FIN 385 Week 4 Midterm: Bond Prices and Yields

100% All correct answers + Instructor’s explanations!!

Page: 1

1. Question : (TCOs 3, 4) What is the primary role of investment bankers?

To help guide a company seeking to go public through the entire process of filing with the SEC and the eventual sale of the security
To guide a company in making the best capital investment choices
To always buy 100% of the security from the offering company to keep in its own portfolio
None of the above

2. Question : (TCO 2) The higher two stocks’ standard deviations are, _______.

the higher their correlation coefficient will be

there will be no impact on their correlation coefficient

their covariance is unaffected

the lower their correlation coefficient will be

3. Question : (TCO 2) In a two-stock portfolio, what would be the ideal correlation coefficient between the two?

0

+1

+.667

-1

4. Question : (TCO 2) The degree of risk of a particular investment is a function of ______.

its average return

its variability of return as measured by the variance or standard deviation of returns
its maximum return over many periods

market conditions affecting one industry more than another

5. Question : (TCO 2) Which of the following sets of terms mean about the same thing?

Systematic risk, diversifiable risk, unique risk

Market risk and nondiversifiable risk

Firm-specific risk and diversifiable risk

Two of the above

6. Question : (TCO 2) How do annual percentage rates (APR) and effective annual rates (EAR) differ?

APR takes into account compounding of interest.

EAR takes into account compounding of interest.

APR is always higher than EAR.

None of the above

7. Question : (TCO 2) An investor’s investment opportunity set _______.

is a list of the all good stocks he or she has the opportunity to buy below par
is always lowest when risk is maximized

contains numerous combinations of risk and return on bonds
contains numerous combinations of risk and return from the securities available to the investor

8. Question : (TCO 8) Just-in-time inventory techniques are employed in order to ______.

increase cycle time and lower inventories

increase frequency of restocking and reduced inventory levels
improve efficiency in a factory

None of the above

9. Question : (TCO 1) If you were an investor looking for risk-free, fixed-income securities, which of the following would meet your needs?

Treasury bonds

Corporate bonds

Preferred stock

Common stock

None of the above

10. Question : (TCO 1) Serial bonds _______.

increase risks for the investor

are retired on a schedule

increase risks for the company

None of the above

11. Question : (TCO 1) In the purchase and sale of securities, the “spread” refers to the difference between _______.

the IPO offering price and what larger investors are willing to pay
a stock’s par value and its strike price

a preferred stock’s par value and its conversion value

what a dealer pays for a share and what he or she sells it for

12. Question : (TCO 1) The dollar value of all forms of bonds issued over the last several years has approached approximately _____.

$16 million

$16 billion

$16 trillion

$3.8 billion

13. Question : (TCO 1) When a company wants to issue and sell its securities, whether they are bonds or stock, they will _______.

usually place an ad in the Wall Street Journal

contact an investment banker to assist them with following the legal requirements and to assist in the sales of the securities themselves
contact current stockholders first as they are more likely to wish to buy more stock
find specialists on the floor of the exchanges who will buy all the security and then resell it

14. Question : (TCO 5) What is Gross Domestic Product or GDP?

The same as Gross National Product

A measure of the economy’s capacity utilization

A measure of the economy’s national wealth

A measure of the total output of goods and services of the economy

15. Question : (TCO 5) The bid and ask prices of bonds are quoted in the financial press as what?

Par value

Percentage of par value plus number of 1/32 of a percentage of par
Dollar value of the last trade of the prior day (like stocks)

None of the above

16. Question : (TCO 5) The balance sheet ________.

gives a list of the company’s assets and who owns them: creditors or owners
is usually done in the middle of an accounting period

lists assets at their true market value

tells you if the company is profitable

17. Question : (TCO 5) Which of these statements is true about inflation?

Inflation has nothing to do with rising prices.

Usually, the lower the unemployment level, the higher the rate of inflation.
Usually, the higher the unemployment level, the higher the rate of inflation.
Inflation is not related to the unemployment rate.

18. Question : (TCO 5) How can ROE be improved?

By increasing net profits

By increasing sales

By increasing asset turnover

All of the above

None of the above

19. Question : (TCO 5) A bond’s yield is determined from what?

Actual price paid/par value

Coupon/par value

Coupon/actual price paid

None of the above

20. Question : (TCO 5) Sector rotation would be of importance to ______.

individual investors

mutual fund managers

None of the above

Answers 1 and 2

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1. Question : (TCO 2) Semitool Corp has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool’s return responds by a factor of 1.4. Suppose it turns out that the economy and the stock market do better than expected by 2% and Semitool’s products experience more rapid growth than anticipated, thus pushing up the stock price by another 1%. Based on this information, what was Semitool’s actual excess return?

2. Question : (TCO 2) What is the expected return of the three-issue portfolio with the following characteristics?
Issue Expected Return Standard Deviation Weight
A 15% 22 .5
B 10% 8 .4
C 6% 3 .1

3. Question : (TCO 5) The nominal interest rate is 6% and the inflation rate is 4%. What is the exact real interest rate?

4. Question : (TCO 5) Calculate the appropriate selling price of a 30-year 9% annual coupon paid semiannually, $1,000 corporate bond that was purchased five years ago. Marketplace interest rates are averaging 8%.

5. Question : (TCO 6) What is the interest rate needed on a $1,000 face value 7% coupon corporate bond in order to make it equivalent in terms of return to one whose interest rate is tax free? Assume the corporate tax rate is 30%.

6. Question : (TCO 8) Using the security market line formula rather than the dividend discount formula, determine the expected return on a firm’s common stock when
(a) beta = 1.2;
(b) the risk free rate is 6%; and
(c) marketplace interest rates have hovered around 13%.

7. Question : (TCO 6) You bought a $1,000 bond at a YTM of 6%. It has an 8% coupon that is paid semiannually and a 20-year maturity. The trade settled two days ago and the most recent coupon payment occurred 32 days ago. What was the invoice price that you were required to pay?

8. Question : (TCO 2) Find the expected return and variance of a two-asset portfolio, 75% bonds and 25% stocks. The expected return is 6% for bonds and 10% for stocks. The variances are 12% for bonds and 25% for stock. Assume that the correlation coefficient between bonds and stock = 0.