1. Suppose the current one-year Treasury Bill rate is 6%, the current three-year Treasury Bond rate is 5.9%, and the current seven-year Treasury Bond rate is 5.8%. According to the expectations theory of interest rates, what would you expect the four-year Treasury rate to be three years from now?
a) 5.625% b) 5.685% c) 5.725% d) 5.815%
2. _________ bonds allow the bondholder to exchange their bond for shares of stock prior to maturity.
a) Convertible
b) Callable
c) Floating
d) Sinking Fund
3. A bond has a current yield of 7%, a coupon rate of 8% with semiannual payments, a face value of $1,000 and matures in 10 years. What is its Yield to Maturity?
a) 6.1% b) 7.2% c) 8.3% d) 8.9%
4. A bond has a Yield to Call of 8% and a coupon rate of 10% with semiannual payments. The bond has a face value of $1,000 and matures in 12 years. However, it can be called in 6 years for $1,050. How much is the bond worth?
a) $975 b) $1,050 c) $1,125 d) $1,200
5. If a bond is selling at a premium, then its yield to maturity will be _______ than its current yield and ________ than it's coupon rate.
a) Higher; Higher
b) Higher; Lower
c) Lower; Higher
d) Lower; Lower
6. _______________ is the risk that investors will not be able to sell their bond at a fair price before it matures because there is not an active market for the bond.
a) Default Risk
b) Liquidity Risk
c) Maturity Risk
d) Seniority Risk
7. From 2007 to 2009, stock prices fell over 50%. From 2010 to 2012, stock prices rose 50%. One logical explanation is that the market risk premium was increasing from 2007 to 2009 and decreasing from 2010 to 2012.
a) True b) False
8. A stock with a beta of 1.5 has a required return of 14%. If the expected (required) return on the market is 11%, then what is the market risk premium?
a) 5% b) 6% c) 7% d) 8%
9. A stock currently pays no dividends, however, it expects to pay a dividend of $1 four years from now. From that point onward, dividends are expected to grow by 10% per year forever. What should today's price be for this stock if it has a required return of 14%?
a) $16.87 b) $20.38 c) $24.51 d) $27.5
10. You'd want to buy a stock if______________.
a) It had a positive Sharpe Ratio.
b) Its required return were higher than its expected return.
c) Its price were less than its value
d) Its expected return were less than its standard deviation
11. The Capital Asset Pricing Model makes all of these assumptions except ____________.
a) Investors have homogenous expectations
b) That there are no taxes
c) Investors can borrow at the risk-free rate
d) All of these are assumptions of the CAPM
12. In order to reduce the risk of a portfolio, you would want to combine stocks with ______________.
a) Low Coefficients of Variation
b) Low Standard Deviations
c) Low Expected Returns
d) Low Correlation Coefficients
13. If a firm plans on increasing the weight of debt in their capital structure, then this should cause the cost of debt to ___________ and the cost of equity to ___________.
a) Fall; Fall
b) Fall; Rise
c) Rise; Rise
d) Rise; Fall
14. The _________ is used as the ________ return for average risk investments made by a corporation (such as investing in a new plant or machinery).
a) Cost of Equity; Required Return
b) Cost of Equity; Expected Return
c) WACC; Expected Return
d) WACC; Required Return
15. What is the cost of equity on a new issue of stock if the firm pays a $3 dividend with and expected growth rate of 8%. The current stock price is $50, but flotation costs on new issues are 10%.
a) 12.4% b) 13.9% c) 14.5% d) 15.2%
16. A firm had Net Income of $1,000,000 and a payout ratio of 60%. If they are 40% equity financed, how much can they spend on capital expenditures before needing external equity?
a) $666,667 b) $1,000,000 c) $1,600,000 d) $2,000,000
17. Which of these features benefits small shareholders?
a) Cumulative Voting
b) Founders Shares
c) Poison Pills
d) Staggered Boards