Weinstock & Rives ID: S Business Finance 620 Exam 2 SAMPLE ____ 1. You invested $5,500 in a bond mutual fund three years ago today. During the first year you owned the fund, you lost $386 due to rising interest rates. However, during your three-year holding period, the fund's compounded average annual rate of return was 7.350%. What is your investment worth today? A. $6,327 B. $5,893 C. $5,114 D. $6,804 ____ 2. In a year in which common stocks offered an average return of 15.8%, US Treasury bonds offered 9.36%, US Treasury bills offered 4.77%, and the rate of inflation was 2.47%, the risk premium for common stocks would have been A. 6.44% B. 4.59% C. 11.03% D. 8.35% ____ 3. You purchase a $206,750 house with a 17% down payment and a 22-year mortgage at 7.175% APR, compounded monthly. If you make all the payments on schedule, by what percent will you reduce the original balance on the loan after you make half the monthly payments? A. 31.3% B. 27.6% C. 38.4% D. 50.0% ____ 4. A common stock with a beta of 0.94 A. offers slightly less market risk than the market portfolio. B. offers 6% more risk than the market portfolio. C. has an expected risk premium greater than the market risk premium. D. offers greater market risk than a 3-stock portfolio with the same beta. ____ 5. If you purchase a nine-year, zero-coupon bond for $500, how much could you sell it for three years later were the bond’s yield to maturity to remain unchanged? The bond’s face value is $1,000. A. $666.67 B. $723.05 C. $629.96 D. Zero-coupon bonds cannot be sold before maturity. ____ 6. You buy a $228,500 condo with a 19% down payment and a 25-year mortgage at 5.375% APR, compounded monthly. What is your monthly mortgage payment? A. $1,254 B. $1,191 C. $1,206 D. $1,123 Business Finance 620 Exam 2 SAMPLE / Page 2 ID: S ____ 7. If you thought the broader stock market was beginning to move higher (toward higher returns) on a sustained basis, then it would be logical to invest in A. more expensive stocks. B. stocks with betas higher than the market's beta. C. less expensive stocks. D. stocks subject to relatively low market risk. ____ 8. You deposit $2,500 in a bank savings account today and expect to increase this amount by 8% for each of the next four annual deposits (the second deposit one year from today, the third, two years, and so on). If you make all five deposits on schedule, how much will you have in your account five years from today? Assumes the account earns 6.65% APR, compounded quarterly. A. $16,070 B. $13,814 C. $11,880 D. $15,729 ____ 9. You are considering buying 1,000 shares of common stock in American A&E Products. You need an annual return of 12.5% to justify the purchase. According to information provided by your broker, you can expect the stock to pay the following annual dividends: > a $2.75 dividend one year from now, > a $3.15 dividend two years from now, and > a $3.60 dividend three years from now. After the third year, dividends will increase indefinitely at a constant annual rate of 5.75%. If you buy the stock today, how much should you be willing to pay per share? A. $53.56 B. $52.15 C. $63.86 D. $47.07 ____ 10. You can invest in an account that pays 9.5% APR, compounded six times a year (once every two months). You want to retire 30 years and 4 months from today with an account balance of $2.50 million. How much do you need to deposit every two months to meet your goal? Your first deposit is due two months from today. The starting balance of the account is zero. A. $2,407 B. $2,215 C. $1,983 D. $2,825 ____ 11. A seven-year A-rated corporate bond has a 7.15% annual coupon and a $1,000 par value. If the bond trades at a discount to par, which of the following statements about the bond is correct? A. The market yield on comparable debt is less than the bond's coupon rate. B. An investor who buys the bond today for $1,000 and holds it to maturity can expect an average annual return of 7.15%. C. An investor can expect the bond's price at maturity to be less than $1,000. D. The bond is subject to more credit risk than a comparable AA-rated bond. Business Finance 620 Exam 2 SAMPLE / Page 3 ID: S ____ 12. You're planning to enter law school five years from today, when you expect first-year tuition to run $37,475. How much should you invest today to be able to pay this amount five years from now, if your savings account earns 4.85% APR, compounded once every four months, and you make no further deposits or withdrawals? A. $27,674 B. $29,462 C. $30,217 D. $28,552 ____ 13. Consider the following stream of cash flows: > $1,300 paid today > $2,650 paid one year from today > $4,400 paid three years from today > $6,350 paid five years from today If the appropriate discount rate is 7.0%, what is the present value of this stream? A. $14,700 B. $12,926 C. $11,062 D. $11,896 ____ 14. If the market yield on comparable debt is 5.825%, how much should an investor expect to pay for a BBB-rated corporate bond with a 6.145% annual coupon, twelve years to maturity and a $1,000 par value? A. $1,027 B. $973 C. $988 D. $1,000 ____ 15. You buy a residential building lot in Westerville for $77,350 and finance the entire purchase with a 10-year mortgage at 8.625% APR, compounded monthly. Only two years later, after having made just 25 payments, you accept a new position in Chicago and decide to sell the lot. What is your loan’s “pay-off” amount (how much do you owe the lender)? A. $91,600 B. $77,350 C. $66,213 D. $61,235 ____ 16. An R&D stock currently sells OTC for $59 a share. If the dividend expected at the end of this year is $3.86 a share, and the firm's board is committed to perpetual dividend growth at a rate of 3.75% a year, how much of the stock's market value should be attributed to PVGO? Assume investors in the stock seek a 13.9% annual return. A. $20.97 B. $59.00 C. $38.03 D. The answer cannot be determined from the information provided. Business Finance 620 Exam 2 SAMPLE / Page 4 ID: S ____ 17. The first payment in a five-year annuity paying $4,500 a year is three years from today. How much is the annuity worth today? Assume the annual discount rate is 6.35%. A. $16,601 B. $17,327 C. $18,777 D. $15,610 ____ 18. According to the CAPM, when the return on the market portfolio is 14.5% and the yield on Treasury bills is 5.9%, what rate of return should investors expect on a stock with a beta of 0.85? A. 8.6% B. 12.3% C. 13.2% D. 9.7% ____ 19. An investor deposits $1,580 in a bank savings account. No additional deposits are made for the next 5 years. If the deposit earns 8.865% APR, compounded quarterly, how much interest will the investor have earned at the end of 3 years? A. $514 B. $526 C. $475 D. $557 ____ 20. You own a portfolio of six common stocks with a current market value of $73,945. The portfolio’s beta is 0.86. If your portfolio were to earn 13.5% annually over the next six years, what would be the portfolio’s real value at the end of this period if the annual rate of inflation were 2.25%? A. $124,683 B. $138,326 C. $146,215 D. $158,083 ____ 21. As common stock is added to a portfolio, with the objective of building a well-diversified portfolio, one would expect A. the portfolio's unique risk to decline. B. the variance of the portfolio's returns to remain constant. C. the portfolio's beta to increase. D. the portfolio's returns to become more volatile. ____ 22. What price quote would have appeared in the financial press for a US Treasury bond that was sold to an investor for $1,045? A. 450:00 B. 104.50 C. 102:13 D. 104:16 Business Finance 620 Exam 2 SAMPLE / Page 5 ID: S ____ 23. How much does the $1,000 principal to be repaid at maturity in four years add to the value of an A-rated corporate bond today if the bond’s coupon rate is 5.85%, and the bond is trading at par? A. $836 B. $797 C. $1,255 D. The answer cannot be determined from the information provided. ____ 24. In which of the following situations would you expect to realize the largest reduction in risk by spreading a portfolio across two common stocks? A. The monthly return of one stock always seems to be about two percent higher than the monthly return of the other. B. The monthly returns of the two stocks are always basically the same. C. The market price of one stock is usually much lower than the price of the other. D. The monthly return of one stock often increases when the monthly return of the other decreases. ____ 25. What is the FV of $17,700 left on deposit for seven years at an annual rate of 5.625% simple interest? A. $24,669 B. $23,980 C. $25,962 D. $24,095 ____ 26. A credit card that charges interest at the rate of 1.15% per month would have an effective annual rate of _____ and an APR of _____. A. 15.0%, 16.4% B. 19.6%, 13.8% C. 13.8%, 1.15% D. 11.5%, 19.6% ____ 27. Stocks with the same expected risk should A. offer the same annual dividend payment. B. have the same sustainable growth rate. C. have the same market price. D. have the same expected rate of return. ____ 28. Suppose an investor pays $1,054.47 for a 5-year A-rated corporate bond with a 7.3% coupon, and sells the bond one year later for $1,037.19, after having received only one coupon payment. If the rate of inflation during the year was 2.15%, what is the investor's real total return? A. 3.1% B. 4.8% C. 5.3% D. 7.3% Business Finance 620 Exam 2 SAMPLE / Page 6 ID: S ____ 29. According to the constant-growth DDM, if investors expect no future dividend growth, how much should they pay today for a stock whose quarterly dividend is $1.13, if the required return on the stock is 14.8%? A. $7.64 B. $15.28 C. $27.62 D. $30.54 ____ 30. You plan to buy a new home in five years and have opened a savings account for the sole purpose of saving for the down payment. Starting with a zero balance, if you deposit $350 each month, how much will you have in the account at the end of five years? The account pays interest at the rate of 7.635% APR, compounded monthly. Your first deposit is due a month from today. A. $22,932 B. $25,474 C. $26,129 D. $21,000 ____ 31. An investor decides to allocate her portfolio equally among three investments: > US Treasury bills; > a market index (a mutual fund that seeks to replicate the S&P 500 Index); and > a diversified stock mutual fund with a beta of 1.34 (based on the S&P 500 Index). What is the portfolio's beta? A. 0.78 B. 1.11 C. 2.34 D. The answer cannot be determined from the information provided. ____ 32. What is the FV of an annuity scheduled to pay $2,750 a year for five years, if the annuity earns 5.475% APR, compounded monthly, and the first annual payment is due three years from today? A. $31,893 B. $31,101 C. $32,446 D. $30,923 ID: S Business Finance 620 Exam 2 SAMPLE Answer Section MULTIPLE CHOICE 1. ANS: D Chapter 4 2. ANS: C Chapter 10 3. ANS: A Chapter 4 4. ANS: A Chapter 11 5. ANS: C Chapter 5 6. ANS: D Chapter 4 7. ANS: B Chapter 11 8. ANS: D Chapter 4 9. ANS: D Chapter 6 10. ANS: A Chapter 4 11. ANS: D Chapter 5 12. ANS: B Chapter 4 13. ANS: D Chapter 4 14. ANS: A Chapter 5 15. ANS: C Chapter 4 16. ANS: D Chapter 6 17. ANS: A Chapter 4 18. ANS: C Chapter 11 19. ANS: C Chapter 4 20. ANS: B Chapter 6 21. ANS: A Chapter 10 ID: S 22. ANS: D Chapter 5 23. ANS: B Chapter 5 24. ANS: D Chapter 10 25. ANS: A Chapter 4 26. ANS: B Chapter 4 27. ANS: D Chapter 10 28. ANS: A Chapter 4 29. ANS: D Chapter 6 30. ANS: B Chapter 4 31. ANS: A Chapter 11 32. ANS: B Chapter 4 Bill ExamView Pro - BFIN 620 Exam 2 SAMPLE.tst