FIN 370 Final Exam - Quiz Questions and
Answers Graded A+
A perpetuity pays $85 per year and costs $950. What is the rate of return? - Correct
answer-a.) 8.95%
T/F: The greater the number of compounding periods within a year, then (1) the
greater the future value of a lump sum investment at Time 0 and (2) the smaller the
present value of a given lump sum to be received at some future date. - Correct
answer-a.) True
T/F: A stock's beta measures its diversifiable risk relative to the diversifiable risks
of other firms. - Correct answer-b.) False
T/F: A firm can change its beta through managerial decisions, including capital
budgeting and capital structure decisions. - Correct answer-a.) True
T/F: A call provision gives bondholders the right to demand, or "call for,"
repayment of a bond. Typically, calls are exercised if interest rates rise, because
when rates rise the bondholder can get the principal amount back and reinvest it
elsewhere at higher rates. - Correct answer-b.) False
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, T/F: There is an inverse relationship between bonds' quality ratings and their
required rates of return. Thus, the required return is lowest for AAA-rated bonds,
and required returns increase as the ratings get lower. - Correct answer-a.) True
T/F: A bond has a $1,000 par value, makes annual interest payments of $100, has 5
years to maturity, cannot be called, and is not expected to default. The bond should
sell at a premium if interest rates are below 10% and at a discount if interest rates
are greater than 10%. - Correct answer-a.) True
Assume that all interest rates in the economy decline from 10% to 9%. Which of
the following bonds would have the largest percentage increase in price? - Correct
answer-c. A 10-year zero coupon bond.
Below is the common equity section (in millions) of Fethe Industries' last two year-
end balance sheets:
2015 2014
Common stock: $2,000 $1,000
Retained earnings:2,000 2,340
Total com. equity:$4,000 $3,340
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Answers Graded A+
A perpetuity pays $85 per year and costs $950. What is the rate of return? - Correct
answer-a.) 8.95%
T/F: The greater the number of compounding periods within a year, then (1) the
greater the future value of a lump sum investment at Time 0 and (2) the smaller the
present value of a given lump sum to be received at some future date. - Correct
answer-a.) True
T/F: A stock's beta measures its diversifiable risk relative to the diversifiable risks
of other firms. - Correct answer-b.) False
T/F: A firm can change its beta through managerial decisions, including capital
budgeting and capital structure decisions. - Correct answer-a.) True
T/F: A call provision gives bondholders the right to demand, or "call for,"
repayment of a bond. Typically, calls are exercised if interest rates rise, because
when rates rise the bondholder can get the principal amount back and reinvest it
elsewhere at higher rates. - Correct answer-b.) False
©COPYRIGHT 2025, ALL RIGHTS RESERVED 1
, T/F: There is an inverse relationship between bonds' quality ratings and their
required rates of return. Thus, the required return is lowest for AAA-rated bonds,
and required returns increase as the ratings get lower. - Correct answer-a.) True
T/F: A bond has a $1,000 par value, makes annual interest payments of $100, has 5
years to maturity, cannot be called, and is not expected to default. The bond should
sell at a premium if interest rates are below 10% and at a discount if interest rates
are greater than 10%. - Correct answer-a.) True
Assume that all interest rates in the economy decline from 10% to 9%. Which of
the following bonds would have the largest percentage increase in price? - Correct
answer-c. A 10-year zero coupon bond.
Below is the common equity section (in millions) of Fethe Industries' last two year-
end balance sheets:
2015 2014
Common stock: $2,000 $1,000
Retained earnings:2,000 2,340
Total com. equity:$4,000 $3,340
©COPYRIGHT 2025, ALL RIGHTS RESERVED 2
