fina 3313 exam 2

UTA - Richard Berard

Which of the following is correct for a bond priced at $1,100 that has ten years remaining until maturity, and a 10% coupon, with semiannual payments?

Each payment of interest equals $50

Which of the following bonds would be likely to exhibit a greater degree of interest-rate risk?

A zero-coupon bond with 20 years until maturity

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

yield to maturity

Which of the following statements best describes the real interest rate?

Real interest rates can be negative, zero, or positive

True or False: The main vote that shareholders have is to elect the Board of Directors

True

True or False: In addition to voting, shareholders also have a claim on the firm’s assets, after all debts have been paid.

True

You are considering investing in a firm The dividend on the company’s stock has not changed in the past ten years and most likely will not change in the foreseeable future. In this case, the most appropriate stock valuation model would be the _________ model.

zero growth

In the formula r=D1/P0+g, what does g represent?

the expected price appreciation yield from a common stock

Common stock can be valued using the perpetuity formula if the:

dividends are not expected to grow

Which of the following statements is correct about a stock currently selling for $50 per share that has 16% expected return and a 10% expected capital appreciation?

It is expected to pay $3 in annual dividends

A stock’s ______ is found by dividing the stock’s annual dividend by its closing price.

current yield

Which of the following is a true statement regarding publicly traded stocks and bonds?

The constant dividend growth model can be used to value stocks only if the dividend growth rate remains constant.

deals with the emotional reaction people experience after realizing they have made an error in judgement

regret theory

suggests that people express a different degree of emotion towards gains than losses

prospect theory

Some investors rationalize their decision to buy certain stocks with “everyone else doing it”

herding

the tendency of investors to place more value on recent or even irrelevant information

anchoring

tendency to interpret new evidence as confirmation of one’s existing beliefs and theories

confirmation bias

investments that pool an investors’ money together with other investors to purchase shares of a collection of stocks, bonds, or other securities referred to as a portfolio

mutual fund

type of mutual fund with a portfolio constructed to math the return performance of a financial market index

index fund

True or False: Suppose you have an investment in a stock that had a negative 50% return (a loss) in the first year and a positive 50% return (a gain) in the second year.  The geometric returns is 0%

False

an approach for assessing risk that uses several possible alternative outcomes (scenarios) to obtain a sense of variability among returns

scenario analysis

a measure of an asset’s risk, which is found by subtracting the return associated with the pessimistic (worst) outcome from the return associated with the optimistic (best) outcome

range

the chance that a given outcome will occur

probability

a model that relates probabilities to the associated outcomes

probability distribution

The variance of an investment’s returns is a measure of the:

Volatility of the rates of return

The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks

Have no diversification of risk

The benefits of portfolio diversification are highest when the individual securities have returns that

Are uncorrelated with the rest of the portfolio

Macro events only are reflected in the performance of the market portfolio because

Unique risks have been diversified away

If you were willing to bet that the overall stock market was heading up on a sustained basis, it would be logical to invest in

High beta stocks

You have a portfolio that consists of equal amounts of IBM stock and Treasury bills. If you replace one-third of Treasury bills with more IBM stock , the expected portfolio return will ______, ceteris paribus.

increase

News that has been “discounted” by the market is reflected in the ________ portion of the total return.

expected

Which component is more likely to be biased if book values are used in the calculation of WACC rather than market values?

Common stock

Complete the following sentence. The WACC _________________.

For a firm represents the risk and target capital structure of the firm’s existing assets as a whole.

If the Federal Reserve took action to increase interest rates, a firm’s cost of capital would ____ , ceteris paribus.

increase