Question: A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.
Answer Options:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
Answer Options:
a. Projects with “normal” cash flows can have only one real IRR.
b. Projects with “normal” cash flows can have two or more real IRRs.
c. Projects with “normal” cash flows must have two changes in the sign of the cash flows, e.g., from negative to positive to negative. If there are more than two sign changes, then the cash stream is “nonnormal.”
d. The “multiple IRR problem” can arise if a project’s cash flows are “normal.”
e. Projects with “nonnormal” cash flows are almost never encountered in the real world.
Answer: a
Question: Which of the following statements is CORRECT?
Answer Options:
a. If the cost of capital declines, then a project’s NPV increases.
b. The NPV method always provides a correct decision when comparing two mutually exclusive projects.
c. The cost of capital is the best estimate of the return that a company can earn on its best new investments.
d. A project’s NPV depends on the total amount of cash flows the project produces, but because these cash flows are discounted at the WACC, it does not matter if the cash flows occur early or late in the project’s life.
e. The NPV and IRR methods may give different recommendations regarding which of two mutually exclusive projects should be accepted, but they always give the same recommendation regarding the acceptability of a normal, independent project.
Answer: e
Question: The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate.
a. True
b. False
Answer: True
Question: The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.
a. True
b. False
Answer:
Question: In distinguishing being ethical and legal actions of a lender, which of the following is true?
Answer Options:
A lender who charges high but legal interest rates has acted both legally and ethically.
In some instances, a lender who charges high but legal interest rates has acted unethically.
None of the alternatives are correct.
As long as a lender is licensed, a lender should be able to charge whatever interest rate borrowers are willing to pay.
Answer: In some instances, a lender who charges high but legal interest rates has acted unethically.
Question: Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
Answer Options:
a. A project’s regular IRR is found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting this TV at the WACC.
b. A project’s regular IRR is found by discounting the cash inflows at the WACC to find the present value (PV), then compounding this PV to find the IRR.
c. If a project’s IRR is greater than the WACC, then its NPV must be negative.
d. To find a project’s IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project’s costs.
e. To find a project’s IRR, we must find a discount rate that is equal to the WACC.
Answer: d
Question: Which of the following statements is CORRECT?
a. 10-year, zero coupon bonds have more reinvestment risk than 10-year, 10% coupon bonds.
b. A 10-year, 10% coupon bond has less reinvestment risk than a 10-year, 5% coupon bond (assuming all else equal).
c. The total (rate of) return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year, divided by the bond’s price at the beginning of the year.
d. The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond.
e. A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%.
Answer Options:
a. False
b. False
c. True
d. False
e. False
Answer: c. True
Question: If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?
a. A 1-year zero coupon bond.
b. A 1-year bond with an 8% coupon.
c. A 10-year bond with an 8% coupon.
d. A 10-year bond with a 12% coupon.
e. A 10-year zero coupon bond.
Answer Options:
a. False
b. False
c. False
d. False
e. True
Answer: e. True
Question: If in the opinion of a given investor a stock’s expected return exceeds its required return, this suggests that the investor thinks
a. the stock is experiencing supernormal growth.
b. the stock should be sold.
c. the stock is a good buy.
d. management is probably not trying to maximize the price per share.
e. dividends are not likely to be declared.
Answer: c
Question: If you plotted the returns of a company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future.
a. True
b. False
Answer: False
Question: Which of the following adrenergic neurotransmitter receptors plays the major role in heart activity?
Answer Options:
Beta 3
Beta 1
Beta 2
Answer: Beta 1
Question: Four of the following statements are truly disadvantages of the regular payback method, but one is not a disadvantage of this method. Which one is NOT a disadvantage of the payback method?
Answer Options:
a. Lacks an objective, market-determined benchmark for making decisions.
b. Ignores cash flows beyond the payback period.
c. Does not directly account for the time value of money.
d. Does not provide any indication regarding a project’s liquidity or risk.
e. Does not take account of differences in size among projects.
Answer: d
Question: If you plotted the returns on a given stock against those of the market, and you found that the slope of the regression line was negative, the CAPM would indicate that the required rate of return on the stock should be greater than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue into the future.
a. True
b. False
Answer: False
Question: Which of the following statements is CORRECT?
Answer Options:
a. The regular payback method recognizes all cash flows over a project’s life.
b. The discounted payback method recognizes all cash flows over a project’s life, and it also adjusts these cash flows to account for the time value of money.
c. The regular payback method was, years ago, widely used, but virtually no companies even calculate the payback today.
d. The regular payback is useful as an indicator of a project’s liquidity because it gives managers an idea of how quickly the project makes the initial cash flows back.
Answer: b
Question: We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.
a. True
b. False
Answer: