1) Which of the following is TRUE? (Explanation is not required for the False ones)

A) we can find the nominal interest rate by substrating the real rate and inflation from the sum of the default and maturity premiums.

B) If prices rise by 3% and your salary increases by 5%, you would experience a gain of purchasing power.

C) You would never earn a possitive rate of return by purchasing zero- coupon bonds at a discount and holding them to maturity

D) Borrowers want to protect their purchasing power reward from being wiped out by lower inflation.

2) Which is TRUE?

A) You would have less confidence about an expected return on 3- mos. treasury bills than you would for large company stocks.

B) According to CAPM, stocks with greater than average market risk would have an expected return lower than the expected return on the market.

C) For holding periods of less than a year, the annualized holding period return would be higher than the HPR.

D) If the risk free rate is 1.5% and the MRP is 6% points, then the expected return on the market would be 4.5%.

3) Which of the following is TRUE?

A) stocks typically have very predictable future cash flows whereas bond do not.

B) The limited laibility feature of corporate stocks increase the risk for shareholders.

C) Claims for lenders come before those of common stockholders.

D) You should sell stocks if you expect a bull market in stock.