Assume you own a British consol with a face value of $1000 that pays $28 per year. You know that British consols promise to pay interest forever and that the current interest rate is 2.0% p.a. The dollar value to the nearest cent of your consol is $.

Question 16 of 50

Frank Lewis has a typical 30-year, $100,000 mortgage with a nominal interest rate of 10 percent and monthly compounding. Which of the following statements regarding his mortgage is correct?A.The monthly payments will decline over time.

B.The proportion of the monthly payment that represents interest will be lower for the last payment than for the first payment on the loan.

C.The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.

D.All of these statements are correct.

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Part 6 of 16 -

Question 17 of 50

8.0 PointsTo limit interest rate risk and default risk, but invest in corporate bonds, it would be best to select:A.A high quality bond with 10 years to maturity.

B.A medium quality perpetual bond.

C.A medium quality bond with 10 years to maturity.

D.A high quality bond with 2 years to maturity.

E.A medium quality bond with 3 years to maturity.

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Question 18 of 50

8.0 PointsWhich graph shape illustrates the typical or most commonly observed yield curve shape?A.generally an upward sloping graph as time until maturity increases

B.generally a flat graph as time until maturity increases

C.generally a downward sloping graph as time until maturity increases

D.a downward sloping graph until some minimum is reached and afterward an upward sloping graph as time until maturity increases

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Question 19 of 50

8.0 PointsYou know the following about a long-term corporate bond:

Inflation premium3.5Maturity risk premium1.7Default risk premium1.5Liquidity premium0.2Quoted rate of interest (r)10.7The real risk-free interest rate is%. Give your answers in percentage terms to one decimal place.

Part 7 of 16 -

Question 20 of 50

8.0 PointsA 12-year bond has an annual coupon rate of 9 percent. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7 percent. Which of the following statements is correct?A.The bond is currently selling at a price below its par value.

B.If market interest rates decline today, the price of the bond will also decline today.

C.If market interest rates remain unchanged, the bonds price one year from now is expected to be lower than it is today.

D.All of the statements above are correct.

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Question 21 of 50

8.0 PointsA 10-year Treasury bond has an 8 percent coupon. An 8-year Treasury bond has a 10 percent coupon. Both bonds have the same yield to maturity. If the yields to maturity of both bonds increase by the same amount, which of the following statements is correct?A.The prices of both bonds will increase by the same amount.

B.The prices of both bonds will decrease by the same amount.

C.The prices of the two bonds will remain the same.

D.Both bonds will decline in price, but the 10-year bond will have a greater percentage decline in price than the 8-year bond.

E.Both bonds will decline in price, but the 8-year bond will have a greater percentage decline in price than the 10-year bond.

F.Both bonds will increase in price, but the 10-year bond will have a greater percentage increase in price than the 8-year bond.

G.Both bonds will increase in price, but the 8-year bond will have a greater percentage increase in price than the 10-year bond.

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Question 22 of 50

8.0 PointsGiven the following bond ratings, which group represents bonds that are most likely to default?A.AAA

B.AA

C.A

D.BBB

E.BB

F.B

G.C

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Part 8 of 16 -

Question 23 of 50

8.0 PointsWhich alternative provides a good measure of risk?A.Rate of return

B.Expected rate of return

C.Standard deviation

D.Correspondence

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Question 24 of 50

8.0 PointsWhich of the following statements is correct?A.The beta coefficient of a stock is normally found by running a regression of past returns on the stock against past returns on a stock market index. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta.

B.It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free) rate of return.

C.If you found a stock with a zero beta and held it as the only stock in your portfolio, you would earn an infinitely large return.

D.The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.

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Question 25 of 50

8.0 PointsThe security market line shows the relationship between:A.required rate of return of a selected stock and rate of return on the market portfolio.

B.required rate of return of a selected stock and beta (risk).

C.risk-free rate and beta (risk).

D.risk of the market and risk of the individual stock.

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Part 9 of 16 -

Question 26 of 50

8.0 PointsA start-up company has $8,000,000 of assets and no debt. Consequently it has equity exactly equal to its assets. Its ROE is 14% and the payout ratio is 50% and they will remain the same for the upcoming 5 years. Total dividends in the first year will be $US dollars and in the second year they will be $US dollars.

Question 27 of 50

8.0 PointsFirms that are said to be privately owned are firms that are:A.owned by a few people, usually the company's managers.

B.owned by many private investors.

C.traded in public markets.

D.listed on a regional exchange only.

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Question 28 of 50

8.0 PointsHow does preferred stock accurately compare to common stock?A.One of the advantages to the firm associated with preferred stock financing rather than common stock financing is that dividends paid on preferred stock can be written off against earnings.

B.Preferred stock provides slightly steadier and more reliable income to investors than common stock.

C.One of the advantages to the firm of financing with preferred stock is that it is normally distributed only to common shareholders and requires no investment banker involvement.

D.Preferred stock is much harder to value than is common stock since there are so many additional different parameters to consider when evaluating preferred stock.

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Part 10 of 16 -

Question 29 of 50

8.0 PointsWhich of the following is a factor that a firm can control regarding its cost of capital?A.tax rates

B.interest rate levels

C.capital structure policy

D.all of these are factors totally under the control of management

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Question 30 of 50

8.0 PointsSuppose a firm's stock sells for $29.55 per share, the next dividend paid will be $1.94 and it is estimated to grow at a constant rate of 8%. We further estimate that its flotation cost is 7% for selling new shares. Cost of equity from newly sold stock will be%. Give your answer in percentage terms to one decimal place.