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Flashcards in finc 326 Concept MC Deck (47)
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1

Which of the following statements is CORRECT?
A. The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates.
B. The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.
C. The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
D. You hold a 10-year, zero coupon, bond and a 10-year bond that has a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.
E. You hold a 10-year, zero coupon, bond and a 10-year bond that has a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.

D. You hold a 10-year, zero coupon, bond and a 10-year bond that has a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.

2

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?
A. Market interest rates decline sharply.
B. The company's bonds are downgraded.
C. Market interest rates rise sharply.
D. Inflation increases significantly.
E. The company's financial situation deteriorates significantly.

A. Market interest rates decline sharply.

3

Which of the following would be most likely to increase the coupon rate that is required to enable a bond to be issued at par?
A. Adding a call provision.
B. Adding additional restrictive covenants that limit management's actions.
C. Adding a sinking fund.
D. The rating agencies change the bond's rating from Baa to Aaa.
E. Making the bond a first mortgage bond rather than a debenture.

A. Adding a call provision.

4

A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?
A. The bond is currently selling at a price below its par value.
B. If market interest rates decline, the price of the bond will also decline.
C. If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.
D. If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today.
E. The bond should currently be selling at its par value.

C. If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.

5

Which of the following statements is CORRECT?
A. All else equal, if a bond's yield to maturity increases, its price will fall.
B. All else equal, if a bond's yield to maturity increases, its current yield will fall.
C. If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.
D. If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par.
E. If a bond's required rate of return exceeds its coupon rate, the bond will sell at a premium.

A. All else equal, if a bond's yield to maturity increases, its price will fall.

6

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)
A. If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
B. If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.
C. If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.
D. The effect of a change in the market risk premium depends on the level of the risk-free rate.
E. The effect of a change in the market risk premium depends on the slope of the yield curve.

C. If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.

7

Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the following statements must be true about these securities? (Assume the market is in equilibrium.)
A. When held in isolation, Stock A has more risk than Stock B.
B. Stock B would be a more desirable addition to a portfolio than Stock A.
C. Stock A would be a more desirable addition to a portfolio than Stock B.
D. In equilibrium, the expected return on Stock A will be greater than that on Stock B.
E. In equilibrium, the expected return on Stock B will be greater than that on Stock A.


D. In equilibrium, the expected return on Stock A will be greater than that on Stock B.

8

Which of the following statements best describes what would be expected to happen as you randomly select stocks and add them to your portfolio?
A. Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.
B. Adding more such stocks will reduce the portfolio's beta.
C. Adding more such stocks will increase the portfolio's expected return.
D. Adding more such stocks will reduce the portfolio's market risk.
E. Adding more such stocks will have no effect on the portfolio's risk.

A. Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.

9

Bob has a $50,000 stock portfolio with a beta of 1.2, an expected return of 10.8%, and a standard deviation of 25%. Becky has a $50,000 portfolio with a beta of 0.8, an expected return of 9.2%, and her standard deviation is also 25%. The correlation coefficient, r, between Bob's and Becky's portfolios is zero. Bob and Becky are engaged to be married. Which of the following best describes their combined $100,000 portfolio?
A. The combined portfolio's expected return will be greater than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
B. The combined portfolio's expected return will be less than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
C. The combined portfolio's beta will be equal to a simple average of the betas of the two individual portfolios, 1.0; its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios, 10.0%; and its standard deviation will be less than the simple average of the two portfolios' standard deviations, 25%.
D. The combined portfolio's standard deviation will be equal to a simple average of the two portfolios' standard deviations, 25%.
E. The combined portfolio's standard deviation will be greater than the simple average of the two portfolios' standard deviations, 25%.

C. The combined portfolio's beta will be equal to a simple average of the betas of the two individual portfolios, 1.0; its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios, 10.0%; and its standard deviation will be less than the simple average of the two portfolios' standard deviations, 25%.

10

Stock A has a beta of 1.1 and Stock B has a beta of 0.9. The market risk premium is 6%, and the risk-free rate is 6.3%. Both stocks have a constant dividend growth rate of 7% a year. If the market is in equilibrium, which of the following statements is CORRECT?
A. Stock A must have a higher dividend yield than Stock B.
B. Stock A must have a higher stock price than Stock B.
C. Stock B's dividend yield equals its expected dividend growth rate.
D. Stock B must have the higher required return.
E. Stock B could have the higher expected return.

A. Stock A must have a higher dividend yield than Stock B.

11

15. Preferred stock: 1. Which one of the following statements is correct concerning the dividend yield and the total return? 1pt
A. The dividend yield can be zero while the total return must be a positive value.
B. The total return can be negative but the dividend yield cannot be negative.
C. The total return must be greater than the dividend yield.
D. The total return plus the capital gains yield is equal to the dividend yield.
E. The dividend yield exceeds the total return when a stock increases in value.

B. The total return can be negative but the dividend yield cannot be negative.

12

8) Capital gains are included in the return on an investment:1pt.
A) whether or not the investment is sold.
B) only if the investment is sold and the capital gain is realized.
C) whenever dividends are paid.
D) when either the investment is sold or the investment has been owned for at least one year.
E) only if the investment incurs a loss in value or is sold.

A) whether or not the investment is sold.

13

7) If you are willing to sell a stock and wish to receive the option premium you should:1pt.
A) buy a put.
B) sell a put.
C) buy a call.
D) sell a call.
E) either sell a call or buy a put.

D) sell a call.

14

Which one of the following is correct concerning the two-stage dividend growth model? 1PT.
A) The discount rate considers the risk-free rate of return.
B) The discount rate is based on the coupon rate a firm pays on its outstanding bonds.
C) The discount rate ignores the risks associated with an individual firm.
D) The time value of money is ignored.
E) The first growth rate must be higher than the second growth rate.

A) The discount rate considers the risk-free rate of return.

15

An increase in a firm's expected growth rate would cause its required rate of return to 1pt
a. increase.
b. decrease.
c. fluctuate less than before.
d. fluctuate more than before.
e. possibly increase, possibly decrease, or possibly remain constant.

e. possibly increase, possibly decrease, or possibly remain constant.

16

A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

false

17

Portfolio A has but one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion to its market value. Because of its diversification, Portfolio B will by definition be riskless.

false

18

Even if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.

false

19

The risk-free rate is 6 percent. Stock A has a beta of 1.0, while Stock B has a beta of 2.0. The market risk premium (kM – kRF) is positive. Which of the following statements is most correct?

a. Stock B’s required rate of return is twice that of Stock A.
b. If Stock A’s required return is 11 percent, the market risk premium is 5 percent.
c. If the risk-free rate increases (but the market risk premium stays unchanged), Stock B’s required return will increase by more than Stock A’s.
d. Statements b and c are correct.
e. All of the statements above are correct.

b. If Stock A’s required return is 11 percent, the market risk premium is 5 percent.

20

Which of the following statements is most correct?

a. All else equal, if a bond’s yield to maturity increases, its price will fall.
b. All else equal, if a bond’s yield to maturity increases, its current yield will fall.
c. If a bond’s yield to maturity exceeds the coupon rate, the bond will sell at a premium over par.
d. All of the statements above are correct.
e. None of the statements above is correct.

All else equal, if a bond’s yield to maturity increases, its price will fall.

21

How will the price of a stock be affected if the dividend growth rate is decreased?
A. increase
B. either increase or no change
C. no change
D. either decrease or no change
E. decrease

E. decrease

22

Which one of the following will increase the current residual income of a firm?
A. an increase in required earnings
B. a decrease in the current earnings per share
C. a decrease in future earnings per share
D. a decrease in the required return on the firm's equity
E. an increase in the firm's beginning book equity per share

D. a decrease in the required return on the firm's equity

23

Which one of the following models can be used to value the stock of a firm that maintains a one hundred percent retention ratio?
A. two-stage growth
B. residual income
C. perpetual dividend growth
D. supernormal growth
E. perpetual cash flow

B. residual income

24

If in the opinion of a given investor a stock’s expected return exceeds its required return, this suggests that
a. The investor thinks the stock is experiencing supernormal growth.
b. The investor thinks the stock should be sold.
c. The investor thinks the stock is a good buy.
d. The investor thinks management is probably not trying to maximize the price per share.
e. The investor thinks dividends are not likely to be declared

c. The investor thinks the stock is a good buy.

25

One of the basic relationships in interest rate theory is that, other things held constant, for a given change in the required rate of return, the ____ the time to maturity, the ____ the change in price.
a. longer; smaller
b. shorter; larger
c. longer; greater
d. shorter; smaller
e. Answers c and d are both correct

b. shorter; larger

26

A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms

false

27

A firm can change its beta through managerial decisions, including capital budgeting and capital structure decision

true

28

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following statements must be true, according to the CAPM?
a) If you invest in $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated,
b) Stock Y's realized return during the coming year will be higher than Stock X's return,
c) If the expected rate of inflation increases but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount,
d) Stock Y's return has a higher standard deviation than Stock X,
e) If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y

c) If the expected rate of inflation increases but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount,

29

During the coming year, the market risk premium (rm-rRF), is expected to fall, while the risk-free rate, rRF, is expected to remain the same. Given this forecast, which of the following statements is correct?
a) The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0,
b) The required return on all stocks will remain unchanged,
c) The required return will fall for all stocks, but it will more for stocks with higher betas,
d) The required return for all stocks will fall by the same amount,
e) The required return will fall for all stocks, but it will fall more for stocks with higher betas

c) The required return will fall for all stocks, but it will more for stocks with higher betas,

30

If investors become less averse to risk, the slope of the Security Market Line (SML) will increase (T/F)

false