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FINC 340 INVESTMENTS MIDTERM EXAMINATION_04 DIRECTIONS: Here are the questions for the Midterm Examination. Please submit your Midterm Examination Answer Sheet in MS Word format with the following file name: LastNameFirstInitial_MidtermExamAnswerSheet.docx. For example, if you name is John Smith, the file name of your Answer Sheet should be SmithJ_MidtermExamAnswerSheet.docx. If you have any questions or comments, please do not hesitate to contact me. NAME: _____________________________________ Quiz Question Number 1 Betty has saved $60,000 for a down payment on a home. She is now actively looking for her dream house and anticipates making an offer on a home within the next two months. If the offer is accepted, it will take up to three additional months to close on the house. Betty will need to deposit about $1,000 in an escrow account as \"good faith\" money when she makes the offer. The rest of the down payment is made at closing. The best place for Betty to deposit her funds now is A: B: C: D: the stock market. a municipal bond. a six-month certificate of deposit (CD). $1,000 in a two month certificate of deposit (CD) and the remainder in a six-month CD. E: a money market mutual fund. 2 Three years ago, Charles purchased a $1,000 face value 10-year Treasury note for par. The market value of this bond is now $950. If Charles sells the bond today, the tax implications of sale are A: B: C: D: E: 3 $50 loss against ordinary income $50 capital gain $50 capital loss $50 gain against ordinary income No tax effects since Treasury securities are exempt from taxes Two years ago, an investor purchased a $1,000 par 6% coupon bond that pays interest semiannually. Inflation over the last two years has been 2% per year. The inflation-adjusted value of the next interest payment is A: B: C: D: E: $28.84 $30.00 $31.21 $57.67 $60.00 1 FINC 340 INVESTMENTS MIDTERM EXAMINATION_04 4 Cameron pays 15% in dividend and capital gains taxes and 35% in ordinary income taxes. Ten years ago, Cameron purchased a position in a limited partnership for $10,000. Three years later, she was required to contribute $2,000 more to the partnership. Two years ago, she was required to contribute an additional $2,000. If Cameron sells her limited partnership investment today for $20,000, what are the taxes? A: B: C: D: E: 5 $ 900 $1,500 $2,100 $2,700 $3,500 Bonds A, B and C are all zero-coupon bonds. Bond A matures in 3 years; Bond B matures in 7 years, and Bond C matures in 10 years. Paul is uncertain as to the direction of interest rates over the next several years, so he wants to lock-in his return over his 7 year time horizon. Which bond is best for Paul? A: Bond A because it matures in 3 years, and Paul can then roll-over the funds to a 4 year bond. B: Bond B because it matches Paul's time horizon. C: Bond C because it has a longer maturity, it will probably have a higher yield. D: Since these are zero-coupon bonds, it does not matter which bond Paul chooses. E: Bonds are too risky for Paul to be investing. 6 Assume that the futures price of gold is $390 a troy ounce, and the contract is for 100 troy ounces. The initial margin is $2,000. If the future price increases by 5.0%, what is the return to the investor? A: 1.0% B: 2.5% C: 5.0% D: 19.5% E: 97.5% 2 FINC 340 INVESTMENTS MIDTERM EXAMINATION_04 7 Iris pays 15% in dividends and capital gains taxes and 35% in ordinary income taxes. Several years ago, she purchased a Mortgage-Backed Security (MBS) for $20,000 which was the par value of the underlying assets. At the end of this year, she received a statement stating she had received $700 in scheduled amortization of principal, $1,200 in interest, and $500 in unscheduled collection of principal. What is Iris's aftertax cash flow this year from this investment? A: B: C: D: E: 8 Before the new tax law enacted in 2003, dividends were taxed as ordinary income. Now the maximum tax rate on dividends paid to individuals is 15%. As a result of the law, an investor in the 25% tax bracket who received $70,000 in qualifying dividends had a tax savings of A: B: C: D: E: 9 $ 0. $ 7,000. $ 9,000. $10,500. $17,500. Abby buys a position in a closed-end mutual fund that is selling at an 8% discount. The fund earns 12%, but the discount decreases to 5%. What is Abby's return on this investment? A: B: C: D: E: 10 $1,560 $1,695 $1,980 $2,040 $2,400 8.5% 12.0% 12.4% 14.2% 15.7% Corey pays 15% in dividend and capital gains taxes and 35% in ordinary income taxes. Four years ago, she invested $500,000 in a private placement offering with some friends. The initial price was $50 a share. The investment group is now discussing the possibility of publicly selling their shares. One of the members of the group believes they could get at least $75 a share. If this is correct, what are Corey's taxes when she sells her shares (ignoring commissions and fees)? A: B: C: D: E: $0 because the group is not allowed to sell their private placement shares to the public $37,500 $54,000 $70,000 $87,500 3 FINC 340 INVESTMENTS MIDTERM EXAMINATION_04 11 A firm has $10 million to invest in safe securities. The time horizon is five years, and interest rates are anticipated to decrease over this period. The best investment for this firm is A: B: C: D: E: 12 What is the standard deviation of returns given returns of 10%, -5%, 8%, 3%? A: B: C: D: E: 13 3.7% 4.0% 5.8% 6.7% 7.1% Claire has 200 shares of stock in a firm that just issued 1 right per share. The right gives the holder the opportunity to purchase 0.125 shares of stock. If Claire exercises all her rights, how many addition shares of stock will she be able to obtain? A: B: C: D: E: 14 Six-month CDs Nonparticipating GICs Treasury bills Participating GICs Two-year corporate bonds 8 25 125 200 1,600 Luke is 35 years old, has a good job, a wife and two small children, and is financially conservative. He has heard about the large returns that may be achieved by investing in the oil and gas field. Luke is interested, but he has no expertise to provide day-today management. Which of the following investments would be best for Luke? A: B: C: D: E: direct investment through a working interest general partner limited partner all of these options would be a reasonable investment for Frank either B or C (partnership) would be a reasonable investment for Frank, but a direct investment (A) is not reasonable 4 FINC 340 INVESTMENTS MIDTERM EXAMINATION_04 15 A $1,000 par 1.4% coupon convertible bond with a stock purchase warrant for 1 share of stock at $35 per share is purchased for $900. The common stock has a current market price of $38 per share and the warrant's market price is $4. If the market price of the stock increases to $41.80, the minimum percentage increase in the value of the warrant is A: 10.0% B: 17.8% C: 19.4% D: 70.0% E: 119.4% 16 Round lots are A: B: C: D: E: 17 A 6.4% preferred stock has a par value of $30 and is currently selling in the market at $40. The quarterly dividend for this stock is A: B: C: D: E: 18 $0.16. $0.48. $0.64. $1.92. $2.56. Balloon payments A: B: C: D: E: 19 10 shares 100 shares 1,000 shares 10,000 shares 100,000 shares Increases the periodic cash flows to the lender Decreases the probability of default Increases the maturity of the loan Occur at the beginning of the loan Can consist of principal and accrued interest Factors that should be considered in taking a stock option position include: A: B: C: D: E: The dividend paid on the underlying stock The volatility of the underlying stock The time to expiration The anticipated direction of market movement All of the above are relevant factors in the option decision 5 FINC 340 INVESTMENTS MIDTERM EXAMINATION_04 20 Last month when IBM was selling for $86, Dan purchased a call option on IBM with an exercise price of $90 for $2 per option or $200 total. Yesterday IBM closed at $95. Based on the minimum value of the contract, if Dan sells his call at yesterday's close, what would his return be? A: B: C: D: E: 21 One of the most successful collection programs is the 50 State Quarters program developed by the U.S. Mint. This program began in 1999 and permitted each state to put a design on the back of the U.S. quarter. There are 5 state quarters issued each year over the 10-year program. According to CoinWorld.com, in 1999 4.43 billion quarters were minted across the first five states issued. In 2000, the U.S. Mint increased the mintage by 46%. What was the number of state quarters minted in 2000? A: B: C: D: E: 22 2.04 billion 4.43 billion 4.63 billion 6.47 billion 6.65 billion Wendy's broker has recommended she purchase 500 shares of a mutual fund that is currently priced at $25 a share. The commission on the purchase price is 3%, and the fund charges a 1% annual management fee and a $10 annual administrative charge. What is the total cost over the first year to invest in this fund? A: B: C: D: E: 23 4% 6% 50% 150% 250% $12,500 $12,875 $13,000 $13,010 $13,014 Advantages of purchasing Treasury securities directly from the government over the internet include all of the following EXCEPT: A: B: C: D: E: Direct deposit of payments Check-writing Automatic reinvestment option Record keeping Book-entry system 6 FINC 340 INVESTMENTS MIDTERM EXAMINATION_04 24 Angie deposits $250 in an account that earns 12% per year. If no other deposits or withdrawals are made, how much will Angie have in her account at the end of 15 years? A: B: C: D: E: 25 Zack needs a $100,000 loan to start his new business. Due to his age and inexperience, he is unable to obtain a bank loan. Possible alternatives to raise the funds include all of the following EXCEPT A: B: C: D: E: 26 promissory note from his mother. having his mother co-sign a bank loan. selling personal assets. issuing debt in the market. all of the above are possible sources of funds for Zack. A portfolio of Treasury bonds with coupon payment dates of February 15 and August 15 that matures in 10 years may be stripped into how many zero-coupon bonds? A: B: C: D: E: 27 $ 280 $ 700 $1,368 $3,450 $4,200 0 since Treasury securities and not eligible for stripping 1 10 11 21 Jason is in the 28% Federal income tax bracket and 7% New York state income tax. He has invested in New York State bonds that yields a 6% return. The taxable equivalent yield on this bond is A: B: C: D: E: 6.45% 7.32% 8.54% 9.23% 10.61% 7 FINC 340 INVESTMENTS MIDTERM EXAMINATION_04 28 XYZ Corporation has a cumulative preferred stock that pays $1 per share per quarter. The firm did not declare a dividend the last two quarters. To be able to pay dividends to common shareholders, the preferred stock dividend this coming quarter must be A: XYZ does not need to pay preferred stock dividends to be able to pay common stock dividends B: $1 C: $2 D: $3 E: $4 29 Preferred stock with cumulative fixed dividends A: Are required to pay dividends each quarter B: Must pay the missed dividend before common shareholders can receive dividends C: Are taxed on the accumulated dividends D: Are considered to be bankrupted if one year of dividends is missed E: All of the above are true 30 Diane has $85,000 to invest. She wants to invest in relatively safe securities. Diane believes interest rates will decrease and stabilize at a lower level over the next 5-10 years. She should invest in A: B: C: D: E: Treasury bills Long-term Treasury notes or bonds Equity B-rated corporate bonds Commercial paper 8