Assignment

Part 1

Question 1
Which yield curve theory is based on the premises that financial instruments of different terms are not substitutable and therefore the supply and demand in the markets for short-term and long-term instruments is determined largely independently?
All of these answers.
The segmented market hypothesis.
The expectation hypothesis.

Question 2
Which of the following statements regarding the relationship between economic factors and the nominal inflation rate is true?
If the inflationary expectation goes up, the market interest rate decreases.
All of these answers.
If there is an inflationary gap, there will be a corresponding reduction in interest rates.
For every 1% increase in inflation, the nominal interest rate should be raised by more than 1%.

Question 3
Which of the following predictions based on a description of the yield curve is correct?
A flat yield curve suggest that interest rates will be cut.
A normal yield curve suggests that interest rates will be raised in the future.
An inverted yield curve suggests that interest rates will be dramatically cut.
All of these answers.

Question 4
The terms of a bond allows its issuer to redeem the security at anytime. This type of bond is _____.
an Asian callable.
an American callable.
a Bermudan callable.
a European callable.

Question 5
A company issues a bond with a coupon rate of 5%. Since the bond was issued, market interest rates have decreased. What effect will this decrease have on the bond's market price and its current yield?
The bond will trade below par and its current yield will decrease.
The bond will trade below par and its current yield will increase.
The bond will trade above par and its current yield will increase.
The bond will trade above par and its current yield will decrease.

Question 6
Which of the following describes a difference between stocks and bonds?
Stockholders generally have an equity stake in the business while bondholders have a creditor stake.
Stocks can be resold on a secondary market, while bonds cannot.
Bonds always have a defined term while stocks may be outstanding indefinitely.
All of these answers.

Question 7
Which of the following are debt instruments that companies use as investments?
Choose one answer.
Bank Loans
Stocks
Unpaid Accounts
Bonds

Question 8
Which of the following statements about the disadvantages of bonds as investments is correct?
Interest rate risk is only a problem if the bondholder decides to hold the bond until it matures.
Bonds are subject to prepayment risk, credit risk, reinvestment risk, and yield curve risk.
When a bond issuer is able to pay off a bond early, the bond is subject to event risk.
All of these answers.

Question 9
Which of the following statements regarding the advantages of bonds as an investment, are true?
Bonds are more liquid than stock.
If a company goes bankrupt, its bondholders will recover the entirety of the bond's principal.
The market price of bonds are less volatile than stocks.
All of these answers.

Question 10
Which of the following statements about zero coupon bonds is NOT true?
The impact of interest rate fluctuations on zero coupon bonds is higher than for coupon bonds.
U.S. Treasury bills and saving bonds are example of zero coupon bonds.
Zero coupon bonds are particularly popular with pension and insurance companies.
When a bond is "stripped," it is split into two parts; the principal and the coupons, or "residue."

Question 11
Which of the following statements about floating rate bonds (FRBs) is NOT true?
In Europe, FRBs are generally issued by banks.
An FRBs spread is a rate that remains constant.
An FRB with a maximum coupon is called a "capped FRB."
FRBs carry significant interest rate risk; its price declines as market rates rise.

Question 12
Given an inflation rate of 4% and a real rate of 5%, what is the corresponding nominal rate?
109.2%
4%
9%
9.2%

Question 13
A bond has a coupon rate of 7% and a yield to maturity rate of 8%. The bond is ____.
selling at a premium.
selling at par.
selling at a discount.
selling at yield

Question 14
A bond grants its holder the option to sell the bond back to the issuer at a fixed price at a fixed date prior to the bond's maturity. When evaluating the bond's value, the company should calculate the bond's _____.
yield to worst.
yield to discount.
yield to put.
yield to call.

Question 15
Which of the following statements regarding the calculation and use of inflation premiums is true?
An inflation premium is caused by lender compensating for expected inflation.
The inflation premium varies based on each analyst's expectations regarding future inflation.
Actual interest rates are viewed as being the nominal interest rate minus the inflation premium.
All of these answers.

Question 16
A zero-coupon bond has a face value of $1000 and a market value of $800. The bond will mature in 5 years. What is its yield to maturity?
205.17%
4.56%
104.56%
-4.37%

Question 17
A bond has a face value of $1000 and a contractual interest rate of 5%. The bond has quarterly interest payments. The market interest rate is 4%. The bond matures in 5 years and will pay $1000. What is the bond's current market price?
$1135.90
$679.52
$1044.52
$875.38

Question 18
An annuity has an interest rate of 7% and makes a quarterly payment of $2000. The annuity is to last for 5 years. What is the present value of the annuity.
$8,200.40
$21,188.03
$32,801.58
$2,118.80

Question 19
Which of the following statements regarding a bond's time to maturity is true?
United States Treasury Bonds have maturities between six to twelve years.
A bond with a shorter maturity generally has a higher price than one with a longer maturity.
All of these answers.
The fair price of a "straight bond" is the sum of its discounted expected cash flows.

Question 20
Which of the following is NOT a class of credit ratings that a Nationally Recognized Statistical Rating Organization (NRSRO) can register to review?
Insurance companies.
Individuals.
Issuers of government securities.
Financial institutions, brokers, and dealers.

Question 21
When an issuing company goes bankrupt, the bondholders are always paid before which of the following the parties?
The company's trade creditors.
The bank lenders.
All of these answers.
The company's shareholders.

Part 2

Question 1
Which of the following features is generally NOT associated with preferred stock?
Callability at the option of the corporation.
Preference in dividends.
Voting rights.
Convertability to common stock.

Question 2
Which of the following is generally NOT a right granted to owners of preferred shares?
Convertibility to common shares.
Preference with regards to receiving dividends.
Variable dividend amounts.
Callability.

Question 3
Which of the following statements about a preferred stockholder's rights to the company's income is NOT true?
The price of both common and preferred shares are subject to market determinants.
When a business is liquidated, preferred shareholders receive funds equal to the stock's par value.
Dividends to common and preferred shareholders are paid at the same time.
A preferred stock's par value represents the original investment when the shares were issued.

Question 4
A company goes bankrupt and its assets are to be divided between its shareholders and debtholders. Which of the following, from highest priority to lowest, is the correct order of how the company's assets should be divided?
Bondholders, preferred shareholders, common shareholders.
Preferred shareholders, common shareholders, bondholders.
Bondholders, common shareholders, preferred shareholders.
Preferred shareholders, bondholders, common shareholders.

Question 5
A company a constant growth rate of 3%. The company's risk adjusted discount rate is 5%. The company has a $2 dividend. What is the per share value of the stock?
$103
$52.50
$51.50
$105

Question 6
A company has cost of equity of 8% and a dividend growth rate of 3%. Its dividends for next year is $2.20 per share. What should the stock's price be?
$0.22
$4.40
$27.00
$44.00

Question 7
Which of the following statements regarding corporate valuation approaches is true?
A downside of the asset-based approach of valuing a company is that it is not objective.
The income approaches rely on using discount rates to determine a company's value.
One of the variables in the Capital Asset Pricing Model is the cost of equity.
The weighted average cost of capital is an approach used to find the value of a business.

Question 8
An investment portfolio has a 30% chance of earning $125,000 in a year, a 40% chance of earning $50,000, a 15% chance of earning nothing and 15% chance of losing $20,000. What is its expected return?
$38,750
$54,500
$62.000
$50,000

Question 9
A portfolio has $70,000 of bonds and $30,000 of stock. The bonds are 80% likely to have a 10% return and 20% likely to have a 0% return. The stock is 50% likely to have a 20% return and 50% likely to have a 10% loss. What is the expected return?
2.9%
13%
5.9%
7.1%

Question 10
What factors should be considered when weighting an investment portfolio?
The investor's risk tolerance.
The time frame of the investment.
The specific risks of the individual securities.
All of these answers.

Question 11
A company issues a bond with the provision that it may pay off the debt early. This bond is subject to which type of risk?
Interest rate risk.
Model risk.
Prepayment risk.
All of these answers.

Question 12
Using the Value at Risk methodology, an investment advisor says that she is 90% sure that her investment portfolio will not lose more than $250,000 in a given day. Based on that description, which of the following statements is true?
All of these answers.
The portfolio will lose more than $250,000 every month.
Investors should expect to see losses 1 out of every 10 days.
t is 90% sure that the portfolio will not earn more than $250,000 in a given day.

Question 13
A portfolio has a 95% certainty that it won't lose more than $50,000 in a given day. On the big loss days, there is a 30% chance the portfolio will lose $50,000 and a 70% chance it will lose $75,000. What is the portfolio's expected shortfall?
ES_0.95 =$57,500
ES_0.05 = $67,500
ES_0.95 = $67,500
ES_0.05 = $57,500

Question 14
A portfolio is composed of 30% stock, 20% bonds, and 50% mutual funds. The stock is expected to have a 10% return, the bonds a 5% return and the mutual funds a 7% return. What is the expected return of the portfolio?
7.3%
7.5%
8.1%
7%

Question 15
A portfolio is composed of 80% stock and 20% bonds. The variance of stock is 170 and the variance of bonds is 140. The covariance is 30. What is the portfolio's variance?
119
101
168
114.