1. 1)When evaluating financial assets it is better to purchase securites trading at:

• a premium to par.
• a discount to par.
• par or maturity value.
• there is no advantage, all else equal, related to the purchase of an asset whose par value differs from the market value.

1. 2) A security is defined as selling at a premium, par or discount by

• comparing its book value to its par value or maturity value.
• comparing its market price to its current yield.
• comparing its market price to the market price of competing securities.
• comparing its market price to the par or book value.

1. 3)Which has more interest rate risk a 2-year or 10 year bond, all else equal, why?

• the 2 year bond will have more interest rate because the latter cash flows are subjected to increased discounting associated with a given interest rate.
• the 10 year bond will have more interest rate because the cash flows in the future are subjected to increased discounting associated with a given interest rate.
• the 10 year bond will have more interest rate because the cash flows in the future are larger.
• the 2 year bond will have more interest rate because the cash flows in the future are smaller.

1. 4)What factors determine the value of an economic asset?

• The expected size, timing and risk of cash flows along with an assessment of the ability of the firm to minimize expenses.
• The expected size, timing and risk of cash flows.
• The expected size, timing and risk of cash flows along with an assessment of the ability of the firm to maximize income.
• The expected size, timing and risk of cash flows along with an assessment of the ability of the firm to maximize market share.

1. 5)What security will have more reinvestment rate risk a 5-year zero coupon bond or a perpetuity, why?

• The 5-year zero coupon bond will have more risk associated with the uncertainty of what the proceeds from this investment will earn in the future after the 5 year zero matures and is invested again in the market.
• The perpetuity will have more risk associated with the certainty of what the proceeds from this investment will earn in the future.
• The perpetuity will have more risk associated with the uncertainty of what the proceeds from this investment will earn in the future.
• The 5-year zero coupon bond will have more risk associated with the changes in the interest rate and the subsequent change in the value of the zero coupon bond.