FINAL EXAMINATION: FINANCE 327 TUESDAY SECTION
1.
If investors follow the pure expectations hypothesis of interest rates, then the yield curve:
a) is always downward sloping.
b) is always flat.
c) is always upward sloping
d) can be downward sloped, or upward sloped or flat.
2.
If interest rates remain constant over the life of a bond, then the price of a premium
bond one year after purchase :
a) will increase.
b) will decrease.
Price will come down to par by maturity
c) will remain the same.
d) could increase or decrease.
The next 3 parts assume a 5-year 7% annual coupon bond. As usual, the face value paid at maturity
is $1000. The yield to maturity on the bond is currently 9%. One year later, yields-to-maturity on
similar bonds will change to 7%.
3. The current price of the bond is closest to:
a) 820
b) 920
70 PVA (5, 9%) + 1000 PV(5, 9%) = 922.2
c) 1000
d) 1120
4. If you sell the bond, one-year later (immediately after receiving the first coupon), your rate of
return is closest to:
a)
b)
c)
d)
7.0%
8.4%
10.9%
16.0%
Price 1 year later is 1000, r = (1070 – 922.2)/922.2 = 16%
5. Suppose that instead of selling the bond after one year, you decide to hold the bond until maturity,
reinvesting the coupons at 5%. Your realized compound yield (RCY) is closest to: (2 points)
a)
b)
c)
d)
7.0%
8.5%
9.5%
10.0%
FV = 70 * 1.05^4 + 70 * 1.05^3 + 70*1.05^2 + 70*.105 + 1070 = 1386.79
922.2 * (1+RCY)^(0.2) = 1386.79, RCY = 8.50%
6. Everything else equal the __________ the maturity of a bond and the __________ the coupon the
greater the sensitivity of the bond's price to interest rate changes.
a) longer; higher
b) longer; lower See the table in the notes
c) shorter; higher
d) shorter; lower
7. To earn a high rating from the bond rating agencies, a company would want to have _________.
I. a low times interest earned ratio
II. a low debt to equity ratio
III. a high quick ratio
a) I only
b) II and III only would want I to be high not low
c) I and III only
d) I, II and III
Use the following option prices on Amgen Inc to answer questions 8 through 11 below. The stock
price is 66.25 as of now. Option expirations are in 2010.
CALLS
PUTS
Strike
March
April
March
April
65
2.80
3.60
1.50
2.10
70
0.75
1.30
4.40
4.90
8. The highest possible value for the March 65 put option is:
a) 0
b) 2.10
c) The strike price (when the stock is zero)
d) The stock price
9. The break-even stock price at expiration if you buy the March 70 call option now is:
a)
b)
c)
d)
62.90
62.50
69.25
70.75 70 + 0.75
10. The time value for March 70 put option is:
a)
b)
c)
d)
4.40
3.75
0.65 4.40 – (70-66.25)
0
11. Assume that you buy 100 shares of the stock at the current price and also purchase the April 70
put option. At expiration in April, the stock price is $60. Your total gain or loss on the two positions
is closest to:
a) -$625
b) -$505
c) -$115 (6000 + 1000) – (6625+490)
d) +$375
e) none of the above
12. Which of the following statements regarding options is true?
a)
b)
c)
d)
your downside is always limited, and the upside is always unlimited.
Lower strike options always have higher prices than higher strike options
Longer expirations options are always more valuable than shorter expiration options
a) and b) above
Use the following information to answer the next 3 questions.
QTC Inc is a firm that just earned $ 2.00 per share. These earnings are expected to grow at 20% for
3 years. In the long run, earnings growth is targeted to earn a return on equity of 22.5%. 60% of
earnings are paid as dividends. QTC has a required rate of return of 16%.
13. The long-term growth rate for QTC Inc after three years is closest to:
a) 9% (0.225*0.4)
b) 13.5%
c) 20%
d) 22.5%
14. The expected price of this company’s stock in 3 years is closest to:
A.29.60
B. 32.30 D(1) = 1.44, d(2) = d(3) = , d(4) = (2*1.2 * 1.2^3* 1.09) / (0.16-0.09)
C. 53.81
D. None of the above.
15. The intrinsic value of the company’s stock at the present time is closest to:
A. 19.05
B. 24.54
C. 40.90
D. None of the above.
16. All the following statements are consistent with a behavioral finance interpretation of how
market participants behave except:
a) Individuals over-weight recent information and underweight older information.
b) Investors exhibit overconfidence and optimism in their investing activities
c) Investors are slow to update beliefs and refuse to change opinions in the face of new information.
d) Tendency to overweight low probability events and underweight high
e) market prices move only to the extent that new information constitutes a surprise.
17. According to technical analysts, a shift in market fundamentals will __________.
a) be reflected in stock prices immediately
b) lead to a gradual price change that can be recognized as a trend.
c) lead to high volatility in stock market prices
d) leave prices unchanged
18. If mutual fund portfolios are heavy in cash, market contrarians may interpret this as what kind of
signal?
a) Buy signal
b) Sell signal
c) Hold signal
d) This is not interpreted as a signal
19. Which of the following would violate the efficient market hypothesis?
a) Intel has consistently generated large profits for years.
b) Prices for stocks before stock splits show on average consistently positive abnormal returns.
c) Earning abnormal returns after a firm announces surprise earnings.
d) High earnings growth stocks fail to generate higher returns for investors than low earnings
growth stocks.