# Second Mid-semester Test

## Plagiarism declaration

By submitting work for this quiz I hereby declare that I understand the University’s policy on academic integrity and that the work submitted is original and solely my work, and that I have not been assisted by any other person (collusion) apart from where the submitted work is for a designated collaborative task, in which case the individual contributions are indicated. I also declare that I have not used any sources without proper acknowledgment (plagiarism). Where the submitted work is a computer program or code, I further declare that any copied code is declared in comments identifying the source at the start of the program or in a header file, that comments inline identify the start and end of the copied code, and that any modifications to code sources elsewhere are commented upon as to the nature of the modification.

## 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.

### Attempt History

Attempt | Time | Score | |
---|---|---|---|

LATEST | Attempt 1 | 74 minutes | 16.5 out of 25 |

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________

When discussing bonds, convexity relates to the ______

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%, ______

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 ________.

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

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

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?

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

If a share is correctly priced then you know that__________

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

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 ________.

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

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

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

The call provision of a callable bond is:

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?

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

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:

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:

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

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.

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

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

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

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: