1.The accumulated value of an annuity will exactly double if the amount of time

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Question

1.The accumulated value of an annuity will exactly double if the amount of time is exactly doubled, everything else equal.
True
False

2.At 5.95 percent compounded annually, how many years will it take for $1,000 to double?
4
8
12
16

3.You are considering buying some stock in Continental Grain. Which of the following are examples of non-diversifiable risks?
I. Risk resulting from a general decline in the stock market. II.Risk resulting from a possible increase in income taxes. III.Risk resulting from an explosion in a grain elevator owned by Continental. IV. Risk resulting from a pending lawsuit against Continental.
I and II
III and IV
II, III, and IV
All of the above.

4.Which of the following statements is true?
Short-term bonds have greater interest rate risk than do long-term bonds.
Long-term bonds have greater interest rate risk than do short-term bonds.
All bonds have equal interest rate risk.
None of the above.

5.Common stock cannot be worth less than its book value.

True

False

6.Cary's Company bonds have a 12% coupon rate. Interest is paid semi-annually. The bonds have a par value of $1,000 and will mature 8 years from now. Compute the value of the bonds if investors' required rate of return is 8%.
$1,114.70
$1,233.05
$894.06
$941.27

7.The less risky the bond (or the higher the bond rating) the lower the yield to maturity on the bond, all other things being equal.
True
False

8.The sum of the present values of an investment's expected future cash flows is known as the investment's intrinsic value.
True
False

9.All of the following affect the value of a bond except:
investors' required rate of return
the recorded value of the firm's assets
the coupon rate of interest
the maturity date of the bond

10.If you have $20,000 in an account earning 8 percent annually, what constant amount could you withdraw each year and have nothing remaining at the end of 5 years?
$5,009
$4,755
$3,409
$2,466

11.A disadvantage of junk bonds is that they do not provide a coupon payment, and only make a par value payment at maturity.
True
False

12.The expected cash flow of an investment takes the condition of the economy into consideration.
True
False

13. Finance theory suggests that the current market value of a bond is based upon which of the following?
The future value of interest paid on a bond.
The sum total of principal and interest paid on a bond.
The sum of the present value of the bond's interest payments and the present value of the principal. The present value of a bond's par value plus the future value of the bond's present value.

14.One characteristic of an annuity is that the payment amount is the same during each period.
True
False

15.Assume that WhirledCom has an issue of 15-year $1,000 par value bonds that pay 6% interest, semiannually. Further assume that today's required rate of return on these bonds is 9%. How much would these bonds sell for today? Round off to the nearest $1.
$1,066
$756
$1,321
$864

16.If a firm were to experience financial insolvency, the legal system provides an order of hierarchy for the payment of claims. Assume that a firm has the following outstanding securities: mortgage bonds, common stock, debentures, and preferred stock. Rank the order in which investors that own mortgage bonds would have their claim paid?
First.
Second.
Third.
Fourth.

17.How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?

Wait until the stock market rises.
Increase the amount of money invested in the portfolio.
Purchase a variety of securities; i.e., diversify.
Purchase stocks that have exceptionally high standard deviations.

18.If a bond's rating declines, then so does its price, everything else equal.
True
False

19.If you expect NoDiv Corporation to sell for $75 per share in three years while paying no dividends along the way, if your required rate of return is 16% per year, how much is the stock worth today?
$42.68
$48.05
$51.10
$74.64

20.The appropriate measure for risk according to the capital asset pricing model is:
the standard deviation of a firm's cash flows
alpha
the coefficient of variation of a firm's cash flows
none of the above

21.The intrinsic value should necessarily be above the market value in order to make it desirable in the eyes of an investor.
True
False

22.The present value of a future sum of money increases as the number of years before the payment is received increases.
True
False

23.You borrow $25,000 to be repaid in 12 monthly installments of $2,292.00. The annual interest rate is closest to:
1.5 percent.
12 percent.
18 percent.
24 percent.

24.All other things being equal, the future value of an investment will increase if:
the investment compounds more often during each year
the investment is compounded for more years
the investment is compounded at a higher interest rate
all of the above

25. The yield to maturity on a bond:
is fixed in the indenture
is lower for higher risk bonds
is the expected rate of return on the bond
is generally below the coupon interest rate

26.The present value of a $100 perpetuity discounted at 5% is $2,000.
True
False

27.You purchased 1,000 shares of Oliver Inc. common stock one year ago for $50 per share. You decided to take your profit today by selling at $55.00 per share. What is your holding period return?
10.0%
12.5%
50.0%
15.0%

28.What is the value of a bond that matures in 20 years, makes an annual coupon payment of $40, and has a par value of $1,000? Assume a required rate of return of 10%, and round your answer to the nearest $10.

$410
$490
$500
$520

29.Which of the following is/are true:
The Beta of a U.S. Treasury Bill is zero
The Beta of the market is one
The estimate of Beta for a given stock will vary from analyst to analyst depending on the time period used, and the market portfolio used to estimate Beta. All of the above are true

30.Which type of value is shown on the firm's balance sheet?
book value
liquidation value
market value
intrinsic value

31.A firm can increase the growth rate of common stockholders' investment in the firm by retaining more earnings or increasing return on equity.
True
False

32.Which of the following is the slope of the security market line?
security market line
one
it varies depending on risk
beta

33.iSaga, whose common stock is currently selling for $12 per share, is expected to pay a $1.80 dividend, and sell for $14.40 one year from now. What are the dividend yield, growth rate, and total rate of return, respectively?

15% 20% 35%
10% 5% 15%
15% 12% 27%
20% 15% 35%

34.Which of the following is true regarding common stock?
Dividends, unlike interest payments, are not tax deductible.
Common stock, unlike bond principal, does not mature.
Common stockholders are owners of the firm, whereas bondholders are creditors.
Dividend payments, unlike interest payments, are not fixed.
All of the above.

Explanation / Answer

1.The accumulated value of an annuity will exactly double if the amount of time is exactly doubled, everything else equal.

False

2.At 5.95 percent compounded annually, how many years will it take for $1,000 to double?

8

4.Which of the following statements is true?
.
None of the above.

5.Common stock cannot be worth less than its book value.

True

7.The less risky the bond (or the higher the bond rating) the lower the yield to maturity on the bond, all other things being equal.
True

8.The sum of the present values of an investment's expected future cash flows is known as the investment's intrinsic value.
True

9.All of the following affect the value of a bond except:

the maturity date of the bond

10.If you have $20,000 in an account earning 8 percent annually, what constant amount could you withdraw each year and have nothing remaining at the end of 5 years?
$5,009

11.A disadvantage of junk bonds is that they do not provide a coupon payment, and only make a par value payment at maturity.

False

12.The expected cash flow of an investment takes the condition of the economy into consideration.

False

13. Finance theory suggests that the current market value of a bond is based upon which of the following?

The sum of the present value of the bond's interest payments and the present value of the principal.

14.One characteristic of an annuity is that the payment amount is the same during each period.

False

16.If a firm were to experience financial insolvency, the legal system provides an order of hierarchy for the payment of claims. Assume that a firm has the following outstanding securities: mortgage bonds, common stock, debentures, and preferred stock. Rank the order in which investors that own mortgage bonds would have their claim paid?

Third.

17.How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?

.
Purchase stocks that have exceptionally high standard deviations.

18.If a bond's rating declines, then so does its price, everything else equal.

False

21.The intrinsic value should necessarily be above the market value in order to make it desirable in the eyes of an investor.
True

22.The present value of a future sum of money increases as the number of years before the payment is received increases.
True

23.You borrow $25,000 to be repaid in 12 monthly installments of $2,292.00. The annual interest rate is closest to:

24 percent.

24.All other things being equal, the future value of an investment will increase if:

all of the above

25. The yield to maturity on a bond:

is the expected rate of return on the bond

26.The present value of a $100 perpetuity discounted at 5% is $2,000.
True

$490

29.Which of the following is/are true:
All of the above are true

30.Which type of value is shown on the firm's balance sheet?
book value

31.A firm can increase the growth rate of common stockholders' investment in the firm by retaining more earnings or increasing return on equity.
True

32.Which of the following is the slope of the security market line?
security market line

beta

10% 5% 15%

34.Which of the following is true regarding common stock?

All of the above.

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1.The accumulated value of an annuity will exactly double if the amount of time

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