return on SYNC, Inc. is 11%.
Last year's per share FCFE was $2.75. What should the stock
sell for today?
Select one:
a. $28.99
b. $35.21
c. $54.67
d. $56.37
e. $39.71
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The correct answer is: $39.71
Question 19
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The growth in per share FCFE of FOX, 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 per share FCFE is expected to be 3% per year,
indefinitely. The required rate of return on FOX, Inc. is 13%.
Last year's per share FCFE was $1.85. What should the stock
sell for today?
Select one:
a. $28.99
b. $24.47
c. $26.84
d. $27.74
e. $19.18
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The correct answer is: $27.74
Question 20
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Boaters World is expected to have per share FCFE in year 1 of
$1.65, per share FCFE in year 2 of $1.97, and per share FCFE
in year 3 of $2.54. After year 3, per share FCFE is expected to
grow at the rate of 8% per year. An appropriate required
return for the stock is 11%. The stock should be worth
_______ today.
Select one:
a. $77.53
b. $40.67
c. $82.16
d. $71.80
e. None of the options are correct.
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The correct answer is: $71.80
A collar with a net outlay of approximately zero is an options
strategy that
Select one:
a. combines a put and a call to lock in a price range for a
security.
b. uses the gains from sale of a call to purchase a put.
c. uses the gains from sale of a put to purchase a call.
d. combines a put and a call to lock in a price range for a security
and uses the gains from sale of a call to purchase a put.
e. combines a put and a call to lock in a price range for a security
and uses the gains from sale of a put to purchase a call.
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The collar brackets the value of a portfolio between two
bounds.
The correct answer is: combines a put and a call to lock in a
price range for a security and uses the gains from sale of a call
to purchase a put.
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You buy one Home Depot June 60 call contract and one June
60 put contract. The call premium is $5 and the put premium
is $3.
Your strategy is called
Select one:
a. a short straddle.
b. a long straddle.
c. a horizontal straddle.
d. a covered call.
e. None of the options are correct.
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The correct answer is: a long straddle.
Question 3
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An option with an exercise price equal to the underlying
asset's price is
Select one:
a. worthless.
b. in the money.
c. at the money.
d. out of the money.
e. theoretically impossible.
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This is the definition of "at the money." The option has a
market value and may increase in value if there are favorable
price movements in the underlying asset before the
expiration date.
The correct answer is: at the money.
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What happens to an option if the underlying stock has a 2-for1 split?
Select one:
a. There is no change in either the exercise price or in the
number of options held.
b. The exercise price will adjust through normal market
movements; the number of options will remain the same.
c. The exercise price would become one-half of what it was, and
the number of options held would double.
d. The exercise price would double, and the number of options
held would double.
e. There is no standard rule—each corporation has its own
policy.
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The correct answer is: The exercise price would become onehalf of what it was, and the number of options held would
double.
Question 5
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Consider a one-year maturity call option and a one-year put
option on the same stock, both with striking price $100. If the
risk-free rate is 5%, the stock price is $103, and the put sells
for $7.50, what should be the price of the call?
Select one:
a. $17.50
b. $15.26
c. $10.36
d. $12.26
e. None of the options.
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The correct answer is: $15.26
Question 6
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Top Flight Stock currently sells for $53. A one-year call option
with strike price of $58 sells for $10, and the risk-free interest
rate is 5.5%. What is the price of a one-year put with strike
price of $58?
Select one:
a. $10.00
b. $12.12
c. $16.00
d. $11.98
e. $14.13
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The correct answer is: $11.98
Question 7
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Trading in "exotic options" takes place primarily
Select one:
a. on the New York Stock Exchange.
b. in the over-the-counter market.
c. on the American Stock Exchange.
d. in the primary marketplace.
e. None of the options.
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The correct answer is: in the over-the-counter market.
Question 8
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Suppose that you purchased a call option on the S&P 100
Index. The option has an exercise price of 1,680, and the
index is now at 1,720. What will happen when you exercise
the option?
Select one:
a. You will have to pay $1,680.
b. You will receive $1,720.
c. You will receive $1,680.
d. You will receive $4,000.
e. You will have to pay $4,000.
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The correct answer is: You will receive $4,000.
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Derivative securities are also called contingent claims because
Select one:
a. their owners may choose whether or not to exercise them.
b. a large contingent of investors holds them.
c. the writers may choose whether or not to exercise them.
d. their payoffs depend on the prices of other assets.
e. contingency management is used in adding them to
portfolios.
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The values of derivatives depend on the values of the
underlying stock, commodity, index, etc.
The correct answer is: their payoffs depend on the prices of
other assets.
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Suppose that you purchased a call option on the S&P 100
Index. The option has an exercise price of 1,700, and the
index is now at 1,760. What will happen when you exercise
the option?
Select one:
a. You will have to pay $6,000.
b. You will receive $6,000.
c. You will receive $1,700.
d. You will receive $1,760.
e. You will have to pay $7,000.
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The correct answer is: You will receive $6,000.
Question 11
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Asian options differ from American and European options in
that
Select one:
a. they are only sold in Asian financial markets.
b. they never expire.
c. their payoff is based on the average price of the underlying
asset.
d. they are only sold in Asian financial markets and they never
expire.
e. they are only sold in Asian financial markets and their payoff
is based on the average price of the underlying asset.
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Asian options have payoffs that depend on the average price
of the underlying asset during some period of time.
The correct answer is: their payoff is based on the average
price of the underlying asset.
Question 12
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You buy one Home Depot June 60 call contract and one June
60 put contract. The call premium is $5 and the put premium
is $3.
At expiration, you break even if the stock price is equal to
Select one:
a. $52.
b. $60.
c. $68.
d. either $52 or $68.
e. None of the options are correct.
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The correct answer is: either $52 or $68.
Question 13
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HighFlyer Stock currently sells for $48. A one-year call option
with strike price of $55 sells for $9, and the risk-free interest
rate is 6%. What is the price of a one-year put with strike
price of $55?
Select one:
a. $9.00
b. $12.89
c. $16.00
d. $18.72
e. $15.60
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The correct answer is: $12.89
Question 14
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Consider a one-year maturity call option and a one-year put
option on the same stock, both with striking price $45. If the
risk-free rate is 4%, the stock price is $48, and the put sells for
$1.50, what should be the price of the call?
Select one:
a. $4.38
b. $5.60
c. $6.23
d. $12.26
e. None of the options.
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The correct answer is: $6.23
Question 15
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ING Stock currently sells for $38. A one-year call option with
strike price of $45 sells for $9, and the risk-free interest rate is
4%. What is the price of a one-year put with strike price of
$45?
Select one:
a. $9.00
b. $12.89
c. $16.00
d. $18.72
e. $14.27
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The correct answer is: $14.27
Question 16
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What happens to an option if the underlying stock has a 3-for1 split?
Select one:
a. There is no change in either the exercise price or in the
number of options held.
b. The exercise price will adjust through normal market
movements; the number of options will remain the same.
c. The exercise price would become one-third of what it was,
and the number of options held would triple.
d. The exercise price would triple, and the number of options
held would triple.
e. There is no standard rule—each corporation has its own
policy.
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The correct answer is: The exercise price would become onethird of what it was, and the number of options held would
triple.
Question 17
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You purchased a call option for $3.45 17 days ago. The call has
a strike price of $45, and the stock is now trading for $51. If
you exercise the call today, what will be your holding-period
return? If you do not exercise the call today and it expires,
what will be your holding-period return?
Select one:
a. 173.9%, -100%
b. 73.9%, -100%
c. 57.5%, -173.9%
d. 73.9%, -57.5%
e. 100%, -100%
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The correct answer is: 73.9%, -100%
Question 18
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A callable bond should be priced the same as
Select one:
a. a convertible bond.
b. a straight bond plus a put option.
c. a straight bond plus a call option.
d. a straight bond plus warrants.
e. a straight bond.
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corporation and the concurrent issue of a call option by the
bond buyer.
The correct answer is: a straight bond plus a call option.
Question 19
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You buy one Home Depot June 60 call contract and one June
60 put contract. The call premium is $5 and the put premium
is $3.
Your maximum loss from this position could be
Select one:
a. $500.
b. $300.
c. $800.
d. $200.
e. None of the options are correct.
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The correct answer is: $800.
The intrinsic value of an at-the-money put option is equal to
Select one:
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.
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The correct answer is: zero.
Question 2
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Vega is defined as
Select one:
a. the change in the value of an option for a dollar change in the
price of the underlying asset.
b. the change in the value of the underlying asset for a dollar
change in the call price.
c. the percentage change in the value of an option for a 1%
change in the value of the underlying asset.
d. the change in the volatility of the underlying stock price.
e. the sensitivity of an option's price to changes in volatility.
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The correct answer is: the sensitivity of an option's price to
changes in volatility.
Question 3
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The time value of a put option is
I) the difference between the option's price and the value it
would have if it were expiring immediately.
II) the same as the present value of the option's expected
future cash flows.
III) the difference between the option's price and its expected
future value.
IV) different from the usual time value of money concept.
Select one:
a. I
b. I and II
c. II and III
d. II
e. I and IV
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The correct answer is: I and IV
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An American-style call option with six months to maturity has
a strike price of $42. The underlying stock now sells for $50.
The call premium is $14.
If the company unexpectedly announces it will pay its firstever dividend four months from today, you would expect that
Select one:
a. the call price would increase.
b. the call price would decrease.
c. the call price would not change.
d. the put price would decrease.
e. the put price would not change.
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The correct answer is: the call price would decrease.
Question 5
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The intrinsic value of an in-the-money put option is equal to
Select one:
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.
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The correct answer is: the exercise price minus the stock
price.
Question 6
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Use the two-state put-option value in this problem. SO =
$100; X = $120; the two possibilities for ST are $150 and $80.
The range of Pacross the two states is _____, and the hedge
ratio is _______.
Select one:
a. $0 and $40; −4/7
b. $0 and $50; +4/7
c. $0 and $40; +4/7
d. $0 and $50; −4/7
e. $20 and $40; +1/2
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The correct answer is: $0 and $40; −4/7
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The intrinsic value of an in-of-the-money call option is equal
to
Select one:
a. the call premium.
b. zero.
c. the stock price minus the exercise price.
d. the striking price.
e. None of the options are correct.
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The correct answer is: the stock price minus the exercise
price.
Question 8
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The hedge ratio of an option is also called the option's
Select one:
a. alpha.
b. beta.
c. sigma.
d. delta.
e. rho.
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The correct answer is: delta.
Question 9
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Since deltas change as stock values change, portfolio hedge
ratios must be constantly updated in active markets. This
process is referred to as
Select one:
a. portfolio insurance.
b. rebalancing.
c. option elasticity.
d. gamma hedging.
e. dynamic hedging.
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The correct answer is: dynamic hedging.
Question 10
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Rubinstein (1994) observed that the performance of the
Black-Scholes model had deteriorated in recent years, and he
attributed this to
Select one:
a. investor fears of another market crash.
b. higher-than-normal dividend payouts.
c. early exercise of American call options.
d. decreases in transaction costs.
e. None of the options are correct.
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The correct answer is: investor fears of another market crash.
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The Black-Scholes formula assumes that
I) the risk-free interest rate is constant over the life of the
option.
II) the stock price volatility is constant over the life of the
option.
III) the expected rate of return on the stock is constant over
the life of the option.
IV) there will be no sudden extreme jumps in stock prices.
Select one:
a. I and II
b. I and III
c. II and II
d. I, II, and IV
e. I, II, III, and IV
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The correct answer is: I, II, and IV
Question 12
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An American-style call option with six months to maturity has
a strike price of $42. The underlying stock now sells for $50.
The call premium is $14.
What is the intrinsic value of the call?
Select one:
a. $12
b. $10
c. $8
d. $23
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The correct answer is: $8
Question 13
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An American-style call option with six months to maturity has
a strike price of $35. The underlying stock now sells for $43.
The call premium is $12.
If the company unexpectedly announces it will pay its firstever dividend three months from today, you would expect
that
Select one:
a. the call price would increase.
b. the call price would decrease.
c. the call price would not change.
d. the put price would decrease.
e. the put price would not change.
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The correct answer is: the call price would decrease.
Question 14
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An American-style call option with six months to maturity has
a strike price of $35. The underlying stock now sells for $43.
The call premium is $12.
What is the intrinsic value of the call?
Select one:
a. $12
b. $8
c. $0
d. $23
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The correct answer is: $8
Question 15
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Options sellers who are delta-hedging would most likely
Select one:
a. sell when markets are falling.
b. buy when markets are rising.
c. sell when markets are falling and buy when markets are
rising.
d. sell whether markets are falling or rising.
e. buy whether markets are falling or rising.
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The correct answer is: sell when markets are falling and buy
when markets are rising.
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The intrinsic value of an out-of-the-money put option is equal
to
Select one:
a. the stock price minus the exercise price.
b. the put premium.
c. zero.
d. the exercise price minus the stock price.
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The correct answer is: zero.
Question 17
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The intrinsic value of an at-the-money call option is equal to
Select one:
a. the call premium.
b. zero.
c. the stock price plus the exercise price.
d. the striking price.
e. None of the options are correct.
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The correct answer is: zero.
Question 18
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As the underlying stock's price increased, the call option
valuation function's slope approaches
Select one:
a. zero.
b. one.
c. two times the value of the stock.
d. one-half the value of the stock.
e. infinity.
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The correct answer is: one.
Question 19
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An American-style call option with six months to maturity has
a strike price of $42. The underlying stock now sells for $50.
The call premium is $14.
What is the time value of the call?
Select one:
a. $8
b. $12
c. $6
d. $4
e. Cannot be determined without more information
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The correct answer is: $6
Question 20
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An American-style call option with six months to maturity has
a strike price of $35. The underlying stock now sells for $43.
The call premium is $12.
What is the time value of the call?
Select one:
a. $8
b. $12
c. $0
d. $4
e. Cannot be determined without more information
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The correct answer is: $4
Question 21
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In volatile markets, dynamic hedging may be difficult to
implement because
Select one:
a. prices move too quickly for effective rebalancing.
b. as volatility increases, historical deltas are too low.
c. price quotes may be delayed so that correct hedge ratios
cannot be computed.
d. volatile markets may cause trading halts.
e. All of the options are correct.
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The correct answer is: All of the options are correct.
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The intrinsic value of an out-of-the-money call option is equal
to
Select one:
a. the call premium.
b. zero.
c. the stock price minus the exercise price.
d. the striking price.
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The correct answer is: zero.
Question 23
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Empirical tests of the Black-Scholes option pricing model
Select one:
a. show that the model generates values fairly close to the
prices at which options trade.
b. show that the model tends to overvalue deep in-the-money
calls and undervalue deep out-of-the-money calls.
c. indicate that the mispricing that does occur is due to the
possible early exercise of American options on dividendpaying stocks.
d. show that the model generates values fairly close to the
prices at which options trade and indicate that the mispricing
that does occur is due to the possible early exercise of
American options on dividend-paying stocks.
e. All of the options are correct.
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The correct answer is: show that the model generates values
fairly close to the prices at which options trade and indicate
that the mispricing that does occur is due to the possible
early exercise of American options on dividend-paying stocks.
Question 24
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The time value of a call option is
I) the difference between the option's price and the value it
would have if it were expiring immediately.
II) the same as the present value of the option's expected
future cash flows.
III) the difference between the option's price and its expected
future value.
IV) different from the usual time value of money concept.
Select one:
a. I
b. I and II
c. II and III
d. II
e. I and IV
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The correct answer is: I and IV
Question 25
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An American-style call option with six months to maturity has
a strike price of $35. The underlying stock now sells for $43.
The call premium is $12.
If the option has delta of .5, what is its elasticity?
Select one:
a. 4.17
b. 2.32
c. 1.79
d. 0.5
e. 1.5
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The correct answer is: 1.79
You sold one oil future contract at $70 per barrel.
What would be your profit (loss) at maturity if the
oil spot price at that time is $73.12 per barrel?
Assume the contract size is 1,000 barrels and
there are no transactions costs.
Select one:
a. $3.12 profit
b. $31.20 profit
c. $3.12 loss
d. $31.20 loss
e. None of the options are correct.
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The correct answer is: None of the options are
correct.
Question 2
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Given a stock index with a value of $1,100, an
anticipated dividend of $27, and a risk-free rate
of 3%, what should be the value of one futures
contract on the index?
Select one:
a. $943.40
b. $970.00
c. $913.40
d. $1,106.00
e. $1,000.00
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The correct answer is: $1,106.00
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Which of the following is true about profits from
futures contracts?
Select one:
a. The person with the long position gets to decide
whether to exercise the futures contract and will
only do so if there is a profit to be made.
b. It is possible for both the holder of the long
position and the holder of the short position to
earn a profit.
c. The clearinghouse makes most of the profit.
d. The amount that the holder of the long position
gains must equal the amount that the holder of
the short position loses.
e. Holders of short positions can recognize profits
by making delivery early.
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The correct answer is: The amount that the
holder of the long position gains must equal the
amount that the holder of the short position
loses.
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Which one of the following statements regarding
"basis" is true?
I) The basis is the difference between the futures
price and the spot price.
II) The basis risk is borne by the hedger.
III) A short hedger suffers losses when the basis
decreases.
IV) The basis increases when the futures price
increases by more than the spot price.
Select one:
a. I only
b. II only
c. III only
d. IV only
e. I, II, and IV.
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The correct answer is: I, II, and IV.
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Some of the newer futures contracts include
I) fashion futures.
II) weather futures.
III) electricity futures.
IV) entertainment futures.
Select one:
a. I and II
b. II and III
c. III and IV
d. I, II, and III
e. I, III, and IV
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The correct answer is: II and III
Question 6
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To hedge a short position in Treasury bonds, an
investor would most likely
Select one:
a. ignore interest rate futures.
b. buy S&P futures.
c. buy interest rate futures.
d. sell Treasury bonds in the spot market.
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The correct answer is: buy interest rate futures.
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If you determine that the DAX-30 Index futures is
underpriced relative to the spot DAX-30 Index,
you could make an arbitrage profit by
Select one:
a. buying all the stocks in the DAX-30 and selling
put options on the DAX-30 Index.
b. selling short all the stocks in the DAX-30 and
buying DAX-30 futures.
c. selling all the stocks in the DAX-30 and buying
call options on the DAX-30 Index.
d. buying DAX-30 Index futures and selling all the
stocks in the DAX-30.
e. None of the options are correct.
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The correct answer is: buying DAX-30 Index
futures and selling all the stocks in the DAX-30.
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With regard to futures contracts, what does the
word "margin" mean?
Select one:
a. It is the amount of the money borrowed from the
broker when you buy the contract.
b. It is the maximum percentage that the price of
the contract can change before it is marked to
market.
c. It is the maximum percentage that the price of
the underlying asset can change before it is
marked to market.
d. It is a good-faith deposit made at the time of the
contract's purchase or sale.
e. It is the amount by which the contract is marked
to market.
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The correct answer is: It is a good-faith deposit
made at the time of the contract's purchase or
sale.
Question 9
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You hold one long oil futures contract that expires
in April. To close your position in oil futures before
the delivery date, you must
Select one:
a. buy one May oil futures contract.
b. buy two April oil futures contracts.
c. sell one April oil futures contract.
d. sell one May oil futures contract.
e. None of the options are correct.
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The correct answer is: sell one April oil futures
contract.
Question 10
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Who guarantees that a futures contract will be
fulfilled?
Select one:
a. The buyer
b. The seller
c. The broker
d. The clearinghouse
e. Nobody
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The correct answer is: The clearinghouse
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Given a stock index with a value of $1,125, an
anticipated dividend of $33, and a risk-free rate
of 4%, what should be the value of one futures
contract on the index?
Select one:
a. $1137.00
b. $1070.00
c. $993.40
d. $995.09
e. $1000.00
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The correct answer is: $1137.00
Question 12
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To exploit an expected decrease in interest rates,
an investor would most likely
Select one:
a. buy Treasury bond futures.
b. take a long position in wheat futures.
c. buy S&P 500 Index futures.
d. take a short position in Treasury bond futures.
e. None of the options are correct.
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The correct answer is: buy Treasury bond futures.
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If you took a long position in a pork bellies futures
contract and then forgot about it, what would
happen at the expiration of the contract?
Select one:
a. Nothing—the seller understands that these
things happen.
b. You would wake up to find the pork bellies on
your front lawn.
c. Your broker would send you a nasty letter.
d. You would be notified that you owe the holder of
the short position a certain amount of cash.
e. You would be notified that you have to pay a
penalty in addition to the regular cost of the pork
bellies.
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The correct answer is: You would be notified that
you owe the holder of the short position a certain
amount of cash.
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Financial futures contracts are actively traded on
the following indices except
Select one:
a. the All ordinary index.
b. the DAX 30 Index.
c. the CAC 40 Index.
d. the Toronto 35 Index.
e. All of the options are correct.
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The correct answer is: All of the options are
correct.
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Which of the following items is not specified in a
futures contract?
I) The contract size
II) The maximum acceptable price range during
the life of the contract
III) The acceptable grade of the commodity on
which the contract is held
IV) The market price at expiration
V) The settlement price
Select one:
a. II and IV
b. I, III, and V
c. I and V
d. I, IV, and V
e. I, II, III, IV, and V
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The correct answer is: II and IV
Question 16
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An investor with a short position in Treasury notes
futures will profit if
Select one:
a. interest rates decline.
b. interest rates increase.
c. the prices of Treasury notes increase.
d. the price of the long bond increases.
e. None of the options are correct.
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The correct answer is: interest rates increase.
Question 17
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Given a stock index with a value of $1,000, an
anticipated dividend of $30, and a risk-free rate
of 6%, what should be the value of one futures
contract on the index?
Select one:
a. $943.40
b. $970.00
c. $1,030.00
d. $915.09
e. $1,000.00
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The correct answer is: $1,030.00
Question 18
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You purchased one oil future contract at $70 per
barrel. What would be your profit (loss) at
maturity if the oil spot price at that time is $73.12
per barrel? Assume the contract size is 1,000
barrels and there are no transactions costs.
Select one:
a. $3.12 profit
b. $31.20 profit
c. $3.12 loss
d. $31.20 loss
e. None of the options are correct.
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The correct answer is: None of the options are
correct.
Question 19
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If a trader holding a long position in oil futures
fails to meet the obligations of a futures contract,
the party that is hurt by the failure is
Select one:
a. the offsetting short trader.
b. the oil producer.
c. the clearinghouse.
d. the broker.
e. the commodities dealer.
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The correct answer is: the clearinghouse.
Question 20
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Financial futures contracts are actively traded on
which of the following indices?
Select one:
a. The All ordinary index
b. The DAX 30 Index
c. The CAC 40 Index
d. The Toronto 35 Index
e. All of the options are correct.
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The correct answer is: All of the options are
correct.
Question 21
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Which of the following is false about profits from
futures contracts?
I) The person with the long position gets to
decide whether to exercise the futures contract
and will only do so if there is a profit to be made.
II) It is possible for both the holder of the long
position and the holder of the short position to
earn a profit.
III) The clearinghouse makes most of the profit.
IV) The amount that the holder of the long
position gains must equal the amount that the
holder of the short position loses.
Select one:
a. I only
b. II only
c. III only
d. IV only
e. I, II, and III
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The correct answer is: I, II, and III
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Which of the following items is specified in a
futures contract?
I) The contract size
II) The maximum acceptable price range during
the life of the contract
III) The acceptable grade of the commodity on
which the contract is held
IV) The market price at expiration
V) The settlement price
Select one:
a. I, II, and IV
b. I, III, and V
c. I and V
d. I, IV, and V
e. I, II, III, IV, and V
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The correct answer is: I, III, and V
Question 23
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On January 1, the listed spot and futures prices of
a Treasury bond were 95.4 and 95.6. You sold
$100,000 par value Treasury bonds and
purchased one Treasury bond futures contract.
One month later, the listed spot price and futures
prices were 95 and 94.4, respectively. If you were
to liquidate your position, your profits would be a
Select one:
a. $125 loss.
b. $125 profit.
c. $1,060.50 loss.
d. $1,062.50 profit.
e. None of the options are correct.
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The correct answer is: None of the options are
correct.
Question 24
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If you determine that the DAX-30 Index futures is
overpriced relative to the spot DAX-30 Index, you
could make an arbitrage profit by
Select one:
a. buying all the stocks in the DAX-30 and selling
put options on the DAX-30 Index.
b. selling short all the stocks in the DAX-30 and
buying DAX-30 futures.
c. selling all the stocks in the DAX-30 and buying
call options on the DAX-30 Index.
d. selling DAX-30 Index futures and buying all the
stocks in the DAX-30.
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The correct answer is: selling DAX-30 Index
futures and buying all the stocks in the DAX-30.
Question 25
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Given a stock index with a value of $1,200, an
anticipated dividend of $45, and a risk-free rate
of 6%, what should be the value of one futures
contract on the index?
Select one:
a. $1,227.00
b. $1,070.00
c. $993.40
d. $995.09
e. $1,000.00
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The correct answer is: $1,227.00
You purchased one wheat future contract at $3.04
per bushel. What would be your profit (loss) at
maturity if the wheat spot price at that time were
$2.98 per bushel? Assume the contract size is
5,000 bushels and there are no transactions
costs.
Select one:
a. $30 profit
b. $300 profit
c. $300 loss
d. $30 loss
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The correct answer is: $300 loss
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Given a stock index with a value of $1,125, an
anticipated dividend of $33, and a risk-free rate
of 4%, what should be the value of one futures
contract on the index?
Select one:
a. $1137.00
b. $1070.00
c. $993.40
d. $995.09
e. $1000.00
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The correct answer is: $1137.00
Question 3
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On January 1, you bought one April S&P 500
index futures contract at a futures price of 1,420.
If, on February 1, the April futures price was
1,430, what would be your profit (loss) if you
closed your position (without considering
transactions costs)?
Select one:
a. $2,500 loss
b. $10 loss
c. $2,500 profit
d. $10 profit
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The correct answer is: $2,500 profit
Question 4
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Taxation of futures trading gains and losses
Select one:
a. is based on cumulative year-end profits or losses.
b. occurs based on the date contracts are sold or
closed.
c. can be timed to offset stock-portfolio gains and
losses.
d. is based on the contract holding period.
e. None of the options are correct.
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The correct answer is: is based on cumulative
year-end profits or losses.
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Futures contracts are regulated by
Select one:
a. the Commodities Futures Trading Corporation.
b. the Chicago Board of Trade.
c. the Chicago Mercantile Exchange.
d. the Federal Reserve.
e. the Securities and Exchange Commission.
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The correct answer is: the Commodities Futures
Trading Corporation.
Question 6
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On April 1, you bought one S&P 500 Index futures
contract at a futures price of 1,550. If, on June 15,
the futures price was 1,612, what would be your
profit (loss) if you closed your position (without
considering transactions costs)?
Select one:
a. $1,550 loss
b. $15,550 loss
c. $15,550 profit
d. $1,550 profit
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The correct answer is: $15,550 profit
Question 7
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You sold one corn future contract at $2.29 per
bushel. What would be your profit (loss) at
maturity if the corn spot price at that time were
$2.10 per bushel? Assume the contract size is
5,000 bushels and there are no transactions
costs.
Select one:
a. $950 profit
b. $95 profit
c. $950 loss
d. $95 loss
e. None of the options are correct.
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The correct answer is: $950 profit
Question 8
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If a trader holding a long position in corn futures
fails to meet the obligations of a futures contract,
the party that is hurt by the failure is
Select one:
a. the offsetting short trader.
b. the corn farmer.
c. the clearinghouse.
d. the broker.
e. the commodities dealer.
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The correct answer is: the clearinghouse.
Question 9
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You bought one soybean future contract at $5.13
per bushel. What would be your profit (loss) at
maturity if the wheat spot price at that time were
$5.26 per bushel? Assume the contract size is
5,000 bushels and there are no transactions
costs.
Select one:
a. $65 profit
b. $650 profit
c. $650 loss
d. $65 loss
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The correct answer is: $650 profit
Question 10
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On January 1, you sold one April S&P 500 Index
futures contract at a futures price of 1,420. If, on
February 1, the April futures price was 1,430,
what would be your profit (loss) if you closed your
position (without considering transactions costs)?
Select one:
a. $2,500 loss
b. $10 loss
c. $2,500 profit
d. $10 profit
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The correct answer is: $2,500 loss
Question 11
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You purchased one corn future contract at $2.29
per bushel. What would be your profit (loss) at
maturity if the corn spot price at that time were
$2.10 per bushel? Assume the contract size is
5,000 bushels and there are no transactions
costs.
Select one:
a. $950 profit
b. $95 profit
c. $950 loss
d. $95 loss
e. None of the options are correct.
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The correct answer is: $950 loss
Question 12
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On January 1, the listed spot and futures prices of
a Treasury bond were 93.8 and 93.13. You
purchased $100,000 par value Treasury bonds
and sold one Treasury bond futures contract. One
month later, the listed spot price and futures
prices were 94 and 94.09, respectively. If you
were to liquidate your position, your profits would
be a
Select one:
a. $125 loss.
b. $125 profit.
c. $12.50 loss.
d. $1,250 loss.
e. None of the options are correct.
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The correct answer is: $125 loss.
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Open interest includes
Select one:
a. only contracts with a specified delivery date.
b. the sum of short and long positions.
c. the sum of short, long, and clearinghouse
positions.
d. the sum of long or short positions and
clearinghouse positions.
e. only long or short positions but not both.
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The correct answer is: only long or short positions
but not both.
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Given a stock index with a value of $1,500, an
anticipated dividend of $62 and a risk-free rate of
5.75%, what should be the value of one futures
contract on the index?
Select one:
a. $1,343.40
b. $62.00
c. $1,418.44
d. $1,524.25
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The correct answer is: $1,524.25
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The process of marking to market
Select one:
a. posts gains or losses to each account daily.
b. may result in margin calls.
c. impacts only long positions.
d. posts gains or losses to each account daily and
may result in margin calls.
e. All of the options are correct.
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The correct answer is: posts gains or losses to
each account daily and may result in margin
calls.
Question 16
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If you determine that the S&P 500 Index futures is
overpriced relative to the spot S&P 500 Index,
you could make an arbitrage profit by
Select one:
a. buying all the stocks in the S&P 500 and selling
put options on the S&P 500 Index.
b. selling short all the stocks in the S&P 500 and
buying S&P Index futures.
c. selling all the stocks in the S&P 500 and buying
call options on the S&P 500 Index.
d. selling S&P 500 Index futures and buying all the
stocks in the S&P 500.
e. None of the options are correct.
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The correct answer is: selling S&P 500 Index
futures and buying all the stocks in the S&P 500.
Question 17
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Given a stock index with a value of $1,000, an
anticipated dividend of $30, and a risk-free rate
of 6%, what should be the value of one futures
contract on the index?
Select one:
a. $943.40
b. $970.00
c. $1,030.00
d. $915.09
e. $1,000.00
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The correct answer is: $1,030.00
Question 18
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On April 1, you sold one S&P 500 Index futures
contract at a futures price of 1,550. If, on June 15,
the futures price was 1,612, what would be your
profit (loss) if you closed your position (without
considering transactions costs)?
Select one:
a. $1,550 loss
b. $15,550 loss
c. $15,550 profit
d. $1,550 profit
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The correct answer is: $15,550 loss
Question 19
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You sold one wheat future contract at $3.04 per
bushel. What would be your profit (loss) at
maturity if the wheat spot price at that time were
$2.98 per bushel? Assume the contract size is
5,000 bushels and there are no transactions
costs.
Select one:
a. $30 profit
b. $300 profit
c. $300 loss
d. $30 loss
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The correct answer is: $300 profit
Question 20
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The establishment of a futures market in a
commodity should not have a major impact on
spot prices because
Select one:
a. the futures market is small relative to the spot
market.
b. the futures market is illiquid.
c. futures are a zero-sum game.
d. the futures market is large relative to the spot
market.
e. most futures contracts do not take delivery.
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The correct answer is: futures are a zero-sum
game.
Question 21
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You sold one soybean future contract at $5.13 per
bushel. What would be your profit (loss) at
maturity if the wheat spot price at that time were
$5.26 per bushel? Assume the contract size is
5,000 bushels and there are no transactions
costs.
Select one:
a. $65 profit
b. $650 profit
c. $650 loss
d. $65 loss
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The correct answer is: $650 loss
Question 22
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You sold one silver future contract at $3 per
ounce. What would be your profit (loss) at
maturity if the silver spot price at that time is
$4.10 per ounce? Assume the contract size is
5,000 ounces and there are no transactions costs.
Select one:
a. $5.50 profit
b. $5,500 profit
c. $5.50 loss
d. $5,500 loss
e. None of the options are correct.
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The correct answer is: $5,500 loss
Question 23
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Speculators may use futures markets rather than
spot markets because
Select one:
a. transaction costs are lower in futures markets.
b. futures markets provide leverage.
c. spot markets are less efficient.
d. futures markets are less efficient.
e. transaction costs are lower in futures markets,
and futures markets provide leverage.
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The correct answer is: transaction costs are lower
in futures markets, and futures markets provide
leverage.
Question 24
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You purchased one silver future contract at $3 per
ounce. What would be your profit (loss) at
maturity if the silver spot price at that time is
$4.10 per ounce? Assume the contract size is
5,000 ounces and there are no transactions costs.
Select one:
a. $5.50 profit
b. $5,500 profit
c. $5.50 loss
d. $5,500 loss
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The correct answer is: $5,500 profit
Consider two bonds, F and G. Both bonds
presently are selling at their par value of $1,000.
Each pays interest of $90 annually. Bond F will
mature in 15 years while bond G will mature in 26
years. If the yields to maturity on the two bonds
change from 9% to 10%,
Select one:
a. both bonds will increase in value, but bond F will
increase more than bond G.
b. both bonds will increase in value, but bond G will
increase more than bond F.
c. both bonds will decrease in value, but bond F will
decrease more than bond G.
d. both bonds will decrease in value, but bond G will
decrease more than bond F.
e. None of the options are correct.
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The correct answer is: both bonds will decrease in
value, but bond G will decrease more than bond F.
Question 2
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One year ago, you purchased a newly-issued TIPS
bond that has a 4% coupon rate, five years to
maturity, and a par value of $1,000. The average
inflation rate over the year was 3.6%. What is the
amount of the coupon payment you will receive,
and what is the current face value of the bond?
Select one:
a. $40.00, $1,000
b. $41.44, $1,036
c. $40.00, $1,036
d. $36.00, $1,040
e. $76.00, $1,000
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The correct answer is: $41.44, $1,036
Question 3
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Swingin' Soiree, Inc. is a firm that has its main
office on the Right Bank in Paris. The firm just
issued bonds with a final payment amount that
depends on whether the Seine River floods. This
type of bond is known as
Select one:
a. a contingency bond.
b. a catastrophe bond.
c. an emergency bond.
d. an incident bond.
e. an eventuality bond.
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Catastrophe bonds are used to transfer risk from
the firm to the capital markets.
The correct answer is: a catastrophe bond.
Question 4
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A zero-coupon bond is one that
Select one:
a. effectively has a zero-percent coupon rate.
b. pays interest to the investor based on the
general level of interest rates rather than at a
specified coupon rate.
c. pays interest to the investor without requiring the
actual coupon to be mailed to the corporation.
d. is issued by state governments because they
don't have to pay interest.
e. is analyzed primarily by focusing ("zeroing in") on
the coupon rate.
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The correct answer is: effectively has a zeropercent coupon rate.
Question 5
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A convertible bond has a par value of $1,000 and
a current market value of $950. The current price
of the issuing firm's stock is $22, and the
conversion ratio is 40 shares. The bond's
conversion premium is
Select one:
a. $40.
b. $70.
c. $190.
d. $200.
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The correct answer is: $70.
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The process of retiring high-coupon debt and
issuing new bonds at a lower coupon to reduce
interest payments is called
Select one:
a. deferral.
b. reissue.
c. repurchase.
d. refunding.
e. None of the options are correct.
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The correct answer is: refunding.
Question 7
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A 7.5% coupon bond with an ask price of $100.00
pays interest every 182 days. If the bond paid
interest 62 days ago, the invoice price of the
bond would be
Select one:
a. $1,011.67.
b. $1,012.35.
c. $1,012.77.
d. $1,011.98.
e. $1,012.15.
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The correct answer is: $1,012.77.
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Altman’s Z scores are assigned based on a firm's
financial characteristics and are used to predict
Select one:
a. required coupon rates for new bond issues.
b. bankruptcy risk.
c. the likelihood of a firm becoming a takeover
target.
d. the probability of a bond issue being called.
e. None of the options are correct.
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The correct answer is: bankruptcy risk.
Question 9
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If a 7.5% coupon bond that pays interest every
182 days paid interest 62 days ago, the accrued
interest would be
Select one:
a. $11.67.
b. $12.35.
c. $12.77.
d. $11.98.
e. $12.15.
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The correct answer is: $12.77.
Question 10
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Bond analysts might be more interested in a
bond's yield to call if
Select one:
a. the bond's yield to maturity is insufficient.
b. the firm has called some of its bonds in the past.
c. the investor only plans to hold the bond until its
first call date.
d. interest rates are expected to rise.
e. interest rates are expected to fall.
Feedback
If interest rates fall the firm is more likely to call
the issue and refinance at lower rates. This is
similar to an individual refinancing a home. The
student has to think through each of the reasons
given and make the connection between falling
rates and the motivation to refinance.
The correct answer is: interest rates are expected
to fall.
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You purchased an annual interest coupon bond
one year ago that had nine years remaining to
maturity at that time. The coupon interest rate
was 10%, and the par value was $1,000. At the
time you purchased the bond, the yield to
maturity was 8%. If you sold the bond after
receiving the first interest payment and the yield
to maturity continued to be 8%, your annual total
rate of return on holding the bond for that year
would have been
Select one:
a. 8.00%.
b. 7.82%.
c. 7.00%.
d. 11.95%.
e. None of the options are correct.
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The correct answer is: 8.00%.
Question 12
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Subordination clauses in bond indentures
Select one:
a. may restrict the amount of additional borrowing
the firm can undertake.
b. are always bad for investors.
c. provide higher priority to senior creditors in the
event of bankruptcy.
d. may restrict the amount of additional borrowing
the firm can undertake and provide higher
priority to senior creditors in the event of
bankruptcy.
e. All of the options are true.
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The correct answer is: may restrict the amount of
additional borrowing the firm can undertake and
provide higher priority to senior creditors in the
event of bankruptcy.
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TIPS are
Select one:
a. securities formed from the coupon payments
only of government bonds.
b. securities formed from the principal payments
only of government bonds.
c. government bonds with par value linked to the
general level of prices.
d. government bonds with coupon rates linked to
the general level of prices.
e. zero-coupon government bonds.
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The correct answer is: government bonds with
par value linked to the general level of prices.
Question 14
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One year ago, you purchased a newly-issued TIPS
bond that has a 6% coupon rate, five years to
maturity, and a par value of $1,000. The average
inflation rate over the year was 4.2%. What is the
amount of the coupon payment you will receive,
and what is the current face value of the bond?
Select one:
a. $60.00, $1,000
b. $42.00, $1,042
c. $60.00, $1,042
d. $62.52, $1,042
e. $102.00, $1,000
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The correct answer is: $62.52, $1,042
Question 15
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One year ago, you purchased a newly-issued TIPS
bond that has a 5% coupon rate, five years to
maturity, and a par value of $1,000. The average
inflation rate over the year was 3.2%. What is the
amount of the coupon payment you will receive,
and what is the current face value of the bond?
Select one:
a. $50.00, $1,000
b. $32.00, $1,032
c. $50.00, $1,032
d. $32.00, $1,050
e. $51.60, $1,032
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The correct answer is: $51.60, $1,032
Question 16
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A 9% coupon bond with an ask price of 100:00
pays interest every 182 days. If the bond paid
interest 112 days ago, the invoice price of the
bond would be
Select one:
a. $1,027.69.
b. $1,027.35.
c. $1,026.77.
d. $1,027.98.
e. $1,028.15.
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The correct answer is: $1,027.69.
Question 17
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When a bond indenture includes a sinking fund
provision,
Select one:
a. firms must establish a cash fund for future bond
redemption.
b. bondholders always benefit because principal
repayment on the scheduled maturity date is
guaranteed.
c. bondholders may lose because their bonds can
be repurchased by the corporation at belowmarket prices.
d. firms must establish a cash fund for future bond
redemption, and bondholders always benefit
because principal repayment on the scheduled
maturity date is guaranteed.
e. None of the options are true.
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The correct answer is: bondholders may lose
because their bonds can be repurchased by the
corporation at below-market prices.
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Which of the following is not a type of
international bond?
Select one:
a. Samurai bonds
b. Yankee bonds
c. Bulldog bonds
d. Elton bonds
e. All of the options are international bonds.
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Samurai bonds, Yankee bonds, and bulldog bonds
are mentioned in the textbook.
The correct answer is: Elton bonds
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Three years ago, you purchased a bond for
$974.69. The bond had three years to maturity, a
coupon rate of 8%, paid annually, and a face
value of $1,000. Each year, you reinvested all
coupon interest at the prevailing reinvestment
rate shown in the table below. Today is the bond's
maturity date. What is your realized compound
yield on the bond?
Time
0
(purcha
se
date)
1
2
3
(maturi
ty
date)
Prevailing
Reinvestme
nt Rate
6.0%
7.2%
9.4%
8.2%
Select one:
a. 6.43%
b. 7.96%
c. 8.23%
d. 8.97%
e. 9.13%
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The correct answer is: 8.97%
Question 20
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You have just purchased a 7-year zero-coupon
bond with a yield to maturity of 11% and a par
value of $1,000. What would your rate of return
at the end of the year be if you sell the bond?
Assume the yield to maturity on the bond is 9%
at the time you sell.
Select one:
a. 10.00%
b. 23.8%
c. 13.8%
d. 1.4%
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The correct answer is: 23.8%
Question 21
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Convertible bonds
Select one:
a. give their holders the ability to share in price
appreciation of the underlying stock.
b. offer lower coupon rates than similar
nonconvertible bonds.
c. offer higher coupon rates than similar
nonconvertible bonds.
d. give their holders the ability to share in price
appreciation of the underlying stock and offer
lower coupon rates than similar nonconvertible
bonds.
e. give their holders the ability to share in price
appreciation of the underlying stock and offer
higher coupon rates than similar nonconvertible
bonds.
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The correct answer is: give their holders the
ability to share in price appreciation of the
underlying stock and offer lower coupon rates
than similar nonconvertible bonds.
Question 22
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What is the relationship between the price of a
straight bond and the price of a callable bond?
Select one:
a. The straight bond's price will be higher than the
callable bond's price for low interest rates.
b. The straight bond's price will be lower than the
callable bond's price for low interest rates.
c. The straight bond's price will change as interest
rates change, but the callable bond's price will
stay the same.
d. The straight bond and the callable bond will have
the same price.
e. There is no consistent relationship between the
two types of bonds.
Feedback
For low interest rates, the price difference is due
to the value of the firm's option to call the bond
at the call price. The firm is more likely to call the
issue at low interest rates, so the option is
valuable. At higher interest rates the firm is less
likely to call and this option loses value. The
prices converge for high interest rates. A
graphical representation is shown in Figure 14.4.
The correct answer is: The straight bond's price
will be higher than the callable bond's price for
low interest rates.
Question 23
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A coupon bond that pays interest of $40 semiannually has a par value of $1,000, matures in
four years, and is selling today at a $36 discount
from par value. The yield to maturity on this bond
is
Select one:
a. 8.69%.
b. 9.09%.
c. 10.43%.
d. 9.76%.
e. None of the options are correct.
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The correct answer is: 9.09%.
Question 24
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A convertible bond has a par value of $1,000 and
a current market price of $975. The current price
of the issuing firm's stock is $42, and the
conversion ratio is 22 shares. The bond's market
conversion value is
Select one:
a. $729.
b. $924.
c. $870.
d. $1,000.
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The correct answer is: $924.
Question 25
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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
Select one:
a. $1,005.67.
b. $1,007.35.
c. $1,006.35.
d. $1,006.15.
e. $1,007.12.
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The correct answer is: $1,006.15.
Question 26
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Collateralized bonds
Select one:
a. rely on the general earning power of the firm for
the bond's safety.
b. are backed by specific assets of the issuing firm.
c. are considered the safest variety of bonds.
d. are backed by specific assets of the issuing firm
and are generally considered the safest variety of
bonds.
e. All of the options are true.
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The correct answer is: are backed by specific
assets of the issuing firm and are generally
considered the safest variety of bonds.
Question 27
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A convertible bond has a par value of $1,000 and
a current market price of $1,105. The current
price of the issuing firm's stock is $20, and the
conversion ratio is 35 shares. The bond's market
conversion value is
Select one:
a. $700.
b. $810.
c. $870.
d. $1,000.
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The correct answer is: $700.
Question 28
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You have just purchased a 12-year zero-coupon
bond with a yield to maturity of 9% and a par
value of $1,000. What would your rate of return
at the end of the year be if you sell the bond?
Assume the yield to maturity on the bond is 10%
at the time you sell.
Select one:
a. 10.00%
b. 20.42%
c. -1.4%
d. 1.4%
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The correct answer is: -1.4%
Question 29
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A convertible bond has a par value of $1,000 and
a current market value of $1,150. The current
price of the issuing firm's stock is $65, and the
conversion ratio is 15 shares. The bond's
conversion premium is
Select one:
a. $40.
b. $150.
c. $175.
d. $200.
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The correct answer is: $175.
Question 30
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You purchased an annual interest coupon bond
one year ago that now has 18 years remaining
until maturity. The coupon rate of interest was
11%, and par value was $1,000. At the time you
purchased the bond, the yield to maturity was
10%. The amount you paid for this bond one year
ago was
Select one:
a. $1,057.50.
b. $1,075.50.
c. $1,083.65.
d. $1.092.46.
e. $1,104.13.
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The correct answer is: $1,083.65.
Question 31
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If a 7% coupon bond that pays interest every 182
days paid interest 32 days ago, the accrued
interest would be
Select one:
a. $5.67.
b. $7.35.
c. $6.35.
d. $6.15.
e. $7.12.
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The correct answer is: $6.15.
Question 32
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Debt securities are often called fixed-income
securities because
Select one:
a. the government fixes the maximum rate that can
be paid on bonds.
b. they are held predominantly by older people who
are living on fixed incomes.
c. they pay a fixed amount at maturity.
d. they promise either a fixed stream of income or a
stream of income determined by a specific
formula.
e. they were the first type of investment offered to
the public which allowed them to "fix" their
income at a higher level by investing in bonds.
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The correct answer is: they promise either a fixed
stream of income or a stream of income
determined by a specific formula.
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If a 9% coupon bond that pays interest every 182
days paid interest 112 days ago, the accrued
interest would be
Select one:
a. $27.69.
b. $27.35.
c. $26.77.
d. $27.98.
e. $28.15.
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The correct answer is: $27.69.
Question 34
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A coupon bond that pays interest of $90 annually
has a par value of $1,000, matures in nine years,
and is selling today at a $66 discount from par
value. The yield to maturity on this bond is
Select one:
a. 9.00%.
b. 10.15%.
c. 11.25%.
d. 12.32%.
e. None of the options are correct.
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The correct answer is: 10.15%.
A study by Mehra and Prescott (1985) found that
historical average excess returns
Select one:
a. have been too small to be consistent with
rational security pricing.
b. have been too large to be consistent with
rational security pricing.
c. have been too small to be consistent with
fractional security pricing.
d. prove CAPM is incorrect.
e. prove the market is efficient.
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They found that the average reward investors
have earned has been "too generous."
The correct answer is: have been too large to be
consistent with rational security pricing.
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Liew and Vassalou (2000) show that returns on
style portfolios (SMB and HML)
Select one:
a. seem like statistical flukes.
b. seem to predict GDP growth.
c. may be proxies for business cycle risk.
d. seem to predict GDP growth and may be proxies
for business cycle risk.
e. None of the options are correct.
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The correct answer is: seem to predict GDP
growth and may be proxies for business cycle
risk.
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Tests of the CAPM that use regression techniques
are subject to inaccuracies because
Select one:
a. the statistical results used are almost always
incorrect.
b. the slope coefficient of the regression equation is
biased downward.
c. the slope coefficient of the regression equation is
biased upward.
d. the intercept of the regression equation is biased
downward.
e. the intercept of the regression equation is equal
to the risk-free rate.
Feedback
This would be a problem even if it were possible
to use the returns on the true market portfolio in
these regressions. It is due to the fact that the
independent variable (the beta that is found in
the first-pass regression and used as the
independent variable in the second-pass
regression) is measured with error.
The correct answer is: the slope coefficient of the
regression equation is biased downward.
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The Fama-French model
I) is a useful tool for benchmarking performance
against a well-defined set of factors.
II) premia are determined by market irrationality.
III) premia are determined by rational risk factors.
IV) is the reason that the premia is unsettled.
V) is not a useful tool for benchmarking
performance against a well-defined set of factors.
Select one:
a. I only
b. V only
c. I and II
d. I and IV
e. II and V
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The correct answer is: I and IV
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Which of the following is a (are) result(s) of the
Fama and French (2002) study of the equity
premium puzzle?
I) Average realized returns during 1950-1999
exceeded the internal rate of return (IRR) for
corporate investments.
II) The statistical precision of average historical
returns is far higher than the precision of
estimates from the dividend-discount model
(DDM).
III) The reward-to-variability ratio (Sharpe)
derived from the DDM is far more stable than that
derived from realized returns.
IV) There is no difference between DDM estimates
and actual returns with regard to IRR, statistical
precision, or the Sharpe measure.
Select one:
a. I, II, and III
b. I and III
c. I and II
d. II and III
e. IV
Feedback
The study also predicts that future excess returns
will be significantly lower than those experienced
in recent decades. This has important
implications for current investors.
The correct answer is: I and III
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Studies by Chan, Karceski, and Lakonishok (2003)
and La Porta, Lakonishok, Shleifer, and Vishny
(1997) report that
Select one:
a. the value premium is a manifestation of market
irrationality.
b. the value premium is a rational risk premia.
c. the value premium is a statistical artifact found
only in the U.S.
d. All of the options are correct.
e. None of the options are correct.
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The correct answer is: the value premium is a
manifestation of market irrationality.
Question 7
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Equity premium puzzle studies may be subject to
survivorship bias because
Select one:
a. the time period covered was not long enough.
b. an inappropriate index was used.
c. the indexes used did not exist for the whole
period of the study.
d. both U.S. and foreign data were used.
e. only U.S. data was used.
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The correct answer is: only U.S. data was used.
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A major finding by Heaton and Lucas (2000) is
that
Select one:
a. the market rate of return does not help explain
the rate of return of individual securities, and
CAPM must be rejected.
b. the market rate of return does explain the rate of
return of individual securities.
c. the change in proprietary wealth helps explain
the rate of return of individual securities.
d. the market rate of return does not help explain
the rate of return of individual securities, and
CAPM must be rejected, but the change in
proprietary wealth helps explain the rate of return
of individual securities.
e. None of the options are correct.
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The correct answer is: the market rate of return
does not help explain the rate of return of
individual securities, and CAPM must be rejected,
but the change in proprietary wealth helps
explain the rate of return of individual securities.
Question 9
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An extension of the Fama-French three-factor
model was introduced by
Select one:
a. Black.
b. Scholes.
c. Carhart.
d. Jensen.
e. Miller.
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An extension of the Fama-French three-factor
model was introduced by Carhart.
The correct answer is: Carhart.
Question 10
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Petkova and Zhang (2005) examine the
relationship between beta and the market risk
premium and find
Select one:
a. a countercyclical beta is negative in good
economies and positive in bad economies.
b. the beta of the HML portfolio is negative in good
economies and positive in bad economies.
c. a cyclical beta is positive in good economies and
negative in bad economies.
d. the beta of the HML portfolio is positive in good
economies and negative in bad economies.
e. a countercyclical beta and the beta of the HML
portfolio are negative in good economies and
positive in bad economies.
Feedback
Petkova and Zhang (2005) examine the
relationship between beta and the market risk
premium and find a countercyclical beta and the
beta of the HML portfolio are negative in good
economies and positive in bad economies.
The correct answer is: a countercyclical beta and
the beta of the HML portfolio are negative in good
economies and positive in bad economies.
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An extension of the Fama-French three-factor
model includes a fourth factor to measure
Select one:
a. default spread.
b. term spread.
c. momentum.
d. industrial production.
e. inflation.
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An extension of the Fama-French three-factor
model includes a fourth factor to measure
momentum.
The correct answer is: momentum.
Question 12
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Fama and French (2002) studied the equity
premium puzzle by breaking their sample into
subperiods and found that
Select one:
a. the equity premium was largest throughout the
entire 1872-1999 period.
b. the equity premium was largest during the 18721949 subperiod.
c. the equity premium was largest during the 19501999 subperiod.
d. the differences in equity premiums for the three
time periods were statistically insignificant.
e. the constant-growth dividend-discount model
never works.
Feedback
They concluded that the equity premium puzzle
has occurred mostly in modern times. This may
be due to the difference between the dividenddiscount model's (DDM) result of expected return
in comparison to actual returns earned. The DDM
yields a smaller risk premium during the 19501999 period, while actual returns have been
higher. This may be due to unanticipated capital
gains.
The correct answer is: the equity premium was
largest during the 1950-1999 subperiod.
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Which of the following must be done to test the
multifactor CAPM or the APT?
I) Specify the risk factors
II) Identify portfolios that hedge the risk factors
III) Test the explanatory power of hedge portfolios
IV) Test the risk premiums of hedge portfolios
Select one:
a. I and II
b. II and IV
c. II and III
d. I, II, and IV
e. I, II, III, and IV
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The correct answer is: I, II, III, and IV
Question 14
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Liquidity embodies several characteristics, such
as
Select one:
a. trading costs.
b. ease of sale.
c. market depth.
d. necessary price concessions to effect a quick
transaction.
e. All of the options are correct.
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The correct answer is: All of the options are
correct.
The capital market line
I) is a special case of the capital allocation line.
II) represents the opportunity set of a passive
investment strategy.
III) has the one-month T-Bill rate as its intercept.
IV) uses a broad index of common stocks as its
risky portfolio.
Select one:
a. I, III, and IV
b. II, III, and IV
c. III and IV
d. I, II, and III
e. I, II, III, and IV
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The correct answer is: I, II, III, and IV
Question 2
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You invest $100 in a risky asset with an expected
rate of return of 0.11 and a standard deviation of
0.20 and a T-bill with a rate of return of 0.03.
What percentages of your money must be
invested in the risk-free asset and the risky asset,
respectively, to form a portfolio with a standard
deviation of 0.08?
Select one:
a. 30% and 70%
b. 50% and 50%
c. 60% and 40%
d. 40% and 60%
e. Cannot be determined.
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The correct answer is: 60% and 40%
Question 3
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Consider the following probability distribution for
stocks C and D:
Stat Probabilit Return on Return on
e
y
Stock C Stock D
0.3
1
7%
– 9%
0
0.5
2
11%
14%
0
0.2
3
–16%
26%
0
The coefficient of correlation between C and D is
Select one:
a. 0.67.
b. 0.50.
c. –0.50.
d. –0.67.
e. None of the options are correct.
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The correct answer is: –0.50.
Question 4
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Security X has expected return of 14% and
standard deviation of 22%. Security Y has
expected return of 16% and standard deviation of
28%. If the two securities have a correlation
coefficient of 0.8, what is their covariance?
Select one:
a. 0.038
b. 0.049
c. 0.018
d. 0.013
e. 0.054
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The correct answer is: 0.049
Question 5
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Suppose the following equation best describes
the evolution of β over time:
βt = 0.30 + 0.70βt –
1
If a stock had a β of 0.82 last year, you would
forecast the β to be _______ in the coming year.
Select one:
a. 0.91
b. 0.77
c. 0.63
d. 0.87
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The correct answer is: 0.87
Question 6
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Assume that stock market returns do follow a
single-index structure. An investment fund
analyzes 125 stocks in order to construct a meanvariance efficient portfolio constrained by 125
investments. They will need to calculate ________
estimates of expected returns and ________
estimates of sensitivity coefficients to the
macroeconomic factor.
Select one:
a. 125; 15,225
b. 15,625; 125
c. 7,750; 125
d. 125; 125
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For a single-index model, n(125), expected
returns and n(125) sensitivity coefficients to the
macroeconomic factor must be estimated.
The correct answer is: 125; 125
Question 7
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The security market line (SML) is
Select one:
a. the line that describes the expected return-beta
relationship for well-diversified portfolios only.
b. also called the capital allocation line.
c. the line that is tangent to the efficient frontier of
all risky assets.
d. the line that represents the expected return-beta
relationship.
e. All of the options.
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The correct answer is: the line that represents the
expected return-beta relationship.
Question 8
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Assume that a security is fairly priced and has an
expected rate of return of 0.17. The market
expected rate of return is 0.11, and the risk-free
rate is 0.04. The beta of the stock is
Select one:
a. 1.25.
b. 1.86.
c. 1.
d. 0.95.
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The correct answer is: 1.86.
Question 9
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The APT differs from the CAPM because the APT
Select one:
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.
Feedback
The CAPM assumes that market returns represent
systematic risk. The APT recognizes that other
macroeconomic factors may be systematic risk
factors.
The correct answer is: recognizes multiple
systematic risk factors.
Question 10
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Consider the multifactor APT with two factors.
Stock A has an expected return of 16.4%, a beta
of 1.4 on factor 1, and a beta of .8 on factor 2.
The risk premium on the factor-1 portfolio is 3%.
The risk-free rate of return is 6%. What is the risk-
premium on factor 2 if no arbitrage opportunities
exist?
Select one:
a. 2%
b. 3%
c. 4%
d. 7.75%
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The correct answer is: 7.75%
Which of the following statements regarding the
Dow Jones Industrial Average (DJIA) is false?
Select one:
a. The DJIA is not very representative of the market
as a whole.
b. The DJIA consists of 30 blue chip stocks.
c. The DJIA is affected equally by changes in lowand high-priced stocks.
d. The DJIA divisor needs to be adjusted for stock
splits.
e. The value of the DJIA is much higher than
individual stock prices.
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The high-priced stocks have much more impact
on the DJIA than do the lower-priced stocks.
The correct answer is: The DJIA is affected equally
by changes in low- and high-priced stocks.
Question 2
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The ____ is an example of a U.S. index of large
firms.
Select one:
a. Wilshire 5000
b. DJIA
c. DAX
d. Russell 2000
e. All of the options.
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The correct answer is: DJIA
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You sold short 300 shares of common stock at
$55 per share. The initial margin is 60%. At what
stock price would you receive a margin call if the
maintenance margin is 35%?
Select one:
a. $51.00
b. $65.19
c. $35.22
d. $40.36
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The correct answer is: $65.19
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Assume that you purchased shares of a mutual
fund at a net asset value of $10.00 per share.
During the year, you received dividend income
distributions of $0.05 per share and capital gains
distributions of $0.06 per share. At the end of the
year, the shares had a net asset value of $8.16
per share. What was your rate of return on this
investment?
Select one:
a. –18.24%
b. –16.1%
c. 16.10%
d. –17.3%
e. 17.3%
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The correct answer is: –17.3%
Question 5
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Pinnacle Fund had year-end assets of
$825,000,000 and liabilities of $25,000,000. If
Pinnacle's NAV was $32.18, how many shares
must have been held in the fund?
Select one:
a. 21,619,346.92
b. 22,930,546.28
c. 24,860,161.59
d. 25,693,645.25
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The correct answer is: 24,860,161.59
Question 6
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Annual percentage rates (APRs) are computed
using
Select one:
a. simple interest.
b. compound interest.
c. either simple interest or compound interest.
d. best estimates of expected real costs.
e. None of the options are correct.
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The correct answer is: simple interest.
Question 7
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An investor purchased a bond 63 days ago for
$980. He received $17 in interest and sold the
bond for $987. What is the holding-period return
on his investment?
Select one:
a. 1.52%
b. 2.45%
c. 1.92%
d. 2.68%
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The correct answer is: 2.45%
Question 8
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If a portfolio had a return of 15%, the risk-free
asset return was 5%, and the standard deviation
of the portfolio's excess returns was 30%, the
Sharpe measure would be
Select one:
a. 0.20.
b. 0.35.
c. 0.45.
d. 0.33.
e. 0.25.
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The correct answer is: 0.33.
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A portfolio has an expected rate of return of 0.15
and a standard deviation of 0.15. The risk-free
rate is 6%. An investor has the following utility
function: U = E(r) - (A/2)s2. Which value
of A makes this investor indifferent between the
risky portfolio and the risk-free asset?
Select one:
a. 5
b. 6
c. 7
d. 8
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The correct answer is: 8
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Which of the following statement(s)
is(are) false regarding the variance of a portfolio
of two risky securities?
I) The higher the coefficient of correlation
between securities, the greater the reduction in
the portfolio variance.
II) There is a linear relationship between the
securities' coefficient of correlation and the
portfolio variance.
III) The degree to which the portfolio variance is
reduced depends on the degree of correlation
between securities.
Select one:
a. I only
b. II only
c. III only
d. I and II
e. I and III
Feedback
The lower the correlation between the returns of
the securities, the more portfolio risk is reduced.
The correct answer is: I and II
The elasticity of an option is
Select one:
a. the volatility level for the stock that the option
price implies.
b. the continued updating of the hedge ratio as
time passes.
c. the percentage change in the stock call-option
price divided by the percentage change in the
stock price.
d. the sensitivity of the delta to the stock price.
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The correct answer is: the percentage change in
the stock call-option price divided by the
percentage change in the stock price.
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If the hedge ratio for a stock call is 0.60, the
hedge ratio for a put with the same expiration
date and exercise price as the call would be
Select one:
a. 0.60.
b. 0.40.
c. −0.60.
d. −0.40.
e. −0.17.
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The correct answer is: −0.40.
Question 3
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Dynamic hedging is
Select one:
a. the volatility level for the stock that the option
price implies.
b. the continued updating of the hedge ratio as
time passes.
c. the percentage change in the stock call-option
price divided by the percentage change in the
stock price.
d. the sensitivity of the delta to the stock price.
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The correct answer is: the continued updating of
the hedge ratio as time passes.
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Delta neutral
Select one:
a. is the volatility level for the stock that the option
price implies.
b. is the continued updating of the hedge ratio as
time passes.
c. is the percentage change in the stock call-option
price divided by the percentage change in the
stock price.
d. means the portfolio has no tendency to change
value as the underlying portfolio value changes.
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The correct answer is: means the portfolio has no
tendency to change value as the underlying
portfolio value changes.
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A portfolio consists of 400 shares of stock and
200 calls on that stock. If the hedge ratio for the
call is 0.6, what would be the dollar change in the
value of the portfolio in response to a $1 decline
in the stock price?
Select one:
a. +$700
b. +$500
c. −$580
d. −$520
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The correct answer is: −$520
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The gamma of an option is
Select one:
a. the volatility level for the stock that the option
price implies.
b. the continued updating of the hedge ratio as
time passes.
c. the percentage change in the stock call-option
price divided by the percentage change in the
stock price.
d. the sensitivity of the delta to the stock price.
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The correct answer is: the sensitivity of the delta
to the stock price.
Question 7
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A $1 decrease in a call option's exercise price
would result in a
__________ in the call option's
value of __________ one dollar.
Select one:
a. increase; more than
b. decrease; more than
c. decrease; less than
d. increase; less than
e. increase; exactly
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The correct answer is: increase; less than
Question 8
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A portfolio consists of 800 shares of stock and
100 calls on that stock. If the hedge ratio for the
call is 0.5, what would be the dollar change in the
value of the portfolio in response to a $1 decline
in the stock price?
Select one:
a. +$700
b. −$850
c. −$580
d. −$520
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The correct answer is: −$850
Question 9
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A put option is currently selling for $6 with an
exercise price of $50. If the hedge ratio for the
put is -0.30, and the stock is currently selling for
$46, what is the elasticity of the put?
Select one:
a. 2.76
b. 2.30
c. −7.67
d. −2.76
e. −2.30
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The correct answer is: −2.30
Question 10
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If the hedge ratio for a stock call is 0.30, the
hedge ratio for a put with the same expiration
date and exercise price as the call would be
Select one:
a. 0.70.
b. 0.30.
c. −0.70.
d. −0.30.
e. −0.17.
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The correct answer is: −0.70.
Question 11
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If the hedge ratio for a stock call is 0.50, the
hedge ratio for a put with the same expiration
date and exercise price as the call would be
Select one:
a. 0.30.
b. 0.50.
c. −0.60.
d. −0.50.
e. −0.17.
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The correct answer is: −0.50.
Question 12
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Volatility risk is
Select one:
a. the volatility level for the stock that the option
price implies.
b. the risk incurred from unpredictable changes in
volatility.
c. the percentage change in the stock call-option
price divided by the percentage change in the
stock price.
d. the sensitivity of the delta to the stock price.
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The correct answer is: the risk incurred from
unpredictable changes in volatility.
Question 13
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Portfolio A consists of 400 shares of stock and
400 calls on that stock. Portfolio B consists of 500
shares of stock. The call delta is 0.5. Which
portfolio has a higher dollar exposure to a change
in stock price?
Select one:
a. Portfolio B
b. Portfolio A
c. The two portfolios have the same exposure.
d. Portfolio A if the stock price increases and
portfolio B if it decreases
e. Portfolio B if the stock price increases and
portfolio A if it decreases
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The correct answer is: Portfolio A
Question 14
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A portfolio consists of 100 shares of stock and
1500 calls on that stock. If the hedge ratio for the
call is 0.7, what would be the dollar change in the
value of the portfolio in response to a $1 decline
in the stock price?
Select one:
a. +$700
b. +$500
c. −$1,150
d. −$520
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The correct answer is: −$1,150
Question 15
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The dollar change in the value of a stock call
option is always
Select one:
a. lower than the dollar change in the value of the
stock.
b. higher than the dollar change in the value of the
stock.
c. negatively correlated with the change in the
value of the stock.
d. higher than the dollar change in the value of the
stock and negatively correlated with the change
in the value of the stock.
e. lower than the dollar change in the value of the
stock and negatively correlated with the change
in the value of the stock.
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The correct answer is: lower than the dollar
change in the value of the stock.
Question 16
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If the hedge ratio for a stock call is 0.70, the
hedge ratio for a put with the same expiration
date and exercise price as the call would be
Select one:
a. 0.70.
b. 0.30.
c. −0.70.
d. −0.30.
e. −0.17.
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The correct answer is: −0.30.
Question 17
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Portfolio A consists of 500 shares of stock and
500 calls on that stock. Portfolio B consists of 800
shares of stock. The call delta is 0.6. Which
portfolio has a higher dollar exposure to a change
in stock price?
Select one:
a. Portfolio B
b. Portfolio A
c. The two portfolios have the same exposure.
d. Portfolio A if the stock price increases and
portfolio B if it decreases
e. Portfolio B if the stock price increases and
portfolio A if it decreases
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The correct answer is: The two portfolios have the
same exposure.
Question 18
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Portfolio A consists of 150 shares of stock and
300 calls on that stock. Portfolio B consists of 575
shares of stock. The call delta is 0.7. Which
portfolio has a higher dollar exposure to a change
in stock price?
Select one:
a. Portfolio B
b. Portfolio A
c. The two portfolios have the same exposure.
d. Portfolio A if the stock price increases and
portfolio B if it decreases
e. Portfolio B if the stock price increases and
portfolio A if it decreases
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The correct answer is: Portfolio B
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A portfolio consists of 225 shares of stock and
300 calls on that stock. If the hedge ratio for the
call is 0.4, what would be the dollar change in the
value of the portfolio in response to a $1 decline
in the stock price?
Select one:
a. -$345
b. +$500
c. −$580
d. −$520
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The correct answer is: -$345
Question 20
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A put option on the S&P 500 Index will best
protect a portfolio
Select one:
a. of 100 shares of IBM stock.
b. of 50 bonds.
c. that corresponds to the S&P 500.
d. of 50 shares of AT&T and 50 shares of Xerox
stocks.
e. that replicates the Dow.
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The correct answer is: that corresponds to the
S&P 500.
Question 21
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The elasticity of a stock call option is always
Select one:
a. greater than one.
b. smaller than one.
c. negative.
d. infinite.
e. None of the options are correct.
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The correct answer is: greater than one.
Question 22
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Which one of the following variables influences
the value of put options?
I) Level of interest rates
II) Time to expiration of the option
III) Dividend yield of underlying stock
IV) Stock price volatility
Select one:
a. I and IV only
b. II and III only
c. I, II, and IV only
d. I, II, III, and IV
e. I, II, and III only
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The correct answer is: I, II, III, and IV
Question 23
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An American call-option buyer on a nondividendpaying stock will
Select one:
a. always exercise the call as soon as it is in the
money.
b. only exercise the call when the stock price
exceeds the previous high.
c. never exercise the call early.
d. buy an offsetting put whenever the stock price
drops below the strike price.
e. None of the options are correct.
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The correct answer is: never exercise the call
early.
Question 24
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Which one of the following variables influences
the value of call options?
I) Level of interest rates
II) Time to expiration of the option
III) Dividend yield of underlying stock
IV) Stock price volatility
Select one:
a. I and IV only
b. II and III only
c. I, II, and IV only
d. I, II, III, and IV
e. I, II, and III only
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The correct answer is: I, II, III, and IV
Question 25
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Portfolio A consists of 600 shares of stock and
300 calls on that stock. Portfolio B consists of 685
shares of stock. The call delta is 0.3. Which
portfolio has a higher dollar exposure to a change
in stock price?
Select one:
a. Portfolio B
b. Portfolio A
c. The two portfolios have the same exposure.
d. Portfolio A if the stock price increases, and
portfolio B if it decreases
e. Portfolio B if the stock price increases, and
portfolio A if it decreases
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The correct answer is: Portfolio A
Question 26
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Relative to European puts, otherwise identical
American put options
Select one:
a. are less valuable.
b. are more valuable.
c. are equal in value.
d. will always be exercised earlier.
e. None of the options are correct.
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The correct answer is: are more valuable.
Question 27
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The elasticity of a stock put option is always
Select one:
a. positive.
b. smaller than one.
c. negative.
d. infinite.
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The correct answer is: negative.
Question 28
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The percentage change in the stock call-option
price divided by the percentage change in the
stock price is called
Select one:
a. the elasticity of the option.
b. the delta of the option.
c. the theta of the option.
d. the gamma of the option.
Feedback
correct
The correct answer is: the elasticity of the option.
1-Year
Ye Forwar
ar d Rate
1
5%
2 5.5%
3 6.0%
4 6.5%
5 7.0%
Calculate the price at the beginning of year 1 of
an 8% annual coupon bond with face value
$1,000 and 5 years to maturity.
Select one:
a. $1,105.47
b. $1,131.91
c. $1,084.25
d. $1,150.01
e. $719.75
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The correct answer is: $1,084.25
Question 2
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Ye
ar
1
2
3
4
5
1-Year
Forwar
d Rate
5%
5.5%
6.0%
6.5%
7.0%
What would the yield to maturity be on a fouryear zero-coupon bond purchased today?
Select one:
a. 5.75%
b. 6.30%
c. 5.65%
d. 5.25%
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correct
The correct answer is: 5.75%
Question 3
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Ye
ar
1
2
3
4
1-Year
Forwar
d Rate
4.6%
4.9%
5.2%
5.5%
5
6.8%
What should the purchase price of a 1-year zerocoupon bond be if it is purchased today and has
face value of $1,000?
Select one:
a. $966.37
b. $912.87
c. $950.21
d. $956.02
e. $945.51
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correct
The correct answer is: $956.02
Question 4
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Ye
ar
1
2
3
4
5
1-Year
Forwar
d Rate
4.6%
4.9%
5.2%
5.5%
6.8%
What is the yield to maturity of a 3-year bond?
Select one:
a. 4.6%
b. 4.9%
c. 5.2%
d. 5.5%
e. 5.8%
Feedback
correct
The correct answer is: 4.9%
Question 5
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Ye
ar
1
2
3
4
5
1-Year
Forwar
d Rate
4.6%
4.9%
5.2%
5.5%
6.8%
What is the yield to maturity of a 5-year bond?
Select one:
a. 4.6%
b. 4.9%
c. 5.2%
d. 5.5%
e. 5.8%
Feedback
correct
The correct answer is: 5.5%
Question 6
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Ye
ar
1
2
3
4
5
1-Year
Forwar
d Rate
5%
5.5%
6.0%
6.5%
7.0%
What should the purchase price of a 2-year zerocoupon bond be if it is purchased at the
beginning of year 2 and has face value of $1,000?
Select one:
a. $877.54
b. $888.33
c. $883.32
d. $894.21
e. $871.80
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correct
The correct answer is: $894.21
Question 7
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Ye
ar
1
2
3
4
5
1-Year
Forwar
d Rate
4.6%
4.9%
5.2%
5.5%
6.8%
What should the purchase price of a 2-year zerocoupon bond be if it is purchased today and has
face value of $1,000?
Select one:
a. $966.87
b. $911.37
c. $950.21
d. $956.02
e. $945.51
Feedback
correct
The correct answer is: $911.37
Question 8
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Given the yield on a 3-year zero-coupon bond is
7% and forward rates of 6% in year 1 and 6.5% in
year 2, what must be the forward rate in year 3?
Select one:
a. 7.2%
b. 8.6%
c. 8.5%
d. 6.9%
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correct
The correct answer is: 8.5%
Question 9
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Ye
ar
1
2
3
4
5
1-Year
Forwar
d Rate
4.6%
4.9%
5.2%
5.5%
6.8%
What should the purchase price of a 4-year zerocoupon bond be if it is purchased today and has
face value of $1,000?
Select one:
a. $887.42
b. $821.15
c. $879.54
d. $856.02
e. $866.32
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correct
The correct answer is: $821.15
Question 10
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Ye
ar
1
2
3
4
5
1-Year
Forwar
d Rate
4.6%
4.9%
5.2%
5.5%
6.8%
What is the yield to maturity of a 2-year bond?
Select one:
a. 4.6%
b. 4.9%
c. 5.2%
d. 4.7%
e. 5.8%
Feedback
correct
The correct answer is: 4.7%
Question 11
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Ye
ar
1
2
3
4
5
1-Year
Forwar
d Rate
4.6%
4.9%
5.2%
5.5%
6.8%
What should the purchase price of a 3-year zerocoupon bond be if it is purchased today and has
face value of $1,000?
Select one:
a. $887.42
b. $871.12
c. $879.54
d. $856.02
e. $866.32
Feedback
correct
The correct answer is: $866.32
Question 12
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Ye
ar
1
2
3
1-Year
Forwar
d Rate
4.6%
4.9%
5.2%
4
5
5.5%
6.8%
What should the purchase price of a 5-year zerocoupon bond be if it is purchased today and has
face value of $1,000?
Select one:
a. $776.14
b. $721.15
c. $779.54
d. $756.02
e. $766.32
Feedback
correct
The correct answer is: $766.32
Question 13
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Ye
ar
1
2
3
4
5
1-Year
Forwar
d Rate
4.6%
4.9%
5.2%
5.5%
6.8%
What is the yield to maturity of a 1-year bond?
Select one:
a. 4.6%
b. 4.9%
c. 5.2%
d. 5.5%
e. 5.8%
Feedback
correct
The correct answer is: 4.6%
Question 14
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Ye
ar
1
2
3
4
5
1-Year
Forwar
d Rate
4.6%
4.9%
5.2%
5.5%
6.8%
What is the yield to maturity of a 4-year bond?
Select one:
a. 4.69%
b. 4.95%
c. 5.02%
d. 5.05%
e. 5.08%
Feedback
correct
The correct answer is: 5.05%
The current market price of a share of TSCO stock
is $75. If a put option on this stock has a strike
price of $79, the put
Select one:
a. is out of the money.
b. is in the money.
c. can be exercised profitably.
d. is out of the money and can be exercised
profitably.
e. is in the money and can be exercised profitably.
Feedback
If the striking price on a put option is more than
the market price, the option is in the money and
can be profitably exercised.
The correct answer is: is in the money and can be
exercised profitably.
Question 2
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You purchase one September 50 put contract for
a put premium of $2. What is the maximum profit
that you could gain from this strategy?
Select one:
a. $4,800
b. $200
c. $5,000
d. $5,200
e. None of the options are correct.
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The correct answer is: $4,800
Question 3
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The current market price of a share of Boeing
stock is $75. If a call option on this stock has a
strike price of $70, the call
Select one:
a. is out of the money.
b. is in the money.
c. sells for a higher price than if the market price of
Boeing stock is $70.
d. is out of the money and sells for a higher price
than if the market price of Boeing stock is $70.
e. is in the money and sells for a higher price than if
the market price of Boeing stock is $70.
Feedback
If the striking price on a call option is less than
the market price, the option is in the money and
sells for more than an at the money option.
The correct answer is: is in the money and sells
for a higher price than if the market price of
Boeing stock is $70.
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The current market price of a share of JNJ stock is
$60. If a put option on this stock has a strike price
of $55, the put
Select one:
a. is in the money.
b. is out of the money.
c. sells for a lower price than if the market price of
JNJ stock is $50.
d. is in the money and sells for a lower price than if
the market price of JNJ stock is $50.
e. is out of the money and sells for a lower price
than if the market price of JNJ stock is $50.
Feedback
If the striking price on a put option is less than
the market price, the option is out of the money
and sells for less than an in the money option.
The correct answer is: is out of the money and
sells for a lower price than if the market price of
JNJ stock is $50.
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The current market price of a share of AT&T stock
is $50. If a call option on this stock has a strike
price of $45, the call
Select one:
a. is out of the money.
b. is in the money.
c. sells for a higher price than if the market price of
AT&T stock is $40.
d. is out of the money and sells for a higher price
than if the market price of AT&T stock is $40.
e. is in the money and sells for a higher price than if
the market price of AT&T stock is $40.
Feedback
If the striking price on a call option is less than
the market price, the option is in the money and
sells for more than an out of the money option.
The correct answer is: is in the money and sells
for a higher price than if the market price of AT&T
stock is $40.
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You purchased one AT&T March 50 put and sold
one AT&T April 50 put. Your strategy is known as
Select one:
a. a vertical spread.
b. a straddle.
c. a time spread.
d. a collar.
Feedback
A time spread involves the simultaneous
purchase and sale of options with different
expiration dates, same exercise price.
The correct answer is: a time spread.
Question 7
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The value of a stock put option is positively
related to the following factors except
Select one:
a. the time to expiration.
b. the striking price.
c. the stock price.
d. All of the options are correct.
e. None of the options are correct.
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The correct answer is: the stock price.
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Suppose you purchase one WFM May 100 call
contract at $5 and write one WFM May 105 call
contract at $2.
What is the lowest stock price at which you can
break even?
Select one:
a. $101
b. $102
c. $103
d. $104
e. None of the options are correct.
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The correct answer is: $103
Question 9
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The current market price of a share of Boeing
stock is $75. If a put option on this stock has a
strike price of $70, the put
Select one:
a. is out of the money.
b. is in the money.
c. sells for a higher price than if the market price of
Boeing stock is $70.
d. is out of the money and sells for a higher price
than if the market price of Boeing stock is $70.
e. is in the money and sells for a higher price than if
the market price of Boeing stock is $70.
Feedback
If the striking price on a put option is less than
the market price, the option is out of the money
and sells for less than an at the money option.
The correct answer is: is out of the money.
Question 10
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The current market price of a share of CAT stock
is $76. If a call option on this stock has a strike
price of $76, the call
Select one:
a. is out of the money.
b. is in the money.
c. is at the money.
d. None of the options are correct.
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The correct answer is: is at the money.
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You purchase one June 70 put contract for a put
premium of $4. What is the maximum profit that
you could gain from this strategy?
Select one:
a. $7,000
b. $400
c. $7,400
d. $6,600
e. None of the options are correct.
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The correct answer is: $6,600
Question 12
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Suppose the price of a share of IBM stock is $200.
An April call option on IBM stock has a premium
of $5 and an exercise price of $200. Ignoring
commissions, the holder of the call option will
earn a profit if the price of the share
Select one:
a. increases to $204.
b. decreases to $190.
c. increases to $206.
d. decreases to $196.
e. None of the options are correct.
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The correct answer is: increases to $206.
Question 13
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A covered call position is
Select one:
a. the simultaneous purchase of the call and the
underlying asset.
b. the purchase of a share of stock with a
simultaneous sale of a put on that stock.
c. the short sale of a share of stock with a
simultaneous sale of a call on that stock.
d. the purchase of a share of stock with a
simultaneous sale of a call on that stock.
e. the simultaneous purchase of a call and sale of a
put on the same stock.
Feedback
Writing a covered call is a very safe strategy, as
the writer owns the underlying stock. The only
risk to the writer is that the stock will be called
away, thus limiting the upside potential.
The correct answer is: the purchase of a share of
stock with a simultaneous sale of a call on that
stock.
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You purchased one AT&T March 50 call and sold
one AT&T March 55 call. Your strategy is known
as
Select one:
a. a long straddle.
b. a horizontal spread.
c. a money spread.
d. a short straddle.
e. None of the options are correct.
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The correct answer is: a money spread.
Question 15
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The following price quotations were taken from
the Wall Street Journal.
Stoc Stri
k
ke
Pric Pric
e
e
917
85
/8
917
90
/8
917
95
/8
Febru
ary
73/8
31/8
5/8
The premium on one February 90 call contract is
Select one:
a. $3.1250.
b. $318.00.
c. $312.50.
d. $58.00.
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The correct answer is: $312.50.
Question 16
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The Option Clearing Corporation is owned by
Select one:
a. the Federal Reserve System.
b. the exchanges on which stock options are
traded.
c. the major U.S. banks.
d. the Federal Deposit Insurance Corporation.
Feedback
The exchanges on which options are traded
jointly own the Option Clearing Corporation in
order to facilitate option trading.
The correct answer is: the exchanges on which
stock options are traded.
Question 17
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You write one AT&T February 50 put for a
premium of $5. Ignoring transactions costs, what
is the break-even price of this position?
Select one:
a. $50
b. $55
c. $45
d. $40
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The correct answer is: $45
Question 18
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You purchase one IBM 200 call option for a
premium of $6. Ignoring transaction costs, the
break-even price of the position is
Select one:
a. $194.
b. $228.
c. $206.
d. $211.
Feedback
+200 + $6 = $206.
The correct answer is: $206.
Question 19
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The current market price of a share of MSI stock
is $15. If a put option on this stock has a strike
price of $20, the put
Select one:
a. is out of the money.
b. is in the money.
c. can be exercised profitably.
d. is out of the money and can be exercised
profitably.
e. is in the money and can be exercised profitably.
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correct
The correct answer is: is in the money and can be
exercised profitably.
Question 20
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The current market price of a share of AT&T stock
is $50. If a put option on this stock has a strike
price of $45, the put
Select one:
a. is out of the money.
b. is in the money.
c. sells for a lower price than if the market price of
AT&T stock is $40.
d. is out of the money and sells for a lower price
than if the market price of AT&T stock is $40.
e. is in the money and sells for a lower price than if
the market price of AT&T stock is $40.
Feedback
If the striking price on a put option is less than
the market price, the option is out of the money
and sells for less than an in the money option.
The correct answer is: is out of the money and
sells for a lower price than if the market price of
AT&T stock is $40.
Question 21
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Suppose you purchase one WFM May 100 call
contract at $5 and write one WFM May 105 call
contract at $2.
The maximum potential profit of your strategy is
________, if both options are exercised.
Select one:
a. $600
b. $500
c. $200
d. $300
e. $100
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The correct answer is: $200
Question 22
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A protective put strategy is
Select one:
a. a long put plus a long position in the underlying
asset.
b. a long put plus a long call on the same
underlying asset.
c. a long call plus a short put on the same
underlying asset.
d. a long put plus a short call on the same
underlying asset.
e. None of the options are correct.
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The correct answer is: a long put plus a long
position in the underlying asset.
Question 23
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Before expiration, the time value of a call option
is equal to
Select one:
a. zero.
b. the actual call price minus the intrinsic value of
the call.
c. the intrinsic value of the call.
d. the actual call price plus the intrinsic value of the
call.
Feedback
The difference between the actual call price and
the intrinsic value is the time value of the option,
which should not be confused with the time value
of money. The option's time value is the
difference between the option's price and the
value of the option were the option expiring
immediately.
The correct answer is: the actual call price minus
the intrinsic value of the call.
Question 24
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You purchase one JNJ 75 call option for a premium
of $3. Ignoring transaction costs, the break-even
price of the position is
Select one:
a. $75.
b. $72.
c. $3.
d. $78.
Feedback
+75 + $3 = $78.
The correct answer is: $78.
Question 25
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Which of the following factors affect the price of a
stock option?
Select one:
a. The risk-free rate
b. The riskiness of the stock
c. The time to expiration
d. The expected rate of return on the stock
e. The risk-free rate, riskiness of the stock, and time
to expiration
Feedback
The risk-free rate, riskiness of the stock, and time
to expiration are directly related to the price of
the option; the expected rate of return on the
stock does not affect the price of the option.
The correct answer is: The risk-free rate, riskiness
of the stock, and time to expiration
Question 26
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The current market price of a share of a stock is
$20. If a put option on this stock has a strike price
of $18, the put
Select one:
a. is out of the money.
b. is in the money.
c. sells for a higher price than if the strike price of
the put option was $23.
d. is out of the money and sells for a higher price
than if the strike price of the put option was $23.
e. is in the money and sells for a higher price than if
the strike price of the put option was $23.
Feedback
If the striking price on a put option is less than
the market price, the option is out of the money
and sells for less than an in the money option.
The correct answer is: is out of the money.
Question 27
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The current market price of a share of Disney
stock is $60. If a call option on this stock has a
strike price of $65, the call
Select one:
a. is out of the money.
b. is in the money.
c. can be exercised profitably.
d. is out of the money and can be exercised
profitably.
e. is in the money and can be exercised profitably.
Feedback
If the striking price on a call option is more than
the market price, the option is out of the money
and cannot be exercised profitably.
The correct answer is: is out of the money.
Question 28
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Suppose you purchase one WFM May 100 call
contract at $5 and write one WFM May 105 call
contract at $2.
The maximum loss you could suffer from your
strategy is
Select one:
a. $200.
b. $300.
c. zero.
d. $500.
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The correct answer is: $300.
Question 29
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Suppose the price of a share of Google stock is
$500. An April call option on Google stock has a
premium of $5 and an exercise price of $500.
Ignoring commissions, the holder of the call
option will earn a profit if the price of the share
Select one:
a. increases to $504.
b. decreases to $490.
c. increases to $506.
d. decreases to $496.
e. None of the options are correct.
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The correct answer is: increases to $506.
Question 30
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The current market price of a share of Disney
stock is $60. If a put option on this stock has a
strike price of $65, the put
Select one:
a. is out of the money.
b. is in the money.
c. can be exercised profitably.
d. is out of the money and can be exercised
profitably.
e. is in the money and can be exercised profitably.
Feedback
If the striking price on a put option is more than
the market price, the option is in the money and
can be exercise profitably.
The correct answer is: is in the money and can be
exercised profitably.
Question 31
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Question text
The following price quotations on WFM were
taken from the Wall Street Journal.
Stoc Stri
k
ke
Pric Pric
e
e
927
85
/8
927
90
/8
927
95
/8
Febru
ary
87/8
41/8
15/8
The premium on one WFM February 90 call
contract is
Select one:
a. $4.1250.
b. $418.00.
c. $412.50.
d. $158.00.
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correct
The correct answer is: $412.50.
Question 32
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All of the following factors affect the price of a
stock option except
Select one:
a. the risk-free rate.
b. the riskiness of the stock.
c. the time to expiration.
d. the expected rate of return on the stock.
e. None of the options are correct.
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correct
The correct answer is: the expected rate of return
on the stock.
Question 33
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The current market price of a share of CAT stock
is $76. If a put option on this stock has a strike
price of $80, the put
Select one:
a. is out of the money.
b. is in the money.
c. can be exercised profitably.
d. is out of the money and can be exercised
profitably.
e. is in the money and can be exercised profitably.
Feedback
If the striking price on a put option is less than
the market price, the option is in the money and
can be profitably exercised.
The correct answer is: is in the money and can be
exercised profitably.
Question 34
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The value of a stock put option is positively
related to
Select one:
a. the time to expiration.
b. the striking price.
c. the stock price.
d. the time to expiration and the striking price.
e. All of the options are correct.
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correct
The correct answer is: the time to expiration and
the striking price.
Question 35
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The current market price of a share of a stock is
$80. If a put option on this stock has a strike price
of $75, the put
Select one:
a. is in the money.
b. is out of the money.
c. sells for a lower price than if the market price of
the stock is $75.
d. is in the money and sells for a lower price than if
the market price of the stock is $75.
e. is out of the money and sells for a lower price
than if the market price of the stock is $75.
Feedback
If the striking price on a put option is less than
the market price, the option is out of the money
and sells for less than an at the money option.
The correct answer is: is out of the money and
sells for a lower price than if the market price of
the stock is $75.
Question 36
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The current market price of a share of IBM stock
is $195. If a call option on this stock has a strike
price of $195, the call
Select one:
a. is out of the money.
b. is in the money.
c. is at the money.
d. None of the options are correct.
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correct
The correct answer is: is at the money.
Question 37
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According to the put-call parity theorem, the
value of a European put option on a nondividend
paying stock is equal to
Select one:
a. the call value plus the present value of the
exercise price plus the stock price.
b. the call value plus the present value of the
exercise price minus the stock price.
c. the present value of the stock price minus the
exercise price minus the call price.
d. the present value of the stock price plus the
exercise price minus the call price.
e. None of the options are correct.
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correct
The correct answer is: the call value plus the
present value of the exercise price minus the
stock price.
Question 38
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You write one JNJ February 70 put for a premium
of $5. Ignoring transactions costs, what is the
break-even price of this position?
Select one:
a. $65
b. $75
c. $5
d. $70
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The correct answer is: $65
Question 39
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Suppose you purchase one WFM May 100 call
contract at $5 and write one WFM May 105 call
contract at $2.
If, at expiration, the price of a share of WFM stock
is $103, your profit would be
Select one:
a. $500.
b. $300.
c. zero.
d. $200.
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correct
The correct answer is: zero.
Question 40
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Question text
The following price quotations on WFM were
taken from the Wall Street Journal.
Stoc Stri
k
ke
Pric Pric
e
e
927
85
/8
927
90
/8
927
95
/8
Febru
ary
87/8
41/8
15/8
The premium on one WFM February 85 call
contract is
Select one:
a. $8.875.
b. $887.50.
c. $412.50.
d. $158.00.
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correct
The correct answer is: $887.50.
Question 41
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The current market price of a share of CSCO stock
is $22. If a call option on this stock has a strike
price of $20, the call
Select one:
a. is out of the money.
b. is in the money.
c. sells for a higher price than if the market price of
CSCO stock is $21.
d. is out of the money and sells for a higher price
than if the market price of CSCO stock is $21.
e. is in the money and sells for a higher price than if
the market price of CSCO stock is $21.
Feedback
If the striking price on a call option is less than
the market price, the option is in the money and
sells for more than a less in the money option.
The correct answer is: is in the money and sells
for a higher price than if the market price of
CSCO stock is $21.
Question 42
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The current market price of a share of CSCO stock
is $22. If a put option on this stock has a strike
price of $20, the put
Select one:
a. is out of the money.
b. is in the money.
c. sells for a higher price than if the strike price of
the put option was $25.
d. is out of the money and sells for a higher price
than if the strike price of the put option was $25.
e. is in the money and sells for a higher price than if
the strike price of the put option was $25.
Feedback
If the striking price on a put option is less than
the market price, the option is out of the money
and sells for less than an in the money option.
The correct answer is: is out of the money.
Question 43
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Call options on IBM-listed stock options are
Select one:
a. issued by IBM Corporation.
b. created by investors.
c. traded on various exchanges.
d. issued by IBM Corporation and traded on various
exchanges.
e. created by investors and traded on various
exchanges.
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correct
The correct answer is: created by investors and
traded on various exchanges.
Question 44
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The current market price of a share of MSI stock
is $24. If a call option on this stock has a strike
price of $24, the call
Select one:
a. is out of the money.
b. is in the money.
c. is at the money.
d. None of the options are correct.
Feedback
correct
The correct answer is: is at the money.
The most recently issued Treasury securities are
called
Select one:
a. on the run.
b. off the run.
c. on the market.
d. off the market.
e. None of the options are correct.
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correct
The correct answer is: on the run.
Question 2
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The following is a list of prices for zero-coupon
bonds with different maturities and par values of
$1,000.
Matur
ity
(Year
s) Price
943
1 $
.40
881
2
.68
808
3
.88
742
4
.09
What is the price of a 4-year maturity bond with a
12% coupon rate paid annually? (Par value =
$1,000.)
Select one:
a. $742.09
b. $1,222.09
c. $1,000.00
d. $1,141.92
e. None of the options are correct.
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correct
The correct answer is: $1,141.92
Question 3
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Suppose that all investors expect that interest
rates for the 4 years will be as follows:
Forward
Yea Interes
r t Rate
(today
0
%
)6
1
7%
2
9%
3
10%
What is the price of a 3-year zero-coupon bond
with a par value of $1,000?
Select one:
a. $863.83
b. $816.58
c. $772.18
d. $765.55
e. None of the options are correct.
Feedback
correct
The correct answer is: None of the options are
correct.
Question 4
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The following is a list of prices for zero-coupon
bonds with different maturities and par values of
$1,000.
Matur
ity
(Year
s) Price
925
1 $
.15
862
2
.57
788
3
.66
711
4
.00
What is the price of a 4-year maturity bond with a
10% coupon rate paid annually? (Par values =
$1,000.)
Select one:
a. $742.09
b. $1,222.09
c. $1,035.66
d. $1,141.84
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correct
The correct answer is: $1,035.66
Question 5
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Which of the following combinations will result in
a sharply-increasing yield curve?
Select one:
a. Increasing future expected short rates and
increasing liquidity premiums
b. Decreasing future expected short rates and
increasing liquidity premiums
c. Increasing future expected short rates and
decreasing liquidity premiums
d. Increasing future expected short rates and
constant liquidity premiums
e. Constant future expected short rates and
increasing liquidity premiums
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correct
The correct answer is: Increasing future expected
short rates and increasing liquidity premiums
Question 6
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An inverted yield curve is one
Select one:
a. with a hump in the middle.
b. constructed by using convertible bonds.
c. that is relatively flat.
d. that plots the inverse relationship between bond
prices and bond yields.
e. that slopes downward.
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correct
The correct answer is: that slopes downward.
Question 7
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The yield curve is a component of
Select one:
a. the Dow Jones Industrial Average.
b. the consumer price index.
c. the index of leading economic indicators.
d. the producer price index.
e. the inflation index.
Feedback
correct
The correct answer is: the index of leading
economic indicators.
Question 8
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Suppose that all investors expect that interest
rates for the 4 years will be as follows:
Forward
Yea Interes
r t Rate
(today
0
%
)3
1
4%
2
5%
3
6%
If you have just purchased a 4-year zero-coupon
bond, what would be the expected rate of return
on your investment in the first year if the implied
forward rates stay the same? (Par value of the
bond = $1,000.)
Select one:
a. 5%
b. 3%
c. 9%
d. 10%
e. None of the options are correct.
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correct
The correct answer is: 3%
Question 9
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The following is a list of prices for zero-coupon
bonds with different maturities and par values of
$1,000.
Matur
ity
(Year
s) Price
925
1 $
.15
862
2
.57
788
3
.66
711
4
.00
You have purchased a 4-year maturity bond with
a 9% coupon rate paid annually. The bond has a
par value of $1,000. What would the price of the
bond be one year from now if the implied forward
rates stay the same?
Select one:
a. $995.63
b. $1,108.88
c. $1,000.00
d. $1,042.78
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correct
The correct answer is: $995.63
Question 10
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Given the yield on a 3-year zero-coupon bond is
7.2% and forward rates of 6.1% in year 1 and
6.9% in year 2, what must be the forward rate in
year 3?
Select one:
a. 8.4%
b. 8.6%
c. 8.1%
d. 8.9%
e. None of the options are correct.
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correct
The correct answer is: 8.6%
Question 11
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Suppose that all investors expect that interest
rates for the 4 years will be as follows:
Forward
Yea Interes
r t Rate
(today
0
%
)6
1
7%
2
9%
3
10%
What is the yield to maturity of a 3-year zerocoupon bond?
Select one:
a. 7.03%
b. 9.00%
c. 6.99%
d. 7.49%
e. None of the options are correct.
Feedback
correct
The correct answer is: None of the options are
correct.
Question 12
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Question text
The following is a list of prices for zero-coupon
bonds with different maturities and par values of
$1,000.
Matur
ity
(Year
s) Price
943
1 $
.40
881
2
.68
808
3
.88
742
4
.09
What is the yield to maturity on a 3-year zerocoupon bond?
Select one:
a. 6.37%
b. 9.00%
c. 7.33%
d. 10.00%
e. None of the options are correct.
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correct
The correct answer is: 7.33%
Question 13
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Question text
The following is a list of prices for zero-coupon
bonds with different maturities and par values of
$1,000.
Matur
ity
(Year
s) Price
925
1 $
.15
862
2
.57
788
3
.66
711
4
.00
What is the yield to maturity on a 3-year zerocoupon bond?
Select one:
a. 6.37%
b. 9.00%
c. 7.33%
d. 8.24%
Feedback
correct
The correct answer is: 8.24%
Question 14
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The expectations theory of the term structure of
interest rates states that
Select one:
a. forward rates are determined by investors'
expectations of future interest rates.
b. forward rates exceed the expected future
interest rates.
c. yields on long- and short-maturity bonds are
determined by the supply and demand for the
securities.
d. All of the options are correct.
e. None of the options are correct.
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correct
The correct answer is: forward rates are
determined by investors' expectations of future
interest rates.
Question 15
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The following is a list of prices for zero-coupon
bonds with different maturities and par values of
$1,000.
Matur
ity
(Year
s) Price
943
1 $
.40
881
2
.68
808
3
.88
742
4
.09
According to the expectations theory, what is the
expected forward rate in the third year?
Select one:
a. 7.00%
b. 7.33%
c. 9.00%
d. 11.19%
e. None of the options are correct.
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correct
The correct answer is: 9.00%
Question 16
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When computing yield to maturity, the implicit
reinvestment assumption is that the interest
payments are reinvested at the
Select one:
a. coupon rate.
b. current yield.
c. yield to maturity at the time of the investment.
d. prevailing yield to maturity at the time interest
payments are received.
e. the average yield to maturity throughout the
investment period.
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correct
The correct answer is: yield to maturity at the
time of the investment.
Question 17
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Suppose that all investors expect that interest
rates for the 4 years will be as follows:
Forward
Yea Interes
r t Rate
(today
0
%
)6
1
7%
2
9%
3
10%
If you have just purchased a 4-year zero-coupon
bond, what would be the expected rate of return
on your investment in the first year if the implied
forward rates stay the same? (Par value of the
bond = $1,000)
Select one:
a. 5%
b. 7%
c. 9%
d. 10%
e. None of the options are correct.
Feedback
correct
The correct answer is: None of the options are
correct.
Question 18
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Suppose that all investors expect that interest
rates for the 4 years will be as follows:
Forward
Yea Interes
r t Rate
(today
0
%
)3
1
4%
2
3
5%
6%
What is the price of a 2-year maturity bond with a
5% coupon rate paid annually? (Par value =
$1,000.)
Select one:
a. $1,092.97
b. $1,054.24
c. $1,028.51
d. $1,073.34
e. None of the options are correct.
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The correct answer is: $1,028.51
Question 19
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The following is a list of prices for zero-coupon
bonds with different maturities and par values of
$1,000.
Matur
ity
(Year
s) Price
925
1 $
.15
2
3
4
862
.57
788
.66
711
.00
According to the expectations theory, what is the
expected forward rate in the third year?
Select one:
a. 7.23%
b. 9.37%
c. 9.00%
d. 10.9%
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The correct answer is: 9.37%
Question 20
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Suppose that all investors expect that interest
rates for the 4 years will be as follows:
Forward
Yea Interes
r t Rate
(today
0
%
)3
1
2
3
4%
5%
6%
What is the yield to maturity of a 3-year zerocoupon bond?
Select one:
a. 7.00%
b. 9.00%
c. 6.99%
d. 4.00%
e. None of the options are correct.
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The correct answer is: 4.00%
Question 21
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Investors can use publicly available financial data
to determine which of the following?
I) The shape of the yield curve
II) Expected future short-term rates (if liquidity
premiums are ignored)
III) The direction the Dow indexes are heading
IV) The actions to be taken by the Federal
Reserve
Select one:
a. I and II
b. I and III
c. I, II, and III
d. I, III, and IV
e. I, II, III, and IV
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The correct answer is: I and II
Question 22
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Suppose that all investors expect that interest
rates for the 4 years will be as follows:
Forward
Yea Interes
r t Rate
(today
0
%
)6
1
7%
2
9%
3
10%
What is the price of a 2-year maturity bond with a
10% coupon rate paid annually? (Par value =
$1,000)
Select one:
a. $1,092
b. $1,054
c. $1,000
d. $1,073
e. None of the options are correct.
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The correct answer is: None of the options are
correct.
Question 23
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An upward-sloping yield curve
Select one:
a. may be an indication that interest rates are
expected to increase.
b. may incorporate a liquidity premium.
c. may reflect the confounding of the liquidity
premium with interest rate expectations.
d. All of the options are correct.
e. None of the options are correct.
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The correct answer is: All of the options are
correct.
Question 24
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Suppose that all investors expect that interest
rates for the 4 years will be as follows:
Forward
Ye Interest
ar Rate
(today)
0
%
3
1
4%
2
5%
3
6%
What is the price of 3-year zero-coupon bond with
a par value of $1,000?
Select one:
a. $889.08
b. $816.58
c. $772.18
d. $765.55
e. None of the options are correct.
Feedback
correct
The correct answer is: $889.08
A trader who has a __________ position in gold
futures wants the price of gold to __________ in the
future.
Select one:
a. long; decrease
b. short; decrease
c. short; stay the same
d. short; increase
e. long; stay the same
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The correct answer is: short; decrease
Question 2
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Agricultural futures contracts are actively traded
on
Select one:
a. rice.
b. sugar.
c. canola.
d. rice and sugar.
e. All of the options are correct.
Feedback
correct
The correct answer is: All of the options are
correct.
Question 3
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The terms of futures contracts __________
standardized, and the terms of forward contracts
__________ standardized.
Select one:
a. are; are
b. are not; are
c. are; are not
d. are not; are not
e. are; may or may not be
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The correct answer is: are; are not
Question 4
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You hold one long corn futures contract that
expires in April. To close your position in corn
futures before the delivery date you must
Select one:
a. buy one May corn futures contract.
b. buy two April corn futures contract.
c. sell one April corn futures contract.
d. sell one May corn futures contract.
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The correct answer is: sell one April corn futures
contract.
Question 5
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To hedge a long position in Treasury bonds, an
investor would most likely
Select one:
a. buy interest rate futures.
b. sell S&P futures.
c. sell interest rate futures.
d. buy Treasury bonds in the spot market.
e. None of the options are correct.
Feedback
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The correct answer is: sell interest rate futures.
Question 6
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Futures contracts __________ traded on an
organized exchange, and forward contracts
__________ traded on an organized exchange.
Select one:
a. are not; are
b. are; are
c. are not; are not
d. are; are not
e. are; may or may not be
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The correct answer is: are; are not
Question 7
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Contango
Select one:
a. holds that the natural hedgers are the
purchasers of a commodity, not the suppliers.
b. is a hypothesis polar to backwardation.
c. holds that FO must be less than (PT).
d. holds that the natural hedgers are the
purchasers of a commodity, not the suppliers,
and holds that FO must be less than (PT).
e. holds that the natural hedgers are the
purchasers of a commodity, not the suppliers,
and is a hypothesis polar to backwardation.
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The correct answer is: holds that the natural
hedgers are the purchasers of a commodity, not
the suppliers, and is a hypothesis polar to
backwardation.
Question 8
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The buyer of a futures contract is said to have a
__________ position, and the seller of a futures
contract is said to have a __________ position in
futures.
Select one:
a. long; short
b. long; long
c. short; short
d. short; long
e. margined; long
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The correct answer is: long; short
Question 9
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Foreign currency futures contracts are actively
traded on the
Select one:
a. euro.
b. British pound.
c. drachma.
d. euro and British pound.
e. All of the options are correct.
Feedback
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The correct answer is: euro and British pound.
Question 10
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Which one of the following statements regarding
"basis" is not true?
Select one:
a. The basis is the difference between the futures
price and the spot price.
b. The basis risk is borne by the hedger.
c. A short hedger suffers losses when the basis
decreases.
d. The basis increases when the futures price
increases by more than the spot price.
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The correct answer is: A short hedger suffers
losses when the basis decreases.
Question 11
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Agricultural futures contracts are actively traded
on
Select one:
a. corn.
b. oats.
c. pork bellies.
d. corn and oats.
e. All of the options are correct.
Feedback
correct
The correct answer is: All of the options are
correct.
Question 12
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Metals and energy currency futures contracts are
actively traded on
Select one:
a. copper.
b. platinum.
c. weather.
d. copper and platinum.
e. All of the options are correct.
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correct
The correct answer is: All of the options are
correct.
Question 13
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In a futures contract, the futures price is
Select one:
a. determined by the buyer and the seller when the
delivery of the commodity takes place.
b. determined by the futures exchange.
c. determined by the buyer and the seller when
they initiate the contract.
d. determined independently by the provider of the
underlying asset.
e. None of the options are correct.
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The correct answer is: determined by the buyer
and the seller when they initiate the contract.
Question 14
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A futures contract
Select one:
a. is an agreement to buy or sell a specified amount
of an asset at the spot price on the expiration
date of the contract.
b. is an agreement to buy or sell a specified amount
of an asset at a predetermined price on the
expiration date of the contract.
c. gives the buyer the right, but not the obligation,
to buy an asset sometime in the future.
d. is a contract to be signed in the future by the
buyer and the seller of the commodity.
e. None of the options are correct.
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The correct answer is: is an agreement to buy or
sell a specified amount of an asset at a
predetermined price on the expiration date of the
contract.
Question 15
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An increase in the basis will __________ a long
hedger and __________ a short hedger.
Select one:
a. hurt; benefit
b. hurt; hurt
c. benefit; hurt
d. benefit; benefit
e. benefit; have no effect upon
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The correct answer is: benefit; hurt
Question 16
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The expectations hypothesis of futures pricing
Select one:
a. is the simplest theory of futures pricing.
b. states that the futures price equals the expected
value of the future spot price of the asset.
c. is not a zero-sum game.
d. is the simplest theory of futures pricing and
states that the futures price equals the expected
value of the future spot price of the asset.
e. is the simplest theory of futures pricing and is
not a zero-sum game.
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The correct answer is: is the simplest theory of
futures pricing and states that the futures price
equals the expected value of the future spot price
of the asset.
Question 17
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A trader who has a __________ position in wheat
futures believes the price of wheat will __________
in the future.
Select one:
a. long; increase
b. long; decrease
c. short; increase
d. long; stay the same
e. short; stay the same
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The correct answer is: long; increase
Question 18
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Agricultural futures contracts are actively traded
on
Select one:
a. milk.
b. orange juice.
c. lumber.
d. milk and orange juice.
e. All of the options are correct.
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correct
The correct answer is: All of the options are
correct.
Question 19
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The open interest on silver futures at a particular
time is the
Select one:
a. number of silver futures contracts traded during
the day.
b. number of outstanding silver futures contracts
for delivery within the next month.
c. number of silver futures contracts traded the
previous day.
d. number of all long or short silver futures
contracts outstanding.
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The correct answer is: number of all long or short
silver futures contracts outstanding.
Question 20
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Delivery of stock index futures
Select one:
a. is never made.
b. is made by a cash settlement based on the index
value.
c. requires delivery of 1 share of each stock in the
index.
d. is made by delivering 100 shares of each stock in
the index.
e. is made by delivering a value-weighted basket of
stocks.
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The correct answer is: is made by a cash
settlement based on the index value.
Question 21
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A trader who has a __________ position in oil
futures believes the price of oil will __________ in
the future.
Select one:
a. short; increase
b. long; increase
c. short; stay the same
d. long; stay the same
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The correct answer is: long; increase
Question 22
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A trader who has a __________ position in gold
futures wants the price of gold to __________ in the
future.
Select one:
a. long; decrease
b. short; decrease
c. short; stay the same
d. short; increase
e. long; stay the same
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The correct answer is: short; decrease
Question 23
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Which of the following statements is false?
I) The maintenance-margin is the amount of
money you post with your broker when you buy
or sell a futures contract.
II) If the value of the margin account falls below
the maintenance-margin requirement, the holder
of the contract will receive a margin call.
III) A margin deposit can only be met with cash.
IV) All futures contracts require the same margin
deposit.
Select one:
a. I only
b. II only
c. III only
d. IV only
e. I, III, and IV
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The correct answer is: I, III, and IV
Question 24
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A decrease in the basis will __________ a long
hedger and __________ a short hedger.
Select one:
a. hurt; benefit
b. hurt; hurt
c. benefit; hurt
d. benefit; benefit
e. benefit; have no effect upon
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The correct answer is: hurt; benefit
Question 25
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Which one of the following statements regarding
delivery is true?
Select one:
a. Most futures contracts result in actual delivery.
b. Only 1% to 3% of futures contracts result in
actual delivery.
c. Only 15% of futures contracts result in actual
delivery.
d. Approximately 50% of futures contracts result in
actual delivery.
e. Futures contracts never result in actual delivery.
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The correct answer is: Only 1% to 3% of futures
contracts result in actual delivery.
Question 26
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Which one of the following statements regarding
"basis" is true?
Select one:
a. The basis is the difference between the futures
price and the spot price.
b. The basis risk is borne by the hedger.
c. A short hedger suffers losses when the basis
decreases.
d. The basis increases when the futures price
increases by more than the spot price.
e. The basis is the difference between the futures
price and the spot price, basis risk is borne by the
hedger, and basis increases when the futures
price increases by more than the spot price.
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The correct answer is: The basis is the difference
between the futures price and the spot price,
basis risk is borne by the hedger, and basis
increases when the futures price increases by
more than the spot price.
Question 27
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An investor with a long position in Treasury notes
futures will profit if
Select one:
a. interest rates decline.
b. interest rates increase.
c. the prices of Treasury notes decrease.
d. the price of the S&P 500 Index increases.
e. None of the options are correct.
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The correct answer is: interest rates decline.
Question 28
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Metals and energy currency futures contracts are
actively traded on
Select one:
a. gold.
b. silver.
c. propane.
d. gold and silver.
e. All of the options are correct.
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The correct answer is: All of the options are
correct.
Question 29
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The terms of futures contracts, such as the
quality and quantity of the commodity and the
delivery date, are
Select one:
a. specified by the buyers and sellers.
b. specified only by the buyers.
c. specified by the futures exchanges.
d. specified by brokers and dealers.
e. None of the options are correct.
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The correct answer is: specified by the futures
exchanges.
Question 30
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Financial futures contracts are actively traded on
which of the following indices?
Select one:
a. The S&P 500 Index
b. The New York Stock Exchange Index
c. The Nikkei Index
d. The Dow Jones Industrial Index
e. All of the options are correct.
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The correct answer is: All of the options are
correct.
Question 31
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Agricultural futures contracts are actively traded
on
Select one:
a. soybeans.
b. oats.
c. wheat.
d. soybeans and oats.
e. All of the options are correct.
Feedback
correct
The correct answer is: All of the options are
correct.
Question 32
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Investors who take long positions in futures agree
to __________ of the commodity on the delivery
date, and those who take the short positions
agree to __________ of the commodity.
Select one:
a. make delivery; take delivery
b. take delivery; make delivery
c. take delivery; take delivery
d. make delivery; make delivery
e. negotiate the price; pay the price
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The correct answer is: take delivery; make
delivery
Question 33
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Foreign currency futures contracts are actively
traded on the
Select one:
a. Japanese yen.
b. Australian dollar.
c. Brazilian real.
d. Japanese yen and Australian dollar.
e. All of the options are correct.
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The correct answer is: All of the options are
correct.
Question 34
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To exploit an expected increase in interest rates,
an investor would most likely
Select one:
a. sell Treasury bond futures.
b. take a long position in wheat futures.
c. buy S&P 500 Index futures.
d. take a long position in Treasury bond futures.
e. None of the options are correct.
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The correct answer is: sell Treasury bond futures.
Question 35
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Which one of the following statements is true?
Select one:
a. The maintenance margin is the amount of money
you post with your broker when you buy or sell a
futures contract.
b. If the value of the margin account falls below the
maintenance-margin requirement, the holder of
the contract will receive a margin call.
c. A margin deposit can only be met with cash.
d. All futures contracts require the same margin
deposit.
e. The maintenance margin is set by the producer
of the underlying asset.
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The correct answer is: If the value of the margin
account falls below the maintenance-margin
requirement, the holder of the contract will
receive a margin call.
Question 36
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Financial futures contracts are actively traded on
the following indices except
Select one:
a. the S&P 500 Index.
b. the New York Stock Exchange Index.
c. the Nikkei Index.
d. the Dow Jones Industrial Index.
e. All are actively traded.
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The correct answer is: All are actively traded.
Question 37
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Which of the following statements regarding
delivery is false?
I) Most futures contracts result in actual delivery.
II) Only 1% to 3% of futures contracts result in
actual delivery.
III) Only 15% of futures contracts result in actual
delivery.
Select one:
a. I only
b. II only
c. III only
d. I and II
e. I and III
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The correct answer is: I and III
Question 38
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Interest rate futures contracts are actively traded
on the
Select one:
a. eurodollars.
b. euroyen.
c. sterling.
d. eurodollars and euroyen.
e. All of the options are correct.
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The correct answer is: All of the options are
correct.
Question 39
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Normal backwardation
Select one:
a. maintains that, for most commodities, there are
natural hedgers who desire to shed risk.
b. maintains that speculators will enter the long
side of the contract only if the futures price is
below the expected spot price.
c. assumes that risk premiums in the futures
markets are based on systematic risk.
d. maintains that, for most commodities, there are
natural hedgers who desire to shed risk, and that
speculators will enter the long side of the
contract only if the futures price is below the
expected spot price.
e. maintains that speculators will enter the long
side of the contract only if the futures price is
below the expected spot price and assumes that
risk premiums in the futures markets are based
on systematic risk.
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The correct answer is: maintains that, for most
commodities, there are natural hedgers who
desire to shed risk, and that speculators will enter
the long side of the contract only if the futures
price is below the expected spot price.
Before expiration, the time value of an in-themoney call option is always
Select one:
a. equal to zero.
b. positive.
c. negative.
d. equal to the stock price minus the exercise price.
e. None of the options are correct.
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The correct answer is: positive.
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Before expiration, the time value of an at-themoney call option is usually
Select one:
a. positive.
b. equal to zero.
c. negative.
d. equal to the stock price minus the exercise price.
e. None of the options are correct.
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The correct answer is: positive.
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All the inputs in the Black-Scholes option pricing
model are directly observable except
Select one:
a. the price of the underlying security.
b. the risk-free rate of interest.
c. the time to expiration.
d. the variance of returns of the underlying asset
return.
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The correct answer is: the variance of returns of
the underlying asset return.
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Before expiration, the time value of an at-themoney put option is always
Select one:
a. equal to zero.
b. equal to the stock price minus the exercise price.
c. negative.
d. positive.
e. None of the options are correct.
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The correct answer is: positive.
Question 5
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If the stock price decreases, the price of a put
option on that stock __________, and that of a call
option __________.
Select one:
a. decreases; increases
b. decreases; decreases
c. increases; decreases
d. increases; increases
e. does not change; does not change
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The correct answer is: increases; decreases
Question 6
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A hedge ratio for a put is always
Select one:
a. equal to one.
b. greater than one.
c. between zero and one.
d. between negative one and zero.
e. of no restricted value.
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The correct answer is: between negative one and
zero.
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Prior to expiration,
Select one:
a. the intrinsic value of a put option is greater than
its actual value.
b. the intrinsic value of a put option is always
positive.
c. the actual value of a put option is greater than
the intrinsic value.
d. the intrinsic value of a put option is always
greater than its time value.
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The correct answer is: the actual value of a put
option is greater than the intrinsic value.
Question 8
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A call option has an intrinsic value of zero if the
option is
Select one:
a. at the money.
b. out of the money.
c. in the money.
d. at the money and in the money.
e. at the money or out of the money.
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The correct answer is: at the money or out of the
money.
Question 9
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Which of the inputs in the Black-Scholes option
pricing model are directly observable?
Select one:
a. The price of the underlying security
b. The risk-free rate of interest
c. The time to expiration
d. The variance of returns of the underlying asset
return
e. The price of the underlying security, risk-free rate
of interest, and time to expiration
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The correct answer is: The price of the underlying
security, risk-free rate of interest, and time to
expiration
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Prior to expiration,
Select one:
a. the intrinsic value of a call option is greater than
its actual value.
b. the intrinsic value of a call option is always
positive.
c. the actual value of a call option is greater than
the intrinsic value.
d. the intrinsic value of a call option is always
greater than its time value.
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The correct answer is: the actual value of a call
option is greater than the intrinsic value.
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Other things equal, the price of a stock call option
is negatively correlated with which of the
following factors?
Select one:
a. The stock price
b. The time to expiration
c. The stock volatility
d. The exercise price
e. The stock price, time to expiration, and stock
volatility
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The correct answer is: The exercise price
Question 12
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A hedge ratio of 0.85 implies that a hedged
portfolio should consist of
Select one:
a. long 0.85 calls for each short stock.
b. short 0.85 calls for each long stock.
c. long 0.85 shares for each short call.
d. long 0.85 shares for each long call.
e. None of the options are correct.
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The correct answer is: long 0.85 shares for each
short call.
Question 13
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Other things equal, the price of a stock put option
is positively correlated with which of the following
factors?
Select one:
a. The stock price
b. The time to expiration
c. The stock volatility
d. The exercise price
e. The time to expiration, stock volatility, and
exercise price
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The correct answer is: The time to expiration,
stock volatility, and exercise price
Question 14
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Other things equal, the price of a stock put option
is negatively correlated with which of the
following factors?
Select one:
a. The stock price
b. The time to expiration
c. The stock volatility
d. The exercise price
e. The time to expiration, stock volatility, and
exercise price
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The correct answer is: The stock price
Question 15
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Delta is defined as
Select one:
a. the change in the value of an option for a dollar
change in the price of the underlying asset.
b. the change in the value of the underlying asset
for a dollar change in the call price.
c. the percentage change in the value of an option
for a 1% change in the value of the underlying
asset.
d. the change in the volatility of the underlying
stock price.
e. None of the options are correct.
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The correct answer is: the change in the value of
an option for a dollar change in the price of the
underlying asset.
Question 16
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Other things equal, the price of a stock call option
is positively correlated with the following
factors except
Select one:
a. the stock price.
b. the time to expiration.
c. the stock volatility.
d. the exercise price.
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The correct answer is: the exercise price.
Question 17
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A hedge ratio for a call is always
Select one:
a. equal to one.
b. greater than one.
c. between zero and one.
d. between negative one and zero.
e. of no restricted value.
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The correct answer is: between zero and one.
Question 18
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At expiration, the time value of an in-the-money
call option is always
Select one:
a. equal to zero.
b. positive.
c. negative.
d. equal to the stock price minus the exercise price.
e. None of the options are correct.
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The correct answer is: equal to zero.
Question 19
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If the stock price increases, the price of a put
option on that stock __________, and that of a call
option __________.
Select one:
a. decreases; increases
b. decreases; decreases
c. increases; decreases
d. increases; increases
e. does not change; does not change
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The correct answer is: decreases; increases
Question 20
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A put option has an intrinsic value of zero if the
option is
Select one:
a. at the money.
b. out of the money.
c. in the money.
d. at the money and in the money.
e. at the money or out of the money.
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The correct answer is: at the money or out of the
money.
Question 21
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The price of a stock put option is __________
correlated with the stock price and __________
correlated with the strike price.
Select one:
a. positively; positively
b. negatively; positively
c. negatively; negatively
d. positively; negatively
e. not; not
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The correct answer is: negatively; positively
Question 22
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At expiration, the time value of an at-the-money
call option is always
Select one:
a. positive.
b. equal to zero.
c. negative.
d. equal to the stock price minus the exercise price.
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The correct answer is: equal to zero.
Question 23
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Other things equal, the price of a stock put option
is positively correlated with the following
factors except
Select one:
a. the stock price.
b. the time to expiration.
c. the stock volatility.
d. the exercise price.
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correct
The correct answer is: the stock price.
Question 24
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At expiration, the time value of an at-the-money
put option is always
Select one:
a. equal to zero.
b. equal to the stock price minus the exercise price.
c. negative.
d. positive.
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The correct answer is: equal to zero.
Question 25
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The price of a stock call option is __________
correlated with the stock price and __________
correlated with the strike price.
Select one:
a. positively; positively
b. negatively; positively
c. negatively; negatively
d. positively; negatively
e. not; not
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The correct answer is: positively; negatively
Question 26
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A hedge ratio for a call option is ________, and a
hedge ratio for a put option is ______.
Select one:
a. negative; positive
b. negative; negative
c. positive; negative
d. positive; positive
e. zero; zero
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The correct answer is: positive; negative
Question 27
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A hedge ratio of 0.70 implies that a hedged
portfolio should consist of
Select one:
a. long 0.70 calls for each short stock.
b. short 0.70 calls for each long stock.
c. long 0.70 shares for each short call.
d. long 0.70 shares for each long call.
e. None of the options are correct.
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The correct answer is: long 0.70 shares for each
short call.
Question 28
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Other things equal, the price of a stock call option
is positively correlated with which of the following
factors?
Select one:
a. The stock price
b. The time to expiration
c. The stock volatility
d. The exercise price
e. The stock price, time to expiration, and stock
volatility
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The correct answer is: The stock price, time to
expiration, and stock volatility
Question 29
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Before expiration, the time value of an in-themoney put option is always
Select one:
a. equal to zero.
b. negative.
c. positive.
d. equal to the stock price minus the exercise price.
e. None of the options are correct.
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The correct answer is: positive.
Question 30
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At expiration, the time value of an in-the-money
put option is always
Select one:
a. equal to zero.
b. negative.
c. positive.
d. equal to the stock price minus the exercise price.
e. None of the options are correct.
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correct
The correct answer is: equal to zero.
A European put option allows the holder to
Select one:
a. buy the underlying asset at the striking price on
or before the expiration date.
b. sell the underlying asset at the striking price on
or before the expiration date.
c. potentially benefit from a stock price increase.
d. sell the underlying asset at the striking price on
the expiration date.
e. potentially benefit from a stock price increase
and sell the underlying asset at the striking price
on the expiration date.
Feedback
A European put option allows the buyer to sell the
underlying asset at the striking price only on the
expiration date. The put option also allows the
investor to benefit from an expected stock price
decrease while risking only the amount invested
in the contract.
The correct answer is: sell the underlying asset at
the striking price on the expiration date.
Question 2
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An American put option can be exercised
Select one:
a. any time on or before the expiration date.
b. only on the expiration date.
c. any time in the indefinite future.
d. only after dividends are paid.
e. None of the options are correct.
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The correct answer is: any time on or before the
expiration date.
Question 3
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An American call option can be exercised
Select one:
a. any time on or before the expiration date.
b. only on the expiration date.
c. any time in the indefinite future.
d. only after dividends are paid.
e. None of the options are correct.
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The correct answer is: any time on or before the
expiration date.
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Barrier options have payoffs that
Select one:
a. have payoffs that only depend on the minimum
price of the underlying asset during the life of the
option.
b. depend both on the asset's price at expiration
and on whether the underlying asset's price has
crossed through some barrier.
c. are known in advance.
d. have payoffs that only depend on the maximum
price of the underlying asset during the life of the
option.
Feedback
Barrier options have payoffs that depend both on
the asset's price at expiration and on whether the
underlying asset's price has crossed through
some barrier.
The correct answer is: depend both on the asset's
price at expiration and on whether the underlying
asset's price has crossed through some barrier.
Question 5
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A call option on a stock is said to be in the money
if
Select one:
a. the exercise price is higher than the stock price.
b. the exercise price is less than the stock price.
c. the exercise price is equal to the stock price.
d. the price of the put is higher than the price of the
call.
e. the price of the call is higher than the price of the
put.
Feedback
An in the money call option gives the owner the
right to buy the shares for less than market price.
The correct answer is: the exercise price is less
than the stock price.
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All else equal, call option values are higher
Select one:
a. in the month of May.
b. for low dividend-payout policies.
c. for high dividend-payout policies.
d. in the month of May and for low dividend-payout
policies.
e. in the month of May and for high dividend-payout
policies.
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The correct answer is: for low dividend-payout
policies.
Question 7
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Trading in "exotic options" takes place primarily
Select one:
a. on the New York Stock Exchange.
b. in the over-the-counter market.
c. on the American Stock Exchange.
d. in the primary marketplace.
e. None of the options.
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The correct answer is: in the over-the-counter
market.
Question 8
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A put option on a stock is said to be out of the
money if
Select one:
a. the exercise price is higher than the stock price.
b. the exercise price is less than the stock price.
c. the exercise price is equal to the stock price.
d. the price of the put is higher than the price of the
call.
e. the price of the call is higher than the price of the
put.
Feedback
An out of the money put option gives the owner
the right to sell the shares for less than market
price.
The correct answer is: the exercise price is less
than the stock price.
Question 9
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A European put option can be exercised
Select one:
a. any time in the future.
b. only on the expiration date.
c. if the price of the underlying asset declines below
the exercise price.
d. immediately after dividends are paid.
Feedback
European options can be exercised at expiration
only.
The correct answer is: only on the expiration
date.
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A European call option allows the buyer to
Select one:
a. sell the underlying asset at the exercise price on
the expiration date.
b. buy the underlying asset at the exercise price on
or before the expiration date.
c. sell the option in the open market prior to
expiration.
d. buy the underlying asset at the exercise price on
the expiration date.
e. sell the option in the open market prior to
expiration and buy the underlying asset at the
exercise price on the expiration date.
Feedback
A European call option may be exercised
(allowing the holder to buy the underlying asset)
on the expiration date; the option contract also
may be sold prior to expiration.
The correct answer is: sell the option in the open
market prior to expiration and buy the underlying
asset at the exercise price on the expiration date.
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The potential loss for a writer of a naked call
option on a stock is
Select one:
a. limited.
b. unlimited.
c. increasing when the stock price is decreasing.
d. equal to the call premium.
e. None of the options are correct.
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The correct answer is: unlimited.
Question 12
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The price that the writer of a call option receives
for the underlying asset if the buyer executes her
option is called the
Select one:
a. strike price.
b. exercise price.
c. execution price.
d. strike price or exercise price.
e. strike price or execution price.
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The price that the writer of a call option receives
for the underlying asset if the buyer executes her
option is called the strike price or exercise price.
The correct answer is: strike price or exercise
price.
Question 13
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The price that the writer of a put option receives
to sell the option is called the
Select one:
a. premium.
b. exercise price.
c. execution price.
d. acquisition price.
e. strike price.
Feedback
The price that the writer of a put option receives
to sell the option is called the premium.
The correct answer is: premium.
Question 14
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A call option on a stock is said to be out of the
money if
Select one:
a. the exercise price is higher than the stock price.
b. the exercise price is less than the stock price.
c. the exercise price is equal to the stock price.
d. the price of the put is higher than the price of the
call.
e. the price of the call is higher than the price of the
put.
Feedback
An out of the money call option gives the owner
the right to buy the shares for more than market
price.
The correct answer is: the exercise price is higher
than the stock price.
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The price that the buyer of a put option receives
for the underlying asset if she executes her
option is called the
Select one:
a. strike price.
b. exercise price.
c. execution price.
d. strike price or execution price.
e. strike price or exercise price.
Feedback
The price that the buyer of a put option receives
for the underlying asset if she executes her
option is called the strike price or exercise price.
The correct answer is: strike price or exercise
price.
Question 16
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The maximum loss a buyer of a stock call option
can suffer is equal to
Select one:
a. the striking price minus the stock price.
b. the stock price minus the value of the call.
c. the call premium.
d. the stock price.
e. None of the options are correct.
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The correct answer is: the call premium.
Question 17
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The price that the buyer of a call option pays to
acquire the option is called the
Select one:
a. strike price.
b. exercise price.
c. execution price.
d. acquisition price.
e. premium.
Feedback
The price that the buyer of a call option pays to
acquire the option is called the premium.
The correct answer is: premium.
Question 18
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The price that the buyer of a put option pays to
acquire the option is called the
Select one:
a. strike price.
b. exercise price.
c. execution price.
d. acquisition price.
e. premium.
Feedback
The price that the buyer of a put option pays to
acquire the option is called the premium.
The correct answer is: premium.
Question 19
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A call option on a stock is said to be at the money
if
Select one:
a. the exercise price is higher than the stock price.
b. the exercise price is less than the stock price.
c. the exercise price is equal to the stock price.
d. the price of the put is higher than the price of the
call.
e. the price of the call is higher than the price of the
put.
Feedback
A call option on a stock is said to be at the money
if the exercise price is equal to the stock price.
The correct answer is: the exercise price is equal
to the stock price.
Question 20
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An American put option allows the holder to
Select one:
a. buy the underlying asset at the striking price on
or before the expiration date.
b. sell the underlying asset at the striking price on
or before the expiration date.
c. potentially benefit from a stock price increase.
d. sell the underlying asset at the striking price on
or before the expiration date and potentially
benefit from a stock price increase.
e. buy the underlying asset at the striking price on
or before the expiration date and potentially
benefit from a stock price increase.
Feedback
An American put option allows the buyer to sell
the underlying asset at the striking price on or
before the expiration date.
The correct answer is: sell the underlying asset at
the striking price on or before the expiration date.
Question 21
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All else equal, call option values are lower
Select one:
a. in the month of May.
b. for low dividend-payout policies.
c. for high dividend-payout policies.
d. in the month of May and for low dividend-payout
policies.
e. in the month of May and for high dividend-payout
policies.
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The correct answer is: for high dividend-payout
policies.
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The maximum loss a buyer of a stock put option
can suffer is equal to
Select one:
a. the striking price minus the stock price.
b. the stock price minus the value of the call.
c. the put premium.
d. the stock price.
e. None of the options are correct.
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The correct answer is: the put premium.
Question 23
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To the option holder, put options are worth ______
when the exercise price is higher; call options are
worth ______ when the exercise price is higher.
Select one:
a. more; more
b. more; less
c. less; more
d. less; less
e. It doesn't matter—they are too risky to be
included in a reasonable person's portfolio.
Feedback
The holder of the put would prefer to sell the
asset to the writer at a higher exercise price. The
holder of the call would prefer to buy the asset
from the writer at a lower exercise price.
The correct answer is: more; less
Question 24
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The price that the buyer of a call option pays for
the underlying asset if she executes her option is
called the
Select one:
a. strike price.
b. exercise price.
c. execution price.
d. strike price or execution price.
e. strike price or exercise price.
Feedback
The price that the buyer of a call option pays for
the underlying asset if she executes her option is
strike price or exercise price.
The correct answer is: strike price or exercise
price.
Question 25
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The price that the writer of a call option receives
to sell the option is called the
Select one:
a. strike price.
b. exercise price.
c. execution price.
d. acquisition price.
e. premium.
Feedback
The price that the writer of a call option receives
to sell the option is called the premium.
The correct answer is: premium.
Question 26
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To adjust for stock splits
Select one:
a. the exercise price of the option is reduced by the
factor of the split, and the number of options held
is increased by that factor.
b. the exercise price of the option is increased by
the factor of the split, and the number of options
held is reduced by that factor.
c. the exercise price of the option is reduced by the
factor of the split, and the number of options held
is reduced by that factor.
d. the exercise price of the option is increased by
the factor of the split, and the number of options
held is increased by that factor.
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The correct answer is: the exercise price of the
option is reduced by the factor of the split, and
the number of options held is increased by that
factor.
Question 27
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The lower bound on the market price of a
convertible bond is
Select one:
a. its straight-bond value.
b. its crooked-bond value.
c. its conversion value.
d. its straight-bond value and its conversion value.
e. None of the options are correct.
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The correct answer is: its straight-bond value and
its conversion value.
Question 28
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A put option on a stock is said to be in the money
if
Select one:
a. the exercise price is higher than the stock price.
b. the exercise price is less than the stock price.
c. the exercise price is equal to the stock price.
d. the price of the put is higher than the price of the
call.
e. the price of the call is higher than the price of the
put.
Feedback
An in the money put option gives the owner the
right to sell the shares for more than market
price.
The correct answer is: the exercise price is higher
than the stock price.
Question 29
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An American call option allows the buyer to
Select one:
a. sell the underlying asset at the exercise price on
or before the expiration date.
b. buy the underlying asset at the exercise price on
or before the expiration date.
c. sell the option in the open market prior to
expiration.
d. sell the underlying asset at the exercise price on
or before the expiration date and sell the option
in the open market prior to expiration.
e. buy the underlying asset at the exercise price on
or before the expiration date and sell the option
in the open market prior to expiration.
Feedback
An American call option may be exercised
(allowing the holder to buy the underlying asset)
on or before expiration; the option contract also
may be sold prior to expiration.
The correct answer is: buy the underlying asset at
the exercise price on or before the expiration
date and sell the option in the open market prior
to expiration.
Question 30
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Derivative securities are also called contingent
claims because
Select one:
a. their owners may choose whether or not to
exercise them.
b. a large contingent of investors holds them.
c. the writers may choose whether or not to
exercise them.
d. their payoffs depend on the prices of other
assets.
e. contingency management is used in adding them
to portfolios.
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The values of derivatives depend on the values of
the underlying stock, commodity, index, etc.
The correct answer is: their payoffs depend on
the prices of other assets.
Question 31
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Currency-translated options have
Select one:
a. only asset prices denoted in a foreign currency.
b. only exercise prices denoted in a foreign
currency.
c. payoffs that only depend on the maximum price
of the underlying asset during the life of the
option.
d. either asset or exercise prices denoted in a
foreign currency.
Feedback
Currency-translated options have either asset or
exercise prices denoted in a foreign currency.
The correct answer is: either asset or exercise
prices denoted in a foreign currency.
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The price that the writer of a put option receives
for the underlying asset if the option is exercised
is called the
Select one:
a. strike price.
b. exercise price.
c. execution price.
d. strike price or exercise price.
e. None of the options are correct.
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The correct answer is: None of the options are
correct.
Question 33
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A European call option can be exercised
Select one:
a. any time in the future.
b. only on the expiration date.
c. if the price of the underlying asset declines below
the exercise price.
d. immediately after dividends are paid.
Feedback
European options can be exercised at expiration
only.
The correct answer is: only on the expiration
date.
Question 34
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Binary options
Select one:
a. are based on two possible outcomes—yes or no.
b. may make a payoff of a fixed amount if a
specified event happens.
c. may make a payoff of a fixed amount if a
specified event does not happen.
d. may make a payoff of a fixed amount if a
specified event happens and are based on two
possible outcomes—yes or no.
e. All of the options are correct.
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The correct answer is: All of the options are
correct.
Question 35
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A callable bond should be priced the same as
Select one:
a. a convertible bond.
b. a straight bond plus a put option.
c. a straight bond plus a call option.
d. a straight bond plus warrants.
e. a straight bond.
Feedback
A callable bond is the equivalent of a straight
bond sale by the corporation and the concurrent
issue of a call option by the bond buyer.
The correct answer is: a straight bond plus a call
option.
Question 36
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A put option on a stock is said to be at the money
if
Select one:
a. the exercise price is higher than the stock price.
b. the exercise price is less than the stock price.
c. the exercise price is equal to the stock price.
d. the price of the put is higher than the price of the
call.
e. the price of the call is higher than the price of the
put.
Feedback
A put option on a stock is said to be at the money
if the exercise price is equal to the stock price.
The correct answer is: the exercise price is equal
to the stock price.
Question 37
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Lookback options have payoffs that
Select one:
a. depend in part on the minimum or maximum
price of the underlying asset during the life of the
option.
b. only depend on the minimum price of the
underlying asset during the life of the option.
c. only depend on the maximum price of the
underlying asset during the life of the option.
d. are known in advance.
Feedback
Lookback options have payoffs that depend in
part on the minimum or maximum price of the
underlying asset during the life of the option.
The correct answer is: depend in part on the
minimum or maximum price of the underlying
asset during the life of the option.
A preferred stock will pay a dividend of $3.00 in
the upcoming year and every year thereafter; i.e.,
dividends are not expected to grow. You require a
return of 9% on this stock. Use the constant
growth DDM to calculate the intrinsic value of this
preferred stock.
Select one:
a. $33.33
b. $0.27
c. $31.82
d. $56.25
Feedback
3.00/.09 = 33.33.
The correct answer is: $33.33
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A preferred stock will pay a dividend of $7.50 in
the upcoming year and every year thereafter; i.e.,
dividends are not expected to grow. You require a
return of 10% on this stock. Use the constant
growth DDM to calculate the intrinsic value of this
preferred stock.
Select one:
a. $0.75
b. $7.50
c. $64.12
d. $56.25
e. None of the options are correct.
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correct
The correct answer is: None of the options are
correct.
Question 3
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High Tech Chip Company paid a dividend last year
of $2.50. The expected ROE for next year is
12.5%. An appropriate required return on the
stock is 11%. If the firm has a plowback ratio of
60%, the dividend in the coming year should be
Select one:
a. $1.00.
b. $2.50.
c. $2.69.
d. $2.81.
e. None of the options are correct.
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The correct answer is: $2.69.
Question 4
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Suppose that the average P/E multiple in the oil
industry is 16. Shell Oil is expected to have
an EPS of $4.50 in the coming year. The intrinsic
value of Shell Oil stock should be
Select one:
a. $28.12.
b. $35.55.
c. $63.00.
d. $72.00.
e. None of the options are correct.
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The correct answer is: $72.00.
Question 5
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Sure Tool Company is expected to pay a dividend
of $2 in the upcoming year. The risk-free rate of
return is 4%, and the expected return on the
market portfolio is 14%. Analysts expect the price
of Sure Tool Company shares to be $22 a year
from now. The beta of Sure Tool Company's stock
is 1.25.
The market's required rate of return on Sure's
stock is
Select one:
a. 14.0%.
b. 17.5%.
c. 16.5%.
d. 15.25%.
e. None of the options are correct.
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The correct answer is: 16.5%.
Question 6
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You are considering acquiring a common stock
that you would like to hold for one year. You
expect to receive both $0.75 in dividends and
$16 from the sale of the stock at the end of the
year. The maximum price you would pay for the
stock today is _____ if you wanted to earn a 12%
return.
Select one:
a. $23.91
b. $14.96
c. $26.52
d. $27.50
e. None of the options are correct.
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The correct answer is: $14.96
Question 7
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A preferred stock will pay a dividend of $2.75 in
the upcoming year and every year thereafter; i.e.,
dividends are not expected to grow. You require a
return of 10% on this stock. Use the constant
growth DDM to calculate the intrinsic value of this
preferred stock.
Select one:
a. $0.275
b. $27.50
c. $31.82
d. $56.25
Feedback
2.75/.10 = 27.50.
The correct answer is: $27.50
Question 8
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Sunshine Corporation is expected to pay a
dividend of $1.50 in the upcoming year.
Dividends are expected to grow at the rate of 6%
per year. The risk-free rate of return is 6%, and
the expected return on the market portfolio is
14%. The stock of Sunshine Corporation has a
beta of 0.75. The intrinsic value of the stock is
Select one:
a. $10.71.
b. $15.00.
c. $17.75.
d. $25.00.
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The correct answer is: $25.00.
Question 9
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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
Select one:
a. $28.12.
b. $93.50.
c. $63.00.
d. $72.00.
e. None of the options are correct.
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The correct answer is: $93.50.
Question 10
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A preferred stock will pay a dividend of $3.50 in
the upcoming year and every year thereafter; i.e.,
dividends are not expected to grow. You require a
return of 11% on this stock. Use the constant
growth DDM to calculate the intrinsic value of this
preferred stock.
Select one:
a. $0.39
b. $0.56
c. $31.82
d. $56.25
Feedback
3.50/.11 = 31.82.
The correct answer is: $31.82
Question 11
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Antiquated Products Corporation produces goods
that are very mature in their product life cycles.
Antiquated Products Corporation is expected to
pay a dividend in year 1 of $1.00, a dividend of
$0.90 in year 2, and a dividend of $0.85 in year 3.
After year 3, dividends are 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
Select one:
a. $8.98.
b. $10.57.
c. $20.00.
d. $22.22.
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The correct answer is: $8.98.
Question 12
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Old Quartz Gold Mining Company is expected to
pay a dividend of $8 in the coming year.
Dividends are expected to decline at the rate of
2% per year. The risk-free rate of return is 6%,
and the expected return on the market portfolio is
14%. The stock of Old Quartz Gold Mining
Company has a beta of -0.25. The intrinsic value
of the stock is
Select one:
a. $80.00.
b. $133.33.
c. $200.00.
d. $400.00.
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The correct answer is: $133.33.
Question 13
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A company whose stock is selling at a P/E ratio
greater than the P/E ratio of a market index most
likely has
Select one:
a. an anticipated earnings growth rate which is less
than that of the average firm.
b. a dividend yield which is less than that of the
average firm.
c. less predictable earnings growth than that of the
average firm.
d. greater cyclicality of earnings growth than that of
the average firm.
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Firms with lower than average dividend yields are
usually growth firms, which have a higher P/E
ratio than average.
The correct answer is: a dividend yield which is
less than that of the average firm.
Question 14
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JCPenney Company is expected to pay a dividend
in year 1 of $1.65, a dividend in year 2 of $1.97,
and a dividend in year 3 of $2.54. After year 3,
dividends are expected to grow at the rate of 8%
per year. An appropriate required return for the
stock is 11%. The stock should be worth _______
today.
Select one:
a. $33.00
b. $40.67
c. $71.80
d. $66.00
e. None of the options are correct.
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The correct answer is: $71.80
Question 15
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Fools Gold Mining Company is expected to pay a
dividend of $8 in the upcoming year. Dividends
are expected to decline at the rate of 2% per
year. The risk-free rate of return is 6%, and the
expected return on the market portfolio is 14%.
The stock of Fools Gold Mining Company has a
beta of -0.25. The return you should require on
the stock is
Select one:
a. 2%.
b. 4%.
c. 6%.
d. 8%.
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The correct answer is: 4%.
Question 16
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An analyst has determined that the intrinsic value
of Dell stock is $34 per share using the
capitalized earnings model. If the typical P/E ratio
in the computer industry is 27, then it would be
reasonable to assume the expected EPS of Dell in
the coming year will be
Select one:
a. $3.63.
b. $4.44.
c. $14.40.
d. $1.26.
Feedback
$34(1/27) = $1.26.
The correct answer is: $1.26.
Question 17
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Consider the free cash flow approach to stock
valuation. Utica Manufacturing Company is
expected to have before-tax cash flow from
operations of $500,000 in the coming year. The
firm's corporate tax rate is 30%. It is expected
that $200,000 of operating cash flow will be
invested in new fixed assets. Depreciation for the
year will be $100,000. After the coming year,
cash flows are expected to grow at 6% per year.
The appropriate market-capitalization rate for
unleveraged cash flow is 15% per year. The firm
has no outstanding debt. The projected free cash
flow of Utica Manufacturing Company for the
coming year is
Select one:
a. $150,000.
b. $180,000.
c. $300,000.
d. $380,000.
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The correct answer is: $180,000.
Question 18
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Paper Express Company has a balance sheet
which lists $85 million in assets, $40 million in
liabilities, and $45 million in common
shareholders' equity. It has 1,400,000 common
shares outstanding. The replacement cost of the
assets is $115 million. The market share price is
$90.
What is Paper Express's book value per share?
Select one:
a. $1.68
b. $2.60
c. $32.14
d. $60.71
e. None of the options are correct.
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The correct answer is: $32.14
Question 19
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Sure Tool Company is expected to pay a dividend
of $2 in the upcoming year. The risk-free rate of
return is 4%, and the expected return on the
market portfolio is 14%. The beta of Sure Tool
Company's stock is 1.25.
If Sure's intrinsic value is $21.00 today, what
must be its growth rate?
Select one:
a. 0.0%
b. 10%
c. 4%
d. 6%
e. 7%
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The correct answer is: 7%
Question 20
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The market-capitalization rate on the stock of
Flexsteel Company is 12%. The expected ROE is
13%, and the expected EPS are $3.60. If the
firm's plowback ratio is 75%, the P/E ratio will be
Select one:
a. 7.69.
b. 8.33.
c. 9.09.
d. 11.11.
e. None of the options are correct.
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The correct answer is: 11.11.
Question 21
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A preferred stock will pay a dividend of $1.25 in
the upcoming year and every year thereafter; i.e.,
dividends are not expected to grow. You require a
return of 12% on this stock. Use the constant
growth DDM to calculate the intrinsic value of this
preferred stock.
Select one:
a. $11.56
b. $9.65
c. $11.82
d. $10.42
Feedback
1.25/.12 = 10.42.
The correct answer is: $10.42
Question 22
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A company paid a dividend last year of $1.75.
The expected ROE for next year is 14.5%. An
appropriate required return on the stock is 10%. If
the firm has a plowback ratio of 75%, the
dividend in the coming year should be
Select one:
a. $1.80.
b. $2.12.
c. $1.77.
d. $1.94.
Feedback
g = .145 × .75 = 10.875%; $1.75(1.10875) =
$1.94.
The correct answer is: $1.94.
Question 23
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One of the problems with attempting to forecast
stock market values is that
Select one:
a. there are no variables that seem to predict
market return.
b. the earnings multiplier approach can only be
used at the firm level.
c. the level of uncertainty surrounding the forecast
will always be quite high.
d. dividend-payout ratios are highly variable.
e. None of the options are correct.
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The correct answer is: the level of uncertainty
surrounding the forecast will always be quite
high.
Question 24
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Midwest Airline is expected to pay a dividend of
$7 in the coming year. Dividends are expected to
grow at the rate of 15% per year. The risk-free
rate of return is 6%, and the expected return on
the market portfolio is 14%. The stock of Midwest
Airline has a beta of 3.00. The return you should
require on the stock is
Select one:
a. 10%.
b. 18%.
c. 30%.
d. 42%.
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The correct answer is: 30%.
Question 25
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Torque Corporation is expected to pay a dividend
of $1.00 in the upcoming year. Dividends are
expected to grow at the rate of 6% per year. The
risk-free rate of return is 5%, and the expected
return on the market portfolio is 13%. The stock
of Torque Corporation has a beta of 1.2.
What is the intrinsic value of Torque's stock?
Select one:
a. $14.29
b. $14.60
c. $12.33
d. $11.62
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The correct answer is: $11.62
Question 26
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Torque Corporation is expected to pay a dividend
of $1.00 in the upcoming year. Dividends are
expected to grow at the rate of 6% per year. The
risk-free rate of return is 5%, and the expected
return on the market portfolio is 13%. The stock
of Torque Corporation has a beta of 1.2.
What is the return you should require on Torque's
stock?
Select one:
a. 12.0%
b. 14.6%
c. 15.6%
d. 20%
e. None of the options are correct.
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The correct answer is: 14.6%
Question 27
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High Tech Chip Company is expected to
have EPS in the coming year of $2.50. The
expected ROE is 12.5%. An appropriate required
return on the stock is 11%. If the firm has a
plowback ratio of 70%, the growth rate of
dividends should be
Select one:
a. 5.00%.
b. 6.25%.
c. 6.60%.
d. 7.50%.
e. 8.75%.
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12.5% × 0.7 = 8.75%.
The correct answer is: 8.75%.
Question 28
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In the dividend discount model, which of the
following are not incorporated into the discount
rate?
Select one:
a. Real risk-free rate
b. Risk premium for stocks
c. Return on assets
d. Expected inflation rate
Feedback
The real risk-free rate, risk premium for stocks,
and expected inflation rate are incorporated into
the discount rate used in the dividend discount
model.
The correct answer is: Return on assets
Question 29
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A firm's earnings per share increased from $10 to
$12, dividends increased from $4.00 to $4.80,
and the share price increased from $80 to $90.
Given this information, it follows that
Select one:
a. the stock experienced a drop in the P/E ratio.
b. the firm had a decrease in dividend-payout ratio.
c. the firm increased the number of shares
outstanding.
d. the required rate of return decreased.
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The correct answer is: the stock experienced a
drop in the P/E ratio.
Question 30
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You are considering acquiring a common stock
that you would like to hold for one year. You
expect to receive both $3.50 in dividends and
$42 from the sale of the stock at the end of the
year. The maximum price you would pay for the
stock today is _____ if you wanted to earn a 10%
return.
Select one:
a. $23.91
b. $24.11
c. $26.52
d. $27.50
e. None of the options are correct.
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The correct answer is: None of the options are
correct.
Question 31
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A preferred stock will pay a dividend of $6.00 in
the upcoming year and every year thereafter; i.e.,
dividends are not expected to grow. You require a
return of 10% on this stock. Use the constant
growth DDM to calculate the intrinsic value of this
preferred stock.
Select one:
a. $0.60
b. $6.00
c. $600
d. $60.00
e. None of the options are correct.
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The correct answer is: $60.00
Question 32
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Consider the free cash flow approach to stock
valuation. Utica Manufacturing Company is
expected to have before-tax cash flow from
operations of $500,000 in the coming year. The
firm's corporate tax rate is 30%. It is expected
that $200,000 of operating cash flow will be
invested in new fixed assets. Depreciation for the
year will be $100,000. After the coming year,
cash flows are expected to grow at 6% per year.
The appropriate market capitalization rate for
unleveraged cash flow is 15% per year. The firm
has no outstanding debt. The total value of the
equity of Utica Manufacturing Company should be
Select one:
a. $1,000,000.
b. $2,000,000.
c. $3,000,000.
d. $4,000,000.
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The correct answer is: $2,000,000.
Question 33
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Suppose that the average P/E multiple in the oil
industry is 22. Exxon is expected to have
an EPS of $1.50 in the coming year. The intrinsic
value of Exxon stock should be
Select one:
a. $33.00.
b. $35.55.
c. $63.00.
d. $72.00.
e. None of the options are correct.
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The correct answer is: $33.00.
Question 34
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An analyst has determined that the intrinsic value
of IBM stock is $80 per share using the
capitalized earnings model. If the typical P/E ratio
in the computer industry is 22, then it would be
reasonable to assume the expected EPS of IBM in
the coming year is
Select one:
a. $3.64.
b. $4.44.
c. $14.40.
d. $22.50.
Feedback
$80(1/22) = $3.64.
The correct answer is: $3.64.
Question 35
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Low Fly Airline is expected to pay a dividend of $7
in the coming year. Dividends are expected to
grow at the rate of 15% per year. The risk-free
rate of return is 6%, and the expected return on
the market portfolio is 14%. The stock of Low Fly
Airline has a beta of 3.00. The intrinsic value of
the stock is
Select one:
a. $46.67.
b. $50.00.
c. $56.00.
d. $62.50.
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The correct answer is: $46.67.
Question 36
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The market-capitalization rate on the stock of
Flexsteel Company is 12%. The expected ROE is
13%, and the expected EPS are $3.60. If the
firm's plowback ratio is 50%, the P/E ratio will be
Select one:
a. 7.69.
b. 8.33.
c. 9.09.
d. 11.11.
e. None of the options are correct.
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The correct answer is: 9.09.
Question 37
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Paper Express Company has a balance sheet
which lists $85 million in assets, $40 million in
liabilities, and $45 million in common
shareholders' equity. It has 1,400,000 common
shares outstanding. The replacement cost of the
assets is $115 million. The market share price is
$90.
What is Paper Express's market value per share?
Select one:
a. $1.68
b. $2.60
c. $32.14
d. $60.71
e. None of the options are correct.
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The correct answer is: None of the options are
correct.
Question 38
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Exercise Bicycle Company is expected to pay a
dividend in year 1 of $1.20, a dividend in year 2
of $1.50, and a dividend in year 3 of $2.00. After
year 3, dividends are expected to grow at the
rate of 10% per year. An appropriate required
return for the stock is 14%. The stock should be
worth _______ today.
Select one:
a. $33.00
b. $39.86
c. $55.00
d. $66.00
e. $40.68
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The correct answer is: $40.68
Question 39
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An analyst has determined that the intrinsic value
of HPQ stock is $20 per share using the
capitalized earnings model. If the typical P/E ratio
in the computer industry is 25, then it would be
reasonable to assume the expected EPS of HPQ in
the coming year is
Select one:
a. $3.63.
b. $4.44.
c. $0.80.
d. $22.50.
Feedback
$20(1/25) = $0.80.
The correct answer is: $0.80.
Question 40
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Risk Metrics Company is expected to pay a
dividend of $3.50 in the coming year. Dividends
are expected to grow at a rate of 10% per year.
The risk-free rate of return is 5%, and the
expected return on the market portfolio is 13%.
The stock is trading in the market today at a price
of $90.00.
What is the approximate beta of Risk Metrics's
stock?
Select one:
a. 0.8
b. 1.0
c. 1.1
d. 1.4
e. None of the options are correct.
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The correct answer is: 1.1
Question 41
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Low Tech Chip Company is expected to
have EPS of $2.50 in the coming year. The
expected ROE is 14%. An appropriate required
return on the stock is 11%. If the firm has a
dividend payout ratio of 40%, the intrinsic value
of the stock should be
Select one:
a. $22.73.
b. $27.50.
c. $28.57.
d. $38.46.
Feedback
g = 14% × 0.6 = 8.4%; Expected DPS =
$2.50(0.4) = $1.00; P = 1/(.11 - .084) = $38.46.
The correct answer is: $38.46.
Question 42
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You are considering acquiring a common stock
that you would like to hold for one year. You
expect to receive both $1.25 in dividends and
$32 from the sale of the stock at the end of the
year. The maximum price you would pay for the
stock today is _____ if you wanted to earn a 10%
return.
Select one:
a. $30.23
b. $24.11
c. $26.52
d. $27.50
e. None of the options are correct.
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correct
The correct answer is: $30.23
Question 43
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Risk Metrics Company is expected to pay a
dividend of $3.50 in the coming year. Dividends
are expected to grow at a rate of 10% per year.
The risk-free rate of return is 5%, and the
expected return on the market portfolio is 13%.
The stock is trading in the market today at a price
of $90.00.
What is the market-capitalization rate for Risk
Metrics?
Select one:
a. 13.6%
b. 13.9%
c. 15.6%
d. 16.9%
e. None of the options are correct.
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The correct answer is: 13.9%
Question 44
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Mature Products Corporation produces goods that
are very mature in their product life cycles.
Mature Products Corporation is expected to pay a
dividend in year 1 of $2.00, a dividend of $1.50 in
year 2, and a dividend of $1.00 in year 3. After
year 3, dividends are expected to decline at a
rate of 1% per year. An appropriate required rate
of return for the stock is 10%. The stock should
be worth
Select one:
a. $9.00.
b. $10.57.
c. $20.00.
d. $22.22.
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The correct answer is: $10.57.
Question 45
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The market-capitalization rate on the stock of
Fast Growing Company is 20%. The expected ROE
is 22%, and the expected EPS are $6.10. If the
firm's plowback ratio is 90%, the P/E ratio will be
Select one:
a. 7.69.
b. 8.33.
c. 9.09.
d. 11.11.
e. 50.
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The correct answer is: 50.
Question 46
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Sure Tool Company is expected to pay a dividend
of $2 in the upcoming year. The risk-free rate of
return is 4%, and the expected return on the
market portfolio is 14%. Analysts expect the price
of Sure Tool Company shares to be $22 a year
from now. The beta of Sure Tool Company's stock
is 1.25.
What is the intrinsic value of Sure's stock today?
Select one:
a. $20.60
b. $20.00
c. $12.12
d. $22.00
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The correct answer is: $20.60
Question 47
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You are considering acquiring a common stock
that you would like to hold for one year. You
expect to receive both $2.50 in dividends and
$28 from the sale of the stock at the end of the
year. The maximum price you would pay for the
stock today is _____ if you wanted to earn a 15%
return.
Select one:
a. $23.91
b. $24.11
c. $26.52
d. $27.50
e. None of the options are correct.
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correct
The correct answer is: $26.52
Question 48
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The most popular approach to forecasting the
overall stock market is to use
Select one:
a. the dividend multiplier.
b. the aggregate return on assets.
c. the historical ratio of book value to market
value.
d. the aggregate earnings multiplier.
e. Tobin's Q.
Feedback
The earnings multiplier approach is the most
popular approach to forecasting the overall stock
market.
The correct answer is: the aggregate earnings
multiplier.
Question 49
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Suppose that the average P/E multiple in the oil
industry is 20. Dominion Oil is expected to have
an EPS of $3.00 in the coming year. The intrinsic
value of Dominion Oil stock should be
Select one:
a. $28.12.
b. $35.55.
c. $60.00.
d. $72.00.
e. None of the options are correct.
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The correct answer is: $60.00.
Consider a bond selling at par with modified
duration of 10.6 years and convexity of 210. A 2%
decrease in yield would cause the price to
increase by 21.2% according to the duration rule.
What would be the percentage price change
according to the duration-with-convexity rule?
Select one:
a. 21.2%
b. 25.4%
c. 17.0%
d. 10.6%
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MC Qu. 44 Consider a bond selling at par with...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Challenge
Gradable: automatic
Topic: Convexity
The correct answer is: 25.4%
Question 2
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Interest-rate risk is important to
Select one:
a. active bond portfolio managers.
b. passive bond portfolio managers.
c. both active and passive bond portfolio
managers.
d. neither active nor passive bond portfolio
managers.
e. obsessive bond portfolio managers.
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MC Qu. 48 Interest-rate risk is important...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Active and passive investing
The correct answer is: both active and passive
bond portfolio managers.
Question 3
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Two bonds are selling at par value, and each has
17 years to maturity. The first bond has a coupon
rate of 6%, and the second bond has a coupon
rate of 13%. Which of the following is true about
the durations of these bonds?
Select one:
a. The duration of the higher coupon bond will be
higher.
b. The duration of the lower coupon bond will be
higher.
c. The duration of the higher coupon bond will equal
the duration of the lower coupon bond.
d. There is no consistent statement that can be
made about the durations of the bonds.
e. The bond's durations cannot be determined
without knowing the prices of the bonds.
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MC Qu. 54 Two bonds are selling at par value and
each...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Challenge
Gradable: automatic
Topic: Duration
The correct answer is: The duration of the lower
coupon bond will be higher.
Question 4
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A rate anticipation swap is an exchange of
bonds undertaken to
Select one:
a. shift portfolio duration in response to an
anticipated change in interest rates.
b. shift between corporate and government bonds
when the yield spread is out of line with historical
values.
c. profit from apparent mispricing between two
bonds.
d. change the credit risk of the portfolio.
e. increase return by shifting into higher yield
bonds.
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MC Qu. 46 A rate anticipation swap is an
exchange...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Swaps
The correct answer is: shift portfolio duration in
response to an anticipated change in interest
rates.
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Which of the following two bonds is more price
sensitive to changes in interest rates?
1) A par-value bond, A, with a 12 year to maturity
and a 12% coupon rate.
2) A zero-coupon bond, B, with a 12 year to
maturity and a 12% yield to maturity.
Select one:
a. Bond A because of the higher yield to maturity
b. Bond A because of the longer time to maturity
c. Bond B because of the longer duration
d. Both have the same sensitivity because both
have the same yield to maturity.
e. None of the options are correct.
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MC Qu. 56 Which of the following two bonds is
more...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: Bond B because of the
longer duration
Question 6
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When interest rates decline, the duration of a 10year bond selling at a premium
Select one:
a. increases.
b. decreases.
c. remains the same.
d. increases at first, then declines.
e. decreases at first, then increases.
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MC Qu. 33 When interest rates decline, the
duration...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: increases.
Question 7
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Two bonds are selling at par value, and each has
17 years to maturity. The first bond has a coupon
rate of 6%, and the second bond has a coupon
rate of 13%. Which of the following is false about
the durations of these bonds?
Select one:
a. The duration of the higher coupon bond will be
higher.
b. The duration of the lower coupon bond will be
higher.
c. The duration of the higher coupon bond will equal
the duration of the lower coupon bond.
d. There is no consistent statement that can be
made about the durations of the bonds.
e. The duration of the higher coupon bond will be
higher, and the duration of the higher coupon
bond will equal the duration of the lower coupon
bond.
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MC Qu. 55 Two bonds are selling at par value and
each...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Challenge
Gradable: automatic
Topic: Duration
The correct answer is: The duration of the higher
coupon bond will be higher, and the duration of
the higher coupon bond will equal the duration of
the lower coupon bond.
Question 8
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Cash flow matching on a multiperiod basis is
referred to as
Select one:
a. immunization.
b. contingent immunization.
c. dedication.
d. duration matching.
e. rebalancing.
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MC Qu. 41 Cash flow matching on a multiperiod
basis...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Active and passive investing
The correct answer is: dedication.
Question 9
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An 8%, 15-year bond has a yield to maturity of
10% and duration of 8.05 years. If the market
yield changes by 25 basis points, how much
change will there be in the bond's price?
Select one:
a. 1.83%
b. 2.01%
c. 3.27%
d. 6.44%
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MC Qu. 35 An...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: 1.83%
Question 10
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Some of the problems with immunization are
Select one:
a. duration assumes that the yield curve is flat.
b. duration assumes that if shifts in the yield curve
occur, these shifts are parallel.
c. immunization is valid for one interest-rate
change only.
d. durations and horizon dates change by the same
amounts with the passage of time.
e. immunization is valid for one interest-rate
change only, duration assumes that the yield
curve is flat, and that if shifts in the yield curve
occur, these shifts are parallel.
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MC Qu. 39 Some of the problems with
immunization...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Immunization
The correct answer is: immunization is valid for
one interest-rate change only, duration assumes
that the yield curve is flat, and that if shifts in the
yield curve occur, these shifts are parallel.
Question 11
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Immunization through duration matching of
assets and liabilities may be ineffective or
inappropriate because
Select one:
a. conventional duration strategies assume a flat
yield curve.
b. duration matching can only immunize portfolios
from parallel shifts in the yield curve.
c. immunization only protects the nominal value of
terminal liabilities and does not allow for inflation
adjustment.
d. conventional duration strategies assume a flat
yield curve, and immunization only protects the
nominal value of terminal liabilities and does not
allow for inflation adjustment.
e. All of the options are correct.
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MC Qu. 42 Immunization through duration
matching...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Immunization
The correct answer is: All of the options are
correct.
Question 12
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Which of the following two bonds is more price
sensitive to changes in interest rates?
1) A par-value bond, D, with a 2 year to maturity
and an 8% coupon rate.
2) A zero-coupon bond, E, with a 2 year to
maturity and an 8% yield to maturity.
Select one:
a. Bond D because of the higher yield to maturity
b. Bond E because of the longer duration
c. Bond D because of the longer time to maturity
d. Both have the same sensitivity because both
have the same yield to maturity.
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MC Qu. 57 Which of the following two bonds is
more...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: Bond E because of the
longer duration
Question 13
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Which of the following are true about the
interest-rate sensitivity of bonds?
I) Bond prices and yields are inversely related.
II) Prices of long-term bonds tend to be more
sensitive to interest-rate changes than prices of
short-term bonds.
III) Interest-rate risk is correlated with the bond's
coupon rate.
IV) The sensitivity of a bond's price to a change in
its yield to maturity is inversely related to the
yield to maturity at which the bond is currently
selling.
Select one:
a. I and II
b. I and III
c. I, II, and IV
d. II, III, and IV
e. I, II, III, and IV
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MC Qu. 49 Which of the following are true about
the...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Interest rate risk
The correct answer is: I, II, and IV
Question 14
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One way that banks can reduce the duration of
their asset portfolios is through the use of
Select one:
a. fixed-rate mortgages.
b. adjustable-rate mortgages.
c. certificates of deposit.
d. short-term borrowing.
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MC Qu. 36 One way that banks can reduce the
duration...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Basic
Gradable: automatic
Topic: Duration
The correct answer is: adjustable-rate mortgages.
Question 15
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Which of the following are false about the
interest-rate sensitivity of bonds?
I) Bond prices and yields are inversely related.
II) Prices of long-term bonds tend to be more
sensitive to interest-rate changes than prices of
short-term bonds.
III) Interest-rate risk is correlated with the bond's
coupon rate.
IV) The sensitivity of a bond's price to a change in
its yield to maturity is inversely related to the
yield to maturity at which the bond is currently
selling.
Select one:
a. I
b. III
c. I, II, and IV
d. II, III, and IV
e. I, II, III, and IV
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MC Qu. 50 Which of the following are false about
the...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Interest rate risk
The correct answer is: III
Question 16
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The curvature of the price yield curve for a given
bond is referred to as the bond's
Select one:
a. modified duration.
b. immunization.
c. sensitivity.
d. convexity.
e. tangency.
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MC Qu. 43 The curvature of the price-yield
curve...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Convexity
The correct answer is: convexity.
Question 17
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Identify the bond that has the longest duration
(no calculations necessary).
Select one:
a. 20-year maturity with an 8% coupon
b. 20-year maturity with a 12% coupon
c. 20-year maturity with a 0% coupon
d. 10-year maturity with a 15% coupon
e. 12-year maturity with a 12% coupon
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MC Qu. 32 Identify the bond that has the
longest...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: 20-year maturity with a 0%
coupon
Question 18
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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
Select one:
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
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MC Qu. 51 Which of the following researchers
have...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Portfolio management
The correct answer is: I, III, IV, and V
Question 19
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According to the duration concept,
Select one:
a. only coupon payments matter.
b. only maturity value matters.
c. the coupon payments made prior to maturity
make the effective maturity of the bond greater
than its actual time to maturity.
d. the coupon payments made prior to maturity
make the effective maturity of the bond less than
its actual time to maturity.
e. coupon rates don't matter.
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MC Qu. 52 According to the duration...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Duration
The correct answer is: the coupon payments
made prior to maturity make the effective
maturity of the bond less than its actual time to
maturity.
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If a bond portfolio manager believes
I) in market efficiency, he or she is likely to be a
passive portfolio manager.
II) that he or she can accurately predict interestrate changes, he or she is likely to be an active
portfolio manager.
III) that he or she can identify bond-market
anomalies, he or she is likely to be a passive
portfolio manager.
Select one:
a. I only
b. II only
c. III only
d. I and II
e. I, II, and III
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MC Qu. 40 If a bond portfolio manager...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Active and passive investing
The correct answer is: I and II
Question 21
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Duration is important in bond portfolio
management because
I) it can be used in immunization strategies.
II) it provides a gauge of the effective average
maturity of the portfolio.
III) it is related to the interest rate sensitivity of
the portfolio.
IV) it is a good predictor of interest-rate changes.
Select one:
a. I and II
b. I and III
c. III and IV
d. I, II, and III
e. I, II, III, and IV
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The correct answer is: I, II, and III
Question 22
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Holding other factors constant, which one of the
following bonds has the smallest price volatility?
Select one:
a. 20-year, 0% coupon bond
b. 20-year, 6% coupon bond
c. 20 year, 7% coupon bond
d. 20-year, 9% coupon bond
e. Cannot tell from the information given
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The correct answer is: 20-year, 9% coupon bond
Question 23
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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
Select one:
a. 8.05.
b. 9.44.
c. 9.27.
d. 11.22.
e. None of the options are correct.
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The correct answer is: 9.27.
Question 24
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An analyst who selects a particular holding period
and predicts the yield curve at the end of that
holding period is engaging in
Select one:
a. a rate anticipation swap.
b. immunization.
c. horizon analysis.
d. an intermarket spread swap.
e. None of the options are correct.
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The correct answer is: horizon analysis.
Question 25
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Holding other factors constant, which one of the
following bonds has the smallest price volatility?
Select one:
a. 7-year, 0% coupon bond
b. 7-year, 12% coupon bond
c. 7 year, 14% coupon bond
d. 7-year, 10% coupon bond
e. Cannot tell from the information given
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The correct answer is: 7 year, 14% coupon bond
Question 26
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A substitution swap is an exchange of bonds
undertaken to
Select one:
a. change the credit risk of a portfolio.
b. extend the duration of a portfolio.
c. reduce the duration of a portfolio.
d. profit from apparent mispricing between two
bonds.
e. adjust for differences in the yield spread.
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correct
The correct answer is: profit from apparent
mispricing between two bonds.
Question 27
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Immunization is not a strictly passive strategy
because
Select one:
a. it requires choosing an asset portfolio that
matches an index.
b. there is likely to be a gap between the values of
assets and liabilities in most portfolios.
c. it requires frequent rebalancing as maturities and
interest rates change.
d. durations of assets and liabilities fall at the same
rate.
e. None of the options are correct.
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The correct answer is: it requires frequent
rebalancing as maturities and interest rates
change.
Question 28
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The duration of a bond normally increases with an
increase in
Select one:
a. term to maturity.
b. yield to maturity.
c. coupon rate.
d. All of the options are correct.
e. None of the options are correct.
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correct
The correct answer is: term to maturity.
Medtronic Company has an expected ROE of
16%. The dividend growth rate will be ________ if
the firm follows a policy of paying 70% of
earnings in the form of dividends.
Select one:
a. 3.0%
b. 6.0%
c. 7.2%
d. 4.8%
Feedback
16% × 0.30 = 4.8%.
The correct answer is: 4.8%
Question 2
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WACC is the most appropriate discount rate to
use when applying a ______ valuation model.
Select one:
a. FCFF
b. FCFE
c. DDM
d. FCFF or DDM, depending on the debt level of the
firm,
e. P/E
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The correct answer is: FCFF
Question 3
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_________ is equal to common shareholders'
equity divided by common shares outstanding.
Select one:
a. Book value per share
b. Liquidation value per share
c. Market value per share
d. Tobin's Q
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The correct answer is: Book value per share
Question 4
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If a firm follows a low-investment-rate plan
(applies a low plowback ratio), its dividends will
be _______ now and _______ in the future than a
firm that follows a high-reinvestment-rate plan.
Select one:
a. higher; higher
b. lower; lower
c. lower; higher
d. higher; lower
e. It is not possible to tell.
Feedback
By retaining less of its income for plowback, the
firm is able to pay more dividends initially. But
this will lead to a lower growth rate for dividends
and a lower level of dividends in the future
relative to a firm with a high-reinvestment-rate
plan.
The correct answer is: higher; lower
Question 5
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The _______ is defined as the present value of all
cash proceeds to the investor in the stock.
Select one:
a. dividend-payout ratio
b. intrinsic value
c. market-capitalization rate
d. plowback ratio
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The correct answer is: intrinsic value
Question 6
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Light Construction Machinery Company has an
expected ROE of 11%. The dividend growth rate
will be _______ if the firm follows a policy of
paying 25% of earnings in the form of dividends.
Select one:
a. 3.0%
b. 4.8%
c. 8.25%
d. 9.0%
Feedback
11% × 0.75 = 8.25%.
The correct answer is: 8.25%
Question 7
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You wish to earn a return of 12% on each of two
stocks, A and B. Each of the stocks is expected to
pay a dividend of $2 in the upcoming year. The
expected growth rate of dividends is 9% for stock
A and 10% for stock B. The intrinsic value of stock
A
Select one:
a. will be greater than the intrinsic value of stock
B.
b. will be the same as the intrinsic value of stock B.
c. will be less than the intrinsic value of stock B.
d. will be the same or greater than the intrinsic
value of stock B.
e. None of the options are correct.
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The correct answer is: will be less than the
intrinsic value of stock B.
Question 8
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The ______ is a common term for the market
consensus value of the required return on a
stock.
Select one:
a. dividend payout ratio
b. intrinsic value
c. market capitalization rate
d. plowback rate
e. None of the options are correct.
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The correct answer is: market capitalization rate
Question 9
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High Speed Company has an expected ROE of
15%. The dividend growth rate will be ________ if
the firm follows a policy of paying 50% of
earnings in the form of dividends.
Select one:
a. 3.0%
b. 4.8%
c. 7.5%
d. 6.0%
Feedback
15% × 0.50 = 7.5%.
The correct answer is: 7.5%
Question 10
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Since 1955, Treasury bond yields and earnings
yields on stocks have been
Select one:
a. identical.
b. negatively correlated.
c. positively correlated.
d. uncorrelated.
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The correct answer is: positively correlated.
Question 11
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Dividend discount models and P/E ratios are used
by __________ to try to find mispriced securities.
Select one:
a. technical analysts
b. statistical analysts
c. fundamental analysts
d. dividend analysts
e. psychoanalysts
Feedback
Fundamental analysts look at the basic features
of the firm to estimate firm value.
The correct answer is: fundamental analysts
Question 12
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Music Doctors Company has an expected ROE of
14%. The dividend growth rate will be ________ if
the firm follows a policy of paying 60% of
earnings in the form of dividends.
Select one:
a. 4.8%
b. 5.6%
c. 7.2%
d. 6.0%
Feedback
14% × 0.40 = 5.6%.
The correct answer is: 5.6%
Question 13
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Think Tank Company has an expected ROE of
26%. The dividend growth rate will be _______ if
the firm follows a policy of plowing back 90% of
earnings.
Select one:
a. 2.6%
b. 10%
c. 23.4%
d. 90%
Feedback
26% × 0.90 = 23.4%.
The correct answer is: 23.4%
Question 14
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________ are analysts who use information
concerning current and prospective profitability of
a firm to assess the firm's fair market value.
Select one:
a. Credit analysts
b. Fundamental analysts
c. Systems analysts
d. Technical analysts
e. Specialists
Feedback
Fundamentalists use all public information in an
attempt to value stock (while hoping to identify
undervalued securities).
The correct answer is: Fundamental analysts
Question 15
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You wish to earn a return of 13% on each of two
stocks, X and Y. Stock X is expected to pay a
dividend of $3 in the upcoming year while stock Y
is expected to pay a dividend of $4 in the
upcoming year. The expected growth rate of
dividends for both stocks is 7%. The intrinsic
value of stock X
Select one:
a. will be greater than the intrinsic value of stock Y.
b. will be the same as the intrinsic value of stock Y.
c. will be less than the intrinsic value of stock Y.
d. will be the same or greater than the intrinsic
value of stock Y.
e. None of the options are correct.
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The correct answer is: will be less than the
intrinsic value of stock Y.
Question 16
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The required rate of return on equity is the most
appropriate discount rate to use when applying a
______ valuation model.
Select one:
a. FCFE
b. FCEF
c. DDM
d. FCEF or DDM
e. P/E
Feedback
The most appropriate discount rate to use when
applying a FCFE valuation model is the required
rate of return on equity.
The correct answer is: FCFE
Question 17
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Question text
Other things being equal, a low ________ would be
most consistent with a relatively high growth rate
of firm earnings.
Select one:
a. dividend-payout ratio
b. degree of financial leverage
c. variability of earnings
d. inflation rate
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The correct answer is: dividend-payout ratio
Question 18
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If the expected ROE on reinvested earnings is
equal to k, the multistage DDM reduces to
Select one:
a. V0 = (Expected dividend yield in year 1)/k.
b. V0 = (Expected EPS in year 1)/k.
c. V0 = (Treasury bond yield in year 1)/k.
d. V0 = (Market return in year 1)/k.
Feedback
If ROE = k, no growth is occurring; b =
0; EPS = DPS.
The correct answer is: V0 = (Expected EPS in year
1)/k.
Question 19
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High P/E ratios tend to indicate that a company
will _______, ceteris paribus.
Select one:
a. grow quickly
b. grow at the same speed as the average company
c. grow slowly
d. not grow
e. None of the options are correct.
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The correct answer is: grow quickly
Question 20
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You wish to earn a return of 11% on each of two
stocks, C and D. Stock C is expected to pay a
dividend of $3 in the upcoming year while stock D
is expected to pay a dividend of $4 in the
upcoming year. The expected growth rate of
dividends for both stocks is 7%. The intrinsic
value of stock C
Select one:
a. will be greater than the intrinsic value of stock
D.
b. will be the same as the intrinsic value of stock D.
c. will be less than the intrinsic value of stock D.
d. will be the same or greater than the intrinsic
value of stock D.
e. None of the options.
Feedback
PV0 = D1/(k - g); given k and g are equal, the
stock with the larger dividend will have the higher
value.
The correct answer is: will be less than the
intrinsic value of stock D.
Question 21
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Historically, P/E ratios have tended to be
Select one:
a. higher when inflation has been high.
b. lower when inflation has been high.
c. uncorrelated with inflation rates but correlated
with other macroeconomic variables.
d. uncorrelated with any macroeconomic variables,
including inflation rates.
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The correct answer is: lower when inflation has
been high.
Question 22
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_______ is the amount of money per common
share that could be realized by breaking up the
firm, selling the assets, repaying the debt, and
distributing the remainder to shareholders.
Select one:
a. Book value per share
b. Liquidation value per share
c. Market value per share
d. Tobin's Q
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The correct answer is: Liquidation value per share
Question 23
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Each of two stocks, C and D, are expected to pay
a dividend of $3 in the upcoming year. The
expected growth rate of dividends is 9% for both
stocks. You require a rate of return of 10% on
stock C and a return of 13% on stock D. The
intrinsic value of stock C
Select one:
a. will be greater than the intrinsic value of stock D.
b. will be the same as the intrinsic value of stock D.
c. will be less than the intrinsic value of stock D.
d. cannot be calculated without knowing the market
rate of return.
Feedback
PV0 = D1/(k - g); given that dividends are equal,
the stock with the larger required return will have
the lower value.
The correct answer is: will be greater than the
intrinsic value of stock D.
Question 24
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Bubba Gumm Company has an expected ROE of
9%. The dividend growth rate will be _______ if the
firm follows a policy of plowing back 10% of
earnings.
Select one:
a. 90%
b. 10%
c. 9%
d. 0.9%
Feedback
9% × 0.10 = 0.9%.
The correct answer is: 0.9%
Question 25
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Each of two stocks, A and B, are expected to pay
a dividend of $5 in the upcoming year. The
expected growth rate of dividends is 10% for both
stocks. You require a rate of return of 11% on
stock A and a return of 20% on stock B. The
intrinsic value of stock A
Select one:
a. will be greater than the intrinsic value of stock B.
b. will be the same as the intrinsic value of stock B.
c. will be less than the intrinsic value of stock B.
d. cannot be calculated without knowing the market
rate of return.
Feedback
PV0 = D1/(k - g); given that dividends are equal,
the stock with the larger required return will have
the lower value.
The correct answer is: will be greater than the
intrinsic value of stock B.
Question 26
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Low P/E ratios tend to indicate that a company
will _______, ceteris paribus.
Select one:
a. grow quickly
b. grow at the same speed as the average company
c. grow slowly
d. P/E ratios are unrelated to growth.
e. None of the options are correct.
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The correct answer is: grow slowly
Question 27
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________ is equal to the total market value of the
firm's common stock divided by (the replacement
cost of the firm's assets less liabilities).
Select one:
a. Book value per share
b. Liquidation value per share
c. Market value per share
d. Tobin's Q
e. None of the options are correct.
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The correct answer is: Tobin's Q
Question 28
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You wish to earn a return of 10% on each of two
stocks, C and D. Each of the stocks is expected to
pay a dividend of $2 in the upcoming year. The
expected growth rate of dividends is 9% for stock
C and 10% for stock D. The intrinsic value of
stock C
Select one:
a. will be greater than the intrinsic value of stock
D.
b. will be the same as the intrinsic value of stock D.
c. will be less than the intrinsic value of stock D.
d. will be the same or greater than the intrinsic
value of stock D.
e. None of the options are correct.
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The correct answer is: will be less than the
intrinsic value of stock D.
Question 29
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Xlink Company has an expected ROE of 15%. The
dividend growth rate will be _______ if the firm
follows a policy of plowing back 75% of earnings.
Select one:
a. 3.75%
b. 11.25%
c. 8.25%
d. 15.0%
Feedback
15% × 0.75 = 11.25%.
The correct answer is: 11.25%
Question 30
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The Gordon model
Select one:
a. is a generalization of the perpetuity formula to
cover the case of a growing perpetuity.
b. is valid only when g is less than k.
c. is valid only when k is less than g.
d. is a generalization of the perpetuity formula to
cover the case of a growing perpetuity and is
valid only when g is less than k.
e. is a generalization of the perpetuity formula to
cover the case of a growing perpetuity and is
valid only when k is less than g.
Feedback
The Gordon model assumes constant growth
indefinitely. Mathematically, g must be less
than k; otherwise, the intrinsic value is undefined.
The correct answer is: is a generalization of the
perpetuity formula to cover the case of a growing
perpetuity and is valid only when g is less than k.
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The _________ is the fraction of earnings
reinvested in the firm.
Select one:
a. dividend payout ratio
b. retention rate
c. plowback ratio
d. dividend payout ratio and plowback ratio
e. retention rate or plowback ratio
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The correct answer is: retention rate or plowback
ratio
Question 32
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GAAP allows
Select one:
a. no leeway to manage earnings.
b. minimal leeway to manage earnings.
c. considerable leeway to manage earnings.
d. earnings management if it is beneficial in
increasing stock price.
e. None of the options are correct.
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The correct answer is: considerable leeway to
manage earnings.
Question 33
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Low Tech Company has an expected ROE of 10%.
The dividend growth rate will be ________ if the
firm follows a policy of paying 40% of earnings in
the form of dividends.
Select one:
a. 6.0%
b. 4.8%
c. 7.2%
d. 3.0%
Feedback
10% × 0.60 = 6.0%.
The correct answer is: 6.0%
A seven-year par value bond has a coupon rate of
9% (paid annually) and a modified duration of
Select one:
a. 7 years.
b. 5.49 years.
c. 5.03 years.
d. 4.87 years.
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MC Qu. 22 A seven-year par value bond has a
coupon...
AACSB: Knowledge Application
Blooms: Apply
Difficulty: 3 Challenge
Gradable: automatic
Topic: Duration
The correct answer is: 5.03 years.
Question 2
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The duration of a bond is a function of the bond's
Select one:
a. coupon rate.
b. yield to maturity.
c. time to maturity.
d. All of the options are correct.
e. None of the options are correct.
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MC Qu. 1 The duration of a bond is a function of
the...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Duration
The correct answer is: All of the options are
correct.
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Duration measures
Select one:
a. weighted-average time until a bond's half-life.
b. weighted-average time until cash flow payment.
c. the time required to make excessive profit from
the investment.
d. weighted-average time until a bond's half-life
and the time required to make excessive profit
from the investment.
e. weighted-average time until cash flow payment
and the time required to make excessive profit
from the investment.
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MC Qu. 30 Duration measures...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: weighted-average time
until cash flow payment.
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Par-value bond XYZ has a modified duration of 6.
Which one of the following statements regarding
the bond is true?
Select one:
a. If the market yield increases by 1%, the bond's
price will decrease by $60.
b. If the market yield increases by 1%, the bond's
price will increase by $50.
c. If the market yield increases by 1%, the bond's
price will decrease by $50.
d. If the market yield increases by 1%, the bond's
price will increase by $60.
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MC Qu. 23 Par value bond...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: If the market yield
increases by 1%, the bond's price will decrease
by $60.
Question 5
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Ceteris paribus, the duration of a bond is
negatively correlated with the bond's
Select one:
a. time to maturity.
b. coupon rate.
c. yield to maturity.
d. coupon rate and yield to maturity.
e. None of the options are correct.
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MC Qu. 3 Ceteris paribus, the duration of a bond
is...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: coupon rate and yield to
maturity.
Question 6
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Which of the following two bonds is more price
sensitive to changes in interest rates?
1) A par value bond, X, with a 5-year year to
maturity and a 10% coupon rate.
2) A zero-coupon bond, Y, with a 5-year year to
maturity and a 10% yield to maturity.
Select one:
a. Bond X because of the higher yield to maturity
b. Bond X because of the longer time to maturity
c. Bond Y because of the longer duration
d. Both have the same sensitivity because both
have the same yield to maturity.
e. None of the options are correct.
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MC Qu. 14 Which of the following two bonds is
more...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Interest rate risk
The correct answer is: Bond Y because of the
longer duration
Question 7
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The "modified duration" used by practitioners is
equal to ______ divided by (one plus the bond's
yield to maturity).
Select one:
a. current yield
b. the Macaulay duration
c. yield to call
d. yield to maturity
e. None of the options are correct.
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MC Qu. 11 The modified duration used by...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: the Macaulay duration
Question 8
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Holding other factors constant, the interest-rate
risk of a coupon bond is higher when the bond's
Select one:
a. term to maturity is lower.
b. coupon rate is lower.
c. yield to maturity is higher.
d. term to maturity is lower and yield to maturity is
higher.
e. None of the options are correct.
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MC Qu. 6 Holding other factors...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Interest rate risk
The correct answer is: coupon rate is lower.
Question 9
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The duration of a coupon bond
Select one:
a. does not change after the bond is issued.
b. can accurately predict the price change of the
bond for any interest-rate change.
c. will decrease as the yield to maturity decreases.
d. All of the options are true.
e. None of the options are true.
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MC Qu. 28 The duration of a coupon...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Duration
The correct answer is: None of the options are
true.
Question 10
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The basic purpose of immunization is to
Select one:
a. eliminate default risk.
b. produce a zero net-interest-rate risk.
c. offset price and reinvestment risk.
d. eliminate default risk and produce a zero netinterest-rate risk.
e. produce a zero net-interest-rate risk and offset
price and reinvestment risk.
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MC Qu. 19 The basic purpose...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Immunization
The correct answer is: produce a zero netinterest-rate risk and offset price and
reinvestment risk.
Question 11
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Holding other factors constant, the interest-rate
risk of a coupon bond is lower when the bond's
Select one:
a. term to maturity is lower.
b. coupon rate is higher.
c. yield to maturity is higher.
d. term to maturity is lower and coupon rate is
higher.
e. All of the options are correct.
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MC Qu. 8 Holding other factors...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Interest rate risk
The correct answer is: All of the options are
correct.
Question 12
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Ceteris paribus, the duration of a bond is
positively correlated with the bond's
Select one:
a. time to maturity.
b. coupon rate.
c. yield to maturity.
d. All of the options are correct.
e. None of the options are correct.
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MC Qu. 2 Ceteris paribus, the duration of a bond
is...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: time to maturity.
Question 13
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The two components of interest-rate risk are
Select one:
a. price risk and default risk.
b. reinvestment risk and systematic risk.
c. call risk and price risk.
d. price risk and reinvestment risk.
e. None of the options are correct.
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MC Qu. 27 The two components of...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Interest rate risk
The correct answer is: price risk and reinvestment
risk.
Question 14
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Indexing of bond portfolios is difficult because
Select one:
a. the number of bonds included in the major
indexes is so large that it would be difficult to
purchase them in the proper proportions.
b. many bonds are thinly traded, so it is difficult to
purchase them at a fair market price.
c. the composition of bond indexes is constantly
changing.
d. All of the options are true.
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MC Qu. 29 Indexing of bond portfolios is difficult...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Index model portfolio management
The correct answer is: All of the options are true.
Question 15
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Which one of the following statements
is true concerning the duration of a perpetuity?
Select one:
a. The duration of a 15% yield perpetuity that pays
$100 annually is longer than that of a 15% yield
perpetuity that pays $200 annually.
b. The duration of a 15% yield perpetuity that pays
$100 annually is shorter than that of a 15% yield
perpetuity that pays $200 annually.
c. The duration of a 15% yield perpetuity that pays
$100 annually is equal to that of a 15% yield
perpetuity that pays $200 annually.
d. The duration of a perpetuity cannot be
calculated.
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MC Qu. 26 Which one of the following statements
is...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Basic
Gradable: automatic
Topic: Duration
The correct answer is: The duration of a 15%
yield perpetuity that pays $100 annually is equal
to that of a 15% yield perpetuity that pays $200
annually.
Question 16
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The duration of a par-value bond with a coupon
rate of 8% (paid annually) and a remaining time
to maturity of 5 years is
Select one:
a. 5 years.
b. 5.4 years.
c. 4.17 years.
d. 4.31 years.
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MC Qu. 20 The duration of a par value bond with
a coupon...
AACSB: Knowledge Application
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: 4.31 years.
Question 17
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Given the time to maturity, the duration of a
zero-coupon bond is higher when the discount
rate is
Select one:
a. higher.
b. lower.
c. equal to the risk-free rate.
d. The bond's duration is independent of the
discount rate.
e. None of the options are correct.
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MC Qu. 12 Given the time to maturity, the
duration of...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: The bond's duration is
independent of the discount rate.
Question 18
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Holding other factors constant, the interest-rate
risk of a coupon bond is lower when the bond's
Select one:
a. term to maturity is higher.
b. coupon rate is lower.
c. yield to maturity is higher.
d. term to maturity is higher and coupon rate is
lower.
e. All of the options are correct.
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MC Qu. 9 Holding other factors...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Interest rate risk
The correct answer is: yield to maturity is higher.
Question 19
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The duration of a perpetuity with a yield of 8% is
Select one:
a. 13.50 years.
b. 12.11 years.
c. 6.66 years.
d. Cannot be determined
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MC Qu. 21 The duration of a perpetuity with...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Gradable: automatic
Topic: Duration
The correct answer is: 13.50 years.
Question 20
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The "modified duration" used by practitioners is
equal to the Macaulay duration
Select one:
a. times the change in interest rate.
b. times (one plus the bond's yield to maturity).
c. divided by (one minus the bond's yield to
maturity).
d. divided by (one plus the bond's yield to
maturity).
e. None of the options are correct.
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MC Qu. 10 The modified duration used...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: divided by (one plus the
bond's yield to maturity).
Question 21
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Which of the following statements are true?
I) Holding other things constant, the duration of a
bond decreases with time to maturity.
II) Given time to maturity, the duration of a zerocoupon increases with yield to maturity.
III). Given time to maturity and yield to maturity,
the duration of a bond is higher when the coupon
rate is lower.
IV) Duration is a better measure of price
sensitivity to interest-rate changes than is time to
maturity.
Select one:
a. I only
b. I and II
c. III only
d. III and IV
e. I, II, and IV
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MC Qu. 17 Which of the following...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: III and IV
Question 22
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Which of the following is not true?
Select one:
a. Holding other things constant, the duration of a
bond increases with time to maturity.
b. Given time to maturity, the duration of a zerocoupon decreases with yield to maturity.
c. Given time to maturity and yield to maturity, the
duration of a bond is higher when the coupon
rate is lower.
d. Duration is a better measure of price sensitivity
to interest-rate changes than is time to maturity.
e. All of the options are correct.
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MC Qu. 16 Which of the following is...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: Given time to maturity, the
duration of a zero-coupon decreases with yield to
maturity.
Question 23
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Duration
Select one:
a. assesses the time element of bonds in terms of
both coupon and term to maturity.
b. allows structuring a portfolio to avoid interestrate risk.
c. is a direct comparison between bond issues with
different levels of risk.
d. assesses the time element of bonds in terms of
both coupon and term to maturity and allows
structuring a portfolio to avoid interest-rate risk.
e. assesses the time element of bonds in terms of
both coupon and term to maturity and is a direct
comparison between bond issues with different
levels of risk.
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MC Qu. 31 Duration...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: assesses the time element
of bonds in terms of both coupon and term to
maturity and allows structuring a portfolio to
avoid interest-rate risk.
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The interest-rate risk of a bond is
Select one:
a. the risk related to the possibility of bankruptcy of
the bond's issuer.
b. the risk that arises from the uncertainty of the
bond's return caused by changes in interest
rates.
c. the unsystematic risk caused by factors unique in
the bond.
d. the risk related to the possibility of bankruptcy of
the bond's issuer, and the risk that arises from
the uncertainty of the bond's return caused by
changes in interest rates.
e. All of the options are correct.
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MC Qu. 13 The interest-rate risk of a bond...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Interest rate risk
The correct answer is: the risk that arises from
the uncertainty of the bond's return caused by
changes in interest rates.
Question 25
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Holding other factors constant, the interest-rate
risk of a coupon bond is higher when the bond's
Select one:
a. term to maturity is higher.
b. coupon rate is higher.
c. yield to maturity is higher.
d. All of the options are correct.
e. None of the options are correct.
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MC Qu. 5 Holding other factors...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Interest rate risk
The correct answer is: term to maturity is higher.
Question 26
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The duration of a 5-year zero-coupon bond is
Select one:
a. smaller than 5.
b. larger than 5.
c. equal to 5.
d. equal to that of a 5-year 10% coupon bond.
e. None of the options are correct.
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MC Qu. 18 The duration...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Duration
The correct answer is: equal to 5.
Question 27
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Holding other factors constant, the interest-rate
risk of a coupon bond is lower when the bond's
Select one:
a. term to maturity is lower.
b. coupon rate is higher.
c. yield to maturity is lower.
d. term to maturity is lower and coupon rate is
higher.
e. All of the options are correct.
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MC Qu. 7 Holding other factors...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Interest rate risk
The correct answer is: term to maturity is lower
and coupon rate is higher.
Question 28
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Which of the following bonds has the longest
duration?
Select one:
a. An 8-year maturity, 0% coupon bond
b. An 8-year maturity, 5% coupon bond
c. A 10-year maturity, 5% coupon bond
d. A 10-year maturity, 0% coupon bond
e. Cannot tell from the information given
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MC Qu. 24 Which of the following bonds has the...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Duration
The correct answer is: A 10-year maturity, 0%
coupon bond
Question 29
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Holding other factors constant, which one of the
following bonds has the smallest price volatility?
Select one:
a. 5-year, 0% coupon bond
b. 5-year, 12% coupon bond
c. 5 year, 14% coupon bond
d. 5-year, 10% coupon bond
e. Cannot tell from the information given
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MC Qu. 15 Holding other factors constant,
which...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Interest rate risk
The correct answer is: 5 year, 14% coupon bond
Question 30
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Which one of the following par-value 12% coupon
bonds experiences a price change of $23 when
the market yield changes by 50 basis points?
Select one:
a. The bond with a duration of 6 years
b. The bond with a duration of 5 years
c. The bond with a duration of 2.7 years
d. The bond with a duration of 5.15 years
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MC Qu. 25 Which one of the following...
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Challenge
Gradable: automatic
Topic: Duration
The correct answer is: The bond with a duration
of 5.15 years
Question 31
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Holding other factors constant, the interest-rate
risk of a coupon bond is higher when the bond's
Select one:
a. term to maturity is lower.
b. coupon rate is higher.
c. yield to maturity is lower.
d. current yield is higher.
e. None of the options are correct.
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MC Qu. 4 Holding other factors...
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Interest rate risk
The correct answer is: yield to maturity is lower.
Structure of interest rates is
Select one:
a. the relationship between the rates of interest on
all securities.
b. the relationship between the interest rate on a
security and its time to maturity.
c. the relationship between the yield on a bond and
its default rate.
d. All of the options are correct.
e. None of the options are correct.
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The correct answer is: the relationship between
the interest rate on a security and its time to
maturity.
Question 2
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If the value of a Treasury bond was lower than the
value of the sum of its parts (STRIPPED cash
flows),
Select one:
a. arbitrage would probably occur.
b. arbitrage would probably not occur.
c. the FED would adjust interest rates.
d. None of the options are correct.
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correct
The correct answer is: arbitrage would probably
occur.
Question 3
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The value of a Treasury bond should
Select one:
a. be equal to the sum of the value of STRIPS
created from it.
b. be less than the sum of the value of STRIPS
created from it.
c. be greater than the sum of the value of STRIPS
created from it.
d. All of the options are correct.
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The correct answer is: be equal to the sum of the
value of STRIPS created from it.
Question 4
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If the value of a Treasury bond was higher than
the value of the sum of its parts (STRIPPED cash
flows), you could
Select one:
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.
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correct
The correct answer is: profit by buying the
stripped cash flows and reconstituting the bond.
Question 5
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Yea
r
1
2
3
4
5
1Year
Forwa
rd
Rate
5%
5.5%
6.0%
6.5%
7.0%
Calculate the price at the beginning of year 1 of
an 8% annual coupon bond with face value
$1,000 and 5 years to maturity.
Select one:
a. $1,105.47
b. $1,131.91
c. $1,084.25
d. $1,150.01
e. $719.75
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The correct answer is: $1,084.25
Question 6
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Yea
1-
r
1
2
3
4
5
Year
Forwa
rd
Rate
5.8%
6.4%
7.1%
7.3%
7.4%
What should the purchase price of a 2-year zerocoupon bond be if it is purchased at the
beginning of year 2 and has face value of $1,000?
Select one:
a. $877.54
b. $888.33
c. $883.32
d. $893.36
e. $871.80
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The correct answer is: $877.54
Question 7
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Par Value $1,000
Time to
20 Years
Maturity
% (paid
10
annually)
Coupon
Current
price
Yield to
Maturity
$
850
12%
Given the bond described above, if interest were
paid semi-annually (rather than annually), and
the bond continued to be priced at $850, the
resulting effective annual yield to maturity would
be
Select one:
a. less than 12%.
b. more than 12%.
c. 12%.
d. Cannot be determined.
e. None of the options are correct.
Feedback
correct
The correct answer is: more than 12%.
Question 8
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Yea 1r Year
1
2
3
4
5
Forwa
rd
Rate
5%
5.5%
6.0%
6.5%
7.0%
What would the yield to maturity be on a fouryear zero-coupon bond purchased today?
Select one:
a. 5.75%
b. 6.30%
c. 5.65%
d. 5.25%
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correct
The correct answer is: 5.75%
Question 9
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Yea
r
1
2
1Year
Forwa
rd
Rate
5.8%
6.4%
3
4
5
7.1%
7.3%
7.4%
Calculate the price at the beginning of year 1 of a
10% annual coupon bond with face value $1,000
and 5 years to maturity.
Select one:
a. $1,105
b. $1,132
c. $1,179
d. $1,150
e. $1,119
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The correct answer is: $1,132
Question 10
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Treasury STRIPS are
Select one:
a. securities issued by the Treasury with very long
maturities.
b. extremely risky securities.
c. created by selling each coupon or principal
payment from a whole Treasury bond as a
separate cash flow.
d. created by pooling mortgage payments made to
the Treasury.
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The correct answer is: created by selling each
coupon or principal payment from a whole
Treasury bond as a separate cash flow.
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The yield curve
Select one:
a. is a graphical depiction of term structure of
interest rates.
b. is usually depicted for U.S. Treasuries in order to
hold risk constant across maturities and yields.
c. is usually depicted for corporate bonds of
different ratings.
d. is a graphical depiction of term structure of
interest rates and is usually depicted for U.S.
Treasuries in order to hold risk constant across
maturities and yields.
e. is a graphical depiction of term structure of
interest rates and is usually depicted for
corporate bonds of different ratings.
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The correct answer is: is a graphical depiction of
term structure of interest rates and is usually
depicted for U.S. Treasuries in order to hold risk
constant across maturities and yields.
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If the value of a Treasury bond was lower than the
value of the sum of its parts (STRIPPED cash
flows), you could
Select one:
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.
Feedback
correct
The correct answer is: not profit by buying the
stripped cash flows and reconstituting the bond
and profit by buying the bond and creating
STRIPS.
Question 13
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The on the run yield curve is
Select one:
a. a plot of yield as a function of maturity for zerocoupon bonds.
b. a plot of yield as a function of maturity for
recently-issued coupon bonds trading at or near
par.
c. a plot of yield as a function of maturity for
corporate bonds with different risk ratings.
d. a plot of liquidity premiums for different
maturities.
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The correct answer is: a plot of yield as a function
of maturity for recently-issued coupon bonds
trading at or near par.
Question 14
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Bond stripping and bond reconstitution offer
opportunities for ______, which can occur if the
_________ is violated.
Select one:
a. arbitrage; law of one price
b. arbitrage; restrictive covenants
c. huge losses; law of one price
d. huge losses; restrictive covenants
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The correct answer is: arbitrage; law of one price
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______ can occur if _____.
Select one:
a. Arbitrage; the law of one price is not violated
b. Arbitrage; the law of one price is violated
c. Low-risk economic profit; the law of one price is
not violated
d. Low-risk economic profit; the law of one price is
violated
e. Arbitrage and low-risk economic profit; the law of
one price is violated
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The correct answer is: Arbitrage and low-risk
economic profit; the law of one price is violated
Question 16
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Forward rates ____________ future short rates
because ____________.
Select one:
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
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The correct answer is: differ from; they are
imperfect forecasts
Question 17
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If the value of a Treasury bond was higher than
the value of the sum of its parts (STRIPPED cash
flows),
Select one:
a. arbitrage would probably occur.
b. arbitrage would probably not occur.
c. the FED would adjust interest rates.
d. None of the options are correct.
Feedback
correct
The correct answer is: arbitrage would probably
occur.
Question 18
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Yea
r
1
2
3
4
5
1Year
Forwa
rd
Rate
5%
5.5%
6.0%
6.5%
7.0%
What should the purchase price of a 2-year zerocoupon bond be if it is purchased at the
beginning of year 2 and has face value of $1,000?
Select one:
a. $877.54
b. $888.33
c. $883.32
d. $894.21
e. $871.80
Feedback
correct
The correct answer is: $894.21
Question 19
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Par Value $ 1,000
Time to
18 Years
Maturity
% (paid
Coupon
9
annually)
Current
$917.99
price
Yield to
12%
Maturity
Given the bond described above, if interest were
paid semi-annually (rather than annually) and the
bond continued to be priced at $917.99, the
resulting effective annual yield to maturity would
be
Select one:
a. less than 10%.
b. more than 10%.
c. 10%.
d. Cannot be determined.
e. None of the options are correct.
Feedback
correct
The correct answer is: more than 10%.
Question 20
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Yea
r
1
2
3
4
5
1Year
Forwa
rd
Rate
5.8%
6.4%
7.1%
7.3%
7.4%
What would the yield to maturity be on a fouryear zero-coupon bond purchased today?
Select one:
a. 5.80%
b. 7.30%
c. 6.65%
d. 7.25%
e. None of the options are correct.
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correct
The correct answer is: 6.65%
Question 21
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The pure yield curve can be estimated
Select one:
a. by using zero-coupon Treasuries.
b. by using stripped Treasuries if each coupon is
treated as a separate "zero."
c. by using corporate bonds with different risk
ratings.
d. by estimating liquidity premiums for different
maturities.
e. by using zero-coupon Treasuries and by using
stripped Treasuries if each coupon is treated as a
separate "zero."
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The correct answer is: by using zero-coupon
Treasuries and by using stripped Treasuries if
each coupon is treated as a separate "zero."
A bond will sell at a discount when
Select one:
a. the coupon rate is greater than the current yield,
and the current yield is greater than yield to
maturity.
b. the coupon rate is greater than yield to maturity.
c. the coupon rate is less than the current yield,
and the current yield is greater than the yield to
maturity.
d. the coupon rate is less than the current yield,
and the current yield is less than yield to
maturity.
e. None of the options are true.
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correct
The correct answer is: the coupon rate is less
than the current yield, and the current yield is
less than yield to maturity.
Question 2
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A Treasury bond due in one year has a yield of
4.6%; a Treasury bond due in five years has a
yield of 5.6%. A bond issued by Lucent
Technologies due in five years has a yield of
8.9%; a bond issued by Exxon due in one year
has a yield of 6.2%. The default risk premiums on
the bonds issued by Exxon and Lucent
Technologies, respectively, are
Select one:
a. 1.6% and 3.3%.
b. 0.5% and 0.7%.
c. 3.3% and 1.6%.
d. 0.7% and 0.5%.
e. None of the options are correct.
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The correct answer is: 1.6% and 3.3%.
Question 3
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A 10% coupon bond with annual payments and
10 years to maturity is callable in three years at a
call price of $1,100. If the bond is selling today
for $975, the yield to call is
Select one:
a. 10.26%.
b. 10.00%.
c. 9.25%.
d. 13.98%.
e. None of the options are correct.
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The correct answer is: 13.98%.
Question 4
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A coupon bond that pays interest annually is
selling at a par value of $1,000, matures in five
years, and has a coupon rate of 9%. The yield to
maturity on this bond is
Select one:
a. 8.0%.
b. 8.3%.
c. 9.0%.
d. 10.0%.
e. None of the options are correct.
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The correct answer is: 9.0%.
Question 5
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You have just purchased a 10-year zero-coupon
bond with a yield to maturity of 10% and a par
value of $1,000. What would your rate of return
at the end of the year be if you sell the bond?
Assume the yield to maturity on the bond is 11%
at the time you sell.
Select one:
a. 10.00%
b. 20.42%
c. 13.8%
d. 1.4%
e. None of the options are correct.
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The correct answer is: 1.4%
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Consider a $1,000-par-value 20-year zero-coupon
bond issued at a yield to maturity of 10%. If you
buy that bond when it is issued and continue to
hold the bond as yields decline to 9%, the
imputed interest income for the first year of that
bond is
Select one:
a. zero.
b. $14.87.
c. $45.85.
d. $7.44.
e. None of the options are correct.
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The correct answer is: $14.87.
Question 7
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A bond with a 12% coupon, 10 years to maturity,
and selling at $88.00 has a yield to maturity of
Select one:
a. over 14%.
b. between 13% and 14%.
c. between 12% and 13%.
d. between 10% and 12%.
e. less than 12%.
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The correct answer is: over 14%.
Question 8
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You purchased an annual-interest coupon bond
one year ago with six years remaining to maturity
at the time of purchase. The coupon interest rate
is 10%, and par value is $1,000. At the time you
purchased the bond, the yield to maturity was
8%. If you sold the bond after receiving the first
interest payment and the bond's yield to maturity
had changed to 7%, your annual total rate of
return on holding the bond for that year would
have been
Select one:
a. 7.00%.
b. 8.00%.
c. 9.95%.
d. 11.95%.
e. None of the options are correct.
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The correct answer is: 11.95%.
Question 9
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The yield to maturity on a bond is
Select one:
a. below the coupon rate when the bond sells at a
discount and equal to the coupon rate when the
bond sells at a premium.
b. the discount rate that will set the present value
of the payments equal to the bond price.
c. based on the assumption that any payments
received are reinvested at the coupon rate.
d. None of the options are correct.
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The correct answer is: the discount rate that will
set the present value of the payments equal to
the bond price.
Question 10
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A Treasury bond due in one year has a yield of
4.3%; a Treasury bond due in five years has a
yield of 5.06%. A bond issued by Boeing due in
five years has a yield of 7.63%; a bond issued by
Caterpillar due in one year has a yield of 7.16%.
The default risk premiums on the bonds issued by
Boeing and Caterpillar, respectively, are
Select one:
a. 3.33% and 2.10%.
b. 2.57% and 2.86%.
c. 1.2% and 1.0%.
d. 0.76% and 0.47%.
e. None of the options are correct.
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The correct answer is: 2.57% and 2.86%.
Question 11
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Most corporate bonds are traded
Select one:
a. on a formal exchange operated by the New York
Stock Exchange.
b. by the issuing corporation.
c. over the counter by bond dealers linked by a
computer quotation system.
d. on a formal exchange operated by the American
Stock Exchange.
e. on a formal exchange operated by the
Philadelphia Stock Exchange.
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The correct answer is: over the counter by bond
dealers linked by a computer quotation system.
Question 12
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A Treasury bill with a par value of $100,000 due
three months from now is selling today for
$97,087 with an effective annual yield of
Select one:
a. 12.40%.
b. 12.55%.
c. 12.62%.
d. 12.68%.
e. None of the options are correct.
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The correct answer is: 12.55%.
Question 13
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A 10% coupon bond maturing in 10 years that
requires annual payments is expected to make all
coupon payments but to pay only 50% of par
value at maturity. What is the expected yield on
this bond if the bond is purchased for $975?
Select one:
a. 10.00%
b. 6.68%
c. 11.00%
d. 8.68%
e. None of the options are correct.
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The correct answer is: 6.68%
Question 14
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The bond indenture includes
Select one:
a. the coupon rate of the bond.
b. the par value of the bond.
c. the maturity date of the bond.
d. All of the options are correct.
e. None of the options are correct.
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The correct answer is: All of the options are
correct.
Question 15
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A convertible bond has a par value of $1,000 and
a current market value of $850. The current price
of the issuing firm's stock is $27, and the
conversion ratio is 30 shares. The bond's
conversion premium is
Select one:
a. $40.
b. $150.
c. $190.
d. $200.
e. None of the options are correct.
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The correct answer is: $40.
Question 16
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Consider a 5-year bond with a 10% coupon that
has a present yield to maturity of 8%. If interest
rates remain constant, one year from now, the
price of this bond will be
Select one:
a. higher.
b. lower.
c. the same.
d. $1,000.
e. Cannot be determined.
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The correct answer is: lower.
Question 17
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A 12% coupon bond with semi-annual payments
is callable in five years. The call price is $1,120. If
the bond is selling today for $1,110, what is the
yield to call?
Select one:
a. 12.03%
b. 10.86%
c. 10.95%
d. 9.14%
e. None of the options are correct.
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The correct answer is: 10.95%
Question 18
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You purchased an annual interest coupon bond
one year ago that had six years remaining to
maturity at that time. The coupon interest rate
was 10%, and the par value was $1,000. At the
time you purchased the bond, the yield to
maturity was 8%. If you sold the bond after
receiving the first interest payment and the yield
to maturity continued to be 8%, your annual total
rate of return on holding the bond for that year
would have been
Select one:
a. 7.00%.
b. 7.82%.
c. 8.00%.
d. 11.95%.
e. None of the options are correct.
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The correct answer is: 8.00%.
Question 19
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Consider the following $1,000-par-value zerocoupon bonds:
Years
of
Bo Matur
nd ity Price
909.
A
1 $
09
811.
B
2
62
711.
C
3
78
635.
D
4
52
The yield to maturity on bond D is
Select one:
a. 10%.
b. 11%.
c. 12%.
d. 14%.
e. None of the options are correct.
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The correct answer is: 12%.
Question 20
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Consider the following $1,000-par-value zerocoupon bonds:
Years
of
Bo Matur
nd ity Price
909.
A
1 $
09
811.
B
2
62
711.
C
3
78
D
4
635.
52
The yield to maturity on bond B is
Select one:
a. 10%.
b. 11%.
c. 12%.
d. 14%.
e. None of the options are correct.
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The correct answer is: 11%.
Question 21
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You purchased an annual interest coupon bond
one year ago that now has six years remaining
until maturity. The coupon rate of interest was
10%, and par value was $1,000. At the time you
purchased the bond, the yield to maturity was
8%. The amount you paid for this bond one year
ago was
Select one:
a. $1,057.50.
b. $1,075.50.
c. $1,088.50.
d. $1.092.46.
e. $1,104.13.
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The correct answer is: $1,104.13.
Question 22
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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
Select one:
a. 6.00%.
b. 8.33%.
c. 12.00%.
d. 60.00%.
e. None of the options are correct.
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The correct answer is: 12.00%.
Question 23
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Consider the following $1,000-par-value zerocoupon bonds:
Years
of
Bo Matur
nd ity Price
909.
A
1 $
09
811.
B
2
62
711.
C
3
78
635.
D
4
52
The yield to maturity on bond C is
Select one:
a. 10%.
b. 11%.
c. 12%.
d. 14%.
e. None of the options are correct.
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The correct answer is: 12%.
Question 24
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A coupon bond that pays interest semi-annually is
selling at a par value of $1,000, matures in seven
years, and has a coupon rate of 8.6%. The yield
to maturity on this bond is
Select one:
a. 8.0%.
b. 8.6%.
c. 9.0%.
d. 10.0%.
e. None of the options are correct.
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The correct answer is: 8.6%.
Question 25
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A bond has a par value of $1,000, a time to
maturity of 20 years, a coupon rate of 10% with
interest paid annually, a current price of $850,
and a yield to maturity of 12%. Intuitively and
without using calculations, if interest payments
are reinvested at 10%, the realized compound
yield on this bond must be
Select one:
a. 10.00%.
b. 10.9%.
c. 12.0%.
d. 12.4%.
e. None of the options are correct.
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The correct answer is: 10.9%.
Question 26
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Using semi-annual compounding, a 15-year zerocoupon bond that has a par value of $1,000 and a
required return of 8% would be priced at
approximately
Select one:
a. $308.
b. $315.
c. $464.
d. $555.
e. None of the options are correct.
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The correct answer is: $308.
Question 27
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A coupon bond pays interest semi-annually,
matures in five years, has a par value of $1,000,
a coupon rate of 12%, and an effective annual
yield to maturity of 10.25%. The price the bond
should sell for today is
Select one:
a. $922.77.
b. $924.16.
c. $1,075.80.
d. $1,077.20.
e. None of the options are correct.
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The correct answer is: $1,077.20.
Question 28
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A Treasury bill with a par value of $100,000 due
two months from now is selling today for $98,039
with an effective annual yield of
Select one:
a. 12.40%.
b. 12.55%.
c. 12.62%.
d. 12.68%.
e. None of the options are correct.
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The correct answer is: 12.62%.
Question 29
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A Treasury bond due in one year has a yield of
5.7%; a Treasury bond due in 5 years has a yield
of 6.2%. A bond issued by Ford Motor Company
due in 5 years has a yield of 7.5%; a bond issued
by Shell Oil due in one year has a yield of 6.5%.
The default risk premiums on the bonds issued by
Shell and Ford, respectively, are
Select one:
a. 1.0% and 1.2%.
b. 0.7% and 1.5%.
c. 1.2% and 1.0%.
d. 0.8% and 1.3%.
e. None of the options are correct.
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The correct answer is: 0.8% and 1.3%.
Question 30
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Which one of the following statements about
convertibles are false?
I) The longer the call protection on a convertible,
the less the security is worth.
II) The more volatile the underlying stock, the
greater the value of the conversion feature.
III) The smaller the spread between the dividend
yield on the stock and the yield-to-maturity on
the bond, the more the convertible is worth.
IV) The collateral that is used to secure a
convertible bond is one reason convertibles are
more attractive than the underlying stock.
Select one:
a. I only
b. II only
c. I and III
d. IV only
e. I, III, and IV
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The correct answer is: I, III, and IV
Question 31
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A Treasury bill with a par value of $100,000 due
one month from now is selling today for $99,010.
The effective annual yield is
Select one:
a. 12.40%.
b. 12.55%.
c. 12.62%.
d. 12.68%.
e. None of the options are correct.
Feedback
correct
The correct answer is: 12.68%.
Question 32
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A Treasury bond due in one year has a yield of
6.2%; a Treasury bond due in five years has a
yield of 6.7%. A bond issued by Xerox due in five
years has a yield of 7.9%; a bond issued by Exxon
due in one year has a yield of 7.2%. The default
risk premiums on the bonds issued by Exxon and
Xerox, respectively, are
Select one:
a. 1.0% and 1.2%.
b. 0.5% and .7%.
c. 1.2% and 1.0%.
d. 0.7% and 0.5%.
e. None of the options are correct.
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The correct answer is: 1.0% and 1.2%.
Question 33
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Consider two bonds, A and B. Both bonds
presently are selling at their par value of $1,000.
Each pays interest of $120 annually. Bond A will
mature in five years, while bond B will mature in
six years. If the yields to maturity on the two
bonds change from 12% to 10%,
Select one:
a. both bonds will increase in value, but bond A will
increase more than bond B.
b. both bonds will increase in value, but bond B will
increase more than bond A.
c. both bonds will decrease in value, but bond A will
decrease more than bond B.
d. both bonds will decrease in value, but bond B will
decrease more than bond A.
e. None of the options are correct.
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correct
The correct answer is: both bonds will increase in
value, but bond B will increase more than bond A.
Question 34
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Consider the following $1,000-par-value zerocoupon bonds:
Years
of
Bo Matur
nd ity Price
A
1
B
2
C
3
D
4
$
909.
09
811.
62
711.
78
635.
52
The yield to maturity on bond A is
Select one:
a. 10%.
b. 11%.
c. 12%.
d. 14%.
e. None of the options are correct.
Feedback
correct
The correct answer is: 10%.
Question 35
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Which one of the following statements about
convertibles is true?
Select one:
a. The longer the call protection on a convertible,
the less the security is worth.
b. The more volatile the underlying stock, the
greater the value of the conversion feature.
c. The smaller the spread between the dividend
yield on the stock and the yield-to-maturity on
the bond, the more the convertible is worth.
d. The collateral that is used to secure a convertible
bond is one reason convertibles are more
attractive than the underlying stock.
e. Convertibles are not callable.
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The correct answer is: The more volatile the
underlying stock, the greater the value of the
conversion feature.
Question 36
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The yield to maturity of a 20-year zero-coupon
bond that is selling for $372.50 with a value at
maturity of $1,000 is
Select one:
a. 5.1%.
b. 8.8%.
c. 10.8%.
d. 13.4%.
e. None of the options are correct.
Feedback
correct
The correct answer is: 5.1%.
According to Roll, the only testable hypothesis
associated with the CAPM is
Select one:
a. the number of ex-post mean-variance efficient
portfolios.
b. the exact composition of the market portfolio.
c. whether the market portfolio is mean-variance
efficient.
d. the SML relationship.
e. None of the options are correct.
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The correct answer is: whether the market
portfolio is mean-variance efficient.
Question 2
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Tests of multifactor models indicate
Select one:
a. the single-factor model has better explanatory
power in estimating security returns.
b. macroeconomic variables have no explanatory
power in estimating security returns.
c. it may be possible to hedge some economic
factors that affect future-consumption risk with
appropriate portfolios.
d. multifactor models do not work.
e. None of the options are correct.
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The correct answer is: it may be possible to
hedge some economic factors that affect futureconsumption risk with appropriate portfolios.
Question 3
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In the 1972 empirical study by Black, Jensen, and
Scholes, they found that the risk-adjusted returns
of high beta portfolios were _____________ the riskadjusted returns of low beta portfolios.
Select one:
a. greater than
b. equal to
c. less than
d. unrelated to
e. More information is necessary to answer this
question.
Feedback
These results are inconsistent with what would be
predicted with the CAPM.
The correct answer is: less than
Question 4
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Kandel and Stambaugh (1995) expanded Roll's
critique of the CAPM by arguing that tests
rejecting a positive relationship between average
return and beta are demonstrating
Select one:
a. the inefficiency of the market proxy used in the
tests.
b. that the relationship between average return and
beta is not linear.
c. that the relationship between average return and
beta is negative.
d. the need for a better way of explaining security
returns.
e. None of the options are correct.
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correct
The correct answer is: the inefficiency of the
market proxy used in the tests.
Question 5
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Consider the regression equation:
ri - rf = g0 + g1bi + eit
where:
ri - rf = the average difference between the
monthly return on stock i and the monthly riskfree rate
bi = the beta of stock i
This regression equation is used to estimate
Select one:
a. the benchmark error.
b. the security market line.
c. the capital market line.
d. the benchmark error and the security market
line.
e. the benchmark error, the security market line,
and the capital market line.
Feedback
The security market line is a graphical depiction
of the excess returns on the security and a
function of the beta of the security.
The correct answer is: the security market line.
Question 6
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The research by Fama and French suggesting that
CAPM is invalid has generated which of the
following responses?
Select one:
a. Better econometrics should be used in the test
procedure.
b. Estimates of asset betas need to be improved.
c. Theoretical sources and implications of research
that contradicts CAPM needs to be reconsidered.
d. The single-index model needs to account for
nontraded assets and the cyclical behavior of
asset betas.
e. All of the options are correct.
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The correct answer is: All of the options are
correct.
Question 7
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The CAPM is not testable unless
Select one:
a. the exact composition of the true market
portfolio is known and used in the tests.
b. all individual assets are included in the market
proxy.
c. the market proxy and the true market portfolio
are highly negatively correlated.
d. the exact composition of the true market
portfolio is known and used in the tests, and all
individual assets are included in the market
proxy.
e. all individual assets are included in the market
proxy and the market proxy, and the true market
portfolio are highly negatively correlated.
Feedback
correct
The correct answer is: the exact composition of
the true market portfolio is known and used in
the tests, and all individual assets are included in
the market proxy.
Question 8
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Strongest evidence in support of the CAPM has
come from demonstrating that
Select one:
a. the market beta is equal to 1.0.
b. nonsystematic risk has significant explanatory
power in estimating security returns.
c. the average return-beta relationship is highly
significant.
d. the intercept in tests of the excess returns-beta
relationship is exactly zero.
e. professional investors do not generally
outperform market indexes, demonstrating that
the market is efficient.
Feedback
Although tests of CAPM have not found the other
options to be true, the CAPM is qualitatively
supported by findings that the market portfolio is
efficient.
The correct answer is: professional investors do
not generally outperform market indexes,
demonstrating that the market is efficient.
Question 9
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Early tests of the CAPM involved
Select one:
a. establishing sample data.
b. estimating the security characteristic line.
c. estimating the security market line.
d. All of the options are correct.
e. None of the options are correct.
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correct
The correct answer is: All of the options are
correct.
Question 10
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Consider the regression equation:
ri - rf = g0 + g1b1 + g2s2(ei) + eit
where:
ri - rf = the average difference between the
monthly return on stock i and the monthly riskfree rate
bi = the beta of stock i
s2(ei) = a measure of the nonsystematic variance
of the stock i
If you estimated this regression equation and the
CAPM was valid, you would expect the estimated
coefficient, g0, has to be
Select one:
a. 0.
b. 1.
c. equal to the risk-free rate of return.
d. equal to the average difference between the
monthly return on the market portfolio and the
monthly risk-free rate.
e. None of the options are correct.
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correct
The correct answer is: 0.
Question 11
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One way that Black, Jensen and Scholes
overcame the problem of measurement error was
to
Select one:
a. group securities into portfolios.
b. use a two-stage regression methodology.
c. reduce the precision of beta estimates.
d. set alpha equal to one.
e. None of the options are correct.
Feedback
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The correct answer is: group securities into
portfolios.
Question 12
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Fama and French (1992) found that
Select one:
a. firm size had better explanatory power than beta
in describing portfolio returns.
b. beta had better explanatory power than firm size
in describing portfolio returns.
c. beta had better explanatory power than book-tomarket ratios in describing portfolio returns.
d. macroeconomic factors had better explanatory
power than beta in describing portfolio returns.
e. None of the options are correct.
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correct
The correct answer is: firm size had better
explanatory power than beta in describing
portfolio returns.
Question 13
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Consider the regression equation:
ri - rf = g0 + g1bi + g2s2(ei) + eit
where:
ri - rt = the average difference between the
monthly return on stock i and the monthly riskfree rate
bi = the beta of stock i
s2(ei) = a measure of the nonsystematic variance
of the stock i
If you estimated this regression equation and the
CAPM was valid, you would expect the estimated
coefficient, g1, to be
Select one:
a. 0.
b. 1.
c. equal to the risk-free rate of return.
d. equal to the average difference between the
monthly return on the market portfolio and the
monthly risk-free rate.
e. equal to the average monthly return on the
market portfolio.
Feedback
The variable measured by the coefficient, g1, in
this model is the market risk premium.
The correct answer is: equal to the average
difference between the monthly return on the
market portfolio and the monthly risk-free rate.
Question 14
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Which of the following is a (are) result(s) of the
Fama and French (2002) study of the equity
premium puzzle?
I) Average realized returns during 1950-1999
exceeded the internal rate of return (IRR) for
corporate investments.
II) The statistical precision of average historical
returns is far higher than the precision of
estimates from the dividend-discount model
(DDM).
III) The reward-to-variability ratio (Sharpe)
derived from the DDM is far more stable than that
derived from realized returns.
IV) There is no difference between DDM estimates
and actual returns with regard to IRR, statistical
precision, or the Sharpe measure.
Select one:
a. I, II, and III
b. I and III
c. I and II
d. II and III
e. IV
Feedback
The study also predicts that future excess returns
will be significantly lower than those experienced
in recent decades. This has important
implications for current investors.
The correct answer is: I and III
Question 15
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Benchmark error
Select one:
a. refers to the use of an incorrect market proxy in
tests of the CAPM.
b. can result in inconclusive tests of the CAPM.
c. can result in incorrect evaluation measures for
portfolio managers.
d. refers to the use of an incorrect market proxy in
tests of the CAPM and can result in inconclusive
tests of the CAPM.
e. All of the options are correct.
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The correct answer is: All of the options are
correct.
Question 16
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Which of the following statements is true about
models that attempt to measure the empirical
performance of the CAPM?
Select one:
a. The conventional CAPM works better than the
conditional CAPM with human capital.
b. The conventional CAPM works about the same as
the conditional CAPM with human capital.
c. The conditional CAPM with human capital yields a
better fit for empirical returns than the
conventional CAPM.
d. Adding firm size to the model specification
dramatically improves the fit.
e. Adding firm size to the model specification
worsens the fit.
Feedback
The results are presented in Table 13.2.
The correct answer is: The conditional CAPM with
human capital yields a better fit for empirical
returns than the conventional CAPM.
Question 17
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In their multifactor model, Chen, Roll, and Ross
found
Select one:
a. that two market indexes, the equally-weighted
NYSE and the value-weighted NYSE, were not
significant predictors of security returns.
b. that the value-weighted NYSE index had the
incorrect sign, implying a negative market risk
premium.
c. expected changes in inflation-predicted security
returns.
d. that two market indexes, the equally-weighted
NYSE and the value-weighted NYSE, were not
significant predictors of security returns and that
the value-weighted NYSE index had the incorrect
sign, implying a negative market risk premium.
e. All of the options are correct.
Feedback
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The correct answer is: that two market indexes,
the equally-weighted NYSE and the valueweighted NYSE, were not significant predictors of
security returns and that the value-weighted
NYSE index had the incorrect sign, implying a
negative market risk premium.
Question 18
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Consider the regression equation:
rit - rft = ai + bi(rmt - rft) + eit
where:
rit = return on stock i in month t
rft = the monthly risk-free rate of return in
month t
rmt = the return on the market portfolio proxy in
month t
This regression equation is used to estimate
Select one:
a. the security characteristic line.
b. benchmark error.
c. the capital market line.
d. All of the options are correct.
e. None of the options are correct.
Feedback
correct
The correct answer is: the security characteristic
line.
Question 19
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Which of the following statements is false about
models that attempt to measure the empirical
performance of the CAPM?
I) The conventional CAPM works better than the
conditional CAPM with human capital.
II) The conventional CAPM works about the same
as the conditional CAPM with human capital.
III) The conditional CAPM with human capital
yields a better fit for empirical returns than the
conventional CAPM.
Select one:
a. I only
b. II only
c. III only
d. I and II
e. II and III
Feedback
The results are presented in Table 13.2.
The correct answer is: I and II
Question 20
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Consider the regression equation:
ri - rf = g0 + g1bi + g2s2(ei) + eit
where:
ri - rt = the average difference between the
monthly return on stock i and the monthly riskfree rate
bi = the beta of stock i
s2(ei) = a measure of the nonsystematic variance
of the stock i
If you estimated this regression equation and the
CAPM was valid, you would expect the estimated
coefficient, g2, to be
Select one:
a. 0.
b. 1.
c. equal to the risk-free rate of return.
d. equal to the average difference between the
monthly return on the market portfolio and the
monthly risk-free rate.
e. None of the options are correct.
Feedback
correct
The correct answer is: 0.