User Ms Julie Ciarlante Course FIN-601-001 – FA 13-14 Test FIN 601 Final Exam Started 12/12/13 7:19 PM Submitted 12/12/13 9:25 PM Status Completed Attempt Score 126 out of 135 points Time Elapsed 2 hours, 5 minutes out of 5 hours. Question 1 3 out of 3 points A bond with an annual coupon of $70 and originally sold at par for $1 ,OOO. The current market interest rate (yield to maturity) is 8%. This bond will sell at Assuming no change in market interest rates, the bond will present the holder with capital Answer as it matures.. Selected Answer: B. discount; gains

Correct Answer: Given two comparable bonds A and B with par values of $1000. Both bonds mature in twenty years. Bond A has a coupon rate of 15%. Bond B has a coupon rate of 9%. Which bond has the greater interest rate risk? . Bond B Question 3 Daw Crockett, Inc. has an 8 percent coupon bond that matures in 8 years. The bond pays interest semiannually. What is the market price of the $1,000 face value bond if the yield to maturity is 10%? . A. $891. 62 If its yield to maturity is less than its coupon rate, a bond will sell at a increases in market interest rates will . remium; decrease this premium. Question 5 and The lowest Moodys bond rating category considered to be of investment grade quality is: Baa Given a bond with 8 years to maturity, $1000 face value, 8% coupon, 9% yield to maturity. The bond pays an annual coupon. What is the Duration of the bond? . 6. 10 Years Question 7 A General Co. bond has an 8% coupon and pays interest annually. The face value is $1,000 and the current market price is $1 ,020. 50. The bond matures in 20 years. What is the yield to maturity? . 7. 79% The Extreme Reaches Corp. last paid a $1. per share annual dividend. The company is planning on paying $3. 00, $5. 00, $7. 50, and $10. 00 a share over the next four years, respectively. After that the dividend will be a constant $2. 50 per share per year. What is the market price of this stock if the market rate of return is 15%? . $26. 57 Question 9 Skeezix Corporation Just paid a $2. 35 annual dividend. Analysts expect dividends at Skeezix to grow at a rate of 6% for the next 5 years, slow down to a rate 4% for the following 5 years, and settle on a steady growth of 2. 5% thereafter.

The appropriate cost of capital given the risk of Skeezix’s common stock is 13%. What the price per share of Skeezix Corporation’s common stock? . $27. 44 Question 10 The average compound return earned per year over a multi-year period is called the average return.. D. geometric Question 1 1 Over the period of 1926 through 2008, the annual rate of return on more volatile than the annual rate of return on large company stocks; long-term corporate bonds has been Question 12 Which of the following statements concerning the standard deviation are correct? l. The greater the standard deviation, the lower the risk.

II. The standard deviation is a measure of volatility. Ill. The higher the standard deviation, the less certain the rate of return in any one given year. IV. The higher the standard deviation, the higher the expected return.. II, Ill, and IV only Question 13 The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the . Selected Answers: Correct Answers: risk premium Question 14 You recently purchased a stock that is expected to earn 12% in a booming economy, % in a normal economy and lose 5% in a recessionary economy.

There is a 15% probability of a boom, a 75% chance of a normal economy, and a 10% chance of a recession. What is your expected rate of return on this stock? . 7. 30% Question 15 Risk that affects at most a small number of assets is called risk.. unsystematic Question 16 Which of the following would be considered an example of systematic risk? . Greater new Jobless claims in the economy than expected. Question 17 Unsystematic risk: can be effectively eliminated through portfolio diversification. Correct Answer: an be effectively eliminated through portfolio diversification.

Question 18 The diversification effect of a portfolio of two stocks: Both A and C. Question 19 Irene Adler is considering investing in the common stock of Holmes and Watson. The following data are available for the two securities.. Watson ??” 0. 16 . Expected Return 0. 12 ??” ??” 0. 08 . Standard Deviation Holmes 0. 20 If she invests 60% of her funds in Holmes and 40% in Watson, and if the correlation of returns between these two securities is 0. 45, what is the portfolios expected return and standard deviation? .