1. Which of the following would both make the interest rate on a bond higher tha
ID: 1131796 • Letter: 1
Question
1. Which of the following would both make the interest rate on a bond higher than otherwise?
2 . You have a contract with someone who has agreed to pay you $20,000 in four years. She offers to pay you now instead. For which of the following interest rates and payments would you take the money today?.
A. 7 percent, $16,000
B. 6 percent, $17,000
C. 8 percent, $15,000
D. All of the above are correct.
3. The risk of a portfolio
A. is usually measured using a statistic called the standard diversification.
B. bears no relationship to the average return of the portfolio.
C. increases as the number of stocks in the portfolio increases.
D. is positively related to the average return of the portfolio.
4. Diversification reduces
A. both market and firm-specific risk.
B. only market risk.
C. only firm-specific risk.
D. neither market or firm-specific risk.
5. Suppose you purchase a savings bond today for $25. In seven years you may cash in the savings bond for $50. What is the approximate interest rate paid by the savings bond?
A. 5%
B. 20%
C. 15%
D. 10%
A. the interest it pays is taxed and it is short term B. the interest it pays is tax exempt and it is short term C. the interest it pays is tax exempt and it is long term D. the interest it pays is taxed and it is long term2 . You have a contract with someone who has agreed to pay you $20,000 in four years. She offers to pay you now instead. For which of the following interest rates and payments would you take the money today?.
A. 7 percent, $16,000
B. 6 percent, $17,000
C. 8 percent, $15,000
D. All of the above are correct.
3. The risk of a portfolio
A. is usually measured using a statistic called the standard diversification.
B. bears no relationship to the average return of the portfolio.
C. increases as the number of stocks in the portfolio increases.
D. is positively related to the average return of the portfolio.
4. Diversification reduces
A. both market and firm-specific risk.
B. only market risk.
C. only firm-specific risk.
D. neither market or firm-specific risk.
5. Suppose you purchase a savings bond today for $25. In seven years you may cash in the savings bond for $50. What is the approximate interest rate paid by the savings bond?
A. 5%
B. 20%
C. 15%
D. 10%
Explanation / Answer
1.
D
In this condition, the interest rate will be higher.
2.
D
Working note:
For A, FW = 16000*1.07^4 = $20972.74
For B, FW = 17000*1.06^4 = $21462.11
For C, FW = 15000*1.08^4 = $20407.33
All three alternatives give higher value than the 20000 at the end of 4 years. So, all three alternatives can be taken.
3.
D
There is a direct and positive relationship between the risk and return of the portfolio.
4.
C
Only firm specific risks such as business risk, project risk or management risk are diversified. Market risk is for all the market, so it cannot be diversified.
5.
D
Working note:
n = 7 years
Let, R = interest rate
Then,
25 = 50/(1+R)^n = 50/(1+R)^7
(1+R)^7 = 2 = 1.1040^7
R = 1.1040-1 = .1040
Or,
R = 10.4% or 10% approx.
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