1. You arrangement toanalyze the worth of a potential investment by calculating the amount ofthepresent worths of its meant cash flows.Which of the adhering to would lower the calculated valueof theinvestment?

a. The cash flows space in the form of adeferredannuity, and also they full to $100,000. Youlearn the the annuity lasts for only 5 rather than 10 years, hencethat eachpayment is because that $20,000 rather than because that $10,000.

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B. The discount rateincreases.

c. The riskiness ofthe investment’s cash operation decreases.

d. The total amountof cash flows remains the same, but much more of the cash flows are receivedin theearlier years and less are received in the later years.

e. The discount rate decreases.

2.Yourbankaccount payment an 8% nominal price of interest.The attention is compounded quarterly.Which the the following statements is CORRECT?

a. The regular rate of interest is 2%and the efficient rate ofinterest is 4%.

b. The periodic rate of attention is 8%and the efficient rate ofinterest is higher than8%.

c. The periodic rate of interest is 4%and the reliable rate ofinterest is less than 8%.

D. The routine rate of interest is 2% and also the effective rate of attention isgreater than8%.

e. The regular rate of attention is 8%and the reliable rate ofinterest is additionally 8%.

3.Which the thefollowing invest would have actually the highest possible future worth atthe finish of10 years? Assume that the effectiveannual rate for every investments is the same and also is greater than zero.

A. Invest A pays $250 at the beginningof each year for the next 10 year (a total of 10 payments).

b. Invest B payment $125 at the endofevery 6-month period for the following 10 years (a complete of 20 payments).

c. Invest C pays $125 at the beginningof every 6-month duration for the following 10 year (a full of 20 payments).

d. Investment D pays $2,500 in ~ the endof10 years (just one payment).

e. Invest E pays $250 at the endofevery year because that the following 10 years (a complete of 10 payments).

4.Youdeposit$1,000 now in a savings account the pays 3.5% interest, compoundedannually. How much will certainly your account beworth at the finish of 25 years?

a. $2,245.08

B. $2,363.24

c. $2,481.41

d. $2,605.48

e. $2,735.75

5. Suppose the genuine risk-freerate is 2.50% and thefuture price of inflation is meant to be constant at 3.05%. What price of return would you expect on a5-year Treasury security, assuming the pure expectations concept isvalid? disregard cross-productterms, i.e., ifaveraging is required, usage the arithmetic average.

a. 5.15%

b. 5.25%

c. 5.35%

d. 5.45%

E. 5.55%

r= r* + IP + DRP + LP + MRP

r = 2.50% + 3.05% = 5.55%

6. Mean the actual risk-freerate is 3.50%, the typical futureinflation price is 2.25%,and a maturity premium that 0.10% every year to maturity applies, i.e., MRP=0.10%(t), whereby t is the year to maturity.What rate of return would you expect on a 1-year Treasurysecurity, assumingthe pure expectations concept is no valid?Disregard cross-product terms, i.e., if averaging is required,use thearithmetic average.

a. 5.75%

B. 5.85%

c. 5.95%

d. 6.05%

e. 6.15%

r= r* + IP + DRP + LP + MRP

r = 3.50% + 2.25% + 0 + 0 + .10% = 5.85%

7. The real risk-free rate is2.50%, inflation isexpected to it is in 3.00% this year, and the maturity threat premium is zero. Taking account that the cross-product term,i.e., not ignoring it, what is the equilibrium rate of return ~ above a1-yearTreasury bond?

a. 4.975%

b. 5.175%

c. 5.375%


e. 5.775%

8. Supposethe U.S.Treasury uses to offer you a bond for $3,000.No payments will be made till the link matures 10 years fromnow, atwhich time it will certainly be redeemed because that $5,000.What interest rate would you knife if you bought this bond in ~ theofferprice?

a. 3.82%

b. 4.25%

c. 4.72%


e. 5.77%

n = 10 ns = ? PV = -3000 PMT = 0 FV = 5000

fix for "i" which will be 5.2410 %

9. Keys Corporation"s 5-yearbonds yield 6.50%, andT-bonds v the very same maturity yield 4.40%.The default risk premium for Keys" bonds is DRP = 0.40%, theliquiditypremium top top Keys" binding is LP = 1.70% versus zero ~ above T-bonds, inflationpremium(IP) is 1.5%, and also the maturity hazard premium (MRP) top top 5-year bonds is0.40%. What is the real risk-free rate,r*?

a. 2.10%

b. 2.20%

c. 2.30%

d. 2.40%

E.. 2.50%

Simplysubtract the IP the 1.50% and the MRP that .40% native the T-bond yield of4.40% to arrive at 2.50%

10. The Carter Company"sbonds mature in 10 years have apar worth of $1,000 and an annual coupon payment of $80.The market interest price for the binding is9%. What is the price of these bonds?

A. $935.82

b. $941.51

c. $958.15

d. $964.41

e. $979.53

n = 10

11. Brown Enterprises’bonds right now sell for$1,025. They have actually a 9-year maturity, anannual coupon that $80, and also a par worth of $1,000. Whatis their yield come maturity?

a. 6.87%

b. 7.03%

c. 7.21%

d. 7.45%


n = 9i = ? = 7.6063% PV = -1025PMT = 80FV = 1000

12. Highfield Inc"sbonds right now sell because that $1,275 andhave a par worth of $1,000. They pay a$120 annual coupon and have a 20-year maturity, yet they have the right to be calledin 5years in ~ $1,120. What is your yield tocall (YTC)?

a. 7.00%

b. 7.13%

c. 7.28%


e. 7.42%

n = 5i =?= 7.3109%PV = -1275PMT = 120FV = 1120

13. Moussawi Ltd"soutstanding bonds have a $1,000 par value,and they mature in 5 years. Your yieldto maturity is 9%, based on semiannual compounding, and the currentmarketprice is $853.61. What is the bond"sannual coupon attention rate?

a. 5.10%

b. 5.20%


d. 5.40%

e. 5.50%

n= 10i = 4.5PV = -853.61PMT = ? =$26.4994 FV = 1000

Annual rate = 26.4994/1000 =2.64994% times 2 = 5.2999%

14.14. Whichof the complying with statements is CORRECT?

a. The much shorter the time to maturity, the greaterthe adjust in the worth of a shortcut in an answer to a given adjust ininterestrates.

b. The much longer the time come maturity, the smallerthe adjust in the value of a shortcut in an answer to a given readjust ininterestrates.

c. The moment to maturity does not impact the changein the worth of a shortcut in solution to a given readjust in interest rates.

D.Youhold a 10-year, zero coupon, bond and also a10-year bond that has actually a 6% yearly coupon.The same sector rate, 6%, applies to both bonds.If the industry rate rises native the present level,the zero coupon bond will suffer the bigger percentage decline.

e. You organize a 10-year, zero coupon, bond and also a10-year link that has a 6% annual coupon.The same industry rate, 6%, uses to both bonds.If the market rate rises native the existing level,the zero coupon shortcut will experience the smaller portion decline.

15. Whichof the adhering to would be most likely to rise the couponrate thatis required to enable a bond to it is in issued at par?

A. Adding a call provision.

b. Including additional restrictive covenants thatlimit management"s actions.

c. Adding a sinking fund.

d. The rating agencies readjust the bond"s ratingfrom Baa come Aaa.

e. Making the bond a an initial mortgage shortcut ratherthan a debenture.

16. A 12-year bond has actually an annualcoupon rate of 9%. The coupon price willremain addressed until thebond matures. The bond has a yield tomaturity the 7%. I beg your pardon of the followingstatements is CORRECT?

a. Thebond is at this time selling at a price listed below its par value.

b. If sector interestrates decline, the price ofthe bond will likewise decline.

C. If market interest rates remain unchanged, thebond’s price one year from now will be reduced than that is today.

d. If industry interestrates stay unchanged, thebond’s price one year from now will be greater than the is today.

e. Thebond should currently be selling at that par value.

17. What annualpayment must you get in order to earn a 6.5% rate of return ~ above aperpetuitythat has a price of $1,250?

a. $77.19

B. $81.25

c. $85.31

d. $89.58

e. $94.06

1250 * .065 = $81.25

18. You marketed a carand accepted a keep in mind with the following cash circulation stream together your payment. What to be the efficient price you obtained forthe auto assuming one interest price of 6.0%?

Years: 0 1 2 3 4

| | | | |

CFs: $0$1,000 $2,000 $2,000 $2,000

A. $5,987

b. $6,286

c. $6,600

d. $6,930

e. $7,277 placed in CF registers through a rate of 6% andfind the PV

19. Whichof the adhering to statements is CORRECT? (Assume that the risk-freerate isaconstant.)

a. If the sector risk premium rises by 1%,then the required return on all stocks will increase by 1%.

b. If the market risk premium increases by 1%, thenthe required return will boost for stocks that have a beta greaterthan 1.0,but it will decrease for stocks that have a beta much less than 1.0.

C. If the marketrisk premium increases by 1%, then the compelled return will increase by1% fora stock that has a beta that 1.0.

d. The impact of a change in the industry riskpremium depends on the level of the risk-free rate.

e. The result of a change in the industry riskpremium counts on the steep of the yield curve.

20.Inthe following year, the market risk premium, (rM - rRF),isexpected come fall, while the risk-free rate, rRF, is expectedtoremain the same. Provided this forecast,which the the following statements is CORRECT?

a. The compelled return for all stocks will autumn bythe very same amount.

B. The compelled return will autumn for all stocks,but it will certainly fall an ext for share with higher betas.

c. The required return will autumn for every stocks,but it will loss less for stocks with higher betas.

d. The required return will increase for stockswith a beta less than 1.0 and will decrease because that stocks with a betagreater than1.0.

e. The compelled return on every stocks will certainly remainunchanged.

21.Youhave the following dataon three stocks:

Stock StandardDeviation Beta




If you space a strict hazard minimizer,you would choose Stock ____ if that is come be held in isolation and Stock____ ifit is to be organized as part of a well-diversified portfolio.

a. A; A.

b. A; B.

C. B; A.

d. C; A.

e. C; B.

22.Stock A"sbeta is 1.5 and Stock B"sbeta is 0.5. I m sorry of the followingstatements need to be true around thesesecurities? (Assume industry equilibrium.)

a. When organized in isolation, share A hasmore riskthan share B.

b. Share B should be a much more desirableaddition to aportfolio 보다 A.

c. Stock A should be a an ext desirableaddition to aportfolio 보다 B.

D. The expectedreturn on stock A must be higher than the on B.

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e. The expectedreturn on share B need to be higher than the on A.

23.Cooley Company"sstock has actually a beta of1.40, the risk-free price is 4.25%, and also the industry risk premiumis 5.50%. What is the firm"s forced rate the return?

a. 11.36%

b. 11.65%

C. 11.95%

d. 12.25%

e. 12.55%

Rateof Return = Risk cost-free + Beta (Market hazard Premium) Return = 4.25% + 1.4 (5.50%) = 11.95%24.CompanyA has actually a beta that 0.70, whileCompany B"s beta is 1.20. The requiredreturn on the stock market is 11.00%, and also the risk-free rate is 4.25%.What is the difference between A"s and B"srequired prices of return? (Hint: Firstfind the sector risk premium, then find the compelled returns top top thestocks.)


b. 2.89%

c. 3.05%

d. 3.21%


threat Premium is 11%minus 4.25% = 6.75% Feed right into the CAPM and you can uncover thereturns that 8.975% because that A and also 12.35% because that B

25. Mulherin"s share hasa beta the 1.23,its forced return is11.75%, andthe risk-free price is
4.30%. Whatis the forced rate that return top top the market?(Hint: an initial find the industry riskpremium.)

A. 10.36%

b. 10.62%

c. 10.88%

d. 11.15%

e. 11.43%

11.75% = 4.30% +1.23( market Risk Premium)Market RiskPremium = (11.75% - 4.30%) separated by 1.23 = 6.06%Return top top Market= industry Risk Premium + Risk free = 6.06% + 4.30% = 10.36%