ECN 324 Test 2 Chap 7-12
Summer 2013
Dr. Moffett
1.
a.
b.
c.
d.
coupon payments.
Bearer
Registered
Treasury
Corporate
2.
a.
b.
c.
d.
Interest earned from Treasury bonds is
exempt from all income tax.
exempt from federal income tax.
exempt from state and local taxes.
subject to all income taxes.
Student: _______________________________________
3. ____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be
purchased.
a. Competitive
b. Noncompetitive
c. Negotiable
d. Non-negotiable
4. Municipal general obligation bonds are ____. Municipal revenue bonds are ____.
a. supported by the municipal government's ability to tax; supported by the municipal
government's ability to tax
b. supported by the municipal government's ability to tax; supported by revenue generated
from the project
c. always subject to federal taxes; always exempt from state and local taxes
d. typically zero-coupon bonds; typically zero-coupon bonds
5.
a.
b.
c.
d.
A call provision on bonds normally
allows the firm to sell new bonds at par value.
gives the firm to sell new bonds above market value.
allows the firm to sell bonds to the Treasury.
allows the firm to buy back bonds that it previously issued.
6.
a.
b.
c.
d.
When would a firm most likely call bonds?
after interest rates have declined
if interest rates do not change
after interest rates increase
just before the time at which interest rates are expected to decline
7.
a.
b.
c.
d.
Some bonds are "stripped," which means that
they have defaulted.
the call provision has been eliminated.
they are transformed into principal-only and interest-only securities.
their maturities have been reduced.
8.
a.
b.
c.
d.
If the coupon rate equals the required rate of return, the price of the bond
should be above its par value.
should be below its par value.
should be equal to its par value.
is negligible.
9.
a.
b.
c.
d.
e.
As interest rates increase, long-term bond prices
increase by a greater degree than short-term bond prices.
increase by an equal degree as short-term bond prices.
decrease by a greater degree than short-term bond prices.
decrease by an equal degree as short-term bond prices.
decrease by a smaller degree than short-term bond prices.
10. A $1,000 par bond with five years to maturity is currently priced at $892. Annual interest payments are $90. What is
the yield to maturity?
a. 13.1 percent
b. 11.9 percent
c. 11.1 percent
d. 10.9 percent
11. If analysts expect that the demand for loanable funds will increase, and the supply of loanable funds will decrease, they
would most likely expect interest rates to ____ and prices of existing bonds to ____.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
12.
a.
b.
c.
d.
The bonds that are most sensitive to interest rate movements have
no coupon and a short-term maturity.
high coupons and a short-term maturity.
high coupons and a long-term maturity.
no coupon and a long-term maturity.
13.
a.
b.
c.
d.
A mortgage that requires interest payments for a three- to five-year period, then full payment of principal, is a(n)
chattel mortgage.
balloon payment mortgage.
variable-rate mortgage.
open-ended mortgage bond.
14. A ____ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase
over the first 5 to 10 years and then level off.
a. graduated payment mortgage
b. growing-equity mortgage
c. second mortgage
d. shared-appreciation mortgage
15.
a.
b.
c.
d.
The difference between the 30-year mortgages rate and the 30-year Treasury bond rate is primarily attributable to
interest rate risk.
reinvestment rate risk.
credit risk.
insurance risk.
16.
a.
b.
c.
d.
In a collateralized mortgage obligation (CMO), mortgages are segmented into ____ (or classes).
balloon payments
caps
tranches
strips
17. Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ____ risk, because they
commonly use funds obtained from short-term customer deposits to make long-term mortgage loans.
a. exchange rate
b. prepayment
c. reinvestment rate
d. interest rate
e. exchange rate
18.
a.
b.
c.
d.
e.
The probability that a borrower will default (credit risk) is influenced by all of the following, except
economic conditions.
the level of equity invested by the borrower.
the borrower's income level.
the borrower's credit history.
Credit risk is affected by all of the above.
19. A ____ requires that dividends cannot be paid on common stock until all current and previously omitted dividends are
paid on preferred stock.
a. residual claim
b. preferred margin
c. cumulative provision
d. liquidation claim
20.
a.
b.
c.
d.
When a corporation first decides to issue stock to the public, it engages in a(n)
secondary offering.
initial public offering.
seasoned equity offering.
none of the above
21.
a.
b.
c.
d.
The purpose of a lockup provision is to
keep individual investors from buying and selling stock.
prevent downward pressure on the stock's price.
increase the number of outstanding shares.
allocate a larger proportion of stock to institutional investors.
22.
a.
b.
c.
d.
The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called
flipping.
skiing.
flopping.
none of the above
23.
a.
b.
c.
d.
A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n)
stock repurchase.
secondary stock offering.
initial rights issue.
initial public offering (IPO).
24.
a.
b.
c.
d.
____ are not barriers to corporate control to eliminate agency problems.
Leveraged buyouts
Antitakeover amendments
Poison pills
Golden parachutes
25.
a.
b.
c.
d.
The ____ is commonly used as a proxy for the risk-free rate in the Capital Asset Pricing Model.
Treasury bond rate
prime rate
discount rate
federal funds rate
26.
a.
b.
c.
d.
The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's volatility.
Sharpe
Treynor
arbitrage
margin
27. If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all
other public information, security markets are
a. weak-form efficient.
b. semi-strong form efficient.
c. strong form efficient.
d. B and C
e. none of the above
28. A stock's beta is estimated to be 1.3. The risk-free rate is 5 percent, and the market return is expected to be 9 percent.
What is the expected return on the stock based on the CAPM?
a. 5.2 percent
b. 11.7 percent
c. 16.7 percent
d. 4 percent
e. 10.2 percent
29.
a.
b.
c.
d.
A higher beta of an asset reflects
lower risk.
lower covariance between the asset's returns and market returns.
higher covariance between the asset's returns and the market returns.
none of the above
30.
a.
b.
c.
d.
Value at risk estimates POORLY the ____ a particular investment for a specified confidence level.
beta of
risk-free rate of
largest expected loss to
standard deviation of
31.
a.
b.
c.
d.
A ____ order to buy or sell a stock means to execute the transaction at the best possible available price.
market
limit
stop-loss
stop-buy
32. Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to pay $25 a share and
borrows the remaining funds at a 12 percent annual interest. What is the return if the investor sells the stock for $55 at the
end of one year?
a. 50 percent
b. 30 percent
c. 10 percent
d. 16 percent
e. 8 percent
33.
a.
b.
c.
d.
The risk of a short sale is that the stock price
may decrease over time.
will remain the same.
may increase over time.
none of the above
34.
a.
b.
c.
d.
The size of the spread on stocks that have relatively little trading is
smaller to reflect the lower degree of uncertainty.
the same as that of stocks with higher volumes of trading.
wider to reflect the higher degree of uncertainty.
not affected by trading volume.
35.
a.
b.
c.
d.
The bid-ask spread is negatively related to
order costs.
inventory costs.
risk
trading volume.
36. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10
percent yield to maturity. The duration of this bond is
a. 1.90 years.
b. 1.50 years.
c. 1.92 years.
d. none of the above
37.
a.
b.
c.
d.
The relationship reflecting the actual response of a bond's price to a change in bond yields is
concave.
convex.
linear.
quadratic.
R = R + B (R – R )
j
SI 
f
j
m
Pct. Change in Bond Price  Duration 
f
R  Rf

Modified Duration 
TI 
R  Rf

PV 
R  Rf



C
C
C  par

 ... 
1
2
1  k  1  k 
1  k n
Macaulay Duration
YTM 

1 

2 

Pct. Change in Bond Price  - Modified Duration  Change in YTM
TI 
Change in YTM
1  YTM
2
ANSWER KEY
1. coupon payments.
a. Bearer
b. Registered
c. Treasury
d. Corporate
ANS:
A
2. Interest earned from Treasury bonds is
a. exempt from all income tax.
b. exempt from federal income tax.
c. exempt from state and local taxes.
d. subject to all income taxes.
ANS:
C
3. ____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased.
a. Competitive
b. Noncompetitive
c. Negotiable
d. Non-negotiable
ANS:
A
4. Municipal general obligation bonds are ____. Municipal revenue bonds are ____.
a. supported by the municipal government's ability to tax; supported by the municipal government's
ability to tax
b. supported by the municipal government's ability to tax; supported by revenue generated from the
project
c. always subject to federal taxes; always exempt from state and local taxes
d. typically zero-coupon bonds; typically zero-coupon bonds
ANS:
B
5. A call provision on bonds normally
a. allows the firm to sell new bonds at par value.
b. gives the firm to sell new bonds above market value.
c. allows the firm to sell bonds to the Treasury.
d. allows the firm to buy back bonds that it previously issued.
ANS:
D
6. When would a firm most likely call bonds?
a. after interest rates have declined
b. if interest rates do not change
c. after interest rates increase
d. just before the time at which interest rates are expected to decline
ANS:
A
7. Some bonds are "stripped," which means that
a. they have defaulted.
b. the call provision has been eliminated.
c. they are transformed into principal-only and interest-only securities.
d. their maturities have been reduced.
ANS:
C
8. If the coupon rate equals the required rate of return, the price of the bond
a. should be above its par value.
b. should be below its par value.
c. should be equal to its par value.
d. is negligible.
ANS:
C
9. As interest rates increase, long-term bond prices
a. increase by a greater degree than short-term bond prices.
b. increase by an equal degree as short-term bond prices.
c. decrease by a greater degree than short-term bond prices.
d. decrease by an equal degree as short-term bond prices.
e. decrease by a smaller degree than short-term bond prices.
ANS:
C
10. A $1,000 par bond with five years to maturity is currently priced at $892. Annual interest payments are $90. What is the yield to
maturity?
a. 13.1 percent
b. 11.9 percent
c. 11.1 percent
d. 10.9 percent
ANS:
B
11. If analysts expect that the demand for loanable funds will increase, and the supply of loanable funds will decrease, they would most
likely expect interest rates to ____ and prices of existing bonds to ____.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
ANS:
12.
a.
b.
c.
d.
The bonds that are most sensitive to interest rate movements have
no coupon and a short-term maturity.
high coupons and a short-term maturity.
high coupons and a long-term maturity.
no coupon and a long-term maturity.
ANS:
13.
a.
b.
c.
d.
B
D
A mortgage that requires interest payments for a three- to five-year period, then full payment of principal, is a(n)
chattel mortgage.
balloon payment mortgage.
variable-rate mortgage.
open-ended mortgage bond.
ANS:
B
14. A ____ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase over the first
5 to 10 years and then level off.
a. graduated payment mortgage
b. growing-equity mortgage
c. second mortgage
d. shared-appreciation mortgage
ANS:
A
15.
a.
b.
c.
d.
The difference between the 30-year mortgages rate and the 30-year Treasury bond rate is primarily attributable to
interest rate risk.
reinvestment rate risk.
credit risk.
insurance risk.
ANS:
16.
a.
b.
c.
d.
C
In a collateralized mortgage obligation (CMO), mortgages are segmented into ____ (or classes).
balloon payments
caps
tranches
strips
ANS:
C
17. Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ____ risk, because they commonly use
funds obtained from short-term customer deposits to make long-term mortgage loans.
a. exchange rate
b. prepayment
c. reinvestment rate
d. interest rate
e. exchange rate
ANS:
18.
a.
b.
c.
d.
e.
D
The probability that a borrower will default (credit risk) is influenced by all of the following, except
economic conditions.
the level of equity invested by the borrower.
the borrower's income level.
the borrower's credit history.
Credit risk is affected by all of the above.
ANS:
E
19. A ____ requires that dividends cannot be paid on common stock until all current and previously omitted dividends are paid on
preferred stock.
a. residual claim
b. preferred margin
c. cumulative provision
d. liquidation claim
ANS:
20.
a.
b.
c.
d.
When a corporation first decides to issue stock to the public, it engages in a(n)
secondary offering.
initial public offering.
seasoned equity offering.
none of the above
ANS:
21.
a.
b.
c.
d.
C
B
The purpose of a lockup provision is to
keep individual investors from buying and selling stock.
prevent downward pressure on the stock's price.
increase the number of outstanding shares.
allocate a larger proportion of stock to institutional investors.
ANS:
B
22.
a.
b.
c.
d.
The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called
flipping.
skiing.
flopping.
none of the above
ANS:
23.
a.
b.
c.
d.
A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n)
stock repurchase.
secondary stock offering.
initial rights issue.
initial public offering (IPO).
ANS:
24.
a.
b.
c.
d.
A
The ____ is commonly used as a proxy for the risk-free rate in the Capital Asset Pricing Model.
Treasury bond rate
prime rate
discount rate
federal funds rate
ANS:
26.
a.
b.
c.
d.
B
____ are not barriers to corporate control to eliminate agency problems.
Leveraged buyouts
Antitakeover amendments
Poison pills
Golden parachutes
ANS:
25.
a.
b.
c.
d.
A
A
The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's volatility.
Sharpe
Treynor
arbitrage
margin
ANS:
A
27. If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other
public information, security markets are
a. weak-form efficient.
b. semi-strong form efficient.
c. strong form efficient.
d. B and C
e. none of the above
ANS:
A
28. A stock's beta is estimated to be 1.3. The risk-free rate is 5 percent, and the market return is expected to be 9 percent. What is the
expected return on the stock based on the CAPM?
a. 5.2 percent
b. 11.7 percent
c. 16.7 percent
d. 4 percent
e. 10.2 percent
ANS:
E
29.
a.
b.
c.
d.
A higher beta of an asset reflects
lower risk.
lower covariance between the asset's returns and market returns.
higher covariance between the asset's returns and the market returns.
none of the above
ANS:
30.
a.
b.
c.
d.
Value at risk estimates POORLY the ____ a particular investment for a specified confidence level.
beta of
risk-free rate of
largest expected loss to
standard deviation of
ANS:
31.
a.
b.
c.
d.
C
C
A ____ order to buy or sell a stock means to execute the transaction at the best possible available price.
market
limit
stop-loss
stop-buy
ANS:
A
32. Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to pay $25 a share and borrows the
remaining funds at a 12 percent annual interest. What is the return if the investor sells the stock for $55 at the end of one year?
a. 50 percent
b. 30 percent
c. 10 percent
d. 16 percent
e. 8 percent
ANS:
33.
a.
b.
c.
d.
The risk of a short sale is that the stock price
may decrease over time.
will remain the same.
may increase over time.
none of the above
ANS:
34.
a.
b.
c.
d.
C
The size of the spread on stocks that have relatively little trading is
smaller to reflect the lower degree of uncertainty.
the same as that of stocks with higher volumes of trading.
wider to reflect the higher degree of uncertainty.
not affected by trading volume.
ANS:
35.
a.
b.
c.
d.
D
C
The bid-ask spread is negatively related to
order costs.
inventory costs.
risk
trading volume.
ANS:
D
36. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to
maturity. The duration of this bond is
a. 1.90 years.
b. 1.50 years.
c.
d.
1.92 years.
none of the above
ANS:
37.
a.
b.
c.
d.
A
The relationship reflecting the actual response of a bond's price to a change in bond yields is
concave.
convex.
linear.
quadratic.
ANS:
B