a. The yield on a 2-year T-bond must exceed that on a 5-year T-bond.
b. The yield on a 5-year Treasury bond must exceed that on a 2-year Treasury bond.
c. The yield on a 7-year Treasury bond must exceed that of a 5-year corporate bond.
d. The conditions in the problem cannot all be true—they are internally inconsistent.
e. The Treasury yield curve under the stated conditions would be humped rather than have a consistent positive or negative slope.
Answer Options:
Answer: b. The yield on a 5-year Treasury bond must exceed that on a 2-year Treasury bond.
Question: If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?
a. The yield on a 10-year bond would be less than that on a 1-year bill.
b. The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium.
c. It is impossible to tell without knowing the coupon rates of the bonds.
d. The yields on the two securities would be equal.
e. It is impossible to tell without knowing the relative risks of the two securities.
Answer Options:
Answer: a. The yield on a 10-year bond would be less than that on a 1-year bill.
Question: According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock’s contribution to the riskiness of a well-diversified portfolio.
Answer Options:
a. True
b. False
Answer: a. True
Question: If the Treasury yield curve were downward sloping, the yield to maturity on a 10-year Treasury coupon bond would be higher than that on a 1-year T-bill.
Answer Options:
a. True
b. False
Answer: b. False
Question: The present value of a future sum decreases as either the discount rate or the number of periods per year increases, other things held constant.
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transaction costs.)
Answer Options:
a. The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.
b. Because the outstanding balance declines over time, the monthly payments will also decline over time.
c. Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.
d. The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.
e. The outstanding balance declines at a faster rate in the later years of the loan’s life.
Answer: e. The outstanding balance declines at a faster rate in the later years of the loan’s life.
Question: Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor’s perspective than regular bonds.
Answer Options:
a. True
b. False
Answer: b. False
Question: There is an inverse relationship between bonds’ quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.
Answer Options:
a. True
b. False
Answer: a. True
Question: Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?
a. Because of the call premium, the required rate of return would decline.
b. There is no reason to expect a change in the required rate of return.
c. The required rate of return would decline because the bond would then be less risky to a bondholder.
d. The required rate of return would increase because the bond would then be more risky to a bondholder.
e. It is impossible to say without more information.
Answer Options:
a. False
b. False
c. False
d. True
e. False
Answer: d. True
Question: In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data.
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
a. One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.
b. Long-term bonds have less price risk but more reinvestment risk than short-term bonds.
c. If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less price risk.
d. Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more price risk but less reinvestment risk.
e. Long-term bonds have less price risk and also less reinvestment risk than short-term bonds.
Answer Options:
a. False
b. False
c. False
d. True
e. False
Answer: d. True
Question: Which of the following statements is CORRECT?
Answer Options:
a. If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.
b. If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.
c. To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.
d. If you solve for I and get a negative number, then you must have made a mistake.
e. If CF0 is positive and all the other CFs are negative, then you cannot solve for I.
Answer: c. To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.
Question: How many grams of Ne are present in 30.5 L STP?
Answer Options:
[A] 34.20 g
[B] 30.5 g
[C] 1.00 g
[D] 28.0 g
Answer: 27.48 g
Question: You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment?
Answer Options:
a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.
b. The discount rate decreases.
c. The riskiness of the investment’s cash flows increases.
Answer: b. The discount rate decreases.
Question: Any change in its beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock’s price, other things held constant.
Answer Options:
a. True
b. False
Answer: a. True
Question: If investors expect a zero rate of inflation, then the nominal rate of return on a very short-term U.S. Treasury bond should be equal to the real risk-free rate, r*.
Answer Options:
a. True
b. False
Answer: a. True
Question: As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).
Answer Options:
a. True
b. False
Answer: a. True
Question: Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value.
Answer Options:
a. True
b. False
Answer: b. False