FIN 330
Fall 14 Test III
Dr. Clay M. Moffett
Student: ___________________________________________
1. Which one of the following terms applies to a rate that serves as an indicator of future trends?
A. bellwether
B. prime
C. call
D. discount
E. nominal
2. Which one of the following rates is used by brokerage firms as the basis for determining margin loan rates?
A. discount
B. Fed funds
C. prime
D. brokerage
E. call money
3. Which one of the following is unsecured debt issued by corporations a with a maturity of less than 270 days but pays
no coupon?
A. banker’s acceptance
B. interbank offered loan
C. equipment bond
D. collateralized debt
E. commercial paper
4. Which one of the following describes a banker's acceptance?
A. agreement to loan money in exchange for an agreement by the borrower to offer an asset as collateral
B. written agreement to loan funds in the future once the loan terms have been accepted
C. postdated check with payment guaranteed by a bank
D. agreement by a bank to provide short-term funds for the construction phase of a project
E. the sale of a security by a bank accompanied by an agreement to repurchase the security the following day
5. Which one of the following is defined as the relationship between the interest rate on default-free, pure discount
bonds and the time to maturity?
A. discount rate curve
B. Treasury yield curve
C. risk premium structure
D. term structure of interest rates
E. market interest rate curve
6. Which one of the following abbreviations is the interest rate that international banks charge one another for
overnight Eurodollar loans?
A. EIOEL
B. EUDOR
C. LEDOR
D. EDBOR
E. LIBOR
7.
A.
B.
C.
D.
E.
Which one of the following best describes a real interest rate?
current rate on a U.S. Treasury bill
nominal rate minus the risk-premium on an individual security
market return minus the risk-free rate
nominal rate minus inflation
historical rate rather than a projected rate
8. Which one of the following best describes the Fisher hypothesis?
A. long-term interest rates are based on current inflation rates
B. nominal interest rates are inversely related to real rates
C. interest rates tend to be higher than inflation rates
D. nominal interest rates tend to be relatively constant over time
E. future interest rates must be higher than current interest rates
9. Which one of the following proposes that lenders must be financially rewarded for loaning funds on a long-term
versus a short-term basis?
A. expectations theory
B. forward rate theory
C. market hypothesis
D. maturity preference theory
E. Fisher hypothesis
10. Which one of the following is correct when computing the price of a debt security when using a discount yield?
A. The price will exceed the face value.
B. An increase in the discount yield will increase the current price.
C. The current price will decrease as the days to maturity decrease.
D. The computation will be based on a 360-day year.
E. The computation will consider leap years.
11. The market rate on a bond fell from 8.76 percent to 8.70 percent. This is a decline of how many basis points?
A. 0.0006
B. 0.006
C. 0.03
D. 6
E. 3
12. The variable f1,2 as used in the expectations theory is interpreted as the forward rate for one year:
A. based on the prior one-year rate.
B. one year rate in one year.
C. based on a 2 percent increase from the current rate.
D. commencing in two years.
E. based on a 1 percent probability of occurrence.
13. An investment will make one payment of $24,000 eleven years from now. What is the current value of this
investment if the nominal rate of return is 5.8 percent?
A. $11,980.86
B. $12,124.29
C. $12,390.08
D. $12,908.30
E. $13,515.46
14. A bond has a face value of $20,000 and matures in 62 days. What is the bank discount yield if the bond is currently
selling for $19,792.30?
A. 4.67 percent
B. 4.87 percent
C. 5.48 percent
D. 5.78 percent
E. 6.03 percent
15. A Treasury bill is quoted at a bank discount yield of 1.08 percent and has 12 days to maturity. What is the bond
equivalent yield given that this is a leap year?
A. 1.06 percent
B. 1.08 percent
C. 1.10 percent
D. 1.12 percent
E. 1.13 percent
16. A Treasury bill matures in 73 days and has a bond equivalent yield of 4.18 percent. What is the effective annual
rate?
A. 4.25 percent
B. 4.47 percent
C. 4.50 percent
D. 4.54 percent
E. 4.57 percent
17. The one-year interest rate is 4.80 percent and the two-year interest rate is 5.13 percent. What is the one year
interest rate one year from now? Assume the rates are effective annual rates.
A. 5.02 percent
B. 5.23 percent
C. 5.46 percent
D. 5.51 percent
E. 5.74 percent
18. The yield that a bond will earn given that it is bought back by the issuer at the earliest possible date is the:
A. market yield.
B. current yield.
C. yield to maturity.
D. yield to put.
E. yield to call
19. Which one of the following measures a bond's sensitivity to changes in market interest rates?
A. yield to call
B. yield to market
C. duration
D. immunization
E. target date valuation
20. Which one of the following statements applies to a par value bond?
A. The current yield is less than the coupon rate.
B. The yield-to-maturity equals the risk-free, or Treasury bill, rate.
C. The par value exceeds the market price.
D. The current yield, coupon rate, and yield-to-maturity are equal.
E. The dirty price equals the clean price.
21. Which one of the following must be equal for two bonds if they are to have similar changes in their prices given a
relatively small change in bond yields?
A. coupon payment
B. time to maturity
C. market price
D. duration
E. current yield
22. A 6.5 percent coupon bond has a face value of $1,000 and a current yield of 6.61 percent. What is the current market
price?
A. $983.36
B. $989.18
C. $1,011.82
D. $3,933.43
E. $4,067.47
23. A $1,000 par value 5 percent Treasury bond pays interest semiannually and matures in 7.5 years. What is the yield to
maturity if the bond is currently quoted at a price of 112.34?
A. 3.14 percent
B. 3.18 percent
C. 3.23 percent
D. 6.28 percent
E. 6.36 percent
24. A zero-coupon bond has a par value of $1,000 and matures in 6.0 years. The yield to maturity is 6.4 percent. What is
the Macaulay duration?
A. 6 years
B. 3.81 years
C. 3.92 years
D. 4.26 years
E. 4.50 years
25. A bond has a Macaulay duration of 5.75 years. What will be the percentage change in the bond price if the yield to
maturity increases from 6 percent to 6.4 percent?
A. -2.23 percent
B. -2.41 percent
C. -3.30 percent
D. -3.38 percent
E. -3.46 percent
26. A dedicated portfolio is a bond portfolio created to:
A. maximize current interest income.
B. provide an increasing steady stream of income.
C. maximize the return given declining interest rates.
D. fund a future cash outlay.
E. avoid taxation.
27. Which one of the following is the set of portfolios that provides the maximum return for a given standard deviation?
A. minimum variance portfolio
B. Markowitz efficient frontier
C. correlated market frontier
D. asset allocation relationship
E. diversified portfolio line
28. As the number of individual stocks in a portfolio increases, the portfolio standard deviation:
A. increases at a constant rate.
B. remains unchanged.
C. decreases at a constant rate.
D. decreases at a increasing rate (convex).
E. decreases at a decreasing rate.
29. Non-diversifiable risk:
A. can be cut almost in half by simply investing in 10 stocks provided each stock is in a different industry.
B. can almost be eliminated by investing in 35 diverse securities.
C. remains constant regardless of the number of securities held in a portfolio.
D. has little, if any, impact on the actual realized returns for a diversified portfolio.
E. should be ignored by investors.
30. What is the correlation coefficient of two assets that are uncorrelated?
A. -100
B. -1
C. 0
D. 1
E. 100
31. Where does the minimum variance portfolio lie in respect to the investment opportunity set?
A. lowest point
B. highest point
C. most leftward point
D. most rightward point
E. exact center
32. What is the expected return on this stock given the following information?
A. 6.40 percent
B. 6.57 percent
C. 8.99 percent
D. 13.40 percent
E. 14.25 percent
33. Ya’ll Stall stock has an expected return of 17.3 percent. What is the risk-free rate if the risk premium on the stock is
12.4 percent?
A. 4.90 percent
B. 5.30 percent
C. 5.67 percent
D. 6.55 percent
E. 7.17 percent
34. According to the systematic risk principle, the reward for bearing risk is based on which one of the following types of
risk?
A. unsystematic
B. firm specific
C. expected
D. systematic
E. diversifiable
35. Which one of the following statements applies to unsystematic risk?
A. It can be eliminated through portfolio diversification.
B. It is also called market risk.
C. It is a type of risk that applies to most, if not all, securities.
D. Investors receive a risk premium as compensation for accepting this risk.
E. This risk is related to expected returns
36. Which one of the following betas represents the greatest level of systematic risk?
A. .05
B. .68
C. 1.00
D. 1.19
E. 1.27
37. The slope of the security market line is equal to the:
A. market risk premium.
B. risk-free rate of return.
C. market rate of return.
D. market rate of return multiplied by any security's beta, given an inefficient market.
E. market rate of return multiplied by the risk-free rate.
38. Where will a security plot in relation to the security market line (SML) if it has a beta of 1.1 and is overvalued?
A. to the right of the overall market and above the SML
B. to the right of the overall market and below the SML
C. to the left of the overall market and above the SML
D. to the left of the overall market and on the SML
E. on the SML
39. Which one of the following is most commonly used as the measure of the overall market rate of return?
A. DJIA
B. S&P 500
C. NASDAQ 100
D. Wilshire 5000
E. Wilshire 3000
40. Which of the following correctly identifies the factors included in the Fama-French three-factor model?
A. standard deviation, beta, and company size
B. the risk-free rate, beta, and the market risk premium
C. company size, company industry, and beta
D. price-earnings ratios, beta, and book-to-market ratios
E. beta, company size, and book-to-market ratios
41. A risky asset has a beta of .88 and an expected return of 7.4 percent. What is the reward-to-risk ratio if the risk-free
rate is 2.8 percent?
A. 4.04 percent
B. 5.23 percent
C. 6.51 percent
D. 8.41 percent
E. 11.59 percent
42. The common stock of Industrial Technologies has an expected return of 15.6 percent. The market return is 11.2
percent and the risk-free return is 4.6 percent. What is the stock's beta?
A. 0.42
B. 1.00
C. 1.32
D. 1.42
E. 1.67
43. Uptown Markets stock has a standard deviation of 16.8 percent and a covariance with the market of .0178. The
market has a standard deviation of 13.6 percent. What is the correlation of this stock with the market?
A. .74
B. .78
C. .87
D. .89
E. .91
330 Fall 14 T3 Key
1. Which one of the following terms applies to a rate that serves as an indicator of future trends?
A. bellwether
B. prime
C. call
D. discount
E. nominal
2. Which one of the following rates is used by brokerage firms as the basis for determining margin loan rates?
A. discount
B. Fed funds
C. prime
D. brokerage
E. call money
3. Which one of the following is unsecured debt issued by corporations a with a maturity of less than 270 days but pays
no coupon?
A. banker’s acceptance
B. interbank offered loan
C. equipment bond
D. collateralized debt
E. commercial paper
4. Which one of the following describes a banker's acceptance?
A. agreement to loan money in exchange for an agreement by the borrower to offer an asset as collateral
B. written agreement to loan funds in the future once the loan terms have been accepted
C. postdated check with payment guaranteed by a bank
D. agreement by a bank to provide short-term funds for the construction phase of a project
E. the sale of a security by a bank accompanied by an agreement to repurchase the security the following day
5. Which one of the following is defined as the relationship between the interest rate on default-free, pure discount
bonds and the time to maturity?
A. discount rate curve
B. Treasury yield curve
C. risk premium structure
D. term structure of interest rates
E. market interest rate curve
6. Which one of the following abbreviations is the interest rate that international banks charge one another for
overnight Eurodollar loans?
A. EIOEL
B. EUDOR
C. LEDOR
D. EDBOR
E. LIBOR
7.
A.
B.
C.
D.
E.
Which one of the following best describes a real interest rate?
current rate on a U.S. Treasury bill
nominal rate minus the risk-premium on an individual security
market return minus the risk-free rate
nominal rate minus inflation
historical rate rather than a projected rate
8. Which one of the following best describes the Fisher hypothesis?
A. long-term interest rates are based on current inflation rates
B. nominal interest rates are inversely related to real rates
C. interest rates tend to be higher than inflation rates
D. nominal interest rates tend to be relatively constant over time
E. future interest rates must be higher than current interest rates
9. Which one of the following proposes that lenders must be financially rewarded for loaning funds on a long-term
versus a short-term basis?
A. expectations theory
B. forward rate theory
C. market hypothesis
D. maturity preference theory
E. Fisher hypothesis
10. Which one of the following is correct when computing the price of a debt security when using a discount yield?
A. The price will exceed the face value.
B. An increase in the discount yield will increase the current price.
C. The current price will decrease as the days to maturity decrease.
D. The computation will be based on a 360-day year.
E. The computation will consider leap years.
11. The market rate on a bond fell from 8.76 percent to 8.70 percent. This is a decline of how many basis points?
A. 0.0006
B. 0.006
C. 0.03
D. 6
E. 3
12. The variable f1,2 as used in the expectations theory is interpreted as the forward rate for one year:
A. based on the prior one-year rate.
B. one year rate in one year.
C. based on a 2 percent increase from the current rate.
D. commencing in two years.
E. based on a 1 percent probability of occurrence.
13. An investment will make one payment of $24,000 eleven years from now. What is the current value of this
investment if the nominal rate of return is 5.8 percent?
A. $11,980.86
B. $12,124.29
C. $12,390.08
D. $12,908.30
E. $13,515.46
14. A bond has a face value of $20,000 and matures in 62 days. What is the bank discount yield if the bond is currently
selling for $19,792.30?
A. 4.67 percent
B. 4.87 percent
C. 5.48 percent
D. 5.78 percent
E. 6.03 percent
15. A Treasury bill is quoted at a bank discount yield of 1.08 percent and has 12 days to maturity. What is the bond
equivalent yield given that this is a leap year?
A. 1.06 percent
B. 1.08 percent
C. 1.10 percent
D. 1.12 percent
E. 1.13 percent
16. A Treasury bill matures in 73 days and has a bond equivalent yield of 4.18 percent. What is the effective annual
rate?
A. 4.25 percent
B. 4.47 percent
C. 4.50 percent
D. 4.54 percent
E. 4.57 percent
17. The one-year interest rate is 4.80 percent and the two-year interest rate is 5.13 percent. What is the one year
interest rate one year from now? Assume the rates are effective annual rates.
A. 5.02 percent
B. 5.23 percent
C. 5.46 percent
D. 5.51 percent
E. 5.74 percent
(1 + .0513)2 = (1 + .048)(1 + f1,1)
f1,1 = 5.46 percent
18. The yield that a bond will earn given that it is bought back by the issuer at the earliest possible date is the:
A. market yield.
B. current yield.
C. yield to maturity.
D. yield to put.
E. yield to call
19. Which one of the following measures a bond's sensitivity to changes in market interest rates?
A. yield to call
B. yield to market
C. duration
D. immunization
E. target date valuation
20. Which one of the following statements applies to a par value bond?
A. The current yield is less than the coupon rate.
B. The yield-to-maturity equals the risk-free, or Treasury bill, rate.
C. The par value exceeds the market price.
D. The current yield, coupon rate, and yield-to-maturity are equal.
E. The dirty price equals the clean price.
21. Which one of the following must be equal for two bonds if they are to have similar changes in their prices given a
relatively small change in bond yields?
A. coupon payment
B. time to maturity
C. market price
D. duration
E. current yield
22. A 6.5 percent coupon bond has a face value of $1,000 and a current yield of 6.61 percent. What is the current market
price?
A. $983.36
B. $989.18
C. $1,011.82
D. $3,933.43
E. $4,067.47
Market price = (.065  $1,000)/.0661 = $983.36
23. A $1,000 par value 5 percent Treasury bond pays interest semiannually and matures in 7.5 years. What is the yield to
maturity if the bond is currently quoted at a price of 112.34?
A. 3.14 percent
B. 3.18 percent
C. 3.23 percent
D. 6.28 percent
E. 6.36 percent
Using a financial calculator:
24. A zero-coupon bond has a par value of $1,000 and matures in 6.0 years. The yield to maturity is 6.4 percent. What is
the Macaulay duration?
A. 6 years
B. 3.81 years
C. 3.92 years
D. 4.26 years
E. 4.50 years
The duration of a zero-coupon bond is equal to the time to maturity. Thus, the answer is 4.5 years.
25. A bond has a Macaulay duration of 5.75 years. What will be the percentage change in the bond price if the yield to
maturity increases from 6 percent to 6.4 percent?
A. -2.23 percent
B. -2.41 percent
C. -3.30 percent
D. -3.38 percent
E. -3.46 percent
26. A dedicated portfolio is a bond portfolio created to:
A. maximize current interest income.
B. provide an increasing steady stream of income.
C. maximize the return given declining interest rates.
D. fund a future cash outlay.
E. avoid taxation.
27. Which one of the following is the set of portfolios that provides the maximum return for a given standard deviation?
A. minimum variance portfolio
B. Markowitz efficient frontier
C. correlated market frontier
D. asset allocation relationship
E. diversified portfolio line
28. As the number of individual stocks in a portfolio increases, the portfolio standard deviation:
A. increases at a constant rate.
B. remains unchanged.
C. decreases at a constant rate.
D. decreases at a increasing rate (convex).
E. decreases at a decreasing rate.
29. Non-diversifiable risk:
A. can be cut almost in half by simply investing in 10 stocks provided each stock is in a different industry.
B. can almost be eliminated by investing in 35 diverse securities.
C. remains constant regardless of the number of securities held in a portfolio.
D. has little, if any, impact on the actual realized returns for a diversified portfolio.
E. should be ignored by investors.
30. What is the correlation coefficient of two assets that are uncorrelated?
A. -100
B. -1
C. 0
D. 1
E. 100
31. Where does the minimum variance portfolio lie in respect to the investment opportunity set?
A. lowest point
B. highest point
C. most leftward point
D. most rightward point
E. exact center
32. What is the expected return on this stock given the following information?
A. 6.40 percent
B. 6.57 percent
C. 8.99 percent
D. 13.40 percent
E. 14.25 percent
E(R) = (.15  22) + (.60  11) + (.25  -14) = 6.40 percent
33. all Stand Timber stock has an expected return of 17.3 percent. What is the risk-free rate if the risk premium on the
stock is 12.4 percent?
A. 4.90 percent
B. 5.30 percent
C. 5.67 percent
D. 6.55 percent
E. 7.17 percent
Risk premium = 17.3 - 12.4 = 4.90 percent
34. According to the systematic risk principle, the reward for bearing risk is based on which one of the following types of
risk?
A. unsystematic
B. firm specific
C. expected
D. systematic
E. diversifiable
35. Which one of the following statements applies to unsystematic risk?
A. It can be eliminated through portfolio diversification.
B. It is also called market risk.
C. It is a type of risk that applies to most, if not all, securities.
D. Investors receive a risk premium as compensation for accepting this risk.
E. This risk is related to expected returns
36. Which one of the following betas represents the greatest level of systematic risk?
A. .05
B. .68
C. 1.00
D. 1.19
E. 1.27
37. The slope of the security market line is equal to the:
A. market risk premium.
B. risk-free rate of return.
C. market rate of return.
D. market rate of return multiplied by any security's beta, given an inefficient market.
E. market rate of return multiplied by the risk-free rate.
38. Where will a security plot in relation to the security market line (SML) if it has a beta of 1.1 and is overvalued?
A. to the right of the overall market and above the SML
B. to the right of the overall market and below the SML
C. to the left of the overall market and above the SML
D. to the left of the overall market and on the SML
E. on the SML
39. Which one of the following is most commonly used as the measure of the overall market rate of return?
A. DJIA
B. S&P 500
C. NASDAQ 100
D. Wilshire 5000
E. Wilshire 3000
40. Which of the following correctly identifies the factors included in the Fama-French three-factor model?
A. standard deviation, beta, and company size
B. the risk-free rate, beta, and the market risk premium
C. company size, company industry, and beta
D. price-earnings ratios, beta, and book-to-market ratios
E. beta, company size, and book-to-market ratios
41. A risky asset has a beta of .88 and an expected return of 7.4 percent. What is the reward-to-risk ratio if the risk-free
rate is 2.8 percent?
A. 4.04 percent
B. 5.23 percent
C. 6.51 percent
D. 8.41 percent
E. 11.59 percent
42. The common stock of Industrial Technologies has an expected return of 15.6 percent. The market return is 11.2
percent and the risk-free return is 4.6 percent. What is the stock's beta?
A. 0.42
B. 1.00
C. 1.32
D. 1.42
E. 1.67
15.6 = 4.6 +  (11.2 - 4.6);  = 1.67
43. Uptown Markets stock has a standard deviation of 16.8 percent and a covariance with the market of .0178. The
market has a standard deviation of 13.6 percent. What is the correlation of this stock with the market?
A. .74
B. .78
C. .87
D. .89
E. .91