MCQs

MCQs
Test
1. A 5.5% 20-year municipal bond is currently priced to yield 7.2%. For a taxpayer in
the 33% marginal tax bracket, this bond would offer an equivalent taxable yield of:
a.10.75%.
b.4.82%.
c.none of the above.
d.8.20%.
e.11.40%.
2. An investor invests 30 percent of his wealth in a risky asset with an expected rate of
return of 0.13 and a variance of 0.03 and 70 percent in a T-bill that pays 6 percent.
His portfolio's expected return and standard deviation are ........ and ......,
respectively.
a.0.295; 0.125
b.0.081; 0.052
c.0.087; 0.063
d.0.795; 0.14
e.0.114; 0.128
2. Consider the following three stocks: stock A with price of $40 and the number of
shares outstanding is 200, stock B with price of $70 and the number of shares
outstanding is 500, stock C with price of $10 and the number of shares outstanding
is 600. The price-weighted index constructed with the three stocks is
a.40
b.30
c.50
d.60
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e.70
3. Diversifiable risk is also referred to as
a.systematic risk, firm-specific risk.

b.unique risk, market risk.
c.unique risk, firm-specific risk.
d.systematic risk, market risk.
e.systematic risk, unique risk.
4. Security X has expected return of 12% and standard deviation of 20%. Security Y
has expected return of 15% and standard deviation of 27%. If the two securities
have a correlation coefficient of 0.7, what is their covariance?
a.0.018
b.0.038
c.0.013
d.0.054
e.0.070
5. According to the Capital Asset Pricing Model (CAPM), fairly priced securities
a.have positive betas.

b.have negative betas.
c.have zero alphas.

d.have positive alphas.
e.have non-zero alphas.
6. interest
a.is quoted in the bond price in the financial press and must be paid by the buyer of the
bond and remitted to the seller of the bond.
b.is quoted in the bond price in the financial press and must be paid to the broker for the
inconvenience of selling bonds between maturity dates.
c.must be paid by the buyer of the bond and remitted to the seller of the bond.
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d.is quoted in the bond price in the financial press.
e.must be paid to the broker for the inconvenience of selling bonds between maturity
dates.
7. Dividend discount models and P/E ratios are used by ............ to try to find mispriced
securities.
a.psychoanalysts
b.statistical analysts
c.fundamental analysts
d.technical analysts
e.dividend analysts
8. Highpoint had a FCFE of $246M last year and has 123M shares outstanding.
Highpoint's required return on equity is 10% and WACC is 9%. If FCFE is expected
to grow at 8.0% forever, the intrinsic value of Highpoint's shares are ___________.
a.$108
b.$21.60
c.None of these is correct
d.$244.42
e.$216.00
9. If a 7% coupon bond is trading for $975.00, it has a current yield of ....... percent.
a.8.53
b.6.53
c.7.00
d.7.24
e.7.18
10. If a firm has a required rate of return equal to the ROE
a.the firm can increase market price and P/E by increasing the growth rate.
b.the amount of earnings retained by the firm does not affect market price or the
P/E.
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c.the firm can increase market price and P/E by retaining more earnings.
d.the firm can increase market price and P/E by retaining more earnings and the firm
can increase market price and P/E by increasing the growth rate.
e.None of these is correct.
11. Investors want high plowback ratios
a.for all firms.
b.whenever k is greater than ROE.
c.whenever bank interest rates are high.
d.whenever ROE is greater than k.

e.only when they are in low tax brackets.
12. J.C. Penney Company is expected to pay a dividend in year 1 of $1.65, a dividend
in year 2 of $1.97, and a dividend in year 3 of $2.54. After year 3, dividends are
expected to grow at the rate of 8% per year. An appropriate required return for the
stock is 11%. The stock should be worth _______ today.
a.$33.00
b.$71.80
d.$40.67
e.$66.00
13. Rome Corporation is expected have EBIT of $2.3M this year. Rome Corporation is
in the 30% tax bracket, will report $175,000 in depreciation, will make $175,000 in
capital expenditures, and have no change in net working capital this year. What is
Rome's FCFF?
a.2,300,000
b.1,435,000
c.1,960,000
d.1,785,000
e.1,610,000
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14. Suppose that the average P/E multiple in the oil industry is 20. Dominion Oil is
expected to have an EPS of $3.00 in the coming year. The intrinsic value of
Dominion Oil stock should be ____.
a.$60.00
b.$72.00
c.$28.12
d.None of these is correct
e.$35.55
15. The invoice price of a bond that a buyer would pay is equal to
a.the asked price plus accrued interest.
b.the bid price.

c.the asked price less accrued interest.
d.the bid price plus accrued interest.
e.the bid price less accrued interest.
16. The market risk, beta, of a security is equal to
a.the covariance between the security's return and the market return divided by
the variance of the market's returns.
b.the covariance between the security and market returns divided by the standard
deviation of the market's returns.
c.the variance of the security's returns divided by the variance of the market's returns.
d.the variance of the security's return divided by the standard deviation of the market's
returns.
e.the variance of the security's returns divided by the covariance between the security
and market returns
17. The most appropriate discount rate to use when applying a FCFF valuation model is
the __________.
a.WACC
b.required rate of return on equity
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d.risk-free rate
e.required rate of return on equity or risk-free rate depending on the debt level of the
firm
18. The risk-free rate and the expected market rate of return are 0.06 and 0.12,
respectively. According to the capital asset pricing model (CAPM), the expected rate
of return on security X with a beta of 1.2 is equal to.
a.0.132.
b.0.12.
c.0.06.
d.0.18.
e.0.144.
19. The risk-free rate is 7 percent. The expected market rate of return is 15 percent. If
you expect a stock with a beta of 1.3 to offer a rate of return of 12 percent, you
should
a.sell short the stock because it is overpriced.
b.buy the stock because it is underpriced.

c.buy the stock because it is overpriced.
d.hold the stock because it is fairly priced.
e.sell the stock short because it is underpriced.
20. Using semiannual compounding, a 15-year zero coupon bond that has a par value
of $1,000 and a required return of 8% would be priced at approximately .......
a.$464
b.$308
c.$315
d.$555
e.None of these is correct.
21. Which statement is not true regarding the Capital Market Line (CML)?
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a.The CML always has a positive slope.
b.The CML is the best attainable capital allocation line.
c.The risk measure for the CML is standard deviation.
d.The CML is the line from the risk-free rate through the market portfolio.
e.The CML is also called the security market line.
22. You invest $600 in a security with a beta of 1.2 and $400 in another security with a
beta of 0.90. The beta of the resulting portfolio is
a.1.00
b.0.36
c.1.08
d.0.80
e.1.40
23. You wish to earn a return of 11% on each of two stocks, C and D. Stock C is
expected to pay a dividend of $3 in the upcoming year while Stock D is expected to
pay a dividend of $4 in the upcoming year. The expected growth rate of dividends
for both stocks is 7%. The intrinsic value of stock C ........
a.will be greater than the intrinsic value of stock D

b.None of these is correct.
c.will be the same as the intrinsic value of stock D

d.will be greater than the intrinsic value of stock D or will be the same as the intrinsic
value of stock D
e.will be less than the intrinsic value of stock D
Chap 18
1. ________ is equal to the total market value of the firm's common stock divided by
(the replacement cost of the firm's assets less liabilities).
Tobin's Q
2. High P/E ratios tend to indicate that a company will _______, ceteris paribus.
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grow quickly
3. _________ is equal to common shareholders'equity divided by common shares

outstanding.
Book value per share
4. ________ are analysts who use information concerning current and prospective
profitability of a firm to assess the firm's fair market value
fundamental analysis
5. The _______ is defined as the present value of all cash proceeds to the investor in
the stock.
intrinsic value
6. _______ is the amount of money per common share that could be realized by
breaking up the firm, selling the assets, repaying the debt, and distributing the
remainder to shareholders.
liquidation value per share
7. Since 1955, Treasury bond yields and earnings yields on stocks have been
positively correlated
8. Historically, P/E ratios have tended to be
lower when inflation has been high
9. The ______ is a common term for the market consensus value of the required
return on a stock
market capitalization rate
10. The _________ is the fraction of earnings reinvested in the firm
retention rate or plowback ratio
11. The Gordon model
is a generalization of the perpetuity formula to cover the case of a growing perpetuity

and is valid only when g is less than k
12. You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is
expected to pay a dividend of $3 in the upcoming year while stock Y is expected to
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for both stocks is 7%. The intrinsic value of stock X
will be less than the intrinsic value of stock Y(PV0= D1/(k -g); given k and g are equal,
the stock with the larger dividend will have the higher value.)
13. You wish to earn a return of 11% on each of two stocks, C and D. Stock C is
expected to pay a dividend of $3 in the upcoming year while stock D is expected to
for both stocks is 7%. The intrinsic value of stock C
will be less than the intrinsic value of stock D
14. You wish to earn a return of 12% on each of two stocks, A and B. Each of the
stocks is expected to pay a dividend of $2 in the upcoming year. The expected
growth rate of dividends is 9% for stock A and 10% for stock B. The intrinsic value
of stock A
will be less than the intrinsic value of stock B
15. You wish to earn a return of 10% on each of two stocks, C and D. Each of the
stocks is expected to pay a dividend of $2 in the upcoming year. The expected
growth rate of dividends is 9% for stock C and 10% for stock D. The intrinsic value
of stock C
will be less than the intrinsic value of stock D
16. Each of two stocks, A and B, are expected to pay a dividend of $5 in the upcoming
year. The expected growth rate of dividends is 10% for both stocks. You require a
rate of return of 11% on stock A and a return of 20% on stock B. The intrinsic value
of stock A
will be greater than the intrinsic value of stock B
17. Each of two stocks, C and D, are expected to pay a dividend of $3 in the upcoming
year. The expected growth rate of dividends is 9% for both stocks. You require a
rate of return of 10% on stock C and a return of 13% on stock D. The intrinsic value
of stock C
will be greater than the intrinsic value of stock D
18. If the expected ROE on reinvested earnings is equal to k, the multistage DDM
reduces to
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V0= (Expected EPS in year 1)/k
19. Low Tech Company has an expected ROE of 10%. The dividend growth rate will be
________ if the firm follows a policy of paying 40% of earnings in the form of
dividends.
6.0%(10% × 0.60 = 6.0%.)
20. Think Tank Company has an expected ROE of 26%. The dividend growth rate will
be _______ if the firm follows a policy of plowing back 90% of earnings.
23.4%(26% × 0.90 = 23.4%)
21. A preferred stock will pay a dividend of $2.75 in the upcoming year and every year
thereafter; i.e., dividends are not expected to grow. You require a return of 10% on
this stock. Use the constant growth DDM to calculate the intrinsic value of this
preferred stock
$27.50(2.75/.10 = 27.50)
22. You are considering acquiring a common stock that you would like to hold for one
year. You expect to receive both $1.25 in dividends and $32 from the sale of the
stock at the end of the year. The maximum price you would pay for the stock today
is _____ if you wanted to earn a 10% return.
$30.23(.10 = (32 P + 1.25)/P; .10P = 32 - P + 1.25; 1.10P = 33.25; P = 30.23)
23. Paper Express Company has a balance sheet which lists $85 million in assets, $40
million in liabilities, and $45 million in common shareholders'equity. It has 1,400,000
common shares outstanding. The replacement cost of the assets is $115 million.
The market share price is $90What is Paper Express's book value per share?
$32.14($45M/1.4M = $32.14)
24. Paper Express Company has a balance sheet which lists $85 million in assets, $40
million in liabilities, and $45 million in common shareholders'equity. It has 1,400,000
common shares outstanding. The replacement cost of the assets is $115 million.
The market share price is $90What is Paper Express's market value per share?
None of the options are correct($90)
25. One of the problems with attempting to forecast stock market values is that
he level of uncertainty surrounding the forecast will always be quite high
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26. The most popular approach to forecasting the overall stock market is to use
the aggregate earnings multiplier
27. Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The
risk-free rate of return is 4%, and the expected return on the market portfolio is
14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from
now. The beta of Sure Tool Company's stock is 1.25.The market's required rate of
return on Sure's stock is
16.5%(4% + 1.25(14% 4%) = 16.5%)
14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from
now. The beta of Sure Tool Company's stock is 1.25.What is the intrinsic value of
Sure's stock today?
$20.60(k = .04 + 1.25 (.14 .04); k = .165; .165 = (22 P + 2)/P; .165P = 24 - P; 1.165P =
24 ; P = 20.60)
14%. The beta of Sure Tool Company's stock is 1.25If Sure's intrinsic value is
$21.00 today, what must be its growth rate?
7%(k = .04 + 1.25 (.14 .04); k = .165; .165 = 2/21 + g; g = .07.)
30. Fools Gold Mining Company is expected to pay a dividend of $8 in the upcoming
year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate
of return is 6%, and the expected return on the market portfolio is 14%. The stock of
Fools Gold Mining Company has a beta of 0.25. The return you should require on
the stock is
4%.(6% + [-0.25(14% 6%)] = 4%)
31. High Tech Chip Company paid a dividend last year of $2.50. The expected ROE for
next year is 12.5%. An appropriate required return on the stock is 11%. If the firm
has a plowback ratio of 60%, the dividend in the coming year should be
$2.69.(g = .125 × .6 = 7.5%; $2.50(1.075) = $2.69.)
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32. Suppose that the average P/E multiple in the oil industry is 20. Dominion Oil is
expected to have an EPS of $3.00 in the coming year. The intrinsic value of
Dominion Oil stock should be
$60.00.(20 × $3.00 = $60.00.)
33. An analyst has determined that the intrinsic value of HPQ stock is $20 per share
using the capitalized earnings model. If the typical P/E ratio in the computer industry
is 25, then it would be reasonable to assume the expected EPS of HPQ in the
coming year is
$0.80($20(1/25) = $0.80. )
34. Old Quartz Gold Mining Company is expected to pay a dividend of $8 in the coming
year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate
of return is 6%, and the expected return on the market portfolio is 14%. The stock of
Old Quartz Gold Mining Company has a beta of 0.25. The intrinsic value of the
stock is
$133.33(k = 6% + [-0.25(14% 6%)] = 4%; P = 8/[.04 (-.02)] = $133.33)
35. Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year.
Dividends are expected to grow at a rate of 10% per year. The risk-free rate of
return is 5%, and the expected return on the market portfolio is 13%. The stock is
trading in the market today at a price of $90.00What is the market-capitalization rate
for Risk Metrics?
13.9%(k = 3.50/90 + .10; k = 13.9%)
36. Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year.
Dividends are expected to grow at a rate of 10% per year. The risk-free rate of
return is 5%, and the expected return on the market portfolio is 13%. The stock is
trading in the market today at a price of $90.00What is the approximate beta of Risk
Metrics's stock?
1.1(k = 13.9%; 13.9 = 5% + b(13% 5%) = 1.11.)
37. The market-capitalization rate on the stock of Flexsteel Company is 12%. The
expected ROE is 13%, and the expected EPS are $3.60. If the firm's plowback ratio
is 50%, the P/E ratio will be
8.33(g = 13% × 0.5 = 6.5%; .5/(.12 .065) = 9.09)
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38. Consider the free cash flow approach to stock valuation. Utica Manufacturing
Company is expected to have before-tax cash flow from operations of $500,000 in
the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000
of operating cash flow will be invested in new fixed assets. Depreciation for the year
will be $100,000. After the coming year, cash flows are expected to grow at 6% per
year. The appropriate market-capitalization rate for unleveraged cash flow is 15%
per year. The firm has no outstanding debt. The projected free cash flow of Utica
Manufacturing Company for the coming year is
$180,000.
39. A firm's earnings per share increased from $10 to $12, dividends increased from
$4.00 to $4.80, and the share price increased from $80 to $90. Given this
information, it follows tha
the stock experienced a drop in the P/E ratio.
40. In the dividend discount model, which of the following are not incorporated into the
discount rate?
Return on assets
41. A company whose stock is selling at a P/E ratio greater than the P/E ratio of a
market index most likely has
a dividend yield which is less than that of the average firm
42. Other things being equal, a low ________ would be most consistent with a relatively
high growth rate of firm earning
dividend-payout ratio
43. A firm has a return on equity of 14% and a dividend-payout ratio of 60%. The firm's
anticipated growth rate is
5.6%
44 If a firm has a required rate of return equal to the ROE,
the amount of earnings retained by the firm does not affect market price or the P/E
45. According to James Tobin, the long-run value of Tobin's Q should move toward
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46. The goal of fundamental analysts is to find securities
whose intrinsic value exceeds market price.
47. The dividend discount model
includes capital gains implicitly
48. Many stock analysts assume that a mispriced stock will
gradually approach its intrinsic value over several years
49. Investors want high plowback ratios
whenever ROE > k.
50. Because the DDM requires multiple estimates, investors should
carefully examine inputs to the model and perform sensitivity analysis on price
estimates
51. According to Peter Lynch, a rough rule of thumb for security analysis is that
the growth rate should be equal to the P/E ratio
52. Dividend discount models and P/E ratios are used by __________ to try to find
mispriced securities.
fundamental analysts
53. Which of the following is the best measure of the floor for a stock price?
liquidation value
54. Who popularized the dividend discount model, which is sometimes referred to by his
name?
Myron Gordon
55. If a firm follows a low-investment-rate plan (applies a low plowback ratio), its
dividends will be _______ now and _______ in the future than a firm that follows a
high-reinvestment-rate plan
higher; lower
56. The present value of growth opportunities (PVGO) is equal toI) the difference
between a stock's price and its no-growth value per share.II) the stock's price.III)
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zero if its return on equity equals the discount rate.IV) the net present value of
favorable investment opportunities.
I, III, and IV
57. Low P/E ratios tend to indicate that a company will _______, ceteris paribus.
grow slowly
58. Earnings management is
the practice of using flexible accounting rules to improve the apparent profitability of the
firm
59. A version of earnings management that became common in the 1990s was
reported "pro forma earnings."
60. GAAP allows
considerable leeway to manage earnings.
61. The most appropriate discount rate to use when applying a FCFE valuation model is
the
required rate of return on equity
62. WACC is the most appropriate discount rate to use when applying a ______
valuation model
FCFF
63. the most appropriate discount rate to use when applying a FCFF valuation model is
the
WACC.
64. The required rate of return on equity is the most appropriate discount rate to use
when applying a ______ valuation model.
FCFE
65. Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding. Siri's required
return on equity is 12%, and WACC is 9.8%. If FCFE is expected to grow at 9%
forever, the intrinsic value of Siri's shares is
$18.17.($1.6M/3.2M = $0.50 FCFE per share; .50 × 1.09 = .545; .545/(.12 .09) = 18.17)
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Chap 9
1. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk
isA. unique risk.B. beta.C. standard deviation of returns.D. variance of returns.E.
skewness.
B
2. In the context of the Capital Asset Pricing Model (CAPM) the relevant risk isA. unique
risk.B. systematic risk.C. standard deviation of returns.D. variance of returns.E. semi-
variance.
B
3. In the context of the Capital Asset Pricing Model (CAPM) the relevant risk isA. unique
risk.B. market risk.C. standard deviation of returns.D. variance of returns.E. semi-
variance.
B
4. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate
of return is a function ofA. market risk.B. unsystematic risk.C. unique risk.D.
reinvestment risk.E. interest rate risk.
A
of return is a function ofA. beta risk.B. unsystematic risk.C. unique risk.D. reinvestment
risk.E. interest rate risk.
A
of return is a function ofA. systematic risk.B. unsystematic risk.C. unique risk.D.
reinvestment risk.E. interest rate risk.
A
7. The market portfolio has a beta ofA. 0.B. 1.C. -1.D. 0.5.E. 0.75
B
respectively. According to the capital asset pricing model (CAPM), the expected rate of
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return on security X with a beta of 1.2 is equal to.A. 0.06.B. 0.144.C. 0.12.D. 0.132.E.
0.18.
D
respectively. According to the capital asset pricing model (CAPM), the expected rate of
return on a security with a beta of 1.25 is equal toA. 0.142B. 0.144C. 0.153D. 0.134E.
0.117
A
10. Which statement is not true regarding the market portfolio?A. It includes all publicly
traded financial assets.B. It lies on the efficient frontier.C. All securities in the market
portfolio are held in proportion to their market values.D. It is the tangency point between
the capital market line and the indifference curve.E. it lies on a line that represents the
expected risk-return relationship.
D
11. Which statement is true regarding the market portfolio?A. It includes all publicly
traded financial assets.B. It lies on the efficient frontier.C. All securities in the market
portfolio are held in proportion to their market values.D. It is the tangency point between
the capital market line and the indifference curve.E. It includes all publicly traded
financial assets, lies on the efficient frontier, and all securities in the market portfolio are
held in proportion to their market values.
E
12. Which statement is not true regarding the Capital Market Line (CML)?A. The CML is
the line from the risk-free rate through the market portfolio.B. The CML is the best
attainable capital allocation line.C. The CML is also called the security market line.D.
The CML always has a positive slope.E. The risk measure for the CML is standard
deviation.
C
13. Which statement is true regarding the Capital Market Line (CML)?A. The CML is the
line from the risk-free rate through the market portfolio.B. The CML is the best attainable
capital allocation line.C. The CML is also called the security market line.D. The CML
always has a positive slope.E. The CML is the line from the risk-free rate through the
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market portfolio, is the best attainable capital allocation line, and it always has a positive
slope.
E
14. The market risk, beta, of a security is equal toA. the covariance between the
security's return and the market return divided by the variance of the market's returns.B.
the covariance between the security and market returns divided by the standard
deviation of the market's returns.C. the variance of the security's returns divided by the
covariance between the security and market returns.D. the variance of the security's
returns divided by the variance of the market's returns.E. the variance of the security's
return divided by the standard deviation of the market's returns.
A
15. According to the Capital Asset Pricing Model (CAPM), the expected rate of return on
any security is equal toA. Rf+ Beta [E(RM)].B. Rf+ Beta [E(RM) - Rf].C. [E(RM) - Rf].D.
E(RM) + Rf.E. Rf- [E(RM) - Rf].
B
16. The Security Market Line (SML) isA. the line that describes the expected return-beta
relationship for well-diversified portfolios only.B. also called the Capital Allocation
Line.C. the line that is tangent to the efficient frontier of all risky assets.D. the line that
represents the expected return-beta relationship.E. also called the Capital Market Line.
D
17. According to the Capital Asset Pricing Model (CAPM), fairly priced securitiesA. have
positive betas.B. have zero alphas.C. have negative betas.D. have positive alphas.E.
have non-zero alphas.
B
18. According to the Capital Asset Pricing Model (CAPM), underpriced securitiesA. have
positive betas.B. have zero alphas.C. have negative betas.D. have positive alphas.E.
have negative alphas.
D
19. According to the Capital Asset Pricing Model (CAPM), overpriced securitiesA. have
positive betas.B. have zero alphas.C. have negative alphas.D. have positive alphas.E.
have negative betas.
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C
20. According to the Capital Asset Pricing Model (CAPM),A. a security with a positive
alpha is considered overpriced.B. a security with a zero alpha is considered to be a
good buy.C. a security with a negative alpha is considered to be a good buy.D. a
security with a positive alpha is considered to be underpriced.E. a security with a
positive beta is considered to be underpriced.
D
21. According to the Capital Asset Pricing Model (CAPM), which one of the following
statements is false?A. The expected rate of return on a security increases in direct
proportion to a decrease in the risk-free rate.B. The expected rate of return on a security
increases as its beta increases.C. A fairly priced security has an alpha of zero.D. In
equilibrium, all securities lie on the security market line.E. All of these are correct.
A
22. In a well diversified portfolioA. market risk is negligible.B. systematic risk is
negligible.C. unsystematic risk is negligible.D. nondiversifiable risk is negligible.E. risk
does not exist.
C
23. Empirical results regarding betas estimated from historical data indicate thatA. betas
are constant over time.B. betas of all securities are always greater than one.C. betas
are always near zero.D. betas appear to regress toward one over time.E. betas are
always positive.
D
24. Your personal opinion is that a security has an expected rate of return of 0.11. It has
a beta of 1.5. The risk-free rate is 0.05 and the market expected rate of return is 0.09.
According to the Capital Asset Pricing Model, this security isA. underpriced.B.
overpriced.C. fairly priced.D. cannot be determined from data provided.E. can either be
overpriced or underpriced but not fairly priced.
C
you expect a stock with a beta of 1.3 to offer a rate of return of 12 percent, you shouldA.
buy the stock because it is overpriced.B. sell short the stock because it is overpriced.C.
MCQs 19
sell the stock short because it is underpriced.D. buy the stock because it is
underpriced.E. hold the stock because it is fairly priced.
B
beta of 0.90. The beta of the resulting portfolio isA. 1.40B. 1.00C. 0.36D. 1.08E. 0.80
D
27. A security has an expected rate of return of 0.10 and a beta of 1.1. The market
expected rate of return is 0.08 and the risk-free rate is 0.05. The alpha of the stock isA.
1.7%.B. -1.7%.C. 8.3%.D. 5.5%.E. -5.5%.
A
28. Your opinion is that CSCO has an expected rate of return of 0.13. It has a beta of
1.3. The risk-free rate is 0.04 and the market expected rate of return is 0.115. According
to the Capital Asset Pricing Model, this security isA. underpriced by 3%.B. overpriced.C.
fairly priced.D. cannot be determined from data provided.E. underpriced by 5%.
B
to the Capital Asset Pricing Model, this security isA. underpriced by 10%.B.
overpriced.C. fairly priced.D. cannot be determined from data provided.E. underpriced
by 5%.
C
to the Capital Asset Pricing Model, this security isA. underpriced.B. overpriced by
10%.C. fairly priced.D. cannot be determined from data provided.E. overpriced by 5%.
A
31. Your opinion is that Boeing has an expected rate of return of 0.112. It has a beta of
to the Capital Asset Pricing Model, this security isA. underpriced.B. overpriced by 7%.C.
fairly priced.D. cannot be determined from data provided.E. overpriced by 5%.
A
MCQs 20
C
C
34. As a financial analyst, you are tasked with evaluating a capital budgeting project.
You were instructed to use the IRR method and you need to determine an appropriate
hurdle rate. The risk-free rate is 4 percent and the expected market rate of return is 11
percent. Your company has a beta of 1.0 and the project that you are evaluating is
considered to have risk equal to the average project that the company has accepted in
the past. According to CAPM, the appropriate hurdle rate would be ______%.A. 4B. 7C.
15D. 11E. 1
D
the past. According to CAPM, the appropriate hurdle rate would be ______%.A. 13.8B.
7C. 15D. 4E. 1.4
A
the past. According to CAPM, the appropriate hurdle rate would be ______%.A. 4B.
9.25C. 15D. 11E. 0.75
MCQs 21
B
8.69C. 15D. 11E. 0.75
B
5C. 8.35D. 28.35E. 0.67
C
you expect CAT with a beta of 1.0 to offer a rate of return of 10 percent, you shouldA.
buy CAT because it is overpriced.B. sell short CAT because it is overpriced.C. sell stock
short CAT because it is underpriced.D. buy CAT because it is underpriced.E. hold CAT
because it is fairly priced.
B
E
MCQs 22
D
42. You invest 55% of your money in security A with a beta of 1.4 and the rest of your
money in security B with a beta of 0.9. The beta of the resulting portfolio isA. 1.466B.
1.157C. 0.968D. 1.082E. 1.175
E
43. Given the following two stocks A and BIf the expected market rate of return is 0.09
and the risk-free rate is 0.05, which security would be considered the better buy and
why?A. A because it offers an expected excess return of 1.2%.B. B because it offers an
expected excess return of 1.8%.C. A because it offers an expected excess return of
2.2%.D. B because it offers an expected return of 14%.E. B because it has a higher
beta.
C
44. Capital Asset Pricing Theory asserts that portfolio returns are best explained by:A.
economic factors.B. specific risk.C. systematic risk.D. diversification.E. unique risk.
C
45. According to the CAPM, the risk premium an investor expects to receive on any
stock or portfolio increases:A. directly with alpha.B. inversely with alpha.C. directly with
beta.D. inversely with beta.E. in proportion to its standard deviation.
C
46. What is the expected return of a zero-beta security?A. The market rate of return.B.
Zero rate of return.C. A negative rate of return.D. The risk-free rate.E. A return much
higher than the risk-free rate.
D
47. Standard deviation and beta both measure risk, but they are different in thatA. beta
measures both systematic and unsystematic risk.B. beta measures only systematic risk
while standard deviation is a measure of total risk.C. beta measures only unsystematic
risk while standard deviation is a measure of total risk.D. beta measures both
systematic and unsystematic risk while standard deviation measures only systematic
risk.E. beta measures total risk while standard deviation measures only nonsystematic
risk.
MCQs 23
B
48. The expected return-beta relationshipA. is the most familiar expression of the CAPM
to practitioners.B. refers to the way in which the covariance between the returns on a
stock and returns on the market measures the contribution of the stock to the variance
of the market portfolio, which is beta.C. assumes that investors hold well-diversified
portfolios.D. assumes that investors hold well-diversified portfolios, is the most familiar
expression of the CAPM to practitioners, and refers to the way in which the covariance
between the returns on a stock and returns on the market measures the contribution of
the stock to the variance of the market portfolio, which is beta.E. assumes that investors
do not hold well-diversified portfolios.
D
49. The security market line (SML)A. can be portrayed graphically as the expected
return-beta relationship.B. can be portrayed graphically as the expected return-standard
deviation of market returns relationship.C. provides a benchmark for evaluation of
investment performance.D. can be portrayed graphically as the expected return-beta
relationship and provides a benchmark for evaluation of investment performance.E. can
be portrayed graphically as the expected return-standard deviation of market returns
relationship and provides a benchmark for evaluation of investment performance.
D
50. Research by Jeremy Stein of MIT resolves the dispute over whether beta is a
sufficient pricing factor by suggesting that managers should use beta to estimateA.
long-term returns but not short-term returns.B. short-term returns but not long-term
returns.C. both long- and short-term returns.D. book-to-market ratios.E. Stein did not
make any suggestion to managers regarding beta.
A
51. Studies of liquidity spreads in security markets have shown thatA. liquid stocks earn
higher returns than illiquid stocks.B. illiquid stocks earn higher returns than liquid
stocks.C. both liquid and illiquid stocks earn the same returns.D. illiquid stocks are good
investments for frequent, short-term traders.E. only illiquid stocks should be held by
most investors.
B
52. An underpriced security will plotA. on the Security Market Line.B. below the Security
Market Line.C. above the Security Market Line.D. either above or below the Security
MCQs 24
Market Line depending on its covariance with the market.E. either above or below the
Security Market Line depending on its standard deviation.
C
53. An overpriced security will plotA. on the Security Market Line.B. below the Security
Market Line.C. above the Security Market Line.D. either above or below the Security
Market Line depending on its covariance with the market.E. either above or below the
Security Market Line depending on its standard deviation.
B
54. The risk premium on the market portfolio will be proportional toA. the average
degree of risk aversion of the investor population.B. the risk of the market portfolio as
measured by its variance.C. the risk of the market portfolio as measured by its beta.D.
both the average degree of risk aversion of the investor population and the risk of the
market portfolio as measured by its variance.E. both the average degree of risk
aversion of the investor population and the risk of the market portfolio as measured by
its beta.
D
55. In equilibrium, the marginal price of risk for a risky security must beA. equal to the
marginal price of risk for the market portfolio.B. greater than the marginal price of risk
for the market portfolio.C. less than the marginal price of risk for the market portfolio.D.
adjusted by its degree of nonsystematic risk.E. unrelated to the marginal price of risk for
the market portfolio.
A
56. The capital asset pricing model assumesA. all investors are price takers.B. all
investors have the same holding period.C. investors pay taxes on capital gains.D. all
investors are price takers and all investors have the same holding period.E. all investors
are price takers, all investors have the same holding period, and investors pay taxes on
capital gains.
D
57. The capital asset pricing model assumesA. all investors are price takers.B. all
investors have the same holding period.C. investors have homogeneous
expectations.D. all investors are price takers and all investors have the same holding
MCQs 25
period.E. all investors are price takers, all investors have the same holding period, and
investors have homogeneous expectations.
E
58. The capital asset pricing model assumesA. all investors are rational.B. all investors
have the same holding period.C. investors have heterogeneous expectations.D. all
investors are rational, and all investors have the same holding period.E. all investors are
rational, all investors have the same holding period, and investors have heterogeneous
expectations.
D
59. The capital asset pricing model assumesA. all investors are fully informed.B. all
investors are rational.C. all investors are mean-variance optimizers.D. taxes are an
important consideration.E. all investors are fully informed, all investors are rational, and
all investors are mean-variance optimizers.
E
60. If investors do not know their investment horizons for certainA. the CAPM is no
longer valid.B. the CAPM underlying assumptions are not violated.C. the implications of
the CAPM are not violated as long as investors' liquidity needs are not priced.D. the
implications of the CAPM are no longer useful.E. the implications of the CAPM are not
violated as long as investors' liquidity needs are priced.
C
61. Assume that a security is fairly priced and has an expected rate of return of 0.17.
The market expected rate of return is 0.11 and the risk-free rate is 0.04. The beta of the
stock is ___.A. 1.25.B. 1.86.C. 1.D. 0.95.E. 2.04.
B
62. The amount that an investor allocates to the market portfolio is negatively related
toI) The expected return on the market portfolio.II) The investor's risk aversion
coefficient.III) The risk-free rate of return.IV) The variance of the market portfolioA. I and
IIB. II and IIIC. II and IVD. II, III, and IVE. I, III, and IV
D
63. One of the assumptions of the CAPM is that investors exhibit myopic behavior. What
does this mean?A. They plan for one identical holding period.B. They are price-takers
who can't affect market prices through their trades.C. They are mean-variance
MCQs 26
optimizers.D. They have the same economic view of the world.E. They pay no taxes or
transactions costs.
A
64. The CAPM applies toA. portfolios of securities only.B. individual securities only.C.
efficient portfolios of securities only.D. efficient portfolios and efficient individual
securities only.E. all portfolios and individual securities.
E
65. Which of the following statements about the mutual fund theorem is true?I) It is
similar to the separation property.II) It implies that a passive investment strategy can be
efficient.III) It implies that efficient portfolios can be formed only through active
strategies.IV) It means that professional managers have superior security selection
strategies.A. I and IVB. I, II, and IVC. I and IID. III and IVE. II and IV
C
66. The expected return - beta relationship of the CAPM is graphically represented byA.
the security market line.B. the capital market line.C. the capital allocation line.D. the
efficient frontier with a risk-free asset.E. the efficient frontier without a risk-free asset.
A
67. A "fairly priced" asset liesA. above the security market line.B. on the security market
line.C. on the capital market line.D. above the capital market line.E. below the security
market line.
B
68. For the CAPM that examines illiquidity premiums, if there is correlation among
assets due to common systematic risk factors, the illiquidity premium on asset i is a
function ofA. the market's volatility.B. asset i's volatility.C. the trading costs of security
i.D. the risk-free rate.E. the money supply.
C
69. Your opinion is that security A has an expected rate of return of 0.145. It has a beta
of 1.5. The risk-free rate is 0.04 and the market expected rate of return is 0.11.
According to the Capital Asset Pricing Model, this security isA. underpriced.B.
overpriced by 5%.C. fairly priced.D. cannot be determined from data provided.E.
overpriced by 2%.
MCQs 27
C
70. Your opinion is that security C has an expected rate of return of 0.106. It has a beta
of 1.1. The risk-free rate is 0.04 and the market expected rate of return is 0.10.
According to the Capital Asset Pricing Model, this security isA. underpriced by 5%.B.
overpriced.C. fairly priced.D. cannot be determined from data provided.E. underpriced
by 2%.
C
you expect stock X with a beta of 1.0 to offer a rate of return of 10 percent, you shouldA.
buy stock X because it is overpriced.B. sell short stock X because it is overpriced.C. sell
stock short X because it is underpriced.D. buy stock X because it is underpriced.E. hold
the stock because it is fairly priced.
B
you expect stock X with a beta of 2.1 to offer a rate of return of 15 percent, you shouldA.
buy stock X because it is overpriced.B. sell short stock X because it is overpriced.C. sell
stock short X because it is underpriced.D. buy stock X because it is underpriced.E. hold
the stock because it is fairly priced.
B
73. You invest 50% of your money in security A with a beta of 1.6 and the rest of your
money in security B with a beta of 0.7. The beta of the resulting portfolio isA. 1.40B.
1.15C. 0.36D. 1.08E. 0.80
B
74. You invest $200 in security A with a beta of 1.4 and $800 in security B with a beta of
0.3. The beta of the resulting portfolio isA. 1.40B. 1.00C. 0.52D. 1.08E. 0.80
C
75. Security A has an expected rate of return of 0.10 and a beta of 1.3. The market
1.7%.B. -1.8%.C. 8.3%.D. 5.5%.E. -1.7%.
B
MCQs 28
1.7%.B. -1.7%.C. 8.3%.D. 3.5%.E. -8.3%.
D
-0.95%.B. -1.7%.C. 8.3%.D. 5.5%.E. 4.4%.
A
The market expected rate of return is 0.13 and the risk-free rate is 0.04. The beta of the
stock is ___.A. 1.25.B. 1.7.C. 1.D. 0.95.E. -1.3.
C
79. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of
risk is
beta
80. In the context of the Capital Asset Pricing Model (CAPM) the relevant risk is
systematic risk
81. In the context of the Capital Asset Pricing Model (CAPM) the relevant risk is
market risk
82. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's
rate of return is a function of
beta risk
83. The market portfolio has a beta of
respectively. According to the capital asset pricing model (CAPM), the expected rate
of return on security X with a beta of 1.2 is equal to
0.132r = 0.06 + 1.2(0.12-0.06)
85. Which statement is not true regarding the market portfolio?
MCQs 29
it is the tangency point between the capital market line and the indifference curve.the
tangency point is the optimal portfolio for a particular investor.the following are true:it
includes all publicly traded financial assetsit lies on the efficient frontierall securities in
the market portfolio are held in proportion to their market values
86. Which statement is not true regarding the capital market line (CML)?
the CML is also called the security market line.these are true:the cml is the line through
the risk free and market portfoliothe cml is the best attainable capital market linethe cml
always has a positive slopethe risk measure for cml is standard deviation
87. The market risk, beta, of a security is equal to
the covariance between the security's return and the market return divided by the
variance of the market's returnsbeta is a measure of how the security covaries with the
market returns, normalized by the market variance
88. According to the Capital Asset Pricing Model (CAPM), the expected rate of return
on any security is equal to
Rf + β [E(RM) - Rf].
89. the security market line is
the line that we get when we plot the betas of securities against the expected returns of
securities. it's upward sloping. drawing 1 on the x axis and finding the y that
corresponds to that will get you the expected return of the market portfolio. the line tells
the reward for bearing risk. a visual representation of CAPM. the market risk premium is
the slope of this line
90 According to the Capital Asset Pricing Model (CAPM), fairly priced securities have
zero alphasa zero alpha results when the market is in EQ (fairly priced for the level of
risk). alpha is the difference between the security's expected return and the return on
the SML
91. According to the Capital Asset Pricing Model (CAPM), underpriced securities have
positive alphaswith a positive alpha, the stock is supposed to have abnormal rates of
return based on the risk it currently has, and thus is underpriced.
92. According to the Capital Asset Pricing Model (CAPM), overpriced securities have
negative alphas
MCQs 30
93. In a well-diversified portfolio
unsystematic risk is negligible
94. Empirical results regarding betas estimated from historical data indicate that betas
appear to regress to one over time
95. Your personal opinion is that a security has an expected rate of return of 0.11. It has
a beta of 1.5. The risk-free rate is 0.05 and the market expected rate of return is
0.09. According to the Capital Asset Pricing Model, this security is
fairly pricedr = 0.05 + 1.5(0.09-0.05) = 0.11
96. The risk-free rate is 7%. The expected market rate of return is 15%. If you expect a
stock with a beta of 1.3 to offer a rate of return of 12%, you should
overpriced, so short sellwe have a negative alphar = 0.07 + 1.3(0.15 - 0.07) = 0.174
(actual, on the line)
beta of 0.90. The beta of the resulting portfolio is
1.080.6(1.2) + 0.4(0.90) = 1.08
expected rate of return is 0.08 and the risk-free rate is 0.05. The alpha of the stock
is
1.7%r on the line = 0.05 + 1.1(0.08 - 0.05) = 0.083. this is lower than 0.10
You were instructed to use the IRR method and you need to determine an
appropriate hurdle rate. The risk-free rate is 4% and the expected market rate of
return is 11%. Your company has a beta of 1.0 and the project that you are
evaluating is considered to have risk equal to the average project that the company
has accepted in the past. According to CAPM, the appropriate hurdle rate would be
11%r = 0.04 + 1(0.11-0.04) = 0.11
00. Capital asset pricing theory asserts that portfolio returns are best explained by
systematic risk
MCQs 31
01. According to the CAPM, the risk premium an investor expects to receive on any
stock or portfolio increases
directly with beta
02. What is the expected return of a zero-beta security?
the risk free rate
03. Standard deviation and beta both measure risk, but they are different in that beta
measures
only systematic risk, while standard deviation is a measure of total risk
04. The expected return-beta relationship
is the most familiar expression of the CAPMrefers to the way in which the covariance
between the returns on a stock and returns on the market measures the contribution of
the stock to the variance of the market portfolio, which is betaassumes that investors
hold well-diversified portfolios
05. The security market line (SML)
can be portrayed graphically as the expected return-beta relationship and provides a

benchmark for evaluation of investment performance.
06. Studies of liquidity spreads in security markets have shown that
illiquid stocks earn higher returns than liquid stocks
07. The risk premium on the market portfolio will be proportional to
the average degree of risk aversion of the investor population and the risk of the market
portfolio as measured by its variance.
08. In equilibrium, the marginal price of risk for a risky security must be
equal to the marginal price of risk for the market portfolioif this is not true, then investors
will buy or sell the security until they are equal
09. The capital asset pricing model assumes
all investors are price takers with the same single holding periodCAPM assumes that
there are no taxes or transaction costs
10. the CAPM also assumes
MCQs 32
that all investors have homogeneous expectations, are rational, are mean-variance
optimizers, and are fully informed
111. If investors do not know their investment horizons for certain,
the implications of the CAPM are not violated as long as investors' liquidity needs are
not priced
The market expected rate of return is 0.11 and the risk-free rate is 0.04. The beta of
the stock is
1.860.17 = 0.04 + B(0.11 - 0.04)
13. The amount that an investor allocates to the market portfolio is negatively related to
the investor's risk aversion coefficientthe risk-free rate of returnthe variance of the
market portfolio
14. One of the assumptions of the CAPM is that investors exhibit myopic behavior.
What does this mean?
they plan for one identical holding periodmyopic behavior is shortsighted, with no
concern for medium-term or long-term implications
15. The CAPM applies to
all portfolios and individual securities
16. Which of the following statements about the mutual fund theorem is true?
it is similar to the separation propertyit implies that a passive strategy is efficient
17. The expected return-beta relationship of the CAPM is graphically represented by
the security market line
18. For the CAPM that examines illiquidity premiums, if there is correlation among
assets due to common systematic risk factors, the illiquidity premium on asset i is a
function of
the trading costs of security i
19. differences between the capital market line and the security market line
MCQs 33
capital market line measures excess return per unit of total risk (efficient portfolios only).
security market line measures excess return per unit of risk (beta, for individual
securities and portfolios). the SML is more general
Chap 14
1. The current yield on a bond is equal to
Annual interest payment divided by current market price
2. If a 7% coupon bond is trading for $975.00, it has a current yield of
(70/975 =) 7.18%
3. If a 7.25% coupon bond is trading for $982.00, it has a current yield
(72.50/983 =) 7.38%
4. If a 6.75% coupon bond is trading for $1,016.00, it has a current yield of
(67.5/1016 =) 6.64%
(77.5/1019 =) 7.61%
6. If a 6% coupon bond is trading for $950.00, it has a current yield of
(60/950 =) 6.3%
7. If an 8% coupon bond is trading for $1,025.00, it has a current yield of
(80/1025 =) 7.8%
(75/1050 =) 7.1%
9. A coupon bond pays annual interest, has a par value of $1,000, matures in four
years, has a coupon rate of 10%, and has a yield to maturity of 12%. The current
yield on this bond is
10.65%
10. A coupon bond pays annual interest, has a par value of $1,000, matures in four
years, has a coupon rate of 8.25%, and has a yield to maturity of 8.64%. The
MCQs 34
current yield on this bond is
8.36%
11. A coupon bond pays annual interest, has a par value of $1,000, matures in 12
years, has a coupon rate of 11%, and has a yield to maturity of 12%. The current
11.73%
12. A coupon bond pays annual interest, has a par value of $1,000, matures in 12
years, has a coupon rate of 8.7%, and has a yield to maturity of 7.9%. The current
None of the options
13. Of the following four investments, ____________ is considered the safest
Treasury bills
14. Of the following four investments, ___________ is considered the least risky
Treasury bills
15. To earn a high rating from the bond rating agencies, a firm should have
a low debt to equity ratio and a high quick ratio (high values for the times interest and
quick ratios and a low debt to equity ratio are desirable indicators of safety)
16. A firm with a low rating from the bond rating agencies would have
a low times interest earned ratio and a low quick ratio (high values for the times interest
and quick ratios and a low debt to equity ratio are desirable indicators of safety)
17. At issue, coupon bonds typically sell
at or near par value (if the investment banker has appraised the market and the quality
of the bond correctly, the bond will sell at or near par, unless interest rates have
changed very dramatically and very quickly around the time of issuance)
18. Accrued interest
must be paid by the buyer of the bond and remitted to the seller of the bond (accrued
interest must be paid by the buyer, but it is not included in the quotations page price)
19. The invoice price of a bond that a buyer would pay is equal to
MCQs 35
the asked price plus accrued interest (the buyer of a bond will buy at the asked price
and will be invoiced for any accrued interest due to the seller)
20. A 8% coupon U.S. Treasury note pays interest on May 30 and November 30 and is
trade settlement on August 15. The accrued interest on the $100,000 face value of
this note is
$1,661.20
21. A coupon bond is reported as having an ask price of 108% of the $1,000 par value
in the WSJ. If the last interest payment was made one month ago and the coupon
rate is 9%, the invoice price of the bond will be
$1,087.50
22. A coupon bond is reported as having an ask price of 113% of the $1,000 par value
in the Wall Street Journal. If the last interest payment was made two months ago
and the coupon rate is 12%, the invoice price of the bond will be
$1,150
23. The bonds of Ford Motor Company have received a rating of "B" by Moody's. The
"B" rating indicates
the bonds are "high-yield" or junk bonds
24. The bond market
can be quite "thin" and primarily consists of a network of bond dealers in the over-the-
counter market
25. Ceteris paribus, the price and yield on a bond are
negatively related (bond prices and yields are inversely related)
26. The _______ is a measure of the average rate of return an investor will earn if the
investor buys the bond now and holds until maturity
yield to maturity (a measure of the average rate of return an investor will earn if the
investor buys the bond now and holds until maturity)
27. The _______ gives the number of shares for which each convertible bond can be
exchanged
MCQs 36
conversion ratio (the conversion premium is the amount for which the bond sells above
conversion value, the price of a bond as a straight bond provides the floor)
28. A coupon bond is a bond that
pays interest on a regular basis, typically every six months (a coupon bond will pay the
coupon rate of interest on a regular basis unless the firm defaults on the bond.
Convertible bonds are specific types of bonds)
29. A ________ bond is a bond where the bondholder has the right to cash in the bond
before maturity at a specified price after a specific date
put (any bond may be redeemed prior to maturity, but all bonds other than put bonds
are redeemed at a price determined by the prevailing interest rates)
30. Callable bonds
are called when interest rates decline appreciably and have a call price that declines as
time passes (callable bonds often are refunded/called when interest rates decline
appreciably, the calling price of the bond, approximately par and one year's coupon
payment, declines to par as time passes and maturity is reached)
31. A Treasury bond due in one year has a yield of 5.7%; a Treasury bond due in 5
years has a yield of 6.2%. A bond issued by Ford Motor Company due in 5 years
has a yield of 7.5%; a bond issued by Shell Oil due in one year has a yield of 6.5%.
The default risk premiums on the bonds issued by Shell and Ford, respectively, are
0.8% and 1.3%
32. A Treasury bond due in one year has a yield of 4.6%; a Treasury bond due in five
years has a yield of 5.6%. A bond issued by Lucent Technologies due in five years
has a yield of 8.9%; a bond issued by Exxon due in one year has a yield of 6.2%.
The default risk premiums on the bonds issued by Exxon and Lucent Technologies,
respectively, are
1.6% and 3.3%
years has a yield of 6.7%. A bond issued by Xerox due in five years has a yield of
7.9%; a bond issued by Exxon due in one year has a yield of 7.2%. The default risk
premiums on the bonds issued by Exxon and Xerox, respectively, are
1.0% and 1.2%
MCQs 37
years has a yield of 5.06%. A bond issued by Boeing due in five years has a yield of
7.63%; a bond issued by Caterpillar due in one year has a yield of 7.16%. The
default risk premiums on the bonds issued by Boeing and Caterpillar, respectively,
are
2.57% and 2.86%
35. Floating-rate bonds are designed to ____________ while convertible bonds are
designed to ____________
Minimize the holders' interest rate risk give the investor the ability to share in the price
appreciation of the company's stock
36. A coupon bond that pays interest annually is selling at par value of $1,000, matures
in five years, and has a coupon rate of 9%. The yield to maturity on this bond is
9.0%
37. A coupon bond that pays interest semi-annually is selling at par value of $1,000,
matures in seven years and has a coupon rate of 8.6%. The yield to maturity on this
bond is
8.6%
38. A coupon bond that pays interest annually has a par value of $1,000, matures in
five years, and has a yield to maturity of 10%. The intrinsic value of the bond today
will be ______ if the coupon rate is 7%.
$886.28
seven years, and has a yield to maturity of 9.3%. The intrinsic value of the bond
today will be ______ if the coupon rate is 8.5%.
$960.14
40. A coupon bond that pays interest annually, has a par value of $1,000, matures in
five years, and has a yield to maturity of 10%. The intrinsic value of the bond today
will be _________ if the coupon rate is 12%.
$1,075.82
MCQs 38
41. A coupon bond that pays interest semi-annually has a par value of $1,000, matures
in five years, and has a yield to maturity of 10%. The intrinsic value of the bond
today will be __________ if the coupon rate is 8%.
$922.78
in seven years, and has a yield to maturity of 9.3%. The intrinsic value of the bond
today will be ________ if the coupon rate is 9.5%.
$1,010.12
in five years, and has a yield to maturity of 10%. The intrinsic value of the bond
today will be ________ if the coupon rate is 12%.
$1,077.22
44. A coupon bond that pays interest of $100 annually has a par value of $1,000,
matures in five years, and is selling today at a $72 discount from par value. The
yield to maturity on this bond is
12%
45. You purchased an annual interest coupon bond one year ago that now has six
years remaining until maturity. The coupon rate of interest was 10% and par value
was $1,000. At the time you purchased the bond, the yield to maturity was 8%. The
amount you paid for this bond one year ago was
$1,104.13
46. You purchased an annual interest coupon bond one year ago that had six years
remaining to maturity at that time. The coupon interest rate was 10% and the par
value was $1,000. At the time you purchased the bond, the yield to maturity was
8%. If you sold the bond after receiving the first interest payment and the yield to
maturity continued to be 8%, your annual total rate of return on holding the bond for
that year would have been
8%
47. Consider two bonds, A and B. Both bonds presently are selling at their par value of
$1,000. Each pays interest of $120 annually. Bond A will mature in five years, while
MCQs 39
bond B will mature in six years. If the yields to maturity on the two bonds change
from 12% to 10%,
both bonds will increase in value, but bond B will increase more than bond A
48. A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000. If the
bond matures in eight years, the bond should sell for a price of _______ today
$501.87
49. You have just purchased a 10-year zero-coupon bond with a yield to maturity of
10% and a par value of $1,000. What would your rate of return at the end of the
year be if you sell the bond? Assume the yield to maturity on the bond is 11% at the
time you sell.
1.4%
50. A Treasury bill with a par value of $100,000 due one month from now is selling
today for $99,010. The effective annual yield is
12.68%
51. A Treasury bill with a par value of $100,000 due two months from now is selling
today for $98,039, with an effective annual yield of
12.62%
52. A Treasury bill with a par value of $100,000 due three months from now is selling
today for $97,087, with an effective annual yield of
12.55%
53. A coupon bond pays interest semi-annually, matures in five years, has a par value
of $1,000 and a coupon rate of 12%, and an effective annual yield to maturity of
10.25%. The price the bond should sell for today is
$1,077.20
54. A convertible bond has a par value of $1,000 and a current market price of $850.
The current price of the issuing firm's stock is $29 and the conversion ratio is 30
shares. The bond's market conversion value is
$870
MCQs 40
55. A convertible bond has a par value of $1,000 and a current market value of $850.
shares. The bond's conversion premium is
$40
56. Consider the following $1,000 par value zero coupon bonds:Bond A: 1 YTM,
$909.09Bond B: 2 YTM, $811.62Bond C: 3 YTM, $711.78Bond D: 4 YTM,
$635.52The yield to maturity on bond A is
10%
$635.52The yield to maturity on bond B is
11%
$635.52The yield to maturity on bond C is
12%
$635.52The yield to maturity on bond D is
12%
60. A 12% coupon bond, semi-annual payments, is callable in five years. The call price
is $1,120; if the bond is selling today for $1,110, what is the yield to call?
10.95%
61. A 10% coupon, annual payments, bond maturing in 10 years, is expected to make
all coupon payments, but to pay only 50% of par value at maturity. What is the
expected yield on this bond if the bond is purchased for $975?
6.68%
62. You purchased an annual interest coupon bond one year ago with six years
remaining to maturity at the time of purchase. The coupon interest rate is 10% and
par value is $1,000. At the time you purchased the bond, the yield to maturity was
MCQs 41
8%. If you sold the bond after receiving the first interest payment and the bond's
yield to maturity had changed to 7%, your annual total rate of return on holding the
bond for that year would have been
11.95%
63. The ________ is used to calculate the present value of a bond.
yield to maturity
64. The yield to maturity on a bond is
the discount rate that will set the present value of the payments equal to the bond price
65. A bond will sell at discount when
the coupon rate is less than the current yield and the current yield is less than yield to
maturity
66. The yield to maturity on a bond is
the discount rate that will set the present value of the payments equal to the bond price
67. A bond will sell at a discount when
the coupon rate is less than the current yield and the current yield is less than yield to
maturity
68. A bond has a par value of $1,000, a time to maturity of 20 years, a coupon rate of
10% with interest paid annually, a current price of $850, and a yield to maturity of
12%. Intuitively and without using calculations, if interest payments are reinvested
at 10%, the realized compound yield on this bond must be
10.9%
69 A bond with a 12% coupon, 10 years to maturity and selling at 88:00 has a yield to
maturity of
over 14%
70. Using semi-annual compounding, a 15-year zero-coupon bond that has a par value
of $1,000, and a required return of 8% would be priced at approximately
$308
MCQs 42
71. The yield to maturity of a 20-year zero-coupon bond that is selling for $372.50 with
a value at maturity of $1,000 is
5.1%
72. Which one of the following statements about convertibles is true?
the more volatile the underlying stock, the greater the value of the conversion feature
73. Which one of the following statements about convertibles is false?
The longer the call protection on a convertible, the less the security is worth; the smaller
the spread between the dividend yield on the stock and the yield-to-maturity on the
bond, the more the convertible is worth; the collateral that is used to secure a
convertible bond is one reason convertibles are more attractive than the underlying
stock
74. Consider a $1,000 par value 20-year zero-coupon bond issued at a yield to maturity
of 10%. If you buy that bond when it is issued and continue to hold the bond as
yields decline to 9%, the imputed interest income for the first year of that bond is
$14.87
75. The bond indenture includes
the coupon rate of the bond, the par value of the bond, and the maturity date of the
bond
76. A Treasury bond quoted at 107:16 107:18 has a bid price of _______ and an asked
price of _____.
$1,071.80, $1,071.60
77. Most corporate bonds are traded
over the counter by bond dealers linked by a computer quotation system
78. The process of retiring high-coupon debt and issuing new bonds at a lower coupon
to reduce interest payments is called
refunding
79. Convertible bonds
give their holders the ability to share in price appreciation of the underlying stock and
offer lower coupon rates than similar nonconvertible bonds
MCQs 43
80. TIPS are
government bonds with par value linked to the general level of prices
81. Altman's Z scores are assigned based on a firm's financial characteristics and are
used to predict
bankruptcy risk
82. When a bond indenture includes a sinking fund provision,
bondholders may lose because their bonds can be repurchased by the corporation at
below-market prices
83. Subordination clauses in bond indentures
may restrict the amount of additional borrowing the firm can undertake and provide
higher priority to senior creditors in the event of bankruptcy
84. Collateralized bonds
are backed by specific assets of the issuing firm and are considered the safest variety of
bonds.
85. Debt securities are often called fixed-income securities because
they promise either a fixed stream of income or a stream of income determined by a

specific formula
86. A zero-coupon bond is one that
effectively has a zero percent coupon rate
87. Swingin' Soiree, Inc. is a firm that has its main office on the Right Bank in Paris. The
firm just issued bonds with a final payment amount that depends on whether the
Seine River floods. This type of bond is known as
a catastrophe bond
88. One year ago, you purchased a newly issued TIPS bond that has a 6% coupon
rate, five years to maturity, and a par value of $1,000. The average inflation rate
over the year was 4.2%. What is the amount of the coupon payment you will
receive, and what is the current face value of the bond?
$65.52, $1,042
MCQs 44
89. Bond analysts might be more interested in a bond's yield to call if
interest rates are expected to fall
90. What is the relationship between the price of a straight bond and the price of a
callable bond
the straight bond's price will be higher than the callable bond's price for low interest
rates
91. Three years ago you purchased a bond for $974.69. The bond had three years to
maturity, a coupon rate of 8%, paid annually, and a face value of $1,000. Each year
you reinvested all coupon interest at the prevailing reinvestment rate shown in the
table below. Today is the bond's maturity date. What is your realized compound
yield on the bond?0 (purchase date) = 6.0% prevailing reinvestment rate1 = 7.2%2
= 9.4%3 (maturity date) = 8.2%
8.97%
92. Which of the following is not a type of international bond?
Elton bonds
93. A coupon bond that pays interest annually has a par value of $1,000, matures in six
years, and has a yield to maturity of 11%. The intrinsic value of the bond today will
be ______ if the coupon rate is 7.5%.
$851.93
eight years, and has a yield to maturity of 9%. The intrinsic value of the bond today
will be ______ if the coupon rate is 6%.
$833.96
in six years, and has a yield to maturity of 9%. The intrinsic value of the bond today
will be __________ if the coupon rate is 9%.
$1,000
in seven years, and has a yield to maturity of 11%. The intrinsic value of the bond
today will be __________ if the coupon rate is 8.8%.
MCQs 45
$894.51
97. A coupon bond that pays interest of $90 annually has a par value of $1,000,
matures in nine years, and is selling today at a $66 discount from par value. The
10.15%
98. A coupon bond that pays interest of $40 semi-annually has a par value of $1,000,
matures in four years, and is selling today at a $36 discount from par value. The
9.09%
99. You purchased an annual interest coupon bond one year ago that now has 18 years
remaining until maturity. The coupon rate of interest was 11% and par value was
$1,000. At the time you purchased the bond, the yield to maturity was 10%. The
amount you paid for this bond one year ago was
$1,083.65
00. You purchased an annual interest coupon bond one year ago that had nine years
remaining to maturity at that time. The coupon interest rate was 10% and the par
value was $1,000. At the time you purchased the bond, the yield to maturity was
8%. If you sold the bond after receiving the first interest payment and the yield to
maturity continued to be 8%, your annual total rate of return on holding the bond for
that year would have been
8.00%
01. Consider two bonds, F and G. Both bonds presently are selling at their par value of
$1,000. Each pays interest of $90 annually. Bond F will mature in 15 years while
bond G will mature in 26 years. If the yields to maturity on the two bonds change
from 9% to 10%,
both bonds will decrease in value, but bond G will decrease more than bond F
bond matures in 18 years, the bond should sell for a price of _______ today.
$130.04
MCQs 46
bond matures in 27 years, the bond should sell for a price of _______ today.
$59.74
04. You have just purchased a 12-year zero-coupon bond with a yield to maturity of 9%
and a par value of $1,000. What would your rate of return at the end of the year be
if you sell the bond? Assume the yield to maturity on the bond is 10% at the time
you sell.
1.4%
05. You have just purchased a 7-year zero-coupon bond with a yield to maturity of 11%
and a par value of $1,000. What would your rate of return at the end of the year be
if you sell the bond? Assume the yield to maturity on the bond is 9% at the time you
sell.
23.8%
06. A convertible bond has a par value of $1,000 and a current market price of $975.
$924
07. A convertible bond has a par value of $1,000 and a current market price of $1,105.
$700
$70
$175
MCQs 47
10. If a 7% coupon bond that pays interest every 182 days paid interest 32 days ago,
the accrued interest would be
6.15
111. If a 7.5% coupon bond that pays interest every 182 days paid interest 62 days ago,
12.77
12. If a 9% coupon bond that pays interest every 182 days paid interest 112 days ago,
27.69
13. A 7% coupon bond with an ask price of 100:00 pays interest every 182 days. If the
bond paid interest 32 days ago, the invoice price of the bond would be
1,006.15
14. A 7.5% coupon bond with an ask price of 100:00 pays interest every 182 days. If
the bond paid interest 62 days ago, the invoice price of the bond would be
1,012.77
15. A 9% coupon bond with an ask price of 100:00 pays interest every 182 days. If the
bond paid interest 112 days ago, the invoice price of the bond would be
1,027.69
over the year was 3.2%. What is the amount of the coupon payment you will receive
and what is the current face value of the bond?
$51.60, $1,032
over the year was 3.6%. What is the amount of the coupon payment you will
receive, and what is the current face value of the bond?
$41.44, $1,036
18. A CDO is
MCQs 48
collateralized debt obligation
19. A CDS is
credit default swap
20. A credit default swap is
an insurance policy on the default risk of a corporate bond or loan
21. The compensation from a CDS can come from
the CDS holder delivering the defaulted bond to the CDS issuer in return for the bond's
par value and the CDS issuer paying the swap holder the difference between the par
value of the bond and the bond's market price
22. SIVs are
structured investment vehicles
23. SIVs raise funds by ______ and then use the proceeds to ______
issuing short-term commercial paper; buy other forms of debt such as mortgages
24. CDOs are divided in tranches
that provide investors with securities with varying degrees of credit risk, and each tranch
is given a different level of seniority in terms of its claims on the underlying pool
25. Mortgage-backed CDOs were a disaster in 2007 because
they were formed by pooling subprime mortgages, home prices stalled, and the
mortgages were variable rate loans and interest rates increased
MCQs 49

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3. Diversifiable risk is also referred to as

a.systematic risk, firm-specific risk.

a.have positive betas.

c.have zero alphas.

e.have non-zero alphas.

10. If a firm has a required rate of return equal to the ROE

e.None of these is correct.

11. Investors want high plowback ratios

a.for all firms.

b.whenever k is greater than ROE.

c.whenever bank interest rates are high.

d.whenever ROE is greater than k.

c.None of these is correct

d.None of these is correct

a.the asked price plus accrued interest.

b.the bid price.

d.the bid price plus accrued interest.

e.the bid price less accrued interest.

16. The market risk, beta, of a security is equal to

b.required rate of return on equity

a.sell short the stock because it is overpriced.

b.buy the stock because it is underpriced.

d.hold the stock because it is fairly priced.

e.sell the stock short because it is underpriced.

e.None of these is correct.

c.The risk measure for the CML is standard deviation.

e.The CML is also called the security market line.

a.will be greater than the intrinsic value of stock D

c.will be the same as the intrinsic value of stock D

3. _________ is equal to common shareholders'equity divided by common shares

Book value per share

liquidation value per share

8. Historically, P/E ratios have tended to be

lower when inflation has been high

market capitalization rate

10. The _________ is the fraction of earnings reinvested in the firm

retention rate or plowback ratio

11. The Gordon model

is a generalization of the perpetuity formula to cover the case of a growing perpetuity

will be less than the intrinsic value of stock D

will be less than the intrinsic value of stock B

will be less than the intrinsic value of stock D

will be greater than the intrinsic value of stock B

will be greater than the intrinsic value of stock D

6.0%(10% × 0.60 = 6.0%.)

23.4%(26% × 0.90 = 23.4%)

$30.23(.10 = (32 P + 1.25)/P; .10P = 32 - P + 1.25; 1.10P = 33.25; P = 30.23)

None of the options are correct($90)

he level of uncertainty surrounding the forecast will always be quite high

the aggregate earnings multiplier

16.5%(4% + 1.25(14% 4%) = 16.5%)

7%(k = .04 + 1.25 (.14 .04); k = .165; .165 = 2/21 + g; g = .07.)

4%.(6% + [-0.25(14% 6%)] = 4%)

$2.69.(g = .125 × .6 = 7.5%; $2.50(1.075) = $2.69.)

$60.00.(20 × $3.00 = $60.00.)

$133.33(k = 6% + [-0.25(14% 6%)] = 4%; P = 8/[.04 (-.02)] = $133.33)

13.9%(k = 3.50/90 + .10; k = 13.9%)

1.1(k = 13.9%; 13.9 = 5% + b(13% 5%) = 1.11.)

8.33(g = 13% × 0.5 = 6.5%; .5/(.12 .065) = 9.09)