QUESTION 1 There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is the highest for the AAA-rated bonds, and the required return increases as the bond ratings get lower.

True

False

QUESTION 2 What is true regarding long-term and short-term bonds (assume they have the same par value and coupon rate)?

a) Long-term bonds have higher interest rate risk.

b) Short-term bonds have lower reinvestment risk.

c) Long-term bonds have higher reinvestment risk.

d) Short-term bonds have higher interest rate risk.

QUESTION 3 The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

True

False

QUESTION 4 Which of the following statements about sinking fund is NOT true?

a) Sinking fund provision facilitates the orderly retirement of the bond issue.

b) A company would prefer to use sinking fund to call bond if interest rate is higher than the coupon rate.

c) A company would use sinking fund to call bond if interest rate is well below coupon rate.

d) It is a good strategy for a firm to use its sinking fund to call bond if bond sells at a big premium.

QUESTION 5 A 10-year corporate bond has an annual coupon payment of 5%. The bond is currently selling at par ($1,000). Which of the following statement is NOT correct?

a) The bonds yield to maturity is 5%.

b) The bonds current yield is 5%.

c) If the bonds yield to maturity remains constant,

d)the bonds price will remain at par. The bonds capital gain yield is 5%.

QUESTION 6 Analyze the 20-year, 8% coupon rate (semi-annual payment), $1,000 par value bond. The bond currently sells for $1,115. Whats the bonds yield to maturity?

5.87%

5.38%

6.93%

6.10%

QUESTION 7 Analyze the 20-year, 8% coupon rate (semi-annual payment), $1,000 par value bond. The bond currently sells for $1,115. Whats the bonds current yield, and capital gain yield?

6.57%, -0.47%

7.17%, -0.24%

6.57%, 0.47%

7.17%, 0.24%

QUESTION 8 A stock has a 40% chance of producing a 30% return, a 30% chance of producing a 20% return, and a 30% chance of producing a 10% return. What is the expected return of the stock?

9.0%

15.0%

21.0%

18.0%

QUESTION 9 An investor has $500,000 invested in a 2-stock portfolio. $200,000 is invested in Stock A and the remainder is invested in Stock B. The beta of Stock A is 2.0 and the beta of Stock B is 0.8. What is the portfolio's beta?

1.28

1.22

1.38

1.40

QUESTION 10 1. A stock has a beta of 1.40, the risk-free rate is 4.25%, and the expected total market return is 11%. What is the required rate of return for the stock?

4.25%

5.50%

11.95%

13.70%