Question 1

The market allocates capital to companies based on:

A. risk.

B. efficiency.

C. expected returns.

D. all of the above

Question 2

Which of the following financial assets is likely to have the highest required rate of return based on risk?

A. Corporate bond

B. Treasury bill

C. Certificate of Deposit

D. Common stock

Question 3

A bond that has a yield to maturity greater than its coupon interest rate will sell for a price:

A. below par.

B. at par.

C. above par.

D. that is equal to the face value of the bond plus the value of all interest payments.

Question 4

Which of the following is not one of the components that makes up the required rate of return on a bond?

A. Risk premium

B. Real rate of return

C. Inflation premium

D. Maturity payment

Question 5

A 20-year bond pays 12% on a face value of $1,000. If similar bonds are currently yielding 9%, What is the market value of the bond? Use annual analysis.

A. over $1,000

B. under $1,000

C. over $1,200

D. Not enough information given to tell

Question 6

A ten-year bond, with par value equals $1000, pays 10% annually. If similar bonds are currently yielding 6% annually, what is the market value of the bond? Use semi-annual analysis.

A. $1,000

B. $1127.50

C. $1297.85

D. $2549.85

Question 7

A 30-year zero-coupon bond that yields 12% percent is issued with a $1000 par value. What is the issuance price of the bond (round to the nearest dollar)?

A. $33

B. $83

C. $8,333

D. $3,888

Question 8

A 14-year zero-coupon bond was issued with a $1000 par value to yield 12%. What is the approximate market value of the bond?

A. $597

B. $205

C. $275

D. $482

Question 9

Which of the following does not influence the yield to maturity for a security?

A. Required real rate of return

B. Risk free rate

C. Business risk

D. Yields of similar securities

Question 10

An increase in the riskiness of a particular security would NOT affect:

A. the risk premium for that security.

B. the premium for expected inflation.

C. the total required return for the security.

D. investors’ willingness to buy the security.

Question 11

If the inflation premium for a bond goes up, the price of the bond:

A. is unaffected.

B. goes down.

C. goes up.

D. is unpredictable.

Question 12

The risk premium is likely to be highest for:

A. U.S. government bonds.

B. corporate bonds.

C. gold mining expedition.

D. Either b or c

Question 13

A ten-year bond pays 11% interest on a $1000 face value annually. If it currently sells for $1,195, what is its approximate yield to maturity?

A. 9.33%

B. 7.94%

C. 12.66%

D. 8.10%

Question 14

The relationship between a bond’s price and the yield to maturity:

A. changes at a constant level for each percentage change of yield to maturity.

B. is an inverse relationship.

C. is a linear relationship.

D. has no relationship.

Question 15

The longer the time to maturity:

A. the greater the price increase from an increase in interest rates.

B. the less the price increase from an increase in interest rates.

C. the greater the price increase from a decrease in interest rates.

D. the less the price decrease from a decrease in interest rates.

Question 16

What is the approximate yield to maturity for a seven-year bond that pays 11% interest on a $1000 face value annually if the bond sells for $952?

A. 10.5%

B. 10.6%

C. 11.9%

D. 12.0%

Question 17

A higher interest rate (discount rate) would:

A. reduce the price of corporate bonds.

B. reduce the price of preferred stock.

C. reduce the price of common stock.

D. all of the above

Question 18

A bond pays 9% yearly interest in semi-annual payments for 6 years. The current yield on similar bonds is 12%. To determine the market value of this bond, you must:

A. find the interest factors (IFs) for 12 periods at 12%.

B. find the interest factors (IFs) for 6 periods at 9%.

C. find the interest factors (IFs) for 12 periods at 6%.

D. find the interest factors (IFs) for 6 periods at 6%.

Question 19

A 15-year bond pays 11% on a face value of $1,000. If similar bonds are currently yielding 8%, what is the market value of the bond? Use annual analysis.

A. Over $1,000

B. Under $1,000

C. Over $1,200

D. not enough information to tell

Question 20

A 10-year bond pays 8% on a face value of $1,000. If similar bonds are currently yielding 10%, what is the market value of the bond? Use annual analysis.

A. Less than $900

B. More than $900 and less than $1100

C. More than $1100

D. not enough information to tell