1) Which of the following conclusions would be true if you earn a higher rate of return on your investments?
2) At what rate must $500 be compounded annually for it to grow to $1,079.46 in 10 years?
a. 6 percent
b. 7 percent
c. 8 percent
d. 5 percent
3) What is the present value of $12,500 to be received 10 years from today? Assume a discount rate of 8% compounded annually and round to the nearest $10.
4) The appropriate measure for risk according to the capital asset pricing model is:
a. the standard deviation of a firm’s cash flows
c. the standard deviation of a firm’s stock returns
5) How much money must you pay into an account at the end of each of 20 years in order to have $100,000 at the end of the 20th year? Assume that the account pays 6% per year, and round to the nearest $1.
6) You have the choice of two equally risk annuities, each paying $5,000 per year for 8 years. One is an annuity due and the other is an ordinary annuity. If you are going to be receiving the annuity payments, which annuity would you choose to maximize your wealth?
a. The annuity due
c. The ordinary annuity
7) If you put $1,000 in a savings account that yields 8% compounded semi-annually, how much money will you have in the account in 20 years (round to nearest $10)?
8) You want $20,000 in 5 years to take your spouse on a second honeymoon. Your investment account earns 7% compounded semiannually. How much money must you put in the investment account today? (round to the nearest $1)
9) You invest $1,000 at a variable rate of interest. Initially the rate is 4% compounded annually for the first year, and the rate increases one-half of one percent annually for five years (year two’s rate is 4.5%, year three’s rate is 5.0%, etc.). How much will you have in the account after five years?
10) Assume that you have $165,000 invested in a stock that is returning 11.50%,
11) Which of the following statements is most correct concerning diversification and risk?
12) The yield to maturity on a bond ________.
a. is fixed in the indenture
b. is lower for higher risk bonds
c. is the required rate of return on the bond
d. is generally below the coupon interest rate
13) You are considering buying some stock in Continental Grain. Which of the following are examples of non-diversifiable risks?
a. III and IV
b. II, III, and IV
c. I and II
d. I only
14) Of the following, which differs in meaning from the other three?
a. Systematic Risk
b. Market Risk
c. Asset-unique Risk
d. Undiversifiable Risk
15) You must add one of two investments to an already well- diversified portfolio.
Expected Return = 12%
Expected Return = 12%
Standard Deviation of
Standard Deviation of
Returns = 20.9%
Returns = 10.1%
Beta = .8
Beta = 2
If you are a risk-averse investor, which one is the better choice?
a. Security A
b. Security B
16) Which of the following is true of a zero coupon bond?
17) In an efficient securities market the market value of a security is equal to
18) In 1998 Fischer Corp. issued bonds with an 8 percent coupon rate and a $1,000 face value. The bonds mature on March 1, 2023. If an investor purchased one of these bonds on March 1, 2008, determine the yield to maturity if the investor paid $1,050 for the bond.
19) A bond’s yield to maturity depends upon all of the following except:
a. the maturity of the bond
b. the coupon rate
c. the individual investor’s required return
d. the bond’s risk as reflected by the bond rating
20) A bond will sell at a discount (below par value) if:
21) How is preferred stock similar to bonds?
22) Many preferred stocks have a feature that requires a firm to periodically set aside an amount of money for the retirement of its preferred stock. What is the name of this feature?
c. Sinking fund
23) How is preferred stock affected by a decrease in the required rate of return?
24) Modem Development, Inc. paid a dividend of $5.00 per share on its common stock yesterday. Dividends are expected to grow at a constant rate of 10% for the next two years, at which point the dividends will begin to grow at a constant rate indefinitely. If the stock is selling for $50 today and the required return is 15%, what it the ex-pected annual dividend growth rate after year two?
25) Market efficiency implies which of the following?
a. book value = intrinsic value
b. market value = intrinsic value
c. book value = market value
d. liquidation value = book value