FIN350 Quiz 2 Monday First Name___________ Last Name _______ Version B
EVA
=
After-tax
__ After-tax
Operating Income
Capital costs
= NOPAT – After-tax Cost of Capital
Hint: To get YTM, enter bond price as a negative number.
YTM=CGY+CY
Current yield=annual coupon/bond price
1. If a bond issued by First Boston Bank has a Standard & Poor's credit rating of A-, it
is referred to as a(n) ___.
a. Barry's bond
b.
c.
d.
e.
Investment grade bond.
James Bond.
Junk bond
Callable bond
2. Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an
annual coupon interest payment of $65. The market requires an interest rate of 8.2%
on these bonds. What is the bond's price?
a. $972.48
b. $925.62
c. $948.76
d. $903.04
e. $996.79
3.Which of the following bonds would have the greatest percentage increase in value if
all interest rates in the economy fall by 1%? (Hint: No need to calculate numbers.
which one has the largest maturity risk?)
a.
b.
c.
d.
20-year, zero coupon bond.
18-year, 10% coupon bond.
19-year, 5% coupon bond.
10-year, zero coupon bond.
4. What is the current yield for the following bond? (Coupon (%) refers to coupon rate. Par value
is $1000. Bond price is quoted as a percentage of the par value.)
A) 4.863%
B) 4.875%
C) 4.866%
D)10.018%
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5. Below is the term structure for treasury securities as of February 2, 2012. The
yield curve is :
A)
normal
B)
inverted
C)
downward sloping
Date
1 mo
3 mo
6 mo
1 yr
2 yr
3 yr
5 yr
7 yr
10 yr
20 yr
02/02/11
0.15
0.16
0.18
0.28
0.67
1.12
2.10
2.84
3.52
4.39
6. If currently the Treasury yield curve is a normal yield curve, what is the yield to
maturity on a 9-year Treasury bond, relative to that on a 4-year Treasury note?
a.
b.
c.
d.
The yields on the two bonds are equal.
It is impossible to tell without knowing the relative default risks
of the two Treasury bonds.
The yield on a 9-year Treasury bond is lower than the yield on a 4-year
Treasury note.
The yield on the 9-year Treasury bond is higher than the yield on
a 4-year Treasury note.
7. Which chapter of the Federal Bankruptcy Act refers to liquidation?
A)
Chapter 9
B)
Chapter 7
C)
Chapter 11
D)
Chapter 12
8. The long-term bonds issued by state and local governments in the United
States are called:
A. Junk bonds.
B. Treasury bonds.
C. Floating rate bonds.
D. Municipal bonds.
E. Strips bonds.
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9. In finance, a ________bond is a type of bond that can be converted into shares
of stock in the issuing company, usually at some pre-announced ratio. It is a
hybrid security with debt- and equity-like features. A convertible bond typically
has a ____yield to maturity than that of an otherwise comparable bond.
A) callable; lower
B) indexed bond; higher
C) municipal; higher
D) convertible; lower
10. The coupon rate of a bond equals:
A) coupon as a percentage of its face value.
B) current yield
C) the maturity value.
D) its yield to maturity.
11. A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years
to maturity, cannot be called, and is not expected to default. The bond should sell
at a premium if market interest rates are below 10% and at a discount if interest
rates are greater than 10%.
a. False
b. True
12. Risk premiums for different types of bond should be: (IP=inflation premium,
MRP=maturity risk premium, DRP=default risk premium, LP=liquidity
premium.)
IP
A)
S-T Treasury

L-T Treasury

S-T Corporate


L-T Corporate


IP
B)
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MRP
S-T Treasury

L-T Treasury

S-T Corporate

L-T Corporate

DRP
LP

MRP



DRP
LP






3
C)
IP
S-T Treasury

L-T Treasury

S-T Corporate

L-T Corporate

MRP
DRP
LP






13. Sometimes a security cannot be sold quickly in a market unless the
seller cuts price. This may happen because there are not many
buyers/sellers in the market. This kind of risk is called:
A) liquidly risk
B) inflation risk
C) credit risk
D) default risk
E) Interest rate risk
14. Please use the following information to value a 10% coupon rate, four
years maturity bond, if the term structure is:
Year
Spot rate
1
5.9%
2
5.7%
3
5.4%
4
5.0%
The bond should sell for:
(0.05  0.054  0.057  0.059) / 4  0.055
a.
100
100
100
(100  1, 000)



1
2
3
(1  .055) (1  .055) (1  .055)
(1  .055) 4
b.
P
100
100
100
(100  1, 000)



1
2
3
(1  .059) (1  .059) (1  .059)
(1  .059) 4
c.
P
100
100
100
(100  1, 000)



1
2
3
(1  .05) (1  .054) (1  .057)
(1  .059)4
d.
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P
P
100
100
100
(100  1, 000)



1
2
3
(1  .059) (1  .057) (1  .054)
(1  .05) 4
4
15. The discount rate that makes the present value of a bond’s payments equal to its price
is termed the:
A) yield to maturity.
B) capital gain yield.
C) current yield.
D) coupon rate
16. Which of the following stock likely has a low but positive (larger than 0 but smaller
than 1) beta?
A) a utility firm (for example, PG&E)
B) a company that makes luxurious clothes or a high-tech firm
C) a debt-collection firm (that may generate more profit in recession)
17. The resign of a CEO from Coldman Saches, or the winning or losing a big contract
in Dull Computer Inc. is some event that can be characterized as
a.
b.
c.
d.
Beta risk.
diversifiable risk.
Systematic risk that can be diversified away.
Market risk.
18. The total risk of a stock is measured by
(a) the volatility of the stock return (standard deviation)
(b) highest stock price
(c) the expected stock price
(d) the mean of the stock returns
19. Over the next year, if stock HT’s expected return is 12%, stock COLL’s expected
return is 2%, what could be the expected return of a portfolio that allocates 40% fund
on HT and 60% on COLL?
a.
b.
c.
d.
e.
5%
8.2%
10%
6%
7%
20. In reality most investors are usually :
a. risk neutral (do not care about risk.)
b. risk averse
c. risk chasing (love risk.)
d. very pessimistic
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21.
Which of the following statements best describes what would be expected to
happen as you randomly select stocks and add them to your portfolio?
a. Adding more such stocks will reduce the portfolio’s diversifiable (firm
specific) risk.
b. Adding more such stocks will have no effect on the portfolio’s firm specific
risk.
c. Adding more such stocks will always increase the portfolio’s expected return.
d. Adding more such stocks will always reduce the portfolio’s market risk.
22. What is the beta of a treasury bill?
(a) -1
(b) 1
(c) 0
23. What is the best strategy to diversify your portfolio?
A) Invest only in internet stocks
B) Allocate your investment over 5 stocks that are all stocks in the
healthcare sector.
C) Allocate your investment over 40 stocks in different industries.
D) Randomly select just one stock and put all your money on this stock
E) Only choose 20 stocks of Singapore companies
24. In corporate finance, _______is a measure of a company's financial
performance by deducting (after tax) cost of capital from its NOPAT (net
operating profit after tax).
A) MVA
B) economic value added
C) dividend wealth added
D) most valued asset
25. Interest income on which of the following securities may be exempt from
federal tax?
A) municipal bonds
B) callable bonds
C) junk bonds
D) float-rate bonds
E) treasury bond
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