FIN 385 WEEK MIDTERM EXAM
1 Question TCOs 3 4 What is the primary role of investment bankers
To help guide a company seeking to go public through the entire process of filing with the SEC and the eventual sale of the security
To guide a company in making the best capital investment choices
To always buy 100% of the security from the offering company to keep in its own portfolio
None of the above
Question 2. Question : (TCO 2) How do annual percentage rates (APR) and effective annual rates (EAR) differ?
APR takes into account compounding of interest.
EAR takes into account compounding of interest.
APR is always higher than EAR.
None of the above
Question 3. Question : (TCO 2) Which of the following is true about risk and return?
Expected return varies directly with risk as measured by variability of returns.
Expected return varies inversely with risk.
Expected return is unrelated to risk.
Expected return equals the stock's standard deviation of returns.
Question 4. Question : (TCO 2) Which of the following can be said about average bond versus stock returns over the long run?
They have been about equal.
Bonds have averaged about a 6% return and stocks about 5%.
Bonds have averaged about 11.2% and stocks 10.2%.
Bonds have averaged about 6% and stocks about 11%.
Question 5. Question : (TCO 2) A simple diversified portfolio to reduce risk might have which of the following stocks?
A jet fighter firm and a tank manufacturer
Oil company and oil tanker company
Airline company and a pharmaceutical company
Wal-Mart and Target
Question 6. Question : (TCO 2) Which statement is true about nominal versus real interest rates?
Real interest rates are always higher than nominal rates.
Nominal rates must always be higher than real interest rates.
Nominal rates include inflation while real interest rates do not.
None of the above
Question 7. Question : (TCO 2) In a two-stock portfolio, what would be the ideal correlation coefficient between the two?
0
+1
+.667
-1
Question 8. Question : (TCO 8) A disadvantage of just-in-time inventory techniques is ______.
increased cycle time and lower inventories
increased frequency of restocking and reduced inventory levels
problems affecting many people
None of the above
Question 9. Question : (TCO 1) In the purchase and sale of securities, the "spread" refers to the difference between _______.
the IPO offering price and what larger investors are willing to pay
a stock's par value and its strike price
a preferred stock's par value and its conversion value
what a dealer pays for a share and what he or she sells it for
Question 10. Question : (TCO 1) Which of the following is not true about corporate bonds?
They usually pay semiannual or annual interest.
Some bonds may be issued with callable or convertible features.
They are pretty risk free.
Their interest is taxable unlike municipal bonds.
They are the primary method private firms use to raise money from external sources.
Question 11. Question : (TCO 1) If you were an investor looking for risk-free, fixed-income securities, which of the following would meet your needs?
Treasury bonds
Corporate bonds
Preferred stock
Common stock
None of the above
Question 12. Question : (TCO 1) Preferred stock has similarities to both common stock and bonds. How is it similar to bonds?
Preferred stockholders do not get a vote as common shareholders would on important issues pertaining to the company.
The interest received on preferred is taxed just like interest on debt.
The payments of both are fixed in dollar amount assuming the board of directors authorizes payment of preferred dividends.
None of the above
Question 13. Question : (TCO 1) In terms of assessing a corporate bond's risk of default, what would be the proper order in terms of decreasing risk of default?
Callable bonds, convertible bonds, preferred stock
Unsecured bonds, subordinated debentures, secured bonds
Secured bonds, subordinated debentures, unsecured bonds
None of the above
Question 14. Question : (TCO 5) As business people, why do we study macroeconomics?
Because it's bigger than microeconomics
Because it can help predict changes in inflation
Because it can help us forecast how economic changes could affect certain industries more than others
Because we can predict our companies' sales easier this way
Question 15. Question : (TCO 5) A bond's yield is determined from what?
Actual price paid/par value
Coupon/par value
Coupon/actual price paid
None of the above
Question 16. Question : (TCO 5) What does the income statement tell us?
What our market share is
How much cash we have as a result of operations
Whether we can pay our bills on time
None of the above
Question 17. Question : (TCO 5) The statement of cash flows _______.
is based on historical asset values
tells you what your revenues were
describes the sources of and uses of cash
tells you how much cash is needed for next months payment of bills
Question 18. Question : (TCO 5) The appropriate market value of price of a bond is calculated by determining what?
Yield to call and yield to maturity
Par value plus [30 x annual coupon]
Par value plus [60 x semiannual coupon]
PV of the face value plus PV of the annuity stream represented by the coupon payments
Question 19. Question : (TCO 5) Which is more important to the stockholders of a company?
Return on assets
Accounts receivable collection period
Profit as percentage of sales
ROE
Question 20. Question : (TCO 5) To what does accrued interest in bond trading refer?
Annual coupon payments that are past due
Semiannual yield payments that are past due
Semiannual partial payment into a sinking fund
The interest the buyer may owe the seller if the bond is purchased in between scheduled coupon payments
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Question 1. Question : (TCO 2) Semitool Corp has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.4. Suppose it turns out that the economy and the stock market do better than expected by 2% and Semitool's products experience more rapid growth than anticipated, thus pushing up the stock price by another 1%. Based on this information, what was Semitool's actual excess return?
Chapter 5
Question 2. Question : (TCO 2) What is the expected return of the three-issue portfolio with the following characteristics?
Issue Expected Return Standard Deviation Weight
A 15% 22 .4
B 10% 8 .3
C 6% 3 .3
Question 3. Question : (TCO 5) The nominal interest rate is 6% and the inflation rate is 4%. What is the exact real interest rate?
Question 4. Question : (TCO 5) Calculate the appropriate selling price of a 30-year 9% annual coupon paid semiannually, $1,000 corporate bond that was purchased five years ago. Marketplace interest rates are averaging 8%.
Question 5. Question : (TCO 6) What is the interest rate needed on a $1,000 face value 7% coupon corporate bond in order to make it equivalent in terms of return to one whose interest rate is tax free? Assume the corporate tax rate is 30%.
Question 6. Question : (TCO 8) Using the security market line formula rather than the dividend discount formula, determine the expected return on a firm's common stock when
(a) beta = 1.2;
(b) the risk-free rate is 8%; and
(c) marketplace interest rates have hovered around 13%.
Question 7. Question : (TCO 6) You bought a $1,000 bond at a YTM of 10%. It has an 8% coupon that is paid semiannually and a 20-year maturity. The trade settled two days ago and the most recent coupon payment occurred 32 days ago. What was the invoice price that you were required to pay?
Question 8. Question : (TCO 2) Find the expected return and variance of a two-asset portfolio, 75% bonds and 25% stocks. The expected return is 6% for bonds and 10% for stocks. The variances are 12% for bonds and 25% for stock. Assume that the correlation coefficient between bonds and stock = 0.
USA 
India