Answer Options:
a. True
b. False
Answer: a. True
Question: Assume that two investors each hold a portfolio, and that portfolio is their only asset. Investor A’s portfolio has a beta of minus 2.0, while Investor B’s portfolio has a beta of plus 2.0. Assuming that the unsystematic risks of the stocks in the two portfolios are the same, then the two investors face the same amount of risk. However, the holders of either portfolio could lower their risks, and by exactly the same amount, by adding some “normal” stocks with beta = 1.0.
a. True
b. False
Answer Options:
Answer: False
Question: A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is CORRECT?
a. The bond sells at a price below par.
b. The bond has a current yield greater than 8%.
c. The bond sells at a discount.
d. The bond’s required rate of return is less than 7.5%.
e. If the yield to maturity remains constant, the price of the bond will decline over time.
Answer Options:
a. False
b. False
c. False
d. False
e. True
Answer: e. True
Question: Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?
Answer Options:
a. The monthly payments will decline over time.
b. A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.
c. The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.
d. The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%.
e. Exactly 10% of the first monthly payment represents interest.
Answer: b. A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.
Question: Which of the following statements is CORRECT?
a. If a coupon bond is selling at par, its current yield equals its yield to maturity.
b. If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.
c. If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.
d. If a bond’s yield to maturity exceeds its annual coupon, then the bond will trade at a premium.
e. If a coupon bond is selling at a premium, its current yield equals its yield to maturity.
Answer Options:
a. True
b. False
c. False
d. False
e. False
Answer: a. True
Question: A stock with a beta equal to –1.0 has zero systematic (or market) risk.
Answer Options:
a. True
b. False
Answer: b. False
Question: Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.
Answer Options:
a. True
b. False
Answer: a. True
Question: Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that
a. Inflation is expected to decline in the future.
b. The economy is not in a recession.
c. Long-term bonds are a better buy than short-term bonds.
d. Maturity risk premiums could help to explain the yield curve’s upward slope.
e. Long-term interest rates are more volatile than short-term rates.
Answer Options:
Answer: d. Maturity risk premiums could help to explain the yield curve’s upward slope.
Question: Which of the following statements is CORRECT?
a. All else equal, high-coupon bonds have less reinvestment risk than low-coupon bonds.
b. All else equal, long-term bonds have less price risk than short-term bonds.
c. All else equal, low-coupon bonds have less price risk than high-coupon bonds.
d. All else equal, short-term bonds have less reinvestment risk than long-term bonds.
e. All else equal, long-term bonds have less reinvestment risk than short-term bonds.
Answer Options:
a. True
b. False
c. False
d. True
e. False
Answer: d. True
Question: You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?
a. The price of Bond B will decrease over time, but the price of Bond A will increase over time.
b. The prices of both bonds will remain unchanged.
c. The price of Bond A will decrease over time, but the price of Bond B will increase over time.
d. The prices of both bonds will increase by 7% per year.
e. The prices of both bonds will increase over time, but the price of Bond A will increase at a faster rate.
Answer Options:
a. False
b. False
c. True
d. False
e. False
Answer: c. True
Question: We would generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio.
Answer Options:
a. True
b. False
Answer: b. False
Question: All other things held constant, the present value of a given annual annuity increases as the number of periods per year increases.
Answer Options:
a. True
b. False
Answer: b. False
Question: A stock’s beta measures its diversifiable risk relative to the diversifiable risks of other firms.
Answer Options:
a. True
b. False
Answer: b. False
Question: What is the name of the agency within the United States Department of Agriculture (USDA) that was established in 1994 to improve the nutrition and well-being of Americans? (Hint: Refer to “ABOUT US”.)
Answer Options:
[A] Center for Disease Control and Prevention (CDC)
[B] National Institutes of Health (NIH)
[C] Center for Nutrition Policy and Promotion (CNPP)
[D] Food & Drug Administration (FDA)
[E] None of the above
Answer: Center for Nutrition Policy and Promotion (CNPP)
Question: Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 3.20% per year. What is the real risk-free rate of return, r*? Disregard any cross-product terms, i.e., if averaging is required, use the arithmetic average.
a. 3.80%
b. 3.99%
c. 4.19%
d. 4.40%
e. 4.62%
Answer Options:
Answer: b. 3.99%
Question: An upward-sloping yield curve is often call a “normal” yield curve, while a downward-sloping yield curve is called “abnormal.”
Answer Options:
a. True
b. False
Answer: a. True
Question: A time line is not meaningful unless all cash flows occur annually.
Answer Options:
a. True
b. False
Answer: b. False
Question: A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%.
Answer Options:
a. True
b. False
Answer: a. True
Question: A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Neither is callable, and both have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?
a. The prices of both bonds will decrease by the same amount.
b. Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.
c. Both bonds would decline in price, but the 8-year bond would have the greater percentage decline in price.
d. A market yield increase is the same as a yield to maturity increase.
e. The prices of both bonds would increase by the same amount.
Answer Options:
a. False
b. True
c. False
d. False
e. False
Answer: b. True
Question: Assume the following: The real risk-free rate, r*, is expected to remain constant at 3%. Inflation is expected to be 3% next year and then to be constant at 2% a year thereafter. The maturity risk premium is zero. Given this information, which of the following statements is CORRECT?
a. The yield curve for U.S. Treasury securities will be upward sloping.
b. A 5-year corporate bond must have a lower yield than a 5-year Treasury security.
c. A 5-year corporate bond must have a lower yield than a 7-year Treasury security.
d. The real risk-free rate cannot be constant if inflation is not expected to remain constant.
e. This problem assumed a zero maturity risk premium, but that is probably not valid in the real world.
Answer Options:
Answer: e. This problem assumed a zero maturity risk premium, but that is probably not valid in the real world.