Question 1:

If a bond provides a real rate of return of 2.89 percent at a time when inflation is 3.21 percent, what is the nominal rate of return on the bond?

A) 6.13%

B) 6.22%

C) 6.08%

D) 6.19%

E) 6.16%

Question 2:

Exactly three years ago, you purchased a $1,000 face value bond for $1,211.16. The coupon rate was 6.5 percent with interest paid semiannually. Today, you sold that bond for $1,089.54. What was your rate of return for the 3-year period, or holding period yield, on this investment?

A) 7.19%

B) 6.24%

C) 6.38%

D) 6.06%

E) 6.74%

Question 3:

The primary purpose of portfolio diversification is to:

A) increase returns and risks.

B) lower both returns and risks.

C) eliminate asset-specific risk.

D) eliminate systematic risk.

E) eliminate all risks.

Question 4:

One of the indirect costs of bankruptcy is the incentive for managers to take large risks. When following this strategy:

A) stockholders expropriate value from bondholders by selecting high-risk projects.

B) the firm will rank all projects and select the project which results in the highest expected firm value.

C) the firm will select only all-equity financed projects.

D) bondholders expropriate value from stockholders by selecting high-risk projects.

E) the firm will always select the lowest-risk project available.

Question 5:

JR's is preparing to start a new project in an industry that differs significantly from its current operations. JR's has searched and found the beta of a firm that is a good fit as a good pure play for this new project. Given this good fit, why might JR's assign a higher beta to the project than the beta of the pure play?

A) The new project may be more responsive to the economy than the pure play and thus represent a higher risk.

B) The generally accepted practice would be to assign a beta to the project that is based on the average of the firm's beta and the pure play's beta.

C) The revenues of the project may be expected to be less cyclical than those of the pure play.

D) The project may incur flotation costs so a higher beta is warranted to offset the additional cost.

E) The firm may use less debt in its operations than does the pure play.