Review of Lecture 18 Quiz and Test Questions
1. MB19 Which characteristic best describes the Treasury yield curve?
a. coordinates of the yield curve are interest rate on horizontal axis and term-tomaturity on vertical axis
b. the curve normally begins flat and steepens downward toward the right
c. the curve depicts the spread between corporate bond yields and Treasury bonds
d. the curve normally begins with a steep upward slope that flattens toward the right
e. coordinates of the yield curve are yield-to-maturity on horizontal axis and term-tomaturity on vertical axis
2. BD16b Today is a day in July 2525 and a bond with annual yield-to-maturity of 10.20%
just yesterday paid a coupon. The bond matures in July 2539 and its quoted bond price is
74.21 percent of par (semiannual compounding). Find the annual coupon rate and
today's current yield.
a. coupon rate equals 8.86% and current yield is 9.03%
b. coupon rate equals 8.86% and current yield is 7.85%
c. coupon rate equals 6.70% and current yield is 9.03%
d. coupon rate equals 7.71% and current yield is 9.03%
e. coupon rate equals 6.70% and current yield is 7.85%
3. BD5c The yield-to-maturity for a zero coupon bond is 11.20% for a 1-year bond, 12.03%
for a 2-year bond, and 12.52% for a 3-year bond. You think the yield curve will remain
the same throughout the future. You wish to make a 1-year investment, that is, buy a
bond today and sell it in one year. You can pursue three alternative strategies, call them
S1, S2, and S3. For strategy S1, you buy the 1-year bond and hold it to maturity, in
which case your annual rate of return obviously is 11.20%. For S2, buy a 2-year bond
today and sell it when it has 1 year remaining to maturity. For S3, buy a 3-year bond
today and sell it when it has 2 years remaining to maturity. What are your average
annual rates of return for strategies S2 and S3? (Assume, if necessary, that you can buy
fractions of bonds.)
a. Strategy S2 earns 17.01% and strategy S3 earns 11.74% .
b. Strategy S2 earns 14.79% and strategy S3 earns 13.50% .
c. Strategy S2 earns 17.01% and strategy S3 earns 13.50% .
d. Strategy S2 earns 12.86% and strategy S3 earns 11.74% .
e. Strategy S2 earns 12.86% and strategy S3 earns 13.50% .
4. TR34 A mainstay of technical analysis is comparison of moving averages with different
lengths. Is the following statement of the moving average trading strategy True or False:
A sell signal results when the short-run moving average becomes bigger than the longrun moving average.
True
False
5. ST12 A stock you are buying today promises no dividends for a long time. In exactly 6
years you expect the stock will pay its first annual dividend of $3.70 . At that time, you
also believe that the stock could be sold for $45.00 . If today you can buy the stock for
$21.39 , what is the expected annual rate of return on the stock investment?
a. 21.5%
b. 14.7%
c. 17.8%
d. 16.2%
e. 19.6%
6. ST20 The stock for a start-up company probably will pay no dividends until exactly 7
years from today. At that time it will pay $5.60 per year forever. You assess the intrinsic
value of the stock with a 15.1% discount rate. Find the stock's intrinsic value today.
a. $15.95
b. $14.50
c. $19.30
d. $13.18
e. $17.54
7. ST21 A stock you are buying today promises no dividends for a long time. In exactly 5
years you expect the stock will pay its first annual dividend of $8.80 which you expect
will be paid annually forever. If today you can buy the stock for $29.23 , what is the
expected annual rate of return on the stock investment?
a. 11.2%
b. 14.9%
c. 12.3%
d. 13.6%
e. 16.4%
8. ST22 The company preferred stock pays a $3.20 annual dividend. The local bank pays
4.4% interest (compounded annually) on 5-year CDs. You consider the preferred stock an
attractive investment if its ROR is 350 basis points more than the CD rate. Find your
assessment of the preferred stock intrinsic value.
a. $40.51
b. $49.01
c. $33.48
d. $36.82
e. $44.56
9. ST24 The company preferred stock yesterday paid $4.40 annual dividend and today's
stock price is $53.20 . The local bank pays 5.2% interest on CDs. You consider the
preferred stock an attractive investment if its ROR is 225 basis points more than the CD
rate. Find the actual risk premium and is this stock a buy or a sell?
a. the actual risk premium is 406 BP and the stock is a sell
b. the actual risk premium is 406 BP and the stock is a buy
c. the actual risk premium is 353 BP and the stock is a sell
d. the actual risk premium is 353 BP and the stock is a buy
e. the actual risk premium is 307 BP and the stock is a buy
10. ST25 The company preferred stock just yesterday paid its annual dividend of $4.50 per
share. Today's share price is $43.70 . You believe the dividend yield is abnormally high
but that it will revert to its normal value of 5.40%. Your strategy is to buy the stock
today and receive annual dividends for 3 years. Upon receiving the last dividend you
expect the dividend yield will be normal. Your strategy is to sell the stock at that time.
Compute the expected annual rate of return for the strategy.
a. 26.9%
b. 29.6%
c. 35.8%
d. 32.5%
e. 24.4%
11. BD12a Today is a day in October 2525 and a bond with annual coupon rate of 4.90% just
yesterday paid a coupon. The bond matures in October 2538 and its quoted bond price is
90.17 percent of par (semiannual compounding). Find the current yield and capital gains
yield.
a. the current yield equals 6.25% and capital gains yield is 0.57%
b. the current yield equals 6.25% and capital gains yield is 0.65%
c. the current yield equals 7.19% and capital gains yield is 0.65%
d. the current yield equals 7.19% and capital gains yield is 0.57%
e. the current yield equals 5.43% and capital gains yield is 0.57%
12. TK4 At the close of market yesterday the 20-day and 2-day moving average share prices
for the company stock were $27.00 and $25.00 , respectively. The share prices 20 and 2
days ago were $22.00 and $24.75 , respectively. According to a trading rule that
generates a signal when the 2-day moving average crosses the 20-day moving average,
what would be today's cross-over stock price that generates a signal reversal?
a. $35.70
b. $24.38
c. $26.82
d. $32.45
e. $29.50