1) Stock A has the following returns for various states of the economy: State of the Economy Probability Stock A's Return Recession 10% -30% Below Average 20% -2% Average 40% 10% Above Average 20% 18% Boom 10% 40% Stock A's expected return is A) 5.4%. B) 7.2%. C) 8.2%. D) 9.6% 2) Stock A has the following returns for various states of the economy: State of the Economy Probability Stock A's Return Recession 9% -72% Below Average 16% -15% Average 51% 16% Above Average 14% 35% Boom 10% 85% Stock A's expected return is A) 9.9%. B) 12.7%. C) 13.8%. D) 16.5%. 3) You are considering a sales job that pays you on a commission basis or a salaried position that pays you $50,000 per year. Historical data suggests the following probability distribution for your commission income. Which job has the higher expected income? Probability of Commission Occurrence $15,000 .15 $35,000 .20 $48,000 .35 $67,000 .22 $80,000 .18 A) The salary of $50,000 is greater than the expected commission of $49,630. B) The salary of $50,000 is greater than the expected commission of $48,400. C) The salary of $50,000 is less than the expected commission of $50,050. D) The salary of $50,000 is less than the expected commission of $52,720. 4) Stock A has the following returns for various states of the economy: State of the Economy Probability Stock A's Return Recession 10% -30% Below Average 20% -2% Average 40% 10% Above Average 20% 18% Boom 10% 40% Stock A's standard deviation of returns is A) 10%. B) 14%. C) 17%. D) 20% Chapter 7 The Valuation and Characteristics of Bonds 5) Shafer Corporation issued callable bonds. The bonds are most likely to be called if A) interest rates decrease. B) interest rates increase. C) Shafer Corporation needs additional financing. D) Shafer Corporation's stock price increases dramatically. 6) Which of the following statements concerning junk bonds is most correct? A) A rational investor will always prefer a AAA-rated bond to a junk bond. B) Junk bonds have higher interest rates than AAA-rated bonds because of the higher risk. C) Junk bonds may also be called low-yielding securities. D) Junk bonds are priced higher than AAA-rated bonds because junk bonds are more risky. 7) Which of the following statements is true regarding convertible bonds? A) The holder has the right to sell these bonds back to the issuer if the bonds don't perform well. B) The holder can convert these bonds into an equal number of new bonds if they choose to do so. C) These bonds are convertible into common stock of the issuing firm at a prespecified price. D) These bonds have a variable interest rate. 8) If a corporation were to choose between issuing a debenture, a mortgage bond, or a subordinated debenture, which would have the highest yield to maturity, everything else equal? A) the debenture B) the mortgage bond C) the subordinated debenture D) all of the above 9) Which of the following is true of a zero coupon bond? A) The bond makes no coupon payments. B) The bond sells at a premium prior to maturity. C) The bond has a zero par value. D) The bond has no value until the year it matures because there are no positive cash flows until then. 10) If a firm were to experience financial insolvency, the legal system provides an order of hierarchy for the payment of claims. Assume that a firm has the following outstanding securities: mortgage bonds, common stock, debentures, and preferred stock. Rank the order in which investors that own mortgage bonds would have their claim paid? A) First B) Second C) Third D) Fourth 11) Put the following in order of their claim on assets of a firm, starting with the LAST to have a claim: A. Subordinated debentures B. Debentures (unsubordinated) C. Common Stock D. Preferred stock A) C, B, A, D B) C, D, A, B C) B, A, C, D D) D, C, B, A E) D, C, A, B