FIN 3400 Exam 2 Questions and Answers- Florida International University

FIN 3400 Exam 2 Questions and Answers- Florida International University At your full-service brokerage firm, it costs $110 per stock trade. How much money do you receive after selling 100 shares of Time Warner, Inc. (TMX), which trades at $22.62? $2,152.00 $2,372.00 $2,388.20 $2,262.00 What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4 percent for an investor in the 28 percent tax bracket? 2.88 percent 5.56 percent 3.87 percent 4.51 percent Which of the following is a concern regarding beta? Using different market proxies will result in different estimates of beta. Research indicates that a company's beta does not appear to predict its future return very well. A company can alter its risk level which may make the beta estimate obsolete. All of these choices are correct. Which of the following is most correct? In an efficient market, investors will buy overvalued stock which will drive its price down. In an efficient market, investors will sell overvalued stock which will drive its price down. In an efficient market, investors will sell undervalued stock which will drive its price down. none of these choices are complete. Which of the following statements is correct? Restricted stocks are shares of stock issued to executives that have limitations on voting rights. The Capital Market Line graphs the relationship between return and risk (beta). Penny stocks are the stocks of small companies that are priced below $1 per share. All of these choices are correct. U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price falls resulting in a net increase of only $4. Given this information which of the following statements is correct? This is an example of a market underreaction. This is an example of a market overreaction. This is an example of a semi-strong efficient market. none of these choices are complete. Which of the following statements is correct? The Efficient Market Hypothesis states that security prices will be based on their expected return. There is evidence to suggest that the market is strong-form efficient because corporate insiders have made extraordinary profits by trading on inside information. If the market is strong-form efficient it must also be weak-form efficient and semi-strong efficient. none of these choices are complete. A two-year Treasury security currently earns 5.25 percent. Over the next two years, the real interest rate is expected to be 3.00 percent per year and the inflation premium is expected to be 2.00 percent per year. What is the maturity risk premium on the two-year Treasury security? 1.00 percent 5.00 percent 0.25 percent 1.05 percent FedEx Corp. stock ended the previous year at $113.39 per share. It paid a $0.40 per share dividend last year. It ended last year at $126.69. If you owned 300 shares of FedEx, what was your dollar return and percent return? $2,009, 9.13 percent $4,110, 12.08 percent $4,250, 12.29 percent $3,990, 11.73 percent You would like to buy shares of International Business Machines (IBM). The current bid and ask quotes are $96.17 and $96.24, respectively. You place a market buy-order for 100 shares that executes at these quoted prices. How much money did it cost to buy these shares? $7.00 $9,617.00 $19,241.00 $9,624.00 At your discount brokerage firm, it costs $9.95 per stock trade. How much money do you need to buy 100 shares of Ralph Lauren (RL), which trades at $85.13? $8,522.95 $8,503.05 $9,508.00 $8,503.00 Home Depot (HD) recently paid a $0.90 dividend. The dividend is expected to grow at a 17 percent rate. At the current stock price of $33.08, what is the return shareholders are expecting? 2.70 percent 17.03 percent 17.18 percent 20.18 percent Compute the standard deviation of the five monthly returns for PG&E: 1.25 percent, −1.50 percent, 4.25 percent, 3.75 percent, and 1.98 percent. 1.946 percent 1.876 percent 2.046 percent 2.287 percent ompute the standard deviation given these four economic states, their likelihoods, and the potential returns: Economic State Probability Return Fast Growth 0.20 100% Slow Growth 0.50 10% Recession 0.20 -1% Depression 0.10 -10% 23.8 percent 38.65 percent 88.06 percent 12.19 percent A corporation's 10-year bonds are currently yielding a return of 7.75 percent. The expected inflation premium is 3.0 percent annually and the real interest rate is expected to be 3.00 percent annually over the next 10 years. The liquidity risk premium on the corporation's bonds is 0.50 percent. The maturity risk premium is 0.25 percent on two-year securities and increases by 0.10 percent for each additional year to maturity. What is the default risk premium on the corporation's 10-year bonds? 0.18 percent 0.20 percent 0.27 percent 0.22 percent Consider a 2.75 percent TIPS with an issue CPI reference of 184.2. At the beginning of this year, the CPI was 195.4 and was at 200.5 at the end of the year. What was the capital gain of the TIPS in dollars? $27.69 $16.30 $11.20 $5.10 Determine the interest payment for the following three bonds: 2.5 percent coupon corporate bond (paid semiannually), 3.15 percent coupon Treasury note, and a corporate zero-coupon bond maturing in 10 years. (Assume a $1,000 par value.) $12.50, $15.75, $100, respectively $2.50, $3.15, $0, respectively $12.50, $15.75, $0, respectively $25.00, $31.50, $0, respectively Which of the following statements is correct? A low standard deviation means that the investment is less likely to achieve high returns, which means that it is more risky. It is not necessarily true that when an investment achieves a high return that it is risky. A dominant portfolio has the best risk-return relationship as compared to other portfolios. None of these choices are correct. Which of the following statements is correct regarding total risk? The coefficient of variation is a measure of the firm's total risk. Conglomerates will have less total risk than a firm that has one line of business. All firms have the same amount of total risk because they are all exposed to the same market risk. None of these choices are correct. Interest rates, inflation, and economic growth are economic factors that are examples of firm-specific risks that can be diversified away. external factors that are neither firm specific risk nor market risk. market risk. None of these choices are correct. Which of the following are investor diversification problems? Many households hold relatively few individual stocks—the median is three. Investors seem to prefer local firms thereby limiting diversification opportunities. Many employees hold mostly their employer's stocks as investments. All of these choices are correct. To find the percentage return of an investment divide the dollar return by the investment's value at the end of the period. divide the dollar return by the investment's value at the beginning of the period. multiply the dollar return by the investment's value at the end of the period. multiply the dollar return by the investment's value at the beginning of the period. Compute the expected return given these three economic states, their likelihoods, and the potential returns: Economic State Probability Return Fast Growth 0.3 40 % Slow Growth 0.4 15 % Recession 0.3 −15 % 40.0 percent 22.5 percent 18.3 percent 13.5 percent If you own 300 shares of Alaska Air at $15.88, 250 shares of Best Buy at $151.00, and 1,150 shares of Ford Motor at $3.51, what are the portfolio weights of each stock? weight of Alaska Air: 20.23 percent, weight of Best Buy: 76.09 percent, weight of Ford Motor: 3.67 percent weight of Alaska Air: 10.23 percent, weight of Best Buy: 81.09 percent, weight of Ford Motor: 8.67 percent weight of Alaska Air: 15.23 percent, weight of Best Buy: 81.09 percent, weight of Ford Motor: 3.67 percent weight of Alaska Air: 6.23 percent, weight of Best Buy: 71.09 percent, weight of Ford Motor: 22.67 percent The following table shows your stock positions at the beginning of the year, the dividends that each stock paid during the year, and the stock prices at the end of the year. What is your portfolio percentage return? Company Shares Beginning of Year Price Dividend per Share End of Year Price W 100 $ 25.00 $ 1.00 $ 24.00 P 200 $ 14.00 $ 0.75 $ 15.25 J 400 $ 8.00 $ 10.00 D 200 $ 3.00 $ 0.50 $ 3.50 11.54 percent 17.58 percent 3.85 percent 15.38 percent The past five monthly returns for PG Company are 1.25 percent, −1.50 percent, 4.25 percent, 3.75 percent, and 1.98 percent. What is the average monthly return? 12.73 percent 2.546 percent 9.73 percent 1.946 percent One-year Treasury bills currently earn 2.55 percent. You expect that one year from now, one-year Treasury bill rates will increase to 2.85 percent and that two years from now, one-year Treasury bill rates will increase to 3.15 percent. If the unbiased expectations theory is correct, what should the current rate be on 3-year Treasury securities? 2.55 percent 2.93 percent 2.85 percent 3.15 percent Which of the following was the catalyst for the recent financial crisis? defaults on subprime mortgages widespread layoffs due to illegal alien hiring corruption in the investment banking industry All of these choices are correct. Which of the following is NOT true about EE savings bonds? Interest payments are received annually but are tax deductible. About one in six Americans owns a savings bond. These are tax deferred investments. Paper bonds sell for one-half of their face value. Which of the following is true regarding U.S. Government Agency Securities? They carry the federal government's full faith and credit guarantee. They are treated the same as U.S. Treasury bonds with regard to the federal government's full faith and credit guarantee. They do not carry the federal government's full faith and credit guarantee. They are insured by the FDIC. Which of the following is a reason municipal bonds offer lower rates of interest income for their investors? They are tax exempt—at least at the federal level. They are able to offer reduced credit risk as they are backed by the federal government. They are able to avoid interest rate risk. They are able to avoid reinvestment rate risk. Possible shapes for the yield curve include all of the following EXCEPT horizontal line. humped. upward-sloping. vertical line. Calculate the price of a zero-coupon bond that matures in 20 years if the market interest rate is 8.5 percent. (Assume annual compounding and a par value of $1,000.) $995.62 $90.29 $1,195.62 $195.62 The Wall Street Journal reports that the rate on three-year Treasury securities is 7.25 percent and the rate on four-year Treasury securities is 8.50 percent. The one-year interest rate expected in three years is E( 4 r 1), 4.10 percent. According to the liquidity premium theory, what is the liquidity premium on the four-year Treasury security, L 4? 7.1 percent 9.6 percent 8.2 percent 6.7 percent One-year Treasury bills currently earn 3.25 percent. You expect that one year from now, one-year Treasury bill rates will increase to 3.45 percent and that two years from now, one-year Treasury bill rates will increase to 3.95 percent. The liquidity premium on two-year securities is 0.05 percent and on threeyear securities is 0.15 percent. If the liquidity theory is correct, what should the current rate be on threeyear Treasury securities? 3.25 percent 4.10 percent 3.55 percent 3.62 percent A company has a beta of 0.50. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is the company's required return? 11.0 percent 8.5 percent 13.5 percent 6.0 percent A 7.5 percent coupon bond with 16 years left to maturity is offered for sale at $834.92. What yield to maturity is the bond offering? (Assume interest payments are paid semiannually and par value is $1,000.) 10.34 percent 9.54 percent 4.77 percent 7.5 percent You hold the positions in the following table. If you expect the market to earn 10 percent and the riskfree rate is 3 percent, what is the required return of the portfolio? Price Shares Beta W $ 25.00 100 2.72 Budget Stores $ 38.50 200 1.65 Manufacturing Corp. $ 52.00 50 2.30 Pharmacy Corp.$ 18.50 200 0.65 14.83 percent 32.83 percent 15.81 percent 28.67 percent A company's current stock price is $65.40 and it is likely to pay a $2.25 dividend next year. Since analysts estimate the company will have an 11.25 percent growth rate, what is its expected return? 3.61 percent 11.25 percent 14.69 percent 3.44 percent Which of these is NOT a theory that explains the shape of the term structure of interest rates? market segmentation theory short-term structure of interest rates theory unbiased expectations theory liquidity theory Which of the following statements is incorrect? Central governments can intervene in foreign exchange markets directly and value their currency at high rates relative to another currency. Governments affect foreign exchange rates indirectly by altering prevailing interest rates within their own countries. Foreign currency exchange rates vary with the day-to-day demand and supply of the two foreign currencies. All of these choices are correct. How is the shadow banking system the same as the traditional banking system? It serves as a middle man. The complete credit intermediation is performed by a single bank. It intermediates the flow of funds between net savers and net borrowers. The complete credit intermediation is performed through a series of steps involving many nonbank financial service firms. Which of the following occurs as the nonprice restrictions put on borrowers as a condition of borrowing increase? The absolute dollar value borrowed increases. The willingness of market participants to borrow decreases. At every interest rate the demand for loanable funds increases. Assume that you observe the following rates on long-term bonds: U.S. Treasury bonds = 4.15 percent AAA Corporate bonds = 6.2 percent BBB Corporate bonds = 7.15 percent The main reason for the differences in the interest rates is: inflation premium maturity risk premium convertibility premium default risk premium Which of the following will only be executed if the order's price conditions are met? a spread a limit order a trade an unlimited order Value stocks usually have low P/E ratios and low growth rates. high P/E ratios and high growth rates. low P/E ratios and high growth rates. high P/E ratios and low growth rates. We can estimate a stock's value by discounting the future dividends and future stock price appreciation. compounding the past dividends and past stock price appreciation. using the book value of the total stockholder equity section. using the book value of the total assets divided by the number of shares outstanding. The Dow Jones Industrial Average (DJIA) includes 500 firms that are the largest in their respective economic sectors. all of the stock listed on the New York Stock Exchange. 500 firms that are the largest as ranked by Fortune Magazine. 30 of the largest (market capitalization) and most active companies in the U.S. economy. Stock valuation model dynamics make clear that lower discount rates lead to lower valuations. lower growth rates. higher growth rates. higher valuations. Financial analysts forecast ABC Inc. growth for the future to be 12 percent. ABC's recent dividend was $1.60. What is the value of ABC stock when the required return is 15 percent? $91.02 $59.73 $79.81 $63.72