| | The more depreciation an investor-owned healthcare firm reports, the higher its net cash flow, other things held constant. Question 51 pts Which of the following statements regarding a 15-year (180-month) $125,000, 6% APR, fixed-rate mortgage is NOT CORRECT? (Ignore all taxes and transactions costs.) | | The monthly loan payments are constant. | | | Interest payments on the mortgage will steadily decline over time. | | | The proportion of the monthly payment that goes towards repayment of principal will be higher 2 years from now than it will be the first year. | | | The remaining balance after three years will be $110,992.52 | | | The outstanding balance gets paid off at a faster rate in the later years of a loans life. Question 61 pts Which of the following investments will have the highest future value at the end of 10 years? Assume that the annual percentage rate for all investments is the same. | | Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments). | | | Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments). | | | Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). | | | Investment D pays $2,500 at the end of 10 years (a total of one payment). | | | Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments). Question 71 pts A Treasury bond promises to pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT? | | The periodic interest rate is greater than 3%. | | | The periodic rate is less than 3%. | | | The present value would be greater if the lump sum were discounted back for more periods. | | | The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually. | | | The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity. Question 81 pts Which of the following statements is CORRECT, assuming positive interest rates and other things held constant? | | A 5-year, $250 annuity due will have a lower present value than a similar ordinary annuity. | | | A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. | | | A typical investment's nominal interest rate will always be equal to or less than its effective annual rate. | | | If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%. | | | Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will have the higher future value if you leave the funds on deposit. Question 91 pts You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT? | | The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE. | | | The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. | | | The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. | | | The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD. | | | If the going rate of interest decreases, say from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant. | Question 101 pts Your sister turned 35 today, and she is planning to save $5,000 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that will provide an average return of 8% per year. She plans to retire 30 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can she withdraw in each year after she retires? Her first withdrawal will be made at the end of her first retirement year. | | $58,500 Question 111 pts Stock A has a beta = 0.8, while Stock B has a beta = 1.6. Which of the following statements is CORRECT? | | Stock Bs required return is double that of Stock As. | | | If the marginal investor becomes more risk averse, the required return on Stock B will increase by more than the required return on Stock A. | | | An equally weighted portfolio of Stocks A and B will have a beta lower than 1.2. | | | If the marginal investor becomes more risk averse, the required return on Stock A will increase by more than the required return on Stock B. | | | If the risk-free rate increases but the market risk premium remains constant, the required return on Stock B will increase by more than that on Stock A. Question 121 pts Consider the following information for three stocks, A, B, and C, and portfolios of these stocks. The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the correlation coefficients are all between 0 and 1. | Stock | Expected Return | Standard Deviation | Beta | | Stock A | 10% | 20% | 1.0 | | Stock B | 10% | 10% | 1.0 | | Stock C | 12% | 12% | 1.4 | Portfolio AB has half of its funds invested in Stock A and half in Stock B. Portfolio ABC has one third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium, so required returns equal expected returns. Which of the following statements is CORRECT? | | Portfolio AB has a standard deviation of 15%. | | | Portfolio ABs coefficient of variation is less than 1.5. | | | Portfolio ABs required return is greater than the required return on Stock A. | | | Portfolio ABCs expected return is 32%. | | | Portfolio ABC has a standard deviation of 14%. Question 131 pts Which of the following statements best describes what you should expect to happen if you randomly select stocks and add them to your portfolio? | | Adding more such stocks will reduce the portfolios unsystematic, or diversifiable, risk. | | | Adding more such stocks will increase the portfolios expected rate of return. | | | Adding more such stocks will reduce the portfolios beta coefficient and thus its systematic risk. | | | Adding more such stocks will have no effect on the portfolios risk. | | | Adding more such stocks will reduce the portfolios market risk but not its unsystematic risk. | Question 151 pts Boston General Hospital believes the following probability distribution exists for its proposed expansion project. What is the coefficient of variation on the hospitals project investment? | Economic State | Probability of Occurrence | Rate of Return if Economic State Occurs | | Boom | 0.25 | 25% | | Normal | 0.50 | 15% | | Recession | 0.25 | 5% | Question 161 pts Recently, Pfizer Inc. (PFE), tried to acquire AstraZeneca PLC (AZN), a British-Swedish multinational pharmaceutical and biologics company headquartered in London, United Kingdom. As the new CFO of PFE, you were asked to compute AZNs beta based on the following averaged empirical data. | Year | Market Return (%) | AZN Return (%) | | 2006 | 17.15 | 9.35 | | 2007 | 6.51 | -2.02 | | 2008 | 9.15 | 28.50 | | 2009 | 12.12 | -8.15 | | 2010 | -17.78 | -17.70 | | 2011 | -21.95 | -1.33 | | 2012 | 19.21 | 12.37 | | 2013 | 13.27 | 2.46 | | 2014 | 8.26 | -4.80 | | 2015 | 19.17 | 12.03 | Which of the following statements is CORRECT? | | Based on the provided empirical data, AZNs market beta is about 0.48, which indicates that the stock is about half as volatile as the average stock. | | | Based on the provided empirical data, AZNs market beta is about 0.94, which indicates that the stock is slightly less volatile than the average stock. | | | Based on the provided empirical data, AZNs market beta is about 1.5, which indicates that the stock is 1.5 times as volatile as the average stock. | | | Based on the provided empirical data, AZNs market beta is about 1.98, which indicates that the stock is about twice as volatile as the average stock. | Question 171 pts Miami Lab Inc., an investor-owned healthcare enterprise, has a beta of 0.88. The T-bond rate (a proxy of the risk-free rate of return) is 5.25%. Investors expect the average annual future return on the market to be 11.50%. Using the SML, what is the required rate of return on Miami Lab stock? | | 11.29% C) 11.58% Question 181 pts Which is the best measure of risk for a mutually exclusive asset to be held in isolation, and which is the best measure for an asset held in a diversified portfolio? | | Variance; correlation coefficient. | | | Standard deviation; correlation coefficient. | | | Coefficient of variation; beta. | | | Beta; standard deviation Question 191 pts Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are non-callable, are as follows: | T-bond = 7.72% | | A = 9.64% | | AAA = 8.72% | | BBB = 10.18% | The differences in rates among these issues were most probably caused primarily by: | | Real risk-free rate differences. | | | Default risk differences. | | | Maturity risk differences. | | | Inflation differences. Question 201 pts Which of the following statements is CORRECT? | | If individuals in general increase the percentage of their income that they save, interest rates are likely to increase. | | | If companies have fewer good investment opportunities, interest rates are likely to increase. | | | Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities. | | | If expected inflation increases, interest rates are likely to increase. Question 211 pts Which of the following statements is CORRECT? | | The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates. | | | The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates. | | | The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates. | | | You hold two bonds. One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline. | Question 221 pts Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? | | The companys bonds are downgraded from AAA to AA | | | Market interest rates rise sharply. | | | Market interest rates decline sharply. | | | The company's financial situation deteriorates significantly. | | | Inflation increases significantly. | Question 231 pts A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT? | | If the yield to maturity remains constant, the bonds price one year from now will be higher than its current price. | | | The bond is selling below its par value. | | | The bond is selling at a discount. | | | If the yield to maturity remains constant, the bonds price one year from now will be lower than its current price. | | | The bonds current yield is greater than 9%. Question 241 pts Three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTMs are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT? | | Bond As current yield will increase each year. | | | Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity. | | | Bond C sells at a premium (its price is greater than par), and its price is expected to increase over the next year. | | | Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year. | | | Over the next year, Bond As price is expected to decrease, Bond Bs price is expected to stay the same, and Bond Cs price is expected to increase. Question 251 pts Florida Hospital, one of the best hospitals in the USA, is planning two new issues of 25-year bonds to finance its rapid expansion in Central Florida. Bond P will be sold at its $1,000 par value, and it will have a 10% annual coupon. Bond D will also have a 25-year maturity and a $1,000 par value, but its annual coupon will be only 6.25%. If both bonds are to provide investors with the same effective yield, how many of the D bonds must Florida Hospital issue to raise $3,000,000? Round your final answer up to a whole number of bonds. | | | | | | | | | | | | | |
