FIR 4770 Midterm Review Questions

Student: ___________________________________________________________________________ 1. The expected return of a portfolio of risky securities A. is a weighted average of the securities' returns. B. is the sum of the securities' returns. C. is the weighted sum of the securities' variances and covariances. D. A and C. E. none of the above.

2. Other things equal, diversification is most effective when A. securities' returns are uncorrelated. B. securities' returns are positively correlated. C. securities' returns are high. D. securities' returns are negatively correlated. E. B and C.

3. The efficient frontier of risky assets is A. the portion of the investment opportunity set that lies above the global minimum variance portfolio. B. the portion of the investment opportunity set that represents the highest standard deviations. C. the portion of the investment opportunity set which includes the portfolios with the lowest standard deviation. D. the set of portfolios that have zero standard deviation. E. both A and B are true.

4. The Capital Allocation Line provided by a risk-free security and N risky securities is A. the line that connects the risk-free rate and the global minimum-variance portfolio of the risky securities. B. the line that connects the risk-free rate and the portfolio of the risky securities that has the highest expected return on the efficient frontier. C. the line tangent to the efficient frontier of risky securities drawn from the risk-free rate. D. the horizontal line drawn from the risk-free rate. E. none of the above.

5. Which of the following statement(s) is (are) true regarding the selection of a portfolio from those that lie on the Capital Allocation Line? A. Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors. B. More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors. C. Investors choose the portfolio that maximizes their expected utility. D. A and C. E. B and C.

6. Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz?

A. Only portfolio X cannot lie on the efficient frontier. B. Only portfolio Z cannot lie on the efficient frontier. C. Cannot tell from the information given. D. Only portfolio Y cannot lie on the efficient frontier. E. Only portfolio W cannot lie on the efficient frontier.

7. If a 6% coupon bond is trading for $950.00, it has a current yield of ____________ percent. A. 6.0 B. 6.5 C. 6.3 D. 6.1 E. 6.6

8. To earn a high rating from the bond rating agencies, a firm should have A. a low times interest earned ratio B. a low debt to equity ratio C. a high quick ratio D. B and C E. A and C

9. An 8% coupon U. S. Treasury note pays interest on May 30 and November 30 and is traded for settlement on August 15. The accrued interest on the $100,000 face value of this note is _________. A. $491.80 B. $800.00 C. $983.61 D. $1,661.20 E. none of the above

10. The _________ gives the number of shares for which each convertible bond can be exchanged. A. convertible floor B. conversion premium C. P/E ratio D. current ratio E. conversion ratio

11. A Treasury bond due in one year has a yield of 6.2%; a Treasury bond due in 5 years has a yield of 6.7%. A bond issued by Xerox due in 5 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 A. 1.0% and 1.2% B. 0.5% and .7% C. 1.2% and 1.0% D. 0.7% and 0.5% E. none of the above

12. A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be __________ if the coupon rate is 8%. A. $922.78 B. $924.16 C. $1,075.80 D. $1,077.20 E. none of the above

13. The term structure of interest rates is: A. The relationship between the rates of interest on all securities. B. The relationship between the interest rate on a security and its time to maturity. C. The relationship between the yield on a bond and its default rate. D. All of the above. E. None of the above.

14. An inverted yield curve implies that: A. Long-term interest rates are lower than short-term interest rates. B. Long-term interest rates are higher than short-term interest rates. C. Long-term interest rates are the same as short-term interest rates. D. Intermediate term interest rates are higher than either short- or long-term interest rates. E. none of the above.

15. The expectations theory of the term structure of interest rates states that A. forward rates are determined by investors' expectations of future interest rates. B. forward rates exceed the expected future interest rates. C. yields on long- and short-maturity bonds are determined by the supply and demand for the securities. D. all of the above. E. none of the above.

16. According to the "liquidity preference" theory of the term structure of interest rates, the yield curve usually should be: A. inverted. B. normal. C. upward sloping D. A and B. E. B and C.

Suppose that all investors expect that interest rates for the 4 years will be as follows:

17. If you have just purchased a 4-year zero coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000) A. 5% B. 7% C. 9% D. 10% E. none of the above

The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000.

18. What is the yield to maturity on a 3-year zero coupon bond? A. 6.37% B. 9.00% C. 7.33% D. 10.00% E. none of the above

19. The duration of a bond is a function of the bond's A. coupon rate. B. yield to maturity. C. time to maturity. D. all of the above. E. none of the above.

20. Given the time to maturity, the duration of a zero-coupon bond is higher when the discount rate is A. higher. B. lower. C. equal to the risk free rate. D. The bond's duration is independent of the discount rate. E. none of the above.

21. Holding other factors constant, which one of the following bonds has the smallest price volatility? A. 5 year, 14% coupon bond B. 5-year, 10% coupon bond C. 5-year, 0% coupon bond D. 5-year, 12% coupon bond E. Cannot tell from the information given.

22. The duration of a par value bond with a coupon rate of 8% and a remaining time to maturity of 5 years is A. 5 years. B. 5.4 years. C. 4.17 years. D. 4.31 years. E. none of the above.

23. The two components of interest-rate risk are A. price risk and default risk. B. reinvestment risk and systematic risk. C. call risk and price risk. D. price risk and reinvestment risk. E. none of the above.

24. Indexing of bond portfolios is difficult because A. the number of bonds included in the major indexes is so large that it would be difficult to purchase them in the proper proportions. B. many bonds are thinly traded so it is difficult to purchase them at a fair market price. C. the composition of bond indexes is constantly changing. D. all of the above are true. E. both A and B are true.

25. An 8%, 30-year corporate bond was recently being priced to yield 10%. The Macaulay duration for the bond is 10.20 years. Given this information, the bond's modified duration would be________. A. 8.05 B. 9.44 C. 9.27 D. 11.22 E. none of the above

4770 mid Key

1. The expected return of a portfolio of risky securities A. is a weighted average of the securities' returns. b. is the sum of the securities' returns. c. is the weighted sum of the securities' variances and covariances. d. A and C. e. none of the above.

Bodie - Chapter 07 #4 Difficulty: Easy

2. Other things equal, diversification is most effective when a. securities' returns are uncorrelated. b. securities' returns are positively correlated. c. securities' returns are high. D. securities' returns are negatively correlated. e. B and C. Negative correlation among securities results in the greatest reduction of portfolio risk, which is the goal of diversification.

Bodie - Chapter 07 #5 Difficulty: Moderate

3. The efficient frontier of risky assets is A. the portion of the investment opportunity set that lies above the global minimum variance portfolio. b. the portion of the investment opportunity set that represents the highest standard deviations. c. the portion of the investment opportunity set which includes the portfolios with the lowest standard deviation. d. the set of portfolios that have zero standard deviation. e. both A and B are true. Portfolios on the efficient frontier are those providing the greatest expected return for a given amount of risk. Only those portfolios above the global minimum variance portfolio meet this criterion.

Bodie - Chapter 07 #6 Difficulty: Moderate

4. The Capital Allocation Line provided by a risk-free security and N risky securities is a. the line that connects the risk-free rate and the global minimum-variance portfolio of the risky securities. b. the line that connects the risk-free rate and the portfolio of the risky securities that has the highest expected return on the efficient frontier. C. the line tangent to the efficient frontier of risky securities drawn from the risk-free rate. d. the horizontal line drawn from the risk-free rate. e. none of the above. The Capital Allocation Line represents the most efficient combinations of the risk-free asset and risky securities. Only C meets that definition.

Bodie - Chapter 07 #7 Difficulty: Moderate

5. Which of the following statement(s) is (are) true regarding the selection of a portfolio from those that lie on the Capital Allocation Line? a. Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors. b. More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors. c. Investors choose the portfolio that maximizes their expected utility. d. A and C. E. B and C. All rational investors select the portfolio that maximizes their expected utility; for investors who are relatively more risk-averse, doing so means investing less in the optimal risky portfolio and more in the risk-free asset.

Bodie - Chapter 07 #11 Difficulty: Moderate

6. Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz?

a. Only portfolio X cannot lie on the efficient frontier. b. Only portfolio Z cannot lie on the efficient frontier. c. Cannot tell from the information given. d. Only portfolio Y cannot lie on the efficient frontier. E. Only portfolio W cannot lie on the efficient frontier. When plotting the above portfolios, only W lies below the efficient frontier as described by Markowitz. It has a higher standard deviation than Z with a lower expected return.

Bodie - Chapter 07 #23 Difficulty: Moderate

7. If a 6% coupon bond is trading for $950.00, it has a current yield of ____________ percent. a. 6.0 b. 6.5 C. 6.3 d. 6.1 e. 6.6 60/950 = 6.3.

Bodie - Chapter 14 #3 Difficulty: Easy

8. To earn a high rating from the bond rating agencies, a firm should have a. a low times interest earned ratio b. a low debt to equity ratio c. a high quick ratio D. B and C e. A and C High values for the times interest and quick ratios and a low debt to equity ratio are desirable indicators of safety.

Bodie - Chapter 14 #9 Difficulty: Easy

9. An 8% coupon U. S. Treasury note pays interest on May 30 and November 30 and is traded for settlement on August 15. The accrued interest on the $100,000 face value of this note is _________. a. $491.80 b. $800.00 c. $983.61 D. $1,661.20 e. none of the above 76/183($4,000) = $1,661.20. Approximation: .08/12*100,000=666.67 per month. 666.67/month * 2.5 months = 1.666.67.

Bodie - Chapter 14 #13 Difficulty: Moderate

10. The _________ gives the number of shares for which each convertible bond can be exchanged. a. convertible floor b. conversion premium c. P/E ratio d. current ratio E. conversion ratio The conversion premium is the amount for which the bond sells above conversion value; the price of bond as a straight bond provides the floor. The other terms are not specifically relevant to convertible bonds.

Bodie - Chapter 14 #19 Difficulty: Easy

11. A Treasury bond due in one year has a yield of 6.2%; a Treasury bond due in 5 years has a yield of 6.7%. A bond issued by Xerox due in 5 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 A. 1.0% and 1.2% b. 0.5% and .7% c. 1.2% and 1.0% d. 0.7% and 0.5% e. none of the above Exxon: 7.2% - 6.2% = 1.0%; Xerox: 7. 9% - 6.7% = 1.2%.

Bodie - Chapter 14 #25 Difficulty: Moderate

12. A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be __________ if the coupon rate is 8%. A. $922.78 b. $924.16 c. $1,075.80 d. $1,077.20 e. none of the above FV = 1000, PMT = 40, n = 10, i = 5, PV = 922.78

Bodie - Chapter 14 #30 Difficulty: Moderate

13. The term structure of interest rates is: a. The relationship between the rates of interest on all securities. B. The relationship between the interest rate on a security and its time to maturity. c. The relationship between the yield on a bond and its default rate. d. All of the above. e. None of the above. The term structure of interest rates is the relationship between two variables, years and yield to maturity (holding all else constant).

Bodie - Chapter 15 #1 Difficulty: Easy

14. An inverted yield curve implies that: A. Long-term interest rates are lower than short-term interest rates. b. Long-term interest rates are higher than short-term interest rates. c. Long-term interest rates are the same as short-term interest rates. d. Intermediate term interest rates are higher than either short- or long-term interest rates. e. none of the above. The inverted, or downward sloping, yield curve is one in which short-term rates are higher than long-term rates. The inverted yield curve has been observed frequently, although not as frequently as the upward sloping, or normal, yield curve.

Bodie - Chapter 15 #3 Difficulty: Easy

15. The expectations theory of the term structure of interest rates states that A. forward rates are determined by investors' expectations of future interest rates. b. forward rates exceed the expected future interest rates. c. yields on long- and short-maturity bonds are determined by the supply and demand for the securities. d. all of the above. e. none of the above. The forward rate equals the market consensus expectation of future short interest rates.

Bodie - Chapter 15 #7 Difficulty: Easy

16. According to the "liquidity preference" theory of the term structure of interest rates, the yield curve usually should be: a. inverted. b. normal. c. upward sloping d. A and B. E. B and C. According to the liquidity preference theory, investors would prefer to be liquid rather than illiquid. In order to accept a more illiquid investment, investors require a liquidity premium and the normal, or upward sloping, yield curve results.

Bodie - Chapter 15 #9 Difficulty: Easy

Suppose that all investors expect that interest rates for the 4 years will be as follows:

Bodie - Chapter 15

17. If you have just purchased a 4-year zero coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000) A. 5% b. 7% c. 9% d. 10% e. none of the above The forward interest rate given for the first year of the investment is given as 5% (see table above).

Bodie - Chapter 15 #11 Difficulty: Moderate

The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000.

Bodie - Chapter 15

18. What is the yield to maturity on a 3-year zero coupon bond? a. 6.37% b. 9.00% C. 7.33% d. 10.00% e. none of the above (1000 / 808.81)1/3 -1 = 7.33%

Bodie - Chapter 15 #15 Difficulty: Moderate

19. The duration of a bond is a function of the bond's a. coupon rate. b. yield to maturity. c. time to maturity. D. all of the above. e. none of the above. Duration is calculated by discounting the bond's cash flows at the bond's yield to maturity and, except for zerocoupon bonds, is always less than time to maturity.

Bodie - Chapter 16 #1 Difficulty: Easy

20. Given the time to maturity, the duration of a zero-coupon bond is higher when the discount rate is a. higher. b. lower. c. equal to the risk free rate. D. The bond's duration is independent of the discount rate. e. none of the above. The duration of a zero-coupon bond is equal to the maturity of the bond.

Bodie - Chapter 16 #5 Difficulty: Moderate

21. Holding other factors constant, which one of the following bonds has the smallest price volatility? A. 5 year, 14% coupon bond b. 5-year, 10% coupon bond c. 5-year, 0% coupon bond d. 5-year, 12% coupon bond e. Cannot tell from the information given. Duration (and thus price volatility) is lower when the coupon rates are higher.

Bodie - Chapter 16 #8 Difficulty: Moderate

22. The duration of a par value bond with a coupon rate of 8% and a remaining time to maturity of 5 years is a. 5 years. b. 5.4 years. c. 4.17 years. D. 4.31 years. e. none of the above.

Bodie - Chapter 16 #12 Difficulty: Moderate

23. The two components of interest-rate risk are a. price risk and default risk. b. reinvestment risk and systematic risk. c. call risk and price risk. D. price risk and reinvestment risk. e. none of the above. Default, systematic, and call risks are not part of interest-rate risk. Only price and reinvestment risks are part of interest-rate risk.

Bodie - Chapter 16 #19 Difficulty: Easy

24. Indexing of bond portfolios is difficult because a. the number of bonds included in the major indexes is so large that it would be difficult to purchase them in the proper proportions. b. many bonds are thinly traded so it is difficult to purchase them at a fair market price. c. the composition of bond indexes is constantly changing. D. all of the above are true. e. both A and B are true. All of the above are true statements about bond indexes.

Bodie - Chapter 16 #21 Difficulty: Moderate

25. An 8%, 30-year corporate bond was recently being priced to yield 10%. The Macaulay duration for the bond is 10.20 years. Given this information, the bond's modified duration would be________. a. 8.05 b. 9.44 C. 9.27 d. 11.22 e. none of the above D* = D/(1 + y); D* = 10.2/(1.1) = 9.27

Bodie - Chapter 16 #27 Difficulty: Easy

4770 mid Summary

Category Bodie - Chapter 07 Bodie - Chapter 14 Bodie - Chapter 15 Bodie - Chapter 16 Difficulty: Easy Difficulty: Moderate # of Questions 6 6 8 7 11 14