Second Mid-semester Test

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Instructions

The test comprises 25 multiple choice questions.  Choose the most correct answer. You can attempt each question once only.

There are 10 questions worth 0.5 marks each, 10 questions worth 1.0 mark each and 5 questions worth 2.0 marks each.

Questions are drawn randomly from test banks, which means each student will have a different test.

You will be able to see the correct answers after the test.

This quiz was locked May 21, 2020 at 20:15.

Attempt History

Attempt Time Score
LATEST Attempt 1 74 minutes 16.5 out of 25
 Correct answers are no longer available.
Score for this quiz: 16.5 out of 25
Submitted May 21, 2020 at 20:15
This attempt took 74 minutes.

Question 1

0.5 / 0.5 pts

A coupon bond which pays interest of 4% annually, has a par value of $1 000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is________

8.8%

9.6%

7.2%

9.1%

Question 2

0.5 / 0.5 pts

When discussing bonds, convexity relates to the ______

size of the bid-ask spread

shape of the yield curve with respect to maturity

slope of the yield curve with respect to liquidity premiums

shape of the bond price curve with respect to interest rates

Question 3

0.5 / 0.5 pts

You are considering two bonds, A and B. Both bonds presently are selling at their par value of $1 000. Each pay interest of $120 annually. Bond A will mature in 5 years while Bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, ______

both bonds will increase in value but Bond B will increase more than Bond A

both bonds will decrease in value but Bond A will decrease more than Bond B

both bonds will decrease in value but Bond B will decrease more than Bond A

both bonds will increase in value but Bond A will increase more than Bond B

Question 4

0.5 / 0.5 pts

A company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalisation rate, and the constant growth DDM to determine the value of the shares. The share is currently priced at $84.00. Using the constant growth DDM, the market capitalisation rate is ________.

18%

12%

14%

9%

Question 5

0.5 / 0.5 pts

A 1% decline in yield will have the least effect on the price of the bond with a__________

10-year maturity, selling at 100

10-year maturity, selling at 80

20-year maturity, selling at 80

20-year maturity, selling at 100

Question 6

0.5 / 0.5 pts

The constant growth dividend discount model (DDM) can be used only when the_________

growth rate is less than the required return

growth rate is greater than or equal to the required return

growth rate is less than or equal to the required return

growth rate is greater than the required return

IncorrectQuestion 7

/ 0.5 pts

A company has expected earnings of $4 per share for next year. The firm’s ROE is 8% and its earnings retention ratio is 40%. If the firm’s market capitalisation rate is 15%, what is the present value of its growth opportunities?

$26.67

$20.34

$0

-$6.33

IncorrectQuestion 8

/ 0.5 pts

Bill, Jim and Shelly are all looking to buy the same shares that pay dividends. Bill plans on holding the shares for one year. Jim plans on holding the shares for three years. Shelly plans on holding the shares until she retires in 10 years. Which one of the following statements is correct

Bill will be willing to pay the most for the shares because he will get his money back in one year when he sells.

All three should be willing to pay the same amount for the shares regardless of their holding period

Shelly should be willing to pay the most for the shares because she will hold them the longest and hence she will get the most dividends.

Jim should be willing to pay three times as much for the shares as Bill because his expected holding period is three times as long as Bill’s.

Question 9

0.5 / 0.5 pts

If a share is correctly priced then you know that__________

the present value of growth opportunities is equal to the value of assets in place

the dividend payout ratio is optimal

the share’s required return is equal to the growth rate in earnings and dividends

the sum of the share’s expected capital gain and dividend yield is equal to the share’s required rate of return

IncorrectQuestion 10

/ 0.5 pts

Under a ‘passive core’ portfolio management strategy, a manager would_________

index part of the portfolio and actively manage the rest

index the entire portfolio

actively manage the entire portfolio

delegate the management of core segments of the portfolio to other managers

Question 11

/ 1 pts

You buy an 8-year $1000 par value bond today that has a 6% yield and a 6% annual payment coupon. In one year promised yields have risen to 7%. Your one year holding period return was ________.

0.61%

1.28%

-5.39%

-3.25%

Question 12

/ 1 pts

Transportation industry shares currently provide an expected rate of return of 15%. TTT, a large transportation company, will pay a year-end dividend of $3 per share. If the shares are selling at $60 per share, what must be the market’s expectation of the constant growth rate of TTT dividends

5%

10%

None of the above

20%

Question 13

/ 1 pts

Federal/Commonwealth Government yield curves are used in the financial markets as the basis for comparisons of all other debt and borrowings. Other debt issuers are traded at a premium to the government debt.  This premium is known as the “spread” which reflects:

I.     the creditworthiness of the borrower

II.   the liquidity premium charged against the borrower

III.  the default risk of the borrower

IV.  the term to maturity of the debt issue

 

I, III and IV

I, II, and III

none of the above

I and IV

Question 14

/ 1 pts

Holding other factors constant, which one of the following bonds has the smallest price volatility?

5-year, 10% coupon bond

5 year, 14% coupon bond

5-year, 12% coupon bond

5-year, 0% coupon bond

Question 15

/ 1 pts

The call provision of a callable bond is:

advantageous to the investor and disadvantageous to the bondholder

disadvantageous to the issuer and advantageous to the bondholder

advantageous to the issuer and disadvantageous to the bondholder

advantageous to the borrower and disadvantageous to the issuer

Question 16

/ 1 pts

A firm reports EBIT of $100 million. The income statement shows depreciation of $20 million. If the tax rate is 35% and total capital expenditures and increases in working capital total $10 million, what is the free cash flow to the firm?

$75 million

$95 million

$57 million

$65 million

IncorrectQuestion 17

/ 1 pts

Firm A has a share price of $35 and 60% of the value of the shares is in the form of PVGO. Firm B also has a share price of $35 but only 20% of the value of Share B is in the form of PVGO. We know that ________.
I. Share A will give us a higher return than Share B
II. an investment in Share A is probably riskier than an investment in Share B
III. Share A has higher forecast earnings growth than Share B

I, II and III only

II and III only

I only

I and II only

Question 18

/ 1 pts

When investors choose to buy interest rate securities they face a number of risks that are only associated with interest rate securities and their derivatives.  Interest rate risk is the risk that:

c) the issuer cannot readily convert the debt security to cash without incurring some kind of price penalty

a) the coupon will be invested at a lower rate than the current market interest rate and thus the initial yield will not be achieved

d) as interest rates rise, the bond’s price will fall and should the investor wish to sell the security at the current market yield, they will incur a capital loss.

b) the issuer will fail to meet the contractual obligations of the debt servicing being either the interest or principal repayments

Question 19

/ 1 pts

Consider the following $1 000 par value zero-coupon bonds:

Bond               Years to Maturity                Yield to Maturity

A                                      1                                                   6.00%

B                                      2                                                   7.00%

C                                     3                                                    7.99%

D                                     4                                                   9.41%

E                                      5                                                   10.70%

The expected one year interest rate four years from now should be:

22.00%

16.00%

18.00%

20.00%

Question 20

/ 1 pts

Rump Hotels just announced yesterday that its 4th-quarter earnings will be 10% higher than last year’s 4th quarter.  You observe that Rump Hotels had an abnormal return of –1.2% yesterday.  This suggests that

investors expected the earnings increase to be larger than what was actually announced

investors expected the earnings increase to be smaller than what was actually announced.

Rump Hotels stock price will probably rise in value tomorrow

the market is not efficient

IncorrectQuestion 21

/ 2 pts

Lifecycle Motorcycle Company is expected to pay a dividend in Year 1 of $2.00, a dividend in Year 2 of $3.00, and a dividend in Year 3 of $4.00. After Year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the shares is 12%. Using the multistage DDM, the shares should be worth ________ today.

$67.95

$65.13

$63.80

$85.60

IncorrectQuestion 22

/ 2 pts

A seven-year annual-payment par value bond has a coupon rate of 9% and a modified duration of:

4.87 years

5.03 years

5.49 years

7 years

IncorrectQuestion 23

/ 2 pts

Which one of the following statements about convertible bonds is true?

The more volatile the underlying stock, the greater the value of the conversion feature

The collateral that is used to secure a convertible bond is one of the reasons convertible bonds are more attractive than the underlying stock

The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible bond is worth.

The longer the call protection on a convertible, the less the security is worth

Question 24

/ 2 pts

If forward rates are known with certainty and all bonds are fairly priced:

all short-maturity bonds would have lower prices than all long-maturity bonds

all bonds would have the same yield to maturity

all bonds would provide equal 1-year rates of return

all bonds would have the same price

Question 25

/ 2 pts

Sanders Ltd, has just paid a $4.00 dividend per share and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. The firm is expected to generate a 13% return on equity in the future, and if you require a 15% return on the share, the value of the share is:

$42.94

$35.19

$26.67

$59.89