finance exam 2 multiple choice

Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following?

Annuity

Janis just won a scholarship that will pay her $500 a month starting today and continuing for the next 48 months. Which of the following terms best describes these scholarship payments?

Annuity Due

The jones brothers recently established a trust fund that will provide annual scholarships of $12000 indefinitely with the first scholarship one year from today. These annual scholarships are?

A Perpetuity

The stated interest rate is the interest rate expressed?

in terms of the interest payment made each period

all else held constant the present value of an annuity will decrease if you?

decrease the annuity payment

which one of these is a perpetuity?

Trust income of $1200 a year forever

which one of the following statements concerning annuities is correct?

An annuity due has payments that occur at the beginning of each time period

all else held constant the future value of an annuity will increase if you?

increase the time period

you are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information?

Annuity B has both a higher present value and a higher future value than Annuity A

which one of the following features distinguishes an ordinary annuity from an annuity due?

Timing of the annuity payments

A 30-year home mortgage is a classic example of?

an ordinary annuity

you are comparing three investments all of which pay $100 a month and have an interest rate of 8 percent. One is ordinary annuity, on is an annuity due, and the third investment is a perpetuity. which one of the following statements is correct given these three investment options?

The present value of the perpetuity must be higher than the present value of either the ordinary annuity or the annuity due.

which one of the following had the highest effective annual rate?

6 percent compounded daily

a credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate of this account?

will be greater than 12.9 percent

which one of the following statements is correct?

The EAR, rather than the APR, should be used to compare both investment and loan options

a loan has a APR of 8.5 percent and an EAR of 8.5 percent. Given this the loan must?

charge interest annually

which one of the following qualifies as an annuity payment?

auto loan payment

what condition must exist if a bonds coupon rate is to equal both the bonds current yield and its yield to maturity? assume the market rate of interest for this bond is positive.

The bond must be priced at par

what is the principal amount of a bond that is repaid at the end of the loan term called?

Face Value

A bonds annual interest divided by its face value is referred to as the?

coupon rate

on which one of the following dates is the principal amount of a semiannual coupon bond repaid?

The entire bond is repaid on the maturity date

The market-required rate of return on a bond that is held for its entire life is called the?

yield to maturity

the current yield on a bond is equal to the annual interest divided by the?

current market price

a registered form bond is defined as a bond that?

pays coupon payments directly to the owner of record

this morning jeff found an aged bond certificate lying on the street. He picked it up and noticed that it was a 50-year bond that matured today. He presented the bond to the bank teller at his local bank and received payment for both the entire principal and the final interest payment. The bond that jeff found must have been which one of the following.

bearer from bond

miller farm products is issuing a 15-year unsecured bond based on this information you know that this debt can be described as a?

debenture

a company originally issued bonds that were rated investment grade these bonds have now been downgraded to junk status these bonds are referred to as?

fallen angels

which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?

zero coupon

a real rate of return is defined as a rate that has been adjusted for which one of the following?

inflation

the rate of return an investor earns on a bond prior to adjusting for inflation is called the?

nominal rate

generally speaking bonds issued in the U.S pay interest on a ( ) basis

semiannual

a debenture is?

an unsecured bond

which one of the following is a unique characteristic of an income bond?

coupon payments are dependent on the issuer’s income

which one of the following will increase the current value of a stock?

increase in the capital gains yield

which statement is true?

From a legal perspective, preferred stock is a form of corporate equity.

which one of the following statements is correct?

preferred stock can be callable

companies can list their stock on which one of the following without having to meet listing requirements or filing financial statements with the SEC?

Pink Sheets

The net present value of an investment represents the difference between the investments’s?

cost and market value of future cash flows

net present value involves discounting an investment’s?

future cash flows

the internal rate of return is the?

discount rate the results in a zero net present value for the project

the net present value profit illustrates how the net present value of an investment is affected by which one of the following?

discount rate

which one of the following indicates that a project is expected to create value for its owners?

positive net present value

which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?

net present value

if an investment is producing a return that is equal to the required return, the investment’s net present value will be?

zero

which one of the following indicators offers the best assurance that a project will produce value for its owners?

positive NPV

which one of the following is most closely related to the net present value profile?

internal rate of return

mary has just been asked to analyze an investment to determine if it is acceptable. unfortunately she is not being given sufficient time to analyze the project using various methods. she must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation?

Net present value

on a particular risky investment investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. what is this excess return called?

Risk premium

which one of the following is defined as the average compound return earned per year over a multiyear period?

geometric average return

which one of the following best described an arithmetic average return?

return earned in an average year over a multiyear period

an efficient capital market is best defined as a market in which security prices reflect which one of the following?

all available information

which one of the following is the hypothesis that securities markets are efficient?

efficient markets hypothesis

the rate of return on which one of the following has a risk premium of 0%?

U.S. treasury bills

the lower the standard deviation of returns on a security, the ( ) the expected rate of return and the ( ) the risk.

Lower; Lower

according to the efficient markets hypothesis professional investors will earn?

a dollar return equal to the value paid for an investment

news labs just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement which one of the following reactions to this announcement indicates the market for the New Labs stock is efficient?

the price of the New Labs stock increases rapidly to a higher price and then remains at that price

if the financial markers are efficient?

stock prices should respond only to unexpected news and events

semistrong form market efficiency states that the value of a security is based on

all publicly available information

if the financial markets are semistrong form efficient then?

only individuals with private information have a marketplace advantage

The expected rate of return on Delaware Shores stock is based on three possible states of the economy. These states are boom, normal, and recession which have probabilities of occurrence of 20 percent, 75 percent, and 5 percent, respectively. Which one of the following statements is correct concerning the variance of the returns on this stock?

The variance must be positive provided that each state of the economy produces a

different expected rate of return.

which statement is true?

the weights of the securities held in any portfolio must equal 1.0

Consider a portfolio comprised of four risky securities. Assume the economy has three economic states with varying probabilities of occurrence. Which one of the following will guarantee that the portfolio variance will equal zero?

the portfolio expected rate of return must be the same for each economic state

which statement is correct?

A security with a beta of 1.54 will plot on the security market line if it is correctly priced

World United stock currently plots on the security market line and has a beta of 1.04. Which one of the following will increase that stock's rate of return without affecting the risk level of the stock, all else constant?

Increase in the market risk-to-reward ratio

The expected return on a security is not affected by the?

security’s unique risks

Julie wants to create a $5,000 portfolio. She also wants to invest as much as possible in a high risk stock with the hope of earning a high rate of return. However, she wants her portfolio to have no more risk than the overall market. Which one of the following portfolios is most apt to meet all of her objectives?

Invest $2500 in a risk-free asset and $2500 in a stock with a beta of 2.0

Based on the capital asset pricing model which one of the following must increase the expected return on an individual security all else held constant

a decrease in the risk-free rate given a security beta of 1.06