Answer and Explain

1. Which of the following is not likely a concern pertaining to agency costs?

a. Incentive alignment between management and the board of directors

b. Incentive misalignment between management and shareholders

c. Management decision to purchase an overvalued company

d. Management decision to purchase a corporate luxury jet

2. The bid price of a Treasury bill is ________.

a. the price at which the dealer in Treasury bills is willing to sell the bill

b. the price at which the dealer in Treasury bills is willing to buy the bill

c. greater than the ask price of the Treasury bill expressed in dollar terms

d. the price at which the investor can buy the Treasury bill

3. Harold shorts Barnes Inc. at $84. A month later the company pays a $3 dividend. At what stock price will Harold make a 10% gain from his position?

a. $72.60

b. $75.60

c. $89.40

d. $92.40

4. An investor puts up $10,000 but borrows an equal amount of money from his broker to double the amount invested to $20,000. The broker charges 4% on the loan. The stock was originally purchased at $25 per share, and in 1 year the investor sells the stock for $27. The investor's rate of return was ____.

a. 6.00%

b. 10.00%

c. 12.00%

d. 4.00%

5. What kind of bond can the issuer retire before maturity?

a. Callable bond

b. Discount bond

c. Zero

d. Puttable bond

6. Consider a bond with 3 years to maturity and a coupon of 5%. The term structure is flat and the bonds yield to maturity is 3%. Assume the bonds face value is $1,000 and that it pays annual coupons. Calculate the price of the bond.

a. $1,034.91

b. $1,056.97

c. $1,056.57

d. $938.18

7. Considering the same bond in the prior question, suppose at the end of the first year that interest rates increase to 4%, calculate the price of the bond at the end of the first year.

a. $1,018.86

b. $1,027.75

c. $1,038.27

d. $1,019.04

8. Combining the prior two questions, what is your one-year holding period return to the bond?

a. - 3.57%

b. 3.57%

c. - 1.22%

d. 1.16%

9. What would be the profit or loss per share of stock to an investor who bought a January expirationStarbucks call option with an exercise price of $100 if Starbucks closed on the expiration date at $120? Assume the option premium was $3.00.

a. $3.00 loss

b. $20.00 gain

c. $23.00 gain

d. $17.00 gain

10. An investor purchases one municipal bond and one corporate bond that pay rates of return of 9% and 10.5%, respectively. If the investor is in the 20% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____.

a. 9% and 10.5%

b. 9% and 8.40%

c. 7.20% and 10.5%

d. 10.80% and 8.40%

11. A benchmark market value index is comprised of three stocks. Yesterday the three stocks were priced at $18, $28, and $60. The number of outstanding shares for each is 760,000 shares, 660,000 shares, and 360,000 shares, respectively. If the stock prices changed to $22, $26, and $62 today respectively, what is the 1-day rate of return on the index?

a. 3.20%

b. 7.17%

c. 5.35%

d. 4.54%

12. Which of the following does not approximate the performance of a buy-and-hold portfolio strategy?

a. An equally weighted index

b. All of these options (Weights are not a factor in this situation.)

c. A value-weighted index

d. A price-weighted index

13. What distinguishes a pure discount bond from a regular bond?

a. A discount bond pays coupons and regular bond does not

b. A discount bond is sold a premium to par value and a regular bond is not

c. A regular bond pays coupons and a discount bond does not

d. None of the above

14. Which of the following is not a money market security?

a. U.S. Treasury bill

b. 6-month maturity certificate of deposit

c. common stock

d. All of the options

15. What type of portfolio construction starts with selecting attractively priced securities?

a. Bottom-up

b. Top-down

c. Upside-down

d. Side-to-side

16. The _____________ of a corn futures contract has the __________ to deliver the commodity at the expiration of the contract.

a. Seller, right

b. Buyer, right

c. Seller, obligation

d. Buyer, obligation

17. Financial markets allow for all but which one of the following?

a. shift consumption through time from higher-income periods to lower

b. price securities according to their riskiness

c. channel funds from lenders of funds to borrowers of funds

d. allow most participants to routinely earn high returns with low risk

18. Which of the following yield curves generally implies a normal healthy economy?

a. positive slope

b. negative slope

c. flat

d. hump-shaped curve

19. Consider a no-load mutual fund with $270 million in assets and 15 million shares at the start of the year and with $320 million in assets and 16 million shares at the end of the year. During the year investors have received income distributions of $3 per share and capital gain distributions of $0.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 2%, what is the rate of return on the fund?

a. 24.74%

b. 26.94%

c. 19.85%

d. The answer cannot be determined from the information given.

20. One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of 7%, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year from today?

a. 2.07%

b. 8.03%

c. 9.01%

d. 11.12%